Business context and reporting period
Oil-Dri Corporation of America develops, mines, manufactures and markets sorbent products, including cat litter, agricultural and animal-health products, bleaching clay, industrial absorbents and sports-field products. This Form 10-Q covers the fiscal third quarter and first nine months ended April 30, 2019; comparisons are with the same periods in 2018. Amounts below are in millions of dollars unless otherwise stated.
Financial performance and position
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Net sales | $70.9 vs. $64.8 | $206.9 vs. $200.4 |
| Gross profit / margin | $16.8 / 23.7% vs. $17.7 / 27.2% | $48.2 / 23.3% vs. $56.3 / 28.1% |
| Operating income | $2.3 vs. $3.3 | $6.2 vs. $12.7 |
| Net income attributable to Oil-Dri | $5.6 vs. $3.6 | $8.8 vs. $5.5 |
| Diluted earnings per common share | $0.74 vs. $0.48 | $1.17 vs. $0.75 |
Cash flow and liquidity: Nine-month operating cash flow was $15.4, compared with $2.8 a year earlier. Capital expenditures were $10.2; cash used in investing and financing activities was $3.8 and $8.2, respectively. Cash increased $3.5 to $16.2. Short-term investments were $0.7, down from $7.1 at July 31, 2018. Current assets were $86.8 and current liabilities $31.5. Notes payable totaled approximately $6.1, including $3.1 current maturities; the company reported no revolver borrowings during the nine-month period.
Margins and costs: The company attributed lower gross margins to higher freight, manufacturing and packaging costs. For the nine months, freight cost per ton rose about 17%, non-fuel manufacturing cost per ton about 9%, and packaging cost per ton about 13% year over year. SG&A declined 3% for the nine months, but rose about 1% in the quarter. The nine-month effective tax rate was 15%; prior-year tax expense included a $4.0 adjustment related to the 2017 Tax Act.
Material changes versus prior periods
- Quarterly sales rose about 9% and nine-month sales about 3%, but operating income fell in both periods as cost inflation outweighed revenue growth.
- Quarterly attributable earnings benefited from $4.465 of other income, which included net proceeds from resolution of legal proceedings. Nine-month other income was $4.504. The confidential settlement amount is not separately disclosed, so its precise contribution cannot be determined from the filing.
- Retail and Wholesale sales increased 12% in the quarter and 7% year to date, driven mainly by cat litter. Its quarterly operating income increased to $4.2, while nine-month operating income decreased to $6.8.
- Business to Business sales rose 5% in the quarter but declined 2% year to date. Nine-month operating income fell 17% to $21.8. Animal health and nutrition sales were pressured by the swine-virus outbreak in China and delayed product registrations in Africa.
- The company corrected a prior-period comprehensive-income presentation error: 2018 other comprehensive and total comprehensive income had been understated by $2.264. Management assessed the error as immaterial to the prior interim financial statements and presented corrected comparative figures.
Outlook, management commentary, risks and contingencies
- No formal earnings or revenue guidance is provided. Management expected recent commodity-price declines to benefit packaging costs in fiscal fourth quarter and expected fiscal 2019 advertising expense to be below fiscal 2018.
- Management said cash from operations, available credit, cash and investments, and potential additional financing should support foreseeable needs for at least 12 months. The company also noted that liquidity depends on future performance and economic and business conditions.
- The $45.0 million unsecured revolving credit facility was extended to January 31, 2024, with up to $10.0 million available for letters of credit. The company reported compliance with its covenants at April 30, 2019. The filing states variable rates would have been 5.75% under the prime-based option or 3.83% under the LIBOR-based option.
- The ERP system became operational August 1, 2018. Implementation and related disruptions increased product transfers and costs and contributed to plant processing interruptions; Hurricane Michael also disrupted operations at one plant. Management said implementation had not materially changed the effectiveness of internal controls, while identifying inherent implementation risks.
- In March 2019, a jury found in Oil-Dri’s favor in its patent litigation against Nestlé Purina. The parties subsequently agreed on resolution of post-trial motions and the related patent review proceeding; settlement proceeds were included in other income.
- Management reported disclosure controls and procedures were effective as of quarter-end. The filing cautions that forward-looking statements are subject to risks, including ERP implementation issues, and actual results may differ.
Important facts for investors to verify
- How much of reported earnings and other income came from the confidential legal resolution, and whether any comparable proceeds are expected.
- Whether freight, manufacturing and packaging cost pressures ease as management anticipated, and whether gross margins recover.
- The continuing effects of ERP implementation on production, inventory, customer service and operating costs.
- Developments in animal health and nutrition demand, including the China swine-virus impact and delayed African registrations.
- Cash conversion and working-capital trends: inventory increased $4.2 and receivables increased during the nine-month period.
- Future capital allocation, including dividends and authorized share repurchases, alongside debt service and pension obligations.