Oil-Dri Corporation of America — Form 10-Q
Reporting period: First quarter of fiscal 2022, three months ended October 31, 2021; comparison is with the three months ended October 31, 2020. Dollar amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $82.460 | $76.097 | +8% |
| Gross profit / margin | $13.818 / 17% | $18.780 / 25% | Margin down 8 percentage points |
| Operating income | $0.445 | $5.177 | Down substantially |
| Income before taxes | $0.710 | $4.755 | Down 85% |
| Net income attributable to Oil-Dri | $0.585 | $3.984 | |
| Diluted EPS, Common | $0.08 | $0.56 | |
| Operating cash flow | $(0.596) | $(3.435) | |
| Capital expenditures | $6.736 | $3.568 |
Higher freight, packaging, natural gas, materials, labor and other manufacturing costs drove gross-margin compression. Freight cost per manufactured ton, excluding freight no longer charged to a major customer, rose about 37%; packaging cost per ton rose about 44%, natural gas cost per ton about 97%, and non-fuel manufacturing cost per ton about 15%. SG&A declined 2% to $13.373 million.
Segments and material changes
- Business to Business Products: Sales rose 5% to $28.929 million; operating income fell 11% to $6.746 million. Fluids purification sales increased, while agricultural and horticultural and animal health sales declined.
- Retail and Wholesale Products: Sales rose 10% to $53.531 million, including higher cat litter and industrial and sports sales. Operating income declined to $0.074 million from $3.550 million as cost increases outpaced sales growth.
- Management reported a surge in demand and higher order backlog, mainly from customer pickup and transportation delays, longer materials lead times, and some company capacity constraints. The company expanded production shifts and equipment.
- Inventory increased to $28.692 million from $23.598 million at July 31, 2021, reflecting higher costs and inventory buildup for anticipated demand. Cash declined to $13.055 million from $24.591 million.
Liquidity, debt and capital allocation
At October 31, 2021, total assets were $223.888 million, total liabilities $67.587 million, and stockholders’ equity $156.301 million. Notes payable were $8.884 million net of unamortized issuance costs, including $1.000 million current. The company had a $45 million unsecured revolving credit facility, with no borrowings during the quarter, and reported compliance with its covenants. It said cash, operating cash flow and available financing should meet foreseeable needs for at least 12 months.
Quarterly cash uses included $6.736 million for capital expenditures, $1.865 million for dividends paid and $2.291 million for treasury-stock purchases. Management expects fiscal 2022 capital expenditures to exceed fiscal 2021 levels and advertising expense to be essentially flat year over year.
Outlook, risks and unusual items
- Management expects to recover some increased costs through customer price increases. It noted continued uncertainty from COVID-19, inflation, labor shortages, transportation constraints, supply-chain disruption and customers’ demand patterns. It had not experienced significant collection problems or major supply interruptions to date.
- COVID-related effects varied by product and geography; UK industrial granules and animal health and nutrition sales remained pressured, while some industrial, sports and fluids purification products recovered with reopening and increased air travel. African Swine Fever also weighed on feed-additive demand.
- The company reported ordinary-course legal matters and a former service provider’s contract claim. An estimated liability was recorded; management considers the claim without merit and any loss unlikely to be material, but the outcome remains uncertain.
- The filing revised prior-period cost-of-sales and SG&A classifications for an immaterial error; the correction did not change previously reported net income. Management reported disclosure controls were effective and no material changes to risk factors since the fiscal 2021 Form 10-K.
Important facts for investors to verify
- Whether price increases and productivity gains can offset continued freight, packaging, energy, labor and materials inflation.
- Whether backlog converts to sales as transportation and materials delays ease and added production capacity comes online.
- Working-capital and liquidity trends, particularly inventory growth, cash use, capital spending and access to the undrawn revolver.
- Progress in the Retail and Wholesale segment’s recovery in operating profitability, and the persistence of weakness in affected foreign and animal-health markets.
- Updates on the recorded legal contingency and any changes in the company’s outlook or risk disclosures.