# Oil-Dri Corp of America (ODC) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Oil-Dri Corp of America's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/74046/000007404622000072/odc-20220731.htm
Accession: 0000074046-22-000072
Filing date: 2022-10-13
Report date: 2022-07-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ODC/
All MD&A years: /company/ODC/mda/
Previous year: /company/ODC/mda/fy2021/ (FY 2021)
Next year: /company/ODC/mda/fy2023/ (FY 2023)

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with the Consolidated Financial Statements and the related notes included elsewhere herein. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include those discussed under “Forward-Looking Statements” and in Item 1A “Risk Factors” in this Annual Report on Form 10-K.

OVERVIEW

We develop, mine, manufacture and market sorbent products principally produced from clay minerals, primarily consisting of calcium bentonite, attapulgite and diatomaceous shale. Our principal products include agricultural and horticultural chemical carriers, animal health and nutrition products, cat litter, fluid purification and filtration bleaching clays, industrial and automotive floor absorbents and sports field products. Our products are sold to two primary customer groups, including customers who resell our products as originally produced to the end consumer and other customers who use our products as part of their production process or use them as an ingredient in their final finished product. We have two reportable operating segments based on the different characteristics of our two primary customer groups: the Retail and Wholesale Products Group and the Business to Business Products Group. Each operating segment is discussed individually below. Additional detailed descriptions of the operating segments are included in Item 1 “Business” above.

As a result of a change in management organization during fiscal year 2022 and as part of our routine assessments of our segments, our wholly owned subsidiary located in the United Kingdom is now included in our Business to Business Products Group and our co-packaged coarse cat litter is now included in the Retail and Wholesale Products Group. Prior year net sales and operating income have also been reclassified to reflect these changes. The organization change was intended to better serve our customers and the segment information presented reflects the information regularly reviewed by our chief operating decision maker.

RESULTS OF OPERATIONS

OVERVIEW

Consolidated net sales increased approximately $43,608,000 or 14% in fiscal year 2022 compared to fiscal year 2021. Consolidated income from operations in fiscal year 2022 decreased compared to fiscal year 2021 by $8,215,000. Additionally, fiscal year 2022 experienced lower income tax expense than fiscal year 2021 as further described in Note 5 of the Notes to the Consolidated Financial Statements.

Consolidated net income was $5,674,000, or $0.81 per diluted common share, for the fiscal year ended July 31, 2022, a 49% decrease from net income of $11,113,000, or $1.57 per diluted common share, for the fiscal year ended July 31, 2021. The decrease relates to higher freight, packaging, natural gas, and non-fuel manufacturing costs and also various other rising costs as described further below.

Our Consolidated Balance Sheets as of July 31, 2022 and our Consolidated Statements of Cash Flows for fiscal year 2022 show a decrease in total cash and cash equivalents from fiscal year-end 2021 driven by higher cost of goods, increased capital requirements, and stock repurchases. Cash reduction as of July 31, 2022 was offset by an additional $25,000,000 in loan proceeds.

As further discussed below, our consolidated net sales increased in the fiscal year 2022 compared to the fiscal year 2021. Net sales of our industrial and sports products as well as most of our fluids purification products have mostly returned to pre-pandemic levels as many businesses and sports have re-opened and air travel has been increasing. However, parts of our business continue to be negatively impacted by the pandemic and varying recoveries from and resurgences of the pandemic in certain areas. Net sales for our industrial granules in the United Kingdom have increased in fiscal year 2022 as a result of the return of demand following the impact of the pandemic (and also certain timing impacts). Net sales of our animal health and nutrition products have been dampened due to COVID-19 in certain geographic areas, particularly in China, which has continued to impose restrictions and quarantine requirements in response to COVID-19 outbreaks. We have also experienced an increase in backlog due, in part, to supply chain disruptions, shipping delays and constraints on the availability of labor (including at our suppliers) amidst unprecedented demand for our products. We have put in place measures to reduce the backlog that was generated during fiscal year 2022, including hiring additional labor, adding additional work shifts, improving

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operating productivity in our plants, upgrading our manufacturing facilities and equipment and increasing our overseas freight forwarders.

As discussed below in "Consolidated Results," gross profit has declined in fiscal year 2022 compared to fiscal year 2021 related to rising costs and supply chain disruptions. We have faced longer lead times for some of our materials purchases, which have contributed to an increase in our backlog, but we have been able to avoid significant out of stock issues for most of our materials. Where possible, we have found other suppliers to meet the increase in customer demand for our products. In addition, the cost of repair parts has increased but this has not caused any significant disruption to our business. While we have experienced a shortage of production labor at certain times during the fiscal year 2022, which has been a contributing factor to our increase in backlog, we have been able to hire additional labor and reduce our backlog related to production constraints in the third and fourth quarters of fiscal year 2022. We are closely monitoring the continuation, resurgence in certain areas, and effects of COVID-19 on all aspects of our business, including how it has impacted and may impact our suppliers and customers as well as the effects of the pandemic on economic conditions and the financial markets. In general, we have seen an increase in costs, particularly as it relates to commodities as the economy continues to react to, and recover from, the pandemic and demand surpasses supply. We have also seen costs increasing due to inflation. In addition to rising commodity costs and other increased costs described below, several of our suppliers have passed along non-commodity price increases they have experienced in their own businesses. However, we have not experienced any significant interruptions, and we will continue to closely monitor our inventory levels to mitigate the risk of any potential supply interruptions or changes in customer demand. It is possible that significant disruptions could occur if the pandemic and other factors such as labor shortages, ongoing geopolitical tensions, and other strains on the supply chain continue to put pressure on production, transportation, and shipping as a result of an imbalance of supply and demand or if there are continued increases in costs that we are unable to recover. The impacts of COVID-19 and related economic conditions on our future results are uncertain at this time. The scope, duration, and magnitude of the direct and indirect effects of COVID-19 continue to evolve (and in many cases, rapidly) in ways that are difficult or impossible to anticipate. In addition, although COVID-19 has not materially impacted our net sales to date, it remains uncertain whether and how consumers will modify their purchasing habits in response to the ongoing COVID-19 pandemic and/or the lifting or relaxing and/or re-imposition of mandates as various geographies experience resurgences and abatement of the pandemic.

The impacts of COVID-19 to our specific operating segments are discussed below.

RESULTS OF OPERATIONS

FISCAL YEAR 2022 COMPARED TO FISCAL YEAR 2021

CONSOLIDATED RESULTS

Consolidated net sales in fiscal year 2022 reached an all-time high of $348,589,000, an increase of $43,608,000 or 14%, from net sales of $304,981,000 in fiscal year 2021. Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group due to an increase in sales volume and higher prices instituted in response to rising costs. The increase in demand for our products during the fiscal year 2022 has led to an increase in our backlog of orders. We have hired additional manufacturing personnel, expanded our production shifts, increased production equipment and made various repairs to equipment in order to reduce our backlog as well as increase our use of alternate modes of transportation. We continue to analyze the constraints on our operations and implement strategies to meet the increase in customer demand. Segment results are discussed further below.

Consolidated gross profit in fiscal year 2022 was $62,515,000, a decrease of $2,726,000, or 4%, from gross profit of $65,241,000 in the prior fiscal year. Our gross margin (defined as gross profit as a percentage of net sales) in fiscal year 2022 decreased to 18% from 21% in fiscal year 2021. Higher freight, packaging, natural gas, and non-fuel manufacturing costs per ton drove the decrease in gross profit. We continue to experience high freight costs both domestically and with respect to ocean freight. Domestic freight costs per ton, excluding the freight we no longer charge to a significant customer who now picks up its own purchases, increased approximately 27% in fiscal year 2022 compared to fiscal year 2021. The increase relates to higher transportation rates due to an increase in diesel fuel costs, a national driver shortage, and tight trucking capacity. Ocean freight costs have also increased due to rising fuel costs and export fees. In addition, our overall freight costs can vary between periods depending on the mix of products sold and the geographic distribution of our customers. Packaging costs per ton for fiscal year 2022 were approximately 29% higher compared to fiscal year 2021 due to higher commodity costs, particularly as it relates to resin and pallet costs. Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices. The cost of natural gas per ton used to operate kilns that dry our clay was 108% higher in fiscal year 2022 compared to fiscal year 2021 due to higher natural gas prices and higher natural gas delivery costs, which are being driven by demand surpassing available supply as well as the impact of the ongoing conflict between Russia and Ukraine and actions taken in response to such conflict. Non-fuel manufacturing costs per ton also increased during fiscal year

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2022 compared to fiscal year 2021 by 11%. The increase in non-fuel manufacturing costs relate to higher repairs, utility costs, labor and benefit costs, and costs of purchased materials. In addition to the above, during fiscal year 2022, several suppliers started to pass along non-commodity price increases related to cost increases experienced in their own businesses and we expect such increases to persist. While we have faced higher costs due to the reasons mentioned above, we continue to strive to restore our historical margins utilizing various strategies including reducing costs where possible, increasing sales volume, and implementing price increases.

Total selling, general and administrative expenses (SG&A) were 0.3% lower in fiscal year 2022 compared to fiscal year 2021, effectively flat year over year. An increase in compensation expense was offset by lower pension and other costs. The discussion of each segment's operating income below describe the changes in selling, general and administrative expenses that were allocated to that segment.

The loss on impairment of goodwill of $5,644,000 is related to our Retail and Wholesale Products Group reporting unit. Our goodwill impairment test is based on cash flow considerations and other approaches that require significant judgment with respect to volume, revenue, expenses and allocations. We determined that, as a result of lower share prices and the continued adverse impacts of rising costs and additional expenses to prevent supply chain disruptions, and despite improving margins, we had a triggering event during the third quarter of fiscal 2022 that necessitated a goodwill impairment test and resulted in the carrying value of our Retail and Wholesale Products Group reporting unit being higher than its fair value which led to the $5,644,000 impairment charge.

    Other income (expense), net in fiscal year 2021 included approximately $600,000 of settlement expense under our pension plan as further described in Note 8 to the Notes to the Consolidated Financial Statements. No settlement expense was incurred in fiscal 2022. In addition, there was pension income driven by changes in discount rates and census data in fiscal year 2022.

Tax expense for fiscal year 2022 was $97,000 (effective tax rate of 1.7%) compared to $2,388,000 (effective tax rate of 17.7%) in fiscal year 2021. The decrease in tax expense was driven by lower taxable income and additional tax deductions allowed for the mining industry. See Note 5 of the Notes to the Consolidated Financial Statements for additional information about our income taxes.

The Company routinely assesses its operating segments. In fiscal year 2022, driven by a change in its management organization, the Company decided to move its wholly-owned subsidiary in the United Kingdom from the Retail and Wholesale Products Group to the Business to Business Products Group. In addition, the co-packaging coarse cat litter business was moved from the Business to Business Products Group to the Retail and Wholesale Products Group. Prior year net sales and operating income have been reclassified to reflect these changes.

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BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for fiscal year 2022 were $113,379,000, an increase of $16,241,000, or 17%, from net sales of $97,138,000 in fiscal year 2021. Net sales increased in all product categories - agricultural and horticultural products; fluids and purification products; and animal health products. This growth was the result of both price increases and higher demand for our products. Net sales of fluid purification products increased approximately $8,715,000 or 16% in fiscal year 2022 compared with the prior year. The increase in net sales occurred for a variety of reasons, including new customer wins, increased sales to existing customers, increase in air travel in most regions, price increases that were instituted to offset rising costs, and in some cases, timing of net sales. The majority of this increase in net sales was concentrated in North America and Latin America. Revenues in Europe remained relatively flat year over year due to the impact of currency translation on our selling prices as well as ocean freight shipping delays. Net sales of our agricultural and horticultural chemical carrier products increased approximately $4,384,000, or 17%, for fiscal year 2022 compared to fiscal year 2021 as a result of continued strong demand for these products as well as price increases. Net sales of our animal health and nutrition products increased $3,143,000, or 18%, during fiscal year 2022 compared to the prior year driven by increases in North America and Latin America, partially offset by decreases in Mexico and Asia, (excluding China which had a slight increase in net sales as discussed below in "Foreign Operations"). The increase in net sales relates to several new customers, a new product line in North America, and in general, timing of when sales occur. Furthermore, our business to Latin America has benefited from the European Union's ("EU") new antibiotic-free regulation on foreign protein imports, as a large percentage of meat is exported from that region to the EU. Despite the overall increase in net sales, ocean freight delays and the continuation of COVID-19, particularly in China, which has continued to impose restrictions and quarantine requirements in response to COVID-19 outbreaks, impacted our animal health business during fiscal year 2022. See “Foreign Operations” below for a discussion of net sales for our foreign operations that sell our animal health and nutrition products.

SG&A expenses for the Business to Business Products Group increased approximately 23% or $2,628,844 for fiscal year 2022 compared to the prior fiscal year. We continued to invest in our animal health business, which resulted in higher costs due to increased headcount of sales and leadership personnel, increased travel costs, and increased marketing efforts associated with our animal feed additives. The increase in SG&A expenses in fiscal year 2022 also related to an increase in compensation related to additional headcount and a write off of patent applications.

The Business to Business Products Group’s operating income for fiscal year 2022 was $24,344,000, a decrease of $1,570,000, or 6%, from operating income of $25,914,000 for fiscal year 2021. The decrease in operating income was driven by higher freight, packaging, natural gas, and non-fuel manufacturing costs per ton as discussed in “Consolidated Results” above as well as higher SG&A expenses during fiscal year 2022.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for fiscal year 2022 were $235,210,000, an increase of $27,367,000, or 13%, from net sales of $207,843,000 in fiscal year 2021 driven by both increases in net sales of our cat litter and our industrial and sports products. Total cat litter net sales increased $20,159,000, or 11%, compared to the prior fiscal year. This increase was driven by organic volume growth, expanded distribution, price increases in response to rising costs, and the reduced need for trade spending because of higher demand. Net sales of branded scoopable litter, private label lightweight and heavyweight litter, and accessories (liners) increased in fiscal year 2022 compared to the prior year. Sales to e-commerce distributors were also higher during the fiscal year 2022 compared to fiscal year 2021. Our co-packaged coarse cat litter business experienced an increase of $2,474,300 or 17% in net sales during fiscal year 2022 compared to fiscal year 2021 primarily due to price increases partially offset by a decrease in volume. Also included in the Retail and Wholesale Products Group's results were increased net sales of our industrial and sports products in fiscal year 2022, compared to fiscal year 2021. Net sales of our industrial and sports products increased approximately $7,208,000 or 23% in fiscal year 2022 compared to fiscal year 2021, due to the continued re-opening of businesses and sports fields in fiscal 2022, as well as new customers and an increase in selling price per ton as we continue to respond to rising costs.

    SG&A expenses for the Retail and Wholesale Products Group was lower by approximately $4,520,089, or 26%, during fiscal year 2022 compared to fiscal year 2021 due to lower advertising costs, bad debt expenses and other selling expenses in fiscal year 2022.

An impairment of goodwill of $5,644,000 was recognized in the third quarter of fiscal 2022 driven by a third quarter triggering event due to lower share prices and the continued adverse impacts of rising costs and additional expenses to prevent supply chain disruptions.

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The Retail and Wholesale Products Group’s segment operating income for fiscal year 2022 was $6,252,000, a decrease of $4,836,000 or 44%, from operating income of $11,088,000 in fiscal year 2021. The decrease in segment operating income was driven by the goodwill impairment charge recorded in the third quarter of fiscal year 2022 as well as higher freight, packaging, natural gas, and non-fuel manufacturing costs which outpaced the increase in net sales as described in “Consolidated Results” above.

FOREIGN SUBSIDIARIES

Foreign operations include our subsidiary in Canada, which is included in the Retail and Wholesale Products Group, and our subsidiaries in the United Kingdom, China, Mexico and Indonesia, which are included in the Business to Business Products Group. Net sales by our foreign subsidiaries during fiscal year 2022 were $19,893,000, an increase of $2,487,000, or 14%, from net sales of $17,406,000 during fiscal year 2021. All of our foreign operations, with the exception of our subsidiary in Mexico, experienced an increase in net sales during fiscal year 2022 compared to fiscal year 2021. Total net sales of our subsidiary in Canada during fiscal year 2022 increased by $2,237,000, or 23%, compared to fiscal year 2021 driven by higher cat litter net sales. Cat litter sales in Canada were $2,610,000 higher during fiscal year 2022 than in fiscal year 2021. The increase in cat litter sales was mainly driven by a key customer carrying three of our products for the first time as well as price increases instituted in response to rising costs. The increase in cat litter sales was partially offset by lower net sales of our industrial absorbent granules in fiscal year 2022 compared to fiscal year 2021. Net sales of industrial absorbent granules were higher in fiscal year 2021 as companies emerged from the constraints of the pandemic and there was a surge in demand. Net sales of our subsidiary in the United Kingdom in fiscal year 2022 increased by $396,000, or 21%, compared to net sales in fiscal year 2021. The increase related to timing of net sales and partly due to demand starting to slowly return post pandemic. Net sales of our subsidiary in Mexico decreased during fiscal year 2022 compared to fiscal year 2021 by $408,000 or 16%, as fiscal year 2021 included net sales of products in that region that are no longer part of our business strategy. Despite the negative impacts of COVID-19 in China, net sales of our subsidiary in China increased $40,000, or 1%, during fiscal year 2022 compared to fiscal year 2021 due primarily to the addition of a new customer. Net sales by our foreign subsidiaries represented 6% of our consolidated net sales for both the fiscal years 2022 and 2021.

For fiscal year 2022, our foreign subsidiaries reported a net loss of $756,000, compared to a net loss of $597,000 in fiscal year 2021. The net loss in fiscal year 2022 was primarily driven by unfavorable exchange rates, lower net sales for our subsidiary in Mexico, higher cost of sales, and higher SG&A expenses by our subsidiary in China due to increased sales personnel and marketing of our animal feed additives as we continue to invest in our animal health and nutrition products.

Identifiable assets of our foreign subsidiaries as of July 31, 2022 were $12,989,000 compared to $12,572,000 as of July 31, 2021.

LIQUIDITY AND CAPITAL RESOURCES

Our principal short and long-term capital requirements include: funding working capital needs; purchasing and upgrading equipment, facilities, information systems, and real estate; supporting new product development; spending on marketing and advertising costs; investing in infrastructure; repurchasing stock; paying dividends; making pension contributions; and, from time to time, business acquisitions. During fiscal year 2022, we principally funded these short and long-term capital requirements using cash from current operations as well as cash generated in the second quarter of fiscal year 2022 from borrowings under our Series Senior C Notes (described below).

Cash and cash equivalents totaled $16,298,000 and $24,591,000 as of July 31, 2022 and 2021, respectively.

    We currently anticipate cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements. In addition, we are actively monitoring the timing and collection of our accounts receivable. Given the dynamic nature of COVID-19 and its effects, as well as the current inflationary environment and impacts of supply chain disruption on our business, we will continue to assess our liquidity needs and to actively manage our spending.

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The following table sets forth certain elements of our Consolidated Statements of Cash Flows for the fiscal year (in thousands):

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Net cash provided by operating activities

    In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for fiscal years 2022 and 2021 were as follows:

    Non-cash stock compensation was $210,000 higher for fiscal 2022 compared to fiscal 2021 due to an increase of stock awards granted in 2022. See Note 7 of the Notes to the Consolidated Financial Statements for further information about stock-based compensation.

During the third quarter of fiscal 2022, we recorded a non-cash goodwill impairment charge of $5,644,000, which left no remaining goodwill in the Retail and Wholesale Products Group reporting unit. See Note 1 of the Notes to the Consolidated Financial Statements for further information about goodwill.

Accounts receivable, less allowance for doubtful accounts and cash discounts, were $10,881,000 higher at fiscal year-end 2022 compared to fiscal year-end 2021 due primarily to higher sales in the fourth quarter of fiscal 2022 than in the same period in fiscal year 2021. The same measure of accounts receivable was $5,808,000 higher at fiscal year-end 2021 compared to fiscal year-end 2020 due to higher sales in the fourth quarter of fiscal year 2021. Accounts receivable increased in both fiscal years 2022 and 2021 due to the increase in net sales in both periods. In addition, the variation in accounts receivable balances reflect differences in the level and timing of collections as well as the payment terms provided to various customers.

Inventories were $12,109,000 higher at fiscal year-end 2022 compared to fiscal year-end 2021 due primarily to rising costs and building inventory levels to meet demand and thwart potential supply chain disruptions. Inventories were $518,000 lower at fiscal year-end 2021 compared to fiscal year-end 2020 due primarily to higher sales of finished goods offset by increased packaging costs and a lower obsolescence reserve. Packaging costs increased due to anticipated sales demand as well as an increase in the underlying cost of packaging. The lower obsolescence reserve was attributable to our focus on inventory management. See Note 1 of the Notes to the Consolidated Financial Statements for further information regarding our inventory.

Prepaid expenses were $1,014,000 higher at fiscal year-end 2022 compared to fiscal year-end 2021 driven primarily by higher prepaid insurance costs due to the rising cost of insurance and timing of premium payments. Prepaid expenses were $4,067,000 higher at fiscal year end 2021 compared to fiscal year 2020 due to higher prepayments of income taxes. This increase in fiscal year 2021 was partially offset by lower prepaid advertising costs and insurance.

    Deferred income taxes, less provision for deferred income taxes, were $1,581,000 higher at fiscal year-end 2022 compared to fiscal year-end 2021 and were $5,196,000 lower at fiscal year-end 2021 compared to fiscal year-end 2020. Deferred income taxes were higher at fiscal year-end 2022 due to the election of out of bonus depreciation that the Company took in fiscal year 2021. Deferred income taxes were lower at fiscal year-end 2021 due to certain pension and retirement benefits, accrued expenses, and bonus depreciation on fixed assets. See Note 5 of the Notes to the Consolidated Financial Statements for further information about income taxes.

Other assets were $2,138,000 higher at fiscal year-end 2022 compared to fiscal year-end 2021 due to an increase in operating lease right-of-use lease assets offset by amortization of said right-of-use assets. Other assets were $544,000 lower at fiscal year-end 2021 compared to fiscal year-end 2020 due to a reduction in our operating right of use lease asset for expiring leases partially offset by higher pre-production costs at certain of our mines.

    Accounts payable were $5,002,000 higher at fiscal year-end 2022 compared to fiscal year-end 2021. Higher trade payables drove the increase in accounts payable in fiscal year 2022. Accounts payable were $2,411,000 lower at fiscal year-end 2021 compared to fiscal year-end 2020. Lower trade payables drove the decrease in accounts payable in fiscal year 2021 as well

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as income taxes payable being in a prepaid position versus a payable position at the end of the fiscal year 2021. Changes in trade accounts payable in all periods are subject to normal fluctuations in the timing of payments, the cost of goods and services we purchased, production volume levels and vendor payment terms.

Accrued expenses were $4,703,000 higher at fiscal year-end 2022 compared to fiscal year-end 2021 The increase in accrued expenses during the fiscal year 2022 is attributable to a continued increase in freight costs, natural gas prices and salaries and benefits. These increases were somewhat lessened by lower accrued advertising costs. Accrued expenses were $4,097,000 lower at fiscal year-end 2021 compared to fiscal year-end 2020 due primarily to accrued annual discretionary bonus, 401(k) employer match, advertising costs and an accrual for a legal contingency, which is further described in Note 11 of the Notes to the Consolidated Financial Statements. These increases were partially offset by lower accruals for unvouchered freight.

    Deferred compensation balances at fiscal year-end 2022 were $189,000 higher compared to fiscal year-end 2021 and fiscal year-end 2021 was $770,000 lower compared to fiscal year-end 2020. Deferred compensation increased in fiscal 2022 because of higher deferrals by participants in our deferred compensation plans. Deferred compensation balances were lower at fiscal year-end 2021 due to the termination and subsequent pay-out of one of our plans, the Supplemental Executive Retirement Plan, as further discussed in Note 9 to the Notes to the Consolidated Financial Statements.

    Pension and other postretirement liabilities, net of the adjustment recorded in stockholders' equity, were $1,938,000 lower at fiscal year-end 2022 compared to fiscal year-end 2021 due to a higher discount rate and change in census data. These liabilities were $2,652,000 lower at fiscal year-end 2021 compared to fiscal year-end 2020 due to reduced service expense related to the Pension Plan which was frozen in fiscal year 2020 as well as a higher discount rate and change in census data. See Note 8 of the Notes to the Consolidated Financial Statements for more information regarding our postretirement benefit plans.

Other liabilities were $2,799,000 lower at fiscal year-end 2022 compared to fiscal year-end 2021. The decrease in Other liabilities relates to a payment of payroll taxes deferred by the CARES Act during fiscal 2022, payments made against our operating lease liability, partially offset by an increase in reclamation liability due to increased mining activity. Other liabilities were $557,000 lower at fiscal year-end 2021 compared to fiscal year-end 2020. The decrease in other liabilities relates to a reduction in our operating lease liability, partly offset by an increase in our reclamation liability due to increased mining activity and an increase in deferral of employer taxes under the CARES Act as further described in Note 1 of the Notes to the Consolidated Financial Statements.

Net cash used in investing activities

Cash used in investing activities was $22,810,000 in fiscal year 2022 and cash used in investing activities was $18,830,000 in fiscal year 2021. Cash used in fiscal year 2022 related primarily to the purchases of capital expenditures at levels comparably higher to fiscal year 2021. During fiscal year 2022, we expanded our plant equipment and improved our facilities to support increased demand for our products as well as made improvements to our IT network. Cash used in fiscal year 2021 related chiefly to capital expenditures. The increase in our capital expenditures in fiscal year 2021 compared to fiscal year 2020 relates to purchases of equipment to support our increased mining and hauling activity.

Net cash provided by (used in) financing activities

Cash provided in financing activities was $4,703,000 in fiscal year 2022 and cash used in financing activities was $11,322,000 in fiscal year 2021. During fiscal year 2022, we issued $25,000,000 in aggregate principal amount of our 3.25% Series C Senior Notes, which provided cash for operations. The primary uses of cash used in financing activities in all periods were for long-term debt, dividend payments, and stock purchases offset by borrowings as further described in Note 3 of the Notes to the Consolidated Financial Statements.

Other

Total cash and investment balances held by our foreign subsidiaries as of July 31, 2022 and 2021 were $3,260,000 and $3,054,000, respectively. See further discussion in the “Foreign Operations” section above.

On January 31, 2019, we signed a fifth amendment to our credit agreement with BMO Harris, which expires on January 31, 2024. The new agreement provides for a $45,000,000 unsecured revolving credit agreement, including a maximum of $10,000,000 for letters of credit. The remaining terms were substantially unchanged from our previous agreement with BMO Harris, including the provision that we may select a variable rate based on either BMO Harris’ prime rate or a LIBOR-based rate, plus a margin which varies depending on our debt to earnings ratio, or a fixed rate as agreed between us and BMO Harris.

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As of July 31, 2022, the variable rates would have been 5.75% for the BMO Harris’ prime-based rate or 4.04% for the LIBOR-based rate. The credit agreement contains restrictive covenants that, among other things and under various conditions, limit our ability to incur additional indebtedness or to dispose of assets. The agreement also requires us to maintain a minimum fixed coverage ratio and a minimum consolidated net worth. As of July 31, 2022 and 2021, we were in compliance with its covenants. As of July 31, 2022 and 2021, there were no outstanding borrowings under this credit agreement. See Note 13 of the Notes to the Consolidated Financial Statements for further information regarding our debt agreement.

See Note 3 and Note 13 of the Notes to the Consolidated Financial Statements for information about our outstanding notes payable and a discussion of the debt instrument that we entered into on May 15, 2020 pursuant to which, among other things, we issued $10,000,000 in aggregate principal amount of our 3.95% Series B Senior Notes due May 15, 2030 and entered into an amended note agreement that provides the Company with the ability to request, from time to time until May 15, 2023 (or such earlier date as provided for in the agreement), additional senior unsecured notes of the Company in an aggregate principal amount of up to $75,000,000 minus the aggregate principal amount of the notes then outstanding and the additional notes that have been accepted for purchase. The issuance of such additional notes is at the discretion of the noteholders and purchasers and on an uncommitted basis.

    As of July 31, 2022, we had remaining authority to repurchase 436,526 shares of Common Stock and 273,100 shares of Class B Stock under a repurchase plan approved by our Board of Directors (the “Board”). Repurchases may be made on the open market (pursuant to Rule 10b5-1 plans or otherwise) or in negotiated transactions. The timing and number of shares repurchased will be determined by our management pursuant to the repurchase plan approved by our Board. In fiscal years 2021 and 2022 we made repurchases of stock as further discussed in Item 5, Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities.

We believe that cash flow from operations, availability under our revolving credit facility, current cash balances and our ability to obtain other financing, if necessary, will provide adequate cash funds for foreseeable working capital needs, capital expenditures at existing facilities, deferred compensation payouts, dividend payments and debt service obligations for at least the next 12 months. We spent approximately $4,619,000 less for advertising in fiscal year 2022 compared to fiscal year 2021. We spent approximately $1,023,000 less for advertising in fiscal year 2021 compared to fiscal year 2020. We expect advertising expense in fiscal year 2023 to be higher than in fiscal year 2022 and more in line with pre-COVID spending levels. Our expenditures for capital were higher in fiscal year 2022 compared to fiscal year 2021 and also higher in fiscal year 2021 compared to fiscal year 2020. The increased capital expenditures did not dramatically impact our cash position; however our cash requirements are subject to change as business conditions warrant and opportunities arise.

We continually evaluate our liquidity position and anticipated cash needs, as well as the financing options available to obtain additional cash reserves. Our ability to fund operations, to make planned capital expenditures, to make scheduled debt payments, to contribute to our pension plan and to remain in compliance with all financial covenants under debt agreements, including, but not limited to, the current credit agreement, depends on our future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors. The timing and size of any new business ventures or acquisitions that we complete may also impact our cash requirements.

OFF BALANCE SHEET ARRANGEMENTS

We do not have any unconsolidated special purpose entities. As of July 31, 2022, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of the financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with the generally accepted accounting principles of the United States (“U.S. GAAP”). We review our financial reporting and disclosure practices and accounting policies annually to ensure that our financial reporting and disclosures provide accurate and transparent information relative to the current economic and business environment. We believe that, of our significant accounting policies stated in Note 1 of the Notes to the Consolidated Financial Statements, the policies listed below involve a higher degree of judgment and/or complexity. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates include income taxes, promotional programs, pension accounting and allowance for doubtful accounts. Actual results could differ from these estimates.

Income Taxes. Our effective tax rate on earnings was based on income, statutory tax rates and tax planning opportunities available to us in various jurisdictions in which we operate. Significant judgment was required in determining our effective tax rate and in evaluating our tax positions.

We determine our current and deferred taxes in accordance with Accounting Standards Codification (“ASC”) 740 Income Taxes. The tax effect of the expected reversal of tax differences was recorded at rates currently enacted for each jurisdiction in which we operate. To the extent that temporary differences will result in future tax benefit, we must estimate the timing of their reversal and whether taxable operating income in future periods will be sufficient to fully recognize any deferred tax assets.

We maintain valuation allowances where it is likely that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the income tax provision in the period of change. In determining whether a valuation allowance is warranted, we take into account such factors as prior earnings history, expected future earnings and other factors that could affect the realization of deferred tax assets.

We recorded valuation allowances of $1,761,000 and $1,362,000 for the amount of the deferred tax benefit related to our foreign net operating loss carryforwards as of July 31, 2022 and 2021, respectively, because we believe it is unlikely we will realize the benefit of these tax attributes in the future.

In addition to valuation allowances, we may provide for uncertain tax positions when such tax positions do not meet certain recognition thresholds or measurement standards. Amounts for uncertain tax positions are adjusted when new information becomes available or when positions are effectively settled. We did not record a liability for unrecognized tax benefits at either July 31, 2022 or 2021. See Note 5 of the Notes to the Consolidated Financial Statements for further discussion.

Trade Promotions. We routinely commit to one-time or ongoing trade promotion programs in our Retail and Wholesale Products Group. Promotional reserves are provided for sales incentives made directly to consumers, such as coupons, and sales incentives made to customers, such as slotting, discounts based on sales volume, cooperative marketing programs and other arrangements. All such trade promotion costs are netted against sales. Promotional reserves are established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. To estimate trade promotion reserves, we rely on our historical experience of trade spending patterns and that of the industry, current trends and forecasted data. While we believe our promotional reserves are reasonable and that appropriate judgments have been made, estimated amounts could differ from future obligations. We have accrued liabilities at the end of each period for the estimated trade spending programs. We recorded liabilities of approximately $1,180,000 and $1,653,000 for trade promotions as of July 31, 2022 and 2021, respectively.

Pension and Postretirement Benefit Costs. We calculate our pension and postretirement health benefit obligations and the related effects on results of operations using actuarial models. To measure the expense and obligations, we must make a variety of estimates including critical assumptions for the discount rate used to value certain liabilities and the expected return on plan assets set aside to fund these costs. We evaluate these critical assumptions at least annually. Other assumptions involving demographic factors, such as retirement age, mortality and turnover, are evaluated periodically and are updated to reflect actual experience. As these assumptions change from period to period, recorded pension and postretirement health benefit amounts and funding requirements could also change. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.

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The discount rate is the rate assumed to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the pension benefits when due. The discount rate is subject to change each year. We refer to an applicable index and the expected duration of the benefit payments to select a discount rate at which we believe the benefits could be effectively settled. The discount rate was the single equivalent rate that would yield the same present value as the plan’s expected cash flows discounted with spot rates on a yield curve of investment-grade corporate bonds. The yield curve used in both fiscal years 2022 and 2021 was the FTSE Pension Discount Curve (formerly called the Citi Pension Discount Curve). Our determination of pension expense or income is based on a market-related valuation of plan assets, which is the fair market value. Our expected rate of return on plan assets is determined based on asset allocations and historical experience. The expected long-term rate of inflation and risk premiums for the various asset categories are based on general historical returns and inflation rates. The target allocation of assets is used to develop a composite rate of return assumption. See Note 8 of the Notes to the Consolidated Financial Statements for additional information.

As further described in Note 8 of the Notes to the Consolidated Financial Statements, we amended and froze participation in our pension plan and supplemental executive retirement plan in the second quarter of fiscal year 2020. The amendment of these plans triggered a curtailment, which required a remeasurement of the plans’ obligations. Both of these remeasurements were based on actuarially determined amounts. In addition, we offered terminated participants with vested benefits who have not yet begun receipt of benefits under the pension plan the opportunity to receive their pension benefits in a single payment (the “Lump Sum Option”). We made payments to those participants in the pension plan who elected the Lump Sum Option by the May 15, 2020 election deadline. This settlement of the pension plan was completed in fiscal year 2021 when we purchased an annuity.

Trade Receivables. We recognize trade receivables when control of finished products are transferred to our customers. We record an allowance for credit losses based on our expectations and a periodic review of our accounts receivable, including a review of the overall aging of accounts, consideration of customer credit risk and analysis of facts and circumstances about specific accounts. A customer account is determined to be uncollectible when it is probable that a loss will be incurred after we have completed our internal collection procedures, including termination of shipments, direct customer contact and formal demand of payment. We believe our allowance for doubtful accounts is reasonable; however, the unanticipated default by a customer with a material trade receivable could occur. We also record an estimated allowance for cash discounts offered in our payment terms to some customers. We recorded a total allowance for credit losses and cash discounts of $922,000 and $1,174,000 as of July 31, 2022 and 2021, respectively.

Revenue Recognition. We recognize revenue when performance obligations under the terms of the contracts with customers are satisfied. Our performance obligation generally consists of the promise to sell finished products to wholesalers, distributors and retailers or consumers and our obligations have an original duration of one year or less. Control of the finished products are transferred upon shipment to, or receipt at, customers' locations, as determined by the specific terms of the contract. We have completed our performance obligation when control is transferred and we recognize revenue accordingly. Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Sales returns are not material nor are warranties and any related obligations.

     Inventories. We value inventories 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 perform a detailed review of our inventory to determine if a reserve adjustment is necessary, giving consideration to obsolescence, inventory levels, product deterioration and other factors. The review also surveys all of our operating facilities and sales divisions to give consideration to historic and new market trends. The inventory reserve values as of July 31, 2022 and 2021 were $842,000 and $641,000, respectively.

Reclamation. During the normal course of our mining process we remove overburden and perform on-going reclamation activities. As overburden is removed from a mine site, it is hauled to a previously mined site and used to refill older sites. This process allows us to continuously reclaim older mine sites and dispose of overburden simultaneously, therefore minimizing the costs associated with the reclamation process. On an annual basis we evaluate our potential reclamation liability in accordance with ASC 410, Asset Retirement and Environmental Obligations. As of July 31, 2022 and 2021, we have recorded an estimated net reclamation asset of $1,799,000 and $1,152,000, respectively, and a corresponding estimated reclamation liability of $3,807,000 as of July 31, 2022 and $2,965,000 as of July 31, 2021. These values represent the discounted present value of the estimated future mining reclamation costs at the production plants. The reclamation assets are depreciated over the estimated useful lives of the various mines. The reclamation liabilities are increased based on a yearly accretion charge over the estimated useful lives of the mines.

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Accounting for reclamation obligations requires that we make estimates unique to each mining operation of the future costs we will incur to complete the reclamation work required to comply with existing laws and regulations. Actual future costs incurred could significantly differ from estimated amounts. Future changes to environmental laws could increase the extent of reclamation work required. Any such increases in future costs could materially impact the amount incurred for reclamation costs.

Impairment of goodwill, trademarks and other intangible assets. We review carrying values of goodwill, trademarks and other indefinite-lived intangible assets periodically for possible impairment in accordance ASC 350, Intangibles – Goodwill and Other. Our impairment review requires significant judgment with respect to factors such as volume, revenue and expenses. Impairment occurs when the carrying value exceeds the fair value. Our impairment analysis is performed in the fourth quarter of the fiscal year and may be re-performed during the year when indicators such as unexpected adverse economic factors, unanticipated technological changes, competitive activities and acts by governments and courts indicate that an asset may become impaired. We determined that, as a result of lower share prices and the continued adverse impacts of rising costs and additional expenses to prevent supply chain disruptions, we had a triggering event during the third quarter of fiscal year 2022 that necessitated a goodwill impairment test. We performed a goodwill impairment test on our Retail and Wholesale Products Group and Business to Business Products Group reporting units and determined that the carrying value of our Retail and Wholesale Products Group reporting unit was higher than its fair value. As a result, we recorded goodwill impairment of $5,644,000, which left no remaining goodwill in the Retail and Wholesale Products Group reporting unit. We also performed a quantitative impairment analysis on the Business to Business Products Group reporting unit and concluded there was excess fair value over carrying value, therefore no impairment was recorded on this reporting unit. We continue to monitor events, circumstances or changes in the business that might imply a reduction in value which could lead to an impairment. In addition, although we have not identified any additional triggering 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 above.

NEW ACCOUNTING PRONOUNCEMENTS

Recently Issued Accounting Standards

    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 have debt agreements that reference LIBOR and to the extent that those agreements are modified to replace LIBOR with another interest rate index, ASC 848 will allow us to account for the modification as a continuation of the existing contract without additional analysis. The impact of adopting this requirement is not material to 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. We implemented this guidance effective for our first quarter of fiscal year 2022. The impact of adopting this requirement is not material to 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. Early adoption is permitted, and we adopted this standard for the evaluation of bad debt reserves at July 31, 2022. Accordingly, this guidance is effective for our first quarter of fiscal year 2023. The impact of adopting this requirement is not material to our Consolidated Financial Statements.

    A summary of all recently adopted and issued accounting standards is contained in Note 1 of Notes to the Consolidated Financial Statements.

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