Hawkins, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended July 2, 2017; comparison is with the three months ended July 3, 2016. Hawkins distributes and supplies chemicals and specialty ingredients, including value-added manufacturing, blending, and repackaging.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Sales | $133.7 million | $131.4 million |
| Gross profit / margin | $26.0 million / 19.4% | $28.2 million / 21.5% |
| Operating income / margin | $10.2 million / 7.6% | $13.1 million / 10.0% |
| Net income | $5.8 million | $7.6 million |
| Diluted EPS | $0.55 | $0.72 |
| Operating cash flow | $(11.9) million | $14.4 million |
| Capital expenditures | $6.6 million | $6.3 million |
Gross margin declined as cost of sales rose faster than sales. Management cited a $0.5 million year-over-year adverse LIFO-reserve impact, $0.6 million of accelerated depreciation, a $0.5 million cost reclassification from SG&A to operating overhead, raw-material cost increases, and product mix. SG&A was $15.8 million, up from $15.1 million. The effective tax rate was 38.5% in both periods.
Segment sales and operating income were: Industrial, $64.0 million and $3.2 million (prior-year operating income $5.0 million); Water Treatment, $38.2 million and $5.9 million (prior $5.6 million); Health and Nutrition, $31.5 million and $1.1 million (prior $2.5 million). Water Treatment benefited from volume, specialized products, and equipment projects; Industrial and Health and Nutrition operating income declined.
Balance sheet, liquidity, and debt
At July 2, 2017, cash was $2.8 million, total assets $433.3 million, and shareholders’ equity $224.7 million. Current assets were $134.4 million and current liabilities $45.0 million. Gross debt was $121.3 million, comprising a $91.3 million term loan and $30.0 million revolver borrowing; debt net of issuance costs was $120.8 million. Gross debt was $103.1 million at April 2, 2017. Hawkins had $35.0 million of remaining revolver capacity and reported compliance with its credit covenants.
Operating cash use primarily reflected a $14.3 million inventory increase, including higher on-hand and in-transit inventory and higher unit costs for a major commodity. Management said inventory purchases increased partly in anticipation of further commodity cost increases through calendar 2018. Financing included $20.0 million of revolver proceeds, $1.9 million of term-loan repayments, and $4.5 million of dividends paid. Cash declined $4.1 million during the quarter.
Outlook, risks, and other notable items
- Management expects cash, credit-facility availability, and operating cash flows to fund ongoing requirements for the foreseeable future. The filing gives no specific revenue or earnings guidance.
- Management expects commodity raw-material costs to fluctuate and cautions it may not be able to pass cost increases on to customers. Seasonal chemical purchasing can cause significant working-capital and cash-flow swings.
- The variable-rate credit facility had an effective interest rate of 2.5%. A 25-basis-point rate change could alter annual interest expense by approximately $0.1 million. A cash-flow hedge covering scheduled notionals of $40 million, $30 million, and $20 million begins September 1, 2017; an unrealized after-tax loss of about $0.1 million was recorded in other comprehensive income during the quarter.
- The filing reports no material pending litigation and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether inventory accumulation and the expected commodity cost increases convert into sales and cash generation, and how working capital behaves seasonally.
- Whether margin pressure—including LIFO costs, product mix, planned growth spending, and Health and Nutrition equipment transition costs—continues in subsequent quarters.
- Revolver utilization, debt levels, interest-rate exposure, and ongoing compliance with credit-facility covenants.
- The extent to which the interest-rate swap offsets borrowing-rate changes once it begins, and the eventual impact of the planned equipment investments.