HAWKINS INC - 10-Q Summary (Q1 Fiscal 2010)
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2009 (First Quarter of Fiscal 2010). Hawkins, Inc. is a distributor of bulk and specialty chemicals operating primarily in the United States. The company operates through two reportable segments: Industrial and Water Treatment. The company recently exited its Pharmaceutical segment, which is now reported as discontinued operations.
Key Financial Metrics
| Metric | Q1 2010 (Ended June 30, 2009) | Q1 2009 (Ended June 30, 2008) |
|---|---|---|
| Sales | $73,586,000 | $62,554,000 |
| Gross Profit | $15,856,000 (21.5% margin) | $13,441,000 (21.5% margin) |
| Operating Income | $9,501,000 | $7,408,000 |
| Net Income | $6,053,000 | $4,876,000 |
| Earnings Per Share (Diluted) | $0.59 | $0.48 |
| Cash from Operations | $11,724,000 | $2,345,000 |
| Cash & Equivalents (End of Period) | $15,502,000 | $20,719,000 |
| Total Current Assets | $70,389,000 | $84,135,000 (Prior Year End) |
| Total Current Liabilities | $18,989,000 | $27,836,000 (Prior Year End) |
Note: The company holds $19,878,000 in available-for-sale investments (Certificates of Deposit) as of June 30, 2009.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 17.6% year-over-year, driven by higher selling prices due to increased raw material costs and volume growth in specialty products. The Industrial segment grew 20.7%, while Water Treatment grew 11.8%.
- LIFO Impact: A significant factor in gross profit was the Last-In, First-Out (LIFO) inventory valuation. Declining raw material costs in Q1 2010 resulted in a LIFO reserve decrease, positively impacting gross profit by $2,825,000. In contrast, rising costs in Q1 2009 negatively impacted gross profit by $1,663,000.
- Discontinued Operations: The company sold its Pharmaceutical segment inventory in May 2009. Results for this segment are now classified as discontinued operations, contributing $109,000 to net income for the quarter.
- Cash Flow: Operating cash flow surged to $11.7 million from $2.3 million, largely due to working capital management (decreases in receivables and inventory) and higher net income. However, investing activities consumed $23.1 million, primarily due to a $20 million purchase of Certificates of Deposit and $3.1 million in capital expenditures.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that while commodity prices have declined significantly in Q1 2010 due to economic slowdown, they remain higher than a year ago. The company is currently selling higher-cost inventory at lower market prices, which negatively impacts margins absent the LIFO benefit.
- Capital Expenditures: The company invested in two new facilities (Centralia, IL and Minneapolis, MN) totaling approximately $7.5 million in fiscal 2009 and $2.2 million in Q1 2010. Approximately $400,000 in additional spending is expected in Q2 2010 to complete these projects.
- Liquidity: The company maintains a strong liquidity position with no long-term debt disclosed in the balance sheet. Investment strategy focuses on preservation of principal and liquidity, utilizing FDIC-insured Certificates of Deposit.
- Risks: Primary risks include the cyclical nature of commodity chemical prices and the inability to pass cost increases to customers. The company does not currently hedge against commodity price fluctuations.
Key Facts for Investor Verification
- LIFO Sensitivity: Verify the sustainability of gross margins given the $2.8 million LIFO benefit; margins excluding LIFO were lower than the prior year.
- Discontinued Operations: Confirm the final accounting treatment and future royalty payments (up to $3.6 million) related to the sale of the Pharmaceutical segment.
- Capital Allocation: Monitor the deployment of the $20 million in Certificates of Deposit and the completion costs of the new facilities.
- Inventory Valuation: Review the LIFO reserve adjustments in future quarters as commodity prices stabilize or fluctuate.