HAWKINS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS HAWKINS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data) December 29, 2024 March 31, 2024 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 8,305 $ 7,153 Trade accounts receivables, net 111,521 114,477 Inventories 81,634 74,600 Prepaid expenses and other current assets 8,895 6,596 Total current assets 210,355 202,826 PROPERTY, PLANT, AND EQUIPMENT: 410,427 386,648 Less accumulated depreciation 189,984 177,774 Net property, plant, and equipment 220,443 208,874 OTHER ASSETS: Right-of-use assets 13,096 11,713 Goodwill 116,738 103,399 Intangible assets, net of accumulated amortization 130,474 116,626 Deferred compensation plan asset 11,892 9,584 Other 4,242 4,912 Total other assets 276,442 246,234 Total assets $ 707,240 $ 657,934 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable — trade $ 39,891 $ 56,387 Accrued payroll and employee benefits 18,371 19,532 Income tax payable — 1,943 Current portion of long-term debt 9,913 9,913 Environmental remediation 7,700 7,700 Other current liabilities 8,379 7,832 Total current liabilities 84,254 103,307 LONG-TERM LIABILITIES: Long-term debt, less current portion 103,884 88,818 Long-term lease liability 10,613 9,530 Pension withdrawal liability 3,252 3,538 Deferred income taxes 22,120 22,406 Deferred compensation liability 13,413 11,764 Earnout liability 12,262 11,235 Other long-term liabilities 461 1,310 Total long-term liabilities 166,005 148,601 Total liabilities 250,259 251,908 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock; authorized: 60,000,000 shares of $ 0.01 par value; 20,766,764 and 20,790,261 shares issued and outstanding as of December 29, 2024 and March 31, 2024, respectively 208 208 Additional paid-in capital 32,783 38,154 Retained earnings 421,682 364,549 Accumulated other comprehensive income 2,308 3,115 Total shareholders’ equity 456,981 406,026 Total liabilities and shareholders’ equity $ 707,240 $ 657,934 See accompanying notes to condensed consolidated financial statements. 1 HAWKINS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except share and per-share data) Three Months Ended Nine Months Ended December 29, 2024 December 31, 2023 December 29, 2024 December 31, 2023 Sales $ 226,205 $ 208,496 $ 729,113 $ 696,142 Cost of sales ( 177,781 ) ( 166,248 ) ( 555,812 ) ( 548,017 ) Gross profit 48,424 42,248 173,301 148,125 Selling, general and administrative expenses ( 27,361 ) ( 23,774 ) ( 78,702 ) ( 64,173 ) Operating income 21,063 18,474 94,599 83,952 Interest expense, net ( 1,216 ) ( 1,168 ) ( 3,906 ) ( 3,033 ) Other income 436 853 1,268 901 Income before income taxes 20,283 18,159 91,961 81,820 Income tax expense ( 5,262 ) ( 3,274 ) ( 23,943 ) ( 20,289 ) Net income $ 15,021 $ 14,885 $ 68,018 $ 61,531 Weighted average number of shares outstanding - basic 20,766,764 20,781,632 20,780,213 20,864,349 Weighted average number of shares outstanding - diluted 20,875,387 20,907,321 20,902,456 21,004,077 Basic earnings per share $ 0.72 $ 0.72 $ 3.27 $ 2.95 Diluted earnings per share $ 0.72 $ 0.71 $ 3.25 $ 2.93 Cash dividends declared per common share $ 0.18 $ 0.16 $ 0.52 $ 0.47 See accompanying notes to condensed consolidated financial statements. 2 HAWKINS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands) Three Months Ended Nine Months Ended December 29, 2024 December 31, 2023 December 29, 2024 December 31, 2023 Net income $ 15,021 $ 14,885 $ 68,018 $ 61,531 Other comprehensive income, net of tax: Unrealized gain (loss) on interest rate swap 629 ( 1,299 ) ( 807 ) ( 244 ) Total comprehensive income $ 15,650 $ 13,586 $ 67,211 $ 61,287 See accompanying notes to condensed consolidated financial statements. 3 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 — March 31, 2024 20,790,261 $ 208 $ 38,154 $ 364,549 $ 3,115 $ 406,026 Cash dividends declared and paid ($ 0.16 per share) — — — ( 3,358 ) — ( 3,358 ) Share-based compensation expense — — 1,467 — — 1,467 Vesting of restricted stock 83,658 1 ( 1 ) — — — Shares surrendered for payroll taxes ( 34,047 ) ( 1 ) ( 2,540 ) — — ( 2,541 ) Shares repurchased ( 105,541 ) ( 1 ) ( 9,148 ) — — ( 9,149 ) Other comprehensive income, net of tax — — — — ( 106 ) ( 106 ) Net income — — — 28,879 — 28,879 BALANCE — June 30, 2024 20,734,331 $ 207 $ 27,932 $ 390,070 $ 3,009 $ 421,218 Cash dividends declared and paid ($ 0.18 per share) — — — ( 3,763 ) — ( 3,763 ) Share-based compensation expense — — 1,832 — — 1,832 Vesting of restricted stock 10,647 — — — — — ESPP shares issued 21,786 1 1,296 — — 1,297 Other comprehensive income, net of tax — — — — ( 1,330 ) ( 1,330 ) Net income — — — 24,118 — 24,118 BALANCE — September 29, 2024 20,766,764 $ 208 $ 31,060 $ 410,425 $ 1,679 $ 443,372 Cash dividends declared and paid ($ 0.18 per share) — — — ( 3,764 ) — ( 3,764 ) Share-based compensation expense — — 1,723 — — 1,723 Other comprehensive loss, net of tax — — — — 629 629 Net income — — — 15,021 — 15,021 BALANCE — December 29, 2024 20,766,764 $ 208 $ 32,783 $ 421,682 $ 2,308 $ 456,981 4 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 Cash dividends declared and paid ($ 0.16 per share) — — — ( 3,351 ) — ( 3,351 ) Share-based compensation expense — — 1,287 — — 1,287 ESPP shares issued 26,731 — 1,096 — — 1,096 Shares repurchased ( 24,065 ) — ( 1,520 ) — — ( 1,520 ) Other comprehensive income, net of tax — — — — ( 1,299 ) ( 1,299 ) Net income — — — 14,885 $ — 14,885 BALANCE — December 31, 2023 20,790,292 $ 208 $ 36,781 $ 354,069 $ 2,696 $ 393,754 See accompanying notes to condensed consolidated financial statements. 5 HAWKINS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Nine Months Ended December 29, 2024 December 31, 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 68,018 $ 61,531 Reconciliation to cash flows: Depreciation and amortization 29,368 22,849 Change in fair value of earnout liability 1,027 — Operating leases 2,557 1,884 Gain on deferred compensation assets ( 1,268 ) ( 901 ) Stock compensation expense 5,022 3,506 Other ( 4 ) 70 Changes in operating accounts providing (using) cash: Trade receivables 6,157 22,500 Inventories ( 5,682 ) 25,665 Accounts payable ( 16,026 ) ( 14,334 ) Accrued liabilities ( 1,698 ) ( 610 ) Lease liabilities ( 2,565 ) ( 1,804 ) Income taxes ( 2,636 ) ( 1,824 ) Other ( 2,018 ) ( 922 ) Net cash provided by operating activities 80,252 117,610 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant, and equipment ( 30,008 ) ( 28,248 ) Acquisitions ( 43,400 ) ( 78,855 ) Other 586 723 Net cash used in investing activities ( 72,822 ) ( 106,380 ) CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends declared and paid ( 10,885 ) ( 9,886 ) New shares issued 1,297 2,243 Payroll taxes paid in exchange for shares withheld ( 2,541 ) ( 2,140 ) Shares repurchased ( 9,149 ) ( 11,272 ) Payments on revolving loan ( 50,000 ) ( 67,000 ) Proceeds from revolving loan borrowings 65,000 75,000 Net cash used in financing activities ( 6,278 ) ( 13,055 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,152 ( 1,825 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,153 7,566 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,305 $ 5,741 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for income taxes $ 26,566 $ 22,125 Cash paid for interest $ 4,208 $ 3,252 Noncash investing activities - capital expenditures in accounts payable $ 1,152 $ 2,887 See accompanying notes to condensed consolidated financial statements. 6 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 March 31, 2024 , 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 nine months ended December 29, 2024 are not necessarily indicative of the results that may be expected for the full year. References to fiscal 2024 refer to the fiscal year ended March 31, 2024 and references to fiscal 2025 refer to the fiscal year ending March 30, 2025. 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 March 31, 2024 , previously filed with the SEC. There has been no significant change in our accounting policies since the end of fiscal 2024. 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. 7 Note 2 — Acquisitions Acquisition of Waterguard, Inc.: On October 30, 2024, we acquired substantially all the assets of Waterguard, Inc. ("Water Guard") for $ 18.0 million under the terms of a purchase agreement with Water Guard and its shareholders. Water Guard distributes water treatment chemicals and equipment to its customers primarily throughout North Carolina. Of the $ 18.0 million purchase price, $ 9.3 million was allocated to customer relationships, to be amortized over 15 years, $ 5.1 million was allocated to goodwill, $ 1.2 million was allocated to property, plant and equipment, and the remaining amount was allocated to net working capital. 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. The purchase price allocation is not yet complete due to the timing of the acquisition. 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. Acquisition of Wofford Water Service, Inc.: On June 28, 2024, we acquired substantially all the assets of Wofford Water Service, Inc. ("Wofford") for $ 3.4 million under the terms of a purchase agreement with Wofford and its shareholders. Wofford distributed water treatment chemicals and equipment to customers mainly in Mississippi. Of the $ 3.4 million purchase price, $ 2.2 million was allocated to customer relationships, to be amortized over 10 years, $ 1.0 million was allocated to goodwill, and the remaining amount was allocated to net working capital. 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. 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. Acquisition of Intercoastal Trading, Inc.: On June 3, 2024, we acquired substantially all the assets of Intercoastal Trading, Inc. and certain related entities ("Intercoastal") for $ 22.0 million under the terms of a purchase agreement with Intercoastal and its shareholders. Intercoastal distributes water treatment chemicals and equipment to its customers in Maryland, Delaware and Virginia. Of the $ 22.0 million purchase price, $ 10.7 million was allocated to customer relationships, to be amortized over 15 years, $ 0.3 million to trade names, to be amortized over two years, $ 0.1 million to non-compete agreements, to be amortized over one year, $ 7.2 million to goodwill, $2.4 million was allocated to property, plant and equipment, and the remaining amount to net working capital. 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. 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. Acquisition of Industrial Research Corporation: In the fourth quarter of fiscal 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. Acquisition of The Miami Products & Chemical Company: In the third quarter of fiscal 2024, 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 is 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. Acquisition of Water Solutions Unlimited, Inc.: In the third quarter of fiscal 2024, 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 is 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. Acquisition of EcoTech Enterprises, Inc.: In the second quarter of fiscal 2024, 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 results of operations since the acquisition date and the assets are included in our Water Treatment segment. 8 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 three and nine months ended December 29, 2024 and December 31, 2023: Three months ended December 29, 2024 (In thousands) Water Treatment Industrial Health and Nutrition Total Manufactured, blended or repackaged products (1) $ 89,367 $ 76,306 $ 9,240 $ 174,913 Distributed specialty products (2) — — 25,018 25,018 Bulk products (3) 9,136 14,075 — 23,211 Other 1,249 1,616 198 3,063 Total external customer sales $ 99,752 $ 91,997 $ 34,456 $ 226,205 Three months ended December 31, 2023 (In thousands) Water Treatment Industrial Health and Nutrition Total Manufactured, blended or repackaged products (1) $ 73,406 $ 78,313 $ 7,857 $ 159,576 Distributed specialty products (2) — — 25,678 25,678 Bulk products (3) 7,629 12,921 — 20,550 Other 984 1,756 ( 48 ) 2,692 Total external customer sales $ 82,019 $ 92,990 $ 33,487 $ 208,496 Nine months ended December 29, 2024 (In thousands) Water Treatment Industrial Health and Nutrition Total Manufactured, blended or repackaged products (1) $ 307,902 $ 239,024 $ 21,033 $ 567,959 Distributed specialty products (2) — — 80,956 80,956 Bulk products (3) 29,808 40,743 — 70,551 Other 3,746 5,368 533 9,647 Total external customer sales $ 341,456 $ 285,135 $ 102,522 $ 729,113 Nine months ended December 31, 2023 (In thousands) Water Treatment Industrial Health and Nutrition Total Manufactured, blended or repackaged products (1) $ 249,155 $ 264,878 $ 28,956 $ 542,989 Distributed specialty products (2) — — 77,945 77,945 Bulk products (3) 23,710 41,280 — 64,990 Other 3,730 6,240 248 10,218 Total external customer sales $ 276,595 $ 312,398 $ 107,149 $ 696,142 (1) For our Water Treatment and Industrial 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 Water Treatment and Industrial 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. 9 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 Nine Months Ended December 29, 2024 December 31, 2023 December 29, 2024 December 31, 2023 Weighted-average common shares outstanding—basic 20,766,764 20,781,632 20,780,213 20,864,349 Dilutive impact of performance units and restricted stock 108,623 125,689 122,243 139,728 Weighted-average common shares outstanding—diluted 20,875,387 20,907,321 20,902,456 21,004,077 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 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 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. 10 The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis as of December 29, 2024 and March 31, 2024. 0 (In thousands) December 29, 2024 March 31, 2024 Assets Deferred compensation plan assets Level 1 $ 12,528 $ 10,042 Interest rate swap Level 2 $ 3,162 $ 4,268 Liabilities Earnout liability Level 3 $ 12,262 $ 11,235 Changes in the earnout liability measured at fair value using Level 3 inputs were as follows: (In thousands) Earnout liability at March 31, 2024 $ 11,235 Fair value adjustments $ 1,027 Earnout liability at December 29, 2024 $ 12,262 Note 6 – Inventories Inventories at December 29, 2024 and March 31, 2024 consisted of the following: December 29, 2024 March 31, 2024 (In thousands) Inventory (FIFO basis) $ 105,749 $ 99,058 LIFO reserve ( 24,115 ) ( 24,458 ) Net inventory $ 81,634 $ 74,600 The first in, first out (“FIFO”) value of inventories accounted for under the last in, first out (“LIFO”) method was $ 74.1 million at December 29, 2024 and $ 76.2 million at March 31, 2024. 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 $ 116.7 million as of December 29, 2024 and $ 103.4 million as of March 31, 2024, of which $ 65.3 million was related to our Water Treatment segment, $ 44.9 million was related to our Health and Nutrition segment, and $ 6.5 million was related to our Industrial segment. The increase in goodwill during the nine months ended December 29, 2024 represents goodwill recorded in connection with the acquisitions of the assets of Intercoastal, Wofford, and Waterguard as discussed in Note 2. The following is a summary of our identifiable intangible assets as of December 29, 2024 and March 31, 2024: December 29, 2024 March 31, 2024 (In thousands) Gross Amount Accumulated Amortization Net Gross Amount Accumulated Amortization Net Finite-life intangible assets Customer relationships $ 175,864 $ ( 54,236 ) $ 121,628 $ 153,694 $ ( 46,146 ) $ 107,548 Trademarks and trade names $ 14,370 $ ( 6,938 ) $ 7,432 $ 13,570 $ ( 5,968 ) $ 7,602 Other finite-life intangible assets 4,310 ( 4,123 ) 187 4,221 ( 3,972 ) 249 Total finite-life intangible assets 194,544 ( 65,297 ) 129,247 171,485 ( 56,086 ) 115,399 Indefinite-life intangible assets 1,227 — 1,227 1,227 — 1,227 Total intangible assets $ 195,771 $ ( 65,297 ) $ 130,474 $ 172,712 $ ( 56,086 ) $ 116,626 11 Note 8 – Debt Debt at December 29, 2024 and March 31, 2024 consisted of the following: December 29, 2024 March 31, 2024 (In thousands) Senior secured revolving loan $ 114,000 $ 99,000 Less: unamortized debt issuance costs ( 203 ) ( 269 ) Total debt, net of debt issuance costs 113,797 98,731 Less: current portion of long-term debt ( 9,913 ) ( 9,913 ) Total long-term debt $ 103,884 $ 88,818 We were in compliance with all covenants of our credit agreement as of December 29, 2024. 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 28, 2021 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 26 % for the nine months ended December 29, 2024, compared to 25 % for the nine months ended December 31, 2023. 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 2025 and fiscal 2024. 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 76,137 shares in the aggregate for fiscal 2025. 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 nine months ended December 29, 2024: Shares Weighted- Average Grant Date Fair Value Unvested at beginning of period 145,477 $ 40.33 Granted 75,428 76.60 Vested ( 83,658 ) 38.31 Unvested at end of period 137,247 $ 61.49 We recorded compensation expense related to performance share units and restricted stock of $ 1.3 million and $ 3.9 million for the three and nine months ended December 29, 2024, respectively. We recorded compensation expense related to performance share units and restricted stock of $ 1.0 million and $ 2.7 million for the three and nine months ended December 31, 2023, 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 December 29, 2024, there were 6,734 shares of restricted stock with an average grant date fair value of $ 103.90 outstanding under this program. Compensation expense for the three and nine months ended December 29, 2024 related to restricted stock awards to the Board was $ 0.2 million and $ 0.5 million, respectively. Compensation expense for the three and nine months ended December 31, 2023 related to restricted stock awards to the Board was $ 0.1 million and $ 0.4 million, respectively. 12 Note 11 – Share Repurchase Program Our Board has 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 months ended December 29, 2024, no shares were repurchased, and during the nine months ended December 29, 2024, we repurchased 105,541 shares at an aggregate purchase price of $ 9.1 million. During the three months ended December 31, 2023, we repurchased 24,065 shares at an aggregate purchase price of $ 1.5 million, and during the nine months ended December 31, 2023, we repurchased 191,861 shares at an aggregate purchase price of $ 11.3 million. As of December 29, 2024, 831,946 shares remained available to be repurchased under the share repurchase program. Note 12 – Commitments and Contingencies 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. 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. No expenses were charged against this liability during the three and nine months ended December 29, 2024. 13 Note 13 – Segment Information We have three reportable segments: Water Treatment, Industrial, 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 March 31, 2024 . 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) Water Treatment Industrial Health and Nutrition Total Three months ended December 29, 2024: Sales $ 99,752 $ 91,997 $ 34,456 $ 226,205 Gross profit 26,027 15,180 7,217 48,424 Selling, general, and administrative expenses 16,054 7,058 4,249 27,361 Operating income 9,973 8,122 2,968 21,063 Three months ended December 31, 2023: Sales $ 82,019 $ 92,990 $ 33,487 $ 208,496 Gross profit 20,241 16,495 5,512 42,248 Selling, general, and administrative expenses 12,470 7,292 4,012 23,774 Operating income 7,771 9,203 1,500 18,474 Nine months ended December 29, 2024: Sales $ 341,456 $ 285,135 $ 102,522 $ 729,113 Gross profit 96,572 55,324 21,405 173,301 Selling, general and administrative expenses 45,732 20,649 12,321 78,702 Operating income 50,840 34,675 9,084 94,599 Nine months ended December 31, 2023: Sales $ 276,595 $ 312,398 $ 107,149 $ 696,142 Gross profit 75,957 53,645 18,523 148,125 Selling, general and administrative expenses 31,741 20,673 11,759 64,173 Operating income 44,216 32,972 6,764 83,952 No significant changes to identifiable assets by segment occurred during the nine months ended December 29, 2024. 14