Unassociated Document
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 February 25, 2006
OR

o
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 Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 

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 o  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer as defined in Rule 12b-2 of the Exchange Act.
Large Accelerated filer o      Accelerated filer x     Non- Accelerated filer o  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No x
 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes o   No o
 
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate number of shares outstanding of each of the issuer’s classes of common stock (exclusive of treasury shares), as of March 29, 2006.

 
Common Stock, $0.01 par value
 
21,098,891 shares
 
         
 
Class A Common Stock, $0.01 par value
 
2,400,000 shares
 


CAL-MAINE FOODS, INC. AND SUBSIDIARIES

INDEX

Part I.
Financial Information
Page Number
     
 
 
Item 1.
Condensed Consolidated Financial Statements (unaudited)
 
     
 
   
Condensed Consolidated Balance Sheets - February 25, 2006 and May 28, 2005
3
     
 
 
 
Condensed Consolidated Statements of Operations - Three Months and Nine Months Ended February 25, 2006 and February 26, 2005
4
     
 
   
Condensed Consolidated Statements of Cash Flows - Nine Months Ended February 25, 2006 and February 26, 2005
5
     
 
   
Notes to Condensed Consolidated Financial Statements
6
     
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
10
 
   
 
 
Item 3.
Quantitative and Qualitative Disclosures of Market Risk
16
     
 
 
Item 4.
Controls and Procedures
16
     
 
Part II.
Other Information
 
     
 
 
Item 1.
Legal Proceedings
17
     
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
18
 
   
 
 
Item 6.
Exhibits
18
     
 
     
 
Signatures
19


2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

   
February 25, 2006
 
May 28, 2005
 
   
(unaudited)
 
(note1)
 
ASSETS
         
Current assets:
         
Cash and cash equivalents
 
$
14,139
 
$
20,221
 
Investments
   
24,600
   
35,384
 
Trade and other receivables
   
27,842
   
16,739
 
Recoverable federal income taxes
   
1,152
   
6,676
 
Inventories
   
57,794
   
45,628
 
Prepaid expenses and other current assets
   
1,995
   
1,308
 
Total current assets
   
127,522
   
125,956
 
               
Notes receivable and investments
   
8,900
   
11,681
 
Goodwill
   
4,402
   
3,147
 
Other assets
   
2,929
   
1,362
 
               
Property, plant and equipment
   
341,194
   
281,326
 
Less accumulated depreciation
   
(164,628
)
 
(153,938
)
     
176,566
   
127,388
 
TOTAL ASSETS
 
$
320,319
 
$
269,534
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Current liabilities:
         
Accounts payable and accrued expenses
 
$
46,210
 
$
33,120
 
Current maturities of long-term debt
   
10,956
   
10,149
 
Deferred income taxes
   
8,800
   
9,100
 
Total current liabilities
   
65,966
   
52,369
 
               
Long-term debt, less current maturities
   
95,047
   
72,845
 
Other non-current liabilities
   
19,468
   
2,175
 
Deferred income taxes
   
19,590
   
20,290
 
Total liabilities
   
200,071
   
147,679
 
               
Stockholders’ equity:
             
Common stock $0.01 par value per share:
             
Authorized shares - 60,000
             
Issued and outstanding shares - 35,130 at February 25, 2006 and May 28, 2005
   
351
   
351
 
Class A common stock $0.01 par value per share, authorized issued and outstanding 2,400 shares at February 25, 2006 and May 28, 2005
   
24
   
24
 
Paid-in capital
   
28,676
   
28,621
 
Retained earnings
   
112,686
   
114,366
 
Common stock in treasury-14,031 shares at February 25, 2006 and 14,043 at May 28, 2005
   
(21,489
)
 
(21,507
)
Total stockholders’ equity
   
120,248
   
121,855
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
320,319
 
$
269,534
 

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
 
39 Weeks Ended
 
 
 
February 25, 2006
 
February 26, 2005
 
February 25, 2006
 
February 26, 2005
 
                   
Net sales
 
$
130,107
 
$
101,042
 
$
348,150
 
$
293,789
 
Cost of sales
   
104,134
   
83,927
   
303,408
   
261,007
 
Gross profit
   
25,973
   
17,115
   
44,742
   
32,782
 
Selling, general and administrative
   
15,493
   
12,440
   
43,140
   
36,531
 
Operating income (loss)
   
10,480
   
4,675
   
1,602
   
(3,749
)
Other income (expense):
                 
Interest expense, net
   
(1,906
)
 
(791
)
 
(5,895
)
 
(3,097
)
Other
   
1,346
   
247
   
1,090
   
1,168
 
 
   
(560
)
 
(544
)
 
(4,805
)
 
(1,929
)
Income (loss) before income taxes
   
9,920
   
4,131
   
(3,203
)
 
(5,678
)
Income tax expense (benefit)
   
1,930
   
1,710
   
(2,400
)
 
(1,870
)
Net income (loss)
 
$
7,990
 
$
2,421
 
$
(803
)
$
(3,808
)
Net income (loss) per common share:
                 
Basic
 
$
0.34
 
$
0.10
 
$
(0.03
)
$
(0.16
)
Diluted
 
$
0.34
 
$
0.10
 
$
(0.03
)
$
(0.16
)
Dividends per common share
 
$
0.0125
 
$
0.0125
 
$
0.0375
 
$
0.0375
 
Weighted average shares  outstanding:
                 
Basic
   
23,497
   
23,797
   
23,494
   
23,900
 
Diluted
   
23,680
   
23,905
   
23,494
   
23,900
 
 
See notes to condensed consolidated financial statements.
 
4


CAL-MAINE FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
UNAUDITED

 
   
39 Weeks Ended 
 
   
February 25, 2006
 
February 26, 2005
 
           
Cash flows provided by operating activities
 
$
13,622
 
$
4,971
 
               
Cash flows from investing activities:
             
Net decrease in investments
   
10,784
   
34,259
 
Acquisitions of businesses, net of cash acquired
   
(23,804
)
 
-0-
 
Purchases of property, plant and equipment
   
(6,939
)
 
(8,199
)
Payments received on notes receivable and from investments
   
1,755
   
989
 
Increase in notes receivable and investments
   
(519
)
 
(565
)
Net proceeds from sale of property, plant and equipment
   
1,637
   
505
 
Net cash provided by (used in) investing activities
   
(17,086
)
 
26,989
 
               
Cash flows from financing activities:
             
Purchases of common stock for treasury
   
-0-
 
(7,614
)
Long-term borrowings
   
28,000
   
-0-
 
Principal payments on long-term debt
   
(29,814
)
 
(8,371
)
Proceeds from issuance of common stock from treasury
   
73
   
2,577
 
Payment of dividends
   
(877
)
 
(892
)
Net cash used in financing activities
   
( 2,618
)
 
( 14,300
)
Net change in cash and cash equivalents
   
(6,082
)
 
17,660
 
               
Cash and cash equivalents at beginning of period
   
20,221
   
36,629
 
Cash and cash equivalents at end of period
 
$
14,139
 
$
54,289
 

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)
February 25, 2006
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 recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended February 25, 2006 are not necessarily indicative of the results that may be expected for the year ending June 3, 2006.

The balance sheet at May 28, 2005 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 May 28, 2005.

ACQUISITIONS

We entered into an Agreement to Form a Limited Liability Company, Transfer Assets Thereto, and Purchase Units of Membership Therein, dated July 28, 2005, 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 for cash of approximately $27 million on October 12, 2005. The remaining 49% of the units of membership in Hillandale, LLC will be acquired in essentially equal annual installments over a four-year period, with the purchase price of the units equal to their book value at the time of purchases as calculated in accordance with the terms of the Agreement. The total preliminary purchase price is estimated to be as follows (in thousands):


Cash consideration paid to seller for 51% of Hillandale, LLC's membership units
 
$
27,006
 
Obligation to acquire 49% of Hillandale, LLC's membership units
   
25,947
 
     
52,953
 
Less discount of preliminary purchase price to the present value as of July 28, 2005
   
(3,556
)
Total preliminary purchase price
 
$
49,397
 

The preliminary purchase price was allocated based upon the fair value of the assets acquired and liabilities assumed as follows (in thousands):
 
Assets acquired:
     
Cash and cash equivalents
 
$
3,918
 
Receivables
   
7,181
 
Inventories
   
11,330
 
Prepaid and other assets
   
2,798
 
Property, plant and equipment
   
49,531
 
Total assets acquired
   
74,758
 
 
6

Liabilities assumed:
       
Accounts payable and accrued expenses
   
3,567
 
Notes payable and long-term debt
   
21,794
 
Total liabilities assumed
   
25,361
 
         
Net assets acquired
 
$
49,397
 
 
In October 2005, we paid substantially all of Hillandale, LLC notes payable and long-term debt and obtained a new $28 million term loan from an insurance company secured by substantially all of the property, plant and equipment of Hillandale, LLC. The new term loan requires monthly principal payments of $150,000 plus interest beginning in January 2007 through November 2020. The obligation to acquire 49% of Hillandale, LLC is recorded at its present value of $23.3 million as of February 25, 2006, of which $6.9 million is included in current liabilities and $16.4 million is included in other non-current liabilities in the accompanying condensed consolidated balance sheet.

We gained effective control of the Hillandale operations upon signing of the Agreement. Accordingly, the acquisition date for accounting purposes is July 28, 2005. The operations of Hillandale, LLC have been consolidated with our operations beginning July 29, 2005.

We have a 44% membership interest in American Egg Products, LLC (“AEP”) and Hillandale, LLC has a 27.5% membership interest in AEP. Prior to the acquisition of Hillandale, LLC, our membership was accounted for by the equity method. Effective with our acquisition of Hillandale, LLC, we own a majority of the membership interest in AEP and, accordingly, the financial statements of AEP have been consolidated with our financial statements beginning July 29, 2005. AEP, located in Georgia, processes shell eggs into liquid and frozen egg products that are sold primarily to food manufacturers and to the food service industry. AEP has contract shell egg production for approximately 50% of shell egg requirements and purchases the balance from regional egg markets.

Hillandale, LLC’s production facilities are principally located in Florida. Like us, Hillandale, LLC is a fully integrated shell egg producer with its own feed mills, hatchery, production, processing and distribution facilities. The Hillandale acquisition increased our current egg production capacity by approximately 30%.

As of July 28, 2005, Hillandale, LLC owned a 50% ownership interest in Hillandale Farms, LLC that was accounted for by the equity method. On October 5, 2005, Hillandale, LLC acquired the other 50% interest in Hillandale Farms, LLC for $1.0 million. The purchase price was allocated to the assets acquired and liabilities assumed and resulted in approximately $1.3 million of goodwill. Hillandale Farms, LLC is engaged in the production, processing and distribution of shell eggs.

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.
 
 
 
13 Weeks Ended
 
39 Weeks Ended
 
 
 
Feb. 25, 2006
 
Feb 26, 2005
 
Feb. 25, 2006
 
Feb. 26, 2005
 
Net sales
 
$
130,107
 
$
121,971
 
$
361,124
 
$
358,701
 
 
                 
Net income (loss)
 
$
7,990
 
$
(1,095
)
$
(4,959
)
$
(15,9200
)
 
                 
Basic net income (loss) per share
 
$
0.34
 
$
(0.05
)
$
(0.21
)
$
(0.660
)
 
                 
Diluted net income (loss) per share
 
$
0.34
 
$
(0.05
)
$
(0.21
)
$
(0.660
)
 
7

 
Stock Based Compensation
 
We account for stock option grants in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.”

The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock- Based Compensation,” which require compensation cost for all stock-based employee compensation plans to be recognized based on the use of a fair value method (in thousands except per share amounts):
 
   
13 Weeks Ended
 
39 Weeks Ended
 
   
Feb. 25, 2006
 
Feb. 26, 2005
 
Feb. 25, 2006
 
Feb.26, 2005
 
                   
Net income (loss)
 
$
7,990
 
$
2,421
 
$
(803
)
$
(3,808
)
Add: Stock-based employee compensation expense included in reported net income (loss)
   
26
   
(242
)
 
26
   
(467
)
                           
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards
   
(331
)
 
113
   
(242
)
 
212
 
                           
Pro forma net income (loss)
 
$
7,685
 
$
2,292
 
$
(1,019
)
$
(4,063
)
                           
Earnings (loss) per share:
                         
Basic-as reported
 
$
0.34
 
$
0.10
 
$
(0.03
)
$
(0.16
)
Basic-pro forma
 
$
0.33
 
$
0.10
 
$
(0.04
)
$
(0.17
)
                           
Diluted-as reported
 
$
0.34
 
$
0.10
 
$
(0.03
)
$
(0.16
)
Diluted-pro forma
 
$
0.32
 
$
0.10
 
$
(0.04
)
$
(0.17
)
                           
Weighted average shares outstanding:
                         
Basic
   
23,497
   
23,797
   
23,494
   
23,900
 
Diluted
   
23,680
   
23,905
   
23,494
   
23,900
 

 
 NEW STOCK OPTION PLAN AND STOCK APPRECIATION RIGHTS PLAN

On July 28, 2005, our Board of Directors approved the Cal-Maine Foods, Inc. 2005 Incentive Stock Option Plan (the “Plan”) and reserved 500,000 shares for issuance upon exercise of options granted under the Plan. Options issued pursuant to the Plan may be granted to any of our employees. The options may have a term of up to ten years and generally will vest ratably over five years. On August 17, 2005, we issued 360,000 options with an exercise price of $5.93. The options have ten-year terms and vest over five years beginning from the date of grant. The Plan was ratified by our shareholders at our annual meeting of shareholders on October 13, 2005.

On July 28, 2005, our Board of Directors also approved the Cal-Maine Foods, Inc. Stock Appreciation Rights Plan (the “Rights Plan”). The Rights Plan covers 1,000,000 shares of common stock of the Company. Stock Appreciation Rights (“SAR”) may be granted to any employee or non-employee member of the Board of Directors. Upon exercise of a SAR, the holder will receive shares of our common stock equal to the difference between the fair market value of a single share of common stock at the time of exercise and the strike price which is equal to the fair market value of a single share of common stock on the date of the grant. The SARs have a ten-year term and vest over five years. On August 17, 2005, we issued 592,500 SARs with a strike price of $5.93 and, on August 26, 2005, we issued 22,500 SARs with a strike price of $6.71. The Rights Plan was ratified by our shareholders at our annual meeting of shareholders on October 13, 2005.
 
8

2. Inventories

Inventories consisted of the following:
 
   
February 25, 2006
 
May 28, 2005
 
           
Flocks
 
$
39,211
 
$
31,088
 
Eggs
   
3,321
   
2,477
 
Feed and supplies
   
15,262
   
12,063
 
   
$
57,794
 
$
45,628
 

3. Stockholders’ Equity
 
Stock Repurchase Program
 
On August 3, 2004, our Board of Directors approved a repurchase program whereby we were allowed to purchase up to 2,000,000 shares of our common stock by July 31, 2005. The repurchase program, in which approximately 942,000 shares were repurchased, expired on July 31, 2005. We do not have any other stock repurchase programs.
 
4. Legal Proceedings
 
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.

 
 5. Net Income (Loss) per Common Share

Basic earnings (loss) per share are based on the weighted average common shares outstanding. Diluted earnings per share include any dilutive effects of options and warrants. Options and warrants representing 182,793 shares were excluded from the calculation of diluted earnings per share for the nine month period ended February 25, 2006 because of the net loss for the period.

9


ITEM 2. MANAGEMENTS’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 1 of our Annual Report on Form 10-K for the fiscal year ended May 28, 2005, (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 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.

OVERVIEW

Cal-Maine Foods, Inc. (“we”, “us”, “our”, or the “Company”) is primarily engaged in the production, grading, packaging, marketing and distribution of fresh shell eggs. Our fiscal year end is the Saturday closest to May 31.

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 29 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.

Although several of our production facilities are located in areas affected by hurricanes Katrina and Rita, there has been no material adverse effect to our operations or properties at these facilities.

Like other shell egg and poultry producers, our operations are subject to the effects of adverse weather conditions, disease and pests common to agricultural industries.  We do not believe the country's poultry and egg industries are likely to experience a major outbreak of bird flu in the near future.  We are taking extra precautions to assure that we have effective bio-security at our egg complexes.  We have eliminated or reduced visits to our poultry facilities by non-employees.  We also are taking extra precautions against bringing used packaging materials or equipment on to our farms that could cause the spread of any poultry disease.  Thus far, we have not seen any indication of loss of demand for eggs because of bird flu concerns.
 
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.

Our cost of production is materially affected by feed costs, which average about 55% of our total shell egg production cost. Changes in feed costs result in changes in 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 we have little or no control.

10


As discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements, we acquired 51% of the units of membership in Hillandale, LLC for cash of $27 million on October 12, 2005. The remaining 49% of the units of membership in Hillandale, LLC will be acquired over a four-year period, at their book value at the time of purchases.

 We gained effective control of the Hillandale operations upon signing of the Agreement. Accordingly, the acquisition date for accounting purposes is July 28, 2005. The operations of Hillandale, LLC have been consolidated with our operations beginning July 29, 2005.

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

Hillandale, LLC’s production facilities are principally located in Florida. Like us, Hillandale, LLC is a fully integrated shell egg producer with its own feed mills, hatchery, production, processing and distribution facilities. The Hillandale acquisition increased our current egg production capacity by approximately 30%.

As of July 28, 2005, Hillandale, LLC owned a 50% ownership interest in Hillandale Farms, LLC that was accounted for by the equity method of accounting. On October 5, 2005, Hillandale, LLC acquired the other 50% interest in Hillandale Farms, LLC for $1.0 million. The purchase price was allocated to the assets acquired and liabilities assumed and resulted in approximately $1.3 million of goodwill. Hillandale Farms, LLC is engaged in the production, processing and distribution of shell eggs.

The purchase of Hillandale, LLC, AEP and Hillandale Farms, LLC described above are collectively referred to below as the “Acquisitions".
 
RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated selected items from our Condensed Consolidated Statements of Operations expressed as a percentage of net sales.
 
    
   
13 Weeks Ended 
 
39 Weeks Ended 
 
   
February 25, 2006
 
February 26, 2005
 
February 25, 2006
 
February 26, 2005
 
                   
Net sales
   
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
   
80.0
   
83.1
   
87.1
   
88.9
 
Gross profit
   
20.0
   
16.9
   
12.9
   
11.1
 
Selling, general & administrative
   
11.9
   
12.3
   
12.4
   
12.4
 
Operating income (loss)
   
8.1
   
4.6
   
.5
   
(1.3
)
Other income (expense)
   
(0.5
)
 
(0.5
)
 
(1.4
)
 
(.6
)
Income (loss) before taxes
   
7.6
   
4.1
   
(.9
)
 
(1.9
)
Income tax expense (benefit)
   
1.5
   
1.7
   
(.7
)
 
(.6
)
Net income (loss)
   
6.1
%
 
2.4
%
 
(.2
)%
 
(1.3
)%
 
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NET SALES

Approximately 95% of our net sales consist of shell egg sales, 4% consist of incidental feed sales to outside egg producers and 1% consists of sales of liquid and frozen egg products. Net sales for the third quarter of fiscal 2006 were $130.1 million, an increase of $29.1 million, or 28.8% as compared to net sales of $101.0 million for the third quarter of fiscal 2005. The Acquisitions accounted for $21.1 million of the increase. Excluding the Acquisitions, on a comparable basis, net sales increased $8.0 million, or 7.9%, for the third fiscal 2006 quarter. The increase was due to increases in total dozens of shell eggs sold and shell egg selling prices, as compared with the same period in fiscal 2005. Dozens sold for the current quarter were 169.4 million dozen, including 31.5 million dozen sold by the Acquisitions, an increase of 25.0 million dozen, or 17.3% as compared to the third quarter of fiscal 2005. On a comparable basis, excluding the Acquisitions, dozens sold decreased 4.5%. Our production and processing facilities accounted for most of the decrease in dozens of shell eggs sold, with additional reductions in dozens purchased from outside (non-contract) shell egg producers making up the balance. Purchases of shell eggs from outside producers averages about 25% of our total dozens sold. Consumer demand was stronger than last year and shell egg supply was in better balance, both of which market factors resulted in higher shell egg selling prices during the current third quarter as compared to the fiscal 2005 third quarter. Our net average selling price per dozen of shell eggs for the third quarter of fiscal 2006 was $0.741, compared to $0.673 for the third quarter of fiscal 2005, an increase of 10.0%. Our net average selling price is the blended price for all sizes and grades of shell eggs, including non-graded shell egg sales, breaking stock and undergrades.
 
Net sales for the thirty-nine week period ended February 25, 2006 were $348.2 million, an increase of $54.4 million, or 18.5%, as compared to net sales of $293.8 million for the thirty-nine week period ended February 26, 2005. Excluding the net sales of the Acquisitions of $57.7 million, on a comparable basis, sales have decreased $3.4 million, or 1.2%. Dozens sold for the current thirty-nine week period were 493.6 million, including the Acquisitions’ 80.1 million dozen, as compared to 438.4 million for the same time period in fiscal 2005, an increase of 55.2 million dozen, or 12.6%. On a comparable basis, excluding the Acquisitions, dozens sold have decreased 5.7%. For the current fiscal 2006 thirty-nine week period, our net average selling price per dozen of shell eggs was $.659, as compared to $.645 per dozen for the same period in fiscal 2005, an increase of 2.1%.
 
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. Cost of sales for the third quarter ended February 26, 2005 was $104.1 million, an increase of $20.2 million, or 24.1%, as compared to cost of sales of $83.9 million for the third quarter of fiscal 2005. The Acquisitions’ cost of sales accounted for $17.4 million of the increase. Excluding the Acquisitions, on a comparable basis, cost of sales increased $2.8 million, or 3.3%. The increase is due to higher cost of purchases from outside egg producers and higher cost of feed ingredients. The increase in the cost of the shell eggs purchased from outside producers was due to improved shell egg market conditions and selling prices. Feed cost for the third quarter ended February 25, 2006 was $.211 per dozen of shell eggs, compared to the third quarter of fiscal 2005 cost per dozen of shell eggs of $.202, an increase of 4.5%. The higher shell egg selling price was the primary reason for the increase in gross profit from 16.9% of net sales for the quarter ended February 26, 2005 to 20.0% of net sales for the third quarter ended February 25, 2006.

Cost of sales for the thirty-nine week period ended February 25, 2006 was $303.4 million, an increase of $42.4 million, or 16.2%, as compared to cost of sales of $261.0 million for the thirty-nine week period ended February 26, 2005. On a comparable basis, excluding the Acquisitions’ cost of sales of $53.1 million, cost of sales decreased $10.7 million, or 4.1%.The decrease in cost of sales is the net result of a lower number of dozens produced at Company-owned facilities, lower outside shell egg purchases, and a decrease in the cost of feed ingredients. Feed cost for the current thirty-nine week period was $.213 per dozen of shell eggs, as compared to $.247 per dozen for the same period in the prior fiscal year, a decrease of 13.8%. The increase in shell egg selling prices and lower cost of feed ingredients resulted in an increase in gross profit from 11.1% of net sales for last year’s thirty-nine week period to a gross profit of 12.9% of net sales for the current thirty-nine week period.

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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 third quarter ended February 25, 2006 was $15.5 million, an increase of $3.1 million, as compared to $12.4 million for the third quarter of fiscal 2005. The Acquisitions’ selling, general and administrative expense accounted for $2.9 million of the increase. Excluding the Acquisitions, the current thirteen week period had an increase in selling, general and administrative expense of $201,000 or 1.6%. Fuel for vehicles and employee health insurance costs have each increased approximately $100,000 for the third quarter ended February 25, 2006 compared to the same period in the prior year. On a cost per dozen sold basis, including the Acquisitions’ cost, selling, general and administrative expense was $.091 per dozen for the current quarter as compared to $.086 for the third quarter of fiscal 2005. As a percent of net sales, selling, general and administrative expense decreased slightly from 12.3% for the third quarter of fiscal 2005 to 11.9% for the third quarter of fiscal 2006.

Selling, general and administrative expenses for the thirty-nine week period ended February 25, 2006 was $43.1 million, an increase of $6.6 million, as compared to $36.5 million for the thirty-nine week period ended February 26, 2005. The Acquisitions accounted for $7.2 million in expenses for the period. Excluding the Acquisitions, the current thirty-nine week period had a decrease in selling, general and administrative expense of $550,000 or 1.6%. In the thirty-nine week period ended February 25, 2006, insurance costs decreased $850,000, and professional and legal fees decreased $400,000 compared to the comparable period in 2005. During this period, approximately $400,000 was recovered in bad debts previously written off. Franchise fees for specialty eggs increased $1.3 million during the current thirty-nine week period as compared to the same period in fiscal 2005. Fuel for vehicles was the major distribution cost increase in the period. On a cost per dozen sold basis, including the Acquisitions, selling, general and administrative expense was $.087 for the current thirty-nine week period as compared to $.083 for the comparable period in fiscal 2005. As a percent of net sales, selling, general and administrative expense remained the same at 12.4% for both thirty-nine week periods in fiscal 2006 and fiscal 2005.
 

OPERATING INCOME

As the result of the above, operating income was $10.5 million for the third quarter ended February 25, 2006, as compared to operating income of $4.7 million for the third quarter of fiscal 2005. Operating income was 8.1% of net sales for the current fiscal third quarter, compared to operating income of 4.6% of net sales for the third quarter in fiscal 2005.

For the thirty-nine week period ended February 25, 2006, operating income was $1.6 million, as compared to operating loss of $3.7 million for the thirty-nine week period ended February 26, 2005. Operating income was 0.5% of net sales for the current thirty-nine week period as compared to operating loss of 1.3% of net sales in the same thirty-nine week period in fiscal 2005.
 
OTHER INCOME / EXPENSE

Other income or expense consists of costs or income not directly charged to, or related to, operations such as interest expense and equity from affiliates.

Other expense for the third quarter ended February 25, 2006 was $560,000, an increase of $16,000, as compared to other expense of $544,000 for the third quarter of fiscal 2005 In the current third quarter, net interest expense increased $1.1 million and other income increased $1.1 million. This net increase for the third quarter was primarily the result of an $800,000 increase in cash interest expense due to additional long-term borrowings and lower balances in cash equivalents and investments. Included in interest expense for the thirteen weeks ended February 25, 2006 is $300,000 non-cash expense imputed on our non-interest bearing obligation to acquire 49% of Hillandale, LLC’s membership units over a four year period. Other income for the current third quarter increased from equity in income of affiliates and from a gain on sale of land and a legal claim settlement. As a percent of net sales, other expense was the same at 0.5% for the current third quarter and fiscal 2005. 

13

For the thirty-nine week period ended February 25, 2006, other expense was $4.8 million, an increase of $2.9 million as compared to $1.9 million for the same thirty-nine week period in fiscal 2005. For the current thirty-nine weeks, net interest expense increased $2.8 million and other income decreased $780,000. Interest expense increased $937,000, primarily due to additional borrowings and interest income decreased $900,000 due to lower cash equivalents and investments. Included in interest expense for the thirty-nine weeks ended February 25, 2006 is $980,000 non-cash expense imputed on our non-interest bearing obligation to acquire 49% of Hillandale. Other income decreased from equity in losses of affiliates. As a percent of net sales, other expense was 1.4% for the current thirty-nine week period, as compared to 0.6% for the same thirty-nine week period in fiscal 2005.

INCOME TAXES

As a result of the above, our pre-tax income was $9.9 million for the third quarter ended February 25, 2006, as compared to pre-tax income of $4.1 million for the third quarter of fiscal 2005. For the current third quarter, an income tax expense of $1.9 million was recorded with an effective tax rate of 19.4%, as compared to an income tax expense of $1.7 million with an effective rate of 41.4% for last year’s third quarter. The effective tax rate for each period differs from the statutory federal income tax rate due to state income taxes and due to the relationship of certain non-deducible expenses to our income (loss) before income taxes. For the third quarter ended February 25, 2005, we projected our effective tax rate for the year to be approximately 75% compared to the 33% projected annual tax rate used in the second quarter ended November 26, 2005. The increase in the estimated annual effective tax rate is due to an increase in certain non-deductible expenses in relation to our estimated income (loss) before income taxes for the year. As a result of adjusting the income tax benefit for the thirty-nine weeks ended February 25, 2006 to the estimated annual rate of 75%, our effective rate for the thirteen weeks ended February 25, 2006 was reduced to 19.4%.

For the thirty-nine week period ended February 25, 2006, our pre-tax loss was $3.2 million, as compared to pre-tax loss of $5.7 million for the thirty-nine week period ended February 26, 2005. For the current thirty-nine week period, an income tax benefit of $2.4 million was recorded with an effective tax rate of 74.9%, as compared to an income tax benefit of $1.9 million with an effective tax rate of 32.9% for the same thirty-nine week period in fiscal 2005. The effective tax rate for each period differs from the statutory federal income tax rate due to state income taxes and due to the relationship of certain non-deducible expenses to our income (loss) before income taxes.
 
NET INCOME

Net income for the third quarter ended February 25, 2006 was $8.0 million, or $0.34 per basic and diluted share, as compared to net income of $2.4 million, or $.10 per basic and diluted share, for the third quarter of fiscal 2005.

For the thirty-nine week period ended February 25, 2006, net loss was $803,000, or $0.03 per basic and diluted share, as compared to net loss of $3.8 million, or $0.16 per basic and diluted share, for the thirty-nine week period ended February 26, 2005. 
 
CAPITAL RESOURCES AND LIQUIDITY

Our working capital at February 25, 2006 was $61.6 million, as compared to $73.6 million at May 28, 2005. Our current ratio was 1.93 at February 25, 2006, as compared to 2.41 at May 28, 2005. 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, $2.6 million of which was utilized as a standby letter of credit at February 25, 2006. Our long-term debt at February 25, 2006, including current maturities, amounted to $106.0 million, as compared to $83.0 million at May 28, 2005.

14

In the thirty-nine week period ended February 25, 2006, $13.6 million in net cash was provided by operating activities. This compares to $5.0 million of net cash for the thirty-nine week period ended February 26, 2005. In the thirty-nine weeks ended February 25, 2006, $10.8 million was provided from the maturity of short-term investments, $1.2 million was provided from notes receivable and from investments, and $1.6 million was provided from disposal of property, plant and equipment. For purchases of property, plant and equipment, $6.9 million was used and $23.8 million was used for the purchase of the Acquisitions. In addition, $73,000 was provided from the issuance of common stock from the treasury and $877,000 was used for payments of dividends on the common stock. Borrowings of $28.0 million were received in additional long-term debt and $29.8 million was used for principal payments on long-term debt. The net result of these activities was a decrease in cash of $6.1 million since May 28, 2005.
 
 In the thirty-nine weeks ended February 26, 2005, $34.2 million was provided from the maturity of short-term investments, $424,000 was provided from notes receivable and from investments, $505,000 was provided from disposal of property, plant and equipment and $8.2 million was used for purchases of property, plant and equipment. In addition, $2.6 million was provided from the issuance of common stock from the treasury, net cash of $7.6 million was used in the repurchase of common stock for the treasury, $892,000 was used for payments of dividends on the common stock and $8.4 million was used for principal payments on long-term debt. The net result of these activities was an increase in cash of $17.7 million.
 
Substantially all trade receivables and inventories collateralize our 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 as defined (ratio of not less than 1.25 to 1) and net worth (minimum of $90.0 million, plus 45% of cumulative net income, 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), long-term borrowings (total funded debt to total capitalization not to exceed 55%); and (3) maintain various current and cash-flow coverage ratios (1.25 to 1), among other restrictions. At February 25, 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.

As discussed in the Notes to Condensed Consolidated Financial Statements section of this report under “Acquisitions”, under the terms of the Agreement, the remaining 49% of the Units of Membership in Hillandale, LLC, are to be acquired in essentially equal annual installments over a four-year period, with the purchase price of the units equal to their book value as calculated in accordance with the terms of the Agreement. Funding is expected to be provided by our cash on hand, our operational earnings during the period and drawing on our existing line of credit.

We currently have a $2.1 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 $2.1 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.
 
 Impact of Recently Issued Accounting Standards. Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in our Annual Report Form 10-K for the year ended May 28, 2005 for a discussion of the impact of recently issued accounting standards. There were no accounting standards issued during the quarter ended February 25, 2006 that we expect will have a material impact on our consolidated financial statements.

15

 
Critical Accounting Policies. We suggest that our 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 May 28, 2005, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes made to the critical accounting policies identified in our Annual Report on Form 10-K for the year ended May 28, 2005.

ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

There have been no material changes in the market risk reported in the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 2005.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in our periodic reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods required. Our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective based on their evaluation of such controls and procedures as of the end of the period covered by this report. There were no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect, our internal controls over financial reporting. In connection with the Acquisitions, we have been and are currently reviewing the controls and procedures in place and are implementing changes where necessary to conform the controls and procedures of the Acquisitions to those of our other operations.
 
16

 
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Except as noted below, there have been no new matters or changes to matters identified in our Annual Report on Form 10-K for the year ended May 28, 2005.
 
 Chicken Litter Litigation

On May 2, 2005, Cal-Maine Farms, Inc. (“Cal-Maine Farms”), one of our subsidiaries, was added as a defendant in an ongoing action in a case styled Leslie Carroll et al vs. Alpharma, Inc in the Circuit Court of Washington County, Arkansas. There are approximately 80 plaintiffs in the action. The plaintiffs complain of a wide variety of medical problems which they attribute to the use of chicken manure and litter throughout Washington County, Arkansas. The theory of liability is the same as in the McWhorter suit previously reported in our filings with the Securities and Exchange Commission and summarized below. An Answer has been filed, and discovery has begun, but no trial date been set. At this stage it is impossible to evaluate the potential exposure, if any, of Cal-Maine Farms to damages in this suit.

On February 3, 2004, Cal-Maine Farms was served with process in a civil complaint filed in the Circuit Court of Washington County, Arkansas, on behalf of Keith McWhorter and Patsy McWhorter, individually and as next friends and guardians of Hunter McWhorter. Other defendants include Alpharma Inc., Alpharma Animal Health Co., Cargill, Incorporated, George's Farms, Inc., Peterson Farms, Inc., Simmons Foods, Inc., Simmons Poultry Farms, Inc., and Tyson Foods, Inc. Each of the other poultry defendants is engaged in the broiler business. The Alpharma defendants produce additives for broiler feed. One individual was originally named as a defendant, but has been dismissed.

Both the McWhorter and Carroll suits 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 Carroll suit focuses on a feed ingredient that contains arsenic and is alleged to be in the litter that was spread. We do not use this particular feed ingredient in our shell egg production feed formulation. The McWhorter suit focuses on mold and fungi allegedly created by the application of litter. Both suits address conditions alleged to exist in Washington County. Both suits seek unspecified actual damages and request unspecified punitive damages. An answer has been filed on behalf of Cal-Maine Farms and some initial 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.
 
State of Oklahoma Watershed Pollution Litigation

On June 18, 2005, the State of Oklahoma filed suit, in the United States District Court for the Northern District of Oklahoma, against a number of companies, including us and Cal-Maine Farms. We and Cal-Maine Farms filed our joint answer and motion to dismiss the suit 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. The parties participated in a series of mediation meetings without success. We no longer have any operations in the watershed. Accordingly, we do not anticipate that we will be materially affected by the request for injunctive relief. Dispositive motions have been filed by the defendants, but no hearings on those motions have been set. We are not able at present to provide an opinion regarding the ultimate resolution of this action.
 
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 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 
 
We did not make any sales of unregistered securities during the third quarter of fiscal 2006.

Information as to repurchases of our common stock required by this Item is contained in Note 3 of “Notes to Condensed Consolidated Financial Statements” in Part 1 of this Form 10-Q and is incorporated herein by this reference.

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.



ITEM 6. EXHIBITS

 
a.
Exhibits No.
     
Description
   
31.1
Certification of The Chief Executive Officer
   
31.2
Certification of The Chief Financial Officer
   
32.0
Written Statement of The Chief Executive Officer and The Chief Financial Officer
     

18



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: April 4, 2006 By:   /s/ Timothy A. Dawson
 
Timothy A. Dawson
Vice President/Treasurer
(Principal Financial Officer)
     
   
 
 
 
 
 
 
Date: April 4, 2006 By:   /s/ Charles F. Collins
 
Charles F. Collins
Vice President/Controller
(Principal Accounting Officer)


19