| HAWKINS INC 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 Our inability to pass through increases in costs and expenses for raw materials and energy, on a timely basis or at all, could have a material adverse effect on the margins of our products |
| We are experiencing significant increases in the cost of raw materials |
| We generally attempt to pass changes in the prices of raw materials and energy 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 |
| In addition to raising prices, raw material suppliers may extend lead times or limit supplies |
| Constraints on the supply or delivery of critical raw materials could disrupt our operations and adversely affect the performance of our business |
| Additionally, our profit margins may be reduced due to the cyclical nature of commodity chemical prices |
| The cyclicality of commodity chemical markets, such as caustic soda, primarily results from changes in the balance between supply and demand and the level of general economic activity |
| The Company cannot predict with any certainty whether the markets for its commodity chemicals will favorably impact the Company’s operations or whether the Company will experience losses due to excess production resulting in oversupply and lower prices |
| We face competition from other chemical companies, which places downward pressure on the prices and margins of our products |
| We operate in a highly competitive marketplace, competing primarily against a number of chemical companies |
| Competition is based on several key criteria, including product performance and quality, product price, product availability and security of supply, responsiveness of product development in cooperation with customers and customer service |
| Some of our competitors are larger than we are and may have greater financial resources |
| These competitors may also be able to maintain significantly greater operating and financial flexibility than we do |
| As a result, these competitors may be better able to withstand changes in conditions within our industry, changes in the prices of raw materials and energy, and changes in general economic conditions |
| 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 is, and will continue to be, dependent upon our ability to offset decreases in the prices and margins of our products by improving production efficiency and volume, shifting to higher margin chemical products and improving existing products through innovation and research and development |
| If we are unable to do so or to otherwise maintain our competitive position, we could lose market share to our competitors |
| Our business, and in particular our water treatment segment, is subject to seasonality and weather conditions, which could adversely affect our results of operations |
| The Water Treatment segment of our business is seasonal, as higher sales are incurred from April through September due to increased water usage |
| Demand is affected by weather conditions as either higher or lower than normal precipitation may affect usage |
| We cannot assure you that seasonality or weather conditions will not have a material adverse affect on our results of operations and financial condition |
| 4 ______________________________________________________________________ Costs and difficulties in connection with our new enterprise resource planning system could have a material adverse effect on our results of operations |
| We are in the process of implementing a new enterprise resource planning (ERP) system throughout our company and have experienced some delays, extra costs and inefficiency |
| Because ERP systems are highly complex, implementation and the transition to the new system has been costly and may initially result in additional unexpected cost or difficulties, including failure or inefficient operation of the new system |
| A failure in the new system could impair our ability to access certain business and financial information |
| In addition, we may experience difficulties in the transition to our new ERP system that could affect our internal control systems, processes and procedures |
| Should we experience such difficulties as a result of our new ERP system, our business, financial condition and results of operations could be materially adversely affected |
| 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, storage, handling and transportation, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases and other risks |
| These hazards can 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 at our facilities due to any of these hazards may diminish our ability to meet our output goals |
| 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 |
| Our business is subject to risks stemming from natural disasters, 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 business |
| Since 1963, flooding of the Mississippi River has required the Company’s terminal operations to be temporarily shifted out of its buildings four times, the most recent being in the spring of 2001 |
| This had a negative impact on earnings in the third quarter of fiscal 2001 of approximately dlra200cmam000 |
| No assurance can be given that flooding will not recur or that there will not be material damage or interruption to the Company’s operations in the future from flooding |
| In September 2001, a 1dtta5 million-gallon caustic soda storage tank was completed at the Red Rock facility, allowing it to serve as an additional terminal for bulk chemicals |
| Historically, the property on which the Red Rock facility is located has not been subject to flooding when Terminals 1 and 2, located on opposite sides of the Mississippi River in St |
| Paul, Minnesota, were not usable due to high water, and the facility was not affected by the most recent flooding in 2001 |
| The Company believes the impact of future flooding, if any, will be reduced as the Red Rock Facility is expected to allow the Company to continue normal shipping to customers during periods of high water levels |
| Downturns in our customers’ cyclical industries could adversely affect our sales and profitability |
| Downturns in the businesses that use our chemicals will adversely affect our sales |
| Many of our customers are in industries that are cyclical in nature and sensitive to changes in general economic conditions |
| Historically, downturns in general economic conditions have resulted in diminished product demand and lower average selling prices, and we may experience similar problems in the future |
| A decline in economic conditions in our customers’ cyclical industries may have a material adverse effect on our sales and profitability |
| Changes in our customers’ products can reduce the demand for our chemicals |
| Our chemicals are used for a broad range of applications by customers |
| Changes in our customers’ products or processes may enable our customers or reduce the consumption of the chemicals that we provide or make our chemicals unnecessary |
| 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 |
| We incur substantial costs in order to comply with the extensive environmental, health and safety laws and regulations |
| In the jurisdictions in which we operate, we are subject to numerous federal, state and local environmental, health and safety laws and regulations, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes |
| Ongoing compliance with such laws and regulations is an important consideration for us and we incur substantial capital and operating costs in our compliance efforts |
| Governmental laws have become increasingly strict in recent years |
| We expect this trend to continue and anticipate that compliance will continue to require increased capital expenditures and operating costs |
| Violations of environmental, health and safety laws and regulations may subject us to fines, penalties and other liabilities and may require us to change certain business practices |
| If we violate environmental, health and safety laws or regulations, in addition to being required to correct such violations, we can be held liable in administrative, civil or criminal proceedings for substantial fines and other sanctions could be imposed that could disrupt or limit our operations |
| Liabilities associated with the investigation and cleanup of hazardous substances, as well as personal injury, property damages or natural resource damages arising out of such 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 may also be imposed on many different entities with a relationship to the hazardous substances at issue, including, for example, entities that formerly owned or operated the property affected and entities that arranged for the disposal of hazardous substances at the affected property, as well as entities that currently own 5 ______________________________________________________________________ or operate such property |
| 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 we have in the past, and may in the future, be subject to claims relating to exposure to hazardous materials and the associated liabilities may be material |
| We also have generated, and continue to generate, hazardous wastes at a number of our facilities |
| The nature of our business exposes us to risks of liability under these laws and regulations due to the production, storage, use, transportation and sale of materials that can cause contamination or personal injury if released into the environment |
| We could be subject to damages based on claims brought against us by our customers or lose customers as a result of the failure of our products to meet certain quality specifications |
| If a product fails to perform in a manner consistent with quality specifications or has a shorter useful life than guaranteed, a customer could seek replacement of the product or damages for costs incurred as a result of the product failing to perform as expected |
| A successful claim or series of claims against us could have a material adverse effect on our financial condition and results of operations could result in a loss of one or more customers |
| The insurance that we maintain may not fully cover all potential exposures |
| We maintain property, business interruption and casualty insurance but such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered |
| We may incur losses beyond the limits, or outside coverage, of our insurance policies, including liabilities for environmental remediation |
| In addition, from time to time, various types of insurance for companies in the specialty chemical industry 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 |
| If we are unable to retain key personnel or attract new skilled personnel, it could have an adverse effect on our business |
| The unanticipated departure of any key member of our management team could have an adverse effect on our business |
| In addition, because of the specialized and technical nature of our business, our future performance is dependent on the continued service of, and on our ability to attract and retain, qualified management, scientific, technical, marketing and support personnel |
| We may not be able to consummate future acquisitions or integrate future acquisitions into our business, which could result in unanticipated expenses and losses |
| As part of our business growth strategy, we have acquired businesses in the past 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 |
| The expense incurred in consummating acquisitions, 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 any of the anticipated benefits from acquisitions |
| To the extent this strategy is pursued, 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 |
| Some of the risks associated with the integration of acquisitions include, among many others, potential disruption of our ongoing business and distraction of management; unforeseen claims and liabilities; unforeseen adjustments; charges and write-offs; difficulty in conforming the acquired business’ standards, processes, procedures and controls with our operations; challenges arising from the increased scope, geographic diversity and complexity of our operations |
| The occurrence or threat of extraordinary events, including domestic and international terrorist attacks, may disrupt our operations and decrease demand for our products |
| Chemical-related assets may be at greater risk of future terrorist attacks than other possible targets in the United States |
| Federal legislation is under consideration that could impose new site security requirements, specifically on chemical facilities, which may increase our overhead expenses |
| New federal regulations have already been adopted to increase the security of the transportation of hazardous chemicals in the United States |
| We believe we have met these requirements but additional federal and local regulations that limit the distribution of hazardous materials are being considered |
| We ship and receive materials that are classified as hazardous |
| Bans on movement of hazardous materials through certain cities could affect the efficiency of our logistical operations |
| Broader restrictions on hazardous material movements could lead to additional investment to produce hazardous raw materials and change where and what products we provide |
| The occurrence of extraordinary events, including future terrorist attacks and the outbreak of escalation of hostilities, cannot be predicted, and their occurrence can be expected to continue to affect negatively 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 |