OIL-DRI CORP OF AMERICA MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included herein and our Consolidated Financial Statements, accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2021 . This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under "Forward-Looking Statements" and Item 1A, Risk Factors of our Quarterly Report on Form 10-Q for the quarter endedJanuary 31, 2022 and of our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2021 .
OVERVIEW
We develop, mine, manufacture and market sorbent products principally produced from clay minerals and, to a lesser extent, other clay-like sorbent materials. Our principal products include agricultural and horticultural chemical carriers, animal health and nutrition products, bleaching clay and fluid purification aids, cat litter, industrial and automotive floor absorbents and sports field products. Our products are sold to two primary customer groups, including customerswho resell our products as originally produced to the end consumer and thosewho 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 toBusiness Products Group , as described in Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
OVERVIEW
In late 2019 and early 2020, COVID-19 was first reported and then declared a pandemic by theWorld Health Organization , and continues to have a worldwide impact. All of our facilities, with the exception of our subsidiary inChina (which experienced certain disruptions in the first half of our fiscal year 2020 but subsequently resumed operations), have continued to operate as essential businesses during the course of the pandemic as permitted under exceptions in the applicable shelter-in-place mandates due to our inclusion in the Critical Manufacturing Sector as defined by theU.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 theU.S. Centers for Disease Control and Prevention ("CDC") and local health and governmental authorities with respect to social distancing, physical separation, and cleaning and sanitation programs at each of our facilities. We have not experienced any shut downs due to workforce absences or illnesses. As further discussed below, our consolidated net sales increased in the third quarter and in the first nine months of fiscal year 2022 compared to the third quarter and first nine months of fiscal year 2021. Net sales of our industrial and sports products as well as most of our fluids purification products have mostly returned to pre-pandemic levels as many businesses and sports have re-opened and air travel has been increasing. Despite the overall increase in net sales, 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 pandemic and varying recoveries from and resurgences of the pandemic in certain areas. Net sales for our industrial granules in theUnited Kingdom have just recently started to increase in fiscal year 2022 as a result of the return of demand following the impact of the pandemic (and also certain timing impacts). While we have had an overall increase in net sales of our fluids purification products, not all regions have resumed travel to the same extent as prior to the pandemic. In addition, net sales of our animal health and nutrition products have been dampened due to COVID-19 in certain geographic areas, particularly inChina , which has continued to impose restrictions and quarantine requirements in response to COVID-19 outbreaks. We have also experienced an increase in backlog due, in part, to supply chain disruptions, shipping delays and availability of labor amidst unprecedented demand for our products. We have put in place measures to reduce the backlog that was generated during the first nine months of fiscal year 2022, including hiring additional labor, adding additional work shifts, improving operating productivity in our plants, upgrading our manufacturing facilities and equipment and increasing our overseas freight forwarders. As discussed below in "Consolidated Results," gross profit has declined in both the third quarter and the first nine months of fiscal year 2022 compared to the same periods in fiscal year 2021 related to rising costs and supply chain disruptions. We have faced longer lead times for some of our materials purchases, which have contributed to an increase in our backlog but we have been able to avoid significant out of stock issues for most of our materials. Where possible, we have found other suppliers to meet the increase in customer demand for our products. In addition, the cost of repair parts has increased but this has not caused any significant disruption to our business. While we have experienced a shortage of production labor at certain times during the 24 -------------------------------------------------------------------------------- first nine months of fiscal year 2022, which has been a contributing factor to our increase in backlog, we have been able to hire additional labor and reduce our backlog related to production constraints in the third quarter of fiscal year 2022. We are closely monitoring the continuation, resurgence in certain areas, and effects of COVID-19 on all aspects of our business, including how it has impacted and may impact our suppliers and customers as well as the effects of the pandemic on economic conditions and the financial markets. In general, we have seen an increase in costs, particularly as it relates to commodities as the economy continues to react to, and recover from, the pandemic and demand surpasses supply. We have also seen costs increasing due to inflation. In addition to rising commodity costs, several of our suppliers have passed along non-commodity price increases they have experienced in their own business. However, we have not experienced any significant interruptions, and we will continue to closely monitor our inventory levels to mitigate the risk of any potential supply interruptions or changes in customer demand. It is possible that significant disruptions could occur if the pandemic and other factors such as labor shortages, ongoing geopolitical tensions, and other strains on the supply chain continue to put pressure on production, transportation, and shipping as a result of an imbalance of supply and demand or if there are continued increases in costs that we are unable to recover. The impacts of COVID-19 and related economic conditions on our future results are uncertain at this time. The scope, duration, and magnitude of the direct and indirect effects of COVID-19 continue to evolve (and in many cases, rapidly) in ways that are difficult or impossible to anticipate. In addition, although COVID-19 has not materially impacted our net sales to date, it remains uncertain whether and how consumers will modify their purchasing habits in response to the ongoing COVID-19 pandemic and/or the lifting or relaxing and/or re-imposition of mandates as various geographies experience resurgences and abatement of the pandemic. As a result, our results to date may not be indicative of the impact that COVID-19 may have on our results for the remainder of fiscal year 2022.
The impacts of COVID-19 on our specific operating segments are discussed below.
NINE MONTHS ENDEDAPRIL 30, 2022 COMPARED TO NINE MONTHS ENDEDAPRIL 30, 2021
CONSOLIDATED RESULTS
Consolidated net sales for the nine months endedApril 30, 2022 were$255,431,000 , a 13% increase compared to net sales of$226,852,000 for the nine months endedApril 30, 2021 . Net sales increased for both ourRetail and Wholesale Products Group and Business toBusiness Products Group due to an increase in sales volume and higher prices instituted to compensate for rising costs. The increase in demand for our products during the first nine months of fiscal year 2022 has led to an increase in our backlog of orders. We have hired additional manufacturing personnel, expanded our production shifts, increased production equipment and made various repairs to equipment in order to reduce our backlog as well as increase our use of alternate modes of transportation. We continue to analyze the constraints on our operations and implement strategies to meet the increase in customer demand. Segment results are discussed further below. Consolidated gross profit for the first nine months of fiscal year 2022 was$45,034,000 , or 18% of net sales, compared to$50,435,000 , or 22%, of net sales, for the first nine months of fiscal year 2021. Higher freight, packaging, natural gas, and non-fuel manufacturing costs per ton drove the decrease in gross profit. We continue to experience high freight costs both domestically and with respect to ocean freight. Domestic freight costs per ton, excluding the freight we no longer charge to a significant customerwho now picks up its own purchases, increased approximately 32% in the first nine months of fiscal year 2022 compared to the same period of fiscal year 2021. The increase relates to, in part, higher transportation rates due to a national driver shortage and tight trucking capacity. The continued increase in cost of diesel fuel has also contributed to the higher transportation rates. Currently, availability of diesel fuel reserves inthe United States is tight, which is driving the increase in cost. Ocean freight costs have increased due to rising fuel costs and export fees. In addition, our overall freight costs can vary between periods depending on the mix of products sold and the geographic distribution of our customers. Packaging costs per ton for the first nine months of fiscal year 2022 were approximately 32% higher compared to the first nine months of fiscal year 2021 due to higher commodity costs, particularly as it relates to resin and pallet costs. Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices. The cost of natural gas per ton used to operate kilns that dry our clay was 100% higher in the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021 due to higher natural gas prices, which are being driven by demand surpassing available supply as well as the ongoing conflict betweenRussia andUkraine . Non-fuel manufacturing costs per ton also increased during the first nine months of fiscal year 2022 compared to fiscal year 2021 by 13%. The increase in non-fuel manufacturing costs relate to higher repairs, utility costs, labor and benefit costs, and costs of purchased materials. In addition to the above, during the first nine months of fiscal year 2022, several suppliers started to pass along non-commodity price increases related to cost increases experienced in their own businesses and we expect such increases to persist. While we have faced higher costs due to the reasons mentioned above, we continue to strive to restore our historical margins utilizing various strategies including reducing costs where possible, increasing sales volume, and implementing price increases. 25 -------------------------------------------------------------------------------- Total selling, general and administrative ("SG&A") expenses of$41,054,000 for the first nine months of fiscal year 2022 were higher by$1,971,000 , or 5%, compared to$39,083,000 for the first nine months of fiscal year 2021. SG&A expenses for the operating segments were essentially flat for the first nine months of fiscal year 2022 compared to the same period in the prior fiscal year and unallocated corporate expenses were higher by$1,656,000 , or 9%. The discussion of the segments' operating incomes below describes the changes in SG&A expenses that were allocated to the operating segments. The increase in unallocated corporate expenses were driven by higher professional fees related to costs for various outside services related to growing business needs and strategic initiatives. Loss on impairment of goodwill of$5,644,000 related to the impairment of goodwill at ourRetail and Wholesale Products Group reporting unit. Our goodwill impairment test is based on cash flow considerations and other approaches that require significant judgment with respect to volume, revenue, expenses and allocations. We determined that, as a result of lower share prices and the continued adverse impacts of rising costs and additional expenses to prevent supply chain disruptions, that, despite improving margins, we had a triggering event during the third quarter of fiscal 2022 that necessitated a goodwill impairment test and resulted in the carrying value of ourRetail and Wholesale Products Group reporting unit being higher than its fair value which led to the$5,644,000 impairment charge. Other income of$892,000 for the first nine months of fiscal year 2022 was higher than the same period in fiscal year 2021 by$170,000 and included less periodic benefit costs related to our pension plan and insurance recoveries related to our property, plant and equipment partially offset by higher interest expense and exchange rate losses. Consolidated net (loss) income before taxes for the first nine months of fiscal year 2022 was a loss of$772,000 compared to net income before taxes of$12,074,000 for the first nine months of fiscal year 2021. Results for the first nine months of fiscal year 2022 were driven by the factors discussed above. We had a tax benefit for the first nine months of fiscal year 2022 of$1,195,000 compared to tax expense of$1,651,000 for the first nine months of fiscal year 2021. Our tax benefit was driven primarily by the tax impact of our goodwill impairment, lower net income and one-time tax savings identified during the third quarter of fiscal year 2022. We used an estimated annual effective tax rate ("ETR") in determining our provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.
BUSINESS TO BUSINESS PRODUCT GROUP
Net sales of the Business toBusiness Products Group for the first nine months of fiscal year 2022 increased compared to the first nine months of fiscal year 2021 for all our products. Net sales were$92,928,000 for the first nine months of fiscal year 2022, an increase of$12,830,000 , or 16%, from net sales of$80,098,000 for the first nine months of fiscal year 2021. Net sales of our fluids purification products increased approximately$6,108,000 , or 16%, compared to the first nine months of the prior fiscal year. The increase in net sales occurred for a variety of reasons, including new customer wins, increased sales to existing customers, increase in air travel in most regions, price increases that were instituted to offset rising costs, and in some cases, timing of net sales. Much of the increase in net sales relates toNorth America , but net sales inLatin America andAsia also increased and sales inEurope decreased slightly during the first nine months of fiscal year 2022 compared to the same period in fiscal year 2021 due to ocean freight shipping delays. Similar to ourRetail and Wholesale Products Group cat litter business, our co-packaged coarse cat litter business experienced a significant increase of$2,527,000 or 23% in net sales during the first nine months of fiscal year 2022 compared to fiscal year 2021 primarily due to price increases and to some extent, an increase in volume. Net sales of our agricultural and horticultural chemical carrier products increased approximately$2,804,000 , or 15%, for the first nine months of fiscal year 2022 compared to the same period in fiscal year 2021 as a result of continued strong demand for these products as well as price increases. Net sales of our animal health and nutrition products increased$1,391,000 , or 11%, during the first nine months of fiscal year 2022 compared to the first nine months of the prior year. The increase in net sales relates to several new customers, a new product line inNorth America , and in general, timing of when sales occur. Despite the overall increase in net sales, ocean freight delays continue to negatively impact our business as does COVID-19, particularly inChina which has continued to impose restrictions and quarantine requirements in response to COVID-19 outbreaks. See "Foreign Operations" below for a discussion of net sales for our foreign operations that sell our animal health and nutrition products. SG&A expenses for the Business toBusiness Products Group increased approximately 20% or$1,771,000 for the first nine months of fiscal year 2022 compared to the same period of the prior fiscal year. We continued to invest in our animal health business, which resulted in higher costs due to increased headcount of sales and leadership personnel, increased travel costs, and increased marketing efforts associated with our animal feed additives. The increase in SG&A expenses in the first nine months of fiscal year 2022 also related to an increase in bad debt expense and a write off of patent applications. These higher costs were, to some degree, reduced by favorable exchange rates. The Business toBusiness Products Group's operating income for the first nine months of fiscal year 2022 was$20,052,000 , a decrease of$764,000 , or 4%, from operating income of$20,816,000 for the first nine months of fiscal year 2021. The decrease 26 --------------------------------------------------------------------------------
operating income was driven by higher freight, packaging, natural gas and non-fuel manufacturing costs per tonne, as discussed in the “Consolidated Results” section above, as well as higher general and administrative costs.
RETAIL AND WHOLESALE PRODUCT GROUP
Net sales of theRetail and Wholesale Products Group for the first nine months of fiscal year 2022 were$162,503,000 , an increase of$15,749,000 , or 11%, from net sales of$146,754,000 for the first nine months of fiscal year 2021 driven by higher net sales of both our cat litter and industrial and sports products. Total cat litter net sales were approximately$10,580,000 , or 9%, higher compared to the first nine months of the prior fiscal year due to increased sales volume and price increases in response to rising costs. Net sales of branded scoopable litter, private label lightweight and heavyweight litter, and accessories (liners) increased in the first nine months of fiscal year 2022 as we gained business from new customers and existing customers either purchased certain of our products for the first time or increased the volume of their purchases from us. E-commerce sales were also higher during the first nine months of fiscal year 2022 compared to fiscal year 2021. The impact of COVID-19 on increased pet adoption continues to boost sales as well as the overall macro trend of increased spending on pets. In addition, cat litter net sales increased despite revising our shipping terms with one of our significant customers in the fourth quarter of fiscal year 2021 to provide that freight charges are the responsibility of such customer and are no longer included in the prices charged. Cat litter net sales by our subsidiary inCanada further contributed to the net sales increase, as discussed in "Foreign Operations" below. Also included in theRetail and Wholesale Products Group's results were increased net sales of our industrial and sports products compared to the first nine months of fiscal year 2021. Net sales of our industrial and sports products increased approximately$5,051,000 , or 22%, compared to the first nine months of fiscal year 2021, due to an increase in volume due to the re-opening of businesses and sports fields as well as new customers and an increase in selling price per ton as we continue to respond to rising costs. SG&A expenses for theRetail and Wholesale Products Group were lower by approximately$1,467,000 , or 11%, during the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021 primarily due to lower advertising costs partially offset by compliance penalties caused by supply chain disruptions, unfavorable exchange rates and higher travel and personnel costs. We anticipate total advertising expense in fiscal year 2022 will be lower compared to fiscal year 2021.The Retail and Wholesale Products Group experienced an operating loss for the first nine months of fiscal year 2022 of$2,113,000 , a decrease of$10,596,000 , or 125%, from operating income of$8,483,000 for the first nine months of fiscal year 2021. The decrease in operating income was driven by the goodwill impairment charge recorded in the third quarter of fiscal year 2022 as well as higher freight, packaging, natural gas and non-fuel costs which outpaced the increase in net sales as described in "Consolidated Results" above.
AWAY OPERATIONS
Foreign operations include our subsidiaries inCanada and theUnited Kingdom , which are reported in theRetail and Wholesale Products Group , and our subsidiaries inChina ,Mexico andIndonesia , which are reported in the Business toBusiness Products Group . Net sales by our foreign subsidiaries during the first nine months of fiscal year 2022 were$14,353,000 , an increase of$1,341,000 , or 10%, compared to net sales of$13,012,000 during the first nine months of fiscal year 2021. All of our foreign operations, with the exception of our subsidiary inMexico , experienced an increase in net sales during the first nine months of fiscal year 2022 compared to fiscal year 2021.Total net sales of our subsidiary inCanada during the first nine months of fiscal year 2022 increased by$1,521,000 , or 22%, compared to the same period in fiscal year 2021 driven by higher cat litter net sales. Cat litter sales were$1,834,000 higher during the first nine months of fiscal year 2022 than in the same period in fiscal year 2021. The increase in cat litter sales was mainly driven by a key customer carrying three of our products for the first time as well as price increases instituted in response to rising costs. The increase in cat litter sales was partially offset by lower net sales of our industrial absorbent granules in the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021. Net sales of industrial absorbent granules were higher in the first nine months of fiscal year 2021 as companies emerged from the constraints of the pandemic and there was a surge in demand. Net sales of our subsidiary in theUnited Kingdom in the first nine months of fiscal year 2022 increased by$118,000 , or 8%, compared to net sales in the first nine months of fiscal year 2021. The increase related to timing of net sales and partly due to demand starting to slowly return post pandemic. Net sales of our subsidiary inMexico decreased during the first nine months of fiscal year 2022 compared to the same period of fiscal year 2021 by$567,000 , or 28%, as the first nine months of fiscal year 2021 included net sales of products in that region that are no longer part of our business strategy. Despite the negative impacts of COVID-19 inChina , net sales of our subsidiary inChina increased$100,000 , or 4%, during the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021 due primarily to the addition of a new customer. Net sales by our foreign subsidiaries represented 6% of our consolidated net sales during the first nine months of fiscal years 2022 and 2021. 27 -------------------------------------------------------------------------------- Our foreign subsidiaries reported a net loss of$847,000 for the first nine months of fiscal year 2022, compared to a net loss of$177,000 for the first nine months of fiscal year 2021. The net loss in the first nine months of fiscal year 2022 was primarily driven by unfavorable exchange rates, lower net sales for our subsidiary inMexico , higher cost of sales, and higher SG&A expenses by our subsidiary inChina due to increased sales personnel and marketing of our animal feed additives as we continue to invest in our animal health and nutrition products.
Identifiable assets of our foreign subsidiaries in
THREE MONTHS ENDEDAPRIL 30, 2022 COMPARED TO THREE MONTHS ENDEDAPRIL 30, 2021
CONSOLIDATED RESULTS
Consolidated net sales for the three months endedApril 30, 2022 were$85,761,000 , a 12% increase compared to net sales of$76,255,000 for the three months endedApril 30, 2021 . Net sales increased for both ourRetail and Wholesale Products Group and Business toBusiness Products Group due to an increase in sales volume and higher prices instituted to compensate for rising costs. The increase in demand for our products has continued to result in higher backlog but we have put in place measures to reduce backlog. See discussion above in "Results from Operations - Nine Months EndedApril 30, 2022 compared to Nine Months endedApril 30, 2021 " for more detail on backlog. Segment results are discussed below. Consolidated gross profit for the three months endedApril 30, 2022 was$15,630,000 , or 18% of net sales, compared to$14,966,000 , or 20%, of net sales, for the three months endedApril 30, 2021 . Higher freight, packaging, natural gas, and non-fuel manufacturing costs per ton drove the decrease in gross profit. Despite the decrease in gross profit compared to the first quarter of fiscal year 2021, we are starting to experience stronger margins during the third quarter of fiscal year 2022 as the selling prices of our products are starting to catch up to rising costs. We continue to experience high freight costs both domestically and with respect to ocean freight. Domestic freight costs per ton, excluding the freight we no longer charge to a significant customerwho now picks up its own purchases, increased approximately 27% in the third quarter of fiscal year 2022 compared to the same period of fiscal year 2021. The increase relates, in part, to higher transportation rates due to a national driver shortage and tight trucking capacity. The continued increase in cost of diesel fuel has also contributed to the higher transportation rates. Currently, availability of diesel fuel reserves inthe United States is tight, which is driving the increase in cost. Ocean freight costs have increased due to rising fuel costs and export fees. Our overall freight costs can also vary between periods depending on the mix of products sold and the geographic distribution of our customers. Packaging costs per ton for the third quarter of fiscal year 2022 were approximately 24% higher compared to the third quarter of fiscal year 2021 due to higher commodity costs, particularly as it relates to resin and pallet costs. Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices. The cost of natural gas per ton used to operate kilns that dry our clay was 115% higher in the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021 due to higher natural gas prices which are being driven by demand surpassing available supply as well as the ongoing conflict betweenRussia andUkraine . Non-fuel manufacturing costs per ton also increased during the third quarter of fiscal year 2022 compared to fiscal year 2021 by 12%. The increase in non-fuel manufacturing costs relate to higher repairs, utility costs, labor and benefit costs and costs of purchased materials. In addition to the above, several suppliers have passed along non-commodity price increases related to cost increases experienced in their own businesses and we expect such increases to persist. While we have faced higher costs due to the reasons mentioned above, we continue to strive to restore our historical margins utilizing various strategies including reducing costs where possible, increasing sales volume and implementing price increases. Total SG&A expenses of$14,013,000 for the third quarter of fiscal year 2022 were higher by$978,000 , or 8%, compared to$13,035,000 for the third quarter of fiscal year 2021. While unallocated corporate expenses increased 285,000 or 4% during the third quarter of fiscal year 2022 compared to fiscal year 2021, SG&A expenses for the operating segments were the primary driver of the increase. The discussion below describes the SG&A expenses allocated to the operating segments. Unallocated corporate expenses included higher professional fees related to costs for various outside services related to growing business needs and strategic initiatives partially offset by lower personnel costs. Loss on impairment of goodwill of$5,644,000 related to the impairment of goodwill at ourRetail and Wholesale Products Group reporting unit. Our goodwill impairment test is based on cash flow considerations and other approaches that require significant judgment with respect to volume, revenue, expenses and allocations. We determined that, as a result of lower share prices and the continued adverse impacts of rising costs and additional expenses to prevent supply chain disruptions, that, despite improving margins, we had a triggering event during the third quarter of fiscal 2022 that necessitated a goodwill impairment test and resulted in the carrying value of ourRetail and Wholesale Products Group reporting unit being higher than its fair value which led to the$5,644,000 impairment charge. Other income of$175,000 for the third quarter of fiscal year 2022 was lower than the same period in fiscal year 2021 by$56,000 and included higher interest expense and exchange rate losses. 28 -------------------------------------------------------------------------------- Consolidated net loss before taxes for the third quarter of fiscal year 2022 was$3,852,000 , compared to net income before taxes of$2,162,000 for the third quarter of fiscal year 2021. Results for the third quarter of fiscal year 2022 were driven by the factors described above. We had a tax benefit for the third quarter of both fiscal years 2022 and 2021 of$1,719,000 and$24,000 , respectively. Our tax benefit in the third quarter of fiscal year 2022 was driven primarily by the tax impact of our goodwill impairment, net operating losses and one-time tax savings identified during the third quarter of fiscal year 2022. We used an estimated annual ETR in determining our provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion. The tax benefit in the third quarter of fiscal year 2021 reflected a decrease in our expected annual taxable income as well as certain employment related credits we were able to take advantage in addition to a tax deduction for foreign-derived income.
BUSINESS TO BUSINESS PRODUCT GROUP
Net sales of the Business toBusiness Products Group for the third quarter of fiscal year 2022 increased compared to the third quarter of fiscal year 2021 for all our products. Net sales were$31,375,000 , an increase of$5,082,000 , or 19%, from net sales of$26,293,000 for the third quarter of fiscal year 2021. Net sales of our fluids purification products increased approximately$1,974,000 , or 16%, in the third quarter of fiscal year 2022 compared to same period in fiscal year 2021. The increase in net sales occurred for a variety of reasons, including new customer wins, increased sales to existing customers, increase in air travel in most regions, price increases that were instituted to offset rising costs and in some cases, timing of net sales. In particular, net sales of our Ultra-Clear products rebounded as global air travel increased compared to the same period last year in most, but not all, regions. Much of the increase in net sales relates toNorth America , but net sales inLatin America ,Europe andAsia either increased or remained essentially flat during the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021. Net sales of our agricultural and horticultural chemical carrier products increased approximately$1,318,000 , or 20%, in the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 driven by both volume and price increases. While volume is still higher during the third quarter of fiscal year 2022 than the same period in fiscal year 2021, several of our customers are still experiencing their own supply chain disruptions, which negatively impacts their demand of our products. Net sales of our animal health and nutrition products increased approximately$978,000 , or 23%, in the third quarter of fiscal 2022 compared to the third quarter of fiscal year 2021 due to a significant increase in volume of net sales. The increase in net sales is the direct result of our focus on our animal health and nutrition products and the fruition of increased SG&A efforts to grow the animal health and nutrition business as discussed below. The increase in net sales relates to several new customers, a new product line inNorth America , and to some extent, timing of when net sales occur. Despite the overall increase in net sales, ocean freight delays continue to negatively impact our business. In addition, while the impacts of COVID-19 are still dampening sales inChina as a result of restrictions and quarantine requirements imposed in that region in response to COVID-19 outbreaks, net sales from our subsidiary inChina increased during the third quarter of fiscal year 2022 compared to fiscal year 2021 primarily due to a new customer. See "Foreign Operations" below for a discussion of net sales for our foreign operations that sell our animal health and nutrition products. Similar to ourRetail and Wholesale Products Group cat litter business, our co-packaged coarse cat litter business experienced a significant increase of$812,000 , or 25%, in net sales during the third quarter of fiscal year 2022, compared to the same quarter in fiscal year 2021, primarily due to price increases and to some extent, an increase in sales volume. SG&A expenses for the Business toBusiness Products Group increased approximately$1,008,000 , or 34%, in the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021. We continued to invest in our animal health business, which resulted in higher costs due to increased headcount of sales and leadership personnel, increased travel costs, broker commissions, and increased marketing efforts associated with our animal feed additives. The increase in SG&A expenses in the third quarter of fiscal year 2022 also related to higher bad debt expense and a write off of patent applications. These higher costs were, to some degree, reduced by favorable exchange rates. The Business toBusiness Products Group's operating income for the third quarter of fiscal year 2022 was$5,716,000 , a decrease of$705,000 , or 11%, from operating income of$6,421,000 in the third quarter of fiscal year 2021. The decrease in operating income was driven by the higher sales partially offset by higher SG&A expenses and an increase in freight, packaging, materials, natural gas, and non-fuel manufacturing costs discussed in "Consolidated Results" above.
RETAIL AND WHOLESALE PRODUCT GROUP
Net sales of theRetail and Wholesale Products Group for the third quarter of fiscal year 2022 were$54,386,000 , an increase of$4,424,000 , or 9%, from net sales of$49,962,000 for the third quarter of fiscal year 2021 driven by net sales of both our cat litter and industrial and sports products. Total cat litter net sales were approximately$3,318,000 , or 8%, higher in the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 due to increased sales volume and price increases in response to rising costs. Net sales of branded scoopable litter, private label lightweight and heavyweight litter increased in the third quarter of fiscal year 2022 as existing customers increased the volume of their purchases from us. The impact of COVID-19 on increased pet adoption continues to boost sales as well as the overall macro trend of increased spending on pets. In addition, cat litter net sales increased despite revising our shipping terms with one of our significant customers in the fourth 29 -------------------------------------------------------------------------------- quarter of fiscal year 2021 to provide that freight charges are the responsibility of such customer and are no longer included in the prices charged. In addition, net sales of cat litter by our subsidiary inCanada continue to increase as further discussed in "Foreign Operations" below. E-commerce sales decreased during the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 as we lost one of our customers due to price increases. Also included in theRetail and Wholesale Products Group's results were increased net sales of our industrial and sports products compared to the third quarter of fiscal year 2021. Net sales of our industrial and sports products increased approximately$1,083,000 , or 11%, in the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021, due to both an increase in volume due to the re-opening of businesses and sports fields and winning some smaller customers as well as an increase in selling price per ton in response to rising costs. SG&A expenses for theRetail and Wholesale Products Group were lower in the third quarter of fiscal year 2022 than in fiscal year 2021 by 7%, or$293,000 , primarily due to lower advertising costs partially offset by compliance penalties caused by supply chain disruptions, unfavorable exchange rates and personnel costs.The Retail and Wholesale Products Group experienced an operating loss for the third quarter of fiscal year 2022 of$3,113,000 , a decrease of$4,968,000 , compared to operating income of$1,855,000 for the third quarter of fiscal year 2021. The decrease in operating income was driven by the goodwill impairment charge recorded in the third quarter of fiscal year 2022 as well as higher freight, packaging, natural gas, and non-fuel manufacturing costs which outpaced the increase in net sales as described above in "Consolidated Results."
AWAY OPERATIONS
Foreign operations include our subsidiaries inCanada and theUnited Kingdom , which are reported in theRetail and Wholesale Products Group , and our subsidiaries inChina ,Mexico andIndonesia , which are reported in the Business toBusiness Products Group . Net sales by our foreign subsidiaries during the third quarter of fiscal year 2022 were$4,727,000 , a 13% increase compared to net sales of$4,174,000 in the third quarter of fiscal year 2021. All of our foreign operations, with the exception of our subsidiary inMexico , experienced an increase in net sales during the third quarter of fiscal year 2022 compared to fiscal year 2021. Total net sales of our subsidiary inCanada during the third quarter of fiscal year 2022 increased by$294,000 , or 12%, compared to the same period in fiscal year 2021 driven by cat litter net sales. Cat litter net sales for our subsidiary inCanada increased by approximately$605,000 , or 35%, in the third quarter of fiscal year 2022 compared to the same period of fiscal year 2021 due to both an increase in volume and price increases. Cat litter sales inCanada experienced increased sales to existing customers, a key customer carrying three of our products they had not previously purchased, and to some extent, an increase in sales due to our ability to meet demand that our competitors could not. Partially offsetting this increase was a decrease in net sales of our industrial absorbent granules in the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 because net sales were particularly strong in the third quarter of fiscal year 2021 as companies were emerging from the pandemic and were rebuilding stock. Net sales of our absorbent granules by our subsidiary in theUnited Kingdom were modestly higher during the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 by$24,000 or 5%. This increase related partly to timing of net sales and partly to demand starting to slowly return in theUnited Kingdom . Net sales of our animal health and nutrition products by our subsidiary inChina increased in the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 by$228,000 , or 40%, despite the continued impacts of the pandemic inChina . The increase in net sales related primarily to a new customer. Net sales by our subsidiary inMexico decreased$147,000 , or 25%, in the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 as the third quarter of fiscal year 2021 included net sales of products that are no longer part of our business strategy. Our foreign subsidiaries' net sales represented approximately 6% and 5% of consolidated net sales during the third quarter of fiscal years 2022 and 2021, respectively. Our foreign subsidiaries reported a net loss of$34,000 for the third quarter of fiscal year 2022 compared to a net loss of$134,000 for the third quarter of fiscal year 2021. The net loss in the third quarter of fiscal year 2022 was primarily driven by unfavorable foreign exchange rates, higher cost of sales, and higher SG&A expenses incurred by our subsidiary inChina due to increased sales personnel and marketing of our animal feed additives as we continue to invest in our animal health and nutrition products.
CASH AND CAPITAL RESOURCES
Our principal liquidity needs are to fund our capital requirements, including funding working capital needs; purchasing and upgrading equipment, facilities (including significant renovations at one of our plants), information systems, and real estate; supporting new product development; investing in infrastructure; repurchasing stock; paying dividends; making pension contributions; and, from time to time, business acquisitions, and funding our debt service requirements. During the first nine months of fiscal year 2022, we principally funded these requirements using cash from current operations as well as cash generated in the second quarter of fiscal year 2022 from borrowings under our Series SeniorC Notes (described below). 30 -------------------------------------------------------------------------------- We currently anticipate cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements. In addition, we are actively monitoring the timing and collection of our accounts receivable. Given the dynamic nature of COVID-19 and its effects, as well as the current inflationary environment and impacts of supply chain disruption on our business, we will continue to assess our liquidity needs and to actively manage our spending.
The following table sets forth certain items of our unaudited condensed consolidated statements of cash flows (in thousands):
For
nine months ended
2022 2021 Net cash provided by operating activities $ 5,460$ 8,340 Net cash used in investing activities (16,012) (10,753) Net cash provided by (used in) financing activities 8,807 (8,324) Effect of exchange rate changes on cash and cash equivalents (21) 165 Net decrease in cash and cash equivalents $
(1,766)
Net cash flow generated by operating activities
In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first nine months of fiscal years 2022 and 2021 were as follows: Deferred income taxes increased$1,311,000 in the first nine months of fiscal year 2022 primarily due to the tax benefit related to the deductible portion of noncash impairment charge of goodwill that is deductible for tax purposes in future years. Deferred income taxes decreased$716,000 in the first nine months of fiscal year 2022 due to changes in restricted stock balances in the ordinary course of business. Accounts receivable, less allowance for doubtful accounts, increased$2,454,000 in the first nine months of fiscal year 2022 compared to an increase of$3,971,000 in the first nine months of fiscal year 2021. Accounts receivable increased in both fiscal years 2022 and 2021 due to the increase in net sales in both periods. In addition, the variation in accounts receivable balances reflect differences in the level and timing of collections as well as the payment terms provided to various customers. Inventory increased$11,456,000 in the first nine months of fiscal year 2022 compared to a decrease of$524,000 in the first nine months of fiscal year 2021. Inventory increased during the first nine months of fiscal year 2022 due to rising costs and building inventory levels to meet demand and thwart potential supply chain disruptions. We also increased our inventory to be able to meet demand during a planned shutdown for equipment repairs at one of our plants. The decrease in inventory in the first nine months of fiscal year 2021 was due to increased demand, which depleted inventory levels and was partially offset by higher packaging costs. Prepaid expenses decreased$181,000 in the first nine months of fiscal year 2022 due to lower prepaid advertising costs partially offset by higher prepaid insurance costs due to the rising cost of insurance and timing of premium payments. Prepaid expenses increased$2,117,000 in the first nine months of fiscal year 2021 driven primarily by prepayment of income taxes. This increase in fiscal year 2021 was partially offset by lower prepaid advertising costs and insurance. Other assets decreased$971,000 in the first nine months of fiscal year 2022 compared to an increase of$1,066,000 in the first nine months of fiscal year 2021. The decrease in other assets in the first nine months of fiscal year 2022 related to capitalized pre-production costs being transferred to property, plant and equipment as the mines are now in production, partly reduced by an increase in long-term royalties. The increase in other assets in the first nine months of fiscal year 2021 related primarily to an increase in capitalized pre-production mining costs partly offset by amortization of our operating lease right-of-use lease assets. Accounts payable increased$1,333,000 in the first nine months of fiscal year 2022 compared to a decrease of$4,227,000 in the first nine months of fiscal year 2021. Higher trade payables drove the increase in accounts payable in the first nine months of fiscal year 2022. Lower trade payables drove the decrease in accounts payable in the first nine months of fiscal year 2021 as well as income taxes payable being in a prepaid position versus a payable position at the end of the third quarter of fiscal year 2021. Trade and freight payables vary in both periods due to the timing of payments, fluctuations in the cost of goods and services we purchased, production volume levels and vendor payment terms. 31 -------------------------------------------------------------------------------- Accrued expenses increased$1,120,000 in the first nine months of fiscal year 2022 compared to a decrease of$4,070,000 in the first nine months of fiscal year 2021. The increase in accrued expenses during the first nine months of fiscal year 2022 is attributable to an increase in freight costs, natural gas prices and salaries and benefits. These increases were somewhat lessened by lower accrued advertising costs. Accrued expenses decreased$4,070,000 in the first nine months of fiscal year 2021 due to decreases in our discretionary accrued bonus, advertising costs, and real estate taxes offset by an increase in accrued freight and a reclassification of one of our accruals from long term to short term. Accrued freight can vary with freight rates, timing of shipments, and production requirements as well as supply and demand. 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. Other liabilities decreased$1,593,000 in the first nine months of fiscal 2022 compared to a decrease of$330,000 during the first nine months of fiscal year 2021. The decrease in other liabilities for the first nine months of both fiscal years 2022 and 2021 relate to the timing of when payments for the deferral of employer taxes under the CARES Act are due.
Net cash used in investing activities
Cash used in investing activities of$16,012,000 in the first nine months of fiscal year 2022 were higher compared to cash used in investing activities of$10,753,000 in the first nine months of fiscal year 2021 driven by capital expenditures. During the first nine months of fiscal year 2022 we expanded our plant equipment and improved our facilities to support increased demand for our products as well as made improvements to our IT network.
Net cash used in financing activities
Cash provided by financing activities of$8,807,000 in the first nine months of fiscal year 2022 was higher than cash used in financing activities of$8,324,000 in the first nine months of fiscal year 2021. The first nine months of fiscal year 2022 included the issuance of$25,000,000 of notes payable offset by higher repurchases of stock than in the first nine months of fiscal year 2021.
Other
Total cash and investment balances held by our foreign subsidiaries of
sales of
OnJanuary 31, 2019 , we signed a fifth amendment to our credit agreement withBMO Harris Bank N.A . ("BMO Harris"), which expires onJanuary 31, 2024 . The agreement provides for a$45,000,000 unsecured revolving credit agreement and a maximum of$10,000,000 for letters of credit. The agreement terms also state that we may select a variable interest rate based on either the BMO Harris prime rate or a LIBOR-based rate, plus a margin that varies depending on our debt to earnings ratio, or a fixed rate as agreed between us and BMO Harris. As ofApril 30, 2022 , the variable rates would have been 3.75% for the BMO Harris prime-based rate or 2.58% for the three-month 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 ofApril 30, 2022 and 2021, we were in compliance with the covenants. There were no borrowings during the first nine months of either fiscal year 2021 or 2022. OnMay 15, 2020 , we entered into a debt instrument pursuant to which, among other things, we issued$10,000,000 in aggregate principal amount of our 3.95% Series B Senior Notes dueMay 15, 2030 and entered into an amended note agreement that provides the Company with the ability to request, from time to time untilMay 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. Pursuant to the amended note agreement, onDecember 16, 2021 , the Company issued$25,000,000 in aggregate principal amount of its 3.25% Series C Senior Notes dueDecember 16, 2031 . As ofApril 30, 2022 outstanding notes payable were$33,788,000 , net of$212,000 of unamortized debt issuance costs. See Note 15 of the Notes to the unaudited Condensed Consolidated Financial Statements and Item 5 "Other Information" in this Quarterly Report on Form 10-Q for discussion on amendments made to the credit agreement with BMO Harris and our Senior Note Agreements. As ofApril 30, 2022 , we had remaining authority to repurchase 485,196 shares of Common Stock and 273,100 shares of ClassB Stock under a repurchase plan approved by our Board of Directors (the "Board"). Repurchases may be made on the open 32 --------------------------------------------------------------------------------
market (pursuant to the plans in Rule 10b5-1 or otherwise) or in negotiated transactions. The timing, number and terms of share repurchases will be determined by our management in accordance with the repurchase plan approved by our Board of Directors.
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, deferred compensation payouts, dividend payments and debt service obligations for at least the next 12 months. We expect capital expenditures in fiscal year 2022 to be greater than in fiscal year 2021, including capital expenditures to renovate one of our plants, estimated to be approximately$6,500,000 . We do not believe that these increased capital expenditures will dramatically impact our cash position; however our cash requirements are subject to change as business conditions warrant and opportunities arise. Our anticipated advertising expense for fiscal year 2022 is expected to be lower compared to fiscal year 2021. Adjustments to advertising spending for the remainder of the fiscal year may occur due to any upcoming volatility in the economic environment. We continually evaluate our liquidity position and anticipated cash needs, as well as the financing options available to obtain additional cash reserves. Our ability to fund operations, to make planned capital expenditures, to make scheduled debt payments, to contribute to our pension plan and to remain in compliance with all financial covenants under debt agreements, including, but not limited to, the current credit agreement, depends on our future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors. The timing and size of any new business ventures or acquisitions that we complete may also impact our cash requirements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of financial condition and results of operations is based on our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance withU.S. GAAP for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Estimates and assumptions are revised periodically. Actual results could differ from these estimates. See the information concerning our critical accounting policies included under "Management's Discussion of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2021 .
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