Hawkins, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Hawkins, Inc. is a specialty chemical and ingredient company that formulates, distributes, blends and manufactures products for industries including water treatment, industrial, and health and nutrition.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Hawkins, Inc. (HWKN) operates across three primary segments:

Industrial: This group provides chemicals, blends, and other products for applications including agriculture, chemical processing, electronics, energy, food, pharmaceutical, and plating, and they are often sold in large quantities for various industrial processes.
Water Treatment: This group offers solutions for drinking water, industrial water, and wastewater, and they are sold to municipalities, utilities and manufacturing. Services include chemical supply, equipment, support, and training for their customers.
Health and Nutrition: This segment provides ingredients, product formulation and blending, and manufacturing services for food, pharmaceutical, and nutritional companies.

The focus is on providing high-quality products and services tailored to the specific needs of the customers within each segment.

Moat Analysis: 2/5

Hawkins possesses a limited economic moat, earning a rating of 2 out of 5. Here’s an analysis of the company’s competitive advantages:

Brand Recognition: The company has built a strong reputation over time in the water treatment segment. A strong brand in the municipal industry is valuable.
Customer Lock-In: Through its water treatment segment, Hawkins provides very specialized solutions that integrate tightly with the client’s business and processes, thus creating some switching costs. These customers would need to set up an entirely new process and likely retrain or find different professionals to handle a switch to another supplier. The high quality solutions mean customers have less incentive to switch suppliers.
Geographic Concentration: Because some of Hawkins’ raw materials are heavy, their local production facilities are crucial. The company is able to serve customers in different regions in the United States and they have a long history of being the go-to for certain products.
Low Switching Costs Many of Hawkins products are commoditized in nature and do not provide much differentiation, thus creating low switching costs. Customers will not be locked into their current product and thus they can switch suppliers without huge consequences.

Risks to the Moat

Despite some competitive advantages, Hawkins faces several risks that could erode its moat:

Intense Competition: The markets in which Hawkins operates are intensely competitive, and it’s not only from large chemical manufacturers, but also from various distributors and smaller sales reps. This implies that many competitors will try to gain market share, and thus put pressure on margins.
Commoditized Products A large part of Hawkins business is based on commodity-type products, creating price pressure for their business. If the products can easily be replicated by a competitor, it will lead to smaller margins and lower pricing power.
Dependence on Raw Materials: Hawkins is reliant on raw material inputs and fluctuating prices of the raw materials could negatively affect their bottom line.
Regulation: New regulations on chemical products, water treatment or nutrition may lead to substantial costs to change processes and product development cycles. This could lead to disruption in their operations and higher costs of production.

Financials

Here is a financial analysis of the latest earnings and reports:

Revenues: Hawkins reported a 21% increase in sales, totaling $775.8 million for fiscal year 2023. The water treatment segment saw the most growth (27%), followed by health and nutrition (22%) and industrial (14%)
Profitability: Gross profit was $186.9 million with a 24% margin, net income rose to $50.7 million with 6.5% profitability and diluted earnings per share at $2.31. The company was helped by a 29% growth in revenue, mostly coming from price increases, though offset by cost and operational challenges.
Liquidity and Capital Resources: 2023 saw a 29% increase in cash used for operating activities and a 44% increase in cash used for investing activities. Cash at the end of the year was $7.2 million. The increase in operating cash use was mostly due to an inventory buildup. There were also notable increases in capital expenditures as they continue on acquisitions.
Debt: As of the end of 2023, Hawkins had $115.3 million in long-term debt. They have a revolving credit facility to access additional capital. They are required to maintain a minimum fixed charge coverage ratio and a maximum total cash flow leverage ratio.
Share Buybacks: Hawkins bought back 185,241 shares in fiscal year 2023, mainly through a 10b5-1 share repurchase plan.
Recent Accounting Changes: Hawkins adopted new lease accounting standards in early 2022 and 2023.
Debt Covenants: Hawkins is required to maintain a debt/equity and interest coverage ratio under their credit agreement. While this makes their business less risky, it also limits their flexibility if they ever need to take on a lot of debt.

It is extremely important for the intelligent investor to read the financials and footnotes.

Read more about Hawkins’ financial information and reports on their investor page https://ir.hawkinsinc.com/financials/sec-filings.

Key Takeaways from Earnings Calls and Reports

Focus on Organic Growth: The company is focusing on growing organically through market share, new product development, and targeted investments in specific markets and segments. They will continue to build on existing relationships with clients and pursue expansions.
Pricing Power and Margins: Due to their heavy reliance on commodity type chemicals, their costs tend to fluctuate rapidly with prices of the commodities, and thus it’s difficult to maintain high margins. The water treatment division however, is able to get a premium for certain value-added solutions and this helps in margin expansion. They are also starting to pass on supply chain and labor cost increases to customers.
Management on Volatility: Management has stated their operations are sensitive to market conditions and thus they tend to manage the business in a flexible way. They will maintain their ability to be flexible and adapt to new realities. The management is also focusing on minimizing costs in these scenarios.
Acquisitions: The company is actively engaged in acquisitions and expanding their business both vertically and horizontally, they will continue to take advantage of M&A opportunities, but will not pay too much for such companies and keep the quality of the target in check.

Understandability Rating: 3/5

Hawkins’ business is moderately complex.

On the one hand, it is easy to grasp the general idea of specialty chemicals, ingredients, and water treatment.
The number of different business divisions also complicates the company, and the number of different industries that each serves requires further understanding of the competitive landscape for each.
Understanding the finer nuances of the financial statements, like the impact of inventory revaluations and long-term contracts, requires more financial expertise.

Balance Sheet Health: 4/5 Hawkins exhibits solid balance sheet health, warranting a 4/5 rating:

Stable Debt to Equity Ratio: Despite recent acquisitions, the company’s debt-to-equity ratio is within acceptable levels, and it is also in line with where it has been for the past few years.
Current Assets: Current assets outweigh current liabilities, indicating that Hawkins is able to pay its bills.
Growth in Equity: Total shareholder equity has continued to grow over time, indicating the growth of their assets.
Cash Flow: As they continue on their expansion spree, their working capital has been slightly depleted, however overall cash flow from operations is still positive. The company has also made efforts to maintain a large enough revolving credit facility.

Conclusion

Hawkins, Inc. is a chemical and ingredient company with an established presence in the US. Its strength in water treatment and various niche markets provide a limited moat and some profitability. They are focusing on organic growth and making acquisitions to better bolster and diversify the company, while increasing its profitability and efficiencies. They must carefully manage the cost of raw materials to maintain the bottom line, while expanding the business. Their balance sheet remains healthy, but investors must monitor their financials for any potential pitfalls. Given these factors, Hawkins presents a moderately promising investment for investors willing to accept some risks and a potentially bumpy road.