UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D. C.
20549
FORM
10-Q
(Mark
One)
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x
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Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Quarterly
Period Ended January 31, 2020
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or
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o
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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 ______________
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Commission File
Number 001-12622
OIL-DRI
CORPORATION OF AMERICA
(Exact name of
the registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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36-2048898
(I.R.S. Employer
Identification No.)
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410 North
Michigan Avenue, Suite 400
Chicago, Illinois
(Address
of principal executive offices)
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60611-4213
(Zip
Code)
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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 x No o
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 x No o
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
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Accelerated
filer x
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Non-accelerated
filer o
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Smaller reporting
company x
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Emerging growth
company o
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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.o
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Securities
registered pursuant to Section 12(b) of the Act:
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Title of
each class
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Trading
Symbol(s)
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Name of each
exchange on which registered
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Common Stock, par value $0.10
per share
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ODC
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New York Stock
Exchange
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Indicate the
number of shares outstanding of each of the issuer’s classes of
common stock as of January 31,
2020.
Common Stock –
5,415,926 Shares and Class B Stock – 2,196,170 Shares
CONTENTS
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PART I –
FINANCIAL INFORMATION
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Page
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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:
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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 Discussion and Analysis of
Financial Condition and Results of Operations” and those statements
elsewhere in this report and other documents that we file with the
Securities and Exchange Commission (“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,” 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 in Item 1A, Risk Factors, herein and in
our Annual Report on Form 10-K for the fiscal year ended
July 31, 2019. 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 is a
registered trademark 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 share and per share amounts)
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(unaudited)
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ASSETS
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January 31,
2020
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July 31,
2019
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Current Assets
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Cash and cash
equivalents
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$
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21,569
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$
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21,862
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Accounts receivable, less
allowance of
$851 and $644 at January 31, 2020 and July 31, 2019,
respectively
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35,699
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35,459
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Inventories
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22,679
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24,163
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Prepaid repairs
expense
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4,679
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4,708
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Prepaid expenses and other
assets
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1,555
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3,084
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Total
Current Assets
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86,181
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89,276
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Property, Plant and Equipment
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Cost
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253,927
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249,834
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Less accumulated depreciation
and amortization
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(164,096
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(159,036
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)
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Total
Property, Plant and Equipment, Net
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89,831
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90,798
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Other Assets
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Goodwill
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9,262
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9,262
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Other intangibles, net of
accumulated amortization
of $398 and $299 at January 31, 2020 and July 31, 2019,
respectively
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1,545
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1,599
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Customer list, net of
accumulated amortization
of $6,592 and $6,297 at January 31, 2020 and July 31, 2019,
respectively
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1,193
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1,488
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Deferred income
taxes
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7,445
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7,755
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Operating lease right-of-use
assets
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8,535
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—
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Other
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5,087
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5,049
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Total Other
Assets
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33,067
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25,153
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Total
Assets
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$
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209,079
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$
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205,227
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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 share and per share amounts)
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(unaudited)
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LIABILITIES
& STOCKHOLDERS’ EQUITY
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January 31,
2020
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July 31,
2019
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Current Liabilities
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Current maturities of notes
payable, net of unamortized debt issuance costs
of $17 at January 31, 2020
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$
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3,067
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$
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3,083
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Accounts payable
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9,565
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8,092
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Dividends
payable
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1,766
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1,761
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Operating lease
liabilities
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1,461
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—
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Accrued
expenses:
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Salaries, wages and
commissions
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7,446
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6,740
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Trade promotions and
advertising
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1,387
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1,588
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Freight
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1,862
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2,635
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Other
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6,951
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8,707
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Total
Current Liabilities
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33,505
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32,606
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Noncurrent Liabilities
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Notes payable, net of
unamortized debt issuance costs
of $31 at July 31, 2019
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—
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3,052
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Deferred
compensation
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4,881
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6,014
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Pension and postretirement
benefits
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12,637
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23,721
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Long-term operating lease
liabilities
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8,602
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—
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Other
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2,525
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4,288
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Total
Noncurrent Liabilities
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28,645
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37,075
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Total
Liabilities
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62,150
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69,681
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Stockholders’ Equity
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Common Stock, par value $.10
per share, issued 8,349,169 shares at January 31, 2020
and 8,284,199 shares at July 31, 2019
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835
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828
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Class B Stock, par value $.10
per share, issued 2,531,986 shares at January 31, 2020
and 2,576,479 shares at July 31, 2019
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253
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258
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Additional paid-in
capital
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43,149
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41,300
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Retained
earnings
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169,590
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164,756
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Noncontrolling
interest
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(171
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)
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(14
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)
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Accumulated Other
Comprehensive Loss:
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Pension and postretirement
benefits
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(9,343
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)
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(14,891
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)
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Cumulative translation
adjustment
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(246
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)
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(148
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)
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Total Accumulated Other
Comprehensive Loss
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(9,589
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)
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(15,039
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)
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Less Treasury Stock, at cost
(2,933,243 Common and 335,816 Class B shares at
January 31, 2020 and 2,926,547 Common and 324,741 Class B shares at
July 31, 2019)
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(57,138
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)
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(56,543
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)
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Total
Stockholders’ Equity
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146,929
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135,546
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Total
Liabilities & Stockholders’ Equity
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$
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209,079
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$
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205,227
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The accompanying notes are an
integral part of the Condensed Consolidated Financial
Statements.
OIL-DRI
CORPORATION OF AMERICA
Condensed
Consolidated Statements of Income
(in
thousands, except for per share amounts)
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(unaudited)
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For the Six
Months Ended January 31,
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2020
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2019
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Net
Sales
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$
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142,127
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$
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136,023
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Cost of
Sales
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(103,234
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(104,609
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Gross
Profit
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38,893
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31,414
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Selling,
General and Administrative Expenses
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(28,899
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)
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(27,584
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)
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Income from
Operations
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9,994
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3,830
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Other Income
(Expense)
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Interest expense
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(206
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)
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(293
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)
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Interest income
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190
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96
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Other, net
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(143
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)
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39
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Total Other
Expense, Net
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(159
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)
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(158
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)
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Income
Before Income Taxes
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9,835
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3,672
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Income Tax
Expense
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(1,626
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)
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(456
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)
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Net
Income
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8,209
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3,216
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Net (Loss)
Income Attributable to Noncontrolling Interest
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(157
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)
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23
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Net Income
Attributable to Oil-Dri
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8,366
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3,193
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Net Income
Per Share
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Basic
Common
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$
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1.19
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$
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0.46
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Basic Class
B Common
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$
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0.89
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$
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0.34
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Diluted
Common
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$
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1.09
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$
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0.42
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Average
Shares Outstanding
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Basic
Common
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5,164
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5,099
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Basic Class
B Common
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2,045
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2,069
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Diluted
Common
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7,321
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7,242
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Dividends
Declared Per Share
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Basic
Common
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$
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0.5000
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$
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0.4800
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Basic Class
B Common
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$
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0.3750
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$
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0.3600
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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)
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(unaudited)
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For the Six
Months Ended January 31,
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2020
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2019
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Net Income
Attributable to Oil-Dri
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$
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8,366
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$
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3,193
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Other Comprehensive
Income:
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Pension and postretirement
benefits (net of tax)
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5,548
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291
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Cumulative translation
adjustment
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(98
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)
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(36
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)
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Other
Comprehensive Income
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5,450
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255
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Total
Comprehensive Income
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$
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13,816
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$
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3,448
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The accompanying notes are an
integral part of the Condensed Consolidated Financial
Statements.
OIL-DRI
CORPORATION OF AMERICA
Condensed
Consolidated Statements of Income
(in
thousands, except for per share amounts)
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(unaudited)
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For the
Three Months Ended January 31,
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2020
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2019
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Net
Sales
|
$
|
71,005
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$
|
69,880
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Cost of
Sales
|
(52,047
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)
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(54,476
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)
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Gross
Profit
|
18,958
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15,404
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Selling,
General and Administrative Expenses
|
(13,085
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)
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(12,577
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)
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Income from
Operations
|
5,873
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|
2,827
|
|
|
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|
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Other Income
(Expense)
|
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|
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Interest expense
|
(103
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)
|
|
(142
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)
|
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Interest income
|
92
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|
|
47
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|
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Other, net
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(104
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)
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|
56
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|
|
Total Other
Expense, Net
|
(115
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)
|
|
(39
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)
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Income
Before Income Taxes
|
5,758
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|
|
2,788
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Income Tax
Expense
|
(1,009
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)
|
|
(506
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)
|
|
Net
Income
|
4,749
|
|
|
2,282
|
|
|
Net Loss
Attributable to Noncontrolling Interest
|
(81
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)
|
|
(5
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)
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Net Income
Attributable to Oil-Dri
|
4,830
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|
2,287
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Net Income
Per Share
|
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Basic
Common
|
$
|
0.68
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|
$
|
0.33
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Basic Class
B
|
$
|
0.51
|
|
|
$
|
0.25
|
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Diluted
Common
|
$
|
0.63
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|
$
|
0.30
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|
Average
Shares Outstanding
|
|
|
|
|
Basic
Common
|
5,181
|
|
|
5,121
|
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|
Basic Class
B
|
2,039
|
|
|
2,068
|
|
|
Diluted
Common
|
7,344
|
|
|
7,229
|
|
|
Dividends
Declared Per Share
|
|
|
|
|
Basic
Common
|
$
|
0.2500
|
|
|
$
|
0.2400
|
|
|
Basic Class
B
|
$
|
0.1875
|
|
|
$
|
0.1800
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
For the
Three Months Ended January 31,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Net Income
Attributable to Oil-Dri
|
$
|
4,830
|
|
|
$
|
2,287
|
|
|
|
|
|
|
|
Other Comprehensive
Income:
|
|
|
|
|
Pension and postretirement
benefits (net of tax)
|
5,277
|
|
|
124
|
|
|
Cumulative translation
adjustment
|
(54
|
)
|
|
28
|
|
|
Other
Comprehensive Income
|
5,223
|
|
|
152
|
|
|
Total
Comprehensive Income
|
$
|
10,053
|
|
|
$
|
2,439
|
|
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
|
|
|
(unaudited)
|
|
|
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, 2018
|
10,705,328
|
|
|
(3,245,478
|
)
|
|
$
|
1,071
|
|
|
$
|
39,186
|
|
|
$
|
158,185
|
|
|
$
|
(56,154
|
)
|
|
$
|
(10,512
|
)
|
|
$
|
11
|
|
|
$
|
131,787
|
|
|
Net Income (Loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,287
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
2,281
|
|
|
Other Comprehensive
Income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
152
|
|
|
—
|
|
|
152
|
|
|
Dividends
Declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,684
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,684
|
)
|
|
Purchases of Treasury
Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net issuance of stock under
long-term incentive plans
|
107,600
|
|
|
(4,250
|
)
|
|
10
|
|
|
315
|
|
|
—
|
|
|
(326
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
Amortization of Restricted
Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
229
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
229
|
|
|
Balance,
January 31, 2019
|
10,812,928
|
|
|
(3,249,728
|
)
|
|
$
|
1,081
|
|
|
$
|
39,730
|
|
|
$
|
158,788
|
|
|
$
|
(56,480
|
)
|
|
$
|
(10,360
|
)
|
|
$
|
5
|
|
|
$
|
132,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31, 2019
|
10,879,655
|
|
|
(3,268,057
|
)
|
|
$
|
1,088
|
|
|
$
|
42,327
|
|
|
$
|
166,526
|
|
|
$
|
(57,103
|
)
|
|
$
|
(14,812
|
)
|
|
$
|
(90
|
)
|
|
$
|
137,936
|
|
|
Net Income (Loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,830
|
|
|
—
|
|
|
—
|
|
|
(81
|
)
|
|
4,749
|
|
|
Other Comprehensive
Income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,223
|
|
|
—
|
|
|
5,223
|
|
|
Dividends
Declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,766
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,766
|
)
|
|
Purchases of Treasury
Stock
|
—
|
|
|
(602
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23
|
)
|
|
—
|
|
|
—
|
|
|
(23
|
)
|
|
Net issuance of stock under
long-term incentive plans
|
1,500
|
|
|
(400
|
)
|
|
—
|
|
|
12
|
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of Restricted
Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
810
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
810
|
|
|
Balance,
January 31, 2020
|
10,881,155
|
|
|
(3,269,059
|
)
|
|
$
|
1,088
|
|
|
$
|
43,149
|
|
|
$
|
169,590
|
|
|
$
|
(57,138
|
)
|
|
$
|
(9,589
|
)
|
|
$
|
(171
|
)
|
|
$
|
146,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
Months Ended January 31
|
|
|
(unaudited)
|
|
|
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, 2018
|
10,555,828
|
|
|
(3,238,833
|
)
|
|
$
|
1,056
|
|
|
$
|
38,473
|
|
|
$
|
158,935
|
|
|
$
|
(55,946
|
)
|
|
$
|
(10,615
|
)
|
|
$
|
(18
|
)
|
|
$
|
131,885
|
|
|
Net Income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,193
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
3,216
|
|
|
Other Comprehensive
Income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
255
|
|
|
—
|
|
|
255
|
|
|
Dividends
Declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,340
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,340
|
)
|
|
Purchases of Treasury
Stock
|
—
|
|
|
(4,545
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(135
|
)
|
|
—
|
|
|
—
|
|
|
(135
|
)
|
|
Net issuance of stock under
long-term incentive plans
|
257,100
|
|
|
(6,350
|
)
|
|
25
|
|
|
373
|
|
|
—
|
|
|
(399
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
Amortization of Restricted
Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
884
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
884
|
|
|
Balance,
January 31, 2019
|
10,812,928
|
|
|
(3,249,728
|
)
|
|
$
|
1,081
|
|
|
$
|
39,730
|
|
|
$
|
158,788
|
|
|
$
|
(56,480
|
)
|
|
$
|
(10,360
|
)
|
|
$
|
5
|
|
|
$
|
132,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July
31, 2019
|
10,860,678
|
|
|
(3,251,288
|
)
|
|
$
|
1,086
|
|
|
$
|
41,300
|
|
|
$
|
164,756
|
|
|
$
|
(56,543
|
)
|
|
$
|
(15,039
|
)
|
|
$
|
(14
|
)
|
|
$
|
135,546
|
|
|
Net Income (Loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,366
|
|
|
—
|
|
|
—
|
|
|
(157
|
)
|
|
8,209
|
|
|
Other Comprehensive
Income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,450
|
|
|
—
|
|
|
5,450
|
|
|
Dividends
Declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,532
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,532
|
)
|
|
Purchases of Treasury
Stock
|
—
|
|
|
(15,621
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(523
|
)
|
|
—
|
|
|
—
|
|
|
(523
|
)
|
|
Net issuance of stock under
long-term incentive plans
|
20,477
|
|
|
(2,150
|
)
|
|
2
|
|
|
70
|
|
|
—
|
|
|
(72
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of Restricted
Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
1,779
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,779
|
|
|
Balance,
January 31, 2020
|
10,881,155
|
|
|
(3,269,059
|
)
|
|
$
|
1,088
|
|
|
$
|
43,149
|
|
|
$
|
169,590
|
|
|
$
|
(57,138
|
)
|
|
$
|
(9,589
|
)
|
|
$
|
(171
|
)
|
|
$
|
146,929
|
|
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)
|
|
|
For the Six
Months Ended January 31,
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
2020
|
|
2019
|
|
Net
Income
|
$
|
8,209
|
|
|
$
|
3,216
|
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and
amortization
|
6,929
|
|
|
6,539
|
|
|
Amortization of investment
net discount
|
—
|
|
|
(10
|
)
|
|
Stock-based
compensation
|
1,779
|
|
|
898
|
|
|
Deferred income
taxes
|
312
|
|
|
106
|
|
|
Provision for bad debts and
cash discounts
|
221
|
|
|
(168
|
)
|
|
Loss on the sale of fixed
assets
|
116
|
|
|
1
|
|
|
Curtailment gain on SERP
Plan
|
(1,296
|
)
|
|
—
|
|
|
(Increase) Decrease in
assets:
|
|
|
|
|
|
|
Accounts
receivable
|
(434
|
)
|
|
(4,529
|
)
|
|
Inventories
|
1,508
|
|
|
(5,607
|
)
|
|
Prepaid expenses
|
1,561
|
|
|
970
|
|
|
Other assets
|
731
|
|
|
(422
|
)
|
|
Increase (Decrease) in
liabilities:
|
|
|
|
|
|
|
Accounts payable
|
2,661
|
|
|
2,295
|
|
|
Accrued expenses
|
(1,602
|
)
|
|
(1,390
|
)
|
|
Deferred
compensation
|
163
|
|
|
(436
|
)
|
|
Pension and postretirement
benefits
|
(5,536
|
)
|
|
859
|
|
|
Other
liabilities
|
(1,052
|
)
|
|
370
|
|
|
Total
Adjustments
|
6,061
|
|
|
(524
|
)
|
|
Net Cash
Provided by Operating Activities
|
14,270
|
|
|
2,692
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Capital
expenditures
|
(7,286
|
)
|
|
(6,199
|
)
|
|
Purchases of short-term
investments
|
—
|
|
|
(3,948
|
)
|
|
Dispositions of short-term
investments
|
—
|
|
|
10,602
|
|
|
Net Cash
(Used in) Provided by Investing Activities
|
(7,286
|
)
|
|
455
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Principal payments on notes
payable
|
(3,083
|
)
|
|
(3,083
|
)
|
|
Dividends paid
|
(3,527
|
)
|
|
(3,287
|
)
|
|
Purchase of treasury
stock
|
(523
|
)
|
|
(135
|
)
|
|
Net Cash
Used in Financing Activities
|
(7,133
|
)
|
|
(6,505
|
)
|
|
Effect of exchange rate
changes on Cash and Cash Equivalents
|
(144
|
)
|
|
(24
|
)
|
|
Net Decrease
in Cash and Cash Equivalents
|
(293
|
)
|
|
(3,382
|
)
|
|
Cash and
Cash Equivalents, Beginning of Period
|
21,862
|
|
|
12,757
|
|
|
Cash and
Cash Equivalents, End of Period
|
$
|
21,569
|
|
|
$
|
9,375
|
|
OIL-DRI
CORPORATION OF AMERICA
Condensed
Consolidated Statements of Cash Flows - Continued
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
For the Six
Months Ended January 31,
|
|
|
2020
|
|
2019
|
|
Supplemental
disclosure of non-cash investing and financing
activities:
|
|
|
|
|
Capital expenditures accrued,
but not paid
|
$
|
628
|
|
|
$
|
416
|
|
|
Cash dividends declared and
accrued, but not paid
|
$
|
1,766
|
|
|
$
|
1,680
|
|
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”) 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, 2019 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,” the “Company,” “we,” “us” or “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. In addition, certain prior year reclassifications were
made to conform to the current year presentation. Operating results
for the
three and six months ended
January 31, 2020 are not necessarily an
indication of the results that may be expected for the fiscal year
ending
July 31, 2020.
Management
Use of Estimates
The preparation
of the unaudited Condensed Consolidated Financial Statements in
conformity with U.S. GAAP requires the use of estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the reporting period, as
well as the related disclosures. All of our estimates and
assumptions are revised periodically. Actual results could
differ from these estimates.
Summary of
Significant Accounting Policies
Our significant
accounting policies, which are detailed in our Annual Report on
Form 10-K for the fiscal year ended July 31, 2019
have not
materially changed, except as described herein, including policies
associated with the August 1, 2019 adoption of Accounting Standards
Codification (“ASC”) 842, Leases.
Changes to our accounting policies as a result of the ASC 842
adoption are discussed below and further information is also
provided in Note 2 of the Notes to unaudited
Condensed Consolidated Financial Statements. Following is a
description of certain of our significant accounting
policies.
Leases.
ASC 842 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”) 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.
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 $313,000 and $259,000 as of January 31, 2020
and
July 31,
2019,
respectively. This liability is reported in Other Accrued Expenses
on the unaudited Condensed Consolidated Balance Sheet. Revenue
recognized during the six months ended
January 31,
2020 that
was included in the liability for advance payments at the beginning
of the period was $234,000.
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”) 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.
Trade
Receivables. We record an allowance for
doubtful accounts based on our historical experience 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.
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 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.
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.
2. NEW
ACCOUNTING PRONOUNCEMENTS AND REGULATIONS
Recently
Adopted Pronouncements
On August 1, 2019
we adopted ASC 842, Leases,
using the modified retrospective transition approach and,
accordingly, we did not restate prior comparative period financial
statements. As of the date of adoption, we elected the package of
practical expedients that allowed us to forgo assessment under the
ASC 842 guidance whether existing or expired contracts contained
leases, the classification of expired or existing leases and the
accounting for previously incurred initial direct costs. We also
elected the practical expedient to forgo assessment under ASC 842
whether existing or expired land easements not previously accounted
for under legacy leasing GAAP contain leases.
The adoption of
ASC 842 on August 1, 2019 resulted in the recognition of additional
ROU assets and lease liabilities related to operating leases of
$9,348,000 and $10,910,000, respectively, on our
unaudited Condensed Consolidated Balance Sheet. There was no
material impact to any of our other unaudited consolidated
financial statements.
Recently
Issued Pronouncements
In December 2019,
the FASB issued guidance under ASC 740, Income
Taxes,
which simplifies the accounting for income taxes. The guidance
removes several specific exceptions to the general principles in
ASC 740 and clarifies and makes amendments to improve consistent
application of and simplify existing accounting for other areas in
ASC 740. This guidance is effective for our first quarter of fiscal
year 2022, with early adoption permitted. We are currently
evaluating the impact of the adoption of this requirement 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 2021. 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,
2020
|
|
July 31,
2019
|
|
Finished goods
|
$
|
13,353
|
|
|
$
|
13,957
|
|
|
Packaging
|
5,122
|
|
|
5,681
|
|
|
Other
|
4,204
|
|
|
4,525
|
|
|
Total
Inventories
|
$
|
22,679
|
|
|
$
|
24,163
|
|
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. We
performed a detailed review of our inventory items to determine if
an obsolescence reserve adjustment was necessary. The review
surveyed all of our operating facilities and sales groups to ensure
that both historical issues and new market trends were
considered. The obsolescence reserve not only considered
specific items, but also took into consideration the overall value
of the inventory as of the balance sheet date. The inventory
obsolescence reserve values at
January 31, 2020 and
July 31, 2019 were $1,362,000
and
$704,000, respectively. The higher
obsolescence reserve is attributed to our focus on inventory
management and enhanced data available from our enterprise resource
planning (“ERP”) system.
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 $26,000 cash equivalents as of
both January 31, 2020
and
July 31,
2019,
which are included in Cash and cash equivalents on the unaudited
Condensed Consolidated Balance Sheet.
Balances of
accounts receivable and accounts payable approximated their fair
values at
January 31, 2020 and July 31, 2019
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 $3,176,000
and
$6,357,000
as of
January 31, 2020 and July 31,
2019,
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 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 $249,000 and $209,000 in the second quarter of fiscal
years 2020 and 2019, respectively. Intangible
amortization expense was $416,000 and $419,000 in the first six months of
fiscal years 2020 and 2019. Estimated intangible amortization for
the remainder of fiscal year 2020 is $370,000. Estimated intangible
amortization for the next five fiscal years is as follows (in
thousands):
|
|
|
|
|
|
2021
|
$
|
556
|
|
|
2022
|
$
|
406
|
|
|
2023
|
$
|
202
|
|
|
2024
|
$
|
67
|
|
|
2025
|
$
|
47
|
|
We have one
acquired trademark recorded at a cost of $376,000 that was determined to have
an indefinite life and is not amortized.
We performed our
annual goodwill impairment analysis in the fourth quarter of fiscal
year 2019 and no impairment was identified.
There have been no triggering events that would indicate a new
impairment analysis is needed.
6.
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. Further information about our accounting policy
for leases is included in Note 1 of the Notes to unaudited
Condensed Consolidated Financial Statements.
We have no
material finance leases, and variable costs for operating leases
are immaterial for the second quarter of fiscal year
2020. 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, 2020
|
For the Six
Months Ended January 31, 2020
|
|
Operating
Lease Cost
|
|
|
|
Operating lease
cost
|
$
|
517
|
|
$
|
1,034
|
|
|
Short-term operating lease
cost
|
195
|
|
400
|
|
Supplemental cash
flow information related to leases was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended January 31, 2020
|
For the Six
Months Ended January 31, 2020
|
|
Other
Information
|
|
|
|
Cash paid for amounts
included in the measurement of lease liabilities:
|
|
|
|
Operating
cash flows from operating leases
|
$
|
430
|
|
$
|
855
|
|
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:
|
|
|
|
|
For the Six
Months Ended January 31, 2020
|
|
Weighted-average
remaining lease term - operating leases
|
10.8
years
|
|
Weighted-average
discount rate - operating leases
|
4.01%
|
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,
(in
thousands):
|
|
|
|
|
|
2020
|
$
|
1,823
|
|
|
2021
|
1,512
|
|
|
2022
|
1,141
|
|
|
2023
|
812
|
|
|
2024
|
773
|
|
|
Thereafter
|
6,523
|
|
|
Total
|
12,584
|
|
|
Less: imputed
interest
|
(2,521
|
)
|
|
Net lease
obligation
|
$
|
10,063
|
|
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 July 31, 2019
(in thousands):
|
|
|
|
|
|
2020
|
$
|
2,255
|
|
|
2021
|
1,640
|
|
|
2022
|
1,513
|
|
|
2023
|
1,038
|
|
|
2024
|
899
|
|
|
Thereafter
|
7,422
|
|
7. PENSION
AND OTHER POSTRETIREMENT BENEFITS
Pension and
Postretirement Health Benefits
The Oil-Dri
Corporation of America Pension Plan (“Pension 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 will no
longer earn additional benefits on or after March 1,
2020.
The amendment of
the Pension Plan triggered a pension curtailment, which required a
remeasurement of the Pension Plan's obligation. The remeasurement
resulted in a decrease in the benefit obligation of
approximately $6,632,000, which has been recorded in
Other Comprehensive Income, net of taxes of $1,592,000.
The components of
net periodic pension and postretirement health benefit costs were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
(in
thousands)
|
|
|
For the
Three Months Ended January 31,
|
|
For the Six
Months Ended January 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Service cost
|
$
|
363
|
|
|
$
|
391
|
|
|
$
|
851
|
|
|
$
|
813
|
|
|
Interest cost
|
503
|
|
|
517
|
|
|
1,012
|
|
|
1,057
|
|
|
Expected return on plan
assets
|
(716
|
)
|
|
(703
|
)
|
|
(1,414
|
)
|
|
(1,405
|
)
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
Prior service
costs
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Other actuarial
loss
|
313
|
|
|
165
|
|
|
670
|
|
|
386
|
|
|
Net periodic
benefit cost
|
$
|
463
|
|
|
$
|
371
|
|
|
$
|
1,119
|
|
|
$
|
852
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Health Benefits
|
|
|
(in
thousands)
|
|
|
For the
Three Months Ended January 31,
|
|
For the Six
Months Ended January 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Service cost
|
$
|
28
|
|
|
$
|
25
|
|
|
$
|
58
|
|
|
$
|
52
|
|
|
Interest cost
|
20
|
|
|
24
|
|
|
41
|
|
|
49
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
Prior service
costs
|
(2
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
Net periodic
benefit cost
|
$
|
46
|
|
|
$
|
47
|
|
|
$
|
96
|
|
|
$
|
98
|
|
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, but did make a $5,000,000
voluntary
contribution to the Pension Plan during the second quarter of
fiscal year 2020. We have no minimum funding requirements
for the remainder of fiscal year 2020 but we may consider making an
additional voluntary contribution.
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
|
|
|
For the
Three and Six Months Ended January 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Discount rate for net
periodic benefit cost
|
3.35
|
%
|
|
4.04
|
%
|
|
2.93
|
%
|
|
3.81
|
%
|
|
Rate of increase in
compensation levels
|
3.50
|
%
|
|
3.50
|
%
|
|
—
|
|
|
—
|
|
|
Long-term expected rate of
return on assets
|
7.00
|
%
|
|
7.00
|
%
|
|
—
|
|
|
—
|
|
The medical cost
trend assumption for postretirement health benefits was
7.35%. The
graded trend rate is expected to decrease to an ultimate rate
of
4.50% in
fiscal year
2038.
Supplemental
Executive Retirement Plan
The Oil-Dri
Corporation of America Supplemental Executive Retirement Plan
(“SERP”) provides 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 is actuarially determined at the end of each
fiscal year using assumptions similar to those used for the Pension
Plan. The SERP is unfunded and benefits will be funded when
payments are made.
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 is closed to new participants and
current participants no longer earn additional benefits on or after
March 1, 2020.
The amendment of
the SERP triggered a pension curtailment which required a
remeasurement of the SERP's obligation. The remeasurement resulted
in a decrease in the SERP liability of approximately
$1,296,000, which has been recorded in
SG&A in the second quarter of fiscal year 2020.
8.
OPERATING SEGMENTS
We have
two
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; distributors of industrial cleanup and
automotive products; environmental service companies; and sports
field product users. 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; 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, 2019.
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
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Cat Litter
|
$
|
7,247
|
|
|
$
|
6,502
|
|
|
$
|
74,970
|
|
|
$
|
67,613
|
|
|
Industrial and
Sports
|
—
|
|
|
—
|
|
|
15,012
|
|
|
15,429
|
|
|
Agricultural and
Horticultural
|
10,296
|
|
|
12,698
|
|
|
—
|
|
|
—
|
|
|
Bleaching Clay and Fluids
Purification
|
24,605
|
|
|
24,454
|
|
|
1,196
|
|
|
1,197
|
|
|
Animal Health and
Nutrition
|
8,801
|
|
|
8,130
|
|
|
—
|
|
|
—
|
|
|
Net Sales
|
$
|
50,949
|
|
|
$
|
51,784
|
|
|
$
|
91,178
|
|
|
$
|
84,239
|
|
|
|
|
|
|
|
|
|
|
|
|
Business to
Business Products Group
|
|
Retail and
Wholesale Products Group
|
|
|
For the
Three Months Ended January 31,
|
|
Product
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Cat Litter
|
$
|
3,550
|
|
|
$
|
3,287
|
|
|
$
|
38,591
|
|
|
$
|
35,218
|
|
|
Industrial and
Sports
|
—
|
|
|
—
|
|
|
7,412
|
|
|
7,652
|
|
|
Agricultural and
Horticultural
|
4,577
|
|
|
6,646
|
|
|
—
|
|
|
—
|
|
|
Bleaching Clay and Fluids
Purification
|
12,382
|
|
|
12,559
|
|
|
531
|
|
|
552
|
|
|
Animal Health and
Nutrition
|
3,962
|
|
|
3,966
|
|
|
—
|
|
|
—
|
|
|
Net Sales
|
$
|
24,471
|
|
|
$
|
26,458
|
|
|
$
|
46,534
|
|
|
$
|
43,422
|
|
|
|
|
|
|
|
|
|
|
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. We have refined the basis of allocation for
certain of our assets as of January 31, 2020
and we have
restated the allocation of assets as of July 31, 2019
presented below
to enhance comparability. 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
|
|
|
|
|
|
|
January 31,
2020
|
|
July 31,
2019
|
|
|
|
|
|
|
(in
thousands)
|
|
Business to Business Products
Group
|
|
$
|
63,744
|
|
|
$
|
66,655
|
|
|
Retail and Wholesale Products
Group
|
|
96,043
|
|
|
95,593
|
|
|
Unallocated
Assets
|
|
49,292
|
|
|
42,979
|
|
|
Total
Assets
|
|
$
|
209,079
|
|
|
$
|
205,227
|
|
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 the Six
Months Ended January 31,
|
|
|
Net
Sales
|
|
Income
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in
thousands)
|
|
Business to Business Products
Group
|
$
|
50,949
|
|
|
$
|
51,784
|
|
|
$
|
15,848
|
|
|
$
|
14,304
|
|
|
Retail and Wholesale Products
Group
|
91,178
|
|
|
84,239
|
|
|
8,968
|
|
|
2,662
|
|
|
Net
Sales
|
$
|
142,127
|
|
|
$
|
136,023
|
|
|
|
|
|
|
Corporate
Expenses
|
|
(14,822
|
)
|
|
(13,136
|
)
|
|
Income from
Operations
|
|
9,994
|
|
|
3,830
|
|
|
Total Other Expense,
Net
|
|
(159
|
)
|
|
(158
|
)
|
|
Income
before Income Taxes
|
|
9,835
|
|
|
3,672
|
|
|
Income Tax
Expense
|
|
(1,626
|
)
|
|
(456
|
)
|
|
Net
Income
|
|
8,209
|
|
|
3,216
|
|
|
Net (Loss)
Income Attributable to Noncontrolling Interest
|
|
(157
|
)
|
|
23
|
|
|
Net Income
Attributable to Oil-Dri
|
|
$
|
8,366
|
|
|
$
|
3,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended January 31,
|
|
|
Net
Sales
|
|
Income
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in
thousands)
|
|
Business to Business Products
Group
|
$
|
24,471
|
|
|
$
|
26,458
|
|
|
$
|
7,552
|
|
|
$
|
7,272
|
|
|
Retail and Wholesale Products
Group
|
46,534
|
|
|
43,422
|
|
|
5,608
|
|
|
2,653
|
|
|
Net
Sales
|
$
|
71,005
|
|
|
$
|
69,880
|
|
|
|
|
|
|
Corporate
Expenses
|
|
(7,287
|
)
|
|
(7,098
|
)
|
|
Income from
Operations
|
|
5,873
|
|
|
2,827
|
|
|
Total Other Expense,
Net
|
|
(115
|
)
|
|
(39
|
)
|
|
Income
before Income Taxes
|
|
5,758
|
|
|
2,788
|
|
|
Income Tax
Expense
|
|
(1,009
|
)
|
|
(506
|
)
|
|
Net
Income
|
|
4,749
|
|
|
2,282
|
|
|
Net Loss
Attributable to Noncontrolling Interest
|
|
(81
|
)
|
|
(5
|
)
|
|
Net Income
Attributable to Oil-Dri
|
|
$
|
4,830
|
|
|
$
|
2,287
|
|
9. STOCK-BASED
COMPENSATION
The Oil-Dri
Corporation of America 2006 Long Term Incentive Plan, as amended
(the “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.
Restricted
Stock
All of our
non-vested restricted stock as of
January 31, 2020 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
1,500
and
117,000
restricted shares
of Common Stock granted during the second quarter of fiscal
years 2020 and 2019, respectively. There
were no restricted shares of Class B
Stock granted during the second quarter of fiscal year
2020
and
7,000
restricted shares
of Class B Stock granted during the second quarter of fiscal year
2019. Stock-based compensation
expense related to non-vested restricted stock was
$810,000
and
$229,000
for the
second
quarter of fiscal
years 2020 and 2019, respectively. Stock-based
compensation expense related to non-vested restricted stock
was $1,779,000
and
$889,000
for the first six
months of
fiscal years 2020 and 2019, respectively.
A summary of
restricted stock transactions is shown below:
|
|
|
|
|
|
|
|
|
|
Restricted
Shares
(in
thousands)
|
|
Weighted
Average Grant Date Fair Value
|
|
Non-vested restricted stock
outstanding at July 31, 2019
|
414
|
|
|
$
|
33.09
|
|
|
Granted
|
21
|
|
|
$
|
33.51
|
|
|
Vested
|
(41
|
)
|
|
$
|
32.34
|
|
|
Forfeitures
|
(2
|
)
|
|
$
|
33.51
|
|
|
Non-vested restricted stock
outstanding at January 31, 2020
|
392
|
|
|
$
|
33.19
|
|
10. ACCUMULATED
OTHER COMPREHENSIVE (LOSS) INCOME
The following table
summarizes the changes in accumulated other comprehensive (loss)
income by component as of January 31,
2020 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Postretirement Health Benefits
|
|
Cumulative
Translation Adjustment
|
|
Total
Accumulated Other Comprehensive (Loss) Income
|
|
Balance as of July 31,
2019
|
$
|
(14,891
|
)
|
|
$
|
(148
|
)
|
|
$
|
(15,039
|
)
|
|
Other comprehensive loss
before reclassifications, net of tax
|
—
|
|
|
(98
|
)
|
|
(98
|
)
|
|
Amounts reclassified from
accumulated other comprehensive income, net of tax
|
508
|
|
(a)
|
—
|
|
|
508
|
|
|
Curtailment on Pension
Plan
|
$
|
5,040
|
|
(b)
|
$
|
—
|
|
|
$
|
5,040
|
|
|
Net current-period other
comprehensive income (loss), net of tax
|
5,548
|
|
|
(98
|
)
|
|
5,450
|
|
|
Balance as of January 31,
2020
|
$
|
(9,343
|
)
|
|
$
|
(246
|
)
|
|
$
|
(9,589
|
)
|
(a) Amount is net
of tax expense of $160,138.
Amount is included in the components of net periodic benefit cost
for the pension and postretirement health plans. See Note
7
of the Notes to
unaudited Condensed Consolidated Financial Statement-s for further
information.
(b) Amount is net
of tax expense of $1,592,000. See Note 7 of the Notes to
the unaudited Condensed Consolidated Financial Statements for
further information.
11.
RELATED PARTY TRANSACTIONS
One member of our
Board of Directors (the “Board”), and our Lead Independent
Director, retired from the role of President and Chief Executive
Officer of a customer of ours in September 2019. That company was a
customer of ours before the board member joined that company and
before he became a member of our Board. Total net sales to that
customer, including sales to subsidiaries of that customer,
were $49,000 and $105,000 for the second quarter of fiscal
years 2020 and 2019, respectively, and
were $160,000 and $202,000 for the first
six
months of fiscal
years 2020 and 2019, respectively. Outstanding
accounts receivable from that customer, and its subsidiaries,
were $10,000 at both January 31, 2020
and
July 31,
2019.
One member of our
Board, and of the Compensation Committee of our Board, is the
President and Chief Executive Officer as well as a director and
shareholder of a law firm that regularly provides services to us.
Total payments to that vendor for fees and
cost
reimbursements were $25,000 and $51,000 for the second quarter of fiscal
years 2020 and 2019, respectively, and
were $63,000 and $97,000 for the first
six
months of fiscal
years 2020 and 2019, respectively. There
were no outstanding accounts payable
to that vendor as of January 31, 2020
or
July 31,
2019.
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, 2019. 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” and Item 1A, Risk Factors, of this quarterly report on
Form 10-Q for the quarter ended January 31, 2020 and of our Annual
Report on Form 10-K for the fiscal year ended
July 31, 2019.
OVERVIEW
We develop, mine,
manufacture and market sorbent products principally produced from
clay minerals and, to a lesser extent, other clay-like sorbent
materials. Our principal products include agricultural and
horticultural chemical carriers, animal health and nutrition
products, bleaching clay and fluid purification aids, cat litter,
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 those 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: Retail and Wholesale Products Group and Business
to Business Products Group, as described in Note
8
of the Notes to
unaudited Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
SIX
MONTHS ENDED
JANUARY 31, 2020
COMPARED TO
SIX
MONTHS ENDED
JANUARY 31, 2019
CONSOLIDATED
RESULTS
Consolidated net
sales for the six months ended
January 31, 2020 were
$142,127,000, a 4% increase compared to net sales
of $136,023,000
for the
six
months
ended
January 31, 2019. Net sales increased for our
Retail and Wholesale Products Group but decreased for our Business
to Business Products Group. Segment results are discussed further
below.
Consolidated
gross profit for the first six months of fiscal year
2020
was
$38,893,000,
or 27% of net sales, compared
to $31,414,000,
or 23% of net sales, for the
first six months of fiscal year
2019. Lower freight and
natural gas costs drove the increase in gross profit. Freight costs
declined approximately 21% per manufactured ton for the first six
months of fiscal year 2020 compared to the same period in fiscal
year 2019 as the result of lower transportation rates from improved
truck availability. In addition, costs were higher in the first
half of the prior fiscal year due to other one-time events,
including a greater number of product transfers between our plants
and warehouses to support customer service during the
implementation of our new ERP system on August 1, 2018 and
disruptions due to Hurricane Michael. Our overall freight costs
also vary between periods depending on the mix of products sold and
the geographic distribution of our customers. The cost of natural
gas used to operate kilns that dry our clay was approximately 29%
lower per manufactured ton in the first six months of fiscal year
2020
compared to the
first six months of fiscal year
2019. Non-fuel manufacturing
costs per manufactured ton were flat compared to the first
six
months of the
prior fiscal year. In contrast, packaging costs per manufactured
ton for the first six months of fiscal year
2020
were slightly
higher compared to the first six months of fiscal year
2019, due in part to the mix of
products produced. In addition, many of our contracts for packaging
purchases are subject to periodic price adjustments, which trail
changes in underlying commodity prices.
Total SG&A
expenses were $28,899,000
for the
first six months of fiscal year
2020, a 5% increase compared to
$27,584,000
for the
first six months of fiscal year
2019. The discussion of the
segments' operating incomes below describes the changes in SG&A
expenses that were allocated to the operating segments. The
remaining unallocated corporate expenses included a higher
estimated annual incentive bonus accrual, which was based on
performance targets established for each fiscal year. The increased
bonus expense was partially offset
by a curtailment gain reported upon the freeze of our SERP in the
second quarter of fiscal year 2020 (see Note 7
of
the Notes to the unaudited Condensed Consolidated Financial
Statements). In addition, higher SG&A expenses were reported in
the first half of fiscal year 2019 for consulting costs related to
our ERP
system implemented in the first quarter of the prior fiscal year
and legal costs for legal proceedings resolved in the third quarter
of the prior fiscal year.
Consolidated net
income before taxes for the first six months of fiscal year
2020
was
$9,835,000, a 168% increase from net income before taxes
of $3,672,000
for the
first six months of fiscal year
2019. Results for the
first six months of fiscal year
2020
were driven by
the factors discussed above, including higher sales and lower
freight and natural gas costs, which more than offset the increase
in SG&A expenses.
The tax expense
for the first six months of fiscal year
2020
was
$1,626,000
(an effective tax
rate of 16.5%) compared to
$456,000
for the
first six months of fiscal year
2019
(an effective tax
rate of 12.4%). An estimated annual effective tax rate was used in
both periods to determine the provision for income taxes, which is
based on expected annual taxable income and the assessment of
various tax deductions, including depletion. The lower tax rate in
fiscal year 2019 primarily relates to the discrete benefit recorded
relating to the completion of a federal income tax return
examination in the first quarter of that year.
BUSINESS TO
BUSINESS PRODUCTS GROUP
Net sales of the
Business to Business Products Group for the first
six
months of fiscal
year 2020 were $50,949,000,
a decrease
of
$835,000, or 2%, from net sales of
$51,784,000
for the
first six months of fiscal year
2019. Net sales of our
agricultural and horticultural chemical carrier products
decreased
approximately
19%
for the first six
months of fiscal year 2020 compared to the same period in fiscal
year 2019. Sales of traditional granules declined due primarily to
the loss of a customer, which was partially offset by increased
sales to an existing customer. These lower sales were significantly
offset by higher sales of other products in the Business to
Business Group, including an increase of approximately
11%
compared to the
first six months of the prior fiscal year for sales of our
co-packaged coarse cat litter. Net sales of our animal health and
nutrition products also increased approximately
8%
compared to the
first six months of the prior year.
Sales growth occurred for our feed additives primarily in Africa,
Mexico and Asia, excluding China. See “Foreign Operations” below
for a discussion of sales in China, which were impacted by the
spread of the African swine fever in the prior year and the recent
novel coronavirus (COVID-19) outbreak (“the coronavirus”). Net
sales of our fluids purification products increased
approximately 1% compared to the first six
months of the prior fiscal year as higher sales to edible oil
producers offset lower sales that resulted from a biodiesel
processing customer closing operations.
SG&A expenses
for the Business to Business Products Group were approximately 7%
higher for the first six months of fiscal year
2020
compared to the
same period of the prior year, including higher costs for product
development and support, increased compensation-related expenses
and additional costs to establish our subsidiary in
Indonesia.
The Business to
Business Products Group’s operating income for the first
six
months of fiscal
year 2020 was $15,848,000,
an
increase of $1,544,000, or 11%, from operating income
of $14,304,000
for the
first six months of fiscal year
2019. The improved operating
income was driven primarily by the lower freight and natural gas
costs discussed in “Consolidated Results” above.
RETAIL AND
WHOLESALE PRODUCTS GROUP
Net sales of the
Retail and Wholesale Products Group for the first
six
months of fiscal
year 2020 were $91,178,000,
an
increase of $6,939,000, or 8%, from net sales of
$84,239,000
for the
first six months of fiscal year
2019. Sales of cat litter drove
the sales increase. Total cat litter net sales were
approximately 11% higher compared to the first
six
months of the
prior fiscal year, with increased sales for both private label and
branded litters. Sales of private label scoopable litter increased
to existing customers, some of whom had expanded their selection of
our products during the prior fiscal year. Higher sales of private
label coarse litter included incremental sales to customers who
added these products in the second half of the prior fiscal year.
Branded coarse litter and litter box liners sales were also higher
compared to the first half of the prior fiscal year. Cat litter
sales by our subsidiary in Canada further contributed to the sales
increase, as discussed in “Foreign Operations” below. Also included
in the Retail and Wholesale Products Group's results were slightly
lower sales for our industrial and automotive products compared to
the first six months of fiscal year
2019.
SG&A expenses
for the Retail and Wholesale Products Group were approximately 7%
lower in the first six months of fiscal year
2020
compared to the
first six months of fiscal year
2019. Lower advertising expense
in the first six months of fiscal year 2020
contributed to the reduction in costs compared to the same period
in the prior year; however, we expect spending for advertising in
the remainder of fiscal 2020 to result in a higher expense for the
full year of fiscal 2020 compared to fiscal year 2019. In addition,
non-recurring expenses were incurred in the first half of fiscal
year 2019 for customer compliance fees related to shipping and data
communication incurred in connection with the implementation of the
ERP system.
The Retail and
Wholesale Products Group's operating income for the first
six
months of fiscal
year 2020 was $8,968,000, an increase
of
$6,306,000
from operating
income of $2,662,000
for the
first six months of fiscal year
2019. The improved operating
income was driven by the higher sales and lower SG&A described
above, and by lower freight and natural gas costs discussed in
“Consolidated Results”.
FOREIGN
OPERATIONS
Foreign
operations include our subsidiaries in Canada and the United
Kingdom, which are reported in the Retail and Wholesale Products
Group, and our subsidiaries in 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
2020
were
$7,154,000, an increase of $672,000, or 10%, compared to net sales
of $6,482,000
during the
first six months of fiscal year
2019. This increase was
attributable primarily to new cat litter business for our Canada
subsidiary. Sales of our animal health products by our foreign
operations grew to a lesser extent, as higher sales for our
subsidiaries in Mexico and Indonesia were mostly offset by lower
sales for our subsidiary in China. Sales of animal health products
to pork producers in China have not fully recovered since the
spread of African swine fever in fiscal year 2019. In addition, our
Chinese subsidiary's business operations have been impacted in the
second quarter of fiscal year 2020 by the recent outbreak of the
coronavirus. Chinese government restrictions to control the spread
of the coronavirus disrupted our sales office, limited travel by
our salesforce and delayed product shipments. Net sales by our
foreign subsidiaries represented 5% of our consolidated net sales
during the first six months of both fiscal
years 2020 and 2019.
Our foreign
subsidiaries reported a net loss
of
$169,000
for the
first six months of fiscal year
2020, compared to
net income
of
$315,000
for the
first six months of fiscal year
2019. The lower sales described
above for our subsidiary in China and additional costs to establish
operations in Indonesia drove the net loss.
Identifiable
assets of our foreign subsidiaries as of January 31, 2020
were
$10,158,000,
compared to $9,643,000
as of
January 31,
2019. The
increase
was attributed
primarily to the addition of our subsidiary in Indonesia and new
right-of-use lease assets recorded upon the implementation of ASC
842, Leases.
THREE MONTHS ENDED
JANUARY 31, 2020
COMPARED TO
THREE MONTHS ENDED
JANUARY 31, 2019
CONSOLIDATED
RESULTS
Consolidated net
sales for the three months ended
January 31, 2020 were
$71,005,000, a 2% increase compared to
net sales of
$69,880,000 for the three months
ended
January 31, 2019. Net sales increased for our
Retail and Wholesale Products Group, but decreased for our Business
to Business Products Group. Segment results are discussed further
below.
Consolidated
gross profit for the three months ended January 31, 2020
was
$18,958,000,
or
27% of net
sales, compared to $15,404,000,
or 22% of net sales, for the
second quarter of fiscal year
2019. Lower freight and
natural gas costs drove the increase in gross profit. Freight costs
declined approximately 21% for the second quarter of fiscal year
2020 per manufactured ton as the result of lower transportation
rates from improved truck availability. Our overall freight costs
also vary between periods depending on the mix of products sold and
the geographic distribution of our customers. The cost of natural
gas used to operate kilns that dry our clay was approximately 36%
lower per manufactured ton for the
second quarter of fiscal year
2020
compared to the
same period of fiscal year 2019. Non-fuel manufacturing
costs per ton produced were slightly lower compared to the
second quarter in the prior fiscal
year. In contrast, packaging costs per manufactured ton were
slightly higher compared to the second quarter of the prior fiscal
year, driven primarily by the mix of products produced. In
addition, many of our contracts for packaging purchases are subject
to periodic price adjustments, which trail changes in underlying
commodity prices.
Total SG&A
expenses were $13,085,000
for the
second quarter of fiscal year
2020, a 4% increase compared to
$12,577,000
for the
second quarter of fiscal year
2019. The discussion below
describes the SG&A expenses allocated to the operating
segments. The remaining unallocated corporate expenses included a
higher estimated annual incentive bonus accrual, which was based on
performance targets established for each fiscal year. The increased
bonus expense was partially offset
by a curtailment gain reported upon the freeze of our SERP in the
second quarter of fiscal year 2020 (see Note 7
of
the Notes to the unaudited Condensed Consolidated Financial
Statements). In addition, lower SG&A expenses were reported in
the second quarter of fiscal year 2020 for consulting costs related
to our ERP
system and costs for legal proceedings resolved in the third
quarter of the prior fiscal year.
Consolidated net
income before taxes for the second quarter of fiscal year
2020
was
$5,758,000, compared to net income
before taxes of $2,788,000
for the
second
quarter of fiscal
year 2019. Results for the
second
quarter of fiscal
year 2020 were driven by the factors
described above, including higher sales and lower freight and
natural gas costs, which more than offset the increase in SG&A
expenses.
Tax expense
was $1,009,000
for the
second
quarter of fiscal
year 2020, compared to
$506,000
for the
second
quarter of fiscal
year 2019, which resulted in an
effective tax rate of 18% for the second quarters of both fiscal
years. We used an estimated annual
effective tax
rate in determining our quarterly 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
2020
were
$24,471,000,
a decrease
of
$1,987,000, or 8%, from net sales of
$26,458,000
for the
second quarter of fiscal year
2019. Net sales of our
agricultural and horticultural chemical carrier products
decreased
31%, due primarily to the loss
of a customer for our traditional granules. Net sales of our fluids
purification products decreased approximately
1%
for the second
quarter of fiscal year 2020. Lower sales due to a plant closing of
a biodiesel processing customer was partially offset by higher
sales to edible oil producers. Net sales of our animal health and
nutrition products were essentially flat as sales growth for our
feed additives in Mexico and Asia, excluding China, mostly offset
lower sales in China. See “Foreign Operations” below for a
discussion of sales in China, which were impacted by the spread of
the African swine fever in the prior year and the recent outbreak
of the coronavirus. Net sales of our co-packaged coarse cat litter
for the
second quarter were
approximately 8% higher compared to the
second quarter of the prior
year.
SG&A expenses
for the Business to Business Products Group were approximately 11%
higher compared to the second quarter of fiscal year
2019, including higher costs for
product development and support and compensation-related
expenses.
The Business to
Business Products Group’s operating income for the
second
quarter of fiscal
year 2020 was $7,552,000, an increase
of
$280,000, or 4%, from operating income
of $7,272,000
in the
second
quarter of fiscal
year 2019. The improved operating
income was driven by the lower freight and natural gas costs
discussed in “Consolidated Results” above.
RETAIL AND
WHOLESALE PRODUCTS GROUP
Net sales of the
Retail and Wholesale Products Group for the second quarter of fiscal year
2020
were
$46,534,000,
an
increase of $3,112,000, or 7%, from net sales of
$43,422,000
for the
second
quarter of fiscal
year 2019. Total cat litter net sales
were 10% higher compared to the
second
quarter of fiscal
year 2019, driven by increased sales
of both private label and branded litters. Sales of private label
scoopable litter increased to existing customers, some of whom had
expanded their selection of our products during the prior fiscal
year. Higher sales of private label coarse litter included
incremental sales to customers who added these products in the
second half of the prior fiscal year. Branded coarse litter and
litter box liners sales were also higher compared to the
second
quarter of the
prior year. Cat litter sales by our subsidiary in Canada also
contributed to the sales increase, as discussed in “Foreign
Operations” below. Also included in the Retail and Wholesale
Products Group's results were slightly lower sales for our
industrial and automotive products compared to the
second
quarter of fiscal
year 2019.
SG&A expenses
for the Retail and Wholesale Products Group were slightly higher to
support the increased sales compared to the second quarter of fiscal year
2019.
For the
second
quarter of fiscal
year 2020, the Retail and Wholesale
Products Group reported operating income of $5,608,000, an increase
of
$2,955,000, compared to operating
income of $2,653,000
for the
second
quarter of fiscal
year 2019. The improved operating
income was driven by the higher sales described above, and by lower
freight and natural gas costs discussed above in “Consolidated
Results”.
FOREIGN
OPERATIONS
Foreign
operations included our subsidiaries in Canada and the United
Kingdom, which are reported in the Retail and Wholesale Products
Group, and our subsidiaries in China, Mexico and Indonesia, which
are reported in the Business to Business Products Group. Net sales
by our foreign subsidiaries during the
second quarter of fiscal year
2020 were
$3,505,000, a
15%
increase compared to net sales
of
$3,039,000 in the
second quarter of fiscal year
2019. This
increase was attributable primarily to new cat litter business and
improved sales of industrial absorbents for our Canada subsidiary.
Sales of our animal health products by our foreign operations grew
to a lesser extent, as higher sales for our Mexico and Indonesia
subsidiaries were mostly offset by lower sales for our subsidiary
in China. Sales of these products to pork producers in China have
not fully recovered since the spread of African swine fever in
fiscal year 2019. In addition, business operations of our Chinese
subsidiary have been impacted in the second quarter of fiscal year
2020 by the recent outbreak of the coronavirus. Chinese government
restrictions to control the spread of the coronavirus disrupted our
sales office, limited travel by our salesforce and delayed product
shipments. Our foreign subsidiaries' net sales represented
approximately 5% and 4% of consolidated net sales
during the
second quarters of fiscal
years 2020 and 2019, respectively.
Our foreign
subsidiaries reported a net loss
attributable to
Oil-Dri of $101,000 for the second quarter of fiscal year
2020
compared
to net
income of $79,000 for the second quarter of fiscal year
2019. The lower sales described
above for our China subsidiary,
higher material
costs for our subsidiary in the United Kingdom and additional costs
to establish operations in Indonesia drove the net
loss.
LIQUIDITY AND CAPITAL RESOURCES
Our principal
capital requirements include: funding working capital needs;
purchasing and upgrading equipment, facilities, 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. During the first
six months
of fiscal year
2020, we
principally used cash generated from operations to fund these
requirements.
The following
table sets forth certain elements of our unaudited Condensed
Consolidated Statements of Cash Flows (in thousands):
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For the Six
Months Ended January 31,
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2020
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|
2019
|
|
Net cash provided by
operating activities
|
$
|
14,270
|
|
|
$
|
2,692
|
|
|
Net cash (used in) provided
by investing activities
|
(7,286
|
)
|
|
455
|
|
|
Net cash used in financing
activities
|
(7,133
|
)
|
|
(6,505
|
)
|
|
Effect of exchange rate
changes on cash and cash equivalents
|
(144
|
)
|
|
(24
|
)
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Net decrease in cash and cash
equivalents
|
$
|
(293
|
)
|
|
$
|
(3,382
|
)
|
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
2020 and
2019 were
as follows:
Accounts
receivable, less allowance for doubtful accounts,
increased
$213,000
in the
first six months of fiscal year
2020
compared
to an
increase of $4,697,000
in the
first six months of fiscal year
2019. Higher sales in the second
quarter of fiscal year 2020 compared to the second quarter of 2019
drove the increase in accounts receivable as of January 31, 2020.
The accounts receivable balance at the end of the second quarter of
fiscal year 2019 was significantly higher due to delays in sending
invoices to some customers upon implementation of the new ERP
system on August 1, 2018. The variation in accounts receivable
balances also reflected differences in the level and timing of
collections as well as the payment terms provided to various
customers.
Inventory
decreased
$1,508,000
in the
first six months of fiscal year
2020
compared
to an
increase of $5,607,000
in the
first six months of fiscal year
2019. Packaging and finished
goods decreased as of January 31, 2020 due to higher production and
efforts to better manage our safety stock levels. In addition, our
inventory obsolescence reserve increased during the first six
months of fiscal year 2020 which is attributable to our focus on
inventory management and enhanced data available from our new ERP
system. Previously, inventory had increased significantly during
the first six months of fiscal year 2019 due to production
interruptions and increased safety stock for anticipated
disruptions during the new ERP system implementation.
Prepaid
expenses decreased $1,561,000
in the
first six months of fiscal year
2020
compared
to a
decrease of $970,000 in the first
six
months of fiscal
year 2019. Lower prepaid advertising
costs drove the decrease in the first six months of fiscal year
2020. Lower prepaid taxes was the primary reason for lower prepaid
expenses in the first six months of fiscal year 2019. Prepaid
expenses also fluctuated in both periods due to the timing of
prepayment of insurance premium renewals.
Other assets
decreased $731,000 in the first six months of fiscal year 2020
compared to an increase of $422,000 in the first six months of
fiscal year 2019. The decrease in fiscal year 2020 related to
amortization of our operating lease right-of-use lease assets while
the increase in fiscal year 2019 related to additional costs to
establish operations in Indonesia.
Accounts payable,
including income taxes payable, increased $2,661,000
in the
first six months of fiscal year
2020
compared
to an
increase of $2,295,000
in the
first six months of fiscal year
2019. Higher accrued income taxes
due to higher net income drove the increase in the first half of
fiscal year 2020. Accounts payable increased in the first half of
fiscal year 2019 as we managed our cash flow due to issues related
to the ERP system implementation. Trade and freight payables also
varied in both periods due to the timing of payments, fluctuations
in the cost of goods and services we purchased, production volume
levels and vendor payment terms.
Accrued
expenses decreased $1,602,000
in the
first six months of fiscal year
2020
compared
to a
decrease of $1,390,000
in the
first six months of fiscal year
2019. The payout of the
prior fiscal year's discretionary incentive bonus reduced accrued
salaries
in both fiscal
years. Accrued freight also decreased in the first
six
months of fiscal
year 2020, but increased in the first
six months of fiscal year 2019 due to cash flow management as
described above. Accrued plant expenses also fluctuated due to
timing of payments, changes in the cost of goods and services we
purchased, production volume levels and vendor payment
terms.
Pension and
postretirement benefits decreased $5,536,000 in the first six
months of fiscal year 2020 compared to an increase in the first six
months of fiscal year 2019 of $859,000. See Note 7 of the Notes to
the unaudited Condensed Consolidated Financial Statements for
explanation of the decrease in fiscal year 2020 upon curtailment of
our Pension Plan. The increase in fiscal year 2019 is due to normal
increases in benefit obligation due to additional
service.
Other liabilities
decreased $1,052,000 in the first six months of fiscal year 2020
compared to an increase of $370,000 in the first six months of
fiscal year 2019. The decrease in fiscal year 2020 is due to a
reclassification of the deferred lease liability to operating lease
liabilities. The increase in fiscal year 2019 was due to a new
deferred lease liability.
Net cash
(used in) provided by investing activities
Cash
used in
investing
activities was $7,286,000
in the
first six months of fiscal year
2020
compared to
cash provided by
investing
activities of $455,000 in the first
six
months of fiscal
year 2019. Cash used for capital
expenditures was higher for the first quarter of fiscal year 2020
than fiscal year 2019. Net dispositions of investment securities
provided cash in the first half of fiscal year 2019; however, no
short-term investments were held in fiscal year 2020 due to the low
returns available on these investments.
Net cash
used in financing activities
Cash
used in
financing
activities of $7,133,000
in the
first six months of fiscal year
2020
was higher than
cash used
in financing activities
of $6,505,000
in the
first six months of fiscal year
2019, primarily due to increased
purchases of treasury stock and a higher dividend
payout.
Other
Total cash and
investment balances held by our foreign subsidiaries of
$2,709,000
as of
January 31, 2020 were slightly
higher
than the
January 31, 2019 balances of
$2,123,000. See further discussion in
“Foreign Operations” above.
On January 31,
2019, we signed a fifth amendment to our credit agreement with BMO
Harris Bank N.A. (“BMO Harris”), which expires on January 31, 2024.
The agreement provides for a $45,000,000 unsecured revolving credit
agreement and a maximum of $10,000,000 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-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,
2020, the
variable rates would have been 5.00% for the BMO Harris prime-based
rate or 3.00% for the three-month LIBOR-based rate. The credit
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 coverage ratio and a
minimum consolidated net worth. As of January 31, 2020
and
2019, we were in compliance with
the covenants. There were no borrowings during the first
six
months of either
fiscal year 2019 or 2020.
As of
January 31,
2020, we
had remaining authority to repurchase 1,041,371 shares of Common Stock
and 288,925 shares of Class B Stock under
a repurchase plan approved by our Board of Directors (the “Board”).
Repurchases may be made on the open market (pursuant to Rule 10b5-1
plans or otherwise) or in negotiated transactions. The timing and
number of shares repurchased 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
funds 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 both capital expenditures and advertising expense
in fiscal year 2020 to be greater than in fiscal year 2019.
We
do not believe that these increased expenditures will dramatically
impact our cash position; however our cash requirements are subject
to change as business conditions warrant and opportunities
arise.
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 Discussion of Financial
Condition and Results of Operations” in our Annual Report on Form
10-K for the fiscal year ended
July 31, 2019.
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”)) 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”) and Chief
Financial Officer (“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
The Company has
implemented, and is continuing to add new functionality to, a new
ERP system designed to upgrade our technology and improve our
financial and operational information. While the Company believes
that this new system and related changes to internal controls will
ultimately strengthen its internal control over financial
reporting, there are inherent risks in implementing a new ERP
system. The Company has appropriately considered these changes in
its design of and testing for effectiveness of internal controls
over financial reporting and concluded, as part of the evaluation
described in the above paragraph, that the implementation and
ongoing enhancement of the new ERP in these circumstances has not
materially changed the effectiveness of its internal control over
financial reporting.
There were no
changes, other than those described herein, 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, 2020 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” in the Company's Annual Report on Form 10-K for the year
ended July 31, 2019. Except as set forth below, 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, 2019.
Our business could be adversely affected by a widespread threat to
public health.
In December 2019,
a novel strain of the coronavirus was reported in China that has
subsequently spread outside of China. In response to the
coronavirus outbreak, the Chinese government has placed
restrictions on travel and mandated business closures. Such
restrictions and closures have disrupted our sales office in China,
limited travel by our salesforce and delayed product shipments.
Although the impact of such disruptions and delays has not had a
material impact on our results of operations, there is significant
uncertainty relating to the outbreak of coronavirus as well as the
potential effects of such outbreak on our business. Related
disruptions, inside or outside of China, to our operations, or the
operations of our suppliers or customers, may impact our operations
and results. Given the uncertainties related to the outbreak,
including its duration and severity, we cannot reasonably estimate
the scope of its impact on our employees, operations, suppliers, or
customers, or the full extent to which the coronavirus could affect
the global economy and our results.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
During the three
months ended January 31,
2020, we
did not sell any securities which were not registered under the
Securities Act of 1933. The following charts summarize our
repurchases (and remaining authority to repurchase) shares of our
Common Stock during this period. There were no repurchases of Class
B Stock during this period and 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 our Annual Report on Form 10-K for the fiscal year
ended July 31, 2019
filed with the
SEC.
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ISSUER
PURCHASES OF EQUITY SECURITIES
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(a)
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(b)
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(c)
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(d)
|
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For the
Three Months Ended January 31, 2020
|
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Total Number
of Shares Purchased
|
|
Average
Price Paid per Share
|
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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
Programs1
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