Business context and reporting period
Hawkins, Inc. filed this unaudited Form 10-Q for the second quarter and six months of fiscal 2021, ended September 27, 2020. The company distributes and manufactures chemicals and specialty ingredients through its Industrial, Water Treatment, and Health and Nutrition segments. Comparisons are with the quarter and six months ended September 29, 2019.
Key financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Three months ended Sep. 27, 2020 | Three months ended Sep. 29, 2019 | Six months ended Sep. 27, 2020 | Six months ended Sep. 29, 2019 |
|---|---|---|---|---|
| Sales | $147.8 | $140.0 | $291.0 | $287.4 |
| Gross profit / margin | $32.8 / 22.2% | $28.0 / 20.0% | $63.8 / 21.9% | $56.8 / 19.8% |
| Operating income / margin | $16.6 / 11.2% | $13.2 / 9.4% | $32.5 / 11.2% | $27.1 / 9.5% |
| Net income | $12.2 | $9.3 | $24.0 | $19.1 |
| Diluted EPS | $1.15 | $0.87 | $2.25 | $1.79 |
For the six months, operating cash flow was $20.1 million, versus $27.1 million; investing cash outflow was $33.0 million, including the $25.0 million ADC acquisition; and financing cash inflow was $11.8 million. Capital expenditures were $8.1 million. Cash declined $1.1 million from fiscal year-end to $3.2 million.
At September 27, 2020, total debt, net of issuance costs, was $75.7 million, including $9.9 million current debt; long-term debt was $65.8 million. Management reported net debt of $72.8 million, a 1.0x leverage ratio, and $74 million available under the revolving facility. The facility provides up to $150 million and matures November 30, 2023. The effective borrowing rate was 1.3%; the company was in compliance with its covenants.
Material changes versus prior comparable periods
- Quarterly sales grew 5.5%; six-month sales grew 1.3%. Profitability and margins increased in both comparisons.
- Health and Nutrition sales rose 42.2% in the quarter and 25.9% for six months, primarily reflecting demand for health and immunity products. Water Treatment quarterly sales increased 8.0%, partly due to ADC; six-month sales were nearly flat as acquisition sales largely offset COVID-related weakness in pools and other markets.
- Industrial sales declined 10.2% for the quarter and 7.5% for six months. Management attributed the six-month decline mainly to weaker ethanol demand and prior-year Mississippi River flooding-related sales, partly offset by increased bleach demand.
- ADC, a water-treatment chemical distributor operating mainly in Tennessee, Georgia, and Kentucky, was acquired July 28 for $25 million and is included in Water Treatment. Preliminary allocation included $9.2 million goodwill and $13.3 million finite-lived intangibles.
- Debt increased from $59.7 million at March 29, 2020, reflecting $16 million of net revolver borrowings during the six-month period. No shares were repurchased, compared with $3.8 million of repurchases in the prior-year six months.
Outlook, risks, and other notable items
- No numerical earnings or revenue guidance was provided. Management expects COVID-19 effects to remain mixed: demand in food, bottled bleach, and health and nutrition benefited results, while ethanol, pools, and resorts were weaker. It said uncertainty could continue for the foreseeable future.
- Management said facilities continued operating as essential businesses without significant manufacturing disruption. It plans to remain cautious on spending while investing in Water Treatment branches, strategic acquisitions, and higher-margin opportunities, and believes cash, operating flows, and borrowing availability can fund foreseeable needs.
- Working-capital investment increased: receivables and inventories used cash, with higher Health and Nutrition stocking needs and longer lead times. Seasonal bulk chemical purchasing also affects cash requirements.
- Commodity chemical price changes may not be fully passed through to customers. A 25-basis-point interest-rate change could affect annual interest expense by about $0.1 million. A $20 million interest-rate swap was due to expire December 23, 2020; the credit agreement also described the planned LIBOR phaseout and successor-rate process.
- Other income included gains on deferred-compensation investments, substantially offset by compensation expense in SG&A. There were no material pending legal proceedings beyond routine litigation, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported growth and margin improvement is sustainable after separating ADC contributions, COVID-driven demand, product mix, and LIFO effects.
- Whether Health and Nutrition inventory levels and receivables convert to cash, and how seasonal working-capital needs affect operating cash flow.
- ADC’s subsequent contribution, integration progress, and final purchase-price allocation, which remained preliminary.
- Borrowing levels, facility availability, covenant headroom, and the transition from the expiring interest-rate swap and LIBOR-based pricing.
- The persistence of end-market demand and the company’s ability to pass through raw-material cost increases.