Oil-Dri of America(ODC) - 2020 Q4 - Annual Report

FORM 10-K Filing Information Filing Details This section provides basic filing information for the annual report, identifying Oil-Dri Corporation of America as a smaller reporting company and confirming SEC compliance - The registrant, Oil-Dri Corporation of America, is classified as a 'smaller reporting company' and an 'accelerated filer'[2][3] - The company has filed all required reports under the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days[2] - The aggregate market value of Common Stock owned by non-affiliates as of January 31, 2020, was $193,493,002[4] Capital Stock Outstanding as of September 30, 2020 | Class of Stock | Shares Outstanding | | :--------------- | :----------------- | | Common Stock | 5,383,876 | | Class B Stock | 2,078,283 | | Class A Common Stock | 0 | Table of Contents Forward-Looking Statements Forward-Looking Statement Disclosure This section outlines the company's forward-looking statements and cautions investors about inherent risks that could cause actual results to differ materially from projections - Forward-looking statements are based on current expectations, estimates, forecasts, and projections about future performance and business[12] - Statements are subject to risks, uncertainties, and assumptions, including those detailed in Item 1A 'Risk Factors', which could cause actual results to vary materially[13] - The company has no intention or obligation to publicly update forward-looking statements after the report's distribution, except as required by law[13] Trademark Notice Trademark Ownership This section lists the U.S, Canadian, and third-party registered trademarks associated with the company's products - Oil-Dri Corporation of America and its subsidiaries own several U.S, registered trademarks including Agsorb, Amlan, Cat's Pride, Jonny Cat, Oil-Dri, Pure-Flo, and others[15] - Saular is a Canadian registered trademark of Oil-Dri Corporation of America[15] - Fresh Step is a registered trademark of The Clorox Company[15] PART I ITEM 1 – Business Oil-Dri Corporation of America develops, manufactures, and markets sorbent products from clay minerals through its Retail and Wholesale and Business to Business segments - Oil-Dri Corporation of America, incorporated in 1969 as a successor to a business started in 1941, specializes in sorbent products made from hydrated aluminosilicate minerals like calcium bentonite, attapulgite, and diatomaceous shale[18][19] - The company's products include absorbents (e.g, Cat's Pride cat litter, Oil-Dri floor absorbents, Amlan animal health solutions, Agsorb agricultural carriers) and adsorbents (e.g, Pure-Flo bleaching clays for edible oils, Ultra-Clear for petroleum purification)[19] - Operations are divided into two reportable segments: Retail and Wholesale Products Group and Business to Business Products Group, catering to different customer types[33] Overview of Business Oil-Dri Corporation of America is a leader in sorbent products derived from surface-mined clay minerals, serving various industries with absorbent and adsorbent applications - Oil-Dri was incorporated in Delaware in 1969, succeeding a business that began in 1941[18] - The company specializes in sorbent products made from hydrated aluminosilicate minerals (calcium bentonite, attapulgite, diatomaceous shale), which are surface-mined near manufacturing facilities in Mississippi, Georgia, Illinois, and California[19] - Products include absorbents (e.g, cat litter, floor absorbents, animal health solutions, agricultural carriers) and adsorbents (e.g, bleaching clays for edible oils, purification aids for petroleum-based oils)[19] Principal Products The company's principal products leverage mineral-based clays for agricultural, animal health, purification, cat litter, industrial, and sports applications - Agricultural and Horticultural Products: Mineral-based absorbents like Agsorb, Verge, and Flo-Fre serve as carriers for active ingredients, drying agents, and growing media, primarily sold in the U.S[21][22] - Animal Health and Nutrition Products: Amlan brand and private label products, including Calibrin, Varium, Neoprime, and Pel-Unite, manage livestock health and productivity, sold globally[23][24] - Bleaching Clay and Purification Aid Products: Pure-Flo, Perform, Select, and Ultra-Clear are used for bleaching edible oils and purifying jet fuel/petroleum products, sold internationally[25] - Cat Litter Products: Offers scoopable (including lightweight) and non-clumping litters under Cat's Pride and Jonny Cat brands, as well as private label and co-packaged products (e.g, Fresh Step for Clorox)[26][27][28][29] - Industrial and Automotive Products: Clay-based (Oil-Dri branded) and synthetic sorbents for absorbing various liquids in industrial, automotive, and home applications[30][31] - Sports Products: Pro's Choice Sports Field Products (soil conditioners, packing clay, drying agents) for baseball, softball, football, and soccer fields, sold through distributors[32] Business Segments Oil-Dri operates two reportable segments: the Retail and Wholesale Products Group and the Business to Business Products Group - Two reportable operating segments: Retail and Wholesale Products Group and Business to Business Products Group[33] - Retail and Wholesale Products Group customers include mass merchandisers, wholesale clubs, drugstores, pet specialty outlets, dollar stores, grocery stores, e-commerce, and distributors of industrial cleanup, automotive, and sports field products[33] - Business to Business Products Group customers include edible oil processors, petroleum refiners, animal feed and agricultural chemical manufacturers, animal health distributors, and consumer product marketers[33] Foreign Operations The company maintains foreign operations in Canada, the UK, China, Switzerland, Mexico, and Indonesia, which are subject to typical international business risks - Foreign operations are located in Canada and the United Kingdom (Retail and Wholesale Products Group), and China, Switzerland, Mexico, and Indonesia (Business to Business Products Group)[34] - Key foreign subsidiaries include Oil-Dri Canada ULC (cat litter, industrial absorbents), Oil-Dri (U.K,) Limited (industrial absorbents, bleaching earth, cat litter), and Amlan Trading (Shenzhen) Company, Ltd, (animal health solutions)[35][36][37] - Foreign operations are exposed to risks such as currency fluctuations, fund transfer restrictions, and import/export duties, but these have not historically had a material impact[40] Customers Walmart and Clorox are significant customers, accounting for approximately 19% and 5% of total net sales in fiscal year 2020, respectively Sales to Key Customers (Fiscal Years 2020 & 2019) | Customer | FY2020 (% of Net Sales) | FY2019 (% of Net Sales) | | :------- | :---------------------- | :---------------------- | | Walmart | 19% | 20% | | Clorox | 5% | 5% | - Walmart is a customer in the Retail and Wholesale Products Group, while Clorox is in the Business to Business Products Group[41] - The loss of any customer other than Walmart or Clorox is not expected to have a material adverse effect on the business[41] Competition Oil-Dri faces vigorous competition based on product performance, price, brand recognition, and distribution, with some competitors possessing greater financial resources - Competition is vigorous, driven by product performance, price, brand recognition, customer service, technical support, and distribution resources[42] - Retail and Wholesale Products Group faces competitors with substantially greater financial resources and market presence, particularly in the cat litter market, which is dominated by mineral-based products[42][43] - Business to Business Products Group competes on price and performance in a global marketplace, with differentiation also in meeting product specifications and engineered granule technologies[45] Patents The company holds and protects patents for its processes and products, which are important but not individually material to the business as a whole - U.S, patents are granted for a term of 20 years from the filing date[46] - Oil-Dri has obtained or applied for patents for certain processes and products in both Retail and Wholesale, and Business to Business segments[46] - Patents are highly important to the business and are vigorously protected, but no single patent is considered material to the business as a whole[46] Backlog; Seasonality The company's order backlog increased to $15.7 million in 2020, and its business is moderately seasonal, influenced by agricultural cycles and weather Order Backlog (Fiscal Years 2020 & 2019) | Fiscal Year | Backlog Value (approx.) | | :---------- | :---------------------- | | 2020 | $15,692,000 | | 2019 | $11,680,000 | - All backlog orders are expected to be filled within the next 12 months[47] - The business is considered moderately seasonal, with certain customer activities (e.g, agricultural chemical manufacturers) subject to seasonal factors like crop acreage, product formulation cycles, and weather[47] Effects of Inflation Inflation impacts the company by increasing costs for wages, transportation, equipment, raw materials, energy, and borrowing - Inflation increases costs for employee wages and benefits, transportation, processing equipment, purchased raw materials and packaging, energy, and borrowings[48] Reserves Oil-Dri holds substantial proven and probable mineral reserves, estimated at over 280 million tons, sufficient for over 40 years of supply at current consumption rates - Proven mineral reserves as of July 31, 2020, were approximately 103,627,000 tons, and probable reserves were approximately 177,074,000 tons, totaling 280,701,000 tons[50] - Proven reserves are estimated to supply needs for over 40 years based on fiscal year 2020 consumption rates, excluding reserves in Nevada, Oregon, and Tennessee[50] - The company's policy is to add reserves at least equal to the amount consumed annually through exploration and acquisitions, subject to federal and state mining and environmental regulations[51] Mining Operations The company conducts surface mining in Mississippi, Georgia, Illinois, and California, transporting extracted clay to nearby processing facilities - Mining operations have been conducted in Ripley, Mississippi (since 1963), Ochlocknee, Georgia (since 1968), Blue Mountain, Mississippi (since 1989), Mounds, Illinois (since 1998), and Taft, California (since 2002)[53] - Clay is surface mined year-round using heavy equipment to remove overburden and load clay for transport to processing facilities, with distances ranging from immediately adjacent to approximately 13 miles[53] Net Book Value of Land & Mineral Rights and Plant & Equipment (July 31, 2020) | Location | Land & Mineral Rights (in thousands) | Plant and Equipment (in thousands) | | :------------------- | :----------------------------------- | :--------------------------------- | | Ochlocknee, Georgia | $8,873 | $32,924 | | Ripley, Mississippi | $1,943 | $13,295 | | Mounds, Illinois | $1,637 | $3,213 | | Blue Mountain, Mississippi | $908 | $9,089 | | Taft, California | $1,747 | $7,178 | Employees As of fiscal year 2020, the company had approximately 803 employees globally, with satisfactory employee relations and no anticipated labor shortages - Approximately 803 employees ('teammates') globally in fiscal year 2020, with 42 employed by foreign subsidiaries[55] - Approximately 45 U.S, and 14 Canadian teammates are represented by labor unions with collective bargaining agreements[55] - Employee relations are considered satisfactory, and no material labor shortages are anticipated[55] Environmental Compliance The company's operations are subject to stringent environmental regulations, and it strives for continuous compliance, with related expenses not being material to date - Operations in Georgia, Mississippi, California, Illinois, and Canada are subject to federal, state, and local environmental statutes and regulations governing material discharge, water, waste, and overall operations[56] - Environmental regulation is increasingly stringent, and the company endeavors to comply with all applicable controls and regulations[56] - Expenditures for environmental compliance and mining site reclamation have increased but have not been material to cost of sales[56] Energy Natural gas is the primary energy source for drying clay, and the company may use forward purchase contracts to mitigate price volatility - Natural gas is primarily used in processing kilns to dry clay products[59] - The company monitors gas market trends and may use forward purchase contracts to mitigate kiln fuel price volatility, but had no such contracts as of July 31, 2020[59] Research and Development The company conducts research and development to create new products and improve existing ones, with all associated costs expensed as incurred - New products and applications are developed, and existing products improved, at the research and development center in Vernon Hills, Illinois, which includes a pilot plant and a new microbiology lab[60] - Staff expertise spans biology, microbiology, chemistry, physics, and other sciences, leading to new sorbent products and processes[60] - All research and development costs are expensed in the period incurred[60] Available Information SEC filings and corporate governance information are available free of charge on the company's website - Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments are available free of charge on the 'Investor Information' section of www.oildri.com[61](index=61&type=chunk) - Corporate governance information, including the Code of Ethics and Business Conduct, executive officer and director information, and Board committees, is also available on the website[61] ITEM 1A – Risk Factors This section details risks affecting the business, including dependence on new products, intense competition, supply chain disruptions, and reliance on major customers - Future growth and financial performance are highly dependent on successful new product introductions in mature categories, which is inherently risky due to research failures, competitive barriers, and market acceptance challenges[65] - The company operates in highly competitive markets, particularly for cat litter, where competitors often have greater financial resources, potentially leading to price reductions, increased promotional spending, or loss of market share[66] - Operating results may be volatile due to fluctuating demand, product mix, changes in operating costs (raw materials, energy, transportation), and the ability to adapt to changing conditions, with COVID-19 exacerbating these fluctuations[67][68][69] - The business is significantly affected by supply, capacity, information technology, and logistics disruptions (e.g, due to public health crises like COVID-19, weather, governmental controls), which could impact manufacturing, packaging, and transportation[83] - Dependence on a limited number of customers (e.g, Walmart, Clorox) for a large portion of net sales poses a risk, as loss or substantial decrease in purchases from these customers could harm sales and profitability[76][77] Risks Related to our Business This sub-section outlines business-specific risks including new product development, intense competition, volatile operating results, and the impacts of COVID-19 - New product introductions are crucial for future growth, but development is risky due to potential research failures, intellectual property barriers, launch difficulties, and customer rejection[65] - Intense competition, especially in cat litter, from companies with greater financial resources, could lead to price reductions, increased promotional spending, or loss of market share[66] - The COVID-19 pandemic has caused changes in consumer purchasing patterns, increased costs, and potential delays, with ongoing uncertainty regarding its full impact on the global economy and business results[70][71] - Acquisitions involve risks such as difficulty in assessing value, potential loss of key customers/employees, integration problems, and impacts on liquidity and capital resources[72][74][75] - Increases in energy, commodity (paper, plastic resins, steel), and transportation costs could reduce profitability if not fully passed on to customers, potentially leading to volume declines[79][82] - Technology failures or cybersecurity breaches could disrupt operations, damage reputation, lead to legal claims, and compromise confidential data and intellectual property[84] - Environmental, health, and safety regulations impose significant costs and potential liabilities, with increasing stringency and the risk of substantial penalties for non-compliance[89][90] - Dependence on mining operations for sorbent minerals exposes the company to risks from weather, natural disasters, equipment failures, and geological variations[95] - Failure to effectively utilize or successfully assert intellectual property rights, or infringement of third-party rights, could adversely affect competitiveness and result in costly litigation[97][98] Risks Related to Our Common Stock This sub-section addresses risks specific to the company's common stock, including control by principal stockholders, its 'controlled company' status, and market price volatility - Principal stockholders, particularly the Jaffee Investment Partnership, L.P, and its affiliates, control matters requiring a stockholder vote due to Class B Stock having ten votes per share, potentially delaying or preventing a change in control[105] - As a 'controlled company' under NYSE rules, Oil-Dri may rely on exemptions from certain corporate governance requirements, such as having a majority of independent directors or fully independent nominating/governance and compensation committees[106] - The market price for Common Stock may be volatile due to fluctuations in operating results, general economic conditions, industry changes, new product announcements, and increases in raw material costs[107] - Future sales of Common Stock by officers, directors, or significant stockholders, or large issuances by the company, could depress its market price, exacerbated by its relatively small public float[108] - Future dividends are discretionary and depend on earnings, cash flow, financial requirements, and other factors; payment could be suspended or discontinued at any time[110] ITEM 1B – Unresolved Staff Comments This section indicates that there are no unresolved comments from the SEC staff regarding the company's previous filings - There are no unresolved staff comments[111] ITEM 2 – Properties The company owns and leases properties for mining and manufacturing, holding significant mineral reserves and operating facilities adequate for its business needs - The company owns or leases land in California, Georgia, Illinois, Mississippi, Nevada, Oregon, and Tennessee, primarily for mineral extraction, with a research and development facility in Illinois and a Canadian processing facility in Quebec[113][115] Real Property Holdings and Mineral Reserves (July 31, 2020) | State | Land Owned (acres) | Land Leased (acres) | Unpatented Claims | Total Land (acres) | Proven Reserves (thousands of tons) | Probable Reserves (thousands of tons) | Total Reserves (thousands of tons) | | :----------- | :----------------- | :------------------ | :---------------- | :----------------- | :---------------------------------- | :------------------------------------ | :--------------------------------- | | California | 795 | — | 1,030 | 1,825 | 3,700 | 11,226 | 14,926 | | Georgia | 3,851 | 1,593 | — | 5,444 | 33,874 | 23,123 | 56,997 | | Illinois | 105 | 508 | — | 613 | 2,557 | 1,596 | 4,153 | | Mississippi | 2,219 | 1,331 | — | 3,550 | 37,180 | 135,128 | 172,308 | | Nevada | 535 | — | — | 535 | 23,316 | 2,976 | 26,292 | | Oregon | 340 | — | — | 340 | — | 25 | 25 | | Tennessee | 178 | — | — | 178 | 3,000 | 3,000 | 6,000 | | Total | 8,023 | 3,432 | 1,030 | 12,485 | 103,627 | 177,074 | 280,701 | - Active production occurs in Mississippi, Georgia, California, and Illinois, collectively producing approximately 756,000 tons of finished product in both fiscal years 2020 and 2019[115] Real Property Holdings and Mineral Reserves The company's real property includes owned and leased land for mineral extraction across several U.S, states and a processing facility in Canada - Properties in Mississippi, Georgia, Tennessee, Nevada, California, and Illinois are primarily mineral in nature, with a research and development facility in Illinois[115] - The company mines sorbent minerals, mainly calcium bentonite, attapulgite, and diatomaceous shale, with estimated reserves prepared by geologists and mineral specialists[115] - Active production occurs in Mississippi, Georgia, California, and Illinois, which collectively produced approximately 756,000 tons of finished product in both fiscal years 2020 and 2019[115] Mining Properties The company conducts mining on owned or leased land, with some California holdings subject to federal mining laws - Mining leases in Georgia, Illinois, and Mississippi typically require minimum monthly rent, applied against royalties for extracted minerals, with many leases having no stated expiration dates[116] - Certain California land holdings are unpatented mining claims leased from the Bureau of Land Management, whose validity depends on factual matters and compliance with federal, state, and local mining laws[117] - Future amendments to federal mining laws, such as imposing royalty fees or restructuring the patent system, could impact the economic viability of mining unpatented claims[117] Mining and Manufacturing Methods The company uses open-pit mining to extract clay, which is then processed through crushing, screening, and kiln drying to meet customer specifications - Clay is mined in open-pit mines in Georgia, Mississippi, Illinois, and California, involving stripping overburden, excavating, and hauling clay to processing plants[119] - Processing varies by desired moisture level (RVM or LVM), involving primary crushing, disintegrating, kiln drying, and a series of mills and screens to achieve specific particle sizes[121][122][123] - Finished products are sized and packaged in various forms, from bags and boxes to railcars, based on customer requirements, with some products undergoing further processing or additive application[124][125] Facilities The company operates numerous manufacturing and non-clay production facilities across the U.S, and internationally, all of which are in good condition - The company operates manufacturing, packaging, sales, customer service, and R&D facilities in various locations, including Alpharetta (GA), Blue Mountain (MS), Chicago (IL), Coppet (Switzerland), Jakarta (Indonesia), Jalisco (Mexico), Laval (Canada), Mounds (IL), Ochlocknee (GA), Ripley (MS), Shenzhen (China), Taft (CA), Vernon Hills (IL), and Wisbech (UK)[128] - Lease expiration dates for these facilities range from year-to-year for Coppet and Jakarta to 2033 for Chicago[128][129] - All properties are considered to be in good condition, well maintained, and adequate for business operations, with no mortgages on owned real property[129] ITEM 3 – Legal Proceedings The company is involved in ordinary legal actions incidental to its business, none of which are expected to have a material adverse effect - The company is party to various legal actions that are ordinary in nature and incidental to business operations[130] - Management believes that none of the pending proceedings will have a material adverse effect on the business, financial condition, results of operations, or cash flows[130] ITEM 4 – Mine Safety Disclosure The company's mining operations are regulated by the Federal Mine Safety and Health Act of 1977, with related disclosures provided in Exhibit 95 - Mining operations are subject to regulation by the Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977[131] - Information concerning mine safety violations or other regulatory matters is included in Exhibit 95 to this Annual Report on Form 10-K[131] PART II ITEM 5 – Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details the trading market for the company's stock, dividend policy, and recent equity repurchases - Oil-Dri's Common Stock is traded on the NYSE under the symbol ODC; there is no established trading market for Class B Stock[134] - As of September 30, 2020, there were 684 holders of record for Common Stock and 23 for Class B Stock[134] - Dividends are declared at the discretion of the Board of Directors, contingent on future earnings, capital requirements, financial condition, and compliance with debt covenants (e.g, minimum net worth levels)[135] Issuer Purchases of Equity Securities (Three Months Ended July 31, 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :----------------- | :--------------------- | :--------------------------- | | July 1, 2020 to July 31, 2020 | 25,667 | $35.92 | - As of July 31, 2020, the company had remaining authority to repurchase 887,934 shares of Common Stock and 288,925 shares of Class B Stock[187] ITEM 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance for fiscal year 2020, where net sales grew 2% to $283.2 million and net income rose 50% to $18.9 million - Consolidated net sales increased by $6.2 million (2%) to $283.2 million in fiscal year 2020, an all-time high, compared to $277.0 million in fiscal year 2019[142][151] - Income from operations increased by $14.4 million (138%) in fiscal year 2020, driven by a decrease in cost of sales and a one-time $13.0 million receipt from patent licensing[142] - Consolidated net income for fiscal year 2020 was $18.9 million ($2.65 per diluted common share), a 50% increase from $12.6 million ($1.80 per diluted common share) in fiscal year 2019[143] - COVID-19 led to increased cat litter sales due to consumer stockpiling but negatively impacted sales of industrial, sports, agricultural, and fluids purification products[146][147] - Cash and cash equivalents increased to $40.9 million as of July 31, 2020, from $21.9 million in 2019, supported by operating cash flows, borrowings, and the patent licensing receipt[167] Overview Consolidated net sales rose 2% and income from operations jumped 138% in fiscal 2020, driven by lower costs and a patent licensing payment - Consolidated net sales increased by approximately $6.2 million (2%) in fiscal year 2020, reaching an all-time high of $283.2 million[142][151] - Income from operations increased by $14.4 million (138%), primarily due to decreased cost of sales and a one-time $13.0 million receipt from patent licensing[142] - Net income rose 50% to $18.9 million ($2.65 per diluted common share) in fiscal year 2020[143] - COVID-19 led to increased consumer purchases of cat litter but caused declines in industrial, sports, agricultural, and fluids purification product sales[146][147] - All company facilities, except the China subsidiary (which resumed operations), continued to operate as essential businesses during the pandemic, with no significant disruptions to consolidated gross profit or supply chain[145][148] Results of Operations Fiscal 2020 saw record net sales of $283.2 million, a 2% increase, with gross profit improving significantly to $75.8 million due to lower operational costs Consolidated Financial Highlights (Fiscal Years 2020 vs. 2019) | Metric | FY2020 (in thousands) | FY2019 (in thousands) | Change ($) | Change (%) | | :----------------- | :-------------------- | :-------------------- | :--------- | :--------- | | Net Sales | $283,227 | $277,025 | $6,202 | 2% | | Cost of Sales | $(207,404) | $(211,365) | $3,961 | -1.9% | | Gross Profit | $75,823 | $65,660 | $10,163 | 15.5% | | Gross Margin | 27% | 24% | 3 pp | | | Other Operating Income | $13,000 | $0 | $13,000 | N/A | | Selling, General and Administrative Expenses | $(63,996) | $(55,248) | $(8,748) | 15.8% | | Income from Operations | $24,827 | $10,412 | $14,415 | 138.4% | | Net Income | $18,740 | $12,615 | $6,125 | 48.5% | - Gross profit increased due to lower freight costs (down 18% per manufactured ton), natural gas costs (down 29% per manufactured ton), and warehouse costs[152] - Total selling, general and administrative expenses increased by 16% in fiscal year 2020, driven by higher advertising costs in Retail and Wholesale, increased annual incentive bonus accrual, and additional 401(k) employer match expense[154] Consolidated Results Consolidated net sales reached a record $283.2 million in fiscal 2020, a 2% increase, with gross margin rising to 27% due to reduced operational costs - Consolidated net sales reached an all-time high of $283,227,000 in fiscal year 2020, an increase of $6,202,000 from fiscal year 2019[151] - Consolidated gross profit increased by $10,163,000 to $75,823,000 in fiscal year 2020, with gross margin rising to 27% from 24% in fiscal year 2019[152] - Primary drivers for gross profit increase were lower freight costs (down 18% per manufactured ton), natural gas costs (down 29% per manufactured ton), and warehouse costs[152] - Total selling, general and administrative expenses were 16% higher in fiscal year 2020, due to increased advertising, higher annual incentive bonus accrual, and additional 401(k) employer match expense[154] Business to Business Products Group This segment's net sales decreased 2% to $104.3 million due to declines in agricultural and fluids purification products, partially offset by growth in other areas Business to Business Products Group Net Sales (Fiscal Years 2020 vs. 2019) | Product Category | FY2020 (in thousands) | FY2019 (in thousands) | Change ($) | Change (%) | | :--------------------------- | :-------------------- | :-------------------- | :--------- | :--------- | | Net Sales | $104,260 | $105,877 | $(1,617) | -2% | | Agricultural and Horticultural | $21,886 | $24,311 | $(2,425) | -10% | | Fluids Purification | $50,117 | $51,905 | $(1,788) | -3% | | Co-packaged Cat Litter | $14,528 | $13,764 | $764 | 6% | | Animal Health and Nutrition | $17,729 | $15,897 | $1,832 | 12% | - Sales of agricultural and horticultural chemical carrier products decreased 10% due to the loss of a large customer and lower demand from agricultural, home, and garden industries impacted by COVID-19[158] - Fluids purification product sales decreased 3% due to a biodiesel processing customer's plant closing, foreign market pricing competition, and reduced demand from restaurant/school closures and jet fuel processing due to COVID-19[158] - Animal health and nutrition product sales increased 12%, with growth in Latin America, Mexico, Africa, and Asia (excluding China), partially offset by declines in North America and product registration/testing delays due to COVID-19[158] - Operating income for the segment remained flat, as sales decreases were offset by lower freight, natural gas, and warehouse costs[160] Retail and Wholesale Products Group This segment's net sales increased 5% to $179.0 million, driven by a 9% rise in cat litter sales, while industrial and sports product sales declined Retail and Wholesale Products Group Net Sales (Fiscal Years 2020 vs. 2019) | Product Category | FY2020 (in thousands) | FY2019 (in thousands) | Change ($) | Change (%) | | :--------------------------- | :-------------------- | :-------------------- | :--------- | :--------- | | Net Sales | $178,967 | $171,148 | $7,819 | 5% | | Total Cat Litter | N/A | N/A | $12,014 | 9% | | Industrial and Sports Products | $29,035 | $33,341 | $(4,306) | -13% | - Cat litter sales increased due to higher consumer demand in anticipation of COVID-19 shortages and store closures, with growth in both private label and branded litters[161] - Industrial and sports product sales decreased 13% due to businesses and sports fields shutting down because of COVID-19[161] - Selling, general and administrative expenses increased by $2,535,000 (15%), primarily due to higher advertising expenses focused on targeted programs and digital media[162] - Segment operating income increased by $7,176,000 to $15,859,000, driven by higher sales and lower freight, fuel, and warehouse costs, partially offset by increased advertising[163] Foreign Subsidiaries Foreign subsidiaries' net sales increased 12% to $15.2 million, driven by Canadian cat litter sales, though the segment reported an overall net loss Foreign Subsidiaries Financial Performance (Fiscal Years 2020 vs. 2019) | Metric | FY2020 (in thousands) | FY2019 (in thousands) | Change ($) | Change (%) | | :----------------- | :-------------------- | :-------------------- | :--------- | :--------- | | Net Sales | $15,220 | $13,556 | $1,664 | 12% | | Net Income (Loss) | $(1,308) | $155 | $(1,463) | -943.9% | | Identifiable Assets | $12,586 | $10,195 | $2,391 | 23.5% | - The increase in foreign sales was primarily due to higher sales by the Canadian subsidiary, driven by increased consumer demand for cat litter during COVID-19 and new products/customers[164] - Sales of animal health products in China were negatively impacted by the African swine fever and COVID-19, leading to a loss for the Chinese subsidiary[164][165] - Foreign subsidiaries' net sales represented 5% of consolidated net sales in both fiscal years 2020 and 2019[164] Liquidity and Capital Resources The company's liquidity strengthened, with cash increasing to $40.9 million, supported by operating activities, new borrowings, and a patent licensing receipt Consolidated Statements of Cash Flows (Fiscal Years 2020 vs. 2019) | Cash Flow Activity | FY2020 (in thousands) | FY2019 (in thousands) | Change ($) | | :----------------------------- | :-------------------- | :-------------------- | :--------- | | Net cash provided by operating activities | $42,462 | $26,743 | $15,719 | | Net cash used in investing activities | $(14,677) | $(7,888) | $(6,789) | | Net cash used in financing activities | $(8,750) | $(9,886) | $1,136 | | Net increase in cash and cash equivalents | $19,028 | $9,105 | $9,923 | - Cash and cash equivalents increased to $40,890,000 as of July 31, 2020, from $21,862,000 in 2019[167] - The increase in cash was driven by $10 million in borrowings and a one-time $13 million patent licensing receipt[167] - Net cash provided by operating activities increased to $42.5 million in fiscal year 2020, up from $26.7 million in 2019[169] - The company has a $45 million unsecured revolving credit agreement with BMO Harris, expiring January 31, 2024, with no outstanding borrowings as of July 31, 2020[185] - In May 2020, the company issued $10 million in 3.95% Series B Senior Notes due May 15, 2030, and has the ability to request up to an additional $75 million in Shelf Notes[186] Off Balance Sheet Arrangements The company does not have any unconsolidated special purpose entities or material off-balance sheet arrangements - The company does not have any unconsolidated special purpose entities[190] - As of July 31, 2020, there are no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources[190] Critical Accounting Policies and Estimates This section highlights critical accounting policies requiring significant management judgment, including income taxes, trade promotions, and pension benefit costs - Significant estimates include income taxes, promotional programs, pension accounting, and allowance for doubtful accounts, which require management judgment and can affect reported amounts[192] - Income Taxes: Effective tax rate determination, deferred tax asset realization, and valuation allowances (e.g, $923,000 for foreign net operating loss carryforwards in FY2020) involve significant judgment[193][195][196] - Trade Promotions: Promotional reserves ($1,843,000 in FY2020) are estimated based on historical patterns, current trends, and forecast data for sales incentives[198] - Pension and Postretirement Benefit Costs: Actuarial models require critical assumptions for discount rates and expected return on plan assets, which are evaluated annually[199][200] - Trade Receivables: An allowance for doubtful accounts ($1,078,000 in FY2020) is recorded based on historical experience, aging, customer credit risk, and specific account analysis[202] - Inventories: Valued at the lower of cost (FIFO) or market, with an obsolescence reserve ($926,000 in FY2020) based on detailed review of inventory items, levels, deterioration, and market trends[204] - Impairment of goodwill, trademarks and other intangible assets: Reviewed periodically for impairment based on cash flow and other considerations, with no impairment identified in fiscal years 2020 or 2019[207] New Accounting Pronouncements The company adopted ASC 842, Leases, on August 1, 2019, and is evaluating the impact of new guidance on reference rate reform, income taxes, and credit losses - Adopted ASC 842, Leases, on August 1, 2019, resulting in the recognition of $9,348,000 in ROU assets and $10,910,000 in lease liabilities, with no material impact on other consolidated financial statements[208] - Evaluating ASC 848, Reference Rate Reform (effective immediately, applied prospectively), for potential effects on debt, leases, contracts, and hedging relationships[209] - Evaluating ASC 740, Income Taxes (effective Q1 FY2022), which simplifies accounting for income taxes by removing specific exceptions and clarifying existing guidance[210] - Evaluating ASC 326, Financial Instruments-Credit Losses (effective Q1 FY2023), which requires an impairment model for financial assets based on expected losses[211] ITEM 8 – Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2020 and 2019, along with extensive supplementary notes - The section includes the Consolidated Balance Sheets, Statements of Operations, Comprehensive Income, Stockholders' Equity, and Cash Flows for fiscal years ended July 31, 2020 and 2019[376][377][378][379][380] - Detailed Notes to the Consolidated Financial Statements provide additional information on accounting policies, operating segments, debt, financial instruments, income taxes, and other critical financial areas[381] Consolidated Balance Sheets The balance sheets show total assets increased to $235.9 million in 2020, driven by higher cash and new right-of-use assets Consolidated Balance Sheet Highlights (July 31, 2020 vs. 2019) | Item | 2020 (in thousands) | 2019 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Total Current Assets | $108,420 | $89,276 | | Total Property, Plant and Equipment, Net | $92,948 | $90,798 | | Total Other Assets | $34,514 | $25,153 | | Total Assets | $235,882 | $205,227 | | Total Current Liabilities | $46,207 | $32,606 | | Total Noncurrent Liabilities | $41,711 | $37,075 | | Total Liabilities | $87,918 | $69,681 | | Total Stockholders' Equity | $147,964 | $135,546 | - Cash and cash equivalents increased significantly from $21.9 million in 2019 to $40.9 million in 2020[215] - Operating lease right-of-use assets and corresponding liabilities were recognized in 2020 due to the adoption of ASC 842, totaling $9.8 million and $11.3 million (current and long-term), respectively[215][217] - Notes payable (noncurrent) increased from $3.1 million in 2019 to $8.8 million in 2020, reflecting new debt issuance[217] Consolidated Statements of Operations Net sales increased 2% to $283.2 million in 2020, while net income rose 50% to $18.9 million, boosted by a $13 million patent license payment Consolidated Statements of Operations Highlights (Fiscal Years 2020 vs. 2019) | Item | 2020 (in thousands) | 2019 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Net Sales | $283,227 | $277,025 | | Cost of Sales | $(207,404) | $(211,365) | | Gross Profit | $75,823 | $65,660 | | Other Operating Income | $13,000 | — | | Selling, General and Administrative Expenses | $(63,996) | $(55,248) | | Income from Operations | $24,827 | $10,412 | | Total Other (Expense) Income, Net | $(1,807) | $4,136 | | Income Before Income Taxes | $23,020 | $14,548 | | Income Tax Expense | $(4,280) | $(1,933) | | Net Income Attributable to Oil-Dri | $18,900 | $12,611 | | Net Income Per Share (Diluted Common) | $2.65 | $1.80 | - Other Operating Income of $13,000,000 in fiscal year 2020 was a one-time receipt from licensing certain patents[220][271] - Total Other (Expense) Income, Net shifted from an income of $4,136,000 in 2019 (including net proceeds from legal proceedings) to an expense of $1,807,000 in 2020 (including pension settlement expense)[155][220] Consolidated Statements of Comprehensive Income Comprehensive income increased significantly to $21.7 million in 2020, driven by a positive shift in pension and postretirement benefits Consolidated Statements of Comprehensive Income Highlights (Fiscal Years 2020 vs. 2019) | Item | 2020 (in thousands) | 2019 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Net Income Attributable to Oil-Dri | $18,900 | $12,611 | | Pension and postretirement benefits (net of tax) | $2,897 | $(4,507) | | Cumulative translation adjustment | $(112) | $83 | | Other Comprehensive Income (Loss) | $2,785 | $(4,424) | | Comprehensive Income | $21,685 | $8,187 | - The significant increase in comprehensive income is largely due to a positive change in pension and postretirement benefits, shifting from a loss to an income[222] Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $148.0 million in 2020, driven by net income and other comprehensive income, partially offset by dividends and stock purchases Consolidated Statements of Stockholders' Equity Highlights (July 31, 2020 vs. 2019) | Item | 2020 (in thousands) | 2019 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Balance, July 31 | $135,546 | $131,885 | | Net income | $18,900 | $12,611 | | Other comprehensive income (loss) | $2,785 | $(4,424) | | Dividends declared | $(7,077) | $(6,790) | | Purchases of treasury stock | $(5,541) | $(147) | | Amortization of restricted stock | $3,368 | $2,408 | | Balance, July 31 | $147,964 | $135,546 | - Total stockholders' equity increased by $12,418,000 from July 31, 2019, to July 31, 2020[225] - The increase was primarily due to net income of $18.9 million and other comprehensive income of $2.8 million, partially offset by dividends and treasury stock purchases[225] - The company increased its interest in a non-wholly owned subsidiary from 52.0% to 78.4% for approximately $724,000 on April 1, 2020[225] Consolidated Statements of Cash Flows Net cash from operating activities increased to $42.5 million in 2020, contributing to an overall $19.0 million increase in cash and cash equivalents Consolidated Statements of Cash Flows Highlights (Fiscal Years 2020 vs. 2019) | Cash Flow Activity | 2020 (in thousands) | 2019 (in thousands) | | :----------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $42,462 | $26,743 | | Net cash used in investing activities | $(14,677) | $(7,888) | | Net cash used in financing activities | $(8,750) | $(9,886) | | Net Increase in Cash and Cash Equivalents | $19,028 | $9,105 | | Cash and Cash Equivalents, End of Year | $40,890 | $21,862 | - Net cash provided by operating activities increased by $15.7 million, driven by higher net income and adjustments for non-cash items[229] - Investing activities used $14.7 million, primarily for capital expenditures ($14.7 million), comparable to $15.0 million in 2019[229] - Financing activities used $8.8 million, with $10 million in new notes payable proceeds partially offsetting dividend payments ($7.0 million) and treasury stock purchases ($5.5 million)[229] Notes to the Consolidated Financial Statements These notes provide detailed disclosures on accounting policies, financial instruments, debt, equity, and other significant financial information - The notes detail significant accounting policies, including revenue recognition, inventory valuation, and treatment of intangibles and goodwill[233][241][243][259] - Disclosures cover operating segments, debt agreements (including a new $10 million Series B Senior Note and a $45 million revolving credit facility), and fair value measurements of financial instruments[277][285][289][294] - Extensive information is provided on pension and other postretirement benefits, including plan amendments, curtailments, settlements, obligations, funded status, and actuarial assumptions[311][314][317][321] - Details on stock-based compensation, deferred compensation plans, income taxes (including deferred taxes and valuation allowances), and lease accounting under ASC 842 are also included[302][308][330][336] NOTE 1 – Summary of Significant Accounting Policies This note outlines the company's core accounting principles, including consolidation, use of estimates, revenue recognition, and the adoption of new standards - The Consolidated Financial Statements include Oil-Dri Corporation of America and its subsidiaries, with all significant intercompany balances eliminated[234] - Inventories are valued at the lower of cost (FIFO) or net realizable value, with an obsolescence reserve of $926,000 in FY2020 (vs, $704,000 in FY2019) due to improved inventory management[241] - Intangible assets are amortized over 4 to 20 years, with a weighted average of 5.9 years for amortizable assets, Goodwill and indefinite-lived intangibles are reviewed annually for impairment, with no impairment found in FY2020 or FY2019[243][245][247] - Revenue is recognized when performance obligations are satisfied, typically upon shipment or receipt of finished products by customers[259] - The company adopted ASC 842, Leases, on August 1, 2019, recognizing $9.3 million in ROU assets and $10.9 million in lease liabilities, with no material impact on other consolidated financial statements[272] - Other Operating Income in FY2020 included a one-time $13,000,000 payment from a confidential non-exclusive, perpetual patent license agreement[271] NOTE 2 – Operating Segments The company operates two reportable segments, with the Retail and Wholesale group generating $179.0 million in sales and the Business to Business group generating $104.3 million - The two reportable operating segments are the Retail and Wholesale Products Group and the Business to Business Products Group, managed separately due to different customer characteristics[277] Net Sales and Operating Income by Segment (Fiscal Years 2020 vs. 2019) | Segment | Net Sales 2020 (in thousands) | Net Sales 2019 (in thousands) | Income 2020 (in thousands) | Income 2019 (in thousands) | | :--------------------------- | :---------------------------- | :---------------------------- | :------------------------- | :------------------------- | | Business to Business Products | $104,260 | $105,877 | $31,218 | $31,388 | | Retail and Wholesale Products | $178,967 | $171,148 | $15,859 | $8,683 | Sales to Unaffiliated Customers by Geographic Region (Fiscal Years 2020 vs. 2019) | Region | 2020 (in thousands) | 2019 (in thousands) | | :----------------- | :------------------ | :------------------ | | Domestic operations | $268,007 | $263,469 | | Foreign subsidiaries | $15,220 | $13,556 | Walmart's Contribution to Sales and Receivables (Fiscal Years 2020 vs. 2019) | Metric | 2020 | 2019 | | :------------------------- | :--- | :--- | | Net sales for the years ended July 31 | 19% | 20% | | Net accounts receivable as of July 31 | 18% | 26% | NOTE 3 – Debt The company's debt includes a $45 million revolving credit agreement and $10 million in 3.95% Series B Senior Notes due 2030 Notes Payable Composition (July 31, 2020 vs. 2019) | Item | 2020 (in thousands) | 2019 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Senior notes payable (3.96%) | $0 | $6,167 | | Amended and Restated Note Purchase and Private Shelf Agreement (3.95%) | $10,000 | $0 | | Less current maturities | $(1,000) | $(3,083) | | Less unamortized debt issuance costs | $(152) | $(32) | | Noncurrent notes payable | $8,848 | $3,052 | - On May 15, 2020, the company issued $10,000,000 in 3.95% Series B Senior Notes due May 15, 2030, and repaid $3,100,000 of Series A Notes[286][287] - The Amended Note Agreement provides the ability to request up to an additional $75,000,000 in Shelf Notes until May 15, 2023, on an uncommitted basis[287] - A $45,000,000 unsecured revolving credit agreement with BMO Harris expires on January 31, 2024, with no outstanding borrowings as of July 31, 2020, but $1,284,000 in outstanding letters of credit[289][291] - The company was in compliance with all restrictive covenants and limitations of its debt agreements as of July 31, 2020[292] NOTE 4 – Financial Instruments This note details fair value measurements, classifying cash equivalents as Level 1 and notes payable as Level 2, and addresses credit risk concentration - Cash equivalents ($6,000 in FY2020) are classified as Level 1 in the fair value hierarchy, valued using quoted market prices in active markets[296] - The estimated fair value of notes payable was $11,631,000 as of July 31, 2020 (vs, $6,357,000 in FY2019), classified as Level 2, reflecting the new debt agreement[298] - Cash balances exceed the maximum amount insured by the Federal Deposit Insurance Corporation[300] - Concentrations of credit risk for accounts receivable are primarily with major customers, notably Walmart, and collateral is generally not required[300] NOTE 5 – Income Taxes Total income tax expense increased to $4.3 million in 2020, with an effective tax rate of 18.6%, up from 13.3% in 2019 Provision for Income Tax Expense (Fiscal Years 2020 vs. 2019) | Category | 2020 (in thousands) | 2019 (in thousands) | | :----------------- | :------------------ | :------------------ | | Current Income Tax Total | $4,772 | $882 | | Deferred Income Tax Total | $(492) | $1,051 | | Total Income Tax Expense | $4,280 | $1,933 | Effective Income Tax Rate Reconciliation (Fiscal Years 2020 vs. 2019) | Item | 2020 | 2019 | | :------------------------------------ | :------ | :------ | | U.S, federal income tax rate | 21.0 % | 21.0 % | | Depletion deductions allowed for mining | (4.8) | (8.2) | | State income tax expense, net of federal tax expense | 4.3 | 2.5 | | Difference in effective tax rate of foreign subsidiaries | 1.2 | 0.2 | | Prior year income taxes | (1.0) | (1.9) | | Other | (2.1) | (0.3) | | Effective income tax rate | 18.6 %| 13.3 %| - A valuation allowance of $923,000 was recorded as of July 31, 2020 (vs, $732,000 in FY2019), for deferred tax benefits related to foreign net operating loss carryforwards, as realization is deemed unlikely[303] - No material liability for unrecognized tax benefits was recorded as of July 31, 2020 or 2019[304] NOTE 6 – Accumulated Other Comprehensive (Loss) Income Accumulated other comprehensive loss improved to $12.3 million in 2020 from $15.0 million in 2019, driven by a pension plan curtailment/settlement gain Changes in Accumulated Other Comprehensive Income (Loss) by Component (Fiscal Years 2020 vs. 2019) | Component | July 31, 2019 (in thousands) | Net Current-Period OCI (Loss) (in thousands) | July 31, 2020 (in thousands) | | :-------------------------------------- | :--------------------------- | :------------------------------------------- | :--------------------------- | | Pension and Postretirement Health Benefits | $(14,891) | $2,897 | $(11,994) | | Cumulative Translation Adjustment | $(148) | $(112) | $(260) | | Total Accumulated Other Comprehensive (Loss) Income | $(15,039) | $2,785 | $(12,254) | - A curtailment/settlement gain of $6,570,000 (net of tax) on the Pension Plan was recognized in other comprehensive income in fiscal year 2020[306] - Other comprehensive income (loss) for pension and postretirement benefits shifted from a loss of $4,507,000 in 2019 to an income of $2,897,000 in 2020[306] NOTE 7 – Stock-Based Compensation The company's 2006 Long Term Incentive Plan provides for stock-based awards, with related compensation expense totaling $2.6 million in fiscal 2020 - The 2006 Long Term Incentive Plan permits grants of stock options, restricted stock, and other awards to employees and outside directors, with 370,836 shares available for future grants as of July 31, 2020[307] Restricted Stock Transactions (July 31, 2020 vs. 2019) | Item | Number of Shares (in thousands) | Weighted Average Grant Date Fair Value | | :------------------------------------ | :------------------------------ | :------------------------------------- | | Non-vested restricted stock outstanding at July 31, 2019 | 414 | $33.09 | | Granted | 26 | $33.57 | | Vested | (44) | $32.53 | | Forfeited | (6) | $32.46 | | Non-vested restricted stock outstanding at July 31, 2020 | 390 | $33.19 | - Stock-based compensation expense for restricted stock was $2,560,000 in fiscal year 2020, compared to $1,834,000 in fiscal year 2019[310] NOTE 8 – Pension and Other Postretirement Benefits The Pension Plan was frozen in 2020, resulting in a curtailment gain and settlement expense, while its funded status improved significantly - The Pension Plan was amended and frozen effective March 1, 2020, ceasing future benefit accruals and leading to a curtailment gain of approximately $6,632,000 (net of taxes) recorded in Other Comprehensive Income[311] - A lump sum option offered to terminated participants resulted in a settlement expense of $2,012,000 recorded in the Consolidated Statements of Operation in fiscal year 2020[311] Funded Status of Pension and Postretirement Health Benefits (July 31, 2020 vs. 2019) | Item | Pension Benefits 2020 (in thousands) | Pension Benefits 2019 (in thousands) | Postretirement Health Benefits 2020 (in thousands) | Postretirement Health Benefits 2019 (in thousands) | | :------------------------------------ | :-------------------