Hawkins 10Q 2024 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
			SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
			SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-7647


HAWKINS, INC.
(Exact name of registrant as specified in its charter)


Minnesota						41-0771293
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


2381 Rosegate, Roseville, Minnesota			55113
(Address of principal executive offices)			(Zip code)


(612) 331-6910
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	HWKN	Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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).

Yes ☐ No ☒

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


CLASS						Shares Outstanding at October 27, 2023
Common Stock, par value $.01 per share						20,943,750

HAWKINS, INC.

INDEX TO FORM 10-Q


		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets – October 1, 2023 and April 2, 2023	1

	Condensed Consolidated Statements of Income – Three and Six Months Ended October 1, 2023 and October 2, 2022	2

	Condensed Consolidated Statements of Comprehensive Income – Three and Six Months Ended October 1, 2023 and October 2, 2022	3

	Condensed Consolidated Statements of Shareholder’s Equity – Three and Six Months Ended October 1, 2023 and October 2, 2022	4

	Condensed Consolidated Statements of Cash Flows – Six Months Ended October 1, 2023 and October 2, 2022	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15

Item 4.	Controls and Procedures	15

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	16

Item 1A.	Risk Factors	16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

Item 3.	Defaults Upon Senior Securities	16

Item 4.	Mine Safety Disclosures	16

Item 5.	Other Information	16

Item 6.	Exhibits	17

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HAWKINS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)


	October 1, 2023		April 2, 2023
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	10,974	$	7,566
Trade accounts receivables, net	124,813		129,252
Inventories	68,500		88,777

Prepaid expenses and other current assets	2,966		6,449
Total current assets	207,253		232,044
PROPERTY, PLANT, AND EQUIPMENT:	361,362		344,753
Less accumulated depreciation	168,504		158,950
Net property, plant, and equipment	192,858		185,803
OTHER ASSETS:
Right-of-use assets	11,323		10,199
Goodwill	77,401		77,401
Intangible assets, net of accumulated amortization	71,491		73,060
Deferred compensation plan asset	8,917		7,367
Other	6,054		4,661
Total other assets	175,186		172,688
Total assets	$	575,297	$	590,535
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable — trade	$	61,192	$	53,705
Accrued payroll and employee benefits	12,416		17,279
Income tax payable	4,319		3,329
Current portion of long-term debt	9,913		9,913


Other current liabilities	6,622		6,645
Total current liabilities	94,462		90,871
LONG-TERM DEBT, LESS CURRENT PORTION	49,775		101,731
LONG-TERM LEASE LIABILITY	9,522		8,687
PENSION WITHDRAWAL LIABILITY	3,726		3,912
DEFERRED INCOME TAXES	24,190		23,800
DEFERRED COMPENSATION LIABILITY	10,317		9,343
OTHER LONG-TERM LIABILITIES	649		2,175
Total liabilities	192,641		240,519
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Common stock; authorized: 60,000,000 shares of $0.01 par value; 20,787,626 and 20,850,454 shares issued and outstanding as of October 1, 2023 and April 2, 2023, respectively	208		209
Additional paid-in capital	35,918		44,443
Retained earnings	342,535		302,424
Accumulated other comprehensive income	3,995		2,940
Total shareholders’ equity	382,656		350,016
Total liabilities and shareholders’ equity	$	575,297	$	590,535

See accompanying notes to condensed consolidated financial statements.

HAWKINS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except share and per-share data)


	Three Months Ended				Six Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
Sales	$	236,526	$	241,192	$	487,646	$	487,735
Cost of sales	(182,640)		(194,818)		(381,769)		(394,612)

Gross profit	53,886		46,374		105,877		93,123
Selling, general and administrative expenses	(20,895)		(19,838)		(40,399)		(38,723)
Operating income	32,991		26,536		65,478		54,400
Interest expense, net	(717)		(1,383)		(1,865)		(2,312)
Other (expense) income	(289)		(446)		48		(1,209)
Income before income taxes	31,985		24,707		63,661		50,879
Income tax expense	(8,769)		(6,707)		(17,015)		(13,184)
Net income	$	23,216	$	18,000	$	46,646	$	37,695

Weighted average number of shares outstanding - basic	20,903,690		20,814,686		20,905,707		20,861,754
Weighted average number of shares outstanding - diluted	21,026,428		20,956,897		21,034,153		21,004,454

Basic earnings per share	$	1.11	$	0.86	$	2.23	$	1.81
Diluted earnings per share	$	1.10	$	0.86	$	2.22	$	1.79

Cash dividends declared per common share	$	0.16	$	0.14	$	0.31	$	0.28

See accompanying notes to condensed consolidated financial statements.

HAWKINS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)


	Three Months Ended				Six Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
Net income	$	23,216	$	18,000	$	46,646	$	37,695
Other comprehensive income, net of tax:

Unrealized gain on interest rate swap	306		1,977		1,055		2,442


Total comprehensive income	$	23,522	$	19,977	$	47,701	$	40,137

See accompanying notes to condensed consolidated financial statements.

HAWKINS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except share data)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
	Shares	Amount
BALANCE — April 2, 2023	20,850,454	$	209	$	44,443	$	302,424	$	2,940	$	350,016
Cash dividends declared and paid ($0.15 per share)	—	—		—		(3,160)		—		(3,160)
Share-based compensation expense	—	—		959		—		—		959
Vesting of restricted stock	105,600	1		(1)		—		—		—
Shares surrendered for payroll taxes	(48,478)	(1)		(2,139)		—		—		(2,140)
ESPP shares issued	35,281	—		1,147		—		—		1,147

Other comprehensive income, net of tax	—	—		—		—		749		749
Net income	—	—		—		23,430		—		23,430
BALANCE — July 2, 2023	20,942,857	$	209	$	44,409	$	322,694	$	3,689	$	371,001
Cash dividends declared and paid ($0.16 per share)	—	—		—		(3,375)		—		(3,375)
Share-based compensation expense	—	—		1,260		—		—		1,260
Vesting of restricted stock	12,565	—		—		—		—		—


Shares repurchased	(167,796)	(1)		(9,751)		—		—		(9,752)
Other comprehensive income, net of tax	—	—		—		—		306		306
Net income	—	—		—		23,216		—		23,216
BALANCE — October 1, 2023	20,787,626	$	208	$	35,918	$	342,535	$	3,995	$	382,656




















	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
	Shares	Amount
BALANCE — April 3, 2022	20,889,777	$	209	$	46,717	$	254,384	$	1,291	$	302,601
Cash dividends declared and paid ($0.14 per share)	—	—		—		(2,958)		—		(2,958)
Share-based compensation expense	—	—		595		—		—		595
Vesting of restricted stock	102,860	1		(1)		—		—		—
Shares surrendered for payroll taxes	(36,410)	—		(1,550)		—		—		(1,550)
ESPP shares issued	32,768	—		986		—		—		986
Shares repurchased	(181,657)	(2)		(6,555)		—		—		(6,557)
Other comprehensive income, net of tax	—	—		—		—		465		465
Net income	—	—		—		19,695		—		19,695
BALANCE — July 3, 2022	20,807,338	$	208	$	40,192	$	271,121	$	1,756	$	313,277
Cash dividends declared and paid ($0.14 per share)	—	—		—		(2,942)		—		(2,942)
Share-based compensation expense	—	—		1,085		—		—		1,085
Vesting of restricted stock	10,287	—		—		—		—		—

ESPP shares issued	—	—		17		—		—		17

Other comprehensive income, net of tax	—	—		—		—		1,977		1,977
Net income	—	—		—		18,000		—		18,000
BALANCE — October 2, 2022	20,817,625	$	208	$	41,294	$	286,179	$	3,733	$	331,414

See accompanying notes to condensed consolidated financial statements.

HAWKINS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Six Months Ended
	October 1, 2023		October 2, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	46,646	$	37,695
Reconciliation to cash flows:
Depreciation and amortization	14,506		13,371
Operating leases	1,115		945

(Gain) loss on deferred compensation assets	(48)		1,208

Stock compensation expense	2,219		1,680

Other	(34)		187
Changes in operating accounts providing (using) cash:
Trade receivables	4,909		(8,481)
Inventories	20,752		(18,077)
Accounts payable	6,421		(4,609)
Accrued liabilities	(7,149)		(8,600)
Lease liabilities	(1,127)		(972)
Income taxes	990		2,031
Other	3,430		2,425
Net cash provided by operating activities	92,630		18,803
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment	(16,922)		(20,668)


Acquisitions	(3,355)		—
Other	335		296
Net cash used in investing activities	(19,942)		(20,372)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends declared and paid	(6,535)		(5,900)
New shares issued	1,147		1,004
Payroll taxes paid in exchange for shares withheld	(2,140)		(1,550)


Shares repurchased	(9,752)		(6,557)

Payments on revolving loan	(52,000)		(30,000)

Proceeds from revolving loan borrowings	—		45,000
Net cash (used in) provided by financing activities	(69,280)		1,997
NET INCREASE IN CASH AND CASH EQUIVALENTS	3,408		428
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	7,566		3,496
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	10,974	$	3,924

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes	$	16,025	$	11,148
Cash paid for interest	$	2,002	$	1,879
Noncash investing activities - capital expenditures in accounts payable	$	2,970	$	2,535

See accompanying notes to condensed consolidated financial statements.

HAWKINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, accordingly, do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended April 2, 2023, previously filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly our financial position and the results of our operations and cash flows for the periods presented. All adjustments made to the interim condensed consolidated financial statements were of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the six months ended October 1, 2023 are not necessarily indicative of the results that may be expected for the full year.

References to fiscal 2023 refer to the fiscal year ended April 2, 2023 and references to fiscal 2024 refer to the fiscal year ending March 31, 2024.

Use of Estimates. The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, particularly receivables, inventories, property, plant and equipment, right-of-use assets, goodwill, intangibles, accrued expenses, short-term and long-term lease liability, income taxes and related accounts and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounting Policies. 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, 2023, previously filed with the SEC. There has been no significant change in our accounting policies since the end of fiscal 2023.

Note 2 — Acquisitions and Asset Sales

Acquisition of EcoTech Enterprises, Inc.: On July 14, 2023, we acquired substantially all the assets of EcoTech Enterprises, Inc. ("EcoTech") for $3.4 million, 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 $3.4 million purchase price was allocated primarily to customer lists, to be amortized over 10 years, property, plant and equipment, and net working capital. The results of operations since the acquisition date and the assets are included in our Water Treatment segment. Costs associated with this transaction were not material and were expensed as incurred.

Sale of bleach packaging assets: 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 core to our Industrial segment operations, where we tend to focus our manufacturing operations on bulk products. 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 within selling, general and administrative expenses.

Note 3 - Revenue

Our revenue arrangements generally consist of a single performance obligation to transfer promised goods or services. We disaggregate revenues from contracts with customers by operating segments as well as types of products sold. Reporting by operating segment is pertinent to understanding our revenues, as it aligns to how we review the financial performance of our operations. Types of products sold within each operating segment help us to further evaluate the financial performance of our segments. The following tables disaggregate external customer net sales by major revenue stream for the six months ended October 1, 2023 and October 2, 2022:


	Three months ended October 1, 2023
(In thousands)	Industrial		Water Treatment		Health and Nutrition		Total
Manufactured, blended or repackaged products (1)	$	83,890	$	90,964	$	10,858	$	185,712
Distributed specialty products (2)	—		—		26,113		26,113
Bulk products (3)	13,149		8,560		—		21,709
Other	1,496		1,401		95		2,992
Total external customer sales	$	98,535	$	100,925	$	37,066	$	236,526

	Three months ended October 2, 2022
(In thousands)	Industrial		Water Treatment		Health and Nutrition		Total
Manufactured, blended or repackaged products (1)	$	93,548	$	77,172	$	11,736	$	182,456
Distributed specialty products (2)	—		—		28,677		28,677
Bulk products (3)	18,132		7,720		—		25,852
Other	2,259		1,596		352		4,207
Total external customer sales	$	113,939	$	86,488	$	40,765	$	241,192

	Six months ended October 1, 2023
(In thousands)	Industrial		Water Treatment		Health and Nutrition		Total
Manufactured, blended or repackaged products (1)	$	186,565	$	175,749	$	21,099	$	383,413
Distributed specialty products (2)	—		—		52,267		52,267
Bulk products (3)	28,359		16,081		—		44,440
Other	4,484		2,746		296		7,526
Total external customer sales	$	219,408	$	194,576	$	73,662	$	487,646

	Six months ended October 2, 2022
(In thousands)	Industrial		Water Treatment		Health and Nutrition		Total
Manufactured, blended or repackaged products (1)	$	195,160	$	147,529	$	23,697	$	366,386
Distributed specialty products (2)	—		—		59,766		59,766
Bulk products (3)	38,587		14,510		—		53,097
Other	4,902		2,939		645		8,486
Total external customer sales	$	238,649	$	164,978	$	84,108	$	487,735

(1)For our Industrial and Water Treatment segments, this line includes our non-bulk specialty products that we either manufacture, blend, repackage, resell in their original form, or direct ship to our customers in smaller quantities, and services we provide for our customers. For our Health and Nutrition segment, this line includes products manufactured, processed or repackaged in our facility and/or with our equipment.

(2)This line includes non-manufactured distributed specialty products in our Health and Nutrition segment, which may be sold out of one of our facilities or direct shipped to our customers.

(3)This line includes bulk products in our Industrial and Water Treatment segments 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.

Note 4 – Earnings per Share

Basic earnings per share (“EPS”) is computed by dividing net earnings by the weighted-average number of common shares outstanding. Diluted EPS includes the dilutive impact of incremental shares assumed to be issued as performance units and restricted stock.

Basic and diluted EPS were calculated using the following:


	Three Months Ended		Six Months Ended
	October 01, 2023	October 02, 2022	October 01, 2023	October 02, 2022
Weighted-average common shares outstanding—basic	20,903,690	20,814,686	20,905,707	20,861,754
Dilutive impact of performance units and restricted stock	122,738	142,211	128,446	142,700
Weighted-average common shares outstanding—diluted	21,026,428	20,956,897	21,034,153	21,004,454

For each of the periods presented, there were no shares excluded from the calculation of weighted-average common shares for diluted EPS.

Note 5 – Fair Value Measurements

Our financial assets and liabilities are measured at fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The carrying value of cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these instruments. Because of the variable-rate nature of our debt under our credit facility, our debt also approximates fair value.

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The fair value hierarchy requires the use of observable market data when available. In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

Our financial assets that are measured at fair value on a recurring basis are an interest rate swap and assets held in a deferred compensation retirement plan. Both of these assets are classified as long-term assets on our balance sheet, with the portion of the deferred compensation retirement plan assets expected to be paid within twelve months classified as current assets. The fair value of the interest rate swap is determined by the respective counterparties based on interest rate changes. Interest rate swaps are valued based on observable interest rate yield curves for similar instruments. The deferred compensation plan assets relate to contributions made to a non-qualified compensation plan on behalf of certain employees who are classified as “highly compensated employees” as determined by IRS guidelines. The assets are part of a rabbi trust and the funds are held in mutual funds. The fair value of the deferred compensation is based on the quoted market prices for the mutual funds at the end of the period.

The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis as of October 1, 2023 and April 2, 2023.


(In thousands)		October 1, 2023		April 2, 2023
Assets
Deferred compensation plan assets	Level 1	$	9,058	$	7,659
Interest rate swap	Level 2	$	5,473	$	4,028

Note 6 – Inventories

Inventories at October 1, 2023 and April 2, 2023 consisted of the following:


	October 1, 2023		April 2, 2023
(In thousands)
Inventory (FIFO basis)	$	104,878	$	128,589
LIFO reserve	(36,378)		(39,812)
Net inventory	$	68,500	$	88,777

The first in, first out (“FIFO”) value of inventories accounted for under the last in, first out (“LIFO”) method was $83.9 million at October 1, 2023 and $101.4 million at April 2, 2023. The remainder of the inventory was valued and accounted for under the FIFO method.

Note 7 – Goodwill and Intangible Assets

The carrying amount of goodwill was $77.4 million as of October 1, 2023 and April 2, 2023, of which $44.9 million was related to our Health and Nutrition segment, $26.0 million was related to our Water Treatment segment, and $6.5 million was related to our Industrial segment.

A summary of our intangible assets as of October 1, 2023 and April 2, 2023 is as follows:


	October 1, 2023						April 2, 2023
(In thousands)	Gross Amount		Accumulated Amortization		Net		Gross Amount		Accumulated Amortization		Net
Finite-life intangible assets
Customer relationships	$	110,894	$	(41,561)	$	69,333	$	109,107	$	(38,377)	$	70,730
Trademarks and trade names	$	6,370	$	(5,467)	$	903	$	6,370	$	(5,267)	$	1,103
Other finite-life intangible assets	3,941		(3,913)		28		3,904		(3,904)		—
Total finite-life intangible assets	121,205		(50,941)		70,264		119,381		(47,548)		71,833
Indefinite-life intangible assets	1,227		—		1,227		1,227		—		1,227
Total intangible assets	$	122,432	$	(50,941)	$	71,491	$	120,608	$	(47,548)	$	73,060

Note 8 – Debt

Debt at October 1, 2023 and April 2, 2023 consisted of the following:


	October 1, 2023		April 2, 2023

(In thousands)

Senior secured revolving loan	$	60,000	$	112,000

Less: unamortized debt issuance costs	(312)		(356)
Total debt, net of debt issuance costs	59,688		111,644
Less: current portion of long-term debt	(9,913)		(9,913)
Total long-term debt	$	49,775	$	101,731

We were in compliance with all covenants of our credit agreement as of October 1, 2023.

Note 9 – Income Taxes

We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The tax years prior to our fiscal year ended March 29, 2020 are closed to examination by the Internal Revenue Service, and with few exceptions, state and local income tax jurisdictions. Our effective income tax rate was 27% for the six months ended October 1, 2023, compared to 26% for the six months ended October 2, 2022. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.

Note 10 – Share-Based Compensation

Performance-Based Restricted Stock Units. Our Board of Directors (the “Board”) approved a performance-based equity compensation arrangement for our executive officers during the first quarters of each of fiscal 2024 and fiscal 2023. These performance-based arrangements provide for the grant of performance-based restricted stock units that represent a possible future issuance of restricted shares of our common stock based on a pre-tax income target for the applicable fiscal year. The actual number of restricted shares to be issued to each executive officer is determined when our final financial information becomes available after the applicable fiscal year and will be between zero shares and 70,859 shares in the aggregate for fiscal 2024. The restricted shares issued, if any, will fully vest approximately two years after the last day of the fiscal year on which the performance is based. We are recording the compensation expense for the outstanding performance share units and the converted restricted stock over the life of the awards.

The following table represents the restricted stock activity for the six months ended October 1, 2023:


	Shares	Weighted- Average Grant Date Fair Value
Unvested at beginning of period	189,258	$	34.64
Granted	61,819	43.06
Vested	(105,600)	31.74

Unvested at end of period	145,477	$	40.33

We recorded compensation expense related to performance share units and restricted stock of $1.0 million and $1.6 million for the three and six months ended October 1, 2023, respectively. We recorded compensation expense related to performance share units and restricted stock of $0.8 million and $1.2 million for the three and six months ended October 2, 2022, respectively. Substantially all of the compensation expense was recorded in selling, general and administrative expenses in the condensed consolidated statements of income.

Restricted Stock Awards. As part of their retainer, our directors, other than the Chief Executive Officer, receive restricted stock for their Board services. The restricted stock awards are generally expensed over a one-year vesting period, based on the market value on the date of grant. As of October 1, 2023, there were 10,647 shares of restricted stock with an average grant date fair value of $46.00 outstanding under this program. Compensation expense for both the three months ended October 1, 2023 and October 2, 2022 related to restricted stock awards to the Board was $0.1 million. Compensation expense for both the six months ended October 1, 2023 and October 2, 2022 related to restricted stock awards to the Board was $0.2 million.

Note 11 – Share Repurchase Program

Our Board had authorized the repurchase of up to 2.6 million shares of our outstanding common shares. The shares may be repurchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. Upon purchase of the shares, we reduce our common stock for the par value of the shares with the excess applied against additional paid-in capital. During the three and six months ended October 1, 2023, we repurchased 167,796 shares at an aggregate purchase price of $9.8 million. During the three months ended October 2, 2022, no shares were repurchased, and during the six months ended October 2, 2022, we repurchased 181,657 shares at an aggregate purchase price of $6.6 million. As of October 1, 2023, 961,552 shares remained available to be repurchased under the share repurchase program.

Note 12 – Segment Information

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 Annual Report on Form 10-K for the fiscal year ended April 2, 2023.

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. 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.


(In thousands)	Industrial		Water Treatment		Health and Nutrition		Total
Three months ended October 1, 2023:
Sales	$	98,535	$	100,925	$	37,066	$	236,526
Gross profit	17,844		29,308		6,734		53,886
Selling, general, and administrative expenses	6,806		10,145		3,944		20,895
Operating income	11,038		19,163		2,790		32,991
Three months ended October 2, 2022:
Sales	$	113,939	$	86,488	$	40,765	$	241,192
Gross profit	17,713		20,504		8,157		46,374
Selling, general, and administrative expenses	6,891		9,082		3,865		19,838
Operating income	10,822		11,422		4,292		26,536
Six months ended October 1, 2023:
Sales	$	219,408	$	194,576	$	73,662	$	487,646
Gross profit	37,150		55,716		13,011		105,877
Selling, general and administrative expenses	13,381		19,271		7,747		40,399
Operating income	23,769		36,445		5,264		65,478
Six months ended October 2, 2022:
Sales	$	238,649	$	164,978	$	84,108	$	487,735
Gross profit	37,722		39,457		15,944		93,123
Selling, general and administrative expenses	13,276		17,783		7,664		38,723
Operating income	24,446		21,674		8,280		54,400

No significant changes to identifiable assets by segment occurred during the six months ended October 1, 2023.

Note 13 – Subsequent Events

In October 2023, we acquired substantially all the assets of Water Solutions Unlimited, Inc. ("Water Solutions") for $60 million and up to an additional $15 million to be paid after three years based on achieving certain targets, under the terms of an asset purchase agreement with Water Solutions and its shareholders. Water Solutions is a manufacturer and distributor of water treatment chemicals serving customers primarily throughout Indiana, Illinois and Michigan. The results of operations and the assets, including goodwill associated with this acquisition, if any, will be included as part of our Water Treatment segment from the date of acquisition forward. The purchase accounting for this acquisition has not yet been completed.

In October 2023, we acquired substantially all the assets of Miami Products & Chemical Company ("Miami Products") for $15.5 million, under the terms of an asset purchase agreement with Miami Products and its shareholders. Miami Products is a bleach manufacturer and distributor serving customers primarily throughout Ohio and the surrounding region. The results of operations and the assets, including goodwill associated with this acquisition, if any, will be included as part of our Water Treatment segment from the date of acquisition forward. The purchase accounting for this acquisition has not yet been completed.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations for the six months ended October 1, 2023 as compared to the similar period ended October 2, 2022. This discussion should be read in conjunction with the condensed consolidated financial statements and notes to condensed consolidated financial statements included in this quarterly report on Form 10-Q and Item 8 of our Annual Report on Form 10-K for the fiscal year ended April 2, 2023.

Overview

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

Business Acquisitions and Asset Sales

In October 2023, after the end of our second quarter, we acquired substantially all the assets of Water Solutions Unlimited, Inc. ("Water Solutions") for $60 million and up to an additional $15 million to be paid after three years based on achieving certain targets, under the terms of an asset purchase agreement with Water Solutions and its shareholders. Water Solutions is a manufacturer and distributor of water treatment chemicals serving customers primarily throughout Indiana, Illinois and Michigan. The results of operations and the assets, including goodwill associated with this acquisition, if any, will be included as part of our Water Treatment segment from the date of acquisition forward.

In October 2023, after the end of our second quarter, we acquired substantially all the assets of Miami Products & Chemical Company ("Miami Products") for $15.5 million, under the terms of an asset purchase agreement with Miami Products and its shareholders. Miami Products is a bleach manufacturer and distributor serving customers primarily throughout Ohio and the surrounding region. The results of operations and the assets, including goodwill associated with this acquisition, if any, will be included as part of our Water Treatment segment from the date of acquisition forward.

On July 14, 2023, we acquired substantially all the assets of EcoTech Enterprises, Inc. ("EcoTech") for $3.4 million, under the terms of an asset purchase agreement with EcoTech and its shareholders. EcoTech was a manufacturer and distributor of water treatment chemicals serving customers throughout Arkansas and surrounding states. The results of operations and the assets will be included as part of our Water Treatment segment from the date of acquisition forward.

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. 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 was recorded as a reduction to selling, general and administrative expenses.

Share Repurchase Program

We have in place a share repurchase program for up to 2.6 million shares of our common shares. As of October 1, 2023, 961,552 shares remain available to be repurchased under this program.

Financial Results

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 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. Inventories in our Health and Nutrition segment are valued using the first-in, first-out (“FIFO”) method.

We disclose the sales of our bulk commodity products as a percentage of total sales dollars for our Industrial and Water Treatment 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 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.

Results of Operations

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


	Three Months Ended				Six Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	(77.2)	%	(80.8)	%	(78.3)	%	(80.9)	%

Gross profit	22.8	%	19.2	%	21.7	%	19.1	%
Selling, general and administrative expenses	(8.8)	%	(8.2)	%	(8.3)	%	(7.9)	%
Operating income	14.0	%	11.0	%	13.4	%	11.2	%
Interest expense, net	(0.3)	%	(0.6)	%	(0.4)	%	(0.6)	%
Other (expense) income	(0.1)	%	(0.2)	%	—	%	(0.2)	%
Income before income taxes	13.6	%	10.2	%	13.0	%	10.4	%
Income tax expense	(3.7)	%	(2.7)	%	(3.5)	%	(2.7)	%
Net income	9.9	%	7.5	%	9.5	%	7.7	%

Three Months Ended October 1, 2023 Compared to Three Months Ended October 2, 2022

Sales

Sales were $236.5 million for the three months ended October 1, 2023, a decrease of $4.7 million, or 2%, from sales of $241.2 million in the same period a year ago. Decreased sales in our Industrial and Health and Nutrition segments more than offset increased sales in our Water Treatment segment.

Industrial Segment. Industrial segment sales decreased $15.4 million or 14%, to $98.5 million for the three months ended October 1, 2023, from sales of $113.9 million in the same period a year ago. Sales of bulk commodity products in the Industrial segment were approximately 13% of sales dollars in the three months ended October 1, 2023 and 16% in the same period of the prior year. The sale of our consumer bleach packaging business at the end of fiscal 2023 resulted in $4.0 million lower sales in the current quarter. In addition, sales declined due to overall lower volumes.

Water Treatment Segment. Water Treatment segment sales increased $14.4 million, or 17%, to $100.9 million for the three months ended October 1, 2023, from sales of $86.5 million in the same period a year ago. Sales of bulk commodity products in the Water Treatment segment were approximately 8% of sales dollars in the three months ended October 1, 2023 and 9% in the same period a year ago. 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 & Nutrition Segment. Health and Nutrition segment sales decreased $3.7 million, or 9%, to $37.1 million for the three months ended October 1, 2023, from sales of $40.8 million in the same period a year ago. The sales decrease was primarily due to decreased sales of specialty distributed products due to lower demand from our customers, which we believe was driven by excess inventory at some of our customers as well as lower consumer demand for health and immunity products.

Gross Profit

Gross profit increased $7.5 million, or 16%, to $53.9 million, or 23% of sales, for the three months ended October 1, 2023, from $46.4 million, or 19% of sales, in the same period a year ago. During the three months ended October 1, 2023, the LIFO reserve decreased, and gross profit increased, by $3.2 million due primarily to decreasing raw material prices. In the same quarter a year ago, the LIFO reserve increased, and gross profit decreased, by $5.3 million due primarily to rising raw material prices.

Industrial Segment. Gross profit for the Industrial segment increased $0.1 million, or 1%, to $17.8 million, or 18% of sales, for the three months ended October 1, 2023, from $17.7 million, or 16% of sales, in the same period a year ago. During the three months ended October 1, 2023, the LIFO reserve decreased, and gross profit increased, by $2.6 million due primarily to decreasing raw material costs. In the same quarter a year ago, the LIFO reserve increased, and gross profit decreased, by $3.9 million due primarily to rising raw material prices. Gross profit increased slightly due to improved unit margins on certain products.

Water Treatment Segment. Gross profit for the Water Treatment segment increased $8.8 million, or 43%, to $29.3 million, or 29% of sales, for the three months ended October 1, 2023, from $20.5 million, or 24% of sales, in the same period a year ago. During the three months ended October 1, 2023, the LIFO reserve decreased, and gross profit increased, by $0.6 million due primarily to decreasing raw material costs. In the same quarter a year ago, the LIFO reserve increased, and gross profit decreased, by $1.4 million due primarily to rising raw material prices. Gross profit increased as a result of improved per-unit margins on many of our products as well as increased sales.

Health and Nutrition Segment. Gross profit for our Health and Nutrition segment decreased $1.5 million, or 18%, to $6.7 million, or 18% of sales, for the three months ended October 1, 2023, from $8.2 million, or 20% of sales, in the same period a year ago. Gross profit decreased as a result of lower sales and lower per-unit margins on certain products.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased $1.1 million, or 6%, to $20.9 million, or 9% of sales, for the three months ended October 1, 2023, from $19.8 million, or 8% of sales, in the same period a year ago. Expenses increased largely due to increased variable pay as well as added costs from acquired businesses.

Operating Income

Operating income increased $6.5 million, or 25%, to $33.0 million, or 14% of sales, for the three months ended October 1, 2023, from $26.5 million, or 11% of sales, in the same period a year ago due to the combined impact of the factors discussed above.

Interest Expense, Net

Interest expense was $0.7 million for the three months ended October 1, 2023 and $1.4 million the same period a year ago. The decrease was due to a decrease in outstanding borrowings.

Other (Expense) Income

Other expense was $0.3 million for the three months ended October 1, 2023 compared to $0.4 million in the same period a year ago. The expense represents losses recorded on investments held for our non-qualified deferred compensation plan. The amounts recorded as a loss were offset by similar amounts recorded as an increase to compensation expense within SG&A expenses.

Income Tax Provision

Our effective income tax rate was 27% for both the three months ended October 1, 2023 and the three months ended October 2, 2022. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes. Our effective tax rate for the full year is currently expected to be approximately 26 to 27%.

Six Months Ended October 1, 2023 Compared to Six Months Ended October 2, 2022

Sales

Sales were $487.6 million for the six months ended October 1, 2023, a decrease of $0.1 million, or less than 1%, from sales of $487.7 million in the same period a year ago. Decreased sales in our Industrial and Health and Nutrition segments were nearly offset by increased sales in our Water Treatment segment.

Industrial Segment. Industrial segment sales decreased $19.2 million or 8%, to $219.4 million for the six months ended October 1, 2023, from sales of $238.6 million in the same period a year ago. Sales of bulk commodity products in the Industrial segment were approximately 13% of sales dollars in the six months ended October 1, 2023 and 16% in the same period of the prior year.The sale of our consumer bleach packaging business at the end of fiscal 2023 resulted in $8.8 million lower sales in the six months ended October 1, 2023. In addition, sales declined due to overall lower volumes.

Water Treatment Segment. Water Treatment segment sales increased $29.6 million, or 18%, to $194.6 million for the six months ended October 1, 2023, from sales of $165.0 million in the same period a year ago. Sales of bulk commodity products in the Water Treatment segment were approximately 8% of sales dollars in the six months ended October 1, 2023 and 9% in the same period a year ago. 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 & Nutrition Segment. Health and Nutrition segment sales decreased $10.4 million, or 12%, to $73.7 million for the six months ended October 1, 2023, from sales of $84.1 million in the same period a year ago. The sales decrease was primarily due to decreased sales of specialty distributed products due to lower demand from our customers, which we believe was driven by excess inventory at some of our customers as well as lower consumer demand for health and immunity products. The sales decline experienced in the second quarter of fiscal 2023 was about half the decline experienced in the first quarter of fiscal 2023.

Gross Profit

Gross profit increased $12.8 million, or 14%, to $105.9 million, or 22% of sales, for the six months ended October 1, 2023, from $93.1 million, or 19% of sales, in the same period a year ago. During the six months ended October 1, 2023, the LIFO reserve decreased, and gross profit increased, by $3.4 million due primarily to decreasing raw material prices. In the same quarter a year ago, the LIFO reserve increased, and gross profit decreased, by $9.0 million due primarily to rising raw material prices.

Industrial Segment. Gross profit for the Industrial segment decreased $0.5 million, or 1%, to $37.2 million, or 17% of sales, for the six months ended October 1, 2023, from $37.7 million, or 16% of sales, in the same period a year ago. During the six months ended October 1, 2023, the LIFO reserve decreased, and gross profit increased, by $3.0 million due primarily to decreasing raw material costs. In the same quarter a year ago, the LIFO reserve increased, and gross profit decreased, by $6.6 million due primarily to rising raw material prices. Gross profit decreased due to lower sales volumes.

Water Treatment Segment. Gross profit for the Water Treatment segment increased $16.2 million, or 41%, to $55.7 million, or 29% of sales, for the six months ended October 1, 2023, from $39.5 million, or 24% of sales, in the same period a year ago. During the six months ended October 1, 2023, the LIFO reserve decreased, and gross profit increased, by $0.5 million due primarily to decreasing raw material costs. In the same quarter a year ago, the LIFO reserve increased, and gross profit decreased, by $2.4 million due primarily to rising raw material prices. Gross profit increased as a result of improved per-unit margins on many of our products as well as increased sales.

Health and Nutrition Segment. Gross profit for our Health and Nutrition segment decreased $2.9 million, or 18%, to $13.0 million, or 18% of sales, for the six months ended October 1, 2023, from $15.9 million, or 19% of sales, in the same period a year ago. Gross profit decreased as a result of lower sales and lower per-unit margins on certain products.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased $1.7 million, or 4%, to $40.4 million, or 8% of sales, for the six months ended October 1, 2023, from $38.7 million, or 8% of sales, in the same period a year ago. In the current period, we recorded compensation expense of $0.1 million as a result of gains recorded on investments held for our non-qualified deferred compensation plan, as compared to $1.2 million decrease in compensation expense in the same period a year ago as a result of losses incurred. These amounts were offset by similar amounts recorded in other (expense) income. In addition to this unfavorable year-over-year impact of $1.3 million, expenses increased largely due to increased variable pay as well as added costs from acquired businesses.

Operating Income

Operating income increased $11.1 million, or 20%, to $65.5 million, or 13% of sales, for the six months ended October 1, 2023, from $54.4 million, or 11% of sales, in the same period a year ago due to the combined impact of the factors discussed above.

Interest Expense, Net

Interest expense was $1.9 million for the six months ended October 1, 2023 and $2.3 million the same period a year ago. The increase was due to decrease in outstanding borrowings, offset somewhat due to an increase in borrowing interest rates.

Other (Expense) Income

Other income was nominal for the six months ended October 1, 2023 compared to other expense of $1.2 million in the same period a year ago. The prior year expense represents losses recorded on investments held for our non-qualified deferred compensation plan. The amounts recorded as a loss were offset by similar amounts recorded as a decrease to compensation expense within SG&A expenses.

Income Tax Provision

Our effective income tax rate was 27% for the six months ended October 1, 2023 and 26% the six months ended October 2, 2022. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes. Our effective tax rate for the full year is currently expected to be approximately 26 to 27%.

Liquidity and Capital Resources

Cash was $11.0 million at October 1, 2023, an increase of $3.4 million as compared with the $7.6 million available as of April 2, 2023.

Cash provided by operating activities was $92.6 million for the six months ended October 1, 2023, compared to cash provided by operating activities of $18.8 million in the same period a year ago. The year-over-year increase in cash provided by operating activities in the first six months of the current year was primarily driven by decreased cash expended for inventory and accounts payable, along with increased customer collections and increased net income compared to the same period a year ago. 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.

Cash used in investing activities was $19.9 million for the six months ended October 1, 2023, compared to $20.4 million in the same period a year ago. Capital expenditures were $16.9 million for the six months ended October 1, 2023, compared to $20.7 million in the same period a year ago. In the first six months of the current year, we invested $5.1 million to complete an expansion of one of our Minnesota manufacturing facilities. In the prior year, we invested $1.1 million to complete an expansion of our Illinois manufacturing facility, purchased a previously leased facility for $0.9 million, and had larger investments in vehicles, safety equipment and new and replacement equipment compared to the first six months of the current year. In addition, we we acquired substantially all the assets of EcoTech for $3.4 million in the first six months of the current year.

Cash used in financing activities was $69.3 million for the six months ended October 1, 2023, compared to $2.0 million of cash provided by financing activities in the same period a year ago. Included in financing activities in the first six months of the current year were net debt repayments of $52.0 million, compared to net debt proceeds of $15.0 million in the first six months of the prior year. In addition, we repurchased $9.8 million shares of our common stock in the first six months of the current year, compared to $6.6 million in the same period of the prior year.

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

Our Board has authorized the repurchase of up to 2.6 million shares of our outstanding common shares. The shares may be purchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. The primary objective of the share repurchase program is to offset the impact of dilution from issuances relating to employee and director equity grants and our employee stock purchase program. During the six months ended October 1, 2023, we repurchased 167,796 shares of common stock with an aggregate purchase price of $9.8 million. During the six months ended October 2, 2022, we repurchased 181,657 shares at an aggregate purchase price of $6.6 million. As of October 1, 2023, 961,552 shares remained available to be repurchased under the share repurchase program.

We are party to 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 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 April 30, 2027. The Revolving Loan Facility is secured by substantially all of our personal property assets and those of our subsidiaries. We may use the amount available under 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) 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. S. 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 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. At October 1, 2023, the effective interest rate on our borrowings was 3.0%.

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. The commitment fee is between 0.15% and 0.25%, depending on our leverage ratio.

Debt issuance costs paid to the Lenders are being amortized as interest expense over the term of the Credit Agreement. As of October 1, 2023, 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. 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 October 1, 2023 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.

Critical Accounting Estimates

There were no material changes in our critical accounting estimates since the filing of our Annual Report on Form 10-K for the fiscal year ended April 2, 2023.

Forward-Looking Statements

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. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “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, 2023. 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 primarily related to borrowings under our Revolving Loan 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. 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 $60.0 million and it will terminate on May 1, 2027. As of October 1, 2023, we had no unhedged variable-rate debt, limiting our interest rate risk.

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

Evaluation of Disclosure 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 were effective as of October 1, 2023. 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.

Changes in Internal Control

There was no change in our internal control over financial reporting during the second quarter of fiscal 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

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, 2023.

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

Our Board has authorized the repurchase of up to 2.6 million shares of our outstanding common stock. The shares may be purchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. The following table sets forth information concerning purchases of our common stock for the three months ended October 1, 2023:


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program	Maximum Number of Shares that May Yet be Purchased under Plans or Programs
07/03/2023-07/30/2023	—	$	—	—	1,129,348
07/31/2023-08/27/2023	58,614	—		58,614	1,070,734
08/28/2023-10/01/2023	109,182	—		109,182	961,552
Total	167,796			167,796

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit

Description

Method of Filing

3.1

Restated Articles of Incorporation. (1)

Incorporated by Reference

3.2

Amended and Restated By-Laws. (2)

Incorporated by Reference

31.1

Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.

Filed Electronically

31.2

Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.

Filed Electronically

32.1

Section 1350 Certification by Chief Executive Officer.

Filed Electronically

32.2

Section 1350 Certification by Chief Financial Officer.

Filed Electronically

101

Financial statements from the Quarterly Report on Form 10-Q of Hawkins, Inc. for the period ended October 1, 2023 filed with the SEC on November 1, 2023 formatted in Inline Extensible Business Reporting Language (iXBRL); (i) the Condensed Consolidated Balance Sheets at October 1, 2023 and April 2, 2023, (ii) the Condensed Consolidated Statements of Income for the three and six months ended October 1, 2023 and October 2, 2022, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended October 1, 2023 and October 2, 2022, (iv) the Condensed Consolidated Statements of Shareholder's Equity for the three and six months ended October 1, 2023 and October 2, 2022, (v) the Condensed Consolidated Statements of Cash Flows for the six months ended October 1, 2023 and October 2, 2022, and (vi) Notes to Condensed Consolidated Financial Statements.

Filed Electronically

104

Cover Page Interactive Data File (embedded within the inline XBRL document)

Filed Electronically

(1)Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated February 26, 2021 and filed March 2, 2021.

(2)Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated October 28, 2009 and filed November 3, 2009.

SIGNATURES

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.


HAWKINS, INC.

By:						/s/ Jeffrey P. Oldenkamp
						Jeffrey P. Oldenkamp
						Executive Vice President and Chief Financial Officer
						(On behalf of the registrant and as principal financial and accounting officer)

Dated: November 1, 2023

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Hawkins (HWKN) 10-Q2024 Q2 Quarterly report

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