Hawkins, Inc. — Q1 Fiscal 2013 Form 10-Q
Reporting period: Three months ended July 1, 2012; comparisons are with the three months ended July 3, 2011, unless otherwise noted. Hawkins distributes and produces bulk and specialty chemicals through its Industrial and Water Treatment segments.
Financial and operating results
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Sales | $90.1 million | $88.6 million |
| Gross profit / margin | $15.3 million / 17.0% | $17.9 million / 20.2% |
| Operating income / margin | $7.1 million / 7.9% | $10.1 million / 11.3% |
| Income from continuing operations | $4.4 million | $6.4 million |
| Net income | $4.4 million | $6.7 million |
| Diluted EPS | $0.42 | $0.65 |
| Operating cash flow | $14.0 million | $7.2 million |
| Capital expenditures | $4.2 million | $3.6 million |
- Sales increased 1.7%, while gross profit fell 14.6% and net income fell 34.9%. Gross margin contracted 3.2 percentage points.
- Industrial sales declined 2.2% to $62.2 million; segment operating income was $2.2 million versus $5.6 million. Water Treatment sales rose 11.7% to $27.9 million; segment operating income increased to $4.9 million from $4.4 million.
- Cash and cash equivalents were $34.1 million at July 1, 2012; current investments were $12.5 million and long-term investments were $7.3 million. Cash and current investments totaled $46.6 million. Total current assets were $113.4 million and current liabilities $38.7 million. The balance sheet presents no borrowings line; it does not establish whether other financing obligations exist.
- Total liabilities were $50.6 million and shareholders’ equity $161.4 million. Cash dividends paid during the quarter were $3.4 million.
Material changes and unusual items
- A settlement with chemical supplier ICL resolved the parties’ previously disclosed litigation and disputes. Hawkins recorded a $3.2 million pretax charge in cost of sales, approximately $2.0 million after tax. The filing does not state the cash payment amount separately. The settlement also provides for new supply contracts.
- Management attributed the lower gross profit primarily to the ICL charge. Industrial gross profit was also affected by reduced sales volumes; Water Treatment benefited from higher per-unit margins, increased volumes, and more favorable weather.
- SG&A increased to $8.2 million from $7.9 million, primarily due to additional sales staff supporting growth initiatives.
- Operating cash flow increased year over year, principally because of working-capital timing, including inventory purchases and vendor payments. Accounts payable was higher, partly reflecting ICL settlement accruals and Rosemount construction.
- Discontinued operations contributed $18,000, versus $374,000 in the prior-year quarter. The current-quarter amount followed receipt of the final payment under the former Pharmaceutical segment’s marketing agreement.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management said cash balances and operating cash flows were expected to be sufficient to fund fiscal 2013 requirements; interim results are not necessarily indicative of full-year results.
- A new facility under construction in Rosemount, Minnesota was expected to become operational in late fiscal 2013. The company said the site provides growth capacity and reduces reliance on flood-prone Mississippi River sites; it did not intend to close existing sites.
- Seasonality affects working capital: caustic soda inventory generally builds from April through November, while Water Treatment receivables typically increase from April through September. Commodity chemical costs and competitive pricing may limit the company’s ability to pass cost increases to customers; Hawkins reported no hedging activity for commodity purchases.
- Hawkins participates in a multiemployer pension plan. Trustees estimated the company’s share of unfunded vested benefits at approximately $7.9 million assuming withdrawal in calendar 2011, versus $5.1 million on a 2009 basis. This is an estimate, not a reported current withdrawal obligation; actual liability could change, and payment could be spread over 20 years if triggered.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company reported no material changes to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- How the ICL settlement payment and new supply-contract terms affect cash, future chemical costs, and margins; the filing gives the charge but not the payment amount.
- Whether the construction schedule and spending for the Rosemount facility remain consistent with the late-FY2013 operating target.
- Whether Industrial performance improves after excluding the one-time settlement charge, and whether Water Treatment’s sales and margins persist beyond favorable weather conditions.
- How working-capital seasonality and elevated accounts payable affect cash flow in subsequent quarters.
- Updated funding information and potential exposure under the multiemployer pension plan, including the assumptions underlying the estimated withdrawal liability.