Hawkins, Inc. — Fiscal 2022 Form 10-K
Reporting period: Fiscal year ended April 3, 2022. Although the request refers to Q4, this is an annual filing; fiscal 2022 included 53 weeks, compared with 52 weeks in fiscal 2021. Hawkins formulates, manufactures, blends and distributes specialty chemicals and ingredients through its Industrial, Water Treatment, and Health and Nutrition segments.
Financial performance
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Sales | $774.5 million | $596.9 million | Up 30% |
| Gross profit / margin | $146.5 million / 18.9% | $123.8 million / 20.7% | Profit up 18%; margin down 1.8 percentage points |
| Operating income / margin | $71.2 million / 9.2% | $55.9 million / 9.4% | Income up 27%; margin down 0.2 percentage points |
| Net income / diluted EPS | $51.5 million / $2.44 | $41.0 million / $1.93 | Net income up 26% |
| Operating cash flow | $42.8 million | $43.8 million | Down $1.0 million |
| Capital expenditures | $28.5 million | $20.8 million | Up $7.7 million |
Net interest expense was $1.4 million, versus $1.5 million. The effective tax rate was approximately 26.5%. Cash and equivalents were $3.5 million at year-end, versus $3.0 million a year earlier. The company reported $126.0 million outstanding on its revolving facility; total debt, net of issuance costs, was $125.6 million. Total current assets were $227.7 million and current liabilities were $101.5 million.
Segments and changes from prior year
- Industrial: Sales rose 42% to $386.9 million; operating income rose to $31.5 million from $16.3 million. Higher selling prices, increased product sales and the 53rd week contributed. Gross margin declined to about 15% from 16%.
- Water Treatment: Sales rose 34% to $228.1 million, reflecting demand, acquisitions and higher prices. Operating income increased to $23.2 million from $22.3 million. Gross margin fell to about 24% from 28%.
- Health and Nutrition: Sales increased 4% to $159.5 million, but operating income decreased to $16.5 million from $17.2 million. Lower sales of higher-margin manufactured products offset growth in specialty distributed products.
- Management estimated the 53rd week contributed approximately $17.5 million in sales and $3.0 million in operating income. Higher input costs drove a $15.8 million increase in the LIFO reserve, reducing gross profit; the reserve had decreased slightly in fiscal 2021.
- Fiscal 2022 included three Water Treatment acquisitions, with aggregate preceding-year revenue of approximately $17 million and acquisition cash spending of $21.5 million. Fiscal 2021 acquisition spending was $51.0 million.
Liquidity, debt and capital allocation
Operating cash flow was nearly flat year over year, as increased net income was largely offset by higher receivables and inventory. Inventory rose to $95.0 million from $63.9 million, reflecting higher raw-material costs, customer demand and supply-chain concerns. Investing activities used $49.8 million, including acquisitions and capital expenditures. Financing activities provided $7.4 million; the company paid $11.1 million in dividends and repurchased $8.5 million of shares.
A new $250 million secured revolving credit facility was entered into on March 31, 2022, maturing April 30, 2027. The effective borrowing rate at year-end was 1.2%. The company reported compliance with its financial covenants and expected to remain compliant for the next 12 months. A $60 million interest-rate swap runs to May 2027. Management said it intends to pay down debt with available excess cash flow and may use available borrowing capacity or equity for strategic purposes.
Outlook, risks and other notable items
- The filing provides no quantified fiscal 2023 revenue, earnings or margin guidance. Management expects to continue investing in existing and new Water Treatment branches and describes acquisitions as part of its growth strategy.
- Management cited ongoing supply-chain and transportation disruptions, driver shortages, shipping congestion, rising supplier prices and inflationary pressure. The company may not be able to pass cost increases to customers promptly or fully.
- Raw-material prices can change rapidly, and inventory costs may lag market prices. Hawkins does not hedge commodity chemical purchases with futures or other derivatives; the company attempts to pass cost changes through to customers.
- Other disclosed risks include competitive pricing pressure, seasonality and weather, chemical handling and environmental liabilities, product liability and recalls, regulation, cybersecurity, and the potential cost or operational impact of facility lease renewals.
- No material pending legal proceedings were reported. The company and its auditor reported effective internal control over financial reporting; the NAPCO acquisition was excluded from the year-end control assessment.
Important facts for investors to verify
- How much of sales and operating-income growth reflects the extra fiscal week, acquisitions, price increases and underlying volume or mix.
- Whether margins recover as higher raw-material costs and the LIFO reserve affect inventory and pricing; monitor inventory, receivables and operating cash flow.
- Debt levels, interest-rate exposure, available borrowing capacity and continued compliance with credit covenants.
- The filing gives conflicting revolving-facility letter-of-credit sublimits: $10 million in the MD&A and $15 million in the debt note. Verify the executed credit agreement.
- One customer represented approximately 13% of trade receivables, although no customer accounted for 10% or more of total sales. Assess collection and concentration risk.