# CAL-MAINE FOODS INC (CALM) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from CAL-MAINE FOODS INC's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/16160/000156276224000177/calm2024060110K.htm Accession: 0001562762-24-000177 Filing date: 2024-07-23 Report date: 2024-06-01 Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub. Confidence: high Company profile: /company/CALM/ All MD&A years: /company/CALM/mda/ Previous year: /company/CALM/mda/fy2023/ (FY 2023) Next year: /company/CALM/mda/fy2025/ (FY 2025) 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. Fiscal Year   Ended June 1, 2024 June 3, 2023 Net sales 100.0 % 100.0 % Cost of sales 76.7 % 62.0 % Gross profit 23.3 % 38.0 % Selling, general and administrative 10.9 % 7.4 % Gain on involuntary conversions (1.0) % (0.1) % (Gain) loss on disposal of fixed assets — % — % Operating income 13.4 % 30.7 % Total other income 2.0 % 1.0 % Income before income taxes 15.4 % 31.7 % Income tax expense 3.6 % 7.7 % Net income 11.8 % 24.0 % Less:   Net loss attributable to noncontrolling interest (0.1) % — % Net income attributable to Cal-Maine Foods, Inc. 11.9 % 24.0 % 29 Fiscal Year   Ended June 1, 2024 Compared to Fiscal Year   Ended June 3, 2023 NET SALES Net revenue is primarily generated   through sales of shell   eggs and egg products. Net   shell egg sales represented 96.2%   and 96.1% of total   net sales   in fiscal   2024 and   2023, respectively.   The Company’s   shell egg   offerings include   specialty and   conventional shell   eggs.   Specialty   shell   eggs   include   cage-free,   organic,   brown,   free-range,   pasture-raised   and   nutritionally   enhanced. Conventional   shell   eggs sales   represent   all other   shell   egg sales   not   sold   as specialty   shell   eggs.   Shell   egg   sales classified   as “Other” represent sales of miscellaneous byproducts and resale products included   with our shell egg operations. The Company’s egg products   offering include liquid and frozen egg products and hard   -cooked eggs. The table below presents an analysis of our conventional and specialty shell egg   sales (in thousands, except percentage data): June 1, 2024 June 3, 2023 Total net sales $ 2,326,443 $ 3,146,217 Conventional $ 1,291,743 57.7 % $ 2,051,961 67.9 % Specialty 925,665 41.4 % 956,993 31.6 % Egg sales, net 2,217,408 99.1 % 3,008,954 99.5 % Other 20,026 0.9 % 14,993 0.5 % Net shell egg sales $ 2,237,434 100.0 % $ 3,023,947 100.0 % Dozens sold: Conventional 746,687 65.1 % 749,076 65.3 % Specialty 400,946 34.9 % 398,297 34.7 % Total dozens sold 1,147,633 100.0 % 1,147,373 100.0 % Net average selling price per dozen: Conventional $ 1.730 $ 2.739 Specialty $ 2.309 $ 2.403 All shell eggs $ 1.932 $ 2.622 Egg products sales: Egg products net sales $ 89,009 $ 122,270 Pounds sold 74,849 70,035 Net average selling price per pound $ 1.189 $ 1.746 Shell egg net sales - For fiscal 2024,   shell egg net   sales decreased $786.5   million compared to   fiscal 2023,   primarily due to   the decrease in net average selling prices   for conventional eggs, and   to a lesser extent the decrease   in the net average   selling prices for specialty eggs. - For fiscal 2024,   conventional egg sales   decreased $760.2 million,   or 37.0%, compared   to fiscal 2023,   primarily due to the decrease in conventional egg prices. Changes in price resulted in a $753.4 million   decrease in net sales and changes in volume resulted in a $6.5 million decrease in net sales. - Conventional egg   prices reached   record highs   in fiscal   2023 due   to HPAI   outbreaks experienced   throughout calendar year 2022 as   well seasonal demand during   the winter holidays.   Prices were lower   in the first   half of fiscal   2024 compared to the   same period of   fiscal 2023   as the   U.S. egg supply   started to   recover from   outbreaks of   HPAI.   There has   been a resurgence of   HPAI   starting in November   2023, and continuing   through the remainder   of fiscal 2024, which   increased prices due to supply constraints. However, prices   in fiscal 2024 remained lower on average than fiscal 2023. - Specialty egg sales   decreased $31.3 million,   or 3.3%, for fiscal   2024   compared to fiscal 2023,   primarily due to   a 3.9% decrease in specialty   egg prices partially   offset by   a 0.7% increase   in the volume   of specialty dozens   sold. Changes in price resulted   in a $37.7   million decrease in   net sales and   changes in volume   resulted in a   $6.4 million   increase in net sales. 30 - Our   dozens   sold for   fiscal   2024 remained   relatively   flat   compared   to fiscal   2023.   We   had   an   increase   in production capacity with the acquisition of the commercial shell egg production and processing business of Fassio Egg Farms, Inc. during fiscal 2024, which was   offset by the temporary decrease   in production due to the   HPAI outbreaks at our facilities. Egg products net sales - Egg products net sales decreased   $33.3 million, or 27.2%, primarily   due to a 31.9% selling price   decrease compared to fiscal 2023, which had a $41.7 million negative impact on net sales. - Our egg products net average selling price decreased in fiscal 2024, compared to fiscal 2023 as the supply of shell   eggs used to produce egg products increased. COST OF SALES Cost of   sales consists   of   costs directly   related   to producing,   processing   and   packing   shell eggs,   purchases   of   shell   eggs from outside sources,   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 (including   labor), hen   amortization and   other related farm production costs. The following table presents the key variables affecting our cost of   sales (in thousands,   except cost per dozen data): Fiscal Year   Ended June 1, 2024 June 3, 2023 % Change Cost of Sales: Farm production $ 987,861 $ 1,118,741 (11.7) % Processing, packaging, and warehouse 335,949 342,836 (2.0) Egg purchases and other (including change in inventory) 380,200 379,777 0.1 Total shell eggs 1,704,010 1,841,354 (7.5) Egg products 80,862 108,406 (25.4) Total $ 1,784,872 $ 1,949,760 (8.5) % Farm production costs (per dozen produced) Feed $ 0.550 $ 0.676 (18.6) % Other $ 0.433 $ 0.396 9.3 % Total $ 0.983 $ 1.072 (8.3) % Outside egg purchases (average cost per dozen) $ 2.16 $ 3.02 (28.5) % Dozens produced 1,018,835 1,058,540 (3.8) % Percent produced to sold 88.8% 92.3% (3.8) % Farm Production - Feed costs   per dozen   produced decreased   18.6% in   fiscal 2024   compared to   fiscal 2023,   primarily   due to   lower feed ingredient prices.   Basis levels   for corn   and soybean   meal were   lower in   our areas   of operation   compared to   our prior fiscal year. - For fiscal 2024, the average daily CBOT market price was $4.76 per bushel for corn and $390 per ton of soybean meal, representing decreases of 27.6% and   13.4%, respectively, as compared to the average   daily CBOT prices for   fiscal 2023. - Other farm production costs increased   due to higher flock amortization   and increased   facility costs. Flock amortization increased primarily due   to the increased   capitalized value of   our flocks. This   is primarily due   to the higher   feeds costs in earlier periods incurred during the growing phase of the flocks. 31 - Facility   costs   increased   due   primarily   to   increased   contract   labor   in   response   to   labor   shortages   as   well   as   higher depreciation expense primarily due to the completion of several large   construction projects during fiscal 2024. Current   indications   for   corn   project   an   overall   better   stocks-to-use   ratio   implying   potentially   lower   prices   in   the   near   term; however, as long   as outside factors remain uncertain   (including weather patterns and   global supply chain disruptions), volatility could remain. Processing, packaging, and warehouse - Processing, packaging,   and warehouse   costs decreased   primarily due   to a   3.5% reduction   in the   volume of   processed dozens,   partially offset by higher processing costs. Egg purchases and other (including change in inventory) - Costs in this category remained relatively flat as the average cost per dozen of outside   egg purchases decreased 28.5% compared to fiscal 2023, offset by an increase of 29.2% in dozens purchased   due to the loss of production primarily caused by HPAI   outbreaks   at our facilities. GROSS PROFIT Gross profit, as   a percentage of   net sales, was   23.3%   for fiscal 2024,   compared to 38.0%   for fiscal 2023.   The decrease resulted primarily from lower selling prices for conventional eggs,   partially offset by the lower feed ingredients prices. SELLING, GENERAL, AND ADMINISTRATIVE   EXPENSES Selling, general, and administrative (“SGA”) expenses include costs of delivery, marketing, and other general and administrative expenses. Delivery expense includes contract trucking expense and all costs to maintain and operate our fleet of trucks to deliver products to   customers including   the related   payroll expenses.   Marketing   expense includes   franchise fees   that are   submitted to Eggland’s   Best, Inc.   to support   the EB   brand, brokerage   and commission   fees, and   other general   marketing   expenses such   as payroll   expenses   for   our   in-house   sales   team.   Other   general   and   administrative   expenses   include   corporate   payroll   related expenses   and   other   general   corporate   overhead   costs.   The   following   table   presents   an   analysis   of   our   SGA   expenses   (in thousands): Fiscal Year   Ended June 1, 2024 June 3, 2023 $ Change % Change Delivery expense $ 72,742 $ 77,548 $ (4,806) (6.2) % Marketing expense 52,285 57,198 (4,913) (8.6) % Litigation loss contingency accrual 19,648 - 19,648 N.M. % Other general and administrative expenses 107,950 97,461 10,489 10.8 % Total $ 252,625 $ 232,207 $ 20,418 8.8 % N.M. - Not Meaningful Delivery expense - The decreased delivery expense is primarily due to a decrease in contract   trucking expense and fuel costs. Marketing expense - The decrease in marketing expense is primarily due to a decrease in franchise   fees. Litigation loss contingency accrual - The litigation loss contingency accrual in fiscal 2024 is discussed in Note 16 – Commitments and Contingencies of Part II. Item 8. Notes to Consolidated Financial Statements in this Annual Report. 32 Other general and administrative expenses - The increase in other general and administrative expenses   is primarily due to an increase of   $5.5 million in the fair value of the contingent consideration associated with the Fassio asset acquisition, and increased legal costs, partially offset by a decrease in accrued bonuses compared to the prior year. GAIN ON INVOLUNTARY   CONVERSIONS For fiscal 2024 and 2023,   we recorded a gain of $23.5 million and   $3.3 million, respectively,   due to recoveries under indemnity and insurance programs that exceeded the amortized book value of   the covered assets and our direct costs. OPERATING   INCOME As a result of the above, our operating income was $312.5 million for fiscal 2024   ,   compared to $967.7 million for fiscal 2023. 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. Patronage   dividends are paid to us from our membership in the EB cooperative. The Company recorded   interest income of $32.3   million in fiscal 2024,   compared to $18.6 million   in fiscal 2023, primarily   due to significantly   higher cash   and cash   equivalents and   investment securities   available-for-sale balances   and yields.   We   recorded interest expense of $549 thousand and $583 thousand   in fiscal 2024 and 2023, respectively, primarily related to commitment fees on our Credit Facility described below. INCOME TAXES For   the   fiscal   year   ended   June   1,   2024,   our   pre-tax   income   was   $360.0   million,   compared   to   $998.6   million   for   fiscal   2023. Income tax expense   of $83.7 million   was recorded for   fiscal 2024 with   an effective   tax rate of 23.   2%.   For fiscal 2023,   income tax expense was $241.8 million with an effective tax rate of 24.2%. 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. NET LOSS ATTRIBUTABLE   TO NONCONTROLLING INTEREST Net loss attributable to   noncontrolling interest was $1.6 million   for fiscal 2024 compared   to a $1.3 million   net loss for fiscal   2023. NET INCOME ATTRIBUTABLE   TO CAL-MAINE FOODS, INC. As a result of the above, net   income attributable to Cal-Maine Foods, Inc.   for fiscal 2024 was $277.9 million, or $5.70   per basic and $5.69 per diluted share, compared to $758.0 million, or $15.58   per basic and $15.52 per diluted share for fiscal 2023. Fiscal Year   Ended June 3, 2023 Compared to Fiscal Year   Ended May 28, 2022 The discussion of our results of operations for the fiscal   year ended June 3, 2023 compared to the fiscal   year ended May 28, 2022 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 2023 Annual Report   on Form 10-K. 33 LIQUIDITY AND CAPITAL   RESOURCES We aim to maintain a   strong balance sheet and   liquidity, particularly given the cyclical nature   of our business.   We believe a strong balance sheet supports our growth opportunities and stockholder returns. Our priorities for the use of cash in recent periods have included the payment of dividends pursuant to our variable dividend policy, inorganic growth through acquisitions of businesses, organic   growth   including   construction   and   conversion   of   cage-free   facilities   and   investment   in   value-added   products,   and maintenance capital expenditures. Working   Capital and Current Ratio Our working   capital at   June 1,   2024 was   $1.0 billion, compared   to $942.2 million   at June   3, 2023.   The calculation   of working capital is   defined as   current assets   less current   liabilities. Our current   ratio was   5.5 at   June 1,   2024 compared   to 6.2   at June   3, 2023.   The current ratio is calculated by dividing current assets by current liabilities. The decrease   in our current ratio is primarily due to the increase in total current liabilities,   which increased by $45.0 million to $227.7 million at   June 1, 2024, due to increases in   income   tax   payable   and   accrued   expenses   and   other   liabilities   primarily   resulting   from   the   $19.6   million   litigation   loss contingency   accrual   recorded in   fiscal 2024   .   Due to   seasonal factors   described   in Part I. Item I. Business – Seasonality , we generally   expect   our   need   for   working   capital   to   be   highest   in   the   fourth   and   first   fiscal   quarters   ending   in   May/June and August/September, respectively. Cash Flows from Operating Activities Net cash provided   by operating activities was   $451.4 million for   fiscal 2024 compared with   $863.0 million for fiscal   2023. The decrease in cash   flow from operations   resulted primarily from   lower selling prices   for conventional eggs,   partially offset by   the lower cost of feed ingredients. Cash Flows from Investing Activities For   fiscal   2024,   $412.6   million   was   used   in   investing   activities,   primarily   due   to   the   purchases   of   investment   securities,   the acquisition of the assets   of Fassio Egg Farms,   Inc., and purchases of   property,   plant and equipment compared   to $375.1 million used in investing activities in the same   period of fiscal 2023. Purchases of investment securities were   573.6 million in fiscal 2024 compared   to   530.8   million   in   fiscal   2023.   Sales   and   maturities   of   investment   securities   were   $358.9   million   in   fiscal   2024, compared to $291.8 million for fiscal 2023. Purchases of property,   plant and equipment were $147.1 million and $136.6 million in fiscal 2024 and 2023, respectively,   primarily reflecting progress on our construction projects. Cash Flows from Financing Activities We paid dividends   totaling $91.9 million and $252.3 million in fiscal 2024   and 2023, respectively. As of June 1, 2024, cash decreased   $54.9 million since June 3, 2023. Acquisition of ISE America, Inc. Assets Subsequent to our   fiscal 2024 year-end,   we acquired substantially   all the assets of   ISE America, Inc.   and certain of its   affiliates related to   their commercial   shell egg   production and   processing facilities.   The purchase   price was   approximately $112   million and   was   funded   with   available   cash   on   hand.   For   additional   information,   refer   to   Part   II.