HAWKINS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS HAWKINS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data) July 2, 2023 April 2, 2023 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,050 $ 7,566 Trade accounts receivables, net 138,340 129,252 Inventories 76,938 88,777 Prepaid expenses and other current assets 4,127 6,449 Total current assets 226,455 232,044 PROPERTY, PLANT, AND EQUIPMENT: 354,001 344,753 Less accumulated depreciation 163,379 158,950 Net property, plant, and equipment 190,622 185,803 OTHER ASSETS: Right-of-use assets 11,324 10,199 Goodwill 77,401 77,401 Intangible assets, net of accumulated amortization 71,391 73,060 Deferred compensation plan asset 9,130 7,367 Other 5,640 4,661 Total other assets 174,886 172,688 Total assets $ 591,963 $ 590,535 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable — trade $ 55,598 $ 53,705 Accrued payroll and employee benefits 10,690 17,279 Income tax payable 11,584 3,329 Current portion of long-term debt 9,913 9,913 Other current liabilities 6,518 6,645 Total current liabilities 94,303 90,871 LONG-TERM DEBT, LESS CURRENT PORTION 78,353 101,731 LONG-TERM LEASE LIABILITY 9,597 8,687 PENSION WITHDRAWAL LIABILITY 3,819 3,912 DEFERRED INCOME TAXES 24,077 23,800 DEFERRED COMPENSATION LIABILITY 10,117 9,343 OTHER LONG-TERM LIABILITIES 696 2,175 Total liabilities 220,962 240,519 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY: Common stock; authorized: 60,000,000 shares of $ 0.01 par value; 20,942,857 and 20,850,454 shares issued and outstanding as of July 2, 2023 and April 2, 2023, respectively 209 209 Additional paid-in capital 44,409 44,443 Retained earnings 322,694 302,424 Accumulated other comprehensive income 3,689 2,940 Total shareholders’ equity 371,001 350,016 Total liabilities and shareholders’ equity $ 591,963 $ 590,535 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 2, 2023 July 3, 2022 Sales $ 251,120 $ 246,543 Cost of sales ( 199,129 ) ( 199,794 ) Gross profit 51,991 46,749 Selling, general and administrative expenses ( 19,504 ) ( 18,885 ) Operating income 32,487 27,864 Interest expense, net ( 1,148 ) ( 929 ) Other income (expense) 337 ( 763 ) Income before income taxes 31,676 26,172 Income tax expense ( 8,246 ) ( 6,477 ) Net income $ 23,430 $ 19,695 Weighted average number of shares outstanding - basic 20,907,724 20,908,823 Weighted average number of shares outstanding - diluted 21,012,788 21,033,549 Basic earnings per share $ 1.12 $ 0.94 Diluted earnings per share $ 1.12 $ 0.94 Cash dividends declared per common share $ 0.15 $ 0.14 See accompanying notes to condensed consolidated financial statements. 2 HAWKINS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands) Three Months Ended July 2, 2023 July 3, 2022 Net income $ 23,430 $ 19,695 Other comprehensive income, net of tax: Unrealized gain on interest rate swap 749 465 Total comprehensive income $ 24,179 $ 20,160 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 2, 2023 20,850,454 $ 209 $ 44,443 $ 302,424 $ 2,940 $ 350,016 Cash dividends declared and paid ($ 0.15 per share) — — — ( 3,160 ) — ( 3,160 ) Share-based compensation expense — — 959 — — 959 Vesting of restricted stock 105,600 1 ( 1 ) — — — Shares surrendered for payroll taxes ( 48,478 ) ( 1 ) ( 2,139 ) — — ( 2,140 ) ESPP shares issued 35,281 — 1,147 — — 1,147 Other comprehensive income, net of tax — — — — 749 749 Net income — — — 23,430 — 23,430 BALANCE — July 2, 2023 20,942,857 $ 209 $ 44,409 $ 322,694 $ 3,689 $ 371,001 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 See accompanying notes to condensed consolidated financial statements. 4 HAWKINS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Three Months Ended July 2, 2023 July 3, 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 23,430 $ 19,695 Reconciliation to cash flows: Depreciation and amortization 7,107 6,558 Operating leases 534 476 (Gain) loss on deferred compensation assets ( 337 ) 763 Stock compensation expense 959 595 Other 26 273 Changes in operating accounts providing (using) cash: Trade receivables ( 9,055 ) ( 15,857 ) Inventories 11,839 ( 10,003 ) Accounts payable ( 537 ) ( 8,442 ) Accrued liabilities ( 9,075 ) ( 11,043 ) Lease liabilities ( 580 ) ( 521 ) Income taxes 8,255 6,645 Other 2,300 1,466 Net cash provided by (used in) operating activities 34,866 ( 9,395 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant, and equipment ( 7,873 ) ( 11,640 ) Other 44 113 Net cash used in investing activities ( 7,829 ) ( 11,527 ) CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends declared and paid ( 3,160 ) ( 2,958 ) New shares issued 1,147 986 Payroll taxes paid in exchange for shares withheld ( 2,140 ) ( 1,550 ) Shares repurchased — ( 6,557 ) Payments on revolving loan ( 23,400 ) ( 6,500 ) Proceeds from revolving loan borrowings — 40,000 Net cash (used in) provided by financing activities ( 27,553 ) 23,421 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 516 ) 2,499 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,566 3,496 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,050 $ 5,995 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 1,221 $ 721 Noncash investing activities - capital expenditures in accounts payable $ 4,771 $ 1,858 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 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 — Asset 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 $ 7 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 $ 3 million on this sale, which has been recorded within selling, general and administrative expenses. 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 2, 2023 and July 3, 2022: Three months ended July 2, 2023 (In thousands) Industrial Water Treatment Health and Nutrition Total Manufactured, blended or repackaged products (1) $ 102,675 $ 84,785 $ 10,241 $ 197,701 Distributed specialty products (2) — — 26,154 26,154 Bulk products (3) 15,210 7,521 — 22,731 Other 2,988 1,345 201 4,534 Total external customer sales $ 120,873 $ 93,651 $ 36,596 $ 251,120 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 (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 02, 2023 July 03, 2022 Weighted-average common shares outstanding—basic 20,907,724 20,908,823 Dilutive impact of performance units and restricted stock 105,064 124,726 Weighted-average common shares outstanding—diluted 21,012,788 21,033,549 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 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 2, 2023 and April 2, 2023. 0 (In thousands) July 2, 2023 April 2, 2023 Assets Deferred compensation plan assets Level 1 $ 9,454 $ 7,659 Interest rate swap Level 2 $ 5,053 $ 4,028 Note 6 – Inventories Inventories at July 2, 2023 and April 2, 2023 consisted of the following: July 2, 2023 April 2, 2023 (In thousands) Inventory (FIFO basis) $ 116,501 $ 128,589 LIFO reserve ( 39,563 ) ( 39,812 ) Net inventory $ 76,938 $ 88,777 The first in, first out (“FIFO”) value of inventories accounted for under the last in, first out (“LIFO”) method was $ 90.8 million at July 2, 2023 and $ 101.4 million at April 2, 2023. The remainder of the inventory was valued and accounted for under the FIFO method. Note 7 – Goodwill and Intangible Assets The carrying amount of goodwill was $ 77.4 million as of July 2, 2023 and April 2, 2023, 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 2, 2023 and April 2, 2023 is as follows: July 2, 2023 April 2, 2023 (In thousands) Gross Amount Accumulated Amortization Net Gross Amount Accumulated Amortization Net Finite-life intangible assets Customer relationships $ 109,107 $ ( 39,946 ) $ 69,161 $ 109,107 $ ( 38,377 ) $ 70,730 Trademarks and trade names 6,370 ( 5,367 ) 1,003 6,370 ( 5,267 ) 1,103 Total finite-life intangible assets 115,477 ( 45,313 ) 70,164 115,477 ( 43,644 ) 71,833 Indefinite-life intangible assets 1,227 — 1,227 1,227 — 1,227 Total intangible assets $ 116,704 $ ( 45,313 ) $ 71,391 $ 116,704 $ ( 43,644 ) $ 73,060 8 Note 8 – Debt Debt at July 2, 2023 and April 2, 2023 consisted of the following: July 2, 2023 April 2, 2023 (In thousands) Senior secured revolving loan $ 88,600 $ 112,000 Less: unamortized debt issuance costs ( 334 ) ( 356 ) Total debt, net of debt issuance costs 88,266 111,644 Less: current portion of long-term debt ( 9,913 ) ( 9,913 ) Total long-term debt $ 78,353 $ 101,731 We were in compliance with all covenants of our credit agreement as of July 2, 2023. 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 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 26 % for the three months ended July 2, 2023, compared to 25 % 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 – 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 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 zero shares and 70,859 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. The 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 189,258 $ 34.64 Granted 61,819 43.06 Vested ( 105,600 ) 31.74 Unvested at end of period 145,477 $ 40.33 We recorded compensation expense related to performance share units and restricted stock of $ 0.7 million for the three months ended July 2, 2023 and $ 0.4 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 12,565 shares of restricted stock with an average grant date fair value of $ 38.98 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 $ 0.1 million. Note 11 – Share Repurchase Program Our Board had authorized the repurchase of up to 2.6 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, no shares were repurchased, and during the three months ended July 3, 2022, we repurchased 181,657 shares at 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. 9 Note 12 – 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 2, 2023: Sales $ 120,873 $ 93,651 $ 36,596 $ 251,120 Gross profit 19,306 26,408 6,277 51,991 Selling, general, and administrative expenses 6,575 9,126 3,803 19,504 Operating income 12,731 17,282 2,474 32,487 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 No significant changes to identifiable assets by segment occurred during the three months ended July 2, 2023. Note 13 – Subsequent Events In July 2023, 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. 10