Hawkins, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended April 1, 2018 (52 weeks); comparison is with fiscal 2017, also 52 weeks. Hawkins distributes, blends and manufactures chemicals and specialty ingredients through Industrial, Water Treatment, and Health and Nutrition segments. The filing also reports fourth-quarter results.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Sales | $504.2 million | $483.6 million |
| Gross profit / margin | $86.8 million / 17.2% | $98.1 million / 20.3% |
| Operating income (loss) | $(11.8) million | $38.7 million |
| Net income (loss) | $(9.2) million | $22.6 million |
| Diluted EPS | $(0.86) | $2.13 |
| Operating cash flow | $27.3 million | $44.9 million |
| Capital expenditures | $19.7 million | $21.6 million |
Sales rose 4.3%, with growth in all segments. Gross profit declined 11.5%; management cited adverse LIFO reserve changes, product mix, commodity cost pass-through and competitive pricing, as well as planned growth spending and other costs. SG&A was essentially flat at $59.4 million, falling to 11.8% of sales from 12.3%.
- Industrial: Sales increased 3.7% to $247.4 million; segment operating income declined to $8.5 million from $17.1 million. Competitive pricing and rising commodity costs pressured margins.
- Water Treatment: Sales increased 7.4% to $138.5 million; operating income rose to $16.8 million from $16.2 million.
- Health and Nutrition: Sales increased 1.9% to $118.3 million, but gross profit fell to $20.9 million from $23.2 million. Segment operating loss was $37.1 million, including the goodwill impairment.
FY2018 included a $39.1 million Health and Nutrition goodwill impairment, recorded after management revised growth expectations and anticipated product mix. It was not deductible for tax purposes. A one-time $13.9 million tax benefit from revaluing deferred tax liabilities after the Tax Act partly offset the loss; the reported effective tax rate was 39.1%. Fourth-quarter sales were $127.0 million, operating loss was $36.0 million, and net loss was $37.4 million, largely reflecting the impairment.
Liquidity, debt and capital allocation
- Cash was $5.0 million at year-end, versus $6.9 million a year earlier. Current assets were $135.0 million and current liabilities $60.6 million.
- Total debt was $101.0 million ($85.0 million term loan and $16.0 million revolver), compared with $103.1 million a year earlier. The credit facility matures December 2020 and is secured by substantially all personal property assets. Hawkins reported compliance with covenants at year-end.
- Operating cash flow decreased by $17.5 million year over year, primarily due to lower operating income, less cash from receivables, and increased inventory purchases. Inventory rose to $59.7 million from $51.2 million.
- Cash dividends paid were $9.2 million; dividends declared were $0.88 per share. No shares were repurchased in FY2018 or FY2017.
Outlook, risks and contingencies
No earnings or revenue guidance is provided. Management expected FY2019 capital spending to be at or below FY2018’s $19.7 million and expected a 21% federal statutory tax rate in future years. It planned further Water Treatment branch investment and identified Health and Nutrition growth areas, without quantifying targets.
- Key exposures include volatile commodity costs and supply, competitive price pressure, and the risk that higher costs cannot be passed through promptly. Hawkins does not hedge commodity purchases.
- Working capital and sales are seasonal: Water Treatment demand generally peaks April–September, while agricultural sales depend on planting seasons and weather.
- Chemical handling, transportation, environmental and product-liability risks may lead to operating disruption, remediation expense or uninsured losses. The company recorded a $0.6 million reserve for trichloroethylene contamination at its Minneapolis facility; further costs are uncertain.
- Four important operating facilities are on leased land, with lease expirations or renewal periods extending through 2023, 2028, 2029 and 2034; renewal is not guaranteed.
- The company had $7.2 million of scheduled multiemployer pension withdrawal payments, including $0.5 million annually through 2034. No material pending litigation was reported.
Most important facts for investors to verify
- Whether Health and Nutrition’s revised growth and product-mix assumptions support the remaining goodwill and intangible asset values.
- Whether commodity-cost increases, LIFO inventory accounting, and competitive pricing continue to pressure gross margins and operating cash flow.
- Debt repayment capacity, covenant headroom, and variable-rate exposure. The filing gives differing year-end effective borrowing rates: approximately 3.4% in MD&A and 3.8% in the debt note.
- The adequacy of the $0.6 million environmental reserve and any developments in facility leases, remediation obligations, or pension withdrawal liability.
- Progress on Health and Nutrition manufacturing upgrades and whether planned growth investments translate into improved segment profitability.