Oil-Dri Corp of America 10-Q

ITEM 1. Financial Statements OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Balance Sheet (in thousands, except for share and per share amounts) (unaudited) ASSETS October 31, 2022 July 31, 2022 Current Assets Cash and cash equivalents $ 10,470 $ 16,298 Accounts receivable, less allowance of $ 882 and $ 922 at October 31, 2022 and July 31, 2022, respectively 53,062 51,683 Inventories, net 40,419 35,562 Prepaid repairs 8,019 7,474 Prepaid expenses and other assets 2,366 3,664 Total Current Assets 114,336 114,681 Property, Plant and Equipment Cost 287,546 283,240 Less accumulated depreciation and amortization ( 177,891 ) ( 175,374 ) Total Property, Plant and Equipment, Net 109,655 107,866 Other Assets Goodwill 3,618 3,618 Trademarks and patents, net of accumulated amortization of $ 527 and $ 524 at October 31, 2022 and July 31, 2022, respectively 1,465 1,445 Customer list, net of accumulated amortization of $ 7,647 and $ 7,608 at October 31, 2022 and July 31, 2022, respectively 138 177 Deferred income taxes 3,509 3,677 Operating lease right-of-use assets 10,027 10,601 Other 6,365 7,546 Total Other Assets 25,122 27,064 Total Assets $ 249,113 $ 249,611 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 for share and per share amounts) (unaudited) LIABILITIES & STOCKHOLDERS’ EQUITY October 31, 2022 July 31, 2022 Current Liabilities Current maturities of notes payable $ 1,000 $ 1,000 Accounts payable 12,088 13,401 Dividends payable 1,860 1,851 Operating lease liabilities 2,008 2,178 Accrued expenses 28,336 30,085 Total Current Liabilities 45,292 48,515 Noncurrent Liabilities Notes payable, net of unamortized debt issuance costs of $ 200 and $ 202 at October 31, 2022 and July 31, 2022, respectively 31,800 31,798 Deferred compensation 4,159 4,559 Pension and postretirement benefits 616 798 Long-term operating lease liabilities 9,334 9,749 Other 3,884 3,843 Total Noncurrent Liabilities 49,793 50,747 Total Liabilities 95,085 99,262 Stockholders’ Equity Common Stock, par value $ .10 per share, issued 8,725,618 shares at October 31, 2022 and 8,686,768 shares at July 31, 2022 872 868 Class B Stock, par value $ .10 per share, issued 2,397,056 shares at October 31, 2022 and 2,397,056 shares at July 31, 2022 240 240 Additional paid-in capital 53,385 52,467 Retained earnings 182,135 178,754 Noncontrolling interest ( 380 ) ( 369 ) Accumulated Other Comprehensive Loss: Pension and postretirement benefits ( 2,250 ) ( 2,242 ) Cumulative translation adjustment ( 326 ) 59 Total Accumulated Other Comprehensive Loss ( 2,576 ) ( 2,183 ) Less Treasury Stock, at cost ( 3,617,298 Common and 351,641 Class B shares at October 31, 2022 and 3,609,938 Common and 351,641 Class B shares at July 31, 2022) ( 79,648 ) ( 79,428 ) Total Stockholders’ Equity 154,028 150,349 Total Liabilities & Stockholders’ Equity $ 249,113 $ 249,611 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 4 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Operations (in thousands, except for per share amounts) (unaudited) For the Three Months Ended October 31, 2022 2021 Net Sales $ 98,539 $ 82,460 Cost of Sales ( 76,229 ) ( 68,642 ) Gross Profit 22,310 13,818 Selling, General and Administrative Expenses ( 15,741 ) ( 13,373 ) Income from Operations 6,569 445 Other Income (Expense) Interest expense ( 364 ) ( 177 ) Interest income 56 9 Other, net 176 433 Total Other (Expense) Income, Net ( 132 ) 265 Income Before Income Taxes 6,437 710 Income Tax Expense ( 1,207 ) ( 115 ) Net Income 5,230 595 Net (Loss) Income Attributable to Noncontrolling Interest ( 11 ) 10 Net Income Attributable to Oil-Dri $ 5,241 $ 585 Net Income Per Share Basic Common $ 0.80 $ 0.08 Basic Class B Common $ 0.60 $ 0.07 Diluted Common $ 0.78 $ 0.08 Diluted Class B Common $ 0.59 $ 0.06 Average Shares Outstanding Basic Common 4,804 5,113 Basic Class B Common 1,942 1,921 Diluted Common (1) 4,913 5,237 Diluted Class B Common 1,963 1,967 Dividends Declared Per Share Basic Common $ 0.2800 $ 0.2700 Basic Class B Common $ 0.2100 $ 0.2025 (1) The effect of Basic Common potential common stock equivalents related to non-vested restricted stock of 6 thousand shares was excluded from the computation of average diluted shares outstanding for the three months ended October 31, 2022 as inclusion would have been anti-dilutive. 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) (unaudited) For the Three Months Ended October 31, 2022 2021 Net Income Attributable to Oil-Dri $ 5,241 $ 585 Other Comprehensive (Loss) Income: Pension and postretirement benefits (net of tax) ( 8 ) 27 Cumulative translation adjustment ( 385 ) ( 34 ) Other Comprehensive Loss ( 393 ) ( 7 ) Total Comprehensive Income $ 4,848 $ 578 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 6 OIL-DRI CORPORATION OF AMERICA Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) For the Three Months Ended October 31 (unaudited) Number of Shares Common & Class B Stock Treasury Stock Common & Class B Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interest Total Stockholders' Equity Balance, July 31, 2021 10,958,367 ( 3,539,193 ) $ 1,096 $ 48,271 $ 180,443 $ ( 66,154 ) $ ( 4,117 ) $ ( 307 ) $ 159,232 Net Income (Loss) — — — — 585 — — 10 595 Other Comprehensive Loss — — — — — — ( 7 ) — ( 7 ) Dividends Declared — — — — ( 1,864 ) — — — ( 1,864 ) Purchases of Treasury Stock — ( 65,767 ) — — — ( 2,291 ) — — ( 2,291 ) Net issuance of stock under long-term incentive plans 74,657 ( 13,550 ) 7 470 — ( 477 ) — — — Amortization of Restricted Stock — — — 636 — — — — 636 Balance, October 31, 2021 11,033,024 ( 3,618,510 ) $ 1,103 $ 49,377 $ 179,164 $ ( 68,922 ) $ ( 4,124 ) $ ( 297 ) $ 156,301 Balance, July 31, 2022 11,083,824 ( 3,961,579 ) $ 1,108 $ 52,467 $ 178,754 $ ( 79,428 ) $ ( 2,183 ) $ ( 369 ) $ 150,349 Net Income (Loss) — — — — 5,241 — — ( 11 ) 5,230 Other Comprehensive Loss — — — — — — ( 393 ) — ( 393 ) Dividends Declared — — — — ( 1,860 ) — — — ( 1,860 ) Purchases of Treasury Stock — ( 3,360 ) — — — ( 92 ) — — ( 92 ) Net issuance of stock under long-term incentive plans 38,850 ( 4,000 ) 4 124 — ( 128 ) — — — Amortization of Restricted Stock — — — 794 — — — — 794 Balance, October 31, 2022 11,122,674 ( 3,968,939 ) $ 1,112 $ 53,385 $ 182,135 $ ( 79,648 ) $ ( 2,576 ) $ ( 380 ) $ 154,028 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 7 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) For the Three Months Ended October 31, CASH FLOWS FROM OPERATING ACTIVITIES 2022 2021 Net Income $ 5,230 $ 595 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,523 3,456 Non-cash stock-based compensation 794 636 Deferred income taxes 168 200 Provision for bad debts and cash discounts 55 89 Loss on the disposals of property, plant and equipment 54 34 (Increase) Decrease in assets: Accounts receivable ( 1,622 ) ( 2,250 ) Inventories ( 5,064 ) ( 5,084 ) Prepaid expenses ( 489 ) 153 Other assets 1,707 186 Increase (Decrease) in liabilities: Accounts payable 1,854 1,251 Accrued expenses ( 1,601 ) 689 Deferred compensation ( 400 ) 242 Pension and postretirement benefits ( 190 ) ( 303 ) Other liabilities ( 351 ) ( 490 ) Total Adjustments ( 1,562 ) ( 1,191 ) Net Cash Provided by (Used in) Operating Activities 3,668 ( 596 ) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ( 7,521 ) ( 6,736 ) Net Cash Used in Investing Activities ( 7,521 ) ( 6,736 ) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ( 1,851 ) ( 1,865 ) Purchases of treasury stock ( 92 ) ( 2,291 ) Net Cash Used in Financing Activities ( 1,943 ) ( 4,156 ) Effect of exchange rate changes on Cash and Cash Equivalents ( 32 ) ( 48 ) Net Decrease in Cash and Cash Equivalents ( 5,828 ) ( 11,536 ) Cash and Cash Equivalents, Beginning of Period 16,298 24,591 Cash and Cash Equivalents, End of Period $ 10,470 $ 13,055 8 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Cash Flows - Continued (in thousands) (unaudited) For the Three Months Ended October 31, 2022 2021 Supplemental disclosures: Interest payments, net of amounts capitalized $ — $ — Income tax (refunds) payments $ ( 87 ) $ 15 Non-cash investing and financing activities: Capital expenditures accrued, but not paid $ 1,381 $ 1,227 Cash dividends declared and accrued, but not paid $ 1,860 $ 1,864 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 9 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, 2022 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 months ended October 31, 2022 are not necessarily an indication of the results that may be expected for the fiscal year ending July 31, 2023. Management Use of Estimates The preparation of the unaudited Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make 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. All of our estimates and assumptions are revised periodically. Actual results could differ from these estimates. For more information see "Critical Accounting Policies and Estimates" in Item 2 “ Management's Discussion and Analysis of Financial Condition and Results of Operations. ” Summary of Significant Accounting Policies Our significant accounting policies, which are summarized in detail in our Annual Report on Form 10-K for the fiscal year ended July 31, 2022, 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 credit losses based on our expectations and a periodic review of our accounts receivable, including a review of the overall aging of accounts, consideration of customer credit risk and analysis of facts and circumstances about specific accounts. A customer account is determined to be uncollectible when it is probable that a loss will be incurred after we have completed our internal collection procedures, including termination of shipments, direct customer contact and formal demand of payment. We retain outside collection agencies to facilitate our collection efforts. Past due status is determined based on contractual terms and customer payment history. 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 during the development phase 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. 10 Reclamation. We perform ongoing reclamation activities during the normal course of our overburden removal. As overburden is removed from a mine site, it is hauled to previously mined sites and is used to refill older sites. This process allows us to continuously reclaim older mine sites and dispose of overburden simultaneously, therefore minimizing the costs associated with the reclamation process. On an annual basis we evaluate our potential reclamation liability in accordance with ASC 410, Asset Retirement and Environmental Obligations. The reclamation assets are depreciated over the estimated useful lives of the various mines. The reclamation liabilities are increased based on a yearly accretion charge over the estimated useful lives of the mines. 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 $ 0.5 million at both October 31, 2022 and July 31, 2022. This liability is reported in Other within Accrued Expenses on the unaudited Condensed Consolidated Balance Sheet. Revenue recognized during the three months ended October 31, 2022 that was included in the liability for advance payments at the beginning of the period was $ 0.3 million. 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. 11 Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) include salaries, wages and benefits associated with staff outside the manufacturing and distribution functions, all marketing related costs, any miscellaneous trade spending expenses not required to be included in net sales, research and development costs, depreciation and amortization related to assets outside the manufacturing and distribution process and all other non-manufacturing and non-distribution expenses. Other Current and Noncurrent Liabilities. Other liabilities include the accruals for general expenses not yet paid, cash collected not yet vouchered, legal reserves, and reclamation liability accrual. Current liabilities are due to be paid within the next 12 months. Included in current Other within Accrued Expenses on the unaudited Condensed Consolidated Balance Sheet is the remaining $ 1.2 million accrual for payroll taxes which were originally deferred as a result of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which was signed into U.S. law in 2020. Noncurrent other liabilities is primarily comprised of our reclamation liability. 2. NEW ACCOUNTING PRONOUNCEMENTS AND REGULATIONS Recently Adopted Accounting 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. On August 30, 2022 we amended our debt agreements to replace the LIBOR-based reference rate with an adjusted term Secured Overnight Financing Rate (SOFR), ASC 848 will allow us to account for the modification as a continuation of the existing contract without additional analysis. There have been no other accounting pronouncements issued but not yet adopted by us which are expected to have a material impact on our Consolidated Financial Statements. 3. INVENTORIES The composition of inventories is as follows (in thousands): October 31, 2022 July 31, 2022 Finished goods $ 21,523 $ 18,142 Packaging 10,091 9,515 Other 8,805 7,905 Total Inventories $ 40,419 $ 35,562 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 was $ 0.8 million at both October 31, 2022 and July 31, 2022. Inventories have increased due to a combination of rising costs and building inventory levels for anticipated demand. 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 October 31, 2022 and July 31, 2022. 12 Balances of accounts receivable and accounts payable approximated their fair values at October 31, 2022 and July 31, 2022 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 $ 30.1 million and $ 31.8 million as of October 31, 2022 and July 31, 2022, 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 $ 0.1 million in both the first three months of fiscal years 2023 and 2022. Estimated intangible amortization for the remainder of fiscal year 2023 is $ 0.2 million. Estimated intangible amortization for the next five fiscal years is as follows (in thousands): 2024 $ 129 2025 $ 104 2026 $ 102 2027 $ 99 2028 $ 94 We have one acquired trademark recorded at a cost of $ 0.4 million that was determined to have an indefinite life and is not amortized. We performed our goodwill impairment analysis on our Retail and Wholesale Products Group and Business to Business Products Group reporting units in the third quarter of fiscal year 2022. As a result we identified goodwill impairment of $ 5.6 million which left no remaining goodwill in the Retail and Wholesale Products Group reporting unit and no impairment was identified for the Business to Business Products Group. We are not aware of any triggering events in the first quarter of fiscal year 2023 that would indicate a new impairment analysis is needed. 6. ACCRUED EXPENSES Accrued expenses is as follows (in thousands): October 31, 2022 July 31, 2022 Salaries, Wages, Commissions and Employee Benefits $ 11,145 $ 13,439 Trade promotions and advertising 1,238 1,180 Freight 4,227 4,022 Real Estate Tax 1,418 1,006 Other 10,308 10,438 $ 28,336 $ 30,085 The decrease in salaries, wages, commissions and employee benefits relates primarily to the payment of annual bonuses during the first quarter of fiscal year 2023. Real estate tax increased with regular accruals of property tax for various locations including plants and is offset by payments typically made in the second quarter of the fiscal year. The increase in freight cost is primarily due to increase in fuel prices, tight truck capacity, ongoing driver shortages, and supply chain issues. The accrual for other is lower at October 31, 2022 than July 31, 2022 due to a decrease in the legal accrual offset by increases in other payables due to rising costs and timing of certain purchases and expenses. 13 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 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 therefore recorded that estimate in Other within Accrued expenses. There have been no changes during fiscal 2022 or the three months ended October 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 On August 30, 2022, we entered into (i) the Sixth Amendment to Credit Agreement (the “Sixth Amendment”), which amends the Credit Agreement, dated as of January 27, 2006 (as previously amended, the “Credit Agreement”), among us, BMO Harris Bank N.A (“BMO”), and certain of our domestic subsidiaries; and (ii) Amendment No. 3 (the “Third Amendment”) to our Amended and Restated Note Purchase and Private Shelf Agreement, dated as of May 15, 2020 (as previously amended, the “Note Agreement”), with PGIM, Inc. (“Prudential”) and certain existing noteholders affiliated with Prudential named therein. The Sixth Amendment amended the Credit Agreement to, among other things: extend the facility termination date to August 30, 2027 ; replace the LIBOR-based reference rate with an adjusted term Secured Overnight Financing Rate (“SOFR”); revise the method for calculating consolidated EBITDA and consolidated debt for purposes of the Credit Agreement; modify certain restrictive covenants, including increasing the unsecured indebtedness basket from $ 50 million to $ 75 million; and revise the existing financial covenants by replacing the consolidated debt covenant with a covenant to maintain a maximum debt to earnings ratio, lowering the minimum fixed charge coverage ratio level and revising the method for calculating the fixed charge coverage ratio. The Third Amendment amended the Note Agreement to, among other things, modify the existing fixed charge coverage financial covenant and replace the existing consolidated debt financial covenant with a maximum debt to earnings ratio and effect certain changes consistent with the Sixth Amendment, including modifying the method for calculating consolidated EBITDA and the excess leverage fee. 14 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 months ended October 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 October 31, 2022 2021 Operating Lease Cost Operating lease cost $ 696 $ 634 Short-term operating lease cost 1 149 Supplemental cash flow information related to leases was as follows (in thousands): For the Three Months Ended October 31, 2022 2021 Other Information Cash paid for amounts included in the measurement of operating lease liabilities: $ 595 $ 561 Right-of-use assets obtained in exchange for new operating lease liabilities $ 23 $ 241 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: October 31, 2022 July 31, 2022 Weighted-average remaining lease term - operating leases 7.6 years 7.7 years Weighted-average discount rate - operating leases 3.90 % 3.91 % The following table summarizes scheduled minimum future lease payments due within twelve months for operating leases with terms longer than one year for which cash flows are fixed and determinable as of October 31, (in thousands): 2023 $ 1,870 2024 2,047 2025 1,917 2026 1,628 2027 1,213 Thereafter 4,574 Total 13,249 Less: imputed interest ( 1,907 ) Net lease obligation $ 11,342 15 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 September 20, 2022, the Company's Board of Directors approved a resolution to terminate the Company's defined benefit pension plan. The Company expects to complete the termination over a period of eighteen months. The components of net periodic pension and postretirement health benefit costs were as follows: Pension Benefits (in thousands) For the Three Months Ended October 31, 2022 2021 Interest cost $ 335 $ 268 Expected return on plan assets ( 558 ) ( 647 ) Amortization of: Other actuarial loss 9 37 Net periodic benefit cost $ ( 214 ) $ ( 342 ) Postretirement Health Benefits (in thousands) For the Three Months Ended October 31, 2022 2021 Service cost $ 22 $ 33 Interest cost 20 16 Amortization of: Other actuarial loss ( 18 ) — Prior service costs ( 2 ) ( 1 ) Net periodic benefit cost $ 22 $ 48 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 three months of fiscal year 2023. We have no minimum funding requirements for the remainder of fiscal year 2023. The postretirement health plan is an unfunded plan. We pay insurance premiums and claims from our assets. 16 Assumptions used in the previous calculations were as follows: Pension Benefits Postretirement Health Benefits For the Three Months Ended October 31, 2022 2021 2022 2021 Discount rate for net periodic benefit cost 4.05 % 2.57 % 3.82 % 2.10 % 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 8.50 %. The graded trend rate is expected to decrease to an ultimate rate of 4.90 % in fiscal year 2044 . 11. OPERATING SEGMENTS As a result of a change in management organization during fiscal year 2022 and as part of our routine assessments of our segments, our wholly owned subsidiary located in the United Kingdom (UK) is now included in our Business to Business Products Group and our co-packaged coarse cat litter is now included in the Retail and Wholesale Products Group. Prior year net sales and operating income have also been reclassified to reflect these changes. The organization change was intended to better serve our customers and the segment information presented reflects the information regularly reviewed by our chief operating decision maker. 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, 2022. Net sales for our principal products by segment are as follows (in thousands): Business to Business Products Group Retail and Wholesale Products Group For the Three Months Ended October 31, Product 2022 2021 2022 2021 Cat Litter $ — $ — $ 54,198 $ 48,531 Industrial and Sports — — 10,654 $ 9,120 Agricultural and Horticultural 10,003 6,208 — — Bleaching Clay and Fluids Purification 18,229 15,021 — $ — Animal Health and Nutrition 5,455 3,580 — — Net Sales $ 33,687 $ 24,809 64,852 $ 57,651 17 We do not rely on any segment asset allocations and we do not consider them meaningful because of the shared nature of our production facilities; however, we have estimated the segment asset allocations below for those assets for which we can reasonably determine. The unallocated asset category is the remainder of our total assets. The asset allocation is estimated and is not a measure used by our chief operating decision maker about allocating resources to the operating segments or in assessing their performance. Assets October 31, 2022 July 31, 2022 (in thousands) Business to Business Products Group $ 80,717 $ 75,644 Retail and Wholesale Products Group 126,635 125,293 Unallocated Assets 41,761 48,674 Total Assets $ 249,113 $ 249,611 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. In addition, Income from our Business to Business and Retail and Wholesale Products as well as Corporate Expenses for the three months ended October 31, 2021 were adjusted for a change in management organization. See Note 1 of the Notes to the unaudited Condensed Consolidated Financial Statements. For the Three Months Ended October 31, Net Sales Income 2022 2021 2022 2021 (in thousands) Business to Business Products Group $ 33,687 $ 24,809 $ 7,257 $ 5,539 Retail and Wholesale Products Group $ 64,852 57,651 $ 7,574 1,281 Net Sales $ 98,539 $ 82,460 Corporate Expenses ( 8,262 ) ( 6,375 ) Income from Operations 6,569 445 Total Other (Expense) Income, Net ( 132 ) 265 Income before Income Taxes 6,437 710 Income Tax Expense ( 1,207 ) ( 115 ) Net Income 5,230 595 Net (Loss) Income Attributable to Noncontrolling Interest ( 11 ) 10 Net Income Attributable to Oil-Dri $ 5,241 $ 585 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 October 31, 2022, there were 239,985 shares available for future grants under this plan. 18 Restricted Stock All of our non-vested restricted stock as of October 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 40,000 and 75,000 restricted shares of Common Stock granted during the first quarter of fiscal years 2023 and 2022, respectively. Stock-based compensation expense was $ 0.8 million and $ 0.6 million for the first quarter of fiscal years 2023 and 2022, 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, 2022 382 $ 33.63 Granted 40 $ 27.39 Vested ( 42 ) $ 37.32 Forfeitures ( 4 ) $ 32.03 Non-vested restricted stock outstanding at October 31, 2022 376 $ 32.58 13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME The following table summarizes the changes in accumulated other comprehensive (loss) income by component as of October 31, 2022 (in thousands): Pension and Postretirement Health Benefits Cumulative Translation Adjustment Total Accumulated Other Comprehensive (Loss) Income Balance as of July 31, 2022 $ ( 2,242 ) $ 59 $ ( 2,183 ) Other comprehensive loss before reclassifications, net of tax — ( 385 ) ( 385 ) Amounts reclassified from accumulated other comprehensive income, net of tax ( 8 ) — ( 8 ) Net current-period other comprehensive loss, net of tax ( 8 ) ( 385 ) ( 393 ) Balance as of October 31, 2022 $ ( 2,250 ) $ ( 326 ) $ ( 2,576 ) 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 $ 55,158 and $ 75,296 for the first quarter of fiscal years 2023 and 2022 respectively. Outstanding accounts receivable from that customer, and its subsidiaries, were $ 863 as of October 31, 2022 and $ 5,608 as of July 31, 2022. 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 $ 62,360 and $ 215,418 for the first quarter of fiscal years 2022 and 2021 respectively . There were no outstanding accounts payable to that vendor as of October 31, 2022 or July 31, 2022. 19