Oil-Dri Corp of America (ODC) FY 2023 MD&A

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with the Consolidated Financial Statements and the related notes included elsewhere herein. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include those discussed under “Forward-Looking Statements” and in Item 1A “Risk Factors” in this Annual Report on Form 10-K.

OVERVIEW

We develop, mine, manufacture and market sorbent products principally produced from clay minerals, primarily consisting of calcium bentonite, attapulgite and diatomaceous 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 other customers who use our products as part of their production process or use them as an ingredient in their final finished product. We have two reportable operating segments based on the different characteristics of our two primary customer groups: the Retail and Wholesale Products Group and the Business to Business Products Group. Each operating segment is discussed individually below. Additional detailed descriptions of the operating segments are included in Item 1 “Business” above.

RESULTS OF OPERATIONS

OVERVIEW

Oil-Dri experienced a record breaking year with consolidated net sales and net income reaching an all-time high. Record revenues were achieved across all areas of our business. Within the Retail & Wholesale Products Group, pricing actions to improve profitability drove the majority of the sales increase. Within the Business to Business Products Group, revenue growth was driven by higher prices coupled with increased volumes. Consolidated income from operations in fiscal year 2023 increased $36.2 million when compared to fiscal year 2022 .

Despite increasing expenses and significant one off events recognized during the current fiscal year, consolidated net income for fiscal year 2023 was $29.6 million, or $4.13 per diluted common share, a 421% increase compared to $5.7 million, or $0.81 per diluted common share in fiscal year 2022. One-time events included a $2.5 million reserve for anticipated modification costs that we expect to incur to address the capacity issues at our sole landfill located in Ochlocknee, Georgia, as well as a charge of $4.7 million in connection with the termination of the Company's pension plan. Refer to Notes 8 and 11 of the Consolidated Financial Statements for additional details.

Our Consolidated Balance Sheets as of July 31, 2023, and our Consolidated Statements of Cash Flows for the fiscal year 2023 show an increase in total cash and cash equivalents from fiscal year-end 2022. The increase is driven mostly by improved net income and increases in accrued expenses and payables, offset by capital expenditures, increases in accounts receivable and inventories, payment of dividends and stock repurchases. Refer to the "Liquidity and Capital Resources" section below.

RESULTS OF OPERATIONS

FISCAL YEAR 2023 COMPARED TO FISCAL YEAR 2022

CONSOLIDATED RESULTS

Consolidated net sales in fiscal year 2023 reached an all-time high of $413.0 million, an 18% increase from net sales of $348.6 million in fiscal year 2022. Net sales increased for both our Retail and Wholesale and Business to Business Products Groups, primarily due to price increases implemented across both product groups and to a lesser extent due to volume growth in our Business to Business Products Group.

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During fiscal year 2023, we increased personnel, expanded production shifts, optimized equipment, and utilized alternative modes of transportation in order to reduce the backlog. We successfully decreased the backlog by 45% from July 31, 2022, and are back to historical levels. We will continue to implement strategies to further reduce labor, manufacturing and freight constraints in order to meet the increase in customer demand.

Consolidated gross profit in fiscal year 2023 was $103.2 million, an increase of $40.7 million, or 65%, from gross profit of $62.5 million in the prior fiscal year. Our gross margin (defined as gross profit as a percentage of net sales) in fiscal year 2023 increased to 25% from 18% in fiscal year 2022. Our domestic cost of goods sold per ton increased 11%, driven primarily by per ton increases in non-fuel manufacturing and freight, offset by lower per ton packaging costs, while per ton natural gas costs remained flat from prior year. Non-fuel manufacturing costs per ton increased 15% during fiscal year 2023 compared to fiscal year 2022, mainly due to higher per ton costs of labor, repairs, and replacement of assets as we continue to reinvest in our facilities. Domestic freight costs per ton increased approximately 4% in fiscal year 2023 compared to fiscal year 2022. This excludes the impact of a significant customer in our cat litter business that altered shipping terms in January 2023 from collect to delivered which further increased our overall freight cost. Ocean freight costs have also contributed to the increase due to a combination of export fees and the mix of products and geographic locations of our customers throughout the year. Despite fluctuations throughout the year, natural gas remained relatively flat for fiscal year 2023 compared to fiscal year 2022 due to natural gas prices. Packaging costs per ton decreased by approximately 6% in fiscal year 2023 compared to fiscal year 2022 due to lower commodity costs, particularly as it relates to resin and pallet costs. Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices.

Total selling, general and administrative expenses ("SG&A") were 19% higher in fiscal year 2023 compared to fiscal year 2022. Unallocated corporate expenses increased by $5.9 million, or 23%, driven by higher bonus accrual due to improved results compared to the Company’s performance target under the annual incentive plan, and outside consulting services, offset by a reduction in research and development expenses now allocated to the operating segments. The discussion of the segments' operating incomes below describes the changes in SG&A expenses that were allocated to the operating segments.

Total other expenses, net were $6.4 million for fiscal year 2023 compared to other income, net of $0.9 million in fiscal year 2022. This was mostly due to the $4.7 million loss on pension termination and the $2.5 million reserve recorded for anticipated landfill capacity modification costs, offset by other miscellaneous and interest income.

Tax expense for fiscal year 2023 was $5.2 million with an effective tax rate of 15.0% compared to $0.1 million with an effective tax rate of 1.7% in fiscal year 2022. The increase in tax expense was driven by higher taxable income. See Note 5 of the Notes to the Consolidated Financial Statements for additional information about our income taxes.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for fiscal year 2023 were $142.4 million, an increase of $29.0 million, or 26%, from net sales of $113.4 million in fiscal year 2022. Net sales increased in all product categories - fluids purification products; agricultural and horticultural products; and animal health products. This growth was primarily driven by price increases and to a lesser extent higher demand. Net sales of fluids purification products increased approximately $15.6 million or 25% in fiscal year 2023 compared with the prior year. The increase in net sales was driven by a combination of price increases across all regions and continued demand for our products used in the filtration of edible oil, renewable diesel, and jet fuel. Net sales increased in all regions with most of the increase driven by sales in North America, the region including Europe, Middle East, and Africa ("EMEA") and Latin America when compared to fiscal year 2022. Net sales of our agricultural and horticultural chemical carrier products increased approximately $9.9 million, or 32%, for fiscal year 2023 compared to fiscal year 2022. This is a result of strategic pricing actions implemented throughout the year to offset growing costs and continued strong demand from several large customers. Net sales of our animal health and nutrition products increased $3.6 million, or 17%, during fiscal year 2023 compared to the fiscal year 2022. We saw growth in net sales in all regions except our subsidiaries in China and Indonesia, with the greatest impact coming from North America and Latin America regions. North American sales rose due to a new product line, increased distribution to new and existing customers and a strategic focus on that market. Latin American sales were boosted by the European Union's ("EU") regulations requiring antibiotic-free foreign protein imports, as a large percentage of meat is exported from Latin America to the EU. Asia (excluding China) year-to-date net sales increased due to price. See “Foreign Operations” below for a discussion of net sales for our foreign operations that sell our animal health and nutrition products.

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SG&A expenses for the Business to Business Products Group increased approximately $0.7 million, or 5% for fiscal year 2023 compared to the prior fiscal year. The majority of the increase relates to microbiology lab expenses that are now allocated to the animal health business (a change from when existing costs were previously included in unallocated corporate expenses) and an increase in compensation related expenses.

The Business to Business Products Group’s operating income for fiscal year 2023 was $36.6 million, an increase of $12.2 million, or 50%, from operating income of $24.3 million for fiscal year 2022. The increase in operating income was mostly driven by higher net sales across all business within this segment as discussed above.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for fiscal year 2023 were $270.6 million, an increase of $35.4 million, or 15%, from net sales of $235.2 million in fiscal year 2022 driven by increases of our cat litter and industrial & sports products. Total cat litter net sales increased $30.1 million, or 15%, compared to the prior fiscal year driven mostly by increased pricing. Domestic cat litter net sales were $196.4 million, an increase of $27.1 million from fiscal year 2022 due primarily to increased prices. This was supplemented by increases in organic volume growth of our branded and private label lightweight scoop and private label coarse litter which was offset by a decrease in both volume and net sales of private label heavy weight litter. Net sales of co-packaged products increased by approximately $0.9 million compared to fiscal year 2022. This increase was driven by pricing offset by a reduction in volume as our customer discontinued export sales to one of their foreign markets and softer domestic sales volumes. Net sales of cat litter by our subsidiary in Canada increased period over period, as discussed in "Foreign Operations" below. Net sales of our global industrial and sports products increased by approximately $5.4 million, or 14%, compared to fiscal year 2022, primarily driven by price increases implemented to rebuild margins.

SG&A expenses for the Retail and Wholesale Products Group were $3.4 million, or 26%, higher during fiscal year 2023 compared to fiscal year 2022 due primarily to higher advertising costs which ramped up in the fourth quarter. We expect advertising spend in fiscal year 2024 to be higher than fiscal year 2023 and spread more evenly throughout the year than fiscal year 2023.

The Retail and Wholesale Products Group’s segment operating income for fiscal year 2023 was $36.1 million, an increase of $29.9 million or 478%, from operating income of $6.3 million in fiscal year 2022. This was driven primarily by the increase in gross margins due to price increases partially offset by higher cost of goods sold, and the goodwill impairment recognized in the third quarter of fiscal year 2022.

FOREIGN SUBSIDIARIES

Foreign operations include our subsidiary in Canada, which is included in the Retail and Wholesale Products Group, and our subsidiaries in the United Kingdom, China, Mexico and Indonesia, which are included in the Business to Business Products Group. Net sales by our foreign subsidiaries during fiscal year 2023 were $22.1 million, an increase of $2.2 million, or 11%, from net sales of $19.9 million during fiscal year 2022. All of our foreign operations, with the exception of our subsidiaries in China and Indonesia, experienced an increase in net sales during fiscal year 2023 compared to fiscal year 2022. Total net sales of our subsidiary in Canada during fiscal year 2023 increased by $2.1 million, or 18%, compared to fiscal year 2022 driven by increased private label cat litter net sales. The increase in cat litter sales was driven by a combination of price increases instituted in response to rising costs and volume growth. Industrial sales in Canada remained flat year over year. Net sales of our subsidiary in the United Kingdom in fiscal year 2023 increased by $0.3 million, or 14%, compared to net sales in fiscal year 2022. The increase is driven primarily by price increases which offset the impact of softer sale volumes. Net sales of our subsidiary in Mexico increased during fiscal year 2023 compared to fiscal year 2022 by $0.5 million, or 24%, due to growing demand for our animal health products. Net sales of our subsidiary in China decreased $0.6 million, or 19%, during fiscal year 2023 compared to fiscal year 2022 primarily due to the process of transitioning the sale of our products to a master distributor. Net sales by our foreign subsidiaries represented 5% of our consolidated net sales in fiscal years 2023 and 6% in fiscal year 2022.

For fiscal year 2023, our foreign subsidiaries reported a net income of $1.1 million, compared to a net loss of $0.8 million in fiscal year 2022. The net income in fiscal year 2023 was driven by price and volume increases in Canada, UK, and Mexico and the reduction of cost of goods sold in China and Indonesia.

Identifiable assets of our foreign subsidiaries as of July 31, 2023, were $14.6 million compared to $13.0 million as of July 31, 2022.

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LIQUIDITY AND CAPITAL RESOURCES

Our principal short and long-term capital requirements include: funding working capital needs; purchasing and upgrading equipment, facilities, information systems, and real estate; supporting new product development; spending on marketing and advertising costs; investing in infrastructure; repurchasing stock; paying dividends; and, from time to time, business acquisitions. During fiscal year 2023, we principally funded these short and long-term capital requirements using cash from current operations.

Cash and cash equivalents totaled $31.8 million and $16.3 million as of July 31, 2023 and 2022, respectively.

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 current inflationary environment and impacts of supply chain disruption on our business, we continuously assess our liquidity needs and to actively manage our spending.

The following table sets forth certain elements of our Consolidated Statements of Cash Flows for the fiscal year (in thousands):

Net cash provided by operating activities

In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for fiscal years 2023 and 2022 were as follows:

Accounts receivables, less allowance for doubtful accounts and cash discounts, were $7.9 million higher at fiscal year-end 2023 compared to fiscal year-end 2022. The increase is primarily due to the increase in net sales compared to the prior period. In addition, variation in accounts receivable balances reflects differences in the level and timing of collections as well as the payment terms provided to various customers.

Inventories were $2.2 million higher at fiscal year-end 2023 compared to fiscal year-end 2022. The increase is primarily due to rising costs and building inventory levels to meet demand. During fiscal year 2023 we have managed inventory balances primarily focusing on building finished goods inventory offset by decreases in packaging and other through strategic supply chain management. See Note 1 of the Notes to the Consolidated Financial Statements for further information regarding our inventory.

Prepaid expenses were $1.1 million lower at fiscal year-end 2023 compared to fiscal year-end 2022 driven primarily by a reduction in prepaid tax expense.

Accounts payable were $3.2 million higher at fiscal year-end 2023 compared to fiscal year-end 2022. The increase is due to higher trade payables mainly due to increases in costs of goods and freight as well as fluctuations in timing. Changes in trade accounts payable in all periods are subject to normal fluctuations in the timing of payments, the cost of goods and services we purchased, production volume levels and vendor payment terms.

Accrued expenses were $6.5 million higher at fiscal year-end 2023 compared to fiscal year-end 2022. The increase in accrued expenses during the fiscal year 2023 was driven by the $2.5 million reserve added for the Georgia landfill modification, higher compensation-related expenses, higher advertising expense accruals, and income tax payable.

Pension and other postretirement liabilities, net of the adjustment recorded in stockholders' equity, were $1.1 million lower at fiscal year-end 2023 compared to fiscal year-end 2022 due primarily to pension income and actuarial revaluation of the pension and postretirement liabilities prior to the termination of the pension. See Note 8 of the Notes to the Consolidated Financial Statements for more information regarding our postretirement benefit plans.

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Net cash used in investing activities

Cash used in investing activities was $24.6 million in fiscal year 2023. Cash used in investing activities primarily related to capital expenditures to expand our plant equipment and improve our facilities in order to support increased demand for our products.

Net cash (used in) provided by financing activities

Cash used in financing activities was $9.5 million in fiscal year 2023, which was predominantly used for dividend payments, stock repurchases and debt repayments.

Other

Total cash and investment balances held by our foreign subsidiaries as of July 31, 2023 and 2022 were $5.2 million and $3.3 million, respectively. See further discussion in the “Foreign Operations” section above.

As of July 31, 2023, we had remaining authority to repurchase 411,471 shares of Common Stock and 273,100 shares of Class B Stock under a repurchase plan approved by our Board of Directors. Repurchases may be made on the open market (pursuant to Rule 10b5-1 plans or otherwise) or in negotiated transactions. The timing and number of shares repurchased will be determined by our management pursuant to the repurchase plan approved by our Board of Directors. In fiscal years 2022 and 2023, we made repurchases of stock as further discussed in Item 5, Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities.

We believe that cash flow from operations, availability under our revolving credit facility, current cash balances and our ability to obtain other financing, if necessary, will provide adequate cash funds for foreseeable working capital needs, capital expenditures at existing facilities, deferred compensation payouts, dividend payments and debt service obligations for at least the next 12 months.

We 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 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. As of July 31, 2023 and 2022, we were in compliance with all debt covenants.

OFF BALANCE SHEET ARRANGEMENTS

We do not have any unconsolidated special purpose entities. As of July 31, 2023, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of the financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with the generally accepted accounting principles of the United States (“U.S. GAAP”). We review our financial reporting and disclosure practices and accounting policies annually to ensure that our financial reporting and disclosures provide accurate and transparent information relative to the current economic and business environment. We believe that, of our significant accounting policies stated in Note 1 of the Notes to the Consolidated Financial Statements, the policies listed below involve a higher degree of judgment and/or complexity. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates include income taxes, promotional programs, pension accounting and allowance for doubtful accounts. Actual results could differ from these estimates.

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Income Taxes. Our effective tax rate on earnings was based on income, statutory tax rates and tax planning opportunities available to us in various jurisdictions in which we operate. Significant judgment was required in determining our effective tax rate and in evaluating our tax positions.

We determine our current and deferred taxes in accordance with Accounting Standards Codification (“ASC”) 740 Income Taxes. The tax effect of the expected reversal of tax differences was recorded at rates currently enacted for each jurisdiction in which we operate. To the extent that temporary differences will result in future tax benefit, we must estimate the timing of their reversal and whether taxable operating income in future periods will be sufficient to fully recognize any deferred tax assets.

We maintain valuation allowances where it is likely that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the income tax provision in the period of change. In determining whether a valuation allowance is warranted, we take into account such factors as prior earnings history, expected future earnings and other factors that could affect the realization of deferred tax assets.

We recorded valuation allowances of $1.7 million and $1.8 million for the amount of the deferred tax benefit related to our foreign net operating loss carryforwards as of July 31, 2023 and 2022, respectively, because we believe it is unlikely we will realize the benefit of these tax attributes in the future.

In addition to valuation allowances, we may provide for uncertain tax positions when such tax positions do not meet certain recognition thresholds or measurement standards. Amounts for uncertain tax positions are adjusted when new information becomes available or when positions are effectively settled. We did not record a liability for unrecognized tax benefits at either July 31, 2023 or 2022. See Note 5 of the Notes to the Consolidated Financial Statements for further discussion.

Trade Promotions. We routinely commit to one-time or ongoing trade promotion programs in our Retail and Wholesale Products Group. Promotional reserves are provided for sales incentives made directly to consumers, such as coupons, and sales incentives made to customers, such as slotting, discounts based on sales volume, cooperative marketing programs and other arrangements. All such trade promotion costs are netted against sales. Promotional reserves are established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. To estimate trade promotion reserves, we rely on our historical experience of trade spending patterns and that of the 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 $2.3 million and $1.2 million for trade promotions as of July 31, 2023 and 2022, respectively.

Pension and Postretirement Benefit Costs. We calculate our pension and postretirement health benefit obligations and the related effects on results of operations using actuarial models. To measure the expense and obligations, we must make a variety of estimates including critical assumptions for the discount rate used to value certain liabilities and the expected return on plan assets set aside to fund these costs. We evaluate these critical assumptions at least annually. Other assumptions involving demographic factors, such as retirement age, mortality and turnover, are evaluated periodically and are updated to reflect actual experience. As these assumptions change from period to period, recorded pension and postretirement health benefit amounts and funding requirements could also change. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.

The discount rate is the rate assumed to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the pension benefits when due. The discount rate is subject to change each year. We refer to an applicable index and the expected duration of the benefit payments to select a discount rate at which we believe the benefits could be effectively settled. The discount rate was the single equivalent rate that would yield the same present value as the plan’s expected cash flows discounted with spot rates on a yield curve of investment-grade corporate bonds. The yield curve used in both fiscal years 2023 and 2022 was the FTSE Pension Discount Curve (formerly called the Citi Pension Discount Curve). Our determination of pension expense or income is based on a market-related valuation of plan assets, which is the fair market value. Our expected rate of return on plan assets is determined based on asset allocations and historical experience. The expected long-term rate of inflation and risk premiums for the various asset categories are based on general historical returns and inflation rates. The target allocation of assets is used to develop a composite rate of return assumption. See Note 8 of the Notes to the Consolidated Financial Statements for additional information.

As further described in Note 8 of the Notes to the Consolidated Financial Statements, we terminated the pension plan in fiscal year 2023.

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Trade Receivables. We recognize trade receivables when control of finished products are transferred to our customers. We record an allowance for credit losses based on our expectations and a periodic review of our accounts receivable, including a review of the overall aging of accounts, consideration of customer credit risk and analysis of facts and circumstances about specific accounts. A customer account is determined to be uncollectible when it is probable that a loss will be incurred after we have completed our internal collection procedures, including termination of shipments, direct customer contact and formal demand of payment. We believe our allowance for doubtful accounts is reasonable; however, the unanticipated default by a customer with a material trade receivable could occur. We also record an estimated allowance for cash discounts offered in our payment terms to some customers. We recorded a total allowance for credit losses and cash discounts of $1.1 million and $0.9 million as of July 31, 2023 and 2022, respectively.

Revenue Recognition. We recognize revenue when performance obligations under the terms of the contracts with customers are satisfied. Our performance obligation generally consists of the promise to sell finished products to wholesalers, distributors and retailers or consumers and our obligations have an original duration of one year or less. Control of the finished products are transferred upon shipment to, or receipt at, customers' locations, as determined by the specific terms of the contract. We have completed our performance obligation when control is transferred and we recognize revenue accordingly. Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Sales returns are not material nor are warranties and any related obligations.

Inventories. We value inventories at the lower of cost (first-in, first-out) or net realizable value. Inventory costs include the cost of raw materials, packaging supplies, labor and other overhead costs. We perform a detailed review of our inventory to determine if a reserve adjustment is necessary, giving consideration to obsolescence, inventory levels, product deterioration and other factors. The review also surveys all of our operating facilities and sales divisions to give consideration to historic and new market trends. The inventory reserve value was $0.8 million as of both July 31, 2023 and 2022.

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, 2023 and 2022, we have recorded an estimated net reclamation asset of $2.2 million and $1.8 million, respectively, and a corresponding estimated reclamation liability of $4.5 million as of July 31, 2023 and $3.8 million as of July 31, 2022. These values represent the discounted present value of the estimated future mining reclamation and landfill closure and monitoring costs at the production plants. The reclamation assets are depreciated over the estimated useful lives of the various mines. The reclamation liabilities are increased based on a yearly accretion charge over the estimated useful lives of the mines.

Accounting for reclamation obligations requires that we make estimates unique to each mining operation of the future costs we will incur to complete the reclamation work required to comply with existing laws and regulations. Actual future costs incurred could significantly differ from estimated amounts. Future changes to environmental laws could increase the extent of reclamation work required. Any such increases in future costs could materially impact the amount incurred for reclamation costs.

Impairment of goodwill, trademarks and other intangible assets. We review carrying values of goodwill, trademarks and other indefinite-lived intangible assets periodically for possible impairment in accordance ASC 350, Intangibles – Goodwill and Other. Our impairment review requires significant judgment with respect to factors such as volume, revenue and expenses. Impairment occurs when the carrying value exceeds the fair value. Our impairment analysis is performed in the third quarter of the fiscal year and may be re-performed during the year when indicators such as unexpected adverse economic factors, unanticipated technological changes, competitive activities and acts by governments and courts indicate that an asset may become impaired. No such triggering events or impairment of goodwill was identified in fiscal year 2023 however this could change in the future, as outlined under Item 1A "Risk Factors".

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NEW ACCOUNTING PRONOUNCEMENTS

Recently Issued Accounting Standards

In March 2020, the FASB issued guidance under ASC 848, Reference Rate Reform. This guidance provides optional expedients and exceptions to account for debt, leases, contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The guidance is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. On August 30, 2022, we amended our debt agreements to replace the LIBOR-based reference rate with an adjusted term Secured Overnight Financing Rate (SOFR), ASC 848 will allow us to account for the modification as a continuation of the existing contract without additional analysis.

A summary of all recently adopted and issued accounting standards is contained in Note 1 of Notes to the Consolidated Financial Statements.

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