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Item 7. Management’s Discussion and Analysis

2024-05-15 compared with 2023-05-17 · 67 added, 71 removed, 143 unchanged (49% of the section changed)

7 unchanged sentences

Highlights of fiscal 2024 include:

• Sales of $935.1 million, a 21% increase from fiscal 2022;

• Sales of $919.2 million, a 2% decrease from fiscal 2023;

• Gross profit of $193.6 million, an increase of $28.5 million, or 17% from fiscal 2023;

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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.

Business Acquisitions and Asset Sales

On March 8, 2024, we acquired substantially all the assets of Industrial Research Corporation ("Industrial Research") under the terms of a purchase agreement with Industrial Research and its shareholders.

Industrial Research was a distributor of water treatment chemicals and equipment for its customers in central to northern Louisiana, eastern Texas and southern Arkansas.

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

On October 31, 2023, we acquired substantially all the assets of The Miami Products & Chemical Company ("Miami Products") under the terms of a purchase agreement with Miami Products and its shareholders.

Miami Products was a bleach manufacturer and distributor serving customers primarily throughout Ohio and the surrounding region.

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

On October 27, 2023, we acquired substantially all the assets of Water Solutions Unlimited, Inc.

("Water Solutions") under the terms of a purchase agreement with Water Solutions and its shareholders.

Water Solutions was a manufacturer and distributor of water treatment chemicals serving customers primarily throughout Indiana, Illinois and Michigan.

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

On July 14, 2023, we acquired substantially all the assets of EcoTech Enterprises, Inc.

("EcoTech") under the terms of a purchase agreement with EcoTech and its shareholders.

EcoTech was a water treatment chemical distribution company operating primarily in Arkansas.

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

The aggregate annual revenue of these four businesses acquired in fiscal 2024 totaled approximately $70 million, as determined using the applicable twelve-month period preceding each respective acquisition date.

In the fourth quarter of fiscal 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.

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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.

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.

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.

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 2024 Compared to Fiscal 2023

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.

Sales were $919.2 million for fiscal 2024, a decrease of $15.9 million, or 2%, from sales of $935.1 million for fiscal 2023.

Increased sales in our Water Treatment segment were more than offset by decreased sales in our Industrial and Health & Nutrition segments.

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 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.

Industrial segment sales decreased $61.3 million, or 13%, to $409.5 million for fiscal 2024, as compared to $470.8 million for fiscal 2023.

Sales of bulk commodity products in the Industrial segment were approximately 14% of sales dollars in fiscal 2024 and 16% of sales dollars in fiscal 2023.

The sale of our consumer bleach packaging business at the end of fiscal 2023 resulted in $14.5 million lower sales in the current year.

In addition, sales declined due to overall lower volumes.

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 2024 and fiscal 2023.

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.

In addition to $23.9 million in sales from acquired businesses, sales increased as a result of increased selling prices on many of our products as well as increased sales volumes of certain of our products.

Health and Nutrition Segment.

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.

Health and Nutrition segment sales decreased $13.0 million, or 8%, to $146.4 million for fiscal 2024, as compared to $159.4 million for fiscal 2023.

Sales decreased primarily due to decreased sales of our manufactured products, which we believe was driven by customers destocking inventory in the first half of the current fiscal year.

Gross profit increased $28.5 million, or 17%, to $193.6 million, or 21% of sales, for fiscal 2024, from $165.1 million, or 18% of sales, for fiscal 2023.

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

During fiscal 2024, the LIFO reserve decreased, and gross profits increased, by $15.4 million, primarily due to decreased raw material costs.

In fiscal 2023, the LIFO reserve increased, and gross profits decreased, by $18.5 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.

Included as a reduction to gross profit in the current year was a $7.7 million charge to operating expense for an environmental liability related to perchlorinated biphenyls (PCBs) discovered in the soil at our Rosemount, MN facility.

Industrial Segment.

Gross profit for the Industrial segment increased $8.5 million, or 14%, to $68.1 million, or 14% of sales, for fiscal 2023, from $59.6 million, or 15% of sales, for fiscal 2022.

During fiscal 2023, the LIFO reserve increased, and gross profits decreased, by $12.3 million, primarily due to rising raw material costs.

Gross profit for the Industrial segment decreased $0.6 million, or 1%, to $67.5 million, or 16% of sales, for fiscal 2024, from $68.1 million, or 14% of sales, for fiscal 2023.

During fiscal 2024, the LIFO reserve decreased, and gross profits increased, by $12.1 million, primarily due to decreased raw material costs.

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

Offsetting the impact of the favorable year-over-year LIFO change, gross profit decreased as a result of the $7.7 million charge to operating expense for an environmental liability related to PCBs discovered in the soil at our Rosemount, MN facility as well as lower sales.

Water Treatment Segment.

Gross profit for the Water Treatment segment increased $31.3 million, or 47%, to $98.5 million, or 27% of sales, for fiscal 2024, from $67.2 million, or 22% of sales, for fiscal 2023.

During fiscal 2023, the LIFO reserve increased, and gross profits decreased, by $6.2 million, primarily due to rising raw material costs.

During fiscal 2024, the LIFO reserve decreased, and gross profits increased, by $3.3 million, primarily due to decreased raw material costs.

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

Gross profit increased as a result of improved per-unit margins on many of our products as well as increased sales, including the added sales from acquired businesses.

Health and Nutrition Segment.

Gross profit for our Health and Nutrition segment decreased $2.2 million, or 7%, to $27.6 million, or 19% of sales, for fiscal 2024, from $29.8 million, or 19% of sales, for fiscal 2023.

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.

Gross profit decreased due to lower sales.

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.

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.

SG&A expenses increased $12.6 million, or 16% to $89.6 million, or 10% of sales, for fiscal 2024, from $77.0 million, or 8% of sales, for fiscal 2023.

Included in SG&A expenses for the prior 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 increase in compensation expense of $1.4 million related to our non-qualified deferred compensation plan reduced SG&A expenses, with the offset in Other Expense.

Additionally, expenses increased due to the added costs from the acquired businesses in our Water Treatment segment of $5.8 million, including $1.8 million of amortization of intangibles, as well as increased variable expenses, most notably variable pay.

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.

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

Operating income increased $15.8 million, or 18%, to $104.0 million, or 11% of sales, for fiscal 2024, as compared to $88.2 million, or 9% of sales, for fiscal 2023 due to the combined impact of the factors discussed above.

Interest Expense, Net

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.

Interest expense was $4.3 million for fiscal 2024, a decrease of $0.9 million from interest expense of $5.2 million for fiscal 2023.

Interest expense decreased due to lower outstanding borrowings in the current year as compared to the prior year, offset slightly by higher borrowing rates.

Income Tax Provision

Our effective tax rate was approximately 26% for fiscal 2024 and 27% for fiscal 2023.

The current year decrease in the effective tax rate was primarily driven by favorable tax provision adjustments recorded.

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 Total

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

Gross profit 30,976 32,797 28,239 31,750 123,762

Selling, general, and administrative expenses 15,038 16,221 17,750 18,875 67,884

Operating income 15,938 16,576 10,489 12,875 55,878

Net income 11,788 12,190 7,921 9,081 40,980

Basic earnings per share $ 0.56 $ 0.58 $ 0.38 $ 0.43 $ 1.95

Diluted earnings per share $ 0.55 $ 0.57 $ 0.37 $ 0.43 $ 1.93

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

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Our net cash provided by operating activities increased $82.1 million compared to fiscal 2023.

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.

In fiscal 2024, our operating cash flow was improved by $47 million in the aggregate due primarily to favorable year-over-year changes in trade receivables and inventory.

In the prior fiscal year, we expended a net of $13 million in the aggregate for working capital primarily as a result of lower year-over-year payables.

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

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Capital expenditures for property, plant and equipment were $40.2 million in fiscal 2024 and $48.3 million in fiscal 2023.

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.

The current year decrease in capital expenditures was primarily driven by decreased expenditures for facility improvements and expansions.

Cash used in investing activities included Water Treatment group acquisition spending of $83.5 in fiscal 2024 compared to no acquisition spending for acquisitions in fiscal 2023.

Cash used in investing activities also included proceeds from asset disposals of $1.1 million in fiscal 2024 compared to $7.1 million in fiscal 2023.

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.

Cash used in financing activities was $37.4 million in fiscal 2024 compared to $32.1 million in fiscal 2023.

Cash used in financing activities included net debt repayments of $13.0 million in fiscal 2024 and $14.0 million in fiscal 2023.

We paid out cash dividends of $13.2 million in fiscal 2024 and $12.0 million in fiscal 2023.

In fiscal 2024, we used $11.3 million to repurchase shares under our board-authorized share repurchase program, and in fiscal 2023, we used $6.6 million to repurchase shares under the program.

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.

Our cash balance was $7.2 million at March 31, 2024, a decrease of $0.4 million as compared with April 2, 2023.

Cash flows generated by operations during fiscal 2024 were offset by the cash expended for acquisitions, capital expenditures, repayments of debt, dividend payments and share repurchases in fiscal 2024.

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

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

At April 3, 2022, the effective interest rate on our borrowings was 4.3%.

At March 31, 2024, the effective interest rate on our borrowings was 4.3%.

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 April 2, 2023, the unamortized balance of these costs was $0.4 million, and is reflected as a reduction of debt on our balance sheet.

As of March 31, 2024, 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 April 2, 2023 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 March 31, 2024 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.

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Pension withdrawal liability (4) $ 467 $ 467 $ 467 $ 467 $ 467 $ 2,103 $ 4,438

(1) Represents balance outstanding as of April 2, 2023, 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 March 31, 2024, 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 8 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 April 2, 2023.

(2) Represents interest payments and commitment fees payable on outstanding balances under our revolver, net of the expected receivable from our interest rate swap agreement, and assumes interest rates remain unchanged from the rate as of March 31, 2024.

(3) As reported under ASC Topic 842.

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

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

We have determined the following is a critical accounting estimate material to our consolidated financial position, results of operations or cash flow.

Acquisition accounting.

The fair value of the consideration we pay for each new acquisition is allocated to tangible assets and identifiable intangible assets and liabilities assumed.

The accounting for acquisitions involves a considerable amount of judgment and estimate, including the fair value of certain forms of consideration;

fair value of acquired intangible assets involving projections of future revenues and cash flows that are then either discounted at an estimated discount rate or measured at an estimated royalty rate;

fair value of other acquired assets and assumed liabilities, including potential contingencies;

and the useful lives of the acquired assets.

The assumptions used are determined at the time of the acquisition in accordance with accepted valuation models.

Projections are developed using internal forecasts, available industry and market data and estimates of long-term rates of growth for the business.

The impact of prior or future acquisitions on our financial position or results of operations may be materially impacted by the change in or initial selection of assumptions and estimates.

See Note 2, Acquisitions included in Part II, Item 8 of this Form 10-K for further discussion of business combination accounting valuation methodology and assumptions.

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