Oil-Dri Corporation of America — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, three months ended October 31, 2018; comparisons are to the three months ended October 31, 2017 unless otherwise noted. The company develops, mines, manufactures and sells clay-based sorbent products through its Retail and Wholesale and Business to Business segments. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $66.14 | $66.65 |
| Gross profit / margin | $16.01 / 24.2% | $18.98 / 28.5% |
| Operating income / margin | $1.00 / 1.5% | $4.22 / 6.3% |
| Net income attributable to Oil-Dri | $0.91 | $3.05 |
| Diluted earnings per share | $0.12 | $0.41 |
| Operating cash flow | $0.68 | $2.57 |
| Capital expenditures | $4.06 | $4.05 |
- Gross profit fell 15.6%; gross margin contracted 4.3 percentage points. Management cited higher freight, packaging and non-fuel manufacturing costs, partly offset by lower natural gas costs. Freight cost per ton rose more than 20%, packaging cost per ton about 13%, and non-fuel manufacturing cost per ton about 5%.
- Cash and cash equivalents were $9.02 at October 31, down from $12.76 at July 31; short-term investments were $2.65, versus $7.12. Combined cash and short-term investments were $11.67 at quarter-end.
- Net cash decreased $3.74. Operating cash flow was pressured by a $6.37 increase in receivables and a $2.93 increase in inventory, partially offset by a $7.29 increase in accounts payable.
- Notes payable totaled approximately $6.11 at quarter-end, including $3.08 current maturities. The company repaid $3.08 of principal during the quarter. It had a $25.00 unsecured revolving facility, no borrowings under it, and reported compliance with covenants.
- Total assets were $196.95 and total liabilities $65.16 at October 31. Dividends declared per share were $0.24 for Common and $0.18 for Class B stock.
Changes versus prior period
- Sales declined 0.8% overall as Business to Business sales fell 7% to $25.33, while Retail and Wholesale sales rose 3% to $40.82.
- Business to Business operating income decreased 21% to $7.03. Lower fluids purification, coarse cat litter, and animal health and nutrition sales, plus higher costs and segment SG&A, contributed.
- Retail and Wholesale operating income fell to $0.01 from $2.37 despite higher sales. Segment SG&A rose about 22%, including approximately $0.42 of additional advertising expense and ERP-related customer compliance fees.
- Consolidated net income attributable to Oil-Dri decreased 70%. Lower operating income was partly offset by lower net interest and other expense and a $0.05 income tax benefit versus $0.79 of tax expense a year earlier.
Outlook, risks and notable items
- Management expects fiscal 2019 advertising expense to be similar to fiscal 2018 and full-year capital expenditures to be higher than fiscal 2018, reflecting planned manufacturing-facility spending. It provided no earnings or revenue forecast.
- The ERP system went live August 1, 2018. Implementation issues delayed some customer invoicing, required additional product transfers, contributed to production interruptions and inventory growth, and caused shipping and data communication problems. Management said the implementation had not materially changed the effectiveness of internal controls; disclosure controls were deemed effective.
- Hurricane Michael disrupted operations, including a three-day power outage at one plant. Freight availability and rates remained pressured by driver shortages, trucking regulations and rail capacity constraints.
- Other risks discussed include Business to Business competition and demand weakness, currency effects, and reliance on future operating performance and covenant compliance to fund planned needs. Management believed available cash, operating cash flow and financing sources would cover foreseeable needs for at least 12 months.
- The quarter’s tax expense was reduced by a $0.175 tax adjustment related to initial findings in an ongoing federal tax examination. Management reported a 14% effective tax rate excluding that adjustment, versus 21% in the prior-year quarter. Accounting for the 2017 Tax Act remained provisional at quarter-end.
- Oil-Dri’s patent litigation with Nestlé remained pending: trial was set for March 18, 2019, while a related patent review was awaiting a decision. The company could not estimate possible damages or total litigation expense, but management did not expect a material adverse effect based on the case’s status.
- The company adopted ASC 606 in fiscal Q1 using the modified retrospective method and said it did not expect a material annual financial-statement impact.
Important facts for investors to verify
- Whether ERP-related billing, fulfillment and production disruptions are resolved, and whether receivables and inventory normalize.
- Whether freight, packaging and manufacturing cost pressures persist and margins recover.
- Whether weaker Business to Business sales and near break-even Retail and Wholesale operating income improve.
- Actual full-year capital expenditures, cash generation, and use of the revolving credit facility.
- Developments in the Nestlé patent case and federal tax examination, including any financial effects.