Oil-Dri Corporation of America — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended January 31, 2022. The company develops, mines, manufactures and markets clay-based sorbent products. Its reportable segments are Business to Business Products and Retail and Wholesale Products.
Financial results
| Metric | Three months ended Jan. 31, 2022 | Six months ended Jan. 31, 2022 |
|---|---|---|
| Net sales | $87.2 million; up 17% year over year | $169.7 million; up 13% |
| Gross profit / margin | $15.6 million / 18%, versus $16.7 million / 22% | $29.4 million / 17%, versus $35.5 million / 24% |
| Operating income | $1.9 million, versus $4.2 million | $2.4 million, versus $9.4 million |
| Net income attributable to Oil-Dri | $2.0 million, versus $4.3 million | $2.6 million, versus $8.3 million |
| Diluted common EPS | $0.28, versus $0.61 | $0.37, versus $1.17 |
For the six-month period, Business to Business sales grew 14% to $61.6 million, while segment operating income declined 3% to $14.3 million. Retail and Wholesale sales grew 12% to $108.1 million, but operating income fell 85% to $1.0 million. In Q2, Business to Business operating income increased 7% to $7.6 million; Retail and Wholesale operating income decreased to $0.9 million from $3.2 million.
Management attributed margin pressure to sharply higher freight, packaging, natural gas, labor, repair and other manufacturing costs. For the six months, domestic freight cost per ton rose about 35%, packaging cost per ton 37%, natural gas cost per ton 93%, and non-fuel manufacturing cost per ton 14%. Price increases and higher volumes supported sales, but did not offset cost inflation.
Cash flow, balance sheet and liquidity
Six-month operating cash flow was $0.1 million, down from $3.1 million. Working capital absorbed cash, including a $6.2 million inventory increase and a $5.0 million increase in accounts receivable. Investing cash outflow was $10.6 million, primarily capital expenditures, compared with $7.6 million a year earlier. Financing provided $15.0 million, including $25.0 million of new notes, partly offset by $3.7 million of dividends and $6.2 million of share repurchases. Cash increased $4.4 million to $29.0 million from July 31, 2021.
At January 31, 2022, total assets were $247.2 million and stockholders’ equity was $153.3 million. Current assets were $116.8 million and current liabilities $38.9 million. Notes payable totaled $33.8 million, including $1.0 million current. Total liabilities were $93.9 million.
In December 2021, the company issued $25.0 million of Series C Senior Notes at 3.25%, maturing December 16, 2031; annual $5.0 million principal payments begin in 2027. The company also has a $45 million unsecured revolving credit facility expiring January 2024 and reported covenant compliance, with no revolver borrowings in the six-month period. Management said operating cash flow, available liquidity and financing sources are expected to cover foreseeable needs for at least 12 months.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management said it is working to address order backlogs by hiring manufacturing staff, expanding shifts and equipment, and using alternate transportation. It expects capital expenditures to exceed FY2021 levels, including an estimated $6.5 million plant renovation; FY2022 advertising expense is expected to be lower than FY2021.
- COVID-19-related demand shifts, labor shortages, supply constraints, freight delays and inflation remain risks. The filing warns that the company may not be able to pass all cost increases to customers; price increases may also affect volumes. African swine fever and low pork prices continue to weigh on some animal health sales.
- The company reported a former service provider’s contract claim and related lawsuit seeking binding mediation. Oil-Dri considers the claim without merit, has recorded an estimated liability, and believes any loss is unlikely to be material, while noting outcome uncertainty.
- The 2021 comparative statements were revised for an immaterial reclassification of certain manufacturing-related costs from SG&A to cost of sales. The correction did not affect previously reported net income, but changed reported gross profit and segment results.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pricing actions and operational improvements can recover margins amid persistent freight, energy, packaging and labor inflation.
- Whether backlog and supply-chain constraints ease, and whether higher inventory converts into sales without excess or obsolescence.
- Cash generation, capital spending and the impact of the new long-term debt and future principal payments.
- Performance of the Retail and Wholesale segment, where six-month operating income fell substantially despite sales growth.
- Developments in the service-provider litigation and any changes to the company’s recorded estimate.
- Comparability of year-over-year gross profit and segment results in light of the prior-period cost-classification correction.