Oil-Dri Corp of America 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included herein and our Consolidated Financial Statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2023. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under "Forward-Looking Statements" and Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended July 31, 2023. OVERVIEW We develop, mine, manufacture and market sorbent products principally produced from clay minerals, primarily consisting of calcium bentonite, attapulgite and diatomaceous shale. Our principal products include agricultural and horticultural chemical carriers, animal health and nutrition products, cat litter, fluid purification and filtration bleaching clays, industrial and automotive floor absorbents and sports field products. Our products are sold to two primary customer groups, including customers who resell our products as originally produced to the end consumer and other customers who use our products as part of their production process or use them as an ingredient in their final finished product. We have two reportable operating segments based on the different characteristics of our two primary customer groups: the Retail and Wholesale Products Group ("Retail and Wholesale" or "R&W") and the Business to Business Products Group ("Business to Business" or "B2B"), as described in Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements. Each operating segment is discussed individually below. RESULTS OF OPERATIONS OVERVIEW In the first quarter of fiscal year 2024 consolidated net sales reached a new all-time high with top line growth in both the Retail and Wholesale Products Group and the Business to Business Products Group. Within Retail & Wholesale, pricing actions to improve profitability drove the increase in net sales. Within Business to Business, revenue growth was driven by higher prices coupled with increased volumes. Consolidated net sales increased $12.9 million or 13% in the first quarter of fiscal year 2024 compared to the first quarter of fiscal year 2023. Consolidated income from operations in the first quarter of fiscal year 2024 increased $6.6 million or 100% when compared to the same period in fiscal year 2023. Although expenses continued to increase, consolidated net income for the three months ended October 31, 2023, was $10.7 million, compared to $5.2 million in the three months ended October 31, 2022. Our Consolidated Balance Sheets as of October 31, 2023, and our Consolidated Statements of Cash Flows for the first quarter of fiscal year 2024 show a decrease in total cash and cash equivalents from fiscal year-end 2023. The decrease is driven mostly by capital expenditures on property, plant & equipment and dividend payments offset by increases in cash from operations. Refer to the "Liquidity and Capital Resources" section below. THREE MONTHS ENDED OCTOBER 31, 2023 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 2022 CONSOLIDATED RESULTS Consolidated net sales for the three months ended October 31, 2023, were $111.4 million, a 13% increase compared to net sales of $98.5 million for the three months ended October 31, 2022. Net sales increased for both our R&W and B2B products groups, primarily due to price increases implemented across both product groups and volume growth in our B2B products group. Consolidated gross profit in the first quarter of fiscal year 2024 was $31.0 million, an increase of $8.7 million, or 39%, from gross profit of $22.3 million in the first quarter of fiscal year 2023. Our gross margin (defined as gross profit as a percentage of net sales) in the first quarter of fiscal year 2024 increased to 28% from 23% in the same period of fiscal year 2023. Our domestic cost of goods sold per ton increased 11%, driven primarily by per ton increases in non-fuel manufacturing, freight, and packaging offset by lower per ton natural gas costs. Non-fuel manufacturing costs per ton increased 15% during the first quarter of fiscal year 2024 compared to first quarter of fiscal year 2023, mainly due to higher per ton costs of labor, repairs and 21 replacement of assets, and depreciation, offset by a decrease in the per ton cost of purchased materials. Domestic freight costs per ton increased 14% in the first quarter of fiscal year 2024 compared to the same period of fiscal year 2023 due to a significant customer in our cat litter business that altered shipping terms in January 2023 from collect to delivered which increased our overall freight cost. Excluding the impact of this specific customer, per ton domestic freight costs would have decreased 3% quarter over quarter. Ocean freight costs have also decreased due to both lower rates and export fees. However, our overall freight costs can vary between periods depending on the mix of products sold and the geographic distribution of our customers. Packaging costs per ton increased 2% in the first quarter of fiscal year 2024 compared to the same period of fiscal year 2023. Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices. Per ton cost of natural gas decreased 55% in the first quarter of fiscal year 2024 compared to the same period of fiscal year 2023 due to a decrease in natural gas prices. Total SG&A expenses of $17.8 million for the first quarter of fiscal year 2024 were higher by $2.1 million, or 13%, compared to $15.7 million for the first quarter of fiscal year 2023. Unallocated corporate expenses were higher by $1.0 million, or 13%, driven by higher compensation-related expenses, including salaries and bonus accruals. The discussion of the segments' operating incomes below describes the changes in SG&A expenses that were allocated to the operating segments. Total other expenses were $0.3 million for the first quarter of fiscal year 2024 compared to $0.1 million in the same period of fiscal year 2023. Consolidated net income before taxes for the first quarter of fiscal year 2024 was $12.8 million compared to $6.4 million for the first quarter of fiscal year 2023. Results for the first quarter of fiscal year 2024 were driven by the factors discussed above. We had a tax expense for the first quarter of fiscal year 2024 of $2.1 million compared to $1.2 million for the first quarter of fiscal year 2023. Our tax expense was driven primarily by higher net income. We used an estimated annual effective tax rate ("ETR") of 16% in determining our provision for income taxes, which is based on expected annual taxable income. BUSINESS TO BUSINESS PRODUCTS GROUP Net sales of the Business to Business Products Group for the first quarter of fiscal year 2024 were $39.2 million, an increase of $5.5 million, or 16%, from net sales of $33.7 million for the first quarter of fiscal year 2023, with increases across all three of our principal product lines within this group. Net sales of our fluids purification products increased $4.2 million, or 23%, compared to the first quarter of the prior fiscal year. The increase in net sales was primarily driven by new customers in the renewable diesel business in North America, as well as continued demand for our products used in the filtration of edible oil and to a lesser extent pricing. Net sales increased in North America, our subsidiary in the UK, and the region including Europe, Middle East, and Africa ("EMEA"), partially offset by a decrease in Latin America and Asia when compared to the first quarter of fiscal year 2023. Net sales of our animal health and nutrition products increased $1.0 million, or 18%, during the first quarter of fiscal year 2024 compared to the same period of fiscal year 2023. The increase in net sales was driven by North America, our subsidiary in China, and Asia, partially offset by a reduction in net sales from all other regions. North America sales increased due to a combination of higher prices and stronger demand by existing customers when compared to the first quarter of fiscal year 2023. Net sales of our subsidiary in China were driven by the sell off of existing inventory, as discussed further in the "Foreign Operations" section below. Net sales of our agricultural and horticultural chemical carrier products increased $0.3 million, or 3%, for the first quarter of fiscal year 2024 compared to the same period in fiscal year 2023. This is a result of strategic price increases and favorable mix of products. SG&A expenses for the Business to Business Products Group decreased 7% or $0.3 million in the first months of fiscal year 2024 compared to the same period of the prior fiscal year. The decrease is mainly driven by a decrease in allocated technical service support cost from the Innovation Center and Microbiology Lab, offset by an increase in compensation, including bonus and travel-related expenses, paid to teammates and consultants. The Business to Business Products Group’s operating income for the first quarter of fiscal year 2024 was $11.1 million, an increase of $3.9 million, or 53%, from operating income of $7.3 million for the first quarter of fiscal year 2023. The increase in operating income was mostly driven by higher net sales across all business within this segment as discussed above. 22 RETAIL AND WHOLESALE PRODUCTS GROUP Net sales of the Retail and Wholesale Products Group for the first quarter of fiscal year 2024 were $72.3 million, an increase of $7.4 million, or 11%, from net sales of $64.9 million for the same period of fiscal year 2023 mainly driven by higher net sales of cat litter offset partially by a decline in our co-packaged cat litter business. Total global cat litter net sales for the first quarter of fiscal year 2024 increased $6.7 million, or 12%, compared to the first quarter of fiscal year 2023 driven mostly by pricing. Domestic cat litter net sales were $55.0 million, an increase of $8.2 million from the first quarter of fiscal year 2023 due to pricing. Net sales increased across all products except for private label heavy weight litter, with the greatest increase driven by sales of branded light weight scoopable and private label coarse litters. Net sales of co-packaged cat litter products decreased $1.6 million compared to the same period in fiscal year 2023. This decrease was primarily driven by a cyberattack on our customer which prevented them from placing and receiving orders during the first quarter of fiscal year 2024. Net sales of cat litter by our subsidiary in Canada increased period over period, as discussed in "Foreign Operations" below. Net sales of our global industrial and sports products increased $0.8 million, or 7%, compared to the first quarter of fiscal year 2023, primarily driven by increased demand of our synthetic absorbent products and higher prices of our clay-based floor absorbent products. This was further supplemented by an increase in net sales of industrial products by our subsidiary in Canada as discussed further in the "Foreign Operations" section below. SG&A expenses for the Retail and Wholesale Products Group were $1.2 million, or 32%, higher during the first quarter of fiscal year 2024 compared to the first quarter of fiscal year 2023, primarily due to advertising spend. We anticipate total advertising expense in fiscal year 2024 to be higher than fiscal year 2023, however spread more evenly throughout the year. The Retail and Wholesale Products Group's operating income for the first three months of fiscal year 2024 was $11.3 million, an increase of $3.8 million, or 50%, from operating income of $7.6 million for the same period of fiscal year 2023. This was driven primarily by the increase in gross margins due to price increases, partially offset by higher cost of goods sold as discussed above. FOREIGN OPERATIONS Foreign operations include our subsidiary in Canada, which is reported in the Retail and Wholesale Products Group, and our subsidiaries in the UK, Mexico, China and Indonesia, which are reported in the Business to Business Products Group. Net sales by our foreign subsidiaries during the first quarter of fiscal year 2024 were $7.0 million, an increase of 21%, compared to net sales of $5.8 million during the first quarter of fiscal year 2023. All of our foreign operations, with the exception of our subsidiaries in Mexico and Indonesia, experienced an increase in net sales during the first quarter of fiscal year 2024 compared to the same period of fiscal year 2023. Net sales of our subsidiary in China increased $0.9 million, or 117%, during the first quarter of fiscal year 2024 compared to the same period of fiscal year 2023 due to the sell off of all existing inventory to the new master distributor. Future sales to China will be directly though the Company and not through our subsidiary in China. Net sales of our subsidiary in the United Kingdom in the first quarter of fiscal year 2024 increased by $0.4 million, or 87%, compared to net sales in the first quarter of fiscal year 2023. The increase is driven by a combination of higher demand of edible oil filtration products and price increases. Total net sales of our subsidiary in Canada during this period increased by $0.2 million, or 6%, compared to the same period in fiscal year 2023 driven by higher net sales of floor absorbents and private label cat litter. The increase in floor absorbent sales was driven by a combination of higher volume and pricing while the increase in cat litter sales was mainly due to price increases instituted in response to rising costs. Net sales of our subsidiary in Mexico decreased during the first quarter of fiscal year 2024 compared to the same period of fiscal year 2023 by $0.2 million, or 26%. Net sales by our foreign subsidiaries represented 6% of our consolidated net sales in the first quarter of both fiscal year 2024 and 2023. Our foreign subsidiaries reported net income of $0.6 million for the first quarter of fiscal year 2024, compared to $0.5 million in the first quarter of fiscal year 2023. The increase in net income in the first quarter of fiscal year 2024 was primarily driven by price and volume increases in Canada and the UK. Identifiable assets of our foreign subsidiaries as of October 31, 2023, were $11.8 million, compared to $14.6 million as of July 31, 2023. LIQUIDITY AND CAPITAL RESOURCES Our principal liquidity needs are to fund our capital requirements, including funding working capital needs; purchasing and upgrading equipment, facilities, information systems, and real estate; supporting new product development; investing in infrastructure; repurchasing stock; paying dividends; and, from time to time, business acquisitions, and funding our debt service 23 requirements. During the first quarter of fiscal year 2024, we principally funded these short and long-term capital requirements using cash from current operations as well as cash generated in fiscal year 2023 from borrowings under our Series C Notes. We currently anticipate cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements. In addition, we are actively monitoring the timing and collection of our accounts receivable. The following table sets forth certain elements of our unaudited Condensed Consolidated Statements of Cash Flows (in thousands): For the Three Months Ended October 31, 2023 2022 Net cash provided by operating activities $ 8,564 $ 2,814 Net cash used in investing activities (8,064) (6,737) 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) Net cash provided by operating activities In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first quarter of fiscal years 2024 were as follows: Accounts receivable, less allowance for doubtful accounts, increased $1.5 million in the first quarter of fiscal year 2024. The increase in accounts receivable was driven primarily by higher net sales as sales prices increased, offset by the level and timing of collections due to payment terms. Inventory increased by $1.4 million in the first quarter of fiscal year 2024 due to a combination of rising costs, specifically due to labor and repairs and the building of inventory levels for anticipated seasonal demand and to avoid any potential supply chain disruptions. Accounts payable decreased by $1.3 million in the first quarter of fiscal year 2024. The decrease is mainly due to the timing of payments, cost of goods and services we purchase, production volume levels and vendor payment terms. Accrued expenses decreased $4.4 million in the first quarter of fiscal year 2024. The decrease is mainly due to the payout of annual bonuses offset by an increase in the income tax liability and other miscellaneous expenses which fluctuate due to timing of payments, changes in the cost of goods and services we purchase, production volume levels and vendor payment terms. Net cash used in investing activities Cash used in investing activities of $8.1 million in the first quarter of fiscal year 2024 was driven by capital expenditures. During the first quarter of fiscal year 2024 we expanded our plant equipment and improved our facilities to support increased demand for our products. Net cash used in financing activities Cash used in financing activities of $2.8 million in the first quarter of fiscal year 2024 was primarily used for dividend payments. Other Total cash balances held by our foreign subsidiaries of $4.0 million as of October 31, 2023, decreased compared to $5.2 million as of July 31, 2023. See further discussion in "Foreign Operations" above. As of October 31, 2023, we had remaining authority to repurchase 407,150 shares of Common Stock and 262,092 shares of Class B Stock under a repurchase plan approved by our Board of Directors (the "Board"). Repurchases may be made on the open market (pursuant to Rule 10b5-1 plans or otherwise) or in negotiated transactions. The timing, number and manner of share repurchases will be determined by our management pursuant to the repurchase plan approved by our Board. 24 We believe that cash flow from operations, availability under our Note Agreement and revolving credit facility under our Credit Agreement, current cash balances and our ability to obtain other financing, if necessary, will provide sufficient liquidity for foreseeable working capital needs, capital expenditures at existing facilities, deferred compensation payouts, dividend payments and debt service obligations for at least the next 12 months. See Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. We expect capital expenditures in fiscal year 2024 to be greater than in fiscal year 2023. We do not believe that these increased capital expenditures will dramatically impact our cash position; however, our cash requirements are subject to change as business conditions warrant and opportunities arise. We continually evaluate our liquidity position and anticipated cash needs, as well as the financing options available to obtain additional cash reserves. Our ability to fund operations, to make planned capital expenditures, to make scheduled debt payments and to remain in compliance with all financial covenants under debt agreements, including, but not limited to, the current credit agreement, depends on our future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors. The timing and size of any new business ventures or acquisitions that we complete may also impact our cash requirements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES This discussion and analysis of financial condition and results of operations is based on our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Estimates and assumptions are revised periodically. Actual results could differ from these estimates. See the information concerning our critical accounting policies included under "Management’s Discussion of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended July 31, 2023.