Hawkins, Inc. — Q1 Fiscal 2017 Form 10-Q
Business context and reporting period. The filing covers the three months ended July 3, 2016, compared with the three months ended June 28, 2015. Hawkins distributes and sells chemicals and specialty ingredients. Results now include Health and Nutrition, established following the December 2015 acquisition of Stauber Performance Ingredients; the prior-year quarter did not include Stauber. The interim statements are unaudited, and management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $131.4 million | $101.5 million | +29.4% |
| Gross profit / margin | $28.2 million / 21.5% | $20.7 million / 20.4% | Margin +1.1 percentage points |
| Operating income / margin | $13.1 million / 10.0% | $10.8 million / 10.7% | Income +20.7%; margin −0.7 points |
| Net income | $7.6 million | $6.8 million | +12.0% |
| Diluted EPS | $0.72 | $0.64 | +$0.08 |
| Operating cash flow | $14.4 million | $7.9 million | +$6.5 million |
- Segment results: Industrial sales were $63.8 million, down $3.8 million; operating income fell to $5.0 million. Water Treatment sales were $35.6 million, up 5.1%, and operating income was $5.6 million. Health and Nutrition contributed $32.0 million of sales and $2.5 million of operating income.
- Costs and margins: SG&A increased to $15.1 million from $9.9 million and rose to 11.5% of sales from 9.7%. Health and Nutrition SG&A included $1.2 million of acquired-intangible amortization. Industrial gross profit was pressured by weaker margins on some bulk products, lower volumes of higher-margin products, and higher operating costs.
- Cash and investment: Cash was $21.2 million at July 3, up $1.2 million from fiscal year-end. Investing used $8.3 million, including $6.3 million of capital expenditures and a $2.2 million Stauber purchase-price adjustment. Financing used $4.9 million, including $4.2 million of dividends paid and $1.3 million of debt repayment.
- Debt and liquidity: Total debt was $128.5 million, comprising a $97.5 million term loan and $31.0 million drawn on the revolver; $34.0 million remained available under the $65.0 million revolver. The effective borrowing rate was 1.7%. Management reported compliance with all covenants and expects cash, available credit, and operating cash flow to fund ongoing requirements for the foreseeable future.
Material changes and management commentary
- Sales growth primarily reflects the addition of Stauber, rather than comparable organic growth across the business. Excluding the new segment, Industrial sales declined while Water Treatment sales increased modestly.
- Management attributed stronger operating cash flow to Health and Nutrition activity and timing of inventory purchases and payments. Cash needs typically rise from April through November as caustic soda inventories are replenished.
- The company has no formal earnings or revenue guidance in the filing. It may pursue further acquisitions or strategic relationships and says it could seek additional borrowing or equity financing.
- The credit facility matures December 23, 2020, bears variable interest, and is secured by substantially all personal property assets of the company and its subsidiaries. A 25-basis-point rate change could change annual interest expense by approximately $0.3 million.
- Commodity chemical prices are cyclical; Hawkins does not hedge commodity purchases and may not be able to pass future cost increases to customers. The filing reports no material change to previously disclosed risk factors and no material pending legal proceedings.
- Management concluded disclosure controls were effective. Stauber was excluded from the period’s controls assessment, including $201.5 million of assets and $32.0 million of sales; the company stated it would include Stauber in the assessment no later than Q3 FY2017.
Important facts for investors to verify
- How much of sales and earnings growth came from Stauber versus organic performance, and how Stauber performs as a standalone segment.
- Whether Industrial commodity-price and product-mix pressures persist, and whether the company can pass input-cost changes through to customers.
- Debt paydown, variable-rate exposure, covenant headroom, and remaining revolver availability.
- Cash conversion and seasonal working-capital needs, alongside planned capital spending and any further acquisitions.
- The effects of acquired-intangible amortization, purchase-accounting estimates, and the planned inclusion of Stauber in internal-control assessments.