Oil-Dri Corporation Of America - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

Commission File Number 0-8675

(Exact name of the registrant as specified in its charter)

The Registrant's telephone number, including area code: (312) 321-1515

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for at least the past 90 days.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the close of the period covered by this report.

Common Stock – 5,095,136 Shares

Class B Stock – 1,914,797 Shares

The accompanying notes are an integral part of the condensed consolidated financial statements.

The accompanying notes are an integral part of the condensed consolidated financial statements.

The accompanying notes are an integral part of the condensed consolidated financial statements.

The accompanying notes are an integral part of the condensed consolidated financial statements.

The accompanying notes are an integral part of the condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The financial statements and the related notes are condensed and should be read in conjunction with the consolidated financial statements and related notes for the year ended July 31, 2007, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The unaudited condensed consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany transactions are eliminated.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the statements contained herein. Operating results for the three months and the nine months ended April 30, 2008 are not necessarily an indication of the results that may be expected for the fiscal year ending July 31, 2008.

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. Estimates are revised periodically. Actual results could differ from these estimates.

Under the terms of our sales agreements with customers, we recognize revenue when title is transferred. Upon shipment an invoice is generated that sets the fixed and determinable price. Promotional reserves are provided for sales incentives made directly to consumers and customers and are netted against sales. Sales returns and allowances have historically not been material. Selling, general and administrative expenses include salaries, wages and benefits associated with staff outside the manufacturing and distribution functions, advertising costs, research and development costs and all other non-manufacturing and non-distribution expenses.

We evaluate our allowance for doubtful accounts utilizing a combination of a historical experience and a periodic review of our accounts receivable aging and specific customer account analysis. We maintain and monitor a list of customers whose creditworthiness has diminished.

During the normal course of our overburden removal activities we perform on-going reclamation activities. As overburden is removed from a pit, it is hauled to previously mined pits and used to refill older sites. This process allows us to continuously reclaim older pits and dispose of overburden simultaneously, therefore minimizing the liability for the reclamation function.

Additionally, it is our policy to capitalize the purchase cost of land and mineral rights, including associated legal fees, survey fees and real estate fees. The costs of obtaining mineral patents, including legal fees and drilling expenses, are also capitalized. Pre-production development costs on new mines and any prepaid royalties that can be offset against future royalties due upon extraction of the mineral are also capitalized. All exploration related costs are expensed as incurred.

The composition of inventories is as follows (in thousands of dollars):

The components of net periodic pension benefits cost of our sponsored defined benefit plans were as follows:

We have funded the plan based upon actuarially determined contributions that take into account the amount deductible for income tax purposes, the normal cost and the minimum contribution required and the maximum contribution allowed under the Employee Retirement Income Security Act of 1974, as amended. We made a contribution to our pension plan during the third quarter of fiscal 2008 of $827,000.

The components of the net periodic postretirement health benefit cost were as follows:

Our plan covering postretirement health benefits is an unfunded plan.

Assumptions used in the previous calculations are as follows:

The accounting policies of the segments are the same as those described in Note 1 of the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2007 filed with the Securities and Exchange Commission.

Management does not rely on any segment asset allocations and does not consider them meaningful because of the shared nature of our production facilities; however, we have estimated the segment asset allocations as follows:

Our 1995 Long Term Incentive Plan (the “1995 Plan”) provided for grants of both incentive and non-qualified stock options principally at an option price per share of 100% of the fair market value of our Class A Common Stock or, if no Class A Common Stock is outstanding, our Common Stock (“Stock”) on the date of grant. Stock options were generally granted with a five-year vesting period and a 10-year term. The stock options generally vest 25% two years after the grant date and 25% in each of the three following anniversaries of the grant date. This plan expired for purposes of issuing new grants on August 5, 2005. All stock issued from option exercises under this plan were from authorized but unissued stock. All restricted stock issued was from treasury stock.

On March 14, 2006, our Board of Directors unanimously approved adoption of the Oil-Dri Corporation of America 2006 Long Term Incentive Plan; our Board amended and restated the plan following the five-for-four stock split described below (as so amended and restated, the “2006 Plan”). The 2006 Plan was approved by our stockholders at our annual meeting on December 5, 2006. The 2006 Plan permits the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based and cash-based awards.  Our employees and non-employee directors are eligible to receive grants under the 2006 Plan.  The total number of shares of Stock subject to grants under the 2006 Plan may not exceed 919,500. Option grants covering 25,000 shares were issued to our outside directors with a vesting period of one year and option grants covering 32,500 shares were issued to employees with vesting similar to the vesting described above under the 1995 Plan. There were 90,000 shares of restricted stock issued under the 2006 Plan.

The Oil-Dri Corporation of America Outside Director Stock Plan (the “Directors’ Plan”) provides for grants of stock options to our directors at an option price per share of 100% of the fair market value of Common Stock on the date of grant. Our directors are considered employees under the provisions of SFAS 123R. Stock options have been granted to our directors for a 10-year term with a one year vesting period. There are 106,250 stock options outstanding as of April 30, 2008, and no stock options available for future grants under this plan. All stock issued under this plan were from treasury stock.

A five-for-four stock split was announced by our Board on June 6, 2006. In keeping with historical practices, we have adjusted the number of shares and the option prices to equitably adjust all outstanding stock options. Under SFAS 123R, the equitable adjustment of outstanding options to reflect a change in capitalization (such as a stock split) may require the recognition of incremental compensation expense if the adjustment is not determined to have been required by the actual terms of the equity incentive plan. The Directors’ Plan and the 1995 Plan may be deemed to have been discretionary, rather than required by the actual terms of these plans. We therefore recognized additional stock-based compensation expense as a result of the modification of approximately $99,000 and $103,000 in the third quarter of fiscal 2008 and 2007, respectively, and $306,000 and $351,000 in the first nine months of fiscal 2008 and 2007, respectively.

Changes in our stock options during the first nine months of fiscal 2008 were as follows:

The amount of cash received from the exercise of stock options during the third quarter of fiscal 2008 was $180,000 and the related tax benefit was $39,000. The amount of cash received from the exercise of stock options during the first nine months of fiscal 2008 was $1,075,000 and the related tax benefit was $277,000.

Our 1995 Plan and 2006 Plan both provide for grants of restricted stock. The vesting schedule under the 1995 Plan has varied, but has generally been three years or less. Under the 2006 Plan, the grants issued so far have vesting periods between three and five years.

Included in our stock-based compensation expense in the third quarter of fiscal years 2008 and 2007 is $77,000 and $70,000, respectively, related to the unvested restricted stock granted in fiscal years 2005 and 2006. In the first nine months of fiscal years 2008 and 2007, the expense related to the unvested restricted stock was $244,000 and $234,000, respectively. No shares of restricted stock were granted in the first nine months of fiscal 2008.

Changes in our restricted stock outstanding during the first nine months of fiscal 2008 were as follows:

As of August 1, 2007, we recognized no material adjustments in the liability for unrecognized income tax benefits. As of the adoption date on August 1, 2007, we had approximately $200,000 of unrecognized tax benefits, all of which would impact our effective tax rate if recognized. The amount of unrecognized tax benefits was not materially changed as of April 30, 2008.

We recognize interest and penalties related to uncertain tax positions in income tax expense. We have no material accrued interest expense or penalties related to unrecognized tax benefits.

We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. Our federal income tax returns for the fiscal years ending July 31, 2005 through July 31, 2007 remain open for examination by the IRS. However, all U.S. federal income tax examinations for the fiscal years through July 31, 2005, have been effectively concluded. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 3 to 5 years. The state impact of any federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification to the states. There are no material open or unsettled federal, state, local or foreign income tax audits. We believe our accrual for tax liabilities is adequate for all open audit years. This assessment is based on estimates and assumptions that may involve judgments about future events. On the basis of present information, we do not anticipate the total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statue of limitations in the next twelve months.

Prior to this new pronouncement, we recorded these production stripping costs in a prepaid expense account and, as the usable sorbent material was mined, the prepaid overburden removal expense was amortized over the estimated available material. In accordance with the transition guidance provided by this new pronouncement, we wrote off the August 1, 2006 balance of our prepaid overburden removal expense account to opening retained earnings, with no charge to current earnings. The results for prior periods have not been restated. The cumulative effect adjustment reduced opening retained earnings by $1,235,000, eliminated the $1,686,000 balance of the prepaid overburden removal expense account and adjusted our tax accounts by $451,000.

During the first quarter of fiscal 2008, we entered into an agreement to sell emission reduction credits we hold in the State of California to an unaffiliated third party. On November 1, 2007, during our second quarter of fiscal 2008, the San Joaquin Valley Air Pollution Control District completed the transfer of ownership forms and releases, thereby allowing consummation of the sale. Cost of sales for the nine months ending April 30, 2008, was reduced by the net proceeds of $507,000 as a result of this sale.

During the fourth quarter of fiscal 2008, we entered into another agreement to sell emission reduction credits we hold in the State of California to an unaffiliated third party. The San Joaquin Valley Air Pollution Control District has completed the transfer of ownership forms and releases, thereby allowing consummation of the sale. We will record a reduction to our cost of sales of approximately $320,000 in the fourth quarter of fiscal 2008.

We develop, manufacture and market sorbent products principally produced from clay minerals and, to a lesser extent, other sorbent materials. Our principal products include cat litter, industrial and automotive absorbents, bleaching clay and clarification aids, agricultural chemical carriers, animal health and nutrition 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 customer 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 segments, the Retail and Wholesale Products Group and the Business to Business Products Group, as described in Note 5 of the unaudited condensed consolidated financial statements.

Consolidated net sales for the nine months ended April 30, 2008 were $172,854,000, an increase of 9% from net sales of $157,958,000 in the first nine months of fiscal 2007. Net income for the first nine months of fiscal 2008 was $6,586,000, an increase of 17% from net income of $5,609,000 in the first nine months of fiscal 2007. Diluted income per share for the first nine months of fiscal 2008 was $0.91 versus $0.80 diluted net income per share for the first nine months of fiscal 2007.

Net income for the first nine months of fiscal 2008 was positively impacted by overall higher net sales prices, increased tons sold and a $507,000 reduction in cost of sales resulting from the sale of emission reduction credits, as described in Note 9 of the unaudited condensed consolidated financial statements. Net income was negatively affected by higher freight, materials and packaging costs. Freight costs increased significantly due to record high fuel prices which impacted our truck, rail and ship distribution channels. Material costs were driven upward by the high cost of fuel used to dry our clay-based products and to transport raw materials. The cost of other purchased materials also increased. Packaging costs rose due to price increases in the resin and paper markets. The Business to Business Group contributed to the improved net income as higher net sales prices overcame lower volume and increased costs; however, in the Retail and Wholesale Group the higher costs prevailed over increases in both net sales price and volume.

Net sales of the Business to Business Products Group for the first nine months of fiscal 2008 were $55,802,000, an increase of $2,743,000 from net sales of $53,059,000 in the first nine months of fiscal 2007. Total tons sold for the Group were down 3% compared to the first nine months of fiscal 2007; however, increased net sales prices provided for higher sales in the first nine months of fiscal 2008. Net sales of bleaching earth and fluid purification products were up 20% due to increased net sales prices and higher tons sold. The higher tonnage was the result of increased business opportunities in export markets and in the biodiesel production industry. Our co-packaged cat litter net sales increased 3% due to a higher net sales price and a new co-packaging customer. An increase in net sales of animal health and nutrition products resulted from higher volume and sales price increases for our mycotoxin binder and animal feed binder products. Conversely, net sales of agricultural chemical carriers were down due to 13% lower tons sold caused by the continued market erosion due to growth of genetically modified seed and seed treatments. Net sales of sports products were also down as the result of the loss of a customer and unusually cold, wet weather delaying customer purchases.

The Business to Business Products Group’s segment income increased 11% from $10,456,000 in the first nine months of fiscal 2007 to $11,561,000 in the first nine months of fiscal 2008. A higher net sales price offset an increase of approximately 8% in combined freight, materials and packaging costs. Freight costs increased significantly due to higher diesel fuel prices. Material costs were negatively impacted by increased energy-related costs in our mining and manufacturing processes. Packaging costs were driven upward by changes in the resin and paper markets.

Net sales of the Retail and Wholesale Products Group for the first nine months of fiscal 2008 were $117,052,000, an increase of $12,153,000 from net sales of $104,899,000 reported in the first nine months of fiscal 2007. Total tons sold for the Group were up 10%. Cat litter tons sold increased 21%. Net sales of private label cat litter increased 44% due to higher tons sold and net sales price increases. The higher volume was the result of expanded distribution to existing customers, as well as distribution to new customers. In contrast, a 2% decline in branded cat litter sales resulted from changes in product mix and the loss of a customer. Sales of industrial absorbents were down 5% due to lower volume.

The Retail and Wholesale Products Group’s segment income decreased 2% to $11,416,000 in the first nine months of fiscal 2008 from $11,598,000 in the first nine months of fiscal 2007. The Group’s overall increase in sales was offset by higher costs. Record high fuel prices resulted in freight costs approximately 16% higher in the first nine months of fiscal 2008 compared to the same period of fiscal 2007. The Group’s product margins were further negatively impacted by higher material costs.

Our effective tax rate was 27% of pre-tax income in the first nine months of fiscal 2008 compared to 29% in the first nine months of fiscal 2007. The effective tax rate is based on the projected composition of our taxable income for fiscal 2008.

Total assets increased $2,451,000 or 2% during the first nine months of fiscal 2008. Current assets increased $2,723,000 or 3% from fiscal 2007 year-end balances, primarily due to an increase in investments, accounts receivable, inventories and prepaid expenses. These increases were partially offset by a decrease in cash and cash equivalents. The changes in current assets are described in Liquidity and Capital Resources. Property, plant and equipment, net of accumulated depreciation, decreased $1,111,000 during the first nine months of fiscal 2008 due to depreciation in excess of asset additions.

Total liabilities decreased $3,792,000 or 6% during the first nine months of fiscal 2008. Current liabilities increased $1,550,000 or 6% primarily due to an increase in current maturities of notes payable, accounts payable, accrued freight and other accrued expenses. A decrease in accrued salaries partially offset these increases. The changes in current liabilities are described in Liquidity and Capital Resources. Non-current liabilities decreased $5,342,000 or 16% due to a reclassification of notes payable from long-term to current, debt repayment and a pension contribution made during the third quarter. These decreases were partially offset by an increase in deferred compensation due to ongoing deferrals and accrued interest.

Consolidated net sales for the three months ended April 30, 2008 were $59,543,000, an increase of 12% from net sales of $52,956,000 in the third quarter of fiscal 2007. Net income for the third quarter of fiscal 2008 was $2,013,000 compared to net income of $1,999,000 in the third quarter of fiscal 2007. Diluted income per share for the third quarter of fiscal 2008 was $0.28, which was the same as for the third quarter of fiscal 2007.

Net income for the third quarter of fiscal 2008 was positively impacted by overall higher net sales prices and increased tons sold. Net income for the quarter was negatively affected by higher freight, packaging and material costs. Freight costs increased significantly due to record fuel prices which impacted our truck, rail and ship distribution channels. Price increases in the resin and paper commodity markets resulted in higher packaging costs. Material costs were driven upward by the high cost of fuel used to dry our clay-based products and to transport raw materials. The cost of other purchased materials also increased. Net income was down for both the Business to Business Group and the Retail and Wholesale Group.

Net sales of the Business to Business Products Group for the third quarter of fiscal 2008 were $20,322,000, an increase of $1,045,000 from net sales of $19,277,000 in the third quarter of fiscal 2007. Total tons sold for the Group were down 4% compared to the third quarter of fiscal 2007; however, increased net sales prices provided for higher net sales in the third quarter of fiscal 2008. Net sales of bleaching earth and fluid purification products were up 23% due to increased net sales prices and higher tons sold. The higher tonnage was the result of increased opportunities in export markets and in the biodiesel production industry. Our co-packaged cat litter net sales increased 6% due to a higher net sales price and a new co-packaging customer. Net sales of animal health and nutrition products also increased due to net sales price increases and higher volume for our mycotoxin binder products. Net sales were flat for our agricultural chemical carriers and were up for Flo-Fre, a by-product of the chemical carrier manufacturing process, due to a higher net sales price which offset lower volume. In contrast, net sales for the Group were negatively impacted by lower sports product sales due to loss of a customer and cold, wet weather delaying customer purchases.

The Business to Business Products Group’s segment income decreased 7% from $4,207,000 in the third quarter of fiscal 2007 to $3,904,000 in the third quarter of fiscal 2008. A combined increase in freight, material and packaging costs of approximately 14% was greater than the increase in net sales. Material costs were negatively impacted by increased costs in our mining and manufacturing processes. Freight costs were driven upward significantly by record diesel fuel prices. Packaging costs were up due to price increases in the resin and paper markets.

Net sales of the Retail and Wholesale Products Group for the third quarter of fiscal 2008 were $39,221,000, an increase of $5,542,000 from net sales of $33,679,000 reported in the third quarter of fiscal 2007. Total tons sold for the Group were up 14%. Cat litter tons sold increased 26%. Net sales of private label cat litter increased 40% due to both higher volume and net sales prices. The higher volume was the result of expanded distribution to existing customers, as well as distribution to new customers. Branded cat litter net sales also increased 12% due to expanded distribution to existing customers. Conversely, lower tons sold resulted in a decline in net sales of industrial floor absorbents for the quarter.

The Retail and Wholesale Products Group’s segment income decreased 9% from $3,509,000 in the third quarter of fiscal 2007 to $3,183,000 in the third quarter of fiscal 2008. The Group’s increase in both tons sold and net sales prices were not sufficient to offset higher costs. Combined freight, material and packaging costs increased approximately 9% for the reasons described above for the Business to Business Products Group.

Interest expense was down $41,000 for the third quarter of fiscal 2008 compared to the same period in fiscal 2007 due to continued debt reduction. Interest income was down $128,000 in the third quarter of fiscal 2008. A lower average interest rate offset the benefit of higher average investment balances.

Our effective tax rate was 26% of pre-tax income in the third quarter of fiscal 2008 compared to 33% in the third quarter of fiscal 2007. The effective tax rate for the third quarter of fiscal 2008 included an adjustment to decrease the nine month effective tax rate to 27% based on the projected composition of our taxable income for fiscal 2008. The effective tax rate for the third quarter of fiscal 2007 included an adjustment to increase the nine month effective tax rate to 29%.

Net sales by our foreign subsidiaries during the first nine months of fiscal 2008 were $13,186,000 or 8% of total Company sales. This represents an increase of 4% from the first nine months of fiscal 2007, in which foreign subsidiary sales were $12,696,000 or 8% of total Company sales. The increase in net sales was seen in both our Canadian and United Kingdom subsidiaries. Increased net sales prices for both subsidiaries offset lower volume. For the first nine months of fiscal 2008, our foreign subsidiaries reported net income of $936,000, an increase of $240,000 from the $696,000 net income reported in the first nine months of fiscal 2007. Higher net sales prices and lower costs for materials in our Canadian subsidiary contributed to the improved net income.

Identifiable assets of our foreign subsidiaries as of April 30, 2008 were $11,101,000 compared to $9,939,000 as of April 30, 2007. The increase was driven by higher cash and cash equivalents and inventories.

Net sales by our foreign subsidiaries during the third quarter of fiscal 2008 were $4,488,000 or 8% of total Company sales. This represents an increase of 7% from the third quarter of fiscal 2007, in which foreign subsidiary sales were $4,186,000 or 8% of total Company sales. Net sales for our Canadian subsidiary were up, while net sales of our United Kingdom subsidiary were down slightly. Both subsidiaries reported a higher net sales price and lower volume. For the third quarter of fiscal 2008, our foreign subsidiaries reported net income of $447,000, an increase of $60,000 from the $387,000 net income reported in the third quarter of fiscal 2007. Higher net sales prices and lower costs for materials in our Canadian subsidiary contributed to the improved net income.

Our principal capital requirements include funding working capital needs, the purchasing and upgrading of real estate, equipment and facilities, funding new product development and investing in infrastructure and potential acquisitions. We principally have 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 decreased $3,968,000 during the first nine months of fiscal 2008 to $8,165,000 at April 30, 2008.

The following table sets forth certain elements of our unaudited condensed consolidated statements of cash flows (in thousands):

Net cash provided by operations was $6,123,000 for the nine months ended April 30, 2008, compared to $10,112,000 for the nine months ended April 30, 2007. The decrease was due primarily to changes in working capital that offset the increase in net income. For the first nine months of fiscal years 2008 and 2007, the primary components of working capital that impacted operating cash flows were as follows:

Accounts receivable, less allowance for doubtful accounts, increased by $3,176,000 in the first nine months of fiscal 2008 versus an increase of $1,247,000 in the first nine months of fiscal 2007. The increase in accounts receivable for both fiscal years was due to higher sales in the third quarter compared to sales in the fourth quarter of the preceding fiscal year. The comparative sales increase was greater for the third quarter of fiscal 2008 resulting in a larger increase in accounts receivable.

Inventories increased $1,704,000 in the first nine months of fiscal 2008, versus a decrease of $973,000 in the same period in fiscal 2007. Finished goods and packaging inventories increased in the first nine months of fiscal 2008 due to normal operational fluctuations and higher costs. Inventories decreased in the first nine months of fiscal 2007 due to a concerted effort to reduce packaging inventory levels, lower fuel inventory and procurement cost reduction initiatives.

Other prepaid expenses increased $770,000 in the first nine months of fiscal 2008 versus an increase of $253,000 in the first nine months of fiscal 2007. Spare parts inventory and prepaid plant operating expenses increased in the first nine months of fiscal 2008. The timing of insurance premium payments resulted in an increase in prepaid expenses in both years.

Accounts payable increased $1,431,000 in the first nine months of fiscal 2008 versus a decrease of $1,783,000 in the same period in fiscal 2007. The increase in fiscal 2008 reflected higher manufacturing fuel and packaging costs. The decrease in fiscal 2007 reflected a decline in manufacturing fuel costs. Both years were subject to normal fluctuations in the timing of payments.

Accrued expenses decreased $1,233,000 in the first nine months of fiscal 2008 versus an increase of $874,000 in the first nine months of fiscal 2007. In the first nine months of fiscal 2008, accrued salaries were down due to the payout of the prior year’s bonus and a lower estimated bonus accrual for the current fiscal year. Accrued interest payable also decreased due to reduced debt outstanding. Partially offsetting this decrease were higher accruals for freight, packaging and fuel due to higher costs. In the first nine months of fiscal 2007, accrued salaries increased due to a higher estimated fiscal 2007 bonus accrual. Accrued audit expense was higher due to additional expense to comply with the internal control reporting requirements mandated by Section 404 of the Sarbanes-Oxley Act of 2002. These increases were partially offset by lower trade spending accruals due to timing and reduction of promotional activities. Other accrued expenses decreased due to lower interest accruals for notes payable and lower packaging and fuel inventories.

Cash used in investing activities was $4,749,000 in the first nine months of fiscal 2008 compared to $1,443,000 in the first nine months of fiscal 2007. In the first nine months of fiscal 2008, more cash was used for purchases of investment securities as compared to the first nine months of fiscal 2007. We have changed our investment strategy to allocate a greater portion of our financial resources to investments versus cash. Purchases and dispositions of investment securities in both periods are also subject to variations in the timing of investment maturities. Capital expenditures were $4,352,000 in the first nine months of fiscal 2008 compared to $6,616,000 in the same period of fiscal 2007.

Cash used in financing activities was $5,231,000 in the first nine months of fiscal 2008 compared to $5,049,000 in the first nine months of fiscal 2007. Dividend payments were $2,528,000 in the first nine months of fiscal 2008 compared to $2,271,000 in the first nine months of fiscal 2007 due to a dividend increase. Conversely, higher stock options exercise activity in the first nine months of fiscal 2008 provided $1,075,000 from the issuance of common stock compared to $937,000 for the same period in fiscal 2007. The increase in stock option exercises also provided an excess tax benefit of $277,000 in the first nine months of fiscal 2008 compared to $249,000 in the same period of fiscal 2007.

As part of our normal course of business, we guarantee certain debts and trade payables of our wholly owned subsidiaries. These arrangements are made at the request of the subsidiaries’ creditors because separate financial statements are not distributed for the wholly owned subsidiaries. As of April 30, 2008, the value of these guarantees was $2,500,000 of long-term debt and $708,000 of lease liabilities.

On January 27, 2006, we entered into a $15,000,000 unsecured revolving credit agreement with Harris N.A. (“Harris”) that is effective until January 27, 2009. The credit agreement provides that we may select a variable rate based on either 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 Harris. At April 30, 2008, the variable rates would have been 5.3% for the Harris’ prime-based rate or 3.7% for the LIBOR-based rate. The credit agreement contains restrictive covenants that, among other things and under various conditions (including a limitation on capital expenditures), 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 April 30, 2008 and 2007, we had $15,000,000 available under this credit facility and we were in compliance with its covenants.

We believe that cash flow from operations, availability under our revolving credit facility and current cash and investment balances will provide adequate cash funds for foreseeable working capital needs, capital expenditures at existing facilities and debt service obligations for at least the next 12 months. Our ability to fund operations, to make planned capital expenditures, to make scheduled debt payments and to remain in compliance with all of the financial covenants under debt agreements, including, but not limited to, the 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 the cash requirements. Cash requirements in the fourth quarter of fiscal 2008 will include $1,300,000 for the purchase of strategic intangible assets for the Business to Business Group. We received cash proceeds of approximately $320,000 in the fourth quarter of fiscal 2008 related to the sale of emission reduction credits as described in Note 10 of the notes to the unaudited condensed consolidated financial statements.

Our capital requirements are subject to change as business conditions warrant and opportunities arise. The tables in the following subsection summarize our contractual obligations and commercial commitments at April 30, 2008 for the time frames indicated.

We made a contribution to our defined benefit pension plan in the third quarter of fiscal 2008 of $827,000. 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 and actuarial assumptions.

As of April 30, 2008, our non-current liability for uncertain tax positions was approximately $200,000, as described in Note 7 of the unaudited condensed consolidated financial statements. We have not presented this obligation in the table above because the timing of future cash flows is dependent on examinations by taxing authorities and can not reasonably be estimated.

The unconditional purchase obligations represent forward purchase contracts we have entered into for a portion of our natural gas fuel needs for fiscal 2008 and 2009. As of April 30, 2008, the remaining purchase obligation for fiscal 2008 was $2,067,000 for 250,000 MMBtu and for fiscal 2009 was $548,000 for 50,000 MMBtu. These contracts were entered into in the normal course of business and no contracts were entered into for speculative purposes.

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 conformity with accounting principles generally accepted in the United States. 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 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 ended July 31, 2007 filed with the Securities and Exchange Commission, which is incorporated by reference in this Form 10-Q. For additional information on our adoption of FIN 48, see Note 7 of the notes to unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

We are exposed to interest rate risk and employ policies and procedures to manage our exposure to changes in the market risk of our cash equivalents and short-term investments. We had two interest rate swap agreements as of April 30, 2008. We believe that the market risk arising from holding our financial instruments is not material.

We are exposed to currency risk as it relates to certain accounts receivables and from our foreign operations. We believe that the currency risk is immaterial to the overall presentation of the financial statements.

We are exposed to regulatory risk in the fluid purification and agricultural markets, principally as a result of the risk of increasing regulation of the food chain in the United States and Europe. We actively monitor developments in this area, both directly and through trade organizations of which we are a member.

We are exposed to commodity price risk with respect to natural gas. We have contracted for a portion of our fuel needs for fiscal 2008 and 2009 using forward purchase contracts to manage the volatility in fuel prices related to this exposure. The weighted average cost of the fiscal 2008 contracts has been estimated to be approximately 5% higher than the contracts for fiscal 2007. The weighted average cost of the fiscal 2009 contracts has been estimated to be approximately 26% higher than the contracts for fiscal 2008. All contracts were entered into during the normal course of business and no contracts were entered into for speculative purposes.

The tables below provide information about our natural gas purchase contracts, which are sensitive to changes in commodity prices, specifically natural gas prices. For the purchase contracts outstanding at April 30, 2008, the table presents the notional amounts in MMBtu’s, the weighted average contract prices, and the total dollar contract amount, which will mature by July 31, 2008 and July 31, 2009. The Fair Value was determined using the “Most Recent Settle” price for the “Henry Hub Natural Gas” option contract prices as listed by the New York Mercantile Exchange on June 3, 2008.

Management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The controls evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to us and our consolidated subsidiaries is made known to management, including the CEO and CFO, during the period when our periodic reports are being prepared.

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended April 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our management, including the CEO and CFO, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Items 1, 3, 4 and 5 of this Part II are either inapplicable or are answered in the negative and are omitted pursuant to the instructions to Part II.

For information regarding Risk Factors, please refer to Item 1A in our Annual Report on Form 10-K for the year ended July 31, 2007. There have been no material changes in risk factors since July 31, 2007.

During the three months ended April 30, 2008, we did not sell any securities which were not registered under the Securities Act. The following chart summarizes Common Stock repurchases during this period.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: June 5, 2008