Item 1A. Risk Factors
ITEM 1A.
RISK FACTORS
Our
business
and
results
of
operations
are
subject
to
numerous
risks
and
uncertainties,
many
of
which
are
beyond
our
control. The following is a description of the known factors that may materially affect
our business, financial condition or results
of operations. They
should be considered
carefully,
in addition
to the information
set forth
elsewhere in
this Annual
Report on
Form
10-K,
including
under
Part
II.
Item 7.
Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations,
in
making
any
investment
decisions
with
respect
to
our
securities. Additional
risks
or
uncertainties
that
are
not
currently known
to us,
or that we
are aware
of but
currently deem
to be
immaterial or
that could
apply to
any company
could
also materially adversely affect our business, financial condition or results
of operations.
INDUSTRY RISK FACTORS
Market prices
of wholesale
shell eggs
are volatile,
and decreases
in these
prices can
adversely impact
our revenues
and
profits.
Our operating results are significantly
affected by wholesale shell egg
market prices, which fluctuate widely and
are outside our
control. As
a result,
our prior
performance
should not
be presumed
to be
an accurate
indication of
future performance.
Under
certain circumstances, small increases
in production, or small
decreases in demand, within
the industry might
have a large adverse
effect on shell egg prices. Low shell egg prices adversely affect
our revenues and profits.
Market prices for
wholesale shell eggs
have been volatile
and cyclical. Shell
egg prices have
risen in the
past during periods
of
high demand such as the initial outbreak of
the COVID-19 pandemic and periods when high protein
diets are popular. Shell egg
prices
have
also
risen
during
periods
of
constrained
supply,
such
as
the
latest
highly
pathogenic
avian
influenza
(“HPAI”)
outbreak
that was
first detected
in domestic
commercial flocks
in February
2022. During
times when
prices are
high, the
egg
industry
has
typically
geared
up
to
produce
more
eggs,
primarily
by
increasing
the
number
of
layers,
which
historically
has
ultimately resulted in an oversupply of eggs, leading to a period of lower prices.
As discussed
above in
Part I. Item 1. Business – Seasonality
, seasonal fluctuations
impact shell
egg prices. Therefore,
comparisons
of
our
sales
and
operating
results
between
different
quarters
within
a
single
fiscal
year
are
not
necessarily
meaningful
comparisons.
A decline in consumer demand for shell eggs can negatively impact our business.
We believe the
increase in meals prepared at home due
to concerns and restrictions during the initial outbreak
of the COVID-19
pandemic,
high-protein
diet
trends,
industry
advertising
campaigns
and
the
improved
nutritional
reputation
of
eggs
have
all
contributed
at one
time or
another
to increased
shell egg
demand. However,
it is
possible that
the demand
for shell
eggs will
decline in the future. Adverse publicity relating to health or safety
concerns and changes in the perception of the nutritional
value
of shell eggs, changes in consumer
views regarding consumption of animal-based products, as
well as movement away from high
protein diets, could
adversely affect
demand for shell
eggs, which would
have a material
adverse effect
on our future
results of
operations and financial condition.
13
Feed costs are volatile and increases in these costs can
adversely impact our results of operations.
Feed costs are the largest element of our shell
egg (farm) production cost, ranging from 55%
to 63% of total farm production cost
in the last five fiscal years.
Although feed ingredients, primarily corn and soybean
meal, are available from a
number of sources, we do not
have control over
the prices
of the
ingredients we
purchase, which
are affected
by weather,
various global
and U.S.
supply and
demand factors,
transportation
and storage
costs, speculators,
and
agricultural, energy
and trade
policies in
the U.S.
and
internationally.
More
recently,
the Russia-Ukraine
War
has had
a negative
impact on
the worldwide
supply of grain,
including corn,
putting upward
pressure on
prices. We
saw increasing
prices for
corn and
soybean meal
for fiscal
years 2022
and 2023
as a
result of
weather-
related shortfalls
in production
and yields, ongoing
supply chain disruptions
and the Russia-Ukraine
War
and its impact
on the
export markets.
Our costs for
corn and
soybean meal are
also affected
by local basis
prices. Factors that
can affect
basis levels
include transportation
and storage costs. We
saw basis levels
increase in our
areas of operation
during fiscal 2023
as a result of
higher transportation and storage costs, resulting in higher farm production
costs during the year.
Increases in feed
costs unaccompanied by increases
in the selling price
of eggs can have
a material adverse effect
on the results
of our operations and cash flow. Alternatively, low feed costs can encourage industry overproduction, possibly resulting in lower
egg prices and lower revenue.
Agricultural risks, including outbreaks of avian
disease, could harm our business.
Our shell egg
production activities are
subject to a variety
of agricultural risks.
Unusual or extreme
weather conditions, disease
and pests can materially and adversely affect the quality and quantity of shell eggs
we produce and distribute. Outbreaks of avian
influenza among poultry occur
periodically worldwide and have occurred
sporadically in the U.S. Most recently,
an outbreak of
HPAI,
which was first detected
in February 2022,
has impacted the
industry.
Prior to 2022, there
was another significant
HPAI
outbreak in the U.S. impacting poultry during 2015. There have been no positive tests for HPAI
at any Cal-Maine Foods’ owned
or contracted facility as
of July 25,
2023. The Company maintains
controls and procedures designed
to reduce the
risk of exposing
our flocks to harmful
diseases; however, despite these efforts, outbreaks of avian
disease can and do
still occur and may
adversely
impact the
health of
our flocks.
An outbreak
of avian
disease could
have a
material adverse
impact on
our financial
results by
increasing
government
restrictions
on
the
sale
and
distribution
of
our
products
and
requiring
us
to
euthanize
the
affected
layers. Negative publicity from an outbreak within our
industry can negatively impact customer perception, even if
the outbreak
does
not
directly
impact
our flocks.
If
a
substantial portion
of
our
layers
or production
facilities are
affected
by
any
of these
factors in any given quarter or year, our business, financial condition, and results of operations could be materially and adversely
affected.
Shell
eggs
and
shell
egg
products
are
susceptible
to
microbial
contamination,
and
we
may
be
required
to,
or we
may
voluntarily, recall
contaminated products.
Shell eggs
and shell
egg products
are vulnerable
to contamination
by pathogens
such as
Salmonella. The
Company maintains
policies and procedures designed to comply with the complex rules and regulations governing egg production, such as The Final
Egg
Rule
issued
by
the
FDA
“Prevention
of
Salmonella
Enteritidis
in
Shell
Eggs
During
Production,
Storage,
and
Transportation,” and
the FDA’s
Food Safety Modernization Act. Shipment
of contaminated products, even
if inadvertent, could
result in a
violation of law and
lead to increased
risk of exposure
to product liability
claims, product recalls
and scrutiny by federal
and
state
regulatory
agencies.
We
have
little,
if
any,
control
over
proper
handling
once
the
product
has
been
shipped
or
delivered. In
addition,
products
purchased
from
other
producers
could
contain
contaminants
that
might
be
inadvertently
redistributed by us. As such, we might decide or be required
to recall a product if we, our customers
or regulators believe it poses
a potential
health risk.
Any product
recall could
result in
a loss
of consumer
confidence in
our products,
adversely affect
our
reputation
with existing
and potential
customers and
have a
material adverse
effect
on our
business, results
of operations
and
financial condition. We
currently maintain insurance
with respect to certain of
these risks, including product
liability insurance,
business interruption insurance and general liability
insurance, but in many cases such insurance is expensive,
difficult to obtain
and no assurance can
be given that such insurance
can be maintained in
the future on acceptable
terms, or in sufficient
amounts
to protect us against losses due to any such events, or at all.
Our profitability
may be adversely
impacted by
increases in other
input costs such
as packaging materials
and delivery
expenses, including as a result of inflation.
In addition to feed ingredient costs, other significant input costs include costs of packaging materials and delivery expenses. Our
costs of packing materials increased
during fiscal 2023 and 2022
due to rising inflation and labor
costs, and during 2022 also as
a
result
of
supply
chain
constraints
initially
caused
by
the
pandemic,
and
these
costs
may
continue
to
increase.
We
also
14
experienced increases in delivery expenses during fiscal 2023 and 2022 due to increases in fuel and labor costs for both our fleet
and contract
trucking, and
these costs
may continue
to increase.
Increases in
these costs
are largely
outside of
our control
and
have an adverse effect on our profitability and cash flow.
BUSINESS AND OPERATIONAL
RISK FACTORS
Global
or
regional
health
crises including
pandemics
or
epidemics
could
have
an
adverse impact
on
our
business and
operations.
The
effects
of
global
or
regional
pandemics
or
epidemics
can
significantly
impact
our
operations.
Although
demand
for
our
products could
increase as
a result
of restrictions
such as
travel bans
and restrictions,
quarantines, shelter-in-place
orders, and
business and government shutdowns,
which can prompt more
consumers to eat at home,
these restrictions could also significantly
increase our cost of doing business
due to labor shortages, supply-chain disruptions, increased costs and decreased availability of
packaging supplies, and increased
medical and other costs.
We experienced these impacts as a
result of the COVID-19
pandemic,
primarily during our fiscal
years 2020 and 2021.
The pandemic recovery also
contributed to increasing inflation
and interest rates,
which persist and
may continue
to persist. The
impacts of health
crises are difficult
to predict and
depend on numerous
factors
including
the
severity,
length and
geographic
scope
of
the outbreak,
resurgences
of
the disease
and
variants,
availability
and
acceptance of vaccines, and
governmental, business and individuals’
responses.
A resurgence of
COVID-19 and/or variants, or
any future major public health crisis, would disrupt our
business and could have a material adverse effect on
our financial results.
Our acquisition growth strategy subjects us to various risks.
As discussed in
Part I. Item I. Business – Growth Strategy
, we plan
to pursue a
growth strategy that includes
selective acquisitions
of other
companies engaged
in the
production and
sale of
shell eggs,
with a
priority on
those that
will facilitate
our ability
to
expand our cage-free shell egg production capabilities in key locations and markets. We may over-estimate or under-estimate the
demand
for
cage-free
eggs,
which
could
cause
our
acquisition
strategy
to
be
less-than-optimal
for
our
future
growth
and
profitability.
The
number
of existing
companies
with
cage-free
capacity
that
we
may
be
able
to
purchase
is
limited,
as
most
production of shell
eggs by other companies
in our markets currently
does not meet customer
demands or legal requirements
to
be designated
as cage-free.
Conversely,
if we
acquire cage-free
production capacity,
which is
more expensive
to purchase
and
operate, and customer
demands or legal
requirements for cage-free
eggs were to change,
the resulting lack
of demand for
cage-
free eggs may result in higher costs and lower profitability.
Acquisitions require capital resources and can divert management’s attention from our existing business. Acquisitions also entail
an inherent risk that we
could become subject to contingent or
other liabilities, including liabilities arising from
events or conduct
prior to
our acquisition
of a
business that
were unknown
to us
at the
time of
acquisition. We
could incur
significantly greater
expenditures in integrating an acquired business than we anticipated at the
time of its purchase.
We cannot assure
you that we:
●
will identify suitable acquisition candidates;
●
can consummate acquisitions on acceptable terms;
●
can successfully integrate an acquired business into our operations; or
●
can successfully manage the operations of an acquired business.
No
assurance
can
be
given
that
companies
we
acquire
in
the
future
will
contribute
positively
to
our
results
of
operations
or
financial condition.
In addition,
federal antitrust
laws require
regulatory approval
of acquisitions
that exceed
certain threshold
levels of significance, and we cannot guarantee that such approvals would
be obtained.
The consideration
we pay in
connection with any
acquisition affects
our financial results.
If we pay
cash, we could
be required
to
use
a
portion
of
our
available
cash
or
credit
facility
to
consummate
the
acquisition.
To
the
extent
we
issue
shares
of
our
Common Stock, existing stockholders may
be diluted. In addition,
acquisitions may result in
additional debt. Our ability to
access
any additional
capital that
may be
needed for
an acquisition
may be
adversely impacted
by higher
interest rates
and economic
uncertainty.
Our largest customers have accounted for a significant portion of our net sales volume. Accordingly, our business may be
adversely affected by the loss of, or reduced purchases by,
one or more of our large customers.
Our customers, such as supermarkets, warehouse clubs
and food distributors, have continued to consolidate and consolidation
is
expected to continue. These consolidations have
produced larger customers and potential customers with
increased buying power
who are more
capable of operating
with reduced inventories,
opposing price increases,
and demanding lower
pricing, increased
15
promotional programs and specifically tailored products. Because of these trends,
our volume growth could slow or we
may need
to lower prices or increase promotional spending for our products, any of
which could adversely affect our financial results.
Our top
three customers
accounted for
an aggregate of
50.1%, 45.9%
and 48.6% of
net sales dollars
for fiscal 202
3, 2022,
and
2021, respectively.
Our largest
customer,
Walmart
Inc. (including
Sam's Club),
accounted for
34.2%, 29.5%
and 29.8%
of net
sales dollars
for fiscal
2023, 2022,
and 2021,
respectively. Although
we have
established long-term
relationships with
most of
our customers
who continue
to purchase
from us
based on
our ability
to service
their needs,
they are
generally free
to acquire
shell eggs
from other
sources. If, for
any reason, one
or more
of our
large customers
were to
purchase significantly
less of
our
shell eggs
in the
future or
terminate their
purchases from
us, and
we were
not able
to sell
our shell
eggs to
new customers
at
comparable levels, it would have a material adverse effect
on our business, financial condition, and results of operations.
Our business is highly competitive.
The
production
and
sale
of
fresh
shell
eggs,
which
accounted
for
virtually
all
of
our
net
sales
in
recent
years,
is
intensely
competitive. We
compete with
a large
number of
competitors that
may prove
to be
more successful
than we
are in
producing,
marketing and
selling shell
eggs. We
cannot provide
assurance that
we will
be able
to compete
successfully with
any or
all of
these companies.
Increased competition could result in price reductions,
greater cyclicality, reduced
margins and loss of market
share, which would negatively affect our business, results of operations,
and financial condition.
We
are
dependent
on
our
management
team,
and
the
loss
of
any
key
member
of
this
team
may
adversely
affect
the
implementation of our business plan in a timely manner.
Our success
depends largely
upon the
continued service
of our
senior management
team. The
loss or interruption
of service
of
one or more
of our key
executive officers
could adversely
affect our
ability to manage
our operations effectively
and/or pursue
our growth strategy.
We
have not entered
into any employment
or non-compete
agreements with any
of our executive
officers.
Competition could cause us to lose talented employees, and unplanned turnover could deplete institutional
knowledge and result
in increased costs due to increased competition for employees.
Our
business
is
dependent
on
our
information
technology
systems
and
software,
and
failure
to
protect
against
or
effectively respond to
cyber-attacks, security
breaches, or other
incidents involving those systems,
could adversely affect
day-to-day operations and decision making processes and
have an adverse effect on our performance and reputation.
The efficient operation of our business depends on our
information technology systems, which we rely on to effectively manage
our business data, communications, logistics, accounting, regulatory
and other business processes. If we do not allocate and
effectively manage the resources necessary to build
and sustain an appropriate technology environment, our business,
reputation, or financial results could be negatively impacted. In
addition, our information technology systems may be
vulnerable to damage or interruption from circumstances beyond our control,
including systems failures, natural disasters,
terrorist attacks, viruses, ransomware, security breaches or cyber
incidents. Cyber-attacks are becoming more sophisticated and
are increasing in the number of attempts and frequency by groups and individuals
with a wide range of motives. We
have
experienced and expect to continue to experience attempted cyber-attacks
of our information technology systems or networks.
A security breach
of
sensitive
information
could
result
in
damage
to
our
reputation
and
our
relations
with
our
customers
or
employees. Any such damage or interruption could have a material adverse
effect on our business.
Technology
and business and regulatory requirements continue to change rapidly.
Failure to update or replace legacy systems to
address
these
changes
could
result
in
increased
costs,
including
remediation
costs,
system
downtime,
third
party
litigation,
regulatory actions or cyber security vulnerabilities which could have
a material adverse effect on our business.
Labor shortages or increases in labor costs could adversely
impact our business and results of operations.
Labor is a primary component of our farm production costs. Our success is dependent
upon recruiting, motivating, and retaining
staff to operate our farms. Approximately 76% of our employees are paid at hourly rates, often in entry-level positions. While all
our employees are paid at
rates above the federal minimum wage
requirements, any significant increase
in local, state or federal
minimum wage requirements could
increase our labor
costs. In addition,
any regulatory changes
requiring us to
provide additional
employee
benefits
or
mandating
increases
in
other
employee-related
costs,
such
as
unemployment
insurance
or
workers
compensation, would increase our
costs. A shortage
in the labor
pool, which may be
caused by competition from
other employers,
the remote
locations of
many of
our farms,
decreased
labor participation
rates or
changes in
government-provided
support or
immigration laws, particularly in times of lower unemployment,
could adversely affect our business and results of operations.
A
shortage of labor
available to
us could
cause our
farms to
operate with
reduced staff, which
could negatively impact
our production
capacity and efficiencies.
In fiscal 2021 and 2022, our labor costs increased primarily due to the pandemic
and its effects, which
16
caused us to
increase wages in
response to labor shortages.
In fiscal 2023,
labor wages continued to
rise due to
increasing inflation
and low unemployment.
Accordingly, any significant labor shortages or increases
in our labor costs
could have a material
adverse
effect on our results of operations.
We are controlled by the family of our late founder, Fred
R. Adams, Jr., and Adolphus B. Baker,
Chairman of our Board
of Directors,
controls the vote of 100% of our outstanding Class A Common Stock.
Fred R. Adams,
Jr., our
Founder and Chairman Emeritus
died on March 29,
2020. Mr.
Adams’ son-in-law,
Adolphus B. Baker,
Chairman
of
our
board
of
directors,
Mr.
Baker’s
spouse
and
her
three
sisters
(Mr.
Adams’
four
daughters)
(collectively,
the
“Family”)
beneficially
own,
directly
or
indirectly
through
related
entities,
100%
of
our
outstanding
Class
A
Common
Stock
(which has
10 votes
per share),
controlling approximately
52.1% of
our total
voting power.
Such persons
also have
additional
voting power
due to
beneficial ownership
of our
Common Stock
(which has
one vote
per share),
directly or
indirectly through
related entities, resulting in family voting control of approximately 53.8% of our total voting power.
Mr. Baker controls the vote
of 100% of our outstanding Class A Common Stock.
We understand that the Family
intends
to retain ownership
of a
sufficient amount of our
Common Stock and
our Class A
Common
Stock to assure continued ownership of more than 50% of the voting power of
our outstanding shares of capital stock. As a result
of
this ownership,
the
Family has
the
ability
to exert
substantial
influence
over
matters requiring
action
by our
stockholders,
including
amendments
to our
certificate
of incorporation
and by-laws,
the election
and removal
of directors,
and any
merger,
consolidation,
or
sale of
all or
substantially
all of
our
assets,
or
other
corporate
transactions.
Delaware
law
provides
that
the
holders of a majority of the voting power of shares entitled to vote must approve certain fundamental corporate transactions such
as a merger,
consolidation and sale of
all or substantially all
of a corporation’s
assets; accordingly,
such a transaction involving
us
and
requiring
stockholder
approval
cannot
be
effected
without
the
approval
of
the
Family.
Such
ownership
will
make
an
unsolicited acquisition of our Company more difficult and discourage
certain types of transactions involving a change of control
of our Company, including
transactions in which the holders of our Common Stock might otherwise receive a premium for their
shares over then current market prices.
The Family’s controlling
ownership of our capital stock may adversely
affect the market
price of our Common Stock.
The
price
of
our
Common
Stock
may
be
affected
by
the
availability
of
shares
for
sale
in
the
market,
and
you
may
experience significant dilution as a result of future issuances
of our securities, which could materially and adversely
affect
the market price of our Common Stock.
The sale or availability for sale of substantial amounts of our Common Stock could adversely impact its price.
The Family holds
approximately 1.4 million shares of Common Stock (the “Subject Shares”) that are subject to an Agreement Regarding Common
Stock
(the
“Agreement”)
filed
as
an
exhibit
to
this
report.
The
Subject
Shares
remain
subject
to
potential
sale
under
the
Agreement. The Agreement
generally provides that
if a holder
of Subject Shares
intends to sell any
of the Subject
Shares, such
party must give the
Company a right of first
refusal to purchase all or
any of such shares.
The price payable by
the Company to
purchase shares
pursuant to
the exercise
of the
right of
first refusal
will reflect
a 6%
discount to
the then-current
market price
based
on
the
20
business-day
volume-weighted
average
price.
If
the
Company
does
not exercise
its right
of
first
refusal
and
purchase the shares offered, such party will, subject to the approval of a special committee of independent
directors of the Board
of Directors, be
permitted to sell
the shares not
purchased by the
Company pursuant to
a Company registration
statement, Rule
144 under the Securities Act of 1933, or another manner of sale agreed to by the Company. Although
pursuant to the Agreement
the Company
will have a
right of first
refusal to purchase
all or any
of those shares,
the Company
may elect not
to exercise its
rights
of
first
refusal,
and
if so
such
shares
would
be
eligible for
sale pursuant
to
the registration
rights
in
the
Agreement
or
pursuant
to
Rule
144
under
the Securities
Act
of
1933.
Sales, or
the
availability
for
sale, of
a
large
number
of
shares of
our
Common Stock could result in a decline in the market price of our
Common Stock.
In addition,
our articles
of incorporation
authorize us
to issue
120,000,000 shares
of our
Common Stock.
As of
June 3,
2023,
there were
44,184,048 shares
of our
Common Stock
outstanding. Accordingly,
a substantial
number of
shares of
our Common
Stock
are
outstanding
and
are,
or
could
become,
available
for
sale
in
the
market.
In
addition,
we
may
be
obligated
to
issue
additional shares of our Common Stock in connection with employee benefit
plans (including equity incentive plans).
In the
future, we
may decide
to raise
capital through
offerings of
our Common
Stock, additional
securities convertible
into or
exchangeable for
Common Stock, or
rights to acquire
these securities or
our Common Stock.
The issuance of
additional shares
of our Common Stock or additional securities convertible into or exchangeable for our Common Stock could result in dilution of
existing stockholders’ equity interests in
us. Issuances of substantial amounts of
our Common Stock, or the perception
that such
issuances could
occur,
may adversely
affect prevailing
market prices
for our
Common Stock,
and we
cannot predict
the effect
this dilution may have on the price of our Common Stock.
17
LEGAL AND REGULATORY
RISK FACTORS
Pressure from animal rights groups regarding the treatment of animals may subject us to additional costs to conform our
practices
to
comply
with
developing
standards
or
subject
us
to
marketing
costs
to
defend
challenges
to
our
current
practices and protect
our image with
our customers. In
particular,
changes in customer
preferences and
new legislation
have accelerated an increase in demand for cage-free eggs, which increases uncertainty
in our business and increases our
costs.
We and many of our customers face pressure from animal rights groups, such as
People for the Ethical Treatment of Animals and
the Humane
Society of
the United States,
to require
companies that supply
food products
to operate
their business in
a manner
that
treats
animals
in
conformity
with
certain
standards
developed
or
approved
by
these
groups.
In
general,
we
may
incur
additional costs to conform our practices to address
these standards or to defend our existing
practices and protect our image with
our customers.
The standards promoted
by these groups
change over time,
but typically
require minimum
cage space
for hens,
among other requirements, and some
of these groups have led successful
legislative efforts to ban
any form of caged housing
in
various states.
As
discussed
in
Part I. Item 1. Business - Government Regulation
,
ten
states
have
passed
minimum
space
and/or
cage-free
requirements
for
hens,
and
other
states are
considering
such requirements.
In
addition,
in recent
years,
many
large
restaurant
chains,
foodservice
companies
and
grocery
chains,
including
our
largest
customers,
announced
goals
to
transition
to
an
exclusively cage-free
egg supply
chain by specified
future dates.
A significant
number of
our customers
previously announced
goals to offer cage-free eggs exclusively on or before 2026, in most cases subject to available supply, affordability and consumer
demand,
among other contingencies.
Some of these customers have recently changed those goals to offer 70% cage-free eggs by
the end of 2030. While we
anticipate that our retail and foodservice customers will
continue to transition to selling cage-free eggs
given public
commitments,
there is
no assurance
that this
transition
will take
place or
take place
according to
the timeline
of
current cage-free
commitments. For
example, customers
may accelerate
their transition
to stocking
cage-free eggs,
which may
challenge our
ability to
meet the
cage-free
volume needs
of those
customers and
result in
a loss
of shell
egg
sales. Similarly,
customers who
commit to
stock greater
proportional quantities
of cage-free
eggs are
under no
obligation to
continue to
do so,
which may
result in an
oversupply of
cage-free eggs and
result in lower
specialty egg
prices, which could
reduce the return
on
our capital investment in cage-free production.
Changing our infrastructure and operating procedures to conform to consumer preferences, customer demands and
new laws has
resulted and
will continue
to result
in additional
costs, including
capital and
operating cost
increases. The
USDA reported
that
the estimated
U.S. cage-free
flock was
121.6 million hens as
of June
30, 2023,
which is approximately
38.3% of
the total U.S.
table
egg
layer
hen
population.
According
to
the
USDA
Agricultural
Marketing
Service,
as of
May
2023
approximately
221
million hens,
or about
70.5% of
the U.S.
non-organic
laying flock
would have
to be
in cage-free
production by
2026 to
meet
projected demand
from the
retailers, foodservice
providers and
food
manufacturers that
have made
goals to
transition to
cage-
free eggs.
In response
to our
customers’ announced
goals and
increased legal
requirements for
cage-free eggs,
we have
increased capital
expenditures
to
increase
our
cage-free
production
capacity.
We
are
also
enhancing
our
focus
on
cage-free
capacity
when
considering
acquisition opportunities.
Our customers
typically do
not commit
to long-term
purchases of
specific quantities
or
type of eggs
with us, and
as a result,
we cannot predict
with any certainty
which types of
eggs they will
require us to
supply in
future
periods.
The
production
of
cage-free
eggs
is
more
costly
than
the
production
of
conventional
eggs,
and
these
higher
production costs contribute
to the prices
of cage-free eggs,
which historically have
typically been higher
than conventional egg
prices. Many consumers prefer to buy less expensive conventional shell eggs. These consumer preferences may in turn influence
our customers’ future needs for
cage-free and conventional eggs.
Due to these uncertainties,
we may over-estimate future demand
for cage-free
eggs, which
could increase
our costs
unnecessarily,
or we
may under-estimate
future demand
for cage-free
eggs,
which could
harm us
competitively.
If our
competitors obtain
non-cancelable
long-term contracts
to provide
cage-free eggs
to
our existing or potential customers,
then there may be decreased demand
for our cage-free eggs due
to these lost potential sales.
If we and our
competitors increase cage-free egg production
and there is no
commensurate increase in demand for
cage-free eggs,
this overproduction
could lead to
an oversupply of
cage-free eggs, reducing
the sales price
for specialty eggs
and our return
on
capital investments in cage-free production.
Failure
to
comply
with
applicable
governmental
regulations,
including
environmental
regulations,
could
harm
our
operating results,
financial condition,
and reputation.
Further,
we may
incur significant
costs to
comply with
any such
regulations.
We are subject to federal, state and local
regulations relating to grading, quality
control, labeling, sanitary control, waste
disposal,
and other
areas of
our business.
As a
fully-integrated
shell egg
producer,
our shell
egg facilities
are subject
to regulation
and
inspection by the USDA, OSHA, EPA
and FDA, as well as state and local health and agricultural agencies, among others. All of
18
our shell egg production and
feed mill facilities are subject
to FDA, EPA and OSHA regulation and inspections. In addition, rules
are often proposed
that, if adopted as proposed, could increase our costs.
Our operations and facilities are subject to various federal, state and local environmental, health, and safety laws and regulations
governing,
among
other
things,
the
generation,
storage,
handling,
use,
transportation,
disposal,
and
remediation
of
hazardous
materials. Under these laws and
regulations, we are required to obtain permits
from governmental authorities, including, but
not
limited to wastewater discharge permits and manure
and litter land applications.
If we
fail to
comply with
applicable laws
or regulations,
or fail
to obtain
necessary permits,
we could
be subject
to significant
fines and penalties or other sanctions, our reputation could be harmed, and our operating results and financial condition could be
materially
adversely
affected.
In
addition,
because
these
laws and
regulations
are
becoming
increasingly
more
stringent,
it is
possible that we will be required to incur significant costs for compliance
with such laws and regulations in the future.
Climate change and legal or regulatory responses
may have an adverse impact on our business and results of
operations.
Extreme
weather
events,
such
as derechos,
wildfires,
drought,
tornadoes,
hurricanes,
storms,
floods
or
other
natural
disasters
could materially and adversely affect our operating
results and financial condition. In fact, derechos, fires, floods,
tornadoes and
hurricanes have affected our facilities or the facilities of other egg producers in the past. Increased global temperatures
and more
frequent occurrences
of extreme
weather events,
which may
be exacerbated
by climate
change, may
cause crop
and livestock
areas to
become unsuitable,
including due
to water
scarcity or
high or
unpredictable
temperatures,
which may
result in
much
greater stress on food systems and more pronounced food
insecurity globally. Lower
global crop production, including corn and
soybean meal,
which are
the primary
feed ingredients
that support
the health of
our animals,
may result
in significantly
higher
prices for these commodity inputs, impact our ability to source the commodities we use to feed our flocks, and negatively impact
our ability
to maintain
or grow our
operations. Climate
change may
increasingly expose
workers and
animals to
high heat
and
humidity stressors that adversely impact poultry production. Increased
greenhouse gas emissions may also negatively impact air
quality, soil quality
and water quality,
which may hamper our ability to support our operations,
particularly in higher water- and
soil-stressed regions.
Increasing
frequency of
severe weather
events, whether
tied to
climate change
or any
other cause,
may negatively
impact our
ability to raise
poultry and
produce eggs profitably
or to
operate our transportation
and logistics
supply chains. Regulatory
controls
and
market
pricing may
continue
to drive
the costs
of fossil
-based
fuels higher,
which
could negatively
impact
our ability
to
source commodities
necessary to
operate our
farms or
plants and
our current
fleet of
vehicles. These
changes may
cause us
to
change, significantly, our day-to-day
business operations and our strategy. Climate change and extreme weather events may also
impact demand for our products
given evolution of consumer food preferences.
Even if we take
measures to position our business
in anticipation
of such
changes, future
compliance
with legal
or regulatory
requirements may
require significant
management
time, oversight and enterprise expense. We
may also incur significant expense tied to regulatory fines if laws and regulations are
interpreted and applied
in a manner that
is inconsistent with our
business practices. We
can make no
assurances that our efforts
to prepare
for these
adverse events
will be
in line
with future
market and
regulatory expectations
and our
access to
capital to
support our business may also be adversely impacted.
Current and future litigation could expose us to significant
liabilities and adversely affect our business reputation.
We and certain of our subsidiaries are involved in various legal proceedings.
Litigation is inherently unpredictable, and although
we
believe
we
have
meaningful
defenses
in
these
matters,
we
may
incur
liabilities
due
to
adverse
judgments
or
enter
into
settlements of claims that
could have a material
adverse effect on our
results of operations, cash
flow and financial condition.
For
a
discussion
of
our
ongoing
legal
proceedings
see
Part I. Item 3. Legal Proceedings
below
and
Part
II.
Item
8.
Notes
to
the
Consolidated Financial
Statements,
Note 16 – Commitments and Contingencies
.
Such lawsuits are
expensive to
defend, divert
management’s
attention, and
may
result in
significant
adverse judgments
or settlements. Legal
proceedings
may expose
us to
negative publicity,
which could adversely affect our business reputation and customer preference
for our products and brands.
FINANCIAL AND ECONOMIC RISK FACTORS
Weak
or unstable
economic
conditions, including
continued
higher inflation
and rising
interest
rates,
could negatively
impact our business.
Weak
or unstable
economic conditions,
including continued
higher inflation
and rising
interest rates,
may adversely
affect our
business by:
●
Limiting our access to capital markets or increasing the cost of capital we may
need to grow our business;
●
Changing consumer spending and habits and demand for eggs, particularly
higher-priced eggs;
19
●
Restricting the supply of energy sources or increasing our cost to procure
energy; or
●
Reducing the availability of feed
ingredients, packaging material, and other raw
materials, or increasing the cost
of these
items.
Deterioration of economic conditions could also negatively
impact:
●
The financial condition of our suppliers, which may make it more
difficult for them to supply raw materials;
●
The financial condition of our customers, which may decrease demand for
eggs or increase our bad debt expense; or
●
The financial condition of our insurers, which could increase our cost to obtain insurance, and/or make it difficult for or
insurers to meet their obligations in the event we experience a loss due to an
insured peril.
According
to
the
U.S.
Bureau
of
Labor
Statistics,
from
May
2021
to
May
2022,
the
Consumer
Price Index for
All
Urban
Consumers (“CPI-U”) increased
8.5 percent, the largest
12-month increase since
the period ending December
1981. The CPI-U
increased 4.1% from May 2022 to May 2023. Inflationary costs have increased our input costs, and if
we are unable to pass these
costs through to the customer it could have an adverse effect on
our business.
We
hold
significant
cash balances
in deposit
accounts with
deposits in
excess of
the amounts
insured by
the Federal
Deposit
Insurance Corporation (“FDIC”). In
the event of
a bank failure
at an institution
where we maintain
deposits in excess
of the FDIC-
insured amount, we may lose such excess deposits.
The
loss
of
any
registered
trademark
or
other
intellectual
property
could
enable
other
companies
to
compete
more
effectively with us.
We
utilize intellectual
property in
our business. For
example, we
own the
trademarks
Farmhouse Eggs®
,
4Grain®, Sunups®
,
and
Sunny Meadow®
. We
produce and market
Egg-Land’s
Best®
and
Land O’ Lakes
® under license
agreements with EB. We
have invested a significant amount of
money in establishing and promoting
our trademarked brands. The loss or
expiration of any
intellectual property could
enable our competitors
to compete more
effectively with us
by allowing them
to make and
sell products
substantially
similar
to
those
we
offer.
This
could
negatively
impact
our
ability
to
produce
and
sell
those
products,
thereby
adversely affecting our operations.
Impairment in the carrying value
of goodwill or other assets
could negatively affect our results of
operations or net worth.
Goodwill
represents
the
excess
of
the
cost
of
business
acquisitions
over
the
fair
value
of
the
identifiable
net
assets
acquired. Goodwill
is
reviewed
at
least
annually
for
impairment
by
assessing
qualitative
factors
to
determine
whether
the
existence of events or circumstances
leads to a determination that
it is more likely than not
that the fair value of
a reporting unit
is less
than its
carrying
amount. As of
June 3,
2023, we
had $44.0 million
of goodwill. While
we believe
the current
carrying
value of this goodwill is not impaired, future goodwill impairment charges could adversely affect our results of operations in any
particular period and our net worth.
Events beyond our control such as extreme
weather and natural disasters could negatively impact our business.
Fire,
bioterrorism,
pandemics,
extreme
weather
or natural
disasters, including
droughts,
floods,
excessive
cold
or
heat, water
rights restrictions, hurricanes or other storms, could impair the health or growth of our flocks, decrease production or availability
of feed ingredients, or interfere
with our operations due to
power outages, fuel shortages, discharges from
overtopped or breached
wastewater treatment lagoons, damage to our production and processing facilities, labor shortages or disruption of transportation
channels, among other things. Any of these factors could have a material adverse
effect on our financial results.
ITEM 1B.
UNRESOLVED
STAFF COMMENTS
None.
20