Business context and reporting period
Hawkins, Inc. filed this unaudited Form 10-Q for the quarter ended September 27, 2015, the second quarter of fiscal 2016; fiscal 2016 ends April 3, 2016 and has 53 weeks. The company distributes chemicals and also manufactures, blends, and repackages products. Its reportable segments are Industrial and Water Treatment.
Financial performance and position
| Metric | Three months ended Sep. 27, 2015 | Three months ended Sep. 28, 2014 | Six months ended Sep. 27, 2015 | Six months ended Sep. 28, 2014 |
|---|---|---|---|---|
| Sales | $94.6 million | $88.9 million | $196.1 million | $186.9 million |
| Gross profit / margin | $19.8 million / 20.9% | $18.1 million / 20.4% | $40.5 million / 20.7% | $36.6 million / 19.6% |
| Operating income / margin | $9.5 million / 10.0% | $9.9 million / 11.1% | $20.4 million / 10.4% | $19.5 million / 10.4% |
| Net income / net margin | $5.7 million / 6.0% | $6.1 million / 7.0% | $12.5 million / 6.4% | $12.2 million / 6.5% |
| Diluted EPS | $0.54 | $0.58 | $1.17 | $1.15 |
- For the quarter, sales rose 6.4%, while net income declined 7.6%. For the first half, sales rose 4.9% and net income rose 2.5%.
- First-half operating cash flow was $20.5 million, versus $9.6 million in the prior-year period. Management attributed the increase primarily to the timing of inventory purchases; inventory movements can materially affect working capital and cash flow.
- First-half capital expenditures were $9.7 million, compared with $6.2 million. Investing cash use was $9.7 million, including the $4.5 million Davis acquisition; financing cash use was $8.7 million, including $4.8 million of share repurchases and $4.0 million of dividends paid.
- At September 27, cash and cash equivalents were $20.8 million; current and long-term available-for-sale investments were $10.1 million and $17.3 million. Management reported combined cash and investments of $48.1 million, down $2.3 million from fiscal year-end.
- Total assets were $253.2 million and shareholders’ equity was $198.5 million. The balance sheet does not show a borrowing or debt line; this summary does not infer whether other financing obligations exist. Current liabilities were $37.7 million. The company reported a $6.4 million pension withdrawal liability.
- Cash dividends declared were $0.40 per share in the quarter and first half, compared with $0.38 in each prior-year comparable period.
Material changes and segment results
- Water Treatment drove most of the sales growth: quarterly segment sales increased 17.1% to $36.2 million; first-half sales increased 14.2% to $70.2 million. Industrial sales were nearly flat, at $58.3 million for the quarter and $125.9 million for the first half.
- Quarterly Industrial operating income increased to $3.7 million from $3.6 million, while Water Treatment operating income declined to $5.8 million from $6.2 million. First-half operating income increased in Industrial to $9.3 million from $7.9 million, and declined in Water Treatment to $11.1 million from $11.6 million.
- On September 18, 2015, Hawkins acquired substantially all assets of Florida-based Davis Supply for $4.5 million cash. Davis had approximately $5 million of 2014 calendar-year revenue. The preliminary allocation estimated approximately $4.0 million of purchase price as goodwill and intangible assets; valuation was not complete at quarter-end.
- Higher SG&A—up $2.0 million in the quarter and $3.0 million in the first half—more than offset quarterly gross-profit growth and contributed to lower quarterly operating income. Management cited acquired Florida operations and added sales personnel.
Outlook, risks, and unusual items
- Management expects cash balances and operating cash flows to fund ongoing requirements for the foreseeable future, while noting that it may consider acquisitions or strategic relationships requiring additional financing. No quantitative earnings or revenue guidance is provided.
- A preliminary state tax audit finding covering multiple years resulted in $0.3 million of income tax expense in the quarter. The quarterly effective tax rate was 40.2%, versus 37.5% a year earlier.
- Commodity chemical prices are cyclical. Hawkins does not hedge commodity chemical purchases and may be unable to pass all cost increases to customers. Fixed-income investments are exposed to interest-rate risk; management intends to hold them to maturity.
- Management reported no material pending litigation and no material changes to previously disclosed risk factors. The six-month results are not necessarily indicative of full-year results. The LIFO inventory method had a nominal effect on first-half gross profit, versus a $0.7 million reduction in the prior-year first half.
Important facts for investors to verify
- Review whether Water Treatment growth and profitability can improve as the Florida acquisitions are integrated, given lower segment gross margin percentages and higher operating costs at the acquired locations.
- Track the impact of rising SG&A and staffing costs on operating margins, particularly given the quarter’s decline in operating income despite higher sales and gross profit.
- Confirm the final purchase-price allocation and acquired-asset valuation for Davis, and assess its contribution after acquisition.
- Monitor working-capital and inventory timing, capital spending, dividends, and repurchases against operating cash generation and the company’s liquidity position.
- Follow the state tax audit assessment and the company’s exposure to chemical-price changes and its ability to pass costs through to customers.