Hawkins, Inc. — Q2 FY2014 Form 10-Q
Business and period: Hawkins sells bulk and specialty chemicals, principally in the United States, through its Industrial and Water Treatment segments. The quarter ended September 29, 2013; comparisons are with the quarter ended September 30, 2012. Six-month results cover the period through September 29, 2013. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Sales | $86.6 | $87.2 | $181.3 | $177.3 |
| Gross profit / margin | $16.6 / 19.1% | $19.2 / 22.0% | $33.8 / 18.6% | $34.5 / 19.5% |
| Operating income | $8.3 | $11.7 | $16.5 | $18.8 |
| Net income | $5.2 | $7.2 | $10.3 | $11.6 |
| Diluted EPS | $0.49 | $0.69 | $0.98 | $1.10 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $14.8 | $23.5 |
- Q2 sales fell 0.6%; six-month sales rose 2.3%. Q2 diluted EPS declined 29% year over year.
- SG&A was $8.3 million in Q2 and $17.3 million for the half, versus $7.5 million and $15.7 million, respectively. The six-month effective tax rate was 37.5%, compared with 38.6%.
- Cash and cash equivalents were $29.1 million at September 29. Current available-for-sale investments were $15.1 million and long-term investments were $10.6 million; cash plus investments totaled $54.8 million. Current assets were $114.0 million and current liabilities $35.7 million.
- No conventional interest-bearing borrowings are reported on the balance sheet. Long-term obligations include a $7.0 million multiemployer pension withdrawal liability; payments are expected to total approximately $9.3 million over 20 years, subject to a cap.
- Six-month capital expenditures were $6.5 million, down from $11.9 million. Dividends declared were $0.36 per share for the quarter and half-year, versus $0.34 a year earlier.
Changes, outlook, and risks
- Industrial segment Q2 sales declined 0.9% and operating income fell to $2.4 million from $5.7 million. Management cited lower-margin bulk/commodity mix, competitive pressure limiting price pass-through, and costs associated with the new manufacturing facility and exiting a leased pharmaceutical facility.
- Water Treatment Q2 sales were essentially flat at $29.9 million; operating income was $5.9 million versus $6.1 million. Management cited favorable late-quarter weather and newer-branch growth, partly offset by less favorable weather earlier in the quarter.
- For the six months, the new Industrial facility added approximately $1.0 million of costs; the facility exit generated approximately $0.8 million of charges. New headquarters costs were approximately $0.5 million. Management expected full-year FY2014 costs of approximately $1.3 million for the manufacturing facility and $1.1 million to lease and operate the headquarters.
- Management said existing cash and operating cash flows should be sufficient to fund FY2014 requirements. No specific earnings or revenue guidance was provided. Working capital and operating cash flow are seasonal and affected by chemical inventory purchases, payables timing, and water-treatment receivables.
- After quarter-end, Hawkins acquired substantially all assets of Advance Chemical Solutions for $2.5 million cash, with up to $0.5 million additional contingent payments. ACS had approximately $4 million of revenue in the preceding 12 months and will join Water Treatment.
- Key exposures include commodity chemical price cycles and possible inability to pass cost increases to customers, interest-rate risk on fixed-income investments, and seasonal working-capital needs. The company reported no material pending litigation and no material changes to previously disclosed risk factors.
- Prior-year comparisons include a $3.2 million Industrial charge for a supplier litigation settlement in the first quarter of FY2013; the current period also includes facility-related costs. These items affect comparisons of underlying performance.
Important facts for investors to verify
- Whether Industrial margins stabilize as facility start-up and exit costs subside, and whether pricing can recover input-cost increases.
- How much of the year-over-year earnings decline reflects product mix and competitive pricing versus identified one-time or transition costs.
- Whether seasonal working-capital investment reverses and operating cash flow improves in the remainder of FY2014.
- Performance and integration of the ACS acquisition, including achievement of targets for contingent payments.
- Cash requirements and payment schedule for the pension withdrawal liability, alongside planned capital spending and dividends.