UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, (as defineda smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

ITEM 1. FINANCIAL STATEMENTS

See accompanying notes to condensed consolidated financial statements.

 

 

 

The accounting policies we follow are set forth in Note 1 – Nature of Business and Significant Accounting Policies to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended April 2, 2017,1, 2018, previously filed with the SEC. ThereWith the exception of our policy regarding revenue recognition (see Note 2), there has been no significant change in our accounting policies since the end of fiscal 2017.2018.

References to fiscal 2017 refer to the fiscal year ended April 2, 2017 and references to fiscal 2018 refer to the fiscal year endingended April 1, 2018.2018 and references to fiscal 2019 refer to the fiscal year ending March 31, 2019.

Basic earnings per share (“EPS”) are computed by dividing net earnings by the weighted-average number of common shares outstanding. Diluted EPS includes the incremental shares assumed to be issued as performance units and restricted stock. Basic and diluted EPS were calculated using the following:

 

 

 

 

The LIFO reserve increased $0.2 million during the three months ended October 1, 2017 and decreased $0.3 million during the three months ended October 2, 2016. DuringJuly 1, 2018 and increased $0.5 million during the sixthree months ended October 1, 2017, the LIFO reserve increased $0.7 million, while it decreased $0.4 million for the six months ended OctoberJuly 2, 2016.2017. The valuation of LIFO inventory for interim periods is based on our estimates of year-end inventory levels and costs.

We recorded compensation expense related to performance share units and restricted stock of $0.3 million and $0.5$0.2 million for the three and six months ended OctoberJuly 1, 2017, respectively. We recorded compensation expense related to performance share units2018 and restricted stock of $0.4 million and $0.8 million for the three and six months ended OctoberJuly 2, 2016,2017, respectively. Substantially all of the compensation expense was recorded in selling, general and administrative expenses in the condensed consolidated statements of income.

We have in place a shareOur board of directors has authorized the repurchase program approved by our Board of up to 300,000 shares of our outstanding common stock. Under the program, we are authorized to repurchase sharesstock for cash on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. Upon repurchase of the shares, we reduce our common stock for the par value of the shares with the excess applied against additional paid-in capital.

We have three reportable segments: Industrial, Water Treatment, and Health and Nutrition. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our fiscal 20172018 Annual Report on Form 10-K.

We evaluate performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. Reportable segments are defined primarily by product and type of customer. Segments are responsible for the sales, marketing and development of their products and services. Other than our Health and Nutrition segment, the segments do not have separate accounting, administration, customer service or purchasing functions. We allocate certain corporate expenses to our operating segments. There are no intersegment sales and no operating segments have been aggregated. No single customer’s revenues amounted to 10% or more of our total revenue. Sales are primarily within the United States and all assets are located within the United States.

 

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 and specialty ingredients, including manufacturing, blending, and repackaging certain products.

We use the last in, first out (“LIFO”) method for valuing a large portionthe majority of our inventory in our Industrial and Water Treatment segments, which causes the most recent product costs for those products to be recognized in our income statement. The valuation of LIFO inventory for interim periods is based on our estimates of fiscal year-end inventory levels and costs. 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. We recorded an increase in our LIFO reserve of $0.2 million for the three months ended October 1, 2017 and $0.7 million for the six months ended October 1, 2017, which decreased our reported gross profit for those periods. We recorded a decrease in our LIFO reserve of $0.3 million for the three months ended October 2, 2016 and $0.4 million for the six months ended October 2, 2016, which increased our reported gross profit for those periods. Inventories in the Health and Nutrition segment are valued using the first-in, first-out (“FIFO”) method.

Our Industrial and Water Treatment segments sell bulk commodity products. We disclose the sales of our bulk commodity products as a percentage of total sales dollars within each of those segments. 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. We review our sales reporting on a periodic basis to ensure we are including all products that meet this definition.

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

 

Gross profit was $50.1$28.5 million, or 19.3%19.0% of sales, for the sixthree months ended OctoberJuly 1, 2017, a decrease2018, an increase of $5.1$2.5 million from $55.2$26.0 million, or 21.9%19.4% of sales, for the same period of the prior year. As a result of projected year-end raw material price increases,cost and on-hand quantity estimates, the LIFO reserve increased and gross profits decreased by $0.3 million in the current year increaseand $0.5 million in the LIFO reserve reduced gross profit by $1.1 million year overprior year. In addition, the decrease in grossGross profit was due to $1.4 million of planned increases in personnelpositively impacted by improved pricing, increased sales and other investments to drive future growth, including accelerated depreciation of $0.7 million, as well as a $0.5 million reclassification from SG&A expenses,favorable product mix changes and continued competitive pricing pressures.shift.

Selling, general and administrative (“SG&A”) expenses were $15.0 million, or 10.0% of sales, and support personnelfor the three months ended July 1, 2018, a decrease of $0.8 million from $15.8 million, or 11.8% of sales, for the same period of the prior year. SG&A costs decreased as a result of management efforts to drive future growth, offset partially by the reclassification of $0.5 million of expenses in our Health & Nutrition segment from SG&A to operating overhead to conform to our presentation.control costs.

Operating income was $19.5$13.5 million, or 9.0% of sales, for the three months ended July 1, 2018, as compared to $10.2 million, or 7.6% of sales, for the same period of the prior year due to the combined impact of the factors discussed above.

Interest expense was $0.9 million for the sixthree months ended OctoberJuly 1, 2017, as2018 compared to $25.3$0.8 million for the same period of the prior year. Operating income inAlthough our Industrial segment decreased by $3.6 million driven by lower gross profits and increased SG&A expenses in that segment. Operating income in our Water Treatment segment increased by $0.2 million due to higher gross profits partially offset by increased SG&A expenses. Operating income in our Health and Nutrition segment decreased by $2.4 million driven by lower gross profits compared to the comparable period in the prior year.

Our effective income tax rate was 27.3% for the three months ended July 1, 2018 compared to 38.5% for the sixthree months ended October 1,July 2, 2017. The decrease in our effective tax rate was due primarily to the lower federal rate as a result of the U.S. Tax Cuts and Jobs Act of 2017, and 38.1% foroffset slightly by the comparable period inelimination of the prior year.domestic manufacturing deduction. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.

Cash was $3.8$5.2 million at OctoberJuly 1, 2017, a decrease2018, an increase of $3.1$0.2 million as compared with the $6.9$5.0 million available as of April 2, 2017. Cash provided by operating and financing during the six months ended October 1, 2017 was more than offset by cash used for capital expenditures and cash dividends paid.2018.

Cash provided by operating activities was $4.5$6.8 million for the sixthree months ended OctoberJuly 1, 2017,2018, compared to cash provided byused in operating activities of $28.0$11.9 million for the same period of the prior year. The decreaseyear-over-year increase in cash provided by operating activities was primarily driven by a year-over-year changelower first quarter increase in inventory dollars in the amountcurrent quarter as compared to a year ago, favorable timing of cash provided bypayments on accounts receivable, driven by high levels of collectionspayable, and improved operating income. The large first quarter increase in inventory dollars in the first six monththree months of the prior year, as well as a change in the amount of cash utilized to purchase inventory during the first six months of fiscal 2018 as compared to the same period in the prior year. The large increase in inventory in the first half of fiscal 2018year was primarily due to an increase in on-hand and in-transit inventory, along with an increase in the per-unit cost, of one of our major commodities. The decision to increase inventory was driven largely by expectations of further cost increases throughout calendar 2017. Due to the nature of our operations, which includes purchases of large quantities of bulk chemicals, timing of purchases can result in significant changes in working capital investment and the resulting operating cash flow. Typically, our cash requirements increase during the period from April through November as caustic soda inventory levels increase as the majority of barges are received during this period.

Cash used in investing activities was $13.0$2.3 million for the sixthree months ended OctoberJuly 1, 2017,2018, compared to $12.2$6.5 million for the six months ended October 2, 2016.same period of the prior year. Capital expenditures were $13.2$2.4 million for the sixthree months ended OctoberJuly 1, 2017,2018, compared to $10.3$6.6 million in the same period of the prior fiscal year. Included in capital expenditures for the first sixthree months of

Cash used in financing activities was $4.3 million for the previous year, we paid $2.2 million of additional purchase price for Stauber as closingthree months ended July 1, 2018, compared to cash debt and working capital balances were finalized in early 2017.

Our significantThere were no material changes in our critical accounting policies are set forth in Note 1 to our consolidated financial statements inestimates since the filing of our Annual Report on Form 10-K for the fiscal year ended April 2, 2017. The accounting policies used in preparing our condensed consolidated financial statements for the first quarter of fiscal 2017 are the same as those described in that Annual Report.1, 2018.

The information presented in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts, but rather are based on our current expectations, estimates and projections, and our beliefs and assumptions. We intend words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will” and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. These factors could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Additional information concerning potential factors that could affect future financial results is included in our Annual Report on Form 10-K for the fiscal year ended April 2, 2017.1, 2018. We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q. We are not obligated to update these statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to the risk inherent in the cyclical nature of commodity chemical prices. However, we do not currently purchase forward contracts or otherwise engage in hedging activities with respect to the purchase of commodity chemicals. We attempt to pass changes in the cost of our materials to our customers. However, there are no assurances that we will be able to pass on the increases in the future.

We are exposed to market risks related to interest rates. Our exposure to changes in interest rates is limited to borrowings under our Credit Facility. A 25 basis point change in interest rates would potentially increase or decrease our annual interest expense by approximately $0.1 million. In the second quarter of fiscal 2017, we entered into an interest rate swap that converts a portion of our variable-rate debt into a fixed-rate obligation. The new swap agreement began September 1, 2017 and will end concurrently with the expiration of our Credit Facility on December 23, 2020. The notional amount of the swap agreement is $40 million from September 1, 2017 through August 31, 2018, $30 million from September 1, 2018 through August 31, 2019 and $20 million from September 1, 2019 through December 23, 2020. We have designated this swap as a cash flow hedge and have determined that it qualifies for hedge accounting treatment. Changes in fair value of the cash flow hedge are recorded in other comprehensive loss (net of tax) until income or loss from the cash flows of the hedged item is realized.

Other types of market risk, such as foreign currency risk, do not arise in the normal course of our business activities.

ITEM 4.        CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting during the secondfirst quarter of fiscal 20182019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 1.        LEGAL PROCEEDINGS

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries are a party or of which any of our property is the subject.

 

ITEM 1A.    RISK FACTORS

There have been no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended April 2, 2017.1, 2018.

ITEM 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.        MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.        OTHER INFORMATION

None.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.