Hawkins, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2013, the first quarter of fiscal 2014 (fiscal year ending March 30, 2014). Comparisons are with the three months ended July 1, 2012. Hawkins distributes and provides value-added processing of bulk and specialty chemicals; it reports Industrial and Water Treatment segments.
Financial performance
| Metric | Q1 FY2014 | Prior-year quarter |
|---|---|---|
| Sales | $94.7 million | $90.1 million |
| Gross profit / margin | $17.2 million / 18.2% | $15.3 million / 17.0% |
| Operating income / margin | $8.3 million / 8.7% | $7.1 million / 7.9% |
| Net income | $5.1 million | $4.4 million |
| Basic / diluted EPS | $0.49 / $0.48 | $0.42 / $0.42 |
| Cash from operating activities | $1.3 million | $14.0 million |
| Capital expenditures | $4.1 million | $4.2 million |
Industrial sales rose 7.9% to $67.0 million, while segment operating income increased to $3.8 million from $2.2 million. Water Treatment sales edged down to $27.7 million; operating income decreased to $4.5 million from $4.9 million. The effective tax rate was 38.0%, versus 38.6%.
Liquidity, balance sheet, and cash flow
- At June 30, cash and cash equivalents were $17.1 million, current available-for-sale investments were $16.0 million, and long-term investments were $9.9 million. Cash plus investments totaled $43.1 million, down $6.8 million from March 31.
- Total assets were $223.7 million and total liabilities were $48.7 million. The balance sheet presents no borrowings or other conventional debt line; pension withdrawal liability was $7.1 million.
- Operating cash flow fell primarily because working capital consumed cash, including a $7.1 million inventory increase and higher receivables. Management cited inventory purchases and trade-payable payment timing.
- Investing activities used $8.8 million, including $9.1 million of investment purchases and $4.1 million of capital spending, partly offset by investment maturities and sales. Financing activities used $4.1 million, including $3.6 million of dividends paid. No dividends were declared in the quarter.
- Management said cash balances and operating cash flows should be sufficient to meet fiscal 2014 requirements.
Material changes, outlook, and risks
- Sales increased 5.2%, but Industrial growth was concentrated in higher-volume, lower-margin bulk and commodity products. Competitive pressure limited the company’s ability to pass through some cost increases. Gross margin improved year over year partly because the prior-year period included a $3.2 million Industrial charge for settlement of ICL litigation.
- Current-quarter gross profit included about $0.6 million of costs for the new Industrial facility and $0.4 million of accelerated depreciation and related costs for exiting a leased pharmaceutical facility. Management expected about $1.3 million of full-year operating costs for the new Industrial facility, $1.0 million for the new headquarters, and another $0.4–$0.6 million of exit-related charges in the second quarter.
- The new Rosemount Industrial facility adds capacity. The company expected to transfer some production from the leased pharmaceutical facility, discontinue other product lines there, and vacate the facility during fiscal 2014.
- Cash needs are typically higher from April through November as chemical inventories build; Water Treatment receivables are seasonal. Inventory was elevated to guard against potential barge delays and to use the new facility’s added storage.
- Risks discussed include cyclical commodity chemical prices and uncertainty about passing cost increases to customers, interest-rate exposure on fixed-income investments, and weather impacts on Water Treatment demand. Hawkins does not hedge commodity chemical purchases. The filing reported no material change in previously disclosed risk factors and no material pending litigation beyond routine matters.
- The multiemployer pension withdrawal liability is payable over as many as 20 years, subject to a cap. Estimated aggregate cash payments are about $9.3 million, or approximately $467,000 annually, beginning later in fiscal 2014.
Investor facts to verify
- Whether inventory levels and working-capital use normalize, and how operating cash flow develops through the seasonally heavier purchasing period.
- Whether Industrial volume growth can translate into profitable growth despite lower-margin mix and competitive pricing pressure.
- Actual facility, headquarters, and pharmaceutical-site exit costs compared with management’s fiscal 2014 estimates.
- The timing and cash burden of pension withdrawal payments, and the company’s liquidity as it funds capital spending and dividends.