Hawkins 10Q Q1 06.28.2015


 
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 June 28, 2015
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 July 24, 2015
Common Stock, par value $.05 per share
 
10,654,509

 



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 6.
 
 
 
 
 
 
 
 
 

2


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

 
June 28,
2015
 
March 29,
2015
ASSETS
 

 

CURRENT ASSETS:
 

 

Cash and cash equivalents
 
$
18,071

 
$
18,639

Investments available-for-sale
 
13,959

 
14,485

Trade receivables — less allowance for doubtful accounts:
 


 


$441 as of June 28, 2015 and $445 as of March 29, 2015
 
39,764

 
40,355

Inventories
 
39,084

 
37,028

Income taxes receivable
 
—

 
732

Prepaid expenses and other current assets
 
2,527

 
3,101

Total current assets
 
113,405

 
114,340

PROPERTY, PLANT, AND EQUIPMENT:
 
175,861

 
172,772

Less accumulated depreciation and amortization
 
80,739

 
79,042

Net property, plant, and equipment
 
95,122

 
93,730

OTHER ASSETS:
 


 


Goodwill
 
11,750

 
11,750

Intangible assets — less accumulated amortization:
 


 


$4,242 as of June 28, 2015 and $3,933 as of March 29, 2015
 
11,070

 
11,154

Long-term investments available for sale
 
16,101

 
17,249

Other
 
480

 
239

Total other assets
 
39,401

 
40,392

Total assets
 
$
247,928

 
$
248,462

LIABILITIES AND SHAREHOLDERS’ EQUITY
 


 


CURRENT LIABILITIES:
 


 


Accounts payable
 
$
18,345

 
$
20,083

Dividends payable
 
—

 
4,038

Accrued payroll and employee benefits
 
4,775

 
6,122

Deferred income taxes
 
2,698

 
2,698

Income tax payable
 
829

 
—

Other current liabilities
 
3,763

 
3,402

Total current liabilities
 
30,410

 
36,343

PENSION WITHDRAWAL LIABILITY
 
6,513

 
6,589

DEFERRED INCOME TAXES
 
10,014

 
9,978

OTHER LONG-TERM LIABILITIES
 
656

 
1,588

Total liabilities
 
47,593

 
54,498

COMMITMENTS AND CONTINGENCIES
 
—

 
—

SHAREHOLDERS’ EQUITY:
 

 

Common stock; authorized: 30,000,000 shares of $0.05 par value; 10,569,764 and 10,564,949 shares issued and outstanding as of June 28, 2015 and March 29, 2015, respectively
 
528

 
528

Additional paid-in capital
 
50,426

 
50,901

Retained earnings
 
149,358

 
142,567

Accumulated other comprehensive income (loss)
 
23

 
(32
)
Total shareholders’ equity
 
200,335

 
193,964

Total liabilities and shareholders’ equity
 
$
247,928

 
$
248,462

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
 
 
June 28,
2015
 
June 29,
2014
Sales
 
$
101,496

 
$
98,036

Cost of sales
 
(80,761
)
 
(79,540
)
Gross profit
 
20,735

 
18,496

Selling, general and administrative expenses
 
(9,891
)
 
(8,875
)
Operating income
 
10,844

 
9,621

Interest income, net
 
21

 
14

Income before income taxes
 
10,865

 
9,635

Income tax provision
 
(4,074
)
 
(3,614
)
Net income
 
$
6,791

 
$
6,021

 
 
 
 
 
Weighted average number of shares outstanding - basic
 
10,580,542

 
10,570,041

Weighted average number of shares outstanding - diluted
 
10,628,409

 
10,613,738

 
 
 
 
 
Basic earnings per share
 
$
0.64

 
$
0.57

Diluted earnings per share
 
$
0.64

 
$
0.57

 
 
 
 
 
Cash dividends declared per common share
 
$
—

 
$
—

See accompanying notes to condensed consolidated financial statements.


4


HAWKINS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
 
 
 
Three Months Ended
 
 
June 28,
2015
 
June 29,
2014
Net income
 
$
6,791

 
$
6,021

Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized gain (loss) on available-for-sale investments
 
55

 
(8
)
Total comprehensive income
 
$
6,846

 
$
6,013

See accompanying notes to condensed consolidated financial statements.


5


HAWKINS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
 
 
Three Months Ended
 
 
June 28,
2015
 
June 29,
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
6,791

 
$
6,021

Reconciliation to cash flows:
 
 
 
 
Depreciation and amortization
 
3,564

 
2,984

Stock compensation expense
 
457

 
405

Loss (gain) from property disposals
 
13

 
(4
)
Changes in operating accounts providing (using) cash:
 
 
 
 
Trade receivables
 
591

 
(1,971
)
Inventories
 
(2,056
)
 
(8,129
)
Accounts payable
 
(1,333
)
 
3,763

Accrued liabilities
 
(1,995
)
 
(1,695
)
Income taxes
 
1,561

 
(688
)
Other
 
333

 
738

Net cash provided by operating activities
 
7,926

 
1,424

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of property, plant, and equipment
 
(5,181
)
 
(3,298
)
Purchases of investments
 
(2,194
)
 
(8,798
)
Sale and maturities of investments
 
3,960

 
4,520

Other
 
(110
)
 
18

Net cash used in investing activities
 
(3,525
)
 
(7,558
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Cash dividends paid
 
(4,038
)
 
(3,823
)
Shares surrendered for payroll taxes
 
(379
)
 
(295
)
Shares repurchased
 
(552
)
 
(1,431
)
Net cash used in financing activities
 
(4,969
)
 
(5,549
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
 
(568
)
 
(11,683
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
18,639

 
33,486

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
18,071

 
$
21,803

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
 
Cash paid for income taxes
 
$
2,513

 
$
4,325

Noncash investing activities - Capital expenditures in accounts payable
 
$
720

 
$
185

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 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, 2015, 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 29, 2015, filed with the SEC on May 28, 2015. There has been no significant change in our accounting policies since the end of fiscal 2015.
The results of operations for the three months ended June 28, 2015 are not necessarily indicative of the results that may be expected for the full year.
References to fiscal 2015 refer to the fiscal year ended March 29, 2015 and references to fiscal 2016 refer to the fiscal year ending April 3, 2016. As compared to our normal 52-week fiscal years, fiscal 2016 will be a 53-week year, with the extra week to be recorded in our fourth quarter’s results of operations.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued new accounting requirements for recognition of revenue from contracts with customers. The requirements of the new standard will be effective for annual reporting periods beginning after December 15, 2017 (our fiscal year ending March 31, 2019), and interim periods within those annual periods. We are currently evaluating the impact of this accounting pronouncement on our results of operations and financial position.
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
 
 
June 28,
2015
 
June 29,
2014
Weighted-average common shares outstanding—basic
 
10,580,542

 
10,570,041

Dilutive impact of stock options, performance units, and restricted stock
 
47,867

 
43,697

Weighted-average common shares outstanding—diluted
 
10,628,409

 
10,613,738

For the three months ended June 28, 2015 and June 29, 2014, there were no shares or stock options excluded from the calculation of weighted-average common shares for diluted EPS.
Note 3 – Business Combinations

Acquisition of The Dumont Company, Inc.: In the third quarter of fiscal 2015, we acquired substantially all of the assets of The Dumont Company, Inc. (“Dumont”) under the terms of an asset purchase agreement with Dumont and its shareholders. We paid $10.1 million in cash including a working capital adjustment in the third quarter of fiscal 2015, using available cash on hand to fund the acquisition. Dumont was a water treatment chemical distribution company with revenues of approximately

7


$14 million in calendar year 2013. Through this acquisition we added seven operating locations across Florida. 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 to our company and were expensed as incurred.

The acquisition has been accounted for under the acquisition method of accounting, under which the total purchase price is allocated to the net tangible and intangible assets of Dumont acquired in connection with the acquisition based on their estimated fair values. We estimated the fair values of the assets acquired and liabilities assumed using a discounted cash flow analysis (income approach). The following table summarizes the preliminary allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed at the date of the Dumont acquisition:
(In thousands)
Amount
Accounts receivable
$
1,358

Inventory
859

Other assets
159

Property, plant, and equipment
702

Intangible assets
3,509

Current liabilities
(877
)
    Net assets acquired
5,710

Goodwill
4,358

Total purchase price
$
10,068


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 preliminary allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible assets:
(In thousands)
Amount
Life (in years)
Customer relationships
$
2,810

20
Trade Name
699

4
 
$
3,509

 
Note 4 – Cash and Cash Equivalents and Investments
The following table presents information about our financial assets 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.
 
 
June 28,
2015
 
 
 
 
 
 
(In thousands)
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
18,071

 
$
18,071

 
$
—

 
$
—

Certificates of deposit
 
28,243

 
—

 
28,243

 
—

Municipal bonds
 
1,817

 
—

 
1,817

 
—

 
 
 
 
 
 
 
 
 
 
 
March 29,
2015
 
 
 
 
 
 
(In thousands)
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
18,639

 
$
18,639

 
$
—

 
$
—

Certificates of deposit
 
29,136

 
—

 
29,136

 
—

Municipal bonds
 
2,598

 
—

 
2,598

 
—

Our financial assets that are measured at fair value on a recurring basis and fall within valuation technique Level 2 are certificates of deposit (“CDs”) and municipal bonds, with original maturities ranging from three months to three years. The CDs and municipal bonds are classified as investments in current assets and noncurrent assets on the condensed consolidated

8


balance sheets. As of June 28, 2015, the combined CDs and municipal bonds had a fair value of $14.0 million in current assets and $16.1 million in noncurrent assets compared to CDs and municipal bonds with a fair value of $14.5 million in current assets and $17.2 million in noncurrent assets as of March 29, 2015.
Note 5 – Inventories
Inventories at June 28, 2015 and March 29, 2015 consist of the following:
 
 
June 28,
2015
 
March 29,
2015
(In thousands)
 
 
Inventory (FIFO basis)
 
$
44,645

 
$
42,567

LIFO reserve
 
(5,561
)
 
(5,539
)
Net inventory
 
$
39,084

 
$
37,028

The first in, first out (“FIFO”) value of inventories accounted for under the last in, first out (“LIFO”) method was $41.4 million at June 28, 2015 and $39.0 million at March 29, 2015. The remainder of the inventory was valued and accounted for under the FIFO method.

The LIFO reserve changed nominally during the three months ended June 28, 2015, and increased $0.5 million during the three months ended June 29, 2014. The valuation of LIFO inventory for interim periods is based on our estimates of year-end inventory levels and costs.
Note 6 – Goodwill and Intangible Assets
Goodwill. The carrying amount of goodwill was $11.7 million as of June 28, 2015 and March 29, 2015.
Intangible assets. A summary of our intangible assets as of June 28, 2015 and March 29, 2015 is as follows:
 
 
June 28, 2015
 
March 29, 2015
(In thousands)
 
Gross
Amount
 
Accumulated
Amortization
 
Net
 
Gross 
Amount
 
Accumulated
Amortization
 
Net
Finite-life intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
9,948

 
$
(1,837
)
 
$
8,111

 
$
9,723

 
$
(1,697
)
 
$
8,026

Trademarks and trade names
 
2,034

 
(754
)
 
1,280

 
2,034

 
(667
)
 
1,367

Trade secrets
 
962

 
(919
)
 
43

 
962

 
(896
)
 
66

Carrier relationships
 
800

 
(395
)
 
405

 
800

 
(337
)
 
463

Other finite-life intangible assets
 
341

 
(337
)
 
4

 
341

 
(336
)
 
5

Total finite-life intangible assets
 
14,085

 
(4,242
)
 
9,843

 
13,860

 
(3,933
)
 
9,927

Indefinite-life intangible assets
 
1,227

 
—

 
1,227

 
1,227

 
—

 
1,227

Total intangible assets
 
$
15,312

 
$
(4,242
)
 
$
11,070

 
$
15,087

 
$
(3,933
)
 
$
11,154


Note 7 – Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss) on our consolidated balance sheet, net of tax, are as follows:
(In thousands)
 
June 28,
2015
 
March 29,
2015
Unrealized gain (loss) on:
 
 
 
 
Available-for-sale investments
 
$
30

 
$
(25
)
Post-retirement plan liability
 
(7
)
 
(7
)
Accumulated other comprehensive income (loss)
 
$
23

 
$
(32
)
Note 8 – 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 2016 and 2015. 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

9


becomes available after the applicable fiscal year and will be between zero shares and 44,446 shares in the aggregate for fiscal 2016. 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 three months ended June 28, 2015:
 
 
Shares
 
Weighted-
Average Grant
Date Fair Value
Unvested at beginning of period
 
53,580

 
$
37.55

Granted
 
37,309

 
40.89

Vested
 
(28,648
)
 
40.25

Unvested at end of period
 
62,241

 
$
38.31

We recorded compensation expense of $0.3 million related to performance share units and restricted stock for the three months ended June 28, 2015 and June 29, 2014. 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 June 28, 2015, there were 7,077 shares of restricted stock with a weighted averaged grant date fair value of $34.61 outstanding under this program. Compensation expense for the three months ended June 28, 2015 and June 29, 2014 related to restricted stock awards to the Board was $0.1 million.

Stock Option Awards. 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. No stock options have been granted since our fiscal year ended March 28, 2010. During fiscal 2015, 9,333 options were exercised with an exercise price of $19.90. No expense was recorded in fiscal 2015 or fiscal 2016 related to the value of stock options.

Note 9 – Share Repurchase Program

On May 29, 2014, our Board authorized a share repurchase program of up to 300,000 shares of our outstanding common shares. Under the program, we are authorized to repurchase shares for cash on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. Upon repurchase of the shares, we reduced our common stock for the par value of the shares with the excess applied against additional paid-in capital.

During the first quarter of fiscal 2016, we repurchased 13,850 shares of common stock with an aggregate purchase price of $0.6 million. During fiscal 2015, we repurchased 59,602 shares at an aggregate purchase price of $2.2 million, of which 39,170 shares with an aggregate purchase price of $1.4 million were repurchased during the first quarter.

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.







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 2015 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 primarily 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 the nature of our business, 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 outside of the United States are immaterial and all assets are located within the United States.
 
(In thousands)
 
Industrial
 
Water
Treatment
 
Total
Three months ended June 28, 2015:
 
 
 
 
 
 
Sales
 
$
67,588

 
$
33,908

 
$
101,496

Gross profit
 
10,714

 
10,021

 
20,735

Selling, general and administrative expenses
 
5,199

 
4,692

 
9,891

Operating income
 
5,515

 
5,329

 
10,844

Three months ended June 29, 2014:
 
 
 
 
 
 
Sales
 
$
67,546

 
$
30,490

 
$
98,036

Gross profit
 
9,361

 
9,135

 
18,496

Selling, general and administrative expenses
 
5,099

 
3,776

 
8,875

Operating income
 
4,262

 
5,359

 
9,621


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 months ended June 28, 2015 as compared to June 29, 2014. 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 29, 2015 (“fiscal 2015”). References to fiscal 2016 refer to the fiscal year ending April 3, 2016.
Overview
We derive substantially all of our revenues from the sale of 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 the strong customer focus and have expanded our business by increasing our sales of value-added chemical products, including manufacturing, blending, and repackaging certain products.

In the third quarter of fiscal 2015, we acquired substantially all of the assets of The Dumont Company, Inc. (“Dumont”) under the terms of an asset purchase agreement with Dumont and its shareholders. We paid $10.1 million in cash including a working capital adjustment, using available cash on hand to fund the acquisition. Dumont was a water treatment chemical distribution company with revenues of approximately $14.0 million in calendar year 2013. Through this acquisition we added seven operating locations across Florida serving municipal water and wastewater treatment, private utilities, commercial swimming pools, irrigation water treatment and food processing chemical markets. The results of operations since the acquisition date are included in our Water Treatment Segment.

In the first quarter of fiscal 2015, our Board of Directors authorized a share repurchase program of up to 300,000 shares of our outstanding common stock. The shares may be repurchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. The primary objective of the share repurchase program is to offset the impact of dilution from issuances relating to employee and director equity grants and our employee stock purchase program. Since the inception of this program, we have repurchased 73,452 shares for an aggregate purchase price of $2.8 million.

We use the last in, first out (“LIFO”) method for valuing substantially all 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 chemical raw material prices. We recorded a nominal increase in our LIFO reserve for the three months ended June 28, 2015 and a $0.5 million increase in our LIFO reserve for the three months ended June 29, 2014, decreasing our reported gross profit for these periods.

We disclose the sales of our bulk commodity products as a percentage of total sales dollars. Our definition of bulk commodity products includes products that we do not modify in any way, but receive, store, and ship from our facilities, or direct ship to our customers in large quantities. We review our sales reporting on a periodic basis to ensure we are including all products that meet this definition. The disclosures in this document referring to sales of bulk commodity products have been updated for all periods presented based on the most recent review.

















12



Results of Operations
The following table sets forth the percentage relationship of certain items to sales for the period indicated:
 
 
 
Three months ended
 
 
 
June 28, 2015
 
June 29, 2014
 
Sales
 
100.0
 %
 
100.0
 %
 
Cost of sales
 
(79.6
)%
 
(81.1
)%
 
Gross profit
 
20.4
 %
 
18.9
 %
 
Selling, general and administrative expenses
 
(9.7
)%
 
(9.1
)%
 
Operating income
 
10.7
 %
 
9.8
 %
 
Interest income, net
 
—
 %
 
—
 %
 
Income before income taxes
 
10.7
 %
 
9.8
 %
 
Income tax provision
 
(4.0
)%
 
(3.7
)%
 
Net income
 
6.7
 %
 
6.1
 %
 
Three Months Ended June 28, 2015 Compared to the Three Months Ended June 29, 2014
Sales
Sales increased $3.5 million, or 3.5%, to $101.5 million for the three months ended June 28, 2015, as compared to $98.0 million for the same period of the prior year. Sales of bulk commodity products accounted for approximately 19% of sales dollars for the three-month period ended June 28, 2015 compared to 21% during the same period of the prior year.
Industrial Segment. Industrial segment sales were $67.6 million for the three-month periods ended June 28, 2015 and $67.5 million for the same period of the prior year. Our volumes decreased from the same period a year ago due to lower sales of certain bulk commodity products at select accounts, while a shift in product mix increased sales of products that have higher per-unit selling prices, keeping revenues relatively flat.
Water Treatment Segment. Water Treatment segment sales increased $3.4 million, or 11.2%, to $33.9 million, as compared to $30.5 million for the same period of the prior year. Sales at our Florida locations which were acquired in the third quarter of fiscal 2015 were $4.2 million. This increase was partially offset by lower sales of bulk commodity products at certain of our existing branches and lower equipment project revenues.
Gross Profit
Gross profit was $20.7 million, or 20.4% of sales, for the three months ended June 28, 2015, an increase of 11.9% from $18.5 million, or 18.9% of sales, for the same period of the prior year. The LIFO method of valuing inventory had a nominal impact on gross profit for the period ended June 28, 2015 and decreased gross profit by $0.5 million for the period ended June 29, 2014.
Industrial Segment. Gross profit for the Industrial segment increased $1.4 million to $10.7 million, or 15.9% of sales, for the three months ended June 28, 2015, as compared to $9.4 million, or 13.9% of sales, for the same period of the prior year. While total volumes decreased year-over-year, the increase in gross profit primarily resulted from increased sales of certain products that generate higher per-unit margins. The LIFO method of valuing inventory had a nominal impact on gross profit in the first quarter of the current year but decreased gross profit by $0.4 million in the prior year.
Water Treatment Segment. Gross profit for the Water Treatment segment increased $0.9 million to $10.0 million, or 29.6% of sales, for the three months ended June 28, 2015, as compared to $9.1 million, or 30.0% of sales, for the same period of the prior year. The increase in gross profit dollars was driven by profits from our Florida locations. The LIFO method of valuing inventory had a nominal impact on gross profit in the first quarter of the current year but decreased gross profit by $0.1 million in the prior year.



13


Selling, General and Administrative Expenses
Selling, general and administrative expenses were $9.9 million, or 9.7% of sales, for the three months ended June 28, 2015, as compared to $8.9 million, or 9.1% of sales, for the same period of the prior year. The expenses increased primarily in our Water Treatment segment, driven by our Florida locations and the addition of sales personnel in other locations.
Operating Income
Operating income was $10.8 million for the three months ended June 28, 2015, as compared to $9.6 million for the same period of the prior year. Operating income for the Industrial segment increased $1.3 million due to the increase in gross profit discussed above. Operating income for the Water Treatment segment was flat as the increase in gross profit was offset by higher selling, general and administrative expenses.
Income Tax Provision
Our effective income tax rate was 37.5% for each of the three-month periods ended June 28, 2015 and June 29, 2014. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.
Liquidity and Capital Resources
Cash provided by operating activities for the three months ended June 28, 2015 was $7.9 million compared to $1.4 million for the same period of the prior year. The increase in cash provided by operating activities was primarily due to the timing of inventory purchases. Our inventory levels on hand at the end of fiscal 2014 were unusually low, which resulted in significant cash expended to rebuild inventory levels in the first quarter of fiscal 2015. 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 is generally higher during the period of April through September.
Capital expenditures were $5.2 million for the three months ended June 28, 2015, as compared to $3.3 million in the same period of the prior fiscal year. Included in capital expenditures for the first three months of fiscal 2016 was approximately $2.8 million related to facility improvements, replacement equipment, new and replacement containers, and water treatment trucks and $1.2 million related to business expansion, inventory storage and process improvement.
Cash used in financing activities was $5.0 million for the three months ended June 28, 2015, as compared to $5.5 million in the same period of the prior fiscal year. The decrease in the current year use of cash was due to $0.9 million fewer common stock repurchases partially offset by higher cash dividends paid.
Cash and investments were $48.1 million at June 28, 2015, a decrease of $2.3 million as compared with the $50.4 million available as of March 29, 2015, due to cash outflows related to capital expenditures, dividend payments and the share repurchase program described above exceeding the cash flows generated from operations during the three months ended June 28, 2015.

We expect our cash balances and cash flows from operations will be sufficient to fund our cash requirements including acquisitions or other strategic relationships for the foreseeable future. We periodically evaluate opportunities to borrow funds or sell additional equity or debt securities for strategic reasons or to further strengthen our financial position.
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 29, 2015. The accounting policies used in preparing our interim fiscal 2016 condensed consolidated financial statements are the same as those described in our Annual Report.
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,

14


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 29, 2015. 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 June 28, 2015, our investment portfolio included $30.1 million of certificates of deposit and municipal bonds classified as fixed income securities and cash and cash equivalents of $18.1 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 maturity. Consequently, we do 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. 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 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 first quarter of fiscal 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

15


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 29, 2015.

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

On May 29, 2014, our Board of Directors authorized a share repurchase program of up to 300,000 shares of our outstanding common stock. The shares may be repurchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. The following table sets forth information concerning purchases of our common stock for the quarter ended June 28, 2015:

Period
Total Number of Shares Purchased
 
Average Price Paid Per Share
Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program
Maximum Number of Shares that May Yet be Purchased under Plans or Programs
3/29/2015-04/26/2015
9,984

(1)
$
37.99

—

240,398

4/27/2015-5/24/2015
—

 
—

—

240,398

5/25/2015-6/28/2015
13,850

 
$
39.86

13,850

226,548

         Total
23,834

 
—

13,850




(1) The shares of common stock in this row represent shares that were surrendered to us by stock plan participants in order to satisfy minimum withholding tax obligations related to the vesting of restricted stock awards and are not shares purchased under the Board of Directors authorization described below.





16


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 June 28, 2015 filed with the SEC on July 29, 2015, formatted in Extensible Business Reporting Language (XBRL); (i) the Condensed Consolidated Balance Sheets at June 28, 2015 and March 29, 2015, (ii) the Condensed Consolidated Statements of Income for the Three Months Ended June 28, 2015 and June 29, 2014, (iii) the Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended June 28, 2015 and June 29, 2014, (iv) the Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 28, 2015 and June 29, 2014, 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.

17


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: July 29, 2015

18


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 June 28, 2015 filed with the SEC on July 29, 2015, formatted in Extensible Business Reporting Language (XBRL); (i) the Condensed Consolidated Balance Sheets at June 28, 2015 and March 29, 2015, (ii) the Condensed Consolidated Statements of Income for the Three Months Ended June 28, 2015 and June 29, 2014, (iii) the Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended June 28, 2015 and June 29, 2014, (iv) the Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 28, 2015 and June 29, 2014, and (v) Notes to Condensed Consolidated Financial Statements.
 
Filed Electronically

19