Hawkins, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, three months ended June 29, 2014; comparative period ended June 30, 2013. Hawkins sells chemicals across multiple industries, including through its Industrial and Water Treatment segments. Financial statements are unaudited.
Key financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Sales | $98.0 million | $94.7 million |
| Gross profit / margin | $18.5 million / 18.9% | $17.2 million / 18.2% |
| Operating income / margin | $9.6 million / 9.8% | $8.3 million / 8.7% |
| Net income | $6.0 million | $5.1 million |
| Diluted EPS | $0.57 | $0.48 |
| Operating cash flow | $1.4 million | $1.3 million |
| Capital expenditures | $3.3 million | $4.1 million |
Cash and cash equivalents were $21.8 million at June 29, 2014, versus $33.5 million at fiscal year-end. Cash and investments totaled $55.8 million, down from $63.2 million at March 30, 2014. Current assets were $111.5 million and current liabilities $33.8 million. The balance sheet does not report borrowings; total liabilities were $51.8 million, including a $6.8 million pension withdrawal liability.
Changes and operating drivers
- Sales increased 3.5%. Industrial sales rose 0.8% to $67.5 million; higher volumes were offset in part by competitive pricing and lower per-unit selling prices. Water Treatment sales increased 10.0% to $30.5 million, driven by newer branches, the acquired Oklahoma branch, and specialty chemical sales.
- Gross margin improved to 18.9% from 18.2%. Water Treatment operating income rose to $5.4 million from $4.5 million; Industrial operating income increased to $4.3 million from $3.8 million.
- SG&A declined to $8.9 million from $9.0 million. The prior-year quarter included an approximately $0.4 million pre-tax accelerated-depreciation charge tied to exiting a leased pharmaceutical facility.
- Inventory increased to $34.3 million from $26.2 million, and receivables rose to $39.9 million from $37.9 million. Seasonal inventory purchases and receivables growth used operating cash.
Liquidity, capital allocation and outlook
Operating cash flow was modestly higher year over year, but working-capital investment, capital spending, dividends paid of $3.8 million, and $1.4 million of share repurchases contributed to an $11.7 million decrease in cash. The board authorized repurchases of up to 300,000 shares; 39,170 were repurchased in the quarter, leaving 260,830 authorized shares available. No cash dividends were declared during the quarter, although the prior-period dividend was paid.
Management expects cash balances and operating cash flows to fund requirements, including acquisitions or strategic relationships, for the foreseeable future. No specific earnings or sales guidance was provided. Cash needs typically rise from April through November as chemical inventories build, while Water Treatment seasonality generally increases receivables from April through September.
Risks, contingencies and notable items
- Management cited competitive pricing pressure and cyclical commodity chemical prices. Hawkins does not hedge commodity chemical purchases and may not be able to pass cost increases to customers.
- Fixed-income investments are exposed to interest-rate risk. Management stated it intends to hold them until recovery and does not expect fluctuations to affect income or cash flows during the holding period absent other-than-temporary impairment.
- The LIFO reserve increased $0.5 million in the quarter, reducing reported gross profit; interim LIFO valuation depends on estimates of year-end inventory and costs.
- The 2013 ACS asset acquisition included $2.4 million cash consideration and up to $0.5 million additional consideration contingent on performance targets. No material pending litigation was reported, and the filing reported no material risk-factor changes.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Water Treatment growth and margin improvement continue, particularly the contribution from the acquired Oklahoma branch.
- How competitive pricing and commodity-cost changes affect Industrial segment margins and the ability to pass through cost increases.
- Seasonal working-capital needs, inventory build, and operating cash conversion relative to reported earnings.
- Actual future share repurchases, capital expenditures, and any contingent ACS acquisition payments.
- The composition and maturity profile of the $34.0 million fixed-income investment portfolio and any changes in liquidity or liabilities.