The following discussion and analysis of our financial condition and results of
operations should be read together with the Consolidated Financial Statements
and the related notes included elsewhere herein. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in the forward-looking
statements. Factors that might cause a difference include those discussed under
"Forward-Looking Statements" and in Item 1A "Risk Factors" in this Annual Report
on Form 10-K.
OVERVIEW
We develop, mine, manufacture and market sorbent products principally produced
from clay minerals, primarily consisting of calcium bentonite, attapulgite and
diatomaceous shale. Our principal products include agricultural and
horticultural chemical carriers, animal health and nutrition products, cat
litter, fluid purification and filtration bleaching clays, industrial and
automotive floor absorbents and sports field products. Our products are sold to
two primary customer groups, including customers who resell our products as
originally produced to the end consumer and other customers who use our products
as part of their production process or use them as an ingredient in their final
finished product. We have two reportable operating segments based on the
different characteristics of our two primary customer groups: the Retail and
Wholesale Products Group and the Business to Business Products Group. Each
operating segment is discussed individually below. Additional detailed
descriptions of the operating segments are included in Item 1 "Business" above.
RESULTS OF OPERATIONS
OVERVIEW
Consolidated net sales increased approximately $21,754,000 or 8% in fiscal year
2021 compared to fiscal year 2020. Consolidated income from operations in fiscal
year 2021 decreased compared to fiscal year 2020 by $11,791,000. The decrease
was driven primarily by the inclusion in fiscal year 2020 of a one-time receipt
of $13,000,000 related to the licensing of one of our patents as further
described in Note 1 of the Notes to the Consolidated Financial Statements.
Excluding the aforementioned one-time receipt of $13,000,000 in fiscal 2020,
operating income for fiscal 2021 was 10% greater than the prior year. Higher
costs of sales in fiscal year 2021 due to rising commodity costs also accounted
for the decrease in income from operations and was somewhat offset by lower
selling, general and administrative expenses.
Consolidated net income was $11,113,000, or $1.57 per diluted common share, for
the fiscal year ended July 31, 2021, a 41% decrease from net income of
$18,900,000, or $2.65 per diluted common share, for the fiscal year ended
July 31, 2020. The decrease relates to the same factors decreasing income from
operations noted above, partially offset by a decrease in pension service costs
due to the freeze of our pension plan in fiscal year 2020 and lower pension and
deferred compensation settlement costs as further described in Notes 8 and 9 of
the Notes to the Consolidated Financial Statements. Additionally, fiscal year
2021 experienced lower income tax expense than fiscal year 2020 as further
described in Note 5 of the Notes to the Consolidated Financial Statements.
Our Consolidated Balance Sheets as of July 31, 2021 and our Consolidated
Statements of Cash Flows for fiscal year 2021 show a decrease in total cash and
cash equivalents from fiscal year-end 2020 driven, in part, by certain one-time
events. The decrease in cash is further described in Liquidity and Capital
Resources.
In late 2019 and early 2020, COVID-19 was first reported and then declared a
pandemic by the World Health Organization, and continues to have a worldwide
impact. While we saw changes to consumer purchasing patterns for certain
products in response to the pandemic and certain increases in our costs arising
out of the pandemic, its continued spread and accompanying effects, there has
not, to date, been a significant impact to our business as a whole. All of our
facilities, with the exception of our subsidiary in China (which experienced
certain disruptions in the first half of our fiscal year 2020 but has
subsequently resumed operations), have continued to operate as essential
businesses as permitted under exceptions in the applicable shelter-in-place
mandates due to our inclusion in the Critical Manufacturing Sector as defined by
the U.S. Department of Homeland Security and other functions defined as
essential by government authorities. Our top priority has been, and continues to
be, the safety and health of our employees, contractors, and customers. We have
adhered, and continue to adhere, to guidance from the U.S. Centers for Disease
Control and Prevention ("CDC") and local health and governmental authorities
with respect to social distancing, physical separation, and enhanced cleaning
and sanitation programs at each of our facilities. As a result, we have not
experienced any shut downs due to workforce absences or illnesses.
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As further discussed below, our net sales increased in fiscal year 2021 compared
to fiscal year 2020 and represented an all time high for the Company. Despite
the overall increase in net sales during fiscal year 2021, we have not
experienced any significant issues collecting amounts due from customers to
date. However, parts of our business continue to be negatively impacted by the
COVID-19 outbreak. Net sales of our industrial and sports products declined
during fiscal year 2020 as many businesses that typically use our products and
sports fields shut down. As certain geographic areas are permitting broader
re-openings and operations and reducing restrictions, we are starting to see a
positive trend in that such businesses are increasingly re-opening, including
sports fields. As a result, as discussed below in "Retail and Wholesale Products
Group," net sales of our industrial and sports products were higher in fiscal
year 2021 than in fiscal year 2020 with net sales from our industrial products
returning to pre-pandemic levels. In the long term, we foresee that our sports
product sales will improve back to pre-pandemic volumes aided by the expected
continued re-opening of baseball and softball at all levels. As discussed below
in "Foreign Operations," net sales for our industrial floor granules in the
United Kingdom as well as our purification products were lower due to
restrictions imposed by the United Kingdom government on business operations in
response to later waves of outbreaks of COVID-19 as well as reduced travel. In
addition, while net sales of our fluids purification products were higher in
fiscal year 2021 than fiscal year 2020, COVID-19 has negatively impacted the
sales of these products. Reduced travel and, to a lesser extent, our inability
due to COVID-19 to participate in our customers' plant tests of our fluids
purification products, and the continued closures of schools and restaurants in
some parts of the world have continued to impede our sales. In addition, record
cases of COVID-19 since the start of the pandemic in Asia and a second wave of
COVID-19 starting in June of 2021 in China has somewhat hampered net sales of
our animal health products, the extent to which we are monitoring closely.
Consolidated gross profit has not been significantly impacted by COVID-19. We
did experience some delays of incoming materials from several suppliers due to
COVID-19 during fiscal year 2021. However, it did not impact our ability to
fulfill customer orders and we continue to monitor our suppliers. In general,
our suppliers have either remained open or we have found new suppliers to meet
the increase in consumer demand. While we have experienced a significant
increase in transportation costs as discussed further below, including increased
costs from truck loading delays, we have continued to meet the increase in
customer demand for our products. In addition, we have been able to successfully
navigate delays in overseas vessel deliveries of our products by increasing our
safety stock as well as finding other providers. We have incurred additional
employee compensation costs as a result of increased production to meet
increased customer demand as well as additional cleaning and sanitation costs to
comply with the CDC guidelines, but these costs did not have a significant
impact on our consolidated gross profit. Further, we have adjusted our cleaning
and sanitation efforts in response to the evolution of the pandemic and
increasing vaccination rates, which has reduced these costs. In addition, we are
still experiencing a decrease in travel costs as our employees have continued to
travel at reduced levels during the ongoing pandemic.
We are closely monitoring the continuation, resurgence in certain areas, and
effects of the outbreak of COVID-19 on all aspects of our business, including
how it has, and may, impact our suppliers and customers as well as the effects
of the pandemic on economic conditions and the financial markets. In general, we
have seen an increase in costs particularly as it relates to commodities as the
economy continues to react to, and recover from, the pandemic and demand
surpasses supply. However, we have not experienced any significant
interruptions, and we will continue to closely monitor our inventory levels to
mitigate the risk of any potential supply interruptions or changes in customer
demand. It is possible that significant disruptions could occur if the pandemic
continues to put pressure on transportation and shipping as a result of an
imbalance of supply and demand or if there are continued increases in costs that
we are unable to recover. During the fourth quarter of fiscal year 2021, we
revised our shipping terms with one of our significant customers to provide that
freight charges are the responsibility of, and to be paid directly by, such
customer and such costs will no longer be included in the prices we charge such
customer. The impacts of COVID-19 and related economic conditions on our future
results are uncertain at this time. The scope, duration and magnitude of the
direct and indirect effects of COVID-19 continue to evolve (and in many cases,
rapidly) and in ways that are difficult or impossible to anticipate. In
addition, although COVID-19 did not materially impact our financial results to
date, and because it remains uncertain whether and how consumers will modify
their purchasing habits in response to COVID-19 or during the period of
"reopening" as the pandemic abates in certain areas and continued or reduced
government restrictions, these results may not be indicative of the impact that
COVID-19 may have on our future results. See "Part I - Item 1A - Risk Factors"
for additional discussion regarding the risks COVID-19 presents our business.
The impacts of COVID-19 to our specific operating segments are discussed
below.
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RESULTS OF OPERATIONS
FISCAL YEAR 2021 COMPARED TO FISCAL YEAR 2020
CONSOLIDATED RESULTS
Consolidated net sales in fiscal year 2021 reached an all-time high of
$304,981,000, an increase of $21,754,000 or 8%, from net sales of $283,227,000
in fiscal year 2020. Net sales in both our Retail and Wholesale Products Group
and Business to Business Products Group increased in fiscal year 2021 compared
to the prior fiscal year as did net sales for each of our principal products by
segment except for products sold by our subsidiary in the United Kingdom. Sales
fluctuations by operating segment are further discussed below.
Consolidated gross profit in fiscal year 2021 was $65,241,000, a decrease of
$3,465,000 from gross profit of $68,706,000 in the prior fiscal year. Our gross
margin (defined as gross profit as a percentage of net sales) in fiscal year
2021 decreased to 21% from 24% in fiscal year 2020. As further described in Note
1 of the Notes to the Consolidated Financial Statements, we identified an error
in our historical consolidated financial statements related to the
classification of certain costs as selling, general and administrative costs
that relate to the production of our inventory and should be classified as cost
of sales. These costs relate primarily to our annual discretionary bonus and
401(k) employer match for our manufacturing teammates, teammate salaries for
individuals in our support functions that spend a portion of their time related
to our manufacturing operations such as IT, and other costs mostly related to
consultants and outside services. Because the error was not material to any
prior period interim or our annual financial statements, no amendments to
previously filed interim or annual periodic reports were required. We have
adjusted for this error by revising the historical consolidated financial
statements presented herein. The impact to gross margin in fiscal years 2021 and
2020, on a manufactured ton basis, was $6.79 and $9.42, respectively. Aside from
the reclassification of costs from selling, general and administrative expenses
to cost of sales, higher domestic freight, packaging, natural gas, materials,
and non-fuel costs per manufactured ton drove the decrease in gross profit in
fiscal year 2021 compared to fiscal year 2020. Freight costs per manufactured
ton increased approximately 13% compared to the prior fiscal year as the result
of higher transportation rates due to a national driver shortage and tight
trucking capacity in part caused by the continued return of non-essential
businesses. Our overall freight costs also vary between periods depending on the
mix of products sold and the geographic distribution of our customers. Despite
the tight trucking capacity, we have been able to continue to meet the increase
in customer demand. Packaging costs per ton were approximately 19% higher
compared to the prior fiscal year due, in part, to the mix of products produced
driven by higher commodity costs, particularly as it relates to the resin used
in our jugs and pails. Many of our contracts for packaging purchases are subject
to periodic price adjustments, which trail changes in underlying commodity
prices. The cost per manufactured ton of natural gas used to operate kilns that
dry our clay was approximately 15% higher in fiscal year 2021 compared to fiscal
year 2020 due to the increase in natural gas prices. The increased gas prices in
2021 were driven, in part, by the limited supply created by record-low
temperatures across the nation, which drove up demand, and supply was further
limited across the country due to natural gas pipelines and wellheads freezing
in southern regions in the United States. The limited supply coupled with high
demand caused the increase in natural gas prices. In addition, non-fuel
manufacturing costs per ton increased approximately 3% compared to fiscal year
2020 driven primarily by higher purchased materials. While we have experienced
an increase in costs due to the reasons mentioned above, we anticipate being
able to recover some of these rising costs through price increases.
Total selling, general and administrative expenses were 8% lower in fiscal year
2021 compared to fiscal year 2020. The discussion of each segment's operating
income below describe the changes in selling, general and administrative
expenses that were allocated to that segment, particularly the lower advertising
costs in the Retail and Wholesale Products Group. The remaining unallocated
corporate expenses in fiscal year 2021 included a lower estimated annual
incentive bonus accrual for fiscal year 2021 compared to fiscal year 2020. 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. Fiscal year 2021 also included lower pension
service costs expense as the pension plan is frozen. In addition, as compared to
fiscal year 2020, unallocated corporate expenses are lower in fiscal year 2021
because fiscal year 2020 included a legal contingency offset by a curtailment
gain related to the termination of our Supplemental Executive Retirement Plan
(SERP). See Notes 8, 9 and 11 of the Notes to the Consolidated Financial
Statements for a further description of our pension plan freeze, SERP
termination, and legal contingencies.
Other income (expense), net in fiscal years 2021 and 2020 included
approximately $600,000 and $2,000,000, respectively, of settlement expense under
our pension plan as further described in Note 8 to the Notes to the Consolidated
Financial Statements. In addition, there were lower pension costs in fiscal year
2021 due to the pension plan freeze.
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Tax expense for fiscal year 2021 was $2,388,000 (effective tax rate of 17.7%)
compared to $4,280,000 (effective tax rate of 18.6%) in fiscal year 2020. The
decrease in tax expense was driven by lower taxable income as well as certain
employment related credits we were able to take advantage of and a tax deduction
for foreign-derived income which further reduced our effective tax rate. See
Note 5 of the Notes to the Consolidated Financial Statements for additional
information about our income taxes.
BUSINESS TO BUSINESS PRODUCTS GROUP
Net sales of the Business to Business Products Group for fiscal year 2021 were
$110,120,000, an increase of $5,860,000, or 6%, from net sales of $104,260,000
in fiscal year 2020. Net sales increased in all product categories -
agricultural and horticultural products; fluids and purification products;
animal health products; and cat litter. The majority of this growth was the
result of increased volume and to some degree, price increases that were
implemented late in fiscal year 2021 for certain of our products.
Net sales of our agricultural and horticultural chemical carrier products
increased approximately 19% or $4,149,000 in fiscal year 2021 compared to fiscal
year 2020. The increase in net sales was attributable to increased sales to
existing customers, particularly to one of our largest customers using our
product in some of its re-formulated goods; the addition of several smaller new
customers; an expected shift in timing of sales to one of our largest customers
from the last three months of fiscal year 2020 to fiscal year 2021 due to that
customer resuming its production schedule after it experienced various supplier
delays due to COVID-19; and increased sales due to a new business application of
our Agsorb product to an existing customer. Net sales of our fluids purification
products increased approximately $1,334,000 or 3% in fiscal year 2021 compared
to the prior fiscal year despite the negative impacts of COVID-19. We
experienced sales improvement primarily in Latin and North America. A key driver
of the net sales growth in Latin America related to timing of sales as one of
our customers ordered more than usual to navigate potential delays in ocean
freight shipments. Other drivers of the sales growth in Latin America related to
new customers and increased sales to existing customers. Net sales in North
America increased in fiscal year 2021 compared to fiscal year 2020 due to an
increase in air travel and more need for our jet fuel purification products as
well as an increase in demand for our clay used for bio-diesel products.
However, net sales have still been impacted by the oil quality in North America,
which continues to be good and, accordingly, has reduced the need for our clay
products. The increases in net sales to Latin and North America were partially
offset by lower sales to Asia and to some degree, Europe. Reduced air travel due
to COVID-19 has negatively affected the sale of our jet fuel fluids purification
products in Asia and Europe. Sales to Asia also decreased in the fiscal year
2021 compared to fiscal year 2020 due to price competition. Net sales of our
animal health and nutrition products were essentially flat during fiscal year
2021 compared to fiscal year 2020 as the increases in net sales of our animal
feed additives in China and Asia were offset by the decreases in net sales in
other countries, including Mexico. See "Foreign Operations" below for a
discussion of net sales in China and Mexico. The increase in net sales in Asia
as well as the decreases in net sales in other countries were primarily related
to timing of net sales and the impacts of COVID-19. Net sales of our co-packaged
coarse cat litter increased approximately $340,000 or 2% during fiscal year 2021
compared to the same period in the prior fiscal year due to timing of customer
purchases.
The Business to Business Products Group's selling, general and administrative
expenses in fiscal year 2021 were approximately 8% or $805,000 higher compared
to fiscal year 2020, but remained consistent as a percentage of sales. During
fiscal year 2021, we made a concentrated effort to invest in our animal health
business through increased sales personnel, leadership hires, and marketing of
our animal health products which resulted in an increase in selling general and
administrative expenses. This increase was partly offset by lower travel costs
and less bad debt expense in fiscal year 2021.
The Business to Business Products Group's segment operating income for fiscal
year 2021 was $25,086,000, a decrease of $3,351,000 or 12%, from operating
income of $28,437,000 in fiscal year 2020. While net sales increased, this
increase was offset by higher freight, packaging, natural gas, materials, and
non-fuel costs per manufactured ton in fiscal year 2021 as discussed in
Consolidated Results above as well as higher selling, general and administrative
costs. In addition, as previously noted in Note 1 to the Notes to the
Consolidated Financial Statements, the allocation of additional costs from
selling, general and administrative costs to cost of sales decreased segment
operating income in both fiscal years 2021 and 2020.
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RETAIL AND WHOLESALE PRODUCTS GROUP
Net sales of the Retail and Wholesale Products Group for fiscal year 2021 were
$194,861,000, an increase of $15,894,000, or 9%, from net sales of $178,967,000
in fiscal year 2020 driven by both increases in net sales of our cat litter and
our industrial and sports products. Total cat litter net sales increased
$13,748,000 or 9% compared to the prior fiscal year with increased sales of both
private label and branded scoopable litters as we gained business from new
customers and from new items being sold to existing customers. Further, an
increase in e-commerce sales, where the customer base differs from brick and
mortar customers, continued to increase cat litter sales. In addition, the
impact of COVID-19 on increased pet adoption continued to boost sales as well as
the overall macro trend of increased spending on pets. Cat litter sales by our
subsidiary in Canada further contributed to the sales increase, as discussed in
"Foreign Operations" below. Also included in the Retail and Wholesale Products
Group's results were increased sales of our industrial and sports products
compared to fiscal year 2020. Net sales of our industrial and sports products
increased approximately $2,689,000 or 9% in fiscal year 2021 compared to fiscal
year 2020, mainly driven by the re-opening of businesses and sports fields in
the third and fourth quarters of fiscal year 2021 in most, but not all, of the
United States. Industrial floor absorbent sales by our subsidiary in Canada
further contributed to the net sales increase in fiscal year 2021, as discussed
in "Foreign Operations" below. To some extent, the increase in net sales for our
Retail and Wholesale Products Group was also driven by price increases.
Selling, general and administrative expenses for the Retail and Wholesale
Products Group were approximately $730,000 or 4% lower compared to fiscal year
2020. The decrease was driven mainly by lower advertising expense and to some
extent, lower travel costs. The decrease was partially offset by higher
personnel costs and commissions due to the increase in sales volume.
The Retail and Wholesale Products Group's segment operating income for fiscal
year 2021 was $11,916,000, an increase of $393,000 or 3%, from operating income
of $11,523,000 in fiscal year 2020. The higher sales and lower selling, general
and administrative costs were partially offset by higher freight, packaging,
natural gas, materials, and non-fuel costs per manufactured ton, as discussed in
"Consolidated Results" above. In addition, as previously noted in Note 1 to the
Notes to the Consolidated Financial Statements, the allocation of additional
costs from selling, general and administrative costs to cost of sales decreased
segment operating income in both fiscal years 2021 and 2020.
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
subsidiaries in China, Mexico and Indonesia, which are included in the Business
to Business Products Group. Net sales by our foreign subsidiaries during fiscal
year 2021 were $17,406,000, an increase of $2,186,000, or 14%, from net sales of
$15,220,000 during fiscal year 2020. The increase relates chiefly to higher
sales by our subsidiaries in Canada and China during fiscal year 2021. Cat
litter sales for our subsidiary in Canada increased by approximately $1,521,000
or 28% during fiscal year 2021 compared to the prior fiscal year due to new
product sales; higher sales to existing customers; in-store promotions; and
pantry loading in eastern Canada due to a second wave of COVID-19 infections and
lockdown restrictions during the first three months of fiscal year 2021. In
addition to increased sales of cat litter, sales of our industrial absorbent
granules in Canada increased by approximately $551,000 or 27% during fiscal year
2021 compared to fiscal year 2020 due to both price increases and the re-opening
of distributors in the second half of the fiscal year 2021. Sales of our animal
health products by our foreign operations also grew by $658,000 or 13% as higher
sales for our subsidiary in China were somewhat offset by lower sales from our
subsidiaries in Mexico and Indonesia. Net sales in China increased approximately
$1,149,000 or 54% during fiscal year 2021 compared to fiscal year 2020. Despite
the continued impacts of the African Swine Fever to pork consumption, sales of
our animal health products in China were higher during fiscal year 2021 compared
to fiscal year 2020 due to a new contract with an existing customer; increased
sales to existing customers; winning back several previous distributors; the use
of two new distributors; and implementing a concentrated sales and marketing
effort. In addition, net sales for our subsidiary in China in fiscal year 2020
were lower due to the outbreak of COVID-19 that impacted the second and third
quarters of that fiscal year. Net sales by our subsidiary in Mexico in fiscal
year 2020 included a sale of equipment that did not recur in fiscal year 2021
which drove the decrease in net sales in fiscal year 2021 compared to fiscal
year 2020. The increase in net sales of our cat litter and animal health
products in fiscal year 2021 were somewhat offset by the decrease in our
purification products from our subsidiary in the United Kingdom. Sales of
industrial floor absorbents by our subsidiary in the United Kingdom increased
marginally in the fourth quarter of fiscal year 2021 over fiscal year 2020 but
were still lower overall in fiscal year 2021 than 2020. The effect of COVID-19
lockdowns and restrictions on the industry in Europe has, to some extent,
reduced demand for our products. The discontinuation by a customer of a product
that used our clay granules also contributed to the decrease in sales of our
subsidiary in the United Kingdom. Net sales by our foreign subsidiaries
represented 6% of our consolidated net sales for both the fiscal years 2021 and
2020.
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For fiscal year 2021, our foreign subsidiaries reported a net loss of $597,000,
compared to a net loss of $1,308,000 in fiscal year 2020. The net loss in fiscal
year 2021 was primarily driven by our continued investment in our subsidiary in
Indonesia and higher selling, general, and administrative expenses to support
increased sales for our animal health business.
Identifiable assets of our foreign subsidiaries as of July 31, 2021 were
$12,572,000 compared to $12,586,000 as of July 31, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements include: funding working capital needs;
purchasing and upgrading equipment, facilities, information systems, and real
estate; supporting new product development; investing in infrastructure;
repurchasing stock; paying dividends; making pension contributions; and, from
time to time, business acquisitions. During fiscal year 2021, we primarily used
cash generated from operations to fund these requirements. Cash and cash
equivalents totaled $24,591,000 and $40,890,000 as of July 31, 2021 and 2020,
respectively. Contributing to the cash generated in fiscal year 2020 was
$10,000,000 of borrowings in the fourth quarter of fiscal year 2020 as well as a
one-time receipt of $13,000,000 related to licensing of certain of our patents.
These receipts have since been used in our operations in fiscal 2021. See Note 1
of the Notes to the Consolidated Financial Statements for information about the
one-time receipt and Note 3 for the borrowings.
To date, COVID-19 has not had a significant impact on our operations as a
whole, and we anticipate cash flows from operations and our available sources of
liquidity will be sufficient to meet our cash requirements. In addition, we are
actively monitoring the timing and collection of our accounts receivable. Given
the ongoing and dynamic nature of COVID-19, we will continue to assess our
liquidity needs and to actively manage our spending.
The following table sets forth certain elements of our Consolidated Statements
of Cash Flows for the fiscal year (in thousands):
2021 2020
Net cash provided by operating activities $ 13,636 $ 42,462
Net cash used in investing activities (18,830) (14,677)
Net cash used in financing activities (11,322) (8,750)
Effect of exchange rate changes on cash and cash equivalents 217 (7)
Net (decrease) increase in cash and cash equivalents $ (16,299) $ 19,028Net cash provided by operating activities
In addition to net income, as adjusted for depreciation and amortization and
other non-cash operating activities, the primary sources and uses of operating
cash flows for fiscal years 2021 and 2020 were as follows:
Non-cash stock compensation was $837,000 lower for fiscal 2021 compared to
fiscal 2020 due to several large awards of restricted stock fully vesting early
in fiscal year 2021. See Note 7 of the Notes to the Consolidated Financial
Statements for further information about stock-based compensation.
We recognized a curtailment gain on our Supplemental Executive Retirement Plan
("SERP") plan in fiscal year 2020 of $1,296,000, which is further discussed in
Note 9 of the Notes to the Consolidated Financial Statements. No such gain was
recognized in fiscal year 2021 as the SERP was terminated in fiscal year 2020.
Accounts receivable, less allowance for doubtful accounts and cash discounts,
were $5,808,000 higher at fiscal year-end 2021 compared to fiscal year-end 2020
due primarily to higher sales in the fourth quarter of fiscal 2021 than in the
same period in fiscal year 2020. The same measure of accounts receivable was
$411,000 lower at fiscal year-end 2020 compared to fiscal year-end 2019 due to
lower sales in the fourth quarter of fiscal year 2020, an increase in our bad
debt reserve for certain uninsured foreign receivables, and for two customers
that were slow paying Fluctuations in accounts receivable balances were impacted
in all periods by the timing of both sales and collections, as well as the
payment terms provided to various customers in the ordinary course of business.
Inventories were $518,000 lower at fiscal year-end 2021 compared to fiscal
year-end 2020 due primarily to higher sales of finished goods offset by
increased packaging costs and a lower obsolescence reserve. Packaging costs
increased due to
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anticipated sales demand as well as an increase in the underlying cost of
packaging. The lower obsolescence reserve is attributable to our focus on
inventory management. Inventories were $213,000 lower at fiscal year-end 2020
compared to fiscal year-end 2019 due to a higher obsolescence reserve and lower
packaging cost. The higher obsolescence reserve and lower packaging inventories
were attributable to our focus on inventory management and enhanced data
available from our ERP system. Furthermore, finished goods and purchased
materials inventories vary from year to year due to anticipated sales
requirements and the mix of products expected to be produced. See Note 1 of the
Notes of the Notes to the Consolidated Financial Statements.
Prepaid expenses were $4,067,000 higher at fiscal year-end 2021 compared to
fiscal year-end 2020 driven primarily by prepayment of income taxes and
insurance offset by lower prepaid advertising costs. Prepaid expenses were
$949,000 higher at fiscal year end 2020 compared to fiscal year 2019 due to
higher prepaid repairs.
Deferred income taxes, less provision for deferred income taxes, were
$5,196,000 lower at fiscal year-end 2021 compared to fiscal year-end 2020 and
were $453,000 lower at fiscal year-end 2020 compared to fiscal year-end 2019.
Deferred income taxes were lower at fiscal year-end 2021 due to pension and
retirement benefits, accrued expenses, and bonus depreciation on fixed assets.
Deferred income taxes were lower at fiscal year-end 2020 due to pension and
postretirement benefits and accrued expenses. See Note 5 of the Notes to the
Consolidated Financial Statements for further information about income taxes.
Other assets were $544,000 lower at fiscal year-end 2021 compared to fiscal
year-end 2020 due to a reduction in our operating right of use lease asset for
expiring leases partially offset by higher pre-production costs at certain of
our mines. Other assets were $1,242,000 higher at fiscal year-end 2020 than
fiscal year-end 2019 due to pre-production costs at our Georgia mine.
Accounts payable were $2,411,000 lower at fiscal year-end 2021 compared to
fiscal year-end 2020. Lower trade payables drove the decrease in accounts
payable in fiscal year 2021 as well as income taxes payable being in a prepaid
position versus a payable position at the end of the fiscal year 2021. Accounts
payable were $4,238,000 higher at fiscal year-end 2020 compared to fiscal
year-end 2019. Higher accrued income taxes due to higher net income and a higher
effective tax rate drove the increase in fiscal year 2020 as well as higher
freight payables due to the increase in sales. Changes in trade accounts payable
in all periods are subject to normal fluctuations in the timing of payments, the
cost of goods and services we purchased, production volume levels and vendor
payment terms.
Accrued expenses were $4,097,000 lower at fiscal year-end 2021 compared to
fiscal year-end 2020 due mainly to a lower accrued annual discretionary bonus,
as well as lower advertising expenses and real estate taxes somewhat offset by
an increase in accrued freight and a reclassification of one of our accruals
from long-term to short-term. The payout of the prior fiscal year's
discretionary incentive bonus reduced accrued salaries in both fiscal years, but
to a greater extent in fiscal year 2021 as the accrual was higher in the prior
fiscal year. Accrued advertising expenses decreased in fiscal year 2021 more
than fiscal year 2020 due to timing of our advertising programs. Accrued real
estate taxes decreased based on lower real estate taxes for one of our
facilities. These decreases were partially offset by the reclassification of the
current portion of the deferred employer payroll taxes under the CARES Act,
which is due by the end of calendar year 2021, as further described in Note 1 of
the Notes to the Consolidated Financial Statements and an increase in accruals
for unvouchered freight. Accrued freight can vary with freight rates, timing of
shipments, and production requirements. In addition, accrued plant expenses can
also fluctuate due to timing of payments, changes in the cost of goods and
services we purchase, production volume levels and vendor payment terms. Accrued
expenses were $8,632,000 higher at fiscal year-end 2020 compared to fiscal
year-end 2019 due primarily to accrued annual discretionary bonus, 401(k)
employer match, advertising costs and an accrual for a legal contingency which
is further described in Note 11 of the Notes to the Consolidated Financial
Statements. These increases were partially offset by lower accruals for
unvouchered freight.
Deferred compensation balances at fiscal year-end 2021 were $770,000 lower
compared to fiscal year-end 2020 and fiscal year-end 2020 was $421,000 higher
compared to fiscal year-end 2019. Deferred compensation balances were lower at
fiscal year-end 2021 due to the termination and subsequent pay-out of one of our
plans, the Supplemental Executive Retirement Plan, as further discussed in Note
9 to the Notes to the Consolidated Financial Statements. Deferred compensation
increased in fiscal 2020 because of higher deferrals by participants in our
other deferred compensation plans.
Pension and other postretirement liabilities, net of the adjustment recorded
in stockholders' equity, were $2,652,000 lower at fiscal year-end 2021 compared
to fiscal year-end 2020 due to reduced service expense related to the Pension
Plan which was frozen in fiscal year 2020 as well as a higher discount rate and
change in census data. These liabilities were $5,684,000 lower at fiscal
year-end 2020 compared to fiscal year-end 2019 due primarily to the curtailment
of our pension plan and a $8,000,000 voluntary contribution to our pension plan
in excess of the minimum amount required. See Note 8 of the Notes to the
Consolidated Financial Statements for more information regarding our
postretirement benefit plans.
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Other liabilities were $557,000 lower at fiscal year-end 2021 compared to
fiscal year-end 2020. The decrease in Other Liabilities relates to a reduction
in our operating lease liability, partly offset by an increase in our
reclamation liability due to increased mining activity and an increase in
deferral of employer taxes under the CARES Act as further described in Note 1 to
the Notes to the Consolidated Financial Statements. Other liabilities were
$1,120,000 higher at fiscal year-end 2020 compared to fiscal year-end 2019. The
increase in fiscal year 2020 was due to a reclassification of the deferred lease
liability to operating lease liabilities upon adoption of ASC 842, Leases.
Net cash used in investing activities
Cash used in investing activities was $18,830,000 in fiscal year 2021 and cash
used in investing activities was $14,677,000 in fiscal year 2020. Cash used in
fiscal year 2021 related chiefly to capital expenditures. The increase in our
capital expenditures in fiscal year 2021 compared to fiscal year 2020 relates to
purchases of equipment to support our increased mining and hauling activity.
Cash used in fiscal year 2020 related primarily to the purchases of capital
expenditures at levels comparable to fiscal year 2019.
Net cash used in financing activities
Cash used in financing activities was $11,322,000 in fiscal year 2021 and
$8,750,000 in fiscal year 2020. The primary uses of cash in all periods were for
long-term debt, dividend payments, and stock purchases offset by borrowings as
further described in Note 3 of the Notes to the Consolidated Financial
Statements.
Other
Total cash and investment balances held by our foreign subsidiaries as of
July 31, 2021 and 2020 were $3,054,000 and $3,042,000, respectively. See further
discussion in the "Foreign Operations" section above.
On January 31, 2019, we signed a fifth amendment to our credit agreement with
BMO Harris, which expires on January 31, 2024. The new agreement provides for a
$45,000,000 unsecured revolving credit agreement, including a maximum of
$10,000,000 for letters of credit. The remaining terms are substantially
unchanged from our previous agreement with BMO Harris, including the provision
that we may select a variable rate based on either BMO Harris' prime rate or a
LIBOR-based rate, plus a margin which varies depending on our debt to earnings
ratio, or a fixed rate as agreed between us and BMO Harris. As of July 31, 2021,
the variable rates would have been 3.50% for the BMO Harris' prime-based rate or
1.38% 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, 2021 and 2020, we were in compliance with
its covenants. As of July 31, 2021 and 2020, there were no outstanding
borrowings under this credit agreement.
See Note 3 of the Notes to the Consolidated Financial Statements for information
about our outstanding notes payable and a discussion of the debt instrument that
we entered into on May 15, 2020 pursuant to which, among other things, we issued
$10,000,000 in aggregate principal amount of our 3.95% Series B Senior Notes due
May 15, 2030 and entered into an amended note agreement that provides the
Company with the ability to request, from time to time until May 15, 2023 (or
such earlier date as provided for in the agreement), additional senior unsecured
notes of the Company in an aggregate principal amount of up to $75,000,000 minus
the aggregate principal amount of the notes then outstanding and the additional
notes that have been accepted for purchase. The issuance of such additional
notes is at the discretion of the noteholders and purchasers and on an
uncommitted basis.
As of July 31, 2021, we had remaining authority to repurchase 810,962 shares
of Common Stock and 278,250 shares of Class B Stock under a repurchase plan
approved by our Board of Directors (the "Board"). Repurchases may be made on the
open market (pursuant to Rule 10b5-1 plans or otherwise) or in negotiated
transactions. The timing and number of shares repurchased will be determined by
our management pursuant to the repurchase plan approved by our Board. In fiscal
2021 we made repurchases of stock as further discussed in Item 5, Market for
Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of
Equity Securities.
We believe that cash flow from operations, availability under our revolving
credit facility, current cash balances and our ability to obtain other
financing, if necessary, will provide adequate cash funds for foreseeable
working capital needs, capital expenditures at existing facilities, deferred
compensation payouts, dividend payments and debt service obligations for at
least the next 12 months. We spent approximately $1,023,000 less for advertising
in fiscal year 2021 compared to fiscal year 2020 and we expect advertising
expense in fiscal year 2022 to be higher than in fiscal year 2021. Our
expenditures for capital were higher in fiscal year 2021 compared to fiscal year
2020. The increased capital expenditures did not dramatically impact our cash
position; however our cash requirements are subject to change as business
conditions warrant and opportunities arise.
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We continually evaluate our liquidity position and anticipated cash needs, as
well as the financing options available to obtain additional cash reserves. Our
ability to fund operations, to make planned capital expenditures, to make
scheduled debt payments, to contribute to our pension plan and to remain in
compliance with all financial covenants under debt agreements, including, but
not limited to, the current credit agreement, depends on our future operating
performance, which, in turn, is subject to prevailing economic conditions and to
financial, business and other factors. The timing and size of any new business
ventures or acquisitions that we complete may also impact our cash requirements.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any unconsolidated special purpose entities. As of July 31, 2021
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 ("U.S. GAAP"). We review our financial reporting and disclosure
practices and accounting policies annually to ensure that our financial
reporting and disclosures provide accurate and transparent information relative
to the current economic and business environment. We believe that, of our
significant accounting policies stated in Note 1 of the Notes to the
Consolidated Financial Statements, the policies listed below involve a higher
degree of judgment and/or complexity. The preparation of the financial
statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, as
well as the reported amounts of revenues and expenses during the reporting
period. Significant estimates include income taxes, promotional programs,
pension accounting and allowance for doubtful accounts. Actual results could
differ from these estimates.
Income Taxes. Our effective tax rate on earnings was based on income, statutory
tax rates and tax planning opportunities available to us in various
jurisdictions in which we operate. Significant judgment was required in
determining our effective tax rate and in evaluating our tax positions.
We determine our current and deferred taxes in accordance with Accounting
Standards Codification ("ASC") 740 Income Taxes. The tax effect of the expected
reversal of tax differences was recorded at rates currently enacted for each
jurisdiction in which we operate. To the extent that temporary differences will
result in future tax benefit, we must estimate the timing of their reversal and
whether taxable operating income in future periods will be sufficient to fully
recognize any deferred tax assets.
We maintain valuation allowances where it is likely that all or a portion of a
deferred tax asset will not be realized. Changes in valuation allowances from
period to period are included in the income tax provision in the period of
change. In determining whether a valuation allowance is warranted, we take into
account such factors as prior earnings history, expected future earnings and
other factors that could affect the realization of deferred tax assets.
We recorded valuation allowances of $1,362,000 and $1,029,000 for the amount of
the deferred tax benefit related to our foreign net operating loss carryforwards
as of July 31, 2021 and 2020, respectively, because we believe it is unlikely we
will realize the benefit of these tax attributes in the future.
In addition to valuation allowances, we may provide for uncertain tax positions
when such tax positions do not meet certain recognition thresholds or
measurement standards. Amounts for uncertain tax positions are adjusted when new
information becomes available or when positions are effectively settled. We did
not record a liability for unrecognized tax benefits at either July 31, 2021 or
2020. See Note 5 of the Notes to the Consolidated Financial Statements for
further discussion.
Trade Promotions. We routinely commit to one-time or ongoing trade promotion
programs in our Retail and Wholesale Products Group. Promotional reserves are
provided for sales incentives made directly to consumers, such as coupons, and
sales incentives made to customers, such as slotting, discounts based on sales
volume, cooperative marketing programs and other arrangements. All such trade
promotion costs are netted against sales. Promotional reserves are established
based on our best estimate of the amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. To estimate trade
promotion reserves, we rely on our historical experience of trade spending
patterns and that of the
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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 $1,260,000 and $1,843,000 for trade promotions as
of July 31, 2021 and 2020, 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 2021 and 2020 was the FTSE Pension Discount Curve (formally called
the Citi Pension Discount Curve). Our determination of pension expense or income
is based on a market-related valuation of plan assets, which is the fair market
value. Our expected rate of return on plan assets is determined based on asset
allocations and historical experience. The expected long-term rate of inflation
and risk premiums for the various asset categories are based on general
historical returns and inflation rates. The target allocation of assets is used
to develop a composite rate of return assumption. See Note 8 of the Notes to the
Consolidated Financial Statements for additional information.
As further described in Note 8 of the Notes to the Consolidated Financial
Statements, we amended and froze participation in our pension plan and
supplemental executive retirement plan in the second quarter of fiscal year
2020. The amendment of these plans triggered a curtailment, which required a
remeasurement of the plans' obligations. Both of these remeasurements were based
on actuarially determined amounts. In addition, we offered terminated
participants with vested benefits who have not yet begun receipt of benefits
under the pension plan the opportunity to receive their pension benefits in a
single payment (the "Lump Sum Option"). We made payments to those participants
in the pension plan who elected the Lump Sum Option by the May 15, 2020 election
deadline. This settlement of a portion of the pension plan was recorded as
settlement expense based on actuarially determined amounts in the fourth quarter
of fiscal year 2020. The pension plan was further settled in fiscal year 2021
when we purchased an annuity.
Trade Receivables. We recognize trade receivables when control of finished
products are transferred to our customers. We record an allowance for doubtful
accounts based on our historical experience and a periodic review of our
accounts receivable, including a review of the overall aging of accounts,
consideration of customer credit risk and analysis of facts and circumstances
about specific accounts. A customer account is determined to be uncollectible
when it is probable that a loss will be incurred after we have completed our
internal collection procedures, including termination of shipments, direct
customer contact and formal demand of payment. We believe our allowance for
doubtful accounts is reasonable; however, the unanticipated default by a
customer with a material trade receivable could occur. We also record an
estimated allowance for cash discounts offered in our payment terms to some
customers. We recorded a total allowance for doubtful accounts and cash
discounts of $1,174,000 and $1,078,000 as of July 31, 2021 and 2020,
respectively.
Revenue Recognition. We recognize revenue when performance obligations under the
terms of the contracts with customers are satisfied. Our performance obligation
generally consists of the promise to sell finished products to wholesalers,
distributors and retailers or consumers and our obligations have an original
duration of one year or less. Control of the finished products are transferred
upon shipment to, or receipt at, customers' locations, as determined by the
specific terms of the contract. We have completed our performance obligation
when control is transferred and we recognize revenue accordingly. Taxes
collected from customers and remitted to governmental authorities are excluded
from net sales. Sales returns are not material nor are warranties and any
related obligations.
Inventories. We value inventories at the lower of cost (first-in, first-out)
or market. Inventory costs include the cost of raw materials, packaging
supplies, labor and other overhead costs. We perform a detailed review of our
inventory to determine if a reserve adjustment is necessary, giving
consideration to obsolescence, inventory levels, product deterioration and other
factors. The review also surveys all of our operating facilities and sales
divisions to give consideration to historic and new market trends. The inventory
reserve values as of July 31, 2021 and 2020 were $641,000 and $926,000,
respectively.
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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, 2021 and 2020, we have recorded an
estimated net reclamation asset of $1,152,000 and $932,000, respectively, and a
corresponding estimated reclamation liability of $2,965,000 as of July 31, 2021
and $2,554,000 as of July 31, 2020. 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. Our impairment analysis is performed
in the fourth quarter of the fiscal year and may be re-performed during the year
when indicators such as unexpected adverse economic factors, unanticipated
technological changes, competitive activities and acts by governments and courts
indicate that an asset may become impaired. Our impairment analysis performed in
the fourth quarters of both fiscal years 2021 and 2020 did not indicate any
impairment. We continue to monitor events, circumstances or changes in the
business that might imply a reduction in value which could lead to an
impairment. In addition, although we have not identified any triggering events
relating to goodwill or our intangibles, the ultimate effects of COVID-19 could
change this assessment in the future, as outlined under Item 1A, Risk Factors,
discussed above.
NEW ACCOUNTING PRONOUNCEMENTS
Recently Issued Accounting Standards
In March 2020, the FASB issued guidance under ASC 848, Reference Rate Reform.
This guidance provides optional expedients and exceptions to account for debt,
leases, contracts, hedging relationships and other transactions that reference
LIBOR or another reference rate if certain criteria are met. The guidance is
effective immediately and may be applied prospectively to contract modifications
made and hedging relationships entered into or evaluated on or before December
31, 2022. We have debt agreements that reference LIBOR and to the extent that
those agreements are modified to replace LIBOR with another interest rate index,
ASC 848 will allow us to account for the modification as a continuation of the
existing contract without additional analysis. We are currently evaluating the
potential effects of the adoption of this guidance on our Consolidated Financial
Statements.
In December 2019, the FASB issued guidance under ASC 740, Income Taxes, which
simplifies the accounting for income taxes. The guidance removes several
specific exceptions to the general principles in ASC 740 and clarifies and makes
amendments to improve consistent application of and simplify existing accounting
for other areas in ASC 740. This guidance is effective for our first quarter of
fiscal year 2022, with early adoption permitted. We have performed an initial
analysis of the impacts of adopting this requirement and do not anticipate that
it will be material to our Consolidated Financial Statements.
In June 2016, the FASB issued guidance under ASC 326, Financial
Instruments-Credit Losses, which requires companies to utilize an impairment
model for most financial assets measured at amortized cost and certain other
financial instruments, which include trade and other receivables, loans and
held-to-maturity debt securities, to record an allowance for credit risk based
on expected losses rather than incurred losses. In addition, this new guidance
changes the recognition method for credit losses on available-for-sale debt
securities, which can occur as a result of market and credit risk, as well as
additional disclosures. In general, this guidance will require modified
retrospective adoption for all outstanding instruments that fall under this
guidance. This guidance is effective for our first quarter of fiscal year 2023.
We are currently evaluating the impact of the adoption of this requirement on
our Consolidated Financial Statements.
A summary of all recently adopted and issued accounting standards is contained
in Note 1 of Notes to the Consolidated Financial Statements.
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