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Item 8. Financial Statements and Supplementary Data

2020-10-13 compared with 2019-10-10 · 193 added, 154 removed, 672 unchanged (34% of the section changed)

5 unchanged sentences

Cash and cash equivalents

Short-term investments

Accounts receivable, less allowance of $1,078 and $644

19 unchanged sentences

Deferred income taxes

Operating lease right-of-use assets

Total Other Assets

7 unchanged sentences

Dividends payable

Operating lease liabilities

Accrued expenses

1 unchanged sentence

Trade promotions and advertising

Real estate tax

Total Current Liabilities

3 unchanged sentences

Pension and postretirement benefits

Long-term operating lease liabilities

Total Noncurrent Liabilities

19 unchanged sentences

Cost of Sales

Other Operating Income (1)

Selling, General and Administrative Expenses (2)

Income from Operations

Other Income (Expense)

Other (Expense) Income

Interest income

2 unchanged sentences

Other, net (3)

Total Other Income (Expense), Net

Total Other (Expense) Income, Net

Income Before Income Taxes

Income Tax Expense

Net Income (Loss) Attributable to Noncontrolling Interest

Net (Loss) Income Attributable to Noncontrolling Interest

Net Income Attributable to Oil-Dri

2 unchanged sentences

Diluted Common

Diluted Class B Common

Average Shares Outstanding

Basic Class B Common

Diluted Common

(1) Prior year amounts have been retrospectively adjusted to conform to the current year presentation of the non-service cost components of net periodic benefit cost required by new guidance under ASC 715, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

See Note 1 of the Notes to the Consolidated Financial Statements for details.

Diluted Basic Common

Diluted Basic Class B Common

(1) See Note 1 of the Notes to the Consolidated Financial Statements for further information about amounts included in this line item.

(2) See Note 9 of the Notes to the Consolidated Financial Statements for further information about amounts included in this line item.

(3) See Notes 2 and 8 of the Notes to the Consolidated Financial Statements for further information about amounts included in this line item.

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

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Net Income Attributable to Oil-Dri

Other Comprehensive (Loss) Income:

Other Comprehensive Income (Loss):

Pension and postretirement benefits (net of tax)

Cumulative translation adjustment

Other Comprehensive (Loss) Income

Other Comprehensive Income (Loss)

Comprehensive Income

8 unchanged sentences

Balance, July 31, 2018

Other comprehensive income

Reclassification upon adoption of accounting standard

Other comprehensive loss

Dividends declared

3 unchanged sentences

Balance, July 31, 2019

Other comprehensive loss

Other comprehensive income

Dividends declared

2 unchanged sentences

Amortization of restricted stock

Contributions from noncontrolling interests (1)

Balance, July 31, 2020

(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 Consolidated Financial Statements.

10 unchanged sentences

Provision for bad debts and cash discounts

Loss on the sale of property, plant and equipment

Life insurance benefits

Loss on the disposals of property, plant and equipment

Curtailment gain on SERP Plan

(Increase) decrease in:

12 unchanged sentences

Proceeds from sale of property, plant and equipment

Acquisition of business

Purchases of short-term investments

Dispositions of short-term investments

Proceeds from life insurance

Net Cash (Used in) Provided by Investing Activities

Net Cash Used in Investing Activities

Cash Flows from Financing Activities

Proceeds from issuance of notes payable

Principal payments on notes payable

1 unchanged sentence

Purchase of treasury stock

Contributions from noncontrolling interests

Net Cash Used in Financing Activities

9 unchanged sentences

Interest payments, net of amounts capitalized

Income tax (refund) payments

Income tax payments (refund)

Noncash investing and financing activities:

14 unchanged sentences

All significant intercompany balances and transactions have been eliminated from the Consolidated Financial Statements.

R ECLASSIFICATION

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements.

These immaterial reclassifications had no effect on the previously reported net income.

M ANAGEMENT U SE OF E STIMATES

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For more information see Critical Accounting Policies and Estimates in Item 7 “ Management's Discussion and Analysis of Financial Condition and Results of Operations.

In March 2020, the World Health Organization declared 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 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 in the future.

C ASH AND C ASH E QUIVALENTS

Cash equivalents are highly liquid investments with maturities of three months or less.

S HORT - TERM I NVESTMENTS

No short-term investments were held as of July 31, 2019 due to the low returns available on these investments.

The table below shows the composition of short-term investments as of July 31, 2018 (in thousands):

Treasury securities

Certificates of deposit

Short-term investments

Short-term investments have maturities of one year or less.

We intend and have the ability to hold these investments to maturity;

therefore, these investments are reported at amortized cost.

T RADE R ECEIVABLES

12 unchanged sentences

We recorded inventory obsolescence reserves of approximately $ 926,000 and $ 704,000 as of July 31, 2020 and 2019 , respectively.

The reserve decreased due to lower levels of discontinued, slow moving and unsaleable finished goods inventory.

Other inventories increased due to the lower obsolescence reserve and increased levels of purchased materials.

The higher obsolescence reserve and lower packaging inventories are attributed to our focus on inventory management and enhanced data available from our ERP system.

Other inventories increased mainly due to higher levels of raw and purchased materials.

T RANSLATION OF F OREIGN C URRENCIES

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Trademarks and patents

Debt issuance costs

Customer list

4 unchanged sentences

Much of our goodwill cannot be specifically assigned to one of our operating segments because of the shared nature of our production facilities;

however, for purposes of our

most recent impairment analysis we estimated the goodwill allocation and assigned $5,415,000 to the Retail and Wholesale Products Group and $3,847,000 to the Business to Business Products Group.

however, for purposes of our most recent impairment analysis we estimated the goodwill allocation and assigned $ 5,489,000 to the Retail and Wholesale Products Group and $ 3,773,000 to the Business to Business Products Group.

We performed our annual impairment testing in the fourth quarter of fiscal years 2020 and 2019 .

We will continue to consider the need to re-perform impairment testing throughout the year when circumstances such as unexpected adverse economic factors, unanticipated technological changes, competitive activities and acts by governments and courts indicate that an asset may become impaired.

There was no impairment required based on our analysis for fiscal years 2020 or 2019 .

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

O VERBURDEN R EMOVAL AND M INING C OSTS

3 unchanged sentences

Stripping costs included in cost of sales were approximately $ 1,722,000 and $ 2,430,000 for fiscal years 2020 and 2019 , respectively.

Stripping costs decreased in fiscal year 2020 due to a decrease in fuel costs and repair costs.

We defer and amortize the pre-production overburden removal costs associated with opening a new mine.

No pre-production overburden removal costs were deferred in the last two fiscal years.

$ 316,000 of pre-production overburden removal costs were deferred in fiscal year 2020.

There were no pre-production overburden removal costs deferred in fiscal year 2019.

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.

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Pre-production development costs on new mines and any prepaid royalties that may be offset against future royalties due upon extraction of the mineral are also capitalized.

No material capitalized pre-production development costs were recorded in fiscal years 2019 and 2018 .

Total pre-production costs, including the overburden removal costs deferred above, that were capitalized in fiscal year 2020 were $ 535,000 .

No material capitalized pre-production development costs were recorded in fiscal year 2019 .

Prepaid royalties included in current prepaid expenses and in non-current other assets on the Consolidated Balance Sheets were approximately $ 1,232,000 and $ 1,184,000 as of July 31, 2020 and 2019 , respectively.

10 unchanged sentences

Interest expense may also be capitalized for assets that require a period of time to get them ready for their intended use.

There was no capitalized interest in fiscal year 2019 and $176,000 in fiscal year and 2018 .

There was no capitalized interest in fiscal years 2020 and 2019 .

Buildings and leasehold improvements

6 unchanged sentences

No impairment was recorded in either fiscal year 2020 or 2019 .

O THER N ONCURRENT L IABILITIES

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.

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 $ 864,000 in payroll taxes during the fiscal year ended July 31, 2020 and expect to defer the payment of payroll taxes each quarter for the remainder of calendar year 2020 to be paid equally in the fourth quarters of calendar years 2021 and 2022 representing approximately $ 2,100,000 in payroll taxes.

T RADE P ROMOTIONS

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F AIR V ALUE OF F INANCIAL I NSTRUMENTS

Non-derivative financial instruments included in the Consolidated Balance Sheets are cash and cash equivalents, short-term investments and notes payable.

Non-derivative financial instruments included in the Consolidated Balance Sheets are cash and cash equivalents and notes payable.

These instruments, except for notes payable, were carried at amounts approximating fair value as of July 31, 2020 and 2019 .

Short-term investments were certificates of deposits and treasury securities.

We intend and have the ability to hold our short-term investments to maturity;

therefore, these investments were reported at amortized cost on the Consolidated Balance Sheets, which approximated fair value.

See Note 4 of the Notes to the Consolidated Financial Statements for additional information regarding the fair value of our financial instruments, including notes payable.

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Shipping and handling costs are included in cost of sales and were approximately $ 39,865,000 and $ 47,717,000 for fiscal years 2020 and 2019 , respectively.

The decrease in fiscal year 2020 relates to the decrease in freight due to lower transportation rates from improved truck availability.

In addition, costs were higher in the first half of the prior fiscal year due to 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.

S ELLING , G ENERAL AND A DMINISTRATIVE E XPENSES

9 unchanged sentences

Changes in the funded status that arise during the period but are not recognized as components of net periodic benefit cost are recognized within other comprehensive income, net of income tax.

In fiscal year 2020 we amended the defined benefit pension plan and the plan is now closed to new entrants.

See Note 8 of the Notes to the Consolidated Financial Statements for additional information.

13 unchanged sentences

Where unremitted foreign earnings are indefinitely reinvested, no provision for federal or state tax expense is recorded.

When circumstances change and we determine that some or all of the undistributed earnings will be remitted in the foreseeable future, a corresponding expense is accrued in the current period.

When circumstances change and we determine that some or all of the undistributed

earnings will be remitted in the foreseeable future, a corresponding expense is accrued in the current period.

See Note 5 of the Notes to the Consolidated Financial Statements for additional information about income taxes.

O THER O PERATING I NCOME

Included within Other Operating Income is revenue earned from a confidential license 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 and agreed to certain limitations on the ability of the parties to bring forth patent infringement claims or challenges relating to certain products in exchange for a one-time payment of $ 13,000,000 .

This revenue is recognized at a point in time as it is considered functional intellectual property.

N EW A CCOUNTING P RONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued guidance under ASC 606, Revenue from Contracts with Customers , and subsequently issued several amendments to further clarify the principles for recognizing revenue.

This guidance establishes a single comprehensive revenue recognition model for all contracts with customers and will supersede most existing revenue guidance.

The core principle of ASC 606 is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange.

Oil-Dri adopted the new guidance on a modified retrospective basis effective August 1, 2018.

We applied the practical expedient available under ASC 606 to disregard determining significant financing components if the good is transferred and payment is received within one year.

We also adopted the policy election to exclude from the transaction price all amounts collected from customers for sales and other taxes.

There was no material impact on our Consolidated Financial Statements from the adoption of this guidance.

Results for periods beginning on or after August 1, 2018 are recognized and presented in accordance with ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the prior account guidance under ASC 605, Revenue Recognition .

In January 2016, the FASB issued guidance under ASC 825, Recognition and Measurement of Financial Assets and Financial Liabilities.

This guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments.

This guidance was effective for our first quarter of fiscal year 2019.

The provisions relevant to us relate to fair value disclosures for our notes payable, which are measured at amortized cost on the balance sheet.

These provisions require the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, as well as eliminate the requirement to disclose the method and significant assumptions used to estimate the fair value in such disclosure.

This guidance impacted our disclosures only on a prospective basis and did not have a material impact on our Consolidated Financial Statements.

In March 2017, the FASB issued guidance under ASC 715, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires presenting the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period.

This standard also requires that other components of the net periodic benefit cost be presented separately from the line items that includes service costs and outside of any subtotal of operating income, if one is presented, on a retrospective basis.

We adopted this new guidance in the first quarter of fiscal 2019 and accordingly recorded the non-service cost components of net periodic benefit cost in Other Income (Expense) in the line item Other, net on the Consolidated Statements of Operations.

As such, the adoption did not have a material impact on our Consolidated Financial Statements.

In July 2019 the FASB updated the ASC to reflect the SEC's final rule to simplify certain disclosure requirements, Disclosure Update and Simplification, which removed or modified certain disclosure requirements that require substantially similar information in other SEC disclosure requirements or under U.S.

GAAP, as well as information that has become outdated over time.

The amendments generally eliminate disclosures, but also include one expanded disclosure related to interim-period changes in stockholders' equity, which we complied with accordingly in our Form 10-Q for the third quarter of fiscal year 2019.

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 Consolidated Balance Sheet.

There was no material impact to any of our other consolidated financial statements.

Recently Issued Accounting Standards

In February 2016, the FASB issued guidance under ASC 842, Leases , which provides that, for leases with a term greater than 12 months, a lessee must recognize in the statement of financial position both a liability to make lease payments and a ROU asset.

Other requirements describe expense recognition, as well as financial statement presentation and disclosure.

In July 2018, the FASB issued further guidance which provided alternative transition methods.

The Company will adopt this guidance for our first quarter of fiscal year 2020 on a modified retrospective transition approach, and will not restate prior comparative periods presented in our financial statements.

We expect to elect certain practical expedients, including the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs.

We have substantially completed our plan for the adoption of this new standard, including implementing software to meet the reporting and disclosure requirements of this standard.

We anticipate the adoption of this new standard will result in the recognition of additional ROU assets of approximately $9,222,000 and liabilities of approximately $10,784,000 with the difference largely due to deferred rent that will be reclassified.

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 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.

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The amount received under a confidential agreement resolving these legal proceedings was material to our financial results for the period.

Other operating income in fiscal year 2020 relates to revenue earned from a license arrangement of our intellectual property.

See Note 1 of the Notes to the Consolidated Financial Statements.

(in thousands)

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Retail and Wholesale Products

Other Operating Income

Corporate Expenses

Income from Operations

Total Other Income (Expense), Net

Total Other (Expense) Income, Net

Income Before Income Taxes

Income Tax Expense

Net Income (Loss) Attributable to Noncontrolling Interest

Net (Loss) Income Attributable to Noncontrolling Interest

Net Income Attributable to Oil-Dri

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Foreign subsidiaries

Included within identifiable assets for our foreign subsidiaries is cash held at foreign banks of $ 3,038,000 as of July 31, 2020.

Sales to Walmart, our largest customer, are included in our Retail and Wholesale Products Group.

5 unchanged sentences

The composition of notes payable is as follows as of July 31 (in thousands):

Senior notes payable in annual principal installments on August 1:

Senior notes payable in annual installments on August 1.

Final payment made in fiscal year 2020.

Interest was payable semi-annually at an annual rate of 3.96%.

Amended and Restated Note Purchase and Private Shelf Agreement.

Annual principal installments on May 15:

$1,000 in each fiscal year 2021 through 2030.

Interest is payable semiannually at an annual rate of 3.96%

Interest is payable semi-annually at an annual rate of 3.95%

Less current maturities of notes payable

2 unchanged sentences

We issued senior promissory notes in November 2010 for $ 18,500,000 .

The note agreement provides that the proceeds could be used to fund future principal payments on debt, acquisitions, stock repurchases, capital expenditures and working capital purposes.

The note agreement contains restrictions against certain activities, among other things and under various conditions, as well as financial covenants, including a minimum fixed charges coverage ratio and a minimum consolidated debt ratio.

The note agreement provided that the proceeds could be used to fund future principal payments on debt, acquisitions, stock repurchases, capital expenditures and working capital purposes.

The note agreement contained restrictions against certain activities, among other things and under various conditions, as well as financial covenants, including a minimum fixed charges coverage ratio and a minimum consolidated debt ratio.

As further described below, these notes were amended in May 2020 and paid in full in July 2020.

On May 15, 2020 (the “Effective Date”), we 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 Oil-Dri, Prudential and certain existing noteholders named therein, dated as of November 12, 2010 (the “Prior Note Agreement”), under which our 3.96% Series A Senior Notes (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, were paid in full in July 2020 and (ii) we issued $ 10,000,000 in aggregate principal amount of our 3.95% Series B Senior Notes due May 15, 2030 (the “Series B Notes”).

In addition, the Amended Note Agreement provided us 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 Oil-Dri (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 Oil-Dri, and contains customary covenants, including but not limited to, limitations on our and certain of our 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, our obligations under the Amended Note Agreement may be accelerated.

Such events of default include payment defaults, covenant defaults and other enumerated defaults.

We have a credit agreement with BMO Harris that expires on January 31, 2024 .

The agreement provides for a $45,000,000 unsecured revolving credit agreement, including a maximum of $10,000,000 for foreign letters of credit.

Under the agreement we may select a variable rate based on either BMO Harris’ prime rate or a LIBOR-based rate, plus a margin which varies depending on our debt to earnings ratio, or a fixed rate as agreed between us and BMO Harris.

The agreement provides for a $ 45,000,000 unsecured revolving credit agreement, including a maximum of $ 10,000,000 for letters of credit.

Under the credit agreement, we

may select a variable rate based on either BMO Harris’ prime rate or a LIBOR-based rate, plus a margin which varies depending on our debt to earnings ratio, or a fixed rate as agreed between us and BMO Harris.

As of July 31, 2020 , the variable rates would have been 3.50 % for the BMO Harris’ prime-based rate or 1.50 % for the LIBOR-based rate.

We borrowed $6,000,000 at a weighted average interest rate of 2.96% under the credit agreement during the third quarter of fiscal year 2018.

The amount borrowed was repaid in the fourth quarter of fiscal year 2018.

The proceeds from the borrowing were used to make a voluntary contribution to our pension plan.

As of July 31, 2020 and 2019 , there were no outstanding borrowings under this credit agreement.

however, there was a total of $5,973,000 allocated for guarantees required by one of our insurance policies and state environmental regulations.

However, we had outstanding letters of credit of $1,284,000 as of July 31, 2020 under this agreement.

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.

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Categories in the hierarchy are as follows:

Financial assets and liabilities whose values are based on quoted market prices in active markets for identical assets or liabilities.

Financial assets and liabilities whose values are based on:

Quoted prices for similar assets or liabilities in active markets.

Quoted prices for identical or similar assets or liabilities in markets that are not active.

Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Financial assets and liabilities whose values are based on valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

These inputs may reflect estimates of the assumptions that market participants would use in valuing the financial assets and liabilities.

Quoted market prices in active markets for identical assets or liabilities.

Observable market-based inputs for similar assets or liabilities or valuation models whose inputs are observable,

directly or indirectly.

Unobservable inputs.

Cash equivalents are classified as Level 1 of the fair value hierarchy because they were valued using quoted market prices in active markets.

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These cash instruments are primarily money market funds and are included in cash and cash equivalents on the Consolidated Balance Sheets.

Short-term investments on the Consolidated Balance Sheets include certificates of deposit and treasury securities.

We had no short-term investments as of July 31, 2019 due to the low returns available on these investments.

Short-term investment held as of July 31, 2018 were reported at amortized cost on the Consolidated Balance Sheets, which approximated fair value, given our intent and ability to hold them until maturity.

Accounts receivable and accounts payable balances on the Consolidated Balance Sheets approximate their fair values as of July 31, 2020 and 2019 due to the short maturity and nature of those balances.

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The estimated fair value of notes payable was approximately $ 11,631,000 as of July 31, 2020 and $ 6,357,000 as of July 31, 2019 .

Our debt does not trade on a daily basis in an active market, therefore the fair value of notes payable was estimated based on market observable borrowing rates currently available for debt with similar terms and average maturities and is classified as Level 2.

The fair value was estimated using the exit price notion of fair value and is classified as Level 2.

The increase in fair value is attributable to the Amended and Restated Note Purchase and Private Shelf Agreement entered into in May 2020.

See Note 3 of the Notes to the Consolidated Financial Statements for further information about the new debt.

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 1 of the Notes to Consolidated Financial Statements for further information about goodwill and other intangible assets.

Concentration of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash, short-term investments and accounts receivable.

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable.

Our cash is held in banks which are covered by the Federal Deposit Insurance Corporation;

however, our cash balances are in excess of the maximum amount that is insured.

Our short-term investments are placed in government-backed instruments and with other high quality institutions.

Concentrations of credit risk with respect to accounts receivable are subject to the financial condition of certain major customers, principally the customer referred to in Note 2 of the Notes to the Consolidated Financial Statements.

We generally do not require collateral to secure customer receivables.

however, we require letters of credit for some foreign customers or we purchase insurance to reduce our risk.

NOTE 5 – INCOME TAXES

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Total Income Tax Expense

On December 22, 2017, the U.S.

government enacted the 2017 Tax Act.

The 2017 Tax Act included a number of changes to existing U.S.

tax laws that impact us, most notably a reduction of the U.S.

corporate income tax rate and acceleration of depreciation for certain assets placed in service after September 27, 2017, as well as prospective changes, including repeal of the domestic manufacturing deduction and capitalization of research and development expenditures.

The 2017 Tax Act reduced the U.S.

federal corporate tax rate from 35.0% to 21.0% for all corporations effective January 1, 2018.

For fiscal year companies, the change in law requires the application of a blended rate for each quarter of the fiscal year of enactment.

We applied a blended tax rate of 26.9% for fiscal year 2018.

For fiscal year 2019 and thereafter, the applicable statutory rate is 21.0% .

In addition, during fiscal year 2018 the change in the U.S.

corporate income tax rate caused us to adjust our U.S.

net deferred tax assets to the reduced U.S.

federal corporate tax rate and to record a provisional charge as a discrete item in the provision for income taxes.

This transitional impact resulted in a provisional net charge of approximately $3,996,000 in fiscal year 2018.

Our analysis of the 2017 Tax Act impact was finalized in fiscal 2019 and there were no adjustments to these provisional amounts.

Principal reasons for variations between the statutory federal rate and the effective rates by fiscal year were as follows:

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Prior year income taxes

Change in federal tax rate applied to deferred tax assets and liabilities

Deduction for domestic production activities

Effective income tax rate

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Postretirement benefits

Lease right of use assets

Lease liabilities

Allowance for doubtful accounts

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Total deferred taxes

The adjustment to reflect the reduced U.S.

federal corporate tax rate under the 2017 Tax Act impacted the deferred tax amounts for fiscal 2018 in the table above, particularly deferred taxes for depreciation, deferred compensation and postretirement benefits.

Deferred taxes for postretirement benefits were also affected by a voluntary contribution that significantly reduced our pension liability.

See Note 8 of the Notes to the Consolidated Financial Statements for further information about our postretirement benefits.

Deferred taxes for postretirement benefits were also affected by employer contributions and the freeze of our pension plan that significantly reduced our pension liability.

See Note 8 of the Notes to the Consolidated Financial Statements for further information about postretirement benefits.

Deferred taxes for lease right of use assets and liabilities were recorded upon the implementation of ASC 842, Leases , on August 1, 2019.

See Notes 1 and 11 of the Notes to the Consolidated Financial Statements for further information about leases.

Deferred taxes for accrued expenses reflected a higher accrual for the annual discretionary bonus.

We recorded a valuation allowance of $ 923,000 and $ 732,000 as of July 31, 2020 and July 31, 2019 , respectively, for the amount of the deferred tax benefit related to our foreign net operating loss carryforwards since we believe it is unlikely we will realize the benefit of these tax attributes in the future.

As of July 31, 2020 , we have total net operating loss carryforwards from state jurisdictions of approximately $ 2,000,000 .

The carryforward expiration dates vary by state.

No valuation allowance has been established for these carryforwards since we expect our future profitability will allow us to fully realize these tax benefits.

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Balance as of July 31, 2018

Other comprehensive income (loss) before reclassifications, net of tax

Amounts reclassified from accumulated other comprehensive income, net of tax

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

Reclassification to retained earnings upon adoption of accounting standard

Balance as of July 31, 2018

Other comprehensive (loss) income before reclassifications, net of tax

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Balance as of July 31, 2019

Other comprehensive loss before reclassifications, net of tax

Amounts reclassified from accumulated other comprehensive income, net of tax

Curtailment/Settlement on Pension Plan

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

Balance as of July 31, 2020

Amounts are net of taxes of $ 1,359,000 and $ 1,607,000 in fiscal years 2020 and 2019 , respectively, and are included in Other Comprehensive Loss.

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Amounts are included in the components of net periodic benefit cost for the pension and postretirement health plans.

Amount is net of taxes of $ 2,075,000 in fiscal year 2020 .

Amounts are included in the components of net periodic benefit cost for the pension and postretirement health plans.

See Note 8 of the Notes to the Consolidated Financial Statements for further information about pension and postretirement health benefits.

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NOTE 8 – PENSION AND OTHER POSTRETIREMENT BENEFITS

The Oil-Dri Corporation of American Pension Plan (“Pension Plan”) is a defined benefit pension plan for eligible salaried and hourly employees.

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.

During the third quarter of fiscal 2020 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 made 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.

The settlement expense was $ 2,012,000 and was recorded net of tax in Other, net in the Consolidated Statements of Operation.

A postretirement health benefits plan is also provided to domestic salaried employees who meet specific age, participation and length of service requirements at the time of retirement.

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Our contributions to this plan, and to similar plans maintained by our foreign subsidiaries, were $ 2,035,000 and $ 764,000 for fiscal years 2020 and 2019 , respectively.

During fiscal year 2020, we changed the percentage of employer matching contributions from 50 % of every employee dollar contributed up to 4 % of earnings to 100 % of every employee dollar contributed up to 6 % of earnings.

Obligations and Funded Status

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Interest cost

Actuarial loss (gain)

Actuarial loss

Benefits paid

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Other actuarial loss

Settlement cost

Net periodic benefit cost

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Postretirement Health Benefits

Net actuarial loss (gain)

Net actuarial loss

Amortization of:

Prior service (cost) income

Amortization of actuarial (loss) gain

Total recognized in other comprehensive loss (income)

Amortization of actuarial loss

Curtailment/Settlement

Total recognized in other comprehensive (income) loss

The following table shows amortization amounts, net of tax, expected to be recognized in fiscal year 2021 in accumulated other comprehensive income (in thousands):

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We have funded the Pension Plan 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.

During fiscal 2018, we made an $11,500,000 voluntary contribution in excess of the minimum required amount.

This contribution was made within eight and one-half months after the end of our fiscal year 2017 and therefore was deductible for our 2017 tax year.

We received a greater tax benefit for this deduction in our 2017 tax year compared to the the benefit we would have received if the contribution was attributed to our 2018 tax year.

See Note 5 of the Notes to the Consolidated Financial Statements for further discussion of the tax rates and other changes enacted by the 2017 Tax Act.

This voluntary contribution also improved our funded status and contributed to a lower net periodic benefit expense.

During fiscal 2020, we made two voluntary contributions for $ 5,000,000 and $ 3,000,000 in excess of the minimum required amount.

The first contribution was made within eight and one-half months after the end of our fiscal year 2019 and therefore was deductible for our 2019 tax year.

The voluntary contributions also improved our funded status and contributed to a lower net periodic benefit expense.

We do not expect to make a contribution to the Pension Plan in fiscal year 2021 .

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Cash and accrued income

In anticipation of the Lump Sum Option payments we adjusted our asset allocation in fiscal year 2020 and plan to revert back to our historical asset allocations in fiscal year 2021.

The following table sets forth by level, within the fair value hierarchy, the Pension Plan's assets carried at fair value (in thousands):

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Government sponsored entities (g)

Multi-strategy bond fund (h)

Money market fund (i)

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We fund these benefits when payments are made, and the timing and amount of the payments are determined according to the plans' provisions and, for certain plans, according to individual employee agreements.

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:

Our 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 is unfunded and benefits will be funded when payments are made.

The SERP liability is actuarially determined at the end of each fiscal year using assumptions similar to those used for the Pension Plan, see Note 8 of the Notes to the Consolidated Financial Statements.

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We recorded expense related to the SERP of $ 34,000 and $ 539,000 in fiscal years 2020 and 2019 , respectively.

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 curtailment which required a remeasurement of the SERP's obligation.

The remeasurement resulted in a decrease in the SERP liability and recognition of a curtailment gain of approximately $ 1,296,000 , which has been recorded in SG&A.

Subsequent to the curtailment, the SERP was terminated effective June 30, 2020.

Any payments that would otherwise have been payable pursuant to the SERP plan on or after June 30, 2021, will instead be paid in the form of one lump sum, with such lump sum payable no earlier than June 30, 2021 and no later than June 8, 2022.

NOTE 10 – OTHER CONTINGENCIES

We are party to various legal actions from time to time that are ordinary in nature and incidental to the operation of our business.

We are party to various legal actions from time to time that are ordinary in nature and incidental to the operation of our business, including ongoing litigation.

While it is not possible at this time to determine with certainty the ultimate outcome of these or other lawsuits, we believe that none of the pending proceedings will have a material adverse effect on our business, financial condition, results of operations or cash flows.

See Item 3 “ Legal Proceedings ” for more information about specific legal matters related to our patents.

In June 2020, the Company received notice from a former service provider alleging a breach of contract regarding the payment of a contingency fee.

Such party subsequently, in July 2020, filed a lawsuit seeking to require the Company to participate in binding mediation regarding this matter.

Although we believe this claim to be without merit, as of July 31, 2020, we have determined a reasonable estimate of this liability within a range, with no amount within that range being a better estimate than any other amount, and have therefore recorded that estimate within Other accrued expenses.

We believe that any loss related to this matter is unlikely to be material.

However, the outcome of this legal matter is subject to significant uncertainties.

The ability to predict the ultimate outcome of this legal matter involves judgments, estimates and inherent uncertainties.

The actual outcome could differ materially from management’s estimates.

NOTE 11 – LEASES

Our mining operations are conducted on property we lease or own.

These leases generally provide us with the right to mine as long as we continue to pay a minimum monthly rental, which is typically applied against the per ton royalty when the property is mined.

We also lease certain offices and production facilities.

In addition, we may lease vehicles, railcars, mining property and equipment, warehouse space, data processing equipment, and office equipment.

In most cases, we expect that, in the normal course of business, leases will be renewed or replaced by other leases.

The following is a schedule by fiscal year of future minimum rent requirements under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of July 31, 2019 (in thousands):

The following schedule shows the composition of total rent expense by fiscal year for all operating leases, including those with terms of one month or less which were not renewed (in thousands):

Vehicles and Railcars

Office facilities

Warehouse facilities

Mining properties:

Contingent (1)

(1) Contingent mining royalty payments are determined based on the tons of raw clay mined.

We have operating leases primarily for real estate properties, including corporate headquarters, customer service and sales offices, manufacturing and packaging facilities, warehouses, and research and development facilities, as well as for rail tracks, railcars and office equipment.

Certain of our leases for a shared warehouse and office facility, rail track and railcars have options to extend which we are reasonably certain we will exercise and, accordingly, have been considered in the lease term used to recognize our ROU assets and lease liabilities.

To determine the present value of the lease liability, we use an incremental borrowing rate, which is defined as the rate of interest that the Company would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments.

Further information about our accounting policy for leases is included in Note 1 of the Notes to the Consolidated Financial Statements.

We have no material finance leases, and variable costs for operating leases are immaterial.

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 Twelve Months Ended July 31, 2020

Operating Lease Cost

Operating lease cost

Short-term operating lease cost

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

For the Twelve Months Ended July 31, 2020

Other Information

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

Operating cash flows from operating leases

Operating lease ROU assets and operating lease liabilities are separately presented on the 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 Twelve Months Ended July 31, 2020

Weighted-average remaining lease term - operating leases

Weighted-average discount rate - operating leases

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, 2020 (in thousands):

imputed interest

Net lease obligation

Rent expense for the fiscal year ended July 31, 2019 was $ 2,873,000 .

NOTE 12 – SUBSEQUENT EVENTS

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NOTE 13 – RELATED PARTIES

One member of our Board of Directors is currently the President and Chief Executive Officer of a customer of ours.

One member of our Board of Directors retired from the role of President and Chief Executive Officer of a customer of ours on September 28, 2019 and is currently party to a post-employment consulting agreement with the customer.

Total net sales to that customer, including sales to subsidiaries of that customer, were $ 388,000 and $ 462,000 for fiscal years 2020 and 2019 , respectively.

There were $10,000 and $14,000 outstanding accounts receivable due from that customer, and its subsidiaries, as of July 31, 2019 and July 31, 2018 , respectively.

There were no outstanding accounts receivable due from that customer, and its subsidiaries, as of July 31, 2020 and $ 10,000 outstanding as of July 31, 2019 .

One member of our Board of Directors is currently the President and Chief Executive Officer of a vendor of ours.

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Opinions on the financial statements and internal control over financial reporting

We have audited the accompanying consolidated balance sheets of Oil-Dri Corporation of America (a Delaware corporation) and subsidiaries (the “Company”) as of July 31, 2019 and 2018, and the related consolidated statements of comprehensive income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended July 31, 2019, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”).

We have audited the accompanying consolidated balance sheets of Oil-Dri Corporation of America (a Delaware corporation) and subsidiaries (the “Company”) as of July 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended July 31, 2020, and the related notes and financial statement schedule included under Item 15(a)) (collectively referred to as the “financial statements”).

We also have audited the Company’s internal control over financial reporting as of July 31, 2020, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2020, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.

Change in accounting principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases in the current year due to the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases .

Basis for opinions

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data