Oil-Dri Corporation of America — Q1 FY2014 Form 10-Q
Reporting period: Three months ended October 31, 2013; comparative period is the three months ended October 31, 2012. The filing is unaudited. Oil-Dri develops, mines, manufactures and markets clay-based sorbent products. Its reportable segments are Business to Business Products and Retail and Wholesale Products.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $63.5 million | $61.4 million |
| Gross profit / gross margin | $16.5 million / 26% | $17.2 million / 28% |
| Operating income | $4.3 million | $6.4 million |
| Net income | $2.9 million | $4.5 million |
| Diluted EPS | $0.41 | $0.64 |
| Operating cash flow | $(0.7) million | $4.4 million |
| Capital expenditures | $3.4 million | $2.2 million |
- Sales grew 3%, while net income fell approximately 35%. Management attributed stronger sales to Business to Business growth, favorable mix and higher selling prices; lower earnings reflected higher advertising and promotion, freight, packaging, fuel and other manufacturing costs.
- Business to Business sales rose 10% to $23.9 million and segment operating income increased 2% to $7.7 million. Retail and Wholesale sales were essentially flat at $39.6 million, while segment operating income fell to $1.3 million from $4.5 million.
- Gross margin declined from 28% to 26%; SG&A was 19% of sales versus 18%. Natural gas costs for kiln operations increased 36%, and non-fuel manufacturing cost per ton rose 6%.
- Operating cash flow was negative, mainly reflecting working-capital changes, including a $4.3 million decrease in accrued expenses and higher inventories. Cash and cash equivalents decreased $6.3 million during the quarter.
Liquidity, debt and balance sheet
- At October 31, cash and cash equivalents were $17.8 million and short-term investments were $15.2 million, totaling $33.0 million, versus $42.5 million at July 31, 2013.
- Total notes payable were $22.4 million, including $3.5 million current; debt was $25.9 million at July 31. The company made $3.5 million of scheduled principal payments during the quarter.
- Current assets were $96.5 million and current liabilities $27.3 million. The company had a $15 million unsecured revolving credit facility expiring December 31, 2014; it had no borrowings under the facility and reported compliance with its covenants.
- Management said cash, operating cash flow and available credit were expected to cover foreseeable needs for at least 12 months. Fiscal 2014 capital expenditures and advertising and promotional spending were expected to exceed fiscal 2013 levels.
Material developments, outlook and risks
- On November 1, 2013, after quarter-end, Oil-Dri acquired certain MFM Industries clay cat litter business assets. It paid $11.9 million at closing, in addition to an $0.8 million deposit, and placed $0.5 million in escrow. The company used existing cash and investments. Final purchase-price allocation and adjustment remained pending; management expected an approximately $0.1 million payment from MFM related to an inventory adjustment. Oil-Dri did not acquire the plant, land or mineral rights.
- Management expected freight-cost increases to continue and planned higher fiscal 2014 advertising and promotion. Natural gas was purchased at spot rates; the company had not contracted for fiscal 2014 kiln fuel needs.
- Risks discussed include fuel-price volatility, foreign-exchange exposure, pension-asset market fluctuations and regulatory developments affecting fluid purification, animal health and agricultural markets. Management characterized financial-instrument and foreign-currency risks as not material at the time.
- No quantified full-year earnings or sales guidance was provided. The filing cautions that quarterly results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties.
Most important facts for investors to verify
- Whether the MFM acquisition’s final purchase price, valuation and post-closing adjustments differed from the estimates disclosed.
- Whether higher advertising, freight, packaging, natural gas and other manufacturing costs continued to pressure margins.
- Whether the Retail and Wholesale segment recovered from its sharp operating-income decline and private-label cat litter weakness.
- Whether operating cash flow and cash-plus-investment balances supported planned capital spending, dividends, debt service and acquisition-related needs.
- Whether the company maintained compliance with revolving-credit covenants and met expected pension contributions.