Cal-Maine Foods released financial results for the second quarter of 2018 and 26 weeks ended Dec. 2, 2017. While net sales were higher, second-quarter results were affected by a charge of more than $50 million related to a nearly decade-old antitrust lawsuit, the company said.
Net sales for the second quarter of fiscal 2018 were $361.2 million, a 42.4% increase from net sales of $253.5 million for the second quarter of fiscal 2017. The company reported a net loss of $26.1 million, or 54 cents per basic and diluted share, for the second quarter of fiscal 2018, compared to net loss of $23.0 million, or 48 cents per basic and diluted share, for the second quarter of fiscal 2017. Results for the 2018 second quarter include a charge of $52.8 million, or $1.09 per basic and diluted share, after tax, related to the settlement of previously disclosed antitrust claims that several large direct-action purchasers had asserted against the company. Excluding this item, net income for the second quarter of fiscal 2018 was $26.6 million, or 55 cents per basic and diluted share.
For the fiscal 2018 first half, net sales were $624.0 million, compared with $493.4 million for the prior-year period. The company reported a net loss of $42.1 million, or 87 cents per basic and diluted share, for the 26 ended Dec. 2, 2017, compared with a net loss of $53.9 million, or $1.12 per basic and diluted share, for the year-earlier period. Excluding the item described above, net income for the 2018 first half was $10.7 million, or 22 cents per basic and diluted share.
Dolph Baker, chairman, president and chief executive officer of Cal-Maine Foods, stated, “At the end of 2017, we reached an agreement on material terms of the settlement of antitrust lawsuits that several large purchasers had filed nearly a decade ago against the company and many other egg producers. While we deny any liability in these cases and still believe that our conduct has always been lawful, we decided that it was in the best interests of our shareholders, customers and employees to settle these long-standing cases at this time.”
Baker said the settlement “eliminates the substantial risk, uncertainty, expense and distraction associated with continuing the litigation against these purchasers.”
He added, “While the charge related to this settlement affected our financial results for the second quarter of fiscal 2018, we had a solid operating performance during the quarter.”
Pursuant to the agreement, which the parties intend to be legally binding, the company agreed to pay $80.8 million after all parties sign a formal settlement agreement, which the parties agreed to work in good faith to execute no later than Jan. 10, 2018. The settlement does not affect the remaining previously disclosed antitrust claims, which consist of claims of indirect purchasers of shell eggs (who have twice failed in efforts to certify a class) and the dismissed claims of non-class purchasers of egg products (who have appealed this dismissal).
Despite the settlement charge, Baker said the company’s results for the second quarter of fiscal 2018 reflect a significant improvement in egg market conditions compared with the second quarter last year. “Our sales were up 42.4% as we benefitted from higher market prices and solid demand trends. We are pleased with our ability to execute our strategy and capitalize on market opportunities with a profitable performance.
According to Baker, market prices for conventional shell eggs continued to move higher throughout the quarter, with its average second-quarter customer selling prices for all eggs and conventional eggs up 36.0% and 77.6%, respectively, compared with a year ago.
“Market prices remained strong through the Thanksgiving holiday. According to Nielsen data, retail demand has been very good and in line with normal seasonal trends, supported by increased egg promotions in grocery stores,” Baker noted. “After a period of sluggish demand from institutional food customers, this sector has returned to more egg usage.”
U.S. Department of Agriculture data show that shell egg exports have continued to expand in calendar 2017 and have recovered from previous low levels following the 2015 avian influenza outbreak. Export demand has also increased as a result of the reported Fipronil contamination across Europe and Southeast Asia.
“Together, these demand trends have resulted in a more favorable market environment compared with a year ago,” Baker explained, adding that the laying hen flock size has also been consistent with prior-year levels as production has moderated, resulting in an improved balance of supply and demand.
However, Baker said recent USDA reports do show an increase in chicks hatched, which could indicate future increases in supply.
Baker reported that specialty eggs, excluding co-pack sales, accounted for 22.6% of the company’s total sales volume for the second quarter of 2018, compared with 22.4% for the same period a year ago.
Specialty egg revenue was 32.3% of total shell egg revenue, compared with 45.8% for the second quarter of fiscal 2017. The average selling price for specialty eggs was 5.0% lower than the second quarter of last year. However, Baker said volumes were higher for the second quarter, with total specialty egg dozens sold up 5.3% over the prior-year period.
“We have continued to position Cal-Maine Foods to take full advantage of the current and expected growth opportunities for specialty eggs. As reported, many foodservice providers, national restaurant chains and major retailers, including our largest customers, have made public commitments to transition away from conventional eggs and exclusively offer cage-free eggs by future specified dates. We are focused on meeting our customers’ needs through this transition period,” he said.
Baker added, “Our operations ran well throughout this fall, and our managers worked hard to maintain efficient production, especially in our Florida, Georgia and Texas locations affected by the hurricanes early in the second quarter. Operating loss for the second quarter was $40.5 million, including the impact of the $80.8 million legal settlement expense. Excluding the impact of legal settlement expense, our operating income was $40.3 million.”