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 June 30, 1998
-------------
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 August 12, 1998
- -------------------------------------- ------------------------------
Common Stock, par value $.05 per share 11,603,895
HAWKINS CHEMICAL, INC. AND SUBSIDIARY
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets - June 30, 1998 and
September 28, 1997......................................... 3
Consolidated Condensed Statements of Income - Three Months
and Nine Months Ended June 30, 1998 and 1997............... 4
Consolidated Condensed Statements of Cash Flow - Nine Months
Ended June 30, 1998 and 1997............................... 5
Notes to Consolidated Condensed Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 7-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 10
Item 6. Exhibits and Reports on Form 8-K............................. 10
Exhibit Index................................................ 11
Financial Data Schedule...................................... 12
2
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
HAWKINS CHEMICAL, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 1998 September 28, 1997
---------------- -----------------------
(Unaudited) (Derived from audited
financial statements)
ASSETS
Current assets:
Cash and cash equivalents............ $ 3,287,819 $ 8,065,021
Investments available-for-sale....... 14,391,033 11,980,078
Trade receivables-net................ 11,820,316 11,117,991
Notes receivable..................... 263,680 222,946
Inventories.......................... 9,027,740 8,580,705
Other current assets................. 1,927,367 1,912,325
------------ -----------
Total current assets.............. 40,717,955 41,879,066
Property, plant and equipment-net...... 18,252,924 15,487,545
Notes receivable-non current........... 3,364,335 3,639,712
Other assets........................... 2,678,724 2,646,293
------------ -----------
Total................................ $ 65,013,938 $63,652,616
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade............... $ 5,875,656 $ 5,729,584
Current portion of long-term debt.... 89,123 59,928
Dividends payable.................... 0 1,044,351
Other current liabilities............ 4,005,574 6,381,454
------------ -----------
Total current liabilities......... 9,970,353 13,215,317
------------ -----------
Long-term debt......................... 423,402 512,525
------------ -----------
Deferred income taxes.................. 995,000 983,000
------------ -----------
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.................... 10,527,533 5,844,124
------------ -----------
Total shareholders' equity........ 53,625,183 48,941,774
------------ -----------
Total............................. $ 65,013,938 $63,652,616
------------ -----------
------------ -----------
See accompanying Notes to Consolidated Condensed Financial Statements.
3
HAWKINS CHEMICAL, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30 Nine Months Ended June 30
1998 1997 1998 1997
----------- ------------ ----------- -----------
Net sales.............................. $25,719,653 $23,866,512 $70,703,030 $64,476,068
----------- ------------ ----------- -----------
Costs and expenses:
Cost of sales........................ 19,537,731 17,966,900 54,514,634 49,985,070
Selling, general and administrative.. 2,805,881 2,741,391 7,526,496 7,091,513
----------- ------------ ----------- -----------
Total costs and expenses.......... 22,343,612 20,708,291 62,041,130 57,076,583
----------- ------------ ----------- -----------
Income from operations................. 3,376,041 3,158,221 8,661,900 7,399,485
----------- ------------ ----------- -----------
Other income (deductions):
Interest income...................... 301,764 341,547 963,513 864,160
Interest expense..................... (11,181) (11,958) (32,722) (35,620)
Gain on sale of The Lynde Company.... 1,324,827 1,324,827
Miscellaneous........................ 16,823 65,211 50,608 153,472
----------- ------------ ----------- -----------
Total other income (deductions)... 307,406 1,719,627 981,399 2,306,839
----------- ------------ ----------- -----------
Income before income taxes............. 3,683,447 4,877,848 9,643,299 9,706,324
Provision for income taxes............. 1,454,200 1,914,600 3,799,500 3,809,800
----------- ------------ ----------- -----------
Net income............................. $ 2,229,247 $ 2,963,248 $ 5,843,799 $ 5,896,524
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Weighted average number of common
shares outstanding................... 11,603,895 11,603,895 11,603,895 11,603,895
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Earnings per common share - basic
and diluted.......................... $0.19 $0.26 $0.50 $0.51
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
See accompanying Notes to Consolidated Condensed Financial Statements.
4
HAWKINS CHEMICAL, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED JUNE 30
-------------------------
1998 1997
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 5,843,799 $ 5,896,524
Depreciation and amortization......... 1,357,843 1,163,869
Deferred income taxes................. 122,000 432,500
Other................................. (79,715) (54,894)
Changes in certain current assets
and liabilities...................... (3,504,210) (4,222,255)
----------- -----------
Net cash provided by operating
activities....................... 3,739,717 3,215,744
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment............................ (4,075,939) (2,660,706)
Purchases of investments.............. (2,410,955) (368,068)
Payments received on note receivable.. 234,643 168,762
Cash received on sale of The
Lynde Company........................ 500,000
----------- -----------
Net cash used in investing
activities....................... (6,252,251) (2,360,012)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid................... (2,204,740) (1,881,407)
Debt repayment........................ (59,928) (56,008)
----------- -----------
Net cash used in financing
activities....................... (2,264,668) (1,937,415)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS... (4,777,202) (1,081,683)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................... 8,065,021 8,932,125
----------- -----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD............................. $ 3,287,819 $ 7,850,442
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest................ $ 45,502 $ 49,149
----------- -----------
----------- -----------
Cash paid for income taxes............ $ 4,624,487 $ 3,060,771
----------- -----------
----------- -----------
See accompanying Notes to Consolidated Condensed Financial Statements.
5
HAWKINS CHEMICAL, INC. AND SUBSIDIARY
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 and nine months ended
June 30, 1997 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 and nine months ended June 30, 1997 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 June 30, 1998 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 $1,380,000 at June 30, 1998. 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. 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. Lynde had revenues of $725,500 and a
net loss of $19,600 for the nine-month period ended June 30, 1997.
5. During 1995, the Company had a fire in the office/warehouse of The Lynde
Company, a former wholly owned subsidiary. Through June 30, 1998, the
Company has expensed approximately $2,550,000 ($20,000 in the nine months
ended June 30, 1998) to cover estimated costs incurred by the Company in
connection with a lawsuit filed against the Company as a result of the
fire, of which approximately $2,400,000 has been paid. Based upon the
settlement agreement, 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 extent of this potential exposure at this time, but it
believes the final disposition of this 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 such litigation expenses may be
recoverable from the Company's insurers. The Company's insurers have
appealed the lower court's decisions to the U.S. 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 June 30, 1998.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
Net sales increased $1,853,141 (7.8%) in the third quarter of this fiscal
year as compared to the same quarter a year ago, and increased $6,226,962
(9.7%) in the first nine months of fiscal 1998 as compared to the same period
in fiscal 1997. These increases were due to increased sales of
pharmaceutical chemicals, food grade product chemicals and high purity
electroplating products, an increase in the selling price of a single,
large-volume product (caustic soda), and increased volumes in most product
lines.
Gross margin, as a percentage of net sales, for the third quarter of this
fiscal year was 24.0% compared to 24.7% for the same quarter one year ago,
and 22.9% for the first nine months of this fiscal year, compared to 22.5%
for the first nine months of fiscal 1997. The decrease in the third quarter
as compared to the prior year was due mainly to increased costs of operations
and to the increase in the cost and selling price of a single, large-volume
product while maintaining a similar dollar profit margin. The increase in
the gross margin percentage for the first nine months of this fiscal year as
compared to the same period in fiscal 1997 was due to the sales increases
mentioned above that were partially offset by increased costs of operations.
The demand for this product does not fluctuate materially as the cost and
selling price increase or decrease. By maintaining stable dollar margins,
the gross margin percentage will generally decrease when the cost of the
product is increasing and will increase when the cost of the product is
decreasing. Also, because the Company uses the LIFO method for valuing
inventories, when ending inventory units increase, an additional amount
relating to increased units in ending inventory is charged to cost of
operations. 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.
Selling, general and administrative expenses, as a percentage of net sales,
for the third quarter of fiscal 1998 were 10.9% compared to 11.5% for the
same quarter one year ago, and 10.6% for the first nine months of fiscal 1998
as compared to 11.0% for the first nine months of fiscal 1997. Stated as a
percentage of the same period one year ago, the third quarter increase in
such expenses was 2.4%, or $64,490, and the nine-month increase was 6.1%, or
$434,983. These increases were mainly due to increased employee compensation
and benefits, which comprises the majority of the selling, general and
administrative expenditures. Of the remaining expenses in this category, no
single item is more than 6% of the total. Most of these expenses are fixed
in nature and fluctuate only slightly with sales.
Income from operations increased $217,820, or 6.9%, in the third quarter and
$1,262,415, or 17.1%, in the first nine months of fiscal 1998 as compared to
the same periods one year ago. These increases are primarily attributable to
the net sales increase.
OTHER INCOME
Interest income decreased $39,783, in the third quarter of fiscal 1998 as
compared to the same quarter one year ago and increased $99,353 in the first
nine months of this fiscal year as compared to the same period one year ago.
The third quarter decrease was due to lower average cash balances available
for investment and to an increase 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 was
due to an increase in average cash available for investments during the first
six months of this fiscal year. Interest expense decreased slightly due
mainly to the decline in long-term debt.
7
Other income also decreased in both the three and nine-month periods because
of last year's sale of The Lynde Company's inventory and operations; the gain
on the sale of $1,324,827 was reported in the 1997 fiscal third quarter.
Because the sale was effective March 1, 1997, however, Lynde's 1997 sales of
$725,500 and its operating loss of $19,600 were reported in the first two
quarters of 1997.
LIQUIDITY AND CAPITAL RESOURCES
For the nine-month period ended June 30, 1998, cash flows from operations
were $3,739,717 compared to $3,215,744 during the same period one year ago.
During the nine-month period ended June 30, 1998, the Company added
$2,410,955 to investments and invested $4,075,939 in property and equipment
additions. The food grade chemical production facility and truck wash area
accounted for approximately $1,800,000, transportation equipment accounted
for $470,000, warehouse, laboratory and office machinery and equipment
amounted to $550,000 and other building improvements and additions were
$1,256,000.
Accounts receivable increased due to increased sales in the third quarter.
Inventories and accounts payable increased due to the increase in the cost of
the single, large-volume product mentioned above and to an increase in the
quantities of that product at June 30, 1998. Other current liabilities
decreased as a result of the payment of benefit plan accruals that existed at
fiscal year end. The Company did not issue any securities during the
nine-month period ended June 30, 1998.
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 pursuant to a revised investment policy recently adopted by the
Board of Directors. The policy directs investment in short-term and mid-term
fixed income instruments earning a market rate of interest without assuming
undue risk of principal. Primary objectives are preservation of principal,
maintenance of liquidity, and rate of return. 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 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 and annuity contracts.
Other than as discussed above, management is not aware of any matters that
have materially affected the first nine months of fiscal 1998, 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.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of the "Year 2000" issue with respect
to its computer systems and equipment. The Company has been in the process
of upgrading its systems to improve overall business performance and to
accommodate business of the year 2000. The Company is also in the
8
process of communicating with its suppliers and customers to determine the
extent to which it may be affected by any third party's Year 2000 issues.
Therefore, it is believed that the Year 2000 will not have a material adverse
effect on the Company's business, operating results and financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The Company will be required to adopt SFAS No. 130 in
fiscal 1999.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 redefines how
operating segments are determined and requires disclosures of certain
financial and descriptive information about a company's operating segments.
The Company anticipates the adoption of SFAS No. 131 will result in the
Company continuing to operate in one segment. The Company will be required
to adopt SFAS No. 131 in fiscal 1999.
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 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 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.
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
June 30, 1998.
--------------
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: August 12, 1998
10
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 12
11
5
9-MOS
SEP-27-1998
SEP-29-1997
JUN-30-1998
3,287,819
14,391,033
12,191,144
370,828
9,027,740
40,717,955
32,055,319
13,802,395
65,013,938
9,970,353
423,402
0
0
580,195
53,044,988
65,013,938
70,703,030
70,703,030
54,514,634
54,514,634
0
0
32,722
9,643,299
3,799,500
5,843,799
0
0
0
5,843,799
.50
.50
