Oil-Dri Corporation of America — Q1 FY2012 10-Q
Reporting period: Three months ended October 31, 2011; comparisons are with the three months ended October 31, 2010 unless otherwise noted. Oil-Dri develops, manufactures and markets sorbent products, including cat litter, industrial absorbents, agricultural products and animal health products. Its reportable segments are Retail and Wholesale Products and Business to Business Products.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $59.582 million | $56.285 million |
| Gross profit / margin | $14.203 million / 23.8% | $13.208 million / 23.5% |
| Operating income | $1.796 million | $3.822 million |
| Income before taxes | $1.473 million | $3.480 million |
| Net income | $1.075 million | $2.519 million |
| Diluted EPS | $0.15 | $0.35 |
| Operating cash flow | $0.377 million | $(0.464) million |
Revenue grew 6%, but net income fell 57%. Gross margin edged up, while operating margin declined to about 3.0% from 6.8%, mainly as selling, general and administrative expense rose to $12.407 million from $9.386 million. Management cited increased Fresh & Light cat-litter advertising, higher packaging costs and higher freight costs, including the effect of diesel prices. Interest expense increased $113,000, primarily reflecting debt issued in fiscal 2011.
Segments and material changes
- Business to Business: Sales increased 10% to $20.934 million; segment operating income rose 41% to $7.440 million. Higher average selling prices and growth in fluid purification and animal health products contributed; tons sold declined 2% overall.
- Retail and Wholesale: Sales increased 4% to $38.648 million, despite a 3% decline in tons sold. The segment reported a $1.219 million operating loss versus $3.066 million of income a year earlier, primarily due to increased advertising for the new cat-litter product and higher combined packaging, freight and material costs per ton.
- Foreign subsidiary sales declined 6% to $2.859 million; their net loss narrowed to $158,000 from $205,000.
Liquidity, debt and cash flow
At October 31, 2011, cash and cash equivalents were $21.000 million and short-term securities were $8.390 million. Current assets were $91.879 million and current liabilities were $27.474 million. Notes payable totaled $31.200 million, including $3.800 million current maturities. Total liabilities were $77.138 million.
Operating cash flow was $377,000, compared with cash used of $464,000 a year earlier; working-capital movements included a $3.033 million inventory increase and a $2.102 million accounts-receivable increase. Investing activities provided $5.834 million, principally reflecting short-term securities maturities exceeding purchases; capital expenditures were $1.611 million. Financing used $3.223 million, including $2.100 million of debt principal payments and $1.130 million of dividends. Cash increased $3.115 million during the quarter.
The company had a $15 million unsecured revolving credit agreement expiring December 31, 2011, with no borrowings during the quarter and covenant compliance at October 31. Management expected to arrange a successor facility but cautioned that credit-market conditions could affect availability. It believed available cash, investments, operating cash flow and credit availability would fund foreseeable needs for at least 12 months, even without a successor agreement.
Outlook, risks and other disclosures
- Management expected fiscal 2012 earnings to be below fiscal 2011, stating that advertising and promotional spending for the Fresh & Light introduction would exceed the product’s incremental contribution during the year. Marketing spending was expected to remain above historical levels thereafter.
- Fiscal 2012 capital expenditures were expected to be lower than fiscal 2011 following completion of manufacturing-facility projects. Management planned an approximately $1.1 million pension contribution during fiscal 2012.
- Fuel-price exposure is partly managed through natural-gas forward purchase contracts covering approximately 11% of planned fiscal 2012 kiln fuel needs. The filing identifies pension-asset market risk and regulatory risk in fluid purification, animal health and agricultural markets; it does not hedge foreign-currency exposure.
- Reported other comprehensive income included a $193,000 negative currency translation adjustment. No Level 3 fair-value assets or liabilities were reported. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the company secured a successor revolving credit facility before the December 31, 2011 expiration, and on what terms.
- Actual fiscal 2012 earnings and advertising costs versus management’s expectation that earnings would be below fiscal 2011.
- Whether sales growth and margins in the Business to Business segment offset continued pressure in Retail and Wholesale, including Fresh & Light launch costs.
- Working-capital requirements, particularly inventory and receivables, and the timing of operating cash generation.
- Future packaging, freight and fuel costs, pension funding needs, and relevant regulatory developments.