Oil-Dri Corp of America 10-Q

ITEM 1. Financial Statements OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Balance Sheet (in thousands, except share and per share amounts) (unaudited) ASSETS January 31, 2022 July 31, 2021 Current Assets Cash and cash equivalents $ 29,009 $ 24,591 Accounts receivable, less allowance of $ 1,093 and $ 1,174 at January 31, 2022 and July 31, 2021, respectively 45,970 40,923 Inventories 29,797 23,598 Prepaid repairs 6,454 6,088 Prepaid expenses and other assets 5,524 6,742 Total Current Assets 116,754 101,942 Property, Plant and Equipment Cost 272,980 274,825 Less accumulated depreciation and amortization ( 173,119 ) ( 178,885 ) Total Property, Plant and Equipment, Net 99,861 95,940 Other Assets Goodwill 9,262 9,262 Other intangibles, net of accumulated amortization of $ 471 and $ 385 at January 31, 2022 and July 31, 2021, respectively 1,792 1,743 Customer list, net of accumulated amortization of $ 7,464 and $ 7,321 at January 31, 2022 and July 31, 2021, respectively 321 464 Deferred income taxes 2,066 2,096 Operating lease right-of-use assets 10,570 8,619 Other 6,588 7,500 Total Other Assets 30,599 29,684 Total Assets $ 247,214 $ 227,566 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 3 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Balance Sheet (continued) (in thousands, except share and per share amounts) (unaudited) LIABILITIES & STOCKHOLDERS’ EQUITY January 31, 2022 July 31, 2021 Current Liabilities Current maturities of notes payable $ 1,000 $ 1,000 Accounts payable 10,145 9,206 Dividends payable 1,845 1,865 Operating lease liabilities 2,080 2,036 Accrued expenses 23,802 24,883 Total Current Liabilities 38,872 38,990 Noncurrent Liabilities Notes payable, net of unamortized debt issuance costs of $ 222 and $ 122 at January 31, 2022 and July 31, 2021, respectively 32,778 7,878 Deferred compensation 5,060 4,370 Pension and postretirement benefits 4,253 4,922 Long-term operating lease liabilities 9,892 8,022 Other 3,068 4,152 Total Noncurrent Liabilities 55,051 29,344 Total Liabilities 93,923 68,334 Stockholders’ Equity Common Stock, par value $ .10 per share, issued 8,667,968 shares at January 31, 2022 and 8,561,311 shares at July 31, 2021 867 856 Class B Stock, par value $ .10 per share, issued 2,397,056 shares at January 31, 2022 and 2,397,056 shares at July 31, 2021 240 240 Additional paid-in capital 50,220 48,271 Retained earnings 179,322 180,443 Noncontrolling interest ( 338 ) ( 307 ) Accumulated Other Comprehensive Loss: Pension and postretirement benefits ( 4,375 ) ( 4,428 ) Cumulative translation adjustment 217 311 Total Accumulated Other Comprehensive Loss ( 4,158 ) ( 4,117 ) Less Treasury Stock, at cost ( 3,380,955 Common and 351,641 Class B shares at January 31, 2022 and 3,192,702 Common and 346,491 Class B shares at July 31, 2021) ( 72,862 ) ( 66,154 ) Total Stockholders’ Equity 153,291 159,232 Total Liabilities & Stockholders’ Equity $ 247,214 $ 227,566 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 4 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Income (in thousands, except for per share amounts) (unaudited) For the Six Months Ended January 31, 2022 2021 Net Sales $ 169,670 $ 150,597 Cost of Sales (1) ( 140,266 ) ( 115,128 ) Gross Profit 29,404 35,469 Selling, General and Administrative Expenses (1) ( 27,041 ) ( 26,048 ) Income from Operations 2,363 9,421 Other Income (Expense) Interest expense ( 490 ) ( 356 ) Interest income 17 40 Other, net 1,190 807 Total Other Income, Net 717 491 Income Before Income Taxes 3,080 9,912 Income Tax Expense ( 524 ) ( 1,675 ) Net Income 2,556 8,237 Net Loss Attributable to Noncontrolling Interest ( 31 ) ( 46 ) Net Income Attributable to Oil-Dri $ 2,587 $ 8,283 Net Income Per Share Basic Common $ 0.38 $ 1.20 Basic Class B Common $ 0.28 $ 0.89 Diluted Common $ 0.37 $ 1.17 Diluted Class B Common $ 0.28 $ 0.88 Average Shares Outstanding Basic Common 5,095 5,149 Basic Class B Common 1,930 1,930 Diluted Common 5,211 5,265 Diluted Class B Common 1,966 1,972 Dividends Declared Per Share Basic Common $ 0.5400 $ 0.5200 Basic Class B Common $ 0.4050 $ 0.3900 (1) See Note 1 of the Notes to the unaudited Condensed Consolidated Financial Statements for further information about amounts included in this line item. The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 5 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Comprehensive Income (in thousands of dollars) (unaudited) For the Six Months Ended January 31, 2022 2021 Net Income Attributable to Oil-Dri $ 2,587 $ 8,283 Other Comprehensive (Loss) Income: Pension and postretirement benefits (net of tax) 53 329 Cumulative translation adjustment ( 94 ) 408 Other Comprehensive (Loss) Income ( 41 ) 737 Total Comprehensive Income $ 2,546 $ 9,020 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 6 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Income (in thousands, except for per share amounts) (unaudited) For the Three Months Ended January 31, 2022 2021 Net Sales $ 87,210 $ 74,500 Cost of Sales (1) ( 71,624 ) ( 57,811 ) Gross Profit 15,586 16,689 Selling, General and Administrative Expenses (1) ( 13,668 ) ( 12,445 ) Income from Operations 1,918 4,244 Other Income (Expense) Interest expense ( 313 ) ( 164 ) Interest income 8 15 Other, net 757 1,062 Total Other Income, Net 452 913 Income Before Income Taxes 2,370 5,157 Income Tax Expense ( 409 ) ( 869 ) Net Income 1,961 4,288 Net Loss Attributable to Noncontrolling Interest ( 41 ) ( 11 ) Net Income Attributable to Oil-Dri $ 2,002 $ 4,299 Net Income Per Share Basic Common $ 0.29 $ 0.62 Basic Class B Common $ 0.22 $ 0.47 Diluted Common $ 0.28 $ 0.61 Diluted Class B Common $ 0.22 $ 0.46 Average Shares Outstanding Basic Common 5,077 5,150 Basic Class B Common 1,939 1,934 Diluted Common 5,186 5,253 Diluted Class B Common 1,965 1,967 Dividends Declared Per Share Basic Common $ 0.2700 $ 0.2600 Basic Class B Common $ 0.2025 $ 0.1950 (1) See Note 1 of the Notes to the unaudited Condensed Consolidated Financial Statements for further information about amounts included in this line item. The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 7 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Comprehensive Income (in thousands of dollars) (unaudited) For the Three Months Ended January 31, 2022 2021 Net Income Attributable to Oil-Dri $ 2,002 $ 4,299 Other Comprehensive (Loss) Income: Pension and postretirement benefits (net of tax) 26 201 Cumulative translation adjustment ( 60 ) 136 Other Comprehensive (Loss) Income ( 34 ) 337 Total Comprehensive Income $ 1,968 $ 4,636 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 8 OIL-DRI CORPORATION OF AMERICA Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) For the Three Months Ended January 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, October 31, 2020 10,919,617 ( 3,453,239 ) $ 1,092 $ 45,779 $ 178,761 $ ( 63,253 ) $ ( 11,854 ) $ ( 209 ) $ 150,316 Net Income (Loss) — — — — 4,299 — — ( 11 ) 4,288 Other Comprehensive Income — — — — — — 337 — 337 Dividends Declared — — — — ( 1,795 ) — — — ( 1,795 ) Purchases of Treasury Stock — ( 33,594 ) — — — ( 1,211 ) — — ( 1,211 ) Net issuance of stock under long-term incentive plans 18,000 ( 20,950 ) 2 605 — ( 607 ) — — — Amortization of Restricted Stock — — — 506 — — — — 506 Balance, January 31, 2021 10,937,617 ( 3,507,783 ) $ 1,094 $ 46,890 $ 181,265 $ ( 65,071 ) $ ( 11,517 ) $ ( 220 ) $ 152,441 Balance, October 31, 2021 11,033,024 ( 3,618,510 ) $ 1,103 $ 49,377 $ 179,164 $ ( 68,922 ) $ ( 4,124 ) $ ( 297 ) $ 156,301 Net Income (Loss) — — — — 2,002 — — ( 41 ) 1,961 Other Comprehensive Loss — — — — — — ( 34 ) — ( 34 ) Dividends Declared — — — — ( 1,844 ) — — — ( 1,844 ) Purchases of Treasury Stock — ( 113,236 ) — — — ( 3,910 ) — — ( 3,910 ) Net issuance of stock under long-term incentive plans 32,000 ( 850 ) 4 26 — ( 30 ) — — — Amortization of Restricted Stock — — — 817 — — — — 817 Balance, January 31, 2022 11,065,024 ( 3,732,596 ) $ 1,107 $ 50,220 $ 179,322 $ ( 72,862 ) $ ( 4,158 ) $ ( 338 ) $ 153,291 For the Six Months Ended January 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, 2020 10,886,405 ( 3,426,046 ) $ 1,089 $ 44,993 $ 176,579 $ ( 62,269 ) $ ( 12,254 ) $ ( 174 ) $ 147,964 Net Income (Loss) — — — — 8,283 — — ( 46 ) 8,237 Other Comprehensive Income — — — — — — 737 — 737 Dividends Declared — — — — ( 3,597 ) — — — ( 3,597 ) Purchases of Treasury Stock — ( 60,587 ) — — — ( 2,189 ) — — ( 2,189 ) Net issuance of stock under long-term incentive plans 51,212 ( 21,150 ) 5 607 — ( 613 ) — — ( 1 ) Amortization of Restricted Stock — — — 1,290 — — — — 1,290 Balance, January 31, 2021 10,937,617 ( 3,507,783 ) $ 1,094 $ 46,890 $ 181,265 $ ( 65,071 ) $ ( 11,517 ) $ ( 220 ) $ 152,441 Balance, July 31, 2021 10,958,367 ( 3,539,193 ) $ 1,096 $ 48,271 $ 180,443 $ ( 66,154 ) $ ( 4,117 ) $ ( 307 ) $ 159,232 Net Income (Loss) — — — — 2,587 — — ( 31 ) 2,556 Other Comprehensive Loss — — — — — — ( 41 ) — ( 41 ) Dividends Declared — — — — ( 3,708 ) — — — ( 3,708 ) Purchases of Treasury Stock — ( 179,003 ) — — — ( 6,201 ) — — ( 6,201 ) Net issuance of stock under long-term incentive plans 106,657 ( 14,400 ) 11 496 — ( 507 ) — — — Amortization of Restricted Stock — — — 1,453 — — — — 1,453 Balance, January 31, 2022 11,065,024 ( 3,732,596 ) $ 1,107 $ 50,220 $ 179,322 $ ( 72,862 ) $ ( 4,158 ) $ ( 338 ) $ 153,291 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 9 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) For the Six Months Ended January 31, CASH FLOWS FROM OPERATING ACTIVITIES 2022 2021 Net Income $ 2,556 $ 8,237 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,773 7,065 Non-cash stock-based compensation 1,453 1,290 Deferred income taxes 32 742 Provision for bad debts and cash discounts ( 59 ) ( 38 ) Loss on the disposals of property, plant and equipment 265 12 (Increase) Decrease in assets: Accounts receivable ( 5,023 ) ( 3,798 ) Inventories ( 6,236 ) 412 Prepaid expenses 846 ( 760 ) Other assets 634 ( 266 ) Increase (Decrease) in liabilities: Accounts payable 1,326 ( 3,901 ) Accrued expenses ( 1,595 ) ( 5,201 ) Deferred compensation 690 585 Pension and postretirement benefits ( 616 ) ( 437 ) Other liabilities ( 985 ) ( 857 ) Total Adjustments ( 2,495 ) ( 5,152 ) Net Cash Provided by Operating Activities 61 3,085 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ( 10,574 ) ( 7,598 ) Proceeds from sale of property, plant and equipment — 3 Net Cash Used in Investing Activities ( 10,574 ) ( 7,595 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of notes payable 25,000 — Payment of debt issuance costs ( 114 ) — Dividends paid ( 3,728 ) ( 3,606 ) Purchases of treasury stock ( 6,201 ) ( 2,189 ) Net Cash Provided by (Used in) Financing Activities 14,957 ( 5,795 ) Effect of exchange rate changes on Cash and Cash Equivalents ( 26 ) 123 Net Increase (Decrease) in Cash and Cash Equivalents 4,418 ( 10,182 ) Cash and Cash Equivalents, Beginning of Period 24,591 40,890 Cash and Cash Equivalents, End of Period $ 29,009 $ 30,708 10 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Cash Flows - Continued (in thousands) (unaudited) For the Six Months Ended January 31, 2022 2021 Supplemental disclosures: Interest payments, net of amounts capitalized $ 178 $ 198 Income tax payments $ 155 $ 5,478 Non-cash investing and financing activities: Capital expenditures accrued, but not paid $ 835 $ 829 Cash dividends declared and accrued, but not paid $ 1,845 $ 1,799 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 11 OIL-DRI CORPORATION OF AMERICA Notes To Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The financial statements and the related notes are condensed and should be read in conjunction with the Consolidated Financial Statements and related notes for the fiscal year ended July 31, 2021 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. Operating results for the three and six months ended January 31, 2022 are not necessarily an indication of the results that may be expected for the fiscal year ending July 31, 2022. Immaterial Correction of an Error in Previously Issued Financial Statements Subsequent to the issuance of our Annual Report on Form 10-K for the fiscal year ended July 31, 2020, we identified an error in our historical financial statements related to the classification of certain costs as selling, general and administrative expenses relating to the production of our inventory that should be classified as cost of sales. These costs generally relate to our annual discretionary bonus and 401(k) employer match for our manufacturing employees, employee salaries for individuals in our support functions that spend a portion of their time related to our manufacturing operations such as IT, and other costs mostly related to consultants and outside services. In accordance with FASB Accounting Standards Codification 250, Accounting Changes and Error Corrections , we evaluated the materiality of the error from both a quantitative and qualitative perspective, and concluded that the error was immaterial to our prior period interim and annual financial statements. Since the error was not material to any prior period interim or annual financial statements, no amendments to previously filed interim or annual periodic reports are required. Consequently, we have adjusted for these errors by revising our historical condensed consolidated financial statements presented herein. The revision to our historical condensed consolidated financial statements did not result in any impact to our consolidated net income. The effects of the corrections to each of the individual affected line items in our unaudited Condensed Consolidated Statements of Income were as follows (in thousands): For the Three Months Ended January 31, 2021 As Previously Reported Corrections As Corrected Cost of Sales $ ( 56,328 ) $ ( 1,483 ) $ ( 57,811 ) Selling, General and Administrative Expenses $ ( 13,928 ) $ 1,483 $ ( 12,445 ) For the Six Months Ended January 31, 2021 As Previously Reported Corrections As Corrected Cost of Sales $ ( 112,121 ) $ ( 3,007 ) $ ( 115,128 ) Selling, General and Administrative Expenses $ ( 29,055 ) $ 3,007 $ ( 26,048 ) The related impacts to Inventory in our unaudited Condensed Consolidated Balance Sheet were not considered material and hence, were not adjusted. 12 The effects of the corrections to our Notes to the unaudited Condensed Consolidated Financial Statements for Operating Segments were as follows (in thousands): For the Three Months Ended January 31, 2021 Income As Previously Reported Corrections As Corrected Business to Business Products $ 7,663 $ ( 550 ) $ 7,113 Retail and Wholesale Products $ 4,111 $ ( 933 ) $ 3,178 Corporate Expenses $ ( 7,530 ) $ 1,483 $ ( 6,047 ) For the Six Months Ended January 31, 2021 Income As Previously Reported Corrections As Corrected Business to Business Products $ 15,859 $ ( 1,146 ) $ 14,713 Retail and Wholesale Products $ 8,589 $ ( 1,861 ) $ 6,728 Corporate Expenses $ ( 15,027 ) $ 3,007 $ ( 12,020 ) 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. Estimates and assumptions about future events cannot be made with certainty, including the potential impacts and duration of the novel coronavirus pandemic (“the coronavirus” or “COVID-19” or “the pandemic”) and its aftermath. 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, 2021, have not materially changed. The following is a description of certain of our significant accounting policies. Trade Receivables. We recognize trade receivables when control of finished products are transferred to our customers. We record an allowance for doubtful accounts based on our historical experience and a periodic review of our accounts receivable, including a review of the overall aging of accounts, consideration of customer credit risk and analysis of facts and circumstances about specific customer accounts. A customer account is determined to be uncollectible when it is probable that a loss will be incurred after we have completed our internal collection procedures, including termination of shipments, direct customer contact and formal demand of payment. Overburden Removal and Mining Costs. We mine sorbent materials on property that we either own or lease as part of our overall operations. A significant part of our overall mining cost is incurred during the process of removing the overburden (non-usable material) from the mine site, thus exposing the sorbent material used in a majority of our production processes. These stripping costs are treated as a variable inventory production cost and are included in cost of sales in the period they are incurred. We defer and amortize the pre-production overburden removal costs associated with opening a new mine. 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. 13 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, Leases , 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. Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Sales returns are not material nor are warranties and any related obligations. 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 $ 523,000 and $ 256,000 as of January 31, 2022 and July 31, 2021, respectively. This liability is reported in Other within Accrued Expenses on the unaudited Condensed Consolidated Balance Sheet. Revenue recognized during the six months ended January 31, 2022 that was included in the liability for advance payments at the beginning of the period was $ 155,000 . We routinely commit to one-time or ongoing trade promotion programs directly with consumers, such as coupon programs, and with customers, such as volume discounts, cooperative marketing and other arrangements. We estimate and accrue the expected costs of these programs. These costs are considered variable consideration under ASC 606, Revenue from Contracts with Customers , and are netted against sales when revenue is recorded. The accruals are based on our best estimate of the amounts necessary to settle future and existing obligations on products sold as of the balance sheet date. To estimate these accruals, we rely on our historical experience of trade spending patterns and that of the industry, current trends and forecasted data. Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) include salaries, wages and benefits associated with staff outside the manufacturing and distribution functions, all marketing related costs, any miscellaneous trade spending expenses not required to be included in net sales, research and development costs, depreciation 14 and amortization related to assets outside the manufacturing and distribution process and all other non-manufacturing and non-distribution expenses. Other Current and 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 $ 2,300,000 in payroll taxes in calendar year 2020. $ 1,150,000 of the $ 2,300,000 was paid in the fourth quarter of calendar year 2021 and $ 1,150,000 will be paid in the fourth quarter of calendar year 2022. The remaining $ 1,150,000 accrual for these payroll taxes is included in Other within Accrued Expenses 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 have debt agreements that reference LIBOR and to the extent that those agreements are modified to replace LIBOR with another interest rate index, ASC 848 will allow us to account for the modification as a continuation of the existing contract without additional analysis. We are currently evaluating the potential effects of the adoption of this guidance 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): January 31, 2022 July 31, 2021 Finished goods $ 15,702 $ 14,179 Packaging 7,877 5,084 Other 6,218 4,335 Total Inventories $ 29,797 $ 23,598 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. The inventory obsolescence reserve values at January 31, 2022 and July 31, 2021 were $ 541,000 and $ 641,000 , respectively. Inventories, in all categories, have increased due to a combination of rising costs and building inventory levels for anticipated demand. 15 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 no cash equivalents as of January 31, 2022 and July 31, 2021. Balances of accounts receivable and accounts payable approximated their fair values at January 31, 2022 and July 31, 2021 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 $ 36,985,000 and $ 10,231,000 as of January 31, 2022 and July 31, 2021, 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 the 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 $ 138,000 and $ 150,000 in the second quarter of fiscal years 2022 and 2021, respectively. Intangible amortization expense was $ 253,000 and $ 305,000 in the first six months of fiscal years 2022 and 2021, respectively. Estimated intangible amortization for the remainder of fiscal year 2022 is $ 233,000 . Estimated intangible amortization for the next five fiscal years is as follows (in thousands): 2023 $ 262 2024 $ 126 2025 $ 102 2026 $ 99 2027 $ 96 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 2021 and no impairment was identified. There have been no triggering events that would indicate a new impairment analysis is needed. A lthough 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. 16 6. ACCRUED EXPENSES Accrued expenses is as follows (in thousands): January 31, 2022 July 31, 2021 Salaries, Wages, Commissions and Employee Benefits $ 9,097 $ 10,806 Trade promotions and advertising 2,178 1,653 Freight 3,034 2,845 Real Estate Tax 228 1,002 Other 9,265 8,577 $ 23,802 $ 24,883 The decrease in salaries, wages, commissions and employee benefits relates primarily to the payment of annual discretionary bonuses during the first quarter of fiscal year 2022. Changes in the accrual for trade promotions and advertising as well as real estate taxes differ due to timing. The accrual for other is higher at January 31, 2022 than July 31, 2021 due to an increase in accrual for rising natural gas costs and timing of certain plant purchases and expenses. 7. 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 in Other within Accrued expenses. There have been no changes during fiscal 2021 or the three months ended January 31, 2022 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. 8. DEBT Effective December 16, 2021 (the “Effective Date”), we entered into Amendment No. 1 (the “Amendment”) to the Amended and Restated Note Purchase and Private Shelf Agreement (the “Note Agreement”) with PGIM, Inc. (“Prudential”) and certain existing noteholders affiliated with Prudential named therein. The Amendment provides that, among other things, an excess leverage fee will be applied to the interest rate applicable to the outstanding daily average principal amount of Notes issued on or after December 15, 2021 as follows: (i) an additional 0.25% in the event the Net Leverage Ratio (as defined in the Amendment) is 2.00:1.00 or greater as of the last day of any fiscal quarter, or (ii) an additional 1.00% in the event that the Net Leverage Ratio is greater than 2.50:1.00 as of the last day of any fiscal quarter. Concurrent with entering into the Amendment, we issued $ 25,000,000 in aggregate principal amount of Series C Senior Notes (the “Series C Notes”). The Series C Notes bear interest at an annual rate of 3.25 % (subject to the application of the excess leverage fee in the event the Net Leverage Ratio exceeds certain thresholds as described above) and will mature on December 16, 2031 . Annual principal payments of $ 5,000,000 are due December 16 of each fiscal year beginning in 2027 and ending in 2031. Interest is payable semi-annually beginning June 16, 2022. 17 9. LEASES We have operating leases primarily for real estate properties, including corporate headquarters, customer service and sales offices, manufacturing and packaging facilities, warehouses, and research and development facilities, as well as for rail tracks, railcars and office equipment. Certain of our leases for a shared warehouse and office facility, rail track and railcars have options to extend which we are reasonably certain we will exercise and, accordingly, have been considered in the lease term used to recognize our ROU assets and lease liabilities. To determine the present value of the lease liability, we use an incremental borrowing rate, which is defined as the rate of interest that the Company would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. Further information about our accounting policy for leases is included in Note 1 of the Notes to the unaudited Condensed Consolidated Financial Statements. We have no material finance leases, and variable costs for operating leases are immaterial for the three and six months ended January 31, 2022. 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 January 31, For the Six Months Ended January 31, 2022 2021 2022 2021 Operating Lease Cost Operating lease cost $ 718 $ 657 $ 1,352 $ 1,352 Short-term operating lease cost 159 176 308 362 Supplemental cash flow information related to leases was as follows (in thousands): For the Three Months Ended January 31, For the Six Months Ended January 31, 2022 2021 2022 2021 Other Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 636 $ 567 $ 1,197 $ 1,169 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: January 31, 2022 July 31, 2021 Weighted-average remaining lease term - operating leases 8.8 years 9.1 years Weighted-average discount rate - operating leases 3.86 % 3.88 % 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 January 31, (in thousands): 2022 $ 1,294 2023 2,042 2024 1,884 2025 1,751 2026 1,467 Thereafter 5,665 Total 14,103 Less: imputed interest ( 2,131 ) Net lease obligation $ 11,972 18 10. 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 no longer earn additional benefits on or after March 1, 2020. On May 4, 2021, we purchased a pension annuity which settled $ 8.5 million of projected benefit obligations and recognized a settlement loss of approximately $ 0.6 million due to the annuity purchase. The components of net periodic pension and postretirement health benefit costs were as follows: Pension Benefits (in thousands) For the Three Months Ended January 31, For the Six Months Ended January 31, 2022 2021 2022 2021 Interest cost $ 266 $ 583 $ 534 $ 583 Expected return on plan assets ( 646 ) ( 1,444 ) ( 1,293 ) ( 1,444 ) Amortization of: Other actuarial loss 35 265 72 435 Net periodic benefit cost $ ( 345 ) $ ( 596 ) $ ( 687 ) $ ( 426 ) Postretirement Health Benefits (in thousands) For the Three Months Ended January 31, For the Six Months Ended January 31, 2022 2021 2022 2021 Service cost $ 28 $ 34 $ 61 $ 69 Interest cost 13 12 29 25 Amortization of: Other actuarial loss — 2 — 2 Prior service costs ( 2 ) ( 2 ) ( 3 ) ( 3 ) Net periodic benefit cost $ 39 $ 46 $ 87 $ 93 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 no t voluntarily make, a contribution to the Pension Plan during the first six months of fiscal year 2022. We have no minimum funding requirements for the remainder of fiscal year 2022. The postretirement health plan is an unfunded plan. We pay insurance premiums and claims from our assets. 19 Assumptions used in the previous calculations were as follows: Pension Benefits Postretirement Health Benefits For the Three and Six Months Ended January 31, 2022 2021 2022 2021 Discount rate for net periodic benefit cost 2.57 % 2.14 % 2.10 % 1.63 % Rate of increase in compensation levels — % — % — — Long-term expected rate of return on assets 6.50 % 6.50 % — — The medical cost trend assumption for postretirement health benefits was 7.05 %. 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”) provided 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 was actuarially determined at the end of each fiscal year using assumptions similar to those used for the Pension Plan. 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 was closed to new participants and current participants no longer earned additional benefits on or after March 1, 2020. The SERP was terminated effective June 30, 2020 and all participants were paid in the form of one lump sum in July 2021. 11. 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, 2021. 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 Six Months Ended January 31, Product 2022 2021 2022 2021 Cat Litter $ 9,327 $ 7,612 $ 89,141 $ 81,879 Industrial and Sports — — 17,940 $ 13,972 Agricultural and Horticultural 13,519 12,033 — — Bleaching Clay and Fluids Purification 29,540 25,406 1,036 $ 941 Animal Health and Nutrition 9,167 8,754 — — Net Sales $ 61,553 $ 53,805 108,117 $ 96,792 20 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 January 31, Product 2022 2021 2022 2021 Cat Litter $ 4,691 $ 3,736 $ 45,246 $ 41,085 Industrial and Sports — — 8,820 6,710 Agricultural and Horticultural 7,311 5,046 — — Bleaching Clay and Fluids Purification 15,035 12,765 520 422 Animal Health and Nutrition 5,587 4,736 — — Net Sales $ 32,624 $ 26,283 $ 54,586 $ 48,217 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 January 31, 2022 July 31, 2021 (in thousands) Business to Business Products Group $ 73,041 $ 69,023 Retail and Wholesale Products Group 111,332 103,268 Unallocated Assets 62,841 55,275 Total Assets $ 247,214 $ 227,566 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 employees dedicated to corporate operations. In addition, Income from our Business to Business and Retail and Wholesale Products as well as Corporate Expenses for the three and six months ended January 31, 2021 were adjusted for an immaterial correction of an error. See Note 1 of the Notes to the unaudited Condensed Consolidated Financial Statements. For the Six Months Ended January 31, Net Sales Income 2022 2021 2022 2021 (in thousands) Business to Business Products Group $ 61,553 $ 53,805 $ 14,336 $ 14,713 Retail and Wholesale Products Group $ 108,117 96,792 $ 1,000 6,728 Net Sales $ 169,670 $ 150,597 Corporate Expenses ( 12,973 ) ( 12,020 ) Income from Operations 2,363 9,421 Total Other Income, Net 717 491 Income before Income Taxes 3,080 9,912 Income Tax Expense ( 524 ) ( 1,675 ) Net Income 2,556 8,237 Net Loss Attributable to Noncontrolling Interest ( 31 ) ( 46 ) Net Income Attributable to Oil-Dri $ 2,587 $ 8,283 21 For the Three Months Ended January 31, Net Sales Income 2022 2021 2022 2021 (in thousands) Business to Business Products Group $ 32,624 $ 26,283 $ 7,590 $ 7,113 Retail and Wholesale Products Group 54,586 48,217 926 3,178 Net Sales $ 87,210 $ 74,500 Corporate Expenses ( 6,598 ) ( 6,047 ) Income from Operations 1,918 4,244 Total Other Income, Net 452 913 Income before Income Taxes 2,370 5,157 Income Tax Expense ( 409 ) ( 869 ) Net Income 1,961 4,288 Net Loss Attributable to Noncontrolling Interest ( 41 ) ( 11 ) Net Income Attributable to Oil-Dri $ 2,002 $ 4,299 12. 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 January 31, 2022, there were 260,356 shares available for future grants under this plan. Restricted Stock All of our non-vested restricted stock as of January 31, 2022 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 32,000 and 18,000 restricted shares of Common Stock granted during the second quarter of fiscal years 2022 and 2021, respectively. Stock-based compensation expense was $ 817,000 and $ 506,000 for the second quarter of fiscal years 2022 and 2021, respectively. Stock-based compensation expense was $ 1,453,000 and $ 1,290,000 for the first six months of fiscal years 2022 and 2021, 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, 2021 370 $ 33.96 Granted 107 $ 34.56 Vested ( 56 ) $ 35.20 Forfeitures ( 14 ) $ 35.20 Non-vested restricted stock outstanding at January 31, 2022 407 $ 33.90 22 13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME The following table summarizes the changes in accumulated other comprehensive (loss) income by component as of January 31, 2022 (in thousands): Pension and Postretirement Health Benefits Cumulative Translation Adjustment Total Accumulated Other Comprehensive (Loss) Income Balance as of July 31, 2021 $ ( 4,428 ) $ 311 $ ( 4,117 ) Other comprehensive loss before reclassifications, net of tax — ( 94 ) ( 94 ) Amounts reclassified from accumulated other comprehensive income, net of tax 53 (a) — 53 Net current-period other comprehensive income (loss), net of tax 53 ( 94 ) ( 41 ) Balance as of January 31, 2022 $ ( 4,375 ) $ 217 $ ( 4,158 ) (a) Amount is net of tax expense of $ 16,620 . Amount is included in the components of net periodic benefit cost for the pension and postretirement health plans. See Note 10 of the Notes to the unaudited Condensed Consolidated Financial Statements for further information. 14. 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 $ 81,000 and $ 71,000 for the second quarter of fiscal years 2022 and 2021, respectively and were $ 156,000 and $ 181,000 for the first six months of fiscal years 2022 and 2021, respectively. Outstanding accounts receivable from that customer, and its subsidiaries, were $ 14,000 as of January 31, 2022 and $ 4,000 as of July 31, 2021. 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 $ 350,000 and $ 109,000 for the second quarter of fiscal years 2022 and 2021, respectively and were $ 565,000 and $ 201,000 for the first six months of fiscal years 2022 and 2021, respectively. There were no outstanding accounts payable to that vendor as of January 31, 2022 or July 31, 2021. 23