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, 2024. 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 herein under "Forward-Looking Statements" and "Risk Factors," and those discussed under Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the fiscal year ended July 31, 2024. 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, fluids 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 10 of the Notes to the unaudited Condensed Consolidated Financial Statements. Each operating segment is discussed individually below. RESULTS OF OPERATIONS OVERVIEW Quarterly net sales, gross profit and net income reached all-time highs in the three months ended October 31, 2024. Net sales grew across both the Retail and Wholesale Products Group and the Business to Business Products Group. Both operating segments grew due to higher volumes and favorable mix compared to the same period in fiscal year 2024. Consolidated net sales of $127.9 million increased $16.5 million, or 15%, in the three months ended October 31, 2024 compared to the three months ended October 31, 2023. Gross margin grew to 32% for the three months ended October 31, 2024 compared to 28% for the three months ended October 31, 2023. Despite higher SG&A and other expenses including tax, consolidated income from operations increased $8.0 million, or 61%, and net income increased $5.6 million, or 52%, for the three months ended October 31, 2024 compared to the three months ended October 31, 2023. Our Condensed Consolidated Balance Sheet as of October 31, 2024 and our Condensed Consolidated Statement of Cash Flows for the three months ended October 31, 2024 show an decrease in total cash and cash equivalents from fiscal year-end 2024. The decrease was driven primarily due to the use of cash in investing and financing activities which included capital expenditures, partial payment on our revolving credit facility, dividend payments and treasury stock repurchases. These were partially offset by positive cash flow from operations. Refer to the "Liquidity and Capital Resources" section below for more details. THREE MONTHS ENDED OCTOBER 31, 2024 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 2023 CONSOLIDATED RESULTS Consolidated net sales for the three months ended October 31, 2024 were $127.9 million, a 15% increase compared to net sales of $111.4 million for the three months ended October 31, 2023. The increase was primarily driven by higher volumes and favorable mix in both our Business to Business and Retail and Wholesale product groups. Consolidated gross profit in the three months ended October 31, 2024 was $40.8 million, an increase of $9.8 million, or 32%, from gross profit of $31.0 million in the three months ended October 31, 2023. Our gross margin (defined as gross profit as a percentage of net sales) in the three months ended October 31, 2024 increased to 32% from 28% in the three months ended 22 October 31, 2023. This gross margin expansion was mainly driven by volume growth, which led to improved fixed cost coverage, and favorable product mix. Additionally, we realized production efficiencies at various manufacturing plants which resulted in stronger gross margins for several of our products. While some per ton costs such as transportation have increased, overall cost pressures have lessened and have been mitigated by the positive impact of volume and mix. This resulted in overall per ton cost of goods sold, for the three months ended October 31, 2024, to remain flat when compared to the same period last year. Total SG&A expenses of $19.6 million for the three months ended October 31, 2024 were higher by $1.8 million, or 10%, compared to $17.8 million for the three months ended October 31, 2023. Corporate unallocated expenses remained flat year over year as the increase was driven by segments' SG&A. 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, net were $1.0 million for the three months ended October 31, 2024 compared to $0.3 million in the same period of fiscal year 2024. The increase was mainly due to higher interest expenses an increase in the estimated landfill modification cost. Refer to Note 7 of the Notes to the unaudited Condensed Consolidated Financial Statements for additional details regarding the landfill modification accrual. Consolidated net income before taxes for the three months ended October 31, 2024 was $20.2 million compared to $12.8 million for the three months ended October 31, 2023. Results for the three months ended October 31, 2024 were driven by the factors discussed above. We had tax expense of $3.8 million for the three months ended October 31, 2024 compared to $2.1 million for the three months ended October 31, 2023. Our tax expense was driven primarily by higher net income. We used an estimated annual effective tax rate ("ETR") of 19% in determining our provision for income taxes, which is based on expected annual taxable income and the assessment of various tax adjustments, including depletion and discrete items. Consolidated quarterly net income reached a record $16.4 million in the three months ended October 31, 2024, an increase of $5.6 million or 52%, from $10.7 million for the three months ended October 31, 2023. BUSINESS TO BUSINESS PRODUCTS GROUP Net sales of the Business to Business Products Group for the three months ended October 31, 2024 were $48.4 million, an increase of $9.3 million, or 24%, from net sales of $39.2 million for the three months ended October 31, 2023, driven by sales of our fluids purification and agricultural products. Net sales of our fluids purification products increased $8.2 million, or 37%, in the three months ended October 31, 2024 compared to the three months ended October 31, 2023. The increase was primarily driven by new and growing demand in the renewable diesel business and, to a lesser extent, higher prices. Net sales increased in all regions except for our subsidiary in the U.K. which is further discussed below. Net sales of our agricultural and horticultural chemical carrier products increased $1.3 million, or 12%, for the three months ended October 31, 2024 compared to the three months ended October 31, 2023 as a result of stronger demand and, to a lesser extent, higher prices. The volume growth was primarily due to key customers who resumed purchasing after working through inventory surpluses. Net sales of our animal health & nutrition products decreased $0.2 million, or 3%, during the three months ended October 31, 2024 compared to three months ended October 31, 2023. The decrease was driven by the Asia region (including China) and our subsidiary in Mexico, partially offset by higher sales in North America and Latin America. Net sales in Asia were down due to the sell off of existing inventory that occurred in the first quarter of fiscal year 2024 as we transitioned to a master distributor in China. Net sales in Latin America grew due to higher demand of exiting and new customers specifically in Brazil while net sales in North America grew due to higher prices and, to a lesser extent, growth in demand. SG&A expenses for the Business to Business Products Group increased by $0.7 million, or 20%, for the three months ended October 31, 2024 compared to the three months ended October 31, 2023. The increase was mainly driven by a preliminary foreign value-added tax ("VAT") assessment and higher research and development costs. The Business to Business Products Group’s operating income for the three months ended October 31, 2024 was $17.1 million, an increase of $6.0 million, or 54%, from operating income of $11.1 million for the three months ended October 31, 2023. The increase in operating income was mostly driven by higher sales in our fluids purification and agricultural products. 23 RETAIL AND WHOLESALE PRODUCTS GROUP Net sales of the Retail and Wholesale Products Group for the three months ended October 31, 2024 were $79.5 million, an increase of $7.3 million, or 10%, from net sales of $72.3 million for the three months ended October 31, 2023. This increase was mainly driven by sales of our new crystal cat litter products and stronger demand for our co-packaged cat litter and industrial products. Total global cat litter net sales for the three months ended October 31, 2024 increased $6.8 million, or 11%, compared to the three months ended October 31, 2023, driven primarily by sales of our new crystal cat litter products and higher demand in our co-packaged business partially offset by a decrease in our clay based cat litter sales. Net sales of co-packaged cat litter increased $2.1 million, or 78%, compared to the three months ended October 31, 2024 due to higher demand. In the first quarter of fiscal year 2024, a cyber-attack disrupted a key customer’s ability to place and receive orders, which negatively impacted sales of Oil-Dri’s co-packaged coarse litter. However, the cyber event boosted sales of the Oil-Dri’s branded and private label coarse items, and is currently influencing year-over-year comparisons for both domestic clay and co-packaged litter products. Although total domestic clay litter revenues declined, Oil-Dri continued to experience topline growth of its EPA-approved Cat’s Pride Antibacterial Clumping Litter which is currently sold at large brick and mortar and e-commerce retailers. In addition, new distribution of other clay products and accessories was achieved at new and existing customers. Net sales of cat litter by our subsidiary in Canada decreased slightly period over period, as discussed in "Foreign Operations" below. Net sales of our global industrial and sports products increased $0.4 million, or 4%, compared to the three months ended October 31, 2023, primarily driven by increased demand of our clay-based floor absorbent products by new and existing customers. SG&A expenses for the Retail and Wholesale Products Group were $1.0 million, or 21%, higher during the three months ended October 31, 2024 compared to the three months ended October 31, 2023, primarily due to higher compensation related costs, a credit reserve for several customer bankruptcies, amortization of the customer list acquired with Ultra Pet and higher research and development costs. These higher expenses were partially offset by lower advertising expense in the first quarter of fiscal year 2025 compared to the first quarter of fiscal year 2024. We anticipate total advertising expense in fiscal year 2025 to be lower than fiscal year 2024. The Retail and Wholesale Products Group's operating income for the three months ended October 31, 2024 was $13.4 million, an increase of $2.1 million, or 18%, from operating income of $11.3 million for three months ended October 31, 2023. This was driven primarily by higher volumes including new crystal cat litter sales, partially offset by elevated SG&A expenses, as discussed above. FOREIGN OPERATIONS Foreign operations include our subsidiaries in Canada and Netherlands, which are reported in the Retail and Wholesale Products Group, and our subsidiaries in the United Kingdom ("UK"), Mexico, China and Indonesia, which are reported in the Business to Business Products Group. Net sales by our foreign subsidiaries for the three months ended October 31, 2024 were $5.1 million, a decrease of 27%, compared to net sales of $7.0 million during the three months ended October 31, 2023. The decrease was driven mainly by our subsidiary in China and, to a lesser extent, all other subsidiaries. Net sales of our subsidiary in China decreased $1.7 million, or 100%, in the three months ended October 31, 2024 compared to the same period of fiscal year 2024 due to a sell-off of all existing inventory to a new master distributor, which occurred in the first quarter of fiscal year 2024. Sales to China are now directly through the Company and not through our subsidiary in China. Total net sales of our subsidiary in Canada decreased $0.1 million, or 2%, in the three months ended October 31, 2024 compared to the three months ended October 31, 2023, driven by softer sales volumes of cat litter partially offset by higher net sales of floor absorbents due to higher prices. Net sales of our subsidiaries in the UK and Mexico decreased slightly in the three months ended October 31, 2024 compared to the three months ended October 31, 2023. Net sales by our foreign subsidiaries represented 4% and 6% of our consolidated net sales for the three months ended October 31, 2024 and 2023, respectively. Our foreign subsidiaries reported net loss of $0.2 million for the three months ended October 31, 2024, compared to net income of $0.6 million in the three months ended October 31, 2023. The decrease in net income was primarily driven by the decrease in China sales as well as the preliminary foreign VAT assessment recognized in the quarter. Identifiable assets of our foreign subsidiaries as of October 31, 2024, were $9.2 million, compared to $8.7 million as of July 31, 2024. 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 24 infrastructure; repurchasing stock; paying dividends; and, from time to time, business acquisitions, and funding our debt service requirements. During the three months ended October 31, 2024, we principally funded these short and long-term capital requirements using cash from current operations as well as cash generated from previous borrowings under our Series B, C and D Senior Notes and Credit Agreement. On September 30, 2024 we amended the Credit Agreement to, among other things, increase our line of credit from $45 million to $75 million in order to gain extra flexibility in our cash position. See Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information relating to our existing borrowings. 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, 2024 2023 Net cash provided by operating activities $ 10,919 $ 8,564 Net cash used in investing activities (12,817) (8,064) Net cash used in financing activities (9,080) (2,799) Effect of exchange rate changes on cash and cash equivalents 3 124 Net increase in cash and cash equivalents $ (10,975) $ (2,175) 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 three months ended October 31, 2024 were as follows: Accounts receivable, net of allowances increased by $9.0 million in the three months ended October 31, 2024. The increase in accounts receivable was driven primarily by higher net sales, offset by the level and timing of collections due to payment terms. Inventory increased by $2.0 million in the three months ended October 31, 2024 due to the building of finished goods inventory to meet anticipated demand. Prepaid expenses decreased by $2.2 million in the three months ended October 31, 2024. The decrease is mainly due to the timing of tax and insurance payments. Excluding the impact of payments related to capital expenditures, accounts payable increased by $1.9 million in the three months ended October 31, 2024. The increase was mainly due to the timing of payments, cost of goods and services we purchase, production volume levels and vendor payment terms. In the three months ended October 31, 2024 there was a $3.0 million decrease in accounts payable related to capital expenditures recognized as cash used in investing activities Excluding the impact of payments made related to capital expenditures, accrued expenses decreased $6.1 million in the three months ended October 31, 2024. The decrease was mainly due to the payout of annual bonuses and taxes, 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 including freight. In the three months ended October 31, 2024 there was a $4.5 million decrease in accrued expenses related to capital expenditures recognized as cash used in investing activities Net cash used in investing activities Cash used in investing activities of $12.8 million in the three months ended October 31, 2024 was driven by capital expenditures. During the three months ended October 31, 2024 we continued to expand our plant equipment and improve our facilities to support increased demand for our products. 25 Net cash used in financing activities Cash used in financing activities of $9.1 million in the three months ended October 31, 2024 was primarily driven by a $5 million payment of our borrowing under the Credit Agreement, as well as cash used for dividend payments and treasury stock repurchases. Other Total cash balances held by our foreign subsidiaries of $4.7 million as of October 31, 2024 decreased compared to $4.5 million as of July 31, 2024. See further discussion in "Foreign Operations" above. As of October 31, 2024, we had remaining authority to repurchase 368,902 shares of Common Stock and 244,113 shares of Class B Stock under a repurchase plan approved by our Board. Repurchases may be made on the open market (pursuant to Rule 10b5-1 plans or otherwise) or in negotiated transactions. The timing, number and manner of share repurchases will be determined by our management pursuant to the repurchase plan approved by our Board. We believe that cash flow from operations, availability under our 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. 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 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, 2024.