Hawkins, Inc. — Form 10-Q Summary
Business context and period. Hawkins sells chemicals and specialty ingredients, including bulk chemicals and manufactured, blended, or repackaged products. This report covers fiscal 2020’s third quarter and first nine months, ended December 29, 2019; comparisons are to the periods ended December 30, 2018. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Sales | $120.4 | $128.2 | $407.8 | $423.3 |
| Gross profit | $21.5 | $21.0 | $78.3 | $75.3 |
| Gross margin | 17.8% | 16.4% | 19.2% | 17.8% |
| Operating income | $6.8 | $6.7 | $33.9 | $31.0 |
| Net income | $4.5 | $4.1 | $23.6 | $20.7 |
| Diluted EPS | $0.43 | $0.39 | $2.22 | $1.93 |
- Cash flow: Nine-month operating cash flow was $45.0, up from $31.0. Investing used $19.1, including $19.4 of capital expenditures versus $7.2 a year earlier. Financing used $27.8, including $17.0 of net debt payments, $7.4 of dividends, and $3.8 of share repurchases.
- Liquidity and debt: Cash was $7.3 at December 29, 2019, versus $9.2 at March 31, 2019. Revolver borrowings were $68.0 (reported debt, net of issuance costs, was $67.6); total debt was $23.0 lower than a year earlier. The company had a $150.0 million revolving facility maturing November 2023 and reported compliance with its covenants.
- Balance sheet: Total assets were $386.6 and shareholders’ equity was $232.2. Current assets were $127.0 and current liabilities $51.3. Operating lease right-of-use assets and lease liabilities were recognized following adoption of the lease standard.
- Dividends: Declared dividends were $0.23 per share for the quarter and $0.69 per share for the nine months.
Material changes and drivers
- Quarterly sales fell 6.0%; nine-month sales fell 3.7%. Lower sales reflected lower commodity pricing and volumes, particularly bulk products in Industrial, and weaker Health and Nutrition sales. Hawkins attributed Industrial bulk weakness in part to a weak ethanol industry.
- Gross profit and margins improved in both comparison periods, helped by a shift toward higher-margin manufactured, blended, and repackaged products. Nine-month operating income rose to $33.9 from $31.0.
- Health and Nutrition sales declined 14.7% for the quarter and 18.2% year to date. The year-to-date decline included a previously anticipated worldwide supply shortage of a significant product during the first two quarters and the transition to new partners and product lines.
- Water Treatment sales rose 6.6% for both the quarter and nine-month period, with growth in higher-priced manufactured, blended, and repackaged products. Industrial sales declined 8.7% for the quarter and 2.8% year to date.
- Interest expense declined, reflecting lower borrowings and rates. The company’s deferred-compensation investment gains or losses were substantially offset by corresponding compensation expense changes.
- Cash generation benefited from reductions in receivables and inventory and higher net income. Management noted working capital and operating cash flow can vary with bulk chemical purchasing and seasonal inventory receipts.
Outlook, risks, and other notable items
- No specific earnings or revenue guidance was provided. Management said cash, available credit-facility funds, and operating cash flows should be sufficient for ongoing requirements for the foreseeable future.
- Commodity chemical prices are cyclical; the company does not hedge commodity purchases and may not be able to pass future cost increases to customers. A 25-basis-point interest-rate change was estimated to affect annual interest expense by about $0.1 million. A $20 million interest-rate swap hedges part of variable-rate debt through December 2020.
- Environmental remediation liability for contamination at the Minneapolis facility was $0.1 million. The company said additional costs are possible but their extent cannot currently be estimated. No material pending litigation was reported; risk factors were unchanged from the prior annual report.
- Lease accounting adoption on April 1, 2019 added approximately $10.4 million of right-of-use assets and lease liabilities at adoption; management said it did not materially affect income or cash flows. The filing also describes LIBOR transition provisions in the credit agreement.
- Disclosure controls were concluded effective as of December 29, 2019, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Health and Nutrition’s supply and partner transitions stabilize, and whether its sales decline continues.
- Whether favorable product mix and gross-margin improvement persist as commodity prices, volumes, and the ethanol market change.
- How elevated capital spending and seasonal working-capital needs affect future operating cash flow and liquidity.
- Debt reduction, revolving-credit availability, covenant compliance, and the interest-rate exposure remaining after the swap expires.
- Any changes to the Minneapolis remediation estimate or other environmental obligations.