Oil-Dri Corporation of America — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended October 31, 2019; comparisons are with the three months ended October 31, 2018. Amounts are in U.S. dollars.
Business context
Oil-Dri develops, mines, manufactures and markets sorbent products made principally from clay minerals. Its reportable segments are Business to Business Products and Retail and Wholesale Products.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $71.1 million | $66.1 million | +7.5% |
| Gross profit / margin | $19.9 million / 28% | $16.0 million / 24% | Margin +4 percentage points |
| Operating income | $4.1 million | $1.0 million | + $3.1 million |
| Income before taxes | $4.1 million | $0.9 million | +361% |
| Net income attributable to Oil-Dri | $3.5 million | $0.9 million | + $2.6 million |
| Diluted earnings per common share | $0.46 | $0.12 | — |
| Operating cash flow | $6.7 million | $0.7 million | + $6.0 million |
| Capital expenditures | $3.9 million | $4.1 million | — |
Cash and cash equivalents were $19.3 million at October 31, 2019, versus $21.9 million at July 31, 2019. The company reported $3.1 million of current notes payable and no noncurrent notes payable; it made $3.1 million in principal payments during the quarter. Its $45 million unsecured revolving credit facility, expiring January 2024, had no borrowings during the quarter. The company reported compliance with its debt covenants.
Total assets were $209.7 million and total liabilities were $71.8 million. Adoption of lease accounting added operating lease right-of-use assets and liabilities; at quarter-end, operating lease liabilities totaled $10.5 million, including current and long-term portions. Dividends declared were $0.25 per common share and $0.1875 per Class B share.
Material changes versus the prior-year quarter
- Sales rose 7.5%; management reported product tonnage sold was approximately 5% higher.
- Gross profit increased by $3.9 million. Management attributed the improvement chiefly to freight costs, down approximately 21% per manufactured ton, and natural gas costs, down approximately 16% per manufactured ton. The comparison also benefited from prior-year freight disruption, including ERP implementation-related product transfers and Hurricane Michael.
- Retail and Wholesale sales increased 9% to $44.6 million, led by cat litter sales, which rose approximately 12%. Segment operating income increased to $3.4 million from $9,000, helped by higher sales, lower freight costs and lower SG&A.
- Business to Business sales increased 5% to $26.5 million, and segment operating income rose 18% to $8.3 million. Animal health and nutrition sales increased approximately 16%; agricultural and horticultural chemical carrier sales declined approximately 6%, primarily following the loss of a customer.
- SG&A increased 5% overall. Higher estimated incentive compensation was partly offset by lower ERP consulting and legal costs. Prior-year Retail and Wholesale expenses included nonrecurring ERP-related customer compliance fees.
- The effective tax rate was 15%, compared with a tax benefit in the prior-year quarter. The prior-year benefit included a one-time $175,000 tax reduction following a federal income tax examination; excluding it, the prior-year effective rate would have been 14%.
- Operating cash flow improved to $6.7 million from $0.7 million, while cash declined by $2.6 million after investing and financing outflows. Financing cash use included $1.8 million of dividends paid, $0.5 million of treasury-stock purchases and $3.1 million of debt principal payments.
Outlook, risks and notable items
- Management said cash from operations, available credit, existing cash and potential financing should cover foreseeable needs for at least the next 12 months. It expected fiscal 2020 capital expenditures and advertising expense to exceed fiscal 2019 levels, without dramatically affecting cash; no specific full-year amounts or earnings guidance were provided.
- Sales in China continued to be affected by the swine-fever outbreak and its impact on the pork market. Foreign subsidiaries recorded a $68,000 net loss, versus $236,000 of net income a year earlier, reflecting lower China sales and costs to establish operations in Indonesia.
- Management identified freight, packaging and manufacturing cost variability, customer concentration and customer losses, and the timing of spending and business opportunities as factors affecting results and cash needs. Forward-looking statements are subject to the risks described in the company’s fiscal 2019 Form 10-K.
- The company adopted ASC 842 on August 1, 2019, recognizing $9.3 million of operating lease assets and $10.9 million of lease liabilities at adoption, with no material impact to other financial statements. Management reported disclosure controls were effective and said ERP implementation and enhancements had not materially changed internal-control effectiveness.
Important facts for investors to verify
- Whether lower freight and energy costs and improved gross margin are sustainable, given management’s cautions about freight, product mix and input-cost variability.
- Retail and Wholesale growth and profitability, including the contribution and durability of cat litter sales and the expected increase in advertising spending.
- Business to Business exposure to the China swine-fever impact, customer losses and growth in animal health and nutrition products.
- Cash conversion and planned uses of cash, including higher expected fiscal 2020 capital expenditures, dividends, repurchases and debt service.
- The effect of lease obligations, ERP enhancements and the upcoming expected adoption of credit-loss guidance in fiscal 2021.