Hawkins, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2020 second quarter and six months ended September 29, 2019. Hawkins distributes and manufactures chemicals and specialty ingredients through its Industrial, Water Treatment, and Health and Nutrition segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended Sep. 29, 2019 | Year-over-year change | Six months ended Sep. 29, 2019 | Year-over-year change |
|---|---|---|---|---|
| Sales | $140.0 | Down 3.6% | $287.4 | Down 2.6% |
| Gross profit / margin | $28.0 / 20.0% | Up from $25.8 / 17.7% | $56.8 / 19.8% | Up from $54.2 / 18.4% |
| Operating income / margin | $13.2 / 9.4% | Up from $10.8 / 7.4% | $27.1 / 9.5% | Up from $24.3 / 8.3% |
| Net income | $9.3 | Up from $7.4 | $19.1 | Up from $16.5 |
| Diluted EPS | $0.87 | Up from $0.69 | $1.79 | Up from $1.54 |
For the quarter, lower sales were more than offset by improved gross margin and relatively flat SG&A. For the six-month period, SG&A was $29.7 million versus $29.9 million; net interest expense declined to $1.4 million from $1.7 million. The six-month effective tax rate was 26.3%, compared with 27.0%.
Cash flow and liquidity: Six-month operating cash flow was $27.1 million, versus $24.9 million. Investing used $13.9 million, including $14.1 million of capital expenditures, up from $4.2 million; the increase primarily reflected purchase of the previously leased corporate headquarters. Financing used $18.4 million, including $10.0 million of net revolver repayments, $4.9 million of dividends, and $3.8 million of share repurchases. Cash declined $5.1 million from March 31 to $4.1 million.
Debt and balance sheet: At September 29, total debt was $74.6 million net of issuance costs ($75.0 million revolver principal), down from $84.6 million net at March 31. The revolving facility has a $150 million commitment and matures November 30, 2023; the reported effective borrowing rate was 2.9%. The company reported compliance with its debt covenants. Total assets were $393.0 million and shareholders’ equity was $229.4 million. Adoption of the lease accounting standard resulted in approximately $10.4 million of right-of-use assets and lease liabilities at adoption; lease expense was $1.5 million for the six months.
Material changes and segment trends
- Industrial: Quarterly sales fell 1.9% to $68.1 million, but operating income rose to $4.8 million from $2.5 million, reflecting a more favorable mix of higher-margin manufactured, blended, and repackaged products. Six-month sales were essentially unchanged at $143.4 million, while operating income increased to $9.6 million from $7.5 million.
- Water Treatment: Quarterly sales grew 7.4% to $45.9 million and operating income increased to $7.6 million from $6.7 million. Six-month sales rose 6.6% to $89.1 million and operating income reached $14.7 million, up from $13.0 million.
- Health and Nutrition: Quarterly sales declined 21.5% to $26.1 million and operating income fell to $0.8 million from $1.6 million. Six-month sales declined 19.5% to $54.8 million and operating income was $2.8 million versus $3.8 million. Management attributed the sales decline to lower specialty-distributed product sales, including a previously anticipated temporary worldwide supply shortage and the transition to new partners and product lines.
Overall sales and earnings moved in opposite directions: sales declined, while gross profit, operating income, and net income increased. Management cited favorable product mix in Industrial and higher sales in Water Treatment as key contributors. The lower-volume Health and Nutrition business partially offset those gains.
Outlook, risks, and unusual items
- The filing provides no specific numerical earnings or sales guidance. Management expects cash, available credit, and operating cash flows to fund ongoing requirements for the foreseeable future; interim results are not necessarily indicative of full-year results.
- Cash needs typically rise from April through November as the company builds caustic soda inventory ahead of seasonal barge receipts; purchase timing can cause significant working-capital and cash-flow fluctuations.
- Commodity chemical prices are cyclical. Hawkins seeks to pass cost changes to customers but cautions that it may not be able to do so. It does not hedge commodity purchases.
- Variable-rate debt creates interest-rate exposure; management estimated a 25-basis-point rate move could change annual interest expense by about $0.1 million. A $20 million interest-rate swap runs through December 23, 2020.
- An environmental remediation liability for contamination at the Minneapolis facility was $0.2 million at September 29, down from $0.4 million at March 31. The company cautions that reserves could prove insufficient and cannot estimate potential additional costs.
- The company reported no material pending litigation and no material changes to the risk factors in its latest annual report. It repurchased 91,395 shares for $3.8 million during the six months, with 412,985 shares remaining authorized for repurchase.
Important facts for investors to verify
- Whether the Health and Nutrition supply shortage proves temporary and whether new partner/product-line sales offset the decline in distributed products.
- Whether improved Industrial and Water Treatment product mix and margins persist, especially as commodity prices and selling prices change.
- Cash conversion and inventory requirements through the seasonal April–November purchasing period, alongside elevated capital spending.
- Revolver utilization, covenant headroom, and sensitivity to interest rates as the company continues dividends and share repurchases.
- Potential additional Minneapolis remediation costs and the financial effects of operating leases and other commitments.