What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-03-11 compared with 2020-12-07 · 207 added, 116 removed, 101 unchanged (76% of the section changed)

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Our actual results may differ materially from the results discussed in the forward-looking statements.

Factors that might cause a difference include, but are not limited to, those discussed under “Forward-Looking Statements” and Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended July 31, 2020.

Factors that might cause a difference include, but are not limited to, those discussed under “Forward-Looking Statements” and Item 1A, Risk Factors of this quarterly report on Form 10-Q for the quarter ended January 31, 2021 and of our Annual Report on Form 10-K for the fiscal year ended July 31, 2020.

We develop, mine, manufacture and market sorbent products principally produced from clay minerals and, to a lesser extent, other clay-like sorbent materials.

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We have two reportable operating segments based on the different characteristics of our two primary customer groups:

Retail and Wholesale Products Group and Business to Business Products Group, as described in Note 10 of the Notes to unaudited Condensed Consolidated Financial Statements.

Retail and Wholesale Products Group and Business to Business Products Group, as described in Note 10 of the Notes to the unaudited Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS

In December 2019, COVID-19 was reported in China and has subsequently spread worldwide.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

In December 2019, COVID-19 was reported in China and subsequently spread worldwide.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and it continues to have a worldwide impact.

While we saw changes to consumer purchasing patterns for certain products in response to the pandemic and certain increases in our costs arising out of the pandemic outbreak and continued spread of COVID-19, there has not, to date, been a significant impact to our business as a whole.

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As a result, we have not experienced any shut downs due to workforce absences or illnesses.

As further discussed below, our consolidated net sales have increased in the first quarter of fiscal year 2021 compared to the first quarter of fiscal year 2020.

Despite the increase in sales, we have not experienced any significant issues collecting amounts due from customers to date.

As further discussed below, our consolidated net sales have increased in the second quarter of fiscal year 2021 and in the first six months of fiscal year 2021 compared to the second quarter and first six months of fiscal year 2020.

Despite the increase in net sales, we have not experienced any significant issues collecting amounts due from customers to date.

However, parts of our business have been negatively impacted by the COVID-19 outbreak.

Sales of our industrial and sports businesses declined as many businesses and sports fields remain shut down.

In the long-term, we foresee that our sports product sales will improve back to pre-pandemic volumes with the expected re-opening of baseball and softball at all levels in 2021.

As discussed below in "Foreign Operations," sales for our industrial granules in the United Kingdom are lower due to restrictions imposed by the United Kingdom government in response to COVID-19.

In addition, while sales of our fluids purification products are higher in the first three months of fiscal year 2021 than fiscal year 2020, COVID-19 has, on a whole, negatively impacted the sales of these products.

Reduced travel and, to a lesser extent, our inability due to COVID-19 to participate in our customer's plant tests of our fluids purification products has impeded our sales in recent months.

Sales of our animal health products in Latin America, Africa and Asia have also been somewhat impacted as COVID-19 changed our customers' purchasing patterns.

Net sales of our industrial and sports businesses declined as many businesses and sports fields remain shut down.

In the long-term, we foresee that our sports product sales will improve back to pre-pandemic volumes aided by the expected re-opening of baseball and softball at all levels in 2021.

As discussed below in “Foreign Operations,” net sales for our industrial granules in the United Kingdom are lower due to restrictions imposed by the United Kingdom government in response to COVID-19.

In addition, while net sales of our fluids purification products are higher in the second quarter of fiscal year 2021 and the first six months of fiscal year 2021 than in the same periods of fiscal year 2020, COVID-19 has negatively impacted the sales of these products.

Reduced travel and, to a lesser extent, our inability due to COVID-19 to participate in our customers' plant tests of our fluids purification products and the continued closures of schools and restaurants has impeded our sales.

Consolidated gross profit has not been significantly impacted by COVID-19.

We did experience some delays of incoming materials from three suppliers due to COVID-19.

We did experience some delays of incoming materials from three suppliers due to COVID-19 during the first six months of fiscal 2021.

However, it did not impact our ability to fulfill customer orders and we continue to monitor our suppliers.

In general, our suppliers have either remained open or we have found new suppliers.

While we have experienced some increase in transportation costs as discussed further below, we have been able to successfully navigate delays in overseas vessel deliveries of our products by increasing our safety stock as well as finding other providers.

We have incurred additional cleaning and sanitation costs to comply with the CDC guidelines, but these costs did not have a

significant impact on our consolidated gross profit.

In addition, we have experienced a decrease in travel costs as our employees have not been traveling during the outbreak.

While we have experienced an increase in transportation costs as discussed further below, we

have continued to meet the increase in customer demand for our products.

In addition, we have been able to successfully navigate delays in overseas vessel deliveries of our products by increasing our safety stock as well as finding other providers.

We have incurred additional cleaning and sanitation costs to comply with the CDC guidelines, but these costs did not have a significant impact on our consolidated gross profit.

In addition, we have experienced a decrease in travel costs as our employees have been traveling at reduced levels during the outbreak.

We are closely monitoring the continued spread and effects of the outbreak of COVID-19 on all aspects of our business, including how it has and may impact our suppliers and customers as well as the effects of the pandemic on economic conditions and the financial markets.

We have not experienced any significant impacts or interruptions and we will continue to closely monitor our inventory levels to mitigate the risk of any potential supply interruptions or changes in customer demand.

However, it is possible that significant disruptions could occur if the pandemic continues to put pressure on transportation and shipping as a result of an imbalance of supply and demand.

The impacts of COVID-19 and related economic conditions on our future results are uncertain at this time.

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The impacts of COVID-19 to our specific operating segments are discussed below.

THREE MONTHS ENDED OCTOBER 31, 2020 COMPARED TO

THREE MONTHS ENDED OCTOBER 31, 2019

SIX MONTHS ENDED JANUARY 31, 2021 COMPARED TO

SIX MONTHS ENDED JANUARY 31, 2020

CONSOLIDATED RESULTS

Consolidated net sales for the three months ended October 31, 2020 were $76,097,000, a 7% increase compared to net sales of $71,122,000 for the three months ended October 31, 2019.

Consolidated net sales for the six months ended January 31, 2021 were $150,597,000, a 6% increase compared to net sales of $142,127,000 for the six months ended January 31, 2020.

Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group.

Segment results are discussed further below.

Consolidated gross profit for the first three months of fiscal year 2021 was $20,304,000, or 27% of net sales, compared to $19,935,000, or 28% of net sales, for the first three months of fiscal year 2020.

While we incurred additional employee compensation costs to meet increased customer demand as well as cleaning and sanitation costs due to COVID-19, these costs did not have a significant impact on our consolidated gross profit.

In addition, the majority of our suppliers have remained open and have been able to meet our increased demand.

Higher freight, packaging, and to some extent, materials costs and non-fuel costs per manufactured ton, drove the decrease in gross profit.

Freight costs per manufactured ton increased approximately 6% for the first three months of fiscal year 2021 compared to the same period in fiscal year 2020 as the result of higher transportation rates due to a national driver shortage and tight trucking capacity in part caused by the return of non-essential businesses and the pre-holiday build driven by both e-commerce and brick and mortar retailers.

Consolidated gross profit for the first six months of fiscal year 2021 was $38,476,000, or 26% of net sales, compared to $38,893,000, or 27% of net sales, for the first six months of fiscal year 2020.

Higher freight, packaging and non-fuel costs per manufactured ton drove the decrease in gross profit.

Freight costs per manufactured ton increased approximately 10% in the first six months of fiscal year 2021 compared to the same period of fiscal year 2020 as the result of higher transportation rates due to a national driver shortage and tight trucking capacity in part caused by the continued return of non-essential businesses.

Our overall freight costs also vary between periods depending on the mix of products sold and the geographic distribution of our customers.

Packaging costs per manufactured ton for the first three months of fiscal year 2021 were approximately 6% higher compared to the first three months of fiscal year 2020 due to product mix.

Despite the tight trucking capacity we have been able to continue to meet the increase in customer demand.

Packaging costs per manufactured ton for the first six months of fiscal year 2021 were approximately 10% higher compared to the first six months of fiscal year 2020 due to product mix and higher commodity costs, particularly as it relates to resin.

Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices.

Our materials costs per manufactured ton were also slightly higher compared to the first three months of the prior fiscal year.

In contrast, the cost of natural gas used to operate kilns that dry our clay was approximately 9% lower per manufactured ton in the first three months of fiscal year 2021 compared to the first three months of fiscal year 2020.

Total SG&A expenses were $15,127,000 for the first three months of fiscal year 2021, a 4% decrease compared to $15,814,000 for the first three months of fiscal year 2020.

Non-fuel costs per manufactured ton such as repairs and purchased materials also increased during the first six months of fiscal year 2021 compared to fiscal year 2020.

In contrast, the cost of natural gas per manufactured ton used to operate kilns that dry our clay was flat in the first six months of fiscal year 2021 compared to the first six months of fiscal year 2020.

In addition, the majority of our suppliers have remained open and have been able to meet our increased demand.

Total SG&A expenses of $29,055,000 for the first six months of fiscal year 2021 were essentially flat compared to $28,899,000 for the first six months of fiscal year 2020.

The discussion of the segments' operating incomes below describes the changes in SG&A expenses that were allocated to the operating segments.

The remaining unallocated corporate expenses were flat in fiscal year 2021 compared to fiscal year 2020.

Other expense of $422,000 for the first quarter of fiscal year 2021 included unfavorable exchange rate losses and higher interest expense due to the new debt agreement entered into in the third quarter of fiscal year 2020.

Consolidated net income before taxes for the first three months of fiscal year 2021 was $4,755,000, a 17% increase from net income before taxes of $4,077,000 for the first three months of fiscal year 2020.

Results for the first three months of fiscal year 2021 were driven by the factors discussed above, including higher sales, lower natural gas costs and lower SG&A expenses, which more than offset the increase in freight and packaging costs.

The tax expense for the first three months of fiscal year 2021 was $806,000 (an effective tax rate of approximately 17%) compared to $617,000 for the first three months of fiscal year 2020 (an effective tax rate of approximately 15%).

annual effective tax rate was used in both periods to determine the provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.

The remaining unallocated corporate expenses includes a lower estimated annual incentive bonus accrual for fiscal year 2021 compared to fiscal year 2020 offset by additional expense related to the increase in employer match for our 401(k) plan.

In addition, the second quarter of the prior fiscal year included a curtailment gain of $1,296,000 related to the freeze of our Supplemental Executive Retirement Plan, which has since been terminated.

Other income of $491,000 for the first six months of fiscal year 2021 includes approximately $800,000 related to a gain upon the annual actuarial valuation of our pension plan.

Consolidated net income before taxes for the first six months of fiscal year 2021 was $9,912,000, a 1% increase from net income before taxes of $9,835,000 for the first six months of fiscal year 2020.

Results for the first six months of fiscal year 2021 were driven by the factors discussed above.

The tax expense for the first six months of fiscal year 2021 was $1,675,000 compared to $1,626,000 for the first six months of fiscal year 2020 (both periods have an effective tax rate of approximately 17%).

An estimated annual effective tax rate was used in both periods to determine the provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for the first three months of fiscal year 2021 increased compared to the first three months of fiscal year 2020.

Net sales were $27,522,000, an increase of $1,044,000, or 4%, from net sales of $26,478,000 for the first three months of fiscal year 2020.

Net sales of our agricultural and horticultural chemical carrier products increased approximately 22% for the first three months of fiscal year 2021 compared to the same period in fiscal year 2020.

The increase in net sales was attributable to an expected shift in timing of sales to one of our largest customers from the last three months of fiscal year 2020 to the first three months of fiscal year 2021 due to that customer resuming its production schedule after it experienced various supplier delays due to COVID-19.

Additionally, agricultural sales increased due to a new business application of our Agsorb product to an existing customer and increased sales to existing customers in the first three months of fiscal year 2021.

Net sales of our fluids purification products increased approximately 3% compared to the first three months of the prior fiscal year.

Net sales increased despite the negative impacts of COVID-19.

Reduced travel due to COVID-19 decreased the sales of our jet fuel fluids purification products.

However, we experienced sales improvement in Europe due to one of our significant customers increasing its purchases from us during the first three months of fiscal year 2021.

Further, sales were stronger in Africa and Latin America due to increased sales by existing customers despite the currency rates in Brazil continuing to negatively impact our business in Latin America.

Net sales of the Business to Business Products Group for the first six months of fiscal year 2021 increased compared to the first six months of fiscal year 2020.

Net sales were $53,805,000, an increase of $2,856,000, or 6%, from net sales of $50,949,000 for the first six months of fiscal year 2020.

Net sales of our agricultural and horticultural chemical carrier products increased approximately $1,737,000 or 17% for the first six months of fiscal year 2021 compared to the same period in fiscal year 2020.

The increase in net sales was attributable to an expected shift in timing of sales to one of our largest customers from the last three months of fiscal year 2020 to fiscal year 2021 due to that customer resuming its production schedule after it experienced various supplier delays due to COVID-19.

Additionally, agricultural sales increased due to a new business application of our Agsorb product to an existing customer, increased sales to existing customers in the first six months of fiscal year 2021 and to some extent, product mix.

Net sales of our fluids purification products increased approximately $801,000 or 3% compared to the first six months of the prior fiscal year despite the negative impacts of COVID-19.

Reduced travel due to COVID-19 decreased the net sales of our jet fuel fluids purification products.

However, we experienced sales improvement in Latin America, Europe, and Africa for a variety of reasons, primarily due to either customer wins or increased sales to existing customers.

The increases in net sales to Latin America and Europe were partially offset by lower sales to North America due to the high quality of oil and therefore less need for our clay products and lower sales to Asia due to price competition.

Sales of our co-packaged coarse cat litter increased approximately 5% during the first months of fiscal year 2021 compared to the prior fiscal year as consumers continued to buy more cat litter.

These higher sales were partially offset by lower sales of our animal health products.

Net sales of our animal health and nutrition products decreased approximately 17% during the first three months of fiscal year 2021 compared to the first three months of the prior year.

Net sales of our animal feed additives declined primarily in Latin America and Africa, while sales in China increased.

See “Foreign Operations” below for a discussion of sales in China.

Net sales were lower in Latin America compared to the same period in the prior fiscal year due to changes in a distributor while decreases in net sales in Africa changed due to timing of a key customer's purchasing due to COVID-19.

We anticipate that sales to this key customer will resume over the next nine months of fiscal year 2021.

SG&A expenses for the Business to Business Products Group decreased approximately 5% for the first three months of fiscal year 2021 compared to the same period of the prior year.

The decrease in SG&A is attributable to various expenses, but was particularly impacted by fewer travel costs due to COVID-19.

The Business to Business Products Group’s operating income for the first three months of fiscal year 2021 was $8,196,000, a decrease of $100,000, or 1%, from operating income of $8,296,000 for the first three months of fiscal year 2020.

The decrease in operating income was driven primarily by the higher freight and packaging costs discussed in “Consolidated Results” above.

Net sales of our co-packaged coarse cat litter increased approximately $365,000 or 5% during the first six months of fiscal year 2021 compared to the same period in the prior fiscal year as consumers continued to buy more cat litter.

Net sales of our animal health and nutrition products were essentially flat during the first six months of fiscal year 2021 compared to the first six months of the prior year as the increases in net sales of our animal feed additives in China and Mexico offset the decreases in net sales in other countries.

See “Foreign Operations” below for a discussion of net sales in China and Mexico.

While net sales of our animal health and nutrition products are flat for the first six months of fiscal year 2021, we experienced a strong second quarter of fiscal year 2021 which is further described below in “Results of Operations for the Three Months ended January 31, 2021”.

SG&A expenses for the Business to Business Products Group increased approximately 9% or $447,000 for the first six months of fiscal year 2021 compared to the same period of the prior fiscal year but are consistent as a percentage of sales.

The increase in SG&A expenses correlates to the higher sales of our animal health products in the second quarter of fiscal year 2021.

In the first six months of fiscal year 2021 we made a concentrated effort to invest in our animal health business through increased sales personnel, leadership, and marketing of our animal health products.

The Business to Business Products Group’s operating income for the first six months of fiscal year 2021 of $15,859,000 was flat compared to operating income of $15,848,000 for the first six months of fiscal year 2020.

While there were higher freight, packaging and non-fuel costs per manufactured ton as discussed in “Consolidated Results” above as well as higher SG&A expenses, the increase in net sales offset these costs.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for the first three months of fiscal year 2021 were $48,575,000, an increase of $3,931,000, or 9%, from net sales of $44,644,000 for the first three months of fiscal year 2020.

Sales of cat litter drove the net sales increase.

Total cat litter net sales were approximately 12% higher compared to the first three months of the prior fiscal year, with increased sales of both private label and branded scoopable litter.

Net sales of the Retail and Wholesale Products Group for the first six months of fiscal year 2021 were $96,792,000, an increase of $5,614,000, or 6%, from net sales of $91,178,000 for the first six months of fiscal year 2020 driven by sales of cat litter.

Total cat litter net sales were approximately $6,909,000 or 9% higher compared to the first six months of the prior fiscal year, with increased sales of both private label and branded scoopable litter.

We gained business from both new customers and from new items sold to existing customers for both private label and branded scoopable litter.

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Cat litter sales by our subsidiary in Canada further contributed to the sales increase, as discussed in “Foreign Operations” below.

Also included in the Retail and Wholesale Products Group's results were lower sales of our industrial and sports products compared to the first three months of fiscal year 2020.

Sales of our industrial and sports products decreased approximately 4% compared to the three months of fiscal year 2020, primarily driven by the continued impact of businesses and sports fields shutting down and/or reducing operations due to COVID-19.

SG&A expenses for the Retail and Wholesale Products Group were lower during the first three months of fiscal year 2021 compared to the first three months of fiscal year 2020 by approximately 9%.

This decrease relates primarily to lower advertising expense during the first three months of fiscal year 2021 based on the timing our our strategic advertising programs.

We expect that advertising expense for the remainder of fiscal year 2021 will be consistent with the prior fiscal year on an aggregate basis.

The Retail and Wholesale Products Group's operating income for the first three months of fiscal year 2021 was $4,478,000, an increase of $1,118,000, or 33%, from operating income of $3,360,000 for the first three months of fiscal year 2020.

The improved operating income was driven by the higher sales described above and by lower advertising and natural gas costs discussed in “Consolidated Results” which more than offset the higher freight and packaging costs which are also discussed in "Consolidated Results" above.

Also included in the Retail and Wholesale Products Group's results were lower sales of our industrial and sports products compared to the first six months of fiscal year 2020.

Net sales of our industrial and sports products decreased approximately $1,040,000 or 7% compared to the first six months of fiscal year

2020, primarily driven by the continued impact of businesses and sports fields shutting down and/or reducing operations due to COVID-19 subsequent to the first half of our fiscal year 2020.

Additionally, a number of sports customers still have inventory on hand from previous seasons which is causing current net sales to be lower.

SG&A expenses for the Retail and Wholesale Products Group were flat during the first six months of fiscal year 2021 compared to the first six months of fiscal year 2020.

The Retail and Wholesale Products Group's operating income for the first six months of fiscal year 2021 was $8,589,000, a decrease of $379,000, or 4%, from operating income of $8,968,000 for the first six months of fiscal year 2020.

The decrease in operating income was driven by the higher freight, packaging and non-fuel costs as discussed in “Consolidated Results” above.

FOREIGN OPERATIONS

Foreign operations include our subsidiaries in Canada and the United Kingdom, which are reported in the Retail and Wholesale Products Group, and our subsidiaries in China, Mexico and Indonesia, which are reported in the Business to Business Products Group.

Net sales by our foreign subsidiaries during the first three months of fiscal year 2021 were $4,136,000, an increase of $487,000, or 13%, compared to net sales of $3,649,000 during the first three months of fiscal year 2020.

All of our foreign operations, with the exception of the United Kingdom, experienced an increase in net sales during the first three months of fiscal year 2021 compared to fiscal year 2020.

Cat litter sales for our Canada subsidiary increased in the first three months of fiscal year 2021 due to new product sales;

Net sales by our foreign subsidiaries during the first six months of fiscal year 2021 were $8,839,000, an increase of $1,685,000, or 24%, compared to net sales of $7,154,000 during the first six months of fiscal year 2020.

All of our foreign operations, with the exception of the United Kingdom, experienced an increase in net sales during the first six months of fiscal year 2021 compared to fiscal year 2020.

Cat litter sales for our Canada subsidiary increased by approximately $784,000 or 31% in the first six months of fiscal year 2021 compared to the same period in the prior fiscal year due to new product sales;

higher sales to existing customers;

in-store promotions;

and some pantry loading in eastern Canada due to a second COVID-19 wave.

Despite the continued impacts of the African Swine Fever to pork consumption, sales of our animal health products in China were higher during the first three months of fiscal year 2021 compared to fiscal year 2020 due to a new contract with an existing customer.

and some anticipatory purchasing by customers ("pantry loading") in eastern Canada due to a second wave of COVID-19 infections and lockdown restrictions during the first three months of fiscal year 2021.

Sales of our animal health products by our foreign operations grew during the first six months of fiscal year 2021 compared to the same period in fiscal year 2020, particularly in China and Mexico.

Net sales in China increased approximately $831,000 or 81% during the first six months of fiscal year 2021 as compared to the same period in fiscal year 2020.

Despite the continued impacts of the African Swine Fever to pork consumption, sales of our animal health products in China were higher during the first six months of fiscal year 2021 compared to fiscal year 2020 due to a new contract with an existing customer;

increased sales to existing customers;

winning back several distributors and implementing a concentrated sales and marketing effort.

To some extent, the increase in net sales also relates to the economy starting to recover in China from the six month period last year when the pandemic and lockdowns were already prevalent in China.

Sales of our animal health products in Mexico also increased during the first six months of fiscal year 2021 compared to fiscal year 2020 due to several small customer wins as well as increased sales to existing customers.

Higher sales for these subsidiaries were partially offset by lower net sales for our subsidiary in the United Kingdom.

The effect of COVID-19 lockdowns and restrictions on the industry in Europe has, to some extent, reduced demand for our industrial floor granules.

Net sales by our foreign subsidiaries represented 5% of our consolidated net sales during the first three months of both fiscal years 2021 and 2020.

Our foreign subsidiaries reported a net loss of $212,000 for the first three months of fiscal year 2021, compared to a net loss of $68,000 for the first three months of fiscal year 2020.

The net loss was primarily driven by lower net sales for our subsidiary in the United Kingdom.

In addition, the majority of our foreign subsidiaries experienced losses due to unfavorable exchange rates.

Identifiable assets of our foreign subsidiaries as of October 31, 2020 were $11,991,000, compared to $9,712,000 as of October 31, 2019.

The increase was attributed primarily to working capital contributed to our subsidiary in Mexico during the third quarter of fiscal year 2020 that has not yet been used as well as an increase in inventory for our subsidiaries in Canada, China and Indonesia in anticipation of meeting customer needs and thwarting any potential supply chain disruptions due to COVID-19.

Also contributing to the decrease in sales of our subsidiary in the United Kingdom was one of our customers discontinuing a product that used our clay granules.

Net sales by our foreign subsidiaries represented 6% and 5%, respectively, of our consolidated net sales during the first six months of fiscal year 2021 and 2020.

Our foreign subsidiaries reported a net loss of $42,000 for the first six months of fiscal year 2021, compared to a net loss of $169,000 for the first six months of fiscal year 2020.

The net loss was primarily driven by lower net sales for our subsidiary in the United Kingdom and continued investment in our subsidiary in Indonesia.

The improvement during the first six months of fiscal year 2021 compared to fiscal year 2020 relates primarily to our subsidiaries in China and Mexico with the improvements in Mexico primarily occurring in the second quarter of fiscal year 2021 as described below in “Results of Operations for the Three Months ended January 31, 2021”.

Identifiable assets of our foreign subsidiaries as of January 31, 2021 were $12,249,000, compared to $10,158,000 as of January 31, 2020.

The increase was attributed primarily to working capital contributed to our subsidiary in Mexico during the third quarter of fiscal year 2020 that has not yet been used;

an increase in inventory for our subsidiaries in Canada, China and Indonesia in anticipation of meeting customer needs and thwarting any potential supply chain disruptions due to COVID-19 and to some extent, an increase in accounts receivable due to the increase in sales.

THREE MONTHS ENDED JANUARY 31, 2021 COMPARED TO

THREE MONTHS ENDED JANUARY 31, 2020

CONSOLIDATED RESULTS

Consolidated net sales for the three months ended January 31, 2021 were $74,500,000, a 5% increase compared to net sales of $71,005,000 for the three months ended January 31, 2020.

Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group.

Segment results are discussed further below.

Consolidated gross profit for the three months ended January 31, 2021 was $18,172,000, or 24% of net sales, compared to $18,958,000, or 27% of net sales, for the second quarter of fiscal year 2020.

Higher freight, natural gas, packaging and non-fuel costs per manufactured ton drove the decrease in gross profit.

Freight costs per manufactured ton increased approximately 13% in the second quarter of fiscal year 2021 compared to the same period of fiscal year 2020 as the result of higher transportation rates due to a national driver shortage and tight trucking capacity in part caused by the continued return of non-essential businesses.

Our overall freight costs also vary between periods depending on the mix of products sold and the geographic distribution of our customers.

Despite the tight trucking capacity, we have been able to continue to meet the increase in customer demand.

The cost of natural gas used to operate kilns that dry our clay was approximately 8% higher per manufactured ton for the second quarter of fiscal year 2021 compared to the same period of fiscal year 2020 due to the increase in gas prices.

In addition, packaging costs per manufactured ton were approximately 13% higher compared to the second quarter of the prior fiscal year, driven primarily by the mix of products produced and rising commodity prices, particularly as it relates to resin.

Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices.

In addition, our non-fuel manufacturing costs per ton increased during the second quarter of fiscal year 2021 compared to the same period in fiscal year 2020, particularly due to higher costs for purchased materials and labor.

While we incurred additional employee compensation costs to meet increased customer demand as well as cleaning and sanitation costs in the second quarter of fiscal 2021 due to COVID-19, these costs did not have a significant impact on our consolidated gross profit.

Further, our suppliers have either remained open or we have found new suppliers to meet our increased customer demand without any price increases.

Total SG&A expenses were $13,928,000 for the second quarter of fiscal year 2021, a 6% increase compared to $13,085,000 for the second quarter of fiscal year 2020.

The discussion below describes the SG&A expenses allocated to the operating segments.

Other income of $913,000 for the second quarter of fiscal year 2021 includes approximately $800,000 related to a gain upon the annual actuarial valuation of our pension plan.

Consolidated net income before taxes for the second quarter of fiscal year 2021 was $5,157,000, compared to net income before taxes of $5,758,000 for the second quarter of fiscal year 2020.

Results for the second quarter of fiscal year 2021 were driven by the factors described above.

Tax expense was $869,000 for the second quarter of fiscal year 2021, compared to $1,009,000 for the second quarter of fiscal year 2020, which resulted in an effective tax rate of 17% and 18%, respectively.

We used an estimated annual effective tax rate in determining our quarterly provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for the second quarter of fiscal year 2021 were $26,283,000, an increase of $1,812,000, or 7%, from net sales of $24,471,000 for the second quarter of fiscal year 2020.

Net sales increased for all of our products within the Business to Business Products Group .

Net sales of our animal health and nutrition products increased 20% or approximately $774,000 in the second quarter of fiscal 2021.

Net s ales increased in almost all of our markets for our animal feed additives, particularly in China, Latin America, and Mexico.

See “Foreign Operations” below for a discussion of net sales in China and Mexico.

Net sales in Latin America increased due to winning new business.

In addition, a change in one of our distributors last quarter is coming to fruition during the second quarter of fiscal year 2021 resulting in higher sales.

Net sales of our agricultural and horticultural chemical carrier products increased $469,000 or 10%, the majority of which relates to increased sales to existing customers and product mix.

Net sales of our fluids purification products increased approximately $383,000 or 3% for the second quarter of fiscal year 2021.

Net sales increased despite the negative impacts of COVID-19.

Reduced air travel due to COVID-19 decreased the sales of our jet fuel fluids purification products.

However, we experienced sales improvement in Latin America, Europe, and Africa for a variety of reasons, primarily due to either customer wins or increased sales to existing customers.

Sales in Latin America increased due to one of our existing customers starting to buy from us again after a period of little to no sales.

Another of our customers in Latin America opened a new facility and has increased its orders from us.

The increase in net sales in Europe and Africa relate to higher net sales of our bleaching clay to existing customers.

The increases in net sales were partially offset by lower sales to North America due to the high quality of oil and therefore less need for our clay products and lower sales to Asia due to reduced air travel.

Net sales of our co-packaged coarse cat litter for the second quarter were approximately $186,000 or 5% higher compared to the second quarter of the prior year as consumers continued to purchase more cat litter and related products.

SG&A expenses for the Business to Business Products Group were approximately $614,000 or 26% higher compared to the second quarter of fiscal year 2020, but are relatively consistent as a percentage of sales.

The increase in SG&A expenses correlates to the higher sales of our animal health products in the second quarter of fiscal year 2021 as mentioned above.

During the second quarter of fiscal year 2021 we made a concentrated effort to invest in our animal health business through increased sales personnel, leadership, and marketing of our animal health products.

The Business to Business Products Group’s operating income for the second quarter of fiscal year 2021 was $7,663,000, an increase of $111,000, or 1%, from operating income of $7,552,000 in the second quarter of fiscal year 2020.

The improved operating income was driven by the increase in net sales which exceeded the increase in freight, natural gas, packaging, and non-fuel manufacturing costs discussed in “Consolidated Results” above as well as the increase in SG&A.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for the second quarter of fiscal year 2021 were $48,217,000, an increase of $1,683,000, or 4%, from net sales of $46,534,000 for the second quarter of fiscal year 2020.

Total cat litter net sales increased 6%, or $2,494,000, compared to the second quarter of fiscal year 2020, driven by increased sales of both private label and branded scoopable litters to existing customers.

Further, an increase in e-commerce sales, where the customer base differs from brick and mortar customers, continues to increase cat litter sales.

The impact of COVID-19 on increased pet adoption continues to boost sales as well as the overall macro trend of increased spending on pets.

Cat litter sales by our subsidiary in Canada also contributed to the sales increase, as discussed in “Foreign Operations” below.

Also included in the Retail and Wholesale Products Group's results were lower sales of our industrial and sports products compared to the second quarter of fiscal year 2020.

Sales of our industrial and sports products decreased 10%, or approximately $702,000, compared to the second quarter of fiscal year 2020, primarily driven by the impact of businesses and sports fields shutting down due to COVID-19 subsequent to our second quarter of fiscal year 2020.

Additionally, a number of sports customers still have inventory on hand from previous seasons which is causing current sales to be lower.

SG&A expenses for the Retail and Wholesale Products Group were higher in the second quarter of fiscal year 2021 than in fiscal year 2020 by 15% or $533,000, primarily due to the timing of our advertising programs and costs.

We anticipate total advertising expense in fiscal year 2021 will be comparable to fiscal year 2020.

For the second quarter of fiscal year 2021, the Retail and Wholesale Products Group reported operating income of $4,111,000, a decrease of $1,497,000, compared to operating income of $5,608,000 for the second quarter of fiscal year 2020.

The decrease in operating income was driven by the higher freight, natural gas, packaging, and non-fuel manufacturing costs described above in “Consolidated Results”.

FOREIGN OPERATIONS

Net sales by our foreign subsidiaries during the second quarter of fiscal year 2021 were $4,703,000, a 34% increase compared to net sales of $3,505,000 in the second quarter of fiscal year 2020.

Cat litter sales for our Canada subsidiary increased by approximately $563,000 or 44% in the second quarter of fiscal year 2021 compared to the same period of fiscal year 2020 due to new product sales;

higher sales to existing customers;

and in-store promotions.

In addition, the impact of COVID-19 on increased pet adoption continues to boost cat litter sales as well as the overall macro trend of increased spending on pets.

Sales of our animal health products by our foreign operations grew during the second quarter of fiscal year 2021 compared to fiscal year 2020, particularly in China and Mexico.

Net sales in China increased approximately $647,000 or 140% during the second quarter of fiscal year 2021 as compared to the same period in fiscal year 2020.

Despite the continued impacts of the African Swine Fever to pork consumption, net sales in the second quarter of fiscal year 2021 in China were strong for various reasons.

The new contract with an existing customer won in the prior quarter continues to generate additional revenue and we also won back several distributors which contributed to a strong second quarter of fiscal year 2021.

To some extent, the increase in net sales also relates to the economy starting to recover in China as compared to the second quarter last year when the pandemic and lockdowns were already prevalent in China.

In Mexico, there were several small customer wins as well as increased sales to existing customers.

The increase in sales of our cat litter and animal health products were somewhat offset by lower sales for our subsidiary in the United Kingdom.

The effect of COVID-19 lockdowns and restrictions on the industry in Europe has, to some extent, reduced demand for our industrial floor granules.

Also contributing to the decrease in sales of our subsidiary in the United Kingdom was one of our customers discontinuing a product that used our clay granules.

Our foreign subsidiaries' net sales represented approximately 6% and 5%, respectively, of consolidated net sales during the second quarters of fiscal years 2021 and 2020.

Our foreign subsidiaries reported net income of $170,000 for the second quarter of fiscal year 2021 compared to a net loss of $101,000 for the second quarter of fiscal year 2020 driven by the increase in sales for our subsidiaries in Canada, China and Mexico.

LIQUIDITY AND CAPITAL RESOURCES

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and, from time to time, business acquisitions.

During the first three months of fiscal year 2021, we principally funded these requirements using cash from current operations as well as cash generated in the fourth quarter of fiscal year 2020 from borrowings and a one-time receipt of cash related to licensing of certain of our patents.

During the first six months of fiscal year 2021, we principally funded these requirements using cash from current operations as well as cash generated in the fourth quarter of fiscal year 2020 from borrowings and a one-time receipt of cash related to licensing of certain of our patents.

To date, COVID-19 has not had a significant impact on our operations as a whole, and we anticipate cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements.

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The following table sets forth certain elements of our unaudited Condensed Consolidated Statements of Cash Flows (in thousands):

For the Three Months Ended October 31,

Net cash (used in) provided by operating activities $ (3,435) $ 6,692

For the Six Months Ended January 31,

Net cash provided by operating activities $ 3,085 $ 14,270

Net cash used in investing activities (7,595) (7,286)

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Net decrease in cash and cash equivalents $ (10,182) $ (293)

Net cash (used in) provided by operating activities

In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first three months of fiscal years 2021 and 2020 were as follows:

Accounts receivable, less allowance for doubtful accounts, increased $4,256,000 in the first three months of fiscal year 2021 compared to an increase of $791,000 in the first three months of fiscal year 2020.

Higher sales in the first quarter of fiscal year 2021 compared to the first quarter of fiscal year 2020 drove the increase in accounts receivable as of October 31, 2020.

Net cash provided by operating activities

In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first six months of fiscal years 2021 and 2020 were as follows:

Accounts receivable, less allowance for doubtful accounts, increased $3,836,000 in the first six months of fiscal year 2021 compared to an increase of $213,000 in the first six months of fiscal year 2020.

Higher sales in the first six months of fiscal year 2021 compared to the first six months of fiscal year 2020 drove the increase in accounts receivable as of January 31, 2021.

The variation in accounts receivable balances also reflects differences in the level and timing of collections as well as the payment terms provided to various customers.

Inventory decreased $462,000 in the first three months of fiscal year 2021 compared to a decrease of $371,000 in the first three months of fiscal year 2020 due to decreases in other inventory and finished goods.

Other inventory includes a variety of items including clay, additives, fragrances and other supplies.

Other inventory decreased due to increased demand during the first three months of fiscal year 2021.

Finished goods decreased during the first three months of fiscal year 2021 due to higher sales.

Packaging and other purchased materials inventory decreased as of October 31, 2019 due to higher production and efforts to better manage our safety stock levels.

Prepaid expenses decreased $458,000 in the first three months of fiscal year 2021.

Lower prepaid advertising costs partially offset by higher prepaid repairs drove the overall decrease in prepaid expenses.

Lower prepaid advertising costs also drove the decrease of $1,578,000 in the first quarter of fiscal year 2020.

Other assets increased $985,000 in the first three months of fiscal year 2021 compared to a decrease of $316,000 in the first three months of fiscal year 2020.

The increase in other assets relates to an increase in capitalized pre-production mining costs.

The decrease during the first three months of fiscal year 2020 related to amortization of our operating lease right-of-use lease assets.

Accounts payable, including income taxes payable, decreased $1,435,000 in the first three months of fiscal year 2021 compared to an increase of $835,000 in the first three months of fiscal year 2020.

Lower trade and freight payables drove the decrease in accounts payable in the first three months of fiscal year 2021.

Inventory decreased $412,000 in the first six months of fiscal year 2021 compared to a decrease of $1,508,000 in the first six months of fiscal year 2020 due to decreases in other inventory and finished goods offset by an increase in packaging.

Overall, the decrease is due to increased demand during the first six months of fiscal year 2021 offset by higher packaging costs.

Packaging and finished goods decreased as of January 31, 2020 due to higher production and efforts to better manage our safety stock levels.

In addition, our inventory obsolescence reserve increased during the first six months of fiscal year 2020 which is attributable to our focus on inventory management and enhanced data available from our new ERP system.

Prepaid expenses increased $760,000 in the first six months of fiscal year 2021 driven primarily by prepayment of income taxes.

This increase in fiscal year 2021 was offset by lower prepaid advertising costs and insurance.

Lower prepaid advertising costs and insurance also drove the decrease of $1,561,000 during the first six months of fiscal year 2020.

Other assets increased $266,000 in the first six months of fiscal year 2021 compared to a decrease of $731,000 in the first six months of fiscal year 2020.

The increase in other assets relates primarily to an increase in capitalized pre-production mining costs offset by amortization of our operating lease right-of-use lease assets.

Amortization of our operating lease right-of-use lease assets also drove the decrease in the first six months of fiscal 2020.

Accounts payable, including income taxes payable, decreased $3,901,000 in the first six months of fiscal year 2021 compared to an increase of $2,661,000 in the first six months of fiscal year 2020.

Lower trade payables drove the decrease in accounts payable in the first six months of fiscal year 2021 as well as income taxes payable being in a prepaid position versus a payable position at the end of the second quarter of fiscal year 2021.

Trade and freight payables vary in both periods due to the timing of payments, fluctuations in the cost of goods and services we purchased, production volume levels and vendor payment terms.

Higher accrued income taxes drove the increase in the first three months of fiscal year 2020.

Accrued expenses decreased $8,106,000 in the first three months of fiscal year 2021 compared to a decrease of $3,812,000 in the first three months of fiscal year 2020.

Higher accrued income taxes due to higher net income drove the increase in the first half of fiscal year 2020.

Accrued expenses decreased $5,201,000 in the first six months of fiscal year 2021 compared to a decrease of $1,602,000 in the first six months of fiscal year 2020.

The payout of the prior fiscal year's discretionary incentive bonus reduced accrued salaries in both fiscal years, but to a greater extent in fiscal year 2021 as the accrual was higher in the prior fiscal year.

Accrued advertising also decreased in the first three months of fiscal year 2021.

Theses decreases were partially offset by an increase in accrued freight.

In contrast, the decrease in accrued expenses in the first three months of fiscal year 2020 related to a decrease in accrued freight.

Accrued advertising also decreased in the first six months of fiscal year 2021 more than the same period of fiscal year 2020 due to timing of our advertising programs.

Accrued real estate taxes also decreased based on lower real estate taxes for one of our facilities.

These decreases were partially offset by the reclassification of the current portion of the deferred employer payroll taxes under the CARES Act which is due by the end of calendar year 2021 as further described in Note 1 of the Notes to the unaudited Condensed Financial Statements and an increase in accrued freight.

In contrast, the decrease in accrued expenses in the first six months of fiscal year 2020 related to a decrease in accrued freight.

Accrued freight can vary with freight rates, timing of shipments, and production requirements.

In addition, accrued plant expenses can also fluctuate due to timing of payments, changes in the cost of goods and services we purchase, production volume levels and vendor payment terms.

Other liabilities increased $1,135,000 in the first three months of fiscal year 2021 compared to a decrease of $474,000 in the first three months of fiscal year 2020.

The increase in other liabilities for the first three months of fiscal year 2021 relates to the deferral of employer taxes under the CARES Act as further described in Note 1 of the Notes to unaudited Condensed Financial Statements.

The decrease in fiscal year 2020 is due to a reclassification of the deferred lease liability to operating lease liabilities.

Pension and postretirement benefits decreased $437,000 in the first six months of fiscal year 2021 compared to a decrease of $5,536,000 in the first six months of fiscal year 2020.

The liability decreased during the first six months of fiscal year 2021 due to reduced service expense related to the Pension Plan which was frozen in fiscal year 2020.

The decrease in the first six months of fiscal year 2020 relates to the curtailment of our Pension Plan during the second quarter of that fiscal year which reduced the pension benefit obligation.

Other liabilities decreased $857,000 in the first six months of fiscal year 2021 compared to a decrease of $1,052,000 in the first six months of fiscal year 2020.

The decrease in other liabilities for the first six months of fiscal year 2021 relates to reclassifying the current portion of the deferral of employer taxes under the CARES Act to current liabilities.

The decrease in fiscal year 2020 for the same period is due to a reclassification of the deferred lease liability to operating lease liabilities.

Net cash used in investing activities

Cash used in investing activities was $3,565,000 in the first three months of fiscal year 2021 compared to cash used in investing activities of $3,900,000 in the first three months of fiscal year 2020.

Cash used for capital expenditures was slightly lower for the first three months of fiscal year 2021 than fiscal year 2020.

Cash used in investing activities of $7,595,000 in the first six months of fiscal year 2021 was slightly higher than cash used in investing activities of $7,286,000 in the first six months of fiscal year 2020 driven by capital expenditures.

Net cash used in financing activities

Cash used in financing activities of $2,781,000 in the first three months of fiscal year 2021 was lower than cash used in financing activities of $5,344,000 in the first three months of fiscal year 2020.

The first three months of fiscal year 2020 included the semi-annual payment on the then existing notes payable.

Cash used in financing activities of $5,795,000 in the first six months of fiscal year 2021 was lower than cash used in financing activities of $7,133,000 in the first six months of fiscal year 2020.

The first six months of fiscal year 2021 includes higher purchases of treasury stock than in the first six months of fiscal year 2020.

Offsetting this increase is lower payments on our notes payable.

The first six months of fiscal year 2020 included the semi-annual payment on the then existing notes payable.

The remaining notes payable were paid in the fourth quarter of fiscal year 2020 and replaced by a new notes payable agreement as further described below.

No payments on the new notes payable agreement are yet due.

Total cash and investment balances held by our foreign subsidiaries of $3,221,000 as of October 31, 2020 were slightly higher than the October 31, 2019 balances of $3,042,000.

Total cash and investment balances held by our foreign subsidiaries of $3,411,000 as of January 31, 2021 were slightly higher than the January 31, 2020 balances of $3,042,000.

See further discussion in “Foreign Operations” above.

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The agreement terms also state that we may select a variable interest rate based on either the BMO Harris prime rate or a LIBOR-based rate, plus a margin that varies depending on our debt to earnings ratio, or a fixed rate as agreed between us and BMO Harris.

As of October 31, 2020, the variable rates would have been 3.50% for the BMO Harris prime-based rate or 1.47% for the three-month LIBOR-based rate.

As of January 31, 2021, the variable rates would have been 3.50% for the BMO Harris prime-based rate or 1.45% for the three-month LIBOR-based rate.

The credit agreement contains restrictive covenants that, among other things and under various conditions, limit our ability to incur additional indebtedness or to dispose of assets.

The agreement also requires us to maintain a minimum fixed coverage ratio and a minimum consolidated net worth.

As of October 31, 2020 and 2019, we were in compliance with the covenants.

There were no borrowings during the first three months of either fiscal year 2020 or 2021.

As of January 31, 2021 and 2020, we were in compliance with the covenants.

There were no borrowings during the first six months of either fiscal year 2020 or 2021.

On May 15, 2020, we entered into a new debt instrument pursuant to which, among other things, we issued $10,000,000 in aggregate principal amount of our 3.95% Series B Senior Notes due May 15, 2030 and entered into an amended note agreement that provides the Company with the ability to request, from time to time until May 15, 2023 (or such earlier date as provided for in the agreement), additional senior unsecured notes of the Company in an aggregate principal amount of up to $75,000,000 minus the aggregate principal amount of the notes then outstanding and the additional notes that have been accepted for purchase.

The issuance of such additional notes is at the discretion of the noteholders and purchasers and on an uncommitted basis.

As of October 31, 2020 outstanding notes payable were $9,857,000, net of $143,000 of unamortized debt issuance costs.

As of October 31, 2020, we had remaining authority to repurchase 871,616 shares of Common Stock and 278,250 shares of Class B Stock under a repurchase plan approved by our Board of Directors (the “Board”).

As of January 31, 2021 outstanding notes payable were $9,864,000, net of $136,000 of unamortized debt issuance costs.

As of January 31, 2021, we had remaining authority to repurchase 838,022 shares of Common Stock under a repurchase plan approved by our Board of Directors (the “Board”).

Repurchases may be made on the open market (pursuant to Rule 10b5-1 plans or otherwise) or in negotiated transactions.

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GAAP for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X.

The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related

The preparation of these financial statements

requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures.

In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis