Oil-Dri Corporation of America — Q3 FY2015 10-Q
Reporting period: Quarter and nine months ended April 30, 2015; fiscal year ends July 31. Oil-Dri develops, mines, manufactures, and markets sorbent products. Its reportable segments are Retail and Wholesale Products and Business to Business Products.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $65.196 million | $67.417 million | $195.883 million | $200.268 million |
| Gross profit | $14.433 million | $13.884 million | $43.435 million | $47.277 million |
| Operating income | $1.909 million | $0.990 million | $9.350 million | $11.066 million |
| Net income | $1.385 million | $0.722 million | $6.302 million | $7.890 million |
| Diluted earnings per share | $0.19 | $0.10 | $0.88 | $1.11 |
Margins: Gross margin was 22% in Q3 versus 21% a year earlier, and 22% for the nine-month period versus 24%. Nine-month SG&A was $34.085 million, down from $36.211 million; operating margin was approximately 4.8%, versus 5.5%.
Cash flow and investment: Nine-month operating cash flow was $16.268 million, compared with $10.710 million. Investing used $10.622 million, including $13.945 million of capital expenditures; financing used $7.476 million. Cash declined $1.851 million to $14.379 million. Short-term investments were $0.480 million.
Balance sheet and liquidity: At April 30, cash and short-term investments totaled $14.859 million. Notes payable totaled $18.900 million, including $3.483 million current; total liabilities were $78.056 million. Current assets of $78.491 million compared with current liabilities of $28.729 million. The company had an undrawn $25 million revolving facility, extended to December 2019, and reported covenant compliance. Management said available cash, operating cash flow, and credit availability were expected to cover foreseeable needs for at least 12 months.
Dividends declared for the nine months were $0.60 per Common share and $0.45 per Class B share, up from $0.57 and $0.4275, respectively. The company paid $3.937 million in dividends during the period.
Material changes and operating drivers
- Q3: Sales fell 3%, but net income rose 92% and operating income nearly doubled. Lower natural-gas cost per manufactured ton, lower advertising, and reduced SG&A supported results; lower volume, unfavorable mix, and higher non-fuel manufacturing costs were offsets.
- Nine months: Sales declined 2% and net income fell 20%. Gross profit was pressured by higher manufacturing and packaging cost per ton, fewer tons produced and weaker fixed-cost absorption, and unfavorable mix. Natural-gas cost per ton fell 24%, partly offsetting these pressures.
- Business to Business: Nine-month sales declined 4% to $68.549 million while operating income was essentially flat at $20.990 million. Fluid purification sales weakened amid lower customer usage and currency-related competitiveness; agricultural granules and animal-health products grew. Q3 operating income rose 25% to $6.676 million despite 3% lower sales.
- Retail and Wholesale: Nine-month sales declined 1% to $127.334 million and operating income fell 29% to $2.521 million. Branded cat litter faced competitive advertising and discounting; private-label sales grew but generally carry lower gross profit. Q3 segment operating income improved to $0.373 million from a $0.694 million loss, aided by lower advertising and fuel costs.
- Foreign subsidiaries generated $8.245 million in nine-month sales but reported a $0.940 million net loss, versus a $0.374 million loss a year earlier. Management cited China start-up/integration costs, currency translation, and higher U.S.-sourced costs in Canada and the U.K.
Outlook, risks, and notable items
No formal earnings or revenue guidance was provided. Management anticipated some Q4 packaging-cost relief as lower resin prices flow through supply-contract adjustments. It also stated that operating results for the nine months are not necessarily indicative of full-year results.
Key disclosed risks include competitive pricing and advertising, product mix and production-volume effects, natural-gas and packaging costs, foreign-exchange movements, pension asset performance and funding needs, and regulatory developments affecting food-chain, agricultural, and animal-health markets. The company bought natural gas at spot rates and had no forward contracts for planned FY2015 kiln fuel needs.
Notable items include $0.903 million of proceeds from closing two life-insurance policies and the absence of the prior-year $12.814 million MFM acquisition cash outflow. The annual goodwill impairment review found no impairment. Disclosure controls were deemed effective, and the filing reported no material change in internal control over financial reporting.
Investor facts to verify
- Whether branded cat-litter sales and the new lightweight products improve the Retail and Wholesale segment’s sales and margins.
- Whether lower resin and natural-gas costs persist and offset higher labor, depreciation, and other manufacturing costs.
- Whether fluid-purification demand, foreign-market competitiveness, and China subsidiary losses improve.
- Capital-spending requirements, pension contributions, debt repayments, and continued compliance with revolving-credit covenants.
- The extent to which Q3 earnings improvement reflects sustainable operations versus cost timing and other period-specific factors.