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Item 2. Management’s Discussion and Analysis

2023-03-09 compared with 2022-12-06 · 171 added, 88 removed, 80 unchanged (76% of the section changed)

11 unchanged sentences

RESULTS OF OPERATIONS

Consolidated net sales and gross profits for the first quarter of fiscal 2023 across both the Retail and Wholesale Products Group and the Business to Business Products Group were up from the same period of fiscal year 2022.

Although expenses increased, consolidated net income for the three months ended October 31, 2022 was $5.2 million, compared to $0.6 million in the three months ended October 31, 2021.

Consolidated net sales increased approximately $16.0 million or 19% in the first quarter of fiscal year 2023 compared to first quarter of fiscal year 2022.

Consolidated income from operations in the first quarter of fiscal year 2023 increased by $6.1 million compared to the first quarter of fiscal year 2022.

This increase is driven by strategic pricing increases as well as growth in the demand for our products, as further discussed below.

Our Consolidated Balance Sheets as of October 31, 2022, and our Consolidated Statements of Cash Flows for the first quarter of fiscal year 2023 show a decrease in total cash and cash equivalents from fiscal year-end 2022 driven by higher inventories and capital expenditures on PP&E.

THREE MONTHS ENDED OCTOBER 31, 2022 COMPARED TO

THREE MONTHS ENDED OCTOBER 31, 2021

Consolidated net sales were at an all-time high in the second quarter and first six months of fiscal year 2023 as we continued to implement strategic price increases across multiple principal products in order to improve profitability in both the Retail and Wholesale Products Group and the Business to Business Products Group.

Consolidated net sales increased approximately $14.5 million or 17% in the second quarter of fiscal year 2023 and $30.5 million or 18% for the first six months of fiscal year 2023 compared to the same periods of fiscal year 2022.

Consolidated income from operations in the second quarter and first six months of fiscal year 2023 increased by $5.4 million and $11.5 million, respectively compared to the same periods in fiscal year 2022.

Although expenses continued to increase, consolidated net income for the three and six months ended January 31, 2023, were $3.9 million and $9.1 million, respectively, compared to $2.0 million and $2.6 million in the three and six months ended January 31, 2022, respectively.

In the second quarter we recorded a $2.5 million reserve for anticipated modification costs that we expect to incur to address the capacity issues at our sole landfill located in Ochlocknee, Georgia.

Refer to Note 7 to the Financial Statements for additional details.

Our Consolidated Balance Sheets as of January 31, 2023, and our Consolidated Statements of Cash Flows for the second quarter of fiscal year 2023 show a decrease in total cash and cash equivalents from fiscal year-end 2022.

The decrease is driven by capital expenditures on property, plant & equipment and an increase in accounts receivables and inventories, offset by improved net income and increased accrued expenses.

Refer to the "Liquidity and Capital Resources" section below for more analysis of the movements in cash.

SIX MONTHS ENDED JANUARY 31, 2023 COMPARED TO

SIX MONTHS ENDED JANUARY 31, 2022

CONSOLIDATED RESULTS

Consolidated net sales for the three months ended October 31, 2022 were $98.5 million, a 19% increase compared to net sales of $82.5 million for the three months ended October 31, 2021.

Consolidated net sales for the six months ended January 31, 2023, were $200.2 million, a 18% increase compared to net sales of $169.7 million for the six months ended January 31, 2022.

Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group, primarily due to price increases implemented across both product groups.

In the first three months of fiscal year 2023, we have been able to reduce our backlog of orders.

The actions taken to increase personnel, expand our production shifts, increase production equipment, make various repairs to equipment, and utilize alternative modes of transportation have driven a reduction of our backlog by $1.1 million, a 17% decrease from July 31, 2022.

Furthermore, export tonnages shipped for the first three months of fiscal year 2023 exceeded all quarters in fiscal years 2022 and 2021.

We continue to implement strategies related to further reduce manufacturing and freight constraints in order to meet the increase in customer demand.

In the first six months of fiscal year 2023, we have been able to reduce our backlog of orders.

The actions taken to increase personnel, expand production shifts, increase production equipment, repair equipment, and utilize alternative modes of transportation have driven a reduction of our backlog by $0.9 million, a 13% decrease from July 31, 2022.

In order to meet the increase in customer demand, we continue to implement strategies to further reduce labor, manufacturing and freight constraints.

Segment results are discussed further below.

Consolidated gross profit for the first three months of fiscal year 2023 was $22.3 million, or 23% of net sales, compared to $13.8 million, or 17%, of net sales, for the first three months of fiscal year 2022.

The increase is driven by higher selling prices, with multiple price increases across our businesses, which are beginning to offset the increases in costs of goods sold.

Costs of goods sold continued to rise, driven primarily by per ton increases in natural gas, non-fuel manufacturing and freight costs, offset by lower packaging costs.

The cost of natural gas per ton used to operate kilns that dry our clay was 97% higher in the first three months of fiscal year 2023 compared to first three months of fiscal year 2022.

There was also a 15% increase in per ton non-fuel manufacturing costs during the first three months of fiscal year 2023 compared to the first three months of fiscal year 2022, due to higher costs for labor, purchased materials, repairs, utilities, electricity, and diesel.

Domestic freight costs per ton increased approximately 21% in the first three months of fiscal year 2023 compared to the same period of fiscal year 2022.

Ocean freight costs have also increased due to rising fuel costs and export fees.

Consolidated gross profit for the first six months of fiscal year 2023 was $45.3 million, or 23% of net sales, compared to $29.4 million, or 17%, of net sales, for the first six months of fiscal year 2022.

The increase is driven by higher selling prices across multiple products thus helping to mitigate the increases in costs of goods sold.

Our domestic costs of goods sold per ton increased 12%, driven primarily by per ton increases in natural gas, non-fuel manufacturing and freight costs, offset by lower per ton packaging costs.

The cost of natural gas per ton used to operate kilns that dry our clay was 47% higher in the first six months of fiscal year 2023 compared to the first six months of fiscal year 2022.

There was also a 20% increase in per ton non-fuel manufacturing costs during the first six months of fiscal year 2023 compared to the first six months of fiscal year 2022, due to higher per ton costs for labor, repairs, purchased materials, electricity, depreciation, and diesel.

Domestic freight costs per ton increased approximately 15% in the first six months of fiscal year 2023 compared to the same period of fiscal year 2022.

This excludes the impact of a significant customer in our cat litter business that altered shipping terms in January 2023 from collect to delivered which further increased our overall freight cost.

Ocean freight costs have also increased due to rising fuel prices, export fees, and demurrage charges.

In addition, our overall freight costs can vary between periods depending on the mix of products sold and the geographic distribution of our customers.

Packaging costs per ton decreased by approximately 8% in the first three months of fiscal year 2023 compared to the first three months of fiscal year 2023 due to lower commodity costs, particularly as it relates to resin and pallet costs.

Packaging costs per ton decreased by approximately 3% in the first six months of fiscal year 2023 compared to the first six months of fiscal year 2023 due to lower commodity costs, particularly as it relates to resin and pallet costs.

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

Total selling, general and administrative (“SG&A”) expenses of $15.7 million for the first three months of fiscal year 2023 were higher by $2.4 million, or 18%, compared to $13.4 million for the first three months of fiscal year 2022.

Unallocated corporate expenses were higher by $1.9 million, or 30%, driven by higher bonus accrual due to improved quarterly results compared to the Company’s performance target under the annual incentive plan, as well as other corporate expenses.

Total selling, general and administrative expenses of $31.5 million for the first six months of fiscal year 2023 were higher by $4.4 million, or 16%, compared to $27.0 million for the first six months of fiscal year 2022.

Unallocated corporate expenses were higher by $4.4 million, or 34%, driven by higher bonus accrual due to improved quarterly results compared to the Company’s performance target under the annual incentive plan as well as an increase in compensation and outside services to support strategic initiatives.

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

Total other (expense) income, net of $(0.1) million for the first three months of fiscal year 2023 was mostly driven by foreign currency translations compared to the net other income of $0.3 million in the first three months of fiscal year 2022.

Consolidated net income before taxes for the first three months of fiscal year 2023 was $6.4 million compared to $0.7 million for the first three months of fiscal year 2022.

Results for the first three months of fiscal year 2023 were driven by the factors discussed above.

We had a tax expense for the first three months of fiscal year 2023 of $1.2 million compared to $0.1 million for the first three months of fiscal year 2022.

Total other (expense) income, net of $(2.4) million for the first six months of fiscal year 2023 compared to a net other income of $0.7 million in the same period of fiscal year 2022.

This was mostly due to the $2.5 million reserve recorded for anticipated modification costs to address the landfill capacity issue.

Consolidated net income before taxes for the first six months of fiscal year 2023 was $11.5 million compared to $3.1 million for the first six months of fiscal year 2022.

Results for the first six months of fiscal year 2023 were driven by the factors discussed above.

We had a tax expense for the first six months of fiscal year 2023 of $2.4 million compared to $0.5 million for the first six months of fiscal year 2022.

Our tax expense was driven primarily by higher net income.

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

We used an estimated annual effective tax rate ("ETR") of 21% in determining our provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for the first three months of fiscal year 2023 were $33.7 million, an increase of $8.9 million, or 36%, from net sales of $24.8 million for the first three months of fiscal year 2022, with strong increases across all three of our businesses in this group.

Net sales of our agricultural and horticultural chemical carrier products increased approximately $3.8 million, or 61%, for the first three months of fiscal year 2023 compared to the same period in fiscal year 2022.

This is a result of price increases as well as strong demand from several large customers.

Net sales of our fluids purification products increased approximately $3.2 million, or 21%, compared to the first three months of the prior fiscal year.

The increase in net sales was driven by price increases and continued demand for our products used in the filtration of edible oil, renewable diesel, and jet fuel.

Net sales increased in all regions except for the UK, with the majority of the increase in North America and Latin America when compared to the first three months of fiscal year 2022.

Net sales of our animal health and nutrition products increased $1.9 million, or 52%, during the first three months of fiscal year 2023 compared to the first three months of the prior year.

We saw growth in net sales in all regions except Asia (excluding China) with the most impact coming from Latin America.

Latin American sales continued to benefit from the European Union's ("EU") regulations for antibiotic-free foreign protein imports, as a large percentage of meat is exported from that region to the EU.

Net sales of the Business to Business Products Group for the first six months of fiscal year 2023 were $68.8 million, an increase of $15.5 million, or 29%, from net sales of $53.3 million for the first six months of fiscal year 2022, with increases across all three of our businesses in this group.

Net sales of our fluids purification products increased approximately $6.7 million, or 22%, compared to the first six months of the prior fiscal year.

The increase in net sales was driven by price increases across all regions and continued demand for our products used in the filtration of edible oil, renewable diesel, and jet fuel.

Net sales increased in all regions with most of the increase driven by sales in North America when compared to the first half of fiscal year 2022.

Net sales of our agricultural and horticultural chemical carrier products increased approximately $6.3 million, or 46%, for the first half of fiscal year 2023 compared to the same period in fiscal year 2022.

This is a result of quarterly price increases implemented throughout the year.

Net sales of our animal health and nutrition products increased $2.6 million, or 29%, during the first half of fiscal year 2023 compared to the first half of fiscal year 2022.

We saw growth in net sales in all regions except Asia and our subsidiary in China, with the most impact coming from Latin America.

Latin American sales benefited from the European Union's ("EU") regulations requiring antibiotic-free foreign protein imports, as a large percentage of meat is exported from that region to the EU.

North American sales rose due to a new product line and increased distribution.

The decrease in Asia is due to timing and ocean freight delays and not indicative of projected sales for the year.

SG&A expenses for the Business to Business Products Group increased approximately 24% or $0.8 million for the first three months of fiscal year 2023 compared to the same period of the prior fiscal year.

The decrease in

Asia sales is due to timing and ocean freight delays and not indicative of projected sales for the year.

Net sales of our subsidiary in China decreased period over period, as discussed in the "Foreign Operations" section below.

SG&A expenses for the Business to Business Products Group increased approximately 11% or $0.8 million for the first half of fiscal year 2023 compared to the same period of the prior fiscal year.

The majority of the increase relates to research and development expenses that are now allocated to the animal health business (a change in where existing costs were allocated), previously included in unallocated corporate expenses and increased travel costs.

The Business to Business Products Group’s operating income for the first three months of fiscal year 2023 was $7.3 million, an increase of $1.8 million, or 31%, from operating income of $5.5 million for the first three months of fiscal year 2022.

The increase in operating income was driven by higher net sales due to strategic price increases and continued volume growth.

The Business to Business Products Group’s operating income for the first six months of fiscal year 2023 was $15.0 million, an increase of $3.0 million, or 25%, from operating income of $12.0 million for the first six months of fiscal year 2022.

The increase in operating income was mostly driven by higher net sales across all business within this segment.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for the first three months of fiscal year 2023 were $64.9 million, an increase of $7.2 million, or 12%, from net sales of $57.7 million for the first three months of fiscal year 2022 driven by higher net sales of cat litter, industrial and sport products, slightly offset by a small decline in our co-packaged cat litter business.

Total cat litter net sales were approximately $5.7 million, or 12%, higher compared to the first three months of the prior fiscal year driven mostly by price increases.

Domestic cat litter net sales were $46.8 million an increase of $5.2 million from the first three months of fiscal year 2022 driven primarily by price increases on branded and private label lightweight and coarse litter partially offset by a decrease in net sales of accessories (liners) and private label heavy weight litter.

Net sales of the Retail and Wholesale Products Group for the first half of fiscal year 2023 were $131.4 million, an increase of $15.0 million, or 13%, from net sales of $116.4 million for the first half of fiscal year 2022 driven by higher net sales of cat litter, industrial and sport products, slightly offset by a decline in our co-packaged cat litter business.

Total global cat litter net sales were higher by approximately $12.1 million, or 12% compared to the first six months of fiscal year 2022 driven mostly by price increases.

Domestic cat litter net sales were $95.8 million an increase of $11.2 million from the first half of fiscal year 2022 driven primarily by price increases.

Increased sales of branded and private label lightweight and coarse litter were partially offset by a decrease in revenue for private label heavy weight litter.

Net sales of co-packaged products decreased by approximately $0.5 million compared to the same period in fiscal year 2022.

This decrease was primarily due to our customer discontinuing export sales to one of their foreign subsidiaries as well as softer sales volumes domestically.

This decrease was primarily driven by our customer discontinuing export sales to one of their foreign subsidiaries as well as softer domestic sales volumes.

Net sales of cat litter by our subsidiary in Canada increased period over period, as discussed in "Foreign Operations" below.

Net sales of our global industrial and sports products increased approximately $1.5 million, or 17%, compared to the first three months of fiscal year 2022, primarily due to price increases across both industrial and sport products.

SG&A expenses for the Retail and Wholesale Products Group were lower by approximately $0.4 million, or 10%, during the first three months of fiscal year 2023 compared to the first three months of fiscal year 2022, primarily due to significantly lower advertising costs partially offset by higher broker sales commissions which are percentage based on net sales, as well as higher travel costs.

We anticipate total advertising expense in fiscal year 2023 to be higher than fiscal year 2022 and more in line with historical levels, with spending concentrated in the second half of the year.

The Retail and Wholesale Products Group experienced an operating income for the first three months of fiscal year 2023 of $7.6 million, an increase of $6.3 million, or 491%, from operating income of $1.3 million for the first three months of fiscal year 2022.

Net sales of our global industrial and sports products increased approximately $2.8 million, or 16%, compared to the first six months of fiscal year 2022, primarily driven by price increases implemented to rebuild margins, and to a lesser extent from higher volumes.

SG&A expenses for the Retail and Wholesale Products Group were lower by approximately $1.1 million, or 14%, during the first half of fiscal year 2023 compared to the first half of fiscal year 2022, primarily due to the timing of marketing and advertising costs.

These decreases were partially offset by higher broker sales commissions which are percentage based on net sales, and an increase in our allowance for doubtful accounts due to one customer declaring bankruptcy.

We anticipate total advertising expense in fiscal year 2023 to be higher than fiscal year 2022, with a majority of the spend concentrated in the second half of the fiscal year.

The Retail and Wholesale Products Group experienced an operating income for the first half of fiscal year 2023 of $16.3 million, an increase of $12.9 million, or 380%, from operating income of $3.4 million for the first half of fiscal year 2022.

This was driven primarily by the increase in gross margins due to selling price increases partially offset by higher costs of goods sold, and to a much lesser extent lower than expected advertising spend in the first quarter.

1 unchanged sentence

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

Net sales by our foreign subsidiaries during the first three months of fiscal year 2023 were $5.8 million, an increase of $1.4 million, or 32%, compared to net sales of $4.4 million during the first three months of fiscal year 2022.

All of our foreign operations, with the exception of our subsidiary in the UK, experienced an increase in net sales during the first three months of fiscal year 2023 compared to fiscal year 2022.

Total net sales of our subsidiary in Canada during the first three months of fiscal year 2022 increased by $0.8 million, or 29%, compared to the same period in fiscal year 2022 driven by higher private label cat litter net sales.

The increase in cat litter sales was mainly driven by price increases instituted in response to rising costs and to a lesser extent by increases in demand.

Net sales of industrial absorbent granules were also higher in the first three months of fiscal year 2022 driven mainly by price increases.

Net sales of our subsidiary in the United Kingdom in the first three months of fiscal year 2023 decreased by $47 thousand, or 9%, compared to net sales in the first three months of fiscal year 2022.

The decrease relates to the impact of foreign currency in addition to softer sales.

Net sales of our subsidiary in Mexico increased during the first three months of fiscal year 2022 compared to the same period of fiscal year 2022 by $0.2 million, or 38% due to growing demand of our animal health products.

Net sales of our subsidiary in China increased $0.3 million, or 63%, during the first three months of fiscal year 2023 compared to the first three months of fiscal year 2022 due primarily to the addition of a new customer.

Net sales by our foreign subsidiaries represented 6% and 5% of our consolidated net sales during the first three months of fiscal years 2023 and 2022, respectively.

Our foreign subsidiaries reported net income of $0.5 million for the first three months of fiscal year 2023, compared to a net loss of $0.3 million for the first three months of fiscal year 2022.

The net income in the first three months of fiscal year 2023 was driven by price increases in Canada on our cat litter products, and increased demand in China and Mexico offset by unfavorable impacts of foreign exchange rates primarily in the UK.

Identifiable assets of our foreign subsidiaries as of October 31, 2022, were $17.7 million, compared to $17.4 million as of July 31, 2022.

Net sales by our foreign subsidiaries during the first six months of fiscal year 2023 were $11.2 million, an increase of $1.6 million, or 17%, compared to net sales of $9.6 million during the first half of fiscal year 2022.

All of our foreign operations, with the exception of our subsidiary in China, experienced an increase in net sales during the half of fiscal year 2023 compared to fiscal year 2022.

Total net sales of our subsidiary in Canada during this period increased by $1.3 million, or 22%, compared to the same period in fiscal year 2022 driven by higher private label cat litter net sales offset by a decrease of $0.1 million in net sales of industrial products.

The increase in cat litter sales of $1.4 million was driven primarily by price increases instituted in response to rising costs and to a lesser extent by increases in demand.

Net sales of our subsidiary in the United Kingdom in the first six months of fiscal year 2023 increased by $0.2 million, or 18%, compared to net sales in the first six months of fiscal year 2022.

The increase is driven primarily by price increases which offset the impact of softer sale volumes.

Net sales of our subsidiary in Mexico increased during the first six months of fiscal year 2023 compared to the same period of fiscal year 2022 by $0.5 million, or 48% due to growing demand for our animal health products.

Net sales of our subsidiary in China decreased $0.4 million, or 22%, during the first half of fiscal year 2023 compared to the first half of fiscal year 2022 primarily due to a transition in our distribution strategy.

Net sales by our foreign subsidiaries represented 6% of our consolidated net sales during both the first six months of fiscal year 2023 and 2022.

Our foreign subsidiaries reported net income of $0.6 million for the first six months of fiscal year 2023, compared to a net loss of $0.7 million for the first six months of fiscal year 2022.

The net income in the first six months of fiscal year 2023 was driven by price increases in Canada and the UK, increased sales volume in Mexico, and reduction of costs of goods sold in China and Indonesia.

Identifiable assets of our foreign subsidiaries as of January 31, 2023, were $14.9 million, compared to $13.0 million as of July 31, 2022.

THREE MONTHS ENDED JANUARY 31, 2023 COMPARED TO

THREE MONTHS ENDED JANUARY 31, 2022

CONSOLIDATED RESULTS

Consolidated net sales for the three months ended January 31, 2023, were $101.7 million, a 17% increase compared to net sales of $87.2 million for the three months ended January 31, 2022.

Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group, primarily due to price increases implemented across both product groups.

See discussion above in "Results from Operations - Six Months Ended January 31, 2023, compared to Six Months ended January 31, 2022" for more detail on backlog.

Segment results are discussed below.

Consolidated gross profit for the three months ended January 31, 2023, was $23.0 million, or 23% of net sales, compared to $15.6 million, or 18%, of net sales, for the three months ended January 31, 2022.

The increase is driven by higher selling prices across multiple products thus helping to mitigate the increases in costs of goods sold.

Domestic costs of goods sold per ton rose by 18%, driven primarily by per ton increases in non-fuel manufacturing, freight and natural gas costs.

The cost of natural gas per ton used to operate kilns that dry our clay was 9% higher in the second quarter of fiscal year 2023 compared to the second quarter of fiscal year 2022.

Per ton non-fuel manufacturing costs rose 28% in the second quarter of fiscal year 2023 compared to the second quarter of fiscal year 2022, due to higher costs for labor, repairs, purchased materials, depreciation, electricity, and diesel.

Domestic freight costs per ton increased approximately 17% in the second quarter of fiscal year 2023 compared to the same period of fiscal year 2022.

This excludes the impact of a significant customer in our cat litter business that altered shipping terms in January 2023 from collect to delivered which further increased our overall freight cost.

Ocean freight costs have also increased due to rising fuel costs, export fees, and demurrage charges.

In addition, our overall freight costs can vary between periods depending on the mix of products sold and the geographic distribution of our customers.

Packaging costs per ton remained flat in the three months ended January 31, 2023, when compared to the same period of fiscal year 2022.

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

Total selling, general and administrative expenses of $15.0 million for the three months ended January 31, 2023, were higher by $2.0 million, or 15%, compared to $13.0 million for the same period of fiscal year 2022.

Unallocated corporate expenses were higher by $2.5 million, or 38%, driven by higher bonus accrual due to improved quarterly results compared to the Company’s performance target under the annual incentive plan, an increase in compensation and outside services to support strategic initiatives.

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

Total other (expense) income, net of $(2.3) million for the three months ended January 31, 2023, decreased compared to net other income of $0.5 million in the same period of fiscal year 2022.

This was mostly driven by the reserve recorded for the Georgia landfill modification offset by the impact of foreign currency translation gains.

Refer above to Results of Operations – Overview section of Management’s Discussion and Analysis as well as Note 7 to the Financial Statements for additional details of the Georgia landfill modification reserve.

Consolidated net income before taxes for the three months ended January 31, 2023, was $5.0 million compared to $2.4 million for the same period of fiscal year 2022.

Results for the second quarter of fiscal year 2023 were driven by the factors discussed above.

We had a tax expense for the second quarter of fiscal year 2023 of $1.2 million compared to $0.4 million for the second quarter of fiscal year 2022.

Our tax expense was driven primarily by higher net income.

We used an estimated annual ETR of 21% in both periods in determining our provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for the three months ended January 31, 2023, were $35.2 million, an increase of $6.7 million, or 24%, from net sales of $28.5 million for the three months ended January 31, 2022, with increases across all three of our businesses in this group.

Net sales of our fluids purification products increased approximately $3.5 million, or 22%, compared to the second quarter of fiscal year 2022.

The increase in net sales was driven by price increases implemented across all regions.

Net sales increased in all regions, with most of the increase driven by North America and the region including Europe, Middle East, and Africa when compared to the three months ended January 31, 2022.

Net sales of our agricultural and horticultural chemical carrier products increased approximately $2.5 million, or 34%, for the three months ended January 31, 2023, compared to the same period in fiscal year 2022.

This is a result of quarterly price increases implemented throughout the year.

Net sales of our animal health and nutrition products increased $0.8 million, or 14%, during the three months ended January 31, 2023, compared to the same period in fiscal year 2022.

The growth was driven by North America, Latin America, Asia (excluding China), and Mexico, offset by a decrease in sales in China.

North American sales rose due to a strategic focus on this region, several significant new customers, and new product line.

In Latin America a shift in product mix and price increases resulted in higher net sales, while the increase in Mexico was driven by higher sales volumes compared to prior year.

Net sales of our subsidiary in China decreased period over period, as discussed in the "Foreign Operations" section below.

Total SG&A expenses for the Business to Business Products Group in the three months ended January 31, 2023 remained flat compared to the same period of fiscal year 2022.

The Business to Business Products Group’s operating income for the three months ended January 31, 2023, was $7.7 million, an increase of $1.3 million, or 20%, from operating income of $6.4 million for the three months ended January 31, 2022.

The overall increase in operating income was driven primarily by higher net sales due to continued strategic price increases.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for the three months ended January 31, 2023, were $66.5 million, an increase of $7.8 million, or 13%, from net sales of $58.8 million for the three months ended January 31, 2022, driven by higher net sales of cat litter, industrial and sports products, offset by a decline in our co-packaged cat litter business.

Global cat litter net sales were higher by approximately $6.4 million, or 13%, compared to the second quarter of fiscal year 2022 driven by price increases.

Domestic cat litter net sales were $49.0 million an increase of $6.1 million driven primarily by price increases.

Increased sales of lightweight (branded and private label) and coarse litter were partially offset by a decrease in net sales of private label heavy weight litter, and modest, category wide, elasticity impacts from price increases.

Net sales of co-packaged products decreased by approximately $0.2 million compared to the same period in fiscal year 2022.

This decrease was primarily due to our customer discontinuing export sales to one of their foreign subsidiaries.

Net sales of cat litter by our subsidiary in Canada increased period over period, as discussed in "Foreign Operations" below.

Net sales of our global industrial and sports products increased approximately $1.3 million, or 15%, compared to the three months ended January 31, 2022, primarily driven by price increases implemented to rebuild margins, and to a lesser extent from higher volumes.

SG&A expenses for the Retail and Wholesale Products Group were lower by approximately $0.6 million, or 16%, during the three months ended January 31, 2023, compared to the same period in fiscal year 2022.

The decrease was primarily due to timing of SG&A spend, offset by an increase in our allowance for doubtful accounts due to a customer declaring bankruptcy.

Advertising costs in the second quarter of fiscal year 2023 were flat when compared with prior year second quarter.

We anticipate total advertising expense in fiscal year 2023 to be higher than fiscal year 2022 and more in line with historical levels, with spending concentrated in the second half of the year.

The Retail and Wholesale Products Group experienced an operating income of $8.7 for the second quarter of fiscal year 2023, an increase of $6.5 million, or 315%, from operating income of $2.1 million for the same period of fiscal year 2022.

This was driven primarily by the increase in gross margins due to selling price increases partially offset by higher costs of goods sold.

FOREIGN OPERATIONS

Net sales by our foreign subsidiaries during the three months ending January 31, 2023 were $5.5 million, an increase of $0.2 million, or 4%, compared to net sales of $5.3 million during the same period of fiscal year 2022 which was driven by increases in net sales in Canada, UK and Mexico offset by reduction in net sales in China and Indonesia.

Total net sales of our subsidiary in Canada increased by $0.4 million, or 15%, in the three months ended January 31, 2023, compared to the same period in fiscal year 2022 driven by higher private label cat litter sales.

The increase in cat litter sales was mainly driven by price increases instituted in response to rising costs as well as from higher demand.

Net sales of industrial products decreased by $0.1 million compared to second quarter of fiscal year 2022.

Net sales of our subsidiary in the United Kingdom in the three months ended January 31, 2023, increased by $0.2 million, or 45%, compared to net sales in the three months ended January 31, 2022.

The increase primarily relates to prices increases.

Net sales of our subsidiary in Mexico increased during the second quarter of fiscal year 2023 compared to the second quarter of fiscal year 2022 by $0.3 million, or 60% due to growing demand of our animal health products.

Net sales of our subsidiary in China decreased $0.7 million, or 56%, during the second quarter of fiscal year 2023 compared to the second quarter of fiscal year 2022 primarily due to a transition in our distribution strategy.

Net sales by our foreign subsidiaries represented 5% and 6% of our consolidated net sales during the second quarter of fiscal years 2023 and 2022, respectively.

Our foreign subsidiaries reported net income of $0.1 million for the three months ended January 31, 2023, compared to a net loss of $0.4 million for the three months ended January 31, 2022.

The increase in net income was driven by price increases in Canada and UK, increased sales in Mexico, and a reduction of costs in Indonesia offset by a reduction in net sales in China.

Identifiable assets of our foreign subsidiaries as of January 31, 2023, were $19.3 million, compared to $17.4 million as of July 31, 2022.

LIQUIDITY AND CAPITAL RESOURCES

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and, from time to time, business acquisitions, and funding our debt service requirements.

During the first three months of fiscal year 2023, we principally funded these short and long-term capital requirements using cash from current operations as well as cash generated in fiscal year 2022 from borrowings under our Series Senior C Notes.

During the first six months of fiscal year 2023, we principally funded these short and long-term capital requirements using cash from current operations as well as cash generated in fiscal year 2022 from borrowings under our Series Senior C Notes.

We currently anticipate cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements.

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

For the Three Months Ended October 31,

For the Six Months Ended January 31,

Net cash provided by (used in) operating activities $ 14,898 $ 61

Net cash used in investing activities (13,280) (10,574)

Net cash used in financing activities (1,943) (4,156)

Net cash (used in) provided by financing activities (3,936) 14,957

Effect of exchange rate changes on cash and cash equivalents (29) (26)

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Net cash provided by operating activities

In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first three months of fiscal years 2023 and 2022 were as follows:

Accounts receivable, less allowance for doubtful accounts, increased $1.6 million in the first three months of fiscal year 2023 compared to an increase of $2.3 million in the first three months of fiscal year 2022.

In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first six months of fiscal years 2023 and 2022 were as follows:

Accounts receivable, less allowance for doubtful accounts, increased $5.7 million in the first six months of fiscal year 2023 compared to an increase of $5.0 million in the first six months of fiscal year 2022.

The increase in accounts receivable was driven primarily by higher net sales as sales prices increased offset by the level and timing of collections due to payment terms.

Inventory increased by $5.1 million in the first three months of both fiscal year 2023 and 2022 due to a combination of rising costs, specifically due to natural gas, purchased materials, electricity, diesel, and freight and the building of inventory levels for anticipated seasonal demand and thwart potential supply chain disruptions.

Other assets decreased by $1.4 million in the first three months of fiscal year 2023 compared to a decrease of $0.2 million in the first three months of fiscal year 2022.

The decrease in other assets in the first three months of fiscal year 2023 relates to capitalized pre-production costs being transferred to property, plant and equipment as the mines are now in production.

Accounts payable increased by $1.9 million in the first three months of fiscal year 2023 compared to an increase of $1.3 million in the first three months of fiscal year 2022.

Inventory increased by $2.4 million in the first six months of both fiscal year 2023 compared to $6.2 million in the first six months of 2022 due to a combination of rising costs, specifically due to natural gas, purchased materials, electricity, repairs, diesel, and freight and the building of inventory levels for anticipated seasonal demand and thwart potential supply chain disruptions.

Other assets decreased by $2.0 million in the first six months of fiscal year 2023 compared to a decrease of $0.6 million in the first six months of fiscal year 2022.

The decrease in other assets in the first six months of fiscal year 2023 relates mostly to capitalized pre-production costs being transferred to property, plant and equipment as the mines are now in production.

Accounts payable increased by $0.2 million in the first six months of fiscal year 2023 compared to an increase of $1.3 million in the first six months of fiscal year 2022.

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

Accrued expenses decreased $1.6 million in the first three months of fiscal year 2023 compared to an increase of $0.7 million in the first three months of fiscal year 2022.

The payout of the prior fiscal year's bonus reduced accrued salaries in both fiscal years, but to a greater extent in fiscal year 2023 as the accrual was higher at year end 2022 than the prior fiscal year.

The decrease in accrued expenses is also impacted by the decrease in advertising expenses and other accruals.

The decrease in accrued bonus in the first three months of fiscal year 2022 was offset by an increase in accrued advertising, real estate taxes, professional fees and accrued utilities.

These accruals can vary based on timing.

Accrued expenses increased $3.9 million in the first six months of fiscal year 2023 compared to a decrease of $1.6 million in the first six months of fiscal year 2022.

The majority of this increase is driven by the $2.5 million reserve added in the second quarter for the Georgia landfill modification as well as higher compensation related expenses accrued for in fiscal year 2023 compared to fiscal year 2022.

The increases were offset by the payout of the prior fiscal year's bonus which reduced accrued compensation in both fiscal years, but to a greater extent in fiscal year 2023 as the accrual was higher at year end 2022 than the prior fiscal year.

The increase in accrued expenses is also impacted by the decrease in advertising expenses and other accruals that vary based on timing.

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

Other liabilities decreased by $0.4 million in the first three months of fiscal year 2023 compared to a decrease of $0.5 million in the first three months of fiscal year 2022.

The decreases in both fiscal years 2022 and 2023 relate primarily to a reduction in our operating lease liability.

The decrease in accrued expenses for the first six months of fiscal year 2022 was driven by the payout of the bonuses and real estate taxes offset by higher accrued utilities due to the rising cost of natural gas, higher accrued advertising due to the timing of our advertising programs, and additional accrued capital projects.

Other liabilities decreased by $0.9 million in the first six months of fiscal year 2023 and $1.0 million for the same period in fiscal year 2022.

The decreases in both fiscal years 2023 and 2022 relate primarily to a reduction in the operating lease liability.

Net cash used in investing activities

Cash used in investing activities of $7.5 million in the first three months of fiscal year 2023 were higher compared to cash used in investing activities of $6.7 million in the first three months of fiscal year 2022 driven by capital expenditures.

During the first three months of fiscal year 2023 we expanded our plant equipment and improved our facilities to support increased demand for our products as well as made improvements to our IT network.

Cash used in investing activities of $13.3 million in the first six months of fiscal year 2023 were higher compared to cash used in investing activities of $10.6 million in the first six months of fiscal year 2022 driven by capital expenditures.

During the first six months of fiscal year 2023 we expanded our plant equipment and improved our facilities to support increased demand for our products as well as made improvements to our IT network.

Net cash used in financing activities

Cash used in financing activities of $1.9 million in the first three months of fiscal year 2023 was lower than cash used in financing activities of $4.2 million in the first three months of fiscal year 2022 driven by less share repurchases.

Total cash and investment balances held by our foreign subsidiaries of $2.6 million as of October 31, 2022 were slightly lower than July 31, 2022 balances of $3.3 million.

Cash used in financing activities of $3.9 million in the first six months of fiscal year 2023 compared to cash provided by financing activities of $15.0 million in the first six months of fiscal year 2022.

The decrease is driven by less share repurchases and no additional note issuances in the current year compared to the second quarter of fiscal year 2022.

Cash provided by financing activities in the first six months of fiscal year 2022 was primarily driven by the issuance of a $25.0 million note offset by treasury stock repurchases and dividend payments.

Total cash balances held by our foreign subsidiaries of $3.4 million as of January 31, 2023, remained relatively flat compared to $3.3 million as of July 31, 2022.

See further discussion in "Foreign Operations" above.

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

As of October 31, 2022, the variable rates would have been 6.25% for the BMO Harris prime-based rate or 4.10% for the adjusted SOFR-based rate.

As of January 31, 2023, the variable rates would have been 7.50% for the BMO Harris prime-based rate or 4.69% for the adjusted SOFR-based rate.

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

The agreement also requires us to maintain a minimum fixed charge coverage ratio and a maximum net debt to earnings ratio.

As of October 31, 2022 and 2021, we were in compliance with the covenants.

There were no borrowings during the first three months of either fiscal year 2022 or 2023.

As of January 31, 2023 and 2022, we were in compliance with the covenants.

There were no borrowings during the first six months of either fiscal year 2023 or 2022.

We are party to an Amended and Restated Note Purchase and Private Shelf Agreement (as amended, the "Note Agreement") with PGIM, Inc.

(“Prudential”) and certain existing noteholders and purchasers affiliated with Prudential named therein pursuant to which, among other things, we issued $10 million in aggregate principal amount of our 3.95% Series B Senior Notes due May 15, 2030 of which $8 million aggregate principal amount remained outstanding as of October 31, 2022.

("Prudential") and certain existing noteholders and purchasers affiliated with Prudential named therein pursuant to which, among other things, we issued $10 million in aggregate principal amount of our 3.95% Series B Senior Notes due May 15, 2030 of which $8 million aggregate principal amount remained outstanding as of January 31, 2023.

The Note Agreement provides us with the ability to request, from time to time until May 15, 2023 (or such earlier date as provided for in the agreement), the issuance of additional senior unsecured notes in an aggregate principal amount of up to $75 million minus the aggregate principal amount of the notes then outstanding and the additional notes that have been accepted for purchase.

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Pursuant to the Note Agreement, on December 16, 2021, we issued $25 million in aggregate principal amount of our 3.25% Series C Senior Notes due December 16, 2031.

As of October 31, 2022 outstanding notes payable totaled $32.8 million, net of $0.2 million of unamortized debt issuance costs.

As of January 31, 2023 outstanding notes payable totaled $31.8 million, net of $0.2 million of unamortized debt issuance costs.

See Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for discussion on amendments made to the credit agreement with BMO Harris and our Senior Note Agreements.

As of October 31, 2022, we had remaining authority to repurchase 433,166 shares of Common Stock and 273,100 shares of Class B Stock under a repurchase plan approved by our Board of Directors (the “Board”).

As of January 31, 2023, we had remaining authority to repurchase 429,033 shares of Common Stock and 273,100 shares of Class B Stock under a repurchase plan approved by our Board of Directors (the "Board").

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis