Oil-Dri of America(ODC) - 2022 Q2 - Quarterly Report

Forward-Looking Statements This section clarifies that the report contains forward-looking statements subject to risks and that the company has no obligation to update them publicly - The report contains forward-looking statements based on current expectations, estimates, forecasts, and projections about future performance, business, beliefs, and management's assumptions[7] - Such statements are subject to certain risks, uncertainties, and assumptions that could cause actual results to differ materially, as described in Item 1A, Risk Factors[8] - The company has no intention or obligation to update publicly any forward-looking statements after the distribution of this report, except to the extent required by law[8] Trademark Notice This section identifies "Oil-Dri" and "Ultra-Clear" as registered trademarks of Oil-Dri Corporation of America - "Oil-Dri" and "Ultra-Clear" are registered trademarks of Oil-Dri Corporation of America[10] PART I – FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, and disclosures on controls and procedures Item 1. Financial Statements This section provides the unaudited condensed consolidated financial statements, including the balance sheet, income statements, comprehensive income statements, statements of stockholders' equity, and cash flow statements, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items Condensed Consolidated Balance Sheet The balance sheet shows an increase in total assets driven by current assets and property, plant, and equipment, alongside a significant rise in total liabilities, primarily noncurrent notes payable, while stockholders' equity decreased Balance Sheet Summary | Metric | Jan 31, 2022 (in thousands) | July 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :------------------------- | :-------------------- | | Total Current Assets | $116,754 | $101,942 | +$14,812 | | Total Property, Plant and Equipment, Net | $99,861 | $95,940 | +$3,921 | | Total Other Assets | $30,599 | $29,684 | +$915 | | Total Assets | $247,214 | $227,566 | +$19,648 | | Total Current Liabilities | $38,872 | $38,990 | -$118 | | Total Noncurrent Liabilities | $55,051 | $29,344 | +$25,707 | | Total Liabilities | $93,923 | $68,334 | +$25,589 | | Total Stockholders' Equity | $153,291 | $159,232 | -$5,941 | | Total Liabilities & Stockholders' Equity | $247,214 | $227,566 | +$19,648 | - Cash and cash equivalents increased from $24,591 thousand at July 31, 2021, to $29,009 thousand at January 31, 2022[12] - Noncurrent notes payable significantly increased from $7,878 thousand at July 31, 2021, to $32,778 thousand at January 31, 2022[14] Condensed Consolidated Statements of Income (Six Months) For the six months, net sales increased, but gross profit, income from operations, and net income attributable to Oil-Dri significantly decreased due to rising costs, leading to a substantial drop in diluted common EPS Six-Month Income Statement Summary | Metric | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :------------------------ | :------------- | | Net Sales | $169,670 | $150,597 | +$19,073 | +12.7% | | Cost of Sales | $(140,266) | $(115,128) | -$(25,138) | +21.8% | | Gross Profit | $29,404 | $35,469 | -$6,065 | -17.1% | | Income from Operations | $2,363 | $9,421 | -$7,058 | -74.9% | | Net Income Attributable to Oil-Dri | $2,587 | $8,283 | -$5,696 | -68.8% | | Diluted Common EPS | $0.37 | $1.17 | -$0.80 | -68.4% | - Dividends declared per share for Basic Common Stock increased from $0.5200 in 2021 to $0.5400 in 2022[16] Condensed Consolidated Statements of Comprehensive Income (Six Months) Total comprehensive income for the six months significantly decreased, primarily reflecting the decline in net income and a negative shift in other comprehensive income Six-Month Comprehensive Income Summary | Metric | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :------------------------ | :------------- | | Net Income Attributable to Oil-Dri | $2,587 | $8,283 | -$5,696 | -68.8% | | Other Comprehensive (Loss) Income | $(41) | $737 | -$778 | -105.6% | | Total Comprehensive Income | $2,546 | $9,020 | -$6,474 | -71.8% | Condensed Consolidated Statements of Income (Three Months) For the three months, net sales increased, but gross profit, income from operations, and net income attributable to Oil-Dri decreased, resulting in a notable reduction in diluted common EPS Three-Month Income Statement Summary | Metric | Three Months Ended Jan 31, 2022 (in thousands) | Three Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------ | :------------- | | Net Sales | $87,210 | $74,500 | +$12,710 | +17.1% | | Cost of Sales | $(71,624) | $(57,811) | -$(13,813) | +23.9% | | Gross Profit | $15,586 | $16,689 | -$1,103 | -6.6% | | Income from Operations | $1,918 | $4,244 | -$2,326 | -54.8% | | Net Income Attributable to Oil-Dri | $2,002 | $4,299 | -$2,297 | -53.4% | | Diluted Common EPS | $0.28 | $0.61 | -$0.33 | -54.1% | - Dividends declared per share for Basic Common Stock increased from $0.2600 in 2021 to $0.2700 in 2022[22] Condensed Consolidated Statements of Comprehensive Income (Three Months) Total comprehensive income for the three months significantly decreased, primarily reflecting the decline in net income and a negative shift in other comprehensive income Three-Month Comprehensive Income Summary | Metric | Three Months Ended Jan 31, 2022 (in thousands) | Three Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------ | :------------- | | Net Income Attributable to Oil-Dri | $2,002 | $4,299 | -$2,297 | -53.4% | | Other Comprehensive (Loss) Income | $(34) | $337 | -$371 | -110.1% | | Total Comprehensive Income | $1,968 | $4,636 | -$2,668 | -57.5% | Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased, influenced by increased treasury stock purchases and dividends declared, partially offset by an increase in additional paid-in capital Stockholders' Equity Summary | Metric | Jan 31, 2022 (in thousands) | July 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :------------------------- | :-------------------- | | Total Stockholders' Equity | $153,291 | $159,232 | -$5,941 | | Treasury Stock, at cost | $(72,862) | $(66,154) | -$(6,708) | | Retained Earnings | $179,322 | $180,443 | -$1,121 | | Additional Paid-In Capital | $50,220 | $48,271 | +$1,949 | - Purchases of treasury stock for the six months ended January 31, 2022, amounted to $6,201 thousand[30] - Dividends declared for the six months ended January 31, 2022, totaled $3,708 thousand[30] Condensed Consolidated Statements of Cash Flows Operating cash flow significantly decreased, while investing activities used more cash, and financing activities shifted to a net cash provision due to new debt issuance, resulting in a net increase in cash and cash equivalents Cash Flow Summary | Metric | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :------------------------ | | Net cash provided by operating activities | $61 | $3,085 | -$3,024 | | Net cash used in investing activities | $(10,574) | $(7,595) | -$(2,979) | | Net cash provided by (used in) financing activities | $14,957 | $(5,795) | +$20,752 | | Net increase (decrease) in cash and cash equivalents | $4,418 | $(10,182) | +$14,600 | - Proceeds from issuance of notes payable were $25,000 thousand in the first six months of fiscal year 2022, compared to none in the prior year[32] - Capital expenditures increased from $7,598 thousand in 2021 to $10,574 thousand in 2022[32] Notes To Condensed Consolidated Financial Statements The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information, reflecting normal recurring accruals and reclassifications. An immaterial error in classifying certain production-related costs was corrected, reclassifying them from SG&A to Cost of Sales, with no impact on net income. Key policies include revenue recognition upon transfer of control and specific treatment of mining costs 1. Basis of Presentation and Significant Accounting Policies The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information, reflecting normal recurring accruals and reclassifications. An immaterial error in classifying certain production-related costs was corrected, reclassifying them from SG&A to Cost of Sales, with no impact on net income. Key policies include revenue recognition upon transfer of control and specific treatment of mining costs - The financial statements are unaudited and prepared under U.S. GAAP for interim information, reflecting management's necessary adjustments[37][39] - An immaterial error in classifying manufacturing employee bonuses, 401(k) match, and IT support salaries was corrected, reclassifying $1,483 thousand (3 months) and $3,007 thousand (6 months) from SG&A to Cost of Sales, with no impact on consolidated net income[40][41][42] - Revenue is recognized when performance obligations are satisfied, generally upon shipment to, or receipt at, customers' locations[53] 2. New Accounting Pronouncements and Regulations The company is evaluating the potential impacts of recently issued accounting pronouncements, including ASC 848 (Reference Rate Reform) for debt agreements referencing LIBOR and ASC 326 (Financial Instruments-Credit Losses) which requires an expected loss impairment model for financial assets - The company is evaluating ASC 848 (Reference Rate Reform) for debt agreements that reference LIBOR, which is effective immediately and may be applied prospectively[59] - The company is evaluating ASC 326 (Financial Instruments-Credit Losses), effective for the first quarter of fiscal year 2023, which requires an expected loss impairment model for financial assets[60] 3. Inventories Total inventories increased by 26.3% from July 31, 2021, to January 31, 2022, driven by rising costs and increased inventory levels to meet anticipated demand Inventory Breakdown | Inventory Category | Jan 31, 2022 (in thousands) | July 31, 2021 (in thousands) | Change (in thousands) | Change (%) | | :----------------- | :-------------------------- | :------------------------- | :-------------------- | :--------- | | Finished goods | $15,702 | $14,179 | +$1,523 | +10.7% | | Packaging | $7,877 | $5,084 | +$2,793 | +55.0% | | Other | $6,218 | $4,335 | +$1,883 | +43.4% | | Total Inventories | $29,797 | $23,598 | +$6,199 | +26.3% | - Inventories, in all categories, have increased due to a combination of rising costs and building inventory levels for anticipated demand[62] 4. Fair Value Measurements Fair value measurements are categorized into Level 1, 2, and 3 inputs. Cash equivalents are Level 1, and notes payable are classified as Level 2, with an estimated fair value of $36,985 thousand as of January 31, 2022, significantly higher than July 31, 2021 - Cash equivalents are primarily money market mutual funds classified as Level 1[63] Notes Payable Fair Value | Metric | Jan 31, 2022 (in thousands) | July 31, 2021 (in thousands) | Change (in thousands) | | :-------------------- | :-------------------------- | :------------------------- | :-------------------- | | Estimated fair value of notes payable | $36,985 | $10,231 | +$26,754 | - Fair value techniques are applied annually for valuing potential impairment loss related to goodwill, trademarks, other indefinite-lived intangible assets, and long-lived assets[65] 5. Goodwill and Other Intangible Assets Intangible assets include trademarks, patents, customer lists, and product registrations. Amortization expense for the first six months of fiscal year 2022 was $253 thousand. No goodwill impairment was identified in the last annual analysis, and no triggering events have occurred since Intangible Amortization Expense | Metric | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :------------------------ | | Intangible amortization expense | $253 | $305 | -$52 | - Estimated intangible amortization for the remainder of fiscal year 2022 is $233 thousand[66] - The annual goodwill impairment analysis in Q4 fiscal year 2021 identified no impairment, and no triggering events have occurred since[68] 6. Accrued Expenses Total accrued expenses decreased by 4.3% from July 31, 2021, to January 31, 2022, primarily due to lower salaries, wages, commissions, and employee benefits, partially offset by increases in trade promotions, advertising, and other accruals Accrued Expenses Breakdown | Accrued Expense Category | Jan 31, 2022 (in thousands) | July 31, 2021 (in thousands) | Change (in thousands) | Change (%) | | :----------------------- | :-------------------------- | :------------------------- | :-------------------- | :--------- | | Salaries, Wages, Commissions and Employee Benefits | $9,097 | $10,806 | -$1,709 | -15.8% | | Trade promotions and advertising | $2,178 | $1,653 | +$525 | +31.8% | | Freight | $3,034 | $2,845 | +$189 | +6.6% | | Real Estate Tax | $228 | $1,002 | -$774 | -77.2% | | Other | $9,265 | $8,577 | +$688 | +8.0% | | Total Accrued Expenses | $23,802 | $24,883 | -$1,081 | -4.3% | - The decrease in salaries, wages, commissions, and employee benefits relates primarily to the payment of annual discretionary bonuses[70] - The accrual for 'Other' is higher due to an increase in accrual for rising natural gas costs and timing of certain plant purchases and expenses[70] 7. Other Contingencies The company is involved in various legal actions, including a lawsuit from a former service provider alleging breach of contract. Management believes none of the pending proceedings will have a material adverse effect on the business, and any loss related to the specific lawsuit is unlikely to be material, though outcomes are subject to uncertainties - The company is party to various legal actions, including ongoing litigation, that are ordinary in nature and incidental to business operations[71] - A lawsuit from a former service provider alleging breach of contract for a contingency fee is considered unlikely to be material, but the ultimate outcome is subject to significant uncertainties[71] 8. Debt The company amended its Note Purchase and Private Shelf Agreement, introducing an excess leverage fee on interest rates if the Net Leverage Ratio exceeds certain thresholds. Concurrent with the amendment, $25 million in Series C Senior Notes were issued at an annual rate of 3.25%, maturing in 2031 with annual principal payments starting in 2027 - Amendment No. 1 to the Note Purchase and Private Shelf Agreement introduces an excess leverage fee (0.25% or 1.00%) if the Net Leverage Ratio is 2.00:1.00 or greater, or greater than 2.50:1.00, respectively[73] - The company issued $25,000,000 in Series C Senior Notes on December 16, 2021, bearing interest at an annual rate of 3.25% and maturing on December 16, 2031[74] - Annual principal payments of $5,000,000 for the Series C Notes are due December 16 of each fiscal year, beginning in 2027 and ending in 2031[74] 9. Leases The company primarily has operating leases for real estate and equipment, with a weighted-average remaining lease term of 8.8 years and a weighted-average discount rate of 3.86% as of January 31, 2022. Total operating lease costs for the six months ended January 31, 2022, were $1,352 thousand - The company has operating leases primarily for real estate properties, rail tracks, railcars, and office equipment[76] Operating Lease Terms and Rates | Metric | Jan 31, 2022 | July 31, 2021 | | :------------------------------------ | :----------- | :------------ | | Weighted-average remaining lease term - operating leases | 8.8 years | 9.1 years | | Weighted-average discount rate - operating leases | 3.86% | 3.88% | Operating Lease Costs | Lease Cost Category | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | | :------------------ | :----------------------------------- | :----------------------------------- | | Operating lease cost | $1,352 | $1,352 | | Short-term operating lease cost | $308 | $362 | 10. Pension and Other Postretirement Benefits The company's Pension Plan was frozen for participation and benefit accruals effective March 1, 2020. Net periodic pension benefit cost for the six months ended January 31, 2022, was a benefit of $687 thousand, while postretirement health benefit cost was $87 thousand. The Supplemental Executive Retirement Plan (SERP) was terminated in June 2020, with all participants paid in July 2021 - The Oil-Dri Corporation of America Pension Plan was amended to freeze participation and all future benefit accruals effective March 1, 2020[78] Net Periodic Benefit Costs | Benefit Cost Component | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | | :--------------------- | :----------------------------------- | :----------------------------------- | | Net periodic pension benefit cost | $(687) | $(426) | | Net periodic postretirement health benefit cost | $87 | $93 | - The Supplemental Executive Retirement Plan (SERP) was terminated effective June 30, 2020, and all participants were paid in the form of one lump sum in July 2021[84] 11. Operating Segments The company operates in two reportable segments: Business to Business Products Group and Retail and Wholesale Products Group. For the six months ended January 31, 2022, the Retail and Wholesale Products Group generated higher net sales ($108,117 thousand) but significantly lower operating income ($1,000 thousand) compared to the Business to Business Products Group ($61,553 thousand net sales, $14,336 thousand operating income) - The company has two operating segments: Business to Business Products Group and Retail and Wholesale Products Group, which are managed separately due to different customer characteristics[85] Net Sales by Operating Segment | Segment | Six Months Ended Jan 31, 2022 (Net Sales, in thousands) | Six Months Ended Jan 31, 2021 (Net Sales, in thousands) | YoY Change (Net Sales, in thousands) | YoY Change (Net Sales, %) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :----------------------------------- | :------------------------ | | Business to Business Products Group | $61,553 | $53,805 | +$7,748 | +14.4% | | Retail and Wholesale Products Group | $108,117 | $96,792 | +$11,325 | +11.7% | | Total Net Sales | $169,670 | $150,597 | +$19,073 | +12.7% | Operating Income by Operating Segment | Segment | Six Months Ended Jan 31, 2022 (Income, in thousands) | Six Months Ended Jan 31, 2021 (Income, in thousands) | YoY Change (Income, in thousands) | YoY Change (Income, %) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------------------- | :--------------------- | | Business to Business Products Group | $14,336 | $14,713 | -$377 | -2.6% | | Retail and Wholesale Products Group | $1,000 | $6,728 | -$5,728 | -85.1% | | Corporate Expenses | $(12,973) | $(12,020) | -$(953) | +7.9% | | Income from Operations | $2,363 | $9,421 | -$7,058 | -74.9% | 12. Stock-Based Compensation The company's 2006 Long Term Incentive Plan allows for various stock-based awards. Stock-based compensation expense for the six months ended January 31, 2022, was $1,453 thousand, with 107 thousand restricted shares granted and 56 thousand vested during the period - The 2006 Long Term Incentive Plan permits the grant of stock options, restricted stock, and other awards, with 260,356 shares available for future grants as of January 31, 2022[91] Stock-Based Compensation Expense | Metric | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :------------------------ | | Stock-based compensation expense | $1,453 | $1,290 | +$163 | Restricted Stock Activity | Restricted Stock Activity | Shares (in thousands) | Weighted Average Grant Date Fair Value | | :------------------------ | :-------------------- | :------------------------------------- | | Non-vested outstanding at July 31, 2021 | 370 | $33.96 | | Granted | 107 | $34.56 | | Vested | (56) | $35.20 | | Forfeitures | (14) | $35.20 | | Non-vested outstanding at January 31, 2022 | 407 | $33.90 | 13. Accumulated Other Comprehensive (Loss) Income Accumulated other comprehensive loss increased from $4,117 thousand at July 31, 2021, to $4,158 thousand at January 31, 2022, primarily due to a cumulative translation adjustment loss of $94 thousand, partially offset by a gain in pension and postretirement benefits Accumulated Other Comprehensive Income Components | Component | July 31, 2021 (in thousands) | Jan 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :--------------------------- | :-------------------------- | :-------------------- | | Pension and Postretirement Health Benefits | $(4,428) | $(4,375) | +$53 | | Cumulative Translation Adjustment | $311 | $217 | -$94 | | Total Accumulated Other Comprehensive (Loss) Income | $(4,117) | $(4,158) | -$(41) | 14. Related Party Transactions The company engages in transactions with entities where its Board members hold executive positions. Net sales to a customer whose former CEO is a Board member were $156 thousand for the six months ended January 31, 2022. Payments to a vendor whose CEO is a Board member were $565 thousand for the same period Related Party Transaction Summary | Transaction Type | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | | :--------------- | :----------------------------------- | :----------------------------------- | | Net sales to customer (Board member's former employer) | $156 | $181 | | Payments to vendor (Board member's current employer) | $565 | $201 | Item 2. Management's Discussion and Analysis of Financial Condition and Results Of Operations This section provides management's perspective on the company's financial performance and condition, discussing the impact of COVID-19, detailed results of operations for consolidated and segment-level performance, liquidity, capital resources, and critical accounting policies Overview Oil-Dri Corporation of America develops, mines, manufactures, and markets sorbent products from clay minerals, serving two primary customer groups: Retail and Wholesale, and Business to Business. The company's facilities have operated as essential businesses during COVID-19, but the pandemic has impacted certain product sales and led to increased backlog due to supply chain disruptions and labor shortages - The company develops, mines, manufactures, and markets sorbent products principally produced from clay minerals, serving Retail and Wholesale Products Group and Business to Business Products Group[99] - All company facilities operated as essential businesses during COVID-19, but the pandemic negatively impacted some product sales (e.g., animal health and nutrition) and led to increased backlog due to supply chain disruptions and labor shortages[100][101][102] - Gross profit declined in both the second quarter and first six months of fiscal year 2022 compared to the same periods in fiscal year 2021, related to rising costs and supply chain disruptions[102] Results of Operations This section details the financial performance for both the six-month and three-month periods ended January 31, 2022, compared to the prior year, analyzing consolidated results and performance across the Business to Business Products Group, Retail and Wholesale Products Group, and Foreign Operations, highlighting sales growth, cost pressures, and impacts of the pandemic Six Months Ended January 31, 2022 Compared to Six Months Ended January 31, 2021 This section compares the company's consolidated and segment-level financial performance for the six months ended January 31, 2022, against the prior year, detailing sales, costs, and operating income trends Consolidated Results Consolidated net sales increased, but gross profit and income from operations significantly declined due to rising costs, despite a moderate increase in SG&A expenses Six-Month Consolidated Financial Highlights | Metric | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :------------------------ | :------------- | | Net Sales | $169,670 | $150,597 | +$19,073 | +12.7% | | Gross Profit | $29,404 | $35,469 | -$6,065 | -17.1% | | Income from Operations | $2,363 | $9,421 | -$7,058 | -74.9% | | SG&A Expenses | $27,041 | $26,048 | +$993 | +3.8% | - Domestic freight costs per ton increased approximately 35%, packaging costs per ton increased approximately 37%, natural gas cost per ton increased 93%, and non-fuel manufacturing costs per ton increased 14%[106] - Unallocated corporate SG&A expenses were higher by $953 thousand, or 8%, driven by higher professional fees related to growing business needs and strategic initiatives[107] Business to Business Products Group The Business to Business Products Group experienced net sales growth across all categories, but operating income slightly decreased due to higher SG&A expenses Six-Month Business to Business Net Sales by Category | Product Category | Six Months Ended Jan 31, 2022 (Net Sales, in thousands) | Six Months Ended Jan 31, 2021 (Net Sales, in thousands) | YoY Change (in thousands) | YoY Change (%) | | :--------------- | :------------------------------------------ | :------------------------------------------ | :------------------------ | :------------- | | Fluids Purification | $29,540 | $25,406 | +$4,134 | +16.3% | | Agricultural and Horticultural | $13,519 | $12,033 | +$1,486 | +12.4% | | Cat Litter | $9,327 | $7,612 | +$1,715 | +22.5% | | Animal Health and Nutrition | $9,167 | $8,754 | +$413 | +4.7% | Six-Month Business to Business Operating Income and SG&A | Metric | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :---------------- | :----------------------------------- | :----------------------------------- | :------------------------ | :------------- | | Operating Income | $14,336 | $14,713 | -$377 | -2.6% | | SG&A Expenses | $6,771 (estimated) | $5,690 (estimated) | +$1,081 | +19.0% | - SG&A expenses increased due to higher headcount of sales and leadership personnel, increased travel costs, and increased marketing efforts associated with the animal health business[112] Retail and Wholesale Products Group The Retail and Wholesale Products Group saw increased net sales, particularly in industrial and sports products, but a substantial decline in operating income despite lower SG&A expenses Six-Month Retail and Wholesale Net Sales by Category | Product Category | Six Months Ended Jan 31, 2022 (Net Sales, in thousands) | Six Months Ended Jan 31, 2021 (Net Sales, in thousands) | YoY Change (in thousands) | YoY Change (%) | | :--------------- | :------------------------------------------ | :------------------------------------------ | :------------------------ | :------------- | | Cat Litter | $89,141 | $81,879 | +$7,262 | +8.9% | | Industrial and Sports | $17,940 | $13,972 | +$3,968 | +28.4% | Six-Month Retail and Wholesale Operating Income and SG&A | Metric | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :---------------- | :----------------------------------- | :----------------------------------- | :------------------------ | :------------- | | Operating Income | $1,000 | $6,728 | -$5,728 | -85.1% | | SG&A Expenses | $7,900 (estimated) | $8,974 (estimated) | -$1,074 | -12.0% | - Cat litter net sales were boosted by increased pet adoption, the overall macro trend of increased spending on pets, and new customer business[114] Foreign Operations Foreign subsidiaries reported increased total net sales, primarily from Canada, but a significant net loss driven by lower sales in Mexico and increased costs in China Six-Month Foreign Operations Net Sales and Net Loss | Metric | Six Months Ended Jan 31, 2022 (in thousands) | Six Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :------------------------ | :------------- | | Total Net Sales (Foreign Subsidiaries) | $9,626 | $8,839 | +$787 | +8.9% | | Net Loss (Foreign Subsidiaries) | $(812) | $(42) | -$(770) | +1833.3% | - Net sales of the Canadian subsidiary increased by $1,226 thousand, or 27%, driven by higher cat litter sales due to a key customer carrying three new products and price increases[118] - The net loss in foreign operations was primarily driven by lower net sales for the Mexican subsidiary, higher cost of sales, and increased SG&A expenses by the Chinese subsidiary due to investments in animal health and nutrition products[119] Three Months Ended January 31, 2022 Compared to Three Months Ended January 31, 2021 This section compares the company's consolidated and segment-level financial performance for the three months ended January 31, 2022, against the prior year, detailing sales, costs, and operating income trends Consolidated Results Consolidated net sales increased, but gross profit and income from operations significantly declined due to rising costs, alongside an increase in SG&A expenses Three-Month Consolidated Financial Highlights | Metric | Three Months Ended Jan 31, 2022 (in thousands) | Three Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------ | :------------- | | Net Sales | $87,210 | $74,500 | +$12,710 | +17.1% | | Gross Profit | $15,586 | $16,689 | -$1,103 | -6.6% | | Income from Operations | $1,918 | $4,244 | -$2,326 | -54.8% | | SG&A Expenses | $13,668 | $12,445 | +$1,223 | +9.8% | - Domestic freight costs per ton increased approximately 31%, packaging costs per ton increased approximately 30%, natural gas cost per ton increased 90%, and non-fuel manufacturing costs per ton increased 9%[123] - Unallocated corporate SG&A expenses increased due to higher professional fees related to growing business needs and strategic initiatives[124] Business to Business Products Group The Business to Business Products Group achieved net sales growth across all categories, leading to an increase in operating income despite higher SG&A expenses Three-Month Business to Business Net Sales by Category | Product Category | Three Months Ended Jan 31, 2022 (Net Sales, in thousands) | Three Months Ended Jan 31, 2021 (Net Sales, in thousands) | YoY Change (in thousands) | YoY Change (%) | | :--------------- | :------------------------------------------ | :------------------------------------------ | :------------------------ | :------------- | | Fluids Purification | $15,035 | $12,765 | +$2,270 | +17.8% | | Agricultural and Horticultural | $7,311 | $5,046 | +$2,265 | +44.9% | | Cat Litter | $4,691 | $3,736 | +$955 | +25.6% | | Animal Health and Nutrition | $5,587 | $4,736 | +$851 | +18.0% | Three-Month Business to Business Operating Income and SG&A | Metric | Three Months Ended Jan 31, 2022 (in thousands) | Three Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :---------------- | :------------------------------------- | :------------------------------------- | :------------------------ | :------------- | | Operating Income | $7,590 | $7,113 | +$477 | +6.7% | | SG&A Expenses | $3,569 (estimated) | $3,000 (estimated) | +$569 | +19.0% | - Agricultural and horticultural chemical carrier products saw a 45% increase in net sales, driven by volume and a shift in timing of net sales from the first to the second quarter[128] Retail and Wholesale Products Group The Retail and Wholesale Products Group experienced increased net sales, but a substantial decline in operating income, despite relatively stable SG&A expenses Three-Month Retail and Wholesale Net Sales by Category | Product Category | Three Months Ended Jan 31, 2022 (Net Sales, in thousands) | Three Months Ended Jan 31, 2021 (Net Sales, in thousands) | YoY Change (in thousands) | YoY Change (%) | | :--------------- | :------------------------------------------ | :------------------------------------------ | :------------------------ | :------------- | | Cat Litter | $45,246 | $41,085 | +$4,161 | +10.1% | | Industrial and Sports | $8,820 | $6,710 | +$2,110 | +31.4% | Three-Month Retail and Wholesale Operating Income and SG&A | Metric | Three Months Ended Jan 31, 2022 (in thousands) | Three Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :---------------- | :------------------------------------- | :------------------------------------- | :------------------------ | :------------- | | Operating Income | $926 | $3,178 | -$2,252 | -70.9% | | SG&A Expenses | $4,200 (estimated) | $4,241 (estimated) | -$41 | -1.0% | - Cat litter net sales increased due to increased sales volume, price increases, increased pet adoption, and existing customers increasing purchases[132] Foreign Operations Foreign subsidiaries reported increased total net sales, primarily from Canada, but a significant net loss due to decreased sales in Mexico and other cost pressures Three-Month Foreign Operations Net Sales and Net Loss | Metric | Three Months Ended Jan 31, 2022 (in thousands) | Three Months Ended Jan 31, 2021 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------ | :------------- | | Total Net Sales (Foreign Subsidiaries) | $5,283 | $4,703 | +$580 | +12.3% | | Net Loss (Foreign Subsidiaries) | $(477) | $170 | -$(647) | -380.6% | - Net sales of the Canadian subsidiary increased by $566 thousand, or 24%, driven by cat litter sales due to increased sales to existing customers and new product offerings[135] - The Mexican subsidiary's net sales decreased by $298 thousand, or 39%, due to the discontinuation of products no longer part of the business strategy[136] Liquidity and Capital Resources The company's principal capital requirements include working capital, equipment upgrades, new product development, stock repurchases, and dividends. These were primarily funded by cash from operations and borrowings in the first six months of fiscal year 2022. Net cash provided by operating activities significantly decreased, while financing activities shifted from a net use to a significant net provision of cash due to new debt issuance Net cash provided by operating activities Net cash provided by operating activities significantly decreased due to increased accounts receivable and inventories, reflecting rising costs and demand - Net cash provided by operating activities decreased significantly to $61 thousand for the six months ended January 31, 2022, from $3,085 thousand in the prior year[139][140] - Accounts receivable increased by $5,023 thousand in the first six months of fiscal year 2022, compared to an increase of $3,798 thousand in the prior year, driven by significantly higher net sales[140] - Inventories increased by $6,236 thousand in the first six months of fiscal year 2022 (compared to a decrease of $412 thousand in 2021) due to rising costs and increased inventory levels to accommodate demand and thwart potential supply chain disruptions[141] Net cash used in investing activities Net cash used in investing activities increased due to higher capital expenditures for plant equipment, facility improvements, and IT network upgrades - Net cash used in investing activities increased to $10,574 thousand for the six months ended January 31, 2022, from $7,595 thousand in the prior year[139][146] - The increase in cash used in investing activities was driven by higher capital expenditures for plant equipment, facility improvements, and IT network upgrades to support increased demand[146] Net cash used in financing activities Financing activities shifted from a net cash use to a significant net cash provision, primarily driven by proceeds from new notes payable, partially offset by increased treasury stock repurchases - Net cash provided by financing activities was $14,957 thousand for the six months ended January 31, 2022, a significant shift from a net use of $5,795 thousand in the prior year[139][147] - This change was primarily due to $25,000 thousand in proceeds from the issuance of notes payable, partially offset by higher repurchases of treasury stock[147] Other Liquidity Information The company maintains a revolving credit agreement and has authority for additional senior unsecured notes and share repurchases, indicating available liquidity and capital flexibility - The company has a $45,000,000 unsecured revolving credit agreement with BMO Harris Bank N.A., expiring January 31, 2024, and was in compliance with all covenants as of January 31, 2022[149] - The company issued $25,000,000 in Series C Senior Notes under an amended note agreement, which also provides the ability to request up to $75,000,000 in additional senior unsecured notes (minus outstanding notes) on an uncommitted basis[150][151] - As of January 31, 2022, the company had remaining authority to repurchase 637,109 shares of Common Stock and 273,100 shares of Class B Stock under a Board-approved plan[152] Critical Accounting Policies and Estimates This section highlights that financial statement preparation involves estimates and assumptions, which are subject to revision and potential differences from actual results - The preparation of financial statements requires the use of estimates and assumptions that are periodically revised, and actual results could differ from these estimates[155] - Information concerning critical accounting policies and estimates is included under "Management's Discussion of Financial Condition and Results of Operations" in the Annual Report on Form 10-K for the fiscal year ended July 31, 2021[155] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of January 31, 2022, concluding they were effective. No material changes to internal control over financial reporting occurred, despite remote work due to COVID-19. The section also acknowledges inherent limitations of control systems Evaluation of Disclosure Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of January 31, 2022, providing reasonable assurance for timely and accurate reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of January 31, 2022[156] - Disclosure controls and procedures provide reasonable assurance that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported timely[156] Changes in Internal Control over Financial Reporting No material changes occurred in internal control over financial reporting during the quarter, with ongoing monitoring of COVID-19 impacts - No material changes in internal control over financial reporting occurred during the fiscal quarter ended January 31, 2022[159] - The company is continually monitoring and assessing the effects of COVID-19 on internal controls to minimize the impact on their design and operating effectiveness[157] Inherent Limitations on Effectiveness of Controls Management acknowledges that control systems provide only reasonable assurance due to inherent limitations like resource constraints, faulty judgments, and potential circumvention - Management acknowledges that control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that objectives will be met[160] - Inherent limitations include resource constraints, faulty judgments, circumvention by individual acts or collusion, and management override of controls[160] PART II – OTHER INFORMATION This part updates risk factors, details unregistered sales of equity securities and use of proceeds, provides mine safety disclosures, and lists all exhibits filed with the report Item 1A. Risk Factors This section updates the risk factors from the Annual Report on Form 10-K, highlighting new or emphasized risks related to price competition, trade concessions, and increasing operating costs (energy, commodity, transportation, labor) which may not be fully offset by price increases, potentially impacting profitability and sales volumes. Supply chain disruptions and capacity constraints are also noted - The company's products are subject to significant price competition, and the need to reduce prices or offer concessions to retain customers could adversely affect sales and profitability[164] - Increases in energy, commodity, transportation, and other costs (e.g., paper, plastic resins, synthetic rubber, steel, labor) would increase operating costs, and the company may be unable to pass all these increases on to customers, reducing profitability[165][168][169][170] - Supply, capacity, labor, information technology, and logistics disruptions (e.g., COVID-19, weather, geopolitical tensions, driver shortages) could adversely affect the ability to manufacture, package, or transport products, leading to backlogs and increased costs[165][170][171] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended January 31, 2022, the company did not sell any unregistered securities. It repurchased 113,236 shares of Common Stock at an average price of $34.51 per share, with 637,109 Common Stock and 273,100 Class B Stock shares remaining authorized for repurchase - No securities were sold that were not registered under the Securities Act of 1933 during the three months ended January 31, 2022[172] Common Stock Repurchase Activity | Period | Total Number of Shares Purchased (Common Stock) | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that may yet be Purchased Under Plans or Programs | | :-------------------------- | :------------------------------------ | :--------------------------- | :--------------------------------------------------------------- | :----------------------------------------------------------------------- | | Nov 1, 2021 to Nov 30, 2021 | 12,691 | $34.95 | 10,933 | 737,654 | | Dec 1, 2021 to Dec 31, 2021 | 303 | $32.80 | — | 737,351 | | Jan 1, 2022 to Jan 31, 2022 | 100,242 | $34.51 | — | 637,109 | - As of January 31, 2022, the company had remaining authority to repurchase 637,109 shares of Common Stock and 273,100 shares of Class B Stock[152][173] Item 4. Mine Safety Disclosures The company's mining operations are subject to regulation by the Mine Safety and Health Administration. Required information concerning mine safety violations and other regulatory matters is included in Exhibit 95 of this report - The company's mining operations are subject to regulation by the Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977[174] - Information concerning mine safety violations or other regulatory matters is included in Exhibit 95 to this Quarterly Report on Form 10-Q[174] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including Amendment No. 1 to the Note Purchase and Private Shelf Agreement, computation of earnings per share, certifications, mine safety disclosures, and XBRL taxonomy documents - The section lists all exhibits filed with the Form 10-Q, including financial agreements, certifications, mine safety disclosures, and XBRL taxonomy documents[175] - Stockholders may receive copies of the listed exhibits, without fee, by written request, telephone, or e-mail[175] Signatures This section confirms the report's official signing by the Chairman, President, CEO, and CFO of Oil-Dri Corporation of America, dated March 11, 2022 - The report is signed on behalf of Oil-Dri Corporation of America by Daniel S. Jaffee, Chairman, President and Chief Executive Officer, and Susan M. Kreh, Chief Financial Officer[178] - The report is dated March 11, 2022[178]