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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 27, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-7647
HAWKINS, INC.
(Exact name of registrant as specified in its charter) 

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

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

(612) 331-6910
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $.05 per shareHWKNNasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes   ☒    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
CLASS Shares Outstanding at January 22, 2021
Common Stock, par value $.05 per share 10,611,026





HAWKINS, INC.
INDEX TO FORM 10-Q
  Page
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

i


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
HAWKINS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
December 27,
2020
March 29,
2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$7,969 $4,277 
Trade receivables — less allowance for doubtful accounts:
$549 as of December 27, 2020 and $784 as of March 29, 2020
76,822 67,391 
Inventories64,657 54,436 
Income taxes receivable946  
Prepaid expenses and other current assets5,075 4,927 
Total current assets155,469 131,031 
PROPERTY, PLANT, AND EQUIPMENT:291,491 267,221 
Less accumulated depreciation152,568 140,877 
Net property, plant, and equipment138,923 126,344 
OTHER ASSETS:
Right-of-use assets8,181 9,090 
Goodwill67,657 58,440 
Intangible assets, net of accumulated amortization69,726 60,653 
Other6,049 3,770 
Total other assets151,613 131,953 
Total assets$446,005 $389,328 
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable — trade$31,160 $34,129 
Accrued payroll and employee benefits13,406 13,538 
Current portion of long-term debt9,907 9,907 
Short-term lease liability1,440 1,523 
Container deposits1,426 1,376 
Other current liabilities1,693 1,747 
Total current liabilities59,032 62,220 
LONG-TERM DEBT, LESS CURRENT PORTION85,821 49,751 
LONG-TERM LEASE LIABILITY6,854 7,649 
PENSION WITHDRAWAL LIABILITY4,719 4,978 
DEFERRED INCOME TAXES25,097 25,106 
DEFERRED COMPENSATION LIABILITY7,054 5,026 
OTHER LONG-TERM LIABILITIES514 1,114 
Total liabilities189,091 155,844 
COMMITMENTS AND CONTINGENCIES  
SHAREHOLDERS’ EQUITY:
Common stock; authorized: 30,000,000 shares of $0.05 par value; 10,462,159 and 10,512,229 shares issued and outstanding as of December 27, 2020 and March 29, 2020, respectively
523 526 
Additional paid-in capital48,975 50,090 
Retained earnings207,416 182,947 
Accumulated other comprehensive loss (79)
Total shareholders’ equity256,914 233,484 
Total liabilities and shareholders’ equity$446,005 $389,328 

See accompanying notes to condensed consolidated financial statements.
1


HAWKINS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per-share data)
 
 Three Months EndedNine Months Ended
 December 27,
2020
December 29,
2019
December 27,
2020
December 29,
2019
Sales$142,927 $120,406 $433,900 $407,785 
Cost of sales(114,688)(98,928)(341,888)(329,516)
Gross profit28,239 21,478 92,012 78,269 
Selling, general and administrative expenses(17,750)(14,702)(49,009)(44,355)
Operating income10,489 6,776 43,003 33,914 
Interest expense, net(382)(584)(1,101)(2,013)
Other income478 131 1,282 274 
Income before income taxes10,585 6,323 43,184 32,175 
Income tax expense(2,664)(1,776)(11,285)(8,571)
Net income$7,921 $4,547 $31,899 $23,604 
Weighted average number of shares outstanding - basic10,506,918 10,546,453 10,521,521 10,575,432 
Weighted average number of shares outstanding - diluted10,611,655 10,605,895 10,639,372 10,656,115 
Basic earnings per share$0.75 $0.43 $3.03 $2.23 
Diluted earnings per share$0.75 $0.43 $3.00 $2.22 
Cash dividends declared per common share$0.2325 $0.2300 $0.6975 $0.6900 
See accompanying notes to condensed consolidated financial statements.

2


HAWKINS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
 
 Three Months EndedNine Months Ended
 December 27,
2020
December 29,
2019
December 27,
2020
December 29,
2019
Net income$7,921 $4,547 $31,899 $23,604 
Other comprehensive loss, net of tax:
Unrealized gain (loss) on interest rate swap50 (11)79 (259)
Total comprehensive income$7,971 $4,536 $31,978 $23,345 
See accompanying notes to condensed consolidated financial statements.

3


HAWKINS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share data)
 Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated Other Comprehensive Income (Loss)Total
Shareholders’
Equity
SharesAmount
BALANCE — March 29, 202010,512,229 $526 $50,090 $182,947 $(79)$233,484 
Cash dividends declared and paid(2,479)(2,479)
Share-based compensation expense700 700 
Vesting of restricted stock5,263    
Shares surrendered for payroll taxes(1,657) (54)(54)
Other comprehensive loss, net of tax(10)(10)
Net income11,788 11,788 
BALANCE — June 28, 202010,515,835 $526 $50,736 $192,256 $(89)$243,429 
Cash dividends declared and paid(2,480)(2,480)
Share-based compensation expense686 686 
Vesting of restricted stock8,008    
ESPP shares issued21,360 1 772 773 
Other comprehensive income, net of tax39 39 
Net income12,190 12,190 
BALANCE — September 27, 202010,545,203 $527 $52,194 $201,966 $(50)$254,637 
Cash dividends declared and paid(2,471)(2,471)
Share-based compensation expense917 917 
Shares repurchased(83,044)(4)(4,136)(4,140)
Other comprehensive income, net of tax50 50 
Net income7,921 7,921 
BALANCE — December 27, 202010,462,159 $523 $48,975 $207,416 $ $256,914 
 Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated Other Comprehensive Income (Loss)Total
Shareholders’
Equity
SharesAmount
BALANCE — March 31, 201910,592,450 $530 $52,609 $164,405 $317 $217,861 
Cash dividends declared and paid(2,460)(2,460)
Share-based compensation expense509 509 
Vesting of restricted stock27,620 1 (1) 
Shares surrendered for payroll taxes(9,160)(1)(342)(343)
Shares repurchased(47,136)(2)(1,801)(1,803)
Other comprehensive loss, net of tax(179)(179)
Net income9,807 9,807 
BALANCE — June 30, 201910,563,774 $528 $50,974 $171,752 $138 $223,392 
Cash dividends declared and paid(2,445)(2,445)
Share-based compensation expense636 636 
Vesting of restricted stock8,352    
ESPP shares issued18,586 1 660 661 
Shares repurchased(44,259)(2)(1,988)(1,990)
Other comprehensive loss, net of tax(69)(69)
Net income9,250 9,250 
BALANCE — September 29, 201910,546,453 $527 $50,282 $178,557 $69 $229,435 
Cash dividends declared and paid(2,445)(2,445)
Share-based compensation expense685 685 
Other comprehensive income, net of tax(11)(11)
Net income4,547 4,547 
BALANCE — December 29, 201910,546,453 $527 $50,967 $180,659 $58 $232,211 
See accompanying notes to condensed consolidated financial statements.
4


HAWKINS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
 Nine Months Ended
 December 27,
2020
December 29,
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$31,899 $23,604 
Reconciliation to cash flows:
Depreciation and amortization16,735 16,181 
Operating leases1,419 1,538 
Gain on deferred compensation assets(1,282)(274)
Stock compensation expense2,303 1,830 
Other170 (42)
Changes in operating accounts providing (using) cash:
Trade receivables(8,121)8,035 
Inventories(9,431)2,940 
Accounts payable(3,569)(2,469)
Accrued liabilities1,160 (3,148)
Lease liabilities(1,363)(1,565)
Income taxes(1,006)(82)
Other(2,308)(1,557)
Net cash provided by operating activities26,606 44,991 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment(13,200)(19,426)
Acquisitions, net of cash acquired(35,017) 
Other 154 326 
Net cash used in investing activities(48,063)(19,100)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends declared and paid(7,430)(7,350)
New shares issued773 661 
Shares surrendered for payroll taxes(54)(343)
Shares repurchased(4,140)(3,793)
Net proceeds from (payments on) revolving loan36,000 (17,000)
Net cash provided by (used in) financing activities25,149 (27,825)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS3,692 (1,934)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD4,277 9,199 
CASH AND CASH EQUIVALENTS, END OF PERIOD$7,969 $7,265 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes$12,345 $8,653 
Cash paid for interest$893 $1,960 
Noncash investing activities - capital expenditures in accounts payable$790 $394 
See accompanying notes to condensed consolidated financial statements.

5


HAWKINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, accordingly, do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended March 29, 2020, previously filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly our financial position and the results of our operations and cash flows for the periods presented. All adjustments made to the interim condensed consolidated financial statements were of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the nine months ended December 27, 2020 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, references to fiscal 2020 refer to the fiscal year ended March 29, 2020 and references to fiscal 2021 refer to the fiscal year ending March 28, 2021.

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

Accounting Policies. The accounting policies we follow are set forth in Note 1 – Nature of Business and Significant Accounting Policies to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 29, 2020, previously filed with the SEC. There has been no significant change in our accounting policies since the end of fiscal 2020.
 
Recently Adopted Accounting Pronouncements

On March 30, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this update replaced the incurred loss impairment methodology in previous 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. Our adoption of this ASU impacted our method for calculating and estimating our allowance for doubtful accounts but did not have a material impact to our financial position or results of operations.
Note 2 — Acquisitions

Acquisition of American Development Corporation of Tennessee, Inc.: On July 28, 2020, we acquired substantially all the assets of American Development Corporation of Tennessee, Inc. (“ADC”) under the terms of an asset purchase agreement among us, ADC and its shareholders. We paid $25 million for the acquisition, using funds available under our revolving credit facility with U.S. Bank National Association to fund the acquisition. ADC is a water treatment chemical distribution company operating primarily in Tennessee, Georgia and Kentucky. The results of operations since the acquisition date, and the assets, including the goodwill associated with this acquisition, are included in our Water Treatment segment. Costs associated with this transaction were not material and were expensed as incurred.

The acquisition has been accounted for as a business combination, under which the total purchase price is allocated to the net tangible and intangible assets and liabilities of ADC acquired in connection with the acquisition based on their estimated fair values. We estimated the fair values of the assets acquired and liabilities assumed using a discounted cash flow analysis (income approach). Of the $25 million purchase price, we allocated $13.3 million to finite-lived intangible assets, primarily customer relationships to be amortized over 17 years, $1.6 million to property, plant and equipment, and $0.9 million to net working capital. The residual amount of $9.2 million was allocated to goodwill. The goodwill recognized as a result of this acquisition is primarily attributable to strategic and synergistic benefits, as well as the assembled workforce. Such goodwill is expected to be deductible for tax purposes. The purchase price allocation is final.

Acquisition of Property: On December 16, 2020, we acquired a manufacturing facility on 28 acres located adjacent to our facility in Rosemount, Minnesota to allow further expansion and growth in both our Industrial and Water Treatment segments. We paid $10 million for the property. The purchase of this facility adds approximately 40,000 square feet of manufacturing and warehouse space to bring us to a total of 105,000 square feet of space on 56 acres of land in the area, with
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rail access at both of the sites to allow for future growth and provide for supply chain flexibility on certain raw materials to better serve the customer.

This acquisition has been accounted for as a property purchase.

Note 3 - Revenue

Our revenue arrangements generally consist of a single performance obligation to transfer promised goods or services. We disaggregate revenues from contracts with customers by operating segments as well as types of products sold. Reporting by operating segment is pertinent to understanding our revenues, as it aligns to how we review the financial performance of our operations. Types of products sold within each operating segment help us to further evaluate the financial performance of our segments.

The following tables disaggregate external customer net sales by major revenue stream for the three and nine months ended December 27, 2020 and December 29, 2019:
Three months ended December 27, 2020
(In thousands)IndustrialWater
Treatment
Health and
Nutrition
Total
Bulk / Distributed specialty products (1)
$10,016 $3,896 $27,839 $41,751 
Manufactured, blended or repackaged products (2)
53,501 35,129 11,577 100,207 
Other839 273 (143)969 
Total external customer sales$64,356 $39,298 $39,273 $142,927 
Three months ended December 29, 2019
(In thousands)IndustrialWater
Treatment
Health and
Nutrition
Total
Bulk / Distributed specialty products (1)
$11,562 $4,280 $19,115 $34,957 
Manufactured, blended or repackaged products (2)
50,600 30,251 3,199 84,050 
Other856 359 184 1,399 
Total external customer sales$63,018 $34,890 $22,498 $120,406 
Nine months ended December 27, 2020
(In thousands)IndustrialWater
Treatment
Health and
Nutrition
Total
Bulk / Distributed specialty products (1)
$28,153 $12,129 $82,737 $123,019 
Manufactured, blended or repackaged products (2)
166,498 115,473 25,808 307,779 
Other2,378 950 (226)3,102 
Total external customer sales$197,029 $128,552 $108,319 $433,900 
Nine months ended December 29, 2019
(In thousands)IndustrialWater
Treatment
Health and
Nutrition
Total
Bulk / Distributed specialty products (1)
$38,174 $13,959 $66,608 $118,741 
Manufactured, blended or repackaged products (2)
165,678 108,888 10,532 285,098 
Other2,581 1,163 202 3,946 
Total external customer sales$206,433 $124,010 $77,342 $407,785 

(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 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 were unique to their 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 have made a policy election to treat shipping costs for FOB shipping point sales as fulfillment costs. As such, we 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 contracts have a single performance obligation and are short term in nature. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. We offer certain customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenue is recognized in an amount estimated based on historical experience and contractual obligations. We periodically review the assumptions underlying our estimates of discounts and volume rebates and adjust revenues accordingly.

Note 4 – Earnings per Share

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

Basic and diluted EPS were calculated using the following:
 Three Months EndedNine Months Ended
December 27, 2020December 29, 2019December 27, 2020December 29, 2019
Weighted-average common shares outstanding—basic10,506,918 10,546,453 10,521,521 10,575,432 
Dilutive impact of performance units and restricted stock104,737 59,442 117,851 80,683 
Weighted-average common shares outstanding—diluted10,611,655 10,605,895 10,639,372 10,656,115 

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

Note 5 – Derivative Instruments

We had 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 $20 million swap agreement terminated on December 23, 2020. We had designated this swap as a cash flow hedge and determined that it qualified for hedge accounting treatment. For so long as the hedge was effective, changes in fair value of the cash flow hedge were recorded in other comprehensive income (net of tax) until income or loss from the cash flows of the hedged item was realized.

For the three and nine months ended December 27, 2020, we recorded $0.1 million in other comprehensive income related to unrealized gains (net of tax) on the cash flow hedge described above. For the three months ended December 29, 2019, we recorded a nominal amount in other comprehensive loss related to unrealized losses (net of tax) on the cash flow hedge. For the nine months ended December 29, 2019, we recorded $0.3 million in other comprehensive loss related to unrealized losses (net of tax) on the cash flow hedge. Included in other current liabilities on our condensed consolidated balance sheet was $0.1 million as of March 29, 2020. The interest rate swap ended on December 23, 2020, and is therefore no longer recorded on our balance sheet.

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.
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Note 6 – 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. As of December 27, 2020 and March 29, 2020, the assets held in a deferred compensation retirement plan are classified as other long-term assets on our balance sheet, with the portion of the plan assets expected to be paid within twelve months classified as current assets and the interest rate swap was classified as other current liabilities on our balance sheet. The fair value of the interest rate swap was determined by the respective counterparties based on interest rate changes. Interest rate swaps are valued based on observable interest rate yield curves for similar instruments. The deferred compensation plan assets relate to contributions made to a non-qualified compensation plan on behalf of certain employees who are classified as “highly compensated employees” as determined by IRS guidelines. The assets are part of a rabbi trust and the funds are held in mutual funds. The fair value of the deferred compensation is based on the quoted market prices for the mutual funds at the end of the period.

 
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis as of December 27, 2020 and March 29, 2020.

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(In thousands)December 27, 2020March 29, 2020
Assets
Deferred compensation plan assets Level 1$5,937 $3,564 
Liabilities
Interest rate swapLevel 2$ $108 

Note 7– Assets Held for Sale

In the first quarter of fiscal 2021, management determined that an office building that was previously held for sale no longer met the criteria to be classified as such. As a result, the $0.9 million net book value was reclassified out of “Prepaid expenses and other current assets” and is now classified as held and used within Property, Plant and Equipment on our balance sheet.

Note 8 – Inventories

Inventories at December 27, 2020 and March 29, 2020 consisted of the following:
December 27,
2020
March 29,
2020
(In thousands)
Inventory (FIFO basis)$70,278 $60,090 
LIFO reserve(5,621)(5,654)
Net inventory$64,657 $54,436 
The first in, first out (“FIFO”) value of inventories accounted for under the last in, first out (“LIFO”) method was $43.7 million at December 27, 2020 and $43.3 million at March 29, 2020. The remainder of the inventory was valued and accounted for under the FIFO method.
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Note 9 – Goodwill and Intangible Assets

The carrying amount of goodwill was $67.7 million as of December 27, 2020 and $58.4 million as of March 29, 2020, of which $44.9 million was related to our Health and Nutrition segment, $16.3 million was related to our Water Treatment segment, and $6.5 million was related to our Industrial segment. The increase in goodwill during the nine months ended December 27, 2020 represents goodwill recorded in connection with the ADC acquisition as discussed in Note 2.

A summary of our intangible assets as of December 27, 2020 and March 29, 2020 is as follows:
 December 27, 2020March 29, 2020
(In thousands)Gross
Amount
Accumulated
Amortization
NetGross 
Amount
Accumulated
Amortization
Net
Finite-life intangible assets
Customer relationships$91,483 $(25,094)$66,389 $78,383 $(21,400)$56,983 
Trademarks and trade names6,150 (4,123)2,027 6,045 (3,640)2,405 
Other finite-life intangible assets3,753 (3,670)83 3,648 (3,610)38 
Total finite-life intangible assets101,386 (32,887)68,499 88,076 (28,650)59,426 
Indefinite-life intangible assets1,227 — 1,227 1,227 — 1,227 
Total intangible assets$102,613 $(32,887)$69,726 $89,303 $(28,650)$60,653 

Note 10 – Debt

Debt at December 27, 2020 and March 29, 2020 consisted of the following:
December 27,
2020
March 29,
2020
(In thousands)
Senior secured revolving loan$96,000 $60,000 
Less: unamortized debt issuance costs(272)(342)
Total debt, net of debt issuance costs95,728 59,658 
Less: current portion of long-term debt(9,907)(9,907)
Total long-term debt$85,821 $49,751 

Note 11 – Income Taxes

We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The tax years prior to our fiscal year ended April 3, 2016 are closed to examination by the Internal Revenue Service, and with few exceptions, state and local
income tax jurisdictions. Our effective tax rate for the nine months ended December 27, 2020 was 26.1% and was 26.6% for the nine months ended December 29, 2019. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.

Note 12 – Leases

Lease Obligations. As of December 27, 2020, 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 24 years, some of which include options to extend the lease for up to 10 years.

As of December 27, 2020, 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 nine months ended December 27, 2020 was not material. Total lease expense was $0.7 million for both the three months ended December 27, 2020 and December 29, 2019. Total lease expense for the nine months ended December 27, 2020 and December 29, 2019 was $2.1 million and $2.2 million, respectively.






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Other information related to our operating leases was as follows:
December 27, 2020
Lease Term and Discount Rate
Weighted average remaining lease term (years)8.45
Weighted average discount rate3.2 %

Maturities of lease liabilities as of December 27, 2020 were as follows:
(In thousands)Operating Leases
Remaining fiscal 2021$400 
Fiscal 20221,750 
Fiscal 20231,624 
Fiscal 20241,270 
Fiscal 20251,279 
Thereafter4,337 
Total$10,660 
Less: Interest(2,366)
Present value of lease liabilities$8,294 

Note 13 – 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 2021 and fiscal 2020. 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 62,385 shares in the aggregate for fiscal 2021. The restricted shares issued, if any, will fully vest approximately two years after the last day of the fiscal year on which the performance is based. We are recording the compensation expense for the outstanding performance share units and the converted restricted stock over the life of the awards.

The following table represents the restricted stock activity for the nine months ended December 27, 2020:
SharesWeighted-
Average Grant
Date Fair Value
Unvested at beginning of period74,515 $34.27 
Granted64,813 37.37 
Vested(5,263)31.35 
Forfeited or expired(14,505)35.83 
Unvested at end of period119,560 $35.89 

We recorded compensation expense related to performance share units and restricted stock of $0.7 million and $1.6 million for the three and nine months ended December 27, 2020, respectively. We recorded compensation expense related to performance share units and restricted stock of $0.5 million and $1.3 million for the three and nine months ended December 29, 2019, 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 retainers, each director who is not an executive officer receives an annual grant of restricted stock for their service on our Board. The restricted stock awards are expensed over the requisite vesting period, which is generally one year from the date of issuance, based on the market value on the date of grant. As of December 27, 2020, there were 6,593 shares of restricted stock with an average grant date fair value of $51.17 outstanding under this program. Compensation expense for both the three months ended December 27, 2020 and December 29, 2019 related to restricted stock awards to the Board was $0.1 million. Compensation expense for both the nine months ended December 27, 2020 and December 29, 2019 related to restricted stock awards to the Board was $0.2 million.


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Note 14 – Share Repurchase Program

Our Board has authorized the repurchase of up to 800,000 shares of our outstanding common stock for cash on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. Upon purchase of the shares, we reduce our common stock for the par value of the shares with the excess applied against additional paid-in capital. During the three and nine months ended December 27, 2020, we repurchased 83,044 shares at an aggregate purchase price of $4.1 million. During the three months ended December 29, 2019, no shares were repurchased. During the nine months ended December 29, 2019, we repurchased 91,395 shares at an aggregate purchase price of $3.8 million. As of December 27, 2020, 275,753 shares remained available to be repurchased under the share repurchase program.

Note 15 – Litigation, Commitments and Contingencies

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.

Note 16 – Segment Information

We have three reportable segments: Industrial, Water Treatment, and Health and Nutrition. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the fiscal year ended March 29, 2020.

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)IndustrialWater
Treatment
Health and NutritionTotal
Three months ended December 27, 2020:
Sales$64,356 $39,298 $39,273 $142,927 
Gross profit9,207 10,027 9,005 28,239 
Selling, general, and administrative expenses6,978 6,788 3,984 17,750 
Operating income2,229 3,239 5,021 10,489 
Three months ended December 29, 2019:
Sales$63,018 $34,890 $22,498 $120,406 
Gross profit8,418 8,362 4,698 21,478 
Selling, general, and administrative expenses6,050 4,834 3,818 14,702 
Operating income 2,368 3,528 880 6,776 
Nine months ended December 27, 2020:
Sales$197,029 $128,552 $108,319 $433,900 
Gross profit32,100 35,888 24,024 92,012 
Selling, general and administrative expenses19,474 17,654 11,881 49,009 
Operating income12,626 18,234 12,143 43,003 
Nine months ended December 29, 2019:
Sales$206,433 $124,010 $77,342 $407,785 
Gross profit30,007 33,206 15,056 78,269 
Selling, general and administrative expenses18,041 14,956 11,358 44,355 
Operating income 11,966 18,250 3,698 33,914 

No significant changes to identifiable assets by segment occurred during the nine months ended December 27, 2020.
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Note 17 – Subsequent Events

On December 30, 2020, we acquired substantially all the assets of C & L Aqua Professionals, Inc. and LC
Blending, Inc. (together, “C&L Aqua”) for $16 million under the terms of an asset purchase agreement among us, C&L Aqua and its shareholders. C&L Aqua is a water treatment chemical distribution company operating primarily in Louisiana. The results of operations and the assets, including the goodwill associated with this acquisition, will be included as part of our Water Treatment segment from the date of acquisition forward. The purchase accounting for this acquisition has not yet been completed.
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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 nine months ended December 27, 2020 as compared to the similar period ended December 29, 2019. 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 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 chemicals and specialty ingredients, including manufacturing, blending, and repackaging certain products.

Business and Property Acquisitions

On December 30, 2020, after the end of our third quarter, we acquired substantially all the assets of C & L Aqua Professionals, Inc. and LC Blending, Inc. (together, “C&L Aqua”) under the terms of an asset purchase agreement among us, C&L Aqua and its shareholders. C&L Aqua is a water treatment chemical distribution company operating primarily in Louisiana. The results of operations and the assets will be included as part of our Water Treatment segment from the date of acquisition forward.

In the third quarter of fiscal 2021, we acquired a manufacturing facility to allow further expansion and growth in both our Industrial and Water Treatment segments. This site is adjacent to our facility in Rosemount, Minnesota, adding 40,000 square feet of manufacturing and warehouse space on 28 acres of land to bring us to a total of 105,000 square feet of space on 56 acres of land in the area, with rail access at both of the sites to allow for future growth and provide for supply chain flexibility on certain raw materials to better serve the customer.

On July 28, 2020, we acquired substantially all the assets of American Development Corporation of Tennessee, Inc. (“ADC”) under the terms of an asset purchase agreement among us, ADC and its shareholders. ADC is a water treatment chemical distribution company operating primarily in Tennessee, Georgia and Kentucky. The results of operations since the acquisition date are included in our Water Treatment segment.

The annual revenue from C&L Aqua and ADC in the twelve months prior to our acquisitions totaled approximately $25 million in the aggregate.

Statement on COVID-19

The pandemic caused by COVID-19 has resulted in federal, state and local governments around the world implementing stringent measures to help control the spread of the virus, including, from time to time, quarantines, “shelter in place” and “stay at home” orders, travel restrictions or bans, business curtailments, school closures, and other protective measures. While some restrictions have eased since the stare of the COVID-19 pandemic, certain restrictions remain in place or new restrictions may be implemented in the future. Restrictions will likely remain in place for some time. Financial markets have been volatile, primarily due to uncertainty with respect to the severity and duration of the pandemic.

All of our manufacturing facilities have qualified as essential operations (or the equivalent) under applicable federal and state orders. As a result, all of our manufacturing sites and facilities have continued to operate, with no significant impact to our output levels. We are enforcing social distancing and enhanced health, safety and sanitization measures in accordance with guidelines from the Center for Disease Control. We have also implemented necessary procedures and support to enable a significant portion of our office personnel to work remotely.

During this public health crisis, we remain focused on the health and safety of our employees, customers and suppliers and maintaining safe and reliable operations of our manufacturing sites. As our operations and products are essential to critical national infrastructure, it is imperative that we continue to supply materials including the products needed to maintain safe drinking water, ingredients essential for large-scale food, pharmaceutical and other health product manufacturing and nutrition products needed to support our critical infrastructure. Our manufacturing sites have continued to operate during the COVID-19 pandemic, with no significant impact to manufacturing.

We ended the third quarter of fiscal 2021 with a leverage ratio of 1.2x, net debt of $88 million and $54 million available for borrowing under our Revolving Loan Facility.

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The financial impact of the COVID-19 pandemic to our company has been mixed, as sales to certain end-markets such as food, bottled bleach and health and nutrition have benefited our reporting segments, while decreased sales to other end-markets such as ethanol, pools and resorts have negatively impacted them. In addition, certain expenses, such as travel and entertainment and trade show expenses, have been lower than historical levels during fiscal 2021. As uncertainty continues with this pandemic, we expect mixed results to continue for the foreseeable future.

Financial Results

We focus on total profitability dollars when evaluating our financial results as opposed to profitability as a percentage of sales, as sales dollars tend to fluctuate, particularly in our Industrial and Water Treatment segments, as raw material costs rise and fall. The costs for certain of our raw materials can rise or fall rapidly, causing fluctuations in gross profit as a percentage of sales.

We use the 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. Inventories in the Health and Nutrition segment are valued using the FIFO method.

We disclose the sales of our bulk commodity products as a percentage of total sales dollars for our Industrial and Water Treatment segments. Our definition of bulk commodity products includes products that we do not modify in any way, but receive, store, and ship from our facilities, or direct ship to our customers in large quantities.

Results of Operations
The following table sets forth the percentage relationship of certain items to sales for the period indicated:
 
 Three Months EndedNine Months Ended
December 27, 2020December 29, 2019December 27, 2020December 29, 2019
Sales100.0 %100.0 %100.0 %100.0 %
Cost of sales(80.2)%(82.2)%(78.8)%(80.8)%
Gross profit19.8 %17.8 %21.2 %19.2 %
Selling, general and administrative expenses(12.4)%(12.2)%(11.3)%(10.9)%
Operating income7.4 %5.6 %9.9 %8.3 %
Interest expense, net(0.3)%(0.5)%(0.3)%(0.5)%
Other income0.3 %0.1 %0.3 %0.1 %
Income before income taxes7.4 %5.2 %9.9 %7.9 %
Income tax expense(1.9)%(1.5)%(2.6)%(2.1)%
Net income5.5 %3.7 %7.3 %5.8 %

Three Months Ended December 27, 2020 Compared to Three Months Ended December 29, 2019
Sales
Sales were $142.9 million for the current quarter, an increase of $22.5 million, or 19%, from sales of $120.4 million a year ago.
Industrial Segment. Industrial segment sales increased $1.4 million, or 2%, to $64.4 million for the current quarter, as compared to $63.0 million in the same period a year ago. Sales of bulk commodity products in the Industrial segment were approximately 16% of sales dollars in the current quarter and 18% in the same period of the prior year. The increase in sales dollars from the prior year was driven largely by a product mix shift to more sales of certain of our higher-priced manufactured, blended and repackaged products.
Water Treatment Segment. Water Treatment segment sales increased $4.4 million, or 13%, to $39.3 million for the current quarter, as compared to $34.9 million in the same period a year ago. Sales of bulk commodity products in the Water Treatment segment were approximately 10% of sales dollars in the current quarter and 12% in the same period of the prior year. The increase in sales dollars from the prior year was largely attributable to added sales from the acquisition of ADC. Sales by our legacy business also increased overall due to increased sales of our manufactured, blended and repackaged products.
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Health & Nutrition Segment. Health and Nutrition segment sales increased $16.8 million, or 75%, to $39.3 million for the current quarter, as compared to $22.5 million in the same period a year ago. The increase in sales was driven by increased sales of both our manufactured and specialty distributed products largely as a result of increased consumer demand for health and immunity products.

Gross Profit
Gross profit increased $6.7 million, or 31%, to $28.2 million, or 20% of sales, for the current quarter, from $21.5 million, or 18% of sales, for the same period a year ago. During the current quarter, the LIFO reserve increased, and gross profits decreased, by $0.1 million. In the same quarter a year ago, the LIFO reserve decreased, and gross profits increased, by $0.3 million.
Industrial Segment. Gross profit for the Industrial segment increased $0.8 million, or 9%, to $9.2 million, or 14% of sales, for the current quarter, from $8.4 million, or 13% of sales, in the same period of the prior year. During the current quarter, the change in the LIFO reserve had a nominal impact on gross profit. In the same quarter a year ago, the LIFO reserve decreased, and gross profits increased, by $0.2 million. Total gross profit, and gross profit as a percentage of sales, decreased due to a product mix shift to more sales of certain higher-margin manufactured, blended and repackaged products.
Water Treatment Segment. Gross profit for the Water Treatment segment increased $1.6 million, or 20%, to $10.0 million, or 26% of sales, for the current quarter, from $8.4 million, or 24% of sales, in the same period of the prior year. During the current and prior year quarters, the change in the LIFO reserve had a nominal impact on gross profit. Gross profit increased as a result of the added gross profit from the sales in the acquired ADC business, as well as the increased sales of manufactured, blended and repackaged products in our legacy business. Gross profit as a percentage of sales increased as a result of product mix changes.
Health and Nutrition Segment. Gross profit for our Health and Nutrition segment increased $4.3 million, or 92%, to $9.0 million, or 23% of sales, for the current quarter, from $4.7 million, or 21% of sales, for the same period of the prior year. The increase in gross profit was a result of higher sales compared to the prior year. Gross profit as a percentage of sales increased as a result of product mix changes.
Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased $3.1 million to $17.8 million, or 12% of sales, for the current quarter, from $14.7 million, or 12% of sales, for the same period of the prior year. Expenses increased primarily due to an increase in variable costs, primarily variable compensation, added costs from the acquired ADC business, including amortization of intangibles, and acquisition expenses. In addition, we recorded a year-over-year expense increase of $0.3 million due to higher compensation expense relating to the non-qualified deferred compensation plan liability which is offset in other income as described below. These increases were partially offset by a decrease in travel and trade show expenses due to restrictions imposed as a result of COVID-19.
Operating Income
Operating income increased $3.7 million, or 55%, to $10.5 million, or 7% of sales, for the current quarter, from $6.8 million, or 6% 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 $0.4 million for the current quarter, a decrease of $0.2 million from interest expense of $0.6 million for the same period a year ago. Interest expense decreased due to lower outstanding borrowings compared to the prior year.
Other Income
Other income increased $0.4 million from the same period a year ago, with $0.5 million recorded in the current quarter, from $0.1 million in the same period of the prior year. This amount represents gains recorded on investments held for our non-qualified deferred compensation plan. The amount recorded as a gain was offset by a similar amount recorded as an increase to compensation expense within SG&A expenses.
Income Tax Provision

Our effective income tax rate was 25.2% for the current quarter, compared to 28.1% in the same period of the prior year. The effective tax rate decreased from the prior year due to favorable tax provision adjustments recorded in the third quarter of fiscal 2021. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.

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Nine Months Ended December 27, 2020 Compared to Nine Months Ended December 29, 2019
Sales
Sales were $433.9 million for the nine months ended December 27, 2020, an increase of $26.1 million, or 6%, from sales of $407.8 million for the same period a year ago.
Industrial Segment. Industrial segment sales decreased $9.4 million, or 5%, to $197.0 million for the nine months ended December 27, 2020, as compared to $206.4 million for the same period a year ago. Sales of bulk commodity products in the Industrial segment were approximately 14% of sales dollars in the current year and 18% in the same period of the prior year. The decrease in sales dollars from the prior year was driven largely by weakened economic conditions in the ethanol industry, which decreased sales of products into that industry in the first half of the year. In addition, the decrease in sales dollars when compared to the prior year was partially attributable to temporarily higher sales in the first quarter of the prior year attributable to heavy rains and flooding along the Mississippi River, which increased demand from certain customers. These year-over-year sales decreases were partially offset by increased sales of certain of our manufacturing, blended and repackaged products, largely our food ingredient, pharmaceutical, and bleach products as a result of increased demand.
Water Treatment Segment. Water Treatment segment sales increased $4.5 million, or 4%, to $128.6 million for the nine months ended December 27, 2020, as compared to $124.0 million for the same period a year ago. Sales of bulk commodity products in the Water Treatment segment were approximately 9% of sales dollars in the current year and 11% a year ago. The increase in sales dollars resulted primarily from the added sales from the acquisition of ADC and was largely offset by a first quarter sales decline due to reduced sales to certain end markets, primarily public pools, as a result of shutdowns due to the COVID-19 pandemic.
Health & Nutrition Segment. Health and Nutrition segment sales increased $31.0 million, or 40%, to $108.3 million for the nine months ended December 27, 2020, as compared to $77.3 million for the same period a year ago. The increase in sales was driven by increased sales of both our manufactured and specialty distributed products largely as a result of increased consumer demand for health and immunity products.
Gross Profit
Gross profit increased $13.7 million, or 18%, to $92.0 million, or 21% of sales, for the nine months ended December 27, 2020, from $78.3 million, or 19% of sales, for the same period a year ago. During the current year, the LIFO reserve decreased, and gross profits increased, by $0.1 million. In the same period a year ago, the LIFO reserve decreased, and gross profits increased, by $0.6 million.
Industrial Segment. Gross profit for the Industrial segment increased $2.1 million, or 7%, to $32.1 million, or 16% of sales, for the nine months ended December 27, 2020, from $30.0 million, or 15% of sales, for the same period a year ago. During the current year, the LIFO reserve decreased, and gross profits increased, by $0.1 million. In the same period a year ago, the LIFO reserve decreased, and gross profits increased, by $0.5 million. Total gross profit, and gross profit as a percentage of sales, increased due to a product mix shift to more sales of higher-margin manufactured, blended and re-packaged products.
Water Treatment Segment. Gross profit for the Water Treatment segment increased $2.7 million, or 8%, to $35.9 million, or 28% of sales, for the nine months ended December 27, 2020, from $33.2 million, or 27% of sales, for the same period a year ago. During the current year, changes in the LIFO reserve had a nominal impact on gross profits. In the same period a year ago, the LIFO reserve decreased, and gross profits increased by $0.1 million. Gross profit increased as a result of the added gross profit from the sales in the acquired ADC business, as well as a product mix shift in our legacy business to more sales of manufactured, blended and repackaged products. Gross profit as a percentage of sales increased as a result of product mix changes.
Health and Nutrition Segment. Gross profit for our Health and Nutrition segment increased $8.9 million, or 60%, to $24.0 million, or 22% of sales, for the nine months ended December 27, 2020, from $15.1 million, or 20% of sales, for the same period a year ago. The increase in gross profit was a result of higher sales compared to the prior year. Gross profit as a percentage of sales increased as a result of product mix changes.
Selling, General and Administrative Expenses

SG&A expenses increased $4.6 million, or 11% to $49.0 million, or 11% of sales, for the nine months ended December 27, 2020, compared to $44.4 million, or 11% of sales, for the same prior year period. Expenses increased primarily due to an increase in variable costs, primarily variable compensation, added costs from the acquired ADC business, including amortization of intangibles, and acquisition expenses. In addition, we recorded a year-over-year expense increase of $1.0 million due to higher compensation expense relating to the non-qualified deferred compensation plan liability which is offset in other income as described below. These increases were partially offset by a decrease in travel and trade show expenses due to restrictions imposed as a result of COVID-19.
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