HAWKINS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS HAWKINS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data) July 3, 2022 April 3, 2022 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,995 $ 3,496 Trade accounts receivables, net 138,775 122,826 Inventories 104,988 94,985 Prepaid expenses and other current assets 3,864 6,431 Total current assets 253,622 227,738 PROPERTY, PLANT, AND EQUIPMENT: 313,186 304,055 Less accumulated depreciation 146,739 142,209 Net property, plant, and equipment 166,447 161,846 OTHER ASSETS: Right-of-use assets 9,976 10,606 Goodwill 77,401 77,401 Intangible assets, net of accumulated amortization 78,435 80,193 Deferred compensation plan asset 7,285 6,783 Other 3,238 2,761 Total other assets 176,335 177,744 Total assets $ 596,404 $ 567,328 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable — trade $ 56,376 $ 66,693 Accrued payroll and employee benefits 9,658 19,034 Income tax payable 6,684 39 Current portion of long-term debt 9,913 9,913 Short-term lease liability 1,456 1,657 Container deposits 1,557 1,558 Other current liabilities 2,519 2,572 Total current liabilities 88,163 101,466 LONG-TERM DEBT, LESS CURRENT PORTION 149,166 115,644 LONG-TERM LEASE LIABILITY 8,665 9,143 PENSION WITHDRAWAL LIABILITY 4,186 4,276 DEFERRED INCOME TAXES 23,594 23,422 DEFERRED COMPENSATION LIABILITY 8,082 8,402 OTHER LONG-TERM LIABILITIES 1,271 2,374 Total liabilities 283,127 264,727 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY: Common stock; authorized: 60,000,000 shares of $ 0.01 par value; 20,807,338 and 20,889,777 shares issued and outstanding as of July 3, 2022 and April 3, 2022, respectively 208 209 Additional paid-in capital 40,192 46,717 Retained earnings 271,121 254,384 Accumulated other comprehensive income 1,756 1,291 Total shareholders’ equity 313,277 302,601 Total liabilities and shareholders’ equity $ 596,404 $ 567,328 See accompanying notes to condensed consolidated financial statements. 1 HAWKINS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except share and per-share data) Three Months Ended July 3, 2022 June 27, 2021 Sales $ 246,543 $ 181,241 Cost of sales ( 199,794 ) ( 142,267 ) Gross profit 46,749 38,974 Selling, general and administrative expenses ( 18,885 ) ( 16,856 ) Operating income 27,864 22,118 Interest expense, net ( 929 ) ( 349 ) Other (expense) income ( 763 ) 232 Income before income taxes 26,172 22,001 Income tax expense ( 6,477 ) ( 5,373 ) Net income $ 19,695 $ 16,628 Weighted average number of shares outstanding - basic 20,908,823 21,034,302 Weighted average number of shares outstanding - diluted 21,033,549 21,178,320 Basic earnings per share $ 0.94 $ 0.79 Diluted earnings per share $ 0.94 $ 0.79 Cash dividends declared per common share $ 0.1400 $ 0.1225 See accompanying notes to condensed consolidated financial statements. 2 HAWKINS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands) Three Months Ended July 3, 2022 June 27, 2021 Net income $ 19,695 $ 16,628 Other comprehensive income, net of tax: Unrealized gain on interest rate swap 465 — Total comprehensive income $ 20,160 $ 16,628 See accompanying notes to condensed consolidated financial statements. 3 HAWKINS, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) (In thousands, except share data) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Shares Amount BALANCE — April 3, 2022 20,889,777 $ 209 $ 46,717 $ 254,384 $ 1,291 $ 302,601 Cash dividends declared and paid ($ 0.14 per share) — — — ( 2,958 ) — ( 2,958 ) Share-based compensation expense — — 595 — — 595 Vesting of restricted stock 102,860 1 ( 1 ) — — — Shares surrendered for payroll taxes ( 36,410 ) — ( 1,550 ) — — ( 1,550 ) ESPP shares issued 32,768 — 986 — — 986 Shares repurchased ( 181,657 ) ( 2 ) ( 6,555 ) — — ( 6,557 ) Other comprehensive income, net of tax — — — — 465 465 Net income — — — 19,695 — 19,695 BALANCE — July 3, 2022 20,807,338 $ 208 $ 40,192 $ 271,121 $ 1,756 $ 313,277 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Shares Amount BALANCE — March 28, 2021 20,969,746 $ 210 $ 51,138 $ 213,898 $ — $ 265,246 Cash dividends declared and paid ($ 0.1225 per share) — — — ( 2,600 ) — ( 2,600 ) Share-based compensation expense — — 799 — — 799 Vesting of restricted stock 123,002 1 ( 1 ) — — — Shares surrendered for payroll taxes ( 45,390 ) — ( 1,467 ) — — ( 1,467 ) Shares repurchased ( 100,954 ) ( 1 ) ( 3,400 ) — — ( 3,401 ) Net income — — — 16,628 — 16,628 BALANCE — June 27, 2021 20,946,404 $ 210 $ 47,069 $ 227,926 $ — $ 275,205 See accompanying notes to condensed consolidated financial statements. 4 HAWKINS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Three Months Ended July 3, 2022 June 27, 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 19,695 $ 16,628 Reconciliation to cash flows: Depreciation and amortization 6,558 5,935 Operating leases 476 481 Loss (Gain) on deferred compensation assets 763 ( 232 ) Stock compensation expense 595 799 Other 273 67 Changes in operating accounts providing (using) cash: Trade receivables ( 15,857 ) ( 316 ) Inventories ( 10,003 ) ( 4,079 ) Accounts payable ( 8,442 ) 868 Accrued liabilities ( 11,043 ) ( 10,159 ) Lease liabilities ( 521 ) ( 572 ) Income taxes 6,645 5,393 Other 1,466 8 Net cash (used in) provided by operating activities ( 9,395 ) 14,821 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant, and equipment ( 11,640 ) ( 2,155 ) Other 113 26 Net cash used in investing activities ( 11,527 ) ( 2,129 ) CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends declared and paid ( 2,958 ) ( 2,600 ) New shares issued 986 — Payroll taxes paid in exchange for shares withheld ( 1,550 ) ( 1,467 ) Shares repurchased ( 6,557 ) ( 3,401 ) Payments on revolving loan ( 6,500 ) ( 3,000 ) Proceeds from revolving loan borrowings 40,000 — Net cash provided by (used in) financing activities 23,421 ( 10,468 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 2,499 2,224 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,496 2,998 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,995 $ 5,222 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 721 $ 292 Noncash investing activities - capital expenditures in accounts payable $ 1,858 $ 497 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 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 3, 2022 , 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 3, 2022 are not necessarily indicative of the results that may be expected for the full year. References to fiscal 2022 refer to the fiscal year ended April 3, 2022 and references to fiscal 2023 refer to the fiscal year ending April 2, 2023. 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 3, 2022 , previously filed with the SEC. There has been no significant change in our accounting policies since the end of fiscal 2022. Note 2 — Acquisitions Acquisition of NAPCO Chemical Company, Inc.: In the fourth quarter of fiscal 2022, we acquired substantially all the assets of NAPCO Chemical Company, Inc. ("NAPCO"), under the terms of an asset purchase agreement with NAPCO and certain other parties thereto, to further the geographic reach of our Water Treatment segment. We paid $ 18.5 million at closing for the acquisition, and an additional $ 0.5 million for a working capital adjustment. NAPCO manufactured and distributed water treatment chemicals from three locations in Texas. The results of operations since the acquisition date, and the assets, including the goodwill associated with this acquisition, are included in our Water Treatment segment. Costs associated with this transaction were not material and were expensed as incurred. Acquisition of Water and Waste Specialties, Inc.: In the third quarter of fiscal 2022, we acquired substantially all the assets of Water and Waste Specialties, Inc., under the terms of a purchase agreement with Water and Waste Specialties and its shareholders. We paid $ 1.4 million at closing for the acquisition. Water and Waste Specialties was a water treatment chemical distribution company operating primarily in Alabama. The results of operations since the acquisition date, and the assets, including the goodwill associated with this acquisition, are included in our Water Treatment segment. Costs associated with this transaction were not material and were expensed as incurred. Acquisition of Southeast Water Systems LLC: In the second quarter of fiscal 2022, we acquired substantially all the assets of Southeast Water Systems LLC, under the terms of an asset purchase agreement with Southeast Water Systems and its shareholders. We paid $ 1.2 million at closing for the acquisition and may pay up to an additional $ 1.0 million over the next three years based on achieving certain goals. Southeast Water Systems supplied and installed water treatment chemical equipment to its customers located primarily in Alabama, southern Georgia and the Florida panhandle. The results of operations since the acquisition date, and the assets, including the goodwill associated with this acquisition, are included in our Water Treatment segment. Costs associated with this transaction were not material and were expensed as incurred. 6 Note 3 - Revenue 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. The following tables disaggregate external customer net sales by major revenue stream for the three months ended July 3, 2022 and June 27, 2021: Three months ended July 3, 2022 (In thousands) Industrial Water Treatment Health and Nutrition Total Manufactured, blended or repackaged products (1) $ 101,612 $ 70,357 $ 11,961 $ 183,930 Distributed specialty products (2) — — 31,089 31,089 Bulk products (3) 20,455 6,790 — 27,245 Other 2,643 1,343 293 4,279 Total external customer sales $ 124,710 $ 78,490 $ 43,343 $ 246,543 Three months ended June 27, 2021 (In thousands) Industrial Water Treatment Health and Nutrition Total Manufactured, blended or repackaged products (1) $ 72,566 $ 51,228 $ 8,051 $ 131,845 Distributed specialty products (2) — — 30,942 30,942 Bulk products (3) 11,843 4,553 — 16,396 Other 1,441 457 160 2,058 Total external customer sales $ 85,850 $ 56,238 $ 39,153 $ 181,241 (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 – Earnings 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. Basic and diluted EPS were calculated using the following: Three Months Ended July 03, 2022 June 27, 2021 Weighted-average common shares outstanding—basic 20,908,823 21,034,302 Dilutive impact of performance units and restricted stock 124,726 144,018 Weighted-average common shares outstanding—diluted 21,033,549 21,178,320 For each of the periods presented, there were no shares excluded from the calculation of weighted-average common shares for diluted EPS. 7 Note 5 – Fair 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 other 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. The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis as of July 3, 2022 and April 3, 2022. 0 (In thousands) July 3, 2022 April 3, 2022 Assets Deferred compensation plan assets Level 1 $ 7,632 $ 7,038 Interest rate swap Level 2 $ 2,406 $ 1,769 Note 6 – Inventories Inventories at July 3, 2022 and April 3, 2022 consisted of the following: July 3, 2022 April 3, 2022 (In thousands) Inventory (FIFO basis) $ 130,107 $ 116,325 LIFO reserve ( 25,119 ) ( 21,340 ) Net inventory $ 104,988 $ 94,985 The first in, first out (“FIFO”) value of inventories accounted for under the last in, first out (“LIFO”) method was $ 93.9 million at July 3, 2022 and $ 83.7 million at April 3, 2022. The remainder of the inventory was valued and accounted for under the FIFO method. 8 Note 7 – Goodwill and Intangible Assets The carrying amount of goodwill was $ 77.4 million as of July 3, 2022 and April 3, 2022, of which $ 44.9 million was related to our Health and Nutrition segment, $ 26.0 million was related to our Water Treatment segment, and $ 6.5 million was related to our Industrial segment. A summary of our intangible assets as of July 3, 2022 and April 3, 2022 is as follows: July 3, 2022 April 3, 2022 (In thousands) Gross Amount Accumulated Amortization Net Gross Amount Accumulated Amortization Net Finite-life intangible assets Customer relationships $ 109,644 $ ( 33,976 ) $ 75,668 $ 109,644 $ ( 32,399 ) $ 77,245 Trademarks and trade names 6,370 ( 4,886 ) 1,484 6,370 ( 4,746 ) 1,624 Other finite-life intangible assets 3,904 ( 3,848 ) 56 3,904 ( 3,807 ) 97 Total finite-life intangible assets 119,918 ( 42,710 ) 77,208 119,918 ( 40,952 ) 78,966 Indefinite-life intangible assets 1,227 — 1,227 1,227 — 1,227 Total intangible assets $ 121,145 $ ( 42,710 ) $ 78,435 $ 121,145 $ ( 40,952 ) $ 80,193 Note 8 – Debt Debt at July 3, 2022 and April 3, 2022 consisted of the following: July 3, 2022 April 3, 2022 (In thousands) Senior secured revolving loan $ 159,500 $ 126,000 Less: unamortized debt issuance costs ( 421 ) ( 443 ) Total debt, net of debt issuance costs 159,079 125,557 Less: current portion of long-term debt ( 9,913 ) ( 9,913 ) Total long-term debt $ 149,166 $ 115,644 We were in compliance with all covenants of our credit agreement as of July 3, 2022. Note 9 – Income 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 31, 2019 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 25 % for the current quarter, compared to 24 % for the three months ended June 27, 2021. The effective tax rate is impacted by projected levels of annual taxable income, permanent items, and state taxes. 9 Note 10 – Leases Lease Obligations. As of July 3, 2022, we were obligated under operating lease agreements for certain manufacturing facilities, warehouse space, the land on which some of our facilities sit, vehicles and information technology equipment. Our leases have remaining original lease terms of 1 year to 22 years, some of which include options to extend the lease for up to 10 years . As of July 3, 2022, our operating lease components with initial or remaining terms in excess of one year were classified on the condensed consolidated balance sheet within right of use assets, short-term lease liability and long-term lease liability. Expense for leases less than 12 months was no t material for the three months ended July 3, 2022 and June 27, 2021. Total lease expense was $ 0.8 million and $ 0.7 million for the three months ended July 3, 2022 and June 27, 2021. Other information related to our operating leases was as follows: July 3, 2022 April 3, 2022 Lease Term and Discount Rate Weighted average remaining lease term (years) 8.93 8.91 Weighted average discount rate 2.5 % 2.6 % Maturities of lease liabilities as of July 3, 2022 were as follows: (In thousands) Operating Leases Remaining fiscal 2023 $ 1,250 Fiscal 2024 1,393 Fiscal 2025 1,330 Fiscal 2026 1,268 Fiscal 2027 1,239 Thereafter 5,024 Total $ 11,504 Less: Interest ( 1,383 ) Present value of lease liabilities $ 10,121 Note 11 – Share-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 2023 and fiscal 2022. 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 zero shares and 76,863 shares in the aggregate for fiscal 2023. 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. The following table represents the restricted stock activity for the three months ended July 3, 2022: 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 We recorded compensation expense related to performance share units and restricted stock of $ 0.4 million for the three months ended July 3, 2022 and $ 0.6 million for the three months ended June 27, 2021. Substantially all of the compensation expense was recorded in selling, general and administrative expenses in the condensed consolidated statements of income. 10 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 3, 2022, there were 10,287 shares of restricted stock with an average grant date fair value of $ 32.80 outstanding under this program. Compensation expense for both the three months ended July 3, 2022 and June 27, 2021 related to restricted stock awards to the Board was $ 0.1 million. Note 12 – Share Repurchase Program As of July 3, 2022, our Board had authorized the repurchase of up to 1.6 million shares of our outstanding common stock for cash 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 3, 2022, we repurchased 181,657 shares at an aggregate purchase price of $ 6.6 million. During the three months ended June 27, 2021, we repurchased 100,954 shares at an aggregate purchase price of $ 3.4 million. As of July 3, 2022, 129,348 shares remained available to be repurchased under the share repurchase program. On August 4, 2022, our Board increased the number of shares authorized to be repurchased to 2.6 million. Accordingly, as of August 4, 2022, 1,129,348 shares remain available to be repurchased under the share repurchase program. Note 13 – Segment Information We have three 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 no intersegment sales and no operating segments have been aggregated. No 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. (In thousands) Industrial Water Treatment Health and Nutrition Total Three months ended July 3, 2022: Sales $ 124,710 $ 78,490 $ 43,343 $ 246,543 Gross profit 20,009 18,953 7,787 46,749 Selling, general, and administrative expenses 6,385 8,701 3,799 18,885 Operating income 13,624 10,252 3,988 27,864 Three months ended June 27, 2021: Sales $ 85,850 $ 56,238 $ 39,153 $ 181,241 Gross profit 14,254 16,234 8,486 38,974 Selling, general, and administrative expenses 6,241 7,062 3,553 16,856 Operating income 8,013 9,172 4,933 22,118 No significant changes to identifiable assets by segment occurred during the three months ended July 3, 2022. 11