Oil-Dri Corporation of America — Q1 FY2023 10-Q
Reporting period: Three months ended October 31, 2022, compared with the three months ended October 31, 2021. Oil-Dri develops, mines, manufactures and markets clay-based sorbent products through its Business to Business and Retail and Wholesale Products groups. Amounts below are in millions unless noted.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $98.5 | $82.5 |
| Gross profit / margin | $22.3 / 23% | $13.8 / 17% |
| Operating income | $6.6 | $0.4 |
| Net income attributable to Oil-Dri | $5.2 | $0.6 |
| Diluted EPS, Common / Class B | $0.78 / $0.59 | $0.08 / $0.06 |
| Operating cash flow | $3.7 | $(0.6) |
| Capital expenditures | $7.5 | $6.7 |
Sales rose 19%, while gross margin expanded to 23% from 17%; management attributed the improvement principally to price increases and demand growth, which began to offset higher input costs. SG&A increased 18% to $15.7 million, including higher corporate incentive compensation and other expenses. The effective tax rate was not stated as a clear percentage; income tax expense was $1.2 million versus $0.1 million.
Segments and period-over-period changes
- Business to Business: Sales increased 36% to $33.7 million; operating income rose 31% to $7.3 million. Growth came from agricultural and horticultural products, fluids purification, and animal health and nutrition.
- Retail and Wholesale: Sales increased 12% to $64.9 million; operating income rose to $7.6 million from $1.3 million. Higher cat litter pricing and industrial and sports product sales contributed; lower first-quarter advertising also helped operating income.
- Natural gas cost per ton was 97% higher, non-fuel manufacturing cost per ton 15% higher, and domestic freight cost per ton approximately 21% higher year over year. Packaging cost per ton decreased approximately 8%.
Cash, debt and liquidity
Cash and cash equivalents fell to $10.5 million from $16.3 million at July 31, 2022. The $5.8 million decrease reflected $7.5 million of investing outflows, principally capital spending, partly offset by $3.7 million of operating cash flow. Inventory increased $4.9 million on the balance sheet to $40.4 million, reflecting higher costs and inventory built for anticipated demand.
At October 31, 2022, current assets were $114.3 million and current liabilities $45.3 million. Notes payable totaled $32.8 million, net of debt issuance costs, with $1.0 million current; the company reported no revolving-credit borrowings during the quarter. Its unsecured revolving facility provides up to $45 million, and management said available liquidity and expected operating cash flows should cover foreseeable needs for at least 12 months. The credit agreement and note agreement were amended in August 2022, including replacing LIBOR references with SOFR and revising financial covenants; the company reported covenant compliance.
Dividends declared per share were $0.28 for Common Stock and $0.21 for Class B Stock. The company paid $1.9 million in dividends and $0.1 million for treasury-stock purchases during the quarter.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. Management expects FY2023 capital expenditures to exceed FY2022 and advertising expense to be higher than FY2022, with spending concentrated in the second half and expected to return toward historical pre-pandemic levels.
- Management described ongoing manufacturing and freight constraints amid higher customer demand. Actions to add personnel, shifts and equipment, repair equipment, and use alternative transportation reduced the order backlog by $1.1 million, or 17%, from July 31, 2022.
- Management cited continued cost pressure from natural gas, labor, materials, repairs, utilities, electricity, diesel and freight. It also noted supply-chain and truck-capacity constraints and said inventory was being built partly to address anticipated seasonal demand and potential disruptions.
- The board approved termination of the defined-benefit pension plan, with completion expected over approximately 18 months. No pension contribution was required or made in the quarter.
- The company disclosed ordinary-course litigation and a contract-related claim; it believes the claim is without merit and any loss is unlikely to be material, but acknowledged significant uncertainty over the outcome.
- Management reported no material changes to the risk factors in its FY2022 Form 10-K. Forward-looking statements remain subject to the risks and uncertainties described in that filing.
Important facts for investors to verify
- Whether price increases continue to offset elevated energy, manufacturing and freight costs, and whether demand and volume support current sales growth.
- Whether backlog reduction and capacity measures can keep pace with customer demand without further pressure on costs or delivery.
- Capital-expenditure plans, working-capital needs—especially inventory—and cash generation against the company’s liquidity expectations.
- The terms and ongoing compliance requirements of the amended credit and note agreements, and the effects of the pension-plan termination.
- The timing and eventual cost of planned advertising increases, and the resolution or any changed estimate for the disclosed legal contingency.