Hawkins, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended April 2, 2017. Fiscal 2017 had 52 weeks; the comparable fiscal 2016 year had 53 weeks. Hawkins distributes, blends and manufactures chemicals and specialty ingredients through Industrial, Water Treatment, and Health and Nutrition segments. Fiscal 2017 included a full year of Stauber operations, acquired in December 2015.
Financial performance and liquidity
- Sales: $483.6 million, up 16.8% from $414.0 million.
- Gross profit: $98.1 million, up 22.2%; gross margin rose to 20.3% from 19.4%.
- Operating income: $38.7 million, up from $31.2 million; operating margin was 8.0% versus 7.5%.
- Net income and EPS: Net income was $22.6 million versus $18.1 million. Diluted EPS was $2.13 versus $1.72.
- Cash flow: Operating cash flow was $44.9 million, compared with $36.3 million. Capital expenditures were $21.6 million; cash used in investing activities was $23.5 million.
- Cash and liquidity: Cash was $6.9 million at year-end, down from $20.0 million. Current assets were $120.9 million and current liabilities $55.7 million.
- Debt: Total borrowings were $103.1 million ($93.1 million term loan and $10.0 million revolver), down from $129.8 million. The company reported $55.0 million of remaining revolver availability and compliance with all credit covenants. The effective borrowing rate was approximately 2.2%.
- Dividends: $0.84 per share declared in fiscal 2017, up from $0.80.
Segments and changes versus prior year
- Industrial: Sales declined 5.2% to $238.6 million; operating income rose to $17.1 million from $15.8 million. Management attributed lower sales to reduced volumes, partly reflecting the prior year’s extra week, and lower selling prices for certain products.
- Water Treatment: Sales rose 0.5% to $129.0 million; operating income was $16.2 million, roughly flat. Acquired business and higher specialty-product volumes supported sales despite the prior-year extra week.
- Health and Nutrition: Sales were $116.1 million, versus $33.9 million for only one quarter in fiscal 2016. Fiscal 2017 operating income was $5.5 million, compared with a $0.9 million loss that included $3.3 million of Stauber acquisition expenses. Pro forma prior-year full-year sales were $121.6 million, including an extra week.
- Overall growth reflects the full-year contribution from Stauber; it should not be read as equivalent organic growth. The 53rd week in fiscal 2016 also affects comparisons. Hawkins estimated that week added about $2.1 million to prior-year gross profit.
- The LIFO reserve reduction increased reported fiscal 2017 gross profit by $2.7 million, compared with a $1.4 million increase in fiscal 2016. This is a notable contribution to reported profitability.
Outlook, commentary and risks
- Management expected fiscal 2018 capital spending to be comparable to fiscal 2017. No specific revenue, earnings or margin guidance was provided.
- Hawkins plans continued investment in existing and new Water Treatment branches; it also indicated potential for future acquisitions, subject to available resources and financing.
- Key risks include volatile chemical input prices and potential delays in passing costs to customers; supply and transportation disruptions; competition and pricing pressure; seasonal and weather-sensitive demand; environmental, product-safety and regulatory exposure; and acquisition integration and goodwill impairment risk.
- Health and Nutrition goodwill was $84.1 million; its estimated fair value exceeded carrying value by $7.4 million, or 4.8%, at the annual test. A deterioration in assumptions could reduce that cushion.
- Debt is variable-rate, although a cash-flow hedge scheduled to begin in September 2017 covers a portion of borrowings. The credit agreement is secured and includes financial covenants and restrictions.
- There were no material pending legal proceedings reported. The company identified lease-renewal risk for several important operating sites and recorded no asset-retirement obligation because a reasonable estimate could not be made.
- The CFO was scheduled to retire in June 2017, with Jeffrey Oldenkamp expected to assume the CFO role.
Key facts for investors to verify
- How much of sales and earnings growth is attributable to Stauber versus underlying organic performance; compare against the disclosed pro forma prior-year results.
- The sustainability of gross-margin improvement, including the effect of LIFO reserve changes and commodity-price movements.
- Cash generation and working-capital needs, especially seasonal inventory buildup and receivables.
- Debt repayment capacity, revolver availability, variable-rate exposure, and continuing compliance with covenants.
- Health and Nutrition segment performance and the assumptions supporting its relatively limited goodwill valuation cushion.
- Execution of branch expansion and planned capital spending, alongside key-site lease renewals and the CFO transition.
Audit and controls: KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of April 2, 2017. Management also concluded disclosure controls and internal financial controls were effective.