HAWKINS INC 10-Q

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 nine months ended December 29, 2024 as compared to the similar period ended December 31, 2023. 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 March 31, 2024 . 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. Business Acquisitions We completed the following acquisitions in fiscal 2024 and fiscal 2025.The results of operations since the date of each acquisition and the assets, including goodwill associated with these acquisitions, are included in our Water Treatment segment. • On October 30, 2024, we acquired substantially all the assets of Water Guard for $18.0 million. Water Guard distributes water treatment chemicals and equipment to its customers primarily throughout North Carolina. • On June 28, 2024, we acquired substantially all the assets of Wofford for $3.4 million. Wofford distributed water treatment chemicals and equipment to customers mainly in Mississippi. • On June 3, 2024, we acquired substantially all the assets of Intercoastal for $22.0 million. Intercoastal distributes water treatment chemicals and equipment to its customers in Maryland, Delaware and Virginia. • In the fourth quarter of fiscal 2024, we acquired substantially all the assets of Industrial Research for $4.6 million. Industrial Research was a distributor of water treatment chemicals and equipment for its customers in central to northern Louisiana, eastern Texas and southern Arkansas. • In the third quarter of fiscal 2024, we acquired substantially all the assets of Miami Products for $15.5 million. Miami Products is a bleach manufacturer and distributor serving customers primarily throughout Ohio and the surrounding region. • In the third quarter of fiscal 2024, we acquired substantially all the assets of Water Solutions for $60 million and an additional amount to be paid after three years based on achieving certain targets. The total purchase price was estimated to be $70.7 million, including the estimated potential earnout to be paid of $10.7 million. Water Solutions is a manufacturer and distributor of water treatment chemicals serving customers primarily throughout Indiana, Illinois and Michigan. • In the second quarter of fiscal 2024, we acquired substantially all the assets of EcoTech for $3.4 million. EcoTech was a manufacturer and distributor of water treatment chemicals serving customers throughout Arkansas and surrounding states. The aggregate annual revenue of these seven businesses acquired in fiscal 2024 and fiscal 2025 totaled approximately $105 million, as determined using the applicable twelve-month period preceding each respective acquisition date. Share Repurchase Program We have in place a share repurchase program for up to 2.6 million shares of our common shares. As of December 29, 2024, 831,946 shares remained 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 Water Treatment and Industrial 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 Water Treatment and Industrial 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 Water Treatment and Industrial 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: Three Months Ended Nine Months Ended December 29, 2024 December 31, 2023 December 29, 2024 December 31, 2023 Sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales (78.6) % (79.7) % (76.2) % (78.7) % Gross profit 21.4 % 20.3 % 23.8 % 21.3 % Selling, general and administrative expenses (12.1) % (11.4) % (10.8) % (9.2) % Operating income 9.3 % 8.9 % 13.0 % 12.1 % Interest expense, net (0.5) % (0.6) % (0.5) % (0.4) % Other (expense) income 0.2 % 0.4 % 0.2 % 0.1 % Income before income taxes 9.0 % 8.7 % 12.7 % 11.8 % Income tax expense (2.3) % (1.6) % (3.3) % (2.9) % Net income 6.7 % 7.1 % 9.4 % 8.9 % Three Months Ended December 29, 2024 Compared to Three Months Ended December 31, 2023 Sales Sales were $226.2 million for the three months ended December 29, 2024, an increase of $17.7 million, or 8%, from sales of $208.5 million in the same period a year ago. Sales in our Water Treatment segment increased 22%, sales in our Health and Nutrition segment increased 3%, while sales in our Industrial segment decreased slightly. Water Treatment Segment. Water Treatment segment sales increased $17.8 million, or 22%, to $99.8 million for the three months ended December 29, 2024, from sales of $82.0 million in the same period a year ago. Sales of bulk commodity products in the Water Treatment segment were approximately 9% of sales dollars for both the current quarter and in the same period a year ago. Sales increased as a result of $12 million of added sales from acquired businesses as well as increased sales volumes in our legacy business. Industrial Segment. Industrial segment sales decreased $1.0 million, or 1%, to $92.0 million for the three months ended December 29, 2024, from sales of $93.0 million in the same period a year ago. Sales of bulk commodity products in the Industrial segment were approximately 15% of sales dollars in the current quarter and 14% in the same period a year ago. Sales decreased as a result of lower selling prices on certain products, driven by lower raw material costs, product mix changes and competitive pricing pressures. Health & Nutrition Segment. Health and Nutrition segment sales increased $1.0 million, or 3%, to $34.5 million for the three months ended December 29, 2024, from sales of $33.5 million in the same period a year ago. Sales increased due to increased sales volumes of our manufactured products. Gross Profit Gross profit increased $6.2 million, or 15%, to $48.4 million, or 21% of sales, for the three months ended December 29, 2024, from $42.2 million, or 20% of sales, in the same period a year ago. During the current quarter, the LIFO reserve decreased, and gross profit increased, by $0.8 million, primarily due to lower anticipated fiscal year-end prices on certain products. In the same period a year ago, the LIFO reserve decreased, and gross profit increased, by $2.5 million. Water Treatment Segment. Gross profit for the Water Treatment segment increased $5.8 million, or 29%, to $26.0 million, or 26% of sales, for the three months ended December 29, 2024, from $20.2 million, or 25% of sales, in the same period a year ago. During the current quarter, the LIFO reserve decreased, and gross profit increased, by $0.1 million. In the same period a year ago, the LIFO reserve decreased, and gross profit increased, by $0.4 million. Gross profit increased as a result of increased sales, including the increased sales from our acquired businesses. Industrial Segment. Gross profit for the Industrial segment decreased $1.3 million, or 8%, to $15.2 million, or 17% of sales, for the three months ended December 29, 2024, from $16.5 million, or 18% of sales, in the same period a year ago. During the current quarter, the LIFO reserve decreased, and gross profit increased, by $0.6 million. In the same period a year ago, the LIFO reserve decreased, and gross profit increased, by $2.1 million. Gross profit decreased primarily as a result of product mix changes and the change in the LIFO reserve. Health and Nutrition Segment . Gross profit for our Health and Nutrition segment increased $1.7 million, or 31%, to $7.2 million, or 21% of sales, for the three months ended December 29, 2024, from $5.5 million, or 16% of sales, in the same period a year ago. Gross profit increased as a result of the increased sales. Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses increased $3.6 million, or 15%, to $27.4 million, or 12% of sales, for the three months ended December 29, 2024, from $23.8 million, or 11% of sales, in the same period a year ago. Expenses increased largely due to $1.9 million in added costs from the acquired businesses in our Water Treatment segment, including amortization of intangibles of $0.8 million, as well as other increased variable costs. Operating Income Operating income increased $2.6 million, or 14%, to $21.1 million, or 9% of sales, for the three months ended December 29, 2024, from $18.5 million, or 9% 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 $1.2 million for both the three months ended December 29, 2024 and the same period a year ago. Interest expense was flat year over year as an increase in outstanding borrowings in the current quarter, as compared to the same period a year ago, was offset by slightly lower interest rates. Other Income Other income was $0.4 million for the three months ended December 29, 2024 compared to $0.9 million in the same period a year ago. The income represents gains recorded on investments held for our non-qualified deferred compensation plan. The amounts recorded as a gain were offset by similar amounts recorded as an increase to compensation expense within SG&A expenses. Income Tax Provision Our effective income tax rate was 26% for the three months ended December 29, 2024 and 18% for the same period a year ago. The effective tax rate in the third quarter of both years was impacted by favorable tax provision adjustments recorded. 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 expected to be approximately 26 to 27%. Nine Months Ended December 29, 2024 Compared to Nine Months Ended December 31, 2023 Sales Sales were $729.1 million for the nine months ended December 29, 2024, an increase of $33.0 million, or 5%, from sales of $696.1 million in the same period a year ago. Increased sales in our Water Treatment segment more than offset decreased sales in our Industrial and Health and Nutrition segments. Water Treatment Segment. Water Treatment segment sales increased $64.9 million, or 23%, to $341.5 million for the nine months ended December 29, 2024, from sales of $276.6 million in the same period a year ago. Sales of bulk commodity products in the Water Treatment segment were approximately 9% of sales dollars in the current period and in the same period a year ago. Sales increased as a result of added sales from acquired businesses as well as increased sales volumes in our legacy business. Industrial Segment. Industrial segment sales decreased $27.3 million or 9%, to $285.1 million for the nine months ended December 29, 2024, from sales of $312.4 million in the same period a year ago. Sales of bulk commodity products in the Industrial segment were approximately 14% of sales dollars in the current period and 13% in the same period of the prior year. Although overall volumes increased slightly year over year, sales decreased as a result of lower selling prices on certain of our products, driven by lower raw material costs, product mix changes and competitive pricing pressures. Health & Nutrition Segment. Health and Nutrition segment sales decreased $4.6 million, or 4%, to $102.5 million for the nine months ended December 29, 2024, from sales of $107.1 million in the same period a year ago. Sales decreased due to lower sales of our manufactured products, driven by reduced volumes and selling prices due to decreased demand for certain of our products in the first two quarters of the year, offset somewhat by increased sales of our distributed products. Gross Profit Gross profit increased $25.2 million, or 17%, to $173.3 million, or 24% of sales, for the nine months ended December 29, 2024, from $148.1 million, or 21% of sales, in the same period a year ago. During the current period, the LIFO reserve decreased, and gross profit increased, by $0.3 million due primarily to lower anticipated fiscal year-end prices on certain products. In the same quarter a year ago, the LIFO reserve decreased, and gross profit increased, by $6.0 million. Water Treatment Segment. Gross profit for the Water Treatment segment increased $20.6 million, or 27%, to $96.6 million, or 28% of sales, for the nine months ended December 29, 2024, from $76.0 million, or 27% of sales, in the same period a year ago. During the current period, the LIFO reserve increased, and gross profit decreased, slightly. In the same quarter a year ago, the LIFO reserve decreased, and gross profit increased, by $0.9 million. Gross profit increased primarily as a result of increased sales from our acquired businesses. Industrial Segment. Gross profit for the Industrial segment increased $1.7 million, or 3% to $55.3 million, or 19% of sales, for the nine months ended December 29, 2024, from $53.6 million, or 17% of sales, in the same period a year ago. During the current period, the LIFO reserve decreased, and gross profit increased, by $0.4 million. In the same quarter a year ago, the LIFO reserve decreased, and gross profit increased, by $5.0 million. Gross profit increased as a result of net favorable product mix changes. Health and Nutrition Segment . Gross profit for our Health and Nutrition segment increased $2.9 million, or 16%, to $21.4 million, or 21% of sales, for the nine months ended December 29, 2024, from $18.5 million, or 17% of sales, in the same period a year ago. Gross profit increased as a result of product mix changes. Selling, General and Administrative Expenses SG&A expenses increased $14.5 million, or 23%, to $78.7 million, or 11% of sales, for the nine months ended December 29, 2024, from $64.2 million, or 9% of sales, in the same period a year ago. Expenses increased primarily due to $9.0 million in added costs from the acquired businesses in our Water Treatment segment, including amortization of intangibles of $3.4 million as well as other increased variable costs. Operating Income Operating income increased $10.6 million, or 13%, to $94.6 million, or 13% of sales, for the nine months ended December 29, 2024, from $84.0 million, or 12% 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 $3.9 million for the nine months ended December 29, 2024 and $3.0 million the same period a year ago. Interest expense increased due to an increase in outstanding borrowings in the current year as compared to a year ago as well as slightly higher interest rates. Other Income Other income was $1.3 million for the nine months ended December 29, 2024 compared to $0.9 million in the same period a year ago. The income represents gains recorded on investments held for our non-qualified deferred compensation plan. The amounts recorded as a gain were offset by similar amounts recorded as an increase to compensation expense within SG&A expenses. Income Tax Provision Our effective income tax rate was 26% for the nine months ended December 29, 2024 and 25% in the same period a year ago. The effective tax rate in the first nine months of the current year and the same period a year was impacted by favorable tax provision adjustments recorded. 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 $8.3 million at December 29, 2024, an increase of $1.1 million as compared with the $7.2 million available as of March 31, 2024. Cash provided by operating activities was $80.3 million for the nine months ended December 29, 2024, compared to cash provided by operating activities of $117.6 million in the same period a year ago. The year-over-year decrease in cash provided by operating activities in the current period was primarily driven by unfavorable year-over-year changes in inventory and receivables, slightly offset by increased net income compared to the same period a year ago. Due to the nature of our operations, which includes purchases of large quantities of bulk chemicals, the timing of purchases can result in significant changes in working capital investment and the resulting operating cash flow. Cash u sed in investing activities was $72.8 million for the nine months ended December 29, 2024, compared to $106.4 million in the sam e period a year ago. In the current period, we incurred acquisition spending of $43.4 million , with the acquisitions of Water Guard for $18.0 million, Intercoastal for $22.0 million and Wofford for $3.4 million. Capital expenditures were $30.0 million for the current period, compared to $28.2 million in the same period a year ago. In the current period, we purchased a building in Texas for $2.5 million and had more investments in equipment and containers, resulting in an increase in overall capital expenditures compared to the prior year. In the prior year, we invested $5.1 million to complete an expansion of one of our Minnesota manufacturing facilities. Cash used in financing activities was $6.3 million for the nine months ended December 29, 2024, compared to $13.1 million of cash used in financing activities in the same period a year ago. Included in financing activities in the current period were net debt borrowing of $15.0 million, compared to net debt borrowing of $8.0 million in the same period a year ago. In addition, we repurchased $9.1 million of our common stock in the current period, compared to $11.3 million in the same period 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 nine months ended December 29, 2024, we repurchased 105,541 shares of common stock with an aggregate purchase price of $9.1 million. In the same period a year ago, we repurchased 191,861 shares of common stock with an aggregate purchase price of $11.3 million. As of December 29, 2024, 831,946 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 December 29, 2024, the effective interest rate on our borrowings was 4.2%. 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 December 29, 2024, the unamortized balance of these costs was $0.2 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 December 29, 2024 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. Critical Accounting Estimates There were no material changes in our critical accounting estimates since the filing of our Annual Report on Form 10-K for the fiscal year ended March 31, 2024 . 15 Forward-Looking Statements 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 March 31, 2024 . 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. 16