Oil-Dri Corporation of America — Q1 FY2016 Form 10-Q
Reporting period: Three months ended October 31, 2015; comparison is with the three months ended October 31, 2014. Oil-Dri develops, mines, manufactures and markets clay-based sorbent products. Its reportable segments are Business to Business Products and Retail and Wholesale Products.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $67.795 million | $66.044 million |
| Gross profit / margin | $20.653 million / 30% | $13.769 million / 21% |
| Operating income | $7.776 million | $3.160 million |
| Net income | $5.423 million | $2.120 million |
| Diluted earnings per share | $0.75 | $0.30 |
| Operating cash flow | $8.516 million | $1.748 million |
| Capital expenditures | $1.765 million | $5.717 million |
Gross margin increased to approximately 30.5% from 20.8%; operating margin was approximately 11.5% versus 4.8%. SG&A rose to $12.877 million from $10.609 million. The effective tax rate was 28%, versus 26%.
Segments
- Business to Business: Sales rose 9% to $25.821 million; operating income increased 33% to $9.169 million. Agricultural chemical carrier sales increased approximately 38%; fluid purification sales rose approximately 3%.
- Retail and Wholesale: Sales declined 1% to $41.974 million; operating income increased to $5.402 million from $0.886 million. Cat litter and industrial absorbent sales improved, offset by lower sales in Canada and the U.K.
Liquidity, debt and cash flow
- Cash and cash equivalents were $21.011 million at October 31, 2015; short-term investments were $3.390 million. Current assets were $86.117 million and current liabilities $28.744 million.
- Notes payable totaled $15.416 million, including $3.083 million current and $12.333 million noncurrent, down from $18.900 million at July 31, 2015. Cash and short-term investments together exceeded notes payable by approximately $8.985 million.
- Operating cash flow was $8.516 million; investing activities used $2.965 million and financing activities used $4.677 million. Cash increased $0.873 million in the quarter.
- The company had a $25 million unsecured revolving credit facility, expiring December 2019, with no borrowings during the quarter. Management reported covenant compliance. Scheduled pension contributions were estimated at $0.994 million for the remainder of FY2016.
Material changes and management commentary
- Sales grew 3%, while net income rose to $5.423 million from $2.120 million. Management attributed the gross-profit improvement principally to a 22% decline in natural-gas cost per manufactured ton, lower freight costs and favorable packaging costs; lower diesel prices, freight capacity and commodity-linked packaging adjustments contributed.
- Operating income improved in both segments. Retail and Wholesale benefited from product mix, manufacturing, freight and packaging costs, and lower advertising expense. Business to Business benefited from sales growth and lower manufacturing, freight and packaging costs.
- Foreign subsidiary sales fell 19% to $2.513 million, and their net loss widened to $0.467 million from $0.242 million. Management cited Canadian competition and currency-related costs, and continuing challenges selling in foreign markets amid U.S. dollar strength.
- Capital spending was lower because major processing, packaging and capacity projects were substantially completed in FY2015. Dividends declared per share increased to $0.21 for Common Stock and $0.1575 for Class B, from $0.20 and $0.15, respectively.
Outlook, risks and other items
- No quantitative earnings or sales guidance was provided. Management expects significantly higher advertising and trade-promotion spending in the second half of FY2016, particularly for lightweight branded cat litter, and believes available cash, operating cash flow and credit availability will meet foreseeable needs for at least 12 months.
- Risks discussed include foreign exchange and competition, natural-gas price exposure, pension asset market fluctuations and regulatory developments in fluid purification, animal health and agricultural markets. The company had not contracted for FY2016 natural-gas needs and continued to buy at spot rates.
- Management reported no goodwill impairment in its annual first-quarter review. Pension benefit cost increased to $0.784 million from $0.582 million. The filing notes that quarterly results are not necessarily indicative of full-year results.
- Disclosure controls were considered effective; no material change in internal control over financial reporting was reported. The filing also describes $32.950 million of contractual cash obligations and $34.402 million in open purchase-order commitments as of October 31, 2015.
Important facts for investors to verify
- Whether lower natural-gas, freight and packaging costs persist and how they affect margins.
- Execution and results of planned second-half advertising and trade promotions for lightweight cat litter.
- Foreign subsidiary performance, including Canadian customer losses, currency effects and China-market losses.
- Cash generation, scheduled debt repayments, pension funding needs and compliance with credit-facility covenants.
- Potential effects of foreign exchange, fuel prices, regulation and pension-asset market movements.