Oil-Dri Corporation of America — Q2 FY2020 Form 10-Q
Reporting period: Fiscal second quarter and six months ended January 31, 2020, compared with the corresponding prior-year periods. Oil-Dri develops, mines, manufactures and markets clay-based sorbent products. Its reportable segments are Business to Business Products and Retail and Wholesale Products.
Financial performance
| Metric | Three months ended Jan. 31, 2020 | Six months ended Jan. 31, 2020 |
|---|---|---|
| Net sales | $71.0 million, up 2% | $142.1 million, up 4% |
| Gross profit / margin | $19.0 million / 26.7%, versus $15.4 million / 22.0% | $38.9 million / 27.4%, versus $31.4 million / 23.1% |
| Operating income | $5.9 million, versus $2.8 million | $10.0 million, versus $3.8 million |
| Net income attributable to Oil-Dri | $4.8 million, versus $2.3 million | $8.4 million, versus $3.2 million |
| Diluted EPS | $0.63, versus $0.30 | $1.09, versus $0.42 |
Six-month operating cash flow was $14.3 million, compared with $2.7 million a year earlier. Capital expenditures were $7.3 million; cash dividends paid were $3.5 million and debt principal payments were $3.1 million. Cash declined $0.3 million to $21.6 million.
At January 31, current assets were $86.2 million and current liabilities $33.5 million (current ratio approximately 2.6). Notes payable totaled $3.1 million, all current, versus $6.1 million at July 31, 2019. The company reported no revolving-credit borrowings during the first half. Its unsecured revolving facility provides up to $45 million, with up to $10 million for letters of credit; the company reported covenant compliance. Shareholders’ equity was $146.9 million.
Changes and operating drivers
- Higher Retail and Wholesale sales, particularly cat litter, drove consolidated growth. Six-month segment sales rose 8% to $91.2 million; segment operating income increased to $9.0 million from $2.7 million.
- Business to Business six-month sales fell 2% to $50.9 million, with lower agricultural and horticultural carrier sales, including the loss of a traditional-granules customer. Segment operating income nevertheless rose 11% to $15.8 million.
- Management attributed improved gross profit chiefly to lower freight and natural gas costs: freight cost per manufactured ton declined about 21% and natural-gas cost per ton about 29% in the first half. Prior-year costs included ERP-related product transfers and Hurricane Michael disruptions.
- SG&A increased 5% for the first half to $28.9 million, including higher incentive accruals and segment costs; a SERP curtailment gain partly offset the increase. The six-month effective tax rate was 16.5%, versus 12.4%, when the prior-year rate benefited from a discrete tax-examination item.
- Inventory fell to $22.7 million from $24.2 million, while the inventory obsolescence reserve increased to $1.36 million from $0.70 million.
Outlook, risks and unusual items
- Management said cash from operations, cash balances and available credit were expected to fund foreseeable needs for at least 12 months. It expected FY2020 capital expenditures and advertising expense to exceed FY2019 levels; no numerical earnings or sales guidance was provided.
- The company reported that China operations were disrupted by COVID-19-related restrictions, including office disruption, limited salesforce travel and delayed shipments. It said the impact had not yet been material but could not estimate the outbreak’s eventual scope or duration. China animal-health sales also remained affected by African swine fever.
- On January 9, 2020, the company amended its pension and SERP plans to freeze participation and future benefit accruals effective March 1, 2020. The pension remeasurement reduced the benefit obligation by about $6.6 million, recorded in other comprehensive income; the SERP remeasurement reduced the liability by about $1.3 million, recorded as an SG&A gain. The company also made a voluntary $5.0 million pension contribution and had no minimum contribution requirement for the rest of FY2020, though it could make another voluntary contribution.
- Adoption of lease-accounting standard ASC 842 added $9.3 million of operating lease right-of-use assets and $10.9 million of lease liabilities at adoption; the January 31 balance sheet included $10.1 million of net operating lease obligations.
- Management reported effective disclosure controls. It noted the new ERP system was still receiving enhancements and that implementation carries inherent control risks, but concluded it had not materially changed internal-control effectiveness.
Investor verification priorities
- Track whether COVID-19 restrictions, shipment delays and continuing African swine fever effects materially change China sales or operations.
- Assess whether lower freight and fuel costs persist and whether cat-litter growth offsets Business to Business customer and product declines.
- Verify the impact of the pension/SERP freezes, future pension funding decisions and related cash requirements.
- Monitor planned FY2020 capital expenditure and advertising increases, inventory reserves, and cash generation against the company’s liquidity outlook.
- Review credit-facility covenant compliance and ongoing ERP implementation and controls disclosures.