Hawkins, Inc. — Form 10-Q Summary
Reporting period: Quarter ended July 3, 2011, compared with the quarter ended June 30, 2010. The company changed to a 4-4-5-week quarterly reporting convention in fiscal 2012, so the periods may not be directly comparable in length. Amounts below are in millions unless stated otherwise.
Business context and results
Hawkins sells bulk and specialty chemicals, including products it blends and manufactures. It reports Industrial and Water Treatment segments. The quarter included Vertex, acquired in January 2011; its results are included from the acquisition date.
| Metric | Q1 FY2012 | Prior comparable quarter | Change |
|---|---|---|---|
| Sales | $88.6 | $74.7 | Up 18.7% |
| Gross profit / margin | $17.9 / 20.2% | $18.4 / 24.7% | Profit down $0.5; margin down 4.5 percentage points |
| Operating income | $10.1 | $11.8 | Down $1.7 |
| Income from continuing operations | $6.4 | $7.3 | Down $1.0 |
| Net income | $6.7 | $7.3 | Down $0.6 |
| Basic / diluted EPS | $0.65 / $0.65 | $0.72 / $0.71 | Lower year over year |
| Operating cash flow | $7.2 | $4.6 | Up $2.6 |
| Capital expenditures | $3.6 | $3.3 | Up $0.3 |
Margins, segments, liquidity, and balance sheet
- Industrial sales rose 27.6% to $63.6 million, with approximately $11.0 million of the increase attributed to Vertex. Segment gross profit was $10.7 million (16.9% margin), versus $10.3 million (20.8%).
- Water Treatment sales rose 0.7% to $25.0 million. Segment gross profit fell to $7.2 million (28.8% margin) from $8.1 million (32.6%), mainly amid competitive pricing.
- Companywide SG&A increased to $7.9 million from $6.7 million, primarily due to Vertex. Its share of sales remained 8.9%.
- Cash and cash equivalents were $23.3 million at July 3, 2011; current available-for-sale investments were $10.3 million and long-term investments $2.7 million. Cash plus current and long-term investments totaled approximately $36.3 million, down from $37.4 million at April 3, 2011.
- Current assets were $105.5 million and current liabilities $33.9 million. Total liabilities were $42.7 million; the balance sheet does not list borrowings or other debt.
- Operating cash flow benefited from lower cash use for working capital versus the prior period. Investing cash flow included $3.6 million of capital spending and the $1.7 million final Vertex payment; financing cash flow included $3.1 million of dividends paid.
Material changes, outlook, and risks
- Sales growth reflected Vertex, higher bulk chemical selling prices and increased specialty/manufactured product sales. Lower bulk volumes partly offset growth. Cold, wet weather and flooding reduced demand for water-treatment and agricultural chemicals.
- Management said it seeks relatively stable gross profit dollars as commodity input costs change, but reported margins can move with selling prices and product costs. The company recorded a $0.3 million LIFO reserve increase in the quarter and expects material costs to rise somewhat during fiscal 2012.
- Management attributed lower operating income to lower gross profit and higher SG&A. The effective tax rate was 37.3%, versus 38.3%, with the reduction attributed primarily to projected permanent tax benefits.
- No specific earnings or revenue guidance was provided. Management expects operating cash flow to fund planned fiscal 2012 capital expenditures.
- Hawkins does not hedge commodity chemical purchases and may not be able to pass future cost increases on to customers. Investments in fixed-income certificates of deposit are exposed to interest-rate risk; the company says it intends to hold them until recovery.
- In pending supplier litigation, ICL seeks $7.3 million plus interest and costs; Hawkins counterclaims for $1.5 million plus other relief. Summary judgment motions were pending and trial was scheduled for mid-November 2011. The company said the outcome could not be predicted and the case could be costly or disruptive.
- In July 2011, Hawkins received a $1.4 million second-year payment under a discontinued pharmaceutical-business marketing agreement and recorded an approximately $0.6 million pretax gain. The income statement reports $0.374 million of discontinued-operations income net of tax; these figures reflect different stated measures.
- After quarter-end, the company adopted an executive severance plan with benefits for qualifying terminations, including enhanced benefits in connection with a change in control. It also reduced the chairman’s separate consulting compensation from $6,250 to $5,000 per month.
Important facts for investors to verify
- Confirm the quarter-length comparability under the new 4-4-5 reporting convention and the extent to which Vertex contributed to reported sales and earnings.
- Track whether higher commodity costs can be passed through, and how pricing competition, weather, and demand affect segment gross profit and margins.
- Review operating cash flow, seasonal working-capital needs, planned capital spending, and cash and investment balances.
- Monitor the ICL litigation, including rulings on the pending motions and potential financial or operational effects.
- Reconcile the discontinued-operations gain and cash receipt with the reported net-of-tax amount, and assess the effects of the new severance plan.