Hawkins(HWKN) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements and management's discussion and analysis for the recent fiscal quarter Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, comprehensive income statements, shareholders' equity statements, and cash flow statements, along with detailed notes explaining significant accounting policies, revenue disaggregation, fair value measurements, inventory, debt, and segment information for the three months ended July 2, 2023, and comparable periods Condensed Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and equity, at specific reporting dates Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | July 2, 2023 | April 2, 2023 | | :-------------------- | :----------- | :------------ | | Total assets | $591,963 | $590,535 | | Total liabilities | $220,962 | $240,519 | | Total shareholders' equity | $371,001 | $350,016 | - Total assets increased slightly by $1,428 thousand (0.24%) from April 2, 2023, to July 2, 2023[6] - Total liabilities decreased by $19,557 thousand (8.13%) from April 2, 2023, to July 2, 2023[6] - Total shareholders' equity increased by $20,985 thousand (5.99%) from April 2, 2023, to July 2, 2023[6] Condensed Consolidated Statements of Income Details the company's revenues, expenses, and net income over a specific period Condensed Consolidated Statements of Income (in thousands, except per-share) | Metric (in thousands, except per-share) | Three Months Ended July 2, 2023 | Three Months Ended July 3, 2022 | Change ($) | Change (%) | | :-------------------------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Sales | $251,120 | $246,543 | $4,577 | 1.86% | | Gross profit | $51,991 | $46,749 | $5,242 | 11.21% | | Operating income | $32,487 | $27,864 | $4,623 | 16.59% | | Net income | $23,430 | $19,695 | $3,735 | 18.96% | | Basic earnings per share | $1.12 | $0.94 | $0.18 | 19.15% | | Diluted earnings per share | $1.12 | $0.94 | $0.18 | 19.15% | | Cash dividends declared per common share | $0.15 | $0.14 | $0.01 | 7.14% | Condensed Consolidated Statements of Comprehensive Income Reports net income and other comprehensive income items, such as unrealized gains or losses Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric (in thousands) | Three Months Ended July 2, 2023 | Three Months Ended July 3, 2022 | Change ($) | Change (%) | | :-------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Net income | $23,430 | $19,695 | $3,735 | 18.96% | | Unrealized gain on interest rate swap | $749 | $465 | $284 | 61.08% | | Total comprehensive income | $24,179 | $20,160 | $4,019 | 19.94% | Condensed Consolidated Statements of Shareholder's Equity Outlines changes in shareholders' equity, including net income, dividends, and share repurchases - Shareholders' equity increased from $350,016 thousand at April 2, 2023, to $371,001 thousand at July 2, 2023, primarily driven by net income of $23,430 thousand and other comprehensive income of $749 thousand[11] - Cash dividends declared and paid were $3,160 thousand ($0.15 per share) for the three months ended July 2, 2023, compared to $2,958 thousand ($0.14 per share) for the same period in 2022[11] - No shares were repurchased during the three months ended July 2, 2023, while 181,657 shares were repurchased for $6,557 thousand during the three months ended July 3, 2022[11] Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Three Months Ended July 2, 2023 | Three Months Ended July 3, 2022 | Change ($) | | :-------------------- | :------------------------------ | :------------------------------ | :--------- | | Net cash provided by (used in) operating activities | $34,866 | $(9,395) | $44,261 | | Net cash used in investing activities | $(7,829) | $(11,527) | $3,698 | | Net cash (used in) provided by financing activities | $(27,553) | $23,421 | $(50,974) | | Net (decrease) increase in cash and cash equivalents | $(516) | $2,499 | $(3,015) | | Cash and cash equivalents, end of period | $7,050 | $5,995 | $1,055 | - The significant increase in cash provided by operating activities was primarily driven by decreased cash expended for inventory purchases and increased net income[13] Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1 – Summary of Significant Accounting Policies Describes the key accounting principles and methods used in preparing the financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with Form 10-Q instructions and generally accepted accounting principles[14] - Management's opinion is that the financial statements contain all necessary adjustments for fair presentation, with all adjustments being of a normal recurring nature[14] - There has been no significant change in accounting policies since the end of fiscal 2023 (April 2, 2023)[17] Note 2 – Asset Sales Details the sale of certain assets and the resulting gain recognized by the company - In the fourth quarter of fiscal 2023, the company sold certain assets related to its consumer bleach packaging business in the Industrial segment for $7 million[18] - A gain of $3 million was realized on this sale, recorded within selling, general and administrative expenses[18] Note 3 – Revenue Disaggregates revenue by product type and segment, highlighting year-over-year changes Revenue by Product Type and Segment (in thousands) | (In thousands) | Industrial (2023) | Water Treatment (2023) | Health and Nutrition (2023) | Total (2023) | Industrial (2022) | Water Treatment (2022) | Health and Nutrition (2022) | Total (2022) | | :------------- | :---------------- | :--------------------- | :-------------------------- | :----------- | :---------------- | :--------------------- | :-------------------------- | :----------- | | Manufactured, blended or repackaged products | $102,675 | $84,785 | $10,241 | $197,701 | $101,612 | $70,357 | $11,961 | $183,930 | | Distributed specialty products | — | — | $26,154 | $26,154 | — | — | $31,089 | $31,089 | | Bulk products | $15,210 | $7,521 | — | $22,731 | $20,455 | $6,790 | — | $27,245 | | Other | $2,988 | $1,345 | $201 | $4,534 | $2,643 | $1,343 | $293 | $4,279 | | Total external customer sales | $120,873 | $93,651 | $36,596 | $251,120 | $124,710 | $78,490 | $43,343 | $246,543 | - Total external customer sales increased by $4,577 thousand (1.86%) year-over-year[20] - Water Treatment segment sales increased by $15,161 thousand (19.32%), while Industrial segment sales decreased by $3,837 thousand (3.08%) and Health and Nutrition segment sales decreased by $6,747 thousand (15.57%)[20] Note 4 – Earnings per Share Presents basic and diluted earnings per share for the reporting periods Earnings per Share | Metric | Three Months Ended July 2, 2023 | Three Months Ended July 3, 2022 | | :----- | :------------------------------ | :------------------------------ | | Basic EPS | $1.12 | $0.94 | | Diluted EPS | $1.12 | $0.94 | - Basic and diluted EPS increased by $0.18 (19.15%) year-over-year[7] Note 5 – Fair Value Measurements Details the fair value of financial instruments, including deferred compensation assets and interest rate swaps Fair Value Measurements (in thousands) | (In thousands) | July 2, 2023 | April 2, 2023 | | :------------- | :----------- | :------------ | | Deferred compensation plan assets | $9,454 | $7,659 | | Interest rate swap | $5,053 | $4,028 | - Deferred compensation plan assets increased by $1,795 thousand (23.44%) from April 2, 2023, to July 2, 2023[26] - Interest rate swap fair value increased by $1,025 thousand (25.45%) from April 2, 2023, to July 2, 2023[26] Note 6 – Inventories Provides a breakdown of inventory valuation methods and changes in net inventory Inventories (in thousands) | (In thousands) | July 2, 2023 | April 2, 2023 | | :------------- | :----------- | :------------ | | Inventory (FIFO basis) | $116,501 | $128,589 | | LIFO reserve | $(39,563) | $(39,812) |\n| Net inventory | $76,938 | $88,777 | - Net inventory decreased by $11,839 thousand (13.34%) from April 2, 2023, to July 2, 2023[27] - The LIFO reserve decreased by $249 thousand, indicating a favorable impact on gross profit in the current quarter[27][53] Note 7 – Goodwill and Intangible Assets Reports the carrying amounts of goodwill and intangible assets by segment - Goodwill remained constant at $77.4 million as of July 2, 2023, and April 2, 2023, with $44.9 million related to Health and Nutrition, $26.0 million to Water Treatment, and $6.5 million to Industrial segments[28] Intangible Assets (in thousands) | (In thousands) | July 2, 2023 Net | April 2, 2023 Net | | :------------- | :--------------- | :---------------- | | Total finite-life intangible assets | $70,164 | $71,833 | | Indefinite-life intangible assets | $1,227 | $1,227 | | Total intangible assets | $71,391 | $73,060 | - Net intangible assets decreased by $1,669 thousand (2.28%) from April 2, 2023, to July 2, 2023[28] Note 8 – Debt Details the company's debt obligations, including revolving loans and compliance with covenants Debt (in thousands) | (In thousands) | July 2, 2023 | April 2, 2023 | | :------------- | :----------- | :------------ | | Senior secured revolving loan | $88,600 | $112,000 | | Total long-term debt | $78,353 | $101,731 | - The senior secured revolving loan balance decreased by $23,400 thousand (20.89%) from April 2, 2023, to July 2, 2023[29] - The company was in compliance with all covenants of its credit agreement as of July 2, 2023[29] Note 9 – Income Taxes Explains the effective income tax rate and factors influencing it - The effective income tax rate was 26% for the three months ended July 2, 2023, an increase from 25% for the three months ended July 3, 2022[30] - The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes[30] Note 10 – Share-Based Compensation Reports compensation expense related to share-based awards and restricted stock activity - Compensation expense related to performance share units and restricted stock increased to $0.7 million for the three months ended July 2, 2023, from $0.4 million in the prior year period[32] Restricted Stock Activity | Restricted Stock Activity | Shares (July 2, 2023) | | :------------------------ | :-------------------- | | Unvested at beginning of period | 189,258 | | Granted | 61,819 | | Vested | (105,600) | | Unvested at end of period | 145,477 | Note 11 – Share Repurchase Program Provides details on share repurchases and the remaining authorization under the program - No shares were repurchased during the three months ended July 2, 2023[34] - During the three months ended July 3, 2022, 181,657 shares were repurchased for an aggregate purchase price of $6.6 million[34] - As of July 2, 2023, 1,129,348 shares remained available for repurchase under the program[34] Note 12 – Segment Information Presents financial performance data, including sales, gross profit, and operating income, by business segment Segment Information (in thousands) | (In thousands) | Industrial (2023) | Water Treatment (2023) | Health and Nutrition (2023) | Total (2023) | Industrial (2022) | Water Treatment (2022) | Health and Nutrition (2022) | Total (2022) | | :------------- | :---------------- | :--------------------- | :-------------------------- | :----------- | :---------------- | :--------------------- | :-------------------------- | :----------- | | Sales | $120,873 | $93,651 | $36,596 | $251,120 | $124,710 | $78,490 | $43,343 | $246,543 | | Gross profit | $19,306 | $26,408 | $6,277 | $51,991 | $20,009 | $18,953 | $7,787 | $46,749 | | Operating income | $12,731 | $17,282 | $2,474 | $32,487 | $13,624 | $10,252 | $3,988 | $27,864 | - Water Treatment segment sales increased by 19% and operating income increased by 68.57% year-over-year[37] - Health and Nutrition segment sales decreased by 15.57% and operating income decreased by 37.96% year-over-year[37] Note 13 – Subsequent Events Discloses significant events occurring after the balance sheet date, such as acquisitions - In July 2023, the company acquired substantially all the assets of EcoTech Enterprises, Inc. for $3.4 million[38] - EcoTech is a manufacturer and distributor of water treatment chemicals, and its operations will be included in the Water Treatment segment[38] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the three months ended July 2, 2023, compared to the prior year. It covers an overview of the business, recent asset sales and acquisitions, the share repurchase program, detailed results of operations by segment, liquidity and capital resources, critical accounting estimates, and forward-looking statements Overview Provides a general description of the company's business and revenue streams - The company derives substantially all revenues from the sale of chemicals and specialty ingredients[40] - Business has expanded from bulk chemical distribution to include value-added chemicals and specialty ingredients, including manufacturing, blending, and repackaging[40] Asset Sales and Business Acquisitions Summarizes recent divestitures and acquisitions, including their financial impact - Acquired EcoTech Enterprises, Inc. for $3.4 million in July 2023, expanding the Water Treatment segment[41] - Sold consumer bleach packaging business assets in the Industrial segment for $7 million in Q4 fiscal 2023, realizing a $3 million gain[42] Share Repurchase Program Details the company's share repurchase authorization and remaining capacity - A share repurchase program for up to 2.6 million common shares is in place[43] - As of July 2, 2023, 1,129,348 shares remain available for repurchase[43] Financial Results Discusses the company's approach to profitability measurement and inventory valuation methods - The company focuses on total profitability dollars rather than profitability as a percentage of sales due to raw material price fluctuations[44] - LIFO method is used for valuing the majority of inventory in Industrial and Water Treatment segments, while FIFO is used for Health and Nutrition[45] - Bulk commodity products, which are generally distributed without significant value-add, typically have the lowest margins and are price sensitive[46] Results of Operations Analyzes the company's financial performance, including sales, gross profit, and operating income Financial Performance as Percentage of Sales | Metric | Three Months Ended July 2, 2023 | Three Months Ended July 3, 2022 | | :----- | :------------------------------ | :------------------------------ | | Sales | 100.0 % | 100.0 % | | Gross profit | 20.7 % | 19.0 % | | Operating income | 12.9 % | 11.3 % | | Net income | 9.2 % | 8.0 % | Three Months Ended July 2, 2023 Compared to Three Months Ended July 3, 2022 Compares the company's financial performance for the current quarter against the prior year period Sales Analyzes sales performance across segments, highlighting drivers of change - Total sales increased by $4.6 million (2%) to $251.1 million, driven by increased selling prices[49] - Industrial segment sales decreased by $3.8 million (3%) due to the divestiture of the consumer bleach packaging business ($4.7 million lower sales) and overall lower volumes, partially offset by increased selling prices[50] - Water Treatment segment sales increased by $15.2 million (19%) to $93.7 million, primarily due to increased selling prices driven by higher raw material costs[51] - Health and Nutrition segment sales decreased by $6.7 million (15%) to $36.6 million, attributed to decreased sales volumes from softened customer demand and excess inventory[52] Gross Profit Examines changes in gross profit and margin, including the impact of LIFO adjustments - Gross profit increased by $5.3 million (11%) to $52.0 million, with gross margin improving from 19% to 21% of sales[53] - The LIFO reserve decreased by $0.2 million in the current quarter, increasing gross profit, compared to a $3.8 million increase in the prior year that decreased gross profit due to rising raw material prices[53] - Water Treatment segment gross profit increased by $7.4 million (39%) to $26.4 million, driven by improved per-unit margins[55] - Health and Nutrition segment gross profit decreased by $1.5 million (19%) to $6.3 million due to lower sales volumes and per-unit margins[56] Selling, General and Administrative Expenses Discusses changes in SG&A expenses and factors contributing to these changes - SG&A expenses increased by $0.6 million (3%) to $19.5 million[57] - A $1.1 million unfavorable year-over-year impact resulted from compensation expense related to gains on deferred compensation plan investments in the current quarter versus losses in the prior year, partially offset by expense control measures[57] Operating Income Reviews the increase in operating income and improvement in operating margin - Operating income increased by $4.6 million (16%) to $32.5 million, with operating margin improving from 11% to 13% of sales[58] Interest Expense, Net Analyzes changes in net interest expense due to borrowing rates and debt levels - Interest expense increased from $0.9 million to $1.1 million, primarily due to higher borrowing interest rates, largely offset by decreased outstanding borrowings[59] Other Income (Expense) Explains the shift in other income/expense, primarily from deferred compensation investments - Other income was $0.3 million, a shift from other expense of $0.8 million in the prior year, due to gains on deferred compensation plan investments versus losses in the prior period[60] Income Tax Provision Discusses the effective income tax rate and its expected full-year range - The effective income tax rate increased to 26% for the current quarter from 25% in the prior year[61] - The effective tax rate for the full year is expected to be approximately 26% to 27%[61] Liquidity and Capital Resources Assesses the company's cash position, operating cash flow, debt, and compliance with credit covenants - Cash and cash equivalents decreased by $0.5 million to $7.0 million at July 2, 2023[62] - Cash provided by operating activities significantly increased to $34.9 million, compared to $9.4 million used in the prior year, driven by decreased inventory purchases and increased net income[63] - Net debt repayments of $23.4 million occurred in the current quarter, contrasting with net debt proceeds of $33.5 million in the prior year[65] - The company has a $250 million senior secured Revolving Loan Facility maturing on April 30, 2027, and was in compliance with all covenants as of July 2, 2023[68][72] - An interest rate swap agreement with a notional amount of $60 million is in place to manage variable-rate long-term debt risk[74] Critical Accounting Estimates Confirms no material changes to critical accounting estimates since the last annual report - There were no material changes in critical accounting estimates since the filing of the Annual Report on Form 10-K for the fiscal year ended April 2, 2023[76] Forward-Looking Statements Highlights the nature of forward-looking statements and associated risks and uncertainties - The report contains forward-looking statements based on current expectations, estimates, and projections, subject to risks and uncertainties[77] - The company cautions against undue reliance on these statements and is not obligated to update them[77] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section outlines the company's exposure to market risks, primarily related to the cyclical nature of commodity chemical prices and interest rate fluctuations on its variable-rate debt. The company uses an interest rate swap to mitigate interest rate risk and aims to pass on material cost changes to customers - The company is subject to risks from the cyclical nature of commodity chemical prices and attempts to pass cost changes to customers[79] - An interest rate swap agreement with a notional amount of $60 million, terminating on May 1, 2027, is in place to manage variable-rate long-term debt risk[80] - A 25-basis point change in interest rates on unhedged variable-rate debt would impact annual interest expense by approximately $0.1 million[80] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures, confirming their effectiveness, and reports no material changes in internal control over financial reporting during the first quarter of fiscal 2024 Evaluation of Disclosure Controls and Procedures Confirms the effectiveness of the company's disclosure controls and procedures as of the reporting date - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of July 2, 2023[82] Changes in Internal Control Reports no material changes in internal control over financial reporting during the quarter - There was no material change in internal control over financial reporting during the first quarter of fiscal 2024[83] PART II. OTHER INFORMATION This section provides additional non-financial information, including legal matters, risk factors, and exhibits Item 1. Legal Proceedings This section states that there are no material pending legal proceedings against the company, beyond routine litigation incidental to its business - There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business[85] Item 1A. Risk Factors This section confirms that there have been no material changes to the company's risk factors since the last Annual Report on Form 10-K - There have been no material changes to the company's risk factors from those disclosed in the Annual Report on Form 10-K for the fiscal year ended April 2, 2023[86] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides information on the company's share repurchase program, indicating no shares were repurchased during the three months ended July 2, 2023, and details the remaining shares available under the program - No shares were repurchased under the program during the three months ended July 2, 2023[87] - As of July 2, 2023, 1,129,348 shares remained available to be repurchased under the Board-authorized program[87] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - None[88] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company's operations - Not Applicable[89] Item 5. Other Information This section states that there is no other information to report - None[90] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including certifications by the CEO and CFO, and the financial statements formatted in Inline Extensible Business Reporting Language (iXBRL) - Includes Certifications by Chief Executive Officer (31.1, 32.1) and Chief Financial Officer (31.2, 32.2) pursuant to the Exchange Act[92] - Financial statements from the Quarterly Report on Form 10-Q are filed in Inline Extensible Business Reporting Language (iXBRL) format (Exhibit 101)[92] SIGNATURES Confirms the official submission of the report by authorized company officers