Hawkins, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 30, 2018; comparable periods ended December 31, 2017. Hawkins sells chemicals and specialty ingredients through its Industrial, Water Treatment, and Health and Nutrition segments.
Financial results
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Sales | $128.2 million | $118.1 million | $423.3 million | $377.2 million |
| Gross profit / margin | $21.0 million / 16.4% | $18.8 million / 16.0% | $75.3 million / 17.8% | $69.0 million / 18.3% |
| Operating income / margin | $6.7 million / 5.2% | $4.7 million / 4.0% | $31.0 million / 7.4% | $24.2 million / 6.4% |
| Net income | $4.1 million | $17.1 million | $20.7 million | $28.2 million |
| Diluted EPS | $0.39 | $1.61 | $1.93 | $2.65 |
Prior-year net income included a one-time tax benefit from the Tax Cuts and Jobs Act: $13.2 million in the prior-year quarter and $13.9 million recorded in fiscal 2018. Thus, reported net-income comparisons are not indicative of underlying operating trends. Current-period effective tax rates were 26.2% for the quarter and 26.8% year to date.
Quarterly sales rose 8.6%; nine-month sales rose 12.2%. Industrial and Water Treatment growth reflected higher volumes, product mix and, in some cases, selling prices reflecting higher raw-material costs. Nine-month sales also increased in Health and Nutrition, while that segment’s quarterly sales declined 1.7% as lower manufactured-product sales more than offset growth in distributed products. Operating income improved in all three segments year to date. Nine-month gross margin declined 0.5 percentage point despite higher gross-profit dollars.
Cash, debt and liquidity
- Nine-month operating cash flow was $31.0 million, up from $14.6 million. Investing activities used $7.0 million, including $7.2 million of capital expenditures; financing activities used $21.7 million.
- Cash was $7.3 million at December 30, 2018, versus $5.0 million at April 1, 2018. Inventory increased to $67.7 million from $59.7 million; management notes that seasonal chemical purchases and purchase timing can materially affect working capital and operating cash flow.
- Debt was $91.0 million gross ($90.5 million net of issuance costs), down from $101.0 million gross at April 1, 2018. The company refinanced its prior term and revolving facilities in November with a $150 million senior secured revolving facility maturing November 30, 2023; the effective borrowing rate was 3.1% at quarter-end.
- The credit agreement requires a minimum fixed-charge coverage ratio of 1.15:1 and maximum total cash-flow leverage ratio of 3.0:1. The filing does not state specific covenant headroom.
- Shareholders’ equity was $217.5 million. The company paid $9.5 million in dividends and repurchased 59,788 shares for $2.4 million during the nine months.
Management outlook, risks and notable items
Management expects cash balances, available credit and operating cash flows to fund ongoing operations for the foreseeable future. No specific earnings or revenue guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- Commodity chemical prices are cyclical. Hawkins does not hedge commodity purchases and may not be able to pass future cost increases to customers. A 25-basis-point interest-rate change would affect annual interest expense by approximately $0.1 million; an interest-rate swap covers a portion of variable-rate debt through December 2020.
- In the third quarter, management initiated a sale of an Industrial-segment office building in St. Louis, with a $0.9 million carrying value; no impairment was recorded because the listing price exceeded book value.
- The Minneapolis facility environmental-remediation liability was reduced by $0.2 million in the quarter from the $0.6 million liability recorded in fiscal 2018. Management says reserves could prove insufficient and cannot estimate the possible additional impact.
- No material pending litigation or material changes to previously disclosed risk factors were reported. Management said disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of sales and gross-profit growth reflects volume and mix versus raw-material price changes, freight and other operating costs, and interim LIFO estimates.
- The underlying earnings comparison excluding the prior-year tax benefit, and the outlook for margins and the Health and Nutrition segment.
- Revolver availability and covenant headroom, particularly as working-capital needs fluctuate seasonally.
- Final sale proceeds and any relocation costs for the St. Louis building, and whether Minneapolis remediation costs exceed the recorded reserve.
- The effects of adopting lease-accounting and expected-credit-loss standards; the company was still assessing their impact.