10-Q 1 calm-2018x03x03x10q.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 March 3, 2018

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth 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 ¨
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨


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 43,832,291 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 March 29, 2018.



CAL-MAINE FOODS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED MARCH 3, 2018
 
 
 
 
 
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)
 
 
March 3, 2018
 
June 3, 2017
ASSETS
 
 (unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
106,178

 
$
17,564

Investment securities available-for-sale
 
177,270

 
138,462

Trade and other receivables (less allowance for doubtful accounts of
 
 

 
 

$521 and $386 at March 3, 2018 and June 3, 2017, respectively)
 
121,642

 
64,509

Income tax receivable
 

 
52,691

Inventories
 
165,363

 
160,692

Prepaid expenses and other current assets
 
2,074

 
2,288

Total current assets
 
572,527

 
436,206

Property, plant and equipment, net
 
433,482

 
458,184

Other investments
 
70,417

 
69,296

Goodwill
 
35,525

 
35,525

Other intangible assets, net
 
27,018

 
29,149

Other assets
 
4,714

 
4,734

TOTAL ASSETS
 
$
1,143,683

 
$
1,033,094

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
96,071

 
$
59,853

Accrued legal settlement expense - see Note 4
 
80,750

 

Current maturities of long-term debt and capital lease obligations
 
3,926

 
4,826

Total current liabilities
 
180,747

 
64,679

Long-term debt and capital lease obligations, less current maturities
 
3,351

 
6,113

Other noncurrent liabilities
 
8,038

 
7,527

Deferred income taxes
 
51,888

 
110,282

Total liabilities
 
244,024

 
188,601

 
 
 

 
 

Commitments and Contingencies - see Note 4
 


 


 
 
 
 
 
Stockholders’ equity:
 
 

 
 

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

 
 

at March 3, 2018 and June 3, 2017, respectively, and 43,832 and 43,777
 
 

 
 

shares outstanding at March 3, 2018 and June 3, 2017, respectively
 
703

 
703

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

 
 

and outstanding at March 3, 2018 and June 3, 2017, respectively 
 
48

 
48

Paid-in capital
 
52,436

 
49,932

Retained earnings
 
870,211

 
816,046

Accumulated other comprehensive loss, net of tax
 
(792
)
 
(128
)
Common stock in treasury at cost – 26,431 and 26,484 shares at March 3, 2018
 
 

 
 

and June 3, 2017, respectively
 
(24,967
)
 
(23,914
)
Total Cal-Maine Foods, Inc. stockholders’ equity
 
897,639

 
842,687

Noncontrolling interest in consolidated entities
 
2,020

 
1,806

Total stockholders’ equity
 
899,659

 
844,493

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
1,143,683

 
$
1,033,094

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
 
39 Weeks Ended
 
 
March 3, 2018
 
February 25, 2017
 
March 3, 2018
 
February 25, 2017
Net sales
 
$
435,820

 
$
306,540

 
$
1,059,837

 
$
799,929

Cost of sales
 
315,722

 
267,375

 
840,007

 
766,385

Gross profit
 
120,098

 
39,165

 
219,830

 
33,544

Selling, general, and administrative expense
 
44,175

 
43,738

 
128,045

 
125,985

Legal settlement expense - see Note 4
 

 

 
80,750

 

(Gain) loss on disposal of fixed assets
 
(279
)
 
622

 
(325
)
 
1,361

Operating income (loss)
 
76,202

 
(5,195
)
 
11,360

 
(93,802
)
Other income (expense):
 
 
 
 
 
 

 
 

Interest income, net
 
992

 
411

 
2,044

 
2,283

Royalty income
 
169

 
381

 
759

 
1,111

Patronage dividends
 
8,286

 
7,608

 
8,286

 
7,608

Equity in income of affiliates
 
2,379

 
1,018

 
2,302

 
1,854

Other, net
 
29

 
(58
)
 
(1,304
)
 
(197
)
Total other income
 
11,855

 
9,360

 
12,087

 
12,659

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and noncontrolling interest
 
88,057

 
4,165

 
23,447

 
(81,143
)
Income tax (benefit) expense
 
(8,301
)
 
34

 
(30,653
)
 
(31,327
)
Net income (loss) before noncontrolling interest
 
96,358

 
4,131

 
54,100

 
(49,816
)
Less: Net income (loss) attributable to noncontrolling interest
 
64

 
(8
)
 
(65
)
 
(9
)
Net income (loss) attributable to Cal-Maine Foods, Inc.
 
$
96,294

 
$
4,139

 
$
54,165

 
$
(49,807
)
 
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to Cal-Maine Foods, Inc.:
 
 
 
 
 
 

 
 

Basic
 
$
1.99

 
$
0.09

 
$
1.12

 
$
(1.03
)
Diluted
 
$
1.99

 
$
0.09

 
$
1.12

 
$
(1.03
)
Weighted average shares outstanding:
 
 
 
 
 
 

 
 

Basic
 
48,361

 
48,286

 
48,340

 
48,285

Diluted
 
48,476

 
48,417

 
48,460

 
48,285


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
 
39 Weeks Ended
 
 
March 3, 2018
 
February 25, 2017
 
March 3, 2018
 
February 25, 2017
Net income (loss), including noncontrolling interests
 
$
96,358

 
$
4,131

 
$
54,100

 
$
(49,816
)
 
 
 
 
 
 
 

 
 

Other comprehensive income (loss), before tax:
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 

 
 

Unrealized holding gain (loss) on available-for-sale securities, net of reclassification adjustments
 
(547
)
 
233

 
(1,004
)
 
199

 
 
 
 
 
 
 

 
 

Income tax benefit (expense) related to items of other comprehensive loss
 
155

 
(89
)
 
340

 
(75
)
 
 
 
 
 
 
 

 
 

Other comprehensive income (loss), net of  tax
 
(392
)
 
144

 
(664
)
 
124

 
 
 
 
 
 
 

 
 

Comprehensive income (loss)
 
95,966

 
4,275

 
53,436

 
(49,692
)
 
 
 
 
 
 
 

 
 

Less: comprehensive income (loss) attributable to the noncontrolling interest
 
64

 
(8
)
 
(65
)
 
(9
)
 
 
 
 
 
 
 

 
 

Comprehensive income (loss) attributable to Cal-Maine Foods, Inc.
 
$
95,902

 
$
4,283

 
$
53,501

 
$
(49,683
)

See Notes to Condensed Consolidated Financial Statements.

4


CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
39 Weeks Ended
 
 
March 3, 2018
 
February 25, 2017
Operating activities:
 
 
 
 
Net income (loss) including noncontrolling interest
 
$
54,100

 
$
(49,816
)
Depreciation and amortization
 
40,331

 
35,724

Other adjustments, net
 
51,655

 
(43,125
)
Net cash provided by (used in) operations
 
146,086

 
(57,217
)
 
 
 

 
 

Investing activities:
 
 

 
 

Purchase of investments
 
(136,921
)
 
(25,872
)
Sales of investments
 
95,289

 
228,327

Acquisition of business
 

 
(68,643
)
Investment in joint venture
 
(4,100
)
 
(17,700
)
Purchases of property, plant and equipment
 
(13,639
)
 
(54,862
)
Payments received from affiliates
 
5,831

 
5,236

Net proceeds from disposal of property, plant and equipment
 
579

 
76

Net cash provided by (used in) investing activities
 
(52,961
)
 
66,562

 
 
 

 
 

Financing activities:  
 
 

 
 

Purchase of common stock by treasury
 
(1,128
)
 
(1,715
)
Contributions from (distributions to) noncontrolling interests
 
279

 
(73
)
Principal payments on long-term debt and capital lease obligations
 
(3,662
)
 
(4,698
)
Net cash used in financing activities
 
(4,511
)
 
(6,486
)
 
 
 
 
 
Net change in cash and cash equivalents
 
88,614

 
2,859

 
 
 

 
 

Cash and cash equivalents at beginning of period
 
17,564

 
29,046

Cash and cash equivalents at end of period
 
$
106,178

 
$
31,905


See Notes to Condensed Consolidated Financial Statements.


5


CAL-MAINE FOODS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 3, 2018
(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 thirty-nine weeks ended March 3, 2018 are not necessarily indicative of the results that may be expected for the year ending June 2, 2018.  

The condensed consolidated balance sheet at June 3, 2017 was 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 June 3, 2017. References to “we,” “us,” “our,” or the “Company” refer to Cal-Maine Foods, Inc.

2.   Stock Based Compensation

Total stock based compensation expense for the thirty-nine weeks ended March 3, 2018 and February 25, 2017 was $2.6 million and $2.5 million, respectively. 

Unrecognized compensation expense as a result of non-vested shares of the 2012 Omnibus Long-Term Incentive Plan at March 3, 2018 was $6.9 million and will be recorded over a weighted average period of 2.2 years.  Refer to Note 10 of our June 3, 2017 audited financial statements for further information on our stock compensation plans.

At March 3, 2018, there were 243,060 restricted shares outstanding, with a weighted average grant date fair value of $45.30 per share. The Company’s restricted share activity for the thirty-nine weeks ended March 3, 2018 follows:
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Outstanding, June 3, 2017
 
247,735

 
$
42.76

Granted
 
88,965

 
43.81

Vested
 
(85,990
)
 
36.76

Forfeited
 
(7,650
)
 
41.75

Outstanding, March 3, 2018
 
243,060

 
$
45.30



6


3.   Inventories

Inventories consisted of the following (in thousands):
 
 
March 3, 2018
 
June 3, 2017
Flocks
 
$
92,763

 
$
98,059

Eggs and egg products
 
18,153

 
14,911

Feed and supplies
 
54,447

 
47,722

 
 
$
165,363

 
$
160,692


We grow and maintain flocks of layers (mature female chickens), pullets (female chickens, under 18 weeks of age), and breeders (male and female chickens used to produce fertile eggs to hatch for egg production flocks). Our total flock at March 3, 2018, consisted of approximately 9.2 million pullets and breeders and 37.8 million layers.

4.   Contingencies

Financial Instruments
The Company maintained standby letters of credit (“LOC”) totaling $4.2 million at March 3, 2018.  The 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, and 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.

On December 29, 2017, the Company reached an agreement on material terms of the settlement of several large direct action purchasers' antitrust claims against the Company. The agreement was finalized and effective January 30, 2018. Pursuant to the agreement, the Company settled the claims with a single $80.8 million payment, which is $54.8 million net of tax, or $1.13 per basic and diluted share. As a result, the Company recorded the legal settlement expense and offsetting liability to operating expense and current liabilities, respectively, in the second quarter of fiscal 2018. The Company paid the settlement on March 23, 2018, subsequent to the end of our fiscal 2018 third quarter.

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


7


5.   Net Income (Loss) per Common Share  

Basic net income (loss) per share was calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.  Diluted net income (loss) per share was calculated by dividing net income (loss) 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 thirty-nine weeks ended February 25, 2017, restricted shares were excluded from the calculation of diluted net loss per share because their inclusion would have been antidilutive.  The computations of basic and diluted net income (loss) per share attributable to the Company are as follows (in thousands, except per share data):

 
 
13 Weeks Ended
 
39 Weeks Ended
 
 
March 3, 2018
 
February 25, 2017
 
March 3, 2018
 
February 25, 2017
Net income (loss) attributable to Cal-Maine Foods, Inc.
 
$
96,294

 
$
4,139

 
$
54,165

 
$
(49,807
)
 
 
 
 
 
 
 

 
 

Basic weighted-average common shares
 
48,361

 
48,286

 
48,340

 
48,285

Dilutive potential common shares
 
48,476

 
48,417

 
48,460

 
48,285

 
 
 
 
 
 
 
 
 
Antidilutive securities excluded from computation of earnings per share

 

 

 

 
145

 
 
 
 
 
 
 

 
 

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

 
 

Basic
 
$
1.99

 
$
0.09

 
$
1.12

 
$
(1.03
)
Diluted
 
$
1.99

 
$
0.09

 
$
1.12

 
$
(1.03
)

6.   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. Therefore, the Company did not pay a dividend with respect to the fourth quarter of fiscal 2016, or any quarter of fiscal 2017, and will not pay a dividend for the first, second, or third quarters of fiscal 2018. At March 3, 2018, the cumulative losses that must be recovered prior to paying a dividend were $20.5 million. When applicable, the amount of the accrual appears on the Condensed Consolidated Balance Sheets as “Accrued dividends payable.”

7.   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

8


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 disclosures 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. The fair value and carrying value of the Company’s borrowings under its long-term debt were as follows (in thousands):
 
 
March 3, 2018
 
June 3, 2017
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
5.4% – 6.2% Notes payable
 
$
5,875

 
$
5,855

 
$
9,250

 
$
9,295

Long-term leases
 
1,402

 
1,228

 
1,689

 
1,520

 
 
$
7,277

 
$
7,083

 
$
10,939

 
$
10,815


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 March 3, 2018 and June 3, 2017 (in thousands):
໿
 
 
 
 
 
 
 
 
Total
March 3, 2018
 
Level 1
 
Level 2
 
Level 3
 
Balance
Assets
 
 

 
 

 
 

 
 

US government and agency obligations
 

 
$
18,888

 

 
$
18,888

Municipal bonds
 

 
21,165

 

 
21,165

Corporate bonds
 

 
133,701

 

 
133,701

Certificates of deposits
`

 
1,504

 

 
1,504

Asset backed securities
 

 
2,012

 

 
2,012

Mutual funds
 
3,008

 

 

 
3,008

Total assets measured at fair value
 
$
3,008

 
$
177,270

 

 
$
180,278

໿
 
 
 
 
 
 
 
 
Total
June 3, 2017
 
Level 1
 
Level 2
 
Level 3
 
Balance
Assets
 
 

 
 

 
 

 
 

US government and agency obligations
 
$

 
$
20,216

 
$

 
$
20,216

Municipal bonds
 

 
36,873

 

 
36,873

Corporate bonds
 

 
75,790

 

 
75,790

Asset backed securities
 

 
5,583

 

 
5,583

Mutual funds
 
2,459

 

 

 
2,459

Total assets measured at fair value
 
$
2,459

 
$
138,462

 
$

 
$
140,921


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


8.   Investment Securities

The following represents the Company’s investment securities as of March 3, 2018 and June 3, 2017 (in thousands):
March 3, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
US government and agency obligations
 
$
19,071

 
$

 
$
183

 
$
18,888

Municipal bonds
 
21,188

 

 
23

 
21,165

Corporate bonds
 
134,704

 

 
1,003

 
133,701

Certificates of deposits
 
1,504

 

 

 
1,504

Asset backed securities
 
2,027

 

 
15

 
2,012

Total current investment securities
 
$
178,494

 
$

 
$
1,224

 
$
177,270

 
 
 

 
 

 
 

 
 

Mutual funds
 
$
2,023

 
$
985

 
$

 
$
3,008

Total noncurrent investment securities
 
$
2,023

 
$
985

 
$

 
$
3,008

June 3, 2017
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
US government and agency obligations
 
$
20,259

 
$

 
$
43

 
$
20,216

Municipal bonds
 
36,839

 
34

 

 
36,873

Corporate bonds
 
75,769

 
21

 

 
75,790

Asset backed securities
 
5,583

 

 

 
5,583

Total current investment securities
 
$
138,450

 
$
55

 
$
43

 
$
138,462

 
 
 

 
 

 
 

 
 

Mutual funds
 
$
1,706

 
$
753

 
$

 
$
2,459

Total noncurrent investment securities
 
$
1,706

 
$
753

 
$

 
$
2,459


Proceeds from sales of available-for-sale securities were $95.3 million and $228.3 million during the thirty-nine weeks ended March 3, 2018 and February 25, 2017, respectively. Gross realized gains during the thirty-nine weeks ended ended March 3, 2018 and February 25, 2017 were $25,000 and $231,000, respectively.  Gross realized losses during the thirty-nine weeks ended March 3, 2018 and February 25, 2017 were $5,000 and $6,000, respectively. For purposes of determining gross realized gains and losses, the cost of securities sold is based on the specific identification method.

Unrealized holding gains and (losses), net of taxes, for the thirty-nine weeks ended March 3, 2018 and February 25, 2017 were as follows (in thousands):
 
 
39 Weeks Ended
 
 
March 3, 2018
 
February 25, 2017
Current investments
 
$
(975
)
 
$
(30
)
Noncurrent investments
 
311

 
154

Total unrealized holding gains (losses)
 
$
(664
)
 
$
124


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 March 3, 2018, are as follows (in thousands):
 
 
Estimated Fair Value
Within one year       
 
$
95,140

1-5 years
 
82,130

Total
 
$
177,270


໿

10


9.   Equity

The following reflects the equity activity, including our noncontrolling interest, for the thirty-nine weeks ended March 3, 2018 (in thousands, except share amounts):
໿
 
 
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 June 3, 2017
 
$
703

 
$
48

 
$
(23,914
)
 
$
49,932

 
$
(128
)
 
$
816,046

 
$
1,806

 
$
844,493

Other comprehensive loss, net of tax
 

 

 

 

 
(664
)
 

 

 
(664
)
Grant of restricted stock
 

 

 
81

 
(81
)
 

 

 

 

Forfeiture of restricted stock
 

 

 
(6
)
 
6

 

 

 

 

Buyback of 25,575 shares to satisfy withholding obligation in connection with the vesting of restricted stock
 

 

 
(1,128
)
 

 

 

 

 
(1,128
)
Contribution from noncontrolling interest partners
 

 

 

 

 

 

 
279

 
279

Restricted stock compensation
 

 

 

 
2,579

 

 

 

 
2,579

Net income
 

 

 

 

 

 
54,165

 
(65
)
 
54,100

Balance at March 3, 2018
 
$
703

 
$
48

 
$
(24,967
)
 
$
52,436

 
$
(792
)
 
$
870,211

 
$
2,020

 
$
899,659


10. Income Taxes

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Act”). The new tax legislation reduces the United States corporate tax rate from 35% to 21% effective January 1, 2018.

Following the enactment of the Act, the United States Securities and Exchange Commission issued guidance in Staff Accounting Bulletin 118 which provides the Company up to a one-year measurement period, beginning on the Act’s enactment date, in which to complete the required analysis and accounting for the effects of the Act. The guidance allows the Company to record provisional adjustments related to the impacts of the Act when the accounting for the effects of the Act is incomplete, but when reasonable estimates can be made regarding the effects of the Act. Our accounting for the Act is not complete, because it required the Company to estimate the timing of settlement of the temporary differences from which our deferred taxes arose; however, we were able to make reasonable estimates, and we recorded those estimates as provisional adjustments as described in the paragraph below. The Company will complete the required analysis during its fourth quarter. If any adjustments to the provisional amounts are required, those adjustments will be recorded in the Company’s fourth quarter.

Pre-tax income, less net income attributable to noncontrolling interest, was $88.0 million for the thirteen weeks ended March 3, 2018, compared to pre-tax income, less net income attributable to noncontrolling interest, of $4.2 million for last year’s comparable period.  For the current thirteen-week period, income tax benefit of $8.3 million was recorded, with an effective tax rate of 31.8%, excluding the impact of any discrete items, compared to income tax expense of $34,000, with an effective rate of 0.8%, for last year’s comparable period. Results for the current thirteen-week period were favorably impacted by a $35 million discrete tax benefit related to the Act.

For the thirty-nine weeks ended March 3, 2018, pre-tax income, less net loss attributable to noncontrolling interest, was $23.4 million, compared to pre-tax loss, less net loss attributable to noncontrolling interest, of $81.1 million for the same period of fiscal 2017. For the thirty-nine weeks ended March 3, 2018, income tax benefit of $30.7 million was recorded, with an effective tax rate of 24.0%, excluding the impact of any discrete items, compared to an income tax benefit of $31.3 million, with an effective rate of 38.6% for last year's comparable period. Discrete items for current thirty-nine week period primarily related to a $35.0 million tax benefit in connection with the Act.


11


The effective rate increase for the thirteen weeks ended March 3, 2018 was primarily related to the provision to return adjustments on the fiscal 2016 tax return recorded in the prior period.  The effective rate decrease for the thirty-nine weeks ended March 3, 2018 was primarily related to the change in the federal statutory rate from 35% to 21%, resulting from legislation that was enacted on December 22, 2017. The rate change is administratively effective at the beginning of our fiscal year, using a blended rate for the annual period. As a result, the blended statutory tax rate for the year is 29.13%.

At March 3, 2018, accounts payable included an income tax payable of $20.7 million compared to an income tax receivable of $52.7 million at June 3, 2017. Not included in income taxes payable of $20.7 million is the tax benefit from deduction of the $80.8 million legal settlement expense, which was recorded in the second quarter of fiscal 2018, but is not deductible for income tax purposes until paid.  As noted above, the legal settlement expense was paid by the Company on March 23, 2018, subsequent to the end of our third quarter. The Company will receive a tax deduction for the legal settlement expense in the fourth quarter.  The remainder of the change is primarily due to the second quarter fiscal 2018 receipt of a $45.0 million federal tax refund related to the carryback of fiscal 2017 losses.

Our effective rate differs from the federal statutory income tax rate 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, the domestic manufacturers deduction, and net income or loss attributable to noncontrolling interest.  The enacted rate change from 35% to 21% also caused the thirteen-week and thirty-nine week effective rate to be significantly different from the Company’s historical annual effective rate.  The Company’s effective tax rate for future fiscal years under current legislation is expected to be 21% plus a state tax effected rate of approximately 3%.

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 June 3, 2017, 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.  In addition, we continue to assess the impact of the recently enacted federal tax reform legislation on our business and consolidated financial statements. 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.


12


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 hatch 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, 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.
 
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 per dozen eggs of the Urner-Barry Southeastern Regional Large Egg Market Price ("UB southeastern large index"), for our last ten fiscal years ranged from a low of $0.85 in fiscal year 2017 to a high of $1.79 in fiscal year 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 in 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.  

In 2015, our industry experienced a significant avian influenza (“AI”) outbreak, primarily in the upper Midwestern U.S.  There were no positive tests for AI at any of our locations. Based on several published industry estimates, we believe approximately 12% of the national flock of laying hens was affected.  During April through June 2015, the affected laying hens were either destroyed by the disease or euthanized.  The USDA data showed the supply of laying hens decreased substantially. Since that time, hen numbers have recovered and even exceeded pre–AI levels in late 2016.

Egg prices increased significantly during the summer and fall of 2015. The average of Thursday prices for the UB southeastern large index 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 UB southeastern large index hit a decade-low level in both our fiscal 2016 fourth quarter and fiscal 2017 second quarter. During our fiscal 2018, shell egg prices have rebounded due to strong demand illustrating the volatility of our industry. During the thirty-nine weeks ended March 3, 2018, the UB southeastern large index averaged $1.37 per dozen, a 59.5% increase over the comparable period of the prior year which averaged $0.86 per dozen.


13


According to Nielsen data, retail demand for calendar year 2017 and early 2018 has been strong and exceeded normal seasonal trends, supported by increased egg promotions in grocery stores. After a period of sluggish demand from institutional food customers, this sector has seen increasing egg usage in recent months. The USDA reports that shell egg exports expanded in calendar 2017 and have recovered from previous low levels following the 2015 avian influenza (AI) outbreak. Export demand has also increased as a result of the reported Fipronil contaminations across Europe and Southeast Asia. Together, these demand trends have resulted in a more favorable market environment compared with a year ago despite the laying hen flock size increasing slighly over prior-year levels. Accordingly, our net average selling price for shell eggs for the third quarter of fiscal 2018 was $1.545 compared with $1.130 for the corresponding period of fiscal 2017. However, recent USDA reports show an increase in chicks hatched which could indicate future increases in supply.

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 portion of the market in recent years. During our fiscal 2016 a 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. Our focus for future expansion at our farms will be environments that are cage-free or with equipment that can easily be converted to cage-free, based on a timeline to meet our customer’s needs.

For the thirteen weeks ended March 3, 2018, we produced approximately 81% of the total number of shell eggs we sold compared to 84% in the comparable prior year period.  We produced 0.6% less dozens during the thirteen weeks ended March 3, 2018 than in the corresponding period of last year. For the thirteen weeks ended March 3, 2018 and February 25, 2017, approximately 9% of such production was provided by contract producers who utilize their facilities in the production of shell eggs by layers owned by us. We own the shell eggs produced under these arrangements.

Our cost of production is materially affected by feed costs.  Feed costs averaged 57% and 58% of our total farm egg production cost for the thirteen weeks ended March 3, 2018 and February 25, 2017, respectively. 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 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.  Large U.S. corn and soybean crops were harvested in 2017, which combined with the large 2016 crops should provide an adequate supply of our primary feed ingredients during the remainder of fiscal 2018. 

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Act”). The new tax legislation reduces the United States corporate tax rate from 35% to 21% effective January 1, 2018. As a result, the Company recognized an income tax benefit for the period related to the remeasurement of the Company’s net deferred tax liability. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The Company has not completed the accounting for the tax effects of enactment of the Act; however, the Company has made a reasonable estimate of the effects on existing deferred balances. The provisional amount recorded related to the remeasurement of our deferred tax balance was $35 million, which is included as a component of income tax (benefit) expense from continuing operations.

On December 29, 2017, the Company reached an agreement on material terms of the settlement of several large direct action purchasers' antitrust claims against the Company. The agreement was finalized and effective January 30, 2018. Pursuant to the agreement, the Company settled the claims with a single $80.8 million payment, which is $54.8 million net of tax, or $1.13 per basic and diluted share. As a result, the Company recorded the legal settlement expense and offsetting liability to operating expense and current liabilities, respectively, in the second quarter of fiscal 2018. The Company paid the settlement on March 23, 2018, subsequent to the end of our fiscal 2018 third quarter.


14


RESULTS OF OPERATIONS

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

 
 
13 Weeks Ended
 
39 Weeks Ended
 
 
March 3, 2018
 
February 25, 2017
 
March 3, 2018
 
February 25, 2017
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
 
72.4
 %
 
87.2
 %
 
79.3
 %
 
95.8
 %
Gross profit
 
27.6
 %
 
12.8
 %
 
20.7
 %
 
4.2
 %
Selling, general, and administrative expense
 
10.1
 %
 
14.3
 %
 
12.1
 %
 
15.7
 %
Legal settlement expense
 
 %
 
 %
 
7.6
 %
 
 %
(Gain) Loss on disposal of fixed assets
 
(0.1
)%
 
0.2
 %
 
 %
 
0.2
 %
Operating income (loss)
 
17.6
 %
 
(1.7
)%
 
1.0
 %
 
(11.7
)%
Other income, net
 
2.7
 %
 
3.1
 %
 
1.1
 %
 
1.6
 %
Income (loss) before income taxes and noncontrolling interest
 
20.3
 %
 
1.4
 %
 
2.1
 %
 
(10.1
)%
Income tax (benefit) expense
 
(1.9
)%
 
 %
 
(2.9
)%
 
(3.9
)%
Net income (loss) before noncontrolling interest
 
22.2
 %
 
1.4
 %
 
5.0
 %
 
(6.2
)%
Less: Net income (loss) attributable to noncontrolling interest
 
 %
 
 %
 
 %
 
 %
Net income (loss) attributable to Cal-Maine Foods, Inc.
 
22.2
 %
 
1.4
 %
 
5.0
 %
 
(6.2
)%

NET SALES

Net sales for the thirteen weeks ended March 3, 2018 were $435.8 million, an increase of $129.3 million, or 42.2%, compared to net sales of $306.5 million for the thirteen weeks ended February 25, 2017. The increase was primarily due to an increase in egg selling prices and, to a lesser extent, an increase in dozens sold.

Shell egg sales made up approximately 97.2% of net sales for the thirteen weeks ended March 3, 2018.  Dozens sold for the third quarter of fiscal year 2018 were up 9.6 million to 273.2 million, a 3.6% increase from 263.6 million dozen for the third quarter of fiscal 2017. The volume increase accounted for a $10.8 million increase in net sales. 

Net average selling price per dozen of shell eggs was $1.545 for the thirteen weeks ended March 3, 2018, compared to $1.130 for the thirteen weeks ended February 25, 2017. The 36.7% increase in average selling price accounted for a $113.4 million increase in net sales.  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 accounted for 2.8% of net sales for the thirteen weeks ended March 3, 2018. These revenues were $12.1 million for the thirteen weeks ended March 3, 2018, compared to $6.4 million for the thirteen weeks ended February 25, 2017.

Net sales for the thirty-nine weeks ended March 3, 2018 were $1,059.8 million, an increase of $259.9 million, or 32.5%, compared to net sales of $799.9 million for the thirty-nine weeks ended February 25, 2017. The increase was primarily due to an increase in egg selling prices and, to a lesser extent, an increase in dozens sold.

Shell egg sales made up approximately 97.3% of net sales for the thirty-nine weeks ended March 3, 2018.  Dozens sold for the thirty-nine weeks ended March 3, 2018 were 785.8 million, a 3.6% increase from 758.1 million dozen for the same period of fiscal 2017. The volume increase accounted for a $28.2 million increase in net sales. 

Net average selling price per dozen of shell eggs was $1.303 for the thirty-nine weeks ended March 3, 2018, compared to $1.020 for the thirty-nine weeks ended February 25, 2017. The 27.7% increase in average selling price accounted for a $222.4 million increase in net sales.     


15


Egg products accounted for 2.7% of net sales for the thirty-nine weeks ended March 3, 2018. These revenues were $29.1 million for the thirty-nine weeks ended March 3, 2018, compared to $18.3 million for the thirty-nine weeks ended February 25, 2017.

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
 
39 Weeks Ended
 
 
March 3, 2018
 
February 25, 2017
 
March 3, 2018
 
February 25, 2017
Total net sales
 
$
435,820

 
 
 
$
306,540

 
 
 
$
1,059,837

 
 
 
$
799,929

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-specialty shell egg
 
$
286,994

 
67.7
%
 
$
166,893

 
55.6
%
 
$
662,017

 
64.2
%
 
$
403,404

 
51.6
%
Specialty shell egg
 
128,079

 
30.2
%
 
122,337

 
40.8
%
 
343,069

 
33.3
%
 
344,873

 
44.1
%
Co-pack specialty shell egg
 
6,956

 
1.7
%
 
8,522

 
2.8
%
 
18,875

 
1.8
%
 
25,492

 
3.3
%
Other
 
1,697

 
0.4
%
 
2,346

 
0.8
%
 
6,792

 
0.7
%
 
7,828

 
1.0
%
Net shell egg sales
 
$
423,726

 
100.0
%
 
$
300,098

 
100.0
%
 
$
1,030,753

 
100.0
%
 
$
781,597

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net shell egg sales as a percent of total net sales
 
97.2
%
 
 
 
97.9
%
 
 
 
97.3
%
 
 
 
97.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dozens sold:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-specialty shell egg
 
203,444

 
74.4
%
 
196,998

 
74.7
%
 
596,061

 
75.9
%
 
571,111

 
75.3
%
Specialty shell egg
 
66,260

 
24.3
%
 
62,265

 
23.6
%
 
179,941

 
22.9
%
 
174,204

 
23.0
%
Co-pack specialty shell egg
 
3,505

 
1.3
%
 
4,350

 
1.7
%
 
9,756

 
1.2
%
 
12,799

 
1.7
%
Total dozens sold
 
273,209

 
100.0
%
 
263,613

 
100.0
%
 
785,758

 
100.0
%
 
758,114

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net average selling price per dozen:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-specialty shell eggs
 
$
1.411

 
 
 
$
0.847

 
 
 
$
1.111

 
 
 
$
0.706

 
 
Specialty shell eggs
 
$
1.933

 
 
 
$
1.965

 
 
 
$
1.907

 
 
 
$
1.980

 
 
All shell eggs
 
$
1.545

 
 
 
$
1.130

 
 
 
$
1.303

 
 
 
$
1.020

 
 

Non-specialty shell eggs include all shell egg sales not specifically identified as specialty or co-pack specialty shell egg sales.   This market is characterized generally 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 March 3, 2018, non-specialty shell egg dozens sold increased 3.3%, and the average selling price increased 66.6% to $1.411 from $0.847 for the same period of fiscal 2017. For the thirty-nine weeks ended March 3, 2018, non-specialty shell egg dozens sold increased approximately 4.4%, and the average selling price increased 57.4% to $1.111 from $0.706 for the same period of fiscal 2017.

Specialty shell eggs, which include nutritionally enhanced, cage-free, organic, and brown 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.  As non-specialty egg prices declined, we experienced some margin and volume pressures on specialty egg sales.  For the thirteen weeks ended March 3, 2018, specialty shell egg dozens sold increased 6.4%, but the average selling price decreased 1.6% to $1.933 from $1.965 for the same period of fiscal 2017. For the thirty-nine weeks ended March 3, 2018, specialty shell egg dozens sold increased 3.3%, but the average selling price decreased 3.7% to $1.907 from $1.980 for the same period of fiscal 2017.

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.  Co-pack specialty shell eggs sold during the thirty-nine weeks ended March 3, 2018 and February 25, 2017 were 9.8 million and 12.8 million, which represented 1.2% and 1.7% of total dozens sold for those periods, respectively.

16



The shell egg sales classified as “Other” represent sales of hard cooked eggs, hatching eggs, and 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 third quarter of fiscal 2018, egg product sales were $12.1 million, an increase of $5.7 million, or 87.8%, compared to $6.4 million for the same period of 2017. Pounds sold for the third quarter of fiscal 2018 were 15.5 million, a decrease of 6.9%, compared to 16.7 million for the same period of fiscal 2017. The selling price per pound for the third quarter of fiscal 2018 was $0.782 compared to $0.391 for the same period of fiscal 2017, a 99.4% increase.

For the thirty-nine weeks ended March 3, 2018, egg product sales were $29.1 million, an increase of $10.8 million, or 58.7%, compared to $18.3 million for the same period of fiscal 2017. Pounds sold for the thirty-nine weeks ended March 3, 2018 were 45.4 million, a decrease of 2.2 million, or 4.6%, compared to 47.6 million for the same period of fiscal 2017. The selling price per pound for the thirty-nine weeks ended March 3, 2018 was $0.644 compared to $0.391 for the same period of fiscal 2017, a 64.1% increase.

COST OF SALES

Cost of sales consists of costs directly related to production, processing and packing of 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.

The following table presents the key variables affecting cost of sales (in thousands, except cost per dozen data).
໿
໿
໿
໿
 
 
13 Weeks Ended
 
39 Weeks Ended
 
 
March 3, 2018
 
February 25, 2017
 
Percent Change
 
March 3, 2018
 
February 25, 2017
 
Percent Change
Cost of Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Farm production
 
$
152,242

 
$
151,478

 
0.5
 %
 
$
448,416

 
$
438,929

 
2.2
 %
Processing, packaging, and warehouse
 
55,525

 
53,038

 
4.7
 %
 
160,344

 
147,329

 
8.8
 %
Egg purchases and other (including change in inventory)
 
97,778

 
57,806

 
69.1
 %
 
205,849

 
165,833

 
24.1
 %
Total shell eggs
 
305,545

 
262,322

 
16.5
 %
 
814,609

 
752,091

 
8.3
 %
Egg products
 
10,041

 
4,959

 
102.5
 %
 
24,808

 
13,691

 
81.2
 %
Other
 
136

 
94

 
44.7
 %
 
590

 
603

 
(2.2
)%
Total
 
$
315,722

 
$
267,375

 
18.1
 %
 
$
840,007

 
$
766,385

 
9.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Farm production cost (per dozen produced)
 
 
 
 
 
 
 
 
 
 
 
 
Feed
 
$
0.396

 
$
0.396

 
 %
 
$
0.387

 
$
0.406

 
(4.7
)%
Other
 
$
0.297

 
$
0.290

 
2.4
 %
 
$
0.300

 
$
0.293

 
2.4
 %
Total
 
$
0.693

 
$
0.686

 
1.0
 %
 
$
0.687

 
$
0.699

 
(1.7
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Outside egg purchases (average cost per dozen)
 
$
1.60

 
$
1.10

 
45.5
 %
 
$
1.35

 
$
1.04

 
29.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Dozen produced
 
221,119

 
222,492

 
(0.6
)%
 
657,577

 
633,246

 
3.8
 %
Dozen sold
 
273,209

 
263,613

 
3.6
 %
 
785,758

 
758,114

 
3.6
 %


17


Cost of sales for the third quarter of fiscal 2018 was $315.7 million, an increase of $48.3 million, or 18.1%, from $267.4 million for the third quarter of fiscal 2017. This increase was primarily driven by an increase in the cost of eggs purchased for the quarter. Feed cost per dozen was $0.396 for the third quarter of both fiscal 2018 and 2017. Other farm production cost increased 2.4% to $0.297 for the third quarter of fiscal 2018 compared to $0.290 for the same period of last year.

Cost of sales for the thirty-nine weeks ended March 3, 2018 was $840.0 million, an increase of $73.6 million, or 9.6%, from $766.4 million for the same period of fiscal 2017. The increase was primarily driven by an increase in the cost of eggs purchased in 2018, including the freight cost for delivery of those eggs, and, to a lesser extent, an increase in dozens produced during the period. Dozens produced increased 3.8% resulting in higher farm production, processing, and packaging costs. These increases were offset by a lower feed cost per dozen produced. Feed cost per dozen for the thirty-nine weeks ended March 3, 2018, was $0.387, compared to $0.406 per dozen for the comparable period of fiscal 2017, a decrease of 4.7%, resulting in a decrease in cost of sales of approximately $12.0 million for the comparable period. Other farm production cost increased 2.4% to $0.300 for the thirty-nine weeks ended March 3, 2018, compared to $0.293 for the same period of last year primarily due to increased facility costs related to capital improvement and conversion projects.

Gross profit for the third quarter of fiscal 2018 was $120.1 million compared to $39.2 million for the third quarter of fiscal 2017. For the thirty-nine weeks ended ended March 3, 2018, gross profit increased to $219.8 million from $33.5 million for the same period of fiscal 2017 primarily due to the increased average customer selling prices and sales volumes. 
 
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
 
 
March 3, 2018
 
 
February 25, 2017
 
$ Change
 
% Change
Specialty egg expense
 
$
13,848

 
 
$
15,329

 
$
(1,481
)
 
(9.7
)%
Delivery expense
 
13,443

 
 
13,875

 
(432
)
 
(3.1
)%
Payroll and overhead
 
9,425

 
 
6,783

 
2,642

 
39.0
 %
Stock compensation expense
 
841

 
 
823

 
18

 
2.2
 %
Other expenses
 
6,618

 
 
6,928

 
(310
)
 
(4.5
)%
Total
 
$
44,175

 
 
$
43,738

 
$
437

 
1.0
 %

For the thirteen weeks ended March 3, 2018, selling, general, and administrative expenses was $44.2 million compared to $43.7 million for the thirteen weeks ended February 25, 2017. Specialty egg expense decreased $1.5 million, or 9.7%, compared to the same period of last year. Specialty egg expense typically fluctuates with specialty egg dozens sold, which increased 6.4% for the thirteen weeks ended March 3, 2018; however, this was more than offset by reduced advertising expense, which is a component of specialty egg expense and decreased 75.9% compared to the same period of fiscal 2017 due to increased reimbursements of promotional expenses and reduced current year promotions. Payroll and overhead increased $2.6 million, or 39.0%, compared to the same period of fiscal 2017 primarily due to reduced prior year bonus accruals. Other expenses decreased 4.5% to $6.6 million for the thirteen weeks ended March 3, 2018 from $6.9 million for the comparable period of fiscal 2017 primarily due to reduced legal expense partially offset by increased automobile liability claims in the current period.


18


 
 
39 Weeks Ended
 
 
March 3, 2018
 
February 25, 2017
 
$ Change
 
% Change
Specialty egg expense
 
$
37,422

 
$
42,158

 
$
(4,736
)
 
(11.2
)%
Delivery expense
 
39,680

 
39,570

 
110

 
0.3
 %
Payroll and overhead
 
27,168

 
23,945

 
3,223

 
13.5
 %
Stock compensation expense
 
2,579

 
2,480

 
99

 
4.0
 %
Other expenses
 
21,196

 
17,832

 
3,364

 
18.9
 %
Total
 
$
128,045

 
$
125,985

 
$
2,049

 
1.6
 %

໿
For the thirty-nine weeks ended March 3, 2018, selling, general, and administrative expenses was $128.0 million, an increase of $2.0 million, or 1.6%, compared to $126.0 million for the thirty-nine weeks ended February 25, 2017. Specialty egg expense decreased $4.7 million, or 11.2%, compared to the same period of last year. Specialty egg expense typically fluctuates with specialty egg dozens sold, which increased 3.3% for the thirty-nine weeks ended March 3, 2018; however, this was more than offset by reduced advertising expense, which is a component of specialty egg expense and decreased 72.8% compared to the same period for fiscal 2017 due to refunded promotional allowances and reduced current year promotions. Payroll and overhead increased $3.2 million, or 13.5%, compared to the same period of fiscal 2017 primarily due to reduced prior year bonus accruals. Other expenses increased 18.9% to $21.2 million for the thirty-nine weeks ended March 3, 2018 from $17.8 million for the comparable period of fiscal 2017 primarily due to increased insurance, amortization of intangible assets, bad debt, and professional fees.

LEGAL SETTLEMENT EXPENSE

On December 29, 2017, the Company reached an agreement on material terms of the settlement of several large direct action purchasers' antitrust claims against the Company. Pursuant to the agreement, the Company settled the claims with a single $80.8 million payment, which is $54.8 million net of tax, or $1.13 per basic and diluted share. As a result, the Company has recorded the legal settlement expense and offsetting liability to operating expense and current liabilities, respectively, during the thirteen and thirty-nine weeks ended March 3, 2018. The agreement was effective January 30, 2018. The Company paid the settlement on March 23, 2018, subsequent to the end of our fiscal 2018 third quarter.

(GAIN) LOSS ON DISPOSAL OF FIXED ASSETS

During the thirty-nine weeks ended February 25, 2017 we recorded a $1.4 million loss on disposal of fixed assets due to a roof replacement at one of our Texas locations and the replacement of equipment at our Utah location to comply with California regulations.

OPERATING INCOME

As a result of the above, operating income was $76.2 million for the third quarter of fiscal 2018, compared to a loss of $5.2 million for the fiscal 2017 third quarter. 

For the thirty-nine weeks ended March 3, 2018, we recorded an operating income of $11.4 million compared to a loss of $93.8 million for the same period of fiscal 2017.

OTHER INCOME (EXPENSE)    

Total other income (expense) consists of items not directly charged to, or related to, operations such as interest income and expense, royalty income, equity in income or loss of affiliates, and patronage income, among other items.  


19


For the third quarter of fiscal 2018, we recorded $1.1 million of interest income compared to $587,000 for the same period of last year.   The increase resulted primarily from higher average invested balances and higher rates earned. The Company recorded interest expense of $112,000 and $386,000, of which $8,000 and $210,000 was capitalized, in the third quarters of fiscal 2018 and 2017, respectively.  The $274,000 reduction in interest expense resulted from the Company reducing outstanding debt.

Equity in income (loss) of affiliates for the third quarter of fiscal 2018 was income of $2.4 million compared to $1.0 million for the same period of last year.  The increase of $1.4 million is primarily due to improved results at our Red River joint venture.

For the thirty-nine weeks ended March 3, 2018, we recorded $2.2 million of interest income compared to $2.5 million for the same period of fiscal 2017. The decrease resulted primarily from lower average invested balances partially offset by higher rates earned during the period. The Company recorded interest expense of $387,000 and $1.1 million, of which $214,000 and $959,000 was capitalized, for the thirty-nine weeks ended March 3, 2018 and February 25, 2017, respectively. The $755,000 reduction in interest expense resulted from the Company reducing outstanding debt.

Patronage dividends, which represent distributions from our membership in Eggland's Best, Inc., increased $678,000 from $7.6 million in fiscal 2017 to $8.3 million in fiscal 2018.

Equity in income (loss) of affiliates for the thirty-nine weeks ended March 3, 2018 was a income of $2.3 million compared to income of $1.9 million for the same period of fiscal 2017. The increase of $448,000 is primarily due to improved results at our Red River joint venture.

Other, net for the thirty-nine weeks ended March 3, 2018, was a loss of $1.3 million compared to $156,000 for the same period of fiscal 2017, primarily driven by a reduction in miscellaneous income.

INCOME TAXES

As previously discussed in the Overview of MD&A, the Tax Cuts ands Jobs Act of 2017 favorably impacted our third quarter results. The new tax legislation reduces the United States corporate tax rate from 35% to 21%.

Following the enactment of the Act, the United States Securities and Exchange Commission issued guidance in Staff Accounting Bulletin 118 which provides the Company up to a one-year measurement period, beginning on the Act’s enactment date, in which to complete the required analysis and accounting for the effects of the Act. The guidance allows the Company to record provisional adjustments related to the impacts of the Act when the accounting for the effects of the Act is incomplete, but when reasonable estimates can be made regarding the effects of the Act. Our accounting for the Act is not complete, because it required the Company to estimate the timing of settlement of the temporary differences from which our deferred taxes arose; however, we were able to make reasonable estimates, and we recorded those estimates as provisional adjustments as described in the paragraph below. The Company will complete the required analysis during its fourth quarter. If any adjustments to the provisional amounts are required, those adjustments will be recorded in the Company’s fourth quarter.

Pre-tax income, less net income attributable to noncontrolling interest, was $88.0 million for the thirteen weeks ended March 3, 2018, compared to $4.2 million for last year’s comparable period.  For the current thirteen-week period, income tax benefit of $8.3 million was recorded, with an effective tax rate of 31.8%, excluding the impact of any discrete items, compared to an income tax expense of $34,000, with an effective rate of 0.8%, for last year’s comparable period. Results for the current thirteen week period were favorably impacted by a $35 million discrete tax benefit related to the Act.


20


For the thirty-nine weeks ended March 3, 2018, pre-tax income, less net loss attributable to noncontrolling interest, was $23.4 million, compared to pre-tax loss, less net loss attributable to noncontrolling interest, of $81.1 million for the same period of fiscal 2017. For the thirty-nine weeks ended March 3, 2018 income tax benefit of $30.7 million was recorded, with an effective tax rate of 24.0%, excluding the impact of any discrete items, compared to an income tax benefit of $31.3 million, with an effective rate of 38.6% for last year's comparable period. Discrete items for the current thirty-nine weeks ended week period primarily related to a $35 million tax benefit in connection with the Act.

The effective rate increase for the thirteen weeks ended March 3, 2018 was primarily related to the provision to return adjustments on the fiscal 2016 tax return recorded in the prior period.  The effective rate decrease for the thirty-nine weeks ended March 3, 2018 was primarily related to the change in the federal statutory rate from 35% to 21%, resulting from legislation that was enacted on December 22, 2017. The rate change is administratively effective at the beginning of our fiscal year, using a blended rate for the annual period. As a result, the blended statutory tax rate for the year is 29.13%.

At March 3, 2018, accounts payable included an income tax payable of $20.7 million compared to an income tax receivable of $52.7 million at June 3, 2017. Not included in income taxes payable of $20.7 million is the tax benefit from deduction of the $80.8 million legal settlement expense, which was recorded in the second quarter of fiscal 2018, but is not deductible for income tax purposes until paid.  As noted above, the legal settlement expense was paid by the Company on March 23, 2018, subsequent to the end of our third quarter. The Company will receive a tax deduction for the legal settlement expense in the fourth quarter.  The remainder of the change is primarily due to the second quarter fiscal 2018 receipt of a $45.0 million federal tax refund related to the carryback of fiscal 2017 losses.

Our effective rate differs from the federal statutory income tax rate 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, the domestic manufacturers deduction, and net income or loss attributable to noncontrolling interest.  The enacted rate change from 35% to 21% also caused the thirteen-week and thirty-nine week effective rate to be significantly different from the Company’s historical annual effective rate.  The Company’s effective tax rate for future fiscal years under current legislation is expected to be 21% plus a state tax effected rate of approximately 3%.

NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST

For the thirteen weeks ended March 3, 2018, net income attributable to noncontrolling interest was $64,000 compared to a loss of $8,000 for the same period of fiscal 2017.

For the thirty-nine weeks ended March 3, 2018, net loss attributable to noncontrolling interest was $65,000 compared to $9,000 for the same period of fiscal 2017. This is attributable to income and losses from the Company's consolidated joint ventures.

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

Net income for the thirteen weeks ended March 3, 2018 was $96.3 million, or $1.99 per basic and diluted share, compared to $4.1 million, or $0.09 per basic and diluted share for the same period last year.

Net income for the thirty-nine weeks ended March 3, 2018 was $54.2 million, or $1.12 per basic and diluted share, compared to a loss of $49.8 million, or $1.03 per basic and diluted share, for the same period of fiscal 2017.


21


CAPITAL RESOURCES AND LIQUIDITY

Our working capital at March 3, 2018 was $391.8 million, compared to $371.5 million at June 3, 2017. The calculation of working capital is defined as current assets less current liabilities. Our current ratio was 3.17 at March 3, 2018, compared with 6.74 at June 3, 2017. The decrease was due to the accrual of the legal settlement expense and higher accounts payable balances at period end due to the increase in the cost of purchased eggs. We have $4.2 million in outstanding standby letters of credit, which are collateralized by cash for the benefit of certain insurance companies. Our long-term debt at March 3, 2018, including current maturities, amounted to $7.3 million, compared to $10.9 million at June 3, 2017. Refer to Note 9 of our June 3, 2017 audited financial statements for further information on our long-term debt.
  
For the thirty-nine weeks ended March 3, 2018, $146.1 million in net cash was provided by operating activities, an improvement of $203.3 million, compared to net cash used in operations of $57.2 million for the comparable period in fiscal 2017.   Improved gross profit margins primarily resulting from higher sales volumes and egg selling prices as well as increased accounts payable at March 3, 2018 contributed to our increase in cash flow from operations.

For the thirty-nine weeks ended March 3, 2018, approximately $95.3 million was provided from the sale of short-term investments compared to $228.3 million for the thirty-nine weeks ended February 25, 2017. We used $136.9 million and $25.9 million for purchases of short-term investments for the thirty-nine weeks ended March 3, 2018 and February 25, 2017, respectively.
 
We invested an additional $4.1 million in our Red River Valley Egg Farm, LLC joint venture (“Red River JV”) compared to $17.7 million for the first three quarters of fiscal 2017.  Approximately $13.6 million was used to purchase property, plant and equipment compared to $54.9 million in the thirty-nine weeks ended February 25, 2017.  This decrease represents the completion of several major expansion projects over the past twelve months. In fiscal 2017 we used $68.6 million for the acquisition of Foodonics International, Inc.

As of March 3, 2018, cash increased approximately $88.6 million since June 3, 2017 compared to an increase of $2.9 million during the same period of fiscal 2017.

Over the past five fiscal years the Company has completed over $300 million in capital expenditures. The Company continues to undertake expansion projects as needed to meet customer demand for cage-free eggs. At March 3, 2018, there are not any material projects underway.
໿

The Company expects to continue to fund its 50% share of the Red River JV.  As of March 20, 2018, we have contributed $58.0 million to the joint venture to fund our share of construction, startup costs, and operating losses. At March 3, 2018, the farm is in full production. We estimate we will make additional contributions of approximately $2 million to fund our share of the remaining construction costs, which are primarily related to the construction of a feed mill.

Property, plant, and equipment at certain of our locations is pledged as collateral on our notes payable and senior secured notes.  Unless otherwise approved by our lenders, we are required by provisions of our loan agreements to (1) maintain minimum levels of working capital (current ratio of not less than 1.25 to 1) and net worth (minimum of $90.0 million tangible net worth, plus 45% of cumulative net income since the fiscal year ended May 28, 2005); (2) limit dividends paid in any given quarter to not exceed an amount equal to one third of the previous quarter’s consolidated net income (allowed if no events of default); (3) maintain minimum total funded debt to total capitalization (not to exceed 55%); and (4) maintain various cash-flow coverage ratios (1.25 to 1), among other restrictions. At March 3, 2018, we were in compliance with the financial covenant requirements of all loan agreements. Under certain of the loan agreements, the lenders have the option to require the prepayment of any outstanding borrowings in the event we undergo a change in control, as defined in the applicable loan agreement. Our debt agreements require Fred R. Adams, Jr., our Founder and Chairman Emeritus, or his family, to maintain ownership of Company shares representing not less than 50% of the outstanding voting power of the Company.    


22


We believe our current cash balances, investments, and cash flows from operations will be sufficient to fund our current and projected capital needs for at least the next twelve months.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer in an amount that reflects the consideration that is expected to be received for those goods or services.  In August 2015, FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. To date the Company’s assessments efforts include evaluation of certain revenue contracts with customers and the method of retrospective application, either full or modified.  We currently expect to utilize the full retrospective transition on date of adoption.  Based on the findings to date, the Company does not  ex