Oil-Dri Corporation of America — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended January 31, 2018; comparisons are with the corresponding FY2017 periods. Financial statements are unaudited. Oil-Dri develops, mines, manufactures, and markets sorbent products, including cat litter, agricultural and animal-health products, fluid-purification aids, and industrial absorbents. Its reportable segments are Business to Business and Retail and Wholesale Products.
Financial results
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $68.894 million, up 5.7% | $135.540 million, up 2.8% |
| Gross profit | $19.640 million; 28.5% margin, versus 29.3% | $38.609 million; 28.5% margin, versus 30.2% |
| Operating income | $4.757 million, versus $5.587 million | $8.673 million, versus $8.633 million |
| Net income (loss) | $(1.096) million, versus $4.250 million | $1.954 million, versus $6.259 million |
| Diluted earnings (loss) per share | $(0.15), versus $0.58 | $0.26, versus $0.86 |
| Operating cash flow | Not separately presented for the quarter | $11.629 million, versus $9.093 million |
- Segment results, six months: Business to Business sales rose 7% to $54.442 million and operating income rose 8% to $18.635 million. Retail and Wholesale sales were essentially flat at $81.098 million; operating income rose 7% to $4.787 million.
- Cash and liquidity: At January 31, cash and cash equivalents were $9.381 million and short-term investments were $21.894 million. Current assets were $94.154 million and current liabilities $33.334 million.
- Debt: Notes payable totaled $9.175 million on the balance sheet, including $3.083 million current maturities. The company had not borrowed under its $25 million revolving credit facility and reported covenant compliance.
- Cash uses: Six-month capital expenditures were $6.850 million; dividends paid were $3.112 million. Cash increased $0.286 million during the period.
Material changes and drivers
- Second-quarter sales growth was led by Business to Business, up 18%; Retail and Wholesale sales declined 1%. In the six-month period, Business to Business growth offset essentially flat Retail and Wholesale sales.
- Gross margin was pressured by higher manufacturing, natural-gas, freight, and packaging costs. Natural gas cost per manufactured ton was approximately 11% higher in both the quarter and six-month period; freight and packaging costs also increased. Price increases and favorable product mix partly offset the cost pressure.
- Retail and Wholesale second-quarter operating income fell 51%, with higher Fresh & Light advertising expense and increased input and freight costs. Business to Business second-quarter operating income rose 25% on stronger sales.
- Foreign-subsidiary sales declined 6% in both the quarter and six-month period, mainly reflecting lower China animal-health and nutrition sales. Foreign-subsidiary net income improved in both periods.
Outlook, risks, and unusual items
- A one-time, provisional $5.091 million tax charge from remeasuring deferred tax assets under the 2017 Tax Act drove the reported quarterly loss and materially reduced six-month earnings. Management said the charge reduced six-month diluted EPS by $0.69. Excluding it, the six-month effective tax rate would have been 21%; the tax accounting remained under review, with adjustments possible through December 22, 2018.
- The company expects FY2018 advertising expense to be below FY2017 levels while continuing to promote lightweight litter. It anticipates FY2018 capital expenditures above FY2017, including enterprise resource planning system costs. Management believes available cash, investments, operating cash flow, and credit capacity will cover foreseeable needs for at least 12 months.
- Approximately $5.996 million of deferred compensation was payable within the next year. Management estimated an additional $1.372 million of pension contributions for the remainder of FY2018. Contractual obligations included $15.437 million of operating lease payments and $25.263 million of open purchase orders.
- Risks discussed include ongoing natural-gas and other cost volatility, freight capacity and rates, packaging commodity prices, foreign exchange, pension-asset market fluctuations, and regulation in fluid-purification, animal-health, and agricultural markets. No natural-gas contracts had been purchased for the remainder of FY2018.
- Oil-Dri’s patent-infringement litigation against Nestlé Purina continued, with appellate proceedings related to a patent review. The company said it could not estimate potential damages or total litigation expense, but did not expect the outcome to materially adversely affect its financial condition or results.
Important facts for investors to verify
- How the provisional tax remeasurement is finalized and whether further tax adjustments affect reported earnings.
- Whether sales growth in Business to Business can continue and whether Retail and Wholesale results recover amid customer/product mix changes and ongoing advertising.
- Whether higher manufacturing, freight, and packaging costs persist or are offset by pricing and product mix.
- Actual FY2018 capital expenditures, pension contributions, and deferred-compensation payments relative to management’s estimates.
- Developments in the Nestlé litigation and any resulting changes to legal expenses or exposure.