Hawkins, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended April 3, 2016. Fiscal 2016 comprised 53 weeks; fiscal 2015 comprised 52 weeks. This is an annual filing, not a standalone fourth-quarter report. Hawkins distributes, blends and manufactures chemicals and specialty ingredients through Industrial, Water Treatment, and—following the December 2015 Stauber acquisition—Health and Nutrition.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Sales | $414.0 million | $364.0 million |
| Gross profit / margin | $80.3 million / 19.4% | $65.8 million / 18.1% |
| Operating income / margin | $31.2 million / 7.5% | $30.4 million / 8.4% |
| Net income / margin | $18.1 million / 4.4% | $19.2 million / 5.3% |
| Diluted EPS | $1.72 | $1.81 |
| Operating cash flow | $36.3 million | $20.7 million |
- Revenue increased 13.7%. Acquisitions contributed $33.9 million of sales from Health and Nutrition and $12.6 million from Water Treatment locations acquired in fiscal 2015 and 2016. The extra fiscal week also contributed to growth.
- Gross profit increased 22.0%; margin improved, partly reflecting product mix and a $1.4 million benefit from the lower LIFO reserve. Operating income rose only 2.5%, as SG&A increased to $49.1 million from $35.4 million. Net income fell 5.6%, with higher interest expense and a 40.2% effective tax rate contributing to the decline.
- Cash from operations was $36.3 million. Investing activities used $151.4 million, including $159.2 million net for acquisitions; financing activities provided $116.4 million, including $131.0 million of new borrowings. Capital expenditures were $24.2 million.
- At year-end, cash was $20.0 million, total debt was $129.8 million, and $34.0 million remained available under the $65.0 million revolving facility. Current assets were $137.3 million and current liabilities $59.8 million. Debt was secured by substantially all personal property assets of the company and subsidiaries; the stated effective borrowing rate was approximately 1.9%.
- Dividends declared were $0.80 per share, up from $0.76. The company repurchased 127,852 shares for $4.8 million during the year.
Material changes and unusual items
- Hawkins acquired Stauber for total consideration of $158.2 million ($156.7 million net of acquired cash), funded partly by $131.0 million of credit-facility borrowings. Stauber contributed $33.9 million in reported fiscal 2016 sales and $6.8 million gross profit, but recorded an operating loss of $0.9 million, including $3.3 million of acquisition-related costs.
- Stauber’s $71.5 million of acquired identifiable intangible assets and $84.2 million of goodwill substantially increased reported assets. Total assets rose to $436.5 million from $248.5 million.
- Fiscal 2016’s additional week was estimated to add approximately $2.1 million to gross profit. The company also reported a $0.5 million tax expense related to nondeductible Stauber acquisition costs and a $0.2 million impact from a preliminary state tax audit finding.
- Fourth-quarter sales were $129.5 million, operating income $8.9 million, and net income $4.9 million. The fourth quarter included $0.6 million of Stauber acquisition-related costs; a further $2.7 million of these costs was recorded in the third quarter.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management expected fiscal 2017 capital spending to be comparable to fiscal 2016 and planned continued Water Treatment branch investment and expansion.
- Management identifies exposure to volatile commodity input prices and supply availability; Hawkins does not hedge commodity purchases and may be delayed or unable to pass cost increases to customers. Competitive pricing, cyclical customer industries, weather and seasonality may affect results.
- Other stated risks include chemical handling and transportation incidents, environmental and safety regulation, food and nutritional product regulation and reputation, acquisition integration and goodwill impairment, and dependence on key personnel and transportation infrastructure.
- The credit agreement requires a minimum fixed-charge coverage ratio of 1.15:1 and maximum cash-flow leverage ratio of 3.0:1. Hawkins reported compliance at year-end. The filing reports no material pending litigation and no off-balance-sheet arrangements.
- Hawkins was negotiating to extend a significant facility lease expiring in 2018; failure to renew certain terminal or manufacturing leases could disrupt operations or create relocation costs. Annual payments on its multiemployer pension withdrawal liability are approximately $467,000 through 2034.
- The independent auditor gave unqualified opinions on the financial statements and on internal control over financial reporting. Hawkins excluded Stauber from management’s and the auditor’s internal-control assessment for this year; the company stated Stauber must be included no later than fiscal 2017’s third quarter.
Key facts for investors to verify
- How Stauber performs after integration, including its operating profitability, acquired intangible amortization, and the final purchase-price allocation.
- Debt reduction, interest-rate sensitivity, covenant headroom, and the availability and terms of remaining credit capacity.
- Whether revenue and gross-profit growth persist absent the extra fiscal week, acquisition contributions, and favorable LIFO-reserve movement.
- Progress on the lease extension due in 2018 and the potential cost or operational effect if renewal is not secured.
- How commodity pricing, inventory working-capital swings, and higher SG&A affect cash generation and margins.