UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended January 31, 20222023
or
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☐ | 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 001-12622
OIL-DRI CORPORATION OF AMERICA
(Exact name of the registrant as specified in its charter)
Delaware 36-2048898
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer o | Accelerated Filer x | Non-accelerated Filer o | Smaller Reporting Company x | Emerging Growth Company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.10 per share | ODC | New York Stock Exchange |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of January 31, 2022.2023.
Common Stock – 5,287,0135,119,546 Shares and Class B Stock – 2,045,415 Shares
CONTENTS
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| PART I – FINANCIAL INFORMATION | |
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Item 1: | | |
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Item 2: | | |
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Item 4: | | |
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| PART II – OTHER INFORMATION | |
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Item 1A: | Risk Factors | |
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Item 2: | | |
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Item 4: | | |
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Item 6: | | |
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FORWARD-LOOKING STATEMENTS
Certain statements in this report, including, but not limited to, those under the heading “Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations," and those statements elsewhere in this report and other documents that we file with the Securities and Exchange Commission (“SEC”("SEC"), contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” “potential,” “strive,”"expect," "outlook," "forecast," "would," "could," "should," "project," "intend," "plan," "continue," "believe," "seek," "estimate," "anticipate," "may," "assume," "potential," "strive," and variations of such words and similar expressions are intended to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially, including, but not limited to, those described herein and in Item 1A, Risk Factors,"Risk Factors", in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.2022, and from time to time in our filings with the SEC. Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, intended, expected, believed, estimated, projected or planned. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except to the extent required by law, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise.
TRADEMARK NOTICE
“Oil-Dri”"Oil-Dri" and “Ultra-Clear”"Ultra-Clear" are registered trademarks of Oil-Dri Corporation of America.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Balance Sheet
(in thousands, except for share and per share amounts)
| | | (unaudited) | | | (unaudited) | |
ASSETS | ASSETS | January 31, 2022 | | July 31, 2021 | ASSETS | January 31, 2023 | | July 31, 2022 |
Current Assets | Current Assets | | | | Current Assets | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 29,009 | | | $ | 24,591 | | Cash and cash equivalents | $ | 13,951 | | | $ | 16,298 | |
Accounts receivable, less allowance of $1,093 and $1,174 at January 31, 2022 and July 31, 2021, respectively | 45,970 | | | 40,923 | | |
Inventories | 29,797 | | | 23,598 | | |
Accounts receivable, net allowances of $1,037 and $922 at January 31, 2023 and July 31, 2022, respectively | | Accounts receivable, net allowances of $1,037 and $922 at January 31, 2023 and July 31, 2022, respectively | 57,179 | | | 51,683 | |
Inventories, net | | Inventories, net | 37,938 | | | 35,562 | |
Prepaid repairs | Prepaid repairs | 6,454 | | | 6,088 | | Prepaid repairs | 8,107 | | | 7,474 | |
Prepaid expenses and other assets | Prepaid expenses and other assets | 5,524 | | | 6,742 | | Prepaid expenses and other assets | 2,413 | | | 3,664 | |
Total Current Assets | Total Current Assets | 116,754 | | | 101,942 | | Total Current Assets | 119,588 | | | 114,681 | |
| Property, Plant and Equipment | Property, Plant and Equipment | | | | Property, Plant and Equipment | | | |
Cost | Cost | 272,980 | | | 274,825 | | Cost | 292,615 | | | 283,240 | |
Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | (173,119) | | | (178,885) | | Less accumulated depreciation and amortization | (180,936) | | | (175,374) | |
Total Property, Plant and Equipment, Net | Total Property, Plant and Equipment, Net | 99,861 | | | 95,940 | | Total Property, Plant and Equipment, Net | 111,679 | | | 107,866 | |
| Other Assets | Other Assets | | | | Other Assets | | | |
Goodwill | Goodwill | 9,262 | | | 9,262 | | Goodwill | 3,618 | | | 3,618 | |
Other intangibles, net of accumulated amortization of $471 and $385 at January 31, 2022 and July 31, 2021, respectively | 1,792 | | | 1,743 | | |
Customer list, net of accumulated amortization of $7,464 and $7,321 at January 31, 2022 and July 31, 2021, respectively | 321 | | | 464 | | |
Trademarks and patents, net of accumulated amortization of $550 and $524 at January 31, 2023 and July 31, 2022, respectively | | Trademarks and patents, net of accumulated amortization of $550 and $524 at January 31, 2023 and July 31, 2022, respectively | 1,476 | | | 1,445 | |
Customer list, net of accumulated amortization of $7,685 and $7,608 at January 31, 2023 and July 31, 2022, respectively | | Customer list, net of accumulated amortization of $7,685 and $7,608 at January 31, 2023 and July 31, 2022, respectively | 100 | | | 177 | |
Deferred income taxes | Deferred income taxes | 2,066 | | | 2,096 | | Deferred income taxes | 3,511 | | | 3,677 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 10,570 | | | 8,619 | | Operating lease right-of-use assets | 9,460 | | | 10,601 | |
Other | Other | 6,588 | | | 7,500 | | Other | 6,612 | | | 7,546 | |
Total Other Assets | Total Other Assets | 30,599 | | | 29,684 | | Total Other Assets | 24,777 | | | 27,064 | |
| Total Assets | Total Assets | $ | 247,214 | | | $ | 227,566 | | Total Assets | $ | 256,044 | | | $ | 249,611 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Balance Sheet (continued)
(in thousands, except for share and per share amounts)
| | | (unaudited) | | | (unaudited) | |
LIABILITIES & STOCKHOLDERS’ EQUITY | LIABILITIES & STOCKHOLDERS’ EQUITY | January 31, 2022 | | July 31, 2021 | LIABILITIES & STOCKHOLDERS’ EQUITY | January 31, 2023 | | July 31, 2022 |
Current Liabilities | Current Liabilities | | | | Current Liabilities | | | |
Current maturities of notes payable | Current maturities of notes payable | $ | 1,000 | | | $ | 1,000 | | Current maturities of notes payable | $ | 1,000 | | | $ | 1,000 | |
Accounts payable | Accounts payable | 10,145 | | | 9,206 | | Accounts payable | 11,048 | | | 13,401 | |
Dividends payable | Dividends payable | 1,845 | | | 1,865 | | Dividends payable | 1,858 | | | 1,851 | |
Operating lease liabilities | Operating lease liabilities | 2,080 | | | 2,036 | | Operating lease liabilities | 1,850 | | | 2,178 | |
Accrued expenses | Accrued expenses | 23,802 | | | 24,883 | | Accrued expenses | 33,785 | | | 30,085 | |
Total Current Liabilities | Total Current Liabilities | 38,872 | | | 38,990 | | Total Current Liabilities | 49,541 | | | 48,515 | |
| Noncurrent Liabilities | Noncurrent Liabilities | | | | Noncurrent Liabilities | | | |
Notes payable, net of unamortized debt issuance costs of $222 and $122 at January 31, 2022 and July 31, 2021, respectively | 32,778 | | | 7,878 | | |
Notes payable, net of unamortized debt issuance costs of $191 and $202 at January 31, 2023 and July 31, 2022, respectively | | Notes payable, net of unamortized debt issuance costs of $191 and $202 at January 31, 2023 and July 31, 2022, respectively | 31,809 | | | 31,798 | |
Deferred compensation | Deferred compensation | 5,060 | | | 4,370 | | Deferred compensation | 4,441 | | | 4,559 | |
Pension and postretirement benefits | Pension and postretirement benefits | 4,253 | | | 4,922 | | Pension and postretirement benefits | 434 | | | 798 | |
Long-term operating lease liabilities | Long-term operating lease liabilities | 9,892 | | | 8,022 | | Long-term operating lease liabilities | 8,919 | | | 9,749 | |
Other | Other | 3,068 | | | 4,152 | | Other | 3,926 | | | 3,843 | |
Total Noncurrent Liabilities | Total Noncurrent Liabilities | 55,051 | | | 29,344 | | Total Noncurrent Liabilities | 49,529 | | | 50,747 | |
| Total Liabilities | Total Liabilities | 93,923 | | | 68,334 | | Total Liabilities | 99,070 | | | 99,262 | |
| Stockholders’ Equity | Stockholders’ Equity | | | | Stockholders’ Equity | | | |
Common Stock, par value $.10 per share, issued 8,667,968 shares at January 31, 2022 and 8,561,311 shares at July 31, 2021 | 867 | | | 856 | | |
Class B Stock, par value $.10 per share, issued 2,397,056 shares at January 31, 2022 and 2,397,056 shares at July 31, 2021 | 240 | | | 240 | | |
Common Stock, par value $.10 per share, issued 8,744,223 shares at January 31, 2023 and 8,686,768 shares at July 31, 2022 | | Common Stock, par value $.10 per share, issued 8,744,223 shares at January 31, 2023 and 8,686,768 shares at July 31, 2022 | 874 | | | 868 | |
Class B Stock, par value $.10 per share, issued 2,397,056 shares at January 31, 2023 and 2,397,056 shares at July 31, 2022 | | Class B Stock, par value $.10 per share, issued 2,397,056 shares at January 31, 2023 and 2,397,056 shares at July 31, 2022 | 240 | | | 240 | |
Additional paid-in capital | Additional paid-in capital | 50,220 | | | 48,271 | | Additional paid-in capital | 54,328 | | | 52,467 | |
Retained earnings | Retained earnings | 179,322 | | | 180,443 | | Retained earnings | 184,133 | | | 178,754 | |
Noncontrolling interest | Noncontrolling interest | (338) | | | (307) | | Noncontrolling interest | (390) | | | (369) | |
Accumulated Other Comprehensive Loss: | Accumulated Other Comprehensive Loss: | | | | Accumulated Other Comprehensive Loss: | | | |
| Pension and postretirement benefits | Pension and postretirement benefits | (4,375) | | | (4,428) | | Pension and postretirement benefits | (2,255) | | | (2,242) | |
Cumulative translation adjustment | Cumulative translation adjustment | 217 | | | 311 | | Cumulative translation adjustment | (70) | | | 59 | |
Total Accumulated Other Comprehensive Loss | Total Accumulated Other Comprehensive Loss | (4,158) | | | (4,117) | | Total Accumulated Other Comprehensive Loss | (2,325) | | | (2,183) | |
Less Treasury Stock, at cost (3,380,955 Common and 351,641 Class B shares at January 31, 2022 and 3,192,702 Common and 346,491 Class B shares at July 31, 2021) | (72,862) | | | (66,154) | | |
Less Treasury Stock, at cost (3,624,677 Common and 351,641 Class B shares at January 31, 2023 and 3,609,938 Common and 351,641 Class B shares at July 31, 2022) | | Less Treasury Stock, at cost (3,624,677 Common and 351,641 Class B shares at January 31, 2023 and 3,609,938 Common and 351,641 Class B shares at July 31, 2022) | (79,886) | | | (79,428) | |
Total Stockholders’ Equity | Total Stockholders’ Equity | 153,291 | | | 159,232 | | Total Stockholders’ Equity | 156,974 | | | 150,349 | |
| Total Liabilities & Stockholders’ Equity | Total Liabilities & Stockholders’ Equity | $ | 247,214 | | | $ | 227,566 | | Total Liabilities & Stockholders’ Equity | $ | 256,044 | | | $ | 249,611 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of IncomeOperations
(in thousands, except for per share amounts)
| | | (unaudited) | | (unaudited) |
| | For the Six Months Ended January 31, | | For the Six Months Ended January 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Net Sales | Net Sales | $ | 169,670 | | | $ | 150,597 | | Net Sales | $ | 200,208 | | | $ | 169,670 | |
Cost of Sales (1) | Cost of Sales (1) | (140,266) | | | (115,128) | | Cost of Sales (1) | (154,882) | | | (140,266) | |
Gross Profit | Gross Profit | 29,404 | | | 35,469 | | Gross Profit | 45,326 | | | 29,404 | |
Selling, General and Administrative Expenses (1) | Selling, General and Administrative Expenses (1) | (27,041) | | | (26,048) | | Selling, General and Administrative Expenses (1) | (31,451) | | | (27,041) | |
| Income from Operations | Income from Operations | 2,363 | | | 9,421 | | Income from Operations | 13,875 | | | 2,363 | |
| Other Income (Expense) | | | | |
Other (Expense) Income | | Other (Expense) Income | | | |
Interest expense | Interest expense | (490) | | | (356) | | Interest expense | (731) | | | (490) | |
Interest income | Interest income | 17 | | | 40 | | Interest income | 115 | | | 17 | |
Other, net | Other, net | 1,190 | | | 807 | | Other, net | (1,783) | | | 1,190 | |
Total Other Income, Net | 717 | | | 491 | | |
Total Other (Expense) Income, Net | | Total Other (Expense) Income, Net | (2,399) | | | 717 | |
| Income Before Income Taxes | Income Before Income Taxes | 3,080 | | | 9,912 | | Income Before Income Taxes | 11,476 | | | 3,080 | |
Income Tax Expense | Income Tax Expense | (524) | | | (1,675) | | Income Tax Expense | (2,400) | | | (524) | |
Net Income | Net Income | 2,556 | | | 8,237 | | Net Income | 9,076 | | | 2,556 | |
Net Loss Attributable to Noncontrolling Interest | Net Loss Attributable to Noncontrolling Interest | (31) | | | (46) | | Net Loss Attributable to Noncontrolling Interest | (21) | | | (31) | |
Net Income Attributable to Oil-Dri | Net Income Attributable to Oil-Dri | $ | 2,587 | | | $ | 8,283 | | Net Income Attributable to Oil-Dri | $ | 9,097 | | | $ | 2,587 | |
| Net Income Per Share | Net Income Per Share | | Net Income Per Share | |
Basic Common | Basic Common | $ | 0.38 | | | $ | 1.20 | | Basic Common | $ | 1.37 | | | $ | 0.38 | |
Basic Class B Common | Basic Class B Common | $ | 0.28 | | | $ | 0.89 | | Basic Class B Common | $ | 1.03 | | | $ | 0.28 | |
Diluted Common | $ | 0.37 | | | $ | 1.17 | | |
Diluted Common (1) | | Diluted Common (1) | $ | 1.34 | | | $ | 0.37 | |
Diluted Class B Common | Diluted Class B Common | $ | 0.28 | | | $ | 0.88 | | Diluted Class B Common | $ | 1.02 | | | $ | 0.28 | |
Average Shares Outstanding | Average Shares Outstanding | | Average Shares Outstanding | |
Basic Common | Basic Common | 5,095 | | | 5,149 | | Basic Common | 4,817 | | | 5,095 | |
Basic Class B Common | Basic Class B Common | 1,930 | | | 1,930 | | Basic Class B Common | 1,953 | | | 1,930 | |
Diluted Common | 5,211 | | | 5,265 | | |
Diluted Common (1) | | Diluted Common (1) | 4,937 | | | 5,211 | |
Diluted Class B Common | Diluted Class B Common | 1,966 | | | 1,972 | | Diluted Class B Common | 1,975 | | | 1,966 | |
Dividends Declared Per Share | Dividends Declared Per Share | | Dividends Declared Per Share | |
Basic Common | Basic Common | $ | 0.5400 | | | $ | 0.5200 | | Basic Common | $ | 0.5600 | | | $ | 0.5400 | |
Basic Class B Common | Basic Class B Common | $ | 0.4050 | | | $ | 0.3900 | | Basic Class B Common | $ | 0.4200 | | | $ | 0.4050 | |
(1) See Note 1The effect of Basic Common potential common stock equivalents related to non-vested restricted stock of $7 thousand shares was excluded from the Notes tocomputation of average diluted shares outstanding for the unaudited Condensed Consolidated Financial Statements for further information about amounts included in this line item.six months ended January 31, 2023, as inclusion would have been anti-dilutive.
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Comprehensive Income
(in thousands of dollars)thousands)
| | | (unaudited) | | (unaudited) |
| | For the Six Months Ended January 31, | | For the Six Months Ended January 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Net Income Attributable to Oil-Dri | Net Income Attributable to Oil-Dri | $ | 2,587 | | | $ | 8,283 | | Net Income Attributable to Oil-Dri | $ | 9,097 | | | $ | 2,587 | |
| Other Comprehensive (Loss) Income: | Other Comprehensive (Loss) Income: | | Other Comprehensive (Loss) Income: | |
| Pension and postretirement benefits (net of tax) | Pension and postretirement benefits (net of tax) | 53 | | | 329 | | Pension and postretirement benefits (net of tax) | (13) | | | 53 | |
Cumulative translation adjustment | Cumulative translation adjustment | (94) | | | 408 | | Cumulative translation adjustment | (129) | | | (94) | |
Other Comprehensive (Loss) Income | (41) | | | 737 | | |
Other Comprehensive Loss | | Other Comprehensive Loss | (142) | | | (41) | |
Total Comprehensive Income | Total Comprehensive Income | $ | 2,546 | | | $ | 9,020 | | Total Comprehensive Income | $ | 8,955 | | | $ | 2,546 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of IncomeOperations
(in thousands, except for per share amounts)
| | | (unaudited) | | (unaudited) |
| | For the Three Months Ended January 31, | | For the Three Months Ended January 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Net Sales | Net Sales | $ | 87,210 | | | $ | 74,500 | | Net Sales | $ | 101,669 | | | $ | 87,210 | |
Cost of Sales (1) | Cost of Sales (1) | (71,624) | | | (57,811) | | Cost of Sales (1) | (78,653) | | | (71,624) | |
Gross Profit | Gross Profit | 15,586 | | | 16,689 | | Gross Profit | 23,016 | | | 15,586 | |
Selling, General and Administrative Expenses (1) | Selling, General and Administrative Expenses (1) | (13,668) | | | (12,445) | | Selling, General and Administrative Expenses (1) | (15,710) | | | (13,668) | |
Income from Operations | Income from Operations | 1,918 | | | 4,244 | | Income from Operations | 7,306 | | | 1,918 | |
| Other Income (Expense) | | | | |
Other (Expense) Income | | Other (Expense) Income | | | |
Interest expense | Interest expense | (313) | | | (164) | | Interest expense | (367) | | | (313) | |
Interest income | Interest income | 8 | | | 15 | | Interest income | 59 | | | 8 | |
Other, net | Other, net | 757 | | | 1,062 | | Other, net | (1,959) | | | 757 | |
Total Other Income, Net | 452 | | | 913 | | |
Total Other (Expense) Income, Net | | Total Other (Expense) Income, Net | (2,267) | | | 452 | |
| Income Before Income Taxes | Income Before Income Taxes | 2,370 | | | 5,157 | | Income Before Income Taxes | 5,039 | | | 2,370 | |
Income Tax Expense | Income Tax Expense | (409) | | | (869) | | Income Tax Expense | (1,193) | | | (409) | |
Net Income | Net Income | 1,961 | | | 4,288 | | Net Income | 3,846 | | | 1,961 | |
Net Loss Attributable to Noncontrolling Interest | Net Loss Attributable to Noncontrolling Interest | (41) | | | (11) | | Net Loss Attributable to Noncontrolling Interest | (10) | | | (41) | |
Net Income Attributable to Oil-Dri | Net Income Attributable to Oil-Dri | $ | 2,002 | | | $ | 4,299 | | Net Income Attributable to Oil-Dri | $ | 3,856 | | | $ | 2,002 | |
| Net Income Per Share | Net Income Per Share | | Net Income Per Share | |
Basic Common | Basic Common | $ | 0.29 | | | $ | 0.62 | | Basic Common | $ | 0.58 | | | $ | 0.29 | |
Basic Class B Common | Basic Class B Common | $ | 0.22 | | | $ | 0.47 | | Basic Class B Common | $ | 0.44 | | | $ | 0.22 | |
Diluted Common(1) | Diluted Common(1) | $ | 0.28 | | | $ | 0.61 | | Diluted Common(1) | $ | 0.56 | | | $ | 0.28 | |
Diluted Class B Common | Diluted Class B Common | $ | 0.22 | | | $ | 0.46 | | Diluted Class B Common | $ | 0.43 | | | $ | 0.22 | |
Average Shares Outstanding | Average Shares Outstanding | | Average Shares Outstanding | |
Basic Common | Basic Common | 5,077 | | | 5,150 | | Basic Common | 4,829 | | | 5,077 | |
Basic Class B Common | Basic Class B Common | 1,939 | | | 1,934 | | Basic Class B Common | 1,964 | | | 1,939 | |
Diluted Common(1) | Diluted Common(1) | 5,186 | | | 5,253 | | Diluted Common(1) | 4,965 | | | 5,186 | |
Diluted Class B Common | Diluted Class B Common | 1,965 | | | 1,967 | | Diluted Class B Common | 1,985 | | | 1,965 | |
Dividends Declared Per Share | Dividends Declared Per Share | | Dividends Declared Per Share | |
Basic Common | Basic Common | $ | 0.2700 | | | $ | 0.2600 | | Basic Common | $ | 0.2800 | | | $ | 0.2700 | |
Basic Class B Common | Basic Class B Common | $ | 0.2025 | | | $ | 0.1950 | | Basic Class B Common | $ | 0.2100 | | | $ | 0.2025 | |
(1) See NoteThe effect of Basic Common potential common stock equivalents related to non-vested restricted stock of 1 thousand shares was excluded from the computation of average diluted shares outstanding for the Notes to the unaudited Condensed Consolidated Financial Statements for further information about amounts included in this line item.three months ended January 31, 2023, as inclusion would have been anti-dilutive.
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Comprehensive (Loss) Income
(in thousands of dollars)
| | | (unaudited) | | (unaudited) |
| | For the Three Months Ended January 31, | | For the Three Months Ended January 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Net Income Attributable to Oil-Dri | Net Income Attributable to Oil-Dri | $ | 2,002 | | | $ | 4,299 | | Net Income Attributable to Oil-Dri | $ | 3,856 | | | $ | 2,002 | |
| Other Comprehensive (Loss) Income: | | |
Other Comprehensive Income (Loss): | | Other Comprehensive Income (Loss): | |
Pension and postretirement benefits (net of tax) | Pension and postretirement benefits (net of tax) | 26 | | | 201 | | Pension and postretirement benefits (net of tax) | (5) | | | 26 | |
Cumulative translation adjustment | Cumulative translation adjustment | (60) | | | 136 | | Cumulative translation adjustment | 256 | | | (60) | |
Other Comprehensive (Loss) Income | (34) | | | 337 | | |
Other Comprehensive Income (Loss) | | Other Comprehensive Income (Loss) | 251 | | | (34) | |
Total Comprehensive Income | Total Comprehensive Income | $ | 1,968 | | | $ | 4,636 | | Total Comprehensive Income | $ | 4,107 | | | $ | 1,968 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
OIL-DRI CORPORATION OF AMERICA
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
| | | For the Three Months Ended January 31 | | For the Three Months Ended January 31 |
| | (unaudited) | | (unaudited) |
| | Number of Shares | | | | Number of Shares | | |
| Common & Class B Stock | | Treasury Stock | | Common & Class B Stock | | Additional Paid-In Capital | | Retained Earnings | | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Non-Controlling Interest | | Total Stockholders’ Equity | |
Balance, October 31, 2020 | 10,919,617 | | | (3,453,239) | | | $ | 1,092 | | | $ | 45,779 | | | $ | 178,761 | | | | $ | (63,253) | | | $ | (11,854) | | | $ | (209) | | | $ | 150,316 | | |
Net Income (Loss) | — | | | — | | | — | | | — | | | 4,299 | | | | — | | | — | | | (11) | | | 4,288 | | |
Other Comprehensive Income | — | | | — | | | — | | | — | | | — | | | | — | | | 337 | | | — | | | 337 | | |
Dividends Declared | — | | | — | | | — | | | — | | | (1,795) | | | | — | | | — | | | — | | | (1,795) | | |
Purchases of Treasury Stock | — | | | (33,594) | | | — | | | — | | | — | | | | (1,211) | | | — | | | — | | | (1,211) | | |
Net issuance of stock under long-term incentive plans | 18,000 | | | (20,950) | | | 2 | | | 605 | | | — | | | | (607) | | | — | | | — | | | — | | |
Amortization of Restricted Stock | — | | | — | | | — | | | 506 | | | — | | | | — | | | — | | | — | | | 506 | | |
Balance, January 31, 2021 | 10,937,617 | | | (3,507,783) | | | $ | 1,094 | | | $ | 46,890 | | | $ | 181,265 | | | | $ | (65,071) | | | $ | (11,517) | | | $ | (220) | | | $ | 152,441 | | |
| | | | | | | | | | | | | | | | | | | | | Common & Class B Stock | | Treasury Stock | | Common & Class B Stock | | Additional Paid-In Capital | | Retained Earnings | | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Non-Controlling Interest | | Total Stockholders’ Equity |
Balance, October 31, 2021 | Balance, October 31, 2021 | 11,033,024 | | | (3,618,510) | | | $ | 1,103 | | | $ | 49,377 | | | $ | 179,164 | | | | $ | (68,922) | | | $ | (4,124) | | | $ | (297) | | | $ | 156,301 | | Balance, October 31, 2021 | 11,033,024 | | | (3,618,510) | | | $ | 1,103 | | | $ | 49,377 | | | $ | 179,164 | | | | $ | (68,922) | | | $ | (4,124) | | | $ | (297) | | | $ | 156,301 | |
Net Income (Loss) | Net Income (Loss) | — | | | — | | | — | | | — | | | 2,002 | | | | — | | | — | | | (41) | | | 1,961 | | Net Income (Loss) | — | | | — | | | — | | | — | | | 2,002 | | | | — | | | — | | | (41) | | | 1,961 | |
Other Comprehensive Loss | Other Comprehensive Loss | — | | | — | | | — | | | — | | | — | | | | — | | | (34) | | | — | | | (34) | | Other Comprehensive Loss | — | | | — | | | — | | | — | | | — | | | | — | | | (34) | | | — | | | (34) | |
Dividends Declared | Dividends Declared | — | | | — | | | — | | | — | | | (1,844) | | | | — | | | — | | | — | | | (1,844) | | Dividends Declared | — | | | — | | | — | | | — | | | (1,844) | | | | — | | | — | | | — | | | (1,844) | |
Purchases of Treasury Stock | Purchases of Treasury Stock | — | | | (113,236) | | | — | | | — | | | — | | | | (3,910) | | | — | | | — | | | (3,910) | | Purchases of Treasury Stock | — | | | (113,236) | | | — | | | — | | | — | | | | (3,910) | | | — | | | — | | | (3,910) | |
Net issuance of stock under long-term incentive plans | Net issuance of stock under long-term incentive plans | 32,000 | | | (850) | | | 4 | | | 26 | | | — | | | | (30) | | | — | | | — | | | — | | Net issuance of stock under long-term incentive plans | 32,000 | | | (850) | | | 4 | | | 26 | | | — | | | | (30) | | | — | | | — | | | — | |
Amortization of Restricted Stock | Amortization of Restricted Stock | — | | | — | | | — | | | 817 | | | — | | | | — | | | — | | | — | | | 817 | | Amortization of Restricted Stock | — | | | — | | | — | | | 817 | | | — | | | | — | | | — | | | — | | | 817 | |
Balance, January 31, 2022 | Balance, January 31, 2022 | 11,065,024 | | | (3,732,596) | | | $ | 1,107 | | | $ | 50,220 | | | $ | 179,322 | | | | $ | (72,862) | | | $ | (4,158) | | | $ | (338) | | | $ | 153,291 | | Balance, January 31, 2022 | 11,065,024 | | | (3,732,596) | | | $ | 1,107 | | | $ | 50,220 | | | $ | 179,322 | | | | $ | (72,862) | | | $ | (4,158) | | | $ | (338) | | | $ | 153,291 | |
| Balance, October 31, 2022 | | Balance, October 31, 2022 | 11,122,674 | | | (3,968,939) | | | $ | 1,112 | | | $ | 53,385 | | | $ | 182,135 | | | | $ | (79,648) | | | $ | (2,576) | | | $ | (380) | | | $ | 154,028 | |
Net Income (Loss) | | Net Income (Loss) | — | | | — | | | — | | | — | | | 3,856 | | | | — | | | — | | | (10) | | | 3,846 | |
Other Comprehensive Income | | Other Comprehensive Income | — | | | — | | | — | | | — | | | — | | | | — | | | 251 | | | — | | | 251 | |
Dividends Declared | | Dividends Declared | — | | | — | | | — | | | — | | | (1,858) | | | | — | | | — | | | — | | | (1,858) | |
Purchases of Treasury Stock | | Purchases of Treasury Stock | — | | | (4,133) | | | — | | | — | | | — | | | | (133) | | | — | | | — | | | (133) | |
Net issuance of stock under long-term incentive plans | | Net issuance of stock under long-term incentive plans | 18,605 | | | (3,246) | | | 2 | | | 103 | | | — | | | | (105) | | | — | | | — | | | — | |
Amortization of Restricted Stock | | Amortization of Restricted Stock | — | | | — | | | — | | | 840 | | | — | | | | — | | | — | | | — | | | 840 | |
Balance, January 31, 2023 | | Balance, January 31, 2023 | 11,141,279 | | | (3,976,318) | | | $ | 1,114 | | | $ | 54,328 | | | $ | 184,133 | | | | $ | (79,886) | | | $ | (2,325) | | | $ | (390) | | | $ | 156,974 | |
|
| | | For the Six Months Ended January 31 | | For the Six Months Ended January 31 |
| | (unaudited) | | (unaudited) |
| | Number of Shares | | | | | Number of Shares | | | |
| Common & Class B Stock | | Treasury Stock | | Common & Class B Stock | | Additional Paid-In Capital | | Retained Earnings | | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Non-controlling Interest | | Total Stockholders' Equity | |
Balance, July 31, 2020 | 10,886,405 | | | (3,426,046) | | | $ | 1,089 | | | $ | 44,993 | | | $ | 176,579 | | | | $ | (62,269) | | | $ | (12,254) | | | $ | (174) | | | $ | 147,964 | | |
Net Income (Loss) | — | | | — | | | — | | | — | | | 8,283 | | | | — | | | — | | | (46) | | | 8,237 | | |
Other Comprehensive Income | — | | | — | | | — | | | — | | | — | | | | — | | | 737 | | | — | | | 737 | | |
Dividends Declared | — | | | — | | | — | | | — | | | (3,597) | | | | — | | | — | | | — | | | (3,597) | | |
Purchases of Treasury Stock | — | | | (60,587) | | | — | | | — | | | — | | | | (2,189) | | | — | | | — | | | (2,189) | | |
Net issuance of stock under long-term incentive plans | 51,212 | | | (21,150) | | | 5 | | | 607 | | | — | | | | (613) | | | — | | | — | | | (1) | | |
Amortization of Restricted Stock | — | | | — | | | — | | | 1,290 | | | — | | | | — | | | — | | | — | | | 1,290 | | |
Balance, January 31, 2021 | 10,937,617 | | | (3,507,783) | | | $ | 1,094 | | | $ | 46,890 | | | $ | 181,265 | | | | $ | (65,071) | | | $ | (11,517) | | | $ | (220) | | | $ | 152,441 | | |
| | | | | | | | | | | | | | | | | | | | | Common & Class B Stock | | Treasury Stock | | Common & Class B Stock | | Additional Paid-In Capital | | Retained Earnings | | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Non-controlling Interest | | Total Stockholders' Equity |
Balance, July 31, 2021 | Balance, July 31, 2021 | 10,958,367 | | | (3,539,193) | | | $ | 1,096 | | | $ | 48,271 | | | $ | 180,443 | | | | $ | (66,154) | | | $ | (4,117) | | | $ | (307) | | | $ | 159,232 | | Balance, July 31, 2021 | 10,958,367 | | | (3,539,193) | | | $ | 1,096 | | | $ | 48,271 | | | $ | 180,443 | | | | $ | (66,154) | | | $ | (4,117) | | | $ | (307) | | | $ | 159,232 | |
Net Income (Loss) | Net Income (Loss) | — | | | — | | | — | | | — | | | 2,587 | | | | — | | | — | | | (31) | | | 2,556 | | Net Income (Loss) | — | | | — | | | — | | | — | | | 2,587 | | | | — | | | — | | | (31) | | | 2,556 | |
Other Comprehensive Loss | Other Comprehensive Loss | — | | | — | | | — | | | — | | | — | | | | — | | | (41) | | | — | | | (41) | | Other Comprehensive Loss | — | | | — | | | — | | | — | | | — | | | | — | | | (41) | | | — | | | (41) | |
Dividends Declared | Dividends Declared | — | | | — | | | — | | | — | | | (3,708) | | | | — | | | — | | | — | | | (3,708) | | Dividends Declared | — | | | — | | | — | | | — | | | (3,708) | | | | — | | | — | | | — | | | (3,708) | |
Purchases of Treasury Stock | Purchases of Treasury Stock | — | | | (179,003) | | | — | | | — | | | — | | | | (6,201) | | | — | | | — | | | (6,201) | | Purchases of Treasury Stock | — | | | (179,003) | | | — | | | — | | | — | | | | (6,201) | | | — | | | — | | | (6,201) | |
Net issuance of stock under long-term incentive plans | Net issuance of stock under long-term incentive plans | 106,657 | | | (14,400) | | | 11 | | | 496 | | | — | | | | (507) | | | — | | | — | | | — | | Net issuance of stock under long-term incentive plans | 106,657 | | | (14,400) | | | 11 | | | 496 | | | — | | | | (507) | | | — | | | — | | | — | |
Amortization of Restricted Stock | Amortization of Restricted Stock | — | | | — | | | — | | | 1,453 | | | — | | | | — | | | — | | | — | | | 1,453 | | Amortization of Restricted Stock | — | | | — | | | — | | | 1,453 | | | — | | | | — | | | — | | | — | | | 1,453 | |
Balance, January 31, 2022 | Balance, January 31, 2022 | 11,065,024 | | | (3,732,596) | | | $ | 1,107 | | | $ | 50,220 | | | $ | 179,322 | | | | $ | (72,862) | | | $ | (4,158) | | | $ | (338) | | | $ | 153,291 | | Balance, January 31, 2022 | 11,065,024 | | | (3,732,596) | | | $ | 1,107 | | | $ | 50,220 | | | $ | 179,322 | | | | $ | (72,862) | | | $ | (4,158) | | | $ | (338) | | | $ | 153,291 | |
| Balance, July 31, 2022 | | Balance, July 31, 2022 | 11,083,824 | | | (3,961,579) | | | $ | 1,108 | | | $ | 52,467 | | | $ | 178,754 | | | | $ | (79,428) | | | $ | (2,183) | | | $ | (369) | | | $ | 150,349 | |
Net Income (Loss) | | Net Income (Loss) | — | | | — | | | — | | | — | | | 9,097 | | | | — | | | — | | | (21) | | | 9,076 | |
Other Comprehensive Loss | | Other Comprehensive Loss | — | | | — | | | — | | | — | | | — | | | | — | | | (142) | | | — | | | (142) | |
Dividends Declared | | Dividends Declared | — | | | — | | | — | | | — | | | (3,718) | | | | — | | | — | | | — | | | (3,718) | |
Purchases of Treasury Stock | | Purchases of Treasury Stock | — | | | (7,493) | | | — | | | — | | | — | | | | (225) | | | — | | | — | | | (225) | |
Net issuance of stock under long-term incentive plans | | Net issuance of stock under long-term incentive plans | 57,455 | | | (7,246) | | | 6 | | | 227 | | | — | | | | (233) | | | — | | | — | | | — | |
Amortization of Restricted Stock | | Amortization of Restricted Stock | — | | | — | | | — | | | 1,634 | | | — | | | | — | | | — | | | — | | | 1,634 | |
Balance, January 31, 2023 | | Balance, January 31, 2023 | 11,141,279 | | | (3,976,318) | | | $ | 1,114 | | | $ | 54,328 | | | $ | 184,133 | | | | $ | (79,886) | | | $ | (2,325) | | | $ | (390) | | | $ | 156,974 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Cash Flows
(in thousands)
| | | (unaudited) | | (unaudited) |
| | For the Six Months Ended January 31, | | For the Six Months Ended January 31, |
CASH FLOWS FROM OPERATING ACTIVITIES | CASH FLOWS FROM OPERATING ACTIVITIES | 2022 | | 2021 | CASH FLOWS FROM OPERATING ACTIVITIES | 2023 | | 2022 |
Net Income | Net Income | $ | 2,556 | | | $ | 8,237 | | Net Income | $ | 9,076 | | | $ | 2,556 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | Depreciation and amortization | 6,773 | | | 7,065 | | Depreciation and amortization | 7,274 | | | 6,773 | |
| Non-cash stock-based compensation | Non-cash stock-based compensation | 1,453 | | | 1,290 | | Non-cash stock-based compensation | 1,634 | | | 1,453 | |
Deferred income taxes | Deferred income taxes | 32 | | | 742 | | Deferred income taxes | 166 | | | 32 | |
Provision for bad debts and cash discounts | Provision for bad debts and cash discounts | (59) | | | (38) | | Provision for bad debts and cash discounts | 207 | | | (59) | |
Loss on the disposals of property, plant and equipment | Loss on the disposals of property, plant and equipment | 265 | | | 12 | | Loss on the disposals of property, plant and equipment | 15 | | | 265 | |
| (Increase) Decrease in assets: | (Increase) Decrease in assets: | | | | (Increase) Decrease in assets: | | | |
Accounts receivable | Accounts receivable | (5,023) | | | (3,798) | | Accounts receivable | (5,738) | | | (5,023) | |
Inventories | Inventories | (6,236) | | | 412 | | Inventories | (2,432) | | | (6,236) | |
Prepaid expenses | Prepaid expenses | 846 | | | (760) | | Prepaid expenses | (8) | | | 846 | |
Other assets | Other assets | 634 | | | (266) | | Other assets | 2,030 | | | 634 | |
Increase (Decrease) in liabilities: | Increase (Decrease) in liabilities: | | | | Increase (Decrease) in liabilities: | | | |
Accounts payable | Accounts payable | 1,326 | | | (3,901) | | Accounts payable | 180 | | | 1,326 | |
Accrued expenses | Accrued expenses | (1,595) | | | (5,201) | | Accrued expenses | 3,889 | | | (1,595) | |
Deferred compensation | Deferred compensation | 690 | | | 585 | | Deferred compensation | (118) | | | 690 | |
Pension and postretirement benefits | Pension and postretirement benefits | (616) | | | (437) | | Pension and postretirement benefits | (377) | | | (616) | |
Other liabilities | Other liabilities | (985) | | | (857) | | Other liabilities | (900) | | | (985) | |
Total Adjustments | Total Adjustments | (2,495) | | | (5,152) | | Total Adjustments | 5,822 | | | (2,495) | |
Net Cash Provided by Operating Activities | Net Cash Provided by Operating Activities | 61 | | | 3,085 | | Net Cash Provided by Operating Activities | 14,898 | | | 61 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | CASH FLOWS FROM INVESTING ACTIVITIES | | | | CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Capital expenditures | Capital expenditures | (10,574) | | | (7,598) | | Capital expenditures | (13,285) | | | (10,574) | |
Proceeds from sale of property, plant and equipment | Proceeds from sale of property, plant and equipment | — | | | 3 | | Proceeds from sale of property, plant and equipment | 5 | | | — | |
| Net Cash Used in Investing Activities | Net Cash Used in Investing Activities | (10,574) | | | (7,595) | | Net Cash Used in Investing Activities | (13,280) | | | (10,574) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | CASH FLOWS FROM FINANCING ACTIVITIES | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Proceeds from issuance of notes payable | Proceeds from issuance of notes payable | 25,000 | | | — | | Proceeds from issuance of notes payable | — | | | 25,000 | |
| Payment of debt issuance costs | Payment of debt issuance costs | (114) | | | — | | Payment of debt issuance costs | — | | | (114) | |
Dividends paid | Dividends paid | (3,728) | | | (3,606) | | Dividends paid | (3,711) | | | (3,728) | |
Purchases of treasury stock | Purchases of treasury stock | (6,201) | | | (2,189) | | Purchases of treasury stock | (225) | | | (6,201) | |
| Net Cash Provided by (Used in) Financing Activities | 14,957 | | | (5,795) | | |
Net Cash (Used in) Provided by Financing Activities | | Net Cash (Used in) Provided by Financing Activities | (3,936) | | | 14,957 | |
Effect of exchange rate changes on Cash and Cash Equivalents | Effect of exchange rate changes on Cash and Cash Equivalents | (26) | | | 123 | | Effect of exchange rate changes on Cash and Cash Equivalents | (29) | | | (26) | |
Net Increase (Decrease) in Cash and Cash Equivalents | 4,418 | | | (10,182) | | |
Net (Decrease) Increase in Cash and Cash Equivalents | | Net (Decrease) Increase in Cash and Cash Equivalents | (2,347) | | | 4,418 | |
Cash and Cash Equivalents, Beginning of Period | Cash and Cash Equivalents, Beginning of Period | 24,591 | | | 40,890 | | Cash and Cash Equivalents, Beginning of Period | 16,298 | | | 24,591 | |
Cash and Cash Equivalents, End of Period | Cash and Cash Equivalents, End of Period | $ | 29,009 | | | $ | 30,708 | | Cash and Cash Equivalents, End of Period | $ | 13,951 | | | $ | 29,009 | |
OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Cash Flows - Continued
(in thousands)
| | | (unaudited) | | (unaudited) |
| | For the Six Months Ended January 31, | | For the Six Months Ended January 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Supplemental disclosures: | Supplemental disclosures: | | | | Supplemental disclosures: | | | |
Interest payments, net of amounts capitalized | Interest payments, net of amounts capitalized | $ | 178 | | | $ | 198 | | Interest payments, net of amounts capitalized | $ | 567 | | | $ | 178 | |
Income tax payments | Income tax payments | $ | 155 | | | $ | 5,478 | | Income tax payments | $ | 1,323 | | | $ | 155 | |
Non-cash investing and financing activities: | Non-cash investing and financing activities: | | Non-cash investing and financing activities: | |
Capital expenditures accrued, but not paid | Capital expenditures accrued, but not paid | $ | 835 | | | $ | 829 | | Capital expenditures accrued, but not paid | $ | 1,283 | | | $ | 835 | |
Cash dividends declared and accrued, but not paid | Cash dividends declared and accrued, but not paid | $ | 1,845 | | | $ | 1,799 | | Cash dividends declared and accrued, but not paid | $ | 1,858 | | | $ | 1,845 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
OIL-DRI CORPORATION OF AMERICA
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“("U.S. GAAP”GAAP") for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. 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 fiscal year ended July 31, 20212022 included in our Annual Report on Form 10-K filed with the SEC.
The unaudited Condensed Consolidated Financial Statements include the accounts of Oil-Dri Corporation of America and its subsidiaries. All significant intercompany transactions are eliminated. Except as otherwise indicated herein or as the context otherwise requires, references to “Oil-Dri,”"Oil-Dri," the “Company,” “we,” “us”"Company," "we," "us" or “our”"our" refer to Oil-Dri Corporation of America and its subsidiaries.
The unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals and reclassifications which are, in the opinion of management, necessary for a fair presentation of the statements contained herein. Operating results for the three and six months ended January 31, 20222023 are not necessarily an indication of the results that may be expected for the fiscal year ending July 31, 2022.
Immaterial Correction of an Error in Previously Issued Financial Statements
Subsequent to the issuance of our Annual Report on Form 10-K for the fiscal year ended July 31, 2020, we identified an error in our historical financial statements related to the classification of certain costs as selling, general and administrative expenses relating to the production of our inventory that should be classified as cost of sales. These costs generally relate to our annual discretionary bonus and 401(k) employer match for our manufacturing employees, employee salaries for individuals in our support functions that spend a portion of their time related to our manufacturing operations such as IT, and other costs mostly related to consultants and outside services.
In accordance with FASB Accounting Standards Codification 250, Accounting Changes and Error Corrections, we evaluated the materiality of the error from both a quantitative and qualitative perspective, and concluded that the error was immaterial to our prior period interim and annual financial statements. Since the error was not material to any prior period interim or annual financial statements, no amendments to previously filed interim or annual periodic reports are required. Consequently, we have adjusted for these errors by revising our historical condensed consolidated financial statements presented herein. The revision to our historical condensed consolidated financial statements did not result in any impact to our consolidated net income.
The effects of the corrections to each of the individual affected line items in our unaudited Condensed Consolidated Statements of Income were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| For the Three Months Ended January 31, 2021 |
| As Previously Reported | | Corrections | | As Corrected |
Cost of Sales | $ | (56,328) | | | $ | (1,483) | | | $ | (57,811) | |
| | | | | |
Selling, General and Administrative Expenses | $ | (13,928) | | | $ | 1,483 | | | $ | (12,445) | |
| | | | | |
| For the Six Months Ended January 31, 2021 |
| As Previously Reported | | Corrections | | As Corrected |
Cost of Sales | $ | (112,121) | | | $ | (3,007) | | | $ | (115,128) | |
| | | | | |
Selling, General and Administrative Expenses | $ | (29,055) | | | $ | 3,007 | | | $ | (26,048) | |
The related impacts to Inventory in our unaudited Condensed Consolidated Balance Sheet were not considered material and hence, were not adjusted.
The effects of the corrections to our Notes to the unaudited Condensed Consolidated Financial Statements for Operating Segments were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| For the Three Months Ended January 31, 2021 |
| | | | | |
| Income |
| | | | | |
| As Previously Reported | | Corrections | | As Corrected |
| | | | | |
Business to Business Products | $ | 7,663 | | | $ | (550) | | | $ | 7,113 | |
| | | | | |
Retail and Wholesale Products | $ | 4,111 | | | $ | (933) | | | $ | 3,178 | |
| | | | | |
Corporate Expenses | $ | (7,530) | | | $ | 1,483 | | | $ | (6,047) | |
| | | | | |
| | | | | |
| For the Six Months Ended January 31, 2021 |
| | | | | |
| Income |
| | | | | |
| As Previously Reported | | Corrections | | As Corrected |
| | | | | |
Business to Business Products | $ | 15,859 | | | $ | (1,146) | | | $ | 14,713 | |
| | | | | |
Retail and Wholesale Products | $ | 8,589 | | | $ | (1,861) | | | $ | 6,728 | |
| | | | | |
Corporate Expenses | $ | (15,027) | | | $ | 3,007 | | | $ | (12,020) | |
2023.
Management Use of Estimates
The preparation of the unaudited Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires the use ofmanagement to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period, as well as the related disclosures. Estimates and assumptions about future events cannot be made with certainty, including the potential impacts and duration of the novel coronavirus pandemic (“the coronavirus” or “COVID-19” or “the pandemic”) and its aftermath.certainty. All of our estimates and assumptions are revised periodically. Actual results could differ from these estimates. For more information see "Critical Accounting Policies and Estimates" in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Summary of Significant Accounting Policies
Our significant accounting policies, which are detailedsummarized in detail in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021,2022, have not materially changed. The following is a description of certain of our significant accounting policies.policies:
Trade Receivables. We recognize trade receivables when control of finished products are transferred to our customers. We record an allowance for doubtful accountscredit losses based on our historical experienceexpectations and a periodic review of our accounts receivable, including a review of the overall aging of accounts, consideration of customer credit risk and analysis of facts and circumstances about specific customer accounts. A customer account is determined to be uncollectible when it is probable that a loss will be incurred after we have completed our internal collection procedures, including termination of shipments, direct customer contact and formal demand of payment. We retain outside collection agencies to facilitate our collection efforts. Past due status is determined based on contractual terms and customer payment history.
Overburden Removal and Mining Costs. We mine sorbent materials on property that we either own or lease as part of our overall operations. A significant part of our overall mining cost is incurred during the process of removing the overburden (non-usable material) from the mine site, thus exposing the sorbent material used in a majority of our production processes. These stripping costs are treated as a variable inventory production cost and are included in cost of sales in the period they are incurred. We defer and amortize the pre-production overburden removal costs during the development phase associated with opening a new mine.
Additionally, it is our policy to capitalize the purchase cost of land and mineral rights, including associated legal fees, survey fees and real estate fees. The costs of obtaining mineral patents, including legal fees and drilling expenses, are also capitalized. Pre-production development costs on new mines and any prepaid royalties that may be offset against future royalties due upon extraction of the minerals are also capitalized. All exploration related costs are expensed as incurred.
Reclamation. We perform ongoing reclamation activities during the normal course of our overburden removal. As overburden is removed from a mine site, it is hauled to previously mined sites and is used to refill older sites. This process allows us to continuously reclaim older mine sites and dispose of overburden simultaneously, therefore minimizing the costs associated with the reclamation process.
On an annual basis we evaluate our potential reclamation liability in accordance with ASC 410, Asset Retirement and Environmental Obligations. The reclamation assets are depreciated over the estimated useful lives of the various mines. The reclamation liabilities are increased based on a yearly accretion charge over the estimated useful lives of the mines.
Leases. ASC 842, Leases, provides that a contract is, or contains, a lease if it conveys the right to control the use of an identified asset and, accordingly, a lease liability and a related right-of-use (“ROU”("ROU") asset is recognized at the commencement date on our consolidated balance sheet. As provided in ASC 842, we have elected not to apply these measurement and recognition requirements to short-term leases (i.e., leases with a term of 12 months or less). Short-term leases will not be recorded as ROU assets or lease liabilities on our consolidated balance sheet, and the related lease payments will be recognized in net earnings on a straight-line basis over the lease term. For leases other than short-term leases, the lease liability is equal to the present value of unpaid lease payments over the remaining lease term. The lease term may reflect options to extend or terminate the lease when it is reasonably certain that such options will be exercised. To determine the present value of the lease liability, we used an incremental borrowing rate, which is defined as the rate of interest we would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. The ROU asset is based on the corresponding lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Both operating and finance lease ROU assets are reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. After a ROU asset is impaired, any remaining balance of the ROU asset is amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful life. After the lease commencement date, we evaluate lease modifications, if any, that could result in a change in the accounting for leases.
Certain of our leases provide for variable lease payments that vary due to changes in facts and circumstances occurring after the commencement date, other than the passage of time. Variable lease payments that are dependent on an index or rate (e.g., Consumer Price Index) are included in the initial measurement of the lease liability and the ROU asset. Variable lease payments that are not known at the commencement date and are determinable based on the performance or use of the underlying asset, are expensed as incurred. Our variable lease payments primarily include common area maintenance charges based on the percentage of the total square footage leased and the usage of assets, such as photocopiers.
Some of our contracts may contain lease components as well as non-lease components, such as an agreement to purchase services. As allowed under ASC 842, we have elected not to separate the lease components from non-lease components for all asset classes and we will not allocate the contract consideration to these components. This policy was applied to all existing leases upon adoption of ASC 842 and will be applied to new leases on an ongoing basis.
Revenue Recognition. We recognize revenue when performance obligations under the terms of the contracts with customers are satisfied. Our performance obligation generally consists of the promise to sell finished products to wholesalers, distributors and retailers or consumers and our obligations have an original duration of one year or less. Control of the finished products are transferred upon shipment to, or receipt at, customers' locations, as determined by the specific terms of the contract. We have completed our performance obligation when control is transferred and we recognize revenue accordingly. Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Sales returns are not material nor are warranties and any related obligations.
We have an unconditional right to consideration under the payment terms specified in the contract upon completion of the performance obligation. We may require certain customers to provide payment in advance of product shipment. We recorded a liability for these advance payments of $523,000$0.2 million and $256,000$0.5 million as of January 31, 20222023 and July 31, 2021,2022, respectively. This liability is reported in Other within Accrued Expenses on the unaudited Condensed Consolidated Balance Sheet. Revenue recognized during the six months ended January 31, 20222023 that was included in the liability for advance payments at the beginning of the period was $155,000.$0.1 million.
We routinely commit to one-time or ongoing trade promotion programs directly with consumers, such as coupon programs, and with customers, such as volume discounts, cooperative marketing and other arrangements. We estimate and accrue the expected costs of these programs. These costs are considered variable consideration under ASC 606, Revenue from Contracts with Customers, and are netted against sales when revenue is recorded. The accruals are based on our best estimate of the amounts necessary to settle future and existing obligations on products sold as of the balance sheet date. To estimate these accruals, we rely on our historical experience of trade spending patterns and that of the industry, current trends and forecasted data.
Selling, General and Administrative Expenses. Selling, general and administrative expenses (“("SG&A”&A") include salaries, wages and benefits associated with staff outside the manufacturing and distribution functions, all marketing related costs, any miscellaneous trade spending expenses not required to be included in net sales, research and development costs, depreciation
and amortization related to assets outside the manufacturing and distribution process and all other non-manufacturing and non-distribution expenses.
Other Current and Noncurrent Liabilities. On March 27, 2020, in responseOther liabilities include the accruals for general expenses not yet paid, cash collected not yet vouchered, legal reserves, and reclamation liability accrual. Current liabilities are due to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into U.S. law. The CARES Act provides for, among other things, deferral of the employer portion of social security taxes incurred through the end of calendar 2020. As permitted by the CARES Act, we deferred approximately $2,300,000 in payroll taxes in calendar year 2020. $1,150,000 of the $2,300,000 was paid in the fourth quarter of calendar year 2021 and $1,150,000 will be paid within the next 12 months. Included in the fourth quarter of calendar year 2022. The remaining $1,150,000 accrual for these payroll taxes is included in Othercurrent liabilities within Accrued Expenses on the unaudited Condensed Consolidated Balance Sheet.Sheet is $2.5 million for the Georgia landfill modification reserve as modification efforts are expected to begin in the third quarter of fiscal year 2023, refer to Note 7 for further details.
2. NEW ACCOUNTING PRONOUNCEMENTS AND REGULATIONS
Recently IssuedAdopted Accounting Pronouncements
In March 2020, the FASB issued guidance under ASC 848, Reference Rate Reform. This guidance provides optional expedients and exceptions to account for debt, leases, contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The guidance is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We haveOn August 30, 2022 we amended our debt agreements that reference LIBOR and to the extent that those agreements are modified to replace LIBORthe LIBOR-based reference rate with another interest rate index,an adjusted term Secured Overnight Financing Rate (SOFR), ASC 848 will allow us to account for the modification as a continuation of the existing contract without additional analysis. We are currently evaluating the potential effects of the adoption of this guidance on our Consolidated Financial Statements.
In June 2016, the FASB issued guidance under ASC 326, Financial Instruments-Credit Losses, which requires companies to utilize an impairment model for most financial assets measured at amortized cost and certain other financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses. In addition, this new guidance changes the recognition method for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk, as well as additional disclosures. In general, this guidance will require modified retrospective adoption for all outstanding instruments that fall under this guidance. This guidance is effective for our first quarter of fiscal year 2023. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements.
There have been no other accounting pronouncements issued but not yet adopted by us which are expected to have a material impact on our Consolidated Financial Statements.
3. INVENTORIES
The composition of inventories is as follows (in thousands):
| | | January 31, 2022 | | July 31, 2021 | | January 31, 2023 | | July 31, 2022 |
Finished goods | Finished goods | $ | 15,702 | | | $ | 14,179 | | Finished goods | $ | 19,071 | | | $ | 18,142 | |
Packaging | Packaging | 7,877 | | | 5,084 | | Packaging | 9,795 | | | 9,515 | |
Other | Other | 6,218 | | | 4,335 | | Other | 9,072 | | | 7,905 | |
Total Inventories | Total Inventories | $ | 29,797 | | | $ | 23,598 | | Total Inventories | $ | 37,938 | | | $ | 35,562 | |
Inventories are valued at the lower of cost (first-in, first-out) or net realizable value. Inventory costs include the cost of raw materials, packaging supplies, labor and other overhead costs. The inventory obsolescence reserve valueswas $0.9 million and $0.8 million at January 31, 20222023 and July 31, 2021 were $541,000 and $641,000,2022, respectively. Inventories in all categories, have increased due to a combination of rising costs and building inventory levels for anticipated demand.
4. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized into categories based on the lowest level of input that is significant to the fair value measurement. The categories in the fair value hierarchy are as follows:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs for similar assets or liabilities or valuation models whose inputs are observable, directly or indirectly.
Level 3: Unobservable inputs.
Cash equivalents are primarily money market mutual funds classified as Level 1. We had no cash equivalents as of January 31, 20222023 and July 31, 2021.2022.
Balances of accounts receivable and accounts payable approximated their fair values at January 31, 20222023 and July 31, 20212022 due to the short maturity and nature of those balances.
Notes payable are reported at the face amount of future maturities. The estimated fair value of notes payable, including current maturities, was $36,985,000$31.2 million and $10,231,000$31.8 million as of January 31, 20222023 and July 31, 2021,2022, respectively, and are classified as Level 2. The fair value was estimated using the exit price notion of fair value.
We apply fair value techniques on at least an annual basis associated with: (1) valuing potential impairment loss related to goodwill, trademarks and other indefinite-lived intangible assets and (2) valuing potential impairment loss related to long-lived assets. See Note 5 of the Notes to the unaudited Condensed Consolidated Financial Statements for further information about goodwill and other intangible assets.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets, other than goodwill, include trademarks, patents, customer lists and product registrations. Intangible amortization expense was $138,000$67 thousand and $150,000$138 thousand in the second quarter of fiscal years 20222023 and 2021,2022, respectively. Intangible amortization expense was $253,000$134 thousand and $305,000$253 thousand in the first six months of fiscal years 20222023 and 2021,2022, respectively. Estimated intangible amortization for the remainder of fiscal year 20222023 is $233,000.$131 thousand. Estimated intangible amortization for the next five fiscal years is as follows (in thousands):
| 2023 | $ | 262 | | |
2024 | 2024 | $ | 126 | | 2024 | $ | 129 | |
2025 | 2025 | $ | 102 | | 2025 | $ | 104 | |
2026 | 2026 | $ | 99 | | 2026 | $ | 102 | |
2027 | 2027 | $ | 96 | | 2027 | $ | 99 | |
2028 | | 2028 | $ | 94 | |
We have one acquired trademark recorded at a cost of $376,000$0.4 million that was determined to have an indefinite life and is not amortized.
We performed our annual goodwill impairment analysis on our Retail and Wholesale Products Group and Business to Business Products Group reporting units in the fourththird quarter of fiscal year 20212022. As a result, we identified goodwill impairment of $5.6 million which left no remaining goodwill in the Retail and Wholesale Products Group reporting unit and no impairment was identified. identified for the Business to Business Products Group.
There have been no triggering events in fiscal year 2023 that would indicate a new impairment analysis is needed.Although we have not identified any triggering events relating to goodwill or our intangibles, the ultimate effects of COVID-19 could change this assessment in the future.
6. ACCRUED EXPENSES
Accrued expenses is as follows (in thousands):
| | | January 31, 2022 | | July 31, 2021 | | January 31, 2023 | | July 31, 2022 |
Salaries, Wages, Commissions and Employee Benefits | Salaries, Wages, Commissions and Employee Benefits | | $ | 9,097 | | | $ | 10,806 | | Salaries, Wages, Commissions and Employee Benefits | | $ | 13,780 | | | $ | 13,439 | |
Trade promotions and advertising | | 2,178 | | | 1,653 | | |
Freight | Freight | | 3,034 | | | 2,845 | | Freight | | 4,356 | | | 4,022 | |
Georgia Landfill Modification Reserve | | Georgia Landfill Modification Reserve | | 2,500 | | | — | |
Trade Promotions and Advertising | | Trade Promotions and Advertising | | 1,971 | | | 1,180 | |
Real Estate Tax | Real Estate Tax | | 228 | | | 1,002 | | Real Estate Tax | | 317 | | | 1,006 | |
Other | Other | | 9,265 | | | 8,577 | | Other | | 10,861 | | | 10,438 | |
| | $ | 23,802 | | | $ | 24,883 | | | $ | 33,785 | | | $ | 30,085 | |
The decreasechange in salaries, wages, commissions and employee benefits relates primarily to the payment of annual discretionary bonuses during the first quarter of fiscal year 2022. Changes2023 offset by the increase in labor costs and bonus accrual for the first six months of fiscal year 2023. The increase in freight cost is primarily due to increased fuel prices, export fees and demurrage charges for international ocean freight. Refer to Note 7 for details of the Georgia landfill modification reserve recorded for the first time in the accrual for tradesecond quarter of fiscal year 2023. Trade promotions and advertising as well as real estate taxes differaccruals have increased with marketing spend due to timing. The accrual for otherReal estate tax decreased due to the timing of payments which typically occur in the second quarter of the fiscal year. Other is higher at January 31, 2022 than2023 compared to July 31, 20212022 due to an increase in accrualaccruals for rising natural gas costscash received in advance, account receivable credits, and other accrued expenses due to timing of certain plant purchases and expenses.rising costs offset by a reduction in professional fees.
7. OTHER CONTINGENCIES
We are party to various legal actions from time to time that are ordinary in nature and incidental to the operation of our business, including ongoing litigation. While it is not possible at this time to determine with certainty the ultimate outcome of these or other lawsuits, we believe that none of the pending proceedings will have a material adverse effect on our business, financial condition, results of operations or cash flows. In June 2020, the Company received notice from a former service provider alleging a breach of contract regarding the payment of a contingency fee. Such party subsequently, in July 2020, filed a lawsuit seeking to require the Company to participate in binding mediation regarding this matter. Although we believe this claim to be without merit, as of July 31, 2020, we have determined a reasonable estimate of this liability within a range, with no amount within that range being a better estimate than any other amount, and have therefore recorded that estimate in Other within Accrued expenses. There have been no changes during fiscal 20212022 or the threesix months ended January 31, 20222023 that would have changed this estimate. We believe that any loss related to this matter is unlikely to be material. However, the outcome of this legal matter is subject to significant uncertainties. The ability to predict the ultimate outcome of this legal matter involves judgments, estimates and inherent uncertainties. The actual outcome could differ materially from management’s estimates.
In the three months ended January 31, 2023, we recorded a reserve of $2.5 million for anticipated modification costs that we expect to incur to address capacity issues at our sole landfill located in Ochlocknee, Georgia. Reserves are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The amount of the reserve represents management’s best estimate of the costs for the modification with respect to this matter. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards, and emerging technologies for handling site modification. Consequently, it is reasonably possible that modification costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows.
8. DEBT
Effective December 16, 2021 (the “Effective Date”),On August 30, 2022, we entered into (i) the Sixth Amendment to Credit Agreement (the "Sixth Amendment"), which amends the Credit Agreement, dated as of January 27, 2006 (as previously amended, the "Credit Agreement"), among us, BMO Harris Bank N.A (“BMO”), and certain of our domestic subsidiaries; and (ii) Amendment No. 13 (the “Amendment”"Third Amendment") to theour Amended and Restated Note Purchase and Private Shelf Agreement, (the “Note Agreement”dated as of May 15, 2020 (as previously amended, the "Note Agreement"), with PGIM, Inc. (“Prudential”("Prudential") and certain existing noteholders affiliated with Prudential named therein.
The Amendment provides that, among other things, an excess leverage fee will be applied to the interest rate applicable to the outstanding daily average principal amount of Notes issued on or after December 15, 2021 as follows: (i) an additional 0.25% in the event the Net Leverage Ratio (as defined in the Amendment) is 2.00:1.00 or greater as of the last day of any fiscal quarter, or (ii) an additional 1.00% in the event that the Net Leverage Ratio is greater than 2.50:1.00 as of the last day of any fiscal quarter.
Concurrent with entering into the Amendment, we issued $25,000,000 in aggregate principal amount of Series C Senior Notes (the “Series C Notes”). The Series C Notes bear interest at an annual rate of 3.25% (subject to the application of the excess leverage fee in the event the Net Leverage Ratio exceeds certain thresholds as described above) and will mature on December 16, 2031. Annual principal payments of $5,000,000 are due December 16 of each fiscal year beginning in 2027 and ending in 2031. Interest is payable semi-annually beginning June 16, 2022.
The Sixth Amendment amended the Credit Agreement to, among other things: extend the facility termination date to August 30, 2027; replace the LIBOR-based reference rate with an adjusted term Secured Overnight Financing Rate ("SOFR"); revise the method for calculating consolidated EBITDA and consolidated debt for purposes of the Credit Agreement; modify certain restrictive covenants, including increasing the unsecured indebtedness basket from $50 million to $75 million; and revise the existing financial covenants by replacing the consolidated debt covenant with a covenant to maintain a maximum debt to earnings ratio, lowering the minimum fixed charge coverage ratio level and revising the method for calculating the fixed charge coverage ratio.
The Third Amendment amended the Note Agreement to, among other things, modify the existing fixed charge coverage financial covenant and replace the existing consolidated debt financial covenant with a maximum debt to earnings ratio and effect certain changes consistent with the Sixth Amendment, including modifying the method for calculating consolidated EBITDA and the excess leverage fee.
9. LEASES
We have operating leases primarily for real estate properties, including corporate headquarters, customer service and sales offices, manufacturing and packaging facilities, warehouses, and research and development facilities, as well as for rail tracks, railcars and office equipment. Certain of our leases for a shared warehouse and office facility, rail track and railcars have options to extend which we are reasonably certain we will exercise and, accordingly, have been considered in the lease term used to recognize our ROU assets and lease liabilities. To determine the present value of the lease liability, we use an incremental borrowing rate, which is defined as the rate of interest that the Company would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. Further information about our accounting policy for leases is included in Note 1 of the Notes to the unaudited Condensed Consolidated Financial Statements.
We have no material finance leases, and variable costs for operating leases are immaterial for the three and six months ended January 31, 2022.2023. Operating lease costs are included in Cost of Sales or SG&A expenses based on the nature of the lease. The following table summarizes total lease costs for our operating leases (in thousands):
| | | For the Three Months Ended January 31, | | For the Six Months Ended January 31, | | | For the Three Months Ended January 31, | | For the Six Months Ended January 31, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 2023 | | 2022 | |
Operating Lease Cost | Operating Lease Cost | | | | | | | Operating Lease Cost | | | | | | |
Operating lease cost | Operating lease cost | $ | 718 | | | $ | 657 | | | $ | 1,352 | | | $ | 1,352 | | | Operating lease cost | $ | 687 | | | $ | 718 | | | $ | 1,383 | | | $ | 1,352 | | |
Short-term operating lease cost | Short-term operating lease cost | 159 | | | 176 | | | 308 | | | 362 | | | Short-term operating lease cost | — | | | 159 | | | 1 | | | 308 | | |
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended January 31, | | For the Six Months Ended January 31, |
| |
| 2022 | | 2021 | | 2022 | | 2021 |
Other Information | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows from operating leases | $ | 636 | | | $ | 567 | | | $ | 1,197 | | | $ | 1,169 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended January 31, | | For the Six Months Ended January 31, |
| |
| 2023 | | 2022 | | 2023 | | 2022 |
Other Information | | | | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities: | $ | 585 | | | $ | 636 | | | $ | 1,180 | | | $ | 1,197 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | — | | | $ | 1,042 | | | $ | 23 | | | $ | 1,283 | |
| | | | | | | |
We have no new leases in the three months ended January 31, 2023.
Operating lease ROU assets and operating lease liabilities are separately presented on the unaudited Condensed Consolidated Balance Sheet, excluding leases with an initial term of twelve months or less. Other supplemental balance sheet information related to leases was as follows:
| | | January 31, 2022 | | July 31, 2021 | | January 31, 2023 | | July 31, 2022 |
| Weighted-average remaining lease term - operating leases | Weighted-average remaining lease term - operating leases | 8.8 years | | 9.1 years | Weighted-average remaining lease term - operating leases | 7.6 years | | 7.7 years |
| Weighted-average discount rate - operating leases | Weighted-average discount rate - operating leases | 3.86% | | 3.88% | Weighted-average discount rate - operating leases | 3.90% | | 3.91% |
The following table summarizes scheduled minimum future lease payments due within twelve months for operating leases with terms longer than one year for which cash flows are fixed and determinable as of January 31, 2023, (in thousands):
| | 2022 | $ | 1,294 | | | |
2023 | 2,042 | | | |
2024 | 2024 | 1,884 | | | 2024 | $ | 1,180 | | |
2025 | 2025 | 1,751 | | | 2025 | 2,052 | | |
2026 | 2026 | 1,467 | | | 2026 | 1,919 | | |
2027 | | 2027 | 1,629 | | |
2028 | | 2028 | 1,214 | | |
Thereafter | Thereafter | 5,665 | | | Thereafter | 4,577 | | |
Total | Total | 14,103 | | | Total | 12,571 | | |
Less: imputed interest | Less: imputed interest | (2,131) | | | Less: imputed interest | (1,802) | | |
Net lease obligation | Net lease obligation | $ | 11,972 | | | Net lease obligation | $ | 10,769 | | |
10. PENSION AND OTHER POSTRETIREMENT BENEFITS
Pension and Postretirement Health Benefits
The Oil-Dri Corporation of America Pension Plan (“("Pension Plan”Plan") is a defined benefit pension plan for eligible salaried and hourly employees. Pension benefits are based on a formula of years of credited service and levels of compensation or stated amounts for each year of credited service. On January 9, 2020, we amended the Pension Plan to freeze participation, all future benefit accruals and accrual of benefit service, including consideration of compensation increases, effective March 1, 2020. Consequently, the Pension Plan is closed to new participants and current participants no longer earn additional benefits on or after March 1, 2020. On May 4, 2021, we purchasedSeptember 20, 2022, the Company's Board of Directors approved a resolution to terminate the Company's defined benefit pension annuity which settled $8.5 millionplan. The Company expects to complete the termination over a period of projected benefit obligations and recognized a settlement loss of approximately $0.6 million due to the annuity purchase. eighteen months.
The components of net periodic pension and postretirement health benefit costs were as follows:
| | | Pension Benefits | | Pension Benefits |
| | (in thousands) | | (in thousands) |
| | For the Three Months Ended January 31, | | For the Six Months Ended January 31, | | For the Three Months Ended January 31, | | For the Six Months Ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Interest cost | Interest cost | $ | 266 | | | $ | 583 | | | $ | 534 | | | $ | 583 | | Interest cost | $ | 338 | | | $ | 266 | | | $ | 673 | | | $ | 534 | |
Expected return on plan assets | Expected return on plan assets | (646) | | | (1,444) | | | (1,293) | | | (1,444) | | Expected return on plan assets | (558) | | | (646) | | | (1,116) | | | (1,293) | |
Amortization of: | Amortization of: | | Amortization of: | |
Other actuarial loss | Other actuarial loss | 35 | | | 265 | | | 72 | | | 435 | | Other actuarial loss | 19 | | | 35 | | | 28 | | | 72 | |
Net periodic benefit cost | Net periodic benefit cost | $ | (345) | | | $ | (596) | | | $ | (687) | | | $ | (426) | | Net periodic benefit cost | $ | (201) | | | $ | (345) | | | $ | (415) | | | $ | (687) | |
| | | Postretirement Health Benefits | | Postretirement Health Benefits |
| | (in thousands) | | (in thousands) |
| | For the Three Months Ended January 31, | | For the Six Months Ended January 31, | | For the Three Months Ended January 31, | | For the Six Months Ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Service cost | Service cost | $ | 28 | | | $ | 34 | | | $ | 61 | | | $ | 69 | | Service cost | $ | 20 | | | $ | 28 | | | $ | 42 | | | $ | 61 | |
Interest cost | Interest cost | 13 | | | 12 | | | 29 | | | 25 | | Interest cost | 16 | | | 13 | | | 36 | | | 29 | |
Amortization of: | Amortization of: | | Amortization of: | |
Other actuarial loss | Other actuarial loss | — | | | 2 | | | — | | | 2 | | Other actuarial loss | (23) | | | — | | | (41) | | | — | |
Prior service costs | Prior service costs | (2) | | | (2) | | | (3) | | | (3) | | Prior service costs | (1) | | | (2) | | | (3) | | | (3) | |
Net periodic benefit cost | Net periodic benefit cost | $ | 39 | | | $ | 46 | | | $ | 87 | | | $ | 93 | | Net periodic benefit cost | $ | 12 | | | $ | 39 | | | $ | 34 | | | $ | 87 | |
The non-service cost components of net periodic benefit cost are included in Other Income (Expense) in the line item Other, net on the unaudited Condensed Consolidated Statements of Income.
The Pension Plan is funded based upon actuarially determined contributions that take into account the amount deductible for income tax purposes, the normal cost and the minimum contribution required and the maximum contribution allowed under applicable regulations. We were not required to make, and did not voluntarily make, a contribution to the Pension Plan during the first six months of fiscal year 2022.2023. We have no minimum funding requirements for the remainder of fiscal year 2022.2023.
The postretirement health plan is an unfunded plan. We pay insurance premiums and claims from our assets.
Assumptions used in the previous calculations were as follows:
| | | Pension Benefits | | Postretirement Health Benefits | | Pension Benefits | | Postretirement Health Benefits |
| | For the Three and Six Months Ended January 31, | | For the Three and Six Months Ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Discount rate for net periodic benefit cost | Discount rate for net periodic benefit cost | 2.57 | % | | 2.14 | % | | 2.10 | % | | 1.63 | % | Discount rate for net periodic benefit cost | 4.05 | % | | 2.57 | % | | 3.82 | % | | 2.10 | % |
Rate of increase in compensation levels | Rate of increase in compensation levels | — | % | | — | % | | — | | | — | | Rate of increase in compensation levels | — | % | | — | % | | — | % | | — | % |
Long-term expected rate of return on assets | Long-term expected rate of return on assets | 6.50 | % | | 6.50 | % | | — | | | — | | Long-term expected rate of return on assets | 6.50 | % | | 6.50 | % | | — | % | | — | % |
The medical cost trend assumption for postretirement health benefits was 7.05%8.50%. The graded trend rate is expected to decrease to an ultimate rate of 4.50%4.90% in fiscal year 2038.
Supplemental Executive Retirement Plan
The Oil-Dri Corporation of America Supplemental Executive Retirement Plan (“SERP”) provided certain retired participants in the Pension Plan with the amount of benefits that would have been provided under the Pension Plan but for: (1) the limitations on benefits imposed by Section 415 of the Internal Revenue Code (“Code”) and/or (2) the limitation on compensation for purposes of calculating benefits under the Pension Plan imposed by Section 401(a)(17) of the Code. The SERP liability was actuarially determined at the end of each fiscal year using assumptions similar to those used for the Pension Plan.
On January 9, 2020, we amended the SERP to freeze participation and any excess benefit, supplemental benefit or additional benefit effective March 1, 2020. Consequently, the SERP was closed to new participants and current participants no longer earned additional benefits on or after March 1, 2020. The SERP was terminated effective June 30, 2020 and all participants were paid in the form of one lump sum in July 2021.2044.
11. OPERATING SEGMENTS
As a result of a change in management organization during fiscal year 2022 and as part of our routine assessments of our segments, our wholly owned subsidiary located in the United Kingdom (UK) is now included in our Business to Business Products Group and our co-packaged coarse cat litter is now included in the Retail and Wholesale Products Group. Prior year net sales and operating income have also been reclassified to reflect these changes.The organization change was intended to better serve our customers and the segment information presented reflects the information regularly reviewed by our chief operating decision maker.
We have 2two operating segments: (1) Business to Business Products Group and (2) Retail and Wholesale Products Group. These operating segments are managed separately and each segment's major customers have different characteristics. The Retail and Wholesale Products Group customers include: mass merchandisers; wholesale clubs; drugstore chains; pet specialty retail outlets; dollar stores; retail grocery stores; e-commerce retailers; distributors of industrial cleanup and automotive products; environmental service companies; and sports field product users.users; and marketers of consumer products. The Business to Business Products Group customers include: processors and refiners of edible oils, petroleum-based oils and biodiesel fuel; manufacturers of animal feed and agricultural chemicals; and distributors of animal health and nutrition products; and marketers of consumer products. Our operating segments are also our reportable segments. The accounting policies of the segments are the same as those described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.2022.
Net sales for our principal products by segment are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Business to Business Products Group | | Retail and Wholesale Products Group |
| For the Six Months Ended January 31, |
Product | 2023 | | 2022 | | 2023 | | 2022 |
Cat Litter | $ | — | | | $ | — | | | $ | 110,580 | | | $ | 98,468 | |
Industrial and Sports | — | | | — | | | 20,787 | | | $ | 17,940 | |
Agricultural and Horticultural | 19,788 | | | 13,519 | | | — | | | — | |
Bleaching Clay and Fluids Purification | 37,241 | | | 30,576 | | | — | | | $ | — | |
Animal Health and Nutrition | 11,812 | | | 9,167 | | | — | | | — | |
Net Sales | $ | 68,841 | | | $ | 53,262 | | | 131,367 | | | $ | 116,408 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Business to Business Products Group | | Retail and Wholesale Products Group |
| For the Three Months Ended January 31, |
Product | 2023 | | 2022 | | 2023 | | 2022 |
Cat Litter | $ | — | | | $ | — | | | $ | 56,382 | | | $ | 49,937 | |
Industrial and Sports | — | | | — | | | 10,133 | | | 8,820 | |
Agricultural and Horticultural | 9,785 | | | 7,311 | | | — | | | — | |
Bleaching Clay and Fluids Purification | 19,012 | | | 15,555 | | | — | | | — | |
Animal Health and Nutrition | 6,357 | | | 5,587 | | | — | | | — | |
Net Sales | $ | 35,154 | | | $ | 28,453 | | | $ | 66,515 | | | $ | 58,757 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Business to Business Products Group | | Retail and Wholesale Products Group |
| For the Six Months Ended January 31, |
Product | 2022 | | 2021 | | 2022 | | 2021 |
Cat Litter | $ | 9,327 | | | $ | 7,612 | | | $ | 89,141 | | | $ | 81,879 | |
Industrial and Sports | — | | | — | | | 17,940 | | | $ | 13,972 | |
Agricultural and Horticultural | 13,519 | | | 12,033 | | | — | | | — | |
Bleaching Clay and Fluids Purification | 29,540 | | | 25,406 | | | 1,036 | | | $ | 941 | |
Animal Health and Nutrition | 9,167 | | | 8,754 | | | — | | | — | |
Net Sales | $ | 61,553 | | | $ | 53,805 | | | 108,117 | | | $ | 96,792 | |
Net sales for our principal products by segment are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Business to Business Products Group | | Retail and Wholesale Products Group |
| For the Three Months Ended January 31, |
Product | 2022 | | 2021 | | 2022 | | 2021 |
Cat Litter | $ | 4,691 | | | $ | 3,736 | | | $ | 45,246 | | | $ | 41,085 | |
Industrial and Sports | — | | | — | | | 8,820 | | | 6,710 | |
Agricultural and Horticultural | 7,311 | | | 5,046 | | | — | | | — | |
Bleaching Clay and Fluids Purification | 15,035 | | | 12,765 | | | 520 | | | 422 | |
Animal Health and Nutrition | 5,587 | | | 4,736 | | | — | | | — | |
Net Sales | $ | 32,624 | | | $ | 26,283 | | | $ | 54,586 | | | $ | 48,217 | |
| | | | | | | |
We do not rely on any segment asset allocations and we do not consider them meaningful because of the shared nature of our production facilities; however, we have estimated the segment asset allocations below for those assets for which we can reasonably determine. The unallocated asset category is the remainder of our total assets. The asset allocation is estimated and is not a measure used by our chief operating decision maker about allocating resources to the operating segments or in assessing their performance.
| | | | Assets | | | Assets |
| | January 31, 2022 | | July 31, 2021 | | January 31, 2023 | | July 31, 2022 |
| | | (in thousands) | | | (in thousands) |
Business to Business Products Group | Business to Business Products Group | | $ | 73,041 | | | $ | 69,023 | | Business to Business Products Group | | $ | 83,697 | | | $ | 75,644 | |
Retail and Wholesale Products Group | Retail and Wholesale Products Group | | 111,332 | | | 103,268 | | Retail and Wholesale Products Group | | 130,443 | | | 125,293 | |
Unallocated Assets | Unallocated Assets | | 62,841 | | | 55,275 | | Unallocated Assets | | 41,904 | | | 48,674 | |
Total Assets | Total Assets | | $ | 247,214 | | | $ | 227,566 | | Total Assets | | $ | 256,044 | | | $ | 249,611 | |
Net sales and operating income for each segment are provided below. The corporate expenses line includes certain unallocated expenses, including primarily salaries, wages and benefits, purchased services, rent, utilities and depreciation and amortization associated with corporate functions such as research and development, information systems, finance, legal, human resources and customer service. Corporate expenses also include the estimated annual incentive plan bonus accrual for employees dedicated to corporate operations.employees. In addition, Income from our Business to Business and Retail and Wholesale Products as well as Corporate Expenses for the three and six months ended January 31, 20212022 were adjusted for an immaterial correction of an error.a change in management organization. See Note 1 of the Notes to the unaudited Condensed Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended January 31, |
| Net Sales | | Income |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
Business to Business Products Group | $ | 61,553 | | | $ | 53,805 | | | $ | 14,336 | | | $ | 14,713 | |
Retail and Wholesale Products Group | $ | 108,117 | | | 96,792 | | | $ | 1,000 | | | 6,728 | |
Net Sales | $ | 169,670 | | | $ | 150,597 | | | | | |
Corporate Expenses | | (12,973) | | | (12,020) | |
Income from Operations | | 2,363 | | | 9,421 | |
Total Other Income, Net | | 717 | | | 491 | |
Income before Income Taxes | | 3,080 | | | 9,912 | |
Income Tax Expense | | (524) | | | (1,675) | |
Net Income | | 2,556 | | | 8,237 | |
Net Loss Attributable to Noncontrolling Interest | | (31) | | | (46) | |
Net Income Attributable to Oil-Dri | | $ | 2,587 | | | $ | 8,283 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended January 31, |
| Net Sales | | Income |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
Business to Business Products Group | $ | 68,841 | | | $ | 53,262 | | | $ | 14,991 | | | $ | 11,962 | |
Retail and Wholesale Products Group | $ | 131,367 | | | 116,408 | | | $ | 16,256 | | | 3,374 | |
Net Sales | $ | 200,208 | | | $ | 169,670 | | | | | |
Corporate Expenses | | (17,372) | | | (12,973) | |
Income from Operations | | 13,875 | | | 2,363 | |
Total Other (Expense) Income, Net | | (2,399) | | | 717 | |
Income before Income Taxes | | 11,476 | | | 3,080 | |
Income Tax Expense | | (2,400) | | | (524) | |
Net Income | | 9,076 | | | 2,556 | |
Net Loss Attributable to Noncontrolling Interest | | (21) | | | (31) | |
Net Income Attributable to Oil-Dri | | $ | 9,097 | | | $ | 2,587 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| For the Three Months Ended January 31, |
| Net Sales | | Income |
| 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands) |
Business to Business Products Group | $ | 35,154 | | | $ | 28,453 | | | $ | 7,734 | | | $ | 6,424 | |
Retail and Wholesale Products Group | 66,515 | | | 58,757 | | | 8,682 | | | 2,092 | |
Net Sales | $ | 101,669 | | | $ | 87,210 | | | | | |
Corporate Expenses | | (9,110) | | | (6,598) | |
Income from Operations | | 7,306 | | | 1,918 | |
Total Other (Expense) Income, Net | | (2,267) | | | 452 | |
Income before Income Taxes | | 5,039 | | | 2,370 | |
Income Tax Expense | | (1,193) | | | (409) | |
Net Income | | 3,846 | | | 1,961 | |
Net Loss Attributable to Noncontrolling Interest | | (10) | | | (41) | |
Net Income Attributable to Oil-Dri | | $ | 3,856 | | | $ | 2,002 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| For the Three Months Ended January 31, |
| Net Sales | | Income |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
Business to Business Products Group | $ | 32,624 | | | $ | 26,283 | | | $ | 7,590 | | | $ | 7,113 | |
Retail and Wholesale Products Group | 54,586 | | | 48,217 | | | 926 | | | 3,178 | |
Net Sales | $ | 87,210 | | | $ | 74,500 | | | | | |
Corporate Expenses | | (6,598) | | | (6,047) | |
Income from Operations | | 1,918 | | | 4,244 | |
Total Other Income, Net | | 452 | | | 913 | |
Income before Income Taxes | | 2,370 | | | 5,157 | |
Income Tax Expense | | (409) | | | (869) | |
Net Income | | 1,961 | | | 4,288 | |
Net Loss Attributable to Noncontrolling Interest | | (41) | | | (11) | |
Net Income Attributable to Oil-Dri | | $ | 2,002 | | | $ | 4,299 | |
12. STOCK-BASED COMPENSATION
The Oil-Dri Corporation of America 2006 Long Term Incentive Plan, as amended (the “2006 Plan”"2006 Plan"), permits the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based and cash-based awards. Our employees and outside directors are eligible to receive grants under the 2006 Plan. The total number of shares of stock subject to grants under the 2006 Plan may not exceed 1,219,500. As of January 31, 2022,2023, there were 260,356229,759 shares available for future grants under this plan.
Restricted Stock
All of our non-vested restricted stock as of January 31, 20222023 was issued under the 2006 Plan with vesting periods generally between one and five years. We determined the fair value of restricted stock as of the grant date. We recognize the related compensation expense over the period from the date of grant to the date the shares vest.
There were 32,00057,000 and 18,000107,000 restricted shares of Common Stock granted during the second quarter of fiscal years 20222023 and 2021,2022, respectively. Stock-based compensation expense was $817,000$1.6 million and $506,000$1.5 million for the second quarter of fiscal years 20222023 and 2021, respectively. Stock-based compensation expense was $1,453,000 and $1,290,000 for the first six months of fiscal years 2022, and 2021, respectively.
A summary of restricted stock transactions is shown below:
| | | Restricted Shares (in thousands) | | Weighted Average Grant Date Fair Value | | Restricted Shares (in thousands) | | Weighted Average Grant Date Fair Value |
Non-vested restricted stock outstanding at July 31, 2021 | 370 | | | $ | 33.96 | | |
Non-vested restricted stock outstanding at July 31, 2022 | | Non-vested restricted stock outstanding at July 31, 2022 | 382 | | | $ | 33.63 | |
Granted | Granted | 107 | | | $ | 34.56 | | Granted | 57 | | | $ | 28.53 | |
Vested | Vested | (56) | | | $ | 35.20 | | Vested | (69) | | | $ | 35.16 | |
Forfeitures | Forfeitures | (14) | | | $ | 35.20 | | Forfeitures | (7) | | | $ | 32.19 | |
Non-vested restricted stock outstanding at January 31, 2022 | 407 | | | $ | 33.90 | | |
Non-vested restricted stock outstanding at January 31, 2023 | | Non-vested restricted stock outstanding at January 31, 2023 | 363 | | | $ | 32.57 | |
13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The following table summarizes the changes in accumulated other comprehensive (loss) income by component as of January 31, 20222023 (in thousands):
| | | | | | | | | | | | | | | | | |
| Pension and Postretirement Health Benefits | | Cumulative Translation Adjustment | | Total Accumulated Other Comprehensive (Loss) Income |
Balance as of July 31, 2021 | $ | (4,428) | | | $ | 311 | | | $ | (4,117) | |
Other comprehensive loss before reclassifications, net of tax | — | | | (94) | | | (94) | |
Amounts reclassified from accumulated other comprehensive income, net of tax | 53 | | (a) | — | | | 53 | |
Net current-period other comprehensive income (loss), net of tax | 53 | | | (94) | | | (41) | |
Balance as of January 31, 2022 | $ | (4,375) | | | $ | 217 | | | $ | (4,158) | |
| | | | | | | | | | | | | | | | | |
| Pension and Postretirement Health Benefits | | Cumulative Translation Adjustment | | Total Accumulated Other Comprehensive (Loss) Income |
Balance as of July 31, 2022 | $ | (2,242) | | | $ | 59 | | | $ | (2,183) | |
Other comprehensive loss before reclassifications, net of tax | — | | | (129) | | | (129) | |
Amounts reclassified from accumulated other comprehensive income, net of tax | (13) | | | — | | | (13) | |
Net current-period other comprehensive loss, net of tax | (13) | | | (129) | | | (142) | |
Balance as of January 31, 2023 | $ | (2,255) | | | $ | (70) | | | $ | (2,325) | |
(a) Amount is net of tax expense of $16,620. Amount is included in the components of net periodic benefit cost for the pension and postretirement health plans. See Note 10 of the Notes to the unaudited Condensed Consolidated Financial Statements for further information.
14. RELATED PARTY TRANSACTIONS
One member of our Board of Directors (the “Board”"Board") retired from the role of President and Chief Executive Officer of a customer of ours in September 2019 and is currently party to a post-employment agreement with the customer. Total net sales to that customer, including sales to subsidiaries of that customer, were $81,000$71,768 and $71,00081,210 for the second quarter of fiscal years 20222023 and 2021,2022 respectively and were $156,000$126,926 and $181,000$156,476 for the first six months of fiscal years 20222023 and 2021,2022 respectively. Outstanding accounts receivable from that customer, and its subsidiaries, were $14,000$8,661 as of January 31, 20222023 and $4,000$5,608 as of July 31, 2021.2022.
One member of our Board is currently the President and Chief Executive Officer of a vendor of ours. Total payments to this vendor for fees and cost reimbursements were $350,000$49,916 and $109,000$349,773 for the second quarter of fiscal years 20222023 and 2021,2022 respectively and were $565,000$112,276 and $201,000$565,191 for the first six months of fiscal years 20222023 and 2021,2022 respectively. There were no outstanding accounts payable to that vendor as of January 31, 20222023 or July 31, 2021.
2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included herein and our Consolidated Financial Statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.2022. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under “Forward-Looking Statements”"Forward-Looking Statements" and Item 1A, Risk Factors of this Quarterly Report on Form 10-Q for the quarter ended January 31, 2022 and of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.2022.
OVERVIEW
We develop, mine, manufacture and market sorbent products principally produced from clay minerals, primarily consisting of calcium bentonite, attapulgite and to a lesser extent, other clay-like sorbent materials.diatomaceous shale. Our principal products include agricultural and horticultural chemical carriers, animal health and nutrition products, bleaching clay andcat litter, fluid purification aids, cat litter,and filtration bleaching clays, industrial and automotive floor absorbents and sports field products. Our products are sold to two primary customer groups, including customers who resell our products as originally produced to the end consumer and thoseother customers who use our products as part of their production process or use them as an ingredient in their final finished product. We have two reportable operating segments based on the different characteristics of our two primary customer groups: the Retail and Wholesale Products Group and the Business to Business Products Group, as described in Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements. Each operating segment is discussed individually below.
RESULTS OF OPERATIONS
OVERVIEW
In late 2019 and early 2020, COVID-19 was first reported and then declared a pandemic by the World Health Organization, and continues to have a worldwide impact. All of our facilities, with the exception of our subsidiary in China (which experienced certain disruptions in the first half of our fiscal year 2020 but subsequently resumed operations), have continued to operate as essential businesses during the course of the pandemic as permitted under exceptions in the applicable shelter-in-place mandates due to our inclusion in the Critical Manufacturing Sector as defined by the U.S. Department of Homeland Security and other functions defined as essential by government authorities.Our top priority has been, and continues to be, the safety and health of our employees, contractors, and customers. We have adhered, and continue to adhere, to guidance from the U.S. Centers for Disease Control and Prevention (“CDC”) and local health and governmental authorities with respect to social distancing, physical separation, and cleaning and sanitation programs at each of our facilities. We have not experienced any shut downs due to workforce absences or illnesses.
As further discussed below, our consolidatedConsolidated net sales increasedwere at an all-time high in the second quarter and in the first six months of fiscal year 2022 compared to the second quarter and first six months of fiscal year 2021. Net sales of our industrial2023 as we continued to implement strategic price increases across multiple principal products in order to improve profitability in both the Retail and sports products as well as most of our fluids purification products have mostly returnedWholesale Products Group and the Business to pre-pandemic levels as many businesses and sports have re-opened and air travel has been increasing. Despite the overall increase inBusiness Products Group. Consolidated net sales we have not experienced any significant issues collecting amounts duefrom customers to date. However, parts of our business continue to be negatively impacted by the pandemic. Net sales for our industrial granules in the United Kingdom have just recently started to increaseincreased approximately $14.5 million or 17% in the second quarter of fiscal year 2022. While we have had an overall increase in net sales of our fluids purification products, not all regions have resumed travel to the same extent as prior to the pandemic. In addition, net sales of our animal health2023 and nutrition products have been dampened due to COVID-19 and African swine fever in certain geographic areas. We have also experienced an increase in backlog due, in part, to supply chain disruptions and availability of labor amidst unprecedented demand$30.5 million or 18% for our products.
As discussed below in "Consolidated Results," gross profit has declined in both the second quarter and the first six months of fiscal year 20222023 compared to the same periods of fiscal year 2022. Consolidated income from operations in the second quarter and first six months of fiscal year 2023 increased by $5.4 million and $11.5 million, respectively compared to the same periods in fiscal year 2021 related2022.
Although expenses continued to risingincrease, consolidated net income for the three and six months ended January 31, 2023, were $3.9 million and $9.1 million, respectively, compared to $2.0 million and $2.6 million in the three and six months ended January 31, 2022, respectively.
In the second quarter we recorded a $2.5 million reserve for anticipated modification costs that we expect to incur to address the capacity issues at our sole landfill located in Ochlocknee, Georgia. Refer to Note 7 to the Financial Statements for additional details.
Our Consolidated Balance Sheets as of January 31, 2023, and supply chain disruptions. We have faced longer lead timesour Consolidated Statements of Cash Flows for somethe second quarter of our materials purchases, which have contributed tofiscal year 2023 show a decrease in total cash and cash equivalents from fiscal year-end 2022. The decrease is driven by capital expenditures on property, plant & equipment and an increase in our backlog but have been ableaccounts receivables and inventories, offset by improved net income and increased accrued expenses. Refer to avoid significant out of stock issuesthe "Liquidity and Capital Resources" section below for most of our materials. Where possible, we have found other suppliers to meet the increase in customer demand for our products. In addition, the cost of repair parts has increased but this has not caused any significant disruption to our business. Further, we, along with some of our suppliers and toll processors, have experienced a shortage of production labor, which has been a contributing factor to our increase in backlog. We are closely monitoring the continuation, resurgence in certain areas, and effects of COVID-19 on all aspects of our business, including how it has impacted and may impact our suppliers and customers as well as the effectsmore analysis of the pandemic on economic conditions and the financial markets. In general, we have seen an increasemovements in costs, particularly as it relates to commodities as the economy continues to
react to, and recover from, the pandemic and demand surpasses supply. In addition to rising commodity costs, several of our suppliers have started to pass along non-commodity price increases they have experienced in their own business. However, we have not experienced any significant interruptions, and we will continue to closely monitor our inventory levels to mitigate the risk of any potential supply interruptions or changes in customer demand. It is possible that significant disruptions could occur if the pandemic and other factors such as labor shortages, ongoing geopolitical tensions, and other strains on the supply chain continue to put pressure on production, transportation, and shipping as a result of an imbalance of supply and demand or if there are continued increases in costs that we are unable to recover. The impacts of COVID-19 and related economic conditions on our future results are uncertain at this time. The scope, duration, and magnitude of the direct and indirect effects of COVID-19 continue to evolve (and in many cases, rapidly) in ways that are difficult or impossible to anticipate. In addition, although COVID-19 has not materially impacted our net sales to date, it remains uncertain whether and how consumers will modify their purchasing habits in response to the ongoing COVID-19 pandemic and/or the lifting or relaxing of mandates as the pandemic abates in certain areas and government restrictions are reduced and/or reimposed. As a result, our results to date may not be indicative of the impact that COVID-19 may have on our results for the remainder of fiscal year 2022.
The impacts of COVID-19 to our specific operating segments are discussed below.cash.
SIX MONTHS ENDED JANUARY 31, 20222023 COMPARED TO
SIX MONTHS ENDED JANUARY 31, 20212022
CONSOLIDATED RESULTS
Consolidated net sales for the six months ended January 31, 20222023, were $169,670,000,$200.2 million, a 13%18% increase compared to net sales of $150,597,000$169.7 million for the six months ended January 31, 2021.2022. Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group, primarily due to an increase in sales volume and somewhat due to higher prices instituted to compensate for rising costs. The increase in demand for our products duringprice increases implemented across both product groups.
In the first six months of fiscal year 2022 has led2023, we have been able to an increase inreduce our backlog of orders driven by late customer pick-ups and our own constraints relatedorders. The actions taken to production, capacity and transportation. We have hired additional manufacturingincrease personnel, expanded ourexpand production shifts, and increasedincrease production equipment, to aid in the resolution of these constraints in the coming months as well as increased our use of alternaterepair equipment, and utilize alternative modes of transportation. We continue to analyzetransportation have driven a reduction of our constraints and implement strategiesbacklog by $0.9 million, a 13% decrease from July 31, 2022. In order to meet the increase in customer demand.demand, we continue to implement strategies to further reduce labor, manufacturing and freight constraints. Segment results are discussed further below.
Consolidated gross profit for the first six months of fiscal year 20222023 was $29,404,000,$45.3 million, or 17%23% of net sales, compared to $35,469,000,$29.4 million, or 24%17%, of net sales, for the first six months of fiscal year 2021. Higher freight, packaging,2022. The increase is driven by higher selling prices across multiple products thus helping to mitigate the increases in costs of goods sold. Our domestic costs of goods sold per ton increased 12%, driven primarily by per ton increases in natural gas, and non-fuel manufacturing and freight costs, offset by lower per ton drove the decrease in gross profit. We continue to experience high freight costs both domestically and with respect to ocean freight. Domestic freight costspackaging costs. The cost of natural gas per ton excluding the freight we no longer chargeused to a significant customer who now picks up its own purchases, increased approximately 35%operate kilns that dry our clay was 47% higher in the first six months of fiscal year 2023 compared to the first six months of fiscal year 2022. There was also a 20% increase in per ton non-fuel manufacturing costs during the first six months of fiscal year 2023 compared to the first six months of fiscal year 2022, due to higher per ton costs for labor, repairs, purchased materials, electricity, depreciation, and diesel. Domestic freight costs per ton increased approximately 15% in the first six months of fiscal year 2023 compared to the same period of fiscal year 2021. The increase relates2022. This excludes the impact of a significant customer in our cat litter business that altered shipping terms in January 2023 from collect to in part, higher transportation ratesdelivered which further increased our overall freight cost. Ocean freight costs have also increased due to a national driver shortagerising fuel prices, export fees, and tight trucking capacity. The continued increase in cost of diesel fuel has also contributed to the higher transportation rates.demurrage charges. In addition, our overall freight costs can vary between periods depending on the mix of products sold and the geographic distribution of our customers. Packaging costs per ton fordecreased by approximately 3% in the first six months of fiscal year 2022 were approximately 37% higher2023 compared to the first six months of fiscal year 20212023 due to higherlower commodity costs, particularly as it relates to resin.resin and pallet costs. Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices. The cost of natural gas per ton used to operate kilns that dry our clay was 93% higher in the first six months of fiscal year 2022 compared to the first six months of fiscal year 2021 due to higher natural gas prices, which are being driven by demand surpassing available supply. Non-fuel manufacturing costs per ton also increased during the first six months of fiscal year 2022 compared to fiscal year 2021 by 14%. The increase in non-fuel manufacturing costs relate to higher repairs, labor costs, and costs of purchased materials. In addition to the above, during the first six months of fiscal year 2022, several suppliers started to pass along non-commodity price increases related to cost increases experienced in their own businesses and we expect such increases to persist. While we have faced higher costs due to the reasons mentioned above, we continue to strive to restore our historical margins utilizing various strategies including reducing costs where possible, increasing sales volume, and implementing price increases.
Total selling, general and administrative (“SG&A”) expenses of $27,041,000$31.5 million for the first six months of fiscal year 20222023 were higher by $993,000,$4.4 million, or 4%16%, compared to $26,048,000$27.0 million for the first six months of fiscal year 2021. SG&A expenses for the operating segments were essentially flat for the, first six months of fiscal year 2022 compared to the same period in the prior fiscal year and unallocated2022. Unallocated corporate expenses were higher by $953,000,$4.4 million, or 8%.34%, driven by higher bonus accrual due to improved quarterly results compared to the Company’s performance target under the annual incentive plan as well as an increase in compensation and outside services to support strategic initiatives. The discussion of the segments' operating incomes below describes the changes in SG&A expenses that were allocated to the operating segments. The increase in unallocated corporate expenses were driven by higher professional fees related to costs for various outside services related to growing business needs and strategic initiatives.
OtherTotal other (expense) income, net of $717,000$(2.4) million for the first six months of fiscal year 2022 was higher than2023 compared to a net other income of $0.7 million in the same period inof fiscal year 2021 by $226,000 and included less periodic benefit2022. This was mostly due to the $2.5 million reserve recorded for anticipated modification costs related to our pension plan and insurance recoveries related to our property, plant and equipment partially offset by higher interest expense and exchange rate losses.address the landfill capacity issue.
Consolidated net income before taxes for the first six months of fiscal year 20222023 was $3,080,000$11.5 million compared to net income before taxes of $9,912,000$3.1 million for the first six months of fiscal year 2021.2022. Results for the first six months of fiscal year 20222023 were driven by the factors discussed above.
TaxWe had a tax expense for the first six months of fiscal year 2022 was $524,0002023 of $2.4 million compared to $1,675,000$0.5 million for the first six months of fiscal year 2021, which resulted in an effective2022. Our tax rate of 17% in both periods.expense was driven primarily by higher net income. We used an estimated annual effective tax rate (“ETR”("ETR") of 21% in determining our provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.
BUSINESS TO BUSINESS PRODUCTS GROUP
Net sales of the Business to Business Products Group for the first six months of fiscal year 2022 increased compared to the first six months2023 were $68.8 million, an increase of fiscal year 2021 for all our products. Net$15.5 million, or 29%, from net sales were $61,553,000of $53.3 million for the first six months of fiscal year 2022, an increasewith increases across all three of $7,748,000, or 14%, from net sales of $53,805,000 for the first six months of fiscal year 2021.our businesses in this group. Net sales of our fluids purification products increased approximately $4,134,000,$6.7 million, or 16%22%, compared to the first six months of the prior fiscal year. We experienced sales improvement primarily in Latin America, North America and Asia. The increases in net sales to these countries were partially offset by lower net sales to Europe. The increase in net sales occurred for a variety of reasons, including new customer wins, increased sales to existing customers, increase in air travel,was driven by price increases that were instituted to offset rising costs,across all regions and continued demand for our products used in some cases, timingthe filtration of net sales.edible oil, renewable diesel, and jet fuel. Net sales increased in all regions with most of our Ultra-Clear clay products rebounded as global air travel increasedthe increase driven by sales in North America when compared to the same period last year. Net sales of bleaching clay to Europe decreased primarily as a function of timing and ocean freight shipping delays. Similar to our Retail and Wholesale Products Group cat litter business, our co-packaged coarse cat litter business experienced a significant increase of 23% in net sales during the first six monthshalf of fiscal year 2022 compared to fiscal year 2021 primarily due to price increases and to some extent, an increase in volume.2022. Net sales of our agricultural and horticultural chemical carrier products increased approximately $1,486,000,$6.3 million, or 12%46%, for the first six monthshalf of fiscal year 20222023 compared to the same period in fiscal year 2021 as2022. This is a result of continued strong demand for these products as well asquarterly price increases.increases implemented throughout the year. Net sales of our animal health and nutrition products increased $413,000,$2.6 million, or 5%29%, during the first six monthshalf of fiscal year 20222023 compared to the first six monthshalf of the prior year. The increasefiscal year 2022. We saw growth in net sales relatesin all regions except Asia and our subsidiary in China, with the most impact coming from Latin America. Latin American sales benefited from the European Union's ("EU") regulations requiring antibiotic-free foreign protein imports, as a large percentage of meat is exported from that region to several new customers,the EU. North American sales rose due to a new product line in North America, and increased distribution. The decrease in general,
Asia sales is due to timing and ocean freight delays and not indicative of whenprojected sales occur. Despitefor the overall increase in net sales, the African swine fever and low pork prices are still affecting the swine market and ultimately, the netyear. Net sales of our feed additivessubsidiary in some countries. The swine population has been reduced, and demand and consumption are down, thereby causing a decreaseChina decreased period over period, as discussed in our net sales in some regions, mostly in China. Ocean freight delays also continue to negatively impact our business. See “Foreign Operations” below for a discussion of net sales for our foreign operations that sell our animal health and nutrition products.the "Foreign Operations" section below.
SG&A expenses for the Business to Business Products Group increased approximately 19%11% or $1,081,000$0.8 million for the first six monthshalf of fiscal year 20222023 compared to the same period of the prior fiscal year. We continuedThe majority of the increase relates to invest in ourresearch and development expenses that are now allocated to the animal health business which resulted(a change in higherwhere existing costs due to increased headcount of saleswere allocated), previously included in unallocated corporate expenses and leadership personnel, increased travel costs, and increased marketing efforts associated with our animal feed additives.costs.
The Business to Business Products Group’s operating income for the first six months of fiscal year 20222023 was $14,336,000, a decrease$15.0 million, an increase of $377,000,$3.0 million, or 3%25%, from operating income of $14,713,000$12.0 million for the first six months of fiscal year 2021.2022. The decreaseincrease in operating income was mostly driven by higher freight, packaging, natural gas, and non-fuel manufacturing costs per ton as discussed in “Consolidated Results” above as well as higher SG&A expenses.net sales across all business within this segment.
RETAIL AND WHOLESALE PRODUCTS GROUP
Net sales of the Retail and Wholesale Products Group for the first six monthshalf of fiscal year 20222023 were $108,117,000,$131.4 million, an increase of $11,325,000,$15.0 million, or 12%13%, from net sales of $96,792,000$116.4 million for the first six monthshalf of fiscal year 20212022 driven by higher net sales of both our cat litter, and industrial and sports products.sport products, slightly offset by a decline in our co-packaged cat litter business. Total global cat litter net sales were higher by approximately $7,262,000,$12.1 million, or 9%, higher compared to the first six months of the prior fiscal year primarily due to increased sales volume and somewhat due to price increases in response to rising costs. Net sales of branded scoopable litter, private label lightweight and heavyweight litter, and accessories (liners) increased in the first six months of fiscal year 2022 as we gained business from new customers and existing customers either sold certain of our products for the first time or increased the volume of their purchases from us. E-commerce sales were also higher during the first six months of fiscal year 2022 compared to fiscal year 2021. The impact of COVID-19 on increased pet adoption continues to boost sales as well as the overall macro trend of increased spending on pets. In addition, cat litter net sales increased despite revising our shipping terms with one of our significant customers in the fourth quarter of fiscal year 2021 to provide that freight charges are the responsibility of such customer and no longer included in the
prices charged. Cat litter net sales by our subsidiary in Canada further contributed to the net sales increase, as discussed in “Foreign Operations” below. Also included in the Retail and Wholesale Products Group's results were increased net sales of our industrial and sports products12% compared to the first six months of fiscal year 2021.2022 driven mostly by price increases. Domestic cat litter net sales were $95.8 million an increase of $11.2 million from the first half of fiscal year 2022 driven primarily by price increases. Increased sales of branded and private label lightweight and coarse litter were partially offset by a decrease in revenue for private label heavy weight litter. Net sales of co-packaged products decreased by approximately $0.5 million compared to the same period in fiscal year 2022. This decrease was primarily driven by our customer discontinuing export sales to one of their foreign subsidiaries as well as softer domestic sales volumes. Net sales of cat litter by our subsidiary in Canada increased period over period, as discussed in "Foreign Operations" below. Net sales of our global industrial and sports products increased approximately $3,968,000,$2.8 million, or 28%16%, compared to the first six months of fiscal year 2021, due2022, primarily driven by price increases implemented to both an increase in volume duerebuild margins, and to the re-opening of businesses and sports fields as well as an increase in selling price per ton as we continue to respond to rising costs.a lesser extent from higher volumes.
SG&A expenses for the Retail and Wholesale Products Group were lower by approximately $1,074,000,$1.1 million, or 12%14%, during the first six monthshalf of fiscal year 2023 compared to the first half of fiscal year 2022, compared to the first six months of fiscal year 2021 primarily due to lowerthe timing of marketing and advertising costscosts. These decreases were partially offset by compliance penalties caused by supply chain disruptions, travel expensehigher broker sales commissions which are percentage based on net sales, and personnel costs.an increase in our allowance for doubtful accounts due to one customer declaring bankruptcy. We anticipate total advertising expense in fiscal year 2022 will2023 to be lower compared tohigher than fiscal year 2021.2022, with a majority of the spend concentrated in the second half of the fiscal year.
The Retail and Wholesale Products Group'sGroup experienced an operating income for the first six monthshalf of fiscal year 2022 was $1,000,000, a decrease2023 of $5,728,000,$16.3 million, an increase of $12.9 million, or 85%380%, from operating income of $6,728,000$3.4 million for the first six monthshalf of fiscal year 2021. The decrease in operating income2022. This was driven primarily by higher freight, packaging, natural gas and non-fuel costs as discussed in “Consolidated Results” above which outpaced the increase in net sales.gross margins due to selling price increases partially offset by higher costs of goods sold, and to a much lesser extent lower than expected advertising spend in the first quarter.
FOREIGN OPERATIONS
Foreign operations include our subsidiariessubsidiary in Canada and the United Kingdom, which areis reported in the Retail and Wholesale Products Group, and our subsidiaries in the UK, Mexico, China Mexico and Indonesia, which are reported in the Business to Business Products Group. Net sales by our foreign subsidiaries during the first six months of fiscal year 20222023 were $9,626,000,$11.2 million, an increase of $787,000,$1.6 million, or 9%17%, compared to net sales of $8,839,000$9.6 million during the first six monthshalf of fiscal year 2021.2022. All of our foreign operations, with the exception of our subsidiary in China, experienced an increase in net sales during the half of fiscal year 2023 compared to fiscal year 2022. Total net sales of our subsidiary in Canada during the first six months of fiscal year 2022this period increased by $1,226,000,$1.3 million, or 27%22%, compared to the same period in fiscal year 20212022 driven by higher private label cat litter net sales.sales offset by a decrease of $0.1 million in net sales of industrial products. The increase in cat litter sales of $1.4 million was mainly driven primarily by a key customer carrying three of our products for the first time as well as price increases instituted in response to rising costs. Net sales of our industrial absorbent granules were flatcosts and to a lesser extent by increases in the first six months of fiscal year 2022 compared to the first six months of fiscal year 2021.demand. Net sales of our subsidiary in the United Kingdom in the first six months of fiscal year 20222023 increased by $95,000,$0.2 million, or 10%18%, compared to net sales ofin the first six months of fiscal year 2021.2022. The increase related to timingis driven primarily by price increases which offset the impact of net sales and partly due to demand starting to slowly return post pandemic.softer sale volumes. Net sales of our subsidiary in Mexico decreasedincreased during the first six months of fiscal year 20222023 compared to the same period of fiscal year 20212022 by $420,000,$0.5 million, or 29%, as the first six months of fiscal year 2021 included net sales of products that are no longer part of48% due to growing demand for our business strategy.animal health products. Net sales of our subsidiary in China decreased $129,000,$0.4 million, or 7%22%, during the first six monthshalf of fiscal year 2023 compared to the first half of fiscal year 2022 compared to the first six months of fiscal year 2021. The decrease relates primarily to the impact of the African swine fever, low pork prices, as well as timing of net sales due to ocean freight delays and because some customers made purchasesa transition in the prior fiscal year ahead of effective price increases.our distribution strategy. Net sales by our foreign subsidiaries represented 6% of our consolidated net sales during both the first quartersix months of fiscal years 2022year 2023 and 2021.2022.
Our foreign subsidiaries reported a net lossincome of $812,000$0.6 million for the first six months of fiscal year 2022,2023, compared to a net loss of $42,000$0.7 million for the first six months of fiscal year 2021.2022. The net lossincome in the first six months of fiscal year 20222023 was primarily driven by lower netprice increases in Canada and the UK, increased sales for our subsidiaryvolume in Mexico, higher costand reduction of sales and higher SG&A expenses by our subsidiarycosts of goods sold in China due to increased sales personnel and marketing of our animal feed additives as we continue to invest in our animal health and nutrition products.Indonesia.
Identifiable assets of our foreign subsidiaries as of January 31, 20222023, were $12,174,000,$14.9 million, compared to $12,572,000$13.0 million as of July 31, 2021. 2022.
THREE MONTHS ENDED JANUARY 31, 20222023 COMPARED TO
THREE MONTHS ENDED JANUARY 31, 20212022
CONSOLIDATED RESULTS
Consolidated net sales for the three months ended January 31, 20222023, were $87,210,000,$101.7 million, a 17% increase compared to net sales of $74,500,000$87.2 million for the three months ended January 31, 2021.2022. Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group, primarily due to an increase in sales volume and somewhat due to higher prices instituted to compensate for rising costs. price increases implemented across both product groups.
The increase in demand for our products during the second quarter of fiscal year 2022 has continuedactions taken to increase thepersonnel, expand our production shifts, increase production equipment, make various repairs to equipment, and utilize alternative modes of transportation have driven a reduction of our backlog that arose in the first quarter of fiscal year 2022.when compared to prior year. See discussion above in “Results"Results from Operations - Six Months Ended January 31, 20222023, compared to Six Months ended January 31, 2021”2022" for more detail on backlog. Segment results are discussed below.
Consolidated gross profit for the three months ended January 31, 20222023, was $15,586,000,$23.0 million, or 18%23% of net sales, compared to
$16,689,000, $15.6 million, or 22%18%, of net sales, for the three months ended January 31, 2021. Higher2022. The increase is driven by higher selling prices across multiple products thus helping to mitigate the increases in costs of goods sold. Domestic costs of goods sold per ton rose by 18%, driven primarily by per ton increases in non-fuel manufacturing, freight packaging,and natural gas and non-fuel manufacturing costscosts. The cost of natural gas per ton drove the decrease in gross profit. We continueused to experience high freight costs both domestically and with respect to ocean freight. Domestic freight costs per ton, excluding the freight we no longer charge to a significant customer who now picks up its own purchases, increased approximately 31%operate kilns that dry our clay was 9% higher in the second quarter of fiscal year 2023 compared to the second quarter of fiscal year 2022. Per ton non-fuel manufacturing costs rose 28% in the second quarter of fiscal year 2023 compared to the second quarter of fiscal year 2022, due to higher costs for labor, repairs, purchased materials, depreciation, electricity, and diesel. Domestic freight costs per ton increased approximately 17% in the second quarter of fiscal year 2023 compared to the same period of fiscal year 2021. The increase relates,2022. This excludes the impact of a significant customer in part,our cat litter business that altered shipping terms in January 2023 from collect to higher transportation ratesdelivered which further increased our overall freight cost. Ocean freight costs have also increased due to a national driver shortagerising fuel costs, export fees, and tight trucking capacity. The continued increase in cost of diesel fuel has also contributed to the higher transportation rates. Ourdemurrage charges. In addition, our overall freight costs can also vary between periods depending on the mix of products sold and the geographic distribution of our customers. Packaging costs per ton forremained flat in the second quarterthree months ended January 31, 2023, when compared to the same period of fiscal year 2022 were approximately 30% higher compared to the second quarter of fiscal year 2021 due to higher commodity costs, particularly as it relates to resin.2022. Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices. The cost of natural gas per ton used to operate kilns that dry our clay was 90% higher in the second quarter of fiscal year 2022 compared to the second quarter of fiscal year 2021 due to higher natural gas prices which are being driven by demand surpassing available supply. Non-fuel manufacturing costs per ton also increased during the second quarter of fiscal year 2022 compared to fiscal year 2021 by 9%. The increase in non-fuel manufacturing costs relate to higher repairs, labor costs and costs of purchased materials. In addition to the above, during the second quarter of fiscal year 2022, several suppliers started to pass along non-commodity price increases related to cost increases experienced in their own businesses and we expect such increases to persist. While we have faced higher costs due to the reasons mentioned above, we continue to strive to restore our historical margins utilizing various strategies including reducing costs where possible, increasing sales volume and implementing price increases.
Total SG&Aselling, general and administrative expenses of $13,668,000$15.0 million for the second quarterthree months ended January 31, 2023, were higher by $2.0 million, or 15%, compared to $13.0 million for the same period of fiscal year 20222022. Unallocated corporate expenses were higher by $1,223,000,$2.5 million, or 10%38%, driven by higher bonus accrual due to improved quarterly results compared to $12,445,000 for the second quarter of fiscal year 2021. SG&A expenses for bothCompany’s performance target under the operating segmentsannual incentive plan, an increase in compensation and unallocated corporate expenses contributedoutside services to the increase.support strategic initiatives. The discussion of the segments' operating incomes below describes the changes in SG&A expenses that were allocated to the operating segments. The increase in unallocated corporate expenses were driven by higher professional fees related to costs for various outside services related to growing business needs and strategic initiatives.
OtherTotal other (expense) income, net of $(2.3) million for the three months ended January 31, 2023, decreased compared to net other income of $452,000 for$0.5 million in the second quartersame period of fiscal year 20222022. This was lower thanmostly driven by the same period in fiscal year 2021 by $461,000 and included higher interest expense and exchange rate losses partiallyreserve recorded for the Georgia landfill modification offset by insurance recoveries relatedthe impact of foreign currency translation gains. Refer above to our property, plantResults of Operations – Overview section of Management’s Discussion and equipment.Analysis as well as Note 7 to the Financial Statements for additional details of the Georgia landfill modification reserve.
Consolidated net income before taxes for the second quarterthree months ended January 31, 2023, was $5.0 million compared to $2.4 million for the same period of fiscal year 2022 was $2,370,000, compared to net income before taxes of $5,157,000 for the second quarter of fiscal year 2021.2022. Results for the second quarter of fiscal year 20222023 were driven by the factors describeddiscussed above.
TaxWe had a tax expense for the second quarter of fiscal year 2022 was $409,0002023 of $1.2 million compared to tax expense $869,000$0.4 million for the second quarter of fiscal year 2021, which resulted in an effective2022. Our tax rate of 17% in both periods.expense was driven primarily by higher net income. We used an estimated annual effective tax rateETR of 21% in both periods in determining our provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.
BUSINESS TO BUSINESS PRODUCTS GROUP
Net sales of the Business to Business Products Group for the second quarter of fiscal year 2022 increased compared to the second quarter of fiscal year 2021 for all our products. Net salesthree months ended January 31, 2023, were $32,624,000,$35.2 million, an increase of $6,341,000,$6.7 million, or 24%, from net sales of $26,283,000$28.5 million for the second quarterthree months ended January 31, 2022, with increases across all three of fiscal year 2021.our businesses in this group. Net sales of our fluids purification products increased approximately $2,270,000,$3.5 million, or 18%22%, incompared to the second quarter of fiscal year 2022 compared to same period in fiscal year 2021.2022. The increase in net sales occurred for a variety of reasons, including new customer wins, increased sales to existing customers, increase in air travel,was driven by price increases that were instituted to offset rising costs and in some cases, timing of net sales.implemented across all regions. Net sales increased in all regions, with most of our Ultra-Clear products rebounded as global air travel increasedthe increase driven by North America and the region including Europe, Middle East, and Africa when compared to the same period last year.three months ended January 31, 2022. Net sales of our agricultural and horticultural chemical carrier products increased approximately $2,265,000,$2.5 million, or 45%34%, infor the second quarter of fiscal year 2022three months ended January 31, 2023, compared to the same period in fiscal year 2021 driven by both volume and to some degree, price increases. The increase in volume2022. This is attributable to continued strong demand for our products as well as a shift in timingresult of net sales from the first quarter to the second quarter of fiscal year 2022 as several of our customer delayed their orders due to their own supply chain issues. In addition, one of our customers had partially shut down in the second quarter of fiscal year 2021 which reduced our net sales and then later resumed operations. Similar to our Retail and Wholesale Products Group cat litter business, our co-packaged coarse cat litter business experienced a significant increase of $955,000, or 26%, in net sales during the second quarter of fiscal year 2022, compared to the same quarter in fiscal year 2021, primarily due toquarterly price increases and to some extent, an increase in volume.implemented throughout the year. Net sales of our animal health and nutrition products increased approximately $851,000,$0.8 million, or 18%14%, induring the second quarter of fiscal 2022three months ended January 31, 2023, compared to the second quarter ofsame period in fiscal year 2021.2022. The increase in net sales relates to several new customers, a new product line ingrowth was driven by North America, Latin America, Asia (excluding China), and in general, timing of when net sales occur. Despite the overall increase in net sales, ocean freight delays continue to negatively impact our business. African swine fever and low pork prices are still affecting the swine market and ultimately, the net sales of our feed additives in some countries. The swine population has been reduced, and demand and consumption are down, thereby causingMexico, offset by a decrease in oursales in China. North American sales rose due to a strategic focus on this region, several significant new customers, and new product line. In Latin America a shift in product mix and price increases resulted in higher net sales, while the increase in some regions, mostly in China. However, netMexico was driven by higher sales fromvolumes compared to prior year. Net sales of our subsidiary in China increased duringdecreased period over period, as discussed in the second quarter of fiscal year 2022 compared to
fiscal year 2021 primarily due to a new customer. See “Foreign Operations” below for a discussion of net sales for our foreign operations that sell our animal health and nutrition products."Foreign Operations" section below.
Total SG&A expenses for the Business to Business Products Group increased approximately $569,000, or 19%, in the second quarterthree months ended January 31, 2023 remained flat compared to the same period of fiscal year 2022 compared to the second quarter of fiscal year 2021. We continued to invest in our animal health business which resulted in higher costs due to increased headcount of sales and leadership personnel, increased travel costs, and increased marketing efforts associated with our animal feed additives partially offset by lower bad debt expenses.2022.
The Business to Business Products Group’s operating income for the second quarter of fiscal year 2022three months ended January 31, 2023, was $7,590,000,$7.7 million, an increase of $477,000,$1.3 million, or 7%20%, from operating income of $7,113,000 in$6.4 million for the second quarter of fiscal year 2021.three months ended January 31, 2022. The overall increase in operating income was driven by the higher sales partially offsetprimarily by higher SG&A expenses and an increase in freight, packaging, materials, natural gas, and non-fuel manufacturing costs discussed in “Consolidated Results” above.net sales due to continued strategic price increases.
RETAIL AND WHOLESALE PRODUCTS GROUP
Net sales of the Retail and Wholesale Products Group for the second quarter of fiscal year 2022three months ended January 31, 2023, were $54,586,000,$66.5 million, an increase of $6,369,000,$7.8 million, or 13%, from net sales of $48,217,000$58.8 million for the three months ended January 31, 2022, driven by higher net sales of cat litter, industrial and sports products, offset by a decline in our co-packaged cat litter business. Global cat litter net sales were higher by approximately $6.4 million, or 13%, compared to the second quarter of fiscal year 20212022 driven by net sales of both our cat litter and industrial and sports products. Totalprice increases. Domestic cat litter net sales were $49.0 million an increase of $6.1 million driven primarily by price increases. Increased sales of lightweight (branded and private label) and coarse litter were partially offset by a decrease in net sales of private label heavy weight litter, and modest, category wide, elasticity impacts from price increases. Net sales of co-packaged products decreased by approximately $4,161,000, or 10%, higher in the second quarter of fiscal year 2022$0.2 million compared to the same period in fiscal year 20212022. This decrease was primarily due to increasedour customer discontinuing export sales volume and somewhat due to price increases in response to rising costs. Net sales of branded scoopable litter, private label lightweight and heavyweight litter increased in the second quarter of fiscal year 2022 as existing customers either sold certain of our products for the first time or increased the volumeone of their purchases from us. The impact of COVID-19 on increased pet adoption continues to boost sales as well as the overall macro trend of increased spending on pets. In addition, cat litter net sales increased despite revising our shipping terms with one of our significant customers in the fourth quarter of fiscal year 2021 to provide that freight charges are the responsibility of such customer and no longer included in the prices charged. In addition, netforeign subsidiaries. Net sales of cat litter by our subsidiary in Canada continue to increaseincreased period over period, as further discussed in “Foreign Operations”"Foreign Operations" below. E-commerce sales were flat during the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021. Also included in the Retail and Wholesale Products Group's results were increased netNet sales of our industrial and sports products compared to the second quarter of fiscal year 2021. Net sales of ourglobal industrial and sports products increased approximately $2,110,000,$1.3 million, or 31%15%, in the second quarter of fiscal year 2022 compared to the second quarter of fiscal year 2021, duethree months ended January 31, 2022, primarily driven by price increases implemented to both an increase in volume duerebuild margins, and to the re-opening of businesses and sports fields as well as an increase in selling price per ton in response to rising costs.a lesser extent from higher volumes.
SG&A expenses for the Retail and Wholesale Products Group were lower by approximately $0.6 million, or 16%, during the three months ended January 31, 2023, compared to the same period in fiscal year 2022. The decrease was primarily due to timing of SG&A spend, offset by an increase in our allowance for doubtful accounts due to a customer declaring bankruptcy. Advertising costs in the second quarter of fiscal year 2022 than2023 were flat when compared with prior year second quarter. We anticipate total advertising expense in fiscal year 2021 by 1%, or $41,000, primarily due2023 to lower advertising costs partially offset by compliance penalties caused by supply chain disruptions, travel expensebe higher than fiscal year 2022 and personnel costs.more in line with historical levels, with spending concentrated in the second half of the year.
For the second quarter of fiscal year 2022, theThe Retail and Wholesale Products Group reportedexperienced an operating income of $926,000, a decrease of $2,252,000, compared to operating income of $3,178,000$8.7 for the second quarter of fiscal year 2021. The decrease in2023, an increase of $6.5 million, or 315%, from operating income of $2.1 million for the same period of fiscal year 2022. This was driven primarily by the increase in gross margins due to selling price increases partially offset by higher freight, packaging, natural gas, and non-fuel manufacturing costs described above in “Consolidated Results” which outpaced higher net sales.of goods sold.
FOREIGN OPERATIONS
Foreign operations include our subsidiariessubsidiary in Canada and the United Kingdom, which areis reported in the Retail and Wholesale Products Group, and our subsidiaries in the UK, Mexico, China Mexico and Indonesia, which are reported in the Business to Business Products Group. Net sales by our foreign subsidiaries during the three months ending January 31, 2023 were $5.5 million, an increase of $0.2 million, or 4%, compared to net sales of $5.3 million during the same period of fiscal year 2022 which was driven by increases in net sales in Canada, UK and Mexico offset by reduction in net sales in China and Indonesia. Total net sales of our subsidiary in Canada increased by $0.4 million, or 15%, in the three months ended January 31, 2023, compared to the same period in fiscal year 2022 driven by higher private label cat litter sales. The increase in cat litter sales was mainly driven by price increases instituted in response to rising costs as well as from higher demand. Net sales of industrial products decreased by $0.1 million compared to second quarter of fiscal year 2022. Net sales of our subsidiary in the United Kingdom in the three months ended January 31, 2023, increased by $0.2 million, or 45%, compared to net sales in the three months ended January 31, 2022. The increase primarily relates to prices increases. Net sales of our subsidiary in Mexico increased during the second quarter of fiscal year 2023 compared to the second quarter of fiscal year 2022 were $5,283,000, a 12% increase comparedby $0.3 million, or 60% due to netgrowing demand of our animal health products. Net sales of $4,703,000our subsidiary in China decreased $0.7 million, or 56%, during the second quarter of fiscal year 2021. All2023 compared to the second quarter of fiscal year 2022 primarily due to a transition in our distribution strategy. Net sales by our foreign subsidiaries represented 5% and 6% of our foreign operations, with the exception of our subsidiary in Mexico, experienced an increase inconsolidated net sales during the second quarter of fiscal yearyears 2023 and 2022, compared to fiscal year 2021.Total net sales of our subsidiary in Canada during the second quarter of fiscal year 2022 increased by $566,000, or 24%, compared to the same period in fiscal year 2021 driven by cat litter net sales. Cat litter net sales for our subsidiary in Canada increased by approximately $499,000, or 27%, in the second quarter of fiscal year 2022 compared to the same period of fiscal year 2021 due to increased sales to existing customers, a key customer carrying three of our products they had not previously purchased and, to some extent, price increases to keep pace with rising costs. Moreover, the impact of COVID-19 on increased pet adoption continues to boost cat litter net sales as well as the overall macro trend of increased spending on pets. In addition to increased net sales of cat litter, net sales of our industrial absorbent granules in Canada increased by approximately $67,000, or 12%, during the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021. Net sales of our absorbent granules by our subsidiary in the United Kingdom increased by $97,000 during the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021. This increase related partly due to timing of net sales and partly due to demand starting to slowly return in the United Kingdom. Net sales of our animal health and nutrition
products by our subsidiary in China increased moderately in the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021 by $130,000, or 12%. The increase in net sales related primarily to a new customer. Net sales by our subsidiary in Mexico decreased $298,000, or 39%, in the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021 as the second quarter of fiscal year 2021 included net sales of products that are no longer part of our business strategy. Our foreign subsidiaries' net sales represented approximately 6% of consolidated net sales during the second quarters of fiscal years 2022 and 2021.respectively.
Our foreign subsidiaries reported net income of $0.1 million for the three months ended January 31, 2023, compared to a net loss of $477,000$0.4 million for the second quarterthree months ended January 31, 2022. The increase in net income was driven by price increases in Canada and UK, increased sales in Mexico, and a reduction of fiscal year 2022costs in Indonesia offset by a reduction in net sales in China.
Identifiable assets of our foreign subsidiaries as of January 31, 2023, were $19.3 million, compared to net income$17.4 million as of $170,000 for the second quarter of fiscal year 2021. The net loss in the second quarter of fiscal year 2022 was primarily driven by lower net sales of our subsidiary in Mexico, higher cost of sales, and higher SG&A expenses incurred by our subsidiary in China due to increased sales personnel and marketing of our animal feed additives as we continue to invest in our animal health and nutrition products.July 31, 2022.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity needs are to fund our capital requirements, include:including funding working capital needs; purchasing and upgrading equipment, facilities (including significant renovations at one of our plants), information systems, and real estate; supporting new product development; investing in infrastructure; repurchasing stock; paying dividends; making pension contributions; and, from time to time, business acquisitions.acquisitions, and funding our debt service requirements. During the first six months of fiscal year 2022,2023, we principally funded these short and long-term capital requirements using cash from current operations as well as cash generated in the second quarter of fiscal year 2022 from borrowings.borrowings under our Series Senior C Notes.
We currently anticipate cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements. In addition, we are actively monitoring the timing and collection of our accounts receivable. Given the dynamic nature of COVID-19 and its effects, we will continue to assess our liquidity needs and to actively manage our spending.
The following table sets forth certain elements of our unaudited Condensed Consolidated Statements of Cash Flows (in thousands):
| | | | | | | | | | | |
| For the Six Months Ended January 31, |
| 2022 | | 2021 |
Net cash provided by operating activities | $ | 61 | | | $ | 3,085 | |
Net cash used in investing activities | (10,574) | | | (7,595) | |
Net cash provided by (used in) financing activities | 14,957 | | | (5,795) | |
Effect of exchange rate changes on cash and cash equivalents | (26) | | | 123 | |
Net increase (decrease) in cash and cash equivalents | $ | 4,418 | | | $ | (10,182) | |
| | | | | | | | | | | |
| For the Six Months Ended January 31, |
| 2023 | | 2022 |
Net cash provided by (used in) operating activities | $ | 14,898 | | | $ | 61 | |
Net cash used in investing activities | (13,280) | | | (10,574) | |
Net cash (used in) provided by financing activities | (3,936) | | | 14,957 | |
Effect of exchange rate changes on cash and cash equivalents | (29) | | | (26) | |
Net decrease in cash and cash equivalents | $ | (2,347) | | | $ | 4,418 | |
Net cash provided by operating activities
In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first six months of fiscal years 20222023 and 20212022 were as follows:
Accounts receivable, less allowance for doubtful accounts, increased $5,082,000$5.7 million in the first six months of fiscal year 20222023 compared to an increase of $3,836,000 in the first six months of fiscal year 2021. The change in accounts receivable was higher in fiscal year 2022 than fiscal year 2021 because net sales increased significantly in the first six months of fiscal year 2022, thereby driving accounts receivable higher. In addition, the variation in accounts receivable balances reflect differences in the level and timing of collections as well as the payment terms provided to various customers.
Inventory increased $6,236,000 in the first six months of fiscal year 2022 compared to a decrease of $412,000 in the first six months of fiscal year 2021. While inventory increased in both periods due to rising costs, costs rose much more significantly$5.0 million in the first six months of fiscal year 2022. In addition, duringThe increase in accounts receivable was driven primarily by higher net sales as sales prices increased offset by the level and timing of collections due to payment terms.
Inventory increased by $2.4 million in the first six months of both fiscal year 2023 compared to $6.2 million in the first six months of 2022 we increased ourdue to a combination of rising costs, specifically due to natural gas, purchased materials, electricity, repairs, diesel, and freight and the building of inventory levels to accommodate increasedfor anticipated seasonal demand and thwart potential supply chain disruptions. The decrease in inventory
Other assets decreased by $2.0 million in the first six months of fiscal year 2021 was due2023 compared to increased demand which offset the higher packaging costs.
Prepaidexpensesdecreased $846,000a decrease of $0.6 million in the first six months of fiscal year 2022 due to lower prepaid advertising costs and insurance somewhat offset by higher prepaid repairs. Prepaid expenses increased $760,000 inthefirstsixmonthsoffiscalyear2021drivenprimarilybyprepaymentofincometaxes. This increase in fiscal year 2021 was offset by lower prepaid advertising costs and insurance.
Other assets decreased $634,000 in the first six months of fiscal year 2022 compared to an increase of $266,000 in the first six months of fiscal year 2021.2022. The decrease in other assets in the first six months of fiscal year 2022 related2023 relates mostly to capitalized pre-production costs being transferred to property, plant and equipment as the mines are now in production, partially offsetproduction.
Accounts payable increased by an increase in long-term royalties. The increase in other assets$0.2 million in the first six months of fiscal year 2021 related primarily2023 compared to an increase in capitalized pre-production mining costs offset by amortization of our operating lease right-of-use lease assets.
Accounts payable increased $1,326,000 in the first six months of fiscal year 2022 compared to a decrease of $3,901,000 in the first six months of fiscal year 2021. Higher trade payables drove the increase in accounts payable$1.3 million in the first six months of fiscal year 2022. Lower trade payables drove the decrease in accounts payable in the first six months of fiscal year 2021 as well as income taxes payable being in a prepaid position versus a payable position at the end of the second quarter of fiscal year 2021.Trade and freight payables vary in both periods due to the timing of payments, fluctuations in thehigher cost of goods and services we purchased, production volume levels and vendor payment terms.
Accrued expenses decreased $1,595,000increased $3.9 million in the first six months of fiscal year 20222023 compared to a decrease of $5,201,000$1.6 million in the first six months of fiscal year 2021.2022. The majority of this increase is driven by the $2.5 million reserve added in the second quarter for the Georgia landfill modification as well as higher compensation related expenses accrued for in fiscal year 2023 compared to fiscal year 2022. The increases were offset by the payout of the prior fiscal year's discretionary incentive bonus which reduced accrued expensescompensation in both fiscal years, but to a greater extent in fiscal year 20212023 as the accrual was higher inat year end 2022 than the prior fiscal year. In addition, the timing of real estate tax payments also reducedThe increase in accrued expenses inis also impacted by the first six months of fiscal year 2022. The decrease in accrued bonusadvertising expenses and real estate taxes was partly offset by higher accrued utilities due to the rising cost of natural gas, higher accrued advertising due to the timing of our advertising programs, and additional accrued capital projects.other accruals that vary based on timing. In addition, accrued plant expenses can also fluctuate due to timing of payments, changes in the cost of goods and services we purchase, production volume levels and vendor payment terms. AccruedThe decrease in accrued expenses for the first six months of fiscal year 2022 was driven by the payout of the bonuses and real estate taxes offset by higher accrued utilities due to the rising cost of natural gas, higher accrued advertising due to the timing of our advertising programs, and additional accrued capital projects.
Other liabilities decreased $5,201,000by $0.9 million in the first six months of fiscal year 2021 due2023 and $1.0 million for the same period in fiscal year 2022. The decreases in both fiscal years 2023 and 2022 relate primarily to before-mentioned payout of discretionary incentive bonus, decreased accrued advertising and real estate taxes partially offset bya reduction in the reclassification of the current portion of the deferred employer payroll taxes under the CARES Act which was paid at the end of calendar year 2021 as further described in Note 1 of the Notes to the unaudited Condensed Financial Statements and an increase in accrued freight.operating lease liability.
Net cash used in investing activities
Cash used in investing activities of $10,574,000$13.3 million in the first six months of fiscal year 20222023 were higher compared to cash used in investing activities of $7,595,000$10.6 million in the first six months of fiscal year 20212022 driven by capital expenditures. During the first six months of fiscal year 20222023 we expanded our plant equipment and improved our facilities to support increased demand for our products as well as made improvements to our IT network.
Net cash used in financing activities
Cash used in financing activities of $3.9 million in the first six months of fiscal year 2023 compared to cash provided by financing activities of $14,957,000$15.0 million in the first six months of fiscal year 2022. The decrease is driven by less share repurchases and no additional note issuances in the current year compared to the second quarter of fiscal year 2022. Cash provided by financing activities in the first six months of fiscal year 2022 was higher than cash used in financing activities of $5,795,000 in the first six months of fiscal year 2021. The first six months of fiscal year 2022 includedprimarily driven by the issuance of $25,000,000 of notes payablea $25.0 million note offset by highertreasury stock repurchases of stock than in the first six months of fiscal year 2021.and dividend payments.
Other
Total cash and investment balances held by our foreign subsidiaries of $2,053,000$3.4 million as of January 31, 2022 were lower than the January2023, remained relatively flat compared to $3.3 million as of July 31, 2021 balances of $3,411,000.2022. See further discussion in “Foreign Operations”"Foreign Operations" above.
On January 31, 2019, we signed
We are party to a fifth amendment to our credit agreement (as amended, the "Credit Agreement") with BMO Harris Bank N.A. (“("BMO Harris”Harris"), which expiresterminates on January 31, 2024.August 30, 2027. The agreement provides for a $45,000,000$45 million unsecured revolving credit agreementfacility and a maximum of $10,000,000$10 million for letters of credit. The agreement terms also state that we may select a variable interest rate based on either the BMO Harris prime rate or a LIBOR-basedan adjusted SOFR-based rate, plus a margin that varies depending on our debt to earnings ratio, or a fixed rate as agreed between us and BMO Harris. As of January 31, 2022,2023, the variable rates would have been 3.50%7.50% for the BMO Harris prime-based rate or 1.56%4.69% for the three-month LIBOR-basedadjusted SOFR-based rate. The credit agreementCredit Agreement contains restrictive covenants that, among other things and under various conditions, limit our ability to incur additional indebtedness or to dispose of assets. The agreement also requires us to maintain a minimum fixed charge coverage ratio and a minimum consolidatedmaximum net worth.debt to earnings ratio. As of January 31, 20222023 and 2021,2022, we were in compliance with the covenants. There were no borrowings during the first six months of either fiscal year 20212023 or 2022.
On May 15, 2020, we entered into a debt instrumentWe are party to an Amended and Restated Note Purchase and Private Shelf Agreement (as amended, the "Note Agreement") with PGIM, Inc. ("Prudential") and certain existing noteholders and purchasers affiliated with Prudential named therein pursuant to which, among other things, we issued $10,000,000$10 million in aggregate principal amount of our 3.95% Series B Senior Notes due May 15, 2030 and entered into an amended note agreement thatof which $8 million aggregate principal amount remained outstanding as of January 31, 2023. The Note Agreement provides the Companyus with the ability to request, from time to time until May 15, 2023 (or such earlier date as provided for in the agreement), the issuance of additional senior unsecured notes of the Company in an aggregate principal amount of up to $75,000,000
$75 million minus the aggregate principal amount of the notes then outstanding and the additional notes that have been accepted for purchase. The issuance of such additional notes is at the discretion of the noteholders and purchasers and on an uncommitted basis. Pursuant to the amended note agreement,Note Agreement, on December 16, 2021, the Companywe issued $25,000,000$25 million in aggregate principal amount of itsour 3.25% Series C Senior Notes due December 16, 2031. As of January 31, 20212023 outstanding notes payable were $33,778,000,totaled $31.8 million, net of $222,000$0.2 million of unamortized debt issuance costs.
See Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for discussion on amendments made to the credit agreement with BMO Harris and our Senior Note Agreements.
As of January 31, 2022,2023, we had remaining authority to repurchase 637,109429,033 shares of Common Stock and 273,100 shares of Class B Stock under a repurchase plan approved by our Board of Directors (the “Board”"Board"). Repurchases may be made on the open market (pursuant to Rule 10b5-1 plans or otherwise) or in negotiated transactions. The timing, number and manner of share repurchases will be determined by our management pursuant to the repurchase plan approved by our Board.
We believe that cash flow from operations, availability under our revolving credit facility, current cash and investment balances and our ability to obtain other financing, if necessary, will provide adequate cash fundssufficient liquidity for foreseeable working capital needs, capital expenditures at existing facilities, deferred compensation payouts, dividend payments and debt service obligations for at least the next 12 months. We expect capital expenditures in fiscal year 20222023 to be greater than in fiscal year 2021, including capital expenditures to renovate one of our plants, estimated to be approximately $6,500,000.2022. We do not believe that these increased capital expenditures will dramatically impact our cash position; however our cash requirements are subject to change as business conditions warrant and opportunities arise. Our anticipated advertising expense for fiscal year 20222023 is expected to be lowerhigher compared to fiscal year 2021. Adjustments to advertising spending for the remainder of the fiscal year may occur due to any upcoming volatility2022 and in the economic environment.line with historical pre-pandemic levels.
We continually evaluate our liquidity position and anticipated cash needs, as well as the financing options available to obtain additional cash reserves. Our ability to fund operations, to make planned capital expenditures, to make scheduled debt payments, to contribute to our pension plan and to remain in compliance with all financial covenants under debt agreements, including, but not limited to, the current credit agreement, depends on our future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors. The timing and size of any new business ventures or acquisitions that we complete may also impact our cash requirements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of financial condition and results of operations is based on our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Estimates and assumptions are revised periodically. Actual results could differ from these estimates. See the information concerning our critical accounting policies included under “Management’s"Management’s Discussion of Financial Condition and Results of Operations”Operations" in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”"Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. The controls evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”("CEO") and Chief Financial Officer (“CFO”("CFO"). Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
We have not experienced any material impact to our internal controls over financial reporting despite the fact that many of our employees are still working remotely due to COVID-19.remotely. We are continually monitoring and assessing the effects of COVID-19a hybrid work model on our internal controls to minimize the impact to their design and operating effectiveness.
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended January 31, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II – OTHER INFORMATION
Items 1, 3 and 5 of this Part II are either inapplicable or are answered in the negative and are omitted pursuant to the instructions to Part II.
ITEM 1A. RISK FACTORS
The Company's operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors”"Risk Factors" in the Company's Annual Report on Form 10-K for the year ended July 31, 2021. Except as set forth below, there2022. There have been no material changes to our risk factors since the Company's Annual Report on Form 10-K for the year ended July 31, 2021.
Price or trade concessions, the failure to make them to retain customers, or other price reductions could adversely affect our sales and profitability.2022.
The products we sell are subject to significant price competition and the prices may fluctuate for a variety of reasons. From time to time, we may need to reduce the prices for some of our products to respond to competitive and customer pressures and to maintain market share. These pressures are often exacerbated during an economic downturn. Additionally, we have, from time to time, experienced customer-driven price deductions on our products as a result of delayed shipments of products. Any reduction in prices to respond to these pressures would reduce our profit margins. In addition, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations would suffer. Because of the competitive environment facing many of our customers, particularly our high-volume mass merchandiser customers, these customers have increasingly sought to obtain price reductions, deductions, specialized packaging or other concessions from product suppliers. These business demands may relate to inventory practices, logistics or other aspects of the customer-supplier relationship. To the extent we provide these concessions, our profit margins are reduced. Further, if we are unable to maintain terms that are acceptable to our customers, these customers could reduce purchases of our products and increase purchases of products from our competitors, which would harm our sales and profitability.
Increases in energy, commodity, transportation and other costs would increase our operating costs, and we may be unable to pass all these increases on to our customers in the form of higher prices and surcharges.
If our energy, commodity and transportation costs increase disproportionately to our net sales, our earnings could be significantly reduced. Increases in our operating costs may reduce our profitability if we are unable to pass all the increases on to our customers through price increases or surcharges. Sustained price increases, surcharges or price inflation (or inflation pressure generally), in turn, may lead to declines in volume, and while we seek to project tradeoffs between price increases, surcharges and inflation, on the one hand, and volume, on the other, there can be no assurance that our projections will prove to be accurate. In particular, as a result of the COVID-19 pandemic and increased demand in trucking in certain areas of the United States following the reopening of state economies as well as increased shipping demand globally, which has impacted overseas vessel deliveries, the Company has experienced significant increases in transportation costs, decreases in the availability of shipping, and other global supply chain complexities and could experience delays in customer shipments and increased customer deductions for late shipments. Such increases in transportation costs may be further exacerbated by volatile global oil and gas markets. Given the varying level of re-openings and the continued spread of the pandemic globally (and
uncertainty regarding how areas will respond to a continued or renewed spread), it is possible that significant disruptions could occur if the pandemic continues to put pressure on transportation and shipping as a result of an imbalance of supply and demand or if there are continued increases in costs that we are unable to recover. The duration and magnitude of the increased transportation costs cannot be predicted at this time and there can be no assurances that such costs and/or shipping disruptions will not continue to increase.
We are subject to volatility in the price and availability of natural gas, as well as other sources of energy. Such volatility could be intensified by geopolitical tensions, including war and terrorism, as well as other disruptions and market reactions to such events. From time to time, we may use forward purchase contracts or financial instruments to moderate the volatility of a portion of our energy costs. The success or failure of any such transactions depends on a number of factors, including our ability to anticipate and manage volatility in energy prices, the general demand for fuel by the manufacturing sector, seasonality and the weather patterns throughout the United States and the world.
The prices of other commodities such as paper, plastic resins, synthetic rubber and steel significantly influence the costs of packaging, replacement parts and equipment we use in the manufacture of our products and the maintenance of our facilities. Similarly, transportation prices impact our cost of packaging and raw materials we purchase, as well as our cost to deliver finished products to our customers. We have also experienced increases in prices of non-commodity materials we purchase. As a result, increases in the prices of commodities, transportation and other materials may increase our cost of sales and present the same types of risks as described above.
To the extent that we experience increased costs in any of these areas, we may increase our prices, pass the increases along to customers, or otherwise take actions to offset the impact. Further, competitive pressures and other factors may also limit our ability to quickly raise prices in response to increased costs. Accordingly, we may not be able to offset increased costs fully or at all, and there can be no assurances that increasing prices will fully mitigate the impact of these increases, which could adversely impact our results.
Our business could be negatively affected by supply, capacity, labor, information technology, logistics and other disruptions or the costs incurred to avoid these disruptions.
Supply, capacity, information technology and logistics disruptions (which may be caused by a variety of factors, including public health crises such as the COVID-19 outbreak or other outbreaks of diseases or illnesses, weather conditions, governmental controls, tariffs, national emergencies, natural or man-made disasters, other force majeure events, abrupt political change, terrorist activity and armed conflict, or other similar events) or our failure to mitigate such disruptions could adversely affect our ability to manufacture, package or transport our products or require additional resources to maintain or restore our supply chain. In addition, labor shortages or an increase in the cost of labor could adversely affect our profit margins and results of operations. As a result of the COVID-19 pandemic, there could be continued or renewed restrictions on our ability to travel or disruptions in our supply chain or ability to manufacture our products, as well as temporary closures of our facilities or those of our suppliers or customers, any of which could impact our sales and operating results. Some of our products require raw materials and/or packaging that are provided by a limited number of suppliers, or are demanded by other industries or are simply not available at times. Problems or delays experienced by these suppliers as a result of labor shortages or other events could lead to shortages in our production capacity, which could impact our ability to meet customer demand. In addition, as we grow or experience increased customer demand, our existing suppliers may not be able to meet our increasing demand, and we may need to find additional suppliers. We may not be able to secure suppliers who provide materials at, or services to, the specification, quantity and quality levels that we demand (or at all) or be able to negotiate acceptable fees and terms of services with any such suppliers. Additionally, such disruptions have resulted in challenges in addressing or backlogs and further backlog could develop in the event of continued disruptions.
Further, some of our products are manufactured on equipment at or near its capacity thus limiting our ability to sell additional volumes of such products until more capacity is obtained. Additionally, as with all manufacturing facilities, equipment and infrastructure age and become subject to increasing maintenance and repair and the costs associated with such maintenance and repair may be significant. We have experienced increased costs and shortages in repair parts and our ability to procure components to repair equipment essential for our manufacturing processes could also be negatively impacted by various restrictions or disruptions in supply chains, among other items. In addition, an increase in truck or ocean freight costs may reduce our profitability, and a decrease in transportation availability may affect our ability to deliver our products to our customers and consequently decrease customer satisfaction and future orders. See “Increases in energy, commodity and transportation costs would increase our operating costs, and we may be unable to pass all these increases on to our customers in the form of higher prices and surcharges” for additional risks related to increased transportation costs and logistics disruptions. Disruptions arising from the foregoing or other events could adversely impact our results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended January 31, 2022,2023, we did not sell any securities which were not registered under the Securities Act of 1933. The following chart summarize our Common Stock and Class B stock purchases during this period. There are no shares of our Class A Common Stock currently outstanding.
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ISSUER PURCHASES OF EQUITY SECURITIES1, 2 |
| | (a) | | (b) | | (c) | | (d) |
For the Three Months Ended January 31, 2022 | | Total Number of Shares Purchased3 | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that may yet be Purchased Under Plans or Programs4 |
Common Stock |
November 1, 2021 to November 30, 2021 | | 12,691 | | $34.95 | | 10,933 | | 737,654 |
December 1, 2021 to December 31, 2021 | | 303 | | $32.80 | | — | | 737,351 |
January 1, 2022 to January 31, 2022 | | 100,242 | | $34.51 | | — | | 637,109 |
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ISSUER PURCHASES OF EQUITY SECURITIES1, 2 |
| | (a) | | (b) | | (c) | | (d) |
For the Three Months Ended January 31, 2023 | | Total Number of Shares Purchased3 | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that may yet be Purchased Under Plans or Programs4 |
Common Stock |
November 1, 2022 to November 30, 2022 | | — | | $— | | — | | 433,166 |
December 1, 2022 to December 31, 2022 | | 4,133 | | $32.34 | | — | | 429,033 |
January 1, 2023 to January 31, 2023 | | — | | $— | | — | | 429,033 |
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1 The table summarizes repurchases of (and remaining authority to repurchase) shares of our Common Stock. Our Board of Directors authorized the repurchase of 300,000 shares of Class B Stock on March 21, 2018, however there have been no repurchases of Class B Stock for the three months ended January 31, 2023, and the authorized Class B Stock is not included in the table above. No shares of our Class A Common Stock are currently outstanding. Descriptions of our Common Stock, Class B Stock and Class A Common Stock are contained in Exhibit 4.1 to ourof the Annual Report on Form 10-K for the fiscal year ended July 31, 2021 filed with the SEC.2022.
2 The figures in the table reflect transactions according to the settlement dates. For purposes of our unaudited consolidated financial statements included in this Form 10-Q, the impact of these repurchases is recorded according to the settlement dates.
3 Includes 2,0614,133 Common Stock shares surrendered by employees to pay taxes related to restricted stock awards.
4 Our Board of Directors authorized the repurchase of 250,000 shares of Common Stock on June 14, 2012 and an additional 750,000 shares of Common Stock on March 11, 2019. These authorizations do not have a stated expiration date. Our Board of Directors authorized the repurchase of 300,000 shares of Class B stock on March 21, 2018. The share numbers in this column indicate the number of shares of Common Stock that may yet be repurchased under these authorizations. Repurchases may be made on the open market (pursuant to Rule 10b5-1 plans or otherwise) or in negotiated transactions. The timing, number and manner of share repurchases will be determined by our management.
ITEM 4. MINE SAFETY DISCLOSURES
Our mining operations are subject to regulation by the Mine Safety and Health Administration under authority of the Federal Mine Safety and Health Act of 1977, as amended. Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS
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Exhibit No. | | Description | | SEC Document Reference |
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10.1 | | | | Incorporated by reference to Exhibit 10.1 to Oil-Dri's (file No. 001-12622) Current Report on Form 8-K filed on December 17, 2021. |
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11 | | | | Filed herewith. |
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31 | | | | Filed herewith. |
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32 | | | | Furnished herewith. |
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95 | | | | Filed herewith. |
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101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith. |
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101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document | | Filed herewith. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase | | Filed herewith. |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101 | | Filed herewith. |
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, by telephone at (312) 321-1515 or by e-mail to info@oildri.com.
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/ Daniel S. Jaffee
Daniel S. Jaffee
Chairman, President and Chief Executive Officer
BY /s/ Susan M. Kreh
Susan M. Kreh
Chief Financial Officer
Dated: March 11, 20229, 2023