Hawkins, Inc. — Form 10-Q Summary
Business context and reporting period. Hawkins sells bulk and specialty chemicals, including blended and manufactured products, through its Industrial and Water Treatment segments. This unaudited report covers the quarter and nine months ended January 1, 2012; comparisons are to periods ended December 31, 2010. The company changed to a 13-week quarterly reporting convention in fiscal 2012, so period comparability should be considered. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless noted.
Key financial results
| Metric | Quarter ended Jan. 1, 2012 | Prior-year quarter | Nine months ended Jan. 1, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Sales | $84.2 million | $70.6 million | $260.6 million | $215.7 million |
| Gross profit / margin | $15.7 million / 18.6% | $13.7 million / 19.4% | $52.4 million / 20.1% | $49.9 million / 23.1% |
| Operating income / margin | $8.5 million / 10.1% | $6.8 million / 9.7% | $29.5 million / 11.3% | $29.5 million / 13.7% |
| Net income | $5.6 million | $4.3 million | $19.2 million | $18.4 million |
| Diluted EPS | $0.53 | $0.41 | $1.84 | $1.78 |
- Quarterly income from continuing operations was $5.3 million, or $0.51 diluted EPS; nine-month continuing income was $18.4 million, or $1.76 diluted EPS. Discontinued operations contributed $0.3 million after tax in the quarter and $0.8 million for nine months.
- Operating cash flow was $20.5 million for nine months, down from $24.3 million. Capital expenditures were $13.8 million, versus $7.8 million; cash dividends paid were $6.4 million.
- At January 1, cash and cash equivalents were $19.3 million; cash and investments totaled approximately $36.6 million. Current assets were $100.4 million and current liabilities $29.2 million. The balance sheet presents no interest-bearing debt line.
- Total assets were $191.7 million, total liabilities $38.0 million, and shareholders’ equity $153.6 million. Cash dividends declared were $0.32 per share for the nine-month period.
Material changes and drivers
- Quarterly sales rose 19.2%; nine-month sales rose 20.8%. The Vertex acquisition contributed $9.3 million of quarterly and $30.7 million of nine-month sales growth. Higher commodity-related selling prices also lifted sales, while bulk chemical volumes were lower overall.
- Industrial segment sales were $63.7 million for the quarter and $188.6 million for nine months. Water Treatment sales were $20.4 million and $72.0 million, respectively. Water Treatment’s nine-month gross profit declined amid competitive pricing and unfavorable weather-related lower volumes.
- Gross profit dollars increased, but gross margin declined year over year, particularly for the nine-month period, reflecting product mix, competitive pricing and cost dynamics. Management says it seeks to maintain relatively stable gross profit dollars per product as raw-material costs change.
- Operating income was nearly flat for nine months: Industrial improved by $1.3 million while Water Treatment declined by $1.3 million. Quarterly operating income increased, mainly from Industrial.
- The LIFO inventory reserve increased gross profit by $0.2 million for nine months in fiscal 2012, versus reducing it by $1.4 million in the prior-year period. The quarter’s $0.6 million reserve decrease also increased gross profit.
Outlook, risks and unusual items
- No earnings or revenue guidance is provided. Management anticipated that certain commodity chemical costs would decline during the remainder of fiscal 2012 and projected lower fiscal year-end inventory volumes than the prior year. It expected cash and operating cash flows to fund planned remaining fiscal 2012 capital expenditures.
- Hawkins purchased a 28-acre Rosemount, Minnesota site and began constructing a facility during the quarter, expecting it to be operational in late calendar 2012. The facility is intended to support growth and reduce reliance on flood-prone Mississippi River sites; the company does not plan to close existing sites.
- Commodity chemical prices are cyclical. The company does not hedge raw-material purchases and cautions it may not be able to pass future cost increases to customers. Interest-rate changes could affect the fair value of its certificates of deposit.
- ICL Performance Products seeks $7.3 million plus interest, costs and fees in a phosphoric-acid contract lawsuit. Hawkins counterclaims for $1.5 million plus other damages and relief. Discovery is complete and both parties have sought summary judgment; outcome and timing are uncertain, and no trial date was set.
- Discontinued pharmaceutical operations generated gains under a prior marketing agreement; Hawkins reported approximately $1.3 million of pretax gains in fiscal 2012 to date. Vertex was acquired in January 2011 for $27.2 million, with $1.7 million paid in the first quarter of fiscal 2012.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing states there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of sales and earnings growth is attributable to Vertex, pricing, and ongoing volume or mix trends.
- Whether gross margin pressure—especially in Water Treatment and across the nine-month period—persists, and how commodity prices and LIFO estimates affect reported results.
- Progress, total cost and timing of the Rosemount facility, alongside planned capital spending and operating cash generation.
- The outcome and potential financial or operational impact of the ICL litigation.
- Whether projected commodity-cost declines and lower year-end inventory assumptions materialize; the filing provides no quantified full-year earnings outlook.