UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(mark one)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended November 30, 2002
OR
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number: 000-04892
CAL-MAINE FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware 64-0500378
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3320 Woodrow Wilson Avenue, Jackson, Mississippi 39209
(Address of principal executive offices) (Zip Code)
(601) 948-6813
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of each of the issuer's classes of common
stock (exclusive of treasury shares), as of December 30, 2002.
Common Stock, $0.01 par value 10,564,388 shares
Class A Common Stock, $0.01 par value 1,200,000 shares
CAL-MAINE FOODS, INC.
INDEX
Page
Part I. Financial Information Number
------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
November 30, 2002 and June 1, 2002 3
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended
November 30, 2002 and December 1, 2001 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended November 30, 2002 and
December 1, 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures of Market Risk 12
Item 4. Controls and Procedures 12
Part II. Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Certifications 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
November 30, 2002 June 1, 2002
----------------- ------------
(unaudited) (note1)
ASSETS
Current assets:
Cash and cash equivalents $ 4,339 $ 4,878
Trade and other receivables 29,745 17,380
Recoverable federal income taxes 7,209 6,031
Inventories 50,728 46,108
Prepaid expenses and other current assets 1,588 911
----------------------------------------------------
Total current assets 93,609 75,308
Notes receivable and investments 7,307 7,116
Goodwill 3,147 3,147
Other assets 1,813 1,865
Property, plant and equipment 263,304 258,696
Less accumulated depreciation (122,115) (116,478)
----------------------------------------------------
141,189 142,218
----------------------------------------------------
TOTAL ASSETS $ 247,065 $ 229,654
====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 21,000 $ 7,000
Accounts payable and accrued expenses 35,081 28,867
Current maturities of long-term debt 10,364 10,364
Deferred income taxes 11,767 11,767
----------------------------------------------------
Total current liabilities 78,212 57,998
Long-term debt, less current maturities 103,883 107,998
Other non-current liabilities 1,450 1,450
Deferred income taxes 9,056 7,748
----------------------------------------------------
Total liabilities 192,601 175,194
Stockholders' equity:
Common stock $0.01 par value per share:
Authorized shares - 30,000,000
Issued and outstanding shares - 17,565,200 at November 30, 2002
and June 1, 2002 176 176
Class A common stock $0.01 part value, authorized, issued and
outstanding 1,200,000 shares 12 12
Paid-in capital 18,784 18,784
Retained earnings 48,591 48,587
Common stock in treasury-6,863,512 shares at November 30,2002
and June 1, 2002 (13,099) (13,099)
----------------------------------------------------
Total stockholders' equity 54,464 54,460
----------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 247,065 $ 229,654
====================================================
See notes to condensed consolidated financial statements.
3
CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
13 Weeks Ended 26 Weeks Ended
November 30, 2002 December 1, 2001 November 30, 2002 December 1, 2001
---------------------------------------------------------------------------------------
Net sales $ 94,984 $ 83,759 $177,202 $ 156,187
Cost of sales 79,629 74,365 151,776 144,096
---------------------------------------------------------------------------------------
Gross profit 15,355 9,394 25,426 12,091
Selling, general and
administrative 10,275 10,455 20,832 20,469
---------------------------------------------------------------------------------------
Operating income (loss) 5,080 (1,061) 4,594 (8,378)
Other income (expense):
Interest expense, net (2,122) (2,255) (4,341) (4,321)
Other 158 125 211 7
---------------------------------------------------------------------------------------
(1,964) (2,130) (4,130) (4,314)
---------------------------------------------------------------------------------------
Income (loss) before income
taxes 3,116 (3,191) 464 (12,692)
Income tax expense (benefit) 1,107 (1,132) 167 (4,533)
---------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,009 $ (2,059) $ 297 $ (8,159)
=======================================================================================
Net income (loss) per common share:
Basic $ .17 $ (.18) $ .03 $ (.69)
=======================================================================================
Diluted $ .17 $ (.18) $ .03 $ (.69)
=======================================================================================
Weighted average shares
outstanding:
Basic 11,764 11,765 11,764 11,821
=======================================================================================
Diluted 11,813 11,765 11,836 11,821
=======================================================================================
See notes to condensed consolidated financial statements.
4
CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
26 Weeks Ended
November 30, 2002 December 1, 2001
---------------------------------------------
Cash flows used in operating activities $ (3,053) $ (9,057)
Cash flows from investing activities:
Purchases of property, plant and equipment (2,451) (4,633)
Construction of production facilities (5,014) (4,579)
Payments received on notes receivable and from investments 48 94
Increase in note receivable, investments and other assets (110) 0
Net proceeds from sale of property, plant and equipment 449 373
---------------------------------------------
Net cash used in investing activities (7,078) 8,745)
Cash flows from financing activities:
Net borrowings on notes payable to banks 14,000 7,500
Long-term borrowings 0 8,600
Principal payments on long-term debt and capital leases (4,115) (3,642)
Purchases of common stock for treasury 0 (571)
Payment of dividends (293) (297)
---------------------------------------------
Net cash provided by financing activities 9,592 11,590
---------------------------------------------
Decrease in cash and cash equivalents (539) (6,212)
Cash and cash equivalents at beginning of period 4,878 13,129
---------------------------------------------
Cash and cash equivalents at end of period $ 4,339 $ 6,917
=============================================
See notes to condensed consolidated financial statements.
5
CAL-MAINE FOODS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(in thousands, except share amounts)
November 30, 2002
(unaudited)
1. Presentation of Interim Information
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 occurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods ended
November 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending May 31, 2003.
The balance sheet at June 1, 2002 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 1, 2002.
2. Inventories
Inventories consisted of the following:
November 30, 2002 June 1, 2002
----------------------------------------
Flocks $ 31,976 $ 30,836
Eggs 3,862 2,257
Feed and supplies 12,048 10,073
Livestock 2,842 2,942
----------------------------------------
$ 50,728 $ 46,108
========================================
3. Other Matters
During the second quarter of fiscal 2003, the Company recognized $2,947 in
vendor settlements pertaining to overcharges for vitamins and methionine
purchased by the Company over a number of years. The settlements are reflected
in the accompanying condensed consolidated financial statements as a reduction
of cost of sales in the period ended November 30, 2002. Other receivables at
November 30, 2002 include $2,400 of the settlements, which is expected to be
collected in fiscal 2003.
6
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Cal-Maine Foods, Inc. (the" Company") is primarily engaged in the
production, grading, packing and sale of fresh shell eggs. The Company's fiscal
year end is the Saturday closest to May 31.
The Company's operations are fully integrated. At its facilities it hatches
chicks, grows pullets, manufactures feed, and produces, processes, and
distributes shell eggs. The Company currently is the largest producer and
distributor of fresh shell eggs in the United States. Shell egg sales, including
feed sales to outside egg producers, account for 98% of the Company's net sales.
The Company primarily markets its shell eggs in the southwestern, southeastern,
mid-western and mid-Atlantic regions of the United States. Shell eggs are sold
directly by the Company primarily to national and regional supermarket chains.
The Company currently uses contract producers for approximately 15% of its
total egg production. Contract producers operate under agreements with the
Company for the use of their facilities in the production of shell eggs by
layers owned by the Company, which owns the eggs produced. Also, shell eggs are
purchased from outside producers for resale, as needed, by the Company.
The Company's operating income or loss is significantly affected by
wholesale shell egg market prices, which can fluctuate widely and are outside of
the Company's control. Retail sales of shell eggs are 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 Company's cost of production is materially affected by feed costs,
which average about 56% of the Company's total farm egg production cost. Changes
in feed costs result in changes in the Company's cost of goods sold. The cost of
feed ingredients is affected by a number of supply and demand factors such as
crop production and weather, and other factors, such as the level of grain
exports, over which the Company has little or no control.
According to U.S. Department of Agriculture reports, during the past twelve
calendar months in 2002, the chick hatch has been lower than in the same
twelve-month period in 2001, resulting in lower projected hen numbers for 2003.
This could result in decreased egg production and upward pressure on egg prices.
Egg demand is very good for domestic use, with export demand down slightly.
Although the fall 2002 grain crop was adequate, current grain commodities
futures trading levels indicate that the cost of feed ingredients may be at
higher price levels during 2003.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Condensed Consolidated Statements of Operations expressed as
a percentage of net sales.
Percentage of Net Sales
13 Weeks Ended 26 Weeks Ended
Nov. 30, 2002 Dec. 1, 2001 Nov. 30, 2002 Dec. 1, 2001
----------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.8 88.8 85.7 92.3
----------------------------------------------------------------------------
Gross profit 16.2 11.2 14.3 7.7
Selling, general & administrative
10.8 12.5 11.7 13.1
----------------------------------------------------------------------------
Operating income (loss) 5.4 (1.3) 2.6 (5.4)
Other expense (2.1) (2.5) (2.3) (2.7)
----------------------------------------------------------------------------
Income (loss) before taxes 3.3 (3.8) .3 (8.1)
Income tax expense (benefit) 1.2 (1.3) .1 (2.9)
----------------------------------------------------------------------------
Net income (loss) 2.1% (2.5)% .2% (5.2)%
============================================================================
7
NET SALES
Net sales for the second quarter of fiscal 2003 were $95.0 million, an
increase of $11.2 million, or 13.4% as compared to net sales of $83.8 million
for the second quarter of fiscal 2002. Total dozens of eggs sold increased in
the current quarter and egg selling prices increased as compared with prices
last year. Dozens sold for the current quarter were 144.9 million dozen, an
increase of 2.2 million dozen, or 1.5% as compared to the second quarter of last
year. Domestic demand for eggs is good, and an export order during the current
quarter helped tighten overall egg supply. This resulted in higher egg selling
prices during the current quarter. The Company's net average selling price per
dozen for the fiscal 2003 second quarter was $.622, compared to $.557 for the
second quarter of last year, an increase of 11.7%.
Net sales for the twenty-six weeks ended November 30, 2002 were $177.2
million, an increase of $21.0 million, or 13.4%. As in the current quarter,
total dozens sold increased and net egg selling prices increased. Dozens sold
for the current twenty-six week period were 280.9 million as compared to 276.7
million for last fiscal year, an increase of 1.5%. As discussed above, favorable
egg market conditions resulted in increased egg selling prices. For the current
twenty-six week period, the Company's net average selling price per dozen was
$.598, compared to $.532 per dozen last year, an increase of $.066 per dozen, or
12.4%.
COST OF SALES
Total cost of sales for the second quarter ended November 30, 2002 was
$79.6 million, an increase of $5.2 million, or 7.0%, as compared to the cost of
sales of $74.4 million for last year's second quarter. The increase is due to
increases in dozens sold, higher costs of eggs purchased from outside producers
and an increase in the cost of feed ingredients, offset by the Company's share
of a feed ingredient lawsuit. Dozens of eggs sold increased 2.2 million for the
current quarter. The cost of eggs purchased from outside producers increased due
to higher egg market selling prices. Feed cost for the second quarter ended
November 30, 2002 was $.220 per dozen, an increase of 11.0%, as compared to last
fiscal year's cost per dozen of $.198. During the current quarter, the Company
recognized $2.9 million as a reduction in cost of sales for its share in the
settlement of certain class action feed ingredient lawsuits. The claim is for
alleged overcharges by certain vitamin and methionine suppliers. Settlement
discussions are ongoing with other vitamin and methionine suppliers and
management believes that additional settlements are likely during the remainder
of fiscal 2003 or during fiscal 2004. The increase in egg selling prices and
dozens sold, offset by the increases in cost of sales, resulted in a net
increase in gross profit from 11.2% of net sales for the quarter ended December
1, 2001 to 16.2% of net sales for the current quarter ended November 30, 2002.
For the twenty-six week period ended November 30, 2002, total cost of sales
was $151.8 million, an increase of $7.7 million, or 5.3%, as compared to the
cost of sales of $144.1 million for last year. As in the quarter, the increase
in cost of sales is the result of more dozens sold, higher cost of eggs
purchased from outside producers and an increase in the cost of feed ingredients
offset by the Company's share of the class action lawsuit settlement. Eggs sold
increased 4.2 million dozen in the current year. Feed cost for the current
twenty-six weeks was $.208 per dozen, compared to $.196 per dozen for last year,
an increase of 6.1%. As in the quarter, the increase in egg selling prices,
offset by the increases in cost of sales, resulted in a net increase in gross
profit from 7.7% of net sales for last year to 14.3% for the current fiscal
year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense for the second quarter ended
November 30, 2002 was $10.3 million, a decrease of $180,000, as compared to
$10.5 million for last fiscal year's second quarter. On a cost per dozen sold
basis, selling, general and administrative expense remained about the same,
$.071 per dozen for the current quarter as compared to $.073 for last year. As a
percent of net sales, selling, general and administrative expense decreased from
12.5% for fiscal 2002 second quarter to 10.8% for the current quarter.
For the twenty-six weeks ended November 30, 2002, selling, general and
administrative expense was $20.8 million, an increase of $363,000, as compared
to $20.5 million for the same period last fiscal year. On a cost per dozen sold
basis, selling, general and administrative expense was $.074 for the current
twenty-six weeks and for last year. As a percent of net sales, selling, general
and administrative expense has decreased from 13.1% for fiscal 2002 to 11.7% for
the current fiscal year.
8
OPERATING INCOME (LOSS)
As the result of the above, operating income was $5.1 million for the
second quarter ended November 30, 2002, as compared to an operating loss of $1.1
million for last year's fiscal second quarter. As a percent of net sales, the
current fiscal 2003 quarter had a 5.4% operating income, compared to a 1.3%
operating loss for last year.
For the twenty-six weeks ended November 30, 2002, operating income was $4.6
million, compared to an operating loss of $8.4 million for last fiscal year. As
a percent of net sales, the current fiscal period had a 2.6% operating income,
compared to a 5.4% operating loss for the same period last year.
OTHER EXPENSE
Other expense for the second quarter ended November 30, 2002 was $2.0
million, a decrease of $166,000, as compared to $2.1 million for last year's
second quarter. This net decrease for the current quarter was the result of a
decrease of $133,000 in net interest expense and a $33,000 increase in other
income. As a percent of net sales, other expense was 2.1% for the current fiscal
second quarter, compared to 2.5% last year.
For the twenty-six weeks ended November 30, 2002, other expense was $4.1
million, a decrease of $184,000 as compared to an expense of $4.3 million for
last year. For the current period, net interest expense increased $20,000 and
other income increased $203,000. The increase in other income resulted from
increased equity in income of affiliates. As a percent of net sales, other
expense was 2.3% for the current period, as compared to 2.7% for the same period
last year.
INCOME TAXES
As a result of the above, the Company's pre-tax income was $3.1 million for
the quarter ended November 30, 2002, compared to a pre-tax loss of $3.2 million
for last year's quarter. For the current quarter, income tax expense of $1.1
million was recorded with an effective tax rate of 35.5%, as compared to an
income tax benefit of $1.1 million with an effective rate of 35.5% for last
year's comparable quarter.
For the twenty-six week period ended November 30, 2002, the Company's
pre-tax income was $464,000, compared to pre-tax loss of $12.7 million for last
year. For the current twenty-six week period, income tax expense of $167,000 was
recorded with an effective tax rate of 36.0%, as compared to an income tax
benefit of $4.5 million, with an effective rate of 35.7% for last year's
comparable period.
NET INCOME (LOSS)
Net income for the second quarter ended November 30, 2002 was $2.0 million,
or $.17 per basic and diluted share, compared to net loss of $2.1 million, or
$.18 per basic share for last fiscal year's second quarter.
For the twenty-six week period ended November 30, 2002, net income was
$297,000, or $.03 per basic and diluted share, compared to last fiscal year's
net loss of $8.2 million, or $.69 per basic share.
CAPITAL RESOURCES AND LIQUIDITY
9
The Company's working capital at November 30, 2002 was $15.4 million
compared to $17.3 million at June 1, 2002. The Company's current ratio was 1.20
at November 30, 2002 as compared with 1.30 at June 1, 2002. The Company's 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. The Company has a $35.0 million line of credit
with three banks of which $21.0 million was outstanding at November 30, 2002.
The Company's long-term debt at November 30, 2002, including current maturities,
amounted to $114.2 million, as compared to $118.4 million at June 1, 2002.
For the twenty-six weeks ended November 30, 2002, $3.1 million in net cash
was used in operating activities. This compares to $9.1 million that was used in
operating activities for the comparable period last fiscal year. In the current
twenty-six week period, $2.5 million was used for purchases of property, plant
and equipment, $449,000 net proceeds were received from sales of property, plant
and equipment, and $5.0 million used for construction projects. Payments of
$293,000 were made for dividends on the common stock. Additional cash of $14.0
million was received from net borrowings on the notes payable to banks and
repayments of $4.1 million were made on long-term debt. The net result was a
decrease in cash of approximately $539,000.
For the comparable period last year, $4.6 million was used for purchases of
property, plant and equipment, $373,000 net proceeds were received from sales of
property, plant and equipment, and $4.6 million used for construction projects.
Net cash of $94,000 was received in payments on notes receivable. Approximately
$571,000 was used for purchase of common stock for the treasury and $297,000 was
used for payments of dividends on the common stock. Additional cash of $7.5
million was received on the notes payable to banks and additional long-term
borrowings of $8.6 million were received. Repayments of $3.6 million were made
on long-term debt. The net result was a decrease in cash of approximately $6.2
million.
Substantially all trade receivables and inventories collateralize the
Company's line of credit, and property, plant and equipment collateralize the
Company's long-term debt. The Company is required by certain provisions of these
loan agreements to (1) maintain minimum levels of working capital and net worth;
(2) limit dividends, capital expenditures, lease obligations and additional
long-term borrowings; and (3) maintain various current and cash-flow coverage
ratios, among other restrictions. At June 1, 2002, the Company did not meet
certain of these provisions on its long-term debt agreements and obtained
waivers of these requirements through fiscal 2003. As of November 30, 2002, the
Company is in compliance with the provisions of all loan agreements as waived or
amended. Under certain of the loan agreements, the lenders have the option to
require the prepayment of any outstanding borrowings in the event of a change in
the control of the Company.
In fiscal 2001, the Company began construction of a new shell egg
production and processing facility in Guthrie, Kentucky, with completion of the
facility expected in fiscal 2004. The total cost of the facility is
approximately $18.0 million, of which $9.9 million was incurred through November
30, 2002. The Company has commitments from an insurance company to receive $10.0
million in long-term borrowings and from a leasing company to receive $7.5
million applicable to the Guthrie facility. Including the construction project,
the Company has projected capital expenditures of $14.0 million in fiscal 2003,
which will be funded by cash flows from operations and additional long-term
borrowings.
Impact of Recently Issued Accounting Standards.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS No. 144). SFAS No. 144 supersedes Statement of Financial
10
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of," (SFAS No. 121), however, it
retains the fundamental provisions of SFAS No. 121 related to the recognition
and measurement of the impairment of long-lived assets to be "held and used." In
addition, SFAS No. 144 provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset to be
disposed other than by sale (e.g., abandoned) be classified as "held and used"
until it is disposed of, and establishes more restrictive criteria to classify
an asset as "held for sale." The Company adopted SFAS No. 144 effective June 2,
2002. The adoption did not have an effect on the Company's consolidated results
of operations or financial position.
Forward Looking Statements. The foregoing statements contain
forward-looking statements, which involve risks and uncertainties, and the
Company's actual experience may differ materially from that discussed above.
Factors that may cause such a difference include, but are not limited to, those
discussed in "Factors Affecting Future Performance" below, as well as future
events that have the effect of reducing the Company's available cash balances,
such as unanticipated operating losses or capital expenditures related to
possible future acquisitions. Readers are cautioned not to place undue reliance
on forward-looking statements, which reflect management's analysis only as the
date hereof. The Company assumes no obligation to update forward-looking
statements. See also the Company's reports to be filed from time to time with
the Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934.
Factors Affecting Future Performance. The Company's future operating
results may be affected by various trends and factors beyond the Company's
control. These include adverse changes in shell egg prices and in the grain
markets. Accordingly, past trends should not be used to anticipate future
results and trends. Further, the Company's prior performance should not be
presumed to be an accurate indication of future performance.
Critical Accounting Policies. The preparation of financial statements in
accordance with accounting standards generally accepted in the United States
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 that the Company's Summary of Significant Accounting
Policies, as described in Note 1 of the Notes to Consolidated Financial
Statements included in Cal-Maine Foods, Inc. and Subsidiaries annual report on
Form10-K for the fiscal year ended June 1, 2002, be read in conjunction with
this Management's Discussion and Analysis of Financial Condition and Results of
Operations. The Company believes the critical accounting policies that most
impact the Company's consolidated financial statements are described below.
Allowance for Doubtful Accounts. In the normal course of business, the Company
extends credit to its customers on a short-term basis. Although credit risks
associated with our customers are considered minimal, the Company routinely
reviews its accounts receivable balances and makes provisions for probable
doubtful accounts. In circumstances where management is aware of a specific
customer's inability to meet its financial obligations to the Company (e.g.
bankruptcy filings), a specific reserve is recorded to reduce the receivable to
the amount expected to be collected. For all other customers, the Company
recognizes reserves for bad debts 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 livestock are valued
principally at the lower of cost (first-in, first-out method) or market. If
market prices for eggs and feed grains move substantially lower, the Company
would 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 18 weeks. Capitalized flock costs are
then amortized over the productive lives of the flocks, generally one to two
years. Flock mortality is charged to cost of sales as incurred. High mortality
from disease or extreme temperatures would result in abnormal adjustments to
write-down 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 and improvements and machinery and equipment. Depreciation is provided
by the straight-line method over the estimated useful lives, which are 15 to 25
11
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.
The Company continually reevaluates the carrying value of its long-lived
assets, for events or changes in circumstances, which indicate that the carrying
value may not be recoverable. As part of this reevaluation, the Company
estimates the future cash flows expected to result from the use of the asset and
its eventual disposal. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized to reduce the carrying value of the
long-lived asset to the estimated fair value of the asset.
Investment in Affiliates. The Company has invested in other companies engaged in
the production, processing and distribution of shell eggs and egg products. The
Company's ownership percentages in these companies range from less than 20% to
50%. Therefore, these investments are recorded using the cost or the equity
method, and accordingly, not consolidated in the Company's financial statements.
Changes in the ownership percentages of these investments might alter the
accounting methods currently used. The Company is a guarantor of approximately
$9 million of long-term debt of one of the affiliates.
Goodwill. Goodwill primarily relates to the fiscal 1999 acquisition of Hudson
Brothers, Inc. Goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually, or more frequently if impairment indicators
arise, for impairment. An impairment loss would be recorded if the recorded
goodwill exceeds its implied fair value.
The Company has only one operating segment, which is its sole reporting
unit. Accordingly, goodwill is tested for impairment at the entity level.
Significant adverse industry or economic changes, or other factors not
anticipated could result in an impairment charge to reduce recorded goodwill.
Income Taxes. The Company determines its effective tax rate by estimating its
permanent differences resulting from differing treatment of items for tax and
accounting purposes. The Company is periodically audited by taxing authorities.
Any audit adjustments affecting permanent differences could have an impact on
the Company's effective tax rate.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There have been no material changes in the market risk reported in the
Company's fiscal 2002 annual report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective
based on their evaluation of such controls and procedures as of a date within 90
days prior to the filing of this report. There were no significant changes in
internal controls or in other factors that significantly affect internal
controls subsequent to the date of their most recent evaluation.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 26, 2002, Cal-Maine Farms, Inc.("Cal-Maine Farms"), a Delaware
corporation and a wholly owned subsidiary of the Company, was served with
process in a civil complaint filed in the First Judicial District of Hinds
County, Mississippi, on behalf of four plaintiffs, Hunter McWhorter, a minor,
his two parents, and Michael Green, an adult. In addition to Cal-Maine Farms,
Fred Adams, Dolph Baker, Charlie Collins, R. K. Looper and B.J. Raines, officers
of the Company, are also named as defendants. Six other named defendants include
Cargill, Incorporated, George's Farms, Inc., Peterson Farms, Inc., Simmons
Foods, Inc., Simmons Poultry Farms, Inc., and Tyson Foods, Inc., each of which
is engaged in the broiler business.
The suit alleges the plaintiffs have suffered medical problems resulting
from living near land upon which "litter" from the defendant's flocks of hens
was spread as fertilizer. The suit specifically addresses conditions alleged to
exist in Washington County, Arkansas, where there is a relatively high
concentration of broiler farms. Cal-Maine Farms is not engaged in any broiler
production and, compared to the broiler producers, only has a very small portion
of the hens located in Washington County, Arkansas.
The suit alleges actual damages in the amount of $55,000,000 and requests
punitive damages in the amount of $100,000,000. On December 31, 2002, an Amended
Complaint was filed, bringing the total number of plaintiffs to 93, of which 67
are alleged to be ill and 3 are deceased. The damages sought were not amended.
No answer has yet been filed on behalf of Cal-Maine Farms and no discovery
has taken place. At this stage, it is impossible to evaluate the potential
exposure, if any, of Cal-Maine Farms to damages in this suit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
99.1 Written Statement of The Chief Executive Officer
99.2 Written Statement of The Chief Financial Officer
b. Reports on Form 8-K
No Current Report on Form 8-K was filed by the Company covering an event
during the second quarter of fiscal 2003.
13
SIGNATURES
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.
CAL-MAINE FOODS, INC.
(Registrant)
Date: January 13, 2003 /s/ Bobby J. Raines
---------------------------------------------
Bobby J. Raines
Vice President/Treasurer
(Principal Financial Officer)
Date: January 13, 2003 /s/ Charles F. Collins
---------------------------------------------
Charles F. Collins
Vice President/Controller
(Principal Accounting Officer)
14
CERTIFICATION
I, Fred R. Adams, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cal-Maine Foods, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Fred R. Adams, Jr.
- ----------------------------------------------
Fred R. Adams, Jr.
Chairman of the Board and Chief Executive Officer
Date : January 13, 2003
15
CERTIFICATION
I, Bobby J. Raines, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cal-Maine Foods, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Bobby J. Raines
- ----------------------------------------------
Bobby J. Raines
Vice President, Chief Financial Officer, Treasurer and Secretary
Date: January 13, 2003
16