Oil-Dri Corporation of America — Q1 FY2017 Form 10-Q
Reporting period: Three months ended October 31, 2016; year-over-year comparisons are to the three months ended October 31, 2015. Amounts below are in millions unless otherwise noted.
Business context and results
Oil-Dri develops, mines, manufactures and markets sorbent products, including cat litter, agricultural and animal-health products, fluid-purification aids, and industrial and sports-field products. It reports Retail and Wholesale Products and Business to Business Products segments.
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $66.612 | $67.795 |
| Gross profit | $20.725 | $20.653 |
| Gross margin | 31% | 30% |
| Operating income | $3.046 | $7.776 |
| Net income | $2.009 | $5.423 |
| Diluted earnings per share | $0.28 | $0.75 |
| Operating cash flow | $1.325 | $8.516 |
| Capital expenditures | $4.295 | $1.765 |
Gross margin was approximately 31.1% versus 30.5%; net margin was approximately 3.0% versus 8.0%. Selling, general and administrative expenses rose 37%, to $17.679 million from $12.877 million.
Material changes and segment performance
- Sales fell 2% year over year. Business to Business sales increased 6% to $27.473 million, with segment operating income up 3% to $9.408 million. Animal health and nutrition sales rose approximately 53%; fluid-purification sales rose approximately 6%.
- Retail and Wholesale sales decreased 7% to $39.139 million. Cat-litter sales fell approximately 8%, partly reflecting the decision to exit two major low-margin customers. Segment operating results moved from $5.402 million of income to a $0.507 million loss.
- Retail and Wholesale advertising expense increased approximately $5.4 million, principally for the Fresh & Light Ultimate Care lightweight cat-litter campaign. This was the main driver of the consolidated operating-income decline.
- Lower packaging costs supported gross profit, while natural-gas cost per manufactured ton rose approximately 4% and other manufacturing costs per ton rose approximately 9%.
- Foreign-subsidiary sales increased 25% to $3.151 million; those subsidiaries reported $0.031 million net income versus a $0.467 million net loss a year earlier.
Cash, debt and liquidity
- At October 31, cash and cash equivalents were $15.991 million and short-term investments were $5.359 million, together $21.350 million. Combined balances declined $7.463 million from July 31.
- Operating cash flow declined to $1.325 million, with cash uses including a $3.592 million decrease in accrued expenses, primarily from payment of the prior-year incentive bonus, and higher prepaid expenses.
- Financing used $4.554 million, including $3.083 million of scheduled debt payments and $1.477 million of dividends paid. Notes payable were $12.223 million on the balance sheet, including current maturities; the contractual-obligations table reports $12.333 million in principal payments.
- Current assets were $85.999 million and current liabilities $27.327 million. The company had a $25 million unsecured revolving credit facility, expiring December 4, 2019, with no borrowings during the quarter; it reported compliance with covenants.
- Management said available cash, investments, operating cash flow and credit access were expected to cover foreseeable needs for at least 12 months. Capital expenditures were expected to increase in FY2017, partly for an enterprise resource planning system.
Outlook, risks and other disclosures
Management expected to continue the cat-litter advertising campaign through FY2017 and anticipated advertising expense to exceed FY2016 levels. No numerical full-year earnings or sales guidance was provided. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Disclosed exposures include foreign-currency movements, pension-asset market fluctuations, natural-gas prices, and regulatory changes affecting fluid purification, animal health and agricultural markets. The company had not contracted for natural gas for the remainder of FY2017. Pension contributions were $0.301 million in the quarter, with approximately $1.174 million estimated for the remainder of the fiscal year. Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing text provided does not describe a material litigation contingency.
Key facts for investors to verify
- Whether the ongoing cat-litter campaign improves sales and market share enough to justify higher advertising costs.
- Whether Retail and Wholesale results recover after exiting low-margin accounts, and whether Business to Business growth continues.
- Drivers of the sharp year-over-year decrease in operating cash flow and the timing of accrued-expense and working-capital movements.
- Capital-spending and ERP implementation costs, alongside scheduled debt repayment and dividend commitments.
- Future manufacturing-cost trends, especially packaging, natural gas, employee benefits, repairs and depreciation.