ITEM 2. MANAGEMENT’S
DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains numerous forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) relating to our shell egg business, including estimated production data, expected operating schedules, projected construction costs, and other operating data, including anticipated results of operations and financial condition. Such forward-looking statements are identified by the use of words such as “believes,” “intends,” “expects,” “hopes,” “may,” “should,” “plans,” “projected,” “contemplates,” “anticipates,” or similar words. Actual production, operating schedules, capital costs, results of operations, and other projections and estimates could differ materially from those projected in the forward-looking statements. The forward-looking statements are based on management’s current intent, belief, expectations, estimates, and projections regarding the Company and its industry. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions, and other factors that are difficult to predict and may be beyond our control. The factors that could cause actual results to differ materially from those projected in the forward-looking statements include, among others, (i) the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended
June 3, 2017
, as updated by our subsequent Quarterly Reports on Form 10-Q, (ii) the risks and hazards inherent in the shell egg business (including disease, pests, weather conditions, and potential for product recall), (iii) changes in the demand for and market prices of shell eggs and feed costs, (iv) our ability to predict and meet demand for cage-free and other specialty eggs, (v) risks, changes, or obligations that could result from our future acquisition of new flocks or businesses and risks or changes that may cause conditions to completing a pending acquisition not to be met, and (vi) adverse results in pending litigation matters. In addition, we continue to assess the impact of the recently enacted federal tax reform legislation on our business and consolidated financial statements. Readers are cautioned not to place undue reliance on forward-looking statements because, while we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these
forward-looking statements will prove to be accurate. Further, forward-looking statements included herein are only made as of the respective dates thereof, or if no date is stated, as of the date hereof. Except as otherwise required by law, we disclaim any intent or obligation to update publicly these forward-looking statements, whether because 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, under 18 weeks of age), layers (mature female chickens) and breeders (male and female birds used to produce fertile eggs to hatch 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 ("U.S."). We market the majority of our shell eggs in the southwestern, southeastern, mid-western, and mid-Atlantic regions of the U.S. We market shell eggs through an extensive distribution network to a diverse group of customers, including national and regional grocery store chains, club stores, foodservice distributors, and egg product consumers.
The Company has one operating segment, which is the production, grading, packaging, marketing and distribution of shell eggs. The majority of our customers rely on us to provide most of their shell egg needs, including specialty and non-specialty eggs. Specialty eggs represent a broad range of products. We classify nutritionally enhanced, cage free, organic and brown eggs as specialty products for accounting and reporting purposes. We classify all other shell eggs as non-specialty products. While we report separate sales information for these types of eggs, there are a number of cost factors which are not specifically available for non-specialty or specialty eggs due to the nature of egg production. We manage our operations and allocate resources to these types of eggs on a consolidated basis based on the demands of our customers.
Our operating results are directly tied to egg prices, which are highly volatile and subject to wide fluctuations, and are outside of our control. For example, the annual per dozen eggs average of the Urner-Barry Southeastern Regional Large Egg Market Price ("UB southeastern large index"), for our last ten fiscal years ranged from a low of $0.85 in fiscal year 2017 to a high of $1.79 in fiscal year 2016. The shell egg industry has traditionally been subject to periods of high profitability followed by periods of significant loss. In the past, during periods of high profitability, shell egg producers tended to increase the number of layers in production with a resulting increase in the supply of shell eggs, which generally caused a drop in shell egg prices until supply and demand returned to balance. As a result, our financial results from year to year may vary significantly. Shorter term, retail sales of shell eggs historically have been 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 shell egg production in the spring and early summer. Shell egg prices tend to increase with the start of the school year and are highest prior to holiday periods, particularly Thanksgiving, Christmas, and Easter. Consequently, we generally experience lower sales and net income in our first and fourth fiscal quarters ending in August and May, respectively. Because of the seasonal and quarterly fluctuations, comparisons of our sales and operating results between different quarters within a single fiscal year are not necessarily meaningful comparisons.
In 2015, our industry experienced a significant avian influenza (“AI”) outbreak, primarily in the upper Midwestern U.S. There were no positive tests for AI at any of our locations. Based on several published industry estimates, we believe approximately 12% of the national flock of laying hens was affected. During April through June 2015, the affected laying hens were either destroyed by the disease or euthanized. The USDA data showed the supply of laying hens decreased substantially. Since that time, hen numbers have recovered and even exceeded pre–AI levels in late 2016.
Egg prices increased significantly during the summer and fall of 2015. The average of Thursday prices for the UB southeastern large index for the months of June through November 2015 was $2.32 per dozen, with a peak of $2.97 in August. Subsequent to November 2015, shell egg prices declined. The UB southeastern large index hit a decade-low level in both our fiscal 2016 fourth quarter and fiscal 2017 second quarter. During the twenty-six weeks ended
December 2, 2017
, the UB southeastern large index averaged $1.19 per dozen, a 53.8% increase over the comparable period of the prior year which averaged $0.77 per dozen. In spite of this increase, the UB southeastern large index remained below the average of $1.46 for fiscal 2012-2016.
According to Nielsen data, retail demand for calendar year 2017 has been very good and in line with normal seasonal trends, supported by increased egg promotions in grocery stores. After a period of sluggish demand from institutional food customers, this sector has seen increasing egg usage in recent months. The USDA reports that shell egg exports have continued to expand in calendar 2017 and have recovered from previous low levels following the 2015 avian influenza (AI) outbreak. Export demand has also increased as a result of the reported Fipronil contaminations across Europe and Southeast Asia. Together, these demand trends have resulted in a more favorable market environment compared with a year ago. The laying hen flock size has been consistent with prior-year levels as production has moderated, resulting in an improved balance of supply and demand. Accordingly, our net average selling price for shell eggs for the second quarter of fiscal 2018 was
$1.321
compared with
$0.971
for the corresponding period of fiscal 2017. Recent USDA reports, however, show an increase in chicks hatched which could indicate future increases in supply.
We are one of the largest producers and marketers of value-added specialty shell eggs in the U.S. They have been a significant and growing portion of the market in recent years. During our fiscal 2016 a number of large restaurant chains, food service companies and grocery chains, including our largest customers, announced goals to transition to a cage-free egg supply chain by specified future dates. We are working with our customers to achieve smooth progress in meeting their goals. Our focus for future expansion at our farms will be environments that are cage-free or with equipment that can easily be converted to cage-free, based on a timeline to meet our customer’s needs.
For the
thirteen weeks ended December 2, 2017
, we produced approximately 85% of the total number of shell eggs we sold compared to 84% in the comparable prior year period. We produced
5.2%
more dozens during the
thirteen weeks ended December 2, 2017
than in the corresponding period of last year. For the
thirteen weeks ended December 2, 2017
, approximately 9% of such production was provided by contract producers who utilize their facilities in the production of shell eggs by layers owned by us compared to 7% for the same period of last year. This increase represents contract production acquired with our fiscal 2017 acquisitions. We own the shell eggs produced under these arrangements.
Our cost of production is materially affected by feed costs. Feed costs averaged approximately 57% of our total farm egg production cost for the thirteen weeks ended
December 2, 2017
and
November 26, 2016
. Changes in market prices for corn and soybean meal, the primary ingredients in the feed we use, result in changes in our cost of goods sold. The cost of feed ingredients, which are commodities, are subject to factors over which we have little or no control such as volatile price changes caused by weather, size of harvest, transportation and storage costs, demand, and the agricultural and energy policies of the U.S. and foreign governments. Large U.S. corn and soybean crops have been harvested in 2017, which combined with the large 2016 crops should provide an adequate supply of our primary feed ingredients during the remainder of fiscal 2018.
While the recent hurricanes that hit the U.S. during our fiscal 2018 second quarter caused disruptions to our operations in Texas, Florida and Georgia, we did not sustain any material loss of egg production.
On December 29, 2017, the Company reached an agreement on material terms of the settlement of several large direct action purchasers' antitrust claims against the Company. Pursuant to the agreement, the Company will settle the claims with a single
$80.8 million
payment, which is
$52.8 million
net of tax, or
$1.09
per basic and diluted share. As a result, the Company has recorded the legal settlement expense and offsetting liability to operating expense and current liabilities, respectively, in the second quarter of fiscal 2018.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from our Condensed Consolidated Statements of Operations expressed as a percentage of net sales.
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13 Weeks Ended
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26 Weeks Ended
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December 2, 2017
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November 26, 2016
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|
December 2, 2017
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|
November 26, 2016
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Net sales
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100.0
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%
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|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of sales
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|
77.2
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%
|
|
98.4
|
%
|
|
84.0
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%
|
|
101.1
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%
|
Gross profit (loss)
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|
22.8
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%
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|
1.6
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%
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|
16.0
|
%
|
|
(1.1
|
)%
|
Selling, general, and administrative expense
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|
11.7
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%
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|
16.6
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%
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|
13.4
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%
|
|
16.7
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%
|
Legal settlement expense
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|
22.3
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%
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|
—
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%
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|
13.0
|
%
|
|
—
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%
|
Loss on disposal of fixed assets
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—
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%
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0.1
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%
|
|
—
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%
|
|
0.1
|
%
|
Operating loss
|
|
(11.2
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)%
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|
(15.1
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)%
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|
(10.4
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)%
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|
(17.9
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)%
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Other income (expense), net
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0.1
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%
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|
0.6
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%
|
|
—
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%
|
|
0.7
|
%
|
Loss before income taxes and noncontrolling interest
|
|
(11.1
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)%
|
|
(14.5
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)%
|
|
(10.4
|
)%
|
|
(17.2
|
)%
|
Income tax benefit
|
|
(3.9
|
)%
|
|
(5.4
|
)%
|
|
(3.6
|
)%
|
|
(6.3
|
)%
|
Net loss before noncontrolling interest
|
|
(7.2
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)%
|
|
(9.1
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)%
|
|
(6.8
|
)%
|
|
(10.9
|
)%
|
Less: Net income (loss) attributable to noncontrolling interest
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—
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%
|
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—
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%
|
|
—
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%
|
|
—
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%
|
Net loss attributable to Cal-Maine Foods, Inc.
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|
(7.2
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)%
|
|
(9.1
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)%
|
|
(6.8
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)%
|
|
(10.9
|
)%
|
NET SALES
Net sales for the thirteen weeks ended
December 2, 2017
were
$361.2 million
,
an increase of
$107.7 million
, or
42.4%
, compared to net sales of
$253.5 million
for the thirteen weeks ended
November 26, 2016
. The increase was primarily due to an increase in egg selling prices and, to a lesser extent, an increase in dozens sold.
Shell egg sales made up approximately
97.0%
of net sales for the thirteen weeks ended
December 2, 2017
. Dozens sold for the
second
quarter of fiscal year
2018
were
263.1 million
, a
4.3%
increase from
252.2 million
dozen for the
second
quarter of fiscal
2017
. The volume increase accounted for a
$10.6 million
increase in net sales.
Net average selling price per dozen of shell eggs was
$1.321
for the thirteen weeks ended
December 2, 2017
, compared to
$0.971
for the thirteen weeks ended
November 26, 2016
. The
36.0%
increase in average selling price accounted for a
$92.1 million
increase in net sales. 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.
Egg products and other revenues accounted for
3.0%
of net sales for the thirteen weeks ended
December 2, 2017
.
These revenues were
$10.8 million
for the thirteen weeks ended
December 2, 2017
, compared to
$6.3 million
for the thirteen weeks ended
November 26, 2016
.
Net sales for the
twenty-six weeks ended
December 2, 2017
were
$624.0 million
,
an increase of
$130.6 million
, or
26.5%
, compared to net sales of
$493.4 million
for the
twenty-six weeks ended
November 26, 2016
. The increase was primarily due to an increase in egg selling prices and, to a lesser extent, an increase in dozens sold.
Shell egg sales made up approximately
97.3%
of net sales for the
twenty-six weeks ended
December 2, 2017
. Dozens sold for the
twenty-six weeks ended
December 2, 2017
were
512.5 million
, a
3.6%
increase from
494.5 million
dozen for the same period of fiscal
2017
. The volume increase accounted for a
$17.4 million
increase in net sales.
Net average selling price per dozen of shell eggs was
$1.173
for the
twenty-six weeks ended
December 2, 2017
, compared to
$0.962
for the
twenty-six weeks ended
November 26, 2016
. The
21.9%
increase in average selling price accounted for a
$108.1 million
increase in net sales.
Egg products and other revenues accounted for
2.7%
of net sales for the
twenty-six weeks ended
December 2, 2017
.
These revenues were
$17.0 million
for the
twenty-six weeks ended
December 2, 2017
, compared to
$11.9 million
for the
twenty-six weeks ended
November 26, 2016
.
The table below represents an analysis of our non-specialty and specialty shell egg sales (in thousands, except percentage data). Following the table is a discussion of the information presented in the table.
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|
|
|
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|
13 Weeks Ended
|
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26 Weeks Ended
|
|
|
December 2, 2017
|
|
November 26, 2016
|
|
December 2, 2017
|
|
November 26, 2016
|
Total net sales
|
|
$
|
361,172
|
|
|
|
|
$
|
253,544
|
|
|
|
|
$
|
624,017
|
|
|
|
|
$
|
493,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-specialty shell egg
|
|
$
|
228,975
|
|
|
65.4
|
%
|
|
$
|
123,008
|
|
|
49.8
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%
|
|
$
|
374,758
|
|
|
61.7
|
%
|
|
$
|
236,512
|
|
|
49.2
|
%
|
Specialty shell egg
|
|
113,293
|
|
|
32.3
|
%
|
|
113,224
|
|
|
45.8
|
%
|
|
214,990
|
|
|
35.4
|
%
|
|
222,536
|
|
|
46.2
|
%
|
Co-pack specialty shell egg
|
|
5,839
|
|
|
1.7
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%
|
|
8,514
|
|
|
3.4
|
%
|
|
11,919
|
|
|
2.0
|
%
|
|
16,969
|
|
|
3.5
|
%
|
Other
|
|
2,211
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|
|
0.6
|
%
|
|
2,485
|
|
|
1.0
|
%
|
|
5,360
|
|
|
0.9
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%
|
|
5,482
|
|
|
1.1
|
%
|
Net shell egg sales
|
|
$
|
350,318
|
|
|
100.0
|
%
|
|
$
|
247,231
|
|
|
100.0
|
%
|
|
$
|
607,027
|
|
|
100.0
|
%
|
|
$
|
481,499
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net shell egg sales as a percent of total net sales
|
|
97.0
|
%
|
|
|
|
97.5
|
%
|
|
|
|
97.3
|
%
|
|
|
|
97.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Dozens sold:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-specialty shell egg
|
|
200,449
|
|
|
76.2
|
%
|
|
191,383
|
|
|
75.9
|
%
|
|
392,617
|
|
|
76.6
|
%
|
|
374,113
|
|
|
75.7
|
%
|
Specialty shell egg
|
|
59,544
|
|
|
22.6
|
%
|
|
56,540
|
|
|
22.4
|
%
|
|
113,681
|
|
|
22.2
|
%
|
|
111,939
|
|
|
22.6
|
%
|
Co-pack specialty shell egg
|
|
3,093
|
|
|
1.2
|
%
|
|
4,254
|
|
|
1.7
|
%
|
|
6,251
|
|
|
1.2
|
%
|
|
8,449
|
|
|
1.7
|
%
|
Total dozens sold
|
|
263,086
|
|
|
100.0
|
%
|
|
252,177
|
|
|
100.0
|
%
|
|
512,549
|
|
|
100.0
|
%
|
|
494,501
|
|
|
100.0
|
%
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Net average selling price per dozen:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-specialty shell eggs
|
|
$
|
1.142
|
|
|
|
|
$
|
0.643
|
|
|
|
|
$
|
0.955
|
|
|
|
|
$
|
0.632
|
|
|
|
Specialty shell eggs
|
|
$
|
1.903
|
|
|
|
|
$
|
2.003
|
|
|
|
|
$
|
1.891
|
|
|
|
|
$
|
1.988
|
|
|
|
All shell eggs
|
|
$
|
1.321
|
|
|
|
|
$
|
0.971
|
|
|
|
|
$
|
1.173
|
|
|
|
|
$
|
0.962
|
|
|
|
Non-specialty shell eggs include all shell egg sales not specifically identified as specialty or co-pack specialty shell egg sales. This market is characterized generally by an inelasticity of demand. Small increases or decreases in production or demand can have a large positive or adverse effect on selling prices. For the thirteen weeks ended
December 2, 2017
, non-specialty shell egg dozens sold
increased
4.7%
, and the average selling price
increased
77.6%
to
$1.142
from
$0.643
for the same period of fiscal
2017
. For the
twenty-six weeks ended
December 2, 2017
, non-specialty shell egg dozens sold
increased
approximately
4.9%
, and the average selling price
increased
51.1%
to
$0.955
from
$0.632
for the same period of fiscal
2017
.
Specialty shell eggs, which include nutritionally enhanced, cage-free, organic, and brown eggs continue to make up a large portion of our total shell egg revenue and dozens sold. Specialty egg retail prices are less cyclical than non-specialty shell egg prices and are generally higher due to consumer willingness to pay for the perceived benefits from these products. This was particularly evident in fiscal 2017 as non-specialty egg prices declined more than specialty egg prices. However, as non-specialty egg prices declined, we experienced some margin and volume pressures on specialty egg sales. For thirteen weeks ended
December 2, 2017
, specialty shell egg dozens sold
increased
5.3%
, but the average selling price
decreased
5.0%
to
$1.903
from
$2.003
for the same period of fiscal
2017
. For the
twenty-six weeks ended
December 2, 2017
, specialty shell egg dozens sold
increased
1.6%
, but the average selling price
decreased
4.9%
to
$1.891
from
$1.988
for the same period of fiscal
2017
.
Co-pack specialty shell eggs are sold primarily through co-pack arrangements, a common practice in the industry whereby production and processing of certain products is outsourced to another producer. Co-pack specialty shell
eggs sold during the
twenty-six weeks ended
December 2, 2017
and
November 26, 2016
were
6.3 million
and
8.4 million
, which represented
1.2%
and
1.7%
of total dozens sold for those periods, respectively.
The shell egg sales classified as “Other” represent sales of hard cooked eggs, hatching eggs, and other miscellaneous products, which are included with our shell egg operations.
Egg products are shell eggs that are broken and sold in liquid, frozen, or dried form. Our egg products are sold through our consolidated subsidiaries American Egg Products, LLC (“AEP”) and Texas Egg Products, LLC (“TEP”).
For the
second
quarter of fiscal
2018
, egg product sales were
$10.8 million
,
an increase
of
$4.5 million
, or
71.9%
, compared to
$6.3 million
for the same period of
2017
. Pounds sold for the
second
quarter of fiscal
2018
were
14.3 million
,
a decrease
of
13.9%
, compared to
16.6 million
for the same period of fiscal
2017
. The selling price per pound for the
second
quarter of fiscal
2018
was $0.760 compared to $0.387 for the same period of fiscal
2017
, a 96.4% increase.
For the
twenty-six weeks ended
December 2, 2017
, egg product sales were
$17.0 million
,
an increase
of
$5.1 million
, or
42.9%
, compared to
$11.9 million
for the same period of fiscal
2017
. Pounds sold for the
twenty-six weeks ended
December 2, 2017
were
29.9 million
,
a decrease
of
1.0 million
, or
3.4%
, compared to
30.9 million
for the same period of fiscal
2017
. The selling price per pound for the
twenty-six weeks ended
December 2, 2017
was $0.572 compared to $0.392 for the same period of fiscal
2017
, a 46.1% increase.
COST OF SALES
Cost of sales consists of costs directly related to production, processing and packing of shell eggs, purchases of shell eggs from outside producers, 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, hen amortization, and other related farm production costs.
The following table presents the key variables affecting cost of sales (in thousands, except cost per dozen data).
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|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
|
|
December 2, 2017
|
|
November 26, 2016
|
|
Percent Change
|
|
December 2, 2017
|
|
November 26, 2016
|
|
Percent Change
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Farm production
|
|
151,902
|
|
|
144,581
|
|
|
5.1
|
%
|
|
296,191
|
|
|
287,452
|
|
|
3.0
|
%
|
Processing, packaging, and warehouse
|
|
53,707
|
|
|
47,988
|
|
|
11.9
|
%
|
|
104,819
|
|
|
94,291
|
|
|
11.2
|
%
|
Egg purchases and other (including change in inventory)
|
|
64,276
|
|
|
52,433
|
|
|
22.6
|
%
|
|
108,054
|
|
|
108,026
|
|
|
—
|
%
|
Total shell eggs
|
|
269,885
|
|
|
245,002
|
|
|
10.2
|
%
|
|
509,064
|
|
|
489,769
|
|
|
3.9
|
%
|
Egg products
|
|
8,722
|
|
|
4,434
|
|
|
96.7
|
%
|
|
14,767
|
|
|
8,732
|
|
|
69.1
|
%
|
Other
|
|
169
|
|
|
160
|
|
|
5.6
|
%
|
|
454
|
|
|
509
|
|
|
(10.8
|
)%
|
Total
|
|
$
|
278,776
|
|
|
$
|
249,596
|
|
|
11.7
|
%
|
|
$
|
524,285
|
|
|
$
|
499,010
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farm production cost (per dozen produced)
|
|
|
|
|
|
|
|
|
|
|
|
|
Feed
|
|
$
|
0.388
|
|
|
$
|
0.394
|
|
|
(1.5
|
)%
|
|
$
|
0.382
|
|
|
$
|
0.412
|
|
|
(7.3
|
)%
|
Other
|
|
$
|
0.298
|
|
|
$
|
0.294
|
|
|
1.4
|
%
|
|
$
|
0.301
|
|
|
$
|
0.294
|
|
|
2.4
|
%
|
Total
|
|
$
|
0.686
|
|
|
$
|
0.688
|
|
|
(0.3
|
)%
|
|
$
|
0.683
|
|
|
$
|
0.706
|
|
|
(3.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside egg purchases (average cost per dozen)
|
|
$
|
1.39
|
|
|
$
|
0.98
|
|
|
41.8
|
%
|
|
$
|
1.20
|
|
|
$
|
1.01
|
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dozen produced
|
|
222,889
|
|
|
211,971
|
|
|
5.2
|
%
|
|
436,459
|
|
|
410,753
|
|
|
6.3
|
%
|
Dozen sold
|
|
263,086
|
|
|
252,177
|
|
|
4.3
|
%
|
|
512,549
|
|
|
494,501
|
|
|
3.6
|
%
|
Cost of sales for the
second
quarter of fiscal
2018
was
$278.8 million
,
an increase
of
$29.2 million
, or
11.7%
, from
$249.6 million
for the
second
quarter of fiscal
2017
. This increase was primarily driven by an increase in the cost of eggs purchased and increased dozens produced for the quarter. Feed cost per dozen for the
second
quarter of fiscal
2018
was
$0.388
, compared to
$0.394
per dozen for the
second
quarter of fiscal
2017
,
a decrease
of
1.5%
, resulting in
a decrease
in cost of sales of approximately
$1.3 million
. Other farm production cost
increased
1.4%
to
$0.298
for the
second
quarter of fiscal
2018
compared to
$0.294
for the same period of last year.
Cost of sales for the
twenty-six weeks ended
December 2, 2017
was
$524.3 million
,
an increase
of
$25.3 million
, or
5.1%
, from
$499.0 million
for the same period of fiscal
2017
. The increase was primarily driven by an increase in dozens produced during the period and, to a lesser extent, the increased cost of eggs purchased in fiscal 2018. Dozens produced
increased
6.3%
resulting in higher farm production, processing, and packaging costs. These increases were offset by a lower feed cost per dozen produced. Feed cost per dozen for the
twenty-six weeks ended
December 2, 2017
, was
$0.382
, compared to
$0.412
per dozen for the comparable period of fiscal
2017
,
a decrease
of
7.3%
, resulting in
a decrease
in cost of sales of approximately
$12.3 million
for the comparable period. Other farm production cost
increased
2.4%
to
$0.301
for the
twenty-six weeks ended
December 2, 2017
, compared to
$0.294
for the same period of last year primarily due to increased layer hen amortization expense and facility costs related to capital improvement and conversion projects.
Gross profit for the
second
quarter of fiscal
2018
was
$82.4 million
compared to
$3.9 million
for the
second
quarter of fiscal
2017
. For the
twenty-six weeks ended
ended
December 2, 2017
, gross profit
increased
to
$99.7 million
from a loss of
$5.6 million
for the same period of fiscal
2017
primarily due to the increased average customer selling prices and sales volumes.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses include costs of marketing, distribution, accounting, and corporate overhead. The following table presents an analysis of our selling, general, and administrative expenses (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
December 2, 2017
|
|
|
November 26, 2016
|
|
$ Change
|
|
% Change
|
Specialty egg expense
|
|
$
|
11,840
|
|
|
|
$
|
13,773
|
|
|
$
|
(1,933
|
)
|
|
(14.0
|
)%
|
Delivery expense
|
|
13,113
|
|
|
|
13,136
|
|
|
(23
|
)
|
|
(0.2
|
)%
|
Payroll and overhead
|
|
8,246
|
|
|
|
8,723
|
|
|
(477
|
)
|
|
(5.5
|
)%
|
Stock compensation expense
|
|
879
|
|
|
|
808
|
|
|
71
|
|
|
8.8
|
%
|
Other expenses
|
|
8,082
|
|
|
|
5,551
|
|
|
2,531
|
|
|
45.6
|
%
|
Total
|
|
$
|
42,160
|
|
|
|
$
|
41,991
|
|
|
$
|
169
|
|
|
0.4
|
%
|
For the thirteen weeks ended
December 2, 2017
, selling, general, and administrative expenses was
$42.2 million
compared to
$42.0 million
for the thirteen weeks ended
November 26, 2016
. Specialty egg expense
decreased
$1.9 million
, or
14.0%
, compared to the same period of last year. Specialty egg expense typically fluctuates with specialty egg dozens sold, which
increased
5.3%
for the thirteen weeks ended
December 2, 2017
; however, this was more than offset by reduced advertising expense, which is a component of specialty egg expense and decreased 106.1% compared to the same period of fiscal
2017
due to an increase in refunded promotional allowances. Payroll and overhead
decreased
$477,000
, or
5.5%
, compared to the same period of fiscal 2017 primarily due to timing of bonus accruals. Other expenses increased
45.6%
to
$8.1 million
for the thirteen weeks ended
December 2, 2017
from
$5.6 million
for the comparable period of fiscal
2017
primarily due to increased bad debt expense in the current period as well as amortization of intangible assets related to the impact of the fiscal 2017 acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended
|
|
|
December 2, 2017
|
|
November 26, 2016
|
|
$ Change
|
|
% Change
|
Specialty egg expense
|
|
$
|
23,574
|
|
|
$
|
26,829
|
|
|
$
|
(3,255
|
)
|
|
(12.1
|
)%
|
Delivery expense
|
|
26,237
|
|
|
25,696
|
|
|
541
|
|
|
2.1
|
%
|
Payroll and overhead
|
|
17,743
|
|
|
17,162
|
|
|
581
|
|
|
3.4
|
%
|
Stock compensation expense
|
|
1,738
|
|
|
1,656
|
|
|
82
|
|
|
5.0
|
%
|
Other expenses
|
|
14,578
|
|
|
10,904
|
|
|
3,674
|
|
|
33.7
|
%
|
Total
|
|
$
|
83,870
|
|
|
$
|
82,247
|
|
|
$
|
1,623
|
|
|
2.0
|
%
|
For the
twenty-six weeks ended
December 2, 2017
, selling, general, and administrative expenses was
$83.9 million
,
an increase of
$1.6 million
, or
2.0%
, compared to
$82.2 million
for the
twenty-six weeks ended
November 26, 2016
. Specialty egg expense
decreased
$3.3 million
, or
12.1%
, compared to the same period of last year. Specialty egg expense typically fluctuates with specialty egg dozens sold, which
increased
1.6%
for the
twenty-six weeks ended
December 2, 2017
, however this was more than offset by reduced advertising expense, which is a component of specialty egg expense and decreased 70.3% compared to the same period for fiscal
2017
due to an increase in refunded promotional allowances. Payroll and overhead
increased
$581,000
, or
3.4%
, compared to the same period of fiscal 2017 primarily due to timing of bonus accruals. Delivery expense increased
$541,000
or
2.1%
, compared to the same period of last year primarily due to the impact of the fiscal 2017 acquisitions. Other expenses increased
33.7%
to
$14.6 million
for the
twenty-six weeks ended
December 2, 2017
from
$10.9 million
for the comparable period of fiscal
2017
primarily due to increased amortization of intangible assets related to the impact of the fiscal 2017 acquisitions as well as increases in bad debt, legal, audit and professional expenses.
LEGAL SETTLEMENT EXPENSE
On December 29, 2017, the Company reached an agreement on material terms of the settlement of several large direct action purchasers' antitrust claims against the Company. Pursuant to the agreement, the Company will settle the claims
with a single
$80.8 million
payment, which is
$52.8 million
net of tax, or
$1.09
per basic and diluted share. As a result, the Company has recorded the legal settlement expense and offsetting liability to operating expense and current liabilities, respectively, during the thirteen and
twenty-six weeks ended
December 2, 2017
.
LOSS ON DISPOSAL OF FIXED ASSETS
During
twenty-six weeks ended
November 26, 2016
we recorded a
$740,000
loss on disposal of fixed assets due to a roof replacement at one of our Texas locations.
OPERATING LOSS
As a result of the above, operating
loss
was
$40.5 million
for the
second
quarter of fiscal
2018
, compared to
$38.3 million
for the fiscal
2017
second
quarter.
For the
twenty-six weeks ended
December 2, 2017
, we recorded an operating loss of
$64.8 million
compared to a loss of
$88.6 million
for the same period of fiscal 2017.
OTHER INCOME (EXPENSE)
Total other income (expense) consists of items not directly charged to, or related to, operations such as interest income and expense, royalty income, equity in income or loss of affiliates, and patronage income, among other items.
For the
second
quarter of fiscal
2018
, we recorded
$618,000
of interest income compared to
$781,000
for the same period of last year. The decrease resulted primarily from lower average invested balances. The Company recorded interest expense of
$245,000
and
$370,000
, of which
$205,000
and
$370,000
was capitalized, in the
second
quarters of fiscal
2018
and
2017
, respectively. The
$125,000
reduction in interest expense resulted from the Company reducing outstanding debt.
Equity in income (loss) of affiliates for the
second
quarter of fiscal
2018
was income of
$276,000
compared to
$645,000
for the same period of last year. The decrease of
$369,000
is primarily due to losses at our Red River joint venture.
Other, net for the thirteen weeks ended
December 2, 2017
, was a loss of
$795,000
compared with a loss of
$260,000
for the same period of last year, primarily driven by an increase in uninsured losses in the current period.
For the
twenty-six weeks ended
December 2, 2017
, we recorded
$1.1 million
of interest income compared to
$1.9 million
for the same period of fiscal 2017. The decrease resulted primarily from lower average invested balances. The Company recorded interest expense of
$160,000
and
$757,000
, of which
$90,000
and
$749,000
was capitalized, for the
twenty-six weeks ended
December 2, 2017
and
November 26, 2016
, respectively. The
$597,000
reduction in interest expense resulted from the Company reducing outstanding debt.
Equity in income (loss) of affiliates for the
twenty-six weeks ended
December 2, 2017
was a loss of
$77,000
compared to income of
$836,000
for the same period of fiscal 2017. The decrease of
$913,000
is primarily due to losses at our Red River joint venture.
Other, net for the
twenty-six weeks ended
December 2, 2017
, was a loss of
$1.3 million
compared to a loss of
$138,000
for the same period of fiscal 2017, primarily driven by an increase in uninsured losses in the current period and a reduction in miscellaneous income.
INCOME TAXES
Pre-tax loss, less net income attributable to noncontrolling interest, was
$40.1 million
for the thirteen weeks ended
December 2, 2017
, compared to pre-tax loss, less net income attributable to noncontrolling interest, of
$36.8 million
for last year’s comparable period. For the current thirteen-week period, income tax benefit of
$14.0 million
was recorded, with an effective tax rate of
34.9%
, compared to an income tax benefit of
$13.8 million
, with an effective rate of
37.5%
, for last year’s comparable period.
For the
twenty-six weeks ended
December 2, 2017
, pre-tax loss, less net loss attributable to noncontrolling interest, was
$64.6 million
, compared to pre-tax loss, less net loss attributable to noncontrolling interest, of
$85.3 million
for the same period of fiscal 2017. For the
twenty-six weeks ended
December 2, 2017
income tax benefit of
$22.4 million
was recorded, with an effective tax rate of
34.7%
, compared to an income tax benefit of
$31.4 million
, with an effective rate of
36.8%
for last year's comparable period.
The effective rate decrease for the
thirteen and twenty-six
weeks ended
December 2, 2017
was primarily related to the anticipated carryback of projected net taxable losses, as the carryback reduces prior year taxable income and as a result reduces the benefit of domestic manufacturers deductions, a portion of which was therefore reversed in the current periods.
At
December 2, 2017
, the Company had recorded an income tax payable of $5.3 million compared to an income tax receivable of
$52.7 million
at
June 3, 2017
. The change is primarily due to receipt during the second quarter of fiscal 2018 of a $45.0 million federal tax refund related to the carryback of fiscal 2017 losses.
Our effective rate differs from the federal statutory income tax rate of 35% due to state income taxes and certain items included in income for financial reporting purposes that are not included in taxable income for income tax purposes, including tax exempt interest income, and net income or loss attributable to noncontrolling interest.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. While the Company continues to assess the impact of the tax reform legislation on its business and consolidated financial statements, the legislation does reduce the U.S. corporate tax rate from the current rate of 35% to 21%. At December 2, 2017, the Company had a deferred tax liability of approximately
$75.3 million
based on a U.S. federal tax rate of 35%. Since this legislation was enacted after the close of our second quarter of fiscal 2018, this liability will be revalued at a lower rate during our third quarter of fiscal 2018, which ends on
March 3,
2018
. This revaluation will result in a benefit to income tax expense in continuing operations and a corresponding reduction in the deferred tax liability. Consequently, the Company’s effective tax rate for the
thirteen and twenty-six
ended
December 2, 2017
does not include the impact of any potential tax reform, as it was not enacted before
December 2, 2017
. The Company expects a reduction to its effective tax rate for the thirteen and thirty-nine weeks ending March 3, 2018.
NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST
For the thirteen weeks ended
December 2, 2017
, net income attributable to noncontrolling interest was
$55,000
compared to
$43,000
for the same period of fiscal 2017.
For the
twenty-six weeks ended
December 2, 2017
, net loss attributable to noncontrolling interest was
$129,000
compared to
$1,000
for the same period of fiscal
2017
. This is attributable to income and losses from the Company's consolidated joint ventures.
NET LOSS ATTRIBUTABLE TO CAL-MAINE FOODS, INC.
Net loss for the thirteen weeks ended
December 2, 2017
was
$26.1 million
, or
$0.54
per basic and diluted share, compared to
$23.0 million
, or
$0.48
per basic and diluted share for the same period last year.
Net loss for the
twenty-six weeks ended
December 2, 2017
was
$42.1 million
, or
$0.87
per basic and diluted share, compared to
$53.9 million
, or
$1.12
per basic and diluted share, for the same period of fiscal 2017.
CAPITAL RESOURCES AND LIQUIDITY
Our working capital at
December 2, 2017
was
$311.2 million
, compared to
$371.5 million
at
June 3, 2017
. The calculation of working capital is defined as current assets less current liabilities. Our current ratio was
2.78
at
December 2, 2017
, compared with
6.74
at
June 3, 2017
. The decrease was due to the accrual of the legal settlement expense and higher accounts payable balances at period end due to the increase in the cost of purchased eggs. We have
$4.2 million
in outstanding standby letters of credit, which are collateralized by cash for the benefit of certain insurance companies. Our long-term debt at
December 2, 2017
, including current maturities, amounted to
$8.5 million
, compared to
$10.9 million
at
June 3, 2017
. Refer to Note 9 of our
June 3, 2017
audited financial statements for further information on our long-term debt.
For the
twenty-six weeks ended
December 2, 2017
,
$64.8 million
in net cash was
provided by
operating activities, an improvement of
$135.0 million
, compared to net cash
used in
operations of
$70.2 million
for the comparable period in fiscal
2017
. Improved gross profit margins primarily resulting from higher sales volumes and egg selling prices as well as increased accounts payable at
December 2, 2017
contributed to our increase in cash flow from operations.
For the
twenty-six weeks ended
December 2, 2017
, approximately
$61.7 million
was provided from the sale of short-term investments compared to
$193.3 million
for the
twenty-six weeks ended
November 26, 2016
. We used
$112.8 million
and
$13.3 million
for purchases of short-term investments for the
twenty-six weeks ended
December 2, 2017
and
November 26, 2016
, respectively.
We invested an additional
$2.8 million
in our Red River Valley Egg Farm, LLC joint venture (“Red River JV”) compared to
$10.8 million
for the first quarter of fiscal 2017. Approximately
$10.2 million
was used to purchase property, plant and equipment compared to
$40.6 million
in the
twenty-six weeks ended
November 26, 2016
. This decrease represents the completion of several major expansion projects over the past twelve months. In fiscal 2017 we used
$68.6 million
for the acquisition of Foodonics International, Inc.
As of
December 2, 2017
, cash
increased
approximately
$2.2 million
since
June 3, 2017
compared to an increase of
$11.6 million
during the same period of fiscal
2017
.
Over the past five fiscal years the Company has completed over $300 million in capital expenditures. The Company has completed the majority of previously reported expansion projects. We anticipate future cage-free expansion projects to arise as needed to meet customer demand.
The Company expects to continue to fund its 50% share of the Red River JV. As of December 29, 2017, we have contributed $56.7 million to the joint venture to fund our share of construction, startup costs, and operating losses. We estimate we will make additional contributions of approximately $6 million to fund our share of the remaining construction costs.
Property, plant, and equipment at certain of our locations is pledged as collateral on our notes payable and senior secured notes. Unless otherwise approved by our lenders, we are required by provisions of our loan agreements to (1) maintain minimum levels of working capital (current ratio of not less than 1.25 to 1) and net worth (minimum of $90.0 million tangible net worth, plus 45% of cumulative net income since the fiscal year ended May 28, 2005); (2) limit dividends paid in any given quarter to not exceed an amount equal to one third of the previous quarter’s consolidated net income (allowed if no events of default); (3) maintain minimum total funded debt to total capitalization (not to exceed 55%); and (4) maintain various cash-flow coverage ratios (1.25 to 1), among other restrictions. At
December 2, 2017
, we were in compliance with the financial covenant requirements 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 defined in the applicable loan agreement. Our debt agreements require Fred R. Adams,
Jr., our Founder and Chairman Emeritus, or his family, to maintain ownership of Company shares representing not less than 50% of the outstanding voting power of the Company.
We believe our current cash balances, investments, and cash flows from operations will be sufficient to fund our current and projected capital needs for at least the next twelve months.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. To date the Company’s assessments efforts include evaluation of certain revenue contracts with customers and the method of retrospective application, either full or modified. We currently expect to utilize the full retrospective transition on date of adoption. Based on the findings to date, the Company does not
expect
ASU 2014-09
to have a material impact
on the results of operations or financial position; however, the Company’s assessment is not complete. The Company plans to complete its review and method of adoption in fiscal 2018.
In February 2016, the FASB issued ASU 2016-02,
Leases
. The purpose of the standard is to improve transparency and comparability related to the accounting and reporting of leasing arrangements. The guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. Based on the findings to date, the Company does not expect ASU 2016-02 to have a material impact on the results of operations or financial position; however, the Company's assessment is not complete.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
, which removes step 2 from the goodwill impairment test. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units' fair value. The guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, our fiscal 2021. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017, and the prospective transition method should be applied. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
We suggest our Summary of Significant Accounting Policies, as described in Note 1 of the Notes to Consolidated Financial Statements included our Annual Report on Form 10-K for the fiscal year ended
June 3, 2017
, be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to critical accounting policies identified in our Annual Report on Form 10-K for the year ended
June 3, 2017
.