Oil-Dri Corporation of America — Q2 FY2017 Form 10-Q
Business context and period. Oil-Dri develops, mines, manufactures and markets clay-based sorbent products, including cat litter, agricultural and animal health products, fluid purification aids, absorbents and sports-field products. The quarter ended January 31, 2017; comparisons below are with the corresponding fiscal 2016 periods. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Three months ended Jan. 31, 2017 | Six months ended Jan. 31, 2017 |
|---|---|---|
| Net sales | $65.174 million, down 0.3% | $131.786 million, down 1.0% |
| Gross profit / margin | $19.125 million / 29.3% | $39.850 million / 30.2% |
| Operating income / margin | $5.587 million / 8.6% | $8.633 million / 6.6% |
| Net income | $4.250 million, up 11% | $6.259 million, down 32% |
| Diluted EPS | $0.58, versus $0.53 | $0.86, versus $1.28 |
| Operating cash flow | Not presented separately for the quarter | $9.093 million, versus $17.051 million |
For the six months, gross profit was nearly flat year over year, while SG&A increased 18% to $31.217 million. The effective tax rate declined to 21% from 27%. Q2 gross margin was approximately 29%, unchanged year over year.
Segments
- Business to Business: Six-month sales rose 5% to $50.734 million and operating income rose 3% to $17.223 million. Higher animal health and nutrition and fluid-purification sales contributed. Q2 sales and operating income increased 3% each.
- Retail and Wholesale: Six-month sales fell 4% to $81.052 million and operating income fell 54% to $4.480 million. Q2 sales declined 2%, while operating income increased 16% to $4.987 million.
Liquidity, debt and cash flow
At January 31, 2017, cash and cash equivalents were $17.560 million and short-term investments were $7.358 million, totaling $24.918 million. Current assets were $92.778 million and current liabilities $29.498 million. Notes payable totaled approximately $12.230 million, including current maturities; the company made $3.083 million of scheduled principal payments during the half-year. It had not borrowed under its $25 million revolving credit facility and reported compliance with its covenants. Management said available cash, investments, operating cash flow and credit availability should cover foreseeable needs for at least 12 months.
Six-month investing cash use was $4.446 million, including $7.279 million of capital expenditures, partly offset by net maturities of short-term investments. Financing cash use was $5.784 million, including $2.956 million of dividends paid. Cash decreased $1.069 million to $17.560 million. Dividends declared per share increased to $0.44 for Common and $0.33 for Class B for the six-month period.
Material changes, outlook and risks
- The principal six-month earnings pressure was the Retail and Wholesale group’s approximately $5 million increase in advertising for the Fresh & Light Ultimate Care lightweight cat-litter campaign. Management planned to continue the campaign through the rest of FY2017, with total advertising and trade spending expected to be significant but slightly below FY2016; no numerical earnings or revenue guidance was provided.
- Management attributed the stable gross margin to lower packaging costs, which helped offset higher production costs. Natural-gas cost per manufactured ton increased approximately 16% for the half and 28% in Q2; other manufacturing costs also increased.
- Cat-litter sales were affected by the company’s decision to exit low-margin business with two major customers. Management reported stronger sales in its targeted lightweight products. Business-to-business results benefited from product demand and a new European fluid-purification customer; Latin American animal-health sales were affected by a distributor transition.
- FY2017 capital expenditures were expected to increase, including spending on an enterprise resource planning system and infrastructure. The filing identifies commodity and fuel costs, foreign-exchange movements, pension-asset performance and regulatory changes in food-related markets as risks. No natural-gas contracts had been purchased for the remaining FY2017 kiln-fuel needs as of January 31.
- Six-month pension benefit cost increased to $1.872 million from $1.261 million, including higher actuarial-loss amortization. The company estimated a further $0.840 million of pension contributions for the remainder of FY2017.
Important facts for investors to verify
- Whether the lightweight cat-litter campaign improves sales and margins enough to justify its advertising and promotional spending.
- Whether Retail and Wholesale operating results recover after the first-half decline, and whether exiting low-margin customer business continues to affect volume.
- Whether higher natural-gas and other manufacturing costs persist and offset potential packaging-cost benefits.
- How ERP-related capital spending, working-capital movements and lower operating cash generation affect liquidity and cash balances.
- Whether foreign-market sales, currency movements, pension assumptions and regulatory developments materially change future results or funding needs.