0000016160-16-000082.txt : 20161222 0000016160-16-000082.hdr.sgml : 20161222 20161222170002 ACCESSION NUMBER: 0000016160-16-000082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 55 CONFORMED PERIOD OF REPORT: 20161126 FILED AS OF DATE: 20161222 DATE AS OF CHANGE: 20161222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAL-MAINE FOODS INC CENTRAL INDEX KEY: 0000016160 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - LIVESTOCK & ANIMAL SPECIALTIES [0200] IRS NUMBER: 640500378 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04892 FILM NUMBER: 162067206 BUSINESS ADDRESS: STREET 1: 3320 WOODROW WILSON DRIVE CITY: JACKSON STATE: MS ZIP: 39209 BUSINESS PHONE: 6019486813 MAIL ADDRESS: STREET 1: 3320 WOODROW WILSON DR CITY: JACKSON STATE: MS ZIP: 39209 FORMER COMPANY: FORMER CONFORMED NAME: CAL MAINE FOODS INC DATE OF NAME CHANGE: 19961018 FORMER COMPANY: FORMER CONFORMED NAME: CHICKEN CHEF SYSTEMS INC DATE OF NAME CHANGE: 19710315 10-Q 1 calm-2016x11x26x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q
(mark one)

þ     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended November 26, 2016

OR

¨     Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to ____________

Commission File Number:  000-04892

CAL-MAINE FOODS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
64-0500378
(State or other jurisdiction of incorporation or organization)
 
(I.R.S Employer Identification No.)

3320 Woodrow Wilson Avenue, Jackson, Mississippi  39209
(Address of principal executive offices) (Zip Code)

(601) 948-6813
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ      No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
    
Large Accelerated filer þ
 
Accelerated filer  ¨
 
 
 
Non – Accelerated filer ¨
(Do not check if a smaller reporting company)
 
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨    No þ

There were  43,729,753 shares of Common Stock, $0.01 par value, and 4,800,000 shares of Class A Common Stock, $0.01 par value, outstanding as of December 21, 2016.



CAL-MAINE FOODS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED NOVEMBER 26, 2016

 
 
 
 
Page Number
Part I.
 
 
 
 

 
 
 
 
 

Item 1.
 
 
 

 
 
 
 
 

 
 
 

 
 
 
 
 

 
 
 

 
 
 
 
 

 
 
 

 
 
 
 
 

 
 
 

 
 
 
 
 

 
 
 

 
 
 
 
 

Item 2.
 
 

 
 
 
 
 

Item 3.
 
 

 
 
 
 
 

Item 4.
 
 

 
 
 
 
 
Part II.
 
 
 
 

 
 
 
 
 

Item 1.
 
 

 
 
 
 
 

Item 1A.
 
 

 
 
 
 
 

Item 2.
 
 

 
 
 
 
 

Item 6.
 
 

 
 
 
 
 

 
 
 




PART I.  FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
November 26, 2016
 
May 28, 2016
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
17,491

 
$
29,046

Investment securities available-for-sale
 
180,410

 
360,499

Trade and other receivables (less allowance for doubtful accounts of
 
 

 
 

$564 and $727 at November 26, 2016 and May 28, 2016, respectively)
 
81,718

 
67,448

Income tax receivable
 
39,932

 
11,830

Inventories
 
162,291

 
154,799

Prepaid expenses and other current assets
 
2,885

 
2,661

Total current assets
 
484,727

 
626,283

Property, plant and equipment, net
 
448,547

 
392,274

Goodwill
 
32,492

 
29,196

Other investments
 
63,894

 
53,975

Other intangible assets, net
 
28,159

 
4,958

Other assets
 
4,824

 
5,079

TOTAL ASSETS
 
$
1,062,643

 
$
1,111,765

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
67,005

 
$
67,131

Current maturities of long-term debt
 
15,510

 
16,320

Total current liabilities
 
82,515

 
83,451

Long-term debt, less current maturities
 
7,000

 
9,250

Other noncurrent liabilities
 
8,111

 
6,321

Deferred income taxes
 
100,100

 
95,382

Total liabilities
 
197,726

 
194,404


 
 

 
 

Commitments and Contingencies - see Note 5
 


 


 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Common stock, $0.01 par value, 120,000 and 70,261 shares authorized and issued
 
 

 
 

at November 26,  2016 and May 28, 2016, respectively
 
 

 
 

43,730 and 43,737 shares outstanding at November 26, 2016 and May 28, 2016, respectively 
 
703

 
703

Class A convertible common stock, $.01 par value, 4,800 shares authorized, issued
 
 

 
 

and outstanding at November 26, 2016 and May 28, 2016, respectively 
 
48

 
48

Paid-in capital
 
48,065

 
46,404

Retained earnings
 
836,552

 
890,440

Accumulated other comprehensive loss, net of tax
 
(69
)
 
(48
)
Common stock in treasury at cost – 26,531 and 26,524 shares at November 26, 2016
 
 

 
 

and May 28, 2016, respectively
 
(22,336
)
 
(22,272
)
Total Cal-Maine Foods, Inc. stockholders’ equity
 
862,963

 
915,275

Noncontrolling interest in consolidated entities
 
1,954

 
2,086

Total stockholders’ equity
 
864,917

 
917,361

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
1,062,643

 
$
1,111,765

See Notes to Condensed Consolidated Financial Statements.

2


CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

 
13 Weeks Ended
 
26 Weeks Ended
 
 
November 26, 2016
 
November 28, 2015
 
November 26, 2016
 
November 28, 2015
Net sales
 
$
253,544

 
$
545,975

 
$
493,389

 
$
1,155,870

Cost of sales
 
249,596

 
334,378

 
499,010

 
681,202

Gross profit (loss)
 
3,948

 
211,597

 
(5,621
)
 
474,668

Selling, general, and administrative expense
 
41,991

 
45,438

 
82,247

 
88,401

Operating income (loss)
 
(38,043
)
 
166,159

 
(87,868
)
 
386,267

Other income (expense):
 
 
 
 
 
 

 
 

Interest income, net
 
781

 
616

 
1,872

 
643

Royalty income
 
324

 
298

 
730

 
905

Equity in income of affiliates
 
645

 
1,302

 
836

 
2,031

Other, net
 
(475
)
 
(366
)
 
(878
)
 
(1,180
)
Total other income (expense)
 
1,275

 
1,850

 
2,560

 
2,399

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and noncontrolling interest
 
(36,768
)
 
168,009

 
(85,308
)
 
388,666

Income tax expense (benefit)
 
(13,801
)
 
58,099

 
(31,361
)
 
134,666

Net income (loss) before noncontrolling interest
 
(22,967
)
 
109,910

 
(53,947
)
 
254,000

Less: Net income (loss) attributable to noncontrolling interest
 
43

 
680

 
(1
)
 
1,747

Net income (loss) attributable to Cal-Maine Foods, Inc.
 
$
(23,010
)
 
$
109,230

 
$
(53,946
)
 
$
252,253

 
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to Cal-Maine Foods, Inc.:
 
 
 
 
 
 

 
 

Basic
 
$
(0.48
)
 
$
2.27

 
$
(1.12
)
 
$
5.24

Diluted
 
$
(0.48
)
 
$
2.26

 
$
(1.12
)
 
$
5.22

Dividends per common share
 
$

 
$
0.751

 
$

 
$
1.734

Weighted average shares outstanding:
 
 
 
 
 
 

 
 

Basic
 
48,250

 
48,164

 
48,249

 
48,164

Diluted
 
48,250

 
48,361

 
48,249

 
48,354


See Notes to Condensed Consolidated Financial Statements.

3


CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)

 
13 Weeks Ended
 
26 Weeks Ended

 
November 26, 2016
 
November 28, 2015
 
November 26, 2016
 
November 28, 2015
Net income (loss), including noncontrolling interests
 
$
(22,967
)
 
$
109,910

 
$
(53,947
)
 
$
254,000


 
 
 
 
 
 

 
 

Other comprehensive loss, before tax:
 
 
 
 
 
 

 
 


 
 
 
 
 
 

 
 

Unrealized holding loss on available-for-sale securities, net of reclassification adjustments
 
(536
)
 
(158
)
 
(34
)
 
(458
)

 
 
 
 
 
 

 
 

Income tax benefit related to items of other comprehensive income
 
204

 
60

 
13

 
180


 
 
 
 
 
 

 
 

Other comprehensive loss, net of  tax
 
(332
)
 
(98
)
 
(21
)
 
(278
)

 
 
 
 
 
 

 
 

Comprehensive income (loss)
 
(23,299
)
 
109,812

 
(53,968
)
 
253,722


 
 
 
 
 
 

 
 

Less: comprehensive income (loss) attributable to the noncontrolling interest
 
43

 
680

 
(1
)
 
1,747


 
 
 
 
 
 

 
 

Comprehensive income (loss) attributable to Cal-Maine Foods, Inc.
 
$
(23,342
)
 
$
109,132

 
$
(53,967
)
 
$
251,975


See Notes to Condensed Consolidated Financial Statements.

4


CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
26 Weeks Ended

 
November 26, 2016
 
November 28, 2015
Operating activities:
 
 
 
 
Net income (loss) including noncontrolling interest
 
$
(53,947
)
 
$
254,000

Depreciation and amortization
 
22,975

 
22,107

Other adjustments, net
 
(39,217
)
 
24,345

Net cash provided by (used in) operations
 
(70,189
)
 
300,452


 
 

 
 

Investing activities:
 
 

 
 

Purchase of investments
 
(13,324
)
 
(260,242
)
Sales of investments
 
193,280

 
104,503

Acquisition of business
 
(68,643
)
 

Investment in joint ventures
 
(10,750
)
 
(19,709
)
Purchases of property, plant and equipment
 
(40,649
)
 
(34,028
)
Payments received on notes receivable and from affiliates
 
1,750

 
853

Net proceeds from disposal of property, plant and equipment
 
163

 
219

Net cash provided by (used in) investing activities
 
61,827

 
(208,404
)

 
 

 
 

Financing activities:  
 
 

 
 

Purchase of common stock by treasury
 
(60
)
 
(62
)
Distributions to noncontrolling interests
 
(73
)
 
(459
)
Principal payments on long-term debt
 
(3,060
)
 
(22,090
)
Payments of dividends
 

 
(63,074
)
Net cash used in financing activities
 
(3,193
)
 
(85,685
)
Net change in cash and cash equivalents
 
(11,555
)
 
6,363


 
 

 
 

Cash and cash equivalents at beginning of period
 
29,046

 
8,667

Cash and cash equivalents at end of period
 
$
17,491

 
$
15,030


See Notes to Condensed Consolidated Financial Statements.


5


CAL-MAINE FOODS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
November 26, 2016
(unaudited)
1.   Presentation of Interim Information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the results for the interim periods presented have been included. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions. These estimates and assumptions affected reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions.  Operating results for the thirteen and twenty-six ended November 26, 2016 are not necessarily indicative of the results that may be expected for the year ending June 3, 2017.  

The condensed consolidated balance sheet at May 28, 2016 has been derived from the audited consolidated financial statements at that date.  It does not include all of the information and footnotes required by GAAP for complete financial statements. 

For further information, refer to the consolidated financial statements and footnotes thereto included in Cal-Maine Foods, Inc.'s annual report on Form 10-K for the fiscal year ended May 28, 2016. References to “we,” “us,” “our,” or the “Company” refer to Cal-Maine Foods, Inc.

2.   Acquisitions

On October 16, 2016, the Company acquired substantially all of the egg production assets and assumed certain liabilities of Foodonics International, Inc. ("Foodonics") and its related entities doing business as Dixie Egg Company for $68.6 million of cash and $3.0 million of deferred purchase price. The acquired assets include commercial egg production and processing facilities with capacity for 1.6 million laying hens, contract grower arrangements for an additional 1.5 million laying hens, and related feed production, milling and distribution facilities in Georgia, Alabama, and Florida. The Company also acquired Foodonics' interest in American Egg Products, LLC ("AEP") and the Egg-Land's Best franchise with licensing rights for portions of certain markets in Alabama, Florida, and Georgia as well as Puerto Rico, Bahamas and Cuba. The Company now owns 100% of AEP. The operations of the acquisition are included in the accompanying financial statements as of October 16, 2016, the effective date of the transaction.

Pending the finalization of the Company's valuation, the following table presents the preliminary fair values of the assets acquired and liabilities assumed (in thousands):
Inventory
 
$
7,669

Property, plant and equipment
 
38,683

Intangible assets
 
24,000

Liabilities assumed
 
(2,005
)
Total identifiable net assets
 
68,347

Goodwill
 
3,296

Purchase price
 
71,643

Deferred purchase price
 
(3,000
)
Cash consideration paid
 
$
68,643


These fair value measurements were primarily based on significant inputs that are not observable in the markets.  The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent

6


economic utility, was utilized for certain property, plant and equipment of Foodonics.  The cost to replace given assets reflects the estimated reproduction or replacement cost of the asset, less an allowance for loss in value due to depreciation.  The market approach, which indicates value for a subject asset based on available market pricing for comparable assets, was utilized for inventory and the Egg-Land's Best franchise of Foodonics.  The franchise fees will be amortized over a period of 15 years. Goodwill on business combination recognizes the difference in the fair value of the assets acquired and liabilities assumed, net of the acquisition price. Goodwill associated with the acquisition is tax deductible over a 15 years period.

Pro-forma information, which is usually presented for information purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been completed as of an earlier time, was not material to the Company's Condensed Consolidated Financial Statements.

3.   Stock Based Compensation

Total stock based compensation expense for the twenty-six weeks ended November 26, 2016 and November 28, 2015 was $1.7 million and $1.5 million, respectively. 

Unrecognized compensation expense as a result of non-vested shares of the 2012 Omnibus Long-Term Incentive Plan at November 26, 2016 was $3.9 million and will be recorded over a weighted average period of 1.8 years.  Refer to Note 11 of our May 28, 2016 audited financial statements for further information on our stock compensation plans.

At November 26, 2016, there were 279,050 restricted shares outstanding, with a weighted average grant date fair value of $35.99 per share.    A summary of the Company’s restricted share activity for the  twenty-six weeks ended November 26, 2016 follows:

໿

 
Number of Shares
 
Weighted Average Grant Date Fair Value
Outstanding, May 28, 2016
 
288,900

 
$
35.97

Vested
 
(4,548
)
 
30.23

Forfeited
 
(5,302
)
 
39.64

Outstanding, November 26, 2016
 
279,050

 
$
35.99



7


4.   Inventories

Inventories consisted of the following (in thousands):

 
November 26, 2016
 
May 28, 2016
Flocks
 
$
101,413

 
$
94,312

Eggs
 
12,227

 
11,519

Feed and supplies
 
48,651

 
48,968


 
$
162,291

 
$
154,799


We grow and maintain flocks of layers (mature female chickens), pullets (young female chickens, under 18 weeks of age), and breeders (male and female chickens used to produce fertile eggs to be hatched for egg production flocks). Our total flock at November 26, 2016, consisted of approximately 9.6 million pullets and breeders and 38.1 million layers.

5.   Contingencies

Financial Instruments
The Company maintained standby letters of credit (“LOC”) totaling $3.7 million at November 26, 2016.  These LOCs are collateralized with cash which is included in the line item “Other assets” in the Condensed Consolidated Balance Sheets.    The outstanding LOCs are for the benefit of certain insurance companies. The LOCs are not recorded as a liability on the consolidated balance sheets.

Legal Contingencies
The Company is a defendant in certain legal actions, and intends to vigorously defend its position in these actions.  If the Company’s assessment of a contingency indicates it is probable a material loss has been incurred and the amount of the liability can be reasonably estimated, the estimated liability is accrued in the Company’s financial statements.    If the assessment indicates a potential material loss contingency is not probable, but is reasonably possible, or probable but cannot be reasonably estimated, then the nature of the contingent liability, together with an estimate of the possible loss or range of possible loss will be disclosed, or a statement will be made that such an estimate cannot be made.

These legal actions are discussed in detail at Part II, Item 1, of this report.


8


6.   Net Income per Common Share  

Basic net income per share was calculated by dividing net income by the weighted-average number of common shares outstanding during the period.  Diluted net income per share was calculated by dividing net income by the weighted-average number of common shares outstanding during the period plus the dilutive effects of options and restricted stock.  Due to the net loss in the thirteen and twenty-six weeks ended November 26, 2016, restricted shares in the amount of 155,285 and 147,753, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive.  The computations of basic and diluted net income per share attributable to the Company are as follows (in thousands, except per share data):


 
13 Weeks Ended
 
26 Weeks Ended

 
November 26, 2016
 
November 28, 2015
 
November 26, 2016
 
November 28, 2015
Net income (loss) attributable to Cal-Maine Foods, Inc.
 
$
(23,010
)
 
$
109,230

 
$
(53,946
)
 
$
252,253


 
 
 
 
 
 

 
 

Basic weighted-average common shares
 
48,250

 
48,164

 
48,249

 
48,164

Effect of dilutive securities:
 
 
 
 
 
 

 
 

Restricted shares
 

 
197

 

 
190

Dilutive potential common shares
 
48,250

 
48,361

 
48,249

 
48,354


 
 
 
 
 
 

 
 

Net income (loss) per common share
 
 
 
 
 
 

 
 

attributable to Cal-Maine Foods, Inc.:
 
 
 
 
 
 

 
 

Basic
 
$
(0.48
)
 
$
2.27

 
$
(1.12
)
 
$
5.24

Diluted
 
$
(0.48
)
 
$
2.26

 
$
(1.12
)
 
$
5.22


7.   Accrued Dividends Payable and Dividends per Common Share

We make an accrual of dividends payable at the end of each quarter according to the Company’s dividend policy adopted by its Board of Directors. The Company pays a dividend to shareholders of its Common Stock and Class A Common Stock on a quarterly basis for each quarter for which the Company reports net income attributable to Cal-Maine Foods, Inc. computed in accordance with generally accepted accounting principles in an amount equal to one-third (1/3) of such quarterly income. Dividends are paid to shareholders of record as of the 60th day following the last day of such quarter, except for the fourth fiscal quarter.  For the fourth quarter, the Company pays dividends to shareholders of record on the 65th day after the quarter end. Dividends are payable on the 15th day following the record date. Following a quarter for which the Company does not report net income attributable to Cal-Maine Foods, Inc., the Company will not pay a dividend for a subsequent profitable quarter until the Company is profitable on a cumulative basis computed from the date of the last quarter for which a dividend was paid. At November 26, 2016, cumulative losses that must be recovered prior to paying a dividend were $54.3 million.    When applicable, the amount of the accrual appears on the Condensed Consolidated Balance Sheets as “Accrued dividends payable.”


9


On our condensed consolidated statement of income, we determine dividends per common share in accordance with the computation in the following table (in thousands, except per share data):

 
13 Weeks Ended
 
26 Weeks Ended

 
November 26, 2016
 
November 28, 2015
 
November 26, 2016
 
November 28, 2015
Net income (loss) attributable to Cal-Maine Foods, Inc. available for dividend
 
$
(23,010
)
 
$
109,230

 
$
(53,946
)
 
$
252,253


 
 

 
 

 
 
 
 
1/3 of net income attributable to Cal-Maine Foods, Inc.
 

 
36,410

 

 
84,084


 
 

 
 

 
 
 
 
Common stock outstanding (shares)
 
43,730

 
43,695

 
 
 
 
Class A common stock outstanding (shares)
 
4,800

 
4,800

 
 
 
 
Total common stock outstanding (shares)
 
48,530

 
48,495

 
 
 
 

 
 

 
 

 
 
 
 
Dividends per common share*
 
$

 
$
0.751

 
$

 
$
1.734


*Dividends per common share = 1/3 of Net income (loss) attributable to Cal-Maine Foods, Inc. available for dividend ÷ Total common stock outstanding (shares)


8.   Fair Value Measurements

The Company is required to categorize both financial and nonfinancial assets and liabilities based on the following fair value hierarchy.  The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable, and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.

Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly
Level 3 - Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The disclosure of fair value of certain financial assets and liabilities that are recorded at cost are as follows:
Cash and cash equivalents: The carrying amount approximates fair value due to the short maturity of these instruments.

Long-term debt: The carrying value of the Company’s long-term debt is at its stated value.  We have not elected to carry our long-term debt at fair value.  Fair values for debt are based on quoted market prices or published forward interest rate curves, which are level 2 inputs.  Estimated fair values are management’s estimate, which is a level 3 input; however, when there is no readily available market data, the estimated fair values may not represent the amounts that could be realized in a current transaction, and the fair values could change significantly. The fair value and carrying value of the Company’s borrowings under its long-term debt were as follows (in thousands):

 
November 26, 2016
 
May 28, 2016

 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
5.4% – 6.4% Notes payable
 
$
22,510

 
$
22,568

 
$
25,570

 
$
25,824


 
$
22,510

 
$
22,568

 
$
25,570

 
$
25,824



10


Assets and Liabilities Measured at Fair Value on a Recurring Basis
In accordance with the fair value hierarchy described above, the following table shows the fair value of financial assets and liabilities measured at fair value on a recurring basis as of November 26, 2016 and May 28, 2016 (in thousands):
໿
 
 
 
 
 
 
 
 
Total
November 26, 2016
 
Level 1
 
Level 2
 
Level 3
 
Balance
Assets
 
 

 
 

 
 

 
 

US government and agency obligations
 

 
$
17,248

 

 
$
17,248

Municipal bonds
 

 
57,050

 

 
57,050

Corporate bonds
 

 
98,251

 

 
98,251

Foreign government obligations
 

 
2,019

 

 
2,019

Asset backed securities
 

 
5,842

 

 
5,842

Mutual funds
 
2,028

 

 

 
2,028

Total assets measured at fair value
 
$
2,028

 
$
180,410

 

 
$
182,438

໿
 
 
 
 
 
 
 
 
Total
May 28, 2016
 
Level 1
 
Level 2
 
Level 3
 
Balance
Assets
 
 

 
 

 
 

 
 

US government and agency obligations
 
$

 
$
18,814

 
$

 
$
18,814

Municipal bonds
 

 
79,643

 

 
79,643

Corporate bonds
 

 
240,537

 

 
240,537

Foreign government obligations
 

 
2,046

 

 
2,046

Asset backed securities
 

 
15,893

 

 
15,893

Mutual funds
 
5,503

 

 

 
5,503

Total assets measured at fair value
 
$
5,503

 
$
356,933

 
$

 
$
362,436


Investment securities – available-for-sale, classified as level 2, consist of U.S. government and agency obligations, taxable and tax exempt municipal bonds, zero coupon municipal bonds, foreign government obligations, asset backed securities and corporate bonds with maturities of three months or longer when purchased. We classify these securities as current, because amounts invested are available for current operations. Observable inputs for these securities are yields, credit risks, default rates, and volatility.

໿
໿
9.   Investment Securities

The following represents the Company’s investment securities as of November 26, 2016 and May 28, 2016 (in thousands):
November 26, 2016
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
US government and agency obligations
 
$
17,296

 
$

 
$
48

 
$
17,248

Municipal bonds
 
56,960

 
90

 

 
57,050

Corporate bonds
 
98,318

 

 
67

 
98,251

Foreign government obligations
 
2,021

 

 
2

 
2,019

Asset backed securities
 
5,841

 
1

 

 
5,842

Total current investment securities
 
$
180,436

 
$
91

 
$
117

 
$
180,410


 
 

 
 

 
 

 
 

Mutual funds
 
1,448

 
580

 

 
2,028

Total noncurrent investment securities
 
$
1,448

 
$
580

 


 
$
2,028


11


May 28, 2016
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
US government and agency obligations
 
$
18,809

 
$
5

 
$

 
$
18,814

Municipal bonds
 
79,481

 
162

 

 
79,643

Corporate bonds
 
240,593

 

 
56

 
240,537

Foreign government obligations
 
2,044

 
2

 

 
2,046

Asset backed securities
 
15,908

 

 
15

 
15,893

Mutual funds
 
3,565

 
1

 

 
3,566

Total current investment securities
 
$
360,400

 
$
170

 
$
71

 
$
360,499


 
 

 
 

 
 

 
 

Mutual funds
 
1,448

 
489

 

 
1,937

Total noncurrent investment securities
 
$
1,448

 
$
489

 


 
$
1,937


Proceeds from sales of available-for-sale securities were $193.3 million and $104.5 million during the twenty-six weeks ended November 26, 2016 and November 28, 2015, respectively. Gross realized gains on those sales during the twenty-six weeks ended ended November 26, 2016 and November 28, 2015 were $221,000 and $18,000, respectively.  Gross realized losses on those sales during the twenty-six weeks ended November 26, 2016 and November 28, 2015 were $6,000 and $36,000, respectively. For purposes of determining gross realized gains and losses, the cost of securities sold is based on the specific identification method.

Unrealized holding losses, net of tax, on current investment securities in the amount of  $78,000  were recorded for the twenty-six weeks ended November 26, 2016 compared with unrealized holding losses, net of tax, of $267,000 for the same period of fiscal 2016. Unrealized holding gains, net of tax, on noncurrent investment securities of $57,000 were recorded for the twenty-six weeks ended November 26, 2016 compared with unrealized holding losses, net of tax, of $11,000 for the same period of fiscal 2016.

Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Contractual maturities at November 26, 2016, are as follows (in thousands):

 
Estimated Fair Value
Within one year       
 
$
91,976

1-5 years
 
88,434

Total
 
$
180,410


໿

12


10.   Equity

The following reflects the equity activity, including our noncontrolling interest, for the twenty-six weeks ended November 26, 2016:
໿

 
Cal-Maine Foods, Inc. Stockholders
 
 
 
 

 
Common Stock
 
 
 
 
 
 
 
 

 
 

 
Class A
 
Treasury
 
Paid In
 
Accum. Other
 
Retained
 
Noncontrolling
 
 

 
Amount

 
Amount
 
Amount
 
Capital
 
Comp. Loss
 
Earnings
 
Interest
 
Total
Balance at May 28, 2016
 
$
703

 
$
48

 
$
(22,272
)
 
$
46,404

 
$
(48
)
 
$
890,440

 
$
2,086

 
$
917,361

Other comprehensive loss, net of tax
 

 

 

 

 
(21
)
 

 

 
(21
)
Forfeiture of restricted stock
 

 

 
(4
)
 
4

 

 

 

 

Buyback of 1,426 shares to satisfy withholding obligation in connection with the vesting of restricted stock
 

 

 
(60
)
 

 

 

 

 
(60
)
Distribution to noncontrolling interest partners
 

 

 

 

 

 

 
(73
)
 
(73
)
Restricted stock compensation
 

 

 

 
1,657

 

 

 

 
1,657

Reclass of equity portion of American Egg Products in connection with acquisition, see Note 2
 

 

 

 

 

 
58

 
(58
)
 

Net income
 

 

 

 

 

 
(53,946
)
 
(1
)
 
(53,947
)
Balance at November 26, 2016
 
$
703

 
$
48

 
$
(22,336
)
 
$
48,065

 
$
(69
)
 
$
836,552

 
$
1,954

 
$
864,917



13


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains numerous forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) relating to our shell egg business, including estimated production data, expected operating schedules, projected construction costs, and other operating data, including anticipated results of operations and financial condition.  Such forward-looking statements are identified by the use of words such as “believes,” “intends,” “expects,” “hopes,” “may,” “should,” “plans,” “projected,” “contemplates,” “anticipates,” or similar words.  Actual production, operating schedules, capital costs, results of operations, and other projections and estimates could differ materially from those projected in the forward-looking statements.  The forward-looking statements are based on management’s current intent, belief, expectations, estimates, and projections regarding the Company and its industry.  These statements are not guarantees of future performance and involve risks, uncertainties, assumptions, and other factors that are difficult to predict and may be beyond our control.  The factors that could cause actual results to differ materially from those projected in the forward-looking statements include, among others, (i) the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 28, 2016, as updated by our subsequent Quarterly Reports on Form 10-Q, (ii) the risks and hazards inherent in the shell egg business (including disease, pests, weather conditions, and potential for product recall), (iii) changes in the demand for and market prices of shell eggs and feed costs, (iv) our ability to predict and meet demand for cage-free and other specialty eggs, (v) risks, changes, or obligations that could result from our future acquisition of new flocks or businesses and risks or changes that may cause conditions to completing a pending acquisition not to be met, and (vi) adverse results in pending litigation matters.  Readers are cautioned not to place undue reliance on forward-looking statements because, while we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate.  Further, forward-looking statements included herein are only made as of the respective dates thereof, or if no date is stated, as of the date hereof.  Except as otherwise required by law, we disclaim any intent or obligation to update publicly these forward-looking statements, whether because of new information, future events, or otherwise.

OVERVIEW

Cal-Maine Foods, Inc. (“we,” “us,” “our,” or the “Company”) is primarily engaged in the production, grading, packaging, marketing, and distribution of fresh shell eggs.  Our fiscal year end is the Saturday closest to May 31.
 
Our operations are fully integrated.  At our facilities we hatch chicks, grow and maintain flocks of pullets (young female chickens, under 18 weeks of age), layers (mature female chickens) and breeders (male and female birds used to produce fertile eggs to be hatched for egg production flocks), manufacture feed, and produce, process, and distribute shell eggs. We are the largest producer and marketer of shell eggs in the United States (U.S.).  We market the majority of our shell eggs in the southwestern, southeastern, mid-western, and mid-Atlantic regions of the U.S.  We market shell eggs through an extensive distribution network to a diverse group of customers, including national and regional grocery store chains, club stores, foodservice distributors, and egg product consumers.    

The Company has one operating segment,  which is the production, grading, packaging, marketing and distribution of shell eggs.  The majority of our customers rely on us to provide most of their shell egg needs, including specialty and non-specialty eggs. Specialty eggs represent a broad range of products.  We classify nutritionally enhanced, cage free, organic and brown eggs as specialty products for accounting and reporting purposes. We classify all other shell eggs as non-specialty products.  While we report separate sales information for these types of eggs, we note there are a number of cost factors which are not specifically available for non-specialty or specialty eggs due to the nature of egg production. We manage our operations and allocate resources to these types of eggs on a consolidated basis based on the demands of our customers.
 

14


Our operating results are directly tied to egg prices, which are highly volatile and subject to wide fluctuations, and are outside of our control. For example, the annual average Urner-Barry Southeastern Regional Large Egg Market Price per dozen eggs, for our fiscal 2005-2016 ranged from a low of $0.72 during fiscal 2005 to a high of $2.97 during fiscal 2016.  The shell egg industry has traditionally been subject to periods of high profitability followed by periods of significant loss. In the past, during periods of high profitability, shell egg producers tended to increase the number of layers in production with a resulting increase in the supply of shell eggs, which generally caused a drop in shell egg prices until supply and demand returned to balance.  As a result, our financial results from year to year may vary significantly.   Shorter term, retail sales of shell eggs historically have been greatest during the fall and winter months and lowest during the summer months.  Prices for shell eggs fluctuate in response to seasonal factors and a natural increase in shell egg production during the spring and early summer.  Shell egg prices tend to increase with the start of the school year and are highest prior to holiday periods, particularly Thanksgiving, Christmas, and Easter.  Consequently, we generally experience lower sales and net income in our first and fourth fiscal quarters ending in August and May, respectively. Because of the seasonal and quarterly fluctuations, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons.  

From April through June 2015, our industry experienced a significant avian influenza (“AI”) outbreak, primarily in the upper Midwestern U.S.  Based on several published industry estimates, we believe approximately 12% of the national flock of laying hens was affected.  The affected laying hens were either destroyed by the disease or euthanized.  During April through June 2015, the supply of laying hens decreased substantially, and then began to recover gradually. As of November 1, 2016, the national laying hen flock according to the U.S. Department of Agriculture was approximately 8.0% higher than the AI reduced flock on November 1, 2015, but remained 1.7% below the number of layers on November 1, 2014.  Egg prices increased significantly during the summer and fall of 2015. The average Urner-Barry Thursday prices for the large market (i.e. generic shell eggs) in the southeastern region for the months of June through November 2015 was $2.32 per dozen, with a peak of $2.97 in August.  Subsequent to November 2015, shell egg prices declined.  The Urner Barry price index hit a decade-low level during our fiscal 2016 fourth quarter. During our first quarter of fiscal 2017 it increased slightly, but remained at significantly lower levels than the corresponding period of last year.  During our fiscal 2017 second quarter, it returned to and dropped below the low levels seen during the fiscal 2016 fourth quarter. Accordingly, our net average selling prices for eggs for the second quarter and year to date periods of fiscal 2017 were $0.971 and $0.962 compared with $1.970 and $2.105 for the corresponding periods of fiscal 2016, respectively. Retail demand has remained favorable; however, lower institutional demand for egg products and reduced egg exports have pushed inventory levels higher and created additional pricing pressure.  Subsequent to the end of our second quarter, egg prices have risen sharply; however, egg prices will likely remain volatile and future prices will depend on levels of supply and the recovery of institutional demand for eggs which was adversely impacted as a result of the 2015 shortages caused by AI. 

We are one of the largest producers and marketers of value-added specialty shell eggs in the U.S. They have been a significant and growing segment of the market in recent years. During our fiscal 2016 an increasing number of large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to a cage-free egg supply chain by specified future dates. We are working with our customers to achieve smooth progress in meeting their goals, and our focus for future expansion at our farms will be with environments that are cage-free or with equipment that can easily be converted to cage-free, based on a timeline that meets our customer’s needs.

For the thirteen weeks ended November 26, 2016, we produced approximately 84% of the total number of shell eggs we sold.  This compares to 77% in the comparable prior year period.  For the thirteen weeks ended November 26, 2016, approximately 7% of such production was provided by contract producers who utilize their facilities in the production of shell eggs by layers owned by us compared to 4% for the same period of last year. We own the shell eggs produced under these arrangements.


15


Our cost of production is materially affected by feed costs.  Feed costs averaged approximately 57% and 58%, respectively, of our total farm egg production cost for the thirteen and twenty-six weeks ended November 26, 2016. Changes in market prices for corn and soybean meal, the primary ingredients in the feed we use, result in changes in our cost of goods sold.   The cost of our feed ingredients, which are commodities, are subject to factors over which we have little or no control such as volatile price changes caused by weather, size of harvest, transportation and storage costs, demand and the agricultural and energy policies of the U.S. and foreign governments.  Increased U.S. acreage and large per acre yields for both corn and soybeans in 2016 should provide adequate domestic supplies for both of our primary feed ingredients.  Domestic corn supplies could be particularly robust, although domestic soybean stocks could be negatively impacted by increased exports due to reduced supplies from South America.

During the second quarter of fiscal 2017, the Company acquired substantially all of the egg production assets of Foodonics International, Inc. and its related entities doing business as Dixie Egg Company for $68.6 million of cash and $3.0 million of deferred purchase price. The acquired assets include commercial egg production and processing facilities with capacity for 1.6 million laying hens, contract grower arrangements for an additional 1.5 million laying hens, and related feed production, milling and distribution facilities in Georgia, Alabama, and Florida. The Company also acquired Foodonics' interest in American Egg Products, LLC ("AEP") and the Egg-Land's Best franchise with licensing rights for portions of certain markets in Alabama, Florida, and Georgia as well as Puerto Rico, Bahamas and Cuba. The Company now owns 100% of AEP. The operations of the acquisition are included in the accompanying financial statements as of October 16, 2016, the effective date of the transaction.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items from our Condensed Consolidated Statements of Income expressed as a percentage of net sales.


 
13 Weeks Ended
 
26 Weeks Ended

 
November 26, 2016
 
November 28, 2015
 
November 26, 2016
 
November 28, 2015
Net sales
 
100.0
 %
 
100.0
%
 
100.0
 %
 
100.0
%
Cost of sales
 
98.4
 %
 
61.2
%
 
101.1
 %
 
58.9
%
Gross profit (loss)
 
1.6
 %
 
38.8
%
 
(1.1
)%
 
41.1
%
Selling, general, and administrative expense
 
16.6
 %
 
8.3
%
 
16.7
 %
 
7.6
%
Operating income (loss)
 
(15.0
)%
 
30.5
%
 
(17.8
)%
 
33.5
%
Other income (expense), net
 
0.5
 %
 
0.3
%
 
0.5
 %
 
0.2
%
Income (loss) before income taxes and noncontrolling interest
 
(15.5
)%
 
30.2
%
 
(18.3
)%
 
33.3
%
Income tax expense (benefit)
 
(5.4
)%
 
10.6
%
 
(6.4
)%
 
11.7
%
Net income (loss) before noncontrolling interest
 
(10.1
)%
 
19.6
%
 
(11.9
)%
 
21.6
%
Less: Net income (loss) attributable to noncontrolling interest
 
 %
 
0.1
%
 
 %
 
0.2
%
Net income (loss) attributable to Cal-Maine Foods, Inc.
 
(10.1
)%
 
19.5
%
 
(11.9
)%
 
21.4
%

NET SALES

Approximately 98% of our net sales for the quarter ended November 26, 2016 were shell eggs and approximately 2% were egg products.  Net sales for the thirteen weeks ended November 26, 2016 were $253.5 million, a decrease of $292.5 million, or 53.6%, compared to net sales of $546.0 million for the thirteen weeks ended November 28, 2015, primarily due to the decrease in egg selling prices.  Total dozens of shell eggs sold and egg selling prices decreased for the current thirteen-week period compared to the same period in fiscal 2016.    Dozens sold for the second quarter of fiscal year 2017  were 252.2 million, a decrease of 12.0 million, or 4.5%, compared to 264.2 million for the second quarter of fiscal 2016 resulting in a decrease in net sales of $11.6 million

Our net average selling price per dozen of shell eggs for the thirteen weeks ended November 26, 2016 was $0.971, compared to $1.970 for the thirteen weeks ended November 28, 2015, a decrease of 50.7%, resulting in a corresponding

16


decrease in net shell egg sales of $263.9 million.  Net average selling price is the blended price for all sizes and grades of shell eggs, including non-graded shell egg sales, breaking stock, and undergrades.    

Egg products and other revenues resulted in decreased net sales of $16.3 million for the thirteen weeks ended November 26, 2016 compared to the same period of last year.

For the twenty-six weeks ended November 26, 2016, approximately 98% of our net sales were shell eggs and approximately 2% were egg products. Net sales for the twenty-six weeks ended November 26, 2016 were $493.4 million a decrease of $662.5 million, or 57.3%, compared to $1,155.9 million for the twenty-six weeks ended November 28, 2015. Total dozens of shell eggs sold and egg selling prices decreased for the current twenty-six week period compared to the same period in fiscal 2016. Dozens sold for the twenty-six weeks ended November 26, 2016 were 494.5 million, a decrease of 28.4 million, or 5.4%, compared to 522.9 million for the same period of fiscal 2016 resulting in a decrease in net sales of $27.4 million.

For the twenty-six weeks ended November 26, 2016, our net average selling price per dozen of shell eggs was $0.962 compared to $2.105 for the same period of fiscal 2016, a decrease of 54.3%, resulting in a corresponding decrease in net shell egg sales of $597.7 million.

Egg products and other revenues resulted in decreased net sales of $37.9 million for the twenty-six weeks ended November 26, 2016 compared to the same period of fiscal 2016.

The table below represents an analysis of our non-specialty and specialty shell egg sales (in thousands, except percentage data).  Following the table is a discussion of the information presented in the table.

 
13 Weeks Ended
 
26 Weeks Ended

 
November 26, 2016
 
November 28, 2015
 
November 26, 2016
 
November 28, 2015
Total net sales
 
$
253,544

 
 
 
$
545,975

 
 
 
$
493,389

 
 
 
$
1,155,870

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-specialty shell egg sales
 
$
123,008

 
49.8
%
 
$
369,878

 
70.7
%
 
$
236,512

 
49.1
%
 
$
792,769

 
71.7
%
Specialty shell egg sales
 
113,224

 
45.8
%
 
136,791

 
26.1
%
 
222,536

 
46.2
%
 
280,744

 
25.4
%
Co-pack specialty shell egg sales
 
8,514

 
3.4
%
 
14,246

 
2.7
%
 
16,969

 
3.5
%
 
28,245

 
2.5
%
Other
 
2,485

 
1.0
%
 
2,515

 
0.5
%
 
5,482

 
1.2
%
 
4,301

 
0.4
%
Net shell egg sales
 
$
247,231

 
100.0
%
 
$
523,430

 
100.0
%
 
$
481,499

 
100.0
%
 
$
1,106,059

 
100.0
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net shell egg sales as a percent  of total net sales
 
98
%
 
 
 
96
%
 
 
 
98
%
 
 
 
96
%
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dozens sold:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-specialty shell egg
 
191,383

 
75.9
%
 
199,186

 
75.4
%
 
374,113

 
75.7
%
 
394,538

 
75.5
%
Specialty shell egg
 
56,540

 
22.4
%
 
59,269

 
22.4
%
 
111,939

 
22.6
%
 
117,304

 
22.4
%
Co-pack specialty shell egg
 
4,254

 
1.7
%
 
5,717

 
2.2
%
 
8,449

 
1.7
%
 
11,104

 
2.1
%
Total dozens sold
 
252,177

 
100.0
%
 
264,172

 
100.0
%
 
494,501

 
100
%
 
522,946

 
100.0
%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net average selling price
 
$
0.971

 
 
 
$
1.970

 
 
 
$
0.962

 
 

$
2.105

 
 

Non-specialty shell eggs include all shell egg sales not specifically identified as specialty shell egg sales.   The non-specialty shell egg market is characterized by an inelasticity of demand.   Small increases or decreases in production or demand can have a large positive or adverse effect on selling prices.  For the thirteen weeks ended November 26, 2016, non-specialty shell egg dozens sold decreased approximately 3.9% and the average selling price decreased 64.9% to $0.656 from $1.870 for the same period of the prior year. For the twenty-six weeks ended November 26, 2016, non-specialty shell egg dozens sold decreased approximately 5.2% and the average selling price decreased 68.0% to $0.647 from $2.020 for the same period of fiscal 2016.

17



Specialty shell eggs continue to make up a large portion of our total shell egg revenue and dozens sold.  Specialty egg retail prices are less cyclical than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the perceived benefits from these products.  This was particularly evident in recent quarters as non-specialty egg prices declined more than specialty egg prices.  However, as non-specialty egg prices declined, we experienced some margin and volume pressures on specialty egg sales.  For the thirteen weeks ended November 26, 2016, specialty shell egg dozens sold decreased approximately 4.6% and the average selling price decreased 13.2% to $2.003 from $2.308 for the same period of the prior year. For the twenty-six weeks ended November 26, 2016, specialty shell egg dozens sold decreased 4.6% and the average selling price decreased 16.9% to $1.988 from $2.393 for the same period of fiscal 2016.

Co-pack specialty shell eggs are sold primarily through co-pack arrangements, a common practice in the industry whereby production and processing of certain products is outsourced to another producer.  Shell egg sales in this category represented 4.3 million and 5.7 million dozen for the quarters ended November 26, 2016 and November 28, 2015, respectively,  primarily reflecting the loss of a portion of a major customer’s co-pack business.  Co-pack specialty shell eggs sold during the twenty-six weeks ended November 26, 2016 and November 28, 2015, were 8.4 million and 11.1 million, respectively.

The shell egg sales classified as “Other” represent sales of hard cooked eggs, hatching eggs, and/or other miscellaneous products, which are included with our shell egg operations. 

Egg products are shell eggs that are broken and sold in liquid, frozen, or dried form.  Our egg products are sold through our consolidated subsidiaries American Egg Products, LLC (“AEP”) and Texas Egg Products, LLC (“TEP”).  For the second quarter of fiscal 2017, egg product sales were $6.3 million, a decrease of $16.3 million, or 72.0%, compared to $22.6 million for the same period of fiscal 2016. Pounds sold for the second quarter of fiscal year 2017 were 16.6 million pounds, an increase of 1.9 million pounds, or 12.4%, compared to 14.7 million pounds for the same quarter of fiscal 2016.  For the twenty-six weeks ended November 26, 2016, egg product sales were $11.9 million, a decrease of $37.9 million, or 76.1%, compared to $49.8 million for the same period of 2016. Pounds sold for the twenty-six weeks ended November 26, 2016 were 30.9 million, an increase of 2.1 million, or 7.2%, compared to 28.9 million for the same period of fiscal 2016. Selling prices for liquid and frozen egg products were down 77.4% for the year to date period of fiscal 2017 compared with the same period of last year.

COST OF SALES

Cost of sales consists of costs directly related to production, processing and packing shell eggs, purchases of shell eggs from outside producers, processing and packing of liquid and frozen egg products, and other non-egg costs.  Farm production costs are those costs incurred at the egg production facility, including feed, facility, hen amortization, and other related farm production costs.


18


The following table presents the key variables affecting cost of sales (in thousands, except cost per dozen data).
໿
໿
໿
໿

 
13 Weeks Ended
 
26 Weeks Ended

 
November 26, 2016
 
November 28, 2015
 
Percent Change
 
November 26, 2016
 
November 28, 2015
 
Percent Change
Cost of Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Farm production
 
$
144,581

 
$
140,817

 
2.7
 %
 
287,452

 
279,852

 
2.7
 %
Processing, packaging, and warehouse
 
47,988

 
46,197

 
3.9
 %
 
94,291

 
91,050

 
3.6
 %
Outside egg purchases and other (including change in inventory)
 
52,432

 
131,775

 
(60.2
)%
 
108,026

 
276,849

 
(61.0
)%
Total shell eggs
 
245,001

 
318,789

 
(23.1
)%
 
489,769

 
647,751

 
(24.4
)%
Egg products
 
4,434

 
15,452

 
(71.3
)%
 
8,732

 
32,955

 
(73.5
)%
Other
 
160

 
137

 
16.8
 %
 
509

 
496

 
2.6
 %
Total
 
$
249,595

 
$
334,378

 
(25.4
)%
 
$
499,010

 
$
681,202

 
(26.7
)%

 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Farm production cost (per dozen produced)
 
 
 
 
 
 
 
 
 
 
 
 
Feed
 
$
0.394

 
$
0.427

 
(7.7
)%
 
$
0.412

 
$
0.423

 
(2.6
)%
Other
 
0.294

 
0.262

 
12.2
 %
 
$
0.294

 
$
0.271

 
8.5
 %
Total
 
$
0.688

 
$
0.689

 
(0.1
)%
 
$
0.706

 
$
0.694

 
1.7
 %

 
 
 
 
 
 
 
 
 
 
 
 
Outside egg purchases (average cost per dozen)
 
$
0.98

 
$
1.97

 
(50.3
)%
 
$
1.01

 
$
2.12

 
(52.4
)%

 
 
 
 
 
 
 
 
 
 
 
 
Dozen produced
 
211,971

 
204,423

 
3.7
 %
 
410,753

 
407,071

 
0.9
 %
Dozen sold
 
252,177

 
264,172

 
(4.5
)%
 
494,501

 
522,946

 
(5.4
)%

Cost of sales for the second quarter of fiscal 2017 was $249.6 million, a decrease of $84.8 million, or 25.4%, compared to cost of sales of $334.4 million for the same quarter of fiscal 2016.  The decrease was primarily driven by a decrease in the cost of outside egg purchases during the quarter, including eggs purchased by our egg products divisions.   Feed cost per dozen for the fiscal 2017 second quarter was $0.394, compared to $0.427 per dozen for the comparable fiscal 2016 quarter, a decrease of 7.7% resulting in a decrease in cost of sales of $7.0 million for the thirteen weeks ended November 26, 2016 compared with the same period of fiscal 2016.  Other farm production cost increased 12.2% to $0.294 for the second quarter of 2017, compared with $0.262 for the same period of last year primarily due to increased amortization expense and facility costs related to capital improvement and conversion projects.

For the twenty-six weeks ended November 26, 2016, total cost of sales was $499.0 million, a decrease of $182.2 million , or 26.7% , from $681.2 million for the same period of fiscal 2016. Similar to the thirteen week period, the decrease was driven by a decrease in the cost of outside egg purchases during the period, including eggs purchased by our egg products divisions. Feed cost per dozen for twenty-six weeks ended November 26, 2016, was $0.412, compared to $0.423 per dozen for the comparable period of fiscal 2016, a decrease of 2.6%, resulting in a decrease in cost of sales of $4.5 million for the comparable periods. Other farm production cost increased 8.5% to $0.294 for the twenty-six weeks ended November 26, 2016, compared to $0.271 for the same period of last year primarily due to increased amortization expense and facility costs related to capital improvement and conversion projects.

Gross margin decreased from 38.8%  for the second quarter of fiscal 2016 to 1.6% for the thirteen weeks ended November 26, 2016 primarily due to the decreased average customer selling prices.  For the twenty-six weeks ended November 26, 2016, gross loss was 1.1% compared to gross profit of 41.1% for the same period of fiscal 2016, also primarily due to the decreased average customer selling prices.


19


SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general, and administrative expenses include costs of marketing, distribution, accounting, and corporate overhead.  The following table presents an analysis of our selling, general, and administrative expenses (in thousands). 

 
13 Weeks Ended

 
November 26, 2016
 
November 28, 2015
 
$ Change
 
% Change
Stock compensation expense
 
$
808

 
$
745

 
$
63

 
8.5
 %
Specialty egg expense
 
13,773

 
16,187

 
(2,414
)
 
(14.9
)%
Payroll and overhead
 
8,723

 
10,097

 
(1,374
)
 
(13.6
)%
Other expenses
 
5,551

 
5,700

 
(149
)
 
(2.6
)%
Delivery expense
 
13,136

 
12,709

 
427

 
3.4
 %
Total
 
$
41,991

 
$
45,438

 
$
(3,447
)
 
(7.6
)%


For the thirteen weeks ended November 26, 2016, selling, general, and administrative expense was $42.0 million, a decrease of 7.6%, compared to $45.4 million for the thirteen weeks ended November 28, 2015.  Specialty egg expense decreased $2.4 million compared to the same period of last year, a decrease of 14.9%.  Specialty egg expense typically fluctuates with specialty egg dozens sold which decreased 4.6% for the current quarter compared to the same period of last year.  Franchise fees and advertising, which are components of specialty egg expense, decreased 9.4% and 18.4%, respectively, compared to higher than normal amounts in fiscal 2016. Payroll and overhead decreased $1.4 million, or 13.6%, compared to the same period of last year primarily due to reduced bonus accruals in the current period.  As a percentage of net sales, payroll and overhead was 3.4% for the second quarter of fiscal 2017 compared to 1.8% for the same period of last year.     


 
26 Weeks Ended

 
November 26, 2016
 
November 28, 2015
 
$ Change
 
% Change
Stock compensation expense
 
$
1,656

 
$
1,444

 
$
212

 
14.7
 %
Specialty egg expense
 
26,829

 
30,069

 
(3,240
)
 
(10.8
)%
Payroll and overhead
 
17,162

 
19,683

 
(2,521
)
 
(12.8
)%
Other expenses
 
10,904

 
12,302

 
(1,398
)
 
(11.4
)%
Delivery expense
 
25,696

 
24,903

 
793

 
3.2
 %
Total
 
$
82,247

 
$
88,401

 
$
(6,154
)
 
(7.0
)%

໿
For the twenty-six weeks ended November 26, 2016 , selling, general, and administrative expenses was $82.2 million, a decrease of 7.0%, compared to $88.4 million for the twenty-six weeks ended November 28, 2015. Specialty egg expense decreased $3.2 million compared to the same period of last year, a decrease of 10.8%. Specialty egg expense typcially fluctuates with specialty egg dozens sold, which decreased 4.6% for the twenty-six weeks ended November 26, 2016 compared the same period of last year. Franchise fees and advertising, which are components of specialty egg expense, decreased 11.4% and 6.5%, respectively, compared to higher than normal amounts in fiscal 2016. Payroll and overhead decreased $2.5 million, or 12.8%, compared to the same period of last year primarily due to reduced bonus accruals in the current period and reduced expense related to the vesting of liability awards incurred in the first quarter of fiscal 2016. As a percentage of net sales, payroll and overhead was 3.5% for the twenty-six weeks ended November 26, 2016 compared to 1.7% for the same period of last year. Other expenses decreased $1.4 million, or 11.4%, for the twenty-six weeks ended November 26, 2016 compared with the same period of fiscal 2016, primarily due to decreased legal fees and reduction in intangible asset amortization expense related to fully amortized customer relationships and Egg-Land's Best franchises.

OPERATING INCOME (LOSS)

As a result of the above, operating loss was $38.0 million for the second quarter of fiscal 2017, compared to operating income of $166.2 million for the fiscal 2016 second quarter. 

20



For the twenty-six weeks ended November 26, 2016, operating loss was $87.9 million compared to operating income of $386.3 million for the same period of last year.

OTHER INCOME (EXPENSE)    

Total other income (expense) consists of items not directly charged to, or related to, operations such as interest expense, royalty income, and patronage income, among other items.  Other income for the thirteen weeks ended November 26, 2016 was $1.3 million, a decrease of of $575,000, compared to $1.9 million for the thirteen weeks ended November 28, 2015.  This decrease is primarily due to a decrease in equity income from affiliates in the second quarter of fiscal 2017 compared to the same period of last year. As a percent of net sales, other income was 0.5% for the thirteen weeks ended November 26, 2016 and 0.3% for the same period of fiscal 2016.

For the second quarter of fiscal 2017, we recorded $781,000 of interest income compared with $1.2 million for the same period of last year.   This decrease resulted from lower average invested balances partially offset by higher average interest rates earned on investments. The Company recorded interest expense of $370,000 and $724,000, of which $370,000 and $186,000 was capitalized in the second quarters of fiscal 2017 and 2016, respectively.  These changes resulted from the Company reducing outstanding debt and increasing capitalized interest related to major expansion and renovation projects.

Equity in income of affiliates for the second quarter of fiscal 2017 was $645,000 compared to $1.3 million for the same period of last year.  The decrease of $657,000 is primarily due to increased costs as our Red River joint venture nears completion as well as decreased income from specialty egg sales in our other unconsolidated joint ventures.

Total other income (expense) for the twenty-six weeks ended November 26, 2016, was $2.6 million, an increase of $200,000, compared to $2.4 million for the same period of last year. This decrease is primarily due to a decrease in equity income from affiliates offset by an increase in interest income in the current year. As a percentage of net sales, other income was 0.5% for the twenty-six weeks ended November 26, 2016 compared to 0.2% for the same period of last year.

The Company recorded interest income of $1.9 million for the twenty-six weeks ended November 26, 2016, compared to $1.6 million for the same period of last year. We recorded interest expense of $757,000 and $1.4 million, of which $749,000 and $454,000 was capitalized in the year to date period of fiscal 2017 and 2016, respectively. These changes resulted from the Company reducing outstanding debt and increasing capitalized interest related to major expansion and renovation projects.

Equity in income of affiliates for the twenty-six weeks ended November 26, 2016, was $836,000, a decrease of $1.2 million, from $2.0 million for the same period of fiscal 2016. This decrease is primarily due to increased costs as our Red River joint venture nears completion as well as decreased income from specialty egg sales in our other unconsolidated joint ventures.

INCOME TAXES

Pre-tax loss,  less net loss attributable to noncontrolling interest, was $36.8 million for the thirteen weeks ended November 26, 2016, compared to pre-tax income of $167.3 million for last year’s comparable period.  For the current thirteen-week period, income tax benefit of $13.8 million was recorded, with an effective tax rate of 37.5%, compared to income tax expense of $58.1 million, with an effective rate of 34.7%, for last year’s comparable period.  

For the twenty-six weeks ended November 26, 2016, pre-tax losss, less net loss attributable to noncontrolling interest was $85.3 million compared to net income of $386.9 million. For the current twenty-six week period we recognized income tax benefit of $31.4 million, with an effective tax rate of 36.8%, compared to income tax expense of $134.7 million, with an effective tax rate of 34.8% for the same period of last year.


21


Included in prior period income tax expense is the benefit of the domestic production activity deduction.

Our effective rate differs from the federal statutory income tax rate of 35% due to state income taxes and certain items included in income for financial reporting purposes that are not included in taxable income for income tax purposes, including tax exempt interest income, domestic production activity deduction, and net income or loss attributable to noncontrolling interest.

NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST

For the thirteen weeks ended November 26, 2016 and November 28, 2015, net income attributable to noncontrolling interest was $43,000 and $680,000, respectively.

For the twenty-six weeks ended November 26, 2016, net loss attributable to noncontrolling interest was $1,000 compared to net income of $1.7 million for the same period of fiscal 2016.

NET INCOME (LOSS) ATTRIBUTABLE TO CAL-MAINE FOODS, INC.

Net loss for the thirteen weeks ended November 26, 2016 was $23.0 million, or $0.48 per basic and diluted share, compared to net income of $109.2 million, or $2.27 per basic and $2.26 per diluted share for the same period last year.

For the twenty-six weeks ended November 26, 2016, net loss was $53.9 million, or $1.12 per basic and diluted share, compared to net income of $252.3 million, or $5.24 per basic and $5.22 per diluted share for the same period of last year.

CAPITAL RESOURCES AND LIQUIDITY

Our working capital at November 26, 2016 was $402.2 million, compared to $542.8 million at May 28, 2016. The calculation of working capital is defined as current assets less current liabilities. Our current ratio was 5.87 at November 26, 2016, compared with 7.50 at May 28, 2016. We have $3.7 million in outstanding standby letters of credit, which are collateralized by cash for the benefit of certain insurance companies. Our long-term debt at November 26, 2016, including current maturities, amounted to $22.5 million, compared to $25.6 million at May 28, 2016. Refer to Note 9 of our May 28, 2016 audited financial statements for further information on our long-term debt.
  
For the twenty-six weeks ended November 26, 2016, $70.2 million in net cash was used in operating activities, a decrease of $370.6 million, compared to net cash provided by operations of $300.5 million for the comparable period in fiscal 2016.   Decreased gross profit margins resulting from lower egg selling prices contributed greatly to our decrease in cash flow from operations.

For the twenty-six weeks ended November 26, 2016,  approximately $193.3 million was provided from the sale of short-term investments and $13.3 million was used to purchase short-term investments, compared to $104.5 million in sales and $260.2 million in purchases in the second quarter of fiscal 2016.  We used $68.6 million for the previously discussed acquisition of the assets of Foodonics. We invested an additional $10.8 million in our previously disclosed Red River Valley Egg Farm, LLC joint venture (“Red River”).  Approximately $40.6 million was used to purchase property, plant and equipment, including construction projects discussed in detail below, compared to $34.0 million in the twenty-six weeks ended November 28, 2015 .  We paid dividends of $63.1 million in twenty-six weeks ended November 28, 2015 and none in fiscal 2017.  As of November 26, 2016, cash decreased approximately $11.6 million since May 28, 2016 compared to an increase of $6.4 million during the same period of fiscal 2016.