Oil-Dri Corp of America 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included herein and our Consolidated Financial Statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2022. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under "Forward-Looking Statements" and Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended July 31, 2022. OVERVIEW We develop, mine, manufacture and market sorbent products principally produced from clay minerals, primarily consisting of calcium bentonite, attapulgite and diatomaceous shale. Our principal products include agricultural and horticultural chemical carriers, animal health and nutrition products, cat litter, fluid purification and filtration bleaching clays, industrial and automotive floor absorbents and sports field products. Our products are sold to two primary customer groups, including customers who resell our products as originally produced to the end consumer and other customers who use our products as part of their production process or use them as an ingredient in their final finished product. We have two reportable operating segments based on the different characteristics of our two primary customer groups: the Retail and Wholesale Products Group and the Business to Business Products Group, as described in Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements. Each operating segment is discussed individually below. RESULTS OF OPERATIONS OVERVIEW 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 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. 23 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 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 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 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 $(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") 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 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 24 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 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 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 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 $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. FOREIGN OPERATIONS 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 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. 25 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. 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 when compared to prior year. 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. 26 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. 27 FOREIGN OPERATIONS 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 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 Our principal liquidity needs are to fund our capital requirements, including funding working capital needs; purchasing and upgrading equipment, facilities (including significant renovations at one of our plants), information systems, and real estate; supporting new product development; investing in infrastructure; repurchasing stock; paying dividends; making pension contributions; and, from time to time, business acquisitions, and funding our debt service requirements. 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. In addition, we are actively monitoring the timing and collection of our accounts receivable. The following table sets forth certain elements of our unaudited Condensed Consolidated Statements of Cash Flows (in thousands): For the Six Months Ended January 31, 2023 2022 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) provided by financing activities (3,936) 14,957 Effect of exchange rate changes on cash and cash equivalents (29) (26) Net decrease in cash and cash equivalents $ (2,347) $ 4,418 Net cash provided by operating activities In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first six months of fiscal years 2023 and 2022 were as follows: 28 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 $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 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. 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 $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 $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. Other 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. 29 We are party to a credit agreement (as amended, the "Credit Agreement") with BMO Harris Bank N.A. ("BMO Harris"), which terminates on August 30, 2027. The agreement provides for a $45 million unsecured revolving credit facility and a maximum of $10 million for letters of credit. 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 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 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 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. The issuance of such additional notes is at the discretion of the noteholders and purchasers and on an uncommitted basis. 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 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 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. The timing, number and manner of share repurchases will be determined by our management pursuant to the repurchase plan approved by our Board. We believe that cash flow from operations, availability under our revolving credit facility, current cash and investment balances and our ability to obtain other financing, if necessary, will provide sufficient liquidity for foreseeable working capital needs, capital expenditures at existing facilities, deferred compensation payouts, dividend payments and debt service obligations for at least the next 12 months. We expect capital expenditures in fiscal year 2023 to be greater than in fiscal year 2022. We do not believe that these increased capital expenditures will dramatically impact our cash position; however our cash requirements are subject to change as business conditions warrant and opportunities arise. Our anticipated advertising expense for fiscal year 2023 is expected to be higher compared to fiscal year 2022 and in line with historical pre-pandemic levels. We continually evaluate our liquidity position and anticipated cash needs, as well as the financing options available to obtain additional cash reserves. Our ability to fund operations, to make planned capital expenditures, to make scheduled debt payments, to contribute to our pension plan and to remain in compliance with all financial covenants under debt agreements, including, but not limited to, the current credit agreement, depends on our future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors. The timing and size of any new business ventures or acquisitions that we complete may also impact our cash requirements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES This discussion and analysis of financial condition and results of operations is based on our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Estimates and assumptions are revised periodically. Actual results could differ from these estimates. See the information concerning our critical accounting policies included under "Management’s Discussion of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended July 31, 2022. 30