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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended April 30, 2020
 
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to ______________
 

Commission File Number 001-12622

OIL-DRI CORPORATION OF AMERICA
(Exact name of the registrant as specified in its charter)

Delaware 36-2048898
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
410 North Michigan Avenue, Suite 400 60611-4213
Chicago, Illinois (Zip Code)
(Address of principal executive offices)

The registrant's telephone number, including area code: (312) 321-1515

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 90 days. Yes  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer  x
Non-accelerated filer o
Smaller reporting company x
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10 per share
ODC
New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of April 30, 2020.
Common Stock – 5,307,384 Shares and Class B Stock – 2,176,142 Shares




CONTENTS
 
 
 
 
 
PART I – FINANCIAL INFORMATION
 
 
 
Page
Item 1:
 
 
 
Item 2:
 
 
 
Item 4:
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1A:
Risk Factors
 
 
 
Item 2:
 
 
 
Item 4:
 
 
 
Item 6:
 
 
 
 

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,” "potential," 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.

2



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)

 
(unaudited)
 
 
ASSETS
April 30,
2020
 
July 31,
2019
Current Assets
 
 
 
Cash and cash equivalents
$
20,548

 
$
21,862

Accounts receivable, less allowance of
  $1,324 and $644 at April 30, 2020 and July 31, 2019, respectively
41,846

 
35,459

Inventories
24,096

 
24,163

Prepaid repairs expense
5,163

 
4,708

Prepaid expenses and other assets
2,460

 
3,084

Total Current Assets
94,113

 
89,276

 
 
 
 
Property, Plant and Equipment
 

 
 

Cost
257,123

 
249,834

Less accumulated depreciation and amortization
(166,990
)
 
(159,036
)
Total Property, Plant and Equipment, Net
90,133

 
90,798

 
 
 
 
Other Assets
 

 
 

Goodwill
9,262

 
9,262

Other intangibles, net of accumulated amortization
of $415 and $299 at April 30, 2020 and July 31, 2019, respectively
1,551

 
1,599

Customer list, net of accumulated amortization
of $6,739 and $6,297 at April 30, 2020 and July 31, 2019, respectively
1,046

 
1,488

Deferred income taxes
6,397

 
7,755

Operating lease right-of-use assets
8,327

 

Other
5,152

 
5,049

Total Other Assets
31,735

 
25,153

 
 
 
 
Total Assets
$
215,981

 
$
205,227






The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.


3



OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Balance Sheet (continued)
(in thousands, except share and per share amounts)

 
(unaudited)
 
 
LIABILITIES & STOCKHOLDERS’ EQUITY
April 30,
2020
 
July 31,
2019
Current Liabilities
 
 
 
Current maturities of notes payable, net of unamortized debt issuance costs
of $10 at April 30, 2020
$
3,074

 
$
3,083

Accounts payable
10,524

 
8,092

Dividends payable
1,735

 
1,761

Operating lease liabilities
1,561

 

Accrued expenses:
 
 
 

Salaries, wages and commissions
10,559

 
6,740

Trade promotions and advertising
1,853

 
1,588

Freight
2,216

 
2,635

Other
9,425

 
8,707

Total Current Liabilities
40,947

 
32,606

 
 
 
 
Noncurrent Liabilities
 

 
 

Notes payable, net of unamortized debt issuance costs
of $31 at July 31, 2019

 
3,052

Deferred compensation
4,847

 
6,014

Pension and postretirement benefits
12,565

 
23,721

Long-term operating lease liabilities
8,285

 

Other
2,682

 
4,288

Total Noncurrent Liabilities
28,379

 
37,075

 
 
 
 
Total Liabilities
69,326

 
69,681

 
 
 
 
Stockholders’ Equity
 

 
 

Common Stock, par value $.10 per share, issued 8,371,197 shares at April 30, 2020
  and 8,284,199 shares at July 31, 2019
837

 
828

Class B Stock, par value $.10 per share, issued 2,511,958 shares at April 30, 2020
  and 2,576,479 shares at July 31, 2019
251

 
258

Additional paid-in capital
44,149

 
41,300

Retained earnings
172,504

 
164,756

Noncontrolling interest
(169
)
 
(14
)
Accumulated Other Comprehensive Loss:
 

 
 

Pension and postretirement benefits
(9,217
)
 
(14,891
)
Cumulative translation adjustment
(378
)
 
(148
)
Total Accumulated Other Comprehensive Loss
(9,595
)
 
(15,039
)
Less Treasury Stock, at cost (3,063,813 Common and 335,816 Class B shares at
April 30, 2020 and 2,926,547 Common and 324,741 Class B shares at July 31, 2019)
(61,322
)
 
(56,543
)
Total Stockholders’ Equity
146,655

 
135,546

 
 
 
 
Total Liabilities & Stockholders’ Equity
$
215,981

 
$
205,227



The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

4



OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Income
(in thousands, except for per share amounts)
 
(unaudited)
 
For the Nine Months Ended April 30,
 
2020
 
2019
 
 
 
 
Net Sales
$
218,383

 
$
206,908

Cost of Sales
(158,105
)
 
(158,660
)
Gross Profit
60,278

 
48,248

Selling, General and Administrative Expenses
(44,584
)
 
(42,091
)
Income from Operations
15,694

 
6,157

 
 
 
 
Other (Expense) Income
 

 
 

Interest expense
(314
)
 
(434
)
Interest income
238

 
149

Other, net (1)
(186
)
 
4,504

Total Other (Expense) Income, Net
(262
)
 
4,219

 
 
 
 
Income Before Income Taxes
15,432

 
10,376

Income Tax Expense
(2,573
)
 
(1,599
)
Net Income
12,859

 
8,777

Net Loss Attributable to Noncontrolling Interest
(155
)
 
(35
)
Net Income Attributable to Oil-Dri
13,014

 
8,812

 
 
 
 
Net Income Per Share
 
 
 
Basic Common
$
1.85

 
$
1.27

Basic Class B Common
$
1.39

 
$
0.95

Diluted Common
$
1.69

 
$
1.17

Average Shares Outstanding
 
 
 
Basic Common
5,152

 
5,108

Basic Class B Common
2,042

 
2,068

Diluted Common
7,310

 
7,245

Dividends Declared Per Share
 
 
 
Basic Common
$
0.7500

 
$
0.7200

Basic Class B Common
$
0.5625

 
$
0.5400


(1) See Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements for further information about amounts included in this line item for the nine months ended April 30, 2019.

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

5



OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Comprehensive Income
(in thousands of dollars)
 
(unaudited)
 
For the Nine Months Ended April 30,
 
2020
 
2019
 
 
 
 
Net Income Attributable to Oil-Dri
$
13,014

 
$
8,812

 
 
 
 
Other Comprehensive Income:
 
 
 
Pension and postretirement benefits (net of tax)
5,674

 
437

Cumulative translation adjustment
(230
)
 
(7
)
Other Comprehensive Income
5,444

 
430

Total Comprehensive Income
$
18,458

 
$
9,242


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.



6



OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Income
(in thousands, except for per share amounts)

 
(unaudited)
 
For the Three Months Ended April 30,
 
2020
 
2019
 
 
 
 
Net Sales
$
76,256

 
$
70,885

Cost of Sales
(54,871
)
 
(54,051
)
Gross Profit
21,385

 
16,834

Selling, General and Administrative Expenses
(15,685
)
 
(14,507
)
Income from Operations
5,700

 
2,327

 
 
 
 
Other (Expense) Income
 

 
 

Interest expense
(108
)
 
(141
)
Interest income
48

 
53

Other, net (1)
(43
)
 
4,465

Total Other (Expense) Income, Net
(103
)
 
4,377

 
 
 
 
Income Before Income Taxes
5,597

 
6,704

Income Tax Expense
(947
)
 
(1,143
)
Net Income
4,650

 
5,561

Net Income (Loss) Attributable to Noncontrolling Interest
2

 
(58
)
Net Income Attributable to Oil-Dri
4,648

 
5,619

 
 
 
 
Net Income Per Share
 
 
 
Basic Common
$
0.66

 
$
0.81

Basic Class B
$
0.50

 
$
0.61

Diluted Common
$
0.61

 
$
0.74

Average Shares Outstanding
 
 
 
Basic Common
5,126

 
5,126

Basic Class B
2,036

 
2,068

Diluted Common
7,288

 
7,253

Dividends Declared Per Share
 
 
 
Basic Common
$
0.2500

 
$
0.2400

Basic Class B
$
0.1875

 
$
0.1800


(1) See note 8 of the Notes to the Unaudited Condensed Consolidated financial statements for further information about amounts included in this line item for the three months ended April 30, 2019.

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.


7



OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Comprehensive Income
(in thousands of dollars)

 
(unaudited)
 
For the Three Months Ended April 30,
 
2020
 
2019
 
 
 
 
Net Income Attributable to Oil-Dri
$
4,648

 
$
5,619

 
 
 
 
Other Comprehensive Income:
 
 
 
Pension and postretirement benefits (net of tax)
126

 
146

Cumulative translation adjustment
(132
)
 
29

Other Comprehensive Income
(6
)
 
175

Total Comprehensive Income
$
4,642

 
$
5,794



The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.


8



OIL-DRI CORPORATION OF AMERICA
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
 
For the Nine Months Ended April 30
 
(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 (Loss)


 


 

 

 
8,812

 

 

 
(35
)
 
8,777

Other Comprehensive Income


 


 

 

 

 

 
430

 

 
430

Dividends Declared


 


 

 

 
(5,029
)
 

 

 

 
(5,029
)
Purchases of Treasury Stock


 
(4,545
)
 

 

 

 
(141
)
 

 

 
(141
)
Net issuance of stock under long-term incentive plans
297,600

 
(7,737
)
 
29

 
420

 

 
(450
)
 

 

 
(1
)
Amortization of Restricted Stock


 


 

 
1,594

 

 

 

 

 
1,594

Balance, April 30, 2019
10,853,428

 
(3,251,115
)
 
$
1,085

 
$
40,487

 
$
162,718

 
$
(56,537
)
 
$
(10,185
)
 
$
(53
)
 
$
137,515

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)

 

 

 

 
13,014

 

 

 
(155
)
 
12,859

Other Comprehensive Income

 

 

 

 

 

 
5,444

 

 
5,444

Dividends Declared

 

 

 

 
(5,266
)
 

 

 

 
(5,266
)
Purchases of Treasury Stock

 
(143,391
)
 

 

 

 
(4,620
)
 

 

 
(4,620
)
Net issuance of stock under long-term incentive plans
22,477

 
(4,950
)
 
2

 
158

 

 
(159
)
 

 

 
1

Amortization of Restricted Stock

 

 

 
2,549

 

 

 

 

 
2,549

Contributions from noncontrolling interests

 

 

 
142

 

 

 

 

 
142

Balance, April 30, 2020
10,883,155

 
(3,399,629
)
 
$
1,088

 
$
44,149

 
$
172,504

 
$
(61,322
)
 
$
(9,595
)
 
$
(169
)
 
$
146,655

 
For the Three Months Ended April 30
 
(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, January 31, 2019
10,812,928

 
(3,249,728
)
 
$
1,081

 
$
39,730

 
$
158,788

 
$
(56,480
)
 
$
(10,360
)
 
$
5

 
$
132,764

Net Income (Loss)


 


 

 

 
5,619

 

 

 
(58
)
 
5,561

Other Comprehensive Income


 


 

 

 

 

 
175

 

 
175

Dividends Declared


 


 

 

 
(1,689
)
 

 

 

 
(1,689
)
Purchases of Treasury Stock


 

 

 

 

 
(6
)
 

 

 
(6
)
Net issuance of stock under long-term incentive plans
40,500

 
(1,387
)
 
4

 
47

 

 
(51
)
 

 

 

Amortization of Restricted Stock


 


 

 
710

 

 

 

 

 
710

Balance, April 30, 2019
10,853,428

 
(3,251,115
)
 
$
1,085

 
$
40,487

 
$
162,718

 
$
(56,537
)
 
$
(10,185
)
 
$
(53
)
 
$
137,515

Balance, January 31, 2020
10,881,155

 
(3,269,059
)
 
$
1,088

 
$
43,149

 
$
169,590

 
$
(57,138
)
 
$
(9,589
)
 
$
(171
)
 
$
146,929

Net Income (Loss)

 

 

 

 
4,648

 

 

 
2

 
4,650

Other Comprehensive Income

 

 

 

 

 

 
(6
)
 

 
(6
)
Dividends Declared

 

 

 

 
(1,734
)
 

 

 

 
(1,734
)
Purchases of Treasury Stock

 
(127,770
)
 

 

 

 
(4,097
)
 

 

 
(4,097
)
Net issuance of stock under long-term incentive plans
2,000

 
(2,800
)
 

 
88

 

 
(87
)
 

 

 
1

Amortization of Restricted Stock

 

 

 
770

 

 

 

 

 
770

Contributions from noncontrolling interests (1)

 

 

 
142

 

 

 

 

 
142

Balance, April 30, 2020
10,883,155

 
(3,399,629
)
 
$
1,088

 
$
44,149

 
$
172,504

 
$
(61,322
)
 
$
(9,595
)
 
$
(169
)
 
$
146,655

(1) On April 1, 2020 we increased our interest in one of our non-wholly owned subsidiaries from 52.0% to 78.4% for approximately $724,000 when that subsidiary issued shares through a capital call. Certain other noncontrolling interest holders also purchased shares but to a lesser extent, thereby diluting their collective ownership from 48.0% to 21.6%.

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

9



Condensed Consolidated Statements of Cash Flows
(in thousands)
 
(unaudited)
 
For the Nine Months Ended April 30,
CASH FLOWS FROM OPERATING ACTIVITIES
2020
 
2019
Net Income
$
12,859

 
$
8,777

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
10,399

 
9,849

Amortization of investment net discount

 
(10
)
Stock-based compensation
2,549

 
1,590

Deferred income taxes
1,367

 
277

Provision for bad debts and cash discounts
704

 
(151
)
Loss on the sale of fixed assets
102

 
4

Curtailment gain on SERP Plan
(1,296
)
 

(Increase) Decrease in assets:
 

 
 

Accounts receivable
(7,296
)
 
(2,185
)
Inventories
(72
)
 
(4,248
)
Prepaid expenses
120

 
(201
)
Other assets
816

 
(564
)
Increase (Decrease) in liabilities:
 

 
 

Accounts payable
3,859

 
2,873

Accrued expenses
4,612

 
(1,762
)
Deferred compensation
129

 
(421
)
Pension and postretirement benefits
(5,482
)
 
1,287

Other liabilities
(1,101
)
 
249

Total Adjustments
9,410

 
6,587

Net Cash Provided by Operating Activities
22,269

 
15,364

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Capital expenditures
(10,870
)
 
(10,162
)
Proceeds from sale of property, plant and equipment
112

 

Purchases of short-term investments

 
(4,678
)
Dispositions of short-term investments

 
11,082

Net Cash Used in Investing Activities
(10,758
)
 
(3,758
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Principal payments on notes payable
(3,082
)
 
(3,083
)
Dividends paid
(5,292
)
 
(4,967
)
Purchase of treasury stock
(4,620
)
 
(141
)
Contributions from noncontrolling interests
142

 

Net Cash Used in Financing Activities
(12,852
)
 
(8,191
)
Effect of exchange rate changes on Cash and Cash Equivalents
27

 
52

Net (Decrease) Increase in Cash and Cash Equivalents
(1,314
)
 
3,467

Cash and Cash Equivalents, Beginning of Period
21,862

 
12,757

Cash and Cash Equivalents, End of Period
$
20,548

 
$
16,224


10




OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Cash Flows - Continued
(in thousands)

 
(unaudited)
 
For the Nine Months Ended April 30,
 
2020
 
2019
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Capital expenditures accrued, but not paid
$
784

 
$
468

Cash dividends declared and accrued, but not paid
$
1,735

 
$
1,689



The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.



11



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 nine months ended April 30, 2020 are not necessarily an indication of the results that may be expected for the fiscal year ending July 31, 2020.

In March 2020, the World Health Organization declared the recent novel coronavirus outbreak ("the coronavirus" or "COVID-19") a pandemic. Despite the adverse effects of COVID-19 on the overall economy, we have not experienced a significant decline in customer orders and sales in the third quarter of fiscal year 2020. However, the effects of COVID-19 are unprecedented, and therefore we are unable to ascertain the effects on our sales and net earnings for the balance of fiscal year 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.

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.


12



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.

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 $362,000 and $259,000 as of April 30, 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 nine months ended April 30, 2020 that was included in the liability for advance payments at the beginning of the period was $174,000.

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

13



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.

Income Taxes
On March 27, 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into U.S. law. The CARES Act provides for, among other things, deferral of the employer portion of social security taxes incurred through the end of calendar 2020. As permitted by the CARES Act, we deferred approximately $130,000 in payroll taxes during its quarter ended April 30, 2020 and expect to defer the payment of payroll taxes each quarter for the remainder of 2020 to be paid equally in the fourth quarters of 2021 and 2022 representing approximately $2,000,000 in payroll taxes.

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 March 2020, the FASB issued guidance under ASC 848, Reference Rate Reform. This guidance provides optional expedients and exceptions to account for debt, leases, contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The guidance is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating the potential effects of the adoption of this guidance on our Consolidated Financial Statements.
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 2023. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements.

There have been no other accounting pronouncements issued but not yet adopted by us which are expected to have a material impact on our Consolidated Financial Statements.


14



3. INVENTORIES

The composition of inventories is as follows (in thousands):
 
April 30,
2020
 
July 31,
2019
Finished goods
$
14,250

 
$
13,957

Packaging
5,576

 
5,681

Other
4,270

 
4,525

Total Inventories
$
24,096

 
$
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 April 30, 2020 and July 31, 2019 were $1,350,000 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 $103,000 and $26,000 cash equivalents as of April 30, 2020 and July 31, 2019, respectively, 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 April 30, 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 $3,195,000 and $6,357,000 as of April 30, 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.


15



5. GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets, other than goodwill, include trademarks, patents, customer lists and product registrations. Intangible amortization expense was $184,000 and $209,000 in the third quarter of fiscal years 2020 and 2019, respectively. Intangible amortization expense was $600,000 and $628,000 in the first nine months of fiscal years 2020 and 2019. Estimated intangible amortization for the remainder of fiscal year 2020 is $183,000. Estimated intangible amortization for the next five fiscal years is as follows (in thousands):
2021
$
547

2022
$
397

2023
$
202

2024
$
69

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. Although we have not identified any trigging events relating to goodwill or our intangibles, the ultimate effects of COVID-19 could change this assessment in the future, as outlined under Item 1A, Risk Factors, discussed below.

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 third 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 April 30, 2020
For the Nine Months Ended April 30, 2020
Operating Lease Cost


Operating lease cost
$
517

$
1,551

Short-term operating lease cost
190

590



Supplemental cash flow information related to leases was as follows (in thousands):


For the Three Months Ended April 30, 2020
For the Nine Months Ended April 30, 2020
Other Information


Cash paid for amounts included in the measurement of lease liabilities:


  Operating cash flows from operating leases
$
430

$
1,285




16



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 Nine Months Ended April 30, 2020
Weighted-average remaining lease term - operating leases
10.6 years
Weighted-average discount rate - operating leases
4.02%

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 April 30, (in thousands):
2020
$
1,912

2021
1,507

2022
983

2023
781

2024
767

Thereafter
6,320

Total
12,270

Less: imputed interest
(2,424
)
Net lease obligation
$
9,846


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




17



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 was recorded in Other Comprehensive Income, net of taxes of $1,592,000 in the second quarter of fiscal year 2020.

The components of net periodic pension and postretirement health benefit costs were as follows:
    
 
Pension Benefits
 
(in thousands)
 
For the Three Months Ended April 30,
 
For the Nine Months Ended April 30,
 
2020
 
2019
 
2020
 
2019
Service cost
$
122

 
$
407

 
$
973

 
$
1,220

Interest cost
444

 
529

 
1,456

 
1,586

Expected return on plan assets
(688
)
 
(702
)
 
(2,102
)
 
(2,107
)
Amortization of:
 
 
 
 
 
 
 
  Prior service costs

 

 

 
1

  Other actuarial loss
167

 
192

 
837

 
578

Net periodic benefit cost
$
45

 
$
426

 
$
1,164

 
$
1,278

 
 
 
 
 
 
 
 
 
Postretirement Health Benefits
 
(in thousands)
 
For the Three Months Ended April 30,
 
For the Nine Months Ended April 30,
 
2020
 
2019
 
2020
 
2019
Service cost
$
29

 
$
27

 
$
87

 
$
79

Interest cost
20

 
24

 
61

 
73

Amortization of:
 
 
 
 
 
 
 
  Prior service costs
(2
)
 
(2
)
 
(5
)
 
(5
)
Net periodic benefit cost
$
47

 
$
49

 
$
143

 
$
147



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.


18



Assumptions used in the previous calculations were as follows:
    
 
Pension Benefits
 
Postretirement Health Benefits
 
For the Three and Nine Months Ended April 30,
 
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 was 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.


19



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 Nine Months Ended April 30,
Product
2020
 
2019
 
2020
 
2019
Cat Litter
$
11,026

 
$
9,943

 
$
116,010

 
$
101,754

Industrial and Sports

 

 
22,906

 
25,509

Agricultural and Horticultural
16,518

 
18,320

 

 

Bleaching Clay and Fluids Purification
37,142

 
38,116

 
1,835

 
1,820

Animal Health and Nutrition
12,946

 
11,446

 

 

Net Sales
$
77,632

 
$
77,825

 
$
140,751

 
$
129,083

 
 
 
 
 
 
 
 
 
Business to Business Products Group
 
Retail and Wholesale Products Group
 
For the Three Months Ended April 30,
Product
2020
 
2019
 
2020
 
2019
Cat Litter
$
3,779

 
$
3,441

 
$
41,040

 
$
34,141

Industrial and Sports

 

 
7,894

 
10,080

Agricultural and Horticultural
6,222

 
5,622

 

 

Bleaching Clay and Fluids Purification
12,537

 
13,662

 
639

 
623

Animal Health and Nutrition
4,145

 
3,316

 

 

Net Sales
$
26,683

 
$
26,041

 
$
49,573

 
$
44,844

 
 
 
 
 
 
 
 


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 April 30, 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
 
 
 
 
 
April 30, 2020
 
July 31, 2019
 
 
 
 
 
(in thousands)
Business to Business Products Group
 
$
69,184

 
$
66,655

Retail and Wholesale Products Group
 
100,636

 
95,593

Unallocated Assets
 
46,161

 
42,979

Total Assets
 
$
215,981

 
$
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. Other income for the third quarter and the first nine months of fiscal year 2019 included net proceeds upon resolution of legal proceedings. The amount received under a confidential agreement resolving such legal proceedings was material to our financial results for the period.


20



 
For the Nine Months Ended April 30,
 
Net Sales
 
Income
 
2020
 
2019
 
2020
 
2019
 
 (in thousands)
Business to Business Products Group
$
77,632

 
$
77,825

 
$
24,046

 
$
21,758

Retail and Wholesale Products Group
140,751

 
129,083

 
15,380

 
6,823

Net Sales
$
218,383

 
$
206,908

 
 
 
 
Corporate Expenses
 
(23,732
)
 
(22,424
)
Income from Operations
 
15,694

 
6,157

Total Other (Expense) Income, Net
 
(262
)
 
4,219

Income before Income Taxes
 
15,432

 
10,376

Income Tax Expense
 
(2,573
)
 
(1,599
)
Net Income
 
12,859

 
8,777

Net Loss Income Attributable to Noncontrolling Interest
 
(155
)
 
(35
)
Net Income Attributable to Oil-Dri
 
$
13,014

 
$
8,812

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended April 30,
 
Net Sales
 
Income
 
2020
 
2019
 
2020
 
2019
 
 (in thousands)
Business to Business Products Group
$
26,683

 
$
26,041

 
$
8,198

 
$
7,454

Retail and Wholesale Products Group
49,573

 
44,844

 
6,412

 
4,161

Net Sales
$
76,256

 
$
70,885

 
 
 
 
Corporate Expenses
 
(8,910
)
 
(9,288
)
Income from Operations
 
5,700

 
2,327

Total Other (Expense) Income, Net
 
(103
)
 
4,377

Income before Income Taxes
 
5,597

 
6,704

Income Tax Expense
 
(947
)
 
(1,143
)
Net Income
 
4,650

 
5,561

Net Income (Loss) Attributable to Noncontrolling Interest
 
2

 
(58
)
Net Income Attributable to Oil-Dri
 
$
4,648

 
$
5,619



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 April 30, 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 2,000 and 41,000 restricted shares of Common Stock granted during the third quarter of fiscal years 2020 and 2019, respectively. Stock-based compensation expense related to non-vested restricted stock was $770,000 and $710,000 for the third quarter of fiscal years 2020 and 2019, respectively, and was $2,549,000 and $1,599,000 for the first nine months of fiscal years 2020 and 2019, respectively.

21




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
23

 
$
33.33

Vested
(41
)
 
$
32.34

Forfeitures
(5
)
 
$
32.33

Non-vested restricted stock outstanding at April 30, 2020
391

 




10. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following table summarizes the changes in accumulated other comprehensive (loss) income by component as of April 30, 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

 
(230
)
 
(230
)
Amounts reclassified from accumulated other comprehensive income, net of tax
634

(a)

 
634

Curtailment on Pension Plan
$
5,040

(b)
$

 
$
5,040

Net current-period other comprehensive income (loss), net of tax
5,674

 
(230
)
 
5,444

Balance as of April 30, 2020
$
(9,217
)
 
$
(378
)
 
$
(9,595
)

(a) Amount is net of tax expense of $199,860. 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 Statements 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 $103,000 and $158,000 for the third quarter of fiscal years 2020 and 2019, respectively, and were $263,000 and $360,000 for the first nine months of fiscal years 2020 and 2019, respectively. Outstanding accounts receivable from that customer, and its subsidiaries, were $22,000 and $10,000 at April 30, 2020 and July 31, 2019, respectively.

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 $119,000 and $140,000 for the third quarter of fiscal years 2020 and 2019, respectively, and were $182,000 and $237,000 for the first nine months of fiscal years 2020 and 2019, respectively. There were no outstanding accounts payable to that vendor as of April 30, 2020 or July 31, 2019.


22



12. SUBSEQUENT EVENTS

Amended Note Agreement
On May 15, 2020 (the “Effective Date”), the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement (the “Amended Note Agreement”) with PGIM, Inc. (“Prudential”) and certain existing noteholders and purchasers affiliated with Prudential named therein. The Amended Note Agreement amends and restates the Note Agreement between the Company, Prudential and certain existing noteholders named therein, dated as of November 12, 2010 (the “Prior Note Agreement”), under which the Company’s 3.96% Series A Senior Notes due August 1, 2020 (the “Series A Notes”) were previously issued in an original aggregate principal amount of $18,500,000.
Pursuant to the Amended Note Agreement, (i) the Series A Notes, in an aggregate principal amount of $3,100,000 as of immediately prior to the Effective Date, continue to remain outstanding under and subject to the terms of the Amended Note Agreement, and (ii) the Company issued $10,000,000 in aggregate principal amount of its 3.95% Series B Senior Notes due May 15, 2030 (the “Series B Notes”). In addition, the Amended Note Agreement provides the Company with the ability to request, from time to time until May 15, 2023 (or such earlier date as provided for in the Amended Note Agreement), that Prudential affiliate(s) purchase, at Prudential’s discretion and on an uncommitted basis, additional senior unsecured notes of the Company (the “Shelf Notes,” and collectively with the Series A Notes and Series B Notes, the “Notes”) in an aggregate principal amount of up to $75,000,000 minus the aggregate principal amount of Notes then outstanding and Shelf Notes that have been accepted for purchase. Interest payable on any Shelf Note agreed to be purchased under the Amended Note Agreement will be at a rate determined by Prudential and will mature not more than fifteen years after the date of original issue of such Shelf Note.
Like the Prior Note Agreement, the Amended Note Agreement is guaranteed, on an unsecured basis, by certain U.S. subsidiaries of the Company, and contains customary covenants, including but not limited to, limitations on the Company’s and certain Company subsidiaries’ ability to incur indebtedness, incur liens, engage in mergers, and sell or transfer assets and stock, as well as financial covenants, including a minimum fixed charges coverage ratio and consolidated debt ratio that remain the same as those contained in the Prior Note Agreement. Upon the occurrence of certain events of default, the Company’s obligations under the Amended Note Agreement may be accelerated. Such events of default include payment defaults, covenant defaults and other enumerated defaults.
License Payment
Subsequent to the quarter end, the Company entered into a confidential agreement. Pursuant to this agreement, the Company granted a non-exclusive, perpetual license to develop, manufacture, use, distribute and sell products produced using formulations under certain of our patents until their expiration in exchange for a one-time payment of $13,000,000 as well as certain limitations on the ability of the parties to bring forth patent infringement claims or challenges relating to certain products. The Company received the one-time payment in the fourth quarter of fiscal year 2020.

Pension

In connection with the freeze of our Pension Plan, as described in Note 7 to the Notes to the unaudited Condensed Consolidated Financial Statements, we offered terminated participants with vested benefits who have not yet begun receipt of benefits under the Plan the opportunity to receive their pension benefits in a single payment (the "Lump Sum Option"). We plan to make payments in the fourth quarter of fiscal year 2020 to those participants who elected the Lump Sum Option by the May 15, 2020 election deadline. We estimate that the settlement expense will be approximately $2,000,000.


23



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 April 30, 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

OVERVIEW

In December 2019, COVID-19 was reported in China and has subsequently spread worldwide. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. COVID-19 has not, to date, had a significant impact on our business. All of our facilities, with the exception of our subsidiary in China, have continued to operate as essential businesses pursuant to the applicable shelter-in-place mandates issued where we operate due to our inclusion in the Critical Manufacturing Sector as defined by the U.S. Department of Homeland Security and where otherwise recognized as an essential business by government authorities. Our top priority has been, and continues to be, the safety and health of our employees, contractors, and customers. We have adhered and continue to adhere to guidance from the U.S. Centers for Disease Control and Prevention and local health and governmental authorities with respect to social distancing and physical separation. Additionally, we have increased cleaning and sanitation programs at each of our facilities. As a result, we have not experienced any shut downs due to workforce absences or illnesses.
As further discussed below, our sales have increased significantly in the third quarter of fiscal year 2020. One of the primary drivers of the increase is that consumers purchased more cat litter and related products in anticipation of potential future shortages and store closures due to COVID-19. We have experienced increases in cat litter sales for both our North American business and our subsidiary in Canada as consumers bought more cat litter and related products via e-commerce during COVID-19 due to shelter-in-place orders. Despite the increase in sales, we have not experienced any significant issues collecting amounts due from customers to date. However, parts of our business have been negatively impacted. Sales of our industrial and sports businesses declined as businesses and sports fields shut down. There has been some lower demand from our customers in our agricultural business. In addition, our fluids purification sales decreased in part due to the closures of restaurants and schools, causing sales to edible oil producers to decrease. To a lesser extent, our inability due to COVID-19 to participate in our customer's plant tests of our fluids purification business has also impeded our sales in recent months. Further, during the second quarter of fiscal year 2020 our operations in China were temporarily closed which disrupted our business but has since opened in the third quarter of fiscal year 2020.
Consolidated gross profit has not been significantly impacted by COVID-19. Our suppliers have either remained open or we have found new suppliers to meet the increase in consumer demand without an impact to pricing. While we have incurred some additional costs from truck loading delays due to the large volume of sales, these costs have not been significant. We have been able to successfully navigate delays in overseas vessel deliveries of our products by increasing our safety stock early in the COVID-19 outbreak as well as finding other providers. We have incurred additional employee compensation costs to meet increased customer demand as well as additional cleaning and sanitation costs in recent months, but these costs did not have a significant impact on our consolidated gross profit. In addition, we have experienced a decrease in travel costs as our employees have not been traveling during the outbreak.

24



We are closely monitoring the continued spread and effects of the outbreak of COVID-19 on all aspects of our business, including how it has and may impact our suppliers and customers. We have not experienced any significant impacts or interruptions and we will continue to closely monitor our inventory levels to mitigate the risk of any potential supply interruptions. The impacts of COVID-19 and related economic conditions on our future results are uncertain at this time. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving rapidly and in ways that are difficult or impossible to anticipate. In addition, because COVID-19 did not materially impact our financial results to date and it remains uncertain whether and how consumers will modify their purchasing habits in response to COVID-19 and continued or reduced government restrictions, these results may not be indicative of the impact that COVID-19 may have on our results for the remainder of fiscal year 2020. See “Part II - Item 1A - Risk Factors” for additional discussion regarding the risks COVID-19 presents our business.
The impacts of COVID-19 to our specific operating segments are discussed below.

NINE MONTHS ENDED APRIL 30, 2020 COMPARED TO
NINE MONTHS ENDED APRIL 30, 2019

CONSOLIDATED RESULTS

Consolidated net sales for the nine months ended April 30, 2020 were $218,383,000, a 6% increase compared to net sales of $206,908,000 for the nine months ended April 30, 2019. Net sales increased for our Retail and Wholesale Products Group but slightly decreased for our Business to Business Products Group. Segment results are discussed further below.
 
Consolidated gross profit for the first nine months of fiscal year 2020 was $60,278,000, or 28% of net sales, compared to $48,248,000, or 23% of net sales, for the first nine months of fiscal year 2019. Lower freight and natural gas costs drove the increase in gross profit. Freight costs per manufactured ton declined approximately 20% for the first nine 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 COVID-19 outbreak did not have a significant impact on our freight costs. The cost of natural gas used to operate kilns that dry our clay was approximately 30% lower per manufactured ton in the first nine months of fiscal year 2020 compared to the first nine months of fiscal year 2019. Non-fuel manufacturing costs per manufactured ton were flat compared to the first nine months of the prior fiscal year. In contrast, packaging costs per manufactured ton for the first nine months of fiscal year 2020 were approximately 2% higher compared to the first nine 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. While we incurred additional employee compensation costs to meet increased customer demand as well as cleaning and sanitation costs in recent months due to COVID-19, these costs did not have a significant impact on our consolidated gross profit. In addition, our suppliers have remained open and have been able to meet our increased demand without any price increases.

Total SG&A expenses were $44,584,000 for the first nine months of fiscal year 2020, a 6% increase compared to $42,091,000 for the first nine 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 nine months 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.

Other income of $4,219,000 for the third quarter of fiscal year 2019 included net proceeds upon resolution of legal proceedings. The amounts received under a confidential agreement resolving such legal proceedings was material to our financial results for the period.

Consolidated net income before taxes for the first nine months of fiscal year 2020 was $15,432,000, a 49% increase from net income before taxes of $10,376,000 for the first nine months of fiscal year 2019. Results for the first nine 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.


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The tax expense for the first nine months of fiscal year 2020 was $2,573,000 (an effective tax rate of 16.7%) compared to $1,599,000 for the first nine months of fiscal year 2019 (an effective tax rate of 15.0%). 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 nine months of fiscal year 2020 slightly decreased as compared to the first nine months of fiscal year 2019. Net sales were $77,632,000, a decrease of $193,000, from net sales of $77,825,000 for the first nine months of fiscal year 2019. Net sales of our agricultural and horticultural chemical carrier products decreased approximately 10% for the first nine 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 large customer, which was partially offset by increased sales to an existing customer. Lower demand from our customers in the agricultural, home and garden industries due to the impact of COVID-19 have also contributed to the decrease in net sales. Net sales of our fluids purification products decreased approximately 3% compared to the first nine months of the prior fiscal year. The lower sales are attributable to a plant closing of a biodiesel processing customer and local pricing competition in foreign markets due to unfavorable exchange rates. More recently, the closures of restaurants and schools due to the outbreak of COVID-19 have caused sales to edible oil producers to decrease. In addition, our inability due to COVID-19 to participate in our customer's plant tests of our products has also impeded our sales in recent months. These lower sales were partially offset by higher sales of other products in the Business to Business Group, including an increase of approximately 11% compared to the first nine months of the prior fiscal year for sales of our co-packaged coarse cat litter as consumers purchased more cat litter and related products in anticipation of potential future shortages and store closures. Net sales of our animal health and nutrition products also increased approximately 13% compared to the first nine months of the prior year. Sales growth occurred for our animal feed additives primarily in Latin America, Mexico, Africa, the Middle East 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 COVID-19 in late 2019 and in 2020.

SG&A expenses for the Business to Business Products Group were approximately 10% higher for the first nine months of fiscal year 2020 compared to the same period of the prior year, but remained relatively consistent as a percentage of sales. The increase in SG&A is attributable to 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 nine months of fiscal year 2020 was $24,046,000, an increase of $2,288,000, or 11%, from operating income of $21,758,000 for the first nine 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 nine months of fiscal year 2020 were $140,751,000, an increase of $11,668,000, or 9%, from net sales of $129,083,000 for the first nine months of fiscal year 2019. Sales of cat litter drove the sales increase. Total cat litter net sales were approximately 14% higher compared to the first nine months of the prior fiscal year, with increased sales of both private label and branded litters. Contributing to higher cat litter sales in the first nine months of fiscal year 2020 was higher consumer demand in the last three months as consumers purchased more cat litter and related products in anticipation of potential future shortages and store closures due to COVID-19. 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. Similarly, higher sales of private label coarse litter included incremental sales to customers who added these products in the prior fiscal year. Branded scoopable litter, coarse litter and litter box liners sales were also higher for the nine months of fiscal year 2020 compared to the nine months 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 lower sales of our industrial and sports products compared to the first nine months of fiscal year 2019. Sales of our industrial and sports products decreased 10% or $2,603,000 compared to the first nine months of fiscal year 2019, primarily driven by the impact of businesses and sports fields shutting down due to COVID-19.

SG&A expenses for the Retail and Wholesale Products Group were slightly higher in the first nine months of fiscal year 2020 compared to the first nine months of fiscal year 2019 but are consistent as a percentage of sales.

The Retail and Wholesale Products Group's operating income for the first nine months of fiscal year 2020 was $15,380,000, an increase of $8,557,000 from operating income of $6,823,000 for the first nine months of fiscal year 2019. The improved operating

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income was driven by the higher sales 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 nine months of fiscal year 2020 were $10,986,000, an increase of $978,000, or 10%, compared to net sales of $10,008,000 during the first nine months of fiscal year 2019. Cat litter sales for our Canada subsidiary increased in the first nine months of fiscal year 2020. One of the drivers of this increase was higher consumer demand in the last three months as customers purchased more cat litter and related products in anticipation of potential future shortages and store closures due to the coronavirus. 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 and third quarters of fiscal year 2020 by the recent outbreak of COVID-19. Chinese government restrictions to control the spread of COVID-19 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 nine months of both fiscal years 2020 and 2019.

Our foreign subsidiaries reported a net loss of $200,000 for the first nine months of fiscal year 2020, compared to net income of $343,000 for the first nine months of fiscal year 2019. While our subsidiaries in Canada and Mexico experienced an increase in sales for the third quarter of fiscal year 2020, the lower sales described above for our subsidiary in China, increased SG&A expenses to support increased sales for our subsidiary in Mexico and additional costs to establish operations in Indonesia drove the net loss. In addition, higher materials costs as well as unfavorable exchange rates for our subsidiaries in Canada and the United Kingdom were also drivers for the net loss.

Identifiable assets of our foreign subsidiaries as of April 30, 2020 were $11,286,000, compared to $9,566,000 as of April 30, 2019. The increase was attributed primarily to the addition of our subsidiary in Indonesia, assets related to the expansion of business and increase in sales from our subsidiaries in Canada and Mexico, and new right-of-use lease assets recorded upon the implementation of ASC 842, Leases.


THREE MONTHS ENDED APRIL 30, 2020 COMPARED TO
THREE MONTHS ENDED APRIL 30, 2019

CONSOLIDATED RESULTS

Consolidated net sales for the three months ended April 30, 2020 were $76,256,000, an 8% increase compared to net sales of $70,885,000 for the three months ended April 30, 2019. Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group. Segment results are discussed further below.

Consolidated gross profit for the three months ended April 30, 2020 was $21,385,000, or 28% of net sales, compared to $16,834,000, or 24% of net sales, for the third quarter of fiscal year 2019. Lower freight and natural gas costs drove the increase in gross profit. Freight costs per manufactured ton declined approximately 20% for the third quarter of fiscal year 2020 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 32% lower per manufactured ton for the third quarter of fiscal year 2020 compared to the same period of fiscal year 2019. Non-fuel manufacturing costs per ton produced were slightly higher compared to the third quarter in the prior fiscal year. While we incurred additional employee compensation costs to meet increased customer demand as well as cleaning and sanitation costs in the third quarter of fiscal 2020 due to COVID-19, these costs did not have a significant impact on our consolidated gross profit. Further, our suppliers have either remained open or we have found new suppliers to meet our increased customer demand without any price increases. In addition, packaging costs per manufactured ton were lower compared to the third quarter of the prior fiscal year, driven primarily by the mix of products produced. 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 $15,685,000 for the third quarter of fiscal year 2020, an 8% increase compared to $14,507,000 for the third 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 and other compensation

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and benefit costs. The increased bonus expense was partially offset by lower SG&A expenses for legal proceedings resolved in the third quarter of the prior fiscal year.

Other income of $4,377,000 for the third quarter of fiscal year 2019 included net proceeds upon resolution of legal proceedings. The amounts received under a confidential agreement resolving such legal proceedings was material to our financial results for the period.

Consolidated net income before taxes for the third quarter of fiscal year 2020 was $5,597,000, compared to net income before taxes of $6,704,000 for the third quarter of fiscal year 2019. Results for the third 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 $947,000 for the third quarter of fiscal year 2020, compared to $1,143,000 for the third quarter of fiscal year 2019, which resulted in an effective tax rate of 17% for the third 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 third quarter of fiscal year 2020 were $26,683,000, an increase of $642,000, or 2%, from net sales of $26,041,000 for the third quarter of fiscal year 2019. Net sales of our agricultural and horticultural chemical carrier products increased 11%, due primarily to sales to an existing customer for our traditional granules. The increase in sales to this existing customer has been partially offset by lower demand from our customers in the agricultural, home and garden industries due to the impact of COVID-19 as well as the loss of one of our largest customers. Net sales of our animal health and nutrition products increased 25% in the third quarter of fiscal 2020. Sales increased in almost all of our markets for our animal feed additives, particularly in Latin America, Mexico, Africa, the Middle East and Asia, excluding China. See “Foreign Operations” below for a discussion of sales in China, which was impacted by the spread of the African swine fever in the prior year and the recent outbreak of COVID-19 at the end of 2019 and in 2020. Net sales of our co-packaged coarse cat litter for the third quarter were approximately 10% higher compared to the third quarter of the prior year as consumers purchased more cat litter and related products in anticipation of potential future shortages and store closures. Net sales of our fluids purification products decreased approximately 8% for the third quarter of fiscal year 2020. The lower sales are attributable to a variety of reasons, including a plant closure of a biodiesel processing customer and local pricing competition in foreign markets due to unfavorable exchange rates. The closures of restaurants and schools due to the outbreak of COVID-19 caused sales to edible oil producers to decrease. In addition, our inability due to COVID-19 to participate in our customer's plant tests of our products has also impeded our sales in the third quarter of fiscal 2020.

SG&A expenses for the Business to Business Products Group were approximately 17% higher compared to the third quarter of fiscal year 2019, but are relatively consistent as a percentage of sales. The increase in SG&A expenses relate to higher compensation-related expenses and costs to support the business.

The Business to Business Products Group’s operating income for the third quarter of fiscal year 2020 was $8,198,000, an increase of $744,000, or 10%, from operating income of $7,454,000 in the third 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 third quarter of fiscal year 2020 were $49,573,000, an increase of $4,729,000, or 11%, from net sales of $44,844,000 for the third quarter of fiscal year 2019. Total cat litter net sales increased 20%, or $6,889,000, compared to the third quarter of fiscal year 2019, driven by increased sales of both private label and branded litters. Contributing to the increase in cat litter sales in the third quarter of fiscal year 2020 was higher consumer demand as customers purchased more cat litter and related products in anticipation of potential future shortages and store closures due to COVID-19. In addition, in the third quarter of fiscal year 2020 cat litter sales via e-commerce increased as more consumers purchased their goods on-line due to limitations on their activity as a result of the shelter-in-place orders during the COVID-19 outbreak. 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. Similarly, 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 scoopable litter, coarse litter and litter box liners sales were also higher compared to the third quarter of the prior year. Cat litter sales by our subsidiary in Canada also contributed to the sales increase,

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as discussed in “Foreign Operations” below. Also included in the Retail and Wholesale Products Group's results were lower sales of our industrial and sports products compared to the third quarter of fiscal year 2019. Sales of our industrial and sports products decreased 22%, or $2,186,000, compared to the third quarter of fiscal year 2019, primarily driven by the impact of businesses and sports fields shutting down due to COVID-19.

SG&A expenses for the Retail and Wholesale Products Group were higher in the third quarter of fiscal year 2020 by 41%, or $1,207,000, primarily due to employee compensation costs, advertising and other costs to support the increased sales compared to the third quarter of fiscal year 2019.

For the third quarter of fiscal year 2020, the Retail and Wholesale Products Group reported operating income of $6,412,000, an increase of $2,251,000, compared to operating income of $4,161,000 for the third 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 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 third quarter of fiscal year 2020 were $3,832,000, a 9% increase compared to net sales of $3,526,000 in the third quarter of fiscal year 2019. Cat litter sales for our Canada subsidiary increased in the third quarter of fiscal year 2020. A driver of this increase was higher consumer demand as customers purchased more cat litter and related products in anticipation of potential future shortages and store closures due to the coronavirus. 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 third quarter of fiscal year 2020 by the recent outbreak of COVID-19. Chinese government restrictions to control the spread of COVID-19 disrupted our sales office, limited travel by our salesforce and delayed product shipments. Our foreign subsidiaries' net sales represented approximately 5% of consolidated net sales during the third quarters of both fiscal years 2020 and 2019.

Our foreign subsidiaries reported a net loss of $31,000 for the third quarter of fiscal year 2020 compared to net income of $28,000 for the third quarter of fiscal year