Oil-Dri Corporation of America — Q1 FY2021 Form 10-Q
Business context and period: The filing covers the three months ended October 31, 2020, the first quarter of fiscal 2021, compared with the three months ended October 31, 2019. Oil-Dri develops, mines, manufactures and markets clay-based sorbent products through its Business to Business and Retail and Wholesale Products groups. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $76.1 million | $71.1 million | Up 7% |
| Gross profit | $20.3 million | $19.9 million | Up 2% |
| Gross margin | 26.7% | 28.0% | Down about 1.3 percentage points |
| Income from operations | $5.2 million | $4.1 million | Up 26% |
| Net income attributable to Oil-Dri | $4.0 million | $3.5 million | Up 13% |
| Diluted EPS: Common / Class B | $0.56 / $0.42 | $0.50 / $0.37 | Higher for both classes |
| Operating cash flow | $(3.4) million | $6.7 million | Down $10.1 million |
| Capital expenditures | $3.6 million | $3.9 million | Lower by $0.3 million |
Net sales rose in both groups. Retail and Wholesale sales increased 9% to $48.6 million, led by cat litter; its operating income rose 33% to $4.5 million. Business to Business sales increased 4% to $27.5 million, while operating income edged down 1% to $8.2 million. Consolidated SG&A fell 4% to $15.1 million. Higher freight, packaging and some materials costs pressured gross margin; natural gas costs and SG&A savings partly offset those increases.
Cash, debt and liquidity
- Cash and cash equivalents were $31.3 million at October 31, 2020, down from $40.9 million at July 31, 2020. The quarter’s net cash decrease was $9.6 million.
- Operating cash use reflected working-capital movements, including a $4.2 million cash use from receivables and an $8.1 million decrease in accrued expenses, partly related to payment of prior-year incentive bonuses.
- Notes payable totaled $9.9 million net of debt issuance costs; the company reported no borrowings under its $45 million revolving credit facility during the quarter. It said it was in compliance with debt covenants.
- Current assets were $102.3 million and current liabilities were $34.5 million at October 31. Total liabilities were $77.1 million and stockholders’ equity was $150.3 million.
- The company declared dividends of $0.26 per Common share and $0.195 per Class B share. It repurchased shares during the quarter and had remaining authorization to repurchase 871,616 Common shares and 278,250 Class B shares.
Outlook, commentary and notable items
- Management said operating cash flows, available liquidity and other financing sources should be adequate for foreseeable needs and at least the next 12 months. Fiscal 2021 capital expenditures are expected to exceed fiscal 2020; advertising expense is expected to be flat year over year. No specific revenue or earnings guidance was provided.
- Management reported no significant overall business disruption from COVID-19 to date, but said its effects on the remainder of fiscal 2021 could not be determined. Cat litter demand benefited from increased purchasing and e-commerce; industrial and sports products and some international businesses were affected by closures, restrictions or altered customer purchasing.
- Freight costs per manufactured ton increased approximately 6% year over year, and packaging costs per manufactured ton increased approximately 6%. Management cited driver shortages and tight trucking capacity among freight pressures.
- The company deferred approximately $1.8 million of employer payroll taxes under the CARES Act as of October 31, 2020; it expected to defer about $2.5 million more for the remainder of calendar 2020, with deferred amounts payable in 2021 and 2022.
- The pension plan was frozen to future benefit accruals effective March 1, 2020; the Supplemental Executive Retirement Plan was terminated effective June 30, 2020. These changes substantially reduced reported pension service and interest costs versus the prior-year quarter.
- A former service provider’s contract and contingency-fee claim remains in litigation. The company recorded an estimated liability in the prior fiscal year, reported no change in its estimate this quarter, and said a loss was unlikely to be material, while noting uncertainty in the outcome.
- On December 4, 2020, the company amended its Fresh Step agreement to extend its initial term; the filing text does not provide the amended term’s duration.
Investor verification points
- Verify whether the strong cat litter sales and the timing-related agricultural customer sales persist in subsequent quarters.
- Track gross margin recovery or further pressure from freight, packaging and material costs, and the pace of related price or mix changes.
- Monitor operating cash conversion, receivable collections and accrued-expense movements after the quarter’s working-capital cash outflow.
- Review the effects of COVID-19 on industrial, sports, fluids purification and foreign sales, and any related supply-chain or customer-credit issues.
- Confirm future capital spending, liquidity and covenant compliance, and assess the outcome of the former service provider litigation and the full terms of the Fresh Step extension.