Oil-Dri Corp of America [ODC] Filings

10-Q 1 odc-20230131.htm 10-Q odc-20230131

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended January 31, 2023


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ______________

Commission File Number 001-12622

OIL-DRI CORPORATION OF AMERICA

(Exact name of the registrant as specified in its charter)

Delaware 36-2048898

(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

410 North Michigan Avenue, Suite 400 60611-4213

Chicago, Illinois (Zip Code)

(Address of principal executive offices)

The registrant's telephone number, including area code: (312) 321-1515

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o

Accelerated Filer x

Non-accelerated Filer o

Smaller Reporting Company x

Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.10 per share	ODC	New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of January 31, 2023.

Common Stock – 5,119,546 Shares and Class B Stock – 2,045,415 Shares

CONTENTS



	PART I – FINANCIAL INFORMATION
		Page
Item 1:	Financial Statements	3

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results Of Operations	23



Item 4:	Controls and Procedures	31

	PART II – OTHER INFORMATION

Item 1A:	Risk Factors	31

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 4:	Mine Safety Disclosures	32



Item 6:	Exhibits	33

	Signatures	34

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including, but not limited to, those under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations," and those statements elsewhere in this report and other documents that we file with the Securities and Exchange Commission ("SEC"), contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Words such as "expect," "outlook," "forecast," "would," "could," "should," "project," "intend," "plan," "continue," "believe," "seek," "estimate," "anticipate," "may," "assume," "potential," "strive," and variations of such words and similar expressions are intended to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially, including, but not limited to, those described herein and in Item 1A, "Risk Factors", in our Annual Report on Form 10-K for the fiscal year ended July 31, 2022, and from time to time in our filings with the SEC. Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, intended, expected, believed, estimated, projected or planned. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except to the extent required by law, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise.

TRADEMARK NOTICE

"Oil-Dri" and "Ultra-Clear" are registered trademarks of Oil-Dri Corporation of America.

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

OIL-DRI CORPORATION OF AMERICA

Condensed Consolidated Balance Sheet

(in thousands, except for share and per share amounts)


	(unaudited)
ASSETS	January 31, 2023		July 31, 2022
Current Assets
Cash and cash equivalents	$	13,951	$	16,298
Accounts receivable, net allowances of $1,037 and $922 at January 31, 2023 and July 31, 2022, respectively	57,179		51,683
Inventories, net	37,938		35,562
Prepaid repairs	8,107		7,474
Prepaid expenses and other assets	2,413		3,664
Total Current Assets	119,588		114,681

Property, Plant and Equipment
Cost	292,615		283,240
Less accumulated depreciation and amortization	(180,936)		(175,374)
Total Property, Plant and Equipment, Net	111,679		107,866

Other Assets
Goodwill	3,618		3,618
Trademarks and patents, net of accumulated amortization of $550 and $524 at January 31, 2023 and July 31, 2022, respectively	1,476		1,445
Customer list, net of accumulated amortization of $7,685 and $7,608 at January 31, 2023 and July 31, 2022, respectively	100		177
Deferred income taxes	3,511		3,677
Operating lease right-of-use assets	9,460		10,601
Other	6,612		7,546
Total Other Assets	24,777		27,064

Total Assets	$	256,044	$	249,611

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

OIL-DRI CORPORATION OF AMERICA

Condensed Consolidated Balance Sheet (continued)

(in thousands, except for share and per share amounts)


	(unaudited)
LIABILITIES & STOCKHOLDERS’ EQUITY	January 31, 2023		July 31, 2022
Current Liabilities
Current maturities of notes payable	$	1,000	$	1,000
Accounts payable	11,048		13,401
Dividends payable	1,858		1,851
Operating lease liabilities	1,850		2,178
Accrued expenses	33,785		30,085
Total Current Liabilities	49,541		48,515

Noncurrent Liabilities
Notes payable, net of unamortized debt issuance costs of $191 and $202 at January 31, 2023 and July 31, 2022, respectively	31,809		31,798
Deferred compensation	4,441		4,559
Pension and postretirement benefits	434		798
Long-term operating lease liabilities	8,919		9,749
Other	3,926		3,843
Total Noncurrent Liabilities	49,529		50,747

Total Liabilities	99,070		99,262

Stockholders’ Equity
Common Stock, par value $.10 per share, issued 8,744,223 shares at January 31, 2023 and 8,686,768 shares at July 31, 2022	874		868
Class B Stock, par value $.10 per share, issued 2,397,056 shares at January 31, 2023 and 2,397,056 shares at July 31, 2022	240		240
Additional paid-in capital	54,328		52,467
Retained earnings	184,133		178,754
Noncontrolling interest	(390)		(369)
Accumulated Other Comprehensive Loss:

Pension and postretirement benefits	(2,255)		(2,242)
Cumulative translation adjustment	(70)		59
Total Accumulated Other Comprehensive Loss	(2,325)		(2,183)
Less Treasury Stock, at cost (3,624,677 Common and 351,641 Class B shares at January 31, 2023 and 3,609,938 Common and 351,641 Class B shares at July 31, 2022)	(79,886)		(79,428)
Total Stockholders’ Equity	156,974		150,349

Total Liabilities & Stockholders’ Equity	$	256,044	$	249,611

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

OIL-DRI CORPORATION OF AMERICA

Condensed Consolidated Statements of Operations

(in thousands, except for per share amounts)


	(unaudited)
	For the Six Months Ended January 31,
	2023		2022

Net Sales	$	200,208	$	169,670
Cost of Sales	(154,882)		(140,266)
Gross Profit	45,326		29,404
Selling, General and Administrative Expenses	(31,451)		(27,041)

Income from Operations	13,875		2,363

Other (Expense) Income
Interest expense	(731)		(490)
Interest income	115		17
Other, net	(1,783)		1,190
Total Other (Expense) Income, Net	(2,399)		717

Income Before Income Taxes	11,476		3,080
Income Tax Expense	(2,400)		(524)
Net Income	9,076		2,556
Net Loss Attributable to Noncontrolling Interest	(21)		(31)
Net Income Attributable to Oil-Dri	$	9,097	$	2,587

Net Income Per Share
Basic Common	$	1.37	$	0.38
Basic Class B Common	$	1.03	$	0.28
Diluted Common (1)	$	1.34	$	0.37
Diluted Class B Common	$	1.02	$	0.28
Average Shares Outstanding
Basic Common	4,817		5,095
Basic Class B Common	1,953		1,930
Diluted Common (1)	4,937		5,211
Diluted Class B Common	1,975		1,966
Dividends Declared Per Share
Basic Common	$	0.5600	$	0.5400
Basic Class B Common	$	0.4200	$	0.4050

(1) The effect of Basic Common potential common stock equivalents related to non-vested restricted stock of $7 thousand shares was excluded from the computation of average diluted shares outstanding for the six months ended January 31, 2023, as inclusion would have been anti-dilutive.

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

OIL-DRI CORPORATION OF AMERICA

Condensed Consolidated Statements of Comprehensive Income

(in thousands)


	(unaudited)
	For the Six Months Ended January 31,
	2023		2022

Net Income Attributable to Oil-Dri	$	9,097	$	2,587

Other Comprehensive (Loss) Income:

Pension and postretirement benefits (net of tax)	(13)		53
Cumulative translation adjustment	(129)		(94)
Other Comprehensive Loss	(142)		(41)
Total Comprehensive Income	$	8,955	$	2,546

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

OIL-DRI CORPORATION OF AMERICA

Condensed Consolidated Statements of Operations

(in thousands, except for per share amounts)


	(unaudited)
	For the Three Months Ended January 31,
	2023		2022

Net Sales	$	101,669	$	87,210
Cost of Sales	(78,653)		(71,624)
Gross Profit	23,016		15,586
Selling, General and Administrative Expenses	(15,710)		(13,668)
Income from Operations	7,306		1,918

Other (Expense) Income
Interest expense	(367)		(313)
Interest income	59		8
Other, net	(1,959)		757
Total Other (Expense) Income, Net	(2,267)		452

Income Before Income Taxes	5,039		2,370
Income Tax Expense	(1,193)		(409)
Net Income	3,846		1,961
Net Loss Attributable to Noncontrolling Interest	(10)		(41)
Net Income Attributable to Oil-Dri	$	3,856	$	2,002

Net Income Per Share
Basic Common	$	0.58	$	0.29
Basic Class B Common	$	0.44	$	0.22
Diluted Common (1)	$	0.56	$	0.28
Diluted Class B Common	$	0.43	$	0.22
Average Shares Outstanding
Basic Common	4,829		5,077
Basic Class B Common	1,964		1,939
Diluted Common (1)	4,965		5,186
Diluted Class B Common	1,985		1,965
Dividends Declared Per Share
Basic Common	$	0.2800	$	0.2700
Basic Class B Common	$	0.2100	$	0.2025

(1) The effect of Basic Common potential common stock equivalents related to non-vested restricted stock of 1 thousand shares was excluded from the computation of average diluted shares outstanding for the three months ended January 31, 2023, as inclusion would have been anti-dilutive.

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

OIL-DRI CORPORATION OF AMERICA

Condensed Consolidated Statements of Comprehensive (Loss) Income

(in thousands of dollars)


	(unaudited)
	For the Three Months Ended January 31,
	2023		2022

Net Income Attributable to Oil-Dri	$	3,856	$	2,002

Other Comprehensive Income (Loss):
Pension and postretirement benefits (net of tax)	(5)		26
Cumulative translation adjustment	256		(60)
Other Comprehensive Income (Loss)	251		(34)
Total Comprehensive Income	$	4,107	$	1,968

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

OIL-DRI CORPORATION OF AMERICA

Consolidated Statements of Stockholders' Equity

(in thousands, except share amounts)


	For the Three Months Ended January 31
	(unaudited)
	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, October 31, 2021	11,033,024	(3,618,510)	$	1,103	$	49,377	$	179,164	$	(68,922)	$	(4,124)	$	(297)	$	156,301
Net Income (Loss)	—	—	—		—		2,002		—		—		(41)		1,961
Other Comprehensive Loss	—	—	—		—		—		—		(34)		—		(34)
Dividends Declared	—	—	—		—		(1,844)		—		—		—		(1,844)
Purchases of Treasury Stock	—	(113,236)	—		—		—		(3,910)		—		—		(3,910)
Net issuance of stock under long-term incentive plans	32,000	(850)	4		26		—		(30)		—		—		—
Amortization of Restricted Stock	—	—	—		817		—		—		—		—		817
Balance, January 31, 2022	11,065,024	(3,732,596)	$	1,107	$	50,220	$	179,322	$	(72,862)	$	(4,158)	$	(338)	$	153,291

Balance, October 31, 2022	11,122,674	(3,968,939)	$	1,112	$	53,385	$	182,135	$	(79,648)	$	(2,576)	$	(380)	$	154,028
Net Income (Loss)	—	—	—		—		3,856		—		—		(10)		3,846
Other Comprehensive Income	—	—	—		—		—		—		251		—		251
Dividends Declared	—	—	—		—		(1,858)		—		—		—		(1,858)
Purchases of Treasury Stock	—	(4,133)	—		—		—		(133)		—		—		(133)
Net issuance of stock under long-term incentive plans	18,605	(3,246)	2		103		—		(105)		—		—		—
Amortization of Restricted Stock	—	—	—		840		—		—		—		—		840
Balance, January 31, 2023	11,141,279	(3,976,318)	$	1,114	$	54,328	$	184,133	$	(79,886)	$	(2,325)	$	(390)	$	156,974


	For the Six Months Ended January 31
	(unaudited)
	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, 2021	10,958,367	(3,539,193)	$	1,096	$	48,271	$	180,443	$	(66,154)	$	(4,117)	$	(307)	$	159,232
Net Income (Loss)	—	—	—		—		2,587		—		—		(31)		2,556
Other Comprehensive Loss	—	—	—		—		—		—		(41)		—		(41)
Dividends Declared	—	—	—		—		(3,708)		—		—		—		(3,708)
Purchases of Treasury Stock	—	(179,003)	—		—		—		(6,201)		—		—		(6,201)
Net issuance of stock under long-term incentive plans	106,657	(14,400)	11		496		—		(507)		—		—		—
Amortization of Restricted Stock	—	—	—		1,453		—		—		—		—		1,453
Balance, January 31, 2022	11,065,024	(3,732,596)	$	1,107	$	50,220	$	179,322	$	(72,862)	$	(4,158)	$	(338)	$	153,291

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)	—	—	—		—		9,097		—		—		(21)		9,076
Other Comprehensive Loss	—	—	—		—		—		—		(142)		—		(142)
Dividends Declared	—	—	—		—		(3,718)		—		—		—		(3,718)
Purchases of Treasury Stock	—	(7,493)	—		—		—		(225)		—		—		(225)
Net issuance of stock under long-term incentive plans	57,455	(7,246)	6		227		—		(233)		—		—		—
Amortization of Restricted Stock	—	—	—		1,634		—		—		—		—		1,634
Balance, January 31, 2023	11,141,279	(3,976,318)	$	1,114	$	54,328	$	184,133	$	(79,886)	$	(2,325)	$	(390)	$	156,974

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

OIL-DRI CORPORATION OF AMERICA

Condensed Consolidated Statements of Cash Flows

(in thousands)


	(unaudited)
	For the Six Months Ended January 31,
CASH FLOWS FROM OPERATING ACTIVITIES	2023		2022
Net Income	$	9,076	$	2,556
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,274		6,773

Non-cash stock-based compensation	1,634		1,453
Deferred income taxes	166		32
Provision for bad debts and cash discounts	207		(59)
Loss on the disposals of property, plant and equipment	15		265

(Increase) Decrease in assets:
Accounts receivable	(5,738)		(5,023)
Inventories	(2,432)		(6,236)
Prepaid expenses	(8)		846
Other assets	2,030		634
Increase (Decrease) in liabilities:
Accounts payable	180		1,326
Accrued expenses	3,889		(1,595)
Deferred compensation	(118)		690
Pension and postretirement benefits	(377)		(616)
Other liabilities	(900)		(985)
Total Adjustments	5,822		(2,495)
Net Cash Provided by Operating Activities	14,898		61

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(13,285)		(10,574)
Proceeds from sale of property, plant and equipment	5		—


Net Cash Used in Investing Activities	(13,280)		(10,574)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable	—		25,000

Payment of debt issuance costs	—		(114)
Dividends paid	(3,711)		(3,728)
Purchases of treasury stock	(225)		(6,201)

Net Cash (Used in) Provided by Financing Activities	(3,936)		14,957
Effect of exchange rate changes on Cash and Cash Equivalents	(29)		(26)
Net (Decrease) Increase in Cash and Cash Equivalents	(2,347)		4,418
Cash and Cash Equivalents, Beginning of Period	16,298		24,591
Cash and Cash Equivalents, End of Period	$	13,951	$	29,009

OIL-DRI CORPORATION OF AMERICA

Condensed Consolidated Statements of Cash Flows - Continued

(in thousands)


	(unaudited)
	For the Six Months Ended January 31,
	2023		2022
Supplemental disclosures:
Interest payments, net of amounts capitalized	$	567	$	178
Income tax payments	$	1,323	$	155
Non-cash investing and financing activities:
Capital expenditures accrued, but not paid	$	1,283	$	835
Cash dividends declared and accrued, but not paid	$	1,858	$	1,845

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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, 2022 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 and six months ended January 31, 2023 are not necessarily an indication of the results that may be expected for the fiscal year ending July 31, 2023.

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. For more information see "Critical Accounting Policies and Estimates" in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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, 2022, 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.

Overburden Removal and Mining Costs. We 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 sales 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 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 $0.2 million and $0.5 million as of January 31, 2023 and July 31, 2022, respectively. This liability is reported in Other within Accrued Expenses on the unaudited Condensed Consolidated Balance Sheet. Revenue recognized during the six months ended January 31, 2023 that was included in the liability for advance payments at the beginning of the period was $0.1 million.

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, 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 unaudited Condensed Consolidated Balance Sheet is $2.5 million for the Georgia landfill modification reserve as modification efforts are expected to begin in the third quarter of fiscal year 2023, refer to Note 7 for further details.

2. NEW ACCOUNTING PRONOUNCEMENTS AND REGULATIONS

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.

3. INVENTORIES

The composition of inventories is as follows (in thousands):


	January 31, 2023		July 31, 2022
Finished goods	$	19,071	$	18,142
Packaging	9,795		9,515
Other	9,072		7,905
Total Inventories	$	37,938	$	35,562

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. The inventory obsolescence reserve was $0.9 million and $0.8 million at January 31, 2023 and July 31, 2022, respectively. Inventories have increased due to a combination of rising costs and building inventory levels for anticipated demand.

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 no cash equivalents as of January 31, 2023 and July 31, 2022.

Balances of accounts receivable and accounts payable approximated their fair values at January 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 $31.2 million and $31.8 million as of January 31, 2023 and July 31, 2022, respectively, and are classified as Level 2. The fair value was estimated using the exit price notion of fair value.

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, customer lists and product registrations. Intangible amortization expense was $67 thousand and $138 thousand in the second quarter of fiscal years 2023 and 2022, respectively. Intangible amortization expense was $134 thousand and $253 thousand in the first six months of fiscal years 2023 and 2022, respectively. Estimated intangible amortization for the remainder of fiscal year 2023 is $131 thousand. Estimated intangible amortization for the next five fiscal years is as follows (in thousands):


2024	$	129
2025	$	104
2026	$	102
2027	$	99
2028	$	94

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.

We performed our goodwill impairment analysis on our Retail and Wholesale Products Group and Business to Business Products Group reporting units in the third quarter of fiscal year 2022. As a result, we identified goodwill impairment of $5.6 million which left no remaining goodwill in the Retail and Wholesale Products Group reporting unit and no impairment was identified for the Business to Business Products Group.

There have been no triggering events in fiscal year 2023 that would indicate a new impairment analysis is needed.

6. ACCRUED EXPENSES

Accrued expenses is as follows (in thousands):


	January 31, 2023		July 31, 2022
Salaries, Wages, Commissions and Employee Benefits	$	13,780	$	13,439
Freight	4,356		4,022
Georgia Landfill Modification Reserve	2,500		—
Trade Promotions and Advertising	1,971		1,180
Real Estate Tax	317		1,006
Other	10,861		10,438
	$	33,785	$	30,085

The change in salaries, wages, commissions and employee benefits relates primarily to the payment of annual bonuses during the first quarter of fiscal year 2023 offset by the increase in labor costs and bonus accrual for the first six months of fiscal year 2023. The increase in freight cost is primarily due to increased fuel prices, export fees and demurrage charges for international ocean freight. Refer to Note 7 for details of the Georgia landfill modification reserve recorded for the first time in the second quarter of fiscal year 2023. Trade promotions and advertising accruals have increased with marketing spend due to timing. Real estate tax decreased due to the timing of payments which typically occur in the second quarter of the fiscal year. Other is higher at January 31, 2023 compared to July 31, 2022 due to an increase in accruals for cash received in advance, account receivable credits, and other accrued expenses due to timing of purchases and rising costs offset by a reduction in professional fees.

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 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. There have been no changes during fiscal 2022 or the six months ended January 31, 2023 that would have changed this estimate. 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 three months ended January 31, 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. 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

On August 30, 2022, we entered into (i) the Sixth Amendment to Credit Agreement (the "Sixth Amendment"), which amends 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; and (ii) Amendment No. 3 (the "Third Amendment") to our Amended and Restated Note Purchase and Private Shelf Agreement, dated as of May 15, 2020 (as previously amended, the "Note Agreement"), with PGIM, Inc. ("Prudential") and certain existing noteholders affiliated with Prudential named therein.

The Sixth Amendment amended the Credit Agreement to, among other things: extend the facility termination date to August 30, 2027; replace the LIBOR-based reference rate with an adjusted term Secured Overnight Financing Rate ("SOFR"); revise the method for calculating consolidated EBITDA and consolidated debt for purposes of the Credit Agreement; modify certain restrictive covenants, including increasing the unsecured indebtedness basket from $50 million to $75 million; and revise 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.

The Third Amendment amended the Note Agreement to, among other things, modify the existing fixed charge coverage financial covenant and replace the existing consolidated debt financial covenant with a maximum debt to earnings ratio and effect certain changes consistent with the Sixth Amendment, including modifying the method for calculating consolidated EBITDA and the excess leverage fee.

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 and six months ended January 31, 2023. Operating lease costs are included in Cost of Sales 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 January 31,				For the Six Months Ended January 31,

	2023		2022		2023		2022
Operating Lease Cost
Operating lease cost	$	687	$	718	$	1,383	$	1,352
Short-term operating lease cost	—		159		1		308

Supplemental cash flow information related to leases was as follows (in thousands):


	For the Three Months Ended January 31,				For the Six Months Ended January 31,

	2023		2022		2023		2022
Other Information
Cash paid for amounts included in the measurement of operating lease liabilities:	$	585	$	636	$	1,180	$	1,197
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—	$	1,042	$	23	$	1,283

We have no new leases in the three months ended January 31, 2023.

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:


	January 31, 2023	July 31, 2022









Weighted-average remaining lease term - operating leases	7.6 years	7.7 years


Weighted-average discount rate - operating leases	3.90%	3.91%

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 January 31, 2023, (in thousands):




2024	$	1,180
2025	2,052
2026	1,919
2027	1,629
2028	1,214
Thereafter	4,577
Total	12,571
Less: imputed interest	(1,802)
Net lease obligation	$	10,769

10. PENSION AND OTHER POSTRETIREMENT BENEFITS

Pension and Postretirement Health Benefits

The Oil-Dri Corporation of America Pension Plan ("Pension Plan") is a defined benefit pension plan for eligible salaried and hourly employees. Pension benefits are 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, we 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 is closed to new participants and current participants no longer earn 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 Company expects to complete the termination over a period of eighteen months.

The components of net periodic pension and postretirement health benefit costs were as follows:


	Pension Benefits
	(in thousands)
	For the Three Months Ended January 31,				For the Six Months Ended January 31,
	2023		2022		2023		2022
Interest cost	$	338	$	266	$	673	$	534
Expected return on plan assets	(558)		(646)		(1,116)		(1,293)
Amortization of:
Other actuarial loss	19		35		28		72
Net periodic benefit cost	$	(201)	$	(345)	$	(415)	$	(687)

	Postretirement Health Benefits
	(in thousands)
	For the Three Months Ended January 31,				For the Six Months Ended January 31,
	2023		2022		2023		2022
Service cost	$	20	$	28	$	42	$	61
Interest cost