Oil-Dri Corporation of America — FY2017 Form 10-K
Reporting period: Fiscal year ended July 31, 2017. The filing is an annual report, not a standalone quarterly filing; selected fourth-quarter results are noted below. Amounts are in U.S. dollars.
Business context
Oil-Dri develops, mines, manufactures and markets sorbent products, mainly from clay. Products include cat litter, agricultural carriers, animal health and nutrition products, bleaching and purification clays, industrial absorbents and sports-field products. Its reportable segments are Retail and Wholesale Products and Business to Business Products.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $262.3 million | $262.3 million |
| Gross profit / gross margin | $73.7 million / 28.1% | $77.1 million / 29.4% |
| Operating income | $15.2 million | $15.4 million |
| Net income | $10.8 million | $13.6 million |
| Diluted earnings per common share | $1.47 | $1.87 |
| Cash from operating activities | $26.9 million | $25.2 million |
| Capital expenditures | $14.8 million | $10.7 million |
- Net income declined 21% despite essentially flat sales and operating income. The effective tax rate rose to 25.8% from 5.2%; FY2016 benefited from releasing a $1.68 million valuation allowance on domestic AMT credits.
- Higher manufacturing costs reduced gross profit: natural-gas cost per ton rose about 27%, while non-fuel manufacturing cost per ton increased about 8%. Lower SG&A, notably lower advertising, partly offset the cost increases.
- Cash, cash equivalents and short-term investments totaled $32.7 million at year-end, up $3.9 million from FY2016. Cash and equivalents alone declined to $9.1 million from $18.6 million as short-term investments increased.
- Working capital was $64.1 million; the working-capital ratio was 2.9. Notes payable had a $12.3 million face balance, including $3.1 million current maturities. The company had no borrowings under its $25 million revolving credit facility and reported covenant compliance.
- Dividends declared were $0.89 per Common share and $0.668 per Class B share, up from $0.85 and $0.6375, respectively, in FY2016.
Changes versus the prior period
- Business to Business sales rose 4% to $100.4 million, with growth in animal health, fluid purification and agriculture. Segment operating income was essentially flat at $33.3 million.
- Retail and Wholesale sales fell 2% to $161.9 million, primarily due to cat litter. Segment operating income rose 35% to $6.8 million, helped by lower advertising and higher selling prices.
- Cat litter sales declined about 4%. Lower coarse litter sales reflected market weakness and the exit from two low-margin customers; heavyweight scoopable products faced competition, while private-label lightweight litter grew.
- FY2017 fourth-quarter sales were $65.8 million versus $64.9 million in FY2016; gross profit was $16.1 million versus $18.9 million, and net income was $1.3 million versus $5.3 million.
Outlook, risks and unusual items
- Management expects FY2018 advertising expense to be at a level similar to FY2017 and capital expenditures to be higher, including continued ERP implementation and infrastructure spending. It expects available cash, operating cash flow and credit capacity to fund foreseeable needs for at least 12 months.
- Key exposures include natural-gas and other input costs, intense cat-litter competition, customer concentration, environmental and mining regulation, international operations, and execution risks from the multi-year ERP implementation. Walmart represented about 20% of FY2017 sales and 28% of year-end accounts receivable.
- The defined-benefit pension and postretirement liability declined by $3.3 million, mainly due to actuarial assumptions including a higher year-end discount rate. Management expected to contribute approximately $2.1 million to the pension plan in FY2018.
- Oil-Dri’s patent litigation against Nestlé Purina remained active; management said damages and total expense could not be estimated, but did not expect a material adverse effect based on the status at filing. A separate patent suit and counterclaims were dismissed by agreement in June 2017.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether FY2017’s higher natural-gas and manufacturing costs persist, and whether pricing or efficiency offsets them.
- Whether cat-litter volume and mix stabilize, including the economics of lightweight products and the impact of the customer exits.
- How the FY2018 tax rate compares with FY2017 and the unusually low FY2016 rate that benefited from the AMT valuation-allowance release.
- Actual FY2018 capital spending and ERP implementation progress, costs and operational risks.
- Walmart concentration, pension funding requirements, and developments in the Nestlé patent litigation.