Oil-Dri Corporation of America — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended January 31, 2016; fiscal year ends July 31. Interim financial statements are unaudited. Oil-Dri develops, mines, manufactures and markets sorbent products, including cat litter, agricultural and animal-health products, and fluid-purification materials.
Financial performance
| Metric | Six months FY2016 | Six months FY2015 | Q2 FY2016 | Q2 FY2015 |
|---|---|---|---|---|
| Net sales | $133.2 million | $130.7 million | $65.4 million | $64.6 million |
| Gross profit | $39.7 million | $29.0 million | $19.1 million | $15.2 million |
| Gross margin | 29.8% | 22.2% | 29.2% | 23.6% |
| Operating income | $13.2 million | $7.4 million | $5.4 million | $4.3 million |
| Net income | $9.2 million | $4.9 million | $3.8 million | $2.8 million |
| Diluted EPS | $1.28 | $0.69 | $0.53 | $0.39 |
- Six-month sales rose 2% and net income rose 88%; Q2 sales rose 1% and net income rose 37% year over year.
- Management attributed stronger gross profit to lower natural-gas costs per manufactured ton (down 24% for the six months and 25% in Q2), lower freight and packaging costs, and favorable product mix. Q2 manufacturing repair costs increased somewhat.
- Six-month segment sales and operating income: Business to Business, $48.4 million and $16.7 million; Retail and Wholesale, $84.7 million and $9.7 million. Retail and Wholesale operating income increased from $2.1 million, while Business to Business income rose from $14.3 million. Corporate expenses increased to $13.3 million from $9.0 million.
Cash flow, balance sheet and liquidity
- Operating cash flow was $17.1 million for the six months, versus $10.6 million a year earlier. Capital expenditures were $4.8 million versus $9.9 million; operating cash flow less capital expenditures was $12.3 million.
- Cash and cash equivalents were $13.8 million at January 31, 2016, down from $20.1 million at July 31, 2015. Short-term investments increased to $15.1 million from $2.2 million; cash plus short-term investments totaled $28.9 million.
- Current assets were $92.7 million and current liabilities $32.2 million. Total assets were $199.1 million; stockholders’ equity was $118.1 million.
- Notes payable totaled $15.4 million, including $3.1 million current, down from $18.9 million at July 31, 2015. Interest expense declined by $178,000 for the six months, primarily due to debt reduction.
- The company had a $25 million unsecured revolving credit facility, unused during the period, and reported compliance with its covenants. Management said existing cash and investments, operating cash flow and borrowing availability should meet foreseeable needs for at least 12 months.
- Dividends paid were $2.8 million. Contractual obligations included $15.3 million of operating lease payments and $31.6 million of open purchase orders; the latter were expected in less than one year.
Material changes, outlook and risks
- Management expects a major integrated advertising campaign for Fresh & Light Ultimate Care lightweight cat litter in the second half of FY2016. It expects the expense to significantly exceed the $10.8 million spent when the lightweight cat-litter category was initially created and to reduce earnings in the third and fourth quarters. No numerical earnings or sales guidance was provided.
- Cat-litter sales benefited from mix, lower trade spending and higher selling prices despite lower tonnage. Agricultural chemical carrier sales were strong; some animal-health, fluid-purification and industrial absorbent sales declined. Foreign-subsidiary sales were 4% of consolidated sales for the six months and decreased 6% year over year.
- Risks discussed include foreign-exchange effects (including the U.S. dollar’s impact on product competitiveness), natural-gas price volatility, pension-asset market fluctuations and potentially higher future funding needs, and regulatory developments in food-chain-related markets. The company purchased natural gas at spot rates in the first half and planned limited forward purchases in the second half.
- The filing reported no goodwill impairment in its first-quarter annual analysis. Pension contributions were $599,000 in the first half, with approximately $679,000 estimated for the remainder of FY2016.
Important facts for investors to verify
- Whether the planned advertising campaign materially reduces second-half earnings as management expects, and the campaign’s actual spend and sales impact.
- Whether lower fuel, freight and packaging costs and favorable product mix persist, and how repair costs and sales volumes develop.
- Segment trends, particularly Retail and Wholesale’s operating-income improvement and Business to Business’s uneven product and geographic sales.
- Cash generation, inventory and prepaid-expense movements, debt repayment, and ongoing compliance with credit-facility covenants.
- Potential changes in pension funding needs, foreign-currency exposure, and commodity and regulatory risks.