HAWKINS INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 248 ) 24 Consolidated Balance Sheets 27 Consolidated Statements of Income 28 Consolidated Statements of Comprehensive Income 29 Consolidated Statements of Shareholders’ Equity 30 Consolidated Statements of Cash Flows 31 Notes to Consolidated Financial Statements 32 23 Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Hawkins, Inc. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Hawkins, Inc. (a Minnesota corporation) and subsidiaries (the “Company”) as of March 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended March 31, 2024, and our report dated May 15, 2024 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Water Solutions, Miami Products, or Industrial Research, wholly-owned subsidiaries, whose financial statements reflect total assets and revenues constituting 15 and 2 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended March 31, 2024. As indicated in Management’s Report, Water Solutions, Miami Products, and Industrial Research were acquired during fiscal 2024. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Water Solutions, Miami Products, and Industrial Research. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Minneapolis, Minnesota May 15, 2024 24 Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Hawkins, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Hawkins, Inc. (a Minnesota corporation) and subsidiaries (the “Company”) as of March 31, 2024 and April 2, 2023 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2024, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2024 and April 2, 2023, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2024, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of March 31, 2024, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated May 15, 2024 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Customer relationships acquired with the Water Solutions Unlimited acquisition As described further in Note 2 to the financial statements, on October 27, 2023 the Company acquired substantially all of the assets of Water Solutions Unlimited, Inc. The total purchase price consideration was $70.7 million, which allocated $39.0 million to separately identified intangible assets, including customer relationships of $32.4 million. The determination of the fair value of the customer relationships requires management to make significant estimates and assumptions related to forecasts of future revenues, expenses, and the discount rate applied. Changes to these assumptions could materially affect the determination of the fair value of the customer relationships. We identified the fair value assigned to the customer relationships included on the opening balance sheet as a critical audit matter. 25 The principal considerations for our determination that the valuation of the acquired customer relationships is a critical audit matter is that management utilized significant judgement when estimating the fair value assigned to the customer relationships. In turn, auditing management’s judgements regarding the assigned fair value involved a high degree of subjectivity due to the estimation uncertainty of management’s significant judgements. Our audit procedures related to the estimated fair value assigned to the acquired customer relationships included the following, among others. • We obtained an understanding and tested the design of relevant controls within the Company’s process to value acquired customer relationship assets, including the Company’s control over the selection and review of the reasonableness of assumptions used in determining fair value. • We evaluated the reasonableness of management’s significant assumptions, which included forecasted revenues and operating expenses. We tested whether these forecasts were reasonable and consistent with historical performance. • We involved our valuation professionals with specialized skills and knowledge, to evaluate key inputs and assumptions used to determine fair value. Our valuation professionals compared the discount rate used to value the customer relationships to independently developed discount rates derived from publicly available data for comparable companies. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2020. Minneapolis, Minnesota May 15, 2024 26 HAWKINS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per-share data) March 31, 2024 April 2, 2023 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,153 $ 7,566 Trade accounts receivables, net 114,477 129,252 Inventories 74,600 88,777 Prepaid expenses and other current assets 6,596 6,449 Total current assets 202,826 232,044 PROPERTY, PLANT, AND EQUIPMENT: Land 17,916 16,344 Buildings and improvements 147,701 134,901 Machinery and equipment 141,262 125,970 Transportation equipment 67,868 56,328 Office furniture and equipment 11,901 11,210 386,648 344,753 Less accumulated depreciation 177,774 158,950 Net property, plant, and equipment 208,874 185,803 OTHER ASSETS: Right-of-use assets 11,713 10,199 Goodwill 103,399 77,401 Intangible assets, net 116,626 73,060 Deferred compensation plan asset 9,584 7,367 Other 4,912 4,661 Total other assets 246,234 172,688 Total assets $ 657,934 $ 590,535 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable — trade $ 56,387 $ 53,705 Accrued payroll and employee benefits 19,532 17,279 Current portion of long-term debt 9,913 9,913 Income tax payable 1,943 3,329 Environmental remediation 7,700 — Other current liabilities 7,832 6,645 Total current liabilities 103,307 90,871 LONG-TERM DEBT 88,818 101,731 LONG-TERM LEASE LIABILITY 9,530 8,687 PENSION WITHDRAWAL LIABILITY 3,538 3,912 DEFERRED INCOME TAXES 22,406 23,800 DEFERRED COMPENSATION LIABILITY 11,764 9,343 EARNOUT LIABILITY 11,235 — OTHER LONG-TERM LIABILITIES 1,310 2,175 Total liabilities 251,908 240,519 COMMITMENTS AND CONTINGENCIES (Note 12) SHAREHOLDERS’ EQUITY: Common shares; authorized: 60,000,000 shares of $ 0.01 par value; 20,790,261 and 20,850,454 shares issued and outstanding for 2024 and 2023, respectively 208 209 Additional paid-in capital 38,154 44,443 Retained earnings 364,549 302,424 Accumulated other comprehensive income 3,115 2,940 Total shareholders’ equity 406,026 350,016 Total liabilities and shareholders’ equity $ 657,934 $ 590,535 See accompanying notes to consolidated financial statements. 27 HAWKINS, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share and per-share data) Fiscal Year Ended March 31, 2024 April 02, 2023 April 03, 2022 Sales $ 919,162 $ 935,098 $ 774,541 Cost of sales ( 725,526 ) ( 769,979 ) ( 628,021 ) Gross profit 193,636 165,119 146,520 Selling, general and administrative expenses ( 89,600 ) ( 76,969 ) ( 75,326 ) Operating income 104,036 88,150 71,194 Interest expense, net ( 4,282 ) ( 5,234 ) ( 1,404 ) Other income (expense) 1,391 ( 334 ) 189 Income before income taxes 101,145 82,582 69,979 Income tax expense ( 25,782 ) ( 22,541 ) ( 18,437 ) Net income $ 75,363 $ 60,041 $ 51,542 Weighted average number of shares outstanding-basic 20,864,348 20,848,077 20,947,234 Weighted average number of shares outstanding-diluted 21,014,326 21,014,905 21,135,258 Basic earnings per share $ 3.61 $ 2.88 $ 2.46 Diluted earnings per share $ 3.59 $ 2.86 $ 2.44 Cash dividends declared and paid per common share $ 0.6300 $ 0.5700 $ 0.5225 See accompanying notes to consolidated financial statements. 28 HAWKINS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Fiscal Year Ended March 31, 2024 April 2, 2023 April 3, 2022 Net income $ 75,363 $ 60,041 $ 51,542 Other comprehensive income, net of tax: Unrealized gain on interest rate swap 175 1,649 1,291 Total other comprehensive income 175 1,649 1,291 Total comprehensive income $ 75,538 $ 61,690 $ 52,833 See accompanying notes to consolidated financial statements. 29 HAWKINS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands, except share data) Common Shares Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Shares Amount BALANCE — March 28, 2021 20,969,746 $ 210 $ 51,138 $ 213,898 $ — $ 265,246 Cash dividends declared and paid — — — ( 11,056 ) — ( 11,056 ) Share-based compensation expense — — 3,818 — — 3,818 Vesting of restricted stock 134,230 1 ( 1 ) — — — Shares surrendered for payroll taxes ( 45,390 ) — ( 1,467 ) — — ( 1,467 ) ESPP shares issued 71,692 — 1,772 — — 1,772 Shares repurchased ( 240,501 ) ( 2 ) ( 8,543 ) — — ( 8,545 ) Other comprehensive loss, net of tax — — — — 1,291 1,291 Net income — — — 51,542 — 51,542 BALANCE — April 3, 2022 20,889,777 $ 209 $ 46,717 $ 254,384 $ 1,291 $ 302,601 Cash dividends declared and paid — — — ( 12,001 ) — ( 12,001 ) Share-based compensation expense — — 3,825 — — 3,825 Vesting of restricted stock 113,147 1 ( 1 ) — — — Shares surrendered for payroll taxes ( 36,410 ) — ( 1,550 ) — — ( 1,550 ) ESPP shares issued 65,597 1 2,007 — — 2,008 Shares repurchased ( 181,657 ) ( 2 ) ( 6,555 ) — — ( 6,557 ) Other comprehensive income, net of tax — — — — 1,649 1,649 Net income — — — 60,041 — 60,041 BALANCE — April 2, 2023 20,850,454 $ 209 $ 44,443 $ 302,424 $ 2,940 $ 350,016 Cash dividends declared and paid — — — ( 13,238 ) — ( 13,238 ) Share-based compensation expense — — 4,880 — — 4,880 Vesting of restricted stock 118,165 1 ( 1 ) — — — Shares surrendered for payroll taxes ( 48,478 ) ( 1 ) ( 2,139 ) — — ( 2,140 ) ESPP shares issued 61,981 1 2,241 — — 2,242 Shares repurchased ( 191,861 ) ( 2 ) ( 11,270 ) — — ( 11,272 ) Other comprehensive income, net of tax — — — — 175 175 Net income — — — 75,363 — 75,363 BALANCE — March 31, 2024 20,790,261 $ 208 $ 38,154 $ 364,549 $ 3,115 $ 406,026 See accompanying notes to consolidated financial statements. 30 HAWKINS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal Year Ended March 31, 2024 April 2, 2023 April 3, 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 75,363 $ 60,041 $ 51,542 Reconciliation to cash flows provided by operating activities: Depreciation and amortization 31,803 27,440 24,129 Change in fair value of earnout liability 571 — — Operating leases 2,708 1,971 1,899 (Gain) loss on deferred compensation assets ( 1,391 ) 334 ( 189 ) Deferred income taxes ( 1,459 ) ( 232 ) ( 1,501 ) Stock compensation expense 4,880 3,825 3,818 (Gain) loss from asset disposals ( 85 ) ( 2,950 ) 452 Other 87 87 93 Changes in operating accounts (using) providing cash, net of acquisitions: Trade receivables 21,399 ( 6,389 ) ( 30,526 ) Inventories 19,921 4,717 ( 30,034 ) Accounts payable ( 828 ) ( 11,596 ) 25,138 Accrued liabilities 10,708 ( 737 ) 2,723 Lease liabilities ( 2,676 ) ( 1,958 ) ( 1,907 ) Income taxes ( 1,390 ) 3,290 214 Other ( 112 ) ( 443 ) ( 3,014 ) Net cash provided by operating activities 159,499 77,400 42,837 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant, and equipment ( 40,151 ) ( 48,321 ) ( 28,512 ) Acquisitions ( 83,455 ) — ( 21,546 ) Proceeds from asset disposals 1,102 7,091 302 Net cash used in investing activities ( 122,504 ) ( 41,230 ) ( 49,756 ) CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ( 13,238 ) ( 12,001 ) ( 11,056 ) New shares issued 2,242 2,008 1,772 Shares surrendered for payroll taxes ( 2,140 ) ( 1,550 ) ( 1,467 ) Shares repurchased ( 11,272 ) ( 6,557 ) ( 8,545 ) Payments for debt issuance costs — — ( 287 ) Payments on senior secured revolving loan ( 98,000 ) ( 59,000 ) ( 15,000 ) Borrowings on senior secured revolving loan 85,000 45,000 42,000 Net cash (used in) provided by financing activities ( 37,408 ) ( 32,100 ) 7,417 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 413 ) 4,070 498 CASH AND CASH EQUIVALENTS - beginning of year 7,566 3,496 2,998 CASH AND CASH EQUIVALENTS - end of year $ 7,153 $ 7,566 $ 3,496 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION- Cash paid during the year for income taxes $ 28,631 $ 19,485 $ 19,726 Cash paid for interest 4,654 4,759 1,197 Noncash investing activities - Capital expenditures in accounts payable 2,697 2,340 3,733 See accompanying notes to consolidated financial statements. 31 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 — Nature of Business and Significant Accounting Policies Nature of Business - We have three reportable segments: Industrial, Water Treatment and Health and Nutrition. The Industrial Group specializes in providing industrial chemicals, products and services to industries such as agriculture, chemical processing, electronics, energy, food, pharmaceutical and plating. This group also manufactures and sells certain food-grade products, including liquid phosphates, lactates and other blended products. The Water Treatment Group specializes in providing chemicals, products, equipment, services and solutions for potable water, municipal and industrial wastewater, industrial process water, non-residential swimming pool water and agricultural water. This group has the resources and flexibility to treat systems ranging in size from a single small well to a multi-million-gallon-per-day facility. Our Health and Nutrition Group specializes in providing ingredient distribution, processing and formulation solutions to manufacturers of nutraceutical, functional food and beverage, personal care, dietary supplement and other nutritional food, health and wellness products. This group offers a diverse product portfolio including minerals, vitamins and amino acids, excipients, joint products, botanicals and herbs, sweeteners and enzymes. Fiscal Year - Our fiscal year is a 52 or 53-week year ending on the Sunday closest to March 31. Our fiscal 2024 was 52 weeks, fiscal 2023 was 52 weeks, and fiscal 2022 was 53 weeks. Fiscal 2025 will be 52 weeks. Principles of Consolidation - The consolidated financial statements include the accounts of Hawkins, Inc. and its wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated. Estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) 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 liabilities, income taxes and related accounts and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition - Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. Revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue upon transfer of control of the promised products to the customer, with revenue recognized at the point in time the customer obtains control of the products. Net sales include products and shipping charges, net of estimates for product returns and any related sales rebates. We estimate product returns based on historical return rates. Using probability assessments, we estimate sales rebates expected to be paid over the term of the contract. The majority of our contracts have a single performance obligation and are short term in nature. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. We offer certain customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenue is recognized in an amount estimated based on historical experience and contractual obligations. Shipping and Handling - All shipping and handling amounts billed to customers are included in revenues. Costs incurred related to the shipping and the handling of products are included in cost of sales. 32 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Fair Value Measurements - The financial assets and liabilities that are re-measured and reported at fair value for each reporting period are an interest rate swap, marketable securities held in a deferred compensation retirement plan, and the earnout liability recorded in conjunction with the acquisition of Water Solutions. There are no fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at fair value in our consolidated financial statements on a recurring basis. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date: Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 2: Valuation is based on quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable or can be corroborated by observable market data for the asset or liability. Level 3: Valuation is based upon unobservable inputs for the asset or liability that are supported by little or no market activity. These fair values are determined using pricing models for which the assumptions utilize management’s estimates or market participant assumptions. In making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. Cash Equivalents - Cash equivalents include all liquid debt instruments (primarily cash funds and money market accounts) purchased with an original maturity of three months or less. The cash balances, maintained at large commercial banking institutions with strong credit ratings, typically exceed federally insured limits. Trade Receivables and Concentrations of Credit Risk - Financial instruments, which potentially subject us to a concentration of credit risk, principally consist of trade receivables. We sell our principal products to a large number of customers in many different industries. As of March 31, 2024, no single customer represented more than 10 % of our total trade receivables. There are no other concentrations of credit risk with other single customers from a particular service or geographic area that would significantly impact us in the near term. To reduce credit risk, we routinely assess the financial strength of our customers. Receivables are reported net of an allowance for credit losses as determined by management at the end of each reporting period. Our receivable allowance is based on an estimate of expected credit losses, with the estimate based on a number of qualitative and quantitative factors that, based on collection experience, may have an impact on repayment risk and ability to collect. Inventories - Inventories, consisting primarily of finished goods, are primarily valued at the lower of cost or net realizable value, with cost for approximately 82 % of our inventory determined using the last-in, first-out (“LIFO”) method. Cost for the other 18 % of our total inventory is determined using the first-in, first-out (“FIFO”) method. Leases - We determine if an arrangement is a lease at inception. Right-of-use ("ROU") assets include operating leases. Lease liabilities for operating leases are classified in "short-term lease liabilities" and "long-term lease liabilities" in our consolidated balance sheet. ROU assets and related liabilities are recognized at commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease and non-lease components are generally accounted for separately for real estate leases. For non-real estate leases, we account for the lease and non-lease components as a single lease component. 33 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Property, Plant and Equipment - Property is stated at cost and depreciated or amortized over the lives of the assets, using the straight-line method. Property acquired in a business combination is recorded at the fair value of the assets on the date of acquisition. Estimated lives are generally: 10 to 40 years for buildings and improvements; 3 to 20 years for machinery and equipment; and 3 to 10 years for transportation equipment and office furniture and equipment including computer systems. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining lease term. Depreciation and amortization expense is recorded in our Consolidated Statements of Income within cost of goods sold and selling, general and administrative expense, depending on the use of the underlying asset. We recorded depreciation expense of $ 23.3 million for fiscal 2024, $ 20.5 million for fiscal 2023 and $ 17.7 million for fiscal 2022. Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any related gains or losses are included in income. We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset group may not be recoverable, such as prolonged industry downturn or significant reductions in projected future cash flows. The assessment of possible impairment is based on our ability to recover the carrying value of the asset group from the expected future pre-tax cash flows (undiscounted) of the related asset group. If these cash flows are less than the carrying value of such asset group, an impairment loss would be measured by the amount the carrying value exceeds the fair value of the long-lived asset group. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets. We did not incur any asset write-off charges in fiscal 2024, fiscal 2023, or fiscal 2022 related to the impairment of long-lived assets. Goodwill and Identifiable Intangible Assets - Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable tangible net assets and identifiable intangible assets purchased. Goodwill is tested at least annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. Our annual test for impairment is as of the first day of our fourth fiscal quarter. As of January 1, 2024, we performed an analysis of qualitative factors for our Industrial, Water Treatment and Health and Nutrition reporting units to determine whether it is more likely than not that the fair value of either of these reporting units was less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. Based on management’s analysis of qualitative factors, we determined that it was not necessary to perform a quantitative goodwill impairment test for any of these reporting units. Goodwill impairment assessments were also completed in the fourth quarters of fiscal 2023 and 2022 and, similarly, we did not record a goodwill impairment charge. Our primary identifiable intangible assets include customer relationships, trademarks and tradenames acquired in previous business acquisitions. Identifiable intangible assets with finite lives are amortized whereas identifiable intangible assets with indefinite lives are not amortized. The values assigned to the intangible assets with finite lives are being amortized on average over a remaining useful life of approximately 10 years. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. No such events or changes in circumstances occurred during fiscal 2024, 2023 or 2022. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. The impairment test consists of a qualitative assessment to determine whether it is more likely than not that the asset is impaired. Based on management’s analysis of qualitative factors, we determined that it was not necessary to perform an annual quantitative impairment test for fiscal 2024, 2023 or 2022. Business Combinations - We record business combinations using the acquisition method of accounting. Under the acquisition method of accounting, identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill. Changes in the estimated fair values of net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will adjust the amount of the purchase price allocable to goodwill. Measurement period adjustments are reflected in the period in which they occur. 34 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Income Taxes - Deferred taxes are provided for differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided to offset deferred tax assets if, based on the available evidence, it is more likely than not that some or all of the value of the deferred tax assets will not be realized. We record any interest and penalties related to income taxes as income tax expense in the Consolidated Statements of Income. Stock-Based Compensation - We account for stock-based compensation on a fair value basis. The estimated grant date fair value of each stock-based award is recognized in expense over the requisite service period (generally the vesting period). Non-vested share awards are recorded as expense over the requisite service periods based on the stock price on the date of grant. Earnings Per Share - Basic earnings per share (“EPS”) are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted EPS are computed by dividing net income by the weighted-average number of common shares outstanding including the incremental shares assumed to be issued as performance units and restricted stock. Basic and diluted EPS were calculated using the following: March 31, 2024 April 02, 2023 April 3, 2022 Weighted average common shares outstanding — basic 20,864,348 20,848,077 20,947,234 Dilutive impact of stock performance units and restricted stock 149,978 166,828 188,024 Weighted average common shares outstanding — diluted 21,014,326 21,014,905 21,135,258 There were no shares or stock options excluded from the calculation of weighted average common shares for diluted EPS for fiscal 2024, 2023 or 2022. Derivative Instruments and Hedging Activities - We are subject to interest rate risk associated with our variable rate debt. We have in place an interest rate swap agreement which has been designated as a cash flow hedge, the purpose of which is to eliminate the cash flow impact of interest rate changes on a portion of our variable-rate debt. The interest rate swap is measured at fair value on the contract date and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of a derivative that is highly effective, and that is designated and qualifies as a cash flow hedge, are recorded in other comprehensive income, until the consolidated statement of income is affected by the variability in cash flows of the designated hedged item. To the extent that the hedge is ineffective, changes in the fair value are recognized in the Consolidated Statements of Income. Recently Issued Accounting Pronouncements Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU No.2023-09) In December 2023, the Financial Accounting Standards Board ("FASB") issued accounting standards update No. 2023-09 to enhance the transparency and decision-usefulness of income tax disclosures and to provide information to better assess how an entity's operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2024. We are in the process of evaluating the impact of this standard on the disclosures in our financial statements. Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07) In November 2023, the FASB issued accounting standards update No. 2023-07 to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The update requires public entities to disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker ("CODM"), the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The amendments in this update are effective for public entities in fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 and are to be applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. We are in the process of evaluating the impact of this standard on the disclosures in our financial statements. 35 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 2 — Acquisitions and Asset Sales Acquisition of Industrial Research Corporation: On March 8, 2024, we acquired substantially all the assets of Industrial Research Corporation ("Industrial Research") for $ 4.6 million under the terms of a purchase agreement with Industrial Research and its shareholders. Industrial Research distributed water treatment chemicals and equipment to customers primarily in central to northern Louisiana, eastern Texas and southern Arkansas. 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. The acquisition has been accounted for under the acquisition method of accounting, under which the total purchase price is allocated to the net tangible and intangible assets and liabilities of Industrial Research acquired in connection with the acquisition based on their estimated fair values. We estimated the fair values of the assets acquired and liabilities assumed using a discounted cash flow analysis (income approach). Of the $ 4.6 million purchase price, $ 2.2 million was allocated to customer relationships, to be amortized over 10 years. The remaining amount was allocated to net working capital and property, plant and equipment, with the residual amount of $ 1.7 million allocated to goodwill. The goodwill recognized as a result of this acquisition is primarily attributable to strategic and synergistic benefits, as well as the assembled workforce. Such goodwill is expected to be deductible for tax purposes. Acquisition of The Miami Products & Chemical Company: On October 31, 2023, we acquired substantially all the assets of The Miami Products & Chemical Company ("Miami Products") for $ 15.5 million 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. Costs associated with this transaction were not material and were expensed as incurred. The acquisition has been accounted for under the acquisition method of accounting, under which the total purchase price is allocated to the net tangible and intangible assets and liabilities of Miami Products acquired in connection with the acquisition based on their estimated fair values. We estimated the fair values of the assets acquired and liabilities assumed using a discounted cash flow analysis (income approach). Of the $ 15.5 million purchase price, $ 8.2 million was allocated to customer relationships, to be amortized over 11 years, and $ 0.8 million was allocated to trade names, to be amortized over 10 years. The remaining amount was allocated to net working capital and property, plant and equipment, with the residual amount of $ 3.2 million allocated to goodwill. The goodwill recognized as a result of this acquisition is primarily attributable to strategic and synergistic benefits, as well as the assembled workforce. Such goodwill is expected to be deductible for tax purposes. Acquisition of Water Solutions Unlimited, Inc.: 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. We paid $ 60 million at closing and may be obligated to pay an additional amount based on achieving a certain earnings target three years after the acquisition. 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. Costs associated with this transaction were not material and were expensed as incurred. The acquisition has been accounted for under the acquisition method of accounting, under which the total purchase price is allocated to the net tangible and intangible assets and liabilities of Water Solutions acquired in connection with the acquisition based on their estimated fair values. We estimated the fair values of the assets acquired and liabilities assumed using a discounted cash flow analysis (income approach). The total purchase price was estimated to be $ 70.7 million, including the estimated potential earnout to be paid of $ 10.7 million. Of the $ 70.7 million purchase price, $ 32.4 million was allocated to customer relationships, to be amortized over 13 years, $ 6.4 million was allocated to trade names, to be amortized over 10 years, and $ 0.2 million was allocated to non-compete agreements, to be amortized over five years. The remaining amount was allocated to net working capital and property, plant and equipment, with the residual amount of $ 21.0 million allocated to goodwill. The goodwill recognized as a result of this acquisition is primarily attributable to strategic and synergistic benefits, as well as the assembled workforce. Such goodwill is expected to be deductible for tax purposes. 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 relationships, 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. 36 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Sale of bleach packaging assets: On March 30, 2023, we sold certain assets in our Industrial segment related to our consumer bleach packaging business for $ 7 million. These assets were not 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 was 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 both operating segments and types of product 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 table disaggregates external customer net sales by major revenue stream: Fiscal Year Ended March 31, 2024: (In thousands) Industrial Water Treatment Health and Nutrition Total Manufactured, blended or repackaged products (1) $ 345,837 $ 327,188 $ 36,375 $ 709,400 Distributed specialty products (2) — — 108,789 108,789 Bulk products (3) 55,720 32,349 — 88,069 Other 7,908 3,752 1,244 12,904 Total external customer sales $ 409,465 $ 363,289 $ 146,408 $ 919,162 Fiscal Year Ended April 2, 2023: (In thousands) Industrial Water Treatment Health and Nutrition Total Manufactured, blended or repackaged products (1) $ 383,612 $ 271,448 $ 48,575 $ 703,635 Distributed specialty products (2) — — 109,468 109,468 Bulk products (3) 77,479 27,996 — 105,475 Other 9,669 5,481 1,370 16,520 Total external customer sales $ 470,760 $ 304,925 $ 159,413 $ 935,098 Fiscal Year Ended April 3, 2022: (In thousands) Industrial Water Treatment Health and Nutrition Total Manufactured, blended or repackaged products (1) $ 318,514 $ 205,350 $ 34,690 $ 558,554 Distributed specialty products (2) — — 124,312 124,312 Bulk products (3) 61,443 20,211 — 81,654 Other 6,981 2,572 468 10,021 Total external customer sales $ 386,938 $ 228,133 $ 159,470 $ 774,541 (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. 37 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 4 — Derivative Instruments 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. We have designated this swap as a cash flow hedge and have determined that it qualifies for hedge accounting treatment. For so long as the hedge is effective, changes in fair value of the cash flow hedge are recorded in other comprehensive income or loss (net of tax) until income or loss from the cash flows of the hedged item is realized. For fiscal 2024, 2023 and 2022, we recorded $ 0.2 million, $ 1.6 million, and $ 1.3 million, respectively, in other comprehensive income related to unrealized gains (net of tax) on the cash flow hedge. Included in other long-term assets on our consolidated balance sheet was $ 4.3 million as of March 31, 2024 and $ 4.0 million as of April 2, 2023. By their nature, derivative instruments are subject to market risk. Derivative instruments are also subject to credit risk associated with counterparties to the derivative contracts. Credit risk associated with derivatives is measured based on the replacement cost should the counterparty with a contract in a gain position to us fail to perform under the terms of the contract. While the current interest rate swap is in effect, we do not anticipate nonperformance by the counterparty. Note 5 – Fair Value Measurements Our financial assets and liabilities are measured at fair value as 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 re-measured and reported at fair value for each reporting period are an interest rate swap, marketable securities held in a deferred compensation retirement plan, and the earnout liability recorded in conjunction with the acquisition of Water Solutions. The interest rate swap and assets held in a deferred compensation retirement plan are classified as other 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 earnout liability is classified as a long-term liability on our balance sheet. 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 earnout liability recorded in conjunction with the Water Solutions acquisition is based upon achieving certain targets. The earnout is based on a target of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in year three of the acquisition. The earnout liability was valued based upon a risk-neutral pricing analysis within a Monte Carlo simulation framework, which is a Level 3 input. The Monte Carlo simulation assumptions used to estimate the fair value of the earnout included forecasted EBITDA, an estimated EBITDA-specific required rate of return, term period, risk-free rate, and an estimated EBITDA-specific volatility. Other key inputs included an estimate of our credit-adjusted discount rate and an appropriate risk-free rate over the term of the simulation period. The earnout liability is adjusted to fair value at each reporting date until settled. Changes in fair value are included in selling, general and administrative expenses in our Consolidated Statements of Income. 38 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes the balances of assets measured at fair value on a recurring basis as of March 31, 2024 and April 2, 2023. (In thousands) March 31, 2024 April 2, 2023 Assets Deferred compensation plan assets Level 1 $ 10,042 $ 7,659 Interest rate swap Level 2 4,268 4,028 Liabilities Earnout liability Level 3 11,235 — Changes in the earnout liability measured at fair value using Level 3 inputs were as follows: (In thousands) Earnout liability at April 2, 2023 $ — Addition for acquisition 10,664 Fair value adjustments 571 Earnout liability at March 31, 2024 $ 11,235 0 Note 6 — Inventories Inventories at March 31, 2024 and April 2, 2023 consisted of the following: 2024 2023 (In thousands) Inventory (FIFO basis) $ 99,058 $ 128,589 LIFO reserve ( 24,458 ) ( 39,812 ) Net inventory $ 74,600 $ 88,777 The FIFO value of inventories accounted for under the LIFO method was $ 76.2 million at March 31, 2024 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 Other Identifiable Intangible Assets The carrying amount of goodwill for each of our three reportable segments were as follows: (In thousands) Industrial Water Treatment Health and Nutrition Total Balance as of April 3, 2022 and April 2, 2023 $ 6,495 $ 25,961 $ 44,945 $ 77,401 Addition due to acquisitions — 25,998 — 25,998 Balance as of March 31, 2024 $ 6,495 $ 51,959 $ 44,945 $ 103,399 39 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following is a summary of our identifiable intangible assets as of March 31, 2024 and April 2, 2023: 2024 Gross Amount Accumulated Amortization Net carrying value (In thousands) Finite-life intangible assets: Customer relationships $ 153,694 $ ( 46,146 ) $ 107,548 Trademarks and trade names 13,570 ( 5,968 ) 7,602 Other finite-life intangible assets 4,221 ( 3,972 ) 249 Total finite-life intangible assets 171,485 ( 56,086 ) 115,399 Indefinite-life intangible assets 1,227 — 1,227 Total intangible assets, net $ 172,712 $ ( 56,086 ) $ 116,626 2023 Gross Amount Accumulated Amortization Net carrying value (In thousands) Finite-life intangible assets: Customer relationships $ 109,107 $ ( 38,377 ) $ 70,730 Trademarks and trade names 6,370 ( 5,267 ) 1,103 Other finite-life intangible assets 3,904 ( 3,904 ) — Total finite-life intangible assets 119,381 ( 47,548 ) 71,833 Indefinite-life intangible assets 1,227 — 1,227 Total intangible assets, net $ 120,608 $ ( 47,548 ) $ 73,060 Intangible asset amortization expense was $ 8.5 million during fiscal 2024, $ 6.9 million during fiscal 2023, and $ 6.5 million during fiscal 2022. The estimated future amortization expense for identifiable intangible assets is as follows: (In thousands) Intangible Assets Fiscal 2025 $ 11,156 Fiscal 2026 10,972 Fiscal 2027 10,671 Fiscal 2028 10,577 Fiscal 2029 10,553 Thereafter 61,470 Total $ 115,399 Note 8 – Debt We have in place a Credit Agreement with U.S. Bank as Sole Lead Arranger and Sole Book Runner, and other lenders from time to time party thereto, whereby U.S. Bank is also serving as Administrative Agent. The Credit Agreement provides us with a “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. 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. The commitment fee is between 0.15 % and 0.25 %, depending on our leverage ratio. Unamortized debt issuance costs of $ 0.3 million paid in connection with the previous credit facility, are reflected as a reduction of debt and are being amortized as interest expense over the term of the Revolving Loan Facility. 40 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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. As of March 31, 2024, we were in compliance with all required covenants. Debt at March 31, 2024 and April 2, 2023 consisted of the following: (In thousands) March 31, 2024 April 2, 2023 Senior secured revolving loan $ 99,000 $ 112,000 Less: unamortized debt issuance costs ( 269 ) ( 356 ) Total debt, net of debt issuance costs 98,731 111,644 Less: current portion of long-term debt, net of current unamortized debt issuance costs ( 9,913 ) ( 9,913 ) Total long-term debt $ 88,818 $ 101,731 41 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 9 — Share-Based Compensation Performance-Based Restricted Stock Units. Our Board of Directors has approved a performance-based equity compensation arrangement for our executive officers. This performance-based arrangement provides for the grant of performance-based restricted stock units that represent a possible future issuance of restricted shares of our common shares based on our pre-tax income target for the applicable fiscal year. The actual number of restricted shares to be issued to each executive officer will be 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 two years after the end of the fiscal year on which the performance is based. We record the compensation expense for the outstanding performance share units and then-converted restricted stock over the life of the awards. The following table represents the restricted stock activity for fiscal 2022, 2023, and 2024: Shares Weighted- Average Grant Date Fair Value Outstanding at beginning of fiscal 2022 239,120 $ 17.94 Granted 111,618 31.74 Vested ( 123,002 ) 17.25 Forfeited ( 13,258 ) 18.69 Outstanding at end of fiscal 2022 214,478 $ 25.48 Granted 88,524 38.31 Vested ( 102,860 ) 18.69 Forfeited ( 10,884 ) 34.68 Outstanding at end of fiscal 2023 189,258 $ 34.64 Granted 61,819 43.06 Vested ( 105,600 ) 31.74 Outstanding at end of fiscal 2024 145,477 $ 40.33 We recorded compensation expense on performance-based restricted stock of approximately $ 3.7 million for fiscal 2024, $ 2.8 million for fiscal 2023 and $ 2.9 million for fiscal 2022, substantially all of which was recorded in SG&A expense in the Consolidated Statements of Income. The total fair value of performance-based restricted stock units vested was $ 3.4 million in fiscal 2024, $ 1.9 million in fiscal 2023 and $ 2.1 million in fiscal 2022. Until the performance-based restricted stock units result in the issuance of restricted stock, the amount of expense recorded each period is dependent upon our estimate of the number of shares that will ultimately be issued and our then current common share price. Upon issuance of restricted stock, we record compensation expense over the remaining vesting period using the award date closing price. Unrecognized compensation expense related to non-vested restricted stock and non-vested restricted share units as of March 31, 2024 was $ 4.5 million and is expected to be recognized over a weighted average period of 1.2 years. 42 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 expensed over a one-year vesting period, based on the market value on the date of grant. The following table represents the Board’s restricted stock activity for fiscal 2022, 2023, and 2024: Shares Weighted- Average Grant Date Fair Value Outstanding at beginning of fiscal 2022 11,228 $ 25.60 Granted 10,287 32.80 Vested ( 11,228 ) 25.60 Outstanding at end of fiscal 2022 10,287 $ 32.80 Granted 12,565 38.98 Vested ( 10,287 ) 32.80 Outstanding at end of fiscal 2023 12,565 $ 38.98 Granted 10,647 46.00 Vested ( 12,565 ) 38.98 Outstanding at end of fiscal 2024 10,647 $ 46.00 Annual expense related to the value of restricted stock was $ 0.5 million in fiscal 2024, $ 0.4 million in fiscal 2023, and $ 0.3 million in fiscal 2022, and was recorded in SG&A expense in the Consolidated Statements of Income. Unrecognized compensation expense related to non-vested restricted stock awards as of March 31, 2024 was $ 0.2 million and is expected to be recognized over a weighted average period of 0.3 years. Note 10 — Share Repurchases Our board of directors has authorized the repurchase of up to 2,600,000 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 repurchase of the shares, we reduce our common shares for the par value of the shares with the excess applied against additional paid-in capital. We repurchased 191,861 common shares at an aggregate purchase price of $ 11.3 million during fiscal 2024. We repurchased 181,657 common shares at an aggregate purchase price of $ 6.6 million during fiscal 2023. We repurchased 240,501 common shares at an aggregate purchase price of $ 8.5 million during fiscal 2022. As of March 31, 2024, the number of shares available to be purchased under the share repurchase program was 937,487 . Note 11 — Retirement Plans Company Sponsored Plans . The majority of our non-bargaining unit employees are eligible to participate in a company-sponsored profit sharing plan. Contributions are made at our discretion subject to a maximum amount allowed under the Internal Revenue Code (“IRC”). The profit sharing plan contribution level for each employee depends upon date of hire, and was 2.5 % or 5.0 % of each employee’s eligible compensation for fiscal 2024, 2023 and 2022. We also have in place a retirement plan covering our collective bargaining unit employees. The retirement plan provides for a contribution of 2.5 % or 5.0 % of each employee’s eligible annual wages depending on their hire date. In addition to the employer contributions described above, both the profit sharing plan and the retirement plan include a 401(k) plan that allows employees to contribute pre-tax earnings up to the maximum amount allowed under the IRC, with an employer match of up to 5 % of the employee’s eligible compensation. We have two employee stock ownership plans (“ESOPs”), one covering the majority of our non-bargaining unit employees and the other covering our collective bargaining unit employees. Contributions to the plan covering our non-bargaining unit employees are made at our discretion. Contributions to both plans are subject to a maximum amount allowed under the IRC, and were 2.5 % or 5.0 % of each employee’s eligible wages, depending on each eligible employee’s hire date, for fiscal 2024, 2023 and 2022. 43 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) We have a nonqualified deferred compensation plan covering employees who are classified as “highly compensated employees” as determined by IRS guidelines for the plan year and who were hired on or before April 1, 2012. Employees who are eligible for the nonqualified deferred compensation plan for any plan year are not eligible for the profit sharing plan contribution or the ESOP contributions described above for that plan year. Our contribution to the nonqualified deferred compensation plan for fiscal 2024, 2023 and 2022 was 10 % of each employee’s eligible compensation, subject to the maximum amount allowed under the IRC. We have an employee stock purchase plan (“ESPP”) covering substantially all of our employees. The ESPP allows employees to purchase newly-issued shares of the Company’s common shares at a discount from market. The number of new shares issued under the ESPP was 61,981 in fiscal 2024, 65,597 in fiscal 2023 and 71,692 in fiscal 2022. The following represents the contribution expense for these company-sponsored plans for fiscal 2024, 2023 and 2022: (In thousands) 2024 2023 2022 Non-bargaining unit employee plans: Profit sharing $ 2,340 $ 1,067 $ 1,056 401(k) matching contributions 3,564 3,247 3,122 ESOP 2,340 1,067 1,056 Nonqualified deferred compensation plan 2,060 1,633 1,355 Bargaining unit employee plans 652 618 589 ESPP - all employees 689 619 549 Total contribution expense $ 11,645 $ 8,251 $ 7,727 In 2013, we withdrew from a collectively bargained multiemployer pension plan and recorded a liability for our share of the unfunded vested benefits. Payments of approximately $ 0.5 million per year are being made through 2034. Note 12 — Commitments and Contingencies Litigation. As of March 31, 2024, there were 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. Legal fees associated with such matters are expensed as incurred. Environmental Remediation. In the fourth quarter of fiscal 2024, we recorded a liability of $ 7.7 million related to estimated remediation expenses associated with perchlorinated biphenyls ("PCBs") discovered in the soil at our Rosemount, MN facility during our expansion project. This expense was recorded as an operating expense within cost of goods sold in our Consolidated Statements of Income. We acquired the property, which had prior heavy industrial use, in fiscal 2012. While the source of the PCBs is unknown, we have never brought PCBs onto the property or used PCBs on the site. The liability is not discounted as management expects to incur these expenses within the next twelve months. Given the many uncertainties involved in assessing environmental claims, our reserves may prove to be insufficient. While it is possible that additional expense related to the remediation will be incurred in future periods if currently unknown issues arise, we are unable to estimate the extent of any further financial impact. Asset Retirement Obligations. We have three leases of land which contain terms that state that at the end of the lease term, we have a specified amount of time to remove the property and buildings. Including available lease extensions, these leases expire in 2024, 2033 and 2044. At that time, anything that remains on the land becomes the property of the lessor, and the lessor has the option to either maintain the property or remove the property at our expense. We have not been able to reasonably estimate the fair value of the asset retirement obligations, primarily due to the combination of the following factors: certain of the leases do not expire in the near future; we have a history of extending the leases with the lessors and currently intend to do so at expiration of the lease periods; the lessors do not have a history of terminating leases with their tenants; and because it is more likely than not that the buildings will have value at the end of the lease life and therefore, may not be removed by either the lessee or the lessor. Therefore, in accordance with accounting guidance related to asset retirement and environmental obligations, we have not recorded an asset retirement obligation as of March 31, 2024. We will continue to monitor the factors surrounding the requirement to record an asset retirement obligation and will recognize the fair value of a liability in the period in which it is incurred and a reasonable estimate can be made. 44 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 13 — Income Taxes The provisions for income taxes for fiscal 2024, 2023 and 2022 were as follows: 2024 2023 2022 (In thousands) Federal — current $ 21,872 $ 15,072 $ 14,736 State — current 5,369 7,701 5,202 Total current 27,241 22,773 19,938 Federal — deferred ( 1,146 ) 704 ( 1,054 ) State — deferred ( 313 ) ( 936 ) ( 447 ) Total deferred ( 1,459 ) ( 232 ) ( 1,501 ) Total provision $ 25,782 $ 22,541 $ 18,437 Reconciliations of the provisions for income taxes to the applicable federal statutory income tax rate for fiscal 2024, 2023 and 2022 are listed below. 2024 2023 2022 Statutory federal income tax 21.0 % 21.0 % 21.0 % State income taxes, net of federal deduction 5.4 % 6.8 % 5.6 % Other — net ( 0.9 ) % ( 0.5 ) % ( 0.3 ) % Total 25.5 % 27.3 % 26.3 % The tax effects of items comprising our net deferred tax liability as of March 31, 2024 and April 2, 2023 are as follows: (In thousands) 2024 2023 Deferred tax assets: Trade receivables $ 96 $ 51 Stock compensation accruals 2,224 2,027 Pension withdrawal liability 1,056 1,155 Lease liability 3,242 2,820 Inventories 2,645 2,437 Other 5,963 3,335 Total deferred tax assets $ 15,226 $ 11,825 Deferred tax liabilities: Prepaid expenses $ ( 1,119 ) $ ( 1,089 ) Excess of tax over book depreciation ( 18,428 ) ( 16,360 ) Intangible assets ( 13,771 ) ( 14,334 ) ROU asset ( 3,162 ) ( 2,754 ) Unrealized gain on interest rate swap ( 1,152 ) ( 1,087 ) Total deferred tax liabilities $ ( 37,632 ) $ ( 35,624 ) Net deferred tax liabilities $ ( 22,406 ) $ ( 23,799 ) As of March 31, 2024, the Company has determined that it is more likely than not that the deferred tax assets at March 31, 2024 will be realized either through future taxable income or reversals of taxable temporary differences. 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 28, 2021 are closed to examination by the Internal Revenue Service, and with few exceptions, state and local income tax jurisdictions. 45 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 14 – Leases Lease Obligations. As of March 31, 2024, we were obligated under operating lease agreements for certain manufacturing facilities, warehouse space, the land on which some of our facilities sit, vehicles and information technology equipment. Our leases have remaining lease terms of 1 year to 21 years, some of which include options to extend the lease for up to 15 years . As of March 31, 2024 and April 2, 2023, our operating lease components with initial or remaining terms in excess of one year were classified on the consolidated balance sheet within right-of-use assets, short-term lease liability and long-term lease liability. Total lease expense was $ 4.0 million for the twelve months ended March 31, 2024 and $ 3.1 million for the twelve months ended April 2, 2023, and includes leases less than 12 months in duration. Other information related to our operating leases was as follows: March 31, 2024 April 2, 2023 Lease Term and Discount Rate Weighted average remaining lease term (years) 6.48 7.84 Weighted average discount rate 4.0 % 2.8 % Maturities of lease liabilities as of March 31, 2024 were as follows: (In thousands) Operating Leases Fiscal 2025 $ 2,870 Fiscal 2026 2,548 Fiscal 2027 2,079 Fiscal 2028 1,819 Fiscal 2029 1,475 Thereafter 2,819 Total $ 13,610 Less: Interest ( 1,602 ) Present value of lease liabilities $ 12,008 46 HAWKINS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Note 15 — 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. Product costs and expenses for each segment are based on actual costs incurred along with cost allocations of shared and centralized functions. We evaluate performance based on operating income. 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 customer service or purchasing functions. There are no intersegment sales and no operating segments have been aggregated. Reportable Segments Industrial Water Treatment Health and Nutrition Total (In thousands) Fiscal Year Ended March 31, 2024: Sales $ 409,465 $ 363,289 $ 146,408 $ 919,162 Gross profit 67,545 98,498 27,593 193,636 Selling, general, and administrative expenses 28,316 45,286 15,998 89,600 Operating income 39,229 53,212 11,595 104,036 Identifiable assets* $ 239,586 $ 255,188 $ 134,915 $ 629,689 Capital expenditures $ 24,280 $ 15,739 $ 132 $ 40,151 Fiscal Year Ended April 2, 2023: Sales $ 470,760 $ 304,925 $ 159,413 $ 935,098 Gross profit 68,115 67,208 29,796 165,119 Selling, general, and administrative expenses 25,703 35,734 15,532 76,969 Operating income 42,412 31,474 14,264 88,150 Identifiable assets* $ 253,436 $ 155,430 $ 155,626 $ 564,492 Capital expenditures $ 31,635 $ 16,311 $ 375 $ 48,321 Fiscal Year Ended April 3, 2022: Sales $ 386,938 $ 228,133 $ 159,470 $ 774,541 Gross profit 59,606 54,571 32,343 146,520 Selling, general, and administrative expenses 28,127 31,357 15,842 75,326 Operating income 31,479 23,214 16,501 71,194 Identifiable assets* $ 236,934 $ 143,889 $ 167,034 $ 547,857 Capital expenditures $ 18,812 $ 8,939 $ 761 $ 28,512 * Unallocated assets not included, consisting primarily of cash and cash equivalents, prepaid expenses, and non-qualified deferred compensation plan assets of $ 28.2 million at March 31, 2024, $ 26.0 million at April 2, 2023 and $ 19.5 million at April 3, 2022 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.