UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2016
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
___________________________
Commission File Number 001-12622
OIL-DRI CORPORATION OF AMERICA
Delaware | 36-2048898 |
(State or other jurisdiction of | (IRS. Employer Identification No.) |
incorporation or organization) | |
410 North Michigan Avenue, Suite 400, Chicago, Illinois 60611-4213
(312) 321-1515
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered |
Common Stock, par value $0.10 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:
Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer | o | Accelerated filer | ý | |
Non-accelerated filer | o | Smaller reporting company | o | |
(Do not check if a smaller reporting company) | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes o No ý
The aggregate market value of Oil-Dri’s Common Stock owned by non-affiliates as of January 31, 2016 was $184,774,000.
Number of shares of each class of Oil-Dri’s capital stock outstanding as of September 30, 2016:
Common Stock – 5,071,613 shares
Class B Stock – 2,188,771 shares
Class A Common Stock – 0 shares
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference: Oil-Dri’s Proxy Statement for its 2016 Annual Meeting of Stockholders (“Proxy Statement”), which will be filed with the Securities and Exchange Commission (“SEC”) not later than November 28, 2016 (120 days after the end of Oil-Dri’s fiscal year ended July 31, 2016), is incorporated into Part III of this Annual Report on Form 10-K, as indicated herein.
CONTENTS
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4 | Mine Safety Disclosure | |||
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CONTENTS (CONTINUED)
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including those under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and those statements elsewhere in this report and other documents we file with the SEC, contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” variations of such words and similar expressions are intended to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially, including those described in Item 1A “Risk Factors” below and other documents we file with the SEC. Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, intended, expected, believed, estimated, projected or planned. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except to the extent required by law, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise.
TRADEMARK NOTICE
Agsorb, Amlan, Calibrin, Cat’s Pride, ConditionAde, Flo-Fre, Fresh & Light, Fresh & Light Ultimate Care, Jonny Cat, KatKit, Oil-Dri, Pel-Unite, Perform, Pro Mound, Pro's Choice Sports Field Products, Pure-Flo, Rapid Dry, Select, Terra-Green, Ultra-Clear and Verge are all U.S. registered trademarks of Oil-Dri Corporation of America or of its subsidiaries. Saular is a Canadian registered trademark of Oil-Dri Corporation of America. MD-09, Snow & Go and Varium are trademarks of Oil-Dri Corporation of America. Fresh Step is a registered trademark of The Clorox Company (“Clorox”).
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PART I
ITEM 1 – BUSINESS
In 1969, Oil-Dri Corporation of America was incorporated in Delaware as the successor to an Illinois corporation incorporated in 1946; the Illinois corporation was the successor to a partnership that commenced business in 1941. Except as otherwise indicated herein or as the context otherwise requires, references to “Oil-Dri,” the “Company,” “we,” “us” or “our” refer to Oil-Dri Corporation of America and its subsidiaries.
GENERAL BUSINESS DEVELOPMENTS
Increased net sales for fiscal year 2016 were driven by our fluid purification and animal health products in global markets, as well as by domestic sales of our agriculture products. Net sales of our cat litter products were challenged by the weakening of the coarse litter segment of the market and our decision not to pursue continued business with two major low margin customers. Instead, we focused our resources to gain sales of our lightweight scoopable cat litter in this growing and competitive segment of the market. We launched an integrated marketing campaign to promote our lightweight cat litter in fiscal year 2016 and incurred significantly higher advertising expense compared to fiscal 2015.
Our greatly improved gross profit during fiscal year 2016 reflected a shift in sales to more value-added products in both operating segments and lower commodity costs. Also contributing to our net income growth was a lower effective tax rate on earnings due to the full release of a previously established valuation allowance associated with the deferred tax asset for domestic Alternative Minimum Tax (“AMT”) credits.
Our balance sheet at fiscal year-end 2016 remained strong. Total cash, cash equivalents and short-term investments increased from fiscal year-end 2015 even as we spent heavily for advertising, invested in capital at our plants, paid higher dividends and reduced our notes payable.
PRINCIPAL PRODUCTS
We are a leader in developing, manufacturing and/or marketing sorbent products. Our sorbent products are principally produced from clay minerals, primarily consisting of montmorillonite and attapulgite and, to a lesser extent, other clay-like sorbent materials, such as Antelope shale, which we refer to collectively as our “clay” or our “minerals.” Our sorbent technologies include absorbent and adsorbent products. Absorbents, like sponges, draw liquids up into their many pores. Examples of our absorbent clay products are Cat’s Pride and Jonny Cat branded premium cat litter, as well as other private label cat litters. We also produce Oil-Dri branded floor absorbents, Amlan branded animal health and nutrition solutions for livestock, and Agsorb and Verge agricultural chemical carriers. Adsorbent products attract impurities in liquids, such as metals and surfactants, and form low-level chemical bonds. Examples of our adsorbent products are Pure-Flo, Perform and Select bleaching clay products, which act as a filtration media for edible oils, fats and tallows. Also, our Ultra-Clear product serves as a purification aid for petroleum-based oils and by-products. We also sell some nonclay-based products, such as our Oil-Dri synthetic sorbents used for industrial cleanup. Our principal products are described in more detail below.
Agricultural and Horticultural Products
We produce a wide range of granular and powdered mineral absorbent products that are used for crop protection chemical carriers, drying agents, bulk processing aids, growing media components and seed enhancement media. Our brands include: Agsorb, an agricultural chemical carrier and drying agent; Verge, an engineered granule agricultural chemical carrier; Flo-Fre, a highly absorbent microgranule flowability aid; and Terra-Green, a growing media supplement.
Agsorb and Verge carriers are used as an alternative to agricultural sprays. The clay granules absorb active ingredients and are then delivered directly into, or on top of, the ground providing a more precise application than chemical sprays. Verge carriers are spherical, uniform-sized granules with very low dust. Agsorb drying agent is blended into fertilizer-pesticide blends applied by farmers to absorb moisture and improve flowability. Agsorb also acts as a flowability aid for fertilizers and chemicals used in the lawn and garden market. Flo-Fre microgranules are used by grain processors and other large handlers of bulk products to soak up excess moisture, which prevents caking. We employ technical sales people to market these products in the United States.
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Animal Health and Nutrition Products
We produce, or use contract processors to produce, Amlan brand name and private label products that are used in various livestock feed industries, such as swine, poultry, shrimp and dairy cattle. Our Calibrin and ConditionAde products are used in animal feed and have different attributes that improve animal health and development, such as adsorbing naturally occurring mycotoxins or managing intestinal bacterial and fungal biotoxins. Our new Varium product was introduced in fiscal year 2016 to promote intestinal health in poultry. Our MD-09 moisture manager product is another feed additive for the reduction of wet droppings in poultry. In addition, our Pel-Unite and Pel-Unite Plus products are specialized animal feed pellet binders.
Our animal health and nutrition products are sold primarily through a network of distributors to livestock producers, feed mill operators, nutritionists and veterinarians in the United States, Latin America, Africa, the Middle East and Asia. The sales force for our subsidiary located in Shenzhen, China also sells these products, as further described in Foreign Operations below.
Bleaching Clay and Purification Aid Products
We produce an array of bleaching, purification and filtration applications used by edible oil, jet fuel and other petroleum-based product processors around the world. Bleaching clays are used by edible oil processors to adsorb soluble contaminants that create oxidation problems. Our Pure-Flo and Perform bleaching clays remove impurities, such as trace metals, chlorophyll and color bodies, in various types of edible oils. Perform products provide increased activity for hard-to-bleach oils. Our Select adsorbents are used to remove contaminants in vegetable oil processing and can be used to prepare oil prior to the creation of biodiesel fuel. Our Ultra-Clear product is used as a filtration and purification medium for jet fuel and other petroleum-based products. These products are sold in the United States and in international markets by our team of technical sales employees, distributors and sales agents.
Cat Litter Products
Branded products. We produce two types of mineral-based cat litter products, traditional coarse and scoopable, both of which have absorbent and odor controlling characteristics. Scoopable litters have the additional characteristic of clumping when exposed to moisture, allowing the consumer to selectively dispose of the used portion of the litter. Our coarse and scoopable products are sold under our Cat’s Pride and Jonny Cat brand names. Our Cat's Pride Fresh & Light product line offers superior performance with the added convenience of being lighter to carry and pour. These products created the lightweight scoopable litter segment, which experienced the highest growth rate in the cat litter market during fiscal year 2016. In addition, we offer our coarse litter in a pre-packaged, disposable tray under the Cat’s Pride KatKit and Jonny Cat brands. Moreover, we offer litter box liners under the Cat's Pride and Jonny Cat product lines. These products are sold through independent food brokers and by our sales force to major grocery, drug, dollar store, mass-merchandiser and pet outlets.
Private label products. We also produce private label traditional coarse and scoopable cat litters for certain customers. We added scoopable lightweight cat litters to our private label offerings during fiscal year 2015.
Co-packaged products. We have two long-term supply arrangements (one of which is material to our business) under which we manufacture branded traditional litters for other marketers. Under these co-manufacturing relationships, the marketer controls all aspects of sales, marketing, and distribution, as well as the odor control formula, and we are responsible for manufacturing. The long-term supply agreement that is material to our business is with Clorox, under which we have the exclusive right to supply Clorox’s requirements for Fresh Step coarse cat litter up to certain levels.
Industrial and Automotive Products
We manufacture and/or sell products made from clay, polypropylene and recycled cotton materials that absorb oil, grease, water and other types of spills. These products are used in industrial, home and automotive environments. Our clay-based sorbent products, such as Oil-Dri branded and private label floor absorbents, are used for floor maintenance in industrial applications to provide a non-slip and non-flammable surface for workers. These floor absorbents are also used in automotive repair facilities, car dealerships and other industrial applications, as well as for home use in garages and driveways. Our Oil-Dri branded polypropylene-based and cotton-based products are sold in various forms, such as pads, rolls, socks, booms and spill kits. Snow & Go, a product made with a combination of clay and salt, serves as a winter traction aid that melts snow and ice and then absorbs the melted water before it can re-freeze.
Industrial and automotive sorbent products are sold through a distribution network that includes industrial, auto parts, safety, sanitary supply, chemical and paper distributors. These products are also sold through environmental service companies, mass-merchandisers, catalogs and the Internet.
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Sports Products
We manufacture and sell both branded and private label sports products. Pro’s Choice Sports Field Products are used on baseball, softball, football and soccer fields. Pro’s Choice soil conditioners are used in field construction or as top dressing to absorb moisture, suppress dust and improve field performance. Pro Mound packing clay is used to construct pitcher’s mounds and batter’s boxes. Rapid Dry drying agent is used to dry up puddles and slick spots after rain. Sports products are used at all levels of play, including professional, college and high school and on municipal fields. These products are sold through a network of distributors specializing in sports turf products.
BUSINESS SEGMENTS
We have two reportable operating segments for financial reporting derived from the different characteristics of our two major customer groups: Retail and Wholesale Products Group and Business to Business Products Group. The Retail and Wholesale Products Group customers include mass merchandisers, wholesale clubs, drugstore chains, pet specialty retail outlets, dollar stores, retail grocery stores, distributors of industrial cleanup and automotive products, environmental service companies and sports field product users. The Business to Business Products Group customers include: processors and refiners of edible oils, petroleum-based oils and biodiesel fuel; manufacturers of animal feed and agricultural chemicals; distributors of animal health and nutrition products; and marketers of consumer products. Certain financial information on both segments is contained in Note 3 of the Notes to the Consolidated Financial Statements and is incorporated herein by reference.
We do not manage our business, allocate resources or generate revenue data by product line. Any of our products may be sold in one or both of our operating segments. Information concerning total revenue of classes of similar products accounting for more than 10% of consolidated revenues in any of the last three fiscal years is not separately provided because it would be impracticable to do so.
FOREIGN OPERATIONS
Our wholly-owned subsidiary, Amlan Trading (Shenzhen) Company, Ltd., located in Shenzhen, China, is dedicated to animal health and provides natural disease management solutions for livestock. This subsidiary sells animal health and nutrition products under our Amlan brand name and under private label arrangements.
Our wholly-owned subsidiary, Oil-Dri Canada ULC, is a manufacturer, distributor and marketer of branded and private label cat litter in the Canadian marketplace. Among its leading brands are Saular, Cat’s Pride and Jonny Cat. Our Canadian business also manufactures or purchases and sells industrial granule floor absorbents, synthetic polypropylene sorbent materials and agricultural chemical carriers.
Our wholly-owned subsidiary, Oil-Dri (U.K.) Limited, is a manufacturer, distributor and marketer of industrial floor absorbents, bleaching earth and cat litter. These products are marketed in the United Kingdom and Western Europe. Oil-Dri (U.K.) Limited also sells synthetic polypropylene sorbent materials, filtration units and plastic containment products.
Our wholly-owned subsidiary, Oil-Dri SARL, is a Swiss company that performs various management, customer service and administrative functions for some of the international customers of our domestic operations.
Our foreign operations are subject to the normal risks of doing business overseas, such as currency fluctuations, restrictions on the transfer of funds and import/export duties. Our operating results have not historically been materially impacted by these foreign currency fluctuations; however, they did have some bearing on our fiscal year 2015 results. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” for further information about our foreign markets risks. Certain financial information about our foreign operations is contained in Note 3 of the Notes to the Consolidated Financial Statements and is incorporated herein by reference.
CUSTOMERS
Sales to Wal-Mart Stores, Inc. (“Walmart”) and its affiliates accounted for approximately 19%, 18% and 19% of our total net sales for fiscal years 2016, 2015 and 2014, respectively. Walmart is a customer in our Retail and Wholesale Products Group. There are no customers in the Business to Business Products Group with sales equal to or greater than 10% of our total sales; however, sales to Clorox (a customer in our Business to Business Products Group) and its affiliates accounted for approximately 6% of total net sales for each of fiscal years 2016, 2015 and 2014. The degree of margin contribution of our significant customers in the Business to Business Products Group varies, with certain customers having a greater effect on our operating results. The
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loss of any customer other than those described in this paragraph would not be expected to have a material adverse effect on our business.
COMPETITION
Product performance, price, brand recognition, customer service, technical support, and distribution resources are the principal methods of competition in our markets and competition historically has been very vigorous. Advertising, promotion, merchandising and packaging also have a significant impact on retail consumer purchasing decisions, which primarily affects our Retail and Wholesale Products Group. Most of the principal competitors for our Retail and Wholesale Products Group have substantially greater financial resources or market presence than we do and have established brands. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly and respond more effectively to changing business and economic conditions than us.
In our Retail and Wholesale Products Group, we have five principal competitors, including one which is also our customer. The overall cat litter market has been relatively stable in recent years. The overwhelming majority of all cat litter is mineral based, including both scoopable and traditional coarse litters. Cat litters based on alternative strata such as paper, various agricultural waste products and silica gels have niche positions. Scoopable products have a majority of the cat litter market share followed by traditional coarse products. The growing market share for lightweight scoopable cat litter has primarily offset the declining share for coarse products. There is significant competition to attract consumers of cat litter across multi-outlet channels, including grocery, mass-merchandisers, dollar, pet and drug stores. Competition for the lightweight scoopable litter market has been particularly intense with increased advertising and promotions by our competitors and by us. During fiscal year 2016, we launched an integrated marketing campaign to promote our Cat's Pride Fresh & Light Ultimate Care lightweight scoopable cat litter products. We further differentiate ourselves through product innovation, our operations with a nation-wide distribution network and strong customer service. World class sales and research and development teams give us a potential advantage over smaller and regional manufacturers.
In the Business to Business Products Group, we have ten principal competitors. Our bleaching clay and fluid purification products are sold in a highly cost competitive global marketplace. Performance is a primary competitive factor for these products. The animal health portion of this segment also operates in a global marketplace with price and performance competition from multi-national and local competitors. Competition for our crop protection products is primarily based on price, but competitor differentiation also exists in the ability to meet customer product specifications and enhancements in engineered granule technologies.
PATENTS
U.S. patents are currently granted for a term of 20 years from the date the patent application is filed. We have obtained or applied for patents for certain of our processes and products sold to customers in both the Retail and Wholesale Products Group and the Business to Business Products Group. Our patents are highly important to our business and we vigorously protect them from apparent infringement, although no single patent is considered material to the business as a whole. See Item 3 “Legal Proceedings” for more information about specific legal matters related to our patents.
BACKLOG; SEASONALITY
As of July 31, 2016, 2015 and 2014, our backlog of orders were valued at approximately $8,735,000, $9,617,000 and $7,401,000, respectively. The value of backlog orders was determined by the number of tons on backlog order and the net selling prices. All backlog orders are expected to be filled within the next 12 months. We consider our business, taken as a whole, to be moderately seasonal; however, business activities of certain customers (such as agricultural chemical manufacturers) are subject to such seasonal factors as crop acreage planted, product formulation cycles and weather conditions.
EFFECTS OF INFLATION
Inflation generally affects us by increasing the cost of employee wages and benefits, transportation, processing equipment, purchased raw materials and packaging, energy and borrowings under our credit facility. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 7A “Quantitative and Qualitative Disclosures About Market Risk” below.
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RESERVES
We mine our clay on leased or owned land near our manufacturing facilities in Mississippi, Georgia, Illinois and California; we also have reserves in Nevada, Oregon and Tennessee. We estimate that our proven mineral reserves at July 31, 2016 are approximately 143,819,000 tons in aggregate and our probable reserves are approximately 134,622,000 tons in aggregate, for a total of 278,441,000 tons of mineral reserves. Based on our rate of consumption during fiscal year 2016, and without regard to any of our reserves in Nevada, Oregon and Tennessee, we consider our proven reserves adequate to supply our needs for over 40 years. Although we consider these reserves to be extremely valuable to our business, only a small portion of the reserves, those which were acquired in acquisitions, was reflected at cost on our balance sheet.
It is our policy to attempt to add to reserves in most years, but not necessarily in every year, an amount at least equal to the amount of reserves consumed in that year. We have a program of exploration for additional reserves and, although reserves have been acquired, we cannot assure that additional reserves will continue to become available. Our use of these reserves, and our ability to explore for additional reserves, are subject to compliance with existing and future federal and state statutes and regulations regarding mining and environmental compliance. During fiscal year 2016, we utilized these reserves to produce a majority of the sorbent products that we sold.
Proven reserves are those reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from results of detailed sampling, and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established. Probable reserves are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. We employ geologists and mineral specialists who estimate and evaluate existing and potential reserves in terms of quality, quantity and availability.
MINING OPERATIONS
We have conducted mining operations in Ripley, Mississippi since 1963, in Ochlocknee, Georgia since 1968, in Blue Mountain, Mississippi since 1989, in Mounds, Illinois since 1998 and in Taft, California since 2002. Our clay is surface mined on a year-round basis, generally using large earth moving scrapers, bulldozers, or excavators and off-road trucks to remove overburden (non-usable material), and then loaded into dump trucks with backhoes or front end loaders for movement to the processing facilities. The mining and hauling of our clay is performed by us and by independent contractors. Our current operating mines range in distance from immediately adjacent to approximately 13 miles from the related processing plants. Processing facilities are generally accessed from the mining areas by private roads and in some instances by public highways. Each of our processing facilities maintains inventories of unprocessed clay of approximately one week of production requirements. See Item 2 “Properties” below for additional information regarding our mining properties and operations.
The following schedule summarizes the net book value of land and other plant and equipment for each of our manufacturing facilities at July 31, 2016 (in thousands):
Land & Mineral Rights | Plant and Equipment | |||||||
Ochlocknee, Georgia | $ | 8,876 | $ | 31,480 | ||||
Ripley, Mississippi | $ | 1,804 | $ | 11,410 | ||||
Mounds, Illinois | $ | 1,803 | $ | 1,796 | ||||
Blue Mountain, Mississippi | $ | 908 | $ | 10,905 | ||||
Taft, California | $ | 1,506 | $ | 3,685 | ||||
EMPLOYEES
During fiscal year 2016, we employed approximately 767 persons, 42 of whom were employed by our foreign subsidiaries. We believe our corporate offices, research and development center and manufacturing facilities are adequately staffed and no material labor shortages are anticipated. Approximately 55 of our employees in the U.S. and approximately 18 of our employees in Canada are represented by labor unions, with whom we have entered into separate collective bargaining agreements. We consider our employee relations to be satisfactory.
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ENVIRONMENTAL COMPLIANCE
Our mining and manufacturing operations and facilities in Georgia, Mississippi, California and Illinois are required to comply with state surface mining and environmental protection statutes. These domestic locations and our Canadian operations are subject to various federal, state and local statutes, regulations and ordinances which govern the discharge of materials, water and waste into the environment or otherwise regulate our operations. In recent years, environmental regulation has grown increasingly stringent, a trend that we expect will continue. We endeavor to be in compliance at all times and in all material respects with all applicable environmental controls and regulations. As a result, expenditures relating to environmental compliance have increased over the years; however, these expenditures have not been material. As part of our ongoing environmental compliance activities, we incur expenses in connection with reclaiming mining sites. Historically, reclamation expenses have not had a material effect on our cost of sales.
In addition to the environmental requirements related to our mining and manufacturing operations and facilities, there has been increased federal and state regulation with respect to the content, labeling, use, and disposal after use of various products that we sell. We endeavor to be in compliance at all times and in all material respects with those regulations and to assist our customers in that compliance.
We cannot assure that, despite all commercially reasonable efforts, we will always be in compliance in all material respects with all applicable environmental regulations or with requirements regarding the content, labeling, use, and disposal after use of our products; nor can we assure that from time to time enforcement of such requirements will not have a material adverse effect on our business. See Item 1A “Risk Factors” below for a discussion of these and other risks to our business.
ENERGY
We primarily used natural gas in the processing of our clay products during fiscal year 2016. We have the ability to switch among various energy sources, including natural gas, recycled oil and coal as permitted. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” below for more information about commodity risk with respect to our energy use.
RESEARCH AND DEVELOPMENT
At our research and development facility in Vernon Hills, Illinois, we develop new products and applications and improve existing products. The facility’s staff (and various consultants they engage from time to time) may consist of geologists, mineralogists, chemists and doctors of veterinary medicine. In the past several years, our research efforts have resulted in a number of new sorbent products and processes. The facility produces prototype samples and tests new products for customer trial and evaluation. No significant research and development was customer sponsored, and all research and development costs are expensed in the period in which incurred. See Note 1 of the Notes to the Consolidated Financial Statements for further information about research and development expenses.
AVAILABLE INFORMATION
This Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to all of the foregoing reports, are made available free of charge on or through the “Investor Information” section of our website at www.oildri.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.
Information related to corporate governance at Oil-Dri, including its Code of Ethics and Business Conduct, information concerning executive officers, directors and Board committees, and transactions in Oil-Dri securities by directors and executive officers, is available free of charge on or through the “Investor Information” section of our website at www.oildri.com. The information on our website in not included as a part of, nor incorporated by reference into, this Annual Report on Form 10-K.
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ITEM 1A – RISK FACTORS
We seek to identify, manage and mitigate risks to our business, but risk and uncertainty cannot be eliminated or necessarily predicted. You should consider the following factors carefully, in addition to other information contained in this Annual Report on Form 10-K, before making an investment decision with respect to our securities.
Risks Related to our Business
Our future growth and financial performance depend in large part on successful new product introductions.
A significant portion of our net sales comes from the sale of products in mature categories, some of which have had little or no volume growth or have had volume declines in recent fiscal years. A significant part of our future growth and financial performance will require that we successfully introduce new products or extend existing product offerings to meet emerging customer needs, technological trends and product market opportunities. We cannot be certain that we will achieve these goals. The development and introduction of new products generally require substantial and effective research, development and marketing expenditures, some or all of which may be unrecoverable if the new products do not gain market acceptance. New product development itself is inherently risky, as research failures, competitive barriers arising out of the intellectual property rights of others, launch and production difficulties, customer rejection and unexpectedly short product life cycles may occur even after substantial effort and expense on our part. Even in the case of a successful launch of a new product, the ultimate benefit we realize may be uncertain if the new product “cannibalizes” sales of our existing products beyond expected levels.
We face intense competition in our markets.
Our markets are highly competitive and we expect that both direct and indirect competition will increase in the future. Our overall competitive position depends on a number of factors including price, customer service, marketing, advertising and trade spending, technical support, product quality and delivery. Some of our competitors, particularly in the sale of cat litter (the largest product in our Retail and Wholesale Products Group), have substantially greater financial resources or market presence with established brands. The competition in the future may, in some cases, lead to price reductions, increased promotional spending, or loss of market share or product distribution, any of which could materially and adversely affect our operating results and financial condition.
Our periodic results may be volatile.
Our operating results have varied on a quarterly basis during our operating history and are likely to fluctuate significantly in the future. Our expense levels are based, in part, on our expectations regarding future net sales, and many of our expenses are fixed, particularly in the short term. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Any significant shortfall of net sales in relation to our expectations could negatively affect our quarterly operating results. Our operating results may be below the expectations of our investors as a result of a variety of factors, many of which are outside our control. Factors that may affect our quarterly operating results include:
• | fluctuating demand for our products and services; |
• | size and timing of sales of our products and services; |
• | the mix of products with varying profitability sold in a given quarter; |
• | changes in our operating costs including raw materials, energy, transportation, packaging, overburden removal, trade spending and marketing, wages and other employee-related expenses such as health care costs, and other costs; |
• | our ability to anticipate and adapt to rapidly changing conditions; |
• | introduction of new products and services by us or our competitors; |
• | our ability to successfully implement price increases and surcharges, as well as other changes in our pricing policies or those of our competitors; |
• | variations in purchasing patterns by our customers, including due to weather conditions; |
• | the ability of major customers and other debtors to meet their obligations to us as they come due; |
• | our ability to successfully manage regulatory, intellectual property, tax and legal matters; |
• | litigation judgments, settlements, or other litigation-related costs; |
• | the overall tax rate of our business, which may be affected by a number of factors, including the use of tax attributes, such as AMT tax credits, the financial results of our international subsidiaries and the timing, size and integration of acquisitions we may make from time to time; |
• | the incurrence of restructuring, impairment or other charges; and |
• | general economic conditions and specific economic conditions in our industry and the industries of our customers. |
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Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of one quarter as an indication of our future performance.
Acquisitions involve a number of risks, any of which could cause us not to realize the anticipated benefits.
We intend from time to time to strategically explore potential opportunities to expand our operations and reserves through acquisitions. Identification of good acquisition candidates is difficult and highly competitive. If we are unable to identify attractive acquisition candidates, complete acquisitions, and successfully integrate the companies, businesses or properties that we acquire, our profitability may decline and we could experience a material adverse effect on our business, financial condition, or operating results. Acquisitions involve a number of inherent risks, including:
• | uncertainties in assessing the value, strengths, and potential profitability of acquisition candidates, and in identifying the extent of all weaknesses, risks, contingent and other liabilities (including environmental, legacy product or mining safety liabilities) of those candidates; |
• | the potential loss of key customers, management and employees of an acquired business; |
• | the ability to achieve identified operating and financial synergies anticipated to result from an acquisition; |
• | problems that could arise from the integration of the acquired business; and |
• | unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying our rationale for pursuing the acquisition. |
Any one or more of these factors could cause us not to realize the benefits we anticipate to result from an acquisition. Moreover, acquisition opportunities we pursue could materially affect our liquidity and capital resources and may require us to incur indebtedness, seek equity capital or both. In addition, future acquisitions could result in our assuming more long-term liabilities relative to the value of the acquired assets than we have assumed in our previous acquisitions.
We depend on a limited number of customers for a large portion of our net sales.
A limited number of customers account for a large percentage of our net sales, as described in Item 1 “Business” above. The loss of, or a substantial decrease in the volume of, purchases by Walmart, Clorox or any of our other top customers would harm our sales and profitability. In addition, an adverse change in the terms of our dealings with, or in the financial wherewithal or viability of, one or more of our significant customers could harm our business, financial condition and results of operations.
We expect that a significant portion of our net sales will continue to be derived from a small number of customers and that the percentage of net sales represented by these customers may increase. As a result, changes in the strategies of our largest customers may reduce our net sales. These strategic changes may include a reduction in the number of brands or variety of products they carry or a shift of shelf space to private label products or increased use of global or centralized procurement initiatives. In addition, our business is based primarily upon individual sales orders placed by customers rather than contracts with a fixed duration. Accordingly, most of our customers could reduce their purchasing levels or cease buying products from us on relatively short notice. While we do have long-term contracts with certain of our customers, including Clorox, even these agreements are subject to termination in certain circumstances. In addition, the degree of profit margin contribution of our significant customers varies. If a significant customer with a more favorable profit margin was to terminate its relationship with us or shift its mix of product purchases to lower-margin products, it would have a disproportionately adverse impact on our results of operations.
Price or trade concessions, or the failure to make them to retain customers, could adversely affect our sales and profitability.
The products we sell are subject to significant price competition. From time to time, we may need to reduce the prices for some of our products to respond to competitive and customer pressures and to maintain market share. These pressures are often exacerbated during an economic downturn. Any reduction in prices to respond to these pressures would reduce our profit margins. In addition, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations would suffer. Because of the competitive environment facing many of our customers, particularly our high-volume mass merchandiser customers, these customers have increasingly sought to obtain price reductions, specialized packaging or other concessions from product suppliers. These business demands may relate to inventory practices, logistics or other aspects of the customer-supplier relationship. To the extent we provide these concessions, our profit margins are reduced. Further, if we are unable to maintain terms that are acceptable to our customers, these customers could reduce purchases of our products and increase purchases of products from our competitors, which would harm our sales and profitability.
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Increases in energy and other commodity prices would increase our operating costs, and we may be unable to pass all these increases on to our customers in the form of higher prices and surcharges.
If our energy costs increase disproportionately to our net sales, our earnings could be significantly reduced. Increases in our operating costs may reduce our profitability if we are unable to pass all the increases in energy and other commodity prices on to our customers through price increases or surcharges. Sustained price increases or surcharges in turn may lead to declines in volume, and while we seek to project tradeoffs between price increases and surcharges, on the one hand, and volume, on the other, there can be no assurance that our projections will prove to be accurate.
We are subject to volatility in the price and availability of natural gas, as well as other sources of energy. We have the ability, as we have from time to time in the past, to reallocate a portion of our energy needs among different sources of energy due to seasonal supply limitations and the higher cost of one particular fuel relative to other fuels; however, there can be no assurance that we will be able to effectively reallocate among different fuels in the future. From time to time, we may use forward purchase contracts or financial instruments to hedge the volatility of a portion of our energy costs. The success or failure of any such hedging transactions depends on a number of factors, including our ability to anticipate and manage volatility in energy prices, the general demand for fuel by the manufacturing sector, seasonality and the weather patterns throughout the United States and the world.
The prices of other commodities such as paper, plastic resins, synthetic rubber and steel significantly influence the costs of packaging, replacement parts and equipment we use in the manufacture of our products and the maintenance of our facilities. As a result, increases in the prices of these commodities generally increase the costs of the related materials we use. These increased materials costs present the same types of risks as described above with respect to increased energy costs.
Our business could be negatively affected by supply, capacity, information technology and logistics disruptions or the costs incurred to avoid these disruptions.
Supply, capacity, information technology and logistics disruptions could adversely affect our ability to manufacture, package or transport our products. Some of our products require raw materials that are provided by a limited number of suppliers, or are demanded by other industries or are simply not available at times. Also, some of our products are manufactured on equipment at or near its capacity thus limiting our ability to sell additional volumes of such products until more capacity is obtained. Moreover, disruptions, failures, cyber-attacks or privacy breaches in the information technology or phone systems of us or our customers could adversely affect our communications and business operations. Furthermore, technology enhancements to prevent business interruptions could require increased spending. In addition, an increase in truck or ocean freight costs may reduce our profitability if we are unable to pass such increases on to our customers through price increases or surcharges, and a decrease in transportation availability may affect our ability to deliver our products to our customers and consequently decrease customer satisfaction and future orders.
Changes in inventory strategy by our customers as well as other external factors could adversely affect our sales and increase our inventory risk.
From time to time, customers in both our Retail and Wholesale Products Group and our Business to Business Products Group have changed inventory levels as part of managing their working capital requirements. Any change in inventory levels by our customers would harm our operating results for the financial periods affected by the reductions. In particular, continued consolidation within the retail industry could potentially reduce inventory levels maintained by our retail customers, which could adversely affect our results of operations for the financial periods affected by the reductions.
The value of our inventory may decline as a result of surplus inventory, packaging changes driven by regulatory requirements or market refreshment, price reductions or obsolescence. We must identify the right product mix and maintain sufficient inventory on hand to meet customer orders. Failure to do so could adversely affect our revenue and operating results. If circumstances change (for example, an unexpected shift in market demand, pricing or customer defaults) there could be a material impact on the net realizable value of our inventory. We maintain an inventory valuation reserve account against diminution in the value or saleability of our inventory; however, there is no guaranty that these arrangements will be sufficient to avoid write-offs in excess of our reserves.
Environmental, health and safety matters create potential compliance and other liability risks.
We are subject to a variety of federal, state, local and foreign laws and regulatory requirements relating to the environment and to health and safety matters. For example, our mining operations are subject to extensive governmental regulation on matters such as permitting and licensing requirements, workplace safety, plant and wildlife protection, wetlands and other environmental protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the
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environment, and the effects that mining has on air or groundwater quality and water availability. We believe we have obtained all material permits and licenses required to conduct our present operations. We will, however, need additional permits and renewals of permits in the future.
The expense, liabilities and requirements associated with environmental, health and safety laws and regulations are costly and time-consuming and may delay commencement or continuation of exploration, mining or manufacturing operations. We have incurred, and will continue to incur, significant capital and operating expenditures and other costs in complying with environmental, health and safety laws and regulations. In recent years, regulation of environmental, health and safety matters has grown increasingly stringent, a trend that we expect will continue. Substantial penalties may be imposed if we violate certain of these laws and regulations even if the violation was inadvertent or unintentional. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures, in addition to fines and administrative, civil or criminal sanctions, third-party claims for property damage or personal injury, cleanup and site restoration costs and liens, the issuance of injunctions to limit or cease operations, the suspension or revocation of permits and other enforcement measures that could have the effect of limiting our operations. Under the “joint and several” liability principle of certain environmental laws, we may be held liable for all remediation costs at a particular site and the amount of that liability could be material. In addition, future environmental laws and regulations could restrict our ability to expand our facilities or extract our existing reserves or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. There can be no assurance that future events, including changes in any environmental requirements and the costs associated with complying with such requirements, will not have a material adverse effect on us.
Government regulation imposes significant costs on us, and future regulatory changes (or related customer responses to regulatory changes) could increase those costs or limit our ability to produce and sell our products.
In addition to the regulatory matters described above, our operations are subject to various federal, state, local and foreign laws and regulations relating to the mining, manufacture, packaging, labeling, content, storage, distribution and advertising of our products and the conduct of our business operations. For example, in the United States, some of our products, product claims, labeling and advertising are regulated by the Food and Drug Administration, the Consumer Product Safety Commission, the Occupational Health and Safety Administration, the Environmental Protection Agency and the Federal Trade Commission. Most states have agencies that regulate in parallel to these federal agencies. In addition, our international sales and operations are subject to regulation in each of the foreign jurisdictions in which we manufacture, distribute or sell our products. There is increasing federal and state regulation with respect to the content, labeling, use, and disposal after use of various products we sell. Throughout the world, but particularly in the United States and Europe, there is also increasing government scrutiny and regulation of the food chain and products entering or affecting the food chain.
If we are found to be out of compliance with applicable laws and regulations in these or other areas, we could be subject to loss of customers and to civil remedies, including fines, injunctions, recalls or asset seizures, as well as potential criminal sanctions, any of which could have a material adverse effect on our business. Loss of or failure to obtain necessary permits and registrations could delay or prevent us from meeting product demand, introducing new products, building new facilities or acquiring new businesses and could adversely affect operating results. If these laws or regulations are changed or interpreted differently in the future, it may become more difficult or expensive for us to comply. In addition, investigations or evaluations of our products by government agencies may require us to adopt additional labeling, safety measures or other precautions, or may effectively limit or eliminate our ability to market and sell these products. Accordingly, there can be no assurance that current or future governmental regulation will not have a material adverse effect on our business or that we will be able to obtain or renew required governmental permits and registrations in the future.
We are also experiencing increasing customer scrutiny of the content and manufacturing of our products, particularly our products entering or affecting the food chain, in parallel with the increasing government regulation discussed above. Our customers may impose product specifications or other requirements that are different from, and more onerous than, applicable laws and regulations. As a result, the failure of our products to meet these additional requirements may result in loss of customers and decreased sales of our products even in the absence of any actual failure to comply with applicable laws and regulations. There can be no assurance that future customer requirements concerning the content or manufacturing of our products will not have a material adverse effect on our business.
We depend on our mining operations for a majority of our supply of sorbent minerals.
Most of our principal raw materials are sorbent minerals mined by us or independent contractors on land that we own or lease. While our mining operations are conducted in surface mines, which do not present many of the risks associated with deep underground mining, our mining operations are nevertheless subject to many conditions beyond our control. Our mining operations are affected by weather and natural disasters, such as earthquakes, tornadoes, hurricanes, heavy rains and flooding, equipment
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failures and other unexpected maintenance problems, variations in the amount of rock and soil overlying our reserves, variations in geological conditions, fires and other accidents, fluctuations in the price or availability of supplies and other matters. Any of these risks could result in significant damage to our mining properties or processing facilities, personal injury to our employees, environmental damage, delays in mining or processing, losses or possible legal liability. We cannot predict whether or the extent to which we will suffer the impact of these and other conditions in the future.
We may not be successful in acquiring adequate additional reserves in the future.
We have an ongoing program of exploration for additional reserves on existing properties as well as through the potential acquisition of new owned or leased properties; however, there can be no assurance that our attempts to acquire additional reserves in the future will be successful. Our ability to acquire additional reserves in the future could be limited by competition from other companies for attractive properties, the lack of suitable properties that can be acquired on terms acceptable to us or restrictions under our existing or future debt facilities. We may not be able to negotiate new leases or obtain mining contracts for properties containing additional reserves or renew our leasehold interests in properties on which operations are not commenced during the term of the lease. Also, requirements for environmental compliance may restrict exploration or use of lands that might otherwise be utilized as a source of reserves.
Failure to effectively utilize or successfully assert intellectual property rights, and the loss or expiration of such rights, could materially adversely affect our competitiveness. Infringement of third-party intellectual property rights could result in costly litigation and/or the modification or discontinuance of our products.
We rely on intellectual property rights based on trademark, trade secret, patent and copyright laws to protect our brands, products and packaging for our products. We cannot be certain that these intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property rights or, where appropriate, license intellectual property rights necessary to support new product introductions. We cannot be certain that these rights, if obtained, will not later be invalidated, circumvented or challenged, and we could incur significant costs in connection with legal actions to assert our intellectual property rights or to defend those rights from assertions of invalidity. In addition, even if such rights are obtained in the United States, the laws of some of the other countries in which our products are or may be sold may not protect intellectual property rights to the same extent as the laws of the United States. If other parties infringe our intellectual property rights, they may dilute the value of our brands in the marketplace, which could diminish the value that consumers associate with our brands and harm our sales. The failure to perfect or successfully assert our intellectual property rights could make us less competitive and could have a material adverse effect on our business, operating results, and financial condition.
In addition, if our products are found to infringe intellectual property rights of others, the owners of those rights could bring legal actions against us claiming substantial damages for past infringement and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages from past infringement, we could be required to obtain a license in order to continue to manufacture or market the affected products, potentially adding significant costs. We may not prevail in any action brought against us or we may be unsuccessful in securing any license for continued use and therefore have to discontinue the marketing and sale of a product. This could make us less competitive and could have a material adverse impact on our business, operating results and financial condition. See Item 3 “Legal Proceedings” for more information about specific legal matters related to our patents.
The loss of any key member of our senior management team may impede the implementation of our business plans in a timely manner.
The execution of our business plans depends in part upon the continued service of our senior management team, who possess unique and extensive industry knowledge and experience. The loss or other unavailability of one or more of the key members of our senior management team could adversely impact our ability to manage our operations effectively and/or pursue our business strategy. No Company-owned life insurance coverage has been obtained on these team members.
We face risks as a result of our international sales and business operations.
We derived approximately 22% of our consolidated net sales from sales outside of the United States in fiscal year 2016. Our ability to sell our products and conduct our operations outside of the United States is subject to a number of risks. Local economic, political and labor conditions in each country could adversely affect demand for our products or disrupt our operations in these markets, particularly when local political and economic conditions are unstable. In addition, international sales and operations are subject to currency exchange fluctuations, fund transfer and trade restrictions and import/export duties, and international operations are subject to foreign regulatory requirements and issues, including with respect to environmental matters.
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Any of these matters could result in sudden, and potentially prolonged, changes in demand for our products. Also, we may have difficulty enforcing agreements and collecting accounts receivable through a foreign country’s legal system.
We may incur adverse safety events or product liability claims that may be costly, create adverse publicity and may add further governmental regulation.
If any of the products that we sell cause, or appear to cause, harm to any of our customers or to consumers, we could be exposed to product liability lawsuits, heightened regulatory scrutiny, requirements for additional labeling, withdrawal of products from the market, imposition of fines or criminal penalties or other governmental actions. Any of these actions could result in material write-offs of inventory, material impairments of intangible assets, goodwill and fixed assets, material restructuring charges and other adverse impacts on our business operations. We cannot predict with certainty the eventual outcome of any pending or future litigation, and we could be required to pay substantial judgments or settlements against us or change our product formulations in response to governmental action. Further, lawsuits can be expensive to defend, whether or not they have merit, and the defense of these actions may divert the attention of our management and other resources that would otherwise be engaged in managing our business and our reputation could suffer, any of which could harm our business.
Failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, operating results and stock price.
Section 404 of the Sarbanes-Oxley Act and related SEC rules require that we perform an annual management assessment of the design and effectiveness of our internal control over financial reporting and obtain an opinion from our independent registered public accounting firm on our internal control over financial reporting. Our assessment concluded that our internal control over financial reporting was effective as of July 31, 2016 and we obtained from our independent registered public accounting firm an unqualified opinion on our internal control over financial reporting; however, there can be no assurance that we will be able to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time in future periods. Accordingly, we cannot assure that we will be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal control is necessary for us to produce reliable financial reports and is important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our Common Stock could drop significantly.
Risks Related to Our Common Stock
Our principal stockholders have the ability to control matters requiring a stockholder vote and could delay, deter or prevent a change in control of our company.
Under our Certificate of Incorporation, the holders of our Common Stock are entitled to one vote per share and the holders of our Class B Stock are entitled to ten votes per share; the two classes generally vote together without regard to class (except that any amendment to our Certificate of Incorporation changing the number of authorized shares or adversely affecting the rights of Common Stock or Class B Stock requires the separate approval of the class so affected as well as the approval of both classes voting together). As a result, the holders of our Class B Stock exert control over us and thus limit the ability of other stockholders to influence corporate matters. Beneficial ownership of Common Stock and Class B Stock by Jaffee Investment Partnership, L.P. and its affiliates (including Richard M. Jaffee, our Chairman, and Daniel S. Jaffee, his son and our President and Chief Executive Officer) provides them with the ability to control the election of our Board of Directors and the outcome of most matters requiring the approval of our stockholders, including the amendment of certain provisions of our Certificate of Incorporation and By-Laws, the approval of any equity-based employee compensation plans and the approval of fundamental corporate transactions, including mergers and substantial asset sales. Through their concentration of voting power, our principal stockholders may be able to delay, deter or prevent a change in control of our company or other business combinations that might otherwise be beneficial to our other stockholders.
We are a “controlled company” within the meaning of the New York Stock Exchange (“NYSE”) rules and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements.
We are a “controlled company” under the New York Stock Exchange Corporate Governance Standards. As a controlled company, we may rely on exemptions from certain NYSE corporate governance requirements that otherwise would be applicable, including the requirements:
• | that a majority of the board of directors consists of independent directors; |
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• | that we have a nominating and governance committee comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; |
• | that we have a compensation committee comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; |
• | that we include in our proxy statements certain information regarding compensation consultants and related conflicts of interest; and |
• | that we conduct an annual performance evaluation of the nominating and corporate governance and compensation committees. |
We have previously relied on these exemptions, and we intend to continue to rely on them in the future. As a result, you may not have the same benefits and information available to stockholders of NYSE-listed companies that are subject to all of the NYSE corporate governance requirements.
The market price for our Common Stock may be volatile.
In recent periods, there has been volatility in the market price for our Common Stock. Furthermore, the market price of our Common Stock could fluctuate substantially in the future in response to a number of factors, including the following:
• | fluctuations in our quarterly operating results or the operating results of our competitors; |
• | changes in general conditions in the economy, the financial markets, or the industries in which we operate; |
• | announcements of significant acquisitions, strategic alliances or joint ventures by us, our customers or our competitors; |
• | introduction of new products or services; |
• | increases in the price of energy sources and other raw materials; and |
• | other developments affecting us, our industries, customers or competitors. |
In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our Common Stock price, regardless of our operating results. Given its relatively small public float, number of shareholders and average daily trading volume, our Common Stock may be relatively more susceptible to volatility arising from any of these factors. There can be no assurance that the price of our Common Stock will increase in the future or be maintained at its recent levels.
Future sales of our Common Stock could depress its market price.
Future sales of shares of our Common Stock could adversely affect its prevailing market price. If our officers, directors or significant stockholders sell a large number of shares, or if we issue a large number of shares, the market price of our Common Stock could significantly decline. Moreover, the perception in the public market that stockholders might sell shares of Common Stock could depress the market for our Common Stock. Our Common Stock’s relatively small public float and average daily trading volume may make it relatively more susceptible to these risks.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
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ITEM 2 – PROPERTIES
Real Property Holdings and Mineral Reserves
Land Owned | Land Leased | Land Unpatented Claims | Total | Estimated Proven Reserves | Estimated Probable Reserves | Total | |||||||||||||||
(acres) | (thousands of tons) | ||||||||||||||||||||
California | 795 | — | 1,030 | 1,825 | 4,135 | 11,226 | 15,361 | ||||||||||||||
Georgia | 3,846 | 1,451 | — | 5,297 | 33,652 | 24,592 | 58,244 | ||||||||||||||
Illinois | 105 | 508 | — | 613 | 2,876 | 1,596 | 4,472 | ||||||||||||||
Mississippi | 2,156 | 999 | — | 3,155 | 76,840 | 91,207 | 168,047 | ||||||||||||||
Nevada | 535 | — | — | 535 | 23,316 | 2,976 | 26,292 | ||||||||||||||
Oregon | 340 | — | — | 340 | — | 25 | 25 | ||||||||||||||
Tennessee | 178 | — | — | 178 | 3,000 | 3,000 | 6,000 | ||||||||||||||
7,955 | 2,958 | 1,030 | 11,943 | 143,819 | 134,622 | 278,441 | |||||||||||||||
The Mississippi, Georgia, Tennessee, Nevada, California and Illinois properties are primarily mineral in nature, except our research and development facility which is included in the Illinois owned land. We mine sorbent minerals primarily consisting of montmorillonite and attapulgite and, to a lesser extent, other clay-like sorbent materials, such as Antelope shale. We employ geologists and mineral specialists who prepared the estimated reserves of these minerals in the table above. See also Item 1 “Business” above for further information about our reserves. The locations in the table above collectively produced approximately 784,000 tons of finished product in fiscal year 2016, 808,000 tons in fiscal year 2015 and 857,000 tons in fiscal year 2014. Parcels of such land are also sites of manufacturing facilities operated by us. We own approximately one acre of land in Laval, Quebec, Canada, which is the site of the processing, packaging and distribution facility for our Canadian subsidiary.
MINING PROPERTIES
Our mining operations are conducted on land that we own or lease. The Georgia, Illinois and Mississippi mining leases generally require that we pay a minimum monthly rent to continue the lease term. The rental payments are typically applied against a stated royalty related to the number of unprocessed, or in some cases processed, tons of minerals extracted from the leased property. Many of our mining leases have no stated expiration dates. Some of our leases, however, do have expiration dates ranging from 2026 to 2097. We would not experience a material adverse effect from the expiration or termination of any of these leases. We have a variety of access arrangements, some of which are styled as leases, for manufacturing at facilities that are not contiguous with the related mines. We would not experience a material adverse effect from the expiration or termination of any of these arrangements. See also Item 1 “Business” above for further information on our reserves.
Certain of our land holdings in California are represented by unpatented mining claims we lease from the Bureau of Land Management. These leases generally give us the contractual right to conduct mining or processing activities on the land covered by the claims. The validity of title to unpatented claims, however, is dependent upon numerous factual matters. We believe the unpatented claims we lease are in compliance with all applicable federal, state and local mining laws, rules and regulations. Future amendments to existing federal mining laws, however, could have a prospective effect on mining operations on federal lands and include, among other changes, the imposition of royalty fees on the mining of unpatented claims, the elimination or restructuring of the patent system and an increase in fees for the maintenance of unpatented claims. To the extent that future proposals may result in the imposition of royalty fees on unpatented lands, the mining of our unpatented claims may become economically unfavorable. We cannot predict the form that any such amendments might take or whether or when such amendments might be adopted. In addition, the construction and operation of processing facilities on these sites would require the approval of federal, state and local regulatory authorities. See Item 1A “Risk Factors” above for a discussion of other risks to our business related to our mining properties.
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MINING AND MANUFACTURING METHODS
Mining and Hauling
We mine clay in open-pit mines in Georgia, Mississippi, Illinois and California. The mining and hauling operations are similar throughout the Oil-Dri locations, with the exception of California. The land to be mined is first stripped. The stripping process involves removing the overburden and preparing the site to allow the excavators to reach the desired clay. When stripping is completed, the excavators dig out and load the clay onto dump trucks. The trucks haul the clay directly to our processing plants where it is dumped in a clay yard and segregated by clay type if necessary. Generally, the mine sites are in close proximity to the processing plants; however, the maximum distance the clay is currently hauled to a plant is approximately 13 miles.
At our California mines the clay is excavated and hauled to a hopper. An initial crushing and screening operation is performed at the mine site before the trucks are loaded for delivery to the processing plant.
Processing
The processing of our clay varies depending on the level of moisture desired in the clay after the drying process. The moisture level is referred to as regular volatile moisture (“RVM”) or low volatile moisture (“LVM”).
RVM Clay: A front end loader is used to load the clay from the clay yard into the primary crusher. The primary crusher reduces the clay chunks to 2.0 inches in diameter or smaller. From the crusher, the clay is transported via a belt conveyor into the clay shed. A clay shed loader feeds the clay into a disintegrator which reduces the clay to particles 0.5 inches in diameter or smaller. The clay then feeds directly into the RVM kiln. The RVM kiln reduces the clay’s moisture content. From the RVM kiln, the clay moves through a series of mills and screens which further size and separate the clay into the desired particle sizes. The sized clay is then conveyed into storage tanks. The RVM processed clay can then be packaged or processed into LVM material.
LVM Clay: RVM clay is fed from storage tanks into the LVM kiln where the moisture content is further reduced. The clay then proceeds into a rotary cooler, then on to a screening circuit which separates the clay into the desired particle sizes.
In addition, certain other products may go through further processing or the application of fragrances and additives. For example, certain fluid purification and animal health products are processed into a powder form. We also use a proprietary process for our engineered granules to create spherical, uniform-sized granules.
Packaging
Once the clay has been dried to the desired level it will be sized and packaged. Our products have various package sizes and types ranging from bags, boxes and jugs of cat litter to railcars of agricultural products. We also package some of our products into bulk (approximately one ton) bags or into bulk trucks. The size and delivery configuration of our finished products is determined by customer requirements.
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FACILITIES
We operate clay manufacturing and non-clay production facilities on property owned or leased by us as shown on the map below:
Oil-Dri Corporation of America Plant Site Locations
Location | Owned/Leased | Function |
Alpharetta, Georgia | Leased | Non-clay manufacturing and packaging, sales, customer service |
Bentonville, Arkansas | Leased | Sales office |
Blue Mountain, Mississippi | Owned | Manufacturing and packaging |
Chicago, Illinois | Leased | Principal executive office |
Coppet, Switzerland | Leased | Customer service office |
Laval, Quebec, Canada | Owned | Non-clay manufacturing and clay and non-clay packaging, sales |
Mounds, Illinois | Owned | Manufacturing and packaging |
Ochlocknee, Georgia | Owned | Manufacturing and packaging |
Ripley, Mississippi | Owned | Manufacturing and packaging |
Shenzhen, China | Leased | Sales office, customer service |
Taft, California | Owned | Manufacturing and packaging |
Vernon Hills, Illinois | Owned | Research and development |
Wisbech, United Kingdom | Leased | Non-clay manufacturing and clay and non-clay packaging, sales, customer service |
We have no mortgages on the real property we own. The Bentonville lease for the Bentonville, Arkansas office expires in August 2016. The leases for the Alpharetta, Georgia facility and the Shenzhen, China office all expire in 2018. The Wisbech, United Kingdom facility lease expires in 2032 and the Chicago, Illinois corporate office lease expires in 2033. The lease for the Coppet, Switzerland office is on a year-to-year basis. We consider that our properties are generally in good condition, well maintained and suitable and adequate to carry on our business.
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ITEM 3 – LEGAL PROCEEDINGS
We are party to various legal actions from time to time that are ordinary in nature and incidental to the operation of our business. While it is not possible at this time to determine with certainty the ultimate outcome of these lawsuits, we believe that none of the pending proceedings will have a material adverse effect on our business, financial condition, results of operations or cash flows; however, some proceedings, particularly the matters described below, could have a more significant impact than others.
On February 3, 2015, we brought suit in the United States District Court for the Northern District of Illinois, Eastern Division, against Nestlé Purina PetCare Company (“Nestlé”) seeking monetary damages and injunctive relief based on Nestlé’s alleged infringement of a patent held by us. In response, Nestlé filed a petition for Inter Partes Review (“IPR”) with the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office to challenge certain of the claims in our patent. Nestlé obtained a stay of the lawsuit in district court until the PTAB agreed to consider Nestle’s petition and issued its substantive decision on the IPR’s patent challenges.
The PTAB agreed to consider Nestle’s petition, but on June 20, 2016, upheld all of the challenged claims in our patent. In July 2016, Nestlé filed a motion for reconsideration of the PTAB’s decision, which remains pending, as does the stay of our lawsuit in district court.
In addition, on September 23, 2016, we brought another suit in the United States District Court for the Northern District of Illinois, Eastern Division, against Nestlé seeking monetary damages and injunctive relief based on Nestlé’s alleged infringement of a patent issued in 2016 to us.
Due to the nature of the litigation with Nestlé and because the lawsuits are still in the pre-trial stage, we cannot estimate the possible damages, if any, and the total expense associated with the lawsuit. Although no assurances can be given as to the results of the lawsuits, based on the present status, management does not believe that such results will have a material adverse effect on our financial condition or results of operations.
ITEM 4 – MINE SAFETY DISCLOSURE
Our mining operations are subject to regulation by the Mine Safety and Health Administration under authority of the Federal Mine Safety and Health Act of 1977, as amended. Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Annual Report on Form 10-K.
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PART II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is traded on the NYSE under the symbol ODC. There is no established trading market for our Class B Stock. There are no shares of Class A Common Stock currently outstanding. See Note 7 of the Notes to the Consolidated Financial Statements for a description of our Common Stock, Class B Stock and Class A Common Stock. The number of holders of record of Common Stock and Class B Stock on September 30, 2016 were 608 and 29, respectively, as reported by our transfer agent. In the last three years, we have not sold any securities which were not registered under the Securities Act of 1933.
The following table sets forth, for the periods indicated, the high and low sales price for our Common Stock listed on the NYSE and dividends per share declared on our Common Stock and Class B Stock.
Common Stock Price Range | Cash Dividends Per Share | |||||||||||||||
Low | High | Common Stock | Class B Stock | |||||||||||||
Fiscal Year 2016 | ||||||||||||||||
First Quarter | $ | 21.65 | $ | 31.61 | $ | 0.2100 | $ | 0.1575 | ||||||||
Second Quarter | $ | 28.42 | $ | 38.92 | 0.2100 | 0.1575 | ||||||||||
Third Quarter | $ | 32.24 | $ | 38.43 | 0.2100 | 0.1575 | ||||||||||
Fourth Quarter | $ | 29.89 | $ | 37.67 | 0.2200 | 0.1650 | ||||||||||
Total | $ | 0.8500 | $ | 0.6375 | ||||||||||||
Fiscal Year 2015: | ||||||||||||||||
First Quarter | $ | 24.02 | $ | 31.30 | $ | 0.2000 | $ | 0.1500 | ||||||||
Second Quarter | $ | 26.60 | $ | 32.93 | 0.2000 | 0.1500 | ||||||||||
Third Quarter | $ | 28.30 | $ | 34.19 | 0.2000 | 0.1500 | ||||||||||
Fourth Quarter | $ | 25.92 | $ | 33.44 | 0.2100 | 0.1575 | ||||||||||
Total | $ | 0.8100 | $ | 0.6075 | ||||||||||||
Dividends. Our Board of Directors determines the timing and amount of any dividends. Our Board of Directors may change its dividend practice at any time. The declaration and payment of future dividends, if any, will depend upon, among other things, our future earnings, capital requirements, financial condition, legal requirements, contractual restrictions and other factors that our Board of Directors deems relevant. Our Credit Agreement with BMO Harris Bank N.A. (“BMO Harris”) and our 2005 Note Agreement require that certain minimum net worth and tangible net worth levels are to be maintained. To the extent that these balances are not attained, our ability to pay dividends may be impaired. See Note 4 of the Notes to the Consolidated Financial Statements for further information about our note agreements.
Issuer Repurchase of Equity Securities. Our Board of Directors authorized the repurchase of 250,000 shares of Common Stock on March 11, 2011 and authorized the repurchase of an additional 250,000 shares on June 14, 2012. These authorizations do not have a stated expiration date. As of July 31, 2016, a total of 305,361 shares of Common Stock may yet be repurchased under these authorizations. We do not have any current authorization from our Board of Directors to repurchase shares of Class B Stock.
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Equity Compensation Plan Information. The following table presents information about compensation plans under which our equity securities are authorized for issuance. See Note 8 of the Notes to the Consolidated Financial Statements for further information about these stock-based compensation plans.
Equity Compensation Plan Information As Of July 31, 2016 | ||||||
Plan Category | Number of securities to be issued upon exercise of outstanding options (in thousands) (a) | Weighted-average exercise price of outstanding options (b) | Number of securities remaining available for further issuance under equity compensation plans (excluding securities reflected in column (a)) (in thousands) (c) | |||
Equity compensation plans approved by stockholders | 10 | $17.00 | 376 | |||
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PERFORMANCE GRAPH
The following graph shows the annual cumulative total stockholders’ return for the five years ending July 31, 2016 on an assumed investment of $100 on July 31, 2011 in our Common Stock, the Russell Microcap Index and the Russell 2000-Material and Processing Economic Sector Index. Our Common Stock is included in the Russell Microcap Index and we consider the Russell 2000-Material and Processing Economic Sector Index to be our peer group. The graph assumes all dividends were reinvested. The historical stock price performance of our Common Stock is not necessarily indicative of future stock performance.
Comparative Five-Year Total Returns
Oil-Dri Corporation of America, Russell Microcap Index , Russell 2000-Materials & Processing Index
(Performance results through July 31, 2016)
2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||
Oil-Dri Corporation of America | $ | 100.00 | $ | 109.69 | $ | 164.38 | $ | 153.91 | $ | 142.20 | $ | 208.66 | ||||||
Russell Microcap | $ | 100.00 | $ | 100.85 | $ | 138.28 | $ | 149.71 | $ | 168.14 | $ | 160.74 | ||||||
Russell 2000-Materials & Processing | $ | 100.00 | $ | 93.87 | $ | 127.41 | $ | 140.59 | $ | 137.97 | $ | 157.40 | ||||||
This performance graph and accompanying disclosure is not soliciting material, is not deemed filed with the SEC, and is not incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made on, before or after the date of this filing and irrespective of any general incorporation language in such filing.
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ITEM 6 – SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF FINANCIAL DATA | ||||||||||||||||||||
(In thousands, except for per share amounts and ratios) | ||||||||||||||||||||
Fiscal Year Ended July 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Summary of Operations | ||||||||||||||||||||
Net Sales | $ | 262,313 | $ | 261,402 | $ | 266,313 | $ | 250,583 | $ | 240,681 | ||||||||||
Cost of Sales | (185,164 | ) | (201,245 | ) | (206,663 | ) | (184,084 | ) | (181,676 | ) | ||||||||||
Gross Profit | 77,149 | 60,157 | 59,650 | 66,499 | 59,005 | |||||||||||||||
Selling, General and Administrative Expenses | (61,736 | ) | (45,004 | ) | (47,232 | ) | (47,558 | ) | (47,303 | ) | ||||||||||
Capacity Rationalization Charges (1) | — | — | — | (70 | ) | (1,623 | ) | |||||||||||||
Income from Operations | 15,413 | 15,153 | 12,418 | 18,871 | 10,079 | |||||||||||||||
Other Income (Expense) | ||||||||||||||||||||
Interest Income | 29 | 13 | 23 | 34 | 31 | |||||||||||||||
Interest Expense | (1,035 | ) | (1,327 | ) | (1,569 | ) | (1,773 | ) | (2,060 | ) | ||||||||||
Foreign Exchange (Losses) Gains | (384 | ) | (349 | ) | 35 | (56 | ) | (196 | ) | |||||||||||
Other, Net | 334 | 679 | 430 | 423 | 507 | |||||||||||||||
Total Other Expense, Net | (1,056 | ) | (984 | ) | (1,081 | ) | (1,372 | ) | (1,718 | ) | ||||||||||
Income before Income Taxes | 14,357 | 14,169 | 11,337 | 17,499 | 8,361 | |||||||||||||||
Income Taxes | (744 | ) | (2,801 | ) | (2,981 | ) | (2,913 | ) | (2,263 | ) | ||||||||||
Net Income | $ | 13,613 | $ | 11,368 | $ | 8,356 | $ | 14,586 | $ | 6,098 | ||||||||||
Average Shares Outstanding | ||||||||||||||||||||
Diluted | 7,094 | 7,037 | 7,004 | 6,927 | 7,062 | |||||||||||||||
Net Income per Share | ||||||||||||||||||||
Basic Common | $ | 2.04 | $ | 1.73 | $ | 1.27 | $ | 2.25 | $ | 0.92 | ||||||||||
Basic Class B Common | $ | 1.53 | $ | 1.30 | $ | 0.96 | $ | 1.69 | $ | 0.70 | ||||||||||
Diluted Common | $ | 1.87 | $ | 1.59 | $ | 1.17 | $ | 2.07 | $ | 0.85 | ||||||||||
Important Highlights | ||||||||||||||||||||
Total Assets | $ | 204,933 | $ | 190,031 | $ | 186,204 | $ | 183,559 | $ | 174,267 | ||||||||||
Long-Term Debt | $ | 12,333 | $ | 15,417 | $ | 18,900 | $ | 22,400 | $ | 25,900 | ||||||||||
Working Capital | $ | 60,433 | $ | 53,755 | $ | 54,016 | $ | 71,925 | $ | 66,080 | ||||||||||
Working Capital Ratio | 3.0 | 2.9 | 2.8 | 3.3 | 3.3 | |||||||||||||||
Book Value per Share | $ | 16.42 | $ | 15.85 | $ | 14.94 | $ | 14.96 | $ | 12.19 | ||||||||||
Dividends Declared | $ | 5,701 | $ | 5,312 | $ | 5,040 | $ | 4,712 | $ | 4,511 | ||||||||||
Dividends Declared per Common Share | $ | 0.8500 | $ | 0.8100 | $ | 0.7700 | $ | 0.7300 | $ | 0.6900 | ||||||||||
Dividends Declared per Class B Common Share | $ | 0.6375 | $ | 0.6075 | $ | 0.5775 | $ | 0.5475 | $ | 0.5175 | ||||||||||
Capital Expenditures | $ | 10,684 | $ | 15,859 | $ | 18,566 | $ | 9,795 | $ | 6,960 | ||||||||||
Depreciation and Amortization | $ | 12,192 | $ | 11,994 | $ | 10,396 | $ | 8,946 | $ | 9,272 | ||||||||||
Net Income as a Percent of Net Sales | 5.2 | % | 4.3 | % | 3.1 | % | 5.8 | % | 2.5 | % | ||||||||||
Return on Average Stockholders' Equity | 12.0 | % | 10.6 | % | 8.1 | % | 15.5 | % | 6.8 | % | ||||||||||
Gross Profit as a Percent of Net Sales | 29.4 | % | 23.0 | % | 22.4 | % | 26.5 | % | 24.5 | % | ||||||||||
Operating Expenses as a Percent of Net Sales | 23.5 | % | 17.2 | % | 17.7 | % | 19.0 | % | 20.3 | % | ||||||||||
(1) In fiscal years 2012 and 2013, one-time charges were incurred for the relocation of production of our industrial floor absorbent and cat litter products from our facility located in Mounds, Illinois to our plants located in Mississippi.
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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 montmorillonite and attapulgite and, to a lesser extent, other clay-like sorbent materials, such as Antelope 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: Retail and Wholesale Products Group and 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.
Consolidated net income was $13,613,000, or $1.87 per diluted share, for the fiscal year ended July 31, 2016, a 20% increase from net income of $11,368,000, or $1.59 per diluted share, for the fiscal year ended July 31, 2015. A 28% increase in gross profit and a lower effective tax rate on earnings drove the increase in net income, but these items were partially offset by higher selling, general and administrative expenses. Our improved gross profit reflected a shift to sales of more value-added products in both of our operating segments, as well as lower costs for natural gas, freight and packaging. Our effective tax rate on earnings was 5.2% in fiscal year 2016 compared to 19.8% in fiscal year 2015. The lower tax rate was driven by the full release of the valuation allowance associated with the deferred tax asset for domestic AMT credits. Selling, general and administrative expenses in fiscal year 2016 included higher costs to promote products in both operating segments. The Retail and Wholesale Products Group launched an integrated marketing campaign in the third quarter of fiscal year 2016 to promote our Cat's Pride Fresh & Light Ultimate Care lightweight scoopable cat litter, which resulted in approximately $12,500,000 higher advertising expense compared to fiscal year 2015. In fiscal 2016, our Business to Business Products Group also introduced and promoted our new Varium product that focuses on intestinal health in poultry.
Our balance sheet at fiscal year-end 2016 remained strong. Total cash, cash equivalents and short-term investments increased $6,485,000 from fiscal year-end 2015 even as we spent heavily for advertising, invested in capital at our plants, paid higher dividends and reduced our notes payable. Our cash requirements are subject to change as business conditions warrant and opportunities arise. The noncurrent liability for our pension and postretirement benefits increased $9,063,000 due to a lower discount rate required for the actuarial determination of these obligations.
RESULTS OF OPERATIONS
FISCAL YEAR 2016 COMPARED TO FISCAL YEAR 2015
CONSOLIDATED RESULTS
Consolidated net sales in fiscal year 2016 were $262,313,000, an increase of $911,000 from net sales of $261,402,000 in fiscal year 2015. Net sales in our Business to Business Products Groups increased for our products used in agriculture, fluid purification and animal health applications. Net sales in our Retail and Wholesale Products Group declined for our cat litter and industrial absorbent products, as well as for our subsidiary in Canada. See below for further discussion of sales fluctuations by operating segment.
Consolidated gross profit was $77,149,000, an increase of $16,992,000 from gross profit of $60,157,000 in the prior year. Our gross margin (defined as gross profit as a percentage of net sales) in fiscal year 2016 increased to 29% from 23% in fiscal year 2015. Gross profit increased due primarily to a shift in sales to more value-added products and lower costs. The cost of natural gas used to operate kilns that dry our clay during processing decreased approximately 21% per ton produced. Freight costs declined due to lower diesel prices, as well as additional capacity and regulation changes in the truck freight industry. A significant amount of our packaging purchases are subject to contractual price adjustments throughout the year based on underlying commodity prices. Lower packaging costs reflected favorable price adjustment as commodity prices have declined, particularly for resin and paper-
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based packaging. In contrast, other non-fuel manufacturing costs per ton were up approximately 2% driven by reduced fixed cost absorption due to fewer tons produced, as well as increased repair and depreciation costs. Depreciation costs increased as we continue to invest in machinery and equipment at our plants.
Total selling, general and administrative expenses were 37% higher in fiscal year 2016 compared to fiscal year 2015. The discussions of each segment's operating income below describe the changes in selling, general and administrative expenses that were allocated to the operating segments, particularly higher advertising expense. The remaining unallocated corporate expenses in fiscal year 2016 included a higher estimated annual discretionary incentive plan bonus accrual as compared to fiscal year 2015. 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. Expenses for postretirement benefit plans also increased, as described further in Notes 9 and 10 to the Consolidated Financial Statements.
Our effective tax rate on earnings was 5.2% of pre-tax income in fiscal year 2016 compared to 19.8% in fiscal year 2015. The Company determined during the fourth quarter of fiscal year 2016, that we expect to fully utilize our deferred tax asset for domestic AMT credits in future years. Therefore, we concluded it was appropriate to release the related valuation allowance that had been established in prior years for the full amount of this tax benefit, which resulted in a lower effective federal income tax rate. This decision was based on our current year's improved gross margin and the belief that we will continue to achieve margin and profitability levels in the future that will allow us to use the AMT credits. See Note 6 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 2016 were $96,444,000, an increase of $4,118,000, or 4%, from net sales of $92,326,000 in fiscal year 2015. Net sales increased for our products used in agriculture, fluid purification and animal health. Total sales of our traditional and engineered granule crop protection chemical carriers increased approximately 20% due to more tons sold to existing customers and a favorable product sales mix (defined as a greater proportion of sales from higher priced products). Sales of our fluid purification products were up approximately 4% as the result of more tons sold and a favorable product sales mix. Increased sales to edible oil processors were driven by global growth of the vegetable oil market. Sales were also higher to foreign petroleum oil and domestic biodiesel fuel refiners. Sales of our animal health and nutrition products were up approximately 2%. Sales of animal health products were higher in Asian markets, including sales by our subsidiary in China during its second full year of operations. Our new Varium product introduced in fiscal year 2016 also contributed to the increased sales. Sales of our co-packaged cat litter declined under the pricing terms of our one material long-term supply agreement.
The Business to Business Products Group’s selling, general and administrative expenses in fiscal year 2016 increased approximately 15% compared to fiscal year 2015. Additional costs were incurred primarily for advertising, travel and services to promote our animal health products.
The Business to Business Products Group’s operating income was $33,464,000 in fiscal year 2016, an increase of $4,058,000, or 14%, from operating income of $29,406,000 in fiscal year 2015. Operating income was positively impacted by a shift in sales to more value-added products, as well as by lower costs per manufactured ton for natural gas, packaging and freight. The Group's operating income was negatively impacted to a lesser extent by the higher selling, general and administrative expenses discussed above and by increased non-fuel manufacturing costs. See further discussion of manufacturing, packaging and freight costs in “Consolidated Results” above.
RETAIL AND WHOLESALE PRODUCTS GROUP
Net sales of the Retail and Wholesale Products Group for fiscal year 2016 were $165,869,000, a decrease of $3,207,000, or 2%, from net sales of $169,076,000 in fiscal year 2015. Net sales declined for both our cat litter and industrial absorbent products. Net sales were also lower for our foreign subsidiaries in Canada and the United Kingdom, as described under “Foreign Operations” below. Sales of our industrial absorbent products decreased approximately 4% due primarily to lower sales to a large distributor of maintenance products and to mass-merchandisers.
Overall cat litter net sales were down approximately 1% compared to the prior year. Net sales of our branded and private label coarse litter products were down a total of approximately 4% due to the weakening of the coarse litter segment of the market and our decision not to pursue continued business with two major low margin customers. Instead, we focused our resources on the lightweight scoopable segment of the cat litter market, which grew significantly year over year. Strong competition in this lightweight segment resulted in the introduction of new and improved products by us and by our competitors. Sales of our Cat's Pride Fresh & Light lightweight litters increased approximately 13% and sales of our private label lightweight scoopable cat litter
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more than doubled compared to the prior year; however, lower sales of our traditional Cat's Pride scoopable litters partially offset these gains.
Selling, general and administrative expenses for the Retail and Wholesale Products Group were approximately 69% higher compared to fiscal year 2015. Advertising expenses for fiscal 2016 increased approximately $12,500,000 due to the integrated marketing campaign we launched in March 2016 to promote our Cat's Pride Fresh & Light Ultimate Care lightweight scoopable cat litter. We plan to continue promoting our lightweight products and we expect advertising expense to be higher in fiscal year 2017 compared to fiscal year 2016.
The Retail and Wholesale Products Group’s segment operating income for fiscal year 2016 was $5,009,000, a decrease of $197,000, or 4%, from operating income of $5,206,000 in fiscal year 2015. The impact of the higher advertising expense described above was significantly moderated by a shift in sales to more value-added products. In addition, costs per manufactured ton were lower for natural gas used to operate kilns that dry our clay, packaging and freight. The Group's operating income was negatively impacted to a lesser extent by increased non-fuel manufacturing costs. See further discussion of manufacturing, packaging and freight costs in “Consolidated Results” above.
FOREIGN SUBSIDIARIES
Foreign operations include our subsidiaries in Canada and the United Kingdom, which are included in the Retail and Wholesale Products Group, and our subsidiary in China, which is included in the Business to Business Products Group. Net sales by our foreign subsidiaries during fiscal year 2016 were $11,259,000, an increase of $234,000, or 2%, from net sales of $11,025,000 during fiscal year 2015. Net sales by our foreign subsidiaries represented 4% of our consolidated net sales during fiscal year 2016. Higher sales for our subsidiaries in China and the United Kingdom were partially offset by lower sales for our subsidiary in Canada. Our subsidiary in China sold approximately 40% more tons in fiscal year 2016 compared to fiscal year 2015. Fiscal year 2016 was the subsidiary's second full year of operations in China. Favorable currency exchange rates for the Euro relative to the British Pound contributed to higher sales for industrial absorbents in export markets of our United Kingdom subsidiary. The sales decline reported in U.S. Dollars for our Canadian subsidiary resulted from the weak currency exchange rate of the Canadian Dollar and lower tons sold.
For fiscal year 2016, our foreign subsidiaries reported a net loss of $961,000, compared to a net loss of $1,261,000 in fiscal year 2015. The net loss decreased due primarily to the increased sales by our China subsidiary.
Identifiable assets of our foreign subsidiaries as of July 31, 2016 were $7,297,000 compared to $7,762,000 as of July 31, 2015. The decrease was due primarily to lower cash, deferred income taxes and fixed assets, which were partially offset by higher inventories.
RESULTS OF OPERATIONS
FISCAL YEAR 2015 COMPARED TO FISCAL YEAR 2014
CONSOLIDATED RESULTS
Consolidated net sales in fiscal year 2015 were $261,402,000, a 2% decrease from net sales of $266,313,000 in fiscal year 2014. Net sales in our Retail and Wholesale Products Group declined as lower branded cat litter sales were partially offset by increased sales of private label cat litter and industrial floor absorbents. Net sales in our Business to Business Products Groups decreased as lower sales of fluid purification products outweighed higher sales of animal health and agricultural chemical carrier products. See below for further discussion of these sales fluctuations by operating segment.
Consolidated gross profit as a percentage of net sales in fiscal year 2015 increased to 23% from 22% in fiscal year 2014. Gross profit increased due primarily to reduced freight costs and approximately a 26% decrease in the cost of natural gas used to operate kilns that dry our clay during processing. Freight costs declined due to lower diesel prices, better weather conditions and some relief from unfavorable industry regulations. Partially offsetting these cost declines were higher non-fuel manufacturing and packaging costs per ton. An approximate 5% increase in manufacturing costs per ton was driven by reduced fixed cost absorption due to fewer tons produced, as well as increased labor and depreciation costs. Depreciation costs increased as we continue to invest in machinery and equipment at our plants. A significant amount of our packaging purchases are subject to contractual price adjustments throughout the year based on related commodity prices, particularly for resin. Resin market price declines positively impacted our results in fiscal year 2015, particularly in the fourth quarter, but for the full year overall packaging costs per ton remained higher than fiscal year 2014, particularly for our Retail and Wholesale Products Group.
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Total selling, general and administrative expenses were lower in fiscal year 2015 compared to fiscal year 2014. Selling, general and administrative expenses as a percentage of net sales were 17% in fiscal year 2015 compared to 18% in fiscal year 2014. The discussions of each segment's operating income below describe the changes in selling, general and administrative expenses that were allocated to the operating segments. The remaining unallocated corporate expenses in fiscal year 2015 included a higher estimated annual discretionary incentive plan bonus accrual as compared to the prior year. The incentive bonus expense was based on actual financial results achieved for the fiscal year and discretion by our Chief Executive Officer, in accordance with the bonus plan's provisions.
Our effective tax rate on earnings was 19.8% of pre-tax income in fiscal year 2015 compared to 26.3% in fiscal year 2014. During fiscal year 2015, we utilized domestic AMT credits and correspondingly decreased the related valuation allowance that had been established in prior years for the full amount of the deferred tax benefit related to the AMT credits used, which resulted in a lower federal income tax rate. In fiscal year 2014 we incurred additional AMT expense, which resulted in a higher comparable effective tax rate. See Note 6 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 2015 were $92,326,000, a decrease of $1,960,000, or 2%, from net sales of $94,286,000 in fiscal year 2014. Net sales of fluid purification products and co-packaged coarse cat litter decreased, while net sales of animal health and agricultural and horticultural products increased. Net sales and tons sold for fluid purification products were both down approximately 10% compared to fiscal year 2014. Usage of our product by edible oil producers declined due to natural variations in the quality and other characteristics of certain seed and bean crops. In addition, sales in foreign markets suffered due to the strength of the U.S. Dollar relative to various foreign currencies, which effectively increased the price of our product compared to foreign competitors' products. Our co-packaged coarse cat litter net sales decrease of approximately 7% reflected the continued decline in the coarse litter market. Partially offsetting these declines was an increase in net sales of approximately 18% for animal health and nutrition products, which was primarily attributed to sales by our subsidiary in China that commenced operations in the fourth quarter of fiscal year 2014. In addition, sales increased approximately 12% for our agricultural and horticultural products. Sales increased for our agricultural chemical carrier products sold to producers of crop protection chemicals. Sales also increased for our engineered granule product used in the professional pesticides and agricultural markets.
The Business to Business Products Group’s selling, general and administrative expenses in fiscal year 2015 decreased approximately 7% compared to fiscal year 2014. Lower sales of fluid purification products reduced commissions paid to outside distributors. Our subsidiary in China, which was fully operational during fiscal year 2015, incurred additional internal sales personnel costs but accordingly reduced external distributor commissions. One-time start up costs for the China subsidiary were incurred in fiscal year 2014.
The Business to Business Products Group’s operating income was $29,406,000 in fiscal year 2015, an increase of $2,752,000, or 10%, from operating income of $26,654,000 in fiscal year 2014. Operating income was positively impacted by a reduced cost per manufactured ton for natural gas used to operate kilns that dry our clay, as well as by lower selling general and administrative, freight and packaging costs. Increased non-fuel manufacturing costs negatively impacted the Group's operating income to a lesser extent. See further discussion of manufacturing, freight and packaging costs in “Consolidated Results” above.
RETAIL AND WHOLESALE PRODUCTS GROUP
Net sales of the Retail and Wholesale Products Group for fiscal year 2015 were $169,076,000, a decrease of $2,951,000, or 2%, from net sales of $172,027,000 in fiscal year 2014. Net sales declined for our cat litter products, but increased for industrial absorbent products. Net sales of our foreign subsidiaries in Canada and the United Kingdom also declined, as described under “Foreign Operations” below. Overall cat litter net sales and tons sold were down compared to the prior year. Our branded cat litter net sales decrease of approximately 11% was attributed primarily to our competitors' introduction of new products, which were accompanied by increased advertising and aggressive price discounts. Our Cat's Pride Fresh & Light Ultimate Care product was introduced in the second half of fiscal year 2015. Private label cat litter sales increased approximately 10%, due in part to the acquisition of MFM in fiscal year 2014 (additional MFM-related sales are included in the full fiscal year 2015 but in only three quarters of fiscal year 2014). See Note 2 of the Notes to the Consolidated Financial Statements for more information about the MFM acquisition. In addition, private label cat litter sales in fiscal year 2015 included new customers and our new lightweight private label product, which launched in the second half of fiscal year 2015. Branded and generic floor absorbent sales increased approximately 7% due primarily to increased volume.
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Selling, general and administrative expenses for the Retail and Wholesale Products Group decreased approximately 15% compared to fiscal year 2014 due primarily to lower advertising expenses, which were partially offset by higher amortization expense for intangible assets related to the MFM acquisition.
The Retail and Wholesale Products Group’s segment operating income for fiscal year 2015 was $5,206,000, an increase of $1,638,000, or 46%, from operating income of $3,568,000 in fiscal year 2014. Operating income was positively impacted by a reduced cost per manufactured ton for natural gas used to operate kilns that dry our clay, as well as by lower selling general and administrative and freight costs. Increased non-fuel manufacturing costs negatively impacted the Group's operating income to a lesser extent. See further discussion of manufacturing and freight costs in “Consolidated Results” above.
FOREIGN SUBSIDIARIES
Foreign operations include our subsidiaries in Canada and the United Kingdom, which is included in the Retail and Wholesale Products Group, and our subsidiary in China, which is included in the Business to Business Products Group. Net sales by our foreign subsidiaries during fiscal year 2015 were $11,025,000, a decrease of $221,000, or 2%, from net sales of $11,246,000 during fiscal year 2014. Net sales by our foreign subsidiaries represented 4% of our consolidated net sales during fiscal year 2015. Lower sales for our Canada and the United Kingdom subsidiaries were substantially offset by higher sales for China subsidiary. Strong competition and loss of a private label customer contributed to lower sales of cat litter by our subsidiary in Canada. Unfavorable currency exchange rates contributed to lower demand for industrial absorbents in export markets of our United Kingdom subsidiary. Our China subsidiary was operational for the full year of fiscal year 2015, with sales reported only in the fourth quarter of fiscal year 2014.
For fiscal year 2015, our foreign subsidiaries reported a net loss of $1,261,000, compared to a net loss of $708,000 in fiscal year 2014. The net loss increased due primarily to a greater reported loss at our new subsidiary in China, which is still growing its share in the China market, and foreign currency exchange losses upon translation of financial results to reported U.S. Dollars. In addition, both our United Kingdom and Canadian subsidiaries incurred higher costs for items purchased from the United States due to the weakness of their respective local currencies compared to the U.S. Dollar. A reduction in selling, general and administrative expense for our Canadian subsidiary helped moderate the increase in net losses.
Identifiable assets of our foreign subsidiaries as of July 31, 2015 were $7,762,000 compared to $8,143,000 as of July 31, 2014. The decrease was primarily due to lower fixed assets and cash, which were partially offset by higher inventories.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements include funding working capital needs, purchasing and upgrading equipment, facilities and real estate, investing in infrastructure and acquisitions. Recently we have principally used cash generated from operations to fund these requirements. Cash and cash equivalents totaled $18,629,000, $20,138,000 and $16,230,000 at July 31, 2016, 2015 and 2014, respectively.
The following table sets forth certain elements of our Consolidated Statements of Cash Flows for the fiscal year (in thousands):
2016 | 2015 | 2014 | ||||||||||
Net cash provided by operating activities | $ | 25,171 | $ | 26,976 | $ | 16,296 | ||||||
Net cash used in investing activities | (18,407 | ) | (14,246 | ) | (15,570 | ) | ||||||
Net cash used in financing activities | (8,442 | ) | (8,743 | ) | (8,372 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | 169 | (79 | ) | (159 | ) | |||||||
Net (decrease) increase in cash and cash equivalents | $ | (1,509 | ) | $ | 3,908 | $ | (7,805 | ) | ||||
Net cash provided by operating activities
Net cash provided by operations was $25,171,000 for fiscal year 2016 compared to $26,976,000 for fiscal year 2015. 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 2016 and 2015 were as follows:
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Accounts receivable, less allowance for doubtful accounts and cash discounts, were $992,000 lower at fiscal year-end 2016 compared to fiscal year-end 2015, but were $469,000 higher at fiscal year-end 2015 compared to fiscal year-end 2014. These moderate fluctuations in accounts receivable balances were attributed to timing of both sales and collections, as well as the payment terms provided to various customers.
Inventories were $1,954,000 higher at fiscal year-end 2016 compared to fiscal year-end 2015 due primarily to anticipated sales requirements, particularly for cat litter and agriculture chemical carrier products. Inventories were $3,114,000 lower at fiscal year-end 2015 compared to fiscal year-end 2014 as the result of initiatives to better manage finished goods and packaging inventory levels relative to sales requirements and efforts to reduce costs.
Prepaid expenses were $167,000 lower at fiscal year-end 2016 compared to fiscal year-end 2015 due to ongoing amortization. Prepaid expenses were $2,455,000 lower at fiscal year-end 2015 compared to fiscal year-end 2014 due primarily to a decrease in prepaid income taxes and a reclassification of prepaid rents and royalties to other long-term assets.
Other noncurrent assets balances at fiscal year-end 2016 were similar to fiscal year-end 2015. Other assets were $1,287,000 higher at fiscal year-end 2015 compared to fiscal year-end 2014. The increase was due primarily to the reclassification of prepaid rents and royalties from current prepaid expenses, which was partially offset by a decrease in the cash surrender value of life insurance on key employees due to the closing of two policies.
Accounts payable were $931,000 lower at fiscal year-end 2016 compared to fiscal year-end 2015 due primarily to lower income taxes payable. Accounts payable were $571,000 higher at fiscal year-end 2015 compared to fiscal year-end 2014 due primarily to higher income taxes payable, which was partially offset by lower trade and freight payables. Changes in trade accounts payable in all periods are subject to normal fluctuations in the timing of payments.
Accrued expenses were $2,746,000 higher at fiscal year-end 2016 compared to fiscal year-end 2015 due primarily to a higher discretionary annual bonus accrual. Accrued expenses were $697,000 lower at fiscal year-end 2015 compared to fiscal year-end 2014. Accrued expenses for fiscal year 2015 declined due primarily to payments on leased equipment at our plants and lower accrued freight and other expenses, which were partially offset by a higher discretionary annual bonus accrual. In addition, the trade promotions and advertising accrual was higher at fiscal year-end 2015. Changes in other accrued expenses in all periods related to ongoing operations are also subject to normal fluctuations in the timing of payments.
Deferred compensation was $986,000 higher at fiscal year-end 2016 compared to fiscal year-end 2015 and was $251,000 higher at fiscal year-end 2015 compared to fiscal year-end 2014. Employee deferrals and interest on accumulated deferred compensation balances exceeded payouts in both years. The Supplemental Executive Retirement Plan (“SERP”) accrual also increased in both years as the result of lower discount rates required for the actuarial calculation of this obligation. See Note 10 of the Notes to the Consolidated Financial Statements for more information regarding our deferred compensation plans.
Pension and other postretirement liabilities, net of the adjustment recorded in stockholders' equity, were $4,171,000 higher at fiscal year-end 2016 compared to fiscal year-end 2015 and were $814,000 higher at fiscal year-end 2015 compared to fiscal year-end 2014. A lower discount rate required for the actuarial calculation of these postretirement benefit obligations drove the increase at fiscal year-end 2016, which was partially offset by the benefits of an updated mortality table. Both a change in the mortality table and a slightly lower discount rate resulted in the higher liability at fiscal year-end 2015 compared to fiscal year-end 2014. See Note 9 of the Notes to the Consolidated Financial Statements for more information regarding our postretirement benefit plans.
Net cash used in investing activities
Cash used in investing activities was $18,407,000 in fiscal year 2016, $14,246,000 in fiscal year 2015 and $15,570,000 in fiscal year 2014. During fiscal year 2016, cash used to purchase short-term investments exceeded dispositions 7,984,000, while in fiscal years 2015 and 2014 cash provided by dispositions of short-term investments exceeded purchases by $451,000 and $15,821,000, respectively. During fiscal year 2014, a significant portion of the net cash provided by dispositions was used to fund the $12,876,000 to acquire certain assets of MFM. See Note 2 of the Notes to the Consolidated Financial Statements for more information about the MFM acquisition. Purchases and dispositions of investment securities in all periods are subject to variations in the timing of investment maturities and the cash needs of the Company.
Capital expenditures of $10,684,000 and $15,859,000 in fiscal years 2016 and 2015, respectively, included new processing and packaging equipment, as well as equipment replacement at our manufacturing facilities. Capital expenditures of $18,566,000 in fiscal year 2014 included capacity expansion projects and purchases of new mining equipment. In addition, during fiscal year 2015, cash proceeds of $903,000 were received from the closing of two life insurance policies on former key employees.
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Net cash used in financing activities
Cash used in financing activities was $8,442,000 in fiscal year 2016, $8,743,000 in fiscal year 2015 and $8,372,000 in fiscal year 2014. The primary uses of cash in all periods were payments on long-term debt and dividend. In addition, cash was received from issuance of Common Stock and treasury stock related to share-based compensation in each year.
Other
Total cash and investment balances held by our foreign subsidiaries at July 31, 2016, 2015 and 2014 were $887,000, $1,150,000 and $1,481,000, respectively. See further discussion in the “Foreign Operations” section above.
On December 4, 2014, we signed a fourth amendment to our credit agreement with BMO Harris, to extend the term to December 4, 2019. The new agreement provides for a $25,000,000 unsecured revolving credit agreement, including a maximum of $5,000,000 for foreign 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 the 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. At July 31, 2016, the variable rates would have been 3.50% for BMO Harris’ prime-based rate or 1.70% for 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, 2016 and 2015, there were no outstanding borrowings under this credit facility and we were in compliance with its covenants.
See Note 4 of the Notes to the Consolidated Financial Statements for information about our outstanding debt.
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 adequate cash funds for foreseeable working capital needs, capital expenditures at existing facilities, dividend payments and debt service obligations for at least the next 12 months. We spent approximately $12,900,000 more for advertising in fiscal year 2016 compared to fiscal year 2015 due to, among other things, the integrated marketing campaign launched in March 2016 to promote our Cat's Pride Fresh & Light Ultimate Care lightweight scoopable cat litter. We plan to continue promoting our lightweight cat litter products in fiscal year 2017 and we expect advertising expense to be higher compared to fiscal year 2016. We also anticipate that our capital expenditures will increase in fiscal year 2017, including costs related to the start of an enterprise resource planning software implementation. We do not anticipate that these increased expenditures will 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 and to remain in compliance with all of the 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.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
Our capital requirements are subject to change as business conditions warrant and opportunities arise. The following tables summarize our significant contractual obligations and commercial commitments as of July 31, 2016 and the effect such obligations are expected to have on liquidity and cash flows in future periods:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1 – 3 Years | 4 – 5 Years | After 5 Years | |||||||||||||||
Long-Term Debt | $ | 15,416,000 | $ | 3,083,000 | $ | 6,166,000 | $ | 6,167,000 | $ | — | ||||||||||
Interest on Long-Term Debt | 1,536,000 | 554,000 | 738,000 | 244,000 | — | |||||||||||||||
Operating Leases | 14,733,000 | 1,530,000 | 2,462,000 | 1,575,000 | 9,166,000 | |||||||||||||||
Unconditional Purchase Obligations | 280,000 | 280,000 | — | — | — | |||||||||||||||
Total Contractual Cash Obligations | $ | 31,965,000 | $ | 5,447,000 | $ | 9,366,000 | $ | 7,986,000 | $ | 9,166,000 | ||||||||||
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The unconditional purchase obligations include forward purchase contracts we have entered into for a portion of our natural gas fuel needs for fiscal year 2017. These contracts were entered into in the normal course of business and no contracts were entered into for speculative purposes.
During fiscal year 2016, we made contributions of approximately $1,264,000 to our defined benefit pension plan. We have not presented this obligation for future years in the table above because the funding requirement can vary from year to year based on changes in the fair value of plan assets, actuarial assumptions and regulations. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” below for certain information regarding the potential impact of financial market fluctuations on pension plan assets and future funding contributions.
Amount of Commitment Expiration Per Period | ||||||||||||||||||||
Total Amounts Committed | Less Than 1 Year | 1 – 3 Years | 4 – 5 Years | After 5 Years | ||||||||||||||||
Other Commercial Commitments | $ | 28,107,000 | $ | 28,107,000 | $ | — | $ | — | $ | — | ||||||||||
The obligations above are open purchase orders primarily for packaging and other ingredients used in our products. The expected timing of payments of these obligations was estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any unconsolidated special purpose entities. As of July 31, 2016 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.
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. 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 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 generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount 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 expected 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. For example, certain factors, such as depletion and the cost of fuel used in our manufacturing process are difficult to predict and have a significant impact on our ability to use the deferred
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tax benefit related to our AMT credit carryforwards. We determined during the fourth quarter of fiscal year 2016 that we expect to fully utilize our deferred tax asset for domestic AMT credits in future years. Therefore, we concluded it was appropriate to release the full $1,680,000 valuation allowance that had been established in prior years for the full amount of this tax benefit, which resulted in a lower effective federal income tax rate. This decision was based on our current year's improved gross margin and the belief that we will continue to achieve margin and profitability levels in the future that will allow us to use the AMT credits.
We recorded a $1,170,000 valuation allowance for the amount of the deferred tax benefit related to our foreign net operating loss carryforwards and domestic state tax credits at July 31, 2016 since we believe it is unlikely we will realize the benefit of these tax attributes in the future. We recorded an allowance of $2,210,000 at July 31, 2015 for the amount of the deferred tax benefit related to our AMT credit, foreign net operating loss carryforwards and domestic state tax credits based on our assessment at that time of the likelihood of realizing these benefits.
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, 2016 or 2015. See Note 6 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 $1,401,000 and $2,427,000 for trade promotions at July 31, 2016 and 2015, 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.
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 2016 and 2015 was the Citigroup 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 9 of the Notes to the Consolidated Financial Statements for additional information.
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 $753,000 and $761,000 at July 31, 2016 and 2015, respectively.
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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 items to determine if an obsolescence reserve adjustment is necessary. The review surveys all of our operating facilities and sales divisions to ensure that both historical issues and new market trends are considered. The obsolescence reserve not only considers specific items, but also takes into consideration the overall value of the inventory as of the balance sheet date. The inventory obsolescence reserve values at July 31, 2016 and 2015 were $806,000 and $521,000, 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, 2016 and 2015, we have recorded an estimated net reclamation asset of $790,000 and $813,000, respectively, and a corresponding estimated reclamation liability of $1,771,000 as July 31, 2016 and $1,666,000 as of July 31, 2015. 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.
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.
Following our historical practice, we performed our annual intangible asset impairment analysis in the first quarter of fiscal year 2016 and no impairment was identified. We subsequently decided that it would be more practical to perform this testing in the fourth quarter, which is closer to our fiscal year-end. As such, in fiscal year 2016 we changed the date of our annual impairment analysis from the last day of our first quarter to the first day of our fourth quarter and no impairment was identified. We will perform our annual impairment testing in the fourth quarter of our fiscal year going forward and we will continue to consider the need to re-perform impairment testing throughout 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 believe the change in impairment testing date is not a material change to our method of applying an accounting principle.
NEW ACCOUNTING PRONOUNCEMENTS
Recently Issued Accounting Standards
We plan to adopt Financial Accounting Standards Board (“FASB”) guidance under ASC 205, Presentation of Financial Statements - Going Concern, in the first quarter of fiscal year 2017. This guidance defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. This pronouncement requires additional disclosures only and we do not expect a significant impact on our consolidated financial statements.
We also plan to adopt FASB guidance under ASC 835, Simplifying the Presentation of Debt Issuance Cost, in the first quarter of fiscal year 2017. Under this amendment, entities will no longer be able to recognize debt issuance costs as an asset in the balance sheet, but instead will be required to present debt issuance costs as a direct deduction from the carrying amount of the associated debt liability. The recognition and measurement guidance for debt issuance costs are not affected by this pronouncement. We expect to reclassify for the first quarter of our fiscal year 2017 approximately $110,000 from Debt issuance costs to a direct deduction of Notes payable on the unaudited balance sheet as of October 31, 2016 that will be included in our quarterly report on Form 10-Q. Prior periods presented will also be restated accordingly.
A summary of all recently issued accounting standards is contained in Note 1 of Notes to Consolidated Financial Statements.
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ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk and employ policies and procedures to manage our exposure to changes in the market risk of our cash equivalents and short-term investments. We believe that the market risk arising from holdings of our financial instruments is not material.
We are exposed to foreign currency fluctuation risk, primarily the U.S. Dollar relative to the British Pound, Euro, Canadian Dollar, Chinese Yuan Renminbi and the Brazilian Real, as related to our foreign subsidiaries, to certain accounts receivable, and to our ability to sell in foreign markets. We are subject to translation exposure of our foreign subsidiaries’ financial statements from local currencies to U.S. Dollars. In recent years, our foreign subsidiaries have not generated a substantial portion of our consolidated net sales or net income. In addition, the portion of our consolidated accounts receivable denominated in foreign currencies has not been significant. Finally, foreign sales of our products may be influenced by the relative strength of the U.S. dollar compared to various other currencies, which makes our products relatively more or less expensive than our foreign competitors' products in local marketplaces. Foreign currency fluctuations had some bearing on our operating results in fiscal year 2015; however, historically the overall foreign currency fluctuation risk has not been material to our Consolidated Financial Statements. During fiscal year 2016, we did not enter into any hedge contracts in an attempt to offset any adverse effect of changes in currency exchange rates.
We are exposed to market risk at it relates to the investments of plan assets under our defined benefit pension plan. The fair value of these assets is subject to change due to fluctuations in the financial markets. A lower asset value may increase our pension expense and may increase the amount and accelerate the timing of future funding contributions.
We are exposed to regulatory risk in the fluid purification, animal health and agricultural markets, principally as a result of the risk of increasing regulation of the food chain throughout the world, but particularly in the United States and Europe. We actively monitor developments in this area, both directly and through trade organizations of which we are a member.
We are exposed to commodity price risk with respect to fuel. Factors that could influence the cost of natural gas used in the kilns to dry our clay include the creditworthiness of our natural gas suppliers, the overall general economy, developments in world events, general supply and demand for natural gas, seasonality and the weather patterns throughout the United States and the world. We monitor fuel market trends and, consistent with our past practice, we may contract for a portion of our anticipated fuel needs using forward purchase contracts to mitigate the volatility of our kiln fuel prices. As of July 31, 2016, we have purchased natural gas contracts for approximately 7% of our planned kiln fuel needs for fiscal year 2017. All contracts are related to the normal course of business and no contracts are entered into for speculative purposes.
The tables below provide information about our natural gas purchase contracts, which are sensitive to changes in commodity prices. For the future contracts, the table presents the notional amounts in MMBTu's, the weighted average contract prices, and the total dollar contract amount which will mature by July 31, 2017. The Fair Value was determined using the most recent settle price for the Henry Hub Natural Gas Futures contract prices listed by the New York Mercantile Exchange on September 27, 2016.
Commodity Price Sensitivity | ||||||
Natural Gas Future Contracts | ||||||
For the Year Ended July 31, 2017 | ||||||
Expected Maturity | Fair Value | |||||
Natural Gas Future Volumes (MMBtu) | 120,000 | — | ||||
Weighted Average Price (Per MMBtu) | $ | 2.33 | — | |||
Contracted Amount ($ U.S., in thousands) | $ | 280 | $ | 353 | ||
Please also see Item 1A “Risk Factors” above for a discussion of these and other risks and uncertainties we face in our business.
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ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
July 31, | ||||||||
2016 | 2015 | |||||||
ASSETS | (in thousands) | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 18,629 | $ | 20,138 | ||||
Short-term investments | 10,184 | 2,190 | ||||||
Accounts receivable, less allowance of $753 and $761 in 2016 and 2015, respectively | 30,386 | 31,466 | ||||||
Inventories | 23,251 | 21,369 | ||||||
Deferred income taxes | 3,884 | 2,468 | ||||||
Prepaid repairs expense | 3,938 | 3,813 | ||||||
Prepaid expenses and other assets | 901 | 1,199 | ||||||
Total Current Assets | 91,173 | 82,643 | ||||||
Property, Plant and Equipment | ||||||||
Buildings and leasehold improvements | 36,776 | 28,518 | ||||||
Machinery and equipment | 137,479 | 127,399 | ||||||
Office furniture and equipment | 10,986 | 10,689 | ||||||
Vehicles | 13,108 | 12,330 | ||||||
Gross depreciable assets | 198,349 | 178,936 | ||||||
Less accumulated depreciation and amortization | (137,314 | ) | (129,929 | ) | ||||
Net depreciable assets | 61,035 | 49,007 | ||||||
Construction in progress | 2,831 | 14,188 | ||||||
Land and mineral rights | 16,845 | 16,460 | ||||||
Total Property, Plant and Equipment, Net | 80,711 | 79,655 | ||||||
Other Assets | ||||||||
Goodwill | 9,034 | 9,034 | ||||||
Trademarks and patents, net of accumulated amortization of $261 and $301 in 2016 and 2015, respectively | 916 | 818 | ||||||
Debt issuance costs, net of accumulated amortization of $161 and $133 in 2016 and 2015, respectively | 118 | 146 | ||||||
Customer list, net of accumulated amortization of $3,460 and $2,094 in 2016 and 2015, respectively | 4,325 | 5,691 | ||||||
Deferred income taxes | 12,754 | 6,031 | ||||||
Other | 5,902 | 6,013 | ||||||
Total Other Assets | 33,049 | 27,733 | ||||||
Total Assets | $ | 204,933 | $ | 190,031 | ||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
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July 31, | ||||||||
2016 | 2015 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | (in thousands) | |||||||
Current Liabilities | ||||||||
Current maturities of notes payable | $ | 3,083 | $ | 3,483 | ||||
Accounts payable | 6,635 | 7,428 | ||||||
Dividends payable | 1,477 | 1,376 | ||||||
Accrued expenses | ||||||||
Salaries, wages and commissions | 8,656 | 6,245 | ||||||
Trade promotions and advertising | 2,855 | 2,721 | ||||||
Freight | 1,579 | 1,874 | ||||||
Other | 6,455 | 5,761 | ||||||
Total Current Liabilities | 30,740 | 28,888 | ||||||
Noncurrent Liabilities | ||||||||
Notes payable | 12,333 | 15,417 | ||||||
Deferred compensation | 10,504 | 9,518 | ||||||
Pension and postretirement benefits | 32,492 | 23,429 | ||||||
Other | 3,313 | 2,251 | ||||||
Total Noncurrent Liabilities | 58,642 | 50,615 | ||||||
Total Liabilities | 89,382 | 79,503 | ||||||
Stockholders’ Equity | ||||||||
Common Stock, par value $.10 per share, issued 7,982,243 shares in 2016 and 7,936,343 shares in 2015 | 798 | 794 | ||||||
Class B Stock, convertible, par value $.10 per share, issued 2,515,735 shares in 2016 and 2,389,735 shares in 2015 | 252 | 239 | ||||||
Additional paid-in capital | 34,294 | 32,632 | ||||||
Retained earnings | 149,945 | 142,095 | ||||||
Accumulated Other Comprehensive Loss | ||||||||
Pension and postretirement benefits | (13,867 | ) | (8,975 | ) | ||||
Cumulative translation adjustment | (155 | ) | (270 | ) | ||||
Total Accumulated Other Comprehensive Loss | (14,022 | ) | (9,245 | ) | ||||
Less treasury stock, at cost (2,912,953 Common and 324,741 Class B shares in 2016 and 2,932,796 Common and 324,741 Class B shares in 2015) | (55,716 | ) | (55,987 | ) | ||||
Total Stockholders’ Equity | 115,551 | 110,528 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 204,933 | $ | 190,031 | ||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended July 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
(in thousands, except for per share data) | ||||||||||||
Net Sales | $ | 262,313 | $ | 261,402 | $ | 266,313 | ||||||
Cost of Sales | (185,164 | ) | (201,245 | ) | (206,663 | ) | ||||||
Gross Profit | 77,149 | 60,157 | 59,650 | |||||||||
Selling, General and Administrative Expenses | (61,736 | ) | (45,004 | ) | (47,232 | ) | ||||||
Income from Operations | 15,413 | 15,153 | 12,418 | |||||||||
Other Income (Expense) | ||||||||||||
Interest income | 29 | 13 | 23 | |||||||||
Interest expense | (1,035 | ) | (1,327 | ) | (1,569 | ) | ||||||
Foreign exchange (loss) gain | (384 | ) | (349 | ) | 35 | |||||||
Other, net | 334 | 679 | 430 | |||||||||
Total Other Expense, Net | (1,056 | ) | (984 | ) | (1,081 | ) | ||||||
Income Before Income Taxes | 14,357 | 14,169 | 11,337 | |||||||||
Income Taxes | (744 | ) | (2,801 | ) | (2,981 | ) | ||||||
Net Income | $ | 13,613 | $ | 11,368 | $ | 8,356 | ||||||
Net Income Per Share | ||||||||||||
Basic Common | $ | 2.04 | $ | 1.73 | $ | 1.27 | ||||||
Basic Class B Common | $ | 1.53 | $ | 1.30 | $ | 0.96 | ||||||
Diluted Common | $ | 1.87 | $ | 1.59 | $ | 1.17 | ||||||
Average Shares Outstanding | ||||||||||||
Basic Common | 4,986 | 4,955 | 4,981 | |||||||||
Basic Class B Common | 2,050 | 2,019 | 2,001 | |||||||||
Diluted Common | 7,094 | 7,037 | 7,004 | |||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended July 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
(in thousands) | ||||||||||||
Net Income | $ | 13,613 | $ | 11,368 | $ | 8,356 | ||||||
Other Comprehensive (Loss) Income: | ||||||||||||
Unrealized (loss) gain on marketable securities | — | (114 | ) | 28 | ||||||||
Pension and postretirement benefits (net of tax) | (4,892 | ) | (343 | ) | (3,024 | ) | ||||||
Cumulative translation adjustment | 115 | (525 | ) | (232 | ) | |||||||
Other Comprehensive Loss | (4,777 | ) | (982 | ) | (3,228 | ) | ||||||
Comprehensive Income | $ | 8,836 | $ | 10,386 | $ | 5,128 | ||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Number of Shares | (in thousands) | |||||||||||||||||||||||||||
Common & Class B Stock | Treasury Stock | Common & Class B Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||
Balance, July 31, 2013 | 10,261,047 | (3,239,308 | ) | $ | 1,026 | $ | 29,493 | $ | 132,750 | $ | (55,296 | ) | $ | (5,035 | ) | $ | 102,938 | |||||||||||
Net income | — | — | 8,356 | — | — | 8,356 | ||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (3,228 | ) | (3,228 | ) | ||||||||||||||||||||
Dividends declared | — | — | (5,040 | ) | — | — | (5,040 | ) | ||||||||||||||||||||
Purchases of treasury stock | (2,584 | ) | — | — | — | (87 | ) | — | (87 | ) | ||||||||||||||||||
Net issuance of stock under long-term incentive plans | 51,081 | 1,500 | 5 | 137 | (27 | ) | (21 | ) | — | 94 | ||||||||||||||||||
Share-based compensation | — | 86 | — | — | — | 86 | ||||||||||||||||||||||
Amortization of restricted stock | — | 1,189 | — | — | — | 1,189 | ||||||||||||||||||||||
Balance, July 31, 2014 | 10,312,128 | (3,240,392 | ) | $ | 1,031 | $ | 30,905 | $ | 136,039 | $ | (55,404 | ) | $ | (8,263 | ) | $ | 104,308 | |||||||||||
Net income | — | — | 11,368 | — | — | 11,368 | ||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (982 | ) | (982 | ) | ||||||||||||||||||||
Dividends declared | — | — | (5,312 | ) | — | — | (5,312 | ) | ||||||||||||||||||||
Purchases of treasury stock | (3,645 | ) | — | — | — | (122 | ) | — | (122 | ) | ||||||||||||||||||
Net issuance of stock under long-term incentive plans | 13,950 | (13,500 | ) | 2 | 508 | — | (461 | ) | — | 49 | ||||||||||||||||||
Share-based compensation | — | 77 | — | — | — | 77 | ||||||||||||||||||||||
Amortization of restricted stock | — | 1,142 | — | — | — | 1,142 | ||||||||||||||||||||||
Balance, July 31, 2015 | 10,326,078 | (3,257,537 | ) | $ | 1,033 | $ | 32,632 | $ | 142,095 | $ | (55,987 | ) | $ | (9,245 | ) | $ | 110,528 | |||||||||||
Net income | — | — | 13,613 | — | — | 13,613 | ||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (4,777 | ) | (4,777 | ) | ||||||||||||||||||||
Dividends declared | — | — | (5,701 | ) | — | — | (5,701 | ) | ||||||||||||||||||||
Purchases of treasury stock | (607 | ) | — | — | — | (18 | ) | — | (18 | ) | ||||||||||||||||||
Net issuance of stock under long-term incentive plans | 171,900 | 20,450 | 17 | 221 | (62 | ) | 289 | — | 465 | |||||||||||||||||||
Share-based compensation | — | 194 | — | — | — | 194 | ||||||||||||||||||||||
Amortization of restricted stock | — | 1,247 | — | — | — | 1,247 | ||||||||||||||||||||||
Balance, July 31, 2016 | 10,497,978 | (3,237,694 | ) | $ | 1,050 | $ | 34,294 | $ | 149,945 | $ | (55,716 | ) | $ | (14,022 | ) | $ | 115,551 | |||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Year-Ended July 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
(in thousands) | ||||||||||||
Cash Flows from Operating Activities | ||||||||||||
Net income | $ | 13,613 | $ | 11,368 | $ | 8,356 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 12,192 | 11,994 | 10,396 | |||||||||
Amortization of investment discounts | (10 | ) | (1 | ) | (2 | ) | ||||||
Non-cash stock compensation expense | 1,247 | 1,142 | 1,189 | |||||||||
Excess tax benefits for share-based payments | (194 | ) | (77 | ) | (86 | ) | ||||||
Deferred income taxes | (8,114 | ) | (2,450 | ) | 284 | |||||||
Provision for bad debts and cash discounts | 50 | 177 | 69 | |||||||||
Loss on the sale of property, plant and equipment | 331 | 191 | 452 | |||||||||
Gain on sale of marketable securities | — | (105 | ) | — | ||||||||
Life insurance benefits | — | (117 | ) | — | ||||||||
(Increase) decrease in: | ||||||||||||
Accounts receivable | 942 | (646 | ) | 82 | ||||||||
Inventories | (1,954 | ) | 3,114 | (2,966 | ) | |||||||
Prepaid expenses | 167 | 2,455 | (1,988 | ) | ||||||||
Other assets | (3 | ) | (1,287 | ) | (817 | ) | ||||||
Increase (decrease) in: | ||||||||||||
Accounts payable | (931 | ) | 571 | 187 | ||||||||
Accrued expenses | 2,746 | (697 | ) | (2,586 | ) | |||||||
Deferred compensation | 986 | 251 | 698 | |||||||||
Pension and postretirement benefits | 4,171 | 814 | 2,887 | |||||||||
Other liabilities | (68 | ) | 279 | 141 | ||||||||
Total Adjustments | 11,558 | 15,608 | 7,940 | |||||||||
Net Cash Provided by Operating Activities | 25,171 | 26,976 | 16,296 | |||||||||
Cash Flows from Investing Activities | ||||||||||||
Capital expenditures | (10,684 | ) | (15,859 | ) | (18,566 | ) | ||||||
Proceeds from sale of property, plant and equipment | 261 | 22 | 180 | |||||||||
Acquisition of business | — | — | (12,876 | ) | ||||||||
Restricted cash | — | 129 | (129 | ) | ||||||||
Purchases of short-term investments | (45,198 | ) | (2,890 | ) | (10,391 | ) | ||||||
Dispositions of short-term investments | 37,214 | 3,341 | 26,212 | |||||||||
Proceeds from sale of marketable securities | — | 108 | — | |||||||||
Proceeds from life insurance | — | 903 | — | |||||||||
Net Cash Used in Investing Activities | (18,407 | ) | (14,246 | ) | (15,570 | ) | ||||||
Cash Flows from Financing Activities | ||||||||||||
Principal payments on notes payable | (3,484 | ) | (3,500 | ) | (3,500 | ) | ||||||
Dividends paid | (5,600 | ) | (5,247 | ) | (4,965 | ) | ||||||
Purchase of treasury stock | (18 | ) | (122 | ) | (87 | ) | ||||||
Proceeds from issuance of treasury stock | 370 | — | 82 | |||||||||
Proceeds from issuance of Common Stock | 96 | 49 | 12 | |||||||||
Excess tax benefits for share-based payments | 194 | 77 | 86 | |||||||||
Net Cash Used in Financing Activities | (8,442 | ) | (8,743 | ) | (8,372 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | 169 | (79 | ) | (159 | ) | |||||||
Net (Decrease) Increase in Cash and Cash Equivalents | (1,509 | ) | 3,908 | (7,805 | ) | |||||||
Cash and Cash Equivalents, Beginning of Year | 20,138 | 16,230 | 24,035 | |||||||||
Cash and Cash Equivalents, End of Year | $ | 18,629 | $ | 20,138 | $ | 16,230 | ||||||
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CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year-Ended July 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
(in thousands) | ||||||||||||
Supplemental disclosure: | ||||||||||||
Cash paid for: | ||||||||||||
Interest, net of amounts capitalized | $ | 622 | $ | 826 | $ | 1,078 | ||||||
Income taxes | $ | 6,693 | $ | 2,339 | $ | 3,022 | ||||||
Noncash investing and financing activities: | ||||||||||||
Capital expenditures accrued, but not paid | $ | 761 | $ | 223 | $ | 712 | ||||||
Cash dividends declared and accrued, but not paid | $ | 1,477 | $ | 1,376 | $ | 1,311 | ||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
We are a leader in developing, manufacturing and/or marketing sorbent products. Our sorbent products are principally produced from clay minerals. Our absorbent clay products include cat litter, industrial floor absorbents, agricultural chemical carriers and enterosorbents used in animal feed. Our adsorbent products include synthetic sorbents, which are used for industrial cleanup, and bleaching clay products, which are used for filtration of edible oils and for purification of petroleum-based oils.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Oil-Dri Corporation of America and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated from the Consolidated Financial Statements.
MANAGEMENT USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. For more information see Critical Accounting Policies and Estimates in Item 7 “Managements Discussion and Analysis of Financial Condition and Results of Operations.”
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments with maturities of three months or less.
SHORT-TERM INVESTMENTS
The table below shows the composition of short-term investments as of July 31 (in thousands):
2016 | 2015 | |||||||
U.S. Treasury securities | $ | 5,998 | $ | — | ||||
Certificates of deposit | 4,186 | 2,190 | ||||||
Short-term investments | $ | 10,184 | $ | 2,190 | ||||
Short-term investments have maturities of one year or less. We intend and have the ability to hold these investments to maturity; therefore, these investments are reported at amortized cost.
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 retain outside collection agencies to facilitate our collection efforts. Past due status is determined based on contractual terms and customer payment history.
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INVENTORIES
We value inventories at the lower of cost (first-in, first-out) or market. We recorded inventory obsolescence reserves of approximately $806,000 and $521,000 as of July 31, 2016 and 2015, respectively. The composition of inventories was as follows as of July 31 (in thousands):
2016 | 2015 | |||||||
Finished goods | $ | 14,032 | $ | 12,117 | ||||
Packaging | 4,672 | 4,735 | ||||||
Other | 4,547 | 4,517 | ||||||
Inventories | $ | 23,251 | $ | 21,369 | ||||
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated to U.S. Dollars at the exchange rates in effect at period end. Income statement items are translated at the average exchange rate on a monthly basis. Resulting translation adjustments are recorded as a separate component of stockholders’ equity.
INTANGIBLE ASSETS AND GOODWILL
We amortize most of our intangible assets on a straight-line basis over periods ranging from ten to 20 years. Our customer list intangible asset, related to the acquisition of certain assets of MFM, is amortized at an accelerated amortization rate in the earlier years to reflect the expected pattern of decline in the related benefits over time. Intangible amortization was $1,410,000 in fiscal year 2016 and $1,642,000 in fiscal year 2015. We have some intangible assets that were determined to have indefinite lives and are not amortized, specifically one acquired trademark recorded at $376,000.
Our estimated intangible amortization expense for the next five fiscal years is as follows (in thousands):
2017 | $ | 1,212 | |
2018 | $ | 1,003 | |
2019 | $ | 816 | |
2020 | $ | 646 | |
2021 | $ | 462 | |
The weighted average amortization period of our intangible assets subject to amortization is as follows (in years):
Weighted Average Amortization Period | |
Trademarks and patents | 11.5 |
Debt issuance costs | 4.1 |
Customer list | 7.3 |
Total intangible assets subject to amortization | 7.3 |
We periodically review indefinite-lived intangibles and goodwill to assess for impairment. Our review is based on cash flow considerations and other approaches that require significant judgment with respect to volume, revenue, expenses and allocations. Impairment occurs when the carrying value exceeds the fair value. Much of our goodwill cannot be specifically assigned to one of our operating segments because of the shared nature of our production facilities; however, for purposes of our most recent impairment analysis we estimated the goodwill allocation and assigned $5,775,000 to the Retail and Wholesale Products Group and $3,259,000 to the Business to Business Products Group.
Our impairment analysis has historically been performed in the first quarter of the fiscal year; however, beginning in fiscal year 2016 we performed, and going forward we will perform, our annual impairment testing in the fourth quarter of our fiscal year. We will continue to consider the need to re-perform impairment testing throughout 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 believe the change in impairment testing date is not a material change to
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our method of applying an accounting principle. There has been no impairment from this analysis for fiscal years 2016, 2015 or 2014.
OVERBURDEN REMOVAL AND MINING COSTS
We mine sorbent materials on property that we either own or lease as part of our overall operations. A significant part of our overall mining cost is incurred during the process of removing the overburden from the mine site, thus exposing the sorbent material used in a majority of our production processes. These stripping costs are treated as a variable inventory production cost and are included in cost of sales in the period they are incurred. Stripping costs included in cost of sales were approximately $3,020,000, $2,939,000, and $4,179,000 for fiscal years 2016, 2015 and 2014, respectively. We defer and amortize the pre-production overburden removal costs associated with opening a new mine. No pre-production overburden removal costs were deferred in the last two fiscal years.
Additionally, it is our policy to capitalize the purchase cost of land and mineral rights, including associated legal fees, survey fees and real estate fees. The costs of obtaining mineral rights, including legal fees and drilling expenses, are also capitalized. The amount of land and mineral rights included in land on the Consolidated Balance Sheets were approximately $13,659,000 and $2,165,000, respectively, as of July 31, 2016 and $13,285,000 and $2,165,000, respectively, as of July 31, 2015. Pre-production development costs on new mines and any prepaid royalties that may be offset against future royalties due upon extraction of the mineral are also capitalized. No capitalized pre-production development costs were recorded in fiscal years 2016 and 2015. Prepaid royalties included in current prepaid expenses and in non-current other assets on the Consolidated Balance Sheets were approximately $1,103,000 and $1,068,000 as of July 31, 2016 and 2015, respectively.
RECLAMATION
We perform ongoing reclamation activities during the normal course of our overburden removal. As overburden is removed from a mine site, it is hauled to previously mined sites and is used to refill older sites. This process allows us to continuously reclaim older mine sites and dispose of overburden simultaneously, therefore minimizing the costs associated with the reclamation process.
On an annual basis we evaluate our potential reclamation liability in accordance with ASC 410, Asset Retirement and Environmental Obligations. 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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are generally depreciated using the straight-line method over their estimated useful lives which are listed below. Depreciation expense was $10,782,000, $10,352,000 and $9,289,000 in fiscal years 2016, 2015 and 2014, respectively. Major improvements and betterments are capitalized, while maintenance and repairs that do not extend the useful life of the applicable assets are expensed as incurred. Interest expense may also be capitalized for assets that require a period of time to get them ready for their intended use. Capitalized interest in fiscal year 2016 was $72,000. There was no significant capitalized interest in fiscal years 2015 and 2014.
Years | |||
Buildings and leasehold improvements | 3 | - | 39 |
Machinery and equipment | |||
Packaging | 2 | - | 20 |
Processing | 2 | - | 25 |
Mining and other | 3 | - | 15 |
Office furniture and equipment | 2 | - | 12 |
Vehicles | 3 | - | 15 |
Property, plant and equipment are carried at cost on the Consolidated Balance Sheets and are reviewed for possible impairment on an annual basis. We take into consideration idle and underutilized equipment and review business plans for possible impairment. When impairment is indicated, an impairment charge is recorded for the difference between the carrying value of the asset and its fair market value. There was no impairment recorded in any of fiscal years 2016, 2015 or 2014.
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TRADE PROMOTIONS
We routinely commit to one-time or ongoing trade promotion programs, primarily in our Retail and Wholesale Products Group. All such costs are netted against sales. We have accrued liabilities at the end of each period for the estimated expenses incurred but not yet paid for these programs. 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. We use judgment for estimates to determine our trade spending liabilities. We rely on our historical experience of trade spending patterns and that of the industry, current trends and forecast data.
ADVERTISING
Advertising costs for the development of printed materials, television commercials, web-based digital banners, web-based social media and sales videos are deferred and expensed upon the first use of the materials, unless such amounts are immaterial. Costs paid for communicating advertising over a period of time, such as television air time, radio commercials and print media advertising space, are deferred and expensed on a pro-rata basis. All other advertising costs, including participation in industry conventions and shows and market research, are expensed when incurred. All advertising costs are part of selling, general and administrative expenses.
Advertising expenses were approximately $18,083,000, $5,154,000, and $8,886,000 in fiscal years 2016, 2015 and 2014, respectively. Advertising expense was significantly higher in fiscal year 2016 due to an integrated marketing campaign launched in March 2016 to promote our Cat's Pride Fresh & Light Ultimate Care lightweight cat litter.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Non-derivative financial instruments included in the Consolidated Balance Sheets are cash and cash equivalents, short-term investments and notes payable. These instruments, except for notes payable, were carried at amounts approximating fair value as of July 31, 2016 and 2015. Short-term investments were certificates of deposits and treasury securities. We intend and have the ability to hold our short-term investments to maturity; therefore, these investments were reported at amortized cost on the Consolidated Balance Sheets, which approximated fair value. See Note 5 of the Notes to the Consolidated Financial Statements for additional information regarding the fair value of our financial instruments, including notes payable.
REVENUE RECOGNITION
We recognize revenue when risk of loss and title are transferred under the terms of our sales agreements with customers at a fixed and determinable price and collection of payment is probable. Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Sales returns and allowances are not material.
COST OF SALES
Cost of sales consists of all manufacturing costs, including depreciation and amortization related to assets used in the manufacturing and distribution process, inbound and outbound freight, inspection costs, purchasing costs associated with materials and packaging used in the production process and warehouse and distribution costs.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of sales and were approximately $41,301,000, $46,292,000 and $49,456,000 for fiscal years 2016, 2015 and 2014, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include salaries, wages and benefits associated with staff outside the manufacturing and distribution functions, all marketing related costs, any miscellaneous trade spending expenses not required to be included in net sales, research and development costs, depreciation and amortization related to assets outside the manufacturing and distribution process and all other non-manufacturing and non-distribution expenses.
RESEARCH AND DEVELOPMENT
Research and development costs of approximately $3,025,000, $2,809,000 and $2,587,000 were charged to expense as incurred for fiscal years 2016, 2015 and 2014, respectively.
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PENSION AND POSTRETIREMENT BENEFIT COSTS
We provide a defined benefit pension plan for eligible salaried and hourly employees and we make contributions to fund the plan. We also provide a postretirement health benefit plan to domestic salaried employees who qualify under the plan’s provisions. The postretirement health benefit plan is unfunded. Our pension and postretirement health benefit plans are accounted for using actuarial valuations required by ASC 715, Compensation – Retirement Benefits. The funded status of our defined pension and postretirement health benefit plans are recognized on the Consolidated Balance Sheets. Changes in the funded status that arise during the period but are not recognized as components of net periodic benefit cost are recognized within other comprehensive income, net of income tax. See Note 9 of the Notes to the Consolidated Financial Statements for additional information.
STOCK-BASED COMPENSATION
We account for stock options and restricted stock issued under our long term incentive plans in accordance with ASC 718, Compensation – Stock Compensation. The fair value of stock-based compensation is determined at the grant date. The related compensation expense is recognized over the appropriate vesting period. See Note 8 of the Notes to the Consolidated Financial Statements for additional information.
INCOME TAXES
Deferred income tax assets and liabilities are recorded for the impact of temporary differences between the tax basis of assets and liabilities and the amounts recognized for financial reporting purposes. Deferred tax assets are reviewed and a valuation allowance is established if management believes that it is more likely than not that some portion of our deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change.
In addition to existing valuation allowances, we provide for uncertain tax positions, if necessary, when such tax positions do not meet the recognition thresholds or measurement standards prescribed by ASC 740, Income Taxes. Amounts for uncertain tax positions are adjusted when new information becomes available or when positions are effectively settled. We recognize interest and penalties accrued related to uncertain tax positions in income tax (benefit) expense.
U.S. income tax expense and foreign withholding taxes are provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested. Where unremitted foreign earnings are indefinitely reinvested, no provision for federal or state tax expense is recorded. When circumstances change and we determine that some or all of the undistributed earnings will be remitted in the foreseeable future, a corresponding expense is accrued in the current period. See Note 6 of the Notes to the Consolidated Financial Statements for additional information about income taxes.
NEW ACCOUNTING PRONOUNCEMENTS
Recently Issued Accounting Standards
In May 2014, the FASB issued guidance under ASC 606, Revenue from Contract with Customers, which establishes a single comprehensive revenue recognition model for all contracts with customers and will supersede most existing revenue guidance. This guidance requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange. In March, April and May of 2016, the FASB issued amended guidance that further clarifies the principles for recognizing revenue. Transition options include either a full or modified retrospective approach and early adoption is permitted. The implementation date for this guidance was deferred and will now be effective at the beginning of our first quarter of fiscal year 2019. While we are still in the process of evaluating the financial statement impact of the adoption of this requirement, it is not currently expected to have a material impact on our Consolidated Financial Statements based on the types of products we sell and our arrangements with customers.
In August 2014, the FASB issued guidance under ASC 205, Presentation of Financial Statements - Going Concern, which defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. We plan to adopt this guidance in the first quarter of fiscal year 2017. This pronouncement requires additional disclosures only and we do not expect a significant impact on our consolidated financial statements.
In April 2015, the FASB issued guidance under ASC 835, Simplifying the Presentation of Debt Issuance Cost. Under this amendment, entities will no longer be able to recognize debt issuance costs as an asset in the balance sheet, but instead will be required to present debt issuance costs as a direct deduction from the carrying amount of the associated debt liability. The recognition
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and measurement guidance for debt issuance costs are not affected by this pronouncement. We expect to reclassify for the first quarter of our fiscal year 2017 approximately $110,000 from Debt issuance costs to a direct deduction of Notes payable on the unaudited balance sheet as of October 31, 2016 that will be included in our quarterly report on Form 10-Q. Prior periods presented will also be restated accordingly.
In July 2015, the FASB issued guidance under ASC 330, Simplifying the Measurement of Inventory. The new guidance requires inventory to be measured at the lower of cost and net realizable value, which is defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. This new guidance is effective for our first quarter of fiscal year 2018 and early adoption is permitted. The guidance must be applied prospectively. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements.
In November 2015, the FASB issued guidance under ASC 740, Balance Sheet Classification of Deferred Taxes, which requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. This guidance is effective for our first quarter of fiscal year 2018 and early adoption is permitted. The guidance may be applied either prospectively or retrospectively to all periods presented. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements, but we do not expect a significant impact on our Consolidated Financial Statements.
In January 2016, the FASB issued guidance under ASC 825, Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The provisions relevant to us at this time require the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, as well as eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value in such disclosure. This guidance is effective for our first quarter of fiscal year 2019 and early adoption is generally not permitted. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements.
In February 2016, the FASB issued guidance under ASC 842, Leases, which provides that, for leases with a term greater than 12 months, a lessee must recognize in the statement of financial position both a liability to make lease payments and an asset representing its right to use the underlying asset. Other requirements describe expense recognition, as well as financial statement presentation and disclosure. This guidance is effective for our first quarter of fiscal year 2020 using a modified retrospective approach, which includes a number of optional practical expedients. Early adoption is permitted. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements.
In March 2016, the FASB issued guidance under ASC 718, Compensation-Stock Compensation, which simplifies several aspects of the accounting for share-based payment transactions, including accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. The new guidance also clarifies the statement of cash flows presentation for certain components of share-based awards. This guidance is effective for our first quarter of fiscal year 2018, 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 2021. We are currently evaluating the impact of the adoption of this requirement on our Consolidated Financial Statements.
There have been no other accounting pronouncements issued but not yet adopted by us which are expected to have a material impact on our Consolidated Financial Statements.
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NOTE 2 – ACQUISITION
On November 1, 2013, for $12,505,000 in cash we acquired certain assets of MFM, a company engaged in the manufacturing, marketing and distribution of primarily private label cat litter. This transaction qualified as a business combination for accounting purposes, therefore the assets acquired were recorded at their respective estimated fair values at the date of acquisition. The purchase price was allocated to: goodwill, all of which is related to our Retail and Wholesale Products Group segment and is deductible for tax purposes ($3,872,000); customer list intangible asset ($7,784,000); inventories ($664,000); equipment ($300,000); and other current assets ($130,000). We also recorded a contingent liability of $500,000 for the amount deposited in an escrow account, which represented our maximum obligation for expenses to prepare and sell the real property retained by MFM. In addition, we recorded a contingent receivable of $255,000, which represented the estimated amount we would receive upon the sale of the real property retained by MFM. During fiscal year 2015, we recorded net expense of $113,000 upon settlement of both the contingent liability and receivable. This expense is included in selling, general and administrative expenses on the Consolidated Statements of Operations for fiscal year 2015.
The summarized proforma financial information below presents the combined results of operations as if the acquisition of MFM had occurred as of August 1, 2012. MFM’s pre-acquisition results have been added to Oil-Dri’s historical results and include certain adjustments related to the acquisition, such as amortization of intangible assets and depreciation expense. These proforma results do not include any anticipated cost synergies and do not reflect the actual results of operations that would have been achieved, nor are they indicative of future results of operations. The following proforma results are presented for comparative purposes only for the twelve months ended July 31, 2014 (unaudited) (in thousands, except per share amounts):
2014 | |||
Proforma net sales | $ | 271,279 | |
Proforma net income | $ | 7,834 | |
Proforma net income per share - Basic Common | $ | 1.19 | |
Proforma net income per share - Basic Class B | $ | 0.90 | |
Proforma net income per share - Diluted | $ | 1.11 | |
The net sales for MFM-related customers after the acquisition that are included in our Consolidated Statements of Operations for fiscal 2014 were approximately $10,100,000. The amount of net income specifically attributed to these customers cannot be determined because MFM’s customers’ orders were fulfilled in our existing cat litter manufacturing plants and with our existing sales team and logistics processes.
NOTE 3 – OPERATING SEGMENTS
We have two reportable operating segments: (1) Retail and Wholesale Products Group and (2) Business to Business Products Group. These operating segments are managed separately and each segment's major customers have different characteristics. The Retail and Wholesale Products Group customers include mass merchandisers, wholesale clubs, drugstore chains, pet specialty retail outlets, dollar stores, retail grocery stores, distributors of industrial cleanup and automotive products, environmental service companies and sports field product users. The Business to Business Products Group customers include: processors and refiners of edible oils, petroleum-based oils and biodiesel fuel; manufacturers of animal feed and agricultural chemicals; distributors of animal health and nutrition products; and marketers of consumer products.
Net sales and operating income for each segment are provided below. Revenues by product line are not provided because it would be impracticable to do so. The accounting policies of the segments are the same as those described in the Note 1 of the Notes to the Consolidated Financial Statements.
We do not rely on any operating segment asset allocations and we do not consider them meaningful because of the shared nature of our production facilities; however, we have estimated the segment asset allocations below for those assets for which we can reasonably determine. The unallocated asset category is the remainder of our total assets. The asset allocation is estimated and is not a measure used by our chief operating decision maker about allocating resources to the operating segments or in assessing their performance. The corporate expenses line represents certain unallocated expenses, including primarily salaries, wages and benefits, purchased services, rent, utilities and depreciation and amortization associated with corporate functions such as research and development, information systems, finance, legal, human resources and customer service. Corporate expenses also include the annual incentive plan bonus accrual.
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July 31, | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Business to Business Products | $ | 61,007 | $ | 55,767 | $ | 53,823 | ||||||||||||||||||
Retail and Wholesale Products | 91,626 | 96,043 | 95,712 | |||||||||||||||||||||
Unallocated assets | 52,300 | 38,221 | 36,669 | |||||||||||||||||||||
Total Assets | $ | 204,933 | $ | 190,031 | $ | 186,204 | ||||||||||||||||||
Year Ended July 31, | ||||||||||||||||||||||||
Net Sales | Income | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Business to Business Products | $ | 96,444 | $ | 92,326 | $ | 94,286 | $ | 33,464 | $ | 29,406 | $ | 26,654 | ||||||||||||
Retail and Wholesale Products | 165,869 | 169,076 | 172,027 | 5,009 | 5,206 | 3,568 | ||||||||||||||||||
Total sales | $ | 262,313 | $ | 261,402 | $ | 266,313 | ||||||||||||||||||
Corporate expenses | (23,060 | ) | (19,459 | ) | (17,804 | ) | ||||||||||||||||||
Income from operations | 15,413 | 15,153 | 12,418 | |||||||||||||||||||||
Total other expense, net | (1,056 | ) | (984 | ) | (1,081 | ) | ||||||||||||||||||
Income before income taxes | 14,357 | 14,169 | 11,337 | |||||||||||||||||||||
Income taxes | (744 | ) | (2,801 | ) | (2,981 | ) | ||||||||||||||||||
Net income | $ | 13,613 | $ | 11,368 | $ | 8,356 | ||||||||||||||||||
The following is a summary by fiscal year of financial information by geographic region (in thousands):
2016 | 2015 | 2014 | ||||||||||
Sales to unaffiliated customers by: | ||||||||||||
Domestic operations | $ | 251,054 | $ | 250,377 | $ | 255,067 | ||||||
Foreign subsidiaries | $ | 11,259 | $ | 11,025 | $ | 11,246 | ||||||
Sales or transfers between geographic areas: | ||||||||||||
Domestic operations | $ | 5,723 | $ | 5,606 | $ | 4,285 | ||||||
Income (Loss) before income taxes: | ||||||||||||
Domestic operations | $ | 15,129 | $ | 15,389 | $ | 12,209 | ||||||
Foreign subsidiaries | $ | (772 | ) | $ | (1,220 | ) | $ | (872 | ) | |||
Net Income (Loss): | ||||||||||||
Domestic operations | $ | 14,574 | $ | 12,629 | $ | 9,064 | ||||||
Foreign subsidiaries | $ | (961 | ) | $ | (1,261 | ) | $ | (708 | ) | |||
Identifiable assets: | ||||||||||||
Domestic operations | $ | 197,636 | $ | 182,269 | $ | 178,061 | ||||||
Foreign subsidiaries | $ | 7,297 | $ | 7,762 | $ | 8,143 | ||||||
Sales to Walmart, our largest customer, are included in our Retail and Wholesale Products Group. The percentage of consolidated net sales and net accounts receivable attributed to Walmart are shown in the table below:
2016 | 2015 | 2014 | ||||
Net sales for the years ended July 31 | 19% | 18% | 19% | |||
Net accounts receivable as of July 31 | 29% | 27% | 28% | |||
There are no other customers with sales equal to or greater than 10% of our total sales.
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NOTE 4 – NOTES PAYABLE
The composition of notes payable is as follows as of July 31 (in thousands):
2016 | 2015 | |||||||
Senior notes payable in annual principal installments on August 1: $3,083 in each fiscal year 2016 through 2021. Interest is payable semiannually at an annual rate of 3.96% | $ | 15,416 | $ | 18,500 | ||||
Senior notes mature on October 15, 2015. Interest is payable semiannually at an annual rate of 5.89% | — | 400 | ||||||
Total notes payable | 15,416 | 18,900 | ||||||
Less current maturities of notes payable | (3,083 | ) | (3,483 | ) | ||||
Noncurrent notes payable | $ | 12,333 | $ | 15,417 | ||||
We issued senior promissory notes in November 2010 for $18,500,000 and in December 2005 for $15,000,000. All note agreements provided that the proceeds could be used to fund future principal payments on debt, acquisitions, stock repurchases, and capital expenditures and for working capital purposes. Both note agreements contain certain covenants that restrict our ability and the ability of certain of our subsidiaries to, among other things, (i) incur liens, (ii) incur indebtedness, (iii) merge or consolidate, (iv) sell assets, (v) sell stock of those certain subsidiaries, (vi) engage in business that would change the general nature of the business we are engaged in, and (vii) enter into transactions other than on “arm's length” terms with affiliates. The note agreements also require a minimum fixed coverage ratio and a minimum consolidated net worth to be maintained.
On December 4, 2014, we signed a fourth amendment to our credit agreement with BMO Harris, to extend the term to December 4, 2019. The new agreement provides for a $25,000,000 unsecured revolving credit agreement, including a maximum of $5,000,000 for foreign 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. At July 31, 2016, the variable rates would have been 3.50% for the BMO Harris’ prime-based rate or 1.70% 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, 2016 and 2015, there were no outstanding borrowings under this credit agreement.
Our debt agreements also contain provisions such that if we default on one debt agreement, the others will automatically default. If we default on any guaranteed debt with a balance greater than $1,000,000, our unsecured revolving credit agreement with BMO Harris will be considered in default. If we default on any debt with a balance greater than $5,000,000 we will also be considered in default with the senior promissory notes.
We were in compliance with all restrictive covenants and limitations at July 31, 2016.
The following is a schedule by fiscal year of future maturities of notes payable as of July 31, 2016 (in thousands):
2017 | $ | 3,083 | |
2018 | 3,084 | ||
2019 | 3,083 | ||
2020 | 3,083 | ||
2021 | 3,083 | ||
$ | 15,416 | ||
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NOTE 5 – FINANCIAL INSTRUMENTS
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs used to measure fair value are prioritized into one of three categories based on the lowest level of input that is significant to the fair value measurement. Categories in the hierarchy are as follows:
Level 1: | Financial assets and liabilities whose values are based on quoted market prices in active markets for identical assets or liabilities. | |||
Level 2: | Financial assets and liabilities whose values are based on: | |||
1) | Quoted prices for similar assets or liabilities in active markets. | |||
2) | Quoted prices for identical or similar assets or liabilities in markets that are not active. | |||
3) | Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. | |||
Level 3: | Financial assets and liabilities whose values are based on valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect estimates of the assumptions that market participants would use in valuing the financial assets and liabilities. | |||
The following table summarizes our financial assets and liabilities that were reported at fair value by level within the fair value hierarchy (in thousands):
Fair Value at July 31, 2016 | Fair Value at July 31, 2015 | |||||||
Level 1 | Level 1 | |||||||
Assets | ||||||||
Cash equivalents | $ | 7,626 | $ | 9,297 | ||||
Cash equivalents are classified as Level 1 of the fair value hierarchy because they were valued using quoted market prices in active markets. These cash instruments are primarily money market funds. This amount is included in cash and cash equivalents on the Consolidated Balance Sheets.
Short-term investments on the Consolidated Balance Sheets include certificates of deposit and treasury securities. We intend and have the ability to hold our short-term investments to maturity; therefore, these investments were reported at amortized cost on the Consolidated Balance Sheets, which approximated fair value as of July 31, 2016 and 2015. These balances are excluded from the above table.
Accounts receivable and accounts payable balances on the Consolidated Balance Sheets approximate their fair values at July 31, 2016 and 2015 due to the short maturity and nature of those balances; therefore, these balances are excluded from the above table.
Notes payable on the Consolidated Balance Sheets are carried at the face amount of future maturities and are excluded from the above table. The estimated fair value of notes payable was approximately $16,651,000 as of July 31, 2016 and $20,476,000 as of July 31, 2015. Our debt does not trade on a daily basis in an active market, therefore the fair value of notes payable was estimated based on market observable borrowing rates currently available for debt with similar terms and average maturities and is classified as Level 2.
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Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash, short-term investments and accounts receivable. Our cash is held in banks which are covered by the Federal Deposit Insurance Corporation; however, our cash balances are in excess of the maximum amount that is insured. Our short-term investments are placed in government-backed instruments and with other high quality institutions. Concentrations of credit risk with respect to accounts receivable are subject to the financial condition of certain major customers, principally the customer referred to in Note 3 of the Notes to the Consolidated Financial Statements. We generally do not require collateral to secure customer receivables; however, we require letters of credit for some foreign customers or we purchase insurance to reduce our risk.
NOTE 6 – INCOME TAXES
The provision for income tax expense (benefit) by fiscal year consists of the following (in thousands):
2016 | 2015 | 2014 | ||||||||||
Current | ||||||||||||
Federal | $ | 3,298 | $ | 4,296 | $ | 1,267 | ||||||
Foreign | 15 | (40 | ) | 63 | ||||||||
State | 1,051 | 1,081 | 308 | |||||||||
Current Income Tax Total | 4,364 | 5,337 | 1,638 | |||||||||
Deferred | ||||||||||||
Federal | (3,277 | ) | (2,242 | ) | 1,381 | |||||||
Foreign | 174 | 68 | (215 | ) | ||||||||
State | (517 | ) | (362 | ) | 177 | |||||||
Deferred Income Tax Total | (3,620 | ) | (2,536 | ) | 1,343 | |||||||
Total Income Tax Expense | $ | 744 | $ | 2,801 | $ | 2,981 | ||||||
Principal reasons for variations between the statutory federal rate and the effective rates by fiscal year were as follows:
2016 | 2015 | 2014 | |||||||
U.S. federal income tax rate | 35.0 | % | 35.0 | % | 34.0 | % | |||
Depletion deductions allowed for mining | (13.8 | ) | (9.5 | ) | (12.2 | ) | |||
State income tax expense, net of federal tax expense | 2.5 | 3.4 | 2.8 | ||||||
Difference in effective tax rate of foreign subsidiaries | 1.2 | 2.2 | 0.9 | ||||||
Empowerment zone credits | — | — | (0.5 | ) | |||||
Valuation allowance (decrease) increase | (11.7 | ) | (11.7 | ) | 3.2 | ||||
Change in federal tax rate applied to deferred tax assets and liabilities | (2.5 | ) | — | — | |||||
Deduction for domestic production activities | (2.7 | ) | (1.8 | ) | (1.4 | ) | |||
Other | (2.8 | ) | 2.2 | (0.5 | ) | ||||
Effective income tax rate | 5.2 | % | 19.8 | % | 26.3 | % | |||
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The Consolidated Balance Sheets included the following tax effects of cumulative temporary differences as of July 31 (in thousands):
`
2016 | 2015 | |||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
Depreciation | $ | — | $ | 5,924 | $ | — | $ | 6,749 | ||||||||
Deferred compensation | 4,684 | — | 3,936 | — | ||||||||||||
Postretirement benefits | 11,935 | — | 8,242 | — | ||||||||||||
Allowance for doubtful accounts | 172 | — | 237 | — | ||||||||||||
Deferred marketing expenses | 365 | — | — | 19 | ||||||||||||
Other assets | 923 | — | 41 | — | ||||||||||||
Accrued expenses | 3,100 | — | 1,949 | — | ||||||||||||
Tax credits | 1,060 | — | 1,545 | — | ||||||||||||
Amortization | 216 | — | 37 | — | ||||||||||||
Inventories | 247 | — | 512 | — | ||||||||||||
Depletion | — | 476 | — | 473 | ||||||||||||
Stock-based compensation | 252 | — | 162 | — | ||||||||||||
Reclamation | 364 | — | 283 | — | ||||||||||||
Other assets – foreign | 890 | — | 1,006 | — | ||||||||||||
Valuation allowance | (1,170 | ) | — | (2,210 | ) | — | ||||||||||
Total deferred taxes | $ | 23,038 | $ | 6,400 | $ | 15,740 | $ | 7,241 | ||||||||
The increase in deferred taxes related to postretirement benefits was driven by a higher liability for these obligations. See Note 9 of the Notes to the Consolidated Financial Statements for further information about the assumptions used for the actuarial calculation of the postretirement benefits liability, including the lower discount rate used for fiscal 2016.
We estimate we will use approximately $1,000,000 of our domestic AMT credit carryforwards in fiscal year 2016. We utilized $1,178,000 of our domestic AMT credit carryforwards for fiscal year 2015 and in fiscal year 2014 we added approximately $693,000 to our domestic AMT credit carryforwards. We maintain valuation allowances where it is likely that all or a portion of a deferred tax asset will not be realized. We determined during the fourth quarter of fiscal year 2016, that we expect to fully utilize our deferred tax asset for domestic AMT credits in future years. Therefore, we concluded it was appropriate to release the full $1,680,000 valuation allowance that had been established in prior years for this tax benefit, which resulted in a lower effective federal income tax rate. This decision was based on our current year's improved gross margin and the belief that we will continue to achieve margin and profitability levels in the future that will allow us to use the AMT credits.
As of July 31, 2016, we had total deferred tax assets of $1,170,000 for foreign net operating loss carryforwards and domestic state tax credits. We believe it is more likely than not that we will not realize these tax benefits; therefore, a valuation allowance has been established for the full amount of these deferred tax assets.
Our foreign subsidiaries in the United Kingdom and China have not generated any untaxed foreign income, therefore we have not provided for any related income taxes.
We had no liability for unrecognized tax benefits (“UTBs”) based on tax positions related to the current and prior fiscal years and, correspondingly, no related interest and penalties were recognized as income tax expense and there were no accruals for such items in fiscal 2016 .
Reconciliations of the beginning and ending amount of UTBs by fiscal year were as follows (in thousands):
2016 | 2015 | 2014 | ||||||||||
Gross balance – beginning of year | $ | — | $ | — | $ | 273 | ||||||
Gross decreases - tax positions from prior years | — | — | (273 | ) | ||||||||
Gross balance – end of year | $ | — | $ | — | $ | — | ||||||
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We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. Our federal income tax return for fiscal year 2013 was under examination as of July 31, 2016 and returns for fiscal years 2014 and 2015 remain open for examination. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years. The state impact of any federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification to the states. There are no material open or unsettled state, local or foreign income tax audits. We believe our accrual for tax liabilities is adequate for all open audit years.
NOTE 7 – STOCKHOLDERS’ EQUITY
Common Stock
Our authorized capital stock at July 31, 2016 and 2015 consisted of 15,000,000 shares of Common Stock, 7,000,000 shares of Class B Stock and 30,000,000 shares of Class A Common Stock, each with a par value of $.10 per share. There are no Class A Common Stock shares currently outstanding.
The Common Stock and Class B Stock are equal, on a per share basis, in all respects except as to voting rights, conversion rights, cash dividends and stock splits or stock dividends. The Class A Common Stock is equal, on a per share basis, in all respects, to the Common Stock except as to voting rights and stock splits or stock dividends. In the case of voting rights, Common Stock is entitled to one vote per share and Class B Stock is entitled to ten votes per share, while Class A Common Stock generally has no voting rights. Common Stock and Class A Common Stock have no conversion rights. Class B Stock is convertible on a share-by-share basis into Common Stock at any time and is subject to mandatory conversion under certain circumstances.
Common Stock is entitled to cash dividends, as and when declared or paid, equal to at least 133.33% on a per share basis of the cash dividend paid on Class B Stock. Class A Common Stock is entitled to cash dividends on a per share basis equal to the cash dividend on Common Stock. Additionally, while shares of Common Stock, Class A Common Stock and Class B Stock are outstanding, the sum of the per share cash dividend paid on shares of Common Stock and Class A Common Stock, must be equal to at least 133.33% of the sum of the per share cash dividend paid on Class B Stock and Class A Common Stock. See Note 4 of the Notes to the Consolidated Financial Statements regarding dividend restrictions provided in our debt agreements.
Shares of Common Stock, Class A Common Stock and Class B Stock are equal in respect of all rights to dividends (other than cash) and distributions in the form of stock or other property (including stock dividends and split-ups) in each case in the same ratio except in the case of a Special Stock Dividend. A Special Stock Dividend, which can be issued only once, is either a dividend of one share of Class A Common Stock for each share of Common Stock and Class B Stock outstanding or a recapitalization, in which half of each outstanding share of Common Stock and Class B Stock would be converted into a half share of Class A Common Stock.
Our Board of Directors has authorized in the aggregate the repurchase of 3,666,771 shares of the Company stock since fiscal year 1991. Through fiscal year-end 2016, 3,019,169 shares of Common Stock and 342,241 shares of Class B Stock have been repurchased under the Board approved repurchase authorizations. Common Stock was repurchased by other transactions authorized by management prior to the adoption of the Board’s repurchase authorizations.
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Accumulated Other Comprehensive (Loss) Income
The following table summarizes the changes in accumulated other comprehensive income by component (in thousands):
Unrealized Gain on Marketable Securities | Pension and Postretirement Health Benefits | Cumulative Translation Adjustment | Total Accumulated Other Comprehensive (Loss) Income | ||||||||||||
Balance as of July 31, 2014 | $ | 114 | $ | (8,632 | ) | $ | 255 | (8,263 | ) | ||||||
Other comprehensive (loss) income before reclassifications, net of tax | (9 | ) | (730 | ) | b) | (525 | ) | (1,264 | ) | ||||||
Amounts reclassified from accumulated other comprehensive income, net of tax | (105 | ) | a) | 387 | c) | — | 282 | ||||||||
Net current-period other comprehensive (loss) income , net of tax | (114 | ) | (343 | ) | (525 | ) | (982 | ) | |||||||
Balance as of July 31, 2015 | $ | — | $ | (8,975 | ) | $ | (270 | ) | $ | (9,245 | ) | ||||
Other comprehensive (loss) income before reclassifications, net of tax | — | (5,501 | ) | b) | 115 | (5,386 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax | — | 609 | c) | — | 609 | ||||||||||
Net current-period other comprehensive (loss) income, net of tax | — | (4,892 | ) | 115 | (4,777 | ) | |||||||||
Balance as of July 31, 2016 | $ | — | $ | (13,867 | ) | $ | (155 | ) | $ | (14,022 | ) | ||||
a) | Amount is included in the Consolidated Statements of Operations on the Other, net line item. The cost of the related securities was based on specific identification. |
b) | Amounts are net of taxes of $3,372,000 and $447,000 in fiscal years 2016 and 2015, respectively. and are included in Other Comprehensive Loss. |
c) | Amounts are net of taxes of $374,000 and $239,000 in fiscal years 2016 and 2015, respectively. Amounts are included in the components of net periodic benefit cost for the pension and postretirement health plans. |
See Note 9 of the Notes to the Consolidated Financial Statements for further information about pension and postretirement health benefits.
NOTE 8 – STOCK-BASED COMPENSATION
We determined the fair value of stock options and restricted stock issued under our long term incentive plans as of the grant date. The fair value of restricted stock was determined by the closing market price of our Common Stock on the date of grant multiplied by the number of shares granted. The fair value of the stock options was estimated on the date of the grant using a Black-Scholes option valuation model that used various assumptions. The risk free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. Expected life (estimated period of time outstanding) of a grant was determined by reference to the vesting schedule, past exercise behavior and comparison with other reporting companies. The dividend rate at the date of grant was used as the best estimate of future dividends. Expected volatility was determined by calculating the standard deviation of our stock price for the five years immediately prior to the grant date. This period of time closely resembles the expected term. All stock options issued under our plans have an exercise price equal to the closing market price of our Common Stock on the date of grant. All options currently outstanding have a term of ten years.
STOCK OPTIONS
The Oil-Dri Corporation of America 2006 Long Term Incentive Plan (“2006 Plan”) permits the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based and cash-based awards. Our employees and outside directors are eligible to receive grants under the 2006 Plan. The total number of shares of stock subject to grants under the 2006 Plan may not exceed 937,500. Stock options have been granted to our outside directors with a vesting period of one year and stock options granted to employees generally vest 25% two years after the grant date and in each of the three following anniversaries of the grant date. In addition, shares of restricted stock have been issued under the 2006 Plan as
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described in the restricted stock section below. As of July 31, 2016, there were 375,954 shares available for future grants under this plan.
Our 1995 Long Term Incentive Plan (“1995 Plan”) provided for grants of both incentive and non-qualified stock options and restricted stock. Stock options granted under the 1995 Plan generally vest 25% two years after the grant date and in each of the three following anniversaries of the grant date. All shares of stock issued upon option exercises under this plan were from authorized but unissued stock; all shares of restricted stock issued were from treasury stock. All remaining outstanding options were exercised during fiscal year 2014 and there were no shares available for future grants under this plan as of July 31, 2016.
The Oil-Dri Corporation of America Outside Director Stock Plan (the “Directors’ Plan”) provided for grants of stock options to directors. Stock options were granted to our directors with a one year vesting period. All remaining outstanding options were exercised during fiscal year 2014 and there were no shares available for future grants under this plan as of July 31, 2016. All shares of stock issued under the Directors’ Plan were from treasury stock.
A summary of stock option transactions under the plans is shown below.
Number of Shares (in thousands) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (in thousands) | ||||||||||
Options outstanding and exercisable at July 31, 2013 | 60 | $ | 14.25 | 2.3 | $ | 1,059 | |||||||
Exercised | (8 | ) | $ | 12.47 | $ | 151 | |||||||
Forfeited | (8 | ) | $ | 9.43 | |||||||||
Options outstanding and exercisable at July 31, 2014 | 44 | $ | 15.43 | 1.9 | $ | 611 | |||||||
Exercised | (3 | ) | $ | 15.37 | $ | 45 | |||||||
Options outstanding and exercisable at July 31, 2015 | 41 | $ | 15.43 | 0.9 | $ | 447 | |||||||
Exercised | (31 | ) | $ | 14.93 | $ | 469 | |||||||
Options outstanding and exercisable at July 31, 2016 | 10 | $ | 17.00 | 0.3 | $ | 205 | |||||||
The amount of cash received from the exercise of options during fiscal year 2016 was $467,000 and the related tax benefit was $178,000. The amount of cash received from the exercise of options during fiscal year 2015 was $50,000 and the related tax benefit was $9,000. The amount of cash received from the exercise of options during fiscal year 2014 was $93,000 and the related tax benefit was $39,000.
As of July 31, 2016, we have one stock option grant outstanding and exercisable for 10,000 shares with the exercise price and remaining contractual term as shown in the table above.
We recognized the related compensation expense over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service to us. We recognized no stock-based compensation expense related to stock options during fiscal years 2016, 2015 and 2014. As of July 31, 2016, 2015 and 2014 we had no unamortized expense associated with outstanding stock options.
RESTRICTED STOCK
All of our non-vested restricted stock as of July 31, 2016 was issued under the 2006 Plan with vesting periods from two to five years.
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A summary of restricted stock transactions under the plans is shown below.
Number of Shares (in thousands) | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Term (Years) | Unamortized Expense (in thousands) | |||||||||
Non-vested restricted stock outstanding at July 31, 2013 | 117 | $ | 22.24 | 2.1 | $ | 1,824 | ||||||
Granted | 51 | $ | 34.18 | |||||||||
Vested | (40 | ) | $ | 21.50 | ||||||||
Forfeited | (6 | ) | $ | 25.41 | ||||||||
Non-vested restricted stock outstanding at July 31, 2014 | 122 | $ | 27.31 | 2.4 | $ | 2,226 | ||||||
Granted | 11 | $ | 28.68 | |||||||||
Vested | (45 | ) | $ | 23.16 | ||||||||
Forfeited | (14 | ) | $ | 34.05 | ||||||||
Non-vested restricted stock outstanding at July 31, 2015 | 74 | $ | 28.83 | 2.1 | $ | 931 | ||||||
Granted | 166 | $ | 28.62 | |||||||||
Vested | (41 | ) | $ | 26.46 | ||||||||
Forfeited | (5 | ) | $ | 31.56 | ||||||||
Non-vested restricted stock outstanding at July 31, 2016 | 194 | $ | 29.09 | 3.8 | $ | 4,282 | ||||||
We recognized stock-based compensation related to restricted stock of $773,000, $916,000 and $880,000, net of related tax effect, in fiscal years 2016, 2015 and 2014, respectively. The total restricted stock compensation related tax benefit was $474,000, $226,000 and $309,000 in fiscal years 2016, 2015 and 2014, respectively.
NOTE 9 – PENSION AND OTHER POSTRETIREMENT BENEFITS
The Oil-Dri Corporation of American Pension Plan (“Pension Plan”) is a defined benefit pension plan for eligible salaried and hourly employees. Pension benefits are based on a formula of years of credited service and levels of compensation or stated amounts for each year of credited service.
We also provide a postretirement health benefits plan to domestic salaried employees who meet specific age, participation and length of service requirements at the time of retirement. Eligible employees may elect to continue their health care coverage under the Oil-Dri Corporation of America Employee Benefits Plan until the date certain criteria are met, including attaining the age of Medicare eligibility. We have the right to modify or terminate the postretirement health benefit plan at any time.
We also maintain a 401(k) savings plan under which we match a portion of employee contributions. This plan is available to essentially all domestic employees following a specific number of days of employment. Our contributions to this plan, and to similar plans maintained by our foreign subsidiaries, were $685,000, $683,000 and $814,000 for fiscal years 2016, 2015 and 2014, respectively.
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Obligations and Funded Status
The following tables provide a reconciliation of changes in the plans’ benefit obligations, assets’ fair values and funded status by fiscal year (in thousands):
Pension Benefits | Postretirement Health Benefits | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation, beginning of year | $ | 46,749 | $ | 44,367 | $ | 2,362 | $ | 2,770 | ||||||||
Service cost | 1,502 | 1,606 | 93 | 133 | ||||||||||||
Interest cost | 1,928 | 1,855 | 82 | 106 | ||||||||||||
Actuarial loss (gain) | 6,304 | 96 | 413 | (622 | ) | |||||||||||
Benefits paid | (1,359 | ) | (1,175 | ) | (204 | ) | (25 | ) | ||||||||
Benefit obligation, end of year | 55,124 | 46,749 | 2,746 | 2,362 | ||||||||||||
Change in plan assets: | ||||||||||||||||
Fair value of plan assets, beginning of year | 25,593 | 24,804 | — | — | ||||||||||||
Actual return on plan assets | (234 | ) | 174 | — | — | |||||||||||
Employer contribution | 1,264 | 1,790 | 204 | 25 | ||||||||||||
Benefits paid | (1,359 | ) | (1,175 | ) | (204 | ) | (25 | ) | ||||||||
Fair value of plan assets, end of year | 25,264 | 25,593 | — | — | ||||||||||||
Funded status, recorded in Consolidated Balance Sheets | $ | (29,860 | ) | $ | (21,156 | ) | $ | (2,746 | ) | $ | (2,362 | ) | ||||
The accumulated benefit obligation for the Pension Plan was $48,981,000 as of July 31, 2016 and $41,501,000 as of July 31, 2015.
The following table shows amounts recognized in the Consolidated Balance Sheets as of July 31 (in thousands):
Pension Benefits | Postretirement Health Benefits | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Deferred income taxes | $ | 10,894 | $ | 7,376 | $ | 1,041 | $ | 866 | ||||||||
Other current liabilities | $ | — | $ | — | $ | (114 | ) | $ | (89 | ) | ||||||
Other noncurrent liabilities | $ | (29,860 | ) | $ | (21,156 | ) | $ | (2,632 | ) | $ | (2,273 | ) | ||||
Accumulated other comprehensive loss (income) –net of tax: | ||||||||||||||||
Net actuarial loss | $ | 13,546 | $ | 8,909 | $ | 348 | $ | 92 | ||||||||
Prior service cost (income) | $ | 4 | $ | 9 | $ | (31 | ) | $ | (35 | ) | ||||||
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Benefit Costs and Amortizations
The following table shows the components of the net periodic pension and postretirement health benefit costs by fiscal year (in thousands):
Pension Cost | Postretirement Health Benefit Cost | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
Service cost | $ | 1,502 | $ | 1,606 | $ | 1,425 | $ | 93 | $ | 133 | $ | 111 | ||||||||||||
Interest cost | 1,928 | 1,855 | 1,761 | 82 | 106 | 110 | ||||||||||||||||||
Expected return on plan assets | (1,923 | ) | (1,877 | ) | (1,715 | ) | — | — | — | |||||||||||||||
Amortization of: | ||||||||||||||||||||||||
Net transition obligation | — | — | — | — | 1 | 16 | ||||||||||||||||||
Prior service costs (income) | 8 | 10 | 13 | (6 | ) | (6 | ) | (6 | ) | |||||||||||||||
Other actuarial loss | 981 | 584 | 343 | — | 37 | 24 | ||||||||||||||||||
Net periodic benefit cost | $ | 2,496 | $ | 2,178 | $ | 1,827 | $ | 169 | $ | 271 | $ | 255 | ||||||||||||
The following table shows amounts, net of tax, that are recognized in other comprehensive income by fiscal year (in thousands):
Pension Benefits | Postretirement Health Benefits | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net actuarial loss (gain) | $ | 5,245 | $ | 1,115 | $ | 256 | $ | (385 | ) | |||||||
Amortization of: | ||||||||||||||||
Prior service (cost) income | (5 | ) | (6 | ) | 4 | 4 | ||||||||||
Net transition obligation | — | — | — | (1 | ) | |||||||||||
Amortization of actuarial loss | (608 | ) | (361 | ) | — | (23 | ) | |||||||||
Total recognized in other comprehensive loss (income) | $ | 4,632 | $ | 748 | $ | 260 | $ | (405 | ) | |||||||
The following table shows amortization amounts, net of tax, expected to be recognized in fiscal year 2017 in accumulated other comprehensive income (in thousands):
Amortization of: | Pension Benefits | Postretirement Health Benefits | ||||||
Net actuarial loss | $ | 1,063 | $ | 16 | ||||
Prior service cost (income) | 2 | (4 | ) | |||||
Total to be recognized as other comprehensive loss | $ | 1,065 | $ | 12 | ||||
Cash Flows
We have funded the Pension Plan based upon actuarially determined contributions that take into account the amount deductible for income tax purposes, the normal cost and the minimum contribution required and the maximum contribution allowed under applicable regulations. We expect to contribute approximately $1,475,000 in fiscal year 2017.
The postretirement health plan is an unfunded plan. Our policy is to pay insurance premiums and claims from our assets.
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The following table shows the estimated future benefit payments by fiscal year (in thousands):
Pension Benefits | Postretirement Health Benefits | |||||||
2017 | $ | 1,389 | $ | 114 | ||||
2018 | $ | 1,477 | $ | 72 | ||||
2019 | $ | 1,561 | $ | 88 | ||||
2020 | $ | 1,575 | $ | 128 | ||||
2021 | $ | 1,664 | $ | 157 | ||||
2022-26 | $ | 9,895 | $ | 1,161 | ||||
Assumptions
Our pension benefit and postretirement health benefit obligations and the related effects on operations are calculated using actuarial models. Critical assumptions that are important elements of plan expenses and asset/liability measurements include discount rate and expected return on assets for the Pension Plan and health care cost trend for the postretirement health plan. 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 our experience and to meet regulatory requirements. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. The assumptions used in the previous calculations by fiscal year were as follows:
Pension Benefits | Postretirement Health Benefits | |||||||
2016 | 2015 | 2016 | 2015 | |||||
Discount rate for net periodic benefit costs | 4.22% | 4.28% | 3.51% | 3.87% | ||||
Discount rate for year-end obligations | 3.36% | 4.22% | 2.71% | 3.51% | ||||
Rate of increase in compensation levels for net periodic benefit costs | 3.50% | 3.50% | — | — | ||||
Rate of increase in compensation levels for year-end obligations | 3.50% | 3.50% | — | — | ||||
Long-term expected rate of return on assets | 7.50% | 7.50% | — | — | ||||
The discount rate was based on the Citigroup Pension Discount Curve (“CPDC”) to determine separately for the Pension Plan and the postretirement health plan, the single equivalent rate that would yield the same present value as the specific plan’s expected cash flows.
Our expected rate of return on Pension Plan assets is determined by our asset allocation, our historical long-term investment performance, our estimate of future long-term returns by asset class (using input from our actuaries, investment managers and investment advisors), and long-term inflation assumptions.
For fiscal year 2016, the medical cost trend assumption used for the postretirement health benefit cost was 7.0%. The graded trend rate is expected to decrease to an ultimate rate of 4.0% in fiscal year 2035.
The following table reflects the effect on postretirement health costs and accruals in fiscal year 2016 of a one-percentage point change in the assumed health care cost trend (in thousands):
One-Percentage Point Increase | One-Percentage Point Decrease | |||
Effect on total service and interest cost | $23 | $(20) | ||
Effect on accumulated postretirement benefit obligation | $293 | $(258) | ||
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Pension Plan Assets
The investment objective for the Pension Plan assets is to optimize long-term return at a moderate level of risk in order to secure the benefit obligations to participants at a reasonable cost. To reach this goal, our investment structure includes various asset classes, asset allocations and investment management styles that, in total, have a reasonable likelihood of producing a sufficient level of overall diversification that balances expected return with expected risk over the long-term. The Pension Plan does not invest directly in Company stock.
We measure and monitor the plan’s asset investment performance and the allocation of assets through quarterly investment portfolio reviews. Investment performance is measured by absolute returns, returns relative to benchmark indices and any other appropriate basis of comparison. The targeted allocation percentages of plan assets is shown below for fiscal year 2017 and the actual allocation as of July 31:
Asset Allocation | Target fiscal 2017 | 2016 | 2015 | |||
Cash and accrued income | 2% | —% | 12% | |||
Fixed income | 38% | 47% | 29% | |||
Equity | 60% | 53% | 59% | |||
The following table sets forth by level, within the fair value hierarchy, the Pension Plan's assets carried at fair value (in thousands):
Fair Value At July 31, 2016 | ||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | ||||||||||
Asset Class | ||||||||||||
Cash and cash equivalents(a) | $ | 48 | $ | 48 | $ | — | ||||||
Equity securities(b): | ||||||||||||
U.S. companies | 8,132 | 4,604 | 3,528 | |||||||||
International companies | 1,946 | 1,946 | — | |||||||||
Equity securities - international mutual funds: | ||||||||||||
Developed market(c) | 3,258 | — | 3,258 | |||||||||
Fixed Income: | ||||||||||||
U.S. Treasuries | 2,244 | — | 2,244 | |||||||||
Bonds(f) | 5,692 | — | 5,692 | |||||||||
Government sponsored entities(h) | 2,894 | — | 2,894 | |||||||||
Money market fund(j) | 1,050 | — | 1,050 | |||||||||
Total | $ | 25,264 | $ | 6,598 | $ | 18,666 | ||||||
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Fair Value At July 31, 2015 | ||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | ||||||||||
Asset Class | ||||||||||||
Cash and cash equivalents(a) | $ | 2,678 | $ | 2,678 | $ | — | ||||||
Equity securities(b): | ||||||||||||
U.S. companies | 9,141 | 9,119 | 22 | |||||||||
International companies | 3,178 | 3,178 | — | |||||||||
Equity securities - international mutual funds: | ||||||||||||
Developed market(c) | 1,289 | — | 1,289 | |||||||||
Emerging markets(d) | 331 | — | 331 | |||||||||
Commodities(e) | 267 | — | 267 | |||||||||
Fixed Income: | ||||||||||||
U.S. Treasuries | 3,923 | — | 3,923 | |||||||||
Bonds(f) | 1,751 | — | 1,751 | |||||||||
Floating rate debt(g) | 855 | — | 855 | |||||||||
Government sponsored entities(h) | 292 | — | 292 | |||||||||
Multi-strategy bond fund(i) | 895 | — | 895 | |||||||||
Other(k) | 993 | — | 993 | |||||||||
Total | $ | 25,593 | $ | 14,975 | $ | 10,618 | ||||||
(a) | Cash and cash equivalents consists of highly liquid investments which are traded in active markets. |
(b) | This class represents equities traded on regulated exchanges, as well as funds that invest in a portfolio of such stocks. |
(c) | These mutual funds seek long-term capital growth by investing no less than 80% of their assets in stocks of non- U.S. companies that are primarily in developed markets, but also may invest in emerging and less developed markets. |
(d) | These mutual funds seek long-term capital growth by investing at least 80% of their assets in stocks of companies located in Asia, excluding Japan. |
(e) | The majority of the investments in this class seek maximum real return by investing primarily in commodity-linked derivative instruments. Assets not invested in commodity-linked instruments may be invested in inflation-indexed securities and other fixed income instruments. |
(f) | This class includes bonds of U.S. and non-U.S. corporate issuers from diverse industries and bonds of foreign municipalities. |
(g) | This fund invests at least 80% of its net assets in first- and second-lien senior floating rate debt securities that are generally rated below investment grade. The fund may invest up to 20% of its net assets in debt securities that are lower than a senior claim on collateral and up to 20% of its net assets in senior loans made to non-U.S. borrowers. The fund may also include derivative instruments. |
(h) | This class represents a beneficial ownership interest in a pool of single-family residential mortgage loans. These investments are generally not backed by the full faith and credit of the United States government, except for securities valued for $803,776 in our portfolio. |
(i) | This class invests at least 80% of its net assets in bonds and other fixed income instruments issued by governmental or private-sector entities. More than 50% of its net assets are invested in mortgage-backed securities. The fund may invest up to 33 1/3% of its net assets in high-yield bonds, bank loans and assignments and credit default swaps. |
(j) | These money market mutual funds seek to provide current income consistent with liquidity and stability of principal by investing in a diversified portfolio of high quality, short-term, dollar-denominated debt securities. These funds may include securities issued or guaranteed as to principal and interest by the U.S. government or its agencies, short-term securities issued by domestic or foreign banks, domestic and dollar-denominated foreign commercial papers, and other short-term corporate obligations and obligations issued or guaranteed by one or more foreign governments. |
(k) | This class seeks long-term positive returns by employing a number of arbitrage and alternative investment strategies. The portfolio of instruments may include equities, convertible securities, debt securities, warrants, options, swaps, future contracts, forwards or other types of derivative instruments. |
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NOTE 10 – DEFERRED COMPENSATION
Oil-Dri's deferred compensation plans permit directors and certain management employees to defer portions of their compensation and to earn interest on the deferred amounts. Participants have deferred $483,000 and $318,000 into these plans in fiscal years 2016 and 2015, respectively. We recorded $438,000 and $428,000 of interest expense associated with these plans in fiscal years 2016 and 2015, respectively. Payments to participants were $570,000 and $450,000 in fiscal years 2016 and 2015, respectively, and the total liability recorded for deferred compensation was $9,117,000 and $8,623,000 at July 31, 2016 and 2015, respectively.
The Oil-Dri Corporation of America Annual Incentive Plan provides certain executives with the opportunity to receive a deferred executive bonus award if certain financial goals are met. A total of $763,000 was awarded to certain executives for fiscal year 2016 and will vest and accrue interest over a three-year period. Financial targets under the provisions of the plan were not achieved to merit an award for fiscal year 2015.
Both of the above deferred compensation plans are unfunded. We fund these benefits when payments are made, and the timing and amount of the payments are determined according to the plans' provisions and, for certain plans, according to individual employee agreements.
The Oil-Dri Corporation of America SERP provides certain retired participants in the Pension Plan with the amount of benefits that would have been provided under the Pension Plan but for: (1) the limitations on benefits imposed by Section 415 of the Internal Revenue Code (“Code”), and/or (2) the limitation on compensation for purposes of calculating benefits under the Pension Plan imposed by Section 401(a)(17) of the Code. The SERP liability is actuarially determined at the end of each fiscal year using assumptions similar to those used for the Pension Plan, see Note 9 of the Notes to the Consolidated Financial Statements. The SERP liability recorded at July 31, 2016 was $1,968,000, which was higher than the $1,433,000 liability recorded at July 31, 2015 due primarily to a decrease in the discount rate. We recorded expense related to the SERP of $535,000 in fiscal year 2016 and $178,000 in fiscal year 2015. The SERP is unfunded and we will fund benefits when payments are made.
NOTE 11 – OTHER CONTINGENCIES
We are party to various legal actions from time to time that are ordinary in nature and incidental to the operation of our business. While it is not possible at this time to determine with certainty the ultimate outcome of these or other lawsuits, we believe that none of the pending proceedings will have a material adverse effect on our business, financial condition, results of operations or cash flows. See Item 3 “Legal Proceedings” for more information about specific legal matters related to our patents.
NOTE 12 – LEASES
Our mining operations are conducted on property we lease or own. These leases generally provide us with the right to mine as long as we continue to pay a minimum monthly rental, which is typically applied against the per ton royalty when the property is mined. We also lease certain offices and production facilities. In addition, we may lease vehicles, railcars, mining property and equipment, warehouse space, data processing equipment, and office equipment. In most cases, we expect that, in the normal course of business, leases will be renewed or replaced by other leases.
The following is a schedule by fiscal year of future minimum rent requirements under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of July 31, 2016 (in thousands):
2017 | $ | 1,530 | |
2018 | $ | 1,366 | |
2019 | $ | 1,096 | |
2020 | $ | 847 | |
2021 | $ | 728 | |
Later years | $ | 9,166 | |
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The following schedule shows the composition of total rent expense by fiscal year for all operating leases, including those with terms of one month or less which were not renewed (in thousands):
2016 | 2015 | 2014 | ||||||||||
Vehicles and Railcars | $ | 1,439 | $ | 1,559 | $ | 1,818 | ||||||
Office facilities | 945 | 928 | 890 | |||||||||
Warehouse facilities | 419 | 311 | 235 | |||||||||
Mining properties: | ||||||||||||
Minimum | 124 | 123 | 292 | |||||||||
Contingent (1) | 239 | 239 | 162 | |||||||||
Other | 61 | 46 | 108 | |||||||||
$ | 3,227 | $ | 3,206 | $ | 3,505 | |||||||
(1) Contingent mining royalty payments are determined based on the tons of raw clay mined.
As of July 31, 2014, we had a capital lease for three pieces of equipment used at our manufacturing facilities. All scheduled lease payments had been made as of the 2014 fiscal year-end and the remaining obligation of $1,330,000, which was included in other accrued expenses on the Consolidated Balance Sheets, represented the purchase option price to obtain title to the equipment, which we paid in fiscal year 2015. As of July 31, 2014, the assets under capital lease were included on the Consolidated Balance Sheets in machinery and equipment for $1,523,000, and in accumulated depreciation and amortization for $32,000. Depreciation expense related to these assets was included in cost of sales on the fiscal year 2014 Consolidated Statements of Operations. There were no capital leases during fiscal years 2016 or 2015.
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NOTE 13 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected information for fiscal years 2016 and 2015 is as follows (in thousands, except for per share amounts):
Fiscal Year 2016 Quarter Ended | ||||||||||||||||||||
October 31 | January 31 | April 30 | July 31 | Fiscal 2016 | ||||||||||||||||
Net Sales | $ | 67,795 | $ | 65,367 | $ | 64,235 | $ | 64,916 | $ | 262,313 | ||||||||||
Gross Profit | $ | 20,653 | $ | 19,062 | $ | 18,568 | $ | 18,866 | $ | 77,149 | ||||||||||
Net Income (Loss) | $ | 5,423 | $ | 3,821 | $ | (892 | ) | $ | 5,261 | $ | 13,613 | |||||||||
Net Income Per Share | ||||||||||||||||||||
Basic Common | $ | 0.82 | $ | 0.57 | $ | (0.14 | ) | $ | 0.78 | $ | 2.04 | |||||||||
Basic Class B Common | $ | 0.61 | $ | 0.43 | $ | (0.10 | ) | $ | 0.59 | $ | 1.53 | |||||||||
Diluted Common | $ | 0.75 | $ | 0.53 | $ | (0.13 | ) | $ | 0.72 | $ | 1.87 | |||||||||
Dividends Per Share | ||||||||||||||||||||
Common | $ | 0.2100 | $ | 0.2100 | $ | 0.2100 | $ | 0.2200 | $ | 0.8500 | ||||||||||
Class B Common | $ | 0.1575 | $ | 0.1575 | $ | 0.1575 | $ | 0.1650 | $ | 0.6375 | ||||||||||
Common Stock Price Range | ||||||||||||||||||||
High | $ | 31.61 | $ | 38.92 | $ | 38.43 | $ | 37.67 | ||||||||||||
Low | $ | 21.65 | $ | 28.42 | $ | 32.24 | $ | 29.89 | ||||||||||||
Fiscal Year 2015 Quarter Ended | ||||||||||||||||||||
October 31 | January 31 | April 30 | July 31 | Fiscal 2015 | ||||||||||||||||
Net Sales | $ | 66,044 | $ | 64,643 | $ | 65,196 | $ | 65,519 | $ | 261,402 | ||||||||||
Gross Profit | $ | 13,769 | $ | 15,233 | $ | 14,433 | $ | 16,722 | $ | 60,157 | ||||||||||
Net Income | $ | 2,120 | $ | 2,797 | $ | 1,385 | $ | 5,066 | $ | 11,368 | ||||||||||
Net Income Per Share | ||||||||||||||||||||
Basic Common | $ | 0.32 | $ | 0.43 | $ | 0.21 | $ | 0.77 | $ | 1.73 | ||||||||||
Basic Class B Common | $ | 0.24 | $ | 0.32 | $ | 0.16 | $ | 0.58 | $ | 1.30 | ||||||||||
Diluted Common | $ | 0.30 | $ | 0.39 | $ | 0.19 | $ | 0.71 | $ | 1.59 | ||||||||||
Dividends Per Share | ||||||||||||||||||||
Common | $ | 0.2000 | $ | 0.2000 | $ | 0.2000 | $ | 0.2100 | $ | 0.8100 | ||||||||||
Class B Common | $ | 0.1500 | $ | 0.1500 | $ | 0.1500 | $ | 0.1575 | $ | 0.6075 | ||||||||||
Common Stock Price Range | ||||||||||||||||||||
High | $ | 31.30 | $ | 32.93 | $ | 34.19 | $ | 33.44 | ||||||||||||
Low | $ | 24.02 | $ | 26.60 | $ | 28.30 | $ | 25.92 | ||||||||||||
NOTE 14 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date the financial statements were issued. Based on our evaluation no events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15f. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013 framework) issued by the Committee Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, our management concluded that our internal control over financial reporting was effective as of July 31, 2016.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our internal controls over financial reporting as of July 31, 2016 have been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which appears on the next page of this Annual Report on Form 10-K.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Oil-Dri Corporation of America
We have audited the accompanying consolidated balance sheets of Oil-Dri Corporation of America (a Delaware corporation) and subsidiaries (the “Company”) as of July 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended July 31, 2016. Our audits of the basic consolidated financial statements included the financial statement schedules listed in the index appearing under Item 15(a)(2). We also have audited the Company’s internal control over financial reporting as of July 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Oil-Dri Corporation of America and subsidiaries as of July 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
/s/ GRANT THORNTON LLP
Chicago, Illinois
October 7, 2016
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ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Form 10-K. The controls evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting is set forth in Part II, Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
ITEM 9B – OTHER INFORMATION
None.
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PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item (except as set forth below) is contained in Oil-Dri’s Proxy Statement for its 2016 annual meeting of stockholders under the captions “1. Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Director Nominations,” “Audit Committee” and “Corporate Governance Matters” and is incorporated herein by this reference.
The Company has adopted a Code of Ethics and Business Conduct (the “Code”) which applies to all of its directors, officers (including the Company’s Chief Executive Officer and senior financial officers) and employees. The Code imposes significant responsibilities on the Chief Executive Officer and the senior financial officers of the Company. The Code, the Company’s Corporate Governance Guidelines and the charter of its Audit Committee may be viewed on the Company’s website at www.oildri.com and are available in print to any person upon request to Investor Relations, Oil-Dri Corporation of America, 410 North Michigan Avenue, Suite 400, Chicago, Illinois 60611-4213, telephone (312) 321-1515 or e-mail to info@oildri.com. Any amendment to, or waiver of, a provision of the Code which applies to the Company’s Chief Executive Officer or senior financial officers and relates to the elements of a “code of ethics” as defined by the SEC will also be posted on the Company’s website. As allowed by the “controlled company” exemption to certain NYSE rules, the Company does not have a nominating/corporate governance committee and its compensation committee does not have a charter.
ITEM 11 – EXECUTIVE COMPENSATION
The information required by this Item is contained in Oil-Dri’s Proxy Statement for its 2016 annual meeting of stockholders under the captions “Executive Compensation,” “Report of the Compensation Committee of the Board of Directors,” “Director Compensation,” “Compensation Committee” and “Compensation Committee Interlocks and Insider Participation” and is incorporated herein by reference.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is contained in Oil-Dri’s Proxy Statement for its 2016 annual meeting of stockholders under the captions “Principal Stockholders,” “Security Ownership of Management” and “Equity Compensation Plans” and is incorporated herein by reference.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is contained in Oil-Dri’s Proxy Statement for its 2016 annual meeting of stockholders under the captions “Certain Relationships and Related Party Transactions” and “Director Independence” and is incorporated herein by reference.
ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is contained in Oil-Dri’s Proxy Statement for its 2016 annual meeting of stockholders under the caption “Auditor Fees” and is incorporated herein by reference.
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PART IV
ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a)(1) | The following consolidated financial statements are contained herein. | |
Consolidated Balance Sheets as of July 31, 2016 and July 31, 2015. | ||
Consolidated Statements of Operations for the fiscal years ended July 31, 2016, July 31, 2015 and July 31, 2014. | ||
Consolidated Statements of Comprehensive Income for the fiscal years ended July 31, 2016, July 31, 2015 and July 31, 2014. | ||
Consolidated Statements of Stockholders’ Equity for the fiscal years ended July 31, 2016, July 31, 2015 and July 31, 2014. | ||
Consolidated Statements of Cash Flows for the fiscal years ended July 31, 2016, July 31, 2015 and July 31, 2014. | ||
Notes to Consolidated Financial Statements. | ||
Report of Independent Registered Public Accounting Firm. | ||
(a)(2) | The following financial statement schedule is contained herein: | |
Schedule to Financial Statements, as follows: | ||
Schedule II - Valuation and Qualifying Accounts, years ended July 31, 2016, July 31, 2015 and July 31, 2014. | ||
All other schedules are omitted because they are inapplicable, not required under the instructions or the information is included in the consolidated financial statements or notes thereto. | ||
(a)(3) | The following documents are exhibits to this Report: | |
Exhibit | ||||
No. | Description | SEC Document Reference | ||
3.1 | Certificate of Incorporation of Oil-Dri, as amended. | Incorporated by reference to Exhibit 4.1 to Oil-Dri’s Registration Statement on Form S-8 (Registration No. 333-57625), filed on June 24, 1998. | ||
3.2 | By-Laws of Oil-Dri Corporation of America, as Amended and Restated on December 5, 2006. | Incorporated by reference to Exhibit 3.1 to Oil-Dri’s (file No. 001-12622) Current Report on Form 8-K filed on December 11, 2006. | ||
10.1 | Memorandum of Agreement #1450 “Fresh Step“® dated as of March 12, 2001 between A&M Products Manufacturing Company and Oil-Dri (confidential treatment of certain portions of this exhibit has been granted). | Incorporated by reference to Exhibit 10(s) to Oil-Dri’s (File No. 001-12622) Current Report on Form 8-K filed on May 1, 2001. | ||
10.2 | First Amendment, dated as of December 13, 2002, to Memorandum of Agreement #1450 “Fresh Step”® dated as of March 12, 2001. | Incorporated by reference to Exhibit 10.2 to Oil-Dri’s (File No. 001-12622) Annual Report on Form 10-K for the fiscal year ended July 31, 2007. | ||
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Exhibit | ||||
No. | Description | SEC Document Reference | ||
10.3 | Second Amendment, dated as of October 15, 2007, to Memorandum of Agreement #1450 “Fresh Step”® dated as of March 12, 2001 (confidential treatment of certain portions of this exhibit has been granted). | Incorporated by reference to Exhibit 10.1 to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended October 31, 2007. | ||
10.4 | Third Amendment, dated as of May 27, 2016, to Memorandum of Agreement #1450 “Fresh Step”® dated as of March 12, 2001 (confidential treatment of certain portions of this exhibit have been requested). | Filed herewith. | ||
10.5 | Exclusive Supply Agreement dated May 19, 1999 between Church & Dwight Co., Inc. and Oil-Dri (confidential treatment of certain portions of this exhibit has been granted). | Incorporated by reference to Exhibit (10)(r) to Oil-Dri’s (File No. 001-12622) Annual Report on Form 10-K for the fiscal year ended July 31, 1999. | ||
10.6 | $15,000,000 Credit Agreement, dated January 27, 2006 among the Company, certain subsidiaries of the Company and Harris N.A. | Incorporated by reference to Exhibit 10.1 to Oil-Dri’s (File No. 001-12622) Current Report on Form 8-K filed on February 1, 2006. | ||
10.7 | First Amendment, dated as of December 19, 2008 to Credit Agreement dated as of January 27, 2006. | Incorporated by reference to Exhibit 10.1 to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended January 31, 2009. | ||
10.8 | Second Amendment, dated as of December 21, 2011 to Credit Agreement dated as of January 27, 2006. | Incorporated by reference to Exhibit 10 to Oil-Dri’s (File No. 001-12622) Current Report on Form 8-K filed on December 28, 2011. | ||
10.9 | Third Amendment, dated as of June 21, 2012 to Credit Agreement dated as of January 27, 2006. | Incorporated by reference to Exhibit 10.12 to Oil-Dri’s (File No. 001-12622) Annual Report on Form 10-K for the fiscal year ended July 31, 2012. | ||
10.10 | Fourth Amendment, dated as of December 4, 2014 to Credit Agreement dated as of January 27, 2006. | Incorporated by reference to Exhibit 10.1 to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended October 31, 2014. | ||
10.11 | $15,000,000 Note Agreement dated as of December 16, 2005 among the Company, The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company. | Incorporated by reference to Exhibit 10.1 to Oil-Dri’s (File No. 001-12622) Current Report on Form 8-K filed on December 22, 2005. | ||
10.12 | First Amendment, dated as of July 12, 2006 to Note Agreement dated as of December 16, 2005. | Incorporated by reference to Exhibit 10.9 to Oil-Dri’s (File No. 001-12622) Annual Report on Form 10-K for the fiscal year ended July 31, 2006. | ||
10.13 | $18,500,000 Note Agreement dated as of November 12, 2010 among Oil-Dri Corporation of America, The Prudential Insurance Company of America, Prudential Retirement Insurance and Annuity Company, Forethought Life Insurance Company, Physicians Mutual Insurance Company and BCBSM, Inc. dba Blue Cross and Blue Shield of Minnesota. | Incorporated by reference to Exhibit 10.2 to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended October 31, 2010. | ||
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Exhibit | ||||
No. | Description | SEC Document Reference | ||
10.14 | Description of 1987 Executive Deferred Compensation Program.* | Incorporated by reference to Exhibit (10)(f) to Oil-Dri’s (File No. 001-12622) Annual Report on Form 10-K for the fiscal year ended July 31, 1988. | ||
10.15 | Salary Continuation Agreement dated August 1, l989 between Richard M. Jaffee and Oil-Dri (“1989 Agreement”).* | Incorporated by reference to Exhibit (10)(g) to Oil-Dri’s (File No. 001-12622) Annual Report on Form 10-K for the fiscal year ended July 31, 1989. | ||
10.16 | Extension and Amendment, dated October 9, 1998, to the 1989 Agreement.* | Incorporated by reference to Exhibit 10.12 to Oil-Dri’s (File No. 001-12622) Annual Report on Form 10-K for the fiscal year ended July 31, 2006. | ||
10.17 | Second Amendment, effective October 31, 2000, to the 1989 Agreement.* | Incorporated by reference to Exhibit 99.1 to Oil-Dri’s (File No. 001-12622) Current Report on Form 8-K filed on November 13, 2000. | ||
10.18 | Third Amendment, dated as of January 31, 2006, to the 1989 Agreement.* | Incorporated by reference to Exhibit 10.1 to Oil-Dri’s (File No. 001-12622) Current Report on Form 8-K filed on February 13, 2006. | ||
10.19 | Fourth Amendment, dated as of October 14, 2010, to the 1989 Agreement.* | Incorporated by reference to Exhibit 10.1 to Oil-Dri’s (File No. 001-12622) Current Report on Form 8-K filed on October 14, 2010. | ||
10.20 | Oil-Dri Corporation of America Deferred Compensation Plan, as amended and restated effective April 1, 2003.* | Incorporated by reference to Exhibit (10)(j)(1) to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended April 30, 2003. | ||
10.21 | First Amendment, effective as of January 1, 2007, to Oil-Dri Corporation of America Deferred Compensation Plan, as amended and restated effective April 1, 2003.* | Incorporated by reference to Exhibit 10.1 to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended January 31, 2008. | ||
10.22 | Second Amendment, effective as of January 1, 2008, to Oil-Dri Corporation of America Deferred Compensation Plan, as amended and restated effective April 1, 2003.* | Incorporated by reference to Exhibit 10.2 to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended January 31, 2008. | ||
10.23 | Oil-Dri Corporation of America 1995 Long-Term Incentive Plan as amended and restated effective June 9, 2000.* | Incorporated by reference to Exhibit (10)(k) to Oil-Dri’s (File No. 001-12622) Annual Report on Form 10-K for the fiscal year ended July 31, 2000. | ||
10.24 | Supplemental Executive Retirement Plan dated April 1, 2003.* | Incorporated by reference to Exhibit (10)(1) to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended April 30, 2003. | ||
10.25 | Oil-Dri Corporation of America Outside Director Stock Plan as amended and restated effective October 16, 1999.* | Incorporated by reference to Exhibit (10)(n) to Oil-Dri’s (File No. 001-12622) Annual Report on Form 10-K for the fiscal year ended July 31, 2000. | ||
10.26 | Oil-Dri Corporation of America Annual Incentive Plan (as amended and restated effective January 1, 2008).* | Incorporated by reference to Exhibit 10.4 to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended January 31, 2008. | ||
74
Exhibit | ||||
No. | Description | SEC Document Reference | ||
10.27 | Oil-Dri Corporation of America 2005 Deferred Compensation Plan (as amended and restated effective January 1, 2008)* | Incorporated by reference to Exhibit 10.3 to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended January 31, 2008. | ||
10.28 | Oil-Dri Corporation of America 2006 Long Term Incentive Plan (as amended and restated effective July 28, 2006)* | Incorporated by reference to Appendix A to Oil-Dri’s (File No. 001-12622) Definitive Proxy Statement on Schedule 14A filed on November 3, 2006. | ||
10.29 | First Amendment, effective as of January 1, 2008, to Oil-Dri Corporation of America 2006 Long Term Incentive Plan (as amended and restated effective July 28, 2006)* | Incorporated by reference to Exhibit 10.5 to Oil-Dri’s (File No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended January 31, 2008. | ||
10.30 | Second Amendment, effective as of October 15, 2015, to Oil-Dri Corporation of America 2006 Long Term Incentive Plan (as previously amended and restated effective July 28, 2006)* | Incorporated by reference to Appendix A to Oil-Dri’s (File No. 001-12622) Definitive Proxy Statement on Schedule 14A filed on October 28, 2015. | ||
10.31 | Form of Oil-Dri Corporation of America 2006 Long Term Incentive Plan Employee Stock Option Agreement for Class A Common Stock.* | Incorporated by reference to Exhibit 10.2 to Oil-Dri’s (file No. 001-12622) Current Report on Form 8-K filed on December 11, 2006. | ||
10.32 | Form of Oil-Dri Corporation of America 2006 Long Term Incentive Plan Employee Stock Option Agreement for Common Stock.* | Incorporated by reference to Exhibit 10.3 to Oil-Dri’s (file No. 001-12622) Current Report on Form 8-K filed on December 11, 2006. | ||
10.33 | Form of Oil-Dri Corporation of America 2006 Long Term Incentive Plan Employee Stock Option Agreement for Class B Stock.* | Incorporated by reference to Exhibit 10.4 to Oil-Dri’s (file No. 001-12622) Current Report on Form 8-K filed on December 11, 2006. | ||
10.34 | Form of Oil-Dri Corporation of America 2006 Long Term Incentive Plan Director Stock Option Agreement for Common Stock.* | Incorporated by reference to Exhibit 10.5 to Oil-Dri’s (file No. 001-12622) Current Report on Form 8-K filed on December 11, 2006. | ||
10.35 | Form of Oil-Dri Corporation of America 2006 Long Term Incentive Plan Restricted Stock Agreement for Class A Common Stock.* | Incorporated by reference to Exhibit 10.6 to Oil-Dri’s (file No. 001-12622) Current Report on Form 8-K filed on December 11, 2006. | ||
10.36 | Form of Oil-Dri Corporation of America 2006 Long Term Incentive Plan Restricted Stock Agreement for Common Stock.* | Incorporated by reference to Exhibit 10.7 to Oil-Dri’s (file No. 001-12622) Current Report on Form 8-K filed on December 11, 2006. | ||
10.37 | Form of Oil-Dri Corporation of America 2006 Long Term Incentive Plan Restricted Stock Agreement for Class B Stock.* | Incorporated by reference to Exhibit 10.8 to Oil-Dri’s (file No. 001-12622) Current Report on Form 8-K filed on December 11, 2006. | ||
10.38 | Letter Agreement, dated as of April 23, 2015, between Oil-Dri Corporation of America and Paul D. Ziemnisky, Jr.* | Incorporated by reference to Exhibit 10.1 to Oil-Dri’s (file No. 001-12622) Quarterly Report on Form 10-Q for the quarter ended April 30, 2015. | ||
11.1 | Statement re: Computation of Net Income Per Share. | Filed herewith. | ||
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Exhibit | ||||
No. | Description | SEC Document Reference | ||
14.1 | Code of Ethics | Available at Oil-Dri’s website at www.oildri.com or in print upon request to Investor Relations, Oil-Dri Corporation of America, 410 North Michigan Avenue, Suite 400, Chicago, IL 60611-4213, telephone (312) 321-1515 or e-mail to info@oildri.com. | ||
21.1 | Subsidiaries of Oil-Dri Corporation of America | Filed herewith. | ||
23.1 | Consent of Independent Registered Public Accounting Firm | Filed herewith. | ||
31.1 | Certifications pursuant to Rule 13a – 14(a). | Filed herewith. | ||
32.1 | Certifications pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002. | Furnished herewith. | ||
95 | Mine Safety Disclosure | Filed herewith. | ||
101.INS | XBRL Taxonomy Instance Document | Furnished herewith. | ||
101.SCH | XBRL Taxonomy Extension Schema Document | Furnished herewith. | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Furnished herewith. | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Furnished herewith. | ||
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | Furnished herewith. | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | Furnished herewith. | ||
* | Management contract or compensatory plan or arrangement. | |||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Oil-Dri has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OIL-DRI CORPORATION OF AMERICA | |||
(Registrant) | |||
By | /s/ Daniel S. Jaffee | ||
Daniel S. Jaffee | |||
President and Chief Executive Officer, Director | |||
Dated: October 7, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Oil-Dri and in the capacities and on the dates indicated:
/s/ Richard M. Jaffee | October 7, 2016 | |
Richard M. Jaffee | ||
Chairman of the Board of Directors | ||
/s/ Daniel S. Jaffee | October 7, 2016 | |
Daniel S. Jaffee | ||
President and Chief Executive Officer, Director | ||
(Principal Executive Officer) | ||
/s/ Daniel T. Smith | October 7, 2016 | |
Daniel T. Smith | ||
Vice President, Chief Financial Officer | ||
(Principal Financial Officer) | ||
/s/ Paula J. Krystopolski | October 7, 2016 | |
Paula J. Krystopolski | ||
Corporate Controller | ||
(Controller) | ||
/s/ J. Steven Cole | October 7, 2016 | |
J. Steven Cole | ||
Director | ||
/s/ Joseph C. Miller | October 7, 2016 | |
Joseph C. Miller | ||
Vice Chairman of the Board of Directors | ||
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/s/ Michael A. Nemeroff | October 7, 2016 | |
Michael A. Nemeroff | ||
Director | ||
/s/ Allan H. Selig | October 7, 2016 | |
Allan H. Selig | ||
Director | ||
/s/ Paul E. Suckow | October 7, 2016 | |
Paul E. Suckow | ||
Director | ||
/s/ Lawrence E. Washow | October 7, 2016 | |
Lawrence E. Washow | ||
Director | ||
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SCHEDULE II
OIL-DRI CORPORATION OF AMERICA AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended July 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
(in thousands) | ||||||||||||
Allowance for doubtful accounts and cash discounts: | ||||||||||||
Balance, beginning of year | $ | 761 | $ | 707 | $ | 641 | ||||||
Additions | 49 | 169 | 69 | |||||||||
Deductions* | (57 | ) | (115 | ) | (3 | ) | ||||||
Balance, end of year | $ | 753 | $ | 761 | $ | 707 | ||||||
* Net of recoveries. | ||||||||||||
Valuation reserve for income taxes: | ||||||||||||
Balance, beginning of year | $ | 2,210 | $ | 3,459 | $ | 3,205 | ||||||
Additions charged to expense | (1,040 | ) | (1,249 | ) | 254 | |||||||
Balance, end of year | $ | 1,170 | $ | 2,210 | $ | 3,459 | ||||||
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EXHIBITS
Exhibit No. | Description | |
10.4 | Third Amendment, dated as of May 27, 2016, to Memorandum of Agreement #1450 “Fresh Step”® dated as of March 12, 2001 (confidential treatment of certain portions of this exhibit has been requested). | |
11.1 | Statement Re: Computation of Net Income Per Share | |
21.1 | Subsidiaries of Oil-Dri Corporation of America | |
23.1 | Consent of Independent Registered Public Accounting Firm | |
31.1 | Certifications by Daniel S. Jaffee, President and Chief Executive Officer and Daniel T. Smith, Vice President and Chief Financial Officer, required by Rule 13a-14(a) | |
32.1 | Certifications pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 | |
95 | Mine Safety Disclosure | |
101.INS | XBRL Taxonomy Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |
Note: | Stockholders may receive copies of the above listed exhibits, without fee, by written request to Investor Relations, Oil-Dri Corporation of America, 410 North Michigan Avenue, Suite 400, Chicago, Illinois 60611-4213, telephone (312) 321-1515 or e-mail to info@oildri.com. | |
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EXHIBIT 10.4:
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS DOCUMENT. THE REDACTED MATERIAL IS INDICATED IN THIS DOCUMENT WITH BRACKETED DOUBLE ASTERISKS ([**]) AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATEMENT.
The Clorox International Company
THIRD AMENDMENT TO MEMORANDUM OF AGREEMENT NO. 1450
______________________________________________________________________
This THIRD AMENDMENT to MEMORANDUM OF AGREEMENT No. 1450 (the “Third Amendment”) is made this 27th day of May 2016, by and between A & M Products Manufacturing Company, 1221 Broadway, Oakland, CA 94612 (“Buyer”), and Oil-Dri Corporation of America, 410 N. Michigan Ave., Chicago, IL 60611 (“Seller”).
RECITALS
A. | Buyer and Seller are parties to Memorandum of Agreement #1450, dated March 12, 2001, as amended by the First Amendment, dated December 13, 2002, and the Second Amendment, dated October 15, 2007 (the “Original Agreement”); and |
B. | Seller and Buyer wish to amend the Original Agreement as hereinafter set forth. |
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and accepted, the parties hereby agree to amend the Original Agreement as follows:
1. | The Original Agreement is amended by the addition of SCHEDULE II PRODUCT SPECIFICATIONS, which is attached hereto as Exhibit A (the “New Product Specifications”). The New Product Specifications shall apply as of the date the Seller has successfully installed the equipment referenced in Section 3 below and is able to meet the New Product Specifications (the “Start Date”). |
2. | As of the Start Date, the Base Price of MOA 1450 will be increased $[**] per ton (which is estimated to be $[**] per case) to accommodate the New Product Specifications. |
3. | The Seller agrees to purchase the equipment, at its own expense, as outlined in Exhibit B. |
4. | The terms of the Original Agreement shall remain in full force and effect except as amended, modified and superseded hereby. Capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Original Agreement. |
5. | The parties represent and warrant to each other that any person or entity purporting to have the authority to enter into this Third Amendment on behalf of or for the benefit of a party has such authority. |
6. | This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Any signature page delivered by facsimile, pdf or DocuSign system shall be binding to the same extent as an original signature page. |
[The remainder of this page is intentionally left blank. Signature page follows.]
IN WITNESS WHEREOF, the undersigned have caused this Third Amendment to be signed, all as of the date first written above.
BUYER: A & M Products Manufacturing Company, a Delaware corporation By: Javier Ortega Title: Director, Global Strategic Sourcing Signature:/s/ Javier Ortega Date:6/2/16___________________________ | SELLER: OIL-DRI CORPORATION OF AMERICA, A Delaware corporation By (print name): Jeffrey M. Libert Title: Vice President, Planning and Analysis and Treasurer Signature:/s/ Jeff Libert____ Date: 6/2/16__________________________ |
EXHIBIT A - SCHEDULE II
PRODUCT SPECIFICATIONS
Revised: 2/25/16
DIR 121110: Paw Points Program Requirements
The Paw Points promotional program applies to all Fresh Step skus supplied by the Seller, unless otherwise stated by Clorox.
The Paw Points code shall comply with the following specifications, reference component specifications as needed for additional details:
[**]
Responsibilities for Code Application & Inspection by Filling Plant Location:
• | Components without properly printed codes must not be shipped without Clorox’s authorization. |
Visually check codes for legibility, location, orientation, size, and completeness once per hour in conjunction with standard quality checks
Contingency plan to use reverse printed stickers is approved given that Filling Plant Location can insure stickers will not detach or become illegible in transit.
• | Items with missing or illegible codes shall be governed by the “Quality” section of the MOA/Quality Defect Process. |
Scrap materials with printed codes do not require any special handling and may be disposed of via Filling Location’s standard practice. Filling Plant Location shall not be held liable for unauthorized redemption of discarded codes.
Filling Plant Location shall connect directly with their [**] contact to order new codes; allow 5-19 days advanced notice if possible. Reference the Code Request Form xls attached to DIR 121110.
Referenced Code Appearance Photos:
Multiwall Bags
EXHIBIT B - SCHEDULE IV
EQUIPMENT PURCHASE AGREEMENT
The Seller agrees to purchase the equipment below in order to meet the product specifications as defined in Exhibit A.
BETWEEN A & M Products Manufacturing Company, 1221 Broadway, Oakland, CA 94612 (“Buyer”), and Oil-Dri Corporation of America, 410 N. Michigan Ave., Chicago, IL 60611 (“Seller”).
A. | Equipment. |
(1) | Seller will install and procure the Equipment outlined in the table below to meet Buyer’s Product Specifications. |
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Equipment Description | Quantity/Unit | Product # | Unit Cost |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 2 | [**] | $[**] |
[**] | 4 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 2 | [**] | $[**] |
[**] | 4 | [**] | $[**] |
[**] | 1 | [**] | $[**] |
[**] | 4 | [**] | $[**] |
[**] | $[**] | ||
[**] | $[**] | ||
B. |
IN WITNESS WHEREOF, the undersigned have caused this Third Amendment to be signed, all as of the date first written above.
BUYER: A & M Products Manufacturing Company, a Delaware corporation By: Javier Ortega Title: Director, Global Strategic Sourcing Signature: /s/ Javier Ortega__ Date:6/2/16____________________________ | SELLER: OIL-DRI CORPORATION OF AMERICA, A Delaware corporation By (print name): Jeffrey M. Libert Title: Vice President, Planning and Analysis and Treasurer Signature: /s/Jeff Libert____ Date: 6/2/16__________________________ |
EXHIBIT 11.1:
OIL-DRI CORPORATION OF AMERICA
Computation of Net Income Per Share
(in thousands except for per share amounts)
Year Ended July 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net income available to stockholders | $ | 13,613 | $ | 11,368 | $ | 8,356 | |||||
Less: Distributed and undistributed earnings allocated to nonvested restricted stock | (315 | ) | (147 | ) | (128 | ) | |||||
Earnings available to common shareholders | $ | 13,298 | $ | 11,221 | $ | 8,228 | |||||
Shares Calculation | |||||||||||
Average shares outstanding - Basic Common | 4,986 | 4,955 | 4,981 | ||||||||
Average shares outstanding - Basic Class B Common | 2,050 | 2,019 | 2,001 | ||||||||
Potential Common Stock relating to stock options and non-vested restricted stock | 58 | 63 | 22 | ||||||||
Average shares outstanding - Assuming dilution | 7,094 | 7,037 | 7,004 | ||||||||
Net Income Per Share: Basic Common | $ | 2.04 | $ | 1.73 | $ | 1.27 | |||||
Net Income Per Share: Basic Class B Common | $ | 1.53 | $ | 1.30 | $ | 0.96 | |||||
Net Income Per Share: Diluted Common | $ | 1.87 | $ | 1.59 | $ | 1.17 | |||||
EXHIBIT 21.1:
SUBSIDIARIES OF OIL-DRI CORPORATION OF AMERICA
Subsidiary | State or Country of Organization | |
Amlan Trading (Shenzhen) Company, Ltd. | China | |
Blue Mountain Production Company | Mississippi | |
Mounds Management, Inc. | Delaware | |
Mounds Production Company, LLC | Illinois | |
ODC Acquisition Corp. | Illinois | |
Oil-Dri Canada ULC | Canada | |
Oil-Dri Corporation of Georgia | Georgia | |
Amlan International | Nevada | |
Oil-Dri Production Company | Mississippi | |
Oil-Dri SARL | Switzerland | |
Oil-Dri (U.K.) Limited | United Kingdom | |
Taft Production Company | Delaware | |
EXHIBIT 23.1:
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated October 7, 2016, with respect to the consolidated financial statements, schedule, and internal control over financial reporting included in the Annual Report of Oil-Dri Corporation of America on Form 10-K for the year ended July 31, 2016. We consent to the incorporation by reference of said report in the Registration Statements of Oil-Dri Corporation of America on Form S-8 (File No. 333-139550).
/s/ GRANT THORNTON LLP
Chicago, Illinois
October 7, 2016
EXHIBIT 31.1:
CERTIFICATIONS PURSUANT TO RULE 13A -14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Certification of Principal Executive Officer
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Daniel S. Jaffee, certify that:
1. | I have reviewed this Annual Report on Form 10-K of Oil-Dri Corporation of America (the “registrant”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: | October 7, 2016 |
By: | /s/ Daniel S. Jaffee |
Daniel S. Jaffee President and Chief Executive Officer | |
EXHIBIT 31.1 (CONTINUED):
Certification of a Principal Financial Officer
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Daniel T. Smith, certify that:
1. | I have reviewed this Annual Report on Form 10-K of Oil-Dri Corporation of America (the “registrant”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: | October 7, 2016 |
By: | /s/ Daniel T. Smith |
Daniel T. Smith Vice President, Chief Financial Officer | |
EXHIBIT 32.1:
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION
Certification
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Oil-Dri Corporation of America (the “Company”) hereby certifies that to the best of my knowledge the Company's Annual Report on Form 10-K for the year ended July 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Dated: | October 7, 2016 |
/s/ Daniel S. Jaffee | |
Name: Daniel S. Jaffee Title: President and Chief Executive Officer | |
A signed original of this written statement required by Section 906 has been provided to Oil-Dri Corporation of America and will be retained by Oil-Dri Corporation of America and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document.
Certification
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Oil-Dri Corporation of America (the “Company”) hereby certifies that to the best of my knowledge the Company's Annual Report on Form 10-K for the year ended July 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Dated: | October 7, 2016 |
/s/ Daniel T. Smith | |
Name: Daniel T. Smith Title: Vice President, Chief Financial Officer | |
A signed original of this written statement required by Section 906 has been provided to Oil-Dri Corporation of America and will be retained by Oil-Dri Corporation of America and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document.
EXHIBIT 95:
MINE SAFETY DISCLOSURE
Under section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K, each operator of a coal or other mine is required to include certain mine safety information in its periodic reports filed with the SEC. The table below includes this mine safety information for each mine facility owned and operated by Oil-Dri Corporation of America, or its subsidiaries, for the year ended July 31, 2016. Due to timing and other factors, our data may not agree with the mine data retrieval system maintained by the Mine Safety and Health Administration (“MSHA”). The columns in the table represent the total number of, and the proposed dollar assessment for, violations, citations and orders issued by MSHA during the period upon periodic inspection of our mine facilities in accordance with the referenced sections of the Federal Mine Safety and Health Act of 1977, as amended (the “Mine Act”), described as follows:
Section 104 Significant and Substantial Violations: Total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard.
Section 104(b) Orders: Total number of orders issued due to a failure to totally abate, within the time period prescribed by MSHA, a violation previously cited under section 104, which results in the issuance of an order requiring the mine operator to immediately withdraw all persons from the mine.
Section 104(d) Citations and Orders: Total number of citations and orders issued for unwarrantable failure of the mine operator to comply with mandatory health and safety standards. The violation could significantly and substantially contribute to the cause and effect of a safety and health hazard, but the conditions do not cause imminent danger.
Section 110(b)(2) Flagrant Violations: Total number of flagrant violations defined as a reckless or repeated failure to make reasonable efforts to eliminate a known violation of a mandatory health or safety standard that substantially and proximately caused, or reasonably could have been expected to cause, death or serious bodily injury.
Section 107(a) Imminent Danger Orders: Total number of orders issued when an imminent danger is identified which requires all persons to be withdrawn from area(s) in the mine until the imminent danger and the conditions that caused it cease to exist.
Total Dollar Value of Proposed MSHA Assessments: Each issuance of a citation or order by MSHA results in the assessment of a monetary penalty. The total dollar value presented includes any contested penalties.
Legal Actions Pending, Initiated or Resolved: Total number of cases pending legal action before the Federal Mine Safety and Health Review Commission as of the last day of the reporting period or the number of such cases initiated or resolved during the reporting period.
Legal Actions | |||||||||
Mine location | Section 104 “Significant and Substantial” Violations | Section 104(b) Orders | Section 104(d) Citations and Orders | Section 110(b)(2)Flagrant Violations | Section 107(a) Imminent Danger Orders | Total Dollar Value of Proposed MSHA Assessments | Pending as of Last Day of Period | Initiated During Period | Resolved During Period |
(#) | (#) | (#) | (#) | (#) | ($) | (#) | (#) | (#) | |
Ochlocknee, Georgia | 2 | — | — | — | — | 5,550 | — | — | — |
Ripley, Mississippi | 3 | — | — | — | — | 1,402 | 4 | 2 | 3 |
Mounds, Illinois | 18 | — | 4 | — | — | 36,927 | 5 | 5 | — |
Blue Mountain, Mississippi | 1 | — | — | — | — | 1,819 | 1 | 1 | — |
Taft, California | 1 | — | — | — | — | 11,771 | 1 | 1 | — |
We had no mining-related fatalities at any of our facilities during the twelve months ended July 31, 2016. During this period we also received no written notices from MSHA under section 104(e) of the Mine Act of (i) a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health or safety hazards; or (ii) the potential to have such a pattern. All legal actions pending and initiated during the period were contests of proposed penalties.