Hawkins, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 1, 2017. The filing compares results with periods ended December 27, 2015. Amounts below are in millions unless stated otherwise.
Business context and financial performance
Hawkins distributes, blends, manufactures, and repackages chemicals and specialty ingredients. Its three reportable segments are Industrial, Water Treatment, and Health and Nutrition. The Health and Nutrition segment reflects the Stauber acquisition, completed near the end of the comparable prior-year third quarter.
| Metric | Three months ended Jan. 1, 2017 | Three months ended Dec. 27, 2015 | Nine months ended Jan. 1, 2017 | Nine months ended Dec. 27, 2015 |
|---|---|---|---|---|
| Sales | $112.4 | $88.4 | $365.0 | $284.5 |
| Gross profit / margin | $20.9 / 18.6% | $14.7 / 16.6% | $76.2 / 20.9% | $55.3 / 19.4% |
| Operating income / margin | $6.0 / 5.3% | $1.9 / 2.1% | $31.2 / 8.6% | $22.2 / 7.8% |
| Net income | $3.6 | $0.8 | $18.3 | $13.3 |
| Diluted EPS | $0.34 | $0.08 | $1.73 | $1.25 |
Material changes and management commentary
- Sales increased 27.1% for the quarter and 28.3% year to date. The inclusion of Stauber in current-period results materially affects comparisons; the prior-year reported periods did not include its results for most of the comparable periods. Management reports Health and Nutrition sales of $27.2 million for the quarter versus $26.0 million of prior-year pro forma sales, and $87.7 million year to date versus $87.7 million pro forma.
- Quarterly Industrial sales declined to $57.1 million, mainly from lower selling prices tied to lower raw-material costs and somewhat lower volume. Water Treatment sales fell 3.3% to $28.1 million, reflecting lower equipment-project revenue and selling prices, partly offset by slightly higher volume. Year-to-date Industrial sales declined 4.6%; Water Treatment sales rose 1.4%.
- Gross margin improved in both periods. Management cited stronger margins on selected specialized products, favorable product mix, and lower selling prices associated with reduced raw-material costs. Lower LIFO reserves increased gross profit by $0.4 million for the quarter and $0.8 million year to date.
- Quarterly operating income improved from the prior-year period, which included $2.7 million of Stauber acquisition-related expenses. Current-period Health and Nutrition operating income was $0.7 million for the quarter and $4.4 million year to date. Its quarterly gross profit was lower than in the preceding quarter, partly because of fixed overhead costs.
- Interest expense increased because of borrowings used to help finance Stauber. The prior-year effective tax rate was also elevated by nondeductible acquisition costs and a state tax audit assessment.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $31.0 million, compared with $23.8 million. Investing used $17.7 million, including $15.8 million of capital expenditures and $2.2 million of final Stauber consideration. Financing used $24.9 million, including $16.8 million of debt repayments and $8.7 million of dividends paid.
- Cash declined $11.6 million from fiscal year-end to $8.4 million at January 1, 2017. Total assets were $414.7 million and shareholders’ equity was $217.3 million.
- Debt was $113.0 million gross: $95.0 million term loan and $18.0 million revolver. The revolver had $47.0 million of borrowing capacity available. The filing reports a 1.9% effective borrowing rate and compliance with all credit-facility covenants. Management expects cash, available credit, and operating cash flow to fund foreseeable operating needs.
- Current assets were $117.0 million and current liabilities $41.9 million. Inventory was $50.3 million. The company declared $0.42 per share in dividends during the nine-month period.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- Commodity chemical prices are cyclical; Hawkins seeks to pass cost changes to customers but cannot assure it will do so successfully. Working-capital and operating cash flows can vary with the timing of bulk chemical purchases and inventory buildup.
- Debt bears variable interest rates. Management estimated that a 25-basis-point rate change could change annual interest expense by approximately $0.3 million. A cash-flow hedge is intended to cover portions of variable-rate debt beginning September 1, 2017; its notional amount steps down from $40 million to $20 million over its term.
- The credit agreement includes leverage and fixed-charge coverage covenants and restrictions on certain transactions. The filing reports compliance at quarter-end. No material pending litigation or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Assess how much reported growth and profitability reflects the Stauber acquisition versus underlying comparable performance; consider the filing’s pro forma segment comparisons.
- Track whether gross-margin gains from specialized products, product mix, and LIFO reserve changes persist as raw-material prices and selling prices move.
- Monitor debt reduction, revolver availability, variable-rate exposure, and covenant headroom; the filing does not provide the actual covenant ratios.
- Review capital spending, inventory and working-capital seasonality, and the sustainability of operating cash flow and dividend payments.