Oil-Dri Corporation of America — Form 10-Q
Reporting period: Second quarter and six months ended January 31, 2015. The company develops, mines, manufactures and markets clay-based sorbent products through its Retail and Wholesale Products Group and Business to Business Products Group. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Three months ended Jan. 31, 2015 | Three months ended Jan. 31, 2014 | Six months ended Jan. 31, 2015 | Six months ended Jan. 31, 2014 |
|---|---|---|---|---|
| Net sales | $64.6 | $69.3 | $130.7 | $132.9 |
| Gross profit | $15.2 | $16.9 | $29.0 | $33.4 |
| Gross margin | 23.6% | 24.4% | 22.2% | 25.1% |
| Operating income | $4.3 | $5.7 | $7.4 | $10.1 |
| Net income | $2.8 | $4.3 | $4.9 | $7.2 |
| Diluted EPS | $0.39 | $0.60 | $0.69 | $1.01 |
| Operating cash flow | Not separately stated | Not separately stated | $10.6 | $2.4 |
Liquidity and debt: At January 31, 2015, cash and cash equivalents were $12.8 million, short-term investments $0.9 million, and current assets $77.0 million versus current liabilities of $27.7 million. Notes payable totaled $18.9 million, including $3.5 million current. Cash declined $3.5 million during the six-month period. The company had a $25 million unsecured revolving credit facility, extended through December 4, 2019; it had no borrowings under the facility and reported compliance with its covenants.
Cash uses and capital position: Six-month investing outflow was $8.0 million, including $9.9 million of capital expenditures, primarily for processing and packaging equipment. Financing outflow was $6.1 million, including $3.5 million in scheduled debt payments and $2.6 million in dividends. Total assets were $184.3 million and stockholders’ equity $106.9 million at period end.
Material changes and management commentary
- For the six months, sales declined 2% and net income 31% year over year. Second-quarter sales fell 7% and net income fell 35%.
- Six-month Business to Business sales fell 5% to $46.7 million and segment operating income fell 9% to $14.3 million. Lower fluid-purification and co-packaged cat-litter sales were partly offset by animal health and nutrition growth.
- Six-month Retail and Wholesale sales were nearly flat at $84.0 million, but segment operating income fell 50% to $2.1 million. Branded cat-litter competition, greater private-label mix, and higher manufacturing and packaging costs weighed on results. Industrial absorbents sales increased.
- Management attributed lower six-month gross margin mainly to higher manufacturing and packaging costs per ton, lower production and fixed-cost absorption, and unfavorable product mix. Lower natural-gas costs provided a partial offset. Lower SG&A, including lower advertising and incentive accruals, also partly offset operating pressure.
- Foreign subsidiaries generated $5.9 million in six-month sales but reported a $0.7 million net loss, primarily from the China subsidiary’s market integration and foreign-exchange losses.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management said new Cat’s Pride Fresh & Light Ultimate Care and lightweight private-label litter products introduced at quarter-end may support second-half fiscal 2015 sales growth. It expected some relief from lower resin prices later in the fiscal year.
- Management expected fiscal 2015 capital spending to be comparable to fiscal 2014 and estimated remaining fiscal 2015 pension contributions of approximately $1.3 million. It believed available cash, operating cash flow and credit availability would fund foreseeable needs for at least 12 months.
- The company bought natural gas at spot rates and had not contracted for fiscal 2015 kiln-fuel needs. It identified exposure to fuel prices, foreign exchange, pension-asset market fluctuations, and regulatory changes affecting food-chain-related markets.
- Capital expenditures rose to $9.9 million from $6.8 million in the comparable period. Prior-year investing cash flow included the $12.5 million MFM acquisition; there was no business acquisition cash outflow in the current period.
- The annual goodwill impairment review found no impairment. The company also reported no material impact from newly adopted tangible-property tax regulations.
Important facts for investors to verify
- Whether new litter products and expected resin-cost relief improve Retail and Wholesale margins in the second half.
- Whether lower production volumes, product mix, and manufacturing and packaging costs continue to pressure gross profit.
- Progress and profitability of the China subsidiary, and the effect of currency movements on foreign operations.
- Capital-spending requirements, planned debt repayments, pension funding, and compliance with revolving-credit covenants.
- Management’s estimates and forward-looking statements remain subject to the risks described in the company’s fiscal 2014 Form 10-K; actual results may differ.