Consolidated net sales for the three months ended October 31, 2005 were $47,789,000, an increase of 8.3% from net sales of $44,121,000 in the first three months of fiscal 2005. Net income for the first three months of fiscal 2006 was $1,028,000, a decrease of 19.7% from net income of $1,280,000 earned in the first three months of fiscal 2005. See Note 5 in the Notes to the Consolidated Financial Statements for a discussion of the Company’s business segments.
Fiscal 2006’s net income was positively impacted by a 20.6% growth in sales for the Business to Business Products Group and a 2.6% increase in the sales for the Retail and Wholesale Products Group. These sales improvements were driven by both tonnage growth and pricing increases for the Business to Business Products Group and pricing increases in the Retail and Wholesale Products Group. Overall, the Company reported a total tonnage increase for the first quarter of 2006 from the first quarter of 2005. Also, positively impacting net income for the quarter was a gain on the sale of long-lived assets. See Note 6 in the Notes to the Consolidated Financial Statements for a discussion of this gain.
Negatively impacting the results for the first quarter of fiscal 2006 were substantial material, packaging and freight cost increases, which were experienced throughout the Company. These cost increases were generally driven directly or indirectly by the higher cost of energy being experienced by the world economy. The impact of the cost increases were experienced by both the Company’s domestic and foreign operations and overcame the sales volume and price increases described above. Diluted net income per share for the first three months of fiscal 2006 was $0.18 versus $0.22 diluted net income per share reported for the first three months of fiscal 2005.
Net sales of the Retail and Wholesale Products Group for the first three months of fiscal 2006 were $30,978,000, an increase of $798,000 from net sales of $30,180,000 reported in the first three months of fiscal 2005. Sales of branded cat litter increased as compared to the first quarter of fiscal 2005, with the scoop products driving the sales growth. Partially offsetting the increase in branded products was a sales reduction in the private label cat litter area. The private label items were down due to competitive market conditions. The Company’s floor absorbent business remained relatively flat from a tonnage perspective. The Retail and Wholesale Products Group’s income decreased 33.5% from $2,485,000 in the first quarter of fiscal 2005 to $1,653,000 in the first quarter of fiscal 2006. Driving the income decline were increased material, packaging and freight costs. Transportation and manufacturing fuel costs and resin prices have increased as the cost of oil has increased. Bag stock costs have also increased as the price of paper has increased. Price increases and the reduction of selling and advertising expenses offset some of the increased freight, packaging and materials costs.
Net sales of the Business to Business Products Group for the first three months of fiscal 2006 were $16,811,000, an increase of $2,870,000 from net sales of $13,941,000 in the first three months of fiscal 2005. Strong sales growth was seen in agricultural products and co-manufactured products. The agricultural product sales were negatively impacted in the first quarter of 2005 due to customer inventory issues. Bleaching earth and animal health and nutrition products both reported sales increases as compared to the first quarter of fiscal 2005. The Business to Business Products Group’s income increased 1.8% from $2,977,000 in the first three months of fiscal 2005 to $3,031,000 in the first three months of fiscal 2006. Like the Retail and Wholesale Products Group, the Business to Business Products Group experienced substantial increases in material and freight costs.
Consolidated gross profit as a percentage of net sales for the first three months of fiscal 2006 decreased to 17.6% from 21.9% in the first three months of fiscal 2005. As discussed above, freight, materials, fuel and packing cost increases throughout the Company had a substantial negative impact on the gross profit reported in the first quarter of fiscal 2006. Volume and price increases were insufficient to compensate for the change in the key cost factors. The cost of fuel used in the manufacturing processes for the first quarter of fiscal 2006 increased 91.2% as compared to the first quarter of fiscal 2005. Non-fuel manufacturing costs rose 4.5%, which had a negative impact on gross profit. The increases in non-fuel manufacturing costs were seen in electricity, repairs and labor.
Operating expenses as a percentage of net sales for the first three months of fiscal 2006 decreased to 14.3% compared to the 17.3% for the first three months of fiscal 2005. Excluding the gain on long-lived assets, the operating expenses for the first three months of fiscal 2006 would have been 15.2%. The reductions in fiscal 2006 operating expenses were reported by the Retail and Wholesale Products Group. Most of the reductions were attributable to lower advertising and selling expenses. The Company also accrued a smaller bonus amount.
Interest expense was down $12,000 for the first quarter of fiscal 2006 as compared to the same quarter in fiscal 2005. Interest income increased $104,000 from the first quarter of fiscal 2005 due to increases in the market rates and a shifting from treasury securities to debt securities.
The Company’s effective tax rate was 26.7% of pre-tax income in the first quarter of fiscal 2006 versus 25.5% in the first three months of fiscal 2005. The effective tax rate for fiscal 2006 was consistent with the final rate for fiscal 2005.
Total assets of the Company increased $3,017,000 or 2.4% during the first quarter of fiscal 2006. Current assets increased $2,226,000 or 3.5% from fiscal 2005 year-end balances, primarily due to increases in accounts receivables, inventory and prepaid expenses. Offsetting these increases were decreases in cash and investments. The changes in accounts receivable and cash and investments are described below in the Liquidity and Capital Resources section. Much of the increase in inventory and prepaid expenses can best be described as normal seasonal timing changes.
Property, plant and equipment, net of accumulated depreciation, increased $804,000 or 1.7% during the first quarter of fiscal 2006. The increase was driven by purchases of machinery and equipment and land.
Total liabilities increased $2,731,000 or 5.5% during the first three months of fiscal 2006. Current liabilities increased $2,224,000 or 9.9% during the first quarter of fiscal 2006. The increase in current liabilities was mostly driven by an increase in accounts payable and other accrued expenses. These increases follow the increases the Company has experienced in its energy and packaging costs. The decrease in salaries payable was consistent with the payment of the fiscal 2005 discretionary bonus. Non-current liabilities increased $507,000 or 1.9%.
EXPECTATIONS
Beginning with fiscal 2006, the Company will no longer provide quarterly or annual earnings per share guidance. This change will allow management to focus on making the best decisions based on long-term strategies.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $2,000 during the first three months of fiscal 2006 to $40,564,000. The primarily reasons for the slight change were increases in inventory, accounts receivable and prepaid expenses, offset by decreases in cash and investments and an increase in accounts payable and other accrued expenses.
Cash was used during the three months ended October 31, 2005 to fund capital expenditures of $3,035,000, to make payments on long-term debt of $80,000, to purchase treasury stock of $630,000 and to make dividend payments of $559,000. The Company received $1,000,000 as proceeds from the sale of property plant and equipment. Cash and investment securities decreased $1,069,000 during the first quarter of fiscal 2006. Most of the cash and investment decline was attributable to the items listed above, plus the September 2005 payment of the fiscal 2005 discretionary bonus.
Total cash and investment balances held by the Company’s foreign subsidiaries at October 31, 2005 and July 31, 2005 were $4,433,000 and $3,427,000, respectively.
Accounts receivable, less allowance for doubtful accounts was $24,086,000, an increase of 2.0% from the July 31, 2005 value of $23,611,000. The sales for the first quarter of fiscal 2006 were $47,789,000, while the sales for the fourth quarter of fiscal 2005 were $46,017,000. This quarterly sales change drove the increased receivable value.
The table listed below depicts the Company’s Contractual Obligations and Commercial Commitments at October 31, 2005 for the timeframes listed:
CONTRACTUAL OBLIGATIONS
| | Payments Due by Period | |
| |
| |
Contractual
Obligations | | Total | | Less Than 1 Year | | 1 – 3 Years | | 4 – 5 Years | | After 5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Long-Term Debt | | $ | 23,240,000 | | $ | 3,080,000 | | $ | 8,160,000 | | $ | 7,000,000 | | $ | 5,000,000 | |
Interest on Long-Term Debt | | | 4,827,000 | | | 1,345,000 | | | 1,995,000 | | | 1,015,000 | | | 472,000 | |
Pension & Post Retirement | | | 8,230,000 | | | 561,000 | | | 1,272,000 | | | 1,397,000 | | | 5,000,000 | |
Operating Leases | | | 12,834,000 | | | 3,083,000 | | | 2,300,000 | | | 1,967,000 | | | 5,484,000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Unconditional Purchase Obligations | | | 3,463,000 | | | 3,463,000 | | | — | | | — | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total Contractual Cash Obligations | | $ | 52,594,000 | | $ | 11,532,000 | | $ | 13,727,000 | | $ | 11,379,000 | | $ | 15,956,000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
16
OTHER COMMERCIAL COMMITMENTS
| | Amount of Commitment Expiration Per Period | |
| |
| |
Other Commercial
Commitments | | Total Amounts
Committed | | Less Than 1 Year | | 1 – 3 Years | | 4 – 5 Years | | After 5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Standby Letters of Credit | | $ | 3,125,000 | | $ | 3,125,000 | | $ | — | | $ | — | | $ | — | |
Other Commercial Commitments | | | 6,060,000 | | | 6,060,000 | | | — | | | — | | | — | |
Guarantees | | | 3,561,000 | | | 769,000 | | | 292,000 | | | 2,500,000 | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total Commercial Commitments | | $ | 12,746,000 | | $ | 9,954,000 | | $ | 292,000 | | $ | 2,500,000 | | $ | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
The Company’s liquidity needs have been, and are expected to be, met through internally generated funds and, to the extent needed, borrowings under the Company’s revolving credit facility with Harris Trust and Savings Bank. During the second quarter of fiscal 2005 the Company extended the credit agreement to January 2006. As of October 31, 2005, the Company had $7,500,000 available under the credit facility. The credit agreement, as amended, contains restrictive covenants that, among other things and under various conditions (including a limitation on capital expenditures), limit the Company’s ability to incur additional indebtedness or to acquire or dispose of assets and to pay dividends.
The Company believes that cash flow from operations, availability under its revolving credit facility and current cash and investment balances will provide adequate cash funds for foreseeable working capital needs, capital expenditures at existing facilities and debt service obligations. The Company’s ability to fund operations, to make planned capital expenditures, to make scheduled debt payments and to remain in compliance with all of the financial covenants under debt agreements, including, but not limited to, the Credit Agreement, depends on its future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors.
The Company as part of its normal course of business guarantees certain debts and trade payables of its wholly owned subsidiaries. These arrangements are made at the request of the subsidiaries’ creditors, as separate financial statements are not distributed for the wholly owned subsidiaries. As of October 31, 2005, the value of these guarantees was $500,000 of short-term liabilities, $561,000 of lease liabilities and $2,500,000 of long-term debt.
RECENTLY ISSUED ACCOUNTING STANDARDS AND OTHER MATTERS
On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. The Company is currently evaluating its actions related to this matter.
Also, the Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and, as of today, uncertainty remains as to how to interpret numerous provisions in the Act. As such, the Company is not yet in a position to decide on whether, and to what extent, it might repatriate foreign earnings that have not yet been remitted to the U.S.
In May 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections,” effective for the first fiscal period in the fiscal year beginning after December 15, 2005. This statement replaces APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”. This statement applies to all voluntary changes in accounting principle and requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable. The Company would only be impacted by this statement if it made a voluntary change in accounting principle after the effective date.
In March 2005, the FASB ratified the consensus reached in EITF Issue No. 04-06, “Accounting for Stripping Costs in the Mining Industry”. The consensus will be effective for the first fiscal period in the fiscal year beginning after December 15, 2005. The consensus on this issue calls for post-production stripping costs to be treated as a variable inventory production cost. As a result, such costs are subject to inventory costing procedures in the period they are incurred. The Company is currently reviewing this pronouncement, but believes that the Consolidated Statement of Cash Flows and the Consolidated Balance Sheets will be impacted by this new pronouncement.
17
FOREIGN OPERATIONS
Net sales by the Company’s foreign subsidiaries during the three months ended October 31, 2005 were $4,088,000 or 8.6% of total Company sales. This represents an increase of 17.2% from the first three months of fiscal 2005, in which foreign subsidiary sales were $3,489,000 or 7.9% of total Company sales. This increase in sales was seen in both our UK and Canadian operations, however the Canadian operation has experienced the larger increase. Branded and private label cat litter products both reported sales increases. Much of the revenue increase was offset by increased material costs. The Canadian operation also faced material sourcing issues that caused their costs to increase for reasons other than energy. For the three months ended October 31, 2005, the foreign subsidiaries reported net income of $242,000, an increase of $109,000 from the $133,000 income reported in the first quarter of fiscal 2005.
Identifiable assets of the Company’s foreign subsidiaries as of October 31, 2005 were $13,100,000 compared to $11,637,000 as of October 31, 2004. The increase was driven by increased cash and investments, inventories, accounts receivable and property, plant and equipment.
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following chart summarizes Common Stock repurchases for the three months ended October 31, 2005. On October 10 2005, the Board of Directors authorized the repurchase of an additional 500,000 shares.
ISSUER PURCHASES OF EQUITY SECURITIES
For the Three
Months Ended
October 31, 2005 | | (a)
Total Number
of Shares
Purchased | | (b)
Average Price
Paid per Share | | Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs | | (d) Maximum
Number of Shares
that may yet be
Purchased Under
Plans or
Programs | |
| |
|
| |
|
| |
|
| |
|
| |
August 1, 2005 to | | | | | | | | | | | | | |
August 31, 2005 | | | 14,400 | | $ | 17.97 | | | 14,400 | | | 204,304 | |
September 1, 2005 to | | | | | | | | | | | | | |
September 30, 2005 | | | — | | | — | | | — | | | 204,304 | |
October 1, 2005 to | | | | | | | | | | | | | |
October 31, 2005 | | | 20,700 | | $ | 17.89 | | | 20,700 | | | 683,604 | |
18
ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company is exposed to interest rate risk and employs policies and procedures to manage its exposure to changes in the market risk of its cash equivalents and short-term investments. The Company had two interest rate swap agreements as of October 31, 2005. The Company believes that the market risk arising from holdings of its financial instruments is not material.
The Company is exposed to currency risk as it relates to certain accounts receivables and the Company’s foreign operations. The Company believes that the currency risk is immaterial to the overall presentation of the financial statements.
The Company is exposed to regulatory risk in the fluid purification and agricultural markets, principally as a result of the risk of increasing regulation of the food chain in the United States and Europe. The Company actively monitors developments in this area, both directly and through trade organizations of which it is a member.
The Company is exposed to commodity price risk with respect to natural gas. The Company has contracted for a portion of its fuel needs for fiscal 2006 using forward purchase contracts to manage the volatility related to this exposure. These contracts will reduce the volatility in fuel prices, and the weighted average cost of these contracts has been estimated to be approximately 20.8% higher than the contracts for fiscal 2005. These contracts were entered into during the normal course of business and no contracts were entered into for speculative purposes.
The table below provides information about the Company’s natural gas future contracts, which are sensitive to changes in commodity prices, specifically natural gas prices. For the future contracts the table presents the notional amounts in MMBtu’s, the weighted average contract prices, and the total dollar contract amount, which will mature by July 31, 2006. The Fair Value was determined using the “Most Recent Settle” price for the “Henry Hub Natural Gas” option contract prices as listed by the New York Mercantile Exchange on November 30, 2005.
Commodity Price Sensitivity
Natural Gas Future Contracts
For the Year Ending July 31, 2006
| | Expected 2006
Maturity | | Fair Value | |
| |
|
| |
|
| |
Natural Gas Future Volumes (MMBtu) | | | 610,000 | | | — | |
Weighted Average Price (Per MMBtu) | | $ | 7.62 | | | — | |
Contract Amount ($U.S., in thousands) | | $ | 4,646.0 | | $ | 6,633.7 | |
Factors that could influence the fair value of the natural gas contracts, include, but are not limited to, the creditworthiness of the Company’s natural gas suppliers, the overall general economy, developments in world events, and the general demand for natural gas by the manufacturing sector, seasonality and the weather patterns throughout the United States and the world. Some of these same events have allowed the Company to mitigate the impact of the natural gas contracts by the continued and in some cases expanded use of recycled oil in our manufacturing processes. Accurate estimates of the impact that these contracts may have on the Company’s fiscal 2006 financial results are difficult to make due to the inherent uncertainty of future fluctuations in option contract prices in the natural gas options market.
ITEM 4. | CONTROLS AND PROCEDURES |
| (a) | Based on their evaluation within 90 days prior to the filing date of this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended, are effective for gathering, analyzing, and disclosing the information the Company is required to disclose in reports filed under the Act. |
| | |
| (b) | There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls since the date of last evaluation of those internal controls. |
19
PART II – OTHER INFORMATION
ITEM 6. EXHIBITS
| (a) | EXHIBITS: |
| | |
| | Exhibit 11: | Statement Re: Computation of per share earnings |
| | | |
| | Exhibit 31: | Rule 13a – 14(a) Certifications |
| | | |
| | Exhibit 32: | Section 1350 Certifications |
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OIL-DRI CORPORATION OF AMERICA |
| (Registrant) |
| | |
| BY | /s/ Andrew N. Peterson |
| |
|
| | Andrew N. Peterson |
| | Vice President and Chief Financial Officer |
| | |
| BY | /s/ Daniel S. Jaffee |
| |
|
| | Daniel S. Jaffee |
| | President and Chief Executive Officer |
| | |
Dated: December 9, 2005 | | |
21
EXHIBITS
Note: | Stockholders may receive copies of the above listed exhibits, without fee, by written request to Investor Relations, Oil-Dri Corporation of America, 410 North Michigan Avenue, Suite 400, Chicago, Illinois 60611-4213. |
22
