Oil-Dri Corporation of America — FY2016 Form 10-K
Reporting period: Fiscal year ended July 31, 2016. This is an annual filing; fourth-quarter figures below are for the quarter ended July 31, 2016.
Business context
Oil-Dri develops, mines, manufactures and markets mineral-based sorbent products, including cat litter, agricultural carriers, animal-health products, bleaching clays and industrial absorbents. Its two reporting segments are Retail and Wholesale Products and Business to Business Products.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $262.3 million | $261.4 million |
| Gross profit / margin | $77.1 million / 29.4% | $60.2 million / 23.0% |
| Operating income | $15.4 million | $15.2 million |
| Net income | $13.6 million | $11.4 million |
| Diluted EPS | $1.87 | $1.59 |
| Operating cash flow | $25.2 million | $27.0 million |
Sales increased 0.3%, while gross profit rose 28%. Lower natural-gas, freight and packaging costs and a shift toward higher-value products lifted gross margin. SG&A increased 37%, principally reflecting approximately $12.5 million of additional cat-litter advertising. Operating income therefore grew only modestly. The 5.2% effective tax rate, versus 19.8%, included release of a $1.68 million valuation allowance on domestic AMT credits; the benefit depended on expected future taxable earnings.
For Q4 FY2016, net sales were $64.9 million, gross profit $18.9 million and net income $5.3 million, versus $65.5 million, $16.7 million and $5.1 million, respectively, in Q4 FY2015. Q4 diluted EPS was $0.72, compared with $0.71.
Segments and material changes
- Business to Business: Sales rose 4% to $96.4 million; segment operating income increased 14% to $33.5 million. Growth came from agriculture carriers, fluid purification and animal health, including new poultry product Varium.
- Retail and Wholesale: Sales fell 2% to $165.9 million; segment operating income declined 4% to $5.0 million. Coarse litter and industrial absorbent sales weakened. Cat’s Pride Fresh & Light sales rose about 13%, and private-label lightweight scoopable litter more than doubled, but advertising investment increased substantially.
- Total cash, cash equivalents and short-term investments were $28.8 million, up from $22.3 million. Working capital was $60.4 million and the working-capital ratio was 3.0. Cash alone was $18.6 million, down from $20.1 million.
- Notes payable totaled $15.4 million, including $3.1 million due within one year, down from $18.9 million. The $25 million revolving credit facility had no borrowings at year-end; the company reported covenant compliance.
Outlook, risks and unusual items
Management expects FY2017 advertising expense to exceed FY2016 levels as it continues promoting lightweight cat litter. Capital expenditures are also expected to increase, including the start of an enterprise resource planning implementation. Management said it expects available cash, operating cash flow and credit capacity to fund foreseeable needs for at least 12 months, while noting that cash requirements may change.
Key risks include intense competition, reliance on major customers (Walmart represented 19% of sales and 29% of receivables), volatile energy and freight costs, mining and environmental regulation, and international currency and operating risks. Pension and postretirement liabilities increased, with the year-end balance-sheet liability rising by about $9.1 million, primarily because of lower actuarial discount rates. The company is pursuing two patent-infringement lawsuits against Nestlé Purina; damages and total litigation expense were not estimable, though management did not expect a material adverse effect. The filing reports no material off-balance-sheet arrangements. Auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether lightweight cat-litter growth and the elevated advertising spend produce durable sales and profit gains.
- How much FY2017 earnings benefit from the FY2016 AMT valuation-allowance release, and the assumptions supporting future use of remaining tax attributes.
- Whether operating cash flow can sustain planned higher advertising and capital spending, dividends and scheduled debt repayments.
- Developments in the Nestlé Purina patent cases, Walmart concentration, and pension funding obligations.