UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 30, 1996
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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
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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
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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
----- -----
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 August 12, 1996
-------------------------------------- ------------------------------
Common Stock, par value $.05 per share 11,051,690
HAWKINS CHEMICAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets - June 30, 1996 and
October 1, 1995 ............................................. 3
Consolidated Condensed Statements of Income - Three Months and
Nine Months Ended June 30, 1996 and 1995 .................... 4
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended June 30, 1996 and 1995 .................... 5
Notes to Consolidated Condensed Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 7-8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 9
Item 6. Exhibits and Reports of Form 8-K .............................. 9
Financial Data Schedule.................................... Exhibit 27
2
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
HAWKINS CHEMICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 1996 October 1, 1995
------------- ---------------------
ASSETS (Unaudited) (Derived from Audited
financial statements)
Current assets:
Cash and cash equivalents........................... $ 6,286,674 $ 9,906,107
Investments (fair value approximates cost).......... 10,387,977 7,968,761
Accounts receivable-net............................. 9,929,176 10,512,260
Note receivable..................................... 170,503 208,943
Inventories......................................... 6,244,790 8,663,959
Other current assets................................ 1,757,871 1,647,660
----------- -----------
Total current assets............................ 34,776,991 38,907,690
Property, plant and equipment-net..................... 12,957,065 11,438,895
Note receivable-non current........................... 1,824,022 715,045
Other assets.......................................... 2,640,641 2,629,184
----------- -----------
Total $52,198,719 $53,690,814
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 5,345,491 $ 8,691,204
Current portion of long-term debt................... 56,008 52,344
Other current liabilities........................... 4,085,765 5,822,383
----------- -----------
Total current liabilities........................ 9,487,264 14,565,931
----------- -----------
Long term debt......................................... 572,453 628,461
----------- -----------
Deferred income taxes.................................. 390,800 377,800
----------- -----------
Shareholders' equity:
Common stock, par value $.05 per share; issued
and outstanding, 11,051,690 shares and
10,525,772 shares respectively....................... 552,585 526,289
Additional paid-in capital........................... 38,679,630 34,235,623
Retained earnings.................................... 2,515,987 3,356,710
----------- -----------
Total shareholders' equity...................... 41,748,202 38,118,622
----------- -----------
Total $52,198,719 $53,690,814
----------- -----------
----------- -----------
See accompanying Notes to Consolidated Condensed Financial Statements
3
HAWKINS CHEMICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30 Nine Months Ended June 30
1996 1995 1996 1995
------------- -------------- ----------- ------------
Net sales $22,274,546 $26,519,043 $58,136,597 $61,916,161
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales 16,816,775 21,229,029 45,061,816 49,014,124
Selling, general and administrative 2,399,020 2,363,251 6,444,690 6,194,328
Unusual and nonrecurring 0 750,000
----------- ----------- ----------- -----------
Total costs and expenses 19,215,795 23,592,280 51,506,506 55,958,452
----------- ----------- ----------- -----------
Income from operations 3,058,751 2,926,763 6,630,091 5,957,709
----------- ----------- ----------- -----------
Other income (deductions):
Interest income 238,319 242,687 728,815 676,275
Interest expense (14,193) (13,784) (40,702) (41,274)
Miscellaneous 68,752 19,924 139,641 43,689
----------- ----------- ----------- -----------
Total other income (deductions) 292,878 248,827 827,754 678,690
Income from continuing operations before
income taxes 3,351,629 3,175,590 7,457,845 6,636,399
Provision for income taxes from
continuing operations 1,336,500 1,277,800 2,983,200 2,667,700
----------- ----------- ----------- -----------
Income from continuing operations 2,015,129 1,897,790 4,474,645 3,968,699
Discontinued Operations:
Loss from operations of Tessman
Seed, Inc. (less applicable income
taxes of $0, $0, $0, ($46,500),
respectively) (69,905)
Loss on disposal of assets of Tessman
Seed, Inc. (less applicable income
taxes of $214,200) (321,266)
----------- ----------- ----------- -----------
Loss from discontinued operations 0 0 0 (391,171)
----------- ----------- ----------- -----------
Net income $ 2,015,129 $ 1,897,790 $ 4,474,645 $ 3,577,528
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding 11,051,690 11,051,690 11,051,690 11,051,690
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per common share
Continuing operations $0.18 $0.17 $0.40 $0.36
Discontinued operations 0 0 (.04)
----------- ----------- ----------- -----------
Total $0.18 $0.17 $0.40 $0.32
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying Notes to Consolidated Condensed Financial Statements
4
HAWKINS CHEMICAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED JUNE 30
-------------------------------
1996 1995
--------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 4,474,645 $ 3,577,528
Loss on disposal of assets of Tessman Seed, Inc.................... 321,266
Loss on discontinued operations of Tessman Seed, Inc............... 69,905
Unusual and nonrecurring charge.................................... 750,000
Depreciation and amortization...................................... 1,052,081 973,579
Deferred income taxes.............................................. (2,000) (103,500)
Other.............................................................. (130,777) (60,285)
Changes in certain current assets and liabilities.................. (1,438,485) 2,492,842
----------- -----------
Net cash provided by operating activities 3,955,464 8,021,335
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.......................... (3,655,072) (1,676,422)
Purchase of investments............................................. (2,419,216) (1,294,505)
Cash received on sale of land and building.......................... 108,188
Cash received on sale of assets and business of Tessman Seed, Inc... 100,000
----------- -----------
Net cash used in investing activities (5,966,100) (2,870,927)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid.................................................. (1,581,869) (1,437,644)
Debt repayment....................................................... (52,344) (48,919)
Payments received on note receivable................................. 25,416 80,726
----------- -----------
Net cash used in financing activities (1,608,797) (1,405,837)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,619,433) 3,744,571
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,906,107 6,895,341
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,286,674 $10,639,912
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.............................................. $ 54,956 $ 56,180
----------- -----------
----------- -----------
Cash paid for income taxes.......................................... $ 3,230,451 $ 1,817,258
----------- -----------
----------- -----------
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 October 1, 1995, 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 normal recurring nature.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements in the 1995 Hawkins Chemical, Inc. Annual Report
which is incorporated by reference to Form 10-K filed with the Commission on
December 28, 1995.
2. The results of operations for the period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the full year.
3. Effective January 1, 1996, the Company sold property, which was
previously rented to a former subsidiary, for $1,208,000. At closing the
Company received $108,000 and a contract for deed for $1,100,000. The
contract for deed requires monthly payments of $9,201, including interest at
8% per annum, for eight years. On January 1, 2004, the remaining unpaid
principal balance is due.
4. Inventories, principally valued by the LIFO method, are less than current
cost by approximately $1,501,000 at June 30, 1996. 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.
5. 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 7, 1996 to shareholders of record at the close of business
on March 29, 1996. Cash dividends in the amount of $845,065 were paid on
April 12, 1996.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
Net sales decreased $4,244,497 (16.0%) in the third quarter of this fiscal
year and $3,779,564 (6.1%) in the first nine months of fiscal 1996 as compared
to the same periods a year ago. The majority of the sales decrease was due to
management's decision to discontinue sales to mass merchandisers by The Lynde
Company subsidiary, as that business involved high volumes and high inventory
levels with a low, decreasing profit margin. Also contributing to the nine
month sales decrease was a slight decrease in the selling price of a single,
large-volume product and extremely cold weather conditions during the second
quarter of this fiscal year, which caused some customers to have limited
operations or to close down temporarily, thereby decreasing their volumes.
The above decreases were partially offset by volume increases in some of the
Company's divisions and subsidiaries. Selling prices of the single,
large-volume product mentioned above are beginning to stabilize and the
Company expects to maintain historical profit margins.
Gross margin, as a percentage of net sales, for the third quarter of this
fiscal year was 24.5% compared to 19.9% for the same quarter one year ago, and
22.5% for the first nine months of fiscal 1996 as compared to 20.8% for the
first nine months of fiscal 1995. These increases are due mainly to
discontinuing the lower margin sales to mass merchandisers previously
mentioned and, to a lesser extent, better profit margins on a few product
lines. 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 increased $35,769 (1.5%) in the
third quarter and $250,362 (4.0%) in the first nine months of fiscal 1996 as
compared to the same periods in fiscal 1995. Selling, general and
administrative expenses, as a percentage of net sales, for the third quarter
of fiscal 1996 were 10.8% compared to 8.9% for the same quarter one year ago,
and 11.1% for the first nine months of fiscal 1996 as compared to 10.0% for
the first nine months of fiscal 1995. The increases were due to a decrease in
sales and increased employee compensation, employee benefits and insurance
costs.
The unusual and nonrecurring charge in the second quarter and first nine
months of fiscal 1995 of $750,000 was recorded to cover estimated settlement
costs to be incurred by the Company in connection with a lawsuit filed against
the Company. Developments in this lawsuit do not indicate the need to adjust
this reserve at the present time.
Interest income decreased $4,368 in the third quarter of fiscal 1996 as
compared to the same quarter one year ago and increased $52,540 for the first
nine months of this fiscal year as compared to the same period one year ago.
The third quarter decrease is due to increases in investments in income tax
exempt securities which generally have a lower pre-tax return than other
taxable investments, but have a higher after-tax return. The nine month
increase is due to an increase in the amount of cash available for investments.
DISCONTINUED OPERATIONS
In March 1995, the Company adopted a formal plan to discontinue operations of
Tessman Seed, which sold a wide range of horticulture and pest control
products. Effective March 1, 1995, the Company sold the inventory, equipment
and operations of Tessman. As a result of the transaction, the Company
recorded a loss on the disposal in the second quarter of fiscal 1995 of
$321,266, net of taxes totaling $214,200, to write-down Tessman's assets to
the amount realized.
Revenues for Tessman for the quarter and nine months ended June 30, 1995 were
$0 and $931,000, respectively. The loss for Tessman for the nine-month period
ended June 30, 1995 was less than $.01 per share.
7
LIQUIDITY AND CAPITAL RESOURCES
For the nine-month period ended June 30, 1996, cash flows from operations
were $3,955,464. This amount was lower than cash provided by operations
during the same period one year ago, due mainly to the changes in certain
current assets and liability accounts discussed below. During the nine-month
period ended June 30, 1996, the Company purchased $3,655,072 in property and
equipment and invested an additional $2,419,216 in short-term investments.
Accounts receivable, inventories and accounts payable decreased during the
first nine months of fiscal 1996 due primarily to management's decision to
discontinue sales to mass merchandisers by The Lynde Company subsidiary, as
discussed previously. Other current liabilities decreased as a result of the
payment of cash dividends and benefit plan accruals that existed at fiscal
year end. The Company did not issue any securities during the nine-month
period ended June 30, 1996.
In January 1996, the Company sold property which was previously rented to a
former subsidiary for $1,208,000. At closing the Company received $108,188
and a contract for deed for $1,100,000. The contract for deed requires
monthly payments of $9,201, including interest at 8% per annum, for eight
years. On January 1, 2004, the remaining unpaid principal balance is due.
On May 30,1996, the Company paid cash to acquire buildings and land adjacent
to its location in Minneapolis, Minnesota for $880,000. At present, the
property is being rented to the former owner until such time that the Company
needs it for expansion.
Since 1985, the Company has been paying an annual cash dividend each year. In
the fourth quarter of fiscal 1995 this was changed to a semi-annual cash
dividend policy. The first half of the 1996 dividend was paid in October 1995
and the second half was paid in April 1996.
The 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. 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, all of which
are carried at fair value which approximates cost. All cash equivalents are
generally highly liquid and are available upon demand.
Other than as discussed above, management is not aware of any matters that
have materially affected the first nine months of fiscal 1996, but are not
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
In addition to the historical information contained herein, the foregoing
discussion includes forward looking statements that involve a number of risks
and uncertainties. Among the factors that could cause actual results to
differ materially are the following: changes in demand for the Company's
products; the condition of the general economy; competitive factors such as
aggressive pricing by regional competitors and entry of well capitalized
competitors into territories served by the Company; increased local, state or
federal regulation of the Company's products; changes in product mix;
increases in product costs; and the risk factors listed from time to time in
the Company's reports filed with the Securities and Exchange Commission.
8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As disclosed by the Company in previous filings with the Commission, the
Company has commenced suit in the Minnesota Federal District Court against The
North River Insurance Company and the Westchester Fire Insurance Company, its
primary and umbrella insurers, respectively, seeking declaratory relief
consisting of a finding that the Company has coverage under both its primary
and umbrella policies with respect to a lawsuit brought against the Company
and its subsidiary, The Lynde Company. The lawsuit brought against the
Company and its subsidiary, captioned DONNA M. COOKSEY. ET AL. V. HAWKINS
CHEMICAL, INC. AND THE LYNDE COMPANY seeks damages for personal injury,
property damage and other damages alleged to have been caused by the alleged
release of certain pollutants as a result of a fire at an office/warehouse
facility used by The Lynde Company.
In early 1996, The Company moved for summary judgment on the issue of the
enforceability of a "total pollution exclusion" contained in the subject
insurance policies, which the insurers claim excludes coverage for hostile
fires, such as the one underlying the COOKSEY lawsuit. In late June of 1996,
the United States Magistrate Judge hearing the summary judgment motion in the
Company's action against North River filed a recommendation that the Company
has coverage for the damages alleged in the COOKSEY lawsuit alleged to be
caused by the hostile fire under its primary insurance policy. In July of
1996, the same Magistrate reached the same conclusion with respect to the
umbrella policy issued by Westchester.
Both of these recommendations are subject to a de novo review by a United
States District Court Judge, as well as potential appeals to the Eighth
Circuit Court of Appeals and the United States Supreme Court. It is not
possible at this time, therefore, for the Company to determine what insurance
coverage, if any, will be available with respect to the COOKSEY lawsuit.
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 Page No.
- ----------- ------------------------ --------
27 Financial Data Schedule 10
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the fiscal quarter ended
June 30, 1996.
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
----------------------------------------
Howard M. Hawkins, Treasurer
(Chief Financial and Accounting Officer)
Dated: August 12, 1996
9
5
9-MOS
SEP-29-1996
OCT-02-1995
JUN-30-1996
6,286,674
10,387,977
9,929,176
0
6,244,790
34,776,991
12,957,065
0
52,198,719
9,487,264
0
0
0
552,585
41,195,617
41,748,202
58,136,597
58,136,597
45,061,816
51,506,506
0
0
40,702
7,457,845
2,983,200
4,474,645
0
0
0
4,474,645
.40
.40
