Hawkins, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2015, ended December 28, 2014; filed February 3, 2015. Comparisons are with the periods ended December 29, 2013, and with the March 30, 2014 balance sheet. Hawkins distributes chemicals and provides value-added blending, repackaging, and manufacturing services through Industrial and Water Treatment segments.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $83.8 million, up 2.6% | $270.7 million, up 2.9% |
| Gross profit / margin | $13.6 million / 16.3%, versus $13.6 million / 16.6% | $50.3 million / 18.6%, versus $47.4 million / 18.0% |
| Operating income / margin | $4.9 million / 5.9%, versus $5.4 million / 6.6% | $24.4 million / 9.1%, versus $21.9 million / 8.3% |
| Net income | $3.1 million, versus $3.5 million | $15.3 million, versus $13.8 million |
| Diluted EPS | $0.30, versus $0.33 | $1.44, versus $1.30 |
| Operating cash flow | Not reported by quarter | $17.0 million, versus $24.9 million |
Quarterly results reflected lower Industrial operating income and lower Water Treatment operating income, as acquisition-related branch costs more than offset the segment’s gross-profit increase. For the nine-month period, both segments increased operating income. The prior-year nine-month gross profit included an approximately $0.8 million charge for exiting a leased pharmaceutical facility; the current period’s LIFO reserve increase reduced gross profit by $0.9 million, compared with a $0.2 million benefit in the prior-year period.
At December 28, 2014, cash and cash equivalents were $19.0 million, current investments were $16.1 million, and long-term investments were $16.3 million. Management reported cash and investments of $51.3 million, down from $63.2 million at March 30, 2014. Total assets were $242.1 million and shareholders’ equity was $193.9 million. The balance sheet reports no borrowings; liabilities included $6.7 million of pension withdrawal liability. Current liabilities were $30.4 million. Dividends paid during the nine months were $7.9 million; dividends declared were $0.38 per share.
Material changes and business developments
- Hawkins acquired substantially all assets of The Dumont Company on October 20, 2014, for $10.1 million in cash. Dumont, a water-treatment chemical distributor with approximately $14 million of 2013 calendar-year revenue, added seven Florida locations. Its post-acquisition results are included in Water Treatment.
- Water Treatment sales rose 12.2% for the quarter and 8.2% year to date, supported by acquired locations and newer branches. Industrial quarterly sales declined 1.2%; year-to-date sales increased 0.6%. Management cited lower per-unit selling prices from lower raw-material prices, and, for Industrial, a quarterly mix shift to lower-margin products.
- Inventories increased to $37.0 million from $26.2 million at March 30, 2014. Management attributed the lower year-to-date operating cash flow primarily to inventory purchase timing and higher inventory levels; seasonal chemical purchases can materially affect working capital and cash flow.
- Capital expenditures were $10.1 million year to date, including $4.4 million for expansion, storage, and process-improvement projects. Investing cash outflow also included $10.1 million for acquisitions. Share repurchases totaled 40,020 shares for $1.5 million under a program authorizing up to 300,000 shares.
Outlook, risks, and other items
Management expects cash balances and operating cash flows to be sufficient for foreseeable requirements, including acquisitions or other strategic relationships. No specific earnings or revenue guidance was provided. The company said results for the nine months are not necessarily indicative of full-year results.
Key risks discussed include cyclical commodity chemical prices and the competitive limits on passing cost increases to customers; Hawkins does not hedge commodity chemical purchases. Fixed-income investments are exposed to interest-rate risk, though management intends to hold them until recovery. Management also noted seasonal working-capital needs, including higher chemical inventories and seasonally higher Water Treatment receivables. The filing reported no material change to previously disclosed risk factors and no material pending litigation beyond routine matters.
The Dumont purchase-price allocation was preliminary and included $4.4 million of goodwill and $3.5 million of intangible assets. Hawkins may owe up to $0.1 million of the remaining ACS earnout, contingent on performance targets. The company was evaluating the impact of the new revenue-recognition standard, expected to apply to its fiscal year ending April 1, 2018. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification points
- Assess whether Dumont’s acquired Florida locations can grow revenue and margins enough to cover their operating costs.
- Track inventory levels, LIFO reserve changes, and operating cash flow as seasonal purchasing patterns shift.
- Monitor Industrial product mix, raw-material pricing, and competitive pressure on per-unit margins.
- Review capital spending, acquisition and earnout commitments, dividends, and share repurchases against available liquidity.
- Confirm subsequent filings for full-year performance and any updated outlook or material risk developments.