OIL-DRI CORPORATION OF AMERICA The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included herein and our Consolidated Financial Statements, accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2022 . 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, but are not limited to, those discussed under "Forward-Looking Statements" and Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2022 .
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: theRetail and Wholesale Products Group and the Business toBusiness Products Group , as described in Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements. Each operating segment is discussed individually below. RESULTS OF OPERATIONS OVERVIEW Consolidated net sales and gross profits for the first quarter of fiscal 2023 across both theRetail and Wholesale Products Group and the Business toBusiness Products Group were up from the same period of fiscal year 2022. Although expenses increased, consolidated net income for the three months endedOctober 31, 2022 was$5.2 million , compared to$0.6 million in the three months endedOctober 31, 2021 . Consolidated net sales increased approximately$16.0 million or 19% in the first quarter of fiscal year 2023 compared to first quarter of fiscal year 2022. Consolidated income from operations in the first quarter of fiscal year 2023 increased by$6.1 million compared to the first quarter of fiscal year 2022. This increase is driven by strategic pricing increases as well as growth in the demand for our products, as further discussed below. Our Consolidated Balance Sheets as ofOctober 31, 2022 , and our Consolidated Statements of Cash Flows for the first quarter of fiscal year 2023 show a decrease in total cash and cash equivalents from fiscal year-end 2022 driven by higher inventories and capital expenditures on PP&E. THREE MONTHS ENDEDOCTOBER 31, 2022 COMPARED TO THREE MONTHS ENDEDOCTOBER 31, 2021
CONSOLIDATED RESULTS
Consolidated net sales for the three months endedOctober 31, 2022 were$98.5 million , a 19% increase compared to net sales of$82.5 million for the three months endedOctober 31, 2021 . Net sales increased for both ourRetail and Wholesale Products Group and Business toBusiness Products Group , primarily due to price increases implemented across both product groups. In the first three months of fiscal year 2023, we have been able to reduce our backlog of orders. The actions taken to increase personnel, expand our production shifts, increase production equipment, make various repairs to equipment, and utilize alternative modes of transportation have driven a reduction of our backlog by$1.1 million , a 17% decrease fromJuly 31, 2022 . Furthermore, export tonnages shipped for the first three months of fiscal year 2023 exceeded all quarters in fiscal years 2022 and 2021. We continue to implement strategies related to further reduce manufacturing and freight constraints in order to meet the increase in customer demand. Segment results are discussed further below. 20 -------------------------------------------------------------------------------- Consolidated gross profit for the first three months of fiscal year 2023 was$22.3 million , or 23% of net sales, compared to$13.8 million , or 17%, of net sales, for the first three months of fiscal year 2022. The increase is driven by higher selling prices, with multiple price increases across our businesses, which are beginning to offset the increases in costs of goods sold. Costs of goods sold continued to rise, driven primarily by per ton increases in natural gas, non-fuel manufacturing and freight costs, offset by lower packaging costs. The cost of natural gas per ton used to operate kilns that dry our clay was 97% higher in the first three months of fiscal year 2023 compared to first three months of fiscal year 2022. There was also a 15% increase in per ton non-fuel manufacturing costs during the first three months of fiscal year 2023 compared to the first three months of fiscal year 2022, due to higher costs for labor, purchased materials, repairs, utilities, electricity, and diesel. Domestic freight costs per ton increased approximately 21% in the first three months of fiscal year 2023 compared to the same period of fiscal year 2022. 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 decreased by approximately 8% in the first three months of fiscal year 2023 compared to the first three months of fiscal year 2023 due to lower 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. Total selling, general and administrative ("SG&A") expenses of$15.7 million for the first three months of fiscal year 2023 were higher by$2.4 million , or 18%, compared to$13.4 million for the first three months of fiscal year 2022. Unallocated corporate expenses were higher by$1.9 million , or 30%, driven by higher bonus accrual due to improved quarterly results compared to the Company's performance target under the annual incentive plan, as well as other corporate expenses. The discussion of the segments' operating incomes below describes the changes in SG&A expenses that were allocated to the operating segments. Total other (expense) income, net of$(0.1) million for the first three months of fiscal year 2023 was mostly driven by foreign currency translations compared to the net other income of$0.3 million in the first three months of fiscal year 2022. Consolidated net income before taxes for the first three months of fiscal year 2023 was$6.4 million compared to$0.7 million for the first three months of fiscal year 2022. Results for the first three months of fiscal year 2023 were driven by the factors discussed above. We had a tax expense for the first three months of fiscal year 2023 of$1.2 million compared to$0.1 million for the first three months of fiscal year 2022. Our tax expense was driven primarily by higher net income. We used an estimated annual effective tax rate ("ETR") in determining our provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.
BUSINESS TO BUSINESS PRODUCTS GROUP
Net sales of the Business toBusiness Products Group for the first three months of fiscal year 2023 were$33.7 million , an increase of$8.9 million , or 36%, from net sales of$24.8 million for the first three months of fiscal year 2022, with strong increases across all three of our businesses in this group. Net sales of our agricultural and horticultural chemical carrier products increased approximately$3.8 million , or 61%, for the first three months of fiscal year 2023 compared to the same period in fiscal year 2022. This is a result of price increases as well as strong demand from several large customers. Net sales of our fluids purification products increased approximately$3.2 million , or 21%, compared to the first three months of the prior fiscal year. The increase in net sales was driven by price increases and continued demand for our products used in the filtration of edible oil, renewable diesel, and jet fuel. Net sales increased in all regions except for theUK , with the majority of the increase inNorth America andLatin America when compared to the first three months of fiscal year 2022. Net sales of our animal health and nutrition products increased$1.9 million , or 52%, during the first three months of fiscal year 2023 compared to the first three months of the prior year. We saw growth in net sales in all regions exceptAsia (excludingChina ) with the most impact coming fromLatin America . Latin American sales continued to benefit from theEuropean Union's ("EU") regulations for antibiotic-free foreign protein imports, as a large percentage of meat is exported from that region to the EU. North American sales rose due to a new product line and increased distribution. The decrease inAsia is due to timing and ocean freight delays and not indicative of projected sales for the year. SG&A expenses for the Business toBusiness Products Group increased approximately 24% or$0.8 million for the first three months of fiscal year 2023 compared to the same period of the prior fiscal year. The majority of the increase relates to research and development expenses that are now allocated to the animal health business (a change in where existing costs were allocated), previously included in unallocated corporate expenses and increased travel costs. 21 -------------------------------------------------------------------------------- The Business toBusiness Products Group's operating income for the first three months of fiscal year 2023 was$7.3 million , an increase of$1.8 million , or 31%, from operating income of$5.5 million for the first three months of fiscal year 2022. The increase in operating income was driven by higher net sales due to strategic price increases and continued volume growth.
RETAIL AND WHOLESALE PRODUCTS GROUP
Net sales of theRetail and Wholesale Products Group for the first three months of fiscal year 2023 were$64.9 million , an increase of$7.2 million , or 12%, from net sales of$57.7 million for the first three months of fiscal year 2022 driven by higher net sales of cat litter, industrial and sport products, slightly offset by a small decline in our co-packaged cat litter business. Total cat litter net sales were approximately$5.7 million , or 12%, higher compared to the first three months of the prior fiscal year driven mostly by price increases. Domestic cat litter net sales were$46.8 million an increase of$5.2 million from the first three months of fiscal year 2022 driven primarily by price increases on branded and private label lightweight and coarse litter partially offset by a decrease in net sales of accessories (liners) and private label heavy weight litter. Net sales of co-packaged products decreased by approximately$0.3 million compared to the same period in fiscal year 2022. This decrease was primarily due to our customer discontinuing export sales to one of their foreign subsidiaries as well as softer sales volumes domestically. Net sales of cat litter by our subsidiary inCanada increased period over period, as discussed in "Foreign Operations" below. Net sales of our global industrial and sports products increased approximately$1.5 million , or 17%, compared to the first three months of fiscal year 2022, primarily due to price increases across both industrial and sport products. SG&A expenses for theRetail and Wholesale Products Group were lower by approximately$0.4 million , or 10%, during the first three months of fiscal year 2023 compared to the first three months of fiscal year 2022, primarily due to significantly lower advertising costs partially offset by higher broker sales commissions which are percentage based on net sales, as well as higher travel costs. We anticipate total advertising expense in fiscal year 2023 to be higher than fiscal year 2022 and more in line with historical levels, with spending concentrated in the second half of the year.The Retail and Wholesale Products Group experienced an operating income for the first three months of fiscal year 2023 of$7.6 million , an increase of$6.3 million , or 491%, from operating income of$1.3 million for the first three months of fiscal year 2022. This was driven primarily by the increase in gross margins due to selling price increases partially offset by higher costs of goods sold, and to a much lesser extent lower than expected advertising spend in the first quarter. FOREIGN OPERATIONS Foreign operations include our subsidiary inCanada which is reported in theRetail and Wholesale Products Group , and our subsidiaries in theUK ,Mexico ,China andIndonesia , which are reported in the Business toBusiness Products Group . Net sales by our foreign subsidiaries during the first three months of fiscal year 2023 were$5.8 million , an increase of$1.4 million , or 32%, compared to net sales of$4.4 million during the first three months of fiscal year 2022. All of our foreign operations, with the exception of our subsidiary in theUK , experienced an increase in net sales during the first three months of fiscal year 2023 compared to fiscal year 2022. Total net sales of our subsidiary inCanada during the first three months of fiscal year 2022 increased by$0.8 million , or 29%, compared to the same period in fiscal year 2022 driven by higher private label cat litter net sales. The increase in cat litter sales was mainly driven by price increases instituted in response to rising costs and to a lesser extent by increases in demand. Net sales of industrial absorbent granules were also higher in the first three months of fiscal year 2022 driven mainly by price increases. Net sales of our subsidiary in theUnited Kingdom in the first three months of fiscal year 2023 decreased by$47 thousand , or 9%, compared to net sales in the first three months of fiscal year 2022. The decrease relates to the impact of foreign currency in addition to softer sales. Net sales of our subsidiary inMexico increased during the first three months of fiscal year 2022 compared to the same period of fiscal year 2022 by$0.2 million , or 38% due to growing demand of our animal health products. Net sales of our subsidiary inChina increased$0.3 million , or 63%, during the first three months of fiscal year 2023 compared to the first three months of fiscal year 2022 due primarily to the addition of a new customer. Net sales by our foreign subsidiaries represented 6% and 5% of our consolidated net sales during the first three months of fiscal years 2023 and 2022, respectively. Our foreign subsidiaries reported net income of$0.5 million for the first three months of fiscal year 2023, compared to a net loss of$0.3 million for the first three months of fiscal year 2022. The net income in the first three months of fiscal year 2023 was driven by price increases inCanada on our cat litter products, and increased demand inChina andMexico offset by unfavorable impacts of foreign exchange rates primarily in theUK .
Identifiable assets of our foreign subsidiaries as of
22
--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity needs are to fund our capital requirements, including funding working capital needs; purchasing and upgrading equipment, facilities (including significant renovations at one of our plants), 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, and funding our debt service requirements. During the first three months of fiscal year 2023, we principally funded these short and long-term capital requirements using cash from current operations as well as cash generated in fiscal year 2022 from borrowings under our Series SeniorC Notes . 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.
The following table sets forth certain elements of our unaudited Condensed Consolidated Statements of Cash Flows (in thousands):
For the Three Months Ended October
31,
2022 2021
Net cash provided by (used in) operating activities $ 3,668 $ (596)
Net cash used in investing activities (7,521) (6,736)
Net cash used in financing activities (1,943) (4,156)
Effect of exchange rate changes on cash and cash equivalents (32) (48)
Net decrease in cash and cash equivalents $
(5,828)
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 the first three months of fiscal years 2023 and 2022 were as follows: Accounts receivable, less allowance for doubtful accounts, increased$1.6 million in the first three months of fiscal year 2023 compared to an increase of$2.3 million in the first three months of fiscal year 2022. The increase in accounts receivable was driven primarily by higher net sales as sales prices increased offset by the level and timing of collections due to payment terms. Inventory increased by$5.1 million in the first three months of both fiscal year 2023 and 2022 due to a combination of rising costs, specifically due to natural gas, purchased materials, electricity, diesel, and freight and the building of inventory levels for anticipated seasonal demand and thwart potential supply chain disruptions. Other assets decreased by$1.4 million in the first three months of fiscal year 2023 compared to a decrease of$0.2 million in the first three months of fiscal year 2022. The decrease in other assets in the first three months of fiscal year 2023 relates to capitalized pre-production costs being transferred to property, plant and equipment as the mines are now in production. Accounts payable increased by$1.9 million in the first three months of fiscal year 2023 compared to an increase of$1.3 million in the first three months of fiscal year 2022. Trade and freight payables vary in both periods due to the timing of payments, higher cost of goods and services we purchased, production volume levels and vendor payment terms. Accrued expenses decreased$1.6 million in the first three months of fiscal year 2023 compared to an increase of$0.7 million in the first three months of fiscal year 2022. The payout of the prior fiscal year's bonus reduced accrued salaries in both fiscal years, but to a greater extent in fiscal year 2023 as the accrual was higher at year end 2022 than the prior fiscal year. The decrease in accrued expenses is also impacted by the decrease in advertising expenses and other accruals. The decrease in accrued bonus in the first three months of fiscal year 2022 was offset by an increase in accrued advertising, real estate taxes, professional fees and accrued utilities. These accruals can vary based on timing. In addition, accrued plant expenses can also fluctuate due to timing of payments, changes in the cost of goods and services we purchase, production volume levels and vendor payment terms. 23 -------------------------------------------------------------------------------- Other liabilities decreased by$0.4 million in the first three months of fiscal year 2023 compared to a decrease of$0.5 million in the first three months of fiscal year 2022. The decreases in both fiscal years 2022 and 2023 relate primarily to a reduction in our operating lease liability.
Net cash used in investing activities
Cash used in investing activities of$7.5 million in the first three months of fiscal year 2023 were higher compared to cash used in investing activities of$6.7 million in the first three months of fiscal year 2022 driven by capital expenditures. During the first three months of fiscal year 2023 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.
Net cash used in financing activities
Cash used in financing activities of
Other
Total cash and investment balances held by our foreign subsidiaries of
We are party to a credit agreement (as amended, the "Credit Agreement") withBMO Harris Bank N.A . ("BMO Harris"), which terminates onAugust 30, 2027 . The agreement provides for a$45 million unsecured revolving credit facility and a maximum of$10 million for letters of credit. The agreement terms also state that we may select a variable interest rate based on either the BMO Harris prime rate or an adjusted SOFR-based rate, plus a margin that varies depending on our debt to earnings ratio, or a fixed rate as agreed between us and BMO Harris. As ofOctober 31, 2022 , the variable rates would have been 6.25% for the BMO Harris prime-based rate or 4.10% for the adjusted SOFR-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 charge coverage ratio and a maximum net debt to earnings ratio. As ofOctober 31, 2022 and 2021, we were in compliance with the covenants. There were no borrowings during the first three months of either fiscal year 2022 or 2023. We are party to an Amended and Restated Note Purchase and Private Shelf Agreement (as amended, the "Note Agreement") withPGIM, Inc. ("Prudential") and certain existing noteholders and purchasers affiliated with Prudential named therein pursuant to which, among other things, we issued$10 million in aggregate principal amount of our 3.95% Series B Senior Notes dueMay 15, 2030 of which$8 million aggregate principal amount remained outstanding as ofOctober 31, 2022 . The Note Agreement provides us with the ability to request, from time to time untilMay 15, 2023 (or such earlier date as provided for in the agreement), the issuance of additional senior unsecured notes in an aggregate principal amount of up to$75 million 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. Pursuant to the Note Agreement, onDecember 16, 2021 , we issued$25 million in aggregate principal amount of our 3.25% Series C Senior Notes dueDecember 16, 2031 . As ofOctober 31, 2022 outstanding notes payable totaled$32.8 million , net of$0.2 million of unamortized debt issuance costs.
See Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for discussion on amendments made to the credit agreement with BMO Harris and our Senior Note Agreements.
As ofOctober 31, 2022 , we had remaining authority to repurchase 433,166 shares of Common Stock and 273,100 shares of ClassB 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, number and manner of share repurchases will be determined by our management pursuant to the repurchase plan approved by our Board. We believe that cash flow from operations, availability under our revolving credit facility, current cash and investment balances and our ability to obtain other financing, if necessary, will provide sufficient liquidity 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 expect capital expenditures in fiscal year 2023 to be greater than in fiscal year 2022. We do not believe that these increased capital expenditures will dramatically impact our cash position; however our cash requirements are subject to change as business conditions warrant and opportunities arise. Our anticipated advertising expense for fiscal year 2023 is expected to be higher compared to fiscal year 2022 and in line with historical pre-pandemic levels. 24 -------------------------------------------------------------------------------- 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of financial condition and results of operations is based on our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance withU.S. GAAP for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Estimates and assumptions are revised periodically. Actual results could differ from these estimates. See the information concerning our critical accounting policies included under "Management's Discussion of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2022 .
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