Oil-Dri Corporation of America — Q3 FY2018 Form 10-Q
Reporting period: Fiscal quarter and nine months ended April 30, 2018; comparisons are with the corresponding 2017 periods. Figures are unaudited. Oil-Dri develops, mines, manufactures and sells sorbent products through its Retail and Wholesale Products and Business to Business Products segments.
Financial performance
| Metric | Three months ended Apr. 30, 2018 | Three months ended Apr. 30, 2017 | Nine months ended Apr. 30, 2018 | Nine months ended Apr. 30, 2017 |
|---|---|---|---|---|
| Net sales | $64.8 million | $64.7 million | $200.4 million | $196.5 million |
| Gross profit / margin | $17.7 million / 27.4% | $17.8 million / 27.5% | $56.4 million / 28.1% | $57.6 million / 29.3% |
| Operating income | $3.1 million | $3.7 million | $11.8 million | $12.4 million |
| Net income | $3.6 million | $3.2 million | $5.5 million | $9.5 million |
| Diluted earnings per common share | $0.48 | $0.44 | $0.75 | $1.29 |
| Operating cash flow | Not stated separately | Not stated separately | $2.8 million | $21.0 million |
- Quarterly comparison: Sales were essentially flat. Operating income declined, but net income and diluted EPS rose, mainly reflecting a $1.095 million tax benefit associated principally with the pension contribution and tax-law changes.
- Nine-month comparison: Sales increased 2%, while net income fell 42%. The company recorded a net $3.996 million provisional tax charge related to the 2017 Tax Act; management said it reduced nine-month diluted EPS by $0.54. Excluding that tax adjustment, the reported effective tax rate would have been 21.9%, versus 19.0% a year earlier.
- Costs and margins: Nine-month gross margin contracted amid higher natural gas, manufacturing, freight and packaging costs, partly offset by higher selling prices and favorable mix. Freight cost per ton rose about 8% and packaging cost per ton about 9%. In Q3, lower gas and manufacturing costs were offset mainly by freight cost per ton rising about 15% and packaging cost per ton rising about 9%.
- Segments, nine months: Business to Business sales rose 6% to $79.2 million and operating income increased 5% to $26.2 million. Retail and Wholesale sales edged down to $121.2 million, while operating income rose 17% to $7.0 million, helped by lower advertising expense.
Balance sheet, liquidity and capital
- At April 30, 2018, cash and cash equivalents were $10.6 million and short-term investments were $14.3 million. Current assets were $87.1 million versus current liabilities of $35.7 million.
- Balance-sheet notes payable were $9.2 million net of issuance costs, including $3.1 million current; the company also had $6.0 million in short-term borrowings. The borrowing was under its $25 million revolving facility and was expected to be repaid in fiscal Q4. The facility expires December 4, 2019; the company reported covenant compliance.
- Nine-month operating cash flow was $2.8 million, down from $21.0 million. Investing activities provided $0.6 million and financing activities used $1.8 million. Capital expenditures were $10.5 million.
- The company contributed $13.2 million to its pension plan during the nine months, including an $11.5 million voluntary contribution. It reported no minimum pension funding requirement for the remainder of FY2018.
- Dividends declared per share for the nine months were $0.69 for Common Stock and $0.5175 for Class B Stock. Management said current resources, operating cash flow and available credit were expected to cover foreseeable needs for at least 12 months.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected FY2018 advertising expense to be below FY2017, while full-year capital expenditures were expected to be higher, including ERP implementation costs.
- The new enterprise resource planning system was scheduled to become operational August 1, 2018; implementation issues could affect results. The filing refers investors to the risk discussion in the FY2017 Form 10-K.
- The 2017 Tax Act reduced the federal corporate tax rate to 21% after FY2018’s blended 26.9% rate. Tax accounting remained provisional, with analysis expected to be completed by December 22, 2018.
- The company’s patent litigation with Nestlé Purina continued; damages, if any, and total litigation expense could not be estimated. Management did not believe the outcome would materially adversely affect financial condition or results, but gave no assurance.
- Other disclosed exposures include pension-asset market fluctuations, foreign-currency movements, fuel and packaging cost volatility, and regulatory changes in food-chain-related markets. The company had not entered into natural-gas forward contracts for the remainder of FY2018.
- Inventory obsolescence reserves increased to $1.136 million from $0.619 million, reflecting higher discontinued, slow-moving and unsaleable inventory. The company also early adopted accounting guidance and reclassified $2.264 million of stranded tax effects from accumulated other comprehensive income to retained earnings.
Important facts for investors to verify
- Whether the $6.0 million revolving-credit borrowing was repaid in fiscal Q4 as anticipated.
- How final tax-law accounting changed the provisional $3.996 million nine-month tax charge and deferred tax balances.
- ERP implementation progress and whether the scheduled August 1, 2018 launch affected operations or costs.
- Whether freight, packaging and manufacturing cost pressures continued, and whether pricing and mix offset them.
- Developments in the Nestlé litigation, pension funding and inventory obsolescence.