Hawkins, Inc. — Q3 Fiscal 2021 Form 10-Q
Reporting period: Third quarter and first nine months ended December 27, 2020; comparisons are to periods ended December 29, 2019. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Sales | $142.9 million | $120.4 million | $433.9 million | $407.8 million |
| Gross profit | $28.2 million | $21.5 million | $92.0 million | $78.3 million |
| Operating income | $10.5 million | $6.8 million | $43.0 million | $33.9 million |
| Net income | $7.9 million | $4.5 million | $31.9 million | $23.6 million |
| Diluted EPS | $0.75 | $0.43 | $3.00 | $2.22 |
| Gross margin | 19.8% | 17.8% | 21.2% | 19.2% |
| Operating margin | 7.4% | 5.6% | 9.9% | 8.3% |
Q3 sales rose 19% and net income rose 74% year over year. For the nine months, sales increased 6% and net income increased 35%. SG&A rose 21% in Q3 and 11% year to date, including variable compensation, ADC-related costs and intangible amortization; lower travel and trade-show costs partly offset the increases. Other income included gains on deferred-compensation investments, substantially offset by higher compensation expense.
Cash flow and liquidity: Nine-month operating cash flow was $26.6 million, down from $45.0 million, largely due to higher receivables and inventory. Investing cash use was $48.1 million, including acquisitions and capital expenditures of $13.2 million. Cash ended at $8.0 million. The company reported $96.0 million of revolving borrowings, $88 million of net debt, $54 million available under its $150 million facility, and a 1.2x leverage ratio. It was in compliance with credit covenants and said cash, borrowing availability and operating cash flow should fund foreseeable operating needs.
Cash dividends declared were $0.2325 per share in Q3 and $0.6975 for the nine months. The company repurchased 83,044 shares for $4.1 million during the nine months; 275,753 shares remained authorized for repurchase.
Segment results and material changes
- Industrial: Q3 sales increased 2% to $64.4 million; nine-month sales declined 5% to $197.0 million. Year-to-date weakness in ethanol and prior-year flood-related demand weighed on sales, partly offset by demand for manufactured food, pharmaceutical and bleach products.
- Water Treatment: Q3 sales increased 13% to $39.3 million; nine-month sales increased 4% to $128.6 million. ADC contributed to growth; COVID-related pool closures weighed on first-quarter sales. Nine-month operating income was essentially flat at $18.2 million.
- Health and Nutrition: Q3 sales increased 75% to $39.3 million; nine-month sales increased 40% to $108.3 million, largely from stronger consumer demand for health and immunity products. Nine-month operating income increased to $12.1 million from $3.7 million.
Management attributed improved overall gross margin to product mix and greater sales of manufactured, blended and repackaged products. COVID-19 effects were mixed across end markets: food, bottled bleach, and health and nutrition benefited, while ethanol, pools and resorts were negatively affected.
Acquisitions, outlook and risks
- Hawkins acquired water-treatment distributor ADC in July 2020 for $25 million. Its prior-year annual revenue, together with C&L Aqua’s, was approximately $25 million in aggregate. Hawkins also bought a nearby Rosemount manufacturing property for $10 million, adding about 40,000 square feet.
- After quarter-end, on December 30, 2020, Hawkins acquired C&L Aqua, a Louisiana water-treatment chemical distributor, for $16 million. Purchase accounting was not complete at filing.
- No specific earnings or sales guidance was provided. Management expected COVID-19 impacts to remain mixed for the foreseeable future and stated facilities had continued operating without significant production impact.
- Risks include volatile commodity chemical costs and uncertainty about passing cost increases through to customers. Hawkins does not hedge commodity chemical purchases. A 25-basis-point interest-rate change could change annual interest expense by approximately $0.1 million. The $20 million interest-rate swap expired December 23, 2020; borrowings were variable-rate.
- No material pending litigation or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether Health and Nutrition demand and product mix gains persist, and how segment performance changes as pandemic-related demand normalizes.
- How much growth and profitability ADC and C&L Aqua contribute, including integration results and final purchase accounting for C&L Aqua.
- Whether working-capital investment, particularly inventory and receivables, converts into operating cash flow.
- Debt, borrowing availability, covenant headroom and interest-rate exposure following acquisitions and facility investment.
- Whether commodity-cost changes can be passed through to customers without eroding margins.