Hawkins, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended March 29, 2020 (52 weeks). The filing also reports unaudited fourth-quarter results. Hawkins distributes, blends and manufactures chemicals and specialty ingredients through Industrial, Water Treatment, and Health and Nutrition segments.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Sales | $540.2 million | $556.3 million | Down 2.9% |
| Gross profit / margin | $100.9 million / 18.7% | $95.9 million / 17.2% | Profit up 5.2%; margin up 1.5 percentage points |
| Operating income / margin | $41.7 million / 7.7% | $36.8 million / 6.6% | Up 13.2% |
| Net income | $28.4 million | $24.4 million | Up 16.1% |
| Diluted EPS | $2.66 | $2.28 | Up 16.7% |
| Operating cash flow | $58.9 million | $48.0 million | Up $10.9 million |
| Capital expenditures | $24.5 million | $12.6 million | Nearly doubled |
| Cash and cash equivalents at year-end | $4.3 million | $9.2 million | Down $4.9 million |
| Revolver borrowings | $60.0 million | $85.0 million | Down $25.0 million |
FY2020 interest expense was $2.5 million, versus $3.4 million; the effective tax rate was 27.2%, versus 27.1%. The company declared dividends of $0.9225 per share. The $150 million secured revolver matures November 30, 2023; the company reported a 2.3% borrowing rate and compliance with its covenants. Management reported net debt of $55.7 million and a leverage ratio below 1.0x.
Fourth quarter (unaudited)
Q4 sales were $132.4 million, compared with $133.1 million a year earlier. Gross profit was $22.6 million versus $20.7 million; operating income was $7.8 million versus $5.8 million; net income was $4.8 million versus $3.8 million; diluted EPS was $0.45 versus $0.35.
Material changes and segment performance
- Industrial: Sales fell 2.4% to $275.2 million, reflecting lower commodity pricing and reduced volume, particularly in bulk products amid weakness in ethanol. Gross profit increased to $38.9 million, supported by a richer mix of manufactured, blended and repackaged products.
- Water Treatment: Sales rose 7.0% to $159.9 million and gross profit rose to $41.9 million, primarily on increased volumes of higher-priced manufactured, blended and repackaged products.
- Health and Nutrition: Sales declined 15.9% to $105.1 million, partly due to a previously anticipated worldwide shortage of a significant product and the transition to new partners and product lines. Gross profit decreased to $20.1 million; segment operating income fell to $4.8 million from $6.2 million.
Despite lower consolidated sales, improved product mix helped lift gross profit and operating margin. SG&A was essentially flat at $59.2 million, though it increased as a share of sales to 11.0% from 10.6%. Investing cash use rose to $24.2 million, including $24.5 million of capital spending; financing cash use was $39.6 million, including $25.0 million of net debt repayments, $9.8 million of dividends and $5.9 million of share repurchases.
Outlook, risks and notable items
- Management said COVID-19 effects were mixed: food, bottled bleach and Health and Nutrition markets benefited, while ethanol, pools and resorts weakened. It expected mixed results to continue for the foreseeable future; no quantified earnings or sales guidance was provided.
- Manufacturing facilities continued operating as essential operations, with no significant reported impact on output. Management said it would be cautious with capital spending while continuing selected investments, including Water Treatment branch expansion and projects intended to support higher-margin business.
- Key exposures include commodity-price and supply volatility, competition and margin pressure, cyclical end-market demand, seasonal and weather effects, transportation disruptions, chemical handling and environmental liabilities, regulation of food and nutrition products, and COVID-19 uncertainty. The company does not hedge commodity purchases and may be delayed or unable to pass cost increases to customers.
- A $0.6 million impairment charge was recorded for manufacturing equipment no longer planned for use. No goodwill impairment was recorded in FY2020; the Health and Nutrition reporting unit’s estimated fair value exceeded carrying value at the annual test date. FY2018 included a $39.1 million goodwill impairment and a $13.9 million one-time tax benefit.
- The company reported a trichloroethylene remediation reserve below $0.1 million at year-end and cautioned that the estimate may be insufficient. It reported no material pending litigation. A multiemployer pension withdrawal liability is payable at $467,000 annually through 2034.
- Operating lease accounting was adopted in FY2020, adding $9.1 million of right-of-use assets and $9.2 million of lease liabilities at year-end; the adoption materially affected the balance sheet but not materially the income statement or cash flows.
Important facts for investors to verify
- Whether Health and Nutrition sales and profitability recover as product supply and partner transitions progress.
- How COVID-19-related demand changes affect end markets, operations, working capital and future cash generation.
- Whether gross-margin improvement from product mix is sustainable amid commodity-price changes and competitive pricing.
- Revolver availability and covenant headroom, including the effect of seasonal working-capital needs and planned investment.
- Future remediation costs, lease renewal outcomes at key facilities, and the assumptions supporting goodwill and intangible-asset valuations.
- The filing’s auditor expressed an unmodified opinion on the financial statements and concluded internal control over financial reporting was effective as of March 29, 2020.