Oil-Dri Corporation of America — Form 10-Q Summary
Reporting period: Third quarter and nine months ended April 30, 2012. Comparisons are with the corresponding 2011 periods. Amounts are in U.S. dollars; financial statement figures are generally in thousands.
Business context and financial performance
Oil-Dri develops, manufactures and sells sorbent products, including cat litter, industrial and automotive absorbents, bleaching clay, agricultural products, and animal health products. Its reportable segments are Retail and Wholesale Products and Business to Business Products.
| Metric | Three months ended Apr. 30, 2012 | Nine months ended Apr. 30, 2012 |
|---|---|---|
| Net sales | $59.780 million; up 8% | $179.565 million; up 6% |
| Gross profit / margin | $14.705 million / 25%, versus 21% | $43.462 million / 24%, versus 22% |
| Operating income | $2.962 million, versus $2.778 million | $9.587 million, versus $9.654 million |
| Net income | $1.892 million, up 2% | $6.206 million, versus $6.156 million |
| Diluted EPS | $0.26, unchanged | $0.86, unchanged |
| Operating cash flow | $15.636 million for nine months, versus $11.120 million |
Quarterly sales growth reflected higher prices and favorable product mix; net income rose only modestly as increased Retail and Wholesale advertising and higher packaging, freight and other costs offset some gains. For the nine-month period, sales and gross profit increased, but operating income was slightly lower as SG&A rose to $33.875 million from $27.953 million. The filing attributes improved gross margin partly to product mix and lower fuel costs, offset by higher non-fuel manufacturing, packaging and freight costs.
Segments and material changes
- Business to Business: Nine-month sales increased 16% to $64.167 million and operating income increased 43% to $20.918 million. Higher prices, volume and favorable mix contributed; agricultural and fluid purification products grew. Quarterly sales rose 19% and segment operating income rose 46%.
- Retail and Wholesale: Nine-month sales increased 2% to $115.398 million, but operating income fell 71% to $2.279 million. Quarterly sales rose 2%, while operating income fell 81% to $0.440 million. Cat’s Pride branded litter growth was offset by lower private-label sales, declining coarse-litter demand, lower volumes and substantially higher advertising and promotion costs.
- Management said fiscal 2012 advertising and promotion spending was expected to exceed the additional contribution from Cat’s Pride Fresh & Light and expected full-year fiscal 2012 earnings to be below fiscal 2011. Advertising spending was expected to remain above historical levels after fiscal 2012.
Cash, debt and liquidity
- At April 30, 2012, cash and cash equivalents were $25.649 million and short-term securities were $9.043 million. Current assets were $92.164 million against current liabilities of $27.213 million.
- Notes payable totaled $29.700 million, including $3.800 million current maturities. Total liabilities were $75.519 million. The company repaid $3.600 million of principal during the nine months.
- Operating cash flow was $15.636 million; investing activities provided $1.359 million, including net proceeds from short-term securities, while capital expenditures were $5.452 million. Financing activities used $9.228 million, including dividends of $3.395 million and treasury-stock purchases of $2.481 million.
- The company had a $15 million unsecured revolving credit facility expiring December 31, 2014, with no borrowings during the period and reported compliance with its covenants. Management expected cash, operating cash flow and credit availability to cover foreseeable needs for at least 12 months.
Outlook, risks and unusual items
- On May 30, 2012, the company announced relocation of industrial floor absorbent and cat litter production from Mounds, Illinois, to Mississippi plants. Mounds would continue producing animal health and nutrition products. The decision followed continued decline in the coarse cat litter market and a review of manufacturing costs and regulatory requirements.
- The relocation was expected to affect up to 40 employees and result in an estimated $1.7 million pretax charge: about $1.2 million in asset write-offs, $0.45 million in severance and related employee costs, and $0.05 million in transfer costs. Most costs were expected in fiscal Q4 2012, with the remainder in fiscal Q1 2013.
- After quarter-end, the company repurchased 161,838 common shares at an average $20.84 per share. Remaining repurchase authorization was 89,229 shares as of the filing date.
- Key disclosed exposures include fuel-price changes, freight and packaging costs, foreign currency movements, pension-asset volatility, and regulatory developments in food-related, animal health and agricultural markets. Natural gas contracts covered approximately 35% of planned fiscal 2012 kiln-fuel needs; the company did not use currency hedges.
Important facts for investors to verify
- Whether the expected fiscal 2012 earnings decline and elevated advertising spending developed as management anticipated.
- The realized costs, timing, employee impact and expected savings from the Mounds production relocation.
- Whether Business to Business growth can continue and Retail and Wholesale profitability can recover despite declining coarse-litter demand and higher marketing costs.
- Subsequent cash generation, debt repayment, share repurchases, and compliance with revolving-credit covenants.
- The impact of fuel, freight, packaging, pension funding and regulatory risks on future margins and liquidity.