Hawkins, Inc. — Fiscal 2023 First-Quarter 10-Q
Reporting period: Three months ended July 3, 2022, compared with the three months ended June 27, 2021. This is the company’s fiscal first quarter, not a calendar-quarter comparison. Hawkins distributes and supplies chemicals and specialty ingredients through its Industrial, Water Treatment, and Health and Nutrition segments.
Financial performance
| Metric | Quarter ended July 3, 2022 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $246.5 million | $181.2 million | +36% |
| Gross profit / margin | $46.7 million / 19.0% | $39.0 million / 21.5% | +20% profit; margin down 2.5 points |
| Operating income / margin | $27.9 million / 11.3% | $22.1 million / 12.2% | +26% income; margin down 0.9 points |
| Net income | $19.7 million | $16.6 million | +18% |
| Diluted earnings per share | $0.94 | $0.79 | +$0.15 |
Sales growth was primarily driven by higher selling prices reflecting increased raw-material costs. Industrial sales rose 45% to $124.7 million, Water Treatment sales rose 40% to $78.5 million, and Health and Nutrition sales rose 10% to $43.3 million. Water Treatment also benefited from acquisitions and higher demand. Gross profit increased in Industrial and Water Treatment, but their margins declined; Health and Nutrition gross profit fell 8% to $7.8 million, partly due to increased reserves for excess inventory.
The LIFO reserve increase reduced gross profit by $3.8 million in the quarter, versus $1.8 million in the prior-year quarter, primarily reflecting rising raw-material prices. SG&A rose to $18.9 million from $16.9 million, mainly due to acquired-business costs and higher variable expenses. Net interest expense increased to $0.9 million from $0.3 million as borrowings and rates rose. Other expense of $0.8 million, versus other income of $0.2 million, reflected losses on deferred-compensation investments; corresponding compensation expense movements largely offset those investment results.
Cash flow, debt, and liquidity
- Operating cash flow was negative $9.4 million, compared with positive $14.8 million a year earlier. Higher receivables, inventory, and payments against accounts payable contributed to the change; management attributed increased receivables and inventory largely to higher sales and raw-material prices.
- Investing cash outflow was $11.5 million, including $11.6 million of capital expenditures, compared with $2.1 million of investing outflow and $2.2 million of capital expenditures in the prior-year quarter. Current-period spending included facility expansion, purchase of a previously leased facility, and investment in vehicles, containers, and equipment.
- Financing provided $23.4 million, including $33.5 million of net debt proceeds, $6.6 million of share repurchases, and $3.0 million of dividends paid. Cash increased $2.5 million to $6.0 million.
- Debt was $159.5 million of revolving borrowings at July 3, 2022, versus $126.0 million at April 3, 2022. The company has a $250 million revolving facility maturing April 30, 2027; the filing does not state the precise undrawn availability. The effective borrowing rate was 2.8%. A $60 million interest-rate swap runs through May 1, 2027.
- Hawkins reported compliance with credit-agreement covenants and expected to remain compliant for the next 12 months. Management said cash, operating cash generation, and facility resources should cover ongoing requirements for the foreseeable future.
Outlook, developments, and risks
- Management expected a full-year effective tax rate of approximately 26%–27%, versus 25% in the quarter and 24% in the comparable prior-year quarter. The filing provides no specific revenue or earnings guidance.
- Three Water Treatment businesses acquired in fiscal 2022 had aggregate historical annual revenue of approximately $17 million. The quarter’s results include acquired businesses, but the filing does not quantify their contribution to current-period sales or earnings.
- On August 4, 2022, after quarter-end, the Board increased the share-repurchase authorization from 1.6 million to 2.6 million shares. After the increase, 1,129,348 shares remained available. The company repurchased 181,657 shares for $6.6 million during the quarter.
- Management cited commodity-price volatility and cautioned that it may not be able to pass future raw-material cost increases to customers. Hawkins does not hedge commodity purchases. A 25-basis-point interest-rate change could affect annual interest expense by approximately $0.4 million.
- The company reported no material changes to its previously disclosed risk factors, no material pending legal proceedings beyond routine litigation, and effective disclosure controls as of July 3, 2022.
Important facts for investors to verify
- Whether price increases can continue to offset raw-material inflation without further pressure on gross margins and the LIFO reserve.
- Whether working-capital investment converts back into operating cash flow, given the quarter’s negative operating cash flow and increased borrowings.
- Trends in Health and Nutrition profitability and inventory reserves, and the contribution and integration of the acquired Water Treatment businesses.
- Revolving-facility availability, future borrowing costs, covenant headroom, and the effect of continued repurchases and capital spending on liquidity.
- Whether actual full-year tax rates and results align with management’s tax-rate estimate; the filing gives no full-year sales or earnings forecast.