Oil-Dri Corporation of America — Form 10-Q Summary
Business context and period: This unaudited quarterly report covers the three and six months ended January 31, 2013, the second quarter and first half of fiscal 2013. Oil-Dri develops, mines, manufactures, and sells sorbent products, including cat litter, industrial absorbents, purification products, and agricultural and animal-health products. Its reportable segments are Retail and Wholesale Products and Business to Business Products.
Financial performance and position
| Metric | Three months ended Jan. 31 | Six months ended Jan. 31 |
|---|---|---|
| Net sales | $61.1 million vs. $60.2 million (+2%) | $122.5 million vs. $119.8 million (+2%) |
| Gross profit | $16.3 million vs. $14.6 million; gross margin 27% vs. 24% | $33.5 million vs. $28.8 million; gross margin 27% vs. 24% |
| Operating income | $3.4 million vs. $4.8 million | $9.8 million vs. $6.6 million |
| Net income | $2.1 million vs. $3.2 million | $6.6 million vs. $4.3 million |
| Diluted EPS | $0.31 vs. $0.45 | $0.94 vs. $0.60 |
| SG&A as a share of sales | 21% vs. 16% | 19% vs. 18% |
Cash flow and liquidity: First-half operating cash flow was $10.8 million, compared with $10.3 million. Capital expenditures were $5.0 million, up from $3.5 million. Cash and cash equivalents were $25.4 million at January 31, down $1.7 million from July 31, 2012; short-term securities were $10.4 million. Cash plus short-term securities totaled $35.8 million. Current assets were $97.2 million and current liabilities $29.4 million.
Debt: Notes payable totaled $27.4 million, including $5.0 million due within one year. The company repaid $2.3 million of principal during the first half. It had an undrawn $15 million revolving credit facility expiring December 31, 2014, and reported compliance with its covenants.
Segments: First-half Business to Business sales were $43.5 million (+3%) and operating income $14.6 million (+5%). Retail and Wholesale sales were $79.0 million (+2%) and operating income $6.5 million, versus $1.8 million. In Q2, Business to Business operating income rose to $7.1 million from $6.4 million, while Retail and Wholesale operating income fell to $1.9 million from $3.1 million.
Material changes and management commentary
- First-half earnings improved with higher prices, lower trade spending, favorable sales mix, lower natural-gas costs, and reduced non-fuel manufacturing costs. Gross margin improved to 27% from 24%.
- Q2 net income declined despite higher sales and gross margin. Management attributed the decline mainly to substantially higher advertising and promotion spending; Retail and Wholesale SG&A rose 78%, including approximately $2.3 million of additional advertising and promotion expense.
- Management expects advertising and promotional spending to increase during the remainder of fiscal 2013, while total spending for the year is expected to be below fiscal 2012 but above historical levels. Fiscal 2013 capital expenditures are expected to exceed fiscal 2012.
- Management stated that operating cash flow, available credit, and cash and investment balances should cover foreseeable working-capital needs, capital spending at existing facilities, dividends, and debt service for at least the next 12 months. No full-year earnings or revenue guidance is provided.
Outlook, risks, and unusual items
- The company recorded $62,000 of capacity-rationalization charges through the first half for moving production from Mounds, Illinois, to Mississippi facilities, and estimated another $2,000 of employee-relocation expense for the rest of fiscal 2013.
- The Board accelerated the third- and fourth-quarter fiscal 2013 dividends into a December 2012 payment; management described this as an acceleration, not a special dividend or increase. The next regular dividend decision was expected at the June 2013 Board meeting.
- Management cited continuing freight-cost pressure, including higher Retail and Wholesale freight cost per ton, and said it expected that pressure to continue. Natural gas was purchased at spot rates; no fiscal 2013 forward contracts had been purchased.
- Risks discussed include fuel-price volatility, pension-asset market fluctuations and potential funding needs, foreign-currency movements, and regulatory developments in fluid purification, animal health, and agricultural markets. The company said its overall foreign-exchange risk was not material.
- Foreign subsidiaries generated 5% of consolidated sales in the first half and reported a $146,000 net loss, an improvement from a $316,000 loss a year earlier.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether Q2 advertising and promotional spending produces sustained branded-cat-litter growth, given the quarter’s lower net income and reduced Retail and Wholesale operating income.
- Whether freight-cost increases and competitive pricing affect margins in coming quarters, and whether the expected natural-gas cost benefits persist.
- Progress and remaining costs from the production relocation, including the reported remaining employee-relocation estimate.
- Cash conversion and inventory levels: inventory rose $2.5 million during the first half, while operating cash flow was broadly stable year over year.
- Future capital spending, pension contributions, debt repayments, and the Board’s next dividend decision; management estimated approximately $780,000 of pension contributions for the remainder of fiscal 2013.