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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

 

For the quarterly period ended December 31, 2003

 

OR

 

o

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, INC.

(Exact name of registrant as specified in its charter)

 

MINNESOTA

41-0771293

(State or other jurisdiction of
incorporation of organization)

(I.R.S. Employer Identification No.)

 

 

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

 

ý

 

NO

 

o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

YES

 

o

 

NO

 

ý

 

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 16, 2004

Common Stock, par value $.05 per share

 

10,216,688

 

 



 

HAWKINS, INC.
INDEX TO FORM 10-Q

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Condensed Balance Sheets – December 31, 2003 and March 30, 2003

 

 

 

 

 

Condensed Statements of Income – Three and Nine Months Ended December 31, 2003 and 2002

 

 

 

 

 

Condensed Statements of Cash Flows – Nine Months Ended December 31, 2003 and 2002

 

 

 

 

 

Notes to Condensed Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

Signatures

 

Certifications

 

2



 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

HAWKINS, INC.
CONDENSED BALANCE SHEETS

 

 

 

DECEMBER 31,
2003

 

MARCH 30,
2003

 

 

 

(UNAUDITED)

 

(DERIVED FROM
AUDITED
FINANCIAL
STATEMENTS
)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

2,901,860

 

$

1,353,720

 

Investments available-for-sale

 

22,261,399

 

22,902,561

 

Trade receivables – net

 

9,957,176

 

11,253,571

 

Inventories

 

10,924,219

 

9,398,338

 

Prepaid expenses and other current assets

 

2,675,829

 

2,502,496

 

Total current assets

 

48,720,483

 

47,410,686

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT- net

 

28,071,354

 

27,466,519

 

 

 

 

 

 

 

INTANGIBLE ASSETS - less accumulated amortization of $1,514,000 and $1,301,386, respectively

 

2,849,049

 

3,061,663

 

 

 

 

 

 

 

OTHER ASSETS

 

2,749,606

 

3,159,871

 

 

 

$

82,390,492

 

$

81,098,739

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable — trade

 

$

4,793,859

 

$

5,854,720

 

Dividends payable

 

 

 

1,839,004

 

Other current liabilities

 

5,710,297

 

6,210,526

 

Total current liabilities

 

10,504,156

 

13,904,250

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

1,287,649

 

1,254,649

 

 

 

 

 

 

 

OTHER LONG-TERM LIABILITIES

 

124,437

 

226,336

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Common stock, par value $.05 per share; 10,216,688 shares issued and outstanding

 

510,834

 

510,834

 

Additional paid-in capital

 

37,747,492

 

37,747,492

 

Accumulated other comprehensive income

 

132,387

 

79,063

 

Retained earnings

 

32,083,537

 

27,376,115

 

Total shareholders’ equity

 

70,474,250

 

65,713,504

 

 

 

$

82,390,492

 

$

81,098,739

 

 

See accompanying notes to condensed financial statements.

 

3



 

HAWKINS, INC.
CONDENSED STATEMENTS OF INCOME

 

 

 

THREE MONTHS ENDED
DECEMBER 31

 

NINE MONTHS ENDED
DECEMBER 31

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(UNAUDITED)

 

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

24,951,807

 

$

24,331,951

 

$

82,663,688

 

$

79,251,163

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

19,057,101

 

18,041,370

 

59,970,542

 

57,246,901

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

5,894,706

 

6,290,581

 

22,693,146

 

22,004,262

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

4,250,032

 

3,578,708

 

12,848,275

 

11,269,932

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

1,644,674

 

2,711,873

 

9,844,871

 

10,734,330

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

217,163

 

201,290

 

630,555

 

524,628

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

(4,089

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,861,837

 

2,913,163

 

10,475,426

 

11,254,869

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

699,000

 

1,078,000

 

3,929,000

 

4,164,000

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,162,837

 

$

1,835,163

 

$

6,546,426

 

$

7,090,869

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

10,216,688

 

10,216,688

 

10,216,688

 

10,216,688

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic and diluted

 

$

0.11

 

$

0.18

 

$

0.64

 

$

0.69

 

 

See accompanying notes to condensed financial statements.

 

4



 

HAWKINS, INC.
CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

NINE MONTHS ENDED
DECEMBER 31

 

 

 

2003

 

2002

 

 

 

(UNAUDITED)

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

6,546,426

 

$

7,090,869

 

Reconciliation to cash flows:

 

 

 

 

 

Depreciation and amortization

 

2,204,577

 

2,201,147

 

Deferred income taxes

 

 

 

40,000

 

Changes in operating accounts (requiring) providing cash:

 

 

 

 

 

Trade receivables

 

1,296,395

 

848,662

 

Inventories

 

(1,525,881

)

(135,926

)

Accounts payable

 

(1,060,861

)

(300,360

)

Other liabilities

 

(602,128

)

1,100,084

 

Other

 

(55,986

)

(89,460

)

 

 

 

 

 

 

Net cash provided by operating activities

 

6,802,542

 

10,755,016

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Additions to property, plant and equipment

 

(2,596,798

)

(1,563,770

)

Purchases of investments

 

(4,118,234

)

(17,985,269

)

Sale and maturities of investments

 

4,995,720

 

5,290,000

 

Payments received on notes receivable.

 

142,918

 

223,350

 

 

 

 

 

 

 

Net cash used in investing activities

 

(1,576,394

)

(14,035,689

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Cash dividends paid

 

(3,678,008

)

(3,065,193

)

Debt repayment

 

 

 

(116,823

)

 

 

 

 

 

 

Net cash used in financing activities

 

(3,678,008

)

(3,182,016

)

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

1,548,140

 

(6,462,689

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

1,353,720

 

7,339,895

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

2,901,860

 

$

877,206

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

3,058,498

 

$

3,641,224

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

8,177

 

 

See accompanying notes to condensed financial statements.

 

5



 

HAWKINS, 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 fiscal year ended March 30, 2003, previously filed with the Securities and Exchange Commission (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 Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2003 filed with the Commission on June 27, 2003.

 

2.                                       The results of operations for the period ended December 31, 2003 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 $528,000 at December 31, 2003.  Inventory consists principally of finished goods.

 

4.                                       In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (Interpretation No. 45).  Interpretation No. 45 clarifies the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  Interpretation No. 45 also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing certain types of guarantees.  The disclosure requirements in Interpretation No. 45 are effective for interim or annual financial statements for periods ended after December 15, 2002.  The adoption of Interpretation No. 45 did not have an impact on the Company’s results of operations or financial position.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities (VIE), an Interpretation of ARB No. 51,” which requires all VIEs to be consolidated by the primary beneficiary.  The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE.  In addition, the interpretation expands disclosure requirements for both VIEs that are consolidated as well as VIEs from which the entity is the holder of a significant amount of the beneficial interests, but not the majority.  In December 2003, the FASB revised Interpretation No. 46 to exclude from its scope certain entities that meet the definition of a business under Emerging Issues Task Force Issue No. 98-3 “Determining Whether a Nonmonetary Transaction Involves the Receipt of Productive Assets or of a Business.”  Interpretation No. 46 (Revised) shall be applied to all entities no later than the first reporting period ending after March 15, 2004.  The adoption of Interpretation No. 46 is not expected to have an impact on the Company’s results of operations or financial position.

 

In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 establishes new standards on how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  Under previous guidance, issuers could account for many of those instruments as equity.  SFAS No. 150 requires that those instruments be classified as liabilities in statements of financial position.  SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  The adoption of SFAS No. 150 did not have an impact on the Company’s financial position.

 

6



 

5.                                       The Company has two reportable segments: Industrial and Water Treatment.  Reportable segments are defined by product and type of customer.  Each segment is responsible for the sales, marketing and development of its products and services.  The segments do not have separate accounting, administration, customer service or purchasing functions.

 

REPORTABLE SEGMENTS

 

INDUSTRIAL

 

WATER
TREATMENT

 

TOTAL

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED DECEMBER 31, 2003

 

 

 

 

 

 

 

Sales

 

$

16,712,142

 

$

8,239,665

 

$

24,951,807

 

Gross margin

 

3,541,127

 

2,353,579

 

5,894,706

 

Income from operations

 

663,252

 

981,422

 

1,644,674

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED DECEMBER 31, 2002

 

 

 

 

 

 

 

Sales

 

$

16,551,720

 

$

7,780,231

 

$

24,331,951

 

Gross margin

 

4,015,042

 

2,275,539

 

6,290,581

 

Income from operations

 

1,485,441

 

1,226,432

 

2,711,873

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED DECEMBER 31, 2003

 

 

 

 

 

 

 

Sales

 

$

51,074,491

 

$

31,589,197

 

$

82,663,688

 

Gross margin

 

12,010,066

 

10,683,080

 

22,693,146

 

Income from operations

 

3,655,338

 

6,189,533

 

9,844,871

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED DECEMBER 31, 2002

 

 

 

 

 

 

 

Sales

 

$

50,539,576

 

$

28,711,587

 

$

79,251,163

 

Gross margin

 

12,353,991

 

9,650,271

 

22,004,262

 

Income from operations

 

5,048,467

 

5,685,863

 

10,734,330

 

 

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING INFORMATION

 

The information contained in this Quarterly Report on Form 10-Q for the period ended December 31, 2003 contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements give our current expectations or forecasts of future events.  Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expected,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or the negative thereof or similar words.  From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public.  Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any public statements we make could be materially different from actual results.  They can be affected by assumptions we might make or by known or unknown risks or uncertainties, including those described below under “Risk Factors” and other factors disclosed throughout this Quarterly Report on Form 10-Q and the Company’s other filings with the Securities and Exchange Commission.  Consequently, we cannot guarantee any forward-looking statements and undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Quarterly Report on Form 10-Q.  Investors are cautioned not to place undue reliance on any forward-looking statements.  Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.

 

7



 

RISK FACTORS

 

In addition to specific factors which may be described in connection with any of the Company’s forward-looking statements, factors which could cause actual results to differ materially include, but are not limited to, the following items.

 

                  Reduced profit margins due to the cyclical nature of commodity chemical prices.  The cyclicality of commodity chemical markets, such as caustic soda, primarily results from changes in the balance between supply and demand and the level of general economic activity.  The Company cannot predict with any certainty whether the markets for its commodity chemicals will favorably impact the Company’s operations or whether the Company will experience losses due to excess inventory levels and hence lower prices.

 

                  Unforeseen liabilities arising from litigation, particularly liabilities that may arise from claims under environmental laws which may impose liability for the release of hazardous materials whether or not the Company had knowledge of or was responsible for such release.

 

                  Changes in governmental and regulatory policies that affect the Company which may entail significant cost increases relating to the handling, storage, transportation, treatment or disposal of hazardous materials.

 

                  Increased competition which could affect our ability to raise prices or successfully enter certain markets.

 

                  Changes in customer demand which may significantly reduce revenues and income.

 

                  Changes in product costs or operating expenses which may reduce our operating margins.

 

                  The financial condition of our customers and their ability to purchase our products at comparable prices.

 

                  Unforeseen problems in our ability to develop, introduce and gain market acceptance for new products.

 

                  Significant changes in our business strategies, including acquisition, divestiture and restructuring activities which may affect our ability to focus on operating activities or increase costs.

 

                  General economic and political conditions, such as political instability or the rate of economic growth in our principal geographic or product markets.

 

                  Changes in operating factors, such as our ability to make continued improvements in distribution efficiencies and inventory risks due to shifts in market demand.

 

                  Unforeseen or recurring operational problems or natural disasters at any of our facilities causing significant lost production and/or increased costs.

 

                  Technology risks, such as the failure to successfully implement new technology, or the failure to continue to make process improvements to reduce costs or to analyze our business.3

 

                  Loss of senior management or other key personnel and our ability to hire suitable replacements in a timely manner.

 

These factors are not exhaustive and new factors may emerge or existing factors may change in a manner that impacts our business.  We assume no obligation and disclaim any duty to update the forward-looking statements in this Quarterly Report on Form 10-Q or any other public statement.

 

RESULTS OF OPERATIONS

 

Sales increased $619,856, or 2.5%, in the three months ended December 31, 2003, and $3,412,525, or 4.3%, in the nine months ended December 31, 2003 as compared to the same periods a year ago.  Industrial segment sales increased by $160,422 in the three months ended December 31, 2003 and increased by $534,915 in the nine-month period ended December 31, 2003 as compared to the same respective periods in 2002.  An increase in the cost and selling price of a single, large-volume product (caustic soda) in comparison to the prior year positively effected sales contributing to the increase in sales for the three and nine-month periods ended December 31,

 

8



 

2003.  However, the Industrial segment continues to be negatively affected by competitive pricing along several product lines and by a decrease in market demand.  Water Treatment segment sales increased by $459,434 and $2,877,610 respectively, in the three and nine-month periods ended December 31, 2003 as compared to the same respective periods in 2002.  These increases were primarily attributable to volume increases, due in part to favorable weather conditions, and, to a lesser extent, the Company’s geographic expansion into Illinois and Nebraska and selling price increases.

 

Gross margin, as a percentage of sales, for the three and nine months ended December 31, 2003 was 23.6% and 27.5%, respectively, compared to 25.9% and 27.8%, respectively, for the comparable periods of 2002.  For the Industrial segment, gross margin, as a percentage of sales, was 21.2% for the three months ended December 31, 2003 compared to 24.3% in the prior year and 23.5% for the nine months ended December 31, 2003 compared to 24.4% for the comparable period in 2002.  These decreases relate in part to changes in the cost and selling price of caustic soda during fiscal 2003 and 2004 and to the inventory position the Company had at the end of the 2002 barge-shipping season.  Additionally, gross margin has been negatively impacted by increased insurance costs and employee compensation and benefits.  Changes in product mix in all product lines and a highly competitive market environment also contributed to the decreases in gross margin.  The Company attempts to maintain relatively constant dollar margins as the cost of caustic soda increases or decreases.  The cost of this product is normally subject to fluctuations, which are expected to continue in future periods.  The Company has also generally been able to, and expects to continue to be able to, adjust its selling price as the cost of materials and other expenses changes.  Gross margin, as a percentage of sales, for the Water Treatment segment was 28.6% for the three months ended December 31, 2003 compared to 29.2% in the comparable period of 2002 and 33.8% for the nine-month period ended December 31, 2003 compared to 33.6% for the comparable period of 2002.  The decrease for the three-month period ended December 31, 2003 was primarily attributable to less favorable product mix and an increase in competitive pricing pressures.  The increase for the nine month period ended December 31, 2003 was primarily attributable to increased sales volumes associated with favorable weather conditions, new product introductions, which tend to have higher margins, and, to some extent, fixed costs included in cost of sales that do not fluctuate with volume changes.

 

Selling, general and administrative expenses, as a percentage of sales, for the three and nine months ended December 31, 2003 were 17.0% and 15.5%, respectively, compared to 14.7% and 14.2% for the comparable periods a year ago.  The increases were mainly due to consulting fees associated with the Company’s efforts in complying with the requirements of the Sarbanes-Oxley Act and to the Company’s evaluation and investment in an Enterprise Resource Planning System.  The Company will continue to incur additional expenses, including additional staffing and outside professional services, to implement the Enterprise Resource Planning System and meet the requirements of the Sarbanes-Oxley Act.  Additionally, increased insurance costs and employee compensation and benefits within both the Industrial and Water Treatment segments contributed to the increases.  Employee compensation and benefits comprise the majority of the selling, general and administrative expenditures.

 

INVESTMENT INCOME

 

Investment income increased by $105,927 for the nine months ended December 31, 2003, compared to the same period one year ago.  The increase was primarily due to increased amounts of cash available for investment and higher returns on the Company’s cash equivalents and available for sale securities, which consist primarily of money market accounts, municipal bonds, U.S. Government agency securities, mutual funds, and investment contracts with high-rated, stable insurance companies.

 

PROVISION FOR INCOME TAXES

 

The effective income tax rate was 37.5% for the three and nine months ended December 31, 2003 and was 37.0% for the three and nine months ended December 31, 2002.

 

LIQUIDITY AND CAPITAL RESOURCES

 

For the nine-month period ended December 31, 2003, cash provided by operations was $6,802,542 compared to $10,755,016 for the same period one year ago.  This decrease was primarily due to fluctuations in inventory values and quantities, a decrease in net income, year-over-year variances in tax payments and the timing of retirement plan payments due to the Company’s change in fiscal year end, which resulted in the six-month transitional period ended March 31, 2002.

 

9



 

Cash provided by investing activities increased by $12,459,295 primarily due to a $13,867,035 decrease in purchases of investments as the Company was in the process of transitioning investments into higher rate of return investments during the nine months ended December 31, 2002.  This decrease in purchases was partially offset by a $1,033,028 increase in property and equipment additions during the nine months ended December 31, 2003 in comparison to the nine months ended December 31, 2002.

 

Cash and investments available-for-sale increased by $906,978 from March 30, 2003 to $25,163,259 as of December 31, 2003.  The increase was primarily attributable to cash generated by operations in excess of capital expenditures and financing uses.  Cash equivalents consist of money market accounts at a financial institution.  Investments consist of investment contracts with high-rated, stable insurance companies, marketable securities consisting of commercial paper, municipal bonds, U.S. Government agency securities and mutual funds carried at fair value.  Investments are highly liquid and are available upon demand generally with only a minor penalty.

 

Expected future cash flows from operations, coupled with the Company’s strong financial 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 at December 31, 2003 puts it in a position to obtain debt financing 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 include all liquid debt instruments (primarily cash funds and money market accounts) purchased with an original maturity of three months or less.  Investments classified as available-for-sale securities consist of investment contracts with high-rated, stable insurance companies, marketable securities consisting of commercial paper, municipal bonds, U.S. Government agency securities, and mutual funds carried at fair value.

 

Other than as discussed above, management is not aware of any matters that have materially affected the nine months ended December 31, 2003, 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.

 

CRITICAL ACCOUNTING POLICIES

 

The significant accounting policies followed by the Company are set forth in Note 1 to the Company’s financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2003 (fiscal 2003).  The accounting policies used in preparing the Company’s interim fiscal 2004 financial statements are the same as those described in the Company’s Annual Report, except as described in Note 4 to the unaudited financial statements included in this report.

 

In preparing the financial statements, the Company follows accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities.  The Company re-evaluates its estimates on an on-going basis.  The Company’s estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions and conditions.  The Company believes its critical accounting policies are those related to:

 

Revenue Recognition - - The Company recognizes revenue when the product has been shipped to the customer if there is evidence that the customer has agreed to purchase the products, delivery and performance has occurred, the price and terms of sale are fixed, and collection of the receivable is expected.

 

Allowance for Doubtful Accounts - - Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future.  Substantially all of the Company’s receivables are due from customers located in the United States.  The estimated allowance for doubtful accounts is based upon the age of the outstanding receivables and the payment history and credit worthiness of each customer.  Management evaluates the adequacy of the reserve for doubtful accounts on a quarterly basis.

 

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Inventories - Inventories are valued at the lower of cost or market.  On a quarterly basis, management assesses the inventory quantities on hand to estimated future usage and sales and, if necessary, writes down the value of inventory deemed obsolete or excess to market.

 

Property, Plant and Equipment - - Property, plant and equipment are stated at cost and depreciated over the lives of the assets using both the straight-line and declining balance methods.  Major replacements and improvements are capitalized, while maintenance and repairs which do not improve or extend the useful lives of the respective assets are charged to operations.  The assets and related accumulated depreciation accounts are adjusted for asset retirements and disposals with the resulting gain or loss, if any, recorded in the statement of income at the time of disposal.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

At December 31, 2003, the Company had an investment portfolio of fixed income securities of $12,827,893 and mutual funds of $8,932,558, excluding $4,241,893 of those classified as cash and cash equivalents and variable rate securities.  The fixed income securities, like all fixed income instruments, are subject to interest rate risks and will decline in value if market interest rates increase.  However, while the value of the investment may fluctuate in any given period, the Company intends to hold its fixed income investments until maturity.  Consequently, the Company would not expect to recognize an adverse impact on net income or cash flows or the amount ultimately realized on the investment.  The value of the mutual funds, like all mutual funds, may increase or decrease due to market volatility.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of its management, including the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The Company is a defendant in a lawsuit encaptioned Chavarria v. Hawkins, Inc., Panorama Compounding Pharmacy, and Valley Drug and Compounding, et al.  This action was filed on September 7, 2001 in the Superior Court of the State of California, County of Los Angeles, Northwest District, Case No. LC 057561.  The plaintiffs are seeking unspecified compensatory and punitive damages relating to claims arising from the alleged mislabeling of certain inventory purchased by the Company as part of an acquisition by the Company in May 2000.  The Company is vigorously defending the lawsuit.  However, due to the inherent uncertainty of litigation, the Company is unable to predict the outcome and what effect, if any, the resolution of this matter may have on the Company’s business or its financial condition.

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits.

 

Exhibit Index

 

Exhibit

 

Description

 

Method of Filing

3.1

 

Amended and Second Restated Articles of Incorporation as amended through February 27, 2001.(1)

 

Incorporated by Reference

3.2

 

Amended and Superseding By-Laws as amended through February 15, 1995. (2)

 

Incorporated by Reference

31.1

 

Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.

 

Filed Electronically

31.2

 

Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.

 

Filed Electronically

32.1

 

Section 1350 Certification by Chief Executive Officer.

 

Filed Electronically

32.2

 

Section 1350 Certification by Chief Financial Officer.

 

Filed Electronically

 


(1)          Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended September 30, 2001.

(2)          Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended October 1, 1995.

 

(b)                      Reports on Form 8-K.

 

On November 13, 2003, we furnished a Current Report on Form 8-K to the SEC, including the Company’s press release announcing financial results for the quarter ended September 30, 2003.

 

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SIGNATURES

 

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, INC.

 

 

 

By:

/s/  Marvin E. Dee

 

 

 

 

Marvin E. Dee

 

 

 

Vice President, Chief Financial Officer, Secretary and Treasurer
(On behalf of the Registrant and as principal financial officer)

Dated:  February 16, 2004

 

 

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