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MarketScreener Homepage  >  Equities  >  Nyse  >  Oil-Dri Corporation of America    ODC

OIL-DRI CORPORATION OF AMERICA

(ODC)
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OIL DRI OF AMERICA : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

10/13/2020 | 04:17pm EST

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.

RESULTS OF OPERATIONS

OVERVIEW

Consolidated net sales increased approximately $6,202,000 or 2% in fiscal year 2020 compared to fiscal year 2019 along with an increase in income from operations of $14,415,000 or 138%. The increase in income from operations relates to a decrease in cost of sales and a one-time receipt of $13,000,000 relating to licensing of certain of our patents as further described in Note 1 of the Notes to the Consolidated Financial Statements partially offset by higher selling, general and administrative expenses.

Consolidated net income was $18,900,000, or $2.65 per diluted common share, for the fiscal year ended July 31, 2020, a 50% increase from net income of $12,611,000, or $1.80 per diluted common share, for the fiscal year ended July 31, 2019. Higher income from operations as noted above contributed to the increase in net income in fiscal year 2020 offset in part by pension settlement expense as further described in Note 9 of the Notes to the Consolidated Financial Statements as well as by higher income tax expense.

Our Consolidated Balance Sheets as of July 31, 2020 and our Consolidated Statements of Cash Flows for fiscal year 2020 show an increase in total cash and cash equivalents from fiscal year-end 2019, even while we continue to invest in our facilities, repay debt, pay dividends and make contributions to our pension plan. The increase in cash is further described in Liquidity and Capital Resources.

In December 2019, COVID-19 was reported in China and has subsequently spread worldwide. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. While we saw changes to consumer purchasing patterns for certain products in response to the pandemic and certain increases in our costs arising out of the pandemic, COVID-19 has not, to date, had a significant impact on our business as a whole. All of our facilities, with the exception of our subsidiary in China, (which as noted below, has resumed operations), have continued to operate as essential businesses as permitted under exceptions in the applicable shelter-in-place mandates due to our inclusion in the Critical Manufacturing Sector as defined by the U.S. Department of Homeland Security and other functions defined as essential by government authorities. Our subsidiary in China returned to operations in the third quarter of fiscal year 2020. Our top priority has been, and continues to be, the safety and health of our employees, contractors, and customers. We have adhered to and continue to adhere to guidance from the U.S. Centers for Disease Control and Prevention and local health and governmental authorities with respect to social distancing and physical separation. Additionally, we have increased cleaning and sanitation programs at each of our facilities. As a result, we have not experienced any shutdowns due to workforce absences or illnesses.

As further discussed below, our sales increased in fiscal year 2020 primarily due to volume. One of the primary drivers of the increase is that in the third quarter of fiscal year 2020 consumers purchased more cat litter and related products in anticipation of potential future shortages and store closures due to COVID-19. We experienced increases in cat litter sales for both our U.S. business and our subsidiary in Canada as consumers bought more cat litter and related products in response to the shelter-in-place


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orders instituted by many states and localities in response to the COVID-19 outbreak. Sales normalized by fiscal year-end 2020. Despite the increase in sales, we have not experienced any increased issues collecting amounts due from customers to date. However, other areas of our business have been negatively impacted. Sales from our industrial and sports products declined in fiscal year 2020 as businesses and sports fields shut down. In the long-term, we foresee that our sports product sales will improve back to pre-pandemic volumes with the re-opening of baseball and softball at all levels. There has been some lower demand from customers in our agricultural business as well a shift in demand from fiscal year 2020 into fiscal year 2021 for one of our customers. In addition, our fluids purification sales decreased in part due to the closures of restaurants and schools, which have not fully re-opened. To a lesser extent, our inability due to COVID-19 to participate in our customers' plant tests of our fluids purification products has also impeded our sales in recent months. Further, during the second quarter of fiscal year 2020 our operations in China temporarily closed, which disrupted our business in China. Our operations in China subsequently re-opened in the third quarter of fiscal year 2020.

Consolidated gross profit has not been significantly impacted by COVID-19. Our suppliers have either remained open or we have found new suppliers to meet the increase in consumer demand without an impact to pricing. While we have incurred some additional costs from truck loading delays due to the large volume of sales, these costs have not been significant. Further, we have been able to successfully navigate delays in overseas vessel deliveries of our products by increasing our safety stock early in the COVID-19 outbreak as well as finding other providers. We have incurred additional employee compensation costs as a result of increased production to meet increased customer demand as well as additional cleaning and sanitation costs in recent months, but these costs did not have a significant impact on our consolidated gross profit. In addition, we have experienced a decrease in travel costs as our employees have not been traveling during the outbreak.

We are closely monitoring the continued spread and effects of the outbreak of COVID-19 on all aspects of our business, including how it has and may impact our suppliers and customers. We have not experienced any significant negative impacts or interruptions and we will continue to closely monitor our inventory levels to mitigate the risk of any potential supply interruptions or changes in customer demands. 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) and in ways that are difficult or impossible to anticipate. In addition, because COVID-19 did not materially impact our financial results to date and it remains uncertain whether and how consumers will modify their purchasing habits in response to COVID-19 and continued or reduced government restrictions, these results may not be indicative of the impact that COVID-19 may have on our future results. See "Part I - Item 1A - Risk Factors" for additional discussion regarding the risks COVID-19 presents our business.

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


RESULTS OF OPERATIONS
FISCAL YEAR 2020 COMPARED TO FISCAL YEAR 2019

CONSOLIDATED RESULTS

Consolidated net sales in fiscal year 2020 reached an all-time high of $283,227,000, an increase of $6,202,000 from net sales of $277,025,000 in fiscal year 2019. Net sales in our Retail and Wholesale Products Group increased for our cat litter products, as well as for our subsidiaries in Canada and the United Kingdom. Net sales in our Business to Business Products Group decreased slightly. Sales fluctuations by operating segment are further discussed below.

Consolidated gross profit in fiscal year 2020 was $75,823,000, an increase of $10,163,000 from gross profit of $65,660,000 in the prior fiscal year. Our gross margin (defined as gross profit as a percentage of net sales) in fiscal year 2020 increased to 27% from 24% in fiscal year 2019. Gross profit increased primarily due to lower freight, natural gas and warehouse costs. Freight costs per manufactured ton decreased approximately 18% compared to the prior fiscal year due in part to lower transportation rates from improved truck availability. Costs were higher in the first half of the prior fiscal year due to one-time events, including a greater number of product transfers between our plants and warehouses to support customer service during the implementation of our new ERP system on August 1, 2018 and disruptions due to Hurricane Michael. Our overall freight costs also vary between periods depending on the mix of products sold and the geographic distribution of our customers. We do expect that freight costs will increase in fiscal 2021 as there is an anticipated industry freight need as imports are surging back to pre-COVID-19 levels. The cost per manufactured ton of natural gas used to operate kilns that dry our clay was approximately 29% lower in fiscal year 2020 compared to fiscal year 2019. Warehouse costs were lower in fiscal year 2020 compared to fiscal year 2019 due to better management of inventory. Our suppliers have remained open during COVID-19 and have been able to meet our increased demand. In contrast, non-fuel manufacturing costs per ton were up approximately 3% and purchased material per ton also increased 3%. In addition, we incurred additional employee compensation costs as a result of increased production to meet increased customer demand as well as cleaning and sanitation costs in recent months due to COVID-19. These costs related to COVID-19 did not


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have a significant impact on our consolidated gross profit. In addition, an increase in the number of tons produced contributed to higher costs for labor and mining-related costs. Our repairs expense also increased for routine and preventative equipment maintenance. Packaging costs per ton were approximately 1.3% higher compared to the prior fiscal year due in part to the mix of products produced. Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices.

Total selling, general and administrative expenses were 16% higher in fiscal year 2020 compared to fiscal year 2019. The discussions of each segment's operating income below describe the changes in selling, general and administrative expenses that were allocated to that segment, particularly the higher advertising costs in the Retail and Wholesale Products Group. The remaining unallocated corporate expenses in fiscal year 2020 included a higher estimated annual incentive bonus accrual for fiscal year 2020 compared to fiscal year 2019. The incentive bonus accrual was based on actual financial results achieved for the fiscal year and discretion by our Chief Executive Officer, in accordance with the incentive plan's provisions. Also included in unallocated corporate expenses was additional expense related to the increase in employer match for our 401(k) plan. A legal contingency is also included in unallocated corporate expenses in fiscal 2020 as further discussed in Note 10 of the Notes to the Consolidated Financial Statements. These higher expenses were partially offset by lower legal and deferred compensation costs and the curtailment gain related to our Supplemental Executive Retirement Plan as further described in Note 9 of the Notes to the Consolidated Financial Statements.

Other expense of $1,387,000 in fiscal year 2020 included expense of approximately $2,000,000 of settlement expense under our pension plan as further described in Note 8 to the Notes to the Consolidated Financial Statements. In fiscal year 2019 Other income of $4,723,000 included net proceeds upon resolution of legal proceedings. The amount received under a confidential agreement resolving these legal proceedings was material to our financial results for the period. See Note 2 of the Notes to the Consolidated Financial Statements.

Tax expense for fiscal year 2020 was $4,280,000 compared to $1,933,000 in fiscal year 2019 driven by our increase in net income. See Note 5 of the Notes to the Consolidated Financial Statements for additional information about our income taxes.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for fiscal year 2020 were $104,260,000, a decrease of $1,617,000, or 2%, from net sales of $105,877,000 in fiscal year 2019. Net sales increased for our cat litter and animal health products; however, sales declined for our agricultural and horticultural products and fluids purification products.

Net sales of our agricultural and horticultural chemical carrier products decreased approximately 10% or $2,425,000 in fiscal year 2020 compared to fiscal year 2019. Sales of traditional granules declined primarily due to the previously reported loss of a large customer, which was partially offset by increased sales to an existing customer. Lower demand from our customers in the agricultural, home and garden industries due to the impact of COVID-19 have also contributed to the decrease in net sales. Net sales of our fluids purification products in fiscal year 2020 decreased approximately 3% or $1,788,000 compared to the prior fiscal year. The lower sales are attributable to a plant closing of a biodiesel processing customer and local pricing competition in foreign markets due to unfavorable exchange rates. More recently, the closures of restaurants and schools due to the outbreak of COVID-19 have caused sales to edible oil producers to decrease. There has also been a decrease in our fluids purification sales for jet fuel processing due to reductions in travel as a result of COVID-19. In addition, our inability to participate in our customers' plant tests of our products due to COVID-19 has also impeded our sales in recent months. However, sales from our UK subsidiary increased in fiscal year 2020 compared to fiscal year 2019 due to a new customer; this increase offset a portion of the decrease in sales from our overall fluids purification products. The lower sales for our agricultural and horticultural chemical carrier products and fluids purification products were partially offset by higher sales of other products in the Business to Business Group, including an increase of approximately 6% or $764,000 compared to the prior fiscal year for sales of our co-packaged coarse cat litter primarily due to volume. Net sales of our animal health and nutrition products also increased approximately 12% or $1,832,000 compared to the prior fiscal year. Sales growth occurred for our animal feed additives primarily in Latin America, Mexico, Africa, and Asia, excluding China. See "Foreign Operations" below for a discussion of sales in China, which were negatively impacted by the spread of the African swine fever in the prior year and COVID-19 in late 2019 and in 2020. The increase in sales growth in Latin America, Mexico, Africa and Asia (excluding China) was slightly offset by a decrease in sales in North America and a delay in the product registration of one of our products as well as a delay in testing and trials of our product at our customers due to COVID-19.

The Business to Business Products Group's selling, general and administrative expenses in fiscal year 2020 were approximately 9% or $841,000 higher compared to fiscal year 2019, but remained relatively consistent as a percentage of sales. The increase in SG&A is attributable to higher costs for product development and support, increased compensation-related


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expenses, an increase in bad debt allowance for certain uninsured foreign receivables, and additional costs to establish our subsidiary in Indonesia.

The Business to Business Products Group's operating income in fiscal year 2020 was flat compared to fiscal year 2019. While net sales decreased, this decrease was offset by lower freight, natural gas, and warehouse costs in fiscal year 2020 as discussed in Consolidated Results above.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for fiscal year 2020 were $178,967,000, an increase of $7,819,000, or 5%, from net sales of $171,148,000 in fiscal year 2019. Sales of cat litter drove the increase in sales. Total cat litter net sales were $12,014,000 or 9% higher compared to the prior fiscal year with increased sales of both private label and branded litters. Sales of private label scoopable litter increased to existing customers, some of whom had expanded their selection of our products during the prior fiscal year. Similarly, higher sales of private label coarse litter included incremental sales to customers who added these products in the prior fiscal year. Branded coarse litter and litter box liners sales were also higher in fiscal year 2020 compared to the prior fiscal year. Cat litter sales by our subsidiary in Canada further contributed to the sales increase, as discussed in "Foreign Operations" below. Contributing to higher cat litter sales in fiscal year 2020 was higher consumer demand as consumers purchased more cat litter and related products in anticipation of potential future shortages and store closures due to COVID-19. The increase in these sales due to COVID-19 leveled out to a more normalized volume towards the end of fiscal 2020. Also included in the Retail and Wholesale Products Group's results were lower sales of our industrial and sports products compared to fiscal year 2019. Sales of our industrial floor absorbents and sports products decreased 13% or $4,306,000 compared to fiscal year 2019, primarily driven by the impact of businesses and sports fields shutting down due to COVID-19.

Selling, general and administrative expenses for the Retail and Wholesale Products Group were approximately $2,535,000 or 15% higher compared to fiscal year 2019. The increase was driven by higher advertising expense due primarily to a focus on targeted programs and digital media.

The Retail and Wholesale Products Group's segment operating income for fiscal year 2020 was $15,859,000, an increase of $7,176,000, from operating income of $8,683,000 in fiscal year 2019. The higher sales plus lower freight, fuel and warehouse costs, were partially offset by an increase in advertising expenses and to some extent higher packaging and non-fuel costs, as discussed in "Consolidated Results" above.

FOREIGN SUBSIDIARIES Foreign operations include our subsidiaries in Canada and the UK, which are included in the Retail and Wholesale Products Group, and our subsidiaries in China, Mexico and Indonesia, which are included in the Business to Business Products Group. Net sales by our foreign subsidiaries during fiscal year 2020 were $15,220,000, an increase of $1,664,000, or 12%, from net sales of $13,556,000 during fiscal year 2019. The increase relates primarily to higher sales by our Canadian subsidiary in fiscal year 2020. One of the drivers of this increase was higher consumer demand in the third quarter as customers purchased more cat litter and related products in anticipation of potential future shortages and store closures due to COVID-19. In addition, our Canadian subsidiary had higher sales in fiscal year 2020 due to new products and customers. Sales of our animal health products by our foreign operations grew to a lesser extent, as higher sales for our subsidiaries in Mexico and Indonesia were mostly offset by lower sales for our subsidiary in China. Sales of animal health products to pork producers in China have not fully recovered since the spread of African swine fever in fiscal year 2019. In addition, our Chinese subsidiary's business operations have been impacted in the second and third quarters of fiscal year 2020 by the recent outbreak of COVID-19. Chinese government restrictions to control the spread of COVID-19 disrupted our sales office, limited travel by our salesforce and delayed product shipments. In addition, our subsidiary in China had a delay in product registration for one of our products as discussed above. Net sales by our foreign subsidiaries represented 5% of our consolidated net sales for both the fiscal years 2020 and 2019.

For fiscal year 2020, our foreign subsidiaries reported a net loss of $1,308,000, compared to net income of $155,000 in fiscal year 2019. Our subsidiaries in Canada and the UK experienced an increase in sales and net income in fiscal year 2020. While our subsidiaries in Mexico and Indonesia experienced an increase in sales in fiscal year 2020 they also had net losses, primarily due to sales commissions to brokers for our Mexico subsidiary and additional costs to establish operations in Indonesia. Our Chinese subsidiary experienced a loss in fiscal year 2020 due to a decrease in sales as noted above as well as changes in product mix.

Identifiable assets of our foreign subsidiaries as of July 31, 2020 were $12,586,000 compared to $10,195,000 as of July 31, 2019. The increase was due primarily to higher cash, inventory and receivables balances.



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LIQUIDITY AND CAPITAL RESOURCES

Our principal capital requirements include: funding working capital needs; purchasing and upgrading equipment, facilities, information systems, and real estate; supporting new product development; investing in infrastructure; repurchasing stock; paying dividends; making pension contributions; and, from time to time, business acquisitions. During fiscal year 2020, we primarily used cash generated from operations to fund these requirements. Cash and cash equivalents totaled $40,890,000 and $21,862,000 as of July 31, 2020 and 2019, respectively. Contributing to the increase in cash in fiscal year 2020 is $10,000,000 of borrowings in the fourth quarter of fiscal year 2020 as well as a one-time receipt of $13,000,000 related to licensing of certain of our patents. See Notes 1 of the Notes to the Consolidated Financial Statements for information about the one-time receipt and Note 3 for the borrowings.

To date, COVID-19 has not had a significant impact on our operations as a whole, and we 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, we will continue to assess our liquidity needs and to actively manage our spending.

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


                                                                  2020         2019
Net cash provided by operating activities                      $ 42,462$ 26,743
Net cash used in investing activities                           (14,677 )     (7,888 )
Net cash used in financing activities                            (8,750 )     (9,886 )

Effect of exchange rate changes on cash and cash equivalents (7 ) 136 Net increase in cash and cash equivalents

                      $ 19,028$  9,105

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 2020 and 2019 were as follows:

Non-cash stock compensation was $961,000 higher for fiscal 2020 compared to fiscal 2019 due to additional grants of restricted stock in fiscal year 2020. In addition, in fiscal year 2019, the amount of stock awarded was significantly higher than in the previous year and a full year of expense related to these awards was recorded in fiscal year 2020. See Note 7 of the Notes to the Consolidated Financial Statements for further information about stock-based compensation.

Deferred income taxes were $453,000 lower at fiscal year-end 2020 compared to fiscal year-end 2019, and were $406,000 higher at fiscal year-end 2019 compared to fiscal year-end 2018. Deferred income taxes were lower at fiscal year-end 2020 due to postretirement benefits and accrued expenses. Deferred income taxes were higher at fiscal year-end 2019 because during fiscal year 2018, an adjustment to reflect the lower U.S. federal corporate tax rate under the 2017 Tax Cuts and Jobs Act reduced deferred taxes, particularly related to depreciation, deferred compensation and postretirement benefits. See Note 5 of the Notes to the Consolidated Financial Statements for further information about income taxes.

We recognized a curtailment gain on our Supplemental Executive Retirement Plan ("SERP") plan in fiscal year 2020 of $1,296,000, which is further discussed in Note 9 of the Notes to the Consolidated Financial Statements.

Accounts receivable, less allowance for doubtful accounts and cash discounts, were $411,000 lower at fiscal year-end 2020 compared to fiscal year-end 2019 due primarily to lower sales in the fourth quarter of fiscal 2020 and an increase in our bad debt reserve for certain uninsured foreign receivables which had been previously insured, and for two customers that are slow-paying. The same measure of accounts receivable was $1,908,000 higher at fiscal year-end 2019 compared to fiscal year-end 2018 due to higher sales in the fourth quarter of fiscal year 2019 compared to the same fiscal year end 2018. Fluctuations in


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accounts receivable balances were impacted in all periods by the timing of both sales and collections, as well as the payment terms provided to various customers in the ordinary course of business.

Inventories were $213,000 lower at fiscal year-end 2020 compared to fiscal year-end 2019 due primarily to a higher obsolescence reserve and lower inventory packaging levels. The higher obsolescence reserve and lower packaging inventories are attributed to our focus on inventory management and enhanced data available from our ERP system. Inventories were $1,693,000 higher at fiscal year-end 2019 compared to fiscal year-end 2018 for the exact opposite reason than in fiscal year 2020. A larger amount of on-hand quantities of packaging and other materials purchased at higher costs as well as a lower reserve for discontinued, slow moving and unsaleable inventory contributed to the higher inventory value at fiscal year-end 2019. Furthermore, finished goods and purchased materials inventories vary from year to year due to anticipated sales requirements and the mix of products expected to be produced. See Note 1 of the Notes of the Notes to the Consolidated Financial Statements.

Other assets were $1,242,000 higher at fiscal year-end 2020 compared to fiscal year-end 2019 due to pre-production development costs at our Georgia mine. Other assets were $617,000 higher at fiscal year-end 2019 than fiscal year-end 2018 related to intangibles.

Accounts payable, including income taxes payable, were $4,238,000 higher at fiscal year-end 2020 compared to fiscal year-end 2019. Higher accrued income taxes due to higher net income and a higher effective tax rate drove the increase in fiscal year 2020 as well as higher freight payables due to the increase in sales. In addition, accounts payable were higher at fiscal year-end 2020 due to the additional capital expenditures made in the fourth quarter. Accounts payable were $590,000 higher at fiscal year-end 2019 compared to fiscal year-end 2018 due to normal fluctuations. 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 $8,632,000 higher at fiscal year-end 2020 compared to fiscal year-end 2019 due primarily to a higher accrued annual discretionary bonus, 401(k) employer match, advertising costs and an accrual for a legal contingency which is further described in Note 10 of the Notes to the Consolidated Financial Statements. These increases were partially offset by lower accruals for unvouchered freight. Accrued expenses were $589,000 lower at fiscal year-end 2019 compared to fiscal year-end 2018 due primarily to a lower annual discretionary bonus, which was partially offset by higher accruals for trade promotions, advertising and freight. Changes in other accrued expenses in all periods are subject to normal fluctuations in the timing of payments.

Deferred compensation balances at fiscal year-end 2020 were $421,000 higher compared to fiscal year-end 2019 and fiscal year-end 2019 was slightly lower compared to fiscal year-end 2018. Deferred compensation has increased in fiscal 2020 because of higher deferrals by participants in our deferred compensation plan. A significant payout under the terms of the deferred compensation plan in fiscal year 2018 contributed to $86,000 lower balances at fiscal year-end 2019 compared to fiscal year-end 2018.

Pension and other postretirement liabilities, net of the adjustment recorded in stockholders' equity, were $5,684,000 lower at fiscal year-end 2020 compared to fiscal year-end 2019 due primarily to the curtailment of our pension plan and a $8,000,000 voluntary contribution to our pension plan in excess of the minimum amount required. These liabilities were $3,307,000 higher at fiscal year-end 2019 compared to fiscal year-end 2018 due primarily to continued accumulation of employee benefits and a lower discount rate applied to the actuarial liability calculation. See Note 8 of the Notes to the Consolidated Financial Statements for more information regarding our postretirement benefit plans.

Other liabilities were $1,120,000 higher at fiscal year-end 2020 compared to fiscal year-end 2019. Other liabilities were $583,000 higher at fiscal year-end 2019 compared to fiscal year-end 2018. The increase in fiscal year 2020 is due to a reclassification of the deferred lease liability to operating lease liabilities upon adoption of ASC 842, Leases. The increase in fiscal year 2019 was due to a new deferred lease liability.

Net cash used in investing activities

Cash used in investing activities was $14,677,000 in fiscal year 2020 and cash used in investing activities was $7,888,000 in fiscal year 2019. Cash used in fiscal year 2020 related primarily to the purchases of capital expenditures at levels comparable to fiscal year 2019. In fiscal year 2019, dispositions of short-term investments exceeded purchases by $7,134,000. Net dispositions of investment securities provided cash in the first nine months of fiscal year 2019; however, no short-term investments were held in fiscal year 2020 due to the low returns available on these investments.



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Net cash used in financing activities

Cash used in financing activities was $8,750,000 in fiscal year 2020 and $9,886,000 in fiscal year 2019. The primary uses of cash in all periods were for long-term debt and dividend payments offset by borrowings as further described in Note 3 of the Notes to the Consolidated Financial Statements. In fiscal year 2020, stock purchases were another primary use of cash.

Other

Total cash and investment balances held by our foreign subsidiaries as of July 31, 2020 and 2019 were $3,042,000 and $2,136,000, 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 are 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. As of July 31, 2020, the variable rates would have been 3.50% for the BMO Harris' prime-based rate or 1.50% 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, 2020 and 2019, we were in compliance with its covenants. As of July 31, 2020 and 2019, there were no outstanding borrowings under this credit agreement.

See Note 3 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, 2020, we had remaining authority to repurchase 887,934 shares of Common Stock and 288,925 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 2020 we made repurchases of stock as further discussed in Item 5, Market for Registrant' 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. Our expenditures for capital were comparable to fiscal year 2019. We made $8,000,0000 of discretionary contributions to our pension plan in fiscal year 2020. See Note 8 of the Notes to the Consolidated Financial Statements for discussion of our Pension Plan.

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, 2020 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,


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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.

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 $923,000 and $732,000 for the amount of the deferred tax benefit related to our foreign net operating loss carryforwards as of July 31, 2020 and 2019, 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, 2020 or 2019. 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 $1,843,000 and $1,449,000 for trade promotions as of July 31, 2020 and 2019, 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 2020 and 2019 was the FTSE Pension Discount Curve (formally 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 who elected the Lump Sum Option by the May 15, 2020 election deadline. This settlement of a portion of the pension plan was recorded as settlement expense based on actuarially determined amounts in the fourth quarter of fiscal year 2020.

Trade Receivables. We recognize trade receivables when the risk of loss and title pass to the customer. 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 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 doubtful accounts and cash discounts of $1,078,000 and $644,000 as of July 31, 2020 and 2019, 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 and allowances are not material.

Inventories. We value inventories at the lower of cost (first-in, first-out) or market. 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, 2020 and 2019 were $926,000 and $704,000, 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, 2020 and 2019, we have recorded an estimated net reclamation asset of $932,000 and $975,000, respectively, and a corresponding estimated reclamation liability of $2,554,000 as of July 31, 2020 and $2,410,000 as of July 31, 2019. 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.

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.


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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. Our impairment analysis performed in the fourth quarters of both fiscal years 2020 and 2019 did not indicate any impairment. 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 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 Adopted Accounting 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 right-of-use (ROU) assets and lease liabilities related to operating leases of $9,348,000 and $10,910,000, respectively, on our Consolidated Balance Sheet. There was no material impact to any of our other consolidated financial statements.

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 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.

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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