PENSION AND OTHER POSTRETIREMENT BENEFITS

The Oil-Dri Corporation of American Pension Plan (“Pension Plan”) is a defined benefit pension plan for eligible salaried and hourly employees. Pension benefits are based on a formula of years of credited service and levels of compensation or stated amounts for each year of credited service.

A postretirement health benefits plan is also provided to domestic salaried employees who meet specific age, participation and length of service requirements at the time of retirement. Eligible employees may elect to continue their health care coverage under the Oil-Dri Corporation of America Employee Benefits Plan until the date certain criteria are met, including attaining the age of Medicare eligibility. We have the right to modify or terminate the postretirement health benefit plan at any time.

A 401(k) savings plan is maintained under which we match a portion of employee contributions. This plan is available to essentially all domestic employees following a specific number of days of employment. Our contributions to this plan, and to similar plans maintained by our foreign subsidiaries, were $764,000 and $782,000 for fiscal years 2019 and 2018, respectively.

Obligations and Funded Status

The following tables provide a reconciliation of changes in the plans’ benefit obligations, asset fair values and funded status by fiscal year (in thousands):



	Pension Benefits						Postretirement Health Benefits
	2019			2018			2019			2018
Change in benefit obligation:
Benefit obligation, beginning of year	$	54,267		$	53,742		$	2,667		$	2,925
Service cost	1,626			1,723			105			106
Interest cost	2,114			2,022			97			84
Actuarial loss (gain)	5,125			(1,811		)	97			(363		)
Benefits paid	(1,579		)	(1,409		)	(8		)	(85		)
Benefit obligation, end of year	61,553			54,267			2,958			2,667

Change in plan assets:
Fair value of plan assets, beginning of year	40,971			27,457			—			—
Actual return on plan assets	1,333			1,719			—			—
Employer contribution	—			13,204			8			85
Benefits paid	(1,579		)	(1,409		)	(8		)	(85		)
Fair value of plan assets, end of year	40,725			40,971			—			—
Funded status, recorded in Consolidated Balance Sheets	$	(20,828	)	$	(13,296	)	$	(2,958	)	$	(2,667	)

See “Cash Flows” below for further information about employer contributions and benefits payments.

The accumulated benefit obligation for the Pension Plan was $54,696,000 and $48,358,000 as of July 31, 2019 and July 31, 2018, respectively.

The following table shows amounts recognized in the Consolidated Balance Sheets as of July 31 (in thousands):



	Pension Benefits						Postretirement Health Benefits
	2019			2018			2019			2018
Deferred income taxes	$	5,346		$	3,525		$	754		$	639
Other current liabilities	$	—		$	—		$	(65	)	$	(57	)
Other noncurrent liabilities	$	(20,828	)	$	(13,296	)	$	(2,893	)	$	(2,610	)
Accumulated other comprehensive loss – net of tax:
Net actuarial loss	$	14,731		$	10,301		$	184		$	110
Prior service cost (income)	$	—		$	2		$	(24	)	$	(29	)

Benefit Costs and Amortizations

The following table shows the components of the net periodic pension and postretirement health benefit costs by fiscal year (in thousands):



	Pension Cost						Postretirement Health Benefit Cost
	2019			2018			2019			2018
Service cost	$	1,626		$	1,723		$	105		$	106
Interest cost	2,114			2,022			97			84
Expected return on plan assets	(2,809		)	(2,168		)	—			—
Amortization of:
Prior service costs (income)	2			2			(6		)	(6		)
Other actuarial loss	771			1,274			—			—
Net periodic benefit cost	$	1,704		$	2,853		$	196		$	184

The following table shows amounts, net of tax, that are recognized in other comprehensive income by fiscal year (in thousands):



	Pension Benefits						Postretirement Health Benefits
	2019			2018			2019		2018
Net actuarial loss (gain)	$	5,016		$	(1,034	)	$	73	$	(276	)
Amortization of:
Prior service (cost) income	(1		)	(2		)	5		1
Amortization of actuarial (loss) gain	(586		)	(901		)	—		5
Total recognized in other comprehensive loss (income)	$	4,429		$	(1,937	)	$	78	$	(270	)

The following table shows amortization amounts, net of tax, expected to be recognized in fiscal year 2020 in accumulated other comprehensive income (in thousands):



Amortization of:	Pension Benefits		Postretirement Health Benefits
Net actuarial loss	$	1,087	$	—
Prior service income	—		(5		)
Total to be recognized as other comprehensive loss (income)	$	1,087	$	(5	)

Cash Flows

We have funded the Pension 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 applicable regulations. During fiscal 2018, we made an $11,500,000 voluntary contribution in excess of the minimum required amount. This contribution was made within eight and one-half months after the end of our fiscal year 2017 and therefore was deductible for our 2017 tax year. We received a greater tax benefit for this deduction in our 2017 tax year compared to the the benefit we would have received if the contribution was attributed to our 2018 tax year. See Note 5 of the Notes to the Consolidated Financial Statements for further discussion of the tax rates and other changes enacted by the 2017 Tax Act. This voluntary contribution also improved our funded status and contributed to a lower net periodic benefit expense.

We do not expect to make a contribution to the Pension Plan in fiscal year 2020. The postretirement health plan is an unfunded plan. Our policy is to pay health insurance premiums and claims from our assets.

The following table shows the estimated future benefit payments by fiscal year (in thousands):



	Pension Benefits		Postretirement Health Benefits
2020	$	1,686	$	66
2021	$	1,763	$	98
2022	$	1,864	$	108
2023	$	1,902	$	147
2024	$	2,013	$	236
2025-29	$	13,969	$	1,412

Assumptions

Our pension benefit and postretirement health benefit obligations and the related effects on operations are calculated using actuarial models. Critical assumptions that are important elements of plan expenses and asset/liability measurements include discount rate and expected return on assets for the Pension Plan and health care cost trend for the postretirement health plan. 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 our experience and to meet regulatory requirements. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. The assumptions used in the previous calculations by fiscal year were as follows:



	Pension Benefits		Postretirement Health Benefits
	2019	2018	2019	2018
Discount rate for net periodic benefit costs	4.04%	3.75%	3.81%	3.26%
Discount rate for year-end obligations	3.35%	4.04%	2.93%	3.81%
Rate of increase in compensation levels for net periodic benefit costs	3.50%	3.50%	—	—
Rate of increase in compensation levels for year-end obligations	3.50%	3.50%	—	—
Long-term expected rate of return on assets	7.00%	7.00%	—	—

The discount rate was based on the FTSE Pension Discount Curve to determine separately for the Pension Plan and the postretirement health plan, the single equivalent rate that would yield the same present value as the specific plan’s expected cash flows.

Our expected rate of return on Pension Plan assets is determined by our asset allocation, our historical long-term investment performance, our estimate of future long-term returns by asset class (using input from our actuaries, investment managers and investment advisors), and long-term inflation assumptions.

For fiscal year 2019, the medical cost trend assumption used for the postretirement health benefit cost was 7.5%. The graded trend rate is expected to decrease to an ultimate rate of 4.5% in fiscal year 2038.

The following table reflects the effect on postretirement health costs and accruals in fiscal year 2019 of a one-percentage point change in the assumed health care cost trend (in thousands):



	One-Percentage Point Increase	One-Percentage Point Decrease
Effect on total service and interest cost	$26	$(22)
Effect on accumulated postretirement benefit obligation	$301	$(267)

Pension Plan Assets

The investment objective for the Pension Plan assets is to optimize long-term return at a moderate level of risk in order to secure the benefit obligations to participants at a reasonable cost. To reach this goal, our investment structure includes various asset classes, asset allocations and investment management styles that, in total, have a reasonable likelihood of producing a sufficient level of overall diversification that balances expected return with expected risk over the long-term. The Pension Plan does not invest directly in Company stock.

We measure and monitor the plan’s asset investment performance and the allocation of assets through quarterly investment portfolio reviews. Investment performance is measured by absolute returns, returns relative to benchmark indices and any other appropriate basis of comparison. The targeted allocation percentages of plan assets is shown below for fiscal year 2020 and the actual allocation as of July 31:



Asset Allocation	Target fiscal 2020	2019	2018
Cash and accrued income	2%	—%	—%
Fixed income	38%	42%	36%
Equity	60%	58%	64%

The following table sets forth by level, within the fair value hierarchy, the Pension Plan's assets carried at fair value (in thousands):



	Fair Value At July 31, 2019
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)
Asset Class
Cash and cash equivalents^(a)	$	66	$	66	$	—
Equity securities^(b):
U.S. companies	13,775		4,147		9,628
International companies	2,609		2,609		—
Equity securities - international mutual funds:
Developed market^(c)	5,275		—		5,275
Emerging markets^(d)	1,141		—		1,141
Commodities^(e)	637		—		637
Fixed Income:
U.S. Treasuries	3,273		—		3,273
Debt securities^(f)	8,103		—		8,103
Government sponsored entities^(g)	2,087		—		2,087
Multi-strategy bond fund^(h)	813		—		813
Money market fund⁽ⁱ⁾	557		—		557
Other^(j)	2,389		—		2,389
Total	$	40,725	$	6,822	$	33,903



	Fair Value At July 31, 2018
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)
Asset Class
Cash and cash equivalents^(a)	$	1,102	$	1,102	$	—
Equity securities^(b):
U.S. companies	14,253		5,519		8,734
International companies	3,157		3,157		—
Equity securities - international mutual funds:
Developed market^(c)	5,851		—		5,851
Emerging markets^(d)	905		—		905
Commodities^(e)	687		—		687
Fixed Income:
U.S. Treasuries	1,929		—		1,929
Debt securities(f)	8,325		—		8,325
Government sponsored entities^(g)	1,814		—		1,814
Money market fund⁽ⁱ⁾	1,567		—		1,567
Other^(j)	1,381		—		1,381
Total	$	40,971	$	9,778	$	31,193


(a)	Cash and cash equivalents consists of highly liquid investments which are traded in active markets.


(b)	This class represents equities traded on regulated exchanges, as well as funds that invest in a portfolio of such stocks.


(c)	These mutual funds seek long-term capital growth by investing no less than 80% of their assets in stocks of non- U.S. companies that are primarily in developed markets, but also may invest in emerging and less developed markets.


(d)	These mutual funds seek to track the performance of a benchmark index that measures the investment return of stock issued by companies located in emerging market countries.


(e)	These investments seek attractive total return by investing primarily in a diversified portfolio of commodity futures contracts and fixed income investments.


(f)	This class includes bonds and loans of U.S. and non-U.S. corporate issuers from diverse industries and bonds of domestic and foreign municipalities.


(g)	This class represents a beneficial ownership interest in a pool of single-family residential mortgage loans. These investments are generally not backed by the full faith and credit of the United States government, except for securities valued at $377,000 in our portfolio as of July 31, 2019 and $443,000 as of July 31, 2018.


(h)	This class invests at least 80% of its net assets in bonds and other fixed income instruments issued by governmental or private-sector entities. More than 50% of its net assets are invested in mortgage-backed securities. The fund may invest up to 33 1/3% of its net assets in high-yield bonds, bank loans and assignments and credit default swaps.

(i)

These money market mutual funds seek to provide current income consistent with liquidity and stability of principal by investing in a diversified portfolio of high quality, short-term, dollar-denominated debt securities. These funds may include securities issued or guaranteed as to principal and interest by the U.S. government or its agencies, short-term securities issued by domestic or foreign banks, domestic and dollar-denominated foreign commercial papers, and other short-term corporate obligations and obligations issued or guaranteed by one or more foreign governments.


(j)	This class includes funds that use a number of other strategies, including arbitrage, to obtain long-term positive returns. The portfolio of instruments may include equities, debt securities, real estate properties, warrants, options, swaps, future contracts, forwards or other types of derivative instruments.