Oil-Dri Corporation of America — Form 10-Q Summary
Business context and period: The company develops, mines, manufactures and markets sorbent products, including cat litter, agricultural and animal-health products, fluid-purification aids, absorbents and sports-field products. This unaudited report covers the third quarter and nine months ended April 30, 2017, in fiscal 2017. Comparisons are with the corresponding 2016 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Net sales | $64.745 (2016: $64.235) | $196.531 (2016: $197.397) |
| Gross profit / gross margin | $17.781 / 27% (2016: $18.568 / 29%) | $57.631 / 29% (2016: $58.283 / 30%) |
| Operating income (loss) | $3.746 (2016: $(1.235)) | $12.379 (2016: $11.941) |
| Net income (loss) | $3.211 (2016: $(0.892)) | $9.470 (2016: $8.352) |
| Diluted EPS | $0.44 (2016: $(0.13)) | $1.29 (2016: $1.15) |
| Operating cash flow | Not provided as a quarterly figure | $21.033 (2016: $19.409) |
- Cash and liquidity: At April 30, cash and equivalents were $13.603 and short-term investments were $18.700, totaling $32.303. Current assets were $98.077 and current liabilities $32.771.
- Debt: Notes payable totaled $12.237 on the balance sheet, including $3.083 current maturities. The company had an unused $25.0 revolving credit facility, expiring December 2019, and reported compliance with its covenants.
- Cash uses: Nine-month capital expenditures were $10.418; dividends paid were $4.441; scheduled debt principal payments were $3.083. Cash decreased $5.026, while short-term investments increased $8.516 from July 31, 2016.
Material changes and segment results
- Quarterly sales rose slightly, but gross margin declined to 27% from 29%. Natural-gas cost per manufactured ton was about 54% higher year over year; other manufacturing costs per ton rose about 7%. Lower freight costs partly offset these increases.
- Quarterly SG&A fell 29%, largely because Retail and Wholesale advertising expense was approximately $6.4 lower than in the prior-year quarter. This helped the company move from an operating loss to operating income and from a net loss to net income.
- For the nine months, sales declined modestly while net income rose 13% and diluted EPS increased to $1.29 from $1.15. Lower SG&A and a lower effective tax rate supported earnings, while higher fuel and manufacturing costs weighed on gross profit.
- Business to Business: Nine-month sales increased 6% to $74.893 and operating income rose 4% to $25.033. Quarterly sales increased 8% to $24.159 and operating income rose 7% to $7.810. Animal-health and nutrition and fluid-purification sales contributed to growth.
- Retail and Wholesale: Nine-month sales decreased 4% to $121.638, while operating income increased 6% to $5.996. Quarterly sales decreased 3% to $40.586; operating income was $1.516 versus a $4.015 loss. Lower advertising drove the operating-income improvement. Cat-litter sales declined, partly reflecting the exit from low-margin business with two major customers over the nine-month period.
Outlook, risks and unusual items
- Management planned to continue promoting lightweight cat litter through fiscal 2017’s fourth quarter, reallocating some spending between advertising and trade promotions. It expected full-year advertising and trade spending to remain significant but below fiscal 2016 levels.
- Management expected fiscal 2017 capital expenditures to increase, including spending on enterprise resource planning software and related infrastructure. It believed cash, investments, operating cash flow and available credit would cover foreseeable needs for at least 12 months.
- The company identified natural-gas prices as a cost risk and had not purchased natural-gas contracts for planned kiln fuel needs for the remainder of fiscal 2017. It also cited foreign-currency exposure, pension-asset market risk and regulatory risks in fluid purification, animal health and agriculture.
- Two patent lawsuits against Nestlé Purina remained pending. The company said it could not estimate possible damages or total litigation expense, but management did not believe the matters would have a material adverse effect based on their then-current status.
- The quarterly and nine-month effective tax rates were lower than the prior-year rates, which management attributed to estimated depletion deductions representing a greater share of pretax income. Rates were 15% versus 28% for the quarter and 19% versus 27% year to date.
- The report notes that interim results are not necessarily indicative of full-year results. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher natural-gas and other manufacturing costs continue to pressure margins, and how fuel-price exposure is managed.
- Whether cat-litter demand and sales stabilize as advertising and trade-promotion spending is shifted and reduced versus fiscal 2016.
- Progress, costs and expected benefits of the ERP implementation and elevated capital expenditures.
- Developments in the Nestlé patent litigation, including the appeal and any potential financial impact.
- Assumptions underlying the lower estimated tax rate, pension obligations and planned pension contributions.