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(Exact
name of registrant as specified in its charter)
iMinnesota
i41-0771293
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i2381 Rosegate, iRoseville,
iMinnesota
i55113
(Address of principal executive offices)
(Zip code)
(i612)
i331-6910
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, par value $.01 per share
iHWKN
iNasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer
☒
Accelerated
filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Intangible
assets, net of accumulated amortization
i71,391
i73,060
Deferred
compensation plan asset
i9,130
i7,367
Other
i5,640
i4,661
Total
other assets
i174,886
i172,688
Total assets
$
i591,963
$
i590,535
LIABILITIES
AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable — trade
$
i55,598
$
i53,705
Accrued
payroll and employee benefits
i10,690
i17,279
Income
tax payable
i11,584
i3,329
Current
portion of long-term debt
i9,913
i9,913
Other
current liabilities
i6,518
i6,645
Total
current liabilities
i94,303
i90,871
LONG-TERM
DEBT, LESS CURRENT PORTION
i78,353
i101,731
LONG-TERM
LEASE LIABILITY
i9,597
i8,687
PENSION
WITHDRAWAL LIABILITY
i3,819
i3,912
DEFERRED
INCOME TAXES
i24,077
i23,800
DEFERRED
COMPENSATION LIABILITY
i10,117
i9,343
OTHER
LONG-TERM LIABILITIES
i696
i2,175
Total
liabilities
i220,962
i240,519
COMMITMENTS AND CONTINGENCIES
i
i
SHAREHOLDERS’
EQUITY:
Common stock; authorized: ii60,000,000/
shares of $ii0.01/ par value; ii20,942,857/
and ii20,850,454/ shares issued and outstanding as of July 2, 2023 and April 2,
2023, respectively
i209
i209
Additional paid-in capital
i44,409
i44,443
Retained
earnings
i322,694
i302,424
Accumulated
other comprehensive income
i3,689
i2,940
Total
shareholders’ equity
i371,001
i350,016
Total
liabilities and shareholders’ equity
$
i591,963
$
i590,535
See
accompanying notes to condensed consolidated financial statements.
1
HAWKINS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Changes
in operating accounts providing (using) cash:
Trade receivables
(i9,055)
(i15,857)
Inventories
i11,839
(i10,003)
Accounts
payable
(i537)
(i8,442)
Accrued
liabilities
(i9,075)
(i11,043)
Lease
liabilities
(i580)
(i521)
Income taxes
i8,255
i6,645
Other
i2,300
i1,466
Net
cash provided by (used in) operating activities
i34,866
(i9,395)
CASH
FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment
(i7,873)
(i11,640)
Other
i44
i113
Net
cash used in investing activities
(i7,829)
(i11,527)
CASH
FLOWS FROM FINANCING ACTIVITIES:
Cash dividends declared and paid
(i3,160)
(i2,958)
New
shares issued
i1,147
i986
Payroll taxes paid in
exchange for shares withheld
(i2,140)
(i1,550)
Shares
repurchased
i—
(i6,557)
Payments
on revolving loan
(i23,400)
(i6,500)
Proceeds
from revolving loan borrowings
i—
i40,000
Net
cash (used in) provided by financing activities
(i27,553)
i23,421
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(i516)
i2,499
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
i7,566
i3,496
CASH
AND CASH EQUIVALENTS, END OF PERIOD
$
i7,050
$
i5,995
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest
$
i1,221
$
i721
Noncash
investing activities - capital expenditures in accounts payable
$
i4,771
$
i1,858
See
accompanying notes to condensed consolidated financial statements.
5
HAWKINS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 – Summary of Significant Accounting Policies
i
Basis
of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, accordingly, do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended April 2, 2023, previously filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present
fairly our financial position and the results of our operations and cash flows for the periods presented. All adjustments made to the interim condensed consolidated financial statements were of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended July 2, 2023 are not necessarily indicative of the results that may be expected for the full year.
References to fiscal 2023 refer to the fiscal year ended April 2, 2023 and references to fiscal 2024 refer to the fiscal year ending March 31, 2024.
Use of Estimates. The preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, particularly receivables, inventories, property, plant and equipment, right-of-use assets, goodwill, intangibles, accrued expenses, short-term and long-term lease liability, income taxes and related accounts and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounting Policies. The accounting policies we follow are set forth in Note 1 – Nature of Business and Significant Accounting Policies to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended April 2,
2023, previously filed with the SEC. There has been no significant change in our accounting policies since the end of fiscal 2023.
Note 2 — iAsset Sales
Sale of bleach packaging assets: In the fourth quarter of fiscal 2023, we sold certain assets in our Industrial segment
related to our consumer bleach packaging business for $i7 million. These assets were not core to our Industrial segment operations, where we tend to focus our manufacturing operations on bulk products. The assets sold included plant equipment, inventory and intangible assets, all related to the packaging of bleach. We realized a gain of $i3 million
on this sale, which has been recorded within selling, general and administrative expenses.
6
Note 3 - iRevenue
Our revenue arrangements generally consist of a single performance obligation to transfer promised goods or services. We
disaggregate revenues from contracts with customers by operating segments as well as types of products sold. Reporting by operating segment is pertinent to understanding our revenues, as it aligns to how we review the financial performance of our operations. Types of products sold within each operating segment help us to further evaluate the financial performance of our segments. iThe following tables disaggregate external customer net sales by major revenue stream for the three months ended July 2,
2023 and July 3, 2022:
(1)For
our Industrial and Water Treatment segments, this line includes our non-bulk specialty products that we either manufacture, blend, repackage, resell in their original form, or direct ship to our customers in smaller quantities, and services we provide for our customers. For our Health and Nutrition segment, this line includes products manufactured, processed or repackaged in our facility and/or with our equipment.
(2)This line includes non-manufactured distributed specialty products in our Health and Nutrition segment, which may be sold out of one of our facilities or direct shipped to our customers.
(3)This line includes bulk products in our Industrial and Water Treatment segments that we do not modify in any way, but receive, store, and ship from our facilities, or direct ship to our customers in large quantities.
Note
4 – iEarnings per Share
Basic earnings per share (“EPS”) is computed by dividing net earnings by the weighted-average number of common shares outstanding. Diluted EPS includes the dilutive impact of incremental shares assumed to be issued as performance units and restricted stock.
iBasic
and diluted EPS were calculated using the following:
Dilutive
impact of performance units and restricted stock
i105,064
i124,726
Weighted-average
common shares outstanding—diluted
i21,012,788
i21,033,549
/
For
each of the periods presented, there were iino/
shares excluded from the calculation of weighted-average common shares for diluted EPS.
7
Note 5 – iFair Value Measurements
Our financial assets and liabilities are measured at fair value at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The carrying value of cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these instruments. Because of the variable-rate nature of our debt under our credit facility, our debt also approximates fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis. The fair value hierarchy requires the use of observable market data when available. In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular
item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Our financial assets that are measured at fair value on a recurring basis are an interest rate swap and assets held in a deferred compensation retirement plan. Both of these assets are classified as long-term assets on our balance sheet, with the portion of the deferred compensation retirement plan assets expected to be paid within twelve months classified as current assets. The fair value of the interest rate swap is determined by the respective counterparties based on interest rate changes. Interest rate swaps are valued based on observable interest rate yield curves for similar instruments. The deferred compensation plan assets relate to contributions made to a non-qualified compensation plan on behalf of certain employees who are classified
as “highly compensated employees” as determined by IRS guidelines. The assets are part of a rabbi trust and the funds are held in mutual funds. The fair value of the deferred compensation is based on the quoted market prices for the mutual funds at the end of the period.
i
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis as of July 2, 2023 and April 2, 2023.
The
first in, first out (“FIFO”) value of inventories accounted for under the last in, first out (“LIFO”) method was $i90.8 million at July 2, 2023 and $i101.4 million at April 2, 2023.
The remainder of the inventory was valued and accounted for under the FIFO method.
Note 7 – iGoodwill and Intangible Assets
The carrying amount of goodwill was $i77.4 million
as of July 2, 2023 and April 2, 2023, of which $i44.9 million was related to our Health and Nutrition segment, $i26.0 million was related to our Water Treatment segment, and $i6.5
million was related to our Industrial segment.
We
were in compliance with all covenants of our credit agreement as of July 2, 2023.
Note 9 – iIncome Taxes
We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The tax years prior to our fiscal year ended March 29, 2020 are closed to examination by the Internal Revenue Service,
and with few exceptions, state and local income tax jurisdictions. Our effective income tax rate was i26% for the three months ended July 2, 2023, compared to i25% for the three
months ended July 3, 2022. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes.
Note 10 – iShare-Based Compensation
Performance-Based Restricted Stock Units. Our Board
of Directors (the “Board”) approved a performance-based equity compensation arrangement for our executive officers during the first quarters of each of fiscal 2024 and fiscal 2023. These performance-based arrangements provide for the grant of performance-based restricted stock units that represent a possible future issuance of restricted shares of our common stock based on a pre-tax income target for the applicable fiscal year. The actual number of restricted shares to be issued to each executive officer is determined when our final financial information becomes available after the applicable fiscal year and will be between izero
shares and i70,859 shares in the aggregate for fiscal 2024. The restricted shares issued, if any, will fully vest approximately two years after the last day of the fiscal year on which the performance is based. We are recording the compensation expense for the outstanding performance share units and the converted restricted stock over the life of the awards.
iThe
following table represents the restricted stock activity for the three months ended July 2, 2023:
Shares
Weighted- Average Grant Date Fair Value
Unvested at beginning of period
i189,258
$
i34.64
Granted
i61,819
i43.06
Vested
(i105,600)
i31.74
Unvested
at end of period
i145,477
$
i40.33
/
We
recorded compensation expense related to performance share units and restricted stock of $i0.7 million for the three months ended July 2, 2023 and $i0.4 million
for the three months ended July 3, 2022. Substantially all of the compensation expense was recorded in selling, general and administrative expenses in the condensed consolidated statements of income.
Restricted Stock Awards. As part of their retainer, our non-employee directors receive restricted stock for their Board services. The restricted stock awards are generally expensed over a one-year vesting period, based on the market value on the date of grant. As of July 2, 2023, there were i12,565
shares of restricted stock with an average grant date fair value of $i38.98 outstanding under this program. Compensation expense for both the three months ended July 2, 2023 and July 3, 2022 related to restricted stock awards to the Board was $i0.1
million.
Note 11 – iShare Repurchase Program
Our Board had authorized the repurchase of up to i2.6
million shares of our outstanding common shares. The shares may be repurchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. Upon purchase of the shares, we reduce our common stock for the par value of the shares with the excess applied against additional paid-in capital. During the three months ended July 2, 2023, ino shares were repurchased, and during the three months ended July 3, 2022, we repurchased i181,657
shares at an aggregate purchase price of $i6.6 million. As of July 2, 2023, i1,129,348 shares
remained available to be repurchased under the share repurchase program.
9
Note 12 – iSegment Information
We have ithree
reportable segments: Industrial, Water Treatment, and Health and Nutrition. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the fiscal year ended April 3, 2022.
We evaluate performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. Reportable segments are defined primarily by product and type of customer. Segments are responsible for the sales, marketing and development of their products and services. We allocate certain corporate expenses to our operating segments. There are ino
intersegment sales and ino operating segments have been aggregated. iNo single customer’s revenues amounted to 10% or more of our total revenue. Sales are primarily within the United States and all assets are located within the United States.
iNo
significant changes to identifiable assets by segment occurred during the three months ended July 2, 2023.
Note 13 – iSubsequent Events
In July 2023, we acquired substantially all the assets of EcoTech Enterprises, Inc. ("EcoTech") for $i3.4 million,
under the terms of an asset purchase agreement with EcoTech and its shareholders. EcoTech is a manufacturer and distributor of water treatment chemicals serving customers throughout Arkansas and surrounding states. The results of operations and the assets, including goodwill associated with this acquisition, if any, will be included as part of our Water Treatment segment from the date of acquisition forward. The purchase accounting for this acquisition has not yet been completed.
10
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following is a discussion and analysis of our financial condition and results of operations for the three months ended July 2, 2023 as compared to the similar period ended July 3, 2022. This discussion should be read in conjunction with the condensed consolidated financial statements and notes to condensed consolidated financial statements included in this quarterly report on Form 10-Q and Item 8 of our Annual Report on Form 10-K for the fiscal year ended April 2, 2023.
Overview
We derive substantially all of our revenues from the sale of chemicals and specialty ingredients to our customers in a wide variety
of industries. We began our operations primarily as a distributor of bulk chemicals with a strong customer focus. Over the years, we have maintained the strong customer focus and have expanded our business by increasing our sales of value-added chemicals and specialty ingredients, including manufacturing, blending, and repackaging certain products.
Asset Sales and Business Acquisitions
In July 2023, after the end of our first quarter, we acquired substantially all the assets of EcoTech Enterprises, Inc. ("EcoTech") for $3.4 million, under the terms of an asset purchase agreement with EcoTech and its shareholders. EcoTech is a manufacturer and distributor of water treatment chemicals serving customers throughout Arkansas and surrounding states. The results of operations and the assets, including goodwill associated with this acquisition, if any,
will be included as part of our Water Treatment segment from the date of acquisition forward. The purchase accounting for this acquisition has not yet been completed.
In the fourth quarter of fiscal 2023, we sold certain assets in our Industrial segment related to our consumer bleach packaging business for $7 million. These assets were not deemed core to our Industrial segment operations. The assets sold included plant equipment, inventory, and intangible assets, all related to the packaging of bleach. We realized a gain of $3 million on this sale, which was recorded as a reduction to selling, general and administrative expenses.
Share Repurchase Program
We have in place a share repurchase program for up to 2.6 million shares of our common shares. As of July 2,
2023, 1,129,348 shares remain available to be repurchased under this program.
Financial Results
We focus on total profitability dollars when evaluating our financial results as opposed to profitability as a percentage of sales, as sales dollars tend to fluctuate as raw material prices rise and fall, particularly in our Industrial and Water Treatment segments. The costs for certain of our raw materials can rise or fall rapidly, causing fluctuations in gross profit as a percentage of sales.
We use the last in, first out (“LIFO”) method of valuing the majority of our inventory in our Industrial and Water Treatment segments, which causes the most recent product costs to be recognized in our income statement. The LIFO inventory valuation method
and the resulting cost of sales are consistent with our business practices of pricing to current chemical raw material prices. Inventories in our Health and Nutrition segment are valued using the first-in, first-out (“FIFO”) method.
We disclose the sales of our bulk commodity products as a percentage of total sales dollars for our Industrial and Water Treatment segments. Our definition of bulk commodity products includes products that we do not modify in any way, but receive, store, and ship from our facilities, or direct ship to our customers in large quantities. We disclose the percentage of our overall sales that consist of sales of bulk commodity products as these products are generally distributed and we do not add significant value to these products in comparison to our non-bulk products. Sales of these products are generally highly competitive and price sensitive. As a result, bulk
commodity products generally have our lowest margins.
Results of Operations
The following table sets forth the percentage relationship of certain items to sales for the period indicated:
Sales were $251.1 million for the three months ended July 2, 2023, an increase of $4.6 million, or 2%, from sales of $246.5 million in the same period a year ago, driven by increased selling prices.
Industrial Segment. Industrial segment sales decreased $3.8 million or 3%, to $120.9 million for the three months ended July 2, 2023, from sales of $124.7 million in the same period a year ago. Sales of bulk commodity products in the Industrial segment were approximately 13% of sales dollars in the three months ended July
2, 2023 and 17% in the same period of the prior year.The divestiture of our consumer bleach packaging business at the end of fiscal 2023 resulted in $4.7 million lower sales in the current quarter. Offsetting that decrease were increases in sales resulting from increased selling prices on many of our products driven by higher raw material costs on overall lower volumes and, to a lesser extent, a product mix shift.
Water Treatment Segment. Water Treatment segment sales increased $15.2 million, or 19%, to $93.7 million for the three months ended July 2, 2023, from sales of $78.5 million in the same period a year ago. Sales of bulk commodity products in the Water Treatment segment were approximately 8% of sales dollars in the three months ended July 2, 2023 and 9% in the same period
a year ago. Sales increased as a result of increased selling prices on many of our products driven primarily by higher raw material costs.
Health & Nutrition Segment. Health and Nutrition segment sales decreased $6.7 million, or 15%, to $36.6 million for the three months ended July 2, 2023, from sales of $43.3 million in the same period a year ago. The sales decrease was due to decreased sales volumes of both our specialty distributed products and our manufactured products due to softened demand from our customers, which we believe was driven by excess inventory at many of our customers as well as lower consumer demand for health and immunity products.
Gross Profit
Gross profit increased $5.3 million, or
11%, to $52.0 million, or 21% of sales, for the three months ended July 2, 2023, from $46.7 million, or 19% of sales, in the same period a year ago. During the three months ended July 2, 2023, the LIFO reserve decreased, and gross profit increased, by $0.2 million. In the same quarter a year ago, the LIFO reserve increased, and gross profit decreased, by $3.8 million due primarily to rising raw material prices.
Industrial Segment. Gross profit for the Industrial segment decreased $0.7 million, or 4%, to $19.3 million, or 16% of sales, for the three months ended July 2, 2023, from $20.0 million, or 16% of sales, in the same period a year ago. During the three months ended July 2, 2023,
the LIFO reserve decreased, and gross profit increased, by $0.3 million. In the same quarter a year ago, the LIFO reserve increased, and gross profit decreased, by $2.7 million due primarily to rising raw material prices. Gross profit decreased due to decreased sales volumes, which was largely offset by the favorable impact of the change in the LIFO reserve.
Water Treatment Segment. Gross profit for the Water Treatment segment increased $7.4 million, or 39%, to $26.4 million, or 28% of sales, for the three months ended July 2, 2023, from $19.0 million, or 24% of sales, in the same period a year ago. During the three months ended July 2, 2023, the LIFO reserve increased, and gross profit decreased, by $0.1 million. In the same quarter a year ago, the LIFO reserve increased, and gross
profit decreased, by $1.1 million due primarily to rising raw material prices. Gross profit increased as a result of improved per-unit margins.
Health and Nutrition Segment. Gross profit for our Health and Nutrition segment decreased $1.5 million, or 19%, to $6.3 million, or 17% of sales, for the three months ended July 2, 2023, from $7.8 million, or 18% of sales, in the same period a year ago. Gross profit decreased as a result of lower sales volumes and lower per-unit margins on certain products.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses increased $0.6 million, or 3%, to $19.5 million, or 8% of sales, for the three months ended July
2, 2023, from $18.9 million, or 8% of sales, in the same period a year ago. In the current quarter, we recorded compensation expense of $0.3 million as a result of gains recorded on investments held for our non-qualified deferred compensation plan, as compared to $0.8 million decrease in compensation expense in the same quarter a year ago as a result of losses incurred. These amounts were offset by similar amounts recorded in other income (expense). Offsetting this $1.1 million unfavorable year-over-year impact were decreases in SG&A expenses resulting largely from expense control measures.
Operating Income
Operating income increased $4.6 million, or 16%, to $32.5 million, or 13% of sales, for the three months ended July 2, 2023, from $27.9 million, or 11% of sales, in the same period a year ago due to the combined
impact of the factors discussed above.
Interest Expense, Net
Interest expense was $1.1 million for the three months ended July 2, 2023 and $0.9 million the same period a year ago. The increase was due to an increase in borrowing interest rates, largely offset by a decrease in outstanding borrowings.
Other Income (Expense)
Other income was $0.3 million for the three months ended July 2, 2023 compared to other expense of $0.8 million in the same period a year ago. The income represents gains recorded on investments held for our non-qualified deferred compensation plan, whereas the expense in the same period a year ago represented
losses recorded on those investments. The amounts recorded as a gain or loss were offset by similar amounts recorded as a decrease or increase to compensation expense within SG&A expenses.
Income Tax Provision
Our effective income tax rate was 26% for the three months ended July 2, 2023 and 25% the three months ended July 3, 2022. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes. Our effective tax rate for the full year is currently expected to be approximately 26 to 27%.
Liquidity and Capital Resources
Cash was $7.0 million at July 2,
2023, a decrease of $0.5 million as compared with the $7.6 million available as of April 2, 2023.
Cash provided by operating activities was $34.9 million for the three months ended July 2, 2023, compared to cash used in operating activities of $9.4 million in the same period a year ago. The year-over-year increase in cash provided by operating activities was primarily driven by decreased cash expended for inventory purchases and increased net income. Due to the nature of our operations, which includes purchases of large quantities of bulk chemicals, timing of purchases can result in significant changes in working capital investment and the resulting operating cash flow.
Cash used in investing activities was $7.8 million for the three months
ended July 2, 2023, compared to $11.5 million in the same period a year ago. Capital expenditures were $7.9 million for the three months ended July 2, 2023, compared to $11.6 million in the same period a year ago. In the first three months of the current year, we invested $5.1 million to complete an expansion of one of our Minnesota manufacturing facilities. In the prior year, we invested $1.1 million to complete an expansion of our Illinois manufacturing facility, purchased a previously leased facility for $0.9 million, and had larger investments in vehicles, safety equipment and new and replacement equipment compared to the first three months of the current year.
Cash used in financing activities was $27.6 million for the three months ended July 2, 2023, compared
to $23.4 million of cash provided by financing activities in the same period a year ago. Included in financing activities in the first three months of the current year were net debt repayments of $23.4 million, compared to net debt proceeds of $33.5 million in the first three months of the prior year. In addition, we repurchased $6.6 million of shares of our common stock in the first three months of the prior year.
We expect our cash balances and funds available under our credit facility, discussed below, along with cash flows generated from operations, will be sufficient to fund the cash requirements of our ongoing operations for the foreseeable future.
Our Board has authorized the repurchase of up to 2.6 million shares of our outstanding common shares. The shares may be purchased on the open market or in privately negotiated transactions subject
to applicable securities laws and regulations. The primary objective of the share repurchase program is to offset the impact of dilution from issuances relating to employee and director equity grants and our employee stock purchase program. During the three months ended July 2, 2023, no shares were repurchased, and during the three months ended July 2, 2023, we repurchased 181,657 shares of common stock with an aggregate purchase price of $6.6 million. As of July 2, 2023, 1,129,348 shares remained available to be repurchased under the share repurchase program.
We are party to a second amended and restated credit agreement (the “Credit Agreement”) with U.S. Bank National Association (“U.S. Bank”) as Sole Lead Arranger and Sole Book Runner,
and other lenders from time to time party thereto (collectively, the “Lenders”), whereby U.S. Bank is also serving as Administrative Agent. The Credit Agreement refinanced the
revolving loan under our previous credit agreement with U.S. Bank and provides us with senior secured revolving credit facilities (the “Revolving Loan Facility”) totaling $250 million. The Revolving Loan Facility includes a $10 million letter of credit subfacility and $25 million swingline subfacility. The Revolving Loan Facility has a five-year maturity date, maturing on April 30, 2027. The Revolving Loan Facility is secured by substantially all of our personal property assets and those of our subsidiaries. We may use the amount available under the Revolving Loan Facility for working capital, capital
expenditures, share repurchases, restricted payments and acquisitions permitted under the Credit Agreement, and other general corporate purposes.
Borrowings under the Revolving Loan Facility bear interest at a rate per annum equal to one of the following, plus, in both cases, an applicable margin based upon our leverage ratio: (a) Term SOFR, which includes a credit spread adjustment of 0.10%, for an interest period of one, three or six months as selected by us, reset at the end of the selected interest period, or (b) a base rate determined by reference to the highest of (1) U. S. Bank’s prime rate, (2) the Federal Funds Effective Rate plus 0.5%, or (3) one-month Term SOFR for U.S. dollars plus 1.0%. The Term SOFR margin is between 0.85% and 1.35%, depending on our leverage ratio. The base rate margin is between 0.00% and 0.35%, depending on our leverage ratio. At July 2,
2023, the effective interest rate on our borrowings was 3.9%.
In addition to paying interest on the outstanding principal under the Revolving Loan Facility, we are required to pay a commitment fee on the unutilized commitments thereunder. The commitment fee is between 0.15% and 0.25%, depending on our leverage ratio.
Debt issuance costs paid to the Lenders are being amortized as interest expense over the term of the Credit Agreement. As of July 2, 2023, the unamortized balance of these costs was $0.3 million, and is reflected as a reduction of debt on our balance sheet.
The Credit Agreement requires us to maintain (a) a minimum fixed charge coverage ratio of 1.15 to 1.00 and (b) a maximum total cash
flow leverage ratio of 3.0 to 1.0. The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict our ability to incur additional indebtedness, dispose of significant assets, make certain investments, including any acquisitions other than permitted acquisitions, make certain payments, enter into sale and leaseback transactions, grant liens on our assets or enter into rate management transactions, subject to certain limitations. We are permitted to make distributions, pay dividends and repurchase shares so long as no default or event of default exists or would exist as a result thereof. We were in compliance with all covenants of the Credit Agreement as of July 2, 2023 and expect to remain in compliance with all covenants for the next 12 months.
The Credit Agreement contains customary
events of default, including failure to comply with covenants in the Credit Agreement and other loan documents, cross default to other material indebtedness, failure by us to pay or discharge material judgments, bankruptcy, and change of control. The occurrence of an event of default would permit the lenders to terminate their commitments and accelerate loans under the Credit Facility.
We have in place an interest rate swap agreement to manage the risk associated with a portion of our variable-rate long-term debt. We do not utilize derivative instruments for speculative purposes. The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The notional amount of the swap agreement is $60 million and it will terminate on May
1, 2027.
As part of our growth strategy, we have acquired businesses and may pursue acquisitions or other strategic relationships in the future that we believe will complement or expand our existing businesses or increase our customer base. We believe we could borrow additional funds under our current or new credit facilities or sell equity for strategic reasons or to further strengthen our financial position.
The information presented in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts, but rather are based on our current expectations, estimates and projections, and our beliefs and assumptions. Words such as “anticipate,”“believe,”“estimate,”“expect,”“intend,”“plan,”“will” and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. These factors could cause actual results
to differ materially from those expressed or forecasted in the forward-looking statements. Additional information concerning potential factors that could affect future financial results is included in our Annual Report on Form 10-K for the fiscal year ended April 2, 2023. We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q. We are not obligated to update these statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
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ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to the risk inherent in the cyclical nature of commodity chemical prices. However, we do not currently purchase forward contracts or otherwise engage in hedging activities with respect to the purchase of commodity chemicals. We attempt to pass changes in the cost of our materials to our customers. However, there are no assurances that we will be able to pass on the increases in the future.
We are exposed to market risks related to interest rates. Our exposure to changes in interest rates is primarily related to borrowings under our Revolving Loan Facility. We have in place an interest rate swap agreement to manage the risk associated with a portion of our variable-rate long-term debt. The interest rate
swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The notional amount of the swap agreement is $60.0 million and it will terminate on May 1, 2027. As of July 2, 2023, a 25-basis point change in interest rates on our unhedged variable-rate debt would potentially increase or decrease our annual interest expense by approximately $0.1 million.
Other types of market risk, such as foreign currency risk, do not arise in the normal course of our business activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of July 2, 2023. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
There was no change in our internal control over financial reporting during the first quarter of fiscal 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries are a party or of which any of our property is the subject.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Our Board has authorized the repurchase of up to 2.6 million shares of our outstanding common stock. The shares may be purchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. The following table sets forth information concerning purchases of our common stock for the three months ended July 2, 2023:
Period
Total
Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program
Maximum Number of Shares that May Yet be Purchased under Plans or Programs
Financial statements from the Quarterly Report on Form 10-Q of Hawkins, Inc. for the period ended July 2, 2023 filed with the SEC on August
2, 2023 formatted in Inline Extensible Business Reporting Language (iXBRL); (i) the Condensed Consolidated Balance Sheets at July 2, 2023 and April 2, 2023, (ii) the Condensed Consolidated Statements of Income for the three months ended July 2, 2023 and July 3, 2022, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended July 2, 2023 and July 3, 2022, (iv) the Condensed Consolidated Statements of Shareholder's Equity for the three months ended July 2, 2023 and July 3, 2022, (v) the Condensed Consolidated Statements of Cash Flows for
the three months ended July 2, 2023 and July 3, 2022, and (vi) Notes to Condensed Consolidated Financial Statements.
Filed Electronically
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Cover Page Interactive Data File (embedded within the inline XBRL document)
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
