I'm not going to sugarcoat this: Oil-Dri (NYSE:ODC) is having a miserable year.

And it's not just me that's saying this. The comments from CEO Dan Jaffee, included in yesterday's earnings release, make it clear that this company is struggling. Said Jaffee, "we have absorbed $6 million of increased fuel cost, in addition to many other commodity and transportation cost increases." Although the company has done what it could to raise prices and pass these higher input costs on to consumers, Jaffee had to admit that the price increases only "partially offset these cost increases," concluding that the company has "more work to do [if it is to] combat margin erosion."

Sound bleak? Well, it is. The higher costs of doing business helped to turn a respectable 7% rise in fiscal Q3 2006 sales into a $0.36 per diluted share decline in profits. This, despite the fact the company boosted its profits per share by reducing the number of shares among which firmwide profits are distributed -- it spent an average of $19.10 per share to buy back a total of 237,600 shares this year.

Aside from inconveniently high raw materials costs, what else is ailing Oil-Dri? In a word (actually three): free cash flow. By this time last year, Oil-Dri had already generated $2.6 million in positive free cash flow. In the first three quarters of fiscal 2004, the company generated a cool $10 million. But so far this year, Oil-Dri has managed to generate negative $3.1 million. Although $3 million of that had already been lost through the end of fiscal Q2, this still means that Q3 was the third free cash flow-negative quarter this year. (You can assign part of the blame to rising accounts receivable, which outgrew sales 10% to 7%; and rising inventories, which outpaced sales growth 19% to 7%.)

None of which would hurt so bad, if it weren't for the fact that both of Oil-Dri's competitors appear to be doing much better. Amcol International (NYSE:ACO) reported on April 21 that its earnings were up 35% year over year for the quarter, beating consensus analyst estimates by $0.03. And on May 9, Oil-Dri's other main rival, Church & Dwight (NYSE:CHD), proved the analysts (who had predicted an earnings decrease) wrong and beat consensus estimates by $0.07, reporting a 7% increase in profits.

"More work to do," Mr. Jaffee? I'll say.

For a recap of last quarter's news on Oil-Dri, read:

Fool contributor Rich Smith does not own shares of any company named above.