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
during
outbreaks
of
highly
pathogenic
avian
influenza
(“HPAI”).
During
times
when
prices
are
high,
the
egg
industry
has
typically
geared
up
to
produce
more
eggs,
primarily
by
14
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 high-protein diet trends, industry advertising campaigns, the improved nutritional reputation of eggs and an increase
in at-home consumption of eggs
during the COVID-19 pandemic, 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 could have a material adverse effect on our future results of operations and financial condition.
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 53%
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, agricultural,
energy and
trade policies
in the
U.S. and
internationally,
and global
instability, including as
a result of the war in Ukraine,
the conflicts involving Israel and Iran and
attacks on shipping in the Red
Sea. For example, while
feed costs declined during
fiscal 2025, we saw
higher prices for corn
and soybean meal over
the last five
fiscal years 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.
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 egg industry overproduction, possibly
resulting in
lower egg prices and lower revenue.
Agricultural risks, including
outbreaks of avian
diseases such as
HPAI,
have harmed and
in the future
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. Recent HPAI outbreaks in the
U.S. caused
significant depopulation
of U.S.
commercial table
egg layer
flocks, lower
shell egg
supplies and
higher shell
egg
prices. During the third
and fourth quarters of
fiscal 2024, we experienced
HPAI outbreaks within our facilities located in
Kansas
and Texas,
which are now
fully operational. For
additional information, refer
to
Part II. Item7. Management’sDiscussion and
Analysis of Financial Condition and Results of Operations – HPAI
.
We
maintain controls
and procedures
designed to
reduce the
risk of
exposing our
flocks and
employees to
harmful diseases;
however, despite
these efforts, outbreaks
of avian diseases
can and do
still occur and
have adversely impacted,
and may in
the
future adversely impact, the health
of our flocks and could in the
future adversely impact the health
of our employees. Continued
or intensified spread of
HPAI 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 outbreaks
within our industry can
negatively impact customer perception. 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
Enteritidis. 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
15
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. This has occurred in the past and we were
required to recall eggs redistributed to our customers. 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,
product recall 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,
delivery
expenses, construction materials and equipment, including as a result of inflation and tariffs.
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
the past
three fiscal
years due
to inflation
and higher
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
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.
Changes in U.S. trade and
tariffs policies may cause higher costs
for construction materials, equipment, packaging and other
items. Increases in these costs are
largely outside of our control
and
could have a material adverse effect on our profitability and cash flow.
BUSINESS AND OPERATIONAL RISK FACTORS
Our acquisition growth strategy subjects us to various risks.
As discussed in
Part I. Item I. Business – Growth Strategy
, we plan to continue to pursue a growth strategy that includes,
in part,
selective acquisitions
of
other
businesses 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 businesses 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