Oil-Dri Corporation of America — Form 10-Q Summary
Business context and reporting period: Oil-Dri develops, mines, manufactures and markets clay-based sorbent products, including cat litter, fluid purification products, agricultural and animal-health products, and industrial and sports products. This filing reports the fiscal third quarter and nine months ended April 30, 2022; comparisons are with the corresponding 2021 periods unless noted. The company reports Business to Business and Retail and Wholesale Products segments.
Financial performance and position
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Net sales | $85.8 million, up 12% | $255.4 million, up 13% |
| Gross profit and margin | $15.6 million; 18% of sales, versus 20% | $45.0 million; 18% of sales, versus 22% |
| Operating income (loss) | $(4.0) million, including $5.6 million goodwill impairment | $(1.7) million, including $5.6 million goodwill impairment |
| Net income (loss) attributable to Oil-Dri | $(2.1) million, versus $2.2 million | $0.5 million, versus $10.5 million |
| Diluted earnings (loss) per share | Common $(0.32); Class B $(0.24) | Common $0.06; Class B $0.05 |
- Segment results: Third-quarter Business to Business sales rose 19% to $31.4 million, while operating income fell 11% to $5.7 million. Retail and Wholesale sales rose 9% to $54.4 million, but the segment reported a $3.1 million operating loss, including the goodwill impairment. For the nine months, segment sales were $92.9 million and $162.5 million, respectively; operating income was $20.1 million for Business to Business and a $2.1 million loss for Retail and Wholesale.
- Cash flow: Nine-month operating cash flow was $5.5 million, versus $8.3 million. Investing used $16.0 million, principally for capital expenditures of $16.0 million, versus $10.8 million in the prior period. Financing provided $8.8 million, including $25.0 million of note proceeds, and included $5.6 million of dividends paid and $10.5 million of share repurchases. Cash declined $1.8 million to $22.8 million.
- Liquidity and debt: At April 30, cash was $22.8 million, current assets $113.7 million, and current liabilities $41.4 million. Notes payable totaled $33.8 million, net of issuance costs, compared with $8.9 million at July 31, 2021. The company had a $45 million revolving credit facility, with no borrowings under it during the first nine months, and reported compliance with its covenants at April 30.
- Dividends and repurchases: Nine-month dividends declared were $0.81 per Common share and $0.6075 per Class B share. The company repurchased $10.5 million of treasury stock during the nine months.
Material changes and management commentary
- Higher sales reflected volume growth and price increases in both segments. Rising freight, packaging, natural gas and other manufacturing costs more than offset sales growth over the nine-month period, reducing gross margin from 22% to 18%.
- Management reported stronger margins beginning in the third quarter as selling prices began to catch up with costs, while continuing efforts to restore historical margins through pricing, volume growth and cost reduction.
- Third-quarter goodwill testing, prompted by lower share prices and the adverse effects of cost increases and supply-chain spending, resulted in a $5.6 million impairment of Retail and Wholesale Products goodwill. No goodwill remained in that reporting unit; no impairment was recorded for Business to Business.
- Inventory increased $11.4 million from July 31, 2021, reflecting higher costs and stock-building for anticipated demand, supply disruption mitigation and a planned plant repair shutdown. Backlog remained elevated amid strong demand, labor constraints, shipping delays and supply-chain disruption; management cited additional labor, shifts and equipment as mitigation steps.
- Management said cash from operations and available liquidity should cover foreseeable requirements for at least 12 months. Fiscal 2022 capital expenditures were expected to exceed fiscal 2021, including an approximately $6.5 million plant renovation; advertising expense was expected to be lower than fiscal 2021. The filing gives no quantified revenue or earnings forecast.
Risks, contingencies and unusual items
- Management highlighted inflation and commodity-cost pressure, especially fuel, freight, packaging and natural gas; ongoing labor and supply-chain constraints; shipping delays; and uncertainty related to COVID-19, geopolitical tensions and customer demand. Cost increases may persist or may not be fully recovered through pricing.
- COVID-19 continued to affect some markets, including animal-health sales in China and certain international product demand. Management also noted that customer backlog and supply constraints could affect future results.
- The company disclosed ordinary-course litigation and a former service provider’s contract claim concerning a contingency fee. Oil-Dri considers the claim without merit, has recorded an estimated liability, and says the outcome is uncertain but any loss is unlikely to be material.
- Effective June 3 and June 6, 2022, amendments to the Prudential note agreement and BMO credit agreement revised definitions used in covenant calculations. The goodwill impairment was excluded from quarterly covenant calculations under the amended definitions.
- The filing revised prior-period cost-of-sales and SG&A classifications for an immaterial error; the correction did not affect previously reported net income. Management reported disclosure controls were effective and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing and operating improvements continue to offset inflation and restore gross margins.
- Whether backlog, labor availability, freight capacity and supplier constraints improve, and whether inventory converts into sales without further disruption.
- The Retail and Wholesale segment’s operating performance following the goodwill impairment and the assumptions behind any future impairment testing.
- Cash generation, capital spending, share repurchases and dividends relative to liquidity and the increased debt balance.
- The company’s covenant headroom under the amended debt agreements and any effects of future changes in financing costs or operating results.
- Developments in the contingency-fee litigation and the ultimate liability, if any.