Hawkins, Inc. — Q1 Fiscal 2024 Form 10-Q
Reporting period: Three months ended July 2, 2023; comparative period ended July 3, 2022. Hawkins distributes and manufactures chemicals and specialty ingredients through its Industrial, Water Treatment, and Health and Nutrition segments. Amounts below are in U.S. dollars.
Financial results
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Sales | $251.1 million | $246.5 million |
| Gross profit / margin | $52.0 million / 20.7% | $46.7 million / 19.0% |
| Operating income / margin | $32.5 million / 12.9% | $27.9 million / 11.3% |
| Net income | $23.4 million | $19.7 million |
| Diluted EPS | $1.12 | $0.94 |
| Operating cash flow | $34.9 million provided | $9.4 million used |
| Capital expenditures | $7.9 million | $11.6 million |
Sales rose 2%, driven by higher selling prices. Gross profit increased 11%, supported by improved per-unit margins in Water Treatment and a more favorable year-over-year LIFO reserve impact. SG&A rose 3% to $19.5 million. Net interest expense was $1.1 million, versus $0.9 million. The effective tax rate was 26%, compared with 25%.
Segments
- Industrial: Sales fell 3% to $120.9 million; operating income declined to $12.7 million from $13.6 million. Lower volume and the prior-year comparison with the divested bleach packaging business weighed on sales.
- Water Treatment: Sales increased 19% to $93.7 million; operating income rose to $17.3 million from $10.3 million, reflecting improved per-unit margins and higher selling prices.
- Health and Nutrition: Sales declined 15% to $36.6 million; operating income decreased to $2.5 million from $4.0 million. The company cited softer customer demand, customer inventory levels, and lower consumer demand for health and immunity products.
Liquidity, debt, and capital allocation
Cash was $7.1 million at July 2, 2023, down from $7.6 million at April 2, 2023. Operating cash flow improved year over year, primarily because of lower inventory-related cash outflows and higher net income; working-capital movements can vary substantially with the timing of bulk chemical purchases. Financing used $27.6 million, including $23.4 million of net debt repayments. Total debt, net of issuance costs, was $88.3 million, compared with $111.6 million at fiscal year-end. The company reported compliance with its credit agreement covenants.
The revolving credit facility totals $250 million and matures April 30, 2027. The effective borrowing rate was 3.9% at quarter-end. A $60 million interest-rate swap extends to May 1, 2027. Management said cash, facility availability, and operating cash flows should fund ongoing requirements for the foreseeable future. The quarterly dividend was $0.15 per share, versus $0.14 a year earlier; no shares were repurchased during the quarter.
Outlook, risks, and notable items
- Management expects a full-year effective tax rate of approximately 26%–27%. The filing provides no specific revenue or earnings guidance.
- Commodity chemical prices are cyclical; Hawkins seeks to pass cost changes to customers but cannot assure it will do so. It does not currently hedge commodity purchases.
- Interest-rate exposure remains on unhedged variable-rate debt; management estimated a 25-basis-point rate change could alter annual interest expense by approximately $0.1 million.
- In July 2023, after quarter-end, Hawkins acquired substantially all assets of EcoTech Enterprises for $3.4 million. EcoTech serves the Water Treatment market; purchase accounting was not complete at filing.
- The company sold its consumer bleach packaging assets in fiscal Q4 2023 for $7 million and recorded a $3 million gain. This was not a current-quarter transaction.
- Management reported no material change in risk factors, no material pending legal proceedings beyond routine litigation, and effective disclosure controls as of July 2, 2023.
Important facts for investors to verify
- Whether price increases can be sustained and passed through as raw-material costs change, and how volume trends evolve by segment.
- Whether Health and Nutrition demand recovers from customer inventory and consumer-demand softness.
- Cash conversion and working-capital needs, given the significant quarter-to-quarter impact of inventory and purchase timing.
- The financing, integration, and final purchase accounting effects of the EcoTech acquisition, including any goodwill recognized.
- Debt levels, interest-rate exposure, and continued compliance with credit-facility covenants.