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HWKN > SEC Filings for HWKN > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for HAWKINS INC

Form 10-Q for HAWKINS INC


31-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations for the three and six months ended September 30, 2012 as compared to October 2, 2011. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements included in this Form 10-Q and Item 8 of our Annual Report on Form 10-K for the fiscal year ended April 1, 2012 ("fiscal 2012"). References to fiscal 2013 refer to the fiscal year ending March 31, 2013.

Overview

We derive substantially all of our revenues from the sale of bulk and specialty chemicals to our customers in a wide variety of industries. We began our operations primarily as a distributor of bulk chemicals with a strong customer focus. Over the years we have maintained our strong customer focus and have expanded our business by increasing our sales of value-added specialty chemical products, including repackaging, blending and manufacturing certain products. In recent years, we expanded the sales of our higher-margin blended and manufactured products.

We have continued to invest in growing our business. During fiscal 2012, we purchased a 28-acre parcel of land in Rosemount, Minnesota and began construction of a new facility on the site, which is expected to be operational by the end of fiscal 2013. The site provides capacity for future business growth and lessens our dependence on our flood-prone sites on the Mississippi River. While we expect to transfer some blending and manufacturing activity to the Rosemount site, we do not intend to close any sites we currently operate.

We seek to maintain relatively constant gross profit dollars on each of our products as the cost of our raw materials increase or decrease. Since we expect that we will continue to experience fluctuations in our raw material costs and resulting prices in the future, we believe that gross profit dollars is the best measure of our profitability from the sale of our products. If we maintain relatively stable profit dollars on each of our products, our reported gross profit percentage will decrease when the cost of the product increases and will increase when the cost of the product decreases.

On June 15, 2012, we entered into a settlement agreement with ICL Performance Products LP ("ICL"), a chemical supplier to us, pursuant to which we mutually resolved the previously disclosed litigation and all disputes among us. The settlement agreement provides for a cash payment by us to ICL and provides that both parties will enter into new contracts for the supply by ICL of certain chemicals to us. Our obligations under the settlement agreement resulted in a $3.2 million charge to pretax income recorded in cost of sales (approximately $2.0 million after tax) for the fiscal quarter ended July 1, 2012.

We use the last in, first out ("LIFO") method for valuing substantially all of our inventory, which causes the most recent product costs to be recognized in our income statement. The valuation of LIFO inventory for interim periods is based on our estimates of fiscal year-end inventory levels and costs. The LIFO inventory valuation method and the resulting cost of sales are consistent with our business practices of pricing to current commodity chemical raw material prices. We recorded a $0.1 million increase in our LIFO reserve for the three months ended September 30, 2012 and $0.2 million increase for the six months ended September 30, 2012, which decreased our gross profit in those periods by those amounts. We recorded a $0.1 million increase in our LIFO reserve for the three months ended October 2, 2011, and $0.4 million increase for the six months ended October 2, 2011, which decreased our gross profit in those periods by those amounts.


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Results of Operations

The following table sets forth the percentage relationship of certain items to
sales for the period indicated:



                                             Three months ended                          Six months ended
                                     September 30,            October 2          September 30,           October 2
                                          2012                  2011                  2012                 2011
Sales                                          100.0 %             100.0 %                 100.0 %            100.0 %
Cost of sales                                  (78.0 )             (78.7 )                 (80.5 )            (79.2 )

Gross profit                                    22.0                21.3                    19.5               20.8
Selling, general and
administrative expenses                         (8.6 )              (8.9 )                  (8.8 )             (8.9 )

Operating income                                13.4                12.4                    10.7               11.9
Investment income                                 -                   -                       -                  -

Income from continuing
operations before income taxes                  13.4                12.4                    10.7               11.9
Provision for income taxes                      (5.2 )              (4.8 )                  (4.1 )             (4.5 )

Income from continuing
operations                                       8.2                 7.6                     6.6                7.4
Income from discontinued
operations, net of tax                            -                  0.2                      -                 0.3

Net income                                       8.2 %               7.8 %                   6.6 %              7.7 %

Three Months Ended September 30, 2012 Compared to the Three Months Ended October 2, 2011

Sales

Sales decreased $0.7 million, or 0.8%, to $87.2 million for the three months ended September 30, 2012 as compared to $87.9 million in the same period of the prior year. Sales of bulk chemicals, including caustic soda, were approximately 24% of sales during the three months ended September 30, 2012 as compared to 21% during the same period of the prior year.

Industrial Segment. Industrial segment sales decreased $4.1 million, or 6.7%, to $57.2 million for the three months ended September 30, 2012 as compared to the same period of the prior year. The decrease in sales was primarily due to a shift in product mix to more bulk products, which carry lower per-unit selling prices.

Water Treatment Segment. Water Treatment segment sales increased $3.4 million, or 12.9%, to $29.9 million for the three months ended September 30, 2012 as compared to the same period of the prior year. The increase in sales was primarily due to favorable weather conditions, volume growth in our new and many of our existing branches, as well as higher selling prices.

Gross Profit

Gross profit was $19.2 million, or 22.0% of sales, for the three months ended September 30, 2012, as compared to $18.8 million, or 21.3% of sales, for the same period of the prior year. The LIFO method of valuing inventory decreased gross profit by $0.1 million for each of the three months ended September 30, 2012 and October 2, 2011.

Industrial Segment. Gross profit for the Industrial segment was $10.1 million, or 17.6% of sales, for the three months ended September 30, 2012, as compared to $10.9 million, or 17.7% of sales, for the same period of the prior year. The LIFO method of valuing inventory decreased gross profit in this segment by $0.1 million for each of the three months ended September 30, 2012 and October 2, 2011. The $0.8 million decline in gross profit was primarily due to continued pricing pressures which led to lower per-unit profits.

Water Treatment Segment. Gross profit for the Water Treatment segment was $9.1 million, or 30.4% of sales, for the three months ended September 30, 2012, as compared to $7.9 million, or 29.8% of sales, for the same period in the prior year. The increase in gross profit was primarily due to increased volumes and higher per-unit margins across most product lines. The LIFO method of valuing inventory decreased gross profit in this segment nominally for the three months ended September 30, 2012 and October 2, 2011.


Table of Contents

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $7.5 million, or 8.6% of sales, for the three months ended September 30, 2012 as compared to $7.8 million, or 8.9% of sales, for the three months ended October 2, 2011, with slightly higher selling costs due to additional sales staffing offset by lower administration expenses in the period.

Operating Income

Operating income was $11.7 million for the three months ended September 30, 2012 and $10.9 million for the three months ended October 2, 2011. Operating income for the Industrial segment decreased $0.1 million, while the operating income for the Water Treatment segment increased $0.9 million.

Investment Income

Investment income was not material during the three months ended September 30, 2012 and October 2, 2011.

Provision for Income Taxes

Our effective income tax rate was 38.6% for the three months ended September 30, 2012 and October 2, 2011, respectively. The effective tax rate is impacted by projected levels of taxable income, permanent items, and state taxes.

Six Months Ended September 30, 2012 Compared to the Six Months Ended October 2, 2011

Sales

Sales increased $0.8 million, or 0.5%, to $177.3 million for the six months ended September 30, 2012 as compared to $176.5 million in the same period of the prior year. Sales of bulk chemicals, including caustic soda, were approximately 22% of sales during the six months ended September 30, 2012 as compared to 21% during the same period of the prior year.

Industrial Segment. Industrial segment sales decreased $5.5 million, or 4.4%, to $119.4 million for the six months ended September 30, 2012 as compared to the same period of the prior year. The decrease in sales was primarily due to reduced volumes and a shift in product mix to more bulk products, which carry lower per-unit selling prices.

Water Treatment Segment. Water Treatment segment sales increased $6.3 million, or 12.3%, to $57.9 million for the six months ended September 30, 2012 as compared to the same period of the prior year. The increase in sales was primarily due to favorable weather conditions, volume growth in our new and many of our existing branches, as well as higher selling prices.

Gross Profit

Gross profit was $34.5 million, or 19.5% of sales, for the six months ended September 30, 2012, as compared to $36.7 million, or 20.8% of sales, for the same period of the prior year. Gross profit was adversely impacted by the $3.2 million charge resulting from the ICL litigation settlement in the first quarter of the current fiscal year, which charge constituted 1.8% of sales for the six month period. The LIFO method of valuing inventory decreased gross profit by $0.2 million for the six months ended September 30, 2012 and by $0.4 million for the same period of the prior year.

Industrial Segment. Gross profit for the Industrial segment was $17.4 million, or 14.5% of sales, for the six months ended September 30, 2012, as compared to $21.6 million, or 17.3% of sales, for the same period of the prior year. Gross profit for this segment was negatively impacted by the $3.2 million charge resulting from the ICL litigation settlement, which charge constituted 2.7% of sales for this segment for the six month period. The LIFO method of valuing inventory decreased gross profit in this segment by $0.1 million for the six months ended September 30, 2012 and by $0.3 million for the same period of the prior year. The remainder of the decline was primarily due to reduced volumes and pricing pressures which led to lower per-unit profits.

Water Treatment Segment. Gross profit for the Water Treatment segment was $17.1 million, or 29.6% of sales, for the six months ended September 30, 2012, as compared to $15.1 million, or 29.3% of sales, for the same period in the prior year. The increase in gross profit was primarily due to increased volumes and higher per-unit margins across most product lines. The LIFO method of valuing inventory decreased gross profit in this segment nominally for the six months ended September 30, 2012 and decreased gross profit by $0.1 million for the same period of the prior year.


Table of Contents

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $15.7 million, or 8.8% of sales, for the six months ended September 30, 2012 as compared to $15.7 million, or 8.9% of sales, for the six months ended October 2, 2011 with higher selling costs due to additional sales staffing offset by lower administration expenses in the period.

Operating Income

Operating income was $18.8 million for the six months ended September 30, 2012 and $21.0 million for the six months ended October 2, 2011. Operating income for the Industrial segment decreased $3.6 million, primarily due to the $3.2 million charge resulting from the ICL litigation settlement recorded within that segment. Operating income for the Water Treatment segment increased $1.4 million for the six months ended September 30, 2012, as compared to the same period of the prior year due to increased volumes and higher per-unit margins.

Investment Income

Investment income was $0.1 for the six month periods ended September 30, 2012 and October 2, 2011.

Provision for Income Taxes

Our effective income tax rate was 38.6% for the six months ended September 30, 2012, compared to 38.0% for the six months ended October 2, 2011. The effective tax rate is impacted by projected levels of taxable income, permanent items, and state taxes.

Liquidity and Capital Resources

Cash provided by operating activities for the six months ended September 30, 2012 was $23.5 million compared to $12.3 million for the six months ended October 2, 2011. The increase in cash provided by operating activities was primarily due to reduced cash used to fund working capital, including the timing of inventory purchases and other trade payables. Due to the nature of our operations, which includes purchases of large quantities of bulk chemicals, timing of purchases can result in significant changes in working capital investment and the resulting operating cash flow. Historically, our cash requirements increase during the period from April through November as caustic soda inventory levels increase as the majority of barges are received during this period. Additionally, due to the seasonality of the water treatment business, our accounts receivable balance generally increases during the period of April through September.

Cash and investments available-for-sale of $55.2 million at September 30, 2012 increased by $9.3 million as compared with the $45.9 million available as of April 1, 2012, primarily due to cash flows generated from operations, partially offset by capital expenditures and dividends paid.

Capital Expenditures

Capital expenditures were $11.9 million for the six months ended September 30, 2012 compared to $6.2 million in the same period in the prior fiscal year. Significant capital expenditures during the six months ended September 30, 2012 consisted of approximately $8.5 million related to business expansion and process improvement projects including the new facility in Rosemount, Minnesota. Other capital spending was related to regulatory, safety, and facility improvements and replacement trucks for the Water Treatment segment. We expect cash balances and our cash flows from operations will be sufficient to fund our cash requirements in fiscal 2013.

Critical Accounting Policies

Our significant accounting policies are set forth in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended April 1, 2012. The accounting policies used in preparing our interim fiscal 2013 condensed consolidated financial statements are the same as those described in our Annual Report.


Table of Contents

Forward-Looking Statements

The information presented in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts, but rather are based on our current expectations, estimates and projections, and our beliefs and assumptions. We intend words such as "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," "will" and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. These factors could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Additional information concerning potential factors that could affect future financial results is included in our Annual Report on Form 10-K for the fiscal year ended April 1, 2012. We caution you not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this Quarterly Report on Form 10-Q. We are not obligated to update these statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

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