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Item 7. Management’s Discussion and Analysis

2023-05-17 compared with 2022-05-18 · 72 added, 85 removed, 142 unchanged (53% 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 2021 , filed with the SEC on June 2, 2021.

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 2022 compared to fiscal 2021.

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• Gross profit of $165.1 million, an increase of $18.6 million, or 13% from fiscal 2022;

• 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;

• Diluted earnings per share (EPS) of $2.86, an increase of $0.42, or 17%, from fiscal 2022.

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.

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Our definition of bulk commodity products includes products that we do not modify in any way, but receive, store, and ship from our facilities, or direct ship to our customers in large quantities.

Business and Property Acquisitions

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

We disclose the percentage of our overall sales that consist of sales of bulk commodity products as these products are generally distributed and we do not add significant value to these products in comparison to our non-bulk products.

Sales of these products are generally highly competitive and price sensitive.

As a result, bulk commodity products generally have our lowest margins.

Factors Affecting Comparability of Results

Asset Sales and Business Acquisitions

On March 30, 2023, we sold certain assets in our Industrial segment related to our consumer bleach packaging business for $7 million.

These assets were not deemed core to our Industrial segment operations.

The assets sold included plant equipment, inventory, and intangible assets, all related to the packaging of bleach.

We realized a gain of $3 million on this sale, which has been recorded as a reduction to selling, general and administrative expenses.

In the fourth quarter of fiscal 2022, 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.

The results of operations are included as part of our Water Treatment segment.

In the third quarter of fiscal 2022, 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.

In the second quarter of fiscal 2022, 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.

and LC Blending, Inc.

(together, “C&L Aqua”) under the terms of an asset purchase agreement among us, C&L Aqua and its shareholders.

C&L Aqua was a water treatment chemical distribution company operating primarily in Louisiana.

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

In the third quarter of fiscal 2021, we acquired a manufacturing facility to allow further expansion and growth in both our Industrial and Water Treatment segments.

This site is adjacent to our facility in Rosemount, Minnesota, adding 40,000 square feet of manufacturing and warehouse space on 28 acres of land to bring us to a total of 105,000 square feet of space on 56 acres of land, with rail access at both of the sites.

The expansion will allow for future growth and provide supply chain flexibility on certain raw materials to better serve our customers.

In the second quarter of fiscal 2021, we acquired substantially all the assets of American Development Corporation of Tennessee, Inc.

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

ADC was 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.

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.

At the same time, we increased the number of authorized shares from 30 million to 60 million.

Our consolidated financial statements, related notes, and other financial data contained in this report have been adjusted to give retroactive effect to the stock split for all periods presented.

Statement on COVID-19

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 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.

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 country's critical infrastructure.

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

Results of Operations

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Fiscal 2023 Compared to Fiscal 2022

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.

Sales were $935.1 million for fiscal 2023, an increase of $160.6 million, or 21%, from sales of $774.5 million for fiscal 2022, driven primarily by increased selling prices.

Fiscal 2022 included an additional week, which we estimated to add approximately $17.5 million in additional sales in that year.

Industrial Segment.

Industrial segment sales increased $83.9 million, or 22%, to $470.8 million for fiscal 2023, as compared to $386.9 million for fiscal 2022.

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.

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.

Sales of bulk commodity products in the Industrial segment were approximately 16% of sales dollars in both fiscal 2023 and fiscal 2022.

The increase in sales was driven by increased selling prices on many of our products driven primarily by higher costs on many of our raw materials, while total sales volumes were down approximately 11%.

Average selling prices increased 36% over the prior year, in part due to higher raw material costs as well as product mix changes.

Fiscal 2022 included an additional week, which we estimated to be approximately $10.0 million in additional sales in our Industrial segment in that year.

Water Treatment Segment.

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Sales of bulk commodity products in the Water Treatment segment were approximately 9% of sales dollars in both fiscal 2023 and fiscal 2022.

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.

Sales increased as a result of increased selling prices on many of our products driven by higher costs on many of our raw materials, with average selling prices increasing 28% over the prior year.

In addition, a 4% increase in sales volume, due to the added sales from acquired businesses, contributed to the year-over-year increase in sales.

Fiscal 2022 included an additional week, which we estimated to add approximately $3.9 million in additional sales in our Water Treatment segment in that year.

Health and Nutrition Segment.

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.

Health and Nutrition segment sales decreased $0.1 million, or less than 1%, to $159.4 million for fiscal 2023, as compared to $159.5 million for fiscal 2022.

Sales of our manufactured products increased 40% year over year, but were offset by a 12% decline in sales of our specialty distributed products.

Fiscal 2022 included an additional week, which we estimated to add approximately $3.6 million in additional sales in our Health and Nutrition segment in that year.

Gross profit increased $18.6 million, or 13%, to $165.1 million, or 18% of sales, for fiscal 2023, from $146.5 million, or 19% of sales, for fiscal 2022.

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.

During fiscal 2023, the LIFO reserve increased, and gross profits decreased, by $18.5 million, primarily due to rising raw material costs.

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

Gross profit increased due to increased revenue, partially offset by the unfavorable year-over-year impact of the increased LIFO reserve.

Fiscal 2022 included an additional week, which we estimated to add approximately $3.6 million in additional gross profit in that year.

Industrial Segment.

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During fiscal 2023, the LIFO reserve increased, and gross profits decreased, by $12.3 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.

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

Gross profit increased as a result of the increase in sales, partially offset by the unfavorable year-over-year impact of the increased LIFO reserve.

Fiscal 2022 included an additional week, which we estimated to add approximately $1.9 million in additional gross profit in our Industrial segment in that year.

Water Treatment Segment.

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During fiscal 2023, the LIFO reserve increased, and gross profits decreased, by $6.2 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.

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

Gross profit increased as a result of the increase in sales.

Fiscal 2022 included an additional week, which we estimated to add approximately $1.0 million in additional gross profit in our Water Treatment segment in that year.

Health and Nutrition Segment.

Gross profit for our Health and Nutrition segment decreased $2.5 million, or 8%, to $29.8 million, or 19% of sales, for fiscal 2023, from $32.3 million, or 20% of sales, for fiscal 2022.

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.

Gross profit decreased as a result of a product mix shift.

Fiscal 2022 included an additional week, which we estimated to add approximately $0.7 million in additional gross profit in our Health and Nutrition segment in that year.

Selling, General and Administrative Expenses

SG&A expenses increased $1.6 million to $77.0 million, or 8% of sales, for fiscal 2023, from $75.3 million, or 10% of sales, for fiscal 2022.

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.

Included in SG&A expenses for the current fiscal year was a gain of approximately $3.0 million related to the sale of certain assets related to our consumer bleach packaging business.

In addition, a year-over-year decrease in compensation expense of $0.5 million related to our non-qualified deferred compensation plan reduced SG&A expenses, with the offset in Other Expense.

In spite of these decreases in SG&A expense, expenses increased primarily due to the added costs from the acquired businesses in our Water Treatment segment and increased wages.

Fiscal 2022 included an additional week, which we estimated to add approximately $1.0 million in additional SG&A expense in that year.

Operating Income

Operating income was $88.2 million, or 9% of sales, for fiscal 2023, as compared to $71.2 million, or 9% of sales, for fiscal 2022 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.

Fiscal 2022 included an additional week, which we estimated to add approximately $3.0 million in additional operating income expense in that year.

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.

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

Interest expense was $5.2 million for fiscal 2023, an increase of $3.8 million from interest expense of $1.4 million for fiscal 2022.

The increase was due to an increase in borrowing interest rates as well as an increase in average outstanding borrowings due to increased capital needs.

Income Tax Provision

Our effective tax rate was approximately 26.5% for both fiscal 2022 and fiscal 2021.

Our effective tax rate was approximately 27.3% for fiscal 2023 and 26.3% for fiscal 2022.

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

The current year increase in the effective tax rate was primarily driven by unfavorable book to tax LIFO differences.

Selected Quarterly Financial Data

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Diluted earnings per share $ 0.94 $ 0.86 $ 0.51 $ 0.55 $ 2.86

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 $ 0.79 $ 0.67 $ 0.48 $ 0.50 $ 2.44

First Second Third Fourth

First Second Third Fourth Total

Sales $ 143,172 $ 147,801 $ 142,927 $ 162,971 $ 596,871

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Cash provided by operating activities in fiscal 2023 was $77.4 million compared to $42.8 million in fiscal 2022.

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.

Our net cash provided by operating activities increased $34.6 million compared to fiscal 2022.

In the prior fiscal year, we expended significant working capital as accounts receivable and inventory increased over fiscal 2021 resulting in a net $37 million use of cash for working capital accounts.

In fiscal 2023, we expended net $13 million in the aggregate for working capital accounts due to lower year-over-year changes.

This, combined with improved net income, resulted in the year-over-year increase in net cash provided by operating activities.

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.

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Cash used in investing activities was $41.2 million in fiscal 2023 compared to $49.8 million in fiscal 2022.

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

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.

Capital expenditures for property, plant and equipment were $48.3 million in fiscal 2023 and $28.5 million in fiscal 2022.

The current year increase in capital expenditures was primarily driven by increased expenditures for new trucks and facility improvements and expansions.

Cash used in investing activities included no acquisition spending in fiscal 2023 compared to an aggregate of $21.5 million for Water Treatment group acquisitions in fiscal 2022.

Cash used in investing activities also included proceeds from asset disposals of $7.0 million in fiscal 2023 compared to $0.3 million in fiscal 2022.

The proceeds received in fiscal 2023 related primarily to our sale of certain assets related to our consumer bleach packaging business.

Cash used in financing activities was $32.1 million in fiscal 2023, as compared to cash provided by financing activities of $7.4 million in fiscal 2022.

Cash used in financing activities included net debt repayments of $14.0 million in fiscal 2023, compared to net debt borrowings of $27.0 million in fiscal 2022, which was used primarily to fund our acquisitions in fiscal 2022.

We paid out cash dividends of $12.0 million in fiscal 2023 and $11.1 million in fiscal 2022.

In fiscal 2023, we used $6.6 million to repurchase shares under our board-authorized share repurchase program, and in fiscal 2022, we used $8.5 million to repurchase shares under the program.

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 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.

Our cash balance was $7.6 million at April 2, 2023, an increase of $4.1 million as compared with April 3, 2022.

Cash flows generated by operations during fiscal 2023 were offset by the cash expended for capital expenditures, repayments of debt and dividend payments in fiscal 2023.

We are party to a Credit Agreement with U.S.

Bank as Sole Lead Arranger and Sole Book Runner, and other lenders from time to time party thereto, whereby U.S.

Bank is also serving as Administrative Agent.

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 Credit Agreement provides us with a Revolving Loan Facility totaling $250.0 million.

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

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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:

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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.

Contractual Obligations and Commercial Commitments

Material Cash Requirements

The following table provides aggregate information about our contractual payment obligations and the periods in which payments are due:

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Payments on this obligation will continue through 2034.

In addition to the above contractual obligations, in the ordinary course of business we have routine cash requirements related to capital expenditures for new trucks, facility improvements and expansions, safety equipment and other additions of property, plant and equipment.

Our capital expenditures in fiscal 2023 were $48.3 million and in fiscal 2023 were $28.5 million.

We anticipate total capital expenditures to be in the range of $40 to $45 million for fiscal 2024.

Critical Accounting Estimates

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The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities.

We re-evaluate our estimates on an on-going basis.

We re-evaluate our estimates on an ongoing basis.

Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.

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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-K

Item 7. Management’s Discussion and Analysis