Hawkins 10Q Q2 09.29.2013


 
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 September 29, 2013
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, including zip code)
(612) 331-6910
(Registrant’s telephone number, including area code)
 
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 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 in Rule 12b-2 of the Exchange Act).
 
Large Accelerated Filer
¨
Accelerated Filer
ý
 
 
 
 
Non-Accelerated Filer
¨  (Do not check if a smaller reporting company)
Smaller Reporting Company
¨
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 October 26, 2013
Common Stock, par value $.05 per share
 
10,606,042

 



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 6.
 
 
 
 

2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAWKINS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)

 
September 29,
2013
 
March 31,
2013
ASSETS
 

 

CURRENT ASSETS:
 

 

Cash and cash equivalents
 
$
29,111

 
$
28,715

Investments available-for-sale
 
15,095

 
15,625

Trade receivables — less allowance for doubtful accounts:
 


 


$418 as of September 29, 2013 and $469 as of March 31, 2013
 
36,808

 
35,920

Inventories
 
31,626

 
28,208

Prepaid expenses and other current assets
 
1,348

 
2,613

Total current assets
 
113,988

 
111,081

PROPERTY, PLANT, AND EQUIPMENT:
 
156,228

 
153,055

Less accumulated depreciation and amortization
 
(66,087
)
 
(62,081
)
Net property, plant, and equipment
 
90,141

 
90,974

OTHER ASSETS:
 


 


Goodwill
 
6,495

 
6,495

Intangible assets — less accumulated amortization:
 


 


$2,704 as of September 29, 2013 and $2,398 as of March 31, 2013
 
7,372

 
7,678

Long-term investments
 
10,601

 
5,597

Other
 
244

 
323

Total other assets
 
24,712

 
20,093

Total assets
 
$
228,841

 
$
222,148

LIABILITIES AND SHAREHOLDERS’ EQUITY
 


 


CURRENT LIABILITIES:
 


 


Accounts payable — trade
 
$
17,979

 
$
18,516

Dividends payable
 
3,818

 
3,592

Accrued payroll and employee benefits
 
5,203

 
5,391

Deferred income taxes
 
2,832

 
2,554

Income tax payable
 
1,639

 
1,446

Other current liabilities
 
4,192

 
3,626

Total current liabilities
 
35,663

 
35,125

PENSION WITHDRAWAL LIABILITY
 
7,035

 
7,136

OTHER LONG-TERM LIABILITIES
 
950

 
1,653

DEFERRED INCOME TAXES
 
8,033

 
8,062

Total liabilities
 
51,681

 
51,976

COMMITMENTS AND CONTINGENCIES
 

 

SHAREHOLDERS’ EQUITY:
 

 

Common stock; authorized: 30,000,000 shares of $0.05 par value; 10,547,882 and 10,495,427 shares issued and outstanding for September 29, 2013 and March 31, 2013, respectively
 
528

 
525

Additional paid-in capital
 
49,307

 
48,779

Retained earnings
 
127,475

 
120,974

Accumulated other comprehensive loss
 
(150
)
 
(106
)
Total shareholders’ equity
 
177,160

 
170,172

Total liabilities and shareholder's equity
 
$
228,841

 
$
222,148


See accompanying notes to condensed consolidated financial statements.

3


HAWKINS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per-share data)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
Sales
 
$
86,599

 
$
87,160

 
$
181,343

 
$
177,259

Cost of sales
 
(70,029
)
 
(67,964
)
 
(147,542
)
 
(142,756
)
Gross profit
 
16,570

 
19,196

 
33,801

 
34,503

Selling, general and administrative expenses
 
(8,293
)
 
(7,455
)
 
(17,263
)
 
(15,682
)
Operating income
 
8,277

 
11,741

 
16,538

 
18,821

Interest (expense) income
 
(12
)
 
34

 
(27
)
 
64

Income from continuing operations before income taxes
 
8,265

 
11,775

 
16,511

 
18,885

Income tax provision
 
(3,058
)
 
(4,545
)
 
(6,192
)
 
(7,290
)
Income from continuing operations
 
5,207

 
7,230

 
10,319

 
11,595

Income from discontinued operations, net of tax
 
—

 
—

 
—

 
18

Net income
 
$
5,207

 
$
7,230

 
$
10,319

 
$
11,613

Weighted average number of shares outstanding - basic
 
10,545,719

 
10,458,922

 
10,533,951

 
10,444,898

Weighted average number of shares outstanding - diluted
 
10,588,747

 
10,519,400

 
10,582,318

 
10,513,213

Basic earnings per share
 
 
 
 
 
 
 
 
Earnings per share from continuing operations
 
$
0.49

 
$
0.69

 
$
0.98

 
$
1.11

Earnings per share from discontinued operations
 
—

 
—

 
—

 
—

Basic earnings per share
 
$
0.49

 
$
0.69

 
$
0.98

 
$
1.11

Diluted earnings per share
 
 
 
 
 
 
 
 
Earnings per share from continuing operations
 
$
0.49

 
$
0.69

 
$
0.98

 
$
1.10

Earnings per share from discontinued operations
 
—

 
—

 
—

 
—

Diluted earnings per share
 
$
0.49

 
$
0.69

 
$
0.98

 
$
1.10

Cash dividends declared per common share
 
$
0.36

 
$
0.34

 
$
0.36

 
$
0.34

See accompanying notes to condensed consolidated financial statements.


4


HAWKINS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
Net income
 
$
5,207

 
$
7,230

 
$
10,319

 
$
11,613

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale investments
 
(13
)
 
4

 
(43
)
 
6

Unrealized gain (loss) on post-retirement liability
 
—

 
78

 
—

 
78

Total other comprehensive income (loss)
 
(13
)
 
82

 
(43
)
 
84

Total comprehensive income
 
$
5,194

 
$
7,312

 
$
10,276

 
$
11,697

See accompanying notes to condensed consolidated financial statements.


5


HAWKINS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
 
 
Six Months Ended
 
 
September 29,
2013
 
September 30,
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
10,319

 
$
11,613

Reconciliation to cash flows:
 
 
 
 
Depreciation and amortization
 
6,748

 
4,761

Stock compensation expense
 
596

 
840

Loss from property disposals
 
53

 
129

Changes in operating accounts providing (using) cash:
 
 
 
 
Trade receivables
 
(888
)
 
2,066

Inventories
 
(3,418
)
 
(3,882
)
Accounts payable
 
274

 
5,052

Accrued liabilities
 
(424
)
 
(2,453
)
Income taxes
 
193

 
4,469

Other
 
1,343

 
864

Net cash provided by operating activities
 
14,796

 
23,459

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Additions to property, plant, and equipment
 
(6,529
)
 
(11,883
)
Purchases of investments
 
(13,791
)
 
(12,940
)
Sale and maturities of investments
 
9,245

 
4,855

Acquisitions
 
—

 
(100
)
Proceeds from property disposals
 
55

 
113

Net cash used in investing activities
 
(11,020
)
 
(19,955
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Cash dividends paid
 
(3,592
)
 
(3,352
)
New shares issued
 
459

 
500

Shares surrendered for payroll taxes
 
(485
)
 
—

Proceeds from the exercise of stock options
 
186

 
330

Excess tax benefit from share-based compensation
 
52

 
159

Net cash used in financing activities
 
(3,380
)
 
(2,363
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
396

 
1,141

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
28,715

 
28,566

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
29,111

 
$
29,707

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
 
Cash paid for income taxes
 
$
5,947

 
$
2,659

Noncash investing activities - Capital expenditures in accounts payable
 
$
589

 
$
2,167

See accompanying notes to condensed consolidated financial statements.


6


HAWKINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 – 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 statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, 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 accounting policies we follow are set forth in “Item 8. Financial Statements and Supplementary Data, Note 1 – Nature of Business and Significant Accounting Policies” to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013 filed with the SEC on May 30, 2013. There has been no significant change in our accounting policies since the end of fiscal 2013.
The results of operations for the six month period ended September 29, 2013 are not necessarily indicative of the results that may be expected for the full year.
References to fiscal 2013 refer to the fiscal year ended March 31, 2013 and references to fiscal 2014 refer to the fiscal year ending March 30, 2014.
Note 2 – 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 incremental shares assumed to be issued upon the exercise of stock options and the incremental shares assumed to be issued as performance units and restricted stock. Basic and diluted EPS were calculated using the following:
 
 
Three Months Ended
 
Six Months Ended
 
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
Weighted-average common shares outstanding—basic
 
10,545,719

 
10,458,922

 
10,533,951

 
10,444,898

Dilutive impact of stock options, performance units, and restricted stock
 
43,028

 
60,478

 
48,367

 
68,315

Weighted-average common shares outstanding—diluted
 
10,588,747

 
10,519,400

 
10,582,318

 
10,513,213

For the three and six months ended September 29, 2013 and September 30, 2012, there were no shares or stock options excluded from the calculation of weighted-average common shares for diluted EPS.


7


Note 3 – Cash and Cash Equivalents and Investments
The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
 
 
September 29,
2013
 
 
 
 
 
 
(In thousands)
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Cash
 
$
29,111

 
$
29,111

 
$
—

 
$
—

Certificates of deposit
 
21,989

 
—

 
21,989

 
—

Municipal bonds
 
3,707

 
—

 
3,707

 
—

 
 
 
 
 
 
 
 
 
 
 
March 31,
2013
 
 
 
 
 
 
(In thousands)
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Cash
 
$
28,715

 
$
28,715

 
$
—

 
$
—

Certificates of deposit
 
21,222

 
—

 
21,222

 
—

Our financial assets that are measured at fair value on a recurring basis are certificates of deposit (“CD’s”) and municipal bonds, with original maturities ranging from three months to two years that fall within valuation technique Level 2. The CD’s and municipal bonds are classified as investments in current assets and noncurrent assets on the condensed consolidated balance sheets. As of September 29, 2013, the combined CD’s and municipal bonds in current assets had a fair value of $15.1 million and in noncurrent assets, the combined CD’s and municipal bonds had a fair value of $10.6 million.
The carrying value of cash and cash equivalents accounts approximates fair value, as original maturities are three months or less. We did not have any financial liability instruments subject to recurring fair value measurements as of September 29, 2013.
Note 4 – Inventories
Inventories at September 29, 2013 and March 31, 2013 consisted of the following:
 
 
September 29,
2013
 
March 31,
2013
(In thousands)
 
 
Inventory (FIFO basis)
 
$
38,588

 
$
35,281

LIFO reserve
 
(6,962
)
 
(7,073
)
Net inventory
 
$
31,626

 
$
28,208

The first in, first out (“FIFO”) value of inventories accounted for under the last in, first out (“LIFO”) method was $34.5 million at September 29, 2013 and $30.3 million at March 31, 2013. The remainder of the inventory was valued and accounted for under the FIFO method.
The LIFO reserve decreased $0.4 million during the three months ended September 29, 2013, and increased $0.1 million during the three months ended September 30, 2012. During the six months ended September 29, 2013 the LIFO reserve decreased $0.1 million, and for the six months ended September 30, 2012 the LIFO reserve increased $0.2 million. The valuation of LIFO inventory for interim periods is based on our estimates of year-end inventory levels and costs.








8


Note 5 – Goodwill and Intangible Assets
Goodwill. The carrying amount of goodwill as of September 29, 2013 and March 31, 2013 was $6.5 million.
Intangible assets. Intangible assets consist primarily of customer lists, trademarks, trade secrets and non-compete agreements classified as finite life and trade names classified as indefinite life, related to business acquisitions. A summary of our intangible assets as of September 29, 2013 and March 31, 2013 were as follows:
 
 
September 29, 2013
 
March 31, 2013
(In thousands)
 
Gross
Amount
 
Accumulated
Amortization
 
Net
 
Gross 
Amount
 
Accumulated
Amortization
 
Net
Finite-life intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
5,508

 
$
(1,119
)
 
$
4,389

 
$
5,508

 
$
(981
)
 
$
4,527

Trademark
 
1,240

 
(336
)
 
904

 
1,240

 
(274
)
 
966

Trade secrets
 
962

 
(704
)
 
258

 
962

 
(640
)
 
322

Carrier relationships
 
800

 
(217
)
 
583

 
800

 
(177
)
 
623

Other finite-life intangible assets
 
339

 
(328
)
 
11

 
339

 
(326
)
 
13

Total finite-life intangible assets
 
8,849

 
(2,704
)
 
6,145

 
8,849

 
(2,398
)
 
6,451

Indefinite-life intangible assets
 
1,227

 
—

 
1,227

 
1,227

 
—

 
1,227

Total intangible assets
 
$
10,076

 
$
(2,704
)
 
$
7,372

 
$
10,076

 
$
(2,398
)
 
$
7,678

Note 6 – Income Taxes
In the preparation of our condensed consolidated financial statements, management calculates income taxes based upon the estimated effective rate applicable to operating results for the full fiscal year. This includes estimating the current tax liability as well as assessing differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the condensed consolidated balance sheet. These assets and liabilities are analyzed regularly and management assesses the likelihood that deferred tax assets will be recovered from future taxable income. We record any interest and penalties related to income taxes as income tax expense in the condensed consolidated statements of income.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
We file income tax returns in the U.S. federal jurisdiction and numerous state and local jurisdictions. The tax years beginning with our fiscal year ended March 29, 2009 remain open to examination by the Internal Revenue Service, and with few exceptions, state and local income tax jurisdictions.

Note 7 – Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss on our balance sheet, net of tax, were as follows:
(In thousands)
 
September 29,
2013
 
March 31,
2013
Unrealized gain (loss) on:
 
 
 
 
Available-for-sale investments
 
$
(33
)
 
$
11

Post-retirement plan liability
 
(117
)
 
(117
)
Accumulated other comprehensive loss
 
$
(150
)
 
$
(106
)
Note 8 – Share-Based Compensation
Stock Option Awards. Although no stock options have been granted since the fiscal year ended March 28, 2010, our Board of Directors (the "Board") previously approved a long-term incentive equity compensation arrangement for our executive officers that provided for the grant of non-qualified stock options that vested at the end of a three-year period. As of September 29, 2013, we had 9,333 stock options outstanding and exercisable at a weighted average exercise price of $19.90. No compensation expense was recorded related to stock options for the three and six months ended September 29, 2013. Compensation expense for the three and six month periods ended September 30, 2012 related to stock options was nominal.

9


Performance-Based Restricted Stock Units. The Board approved a performance-based equity compensation arrangement for our executive officers during the first quarters of each of fiscal 2014 and 2013. 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 39,833 shares in the aggregate for fiscal 2014. The restricted shares issued 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 six months ended September 29, 2013:
 
 
Shares
 
Weighted-
Average Grant
Date Fair Value
Outstanding at beginning of period
 
63,244

 
$
34.26

Granted
 
28,648

 
40.25

Vested
 
(36,182
)
 
35.20

Forfeited or expired
 
(3,606
)
 
33.01

Outstanding at end of period
 
52,104

 
$
36.99

We recorded compensation expense of $0.2 million and $0.3 million related to performance share units and restricted stock for the three and six months ended September 29, 2013. We recorded compensation expense of $0.3 million and $0.6 million related to performance share units and restricted stock for the three and six months ended September 30, 2012. 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 Board services. 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 September 29, 2013, there were 6,055 shares of restricted stock with a weighted averaged grant date fair value of $40.42 outstanding under this program. Compensation expense for the three and six months ended September 29, 2013 and September 30, 2012 related to restricted stock awards to the Board was $0.1 million.

Note 9 – Employee Pension Plans

Multiemployer pension plan. In fiscal 2013, we concluded negotiations with two collective bargaining units to discontinue our participation in the Central States, Southeast and Southwest Areas Pension Fund (“CSS” or “the plan”), a collectively bargained multiemployer pension plan. As a result, we recorded a pre-tax charge of $7.2 million (approximately $4.5 million after tax, or $0.43 per share, fully diluted) in the third quarter of fiscal 2013. This charge represents the discounted value of our withdrawal payment obligation and was recorded as a charge to cost of sales in our Industrial segment.

Payment of our share of the unfunded vested benefit liability will be made over 20 years and is subject to a cap. At the end of the 20-year period we will have no further liability, even if our share of the unfunded vested benefit liability has not yet been paid in full. The aggregate cash payments to be made will total approximately $9.3 million, or $467,000 per year, with the first payment due on October 1, 2013.
    
Effective March 1, 2013, we established defined-contribution retirement benefits to our union employees that are similar to those benefits currently offered to our non-union employees.

Note 10 – 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.
In the first quarter of fiscal 2013, we entered into a settlement agreement with ICL Performance Products LP (“ICL”), a chemical supplier to us, pursuant to which we mutually resolved the previously disclosed litigation and all disputes among us. Our obligations under the settlement agreement resulted in a $3.2 million charge to pretax income recorded in cost of sales in our Industrial segment (approximately $2.0 million or $0.19 per share, fully diluted, after tax) in the first quarter of fiscal 2013.

10


Note 11 – Segment Information
We have two reportable segments: Industrial and Water Treatment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed in our fiscal 2013 Annual Report on Form 10-K. Product costs and expenses for each segment are based on actual costs incurred along with cost allocation of shared and centralized functions. We evaluate performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. Reportable segments are defined by product and type of customer. Segments are responsible for the sales, marketing and development of their products and services. The segments do not have separate accounting, administration, customer service or purchasing functions. There are no intersegment sales and no operating segments have been aggregated. Given our nature, it is not practical to disclose revenues from external customers for each product or each group of similar products. 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
 
Total
Three months ended September 29, 2013:
 
 
 
 
 
 
Sales
 
$
56,683

 
$
29,916

 
$
86,599

Gross profit
 
7,282

 
9,288

 
16,570

Selling, general, and administrative expenses
 
4,881

 
3,412

 
8,293

Operating income
 
2,401

 
5,876

 
8,277

Three months ended September 30, 2012:
 
 
 
 
 
 
Sales
 
$
57,214

 
$
29,946

 
$
87,160

Gross profit
 
10,089

 
9,107

 
19,196

Selling, general, and administrative expenses
 
4,438

 
3,017

 
7,455

Operating income
 
5,651

 
6,090

 
11,741

Six months ended September 29, 2013:
 
 
 
 
 
 
Sales
 
$
123,714

 
$
57,629

 
$
181,343

Gross profit
 
16,504

 
17,297

 
33,801

Selling, general, and administrative expenses
 
10,315

 
6,948

 
17,263

Operating income
 
6,189

 
10,349

 
16,538

Six months ended September 30, 2012:
 
 
 
 
 
 
Sales
 
$
119,365

 
$
57,894

 
$
177,259

Gross profit
 
17,365

 
17,138

 
34,503

Selling, general, and administrative expenses
 
9,530

 
6,152

 
15,682

Operating income
 
7,835

 
10,986

 
18,821


Gross profit for our Industrial segment for the six months ended September 30, 2012 was negatively impacted by a $3.2 million (pre-tax) charge in the first quarter of fiscal 2013 related to the legal settlement discussed in Note 10.
Note 12 – Subsequent Events

On October 1, 2013, we acquired substantially all of the assets of Advance Chemical Solutions, Inc. (“ACS”), under the terms of an asset purchase agreement with ACS and its shareholders. We paid $2.5 million in cash at closing, and may be obligated to pay an additional $0.5 million in the aggregate to ACS over the next three years. The amount of such payments will be based on the achievement of certain financial performance targets for each of the next three years.

ACS, with revenues of approximately $4 million for the 12 months ended September 30, 2013, is located near Tulsa, Oklahoma, and will operate as part of our Water Treatment Group. The results of its operations will be included in our Water Treatment Segment.


11


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 six months ended September 29, 2013 as compared to September 30, 2012. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements included in this Form 10-Q and Item 8 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2013 (“fiscal 2013”). References to fiscal 2014 refer to the fiscal year ending March 30, 2014.
Overview
We derive substantially all of our revenues from the sale of bulk and specialty chemicals 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 our strong customer focus and have expanded our business by increasing our sales of value-added specialty chemical products, including repackaging, blending and manufacturing certain products.

We have continued to invest in growing our business. During fiscal 2013, we completed construction of a new Industrial manufacturing facility in Rosemount, Minnesota. The site provides capacity for future business growth and lessens our dependence on our flood-prone sites on the Mississippi River. While we have transferred some blending and manufacturing activity to the Rosemount site, we do not intend to close any sites we currently operate as a result of this transfer of activity. In the first half of fiscal 2014, we incurred incremental costs related to this new facility of approximately $1.0 million, which have been recorded in cost of sales in our Industrial segment. We anticipate full-year incremental costs of approximately $1.3 million in fiscal 2014 to operate this facility for the entire year as we began to incur start-up costs during the second half of fiscal 2013.

In April 2013, we moved into a new corporate headquarters located in Roseville, Minnesota. The move was necessary because we had outgrown our former corporate headquarters that had been our home for over 60 years. As a result of this move, we incurred incremental costs during the first half of fiscal 2014 of approximately $0.5 million, recorded in selling, general and administrative expenses and allocated among both our Water Treatment and Industrial segments during the first half of fiscal 2014. We expect to incur incremental costs of approximately $1.1 million in fiscal 2014 to lease and operate this facility for the entire year.

In the first quarter of fiscal 2013, we entered into a settlement agreement with a chemical supplier to us, pursuant to which we mutually resolved the previously disclosed litigation and all disputes among us. The settlement agreement provided for a cash payment by us to the supplier and provided that both parties enter into new contracts for the supply by the supplier of certain chemicals to us. Our obligations under the settlement agreement resulted in a $3.2 million charge to pre-tax income recorded in cost of sales in our Industrial segment (approximately $2.0 million after tax or $0.19 per share, fully diluted) in the first quarter of fiscal 2013.

In the second quarter of fiscal 2014, we vacated the leased facility used to serve our bulk pharmaceutical customers and transferred production of certain products to our other Industrial production facilities while discontinuing production of the remaining product lines. As a result, we recorded a pre-tax charge of approximately $0.8 million in cost of sales in our Industrial segment (approximately $0.5 million after tax) primarily related to accelerated depreciation on leasehold improvements and manufacturing equipment related to this facility in the first half of fiscal 2014.

We use the last in, first out (“LIFO”) method for valuing substantially all of our inventory, which causes the most recent product costs 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 bulk chemical raw material prices. We recorded a $0.4 million decrease in our LIFO reserve for the three months ended September 29, 2013 and a $0.1 million decrease in our LIFO reserve for the six months ended September 29, 2013, both of which increased our gross profit in those periods by those amounts. We recorded a $0.1 million increase in our LIFO reserve for the three months ended September 30, 2012 and a $0.2 million increase in our LIFO reserve for the six months ended September 30, 2012, both of which decreased our gross profit for the respective periods by those amounts.

12


Results of Operations
The following table sets forth the percentage relationship of certain items to sales for the period indicated:
 
 
 
Three months ended
 
Six months ended
 
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
 
(80.9
)%
 
(78.0
)%
 
(81.4
)%
 
(80.5
)%
Gross profit
 
19.1
 %
 
22.0
 %
 
18.6
 %
 
19.5
 %
Selling, general and administrative expenses
 
(9.6
)%
 
(8.6
)%
 
(9.5
)%
 
(8.8
)%
Operating income
 
9.5
 %
 
13.4
 %
 
9.1
 %
 
10.7
 %
Interest (expense) income
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Income from continuing operations before income taxes
 
9.5
 %
 
13.4
 %
 
9.1
 %
 
10.7
 %
Income tax provision
 
(3.5
)%
 
(5.2
)%
 
(3.4
)%
 
(4.1
)%
Income from continuing operations
 
6.0
 %
 
8.2
 %
 
5.7
 %
 
6.6
 %
Income from discontinued operations, net of tax
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Net income
 
6.0
 %
 
8.2
 %
 
5.7
 %
 
6.6
 %
Three Months Ended September 29, 2013 Compared to the Three Months Ended September 30, 2012
Sales
Sales decreased $0.6 million, or 0.6%, to $86.6 million for the three months ended September 29, 2013, as compared to $87.2 million for the same period of the prior year. Sales of bulk chemicals accounted for approximately 24% of sales dollars during the second quarter of both fiscal 2014 and fiscal 2013, despite an increase in the volumes of bulk and commodity products sold, which carry lower per unit selling prices.
Industrial Segment. Industrial segment sales decreased $0.5 million, or 0.9%, to $56.7 million for the three months ended September 29, 2013, as compared to $57.2 million for the same period of the prior year, despite an increase in the volumes of bulk and commodity products sold, which carry lower per unit selling prices. In addition, we were unable to pass along cost increases in certain cases due to heightened competitive pressures, which negatively impacted our sales growth in this quarter.
Water Treatment Segment. Water Treatment segment sales for the second quarter of fiscal 2014 were $29.9 million, unchanged from the same period of the prior year. Favorable weather conditions late in the quarter and sales growth in its newer branches offset the negative impact of less favorable weather conditions for the majority of the quarter.
Gross Profit
Gross profit decreased $2.6 million to $16.6 million, or 19.1% of sales, for the three months ended September 29, 2013, as compared to $19.2 million, or 22.0% of sales, for the same period of the prior year. Gross profit in the Industrial segment declined $2.8 million, while gross profit in the Water Treatment segment increased $0.2 million as discussed below. The LIFO method of valuing inventory increased gross profit by $0.4 million for the current quarter, while it decreased gross profit by $0.1 million for the same period of the prior year.
Industrial Segment. Gross profit for the Industrial segment decreased $2.8 million to $7.3 million, or 12.8% of sales, for the three months ended September 29, 2013, as compared to $10.1 million, or 17.6% of sales, for the same period of the prior year. Gross profit was negatively impacted by the incremental costs to operate our new manufacturing facility ($0.4 million) as well as the costs incurred to exit the leased facility used to serve our bulk pharmaceutical customers ($0.4 million). Gross profit was also negatively impacted by a shift in product mix to lower-margin bulk and commodity products and, in certain cases, our inability to pass along cost increases due to heightened competitive pressures. The LIFO method of valuing inventory increased gross profit in this segment by $0.4 million for the current quarter, while it decreased gross profit in this segment by $0.1 million for the same period of the prior year.
Water Treatment Segment. Gross profit for the Water Treatment segment was $9.3 million, or 31.0% of sales, for the three months ended September 29, 2013, and $9.1 million, or 30.4% of sales, for the same period in the prior year. Favorable weather conditions later in the quarter, along with growth from its newer branches, more than offset the negative impact of less

13


favorable weather conditions for the majority of the quarter. The LIFO Method of valuing inventory nominally impacted gross profit for the current quarter and the same period of the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $8.3 million, or 9.6% of sales, for the three months ended September 29, 2013, as compared to $7.5 million, or 8.6% of sales, for the same period of the prior year. The increase in expenses was driven by the $0.3 million of costs related to our new headquarters facility, as well as additional sales staffing costs in both segments.
Operating Income
Operating income was $8.3 million for the three months ended September 29, 2013 and $11.7 million for the same period of the prior year. Operating income for the Industrial segment decreased $3.3 million and operating income for the Water Treatment segment decreased $0.2 million, primarily as a result of the lower gross profit in our Industrial segment and higher selling, general and administrative expenses incurred within and allocated to both segments discussed above.
Provision for Income Taxes
Our effective income tax rate was 37.0% for the three months ended September 29, 2013 and 38.6% for the same period of the prior year. The effective tax rate is impacted by projected levels of taxable income, permanent items, and state taxes.
Six months ended September 29, 2013 Compared to the Six months ended September 30, 2012
Sales
Sales increased $4.1 million, or 2.3%, to $181.3 million for the six months ended September 29, 2013, as compared to $177.3 million for the same period of the prior year. Sales of bulk chemicals were approximately 24% of sales dollars during the six month period ended September 29, 2013, compared to 23% during the same period of the prior year.
Industrial Segment. Industrial segment sales increased $4.3 million, or 3.6%, to $123.7 million for the six months ended September 29, 2013, as compared to $119.4 million for the same period of the prior year. The increase in sales was due to increased sales volumes, primarily in our bulk and commodity products which carry lower per-unit selling prices and margins. In addition, we were unable to pass along cost increases in certain cases due to heightened competitive pressures, which negatively impacted our sales growth in this six month period.
Water Treatment Segment. Water Treatment segment sales decreased $0.3 million to $57.6 million for the six months ended September 29, 2013, as compared to $57.9 million for the same period of the prior year. Growth in its newer branches, along with favorable weather conditions late in the second quarter, partially offset the negative impact of less favorable weather conditions for the majority of the six month period of this fiscal year as compared to the same period of the prior year.
Gross Profit
Gross profit decreased $0.7 million to $33.8 million, or 18.6% of sales, for the six months ended September 29, 2013, as compared to $34.5 million, or 19.5% of sales, for the same period of the prior year. Gross profit in the Industrial segment decreased $0.9 million, while gross profit in the Water Treatment segment increased $0.2 million. The prior year's gross profit was adversely impacted by the $3.2 million charge resulting from the litigation settlement in the first quarter of fiscal 2013. The settlement charge constituted 1.8% of total sales for the six month period. The LIFO method of valuing inventory increased gross profit by $0.1 million for the six months ended September 29, 2013, while it decreased gross profit by $0.2 million for the same period of the prior year.
Industrial Segment. Gross profit for the Industrial segment decreased $0.9 million to $16.5 million, or 13.3% of sales, for the six months ended September 29, 2013, as compared to $17.4 million, or 14.5% of sales, for the same period of the prior year. Gross profit was negatively impacted by the incremental costs to operate our new manufacturing facility ($1.0 million) as well as the costs incurred to exit the leased facility used to serve our bulk pharmaceutical customers ($0.8 million). Despite higher overall sales volumes, gross profit was also negatively impacted by a product mix shift to lower-margin bulk and commodity products and, in certain cases, our inability to pass along cost increases due to heightened competitive pressures. The prior year's gross profit was adversely impacted by the $3.2 million charge resulting from the litigation settlement in the first quarter of fiscal 2013. The settlement charge constituted 2.7% of Industrial segment sales for the six month period. The LIFO method of valuing inventory increased gross profit in this segment by $0.1 million for the six months ended September 29, 2013, while it decreased gross profit in this segment by $0.1 million for the same period of the prior year.

14


Water Treatment Segment. Gross profit for the Water Treatment segment was $17.3 million, or 30.0% of sales, for the six months ended September 29, 2013, and $17.1 million, or 29.6% of sales, for the same period in the prior year. Favorable weather conditions later in the second quarter and growth from its newer branches more than offset the negative impact of less favorable weather conditions for the majority of the six month period when compared to a year ago. The LIFO Method of valuing inventory had a nominal impact on gross profit for the six months ended September 29, 2013 and for the same period of the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $17.3 million, or 9.5% of sales, for the six months ended September 29, 2013, as compared to $15.7 million, or 8.8% of sales, for the same period of the prior year. The increase in expenses was driven by $0.5 million of costs related to our new headquarters facility, as well as additional sales staffing costs in both segments.
Operating Income
Operating income was $16.5 million for the six months ended September 29, 2013 and $18.8 million for the same period of the prior year. Operating income for the Industrial segment decreased $1.6 million and operating income for the Water Treatment segment decreased $0.6 million, primarily as a result of lower gross profit from the Industrial segment and higher selling, general and administrative expenses incurred within and allocated to both segments as discussed above.
Provision for Income Taxes
Our effective income tax rate was 37.5% for the six months ended September 29, 2013 and 38.6% for the same period of the prior year. The effective tax rate is impacted by projected levels of taxable income, permanent items, and state taxes.
Liquidity and Capital Resources
Cash provided by operating activities for the six months ended September 29, 2013 was $14.8 million compared to $23.5 million for the same period of the prior year. The decrease in cash provided by operating activities was due to an increase in cash used to fund working capital, primarily relating to the timing of inventory purchases and the payment of trade payables as well as the timing of income tax payments. 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 as the majority of barges are received during this period. Additionally, due to the seasonality of the water treatment business, our accounts receivable balance generally increases during the period of April through September.
Cash and investments available-for-sale of $54.8 million at September 29, 2013 increased by $4.9 million as compared with the $49.9 million available as of March 31, 2013, primarily due to cash flows generated from operations, partially offset by capital expenditures and dividends paid.
We expect cash balances and our cash flows from operations will be sufficient to fund our cash requirements in fiscal 2014.
Capital expenditures were $6.5 million for the six months ended September 29, 2013, as compared to $11.9 million in the same period of the prior fiscal year. Included in capital expenditures for the first six months of fiscal 2014 was an aggregate $2.3 million related to our new headquarters facility ($1.5 million) and our new manufacturing facility ($0.8 million), compared to capital expenditures of $7.6 million related to the same projects during the first half of fiscal 2013. Other capital spending was related to regulatory, safety, and facility improvements and replacement trucks for the Water Treatment segment.
Critical Accounting Policies
Our significant accounting policies are set forth in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013. The accounting policies used in preparing our interim fiscal 2014 condensed consolidated financial statements are the same as those described in our Annual Report.

15


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 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 March 31, 2013. 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
At September 29, 2013, our investment portfolio included $25.7 million of certificates of deposit and municipal bonds classified as fixed income securities and cash and cash equivalents of $29.1 million. The fixed income securities, like all fixed income instruments, are subject to interest rate risks and will decline in value if market interest rates increase. However, while the value of the investment may fluctuate in any given period, we intend to hold our fixed income investments until recovery. Consequently, we would not expect to recognize an adverse impact on net income or cash flows during the holding period. We adjust the carrying value of our investments if impairment occurs that is other than temporary.
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 material prices on to our customers, however, there are no assurances that we will be able to pass on cost increases in the future as our pricing must be competitive.

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. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
There was no change in our internal control over financial reporting during the second quarter of fiscal 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

16


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 March 31, 2013.
 
ITEM 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not sell or repurchase any shares of our common stock during the second quarter of fiscal 2014.




17


ITEM 6.        EXHIBITS
Exhibit Index
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
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 September 29, 2013 filed with the SEC on October 30, 2013, formatted in Extensible Business Reporting Language (XBRL); (i) the Condensed Consolidated Balance Sheets at September 29, 2013 and March 31, 2013, (ii) the Condensed Consolidated Statements of Income for the Three and Six Months Ended September 29, 2013 and September 30, 2012, (iii) the Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended September 29, 2013 and September 30, 2012, (iv) the Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 29, 2013 and September 30, 2012, and (v) 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.
(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.

18


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/ Kathleen P. Pepski
 
 
 
Kathleen P. Pepski
 
 
 
Vice President, Chief Financial Officer, and Treasurer
 
 
 
(On behalf of the Registrant and as principal financial officer)
 
Dated: October 30, 2013

19


Exhibit Index
 
Exhibit

 
Description
 
Method of Filing
3.1

 
Amended and Restated Articles of Incorporation.
 
Incorporated by Reference
3.2

 
Amended and Restated By-Laws.
 
Incorporated by Reference
31.1

 
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.
 
Filed Electronically
31.2

 
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
 
Filed Electronically
32.1

 
Section 1350 Certification by Chief Executive Officer.
 
Filed Electronically
32.2

 
Section 1350 Certification by Chief Financial Officer.
 
Filed Electronically
101

 
Financial statements from the Quarterly Report on Form 10-Q of Hawkins, Inc. for the period ended September 29, 2013 filed with the SEC on October 30, 2013, formatted in Extensible Business Reporting Language (XBRL); (i) the Condensed Consolidated Balance Sheets at September 29, 2013 and March 31, 2013, (ii) the Condensed Consolidated Statements of Income for the Three and Six Months Ended September 29, 2013 and September 30, 2012, (iii) the Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended September 29, 2013 and September 30, 2012, (iv) the Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 29, 2013 and September 30, 2012, and (v) Notes to Condensed Consolidated Financial Statements.
 
Filed Electronically

20