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Item 7. Management’s Discussion and Analysis

2022-05-18 compared with 2021-06-02 · 97 added, 93 removed, 130 unchanged (59% of the section changed)

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This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report because that disclosure was already included in our Annual Report on Form 10-K for fiscal 2020, filed with the SEC on May 20, 2020.

You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for fiscal 2019 compared to fiscal 2020.

We derive substantially all of our revenues from the sale of chemicals and specialty ingredients to our customers in a wide variety of industries.

We began our operations primarily as a distributor of bulk chemicals with a strong customer focus.

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

You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and results of operations for fiscal 2020 compared to fiscal 2021.

We derive substantially all of our revenues from the sale of specialty chemicals and ingredients that we formulate, distribute, blend and manufacture for our Industrial, Water Treatment and Health and Nutrition customers.

Financial Overview

An overview of our financial performance in fiscal 2021 is provided below:

Highlights of fiscal 2022 include:

• Sales of $774.5 million, a 30% increase from fiscal 2021;

• Gross profit of $146.5 million, an increase of $22.8 million, or 18% from fiscal 2021;

• Selling, general and administrative (“SG&A”) expenses increased $8.6 million year over year, and were relatively flat as a percentage of sales from fiscal 2020;

• Net cash provided by operating activities of $43.8 million, as compared to $58.9 million for fiscal 2020.

We focus on total profitability dollars when evaluating our financial results as opposed to profitability as a percentage of sales, as sales dollars tend to fluctuate, particularly in our Industrial and Water Treatment segments, as raw material prices rise and fall.

• An increase in selling, general and administrative (“SG&A”) expenses of $7.4 million year over year, but a decrease of 160 basis points as a percentage of sales when compared to fiscal 2021;

We focus on total profitability dollars when evaluating our financial results as opposed to profitability as a percentage of sales, as sales dollars tend to fluctuate as raw material prices rise and fall, particularly in our Industrial and Water Treatment segments.

The costs for certain of our raw materials can rise or fall rapidly, causing fluctuations in gross profit as a percentage of sales.

We use the last in, first out (“LIFO”) method of valuing the inventory in our Industrial and Water Treatment segments, which causes the most recent product costs to be recognized in our income statement.

We use the last in, first out (“LIFO”) method of valuing the majority of our inventory in our Industrial and Water Treatment segments, which causes the most recent product costs to be recognized in our income statement.

The LIFO inventory valuation method and the resulting cost of sales are consistent with our business practices of pricing to current chemical raw material prices.

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Business and Property Acquisitions

On December 30, 2021, we acquired substantially all the assets of NAPCO Chemical Company, Inc.

and its affiliates ("NAPCO") under the terms of an asset purchase agreement among us, NAPCO and certain other parties thereto.

NAPCO manufactures and distributes water treatment chemicals from three locations in Texas.

The results of operations are included as part of our Water Treatment segment from the date of acquisition forward.

On October 29, 2021, we acquired substantially all the assets of Water and Waste Specialties, LLC, under the terms of an asset purchase agreement with Water and Waste Specialties and its shareholders.

Water and Waste Specialties was a water treatment chemical distribution company operating primarily in Alabama.

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

On September 20, 2021, we acquired substantially all the assets of Southeast Water Systems LLC, under the terms of an asset purchase agreement with Southeast Water Systems and its shareholders.

Southeast Water Systems supplied and installed water treatment chemical equipment to its customers located primarily in Alabama, southern Georgia and the Florida panhandle.

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

In the fourth quarter of fiscal 2021, we acquired substantially all the assets of C & L Aqua Professionals, Inc.

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

The aggregate annual revenue from C&L Aqua and ADC in the twelve months prior to each acquisition date totaled approximately $25 million.

The aggregate annual revenue of the three businesses acquired in fiscal 2022 totaled approximately $17 million, as determined using the applicable twelve-month period preceding each respective acquisition date.

The aggregate annual revenue from the fiscal 2021 acquisitions totaled approximately $25 million, as determined using the applicable twelve-month period preceding each respective acquisition date.

On March 1, 2021, we effected a two-for-one split of our common stock and adjusted the par value from $.05 per share to $0.01 per share.

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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, 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 many restrictions have eased since the start of the COVID-19 pandemic, certain restrictions remain in place or new restrictions may be implemented in the future.

Certain restrictions may remain in place for some time.

During the pandemic caused by COVID-19, federal, state and local governments around the world implemented 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 most restrictions have eased since the start of the COVID-19 pandemic, certain restrictions remain in place or new restrictions may be implemented in the future.

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 our output levels.

During this public health crisis, we have remained focused on the health and safety of our employees, customers and suppliers and maintaining safe and reliable operations of our manufacturing sites.

As our operations and products are essential to critical national infrastructure, it is imperative that we continue to supply materials including the products needed to maintain safe drinking water, ingredients essential for large-scale food, pharmaceutical and other health product manufacturing and nutrition products needed to support our critical infrastructure.

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

The financial impact of the COVID-19 pandemic to our company has been mixed, as sales to certain end-markets such as food, bottled bleach and health and nutrition have benefited our reporting segments, while decreased sales to other end-markets such as ethanol, pools and resorts have negatively impacted them.

In addition, certain expenses, such as travel and entertainment and trade show expenses, were lower than historical levels during fiscal 2021.

We expect mixed results to continue until conditions normalize following the end of the pandemic.

During the public health crisis, we remained focused on the health and safety of our employees, customers and suppliers and maintaining safe and reliable operations of our manufacturing sites.

Results of Operations

The following table sets forth certain items from our statement of income as a percentage of sales from period to period:

The following table sets forth certain items from our statement of income as a percentage of sales for fiscal 2022 and 2021:

Fiscal 2022 Fiscal 2021

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Selling, general and administrative expenses (9.7) % (11.3) %

Operating income (loss) 9.4 % 7.7 %

Operating income 9.2 % 9.4 %

Interest expense, net (0.2) % (0.2) %

Other income — % 0.2 %

Income (loss) before income taxes 9.4 % 7.3 %

Income before income taxes 9.0 % 9.4 %

Income tax provision (2.3) % (2.5) %

Net income (loss) 6.9 % 5.3 %

Net income 6.7 % 6.9 %

Fiscal 2022 Compared to Fiscal 2021

Sales were $774.5 million for fiscal 2022, an increase of $177.7 million, or 30%, from sales of $596.9 million for fiscal 2021.

We estimated the impact of the 53rd week in fiscal 2022 to be approximately $17.5 million in additional sales.

Industrial Segment.

Industrial segment sales decreased $1.9 million, or 1%, to $273.4 million for fiscal 2021, as compared to $275.2 million for fiscal 2020.

Industrial segment sales increased $113.6 million, or 42%, to $386.9 million for fiscal 2022, as compared to $273.4 million for fiscal 2021.

Sales of bulk commodity products in the Industrial segment were approximately 16% of sales dollars in fiscal 2022 and 14% of sales dollars in fiscal 2021.

Increased sales resulting from a product mix shift to more sales of certain of our higher-priced manufactured, blended and repackaged products, in particular certain of our food ingredient and agricultural products, as well as increased sales of our bleach products, was more than offset by decreased sales into the ethanol industry in the first half of fiscal 2021, due largely to weakened economic conditions in that industry.

We estimated the impact of the 53rd week in fiscal 2022 to be approximately $10.0 million in additional sales in our Industrial segment.

In addition, the increase in sales was driven by increased selling prices on many of our products driven by higher costs on many of our raw materials, as well as increased sales of our bulk and our manufactured, blended and repackaged products.

Water Treatment Segment.

Water Treatment segment sales increased $58.1 million, or 34%, to $228.1 million for fiscal 2022, as compared to $170.0 million for fiscal 2021.

Sales of bulk commodity products in the Water Treatment segment were approximately 9% of sales dollars in fiscal 2021 and 12% of sales dollars in fiscal 2020.

The increase in sales dollars resulted from the added sales from the acquisition of ADC and C&L Aqua as well as increased sales of certain manufactured, blended and re-packaged products in our legacy business, partially offset by a first quarter sales decline as a result of COVID-19 which reduced sales to certain end markets, primarily swimming pools.

Sales of bulk commodity products in the Water Treatment segment were approximately 9% of sales dollars in both fiscal 2022 and fiscal 2021.

We estimated the impact of the 53rd week in fiscal 2022 to be approximately $3.9 million in additional sales in our Water Treatment segment.

In addition, sales increased as a result of increased demand for our products as well as the added sales from acquisitions.

Health and Nutrition Segment.

Sales for our Health and Nutrition segment increased $48.4 million, or 46%, to $153.5 million for fiscal 2021, as compared to $105.1 million for fiscal 2020.

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

Health and Nutrition segment sales increased $6.0 million, or 4%, to $159.5 million for fiscal 2022, as compared to $153.5 million for fiscal 2021.

We estimated the impact of the 53rd week in fiscal 2022 to be approximately $3.6 million in additional sales in our Health and Nutrition segment.

In addition, sales increased as a result of an increase in sales of our specialty distributed products, which was partially offset by the normalizing of demand for our manufactured products when compared to the temporary COVID-driven increase in demand these products experienced in the prior year.

Gross profit increased $22.8 million, or 18%, to $146.5 million, or 19% of sales, for fiscal 2022, from $123.8 million, or 21% of sales, for fiscal 2021.

During fiscal 2021, the LIFO reserve decreased, and gross profits increased, by $0.1 million.

In fiscal 2020, the LIFO reserve increased, and gross profits decreased, by $0.6 million.

During fiscal 2022, the LIFO reserve increased, and gross profits decreased, by $15.8 million, primarily due to rising input costs.

In fiscal 2021, the LIFO reserve decreased, and gross profits increased, by $0.1 million.

We estimated the impact of the 53rd week in fiscal 2022 to be approximately $3.6 million in additional gross profit.

Industrial Segment.

Gross profit for the Industrial segment increased $16.3 million, or 38%, to $59.6 million, or 15% of sales, for fiscal 2022, from $43.3 million, or 16% of sales, for fiscal 2021.

During fiscal 2021, the LIFO reserve decreased, and gross profits increased, by $0.2 million.

In fiscal 2020, the LIFO reserve increased, and gross profits decreased, by $0.6 million.

Total gross profit, and gross profit as a percentage of sales, increased due to a product mix shift to more sales of certain higher-margin manufactured, blended and re-packaged products, partially offset by higher operating costs.

During fiscal 2022, the LIFO reserve increased, and gross profits decreased, by $10.4 million, primarily due to rising raw material costs.

In fiscal 2021, the LIFO reserve decreased, and gross profits increased, by $0.2 million.

We estimated the impact of the 53rd week in fiscal 2022 to be approximately $1.9 million in additional gross profit in our Industrial segment.

In addition, gross profit increased as a result of the increase in sales, partially offset by the negative impact resulting from the increase in the LIFO reserve.

Water Treatment Segment.

Gross profit for the Water Treatment segment increased $7.8 million, or 17%, to $54.6 million, or 24% of sales, for fiscal 2022, from $46.8 million, or 28% of sales, for fiscal 2021.

During fiscal 2021, the LIFO reserve increased, and gross profits decreased, by $0.1 million.

During fiscal 2020, the LIFO reserve had a nominal impact on gross profit.

Gross profit increased as a result of the added gross profit from sales in the acquired businesses of ADC and C&L Aqua.

Gross profit, and gross profit as a percentage of sales, also increased as a result of a product mix shift to more sales of certain of our manufactured, blended and repackaged products in our legacy business.

During fiscal 2022, the LIFO reserve increased, and gross profits decreased, by $5.4 million, primarily due to rising raw material costs.

During fiscal 2021, the LIFO reserve increased, and gross profit decreased, by $0.1 million.

We estimated the impact of the 53rd week in fiscal 2022 to be approximately $1.0 million in additional gross profit in our Water Treatment segment.

In addition, gross profit increased as a result of the increase in sales.

Health and Nutrition Segment.

Gross profit for our Health and Nutrition segment increased $13.6 million, or 68% to $33.6 million, or 22% of sales, for fiscal 2021, from $20.1 million, or 19% of sales, for fiscal 2020.

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

Gross profit as a percentage of sales increased primarily as a result of product mix changes.

Gross profit for our Health and Nutrition segment decreased $1.3 million, or 4%, to $32.3 million, or 20% of sales, for fiscal 2022, from $33.6 million, or 22% of sales, for fiscal 2021.

We estimated the impact of the 53rd week in fiscal 2022 to be approximately $0.7 million in additional gross profit in our Health and Nutrition segment.

This increase from the 53rd week was more than offset by a decrease in gross profit resulting from a decline in sales of our manufactured products which generally have higher per-unit margins than our specialty distributed products.

Selling, General and Administrative Expenses

SG&A expenses increased $7.4 million to $75.3 million, or 10% of sales, for fiscal 2022, from $67.9 million, or 11% of sales, for fiscal 2021.

Expenses increased primarily due to increased variable pay, the added costs from the acquired businesses of ADC and C&L Aqua, including $0.8 million expense for amortization of intangibles, and a year-over-year increase in compensation expense related to our non-qualified deferred compensation plan, with the expense offset in other income.

We estimated the impact of the 53rd week in fiscal 2022 to be approximately $1.0 million in additional SG&A expense.

In addition, expenses increased in part due to the added costs from the acquired businesses in the Water Treatment segment, an increase in variable incentive compensation, increased costs due to added personnel and other resources as we invest to grow the business, and normalization of travel and other variable expenses to pre-COVID levels.

Operating Income

Operating income was $71.2 million, or 9% of sales, for fiscal 2022, as compared to $55.9 million, or 9% of sales, for fiscal 2021 due to the combined impact of the factors discussed above.

We estimated the impact of the 53rd week in fiscal 2022 to be approximately $3 million in additional operating income.

Interest Expense, Net

Interest expense was $1.4 million for fiscal 2022, a decrease of $0.1 million from interest expense of $1.5 million for fiscal 2021.

The additional interest cost as a result of the increase in outstanding borrowings was more than offset by lower borrowing rates compared to the prior year.

Lower borrowing rates compared to the prior year more than offset the increase in outstanding borrowings in the current year.

Income Tax Provision

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Selected Quarterly Financial Data

Selected financial data for our fiscal quarters is shown below.

No changes have been made to previously reported information.

(In thousands, except per share data) Fiscal 2022

First Second Third Fourth

First Second Third Fourth Total

Sales $ 181,241 $ 183,277 $ 187,050 $ 222,973 $ 774,541

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Diluted earnings per share $ 0.46 $ 0.43 $ 0.21 $ 0.22 $ 1.33

Earnings (loss) per share may not equal the face of the Consolidated Statements of Income (Loss) due to rounding.

Earnings per share may not equal the face of the Consolidated Statements of Income due to rounding.

Liquidity and Capital Resources

Cash provided by operating activities in fiscal 2022 was $42.8 million compared to $43.8 million in fiscal 2021.

The decrease in cash provided by operating activities in fiscal 2021 as compared to fiscal 2020 was primarily driven by increases in customer receivables, resulting from higher sales, as well as higher inventory levels, partially offset by an increase in net income.

Increased customer demand in our Health and Nutrition segment resulted in an increase in on-hand inventory due to increased stocking levels to fill the increased demand and to offset longer lead times from our suppliers for many products.

The decrease in cash provided by operating activities in fiscal 2022 as compared to fiscal 2021 was driven by higher inventory levels and increases in customer receivables resulting from higher sales, mostly offset by an increase in net income and accounts payable.

The inventory increase was driven by increased raw material costs as well as a conscious management decision to increase inventory levels due to increased customer demand and supply chain issues.

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

Historically, our cash requirements for working capital increase during the period from April through November as caustic soda inventory levels increase as most of our barges are received during this period.

Historically, our cash requirements for working capital increase during the period from March through November as caustic soda inventory levels increase as most of our barges are received during this period.

Cash used in investing activities was $49.8 million in fiscal 2022 compared to $71.4 million in fiscal 2021.

Capital expenditures were $28.5 million in fiscal 2022 and $20.8 million in fiscal 2021.

Total cash used in investing activities in fiscal 2021 included an aggregate of $51.0 million for the acquisitions of ADC, C&L Aqua and the purchase of the manufacturing facility in Rosemount, Minnesota.

Capital expenditures in fiscal 2021 included $7.8 million of facility improvements, including $4.3 million to expand our pharmaceutical product manufacturing capabilities, vehicles and trucks of $4.7 million, the purchase of a previously leased Water Treatment branch facility for $0.9 million, along with other new and replacement equipment.

Capital expenditures in fiscal 2020 included $9.5 million in the aggregate for the purchase of our previously leased corporate headquarters and a previously leased Water Treatment branch facility as well as the purchase of a facility for a Water Treatment branch expansion.

Cash provided by financing activities was $26.4 million in fiscal 2021, as compared to cash used in financing activities of $39.6 million in fiscal 2020.

Cash provided by financing activities included net debt borrowings of $39.0 million in fiscal 2021 to partially fund the acquisitions in fiscal 2021, compared to net debt repayments of $25.0 million in fiscal 2020.

We also paid out cash dividends of $10.0 million in fiscal 2021 and $9.8 million in fiscal 2020.

Total cash used in investing activities in fiscal 2022 included an aggregate of $21.5 million for Water Treatment group acquisitions compared to $51.0 million in Water Treatment group acquisition spending in fiscal 2021.

Capital expenditures in fiscal 2022 included vehicles and trucks, facility improvements, and pharmaceutical ingredient manufacturing capabilities, along with other new and replacement equipment.

Capital expenditures in fiscal 2021 included pharmaceutical ingredient manufacturing capabilities, vehicles and trucks, and the purchase of a previously leased Water Treatment branch facility, along with other new and replacement equipment.

Cash provided by financing activities was $7.4 million in fiscal 2022, as compared to $26.4 million in fiscal 2021.

Cash provided by financing activities included net debt borrowings of $27.0 million in fiscal 2022, compared to net debt borrowings of $39.0 million in fiscal 2021, which was used primarily to fund our acquisitions in both fiscal years.

We paid out cash dividends of $11.1 million in fiscal 2022 and $10.0 million in fiscal 2021.

In fiscal 2022, we used $8.5 million to repurchase shares under our board-authorized share repurchase program, and in fiscal 2021, we used $4.1 million to repurchase shares under the program.

Our cash balance was $3.0 million at March 28, 2021, a decrease of $1.3 million as compared with March 29, 2020.

Our cash balance was $3.5 million at April 3, 2022, an increase of $0.5 million as compared with March 28, 2021.

Cash flows generated by operations and financing activities during fiscal 2022 were offset by the cash expended for acquisitions in fiscal 2022, capital expenditures and dividend payments.

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

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

Bank as Sole Lead Arranger and Sole Book Runner, and other lenders from time to time party thereto (collectively, the “Lenders”), whereby U.S.

Bank was also serving as Administrative Agent.

The Prior Credit Agreement provided us with senior secured revolving credit facilities (the “Prior Revolving Loan Facility”) totaling $150.0 million.

The Prior Revolving Loan Facility included a $5.0 million letter of credit subfacility and $15.0 million swingline subfacility.

The Prior Revolving Loan Facility was scheduled to terminate on November 30, 2023, and was secured by substantially all of our personal property assets and those of our subsidiaries.

On March 31, 2022, we entered into a second amended and restated credit agreement (the “Credit Agreement”) with U.S.

Bank National Association (“U.S.

Bank”) as Sole Lead Arranger and Sole Book Runner, and other lenders from time to time party thereto (collectively, the “Lenders”), whereby U.S.

Bank is also serving as Administrative Agent.

The Credit Agreement refinanced the term and revolving loans under the Prior Credit Agreement and provides us with senior secured revolving credit facilities (the “Revolving Loan Facility”) totaling $150.0 million.

The Credit Agreement refinanced the revolving loan under our previous credit agreement with U.S.

Bank and provides us with senior secured revolving credit facilities (the “Revolving Loan Facility”) totaling $250 million.

The Revolving Loan Facility includes a $10 million letter of credit subfacility and $25 million swingline subfacility.

The Revolving Loan Facility has a five-year maturity date, maturing on November 30, 2023.

The Revolving Loan Facility has a five-year maturity date, maturing on April 30, 2027.

The Revolving Loan Facility is secured by substantially all of our personal property assets and those of our subsidiaries.

We used $126.0 million of the proceeds from the Revolving Loan Facility to refinance the obligations under the previous credit facility.

We may use the remaining amount of the Revolving Loan Facility for working capital, capital expenditures, share repurchases, restricted payments and acquisitions permitted under the Credit Agreement, and other general corporate purposes.

Borrowings under the Revolving Loan Facility bear interest at a rate per annum equal to one of the following, plus, in both cases, an applicable margin based upon our leverage ratio:

(a) LIBOR for an interest period of one, two, three or six months as selected by us, reset at the end of the selected interest period, or (b) a base rate determined by reference to the highest of (1) U.

Bank’s prime rate, (2) the Federal Funds Effective Rate plus 0.5%, or (3) one-month LIBOR for U.S.

(a) Term SOFR, which includes a credit spread adjustment of 0.10%, for an interest period of one, three or six months as selected by us, reset at the end of the selected interest period, or (b) a base rate determined by reference to the highest of (1) U.

Bank’s prime rate, (2) the Federal Funds Effective Rate plus 0.5%, or (3) one-month Term SOFR for U.S.

dollars plus 1.0%.

The LIBOR margin is between 0.85% and 1.35%, depending on our leverage ratio.

The Term SOFR margin is between 0.85% and 1.35%, depending on our leverage ratio.

The base rate margin is between 0.00% and 0.35%, depending on our leverage ratio.

In the event that the ICE Benchmark Administration (or any person that takes over administration of such rate) determines that LIBOR is no longer available, including as a result of the intended phase out of LIBOR by the end of 2021, our Revolving Loan Facility provides for an alternative rate of interest to be jointly determined by us and U.S.

Bank, as administrative agent, that gives due consideration to the then prevailing market convention for determining a rate of interest for syndicated loans in the United States.

Once such successor rate has been approved by us and U.S.

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 March 28, 2021, the effective interest rate on our borrowings was 1.1%.

At April 3, 2022, the effective interest rate on our borrowings was 1.2%.

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 March 28, 2021, the unamortized balance of these costs was $0.3 million, and is reflected as a reduction of debt on our balance sheet.

As of April 3, 2022, the unamortized balance of these costs was $0.4 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.

The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict our ability to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain payments, enter into sale and leaseback transactions, grant liens on our assets or rate management transactions, subject to certain limitations.

The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict our ability to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain payments, enter into sale and leaseback transactions, grant liens on our assets or enter into rate management transactions, subject to certain limitations.

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 March 28, 2021 and expect to remain in compliance with all covenants for the next 12 months.

We were in compliance with all covenants of the Credit Agreement as of April 3, 2022 and expect to remain in compliance with all covenants for the next 12 months.

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.

The occurrence of an event of default would permit the lenders to terminate their commitments and accelerate loans under the Credit Facility.

We have in place an interest rate swap agreement to manage the risk associated with a portion of our variable-rate long-term debt.

We do not utilize derivative instruments for speculative purposes.

The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated.

The notional amount of the swap agreement is $60 million and it will terminate on May 1, 2027.

As part of our growth strategy, we have acquired businesses and may pursue acquisitions or other strategic relationships in the future that we believe will complement or expand our existing businesses or increase our customer base.

We believe we could borrow additional funds under our current or new credit facilities or sell equity for strategic reasons or to further strengthen our financial position.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations and Commercial Commitments

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Pension withdrawal liability (4) $ 467 $ 467 $ 467 $ 467 $ 467 $ 3,037 $ 5,372

(1) Represents balance outstanding as of March 28, 2021, and assumes such amount remains outstanding until its maturity date, as periodic payments are not required under the terms of our Credit Agreement.

(1) Represents balance outstanding as of April 3, 2022, and assumes such amount remains outstanding until its maturity date, as periodic payments are not required under the terms of our Credit Agreement.

However, it is our intention to pay down our debt with available excess cash flow.

See Note 9 of our consolidated Financial Statements for further information.

(2) Represents interest payments and commitment fees payable on outstanding balances under our revolver, and assumes interest rates remain unchanged from the rate as of March 28, 2021.

(2) Represents interest payments and commitment fees payable on outstanding balances under our revolver, and assumes interest rates remain unchanged from the rate as of April 3, 2022.

(3) As reported under ASC Topic 842

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Payments on this obligation will continue through 2034.

Critical Accounting Policies

Critical Accounting Estimates

In preparing the financial statements, we follow U.S.

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Actual results may differ from these estimates under different assumptions and conditions.

We consider the following policies to involve the most judgment in the preparation of our financial statements.

Goodwill and Infinite-life Intangible Assets - Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable tangible net assets and identifiable intangible assets purchased.

Goodwill is tested at least annually for impairment, and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired.

Our annual test for impairment is as of the first day of our fourth fiscal quarter, or December 28, 2020 for fiscal 2021.

For each of our reporting units, we performed an analysis of qualitative factors to determine whether it is more likely than not that the fair value of any of our reporting units is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test.

Based on management’s analysis of qualitative factors, we determined that it was not necessary to perform a quantitative goodwill impairment test for any of our reporting units.

Business Acquisitions - We account for acquired businesses using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values.

The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed in a business combination.

For intangible assets, we normally utilize one or more forms of the “income method.” This method starts with a forecast of all of the expected future net cash flows attributable to the subject intangible asset.

These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.

Some of the more significant estimates and assumptions inherent in the income method (or other methods) include the projected future cash flows (including timing) and the discount rate reflecting the risks inherent in the future cash flows.

Estimating the useful life of an intangible asset also requires judgment.

For example, different types of intangible assets will have different useful lives, influenced by the nature of the asset, competitive environment, and rate of change in the industry.

Certain assets may even be considered to have indefinite useful lives.

All of these judgments and estimates can significantly impact the determination of the amortization period of the intangible asset, and thus net income.

Recent Accounting Pronouncements

See Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K for a full description of recent accounting pronouncements, including expected dates of adoption and estimated effects on results of operations and financial condition.

We have determined we have no critical accounting estimates material to our consolidated financial position, results of operations or cash flow.

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-K

Item 7. Management’s Discussion and Analysis