Hawkins, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 27, 2015. Fiscal 2016 is a 53-week year; the extra week falls in the fourth quarter. Unaudited results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $88.4 million, up 5.4% | $284.5 million, up 5.1% |
| Gross profit / margin | $14.7 million / 16.6%, versus $13.6 million / 16.3% | $55.3 million / 19.4%, versus $50.3 million / 18.6% |
| Operating income | $1.9 million, versus $4.9 million | $22.2 million, versus $24.4 million |
| Net income | $0.8 million, versus $3.1 million | $13.3 million, versus $15.3 million |
| Diluted EPS | $0.08, versus $0.30 | $1.25, versus $1.44 |
| Operating cash flow | $23.8 million for nine months, versus $17.0 million |
Quarterly sales growth reflected higher Industrial volumes and Water Treatment contributions from acquired locations. Nine-month Water Treatment sales increased 13.4%, largely from acquisitions; Industrial sales were broadly flat. Gross margin improved overall, while nine-month Water Treatment margin declined to 28.1% from 29.2%, partly because newer locations have lower branch revenue relative to operating costs. SG&A rose to $12.8 million for the quarter and $33.0 million year to date, including $2.7 million of Stauber acquisition costs. Those costs, along with higher operating expenses, drove lower operating income despite improved gross profit.
Liquidity, debt, and capital allocation
At December 27, cash was $20.8 million and investments were approximately $3.1 million, compared with cash and investments of $50.4 million at fiscal year-end. Current assets were $129.9 million and current liabilities $57.3 million. Capital expenditures were $17.1 million year to date. Investing cash outflow was $139.0 million, principally reflecting acquisitions; financing cash inflow was $117.4 million.
The company had $131.0 million of borrowings: a $100 million term loan and $31 million drawn on a $65 million revolver. The remaining facility availability was $34 million; the facility matures in December 2020 and had a 1.9% effective rate at inception. It is secured and includes financial covenants, including a minimum fixed-charge coverage ratio of 1.15 and maximum total cash-flow leverage ratio of 3.0, applicable beginning fiscal 2016. Year-to-date dividends paid were $8.3 million; the company repurchased $4.8 million of shares. Management said cash, facility availability, and operating cash flow should fund foreseeable ongoing requirements.
Acquisitions, outlook, and risks
On December 23, Hawkins acquired Stauber Performance Ingredients for estimated total consideration of $158.5 million, net of acquired cash approximately $155.9 million. Stauber reported approximately $118 million in revenue for the preceding twelve months and expands Hawkins into nutrition, food, pharmaceutical, cosmetic, and pet-care markets. Its operating results were not included in this quarter or year-to-date results; they were expected to begin in the fourth quarter. Preliminary purchase accounting recorded $96.8 million of goodwill and $51.0 million of identifiable intangibles, subject to revision. Hawkins also acquired Davis Supply for $4.5 million in September, adding a Florida water-treatment location.
No specific earnings or sales guidance was provided. Management cited the usual working-capital seasonality of chemical purchases and stated that commodity price changes may not always be passed through because pricing must remain competitive; the company does not hedge these purchases. Other notable risks include variable interest rates, compliance with new debt covenants, and regulatory and reputational exposure for food and nutritional products. The Stauber acquisition also brings estimation uncertainty in preliminary fair values and goodwill. Several antitrust class actions naming Hawkins were dismissed in February 2016 after the company established it distributes, rather than manufactures, alum. Management reported effective disclosure controls; Stauber was excluded from the period-end controls assessment, with inclusion required no later than fiscal 2017’s third quarter.
Most important facts for investors to verify
- Whether Stauber’s integration, acquired revenue, margins, and cash generation support the acquisition’s strategic rationale and the debt burden.
- Final purchase-price allocation, including goodwill and intangible-asset values, useful lives, and resulting amortization.
- Debt covenant headroom, interest-rate exposure, scheduled repayments, and continued access to the undrawn revolver.
- Whether gross-margin improvement persists amid commodity-price changes and the lower margins of newer Water Treatment locations.
- Ongoing effects of acquisition costs, higher SG&A, and the elevated effective tax rate on earnings and cash flow.