Hawkins, Inc. — Q3 Fiscal 2014 Form 10-Q
Reporting period: Third quarter and first nine months ended December 29, 2013; comparisons are with periods ended December 30, 2012. Hawkins distributes and supplies bulk and specialty chemicals, primarily in the United States, through its Industrial and Water Treatment segments. The quarter’s results are unaudited.
Financial results
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $81.7 million, down 4.5% | $263.0 million, up 0.1% |
| Gross profit / margin | $13.6 million / 16.6%; prior year $8.1 million / 9.5% | $47.4 million / 18.0%; prior year $42.6 million / 16.3% |
| Operating income | $5.4 million; prior year $0.5 million | $21.9 million; prior year $19.3 million |
| Net income | $3.5 million; prior year $1.3 million | $13.8 million; prior year $13.0 million |
| Diluted EPS | $0.33; prior year $0.13 | $1.30; prior year $1.23 |
| Operating cash flow | Not presented for the quarter | $24.9 million; prior year $30.0 million |
Quarterly Industrial sales fell 7.3% to $58.5 million, while Water Treatment sales rose 3.4% to $23.2 million. Nine-month segment sales were $182.2 million for Industrial and $80.8 million for Water Treatment. Nine-month operating income was $8.7 million and $13.2 million, respectively.
At December 29, cash was $27.9 million and current available-for-sale investments were $14.0 million; additional long-term investments were $12.9 million. Total assets were $230.9 million, current liabilities $31.4 million, and shareholders’ equity $180.9 million. The balance sheet presents no debt balance. The pension withdrawal liability was $7.0 million, down from $7.1 million at fiscal year-end. Cash and current investments totaled $41.8 million, compared with current liabilities of $31.4 million.
Changes, drivers, and unusual items
- Year-over-year profit improvement substantially reflects prior-year charges: a $7.2 million pension withdrawal charge in Q3 fiscal 2013 and a $3.2 million supplier-litigation settlement charge in Q1 fiscal 2013. These charges increased prior-year cost of sales; comparisons are not solely indicative of underlying growth.
- Current-period Industrial gross profit was pressured by competitive pricing, lower-margin bulk-product mix, lower quarterly volume, and $0.5 million of new-facility operating costs in the quarter. For the nine months, new manufacturing-facility costs were $1.5 million, and exit costs for a leased pharmaceutical facility were $0.8 million.
- Water Treatment benefited from specialty-product and equipment sales, newer branches, and the ACS acquisition, partly offset by commodity pricing pressure and, earlier in the year, less favorable weather. ACS was acquired October 1 for $2.4 million cash; up to $0.5 million additional consideration may be payable based on performance targets. ACS had approximately $4 million of revenue in the 12 months ended September 30, 2013.
- SG&A rose to $25.4 million for the nine months from $23.3 million, reflecting headquarters costs, Water Treatment staffing and infrastructure, and ACS. The new headquarters generated $0.8 million of incremental nine-month costs.
- Nine-month investing cash outflow was $18.6 million, including $10.5 million of capital expenditures and $2.4 million for acquisitions. Financing cash outflow was $7.2 million, primarily dividends. Cash declined $0.9 million from fiscal year-end.
Outlook, risks, and contingencies
Management expected cash balances and operating cash flow to be sufficient for fiscal 2014 requirements. It estimated full-year incremental operating costs of approximately $1.6 million for the Rosemount manufacturing facility and $1.1 million to lease and operate the new headquarters. No earnings or revenue guidance is provided, and management cautions that nine-month results are not necessarily indicative of full-year results.
Risks discussed include competitive pricing and difficulty passing commodity chemical cost increases to customers; Hawkins does not hedge its commodity chemical purchases. Fixed-income investments are exposed to interest-rate risk. Cash payments on the capped pension withdrawal obligation began in Q3 fiscal 2014 and are expected to total approximately $9.3 million over 20 years, or about $467,000 annually. Management reported no material pending litigation beyond routine matters and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of the reported profit improvement reflects the absence of the prior-year pension and settlement charges versus current operating performance.
- Whether Industrial volume, product mix, and pricing pressure improve, and whether Water Treatment growth can offset weather and commodity-product weakness.
- Actual operating and capital costs of the new facilities, and the results and potential contingent payments related to ACS.
- Cash generation and working-capital needs, particularly seasonal inventory and receivables, alongside capital spending, dividends, and pension payments.
- The impact of chemical input-price movements and interest-rate changes on margins and investment values.