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Section 1: 10-Q (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended April 30, 2020
 
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to ______________
 

Commission File Number 001-12622

OIL-DRI CORPORATION OF AMERICA
(Exact name of the registrant as specified in its charter)

Delaware 36-2048898
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
410 North Michigan Avenue, Suite 400 60611-4213
Chicago, Illinois (Zip Code)
(Address of principal executive offices)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer  x
Non-accelerated filer o
Smaller reporting company x
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10 per share
ODC
New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of April 30, 2020.
Common Stock – 5,307,384 Shares and Class B Stock – 2,176,142 Shares




CONTENTS
 
 
 
 
 
PART I – FINANCIAL INFORMATION
 
 
 
Page
Item 1:
 
 
 
Item 2:
 
 
 
Item 4:
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1A:
Risk Factors
 
 
 
Item 2:
 
 
 
Item 4:
 
 
 
Item 6:
 
 
 
 

FORWARD-LOOKING STATEMENTS

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

Such statements are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially, including, but not limited to, those described in Item 1A, Risk Factors, herein, and in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019. Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, intended, expected, believed, estimated, projected or planned. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except to the extent required by law, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise.
 
TRADEMARK NOTICE

Oil-Dri is a registered trademark of Oil-Dri Corporation of America.

2



PART I - FINANCIAL INFORMATION

ITEM 1.  Financial Statements

OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Balance Sheet
(in thousands, except share and per share amounts)

 
(unaudited)
 
 
ASSETS
April 30,
2020
 
July 31,
2019
Current Assets
 
 
 
Cash and cash equivalents
$
20,548

 
$
21,862

Accounts receivable, less allowance of
  $1,324 and $644 at April 30, 2020 and July 31, 2019, respectively
41,846

 
35,459

Inventories
24,096

 
24,163

Prepaid repairs expense
5,163

 
4,708

Prepaid expenses and other assets
2,460

 
3,084

Total Current Assets
94,113

 
89,276

 
 
 
 
Property, Plant and Equipment
 

 
 

Cost
257,123

 
249,834

Less accumulated depreciation and amortization
(166,990
)
 
(159,036
)
Total Property, Plant and Equipment, Net
90,133

 
90,798

 
 
 
 
Other Assets
 

 
 

Goodwill
9,262

 
9,262

Other intangibles, net of accumulated amortization
of $415 and $299 at April 30, 2020 and July 31, 2019, respectively
1,551

 
1,599

Customer list, net of accumulated amortization
of $6,739 and $6,297 at April 30, 2020 and July 31, 2019, respectively
1,046

 
1,488

Deferred income taxes
6,397

 
7,755

Operating lease right-of-use assets
8,327

 

Other
5,152

 
5,049

Total Other Assets
31,735

 
25,153

 
 
 
 
Total Assets
$
215,981

 
$
205,227






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


3



OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Balance Sheet (continued)
(in thousands, except share and per share amounts)

 
(unaudited)
 
 
LIABILITIES & STOCKHOLDERS’ EQUITY
April 30,
2020
 
July 31,
2019
Current Liabilities
 
 
 
Current maturities of notes payable, net of unamortized debt issuance costs
of $10 at April 30, 2020
$
3,074

 
$
3,083

Accounts payable
10,524

 
8,092

Dividends payable
1,735

 
1,761

Operating lease liabilities
1,561

 

Accrued expenses:
 
 
 

Salaries, wages and commissions
10,559

 
6,740

Trade promotions and advertising
1,853

 
1,588

Freight
2,216

 
2,635

Other
9,425

 
8,707

Total Current Liabilities
40,947

 
32,606

 
 
 
 
Noncurrent Liabilities
 

 
 

Notes payable, net of unamortized debt issuance costs
of $31 at July 31, 2019

 
3,052

Deferred compensation
4,847

 
6,014

Pension and postretirement benefits
12,565

 
23,721

Long-term operating lease liabilities
8,285

 

Other
2,682

 
4,288

Total Noncurrent Liabilities
28,379

 
37,075

 
 
 
 
Total Liabilities
69,326

 
69,681

 
 
 
 
Stockholders’ Equity
 

 
 

Common Stock, par value $.10 per share, issued 8,371,197 shares at April 30, 2020
  and 8,284,199 shares at July 31, 2019
837

 
828

Class B Stock, par value $.10 per share, issued 2,511,958 shares at April 30, 2020
  and 2,576,479 shares at July 31, 2019
251

 
258

Additional paid-in capital
44,149

 
41,300

Retained earnings
172,504

 
164,756

Noncontrolling interest
(169
)
 
(14
)
Accumulated Other Comprehensive Loss:
 

 
 

Pension and postretirement benefits
(9,217
)
 
(14,891
)
Cumulative translation adjustment
(378
)
 
(148
)
Total Accumulated Other Comprehensive Loss
(9,595
)
 
(15,039
)
Less Treasury Stock, at cost (3,063,813 Common and 335,816 Class B shares at
April 30, 2020 and 2,926,547 Common and 324,741 Class B shares at July 31, 2019)
(61,322
)
 
(56,543
)
Total Stockholders’ Equity
146,655

 
135,546

 
 
 
 
Total Liabilities & Stockholders’ Equity
$
215,981

 
$
205,227



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

4



OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Income
(in thousands, except for per share amounts)
 
(unaudited)
 
For the Nine Months Ended April 30,
 
2020
 
2019
 
 
 
 
Net Sales
$
218,383

 
$
206,908

Cost of Sales
(158,105
)
 
(158,660
)
Gross Profit
60,278

 
48,248

Selling, General and Administrative Expenses
(44,584
)
 
(42,091
)
Income from Operations
15,694

 
6,157

 
 
 
 
Other (Expense) Income
 

 
 

Interest expense
(314
)
 
(434
)
Interest income
238

 
149

Other, net (1)
(186
)
 
4,504

Total Other (Expense) Income, Net
(262
)
 
4,219

 
 
 
 
Income Before Income Taxes
15,432

 
10,376

Income Tax Expense
(2,573
)
 
(1,599
)
Net Income
12,859

 
8,777

Net Loss Attributable to Noncontrolling Interest
(155
)
 
(35
)
Net Income Attributable to Oil-Dri
13,014

 
8,812

 
 
 
 
Net Income Per Share
 
 
 
Basic Common
$
1.85

 
$
1.27

Basic Class B Common
$
1.39

 
$
0.95

Diluted Common
$
1.69

 
$
1.17

Average Shares Outstanding
 
 
 
Basic Common
5,152

 
5,108

Basic Class B Common
2,042

 
2,068

Diluted Common
7,310

 
7,245

Dividends Declared Per Share
 
 
 
Basic Common
$
0.7500

 
$
0.7200

Basic Class B Common
$
0.5625

 
$
0.5400


(1) See Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements for further information about amounts included in this line item for the nine months ended April 30, 2019.

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

5



OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Comprehensive Income
(in thousands of dollars)
 
(unaudited)
 
For the Nine Months Ended April 30,
 
2020
 
2019
 
 
 
 
Net Income Attributable to Oil-Dri
$
13,014

 
$
8,812

 
 
 
 
Other Comprehensive Income:
 
 
 
Pension and postretirement benefits (net of tax)
5,674

 
437

Cumulative translation adjustment
(230
)
 
(7
)
Other Comprehensive Income
5,444

 
430

Total Comprehensive Income
$
18,458

 
$
9,242


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



6



OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Income
(in thousands, except for per share amounts)

 
(unaudited)
 
For the Three Months Ended April 30,
 
2020
 
2019
 
 
 
 
Net Sales
$
76,256

 
$
70,885

Cost of Sales
(54,871
)
 
(54,051
)
Gross Profit
21,385

 
16,834

Selling, General and Administrative Expenses
(15,685
)
 
(14,507
)
Income from Operations
5,700

 
2,327

 
 
 
 
Other (Expense) Income
 

 
 

Interest expense
(108
)
 
(141
)
Interest income
48

 
53

Other, net (1)
(43
)
 
4,465

Total Other (Expense) Income, Net
(103
)
 
4,377

 
 
 
 
Income Before Income Taxes
5,597

 
6,704

Income Tax Expense
(947
)
 
(1,143
)
Net Income
4,650

 
5,561

Net Income (Loss) Attributable to Noncontrolling Interest
2

 
(58
)
Net Income Attributable to Oil-Dri
4,648

 
5,619

 
 
 
 
Net Income Per Share
 
 
 
Basic Common
$
0.66

 
$
0.81

Basic Class B
$
0.50

 
$
0.61

Diluted Common
$
0.61

 
$
0.74

Average Shares Outstanding
 
 
 
Basic Common
5,126

 
5,126

Basic Class B
2,036

 
2,068

Diluted Common
7,288

 
7,253

Dividends Declared Per Share
 
 
 
Basic Common
$
0.2500

 
$
0.2400

Basic Class B
$
0.1875

 
$
0.1800


(1) See note 8 of the Notes to the Unaudited Condensed Consolidated financial statements for further information about amounts included in this line item for the three months ended April 30, 2019.

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


7



OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Comprehensive Income
(in thousands of dollars)

 
(unaudited)
 
For the Three Months Ended April 30,
 
2020
 
2019
 
 
 
 
Net Income Attributable to Oil-Dri
$
4,648

 
$
5,619

 
 
 
 
Other Comprehensive Income:
 
 
 
Pension and postretirement benefits (net of tax)
126

 
146

Cumulative translation adjustment
(132
)
 
29

Other Comprehensive Income
(6
)
 
175

Total Comprehensive Income
$
4,642

 
$
5,794



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


8



OIL-DRI CORPORATION OF AMERICA
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
 
For the Nine Months Ended April 30
 
(unaudited)
 
Number of Shares
 
 
 
Common
& Class B
Stock
 
Treasury
Stock
 
Common
& Class B
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Non-Controlling Interest
 
Total
Stockholders’
Equity
Balance, July 31, 2018
10,555,828

 
(3,238,833
)
 
$
1,056

 
$
38,473

 
$
158,935

 
$
(55,946
)
 
$
(10,615
)
 
$
(18
)
 
$
131,885

Net Income (Loss)


 


 

 

 
8,812

 

 

 
(35
)
 
8,777

Other Comprehensive Income


 


 

 

 

 

 
430

 

 
430

Dividends Declared


 


 

 

 
(5,029
)
 

 

 

 
(5,029
)
Purchases of Treasury Stock


 
(4,545
)
 

 

 

 
(141
)
 

 

 
(141
)
Net issuance of stock under long-term incentive plans
297,600

 
(7,737
)
 
29

 
420

 

 
(450
)
 

 

 
(1
)
Amortization of Restricted Stock


 


 

 
1,594

 

 

 

 

 
1,594

Balance, April 30, 2019
10,853,428

 
(3,251,115
)
 
$
1,085

 
$
40,487

 
$
162,718

 
$
(56,537
)
 
$
(10,185
)
 
$
(53
)
 
$
137,515

Balance, July 31, 2019
10,860,678

 
(3,251,288
)
 
$
1,086

 
$
41,300

 
$
164,756

 
$
(56,543
)
 
$
(15,039
)
 
$
(14
)
 
$
135,546

Net Income (Loss)

 

 

 

 
13,014

 

 

 
(155
)
 
12,859

Other Comprehensive Income

 

 

 

 

 

 
5,444

 

 
5,444

Dividends Declared

 

 

 

 
(5,266
)
 

 

 

 
(5,266
)
Purchases of Treasury Stock

 
(143,391
)
 

 

 

 
(4,620
)
 

 

 
(4,620
)
Net issuance of stock under long-term incentive plans
22,477

 
(4,950
)
 
2

 
158

 

 
(159
)
 

 

 
1

Amortization of Restricted Stock

 

 

 
2,549

 

 

 

 

 
2,549

Contributions from noncontrolling interests

 

 

 
142

 

 

 

 

 
142

Balance, April 30, 2020
10,883,155

 
(3,399,629
)
 
$
1,088

 
$
44,149

 
$
172,504

 
$
(61,322
)
 
$
(9,595
)
 
$
(169
)
 
$
146,655

 
For the Three Months Ended April 30
 
(unaudited)
 
Number of Shares
 
 
 
Common
& Class B
Stock
 
Treasury
Stock
 
Common
& Class B
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Non-Controlling Interest
 
Total
Stockholders’
Equity
Balance, January 31, 2019
10,812,928

 
(3,249,728
)
 
$
1,081

 
$
39,730

 
$
158,788

 
$
(56,480
)
 
$
(10,360
)
 
$
5

 
$
132,764

Net Income (Loss)


 


 

 

 
5,619

 

 

 
(58
)
 
5,561

Other Comprehensive Income


 


 

 

 

 

 
175

 

 
175

Dividends Declared


 


 

 

 
(1,689
)
 

 

 

 
(1,689
)
Purchases of Treasury Stock


 

 

 

 

 
(6
)
 

 

 
(6
)
Net issuance of stock under long-term incentive plans
40,500

 
(1,387
)
 
4

 
47

 

 
(51
)
 

 

 

Amortization of Restricted Stock


 


 

 
710

 

 

 

 

 
710

Balance, April 30, 2019
10,853,428

 
(3,251,115
)
 
$
1,085

 
$
40,487

 
$
162,718

 
$
(56,537
)
 
$
(10,185
)
 
$
(53
)
 
$
137,515

Balance, January 31, 2020
10,881,155

 
(3,269,059
)
 
$
1,088

 
$
43,149

 
$
169,590

 
$
(57,138
)
 
$
(9,589
)
 
$
(171
)
 
$
146,929

Net Income (Loss)

 

 

 

 
4,648

 

 

 
2

 
4,650

Other Comprehensive Income

 

 

 

 

 

 
(6
)
 

 
(6
)
Dividends Declared

 

 

 

 
(1,734
)
 

 

 

 
(1,734
)
Purchases of Treasury Stock

 
(127,770
)
 

 

 

 
(4,097
)
 

 

 
(4,097
)
Net issuance of stock under long-term incentive plans
2,000

 
(2,800
)
 

 
88

 

 
(87
)
 

 

 
1

Amortization of Restricted Stock

 

 

 
770

 

 

 

 

 
770

Contributions from noncontrolling interests (1)

 

 

 
142

 

 

 

 

 
142

Balance, April 30, 2020
10,883,155

 
(3,399,629
)
 
$
1,088

 
$
44,149

 
$
172,504

 
$
(61,322
)
 
$
(9,595
)
 
$
(169
)
 
$
146,655

(1) On April 1, 2020 we increased our interest in one of our non-wholly owned subsidiaries from 52.0% to 78.4% for approximately $724,000 when that subsidiary issued shares through a capital call. Certain other noncontrolling interest holders also purchased shares but to a lesser extent, thereby diluting their collective ownership from 48.0% to 21.6%.

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

9



Condensed Consolidated Statements of Cash Flows
(in thousands)
 
(unaudited)
 
For the Nine Months Ended April 30,
CASH FLOWS FROM OPERATING ACTIVITIES
2020
 
2019
Net Income
$
12,859

 
$
8,777

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
10,399

 
9,849

Amortization of investment net discount

 
(10
)
Stock-based compensation
2,549

 
1,590

Deferred income taxes
1,367

 
277

Provision for bad debts and cash discounts
704

 
(151
)
Loss on the sale of fixed assets
102

 
4

Curtailment gain on SERP Plan
(1,296
)
 

(Increase) Decrease in assets:
 

 
 

Accounts receivable
(7,296
)
 
(2,185
)
Inventories
(72
)
 
(4,248
)
Prepaid expenses
120

 
(201
)
Other assets
816

 
(564
)
Increase (Decrease) in liabilities:
 

 
 

Accounts payable
3,859

 
2,873

Accrued expenses
4,612

 
(1,762
)
Deferred compensation
129

 
(421
)
Pension and postretirement benefits
(5,482
)
 
1,287

Other liabilities
(1,101
)
 
249

Total Adjustments
9,410

 
6,587

Net Cash Provided by Operating Activities
22,269

 
15,364

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Capital expenditures
(10,870
)
 
(10,162
)
Proceeds from sale of property, plant and equipment
112

 

Purchases of short-term investments

 
(4,678
)
Dispositions of short-term investments

 
11,082

Net Cash Used in Investing Activities
(10,758
)
 
(3,758
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Principal payments on notes payable
(3,082
)
 
(3,083
)
Dividends paid
(5,292
)
 
(4,967
)
Purchase of treasury stock
(4,620
)
 
(141
)
Contributions from noncontrolling interests
142

 

Net Cash Used in Financing Activities
(12,852
)
 
(8,191
)
Effect of exchange rate changes on Cash and Cash Equivalents
27

 
52

Net (Decrease) Increase in Cash and Cash Equivalents
(1,314
)
 
3,467

Cash and Cash Equivalents, Beginning of Period
21,862

 
12,757

Cash and Cash Equivalents, End of Period
$
20,548

 
$
16,224


10




OIL-DRI CORPORATION OF AMERICA
Condensed Consolidated Statements of Cash Flows - Continued
(in thousands)

 
(unaudited)
 
For the Nine Months Ended April 30,
 
2020
 
2019
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Capital expenditures accrued, but not paid
$
784

 
$
468

Cash dividends declared and accrued, but not paid
$
1,735

 
$
1,689



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



11



OIL-DRI CORPORATION OF AMERICA
Notes To Condensed Consolidated Financial Statements
(Unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The financial statements and the related notes are condensed and should be read in conjunction with the Consolidated Financial Statements and related notes for the fiscal year ended July 31, 2019 included in our Annual Report on Form 10-K filed with the SEC.

The unaudited Condensed Consolidated Financial Statements include the accounts of Oil-Dri Corporation of America and its subsidiaries. All significant intercompany transactions are eliminated. Except as otherwise indicated herein or as the context otherwise requires, references to “Oil-Dri,” the “Company,” “we,” “us” or “our” refer to Oil-Dri Corporation of America and its subsidiaries.

The unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals and reclassifications which are, in the opinion of management, necessary for a fair presentation of the statements contained herein. In addition, certain prior year reclassifications were made to conform to the current year presentation. Operating results for the three and nine months ended April 30, 2020 are not necessarily an indication of the results that may be expected for the fiscal year ending July 31, 2020.

In March 2020, the World Health Organization declared the recent novel coronavirus outbreak ("the coronavirus" or "COVID-19") a pandemic. Despite the adverse effects of COVID-19 on the overall economy, we have not experienced a significant decline in customer orders and sales in the third quarter of fiscal year 2020. However, the effects of COVID-19 are unprecedented, and therefore we are unable to ascertain the effects on our sales and net earnings for the balance of fiscal year 2020.

Management Use of Estimates

The preparation of the unaudited Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period, as well as the related disclosures. All of our estimates and assumptions are revised periodically. Actual results could differ from these estimates.

Summary of Significant Accounting Policies

Our significant accounting policies, which are detailed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019 have not materially changed, except as described herein, including policies associated with the August 1, 2019 adoption of Accounting Standards Codification (“ASC”) 842, Leases. Changes to our accounting policies as a result of the ASC 842 adoption are discussed below and further information is also provided in Note 2 of the Notes to unaudited Condensed Consolidated Financial Statements. Following is a description of certain of our significant accounting policies.

Trade Receivables. We record an allowance for doubtful accounts based on our historical experience and a periodic review of our accounts receivable, including a review of the overall aging of accounts, consideration of customer credit risk and analysis of facts and circumstances about specific customer accounts. A customer account is determined to be uncollectible when it is probable that a loss will be incurred after we have completed our internal collection procedures, including termination of shipments, direct customer contact and formal demand of payment.

Overburden Removal and Mining Costs. We mine sorbent materials on property that we either own or lease as part of our overall operations. A significant part of our overall mining cost is incurred during the process of removing the overburden (non-usable material) from the mine site, thus exposing the sorbent material used in a majority of our production processes. These stripping costs are treated as a variable inventory production cost and are included in cost of sales in the period they are incurred. We defer and amortize the pre-production overburden removal costs associated with opening a new mine.


12



Additionally, it is our policy to capitalize the purchase cost of land and mineral rights, including associated legal fees, survey fees and real estate fees. The costs of obtaining mineral patents, including legal fees and drilling expenses, are also capitalized. Pre-production development costs on new mines and any prepaid royalties that may be offset against future royalties due upon extraction of the minerals are also capitalized. All exploration related costs are expensed as incurred.

We perform ongoing reclamation activities during the normal course of our overburden removal. As overburden is removed from a mine site, it is hauled to previously mined sites and is used to refill older sites. This process allows us to continuously reclaim older mine sites and dispose of overburden simultaneously, therefore minimizing the costs associated with the reclamation process.

Leases. ASC 842 provides that a contract is, or contains, a lease if it conveys the right to control the use of an identified asset and, accordingly, a lease liability and a related right-of-use (“ROU”) asset is recognized at the commencement date on our consolidated balance sheet. As provided in ASC 842, we have elected not to apply these measurement and recognition requirements to short-term leases (i.e., leases with a term of 12 months or less). Short-term leases will not be recorded as ROU assets or lease liabilities on our consolidated balance sheet, and the related lease payments will be recognized in net earnings on a straight-line basis over the lease term. For leases other than short-term leases, the lease liability is equal to the present value of unpaid lease payments over the remaining lease term. The lease term may reflect options to extend or terminate the lease when it is reasonably certain that such options will be exercised. To determine the present value of the lease liability, we used an incremental borrowing rate, which is defined as the rate of interest we would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. The ROU asset is based on the corresponding lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Both operating and finance lease ROU assets are reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. After a ROU asset is impaired, any remaining balance of the ROU asset is amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful life. After the lease commencement date, we evaluate lease modifications, if any, that could result in a change in the accounting for leases.

Certain of our leases provide for variable lease payments that vary due to changes in facts and circumstances occurring after the commencement date, other than the passage of time. Variable lease payments that are dependent on an index or rate (e.g., Consumer Price Index) are included in the initial measurement of the lease liability and the ROU asset. Variable lease payments that are not known at the commencement date and are determinable based on the performance or use of the underlying asset, are expensed as incurred. Our variable lease payments primarily include common area maintenance charges based on the percentage of the total square footage leased and the usage of assets, such as photocopiers.

Some of our contracts may contain lease components as well as non-lease components, such as an agreement to purchase services. As allowed under ASC 842, we have elected not to separate the lease components from non-lease components for all asset classes and we will not allocate the contract consideration to these components. This policy was applied to all existing leases upon adoption of ASC 842 and will be applied to new leases on an ongoing basis.

Revenue Recognition. We recognize revenue when performance obligations under the terms of the contracts with customers are satisfied. Our performance obligation generally consists of the promise to sell finished products to wholesalers, distributors and retailers or consumers and our obligations have an original duration of one year or less. Control of the finished products are transferred upon shipment to, or receipt at, customers' locations, as determined by the specific terms of the contract. We have completed our performance obligation when control is transferred and we recognize revenue accordingly.

We have an unconditional right to consideration under the payment terms specified in the contract upon completion of the performance obligation. We may require certain customers to provide payment in advance of product shipment. We recorded a liability for these advance payments of $362,000 and $259,000 as of April 30, 2020 and July 31, 2019, respectively. This liability is reported in Other Accrued Expenses on the unaudited Condensed Consolidated Balance Sheet. Revenue recognized during the nine months ended April 30, 2020 that was included in the liability for advance payments at the beginning of the period was $174,000.

We routinely commit to one-time or ongoing trade promotion programs directly with consumers, such as coupon programs, and with customers, such as volume discounts, cooperative marketing and other arrangements. We estimate and accrue the expected costs of these programs. These costs are considered variable consideration under ASC 606, Revenue from Contracts with Customers, and are netted against sales when revenue is recorded. The accruals are based on our best estimate of the amounts necessary to settle future and existing obligations on products sold as of the balance sheet date. To estimate these accruals, we rely on our historical experience of trade spending patterns and that of the industry, current trends and forecasted data.

Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) include salaries, wages and benefits associated with staff outside the manufacturing and distribution functions, all marketing related costs, any

13



miscellaneous trade spending expenses not required to be included in net sales, research and development costs, depreciation and amortization related to assets outside the manufacturing and distribution process and all other non-manufacturing and non-distribution expenses.

Income Taxes
On March 27, 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into U.S. law. The CARES Act provides for, among other things, deferral of the employer portion of social security taxes incurred through the end of calendar 2020. As permitted by the CARES Act, we deferred approximately $130,000 in payroll taxes during its quarter ended April 30, 2020 and expect to defer the payment of payroll taxes each quarter for the remainder of 2020 to be paid equally in the fourth quarters of 2021 and 2022 representing approximately $2,000,000 in payroll taxes.

2. NEW ACCOUNTING PRONOUNCEMENTS AND REGULATIONS

Recently Adopted Pronouncements

On August 1, 2019 we adopted ASC 842, Leases, using the modified retrospective transition approach and, accordingly, we did not restate prior comparative period financial statements. As of the date of adoption, we elected the package of practical expedients that allowed us to forgo assessment under the ASC 842 guidance whether existing or expired contracts contained leases, the classification of expired or existing leases and the accounting for previously incurred initial direct costs. We also elected the practical expedient to forgo assessment under ASC 842 whether existing or expired land easements not previously accounted for under legacy leasing GAAP contain leases.

The adoption of ASC 842 on August 1, 2019 resulted in the recognition of additional ROU assets and lease liabilities related to operating leases of $9,348,000 and $10,910,000, respectively, on our unaudited Condensed Consolidated Balance Sheet. There was no material impact to any of our other unaudited consolidated financial statements.

Recently Issued Pronouncements

In March 2020, the FASB issued guidance under ASC 848, Reference Rate Reform. This guidance provides optional expedients and exceptions to account for debt, leases, contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The guidance is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating the potential effects of the adoption of this guidance on our Consolidated Financial Statements.
In December 2019, the FASB issued guidance under ASC 740, Income Taxes, which simplifies the accounting for income taxes. The guidance removes several specific exceptions to the general principles in ASC 740 and clarifies and makes amendments to improve consistent application of and simplify existing accounting for other areas in ASC 740. This guidance is effective for our first quarter of fiscal year 2022, with early adoption permitted. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements.
In June 2016, the FASB issued guidance under ASC 326, Financial Instruments-Credit Losses, which requires companies to utilize an impairment model for most financial assets measured at amortized cost and certain other financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses. In addition, this new guidance changes the recognition method for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk, as well as additional disclosures. In general, this guidance will require modified retrospective adoption for all outstanding instruments that fall under this guidance. This guidance is effective for our first quarter of fiscal year 2023. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements.

There have been no other accounting pronouncements issued but not yet adopted by us which are expected to have a material impact on our Consolidated Financial Statements.


14



3. INVENTORIES

The composition of inventories is as follows (in thousands):
 
April 30,
2020
 
July 31,
2019
Finished goods
$
14,250

 
$
13,957

Packaging
5,576

 
5,681

Other
4,270

 
4,525

Total Inventories
$
24,096

 
$
24,163



Inventories are valued at the lower of cost (first-in, first-out) or net realizable value. Inventory costs include the cost of raw materials, packaging supplies, labor and other overhead costs. We performed a detailed review of our inventory items to determine if an obsolescence reserve adjustment was necessary. The review surveyed all of our operating facilities and sales groups to ensure that both historical issues and new market trends were considered. The obsolescence reserve not only considered specific items, but also took into consideration the overall value of the inventory as of the balance sheet date. The inventory obsolescence reserve values at April 30, 2020 and July 31, 2019 were $1,350,000 and $704,000, respectively. The higher obsolescence reserve is attributed to our focus on inventory management and enhanced data available from our enterprise resource planning (“ERP”) system.

4. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized into categories based on the lowest level of input that is significant to the fair value measurement. The categories in the fair value hierarchy are as follows:

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs for similar assets or liabilities or valuation models whose inputs are observable, directly or indirectly.
Level 3: Unobservable inputs.

Cash equivalents are primarily money market mutual funds classified as Level 1. We had $103,000 and $26,000 cash equivalents as of April 30, 2020 and July 31, 2019, respectively, which are included in Cash and cash equivalents on the unaudited Condensed Consolidated Balance Sheet.

Balances of accounts receivable and accounts payable approximated their fair values at April 30, 2020 and July 31, 2019 due to the short maturity and nature of those balances.

Notes payable are reported at the face amount of future maturities. The estimated fair value of notes payable, including current maturities, was $3,195,000 and $6,357,000 as of April 30, 2020 and July 31, 2019, respectively, and are classified as Level 2. The fair value was estimated using the exit price notion of fair value.

We apply fair value techniques on at least an annual basis associated with: (1) valuing potential impairment loss related to goodwill, trademarks and other indefinite-lived intangible assets and (2) valuing potential impairment loss related to long-lived assets. See Note 5 of the Notes to unaudited Condensed Consolidated Financial Statements for further information about goodwill and other intangible assets.


15



5. GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets, other than goodwill, include trademarks, patents, customer lists and product registrations. Intangible amortization expense was $184,000 and $209,000 in the third quarter of fiscal years 2020 and 2019, respectively. Intangible amortization expense was $600,000 and $628,000 in the first nine months of fiscal years 2020 and 2019. Estimated intangible amortization for the remainder of fiscal year 2020 is $183,000. Estimated intangible amortization for the next five fiscal years is as follows (in thousands):
2021
$
547

2022
$
397

2023
$
202

2024
$
69

2025
$
47



We have one acquired trademark recorded at a cost of $376,000 that was determined to have an indefinite life and is not amortized.

We performed our annual goodwill impairment analysis in the fourth quarter of fiscal year 2019 and no impairment was identified. There have been no triggering events that would indicate a new impairment analysis is needed. Although we have not identified any trigging events relating to goodwill or our intangibles, the ultimate effects of COVID-19 could change this assessment in the future, as outlined under Item 1A, Risk Factors, discussed below.

6. LEASES

We have operating leases primarily for real estate properties, including corporate headquarters, customer service and sales offices, manufacturing and packaging facilities, warehouses, and research and development facilities, as well as for rail tracks, railcars and office equipment. Certain of our leases for a shared warehouse and office facility, rail track and railcars have options to extend which we are reasonably certain we will exercise and, accordingly, have been considered in the lease term used to recognize our ROU assets and lease liabilities. Further information about our accounting policy for leases is included in Note 1 of the Notes to unaudited Condensed Consolidated Financial Statements.

We have no material finance leases, and variable costs for operating leases are immaterial for the third quarter of fiscal year 2020. Operating lease costs are included in Cost of Sales or SG&A expenses based on the nature of the lease. The following table summarizes total lease costs for our operating leases (in thousands):


For the Three Months Ended April 30, 2020
For the Nine Months Ended April 30, 2020
Operating Lease Cost


Operating lease cost
$
517

$
1,551

Short-term operating lease cost
190

590



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


For the Three Months Ended April 30, 2020
For the Nine Months Ended April 30, 2020
Other Information


Cash paid for amounts included in the measurement of lease liabilities:


  Operating cash flows from operating leases
$
430

$
1,285




16



Operating lease ROU assets and operating lease liabilities are separately presented on the unaudited Condensed Consolidated Balance Sheet, excluding leases with an initial term of twelve months or less. Other supplemental balance sheet information related to leases was as follows:
 
For the Nine Months Ended April 30, 2020
Weighted-average remaining lease term - operating leases
10.6 years
Weighted-average discount rate - operating leases
4.02%

The following table summarizes scheduled minimum future lease payments due within twelve months for operating leases with terms longer than one year for which cash flows are fixed and determinable as of April 30, (in thousands):
2020
$
1,912

2021
1,507

2022
983

2023
781

2024
767

Thereafter
6,320

Total
12,270

Less: imputed interest
(2,424
)
Net lease obligation
$
9,846


The following table summarizes scheduled minimum future lease payments due within twelve months for operating leases with terms longer than one year for which cash flows are fixed and determinable as of July 31, 2019 (in thousands):
2020
$
2,255

2021
1,640

2022
1,513

2023
1,038

2024
899

Thereafter
7,422




17



7. PENSION AND OTHER POSTRETIREMENT BENEFITS

Pension and Postretirement Health Benefits

The Oil-Dri Corporation of America Pension Plan (“Pension Plan”) is a defined benefit pension plan for eligible salaried and hourly employees. Pension benefits are based on a formula of years of credited service and levels of compensation or stated amounts for each year of credited service. On January 9, 2020, we amended the Pension Plan to freeze participation, all future benefit accruals and accrual of benefit service, including consideration of compensation increases, effective March 1, 2020. Consequently, the Pension Plan is closed to new participants and current participants will no longer earn additional benefits on or after March 1, 2020.

The amendment of the Pension Plan triggered a pension curtailment, which required a remeasurement of the Pension Plan's obligation. The remeasurement resulted in a decrease in the benefit obligation of approximately $6,632,000, which was recorded in Other Comprehensive Income, net of taxes of $1,592,000 in the second quarter of fiscal year 2020.

The components of net periodic pension and postretirement health benefit costs were as follows:
    
 
Pension Benefits
 
(in thousands)
 
For the Three Months Ended April 30,
 
For the Nine Months Ended April 30,
 
2020
 
2019
 
2020
 
2019
Service cost
$
122

 
$
407

 
$
973

 
$
1,220

Interest cost
444

 
529

 
1,456

 
1,586

Expected return on plan assets
(688
)
 
(702
)
 
(2,102
)
 
(2,107
)
Amortization of:
 
 
 
 
 
 
 
  Prior service costs

 

 

 
1

  Other actuarial loss
167

 
192

 
837

 
578

Net periodic benefit cost
$
45

 
$
426

 
$
1,164

 
$
1,278

 
 
 
 
 
 
 
 
 
Postretirement Health Benefits
 
(in thousands)
 
For the Three Months Ended April 30,
 
For the Nine Months Ended April 30,
 
2020
 
2019
 
2020
 
2019
Service cost
$
29

 
$
27

 
$
87

 
$
79

Interest cost
20

 
24

 
61

 
73

Amortization of:
 
 
 
 
 
 
 
  Prior service costs
(2
)
 
(2
)
 
(5
)
 
(5
)
Net periodic benefit cost
$
47

 
$
49

 
$
143

 
$
147



The non-service cost components of net periodic benefit cost are included in Other Income (Expense) in the line item Other, net on the unaudited Condensed Consolidated Statements of Income.

The Pension Plan is funded based upon actuarially determined contributions that take into account the amount deductible for income tax purposes, the normal cost and the minimum contribution required and the maximum contribution allowed under applicable regulations. We were not required to make, but did make a $5,000,000 voluntary contribution to the Pension Plan during the second quarter of fiscal year 2020. We have no minimum funding requirements for the remainder of fiscal year 2020 but we may consider making an additional voluntary contribution.

The postretirement health plan is an unfunded plan. We pay insurance premiums and claims from our assets.


18



Assumptions used in the previous calculations were as follows:
    
 
Pension Benefits
 
Postretirement Health Benefits
 
For the Three and Nine Months Ended April 30,
 
2020
 
2019
 
2020
 
2019
Discount rate for net periodic benefit cost
3.35
%
 
4.04
%
 
2.93
%
 
3.81
%
Rate of increase in compensation levels