Hawkins, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2012, ended October 2, 2011. The company changed to 13-week quarterly reporting at the start of fiscal 2012. Financial amounts below are in millions of dollars except per-share data.
Financial results
| Metric | Quarter ended Oct. 2, 2011 | Prior-year quarter | Six months ended Oct. 2, 2011 | Prior-year six months |
|---|---|---|---|---|
| Sales | $87.9 | $70.4 | $176.5 | $145.1 |
| Gross profit | $18.8 | $17.7 | $36.7 | $36.2 |
| Gross margin | 21.3% | 25.2% | 20.8% | 24.9% |
| Operating income | $10.9 | $10.9 | $21.0 | $22.7 |
| Income from continuing operations | $6.7 | $6.8 | $13.1 | $14.2 |
| Net income | $6.9 | $6.8 | $13.6 | $14.2 |
| Diluted EPS | $0.67 | $0.66 | $1.32 | $1.37 |
- Quarterly sales rose 24.9%; first-half sales rose 21.6%. Vertex, acquired in January 2011, contributed $10.5 million and $21.6 million of the respective increases. Higher selling prices and specialty/manufactured product sales also contributed; the filing does not quantify organic growth separately.
- Margins compressed as commodity chemical costs rose and pricing pressure limited pass-through. Management said it seeks to maintain gross profit dollars as input costs fluctuate and expects higher material costs to continue through the rest of fiscal 2012.
- Quarterly operating income was essentially unchanged; first-half operating income declined $1.7 million, with lower results in both segments, particularly Water Treatment.
- Discontinued operations contributed $0.2 million for the quarter and $0.6 million for the six months. These amounts relate to the former Pharmaceutical business’s marketing agreement.
Cash, liquidity and balance sheet
- Six-month operating cash flow was $12.3 million, down from $17.3 million. Working-capital needs, including inventory purchases, vendor-payment timing, receivables and income-tax payments, were the primary explanation.
- At October 2, cash and cash equivalents were $23.7 million; current available-for-sale investments were $9.3 million and long-term investments were $6.1 million. Cash plus investments totaled approximately $39.1 million.
- Total current assets were $106.1 million and current liabilities $34.5 million. Total liabilities were $43.2 million. The balance sheet lists no borrowings; it does include deferred taxes and other liabilities.
- Capital expenditures were $6.2 million for the first half. Management expected cash balances and operating cash flow to fund planned remaining fiscal 2012 capital expenditures.
- Cash dividends declared were $0.32 per share for the first half, compared with $0.40 in the prior-year period; cash dividends paid were $3.1 million.
Segments, outlook and risks
- Industrial: Second-quarter sales increased 36.5% to $61.3 million, including $10.5 million from Vertex. Gross profit rose to $10.9 million, while margin declined to 17.7% from 21.3%. First-half operating income decreased to $11.4 million from $11.8 million.
- Water Treatment: Second-quarter sales increased 3.9% to $26.5 million, but gross profit fell to $7.9 million from $8.2 million. Competitive pricing and unfavorable weather weighed on results. First-half operating income declined to $9.5 million from $11.0 million.
- No quantified earnings or revenue guidance was provided. Management noted seasonality in water treatment and working-capital needs, including bulk chemical inventory accumulation from April through November.
- The company does not hedge commodity chemical purchases and may not be able to pass all cost increases to customers. Its investment portfolio is exposed to interest-rate risk; management stated it intended to hold fixed-income investments until recovery.
- ICL Performance Products seeks $7.3 million plus interest and costs in a phosphoric-acid contract dispute. Hawkins counterclaimed for $1.5 million plus other damages and fees. Both parties moved for summary judgment; the timing and outcome were uncertain, and the company warned the case could be costly and disruptive.
- The filing reported no material change in risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- How much of sales growth and future earnings reflects Vertex versus underlying volume, pricing and product mix.
- Whether gross-margin pressure and higher raw-material costs persist, and the company’s ability to pass those costs through.
- Whether working-capital investment and seasonality continue to constrain operating cash flow.
- Progress and potential financial impact of the ICL litigation.
- Actual remaining-year capital expenditures and whether cash generation meets management’s stated funding expectation.