Oil-Dri Corporation of America — Q3 FY2013 Form 10-Q
Reporting period: Fiscal quarter and nine months ended April 30, 2013. Unaudited consolidated results. Oil-Dri develops, mines, manufactures and sells sorbent-based products, including cat litter, industrial absorbents, fluid purification products, and agricultural and animal health products. Its reportable segments are Retail and Wholesale Products and Business to Business Products.
Key financial results
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Net sales | $64.2 million, up 7% from $59.8 million | $186.7 million, up 4% from $179.6 million |
| Gross profit / gross margin | $16.9 million / 26%, versus $14.7 million / 25% | $50.4 million / 27%, versus $43.5 million / 24% |
| Operating income | $4.7 million, versus $3.0 million | $14.5 million, versus $9.6 million |
| Net income | $3.3 million, versus $1.9 million | $9.8 million, versus $6.2 million |
| Diluted EPS | $0.46, versus $0.26 | $1.40, versus $0.86 |
| Operating cash flow | Not separately reported for the quarter | $19.3 million, versus $15.6 million |
- Segment performance, nine months: Business to Business sales were $68.0 million, up 6%, and segment operating income was $22.6 million, up 8%. Retail and Wholesale sales were $118.7 million, up 3%, while segment operating income rose to $9.4 million from $2.3 million.
- Balance sheet and liquidity: At April 30, cash and cash equivalents were $22.6 million and short-term securities were $17.4 million. Current assets were $99.4 million versus current liabilities of $30.3 million. Total debt was $25.9 million, including $3.5 million current maturities; total liabilities were $87.4 million.
- Cash flows and investment: Nine-month investing cash outflow was $16.0 million, including $7.8 million of capital expenditures and net purchases of short-term securities. Financing cash outflow was $7.7 million, including $4.6 million of dividends and $3.8 million of debt principal payments. Cash declined $4.4 million from July 31, 2012.
Changes and operating drivers
- Quarterly and year-to-date sales and earnings improved. Management attributed sales growth to Business to Business strength, higher selling prices, lower trade spending and favorable product mix. Nine-month gross margin also benefited from lower packaging and natural gas costs.
- Business to Business growth included strong animal health and nutrition and fluid purification sales; agricultural product sales declined. Retail and Wholesale growth reflected cat litter pricing and reduced trade spending, despite lower volumes in some product categories.
- Profitability faced pressure from higher freight and material costs. In Q3, natural gas costs were 16% higher year over year; freight costs also rose in both segments. Management said freight-industry cost increases were expected to continue.
- Retail and Wholesale operating income improved substantially, supported in part by lower advertising and promotional spending. The company expects such spending to increase during the rest of FY2013, but remain below FY2012 levels and above historical levels.
Outlook, risks and unusual items
- No specific full-year earnings or sales guidance was provided. Management said current cash, operating cash flow and available credit were expected to fund foreseeable working capital, capital expenditures, dividends and debt service for at least the next 12 months. FY2013 capital expenditures were expected to exceed FY2012 levels.
- The company had not borrowed under its $15 million unsecured revolving credit facility, which expires December 31, 2014, and reported compliance with its covenants. It identified $40.2 million of contractual cash obligations, including debt, interest and operating leases, and $26.9 million of open purchase commitments.
- Risks discussed include fuel-price volatility (natural gas was purchased at spot rates, with no fiscal 2013 forward contracts), freight and other input-cost increases, foreign exchange movements, pension asset market fluctuations and increased regulation in food-chain-related markets. Management characterized overall financial-instrument and currency risks as not material.
- Capacity rationalization charges related to relocating production from Mounds, Illinois, totaled $70,000 for the first nine months, including $8,000 in Q3. The reserve was fully utilized or adjusted to zero; no additional material expense was expected.
Important facts for investors to verify
- Whether sales growth and improved margins persist as volumes, pricing, product mix and trade spending change.
- Whether freight, natural gas and material-cost increases offset segment growth and planned increases in advertising.
- Whether the sharp year-to-date improvement in Retail and Wholesale operating income is sustainable.
- How inventory growth, capital spending, dividends, debt repayments and pension funding affect cash and liquidity.
- Whether the company maintains covenant compliance and its stated ability to meet contractual obligations and fund operations.