Hawkins, Inc. — Q3 FY2013 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended December 30, 2012; comparisons are with periods ended January 1, 2012. Hawkins sells bulk and specialty chemicals through its Industrial and Water Treatment segments. Amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Sales | $85.5 | $84.2 | $262.8 | $260.6 |
| Gross profit | $8.1 | $15.7 | $42.6 | $52.4 |
| Gross margin | 9.5% | 18.6% | 16.2% | 20.1% |
| Operating income | $0.5 | $8.5 | $19.3 | $29.5 |
| Net income | $1.3 | $5.6 | $13.0 | $19.2 |
| Diluted EPS | $0.13 | $0.53 | $1.23 | $1.84 |
- Q3 sales rose 1.6%; nine-month sales rose 0.8%. Profitability fell sharply, with reported gross profit including a $7.2 million pension withdrawal charge in Q3 and, for the nine months, an additional $3.2 million ICL settlement charge recorded in Q1.
- Nine-month operating cash flow was $30.0 million, up from $20.5 million. Capital expenditures were $20.1 million, versus $13.8 million. Cash and cash equivalents ended at $24.6 million.
- Cash plus investments available-for-sale totaled $43.4 million at period-end; including long-term investments, cash and investments totaled approximately $50.2 million. Current assets were $111.8 million and current liabilities $32.6 million. No interest-bearing debt is shown on the balance sheet.
- Total assets were $219.9 million and shareholders’ equity was $168.5 million. Cash dividends paid in the nine-month period were $6.9 million; dividends declared were $0.34 per share.
Material changes and segment results
- Industrial sales declined 1.0% in Q3 and 3.3% for the nine months; nine-month segment operating income fell to $5.7 million from $17.1 million. Management cited lower volumes, a shift toward lower-priced bulk products, pricing pressure, the pension and settlement charges, and Rosemount facility expenses.
- Water Treatment sales increased 9.8% in Q3 and 11.6% for the nine months. Nine-month operating income increased to $13.6 million from $12.3 million, supported by volume growth and higher per-unit margins; lower-margin commodity mix partly offset gains.
- Q3 tax benefit included a nonrecurring $0.8 million benefit from amended federal returns related to the domestic manufacturing deduction and investment tax credits. The nine-month effective tax rate was 33.4%, compared with 38.0%.
Outlook, risks, and unusual items
- Management expected cash balances and operating cash flows to be sufficient for fiscal 2013 requirements; no earnings or revenue guidance was provided. The Rosemount facility was expected to become operational by fiscal year-end, with incremental ramp-up expenses in fiscal 2013 and 2014.
- Management considered withdrawal from the underfunded Central States multiemployer pension plan probable, subject to negotiations on labor agreements expiring February 28, 2013. It accrued $7.2 million; estimated aggregate cash payments are approximately $9.3 million, or about $467,000 annually beginning sometime in fiscal 2014. The ultimate assessment may differ based on plan and withdrawal factors.
- The ICL settlement resolved disclosed litigation and included a cash payment and new chemical supply contracts. The $3.2 million pretax charge was recorded in Q1.
- Commodity chemical prices are cyclical. Hawkins does not hedge purchases and may be unable to pass cost increases to customers. Working capital and operating cash flow fluctuate with chemical purchasing and seasonal Water Treatment demand.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change to the prior annual-report risk factors.
Important facts for investors to verify
- Whether the pension-plan withdrawal occurs and how the final liability compares with the $7.2 million accrual and $9.3 million estimated payments.
- Progress, spending, operating start-up, and incremental costs of the Rosemount facility.
- Whether Industrial volumes, product mix, and per-unit profitability stabilize, and whether Water Treatment growth persists beyond favorable weather periods.
- Cash generation and capital spending relative to management’s fiscal 2013 liquidity expectation, along with the company’s ability to pass through commodity-cost changes.