Oil-Dri Corporation of America — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended April 30, 2016. The interim financial statements are unaudited. Oil-Dri develops, mines, manufactures and sells sorbent products through its Retail and Wholesale Products and Business to Business groups.
Key financial results
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Net sales | $64.2 million, down 1% from $65.2 million | $197.4 million, up 1% from $195.9 million |
| Gross profit / margin | $18.6 million / 29%, versus $14.4 million / 22% | $58.3 million / 30%, versus $43.4 million / 22% |
| Operating income (loss) | $(1.2) million, versus $1.9 million | $11.9 million, versus $9.4 million |
| Net income (loss) | $(0.9) million, versus $1.4 million; diluted EPS $(0.13) versus $0.19 | $8.4 million, up 33%; diluted EPS $1.15 versus $0.88 |
| Operating cash flow | Not separately presented for the quarter | $19.4 million, versus $16.3 million |
For the nine-month period, lower natural gas, freight and packaging costs and favorable product mix supported higher gross profit. SG&A rose 36%, including higher advertising and incentive-bonus accruals. For the quarter, SG&A increased 58%, principally due to the cat-litter campaign, driving the consolidated operating loss despite improved gross margin.
Segments and material changes
- Business to Business: Nine-month sales rose 3% to $70.9 million and operating income rose 15% to $24.0 million. In Q3, sales increased 3% to $22.5 million and operating income increased 9% to $7.3 million. Sales growth included animal health and nutrition products and fluid purification products; higher promotion costs were more than offset by favorable mix and lower input costs.
- Retail and Wholesale: Nine-month sales declined 1% to $126.5 million, while operating income increased to $5.7 million from $2.5 million. Q3 sales fell 4% to $41.8 million and the segment reported a $4.0 million operating loss, versus $0.4 million income, largely reflecting a 140% increase in SG&A from advertising. Traditional private-label cat litter sales were affected by the loss of two customers.
- Consolidated nine-month gross margin improved to 30% from 22%; the company cited favorable mix, natural gas cost per manufactured ton down 24%, and lower freight and packaging costs. Other manufacturing costs per ton increased about 2% for the nine months and 5% in Q3, including higher repair costs.
Liquidity, debt and cash flow
- At April 30, cash and cash equivalents were $17.2 million and short-term investments were $10.5 million, compared with $20.1 million and $2.2 million at July 31, 2015. Cash declined $2.9 million over the nine months as short-term investments increased $8.3 million.
- Nine-month operating cash flow was $19.4 million; investing activities used $15.1 million, including $7.1 million of capital expenditures and net purchases of short-term investments; financing activities used $7.3 million, including $3.5 million of debt principal payments and $4.2 million of dividends.
- Notes payable totaled $15.4 million, including $3.1 million current maturities, down from $18.9 million at July 31, 2015. The company had a $25 million unsecured revolving credit facility, unused during the period, and reported compliance with its covenants. Current assets were $89.9 million and current liabilities $30.6 million.
- Management said cash, investments, operating cash flow and available borrowing capacity were expected to cover foreseeable working-capital needs, capital expenditures, dividends and debt service for at least 12 months. Dividends declared per share for the nine months increased to $0.63 for Common Stock and $0.4725 for Class B Stock.
Outlook, risks and notable items
- The Fresh & Light Ultimate Care lightweight cat-litter marketing campaign was to continue through Q4 FY2016 and into FY2017. Management expected annual advertising expense to significantly exceed the $10.8 million spent when the lightweight cat-litter category was initially created; no specific earnings or sales guidance was provided.
- Risks discussed include foreign-currency movements, pension-asset market fluctuations and resulting funding needs, fuel-price volatility, and regulatory changes affecting fluid purification, animal health and agricultural markets. Natural-gas forward contracts covered about 26% of planned kiln-fuel needs for the remainder of FY2016 and 6% for FY2017; the company said contracts were for normal business purposes, not speculation.
- Contractual cash obligations totaled $32.5 million, including $15.4 million of notes payable, $15.0 million of operating leases and $1.5 million of interest. Pension contributions were $962,000 for the nine months, with approximately $301,000 estimated for the remainder of FY2016.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. Forward-looking statements are subject to risks described in its FY2015 Form 10-K.
Important facts for investors to verify
- Whether continued Fresh & Light advertising generates sales and margins sufficient to offset its substantial expense, particularly after Q3’s Retail and Wholesale operating loss.
- Whether gross-margin benefits from product mix and lower input costs persist, and how repair and other manufacturing-cost increases develop.
- Retail and Wholesale recovery prospects given lower Q3 sales, lost private-label customers and declining coarse cat-litter demand.
- Cash generation, inventory levels, planned investment spending, debt repayments and compliance with revolving-credit covenants.
- Potential pension contribution changes and exposure to fuel prices, foreign currencies and regulatory developments.