Cal-Maine Foods - 10-Q quarterly report FY

For the transition period from ____________ to ____________

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the thirteen weeks ended September 2, 2006 are not necessarily indicative of the results that may be expected for the year ending June 2, 2007.

The balance sheet at June 3, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in Cal-Maine Foods, Inc.'s annual report on Form 10-K for the fiscal year ended June 3, 2006.

The fair value of liability awards was estimated as of September 2, 2006 using a Black-Scholes option pricing model using the following weighted-average assumptions: risk-free interest rate of 4.7%; dividend yield of 1%; volatility factor of the expected market price of our stock of 51.4%; and a weighted-average expected life of the rights of 5 years.

We are defendants in certain legal actions. It is our opinion, based on advice of legal counsel, that the outcome of these actions will not have a material adverse effect on our consolidated financial position or operations. Please refer to Part II, Item 1, of this report for description of certain pending legal proceedings.

This report contains numerous forward-looking statements relating to our shell egg business, including estimated production data, expected operating schedules, expected capital costs and other operating data. Such forward-looking statements are identified by the use of words such as "believes," "intends," "expects," "hopes," "may," "should," "plan," "projected," "contemplates," "anticipates" or similar words. Actual production, operating schedules, results of operations and other projections and estimates could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ materially from those projected in the forward-looking statements include (i) the risk factors set forth under Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 2, 2006, (ii) the risks and hazards inherent in the shell egg business (including disease, pests, and weather conditions), (iii) changes in the market prices of shell eggs, and (iv) changes or obligations that could result from our future acquisition of new flocks or businesses. Readers are cautioned not to put undue reliance on forward-looking statements. We disclaim any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.

Our operations are fully integrated. At our facilities we hatch chicks, grow and maintain flocks of pullets (young female chickens, usually under 20 weeks of age), layers (mature female chickens) and breeders (male or female birds used to produce fertile eggs to be hatched for egg production flocks), manufacture feed, and produce, process and distribute shell eggs. We are the largest producer and marketer of shell eggs in the United States. We market the majority of our shell eggs in 30 states, primarily in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. We market our shell eggs through our extensive distribution network to a diverse group of customers, including national and regional grocery store chains, club stores, foodservice distributors and egg product manufacturers.

We currently produce approximately 75% of the total number of shell eggs sold by us, with approximately 10% of such total shell egg production being through the use of contract producers. Contract producers operate under agreements with us for the use of their facilities in the production of shell eggs by layers owned by us. We own the shell eggs produced under these arrangements. Approximately 25% of the total number of shell eggs sold by us is purchased from outside producers for resale, as needed, by us.

Our operating income or loss is significantly affected by wholesale shell egg market prices, which can fluctuate widely and are outside of our control. Retail sales of shell eggs are generally greatest during the fall and winter months and lowest during the summer months. Prices for shell eggs fluctuate in response to seasonal factors and a natural increase in egg production during the spring and early summer.

Approximately 95% of our net sales consist of shell egg sales and approximately 2% was for incidental feed sales to outside egg producers, with the 3% balance consisting of sales of egg products. Net sales for the first quarter of fiscal 2007 were $115.3 million, an increase of $35.5 million, or 44.5%, as compared to net sales of $79.8 million for the first quarter of fiscal 2006. As discussed above, there was no financial data concerning the Acquisitions included in the first quarter of fiscal 2006. For the first quarter of fiscal 2007, the Acquisitions accounted for $17.8 million of the increase in net sales. Excluding the Acquisitions, on a comparable basis, net sales increased $17.7 million, or 22.0%. Total eggs sold and egg selling prices increased in the current fiscal 2007 quarter as compared to the same fiscal 2006 quarter. Dozens sold for the 2007 current quarter were 171.6 million dozen, including 25.4 million dozen sold by the Acquisitions, an increase of 36.1 million dozen, or 26.7%, as compared to the first quarter of fiscal 2006. On a comparable basis, excluding the Acquisitions, dozens sold increased 10.7 million dozen, or 7.9%. Our net average selling price per dozen for the fiscal 2007 first quarter was $.633, compared to $.555 for the first quarter of fiscal 2006, an increase of 14.1%. Our net average selling price is the blended price for all sizes and grades of shell eggs, including non-graded egg sales, breaking stock and undergrades. During the first quarter of fiscal 2006, consumer demand decreased while egg supply continued at higher levels, resulting in a drop in egg selling prices. For the first quarter of fiscal 2007, there is a fully adequate egg supply to meet a fairly good demand, resulting in improved egg selling prices as compared to fiscal 2006.

Cost of sales consists of costs directly related to production and processing of shell eggs, including feed costs, and purchases of shell eggs from outside egg producers. Cost of sales for the first quarter of fiscal 2007 was $106.9 million, an increase of $28.1 million, or 35.7%, as compared to the cost of sales of 78.8 million for the first quarter of fiscal 2006. The Acquisitions’ cost of sales for the first quarter accounted for $19.2 million of the increase. On a comparable basis, excluding the Acquisitions, cost of sales increased $8.9 million, or 11.3%. The increase is due to increases in dozen sold, provided by increased outside purchases, and in the cost of purchases from outside egg producers. Feed cost remained approximately the same. Following the increase in egg selling prices, the cost of outside purchases increased. Feed cost per dozen for the fiscal 2007 first quarter was $.216, compared to $.219 per dozen for the comparable fiscal 2006 first quarter. The increase in egg selling prices exceeded the increase in cost of sales and resulted in an increase in gross profit from 1.2% of net sales for the quarter ended August 27, 2005 to 7.3% of net sales for the current quarter ended September 2, 2006.

Selling, general and administrative expenses include costs of marketing, distribution, accounting and corporate overhead. Selling, general and administrative expense for the first quarter of fiscal 2007 was $14.5 million, an increase of $3.6 million as compared to the expense of $10.9 million for the first quarter of fiscal 2006. The Acquisitions’ selling, general and administrative expense accounted for $2.7 million of the increase. Excluding the Acquisitions, on a comparable basis, selling, general and administrative expense increased $900,000, or 8.25%. The increase is due to increases in payroll expenses and franchise fees on specialty egg sales. Excluding the cost of fuel, delivery costs generally decreased. On a cost per dozen sold basis, selling, general and administrative expense increased slightly from $.081 per dozen for the first quarter of fiscal 2006 to $.084 per dozen for the first quarter of fiscal 2007. As a percent of net sales, selling, general and administrative expense decreased from 13.7% for fiscal 2006 first quarter to 12.5% for fiscal 2007 first quarter.

Our working capital at September 2, 2006 was $48.7 million compared to $60.8 million at June 3, 2006. Our current ratio was 1.67 at September 2, 2006 as compared with 1.94 at June 3, 2006. Our need for working capital generally is highest in the last and first fiscal quarters ending in May and August, respectively, when egg prices are normally at seasonal lows. Seasonal borrowing needs frequently are higher during these quarters than during other fiscal quarters. We have a $40 million line of credit with three banks, $2.7 million of which was utilized as a standby letter of credit at September 2, 2006. Our long-term debt at September 2, 2006, including current maturities, amounted to $102.3 million, as compared to $103.9 million at June 3, 2006.

Both cases allege that the plaintiffs have suffered medical problems resulting from living near land upon which “litter” from the defendants’ flocks was spread as fertilizer. The McWhorter case focuses on mold and fungi allegedly created by the application of litter. The Carroll case also alleges injury from mold and fungi, but focuses primarily on the broiler feed ingredient as the cause of the alleged medical injuries.

The plaintiffs’ attorneys have not yet indicated their intentions regarding the remaining cases. It is possible that the McWhorter and Carroll plaintiffs can present fundamentally different proof than was presented in the Green case, but that does not appear likely at present. The potential exposure, if any, in the McWhorter and Carroll cases appears to be diminished as a result of the outcome in the Green case, but at this point it is still not possible to evaluate any potential exposure with certainty.

On June 18, 2005, the State of Oklahoma filed suit in the U.S. District Court for the Northern District of Oklahoma against a number of companies including us and Cal-Maine Farms. An Answer on behalf of us and Cal-Maine Farms was filed on October 3, 2005. The State of Oklahoma claims that through the disposal of chicken litter the defendants have polluted the Illinois River Watershed. This watershed provides water to eastern Oklahoma. The Complaint seeks injunctive relief and monetary damages. We no longer have any operations in the Illinois River Watershed. Accordingly, we do not anticipate that we will be materially affected by any injunctive relief granted or monetary damages awarded.

The Court has under advisement motions to dismiss filed by all defendants. Merit discovery is underway. We presently are not able to provide an opinion regarding the ultimate resolution of this action.

We did not make any sales of unregistered securities during the first quarter of fiscal 2007.

For information as to working capital utilization and other limitations upon the payment of dividends see “Capital Resources” under Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.