Hawkins, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended September 26, 2021; comparisons are to the periods ended September 27, 2020. Hawkins distributes and manufactures chemicals and specialty ingredients through Industrial, Water Treatment, and Health and Nutrition segments.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Sales | $183.3m | $147.8m | $364.5m | $291.0m |
| Gross profit / margin | $37.3m / 20.3% | $32.8m / 22.2% | $76.3m / 20.9% | $63.8m / 21.9% |
| Operating income / margin | $19.6m / 10.7% | $16.6m / 11.2% | $41.7m / 11.4% | $32.5m / 11.2% |
| Net income | $14.1m | $12.2m | $30.8m | $24.0m |
| Diluted EPS | $0.67 | $0.57 | $1.45 | $1.13 |
For the six months, operating cash flow was $40.1m versus $20.1m; investing cash outflow was $7.9m versus $33.0m, including $6.9m of capital expenditures and $1.2m for the Southeast Water Systems acquisition. Financing cash outflow was $28.4m, including $15.0m of net debt repayment, $7.4m of share repurchases, and $5.4m of dividends. Cash rose to $6.8m from $3.0m at fiscal year-end.
At September 26, 2021, total debt was $83.8m net of issuance costs ($84.0m revolving borrowings); the current portion was $9.9m. Current assets were $169.7m and current liabilities $71.5m. The $150m revolving facility matures November 30, 2023; the borrowing rate was 1.1%. Hawkins reported compliance with its debt covenants.
Changes and operating drivers
- Quarterly sales increased 24%; six-month sales increased 25%. Industrial and Water Treatment drove most of the growth, with Health and Nutrition also higher over six months.
- Six-month segment sales were $169.0m Industrial, $118.3m Water Treatment, and $77.2m Health and Nutrition. Water Treatment growth included $11.7m of six-month sales from the ADC and C&L Aqua acquisitions; quarterly sales from those businesses were $4.9m.
- Gross profit grew, but gross margin fell year over year. Rising raw material prices increased the LIFO reserve and reduced gross profit by $4.8m in the first half (including $3.0m in Q2). Health and Nutrition Q2 gross profit also declined, reflecting product mix and a $1.0m inventory reserve adjustment.
- SG&A increased in dollars, partly from acquired businesses and higher variable compensation, but declined as a share of sales. Six-month operating income rose 28%.
Outlook, risks and notable items
- Management expects cash, operating cash flow, and credit-facility availability to fund ongoing needs for the foreseeable future. It expects a full-year effective tax rate of approximately 26%–27%; no earnings or revenue guidance was provided.
- Management said COVID-19’s financial impact had been mixed and expected mixed effects to continue until conditions normalize. Facilities continued operating without significant output impact.
- The company does not hedge commodity chemical purchases and may not be able to pass all cost increases to customers. Rising raw material costs and seasonal inventory purchases can affect margins and working capital; inventory cash needs typically increase April through November.
- September 20 acquisition of Southeast Water Systems cost $1.2m at closing, with up to an additional $1.0m contingent on goals over three years. The filing says no material legal proceedings and no material changes to previously disclosed risk factors.
- Fiscal 2022 is a 53-week year, with the extra week in Q4. The revolving facility’s LIBOR provisions address a successor rate if LIBOR becomes unavailable.
Investor facts to verify
- Whether pricing and customer demand can offset continued raw-material inflation and the associated LIFO charges.
- How much reported growth is organic versus attributable to acquisitions, and whether acquired operations meet expected performance.
- Whether Health and Nutrition inventory reserves and product mix improve after the Q2 adjustment.
- Future working-capital needs, credit-facility availability, and covenant headroom as seasonal inventory builds.
- Terms and achievement of Southeast Water Systems’ contingent consideration, and the timing and extent of remaining authorized share repurchases.