Hawkins, Inc. — Form 10-Q Summary
Business context and reporting period. This report covers the first quarter of fiscal 2022, the three months ended June 27, 2021, compared with the three months ended June 28, 2020. Hawkins sells chemicals and specialty ingredients through its Industrial, Water Treatment, and Health and Nutrition segments. The interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Sales | $181.2 million | $143.2 million | Up 27% |
| Gross profit | $39.0 million | $31.0 million | Up 26% |
| Gross margin | 21.5% | 21.6% | Down 0.1 percentage point |
| Operating income | $22.1 million | $15.9 million | Up 39% |
| Operating margin | 12.2% | 11.1% | Up 1.1 percentage points |
| Net income | $16.6 million | $11.8 million | Up 41% |
| Diluted EPS | $0.79 | $0.55 | Up $0.24 |
| Operating cash flow | $14.8 million | $1.6 million | Up $13.3 million |
Segment sales were $85.9 million in Industrial (up 20%), $56.2 million in Water Treatment (up 42%), and $39.2 million in Health and Nutrition (up 23%). Management attributed growth to stronger demand across several product categories; Water Treatment also benefited from the ADC and C&L Aqua acquisitions. Health and Nutrition growth reflected increased demand for health and immunity products.
Cash from investing activities was $2.1 million used, including $2.2 million of capital expenditures. Cash from financing activities was $10.5 million used, including $3.0 million of net debt repayments, $2.6 million of dividends, and $3.4 million of share repurchases. Cash increased $2.2 million to $5.2 million from March 28, 2021.
At June 27, 2021, total debt, net of issuance costs, was $95.8 million, including $9.9 million classified as current. Revolver borrowings were $96.0 million under a $150.0 million secured revolving facility maturing November 30, 2023; the reported effective borrowing rate was 1.1%. The company reported compliance with its credit covenants. Current assets were $167.8 million and current liabilities were $66.5 million.
Material changes and notable items
- Sales growth exceeded gross-profit growth; gross margin was essentially flat year over year. The quarter’s LIFO reserve increase reduced gross profit by $1.8 million, versus $0.1 million in the prior-year quarter.
- SG&A rose to $16.9 million from $15.0 million, mainly due to acquired businesses, including $0.4 million of intangible amortization. SG&A fell as a share of sales to 9.3% from 10.5%.
- Operating cash flow improved substantially, primarily reflecting higher earnings and less cash used for inventory than in the prior-year quarter. Management cautioned that bulk chemical purchasing timing can cause significant working-capital and cash-flow swings.
- The company repurchased 100,954 shares for $3.4 million; 450,552 shares remained available under the authorization at quarter-end. The declared dividend was $0.1225 per share, compared with $0.11625 a year earlier.
Outlook, risks, and contingencies
- No full-year sales or earnings guidance was provided. Management expected the full-year effective tax rate to be approximately 26%–27%; the quarter’s rate was 24.4%, versus 26.5% a year earlier.
- Management stated that cash, operating cash generation, and credit-facility availability should be sufficient for foreseeable operating needs. Cash needs typically rise from April through November as caustic soda inventory is accumulated.
- COVID-19 effects remained mixed across end markets. Facilities continued operating without significant production impact; management expected mixed market effects to continue until conditions normalize.
- Commodity chemical prices are cyclical. Hawkins does not hedge commodity purchases and may not be able to pass future cost increases to customers. A 25-basis-point interest-rate change could affect annual interest expense by approximately $0.2 million. The filing also describes a process for replacing LIBOR in the credit agreement.
- The filing reports no material changes to previously disclosed risk factors and no material pending legal proceedings beyond routine litigation. No material changes to critical accounting estimates were reported.
Important facts for investors to verify
- How much of Water Treatment growth and profitability is attributable to ADC and C&L Aqua versus underlying demand, and how those acquisitions perform over time.
- Whether raw-material cost increases can be passed through to customers, particularly given the quarter’s $1.8 million LIFO-related gross-profit reduction.
- Whether working-capital seasonality and inventory purchasing cause operating cash flow to fluctuate materially in subsequent quarters.
- Debt repayment, facility availability, covenant compliance, and the effect of any successor benchmark rate to LIBOR.
- Whether the expected 26%–27% full-year tax rate and management’s liquidity assessment remain appropriate as the year progresses.