Oil-Dri Corporation of America — Form 10-Q
Reporting period: Fiscal second quarter and six months ended January 31, 2023. Oil-Dri develops, mines, manufactures and markets clay-based sorbent products. Its reportable segments are Business to Business Products and Retail and Wholesale Products.
Financial performance
Amounts below are in millions, except percentages and per-share data. Second-quarter comparisons are to the three months ended January 31, 2022; six-month comparisons are to the same prior-year period.
| Metric | Q2 FY2023 | Six months FY2023 | Prior-year comparison |
|---|---|---|---|
| Net sales | $101.7 | $200.2 | Q2 +17%; six months +18% |
| Gross profit / margin | $23.0 / 22.6% | $45.3 / 22.6% | Q2: $15.6 / 17.9%; six months: $29.4 / 17.3% |
| Operating income | $7.3 | $13.9 | Q2 $1.9; six months $2.4 |
| Net income attributable to Oil-Dri | $3.9 | $9.1 | Q2 $2.0; six months $2.6 |
| Diluted Common earnings per share | $0.56 | $1.34 | Q2 $0.28; six months $0.37 |
| Operating cash flow | $14.9 for six months | Prior-year six months: $0.1 | |
| Capital expenditures | $13.3 for six months | Prior-year six months: $10.6 |
Segments and drivers
- Business to Business: Six-month sales rose 29% to $68.8 million and operating income increased 25% to $15.0 million. Price increases and demand for fluid-purification, agricultural and animal-health products supported growth.
- Retail and Wholesale: Six-month sales rose 13% to $131.4 million; operating income increased to $16.3 million from $3.4 million. Higher cat-litter and industrial/sports sales and improved margins contributed.
- Management attributed the record consolidated sales to strategic price increases. These helped offset inflation, while domestic cost of goods sold per ton rose 12% for the six months and 18% in Q2. Higher costs included natural gas, manufacturing and freight.
Financial position and liquidity
- At January 31, 2023, cash was $14.0 million, down $2.3 million from July 31, 2022. Current assets were $119.6 million and current liabilities $49.5 million.
- Notes payable were approximately $32.8 million including current maturities; the company reported no revolving-credit borrowings. Its $45 million unsecured revolving facility runs to August 2027. The company was in compliance with debt covenants.
- Operating cash flow of $14.9 million was largely offset by $13.3 million of capital expenditures, $3.7 million of dividends paid and other financing outflows. Receivables and inventory increased.
- Management expects operating cash flow and available liquidity to cover foreseeable needs for at least 12 months. Fiscal 2023 capital expenditures are expected to exceed fiscal 2022, and advertising expense is also expected to be higher.
Material changes, outlook and risks
- In Q2, the company recorded a $2.5 million reserve for anticipated modifications to address capacity issues at its sole landfill in Ochlocknee, Georgia. Management says costs above the reserve are reasonably possible and could materially affect results, financial condition or cash flows.
- Order backlog declined $0.9 million, or 13%, from July 31, 2022, following added personnel, production shifts and equipment, repairs, and alternative transportation. Management continues efforts to address labor, manufacturing and freight constraints.
- Management cited strategic price increases and continued demand, but noted ongoing cost inflation, freight variability, supply-chain considerations and timing effects. No numerical earnings or sales guidance was provided.
- A customer bankruptcy increased the allowance for doubtful accounts. Management said there were no material changes to the risk factors reported in its fiscal 2022 Form 10-K.
- The company is terminating its frozen defined-benefit pension plan, with completion expected over approximately 18 months. It also disclosed ordinary-course litigation and a disputed former-service-provider claim; management believes these are unlikely to have a material adverse effect, while noting uncertainty in the claim’s outcome.
Investor verification points
- Track whether pricing continues to offset manufacturing, energy and freight cost increases—and whether improved gross margins persist.
- Monitor the Georgia landfill modification work, total eventual cost versus the $2.5 million reserve, and any operational or regulatory developments.
- Verify the pace and returns of planned capital expenditures, working-capital needs, cash generation and liquidity.
- Assess backlog, production capacity, freight constraints, advertising plans and the effect of the customer bankruptcy on receivables.
- Review debt covenant compliance, pension-plan termination costs and developments in the disclosed legal matters.