Oil-Dri Corporation of America — FY2019 Form 10-K
Reporting period: Fiscal year ended July 31, 2019; this is an annual report, not a standalone Q4 report. Oil-Dri develops, mines, manufactures and sells mineral-based sorbent products. Its two reportable segments are Retail and Wholesale Products and Business to Business Products.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $277.025 million | $266.000 million |
| Gross profit / gross margin | $65.660 million / 24% | $71.922 million / 27% |
| Income from operations | $10.412 million | $15.877 million |
| Net income attributable to Oil-Dri | $12.611 million | $8.240 million |
| Diluted earnings per share | $1.67 | $1.11 |
| Operating cash flow | $26.743 million | $10.612 million |
| Capital expenditures | $15.029 million | $15.074 million |
| Cash and cash equivalents at year-end | $21.862 million | $12.757 million |
Sales rose about 4%, while operating income fell 34% as higher freight, packaging and manufacturing costs outweighed revenue growth. Gross margin declined three percentage points. Net income increased 53%, but FY2019 included material net proceeds from resolution of legal proceedings; FY2018 earnings were reduced by a $3.996 million tax charge relating to the 2017 Tax Act.
Segments and operating changes
- Retail and Wholesale: Sales increased 6% to $171.148 million; segment operating income rose to $8.683 million from $6.975 million. Cat litter sales increased about 9%, supported by private-label volume and higher prices. Advertising expense was about $3.6 million lower.
- Business to Business: Sales increased 1% to $105.877 million; segment operating income declined to $31.388 million from $35.120 million. Fluids purification and agricultural sales improved, while animal health and nutrition sales fell about 12%, partly due to an Asian swine-virus outbreak and delayed African product registration.
- Freight cost per ton rose about 10%, packaging cost per ton about 10%, non-fuel manufacturing cost per ton about 7%, and natural-gas cost per manufactured ton about 5%. ERP implementation and Hurricane Michael also contributed to disruptions and added costs.
Liquidity, debt and capital
Operating cash flow increased substantially year over year. Cash and short-term investments totaled $21.862 million at July 31, 2019, versus $19.881 million a year earlier; no short-term investments remained at FY2019 year-end. Current assets were $89.276 million and current liabilities $32.606 million. Notes payable totaled $6.167 million, including $3.083 million current; the company had no revolver borrowings and $5.973 million of credit-facility capacity was allocated to guarantees. Its unsecured revolving facility provides up to $45 million and expires January 31, 2024. The company reported compliance with debt covenants and said available cash, operating cash flow and credit access should meet foreseeable needs for at least 12 months.
Cash used in financing was $9.886 million, including $6.656 million of dividends paid and $3.083 million of note principal repayments. The company expects FY2020 advertising expense and capital expenditures to be higher than FY2019 levels; it said the increases were not expected to dramatically affect cash. No FY2020 revenue or earnings guidance was provided.
Management commentary, risks and unusual items
- A confidential agreement resolving patent litigation generated material net proceeds included in FY2019 other income. Oil-Dri reported a favorable March 2019 jury verdict in its patent case against Nestlé Purina; the parties later resolved post-trial motions and the related inter partes review. The filing does not disclose the settlement amount.
- Walmart accounted for approximately 20% of FY2019 sales, up from 18% in FY2018, and 26% of year-end receivables. Customer concentration, competitive pricing and the possibility of customers reducing orders are material business risks.
- Other key risks include higher energy, freight and input costs; mining and environmental regulation; supply, capacity and logistics interruptions; product and regulatory claims; and dependence on successful new products and adequate mineral reserves.
- The company implemented a new ERP system in FY2019. It reported no material change in internal-control effectiveness from implementation and stated that financial reporting controls were effective; however, ERP disruption could affect orders, shipments, invoicing, results and cash flow.
- Oil-Dri estimated proven and probable mineral reserves of 102.220 million and 171.441 million tons, respectively, and said proven reserves at its operating locations represented over 40 years of supply at FY2019 consumption rates.
- The company adopted ASC 606 in FY2019 with no material financial-statement impact. It expected ASC 842 lease adoption in FY2020 to add approximately $9.222 million of right-of-use assets and $10.784 million of lease liabilities.
Investor facts to verify
- How much of FY2019 net income and cash flow depended on the undisclosed legal-resolution proceeds, and whether any related amounts recur.
- Whether freight, packaging and manufacturing cost pressures eased, and how FY2020 higher advertising and capital spending affected margins and cash.
- Whether animal-health sales recovered from the swine-virus impact and African registration delay.
- Walmart sales concentration, customer terms and margin contribution, alongside private-label cat litter performance.
- Debt maturities, covenant headroom, pension/postretirement obligations and the balance-sheet effects of lease adoption.