ODC — FY2026 Financial Report Analysis

Oil-Dri, the Chicago company that mines clay and turns it into cat litter, farm-chemical carriers and the bleaching clays used to clean cooking oil and renewable diesel, posted record sales and net income for the fiscal year that ended July 31, 2026. Net sales rose 2% to $493.8 million and net income rose 6% to $57.0 million ($3.92 per diluted share, up from $3.70). The core business didn't improve, though. Operating income was flat at $68.0 million because costs per ton rose faster than prices, and the gain in net income came from items below the operating line: a smaller landfill-cost charge, more interest on a bigger cash pile, and a legal settlement.

At a glance

• Gross margin fell from 29.5% to 27.8%. Gross margin is the share of sales left after the direct cost of making and shipping the product. Domestic cost per ton rose 4%, driven by manufacturing costs (+6% per ton: labor, materials, depreciation) and freight (+3% per ton).
• Operating income was $68.0 million, against $68.2 million. Gross profit fell by $5.6 million and overhead (SG&A) fell by $5.3 million, mostly from lower corporate staff costs, a smaller bonus accrual and less spending on outside services. The cut in overhead made up for the higher production costs.
• Operating cash flow was $80.1 million against $57.0 million of net income. Cash ended the year at a record $73.7 million, up from $50.5 million, after $34.2 million of capital spending, $12.6 million of share buybacks and $10.4 million of dividends.

Full-year results

Operating margin is operating income as a share of sales: what's left after running the business, before interest and tax. EPS is net income per share; Oil-Dri has two share classes, and the figure above is for its NYSE-listed Common Stock.

Where the sales came from

Oil-Dri reports two segments. Retail & Wholesale sells finished products to stores and distributors (cat litter, floor absorbents, sports-field products). Business to Business sells clay that other companies use in their own processes or products.

Cat litter grew through co-packing and crystal litter, not through the core clay brands. Co-packaged litter sales (litter Oil-Dri makes for other companies' brands) rose 47% as the company added lightweight litter to that business. Crystal (silica gel) litter sales rose $3.2 million on higher volumes. Domestic litter sales excluding co-packing were $226.1 million, about flat. Within that, clay-based litter fell: $3.9 million came from "changes in private label distribution" and $1.7 million from the absence of a one-time promotion in the prior year. Industrial and sports sales rose $1.4 million domestically, which the company attributes to price increases passed on to cover higher freight.

Business to Business shrank because the prior year had a one-time boost. Fluids purification fell 5% because demand for clay used to filter renewable diesel was "significantly higher in fiscal year 2025 when several new customers began operations in new plants". Those plants are now running and no longer ordering startup quantities. Animal health fell 7% on what the 10-K calls "the temporary loss of a key customer at one of our distributors". Agricultural carriers (clay granules that carry crop chemicals) rose 11% to a record on stronger demand from key customers.

Segment profit fell in both groups. B2B operating income dropped $4.4 million (-7%) on lower sales and a 4% rise in cost per ton. Retail & Wholesale operating income slipped $0.4 million: its cost of goods sold rose 5%, faster than its 4% sales growth, as freight cost per ton rose 7%. A $0.9 million cut in advertising and R&D spending absorbed part of that.

The fourth quarter improved

The full-year totals include a weak first half. The earnings release (Exhibit 99.1 to the 8-K filed the same day) shows a stronger fourth quarter (May to July 2026). Net sales were a record $129.3 million (+3%), operating income was $18.2 million (+17%) and diluted EPS was $1.00, up from $0.89. Gross margin held at 27.8% even though per-ton costs rose 3%, mainly from freight. The release links that freight increase to geopolitical pressure on diesel prices and reduced trucking capacity. B2B segment income rose 13% in the quarter. Animal health sales hit a record $9.9 million (+18%), so the customer loss above looks like it has been at least partly offset. Retail & Wholesale segment income fell 5%.

Takeaway: Oil-Dri's record year rests on lower overhead and gains outside operations, not on the core business. Gross profit fell $5.6 million as cost per ton rose 4%. Net income still grew because SG&A fell $5.3 million (helped by a smaller bonus accrual, which is unlikely to fall every year) and because other income swung by $3.5 million. To grow operating profit from here, the company needs price increases or volume that keep up with cost inflation.

What the headline numbers hide

• About all of the net income growth came from below the operating line. Operating income fell $0.2 million. Pre-tax income rose $3.3 million because "other" items swung from a $2.0 million expense to $1.5 million of income. The 10-K names three causes: $1.0 million less landfill-modification cost (the estimate was raised in FY2025 and reduced in FY2026), $0.9 million more interest income, and an undisclosed gain from the settlement of Oil-Dri vs. Entera Animal Health. At the 18% effective tax rate, that swing adds roughly $2.9 million after tax. Net income rose $3.0 million.
• Part of the overhead saving may reverse. Corporate unallocated costs fell $4.6 million, partly because of a lower incentive bonus. If results improve, bonuses usually rise again.
• Cash conversion is strong. Operating cash flow of $80.1 million was 1.4 times net income, mainly because $23.2 million of depreciation and amortization is a non-cash charge. Free cash flow (operating cash flow minus $34.2 million of capital spending) was about $45.9 million, against about $47.6 million in FY2025.
• Receivables grew faster than sales. Accounts receivable rose 8.7% to $75.4 million while sales grew 1.7%. The company attributes this to higher sales and the timing of collections. The fourth quarter was the biggest of the year, which explains part of it. It's minor at this size but worth checking in the next quarter. Inventory rose a moderate 3.7%.
• Buybacks did not lift EPS. Repurchases rose to $12.6 million from $2.3 million, but the average diluted share count still went up slightly (13.91 million vs 13.88 million). The 5.9% EPS increase came from higher net income, not from a smaller share count.
• The balance sheet has net cash. Debt totals about $38.9 million and cash is $73.7 million. On October 7, 2026, Oil-Dri amended its debt agreements: its shelf for issuing new notes doubled to $150 million and its credit line rose to $75 million from $45 million. Neither is drawn yet. The company says the change gives it "more financial flexibility" for capital spending, buybacks or acquisitions.
• The dividend rose faster than earnings. Dividends declared per Common share rose 26% to $0.815 from $0.645, after two increases during the year.

Outlook

Oil-Dri gives no numerical guidance. Management flagged that conflict in the Middle East had no direct material impact on FY2026 results but "may lead to increased input and transportation costs in future periods." The company buys forward contracts for part of the natural gas used in its clay-drying kilns, covering some of its needs through fiscal 2029. It also notes that packaging contracts reprice with a lag, so FY2026's flat packaging cost per ton may not continue. Freight, packaging and labor costs all pointing up makes FY2027 gross margin the main thing to watch.

Our view: the fourth quarter is a better guide to FY2027 than the full-year totals. A 17% rise in quarterly operating income with gross margin holding at 27.8% suggests pricing and product mix had started to catch up with costs by year-end. Three things to watch:

• Gross margin. It needs to stay at or above the 27.8% Q4 level as freight and packaging costs rise.
• Branded clay litter. It should stop losing private-label volume.
• Renewable-diesel filtration. Demand needs to settle at a new run-rate after the startup orders of FY2025.

FY2026's net income included gains that won't recur, such as the settlement and the landfill-estimate change. Matching it in FY2027 will therefore require operating income to grow.