Oil-Dri Corporation of America — Q1 FY2018 10-Q
Business context and period. The filing covers the three months ended October 31, 2017, compared with the three months ended October 31, 2016. Oil-Dri develops, mines, manufactures and markets sorbent products, including cat litter, agricultural products, animal health products and fluid purification materials. Its reportable segments are Retail and Wholesale Products and Business to Business Products.
Key financial metrics
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $66.646 million | $66.612 million |
| Gross profit | $18.969 million; 28.5% of sales | $20.725 million; 31.1% of sales |
| Operating income | $3.916 million; 5.9% of sales | $3.046 million; 4.6% of sales |
| Net income | $3.050 million | $2.009 million |
| Diluted earnings per share | $0.41 | $0.28 |
| Cash from operations | $2.568 million | $1.325 million |
| Capital expenditures | $4.045 million | $4.295 million |
Cash and cash equivalents were $8.401 million and short-term investments were $18.133 million at October 31, 2017. Current assets totaled $88.901 million versus current liabilities of $27.747 million. Notes payable, including current maturities, totaled approximately $9.168 million. The company made $3.083 million of scheduled debt principal payments during the quarter and reported no revolver borrowings. Net cash decreased $0.694 million to $8.401 million; operating and investing cash inflows were outweighed by financing outflows of $4.663 million, principally debt payments and dividends.
Material changes versus prior period
- Sales were essentially flat. Business to Business sales declined 1% to $27.087 million, while Retail and Wholesale sales rose 1% to $39.559 million.
- Gross profit fell $1.756 million, and gross margin declined about 2.6 percentage points. Management cited higher natural gas, other manufacturing and packaging costs. Natural gas cost per manufactured ton rose about 10%, other manufacturing costs per ton about 8%, and packaging costs about 12%.
- SG&A declined 15%. Retail and Wholesale advertising expense was approximately $3.2 million lower, driving that segment’s operating result from a $0.507 million loss to $2.365 million of income. Business to Business operating income declined 6% to $8.876 million.
- Net income improved despite lower gross profit, supported by lower SG&A and lower total other expense. The effective tax rate was 21%, versus 25%; adoption of share-based compensation guidance contributed a roughly 4% tax-rate benefit, including $143,000 of excess tax benefits.
- Inventory obsolescence reserves increased to $1.072 million from $0.619 million at July 31, 2017.
Outlook, risks and unusual items
- Management expects full-year FY2018 advertising expense to be similar to FY2017 levels, despite lower spending in this quarter, and expects FY2018 capital expenditures to exceed FY2017, including ERP implementation costs. No earnings or revenue guidance was provided.
- Management believes available cash, investments, operating cash flow and the $25 million revolving credit facility will fund foreseeable needs for at least 12 months. The facility expires December 4, 2019; the company reported covenant compliance.
- Management estimated $1.807 million of additional pension contributions for the remainder of FY2018. Pension asset market fluctuations could affect future expense and funding needs.
- Key stated risks include rising fuel and packaging costs, foreign currency movements, regulatory changes affecting food-chain-related markets, and exposure to customer and market conditions. No natural gas contracts had been purchased for planned kiln needs for the remainder of FY2018.
- The company’s patent litigation with Nestlé continued. Nestlé sought remand of its patent review appeal; Oil-Dri responded in December 2017. The company could not estimate possible damages or total litigation expense, but management did not expect the outcome to materially adversely affect financial condition or results.
- Other notable items: the company adopted new share-based compensation, deferred-tax classification and inventory guidance; the reported statements reflect the required adoption effects. Management stated disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher manufacturing and packaging costs persist and how they affect gross margin.
- Whether planned lightweight-litter advertising restores or sustains sales without eroding segment profitability.
- Progress on ERP-related and other capital spending, and its effect on cash and liquidity.
- Developments and potential financial exposure in the Nestlé patent litigation.
- Actual pension contributions, fuel costs and foreign-market performance compared with management’s expectations.