Hawkins, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended June 30, 2019; compared with the three months ended July 1, 2018. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $147.3 million | $149.8 million | Down 1.6% |
| Gross profit / margin | $28.8 million / 19.5% | $28.5 million / 19.0% | Profit up $0.3 million; margin up 0.5 percentage points |
| Operating income / margin | $14.0 million / 9.4% | $13.5 million / 9.0% | Income up $0.5 million |
| Net income | $9.8 million | $9.1 million | Up 7.5% |
| Diluted EPS | $0.92 | $0.85 | Up $0.07 |
| Operating cash flow | $10.1 million | $6.8 million | Up $3.3 million |
| Capital expenditures | $9.2 million | $2.4 million | Up $6.8 million |
Gross margin improved despite lower sales. SG&A was $14.8 million, down $0.2 million year over year; net interest expense was $0.8 million, versus $0.9 million. The effective tax rate declined to 26.3% from 27.3%. Other income of $0.1 million primarily reflected deferred-compensation-plan investment gains, offset by related compensation expense.
Segment results and material changes
- Industrial: Sales rose 1.8% to $75.3 million; operating income was $4.8 million versus $5.0 million. Higher volumes, including from specialty products, benefited from heavy rain and Mississippi River flooding; lower operating costs supported gross profit.
- Water Treatment: Sales rose 5.8% to $43.3 million; operating income increased to $7.1 million from $6.3 million. Higher volumes of certain higher-priced specialty products drove sales growth.
- Health and Nutrition: Sales fell 17.6% to $28.8 million; operating income was $2.0 million versus $2.2 million. The decline reflected weaker sales of distributed specialty products, including an anticipated temporary worldwide supply shortage and the transition to new partners and product lines.
Overall sales fell $2.5 million, with gains in Industrial and Water Treatment more than offset by Health and Nutrition weakness. Management reported gross-profit gains in Industrial and Water Treatment, partly offset by lower Health and Nutrition gross profit.
Cash, debt, liquidity, and capital
- Cash declined to $5.6 million at June 30, 2019, from $9.2 million at March 31, 2019. Operating cash flow improved year over year mainly because inventory declined, whereas it rose substantially in the prior-year quarter. Flooding limited barge receipts of bulk chemicals; management cautioned that purchase timing can cause significant working-capital and cash-flow swings.
- Investing cash use was $9.1 million, primarily reflecting $9.2 million of capital spending. The increase was mainly due to the purchase of the previously leased corporate headquarters.
- Financing cash use was $4.6 million, including $2.5 million of dividends paid and $1.8 million of share repurchases. The company declared a $0.23-per-share dividend; it had declared no dividend in the comparable quarter. The difference in cash dividends paid year over year also reflects the change from semiannual to quarterly payments.
- Debt was $85.0 million gross, or $84.6 million net of issuance costs, including $9.9 million classified as current. The $150 million revolving facility matures November 30, 2023; the reported borrowing rate was 3.1%. The company had an interest-rate swap covering $30 million through August 31, 2019, stepping down to $20 million thereafter through December 23, 2020.
- The company said cash, operating cash flows, and available credit were expected to fund foreseeable operating needs. It was in compliance with credit-agreement covenants at quarter-end. The filing does not state the exact undrawn facility availability after any letters of credit or other usage.
Outlook, accounting, and risks
- No specific earnings or revenue guidance was provided. Management noted that interim results are not necessarily indicative of full-year results.
- Management expects cash balances, credit availability, and operating cash flows to meet foreseeable needs. Seasonal inventory build-up—typically from April through November—and commodity-chemical purchase timing can affect working capital and cash flow.
- Commodity chemical costs are cyclical, and the company does not hedge purchases; it seeks to pass cost changes to customers but cannot assure it will do so. A 25-basis-point interest-rate change could affect annual interest expense by approximately $0.1 million.
- Adoption of the lease accounting standard on April 1, 2019 added right-of-use assets and lease liabilities of approximately $10.4 million at adoption. The company said adoption materially affected the balance sheet but not materially its income statement or cash flows. Lease expense for the quarter was $0.7 million.
- Environmental remediation liability for contamination at the Minneapolis facility was $0.3 million at June 30, 2019. The company said reserves may be insufficient and it could not estimate any additional exposure. No material pending legal proceedings were reported; risk factors were unchanged from the fiscal 2019 Form 10-K.
- The company is selling an underused St. Louis office building, carried at a net book value of $0.9 million, with no impairment recorded. Management stated the listing price exceeded book value.
Important facts for investors to verify
- Whether Health and Nutrition’s supply shortage and partner/product-line transition resolve as anticipated, and how they affect sales and margins.
- Whether flooding-related volume benefits persist and whether restricted barge receipts or seasonal inventory purchases affect subsequent working capital and operating cash flow.
- Actual capital-spending levels after the headquarters purchase and resulting cash generation.
- Revolver utilization, covenant headroom, borrowing costs, and the interest-rate swap’s coverage as its notional amount steps down.
- Whether Minneapolis remediation costs exceed the recorded $0.3 million liability and whether the St. Louis property sale closes above its carrying value.