Oil-Dri Corp of America 10-Q

ITEM 1. Financial Statements OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Balance Sheet (Unaudited) (in thousands, except for share and per share amounts) ASSETS October 31, 2023 July 31, 2023 Current Assets Cash and cash equivalents $ 29,579 $ 31,754 Accounts receivable, net allowances of $ 1,115 and $ 1,087 at October 31, 2023 and July 31, 2023, respectively 60,663 59,287 Inventories, net 43,832 42,612 Prepaid expenses 2,692 2,854 Total Current Assets 136,766 136,507 Property, Plant and Equipment Cost 308,564 303,871 Less accumulated depreciation and amortization ( 185,348 ) ( 182,999 ) Total Property, Plant and Equipment, Net 123,216 120,872 Other Assets Goodwill 3,618 3,618 Trademarks and patents, net of accumulated amortization of $ 581 and $ 578 at October 31, 2023 and July 31, 2023, respectively 1,427 1,399 Customer list, net of accumulated amortization of $ 7,785 and $ 7,763 at October 31, 2023 and July 31, 2023, respectively — 22 Deferred income taxes 7,028 7,201 Operating lease right-of-use assets 8,944 9,386 Other 7,769 7,230 Total Other Assets 28,786 28,856 Total Assets $ 288,768 $ 286,235 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 3 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Balance Sheet (continued) (Unaudited) (in thousands, except for share and per share amounts) LIABILITIES & STOCKHOLDERS’ EQUITY October 31, 2023 July 31, 2023 Current Liabilities Current maturities of notes payable $ 1,000 $ 1,000 Accounts payable 14,867 17,101 Dividends payable 1,953 1,927 Operating lease liabilities 1,872 1,872 Accrued expenses 32,613 36,868 Total Current Liabilities 52,305 58,768 Noncurrent Liabilities Notes payable, net of unamortized debt issuance costs of $ 158 and $ 173 at October 31, 2023 and July 31, 2023, respectively 30,842 30,827 Deferred compensation 5,024 4,512 Long-term operating lease liabilities 8,345 8,810 Other 6,336 6,242 Total Noncurrent Liabilities 50,547 50,391 Total Liabilities 102,852 109,159 Stockholders’ Equity Common Stock, par value $ .10 per share, issued 8,807,223 shares at October 31, 2023 and 8,750,223 shares at July 31, 2023 881 875 Class B Stock, par value $ .10 per share, issued 2,522,056 shares at October 31, 2023 and 2,397,056 shares at July 31, 2023 252 240 Additional paid-in capital 56,746 55,624 Retained earnings 209,585 200,796 Accumulated other comprehensive income 563 748 Less Treasury Stock, at cost ( 3,674,818 Common and 351,641 Class B shares at October 31, 2023 and 3,658,989 Common and 351,641 Class B shares at July 31, 2023) ( 82,111 ) ( 81,207 ) Total Stockholders’ Equity 185,916 177,076 Total Liabilities & Stockholders’ Equity $ 288,768 $ 286,235 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 4 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Operations (Unaudited) (in thousands, except for per share amounts) For the Three Months Ended October 31, 2023 2022 Net Sales $ 111,438 $ 98,539 Cost of Goods Sold ( 80,447 ) ( 76,229 ) Gross Profit 30,991 22,310 Selling, General and Administrative Expenses ( 17,835 ) ( 15,741 ) Income from Operations 13,156 6,569 Other (Expense) Income Interest expense ( 361 ) ( 364 ) Interest income 175 56 Other, net ( 140 ) 176 Total Other Expense, Net ( 326 ) ( 132 ) Income Before Income Taxes 12,830 6,437 Income Tax Expense ( 2,088 ) ( 1,207 ) Net Income 10,742 5,230 Net Loss Attributable to Noncontrolling Interest — ( 11 ) Net Income Attributable to Oil-Dri $ 10,742 $ 5,241 Net Income Per Share Basic Common $ 1.61 $ 0.80 Basic Class B Common $ 1.21 $ 0.60 Diluted Common $ 1.50 $ 0.78 Diluted Class B Common $ 1.21 $ 0.59 Average Shares Outstanding Basic Common 4,827 4,804 Basic Class B Common 1,967 1,942 Diluted Common 6,794 4,913 Diluted Class B Common 1,967 1,963 Dividends Declared Per Share Basic Common $ 0.290 $ 0.280 Basic Class B Common $ 0.218 $ 0.210 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 5 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Comprehensive Income (Unaudited) (in thousands) For the Three Months Ended October 31, 2023 2022 Net Income Attributable to Oil-Dri $ 10,742 $ 5,241 Other Comprehensive Loss: Pension and postretirement benefits (net of tax) ( 19 ) ( 8 ) Cumulative translation adjustment ( 166 ) ( 385 ) Other Comprehensive Loss ( 185 ) ( 393 ) Total Comprehensive Income $ 10,557 $ 4,848 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 6 OIL-DRI CORPORATION OF AMERICA Consolidated Statements of Stockholders' Equity (Unaudited) For the Three Months Ended October 31 (in thousands, except share amounts) Number of Shares Common & Class B Stock Treasury Stock Common & Class B Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Non-controlling Interest Total Stockholders' Equity Balance, July 31, 2022 11,083,824 ( 3,961,579 ) $ 1,108 $ 52,467 $ 178,754 $ ( 79,428 ) $ ( 2,183 ) $ ( 369 ) $ 150,349 Net Income (Loss) — — — — 5,241 — — ( 11 ) 5,230 Other Comprehensive Loss — — — — — — ( 393 ) — ( 393 ) Dividends Declared — — — — ( 1,860 ) — — — ( 1,860 ) Purchases of Treasury Stock — ( 3,360 ) — — — ( 92 ) — — ( 92 ) Net issuance of stock under long-term incentive plans 38,850 ( 4,000 ) 4 124 — ( 128 ) — — — Amortization of Restricted Stock — — — 794 — — — — 794 Balance, October 31, 2022 11,122,674 ( 3,968,939 ) $ 1,112 $ 53,385 $ 182,135 $ ( 79,648 ) $ ( 2,576 ) $ ( 380 ) $ 154,028 Balance, July 31, 2023 11,147,279 ( 4,010,630 ) $ 1,115 $ 55,624 $ 200,796 $ ( 81,207 ) $ 748 $ — $ 177,076 Net Income (Loss) — — — — 10,742 — — — 10,742 Other Comprehensive Loss — — — — — — ( 185 ) — ( 185 ) Dividends Declared — — — — ( 1,953 ) — — — ( 1,953 ) Purchases of Treasury Stock — ( 15,329 ) — — — ( 872 ) — — ( 872 ) Net issuance of stock under long-term incentive plans 182,000 ( 500 ) 18 14 — ( 32 ) — — — Amortization of Restricted Stock — — — 1,108 — — — — 1,108 Balance, October 31, 2023 11,329,279 ( 4,026,459 ) $ 1,133 $ 56,746 $ 209,585 $ ( 82,111 ) $ 563 $ — $ 185,916 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 7 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) For the Three Months Ended October 31, CASH FLOWS FROM OPERATING ACTIVITIES 2023 2022 Net Income $ 10,742 $ 5,230 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,368 3,523 Non-cash stock-based compensation 1,108 794 Deferred income taxes 174 168 Provision for bad debts and cash discounts 28 55 Accretion of Asset Retirement Obligation 53 40 Loss on the disposals of property, plant and equipment 26 54 (Increase) Decrease in assets: Accounts receivable ( 1,487 ) ( 1,622 ) Inventories ( 1,374 ) ( 5,202 ) Prepaid expenses 154 59 Other assets 341 443 Increase (Decrease) in liabilities: Accounts payable ( 1,289 ) 1,854 Accrued expenses ( 4,365 ) ( 1,601 ) Deferred compensation 512 ( 400 ) Other liabilities ( 427 ) ( 581 ) Total Adjustments ( 2,178 ) ( 2,416 ) Net Cash Provided by Operating Activities 8,564 2,814 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ( 8,064 ) ( 6,737 ) Net Cash Used in Investing Activities ( 8,064 ) ( 6,737 ) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ( 1,927 ) ( 1,851 ) Purchases of treasury stock ( 872 ) ( 92 ) Net Cash Used in Financing Activities ( 2,799 ) ( 1,943 ) Effect of exchange rate changes on Cash and Cash Equivalents 124 38 Net Decrease in Cash and Cash Equivalents ( 2,175 ) ( 5,828 ) Cash and Cash Equivalents, Beginning of Period 31,754 16,298 Cash and Cash Equivalents, End of Period $ 29,579 $ 10,470 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 8 OIL-DRI CORPORATION OF AMERICA Condensed Consolidated Statements of Cash Flows - Continued (Unaudited) (in thousands) For the Three Months Ended October 31, 2023 2022 Supplemental disclosures: Other cash flows: Income tax payments (refunds) 12 ( 87 ) Non-cash investing and financing activities: Capital expenditures accrued, but not paid $ 3,532 $ 1,381 Cash dividends declared and accrued, but not paid $ 1,953 $ 1,860 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 9 /OIL-DRI CORPORATION OF AMERICA Notes To Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The financial statements and the related notes are condensed and should be read in conjunction with the Consolidated Financial Statements and related notes for the fiscal year ended July 31, 2023 included in our Annual Report on Form 10-K filed with the SEC. The unaudited Condensed Consolidated Financial Statements include the accounts of Oil-Dri Corporation of America and its subsidiaries. All significant intercompany transactions are eliminated. Except as otherwise indicated herein or as the context otherwise requires, references to "Oil-Dri," the "Company," "we," "us" or "our" refer to Oil-Dri Corporation of America and its subsidiaries. The unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals and reclassifications which are, in the opinion of management, necessary for a fair presentation of the statements contained herein. Operating results for the three months ended October 31, 2023 are not necessarily an indication of the results that may be expected for the fiscal year ending July 31, 2024. 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. Management Use of Estimates The preparation of the unaudited Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period, as well as the related disclosures. Estimates and assumptions about future events cannot be made with certainty. All of our estimates and assumptions are revised periodically. Actual results could differ from these estimates. Summary of Significant Accounting Policies Our significant accounting policies, which are summarized in detail in our Annual Report on Form 10-K for the fiscal year ended July 31, 2023, have not materially changed. The following is a description of certain of our significant accounting policies: Trade Receivables. We recognize trade receivables when control of finished products are transferred to our customers. We record an allowance for credit losses based on our expectations and a periodic review of our accounts receivable, including a review of the overall aging of accounts, consideration of customer credit risk and analysis of facts and circumstances about specific accounts. A customer account is determined to be uncollectible when it is probable that a loss will be incurred after we have completed our internal collection procedures, including termination of shipments, direct customer contact and formal demand of payment. We retain outside collection agencies to facilitate our collection efforts. Past due status is determined based on contractual terms and customer payment history. Property, Plant and Equipment. Property, plant and equipment includes depreciable assets such as building, machinery, equipment, furniture, and vehicles. These assets are depreciated using the straight-line method over their estimated useful lives. Major improvements 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. These assets 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. 10 Capital parts are long-lived spare parts that are recorded net of a valuation reserve based on aging. The capital parts reserve was $ 1.7 million as of October 31, 2023 and $ 2.0 million as of July 31, 2023. Land, Mining Property and Mineral Rights. We surface mine sorbent materials on property that we either own or lease as part of our overall operations. A significant part of our overall mining cost is incurred during the process of removing the overburden (non-usable material) from the mine site, thus exposing the sorbent material used in a majority of our production processes. These stripping costs are treated as a variable inventory production cost and are included in cost of goods sold in the period they are incurred. We defer and amortize the pre-production overburden removal costs during the development phase associated with opening a new mine. Additionally, it is our policy to capitalize the purchase cost of land and mineral rights, including associated legal fees, survey fees and real estate fees. The costs of obtaining mineral patents, including legal fees and drilling expenses, are also capitalized. Pre-production development costs on new mines and any prepaid royalties that may be offset against future royalties due upon extraction of the minerals are also capitalized. All exploration related costs are expensed as incurred. Reclamation. We perform ongoing reclamation activities during the normal course of our overburden removal. As overburden is removed from a mine site, it is hauled to previously mined sites and is used to refill older sites. This process allows us to continuously reclaim older mine sites and dispose of overburden simultaneously, therefore minimizing the costs associated with the reclamation process. On an annual basis we evaluate our potential reclamation liability in accordance with ASC 410, Asset Retirement and Environmental Obligations. The reclamation assets are depreciated over the estimated useful lives of the various mines. The reclamation liabilities are increased based on a yearly accretion charge over the estimated useful lives of the mines. Leases. ASC 842, Leases , provides that a contract is, or contains, a lease if it conveys the right to control the use of an identified asset and, accordingly, a lease liability and a related right-of-use ("ROU") asset is recognized at the commencement date on our consolidated balance sheet. As provided in ASC 842, we have elected not to apply these measurement and recognition requirements to short-term leases (i.e., leases with a term of 12 months or less). Short-term leases will not be recorded as ROU assets or lease liabilities on our consolidated balance sheet, and the related lease payments will be recognized in net earnings on a straight-line basis over the lease term. For leases other than short-term leases, the lease liability is equal to the present value of unpaid lease payments over the remaining lease term. The lease term may reflect options to extend or terminate the lease when it is reasonably certain that such options will be exercised. To determine the present value of the lease liability, we used an incremental borrowing rate, which is defined as the rate of interest we would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. The ROU asset is based on the corresponding lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Both operating and finance lease ROU assets are reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. After a ROU asset is impaired, any remaining balance of the ROU asset is amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful life. After the lease commencement date, we evaluate lease modifications, if any, that could result in a change in the accounting for leases. Certain of our leases provide for variable lease payments that vary due to changes in facts and circumstances occurring after the commencement date, other than the passage of time. Variable lease payments that are dependent on an index or rate (e.g., Consumer Price Index) are included in the initial measurement of the lease liability and the ROU asset. Variable lease payments that are not known at the commencement date and are determinable based on the performance or use of the underlying asset, are expensed as incurred. Our variable lease payments primarily include common area maintenance charges based on the percentage of the total square footage leased and the usage of assets, such as photocopiers. Some of our contracts may contain lease components as well as non-lease components, such as an agreement to purchase services. As allowed under ASC 842, we have elected not to separate the lease components from non-lease components for all asset classes and we will not allocate the contract consideration to these components. This policy was applied to all existing leases upon adoption of ASC 842 and will be applied to new leases on an ongoing basis. Revenue Recognition. We recognize revenue when performance obligations under the terms of the contracts with customers are satisfied. Our performance obligation generally consists of the promise to sell finished products to wholesalers, distributors and retailers or consumers and our obligations have an original duration of one year or less. Control of the finished products are transferred upon shipment to, or receipt at, customers' locations, as determined by the specific terms of the contract. We have completed our performance obligation when control is transferred and we recognize revenue accordingly. Taxes collected from 11 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 $ 0.1 million as of October 31, 2023, and no liability as of July 31, 2023. This liability is reported in Other within Accrued Expenses on the unaudited Condensed Consolidated Balance Sheet. There was no revenue recognized during the three months ended October 31, 2023, that was included in the liability for advance payments at the beginning of the period. We routinely commit to one-time or ongoing trade promotion programs directly with consumers, such as coupon programs, and with customers, such as volume discounts, cooperative marketing and other arrangements. We estimate and accrue the expected costs of these programs. These costs are considered variable consideration under ASC 606, Revenue from Contracts with Customers , and are netted against sales when revenue is recorded. The accruals are based on our best estimate of the amounts necessary to settle future and existing obligations on products sold as of the balance sheet date. To estimate these accruals, we rely on our historical experience of trade spending patterns and that of the industry, current trends and forecasted data. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") include salaries, wages and benefits associated with staff outside the manufacturing and distribution functions, all marketing related costs, any miscellaneous trade spending expenses not required to be included in net sales, research and development costs, depreciation and amortization related to assets outside the manufacturing and distribution process and all other non-manufacturing and non-distribution expenses. Other Current and Noncurrent Liabilities. Other liabilities include the accruals for general expenses not yet paid, cash collected not yet vouchered, legal reserves, postretirement health benefit obligations, and reclamation liability accrual. Current liabilities are due to be paid within the next 12 months. Included in Other noncurrent liabilities on the unaudited Condensed Consolidated Balance Sheet is $ 4.5 million for the reclamation liability and $ 1.8 million for postretirement health benefits as of October 31, 2023. 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. 12 For the Three Months Ended October 31, 2023 (in thousands, except for per share data) Total Common Class B Net income $ 10,742 $ 8,236 $ 2,506 Distributed and undistributed earnings on restricted shares ( 570 ) ( 453 ) ( 117 ) Income available to stockholders $ 10,172 $ 7,783 $ 2,389 Net Income (Numerator) $ 7,783 $ 2,389 Weighted Average Shares Outstanding (Denominator) 4,827 1,967 Basic EPS $ 1.61 $ 1.21 Effect of dilution - Net Income (1) $ 2,389 $ — Net income assuming dilution (Numerator) $ 10,172 $ 2,389 Effect of dilution - Shares (1) 1,967 $ — Shares assuming dilution (Denominator) 6,794 $ 1,967 Diluted EPS $ 1.50 $ 1.21 (1) The impact of unvested restricted stock was anti-dilutive therefore not included in the calculation of diluted EPS 2. NEW ACCOUNTING PRONOUNCEMENTS AND REGULATIONS There have been no new accounting pronouncements adopted in the period or issued but not yet adopted by us which are expected to have a material impact on our Consolidated Financial Statements. 3. INVENTORIES The composition of inventories is as follows (in thousands): October 31, 2023 July 31, 2023 Finished goods $ 23,734 $ 21,943 Packaging 7,434 8,007 Spare parts, net 6,379 5,981 Other 6,285 6,681 Total Inventories $ 43,832 $ 42,612 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. Included in Other is the inventory obsolescence reserve of $ 0.7 million as of October 31, 2023, and $ 0.8 million as of July 31, 2023. Spare parts in inventory are recorded net of a valuation reserve based on aging. The spare parts reserve was $ 3.0 million as of October 31, 2023, and $ 2.9 million as of July 31, 2023. 13 4. FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized into categories based on the lowest level of input that is significant to the fair value measurement. The categories in the fair value hierarchy are as follows: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs for similar assets or liabilities or valuation models whose inputs are observable, directly or indirectly. Level 3: Unobservable inputs. Cash equivalents are primarily money market mutual funds classified as Level 1. We had $ 15.4 million cash equivalents as of October 31, 2023 and July 31, 2023. Balances of accounts receivable and accounts payable approximated their fair values at October 31, 2023 and July 31, 2023 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 $ 29.0 million and $ 29.7 million as of October 31, 2023 and July 31, 2023, respectively, and are classified as Level 2. The fair value was estimated using the exit price notion by discounting future cash flows based on an observable market rate. We apply fair value techniques on at least an annual basis associated with: (1) valuing potential impairment loss related to goodwill, trademarks and other indefinite-lived intangible assets and (2) valuing potential impairment loss related to long-lived assets. See Note 5 of the Notes to the unaudited Condensed Consolidated Financial Statements for further information about goodwill and other intangible assets. 5. GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets, other than goodwill, include trademarks, patents, and customer lists. Estimated intangible amortization for fiscal year 2024 is $ 0.1 million. Estimated intangible amortization for each of the next five fiscal years is $ 0.1 million. We have one acquired trademark recorded at a cost of $ 0.4 million that was determined to have an indefinite life and is not amortized. There have been no triggering events in fiscal years 2024 or 2023 that would indicate a new impairment analysis is needed. 6. ACCRUED EXPENSES Accrued expenses is as follows (in thousands): October 31, 2023 July 31, 2023 Salaries, Wages, Commissions and Employee Benefits $ 9,556 $ 19,054 Freight 3,016 3,078 Georgia Landfill Modification Reserve 2,469 2,469 Income Tax 2,359 521 Trade Promotions and Advertising 2,352 2,292 Real Estate Tax 1,508 1,038 Other 11,353 8,416 $ 32,613 $ 36,868 14 7. OTHER CONTINGENCIES We are party to various legal actions from time to time that are ordinary in nature and incidental to the operation of our business, including ongoing litigation. While it is not possible at this time to determine with certainty the ultimate outcome of these or other lawsuits, we believe that none of the pending proceedings will have a material adverse effect on our business, financial condition, results of operations or cash flows. In 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 in the first quarter of fiscal year 2024. 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. 8. DEBT 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 October 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 October 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 . 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 October 31, 2023, and July 31, 2023, we were in compliance with the covenants. There were no borrowings during the first quarter of fiscal year 2024. However, we had $ 1.0 million of letters of credit outstanding as of October 31, 2023 and July 31, 2023 under this agreement. 15 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 October 31, 2023, the variable rates would have been 8.50 % for the BMO Harris prime-based rate or 5.38 % for the adjusted SOFR-based rate. 9. LEASES We have operating leases primarily for real estate properties, including corporate headquarters, customer service and sales offices, manufacturing and packaging facilities, warehouses, and research and development facilities, as well as for rail tracks, railcars and office equipment. Certain of our leases for a shared warehouse and office facility, rail track and railcars have options to extend which we are reasonably certain we will exercise and, accordingly, have been considered in the lease term used to recognize our ROU assets and lease liabilities. To determine the present value of the lease liability, we use an incremental borrowing rate, which is defined as the rate of interest that the Company would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. Further information about our accounting policy for leases is included in Note 1 of the Notes to the unaudited Condensed Consolidated Financial Statements. We have no material finance leases, and variable costs for operating leases are immaterial for the three months ended October 31, 2023. 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 Three Months Ended October 31, 2023 2022 Operating Lease Cost Operating lease cost $ 546 $ 696 Short-term operating lease cost 2 1 Supplemental cash flow information related to leases was as follows (in thousands): For the Three Months Ended October 31, 2023 2022 Other Information Cash paid for amounts included in the measurement of operating lease liabilities: $ 461 $ 595 Right-of-use assets obtained in exchange for new operating lease liabilities $ — $ 21 Operating lease ROU assets and operating lease liabilities are separately presented on the unaudited Condensed Consolidated Balance Sheet, excluding leases with an initial term of twelve months or less. Other supplemental balance sheet information related to leases was as follows: October 31, 2023 July 31, 2023 Weighted-average remaining lease term - operating leases 7.1 years 7.7 years Weighted-average discount rate - operating leases 4.19 % 4.03 % 16 The following table summarizes scheduled minimum future lease payments due within twelve months for operating leases with terms longer than one year for which cash flows are fixed and determinable as of October 31, 2023, (in thousands): 2024 $ 1,686 2025 2,167 2026 1,848 2027 1,432 2028 883 Thereafter 3,825 Total 11,841 Less: imputed interest ( 1,624 ) Net lease obligation $ 10,217 10. 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. The pension obligations were fully settled in April 2023. 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. The postretirement health plan is an unfunded plan. We pay insurance premiums and claims from our assets. 17 The components of net periodic pension and postretirement health benefit costs were as follows: Pension Benefits (in thousands) For the Three Months Ended October 31, 2023 2022 Interest cost $ — $ 335 Expected return on plan assets — ( 558 ) Amortization of: Other actuarial loss — 9 Net periodic benefit cost $ — $ ( 214 ) Postretirement Health Benefits (in thousands) For the Three Months Ended October 31, 2023 2022 Service cost $ 19 $ 22 Interest cost 22 20 Amortization of: Other actuarial loss ( 24 ) ( 18 ) Prior service costs ( 2 ) ( 2 ) Net periodic benefit cost $ 15 $ 22 The non-service cost components of net periodic benefit cost are included in Other Income (Expense) in the line item Other, net on the unaudited Condensed Consolidated Statements of Income. The discount rate for the net periodic benefit cost used in the calculation of the postretirement health benefits was 4.90 % and 3.82 % for the three months ended October 31, 2023, and 2022, respectively. The medical cost trend assumption for postretirement health benefits was 8.20 %. The graded trend rate is expected to decrease to an ultimate rate of 4.90 % in fiscal year 2044 . 11. OPERATING SEGMENTS We have two 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. Our operating segments are also our reportable segments. The accounting policies of the segments are the same as those described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2023. 18 Net sales for our principal products by segment are as follows (in thousands): Business to Business Products Group Retail and Wholesale Products Group For the Three Months Ended October 31, Product 2023 2022 2023 2022 Cat Litter $ — $ — $ 60,861 $ 54,198 Industrial and Sports — — 11,416 $ 10,654 Agricultural and Horticultural 10,315 10,003 — — Bleaching Clay and Fluids Purification 22,406 18,229 — $ — Animal Health and Nutrition 6,440 5,455 — — Net Sales $ 39,161 $ 33,687 72,277 $ 64,852 We do not rely on any segment asset allocations and we do not consider them meaningful because of the shared nature of our production facilities; however, we have estimated the segment asset allocations below for those assets for which we can reasonably determine. The unallocated asset category is the remainder of our total assets. The asset allocation is estimated and is not a measure used by our chief operating decision maker about allocating resources to the operating segments or in assessing their performance. Assets October 31, 2023 July 31, 2023 (in thousands) Business to Business Products Group $ 86,596 $ 84,424 Retail and Wholesale Products Group 140,819 136,262 Unallocated Assets 61,353 65,549 Total Assets $ 288,768 $ 286,235 Net sales and operating income for each segment are provided below. The corporate expenses line includes certain unallocated expenses, including primarily salaries, wages and benefits, purchased services, rent, utilities and depreciation and amortization associated with corporate functions such as information systems, finance, legal, human resources and customer service. For the Three Months Ended October 31, Net Sales Income 2023 2022 2023 2022 (in thousands) Business to Business Products Group $ 39,161 $ 33,687 $ 11,123 $ 7,257 Retail and Wholesale Products Group $ 72,277 64,852 $ 11,331 7,574 Net Sales $ 111,438 $ 98,539 Corporate Expenses ( 9,298 ) ( 8,262 ) Income from Operations 13,156 6,569 Total Other Expenses, Net ( 326 ) ( 132 ) Income before Income Taxes 12,830 6,437 Income Tax Expense ( 2,088 ) ( 1,207 ) Net Income 10,742 5,230 Net Loss Attributable to Noncontrolling Interest — ( 11 ) Net Income Attributable to Oil-Dri $ 10,742 $ 5,241 19 12. STOCK-BASED COMPENSATION The Oil-Dri Corporation of America 2006 Long Term Incentive Plan, as amended (the "2006 Plan"), permits the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based and cash-based awards. Our employees and outside directors are eligible to receive grants under the 2006 Plan. The total number of shares of stock subject to grants under the 2006 Plan may not exceed 1,219,500 . As of October 31, 2023, there were 120,805 Common Stock or Class B shares available for future grants under this plan. Restricted Stock All of our non-vested restricted stock as of October 31, 2023 was issued under the 2006 Plan with vesting periods generally between one and five years . We determined the fair value of restricted stock as of the grant date. We recognize the related compensation expense over the period from the date of grant to the date the shares vest. There were 57 thousand and 40 thousand restricted shares of Common Stock granted during the first quarter of fiscal years 2024 and 2023, respectively. There were 125 thousand restricted shares of Class B shares granted during the first quarter of fiscal year 2024 and none in fiscal year 2023. Stock-based compensation was $ 0.8 million for the first quarter of fiscal years 2024 and 2023, respectively. A summary of restricted stock transactions is shown below: Restricted Shares (in thousands) Weighted Average Grant Date Fair Value Non-vested restricted stock outstanding at July 31, 2023 348 $ 32.95 Granted 182 $ 62.29 Vested ( 57 ) $ 36.89 Forfeitures ( 1 ) $ 64.00 Non-vested restricted stock outstanding at October 31, 2023 472 $ 43.75 13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME The following table summarizes the changes in accumulated other comprehensive (loss) income by component as of October 31, 2023 (in thousands): Pension and Postretirement Health Benefits Cumulative Translation Adjustment Total Accumulated Other Comprehensive (Loss) Income Balance as of July 31, 2023 $ 1,012 $ ( 264 ) $ 748 Other comprehensive loss before reclassifications, net of tax — ( 166 ) ( 166 ) Amounts reclassified from accumulated other comprehensive income, net of tax ( 19 ) — ( 19 ) Net current-period other comprehensive loss, net of tax ( 19 ) ( 166 ) ( 185 ) Balance as of October 31, 2023 $ 993 $ ( 430 ) $ 563 14. RELATED PARTY TRANSACTIONS One member of our Board is currently the President and Chief Executive Officer of a vendor of ours. Total payments to this vendor for fees and cost reimbursements were $ 0.1 million for the first three months of fiscal years 2024 and 2023. There were no outstanding accounts payable to that vendor as of October 31, 2023, or July 31, 2023. 20