UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended October 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
------------ ---------------
Commission File Number 0-8675
OIL-DRI CORPORATION OF AMERICA
(Exact name of the registrant as specified in its charter)
Delaware 36-2048898
------------------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 North Michigan Avenue, Suite 400 60611-4213
Chicago, Illinois (Zip Code)
----------------- ----------
(Address of principal executive
offices)
The Registrant's telephone number, including area code: (312) 321-1515
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Common Stock - 5,471,685 Shares (Including 1,276,138 Treasury Shares)
Class B Stock - 1,765,083 Shares (Including 342,241 Treasury Shares)
2
CONTENTS
Page
PART I
Item 1: Financial Statements...............................................3-11
Item 2: Management Discussion And Analysis Of Financial Condition
And The Results Of Operations.....................................12-14
Item 3: Quantitative And Qualitative Disclosures About Market Risk........14-15
Item 4: Controls And Procedures..............................................15
PART II
Item 6: Exhibits And Reports on Form 8-K.....................................16
Signatures...................................................................17
Certifications............................................................18-19
3
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
OIL-DRI CORPORATION OF AMERICA & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
October 31
2002 July 31
ASSETS (unaudited) 2002
---------- ----------
CURRENT ASSETS
Cash and Cash Equivalents $ 4,167 $ 7,154
Investment in Treasury Securities 9,540 7,807
Investment Securities 1,280 1,275
Accounts Receivable, less allowance
of $478 and $392 at October 31, 2002
and July 31, 2002, respectively 21,040 21,415
Other Receivables 942 1,025
Inventories 11,769 11,798
Prepaid Overburden Removal Expense 3,435 3,678
Prepaid Expenses 3,861 3,392
-------- --------
TOTAL CURRENT ASSETS 56,034 57,544
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Cost 138,442 137,306
Less Accumulated Depreciation and
Amortization (90,539) (88,684)
-------- --------
TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 47,903 48,622
-------- --------
OTHER ASSETS
Goodwill, net of accumulated amortization
of $2,290 at October 31, 2002 and July
31, 2002 5,430 5,430
Intangibles, net of accumulated amortization
of $2,105 and $1,982 at October 31, 2002
and July 31, 2002, respectively 3,851 3,958
Deferred Income Taxes 3,972 3,972
Other 5,532 5,509
-------- --------
TOTAL OTHER ASSETS 18,785 18,869
-------- --------
TOTAL ASSETS $122,722 $125,035
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
OIL-DRI CORPORATION OF AMERICA & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
October 31
2002 July 31
LIABILITIES & STOCKHOLDERS' EQUITY (unaudited) 2002
----------- ----------
CURRENT LIABILITIES
Current Maturities of Notes Payable $ 4,350 $ 2,850
Accounts Payable 5,391 5,121
Dividends Payable 474 473
Accrued Expenses
Salaries, wages and commissions 1,948 3,722
Trade promotions and advertising 2,861 2,595
Freight 886 828
Other 4,052 4,303
--------- --------
TOTAL CURRENT LIABILITIES 19,962 19,892
--------- --------
NONCURRENT LIABILITIES
Notes Payable 28,900 31,400
Deferred Compensation 2,978 2,954
Other 1,904 1,718
--------- --------
TOTAL NONCURRENT LIABILITIES 33,782 36,072
--------- --------
TOTAL LIABILITIES 53,744 55,964
--------- --------
STOCKHOLDERS' EQUITY
Common Stock, par value $.10 per share,
issued 5,471,685 shares at October 31,
2002 and July 31, 2002 547 547
Class B Stock, par value $.10 per share,
issued 1,765,083 shares at October 31,
2002 and July 31, 2002 177 177
Additional Paid-In Capital 7,644 7,677
Retained Earnings 86,727 86,790
Restricted Unearned Stock Compensation (38) (4)
Cumulative Translation Adjustment (1,310) (1,288)
--------- --------
93,747 93,899
Less Treasury stock, at cost (1,276,138
Common and 342,241 Class B shares at
October 31, 2002 and 1,279,110 Common
and 342,241 Class B shares at July
31, 2002) (24,769) (24,828)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 68,978 69,071
--------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $122,722 $125,035
========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
5
OIL-DRI CORPORATION OF AMERICA & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(unaudited)
For The Three Months
Ended October 31
--------------------
2002 2001
--------- --------
NET SALES $ 37,730 $40,023
Cost of Sales 29,977 32,166
-------- -------
GROSS PROFIT 7,753 7,857
Selling, General and Administrative Expenses (6,617) (6,934)
-------- -------
INCOME FROM OPERATIONS 1,136 923
OTHER INCOME (EXPENSE)
Interest Expense (687) (679)
Interest Income 65 52
Gain on the Sale of Mineral Rights 139 --
Other, Net (68) 77
-------- -------
TOTAL OTHER EXPENSE, NET (551) (550)
-------- --------
INCOME BEFORE INCOME TAXES 585 373
Income Tax 174 106
-------- -------
NET INCOME 411 267
RETAINED EARNINGS
Balance at Beginning of Year 86,790 89,778
Less Cash Dividends Declared 474 473
-------- -------
RETAINED EARNINGS - OCTOBER 31 $ 86,727 $89,572
======== =======
NET INCOME PER SHARE
BASIC $ 0.07 $ 0.05
========= =======
DILUTIVE $ 0.07 $ 0.05
========= =======
AVERAGE SHARES OUTSTANDING
BASIC 5,615 5,614
========= =======
DILUTIVE 5,678 5,625
========= =======
The accompanying notes are an integral part of the consolidated financial
statements.
6
OIL-DRI CORPORATION OF AMERICA & SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(IN THOUSANDS OF DOLLARS)
(unaudited)
For The Three Months
Ended October 31
---------------------
2002 2001
-------- -------
NET INCOME $ 411 $ 267
Other Comprehensive Income:
Cumulative Translation Adjustments (22) 49
-------- -------
TOTAL COMPREHENSIVE INCOME $ 389 $ 316
======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
7
OIL-DRI CORPORATION OF AMERICA & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(unaudited)
For The Three Months
Ended October 31
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2002 2001
-------- --------
NET INCOME $ 411 $ 267
-------- --------
Adjustments to Reconcile Net Income
to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 2,034 2,222
Provision for Bad Debts 80 78
Loss on the Sale of Fixed Assets -- 5
(Increase) Decrease in:
Accounts Receivable 295 (649)
Other Receivables 83 (324)
Inventories 29 (1,033)
Prepaid Overburden Removal Expense 243 (169)
Prepaid Expenses (469) (467)
Other Assets (39) (7)
Increase (Decrease) in:
Accounts Payable 270 (1,369)
Accrued Expenses (1,700) 1,885
Deferred Compensation 24 (15)
Other Liabilities 186 94
-------- --------
TOTAL ADJUSTMENTS 1,036 251
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,447 518
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (1,315) (1,352)
Purchases of Investment Securities (2,448) --
Dispositions of Investment Securities 710 --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,053) (1,352)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payments on Long-Term Debt (1,000) (507)
Dividends Paid (473) (473)
Other 92 29
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,381) (951)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,987) (1,785)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,154 4,444
-------- --------
CASH AND CASH EQUIVALENTS, OCTOBER 31 $4,167 $2,659
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
8
OIL-DRI CORPORATION OF AMERICA & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF STATEMENT PRESENTATION
The financial statements and the related notes are condensed and should be
read in conjunction with the consolidated financial statements and related
notes for the year ended July 31, 2002, included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated.
The unaudited financial information reflects all adjustments which are, in
the opinion of management, necessary for a fair presentation of the
statements contained herein.
Certain items in prior year financial statements have been reclassified to
conform to the presentation used in fiscal 2003.
As part of its overall operations, the Company mines sorbent materials on
property that it either owns or leases. A significant part of the overall
mining cost is incurred during the process of removing the overburden
(non-usable material) from the land, thus exposing the sorbent material that
is then used in a majority of the Company's production processes. The cost
of the overburden removal is recorded in a prepaid expense account and, as
the usable sorbent material is mined, the prepaid expense is amortized over
the estimated available material. As of October 31, 2002, the Company had
$3,435,000 of prepaid expense recorded on its consolidated balance sheet.
During the first three months of fiscal 2003, the Company amortized to
current expense approximately $1,043,000 of previously recorded prepaid
expense. Please also refer to footnote 4 for a discussion of a change in the
accounting estimate associated with this prepaid expense.
2. INVENTORIES
The composition of inventories is as follows (in thousands):
-------------------------
October 31 July 31
(Unaudited) (Audited)
-------------------------
2002 2002
-------------------------
Finished goods $ 6,621 $6,673
Packaging 3,770 3,368
Other 1,378 1,757
----------- -----------
$11,769 $11,798
=========== ===========
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method.
3. DEFINITIVE AGREEMENT TO PURCHASE ASSETS
On November 19, 2002, the Company announced that it had signed a definitive
agreement to purchase, for $6,000,000 cash, various assets principally
relating to the Jonny Cat(R) cat litter business of A&M Products, a
wholly-owned subsidiary of The Clorox Company (NYSE: CLX). Included in the
purchase (the "Purchase") are inventories, trademarks, a manufacturing plant
in Taft, Calif., and extensive mineral reserves. The agreement is subject
to customary closing conditions, including the Company's satisfaction with
its due diligence. The parties anticipate closing the transaction in
December.
In anticipation of the purchase from A&M Products, the Company and Harris
Trust and Savings Bank have executed a second amendment to the credit
agreement, dated January 29, 1999. This amendment, among other things,
modifies the fixed charge coverage ratio such that the Company will be
allowed to incur and exclude up to $6,000,000 of capital expenditures on or
before March 31, 2003. Although, as discussed in the Liquidity and Capital
Resources section of this Form 10-Q, the Company has other credit agreements
of the Company containing restrictive covenants which, among other things,
limit the Company's ability to make capital expenditures, no other such
agreements limit the ability to consummate the purchase.
9
4. CHANGE IN ACCOUNTING ESTIMATE FOR PREPAID OVERBURDEN REMOVAL EXPENSE
During the second quarter of fiscal 2002, an internal review of the estimated
amount of uncovered mineable clay took place at the Company's Georgia
production complex. The quantity of uncovered clay is one of the key
elements in the amortization of the prepaid overburden removal expense
account balance. The review led to a change in the estimated amount of
uncovered clay, which in turn caused a change in the rate of amortization of
the prepaid overburden removal expense account. The impact of this estimate
revision for the first quarter of fiscal 2003 was an additional pre-tax
charge to cost of goods sold of approximately $370,000 versus the previous
estimate, or approximately $0.05 per fully diluted share on an after-tax
basis. The estimate change also increased the amortization rate
approximately $1.31 per ton of uncovered mineable clay. Based on the current
ending estimate of uncovered clay, the Company will have to amortize the
prepaid overburden removal expense account balance using the increased rate
for approximately the next two to three months. Thereafter, management
believes that prepaid overburden removal expense amortization should return
to historical rates.
5. SALE OF MINERAL RIGHTS
During the first quarter, the Company reported a $139,000 pre-tax gain when
it elected to sell certain mineral leases on land in Tennessee. The land was
geographically located in an area that the Company was not actively planning
to pursue. The mineral rights, had they been pursued, would have been
associated with any or all of the operating segments.
6. NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No.
138, "Accounting for Derivative Instruments and Certain Hedging Activities,
an Amendment of SFAS No. 133," (SFAS No. 138), which was required to be
adopted in fiscal years beginning after June 15, 2000. One of the primary
amendments to SFAS No. 133 establishes a "normal purchases and normal sales"
exception. This exception permits companies to exclude contracts that
provide for the purchase or sale of something other than a financial
derivative instrument that will be delivered in quantities expected to be
used or sold by the entity over a reasonable period of time in the normal
course of business operations. The Company has forward purchase contracts
for certain natural gas commodities that qualify for the "normal purchase"
exception provisions of the amended statement. The adoption of SFAS No. 133
as amended by SFAS No. 138 had no material impact on either the financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under SFAS No. 141, the pooling of
interest method is no longer permitted for business combinations after June
30, 2001. Under SFAS No. 142, goodwill will no longer be amortized, but will
be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful
lives.
The Company adopted SFAS No. 142 for the first quarter of fiscal 2003.
Management conducted a review of the estimated fair market value of the
business segments during the first quarter of fiscal 2003, using a
combination of discounted cash flow techniques and an outside appraiser's
evaluations. Based upon management's review, no impairment adjustment was
required at October 31, 2002. Had SFAS No. 142 been in effect for the first
quarter of fiscal 2002, net income and earnings per share, net of tax, would
have been as follows:
10
6. NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS (continued)
First Quarter Ended
October 31,
--------------------
2002 2001
------ ------
Net Income
Net as reported $ 411 $ 267
Add back: Goodwill Amortization -- 30
------ -------
Adjusted net income $ 411 $ 297
====== =======
Basic Earnings Per Share
Net as reported $ 0.07 $ 0.05
Goodwill amortization -- 0.01
------ ------
Adjusted net income $0.07 $ 0.06
====== ======
Diluted Earnings Per Share
Net as reported $ 0.07 $ 0.05
Goodwill amortization -- $ 0.01
------ ------
Adjusted net income $ 0.07 $ 0.06
====== ======
Weighted Average Shares Outstanding
Basic 5,615 5,614
Fully diluted 5,678 5,625
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective for fiscal years beginning after June 15, 2002.
Under the new rules, the fair value of a liability for any asset retirement
obligation is recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The Company adopted SFAS No.
143, for the quarter ending on October 31, 2002. Mining land reclamation
activities occur as part of the Company's normal overburden removal process.
Therefore, the Company determined that an additional liability for land
reclamation was immaterial to the overall presentation of the financial
statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
of Disposal or Long-Lived Assets," effective for years beginning after
December 15, 2001. Under the new rules, the accounting and reporting for the
impairment and disposal of long-lived assets have been superseded from SFAS
No. 121 and APB No. 30. Also, ARB No. 51 has been amended to eliminate the
exception for consolidation for a temporary subsidiary. Adoption is required
for fiscal years beginning after December 15, 2001. Effective October 31,
2002, the Company adopted SFAS No. 144, which did not have an effect on the
financial statements of the Company.
7. SEGMENT REPORTING
The Company has four reportable operating segments: Consumer Products Group,
Specialty Products Group, Crop Production and Horticultural Products Group,
and Industrial and Automotive Products Group. These segments are managed
separately because each business has different economic characteristics.
The accounting policies of the segments are the same as those described in
Note 1 of the Company's Annual Report for the year ended July 31, 2002 on
Form 10-K filed with the Securities and Exchange Commission.
Because management does not rely on segment asset allocation, information
regarding segment assets is not meaningful and therefore is not reported.
11
7. SEGMENT REPORTING (continued)
-------------------------------------
Three Months Ended October 31
-------------------------------------
Net Sales Operating Income
-------------------------------------
2002 2001 2002 2001
-------- -------- ------- --------
(in thousands)
Consumer Products Group.................. $ 22,381 $25,197 2,806 2,036
Specialty Products Group................. 6,636 6,430 1,686 1,591
Crop Production and Horticultural
Products Group......................... 3,866 3,488 209 201
Industrial and Automotive Products
Group.................................. 4,847 4,908 (183) 182
-------- ------- ------- -------
TOTAL SALES/OPERATING INCOME............. $37,730 $40,023 4,518 4,010
======== ======= ------- -------
Gain on the Sale of Mineral Rights(1)..................... 139 --
Less:
Corporate Expenses........................................ 3,450 3,010
Interest Expense, net of Interest Income.................. 622 627
------- -------
INCOME BEFORE INCOME TAXES.................................. 585 373
------- -------
Income Taxes................................................ 174 106
------- -------
NET INCOME.................................................. $ 411 $ 267
======= =======
1. See Note 5 for a discussion of the gain on the sale of mineral rights.
12
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
THREE MONTHS ENDED OCTOBER 31, 2002 COMPARED TO
THREE MONTHS ENDED OCTOBER, 2001
RESULTS OF OPERATIONS
Consolidated net sales for the three months ended October 31, 2002 were
$37,730,000, a decrease of 5.7% from net sales of $40,023,000 in the first
three months of fiscal 2002. Net income for the first three months of fiscal
2003 was $411,000, an increase of 53.9% from $267,000 earned in the first
three months of fiscal 2002. Fiscal 2003 income was positively impacted by a
pre-tax gain of $139,000 on the sale of mineral rights. Basic and diluted
net income per share for the first three months of fiscal 2003 was $0.07
versus $0.05 basic and diluted net income per share earned in the first three
months of fiscal 2002.
Net sales of the Consumer Products Group for the first three months of fiscal
2003 were $22,381,000, a decrease of 11.2% from net sales of $25,197,000 in
the first three months of fiscal 2002. This segment's operating income
increased 37.8% from $2,036,000 in the first three months of fiscal 2002 to
$2,806,000 in the first three months of fiscal 2003. There were a number of
factors that drove the results. The reduction in sales was generally driven
by the elimination of unprofitable business with Wal-Mart, which was
implemented late in the fourth quarter of fiscal 2002. Also, the group did a
much better job of controlling its customer deductions and compensation
expenses. Finally, the group's gross profit was improved by an approximately
$300,000, driven by an improvement in sales mix of branded and
co-manufactured items.
Net sales of the Specialty Products Group for the first three months of
fiscal 2003 were $6,636,000, an increase of 3.2% from net sales of $6,430,000
in the first three months of fiscal 2002. This segment's operating income
increased 6.0% from $1,591,000 in the first three months of fiscal 2002 to
$1,686,000 in the first three months of fiscal 2003. The profit increase was
driven by improved sales of PELUNITE PLUSTM, an animal feed binding agent.
Net sales of the Crop Production and Horticultural Products Group for the
first three months of fiscal 2003 were $3,866,000, an increase of 10.8% from
net sales of $3,488,000 in the first three months of fiscal 2002. Crop
Production and Horticultural Products' operating income increased by 4.0%
from $201,000 in the first three months of fiscal 2002 to $209,000 in the
first three months of fiscal 2003.
Net sales of the Industrial and Automotive Products Group for the first three
months of fiscal 2003 were $4,847,000, which was a decrease of 1.2% from net
sales of $4,908,000 in the first three months of fiscal 2002. Industrial and
Automotive Products' operating income decreased from a profit of $182,000 in
the first three months of fiscal 2002 to a loss of $183,000 in the first
three months of fiscal 2003. The loss was driven by higher than anticipated
manufacturing processing costs. The cost increases were seen in labor and
processing inefficiencies, which were subsequently corrected by a capital
improvement in the processing department.
Consolidated gross profit as a percentage of net sales for the first three
months of fiscal 2003 increased to 20.5% from 19.6% in the first three months
of fiscal 2002. A favorable sales mix in the Consumer Products Group and
improved sales of PELUNITE PLUSTM in the Specialty Product Group and lower
fuel costs in the manufacturing area drove this increase. The Company's
year-to-date fiscal 2003 fuel costs are down approximately 13.0% due to a
rate reduction from the same period in fiscal 2002. Offsetting these factors
were higher than anticipated manufacturing costs.
Operating expenses as a percentage of net sales for the first three months of
fiscal 2003 increased slightly to 17.5% from 17.3% in the first three months
of fiscal 2002. Reductions of both sales and operating expenses in the
Consumer Group helped to maintain this relatively consistent overall expense
ratio.
Interest expense and interest income for the first three months of fiscal
2003 did not vary significantly from fiscal 2002.
The Company's effective tax rate was 29.8% of pre-tax income in the first
three months of fiscal 2003 versus 28.4% in the first three months of fiscal
2002.
Total assets of the Company decreased $2,313,000 or 1.8% during the first
three months of fiscal 2003. Current assets decreased $1,510,000 or 2.6%
from fiscal 2002 year-end balances, primarily due to decreased cash and cash
equivalents and accounts receivable, offset partially by increases in
investments in Treasury securities and prepaid expenses.
Property, plant and equipment, net of accumulated depreciation, decreased
$719,000 or 1.5% during the first three months as depreciation expense
continued to exceed capital expenditures.
13
Total liabilities decreased $2,220,000 or 4.0% during the first three months
of fiscal 2003. Current liabilities remained flat with the fiscal 2002
year-end balances. Increases in current maturities of notes payable were
offset by decreases in accrued expenses.
EXPECTATIONS
The Company believes that fiscal 2003 sales should be down 4% to 7% on a
comparable pre-acquisition (Jonny Cat(R)) basis to fiscal 2002. The impact of
the Company's decision to restructure its private label supply arrangement
with Wal-Mart will reduce sales, but should have a favorable impact on gross
profit. Additional sales reductions may occur due to continued product and
geographical rationalization in a continuing effort to increase
profitability. During the second half of fiscal 2003, the Company's
overburden removal cost at its Georgia facility should return to lower
levels, positively impacting profitability. However, because of the
uncertainties of the general economy, the Company believes it is prudent to
forecast the Company's fully diluted earnings per share in a broad range of
$0.20 to $0.40 per diluted share for fiscal 2003.
In 1999, the Company signed a significant supply contract with a substantial
customer. As part of that contract and subsequent agreements, the Company
made certain capital investments and the customer is required to purchase
certain amounts in each calendar year for the duration of the contract. If,
however, the customer fails to achieve the required annual purchased volume
in any year of the contract, then the customer is required to pay to the
Company its then unamortized capital cost, approximately $700,000 at December
31, 2002.
The Company believes there is a substantial possibility that the customer
will not achieve the required purchase volumes for the calendar year ending
December 31, 2002, and therefore will be obligated to pay the Company the
then unamortized capital cost payment referred to above. The Company has not
accrued this potential payment as of October 31, 2002, nor has it reflected
any of this payment in the Company's fully diluted earnings per share
estimates.
LIQUIDITY AND CAPITAL RESOURCES
The current ratio of 2.8:1 at October 31, 2002 decreased slightly from 2.9:1
at July 31, 2002. Working capital decreased $1,580,000 during the first
three months of fiscal 2003 to $36,072,000, primarily due to a reduction of
cash and cash equivalents, accounts receivable and increased current notes
payable. This decrease was offset partially by increased investments in
Treasury securities, prepaid expenses and decreased accrued expenses. During
the first three months of fiscal 2003, the balances of cash, cash
equivalents, investments and investment in Treasury securities decreased
$1,249,000 to $14,987,000.
Cash provided by operating activities was used to fund capital expenditures
of $1,315,000, payments on long-term debt of $1,000,000 and dividend payments
of $473,000. Total cash and investment balances held by the Company's
foreign subsidiaries at October 31, 2002 and July 31, 2002 were $2,649,000
and $2,187,000 respectively.
Accounts receivable, less allowance for doubtful accounts, decreased 1.8%
during the first three months of fiscal 2002. Days outstanding receivables
decreased from 50.4 at July 31, 2002 to 49.2 at October 31, 2002. The
Company maintains policies and practices to monitor the creditworthiness of
its customers. Such policies include maintenance of a list of customers
whose creditworthiness has diminished. The total balance of accounts
receivable for accounts on that list represents approximately 7.9% of the
Company's outstanding receivables.
The table listed below depicts the Company's Contractual Obligations and
Commercial Commitments at October 31, 2002 for the timeframes listed:
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------
LESS
CONTRACTUAL THAN 1 1 - 3 4 - 5 AFTER 5
OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
- -------------- ------------ ----------- ----------- -------- -----------
Long-Term Debt $33,250,000 $ 4,350,000 $5,660,000 $7,160,000 $16,080,000
Operating
Leases 14,966,000 2,181,000 1,774,000 1,053,000 9,958,000
Unconditional
Purchase
Obligations 3,917,000 3,917,000 -- -- --
----------- ----------- ----------- ---------- -----------
Total
Contractual
Cash
Obligations $52,133,000 $10,448,000 $7,434,000 $8,213,000 $26,038,000
============ =========== =========== ========== ===========
14
OTHER COMMERCIAL COMMITMENTS
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-----------------------------------------------------------
OTHER TOTAL LESS
COMMERCIAL AMOUNTS THAN 1 1 - 3 4 - 5 AFTER 5
COMMITMENTS COMMITTED YEAR YEARS YEARS YEARS
- ---------------- ---------- ---------- ----------- -------- ----------
Standby
Letters of $2,963,000 $2,963,000 -- -- --
Credit
Guarantees 26,000 26,000 -- -- --
Other
Commercial
Commitments 670,000 670,000 -- -- --
---------- ---------- ----------- -------- ----------
Total
Commercial
Commitments $3,659,000 $3,659,000 $ -- $ -- $ --
============ ========== =========== ======== ==========
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. As of October 31,
2002, the Company has $7,500,000 available under the credit facility. The
credit agreement contains restrictive covenants that, among other things and
under various conditions, limit the Company's ability to incur additional
indebtedness, to acquire (including a limitation on capital expenditures) or
dispose of assets and to pay dividends.
The Company believes that cash flow from operations and availability under
its revolving credit facility will provide adequate funds for foreseeable
working capital needs, capital expenditures at existing facilities and debt
service obligations. The Company's ability to fund operations, make planned
capital expenditures, including new facility construction, 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 revolving credit
facility with Harris, depends on its future operating performance, which, in
turn, is subject to prevailing economic conditions and to financial, business
and other factors.
FOREIGN OPERATIONS
Net sales by the Company's foreign subsidiaries during the three months ended
October 31, 2002 were $2,530,000 or 6.7% of total Company sales. This
represents a decrease of 12.8% from the first quarter of fiscal 2002, in
which foreign subsidiary sales were $2,903,000 or 7.3% of total Company
sales. This decrease in sales was partially due to the loss of private label
business from one customer of the Canadian operation. For the three months
ended October 31, 2002, the foreign subsidiaries reported a profit of
$32,000, an improvement of $166,000 from the $134,000 loss reported in the
first quarter of fiscal 2002. The improvement for the quarter was due to a
better sales mix, lower material costs and higher machine efficiencies at the
Company's Canadian operation.
Identifiable assets of the Company's foreign subsidiaries as of October 31,
2002 were $9,986,000 compared to $10,255,000 as of October 31, 2001. This
reduction was seen mostly in inventory.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including, but not limited to, those under
the heading "Expectations" and those statements elsewhere in this report that
use forward-looking terminology such as "expect," "would," "could," "should,"
"estimates," "anticipates" and "believes" are "forward-looking statements"
within the meaning of that term in the Securities Exchange Act of 1934, as
amended. Actual results may differ materially from those reflected in these
forward-looking statements, due primarily to continued vigorous competition
in the grocery, mass merchandiser and club markets and specialty product
markets, the level of success of new products, and the cost of product
introductions and promotions in the consumer market. Forward-looking
statements also involve the risk of changes in market conditions in the
overall economy, and, for the fluids purification and agricultural markets,
in planting activity, crop quality and overall agricultural demand, including
export demand, fluctuations of energy costs and foreign exchange rate
fluctuations. Other factors affecting these forward-looking statements may
be detailed from time to time in reports filed with the Securities and
Exchange Commission.
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, 2002. The Company believes that the market
risk arising from holdings of its financial instruments is not material.
The Company is exposed to commodity price risk with respect to natural gas.
The Company has contracted for a significant portion of its fuel needs for
fiscal 2003 using forward purchase contracts to manage the volatility related
to this exposure. These
15
contracts will reduce the volatility in fuel prices, and the weighted average
cost of these contracts have been estimated to be approximately 17% lower
than the contracts for fiscal 2002. 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, 2003. 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 December 3, 2002.
- ----------------------------------------------------------------
Commodity Price Sensitivity
Natural Gas Future Contracts
For the Year Ending July 31, 2003
- ----------------------------------------------------------------
Expected 2003 Fair
Maturity Value
- ----------------------------------------------------------------
Natural Gas Future Volumes (MMBtu's) 645,000 --
Weighted Average Price (Per MMBtu) $ 3.82 --
Contract Amount ($ U.S., in thousands) $2,462.9 $2,478.3
- ----------------------------------------------------------------
Factors which could influence the fair value of the natural gas contracts,
include, but are not limited to, the overall general economy, developments in
world events, the general demand of 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
2003 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 and Exchange Act of 1934, as amended, are effective for
gathering, analyzing, and disclosing the information we are required
to disclose in our reports filed under the Act.
(b) There were no significant changes in our internal controls or in other
factors that could significantly affect those controls since the date
of last evaluation of those internal controls.
16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS: The following document is an exhibit to this report.
Exhibit 11: Statement Re: Computation of per share
earnings
(b)REPORTS ON FORM 8-K:
Registrant filed a report on Form 8-K dated October 15, 2002,
reporting on Item 9 thereof that it had furnished Certifications
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Registrant filed a report on Form 8-K dated October 16, 2002,
reporting on Item 4 thereof Changes in Registrant's Certifying
Accountant.
17
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/Jeffrey M. Libert
---------------------------
Jeffrey M. Libert
Chief Financial Officer
BY /s/Daniel S. Jaffee
---------------------------
Daniel S. Jaffee
President and Chief Executive Officer
Dated: December 13, 2002
18
CERTIFICATIONS PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED
I. I, Daniel S. Jaffee, Chief Executive Officer of Oil-Dri Corporation of
America, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Oil-Dri Corporation of America ("Oil-Dri");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of Oil-Dri as of, and for, the periods
presented in this quarterly report;
4. Oil-Dri's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Oil-Dri and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to Oil-Dri, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared.
b. evaluated the effectiveness of Oil-Dri's disclosure controls and
procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date:
5. Oil-Dri's other certifying officer and I have disclosed, based on
our most recent evaluation, to Oil-Dri's auditors and the audit
committee of Oil-Dri's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect Oil-Dri's
ability to record, process, summarize and report financial
data and have identified for Oil-Dri's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in Oil-Dri's
internal controls; and
6. Oil-Dri's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 13, 2002
--------------------------
By: /s/ Daniel S. Jaffee
--------------------------
Daniel S. Jaffee
President and Chief Executive
Officer
19
CERTIFICATIONS PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED
I. I, Jeffrey M. Libert, Chief Financial Officer of Oil-Dri Corporation of
America, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Oil-Dri
Corporation of America ("Oil-Dri");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations
and cash flows of Oil-Dri as of, and for, the periods presented
in this quarterly report;
4. Oil-Dri's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Oil-Dri and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to Oil-Dri, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this quarterly report is being prepared.
b. evaluated the effectiveness of Oil-Dri's disclosure controls and
procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date:
5. Oil-Dri's other certifying officer and I have disclosed, based on
our most recent evaluation, to Oil-Dri's auditors and the audit
committee of Oil-Dri's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect Oil-Dri's
ability to record, process, summarize and report financial
data and have identified for Oil-Dri's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Oil-Dri's
internal controls; and
6. Oil-Dri's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: December 13, 2002
--------------------------
By: /s/ Jeffrey M. Libert
--------------------------
Jeffrey M. Libert
Chief Financial Officer
20
EXHIBITS
Exhibit 11: Statement Re: Computation of per share earnings
21
Exhibit 11
OIL-DRI CORPORATION OF AMERICA AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
--------------------
Three Months Ended
October 31
--------------------
2002 2001
--------------------
Net income available to Stockholders
(numerator) $ 411 $ 267
--------- ---------
Shares Calculation (denominator): 5,615 5,614
Average shares outstanding - basic
Effect of Dilutive Securities:
Potential Common Stock
relating to stock options 63 11
--------- ---------
Average shares outstanding- assuming 5,678 5,625
dilution
========= =========
Earnings per share-basic $ 0.07 $0.05
========= =========
Earnings per share-assuming dilution $ 0.07 $0.05
========= =========