Hawkins(HWKN) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the company's unaudited financial statements and management's analysis of its financial condition and operational results ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including balance sheets, income, comprehensive income, equity, and cash flow statements, with detailed notes on accounting policies and key financial items Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific dates | Metric | October 2, 2022 (in thousands) | April 3, 2022 (in thousands) | | :-------------------------------- | :----------------------------- | :--------------------------- | | Total Assets | $599,283 | $567,328 | | Total Liabilities | $267,869 | $264,727 | | Total Shareholders' Equity | $331,414 | $302,601 | | Current Assets | $251,575 | $227,738 | | Current Liabilities | $90,851 | $101,466 | - Total assets increased by $31.955 million from April 3, 2022, to October 2, 2022, primarily driven by increases in trade accounts receivables and inventories[7] - Total shareholders' equity increased by $28.813 million, reflecting retained earnings growth and accumulated other comprehensive income[7] Condensed Consolidated Statements of Income This section outlines the company's financial performance over periods, including sales, gross profit, operating income, and net income | Metric (in thousands) | Three Months Ended Oct 2, 2022 | Three Months Ended Sep 26, 2021 | Six Months Ended Oct 2, 2022 | Six Months Ended Sep 26, 2021 | | :---------------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Sales | $241,192 | $183,277 | $487,735 | $364,518 | | Gross Profit | $46,374 | $37,287 | $93,123 | $76,261 | | Operating Income | $26,536 | $19,608 | $54,400 | $41,726 | | Net Income | $18,000 | $14,133 | $37,695 | $30,761 | | Basic EPS | $0.86 | $0.67 | $1.81 | $1.46 | | Diluted EPS | $0.86 | $0.67 | $1.79 | $1.45 | | Cash Dividends per Share | $0.1400 | $0.1300 | $0.2800 | $0.2525 | - Sales increased by 32% for the three months and 34% for the six months ended October 2, 2022, compared to the prior year periods, primarily due to price increases[8] - Net income grew by 27.3% for the three months and 22.5% for the six months ended October 2, 2022, year-over-year[8] Condensed Consolidated Statements of Comprehensive Income This section details the company's comprehensive income, including net income and other comprehensive income components | Metric (in thousands) | Three Months Ended Oct 2, 2022 | Three Months Ended Sep 26, 2021 | Six Months Ended Oct 2, 2022 | Six Months Ended Sep 26, 2021 | | :---------------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Net Income | $18,000 | $14,133 | $37,695 | $30,761 | | Unrealized gain on interest rate swap | $1,977 | — | $2,442 | — | | Total Comprehensive Income | $19,977 | $14,133 | $40,137 | $30,761 | - Total comprehensive income for the six months ended October 2, 2022, was $40.137 million, an increase of 30.5% from $30.761 million in the prior year, driven by net income growth and unrealized gains on interest rate swaps[10] Condensed Consolidated Statements of Shareholder's Equity This section tracks changes in shareholders' equity, reflecting net income, dividends, and share repurchases | Metric (in thousands) | Balance April 3, 2022 | Balance October 2, 2022 | | :---------------------- | :-------------------- | :---------------------- | | Total Shareholders' Equity | $302,601 | $331,414 | | Net Income | $19,695 (Q1) / $18,000 (Q2) | | | Cash Dividends Declared and Paid | $(2,958) (Q1) / $(2,942) (Q2) | | | Shares Repurchased | $(6,557) (Q1) | | - Shareholders' equity increased from $302.601 million at April 3, 2022, to $331.414 million at October 2, 2022, primarily due to net income generation and other comprehensive income, partially offset by cash dividends and share repurchases[12] - The company repurchased shares totaling $6.557 million during the six months ended October 2, 2022[12] Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities | Metric (in thousands) | Six Months Ended Oct 2, 2022 | Six Months Ended Sep 26, 2021 | | :---------------------- | :----------------------------- | :------------------------------ | | Net Cash Provided by Operating Activities | $18,803 | $40,082 | | Net Cash Used in Investing Activities | $(20,372) | $(7,923) | | Net Cash Provided by (Used in) Financing Activities | $1,997 | $(28,355) | | Net Increase in Cash and Cash Equivalents | $428 | $3,804 | | Cash and Cash Equivalents, End of Period | $3,924 | $6,802 | - Net cash provided by operating activities decreased significantly to $18.803 million for the six months ended October 2, 2022, from $40.082 million in the prior year, mainly due to increased working capital uses for inventory and receivables[13][87] - Cash used in investing activities increased to $20.372 million, primarily due to higher capital expenditures of $20.668 million, including facility expansion and equipment purchases[13][89] - Financing activities shifted from a net use of $28.355 million to a net provision of $1.997 million, driven by $15.0 million in net debt proceeds compared to $15.0 million in net debt payments in the prior year[13][90] Note 1 – Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements - The condensed consolidated financial statements are unaudited and prepared in accordance with Form 10-Q instructions, containing all normal recurring adjustments necessary for fair presentation[14] - Management's estimates and assumptions affect reported amounts, and actual results may differ[16] - There have been no significant changes in accounting policies since the fiscal year ended April 3, 2022[17] Note 2 — Acquisitions This note details recent business acquisitions and their impact on the company's segments - In fiscal 2022, Hawkins, Inc. acquired NAPCO Chemical Company, Inc. for $19.0 million, Water and Waste Specialties, Inc. for $1.4 million, and Southeast Water Systems LLC for $1.2 million (with potential additional $1.0 million), all integrated into the Water Treatment segment[18][19][20] - These acquisitions expanded the geographic reach and capabilities of the Water Treatment segment, with associated goodwill included in the segment's assets[18][19][20] Note 3 - Revenue This note disaggregates revenue by product type and operating segment, providing insights into sales performance | Revenue Stream (in thousands) | Three Months Ended Oct 2, 2022 | Three Months Ended Sep 26, 2021 | Six Months Ended Oct 2, 2022 | Six Months Ended Sep 26, 2021 | | :------------------------------ | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Manufactured, blended or repackaged products | $182,456 | $132,406 | $366,386 | $264,251 | | Distributed specialty products | $28,677 | $30,062 | $59,766 | $61,004 | | Bulk products | $25,852 | $18,905 | $53,097 | $35,301 | | Other | $4,207 | $1,904 | $8,486 | $3,962 | | Total external customer sales | $241,192 | $183,277 | $487,735 | $364,518 | - Manufactured, blended, or repackaged products are the largest revenue stream, showing significant growth across all segments[21] - Revenue is disaggregated by operating segments (Industrial, Water Treatment, Health and Nutrition) and product types, aligning with how financial performance is reviewed[21] Note 4 – Earnings per Share This note explains the calculation of basic and diluted earnings per share, including the impact of dilutive securities | Metric | Three Months Ended Oct 2, 2022 | Three Months Ended Sep 26, 2021 | Six Months Ended Oct 2, 2022 | Six Months Ended Sep 26, 2021 | | :------------------------------------ | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Weighted-average common shares outstanding—basic | 20,814,686 | 20,986,542 | 20,861,754 | 21,010,422 | | Dilutive impact of performance units and restricted stock | 142,211 | 153,545 | 142,700 | 158,387 | | Weighted-average common shares outstanding—diluted | 20,956,897 | 21,140,087 | 21,004,454 | 21,168,809 | - Basic EPS is calculated by dividing net earnings by weighted-average common shares outstanding, while diluted EPS includes the dilutive impact of performance units and restricted stock[23] Note 5 – Fair Value Measurements This note describes the fair value hierarchy and measurements for financial assets and liabilities - Financial assets and liabilities are measured at fair value using an exit price concept, with observable market data prioritized[24][25] | Asset (in thousands) | Fair Value Hierarchy Level | October 2, 2022 | April 3, 2022 | | :--------------------- | :------------------------- | :-------------- | :------------ | | Deferred compensation plan assets | Level 1 | $7,092 | $7,038 | | Interest rate swap | Level 2 | $5,114 | $1,769 | - The fair value of the interest rate swap increased significantly from $1.769 million to $5.114 million, reflecting changes in interest rates[28] Note 6 – Inventories This note provides details on inventory valuation methods and changes in inventory balances | Inventory (in thousands) | October 2, 2022 | April 3, 2022 | | :----------------------- | :-------------- | :------------ | | Inventory (FIFO basis) | $143,433 | $116,325 | | LIFO reserve | $(30,371) | $(21,340) | | Net inventory | $113,062 | $94,985 | | FIFO value of LIFO inventories | $110,300 | $83,700 | - Net inventory increased by $18.077 million from April 3, 2022, to October 2, 2022, with a notable increase in the LIFO reserve due to rising raw material prices[29][63] Note 7 – Goodwill and Intangible Assets This note presents the carrying amounts of goodwill and other intangible assets, including amortization details | Asset Category (in thousands) | October 2, 2022 Net | April 3, 2022 Net | | :---------------------------- | :------------------ | :---------------- | | Goodwill | $77,401 | $77,401 | | Customer relationships | $74,092 | $77,245 | | Trademarks and trade names | $1,344 | $1,624 | | Other finite-life intangible assets | $24 | $97 | | Indefinite-life intangible assets | $1,227 | $1,227 | | Total intangible assets | $76,687 | $80,193 | - Goodwill remained stable at $77.4 million, with the largest portions allocated to Health and Nutrition ($44.9 million) and Water Treatment ($26.0 million) segments[30] - Net intangible assets decreased from $80.193 million to $76.687 million, primarily due to amortization of customer relationships[30] Note 8 – Debt This note details the company's debt obligations, including revolving loans and compliance with covenants | Debt (in thousands) | October 2, 2022 | April 3, 2022 | | :-------------------- | :-------------- | :------------ | | Senior secured revolving loan | $141,000 | $126,000 | | Total debt, net of debt issuance costs | $140,601 | $125,557 | | Current portion of long-term debt | $(9,913) | $(9,913) | | Total long-term debt | $130,688 | $115,644 | - Total debt, net of debt issuance costs, increased by $15.044 million to $140.601 million as of October 2, 2022, primarily due to increased borrowings under the senior secured revolving loan to meet working capital needs[31][90] - The company was in compliance with all covenants of its credit agreement as of October 2, 2022[31] Note 9 – Income Taxes This note outlines the effective income tax rate and factors influencing tax expense - The effective income tax rate was 26% for the six months ended October 2, 2022, consistent with the prior year period[32] - The effective tax rate is influenced by projected annual taxable income, permanent items, and state taxes, with a full-year expectation of 26% to 27%[32][85] Note 10 – Leases This note provides information on operating lease agreements, terms, and related expenses - The company has operating lease agreements for facilities, land, vehicles, and IT equipment, with remaining terms ranging from 1 to 22 years[33] | Metric | October 2, 2022 | April 3, 2022 | | :-------------------------------- | :-------------- | :------------ | | Weighted average remaining lease term (years) | 8.67 | 8.91 | | Weighted average discount rate | 2.6 % | 2.6 % | | Total lease expense (six months) | $1.5 million | $1.4 million | | Lease Maturities (in thousands) | Operating Leases | | :------------------------------ | :--------------- | | Remaining fiscal 2023 | $807 | | Fiscal 2024 | $1,393 | | Fiscal 2025 | $1,330 | | Fiscal 2026 | $1,268 | | Fiscal 2027 | $1,239 | | Thereafter | $5,024 | | Total | $11,061 | | Less: Interest | $(870) | | Present value of lease liabilities | $10,191 | Note 11 – Share-Based Compensation This note details the company's share-based compensation plans, including restricted stock units and awards - The company grants performance-based restricted stock units to executive officers and restricted stock awards to non-employee directors[38][40] | Metric (in thousands) | Three Months Ended Oct 2, 2022 | Three Months Ended Sep 26, 2021 | Six Months Ended Oct 2, 2022 | Six Months Ended Sep 26, 2021 | | :---------------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Compensation expense (performance share units & restricted stock) | $0.8 million | $0.6 million | $1.2 million | $1.2 million | | Compensation expense (Board restricted stock awards) | $0.1 million | $0.1 million | $0.2 million | $0.2 million | | Restricted Stock Activity | Shares | Weighted Average Grant Date Fair Value | | :------------------------ | :----- | :------------------------------------- | | Unvested at beginning of period | 214,478 | $25.48 | | Granted | 88,524 | $38.31 | | Vested | (102,860) | $18.69 | | Forfeited or expired | (10,884) | $34.68 | | Unvested at end of period | 189,258 | $34.64 | Note 12 – Share Repurchase Program This note describes the company's share repurchase activities and the remaining authorization - On August 4, 2022, the Board increased the authorized share repurchase program from 1.6 million to 2.6 million shares[41] | Period | Shares Repurchased | Aggregate Purchase Price | | :-------------------------------- | :----------------- | :----------------------- | | Six months ended Oct 2, 2022 | 181,657 | $6.6 million | | Six months ended Sep 26, 2021 | 209,963 | $7.4 million | - As of October 2, 2022, 1,129,348 shares remained available for repurchase under the program[41] Note 13 – Segment Information This note disaggregates financial performance by operating segment, including sales and operating income - The company operates in three reportable segments: Industrial, Water Treatment, and Health and Nutrition, with performance evaluated based on profit or loss from operations before income taxes[43][44] | Segment (in thousands) | Sales (3M Oct 2, 2022) | Operating Income (3M Oct 2, 2022) | Sales (6M Oct 2, 2022) | Operating Income (6M Oct 2, 2022) | | :--------------------- | :--------------------- | :-------------------------------- | :--------------------- | :-------------------------------- | | Industrial | $113,939 | $10,822 | $238,649 | $24,446 | | Water Treatment | $86,488 | $11,422 | $164,978 | $21,674 | | Health and Nutrition | $40,765 | $4,292 | $84,108 | $8,280 | | Total | $241,192 | $26,536 | $487,735 | $54,400 | - All segments showed increased sales and operating income for both the three and six months ended October 2, 2022, with Water Treatment showing the highest operating income for the three-month period[45] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses the company's financial condition and operational results for the six months ended October 2, 2022, covering business overview, acquisitions, share repurchases, segment performance, liquidity, and critical accounting estimates Overview This section provides a general business description, revenue sources, and inventory valuation methods - Hawkins, Inc. primarily derives revenue from selling chemicals and specialty ingredients, evolving from a bulk chemical distributor to include value-added chemicals and specialty ingredients through manufacturing, blending, and repackaging[48] - The company focuses on total profitability dollars rather than profitability as a percentage of sales, as raw material cost fluctuations can impact sales percentages[54] - Inventory in Industrial and Water Treatment segments is valued using the LIFO method, while the Health and Nutrition segment uses FIFO[55] Business Acquisitions This section details recent acquisitions and their strategic contribution to the Water Treatment segment - In fiscal 2022, Hawkins acquired NAPCO Chemical Company, Inc., Water and Waste Specialties, LLC, and Southeast Water Systems LLC, all contributing to the Water Treatment segment's geographic reach and capabilities[49][50][51] - The aggregate annual revenue of these three acquired businesses totaled approximately $17 million prior to their respective acquisition dates[52] Share Repurchase Program This section outlines the company's share repurchase authorization and remaining capacity - The Board increased the authorized share repurchase program from 1.6 million to 2.6 million shares on August 4, 2022[53] - As of October 2, 2022, 1,129,348 shares remained available for repurchase under the program[53] Financial Results This section highlights the company's approach to profitability and inventory valuation methods - The company prioritizes total profitability dollars over profitability as a percentage of sales due to fluctuations in raw material costs, particularly in the Industrial and Water Treatment segments[54] - The LIFO method is used for valuing the majority of inventory in the Industrial and Water Treatment segments, while the FIFO method is used for the Health and Nutrition segment[55] Results of Operations This section analyzes the company's sales, gross profit, operating income, and net income for the reported periods Three Months Ended October 2, 2022 Compared to Three Months Ended September 26, 2021 This section compares the company's financial performance for the three-month periods, highlighting key revenue and profit drivers | Metric | Oct 2, 2022 | Sep 26, 2021 | Change ($) | Change (%) | | :-------------------------------- | :---------- | :----------- | :--------- | :--------- | | Sales (in thousands) | $241,192 | $183,277 | $57,915 | 31.6% | | Gross Profit (in thousands) | $46,374 | $37,287 | $9,087 | 24.4% | | Operating Income (in thousands) | $26,536 | $19,608 | $6,928 | 35.3% | | Net Income (in thousands) | $18,000 | $14,133 | $3,867 | 27.4% | | Interest Expense, Net (in thousands) | $1,383 | $329 | $1,054 | 320.4% | - Sales increased by 32% to $241.2 million, driven by price increases across all segments[59] Industrial segment sales rose 37%, Water Treatment 39% (including acquisitions), and Health & Nutrition 7%[60][61][62] - Gross profit increased by 24% to $46.4 million, but gross profit margin decreased from 20% to 19% due to a $5.3 million increase in LIFO reserve (vs. $3.0 million prior year) primarily from rising raw material prices[63] - Operating income increased by 35% to $26.5 million, while interest expense surged by 320% to $1.4 million due to higher borrowing rates and increased outstanding borrowings[68][69] Six Months Ended October 2, 2022 Compared to Six Months Ended September 26, 2021 This section compares the company's financial performance for the six-month periods, detailing sales, gross profit, and net income changes | Metric | Oct 2, 2022 | Sep 26, 2021 | Change ($) | Change (%) | | :-------------------------------- | :---------- | :----------- | :--------- | :--------- | | Sales (in thousands) | $487,735 | $364,518 | $123,217 | 33.8% | | Gross Profit (in thousands) | $93,123 | $76,261 | $16,862 | 22.1% | | Operating Income (in thousands) | $54,400 | $41,726 | $12,674 | 30.4% | | Net Income (in thousands) | $37,695 | $30,761 | $6,934 | 22.5% | | Interest Expense, Net (in thousands) | $2,312 | $678 | $1,634 | 241.0% | - Sales increased by 34% to $487.7 million, driven by increased selling prices and demand[72] Industrial segment sales grew 41%, Water Treatment 39% (including acquisitions), and Health & Nutrition 9%[73][74][75] - Gross profit increased by 22% to $93.1 million, but gross profit margin decreased from 21% to 19% due to a $9.0 million increase in LIFO reserve (vs. $4.8 million prior year) from rising raw material costs[76][77] - Operating income increased by 30% to $54.4 million, while interest expense rose by 241% to $2.3 million due to higher borrowing rates and increased working capital needs[82][83] Liquidity and Capital Resources This section assesses the company's cash position, operating, investing, and financing cash flows, and available credit facilities - Cash and cash equivalents increased by $0.4 million to $3.9 million as of October 2, 2022[86] - Net cash provided by operating activities decreased to $18.8 million (from $40.1 million prior year) due to increased working capital uses for inventory and customer receivables[87] - Net cash used in investing activities increased to $20.4 million (from $7.9 million prior year), primarily due to higher capital expenditures of $20.7 million[89] - Net cash provided by financing activities was $2.0 million (compared to $28.4 million used prior year), driven by $15.0 million in net debt proceeds to fund working capital needs[90] - The company has a $250 million senior secured revolving credit facility, with $141.0 million outstanding as of October 2, 2022, and was in compliance with all covenants[31][93][98] - The share repurchase program had 1,129,348 shares remaining available as of October 2, 2022[92] Critical Accounting Estimates This section 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 3, 2022[102] Forward-Looking Statements This section cautions that forward-looking statements are subject to risks and uncertainties and are not guaranteed to be updated - The report contains forward-looking statements based on current expectations, estimates, and projections, which are subject to risks and uncertainties that could cause actual results to differ materially[103] - The company is not obligated to update these statements to reflect future events or circumstances[103] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, primarily related to commodity chemical prices and interest rates, and its strategies for managing these risks - The company is subject to the cyclical nature of commodity chemical prices but does not use forward contracts or hedging for purchases, instead attempting to pass cost changes to customers[105] - Interest rate risk is managed through an interest rate swap agreement with a notional amount of $60 million, terminating on May 1, 2027, to hedge a portion of variable-rate long-term debt[106] - A 25-basis point change in interest rates on unhedged variable-rate debt would impact annual interest expense by approximately $0.2 million[106] ITEM 4. CONTROLS AND PROCEDURES This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as assessed by management - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of October 2, 2022[108] Changes in Internal Control This section reports on the absence of material changes in internal control over financial reporting during the period - There were no material changes in internal control over financial reporting during the second quarter of fiscal 2023[109] PART II. OTHER INFORMATION This section includes legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits ITEM 1. LEGAL PROCEEDINGS This section confirms the absence of any material pending legal proceedings against the company - There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business[112] ITEM 1A. RISK FACTORS This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes to the risk factors from those disclosed in the Annual Report on Form 10-K for the fiscal year ended April 3, 2022[113] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section provides information regarding the company's share repurchase activities during the three months ended October 2, 2022 - No shares were repurchased during the three months ended October 2, 2022[114] - As of October 2, 2022, 1,129,348 shares remained available for repurchase under the Board-authorized program[114] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section confirms that there were no defaults upon senior securities - There were no defaults upon senior securities[115] ITEM 4. MINE SAFETY DISCLOSURES This section indicates that mine safety disclosures are not applicable to the company's operations - Mine Safety Disclosures are not applicable[116] ITEM 5. OTHER INFORMATION This section states that there is no other information to report - No other information is reported in this section[117] ITEM 6. EXHIBITS This section lists all exhibits filed as part of the Form 10-Q, including certifications and financial statements in iXBRL format - Exhibits include certifications by the Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32.1, 32.2) and financial statements in Inline Extensible Business Reporting Language (iXBRL) format (101, 104)[119]