Hawkins, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months of fiscal 2023, ended January 1, 2023; comparisons are to the periods ended December 26, 2021. Amounts are in U.S. dollars unless noted.
Business context
Hawkins sells chemicals and specialty ingredients through its Industrial, Water Treatment, and Health and Nutrition segments. The company highlights that sales can fluctuate with chemical raw-material costs and that it evaluates results primarily by profitability dollars. Fiscal 2023 year-end is April 2, 2023.
Financial results
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $219.2 million, up 17% | $707.0 million, up 28% |
| Gross profit / margin | $36.3 million / 16.5% (prior: 18.1%) | $129.4 million / 18.3% (prior: 20.0%) |
| Operating income | $15.3 million, up 7%; 6.9% margin | $69.7 million, up 24%; 9.9% margin |
| Net income | $10.7 million, up 5% | $48.4 million, up 18% |
| Diluted EPS | $0.51 (prior: $0.48) | $2.31 (prior: $1.94) |
| Operating cash flow | Not presented for the quarter | $44.5 million (prior: $38.7 million) |
| Capital expenditures | Not presented for the quarter | $32.3 million (prior: $15.7 million) |
For the nine months, cash used in investing activities was $32.0 million and cash used in financing activities was $9.9 million. Cash increased $2.7 million from fiscal year-end to $6.1 million. At January 1, debt was $131.0 million of revolving borrowings, or $130.6 million net of debt issuance costs; $9.9 million was classified as current. The effective borrowing rate was 4.2%. The $250 million revolving facility matures April 30, 2027. The company reported compliance with its debt covenants.
At January 1, current assets were $240.2 million and current liabilities were $84.9 million. The company paid $8.8 million in dividends during the nine-month period and repurchased $6.6 million of shares. The quarterly dividend was $0.14 per share.
Changes and management commentary
- Revenue growth was driven primarily by higher selling prices reflecting higher raw-material costs. Water Treatment also benefited from acquired businesses and higher product sales. Nine-month sales increased 31% in Industrial, 39% in Water Treatment, and 6% in Health and Nutrition.
- Margins contracted: the nine-month gross margin fell to 18.3% from 20.0%. The LIFO reserve reduced gross profit by $12.7 million in the current nine-month period, versus $7.6 million in the prior period, primarily because of rising raw-material costs. In the quarter, the respective impacts were $3.7 million and $2.9 million.
- Interest expense rose to $3.9 million for nine months from $1.0 million, reflecting higher rates and increased borrowings for working capital. SG&A increased, including costs from Water Treatment acquisitions and higher wages.
- Capital investment included rail expansions, completion of an Illinois facility expansion, purchase of a previously leased facility, and spending on trucks, safety equipment, and other equipment.
Outlook, risks, and contingencies
Management expects cash, operating cash flows, and available credit to fund ongoing operations for the foreseeable future and expects to remain in covenant compliance over the next 12 months. The company expects a full-year effective tax rate of approximately 26%–27%. No specific sales or earnings guidance is provided.
Commodity chemical prices are a key risk: Hawkins does not hedge chemical purchases and says there is no assurance it can pass future cost increases to customers. The company also has variable-rate debt, partially managed with a $60 million interest-rate swap through May 1, 2027; a 25-basis-point change in rates on unhedged variable-rate debt could change annual interest expense by approximately $0.2 million. Management reported no material changes to previously disclosed risk factors and no material pending legal proceedings other than routine litigation.
Unusual or notable items include the LIFO reserve impact on gross profit and deferred-compensation investment gains or losses, which are substantially offset by corresponding compensation-expense changes. The nine-month comparison also reflects prior-year acquisitions, including NAPCO and two other Water Treatment businesses; the three acquired businesses had aggregate preceding-period annual revenue of approximately $17 million.
Important facts for investors to verify
- Whether selling prices continue to recover input-cost increases, and whether LIFO-related margin pressure moderates.
- Working-capital requirements, cash conversion, and the substantial year-over-year increase in capital expenditures.
- Borrowing levels, interest costs, swap coverage, and covenant headroom under the revolving credit facility.
- Water Treatment acquisition contribution and Health and Nutrition product mix and profitability.
- Whether the expected 26%–27% full-year tax rate and management’s liquidity and covenant expectations are borne out.