Hawkins, Inc. — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2013 (52 weeks), compared primarily with fiscal 2012, ended April 1, 2012. This is an annual filing, not a standalone 2012 fourth-quarter report; quarterly figures are included below.
Business context and results
Hawkins distributes bulk chemicals and blends, manufactures, and distributes specialty chemicals through its Industrial and Water Treatment segments. Water Treatment sales are seasonal, typically strongest from April through September. The company operates primarily in the United States.
| Metric | FY2013 | FY2012 |
|---|---|---|
| Sales | $350.4 million | $343.8 million |
| Gross profit / margin | $56.9 million / 16.2% | $65.9 million / 19.2% |
| Operating income / margin | $25.3 million / 7.2% | $35.1 million / 10.2% |
| Income from continuing operations | $17.1 million | $21.6 million |
| Net income | $17.1 million | $22.7 million |
| Diluted EPS | $1.62 | $2.18 |
| Operating cash flow | $35.5 million | $33.7 million |
Industrial sales declined 1.2% to $248.6 million, while segment operating income fell to $9.0 million from $20.6 million. Water Treatment sales rose 10.2% to $101.8 million and operating income increased to $16.4 million from $14.6 million.
Liquidity, capital, and cash flow
- At March 31, 2013, cash and cash equivalents were $28.7 million, current investments $15.6 million, and long-term investments $5.6 million. Cash plus investments totaled approximately $49.9 million.
- Current assets were $111.1 million and current liabilities $35.1 million. Total assets were $222.1 million; total liabilities were $52.0 million, including a $7.1 million pension withdrawal liability.
- The balance sheet presents no borrowings or other debt balance. Operating cash flow was $35.5 million; capital expenditures were $26.7 million. Cash used in financing was $4.9 million, including $6.9 million of dividends paid.
- Management projected approximately $18 million of FY2014 capital spending and said cash and operating cash flows should be sufficient for FY2014 requirements.
Changes and unusual items
- Sales increased 1.9%, but gross profit declined $8.9 million and operating income fell $9.8 million. Reported gross margin contracted by 3.0 percentage points.
- FY2013 included a $7.2 million pre-tax charge for withdrawal from the Central States multiemployer pension plan and a $3.2 million pre-tax ICL litigation settlement charge, both recorded in Industrial cost of sales. The charges materially reduced reported profitability.
- Other Industrial headwinds included competitive pricing and lower per-unit margins, $1.3 million of incremental Rosemount facility costs, and $0.4 million of accelerated depreciation on a leased facility planned for exit. A $0.4 million reduction in the LIFO reserve increased FY2013 gross profit; the reserve increase had reduced FY2012 gross profit by $1.6 million.
- Water Treatment benefited from favorable weather and volume growth. Industrial sales were lower despite increased overall volumes, reflecting competitive price pressure and product mix.
- Net income was also affected by the prior-year $1.1 million after-tax discontinued-operations contribution; FY2013 discontinued operations contributed only $18,000.
Fourth-quarter comparison: FY2013 Q4 sales were $87.6 million versus $83.2 million in FY2012 Q4; gross profit was $14.3 million versus $13.5 million; operating income was $6.0 million versus $5.6 million; and diluted EPS was $0.39 versus $0.34.
Outlook, risks, and contingencies
- Management expected approximately $1.2 million of additional full-year operating costs for the Rosemount facility in FY2014, approximately $1.0 million of costs for the new corporate headquarters, and $0.8–$1.0 million of pre-tax charges in the first half of FY2014 related to exiting the leased pharmaceutical-products facility. Some pharmaceutical product lines will be transferred; others discontinued.
- CSS payments were estimated at approximately $9.3 million in aggregate, about $467,000 annually over 20 years, beginning in FY2014. The final assessed amount may differ; management identified plan and employer factors that could increase the obligation beyond the accrual.
- Key business risks include volatile commodity prices and supply availability, inability or delay in passing through price changes, competitive price pressure, cyclical customer demand, weather and seasonality, chemical-handling and environmental liabilities, and natural disasters. Hawkins does not hedge commodity chemical prices.
- Four significant operating sites are on leased land without guaranteed renewal options; the disclosed lease renewal periods extend to 2018, 2023, and 2029. The company also noted Mississippi River flood exposure. The Cheese-Phos patent was scheduled to expire in November 2013.
- Hawkins increased its semi-annual dividend to $0.34 per share in FY2013; future dividends depend on results, financial position, cash flows, and Board review. The filing gives no earnings or revenue guidance.
KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of March 31, 2013.
Important facts for investors to verify
- Whether the final CSS withdrawal assessment and payment schedule remain consistent with the $9.3 million estimate and recorded liability.
- Whether Industrial margins recover from FY2013 price competition and whether Water Treatment growth persists under different weather conditions.
- Whether the Rosemount facility delivers expected capacity and whether the planned pharmaceutical-site exit costs stay within estimates.
- Whether commodity input costs and supply availability permit timely customer price pass-through, and the business impact following the Cheese-Phos patent expiration.
- Whether the company renews key leased-site agreements and how capital spending, cash generation, and dividends develop against management’s FY2014 expectations.