Hawkins, Inc. — Form 10-Q Summary
Business and period: Hawkins distributes and supplies chemicals, including value-added products, through its Industrial and Water Treatment segments. This report covers the fiscal second quarter and first six months ended September 28, 2014; comparisons are with the periods ended September 29, 2013. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Sales | $88.9 | $86.6 | $186.9 | $181.3 |
| Gross profit / margin | $18.1 / 20.4% | $16.6 / 19.1% | $36.6 / 19.6% | $33.8 / 18.6% |
| Operating income | $9.9 | $8.3 | $19.5 | $16.5 |
| Net income | $6.1 | $5.2 | $12.2 | $10.3 |
| Diluted EPS | $0.58 | $0.49 | $1.15 | $0.98 |
For the first six months, Industrial sales were $125.5 million and operating income was $7.9 million; Water Treatment sales were $61.4 million and operating income was $11.6 million. Sales rose 3.1% overall, with Water Treatment growing faster than Industrial. The filing reports net interest expense of $4,000 for the six-month period.
Cash flow, liquidity and balance sheet
- Six-month operating cash flow was $9.6 million, down from $14.8 million, primarily due to inventory purchases. Inventory increased to $37.3 million from $26.2 million at fiscal year-end.
- Capital expenditures were $6.2 million. Investing cash outflow was $11.3 million, including net investment purchases; financing cash outflow was $5.1 million, including $3.8 million of dividends and $1.4 million of share repurchases.
- Cash and cash equivalents were $26.7 million; cash and investments totaled $61.6 million, down from $63.2 million at March 30, 2014. Total current assets were $116.7 million and current liabilities were $35.5 million.
- The balance sheet reports no borrowings or other interest-bearing debt; it does report a $6.7 million pension withdrawal liability. Total liabilities were $53.1 million.
- Management expects cash balances and operating cash flows to cover requirements, including acquisitions or strategic relationships, for the foreseeable future.
Changes, outlook and risks
- Gross margin improved year over year. Higher volumes and overhead efficiencies helped, while lower raw-material prices and competitive pricing pressured per-unit selling prices. Water Treatment growth reflected newer branches and specialty chemicals; certain established markets experienced lower sales that management attributed partly to weather and reduced municipal pumping.
- Prior-year gross profit included approximately $0.8 million of costs to exit a leased facility serving bulk pharmaceutical customers. LIFO inventory accounting reduced current-period gross profit by $0.7 million for the first six months, versus a $0.1 million benefit in the prior-year period.
- On October 20, 2014, after quarter-end, Hawkins acquired substantially all assets of The Dumont Company for $10.0 million cash. Dumont operates seven Florida locations and reported approximately $14.0 million of calendar-year 2013 revenue; it will be included in Water Treatment.
- The company repurchased 39,170 shares for $1.4 million during the first half under a program authorizing up to 300,000 shares. A further $0.4 million of potential ACS acquisition consideration was earned and is payable in the third quarter.
- No numerical earnings or revenue guidance was provided. Risks discussed include commodity chemical price volatility, competitive pricing and uncertainty about passing cost increases to customers. Seasonal inventory purchases and water-treatment receivables can affect working capital and cash flow. Management reported no material changes to previously disclosed risk factors and no material pending litigation.
Important facts for investors to verify
- Whether inventory levels unwind as expected and operating cash flow recovers from the seasonal first-half build.
- Whether Hawkins can sustain improved margins amid commodity-cost movements and competitive pricing.
- The financing and integration effects of the Dumont acquisition, including its contribution to Water Treatment results.
- The status of the remaining share-repurchase authorization and the ACS performance-based payment.
- The company’s ability to maintain liquidity while funding capital expenditures, dividends, acquisitions and working-capital needs.