HAWKINS INC - Annual Report: 2020 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K | |||||||||||
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | ||||||||||
| SECURITIES EXCHANGE ACT OF 1934 | |||||||||||
| For the Fiscal Year Ended | March 29, 2020 | ||||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | ||||||||||
| SECURITIES EXCHANGE ACT OF 1934 | |||||||||||
Commission File No. 0-7647 | |||||||||||
HAWKINS, INC.
(Exact Name of Registrant as Specified in its Charter)
| Minnesota | 41-0771293 | |||||||
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||
2381 Rosegate, Roseville, Minnesota | 55113 | |||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||
(612) 331-6910
(Registrant’s Telephone Number, Including Area Code)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading Symbol: | Name of exchange on which registered: | ||||||||||||
| Common Stock, par value $.05 per share | HWKN | Nasdaq Stock Market LLC | ||||||||||||
| Securities registered pursuant to Section 12(g) of the Act: None | ||||||||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 twelve 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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☑ | |||||||||||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☑ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate market value of voting stock held by non-affiliates of the Registrant on September 29, 2019 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $405.0 millions based upon the closing sale price for the Registrant’s common stock on that date as reported by The Nasdaq Stock Market LLC, excluding all shares held by officers and directors of the Registrant and by the Trustees of the Registrant’s Employee Stock Ownership Plan and Trust.
As of May 15, 2020, the Registrant had 10,593,095 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive Proxy Statement for the annual meeting of shareholders to be held July 30, 2020, are incorporated by reference in Part III of this Annual Report on Form 10-K
FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report on Form 10-K 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. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will” and similar expressions may 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. These risks and uncertainties are described in the risk factors and elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K or to reflect the occurrence of unanticipated events.
As used in this Annual Report on Form 10-K, except where otherwise stated or indicated by the context, “Hawkins,” “we,” “us,” “the Company,” “our,” or “the Registrant” means Hawkins, Inc. References to “fiscal 2021” means our fiscal year ending March 28, 2021, “fiscal 2020” means our fiscal year ended March 29, 2020, “fiscal 2019” means our fiscal year ended March 31, 2019, “fiscal 2018” means our fiscal year ended April 1, 2018, and “fiscal 2017” means our fiscal year ended April 2, 2017.
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Hawkins, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended March 29, 2020
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PART I
ITEM 1. BUSINESS
Hawkins, Inc. distributes, blends and manufactures chemicals and specialty ingredients for 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 chemical products and specialty ingredients, including manufacturing, blending and repackaging certain products. We believe that we create value for our customers through superb service and support, quality products, personalized applications and trustworthy, creative employees.
We conduct our business in three segments: Industrial, Water Treatment, and Health and Nutrition.
Industrial Segment. Our Industrial Group specializes in providing industrial chemicals, products and services to industries such as agriculture, chemical processing, electronics, energy, food, pharmaceutical and plating. This group’s principal products are acids, alkalis and industrial and food-grade salts.
The Industrial Group:
•Receives, stores and distributes various chemicals in bulk quantities, including liquid caustic soda, sulfuric acid, hydrochloric acid, urea, phosphoric acid, aqua ammonia and potassium hydroxide;
•Manufactures sodium hypochlorite (bleach), agricultural products and certain food-grade products, including liquid phosphates, lactates and other blended products;
•Repackages water treatment chemicals for our Water Treatment Group and bulk industrial chemicals to sell in smaller quantities to our customers;
•Performs custom blending of chemicals according to customer formulas and specifications; and
•Performs contract and private label bleach packaging.
The group’s sales are concentrated primarily in the Midwestern states, while the group’s products sold into the food and pharmaceutical markets are sold nationally. The Industrial Group relies on a specially trained sales staff that works directly with customers on their specific needs. The group conducts its business primarily through distribution centers and terminal operations. Agricultural sales within this group tend to be seasonal, with higher sales due to the application of fertilizer during the planting season of March through June given the regions of the country where we are located.
Water Treatment Segment. Our Water Treatment Group specializes in providing chemicals, equipment and solutions for potable water, municipal and industrial wastewater, industrial process water, non-residential swimming pool water and agricultural water. This group has the resources and flexibility to treat systems ranging in size from a single small well to a multi-million-gallon-per-day facility.
The group utilizes delivery routes operated by our employees who typically serve as route driver, salesperson and trained technician to deliver our products and diagnose our customers’ water treatment needs. We believe that the high level of service provided by these individuals allows us to serve as the trusted water treatment expert for many of the municipalities and other customers that we serve. We also believe that there are significant synergies between our Water Treatment and Industrial Groups in that we are able to obtain a competitive cost position on many of the chemicals sold by the Water Treatment Group due to the volumes of these chemicals purchased by our Industrial Group. In addition, our Industrial and Water Treatment groups share certain resources, which leverage fixed costs across both groups.
The group operates out of 29 warehouses supplying products and services to customers primarily in the Midwestern states and Florida. We expect to invest in existing and new branches to expand the group’s geographic coverage. Our Water Treatment Group has historically experienced higher sales during April to September, primarily due to a seasonal increase in chemicals used by municipal water treatment facilities.
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Health and Nutrition Segment. We established the Health and Nutrition segment of our business in fiscal 2016 through our acquisition of Stauber Performance Ingredients. Through sales of distributed specialty products and our manufactured products, our Health and Nutrition Group specializes in providing ingredient distribution, processing and formulation solutions to manufacturers of nutraceutical, functional food and beverage, personal care, dietary supplement and other nutritional food, health and wellness products. This group offers a diverse product portfolio including minerals, vitamins and amino acids, excipients, joint products, botanicals and herbs, sweeteners and enzymes.
The Health and Nutrition Group relies on a specially trained sales and product development staff that works directly with customers on their specific needs. The group’s extensive product portfolio combined with value-added services, including product formulation, sourcing and distribution, processing and blending and quality control and compliance, positions this group as a one-stop ingredient solutions provider to its customers. The group operates out of facilities in California and New York and its products are sold nationally and, in certain cases, internationally.
Raw Materials. We have numerous suppliers, including many of the major chemical producers in the United States. We source our health and nutrition ingredients from a wide array of domestic and international vendors. We typically have distributorship agreements or supply contracts with our suppliers that are periodically renewed. We believe that most of the products we purchase can be obtained from alternative sources should existing relationships be terminated. We are dependent upon the availability of our raw materials. While we believe that we have adequate sources of supply for our raw material and product requirements, we cannot be sure that supplies will be consistently available in the future. In the event that certain raw materials become generally unavailable, suppliers may extend lead times or limit or cut off the supply of materials to us. As a result, we may not be able to supply or manufacture products for our customers.
Intellectual Property. Our intellectual property portfolio is of economic importance to our business. When appropriate, we have pursued, and we will continue to pursue, patents covering our products. We also have obtained certain trademarks for our products to distinguish them from our competitors’ products. We regard many of the formulae, information and processes that we generate and use in the conduct of our business as proprietary and protectable under applicable copyright, patent, trademark, trade secret and unfair competition laws.
Customer Concentration. In fiscal 2020, none of our customers accounted for 10% or more of our total sales. Sales to our largest customer, which is in our Industrial segment, represented approximately 3-5% of our total sales in each of fiscal 2020, 2019 and 2018. In fiscal 2020, four of our five largest customers were in our Industrial segment and one was in our Health and Nutrition segment. Aggregate sales to these five customers represented approximately 10-12% of our total sales in each of fiscal 2020, 2019 and 2018. No other customer represented more than 2% of our total sales in fiscal 2020. The loss of any of our largest customers, or a substantial portion of their business, could have a material adverse effect on our results of operations.
Competition. We operate in a competitive industry and compete with many producers, distributors and sales agents offering products equivalent to substantially all of the products we offer. Many of our competitors are larger than we are and may have greater financial resources, although no one competitor is dominant in all of the markets we serve. We compete by offering quality products with outstanding customer service at competitive prices coupled and with value-added services or product formulation where needed. Because of our long-standing relationships with many of our suppliers, we are often able to leverage those relationships to obtain products when supplies are limited or to obtain competitive pricing.
Working Capital. Due to the nature of our operations, which includes purchases of large quantities of bulk chemicals, the timing of purchases can result in significant changes in working capital and the resulting operating cash flow. Historically, our cash requirements for working capital increase during the period from April through November as caustic soda inventory levels increase with most of our barges received during this period. Additionally, due to seasonality of the Water Treatment business, our accounts receivable balance is generally higher during the period of April through September.
Employees. We had 656 employees as of March 29, 2020, including 74 covered by collective bargaining agreements.
About Us. Hawkins, Inc. was founded in 1938 and incorporated in Minnesota in 1955. We became a publicly-traded company in 1972. Our principal executive offices are located at 2381 Rosegate, Roseville, Minnesota.
Available Information. Our Internet address is www.hawkinsinc.com. We have made available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports, as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the Securities and Exchange Commission. Reports of beneficial ownership filed by our directors and executive officers pursuant to Section 16(a) of the Exchange Act are also available on our website. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.
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ITEM 1A. RISK FACTORS
You should consider carefully the following risks when reading the information, including the financial information, contained in this Annual Report on Form 10-K. Shareholders are cautioned that these and other factors may affect future performance and cause actual results to differ from those which may be anticipated. Additionally, the impact of the global coronavirus (“COVID-19”) pandemic could further exacerbate many of the risk factors described below or described elsewhere herein.
We operate in a highly competitive environment and face significant competition and price pressure.
We operate in a highly competitive industry and compete with producers, manufacturers, distributors and sales agents offering products equivalent to substantially all of the products we offer. Competition is based on several key criteria, including product price, product performance, product quality, product availability and security of supply, breadth of product offerings, geographic reach, responsiveness of product development in cooperation with customers, technical expertise and customer service. Many of our competitors are larger than we are and may have greater financial resources, more product offerings and a broader geographic reach. As a result, these competitors may be able to offer a broader array of products to a larger geographic area and may be better able than us to withstand changes in conditions within our industry, changes in the prices and availability of raw materials and changes in general economic conditions as well as be able to introduce innovative products that reduce demand for or the profit from our products. Additionally, competitors’ pricing decisions could compel us to decrease our prices, which could adversely affect our margins and profitability. Our ability to maintain or increase our profitability would be dependent upon our ability to offset competitive decreases in the prices and margins of our products by improving production efficiency, investing in infrastructure to reduce freight costs, identifying and selling higher margin products, providing higher levels of technical expertise and customer service, and improving existing products through innovation and research and development. If we are unable to maintain our profitability or competitive position, we could lose market share to our competitors and experience reduced profitability.
Fluctuations in the prices and availability of our raw materials, which may be cyclical in nature, could have a material adverse effect on our operations and the margins we receive on sales of our products.
We experience regular and recurring fluctuations in the pricing of our raw materials. Those fluctuations can be significant and occur rapidly. The cyclicality of commodity markets, such as the market for caustic soda, primarily results from changes in the balance between supply and demand and the level of general economic activity. We cannot predict whether the markets for our raw materials will favorably impact or negatively impact the margins we can realize.
Our principal chemical raw materials are generally purchased under supply contracts. The prices we pay under these contracts generally lag the market prices of the underlying raw material and the cost of inventory we have on hand, particularly inventories of our bulk commodity chemicals where we have significant volumes stored at our facilities, generally will lag the current market pricing of such inventory. The pricing within our supply contracts generally adjusts quarterly or monthly. While we attempt to maintain competitive pricing and stable margin dollars, the potential variance in our cost of inventory from the current market pricing can cause significant volatility in our margins realized. We do not engage in futures or other derivatives contracts to hedge against fluctuations in future prices. We may enter into sales contracts where the selling prices for our products are fixed for a period of time, exposing us to volatility in raw materials prices that we acquire on a spot market or short-term contractual basis. We attempt to pass commodity pricing changes to our customers, but we may be unable to or be delayed in doing so. Our inability to pass through price increases or any limitation or delay in our passing through price increases could adversely affect our profit margins.
We are also dependent upon the availability of our raw materials. In the event that raw materials are in short supply or unavailable, raw material suppliers may extend lead times or limit or cut off supplies. As a result, we may not be able to supply or manufacture products for some or all of our customers. Constraints on the supply or delivery of critical raw materials could disrupt our operations and adversely affect the performance of our businesses.
Demand for our products is affected by general economic conditions and by the cyclical nature of many of the industries we serve, which could cause significant fluctuations in our sales volumes and results.
Demand for our products is affected by general economic conditions. A decline in general economic or business conditions in the industries served by our customers could have a material adverse effect on our businesses. Although we sell to areas traditionally considered non-cyclical, such as water treatment, food products and health and nutritional ingredients, many of our customers are in businesses that are cyclical in nature, such as the industrial manufacturing and energy industries which include the ethanol and agriculture industries. In addition, due to the extreme pressures of the current economic environment driven by
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the COVID-19 pandemic, even markets that had seemed stable may no longer be stable and may experience significant downturns and variability in demand for our products. Downturns in these industries could adversely affect our sales and our financial results by affecting demand for and pricing of our products.
Changes in our customers’ needs or failure of our products to meet customers’ specifications could adversely affect our sales and profitability.
Our products are used for a broad range of applications by our customers. Changes in our customers’ product needs or processes, or reductions in demand for their end products, may enable or require our customers to reduce or eliminate consumption of the products that we provide. Customers may also find alternative materials or processes that no longer require our products. Consequently, it is important that we develop new products to replace the sales of products that mature and decline in use.
Our products provide important performance attributes to our customers’ products. If our products fail to meet the customers’ specifications or comply with applicable laws or regulations, perform in a manner inconsistent with the customers’ expectations or have a shorter useful life than required, a customer could seek replacement of the product or damages for costs incurred as a result of the product failure. A successful claim or series of claims against us could have a material adverse effect on our financial condition and results of operations and could result in a loss of one or more customers. Reductions in demand for our products could adversely affect our sales and financial results and result in facility closures.
Our business is subject to hazards common to chemical businesses, any of which could interrupt our production and adversely affect our results of operations.
Our business is subject to hazards common to chemical manufacturing, blending, storage, handling and transportation, including explosions, fires, severe weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, traffic accidents involving our delivery vehicles, chemical spills, discharges or releases of toxic or hazardous substances or gases and other risks. These hazards could cause personal injury and loss of life, severe damage to or destruction of property and equipment, and environmental contamination. In addition, the occurrence of material operating problems or the absence of personnel due to pandemics or other disasters at any of our facilities due to any of these hazards may make it impossible for us to make sales to our customers and may result in a negative public or political reaction. Many of our facilities are near significant residential populations which increases the risk of negative public or political reaction should an environmental issue occur and could lead to adverse zoning or other regulatory actions that could limit our ability to operate our business in those locations. Accordingly, these hazards and their consequences could have a material adverse effect on our operations as a whole, including our results of operations and cash flows, both during and after the period of operational difficulties.
We are highly dependent upon transportation infrastructure to ship and receive our products and delays in these shipments could adversely affect our results of operations.
Although we maintain a number of owned trucks and trailers, we rely heavily upon transportation provided by third parties (including common carriers, barge companies, rail companies and trans-ocean cargo companies) to deliver products to us and to our customers. Our access to third-party transportation is not guaranteed, and we may be unable to transport our products in a timely manner, or at all, in certain circumstances, or at economically attractive rates. Disruptions in transportation are common, are often out of our control, and can happen suddenly and without warning. Rail limitations, such as limitations in rail capacity, availability of railcars and adverse weather conditions have disrupted or delayed rail shipments in the past and we expect they will continue into the future. Barge shipments are delayed or impossible under certain circumstances, including during times of high or low water levels, when waterways are frozen and when locks and dams are inoperable. Truck transportation has been negatively impacted by a number of factors, including limited availability of qualified drivers and equipment, and limitations on drivers’ hours of service. The volumes handled by, and operating challenges at, ocean ports have at times been volatile and can delay the receipt of goods, or cause the cost of shipping goods to be more expensive. Our failure to ship or receive products in a timely and efficient manner could have a material adverse effect on our financial condition and results of operations.
Environmental, health and safety, transportation and storage laws and regulations cause us to incur substantial costs and may subject us to future liabilities and risks.
We are subject to numerous federal, state and local environmental, health and safety laws and regulations in the jurisdictions in which we operate, including the management, storage, transportation and disposal of chemicals and wastes; product regulation; air water and soil contamination; and the investigation and cleanup of any spills or releases that may result from our management, handling, storage, sale, or transportation of chemicals and other products. The nature of our business exposes us
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to risks of liability under these laws and regulations. Ongoing compliance with such laws and regulations is an important consideration for us and we invest substantial capital and incur significant operating costs in our compliance efforts. In addition, societal concerns regarding the safety of chemicals in commerce and their potential impact on the environment have resulted in a growing trend towards increasing levels of product safety and environmental protection regulations. These concerns have led to, and could continue to result in, more stringent regulatory intervention by governmental authorities. In addition, these concerns could influence public perceptions, impact the commercial viability of the products we sell and increase the costs to comply with increasingly complex regulations, which could have a negative impact on our business, financial condition and results of operations.
In addition, we operate a fleet of more than 150 commercial vehicles, primarily in our Water Treatment Group, which are highly regulated, including by the U.S. Department of Transportation (“DOT”). The DOT governs transportation matters including authorization to engage in motor carrier service, including the necessary permits to conduct our businesses, equipment operation, and safety. We are audited periodically by the DOT to ensure that we are in compliance with various safety, hours-of-service, and other rules and regulations. If we were found to be out of compliance, the DOT could severely restrict or otherwise impact our operations, which could have a material adverse effect on our operations as a whole, including our results of operations and cash flows.
If we violate applicable laws or regulations, in addition to being required to correct such violations, we could be held liable in administrative, civil or criminal proceedings for substantial fines and other sanctions that could disrupt, limit or halt our operations, which could have a material adverse effect on our operations as a whole, including our results of operations and cash flows. Liabilities associated with the investigation and cleanup of releases of hazardous substances, as well as personal injury, property damages or natural resource damages arising out of such releases of hazardous substances, may be imposed in many situations without regard to violations of laws or regulations or other fault, and may also be imposed jointly and severally (so that a responsible party may be held liable for more than its share of the losses involved, or even the entire loss). Such liabilities can be difficult to identify and the extent of any such liabilities can be difficult to predict. We use, and in the past have used, hazardous substances at many of our facilities, and have generated, and continue to generate, hazardous wastes at a number of our facilities. We have in the past been, and may in the future be, subject to claims relating to exposure to hazardous materials and the associated liabilities may be material.
Environmental problems at any of our facilities could result in significant unexpected costs.
We are subject to federal, state and local environmental regulations regarding the ownership of real property and the operations conducted on real property. Under various federal, state and local laws, ordinances and regulations, we may own or operate real property or may have arranged for the disposal or treatment of hazardous or toxic substances at a property and, therefore, may become liable for the costs of removal or remediation of certain hazardous substances released on or in our property or disposed of by us, as well as certain other potential costs which could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property). Such liability may be imposed whether or not we knew of, or were responsible for, the presence of these hazardous or toxic substances. Further, future changes in environmental laws or regulations may require additional investment in capital equipment or the implementation of additional compliance programs in the future. The cost of investigation, remediation or removal of such substances may be substantial.
In the conduct of our operations, we have handled and do handle materials that are considered hazardous, toxic or volatile under federal, state and local laws. The accidental release of such products cannot be completely eliminated. In addition, we operate or own facilities located on or near real property that was formerly owned and operated by others. These properties may have been used in ways that involved hazardous materials. Contaminates may migrate from, within or through any such property, which may give rise to claims against us. Third parties who are responsible for contamination may not have funds, or may not make funds available when needed, to pay remediation costs imposed upon us jointly with them under environmental laws and regulations.
We are aware that soil and groundwater contamination exists on one of our facilities. The primary contaminate of concern is trichloroethylene. In fiscal 2018, we reserved $0.6 million for estimated expenses related to remediating this contamination. At the end of fiscal 2020, the remaining reserve balance is less than $0.1 million. Given the many uncertainties involved in assessing environmental claims, our reserves may prove to be insufficient. Increases in these estimated environmental expenses could have a material adverse effect on our business, financial condition and results of operations.
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Our food, pharmaceutical and health and nutrition products are subject to government regulation, both in the United States and abroad, which could increase our costs significantly and limit or prevent the sale of such products.
The manufacture, packaging, labeling, advertising, promotion, distribution and sale of our food, pharmaceutical and health and nutrition products are subject to regulation by numerous national and local governmental agencies in the United States and other countries. The primary regulatory bodies in the United States are the Food and Drug Administration (the “FDA”), the United States Department of Agriculture and the Federal Trade Commission, and we are also subject to similar regulators in other countries. Failure to comply with these regulatory requirements may result in various types of penalties or fines. These include injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. Individual states also regulate our products. A state may interpret claims or products presumptively valid under federal law as illegal under that state’s regulations. Approvals or licensing may be conditioned on reformulation of products or may be unavailable with respect to certain products or product ingredients. Any of these government agencies, as well as legislative bodies, can change existing regulations, or impose new ones, or could take aggressive measures, causing or contributing to a variety of negative consequences, including:
•requirements for the reformulation of certain or all products to meet new standards,
•the recall or discontinuance of certain or all products,
•additional record-keeping requirements,
•expanded documentation of the properties of certain or all products,
•expanded or different labeling,
•adverse event tracking and reporting, and
•additional scientific substantiation.
In particular, the FDA’s current good manufacturing practices (“GMPs”) describe policies and procedures designed to ensure that nutraceuticals, pharmaceuticals and dietary supplements are produced in a quality manner, do not contain contaminants or impurities, and are accurately labeled and cover the manufacturing, packaging, labeling and storing of supplements, with requirements for quality control, design and construction of manufacturing plants, testing of ingredients and final products, record keeping, and complaints processes. Those who manufacture, package or store dietary supplements must comply with current GMPs. If we or our suppliers fail to comply with current GMPs, the FDA may take enforcement action against us or our suppliers.
Any or all of the potential negative consequences described above could have a material adverse effect on us or substantially increase the cost of doing business in these areas. There can be no assurance that the regulatory environment in which we operate will not change or that such regulatory environment, or any specific action taken against us, will not result in a material adverse effect on us.
Our businesses expose us to potential product liability claims and recalls, which could adversely affect our financial condition and performance.
The repackaging, blending, mixing and distribution of products by us, including chemical products and products used in food or food ingredients or with medical, pharmaceutical or dietary supplement applications, involve an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity, including, without limitation, claims for exposure to our products, spills or escape of our products, personal injuries, food-related claims and property damage or environmental claims. A product liability claim, judgment or recall against our customers could also result in substantial and unexpected expenditures for us, affect consumer confidence in our products and divert management’s attention from other responsibilities. Although we maintain product liability insurance, there can be no assurance that the type or level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on our business, financial condition and results of operations.
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Demand for our food and health and nutrition products is highly dependent upon consumers’ perception of the safety and quality of our products, our customers’ products as well as similar products distributed by other companies, and adverse publicity and negative public perception regarding particular ingredients or products or the nutraceuticals industry in general could adversely affect the financial performance of those portions of our business.
Purchasing decisions made by consumers of products that contain our ingredients may be affected by adverse publicity or negative public perception regarding particular ingredients or products or the nutraceuticals industry in general. This negative public perception may include publicity regarding the legality or quality of particular ingredients or products in general or of other companies or our products or ingredients specifically. Negative public perception may also arise from regulatory investigations, regardless of whether those investigations involve us. We are highly dependent upon consumers’ perception of the safety and quality of products that contain our ingredients as well as similar products distributed by other companies. Thus, the mere publication of reports asserting that such products may be harmful could have a material adverse effect on us, regardless of whether these reports are scientifically supported. Publicity related to dietary supplements or food ingredients may also result in increased regulatory scrutiny of our industry. Adverse publicity may have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our Water Treatment Group and our agricultural product sales within our Industrial Group are subject to seasonality and weather conditions, which could adversely affect our results of operations.
Our Water Treatment Group has historically experienced higher sales during April to September, primarily due to a seasonal increase in chemicals used by municipal water treatment facilities. Our agricultural product sales within our Industrial Group are also seasonal, primarily corresponding with the planting season. Demand in both of these areas is also affected by weather conditions, as either higher or lower than normal precipitation or temperatures may affect water usage and the timing and the amount of consumption of our products. We cannot assure you that seasonality or fluctuating weather conditions will not have a material adverse effect on our results of operations.
The insurance that we maintain may not fully cover all potential exposures.
We maintain lines of commercial insurance, such as property, general liability and casualty insurance, but such insurance may not cover all risks associated with the hazards of our businesses and is subject to limitations, including deductibles and limits on the liabilities covered. We may incur losses beyond the limits or outside the coverage of our insurance policies, including liabilities for environmental remediation and product liability. In addition, from time to time, various types of insurance for companies in the chemical, food or health and nutrition products industries have not been available on commercially acceptable terms or, in some cases, have not been available at all. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.
Failure to comply with the covenants under our credit facility may have a material adverse effect.
We are party to a credit agreement (the “Credit Agreement”) with U.S. Bank National Association and other lenders (collectively, the “Lenders”), which includes secured revolving credit facilities (the “Revolving Loan Facility”) totaling $150.0 million. The Revolving Loan Facility includes a $5.0 million letter of credit subfacility and $15.0 million swingline subfacility. At March 29, 2020, we had $60.0 million outstanding under the Revolving Loan Facility.
We may make payments on the Revolving Loan Facility from time to time. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make payments on our credit facilities, we could be in default when the facilities become due in 2023. We are also required to comply with several financial covenants under the Credit Agreement. Our ability to comply with these financial covenants may be affected by events beyond our control, which could result in a default under the Credit Agreement; such default may have a material adverse effect on our business, financial condition, operating results or cash flows.
The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict our ability to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain payments, enter into sale and leaseback transactions, grant liens on its assets or rate management transactions, subject to certain limitations. These restrictions may adversely affect our business.
7
Impairment to the carrying value of our goodwill or other intangible assets could adversely affect our financial condition and consolidated results of operations.
Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable tangible net assets and identifiable intangible assets purchased. Goodwill is tested at least annually for impairment, and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. Our annual test for impairment is as of the first day of our fourth fiscal quarter, or December 30, 2019 for fiscal 2020. Goodwill impairment testing is at the reporting unit level. For our Industrial and Water Treatment reporting units, we performed an analysis of qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If that qualitative analysis indicates that an impairment may exist, then we would calculate the amount of the impairment by comparing the fair value of the assets and liabilities to the fair value of the reporting unit. For our Health and Nutrition reporting unit, we performed a quantitative goodwill impairment analysis, which required us to estimate the fair value of the reporting unit and compare the fair value to the reporting unit’s carrying value. The fair value of the reporting unit in excess of the value of the assets and liabilities is the implied fair value of the goodwill. If this amount is less than the carrying amount of goodwill, impairment is recognized for the difference. As of December 30, 2019, the fair value of our Health and Nutrition reporting unit exceeded its carrying value, and thus no impairment was recorded. In fiscal 2018, however, we recorded an impairment charge in our Health and Nutrition reporting unit of $39.1 million. A significant amount of judgment is involved in determining if an indication of impairment exists. Factors may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in the business climate; unanticipated competition; and slower growth rates. An adverse change in these factors may have a significant impact on the recoverability of the net assets recorded, and any resulting impairment charge in the future could have a material adverse effect on our financial condition and consolidated results of operations.
We evaluate the useful lives of our intangible assets to determine if they are definite- or indefinite-lived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), and the expected lives of other related groups of assets.
We cannot accurately predict the amount and timing of any impairment of goodwill and other intangible assets. Should the value of these assets become impaired, there could be a material adverse effect on our financial condition and consolidated results of operations.
If we are unable to retain key personnel or attract new skilled personnel, it could have an adverse impact on our businesses.
Because of the specialized and technical nature of our businesses, our future performance is dependent on the continued service of, and on our ability to attract and retain, qualified management, scientific, technical and support personnel. The unanticipated departure of key members of our management team could have an adverse impact on our business.
We may not be able to successfully consummate future acquisitions or dispositions or integrate acquisitions into our business, which could result in unanticipated expenses and losses.
As part of our business growth strategy, we have acquired businesses and may pursue acquisitions in the future. Our ability to pursue this strategy will be limited by our ability to identify appropriate acquisition candidates and our financial resources, including available cash and borrowing capacity. In addition, we may seek to divest of businesses that are underperforming or not core to our future business. The expense incurred in consummating transactions, the time it takes to integrate an acquisition or our failure to integrate businesses successfully could result in unanticipated expenses and losses. Furthermore, we may not be able to realize the anticipated benefits from acquisitions.
The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. The risks associated with the integration of acquisitions include potential disruption of our ongoing businesses and distraction of management, unforeseen claims, liabilities, adjustments, charges and write-offs, difficulty in conforming the acquired business’ standards, processes, procedures and controls with our operations, and challenges arising from the increased scope, geographic diversity and complexity of the expanded operations.
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Our businesses are subject to risks stemming from natural disasters or other extraordinary events outside of our control, which could interrupt our production and adversely affect our results of operations.
Natural disasters have the potential of interrupting our operations and damaging our properties, which could adversely affect our businesses. Flooding of the Mississippi River has temporarily shifted the Company’s terminal operations out of its buildings four times since the spring of 2010, including most recently the spring of 2019. We can give no assurance that flooding or other natural disasters will not recur or that there will not be material damage or interruption to our operations in the future from such disasters.
Chemical-related assets may be at greater risk of future terrorist attacks than other possible targets in the United States. Federal law imposes site security requirements, specifically on chemical facilities, which have increased our overhead expenses. Federal regulations have also been adopted to increase the security of the transportation of hazardous chemicals in the United States. We ship and receive materials that are classified as hazardous and we believe we have met these requirements, but additional federal and local regulations that limit the distribution of hazardous materials are being considered. Bans on movement of hazardous materials through certain cities could adversely affect the efficiency of our logistical operations. Broader restrictions on hazardous material movements could lead to additional investment and could change where and what products we provide.
The occurrence of extraordinary events, including future terrorist attacks, global health developments and pandemics (including the COVID-19 outbreak), or escalation of hostilities, cannot be predicted, but their occurrence can be expected to negatively affect the economy in general, and specifically the markets for our products. The resulting damage from a direct attack on our assets, or assets used by us, could include loss of life and property damage. In addition, available insurance coverage may not be sufficient to cover all of the damage incurred or, if available, may be prohibitively expensive.
We may not be able to renew our leases of land where four of our operations facilities reside.
We lease the land where our three main terminals are located and where another significant manufacturing plant is located. These leases, including all renewal periods, have expiration dates from 2023 to 2044. The failure to secure extended lease terms on any one of these facilities may have a material adverse impact on our business, as they are where a portion of our chemicals are manufactured and where the majority of our bulk chemicals are stored. While we can make no assurances, based on historical experience and anticipated future needs, we intend to extend these leases and believe that we will be able to renew our leases as the renewal periods expire. If we are unable to renew three of our leases (two relate to terminals and one to manufacturing) any property remaining on the land becomes the property of the lessor, and the lessor has the option to either maintain the property or remove the property at our expense. The fourth lease provides that we turn any property remaining on the land over to the lessor for them to maintain or remove at their expense. The cost to relocate our operations could have a material adverse effect on our results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our facilities material to our operations consist of our locations described below. In addition to the facilities listed below, our Water Treatment group operates out of 27 additional warehouse locations, the majority of which are owned by us. We believe that our facilities are adequate and suitable for the purposes they serve. Unless noted, each facility is owned by us and is primarily used as office and warehouse space. We believe that we carry customary levels of insurance covering the replacement of damaged property.
| Group | Location | Approx. Square Feet | ||||||||||||
| Corporate headquarters | Roseville, MN | 50,000 | ||||||||||||
| Health and Nutrition | Fullerton, CA (1) | 55,800 | ||||||||||||
| Florida, NY (2) | 107,000 | |||||||||||||
| Industrial | Minneapolis, MN (3) | 177,000 | ||||||||||||
| Camanche, IA | 95,000 | |||||||||||||
| Centralia, IL (4) | 77,000 | |||||||||||||
| Dupo, IL (5) | 64,000 | |||||||||||||
| St. Paul, MN (6) | 32,000 | |||||||||||||
| Rosemount, MN (7) | 63,000 | |||||||||||||
| Industrial and Water Treatment | St. Paul, MN (8) | 59,000 | ||||||||||||
| Memphis, TN | 41,000 | |||||||||||||
| Water Treatment | Apopka, FL | 32,100 | ||||||||||||
(1)This is a leased facility comprising administrative offices and a distribution facility. The lease runs through January 2021.
(2)This is comprised of (i) a 79,000 square foot manufacturing plant which sits on approximately 16 acres and (ii) a leased 28,000 square foot warehouse located in close proximity that is leased until December 2022.
(3)This is our principal manufacturing location that sits on approximately 11 acres of land.
(4)This manufacturing facility includes 10 acres of land owned by the Company.
(5)The land for this manufacturing and packaging facility is leased from a third party, with the lease expiring in May 2023.
(6)Our terminal operations, located at two sites on opposite sides of the Mississippi River, are made up of three buildings, outside storage tanks for the storage of liquid bulk chemicals, including caustic soda, as well as numerous smaller tanks for storing and mixing chemicals. The land is leased from the Port Authority of the City of St. Paul, Minnesota. One of the applicable leases runs through 2033, while the other one runs through 2044 including all available lease extensions.
(7)This facility includes 28 acres of land owned by the Company. This manufacturing facility has outside storage tanks for the storage of bulk chemicals, as well as numerous smaller tanks for storing and mixing chemicals.
(8)Our Red Rock facility, which consists of a 59,000 square-foot building located on approximately 10 acres of land, has outside storage capacity for liquid bulk chemicals, as well as numerous smaller tanks for storing and mixing chemicals. The land is leased from the Port Authority of the City of St. Paul, Minnesota and runs until 2029.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries are a party or of which any of our property is the subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the Nasdaq Global Select Market under the symbol “HWKN.” As of May 15, 2020, shares of our common stock were held by approximately 378 shareholders of record.
In 2014, our Board of Directors authorized the repurchase of up to 300,000 shares of our outstanding common stock. On February 7, 2019, our Board of Directors increased the authorization to up to 800,000 shares. The shares may be repurchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. The following table sets forth information concerning purchases of our common stock for three months ended March 29, 2020:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet be Purchased under the Plans or Programs | |||||||||||||
| 12/30/2019 - 1/26/2020 | — | — | — | 412,985 | |||||||||||||
| 1/27/2020 - 2/23/2020 | — | — | 412,985 | ||||||||||||||
| 2/24/2020 - 3/29/2020 | 54,188 | $ | 38.03 | 54,188 | 358,797 | ||||||||||||
| Total | 54,188 | 54,188 | |||||||||||||||
The following graph compares the cumulative total shareholder return on our common shares with the cumulative total returns of the Nasdaq Industrial Index, the Nasdaq Composite Index, the Russell 2000 Index and the Standard & Poor’s (“S&P”) Small Cap 600 Index for our last five completed fiscal years. The graph assumes the investment of $100 in our stock and each of those indices on March 29, 2015, and reinvestment of all dividends.
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ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is presented in the table below and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 and the Company’s Financial Statements and Notes to Financial Statements included in Item 8 of this Annual Report on Form 10-K.
| Fiscal Year | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 (1) | 2017 | 2016 | ||||||||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||||||||
| Sales | $ | 540,198 | $ | 556,326 | $ | 504,169 | $ | 483,593 | $ | 413,976 | ||||||||||||||||||||||
| Gross profit | 100,917 | 95,936 | 86,760 | 98,073 | 80,257 | |||||||||||||||||||||||||||
| Net income (loss) | 28,367 | 24,433 | (9,177) | 22,555 | 18,143 | |||||||||||||||||||||||||||
| Basic earnings (loss) per common share | 2.68 | 2.29 | (0.87) | 2.14 | 1.72 | |||||||||||||||||||||||||||
| Diluted earnings (loss) per common share | 2.66 | 2.28 | (0.86) | 2.13 | 1.72 | |||||||||||||||||||||||||||
| Cash dividends declared per common share | 0.9225 | 0.68 | 0.88 | 0.84 | 0.80 | |||||||||||||||||||||||||||
| Cash dividends paid per common share | 0.9225 | 1.12 (2) | 0.86 | 0.82 | 0.78 | |||||||||||||||||||||||||||
| Total assets | $ | 389,328 | $ | 385,599 | $ | 390,991 | $ | 418,584 | $ | 436,491 | ||||||||||||||||||||||
Total long-term obligations (3) | 64,978 | 90,316 | 96,646 | 100,968 | 130,407 | |||||||||||||||||||||||||||
(1) - Net loss and basic and diluted loss per share for fiscal 2018 include a goodwill impairment charge of $39.1 million, or $3.68 per diluted share, related to our Health & Nutrition reporting unit and a one-time tax benefit of $13.9 million, or $1.31 per diluted share, related to the revaluation of our net deferred tax liabilities associated with the change in the U.S. corporate tax rate from 35% to 21% effective January 1, 2018 due to the Tax Cuts and Jobs Act of 2017.
(2) - In fiscal 2019, we changed from paying dividends semi-annually to quarterly. Normalized dividends paid in fiscal 2019 were $0.90 per share.
(3) - Total long-term obligations includes bank debt payable, as per the terms of the then-existing credit agreement, later than 12 months after the balance sheet date as well as obligations payable under the terms of our withdrawal from a multi-employer pension plan.
ITEM 7. 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 fiscal 2020, 2019 and 2018. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Overview
We derive substantially all of our revenues from the sale of chemicals and specialty ingredients 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 the strong customer focus and have expanded our business by increasing our sales of value-added chemical products and specialty ingredients, including manufacturing, blending and repackaging certain products.
Financial Overview
An overview of our financial performance in fiscal 2020 is provided below:
•Sales of $540.2 million, a 2.9% decrease from fiscal 2019;
•Gross profit of $100.9 million, an increase of $5.0 million, or 5.2% from fiscal 2019;
•Selling, general and administrative (“SG&A”) expenses were relatively flat year over year, and up 0.4% as a percentage of sales from fiscal 2019;
•Net cash provided by operating activities of $58.9 million, as compared to $48.0 million for fiscal 2019.
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We focus on total profitability dollars when evaluating our financial results as opposed to profitability as a percentage of sales, as sales dollars tend to fluctuate, particularly in our Industrial and Water Treatment segments, as raw material prices rise and fall. The costs for certain of our raw materials can rise or fall rapidly, causing fluctuations in gross profit as a percentage of sales.
We use the last in, first out (“LIFO”) method of valuing the majority of our inventory in our Industrial and Water Treatment segments, 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 chemical raw material prices. Inventories in our Health and Nutrition segment are valued using the first-in, first-out (“FIFO”) method.
We disclose the sales of our bulk commodity products as a percentage of total sales dollars for our Industrial and Water Treatment segments. Our definition of bulk commodity products includes products that we do not modify in any way, but receive, store, and ship from our facilities, or direct ship to our customers in large quantities.
Statement on COVID-19
The pandemic caused by COVID-19 was first reported in Wuhan, China in December 2019 and has since spread throughout the world. Financial markets have been volatile in 2020, primarily due to uncertainty with respect to the severity and duration of the pandemic.
The pandemic has resulted in federal, state and local governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions or bans, business curtailments, school closures, and other protective measures.
All of our manufacturing facilities qualify as essential operations (or the equivalent) under applicable federal and state orders. As a result, all of our manufacturing sites and facilities have continued to operate and are doing so safely, with no significant impact to output levels. We are enforcing social distancing and enhanced health, safety and sanitization measures in accordance with guidelines from the Center for Disease Control. We have also implemented necessary procedures and support to enable a significant portion of our office personnel to work remotely.
As the spread of the virus began to be identified within the United States in March 2020, we acted by imposing travel restrictions, transitioning large meetings from in-person to virtual formats, assessing our information technology infrastructure to ensure readiness for a remote workforce, staying connected to customers, suppliers and business partners, planning for return to the workplace and making operational adjustments as needed to ensure continued safety of our workforce, while also ensuring the ability to continue to supply products to meet the nation’s essential needs and evolving market demands.
During this public health crisis, we remain focused on the health and safety of our employees, customers and suppliers and maintaining safe and reliable operations of our manufacturing sites. As our operations and products are essential to critical national infrastructure, it is imperative that we continue to supply materials including the products needed to maintain safe drinking water, ingredients essential for large-scale food, pharmaceutical and other health product manufacturing and nutrition products needed to support our critical infrastructure. Our manufacturing sites have continued to operate during the COVID-19 pandemic, with no significant impact to manufacturing.
We ended fiscal 2020 with a leverage ratio below 1.0x, net debt of $55.7 million and significant amounts available for borrowing under our Revolving Loan Facility.
The COVID-19 pandemic has created tremendous uncertainty in the economy. The financial impact to our company has been mixed, as sales to certain end-markets such as food, bottled bleach and health and nutrition have benefited our reporting segments, while decreased sales to other end-markets such as ethanol, pools and resorts have negatively impacted them. As uncertainty continues with this pandemic, we expect mixed results to continue for the foreseeable future. We will continue to be cautious in our capital expenditures and investments, and delay investments where deemed appropriate, while still investing for the future by opening new Water Treatment branches and making capital investments to drive higher margin business. With our current debt levels and available borrowings, we believe we are well-positioned to weather a continued economic downturn.
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Share Repurchase Program
Our Board of Directors has authorized the repurchase of up to 800,000 shares of our outstanding common stock. The shares may be repurchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. The primary objective of the share repurchase program is to offset the impact of dilution from issuances relating to employee and director equity grants and our employee stock purchase program. During fiscal 2020, we repurchased 145,583 shares of common stock with an aggregate purchase price of $5.9 million. During fiscal 2019, we repurchased 108,166 shares of common stock with an aggregate purchase price of $4.4 million. No shares were repurchased during fiscal 2018. As of March 29, 2020, 358,797 shares remained available for purchase under the program.
Results of Operations
The following table sets forth certain items from our statement of income as a percentage of sales from period to period:
| Fiscal 2020 | Fiscal 2019 | Fiscal 2018 | ||||||||||||||||||
| Sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
| Cost of sales | (81.3) | % | (82.8) | % | (82.8) | % | ||||||||||||||
| Gross profit | 18.7 | % | 17.2 | % | 17.2 | % | ||||||||||||||
| Selling, general and administrative expenses | (11.0) | % | (10.6) | % | (11.8) | % | ||||||||||||||
| Goodwill impairment | — | % | — | % | (7.8) | % | ||||||||||||||
| Operating income (loss) | 7.7 | % | 6.6 | % | (2.3) | % | ||||||||||||||
| Interest expense, net | (0.4) | % | (0.6) | % | (0.7) | % | ||||||||||||||
| Other income | — | % | — | % | — | % | ||||||||||||||
| Income (loss) before income taxes | 7.3 | % | 6.0 | % | (3.0) | % | ||||||||||||||
| Income tax provision | (2.0) | % | (1.6) | % | 1.2 | % | ||||||||||||||
| Net income (loss) | 5.3 | % | 4.4 | % | (1.8) | % | ||||||||||||||
Fiscal 2020 Compared to Fiscal 2019
Sales
Sales decreased $16.1 million, or 2.9%, to $540.2 million for fiscal 2020, as compared to sales of $556.3 million for fiscal 2019.
Industrial Segment. Industrial segment sales decreased $6.6 million, or 2.4%, to $275.2 million for fiscal 2020, as compared to $281.9 million for fiscal 2019. Sales of bulk commodity products in the Industrial segment were approximately 18% of sales dollars in fiscal 2020 and 22% in fiscal 2019. The decrease in sales dollars from the prior year was driven by lower pricing due to lower costs of one of our major commodities as well as an overall decrease in volumes sold, particularly of lower-priced bulk commodities driven by a weak ethanol industry. This was offset somewhat by an increase in volumes sold of our manufactured, blended and re-packaged products that typically carry higher per-unit selling prices.
Water Treatment Segment. Water Treatment segment sales increased $10.4 million, or 7.0%, to $159.9 million for fiscal 2020, as compared to $149.5 million for fiscal 2019. Sales of bulk commodity products in the Water Treatment segment were approximately 12% of sales dollars in fiscal 2020 and 15% in fiscal 2019. The increase in sales dollars was driven by increased volumes sold of certain manufactured, blended and re-packaged products that carry higher per-unit selling prices. This was offset somewhat by lower volumes sold of our bulk commodity products as well as lower pricing due to lower costs of one of our major commodities.
Health and Nutrition Segment. Sales for our Health and Nutrition segment decreased $19.9 million, or 15.9%, to $105.1 million for fiscal 2020, as compared to $125.0 million for fiscal 2019. The decline in sales was driven by decreased sales of our distributed specialty products, some of which was due to a previously anticipated worldwide supply shortage of a significant product that we experienced in the first two quarters of this fiscal year, and the ramp-up of sales with new partners replacing previous product lines.
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Gross Profit
Gross profit increased $5.0 million to $100.9 million, or 18.7% of sales, for fiscal 2020, from $95.9 million, or 17.2% of sales, for fiscal 2019. During the current year, the LIFO reserve increased, and gross profits decreased, by $0.6 million. In the same period a year ago, the LIFO reserve decreased, and gross profits increased, by $0.5 million.
Industrial Segment. Gross profit for the Industrial segment increased $4.0 million to $38.9 million, or 14.1% of sales, for fiscal 2020, from $34.9 million, or 12.4% of sales, for fiscal 2019. During fiscal 2020, the LIFO reserve increased, and gross profits decreased, by $0.6 million. In fiscal 2019, the LIFO reserve decreased, and gross profits increased, by $0.8 million. In spite of the $1.4 million year-over-year unfavorable LIFO impact and lower overall sales dollars, total gross profit increased from a year ago due to a favorable product mix shift to more sales of our higher margin manufactured, blended and re-packaged products.
Water Treatment Segment. Gross profit for the Water Treatment segment increased $3.9 million to $41.9 million, or 26.2% of sales, for fiscal 2020, from $38.0 million, or 25.4% of sales, for fiscal 2019. During fiscal 2020, the LIFO reserve changed nominally and therefore had a minimal impact on gross margin. In fiscal 2019, the LIFO reserve increased, and gross profits decreased, by $0.3 million. Gross profit increased as a result of increased sales of our manufactured, blended and re-packaged products compared to a year ago, offset somewhat by higher operating costs.
Health and Nutrition Segment. Gross profit for our Health and Nutrition segment decreased $3.0 million to $20.1 million, or 19.1% of sales, for fiscal 2020, compared to $23.1 million, or 18.4% of sales, for fiscal 2019. Gross profit decreased as a result of lower sales, while gross profit as a percent of sales improved year over year due to increased profitability on certain products as well as lower operational costs. The decrease in operational costs was offset somewhat by a $0.6 million impairment charge related to certain manufacturing equipment that will not be used in production as previously planned.
Selling, General and Administrative Expenses
SG&A expenses were relatively flat at $59.2 million, or 11.0% of sales, for fiscal 2020, and $59.1 million, or 10.6% of sales, for fiscal 2019. Fiscal 2020 includes a favorable adjustment to compensation expense related to our non-qualified deferred compensation plan of $0.2 million compared to a nominal adjustment in the prior year. These adjustments are offset in other income/expense. Increases in other variable expenses largely offset this year-over-year benefit.
Operating Income (Loss)
Operating income was $41.7 million, or 7.7% of sales, for fiscal 2020, as compared to $36.8 million, or 6.6% of sales, for fiscal 2019 due to the combined impact of the factors discussed above.
Interest Expense, Net
Interest expense was $2.5 million for fiscal 2020, a decrease of $0.9 million from interest expense of $3.4 million for fiscal 2019. Interest expense decreased due to lower outstanding borrowings and lower borrowing rates compared to the prior year.
Income Tax Provision
Our effective tax rate was relatively flat at 27.2% for fiscal 2020 and 27.1% for fiscal 2019.
Fiscal 2019 Compared to Fiscal 2018
Sales
Sales increased $52.2 million, or 10.3%, to $556.3 million for fiscal 2019, as compared to sales of $504.2 million for fiscal 2018. Sales increased year over year in all segments.
Industrial Segment. Industrial segment sales increased $34.5 million, or 13.9%, to $281.9 million for fiscal 2019. Sales of bulk commodity products in the Industrial segment were approximately 22% of sales dollars in fiscal 2019 and 20% in fiscal 2018. Sales dollars increased in fiscal 2019 due to increased volumes, particularly of certain specialty products that carry higher per-unit selling prices, as well as increased selling prices on certain products resulting from increased raw material costs.
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Water Treatment Segment. Water Treatment segment sales increased $11.0 million, or 8.0%, to $149.5 million for fiscal 2019. Sales of bulk commodity products in the Water Treatment segment were approximately 15% of sales dollars in both fiscal 2019 and 2018. Sales dollars increased in fiscal 2019 as a result of increased sales volumes across many product lines as well as a favorable product mix shift.
Health and Nutrition Segment. Sales for our Health and Nutrition segment increased $6.6 million, or 5.6%, to $125.0 million for fiscal 2019. Increased sales of distributed specialty products drove the year-over-year increase in sales.
Gross Profit
Gross profit was $95.9 million, or 17.2% of sales, for fiscal 2019, an increase of $9.2 million from $86.8 million, or 17.2% of sales, for fiscal 2018. During fiscal 2019, the LIFO reserve decreased, and gross profits increased, by $0.5 million. Conversely, during fiscal 2018, the LIFO reserve increased, and gross profits decreased, by $4.1 million. In addition to this $4.6 million year-over-year positive impact, the increase in gross profit during fiscal 2019 was a result of increased sales across all three segments, somewhat offset by increased operating costs.
Industrial Segment. Gross profit for the Industrial segment was $34.9 million, or 12.4% of sales, for fiscal 2019, an increase of $5.3 million from $29.6 million, or 12.0% of sales, for fiscal 2018. During fiscal 2019, the LIFO reserve decreased, and gross profits increased, by $0.8 million. Conversely, during fiscal 2018, the LIFO reserve increased, and gross profits decreased, by $3.3 million. In addition to this $4.1 million positive year-over-year impact, the increase in gross profit dollars was due to a favorable product mix shift to more products with higher per-unit margins as well as improved pricing on certain products, offset somewhat by an increase in operational overhead costs driven largely by repair and maintenance costs, as well as increased transportation costs due to a tight carrier market and increased fuel costs.
Water Treatment Segment. Gross profit for the Water Treatment segment increased $1.7 million, or 4.7%, to $38.0 million, or 25.4% of sales, for fiscal 2019, as compared to $36.3 million, or 26.2% of sales, for fiscal 2018. The increase in gross profit was largely a result of higher sales volumes compared to a year ago, offset in part by an increase in certain variable costs, including variable pay, as well as higher transportation costs, primarily due to rising fuel costs. During fiscal 2019, the LIFO reserve increased, and gross profits decreased, by $0.3 million. Conversely, during fiscal 2018, the LIFO reserve increased, and gross profits decreased, by $0.8 million.
Health and Nutrition Segment. Gross profit for our Health and Nutrition segment increased $2.2 million, or 10.4%, to $23.1 million, or 18.4% of sales, for fiscal 2019, as compared to $20.9 million, or 17.6% of sales, for fiscal 2018. Gross profit increased as a result of the combined impact of higher sales and lower operating costs compared to the same period a year ago.
Selling, General and Administrative Expenses
SG&A expenses were $59.1 million, or 10.6% of sales, for fiscal 2019, and $59.4 million, or 11.8% of sales, for fiscal 2018. The decrease in SG&A expenses resulted from actions taken by management in the prior year, offset somewhat by increased variable pay expense. SG&A expense as a percentage of sales was favorable year over year in all three reporting segments.
Operating Income (Loss)
Operating income was $36.8 million, or 6.6% of sales, for fiscal 2019, as compared to an operating loss of $11.8 million, or (2.3)% of sales, for fiscal 2018 due to the combined impact of the factors discussed above.
Interest Expense, Net
Interest expense was $3.4 million in both fiscal 2019 and 2018. The impact from higher interest rates in fiscal 2019 was offset by a nearly $20 million reduction in average borrowings.
Income Tax Provision
Our effective tax rate was 27.1% for fiscal 2019 and 39.1% for fiscal 2018. Our effective tax rate for fiscal 2018 was impacted by a $13.9 million one-time income tax benefit which was recognized as a result of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”). Our effective tax rate for fiscal 2018 was also impacted by the $39.1 million goodwill impairment charge which was recorded for book purposes but was not deductible for tax purposes.
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Liquidity and Capital Resources
Cash provided by operating activities in fiscal 2020 was $58.9 million compared to $48.0 million in fiscal 2019. The increase in cash provided by operating activities in fiscal 2020 as compared to fiscal 2019 was primarily driven by favorable year-over-year changes in certain components of working capital, in particular lower cash used for accounts payable and inventory, as well as the improvement in net income. Due to the nature of our operations, which includes purchases of large quantities of bulk chemicals, the timing of purchases can result in significant changes in working capital and the resulting operating cash flow. Historically, our cash requirements for working capital increase during the period from April through November as caustic soda inventory levels increase as most of our barges are received during this period.
Cash used in investing activities was $24.2 million in fiscal 2020 compared to $12.3 million in fiscal 2019. Capital expenditures were $24.5 million in fiscal 2020 and $12.6 million in fiscal 2019. Capital expenditures in fiscal 2020 included $9.5 million in the aggregate for the purchase of our previously leased corporate headquarters and a previously leased Water Treatment branch facility as well as the purchase of a facility for a Water Treatment branch expansion. The additional increase in capital expenditures primarily related to facility improvements and new and replacement equipment.
Cash used in financing activities was $39.6 million in fiscal 2020, as compared to cash used in financing activities of $31.4 million in fiscal 2019. Cash used in financing activities included net debt repayments of $25.0 million in fiscal 2020 and $16.0 million in fiscal 2019. We also paid out cash dividends of $9.8 million in fiscal 2020 and $12.0 million in fiscal 2019. In fiscal 2020, we used $5.9 million to repurchase shares under our board-authorized share repurchase program, and in fiscal 2019, we used $4.4 million to repurchase shares under the program.
Our cash balance was $4.3 million at March 29, 2020, a decrease of $4.9 million as compared with March 31, 2019. Cash flows generated by operations during fiscal 2020 were largely offset by debt repayments, capital expenditures and dividend payments.
We were party to a credit agreement (the “Prior Credit Agreement”) with U.S. Bank National Association (“U.S. Bank”) as Sole Lead Arranger and Sole Book Runner and other lenders from time to time party thereto (collectively, the “Prior Lenders”), whereby U.S. Bank was also serving as Administrative Agent. The Prior Credit Agreement provided us with senior secured credit facilities totaling $165.0 million, consisting of a $100.0 million senior secured term loan credit facility and a $65.0 million senior secured revolving loan credit facility. The term loan facility required mandatory quarterly repayments, with the balance due at maturity. The revolving loan facility included a letter of credit subfacility in the amount of $5.0 million and a swingline subfacility in the amount of $8.0 million. The Prior Credit Agreement was scheduled to terminate on December 23, 2020 and the underlying credit facility was secured by substantially all of our personal property assets and those of our subsidiaries. Borrowings under the Prior Credit Agreement bore interest at a variable rate per annum equal to one of the following, plus, in both cases, an applicable margin based upon our leverage ratio: (a) LIBOR for an interest period of one, two, three or six months as selected by us, reset at the end of the selected interest period, or (b) a base rate determined by reference to the highest of (1) U.S. Bank’s prime rate, (2) the Federal Funds Effective Rate plus 0.5%, or (3) one-month LIBOR for U.S. dollars plus 1.0%. The LIBOR margin was 1.125%, 1.25% or 1.5%, depending on our leverage ratio. The base rate margin was either 0.125%, 0.25% or 0.5%, depending on our leverage ratio.
On November 30, 2018, we entered into an amended and restated credit agreement (the “Credit Agreement”) with U.S. Bank as Sole Lead Arranger and Sole Book Runner, and other lenders from time to time party thereto (collectively, the “Lenders”), whereby U.S. Bank is also serving as Administrative Agent. The Credit Agreement refinanced the term and revolving loans under the Prior Credit Agreement and provides us with senior secured revolving credit facilities (the “Revolving Loan Facility”) totaling $150.0 million. The Revolving Loan Facility includes a $5.0 million letter of credit subfacility and $15.0 million swingline subfacility. The Revolving Loan Facility has a five-year maturity date, maturing on November 30, 2023. The Revolving Loan Facility is secured by substantially all of our personal property assets and those of our subsidiaries.
We used $91.0 million of the proceeds from the Revolving Loan Facility to refinance the obligations under the Prior Credit Agreement. We may use the remaining amount of the Revolving Loan Facility for working capital, capital expenditures, share repurchases, restricted payments and acquisitions permitted under the Credit Agreement, and other general corporate purposes.
Borrowings under the Revolving Loan Facility bear interest at a rate per annum equal to one of the following, plus, in both cases, an applicable margin based upon our leverage ratio: (a) LIBOR for an interest period of one, two, three or six months as selected by us, reset at the end of the selected interest period, or (b) a base rate determined by reference to the highest of (1) U. S. Bank’s prime rate, (2) the Federal Funds Effective Rate plus 0.5%, or (3) one-month LIBOR for U.S. dollars plus 1.0%. The LIBOR margin is between 0.85% and 1.35%, depending on our leverage ratio. The base rate margin is between 0.00% and 0.35%, depending on our leverage ratio. In the event that the ICE Benchmark Administration (or any person that
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takes over administration of such rate) determines that LIBOR is no longer available, including as a result of the intended phase out of LIBOR by the end of 2021, our Revolving Loan Facility provides for an alternative rate of interest to be jointly determined by us and U.S. Bank, as administrative agent, that gives due consideration to the then prevailing market convention for determining a rate of interest for syndicated loans in the United States. Once such successor rate has been approved by us and U.S. Bank, the Revolving Credit Loan Facility would be amended to use such successor rate without any further action or consent of any other lender, so long as the administrative agent does not receive any objection from any other lender. At March 29, 2020, the effective interest rate on our borrowings was 2.3%.
In addition to paying interest on the outstanding principal under the Revolving Loan Facility, we are required to pay a commitment fee on the unutilized commitments thereunder. The commitment fee is between 0.15% and 0.25%, depending on our leverage ratio.
Debt issuance costs paid to the Lenders are being amortized as interest expense over the term of the Credit Agreement. As of March 29, 2020, the unamortized balance of these costs was $0.3 million, and is reflected as a reduction of debt on our balance sheet.
The Credit Agreement requires us to maintain (a) a minimum fixed charge coverage ratio of 1.15 to 1.00 and (b) a maximum total cash flow leverage ratio of 3.0 to 1.0. The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict our ability to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain payments, enter into sale and leaseback transactions, grant liens on our assets or rate management transactions, subject to certain limitations. We are permitted to make distributions, pay dividends and repurchase shares so long as no default or event of default exists or would exist as a result thereof. We were in compliance with all covenants of the Credit Agreement as of March 29, 2020 and expect to remain in compliance with all covenants for the next 12 months.
The Credit Agreement contains customary events of default, including failure to comply with covenants in the Credit Agreement and other loan documents, cross default to other material indebtedness, failure by us to pay or discharge material judgments, bankruptcy, and change of control. The occurrence of an event of default would permit the lenders to terminate their commitments and accelerate loans under the Credit Facility.
As part of our growth strategy, we have acquired businesses and may pursue acquisitions or other strategic relationships in the future that we believe will complement or expand our existing businesses or increase our customer base. We believe we could borrow additional funds under our current or new credit facilities or sell equity for strategic reasons or to further strengthen our financial position.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations and Commercial Commitments
The following table provides aggregate information about our contractual payment obligations and the periods in which payments are due:
| Payments Due by Fiscal Period | ||||||||||||||||||||||||||||||||||||||||||||
| Contractual Obligation | 2021 | 2022 | 2023 | 2024 | 2025 | More than 5 Years | Total | |||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Senior secured revolver (1) | $ | — | $ | — | $ | — | $ | 60,000 | $ | — | $ | — | $ | 60,000 | ||||||||||||||||||||||||||||||
| Interest payments (2) | $ | 1,557 | $ | 1,557 | $ | 1,557 | $ | 1,557 | $ | — | $ | — | $ | 6,228 | ||||||||||||||||||||||||||||||
| Operating lease obligations (3) | $ | 1,769 | $ | 1,556 | $ | 1,442 | $ | 1,110 | $ | 1,124 | $ | 4,114 | $ | 11,115 | ||||||||||||||||||||||||||||||
| Pension withdrawal liability (4) | $ | 467 | $ | 467 | $ | 467 | $ | 467 | $ | 467 | $ | 3,972 | $ | 6,307 | ||||||||||||||||||||||||||||||
(1) Represents balance outstanding as of March 29, 2020, and assumes such amount remains outstanding until its maturity date. See Note 8 of our consolidated Financial Statements for further information.
(2) Represents interest payments and commitment fees payable on outstanding balances under our revolver, and assumes interest rates remain unchanged from the rate as of March 29, 2020.
(3) As reported under ASC Topic 842
(4) This relates to our withdrawal from a multiemployer pension plan. Payments on this obligation will continue through 2034.
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Critical Accounting Policies
In preparing the financial statements, we follow U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an on-going basis. Our 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. We consider the following policies to involve the most judgment in the preparation of our financial statements.
Goodwill and Infinite-life Intangible Assets - Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable tangible net assets and identifiable intangible assets purchased. Goodwill is tested at least annually for impairment, and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. Our annual test for impairment is as of the first day of our fourth fiscal quarter, or December 30, 2019 for fiscal 2020. For our Industrial and Water Treatment reporting units, we performed an analysis of qualitative factors to determine whether it is more likely than not that the fair value of either of these reporting units is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. Based on management’s analysis of qualitative factors, we determined that it was not necessary to perform a quantitative goodwill impairment test for either of these reporting units.
For our Health and Nutrition reporting unit, we performed a quantitative goodwill impairment analysis which required us to estimate the fair value of the reporting unit and compare the fair value to its carrying value. We utilized a discounted cash flow approach to calculate the present value of projected future cash flows using appropriate discount rates. In determining the fair value of our Health and Nutrition reporting unit using the discounted cash flow approach, we considered our projected operating results and then made a number of assumptions. These assumptions included future business plans, economic projections and market data as well as management estimates regarding future cash flows and operating results. The key assumptions we used in preparing our discounted cash flow analysis are (1) projected cash flows, (2) risk adjusted discount rate, and (3) expected long term growth rate. We then compared the total fair values for all reporting units to our overall market capitalization as a test of the reasonableness of this approach. For this comparison, the fair value of the Water Treatment reporting unit was estimated based on a multiple of EBITDA. As of December 30, 2019, the estimated fair value of our Health and Nutrition reporting unit was more than its carrying values and accordingly no impairment charge was recorded.
Subsequent to our annual goodwill impairment testing date of December 30, 2019, the United States began to see economic impacts of the COVID-19 pandemic. As a result, management evaluated the potential long-term impact to our businesses. As a result of this qualitative analysis in the fourth quarter, we determined there were no material adverse changes to our initial projections as a result of the COVID-19 pandemic.
Business Acquisitions - We account for acquired businesses using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income.
There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed in a business combination. For intangible assets, we normally utilize one or more forms of the “income method.” This method starts with a forecast of all of the expected future net cash flows attributable to the subject intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method (or other methods) include the projected future cash flows (including timing) and the discount rate reflecting the risks inherent in the future cash flows.
Estimating the useful life of an intangible asset also requires judgment. For example, different types of intangible assets will have different useful lives, influenced by the nature of the asset, competitive environment, and rate of change in the industry. Certain assets may even be considered to have indefinite useful lives. All of these judgments and estimates can significantly impact the determination of the amortization period of the intangible asset, and thus net income.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This
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update is intended to provide financial statement users with more decision-useful information about the expected credit losses. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2019, which for us is our fiscal year beginning March 30, 2020. We have evaluated the requirements of this standard on our financial assets. Upon adoption, this ASU will impact our method for calculating and estimating our allowance for doubtful accounts, but it will not have a material impact to our financial position or results of operations.
We do not expect that any other recently issued accounting pronouncements will have a material effect on our financial statements.
See Item 8, “Note 1 - Nature of Business and Significant Accounting Policies” of the Notes to Consolidated Financial Statements for information regarding recently adopted accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are subject to the risk inherent in the cyclical nature of commodity chemical prices. However, we do not currently purchase forward contracts or otherwise engage in hedging activities with respect to the purchase of commodity chemicals. We attempt to pass changes in the cost of our materials on to our customers; however, there are no assurances that we will be able to pass on the increases in the future.
We are exposed to market risks related to interest rates. Our exposure to changes in interest rates is limited to borrowings under our credit facility. A 25-basis point change in interest rates on the variable-rate portion of debt not covered by the interest rate swap would potentially increase or decrease annual interest expense by approximately $0.1 million. Other types of market risk, such as foreign currency risk, do not arise in the normal course of our business activities.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Hawkins, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hawkins, Inc. and subsidiaries (the Company) as of March 29, 2020 and March 31, 2019, the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended March 29, 2020, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of March 29, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 29, 2020 and March 31, 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended March 29, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 29, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of April 1, 2019 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842), and related amendments.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2009.
Minneapolis, Minnesota
May 20, 2020
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HAWKINS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per-share data)
| March 29, 2020 | March 31, 2019 | |||||||||||||
| ASSETS | ||||||||||||||
| CURRENT ASSETS: | ||||||||||||||
| Cash and cash equivalents | $ | 4,277 | $ | 9,199 | ||||||||||
| Trade receivables less allowance for doubtful accounts of $784 for 2020 and $620 for 2019 | 67,391 | 63,966 | ||||||||||||
| Inventories | 54,436 | 60,482 | ||||||||||||
| Income taxes receivable | — | 527 | ||||||||||||
| Prepaid expenses and other current assets | 4,927 | 5,235 | ||||||||||||
| Total current assets | 131,031 | 139,409 | ||||||||||||
| PROPERTY, PLANT, AND EQUIPMENT: | ||||||||||||||
| Land | 11,045 | 9,140 | ||||||||||||
| Buildings and improvements | 108,175 | 96,389 | ||||||||||||
| Machinery and equipment | 98,171 | 93,153 | ||||||||||||
| Transportation equipment | 32,737 | 29,744 | ||||||||||||
| Office furniture and equipment | 17,093 | 16,435 | ||||||||||||
| 267,221 | 244,861 | |||||||||||||
| Less accumulated depreciation | 140,877 | 126,233 | ||||||||||||
| Net property, plant, and equipment | 126,344 | 118,628 | ||||||||||||
| OTHER ASSETS: | ||||||||||||||
| Right-of-use assets | 9,090 | — | ||||||||||||
| Goodwill | 58,440 | 58,440 | ||||||||||||
| Intangible assets, net | 60,653 | 65,726 | ||||||||||||
| Other | 3,770 | 3,396 | ||||||||||||
| Total other assets | 131,953 | 127,562 | ||||||||||||
| Total assets | $ | 389,328 | $ | 385,599 | ||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
| CURRENT LIABILITIES: | ||||||||||||||
| Accounts payable — trade | $ | 34,129 | $ | 29,314 | ||||||||||
| Accrued payroll and employee benefits | 13,538 | 12,483 | ||||||||||||
| Current portion of long-term debt | 9,907 | 9,907 | ||||||||||||
| Income tax payable | 59 | — | ||||||||||||
| Short-term lease liability | 1,523 | — | ||||||||||||
| Container deposits | 1,376 | 1,299 | ||||||||||||
| Other current liabilities | 1,688 | 2,393 | ||||||||||||
| Total current liabilities | 62,220 | 55,396 | ||||||||||||
| LONG-TERM DEBT, LESS CURRENT PORTION | 49,751 | 74,658 | ||||||||||||
| LONG-TERM LEASE LIABILITY | 7,649 | — | ||||||||||||
| PENSION WITHDRAWAL LIABILITY | 4,978 | 5,316 | ||||||||||||
| OTHER LONG-TERM LIABILITIES | 6,140 | 5,695 | ||||||||||||
| DEFERRED INCOME TAXES | 25,106 | 26,673 | ||||||||||||
| Total liabilities | 155,844 | 167,738 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES | — | — | ||||||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||||||||
| Common stock; authorized: 30,000,000 shares of $0.05 par value; 10,512,229 and 10,592,450 shares issued and outstanding for 2020 and 2019, respectively | 526 | 530 | ||||||||||||
| Additional paid-in capital | 50,090 | 52,609 | ||||||||||||
| Retained earnings | 182,947 | 164,405 | ||||||||||||
| Accumulated other comprehensive income | (79) | 317 | ||||||||||||
| Total shareholders’ equity | 233,484 | 217,861 | ||||||||||||
| Total liabilities and shareholders’ equity | $ | 389,328 | $ | 385,599 | ||||||||||
See accompanying notes to consolidated financial statements.
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HAWKINS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except share and per-share data)
| Fiscal Year Ended | ||||||||||||||||||||
| March 29, 2020 | March 31, 2019 | April 01, 2018 | ||||||||||||||||||
| Sales | $ | 540,198 | $ | 556,326 | $ | 504,169 | ||||||||||||||
| Cost of sales | (439,281) | (460,390) | (417,409) | |||||||||||||||||
| Gross profit | 100,917 | 95,936 | 86,760 | |||||||||||||||||
| Selling, general and administrative expenses | (59,246) | (59,118) | (59,403) | |||||||||||||||||
| Goodwill impairment | — | — | (39,116) | |||||||||||||||||
| Operating income (loss) | 41,671 | 36,818 | (11,759) | |||||||||||||||||
| Interest expense, net | (2,511) | (3,361) | (3,408) | |||||||||||||||||
| Other (expense) income | (204) | 73 | 91 | |||||||||||||||||
| Income (loss) before income taxes | 38,956 | 33,530 | (15,076) | |||||||||||||||||
| Income tax (expense) benefit | (10,589) | (9,097) | 5,899 | |||||||||||||||||
| Net income (loss) | $ | 28,367 | $ | 24,433 | $ | (9,177) | ||||||||||||||
| Weighted average number of shares outstanding-basic | 10,579,989 | 10,654,887 | 10,607,422 | |||||||||||||||||
| Weighted average number of shares outstanding-diluted | 10,654,400 | 10,726,176 | 10,643,719 | |||||||||||||||||
| Basic earnings (loss) per share | $ | 2.68 | $ | 2.29 | $ | (0.87) | ||||||||||||||
| Diluted earnings (loss) per share | $ | 2.66 | $ | 2.28 | $ | (0.86) | ||||||||||||||
| Cash dividends declared per common share | $ | 0.9225 | $ | 0.68 | $ | 0.88 | ||||||||||||||
See accompanying notes to consolidated financial statements.
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HAWKINS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
| Fiscal Year Ended | |||||||||||||||||
| March 29, 2020 | March 31, 2019 | April 1, 2018 | |||||||||||||||
| Net income (loss) | $ | 28,367 | $ | 24,433 | $ | (9,177) | |||||||||||
| Other comprehensive income, net of tax: | |||||||||||||||||
| Unrealized (loss) gain on interest rate swap | (396) | (280) | 296 | ||||||||||||||
| Unrealized gain on post-retirement liability | — | 1 | 2 | ||||||||||||||
| Total other comprehensive (loss) income | (396) | (279) | 298 | ||||||||||||||
| Total comprehensive income (loss) | $ | 27,971 | $ | 24,154 | $ | (8,879) | |||||||||||
See accompanying notes to consolidated financial statements.
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HAWKINS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share data)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| BALANCE — April 2, 2017 | 10,582,596 | $ | 529 | $ | 51,104 | $ | 165,897 | $ | 298 | $ | 217,828 | |||||||||||||||||||||||||||
| Cash dividends declared | (9,400) | (9,400) | ||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 1,371 | 1,371 | ||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | 8,092 | 1 | (1) | — | ||||||||||||||||||||||||||||||||||
| ESPP shares issued | 41,304 | 2 | 1,403 | 1,405 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | (78) | 298 | 220 | |||||||||||||||||||||||||||||||||||
| Net loss | (9,177) | (9,177) | ||||||||||||||||||||||||||||||||||||
| BALANCE — April 1, 2018 | 10,631,992 | $ | 532 | $ | 53,877 | $ | 147,242 | $ | 596 | $ | 202,247 | |||||||||||||||||||||||||||
| Cash dividends declared | (7,270) | (7,270) | ||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 2,010 | 2,010 | ||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | 33,051 | 2 | (2) | — | ||||||||||||||||||||||||||||||||||
| Shares surrendered for payroll taxes | (8,105) | (1) | (265) | (266) | ||||||||||||||||||||||||||||||||||
| ESPP shares issued | 43,678 | 2 | 1,336 | 1,338 | ||||||||||||||||||||||||||||||||||
| Shares repurchased | (108,166) | (5) | (4,347) | (4,352) | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | (279) | (279) | ||||||||||||||||||||||||||||||||||||
| Net income | 24,433 | 24,433 | ||||||||||||||||||||||||||||||||||||
| BALANCE — March 31, 2019 | 10,592,450 | $ | 530 | $ | 52,609 | $ | 164,405 | $ | 317 | $ | 217,861 | |||||||||||||||||||||||||||
| Cash dividends declared and paid | (9,825) | (9,825) | ||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 2,273 | 2,273 | ||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock | 35,972 | 1 | (1) | — | ||||||||||||||||||||||||||||||||||
| Shares surrendered for payroll taxes | (9,160) | (1) | (342) | (343) | ||||||||||||||||||||||||||||||||||
| ESPP shares issued | 38,550 | 2 | 1,398 | 1,400 | ||||||||||||||||||||||||||||||||||
| Shares repurchased | (145,583) | (6) | (5,847) | (5,853) | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | (396) | (396) | ||||||||||||||||||||||||||||||||||||
| Net income | 28,367 | 28,367 | ||||||||||||||||||||||||||||||||||||
| BALANCE — March 29, 2020 | 10,512,229 | $ | 526 | $ | 50,090 | $ | 182,947 | $ | (79) | $ | 233,484 | |||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
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HAWKINS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Fiscal Year Ended | ||||||||||||||||||||
| March 29, 2020 | March 31, 2019 | April 1, 2018 | ||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
| Net income (loss) | $ | 28,367 | $ | 24,433 | $ | (9,177) | ||||||||||||||
| Reconciliation to cash flows: | ||||||||||||||||||||
| Depreciation and amortization | 21,584 | 21,756 | 22,390 | |||||||||||||||||
| Operating leases | 2,033 | — | — | |||||||||||||||||
| Amortization of debt issuance costs | 93 | 122 | 136 | |||||||||||||||||
| Loss (gain) on deferred compensation assets | 233 | (73) | (92) | |||||||||||||||||
| Goodwill Impairment | — | — | 39,116 | |||||||||||||||||
| Deferred income taxes | (1,421) | (607) | (14,757) | |||||||||||||||||
| Stock compensation expense | 2,273 | 2,010 | 1,371 | |||||||||||||||||
| Loss (gain) from property disposals | 563 | 415 | (46) | |||||||||||||||||
| Changes in operating accounts (using) providing cash: | ||||||||||||||||||||
| Trade receivables | (3,387) | (487) | (6,164) | |||||||||||||||||
| Inventories | 6,045 | (746) | (8,487) | |||||||||||||||||
| Accounts payable | 4,228 | (4,137) | 4,157 | |||||||||||||||||
| Accrued liabilities | 663 | 4,752 | 1,674 | |||||||||||||||||
| Lease liabilities | (2,025) | — | — | |||||||||||||||||
| Income taxes | 586 | 2,116 | (1,711) | |||||||||||||||||
| Other | (933) | (1,564) | (1,061) | |||||||||||||||||
| Net cash provided by operating activities | 58,902 | 47,990 | 27,349 | |||||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
| Additions to property, plant, and equipment | (24,549) | (12,618) | (19,703) | |||||||||||||||||
| Proceeds from property disposals | 346 | 275 | 364 | |||||||||||||||||
| Net cash used in investing activities | (24,203) | (12,343) | (19,339) | |||||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
| Cash dividends paid | (9,825) | (11,975) | (9,161) | |||||||||||||||||
| New shares issued | 1,400 | 1,338 | 1,405 | |||||||||||||||||
| Shares surrendered for payroll taxes | (343) | (266) | — | |||||||||||||||||
| Shares repurchased | (5,853) | (4,352) | — | |||||||||||||||||
| Payments for debt issuance costs | — | (183) | — | |||||||||||||||||
| Payments on senior secured term loan | — | (85,000) | (8,125) | |||||||||||||||||
| Payments on senior secured revolving credit facility | (44,000) | (24,000) | (21,000) | |||||||||||||||||
| Proceeds from revolver borrowings | 19,000 | 93,000 | 27,000 | |||||||||||||||||
| Net cash used in financing activities | (39,621) | (31,438) | (9,881) | |||||||||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (4,922) | 4,209 | (1,871) | |||||||||||||||||
| CASH AND CASH EQUIVALENTS - beginning of year | 9,199 | 4,990 | 6,861 | |||||||||||||||||
| CASH AND CASH EQUIVALENTS - end of year | $ | 4,277 | $ | 9,199 | $ | 4,990 | ||||||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION- | ||||||||||||||||||||
| Cash paid during the year for income taxes | $ | 11,415 | $ | 7,589 | $ | 10,232 | ||||||||||||||
| Cash paid for interest | 2,413 | 3,160 | 3,025 | |||||||||||||||||
| Noncash investing activities - Capital expenditures in accounts payable | 1,041 | 495 | 468 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
27
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature of Business and Significant Accounting Policies
Nature of Business - We have three reportable segments: Industrial, Water Treatment and Health and Nutrition. The Industrial Group specializes in providing industrial chemicals, products and services to industries such as agriculture, chemical processing, electronics, energy, food, pharmaceutical and plating. This group also manufactures and sells certain food-grade products, including liquid phosphates, lactates and other blended products. The Water Treatment Group specializes in providing chemicals, equipment and solutions for potable water, municipal and industrial wastewater, industrial process water and non-residential swimming pool water. This group has the resources and flexibility to treat systems ranging in size from a single small well to a multi-million-gallon-per-day facility. Our Health and Nutrition Group specializes in providing ingredient distribution, processing and formulation solutions to manufacturers of nutraceutical, functional food and beverage, personal care, dietary supplement and other nutritional food, health and wellness products. This group offers a diverse product portfolio including minerals, botanicals and herbs, vitamins and amino acids, excipients, joint products, sweeteners and enzymes.
Fiscal Year - Our fiscal year is a 52 or 53-week year ending on the Sunday closest to March 31. Our fiscal years ended March 29, 2020 (“fiscal 2020”), March 31, 2019 (“fiscal 2019”) and April 1, 2018 (“fiscal 2018”) were 52 weeks. The fiscal year ending March 28, 2021 (“fiscal 2021”) will also be 52 weeks.
Principles of Consolidation - The consolidated financial statements include the accounts of Hawkins, Inc. and its wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated.
Estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, particularly receivables, inventories, property, plant and equipment, right-of-use assets, goodwill, intangibles, accrued expenses, short-term and long-term lease liability, income taxes and related accounts and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition - Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. Revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue upon transfer of control of the promised products to the customer, with revenue recognized at the point in time the customer obtains control of the products. Net sales include products and shipping charges, net of estimates for product returns and any related sales rebates. We estimate product returns based on historical return rates. Using probability assessments, we estimate sales rebates expected to be paid over the term of the contract. The majority of our contracts have a single performance obligation and are short term in nature. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. We offer certain customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenue is recognized in an amount estimated based on historical experience and contractual obligations.
Shipping and Handling - All shipping and handling amounts billed to customers are included in revenues. Costs incurred related to the shipping and the handling of products are included in cost of sales.
Fair Value Measurements - The financial assets and liabilities that are re-measured and reported at fair value for each reporting period are an interest rate swap and marketable securities. There are no fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at fair value in our consolidated financial statements on a recurring basis.
Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities.
Level 2: Valuation is based on quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable or can be corroborated by observable market data for the asset or liability.
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HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Level 3: Valuation is based upon unobservable inputs for the asset or liability that are supported by little or no market activity. These fair values are determined using pricing models for which the assumptions utilize management’s estimates or market participant assumptions.
In making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Cash Equivalents - Cash equivalents include all liquid debt instruments (primarily cash funds and money market accounts) purchased with an original maturity of three months or less. The cash balances, maintained at large commercial banking institutions with strong credit ratings, may, at times, exceed federally insured limits.
Trade Receivables and Concentrations of Credit Risk - Financial instruments, which potentially subject us to a concentration of credit risk, principally consist of trade receivables. We sell our principal products to a large number of customers in many different industries. There are no concentrations of credit risk with a single customer from a particular service or geographic area that would significantly impact us in the near term. To reduce credit risk, we routinely assess the financial strength of our customers. We record an allowance for doubtful accounts to reduce our receivables to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for doubtful accounts are based on historical collection experience, current trends, aging of accounts receivable and periodic evaluations of our customers’ financial condition.
Inventories - Inventories, consisting primarily of finished goods, are primarily valued at the lower of cost or net realizable value, with cost for approximately 72% of our inventory determined using the last-in, first-out (“LIFO”) method. Cost for the other 28% of our total inventory is determined using the first-in, first-out (“FIFO”) method.
Leases - The Company determines if an arrangement is a lease at inception. Right-of-use ("ROU") assets include operating leases. Lease liabilities for operating leases are classified in "short-term lease liabilities" and "long-term lease liabilities" in our condensed consolidated balance sheet.
ROU assets and related liabilities are recognized at commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date, in determining the present value of lease payments. We use the implicit rate when readily determinable. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Lease and non-lease components are generally accounted for separately for real estate leases. For non-real estate leases, we account for the lease and non-lease components as a single lease component.
Property, Plant and Equipment - Property is stated at cost and depreciated or amortized over the lives of the assets, using the straight-line method. Estimated lives are: 10 to 40 years for buildings and improvements; 3 to 20 years for machinery and equipment; and 3 to 10 years for transportation equipment and office furniture and equipment including computer systems. Leasehold improvements are depreciated over the lesser of their estimated useful lives or the remaining lease term. Depreciation expense is recorded in our Consolidated Statement of Income (Loss) within cost of goods sold and selling, general and administrative expense, depending on the use of the underlying asset.
Significant improvements that add to productive capacity or extend the lives of properties are capitalized. Costs for repairs and maintenance are charged to expense as incurred. When property is retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any related gains or losses are included in income.
We review the recoverability of long-lived assets to be held and used, such as property, plant and equipment, when events or changes in circumstances occur that indicate the carrying value of the asset group may not be recoverable, such as prolonged industry downturn or significant reductions in projected future cash flows. The assessment of possible impairment is based on our ability to recover the carrying value of the asset group from the expected future pre-tax cash flows (undiscounted) of the related operations. If these cash flows are less than the carrying value of such asset group, an impairment loss would be measured by the amount the carrying value exceeds the fair value of the long-lived asset group. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets. During fiscal 2020, we incurred a $0.6 million impairment charge as a result of the determination to not use a piece of equipment in our manufacturing operations as previously planned. Other that this asset, no additional long-lived assets were determined to be impaired during fiscal years 2020, 2019 or 2018.
29
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill and Identifiable Intangible Assets - Goodwill represents the excess of the cost of acquired businesses over the fair value of identifiable tangible net assets and identifiable intangible assets purchased. Goodwill is tested at least annually for impairment, and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. Our annual test for impairment is as of the first day of our fourth fiscal quarter. As of December 30, 2019, we performed an analysis of qualitative factors for our Industrial and Water Treatment reporting units to determine whether it is more likely than not that the fair value of either of these reporting units was less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. Based on management’s analysis of qualitative factors, we determined that it was not necessary to perform a quantitative goodwill impairment test for either of these reporting units.
We performed a quantitative goodwill impairment test for our Health and Nutrition reporting unit. This test, used to identify potential impairment, compares the fair value of each reporting unit with its carrying value, including indefinite-lived intangible assets. If the fair value exceeds the carrying value, the goodwill is not considered impaired. If the carrying amount exceeds the fair value, the reporting unit’s goodwill is considered impaired, and we must recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value. The fair value of our Health and Nutrition reporting unit exceeded its carrying value as of December 30, 2019, and accordingly we did not record a goodwill impairment charge.
Goodwill impairment assessments were also completed in the fourth quarters of fiscal 2019 and 2018. We recorded a $39.1 million impairment charge during the fourth quarter of fiscal 2018 in our Health and Nutrition reporting unit. The impairment charge was recorded as a result of changes in expectations for future growth as part of our fourth quarter long-term strategic planning process to align with historical experience in recent periods and expected changes in future product mix.
Our primary identifiable intangible assets include customer lists, trade secrets, non-competition agreements, trademarks and trade names acquired in previous business acquisitions. Identifiable intangible assets with finite lives are amortized whereas identifiable intangible assets with indefinite lives are not amortized. The values assigned to the intangible assets with finite lives are being amortized on average over approximately 14 years. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. The impairment test consists of a qualitative assessment to determine whether it is more likely than not that the asset is impaired. Based on management’s analysis of qualitative factors, we determined that it was not necessary to perform a quantitative impairment test for fiscal 2020. Impairment assessments were also completed in the fourth quarters of fiscal 2019 and 2018 which resulted in no impairment charges for either of these fiscal years.
Income Taxes - The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income tax expense in the period that includes the enactment date. The deferred tax assets and liabilities are analyzed regularly, and management assesses the likelihood that deferred tax assets will be recovered from future taxable income. We record any interest and penalties related to income taxes as income tax expense in the consolidated statements of income.
The effects of income tax positions are recognized only if those positions are more likely than not of being sustained. Changes in recognition or measurement are made as facts and circumstances change.
Stock-Based Compensation - We account for stock-based compensation on a fair value basis. The estimated grant date fair value of each stock-based award is recognized in expense over the requisite service period (generally the vesting period). Non-vested share awards are recorded as expense over the requisite service periods based on the market value on the date of grant.
Earnings Per Share - Basic earnings per share (“EPS”) are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted EPS are computed by dividing net income by the weighted-average number of common shares outstanding including the incremental shares assumed to be issued as performance units and restricted stock.
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HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Basic and diluted EPS were calculated using the following:
| March 29, 2020 | March 31, 2019 | April 1, 2018 | ||||||||||||||||||
| Weighted average common shares outstanding — basic | 10,579,989 | 10,654,887 | 10,607,422 | |||||||||||||||||
| Dilutive impact of stock performance units and restricted stock | 74,411 | 71,289 | 36,297 | |||||||||||||||||
| Weighted average common shares outstanding — diluted | 10,654,400 | 10,726,176 | 10,643,719 | |||||||||||||||||
There were no shares or stock options excluded from the calculation of weighted average common shares for diluted EPS for fiscal 2020, 2019 or 2018.
Derivative Instruments and Hedging Activities - We are subject to interest rate risk associated with our variable rate debt. We have in place an interest rate swap which was has been designated as a cash flow hedge, the purpose of which is to eliminate the cash flow impact of interest rate changes on a portion of our variable-rate debt. The hedge was measured at fair value on the contract date and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of a derivative that is highly effective, and that is designated and qualifies as a cash flow hedge, are recorded in other comprehensive income, until the consolidated statement of income is affected by the variability in cash flows of the designated hedged item. To the extent that the hedge is ineffective, changes in the fair value are recognized in the Statement of Income.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2019, which for us is our fiscal year 2021. We have evaluated the requirements of this standard on our financial assets. Upon adoption, this ASU will impact our method for calculating and estimating our allowance for doubtful accounts, but it will not have a material impact to our financial position or results of operations.
We do not expect that any other recently issued accounting pronouncements will have a material effect on our financial statements.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which provides new accounting guidance requiring lessees to recognize most leases as assets and liabilities on the balance sheet and disclose key information about leasing arrangements. We adopted this guidance and related amendments on April 1, 2019. The new standard establishes a Right of Use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement. We adopted this ASU using the modified retrospective method. See Note 14 to the condensed consolidated financial statements for further details.
In May 2014, the FASB issued ASU 2014-09, which provides accounting requirements for recognition of revenue from contracts with customers. We adopted the new standard effective April 2, 2018, and there was no impact to our financial position or results of operations. See Note 2 for disclosures required upon adoption of this new standard.
In January 2016, the FASB issued ASU 2016-01 which provides guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. We adopted the new standard effective April 2, 2018, and there was no impact to our financial position or results of operations.
In February 2018, the FASB issued ASU 2018-02 which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). Hawkins early adopted this standard during the fourth quarter of fiscal 2018 and reclassified approximately $0.1 million from other comprehensive income to retained earnings.
31
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In December 2017, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP related to the enactment of the Tax Act. This guidance was adopted in the third quarter of fiscal 2018. Additional information regarding our adoption of this guidance is contained in Note 12.
In March 2016, the FASB issued ASU 2016-09, which provides accounting guidance intended to improve the accounting for share-based payment transactions. This guidance outlines new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. We adopted this guidance in the first quarter of fiscal 2018. We will continue to estimate forfeitures as we determine compensation cost each period. The primary impact on our consolidated financial statements is the recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital, which may result in increased volatility in the reported amounts of income tax expense and net income.
In July 2015, the FASB issued ASU 2015-11, which requires companies to change the measurement principal for inventory measured using the first-in, first-out (“FIFO”) or average cost method from the lower of cost or market to the lower of cost and net realizable value. Treatment of inventory valued under the last-in, last-out (“LIFO”) method is unchanged by this guidance. We adopted this guidance in the first quarter of fiscal 2018 and there was no impact to our financial position or results of operations.
Note 2 — Revenue
On April 2, 2018, we adopted ASU 2014-09 using the modified retrospective method applied to those contracts which were not completed as of April 2, 2018. Results for reporting periods beginning after April 2, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under Accounting Standards Codification (“ASC”) Topic 605.
Our revenue arrangements generally consist of a single performance obligation to transfer promised goods or services. As a result, the application of ASU 2014-09 had no impact on our financial statement line items as compared with the guidance that was in effect before the change. Accordingly, the impact of adopting the standard resulted in no adjustment to accumulated retained earnings.
We disaggregate revenues from contracts with customers by both operating segments and types of product sold. Reporting by operating segment is pertinent to understanding our revenues, as it aligns to how we review the financial performance of our operations. Types of products sold within each operating segment help us to further evaluate the financial performance of our segments.
The following table disaggregates external customer net sales by major revenue stream:
| Fiscal Year Ended March 29, 2020: | |||||||||||||||||||||||
| (In thousands) | Industrial | Water Treatment | Health and Nutrition | Total | |||||||||||||||||||
Bulk / Distributed specialty products (1) | $ | 49,864 | $ | 18,481 | $ | 90,065 | $ | 158,410 | |||||||||||||||
Manufactured, blended or repackaged products (2) | 222,161 | 139,917 | 14,770 | 376,848 | |||||||||||||||||||
| Other | 3,199 | 1,497 | 244 | 4,940 | |||||||||||||||||||
| Total external customer sales | $ | 275,224 | $ | 159,895 | $ | 105,079 | $ | 540,198 | |||||||||||||||
| Fiscal Year Ended March 31, 2019: | |||||||||||||||||||||||
| (In thousands) | Industrial | Water Treatment | Health and Nutrition | Total | |||||||||||||||||||
Bulk / Distributed specialty products (1) | $ | 60,947 | $ | 21,813 | $ | 109,067 | $ | 191,827 | |||||||||||||||
Manufactured, blended or repackaged products (2) | 216,874 | 126,217 | 15,684 | 358,775 | |||||||||||||||||||
| Other | 4,039 | 1,460 | 225 | 5,724 | |||||||||||||||||||
| Total external customer sales | $ | 281,860 | $ | 149,490 | $ | 124,976 | $ | 556,326 | |||||||||||||||
(1)For our Industrial and Water Treatment segments, this line includes our bulk products that we do not modify in any way, but receive, store, and ship from our facilities, or direct ship to our customers in large quantities. For our Health and Nutrition segment,
32
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
this line includes our non-manufactured distributed specialty products, which may be sold out of one of our facilities or direct shipped to our customers.
(2)For our Industrial and Water Treatment segments, this line includes our non-bulk specialty products that we either manufacture, blend, repackage, resell in their original form, or direct ship to our customers in smaller quantities, and services we provide for our customers. For our Health and Nutrition segment, this line includes products manufactured, processed or repackaged in our facility and/or with our equipment.
Net sales include products and shipping charges, net of estimates for product returns and any related sales rebates. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. Our criteria for recording revenue is consistent between our operating segments and types of products sold. We recognize revenue upon transfer of control of the promised products to the customer, with revenue recognized at the point in time the customer obtains control of the products. In arrangements where product is shipped directly from the vendor to our customer, we act as the principal in the transaction as we direct the other party to provide the product to our customer on our behalf, take inventory risk, establish the selling price, and are exposed to credit risk for the collection of the invoiced amount. If there were circumstances where we were to manufacture products for customers that were unique to their specifications and we would be prohibited by contract to use the product for any alternate use, we would recognize revenue over time if all criteria were met. We have made a policy election to treat shipping costs for FOB shipping point sales as fulfillment costs. As such, we recognize revenue for all shipping charges, if applicable, at the same time we recognize revenue on the products delivered. We estimate product returns based on historical return rates. Using probability assessments, we estimate sales rebates expected to be paid over the term of the contract. The majority of our contracts have a single performance obligation and are short term in nature. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. We offer certain customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenue is recognized in an amount estimated based on historical experience and contractual obligations. We periodically review the assumptions underlying our estimates of discounts and volume rebates and adjusts revenues accordingly.
Note 3 — Derivative Instruments
We have in place an interest rate swap agreement to manage the risk associated with a portion of our variable-rate long-term debt. We do not utilize derivative instruments for speculative purposes. The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The swap agreement will terminate on December 23, 2020, and the notional amount of the swap agreement is $20 million. We have designated this swap as a cash flow hedge and have determined that it qualifies for hedge accounting treatment. For so long as the hedge is effective, changes in fair value of the cash flow hedge are recorded in other comprehensive income or loss (net of tax) until income or loss from the cash flows of the hedged item is realized.
For the years ended March 29, 2020 and March 31, 2019, we recorded $0.4 million and $0.3 million in other comprehensive income related to unrealized losses (net of tax) on the cash flow hedge described above. For the year ended April 1, 2018, we recorded $0.3 million in other comprehensive income related to unrealized gains (net of tax) on the cash flow hedge. Included in other current liabilities on our condensed consolidated balance sheet was $0.1 million as of March 29, 2020. Included in other long-term assets on our condensed consolidated balance sheet was $0.4 million as of March 31, 2019 and $0.8 million as of April 1, 2018.
By their nature, derivative instruments are subject to market risk. Derivative instruments are also subject to credit risk associated with counterparties to the derivative contracts. Credit risk associated with derivatives is measured based on the replacement cost should the counterparty with a contract in a gain position to us fail to perform under the terms of the contract. We do not anticipate nonperformance by the counterparty.
Note 4 – Fair Value Measurements
Our financial assets and liabilities are measured at fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The carrying value of cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these instruments. Because of the variable-rate nature of our debt under our credit facility, our debt also approximates fair value. We classify the inputs used to measure fair value into the following hierarchy:
33
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Level 1: | Quoted prices in active markets for identical assets or liabilities. | |||||||
| Level 2: | Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable or can be corroborated by observable market data for the asset or liability. | |||||||
| Level 3: | Unobservable inputs for the asset or liability that are supported by little or no market activity. These fair values are determined using pricing models for which the assumptions utilize management’s estimates or market participant assumptions. | |||||||
Assets and Liabilities Measured at Fair Value on a Recurring Basis. The fair value hierarchy requires the use of observable market data when available. In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Our financial assets that are measured at fair value on a recurring basis are an interest rate swap and assets held in a deferred compensation retirement plan. As of March 29, 2020, the assets held in a deferred compensation retirement plan is classified as other long-term assets on our balance sheet, with the portion of the plan assets expected to be paid within twelve months classified as current assets and the interest rate swap is classified as other current liabilities on our balance sheet. As of March 31, 2019, both of these assets were classified as other long-term assets on our balance sheet, with the portion of the deferred compensation retirement plan assets expected to be paid within twelve months reclassified to current assets. The fair value of the interest rate swap is determined by the respective counterparties based on interest rate changes. Interest rate swaps are valued based on observable interest rate yield curves for similar instruments. The deferred compensation plan assets relate to contributions made to a non-qualified compensation plan on behalf of certain employees who are classified as “highly compensated employees” as determined by IRS guidelines. The assets are part of a rabbi trust and the funds are held in mutual funds. The fair value of the deferred compensation is based on the quoted market prices for the mutual funds at the end of the period.
The following table summarizes the balances of assets or liabilities measured at fair value on a recurring basis as of March 29, 2020 and March 31, 2019.
| (In thousands) | March 29, 2020 | March 31, 2019 | ||||||||||||
| Assets | ||||||||||||||
| Deferred compensation plan assets | Level 1 | $ | 3,564 | $ | 2,637 | |||||||||
| Interest rate swap | Level 2 | — | 435 | |||||||||||
| Liabilities | ||||||||||||||
| Interest rate swap | Level 2 | 108 | — | |||||||||||
0
Note 5 – Assets Held for Sale
In the third quarter of fiscal 2019, management entered into a plan of action to dispose of an office building in St. Louis, Missouri currently utilized in the administration of our Industrial segment. The amount of office space in this facility is no longer needed due to current staffing levels, and management expects to relocate affected employees to leased space. The building is listed for sale at a price in excess of its current book value, and thus no impairment has been recognized. The $0.9 million net book value of this property is recorded as an asset held for sale within prepaid expenses and other current assets on our balance sheet.
34
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 6 — Inventories
Inventories at March 29, 2020 and March 31, 2019 consisted of the following:
| 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||
| Inventory (FIFO basis) | $ | 60,090 | $ | 65,526 | ||||||||||
| LIFO reserve | (5,654) | (5,044) | ||||||||||||
| Net inventory | $ | 54,436 | $ | 60,482 | ||||||||||
The FIFO value of inventories accounted for under the LIFO method was $43.3 million at March 29, 2020 and $45.2 million at March 31, 2019. The remainder of the inventory was valued and accounted for under the FIFO method.
Note 7 — Goodwill and Other Identifiable Intangible Assets
The carrying amount of goodwill for each of our three reportable segments were as follows:
| (In thousands) | Industrial | Water Treatment | Health and Nutrition | Total | ||||||||||
| Balance as of April 1, 2018, March 31, 2019 and March 29, 2020 | $ | 6,495 | $ | 7,000 | $ | 44,945 | $ | 58,440 | ||||||
The following is a summary of our identifiable intangible assets as of March 29, 2020 and March 31, 2019:
| 2020 | ||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net carrying value | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Finite-life intangible assets: | ||||||||||||||||||||
| Customer relationships | $ | 78,383 | $ | (21,400) | $ | 56,983 | ||||||||||||||
| Trademarks and trade names | 6,045 | (3,640) | 2,405 | |||||||||||||||||
| Other finite-life intangible assets | 3,648 | (3,610) | 38 | |||||||||||||||||
| Total finite-life intangible assets | 88,076 | (28,650) | 59,426 | |||||||||||||||||
| Indefinite-life intangible assets | 1,227 | — | 1,227 | |||||||||||||||||
| Total intangible assets, net | $ | 89,303 | $ | (28,650) | $ | 60,653 | ||||||||||||||
| 2019 | ||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net carrying value | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Finite-life intangible assets: | ||||||||||||||||||||
| Customer relationships | $ | 78,383 | $ | (16,910) | $ | 61,473 | ||||||||||||||
| Trademarks and trade names | 6,045 | (3,115) | 2,930 | |||||||||||||||||
| Other finite-life intangible assets | 3,648 | (3,552) | 96 | |||||||||||||||||
| Total finite-life intangible assets | 88,076 | (23,577) | 64,499 | |||||||||||||||||
| Indefinite-life intangible assets | 1,227 | — | 1,227 | |||||||||||||||||
| Total intangible assets, net | $ | 89,303 | $ | (23,577) | $ | 65,726 | ||||||||||||||
Intangible asset amortization expense was $5.1 million during fiscal 2020, $5.5 million during fiscal 2019, and $5.7 million during fiscal 2018.
The estimated future amortization expense for identifiable intangible assets during the next five years is as follows:
| (In thousands) | 2021 | 2022 | 2023 | 2024 | 2025 | |||||||||||||||||||||||||||
| Estimated amortization expense | $ | 5,028 | $ | 4,891 | $ | 4,891 | $ | 4,891 | $ | 4,891 | ||||||||||||||||||||||
35
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 8 – Debt
On November 30, 2018, we entered into an amended and restated credit agreement (the “Credit Agreement”) with U.S. Bank National Association (“U.S. Bank”) as Sole Lead Arranger and Sole Book Runner, and other lenders from time to time party thereto (collectively, the “Lenders”), whereby U.S. Bank is also serving as Administrative Agent. The Credit Agreement refinanced the term and revolving loans under our previous credit agreement with U.S. Bank and provides us with senior secured revolving credit facilities (the “Revolving Loan Facility”) totaling $150 million. The Revolving Loan Facility includes a $5.0 million letter of credit subfacility and $15.0 million swingline subfacility. The Revolving Loan Facility has a five-year maturity date, maturing on November 30, 2023. The Revolving Loan Facility is secured by substantially all of our personal property assets and those of our subsidiaries.
We used $91.0 million of the proceeds from the Revolving Loan Facility to refinance the obligations under the previous credit facility. We may use the remaining amount of the Revolving Loan Facility for working capital, capital expenditures, share repurchases, restricted payments and acquisitions permitted under the Credit Agreement, and other general corporate purposes.
At March 29, 2020, the effective interest rate on our borrowings was 2.3%. In addition to paying interest on the outstanding principal under the Revolving Loan Facility, we are required to pay a commitment fee on the unutilized commitments thereunder. The commitment fee is between 0.15% and 0.25%, depending on our leverage ratio.
Debt issuance costs of $0.2 million paid to the lenders in connection with the Credit Agreement, as well as unamortized debt issuance costs of $0.3 million paid in connection with the previous credit facility, are reflected as a reduction of debt and are being amortized as interest expense over the term of the Revolving Loan Facility.
Debt at March 29, 2020 and March 31, 2019 consisted of the following:
| (In thousands) | March 29, 2020 | March 31, 2019 | ||||||||||||
| Senior secured revolving loan | $ | 60,000 | $ | 85,000 | ||||||||||
Less: unamortized debt issuance costs | (342) | (435) | ||||||||||||
Total debt, net of debt issuance costs | 59,658 | 84,565 | ||||||||||||
Less: current portion of long-term debt, net of current unamortized debt issuance costs | (9,907) | (9,907) | ||||||||||||
| Total long-term debt | $ | 49,751 | $ | 74,658 | ||||||||||
Note 9 — Share-Based Compensation
Performance-Based Restricted Stock Units. Our Board of Directors has approved a performance-based equity compensation arrangement for our executive officers. This performance-based arrangement provides for the grant of performance-based restricted stock units that represent a possible future issuance of restricted shares of our common stock based on our pre-tax income target for the applicable fiscal year. The actual number of restricted shares to be issued to each executive officer will be determined when our final financial information becomes available after the applicable fiscal year and will be between zero shares and 69,632 shares in the aggregate for fiscal 2020. The restricted shares issued, if any, will fully vest years after the end of the fiscal year on which the performance is based. We record the compensation expense for the outstanding performance share units and then-converted restricted stock over the life of the awards.
The following table represents the restricted stock activity for fiscal 2019 and 2020:
| Shares | Weighted- Average Grant Date Fair Value | |||||||||||||
| Outstanding at beginning of fiscal 2019 | 51,143 | $ | 45.39 | |||||||||||
| Granted | 7,818 | 31.35 | ||||||||||||
| Vested | (24,567) | 43.10 | ||||||||||||
| Forfeited or expired | (1,511) | 47.50 | ||||||||||||
| Outstanding at end of fiscal 2019 | 32,883 | $ | 43.66 | |||||||||||
| Granted | 69,252 | 34.49 | ||||||||||||
| Vested | (27,620) | 46.01 | ||||||||||||
| Forfeited or expired | — | |||||||||||||
| Outstanding at end of fiscal 2020 | 74,515 | $ | 34.27 | |||||||||||
36
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted average grant date fair value of performance-based restricted shares issued in fiscal 2020 was $34.49, fiscal 2019 was $31.35 and fiscal 2018 was $47.50. We recorded compensation expense on performance-based restricted stock of approximately $1.5 million for fiscal 2020, $1.3 million for fiscal 2019 and $0.7 million for fiscal 2018, substantially all of which was recorded in selling, general and administrative (“SG&A”) expense in the Consolidated Statements of Income. The total fair value of performance-based restricted stock units vested was $1.3 million in fiscal 2020 and $1.1 million in fiscal 2019. There were no performance-based restricted stock units that vested in fiscal 2018.
Until the performance-based restricted stock units result in the issuance of restricted stock, the amount of expense recorded each period is dependent upon our estimate of the number of shares that will ultimately be issued and our then current common stock price. Upon issuance of restricted stock, we record compensation expense over the remaining vesting period using the award date closing price. Unrecognized compensation expense related to non-vested restricted stock and non-vested restricted share units as of March 29, 2020 was $2.3 million and is expected to be recognized over a weighted average period of 1.4 years.
Restricted Stock Awards. As part of their retainer, our non-employee directors receive restricted stock for their Board services. The restricted stock awards are expensed over a one-year vesting period, based on the market value on the date of grant. The following table represents the Board’s restricted stock activity for fiscal 2019 and 2020:
| Shares | Weighted- Average Grant Date Fair Value | |||||||||||||
| Outstanding at beginning of fiscal 2019 | 8,484 | $ | 41.25 | |||||||||||
| Granted | 8,352 | 35.90 | ||||||||||||
| Vested | (8,484) | 41.25 | ||||||||||||
| Forfeited or expired | — | — | ||||||||||||
| Outstanding at end of fiscal 2019 | 8,352 | $ | 35.90 | |||||||||||
| Granted | 8,008 | 43.67 | ||||||||||||
| Vested | (8,352) | 35.90 | ||||||||||||
| Forfeited or expired | — | — | ||||||||||||
| Outstanding at end of fiscal 2020 | 8,008 | $ | 43.67 | |||||||||||
Annual expense related to the value of restricted stock was $0.3 million in fiscal 2020, 2019 and 2018, and was recorded in SG&A expense in the Consolidated Statements of Income. Unrecognized compensation expense related to non-vested restricted stock awards as of March 29, 2020 was $0.1 million and is expected to be recognized over a weighted average period of 0.3 years.
Note 10 — Share Repurchases
Our board of directors has authorized the repurchase of up to 800,000 shares of our outstanding common stock. The shares may be repurchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. Upon repurchase of the shares, we reduce our common stock for the par value of the shares with the excess applied against additional paid-in capital. We repurchased 145,583 of common stock at an aggregate purchase price of $5.9 million during fiscal 2020. We repurchased 108,166 of common stock at an aggregate purchase price of $4.4 million during fiscal 2019. No shares were repurchased during fiscal 2018. As of March 29, 2020, the number of shares available to be purchased under the share repurchase program was 358,797.
Note 11 — Profit Sharing, Employee Stock Ownership, Employee Stock Purchase and Pension Plans
Company Sponsored Plans. The majority of our non-bargaining unit employees are eligible to participate in a company-sponsored profit sharing plan. Contributions are made at our discretion subject to a maximum amount allowed under the Internal Revenue Code (“IRC”). The profit sharing plan contribution level for each employee depends upon date of hire, and was 2.5% or 5.0% of each employee’s eligible compensation for fiscal 2020, 2019 and 2018. We also have in place a retirement plan covering our collective bargaining unit employees. The retirement plan provides for a contribution of 2.5% or 5.0% of each employee’s eligible annual wages depending on their hire date. In addition to the employer contributions described above, both the profit sharing plan and the retirement plant include a 401(k) plan that allows employees to contribute pre-tax earnings up to the maximum amount allowed under the IRC, with an employer match of up to 5% of the employee’s eligible compensation.
37
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We have two employee stock ownership plans (“ESOPs”), one covering the majority of our non-bargaining unit employees and the other covering our collective bargaining unit employees. Contributions to the plan covering our non-bargaining unit employees are made at our discretion. Contributions to both plans are subject to a maximum amount allowed under the IRC, and were 2.5% or 5.0% of each employee’s eligible wages, depending on each eligible employee’s hire date, for fiscal 2020, 2019 and 2018.
We have a nonqualified deferred compensation plan covering employees who are classified as “highly compensated employees” as determined by IRS guidelines for the plan year and who were hired on or before April 1, 2012. Employees who are eligible for the nonqualified deferred compensation plan for any plan year are not eligible for the profit sharing plan contribution or the ESOP contributions described above for that plan year. Our contribution to the nonqualified deferred compensation plan for fiscal 2020, 2019 and 2018 was 10% of each employee’s eligible compensation, subject to the maximum amount allowed under the IRC.
We have an employee stock purchase plan (“ESPP”) covering substantially all of our employees. The ESPP allows employees to purchase newly-issued shares of the Company’s common stock at a discount from market. The number of new shares issued under the ESPP was 38,550 in fiscal 2020, 43,678 in fiscal 2019 and 41,304 in fiscal 2018.
The following represents the contribution expense for these company-sponsored plans for fiscal 2020, 2019 and 2018:
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||||||||
| Non-bargaining unit employee plans: | |||||||||||||||||||||||
| Profit sharing | $ | 631 | $ | 899 | $ | 779 | |||||||||||||||||
| 401(k) matching contributions | 2,399 | 2,390 | 2,143 | ||||||||||||||||||||
| ESOP | 631 | 899 | 779 | ||||||||||||||||||||
| Nonqualified deferred compensation plan | 1,262 | 1,246 | 1,258 | ||||||||||||||||||||
| Bargaining unit employee plans | 481 | 474 | 496 | ||||||||||||||||||||
| ESPP - all employees | 431 | 376 | 364 | ||||||||||||||||||||
| Total contribution expense | $ | 5,835 | $ | 6,284 | $ | 5,819 | |||||||||||||||||
In 2013, we withdrew from a collectively bargained multiemployer pension plan and recorded a liability for our share of the unfunded vested benefits. Payments of $467,000 per year are being made through 2034.
Note 12 — Commitments and Contingencies
Litigation. As of March 29, 2020, there were no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries are a party or of which any of our property is the subject. Legal fees associated with such matters are expensed as incurred.
Environmental Remediation: During fiscal 2018, we recorded a liability of $0.6 million related to estimated remediation expenses associated with existing trichloroethylene contamination at our Minneapolis facility. The liability was decreased to $0.1 million as of March 29, 2020 and $0.4 million as of March 31, 2019, to reflect payments made and management’s revised expectations related to the cost of this environmental remediation. The liability is not discounted as management expects to incur these expenses within the next twelve months. Given the many uncertainties involved in assessing environmental claims, our reserves may prove to be insufficient. While it is possible that additional expenses related to remediation will be incurred in future periods if currently unknown issues arise, we are unable to estimate the extent of any further financial impact.
Asset Retirement Obligations. We have three leases of land which contain terms that state that at the end of the lease term, we have a specified amount of time to remove the property and buildings. Including available lease extensions, these leases expire in 2023, 2033 and 2044. At that time, anything that remains on the land becomes the property of the lessor, and the lessor has the option to either maintain the property or remove the property at our expense. We have not been able to reasonably estimate the fair value of the asset retirement obligations, primarily due to the combination of the following factors: Certain of the leases do not expire in the near future; we have a history of extending the leases with the lessors and currently intend to do so at expiration of the lease periods; the lessors do not have a history of terminating leases with their tenants; and because it is more likely than not that the buildings will have value at the end of the lease life and therefore, may not be removed by either the lessee or the lessor. Therefore, in accordance with accounting guidance related to asset retirement and environmental obligations, we have not recorded an asset retirement obligation as of March 29, 2020. We will continue to monitor the factors surrounding the requirement to record an asset retirement obligation and will recognize the fair value of a liability in the period in which it is incurred and a reasonable estimate can be made.
38
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 13 — Income Taxes
The U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) included a number of provisions, including lowering of the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. Under GAAP, deferred tax assets and liabilities are required to be revalued during the period in which the new tax legislation is enacted. As such, during fiscal 2018 we revalued our net deferred tax liabilities to reflect the impact of the Tax Act and recorded a one-time benefit of $13.9 million. The accounting for the impact of the Tax Act was finalized during fiscal 2019 and there were no material adjustments to the estimates used under provisional accounting. Our effective tax rate for fiscal 2018 was also impacted by the $39.1 million goodwill impairment charge which was recorded for book purposes but was not deductible for tax purposes.
In March 2020, the United States government approved the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), providing tax relief to certain individuals and corporations. Other than allowing bonus depreciation on certain qualified improvement property not previously permitted under the Tax Act, the CARES Act is not expected to have an impact on our federal income tax provision.
The provisions for income taxes for fiscal 2020, 2019 and 2018 were as follows:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Federal — current | $ | 8,447 | $ | 6,956 | $ | 7,024 | ||||||||||||||
| State — current | 3,563 | 2,748 | 1,834 | |||||||||||||||||
| Total current | 12,010 | 9,704 | 8,858 | |||||||||||||||||
| Federal — deferred | (976) | (334) | (14,393) | |||||||||||||||||
| State — deferred | (445) | (273) | (364) | |||||||||||||||||
| Total deferred | (1,421) | (607) | (14,757) | |||||||||||||||||
| Total provision | $ | 10,589 | $ | 9,097 | $ | (5,899) | ||||||||||||||
Reconciliations of the provisions for income taxes to the applicable federal statutory income tax rate for fiscal 2020, 2019 and 2018 are listed below.
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Statutory federal income tax | 21.0 | % | 21.0 | % | 31.5 | % | ||||||||||||||
| State income taxes, net of federal deduction | 5.7 | % | 5.8 | % | (8.3) | % | ||||||||||||||
| ESOP dividend deduction on allocated shares | (0.3) | % | (0.3) | % | 1.4 | % | ||||||||||||||
| Domestic production deduction | — | % | — | % | 2.7 | % | ||||||||||||||
| Goodwill impairment | — | % | — | % | (81.7) | % | ||||||||||||||
| Revaluation of net deferred tax liabilities | — | % | — | % | 92.5 | % | ||||||||||||||
| Other — net | 0.8 | % | 0.6 | % | 1.0 | % | ||||||||||||||
| Total | 27.2 | % | 27.1 | % | 39.1 | % | ||||||||||||||
39
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The tax effects of items comprising our net deferred tax liability as of March 29, 2020 and March 31, 2019 are as follows:
| (In thousands) | 2020 | 2019 | ||||||||||||
| Deferred tax assets: | ||||||||||||||
| Trade receivables | $ | 212 | $ | 167 | ||||||||||
| Stock compensation accruals | 728 | 654 | ||||||||||||
| Pension withdrawal liability | 1,435 | 1,525 | ||||||||||||
| Lease liability | 2,476 | — | ||||||||||||
| Unrealized loss on interest rate swap | 29 | — | ||||||||||||
| Other | 1,982 | 1,853 | ||||||||||||
| Total deferred tax assets | $ | 6,862 | $ | 4,199 | ||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Inventories | $ | (2,231) | $ | (3,272) | ||||||||||
| Prepaid expenses | (843) | (764) | ||||||||||||
| Excess of tax over book depreciation | (10,504) | (10,000) | ||||||||||||
| Intangible assets | (15,936) | (16,718) | ||||||||||||
| Unrealized gain on interest rate swap | — | (118) | ||||||||||||
| ROU asset | (2,454) | — | ||||||||||||
| Total deferred tax liabilities | $ | (31,968) | $ | (30,872) | ||||||||||
| Net deferred tax liabilities | $ | (25,106) | $ | (26,673) | ||||||||||
As of March 29, 2020, the Company has determined that it is more likely than not that the deferred tax assets at March 29, 2020 will be realized either through future taxable income or reversals of taxable temporary differences.
We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The tax years prior to our fiscal year ended April 2, 2017 are closed to examination by the Internal Revenue Service, and with few exceptions, state and local
income tax jurisdictions.
Note 14 – Leases
On April 1, 2019, we adopted ASU 2016-02 and related amendments using the modified retrospective method applied to existing leases in place as of April 1, 2019. Leases entered into after April 1, 2019 are presented under the provisions of ASU 2016-02, while prior periods are not adjusted and continue to be reported in accordance with previous accounting guidance. Leases commencing or renewing after the adoption date are evaluated based on the guidance in ASU 2016-02 and may result in more finance leases being recognized even for the renewal of previously classified operating leases. We do not currently have any leases that qualify as financing leases.
We elected to adopt the 'package of practical expedients’, which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the short-term lease recognition exemption for all leases that qualified. This means, for those leases that qualified, we did not recognize right-of-use assets or lease liabilities, and this included not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all leases other than leases of real estate, and this included not separating lease and non-lease components for all leases other than leases of real estate in transition.
We adopted ASU 2016-02 using the modified retrospective method, recognizing the cumulative effect of application as an adjustment to the oening balance sheet. The standard had a material impact on our condensed consolidated balance sheet, but did not have a material impact on our condensed consolidated statement of income or cash flows. The most significant impact was the recognition of the ROU asset and lease liabilities for operating leases, both of which were approximately $10.4 million upon adoption.
Lease Obligations. As of March 29, 2020, we were obligated under operating lease agreements for certain manufacturing facilities, warehouse space, the land on which some of our facilities sit, vehicles and information technology equipment. Our leases have remaining lease terms of 1 year to 24 years, some of which include options to extend the lease for up to 10 years.
40
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of March 29, 2020, our operating lease components with initial or remaining terms in excess of one year were classified on the condensed consolidated balance sheet within right of use assets, short-term lease liability and long-term lease liability.
Total lease expense was $2.8 million for the twelve months ended March 29, 2020, and includes leases less than 12 months in duration.
Other information related to our operating leases was as follows:
| March 29, 2020 | ||||||||
| Lease Term and Discount Rate | ||||||||
| Weighted average remaining lease term (years) | 8.73 | |||||||
| Weighted average discount rate | 4.1 | % | ||||||
Maturities of lease liabilities as of March 29, 2020 were as follows:
| (In thousands) | Operating Leases | |||||||
| Fiscal 2021 | $ | 1,769 | ||||||
| Fiscal 2022 | 1,556 | |||||||
| Fiscal 2023 | 1,442 | |||||||
| Fiscal 2024 | 1,110 | |||||||
| Fiscal 2025 | 1,124 | |||||||
| Thereafter | 4,114 | |||||||
| Total | $ | 11,115 | ||||||
| Less: Interest | (1,943) | |||||||
| Present value of lease liabilities | $ | 9,172 | ||||||
As we have not restated prior year information for our adoption of ASC Topic 842, the following represents our future minimum lease payments for operating leases under ASC Topic 840 on March 31, 2019:
| (In thousands) | Operating Leases | |||||||
| Fiscal 2020 | $ | 2,198 | ||||||
| Fiscal 2021 | 1,783 | |||||||
| Fiscal 2022 | 1,407 | |||||||
| Fiscal 2023 | 1,352 | |||||||
| Fiscal 2024 | 1,183 | |||||||
| Thereafter | 5,473 | |||||||
| Total | $ | 13,396 | ||||||
Note 15 — Segment Information
We have three reportable segments: Industrial, Water Treatment and Health and Nutrition. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Product costs and expenses for each segment are based on actual costs incurred along with cost allocations of shared and centralized functions.
We evaluate performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. Reportable segments are defined primarily by product and type of customer. Segments are responsible for the sales, marketing and development of their products and services. Other than our Health and Nutrition segment, the segments do not have separate accounting, administration, customer service or purchasing functions. There are no intersegment sales and no operating segments have been aggregated.
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Reportable Segments | Industrial | Water Treatment | Health and Nutrition | Total | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Fiscal Year Ended March 29, 2020: | ||||||||||||||||||||||||||
| Sales | $ | 275,224 | $ | 159,895 | $ | 105,079 | $ | 540,198 | ||||||||||||||||||
| Gross profit | 38,936 | 41,902 | 20,079 | 100,917 | ||||||||||||||||||||||
| Selling, general, and administrative expenses | 24,123 | 19,801 | 15,322 | 59,246 | ||||||||||||||||||||||
| Operating income | 14,813 | 22,101 | 4,757 | 41,671 | ||||||||||||||||||||||
| Identifiable assets* | $ | 173,068 | $ | 63,506 | $ | 139,780 | $ | 376,354 | ||||||||||||||||||
| Capital expenditures | $ | 14,933 | $ | 9,160 | $ | 456 | $ | 24,549 | ||||||||||||||||||
| Fiscal Year Ended March 31, 2019: | ||||||||||||||||||||||||||
| Sales | $ | 281,860 | $ | 149,490 | $ | 124,976 | $ | 556,326 | ||||||||||||||||||
| Gross profit | 34,900 | 37,986 | 23,050 | 95,936 | ||||||||||||||||||||||
| Selling, general, and administrative expenses | 22,759 | 19,498 | 16,861 | 59,118 | ||||||||||||||||||||||
| Operating income (loss) | 12,141 | 18,488 | 6,189 | 36,818 | ||||||||||||||||||||||
| Identifiable assets* | $ | 162,926 | $ | 58,274 | $ | 146,042 | $ | 367,242 | ||||||||||||||||||
| Capital expenditures | $ | 7,319 | $ | 4,506 | $ | 793 | $ | 12,618 | ||||||||||||||||||
| Fiscal Year Ended April 1, 2018: | ||||||||||||||||||||||||||
| Sales | $ | 247,374 | $ | 138,465 | $ | 118,330 | $ | 504,169 | ||||||||||||||||||
| Gross profit | 29,619 | 36,268 | 20,873 | 86,760 | ||||||||||||||||||||||
| Selling, general, and administrative expenses | 21,159 | 19,426 | 18,818 | 59,403 | ||||||||||||||||||||||
| Goodwill impairment | — | — | 39,116 | 39,116 | ||||||||||||||||||||||
| Operating income | 8,460 | 16,842 | (37,061) | (11,759) | ||||||||||||||||||||||
| Identifiable assets* | $ | 165,052 | $ | 58,513 | $ | 153,123 | $ | 376,688 | ||||||||||||||||||
| Capital expenditures | $ | 10,265 | $ | 7,228 | $ | 2,210 | $ | 19,703 | ||||||||||||||||||
* Unallocated assets, consisting primarily of cash and cash equivalents, investments and prepaid expenses, were $13.0 million at March 29, 2020, $18.4 million at March 31, 2019 and $14.3 million at April 1, 2018.
42
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 16 — Selected Quarterly Financial Data (Unaudited)
| (In thousands, except per share data) | Fiscal 2020 | |||||||||||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||||||||||||
| Sales | $ | 147,336 | $ | 140,043 | $ | 120,406 | $ | 132,413 | ||||||||||||||||||
| Gross profit | 28,797 | 27,994 | 21,478 | 22,648 | ||||||||||||||||||||||
| Selling, general, and administrative expenses | 14,836 | 14,817 | 14,702 | 14,891 | ||||||||||||||||||||||
| Operating income | 13,961 | 13,177 | 6,776 | 7,757 | ||||||||||||||||||||||
| Net income | 9,807 | 9,250 | 4,547 | 4,763 | ||||||||||||||||||||||
| Basic earnings per share | $ | 0.92 | $ | 0.87 | $ | 0.43 | $ | 0.45 | ||||||||||||||||||
| Diluted earnings per share | $ | 0.92 | $ | 0.87 | $ | 0.43 | $ | 0.45 | ||||||||||||||||||
| Fiscal 2019 | ||||||||||||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||||||||||||
| Sales | $ | 149,800 | $ | 145,324 | $ | 128,151 | $ | 133,051 | ||||||||||||||||||
| Gross profit | 28,457 | 25,772 | 21,033 | 20,674 | ||||||||||||||||||||||
| Selling, general, and administrative expenses | 14,979 | 14,941 | 14,312 | 14,886 | ||||||||||||||||||||||
| Operating income | 13,478 | 10,831 | 6,721 | 5,788 | ||||||||||||||||||||||
| Net income | 9,123 | 7,409 | 4,130 | 3,771 | ||||||||||||||||||||||
| Basic earnings per share | $ | 0.86 | $ | 0.69 | $ | 0.39 | $ | 0.35 | ||||||||||||||||||
| Diluted earnings per share | $ | 0.85 | $ | 0.69 | $ | 0.39 | $ | 0.35 | ||||||||||||||||||
| Fiscal 2018 | ||||||||||||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||||||||||||
| Sales | $ | 133,731 | $ | 125,395 | $ | 118,053 | $ | 126,990 | ||||||||||||||||||
| Gross profit | 25,999 | 24,115 | 18,840 | 17,806 | ||||||||||||||||||||||
| Selling, general, and administrative expenses | 15,766 | 14,828 | 14,139 | 14,670 | ||||||||||||||||||||||
| Goodwill impairment | — | — | — | 39,116 | ||||||||||||||||||||||
| Operating income (loss) | 10,233 | 9,287 | 4,701 | (35,980) | ||||||||||||||||||||||
| Net income (loss) | 5,831 | 5,210 | 17,143 | (37,361) | ||||||||||||||||||||||
| Basic earnings (loss) per share | $ | 0.55 | $ | 0.49 | $ | 1.62 | $ | (3.51) | ||||||||||||||||||
| Diluted earnings (loss) per share | $ | 0.55 | $ | 0.49 | $ | 1.61 | $ | (3.50) | ||||||||||||||||||
Earnings (loss) per share may not equal the face of the Consolidated Statements of Income (Loss) due to rounding.
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of March 29, 2020, based on the criteria described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that our internal control over financial reporting was effective as of March 29, 2020.
Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting for March 29, 2020 which is included in the Report of Independent Registered Public Accounting Firm in Item 8 of this Annual Report on 10-K.
Attestation Report of Registered Public Accounting Firm
The attestation report required under this Item 9A is contained in Item 8 of this Annual Report on 10-K under the caption “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control Procedures
There was no change in our internal control over financial reporting during the fourth quarter of fiscal 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
44
ITEM 9B. OTHER INFORMATION
None.
45
PART III
Certain information required by Part III is incorporated by reference from Hawkins’ definitive Proxy Statement for the Annual Meeting of Shareholders to be held on July 30, 2020 (the “2020 Proxy Statement”). Except for those portions specifically incorporated in this Form 10-K by reference to the 2020 Proxy Statement, no other portions of the 2020 Proxy Statement are deemed to be filed as part of this Form 10-K.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information about our Executive Officers
Our current executive officers, their ages and offices held, are set forth below:
| Name | Age | Office | ||||||||||||
| Patrick H. Hawkins | 49 | Chief Executive Officer and President | ||||||||||||
| Jeffrey P. Oldenkamp | 47 | Vice President, Chief Financial Officer, and Treasurer | ||||||||||||
| Richard G. Erstad | 56 | Vice President, General Counsel and Secretary | ||||||||||||
| Drew M. Grahek | 50 | Vice President — Operations | ||||||||||||
| Thomas J. Keller | 60 | Vice President — Water Treatment Group | ||||||||||||
| Theresa R. Moran | 57 | Vice President — Purchasing, Logistics and Sales Support | ||||||||||||
| Shirley A. Rozeboom | 58 | Vice President — Health and Nutrition | ||||||||||||
| John R. Sevenich | 62 | Vice President — Industrial Group | ||||||||||||
Patrick H. Hawkins has been our Chief Executive Officer and President and member of our board since 2011. Mr. Hawkins has held the position of President since 2010. He joined the Company in 1992 and served as the Business Director - Food and Pharmaceuticals, a position he held from 2009 to 2010. Previously he served as Business Manager - Food and Co-Extrusion Products from 2007 to 2009 and Sales Representative - Food Ingredients from 2002 to 2007. He previously served the Company in various other capacities, including Plant Manager, Quality Director and Technical Director.
Jeffrey P. Oldenkamp joined Hawkins in May 2017 and assumed the role of Chief Financial Officer, Vice President and Treasurer in June 2017. Prior to joining Hawkins, Mr. Oldenkamp was with MTS Systems Corporation, a supplier of high-performance test systems and sensors, where he served as Chief Financial Officer from January 2015 to May 2017 and as Vice President of Finance for the MTS Test business from January 2014 to January 2015, and with Nilfisk-Advance, Inc., a global manufacturer of professional cleaning equipment, where he served as Americas Operations Chief Financial Officer and Vice President from 2012 to 2014.
Richard G. Erstad has been our Vice President, General Counsel and Secretary since 2008. Mr. Erstad was General Counsel and Secretary of BUCA, Inc., a restaurant company, from 2005 to 2008. Mr. Erstad had previously been an attorney with the corporate group of Faegre & Benson LLP, a law firm, from 1996 to 2005, where his practice focused on securities law and mergers and acquisitions. He is a member of the Minnesota Bar.
Drew M. Grahek has been our Vice President - Operations since September 2018. Prior to joining Hawkins, Mr. Grahek was Adjunct Faculty at the University of Minnesota College of Continuing Education and a Business Administrator in the Archdiocese of St. Paul and Minneapolis from June 2017 to June 2018; Director of Service Operations and Supply Chain with Ulta Beauty, Inc. from April 2016 to June 2017; and Director of Stores with Field and Stream Outdoor Stores, a division of Dick’s Sporting Goods, Inc. from July 2015 to April 2016. Previously, he spent a total of 23 years at Target Corporation in a variety of operations, merchandising and property management positions.
Thomas J. Keller has been our Vice President - Water Treatment Group since 2012. Prior to attaining this position, Mr. Keller held various positions since joining the Company in 1980, most recently as its Water Treatment General Manager, a position he had held since 2011. Previously, Mr. Keller served as a Regional Manager of the Water Treatment Group from 2002 to 2011. Mr. Keller has announced his intent to retire from all positions in July of 2020.
Theresa R. Moran has been our Vice President - Purchasing, Logistics and Sales Support since June 2017. Since joining the Company in 1981, Ms. Moran has served the Company in a variety of positions, including Administration Operations Manager from 1999 to 2007, Director - Process Improvement from 2007 until 2010 and Vice President - Quality and Support from 2010 to June 2017.
46
Shirley A. Rozeboom was named Vice President - Health and Nutrition in April 2019. Ms. Rozeboom had held the position of Senior Vice President of Sales for Stauber since 2012. Previously, she held the positions of Director of Sales at Stauber from 2008 to 2012 and Account Executive from 2000 to 2008.
John R. Sevenich has been our Vice President - Industrial Group since 2000. Mr. Sevenich was the Business Unit Manager of Manufacturing from 1998 to 2000 and was a Sales Representative with the Company from 1989 to 1998.
The disclosure under the headings “Election of Directors,” “Corporate Governance,” and, if applicable, “Delinquent Section 16(a) Reports” of the 2019 Proxy Statement is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors and employees, including our principal executive officer, principal financial officer, controller and other persons performing similar functions. We have posted the Code of Business Conduct and Ethics on our website located at www.hawkinsinc.com. Hawkins’ Code of Business Conduct and Ethics is also available in print to any shareholder who requests it in writing from our Corporate Secretary. We intend to post on our website any amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, controller and other persons performing similar functions within four business days following the date of such amendment or waiver. We are not including the information contained on our website as part of, or incorporating it by reference into, this report.
ITEM 11. EXECUTIVE COMPENSATION
The disclosure under the heading “Compensation of Executive Officers and Directors” in the 2020 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The disclosure under the headings “Security Ownership of Management and Beneficial Ownership” and “Equity Compensation Plan Information” in the 2020 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The disclosure under the headings “Election of Directors” and “Related Party Transactions” of the 2020 Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The disclosure under the heading “Independent Registered Public Accounting Firm’s Fees” of the 2020 Proxy Statement is incorporated herein by reference.
47
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a)(1) | FINANCIAL STATEMENTS OF THE COMPANY | |||||||
| The following financial statements of Hawkins, Inc. are filed as part of this Annual Report on Form 10-K: | ||||||||
| Report of Independent Registered Public Accounting Firm. | ||||||||
Consolidated Balance Sheets at March 29, 2020 and March 31, 2019. | ||||||||
Consolidated Statements of Income for the fiscal years ended March 29, 2020, March 31, 2019 and April 1, 2018. | ||||||||
Consolidated Statements of Comprehensive Income for the fiscal years ended March 29, 2020, March 31, 2019 and April 1, 2018. | ||||||||
Consolidated Statements of Shareholders’ Equity for the fiscal years ended March 29, 2020, March 31, 2019, and April 1, 2018. | ||||||||
Consolidated Statements of Cash Flows for the fiscal years ended March 29, 2020, March 31, 2019, and April 1, 2018. | ||||||||
| Notes to Consolidated Financial Statements. | ||||||||
| (a)(2) | FINANCIAL STATEMENT SCHEDULES OF THE COMPANY | |||||||
| The additional financial data listed below is included as a schedule to this Annual Report on Form 10-K and should be read in conjunction with the financial statements presented in Part II, Item 8. Schedules not included with this additional financial data have been omitted because they are not required, or the required information is included in the financial statements or the notes. | ||||||||
The following financial statement schedule for the fiscal years 2020, 2019 and 2018. | ||||||||
| Schedule II — Valuation and Qualifying Accounts. | ||||||||
| (a)(3) | EXHIBITS | |||||||
Exhibit Index
Unless otherwise indicated, all documents incorporated into this Annual Report on Form 10-K by reference to a document filed with the SEC are located under file number 0-7647.
| Exhibit | Description | Method of Filing | ||||||||||||
| 3.1 | Incorporated by Reference | |||||||||||||
| 3.2 | Incorporated by Reference | |||||||||||||
| 4.1 | Filed Electronically | |||||||||||||
| 10.1* | Incorporated by Reference | |||||||||||||
| 10.2* | Incorporated by Reference | |||||||||||||
| 10.3* | Incorporated by Reference | |||||||||||||
| 10.4* | Incorporated by Reference | |||||||||||||
48
| 10.5 | Incorporated by Reference | |||||||||||||
| 10.6 | Incorporated by Reference | |||||||||||||
| 10.7 | Incorporated by Reference | |||||||||||||
| 10.8 | Incorporated by Reference | |||||||||||||
| 10.9 | Incorporated by Reference | |||||||||||||
| 10.10 | Filed Electronically | |||||||||||||
| 21 | Incorporated by Reference | |||||||||||||
| 23.1 | Filed Electronically | |||||||||||||
| 24.1 | Filed Electronically | |||||||||||||
| 31.1 | Filed Electronically | |||||||||||||
| 31.2 | Filed Electronically | |||||||||||||
| 32.1 | Filed Electronically | |||||||||||||
| 32.2 | Filed Electronically | |||||||||||||
| 101 | Financial statements from the Annual Report on Form 10-K of Hawkins, Inc. for the period ended March 29, 2020, filed with the SEC on May 20, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets at March 29, 2020 and March 31, 2019, (ii) the Consolidated Statements of Income for the fiscal years ended March 29, 2020, March 31, 2019, and April 1, 2018, (iii) the Consolidated Statements of Comprehensive Income for the fiscal years ended March 29, 2020, March 31, 2019, and April 1, 2018, (iv) the Consolidated Statements of Shareholders’ Equity for the fiscal years ended March 29, 2020, March 31, 2019, and April 1, 2018, (v) Consolidated Statements of Cash Flows for the fiscal years ended March 29, 2020, March 31, 2019, and April 1, 2018, and (iv) Notes to Consolidated Financial Statements. | Filed Electronically | ||||||||||||
| 104 | Cover Page Interactive Data File (embedded within the inline XBRL document) | Filed Electronically | ||||||||||||
| * | Management contract or compensation plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K. | ||||
(1)Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010.
(2)Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated October 28, 2009 and filed November 3, 2009.
(3)Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 filed June 6, 2011 (file no. 333-174735).
(4)Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010.
(5)Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010.
(6)Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 3, 2011.
(7)Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 23, 2015
(8)Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 23, 2015.
(9)Incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed November 2, 2018 (File no. 333-228128).
(10)Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form 8-K filed December 3, 2018 (File no. 000-07647).
(11)Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2019.
(12) Incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K filed May 31, 2018 (File no. 000-07647),
ITEM 16. FORM 10-K SUMMARY
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Patrick H. Hawkins | ||||||||||||||||
| Patrick H. Hawkins Chief Executive Officer and President | |||||||||||||||||
| Dated: | May 20, 2020 | ||||||||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ Patrick H. Hawkins | May 20, 2020 | |||||||||||||
| Patrick H. Hawkins | Chief Executive Officer, President and Director | |||||||||||||
| (principal executive officer) | ||||||||||||||
| /s/ Jeffrey P. Oldenkamp | May 20, 2020 | |||||||||||||
| Jeffrey P. Oldenkamp | Vice President, Chief Financial Officer and Treasurer | |||||||||||||
| (principal financial officer and principal accounting officer) | ||||||||||||||
| * | Chairman of the Board, Director | May 20, 2020 | ||||||||||||
| John S. McKeon | ||||||||||||||
| * | Director | May 20, 2020 | ||||||||||||
| Daniel J. Stauber | ||||||||||||||
| * | Director | May 20, 2020 | ||||||||||||
| Duane M. Jergenson | ||||||||||||||
| * | Director | May 20, 2020 | ||||||||||||
| James A. Faulconbridge | ||||||||||||||
| * | Director | May 20, 2020 | ||||||||||||
| James T. Thompson | ||||||||||||||
| * | Director | May 20, 2020 | ||||||||||||
| Jeffrey L. Wright | ||||||||||||||
| * | Director | May 20, 2020 | ||||||||||||
| Mary J. Schumacher | ||||||||||||||
* Patrick H. Hawkins, by signing his name hereto, does hereby sign this document on behalf of each of the above‑named directors of the registrant pursuant to Powers of Attorney duly executed by such persons.
| By: | /s/ Patrick H. Hawkins | |||||||
| Patrick H. Hawkins | ||||||||
| Attorney-in-fact | ||||||||
SCHEDULE II
HAWKINS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED March 29, 2020, March 31, 2019 AND April 1, 2018
| Additions | ||||||||||||||||||||||||||||||||
| Description | Balance at Beginning of Year | Charged to Costs and Expenses | Charged to Other Accounts | Deductions Write-Offs | Balance at End of Year | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Reserve deducted from asset to which it applies: | ||||||||||||||||||||||||||||||||
| Fiscal Year Ended March 29, 2020: | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 620 | $ | 448 | $ | — | $ | 284 | $ | 784 | ||||||||||||||||||||||
| Fiscal Year Ended March 31, 2019: | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 942 | $ | 92 | $ | — | $ | 414 | $ | 620 | ||||||||||||||||||||||
| Fiscal Year Ended April 1, 2018: | ||||||||||||||||||||||||||||||||
| Allowance for doubtful accounts | $ | 468 | $ | 509 | $ | — | $ | 35 | $ | 942 | ||||||||||||||||||||||