Business context and reporting period
Oil-Dri Corporation of America’s Form 10-K covers the fiscal year ended July 31, 2018, compared with fiscal 2017. It is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide clear standalone Q4 financial results. The company develops, mines, manufactures and markets clay-based and other sorbent products, including cat litter, agricultural and animal-health products, bleaching clays, industrial absorbents and sports-field products. Its reportable segments are Retail and Wholesale Products and Business to Business Products.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $266.0 million | $262.3 million |
| Gross profit / margin | $72.0 million / 27% | $73.7 million / 28% |
| Operating income | $14.7 million | $15.2 million |
| Net income attributable to Oil-Dri | $8.24 million | $10.79 million |
| Diluted earnings per share | $1.11 | $1.47 |
| Operating cash flow | $10.6 million | $26.9 million |
| Capital expenditures | $15.1 million | $14.8 million |
Cash and cash equivalents were $12.8 million and short-term investments were $7.1 million at year-end, combined down $12.8 million from FY2017. Total assets were $194.7 million; current liabilities were $30.9 million. Notes payable totaled $9.25 million, including $3.08 million current maturities. No revolver borrowings were outstanding at year-end under the $25 million unsecured facility, which expires December 2019; $1.236 million was allocated to guarantees. The company reported compliance with debt covenants. The Board declared dividends totaling $0.93 per Common share and $0.6975 per Class B share for FY2018.
Material changes versus the prior comparable period
- Sales rose about 1%, but gross profit fell $1.7 million and operating income declined $0.6 million as costs increased. Freight cost per ton rose about 12%, packaging cost per ton about 9%, and non-fuel manufacturing cost per ton about 3%.
- Net income attributable to Oil-Dri fell 24%. The $3.996 million provisional tax charge from remeasuring deferred tax assets under the 2017 Tax Act reduced diluted EPS by approximately $0.54. Excluding that charge, management reported an FY2018 effective tax rate of 17.8%, versus 25.8% in FY2017.
- Business to Business sales increased 5% to $105.0 million and segment operating income rose to $35.1 million. Retail and Wholesale sales declined 1% to $161.0 million, while segment operating income increased 3% to $7.0 million, helped by lower advertising expense.
- Operating cash flow declined to $10.6 million, partly reflecting an $11.0 million reduction in pension and postretirement liabilities after a voluntary $11.5 million pension contribution. Cash used for dividends was $6.2 million; scheduled debt principal payments were $3.1 million.
Outlook, commentary, risks and unusual items
- Management expects FY2019 advertising expense to be similar to FY2018 and capital expenditures to be higher, primarily for manufacturing facilities. It expects cash, operating cash flow and credit availability to meet foreseeable needs for at least 12 months, and does not expect a FY2019 pension contribution.
- The multi-year ERP implementation disrupted order processing, shipments and invoicing. Management warned that further implementation difficulties could affect next-year sales, earnings and cash flow.
- Walmart represented 18% of FY2018 sales and 26% of year-end receivables. The company identifies major-customer dependence, competition, pricing pressure, freight and input-cost inflation, mining and environmental regulation, and operational, IT and cyber disruptions as material risks.
- Oil-Dri is pursuing patent litigation against Nestlé Purina; trial was scheduled for March 2019, while related patent-review proceedings continued. Management said it could not estimate potential damages or total expense and did not expect a material adverse effect based on the case’s then-current status.
- The filing reports 276.2 million tons of proven and probable mineral reserves; management estimated proven reserves, excluding Nevada, Oregon and Tennessee, could support more than 40 years of consumption at the FY2018 rate.
Important facts for investors to verify
- Confirm the reported earnings impact and any subsequent adjustment to the provisional $3.996 million Tax Act charge.
- Track whether freight, packaging and other manufacturing cost inflation is offset by pricing, mix or productivity gains.
- Monitor ERP implementation progress and any effects on order fulfillment, invoicing, revenue and cash flow.
- Review operating cash flow and liquidity in light of pension funding, planned higher capital spending, debt maturities and dividend commitments.
- Assess Walmart and other customer concentration, cat-litter customer losses, and the outcome of the Nestlé patent proceedings.