Oil-Dri Corporation of America — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended April 30, 2023. Fiscal year ends July 31. Amounts are unaudited; financial figures below are in millions except per-share amounts.
Business context and financial performance
Oil-Dri develops, mines, manufactures and markets clay-based sorbent products, including cat litter, fluids-purification products, agricultural carriers, animal-health products, industrial absorbents and sports-field products. It reports two segments: Retail and Wholesale (R&W) and Business to Business (B2B).
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $105.4 | $85.8 | $305.6 | $255.4 |
| Gross profit / margin | $27.5 / 26% | $15.6 / 18% | $72.8 / 24% | $45.0 / 18% |
| Operating income (loss) | $14.5 | $(4.0) | $28.3 | $(1.7) |
| Net income (loss) attributable to Oil-Dri | $8.5 | $(2.1) | $17.6 | $0.5 |
| Diluted EPS, Common | $1.24 | $(0.32) | $2.58 | $0.06 |
Management attributed higher sales mainly to strategic price increases across both segments, with additional B2B volume growth. For the nine months, B2B sales rose 28% to $104.3 million and segment operating income increased 47% to $24.8 million. R&W sales rose 16% to $201.4 million; operating income was $27.0 million versus $1.0 million, with the prior period affected by a $5.6 million goodwill impairment. In Q3, B2B sales grew 27% and R&W sales grew 21% year over year.
Margin improvement reflected higher selling prices, partly offset by increased costs. Domestic cost of goods sold per ton rose 12% in both the nine-month and quarterly comparisons. Management cited higher labor and other manufacturing costs and freight; lower natural-gas costs in Q3 and lower packaging costs provided some offset. A major cat-litter customer’s switch from collect to delivered shipping terms increased freight expense.
Cash flow, liquidity and debt
- Cash from operating activities was $36.8 million for the nine months, versus $5.5 million a year earlier. Capital expenditures were $17.4 million; cash used in investing was $17.4 million.
- Cash increased $13.4 million from July 31, 2022, to $29.7 million at April 30, 2023. Working-capital movements included a $5.6 million increase in receivables and a $1.2 million increase in inventory.
- At April 30, current assets were $134.1 million and current liabilities $51.9 million. Notes payable totaled approximately $32.8 million, including current maturities; cash exceeded reported notes payable by about $3.0 million. No revolving-credit borrowings were outstanding.
- The company has a $45 million unsecured revolving facility, with up to $10 million for letters of credit, terminating August 30, 2027. It reported compliance with debt covenants. Management expects operating cash flow, available credit and cash balances to cover foreseeable needs for at least 12 months.
- Cash dividends paid were $5.6 million and capital expenditures were higher than in the prior-year period. Management expects FY2023 capital expenditures and advertising expense to exceed FY2022 levels.
Material changes, unusual items and risks
- The company recorded a $4.9 million pension-termination loss in Q3. It settled approximately $30 million of pension obligations through an annuity purchase and lump-sum payments; the loss included recognition of prior unrealized losses and a charge related to distributing plan surplus.
- A $2.5 million reserve was recorded in Q2 for anticipated modifications to address capacity issues at the company’s sole landfill in Ochlocknee, Georgia. Management said costs above the reserve could materially affect results, financial condition and cash flows; the estimate is subject to uncertainty.
- Backlog declined by $4.2 million, or 64%, from July 31, 2022, as the company increased staffing, expanded shifts, optimized equipment and used alternative transportation. Management said it continues efforts to ease labor, manufacturing and freight constraints.
- Foreign-subsidiary sales increased 16% to $16.8 million for the nine months, but China sales declined amid a transition to a master distributor. One R&W customer’s bankruptcy increased the doubtful-account allowance.
- Management reported no material changes to the risk factors in its FY2022 Form 10-K. It cautioned that forward-looking statements are subject to risks and actual results may differ. The filing gives no specific earnings or sales guidance.
- On April 10, 2023, Oil-Dri amended its Fresh Step agreement with a Clorox subsidiary to extend the initial term; the filing excerpt does not state the revised term or other detailed economics.
Important facts for investors to verify
- Whether price increases continue to offset labor, freight, manufacturing and other input-cost pressures, and whether improved gross margins are sustained.
- The timing and cost of Georgia landfill modifications, including whether costs exceed the $2.5 million reserve.
- Execution of capacity and backlog-reduction plans, and the effect of customer shipping terms on freight costs.
- Cash conversion and working-capital trends, planned capital spending, and continued compliance with debt covenants.
- The full terms and business implications of the Fresh Step agreement extension, and the continuing effects of the China distributor transition and customer credit risks.