Oil-Dri Corporation of America — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended January 31, 2019, the second quarter and first half of fiscal 2019. Oil-Dri develops, mines, manufactures and markets sorbent products, including cat litter, fluid-purification products, agricultural carriers and animal-health products. It reports two segments: Business to Business and Retail and Wholesale.
Financial results and liquidity
| Metric | Three months ended Jan. 31, 2019 | Six months ended Jan. 31, 2019 |
|---|---|---|
| Net sales | $69.880 million | $136.023 million |
| Gross profit / margin | $15.404 million / 22.0% | $31.414 million / 23.1% |
| Operating income | $2.827 million | $3.830 million |
| Net income attributable to Oil-Dri | $2.287 million | $3.193 million |
| Diluted common EPS | $0.30 | $0.42 |
| Operating cash flow | Not separately stated | $2.692 million |
At January 31, 2019, cash and cash equivalents were $9.375 million and short-term investments were $0.480 million. Total notes payable were approximately $6.121 million, including $3.083 million current maturities. The company reported $193.137 million in assets and $31.089 million in current liabilities. Capital expenditures were $6.199 million in the first half; dividends paid were $3.287 million. The company had a $45 million unsecured revolving credit facility, including up to $10 million for letters of credit, and reported no borrowings during the first half. It was in compliance with its credit covenants.
Material changes versus prior comparable periods
- First-half sales rose 0.4% year over year; second-quarter sales increased 1.4%.
- First-half gross margin fell to 23.1% from 28.5%; operating income declined to $3.830 million from $9.398 million. Second-quarter gross margin was 22.0%, versus 28.5%, and operating income was $2.827 million, versus $5.183 million.
- First-half net income attributable to Oil-Dri increased to $3.193 million from $1.954 million, and diluted EPS rose to $0.42 from $0.26. The comparison is affected by a prior-year $5.091 million tax charge related to the 2017 Tax Act. In the second quarter, attributable net income was $2.287 million versus a $1.096 million loss; diluted EPS was $0.30 versus a $0.15 loss.
- Business to Business first-half sales declined 5% to $51.784 million and segment operating income fell 23% to $14.304 million. Retail and Wholesale sales grew 4% to $84.239 million, but segment operating income declined 44% to $2.662 million.
- Operating cash flow fell to $2.692 million from $11.629 million. Receivables increased $4.529 million and inventories increased $5.607 million, contributing to the lower cash generation. Cash and cash equivalents declined by $3.382 million during the half.
Management commentary, outlook and risks
- Management attributed margin pressure mainly to higher freight, packaging and manufacturing costs. First-half freight costs increased approximately $4.0 million, packaging costs about $1.7 million, and natural-gas cost per manufactured ton approximately 11%. Trucking capacity constraints and rail limitations contributed to freight inflation.
- The ERP system, operational from August 1, 2018, caused processing interruptions, additional product transfers, customer invoicing delays and customer compliance fees. Management reported approximately $1.2 million of first-half ERP implementation expense and said receivable days remained elevated while it addressed invoicing issues. Management said implementation had not materially changed internal-control effectiveness; disclosure controls were considered effective.
- Business to Business sales faced foreign price competition, particularly in Brazil, and weaker animal-health demand in Asia following a swine-virus outbreak in China. Retail and Wholesale growth was led by private-label cat litter. Foreign currency weakness reduced translated sales and foreign-subsidiary earnings.
- Management expects fiscal 2019 advertising expense to be lower than fiscal 2018, reflecting a shift toward digital promotions. It said cash, operating cash flow and credit availability should be adequate for foreseeable needs for at least 12 months. No specific revenue or earnings forecast was provided.
- The company is involved in patent litigation with Nestlé Purina concerning alleged patent infringement. Trial was scheduled for March 18, 2019, while a related patent review remained pending. The company said it could not estimate possible damages or total litigation expense, but did not believe the outcome would materially adversely affect its financial condition or results.
- Other disclosed considerations include pension and postretirement obligations, estimates inherent in interim reporting, and planned adoption of lease and expected-credit-loss accounting standards in future fiscal years. Management said the interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether ERP-related invoicing, fulfillment and customer-compliance problems are resolved, and whether receivables and operating cash flow normalize.
- Whether elevated freight, packaging, natural-gas and other manufacturing costs persist or can be offset by pricing, productivity or product mix.
- Whether Business to Business demand improves, including sales in Brazil and Asia, and whether Retail and Wholesale growth continues.
- Progress and outcomes in the Nestlé patent litigation and related patent review, including any subsequent financial disclosures.
- Availability under the revolving credit agreement, covenant compliance, and cash and investment balances as working-capital needs and capital spending evolve.