Hawkins, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2018, ended October 1, 2017; comparisons are to the periods ended October 2, 2016. Financial statements are unaudited. Hawkins sells chemicals and specialty ingredients through Industrial, Water Treatment, and Health and Nutrition segments.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $125.4 million, up 3.4% | $259.1 million, up 2.6% |
| Gross profit / margin | $24.1 million / 19.2%, versus $27.0 million / 22.3% | $50.1 million / 19.3%, versus $55.2 million / 21.9% |
| Operating income | $9.3 million, versus $12.2 million | $19.5 million, versus $25.3 million |
| Net income | $5.2 million, versus $7.2 million; diluted EPS $0.49 versus $0.68 | $11.0 million, versus $14.8 million; diluted EPS $1.04 versus $1.40 |
| Operating cash flow | Not provided for the quarter | $4.5 million, versus $28.0 million |
For the six months, capital expenditures were $13.2 million and cash dividends paid were $4.5 million. Cash declined $3.1 million from fiscal year-end to $3.8 million. At October 1, total debt was $112.4 million ($111.9 million net of issuance costs), including $23.0 million drawn on the revolver; cash less gross debt was approximately $108.6 million net debt. Current assets were $132.2 million and current liabilities $52.5 million. The declared dividend was $0.44 per share for the quarter, compared with $0.42.
Material changes and business drivers
- Revenue increased, but profitability declined: higher raw-material costs and LIFO inventory charges, competitive pricing, product mix, and planned growth-related spending weighed on gross profit. For the six months, management attributed $1.1 million of lower gross profit year over year to the LIFO reserve change.
- Six-month segment sales were $122.7 million Industrial, $76.4 million Water Treatment, and $60.0 million Health and Nutrition. Operating income was $6.2 million, $11.9 million, and $1.4 million, respectively. Water Treatment operating income improved slightly; Industrial and Health and Nutrition declined.
- Health and Nutrition gross profit was affected by lower sales of higher-margin manufactured products, accelerated depreciation for equipment replacement ($0.7 million for six months), and a $0.5 million expense reclassification from SG&A to operating overhead. Management also cited $1.4 million of planned personnel and other growth investments in the six-month gross-profit decline.
- Operating cash flow fell substantially, mainly reflecting less favorable receivables timing than the prior year and inventory purchases. Inventory rose to $65.9 million from $51.2 million at fiscal year-end, partly due to higher on-hand and in-transit inventory and higher costs for a major commodity.
Liquidity, outlook, and risks
Management said cash, credit-facility availability, and operating cash flows should fund ongoing operations for the foreseeable future. The $165 million secured credit facility consists of a $100 million term loan and a $65 million revolver, and matures December 23, 2020. Hawkins reported a 2.7% effective borrowing rate and compliance with its financial covenants at October 1. A cash-flow interest-rate swap covers a declining notional amount of $40 million, $30 million, and $20 million over successive periods through facility maturity.
The filing provides no specific earnings or revenue guidance. Management cautioned that commodity prices are cyclical and that it may not be able to pass future cost increases to customers; Hawkins does not hedge commodity purchases. A 25-basis-point interest-rate change could affect annual interest expense by approximately $0.1 million. Other noted exposures include variable-rate debt and counterparty risk on the swap. No material changes to previously disclosed risk factors or material pending litigation were reported.
Important facts for investors to verify
- Whether inventory build and working-capital use unwind as expected, and whether operating cash flow recovers.
- Whether higher raw-material costs can be passed through without further margin erosion, particularly in Industrial and Health and Nutrition.
- Progress and returns from growth spending, facility investments, and Health and Nutrition equipment replacement.
- Debt, revolver usage, covenant headroom, and sensitivity to interest rates; the filing does not state the exact unused revolver capacity after letters of credit.
- Potential effects of commodity-cost movements and interim LIFO estimates on reported margins.