Hawkins, Inc. — Form 10-Q Summary
Business context and reporting period
Hawkins sells chemicals and specialty ingredients, including bulk distribution and manufactured, blended, or repackaged products. This report covers the three months ended June 28, 2020, the first quarter of fiscal 2021, compared with the three months ended June 30, 2019. Its reportable segments are Industrial, Water Treatment, and Health and Nutrition.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter |
|---|---|---|
| Sales | $143.2 million | $147.3 million |
| Gross profit / margin | $31.0 million / 21.6% | $28.8 million / 19.5% |
| Operating income / margin | $15.9 million / 11.1% | $14.0 million / 9.4% |
| Net income | $11.8 million | $9.8 million |
| Diluted EPS | $1.11 | $0.92 |
| Operating cash flow | $1.6 million | $10.1 million |
| Capital expenditures | $4.8 million | $9.2 million |
Sales fell 2.8%, while gross profit rose 7.6% and net income rose 20.2%. The effective tax rate was 26.5%, versus 26.3%. The company declared dividends of $0.2325 per share, compared with $0.2300.
Segment sales and operating income were: Industrial, $71.5 million and $6.4 million; Water Treatment, $39.7 million and $6.0 million; Health and Nutrition, $32.0 million and $3.5 million. Industrial and Water Treatment sales declined 5.1% and 8.2%, respectively, while Health and Nutrition sales increased 11.1%.
Liquidity, debt, and material changes
Cash was $4.5 million at quarter-end. Operating cash flow was lower year over year, principally reflecting increased inventory and lower accounts payable; management also noted that the prior-year quarter had unusually low inventory after flooding disrupted barge deliveries. Investing activities used $4.8 million, and financing activities provided $3.5 million, including $6.0 million of net revolver borrowings.
Total debt, net of issuance costs, was $65.7 million, up from $59.7 million at fiscal year-end; net debt was $61.5 million. The company reported a leverage ratio below 1.0x and significant borrowing availability under its $150 million revolving facility. It was in compliance with facility covenants. Management said cash, available credit, and operating cash flow should fund foreseeable operating requirements.
Gross margin improved despite lower sales. Industrial’s improvement reflected a favorable mix toward manufactured, blended, and repackaged products; Health and Nutrition benefited from higher sales. Water Treatment operating income declined. Interest expense fell to $0.4 million from $0.8 million, reflecting lower borrowing and rates. Other income of $0.5 million was offset by higher deferred-compensation expense.
Outlook, risks, and unusual items
Management described COVID-19 effects as mixed: demand benefited food, bottled bleach, and health and nutrition products, while ethanol, pools, resorts, and some other markets weakened. Facilities continued operating without significant production disruption. Management expected mixed effects to persist for the foreseeable future, planned to remain cautious on capital spending while continuing selected investments, and said the company was positioned to withstand a continued downturn. No numerical earnings or revenue guidance was provided.
On July 28, 2020, after quarter-end, Hawkins acquired substantially all assets of American Development Corporation of Tennessee for $25 million. The water-treatment chemical distributor operates primarily in Tennessee, Georgia, and Kentucky; purchase accounting was not complete. The company also disclosed commodity-price risk and limited ability to pass through raw-material cost increases, interest-rate exposure, and uncertainty around environmental remediation. The Minneapolis remediation liability was $0.1 million; further costs, if any, could not be estimated. No material pending litigation or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether COVID-19-driven demand and weakness across affected end markets persist, and how they affect segment sales and margins.
- How working-capital needs, particularly seasonal chemical inventory purchases, affect operating cash flow and revolver borrowings.
- The funding, purchase-price allocation, integration, and subsequent contribution of the $25 million ADC acquisition.
- Whether gross-margin improvement is sustained and whether raw-material cost changes can be passed on to customers.
- Future remediation costs and the implications of the interest-rate swap’s December 2020 expiration.