Oil-Dri Corporation of America — Form 10-Q
Reporting period: Quarter and nine months ended April 30, 2014 (fiscal 2014). Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Oil-Dri develops, mines, manufactures and markets sorbent products, including cat litter, agricultural and animal-health products, fluid-purification materials and industrial absorbents. It reports two segments: Retail and Wholesale Products, and Business to Business Products.
Financial performance
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Net sales, 2014 | $67.4 million | $200.3 million |
| Net sales, 2013 | $64.2 million | $186.7 million |
| Gross profit, 2014 | $13.9 million; 21% of sales | $47.3 million; 24% of sales |
| Gross profit, 2013 | $16.9 million; 26% of sales | $50.4 million; 27% of sales |
| Operating income, 2014 | $1.0 million | $11.1 million |
| Operating income, 2013 | $4.7 million | $14.5 million |
| Net income, 2014 | $0.7 million | $7.9 million |
| Net income, 2013 | $3.3 million | $9.8 million |
| Diluted earnings per share, 2014 | $0.10 | $1.11 |
| Diluted earnings per share, 2013 | $0.46 | $1.40 |
For the nine months, operating cash flow was $10.7 million, down from $19.3 million a year earlier. Investing activities used $11.0 million, including $12.8 million for the MFM acquisition; capital expenditures were $13.3 million. Financing activities used $7.2 million. Cash and cash equivalents declined $7.6 million to $16.4 million; short-term investments were $3.2 million at April 30.
Total notes payable were $22.4 million, including $3.5 million due within one year. The company also had a $15 million unsecured revolving credit facility, on which it reported no borrowings and compliance with covenants. Current assets were $87.8 million and current liabilities were $29.8 million. Total liabilities were $76.6 million and stockholders’ equity was $108.0 million.
Material changes versus the prior comparable period
- Sales increased 5% in the quarter and 7% for the nine-month period, but net income and diluted EPS fell sharply in both periods.
- Higher packaging, freight and material costs compressed gross margin. Natural-gas costs used in kiln operations rose 25% year over year in the quarter and 30% over the nine months; non-fuel manufacturing costs also increased.
- Retail and Wholesale sales grew, aided by cat litter and MFM-related private-label business, but segment operating income fell to a $0.7 million loss in the quarter and declined 62% for the nine months.
- Business to Business sales declined 8% in the quarter, chiefly from lower agricultural-product sales and reduced volume, while nine-month sales rose 5%. Segment operating income declined in both comparisons.
- Cash from operations fell as working capital absorbed cash, including increases in receivables, inventory and prepaid expenses. Capital expenditures rose from $7.8 million to $13.3 million.
Outlook, commentary and risks
- Management said available cash, operating cash flow, the revolving facility and potential financing should cover foreseeable needs for at least 12 months. This is a forward-looking assessment, not a guarantee.
- Capital expenditures in the first nine months exceeded the prior full-year level, reflecting capacity expansion for fluid-purification products and mining and hauling equipment. Management expected fiscal 2014 advertising and promotional spending to exceed fiscal 2013.
- Management cited ongoing efforts to improve operating efficiency while integrating MFM volume. MFM’s former customers contributed approximately $6.8 million in sales after acquisition; attributable net income could not be determined.
- The November 2013 MFM asset acquisition had $13.0 million of total consideration, including $0.5 million contingent consideration. Its preliminary purchase accounting included $7.8 million of customer-list intangible assets and $3.4 million of goodwill; valuations remained subject to refinement. The acquired business expanded private-label cat litter, but private-label products generally carry lower gross profit than branded products.
- Key exposures include fuel and other input-cost inflation, freight and packaging costs, weather and more demanding clay extraction, foreign competition and currency movements, pension-asset market changes, and regulation in food-chain-related markets. The company had not purchased natural-gas forward contracts for fiscal 2014 and bought at spot rates.
- The $15 million credit agreement was scheduled to expire December 31, 2014; a successor facility was not assured. The filing also lists $34.3 million of contractual cash obligations, including debt, interest, leases and the MFM contingent liability, plus $29.3 million of open purchase orders.
- The effective tax rate was 16% for the quarter and 23% for the nine months, versus 27% in each 2013 comparison; management attributed the changes to projected income mix and other tax estimates. No specific earnings or sales guidance was provided.
Important facts for investors to verify
- Whether cost inflation, product mix and lower Retail and Wholesale profitability continue to pressure gross margins and earnings.
- Whether MFM customer retention, integration, preliminary asset valuations and expected real-property proceeds develop as anticipated.
- Whether operating cash flow improves as working-capital balances and elevated capital expenditures are managed.
- Whether the company renews or replaces its revolving credit facility before its December 2014 expiration and remains in covenant compliance.
- How fiscal 2014 advertising, capital spending, pension contributions and fuel costs compare with management’s stated expectations.