UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
For The Fiscal Year Ended May 30, 2020
For the transition period from ____________ to ____________
Commission file number: 001-38695
(Exact name of registrant as specified in its charter)
| (State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(601 ) 948-6813
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
| Title of each class: | Trading Symbol(s) | Name of each exchange on which registered: | ||||||||||||
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ 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.
☑ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value, as reported by The NASDAQ Global Select Market, of the registrant’s Common Stock, $0.01 par value, held by non-affiliates at November 30, 2019, which was the date of the last business day of the registrant’s most recently completed second fiscal quarter, was $1,372,892,856 .
As of July 20, 2020, 43,500,718 shares of the registrant’s Common Stock, $0.01 par value, and 4,800,000 shares of the registrant’s Class A Common Stock, $0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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PART I.
FORWARD-LOOKING STATEMENTS
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 future production data, expected construction schedules, projected construction costs, potential future supply of and demand for our products, potential future corn and soybean price trends, potential future impact on our business of the COVID-19 pandemic, potential future impact on our business of new legislation, rules or policies, potential outcomes of legal proceedings, and projected operating data, 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 results 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 and elsewhere in this report as well as those included in other reports we file from time to time with the Securities and Exchange Commission (the “SEC”) (including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K), (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, (vi) risks relating to the evolving COVID-19 pandemic, and (vii) 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.
ITEM 1. BUSINESS
Our Business
We are the largest producer and distributor of shell eggs in the United States. Our mission is to be the most sustainable producer and reliable supplier of consistent, high quality fresh shell eggs and egg products in the country, demonstrating a "Culture of Sustainability" in everything we do, and creating value for our shareholders, customers, team members and communities. We sell most of our shell eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the U.S. and aim to maintain efficient, state-of-the-art operations located close to our customers. We were founded in 1957 by the late Fred R. Adams, Jr. and are headquartered in Jackson, Mississippi.
The Company has one operating segment, which is the production, grading, packaging, marketing and distribution of shell eggs. Our integrated operations consist of hatching chicks, growing and maintaining flocks of pullets, layers, and breeders, manufacturing feed, and producing, processing, packaging, and distributing shell eggs. Layers are mature female chickens, pullets are female chickens usually under 18 weeks of age, and breeders are male and female chickens used to produce fertile eggs to be hatched for egg production flocks.
Many of our customers rely on us to provide most of their shell egg needs, including specialty and conventional eggs. Specialty eggs encompass 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
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conventional products. While we report separate sales information for these egg types, there are many cost factors that are not specifically available for conventional 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.
Over time, we have acquired other companies in our industry. Since 1989, we have completed 22 acquisitions ranging in size from 160 thousand layers to 7.5 million layers. In October 2019, we acquired certain assets of Mahard Egg Farm, relating to its commercial shell egg production, processing, distribution and sales. Effective March 28, 2020, we acquired the remaining interest in our majority-owned subsidiary Texas Egg Products, LLC. For further description of these transactions, refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 2 - Acquisitions.
When we use “we,” “us,” “our,” or the “Company” in this report, we mean Cal-Maine Foods, Inc., our consolidated subsidiaries, unless otherwise indicated or the context otherwise requires. Our fiscal year 2020 ended May 30, 2020, and the first three fiscal quarters of fiscal 2020 ended August 31, 2019, November 30, 2019, and February 29, 2020. All references herein to a fiscal year means our fiscal year and all references to a year mean a calendar year.
Response to the COVID-19 Pandemic
Since early 2020, the coronavirus ("COVID-19") outbreak, characterized as a pandemic by the World Health Organization on March 11, 2020, has caused significant disruptions in international and U.S. economies and markets. We believe we are taking all reasonable precautions in the management of our operations in response to the COVID-19 pandemic. Our top priority is the health and safety of our employees, who work hard every day to produce eggs for our customers. As part of the nation's food supply, we work in a critical infrastructure industry, and we believe we have a special responsibility to maintain our normal work schedule. As such, we are in regular communication with our managers across our operations and continue to closely monitor the situation in our facilities and in the communities where we live and work. We are implementing procedures designed to protect our employees, taking into account guidelines published by the Centers for Disease Control and other government health agencies, and we have strict sanitation protocols and biosecurity measures in place throughout our operations with restricted access to visitors. All non-essential corporate travel has been suspended. There are no known indications that COVID-19 affects hens or can be transferred through the food supply. For discussion regarding the impact of COVID-19 on our financial results, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Industry Background
According to the U.S. Department of Agriculture (“USDA”) Agricultural Marketing Service in 2019, approximately 70% of eggs produced in the U.S. are sold as shell eggs, with 60% sold to retail outlets (e.g. through grocery and convenience stores), 7% sold to food service customers and 3% exported. The remaining 30% of eggs produced in the U.S. are sold as egg products (shell eggs broken and sold in liquid, frozen, or dried form) to institutions (e.g. companies producing baked goods). For information about egg producers in the U.S., see “Competition” below.
Based on historical consumption trends, we believe general demand for eggs increases in line with overall population growth, averaging about 2% per year. Specific events can impact egg consumption in any particular period. For example, in 2015, egg consumption decreased approximately 4% over the prior year primarily due to a shortage of eggs resulting from an outbreak of avian influenza ("AI") in the spring of that year. In 2016, consumption rebounded increasing 7% over 2015 and 3% over the pre-shortage level of 2014. According to the USDA, annual per capita U.S. consumption since 2000 varied between 249 and 287 eggs. In calendar year 2019, per capita U.S. consumption was estimated to be 287 eggs, or approximately six eggs per person per week. Per capita consumption is determined by dividing the total supply of eggs by the entire population in the U.S. (assuming all eggs produced domestically by the egg industry are consumed).
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Prices for Shell Eggs
Shell egg sales prices are a critical component of revenue for the Company. Shell egg prices are volatile, cyclical, and impacted by a number of factors, including consumer demand, seasonal fluctuations, disease, and by the number and productivity of laying hens in the U.S. While we use several different pricing mechanisms in pricing agreements with our customers, we believe the majority of conventional shell eggs sold in the U.S. in the retail and food service channels are sold at prices that take into account, in varying ways, independently quoted wholesale market prices as published by Urner Barry Publications, Inc. ("UB") for shell eggs. We sell the majority of our conventional shell eggs based formulas that take into account, in varying ways, independently quoted regional wholesale market prices for shell eggs or formulas related to our costs of production, which include the cost of corn and soybean meal. We do not sell eggs directly to consumers or set the prices at which eggs are sold to consumers.
As a point of reference, the weekly average price for the southeast region for large white conventional shell eggs as quoted by UB is shown below for the past three fiscal years along with the five year average price. The actual prices that we realize on any given transaction will not necessarily equal quoted market prices because of the individualized terms that we negotiate with individual customers which are influenced by many factors.
Specialty eggs are sold at prices and terms negotiated directly with customers. Historically, prices for specialty eggs have experienced less volatility than prices for conventional shell eggs and have generally been higher due to consumer willingness to pay more for specialty eggs.
Feed Costs for Shell Egg Production
Feed is a primary cost component in the production of shell eggs and represented 55.4% of our farm production costs in fiscal 2020. Generally, we purchase primary feed ingredients, mainly corn and soybean meal, at current market prices. As the quality and composition of feed is a critical factor in the nutritional value of shell eggs and health of our chickens, we formulate and produce our own feed at our feed mills located near our production plants. Our annual feed requirements for fiscal 2020 were 1.7 million tons of finished feed, of which we manufactured 1.6 million tons. We currently have the capacity to store 152 thousand tons of corn and soybean meal.
The primary feed ingredients, corn and soybean meal, are commodities and are subject to volatile price changes due to weather, various supply and demand factors, transportation and storage costs, speculators, and agricultural, energy and trade policies in the U.S. and internationally. Feed grains are currently available from an adequate
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number of sources in the U.S. As a point of reference, a multi-year comparison of the monthly average of daily closing prices per Chicago Board of Trade are shown below for corn and soybean meal:
Shell Egg Production
We produced approximately 87% of our total shell eggs sold in fiscal 2020, with 91% of such production coming from company-owned facilities, and 9% from contract producers. Under a typical arrangement with a contract producer, we own the flock, furnish all feed and critical supplies, own the shell eggs produced and assume market risks. The contract producers own and operate their facilities and are paid a fee based on production with incentives for performance. We purchased approximately 13% of the total shell eggs we sold during fiscal 2020 from outside producers.
The commercial production of shell eggs requires a source of baby chicks for laying flock replacement. We produce the majority of our chicks in our own breeder farms and hatcheries in a computer-controlled environment and obtain the balance from commercial sources.
After the eggs are produced, they are graded and packaged. Substantially all of our farms have modern “in-line” facilities which mechanically gather, grade and package the eggs at the same location where they are laid. The in-line facilities generate significant cost savings compared to the cost of eggs produced from non-in-line facilities, which process eggs laid at another location and transported to the facility. In addition to greater efficiency, the in-line facilities produce a higher percentage of USDA Grade A eggs, which sell at higher prices. Eggs produced on farms owned by contractors are brought to our processing plants to be graded and packaged. Because shell eggs are perishable, we are not able to maintain large egg inventories. Our inventory averages four days of production over the course of a year. We believe our constant attention to production efficiencies and focus on automation throughout the supply chain enables us to be a low-cost supplier in our markets.
We do not use artificial hormones in the production of our eggs. Hormone use in the poultry and egg production industry has been effectively banned in the U.S. since the 1950s. We have an extensive written protocol that allows the use of medically important antibiotics only when animal health is at risk, consistent with guidance from the United States Food and Drug Administration ("FDA") and the Guidance for Judicious Therapeutic Use of Antimicrobials in Poultry, developed by the American Association of Avian Pathologists. When antibiotics are medically necessary, a licensed veterinary doctor will approve and administer approved doses for a restricted period. Our programs are designed to ensure antibiotics are ordered and used only when necessary and records of
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their usage – when and where – are maintained in order to monitor compliance with our protocols. We do not use antibiotics for growth promotion or performance enhancement.
Specialty Eggs
We are one of the largest producers and marketers of value-added specialty shell eggs in the U.S., which continues to be a significant and growing segment of the market. Specialty eggs are intended to meet the demands of consumers who are sensitive to environmental, health and/or animal welfare issues. A significant number of our food service customers, large restaurant chains, and major retailers, including our largest customers, have announced goals to offer cage-free eggs exclusively by specified future dates. Additionally, several states have passed legislation requiring cage-free eggs by specified future dates and other states are considering such requirements. We are working with our customers to ensure a smooth transition in meeting their goals. We have invested significant capital in recent years to acquire and construct cage-free facilities and facilities that can easily be converted to cage-free. Our focus for future expansion will be on such facilities, based on a timeline to meet our customers’ demand and evolving legal requirements.
Egg-Land’s Best® and Land O’ Lakes® branded eggs are produced and processed under license from Eggland's Best, Inc ("EB") at our facilities under EB guidelines. Land O’ Lakes® branded eggs are produced by hens that are fed a whole grain vegetarian diet. Farmhouse Eggs® brand eggs are produced at our facilities by cage-free hens that are provided with a vegetarian diet. We market organic, vegetarian, and omega-3 eggs under our 4-Grain® brand, which consists of both caged and cage-free eggs. We also produce, market, and distribute private label specialty shell eggs to several customers.
Egg Products
Egg products are shell eggs broken and sold in liquid, frozen, or dried form. We sell liquid and frozen egg products primarily to the institutional, food service, and food manufacturing sectors in the U.S. Our egg products are sold through our wholly owned subsidiaries American Egg Products, LLC located in Blackshear, Georgia and Texas Egg Products, LLC located in Waelder, Texas.
Summary of Conventional and Specialty Shell Egg and Egg Product Sales
The following table sets forth the contribution as a percentage of revenue and volumes of dozens sold of conventional and specialty shell egg and egg product sales for the following fiscal years:
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Revenue | Volume | Revenue | Volume | Revenue | Volume | ||||||||||||||||||||||||
| Conventional Eggs | 61.4 | % | 76.1 | % | 59.4 | % | 74.9 | % | 63.7 | % | 75.2 | % | |||||||||||||||||
| Specialty Eggs | |||||||||||||||||||||||||||||
| Egg-Land’s Best® | 19.2 | % | 12.7 | % | 19.9 | % | 13.5 | % | 18.2 | % | 13.9 | % | |||||||||||||||||
| Other Specialty Eggs | 16.7 | % | 11.2 | % | 17.3 | % | 11.6 | % | 14.6 | % | 10.9 | % | |||||||||||||||||
| Total Specialty Eggs | 35.9 | % | 23.9 | % | 37.2 | % | 25.1 | % | 32.8 | % | 24.8 | % | |||||||||||||||||
| Egg Products | 2.3 | % | 3.0 | % | 2.9 | % | |||||||||||||||||||||||
Marketing and Distribution
We sell most of our shell eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the U.S. through our extensive distribution network to a diverse group of customers, including national and regional grocery store chains, club stores, companies servicing independent supermarkets in the U.S., food service distributors and
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egg product consumers. Some of our sales are completed through co-pack agreements – a common practice in the industry whereby production and processing of certain products is outsourced to another producer. Although we face intense competition from numerous other companies, we believe that we have the largest market share for the sale of shell eggs in the grocery segment including large U.S. food retailers.
We are a member of the EB cooperative and produce, market and distribute EB and Land O'Lakes branded eggs, both directly and through our joint ventures Specialty Eggs, LLC and Southwest Specialty Eggs, LLC, under exclusive license agreements for a number of states in the southeast, south central, and southwest U.S. as well as the New York City area.
The majority of eggs sold are based on the daily or short-term needs of our customers. Most sales to established accounts are on payment terms ranging from seven to 30 days. Although we have established long-term relationships with many of our customers, most of them are free to acquire shell eggs from other sources.
The shell eggs we sell are either delivered to our customers’ warehouse or retail stores, by our own fleet or contracted refrigerated delivery trucks, or are picked up by our customers at our processing facilities.
Customers
Our top three customers accounted for an aggregate of 51.1%, 52.2% and 51.7% of net sales dollars for fiscal 2020, 2019, and 2018, respectively. Our largest customer, Walmart Inc. (including Sam's Club), accounted for 32.1%, 33.7% and 33.2% for fiscal 2020, 2019, and 2018, respectively. H-E-B, LP accounted for 10.1% of net sales dollars for fiscal 2020.
In fiscal 2020, approximately 92% of our revenue related to sales to retail customers, 6% to sales to food service providers and 2% to egg products sales. Retail customers include primarily national and regional grocery store chains, club stores, and companies servicing independent supermarkets in the U.S. Food service customers include primarily companies that sell food products and related items to restaurants, healthcare and education facilities, and hotels.
Competition
The production, processing, and distribution of shell eggs is an intensely competitive business, which has traditionally attracted large numbers of producers. Shell egg competition is generally based on price, service, and product quality.
Although the market is sometimes characterized as consolidated, the shell egg production industry remains highly fragmented. According to Egg Industry magazine in its 2020 survey, 66 producers, owning at least 500 thousand layers, owned approximately 99% of total industry layers. The ten largest producers owned approximately 54% of total industry layers compared to 50% in 2015. We believe industry consolidation will continue, and we plan to capitalize on opportunities as they arise. We believe further concentration will result in reduced cyclicality of shell egg prices, but no assurance can be given in that regard. A continuation of this trend could create greater competition among fewer producers.
Seasonality
Retail sales of shell eggs historically have been highest during the fall and winter months and lowest during the summer months. Prices for shell eggs fluctuate in response to seasonal demand factors and a natural increase in egg production during the spring and early summer. Historically, shell egg prices tend to increase with the start of the school year and tend to be highest prior to holiday periods, particularly Thanksgiving, Christmas, and Easter. Consequently, and all other things being equal, we would expect to experience lower selling prices, sales volumes and net income (and may incur net losses) in our first and fourth fiscal quarters ending in August/September and May/June, respectively.
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Growth Strategy
Our growth strategy is focused on remaining a low-cost provider of shell eggs located near our customers. In light of the growing customer demand and increased legal requirements for cage-free eggs, we intend to continue to closely evaluate the need to expand through selective acquisitions, with a priority on those that will facilitate our ability to expand our cage-free shell egg production capabilities in key locations and markets. We plan to continue to closely evaluate the need to continue to expand and convert our own facilities to increase production of cage-free eggs based on a timeline to meet the anticipated needs of our customers. As the ongoing production of cage-free eggs is more costly than the production of conventional eggs, aligning our cage-free production capabilities with changing demand for cage-free eggs is important to the success of our business.
Trademarks and License Agreements
We own the trademarks Farmhouse®, Sunups®, Sunny Meadow® and 4Grain®. We produce and market Egg-Land's Best® and Land O’ Lakes® branded eggs under license agreements with EB. We believe these trademarks and license agreements are important to our business.
Government Regulation
Our facilities and operations are subject to regulation by various federal, state, and local agencies, including, but not limited to, the FDA, USDA, Environmental Protection Agency ("EPA"), Occupational Safety and Health Administration ("OSHA") and corresponding state agencies or laws. The applicable regulations relate to grading, quality control, labeling, sanitary control and reuse or disposal of waste. Our shell egg facilities are subject to periodic USDA, FDA, EPA, and OSHA inspections. Our feed production facilities are subject to FDA regulation and inspections. We maintain our own inspection program to monitor compliance with our own standards and customer specifications. It is possible that we will be required to incur significant costs for compliance with such statutes and regulations. In the future, additional rules could be proposed that, if adopted, could increase our costs.
California, Colorado, Washington, Oregon, Massachusetts, Rhode Island and Michigan have passed minimum space and/or cage-free requirements, mandating the sale of only cage-free eggs in their states with implementation of these laws ranging from January 2022 to January 2026. These states represent approximately 23% of the U.S. total population according to the U.S. Census Bureau. Legislation is pending in Arizona and Hawaii for cage-free requirements. While our direct sales into these states have not been material, these laws will affect sourcing, production and pricing of eggs (conventional as well as specialty) as the national demand for cage-free production could be greater than the current supply which would increase the price of cage-free eggs, unless more cage-free production capacity is constructed. Likewise, the national supply for eggs from caged production could exceed consumer demand which would decrease the price of conventional eggs.
Environmental Regulation
Our operations and facilities are subject to various federal, state, and local environmental, health and safety laws and regulations governing, among other things, the generation, storage, handling, use, transportation, disposal, and remediation of hazardous materials. Under these laws and regulations, we must obtain permits from governmental authorities, including, but not limited to, wastewater discharge permits. We have made, and will continue to make, capital and other expenditures relating to compliance with existing environmental, health and safety laws and regulations and permits. We are not currently aware of any major capital expenditures necessary to comply with such laws and regulations; however, as environmental, health and safety laws and regulations are becoming increasingly more stringent, including those relating to animal wastes and wastewater discharges, it is possible that we will have to incur significant costs for compliance with such laws and regulations in the future.
Employees
As of May 30, 2020, we had 3,636 employees, of whom 2,971 worked in egg production, processing and marketing, 198 worked in feed mill operations and 467 were administrative employees, including our executive officers.
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Approximately 4.8% of our personnel are part-time. None of our employees are covered by a collective bargaining agreement. We consider our relations with employees to be good.
Sustainability
We understand that a healthy environment and responsible management of our flocks and natural resources are vital to the production of high-quality eggs and egg products and therefore to the long-term success of our Company. We have engaged in agricultural production for more than 60 years. Our agricultural practices continue to evolve with increased focus on sustainability factors, aiming to meet the need for healthy, affordable foods for a growing population while sustaining natural resources to enable us to continue to meet this need for the future. In June 2020 we published our first Sustainability Overview, which is available on our website. Information contained in our website is not a part of this report.
Our Corporate Information
We maintain a website at www.calmainefoods.com where general information about our business and corporate governance matters is available. The information contained in our website is not a part of this report. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and all amendments to those reports are available, free of charge, through our website as soon as reasonably practicable after we file them with the SEC. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Information concerning corporate governance matters is also available on our website. Cal-Maine Foods, Inc. is a Delaware corporation, incorporated in 1969.
ITEM 1A. RISK FACTORS
Our business and results of operations are subject to numerous risks and uncertainties, many of which are beyond our control. The following is a description of the known factors that may materially affect our business, financial condition or results of operations. They should be considered carefully, in addition to the information set forth elsewhere in this Annual Report on Form 10-K, including under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in making any investment decisions with respect to our securities. Additional risks or uncertainties that are not currently known to us, or that we are aware of but currently deem to be immaterial or that could apply to any company could also materially adversely affect our business, financial condition or results of operations.
Market prices of wholesale shell eggs are volatile, and decreases in these prices can adversely impact our revenues and profits.
Our operating results are significantly affected by wholesale shell egg market prices, which fluctuate widely and are outside our control. As a result, our prior performance should not be presumed to be an accurate indication of future performance. Under certain circumstances, small increases in production, or small decreases in demand, within the industry might have a large adverse effect on shell egg prices. Low shell egg prices adversely affect our revenues and profits.
Market prices for wholesale shell eggs have been volatile and cyclical. Shell egg prices have risen in the past during periods of high demand such as the COVID-19 pandemic and periods when high protein diets are popular. Shell egg prices have also risen in the past during periods of constrained supply, such as the avian influenza outbreak in 2015, which we believe, based on published industry estimates, impacted approximately 12% of the national flock of laying hens. During times when prices are high, the egg industry has typically geared up to produce more eggs primarily by increasing the number of layers, ultimately resulting in an oversupply of eggs, which was subsequently followed by a period of lower prices.
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As discussed above in Item 1. Business - Seasonality, seasonal fluctuations impact shell egg prices. Therefore, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons.
A decline in consumer demand for shell eggs can negatively impact our business.
We believe fast food restaurant consumption, high protein diet trends, industry advertising campaigns, and the improved nutritional reputation of eggs (related to better scientific understanding of the role of cholesterol in diets) have all contributed to shell egg demand. However, it is possible that the demand for shell eggs will decline in the future. Adverse publicity relating to health concerns and changes in the perception of the nutritional value of shell eggs, changes in consumer views regarding consumption of animal-based products, as well as movement away from high protein diets, could adversely affect demand for shell eggs, which would have a material adverse effect on our future results of operations and financial condition.
Feed costs are volatile and increases in these costs can adversely impact our results of operations.
Feed cost represents the largest element of our shell egg (farm) production cost, ranging from 55% to 60% of total farm production cost in the last five fiscal years. Although feed ingredients are available from a number of sources, we do not have control over the prices of the ingredients we purchase, which are affected by weather, various supply and demand factors, transportation and storage costs, speculators, and agricultural, energy and trade policies in the U.S. and internationally. For example, a severe drought in the summer of 2012 and resulting damage to the national corn and soybean crops resulted in high and volatile feed costs. Increases in feed costs unaccompanied by increases in the selling price of eggs can have a material adverse effect on the results of our operations and cash flow. Alternatively, low feed costs can encourage industry overproduction, possibly resulting in lower egg prices and lower revenue.
Events beyond our control such as pandemics (including the COVID-19 outbreak), extreme weather and natural disasters could negatively impact our business.
Since early 2020, the coronavirus ("COVID-19") outbreak, characterized as a pandemic by the World Health Organization on March 11, 2020, has caused significant disruptions in international and U.S. economies and markets. The potential impact of COVID-19 on our business in the future is uncertain. The pandemic, or similar disease outbreaks in the future, may depress demand for shell eggs due to quarantines or restrictions on public interactions that would limit the ability of consumers to purchase shell eggs. The pandemic, or similar disease outbreaks in the future, may disrupt our supply chain and operations at our facilities. If a significant percentage of our workforce, or the workforce of our suppliers or transportation providers, is unable to work because of illness or government restrictions, our operations would be negatively impacted, potentially materially. Pandemics or disease outbreaks may also impact hens or the food supply, although to date, there is no known indication that COVID-19 affects hens or can be transferred through the food supply.
Fire, bioterrorism, pandemic, extreme weather or natural disasters, including droughts, floods, excessive cold or heat, hurricanes or other storms, could impair the health or growth of our flocks, decrease production or availability of feed ingredients, or interfere with our operations due to power outages, fuel shortages, discharges from overtopped or breached wastewater treatment lagoons, damage to our production and processing facilities, labor shortages or disruption of transportation channels, among other things. Any of these factors could have a material adverse effect on our financial results.
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Pressure from animal rights groups regarding the treatment of animals may subject us to additional costs to conform our practices to comply with developing standards or subject us to marketing costs to defend challenges to our current practices and protect our image with our customers. In particular, changes in customer preferences and new legislation have accelerated an increase in demand for cage-free eggs, which increases uncertainty in our business and increases our costs.
We and many of our customers face pressure from animal rights groups, such as People for the Ethical Treatment of Animals and the Humane Society of the United States, to require companies that supply food products to operate their business in a manner that treats animals in conformity with certain standards developed or approved by these groups. In general, we may incur additional costs to conform our practices to address these standards or to defend our existing practices and protect our image with our customers. The standards promoted by these groups change over time, but typically require minimum cage space for hens, among other requirements, and some of these groups have led successful legislative efforts to ban any form of caged housing in various states. As discussed in Item 1. Business - Government Regulation, several states have passed minimum space and/or cage-free requirements for hens, and other states are considering such requirements. In addition, in recent years, many large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to an exclusively cage-free egg supply chain by specified future dates, in some cases subject to available supply, affordability and consumer demand.
Changing our infrastructure and operating procedures to conform to customer demands and new laws has resulted and will continue to result in additional costs, including capital and operating cost increases. The USDA reported that the estimated cage-free flock is 78.4 million hens as of June 2020 which is approximately 25% of the total U.S. hen population. According to the USDA Agricultural Marketing Service approximately 71% of the U.S. laying flock would have to be in cage-free production by 2026 to meet projected demand from the retailers, foodservice providers and food manufacturers that have made promises to transition to cage-free eggs. The United Egg Producers, a nation-wide egg farmer cooperative, has estimated that the cost to build farms compliant with cage-free standards is $45 a bird. Based on that figure, such an increase in the size of the cage-free flock would require an estimated industry-wide investment of approximately $6.7 billion.
In response to our customers' announced goals and increased legal requirements for cage-free eggs, we increased capital expenditures to increase our cage-free production capacity. Our customers typically do not commit to long-term purchases of specific quantities or type of eggs with us, and as a result, we cannot predict with any certainty which types of eggs they will require us to supply in future periods. The ongoing production of cage-free eggs is more costly than the production of conventional eggs, and these higher production costs contribute to the higher prices of cage-free eggs compared with conventional eggs. Many consumers prefer to buy less expensive conventional shell eggs. These consumer preferences may in turn influence our customers’ future needs for cage-free eggs. Due to these uncertainties, we may over-estimate future demand for cage-free eggs, which could increase our costs unnecessarily, or we may under-estimate future demand for cage-free eggs, which could harm us competitively. We are enhancing our focus on cage-free capacity when considering acquisition opportunities, as discussed in more detail below.
Due to the cyclical nature of our business, our financial results fluctuate from year to year.
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 vary significantly.
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We purchase a portion of the shell eggs we sell from others, and our ability to obtain such eggs at prices and in quantities acceptable to us could fluctuate.
We purchased from other producers approximately 13% and 16% of the total number of shell eggs we sold in fiscal 2020 and fiscal 2019, respectively. As the wholesale price for shell eggs increases, our cost to acquire shell eggs from others increases. There can be no assurance that we can continue to acquire shell eggs in sufficient quantities and at satisfactory prices, and our inability to do so may have a material adverse effect on our business and profitability.
Our acquisition growth strategy subjects us to various risks.
As discussed in Item 1. Business - Growth Strategy, we plan to pursue a growth strategy that includes selective acquisitions of other companies engaged in the production and sale of shell eggs, with a priority on those that will facilitate our ability to expand our cage-free shell egg production capabilities in key locations and markets. The number of existing companies with cage-free capacity that we may be available to purchase is limited, as most production of shell eggs by other companies in our markets currently does not meet customer or legal requirements to be designated as cage-free.
Acquisitions require capital resources and can divert management’s attention from our existing business. Acquisitions also entail an inherent risk that we could become subject to contingent or other liabilities, including liabilities arising from events or conduct prior to our acquisition of a business that were unknown to us at the time of acquisition. We could incur significantly greater expenditures in integrating an acquired business than we anticipated at the time of its purchase. We may over-estimate or under-estimate the demand for cage-free eggs, which could cause our acquisition strategy to be less-than-optimal for our future growth and profitability.
We cannot assure you that we:
• will identify suitable acquisition candidates;
• can consummate acquisitions on acceptable terms;
• can successfully integrate an acquired business into our operations; or
• can successfully manage the operations of an acquired business.
No assurance can be given that companies we acquire in the future will contribute positively to our results of operations or financial condition. In addition, federal antitrust laws require regulatory approval of acquisitions that exceed certain threshold levels of significance, and we cannot guarantee that such approvals would be obtained.
The consideration we pay in connection with any acquisition affects our financial results. If we pay cash, we could be required to use a portion of our available cash to consummate the acquisition. To the extent we issue shares of our Common Stock, existing stockholders may be diluted. In addition, acquisitions may result in additional debt.
Our largest customers historically accounted for a significant portion of our net sales volume. Accordingly, our business may be adversely affected by the loss of, or reduced purchases by, one or more of our large customers.
Our top three customers accounted for an aggregate of 51.1%, 52.2% and 51.7% of net sales dollars for fiscal 2020, 2019, and 2018, respectively. Our largest customer, Walmart Inc. (including Sam's Club), accounted for 32.1%, 33.7% and 33.2% of net sales dollars for fiscal 2020, 2019, and 2018, respectively. H-E-B, LP accounted for 10.1% of net sales dollars for fiscal 2020. Although we have established long-term relationships with most of our customers who continue to purchase from us based on our ability to service their needs, they are free to acquire shell eggs from other sources. If, for any reason, one or more of our large customers were to purchase significantly less of our shell eggs in the future or terminate their purchases from us, and we are not able to sell our shell eggs to new customers at comparable levels, it would have a material adverse effect on our business, financial condition, and results of operations.
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Failure to comply with applicable governmental regulations, including environmental regulations, could harm our operating results, financial condition, and reputation. Further, we may incur significant costs to comply with any such regulations.
We are subject to federal, state and local regulations relating to grading, quality control, labeling, sanitary control, waste disposal, and other areas of our business. As a fully-integrated shell egg producer, our shell egg facilities are subject to regulation and inspection by the USDA, EPA, and FDA, as well as state and local health and agricultural agencies, among others. All of our shell egg production and feed mill facilities are subject to FDA regulation and inspections. In addition, rules are often proposed that, if adopted as proposed, could increase our costs.
Our operations and facilities are subject to various federal, state and local environmental, health, and safety laws and regulations governing, among other things, the generation, storage, handling, use, transportation, disposal, and remediation of hazardous materials. Under these laws and regulations, we are required to obtain permits from governmental authorities, including, but not limited to pollution/wastewater discharge permits.
If we fail to comply with applicable laws or regulations, or fail to obtain necessary permits, we could be subject to significant fines and penalties or other sanctions, our reputation could be harmed, and our operating results and financial condition could be materially adversely affected. In addition, because these laws and regulations are becoming increasingly more stringent, it is possible that we will be required to incur significant costs for compliance with such laws and regulations in the future.
Shell eggs and shell egg products are susceptible to microbial contamination, and we may be required to, or we may voluntarily, recall contaminated products.
Shell eggs and shell egg products are vulnerable to contamination by pathogens such as Salmonella. The Company maintains policies and procedures designed to comply with the complex rules and regulations governing egg production, such as The Final Egg Rule issued by the FDA "Prevention of Salmonella Enteritidis in Shell Eggs During Production, Storage, and Transportation”, and the FDA’s Food Safety Modernization Act. Shipment of contaminated products, even if inadvertent, could result in a violation of law and lead to increased risk of exposure to product liability claims, product recalls and scrutiny by federal and state regulatory agencies. In addition, products purchased from other producers could contain contaminants that might be inadvertently redistributed by us. As such, we might decide or be required to recall a product if we or regulators believe it poses a potential health risk. We do not maintain insurance to cover recall losses. Any product recall could result in a loss of consumer confidence in our products, adversely affect our reputation with existing and potential customers and have a material adverse effect on our business, results of operations and financial condition.
Agricultural risks, including outbreaks of avian disease, could harm our business.
Our shell egg production activities are subject to a variety of agricultural risks. Unusual or extreme weather conditions, disease and pests can materially and adversely affect the quality and quantity of shell eggs we produce and distribute. The Company maintains controls and procedures to reduce the risk of exposing our flocks to harmful diseases; however, despite these efforts, outbreaks of avian disease can and do still occur and may adversely impact the health of our flocks. An outbreak of avian disease could have a material adverse impact on our financial results by increasing government restrictions on the sale and distribution of our products and requiring us to euthanize the affected layers. Negative publicity from an outbreak within our industry can negatively impact customer perception, even if the outbreak does not directly impact our flocks. If a substantial portion of our layers or production facilities are affected by any of these factors in any given quarter or year, our business, financial condition, and results of operations could be materially and adversely affected.
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Our business is highly competitive.
The production and sale of fresh shell eggs, which accounted for virtually all of our net sales in recent years, is intensely competitive. We compete with a large number of competitors that may prove to be more successful than we are in marketing and selling shell eggs. We cannot provide assurance that we will be able to compete successfully with any or all of these companies. Increased competition could result in price reductions, greater cyclicality, reduced margins and loss of market share, which would negatively affect our business, results of operations, and financial condition.
We are dependent on our management team, and the loss of any key member of this team may adversely affect the implementation of our business plan in a timely manner.
Our success depends largely upon the continued service of our senior management team. The loss or interruption of service of one or more of our key executive officers could adversely affect our ability to manage our operations effectively and/or pursue our growth strategy. We have not entered into any employment or non-compete agreements with any of our executive officers nor do we carry any significant key-man life insurance coverage on any such persons. Competition could cause us to lose talented employees, and unplanned turnover could deplete institutional knowledge and result in increased costs due to increased competition for employees.
Labor shortages or increases in labor costs could adversely impact our business and results of operations.
Labor is a primary component of our farm production costs. Our success is dependent upon recruiting, motivating, and retaining staff to operate our farms. Approximately 74% of our employees are paid at hourly rates, often in entry-level positions. While the majority are paid at rates above the federal minimum wage requirements, any significant increase in local, state or federal minimum wage requirements could increase our labor costs. In addition, any regulatory changes requiring us to provide additional employee benefits or mandating increases in other employee-related costs, such as unemployment insurance or workers compensation, would increase our costs. A shortage in the labor pool, which may be caused by competition from other employers, the remote locations of many of our farms, or changes in immigration laws, particularly in times of lower unemployment, could adversely affect our business and results of operations. A shortage of labor available to us could cause our farms to operate with reduced staff, which could negatively impact our production capacity and could require us to increase wages to attract labor. Accordingly, any significant labor shortages or increases in our labor costs could have a material adverse effect on our results of operations.
We are controlled by the family of our late founder, Fred R. Adams, Jr. and, after the settlement of Mr. Adams' estate, we expect to be controlled by Adolphus B. Baker, our Chief Executive Officer and Chairman of the Board.
Fred R. Adams, Jr., our Founder and Chairman Emeritus died on March 29, 2020. Mr. Adams' estate, his son-in-law, Adolphus B. Baker, our Chief Executive Officer and Chairman of the Board, Mr. Baker's spouse and her three sisters (who are Mr. Adams' four daughters) beneficially own, directly or indirectly through related entities, 100% of our outstanding Class A Common Stock, controlling approximately 52.5% of the total voting power of the Company. Additionally, such persons and Mrs. Adams also have additional voting power due to beneficial ownership of Common Stock, directly or indirectly through related entities, resulting in family voting control of approximately 65.6% of the total voting power of the Company.
Mr. Baker and Mrs. Adams share voting power over 100% of the Class A Common Stock and Mr. Adams’ beneficially owned Common Stock, and we expect the Company will continue to be controlled by Mrs. Adams and Mr. Baker, acting jointly, until the settlement of Mr. Adams' estate. After the settlement of Mr. Adams’ estate, we expect there will be a change of control of the Company to Mr. Baker as the sole managing member of the family limited liability company that owns all of the outstanding shares of Class A Common Stock.
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We are and, after the settlement of Mr. Adams’ estate we expect to continue to be, a “controlled company” as defined in the NASDAQ’s listing standards. Accordingly, we are and we expect to continue to be exempt from certain requirements of NASDAQ’s corporate governance listing standards, including the requirement to maintain a majority of independent directors on our board of directors and the requirements regarding the determination of compensation of executive officers and nomination of directors by independent directors.
We understand that the Adams and Baker families intend to retain ownership of a sufficient amount of Common Stock and Class A Common Stock to assure continued ownership of more than 50% of the voting power of our outstanding shares of capital stock. As a result of this ownership, the Adams and Baker families have the ability to exert substantial influence over matters requiring action by our stockholders, including amendments to our certificate of incorporation and by-laws, the election and removal of directors, and any merger, consolidation, or sale of all or substantially all of our assets, or other corporate transactions. Delaware law provides that the holders of a majority of the voting power of shares entitled to vote must approve certain fundamental corporate transactions such as a merger, consolidation and sale of all or substantially all of a corporation’s assets; accordingly, such a transaction involving the Company and requiring shareholder approval cannot be effected without the approval of the Adams and Baker families. Such ownership will make an unsolicited acquisition of the Company more difficult and discourage certain types of transactions involving a change of control of our Company, including transactions in which the holders of Common Stock might otherwise receive a premium for their shares over then current market prices. The Adams and Baker families’ controlling ownership of our capital stock may adversely affect the market price of our Common Stock.
Sales, or the availability for sale, of substantial amounts of our Common Stock could adversely affect the market price of our Common Stock.
Following the settlement of Mr. Adams' estate, we expect Mrs. Adams, Mr. Adams’ daughters, and certain other related entities (the “Stockholder Parties”) will hold approximately 12 million shares of Common Stock (the "Subject Shares") that are subject to an Agreement Regarding Common Stock (the "Agreement"), which is an exhibit to this report.
Pursuant to the Agreement, the Company filed a Shelf Registration Statement and Prospectus dated October 9, 2018, pursuant to which these Subject Shares will be eligible for sale in the amounts and on the terms described in the Agreement. The Stockholder Parties are working on plans to arrange for the payment of estate taxes on Mr. Adams' estate as well as liquidity. We understood those plans may involve the sale of up to 6.0 million shares of Common Stock contemplated under the Agreement. Federal estate taxes are due nine months after the date of death, although a discretionary extension of the due date to pay the federal estate taxes for up to an additional 12 months may be granted by the Internal Revenue Service.
The Agreement provides that if any Stockholder Party intends to sell any of the Subject Shares, such party must give the Company a right of first refusal to purchase all or any of such shares. The price payable by the Company to purchase shares pursuant to the exercise of the right of first refusal will reflect a 6% discount to the then-current market price based on the 20 business-day volume weighted average price. If the Company does not exercise its right of first refusal and purchase the shares offered, such Stockholder Party will, subject to the approval of a special committee of independent directors of the Board of Directors, be permitted to sell the shares not purchased by the Company pursuant to a Company registration statement, Rule 144 under the Securities Act of 1933, or another manner of sale agreed to by the Company.
Although pursuant to the Agreement the Company will have a right of first refusal to purchase all or any of those shares, the Company may elect not to exercise its rights of first refusal, and if so such shares would be eligible for sale pursuant to the foregoing registration rights or pursuant to Rule 144 under the Securities Act of 1933. Sales, or the availability for sale, of a large number of shares of our Common Stock could result in a decline in the market price of our Common Stock.
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Current and future litigation could expose us to significant liabilities and adversely affect our business reputation.
We and certain of our subsidiaries are involved in various legal proceedings. Litigation is inherently unpredictable, and although we believe we have meaningful defenses in these matters, we may incur liabilities due to adverse judgments or enter into settlements of claims that could have a material adverse effect on our results of operations, cash flow and financial condition. For a discussion of legal proceedings see Item 3 below. Such lawsuits are expensive to defend, divert management’s attention, and may result in significant adverse judgments or settlements. Legal proceedings may expose us to negative publicity, which could adversely affect our business reputation and customer preference for our products and brands.
Impairment in the carrying value of goodwill or other assets could negatively affect our results of operations or net worth.
Goodwill represents the excess of the cost of business acquisitions over the fair value of the identifiable net assets acquired. Goodwill is reviewed at least annually for impairment by assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. As of May 30, 2020, we had $35.5 million of goodwill. While we believe the current carrying value of this goodwill is not impaired, future goodwill impairment charges could adversely affect our results of operations in any particular period or our net worth.
The loss of any registered trademark or other intellectual property could enable other companies to compete more effectively with us.
We utilize intellectual property in our business. For example, we own the trademarks Farmhouse Eggs®, 4Grain®, Sunups®, and Sunny Meadow®. We produce and market Egg-Land’s Best® and Land O’ Lakes® under license agreements with EB. We have invested a significant amount of money in establishing and promoting our trademarked brands. The loss or expiration of any intellectual property could enable our competitors to compete more effectively with us by allowing them to make and sell products substantially similar to those we offer. This could negatively impact our ability to produce and sell those products, thereby adversely affecting our operations.
Failure of our information technology systems or software, or a security breach of those systems, could adversely affect day-to-day operations and decision making processes and have an adverse effect on our performance.
The efficient operation of our business depends on our information technology systems, which we rely on to effectively manage our business data, communications, logistics, accounting and other business processes. If we do not allocate and effectively manage the resources necessary to build and sustain an appropriate technology environment, our business or financial results could be negatively impacted. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including systems failures, viruses, ransomware, security breaches or cyber incidents such as intentional cyber-attacks aimed at theft of sensitive data or inadvertent cyber-security compromises.
A security breach of such information could result in damage to our reputation and our relations with our customers or employees. Any such damage or interruption could have a material adverse effect on our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
The table below provides summary information about the primary facilities we use in our business.
| Type | Quantity | Owned | Leased | Production Capacity | Location | ||||||||||||
| Breeding Facilities | 3 | 3 | — | House up to 255,000 hens | MS, GA | ||||||||||||
| Distribution Centers | 6 | 6 | — | NA | FL, TX, GA, SC, NC | ||||||||||||
| Feed Mills | 23 | 22 | 1 | Capable of producing 814 tons of feed per hour | AL, AR, FL, GA, KS, KY, LA, MS, NC, OH, OK, SC, TN, TX, UT | ||||||||||||
| Hatcheries | 2 | 1 | 1 | Hatch up to 407,600 chicks per week | MS, FL | ||||||||||||
| Processing and Packaging | 44 | 44 | — | Approximately 550,800 dozen shell eggs per hour | AL, AR, FL, GA, KS, KY, LA, MS, NC, OH, OK, SC, TN, TX, UT | ||||||||||||
| Pullet Facilities | 28 | 28 | — | Grow 26.2 Million pullets annually | AL, AR, FL, GA, KS, KY, LA, MS, NC, OH, OK, SC, TN, TX, UT | ||||||||||||
| Shell Egg Production | 42 | 42 | — | As of May 30, 2020 40.3 million layers in Company owned facilities | AL, AR, FL, GA, KS, KY, LA, MS, NC, OH, OK, SC, TN, TX, UT | ||||||||||||
| Egg Products Processing Facilities | 2 | 2 | — | Capable of producing 60 million lbs. per year | GA, TX | ||||||||||||
| Offices and other general support facilities | 5 | 4 | 1 | NA | FL, MS, TX | ||||||||||||
As of May 30, 2020, we owned approximately 28.4 thousand acres of land. There are no material encumbrances on our properties.
ITEM 3. LEGAL PROCEEDINGS
Refer to the description of certain legal proceedings pending against us under Part II, Item 8, Notes to Consolidated Financial Statements, Note 18 - Commitments and Contingencies, which discussion is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
We have two classes of capital stock, Common Stock and Class A Common Stock. Our Common Stock trades on the NASDAQ Global Select Market under the symbol “CALM”. There is no public trading market for the Class A Common Stock.
All outstanding Class A shares are owned by a limited liability company of which Adolphus Baker, our Chairman and Chief Executive Officer, is the sole managing member and will be voted at the direction of Mr. Baker and Mrs. Adams acting jointly, and that, after the settlement of Mr. Adams' estate, such shares will be voted at the direction of Mr. Baker. At July 14, 2020, there were approximately 320 record holders of our Common Stock and approximately 33,140 beneficial owners whose shares were held by nominees or broker dealers. For additional
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information about our capital structure, see Note 12 in Part II, Item 8, Notes to the Consolidated Financial Statements.
Dividends
Cal-Maine has a dividend policy adopted by its Board of Directors. Pursuant to the policy, Cal-Maine 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 will pay 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. Under the Company's Revolving Credit Facility, dividends are restricted to the amount permitted under the Company’s current dividend policy, and may not be paid if a default exists or will arise after giving effect to the dividend. At the end of fiscal 2020, the amount of cumulative losses to be recovered before payment of a dividend was $1.4 million.
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Stock Performance Graph
The following graph shows a comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the NASDAQ Composite Total Return, and the NASDAQ 100 Total Return for the five years ended May 30, 2020. As the only publicly held company in the shell egg business, the Company uses the NASDAQ 100 Total Return index in lieu of a published industry index or peer group. The graph assumes $100 was invested on May 30, 2015 in the stock or index. Each date plotted indicates the last day of a fiscal quarter.
Issuer Purchases of Equity Securities
There were no purchases of our Common Stock made by or on behalf of our company or any affiliated purchaser during our fiscal 2020 fourth quarter.
Recent Sales of Unregistered Securities
No sales of securities without registration under the Securities Act of 1933 occurred during our fiscal year ended May 30, 2020.
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Securities Authorized for Issuance under Equity Compensation Plans
| Equity Compensation Plan Information | ||||||||||||||||||||
| (a) | (b) | (c) | ||||||||||||||||||
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | ||||||||||||||||||
| Equity compensation plans approved by shareholders | — | $ | — | 233,617 | ||||||||||||||||
| Equity compensation plans not approved by shareholders | — | — | — | |||||||||||||||||
| Total | — | $ | — | 233,617 | ||||||||||||||||
(a)There were no outstanding options, warrants or rights as of May 30, 2020. There were 273,046 shares of restricted stock outstanding under our 2012 Omnibus Long-Term Incentive Plan as of May 30, 2020.
(b)There were no outstanding options, warrants or rights as of May 30, 2020.
(c)Shares available for future issuance as of May 30, 2020 under our 2012 Omnibus Long-Term Incentive Plan.
For additional information, see Note 16 in Part II, Item 8, Notes to Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
| Fiscal Years Ended | ||||||||||||||||||||||||||||||||
| Summary of Operations | May 30, 2020 | June 1, 2019 | June 2, 2018 | June 3, 2017 | May 28, 2016 | |||||||||||||||||||||||||||
| 52 weeks | 52 weeks | 52 weeks | 53 weeks | 52 weeks | ||||||||||||||||||||||||||||
| Net sales | $ | 1,351,609 | $ | 1,361,188 | $ | 1,502,932 | $ | 1,074,513 | $ | 1,908,650 | ||||||||||||||||||||||
| Gross Profit | $ | 179,588 | $ | 222,859 | $ | 361,046 | $ | 45,550 | $ | 648,074 | ||||||||||||||||||||||
| Operating income (loss) | $ | 1,269 | $ | 45,781 | $ | 100,507 | $ | (134,146) | $ | 471,877 | ||||||||||||||||||||||
| Total other income, net | $ | 18,790 | $ | 25,024 | $ | 16,830 | $ | 19,852 | $ | 15,372 | ||||||||||||||||||||||
| Net income (loss) before noncontrolling interest | $ | 18,328 | $ | 55,062 | $ | 126,196 | $ | (74,427) | $ | 318,047 | ||||||||||||||||||||||
| Net income (loss) attributable to Cal-Maine Foods, Inc. | $ | 18,391 | $ | 54,229 | $ | 125,932 | $ | (74,278) | $ | 316,041 | ||||||||||||||||||||||
| Net income (loss) per common share: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.38 | $ | 1.12 | $ | 2.60 | $ | (1.54) | $ | 6.56 | ||||||||||||||||||||||
| Diluted | $ | 0.38 | $ | 1.12 | $ | 2.60 | $ | (1.54) | $ | 6.53 | ||||||||||||||||||||||
| Cash dividends per common share | $ | — | $ | 0.506 | $ | 0.351 | $ | — | $ | 2.18 | ||||||||||||||||||||||
| Balance Sheet Data | ||||||||||||||||||||||||||||||||
| Working capital | $ | 429,068 | $ | 492,846 | $ | 479,682 | $ | 371,527 | $ | 542,832 | ||||||||||||||||||||||
| Total assets | $ | 1,206,694 | $ | 1,156,278 | $ | 1,150,447 | $ | 1,033,094 | $ | 1,111,765 | ||||||||||||||||||||||
| Total long-term debt and lease obligations (excluding current portion) | $ | 2,387 | $ | 858 | $ | 6,090 | $ | 10,939 | $ | 25,570 | ||||||||||||||||||||||
| Total stockholders’ equity | $ | 1,009,675 | $ | 989,806 | $ | 955,682 | $ | 844,493 | $ | 917,361 | ||||||||||||||||||||||
| Other Key Measures | ||||||||||||||||||||||||||||||||
| Total number of layers at period-end (thousands) | 40,092 | 36,192 | 36,340 | 36,086 | 33,922 | |||||||||||||||||||||||||||
| Total shell eggs sold (millions of dozens) | 1,069.2 | 1,038.9 | 1,037.7 | 1,031.1 | 1,053.6 | |||||||||||||||||||||||||||
a.Results for fiscal 2020 include the results of operations (subsequent to acquisition) of the commercial egg assets acquired from Mahard Egg Farm, which were consolidated with our operations as of October 20, 2019, and the results of operations (subsequent to acquisition) of the remaining non-controlling interest in Texas Egg Products, LLC. Results of the fourth quarter of fiscal 2020 include a $2.4 million income tax benefit related to the net operating loss carryback provisions allowed by the CARES Act.
b.Operating income for fiscal 2020, 2019 and 2018 includes legal settlement expense of $2.0 million, $2.3 million and $80.8 million, respectively.
c.Results for fiscal 2019 include the results of operations (subsequent to acquisition) of the commercial egg assets acquired from Featherland Egg Farms, Inc., which were consolidated with our operations as of October 14, 2018.
d.Results for fiscal 2018 include a $43 million tax benefit related to the Tax Cuts and Jobs Act tax reform legislation and the subsequent revaluation of the Company's deferred tax liabilities at the new, lower tax rates.
e.Results for fiscal 2017 include the results of operations (subsequent to acquisition) of the commercial egg assets acquired from Foodonics International, Inc., which were consolidated with our operations as of October 16, 2016, and the commercial egg assets of Happy Hen Egg Farms, Inc., which were consolidated with our operations as of February 19, 2017.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RISK FACTORS; FORWARD-LOOKING STATEMENTS
For information relating to important risks and uncertainties that could materially adversely affect our business, securities, financial condition or operating results, reference is made to the disclosure set forth under Item 1A. Risk Factors. In addition, because the following discussion includes numerous forward-looking statements relating to us, our results of operations, financial condition and business, reference is made to the information set forth in the section of Part I immediately preceding Item 1 above under the caption “Forward-Looking Statements.”
BACKGROUND
Cal-Maine Foods, Inc. 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. The Company, which is headquartered in Jackson, Mississippi, is the largest producer and distributor of fresh shell eggs in the United States and sells the majority of its shell eggs in states across the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States.
Our operations are fully integrated. We hatch chicks, grow and maintain flocks of pullets (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, market and distribute shell eggs. In fiscal 2020, we sold approximately 1,069 million dozen shell eggs, which we believe represented approximately 19% of domestic shell egg consumption. Our total flock of approximately 40 million layers and 11 million pullets and breeders is the largest in the U.S. We sell most of our shell eggs to a diverse group of customers, including national and regional grocery store chains, club stores, food service distributors, and egg product consumers.
The Company has one operating segment, which is the production, grading, packaging, marketing and distribution of shell eggs. Many of our customers rely on us to provide most of their shell egg needs, including specialty and conventional 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 conventional 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 conventional 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 materially impacted by market prices for eggs and feed grains (corn and soybean meal), which are highly volatile, independent of each other, and out of our control. Generally speaking, higher market prices for eggs have a positive impact on our financial results while higher market prices for feed grains have a negative impact on our financial results. Although we use a variety of pricing mechanisms in pricing agreements with our customers, we sell the majority of our conventional shell eggs based on formulas that take into account, in varying ways, independently quoted regional wholesale market prices for shell eggs or formulas related to our costs of production which include the cost of corn and soybean meal. As an example of the volatility in the market prices of shell eggs, the Urner-Barry Southeastern Regional Large Egg Market Price per dozen eggs ("UB southeastern large index") in fiscal year 2020 ranged from a low of $0.62 in July 2019 to a high of $3.18 in March 2020.
Generally, we purchase primary feed ingredients, mainly corn and soybean meal, at current market prices. Corn and soybean meal are commodities and are subject to volatile price changes due to weather, various supply and demand factors, transportation and storage costs, speculators, and agricultural, energy and trade policies in the U.S. and internationally.
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Specialty shell eggs have been a significant and growing portion of the market. In recent years, a significant number of large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to an exclusively cage-free egg supply chain by specified future dates. Additionally, several states have passed legislation requiring cage-free eggs by specified future dates, and other states are considering such legislation. For additional information, see Item 1. Business, Government Regulation.
Our growth strategy is focused on remaining a low-cost provider of shell eggs located near our customers. In light of the growing customer demand and increased legal requirements for cage-free eggs, we intend to continue to closely evaluate the need to expand through selective acquisitions, with a priority on those that will facilitate our ability to expand our cage-free shell egg production capabilities in key locations and markets. We plan to continue to closely evaluate the need to continue to expand and convert our own facilities to increase production of cage-free eggs based on current demand. As the ongoing production of cage-free eggs is more costly than the production of conventional eggs, aligning our cage-free production capabilities with changing demand for cage-free eggs is important to the success of our business.
Since January 2020, the coronavirus ("COVID-19") outbreak, characterized as a pandemic by the World Health Organization on March 11, 2020, has caused significant disruptions in international and U.S. economies and markets. For a discussion of our response to COVID-19, see Part I, Item 1, Business – Response to the COVID-19 Pandemic. We discuss the pandemic and potential future implications of the pandemic in this report; however, the pandemic is an evolving and challenging situation, and its impact on our business in the future is uncertain.
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 highest during the fall and winter months and lowest during the summer months. Prices for shell eggs fluctuate in response to seasonal demand factors and a natural increase in laying hen productivity and shell egg production during the spring and early summer. Historically, shell egg prices have tended to increase with the start of the school year and tended to be highest prior to holiday periods, particularly Thanksgiving, Christmas, and Easter. Consequently, and all other things being equal, we would expect to experience lower sales and net income (and may incur net losses) in our first and fourth fiscal quarters ending in August/September and May/June, 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.
Executive Overview of Results – Fiscal Years Ended May 30, 2020, June 1, 2019 and June 2, 2018
| Fiscal Years Ended | ||||||||||||||||||||
| May 30, 2020 | June 1, 2019 | June 2, 2018 | ||||||||||||||||||
| Net sales (in thousands) | $ | 1,351,609 | $ | 1,361,188 | $ | 1,502,932 | ||||||||||||||
| Gross profit (in thousands) | $ | 179,588 | $ | 222,859 | $ | 361,046 | ||||||||||||||
Net average shell egg price (a) | $ | 1.231 | $ | 1.265 | $ | 1.397 | ||||||||||||||
| Average UB Southeast Region - Shell Eggs - White Large | $ | 1.220 | $ | 1.229 | $ | 1.490 | ||||||||||||||
| Feed cost per dozen produced | $ | 0.409 | $ | 0.415 | $ | 0.394 | ||||||||||||||
a.The net average shell egg selling price is the blended price for all sizes and grades of shell eggs, including non-graded shell egg sales, breaking stock and undergrades.
Compared to fiscal 2018, fiscal 2019 saw an increasing U.S. flock size result in an oversupply of eggs, particularly in the last half of the fiscal year, which led to lower selling prices for conventional eggs. This resulted in decreased gross profit and net income for fiscal 2019.
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Throughout the first three quarters of our fiscal year 2020, an oversupply of eggs negatively affected the price of conventional eggs, and demand for specialty eggs was negatively impacted by the low conventional egg prices. For the first three quarters of fiscal 2020, the average UB southeastern large index price was down 21.9% compared with the prior-year period, but in the fourth quarter of fiscal 2020 was 62.4% higher than the average price through the first three quarters in fiscal 2020 due to increased demand related to the pandemic, as consumers purchased more eggs in anticipation of preparing more meals at home.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, certain items from our consolidated statements of income expressed as a percentage of net sales.
| May 30, 2020 | June 1, 2019 | |||||||||||||
| Net sales | 100.0 | % | 100.0 | % | ||||||||||
| Cost of sales | 86.7 | % | 83.6 | % | ||||||||||
| Gross profit | 13.3 | % | 16.4 | % | ||||||||||
| Selling, general and administrative | 13.0 | % | 12.8 | % | ||||||||||
| Legal settlement expense | 0.1 | % | 0.2 | % | ||||||||||
| Operating income (loss) | 0.2 | % | 3.4 | % | ||||||||||
| Total other income, net | 1.4 | % | 1.8 | % | ||||||||||
| Income (loss) before income taxes | 1.6 | % | 5.2 | % | ||||||||||
| Income tax (benefit) expense | 0.1 | % | 1.2 | % | ||||||||||
| Net income (loss) | 1.5 | % | 4.0 | % | ||||||||||
| Less: Income (loss) attributable to noncontrolling interest | — | % | 0.1 | % | ||||||||||
| Net income (loss) attributable to Cal-Maine Foods, Inc. | 1.5 | % | 3.9 | % | ||||||||||
Fiscal Year Ended May 30, 2020 Compared to Fiscal Year Ended June 1, 2019
NET SALES
Net sales for the fiscal year ended May 30, 2020 were $1,351.6 million, a decrease of $9.6 million, or 0.7%, from net sales of $1,361.2 million for fiscal 2019. The decrease was primarily due to lower sales volumes for specialty eggs, lower prices of conventional eggs during the first three quarters of fiscal 2020 and a decline in revenue from egg product sales.
In fiscal 2020 and 2019, shell egg sales made up approximately 97.7% and 97.0% of our net sales, respectively. Total dozens sold in fiscal 2020 were 1,069.2 million, an increase of 30.3 million dozen, or 2.9%, compared to 1,038.9 million sold in fiscal 2019 resulting in an increase in net sales of $37.2 million for fiscal 2020 compared with the prior fiscal year.
The net average selling price of shell eggs decreased from $1.265 per dozen for fiscal 2019 to $1.231 per dozen for fiscal 2020, a decrease of $0.034 per dozen, or 2.7%. Shell egg prices were lower throughout the first three quarters of fiscal 2020 as compared to fiscal 2019 primarily reflecting an oversupply of eggs in the market. Demand for specialty eggs and specialty egg prices were negatively impacted by the low conventional egg prices. For the first three quarters of fiscal 2020, the average UB southeastern large index price was down 22% compared with the prior-year period, but in the fourth quarter of fiscal 2020 was 62% higher than in the average price of the first three quarters of fiscal 2020 due to increased demand related to the pandemic, as consumers purchased more eggs in anticipation of preparing more meals at home. The UB southeastern large index price ranged from a high of $3.18 to a low of $1.02 in the fourth quarter of fiscal 2020. The decrease in sales price in fiscal 2020 from fiscal 2019 resulted in a corresponding decrease in net sales of approximately $35.3 million.
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Hen numbers reported by the USDA as of June 1, 2020, were 319.8 million, which is 13.9 million fewer hens than reported a year ago, when the USDA also reported high flock productivity, which led to an oversupply of eggs and a significant decline in prices. The USDA reported that the hatch from January through May 2020 decreased 5.0%, including a 13.1% decrease in May, as compared to the same period in the prior year, which will affect future egg supply levels.
During the second quarter of fiscal 2020, we lost a portion of our of conventional eggs sales to a major customer in the Southeast region, representing 4.6% of total shell egg dozens and 6.1% of conventional egg dozens for fiscal 2019. For fiscal 2020, the volume decreased by 2.8% of total shell egg dozens and 3.7% of conventional shell egg dozens due to this loss of business. However, we expect our new capacity additions and the decommissioning of some older, less efficient facilities that occurred during fiscal 2020 will help optimize our operations, improve our sales mix, and better align our production and sales within the region.
The recent acquisition of Mahard Egg Farm ("Mahard") had a positive impact on our conventional shell egg volumes and continued growth of our customer base. For fiscal year 2020, the volume of total shell egg dozens increased by 3.5% and the volume of conventional shell egg dozens increased by 4.4% due to the acquisition. Furthermore, the acquisition opened up opportunities to streamline aspects of our operations, reduce costs and create efficiencies as we integrated Mahard into our operations.
The table below presents an analysis of our conventional and specialty shell egg sales (in thousands, except percentage data):
| Fiscal Year Ended | ||||||||||||||||||||||||||
| May 30, 2020 | June 1, 2019 | |||||||||||||||||||||||||
| Total net sales | $ | 1,351,609 | $ | 1,361,188 | ||||||||||||||||||||||
| Conventional | $ | 830,278 | 62.9 | % | $ | 810,306 | 61.4 | % | ||||||||||||||||||
| Specialty | 485,465 | 36.8 | % | 504,169 | 38.2 | % | ||||||||||||||||||||
| Egg sales, net | 1,315,743 | 99.7 | % | 1,314,475 | 99.6 | % | ||||||||||||||||||||
| Other | 4,452 | 0.3 | % | 5,205 | 0.4 | % | ||||||||||||||||||||
| Net shell egg sales | $ | 1,320,195 | 100.0 | % | $ | 1,319,680 | 100.0 | % | ||||||||||||||||||
| Net shell egg sales as a percent of total net sales | 97.7 | % | 97.0 | % | ||||||||||||||||||||||
| Dozens sold: | ||||||||||||||||||||||||||
| Conventional | 813,255 | 76.1 | % | 778,052 | 74.9 | % | ||||||||||||||||||||
| Specialty | 255,895 | 23.9 | % | 260,848 | 25.1 | % | ||||||||||||||||||||
| Total dozens sold | 1,069,150 | 100.0 | % | 1,038,900 | 100.0 | % | ||||||||||||||||||||
| Net average selling price per dozen: | ||||||||||||||||||||||||||
| Conventional | $ | 1.021 | $ | 1.041 | ||||||||||||||||||||||
| Specialty | $ | 1.897 | $ | 1.933 | ||||||||||||||||||||||
| All shell eggs | $ | 1.231 | $ | 1.265 | ||||||||||||||||||||||
Conventional shell eggs include all shell egg sales not specifically identified as specialty shell egg sales. In fiscal 2020, conventional shell eggs represented approximately 62.9% of our shell egg revenue, compared to 61.4% for fiscal 2019. Sales of conventional shell eggs accounted for approximately 76.1% and 74.9% of total shell egg volume in fiscal 2020 and 2019, respectively. Revenue from conventional egg sales increased by $20.0 million from fiscal 2019 to fiscal 2020 due to an increase in volume, as net average selling prices decreased. Our net average selling price for conventional eggs was $1.021 per dozen for fiscal 2020 compared to $1.041 per dozen for fiscal 2019.
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Specialty eggs, which include nutritionally enhanced, cage-free, organic and brown eggs, continued to make up a significant portion of our total shell egg revenue and dozens sold. For fiscal 2020, specialty eggs accounted for 36.8% of shell egg revenue, compared to 38.2% in fiscal 2019. Specialty eggs accounted for 23.9% of shell egg volume in fiscal 2020 compared with 25.1% fiscal 2019. Revenue from specialty egg sales decreased by $18.7 million from fiscal 2019 to fiscal 2020 due to decreases in both volume and prices. Our net average selling price for specialty eggs was $1.897 per dozen for fiscal 2020 compared to $1.933 per dozen for fiscal 2019. Specialty egg retail prices are less cyclical than conventional shell egg prices and are generally higher due to consumer willingness to pay more for specialty eggs. Specialty egg prices decreased in fiscal 2020 primarily due to higher priced organic egg sales volumes decreasing as a proportion of total specialty sales.
The shell egg sales classified as “Other sales” represent hard cooked eggs, hatching eggs, other egg products, hens, and manure, which are included with our shell egg operations.
We sell liquid and frozen egg products primarily to the institutional, food service, and food manufacturing sectors in the U.S through our wholly-owned subsidiaries American Egg Products, LLC ("AEP") and Texas Egg Products, LLC ("TEP").
Egg products accounted for approximately 2.3% and 3.0% of our net sales in fiscal 2020 and 2019, respectively. For fiscal 2020, egg product sales were $31.4 million, a decrease of $10.1 million, or 24.3%, compared to $41.5 million for fiscal 2019. Egg products volume for fiscal 2020 was 66.0 million pounds, an increase of 5.1 million pounds, or 8.4%, compared to 60.8 million pounds for fiscal 2019. In fiscal 2020, the selling price per pound was $0.476 compared to $0.685 for fiscal 2019, a decrease of 30.5%. The decline in revenue is attributable to the lower selling prices brought on by an oversupply of eggs throughout the first three quarters in fiscal 2020, followed by a decline in food service demand in the fourth quarter of fiscal 2020 due to the COVID-19 pandemic.
COST OF SALES
Cost of sales consists of costs directly related to producing, 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.
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The following table presents the key variables affecting our cost of sales (in thousands, except cost per dozen data):
| Fiscal Year Ended | ||||||||||||||||||||
| May 30, 2020 | June 1, 2019 | % Change | ||||||||||||||||||
| Cost of Sales: | ||||||||||||||||||||
| Farm production | $ | 677,181 | $ | 635,797 | 6.5 | % | ||||||||||||||
| Processing, packaging, and warehouse | 234,243 | 222,765 | 5.2 | % | ||||||||||||||||
| Egg purchases and other (including change in inventory) | 232,027 | 249,605 | (7.0) | % | ||||||||||||||||
| Total shell eggs | 1,143,451 | 1,108,167 | 3.2 | % | ||||||||||||||||
| Egg products | 25,651 | 29,020 | (11.6) | % | ||||||||||||||||
| Other | 2,919 | 1,142 | 155.6 | % | ||||||||||||||||
| Total | $ | 1,172,021 | $ | 1,138,329 | 3.0 | % | ||||||||||||||
| Farm production cost (per dozen produced) | ||||||||||||||||||||
| Feed | $ | 0.409 | $ | 0.415 | (1.4) | % | ||||||||||||||
| Other | $ | 0.329 | $ | 0.319 | 3.1 | % | ||||||||||||||
| Total | $ | 0.738 | $ | 0.734 | 0.5 | % | ||||||||||||||
| Outside egg purchases (average cost per dozen) | $ | 1.26 | $ | 1.26 | — | % | ||||||||||||||
| Dozen produced | 927,799 | 876,705 | 5.8 | % | ||||||||||||||||
| Dozen sold | 1,069,150 | 1,038,900 | 2.9 | % | ||||||||||||||||
Cost of sales for the fiscal year ended May 30, 2020 was $1,172.0 million, an increase of $33.7 million, or 3.0%, compared to $1,138.3 million for fiscal 2019, primarily attributable to the increase in dozens produced driven primarily by the Mahard acquisition. For the 2020 fiscal year, we produced 86.8% of the eggs sold by us, compared to 84.4% for the previous year. Feed cost for fiscal 2020 was $0.409 per dozen, compared to $0.415 per dozen for the prior fiscal year, a decrease of 1.4%. The decrease in feed cost per dozen resulted in a decrease in cost of sales of $5.6 million for fiscal 2020 compared with fiscal 2019.
Included in cost of sales for fiscal 2020 is a non-cash impairment loss on fixed assets of $2.9 million (included in the line item “Other” in the table above) related to decommissioning some of our older, less efficient production facilities as we continue to invest in new facilities to meet the increasing demand for specialty eggs and reduce production costs.
We continue to proactively monitor and manage operations during the COVID-19 pandemic, including additional related costs that we have incurred or many incur in the future. In fiscal 2020, we spent an additional $2.8 million related to the pandemic. The majority of the expenses were related to supplemental pay including employee benefits and additional labor.
Looking forward to fiscal 2021, according to USDA reports, current supplies of corn and soybeans are favorable, and we believe we will continue to have an adequate supply of both grains in fiscal 2021. However, current ongoing uncertainties and supply chain disruptions related to the COVID-19 outbreak, weather and geopolitical issues surrounding trade agreements and international tariffs may lead to further price volatility.
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GROSS PROFIT
Gross profit, as a percentage of net sales, was 13.3% for fiscal 2020, compared to 16.4% for fiscal 2019. The decrease resulted primarily from lower selling prices for conventional eggs through the first three quarters in fiscal 2020.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses ("SGA") include costs of marketing, distribution, accounting, and corporate overhead. The following table presents an analysis of our SGA expenses (in thousands):
| Fiscal Years Ended | ||||||||||||||||||||||||||
| May 30, 2020 | June 1, 2019 | $ Change | % Change | |||||||||||||||||||||||
| Specialty egg expense | $ | 49,237 | $ | 53,263 | $ | (4,026) | (7.6) | % | ||||||||||||||||||
| Delivery expense | 52,230 | 53,595 | (1,365) | (2.5) | % | |||||||||||||||||||||
| Payroll, taxes and benefits | 44,156 | 42,454 | 1,702 | 4.0 | % | |||||||||||||||||||||
| Stock compensation expense | 3,617 | 3,619 | (2) | (0.1) | % | |||||||||||||||||||||
| Other expenses | 28,997 | 24,114 | 4,883 | 20.2 | % | |||||||||||||||||||||
| Total | $ | 178,237 | $ | 177,045 | $ | 1,192 | 0.7 | % | ||||||||||||||||||
For fiscal year 2020, SGA was $178.2 million compared to $177.0 million for fiscal 2019. Specialty egg expense decreased $4.0 million, or 7.6%, compared to the same period of the prior year. Specialty egg expense typically fluctuates directly with specialty egg dozens sold, which decreased 1.9% for fiscal 2020. Franchise fees and advertising expense combined decreased $4.1 million for fiscal 2020. Both are components of specialty egg expense and are driven by specialty dozens sold.
Payroll, taxes and benefits increased $1.7 million or 4.0%, primarily due to increased employer provided insurance benefits (health, disability and life).
Other expenses increased $4.9 million or 20.2% compared to fiscal 2019. This increase is primarily due to increased property and casualty insurance premiums and an increase in charitable donations.
OPERATING INCOME
As a result of the above, our operating income was $1.3 million for fiscal 2020, compared to $45.8 million for fiscal 2019.
OTHER INCOME (EXPENSE)
Total other income (expense) consists of items not directly charged to, or related to, operations such as interest income and expense, equity in income or loss of unconsolidated entities, and patronage dividends, among other items.
The Company recorded interest income of $5.0 million in fiscal 2020, compared to $8.0 million for fiscal 2019. We recorded interest expense of $498,000 and $644,000 in fiscal 2020 and 2019, respectively. The decrease in interest income resulted from significantly lower investment balances, partially offset by higher interest rates.
Patronage dividends, which represent distributions from our membership in Eggland's Best, Inc. ("EB"), decreased $386,000 from $10.5 million in fiscal 2019 to $10.1 million in fiscal 2020. Patronage dividends are paid once a year based on profits of EB as well as their available cash.
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Equity in income from unconsolidated entities for fiscal 2020 was $534,000 compared to $4.8 million for fiscal 2019. The decrease of $4.2 million is primarily due to the decrease in egg selling prices through the first three quarters of fiscal 2020 impacting the profitability of our joint ventures.
Other, net for fiscal 2020 was income of $3.7 million compared to $2.4 million for fiscal 2019. The increase is primarily driven by realized and unrealized gains in investment securities available-for-sale.
INCOME TAXES
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) was enacted. The most significant provision of the CARES Act that materially affected the Company’s income taxes included the five-year carryback allowance for taxable net operating losses generated in the tax years 2018 through 2020, our fiscal years 2019 through 2021.
The Tax Cut and Jobs Act enacted in December 2017 disallowed the carrying back of taxable net operating losses to offset prior years’ taxable income. The CARES Act allows us to carry those losses generated or that maybe generated during our fiscal years 2019 through 2021 back to offset taxable income recognized during the prior five years. The Company is electing to utilize that provision, which will provide additional liquidity in the form of an income tax refund currently estimated to be approximately $6.9 million. We believe we will receive the refund during our second fiscal quarter of 2021. Additionally, we recorded an income tax benefit of approximately $2.4 million related to the carryback provisions in the fourth quarter of fiscal 2020. For more information regarding the income tax effects of the CARES Act, refer to "Part II, Item 8, Notes to Consolidated Financial Statements, Note 17 - Income Taxes."
For the fiscal year ended May 30, 2020, our pre-tax income was $20.1 million, compared to $70.8 million for fiscal 2019. Income tax expense of $1.7 million was recorded for fiscal 2020 compared to $15.7 million for fiscal 2019. Our fiscal 2020 effective tax rate decreased to 8.6% from 22.5% in fiscal 2019, driven primarily by the net operating loss carryback provisions allowed under the CARES Act, which became law during the fourth quarter of fiscal 2020. Excluding the effects of the CARES Act, the Company’s fiscal 2020 effective tax rate would have been approximately 24.1%.
At May 30, 2020, the Company had an income tax receivable of $9.9 million compared to $9.7 million at June 1, 2019. During the fourth quarter of fiscal 2020, the Company received an $8.4 million federal tax refund related to the filing of its fiscal 2019 tax return. The Company recorded an income tax receivable of $6.9 million related to the decision to carryback fiscal 2020 taxable net operating losses to recover a portion of taxes paid in fiscal 2015. An additional $1.6 million income tax receivable was recorded for claims for refund filed with state taxing authorities.
For the thirteen weeks ended May 30, 2020, our pretax income was $77.6 million and our income tax expense was $17.1 million with an effective tax rate of 22.03%, including the impact of the CARES Act. Our income tax provision for the fourth quarter of fiscal 2020 reflects the carryback of taxable net operating losses generated during periods in which the statutory federal income tax rate was 21% to periods in which the statutory federal income tax rate was 35%, as permitted by the CARES Act. The low effective rate was primarily related to the $2.4 million income tax benefit recorded in connection with the CARES Act.
Items causing our effective tax rate to differ from the federal statutory income tax rate of 21% are state income taxes, certain federal tax credits and certain items included in income or loss for financial reporting purposes that are not included in taxable income or loss for income tax purposes, including tax exempt interest income, certain nondeductible expenses, and net income or loss attributable to noncontrolling interest.
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NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST
Net income (loss) attributable to noncontrolling interest for fiscal 2020 was a loss of $63 thousand compared to income of $833 thousand for fiscal 2019. During fiscal 2020, we acquired the remaining 27.9% interest in our majority-owned subsidiary TEP.
NET INCOME ATTRIBUTABLE TO CAL-MAINE FOODS, INC.
As a result of the above, net income for fiscal 2020 was $18.4 million, or $0.38 per basic and diluted share, compared to $54.2 million, or $1.12 per basic and diluted share for fiscal 2019.
Fiscal Year Ended June 1, 2019 Compared to Fiscal Year Ended June 2, 2018
The discussion of our results of operations for the fiscal year ended June 1, 2019 compared to the fiscal year ended June 2, 2018 can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's fiscal 2019 Annual Report on Form 10-K.
CAPITAL RESOURCES AND LIQUIDITY
Our working capital at May 30, 2020 was $429.1 million, compared to $492.8 million at June 1, 2019. The calculation of working capital is defined as current assets less current liabilities. Our current ratio was 5.6 at May 30, 2020 compared to 7.6 at June 1, 2019. The current ratio is calculated by dividing current assets by current liabilities. Due to seasonal factors described under the heading "Background" above, we generally expect our need for working capital to be highest in the last and first fiscal quarters ending in May/June and August/September, respectively.
During the second quarter of fiscal 2020, we retired all outstanding long-term debt. As such there was no long-term debt at May 30, 2020, compared to $1.5 million at June 1, 2019. On July 10, 2018, we entered into a $100.0 million Senior Secured Revolving Credit Facility (“the Revolving Credit Facility”). As of May 30, 2020, no amounts were borrowed under the Revolving Credit Facility. We have $4.3 million in outstanding standby letters of credit, which were issued under our Revolving Credit Facility for the benefit of certain insurance companies. Refer to Part II, Item 8, Notes to the Financial Statements Note 10 - Credit Facilities and Long-Term Debt for further information regarding our long-term debt.
Net cash provided by operating activities was $73.6 million for fiscal year 2020 compared with $115.1 million for fiscal year 2019. Decreased gross profit margins resulting primarily from lower selling prices for conventional eggs through the first three quarters contributed greatly to our decrease in cash flow from operations. The increase in accounts receivables balance at fiscal 2020 compared to prior fiscal 2019 is due to higher prices and quantities sold of shell eggs in the fourth quarter of fiscal 2020 compared to the same period in fiscal 2019. Increase in accounts payable balance at fiscal 2020 compared to prior fiscal 2019 is due to higher prices quantities purchased of shell eggs in the fourth quarter of fiscal 2020 compared to the same period in fiscal 2019.
For fiscal 2020, approximately $204.3 million was provided from the sale and maturity of short-term investments, $107.2 million was used to purchase short-term investments and net payments of $7.1 million were received from investments in unconsolidated entities. We used $44.7 million to acquire Mahard and the remaining interest in TEP. Approximately $124.2 million was used to purchase or construct property, plant and equipment, most of which related to the expansion of our cage-free shell egg production capacity. Refer to the table of material construction projects presented below for additional information on purchases and construction of property, plant and equipment. We used $1.5 million for principal payments on long-term debt. The net result of these and other activities as of May 30, 2020 was an increase in cash of $8.9 million from June 1, 2019.
For fiscal 2019, approximately $209.8 million was provided from the sale and maturity of short-term investments, $177.0 million was used to purchase short-term investments and net payments of $7.9 million were received from
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investments in unconsolidated entities. We used $17.9 million to acquire Featherland Egg Farms. We invested $4.3 million in unconsolidated entities. Approximately $68.0 million was used to purchase property, plant and equipment. Approximately $3.8 million was used for principal payments on long-term debt and $41.7 million for the payment of dividends. The net result of these and other activities as of June 1, 2019 was an increase in cash of $20.8 million from June 2, 2018.
We continue to monitor the increasing demand for cage-free, organic and other specialty eggs in order to meet our customers' demand. We have invested over $371.7 million in facilities, equipment and related operations to expand our cage-free production starting with our first facility in 2008. The following table presents current material construction projects approved as of May 30, 2020 (in thousands):
| Project(s) Type | Projected Completion | Projected Cost | Spent as of May 30, 2020 | Remaining Projected Cost | ||||||||||||||||||||||
| Convertible/Cage-Free Layer Houses & Pullet Houses | Fiscal 2021 | 38,032 | 28,412 | 9,620 | ||||||||||||||||||||||
| Cage-Free Layer & Pullet Houses/Processing Facility | Fiscal 2022 | 87,204 | 50,411 | 36,793 | ||||||||||||||||||||||
| $ | 125,236 | $ | 78,823 | $ | 46,413 | |||||||||||||||||||||
We believe our current cash balances, investments, cash flows from operations, and Revolving Credit Facility will be sufficient to fund our current and projected capital needs for at least the next twelve months.
CONTRACTUAL OBLIGATIONS
The following table summarizes by fiscal year the future estimated cash payments, in thousands, to be made under existing contractual obligations as of May 30, 2020. Further information on debt obligations is contained in Note 10, and on lease obligations in Note 15, in Part II, Item 8 Notes to the Consolidated Financial Statements. As of May 30, 2020, we had no outstanding long-term debt.
| Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||||||||||||||||||
| Finance leases | $ | 937 | $ | 239 | $ | 239 | $ | 239 | $ | 218 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Operating leases | 2,817 | 930 | 806 | 539 | 380 | 130 | 32 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 3,754 | $ | 1,170 | $ | 1,046 | $ | 779 | $ | 598 | $ | 130 | $ | 32 | ||||||||||||||||||||||||||||||
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
For information on changes in accounting principles and new accounting principles, see “New Accounting Pronouncements and Policies” in Part II, Item 8, Notes to Consolidated Financial Statements, Note 1 - Summary of Significant Accounting Policies.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Management suggests our Summary of Significant Accounting Policies, as described in Note 1 in Part II, Item 8, Notes to the Consolidated Financial Statements, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe the critical accounting policies that most impact our consolidated financial statements are described below.
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INVESTMENTS IN SECURITIES AVAILABLE-FOR-SALE
Our investment securities are accounted for in accordance with ASC 320, “Investments-Debt and Equity Securities” (“ASC 320”). The Company considers all debt securities for which there is a determinable fair market value and no restrictions on the Company's ability to sell within the next 12 months as available-for-sale, and carries them at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. Realized gains and losses are included in other income. The cost basis for realized gains and losses on available-for-sale securities is determined on the specific identification method.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
In the normal course of business, we extend credit to our customers on a short-term basis. Although credit risk associated with our customers is considered minimal, we routinely review our accounts receivable balances and make provisions for probable doubtful accounts. In circumstances where management is aware of a specific customer’s inability to meet its financial obligations to us (e.g. bankruptcy filings), a specific reserve is recorded to reduce the receivable to the amount expected to be collected. For all other customers, we recognize reserves for bad debt based on the length of time the receivables are past due, generally 100% for amounts more than 60 days past due.
INVENTORIES
Inventories of eggs, feed, supplies and flocks are valued principally at the lower of cost (first-in, first-out method) or net realizable value. If market prices for eggs and feed grains move substantially lower, we record adjustments to write-down the carrying values of eggs and feed inventories to fair market value. The cost associated with flock inventories, consisting principally of chick purchases, feed, labor, contractor payments and overhead costs, are accumulated during the growing period of approximately 22 weeks. Capitalized flock costs are then amortized over the flock’s productive life, generally one to two years. Flock mortality is charged to cost of sales as incurred. High mortality from disease or extreme temperatures will result in abnormal write-downs to flock inventories. Management continually monitors each flock and attempts to take appropriate actions to minimize the risk of mortality loss.
LONG-LIVED ASSETS
Depreciable long-lived assets are primarily comprised of buildings, improvements, machinery and equipment. Depreciation is provided by the straight-line method over the estimated useful lives, which are 15 to 25 years for buildings and improvements and 3 to 12 years for machinery and equipment. An increase or decrease in the estimated useful lives would result in changes to depreciation expense. When property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. We continually reevaluate the carrying value of our long-lived assets, for events or changes in circumstances which indicate the carrying value may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the asset, an impairment loss is recognized to reduce the carrying value of the asset to its estimated fair value.
INTANGIBLE ASSETS
Included in other intangible assets are separable intangible assets acquired in business acquisitions, which include franchise fees, non-compete agreements and customer relationship intangibles. They are amortized over their estimated useful lives of 5 to 15 years. The gross cost and accumulated amortization of intangible assets are removed when the recorded amounts are fully amortized and the asset is no longer in use.
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EQUITY AND COST METHOD INVESTMENTS
We have invested in other companies engaged in the production, processing and distribution of shell eggs and egg products. These investments are recorded using the cost or equity method, and are not consolidated in our financial statements. Changes in the ownership percentages of these investments might alter the accounting methods currently used. Our investment in these companies is shown on the Company’s Consolidated Balance Sheet in the amounts presented for "Investment in unconsolidated entities" and “Other long-term assets”.
GOODWILL
Goodwill is evaluated for impairment annually by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. After assessing the totality of events or circumstances, if we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform additional quantitative tests to determine the magnitude of any impairment.
At May 30, 2020, goodwill represented 2.9% of total assets and 3.5% of stockholders’ equity. Goodwill relates to the following (in thousands):
| Fiscal Year | Description | Amount | ||||||||||||
| 1999 | Acquisition of Hudson Brothers, Inc. | $ | 3,147 | |||||||||||
| 2006 | Acquisition of Hillandale Farms, LLC | 869 | ||||||||||||
| 2007 | Acquisition of Green Forest Foods, LLC | 179 | ||||||||||||
| 2008 | Revised Hillandale incremental purchase price | 9,257 | ||||||||||||
| 2009 | Revised Hillandale incremental purchase price | 2,527 | ||||||||||||
| 2009 | Acquisition of Zephyr Egg, LLC | 1,876 | ||||||||||||
| 2009 | Acquisition of Tampa Farms, LLC | 4,600 | ||||||||||||
| 2010 | Revised Hillandale incremental purchase price | (338) | ||||||||||||
| 2013 | Acquisition of Maxim Production Co., Inc. | 2,300 | ||||||||||||
| 2014 | Purchase of joint venture partner’s 50% in Delta Egg | 4,779 | ||||||||||||
| 2017 | Acquisition of Foodonics International, Inc. | 3,389 | ||||||||||||
| 2017 | Acquisition of Happy Hen Egg Farms, Inc. | 2,940 | ||||||||||||
| Total Goodwill | $ | 35,525 | ||||||||||||
REVENUE RECOGNITION AND DELIVERY COSTS
Revenue recognition is completed upon satisfaction of the performance obligation to the customer, which typically occurs within days of the Company and customer agreeing upon the order. See Note 14: Revenue Recognition in Part II, Item 8, Notes to Consolidated Financial Statements for further discussion of the policy.
The Company believes the performance obligation is met upon delivery and acceptance of the product by our customers. Costs to deliver product to customers are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income. Sales revenue reported in the accompanying Consolidated Statements of Income is reduced to reflect estimated returns and allowances. The Company records an estimated sales allowance for returns and discounts at the time of sale using historical trends based on actual sales returns and sales.
SALES INCENTIVES PROVIDED TO CUSTOMERS
The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers (e.g., percentage discounts off current purchases), inducement offers (e.g., offers for future discounts subject to a minimum current purchase), and other similar offers. Current discount offers, when accepted
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by customers, are treated as a reduction to the sales price of the related transaction, while inducement offers, when accepted by customers, are treated as a reduction to sales price based on estimated future redemption rates. Redemption rates are estimated using the Company’s historical experience for similar inducement offers. Current discount and inducement offers are presented as a net amount in ‘‘Net sales.’’
STOCK BASED COMPENSATION
We account for share-based compensation in accordance with ASC 718, “Compensation-Stock Compensation” (“ASC 718”). ASC 718 requires all share-based payments to employees, including grants of employee stock options, restricted stock and performance-based shares to be recognized in the statement of income based on their fair values. ASC 718 requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow. See Note 16 - Stock Compensation Plans in Part II, Item 8, Notes to the Consolidated Financial Statements for more information.
INCOME TAXES
We determine our effective tax rate by estimating our permanent differences resulting from differing treatment of items for tax and accounting purposes. We are periodically audited by taxing authorities. Any audit adjustments affecting permanent differences could have an impact on our effective tax rate.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
COMMODITY PRICE RISK
Our primary exposure to market risk arises from changes in the prices of conventional eggs, which are subject to significant price fluctuations that are largely beyond our control. Our exposure to market risk also includes changes in the prices of corn and soybean meal, which are commodities subject to significant price fluctuations due to market conditions that are largely beyond our control. We are focused on growing our specialty shell egg business because the selling prices of specialty shell eggs are generally not as volatile as conventional shell egg prices. The following table outlines the impact of price changes for corn and soybean meal on feed cost per dozen:
| Feed ingredient | Approximate change in feed ingredient cost | Approximate impact on feed costs per dozen | Approximate dollar impact on farm production cost for the 2020 fiscal year | |||||||||||||||||
| Corn | $0.28 change in the average market price per bushel | $ | 0.01 | $ | 9,278,000 | |||||||||||||||
| Soybean Meal | $27.50 change in the average market price per ton | $ | 0.01 | $ | 9,278,000 | |||||||||||||||
We generally do not enter into long-term contracts to purchase corn and soybean meal or hedge against increases in the price of corn and soybean meal.
INTEREST RATE RISK
The fair value of our debt is sensitive to changes in the general level of U.S. interest rates. At May 30, 2020, there was no long-term debt outstanding. In July 2018, we entered into a $100.0 million Senior Secured Revolving Credit Facility which bears interest at a variable rate. No amounts were outstanding under that facility during fiscal 2020. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes.
FIXED INCOME SECURITIES RISK
At May 30, 2020, the effective maturity of our cash equivalents and investment securities available for sale was 8.3 months, and the composite credit rating of the holdings are A- / A3 / A- (S&P / Moody’s / Fitch).
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CONCENTRATION OF CREDIT RISK
Our financial instruments exposed to concentrations of credit risk consist primarily of trade receivables. Concentrations of credit risk with respect to receivables are limited due to our large number of customers and their dispersion across geographic areas, except that at May 30, 2020 and June 1, 2019, 29.5% and 29.6%, respectively, of our net accounts receivable balance was due from Walmart Inc. (including Sam’s Club). No other single customer or customer group represented 10% or greater of net accounts receivable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Cal-Maine Foods, Inc. and Subsidiaries
Jackson, Mississippi
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cal-Maine Foods, Inc. and Subsidiaries (the “Company”) as of May 30, 2020 and June 1, 2019, the related consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended May 30, 2020, and the related consolidated notes and schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at May 30, 2020 and June 1, 2019, and the results of its operations and its cash flows for each of the three years in the period ended May 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of May 30, 2020, based on the criteria established in 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 17, 2020 expressed an unqualified opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Contingent Liabilities – Litigation and Claims – Refer to Note 18 in the Consolidated Financial Statements
Critical Audit Matter Description
The Company records liabilities for legal proceedings and claims in those instances where it can reasonably estimate the amount of the loss and when the liability is probable. Where the reasonable estimate of the probable loss is a range, the Company records the most likely estimate of the loss, or the low end of the range if there is no one best estimate. The Company either discloses the amount of a possible loss or range of loss in excess of established accruals if estimable, or states that such an estimate cannot be made. The Company discloses significant legal proceedings and claims even where liability is not probable or the amount of the liability is not estimable, or both, if the Company believes there is at least a reasonable possibility that a loss may be incurred.
We identified litigation and claims as a critical audit matter because of the challenges auditing management’s judgments applied in determining the likelihood of loss related to the resolution of such claims. Specifically, auditing management’s determination of whether any contingent loss arising from the related litigation and claims is probable, reasonably possible or remote, and the related disclosures, is subjective and requires significant judgment due to the sensitivity of the issue.
How the Critical Audit Matter was addressed during the Audit
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of the controls relating to the Company’s evaluation of the liability related to legal proceedings and claims, including controls over determining the likelihood of a loss and whether the amount of loss can be reasonably estimated, as well as financial statement disclosures over the legal proceedings and claims. These procedures also included obtaining and evaluating the letters of audit inquiry with external legal counsel, evaluating the reasonableness of the Company’s assessment regarding whether an unfavorable outcome is reasonably possible or probable and reasonably estimable, evaluating the sufficiency of the Company’s disclosures related to legal proceedings and claims and evaluating the completeness and accuracy of the Company’s legal contingencies.
/s/Frost, PLLC
We have served as the Company’s auditor since 2007.
Little Rock, Arkansas
July 17, 2020
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Cal-Maine Foods, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except for par value amounts)
| May 30, 2020 | June 1, 2019 | |||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Investment securities available-for-sale | ||||||||||||||