UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December 31, 2017~~September 29, 2019

Commission file number 0-7647

HAWKINS, INC.

(Exact name of registrant as specified in its charter)



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

~~2381 ROSEGATE, ROSEVILLE, MINNESOTA 55113~~

~~(Address of principal executive offices, including zip~~



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

(612) 331-6910

(Registrant’s telephone number, including area code)

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.05 per share	HWKN	Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). YES ý NO ¨

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

Act.



Large ~~Accelerated Filer~~accelerated filer	¨	~~Non-Accelerated Filer~~		Accelerated filer	ý

Non-accelerated filer	¨	~~Accelerated Filer~~	ý	Smaller ~~Reporting Company~~reporting company	¨

				Emerging ~~Growth Company~~growth company	¨

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

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

YES ¨ NO ý

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



CLASS		Shares Outstanding at ~~February 2, 2018~~October 25, 2019
Common Stock, par value $.05 per share		~~10,695,184~~10,628,976

HAWKINS, INC.

INDEX TO FORM 10-Q



		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets – ~~December~~September 29, 2019 and March 31, ~~2017 and April 2, 2017~~2019	1

	Condensed Consolidated Statements of Income – Three and ~~Nine~~Six Months Ended ~~December 31, 2017~~September 29, 2019 and ~~January 1, 2017~~September 30, 2018	2

	Condensed Consolidated Statements of Comprehensive Income – Three and ~~Nine~~Six Months Ended ~~December 31, 2017~~September 29, 2019 and ~~January 1, 2017~~September 30, 2018	3

	Condensed Consolidated Statements of ~~Cash Flows~~Shareholder’s Equity – ~~Nine~~Three and Six Months Ended ~~December 31, 2017~~September 29, 2019 and ~~January 1, 2017~~September 30, 2018	4

	Condensed Consolidated Statements of Cash Flows – Six Months Ended September 29, 2019 and September 30, 2018	5

	Notes to Condensed Consolidated Financial Statements	56

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1115

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	1620

Item 4.	Controls and Procedures	1720

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	1821

Item 1A.	Risk Factors	1821

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	1821

Item 3.	Defaults Upon Senior Securities	21

Item 4.	Mine Safety Disclosures	21

Item 5.	Other Information	21

Item 6.	Exhibits	1922

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HAWKINS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)


	December 31, 2017		April 2, 2017		September 29, 2019		March 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	7,635	$	6,861	$	4,056	$	9,199
Trade receivables — less allowance for doubtful accounts:
$526 as of December 31, 2017 and $468 as of April 2, 2017	57,867		57,298
$909 as of September 29, 2019 and $620 as of March 31, 2019					65,396		63,966
Inventories	62,736		51,249		60,804		60,482
Income taxes receivable	—		1,273		—		527
Prepaid expenses and other current assets	4,818		4,238		2,848		5,235
Total current assets	133,056		120,919		133,104		139,409
PROPERTY, PLANT, AND EQUIPMENT:	235,742		221,518		257,996		244,861
Less accumulated depreciation	110,649		99,978		133,578		126,233
Net property, plant, and equipment	125,093		121,540		124,418		118,628
OTHER ASSETS:
Right-of-use assets					9,529		—
Goodwill	97,556		97,556		58,440		58,440
Intangible assets, net	72,603		76,883		63,189		65,726
Other	2,436		1,686		4,362		3,396
Total other assets	172,595		176,125		135,520		127,562
Total assets	$	430,744	$	418,584	$	393,042	$	385,599
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable — trade	$	28,077	$	29,756	$	29,624	$	29,314
Dividends payable	—		4,466
Accrued payroll and employee benefits	6,992		9,979		8,862		12,483
Income tax payable	46		—		735		—
Current portion of long-term debt	9,864		7,989		9,907		9,907
Due to sellers of acquired business	—		341
Short-term lease liability					1,664		—
Container deposits	1,233		1,174		1,352		1,299
Other current liabilities	2,335		1,967		1,709		2,393
Total current liabilities	48,547		55,672		53,853		55,396
LONG-TERM DEBT, LESS CURRENT PORTION	104,228		94,626		64,705		74,658
LONG-TERM LEASE LIABILITY					7,873		—
PENSION WITHDRAWAL LIABILITY	5,728		5,968		5,148		5,316
DEFERRED INCOME TAXES	25,315		42,040		26,581		26,673
OTHER LONG-TERM LIABILITIES	3,634		2,450		5,447		5,695
Total liabilities	187,452		200,756		163,607		167,738
COMMITMENTS AND CONTINGENCIES	—		—		—		—
SHAREHOLDERS’ EQUITY:
Common stock; authorized: 30,000,000 shares of $0.05 par value; 10,631,992 and 10,582,596 shares issued and outstanding as of December 31, 2017 and April 2, 2017, respectively	531		529
Common stock; authorized: 30,000,000 shares of $0.05 par value; 10,546,453 and 10,592,450 shares issued and outstanding as of September 29, 2019 and March 31, 2019, respectively					527		530
Additional paid-in capital	53,016		51,104		50,282		52,609
Retained earnings	189,386		165,897		178,557		164,405
Accumulated other comprehensive income	359		298		69		317
Total shareholders’ equity	243,292		217,828		229,435		217,861
Total liabilities and shareholders’ equity	$	430,744	$	418,584	$	393,042	$	385,599

See accompanying notes to condensed consolidated financial statements.

HAWKINS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	December 31, 2017			January 1, 2017			December 31, 2017			January 1, 2017			September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018
Sales	$	118,053		$	112,351		$	377,179		$	364,975		$	140,043		$	145,324		$	287,379		$	295,124
Cost of sales	(99,213		)	(91,439		)	(308,225		)	(288,815		)	(112,049		)	(119,552		)	(230,588		)	(240,895		)
Gross profit	18,840			20,912			68,954			76,160			27,994			25,772			56,791			54,229
Selling, general and administrative expenses	(14,139		)	(14,916		)	(44,733		)	(44,913		)	(14,817		)	(14,941		)	(29,653		)	(29,920		)
Operating income	4,701			5,996			24,221			31,247			13,177			10,831			27,138			24,309
Interest expense, net	(857		)	(634		)	(2,423		)	(1,977		)	(666		)	(811		)	(1,429		)	(1,745		)
Other income													26			78			143			76
Income before income taxes	3,844			5,362			21,798			29,270			12,537			10,098			25,852			22,640
Income tax benefit (expense)	13,299			(1,811		)	6,386			(10,925		)
Income tax expense													(3,287		)	(2,689		)	(6,795		)	(6,108		)
Net income	$	17,143		$	3,551		$	28,184		$	18,345		$	9,250		$	7,409		$	19,057		$	16,532

Weighted average number of shares outstanding - basic	10,609,078			10,538,328			10,599,232			10,529,259			10,575,538			10,675,833			10,589,922			10,662,210
Weighted average number of shares outstanding - diluted	10,648,232			10,595,140			10,641,578			10,592,550			10,633,117			10,719,059			10,663,864			10,714,381

Basic earnings per share	$	1.62		$	0.34		$	2.66		$	1.74		$	0.87		$	0.69		$	1.80		$	1.55
Diluted earnings per share	$	1.61		$	0.34		$	2.65		$	1.73		$	0.87		$	0.69		$	1.79		$	1.54

Cash dividends declared per common share	$	—		$	—		$	0.44		$	0.42		$	0.23		$	0.225		$	0.46		$	0.225

See accompanying notes to condensed consolidated financial statements.

HAWKINS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)


	Three Months Ended				Nine Months Ended				Three Months Ended						Six Months Ended
	December 31, 2017		January 1, 2017		December 31, 2017		January 1, 2017		September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018
Net income	$	17,143	$	3,551	$	28,184	$	18,345	$	9,250		$	7,409		$	19,057		$	16,532
Other comprehensive income, net of tax:
Unrealized gain on interest rate swap	124		393		61		277
Unrealized (loss) gain on interest rate swap									(69		)	(15		)	(248		)	12
Total comprehensive income	$	17,267	$	3,944	$	28,245	$	18,622	$	9,181		$	7,394		$	18,809		$	16,544

See accompanying notes to condensed consolidated financial statements.

HAWKINS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share data)



	Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
BALANCE — March 31, 2019	10,592,450		$	530		$	52,609		$	164,405		$	317		$	217,861
Cash dividends paid									(2,460		)				(2,460		)
Share-based compensation expense						509									509
Vesting of restricted stock	27,620		1			(1		)							—
Shares surrendered for payroll taxes	(9,160	)	(1		)	(342		)							(343		)
Shares repurchased	(47,136	)	(2		)	(1,801		)							(1,803		)
Other comprehensive income, net of tax												(179		)	(179		)
Net income									9,807						9,807
BALANCE — June 30, 2019	10,563,774		$	528		$	50,974		$	171,752		$	138		$	223,392
Cash dividends paid									(2,445		)				(2,445		)
Share-based compensation expense						636									636
Vesting of restricted stock	8,352		—			—									—
ESPP shares issued	18,586		1			660									661
Shares repurchased	(44,259	)	(2		)	(1,988		)							(1,990		)
Other comprehensive income, net of tax												(69		)	(69		)
Net income									9,250						9,250
BALANCE — September 29, 2019	10,546,453		$	527		$	50,282		$	178,557		$	69		$	229,435

	Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
BALANCE — April 1, 2018	10,631,992		$	532		$	53,877		$	147,242		$	596		$	202,247
Share-based compensation expense						470									470
Vesting of restricted stock	24,567		1			(1		)							—
Shares surrendered for payroll taxes	(8,105	)	—			(265		)							(265		)
ESPP shares issued	22,531		1			676									677
Other comprehensive income, net of tax												27			27
Net income									9,123						9,123
BALANCE — July 1, 2018	10,670,985		$	534		$	54,757		$	156,365		$	623		$	212,279
Cash dividends paid									(2,412		)				(2,412		)
Share-based compensation expense						513									513
Vesting of restricted stock	8,484		—			—									—
Other comprehensive income, net of tax												(15		)	(15		)
Net income									7,409						7,409
BALANCE — September 30, 2018	10,679,469		$	534		$	55,270		$	161,362		$	608		$	217,774

See accompanying notes to condensed consolidated financial statements.

HAWKINS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Nine Months Ended							Six Months Ended
	December 31, 2017			January 1, 2017				September 29, 2019			September 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	28,184		$	18,345			$	19,057		$	16,532
Reconciliation to cash flows:
Depreciation and amortization	16,759			15,453				10,739			11,005
Operating leases								106			—
Amortization of debt issuance costs	102			102				47			68
Gain on deferred compensation assets	(99		)	—				(143		)	(76		)
Deferred income taxes	(16,765		)	171
Stock compensation expense	1,209			1,650				1,145			984
Gain from property disposals	(17		)	(61		)
(Gain) loss from property disposals								(43		)	68
Changes in operating accounts providing (using) cash:
Trade receivables	(471		)	7,275				(1,409		)	(2,891		)
Inventories	(11,487		)	(2,537		)		(323		)	(8,035		)
Accounts payable	(990		)	(7,456		)		238			2,372
Accrued liabilities	(1,057		)	(1,928		)		(4,504		)	316
Income taxes	977			848				1,262			3,351
Other	(1,785		)	(869		)		944			1,161
Net cash provided by operating activities	14,560			30,993			��	27,116			24,855
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment	(17,002		)	(15,811		)		(14,088		)	(4,211		)
Acquisitions, net of cash acquired	—			(2,199		)
Other	298			264				209			109
Net cash used in investing activities	(16,704		)	(17,746		)		(13,879		)	(4,102		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid	(9,161		)	(8,683		)		(4,905		)	(7,116		)
New shares issued	704			553				661			677
Net proceeds from (payments on) revolver borrowings	17,000			(13,000		)
Shares surrendered for payroll taxes								(343		)	(265		)
Shares repurchased								(3,793		)	—
Net payments on revolver borrowings								(10,000		)	(10,000		)
Payments on term loan borrowings	(5,625		)	(3,750		)		—			(5,000		)
Net cash provided by (used in) financing activities	2,918			(24,880		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	774			(11,633		)
Net cash used in financing activities								(18,380		)	(21,704		)
NET DECREASE IN CASH AND CASH EQUIVALENTS								(5,143		)	(951		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	6,861			20,014				9,199			4,990
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	7,635		$	8,381			$	4,056		$	4,039

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes	$	9,064		$	9,976			$	5,533		$	2,757
Cash paid for interest	$	2,229		$	1,746			$	1,419		$	1,650
Noncash investing activities - capital expenditures in accounts payable	$	269		$	1,076			$	567		$	154

See accompanying notes to condensed consolidated financial statements.

HAWKINS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies

Basis of ~~Presentation~~

Presentation.The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, accordingly, do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended ~~April 2, 2017~~March 31, 2019, previously filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly our financial position and the results of our operations and cash flows for the periods presented. All adjustments made to the interim condensed consolidated financial statements were of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the six months ended September 29, 2019 are not necessarily indicative of the results that may be expected for the full year.

References to fiscal 2019 refer to the fiscal year ended March 31, 2019 and references to fiscal 2020 refer to the fiscal year ending March 29, 2020.

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

Accounting Policies.The accounting policies we follow are set forth in Note 1 – Nature of Business and Significant Accounting Policies to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended ~~April 2, 2017,~~March 31, 2019, previously filed with the SEC. ~~There~~With the exception of our policy regarding leases (see below), there has been no significant change in our accounting policies since the end of fiscal ~~2017.~~2019.

Leases.The ~~results~~Company determines 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 condensed consolidated balance sheet.

Operating assets and liabilities are recognized at commencement date based on the present value of ~~operations~~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. We use the implicit rate when readily determinable. 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 ~~nine months ended~~ ~~December 31, 2017~~ ~~are not necessarily indicative of the results that may be expected for the full year.~~lease and non-lease components as a single lease component.

~~References to fiscal 2017 refer to the fiscal year ended April 2, 2017 and references to fiscal 2018 refer to the fiscal year ending April 1, 2018.~~

Recently Issued Accounting Pronouncements

In ~~March~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ~~(ASU)~~(“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2019, which for us is our fiscal year beginning March 30, 2020. Entities may early adopt beginning after December 15, 2018. Upon adoption, we expect this ASU to impact our method for calculating and estimating our allowance for doubtful accounts, but do not expect it to have a material impact to our financial position or results of operations.

Recently Adopted Accounting Pronouncements

On April 1, 2019, we adopted ASU 2016-02, which provides new accounting guidance requiring lessees to recognize most leases as assets and liabilities on the balance ~~sheet. This guidance~~sheet and disclose key information about leasing arrangements. The new standard

establishes a ROU model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be ~~effective for annual periods beginning after December 15, 2018 (our fiscal year ending March 30, 2020)~~classified as finance or operating, with classification affecting the pattern and ~~interim periods within those annual periods.~~expense recognition in the income statement. We ~~are currently evaluating~~adopted this ASU using the ~~impact of this accounting pronouncement on our results of operations and financial position.~~

~~In January 2016,~~modified retrospective method. See Note 11 to the FASB issued ASU 2016-01, which provides guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for annual reporting periods beginning after December 15, 2017 (our fiscal year ending March 31, 2019), and interim periods within those annual periods. Early adoption is not permitted. We are currently evaluating the impact that this guidance will have on our results of operations and financial position.

In May 2014, the FASB issued ASU 2014-09, which provides new accounting requirements for recognition of revenue from contracts with customers. The requirements of the new standard will be effective for annual reporting periods beginning after December 15, 2017 (our fiscal year ending March 31, 2019), and interim periods within those annual periods. We have performed a preliminary evaluation of the effect of adoption on ourcondensed consolidated financial statements ~~and we do not currently expect a material impact on our results of operations, cash flows or financial position. The majority of our~~for further details.

Note 2 - 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 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 tables disaggregate external customer net sales by major revenue stream for the three and six months ended September 29, 2019 and September 30, 2018:



	Three months ended September 29, 2019
(In thousands)	Industrial		Water Treatment		Health and Nutrition		Total
Bulk / Distributed specialty products ⁽¹⁾	$	11,700	$	4,971	$	22,892	$	39,563
Manufactured, blended or repackaged products ⁽²⁾	55,506		40,487		3,189		99,182
Other	884		410		4		1,298
Total external customer sales	$	68,090	$	45,868	$	26,085	$	140,043

	Three months ended September 30, 2018
(In thousands)	Industrial		Water Treatment		Health and Nutrition		Total
Bulk / Distributed specialty products ⁽¹⁾	$	15,307	$	5,982	$	29,624	$	50,913
Manufactured, blended or repackaged products ⁽²⁾	53,204		36,305		3,499		93,008
Other	891		426		86		1,403
Total external customer sales	$	69,402	$	42,713	$	33,209	$	145,324

	Six months ended September 29, 2019
(In thousands)	Industrial		Water Treatment		Health and Nutrition		Total
Bulk / Distributed specialty products ⁽¹⁾	$	26,790	$	9,679	$	47,495	$	83,964
Manufactured, blended or repackaged products ⁽²⁾	114,900		78,637		7,333		200,870
Other	1,725		804		16		2,545
Total external customer sales	$	143,415	$	89,120	$	54,844	$	287,379

	Six months ended September 30, 2018
(In thousands)	Industrial		Water Treatment		Health and Nutrition		Total
Bulk / Distributed specialty products ⁽¹⁾	$	30,243	$	11,804	$	60,301	$	102,348
Manufactured, blended or repackaged products ⁽²⁾	111,236		70,964		7,684		189,884
Other	1,941		814		137		2,892
Total external customer sales	$	143,420	$	83,582	$	68,122	$	295,124

(1)

For our Industrial and Water Treatment segments, this line includes our bulk products that we do not modify in any way, but receive, store, and ship from our facilities, or direct ship to our customers in large quantities. For our Health and Nutrition segment, this line includes our non-manufactured distributed specialty products, which may be sold out of one of our facilities or direct shipped to our customers.


(2)	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.

Net sales include products and shipping charges, net of estimates for product returns and any related sales rebates. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. Our criteria for recording revenue is consistent between our operating segments and types of products sold. 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. In ~~limited~~arrangements where product is shipped directly from the vendor to our customer, we act as the principal in the transaction as we direct the other party to provide the product to our customer on our behalf, take inventory risk, establish the selling price, and are exposed to credit risk for the collection of the invoiced amount. If there were circumstances where we were to manufacture products for customers that ~~are~~were unique to their ~~specifications.~~specifications and we would be prohibited by contract to use the product for any alternate use, we would recognize revenue over time if all criteria were met. We ~~anticipate~~have made a policy election to treat shipping costs for FOB shipping point sales as fulfillment costs. As such, we ~~will expand~~recognize revenue for all shipping charges, if applicable, at the same time we recognize revenue on the products delivered. 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 ~~consolidated financial statement disclosures~~contracts have a single performance obligation and are short term in nature. Sales taxes that are collected from customers and remitted to ~~comply with~~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 ~~ASU.~~time revenue is recognized in an amount estimated based on historical experience and contractual obligations. We ~~plan to adopt these standards beginning with~~periodically review the ~~first quarter~~assumptions underlying our estimates of ~~fiscal 2019 using the modified retrospective approach.~~

~~Recently Adopted Accounting Pronouncements~~

In March 2016, the FASB issued ASU 2016-09, which provides accounting guidance intended to improve the accounting for share-based payment transactions. This guidance outlines new provisions intended to simplify various aspects related to accounting for share-based paymentsdiscounts and their presentation in the financial statements. We adopted this guidance in the first quarter of fiscal 2018. We will continue to estimate forfeitures as we determine compensation cost each period. The primary impact on our consolidated financial statements is the recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital, which may result in increased volatility in the reported amounts of income tax expensevolume rebates and ~~net income.~~

In July 2015, the FASB issued ASU 2015-11, which requires companies to change the measurement principal for inventory measured using the first-in, first-out (“FIFO”) or average cost method from the lower of cost or market to the lower of cost and net realizable value. Treatment of inventory valued under the last-in, last-out (“LIFO”) method is unchanged by this guidance.

~~We adopted this guidance in the first quarter of fiscal 2018 and there was no impact to our financial position or results of operations.~~adjust revenues accordingly.

Note 23 – Earnings per Share

Basic earnings per share (“EPS”) are 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		Three Months Ended		Six Months Ended
	December 31, 2017	January 1, 2017	December 31, 2017	January 1, 2017	September 29, 2019	September 30, 2018	September 29, 2019	September 30, 2018
Weighted-average common shares outstanding—basic	10,609,078	10,538,328	10,599,232	10,529,259	10,575,538	10,675,833	10,589,922	10,662,210
Dilutive impact of performance units and restricted stock	39,154	56,812	42,346	63,291	57,579	43,226	73,942	52,171
Weighted-average common shares outstanding—diluted	10,648,232	10,595,140	10,641,578	10,592,550	10,633,117	10,719,059	10,663,864	10,714,381

For each of the three and ~~nine~~six months ended ~~December 31, 2017~~September 29, 2019 and ~~January 1, 2017~~September 30, 2018, there were no shares excluded from the calculation of weighted-average common shares for diluted EPS.

Note 34 – Derivative Instruments

~~On September 20, 2016, we entered into~~We have 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 ~~new~~ swap agreement ~~began September 1, 2017 and~~ will terminate ~~concurrently with the expiration of our credit facility~~ on December 23, 2020. The notional amount of the swap agreement is ~~$40 million from September 1, 2017 through August 31, 2018, $30 million from September 1, 2018 through August 31, 2019 and~~currently $20 million ~~from September 1, 2019~~ through December 23, 2020. We have designated this swap as a cash flow hedge and have determined that it qualifies for hedge accounting treatment. For so long as the hedge is effective, changes in fair value of the cash flow hedge are recorded in other comprehensive income (net of tax) until income or loss from the cash flows of the hedged item is realized.

For the ~~each of the~~ three ~~and nine~~ months ended ~~December 31, 2017,~~September 29, 2019, we recorded $0.1 million in other comprehensive income related to unrealized ~~gains~~losses (net of tax) on the cash flow hedge described above. For the ~~three months and nine~~six months ended ~~January 1, 2017~~September 29, 2019, we recorded ~~$0.4~~$0.2 million in other comprehensive loss related to unrealized losses (net of tax) on the cash flow hedge. For both the three and ~~$0.3 million, respectively,~~six months ended September 30, 2018, we recorded a nominal amount in other comprehensive income related to unrealized gains (net of tax) on the cash flow hedge. Included in other long-term assets on our condensed consolidated balance sheet was ~~$0.6~~$0.1 million as of ~~December 31, 2017~~September 29, 2019 and ~~$0.5~~$0.4 million as of ~~April 2, 2017~~March 31, 2019 related to the cash flow hedge. Unrealized gains and losses will be reflected in net income when the related cash flows or hedged transactions occur and offset the related performance of the hedged item.

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. We do not anticipate nonperformance by the counterparty.

Note 45 – 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). We classify the inputs used to measure fair value into the following hierarchy:




Level 1:		Quoted prices in active markets for identical assets or liabilities.
Level 2:		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:		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.

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 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 reclassified to 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 ~~established in fiscal 2017,~~ on behalf of certain employees who are classified as “highly compensated employees” as determined by IRS guidelines. The assets are part of a rabbi trust and the funds are held in mutual funds. The fair value of the deferred compensation is based on the quoted market prices for the mutual funds at the end of the period.

The following ~~table summarizes~~tables summarize the balances of assets measured at fair value on a recurring basis as of ~~December~~September 29, 2019 and March 31, ~~2017 and April 2, 2017.~~2019.


							September 29, 2019
(In thousands)	December 31, 2017		Level 1		Level 2	Level 3	Level 1		Level 2		Level 3
Interest rate swap	$	604	—		604	—	—		$	95	—
Deferred compensation plan assets	$	1,460	$	1,460	—	—	$	4,008	—		—


							March 31, 2019
(In thousands)	April 2, 2017		Level 1	Level 2		Level 3	Level 1		Level 2		Level 3
Interest rate swap	$	502	—	$	502	—	—		$	435	—
Deferred compensation plan assets	—		—	$	—	—	$	2,637	—		—

Note 56– Assets Held for Sale

In fiscal 2019, management entered into a plan of action to dispose of an office building in St. Louis, Missouri currently utilized in the administration of our Industrial segment. The amount of office space in this facility is no longer needed due to current staffing levels, and management expects to relocate affected employees to leased space. The building is listed for sale at a price in excess of its current book value, and thus no impairment has been recognized. The $0.9 million net book value of this property is recorded as an asset held for sale within “Prepaid expenses and other current assets” on our balance sheet.

Note 7 – Inventories

Inventories at ~~December~~September 29, 2019 and March 31, ~~2017~~ ~~and~~ ~~April 2, 2017~~2019 consisted of the following:


	December 31, 2017			April 2, 2017				September 29, 2019				March 31, 2019
(In thousands)								September 29, 2019				March 31, 2019
Inventory (FIFO basis)	December 31, 2017	$	65,597	April 2, 2017		$	52,735			$	65,523			$	65,526
LIFO reserve	(2,861		)	(1,486		)		(4,719		)		(5,044		)
Net inventory	$	62,736		$	51,249			$	60,804			$	60,482

The ~~FIFO~~first in, first out (“FIFO”) value of inventories accounted for under the ~~LIFO~~last in, first out (“LIFO”) method was ~~$42.7~~$47.5 million at ~~December~~September 29, 2019 and $45.2 million at March 31, ~~2017~~ ~~and~~ ~~$37.0 million~~ at ~~April 2, 2017~~.2019. The remainder of the inventory was valued and accounted for under the FIFO method.

The LIFO reserve ~~increased $0.7~~decreased $0.3 million during the three months ended ~~December 31, 2017~~September 29, 2019 and ~~decreased $0.4~~increased $0.1 million during the three months ended ~~January 1, 2017.~~September 30, 2018. During the ~~nine~~six months ended ~~December 31, 2017,~~September 29, 2019, the LIFO reserve decreased $0.3 million and increased ~~$1.4~~$0.5 million ~~while it decreased $0.8 million for~~during the ~~nine~~six months ended ~~January 1, 2017.~~September 30, 2018. The valuation of LIFO inventory for interim periods is based on our estimates of year-end inventory levels and costs.

Note 68 – Goodwill and Intangible Assets

The carrying amount of goodwill was ~~$97.6~~$58.4 million as of ~~December~~September 29, 2019 and March 31, ~~2017~~ ~~and~~ ~~April 2, 2017~~,2019, of which ~~$84.1~~$44.9 million was related to our Health and Nutrition ~~segment. The annual goodwill impairment test we performed in fiscal 2017 indicated the excess fair value of this reporting unit~~segment, $7.0 million was ~~$7.4~~related to our Water Treatment segment, and $6.5 million ~~or 4.8%.~~was related to our Industrial segment.

A summary of our intangible assets as of ~~December~~September 29, 2019 and March 31, ~~2017~~ ~~and~~ ~~April 2, 2017~~2019 is as follows:


	December 31, 2017							April 2, 2017							September 29, 2019							March 31, 2019
(In thousands)	Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net
Finite-life intangible assets
Customer relationships	$	78,383	$	(11,278	)	$	67,105	$	78,383	$	(7,854	)	$	70,529	$	78,383	$	(19,155	)	$	59,228	$	78,383	$	(16,910	)	$	61,473
Trademarks and trade names	6,045		(2,315		)	3,730		6,045		(1,790		)	4,255		6,045		(3,378		)	2,667		6,045		(3,115		)	2,930
Other finite-life intangible assets	3,648		(3,107		)	541		3,648		(2,776		)	872		3,648		(3,581		)	67		3,648		(3,552		)	96
Total finite-life intangible assets	88,076		(16,700		)	71,376		88,076		(12,420		)	75,656		88,076		(26,114		)	61,962		88,076		(23,577		)	64,499
Indefinite-life intangible assets	1,227		—			1,227		1,227		—			1,227		1,227		—			1,227		1,227		—			1,227
Total intangible assets	$	89,303	$	(16,700	)	$	72,603	$	89,303	$	(12,420	)	$	76,883	$	89,303	$	(26,114	)	$	63,189	$	89,303	$	(23,577	)	$	65,726

Note 79 – Debt

Debt at ~~December~~September 29, 2019 and March 31, ~~2017 and April 2, 2017~~2019 consisted of the following:


	December 31, 2017			April 2, 2017			September 29, 2019			March 31, 2019
							September 29, 2019			March 31, 2019
(In thousands)	December 31, 2017			April 2, 2017
Senior secured term loan	$	87,500		$	93,125
Senior secured revolving loan	27,000			10,000			$	75,000		$	85,000
Total debt	114,500			103,125
Less: unamortized debt issuance costs	(408		)	(510		)	(388		)	(435		)
Total debt, net of debt issuance costs	114,092			102,615			74,612			84,565
Less: current portion of long-term debt	(9,864		)	(7,989		)	(9,907		)	(9,907		)
Total long-term debt	$	104,228		$	94,626		$	64,705		$	74,658

Note 810 – Income Taxes

On December 22, 2017 the Tax Cuts and Jobs Act of 2017 (the “Act”), was signed into law. The Act includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. Because our fiscal 2018 ends April 1, 2018, our tax provision for the current year will be calculated utilizing a blended statutory federal rate of 31.5%. In future years, we expect our statutory federal rate to be 21%. Under generally accepted accounting principles, deferred tax assets and liabilities are required to be revalued during the period in which new tax legislation is enacted. As such, during the three months ended December 31, 2017, we revalued our net deferred tax liabilities to reflect the impact of the Act and recorded a one-time benefit of $13.2 million. Pursuant to SEC Staff Accounting Bulletin 118 (regarding the application of ASC 740 associated with the enactment of the Act), the tax benefit we recorded in the current quarter is provisional. The final impact of the Act may differ due to and among other things, changes in interpretations, assumptions made by the Company and the issuance of additional guidance that may be provided. Specifically, no adjustment was recorded during the three months ended December 31, 2017 related to the impact of the Act on state taxes, as we could not reasonably estimate the impact and do not expect any such impact to be material to our financial statements.

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 April 3, 2016 are closed to examination by the Internal Revenue ~~Service. Our federal tax return filed for our fiscal year ended March 29, 2015 was examined by the Internal Revenue~~ Service, and with ~~no adjustments. For~~few exceptions, state and local

income tax ~~jurisdictions,~~jurisdictions. Our effective tax rate for the six months ended September 29, 2019 was 26.3% and was 27.0% for the six months ended September 30, 2018. The effective tax ~~years prior to our fiscal year ended March 29, 2015 are closed to examination, with few exceptions.~~

rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.

As of ~~December~~March 31, ~~2017 and April 2, 2017,~~2019, our balance sheet included a long-term liability for uncertain tax positions of ~~$0.2~~$0.1 million, ~~and $0.8 million, respectively,~~ which arose from tax positions taken by Stauber Performance Ingredients, Inc. (“Stauber”) on its tax returns for periods prior to our acquisition. Because the Stauber acquisition agreement provides us with indemnification by the prior owners for any tax liabilities relating to pre-acquisition tax returns, we have also recorded an offsetting, long-term receivable of ~~$0.2~~$0.1 million as of ~~December~~March 31, ~~2017 and $0.8 million as of April 2, 2017.~~2019. As a result, any change in the unrecognized tax benefit will not impact our effective tax rate in future periods. ~~We expect these~~As of September 29, 2019, the long-term liability for uncertain ~~income~~ tax ~~amounts~~positions and the offsetting long-term receivable have been removed from our balance sheet, due to ~~decrease as~~ the ~~applicable~~expiration of examination periods for the relevant taxing ~~authorities expire.~~authorities.

Note 11 – Leases

Adoption of ASU 2016-02, Leases. On April 1, 2019, we adopted ASU 2016-02 using the modified retrospective method applied to existing leases in place as of April 1, 2019. Leases entered into after April 1, 2019 are presented under the provisions of ASU 2016-02, while prior periods are not adjusted and continue to be reported in accordance with previous accounting guidance. Leases commencing or renewing after the adoption date are evaluated based on the guidance in ASU 2016-02 and may result in more finance leases being recognized even for the renewal of previously classified operating leases.

We elected to adopt the ‘package of practical expedients’, which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the short-term lease recognition exemption for all leases that qualified. This means, for those leases that qualified, we did not recognize right-of-use assets or lease liabilities, and this included not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all leases other than leases of real estate, and this included not separating lease and non-lease components for all leases other than leases of real estate in transition.

We adopted ASU 2016-02 using the modified retrospective method, recognizing the cumulative effect of application as an adjustment to the opening balance sheet. The standard had a material impact on our condensed consolidated balance sheet, but did not have a material impact on our condensed consolidated statement of income or cash flows. The most significant impact was the recognition of the ROU asset and lease liabilities for operating leases, both of which were approximately $10.4 million upon adoption.

Lease Obligations. As of September 29, 2019, 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 25 years, some of which may include options to extend the lease for up to 10 years.

As of September 29, 2019, our operating lease components with initial or remaining terms in excess of one year were classified on the condensed consolidated balance sheet within right of use assets, short-term lease liability and long-term lease liability.

Expense for leases less than 12 months for the three and six months ended September 29, 2019 was not material. Total lease expense for the three and six months ended September 29, 2019 was $0.7 million and $1.5 million, respectively.

Other information related to our operating leases was as follows:



(In thousands)	September 29, 2019
Supplemental Cash Flow Information
Operating cash flows from leases	$	106
Lease Term and Discount Rate
Weighted average remaining lease term (years)	9.07
Weighted average discount rate	4.1		%

Maturities of lease liabilities as of September 29, 2019 were as follows:



(In thousands)	Operating Leases
Remaining fiscal 2020	$	1,921
Fiscal 2021	1,472
Fiscal 2022	1,300
Fiscal 2023	1,148
Fiscal 2024	1,117
Thereafter	4,678
Total	$	11,636
Less: Interest	(2,099		)
Present value of lease liabilities	$	9,537

As we have not restated prior year information for our adoption of ASC Topic 842, the following represents our future minimum lease payments for operating leases under ASC Topic 840 on March 31, 2019:



(In thousands)	Operating Leases
Fiscal 2020	$	2,198
Fiscal 2021	1,783
Fiscal 2022	1,407
Fiscal 2023	1,352
Fiscal 2024	1,183
Thereafter	5,473
Total	$	13,396

Note 912 – 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 ~~2018~~2020 and fiscal ~~2017.~~2019. 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 ~~57,855~~69,632 shares in the aggregate for fiscal ~~2018.~~2020. The restricted shares issued, if any, will fully vest 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~~six months ended ~~December 31, 2017~~:September 29, 2019:


	Shares		Weighted- Average Grant Date Fair Value		Shares		Weighted- Average Grant Date Fair Value
Unvested at beginning of period	28,853		$	43.10	32,883		$	43.66
Granted	35,075		47.50		69,252		34.49
Forfeited or expired	(9,220	)	45.45
Vested					(27,620	)	46.01
Unvested at end of period	54,708		$	45.52	74,515		$	34.27

~~We recorded compensation expense related to performance share units and restricted stock of $0.2 million and $0.7 million for the three and nine months ended December 31, 2017, respectively.~~

We recorded compensation expense related to performance share units and restricted stock of $0.4 million and ~~$1.1~~$0.8 million for the three and ~~nine~~six months ended ~~January 1, 2017,~~ September 29, 2019, respectively. We recorded compensation expense related to performance share units and restricted stock of $0.3 million and $0.6 million for the three and six months ended September 30, 2018,

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, each non-employee director receives an annual grant of restricted stock for their service on our Board of ~~Director services.~~Directors. The restricted stock awards are expensed over the requisite vesting period, which is one year from the date of issuance, based on the market value on the date of grant. As of ~~December 31, 2017~~,September 29, 2019, there were ~~8,484~~8,008 shares of restricted stock with a grant date fair value of ~~$41.25~~$43.67 outstanding under this program. Compensation expense for both the three months ended ~~December 31, 2017~~September 29, 2019 and ~~January 1, 2017~~September 30, 2018 related to restricted stock awards to the Board was $0.1 million. Compensation expense for both the ~~nine~~six months ended ~~December 31, 2017~~September 29, 2019 and ~~January 1, 2017~~September 30, 2018 related to restricted stock awards to the Board was ~~$0.3 million and~~ $0.2 ~~million, respectively.~~million.

Note 1013 – Share Repurchase Program

~~We have in place a share~~Our Board of Directors has authorized the repurchase ~~program approved by our Board~~ of up to ~~300,000~~800,000 shares of our outstanding common ~~stock. Under the program, we are authorized to repurchase shares~~stock for cash on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. Upon ~~repurchase~~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 September 29, 2019, we repurchased 44,259 shares at an aggregate purchase price of $2.0 million. During the six months ended September 29, 2019, we repurchased 91,395 shares at an aggregate purchase price of $3.8 million. No shares were repurchased during the ~~nine~~first six months ~~ended December 31, 2017 or during~~of fiscal ~~2017.~~2019. As of ~~December 31, 2017, 112,546~~September 29, 2019, 412,985 shares remained available to be repurchased under the share repurchase program.

Note 1114 – Litigation, Commitments and Contingencies

~~Litigation~~—Litigation. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries are a party or of which any of our property is the subject. Legal fees associated with such matters are expensed as incurred.

Environmental Remediation. During fiscal 2018, we recorded a liability of $0.6 million related to estimated remediation expenses associated with existing contamination at our Minneapolis facility. The liability is being reduced as we incur costs related to remediation efforts, and was $0.2 million as of September 29, 2019 and $0.4 million as of March 31, 2019. Given the many uncertainties involved in assessing environmental claims, our reserves may prove to be insufficient. While it is possible that additional expenses related to remediation will be incurred in future periods if currently unknown issues arise, we are unable to estimate the extent of any further financial impact at this time.

Note 1215 – Segment Information

We have three reportable segments: Industrial, Water Treatment, and Health and Nutrition. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our fiscal ~~2017~~2019 Annual Report on Form 10-K.

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


(In thousands)	Industrial		Water Treatment		Health and Nutrition			Total		Industrial		Water Treatment		Health and Nutrition		Total
Three months ended December 31, 2017:
Three months ended September 29, 2019:
Sales	$	60,337	$	30,866	$	26,850		$	118,053	$	68,090	$	45,868	$	26,085	$	140,043
Gross profit	7,091		7,393		4,356			18,840		10,674		12,753		4,567		27,994
Selling, general, and administrative expenses	4,992		4,643		4,504			14,139		5,895		5,134		3,788		14,817
Operating income	2,099		2,750		(148		)	4,701		4,779		7,619		779		13,177
Three months ended January 1, 2017:
Three months ended September 30, 2018:
Sales	$	57,083	$	28,098	$	27,170		$	112,351	$	69,402	$	42,713	$	33,209	$	145,324
Gross profit	8,371		7,242		5,299			20,912		8,328		11,710		5,734		25,772
Selling, general, and administrative expenses	5,467		4,808		4,641			14,916		5,790		5,055		4,096		14,941
Operating income	2,904		2,434		658			5,996		2,538		6,655		1,638		10,831
Nine months ended December 31, 2017:
Six months ended September 29, 2019:
Sales	$	183,053	$	107,307	$	86,819		$	377,179	$	143,415	$	89,120	$	54,844	$	287,379
Gross profit	24,372		29,624		14,958			68,954		21,589		24,844		10,358		56,791
Selling, general and administrative expenses	16,043		14,942		13,748			44,733		11,991		10,122		7,540		29,653
Operating income	8,329		14,682		1,210			24,221		9,598		14,722		2,818		27,138
Nine months ended January 1, 2017:
Six months ended September 30, 2018:
Sales	$	176,717	$	100,590	$	87,668		$	364,975	$	143,420	$	83,582	$	68,122	$	295,124
Gross profit	28,978		28,943		18,239			76,160		18,771		23,147		12,311		54,229
Selling, general and administrative expenses	16,254		14,825		13,834			44,913		11,277		10,156		8,487		29,920
Operating income	12,724		14,118		4,405			31,247		7,494		12,991		3,824		24,309

No significant changes to identifiable assets by segment occurred during the ~~nine~~six months ended ~~December 31, 2017.~~September 29, 2019.


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

The following is a discussion and analysis of our financial condition and results of operations for the three and ~~nine~~six months ended ~~December 31, 2017~~September 29, 2019 as compared to the similar ~~periods~~period ended ~~January 1, 2017~~September 30, 2018. This discussion should be read in conjunction with the condensed consolidated financial statements and notes to condensed consolidated financial statements included in this quarterly report on Form 10-Q and Item 8 of our Annual Report on Form 10-K for the fiscal year ended ~~April 2, 2017~~March 31, 2019 (“fiscal ~~2017”~~2019”). References to “fiscal ~~2018”~~2020” refer to the fiscal year ending ~~April 1, 2018.~~March 29, 2020.

Overview

We derive substantially all of our revenues from the sale of chemicals and specialty ingredients to our customers in a wide variety of industries. We began our operations primarily as a distributor of bulk chemicals with a strong customer focus. Over the years, we have maintained the strong customer focus and have expanded our business by increasing our sales of value-added chemical and specialty ingredients, including manufacturing, blending, and repackaging certain products.

Financial Results

We focus on total profitability dollars when evaluating our financial ~~results. We believe that gross profit~~results as opposed to profitability as a percentage of sales, as sales dollars ~~is the best measure of~~tend to fluctuate, particularly in our ~~profitability from product sales because a significant portion~~Industrial and Water Treatment segments, as raw material costs rise and fall. The costs for certain of our raw ~~material purchases are impacted by commodity pricing. When commodity prices~~materials can rise or fall ~~the changes can cause~~rapidly, causing fluctuations in gross profit as a percentage of sales.

We use the last in, first out (“LIFO”) method for valuing the majority of our inventory in our Industrial and Water Treatment segments, which causes the most recent product costs for those products to be recognized in our income statement. The valuation of LIFO inventory for interim periods is based on our estimates of fiscal year-end inventory levels and costs. The LIFO inventory valuation method and the resulting cost of sales are consistent with our business practices of pricing to current chemical raw material prices. We recorded an increase in our LIFO reserve of $0.7 million for the three months ended December 31, 2017 and $1.4 million for the nine months ended December 31, 2017, which decreased our reported gross profit for those periods. We recorded a decrease in our LIFO reserve of $0.4 million for the three months ended January 1, 2017 and $0.8 million for the nine months ended January 1, 2017, which increased our reported gross profit for those periods. Inventories in the Health and Nutrition segment are valued using the ~~first-in, first-out~~first in, first out (“FIFO”) method.

Our Industrial and Water Treatment segments sell bulk commodity products. We disclose the sales of our bulk commodity products as a percentage of total sales dollars within each of those segments. Our definition of bulk commodity products includes products that we do not modify in any way, but receive, store, and ship from our facilities, or direct ship to our customers in large quantities. We review our sales reporting on a periodic basis to ensure we are including all products that meet this definition.

Results of Operations

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


	Three months ended				Nine months ended				Three months ended				Six Months Ended
	December 31, 2017		January 1, 2017		December 31, 2017		January 1, 2017		September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
Sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	(84.0	)%	(81.4	)%	(81.7	)%	(79.1	)%	(80.0	)%	(82.3	)%	(80.2	)%	(81.6	)%
Gross profit	16.0	%	18.6	%	18.3	%	20.9	%	20.0	%	17.7	%	19.8	%	18.4	%
Selling, general and administrative expenses	(12.0	)%	(13.3	)%	(11.9	)%	(12.3	)%	(10.6	)%	(10.3	)%	(10.3	)%	(10.1	)%
Operating income	4.0	%	5.3	%	6.4	%	8.6	%	9.4	%	7.4	%	9.5	%	8.3	%
Interest expense, net	(0.7	)%	(0.6	)%	(0.6	)%	(0.5	)%	(0.5	)%	(0.6	)%	(0.5	)%	(0.6	)%
Other income (expense)									—	%	0.1	%	—	%	—	%
Income before income taxes	3.3	%	4.7	%	5.8	%	8.1	%	8.9	%	6.9	%	9.0	%	7.7	%
Income tax benefit (expense)	11.3	%	(1.6	)%	1.7	%	(3.0	)%
Income tax expense									(2.3	)%	(1.9	)%	(2.4	)%	(2.1	)%
Net income	14.6	%	3.1	%	7.5	%	5.1	%	6.6	%	5.0	%	6.6	%	5.6	%

Three Months Ended ~~December 31, 2017~~September 29, 2019 Compared to Three Months Ended ~~January 1, 2017~~September 30, 2018

Sales

Sales ~~increased~~ ~~$5.7~~decreased $5.3 million, or ~~5.1%~~3.6%, to ~~$118.1~~$140.0 million for the three months ended ~~December 31, 2017~~,September 29, 2019, as compared to ~~$112.4~~$145.3 million ~~reported~~ for the same period of the prior year.

Industrial Segment. Industrial segment sales ~~were $60.3~~decreased $1.3 million, or 1.9%, to $68.1 million for the three months ended ~~December 31, 2017, an increase of $3.3 million, or 5.7%, from $57.1~~September 29, 2019, as compared to $69.4 million for the same period of the prior year. Sales of bulk commodity products in the Industrial segment were approximately ~~21%~~17% of sales dollars for the three months ended ~~December 31, 2017~~September 29, 2019 and ~~20% of sales~~22% for the same period in the prior year. ~~Overall sales~~Sales dollars decreased from the prior year due to a decrease of volumes ~~decreased slightly, while sales dollars increased as a result~~sold of ~~more sales of certain specialty~~our bulk commodity products ~~with higher per-unit selling prices,~~ as well as ~~higher selling prices on certain products resulting from increased~~lower pricing due to lower costs onof one of our major ~~commodities.~~commodities, offset somewhat by an increase in volumes sold of our manufactured, blended and re-packaged products that typically carry higher per-unit selling prices.

Water Treatment Segment. Water Treatment segment sales increased ~~$2.8~~$3.2 million, or ~~9.9%~~7.4%, to ~~$30.9~~$45.9 million for the three months ended ~~December 31, 2017,~~September 29, 2019, as compared to ~~$28.1~~$42.7 million for the same period of the prior year. Sales of bulk commodity products in the Water Treatment segment were approximately ~~17%~~11% of sales dollars ~~in the both~~for the three months ended ~~December 31, 2017~~September 29, 2019 and 14% of sales dollars for the same period ~~a year ago. Sales~~in the prior year. The increase in sales dollars was driven by increased ~~as a result~~volumes sold of ~~increased sales across many product lines.~~certain manufactured, blended and re-packaged products that carry higher per-unit selling prices, offset somewhat by lower pricing due to lower costs of one of our major commodities.

Health & Nutrition Segment. Health and Nutrition segment sales ~~were $26.9~~decreased $7.1 million, or 21.5%, to $26.1 million for the three months ended ~~December 31, 2017, a decrease of $0.3 million, or 1.2%, from $27.2~~September 29, 2019, as compared to $33.2 million the same period of the prior year. ~~Increased~~The decrease in sales ~~of distributed products were offset~~was driven by decreased sales of our ~~manufactured~~specialty distributed products. The decline in sales of our manufactured products was due to reduced demand from certain customers and temporarily refocused efforts as we made investments to upgrade the facility to generate future growth.

Gross Profit

Gross profit was ~~$18.8~~$28.0 million, or ~~16.0%~~20.0% of sales, for the three months ended ~~December 31, 2017, a decrease~~September 29, 2019, an increase of ~~$2.1~~$2.2 million from ~~$20.9~~$25.8 million, or ~~18.6%~~17.7% of sales, for the same period of the prior year. ~~As a result of raw material price increases and projected increases in year-end inventory levels,~~During the three months ended September 29, 2019, the LIFO reserve ~~reduced~~decreased, and gross profit increased, by ~~$1.1 million~~$0.3 million. In the same period of the prior year, ~~over year. Gross~~the LIFO reserve increased, and gross profit ~~was further negatively impacted~~decreased, by ~~competitive pricing pressures and decreased sales of manufactured products in our Health & Nutrition segment.~~$0.1 million.

Industrial Segment. Gross profit for the Industrial segment ~~decreased $1.3~~increased $2.3 million to ~~$7.1~~$10.7 million, or ~~11.8%~~15.7% of sales, for the three months ended ~~December 31, 2017,~~September 29, 2019, as compared to ~~$8.4~~$8.3 million, or ~~14.7%~~12.0% of sales, for the same period of the prior year. ~~Raw material cost increases negatively impacted~~During the ~~quarter’s results with~~current quarter, the LIFO ~~method of valuing inventory decreasing~~reserve decreased, and gross profit ~~by $0.5 million in the current year while increasing gross profit~~increased, by $0.3 ~~million for~~million. In the same period ofa year ago, the ~~prior year. Although we were able to address~~LIFO reserve increased, costs on one of our major commodities through higher selling prices, competitive pricing pressures limited our ability to pass all cost increases on to our customers, driving the lower year-over-year gross profit and gross profit ~~percentage.~~decreased, by $0.1 million. Total gross profit increased from a year ago due to a favorable product mix shift to sales of higher margin manufactured, blended and re-packaged products.

Water Treatment Segment. Gross profit for the Water Treatment segment increased ~~$0.2~~$1.1 million to ~~$7.4~~$12.8 million, or ~~24.0%~~27.8% of sales, for the three months ended ~~December 31, 2017,~~September 29, 2019, as compared to ~~$7.2~~$11.7 million, or ~~25.8%~~27.4% of sales, for the same period of the prior year. ~~Raw material cost increases negatively impacted~~During the ~~quarter’s results with~~current and prior year quarters, the LIFO ~~method of valuing inventory decreasing~~reserve changed nominally and therefore had a minimal impact on gross ~~profit by $0.1 million in the current year, while it increased gross profit by $0.1 million in the previous year. In spite of the negative year-over-year LIFO impact, gross~~profit. Gross profit increased as a result of ~~increased~~higher sales ~~volumes compared to a year ago. Gross profit as a percentage of sales decreased~~ compared to a year ago, ~~due to the LIFO impact as well as a product mix shift.~~offset somewhat by higher variable operating costs.

Health and Nutrition Segment. Gross profit for our Health and Nutrition segment decreased ~~$0.9~~$1.1 million to ~~$4.4~~$4.6 million, or ~~16.2%~~17.5% of sales, for the three months ended ~~December 31, 2017,~~September 29, 2019, as compared to ~~$5.3~~$5.7 million, or ~~19.5%~~17.3% of sales, for the same period of the prior year. Gross profit ~~and gross profit as a percentage of sales declined primarily~~decreased as a result of lower sales, while gross profit as a percent of ~~our manufactured products, which typically carry higher per-unit margins than distributed products, as compared to a~~sales was up slightly year ~~ago.~~over year.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were ~~$14.1~~relatively flat year over year at $14.8 million, or ~~12.0%~~10.6% of sales, for the three months ended ~~December 31, 2017, a decrease of $0.8 million from~~September 29, 2019, and $14.9 million, or ~~13.3%~~10.3% of sales, for the same period of the prior year. SG&A costs were lower in all segments as a result of management efforts to control costs, including delaying or suspending the filling of open positions as well as a decline in certain other variable expenses.

Operating Income

Operating income increased $2.4 million to $13.2 million, or 9.4% of sales, for the three months ended September 29, 2019, from $10.8 million, or 7.4% of sales, for the same period of the prior year due to the combined impact of the factors discussed above.

Interest Expense, Net

Interest expense was ~~$4.7~~$0.7 million for the three months ended ~~December 31, 2017, as~~September 29, 2019 compared to ~~$6.0~~$0.8 million for the same period of the prior year. ~~Operating income in our Industrial segment~~Interest expense decreased ~~by $0.8 million driven by lower gross profits, partially offset by reduced SG&A expenses. Operating income in our Water Treatment segment increased by $0.3 million~~ due to ~~higher gross profits and slightly~~ lower ~~SG&A expenses. Operating income in our Health and Nutrition Segment decreased by $0.8 million driven by lower gross profits~~outstanding borrowings compared to the ~~comparable period in the~~ prior ~~year, partially offset by lower SG&A expenses.~~year.

~~Interest Expense, Net~~Other (expense) income

~~Interest expense~~Other income was ~~$0.9 million~~nominal for the three months ended ~~December 31, 2017 compared to $0.6~~September 29, 2019 and was $0.1 million ~~for the same period of the prior year due primarily to increased outstanding borrowings~~ in the ~~current~~second quarter of last fiscal year. Other (expense) income represents gains or losses recorded on investments held for our non-qualified deferred compensation plan. The amount recorded as a gain or loss is offset by a similar reduction or increase to ~~fund working capital requirements.~~compensation expense recorded within SG&A expenses.

Income Tax Provision

~~On December 22, 2017 the Tax Cuts and Jobs Act of 2017 (the “Act”), was signed into law. The Act includes a number of provisions, including the lowering of the U.S. corporate~~

Our effective income tax rate ~~from 35% to 21% effective January 1, 2018. Because our fiscal 2018 ends April 1, 2018, our tax provision~~was 26.2% for ~~the current year will be calculated utilizing a blended statutory federal rate of 31.5%. In future years, we expect our statutory federal rate to be 21%.~~

~~Under generally accepted accounting principles, deferred tax assets and liabilities are required to be revalued during the period in which new tax legislation is enacted. As such, during~~ the three months ended ~~December 31, 2017, we revalued our net deferred tax liabilities to reflect the impact of the Act and recorded a one-time benefit of $13.2 million. As a result of this adjustment, our~~September 29, 2019. Our effective tax rate for the three months ended ~~December 31, 2017~~September 30, 2018 was ~~not meaningful. Our effective income tax rate was 33.8% for the three months ended January 1, 2017.~~26.6%. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.

~~Nine~~Six Months Ended ~~December 31, 2017~~September 29, 2019 Compared to ~~Nine~~Six Months Ended ~~January 1, 2017~~September 30, 2018

Sales

Sales ~~increased $12.2~~decreased $7.7 million, or ~~3.3%~~2.6%, to ~~$377.2~~$287.4 million for the ~~nine~~six months ended ~~December 31, 2017,~~September 29, 2019, as compared to ~~$365.0~~

$295.1 million ~~reported~~ for the same period of the prior year.

Industrial Segment.Industrial segment sales were ~~$183.1~~$143.4 million for both the ~~nine~~six months ended ~~December 31, 2017, an increase of $6.3 million, or 3.6%, as compared to $176.7 million for~~September 29, 2019 and the same period of the prior year. Sales of bulk commodity products in the Industrial segment were approximately 19% of sales dollars for the ~~nine~~six months ended ~~December 31, 2017~~September 29, 2019 and 21% of sales dollars for the same period in the prior year. ~~Overall sales volumes were relatively flat year over year, while~~While sales dollars ~~increased as~~did not change in the current period compared to a ~~result of more~~year ago, increased sales of ~~certain specialty~~our manufactured, blended and re-packaged products ~~with higher per-unit selling prices, as well as higher selling prices on certain~~were offset by decreased sales of our Bulk commodity products ~~resulting from increased~~and lower pricing due to lower costs onof one of our major commodities.

Water Treatment Segment. Water Treatment segment sales increased ~~$6.7~~$5.5 million, or ~~6.7%~~6.6%, to ~~$107.3~~$89.1 million for the ~~nine~~six months ended ~~December 31, 2017,~~September 29, 2019, as compared to ~~$100.6~~$83.6 million for the same period of the prior year. Sales of bulk commodity products in the Water Treatment segment were approximately ~~15%~~11% of sales dollars ~~in both~~for the ~~nine~~six months ended ~~December 31, 2017~~September 29, 2019 and 14% for the same period ~~a year ago. Sales~~in the prior year. The increase in sales dollars was driven by increased ~~as a result~~volumes sold of ~~increased sales across many product lines.~~certain manufactured, blended and re-packaged products that carry higher per-unit selling prices.

Health & Nutrition Segment. Health and Nutrition segment sales ~~were $86.8~~decreased $13.3 million, or 19.5%, to $54.8 million for the ~~nine~~six months ended ~~December 31, 2017, a decrease of $0.8~~September 29, 2019, as compared to $68.1 million ~~or 1.0%, from $87.7 million for~~ the same period of the prior year. ~~Increased~~The decline in sales ~~of distributed products were offset~~was driven by decreased sales of our ~~manufactured products. The decline in sales~~specialty distributed products, nearly half of ~~our manufactured products~~which was due to ~~reduced demand from certain customers~~a previously anticipated worldwide supply shortage of a significant product that we believe to be temporary and ~~temporarily refocused efforts as we made investments to upgrade~~ the ~~facility to generate future growth.~~ramp-up of sales with new partners replacing previous product lines.

Gross Profit

Gross profit ~~was $69.0~~increased $2.6 million to $56.8 million, or ~~18.3%~~19.8% of sales, for the ~~nine~~six months ended ~~December 31, 2017, a decrease of $7.2 million compared to $76.2~~September 29, 2019, from $54.2 million, or ~~20.9%~~18.4% of sales, for the same period of the prior year. ~~As a result of raw material price increases and projected increases in year-end inventory levels,~~During the ~~current year increase in~~six months ended September 29, 2019, the LIFO reserve ~~reduced~~decreased and gross profit increased by ~~$2.1~~$0.3 million, ~~year over year. In addition,~~while the ~~decrease in~~LIFO reserve increased and gross profit ~~was due to planned increases in personnel and other investments to drive future growth, including accelerated depreciation of $0.7 million, as well as a~~decreased by $0.5 million ~~reclassification from SG&A expenses, product mix changes and continued competitive pricing pressures.~~

in the same period of the prior year.

Industrial Segment.Gross profit for the Industrial segment ~~decreased $4.6~~increased $2.8 million to ~~$24.4~~$21.6 million, or ~~13.3%~~15.1% of sales, for the ~~nine~~six months ended ~~December 31, 2017,~~September 29, 2019, as compared to ~~$29.0~~$18.8 million, or ~~16.4%~~13.1% of sales, for the same period of the prior year. ~~Raw material cost increases negatively impacted year-to-date results with~~During the six months ended September 29, 2019, the LIFO ~~method of valuing inventory decreasing~~reserve decreased and gross profit increased by ~~$1.1~~$0.3 million, inwhile the ~~current year while increasing~~LIFO reserve increased and gross profit decreased by ~~$0.6~~$0.4 million during the first six months of the prior year. Total gross profit increased from a year ago due to a favorable product mix shift to sales of higher margin manufactured, blended and re-packaged products.

Water Treatment Segment. Gross profit for the Water Treatment segment increased $1.7 million to $24.8 million, or 27.9% of sales, for the six months ended September 29, 2019, as compared to $23.1 million, or 27.7% of sales, for the same period of the prior year. During the six months ended September 29, 2019 the LIFO reserve changed nominally and therefore had a minimal impact on gross profit. In ~~addition,~~ the ~~decrease~~same period in ~~gross profit~~the prior year, the LIFO reserve increased and gross profit decreased by $0.1 million. Gross profit increased as a ~~percentage~~result of higher sales ~~was driven by increased operating costs as we invest for future growth and~~compared to ~~comply with increased regulatory requirements as well as lower margins on certain commodity products with rising material costs, driven by competitive pricing pressures. The impact was~~a year ago, offset somewhat by higher ~~profits on sales of certain specialty products with higher per-unit margins.~~variable operating costs.

~~Water Treatment~~Health and Nutrition Segment.Gross profit for ~~the Water Treatment~~our Health and Nutrition segment ~~increased $0.7~~decreased $2.0 million to ~~$29.6~~$10.4 million, or ~~27.6%~~18.9% of sales, for the ~~nine~~six months ended ~~December 31, 2017,~~September 29, 2019, as compared to ~~$28.9~~$12.3 million, or ~~28.8%~~18.1% of sales, for the same period of the prior year. Gross profit ~~dollars increased~~decreased as a result of lower sales, while gross profit as a percent of sales improved year over year due to increased profitability on certain products as well as lower operational costs.

Selling, General and Administrative Expenses

SG&A expenses were relatively flat year over year at $29.7 million, or 10.3% of sales, ~~volumes. Raw material cost increases negatively impacted year-to-date results with~~for the ~~LIFO method~~six months ended September 29, 2019, and $29.9 million, or 10.1% of ~~valuing inventory decreasing gross profit by $0.3~~sales, for the same period of the prior year.

Operating Income

Operating income was $27.1 million, inor 9.5% of sales, for the ~~current~~six months ended September 29, 2019, as compared to $24.3 million, or 8.3% of sales, for the same period of the prior year ~~while increasing gross profit by $0.2~~due to the combined impact of the factors discussed above.

Interest Expense, Net

Interest expense was $1.4 million for the six months ended September 29, 2019 compared to $1.7 million for the same period of the prior year. ~~In spite of the negative year-over-year LIFO impact, gross profit increased as a result of increased sales volumes compared to a year ago.~~

~~Health and Nutrition Segment. Gross profit for our Health and Nutrition segment~~Interest expense decreased $3.3 million to $15.0 million, or 17.2% of sales, for the nine months ended December 31, 2017, as compared to $18.2 million, or 20.8% of sales, for the same period of the prior year. Decreased sales of our manufactured products, which carry higher per-unit margins, contributed to the decline in gross profit and gross profit as a percentage of sales. The decrease in gross profit and gross profit as a percentage of sales was also driven by planned cost increases including accelerated depreciation expense of $0.7 million related to manufacturing equipment that we removed to make upgrades to current equipment and to make room for more efficient equipment, as well as the reclassification of $0.5 million of costs that were recorded as SG&A expenses in the prior year to operating overhead in the current year to conform to our presentation.

~~Selling, General and Administrative Expenses~~

SG&A expenses were $44.7 million, or 11.9% of sales, for the nine months ended December 31, 2017, a decrease of $0.2 million from $44.9 million, or 12.3% of sales, for the same period of the prior year. Expenses decreased primarily as a result of the reclassification of $0.5 million of expenses in our Health & Nutrition segment from SG&A to operating overhead to conform to our presentation.

~~Operating Income~~

Operating income was $24.2 million for the nine months ended December 31, 2017, as compared to $31.2 million for the same period of the prior year. Operating income in our Industrial segment decreased by $4.4 million driven by lower gross profits in that segment partially offset by lower SG&A expenses. Operating income in our Water Treatment segment increased by $0.6 million due to ~~higher gross profits. Operating income in our Health and Nutrition segment decreased by $3.2 million driven by~~ lower ~~gross profits~~outstanding borrowings compared to the ~~comparable period in the~~ prior year.

~~Interest Expense, Net~~

Interest expense was $2.4 million for the first nine months of fiscal 2018, compared to $2.0 million for the same period of the prior year due primarily to increased outstanding borrowings in the current year to fund working capital requirements.

Income Tax Provision

On December 22, 2017 the Act was signed into law. The Act includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. Because our fiscal 2018 ends April 1, 2018, our tax provision for the current year will be calculated utilizing a blended statutory federal rate of 31.5%. In future years, we expect our statutory federal rate to be 21%.

Under generally accepted accounting principles, deferred tax assets and liabilities are required to be revalued during the period in which new tax legislation is enacted. As such, during the nine months ended December 31, 2017, we revalued our net deferred tax liabilities to reflect the impact of the Act and recorded a one-time benefit of $13.2 million. As a result of this adjustment, ourOur effective tax rate for the ~~nine~~six months ended ~~December 31, 2017~~September 29, 2019 was ~~not meaningful. Without the non-recurring adjustments discussed above, our effective tax rate~~26.3% and was 27.0% for the ~~nine~~six months ended ~~December 31, 2017 was 32.5%.~~

~~Our effective income tax rate was 37.3% for the nine months ended January 1, 2017.~~September 30, 2018. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.

Liquidity and Capital Resources

Cash was ~~$7.6~~$4.1 million at ~~December 31, 2017, an increase~~September 29, 2019, a decrease of ~~$0.7~~$5.1 million as compared with the ~~$6.9~~$9.2 million available as of ~~April 2, 2017.~~March 31, 2019.

Cash provided by operating activities was ~~$14.6~~$27.1 million for the ~~nine~~six months ended ~~December 31, 2017,~~September 29, 2019, compared to cash provided by operating activities of ~~$31.0~~$24.9 million for the same period of the prior year. The ~~decrease~~year-over-year increase in cash provided by operating activities was primarily driven by ~~lower operating~~the improvement in net income ~~and a year-over-year change in the amount of cash provided by accounts receivable, driven by high levels of collections in~~for the first ~~nine month of the prior year, as well as a change in the amount of cash utilized to purchase inventory during the first nine~~six months of fiscal ~~2018 as~~2020 compared to the same period in the prior year. The large increase in inventory in the first nine months of fiscal 2018 was primarily due to an increase in on-hand and in-transit inventory, along with an increase in the per-unit cost, of one of our major commodities. The decision to increase inventory was driven largely by expectations of future cost increases.a year ago. Due to the nature of our operations, which includes purchases of large quantities of bulk chemicals, timing of purchases can result in significant changes in working capital investment and the resulting operating cash flow. Typically, our cash requirements increase during the period from April through November as caustic soda inventory levels increase asbecause the majority of barges are received during this period.

Cash used in investing activities was ~~$16.7~~$13.9 million for the ~~nine~~six months ended ~~December 31, 2017,~~September 29, 2019, compared to ~~$17.7~~$4.1 million for the same period of the prior year. Capital expenditures were ~~$17.0~~$14.1 million for the ~~nine~~six months ended ~~December 31, 2017,~~September 29, 2019, compared to ~~$15.8~~$4.2 million in the same period of the prior year. Included in capital expenditures for the first nine months of fiscal 2018 was $6.7 million related to business expansion, inventory storage, and process improvements, including the purchase of three ofWe purchased our previously leased ~~Florida locations, and $7.4~~corporate headquarters facility in the first quarter of the current fiscal year, which drove the increase in capital spending.

Cash used in financing activities was $18.4 million ~~related~~for the six months ended September 29, 2019, compared to ~~facility improvements, replacement equipment, new and replacement containers, and Water Treatment trucks. In the previous year, we paid $2.2 million of additional purchase price for Stauber as closing~~ cash ~~debt and working capital balances were finalized in early 2017.~~

~~Cash~~ provided by financing activities ~~was $2.9 million for the nine months ended December 31, 2017, compared to cash used in financing activities~~ of ~~$24.9~~$21.7 million in the same period of the prior year. Included in financing activities in the current year were debt payments of $10.0 million, dividend payments of ~~$9.2~~$4.9 million ~~debt repayments~~and share repurchases of $5.6 million on our Term Loan Facility (as defined below) and net proceeds of $17.0 million resulting from borrowings on our Revolving Loan Facility (as defined below) which were made in the nine months ended December 31, 2017 to fund working capital requirements.$3.8 million. In the first ~~nine~~six months of the prior year, we made debt payments of $15.0 million and dividend payments of ~~$8.6 million, debt repayments on our Term Loan Facility of $3.8 million, and repayments of $13.0 million on our Revolving Loan Facility.~~$7.1 million. The year-over-year change in dividend payments resulted from changing from semi-annual dividends previously to quarterly payments made currently.

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

~~On December 23, 2015,~~

Our Board of Directors has authorized the repurchase of up to 800,000 shares of our outstanding common stock, including an increase of 500,000 shares in February 2019. The shares may be purchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. The primary objective of the share repurchase program is to offset the impact of dilution from issuances relating to employee and director equity grants and our employee stock purchase program. During the first six months of fiscal 2020, we ~~entered into a~~repurchased 91,395 shares of common stock with an aggregate purchase price of $3.8 million. No shares were repurchased during the first six months of fiscal 2019. As of September 29, 2019, 412,985 shares remained available for purchase under the program

We are party to an amended and restated credit agreement (the “Credit Agreement”) with U.S. Bank National Association (“U.S. Bank”) as Sole Lead Arranger and Sole Book Runner, and other lenders from time to time party thereto (collectively, the “Lenders”), whereby U.S. Bank is also serving as Administrative Agent. The Credit Agreement provides us with senior secured revolving credit facilities (the “Credit Facility”) totaling $165.0 million, consisting of a $100.0 million senior secured term loan credit facility (the “Term Loan Facility”) and a $65.0 million senior secured revolving loan credit facility (the “Revolving Loan Facility”)~~. The Term Loan facility requires mandatory quarterly repayments, with the balance due at maturity.~~ totaling $150.0 million. The Revolving Loan Facility includes a $5.0 million letter of credit subfacility ~~in the amount of $5.0~~and $15.0 million ~~and~~swingline subfacility. The Revolving Loan Facility has a ~~swingline subfacility in the amount of $8.0 million.~~five-year maturity date, maturing on November 30, 2023. The ~~Credit Facility is scheduled to terminate on December 23, 2020. The Credit~~Revolving Loan Facility is secured by substantially all of our personal property assets and those of our subsidiaries.

Borrowings under the ~~Credit~~Revolving Loan Facility bear interest at a ~~variable~~ rate per annum equal to one of the following, plus, in both cases, an applicable margin based upon our leverage ratio: (a) LIBOR for an interest period of one, two, three or six months as selected by us, reset at the end of the selected interest period, or (b) a base rate determined by reference to the highest of (1) ~~U.S.~~U. S. Bank’s prime rate, (2) the Federal Funds Effective Rate plus 0.5%, or (3) one-month LIBOR for U.S. dollars plus 1.0%. The LIBOR margin is ~~1.125%, 1.25% or 1.5%~~between 0.85% - 1.35%, depending on our leverage ratio. The base rate margin is ~~either 0.125%, 0.25% or 0.5%~~between 0.00% - 0.35%, depending on our leverage ratio. In the event that the ICE Benchmark Administration (or any person that takes over administration of such rate) determines that LIBOR is no longer available, including as a result of the intended phase out of LIBOR by the end of 2021, our Revolving Loan Facility provides for an alternative rate of interest to be jointly determined by us and U.S. Bank, as administrative agent, that gives due consideration to the then prevailing market convention for determining a rate of interest for syndicated loans in the United States. Once such successor rate has been approved by us and U.S. Bank, the Revolving Credit Loan Facility would be amended to use such successor rate without any further action or consent of any other lender, so long as the administrative agent does not receive any objection from any other lender. At ~~December 31, 2017,~~September 29, 2019, the effective interest rate on our ~~borrowings~~borrowing was ~~2.8%~~2.9%.

On September 20, 2016, we entered into 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 new swap agreement began September 1, 2017 and will terminate concurrently with the expiration of our credit facility on December 23, 2020. The notional amount of the swap agreement is $40 million from September 1, 2017 through August 31, 2018, $30 million from September 1, 2018 through August 31, 2019 and $20 million from September 1, 2019 through December 23, 2020. We have designated this swap as a cash flow hedge and have determined that it qualifies for hedge accounting treatment. For so long as the hedge is effective, changes in fair value of the cash flow hedge are recorded in other comprehensive loss (net of tax) until income or loss from the cash flows of the hedged item is realized.

In addition to paying interest on the outstanding principal under the ~~Credit~~Revolving Loan Facility, we are required to pay a commitment fee on the unutilized commitments thereunder. The commitment fee is between 0.15% - 0.25% ~~to 0.3%~~, depending on our leverage ratio.

Debt issuance costs ~~of $0.7 million were~~ paid to the lenders ~~and~~ are being amortized as interest expense over the term of the ~~credit facility.~~Credit Agreement. As of ~~December 31, 2017,~~September 29, 2019, the unamortized balance of these costs was $0.4 million, and is reflected as a reduction of debt on our balance sheet.

The Credit Agreement requires us to maintain (a) a minimum fixed charge coverage ratio of 1.15 to 1.00 and (b) a maximum total cash flow leverage ratio of 3.0 to 1.0. The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict our ability to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain payments, enter into sale and leaseback transactions, grant liens on our assets or ~~enter into~~ rate management transactions, subject to certain limitations. We are permitted to make distributions, pay dividends and repurchase shares so long as no default or event of default exists or would exist as a result thereof. ~~As of December 31, 2017, we~~We were in compliance with all ~~required covenants.~~covenants of the Credit Agreement as of September 29, 2019.

The Credit Agreement contains customary events of default, including ~~failure to make payments under the Term Loan Facility,~~ failure to comply with covenants in the Credit Agreement and other loan documents, cross default to other material indebtedness, failure by us to pay or discharge material judgments, bankruptcy, and change of control. The occurrence of an event of default would permit the lenders to terminate their commitments and accelerate loans under the ~~Credit~~Revolving Loan Facility.

As part of our growth strategy, we have acquired businesses and may pursue acquisitions or other strategic relationships in the future that we believe will complement or expand our existing businesses or increase our customer base. We believe we could borrow additional funds under our current or new credit facilities or sell equity for strategic reasons or to further strengthen our financial position.

Critical Accounting ~~Policies~~Estimates

~~Our significant accounting policies are set forth in Note 1 to our consolidated financial statements~~There were no material changes in our critical accounting estimates since the filing of our Annual Report on Form 10-K for the fiscal year ended ~~April 2, 2017. The accounting policies used in preparing our condensed consolidated financial statements for the first quarter of fiscal 2017 are the same as those described in that Annual Report.~~March 31, 2019.

Forward-Looking Statements

The information presented in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts, but rather are based on our current expectations, estimates and projections, and our beliefs and assumptions. ~~We intend words~~Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,~~” “seek,~~” “estimate,” “will” and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. These factors could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Additional information concerning potential factors that could affect future financial results is included in our Annual Report on Form 10-K for the fiscal year ended ~~April 2, 2017.~~March 31, 2019. We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q. We are not obligated to update these statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures ~~are effective.~~were effective as of September 29, 2019. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control

There was no change in our internal control over financial reporting during the ~~third~~second quarter of fiscal ~~2018~~2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended ~~April 2, 2017.~~March 31, 2019.

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

~~On May 29, 2014,~~As previously announced, our Board of Directors has authorized ~~a share~~the repurchase ~~program~~ of up to ~~300,000~~800,000 shares of our outstanding common stock. The shares may be ~~repurchased~~purchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. ~~We did not repurchase any shares~~The following table sets forth information concerning purchases of our common stock ~~during~~for the three months ended ~~December 31, 2017. As of December 31, 2017, 112,546 shares remained available to be repurchased under the share repurchase program.~~September 29, 2019:



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program	Maximum Number of Shares that May Yet be Purchased under Plans or Programs
7/1/2019 - 7/28/2019	—	$	—	—	457,244
7/29/2019 - 8/25/2019	44,259	45.00		44,259	412,985
8/26/2019 - 9/29/2019	—	—		—	412,985
Total	44,259			44,259

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



Exhibit	Description	Method of Filing
3.1	Amended and Restated Articles of Incorporation. (1)	Incorporated by Reference
3.2	Amended and Restated By-Laws. (2)	Incorporated by Reference
10.1	Employee Stock Purchase Plan, as amended. (3)	Incorporated by Reference
10.2	Amended and Restated Credit Agreement, dated as of November 30, 2018, among the Company, U.S. Bank National Association, and certain financial institutions. (4)	Incorporated by Reference
10.3	2019 Equity Incentive Plan approved August 1, 2019.	Filed Electronically
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.	Filed Electronically
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.	Filed Electronically
32.1	Section 1350 Certification by Chief Executive Officer.	Filed Electronically
32.2	Section 1350 Certification by Chief Financial Officer.	Filed Electronically
101	Financial statements from the Quarterly Report on Form 10-Q of Hawkins, Inc. for the period ended ~~December 31, 2017~~September 29, 2019 filed with the SEC on ~~February 8, 2018~~October 30, 2019 formatted in Extensible Business Reporting Language (XBRL); (i) the Condensed Consolidated Balance Sheets at ~~December~~September 29, 2019 and March 31, ~~2017 and April 2, 2017,~~2019, (ii) the Condensed Consolidated Statements of Income for the three and ~~nine~~six months ended ~~December 31, 2017~~September 29, 2019 and ~~January 1, 2017,~~September 30, 2018, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~December 31, 2017~~September 29, 2019 and ~~January 1, 2017,~~September 30, 2018, (iv) the Condensed Consolidated Statements of Shareholder's Equity for the three and six months ended September 29, 2019 and September 30, 2018, (v) the Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~December 31, 2017~~September 29, 2019 and ~~January 1, 2017,~~September 30, 2018, and ~~(v)~~(vi) Notes to Condensed Consolidated Financial Statements.	Filed Electronically


(1)	Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed on July 29, 2010 (File no. 000-07647).


(2)	Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated October 28, 2009 and filed November 3, 2009 (File no. 000-07647).


(3)	Incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed November 2, 2018 (File no. 333-228128).


(4)	Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form 8-K filed December 3, 2018 (File no. 000-07647).

SIGNATURES

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



HAWKINS, INC.

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

Dated: ~~February 8, 2018~~October 30, 2019