Hawkins, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019 (52 weeks); comparative fiscal year ended April 1, 2018. The filing also reports fourth-quarter FY2019 results. Hawkins distributes, blends and manufactures chemicals and specialty ingredients through Industrial, Water Treatment, and Health and Nutrition segments.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Sales | $556.3 million | $504.2 million |
| Gross profit / margin | $95.9 million / 17.2% | $86.8 million / 17.2% |
| Operating income (loss) | $36.8 million | ($11.8) million |
| Net income (loss) | $24.4 million | ($9.2) million |
| Diluted EPS | $2.28 | ($0.86) |
| Operating cash flow | $48.0 million | $27.3 million |
- Sales increased 10.3%; sales rose in all segments: Industrial $281.9 million (+13.9%), Water Treatment $149.5 million (+8.0%), and Health and Nutrition $125.0 million (+5.6%).
- Gross profit increased 10.6%, while the gross margin remained 17.2%. Management attributed the improvement to higher sales and a $4.6 million favorable year-over-year LIFO impact, partly offset by higher operating costs.
- SG&A was $59.1 million, down slightly from $59.4 million; it declined as a share of sales to 10.6% from 11.8%.
- Cash and equivalents were $9.2 million at year-end, versus $5.0 million. Capital expenditures were $12.6 million; financing activities used $31.4 million, including $16.0 million of net debt repayments, $12.0 million of dividends paid, and $4.4 million of share repurchases.
- Debt was $85.0 million gross ($84.6 million net of issuance costs), down from $101.0 million gross. The company had a $150 million secured revolving facility maturing November 30, 2023; the year-end effective borrowing rate was 3.2%. Total assets were $385.6 million and total liabilities $167.7 million.
- FY2019 fourth-quarter sales were $133.1 million, operating income $5.8 million, net income $3.8 million, and diluted EPS $0.35. Fourth-quarter gross profit was $20.7 million.
Changes and context
- The return to positive operating and net income largely reflects the absence of FY2018’s $39.1 million Health and Nutrition goodwill impairment. FY2018 also included a $13.9 million one-time tax benefit from U.S. tax reform; reported net income comparisons therefore are not solely indicative of underlying operating change.
- FY2019 operating cash flow improved by $20.6 million, supported by higher operating income and more favorable working-capital movements, especially receivables and inventory.
- On November 30, 2018, Hawkins refinanced its prior term and revolving facilities with the $150 million revolving facility. It repurchased 108,166 shares during FY2019; 504,380 authorized shares remained available at year-end.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects FY2020 capital spending of $25–$28 million, citing headquarters purchase, Water Treatment branch expansion and facility purchases, and added production capability.
- Key exposures include volatile chemical input prices and supply availability, competitive pricing and margin pressure, weather and seasonal demand, transportation constraints, and environmental, product-liability and regulatory risks. The company does not hedge commodity chemical purchases and may be delayed or unable to pass cost increases to customers.
- Soil and groundwater contamination involving trichloroethylene exists at a Minneapolis facility. The remediation liability was reduced in FY2019 after payments and revised estimates; management cautions that reserves could be insufficient and cannot estimate any further impact.
- Flooding of the Mississippi River has disrupted terminal operations in the past, including in spring 2019. Certain important facilities are on leased land; failure to renew leases could require relocation and affect operations.
- The credit agreement requires a minimum fixed-charge coverage ratio of 1.15:1 and maximum total cash-flow leverage ratio of 3.0:1. Variable-rate debt creates interest-rate exposure; a 25-basis-point change could affect annual interest expense by about $0.1 million on the unhedged portion. A swap covers $30 million through August 2019, then $20 million through December 2020.
- Annual goodwill testing found reporting-unit fair values above carrying values at December 31, 2018; no FY2019 impairment was recorded. The FY2018 Health and Nutrition impairment reflects changed growth expectations and product mix assumptions.
- Hawkins estimates adoption of the new lease standard in FY2020 will increase both assets and liabilities by approximately $10 million. Auditors gave unqualified opinions on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether FY2019 sales and profit growth, especially in Industrial and Health and Nutrition, is sustained and translates into cash generation.
- The assumptions behind the Health and Nutrition goodwill valuation and the performance of that segment following the prior-year impairment.
- Commodity price pass-through timing, LIFO inventory effects, and working-capital seasonality, which can materially affect margins and operating cash flow.
- Revolver availability and covenant headroom after planned FY2020 capital spending, dividends, and any acquisitions or repurchases.
- Progress, costs and reserve adequacy for Minneapolis contamination remediation, along with the status of critical facility leases and flood-related continuity measures.