Hawkins, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal second quarter and first six months of fiscal 2023, ended October 2, 2022, compared with the corresponding prior-year periods. Hawkins sells chemicals and specialty ingredients through its Industrial, Water Treatment, and Health and Nutrition segments. Fiscal 2023 ends April 2, 2023.
Financial performance
| Metric | Three months ended Oct. 2, 2022 | Year-over-year change | Six months ended Oct. 2, 2022 | Year-over-year change |
|---|---|---|---|---|
| Sales | $241.2 million | +32% | $487.7 million | +34% |
| Gross profit | $46.4 million | +24% | $93.1 million | +22% |
| Gross margin | 19.2% | 20.3% prior year | 19.1% | 20.9% prior year |
| Operating income | $26.5 million | +35% | $54.4 million | +30% |
| Net income | $18.0 million | +$3.9 million | $37.7 million | +$6.9 million |
| Diluted EPS | $0.86 | $0.67 prior year | $1.79 | $1.45 prior year |
Quarterly operating margin was 11.0% versus 10.7% a year earlier; six-month operating margin was 11.2% versus 11.4%. Higher selling prices were the primary driver of sales growth, alongside product mix, Water Treatment acquisitions and demand. Gross margin fell as raw-material inflation increased the LIFO reserve and cost of sales: the reserve increase reduced gross profit by $5.3 million in the quarter and $9.0 million in the half-year.
Segment results
- Industrial: Q2 sales of $113.9 million (+37%); operating income $10.8 million versus $6.1 million. Six-month sales were $238.6 million (+41%) and operating income $24.4 million versus $14.1 million.
- Water Treatment: Q2 sales of $86.5 million (+39%); operating income $11.4 million versus $10.1 million. Six-month sales were $165.0 million (+39%) and operating income $21.7 million versus $19.3 million. Growth included acquired businesses.
- Health and Nutrition: Q2 sales of $40.8 million (+7%); operating income $4.3 million versus $3.4 million. Six-month sales were $84.1 million (+9%) and operating income $8.3 million versus $8.3 million.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $18.8 million, down from $40.1 million. Increased inventory and receivables, partly reflecting higher raw-material prices and sales, used cash.
- Investing cash outflow was $20.4 million, including $20.7 million of capital expenditures, versus $7.9 million of investing outflow and $6.9 million of capex in the prior-year half.
- Cash was $3.9 million at October 2, 2022. Total debt, net of issuance costs, was $140.6 million, versus $125.6 million at April 3, 2022; borrowings under the revolving facility were $141.0 million.
- The company had a $250 million revolving facility maturing April 30, 2027. The effective borrowing rate was 3.4%; a $60 million interest-rate swap runs to May 1, 2027. The company reported compliance with credit covenants and expected to remain compliant for the next 12 months.
- Six-month financing cash flow was positive $2.0 million, including $15.0 million of net revolving-loan proceeds, $5.9 million of dividends and $6.6 million of share repurchases. The quarterly dividend was $0.14 per share; 1,129,348 shares remained authorized for repurchase.
- Working-capital balances increased: net receivables were $131.4 million and inventories $113.1 million at October 2, versus $122.8 million and $95.0 million, respectively, at fiscal year-end.
Changes, outlook and risks
Compared with the prior year, sales, gross profit, operating income and net income increased, but gross margin declined and operating cash flow fell substantially. Interest expense rose to $1.4 million for the quarter and $2.3 million for the half-year, reflecting higher rates and greater borrowing for working capital. The company completed acquisitions in fiscal 2022, including NAPCO Chemical, Water and Waste Specialties, and Southeast Water Systems; their results are included in Water Treatment.
Management said cash, operating cash flows and funds available under the credit facility should be sufficient for foreseeable operating needs. No specific revenue or earnings forecast was provided; management expected a full-year effective tax rate of approximately 26%–27%.
Key risks include volatile commodity chemical costs and uncertainty about passing cost increases on to customers, working-capital demands and variable interest rates. A 25-basis-point change in rates on unhedged variable-rate debt could change annual interest expense by approximately $0.2 million. The company does not hedge commodity chemical purchases. The filing reported no material changes to annual-report risk factors and no material pending legal proceedings beyond routine litigation.
Unusual items include deferred-compensation investment losses recorded in other expense, offset by corresponding compensation expense changes in SG&A, and an unrealized interest-rate-swap gain of $2.4 million in six-month comprehensive income. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether price increases and customer demand can sustain sales growth as raw-material costs and selling prices change.
- How LIFO reserve changes and inventory costs affect future gross margins and cash conversion.
- Working-capital trends, capital spending and the resulting need for revolving-credit borrowings.
- Borrowing rates, remaining facility availability, covenant headroom and the effect of unhedged rate exposure.
- Acquisition contributions and performance, alongside the pace of repurchases, dividends and other capital uses.