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, 1997
-----------------
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
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
3100 EAST HENNEPIN AVENUE, MINNEAPOLIS, MINNESOTA 55413
- --------------------------------------------------------------------------------
(Address of principal executive offices) 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 X NO
--- ---
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 12, 1998
-------------------------------------- --------------------------------
Common Stock, par value $.05 per share 11,603,895
HAWKINS CHEMICAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets - December 31, 1997 and
September 28, 1997 . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Income - Three Months Ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows - Three Months
Ended December 31, 1997 and 1996 . . . . . . . . . . . . . . . 5
Notes to Consolidated Condensed Financial Statements . . . . . . 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 8-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 11
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . 13
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
HAWKINS CHEMICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
December 31, 1997 September 28, 1997
----------------- ------------------
ASSETS (Unaudited) (Derived from audited
financial statements)
Current assets:
Cash and cash equivalents................................ $ 5,528,662 $ 8,065,021
Investments available-for-sale........................... 12,122,297 11,980,078
Trade receivables-net.................................... 10,537,104 11,117,991
Notes receivable......................................... 222,948 222,946
Inventories.............................................. 8,205,886 8,580,705
Other current assets..................................... 2,338,712 1,912,325
------------ ------------
Total current assets................................. 38,955,609 41,879,066
Property, plant and equipment-net.......................... 16,753,747 15,487,545
Notes receivable-non current............................... 3,611,942 3,639,712
Other assets............................................... 2,642,185 2,646,293
------------ ------------
Total $ 61,963,483 $ 63,652,616
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 4,304,547 $ 5,729,584
Current portion of long-term debt........................ 89,123 59,928
Dividends payable........................................ 1,044,351
Other current liabilities................................ 5,324,181 6,381,454
------------ ------------
Total current liabilities............................ 9,717,851 13,215,317
------------ ------------
Long-term debt............................................. 423,402 512,525
------------ ------------
Deferred income taxes...................................... 983,000 983,000
------------ ------------
Commitments and contingencies..............................
------------ ------------
Shareholders' equity:
Common stock, par value $.05 per share; issued
and outstanding, 11,603,895 shares at both dates....... 580,195 580,195
Additional paid-in capital............................... 42,517,455 42,517,455
Retained earnings........................................ 7,741,580 5,844,124
------------ ------------
Total shareholders' equity........................... 50,839,230 48,941,774
------------ ------------
Total $ 61,963,483 $ 63,652,616
------------ ------------
------------ ------------
See accompanying Notes to Consolidated Condensed Financial Statements.
3
HAWKINS CHEMICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
December 31
1997 1996
---- ----
Net sales $22,666,870 $19,936,058
----------- -----------
Costs and expenses:
Cost of sales 17,551,158 15,771,082
Selling, general and administrative 2,354,073 2,112,200
----------- -----------
Total costs and expenses 19,905,231 17,883,282
----------- -----------
Income from operations 2,761,639 2,052,776
----------- -----------
Other income (deductions):
Interest income 355,438 262,181
Interest expense (10,793) (11,843)
Miscellaneous 19,672 82,888
----------- -----------
Total other income (deductions) 364,317 333,226
----------- -----------
Income before income taxes 3,125,956 2,386,002
Provision for income taxes 1,228,500 930,500
----------- -----------
Net income $ 1,897,456 $ 1,455,502
----------- -----------
----------- -----------
Weighted average number of common shares outstanding 11,603,895 11,603,895
----------- -----------
----------- -----------
Earnings per common share - basic and diluted $0.16 $0.13
----------- -----------
----------- -----------
See accompanying Notes to Consolidated Condensed Financial Statements.
4
HAWKINS CHEMICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED DECEMBER 31
------------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 1,897,456 $ 1,455,502
Depreciation and amortization......................... 407,739 384,600
Deferred income taxes................................. 40,000 16,500
Other................................................. (11,666) (19,821)
Changes in certain current assets and liabilities..... (1,992,991) (1,929,169)
------------- -------------
Net cash provided by (used in) operating activities 340,538 (92,388)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............ (1,658,167) (531,574)
Purchases of investments.............................. (142,219) (119,474)
Payments received on notes receivable................. 27,768 20,948
------------- -------------
Net cash used in investing activities (1,772,618) (630,100)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid................................... (1,044,351) (884,135)
Debt repayment........................................ (59,928) (56,008)
------------- -------------
Net cash used in financing activities (1,104,279) (940,143)
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DECREASE IN CASH AND CASH EQUIVALENTS (2,536,359) (1,662,631)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,065,021 8,932,125
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,528,662 $ 7,269,494
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest............................... $ 42,975 $ 46,895
------------- -------------
------------- -------------
Cash paid for income taxes........................... $ 645,000 $ 195,500
------------- -------------
------------- -------------
See accompanying Notes to Consolidated Condensed Financial Statements.
5
HAWKINS CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. 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 financial
statements and footnotes included in the Company's Annual Report on Form
10-K for the year ended September 28, 1997, previously filed with the
Commission. In the opinion of management, the accompanying unaudited
consolidated 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.
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," (SFAS No. 128).
Earnings per common share presented for the three months ended December 31,
1996 have been restated for the adoption of SFAS No. 128. The effect of
adopting SFAS No. 128 at December 15, 1997, on earnings per common share
for the three months ended December 31, 1996 was not material.
The other accounting policies followed by the Company are set forth in Note
1 to the Company's financial statements in the 1997 Hawkins Chemical, Inc.
Annual Report which is incorporated by reference to Form 10-K filed with
the Commission on December 29, 1997.
2. The results of operations for the period ended December 31, 1997 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 $595,000 at December 31, 1997. 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. Earnings per common share are based upon the weighted average number of
shares outstanding after giving retroactive effect to a 5% stock dividend
declared February 12, 1997 to shareholders of record at the close of
business on March 28, 1997. Cash dividends in the amount of $1,044,351
were paid on October 10, 1997.
5. On May 29, 1997, the Company sold the inventory and operations of The Lynde
Company, a wholly owned subsidiary that specialized in swimming pool
chemicals, effective March 1, 1997. For the three-months ended
December 31, 1996, Lynde had revenues of $447,000 and a net loss
of $13,000.
6. During 1995, the Company had a fire in the office/warehouse of The Lynde
Company, a former wholly owned subsidiary. Through December 31, 1997, the
Company has expensed approximately $2,550,000 ($29,000 in the three months
ended December 31, 1997) to cover estimated settlement costs incurred by
the Company in connection with a lawsuit filed against the Company as a
result of the fire. As of December 31, 1997, the Company has paid
approximately $1,670,000 in settlement and legal costs relating to the fire
and, based upon the settlement agreement, expects to incur additional
legal and settlement costs. In February 1998, following approval of the
settlement of the court, the Company paid legal and settlement costs of
approximately $880,000. The Company will incur additional future
obligations relating to the settlement of this lawsuit pursuant to a
matrix and plan of distribution which is a part of the settlement. The
Company is not able to estimate the magnitude of this potential exposure
at this time. Management of the Company believes the final disposition
of this
6
matter will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows. Based on two favorable
lower court rulings, management believes that all or a portion of the
settlement costs incurred to date related to the Lynde fire may be
recoverable from the Company's insurers. The Company's insurers have
appealed the lower courts' decisions to the Eighth Circuit Court of
Appeals. It is not possible, therefore, to determine at this time what
recovery, if any, may be obtained by the Company and no amount has been
recorded at December 31, 1997.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales increased $2,730,812, or 13.7%, in the first quarter of this fiscal
year as compared to the same quarter a year ago. Approximately half of this
increase is due to increased sales of pharmaceutical chemicals, food grade
products and high purity electroplating products. The remaining increase was
due to general volume increases throughout the Company.
The gross margin, as a percentage of net sales, for the first quarter of fiscal
1998 was 22.6% compared to 20.9% for the same quarter one year ago. This
increase was mainly due to increased volumes in most product lines.
Management expects the gross margin to stabilize in future periods.
Historically, gross margins have flucuated in the first quarter of our fiscal
year due to the mix of products sold, as the first quarter volumes are
generally the weakest of the four quarters. 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
gross margins.
Selling, general and administrative expenses, as a percentage of net sales, for
the first quarter of fiscal 1998 were 10.4% compared to 10.6% for the same
quarter one year ago. Most of the expenses in this category are fixed, with the
remaining expenses fluctuating only slightly with net sales.
Income from operations increased $708,863, or 34.5%, in the first quarter of
fiscal 1998, compared to fiscal 1997. This increase is primarily attributable
to the increases in net sales and gross profit.
Interest income increased $93,257, or 35.6%, for the quarter ended December 31,
1997 compared to the same quarter one year ago. This increase is due to an
increase in the amount of cash available for investments, to a higher rate of
return earned on cash equivalents and investments and to interest earned on the
notes receivable relating to the sale of The Lynde Company in March of 1997.
Interest expense decreased slightly due to the decline in long-term debt. Other
miscellaneous income (deductions) decreased as compared to the previous year due
to a gain on the sale of a parcel of real estate last year.
LIQUIDITY AND CAPITAL RESOURCES
For the first quarter ended December 31, 1997, cash provided by operations was
$340,538 compared to cash used in operations of $92,388 for the same period one
year ago. This increase was due mainly to the increase in net income, which was
partially offset by decreases in certain current asset and liability accounts
discussed below. During the three months ended December 31, 1997, the Company
invested $1,658,167 in property and equipment additions and added $142,219 to
investments. The increase in capital expenditures this year as compared to the
same quarter last year is due mainly to the installation of a truck washing
system for the Company's food grade product operations.
Accounts receivable, inventories, accounts payable and other current liabilities
decreased during the first three months of fiscal 1998. Decreases in these
accounts is typical for the first quarter of our fiscal year. Other current
assets increased due to payments of prepaid expenses that will be charged to the
remaining quarters of this fiscal year. The Company did not issue any
securities during the quarter ended December 31, 1997.
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
8
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. Until appropriate investment opportunities are
identified, the Company will continue to invest excess cash in conservative
investments. Cash equivalents consist of short-term certificates of deposit and
investments consist of relatively low-risk investment and annuity contracts with
highly rated, stable insurance companies, and marketable securities consisting
of investment grade municipal securities. These securities are carried at cost,
which approximates fair value. All cash equivalents are highly liquid and are
available upon demand. There are some penalties associated with the early
liquidation of the Company's investment in annuity contracts.
Other than as discussed above, management is not aware of any matters that have
materially affected the first three months of fiscal 1998, 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.
FORWARD-LOOKING STATEMENTS
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.
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,
ULTIMATE EXPENSES INCURRED IN CONNECTION WITH RECENTLY SETTLED LITIGATION 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 AND
FUTURE RESULTS OF OPERATION.
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As of the date of this filing, neither the Registrant nor any of its
subsidiaries were involved in any pending legal proceedings to which the
Registrant or its subsidiaries was a party or of which any property of the
Registrant or its subsidiaries were the subject other than ordinary routine
litigation incidental to their business, except as follows:
LYNDE COMPANY WAREHOUSE FIRE. On March 1, 1995, the Company and its
former subsidiary, The Lynde Company, were named as defendants in an
action entitled DONNA M. COOKSEY, ET AL. V. HAWKINS CHEMICAL, INC. AND
THE LYNDE COMPANY ("COOKSEY"). This action was certified as a partial
class action in 1997. The Registrant has entered into a class
settlement agreement with the class, pursuant to which the Registrant
has agreed to pay certain costs and expenses of the class, as well as
certain compensation to the class pursuant to a Matrix and Plan of
Distribution which form a part of the settlement agreement.
The district court approved the settlement on January 30, 1998.
Pursuant to the settlement, in early February 1998 the Company paid
$850,000 to attorneys for the class, and $5,000 to each of the four
class representatives. It is not possible at this time to quantify
the probable additional settlement costs which may be payable by the
Registrant pursuant to the Matrix and Plan of Distribution which form
a part of the settlement agreement. The Registrant reasonably
expects, however, that such settlement costs will be estimable by the
end of 1998.
10
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
- ------------- --------------------------------------------------------
3.1 Amended and Second Restated Articles of Incorporation as
amended through February 28, 1989 (Incorporated by
reference to Exhibit 3D to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1989).
3.2 Second Amended and Superseding By-Laws as amended through
February 15, 1995 (incorporated by reference to Exhibit
3.2 to the Registrant's Annual Report on Form 10-K for the
year ended October 1, 1995).
4 See Exhibits 3.1 and 3.2 above.
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, 1997.
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/ Howard M. Hawkins
---------------------------------------------------
Howard M. Hawkins, Treasurer,
Chief Financial and Accounting Officer
Dated: February 12, 1998
11
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.
----------- ---------------------- --------
3.1 Amended and Second Restated Articles of Incorporation as
amended through February 28, 1989 (Incorporated by
reference to Exhibit 3D to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1989).
3.2 Second Amended and Superseding By-Laws as amended through
February 15, 1995 (incorporated by reference to Exhibit
3.2 to the Registrant's Annual Report on Form 10-K for the
year ended October 1, 1995).
4 See Exhibits 3.1 and 3.2 above.
27 Financial Data Schedule 13
12
5
3-MOS
SEP-27-1998
SEP-29-1997
DEC-31-1997
5,528,662
12,122,297
10,883,486
346,382
8,205,886
38,955,609
29,839,703
13,085,956
61,963,483
9,717,851
423,402
0
0
580,195
50,259,035
61,963,483
22,666,870
22,666,870
17,551,158
17,551,158
0
0
10,793
3,125,956
1,228,500
1,897,456
0
0
0
1,897,456
.16
.16
