Cal-Maine Foods - 10-Q quarterly report FY

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 three-month and six-month periods ended December 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.

On July 28, 2005, we entered into an Agreement to Form a Limited Liability Company with Hillandale Farms, Inc. and Hillandale Farms of Florida, Inc. (together, “Hillandale”), and the Hillandale shareholders (the “Agreement”). Under the terms of the Agreement, we acquired 51% of the Units of Membership in Hillandale, LLC, formed under the Agreement, for cash of approximately $27 million on October 12, 2005, with the remaining 49% of the Units of Membership to be acquired in essentially equal annual installments over a four-year period. The purchase price of the Units equals their book value at the time of purchase as calculated under the terms of the Agreement.

Prior to the acquisition of our Units of Membership in Hillandale, LLC, we had a 44% membership interest in American Egg Products, LLC (“AEP”) and Hillandale, LLC had a 27.5% membership interest in AEP. Prior to the acquisition of Hillandale, LLC, our membership interest in AEP was accounted for by the equity method. Effective with our acquisition of Hillandale, LLC, we own a majority of the membership interests in AEP. Accordingly, the financial statements of AEP have been consolidated with our financial statements effective July 29, 2005.

We gained effective control of the Hillandale, LLC operations upon signing of the Agreement. Accordingly, the acquisition date for accounting purposes was July 28, 2005. The operations of Hillandale, LLC were consolidated with our operations beginning July 29, 2005. Because all of the information to close the accounting records of Hillandale, LLC was not available at August 27, 2005, we did not include the financial statements of Hillandale, LLC in our consolidated financial statements until the second fiscal quarter of 2006.

The unaudited financial information in the table below summarizes the combined results of our operations and Hillandale, LLC, on a pro forma basis, as though we had been combined as of the beginning of the earliest period presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the earliest period presented.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Statement No. 123 (revised 2004) (“SFAS No.123(R)”), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS No. 95, "Statement of Cash Flows". SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, restricted stock and performance-based shares to be recognized in the income statement based on their fair values. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. In the first quarter of fiscal 2007, we adopted SFAS No. 123(R) using the modified prospective method. Under the modified prospective method, compensation cost will be recognized for all share-based payments granted after the adoption of SFAS No. 123(R) and for all awards granted to employees prior to the adoption date of SFAS No. 123R that remain unvested on the adoption date. Accordingly, no restatements were made to prior periods. We recognized stock based compensation expense of $93 and $253 for the thirteen week and twenty-six week periods ended December 2, 2006.

Prior to adoption of SFAS No. 123(R), we applied Accounting Principles Board (“APB”) No. 25 in accounting for our employee stock compensation plans and generally recognized no compensation expense for employee stock options. Under the provisions of APB No. 25, we recognized a liability for Stock Appreciation Rights (“SARS”) and Tandem Stock Appreciation Rights (“TSARS”) (collectively, “Rights”) based upon the intrinsic value of vested SARS and TSARS at each period end. Under SFAS No. 123(R), we are required to recognize a liability for vested SARS and TSARS based upon their fair value at each period end using a Black-Scholes option pricing model and to record a cumulative effect adjustment for the change in method of accounting for such liability awards. The cumulative effect resulting from the adoption of SFAS No. 123(R) was insignificant and is included in stock based compensation expense for the current fiscal year.

Our stock-based compensation plans are described in note 1 of the notes to consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 3, 2006. On August 24, 2006, in accordance with provisions of our 2005 Stock Appreciation Rights Plan (the “SARs Plan”), our Board of Directors approved an amendment to the SARs Plan providing that exercises under the SARs Plan be settled in cash and not with shares of our common stock.

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 a description of certain pending legal proceedings.

Basic income (loss) per share is based on the weighted average common shares outstanding. Diluted income (loss) per share includes any dilutive effects of options and warrants. Options and warrants representing 121,400 shares were excluded from the calculation of diluted earnings per share for the thirteen and twenty-six week periods ended November 26, 2005 because of the net loss for the periods.

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 3, 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.

The acquisition of Hillandale, LLC and the financial consolidation of American Egg Products, LLC described above in Item 1 are collectively referred to below as the “Acquisitions".

COST OF SALES

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. Total cost of sales for the second quarter ended December 2, 2006 was $112.8 million, a decrease of $7.7 million, or 6.4%, as compared to the cost of sales of $120.5 million for the fiscal 2006 second quarter. This decrease is the net result of a decrease in dozens sold, offset by the higher cost of feed ingredients and cost of shell eggs purchased from outside producers. Due to the increase in shell egg selling prices, outside egg purchase cost increased. Feed cost for the second quarter ended December 2, 2006 was $.229 per dozen, an increase of 11.2%, as compared to the fiscal 2006 second quarter cost per dozen of $.206. Other operating costs have increased slightly above last fiscal year. Increases in shell egg selling prices offset an increase in feed ingredients and resulted in a net increase in gross profit from 12.9% of net sales for the quarter ended November 26, 2005 to 18.1% of net sales the quarter ended December 2, 2006.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses include costs of marketing, distribution, accounting and corporate overhead. Selling, general and administrative expense for the second quarter ended December 2, 2006 was $14.5 million, a decrease of $2.2 million, or 13.2%, as compared to $16.7 million for the quarter ended November 26, 2005. The decrease is primarily attributable to a decrease in selling, general and administrative expenses of the Acquisitions attributable to the 17 weeks of operations of the Acquisitions included in the prior second quarter On a cost per dozen sold basis, selling, general and administrative expense was $.084 per dozen for the current quarter as compared to $.088 for the second quarter of fiscal 2006. As a percent of net sales, selling, general and administrative expense decreased from 12.1% for the second quarter of fiscal 2006 to 10.5% for the second quarter of fiscal 2007.

For the twenty-six weeks ended December 2, 2006, selling, general and administrative expense was $28.9 million, an increase of $1.3 million, or 4.7%, as compared to $27.6 million for the same period in fiscal 2006. In the twenty-six weeks ended December 2, 2006, franchise fees and promotional expenses pertaining to our increasing specialty egg business increased almost $1.0 million. In the fiscal 2006 period, approximately $400,000 was recovered in bad debts. Fuel expense continues to be a major distribution cost increase. On a cost per dozen sold basis, selling, general and administrative expense was $.084 for the current twenty-six weeks as compared to $.085 for the comparable period last fiscal year. As a percent of net sales, selling, general and administrative expense decreased from 12.7% for the twenty-six weeks of fiscal 2006 to 11.4% for the current comparable period in fiscal 2007.

Other income or expense consists of costs or income not directly charged to, or related to, operations such as interest expense and equity in income from affiliates. Other expense for the second quarter ended December 2, 2006 was $940,000, a decrease of $1.2 million, as compared to $2.1 million for last year’s second quarter. This net decrease for the second fiscal 2007 quarter was primarily the result of a $530,000 decrease in net interest expense and a $632,000 increase in other income. Net interest decreased due to lower long-term borrowing balances. Other income increased due to equity in income of affiliates. As a percent of net sales, other expense was .7% for the twenty-six weeks ended December 2, 2006, compared to 1.5% for the comparable period last year.

INCOME TAXES

NET INCOME (LOSS)

Net income for the second quarter ended December 2, 2006 was $6.4 million, or $0.27 per basic and diluted share, compared to net loss of $685,000 million, or $0.03 per basic and diluted share for fiscal 2006.

For the twenty-six week period ended December 2, 2006, net income was $970,000, or $0.04 per basic and diluted share, compared to a fiscal 2006 net loss of $8.8 million, or $0.37 per basic share and diluted share.

Our working capital at December 2, 2006 was $53.7 million compared to $60.8 million at June 3, 2006. Our current ratio was 1.72 at December 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 $40.0 million line of credit with three banks, $2.7 million of which was utilized for a standby letter of credit at December 2, 2006. Our long-term debt at December 2, 2006, including current maturities, amounted to $103.6 million, as compared to $103.9 million at June 3, 2006.

For the twenty-six weeks ended December 2, 2006, $2.3 million in net cash was provided by operating activities. This compares to net cash used in operating activities of $12.7 million for the 26 weeks ended November 26, 2005. For the twenty-six weeks ended December 2, 2006, $15.0 million was provided from the reduction of short-term investments and $470,000 was used for notes receivable and investments. Approximately $277,000 was provided from disposal of property, plant and equipment, $12.1 million was used for purchases of property, plant and equipment and $6.1 million was used for payment on the purchase obligation for the Acquisitions. Borrowings of $3.0 million were received in additional long-term debt and approximately $585,000 was used for payments of dividends on the common stock and $3.3 million was used for principal payments on long-term debt. The net result of these activities was a decrease in cash and cash equivalents of $1.9 million since June 3, 2006.

For the twenty-six weeks ended November 26, 2005, approximately $26.4 million was provided from the reduction of short-term investments and $914,000 was provided from notes receivable and investments. Approximately $1.5 million was provided from disposal of property, plant and equipment, $2.8 million was used for purchases of property, plant and equipment and $23.8 million was used for the purchase of the Acquisitions. Borrowings of $28.0 million were received in additional long-term debt and approximately $584,000 was used for payments of dividends on the common stock and $24.2 million was used for principal payments on long-term debt. The net result of these activities was a decrease in cash and cash equivalents of $7.3 million since May 28, 2005.

Substantially all trade receivables and inventories collateralize our revolving line of credit and property, plant and equipment collateralize our long-term debt under our loan agreements with our lenders. Unless otherwise approved by our lenders, we are required by provisions of these loan agreements to (1) maintain minimum levels of working capital (ratio of not less than 1.25 to 1) and net worth (minimum of $90.0 million tangible net worth); (2) limit dividends to an aggregate amount not to exceed $500,000 per quarter (allowed if no default), capital expenditures (not to exceed depreciation for the same four fiscal quarters), lease obligations and additional long-term borrowings (total funded debt to total capitalization not to exceed 55%); and (3) maintain various cash-flow coverage ratios (1.25 to 1), among other restrictions. At December 2, 2006, we were in compliance with the provisions of all loan agreements. Under certain of the loan agreements, the lenders have the option to require the prepayment of any outstanding borrowings in the event we undergo a change in control.

Under the terms of our Agreement with Hillandale and the Hillandale shareholders, a new Florida limited liability company named Hillandale, LLC was formed. In fiscal 2006, we purchased 51% of the Units of Membership in Hillandale, LLC, with the remaining Units to be acquired in essentially equal annual installments over a four-year period. The purchase price of the Units is equal to their book value as calculated in accordance with the terms of the Agreement. In fiscal 2007, we purchased, pursuant to the Agreement, an additional 13% of the Units of Membership for $6.1 million from our cash balances. We have recorded the obligation to acquire the remaining 36% at its present value of $14.9 million. The actual remaining purchase price may be higher or lower when the acquisitions are completed. Future funding is expected to be provided by our cash balances and borrowings under our revolving credit agreement.

We currently have a $1.9 million deferred tax liability due to a subsidiary's change from a cash basis to an accrual basis taxpayer on May 29, 1988. The Taxpayer Relief Act of 1997 provides that this liability is payable ratably over the 20 years beginning in fiscal 1999. However, such taxes will be due in their entirety in the first fiscal year in which there is a change in ownership control so that we no longer qualify as a "family farming corporation." We are currently making annual payments of approximately $150,000 related to this liability. However, while these current payments reduce cash balances, payment of the $1.9 million deferred tax liability would not impact our consolidated statement of operations or stockholders' equity, as these taxes have been accrued and are reflected on our consolidated balance sheet.

In December 2004, the FASB issued SFAS Statement No. 123 (revised 2004), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS No. 95, "Statement of Cash Flows". SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, restricted stock and performance-based shares to be recognized in the income statement based on their fair values. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. In the first quarter of fiscal 2007, we adopted SFAS No. 123(R) using the modified prospective method. Under the modified prospective method, compensation cost will be recognized for all share-based payments granted after the adoption of SFAS No. 123(R) and for all awards granted to employees prior to the adoption date of SFAS No. 123R that remain unvested on the adoption date. Accordingly, no restatements were made to prior periods.

Prior to adoption of SFAS No. 123(R), we applied APB No. 25 in accounting for our employee stock compensation plans and generally recognized no compensation expense for employee stock options. Under the provisions of APB No. 25, we recognized a liability for Stock Appreciation Rights (“SARS”) and Tandem Stock Appreciation Rights (“TSARS”) based upon the intrinsic value of vested SARS and TSARS at each period end. Under SFAS No. 123(R), we are required to recognize a liability for vested SARS and TSARS based upon their fair value at each period end using a Black-Scholes option pricing model and to record a cumulative effect adjustment for the change in method of accounting for such liability awards. The cumulative effect resulting from the adoption of SFAS No. 123(R) was insignificant and is included in stock based compensation expense for fiscal 2007.

In September 2006, the FASB issued FASB Statement No.157, Fair Value Measurements (“FAS 157”). FAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands on required disclosures about fair value measurement. FAS 157 is effective for us on June 1, 2008 and will be applied prospectively. The provisions of FAS 157 are not expected to have a material impact on our consolidated financial statements.

The Company’s Annual Meeting of Shareholders was held on October 5, 2006.

The following persons were nominated and elected to serve as members of the Board of Directors until our next annual meeting of shareholders and until their successors are elected and qualified. Fred R. Adams, Jr. (40,612,051 votes for and 915,071 votes withheld), Richard K. Looper (40,599,990 votes for and 927,132 votes withheld), Adolphus B. Baker (40,650,591 votes for and 876,531 votes withheld), James E. Poole (41,434,611 votes for and 92,511 votes withheld), R. Faser Triplett (40,387,236 votes for and 139,386 votes withheld), Letitia C. Hughes (41,398,572 votes for and 128,550 votes withheld), and Timothy A. Dawson (40,648,380 votes for and 878,742 votes withheld).

No other matters were voted upon at the annual meeting.

On August 24, 2006, in accordance with provisions of our 2005 Stock Appreciation Rights Plan (the “SARs Plan”), our Board of Directors approved an amendment to the SARs Plan providing that exercises under the SARs Plan be settled in cash and not with shares of our common stock.

On January 3, 2007, we issued a press release announcing our financial results for the quarter ended December 2, 2006.