What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-21 compared with 2020-07-31 · 104 added, 52 removed, 101 unchanged (61% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations for the three months ended June 28, 2020 as compared to the similar period ended June 30, 2019.

The following is a discussion and analysis of our financial condition and results of operations for the six months ended September 27, 2020 as compared to the similar period ended September 29, 2019.

This discussion should be read in conjunction with the condensed consolidated financial statements and notes to condensed consolidated financial statements included in this quarterly report on Form 10-Q and Item 8 of our Annual Report on Form 10-K for the fiscal year ended March 29, 2020 .

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Over the years, we have maintained the strong customer focus and have expanded our business by increasing our sales of value-added chemicals and specialty ingredients, including manufacturing, blending, and repackaging certain products.

Business Acquisition

On July 28, 2020, we acquired substantially all the assets of American Development Corporation of Tennessee, Inc.

(“ADC”) under the terms of an asset purchase agreement with ADC and its shareholders.

ADC is a water treatment chemical distribution company operating primarily in Tennessee, Georgia and Kentucky.

The results of operations since the acquisition date are included in our Water Treatment segment.

Statement on COVID-19

The pandemic caused by COVID-19 has resulted in federal, state and local governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions or bans, business curtailments, school closures, and other protective measures.

While some areas of the country have begun to open up and ease these restrictions, many still have these restrictions in place or are implementing or contemplating new restrictions.

The pandemic caused by COVID-19 has resulted in federal, state and local governments around the world implementing stringent measures to help control the spread of the virus, including, from time to time, quarantines, “shelter in place” and “stay at home” orders, travel restrictions or bans, business curtailments, school closures, and other protective measures.

While some areas of the country have reopened and eased these restrictions, some still have certain restrictions in place or are implementing or contemplating new restrictions.

Restrictions will likely remain in place for some time.

Financial markets have been volatile in 2020, primarily due to uncertainty with respect to the severity and duration of the pandemic .

All of our manufacturing facilities qualify as essential operations (or the equivalent) under applicable federal and state orders.

As a result, all of our manufacturing sites and facilities have continued to operate and are doing so safely, with no significant impact to output levels.

All of our manufacturing facilities have qualified as essential operations (or the equivalent) under applicable federal and state orders.

As a result, all of our manufacturing sites and facilities have continued to operate, with no significant impact to output levels.

We are enforcing social distancing and enhanced health, safety and sanitization measures in accordance with guidelines from the Center for Disease Control.

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Our manufacturing sites have continued to operate during the COVID-19 pandemic, with no significant impact to manufacturing.

We ended the first quarter of fiscal 2021 with a leverage ratio below 1.0x, net debt of $61.5 million and significant amounts available for borrowing under our Revolving Loan Facility.

We ended the second quarter of fiscal 2021 with a leverage ratio of 1.0x, net debt of $72.8 million and $74 million available for borrowing under our Revolving Loan Facility.

The COVID-19 pandemic has created tremendous uncertainty in the economy.

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As uncertainty continues with this pandemic, we expect mixed results to continue for the foreseeable future.

We will continue to be cautious in our capital expenditures and investments, and delay investments where deemed appropriate, while still investing for the future by opening new Water Treatment branches and making capital investments to drive higher margin business.

We will continue to be cautious in our capital expenditures and investments, while still investing for the future by opening new Water Treatment branches, pursuing strategic acquisitions and making capital investments to drive higher margin business.

With our current debt levels and available borrowings, we believe we are well-positioned to weather a continued economic downturn.

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The following table sets forth the percentage relationship of certain items to sales for the period indicated:

Three Months Ended

June 28, 2020 June 30, 2019

Three Months Ended Six Months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

Sales 100.0 % 100.0 % 100.0 % 100.0 %

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Net income 8.2 % 6.6 % 8.3 % 6.6 %

Three Months Ended June 28, 2020 Compared to Three Months Ended June 30, 2019

Sales were $143.2 million for the current quarter, a decrease of $4.1 million, or 2.8%, from sales of $147.3 million for the same period a year ago.

Three Months Ended September 27, 2020 Compared to Three Months Ended September 29, 2019

Sales were $147.8 million for the current quarter, an increase of $7.8 million, or 5.5%, from sales of $140.0 million a year ago.

Industrial Segment.

Industrial segment sales decreased $3.8 million, or 5.1%, to $71.5 million for the current quarter, as compared to $75.3 million for the same period of the prior year.

Industrial segment sales decreased $6.9 million, or 10.2%, to $61.2 million for the current quarter, as compared to $68.1 million in the same period a year ago.

Sales of bulk commodity products in the Industrial segment were approximately 15% of sales dollars in the current quarter and 17% in the same period of the prior year.

The decrease in sales dollars from the prior year was driven primarily by a temporary increase in sales in the first quarter last year attributable to heavy rains and flooding along the Mississippi River, which increased demand from certain customers in that quarter.

Sales also decreased in the current quarter as a result of weak economic conditions in the ethanol industry, which decreased sales of products into that industry.

The decrease was somewhat offset by increased sales of certain of our manufactured, blended and re-packaged products, largely our bottled bleach products as a result of increased demand due to COVID-19, as well as increased sales of certain pharmaceutical, food ingredients and agricultural products.

The decrease in sales dollars as compared to the prior year was driven by lower overall volumes sold.

Water Treatment Segment.

Water Treatment segment sales decreased $3.6 million, or 8.2%, to $39.7 million for the current quarter, as compared to $43.3 million for the same period of the prior year.

Sales of bulk commodity products in the Water Treatment segment were approximately 10% of sales dollars for the current quarter and 11% a year ago.

The decrease in sales dollars was driven by decreased volumes sold in the current quarter due, in part, to customers filling up their tanks in March as a result of supply concerns resulting from COVID-19, which decreased their needs in the current quarter, as well as reduced sales to certain end-markets as a result of COVID-19.

Water Treatment segment sales increased $3.6 million, or 8.0%, to $49.5 million for the current quarter, as compared to $45.9 million in the same period a year ago.

Sales of bulk commodity products in the Water Treatment segment were approximately 9% of sales dollars for the current quarter and 11% in the same period a year ago.

The increase in sales dollars from the prior year was largely attributable to added sales from the acquisition of ADC.

Sales by our legacy business also increased due to increased sales of our manufactured, blended and repackaged products.

Health & Nutrition Segment.

Sales for our Health and Nutrition segment increased $3.2 million, or 11.1%, to $32.0 million for the current quarter, as compared to $28.8 million for the same period of the prior year.

The increase in sales was driven by increased sales of both our manufactured and specialty distributed products, partially as a result of increased demand resulting from COVID-19.

Gross profit increased $2.2 million to $31.0 million, or 21.6% of sales, for the current quarter, from $28.8 million, or 19.5% of sales, for the same period of the prior year.

During the current and prior year quarters, the LIFO reserve had a nominal impact on gross profit.

Sales for our Health and Nutrition segment increased $11.0 million, or 42.2%, to $37.1 million for the current quarter, as compared to $26.1 million in the same period a year ago.

The increase in sales was driven by increased sales of both our manufactured and specialty distributed products largely as a result of increased consumer demand for health and immunity products.

Gross profit increased $4.8 million to $32.8 million, or 22.2% of sales, for the current quarter, from $28.0 million, or 20.0% of sales, for the same period a year ago.

During the current quarter, the LIFO reserve decreased, and gross profits increased, by $0.2 million.

In the same quarter a year ago, the LIFO reserve decreased, and gross profits increased, by $0.3 million.

Industrial Segment.

Gross profit for the Industrial segment increased $1.6 million to $12.5 million, or 17.4% of sales, for the current quarter, from $10.9 million, or 14.5% of sales, for the same period of the prior year.

During the current and prior year

quarters, the LIFO reserve had a nominal impact on gross profit.

Industrial segment gross profit increased due to a favorable product mix shift to more sales of our manufactured, blended and re-packaged products.

Gross profit for the Industrial segment decreased $0.3 million to $10.4 million, or 17.0% of sales, for the current quarter, from $10.7 million, or 15.7% of sales, in the same period of the prior year.

During the current quarter, LIFO reserve decreased, and gross profits increased, by $0.2 million.

In the same quarter a year ago, the LIFO reserve decreased, and gross profits increased, by $0.3 million.

Total gross profit decreased slightly due to the overall reduction in sales.

Water Treatment Segment.

Gross profit for the Water Treatment segment decreased $0.8 million to $11.3 million, or 28.6% of sales, for the current quarter, from $12.1 million, or 28.0% of sales, for the same period of the prior year.

During the current and prior year quarters, the LIFO reserve had a nominal impact on gross profit.

Gross profit decreased as a result of decreased sales.

Gross profit for the Water Treatment segment increased $1.8 million to $14.5 million, or 29.3% of sales, for the current quarter, from $12.8 million, or 27.8% of sales, in the same period of the prior year.

During the current and prior year quarters, the change in the LIFO reserve had a nominal impact on gross profit.

Gross profit increased as a result of the added gross profit from the acquisition of ADC, as well as the increased sales in our legacy business.

Health and Nutrition Segment .

Gross profit for our Health and Nutrition segment increased $3.2 million to $7.8 million, or 21.1% of sales, for the current quarter, from $4.6 million, or 17.5% of sales, for the same period of the prior year.

The increase in gross profit was a result of higher sales compared to the prior year.

The increase in gross profit was primarily a result of higher sales compared to the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased $0.2 million to $15.0 million, or 10.5% of sales, for the current quarter, compared to $14.8 million, or 10.1% of sales, for the same period of the prior year.

The increase includes a year-over-year increase in compensation expense of $0.4 million related to our non-qualified deferred compensation plan, which is offset by other income.

Selling, general and administrative (“SG&A”) expenses were $16.2 million, or 11.0% of sales, for the current quarter, compared to $14.8 million, or 10.6% of sales, for the same period of the prior year.

Expenses increased in part due to increased variable pay and the added costs due to the ADC acquisition, including $0.2 million expense for amortization of intangibles, as well as an unfavorable adjustment to compensation expense related to our non-qualified deferred compensation plan, which expense is offset in other income.

As a percentage of sales, SG&A was relatively flat year over year when adjusted for the expense related to the non-qualified deferred compensation plan and the amortization of the intangibles related to ADC.

Operating Income

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Interest Expense, Net

Interest expense decreased $0.4 million to $0.4 million for the current quarter, from $0.8 million for the same period of the prior year.

Interest expense was $0.3 million for the current quarter, a decrease of $0.4 million from interest expense of $0.7 million for the same period a year ago.

Interest expense decreased due to lower outstanding borrowings and lower borrowing rates compared to the prior year.

Other income increased $0.4 million to $0.5 million recorded for the current quarter, compared to $0.1 million in the same period of the prior year.

This represents gains recorded on investments held for our non-qualified deferred compensation plan.

The amount recorded as a gain was offset by the same amount recorded as an increase to compensation expense within SG&A expenses.

Other income increased $0.3 million from the same period a year ago, with $0.3 million recorded in the current quarter, compared to a nominal amount in the same quarter a year ago.

This amount represents gains recorded on investments held for our non-qualified deferred compensation plan.

The amount recorded as a gain is offset by a similar amount recorded as an increase to compensation expense within SG&A expenses.

Income Tax Provision

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The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.

Six Months Ended September 27, 2020 Compared to Six Months Ended September 29, 2019

Sales were $291.0 million for the six months ended September 27, 2020, an increase of $3.6 million, or 1.3%, from sales of $287.4 million for the same period a year ago.

Industrial Segment.

Industrial segment sales decreased $10.7 million, or 7.5%, to $132.7 million for the six months ended September 27, 2020, as compared to $143.4 million for the same period a year ago.

Sales of bulk commodity products in the Industrial segment were approximately 14% of sales dollars in the current year and 19% in the same period of the prior year.

The decrease in sales dollars from the prior year was driven largely by weakened economic conditions in the ethanol industry, which decreased sales of products into that industry.

In addition, the decrease in sales dollars from the prior year was partially attributable to a temporary increase in sales in the prior year attributable to heavy rains and flooding along the Mississippi River, which increased demand from certain customers.

These year-over-year sales decreases were partially offset by increased sales of certain of our manufacturing, blended and repackaged products, largely our bleach products as a result of increased demand due to COVID-19.

Water Treatment Segment.

Water Treatment segment sales increased $0.2 million, or 0.2%, to $89.3 million for the six months ended September 27, 2020, as compared to $89.1 million for the same period a year ago.

Sales of bulk commodity products in the Water Treatment segment were approximately 9% of sales dollars in the current year and 11% a year ago.

The increase in sales dollars resulted from the added sales from the acquisition of ADC and was largely offset by a first quarter sales decline due to reduced sales to certain end markets, primarily pools, as a result of COVID-19.

Health & Nutrition Segment.

Sales for our Health and Nutrition segment increased $14.2 million, or 25.9%, to $69.0 million for the six months ended September 27, 2020, as compared to $54.8 million for the same period a year ago.

The increase in sales was driven by increased sales of both our manufactured and specialty distributed products largely as a result of increased consumer demand for health and immunity products.

Gross profit increased $7.0 million to $63.8 million, or 21.9% of sales, for the six months ended September 27, 2020, from $56.8 million, or 19.8% of sales, for the same period a year ago.

During the current year, the LIFO reserve decreased, and gross profits increased, by $0.1 million.

In the same period a year ago, the LIFO reserve decreased, and gross profits increased, by $0.3 million.

Industrial Segment.

Gross profit for the Industrial segment increased $1.3 million to $22.9 million, or 17.3% of sales, for the six months ended September 27, 2020, from $21.6 million, or 15.1% of sales, for the same period a year ago.

During the current year, LIFO reserve decreased, and gross profits increased, by $0.1 million.

In the same period a year ago, the LIFO reserve decreased, and gross profits increased, by $0.3 million.

Gross profit increased due to strong first quarter sales of certain manufactured, blended and re-packaged products, largely our bleach products as a result of increased demand due to COVID-19.

Water Treatment Segment.

Gross profit for the Water Treatment segment increased $1.1 million to $25.9 million, or 29.0% of sales, for the six months ended September 27, 2020, from $24.8 million, or 27.8% of sales, for the same period a year ago.

During the current and prior year periods, the LIFO reserve had a nominal impact on gross profit.

Gross profit increased primarily as a result of added sales from the acquisition of ADC.

Health and Nutrition Segment .

Gross profit for our Health and Nutrition segment increased $4.6 million to $15.0 million, or 21.8% of sales, for the six months ended September 27, 2020, from $10.4 million, or 18.9% of sales, for the same prior year period.

The increase in gross profit was primarily a result of higher sales compared to the prior year.

Selling, General and Administrative Expenses

SG&A expenses were $31.3 million, or 10.7% of sales, for the six months ended September 27, 2020, compared to $29.7 million, or 10.3% of sales, for the same prior year period.

Expenses increased in part due to increased variable pay, the added costs due to the ADC acquisition, including $0.2 million expense for amortization of intangibles, as well as an unfavorable adjustment to compensation expense related to our non-qualified deferred compensation plan, which expense is offset in other income.

Operating Income

Operating income increased $5.4 million to $32.5 million, or 11.2% of sales, for the six months ended September 27, 2020, from $27.1 million, or 9.5% of sales, for the same prior year period due to the combined impact of the factors discussed above.

Interest Expense, Net

Interest expense was $0.7 million for the six months ended September 27, 2020 , a decrease of $0.7 million from interest expense of $1.4 million for the same period a year ago.

Interest expense decreased due to lower outstanding borrowings and lower borrowing rates compared to the prior year.

Other income increased $0.7 million from the same period a year ago, with $0.8 million of expense recorded in the six months ended September 27, 2020, compared to $0.1 million in the same period a year ago.

This represents gains recorded on investments held for our non-qualified deferred compensation plan.

The amount recorded as a gain is offset by a similar amount recorded as an increase to compensation expense within SG&A expenses.

Income Tax Provision

Our effective income tax rate for the six months ended September 27, 2020 was 26.4%, compared to 26.3% in the same period of the prior year.

The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.

Liquidity and Capital Resources

Cash was $4.5 million at June 28, 2020, an increase of $0.2 million as compared with the $4.3 million available as of March 29, 2020.

Cash provided by operating activities was $1.6 million for the three months ended June 28, 2020, compared to cash provided by operating activities of $10.1 million for the same period of the prior year.

The year-over-year decrease in cash provided by operating activities was primarily driven by an increase in inventory and decreased payables, partially offset by an increase in customer receivables and improvement in net income for the first three months of fiscal 2020 compared to the same period a year ago.

Cash was $3.2 million at September 27, 2020, a decrease of $1.1 million as compared with the $4.3 million available as of March 29, 2020.

Cash provided by operating activities was $20.1 million for the six months ended September 27, 2020, compared to cash provided by operating activities of $27.1 million for the same period of the prior year.

The year-over-year decrease in cash provided by operating activities was primarily driven by an increase in inventory and customer receivables, offset by an increase in net income for the first six months of fiscal 2021 compared to the same period a year ago.

Increased customer demand in our Health and Nutrition segment resulted in a significant increase in on-hand inventory due to required stocking levels and longer lead times for many products.

Due to the nature of our operations, which includes purchases of large quantities of bulk chemicals, timing of purchases can result in significant changes in working capital investment and the resulting operating cash flow.

Due to flooding in the first quarter of the prior year, we were not able to receive any barges of bulk chemicals into inventory and as a result our inventory levels were unusually low at that time.

Typically, our cash requirements increase during the period from April through November as caustic soda inventory levels increase because we receive the majority of barges during this period.

Cash used in investing activities was $4.8 million for the three months ended June 28, 2020, compared to $9.1 million for the same period of the prior year.

Capital expenditures were $4.8 million for the three months ended June 28, 2020, compared to $9.2 million in the same period of the prior year.

In the first three months of the prior year, we purchased our previously leased corporate headquarters facility for $6.4 million, which was partially offset by increased investments in facility improvements and new and replacement equipment during the first three months of the current year.

Cash provided by financing activities was $3.5 million for the three months ended June 28, 2020, compared to $4.6 million of cash used in financing activities in the same period of the prior year.

Included in financing activities in the first three months of the current year were net debt proceeds of $6.0 million, compared to no borrowings in the first three months of the prior year, as our working capital needs were lower at that time because we did not receive any barges of bulk chemicals into inventory in that quarter.

In addition, we repurchased no shares of our common stock in the first quarter of the current fiscal year, compared to $1.8 million in the same quarter in the prior year.

Cash used in investing activities was $33.0 million for the six months ended September 27, 2020, compared to $13.9 million for the same period of the prior year.

In the six months ended September 27, 2020, we acquired ADC for $25 million.

Capital expenditures were $8.1 million for the six months ended September 27, 2020, compared to $14.1 million in the same period of the prior year.

In the first six months of the prior year, we purchased our previously leased corporate headquarters facility for $6.4 million.

Cash provided by financing activities was $11.8 million for the six months ended September 27, 2020, compared to $18.4 million of cash used in financing activities in the same period of the prior year.

Included in financing activities in the first six months of the current year were net debt proceeds of $16.0 million used in part for the acquisition of ADC, compared to net debt repayments of $10 million in the first six months of the prior year.

In addition, we repurchased no shares of our common stock in the first six months of the current fiscal year, compared to $3.8 million in the same period in the prior year.

We expect our cash balances and funds available under our credit facility, discussed below, along with cash flows generated from operations, will be sufficient to fund the cash requirements of our ongoing operations for the foreseeable future.

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The primary objective of the share repurchase program is to offset the impact of dilution from issuances relating to employee and director equity grants and our employee stock purchase program.

During the first three months of fiscal 2021, we did not repurchase any shares of common stock.

In the first three months of the prior fiscal year, we repurchased 47,136 shares of common stock with an aggregate purchase price of $1.8 million.

As of June 28, 2020, 358,797 shares remained available for purchase under the program

During the first six months of fiscal 2021, we did not repurchase any shares of common stock.

In the first six months of the prior fiscal year, we repurchased 91,395 shares of common stock with an aggregate purchase price of $3.8 million.

As of September 27, 2020, 358,797 shares remained available for purchase under the program

We are party to an amended and restated credit agreement (the “Credit Agreement”) with U.S.

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Bank, the Revolving Credit Loan Facility would be amended to use such successor rate without any further action or consent of any other lender, so long as the administrative agent does not receive any objection from any other lender.

At June 28, 2020, the effective interest rate on our borrowing was 1.5% .

At September 27, 2020, the effective interest rate on our borrowings was 1.3% .

In addition to paying interest on the outstanding principal under the Revolving Loan Facility, we are required to pay a commitment fee on the unutilized commitments thereunder.

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Debt issuance costs paid to the Lenders are being amortized as interest expense over the term of the Credit Agreement.

As of June 28, 2020, the unamortized balance of these costs was $0.3 million, and is reflected as a reduction of debt on our balance sheet.

As of September 27, 2020, the unamortized balance of these costs was $0.3 million, and is reflected as a reduction of debt on our balance sheet.

The Credit Agreement requires us to maintain (a) a minimum fixed charge coverage ratio of 1.15 to 1.00 and (b) a maximum total cash flow leverage ratio of 3.0 to 1.0.

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We are permitted to make distributions, pay dividends and repurchase shares so long as no default or event of default exists or would exist as a result thereof.

We were in compliance with all covenants of the Credit Agreement as of June 28, 2020.

We were in compliance with all covenants of the Credit Agreement as of September 27, 2020.

The Credit Agreement contains customary events of default, including failure to comply with covenants in the Credit Agreement and other loan documents, cross default to other material indebtedness, failure by us to pay or discharge material judgments, bankruptcy, and change of control.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis