Oil-Dri Corporation of America — Form 10-Q
Business context and period. This report covers the third quarter and first nine months of fiscal 2020, ended April 30, 2020. Oil-Dri develops, mines, manufactures and sells clay-based sorbent products through its Business to Business and Retail and Wholesale Products groups. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $76.3 | $70.9 | $218.4 | $206.9 |
| Gross profit / margin | $21.4 / 28% | $16.8 / 24% | $60.3 / 28% | $48.2 / 23% |
| Operating income | $5.7 | $2.3 | $15.7 | $6.2 |
| Net income attributable to Oil-Dri | $4.6 | $5.6 | $13.0 | $8.8 |
| Diluted earnings per common share | $0.61 | $0.74 | $1.69 | $1.17 |
| Operating cash flow | Not separately stated | Not separately stated | $22.3 | $15.4 |
- Cash and liquidity: Cash was $20.5 at April 30, 2020, versus $21.9 at July 31, 2019. Current assets were $94.1 and current liabilities $40.9.
- Debt: Notes payable, including current maturities, were approximately $3.1 at April 30, 2020; the company had no borrowings under its $45 million revolving credit facility. It reported compliance with credit-agreement covenants.
- Cash uses: Nine-month capital expenditures were $10.9; dividends paid were $5.3; treasury-stock purchases were $4.6. Cash decreased $1.3 over the nine-month period.
Material changes versus comparable periods
- Q3 sales rose 8%, led by a 20% increase in cat litter sales in the Retail and Wholesale group; Business to Business sales increased 2%. Nine-month sales rose 6%.
- Gross margin improved in both comparisons, principally due to lower freight costs and natural gas costs. Management reported freight cost per manufactured ton down about 20% for the nine-month period and natural gas cost per ton down about 30%.
- Q3 net income attributable to Oil-Dri declined despite higher operating income, largely because Q3 FY2019 included material proceeds from settlement of confidential legal proceedings: $4.5 million was included in other income for that quarter. Nine-month FY2019 also included these proceeds.
- Nine-month operating income increased to $15.7 million from $6.2 million; the Retail and Wholesale group’s operating income rose to $15.4 million from $6.8 million, while Business to Business operating income rose to $24.0 million from $21.8 million.
- Accounts receivable increased to $41.8 million from $35.5 million at fiscal year-end. Management attributed the rise primarily to higher Q3 sales and timing of collections.
Outlook, management commentary, risks and unusual items
- Management said COVID-19 had not significantly affected overall results through the quarter and that operations, apart from a temporary interruption at the China subsidiary, generally continued as essential businesses. It cited higher cat litter demand, but weaker industrial and sports sales, lower demand in parts of agriculture, and disruption to fluids-purification sales. Management could not estimate the pandemic’s effect on the balance of FY2020 and provided no quantified earnings or sales guidance.
- Management expected operating cash flows and available liquidity to cover foreseeable needs for at least 12 months. It expected FY2020 capital expenditures and advertising expense to exceed FY2019 levels.
- Subsequent to quarter-end, the company issued $10 million of 3.95% senior notes due 2030; $3.1 million of 3.96% Series A notes remained outstanding. The amended agreement permits requests for additional notes up to a stated $75 million aggregate limit, but purchases are uncommitted and at purchasers’ discretion.
- Also after quarter-end, Oil-Dri received a one-time $13 million payment for a non-exclusive, perpetual license relating to certain patented formulations. The payment was received in FY2020’s fourth quarter.
- The company froze future benefit accruals under its pension plan and SERP effective March 1, 2020. The pension remeasurement reduced the obligation by about $6.6 million; a separate SERP curtailment gain of about $1.3 million was recorded in SG&A. A voluntary $5 million pension contribution was made. A pension settlement expense of approximately $2 million was estimated for Q4 following a lump-sum election offer.
- COVID-19, changing customer demand, receivable collection, foreign operations and possible economic deterioration were identified as risks. The inventory obsolescence reserve increased to $1.35 million from $0.70 million at fiscal year-end.
Important facts for investors to verify
- Whether elevated cat litter demand reflected durable growth or pandemic-related stockpiling, and how subsequent demand developed.
- Actual COVID-19 effects on industrial, sports, agricultural, fluids-purification and China operations, as well as on customer collections and supply costs.
- Q4 accounting and cash impact of the $13 million license payment and the estimated $2 million pension settlement expense.
- Terms and covenant headroom after issuance of the $10 million Series B notes, including the availability of any additional shelf financing.
- Whether the higher receivables and inventory reserve resulted in further collection issues, write-downs or working-capital pressure.