Oil-Dri Corp of America 10-K

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OIL-DRI CORPORATION OF AMERICA CONSOLIDATED BALANCE SHEETS July 31, 2023 2022 ASSETS (in thousands) Current Assets Cash and cash equivalents $ 31,754 $ 16,298 Accounts receivable, less allowance of $ 1,087 and $ 922 in 2023 and 2022, respectively 59,287 51,683 Inventories, net 42,612 40,466 Prepaid expenses and other assets 2,854 3,664 Total Current Assets 136,507 112,111 Property, Plant and Equipment Buildings and leasehold improvements 40,940 40,294 Machinery and equipment 184,471 165,350 Office furniture and equipment 18,744 17,524 Vehicles 17,663 15,470 Gross depreciable assets 261,818 238,638 Less accumulated depreciation and amortization ( 182,999 ) ( 175,374 ) Net depreciable assets 78,819 63,264 Construction in progress 15,856 24,496 Land and mineral rights 22,905 20,106 Capital parts, net 3,292 2,570 Total Property, Plant and Equipment, Net 120,872 110,436 Other Assets Goodwill 3,618 3,618 Trademarks and patents, net of accumulated amortization of $ 578 and $ 524 in 2023 and 2022, respectively 1,399 1,445 Customer list, net of accumulated amortization of $ 7,763 and $ 7,608 in 2023 and 2022, respectively 22 177 Deferred income taxes 7,201 3,677 Operating lease right-of-use assets 9,386 10,601 Other 7,230 7,546 Total Other Assets 28,856 27,064 Total Assets $ 286,235 $ 249,611 42 OIL-DRI CORPORATION OF AMERICA CONSOLIDATED BALANCE SHEETS (continued) July 31, 2023 2022 LIABILITIES AND STOCKHOLDERS’ EQUITY (in thousands) Current Liabilities Current maturities of notes payable $ 1,000 $ 1,000 Accounts payable 17,101 13,401 Dividends payable 1,927 1,851 Operating lease liabilities 1,872 2,178 Accrued expenses 36,868 30,085 Total Current Liabilities 58,768 48,515 Noncurrent Liabilities Notes payable, net of unamortized debt issuance costs of $ 173 and $ 202 in 2023 and 2022, respectively 30,827 31,798 Deferred compensation 4,512 4,559 Pension and postretirement benefits 1,753 798 Long-term operating lease liabilities 8,810 9,749 Other 4,489 3,843 Total Noncurrent Liabilities 50,391 50,747 Total Liabilities 109,159 99,262 Stockholders’ Equity Common Stock, par value $ .10 per share, issued 8,750,223 shares in 2023 and 8,686,768 shares in 2022 875 868 Class B Stock, convertible, par value $ .10 per share, issued 2,397,056 shares in 2023 and 2,397,056 shares in 2022 240 240 Additional paid-in capital 55,624 52,467 Retained earnings 200,796 178,754 Noncontrolling interest — ( 369 ) Accumulated Other Comprehensive Income (Loss) Pension and postretirement benefits 1,012 ( 2,242 ) Cumulative translation adjustment ( 264 ) 59 Total Accumulated Other Comprehensive Income (Loss) 748 ( 2,183 ) Less treasury stock, at cost ( 3,658,989 Common and 351,641 Class B shares in 2023 and 3,609,938 Common and 351,641 Class B shares in 2022) ( 81,207 ) ( 79,428 ) Total Stockholders’ Equity 177,076 150,349 Total Liabilities and Stockholders’ Equity $ 286,235 $ 249,611 The accompanying notes are an integral part of the Consolidated Financial Statements. 43 OIL-DRI CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended July 31, 2023 2022 (in thousands, except for per share data) Net Sales $ 413,021 $ 348,589 Cost of Goods Sold ( 309,794 ) ( 286,074 ) Gross Profit 103,227 62,515 Selling, General and Administrative Expenses ( 62,187 ) ( 52,050 ) Loss on Impairment of Goodwill — ( 5,644 ) Income from Operations 41,040 4,821 Other (Expense) Income Interest income 465 45 Interest expense ( 1,464 ) ( 1,228 ) Loss on pension termination ( 4,652 ) — Foreign exchange gain (loss) 105 ( 303 ) Other, net ( 816 ) 2,374 Total Other (Expense) Income, Net ( 6,362 ) 888 Income Before Income Taxes 34,678 5,709 Income Tax Expense ( 5,195 ) ( 97 ) Net Income $ 29,483 $ 5,612 Net Loss Attributable to Noncontrolling Interest ( 68 ) ( 62 ) Net Income Attributable to Oil-Dri 29,551 5,674 Net Income Per Share Basic Common $ 4.45 $ 0.83 Basic Class B $ 3.35 $ 0.63 Diluted Common $ 4.13 $ 0.81 Diluted Class B $ 3.35 $ 0.62 Average Shares Outstanding Basic Common 4,825 4,987 Basic Class B 1,959 1,934 Diluted Basic Common 6,784 5,099 Diluted Basic Class B 1,959 1,962 The accompanying notes are an integral part of the Consolidated Financial Statements. 44 OIL-DRI CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended July 31, 2023 2022 (in thousands) Net Income Attributable to Oil-Dri $ 29,551 $ 5,674 Other Comprehensive Income (Loss): Pension and postretirement benefits (net of tax) 3,254 2,186 Cumulative translation adjustment ( 323 ) ( 252 ) Other Comprehensive Income 2,931 1,934 Comprehensive Income $ 32,482 $ 7,608 The accompanying notes are an integral part of the Consolidated Financial Statements. 45 OIL-DRI CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Number of Shares (in thousands) 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) — — — — 5,674 — — ( 62 ) 5,612 Other comprehensive income — — — — — — 1,934 — 1,934 Dividends declared — — — — ( 7,363 ) — — — ( 7,363 ) Purchases of treasury stock — ( 379,586 ) — — — ( 11,806 ) — — ( 11,806 ) Net issuance of stock under long-term incentive plans 125,457 ( 42,800 ) 12 1,455 — ( 1,468 ) — — ( 1 ) Amortization of restricted stock — — — 2,741 — — — — 2,741 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) — — — — 29,551 — — ( 68 ) 29,483 Other comprehensive income — — — — — — 2,931 — 2,931 Dividends declared — — — — ( 7,509 ) — — — ( 7,509 ) Purchases of treasury stock — ( 25,055 ) — — — ( 1,078 ) — — ( 1,078 ) Net issuance of stock under long-term incentive plans 63,455 ( 23,996 ) 7 695 — ( 701 ) — — 1 Amortization of restricted stock — — — 3,147 — — — — 3,147 Contributions from noncontrolling interests — — — ( 685 ) — — — 437 $ ( 248 ) Balance, July 31, 2023 11,147,279 ( 4,010,630 ) $ 1,115 $ 55,624 $ 200,796 $ ( 81,207 ) $ 748 $ — $ 177,076 The accompanying notes are an integral part of the Consolidated Financial Statements. 46 OIL-DRI CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS Year-Ended July 31, 2023 2022 (in thousands) Cash Flows from Operating Activities Net income $ 29,483 $ 5,612 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,528 13,474 Non-cash stock compensation expense 3,147 2,741 Loss on pension termination 4,652 — Provision for deferred income taxes ( 4,431 ) ( 2,296 ) Provision for bad debts and cash discounts 284 ( 227 ) Loss on impairment of goodwill — 5,644 Loss on impairment of patent applications 61 323 Loss on impairment of Fixed Assets 914 — Accretion for asset retirement obligation 161 145 Loss on the disposals of property, plant and equipment 130 334 (Increase) decrease in: Accounts receivable ( 7,899 ) ( 10,654 ) Inventories ( 2,204 ) ( 13,087 ) Prepaid expenses 1,082 372 Deferred income taxes 510 715 Other assets 59 1,607 Increase (decrease) in: Accounts payable 3,241 5,002 Accrued expenses 6,455 4,702 Deferred compensation ( 47 ) 189 Pension and postretirement benefits ( 1,085 ) ( 1,938 ) Other liabilities ( 277 ) ( 3,641 ) Total Adjustments 20,281 3,405 Net Cash Provided by Operating Activities 49,764 9,017 Cash Flows from Investing Activities Capital expenditures ( 24,368 ) ( 22,010 ) Proceeds from sale of property, plant and equipment 70 21 Acquisition of equity in Agromex ( 269 ) — Net Cash Used in Investing Activities ( 24,567 ) ( 21,989 ) Cash Flows from Financing Activities Proceeds from issuance of notes payable — 25,000 Principal payments on notes payable ( 1,000 ) ( 1,000 ) Payment of debt issuance costs ( 7 ) ( 114 ) Dividends paid ( 7,433 ) ( 7,377 ) Purchase of treasury stock ( 1,078 ) ( 11,806 ) Net Cash (Used in) Provided by Financing Activities ( 9,518 ) 4,703 Effect of exchange rate changes on cash and cash equivalents ( 223 ) ( 24 ) Net Increase (Decrease) in Cash and Cash Equivalents 15,456 ( 8,293 ) Cash and Cash Equivalents, Beginning of Year 16,298 24,591 Cash and Cash Equivalents, End of Year $ 31,754 $ 16,298 47 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year-Ended July 31, 2023 2022 (in thousands) Supplemental disclosure: Other cash flows: Interest payments, net of amounts capitalized $ 1,135 $ 767 Income tax payments (refunds) $ 7,367 $ ( 178 ) Noncash investing and financing activities: Capital expenditures accrued, but not paid $ 4,279 $ 3,558 Cash dividends declared and accrued, but not paid $ 1,927 $ 1,851 The accompanying notes are an integral part of the Consolidated Financial Statements. 48 OIL-DRI CORPORATION OF AMERICA NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES N ATURE OF O PERATIONS We are a leader in developing, manufacturing and/or marketing sorbent products. Our sorbent products are principally produced from clay minerals. Our absorbent clay products include cat litter, industrial floor absorbents, agricultural chemical carriers and animal feed additives. Our adsorbent products include bleaching clays, which are used for filtration of edible oils, pre-treatment of renewable diesel, and for purification of petroleum-based oils. We also sell synthetic sorbents, which are used for industrial cleanup. P RINCIPLES OF C ONSOLIDATION The Consolidated Financial Statements include the accounts of Oil-Dri Corporation of America and its subsidiaries. All significant intercompany balances and transactions have been eliminated from the Consolidated Financial Statements. R ECLASSIFICATION Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These immaterial reclassifications had no effect on the previously reported net income or net cash flows. M ANAGEMENT U SE OF E STIMATES The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of 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. C ASH AND C ASH E QUIVALENTS Cash equivalents are highly liquid investments with maturities of three months or less. T RADE R ECEIVABLES 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. 49 I NVENTORIES The composition of inventories was as follows as of July 31 (in thousands): 2023 2022 Finished goods $ 21,943 $ 18,142 Packaging 8,007 9,515 Spare parts, net $ 5,981 $ 4,904 Other 6,681 7,905 Inventories $ 42,612 $ 40,466 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. We performed a detailed review of our inventory items to determine if an obsolescence reserve adjustment was necessary. The review surveyed all of our operating facilities and sales groups to ensure that both historical issues and new market trends were considered. The obsolescence reserve not only considered specific items, but also took into consideration the overall value of the inventory as of the balance sheet date. We recorded inventory obsolescence reserves of approximately $ 0.8 million as of both July 31, 2023 and July 31, 2022, respectively. The other category of inventories includes a variety of items including clay, additives, fragrances and other supplies. Spare parts in inventory is recorded net of a valuation reserve based on aging. The spare parts reserve was $ 2.9 million as of July 31, 2023, and $ 2.7 million as of July 31, 2022. T RANSLATION OF F OREIGN C URRENCIES Assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated to U.S. Dollars at the exchange rates in effect at period end. Income statement items are translated at the average exchange rate on a monthly basis. Resulting translation adjustments are recorded as a separate component of stockholders’ equity. I NTANGIBLES AND G OODWILL We amortize most of our intangibles on a straight-line basis over periods ranging from 10 to 20 years. Our customer list intangible asset is amortized at an accelerated amortization rate in the earlier years to reflect the expected pattern of decline in the related benefits over time. Intangible amortization was $ 0.3 million in fiscal year 2023 and $ 0.5 million in fiscal year 2022. Some intangible assets were determined to have indefinite lives and are not amortized, specifically one acquired trademark recorded at $ 0.4 million. Our estimated intangible amortization expense for the next five fiscal years is as follows (in thousands): 2024 $ 129 2025 $ 105 2026 $ 102 2027 $ 99 2028 $ 94 The remaining weighted average amortization period of our intangibles subject to amortization is as follows (in years): Weighted Average Amortization Period Patents 11.0 Customer list 0.3 Total intangible assets subject to amortization 10.0 We periodically review indefinite-lived intangibles and goodwill to assess for impairment. Our review entails a qualitative analysis of triggering events and if identified a further analysis is performed based on cash flow considerations and other approaches that require significant judgment with respect to volume, revenue, expenses and allocations. Impairment occurs when the carrying value exceeds the fair value. In fiscal year 2023, all of our goodwill was attributed only to the 50 Business to Business operating segment. We performed our annual impairment assessment and identified no triggering events that would indicate the need for impairment of the goodwill. During fiscal year 2022, we determined, as a result of lower share prices and the continued adverse impacts of rising costs and additional expenses to prevent supply chain disruptions, that we had a triggering event that necessitated a goodwill impairment test. As a result, it was determined that the carrying value of our Retail and Wholesale Products Group reporting unit was higher than its fair value and recognized a goodwill impairment of $ 5.6 million, which left no remaining goodwill in the Retail and Wholesale Products Group reporting unit. No impairment was recognized for the Business to Business operating segment in fiscal year 2022. O VERBURDEN R EMOVAL AND M INING C OSTS We surface mine sorbent minerals 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 from the mine site, thus exposing the sorbent material used in a majority of our production processes. These stripping costs incurred during production are treated as a variable inventory production cost and are included in cost of goods sold in the period they are incurred. Stripping costs included in cost of goods sold were approximately $ 4.0 million and $ 2.7 million for fiscal years 2023 and 2022, respectively. Pre-production overburden removal costs associated with opening a new mine during the development phase are deferred. Total pre-production costs, including the overburden removal costs, that were capitalized in fiscal years 2023 and 2022 were $ 0.1 million and $ 1.3 million respectively. The decrease was due to a new mine going into production in fiscal year 2023. Capitalized development costs are amortized when the sorbent material is removed from the mine and used to produce product for sale. At the end of fiscal year 2023, the amount of development costs that are being amortized is $ 4.3 million. 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 rights, including legal fees and drilling expenses, are also capitalized. As of both fiscal years ending July 31, 2023 and July 31, 2022 we had $ 13.6 million of land and $ 2.2 million of gross mineral rights included in land and mineral rights on the Consolidated Balance Sheets. Any prepaid royalties that may be offset against future royalties due upon extraction of the mineral are also capitalized. Prepaid royalties included in current prepaid expenses and in non-current other assets on the Consolidated Balance Sheets were approximately $ 2.0 million for both fiscal years ending July 31, 2023 and July 31, 2022. R ECLAMATION 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. As of July 31, 2023 and 2022, we have recorded an estimated net reclamation asset of $ 2.2 million and $ 1.8 million, respectively, and a corresponding estimated reclamation liability of $ 4.5 million as of July 31, 2023 and $ 3.8 million as of July 31, 2022. These values represent the discounted present value of the estimated future mining reclamation and landfill closure costs at the production plants. Additional mining activity in fiscal year 2023 and disturbance of land accounts for a majority of the increase in the reclamation asset and liability. P ROPERTY , P LANT AND E QUIPMENT Property, plant and equipment are generally depreciated using the straight-line method over their estimated useful lives which are listed below. Depreciation expense was $ 15.3 million and $ 13.0 million in fiscal years 2023 and 2022, respectively. Major improvements and betterments are capitalized, while maintenance and repairs that do not extend the useful life of the applicable assets are expensed as incurred. Interest expense may also be capitalized for assets that require a period of time to get them ready for their intended use. There was no capitalized interest in fiscal years 2023 and 2022. 51 Years Buildings and leasehold improvements 3 - 40 Machinery and equipment Packaging 2 - 20 Processing 2 - 25 Mining and other 2 - 15 Office furniture and equipment 2 - 15 Vehicles 2 - 15 Property, plant and equipment are carried at cost on the Consolidated Balance Sheets and are reviewed for possible impairment on an annual basis or when circumstances indicate impairment that an asset may become impaired. We take into consideration idle and underutilized equipment and review business plans for possible impairment. When impairment is indicated, an impairment charge is recorded for the difference between the carrying value of the asset and its fair market value. In fiscal year 2023, we recognized $ 0.9 million in impairment losses for fixed assets no longer in use. The impairment is included in cost of goods sold on the Consolidated Statement of Operations. There was no impairment recognized in fiscal year 2022. Capital parts are long-lived spare parts that are recorded net of a valuation reserve based on aging. The capital parts reserve was $ 2.0 million as of July 31, 2023, and $ 1.8 million as of July 31, 2022. 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 liabilities within Accrued Expenses on the Consolidated Balance Sheet is $ 2.5 million for the Georgia landfill modification reserve which began in the third quarter of fiscal year 2023. Refer to Note 11 for further details. T RADE P ROMOTIONS We routinely commit to one-time or ongoing trade promotion programs, primarily in our Retail and Wholesale Products Group. All such costs are netted against sales. We have accrued liabilities at the end of each period for the estimated expenses incurred but not yet paid for these programs. Promotional reserves are provided for sales incentives made directly to consumers, such as coupons, and sales incentives made to customers, such as slotting, discounts based on sales volume, cooperative marketing programs and other arrangements. We use judgment for estimates to determine our trade spending liabilities. We rely on our historical experience of trade spending patterns and that of the industry, current trends and forecast data. A DVERTISING Advertising costs for the development of printed materials, television commercials, web-based digital banners, web-based social media and sales videos are deferred and expensed upon the first use of the materials, unless such amounts are immaterial. Costs paid for communicating advertising over a period of time, such as television air time, radio commercials and print media advertising space, are deferred and expensed on a pro-rata basis. All other advertising costs, including participation in industry conventions and shows and market research, are expensed when incurred. All advertising costs are part of selling, general and administrative expenses. Advertising expenses were approximately $ 7.4 million and $ 4.0 million in fiscal years 2023 and 2022, respectively. F AIR V ALUE OF F INANCIAL I NSTRUMENTS Non-derivative financial instruments included in the Consolidated Balance Sheets are cash and cash equivalents and notes payable. These instruments, except for notes payable, were carried at amounts approximating fair value as of July 31, 2023 and 2022. See Note 4 of the Notes to the Consolidated Financial Statements for additional information regarding the fair value of our financial instruments, including notes payable. 52 R EVENUE R ECOGNITION 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 as of July 31, 2022. There is no liability for advance payments as of July 31, 2023. This liability is reported in Other Accrued Expenses on the Consolidated Balance Sheets. Revenue recognized during fiscal year 2023 that was included in the liability for advance payments at the beginning of the year was $ 0.5 million. C OST OF GOODS SOLD Cost of goods sold consists of all manufacturing costs, including depreciation and amortization related to assets used in the manufacturing and distribution process, inbound and outbound freight, inspection costs, purchasing costs associated with materials and packaging used in the production process and warehouse and distribution costs. Natural gas forward contracts are accounted for as normal purchases. S HIPPING AND H ANDLING C OSTS Shipping and handling costs are included in cost of goods sold and were approximately $ 57.4 million and $ 48.5 million for fiscal years 2023 and 2022, respectively. The increase is primarily related to a key customer switching from pick up to delivered. S ELLING , G ENERAL AND A DMINISTRATIVE E XPENSES Selling, general and administrative expenses 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. R ESEARCH AND D EVELOPMENT Research and development costs of approximately $ 1.2 million and $ 2.1 million were charged to expense as incurred for fiscal years 2023 and 2022, respectively, and are recorded in selling, general and administrative expenses. P ENSION AND P OSTRETIREMENT B ENEFIT C OSTS We historically provided a defined benefit pension plan for eligible salaried and hourly employees and we made contributions to fund the plan. We also provide a postretirement health benefit plan to domestic salaried employees who qualify under the plan’s provisions. The postretirement health benefit plan is unfunded. Our pension and postretirement health benefit plans are accounted for using actuarial valuations required by ASC 715, Compensation – Retirement Benefits . The funded status of our defined pension and postretirement health benefit plans are recognized on the Consolidated Balance Sheets. Changes in the funded status that arise during the period but are not recognized as components of net periodic benefit cost are recognized within other comprehensive income, net of income tax. In fiscal year 2023 we terminated the pension plan. See Note 8 of the Notes to the Consolidated Financial Statements for additional information. S TOCK -B ASED C OMPENSATION We account for stock options and restricted stock issued under our long-term incentive plans in accordance with ASC 718, Compensation – Stock Compensation . The fair value of stock-based compensation is determined at the grant date. The related compensation expense is recognized over the appropriate vesting period. Forfeitures are recognized as they occur. See Note 7 of the Notes to the Consolidated Financial Statements for additional information. 53 I NCOME TAXES Deferred income tax assets and liabilities are recorded for the impact of temporary differences between the tax basis of assets and liabilities and the amounts recognized for financial reporting purposes. Deferred tax assets are reviewed and a valuation allowance is established if management believes that it is more likely than not that some portion of our deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In addition to existing valuation allowances, we provide for uncertain tax positions, if necessary, when such tax positions do not meet the recognition thresholds or measurement standards prescribed by ASC 740, Income Taxes . Amounts for uncertain tax positions are adjusted when new information becomes available or when positions are effectively settled. We recognize interest and penalties accrued related to uncertain tax positions in income tax expense. U.S. income tax expense and foreign withholding taxes are provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested. Where unremitted foreign earnings are indefinitely reinvested, no provision for federal or state tax expense is recorded. When circumstances change and we determine that some or all of the undistributed earnings will be remitted in the foreseeable future, a corresponding expense is accrued in the current period. See Note 5 of the Notes to the Consolidated Financial Statements for additional information about income taxes. EARNINGS PER SHARE We utilize the two-class method to report our earnings per share ("EPS"). The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings. Common Stock is entitled to cash dividends equal to at least 133.33 % on a per share basis of the cash dividend paid on Class B Stock. In computing earnings per share, the Company has allocated dividends declared to Common and Class B shares based on amounts actually declared for each class of stock and 33.33 % more of the undistributed earnings have been allocated to Common Stock than to the Class B shares on a per share basis. Common Stock is entitled to one vote per share and Class B Stock is entitled to ten votes per share. Common Stock have no conversion rights. Class B Stock is convertible on a share-by-share basis into Common Stock at any time and is subject to mandatory conversion under certain circumstances. Basic EPS is computed by dividing net earnings, reduced for any distributed and undistributed earnings allocated to unvested restricted shares, by the weighted-average number of shares outstanding during the period for each class of share. Diluted EPS, for each class of common stock, is computed by dividing net earnings by the weighted-average number of common shares and potential common shares outstanding during the period. Dilution for common stock takes into consideration the effect of both unvested restricted shares and convertible Class B shares, if the effect is dilutive. Dilution for Class B takes into consideration the effect of unvested restricted shares, if the effect is dilutive. Below is a reconciliation of the calculation of basic and diluted EPS. For the year ended July 31, 2023 (in thousands, except for per share data) Total Common Class B Net income $ 29,551 $ 22,712 $ 6,839 Distributed and undistributed earnings on restricted shares ( 1,518 ) ( 1,232 ) ( 286 ) Income available to stockholders $ 28,033 $ 21,480 $ 6,553 Net Income (Numerator) $ 21,480 $ 6,553 Weighted Average Shares Outstanding (Denominator) 4,825 1,959 Basic EPS $ 4.45 $ 3.35 Effect of dilution - Net Income (1) $ 6,553 $ — Net income assuming dilution (Numerator) $ 28,033 $ 6,553 Effect of dilution - Shares (1) 1,959 $ — Shares assuming dilution (Denominator) 6,784 $ 1,959 Diluted EPS $ 4.13 $ 3.35 (1) The impact of unvested restricted stock was anti-dilutive therefore not included in the calculation of diluted EPS 54 N EW A CCOUNTING P RONOUNCEMENTS 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. NOTE 2 – 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 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 reportable operating segments: (1) Retail and Wholesale Products Group and (2) Business to Business 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, the farm and fleet channel, drugstore chains, pet specialty retail outlets, dollar stores, retail grocery stores, distributors of industrial cleanup and automotive products, environmental service companies, sports field product users and marketers of consumer products. The Business to Business Products Group customers include: processors and refiners of edible oils, renewable diesel, petroleum-based oils and biodiesel fuel; manufacturers of animal feed and agricultural chemicals; and distributors of animal health and nutrition products. Net sales for our principal products by segment are as follows (in thousands): Business to Business Products Group Retail and Wholesale Products Group Year Ended July 31, Product 2023 2022 2023 2022 Cat Litter $ — $ — $ 226,335 $ 196,278 Industrial and Sports — — 44,291 38,932 Agricultural and Horticultural 40,275 30,419 — — Bleaching Clay and Fluids Purification 77,643 62,051 — — Animal Health and Nutrition 24,477 20,909 — — Net Sales $ 142,395 $ 113,379 $ 270,626 $ 235,210 Net sales and operating income for each segment are provided below. The accounting policies of the segments are the same as those described in the Note 1 of the Notes to the Consolidated Financial Statements. We do not rely on any operating 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. We have refined the basis of allocation for certain of our assets as of April 30, 2023, and we have restated the allocation of assets as of July 31, 2022 presented below to enhance comparability. 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. 55 The corporate expenses line in the table below represents 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 annual incentive plan bonus accrual. As of July 31, Assets 2023 2022 (in thousands) Business to Business Products $ 85,798 $ 77,840 Retail and Wholesale Products 134,974 125,293 Unallocated assets 65,463 46,478 Total Assets $ 286,235 $ 249,611 Year Ended July 31, Net Sales Income 2023 2022 2023 2022 (in thousands) Business to Business Products $ 142,395 $ 113,379 $ 36,573 $ 24,344 Retail and Wholesale Products 270,626 235,210 36,119 6,252 Net Sales $ 413,021 $ 348,589 Corporate Expenses ( 31,652 ) ( 25,775 ) Income from Operations 41,040 4,821 Total Other Income, Net ( 6,362 ) 888 Income Before Income Taxes 34,678 5,709 Income Tax Expense ( 5,195 ) ( 97 ) Net Income $ 29,483 $ 5,612 Net Loss Attributable to Noncontrolling Interest $ ( 68 ) $ ( 62 ) Net Income Attributable to Oil-Dri $ 29,551 $ 5,674 The following is a summary by fiscal year of financial information by geographic region (in thousands): 2023 2022 Sales to unaffiliated customers by: Domestic operations $ 390,963 $ 328,696 Foreign subsidiaries $ 22,058 $ 19,893 Sales or transfers between geographic areas: Domestic operations $ 6,436 $ 6,418 Foreign subsidiaries $ 69 $ 161 Income (Loss) before income taxes: Domestic operations $ 33,686 $ 6,552 Foreign subsidiaries $ 992 $ ( 843 ) Net Income (Loss) attributable to Oil-Dri: Domestic operations $ 28,494 $ 6,430 Foreign subsidiaries $ 1,057 $ ( 756 ) Identifiable assets: Domestic operations $ 271,627 $ 236,622 Foreign subsidiaries $ 14,608 $ 12,989 56 Included within identifiable assets for our foreign subsidiaries is cash held at foreign banks of $ 5.2 million and $ 3.3 million as of July 31, 2023 and July 31, 2022, respectively. Sales to Walmart, our largest customer, are included in our Retail and Wholesale Products Group. The percentage of consolidated net sales and net accounts receivable attributed to Walmart are shown in the table below: 2023 2022 Net sales for the years ended July 31 19 % 16 % Net accounts receivable as of July 31 26 % 21 % There are no other customers with sales equal to or greater than 10% of our total sales. NOTE 3 – DEBT The composition of notes payable is as follows as of July 31 (in thousands): 2023 2022 Amended and Restated Note Purchase and Private Shelf Agreement. Annual principal installments on May 15: $ 1,000 in each fiscal year 2021 through 2030. Interest is payable semi-annually at an annual rate of 3.95 % [Series B] $ 7,000 $ 8,000 Amended and Restated Note Purchase and Private Shelf Agreement. Annual principal installments on Dec 15: $ 5,000 in each fiscal year 2028 through 2032. Interest is payable semi-annually at an annual rate of 3.25 % [Series C] 25,000 25,000 Less current maturities of notes payable ( 1,000 ) ( 1,000 ) Less unamortized debt issuance costs $ ( 173 ) $ ( 202 ) Noncurrent notes payable $ 30,827 $ 31,798 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 the Note Agreement on May 15, 2021 we issued $ 10 million in aggregate principal amount of our 3.95 % Series B Senior Notes due May 15, 2030 , of which $ 7 million aggregate principal amount remained outstanding as of July 31, 2023. On December 16, 2021 , under the Note Agreement we issued an additional $ 25 million in aggregate principal amount of our 3.25 % Series C Senior Notes due December 16, 2031 , all of which remained outstanding as of July 31, 2023. The Amended Note Agreement also provides us with the ability to request, from time to time, that Prudential affiliate(s) purchase, at Prudential’s discretion and on an uncommitted basis, additional senior unsecured notes of Oil-Dri (the “Shelf Notes,” and collectively with the Series A Notes, Series B Notes, and Series C Notes, the “Notes”) in an aggregate principal amount of up to $ 75 million minus the aggregate principal amount of Notes then outstanding and Shelf Notes that have been accepted for purchase. Interest payable on any Shelf Note agreed to be purchased under the Note Agreement will be at a rate determined by Prudential and will mature no more than fifteen years after the date of original issue of such Shelf Note. On August 30, 2022, we entered into Amendment No. 3 (the "Third Amendment") to the Note Agreement. The Third Amendment modified the existing fixed charge coverage financial covenant and replaced the existing consolidated debt financial covenant with a maximum debt to earnings ratio and effected certain changes consistent with the Sixth Amendment to the Credit Agreement (defined below), including modifying the method for calculating consolidated EBITDA and the excess leverage fee. On September 21, 2023, the Company entered into Amendment No. 4 (the “Fourth Amendment”) to the Note Agreement. The Fourth Amendment extended the time frame for issuing and selling Shelf Notes to September 21, 2026. 57 The following is a schedule by fiscal year of future principal maturities of notes payable as of July 31, 2023 (in thousands): 2024 $ 1,000 2025 1,000 2026 1,000 2027 1,000 2028 6,000 We are party to 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. The agreement provides for a $ 45 million unsecured revolving credit facility, including a maximum of $ 10 million for letters of credit. 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. On August 30, 2022, we entered into the Sixth Amendment to the Credit Agreement (the "Sixth Amendment"). The Sixth Amendment extended the facility termination date to August 30, 2027 ; replaced the LIBOR-based reference rate with an adjusted term Secured Overnight Financing Rate ("SOFR"); revised the method for calculating consolidated EBITDA and consolidated debt for purposes of the Credit Agreement; modified certain restrictive covenants, including increasing the unsecured indebtedness basket from $ 50 million to $ 75 million; and revised 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. As of July 31, 2023, and 2022, we were in compliance with the covenants. There were no borrowings during either fiscal year 2023 or 2022. However, we had $ 1.0 million of letters of credit outstanding as of July 31, 2023, and 2022 under this agreement. The Credit Agreement states 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 July 31, 2023, the variable rates would have been 8.50 % for the BMO Harris prime-based rate or 5.37 % for the adjusted SOFR-based rate. NOTE 4 – FINANCIAL INSTRUMENTS Fair Value 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 one of three categories based on the lowest level of input that is significant to the fair value measurement. Categories in the 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 classified as Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. These cash instruments are primarily money market funds and are included in cash and cash equivalents on the Consolidated Balance Sheets. We had $ 15.4 million cash equivalents as of July 31, 2023 and had no cash equivalents as of July 31, 2022. Balances of accounts receivable and accounts payable approximated their fair values at July 31, 2023 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 approximately $ 29.7 million as of July 31, 2023 and $ 31.8 million as of July 31, 2022. The fair value was estimated using the exit price notion of fair value and is classified as Level 2. The decrease in fair value is attributable to the principal and interest payments. See Note 3 of the Notes to the Consolidated Financial Statements for further information about such debt. 58 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 1 of the Notes to Consolidated Financial Statements for further information about goodwill and other intangible assets. Concentration of Credit Risk Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. Our cash is held in banks which are covered by the Federal Deposit Insurance Corporation; however, our cash balances are in excess of the maximum amount that is insured. Concentrations of credit risk with respect to accounts receivable are subject to the financial condition of certain major customers, principally the customer referred to in Note 2 of the Notes to the Consolidated Financial Statements. We generally do not require collateral to secure customer receivables. NOTE 5 – INCOME TAXES The provision for income tax expense by fiscal year consists of the following (in thousands): 2023 2022 Current Federal $ 7,503 $ 1,681 Foreign 4 16 State 2,119 696 Current Income Tax Total 9,626 2,393 Deferred Federal ( 3,864 ) ( 1,868 ) Foreign — ( 41 ) State ( 567 ) ( 387 ) Deferred Income Tax Total ( 4,431 ) ( 2,296 ) Total Income Tax Expense $ 5,195 $ 97 59 Principal reasons for variations between the statutory federal rate and the effective rates by fiscal year were as follows: 2023 2022 U.S. federal income tax rate 21.0 % 21.0 % Depletion deductions allowed for mining ( 7.7 ) ( 20.1 ) State income tax expense, net of federal tax expense 2.9 4.5 Nondeductible officer compensation 1.5 2.4 Tax credits ( 0.3 ) ( 3.1 ) Valuation allowance - foreign ( 0.2 ) 6.9 Foreign tax differential ( 0.6 ) ( 5.3 ) Prior year income taxes ( 1.3 ) ( 9.5 ) Goodwill impairment — 3.1 Other ( 0.3 ) 1.8 Effective income tax rate 15.0 % 1.7 % The U.S. effective tax rate for the year ended July 31, 2023 and July 31, 2022 were 15.0 % and 1.7 %, respectively, based on income before taxes. The fiscal 2023 effective tax rate was lower than the statutory rate primarily due to favorable depletion deduction and a benefit from an anticipated federal tax return amendment. The fiscal 2023 effective tax rate was negatively impacted primarily due to nondeductible excess officers compensation. The fiscal 2022 effective tax rate benefited due to a favorable depletion deduction as well as federal tax return amendments. The fiscal 2022 effective tax rate was also negatively impacted primarily due to a nondeductible goodwill impairment as well as nondeductible officers compensation. 60 The Consolidated Balance Sheets included the following tax effects of cumulative temporary differences as of July 31 (in thousands): ` 2023 2022 Assets Liabilities Assets Liabilities Depreciation $ — $ 4,338 $ — $ 4,356 Deferred compensation 1,246 — 1,499 — Capitalized R&D 269 — — — Postretirement benefits 478 — 209 — Goodwill — 24 62 — Lease right of use assets — 2,412 — 2,700 Lease liabilities 2,747 — 3,040 — Allowance for doubtful accounts 135 — 95 — Deferred marketing expenses — 11 — 22 Other assets 608 — 1 — Other liabilities — 301 — 23 Accrued expenses 5,303 — 2,362 — Tax credits 301 — 223 — Amortization 935 — 1,046 — Inventories 203 — 366 — Depletion — 158 — 154 Stock-based compensation 1,634 — 1,522 — Reclamation 627 — 549 — Other liabilities - foreign — 41 — 42 Other assets – foreign 1,698 — 1,761 — Valuation allowance ( 1,698 ) — ( 1,761 ) — Total deferred taxes $ 14,486 $ 7,285 $ 10,974 $ 7,297 Deferred tax assets for post retirement benefits were affected by the termination of our pension plan. See Note 8 of the Notes to the Consolidated Financial Statements for further information about postretirement benefits. Deferred tax assets and liabilities related to lease decreased as leases are expiring. Deferred tax assets for accrued expenses reflected a higher accrual for the annual discretionary bonus. We recorded a valuation allowance of $ 1.7 million and $ 1.8 million as of July 31, 2023 and July 31, 2022, respectively, for the amount of the deferred tax benefit related to our foreign net operating loss carryforwards since we believe it is unlikely we will realize the benefit of these tax attributes in the future. As of July 31, 2023, we have total net operating loss carryforwards from state jurisdictions of approximately $ 3.4 million. The carryforward expiration dates vary by state. No valuation allowance has been established for these carryforwards since we expect our future profitability will allow us to fully realize these tax benefits. With the exception of our foreign subsidiary in Canada, none of our foreign subsidiaries have generated any untaxed foreign income, therefore we have not provided for any related income taxes for these subsidiaries. We had no liabilities for unrecognized tax benefits based on tax positions related to the current and prior fiscal years as of July 31, 2023 and 2022; correspondingly, no related interest and penalties were recognized as income tax expense and there were no accruals for such items in either of these fiscal years. We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. We are currently being audited by the Internal Revenue Service ("IRS") for Fiscal Year 2020. The federal tax returns for fiscal years 2019-2021 remain open for examination. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years . The state impact of any federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification to the states. There are a limited number of open state and local income tax 61 audits in which no material issues have been preliminarily identified. There are no material open or unsettled foreign income tax audits. We believe our accrual for tax liabilities is adequate for all open audit years. NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME The following table summarizes the changes in accumulated other comprehensive income by component (in thousands): Pension and Postretirement Health Benefits Cumulative Translation Adjustment Total Accumulated Other Comprehensive (Loss) Income Balance as of July 31, 2021 $ ( 4,428 ) $ 311 $ ( 4,117 ) Other comprehensive income (loss) before reclassifications, net of tax 2,081 a) ( 252 ) 1,829 Amounts reclassified from accumulated other comprehensive income, net of tax 105 — 105 Net current-period other comprehensive income (loss), net of tax 2,186 ( 252 ) 1,934 Balance as of July 31, 2022 $ ( 2,242 ) $ 59 $ ( 2,183 ) Other comprehensive income (loss) before reclassifications, net of tax 1,736 a) ( 323 ) 1,413 Amounts reclassified from accumulated other comprehensive income, net of tax ( 36 ) — ( 36 ) Curtailment/Settlement on Pension Plan 1,554 b) — 1,554 Net current-period other comprehensive income (loss), net of tax 3,254 ( 323 ) 2,931 Balance as of July 31, 2023 $ 1,012 $ ( 264 ) $ 748 a) Amounts are net of taxes of $ 0.4 million and $ 0.7 million in fiscal years 2023 and 2022, respectively, and are included in Other Comprehensive Loss. b) Amount is net of taxes of $ 0.5 million in fiscal year 2023. Amount is included in the components of net periodic benefit cost for the pension and postretirement health plans. See Note 8 of the Notes to the Consolidated Financial Statements for further information about pension and postretirement health benefits. NOTE 7 – 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 July 31, 2023, there were 241,540 shares available for future grants under this plan. RESTRICTED S TOCK All non-vested restricted stock as of July 31, 2023 was issued under the 2006 Plan with vesting periods generally from two to five years . The fair value of restricted stock was determined by the closing market price of our Common Stock on the date of grant multiplied by the number of shares granted. Fair value of shares vested is $ 2.6 million and $ 2.5 million in fiscal year 2023 and 2022, respectively. 62 A summary of restricted stock transactions under the plans is shown below. Number of Shares (in thousands) Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (Years) Unamortized Expense (in thousands) Non-vested restricted stock outstanding at July 31, 2021 370 $ 33.96 3.3 $ 7,073 Granted 126 $ 33.48 Vested ( 71 ) $ 34.64 Forfeited ( 43 ) $ 34.29 Non-vested restricted stock outstanding at July 31, 2022 382 $ 33.63 3.0 $ 7,064 Granted 63 $ 29.88 Vested ( 73 ) $ 35.06 Forfeited ( 24 ) $ 29.22 Non-vested restricted stock outstanding at July 31, 2023 348 $ 32.95 2.3 $ 5,129 Stock-based compensation for restricted stock of $ 2.4 million and $ 2.1 million, net of related tax effect, was recognized in fiscal years 2023 and 2022, respectively. The total restricted stock compensation related tax benefit was $ 0.8 million and $ 0.7 million in fiscal years 2023 and 2022, respectively. NOTE 8 – PENSION AND OTHER POSTRETIREMENT BENEFITS The Oil-Dri Corporation of America Pension Plan ("Pension Plan") was a defined benefit pension plan for eligible salaried and hourly employees. Pension benefits were 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, Oil-Dri 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 was closed to new participants and existing participants no longer earned 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. On April 20, 2023, Oil-Dri settled $ 14 million of the pension obligation through the purchase of an annuity. The remaining $ 16 million of the pension obligation was settled on April 28, 2023, via lump-sum payments. All pension assets were remeasured immediately before settlement resulting in a net surplus amount of $ 3.6 million and net unrealized loss of $ 1.9 million included in accumulated other comprehensive income. Upon settlement of the pension obligations Oil-Dri recognized through net income all unrealized losses resulting in a $ 1.9 million reduction to net income included in "Loss on pension termination" within "Other Income (Expense), Net". On April 27, 2023, the Executive Committee of the Company's Board of Directors approved the distribution of the surplus to a qualified defined contribution retirement fund. A portion of the surplus to be distributed to pension participants was irrevocably distributed to the 401(k) plan on April 28, 2023, which resulted in an additional $ 2.8 million charge to net income included in "Loss on pension termination" within "Other Income (Expense), Net". The remaining $ 0.8 million to be held by the 401(k) plan to cover qualified future plan expenses was recognized as a prepaid asset. A postretirement health benefits plan is also provided to domestic salaried employees who meet specific age, participation and length of service requirements at the time of retirement. Eligible employees may elect to continue their health care coverage under the Oil-Dri Corporation of America Employee Benefits Plan until the date certain criteria are met, including attaining the age of Medicare eligibility. We have the right to modify or terminate the postretirement health benefit plan at any time. A 401(k) savings plan is maintained under which we match a portion of employee contributions. This plan is available to essentially all domestic employees following a specific number of days of employment. Our contributions to this plan, and to similar plans maintained by our foreign subsidiaries, were $ 3.2 million and $ 2.9 million for fiscal years 2023 and 2022, respectively. 63 Obligations and Funded Status The following tables provide a reconciliation of changes in the plans’ benefit obligations, asset fair values and funded status by fiscal year (in thousands): Pension Benefits Postretirement Health Benefits 2023 2022 2023 2022 Change in benefit obligation : Benefit obligation, beginning of year $ 33,741 $ 42,267 $ 2,119 $ 3,125 Service cost — — 84 123 Interest cost 1,009 1,068 73 58 Actuarial gain ( 3,054 ) ( 8,386 ) ( 429 ) ( 1,155 ) Benefits paid ( 941 ) ( 1,208 ) 6 ( 32 ) Settlements ( 30,755 ) — — — Benefit obligation, end of year — 33,741 1,853 2,119 Change in plan assets: Fair value of plan assets, beginning of year 34,989 40,388 — — Actual return on plan assets 502 ( 4,191 ) — — Employer contribution — — ( 6 ) 32 Benefits paid ( 941 ) ( 1,208 ) 6 ( 32 ) Settlements ( 30,755 ) — — — Surplus Transfer ( 3,647 ) — — — Fair value of plan assets, end of year 148 34,989 — — Funded status, recorded in Consolidated Balance Sheets $ 148 $ 1,248 $ ( 1,853 ) $ ( 2,119 ) See “Cash Flows” below for further information about employer contributions and benefits payments. There was no accumulated benefit obligation for the Pension Plan as of July 31, 2023. The accumulated benefit obligation for the Pension Plan was $ 33.7 million as of July 31, 2022. The following table shows amounts recognized in the Consolidated Balance Sheets as of July 31 (in thousands): Pension Benefits Postretirement Health Benefits 2023 2022 2023 2022 Deferred income taxes $ — $ ( 335 ) $ 478 $ 544 Other current assets $ 148 $ — $ — $ — Other current liabilities $ — $ — $ ( 100 ) $ ( 73 ) Other noncurrent liabilities $ — $ 1,248 $ ( 1,753 ) $ ( 2,046 ) Accumulated other comprehensive loss – net of tax: Net actuarial loss (gain) $ — $ 2,998 $ ( 1,012 ) $ ( 756 ) 64 Benefit Costs and Amortizations The following table shows the components of the net periodic pension and postretirement health benefit costs by fiscal year (in thousands): Pension Cost Postretirement Health Benefit Cost 2023 2022 2023 2022 Service cost $ — $ — $ 84 $ 123 Interest cost 1,009 1,068 73 58 Expected return on plan assets ( 1,673 ) ( 2,586 ) — — Amortization of: Prior service income — — ( 6 ) ( 6 ) Other actuarial loss 42 145 ( 83 ) — Settlement cost 5,544 — — — Net periodic benefit (income) cost $ 4,922 $ ( 1,373 ) $ 68 $ 175 Service cost is recorded in Other, net within Other Income (Expense) in the Consolidated Statements of Operations. As the pension plan was frozen, there was no service cost recorded in fiscal years 2022 or 2023. The following table shows amounts, net of tax, that are recognized in other comprehensive income by fiscal year (in thousands): Pension Benefits Postretirement Health Benefits 2023 2022 2023 2022 Net actuarial gain $ ( 1,412 ) $ ( 1,203 ) $ ( 324 ) $ ( 878 ) Amortization of: Prior service income — — 5 5 Amortization of actuarial loss ( 32 ) ( 110 ) 63 — Curtailment/Settlement $ ( 1,554 ) $ — $ — $ — Total recognized in other comprehensive income $ ( 2,998 ) $ ( 1,313 ) $ ( 256 ) $ ( 873 ) Cash Flows We have funded the Pension Plan 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 made no contributions in fiscal years 2022 or 2023. The Pension Plan was terminated in fiscal year 2023 and there will be no more contributions to the Pension Plan. The postretirement health plan is an unfunded plan. Our policy is to pay health insurance premiums and claims from our assets. The following table shows the estimated future benefit payments by fiscal year (in thousands): Postretirement Health Benefits 2024 $ 100 2025 $ 132 2026 $ 129 2027 $ 133 2028 $ 136 2029-2033 $ 867 65 Assumptions Our pension benefit and postretirement health benefit obligations and the related effects on operations are calculated using actuarial models. Critical assumptions that are important elements of plan expenses and asset/liability measurements include discount rate and expected return on assets for the Pension Plan and health care cost trend for the postretirement health plan. We evaluate these critical assumptions at least annually. Other assumptions involving demographic factors such as retirement age, mortality and turnover are evaluated periodically and are updated to reflect our experience and to meet regulatory requirements. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. The assumptions used in the previous calculations by fiscal year were as follows: Pension Benefits Postretirement Health Benefits 2023 2022 2023 2022 Discount rate for net periodic benefit costs — % 2.57 % 3.82 % 2.10 % Discount rate for year-end obligations — % 4.05 % 4.90 % 3.82 % Rate of increase in compensation levels for net periodic benefit costs — % — % — % — % Rate of increase in compensation levels for year-end obligations — % — % — % — % Long-term expected rate of return on assets — % 6.50 % — % — % The discount rate was based on the FTSE Pension Discount Curve to determine for the Pension Plan and the postretirement health plan, the single equivalent rate that would yield the same present value as the specific plan’s expected cash flows. Our expected rate of return on Pension Plan assets is determined by our asset allocation, our historical long-term investment performance, our estimate of future long-term returns by asset class (using input from our actuaries, investment managers and investment advisors), and long-term inflation assumptions. For fiscal year 2023, the medical cost trend assumption used for the postretirement health benefit cost was 8.2 %. The graded trend rate is expected to decrease to an ultimate rate of 4.9 % in fiscal year 2044 . Pension Plan Assets The investment objective for the Pension Plan assets was to optimize long-term return at a moderate level of risk in order to secure the benefit obligations to participants at a reasonable cost. To reach this goal, our investment structure included various asset classes, asset allocations and investment management styles that, in total, have a reasonable likelihood of producing a sufficient level of overall diversification that balances expected return with expected risk over the long-term. The Pension Plan does not invest directly in Company stock. We measured and monitored the plan’s asset investment performance and the allocation of assets through quarterly investment portfolio reviews. Investment performance was measured by absolute returns, returns relative to benchmark indices and any other appropriate basis of comparison. The Pension Plan was terminated in fiscal year 2023 and there are no targeted allocation percentages of plan assets for 2024. The actual allocation percentages of plan assets as of July 31, 2023: Asset Allocation 2023 2022 Cash and accrued income 100 % — % Fixed income — % 36 % Equity — % 64 % 66 The following table sets forth by level, within the fair value hierarchy, the Pension Plan's assets carried at fair value (in thousands): Fair Value At July 31, 2022 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Asset Class Cash and cash equivalents (a) $ 51 $ 51 $ — Equity securities (b) : U.S. companies 15,389 10,387 5,002 International companies 521 521 — Equity securities - international mutual funds: Developed market (c) 4,025 923 3,102 Emerging markets (d) 1,517 1,149 368 Commodities (e) 1,137 1,137 — Fixed Income: U.S. Treasuries 3,019 904 2,115 Debt securities(f) 1,656 — 1,656 Government sponsored entities (g) 1,256 — 1,256 Multi-strategy bond fund (h) 5,079 — 5,079 Money market fund (i) 389 — 389 Other (j) 950 — 950 Total $ 34,989 $ 15,072 $ 19,917 (a) Cash and cash equivalents consists of highly liquid investments which are traded in active markets. (b) This class represents equities traded on regulated exchanges, as well as funds that invest in a portfolio of such stocks. (c) These mutual funds seek long-term capital growth by investing no less than 80 % of their assets in stocks of non- U.S. companies that are primarily in developed markets, but also may invest in emerging and less developed markets. (d) These mutual funds seek to track the performance of a benchmark index that measures the investment return of stock issued by companies located in emerging market countries. (e) These investments seek attractive total return by investing primarily in a diversified portfolio of commodity futures contracts and fixed income investments. (f) This class includes bonds and loans of U.S. and non-U.S. corporate issuers from diverse industries and bonds of domestic and foreign municipalities. (g) This class represents a beneficial ownership interest in a pool of single-family residential mortgage loans. These investments are generally not backed by the full faith and credit of the United States government, except for securities valued at $ 114,000 in our portfolio as of July 31, 2022. (h) This class invests at least 80% of its net assets in bonds and other fixed income instruments issued by governmental or private-sector entities. More than 30% of its net assets are invested in asset-backed and mortgage-backed securities. The fund may invest up to 20% of its net assets in securities below investment grade. (i) These money market mutual funds seek to provide current income consistent with liquidity and stability of principal by investing in a diversified portfolio of high quality, short-term, dollar-denominated debt securities. These funds may include securities issued or guaranteed as to principal and interest by the U.S. government or its agencies, short-term securities issued by domestic or foreign banks, domestic and dollar-denominated foreign commercial papers, and other short-term corporate obligations and obligations issued or guaranteed by one or more foreign governments. (j) This class includes funds that use a number of other strategies, including arbitrage, to obtain long-term positive returns. The portfolio of instruments may include equities, debt securities, real estate properties, warrants, options, swaps, future contracts, forwards or other types of derivative instruments. 67 NOTE 9 – DEFERRED COMPENSATION Oil-Dri's deferred compensation plans permit directors and certain management employees to defer portions of their compensation and to earn interest on the deferred amounts. Participants have deferred $ 0.6 million and $ 0.7 million into these plans in fiscal years 2023 and 2022, respectively. We recorded $ 0.2 million of interest expense associated with these plans in both fiscal years 2023 and 2022. Payments to participants were $ 0.9 million and $ 0.4 million in fiscal years 2023 and 2022, respectively, and the total liability recorded for deferred compensation was $ 4.6 million and $ 4.8 million as of July 31, 2023 and 2022, respectively. The Oil-Dri Corporation of America Annual Incentive Plan provides certain executives with the opportunity to receive a deferred executive bonus award if certain financial goals are met. Deferred executive bonus awards of $ 1.4 million were awarded for fiscal year 2023 and $ 0.7 million executive bonus was awarded for fiscal year 2022 as financial targets under the provisions of the plan were achieved. These awards will vest and accrue interest over a 3-year period. Our deferred compensation plans are unfunded. We fund these benefits when payments are made, and the timing and amount of the payments are determined according to the plans' provisions and, for certain plans, according to individual employee agreements. NOTE 10 - ACCRUED EXPENSES Accrued expenses is as follows (in thousands): July 31, 2023 July 31, 2022 Salaries, Wages, Commissions and Employee Benefits 19,054 $ 13,439 Freight 3,078 4,022 Georgia Landfill Modification Reserve 2,469 — Trade promotions and advertising 2,292 1,180 Real Estate Tax 1,038 1,006 Other 8,937 10,438 $ 36,868 $ 30,085 NOTE 11 – 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. In the fourth quarter of fiscal year 2023, we have updated our estimate to reflect the latest developments in this matter. 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. In the second quarter of fiscal year 2023, we recorded a reserve of $ 2.5 million for anticipated modification costs that we expect to incur to address capacity issues at our sole landfill located in Ochlocknee, Georgia. Reserves are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The amount of the reserve represents management’s best estimate of the costs for the modification with respect to this matter. There have been no changes to the reserve estimate throughout the rest of fiscal year 2023. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards, and emerging technologies for handling site modification. Consequently, it is reasonably possible that modification costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows. 68 NOTE 12 – 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 Consolidated Financial Statements. We have no material finance leases, and variable costs for operating leases are immaterial. Operating lease costs are included in Cost of Goods Sold 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 Twelve Months Ended July 31, 2023 2022 Operating Lease Cost Operating lease cost $ 2,640 $ 2,776 Short-term operating lease cost 2 553 Supplemental cash flow information related to leases was as follows (in thousands): For the Twelve Months Ended July 31, 2023 2022 Other Information Cash paid for amounts included in the measurement of lease liabilities: 2,229 2,490 Right-of-use assets obtained in exchange for new operating lease liabilities 983 4,377 Operating lease ROU assets and operating lease liabilities are separately presented on the unaudited 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: For the Twelve Months Ended July 31, 2023 2022 Weighted-average remaining lease term - operating leases 7.7 years 7.7 years Weighted-average discount rate - operating leases 4.03 % 3.91 % 69 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 July 31, 2023 (in thousands): 2024 $ 2,257 2025 2,168 2026 1,848 2027 1,433 2028 884 Thereafter 3,827 Total 12,417 Less: imputed interest ( 1,735 ) Net lease obligation $ 10,682 NOTE 13 – SUBSEQUENT EVENTS On September 21, 2023, the Company entered into Amendment No. 4 (the “Fourth Amendment”) to the Note Agreement with Prudential. The Fourth Amendment extended the time frame for issuing and selling Shelf Notes to September 21, 2026. NOTE 14 – RELATED PARTIES One member of our Board of Directors retired from the role of President and Chief Executive Officer of a customer of ours on September 28, 2019 and is currently party to a post-employment consulting agreement with the customer. Total net sales to that customer, including sales to subsidiaries of that customer, were $ 0.2 million and $ 0.3 million for fiscal years 2023 and 2022, respectively. There was $ 10,768 of outstanding accounts receivable due from that customer, and its subsidiaries, as of July 31, 2023 and $ 5,608 outstanding accounts receivable as of July 31, 2022. One member of our Board of Directors is currently the President and Chief Executive Officer of a vendor of ours. Total payments to this vendor for fees and cost reimbursements were $ 0.2 million and $ 0.7 million for fiscal years 2023 and 2022, respectively. There were no outstanding amounts due to that vendor as of July 31, 2023 or July 31, 2022. 70 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15f. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013 framework) issued by the Committee Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, our management concluded that our internal control over financial reporting was effective as of July 31, 2023. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our internal controls over financial reporting as of July 31, 2023 have been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which appears on the next page of this Annual Report on Form 10-K. 71 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM of Directors and Shareholders Board of Directors and Shareholders Oil-Dri Corporation of America Opinions on the financial statements and internal control over financial reporting We have audited the accompanying consolidated balance sheets of Oil-Dri Corporation of America (a Delaware corporation) and subsidiaries (the “Company”) as of July 31, 2023 and 2022, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended July 31, 2023, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of July 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended July 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. Basis for opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 72 Critical audit matter(s) Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2014. Chicago, Illinois October 12, 2023 73 ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.