Item 1. Financial Statements
ITEM 1. Financial Statements
OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Balance Sheet
(in thousands, except share and per share amounts)
(unaudited)
ASSETS October 31,
2020 July 31,
2020
Current Assets
Cash and cash equivalents $ 31,291 $ 40,890
Accounts receivable, less allowance of
$1,036 and $1,078 at October 31, 2020 and July 31, 2020, respectively 39,212 34,911
Inventories 23,493 23,893
Prepaid repairs expense 6,106 5,662
Prepaid expenses and other assets 2,183 3,064
Total Current Assets 102,285 $ 108,420
Property, Plant and Equipment
Cost 262,325 261,988
Less accumulated depreciation and amortization ( 171,287 ) ( 169,040 )
Total Property, Plant and Equipment, Net 91,038 92,948
Other Assets
Goodwill 9,262 9,262
Other intangibles, net of accumulated amortization
of $483 and $457 at October 31, 2020 and July 31, 2020, respectively 1,625 1,566
Customer list, net of accumulated amortization
of $6,995 and $6,887 at October 31, 2020 and July 31, 2020, respectively 790 898
Deferred income taxes 6,587 7,302
Operating lease right-of-use assets 9,227 9,816
Other 6,557 5,670
Total Other Assets 34,048 34,514
Total Assets $ 227,371 $ 235,882
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
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OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Balance Sheet (continued)
(in thousands, except share and per share amounts)
(unaudited)
LIABILITIES & STOCKHOLDERS’ EQUITY October 31,
2020 July 31,
2020
Current Liabilities
Current maturities of notes payable $ 1,000 $ 1,000
Accounts payable 9,745 12,529
Dividends payable 1,807 1,808
Operating lease liabilities 2,066 2,170
Accrued expenses 19,852 28,700
Total Current Liabilities 34,470 46,207
Noncurrent Liabilities
Notes payable, net of unamortized debt issuance costs
of $143 and $150 at October 31, 2020 and July 31, 2020, respectively 8,857 8,848
Deferred compensation 5,310 5,140
Pension and postretirement benefits 15,184 15,140
Long-term operating lease liabilities 8,636 9,135
Other 4,598 3,448
Total Noncurrent Liabilities 42,585 41,711
Total Liabilities 77,055 87,918
Stockholders’ Equity
Common Stock, par value $.10 per share, issued 8,506,476 shares at October 31, 2020
and 8,449,003 shares at July 31, 2020 851 845
Class B Stock, par value $.10 per share, issued 2,413,141 shares at October 31, 2020
and 2,437,402 shares at July 31, 2020 241 244
Additional paid-in capital 45,779 44,993
Retained earnings 178,761 176,579
Noncontrolling interest ( 209 ) ( 174 )
Accumulated Other Comprehensive Loss:
Pension and postretirement benefits ( 11,866 ) ( 11,994 )
Cumulative translation adjustment 12 ( 260 )
Total Accumulated Other Comprehensive Loss ( 11,854 ) ( 12,254 )
Less Treasury Stock, at cost (3,106,748 Common and 346,491 Class B shares at
October 31, 2020 and 3,090,230 Common and 335,816 Class B shares at July 31, 2020) ( 63,253 ) ( 62,269 )
Total Stockholders’ Equity 150,316 147,964
Total Liabilities & Stockholders’ Equity $ 227,371 $ 235,882
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
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OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Income
(in thousands, except for per share amounts)
(unaudited)
For the Three Months Ended October 31,
2020 2019
Net Sales $ 76,097 $ 71,122
Cost of Sales ( 55,793 ) ( 51,187 )
Gross Profit 20,304 19,935
Selling, General and Administrative Expenses ( 15,127 ) ( 15,814 )
Income from Operations 5,177 4,121
Other (Expense) Income
Interest expense ( 192 ) ( 103 )
Interest income 25 98
Other, net ( 255 ) ( 39 )
Total Other Expense, Net ( 422 ) ( 44 )
Income Before Income Taxes 4,755 4,077
Income Tax Expense ( 806 ) ( 617 )
Net Income 3,949 3,460
Net Loss Attributable to Noncontrolling Interest ( 35 ) ( 76 )
Net Income Attributable to Oil-Dri 3,984 3,536
Net Income Per Share (1)
Basic Common $ 0.57 $ 0.51
Basic Class B Common $ 0.43 $ 0.38
Diluted Common $ 0.56 $ 0.50
Diluted Class B Common $ 0.42 $ 0.37
Average Shares Outstanding
Basic Common 5,149 5,149
Basic Class B Common 1,926 2,050
Diluted Common 5,276 5,229
Diluted Class B Common 1,978 2,077
Dividends Declared Per Share
Basic Common $ 0.2600 $ 0.2500
Basic Class B Common $ 0.1950 $ 0.1875
(1) Our Form 10-Q for three months ended October 31, 2020 and 2019 reflects a change in presentation for net income per share. We have historically disclosed net income per share for our diluted Common and Class B Common shares in total. As we have two classes of common shares, we have elected to change our net income per share presentation to reflect net income per share for both of our classes of common shares - our diluted Common shares and our diluted Class B Common shares.
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
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OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Comprehensive Income
(in thousands of dollars)
(unaudited)
For the Three Months Ended October 31,
2020 2019
Net Income Attributable to Oil-Dri $ 3,984 $ 3,536
Other Comprehensive Income:
Pension and postretirement benefits (net of tax) 128 271
Cumulative translation adjustment 272 ( 44 )
Other Comprehensive Income 400 227
Total Comprehensive Income $ 4,384 $ 3,763
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
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OIL-DRI CORPORATION OF AMERICA
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
For the Three Months Ended October 31
(unaudited)
Number of Shares
Common
& Class B
Stock Treasury
Stock Common
& Class B
Stock Additional
Paid-In
Capital Retained
Earnings Treasury
Stock Accumulated
Other
Comprehensive
Loss Non-Controlling Interest Total
Stockholders’
Equity
Balance, July 31, 2019 10,860,678 ( 3,251,288 ) $ 1,086 $ 41,300 $ 164,756 $ ( 56,543 ) $ ( 15,039 ) $ ( 14 ) $ 135,546
Net Income (Loss) — — — — 3,536 — — ( 76 ) 3,460
Other Comprehensive Income — — — — — — 227 — 227
Dividends Declared — — — — ( 1,766 ) — — — ( 1,766 )
Purchases of Treasury Stock — ( 15,019 ) — — — ( 500 ) — — ( 500 )
Net issuance of stock under long-term incentive plans 18,977 ( 1,750 ) 2 58 — ( 60 ) — — —
Amortization of Restricted Stock — — — 969 — — — — 969
Balance, October 31, 2019 10,879,655 ( 3,268,057 ) $ 1,088 $ 42,327 $ 166,526 $ ( 57,103 ) $ ( 14,812 ) $ ( 90 ) $ 137,936
Balance, July 31, 2020 10,886,405 ( 3,426,046 ) $ 1,089 $ 44,993 $ 176,579 $ ( 62,269 ) $ ( 12,254 ) $ ( 174 ) $ 147,964
Net Income (Loss) — — — — 3,984 — — ( 35 ) 3,949
Other Comprehensive Income — — — — — — 400 — 400
Dividends Declared — — — — ( 1,802 ) — — — ( 1,802 )
Purchases of Treasury Stock — ( 26,993 ) — — — ( 978 ) — — ( 978 )
Net issuance of stock under long-term incentive plans 33,212 ( 200 ) 3 2 — ( 6 ) — — ( 1 )
Amortization of Restricted Stock — — — 784 — — — — 784
Balance, October 31, 2020 10,919,617 ( 3,453,239 ) $ 1,092 $ 45,779 $ 178,761 $ ( 63,253 ) $ ( 11,854 ) $ ( 209 ) $ 150,316
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
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OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
For the Three Months Ended October 31,
CASH FLOWS FROM OPERATING ACTIVITIES 2020 2019
Net Income $ 3,949 $ 3,460
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization 3,504 3,469
Stock-based compensation 784 969
Deferred income taxes 714 ( 31 )
Provision for bad debts and cash discounts ( 60 ) 189
(Gain) Loss on the sale of fixed assets ( 1 ) 40
(Increase) Decrease in assets:
Accounts receivable ( 4,196 ) ( 980 )
Inventories 462 371
Prepaid expenses 458 1,578
Other assets ( 985 ) 316
Increase (Decrease) in liabilities:
Accounts payable ( 1,435 ) 835
Accrued expenses ( 8,106 ) ( 3,812 )
Deferred compensation 170 141
Pension and postretirement benefits 172 621
Other liabilities 1,135 ( 474 )
Total Adjustments ( 7,384 ) 3,232
Net Cash (Used in) Provided by Operating Activities ( 3,435 ) 6,692
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ( 3,568 ) ( 3,900 )
Proceeds from sale of property, plant and equipment 3 —
Net Cash Used in Investing Activities ( 3,565 ) ( 3,900 )
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable — ( 3,083 )
Dividends paid ( 1,803 ) ( 1,761 )
Purchase of treasury stock ( 978 ) ( 500 )
Net Cash Used in Financing Activities ( 2,781 ) ( 5,344 )
Effect of exchange rate changes on Cash and Cash Equivalents 182 ( 50 )
Net Decrease in Cash and Cash Equivalents ( 9,599 ) ( 2,602 )
Cash and Cash Equivalents, Beginning of Period 40,890 21,862
Cash and Cash Equivalents, End of Period $ 31,291 $ 19,260
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OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Cash Flows - Continued
(in thousands)
(unaudited)
For the Three Months Ended October 31,
2020 2019
Supplemental disclosure of non-cash investing and financing activities:
Capital expenditures accrued, but not paid $ 858 $ 1,043
Cash dividends declared and accrued, but not paid $ 1,807 $ 1,766
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
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OIL-DRI CORPORATION OF AMERICA
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The financial statements and the related notes are condensed and should be read in conjunction with the Consolidated Financial Statements and related notes for the fiscal year ended July 31, 2020 included in our Annual Report on Form 10-K filed with the SEC.
The unaudited Condensed Consolidated Financial Statements include the accounts of Oil-Dri Corporation of America and its subsidiaries. All significant intercompany transactions are eliminated. Except as otherwise indicated herein or as the context otherwise requires, references to “Oil-Dri,” the “Company,” “we,” “us” or “our” refer to Oil-Dri Corporation of America and its subsidiaries.
The unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals and reclassifications which are, in the opinion of management, necessary for a fair presentation of the statements contained herein. In addition, certain prior year reclassifications were made to conform to the current year presentation. Operating results for the three months ended October 31, 2020 are not necessarily an indication of the results that may be expected for the fiscal year ending July 31, 2021.
In March 2020, the World Health Organization declared the recent novel coronavirus outbreak ("the coronavirus" or "COVID-19") a pandemic. Despite its continued spread and the adverse effects of COVID-19 on the overall economy and certain of the industries we serve, we have not experienced a significant decline in customer orders and sales in the first quarter of fiscal year 2021. However, the effects of COVID-19 are unprecedented, and therefore we are unable to ascertain the effects on our sales and net earnings for the balance of fiscal year 2021.
Reclassification
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.
Management Use of Estimates
The preparation of the unaudited Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period, as well as the related disclosures. All of our estimates and assumptions are revised periodically. Actual results could differ from these estimates.
Summary of Significant Accounting Policies
Our significant accounting policies, which are detailed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2020 have not materially changed. The following is a description of certain of our significant accounting policies.
Trade Receivables. We record an allowance for doubtful accounts based on our historical experience and a periodic review of our accounts receivable, including a review of the overall aging of accounts, consideration of customer credit risk and analysis of facts and circumstances about specific customer accounts. A customer account is determined to be uncollectible when it is probable that a loss will be incurred after we have completed our internal collection procedures, including termination of shipments, direct customer contact and formal demand of payment.
Overburden Removal and Mining Costs. We mine sorbent materials on property that we either own or lease as part of our overall operations. A significant part of our overall mining cost is incurred during the process of removing the overburden (non-usable material) from the mine site, thus exposing the sorbent material used in a majority of our production processes. These
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stripping costs are treated as a variable inventory production cost and are included in cost of sales in the period they are incurred. We defer and amortize the pre-production overburden removal costs associated with opening a new mine.
Additionally, it is our policy to capitalize the purchase cost of land and mineral rights, including associated legal fees, survey fees and real estate fees. The costs of obtaining mineral patents, including legal fees and drilling expenses, are also capitalized. Pre-production development costs on new mines and any prepaid royalties that may be offset against future royalties due upon extraction of the minerals are also capitalized. All exploration related costs are expensed as incurred.
We perform ongoing reclamation activities during the normal course of our overburden removal. As overburden is removed from a mine site, it is hauled to previously mined sites and is used to refill older sites. This process allows us to continuously reclaim older mine sites and dispose of overburden simultaneously, therefore minimizing the costs associated with the reclamation process.
Leases. ASC 842 provides that a contract is, or contains, a lease if it conveys the right to control the use of an identified asset and, accordingly, a lease liability and a related right-of-use (“ROU”) asset is recognized at the commencement date on our consolidated balance sheet. As provided in ASC 842, we have elected not to apply these measurement and recognition requirements to short-term leases (i.e., leases with a term of 12 months or less). Short-term leases will not be recorded as ROU assets or lease liabilities on our consolidated balance sheet, and the related lease payments will be recognized in net earnings on a straight-line basis over the lease term. For leases other than short-term leases, the lease liability is equal to the present value of unpaid lease payments over the remaining lease term. The lease term may reflect options to extend or terminate the lease when it is reasonably certain that such options will be exercised. To determine the present value of the lease liability, we used an incremental borrowing rate, which is defined as the rate of interest we would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. The ROU asset is based on the corresponding lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Both operating and finance lease ROU assets are reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. After a ROU asset is impaired, any remaining balance of the ROU asset is amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful life. After the lease commencement date, we evaluate lease modifications, if any, that could result in a change in the accounting for leases.
Certain of our leases provide for variable lease payments that vary due to changes in facts and circumstances occurring after the commencement date, other than the passage of time. Variable lease payments that are dependent on an index or rate (e.g., Consumer Price Index) are included in the initial measurement of the lease liability and the ROU asset. Variable lease payments that are not known at the commencement date and are determinable based on the performance or use of the underlying asset, are expensed as incurred. Our variable lease payments primarily include common area maintenance charges based on the percentage of the total square footage leased and the usage of assets, such as photocopiers.
Some of our contracts may contain lease components as well as non-lease components, such as an agreement to purchase services. As allowed under ASC 842, we have elected not to separate the lease components from non-lease components for all asset classes and we will not allocate the contract consideration to these components. This policy was applied to all existing leases upon adoption of ASC 842 and will be applied to new leases on an ongoing basis.
Revenue Recognition. We recognize revenue when performance obligations under the terms of the contracts with customers are satisfied. Our performance obligation generally consists of the promise to sell finished products to wholesalers, distributors and retailers or consumers and our obligations have an original duration of one year or less. Control of the finished products are transferred upon shipment to, or receipt at, customers' locations, as determined by the specific terms of the contract. We have completed our performance obligation when control is transferred and we recognize revenue accordingly.
We have an unconditional right to consideration under the payment terms specified in the contract upon completion of the performance obligation. We may require certain customers to provide payment in advance of product shipment. We recorded a liability for these advance payments of $ 317,000 and $ 247,000 as of October 31, 2020 and July 31, 2020, respectively. This liability is reported in Other Accrued Expenses on the unaudited Condensed Consolidated Balance Sheet. Revenue recognized during the three months ended October 31, 2020 that was included in the liability for advance payments at the beginning of the period was $ 185,000 .
We routinely commit to one-time or ongoing trade promotion programs directly with consumers, such as coupon programs, and with customers, such as volume discounts, cooperative marketing and other arrangements. We estimate and accrue the expected costs of these programs. These costs are considered variable consideration under ASC 606, Revenue from Contracts with Customers , and are netted against sales when revenue is recorded. The accruals are based on our best estimate of the amounts
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necessary to settle future and existing obligations on products sold as of the balance sheet date. To estimate these accruals, we rely on our historical experience of trade spending patterns and that of the industry, current trends and forecasted data.
Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) include salaries, wages and benefits associated with staff outside the manufacturing and distribution functions, all marketing related costs, any miscellaneous trade spending expenses not required to be included in net sales, research and development costs, depreciation and amortization related to assets outside the manufacturing and distribution process and all other non-manufacturing and non-distribution expenses.
Other Noncurrent Liabilities
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 $ 1,800,000 in payroll taxes as of October 31, 2020 and expect to defer the payment of payroll taxes for the remainder of 2020 to be paid equally in the fourth quarters of calendar years 2021 and 2022 representing approximately $ 2,500,000 in payroll taxes. The accrual for these payroll taxes is included in Other within Noncurrent Liabilities on the unaudited Condensed Consolidated Balance Sheet.
2. NEW ACCOUNTING PRONOUNCEMENTS AND REGULATIONS
Recently Issued Pronouncements
In March 2020, the FASB issued guidance under ASC 848, Reference Rate Reform. This guidance provides optional expedients and exceptions to account for debt, leases, contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The guidance is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating the potential effects of the adoption of this guidance on our Consolidated Financial Statements.
In December 2019, the FASB issued guidance under ASC 740, Income Taxes , which simplifies the accounting for income taxes. The guidance removes several specific exceptions to the general principles in ASC 740 and clarifies and makes amendments to improve consistent application of and simplify existing accounting for other areas in ASC 740. This guidance is effective for our first quarter of fiscal year 2022, with early adoption permitted. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements.
In June 2016, the FASB issued guidance under ASC 326, Financial Instruments-Credit Losses , which requires companies to utilize an impairment model for most financial assets measured at amortized cost and certain other financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses. In addition, this new guidance changes the recognition method for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk, as well as additional disclosures. In general, this guidance will require modified retrospective adoption for all outstanding instruments that fall under this guidance. This guidance is effective for our first quarter of fiscal year 2023. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements.
There have been no other accounting pronouncements issued but not yet adopted by us which are expected to have a material impact on our Consolidated Financial Statements.
3. INVENTORIES
The composition of inventories is as follows (in thousands):
October 31,
2020 July 31,
2020
Finished goods $ 14,384 $ 14,500
Packaging 4,936 4,587
Other 4,173 4,806
Total Inventories $ 23,493 $ 23,893
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Inventories are valued at the lower of cost (first-in, first-out) or net realizable value. Inventory costs include the cost of raw materials, packaging supplies, labor and other overhead costs. We performed a detailed review of our inventory items to determine if an obsolescence reserve adjustment was necessary. The review surveyed all of our operating facilities and sales groups to ensure that both historical issues and new market trends were considered. The obsolescence reserve not only considered specific items, but also took into consideration the overall value of the inventory as of the balance sheet date. The inventory obsolescence reserve values at October 31, 2020 and July 31, 2020 were $ 970,000 and $ 926,000 , respectively. Other Inventories includes a variety of items including clay, additives, fragrances and other supplies. Other inventory decreased due to increased production.
4. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized into categories based on the lowest level of input that is significant to the fair value measurement. The categories in the fair value hierarchy are as follows:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs for similar assets or liabilities or valuation models whose inputs are observable, directly or indirectly.
Level 3: Unobservable inputs.
Cash equivalents are primarily money market mutual funds classified as Level 1. We had $ 6,000 of cash equivalents as of October 31, 2020 and July 31, 2020, respectively, which are included in Cash and cash equivalents on the unaudited Condensed Consolidated Balance Sheet.
Balances of accounts receivable and accounts payable approximated their fair values at October 31, 2020 and July 31, 2020 due to the short maturity and nature of those balances.
Notes payable are reported at the face amount of future maturities. The estimated fair value of notes payable, including current maturities, was $ 11,690,000 and $ 11,631,000 as of October 31, 2020 and July 31, 2020, respectively, and are classified as Level 2. The fair value was estimated using the exit price notion of fair value.
We apply fair value techniques on at least an annual basis associated with: (1) valuing potential impairment loss related to goodwill, trademarks and other indefinite-lived intangible assets and (2) valuing potential impairment loss related to long-lived assets. See Note 5 of the Notes to unaudited Condensed Consolidated Financial Statements for further information about goodwill and other intangible assets.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets, other than goodwill, include trademarks, patents, customer lists and product registrations. Intangible amortization expense was $ 155,000 and $ 167,000 in the first three months of fiscal years 2021 and 2020. Estimated intangible amortization for the remainder of fiscal year 2021 is $ 432,000 . Estimated intangible amortization for the next five fiscal years is as follows (in thousands):
2022 $ 428
2023 $ 226
2024 $ 90
2025 $ 65
2026 $ 63
We have one acquired trademark recorded at a cost of $ 376,000 that was determined to have an indefinite life and is not amortized.
We performed our annual goodwill impairment analysis in the fourth quarter of fiscal year 2020 and no impairment was identified. There have been no triggering events that would indicate a new impairment analysis is needed. Although we have not identified any triggering events relating to goodwill or our intangibles, the ultimate effects of COVID-19 could change this assessment in the future.
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6. 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. There have been no changes during the three months ended October 31, 2020 that would have changed this estimate. We believe that any loss related to this matter is unlikely to be material. However, the outcome of this legal matter is subject to significant uncertainties. The ability to predict the ultimate outcome of this legal matter involves judgments, estimates and inherent uncertainties. The actual outcome could differ materially from management’s estimates.
7. 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 unaudited Condensed Consolidated Financial Statements.
We have no material finance leases, and variable costs for operating leases are immaterial for the first quarter of fiscal year 2021. Operating lease costs are included in Cost of Sales or SG&A expenses based on the nature of the lease. The following table summarizes total lease costs for our operating leases (in thousands):
For the Three Months Ended
October 31,
2020 2019
Operating Lease Cost
Operating lease cost $ 695 $ 517
Short-term operating lease cost 186 205
Supplemental cash flow information related to leases was as follows (in thousands):
For the Three Months Ended
October 31,
2020 2019
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 602 $ 432
Operating lease ROU assets and operating lease liabilities are separately presented on the unaudited Condensed Consolidated Balance Sheet, excluding leases with an initial term of twelve months or less. Other supplemental balance sheet information related to leases was as follows:
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October 31, 2020 July 31, 2020
Weighted-average remaining lease term - operating leases 9.4 years 9.4 years
Weighted-average discount rate - operating leases 3.98 % 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 October 31, (in thousands):
2020 $ 2,432
2021 1,791
2022 1,051
2023 950
2024 852
Thereafter 5,935
Total 13,011
Less: imputed interest ( 2,309 )
Net lease obligation $ 10,702
8. ACCRUED EXPENSES
Accrued expenses is as follows (in thousands):
October 31,
2020 July 31,
2020
Salaries, Wages, Commissions and Employee Benefits $ 5,810 $ 14,798
Trade promotions and advertising 1,572 2,349
Freight 2,094 1,313
Real Estate Tax 1,488 1,658
Other 8,888 8,582
$ 19,852 $ 28,700
The decrease in salaries, wages, commissions and employee benefits relates primarily to the payment of annual discretionary bonuses during the three months ended October 31, 2020. The accrual for trade promotions and advertising is lower for the three months ended October 31, 2020 than the prior fiscal year due to a shift in timing of advertising programs and expense. Freight rates increased during the three months ended October 31, 2020 resulting in a higher accrual.
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9. PENSION AND OTHER POSTRETIREMENT BENEFITS
Pension and Postretirement Health Benefits
The Oil-Dri Corporation of America Pension Plan (“Pension Plan”) is a defined benefit pension plan for eligible salaried and hourly employees. Pension benefits are based on a formula of years of credited service and levels of compensation or stated amounts for each year of credited service. On January 9, 2020, we amended the Pension Plan to freeze participation, all future benefit accruals and accrual of benefit service, including consideration of compensation increases, effective March 1, 2020. Consequently, the Pension Plan is closed to new participants and current participants will no longer earn additional benefits on or after March 1, 2020.
The components of net periodic pension and postretirement health benefit costs were as follows:
Pension Benefits
(in thousands)
For the Three Months Ended October 31,
2020 2019
Service cost $ — $ 488
Interest cost — 509
Expected return on plan assets — ( 698 )
Amortization of:
Other actuarial loss 170 357
Net periodic benefit cost $ 170 $ 656
Postretirement Health Benefits
(in thousands)
For the Three Months Ended October 31,
2020 2019
Service cost $ 35 $ 30
Interest cost 13 21
Amortization of:
Prior service costs ( 1 ) ( 1 )
Net periodic benefit cost $ 47 $ 50
The non-service cost components of net periodic benefit cost are included in Other Income (Expense) in the line item Other, net on the unaudited Condensed Consolidated Statements of Income.
The Pension Plan is funded based upon actuarially determined contributions that take into account the amount deductible for income tax purposes, the normal cost and the minimum contribution required and the maximum contribution allowed under applicable regulations. We were not required to make, and did not make, a voluntary contribution to the Pension Plan during the first quarter of fiscal year 2021. We have no minimum funding requirements for the remainder of fiscal year 2021.
The postretirement health plan is an unfunded plan. We pay insurance premiums and claims from our assets.
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Assumptions used in the previous calculations were as follows:
Pension Benefits Postretirement Health Benefits
For the Three Months Ended October 31,
2020 2019 2020 2019
Discount rate for net periodic benefit cost 2.14 % 3.35 % 1.63 % 2.93 %
Rate of increase in compensation levels — % 3.50 % — —
Long-term expected rate of return on assets 6.50 % 7.00 % — —
The medical cost trend assumption for postretirement health benefits was 7.20 %. The graded trend rate is expected to decrease to an ultimate rate of 4.50 % in fiscal year 2038 .
Supplemental Executive Retirement Plan
The Oil-Dri Corporation of America Supplemental Executive Retirement Plan (“SERP”) provides certain retired participants in the Pension Plan with the amount of benefits that would have been provided under the Pension Plan but for: (1) the limitations on benefits imposed by Section 415 of the Internal Revenue Code (“Code”) and/or (2) the limitation on compensation for purposes of calculating benefits under the Pension Plan imposed by Section 401(a)(17) of the Code. The SERP liability is actuarially determined at the end of each fiscal year using assumptions similar to those used for the Pension Plan. The SERP is unfunded and benefits will be funded when payments are made.
On January 9, 2020, we amended the SERP to freeze participation and any excess benefit, supplemental benefit or additional benefit effective March 1, 2020. Consequently, the SERP is closed to new participants and current participants no longer earn additional benefits on or after March 1, 2020. The SERP was terminated effective June 30, 2020. Any payment of benefits that would otherwise have been payable pursuant to the SERP plan on or after June 30, 2021 will instead be paid to each participant in the form of one lump sum, with such lump sum payment payable no earlier than June 30, 2021 and no later than June 8, 2022.
10. OPERATING SEGMENTS
We have two operating segments: (1) Business to Business Products Group and (2) Retail and Wholesale Products Group. These operating segments are managed separately and each segment's major customers have different characteristics. The Retail and Wholesale Products Group customers include: mass merchandisers; wholesale clubs; drugstore chains; pet specialty retail outlets; dollar stores; retail grocery stores; e-commerce retailers; distributors of industrial cleanup and automotive products; environmental service companies; and sports field product users. The Business to Business Products Group customers include: processors and refiners of edible oils, petroleum-based oils and biodiesel fuel; manufacturers of animal feed and agricultural chemicals; distributors of animal health and nutrition products; and marketers of consumer products. Our operating segments are also our reportable segments. The accounting policies of the segments are the same as those described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2020.
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Net sales for our principal products by segment are as follows (in thousands):
Business to Business Products Group Retail and Wholesale Products Group
For the Three Months Ended October 31,
Product 2020 2019 2020 2019
Cat Litter $ 3,876 $ 3,697 $ 40,794 $ 36,379
Industrial and Sports — — 7,262 7,600
Agricultural and Horticultural 6,987 5,719 — —
Bleaching Clay and Fluids Purification 12,641 12,223 519 665
Animal Health and Nutrition 4,018 4,839 — —
Net Sales $ 27,522 $ 26,478 $ 48,575 $ 44,644
We do not rely on any segment asset allocations and we do not consider them meaningful because of the shared nature of our production facilities; however, we have estimated the segment asset allocations below for those assets for which we can reasonably determine. The unallocated asset category is the remainder of our total assets. The asset allocation is estimated and is not a measure used by our chief operating decision maker about allocating resources to the operating segments or in assessing their performance.
Assets
October 31, 2020 July 31, 2020
(in thousands)
Business to Business Products Group $ 72,687 $ 72,987
Retail and Wholesale Products Group 101,170 95,838
Unallocated Assets 53,514 67,057
Total Assets $ 227,371 $ 235,882
Net sales and operating income for each segment are provided below. The corporate expenses line includes certain unallocated expenses, including primarily salaries, wages and benefits, purchased services, rent, utilities and depreciation and amortization associated with corporate functions such as research and development, information systems, finance, legal, human resources and customer service. Corporate expenses also include the estimated annual incentive plan bonus accrual.
For the Three Months Ended October 31,
Net Sales Income
2020 2019 2020 2019
(in thousands)
Business to Business Products Group $ 27,522 $ 26,478 $ 8,196 $ 8,296
Retail and Wholesale Products Group 48,575 44,644 4,478 3,360
Net Sales $ 76,097 $ 71,122
Corporate Expenses ( 7,497 ) ( 7,535 )
Income from Operations 5,177 4,121
Total Other Expense, Net ( 422 ) ( 44 )
Income before Income Taxes 4,755 4,077
Income Tax Expense ( 806 ) ( 617 )
Net Income 3,949 3,460
Net Loss Attributable to Noncontrolling Interest ( 35 ) ( 76 )
Net Income Attributable to Oil-Dri $ 3,984 $ 3,536
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11. 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 October 31, 2020, there were 354,146 shares available for future grants under this plan.
Restricted Stock
All of our non-vested restricted stock as of October 31, 2020 was issued under the 2006 Plan with vesting periods generally between one and five years . We determined the fair value of restricted stock as of the grant date. We recognize the related compensation expense over the period from the date of grant to the date the shares vest.
There were 33,000 and 19,000 restricted shares of Common Stock granted during the first quarter of fiscal years 2021 and 2020, respectively. Stock-based compensation expense was $ 784,000 and $ 969,000 for the first quarter of fiscal years 2021 and 2020, respectively.
A summary of restricted stock transactions is shown below:
Restricted Shares
(in thousands) Weighted Average Grant Date Fair Value
Non-vested restricted stock outstanding at July 31, 2020 390 $ 33.19
Granted 33 $ 36.08
Vested ( 48 ) $ 33.57
Non-vested restricted stock outstanding at October 31, 2020 375 $ 33.40
12. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The following table summarizes the changes in accumulated other comprehensive (loss) income by component as of October 31, 2020 (in thousands):
Pension and Postretirement Health Benefits Cumulative Translation Adjustment Total Accumulated Other Comprehensive (Loss) Income
Balance as of July 31, 2020 $ ( 11,994 ) $ ( 260 ) $ ( 12,254 )
Other comprehensive loss before reclassifications, net of tax — 272 272
Amounts reclassified from accumulated other comprehensive income, net of tax 128 (a) — 128
Net current-period other comprehensive income, net of tax 128 272 400
Balance as of October 31, 2020 $ ( 11,866 ) $ 12 $ ( 11,854 )
(a) Amount is net of tax expense of $ 40,530 . Amount is included in the components of net periodic benefit cost for the pension and postretirement health plans. See Note 9 of the Notes to unaudited Condensed Consolidated Financial Statements for further information.
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13. RELATED PARTY TRANSACTIONS
One member of our Board of Directors (the “Board”) retired from the role of President and Chief Executive Officer of a customer of ours in September 2019 and is currently party to a post-employment agreement with the customer. Total net sales to that customer, including sales to subsidiaries of that customer, were $ 110,000 and $ 111,000 for the first quarter of fiscal years 2021 and 2020, respectively. Outstanding accounts receivable from that customer, and its subsidiaries, were $ 5,000 and $ 0 at October 31, 2020 and July 31, 2020, respectively.
One member of our Board is currently the President and Chief Executive Officer of a vendor of ours. Total payments to this vendor for fees and cost reimbursements were $ 92,000 and $ 38,000 for the first quarter of fiscal years 2021 and 2020, respectively. There were no outstanding accounts payable to that vendor as of October 31, 2020 or July 31, 2020.
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