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.
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.
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.
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Basic and diluted EPS were calculated using the following:
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|
|
|
|
|
|
|
|
|
|
|
|
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.
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:
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Fiscal Year Ended March 29, 2020:
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(In thousands)
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Industrial
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|
Water
Treatment
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|
Health and
Nutrition
|
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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
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|
|
1,497
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|
|
244
|
|
|
4,940
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|
Total external customer sales
|
$
|
275,224
|
|
|
$
|
159,895
|
|
|
$
|
105,079
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|
|
$
|
540,198
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|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2019:
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|
|
|
|
|
|
(In thousands)
|
Industrial
|
|
Water
Treatment
|
|
Health and
Nutrition
|
|
Total
|
Bulk / Distributed specialty products (1)
|
$
|
60,947
|
|
|
$
|
21,813
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|
|
$
|
109,067
|
|
|
$
|
191,827
|
|
Manufactured, blended or repackaged products (2)
|
216,874
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|
|
126,217
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|
|
15,684
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|
|
358,775
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|
Other
|
4,039
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|
|
1,460
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|
|
225
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|
|
5,724
|
|
Total external customer sales
|
$
|
281,860
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|
|
$
|
149,490
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|
|
$
|
124,976
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|
|
$
|
556,326
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|
|
|
|
|
|
|
|
|
(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,
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:
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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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.
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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.
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|
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|
|
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(In thousands)
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|
March 29, 2020
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|
March 31, 2019
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Assets
|
|
|
|
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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.
HAWKINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 6 — Inventories
Inventories at March 29, 2020 and March 31, 2019 consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
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 two 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
|
|
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.
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.
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
|
%
|
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.
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.
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.