Oil-Dri Corporation of America — FY2020 Form 10-K
Reporting period: Fiscal year ended July 31, 2020; comparisons are primarily with fiscal 2019. This is an annual report, not a standalone fourth-quarter filing. Oil-Dri develops, mines, manufactures and sells clay-based and synthetic sorbent products, including cat litter, agricultural and animal health products, bleaching clays, industrial absorbents and sports-field products.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $283.2 million | $277.0 million |
| Gross profit / margin | $75.8 million / 26.8% | $65.7 million / 23.7% |
| Income from operations | $24.8 million | $10.4 million |
| Net income attributable to Oil-Dri | $18.9 million; diluted common EPS $2.65 | $12.6 million; diluted common EPS $1.80 |
| Net cash provided by operating activities | $42.5 million | $26.7 million |
| Capital expenditures | $14.7 million | $15.0 million |
| Cash and cash equivalents at year-end | $40.9 million | $21.9 million |
The statements report consolidated net income of $18.7 million for FY2020, including a $0.2 million loss attributable to noncontrolling interests; net income attributable to Oil-Dri was $18.9 million. Cash increased by $19.0 million during the year. The company said operating cash flows, cash on hand and available financing should cover foreseeable needs for at least 12 months.
Year-end notes payable were $9.8 million, including $1.0 million due within one year. Oil-Dri issued $10.0 million of 3.95% senior notes due 2030 and had no borrowings outstanding under its $45 million revolving credit facility, which expires in January 2024; $1.284 million of letters of credit were outstanding. The company reported compliance with debt covenants. It paid $7.0 million in dividends, repurchased $5.5 million of stock and made $8.0 million in voluntary pension contributions.
Material changes and segment performance
- Sales rose 2% to a record, while operating income increased $14.4 million. Gross profit improved primarily with lower freight, natural gas and warehouse costs; freight cost per manufactured ton fell about 18% and natural gas cost per ton about 29%.
- A one-time $13.0 million patent-license payment was recorded as other operating income and materially boosted operating income. Excluding this item, reported operating income would have been substantially lower; the filing does not present an adjusted operating-income measure.
- Retail and Wholesale Products Group: Sales grew 5% to $179.0 million and segment operating income rose to $15.9 million from $8.7 million. Cat-litter sales increased $12.0 million, including pandemic-related pantry stocking; industrial and sports product sales fell 13%.
- Business to Business Products Group: Sales declined 2% to $104.3 million and segment income was essentially flat at $31.2 million. Animal health and nutrition sales grew 12%; agricultural and horticultural sales fell about 10%, and fluid-purification sales fell about 3%.
- SG&A increased 16%, including higher advertising, incentive compensation and a recorded legal contingency. FY2020 also included approximately $2.0 million of pension settlement expense. FY2019 included material proceeds from resolution of legal proceedings, making the comparison of other income uneven.
Outlook, risks and unusual items
- Management provided no quantified earnings or revenue guidance. It expected freight costs to rise in FY2021 as transportation demand recovered, while noting that the duration and magnitude of COVID-19 effects were uncertain.
- Management said COVID-19 had not materially affected the business overall through FY2020: facilities generally remained open, and cash collection had not shown significant deterioration. Cat-litter demand temporarily increased, while industrial, sports, agricultural and fluid-purification sales faced pandemic-related weakness or delays. China operations temporarily closed and later reopened.
- Risks include COVID-19-related demand and supply disruptions, transportation and energy costs, intense competition and pricing pressure, reliance on major customers (Walmart represented 19% of sales), mining and environmental compliance, customer concentration, and foreign-market and currency risks.
- A former service provider alleged breach of contract over a contingency fee and sued to compel binding mediation. Oil-Dri said it believed the claim lacked merit but recorded an estimated liability; the outcome remained uncertain, though management considered a material loss unlikely. The filing also describes ordinary-course litigation that management did not expect to have a material adverse effect.
- The defined-benefit pension plan was closed to new participants and future accruals effective March 1, 2020; the SERP was frozen and later terminated. Oil-Dri recorded pension settlement expense and a $1.3 million SERP curtailment gain.
- Adoption of lease accounting added $9.3 million of operating-lease right-of-use assets and $10.9 million of lease liabilities at transition. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of FY2020’s operating-income and earnings increase is repeatable without the one-time $13.0 million patent-license payment, and how did the FY2019 legal-resolution proceeds affect the comparison?
- Whether cat-litter demand normalized after pandemic stocking and whether weaker industrial, sports, agricultural and fluid-purification demand recovered.
- Walmart’s continued contribution to sales and receivables, along with customer purchasing terms and potential margin exposure.
- Future freight, fuel and other input costs, and management’s ability to offset them through pricing, mix or productivity.
- The resolution and ultimate amount of the former service provider’s contingency-fee claim, and the funding needs of pension and postretirement obligations.