Hawkins, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the three and six months ended October 2, 2016, the second quarter and first half of fiscal 2017. Hawkins distributes and sells chemicals and specialty ingredients. Its three reportable segments are Industrial, Water Treatment, and Health and Nutrition. The Health and Nutrition segment reflects the December 2015 acquisition of Stauber Performance Ingredients.
Financial performance
| Metric | Three months ended Oct. 2, 2016 | Six months ended Oct. 2, 2016 | Comparable 2015 period |
|---|---|---|---|
| Sales | $121.3 million | $252.6 million | $94.6 million; $196.1 million |
| Gross profit / margin | $27.0 million / 22.3% | $55.2 million / 21.9% | $19.8 million / 20.9%; $40.5 million / 20.7% |
| Operating income / margin | $12.2 million / 10.0% | $25.3 million / 10.0% | $9.5 million / 10.0%; $20.4 million / 10.4% |
| Net income | $7.2 million | $14.8 million | $5.7 million; $12.5 million |
| Diluted EPS | $0.68 | $1.40 | $0.54; $1.17 |
| Operating cash flow | Not separately presented | $28.0 million | $20.5 million |
Quarterly sales increased 28.2% and first-half sales increased 28.8% year over year, substantially reflecting Stauber’s inclusion in fiscal 2017 results. For a more comparable view, Health and Nutrition sales were $28.5 million for the quarter versus $29.4 million pro forma in the prior-year quarter, and $60.5 million for the half versus $61.7 million pro forma. Quarter net income was $7.2 million versus prior-year pro forma net income of $6.1 million.
Cash and equivalents were $16.7 million at October 2, 2016, down from $20.0 million at April 3, 2016. Total debt was $114.3 million, compared with $129.8 million at fiscal year-end; $47.0 million remained available under the $65 million revolving facility. The reported effective borrowing rate was 1.8%. The company paid $4.2 million in dividends during the half and declared $0.42 per share for the quarter.
Changes, outlook, and risks
- Gross margin improved year over year, supported by product mix, specialized-product volumes, operational efficiencies, and lower raw-material costs. The lower LIFO reserve increased first-half gross profit by $0.4 million.
- SG&A rose to $30.0 million for the half, including $9.2 million in Health and Nutrition expenses and $2.4 million of acquired-intangible amortization. Interest expense increased due to debt used to help finance Stauber.
- First-half cash from operations increased to $28.0 million. Capital expenditures were $10.3 million; investing cash use was $12.2 million and financing cash use was $19.2 million, including debt repayments.
- Management expects cash, operating cash flows, and available credit to fund foreseeable operating needs. No specific earnings or revenue guidance is provided. Management notes that cash needs typically rise from April through November as caustic soda inventories are built.
- Commodity chemical prices and the ability to pass cost changes to customers are key risks. Variable-rate debt creates interest-rate exposure; a 25-basis-point rate change was estimated to affect annual interest expense by approximately $0.3 million. A cash-flow hedge was entered into, with coverage beginning September 1, 2017.
- The company reported compliance with credit covenants and no material pending litigation or material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; however, Stauber was excluded from the control assessment for this period and must be included no later than the third quarter of fiscal 2017.
Important facts for investors to verify
- Separate underlying growth from the acquisition-driven increase in consolidated sales, including Health and Nutrition’s order timing and customer inventory drawdown.
- Track segment margins, raw-material pricing and pass-through effectiveness, and the effect of LIFO estimates on reported gross profit.
- Monitor debt reduction, revolving-credit availability, covenant compliance, and the future impact of the interest-rate swap.
- Assess working-capital and seasonal cash requirements, capital spending, and the planned inclusion of Stauber in internal-control assessments.