Hawkins, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2013, ended September 30, 2012; comparisons are with the periods ended October 2, 2011. Hawkins sells bulk and specialty chemicals through its Industrial and Water Treatment segments. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $87.2, down 0.8% | $177.3, up 0.5% |
| Gross profit / margin | $19.2 / 22.0%, versus $18.8 / 21.3% | $34.5 / 19.5%, versus $36.7 / 20.8% |
| Operating income | $11.7, versus $10.9 | $18.8, versus $21.0 |
| Net income | $7.2, versus $6.9 | $11.6, versus $13.6 |
| Diluted EPS | $0.69, versus $0.67 | $1.10, versus $1.32 |
| Operating cash flow | Not reported separately | $23.5, versus $12.3 |
Second-quarter results improved despite slightly lower sales: Water Treatment growth and margins more than offset weaker Industrial gross profit. For the six months, Industrial results were pressured by lower volume, product-mix shifts, pricing pressure, and a $3.2 million supplier-settlement charge recorded in cost of sales in the first quarter. The prior-year six-month net income also included $0.6 million of after-tax discontinued-operation income; the final payment from the former Pharmaceutical business was received in fiscal 2013’s first quarter and generated a nominal gain.
Liquidity, capital, and balance sheet
- Cash and cash equivalents were $29.7 million at September 30; current and long-term investments were $17.9 million and $7.6 million. Cash plus available-for-sale investments totaled $55.2 million, up $9.3 million from April 1.
- Current assets were $116.2 million and current liabilities $42.5 million. Total liabilities were $54.2 million; the balance sheet reports no borrowings or debt.
- Six-month capital expenditures were $11.9 million, including approximately $8.5 million for expansion and process improvements, including the Rosemount, Minnesota facility. Cash dividends paid were $3.4 million.
- Operating cash flow improved primarily because of working-capital timing, including inventory purchases and trade payables. Inventory increased $3.9 million from April 1; management notes that chemical purchasing and Water Treatment seasonality can cause working-capital and cash-flow fluctuations.
Outlook, commentary, and risks
- Management expects the Rosemount facility to be operational by the end of fiscal 2013; it is intended to provide growth capacity and reduce dependence on flood-prone Mississippi River sites. Hawkins does not intend to close existing sites.
- Management expects cash balances and operating cash flows to be sufficient for fiscal 2013 requirements. No numerical earnings or sales guidance is provided.
- Management emphasizes gross profit dollars because commodity-cost changes can shift reported gross-margin percentages. Hawkins does not hedge commodity chemical purchases and may be unable to pass all input-cost increases to customers.
- The ICL supplier litigation was settled in June 2012. The settlement required a cash payment and new supply contracts and resulted in the $3.2 million pretax charge.
- Hawkins participates in a multiemployer pension plan. Its estimated share of unfunded vested benefits was approximately $10.0 million if withdrawal occurred in 2012, versus $7.9 million on a 2011 estimate; actual liability could change, and payments could be spread over 20 years if triggered.
- Other ordinary-course litigation was not reported as material. The filing states there were no material changes to previously disclosed risk factors. Management said disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether Water Treatment growth and improved margins can continue, and whether Industrial pricing and volume pressures persist.
- The impact of the ICL settlement and new supply arrangements on future costs and gross profit.
- Progress, remaining cost, and expected timing for the Rosemount facility and other capital projects.
- Working-capital seasonality and the sustainability of operating cash flow and liquidity.
- Changes in the multiemployer pension plan’s funding status and potential withdrawal liability.