Hawkins, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2018, ended December 31, 2017; comparator periods ended January 1, 2017. Financial statements are unaudited. Hawkins distributes and sells chemicals and specialty ingredients, including products it manufactures, blends, and repackages.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Prior comparable quarter | Nine months ended Dec. 31, 2017 | Prior comparable nine months |
|---|---|---|---|---|
| Sales | $118.1 million | $112.4 million | $377.2 million | $365.0 million |
| Gross profit / margin | $18.8 million / 16.0% | $20.9 million / 18.6% | $69.0 million / 18.3% | $76.2 million / 20.9% |
| Operating income / margin | $4.7 million / 4.0% | $6.0 million / 5.3% | $24.2 million / 6.4% | $31.2 million / 8.6% |
| Net income | $17.1 million | $3.6 million | $28.2 million | $18.3 million |
| Diluted EPS | $1.61 | $0.34 | $2.65 | $1.73 |
Quarterly sales rose 5.1% and nine-month sales rose 3.3%, while gross profit and operating income declined in both comparisons. Net income was lifted by a one-time $13.2 million tax benefit from remeasuring deferred tax balances after U.S. tax reform; the reported effective tax rate is therefore not meaningful. Excluding that nonrecurring adjustment, the nine-month effective tax rate was 32.5%, versus 37.3% in the prior period. The company expects a 21% federal statutory rate in future years; fiscal 2018 uses a blended 31.5% rate.
- Cash flow and capital spending: Nine-month operating cash flow was $14.6 million, down from $31.0 million. Capital expenditures were $17.0 million, compared with $15.8 million. Cash increased $0.8 million to $7.6 million.
- Liquidity and debt: Current assets were $133.1 million and current liabilities $48.5 million. Total debt, net of issuance costs, was $114.1 million, versus $102.6 million at April 2, 2017; borrowings included $87.5 million of term debt and $27.0 million on the revolver. The $165 million credit facility matures December 23, 2020; effective borrowing rate was 2.8%. Hawkins reported compliance with all covenants.
- Dividends: $9.2 million paid in the first nine months; $0.44 per share declared, versus $0.42 in the prior comparable period.
Material changes and management commentary
- Industrial and Water Treatment sales increased, while Health and Nutrition sales declined 1.0% over nine months. Industrial volume was relatively flat; Water Treatment growth reflected increased sales across product lines. Health and Nutrition manufacturing sales were weaker due to reduced customer demand and temporary facility-upgrade work.
- Gross profit was pressured by higher raw-material costs and a $2.1 million year-over-year LIFO reserve impact over nine months, competitive pricing, lower-margin product mix, and planned investments. Management also cited $0.7 million of accelerated depreciation and a $0.5 million cost reclassification in Health and Nutrition.
- Operating cash flow fell partly because of inventory investment: inventories increased to $62.7 million from $51.2 million, including higher on-hand and in-transit quantities and higher unit costs for a major commodity. Management said purchase timing and seasonal chemical inventory needs can materially affect working capital.
- Capital spending included $6.7 million for expansion, storage, and process improvements, including purchases of three previously leased Florida locations, and $7.4 million for facility improvements, equipment, containers, and Water Treatment trucks.
- Management expects cash, credit-facility availability, and operating cash flows to fund ongoing needs for the foreseeable future. No specific earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- Commodity-price changes may not be fully passed on to customers; Hawkins does not hedge commodity purchases. A 25-basis-point interest-rate change was estimated to affect annual interest expense by about $0.1 million. A swap hedges a portion of variable-rate debt, with a notional amount stepping down from $40 million to $20 million through 2020.
- The $13.2 million tax-reform benefit is provisional; the state-tax impact had not been estimated, although the company did not expect it to be material. The federal tax-rate reduction also affects future tax expense.
- Goodwill was $97.6 million; the prior-year impairment test showed only 4.8% excess fair value for the Health and Nutrition reporting unit, a valuation point investors may monitor.
- No material pending legal proceedings were reported, and the company disclosed no material changes to previously reported risk factors.
Important facts for investors to verify
- Whether gross margins recover as raw-material costs, competitive pricing, and LIFO inventory effects change.
- Whether elevated inventory converts to sales and cash, and how seasonal working-capital requirements affect operating cash flow and revolver usage.
- Whether Health and Nutrition manufacturing demand and returns improve after facility upgrades, and whether goodwill valuation assumptions remain supportable.
- The final tax-reform accounting, particularly any state-tax effects, and the sustainability of earnings apart from the one-time tax benefit.
- Debt levels, interest costs, covenant compliance, and planned capital spending and dividends.