Oil-Dri Corp of America 10-K

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OIL-DRI CORPORATION OF AMERICA CONSOLIDATED BALANCE SHEETS July 31, 2020 2019 ASSETS (in thousands) Current Assets Cash and cash equivalents $ 40,890 $ 21,862 Accounts receivable, less allowance of $1,078 and $644 in 2020 and 2019, respectively 34,911 35,459 Inventories, net 23,893 24,163 Prepaid repairs expense 5,662 4,708 Prepaid expenses and other assets 3,064 3,084 Total Current Assets 108,420 89,276 Property, Plant and Equipment Buildings and leasehold improvements 39,274 38,852 Machinery and equipment 152,583 145,402 Office furniture and equipment 21,502 20,569 Vehicles 17,863 15,375 Gross depreciable assets 231,222 220,198 Less accumulated depreciation and amortization ( 169,040 ) ( 159,036 ) Net depreciable assets 62,182 61,162 Construction in progress 13,717 12,519 Land and mineral rights 17,049 17,117 Total Property, Plant and Equipment, Net 92,948 90,798 Other Assets Goodwill 9,262 9,262 Trademarks and patents, net of accumulated amortization of $457 and $299 in 2020 and 2019, respectively 1,566 1,599 Customer list, net of accumulated amortization of $6,887 and $6,297 in 2020 and 2019, respectively 898 1,488 Deferred income taxes 7,302 7,755 Operating lease right-of-use assets 9,816 — Other 5,670 5,049 Total Other Assets 34,514 25,153 Total Assets $ 235,882 $ 205,227 35 OIL-DRI CORPORATION OF AMERICA CONSOLIDATED BALANCE SHEETS (continued) July 31, 2020 2019 LIABILITIES AND STOCKHOLDERS’ EQUITY (in thousands) Current Liabilities Current maturities of notes payable $ 1,000 $ 3,083 Accounts payable 12,529 8,092 Dividends payable 1,808 1,761 Operating lease liabilities 2,170 — Accrued expenses Salaries, wages and commissions 13,505 7,490 Trade promotions and advertising 2,349 1,588 Freight 1,313 2,635 Real estate tax 1,658 1,581 Other 9,875 6,376 Total Current Liabilities 46,207 32,606 Noncurrent Liabilities Notes payable, net of unamortized debt issuance costs of $150 and $31 in 2020 and 2019, respectively 8,848 3,052 Deferred compensation 5,140 6,014 Pension and postretirement benefits 15,140 23,721 Long-term operating lease liabilities 9,135 — Other 3,448 4,288 Total Noncurrent Liabilities 41,711 37,075 Total Liabilities 87,918 69,681 Stockholders’ Equity Common Stock, par value $.10 per share, issued 8,449,003 shares in 2020 and 8,284,199 shares in 2019 845 828 Class B Stock, convertible, par value $.10 per share, issued 2,437,402 shares in 2020 and 2,576,479 shares in 2019 244 258 Additional paid-in capital 44,993 41,300 Retained earnings 176,579 164,756 Noncontrolling interest ( 174 ) ( 14 ) Accumulated Other Comprehensive Loss Pension and postretirement benefits ( 11,994 ) ( 14,891 ) Cumulative translation adjustment ( 260 ) ( 148 ) Total Accumulated Other Comprehensive Loss ( 12,254 ) ( 15,039 ) Less treasury stock, at cost (3,090,230 Common and 335,816 Class B shares in 2020 and 2,926,547 Common and 324,741 Class B shares in 2019) ( 62,269 ) ( 56,543 ) Total Stockholders’ Equity 147,964 135,546 Total Liabilities and Stockholders’ Equity $ 235,882 $ 205,227 The accompanying notes are an integral part of the Consolidated Financial Statements. 36 37 OIL-DRI CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended July 31, 2020 2019 (in thousands, except for per share data) Net Sales $ 283,227 $ 277,025 Cost of Sales ( 207,404 ) ( 211,365 ) Gross Profit 75,823 65,660 Other Operating Income (1) 13,000 — Selling, General and Administrative Expenses (2) ( 63,996 ) ( 55,248 ) Income from Operations 24,827 10,412 Other (Expense) Income Interest income 259 250 Interest expense ( 518 ) ( 594 ) Foreign exchange loss ( 161 ) ( 243 ) Other, net (3) ( 1,387 ) 4,723 Total Other (Expense) Income, Net ( 1,807 ) 4,136 Income Before Income Taxes 23,020 14,548 Income Tax Expense ( 4,280 ) ( 1,933 ) Net Income $ 18,740 $ 12,615 Net (Loss) Income Attributable to Noncontrolling Interest ( 160 ) 4 Net Income Attributable to Oil-Dri 18,900 12,611 Net Income Per Share Basic Common $ 2.70 $ 1.82 Basic Class B Common $ 2.02 $ 1.36 Diluted Common $ 2.65 $ 1.80 Diluted Class B Common $ 1.99 $ 1.35 Average Shares Outstanding Basic Common 5,149 5,112 Basic Class B Common 2,020 2,068 Diluted Basic Common 5,246 5,165 Diluted Basic Class B Common 2,049 2,086 (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. 38 OIL-DRI CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended July 31, 2020 2019 (in thousands) Net Income Attributable to Oil-Dri $ 18,900 $ 12,611 Other Comprehensive Income (Loss): Pension and postretirement benefits (net of tax) 2,897 ( 4,507 ) Cumulative translation adjustment ( 112 ) 83 Other Comprehensive Income (Loss) 2,785 ( 4,424 ) Comprehensive Income $ 21,685 $ 8,187 The accompanying notes are an integral part of the Consolidated Financial Statements. 39 OIL-DRI CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Number of Shares (in thousands) 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 — — — — 12,611 — — 4 12,615 Other comprehensive loss — — — — — — ( 4,424 ) — ( 4,424 ) Dividends declared — — — — ( 6,790 ) — — — ( 6,790 ) Purchases of treasury stock — ( 4,905 ) — — — ( 147 ) — — ( 147 ) Net issuance of stock under long-term incentive plans 304,850 ( 7,550 ) 30 419 — ( 450 ) — — ( 1 ) Amortization of restricted stock — — — 2,408 — — — — 2,408 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 — — — — 18,900 — — ( 160 ) 18,740 Other comprehensive income — — — — — — 2,785 — 2,785 Dividends declared — — — — ( 7,077 ) — — — ( 7,077 ) Purchases of treasury stock — ( 169,058 ) — — — ( 5,541 ) — — ( 5,541 ) Net issuance of stock under long-term incentive plans 25,727 ( 5,700 ) 3 183 — ( 185 ) — — 1 Amortization of restricted stock — — — 3,368 — — — — 3,368 Contributions from noncontrolling interests (1) — — — 142 — — — — $ 142 Balance, July 31, 2020 10,886,405 ( 3,426,046 ) $ 1,089 $ 44,993 $ 176,579 $ ( 62,269 ) $ ( 12,254 ) $ ( 174 ) $ 147,964 (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. 40 OIL-DRI CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS Year-Ended July 31, 2020 2019 (in thousands) Cash Flows from Operating Activities Net income $ 18,740 $ 12,615 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,923 13,330 Amortization of investment discounts — ( 10 ) Non-cash stock compensation expense 3,368 2,407 Deferred income taxes 453 ( 406 ) Provision for bad debts and cash discounts 423 ( 179 ) Loss on the disposals of property, plant and equipment 114 6 Curtailment gain on SERP Plan ( 1,296 ) — (Increase) decrease in: Accounts receivable ( 12 ) ( 1,729 ) Inventories 213 ( 1,693 ) Prepaid expenses ( 949 ) ( 786 ) Other assets ( 1,242 ) ( 617 ) Increase (decrease) in: Accounts payable 4,238 590 Accrued expenses 8,632 ( 589 ) Deferred compensation 421 ( 86 ) Pension and postretirement benefits ( 5,684 ) 3,307 Other liabilities 1,120 583 Total Adjustments 23,722 14,128 Net Cash Provided by Operating Activities 42,462 26,743 Cash Flows from Investing Activities Capital expenditures ( 14,740 ) ( 15,029 ) Proceeds from sale of property, plant and equipment 63 7 Purchases of short-term investments — ( 4,678 ) Dispositions of short-term investments — 11,812 Net Cash Used in Investing Activities ( 14,677 ) ( 7,888 ) Cash Flows from Financing Activities Proceeds from issuance of notes payable 10,000 — Principal payments on notes payable ( 6,321 ) ( 3,083 ) Dividends paid ( 7,030 ) ( 6,656 ) Purchase of treasury stock ( 5,541 ) ( 147 ) Contributions from noncontrolling interests 142 — Net Cash Used in Financing Activities ( 8,750 ) ( 9,886 ) Effect of exchange rate changes on cash and cash equivalents ( 7 ) 136 Net Increase in Cash and Cash Equivalents 19,028 9,105 Cash and Cash Equivalents, Beginning of Year 21,862 12,757 Cash and Cash Equivalents, End of Year $ 40,890 $ 21,862 41 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year-Ended July 31, 2020 2019 (in thousands) Supplemental disclosure: Other cash flows: Interest payments, net of amounts capitalized $ 273 $ 305 Income tax payments (refund) $ 2,319 $ ( 713 ) Noncash investing and financing activities: Capital expenditures accrued, but not paid $ 2,990 $ 2,263 Cash dividends declared and accrued, but not paid $ 1,808 $ 1,761 The accompanying notes are an integral part of the Consolidated Financial Statements. 42 OIL-DRI CORPORATION OF AMERICA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES N ATURE OF O PERATIONS We are a leader in developing, manufacturing and/or marketing sorbent products. Our sorbent products are principally produced from clay minerals. Our absorbent clay products include cat litter, industrial floor absorbents, agricultural chemical carriers and animal feed additives. Our adsorbent products include bleaching clays, which are used for filtration of edible oils and for purification of petroleum-based oils. We also sell synthetic sorbents, which are used for industrial cleanup. P RINCIPLES OF C ONSOLIDATION The Consolidated Financial Statements include the accounts of Oil-Dri Corporation of America and its subsidiaries. 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 The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates and assumptions are revised periodically. Actual results could differ from these estimates. For more information see Critical Accounting Policies and Estimates in Item 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. T RADE R ECEIVABLES We recognize trade receivables when the risk of loss and title pass to the customer. 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 accounts. A customer account is determined to be uncollectible when it is probable that a loss will be incurred after we have completed our internal collection procedures, including termination of shipments, direct customer contact and formal demand of payment. We retain outside collection agencies to facilitate our collection efforts. Past due status is determined based on contractual terms and customer payment history. 43 I NVENTORIES The composition of inventories was as follows as of July 31 (in thousands): 2020 2019 Finished goods $ 14,500 $ 13,957 Packaging 4,587 5,681 Other 4,806 4,525 Inventories $ 23,893 $ 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. We recorded inventory obsolescence reserves of approximately $ 926,000 and $ 704,000 as of July 31, 2020 and 2019 , respectively. 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 Assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated to U.S. Dollars at the exchange rates in effect at period end. Income statement items are translated at the average exchange rate on a monthly basis. Resulting translation adjustments are recorded as a separate component of stockholders’ equity. I NTANGIBLES AND G OODWILL We amortize most of our intangibles on a straight-line basis over periods ranging from 4 to 20 years. Our customer list intangible asset is amortized at an accelerated amortization rate in the earlier years to reflect the expected pattern of decline in the related benefits over time. Intangible amortization was $ 804,000 in fiscal year 2020 and $ 862,000 in fiscal year 2019 . Some intangible assets were determined to have indefinite lives and are not amortized, specifically one acquired trademark recorded at $ 376,000 . Our estimated intangible amortization expense for the next five fiscal years is as follows (in thousands): 2021 $ 583 2022 $ 431 2023 $ 227 2024 $ 91 2025 $ 66 The weighted average amortization period of our intangibles subject to amortization is as follows (in years): Weighted Average Amortization Period Trademarks and patents 14.3 Customer list 3.3 Total intangible assets subject to amortization 5.9 We periodically review indefinite-lived intangibles and goodwill to assess for impairment. Our review is based on cash flow considerations and other approaches that require significant judgment with respect to volume, revenue, expenses and allocations. Impairment occurs when the carrying value exceeds the fair value. 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 $ 5,489,000 to the Retail and Wholesale Products Group and $ 3,773,000 to the Business to Business Products Group. 44 We performed our annual impairment testing in the fourth quarter of fiscal years 2020 and 2019 . There was no impairment required based on our analysis for fiscal years 2020 or 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. 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 We surface mine sorbent minerals 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 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. 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. $ 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. The costs of obtaining mineral rights, including legal fees and drilling expenses, are also capitalized. The amount of land and mineral rights included in land on the Consolidated Balance Sheets were approximately $ 13,570,000 and $ 2,165,000 , respectively, as of July 31, 2020 , and were $ 13,638,000 and $ 2,165,000 , respectively, as of July 31, 2019 . 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. 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. R ECLAMATION We perform ongoing reclamation activities during the normal course of our overburden removal. As overburden is removed from a mine site, it is hauled to previously mined sites and is used to refill older sites. This process allows us to continuously reclaim older mine sites and dispose of overburden simultaneously, therefore minimizing the costs associated with the reclamation process. On an annual basis we evaluate our potential reclamation liability in accordance with ASC 410, Asset Retirement and Environmental Obligations. The reclamation assets are depreciated over the estimated useful lives of the various mines. The reclamation liabilities are increased based on a yearly accretion charge over the estimated useful lives of the mines. P ROPERTY , P LANT AND E QUIPMENT Property, plant and equipment are generally depreciated using the straight-line method over their estimated useful lives which are listed below. Depreciation expense was $ 13,119,000 and $ 12,468,000 in fiscal years 2020 and 2019 , respectively. Major improvements and betterments are capitalized, while maintenance and repairs that do not extend the useful life of the applicable assets are expensed as incurred. 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 years 2020 and 2019 . Years Buildings and leasehold improvements 3 - 40 Machinery and equipment Packaging 2 - 20 Processing 2 - 30 Mining and other 2 - 20 Office furniture and equipment 3 - 15 Vehicles 2 - 15 45 Property, plant and equipment are carried at cost on the Consolidated Balance Sheets and are reviewed for possible impairment on an annual basis or when circumstances indicate impairment that an asset may become impaired. We take into consideration idle and underutilized equipment and review business plans for possible impairment. When impairment is indicated, an impairment charge is recorded for the difference between the carrying value of the asset and its fair market value. 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. 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 $ 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 We routinely commit to one-time or ongoing trade promotion programs, primarily in our Retail and Wholesale Products Group. All such costs are netted against sales. We have accrued liabilities at the end of each period for the estimated expenses incurred but not yet paid for these programs. Promotional reserves are provided for sales incentives made directly to consumers, such as coupons, and sales incentives made to customers, such as slotting, discounts based on sales volume, cooperative marketing programs and other arrangements. We use judgment for estimates to determine our trade spending liabilities. We rely on our historical experience of trade spending patterns and that of the industry, current trends and forecast data. A DVERTISING Advertising costs for the development of printed materials, television commercials, web-based digital banners, web-based social media and sales videos are deferred and expensed upon the first use of the materials, unless such amounts are immaterial. Costs paid for communicating advertising over a period of time, such as television air time, radio commercials and print media advertising space, are deferred and expensed on a pro-rata basis. All other advertising costs, including participation in industry conventions and shows and market research, are expensed when incurred. All advertising costs are part of selling, general and administrative expenses. Advertising expenses were approximately $ 9,674,000 and $ 6,909,000 in fiscal years 2020 and 2019 , respectively. F AIR V ALUE OF F INANCIAL I NSTRUMENTS 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 . 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. R EVENUE R ECOGNITION We recognize revenue when performance obligations under the terms of the contracts with customers are satisfied. Our performance obligation generally consists of the promise to sell finished products to wholesalers, distributors and retailers or consumers and our obligations have an original duration of one year or less. Control of the finished products are transferred upon shipment to, or receipt at, customers' locations, as determined by the specific terms of the contract. We have completed our performance obligation when control is transferred and we recognize revenue accordingly. Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Sales returns and allowances are not material. 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 $ 247,000 and $ 259,000 as of July 31, 2020 and July 31, 2019 , respectively. This liability is reported in Other Accrued Expenses on the Consolidated Balance Sheets. Revenue recognized during fiscal year 2020 that was included in the liability for advance payments at the beginning of the year was $ 232,000 . 46 C OST OF S ALES Cost of sales consists of all manufacturing costs, including depreciation and amortization related to assets used in the manufacturing and distribution process, inbound and outbound freight, inspection costs, purchasing costs associated with materials and packaging used in the production process and warehouse and distribution costs. S HIPPING AND H ANDLING C OSTS 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 Selling, general and administrative expenses include salaries, wages and benefits associated with staff outside the manufacturing and distribution functions, all marketing related costs, any miscellaneous trade spending expenses not required to be included in net sales, research and development costs, depreciation and amortization related to assets outside the manufacturing and distribution process and all other non-manufacturing and non-distribution expenses. R ESEARCH AND D EVELOPMENT Research and development costs of approximately $ 2,765,000 and $ 3,202,000 were charged to expense as incurred for fiscal years 2020 and 2019 , respectively, and are recorded in selling, general and administrative expenses. P ENSION AND P OSTRETIREMENT B ENEFIT C OSTS We provide a defined benefit pension plan for eligible salaried and hourly employees and we make contributions to fund the plan. We also provide a postretirement health benefit plan to domestic salaried employees who qualify under the plan’s provisions. The postretirement health benefit plan is unfunded. Our pension and postretirement health benefit plans are accounted for using actuarial valuations required by ASC 715, Compensation – Retirement Benefits . The funded status of our defined pension and postretirement health benefit plans are recognized on the Consolidated Balance Sheets. 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. S TOCK -B ASED C OMPENSATION We account for stock options and restricted stock issued under our long term incentive plans in accordance with ASC 718, Compensation – Stock Compensation . The fair value of stock-based compensation is determined at the grant date. The related compensation expense is recognized over the appropriate vesting period. See Note 7 of the Notes to the Consolidated Financial Statements for additional information. I NCOME TAXES Deferred income tax assets and liabilities are recorded for the impact of temporary differences between the tax basis of assets and liabilities and the amounts recognized for financial reporting purposes. Deferred tax assets are reviewed and a valuation allowance is established if management believes that it is more likely than not that some portion of our deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In addition to existing valuation allowances, we provide for uncertain tax positions, if necessary, when such tax positions do not meet the recognition thresholds or measurement standards prescribed by ASC 740, Income Taxes . Amounts for uncertain tax positions are adjusted when new information becomes available or when positions are effectively settled. We recognize interest and penalties accrued related to uncertain tax positions in income tax expense. U.S. income tax expense and foreign withholding taxes are provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested. 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 47 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 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 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. NOTE 2 – OPERATING SEGMENTS We have two reportable operating segments: (1) Retail and Wholesale Products Group and (2) Business to Business 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: 48 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. Net sales for our principal products by segment are as follows (in thousands): Business to Business Products Group Retail and Wholesale Products Group Year Ended July 31, Product 2020 2019 2020 2019 Cat Litter $ 14,528 $ 13,764 $ 147,503 $ 135,489 Industrial and Sports — — 29,035 33,341 Agricultural and Horticultural 21,886 24,311 — — Bleaching Clay and Fluids Purification 50,117 51,905 2,429 2,318 Animal Health and Nutrition 17,729 15,897 — — Net Sales $ 104,260 $ 105,877 $ 178,967 $ 171,148 Net sales and operating income for each segment are provided below. The accounting policies of the segments are the same as those described in the Note 1 of the Notes to the Consolidated Financial Statements. We do not rely on any operating segment asset allocations and we do not consider them meaningful because of the shared nature of our production facilities; however, we have estimated the segment asset allocations below for those assets for which we can reasonably determine. The unallocated asset category is the remainder of our total assets. The asset allocation is estimated and is not a measure used by our chief operating decision maker about allocating resources to the operating segments or in assessing their performance. The corporate expenses line in the table below represents 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 annual incentive plan bonus accrual. Other income in fiscal year 2019 included net proceeds upon resolution of legal proceedings. 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. 49 July 31, Assets 2020 2019 (in thousands) Business to Business Products $ 72,987 $ 65,282 Retail and Wholesale Products 95,838 94,809 Unallocated assets 67,057 45,136 Total Assets $ 235,882 $ 205,227 Year Ended July 31, Net Sales Income 2020 2019 2020 2019 (in thousands) Business to Business Products $ 104,260 $ 105,877 $ 31,218 $ 31,388 Retail and Wholesale Products 178,967 171,148 15,859 8,683 Net Sales $ 283,227 $ 277,025 Other Operating Income 13,000 — Corporate Expenses ( 35,250 ) ( 29,659 ) Income from Operations 24,827 10,412 Total Other (Expense) Income, Net ( 1,807 ) 4,136 Income Before Income Taxes 23,020 14,548 Income Tax Expense ( 4,280 ) ( 1,933 ) Net Income $ 18,740 $ 12,615 Net (Loss) Income Attributable to Noncontrolling Interest $ ( 160 ) $ 4 Net Income Attributable to Oil-Dri $ 18,900 $ 12,611 The following is a summary by fiscal year of financial information by geographic region (in thousands): 2020 2019 Sales to unaffiliated customers by: Domestic operations $ 268,007 $ 263,469 Foreign subsidiaries $ 15,220 $ 13,556 Sales or transfers between geographic areas: Domestic operations $ 6,566 $ 5,097 Income before income taxes: Domestic operations $ 24,494 $ 14,280 Foreign subsidiaries $ ( 1,474 ) $ 268 Net Income (Loss) attributable to Oil-Dri: Domestic operations $ 20,208 $ 12,456 Foreign subsidiaries $ ( 1,308 ) $ 155 Identifiable assets: Domestic operations $ 223,296 $ 195,032 Foreign subsidiaries $ 12,586 $ 10,195 Included within identifiable assets for our foreign subsidiaries is cash held at foreign banks of $ 3,038,000 as of July 31, 2020. 50 Sales to Walmart, our largest customer, are included in our Retail and Wholesale Products Group. The percentage of consolidated net sales and net accounts receivable attributed to Walmart are shown in the table below: 2020 2019 Net sales for the years ended July 31 19 % 20 % Net accounts receivable as of July 31 18 % 26 % There are no other customers with sales equal to or greater than 10% of our total sales. NOTE 3 – DEBT The composition of notes payable is as follows as of July 31 (in thousands): 2020 2019 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%. $ — $ 6,167 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 semi-annually at an annual rate of 3.95% 10,000 — Less current maturities of notes payable ( 1,000 ) ( 3,083 ) Less unamortized debt issuance costs $ ( 152 ) $ ( 32 ) Noncurrent notes payable $ 8,848 $ 3,052 We issued senior promissory notes in November 2010 for $ 18,500,000 . 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 letters of credit. Under the credit agreement, we 51 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. As of July 31, 2020 and 2019 , there were no outstanding borrowings under this credit agreement. 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. The agreement also requires us to maintain a minimum fixed coverage ratio, a minimum consolidated net worth and a minimum consolidated debt ratio. Our debt agreements also contain provisions such that if we default on one debt agreement, the others will automatically default. If we default on any guaranteed debt with a balance greater than $ 1,000,000 , our unsecured revolving credit agreement with BMO Harris will be considered in default. If we default on any debt with a balance greater than $ 5,000,000 we will also be considered in default with the senior promissory notes. We were in compliance with all restrictive covenants and limitations as of July 31, 2020 . The following is a schedule by fiscal year of future principal maturities of notes payable as of July 31, 2020 (in thousands): 2021 $ 1,000 2022 1,000 2023 1,000 2024 1,000 2025 1,000 NOTE 4 – FINANCIAL INSTRUMENTS Fair Value 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 one of three categories based on the lowest level of input that is significant to the fair value measurement. Categories in the 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 classified as Level 1 of the fair value hierarchy because they were valued using quoted market prices in active markets. Cash equivalents were $ 6,000 and $ 26,000 as of July 31, 2020 and 2019 , respectively. These cash instruments are primarily money market funds and are included in cash and cash equivalents on the Consolidated Balance Sheets. 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. Notes payable on the Consolidated Balance Sheets are carried at the face amount of future maturities. 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 . 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. 52 Concentration of Credit Risk 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. 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. NOTE 5 – INCOME TAXES The provision for income tax expense by fiscal year consists of the following (in thousands): 2020 2019 Current Federal $ 3,768 $ ( 529 ) Foreign 5 ( 5 ) State 999 1,416 Current Income Tax Total 4,772 882 Deferred Federal ( 610 ) 1,344 Foreign ( 3 ) 113 State 121 ( 406 ) Deferred Income Tax Total ( 492 ) 1,051 Total Income Tax Expense $ 4,280 $ 1,933 Principal reasons for variations between the statutory federal rate and the effective rates by fiscal year were as follows: 2020 2019 U.S. federal income tax rate 21.0 % 21.0 % Depletion deductions allowed for mining ( 4.8 ) ( 8.2 ) State income tax expense, net of federal tax expense 4.3 2.5 Difference in effective tax rate of foreign subsidiaries 1.2 0.2 Prior year income taxes ( 1.0 ) ( 1.9 ) Other ( 2.1 ) ( 0.3 ) Effective income tax rate 18.6 % 13.3 % 53 The Consolidated Balance Sheets included the following tax effects of cumulative temporary differences as of July 31 (in thousands): ` 2020 2019 Assets Liabilities Assets Liabilities Depreciation $ — $ 3,926 $ — $ 3,995 Deferred compensation 1,779 — 2,121 — Postretirement benefits 3,293 — 6,100 — Lease right of use assets — 2,534 — — Lease liabilities 2,918 — — — Allowance for doubtful accounts 178 — 81 — Deferred marketing expenses — 194 — 326 Other assets — 9 390 — Accrued expenses 4,131 — 2,076 — Tax credits 147 — 250 — Amortization 48 — 166 — Inventories 343 — 264 — Depletion — 173 — 173 Stock-based compensation 987 — 556 — Reclamation 447 — 392 — Other assets – foreign 790 — 585 — Valuation allowance ( 923 ) — ( 732 ) — Total deferred taxes $ 14,138 $ 6,836 $ 12,249 $ 4,494 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. Our foreign subsidiaries in the United Kingdom and China have not generated any untaxed foreign income, therefore we have not provided for any related income taxes. We had no material liability for unrecognized tax benefits based on tax positions related to the current and prior fiscal years as of July 31, 2020 and 2019 ; correspondingly, no related interest and penalties were recognized as income tax expense and there were no accruals for such items in either of these fiscal years. We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. We have no income tax returns under examination as of July 31, 2020 and federal tax returns for fiscal years 2018 and 2019 remain open for examination. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years. The state impact of any federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification to the states. There are a limited number of open state and local income tax audits in which no material issues have been preliminarily identified. There are no material open or unsettled foreign income tax audits. We believe our accrual for tax liabilities is adequate for all open audit years. 54 NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME The following table summarizes the changes in accumulated other comprehensive income by component (in thousands): Pension and Postretirement Health Benefits Cumulative Translation Adjustment Total Accumulated Other Comprehensive (Loss) Income Balance as of July 31, 2018 $ ( 10,384 ) $ ( 231 ) ( 10,615 ) Other comprehensive (loss) income before reclassifications, net of tax ( 5,089 ) a) 83 ( 5,006 ) Amounts reclassified from accumulated other comprehensive income, net of tax 582 b) — 582 Net current-period other comprehensive (loss) income, net of tax ( 4,507 ) 83 ( 4,424 ) Balance as of July 31, 2019 $ ( 14,891 ) $ ( 148 ) $ ( 15,039 ) Other comprehensive loss before reclassifications, net of tax ( 4,431 ) a) ( 112 ) ( 4,543 ) Amounts reclassified from accumulated other comprehensive income, net of tax 758 b) — 758 Curtailment/Settlement on Pension Plan 6,570 c) — 6,570 Net current-period other comprehensive income (loss), net of tax 2,897 ( 112 ) 2,785 Balance as of July 31, 2020 $ ( 11,994 ) $ ( 260 ) $ ( 12,254 ) a) 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. b) Amounts are net of taxes of $ 242,000 and $ 185,000 in fiscal years 2020 and 2019 , respectively. Amounts are included in the components of net periodic benefit cost for the pension and postretirement health plans. c) 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. NOTE 7 – 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 . As of July 31, 2020 , there were 370,836 shares available for future grants under this plan. RESTRICTED S TOCK All non-vested restricted stock as of July 31, 2020 was issued under the 2006 Plan with vesting periods generally from two to five years. The fair value of restricted stock was determined by the closing market price of our Common Stock on the date of grant multiplied by the number of shares granted. 55 A summary of restricted stock transactions under the plans is shown below. Number of Shares (in thousands) Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (Years) Unamortized Expense (in thousands) Non-vested restricted stock outstanding at July 31, 2018 178 $ 32.74 1.7 $ 3,050 Granted 321 $ 32.89 Vested ( 61 ) $ 31.90 Forfeited ( 24 ) $ 30.85 Non-vested restricted stock outstanding at July 31, 2019 414 $ 33.09 4.5 $ 10,474 Granted 26 $ 33.57 Vested ( 44 ) $ 32.53 Forfeited ( 6 ) $ 32.46 Non-vested restricted stock outstanding at July 31, 2020 390 $ 33.19 4.0 $ 7,784 Stock-based compensation for restricted stock of $ 2,560,000 and $ 1,834,000 , net of related tax effect, was recognized in fiscal years 2020 and 2019 , respectively. The total restricted stock compensation related tax benefit was $ 808,000 and $ 579,000 in fiscal years 2020 and 2019 , respectively. NOTE 8 – PENSION AND OTHER POSTRETIREMENT 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. 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. Eligible employees may elect to continue their health care coverage under the Oil-Dri Corporation of America Employee Benefits Plan until the date certain criteria are met, including attaining the age of Medicare eligibility. We have the right to modify or terminate the postretirement health benefit plan at any time. A 401(k) savings plan is maintained under which we match a portion of employee contributions. This plan is available to essentially all domestic employees following a specific number of days of employment. 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. 56 Obligations and Funded Status The following tables provide a reconciliation of changes in the plans’ benefit obligations, asset fair values and funded status by fiscal year (in thousands): Pension Benefits Postretirement Health Benefits 2020 2019 2020 2019 Change in benefit obligation : Benefit obligation, beginning of year $ 61,553 $ 54,267 $ 2,958 $ 2,667 Service cost 1,096 1,626 116 105 Interest cost 1,900 2,114 82 97 Actuarial loss 8,570 5,125 247 97 Benefits paid ( 1,663 ) ( 1,579 ) ( 112 ) ( 8 ) Curtailments ( 6,632 ) — — — Settlements ( 7,544 ) — — — Benefit obligation, end of year 57,280 61,553 3,291 2,958 Change in plan assets: Fair value of plan assets, beginning of year 40,725 40,971 — — Actual return on plan assets 5,816 1,333 — — Employer contribution 8,000 — 112 8 Benefits paid ( 1,663 ) ( 1,579 ) ( 112 ) ( 8 ) Settlements ( 7,544 ) — — — Fair value of plan assets, end of year 45,334 40,725 — — Funded status, recorded in Consolidated Balance Sheets $ ( 11,946 ) $ ( 20,828 ) $ ( 3,291 ) $ ( 2,958 ) See “Cash Flows” below for further information about employer contributions and benefits payments. The accumulated benefit obligation for the Pension Plan was $ 57,280,000 and $ 54,696,000 as of July 31, 2020 and July 31, 2019, respectively. The following table shows amounts recognized in the Consolidated Balance Sheets as of July 31 (in thousands): Pension Benefits Postretirement Health Benefits 2020 2019 2020 2019 Deferred income taxes $ 2,443 $ 5,346 $ 850 $ 754 Other current liabilities $ — $ — $ ( 97 ) $ ( 65 ) Other noncurrent liabilities $ ( 11,946 ) $ ( 20,828 ) $ ( 3,194 ) $ ( 2,893 ) Accumulated other comprehensive loss – net of tax: Net actuarial loss $ 11,642 $ 14,731 $ 352 $ 184 Prior service cost (income) $ — $ — $ — $ ( 24 ) 57 Benefit Costs and Amortizations The following table shows the components of the net periodic pension and postretirement health benefit costs by fiscal year (in thousands): Pension Cost Postretirement Health Benefit Cost 2020 2019 2020 2019 Service cost $ 1,096 $ 1,626 $ 116 $ 105 Interest cost 1,900 2,114 82 97 Expected return on plan assets ( 2,790 ) ( 2,809 ) — — Amortization of: Prior service costs (income) — 2 ( 6 ) ( 6 ) Other actuarial loss 1,005 771 — — Settlement cost 2,012 — — — Net periodic benefit cost $ 3,223 $ 1,704 $ 192 $ 196 The following table shows amounts, net of tax, that are recognized in other comprehensive income by fiscal year (in thousands): Pension Benefits Postretirement Health Benefits 2020 2019 2020 2019 Net actuarial loss $ 4,243 $ 5,016 $ 188 $ 73 Amortization of: Prior service (cost) income — ( 1 ) 5 5 Amortization of actuarial loss ( 763 ) ( 586 ) — — Curtailment/Settlement $ ( 6,570 ) $ — $ — $ — Total recognized in other comprehensive (income) loss $ ( 3,090 ) $ 4,429 $ 193 $ 78 The following table shows amortization amounts, net of tax, expected to be recognized in fiscal year 2021 in accumulated other comprehensive income (in thousands): Amortization of: Pension Benefits Postretirement Health Benefits Net actuarial loss $ 786 $ 11 Prior service income — ( 5 ) Total to be recognized as other comprehensive loss (income) $ 786 $ 6 Cash Flows 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 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 . The postretirement health plan is an unfunded plan. Our policy is to pay health insurance premiums and claims from our assets. 58 The following table shows the estimated future benefit payments by fiscal year (in thousands): Pension Benefits Postretirement Health Benefits 2021 $ 1,743 $ 115 2022 $ 1,794 $ 98 2023 $ 1,798 $ 121 2024 $ 1,842 $ 191 2025 $ 1,952 $ 234 2026-30 $ 11,484 $ 1,385 Assumptions Our pension benefit and postretirement health benefit obligations and the related effects on operations are calculated using actuarial models. Critical assumptions that are important elements of plan expenses and asset/liability measurements include discount rate and expected return on assets for the Pension Plan and health care cost trend for the postretirement health plan. We evaluate these critical assumptions at least annually. Other assumptions involving demographic factors such as retirement age, mortality and turnover are evaluated periodically and are updated to reflect our experience and to meet regulatory requirements. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. The assumptions used in the previous calculations by fiscal year were as follows: Pension Benefits Postretirement Health Benefits 2020 2019 2020 2019 Discount rate for net periodic benefit costs 3.35 % 4.04 % 2.93 % 3.81 % Discount rate for year-end obligations 2.14 % 3.35 % 1.63 % 2.93 % Rate of increase in compensation levels for net periodic benefit costs — % 3.50 % —% —% Rate of increase in compensation levels for year-end obligations — % 3.50 % —% —% Long-term expected rate of return on assets 7.00 % 7.00 % —% —% The discount rate was based on the FTSE Pension Discount Curve to determine separately for the Pension Plan and the postretirement health plan, the single equivalent rate that would yield the same present value as the specific plan’s expected cash flows. Our expected rate of return on Pension Plan assets is determined by our asset allocation, our historical long-term investment performance, our estimate of future long-term returns by asset class (using input from our actuaries, investment managers and investment advisors), and long-term inflation assumptions. For fiscal year 2020 , the medical cost trend assumption used for the postretirement health benefit cost was 7.2 % . The graded trend rate is expected to decrease to an ultimate rate of 4.5 % in fiscal year 2038 . The following table reflects the effect on postretirement health costs and accruals in fiscal year 2020 of a one-percentage point change in the assumed health care cost trend (in thousands): One-Percentage Point Increase One-Percentage Point Decrease Effect on total service and interest cost $ 27 $( 23 ) Effect on accumulated postretirement benefit obligation $ 337 $( 297 ) 59 Pension Plan Assets The investment objective for the Pension Plan assets is to optimize long-term return at a moderate level of risk in order to secure the benefit obligations to participants at a reasonable cost. To reach this goal, our investment structure includes various asset classes, asset allocations and investment management styles that, in total, have a reasonable likelihood of producing a sufficient level of overall diversification that balances expected return with expected risk over the long-term. The Pension Plan does not invest directly in Company stock. We measure and monitor the plan’s asset investment performance and the allocation of assets through quarterly investment portfolio reviews. Investment performance is measured by absolute returns, returns relative to benchmark indices and any other appropriate basis of comparison. The targeted allocation percentages of plan assets is shown below for fiscal year 2021 and the actual allocation as of July 31: Asset Allocation Target fiscal 2021 2020 2019 Cash and accrued income 2 % 1 % — % Fixed income 38 % 68 % 42 % Equity 60 % 31 % 58 % 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): Fair Value At July 31, 2020 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Asset Class Cash and cash equivalents (a) $ 557 $ 557 $ — Equity securities (b) : U.S. companies 9,401 2,093 7,308 International companies 495 495 — Equity securities - international mutual funds: Developed market (c) 2,867 — 2,867 Emerging markets (d) 1,022 — 1,022 Commodities (e) — — — Fixed Income: U.S. Treasuries 3,014 — 3,014 Debt securities (f) 10,131 — 10,131 Government sponsored entities (g) 5,131 — 5,131 Multi-strategy bond fund (h) 10,547 — 10,547 Money market fund (i) 486 — 486 Other (j) 1,683 — 1,683 Total $ 45,334 $ 3,145 $ 42,189 60 Fair Value At July 31, 2019 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Asset Class Cash and cash equivalents (a) $ 66 $ 66 $ — Equity securities (b) : U.S. companies 13,775 4,147 9,628 International companies 2,609 2,609 — Equity securities - international mutual funds: Developed market (c) 5,275 — 5,275 Emerging markets (d) 1,141 — 1,141 Commodities (e) 637 — 637 Fixed Income: U.S. Treasuries 3,273 — 3,273 Debt securities(f) 8,103 — 8,103 Government sponsored entities (g) 2,087 — 2,087 Multi-strategy bond fund (h) 813 — 813 Money market fund (i) 557 — 557 Other (j) 2,389 — 2,389 Total $ 40,725 $ 6,822 $ 33,903 (a) Cash and cash equivalents consists of highly liquid investments which are traded in active markets. (b) This class represents equities traded on regulated exchanges, as well as funds that invest in a portfolio of such stocks. (c) These mutual funds seek long-term capital growth by investing no less than 80 % of their assets in stocks of non- U.S. companies that are primarily in developed markets, but also may invest in emerging and less developed markets. (d) These mutual funds seek to track the performance of a benchmark index that measures the investment return of stock issued by companies located in emerging market countries. (e) These investments seek attractive total return by investing primarily in a diversified portfolio of commodity futures contracts and fixed income investments. (f) This class includes bonds and loans of U.S. and non-U.S. corporate issuers from diverse industries and bonds of domestic and foreign municipalities. (g) This class represents a beneficial ownership interest in a pool of single-family residential mortgage loans. These investments are generally not backed by the full faith and credit of the United States government, except for securities valued at $ 289,000 in our portfolio as of July 31, 2020 and $ 377,000 as of July 31, 2019 . (h) This class invests at least 80% of its net assets in bonds and other fixed income instruments issued by governmental or private-sector entities. More than 50% of its net assets are invested in mortgage-backed securities. The fund may invest up to 33 1/3% of its net assets in high-yield bonds, bank loans and assignments and credit default swaps. (i) These money market mutual funds seek to provide current income consistent with liquidity and stability of principal by investing in a diversified portfolio of high quality, short-term, dollar-denominated debt securities. These funds may include securities issued or guaranteed as to principal and interest by the U.S. government or its agencies, short-term securities issued by domestic or foreign banks, domestic and dollar-denominated foreign commercial papers, and other short-term corporate obligations and obligations issued or guaranteed by one or more foreign governments. (j) This class includes funds that use a number of other strategies, including arbitrage, to obtain long-term positive returns. The portfolio of instruments may include equities, debt securities, real estate properties, warrants, options, swaps, future contracts, forwards or other types of derivative instruments. 61 NOTE 9 – DEFERRED COMPENSATION Oil-Dri's deferred compensation plans permit directors and certain management employees to defer portions of their compensation and to earn interest on the deferred amounts. Participants have deferred $ 266,000 and $ 418,000 into these plans in fiscal years 2020 and 2019 , respectively. We recorded $ 171,000 and $ 204,000 of interest expense associated with these plans in fiscal years 2020 and 2019 , respectively. Payments to participants were $ 440,000 and $ 1,144,000 in fiscal years 2020 and 2019 , respectively, and the total liability recorded for deferred compensation was $ 4,017,000 and $ 3,560,000 as of July 31, 2020 and 2019 , respectively. The Oil-Dri Corporation of America Annual Incentive Plan provides certain executives with the opportunity to receive a deferred executive bonus award if certain financial goals are met. A total of $ 1,352,000 and $ 513,000 were awarded to certain executives for fiscal years 2020 and 2019 , respectively. These awards will vest and accrue interest over a three -year period. Our deferred compensation plans are unfunded. 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. 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. The SERP liability was $ 1,447,000 and $ 2,708,000 as of July 31, 2020 and July 31, 2019 , respectively. We recorded expense related to the SERP of $ 34,000 and $ 539,000 in fiscal years 2020 and 2019 , respectively. 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, including ongoing litigation. While it is not possible at this time to determine with certainty the ultimate outcome of these or other lawsuits, we believe that none of the pending proceedings will have a material adverse effect on our business, financial condition, results of operations or cash flows. In June 2020, the Company received notice from a former service provider alleging a breach of contract regarding the payment of a contingency fee. Such party subsequently, in July 2020, filed a lawsuit seeking to require the Company to participate in binding mediation regarding this matter. Although we believe this claim to be without merit, as of July 31, 2020, we have determined a reasonable estimate of this liability within a range, with no amount within that range being a better estimate than any other amount, and have therefore recorded that estimate 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 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. 62 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 $ 2,219 Short-term operating lease cost 788 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 $ 1,878 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 9.4 years Weighted-average discount rate - operating leases 3.87 % 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): 2021 $ 2,552 2022 2,076 2023 1,106 2024 965 2025 885 Thereafter 6,131 Total 13,715 Less: imputed interest ( 2,410 ) Net lease obligation $ 11,305 Rent expense for the fiscal year ended July 31, 2019 was $ 2,873,000 . 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): 63 2020 $ 2,255 2021 1,640 2022 1,513 2023 1,038 2024 899 Thereafter 7,422 NOTE 12 – SUBSEQUENT EVENTS Management has evaluated subsequent events through the date the financial statements were issued. Based on our evaluation no events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements. NOTE 13 – RELATED PARTIES 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 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. Total payments to this vendor for fees and cost reimbursements were $ 420,000 and $ 271,000 for fiscal years 2020 and 2019 , respectively. There were no outstanding amounts due to that vendor as of July 31, 2020 or July 31, 2019 . 64 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15f. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013 framework) issued by the Committee Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, our management concluded that our internal control over financial reporting was effective as of July 31, 2020 . Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our internal controls over financial reporting as of July 31, 2020 have been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which appears on the next page of this Annual Report on Form 10-K. 65 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Oil-Dri Corporation of America 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, 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”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended July 31, 2020 in conformity with accounting principles generally accepted in the United States of America. 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 The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 66 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2014. Chicago, Illinois October 13, 2020 67 ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.