Hawkins, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2024 third quarter and first nine months ended December 31, 2023; comparisons are to the periods ended January 1, 2023. Amounts are in millions except per-share data. Hawkins sells chemicals and specialty ingredients through its Industrial, Water Treatment, and Health and Nutrition segments.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Sales | $208.5, down 5% | $696.1, down 2% |
| Gross profit / margin | $42.2 / 20.3% (prior 16.5%) | $148.1 / 21.3% (prior 18.3%) |
| Operating income / margin | $18.5 / 8.9% (prior 6.9%) | $84.0 / 12.1% (prior 9.9%) |
| Net income | $14.9 (prior $10.7) | $61.5 (prior $48.4) |
| Diluted EPS | $0.71 (prior $0.51) | $2.93 (prior $2.31) |
Quarterly sales weakness in Industrial and Health and Nutrition was partly offset by Water Treatment growth. Industrial sales fell 19% in the quarter and 12% year to date; Health and Nutrition fell 7% and 11%, respectively. Water Treatment sales rose 20% in the quarter and 18% year to date, aided by acquisitions, pricing, and volumes. Year-to-date Water Treatment operating income increased to $44.2 million from $25.9 million; Health and Nutrition operating income declined to $6.8 million from $11.3 million.
Gross profit benefited from lower raw material costs and a reduction in the LIFO reserve: $2.5 million in the quarter and $6.0 million year to date, compared with prior-period LIFO-related gross-profit reductions of $3.7 million and $12.7 million. SG&A rose 13% in the quarter and 7% year to date, including acquisition-related costs and acquired-business expenses. Nine-month net interest expense fell to $3.0 million from $3.9 million.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $117.6 million, versus $44.5 million, reflecting higher net income, customer collections, and lower inventory cash use. Investing cash outflow was $106.4 million, including $78.9 million for acquisitions and $28.2 million of capital expenditures. Financing cash outflow was $13.1 million. Cash decreased $1.8 million from fiscal year-end to $5.7 million.
- At December 31, cash was $5.7 million, receivables $113.0 million, inventory $68.8 million, and current assets $195.0 million; current liabilities were $79.7 million.
- Revolving-loan borrowings were $120.0 million (net carrying debt $119.7 million), compared with $112.0 million at April 2, 2023. The $250 million revolving facility matures April 30, 2027; the company reported a 4.6% effective borrowing rate and compliance with covenants. A $60 million interest-rate swap runs to May 2027.
- Capital returns included $9.9 million of dividends and $11.3 million of share repurchases year to date. The declared dividend was $0.16 per share in the quarter. Book equity was $393.8 million.
Acquisitions, outlook, and risks
Fiscal 2024 acquisitions added three Water Treatment businesses: EcoTech for $3.4 million; Miami Products for $15.5 million; and Water Solutions, with $60 million paid at closing and an estimated $10.7 million contingent earnout, for an estimated total purchase price of $70.7 million. The purchase-price allocations are preliminary. The acquired businesses had approximately $66 million of aggregate annual revenue based on the respective pre-acquisition twelve-month periods. Goodwill and intangible assets increased accordingly. The prior-year sale of consumer bleach packaging assets generated a $3 million gain and reduced current-period Industrial sales versus the prior year.
Management expects the full-year effective tax rate to be approximately 25%–26% and says cash, operating cash flows, and credit-facility resources should fund foreseeable operating requirements. No revenue or earnings guidance is provided. Management expects covenant compliance over the next 12 months. Key exposures include commodity-price volatility and uncertain ability to pass cost increases to customers; Hawkins does not hedge commodity purchases. Variable-rate debt also creates interest-rate exposure; management estimated that a 25-basis-point change on unhedged variable-rate debt could change annual interest expense by about $0.2 million. Management reported no material change in risk factors, no material pending legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- How much of Water Treatment’s sales and profit growth is attributable to acquired businesses, and how are the acquisitions integrating?
- Whether gross-margin improvement from lower raw material costs and LIFO-reserve reductions is sustainable as input prices change.
- Whether ongoing weakness in Industrial and Health and Nutrition volumes, pricing, or margins persists.
- The final acquisition purchase-price allocations and any Water Solutions earnout obligation.
- Debt capacity and interest-rate exposure under the revolving facility, including available borrowing capacity and covenant headroom; the filing does not state a clear amount of unused availability.
- Whether operating cash flow remains strong as working-capital requirements fluctuate.