TMCnet News
OIL DRI CORP OF AMERICA - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read together with the Consolidated Financial Statements and the related notes included elsewhere herein. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include those discussed under "Forward-Looking Statements" and in Item 1A "Risk Factors" in this Annual Report on Form 10-K. OVERVIEW We develop, mine, manufacture and market sorbent products principally produced from clay minerals, primarily consisting of montmorillonite and attapulgite and, to a lesser extent, other clay-like sorbent materials, such as Antelope shale. Our principal products include agricultural and horticultural chemical carriers, animal health and nutrition products, cat litter, fluids 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 those who use our products as part of their production process or use them as an ingredient in their final finished product. We have two reportable operating segments based on the different characteristics of our two primary customer groups: Retail and Wholesale Products Group and Business to Business Products Group. Each operating segment is discussed individually below. Additional detailed descriptions of the operating segments are included in Item 1 "Business" above. Consolidated net income was $8,356,000, or $1.17 per diluted share, for the year ended July 31, 2014, a 43% decrease from net income of $14,586,000, or $2.07 per diluted share, for the year ended July 31, 2013. During fiscal 2014 we made substantial business investments in both of our operating segments, including the acquisition of certain assets of MFM, which expanded our private label cat litter business, and the opening of our subsidiary in Shenzhen, China, which extended the presence of our animal health and nutrition products in China through a direct sales force. In addition, we increased spending for trade promotions and advertising of our cat litter products and invested significantly in capital at our plant facilities for equipment and capacity expansion. We also experienced cost increases to mine, manufacture and transport our products during fiscal 2014. Rising costs for natural gas, freight and packaging, as well as increased mining costs to extract clay deeper in the ground all impacted our annual results. We believe our balance sheet remains strong at the end of fiscal 2014, even though cash, cash equivalents and short-term investments declined. Major uses of cash included capital expenditures, the MFM acquisition, advertising, dividend payments and debt repayments. We believe cash requirements for capital expenditures in fiscal 2015 will be comparable to fiscal 2014 due to projects at our manufacturing facilities. Advertising and promotions spending is also anticipated to be a significant use of cash in fiscal 2015, but we believe at levels slightly less than in fiscal 2014. Our cash requirements are subject to change as business conditions warrant and opportunities arise. RESULTS OF OPERATIONS FISCAL 2014 COMPARED TO FISCAL 2013 CONSOLIDATED RESULTS Consolidated net sales for the year ended July 31, 2014 were $266,313,000, a 6% increase from net sales of $250,583,000 in fiscal 2013. Net sales in our Retail and Wholesale Products Group increased due to more tons sold, including additional sales after the acquisition of MFM, and net sales in our Business to Business Products Group increased due to higher net selling prices and a favorable product sales mix (defined as a greater proportion of sales from higher priced products). Consolidated gross profit as a percentage of net sales in fiscal 2014 decreased to 22% from 27% in fiscal 2013. Gross profit declined due primarily to the increased costs of packaging and freight, as described by operating segment below, and due to higher material costs per ton, which included a 21% increase in the cost of natural gas used to operate kilns that dry our clay during processing. Material costs also included a 4% increase in non-fuel manufacturing cost per ton, which was attributed to higher purchased material costs, including purchased additives, fragrances and other materials required for the production of scoopable cat litters, as well as higher costs for labor and increased mining and hauling activity. We continue to pursue operational efficiencies as we integrate the additional volume gained through the acquisition of MFM. Our mining and hauling operations have been impacted by the increased volume and by extraction of clay reserves that require more overburden removal. In addition, gross profit was impacted by increased sales of private label cat litter, which generally has a lower gross profit margin than branded cat litter. 26 -------------------------------------------------------------------------------- Selling, general and administrative expenses as a percentage of net sales were 18% in fiscal 2014, compared to 19% in fiscal 2013. The discussions of each segment's operating income below describe the changes in selling, general and administrative expenses that were allocated to the operating segments. The remaining unallocated corporate expenses in fiscal 2014 included a lower estimated annual discretionary incentive plan bonus accrual and lower pension expense, which were partially offset by an increase in expense for the supplemental employee retirement plan ("SERP"). The incentive bonus expense was based on performance targets that are established for each fiscal year and discretionary authority by our Chief Executive Officer. See Notes 10 and 11 of the Notes to the Consolidated Financial Statements for additional information about the pension plan and the SERP, respectively. Our effective tax rate was 26.3% of pre-tax income in fiscal 2014 compared to 16.6% in fiscal 2013. Our tax rate in fiscal 2014 was consistent with the three years preceding fiscal 2013. During fiscal 2013 we utilized domestic AMT credits, which resulted in a lower federal income tax rate; however, in fiscal 2014 we incurred additional AMT expense. See Note 7 of the Notes to the Consolidated Financial Statements for additional information about our income taxes. Consolidated net income for fiscal 2014 was $8,356,000, a 43% decrease from net income of $14,586,000 in fiscal 2013. The decrease in net income was attributed primarily to increased costs for materials, packaging, freight and advertising, which more than offset the impact of increased sales and lower overall non-advertising selling, general and administrative costs. Segment operating income was lower for both our Business to Business and Retail and Wholesale Products Groups as discussed below. BUSINESS TO BUSINESS PRODUCTS GROUP Net sales of the Business to Business Products Group for fiscal 2014 were $94,286,000, an increase of $1,317,000, or 1%, from net sales of $92,969,000 in fiscal 2013. Net sales of both fluid purification and animal health products increased, while net sales of co-packaged cat litter and agricultural and horticultural products decreased. Net sales of fluid purification products were approximately 7% greater than in fiscal 2013 with a 4% increase in tons sold. Sales increased primarily to edible oil processors in both foreign and domestic markets driven by continued global growth in the demand for edible oil. Net sales of animal health and nutrition products increased slightly in both domestic and foreign markets due primarily to a favorable product sales mix, which offset the impact of 13% fewer tons sold. A sales decline of approximately 9% for our agricultural and horticultural products resulted primarily from 10% fewer tons sold. Sales decreased for our agricultural chemical carrier products used by producers of corn rootworm pesticides and other crop protection chemicals. Partially offsetting this decline was improved sales for our engineered granule product used in the professional pesticides and agricultural markets. A small decrease in sales of our co-packaged traditional coarse cat litter net sales was attributed primarily to 2% fewer tons sold. The Business to Business Products Group's operating income was $26,654,000 in fiscal 2014, a decrease of $4,085,000, or 13%, from operating income of $30,739,000 in fiscal 2013. A combined 8% increase in materials, packaging and freight costs per ton more than offset the higher sales described above. Material costs rose due primarily to a higher price paid for natural gas used to operate kilns that dry our clay and increases in other non-fuel manufacturing costs. See further discussion of manufacturing costs in "Consolidated Results" above. Packaging costs rose as the result of supplier price increases and the mix of products sold. Freight costs increases were driven primarily by more shipments to foreign countries and cost increases in the freight industry attributed to recent trends and regulations. The Business to Business Products Group's selling, general and administrative expenses in fiscal 2014 increased approximately 18% compared to fiscal 2013 due primarily to additional personnel and other costs incurred to expand sales of our animal health and nutrition products in foreign markets. RETAIL AND WHOLESALE PRODUCTS GROUP Net sales of the Retail and Wholesale Products Group for fiscal 2014 were $172,027,000, an increase of $14,413,000, or 9%, from net sales of $157,614,000 in fiscal 2013. Net sales increased significantly for cat litter products and increased slightly for both industrial absorbent and sports products; however, net sales decreased for our foreign subsidiaries. Our foreign subsidiaries' net sales are described under "Foreign Operations" below. Overall cat litter net sales increased approximately 13%. The benefits of higher sales volume was partially offset by higher trade spending (trade spending is deducted from net sales and includes coupons, slotting and cooperative marketing programs). Our branded cat litter net sales increased approximately 10% due primarily to more tons sold and higher selling prices that outweighed increased trade spending. Net sales of our Cat's Pride Fresh & Light scoopable products increased approximately 33% and sales also improved for our other Cat's Pride scoopable cat litters. These increases were partially offset by lower sales for our branded coarse litter products. Private label cat litter net sales increased approximately 24% due in part to additional sales from the acquisition of MFM. (See Note 3 of the Notes to the Consolidated Financial Statements for more information about the MFM acquisition.) 27 -------------------------------------------------------------------------------- The Retail and Wholesale Products Group's segment operating income for fiscal 2014 was $3,568,000, a decrease of $6,993,000, or 66%, from operating income of $10,561,000 in fiscal 2013. A combined cost increase of approximately 4% per ton for packaging, freight and materials and higher selling, general and administrative expenses, as discussed below, more than offset the benefits of higher sales described above. Packaging costs were up due to the mix of products produced and commodity price increases, including resin used in cat litter jugs and pails. The increase in freight costs were driven primarily by our service level enhancement efforts and cost increases in the freight industry attributed to recent trends and regulations. Material costs rose due primarily to a higher price paid for natural gas used to operate kilns that dry our clay and increases in other non-fuel manufacturing costs. See further discussion of manufacturing costs in "Consolidated Results" above. Selling, general and administrative expenses for the Retail and Wholesale Products Group increased approximately 15% compared to fiscal 2013 due primarily to increased advertising expense, amortization of intangible assets acquired in the MFM acquisition and higher sales commissions. FOREIGN SUBSIDIARIES Net sales by our foreign subsidiaries during fiscal 2014 were $11,246,000, a decrease of $682,000, or 6%, from net sales of $11,928,000 during fiscal 2013. Net sales by our foreign subsidiaries represented 4% of our consolidated net sales during fiscal year 2014. Net sales declined for our Canadian subsidiary, but increased for our United Kingdom subsidiary. In addition, our new China subsidiary reported initial sales in the fourth quarter of fiscal 2014. Our Canadian subsidiary continued to face strong competition for branded cat litter sales. Sales of fluids purification products provided higher sales for our United Kingdom subsidiary. For fiscal 2014, our foreign subsidiaries reported a net loss of $708,000, compared to a net loss of $176,000 in fiscal 2013. The increase in the net loss was primarily the result of lower sales and expenditures to commence operations for the China subsidiary. Identifiable assets of our foreign subsidiaries as of July 31, 2014 were $8,143,000 compared to $8,298,000 as of July 31, 2013. The decrease was primarily due to lower lower accounts receivable and net fixed assets, which were partially offset by higher deferred income taxes. RESULTS OF OPERATIONS FISCAL 2013 COMPARED TO FISCAL 2012 CONSOLIDATED RESULTS Consolidated net sales for the year ended July 31, 2013 were $250,583,000, a 4% increase from net sales of $240,681,000 in fiscal 2012. Net sales improved due primarily to: increased sales in our Business to Business Products Group; lower trade spending in our Retail and Wholesale Products Group; higher selling prices; and a favorable product sales mix. Our Business to Business Products Group also benefited from more tons sold. Consolidated gross profit as a percentage of net sales in fiscal 2013 increased to 27% from 25% in fiscal 2012. Gross profit improved due to the higher sales described above, a greater proportion of sales from higher margin products and lower costs for packaging. Partially offsetting these positive impacts were higher freight and material costs per ton, as described by operating segment below. Material costs were also effected by a 4% increase in the fuel cost per ton produced, primarily for natural gas used to operate kilns that dry our clay. Selling, general and administrative expenses as a percentage of net sales were 19% in fiscal 2013, compared to 20% in fiscal 2012. The discussions of each segment's operating income below describe the changes in selling, general and administrative expenses that were allocated to the operating segments, including approximately $3,000,000 lower advertising costs in the Retail and Wholesale Products Group. The remaining unallocated corporate expenses in fiscal 2013 included a higher estimated annual incentive plan bonus accrual. The incentive bonus expense was based on performance targets that are established for each fiscal year. Expenses also increased for the pension plan and for research and development, but decreased for the SERP. See Notes 10 and 11 of the Notes to the Consolidated Financial Statements for additional information about the pension plan and the SERP, respectively. Our effective tax rate was 16.6% of pre-tax income in fiscal 2013 compared to 27.1% in fiscal 2012. During fiscal 2013, we utilized approximately $1,369,000 of our domestic AMT attributes. We correspondingly reduced the domestic AMT valuation allowance that had been established in prior years, which resulted in a lower federal income tax rate. See Note 7 of the Notes to the Consolidated Financial Statements for additional information about our income taxes. 28 -------------------------------------------------------------------------------- Consolidated net income for fiscal 2013 was $14,586,000, a 139% increase from net income of $6,098,000 in fiscal 2012. Net income was positively impacted by a lower effective tax rate, higher net sales and lower advertising and promotion costs. These positive factors more than offset increased costs for our incentive bonus, freight and materials. Segment operating income was higher for both our Business to Business and Retail and Wholesale Products Groups as discussed below. BUSINESS TO BUSINESS PRODUCTS GROUP Net sales of the Business to Business Products Group for fiscal 2013 were $92,969,000, an increase of $7,513,000, or 9%, from net sales of $85,456,000 in fiscal 2012. Net sales of fluid purification products, animal health products and co-packaged cat litter all increased, while net sales of agricultural and horticultural products decreased. Net sales of fluid purification products were approximately 13% greater than in fiscal 2012 with an 11% increase in tons sold. Sales to edible oil, biodiesel and petroleum oil processors improved in both foreign and domestic markets. Sales to new customers and higher sales to existing customers were driven by global growth in edible oil production. Net sales of animal health and nutrition products increased approximately 31% due primarily to a favorable product sales mix and 14% more tons sold. Sales of our enterosorbent animal health products increased in both foreign and domestic markets, including both new customers and increased sales to existing customers. Our co-packaged traditional coarse cat litter net sales increase of approximately 4% was attributed primarily to 2% more tons sold and higher selling prices. A sales decline of approximately 7% for our agricultural and horticultural products was caused primarily by 12% fewer tons sold. Sales decreased for products used in horticultural applications and for our engineered granule product used in the professional pesticides and agricultural markets. The Business to Business Products Group's operating income was $30,739,000 in fiscal 2013, an increase of $2,096,000, or 7%, from operating income of $28,643,000 in fiscal 2012. The benefit from improved sales described above was partially offset by higher freight and material costs per ton. Freight cost increases of approximately 7% per ton were driven primarily by more shipments to foreign countries, higher diesel fuel prices and other cost increases in the freight industry due to recent trends and regulations. Material costs increased approximately 9% per ton. Certain products in the Business to Business Group received greater fixed manufacturing cost allocations subsequent to the production relocation for certain products between our plants, as discussed in Note 2 of the Notes to the Consolidated Financial Statements. See further discussion of manufacturing costs in "Consolidated Results" above. The Business to Business Products Group's selling, general and administrative expenses in fiscal 2013 increased approximately 5% compared to fiscal 2012 due primarily to costs incurred to expand sales of our animal health and nutrition products in foreign markets. RETAIL AND WHOLESALE PRODUCTS GROUP Net sales of the Retail and Wholesale Products Group for fiscal 2013 were $157,614,000, an increase of $2,389,000, or 2%, from net sales of $155,225,000 in fiscal 2012. Net sales increased for cat litter products and for our foreign subsidiaries, but decreased for industrial absorbent products. Our foreign subsidiaries' net sales are described under "Foreign Operations" below. Overall cat litter net sales increased approximately 2% as the result of lower trade spending and higher selling prices, which outweighed a 6% decline in tons sold. Our branded cat litter net sales increase of approximately 5% was attributed primarily to approximately 59% higher sales of our Cat's Pride Fresh & Light scoopable products and reduced trade spending. These increases were partially offset by lower sales for our other Cat's Pride scoopable and coarse litter products. Private label cat litter sales were down approximately 3% due primarily to the continued decline in the coarse cat litter market, as well as a market trend away from private label cat litter products. Industrial absorbents net sales were down approximately 3% with a 7% decline in tons sold. The Retail and Wholesale Products Group's segment operating income for fiscal 2013 was $10,561,000, an increase of $8,463,000, from operating income of $2,098,000 in fiscal 2012. The Group's operating income was positively impacted by the higher sales described above, by lower selling, general and administrative expenses, as discussed below, and by an approximate 1% decrease in packaging costs per ton. The Group's operating income was negatively impacted by approximately12% higher freight costs per ton due to more shipments to customers in regions with higher freight costs, higher diesel fuel prices and other cost increases in the freight industry due to recent trends and regulations. In addition, material costs per ton increased approximately 5% primarily as the result of more purchased additives, fragrances and other materials required for the production of scoopable cat litters. See further discussion of manufacturing costs in "Consolidated Results" above. Selling, general and administrative expenses for the Retail and Wholesale Products Group decreased approximately 15% compared to fiscal 2012. We incurred substantial spending to advertise and promote our new Cat's Pride Fresh and Light cat litter products in fiscal 2012. 29 -------------------------------------------------------------------------------- FOREIGN SUBSIDIARIES Net sales by our foreign subsidiaries during fiscal 2013 were $11,928,000, an increase of $629,000, or 6%, from net sales of $11,299,000 during fiscal 2012. Net sales by our foreign subsidiaries represented 5% of our consolidated net sales during fiscal year 2013. Net sales increased 16% for our United Kingdom subsidiary and 3% for our Canadian subsidiary. Bleaching earth sales by our United Kingdom subsidiary increased primarily due to a new customer. Branded cat litter sales by our Canadian subsidiary increased, while industrial product sales were relatively flat. For fiscal 2013, our foreign subsidiaries reported a net loss of $176,000, compared to a net loss of $876,000 in fiscal 2012. The decrease in the net loss was primarily the result of higher sales and a reduction in overhead costs at our Canadian subsidiary. Identifiable assets of our foreign subsidiaries as of July 31, 2013 were $8,298,000 compared to $8,702,000 as of July 31, 2012. The decrease was primarily due to lower cash, inventories and net fixed assets, which were partially offset by higher accounts receivable. LIQUIDITY AND CAPITAL RESOURCES Our principal capital requirements include funding working capital needs, purchasing and upgrading equipment, facilities and real estate, investing in infrastructure and acquisitions. We have principally used cash generated from operations and, to the extent needed, issuance of debt securities and borrowings under our credit facilities to fund these requirements. Cash and cash equivalents totaled $16,230,000, $24,035,000 and $27,093,000 at July 31, 2014, 2013 and 2012, respectively. The following table sets forth certain elements of our Consolidated Statements of Cash Flows (in thousands): Fiscal Year Ended July 31, 2014 July 31, 2013 July 31, 2012 Net cash provided by operating activities $ 16,296 $ 23,366 $ 23,339 Net cash used in investing activities (15,570 ) (19,018 ) (270 ) Net cash used in financing activities (8,372 ) (7,450 ) (13,889 ) Effect of exchange rate changes on cash and cash equivalents (159 ) 44 28 Net (decrease) increase in cash and cash equivalents $ (7,805 ) $ (3,058 ) $ 9,208 Net cash provided by operating activities Net cash provided by operations was $16,296,000 for fiscal 2014 compared to $23,366,000 for fiscal 2013. 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 2014 and 2013 were as follows: Accounts receivable, less allowance for doubtful accounts, were $151,000 lower at fiscal year-end 2014 compared to fiscal year-end 2013. The decrease was attributed primarily to improved cash collections in the fourth quarter of fiscal 2014. Accounts receivable, less allowance for doubtful accounts, were $920,000 higher at fiscal year-end 2013 compared to fiscal year-end 2012. The increase was attributed primarily to higher fiscal 2013 fourth quarter sales compared to fiscal 2012 fourth quarter sales. The change in both periods was subject to timing of sales and collections and the payment terms provided to various customers. Inventories were $2,966,000 higher at fiscal year-end 2014 compared to fiscal year-end 2013. Increased finished goods and packaging inventory at fiscal year-end 2014 were the result of both higher costs and increased quantities on hand. Inventories were $1,050,000 higher at fiscal year-end 2013 compared to fiscal year-end 2012. Increased finished goods inventory values at fiscal year-end 2013 were attributed to higher costs. Inventories of additives and fragrances increased as the result of production trends for certain products, including scoopable cat litter. Prepaid expenses were $1,988,000 higher at fiscal year-end 2014 compared to fiscal year-end 2013 due primarily to an increase in prepaid income taxes and new plant assets with a short-term expected life. Prepaid expenses were $1,416,000 lower at fiscal year-end 2013 compared to fiscal year-end 2012 due primarily to a decrease in prepaid income taxes. 30 -------------------------------------------------------------------------------- Other assets were $817,000 higher at fiscal year-end 2014 compared to fiscal year-end 2013. The increase was due to higher cash surrender value of life insurance on former key employees and a long-term warranty obtained on certain leased plant assets. Other assets were $1,025,000 higher at fiscal year-end 2013 compared to fiscal year-end 2012. During fiscal 2013 a joint infrastructure project with a local government at one of our plant locations resulted in an other asset of approximately $740,000. A higher cash surrender value of life insurance on former key employees also contributed to the increase in 2013. Accounts payable were $187,000 higher at fiscal year-end 2014 compared to fiscal year-end 2013 due primarily to increased costs of purchased materials, which was partially offset by lower income taxes payable. Accounts payable were $135,000 higher at fiscal year-end 2013 compared to fiscal year-end 2012 due primarily to increased income taxes payable, which was partially offset by lower trade accounts payable. Changes in trade accounts payable in all periods are subject to normal fluctuations in the timing of payments. Accrued expenses were $2,586,000 lower at fiscal year-end 2014 compared to fiscal year-end 2013. Accrued expenses for fiscal 2014 declined due primarily due to the lower discretionary annual bonus accrual. In addition, the trade promotions and advertising accrual was lower at fiscal year-end 2014. These decreases were partially offset by a new lease obligation for assets at our plants. Accrued expenses were $2,159,000 higher at fiscal year-end 2013 compared to fiscal year-end 2012. Accrued expenses for fiscal 2013 were higher for both the discretionary bonus and accrued costs related to capital projects at our manufacturing facilities. These increases were partially offset by lower accrued advertising expense. Changes in other accrued expenses in all periods related to ongoing operations are also subject to normal fluctuations in the timing of payments. Deferred compensation was $698,000 higher at fiscal year-end 2014 compared to fiscal year-end 2013 and was $452,000 higher at fiscal year-end 2013 compared to fiscal 2012. Employee deferrals and interest on accumulated deferred compensation balances exceeded payouts in both years. The increase at fiscal year-end 2014 also included a higher accrual for the SERP due to a decrease in the discount rate used and the use of an updated mortality table to actuarially value the obligation. At fiscal year-end 2013, a higher discount rate resulted in a lower SERP accrual compared to the prior year. See Note 11 of the Notes to the Consolidated Financial Statements for more information regarding our deferred compensation plans. Pension and other postretirement liabilities, net of the adjustment recorded in stockholders' equity, were $2,887,000 higher at fiscal year-end 2014 compared to fiscal year-end 2013 and were $1,896,000 lower at fiscal year-end 2013 compared to fiscal year-end 2012. A lower discount rate and the use of an updated mortality table required for the actuarial calculation of postretirement benefit obligations resulted in a significantly higher liability at fiscal year-end 2014. At fiscal year-end 2013, a higher discount rate resulted in a significantly lower liability. See Note 10 of the Notes to the Consolidated Financial Statements for more information regarding our postretirement benefit plans. Net cash used in investing activities Cash used in investing activities was $15,570,000 in fiscal 2014 compared to $19,018,000 in fiscal 2013. Dispositions of investment securities were $15,821,000 greater than purchases in fiscal 2014. During fiscal 2014, some of the proceeds from investment dispositions were used for the $12,876,000 acquisition of certain assets of MFM, plus an additional $129,000 was classified as restricted cash held in escrow as of July 31, 2014. See Note 3 of the Notes to the Consolidated Financial Statements for more information about the MFM acquisition. Cash used for capital expenditures of $18,566,000 in fiscal 2014 included capacity expansion projects and mining equipment at our manufacturing facilities. Capital expenditures in fiscal 2013 of $9,795,000 included replacement and new machinery at our manufacturing facilities. Purchases and dispositions of investment securities in both periods are also subject to variations in the timing of investment maturities. Cash used in investing activities was $19,018,000 in fiscal 2013 compared to $270,000 in fiscal 2012. Purchases of investment securities were $9,289,000 greater than dispositions in fiscal 2013. In fiscal 2012, dispositions of investment securities exceeded purchases by $6,659,000. Purchases and dispositions of investment securities in both periods are subject to variations in the timing of investment maturities. Cash used for capital expenditures of $9,795,000 in fiscal 2013 included replacement and new machinery at our manufacturing facilities. Capital expenditures in fiscal 2012 of $6,960,000 included a new storage facility and replacement of machinery at our manufacturing facilities. 31 --------------------------------------------------------------------------------Net cash used in financing activities Cash used in financing activities was $8,372,000 in fiscal 2014 compared to $7,450,000 in fiscal 2013. Cash used to purchase treasury stock was $87,000 and $175,000 in fiscal 2014 and 2013, respectively. Payments on long-term debt in fiscal 2014 were $3,500,000 compared to $3,800,000 in fiscal 2013. Dividend payments during fiscal 2014 of $4,965,000 were higher than the $4,630,000 paid during fiscal 2013 due to a dividend rate increase. Proceeds from issuance of Common Stock and treasury stock related to stock option exercises were $94,000 and $887,000 in fiscal 2014 and 2013, respectively. Cash used in financing activities was $7,450,000 in fiscal 2013 compared to $13,889,000 in fiscal 2012. Cash used to purchase treasury stock was $175,000 and $6,247,000 in fiscal 2013 and 2012, respectively. Payments on long-term debt in fiscal 2013 were $3,800,000 compared to $3,600,000 in fiscal 2012. Dividend payments during fiscal 2013 of $4,630,000 were higher than the $4,486,000 paid during fiscal 2012 due to a dividend rate increase. Proceeds from issuance of Common Stock and treasury stock related to stock option exercises were $887,000 and $352,000 in fiscal 2013 and 2012, respectively. Other Total cash and investment balances held by our foreign subsidiaries at July 31, 2014, 2013 and 2012 were $1,481,000, $1,413,000 and $1,847,000, respectively. Cash and investment balances fluctuated due to normal business operations. See further discussion in the "Foreign Operations" section above. We have a $15,000,000 unsecured revolving credit agreement with BMO Harris Bank N.A. ("BMO Harris") which will expire on December 31, 2014. While there can be no assurance regarding the terms, timing or consummation of any successor agreement, on or before the expiration of this agreement, we may enter into a successor credit agreement or other financing arrangement with BMO Harris or another financing source. The credit agreement provides 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. The credit agreement also allows us to obtain foreign letters of credit when necessary. At July 31, 2014, the variable rates would have been 3.25% for BMO Harris' prime-based rate or 1.56% for LIBOR-based rate. The credit agreement contains restrictive covenants that, among other things and under various conditions, limit our ability to incur additional indebtedness or to dispose of assets. The agreement also requires us to maintain a minimum fixed coverage ratio and a minimum consolidated net worth. As of July 31, 2014 and 2013, there were no outstanding borrowings under this credit facility and we were in compliance with its covenants. See Note 5 of the Notes to the Consolidated Financial Statements for information about our outstanding debt. We believe that cash flow from operations, availability under our current and any successor revolving credit facility and current cash and investment balances will provide adequate cash funds for foreseeable working capital needs, capital expenditures at existing facilities, dividend payments and debt service obligations for at least the next 12 months. We believe cash requirements for capital expenditures in fiscal 2015 will be comparable to fiscal 2014 due to projects at our manufacturing facilities. Advertising and promotions spending is also anticipated to be a significant use of cash in fiscal 2015, but we believe at levels slightly less than in fiscal 2014. Our cash requirements are subject to change as business conditions warrant and opportunities arise. We continually evaluate our liquidity position and anticipated cash needs, as well as the financing options available to obtain additional cash reserves. Our ability to fund operations, to make planned capital expenditures, to make scheduled debt payments and to remain in compliance with all of the financial covenants under debt agreements, including the current credit agreement and any successor agreements, depends on our future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors. The timing and size of any new business ventures or acquisitions that we complete may also impact our cash requirements. CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS Our capital requirements are subject to change as business conditions warrant and opportunities arise. The following tables summarize our significant contractual obligations and commercial commitments as of July 31, 2014 and the effect such obligations are expected to have on liquidity and cash flows in future periods: 32 -------------------------------------------------------------------------------- Payments Due by Period Less Than 1 Contractual Obligations Total Year 1 - 3 Years 4 - 5 Years After 5 Years Long-Term Debt $ 22,400,000 $ 3,500,000 $ 6,566,000 $ 6,167,000 $ 6,167,000 Interest on Long-Term Debt 3,079,000 859,000 1,238,000 738,000 244,000 Capital Leases 1,330,000 1,330,000 - - - Operating Leases 5,894,000 1,527,000 2,463,000 1,369,000 535,000 Total Contractual Cash Obligations $ 32,703,000 $ 7,216,000 $ 10,267,000 $ 8,274,000 $ 6,946,000 During fiscal 2014, we made contributions of approximately $1,043,000 to our defined benefit pension plan. We have not presented this obligation for future years in the table above because the funding requirement can vary from year to year based on changes in the fair value of plan assets, actuarial assumptions and regulations. See Item 7A "Quantitative and Qualitative Disclosures About Market Risk" below for certain information regarding the potential impact of financial market fluctuations on pension plan assets and future funding contributions. Amount of Commitment Expiration Per Period Total Amounts Less Than After 5 Committed 1 Year 1 - 3 Years 4 - 5 Years Years Other Commercial Commitments $ 30,014,000 $ 30,014,000 $ - $ - $ - The obligations above are open purchase orders primarily for packaging and other ingredients used in our products. The expected timing of payments of these obligations was estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations. OFF BALANCE SHEET ARRANGEMENTS We do not have any unconsolidated special purpose entities. As of July 31, 2014 we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of the financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with the generally accepted accounting principles of the United States. We review our financial reporting and disclosure practices and accounting policies annually to ensure that our financial reporting and disclosures provide accurate and transparent information relative to current economic and business environment. We believe that of our significant accounting policies stated in Note 1 of the Notes to the Consolidated Financial Statements, the policies listed below involve a higher degree of judgment and/or complexity. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates include income taxes, promotional programs, pension accounting and allowance for doubtful accounts. Actual results could differ from these estimates. Income Taxes. Our effective tax rate was based on expected income, statutory tax rates and tax planning opportunities available to us in various jurisdictions in which we operate. Significant judgment was required in determining our effective tax rate and in evaluating our tax positions. We determine our current and deferred taxes in accordance with 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. 33 -------------------------------------------------------------------------------- We maintain valuation allowances where it is likely that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the income tax provision in the period of change. In determining whether a valuation allowance is warranted, we take into account such factors as prior earnings history, expected future earnings and other factors that could affect the realization of deferred tax assets. For example, certain factors, such as depletion and the cost of fuel used in our manufacturing process, are difficult to predict and have a significant impact on our ability to use the deferred tax benefit related to our AMT credit carryforwards. We recorded valuation allowances for income taxes of $3,973,000 and $3,205,000 at July 31, 2014 and 2013, respectively, for the full amount of the deferred tax benefit related to our AMT credit and foreign net operating loss carryforwards since we believe it is more likely than not that the benefit of these tax attributes will not be realized. In addition to valuation allowances, we 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. Our liability for unrecognized tax benefits based on tax positions related to the current and prior fiscal years was zero at July 31, 2014 and $273,000 at July 31, 2013. See Note 7 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 with trade spending patterns and that of the industry, current trends and forecasted data. While we believe our promotional reserves are reasonable and that appropriate judgments have been made, estimated amounts could differ from future obligations. We have accrued liabilities at the end of each period for the estimated trade spending programs. We recorded liabilities of approximately $2,044,000 and $2,173,000 for trade promotions at July 31, 2014 and 2013, 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 fiscal 2014 was the Citigroup Pension Discount Curve and in fiscal 2013 was the Citigroup Pension Liability Index. 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 10 of the Notes to the Consolidated Financial Statements for additional information. Trade Receivables. We recognize trade receivables when the risk of loss and title pass to the customer. We record an allowance for doubtful accounts based on our historical experience and a periodic review of our accounts receivable, including a review of the overall aging of accounts and analysis of specific accounts. A customer account is determined to be uncollectible when 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 recorded an allowance for doubtful accounts of $707,000 and $641,000 at July 31, 2014 and 2013, respectively. Inventories. We value inventories at the lower of cost (first-in, first-out) or market. Inventory costs include the cost of raw materials, packaging supplies, labor and other overhead costs. We perform a detailed review of our inventory items to determine 34 -------------------------------------------------------------------------------- if an obsolescence reserve adjustment is necessary. The review surveys all of our operating facilities and sales divisions to ensure that both historical issues and new market trends are considered. The obsolescence reserve not only considers specific items, but also takes into consideration the overall value of the inventory as of the balance sheet date. The inventory obsolescence reserve values at July 31, 2014 and 2013 were $390,000 and $364,000, respectively. Reclamation. During the normal course of our mining process we remove overburden and perform on-going reclamation activities. As overburden is removed from a mine site, it is hauled to a previously mined site and used to refill older sites. This process allows us to continuously reclaim older mine sites and dispose of overburden simultaneously, therefore minimizing the costs associated with the reclamation process. On an annual basis we evaluate our potential reclamation liability in accordance with ASC 410, Asset Retirement and Environmental Obligations. As of July 31, 2014 and 2013, we have recorded an estimated net reclamation asset of $677,000 and $590,000, respectively, and a corresponding estimated reclamation liability of $1,429,000 as July 31, 2014 and $1,269,000 as of July 31, 2013. 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 usually performed in the first quarter of the fiscal year and may be re-performed when deemed necessary due to indicators such as unexpected adverse economic factors, unanticipated technological changes, competitive activities and acts by governments and courts. Our impairment analysis performed in both the first and fourth quarters of fiscal 2014 did not indicate any impairment. We continue to monitor events, circumstances or changes in the business that might imply a reduction in value and might lead to impairment. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Standards In the first quarter of fiscal 2014 we adopted new guidance from the Financial Accounting Standard Board ("FASB") issued under Accounting Standard Codification ("ASC") 220, Comprehensive Income-Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The guidance required presentation by the respective net income line items, either on the face of the statement where net income is presented or in the notes, of information about significant amounts required to be reclassified out of accumulated other comprehensive income ("AOCI"). We elected to present the reclassifications in the notes to the financial statements. See Note 8 of the Notes to the Consolidated Financial Statements for additional information regarding amounts reclassified from AOCI. In the first quarter of fiscal 2014 we considered the FASB guidance issued under ASC 350, Testing Indefinite-Lived Intangible Assets for Impairment, which provides the option to first assess qualitative factors to determine if the annual two-step test for impairment must be performed. We did not elect to perform a qualitative assessment and continued to perform a quantitative analysis to measure potential indefinite-lived intangible asset impairment. There was no impact on our Consolidated Financial Statements as a result of this new guidance. Recently Issued Accounting Standards and Regulations In September 2013, the IRS released final tangible property regulations ("repair regulations") under Sections 162(a) and 263(a) of the Internal Revenue Code, regarding the deduction and capitalization of amounts paid to acquire, produce, or improve tangible property. The repair regulations provide guidance on the timing of deduction for tangible property and repairs. The final regulations replace temporary regulations that were issued in March 2011 and are effective for our tax year beginning August 1, 2014, with early adoption permitted for tax years beginning January 1, 2012. We do not believe these regulations will have a material impact on our Consolidated Financial Statements. 35-------------------------------------------------------------------------------- In May 2014, the FASB issued guidance under ASC 250, Revenue from Contract with Customers, which establishes a single comprehensive revenue recognition model for all contracts with customers and will supersede most existing revenue guidance. This guidance requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange. Transition options include either a full or modified retrospective approach and early adoption is not permitted. This guidance will be effective at the beginning of our first quarter of fiscal 2017. We are currently evaluating the impact of the adoption of these requirement on our Consolidated Financial Statements. In August 2014, the FASB issued guidance under ASC 205, Presentation of Financial Statements - Going Concern, which defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. This guidance will be effective for our fiscal year ended July 31, 2017. We are currently evaluating the impact of the adoption of these requirement on our Consolidated Financial Statements. |