Oil-Dri Corporation of America — Q1 FY2015 Form 10-Q
Reporting period: Three months ended October 31, 2014. The filing describes a business that develops, mines, manufactures and markets sorbent products, including cat litter, agricultural products, fluids-purification products and industrial absorbents. Reportable segments are Retail and Wholesale Products and Business to Business Products.
Key financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $66.0 million | $63.5 million |
| Gross profit / gross margin | $13.8 million / 21% | $16.5 million / 26% |
| Operating income / operating margin | $3.2 million / 4.8% | $4.3 million / 6.8% |
| Net income | $2.1 million | $2.9 million |
| Diluted earnings per share | $0.30 | $0.41 |
| Operating cash flow | $1.7 million | $(0.7) million |
- Cash and cash equivalents were $8.4 million at October 31, down from $16.2 million at July 31; short-term investments were $1.9 million. Current assets were $74.4 million versus current liabilities of $25.9 million.
- Notes payable totaled $18.9 million, including $3.5 million current, versus $22.4 million at July 31. The company reported $5.7 million in capital expenditures, $3.5 million in principal payments and $1.3 million in dividends paid during the quarter.
Changes and operating drivers
- Sales rose 4%, but net income fell 27%. Lower gross profit and operating income reflected product mix and higher packaging costs; lower SG&A and interest expense partly offset the decline.
- Retail and Wholesale sales increased 7% to $42.4 million, led by cat litter and industrial absorbents. Cat litter volume rose 18%; private-label sales increased about 50%, partly reflecting the MFM acquisition, while branded cat litter sales fell about 13%. Segment operating income declined 31% to $0.9 million, primarily because private-label litter generally carries lower gross profit.
- Business to Business sales declined 1% to $23.6 million as tons sold fell 7%, partly offset by higher prices. Segment operating income declined 10% to $6.9 million; lower sales and packaging and freight costs were cited as pressures.
- Gross margin decreased to 21% from 26%. Management cited increased private-label cat litter mix and higher packaging costs; comparable natural-gas savings offset higher non-fuel manufacturing costs per ton.
Liquidity, outlook and risks
- Cash decreased by $7.8 million. Investing used $4.8 million, principally reflecting capital spending; financing used $4.8 million, mainly debt repayment and dividends. Operating cash flow improved from the prior-year quarter.
- Management said cash, operating cash flow, available borrowing capacity and other financing options were expected to support foreseeable needs for at least 12 months. Fiscal 2015 capital expenditures were expected to be comparable to fiscal 2014, primarily for manufacturing-facility projects. No specific earnings or sales guidance was provided.
- On December 4, 2014, the company amended and extended its unsecured revolving credit agreement to December 4, 2019, with stated capacity of $25 million, including up to $5 million for foreign letters of credit. It had not borrowed under the facility and reported covenant compliance at October 31. The filing’s text contains an apparent extra zero in the stated facility amount; verify against the filed amendment.
- Risks discussed include product mix and cost pressures, foreign-currency fluctuations, pension-asset market performance and related funding needs, regulation in food-chain-related markets, and natural-gas price volatility. The company had not contracted for fiscal 2015 kiln fuel and was buying natural gas at spot rates.
- An estimated receivable related to the MFM acquisition was reduced by $141,000 to $114,500 pending a sale of retained land. The annual goodwill impairment analysis found no impairment.
Important facts for investors to verify
- Confirm the amended revolver’s stated capacity and detailed terms in the credit-agreement exhibit.
- Monitor whether retail sales growth and private-label mix continue to pressure gross margin and segment earnings.
- Assess cash conversion against capital spending, scheduled debt service and the remaining estimated fiscal 2015 pension contribution of $1.6 million.
- Track the pending MFM land sale and the amount ultimately recovered on the related receivable.