Oil-Dri Corporation of America — Q2 FY2014 10-Q
Business and period: The quarter and six-month period ended January 31, 2014. Oil-Dri develops, mines, manufactures and markets sorbent products. Its reportable segments are Business to Business Products and Retail and Wholesale Products. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
- Quarter: Net sales were $69.3 million, up 13% year over year; net income was $4.3 million versus $2.1 million; diluted EPS was $0.60 versus $0.31. Gross margin was approximately 24%, down from 27%.
- Six months: Net sales were $132.9 million, up 8%; net income was $7.2 million versus $6.6 million; diluted EPS was $1.01 versus $0.94. Gross margin was approximately 25%, down from 27%. Operating income was $10.1 million versus $9.8 million.
- Cash flow, six months: Operating cash flow was $2.4 million, compared with $10.8 million. Investing used $8.4 million, including $12.5 million for the MFM acquisition and $6.8 million of capital expenditures; financing used $5.9 million. Cash declined $12.0 million to $12.1 million.
- Liquidity and debt: Current assets were $89.4 million and current liabilities $29.1 million. Cash plus short-term investments totaled $19.2 million. Notes payable totaled $22.4 million, including $3.5 million current maturities. The company had a $15 million undrawn revolving credit facility, expiring December 31, 2014, and reported compliance with its covenants.
Changes, drivers and unusual items
- Quarterly sales growth came from both segments. Business to Business sales rose 16% and segment operating income rose 13%; Retail and Wholesale sales rose 12% and segment operating income increased to $3.0 million from $1.9 million.
- For the six months, Business to Business sales rose 13% and operating income 7%. Retail and Wholesale sales rose 6%, but operating income fell 34% to $4.3 million, reflecting higher packaging, freight and material costs, and higher SG&A.
- Profitability faced cost pressure: management cited higher natural gas, freight, packaging and other manufacturing costs. Six-month natural gas cost was up 33%; quarterly material cost per ton was up 7%. Lower SG&A helped offset these pressures, particularly in the quarter.
- On November 1, 2013, Oil-Dri acquired certain MFM cat-litter business assets for $12.5 million cash, with $0.5 million contingent consideration recorded. MFM-related customers contributed approximately $3.0 million of second-quarter sales; attributable net income was not determinable. The acquisition added $3.4 million of goodwill and a customer-list intangible.
- Working-capital movements weighed on operating cash flow: receivables rose $5.9 million and accrued expenses fell $3.6 million. Capital spending was primarily for capacity expansion and equipment replacement.
Outlook, risks and contingencies
- Management expected second-half FY2014 net income to face cost pressure if elevated natural gas and other manufacturing costs persisted. It also expected the full-year effective tax rate to move closer to historical norms and advertising and promotional spending to exceed FY2013.
- Management expected FY2014 capital expenditures to exceed FY2013, including capacity expansion for fluid-purification products. It believed cash, operating cash flow and available credit would fund foreseeable needs for at least 12 months.
- Natural gas was purchased at spot rates; the company had not entered into forward contracts for planned FY2014 kiln fuel needs. Other disclosed exposures include pension-asset market fluctuations, foreign exchange, and regulation affecting food-chain-related markets.
- Foreign subsidiary sales declined 9% for the six months, primarily from Canadian cat-litter competition; the subsidiaries recorded a $0.2 million net loss. The filing identifies the credit facility’s 2014 expiration and $34.8 million of contractual cash obligations, including debt, interest, leases and the MFM contingent liability.
- Management cautioned that interim results are not necessarily indicative of full-year results. Forward-looking statements are subject to risks described in the company’s FY2013 Form 10-K.
Important facts for investors to verify
- Whether gross-margin pressure from fuel, freight, packaging and product mix persists, and whether management’s spending and earnings expectations are met.
- Whether the MFM customer relationships deliver sustained sales and returns, and whether the preliminary acquisition valuations or contingent obligations change.
- Whether receivables and accrued expenses normalize and operating cash flow improves after the substantial year-over-year decline.
- Availability and terms of a successor credit facility before the existing agreement expires, alongside scheduled debt service and capital-spending needs.
- Developments in natural-gas prices, foreign-market competition, pension funding requirements and relevant regulatory risks.