Oil-Dri Corporation of America (NYSE: ODC) — FY2022 Form 10-K
Reporting period: Fiscal year ended July 31, 2022; comparative figures are for the year ended July 31, 2021. This is an annual filing, not a standalone fourth-quarter report. Oil-Dri develops, mines, manufactures and markets clay-based and synthetic sorbent products, including cat litter, agricultural products, animal health products, bleaching clays and industrial absorbents. Its reportable segments are Retail and Wholesale Products and Business to Business Products.
Key financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $348.6 million | $305.0 million |
| Gross profit / gross margin | $62.5 million / 17.9% | $65.2 million / 21.4% |
| Income from operations | $4.8 million | $13.0 million |
| Net income attributable to Oil-Dri | $5.7 million | $11.1 million |
| Diluted EPS, Common Stock | $0.81 | $1.57 |
| Net cash from operating activities | $9.8 million | $13.6 million |
| Capital expenditures | $22.8 million | $18.8 million |
| Cash and cash equivalents at year-end | $16.3 million | $24.6 million |
| Notes payable at year-end, principal | $33.0 million | $9.0 million |
Sales rose 14%, but gross profit declined 4%; gross margin contracted about 3.5 percentage points. Net income attributable to Oil-Dri fell 49%. Operating cash flow less capital expenditures was approximately negative $13.0 million, compared with negative $5.2 million in FY2021. Current assets were $114.7 million and current liabilities $48.5 million at year-end.
FY2022 income tax expense was $97,000, a 1.7% effective rate, compared with $2.4 million and 17.7% in FY2021. Management attributed the lower tax expense to lower taxable income and additional mining-industry deductions.
Performance drivers and changes from prior year
- Retail and Wholesale Products sales grew 13% to $235.2 million. Cat litter sales increased 11%, and industrial and sports product sales rose 23%. Segment operating income declined 44% to $6.3 million, including a $5.6 million goodwill impairment charge.
- Business to Business Products sales grew 17% to $113.4 million, with increases across agricultural and horticultural, fluid purification, and animal health products. Segment operating income fell 6% to $24.3 million as higher costs and increased segment expenses offset sales growth.
- Management cited higher freight, packaging, natural gas and other manufacturing costs. Per-ton domestic freight costs (excluding freight no longer incurred for a customer that now collects its purchases) increased about 27%; packaging costs per ton increased about 29%; natural gas costs per ton increased 108%; and non-fuel manufacturing costs per ton increased 11%.
- Accounts receivable rose $10.9 million and inventory rose $12.1 million year over year, reflecting higher sales, increased costs, and inventory built to support demand and mitigate supply disruptions.
- Walmart represented 16% of FY2022 sales, down from 18% in FY2021, and 21% of year-end accounts receivable.
Liquidity, debt and capital allocation
Cash declined $8.3 million during FY2022. Financing cash flow included $25 million of proceeds from 3.25% Series C Senior Notes; the company also paid $7.4 million in dividends and repurchased $11.8 million of stock. Year-end notes included $25 million of Series C notes due in 2031 and $8 million remaining on Series B notes due in 2030. No borrowings were outstanding under the $45 million revolving credit facility, although $964,000 of letters of credit were outstanding. The company reported compliance with debt covenants and expects operating cash flow and available liquidity to meet foreseeable requirements, while noting that needs depend on operating conditions.
After year-end, amendments extended the revolving credit facility to August 2027 and revised interest-rate references, covenants and certain debt definitions. In September 2022, the Board approved termination of the frozen defined-benefit pension plan; the process was expected to take approximately 18 months.
Outlook, risks and unusual items
- No quantified FY2023 revenue, earnings or margin guidance is provided. Management said it expects FY2023 advertising expense to rise from FY2022 and be more in line with pre-pandemic levels.
- Management described strong demand and an elevated order backlog—$6.6 million at July 31, 2022 versus $3.7 million a year earlier, under a revised backlog definition. Actions to address production and shipping constraints included adding labor and shifts, improving plant productivity, upgrading equipment and increasing overseas freight-forwarding capacity.
- Management said its ability to recover cost inflation through prices is uncertain. Risks include freight and energy cost volatility, labor and supply constraints, shipping delays, customer price pressure, competition, COVID-19 disruptions, geopolitical uncertainty including the Russia-Ukraine conflict, and environmental and mining regulation.
- The $5.6 million goodwill impairment followed lower share prices and rising-cost and supply-chain mitigation pressures; it eliminated goodwill in the Retail and Wholesale Products reporting unit. The auditor identified the impairment analysis as a critical audit matter because of judgment in forecast cash flows, margins, allocations and discount rates.
- The company disclosed ordinary-course legal matters and a former service provider’s contract claim for which it recorded an estimated liability; it believes a loss is unlikely to be material but notes significant uncertainty. Management believes other pending proceedings will not have a material adverse effect.
- The company reported no material off-balance-sheet arrangements. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether price increases and productivity improvements can offset inflation in freight, packaging, natural gas, labor and manufacturing costs without materially reducing demand or margins.
- Whether the FY2022 cash-flow shortfall relative to capital spending and elevated working-capital investment improves, and how much liquidity remains available after debt service, dividends and repurchases.
- Whether backlog, fulfillment and shipping conditions improve, and whether backlog comparisons remain meaningful under the filing’s revised definition.
- Whether the Retail and Wholesale segment recovers profitability after the goodwill impairment and whether future impairment indicators emerge.
- How the pension plan termination, updated debt covenants and facility amendments affect future cash requirements and financial flexibility.
- Exposure to Walmart and other major customers, and the potential effects of customer purchasing changes, regulatory requirements, environmental obligations and the disclosed legal contingency.