UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________to ______________________
Commission file number 0-7647
HAWKINS CHEMICAL, INC.
------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0771293
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
3100 EAST HENNEPIN AVENUE, MINNEAPOLIS, MINNESOTA 55413
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(Address of principal executive offices) Zip Code
(612) 331-6910
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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 X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT FEBRUARY 7, 2000
- -------------------------------------- -------------------------------
Common Stock, par value $.05 per share 10,626,881
HAWKINS CHEMICAL, INC
INDEX TO FORM 10-Q
Page No.
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Balance Sheets - December 31, 1999 and
October 3, 1999 ............................................. 3
Condensed Statements of Income - Three Months Ended
Ended December 31, 1999 and 1998 ............................... 4
Condensed Statements of Cash Flows - Three Months Ended
December 31, 1999 and 1998 ..................................... 5
Notes to Condensed Financial Statements ........................... 6-7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 8-10
PART II OTHER INFORMATION
Item 1 Legal Proceedings ................................................. 11
Item 6 Exhibits and Reports on Form 8-K .................................. 12
Exhibit Index ..................................................... 13
Financial Data Schedule ........................................... 14
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
HAWKINS CHEMICAL, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 OCTOBER 3, 1999
----------------- ---------------
ASSETS (Unaudited) (Derived from audited
financial statements)
Current assets:
Cash and cash equivalents................................................ $ 3,771,277 $ 4,778,174
Investments available-for-sale........................................... 17,094,487 17,424,700
Trade receivables-net.................................................... 10,240,313 11,329,211
Notes receivable......................................................... 310,033 301,920
Inventories ............................................................. 8,296,004 8,379,228
Prepaid expenses and other............................................... 2,328,627 2,536,448
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Total current assets................................................. 42,040,741 44,749,681
Property, plant and equipment-net.......................................... 20,562,444 18,664,999
Notes receivable-noncurrent................................................ 2,762,905 2,844,220
Other assets............................................................... 2,751,177 2,740,927
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Total ................................................................... $68,117,267 $68,999,827
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 5,818,223 $ 5,032,268
Current portion of long-term debt........................................ 102,037 95,362
Dividends payable........................................................ -- 1,314,154
Other current liabilities................................................ 4,094,243 4,838,635
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Total current liabilities............................................ 10,014,503 11,280,419
Long-term debt............................................................. 226,003 328,040
Deferred income taxes...................................................... 1,032,450 1,029,950
Other long-term liabilities................................................ 714,597 786,202
Commitments and contingencies.............................................. - -
Shareholders' equity:
Common stock, par value $.05 per share; issued and
outstanding, 10,818,881 and 10,951,281 shares respectively .......... 540,944 547,564
Additional paid-in capital............................................. 39,644,583 40,129,749
Retained earnings...................................................... 15,944,187 14,897,903
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Total shareholders' equity.......................................... 56,129,714 55,575,216
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Total .............................................................. $68,117,267 $68,999,827
=========== ===========
See accompanying Notes to Condensed Financial Statements.
3
HAWKINS CHEMICAL, INC.
CONDENSED STATEMENTS OF INCOME
Three Months Ended
December 31
1999 1998
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(Unaudited)
Net sales .............................................. $ 21,626,369 $ 23,311,125
Cost of sales .......................................... (16,654,017) (18,123,717)
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Gross profit ........................................... 4,972,352 5,187,408
Selling, general and administrative .................... (2,560,859) (2,515,517)
Litigation settlement reimbursement .................... -- 2,754,000
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Income from operations ................................. 2,411,493 5,425,891
Other income (deductions):
Interest income ..................................... 287,356 281,062
Interest expense .................................... (7,561) (9,232)
Miscellaneous ....................................... 14,499 21,913
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Total other income (deductions) ........................ 294,294 293,743
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Income before income taxes ............................. 2,705,787 5,719,634
Provision for income taxes ............................. (1,066,100) (2,293,400)
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Net income ............................................. $ 1,639,687 $ 3,426,234
============ ============
Weighted average number of common shares
outstanding............................................. 10,868,087 11,361,052
============ ============
Earnings per common share - basic and diluted .......... $ 0.15 $ 0.30
============ ============
See accompanying Notes to Condensed Financial Statements.
4
HAWKINS CHEMICAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended December 31
------------------------------
1999 1998
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(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 1,639,687 $ 3,426,234
Depreciation and amortization................................................... 510,774 420,274
Deferred income taxes........................................................... 27,500 8,000
Other........................................................................... (26,024) (26,190)
Changes in certain current assets and liabilities............................... 1,324,901 809,826
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Net cash provided by operating activities .................................. 3,476,838 4,638,144
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment...................................... (2,392,445) (668,227)
Purchases of investments........................................................ (169,787) (3,170,560)
Sale of investments ............................................................ 500,000 --
Payments received on notes receivable........................................... 73,202 67,622
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Net cash used in investing activities ...................................... (1,989,030) (3,771,165)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid............................................................. (1,314,154) (1,147,090)
Acquisition and retirement of stock............................................. (1,085,189) (1,295,991)
Debt repayment.................................................................. (95,362) (89,123)
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Net cash used in financing activities ...................................... (2,494,705) (2,532,204)
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DECREASE IN CASH AND CASH EQUIVALENTS .............................................. (1,006,897) (1,665,225)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................................... 4,778,174 3,197,015
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CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 3,771,277 $ 1,531,790
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest.......................................................... $ 32,541 $ 38,780
=========== ===========
Cash paid for income taxes...................................................... $ 322,233 $ 163,500
=========== ===========
See accompanying Notes to Condensed Financial Statements.
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HAWKINS CHEMICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed 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 financial
statements and footnotes included in the Company's Annual Report on Form
10-K for the year ended October 3, 1999, previously filed with the
Commission. In the opinion of management, the accompanying unaudited
condensed financial statements contain all adjustments necessary to present
fairly the Company's financial position and the results of its operations
and cash flows for the periods presented. All adjustments made to the
interim financial statements were of a normal recurring nature.
The accounting policies followed by the Company are set forth in Note 1 to
the Company's financial statements in the 1999 Hawkins Chemical, Inc.
Annual Report which is incorporated by reference to Form 10-K filed with
the Commission on January 3, 2000.
2. The results of operations for the period ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the full
year.
3. Inventories, principally valued by the LIFO method, are less than current
cost by approximately $570,000 at December 31, 1999. Inventory consists
principally of finished goods. Inventory quantities fluctuate during the
year. No material amounts of interim liquidation of inventory quantities
have occurred that are not expected to be replaced by year-end.
4. Cash dividends in the amount of $1,314,154 were paid on October 12, 1999.
5. During the quarter ended December 31, 1999, the Company acquired and
retired 132,400 shares of common stock for $1,085,189.
6. During 1995, the Company had a fire in the office/warehouse of The Lynde
Company, a former wholly owned subsidiary. The Company's insurers denied
coverage and refused to defend the lawsuit filed against it as a result of
the fire. In the first quarter of fiscal 1999, the Company prevailed
against its insurers to recover the legal and settlement costs in
connection with the 1995 warehouse fire. The Company received $2,754,000,
which covers substantially all of its settlement and legal costs. The
umbrella insurer has agreed to defend and indemnify the Company on
remaining claims under the Settlement Agreement up to and in accordance
with its policy limits of $5,000,000. The Company's results of operations
for the first fiscal quarter of 1999 include $2,754,000 associated with
this settlement.
6
7. The Company has two reportable segments: Industrial and Water Treatment.
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 options. The information for 1999 has been
restated to conform to the 2000 presentation.
REPORTABLE SEGMENTS INDUSTRIAL WATER TREATMENT TOTAL
THREE MONTHS ENDED DECEMBER 31, 1999
Net sales ..................... $15,231,831 $ 6,394,538 $21,626,369
Gross profit .................. 2,987,029 1,985,323 4,972,352
Operating income .............. 1,267,412 1,144,081 2,411,493
THREE MONTHS ENDED DECEMBER 31, 1998
Net sales ..................... $16,865,880 $ 6,445,245 $23,311,125
Gross profit .................. 3,241,850 1,945,558 5,187,408
Operating income .............. 1,557,454 1,114,437 2,671,891
THREE MONTHS ENDED DECEMBER 31,
PROFIT RECONCILIATION 1999 1998
Total income for reportable segments $2,411,493 $2,671,891
Unallocated corporate income ....... -- 2,754,000
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Total operating Income ............. $2,411,493 $5,425,891
========== ==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THE INFORMATION CONTAINED IN THIS FORM 10-Q INCLUDES FORWARD-LOOKING
STATEMENTS AS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. FORWARD-LOOKING INFORMATION OR STATEMENTS INCLUDE STATEMENTS
ABOUT THE FUTURE OF THE INDUSTRIES REPRESENTED BY OUR OPERATING GROUPS,
STATEMENTS ABOUT OUR FUTURE BUSINESS PLANS AND STRATEGIES, THE TIMELINESS OF
PRODUCT INTRODUCTIONS AND DELIVERIES, EXPECTATIONS ABOUT INDUSTRY AND MARKET
GROWTH DEVELOPMENTS, EXPECTATIONS ABOUT OUR GROWTH AND PROFITABILITY AND
OTHER STATEMENTS THAT ARE NOT HISTORICAL IN NATURE. MANY OF THESE STATEMENTS
CONTAIN WORDS SUCH AS "MAY", "WILL", "BELIEVE", "INTEND", "ESTIMATE", OR
"CONTINUE" OR OTHER SIMILAR WORDS.
THESE FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING DEMAND FROM MAJOR CUSTOMERS, COMPETITION, CHANGES IN PRODUCT OR
CUSTOMER MIX OR REVENUES, CHANGES IN PRODUCT COSTS AND OPERATING EXPENSES AND
OTHER FACTORS DISCLOSED THROUGHOUT THIS REPORT. THE ACTUAL RESULTS THAT THE
COMPANY ACHIEVES MAY DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS
DUE TO SUCH RISKS AND UNCERTAINTIES. THE COMPANY UNDERTAKES NO OBLIGATION TO
REVISE ANY FORWARD-LOOKING STATEMENTS IN ORDER TO REFLECT EVENTS OR
CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE OF THIS REPORT. READERS ARE URGED
TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY
IN THIS REPORT AND IN THE COMPANY'S OTHER REPORTS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF THE
RISKS AND UNCERTAINTIES THAT MAY AFFECT THE COMPANY'S FINANCIAL CONDITION,
RESULTS OF OPERATIONS, AND CASH FLOWS.
CONTINUING OPERATIONS
Net sales decreased $1,684,756, or 7.2%, in the first quarter of this fiscal
year as compared to the same quarter a year ago, due to a decrease of
$1,634,049 in Industrial segment sales and a decrease of $50,707 in Water
Treatment segment sales. The Industrial segment decrease is mainly
attributable to selling price decreases of a single, large-volume product
(caustic soda), although partially offset by increased volumes in other
product lines. The Water Treatment segment decrease is due mainly to lesser
volumes.
The gross margin, as a percentage of net sales, for the first quarter of
fiscal 2000 was 23.0% compared to 22.3% for the same quarter one year ago.
For the Industrial segment, gross margin, as a percentage of sales, was 19.6%
for the first quarter of fiscal 2000 and 19.2% for the first quarter of
fiscal 1999. This increase is mainly due to the selling price of caustic
soda, where both the selling price and cost of the product had decreased from
one year ago. The demand for this product does not fluctuate materially as
the cost and selling price increases or decreases. The Company has generally
been able to, and expects to continue to, adjust its selling prices as the
cost of materials and other expenses change, thereby maintaining relatively
stable dollar gross margins. Gross margin, as a percentage of sales, for the
Water Treatment segment was 31.0% for the quarter ended December 31, 1999
compared to 30.2% in the comparable quarter one year ago. This increase is
due mainly to increased profit margins in various product lines.
Selling, general and administrative expenses, as a percentage of net sales,
for the first quarter of fiscal 2000 was 11.8% compared to 10.8% for the same
quarter one year ago, an increase of 1.8%, or $45,342, from the prior period.
The increase was mainly due to increased employee compensation and benefits,
which comprise the majority of the selling, general and administrative
expenditures. Most of the remaining expenses in this category are fixed in
nature and vary only slightly with sales fluctuations.
8
Income from operations decreased by $3,014,398 in the first quarter of fiscal
2000, compared to the first quarter of fiscal 1999. This decrease is
primarily attributable to the amounts received from the Company's insurers
during fiscal 1999 in connection with the 1995 fire at the Lynde Company, a
former wholly owned subsidiary, cover substantially all of its related
settlement and legal costs previously incurred in prior periods. Also
contributing to the decrease was a reduction in sales as well as increased
costs of operations.
OTHER INCOME
Interest income increased by $6,294, or 2.2%, for the quarter ended December
31, 1999 compared to the same quarter one year ago. This increase is due to a
higher rate of return earned on cash investments. Interest expense decreased
slightly due to the decline in the outstanding amount of long-term debt.
Other miscellaneous income decreased slightly, by $7,414, as compared to the
same period in the previous year.
LIQUIDITY AND CAPITAL RESOURCES
For the first quarter ended December 31, 1999, cash provided by operations
was $3,476,838 compared to $4,638,144 for the same period one-year ago. This
decrease was due mainly to the decrease in net income and changes in certain
current asset and liability accounts discussed in the next paragraph below.
The decrease in net income is primarily due to the receipt in 1999 of amounts
from the Company's insurers during fiscal 1999 in connection with the 1995
fire at the Lynde Company. During the three months ended December 31, 1999,
the Company invested $2,392,445 in property and equipment additions, which
included approximately $1,800,000 for a new building being constructed in St.
Paul, Minnesota that will be occupied by both the Industrial and Water
Treatment segments.
Accounts receivable, inventories, and other current liabilities decreased
during the first three months of fiscal 2000. Decreases in these accounts are
typical for the first quarter of our fiscal year. Accounts payable increased
due to amounts due for construction costs of the new building in St. Paul.
Other current assets decreased due to prepayment that existed at October 3,
1999, for the new building. The Company did not issue any securities during
the quarter ended December 31, 1999.
During the quarter ended December 31, 1999, the Company acquired and retired
132,400 shares of common stock for an aggregate of $1,085,189.
Cash flows from operations, coupled with the Company's strong cash position,
puts the Company in a position to fund both short and long-term working
capital and capital investment needs with internally generated funds.
Management does not, therefore, anticipate the need to engage in significant
financing activities in either the short or long-term. If the need to obtain
additional capital does arise, however, management is confident that the
Company's total debt to capital ratio puts it in a position to issue either
debt or equity securities on favorable terms.
Although management continually reviews opportunities to enhance the value of
the Company through strategic acquisitions, other capital investments and
strategic divestitures, no material commitments for such investments or
divestitures currently exist, except that an additional amount of
approximately $2.2 million has been committed for the construction of a
facility in St. Paul on the Mississippi River. Until appropriate investment
opportunities are identified, the Company will continue to invest excess cash
in conservative investments. Cash equivalents include all liquid debt
instruments (primarily cash funds and certificates of deposit) purchased with
an original maturity of three months or less. Cash equivalents are carried at
cost, which approximates market value. Investments classified as
available-for-sale securities consist of insurance contracts and variable
rate marketable securities (primarily municipal bonds and
9
annuity contracts) that will be held for indefinite periods of time,
including securities that may be sold in response to changes in market
interest or prepayment rates, needs for liquidity or changes in the
availability or yield of alternative investments. These securities are
carried at market value which approximates cost.
Other than as discussed above, management is not aware of any matters that
have materially affected the first three months of fiscal 2000, or are
expected to materially affect future periods, nor is management aware of
other matters not affecting this period that are expected to materially
affect future periods.
YEAR 2000 COMPLIANCE
As of the date of this filing, the Company has experienced no significant
problems related to Year 2000 issues. The Company upgraded or replaced many
of its information technology (IT) systems and infrastructure in the ordinary
course of business over the last three years, including the upgrade of its
primary IT systems, IT infrastructure and security systems and the
replacement of its telephone, voicemail and time keeping systems, in each
case with Y2K compliant systems. The aggregate amount the Company spent on
these replacements and upgrades was approximately $610,000 as of December 31,
1999. The Company does not expect to incur any significant further expenses
specifically related to the Y2K issue, although it will continue to maintain,
upgrade and replace its IT and related systems as needed in the ordinary
course of business. Further, as of the date of this filing, the Company has
incurred no additional related expenses and has not experienced any operating
problems or product failures as a result of Year 2000 issues with its
vendors, service providers or customers.
MARKET RISK
At December 31, 1999, the Company had an investment portfolio of fixed income
securities of $2,179,226, excluding $20,660,853 of those classified as cash
and cash equivalents and variable rate securities. These securities, like all
fixed income instruments, are subject to interest rate risk and will decline
in value if market interest rates increase. However, the Company has the
ability to hold its fixed income investments until maturity and therefore the
Company would not expect to recognize an adverse impact in income or cash
flows.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting. In July,
1999, the FASB issued SFAS No. 137 delaying the effective date of SFAS No.
133 for one year to fiscal years beginning after June 15, 2000, with earlier
adoption encouraged. Management has not yet determined the effects SFAS No.
133 will have on its financial position or the results of its operations. The
Company will be required to adopt SFAS No. 133 in fiscal 2001.
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this filing, the Registrant was not involved in any pending
legal proceedings other than ordinary routine litigation incidental to their
business, except as follows:
LYNDE COMPANY WAREHOUSE FIRE. The settlement agreement (the "Settlement
Agreement") relating to the class action, DONNA M. COOKSEY, ET AL. V.
HAWKINS CHEMICAL, INC. AND THE LYNDE COMPANY ("Cooksey"), brought in March
1995 against the Company and its former subsidiary, for damages alleged to
be caused by a fire at an office/warehouse facility used by the former
subsidiary, was approved by the court on January 30, 1998. Pursuant to the
Settlement Agreement, the Company agreed to pay certain of the plaintiffs'
costs and expenses as well as certain compensation to the class. In October
1998 the Company obtained a judgment against its primary and umbrella
insurers obligating both insurers to defend the Company in connection with
the Cooksey lawsuit. The two insurers subsequently settled with the Company
by reimbursing it for substantially all amounts incurred in defending and
settling the Cooksey action. Less than 20 claimants remain who have not yet
resolved their claims under the Settlement Agreement. The Registrant
anticipates that the defense and payment of these remaining claims, which
are subject to arbitration, will be covered by its umbrella insurer.
11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are included with this Quarterly Report on Form 10-Q
(or incorporated by reference) as required by Item 601 of Regulation S-K.
Exhibit No. Description of Exhibit
----------------- -------------------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the fiscal quarter ended
DECEMBER 31, 1999.
SIGNATURE
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 CHEMICAL, INC.
By /s/ Marvin E. Dee
------------------------------------
Marvin E. Dee, Vice President, Chief
Financial Officer, Secretary, Treasurer
Dated: February 14, 2000
12
EXHIBIT INDEX
The following exhibits are included with this Quarterly Report on Form 10-Q
(or incorporated by reference) as required by Item 601 of Regulation S-K.
Exhibit No. Description of Exhibit Page No.
----------------- -------------------------------------------------------------- ------------
27 Financial Data Schedule 14
13