Hawkins, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended July 1, 2018; comparable period ended July 2, 2017. Hawkins sells chemicals and specialty ingredients through its Industrial, Water Treatment, and Health and Nutrition segments. Financial statements are unaudited.
Financial performance
| Metric | Quarter ended July 1, 2018 | Comparable 2017 quarter |
|---|---|---|
| Sales | $149.8 million | $133.7 million |
| Gross profit / margin | $28.5 million / 19.0% | $26.0 million / 19.4% |
| SG&A | $15.0 million | $15.8 million |
| Operating income / margin | $13.5 million / 9.0% | $10.2 million / 7.6% |
| Interest expense, net | $0.9 million | $0.8 million |
| Net income | $9.1 million | $5.8 million |
| Diluted EPS | $0.85 | $0.55 |
| Operating cash flow | $6.8 million provided | $11.9 million used |
| Capital expenditures | $2.4 million | $6.6 million |
Sales grew 12.0%. Gross profit dollars increased, while gross margin declined 0.4 percentage point. Management attributed improved operating results to higher sales, improved pricing and product mix, and lower SG&A. The effective tax rate fell to 27.3% from 38.5%, primarily reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act. The company recorded a $13.9 million one-time tax benefit in fiscal 2018; no further adjustment to its provisional Tax Act accounting was made this quarter.
Segments and balance sheet
- Industrial: Sales of $74.0 million, up 15.6%; operating income of $5.0 million versus $3.2 million. Sales dollars rose with specialty-product mix and selling prices, although volumes were relatively flat.
- Water Treatment: Sales of $40.9 million, up 6.9%; operating income of $6.3 million versus $5.9 million. Higher sales volumes supported growth.
- Health and Nutrition: Sales of $34.9 million, up 10.9%; operating income of $2.2 million versus $1.1 million. Distributed-product sales increased, partly offset by lower manufactured-product sales.
- Cash was $5.2 million at July 1, 2018. Current assets were $142.9 million and current liabilities $56.5 million.
- Total debt was $101.0 million, including $18.5 million drawn on the revolving facility; the balance-sheet carrying amount, net of issuance costs, was $100.7 million. The $165 million credit facility matures December 23, 2020. The borrowing rate was 3.0% at quarter-end, and the company reported compliance with its covenants.
- Inventory increased to $66.4 million from $59.7 million at April 1, 2018. Shareholders’ equity was $212.3 million.
Cash flow, outlook, and risks
Operating cash flow improved year over year, chiefly because inventory growth was lower than in the prior-year quarter, accounts-payable payment timing was favorable, and operating income improved. The company noted that bulk-chemical purchasing and seasonal caustic soda inventory build-up can cause significant working-capital and cash-flow fluctuations; cash requirements typically increase from April through November. Financing included $4.7 million of dividend payments, $2.5 million of term-loan repayments, and $2.5 million of net revolver borrowings. Management expects cash, credit availability, and operating cash flows to fund ongoing needs for the foreseeable future. No specific earnings or revenue guidance was provided.
- Commodity chemical prices are cyclical. Hawkins does not hedge commodity purchases and may not be able to pass future cost increases to customers.
- Variable-rate debt exposes the company to interest-rate changes; a 25-basis-point move could change annual interest expense by approximately $0.1 million. A swap hedges a portion of this exposure.
- A $0.6 million liability was recorded in fiscal 2018 for estimated remediation of trichloroethylene contamination at the Minneapolis facility. No adjustment was made this quarter; the reserve may be insufficient, and further impact cannot be estimated.
- The company reported no material pending litigation and no material changes to previously disclosed risk factors. It adopted the new revenue standard effective April 2, 2018, with no impact on financial position or results.
Important facts for investors to verify
- Whether revenue growth and improved operating income are sustained, particularly given the lower gross margin and the role of pricing and product mix.
- How seasonal inventory investment affects operating cash flow and revolver usage in coming quarters.
- Future interest expense, debt levels, covenant headroom, and the effectiveness of the interest-rate swap.
- Whether the Minneapolis remediation reserve proves adequate and whether any additional Tax Act accounting adjustments are required.
- The filing says no shares were repurchased under the authorized program; separately, 8,105 shares were surrendered by stock-plan participants for payroll-tax withholding and were not program repurchases.