Hawkins profit jumps 23% on water volumes; second half faces tougher comparisons

Hawkins was founded in 1938 and is based in Roseville, Minnesota. It calls itself a water treatment and specialty ingredients company and reports three segments: Water Treatment, Food & Health Sciences and Industrial Solutions.¹ It had about $1.1 billion of revenue in fiscal 2026, 69 facilities in 28 states and about 1,200 employees, and no customer was 10% or more of its sales. Its fiscal year ends in late March, so the quarter just reported, the second of fiscal 2027, ended September 27, 2026.²

Water Treatment is seasonal, with sales historically higher from April to September, so the quarter just reported falls in its peak season. Hawkins buys commodity chemicals and does not hedge those purchases.¹ It warns that it may not always be able to pass higher costs on to customers, that bulk commodity products carry its lowest margins, and that rivals' pricing can force it to cut prices.²

Hawkins has grown by buying small distributors. The eight businesses it bought in fiscal 2026 and the first half of fiscal 2027 had about $53.6 million of combined annual revenue.¹ The biggest recent deal was WaterSurplus, bought on April 25, 2025 for about $149.9 million upfront plus an earnout. Borrowing for those deals lifted debt from 0.86 times trailing adjusted EBITDA at the end of fiscal 2025 to 1.47 times at the end of the third quarter of fiscal 2026.² Hawkins says adjusted EBITDA is a key compliance measure under its credit agreement.³

The road here was uneven. In last year's third quarter, diluted earnings per share fell 4% to $0.69.¹ In the quarter ended June 28, 2026, the first of this fiscal year, they fell 4% to $1.35: gross profit still rose $1.6 million despite raw material swings and about $1.3 million of unrecovered freight, but overhead rose $4.3 million, partly because the year-earlier quarter had a $1.9 million earnout gain. Adjusted EBITDA still rose 1% that quarter, to $56.9 million.² Management had said fiscal 2027 would bring a return to historical organic growth rates, plus growth in revenue and operating income in each segment and higher earnings per share.³

Second-quarter sales rose $33.4 million, or 12%, to $313.8 million. Acquired businesses added about $3.7 million, and organic growth, from businesses owned a year earlier, was 11%.¹ Operating income rose 23% to $41.9 million, and the operating margin, operating income as a share of sales, widened to 13.3% from 12.1%. Net income rose 23% to $27.8 million, or $1.34 a diluted share against $1.08.²

Water Treatment sales rose 16% to $175.0 million, and organic sales grew 14%, mainly on higher volumes. Its gross profit, sales minus the cost of the goods sold, rose 20% to $51.7 million, or 30% of sales.¹ That came even as bulk commodity products, the company's lowest-margin line, rose to about 11% of the segment's sales from 8%. The segment earned $28.3 million of operating income, about 67% of the company total.² Part of its gain was $1.2 million of refunds of tariffs paid in earlier periods.³

The other two segments were weaker. Food & Health Sciences sales rose 5% to $76.7 million, but its gross profit fell 4% to $14.9 million on lower margins in food and pharmaceutical products.¹ Its operating income slipped to $7.0 million from $7.4 million. Industrial Solutions sales rose 10% to $62.2 million because higher prices and better mix more than offset lower volumes, and its gross profit rose 12% to $10.0 million.²

How clean was the quarter? Total gross profit rose $9.0 million, and $1.3 million of that came from tariff refunds booked as lower costs.¹ Pushing the other way, Hawkins took a $1.9 million charge to its LIFO reserve because raw material costs rose. LIFO, short for last in, first out, is an inventory method that charges the newest costs against sales, so rising prices lower reported profit.² Fuel costs it could not fully pass on through freight charges also hurt. Overhead, meaning selling, general and administrative costs, rose only 3% to $34.7 million.³ The tax rate rose to 30% from 27%, mainly on higher state taxes and more non-deductible items, so pre-tax profit rose faster than net income, by about 28%.⁴

Adjusted EBITDA rose 16% to $59.1 million. EBITDA means earnings before interest, taxes, depreciation and amortization, and Hawkins builds its adjusted version by starting from net income and adjusting for a list of items.¹ Hawkins changed the definition in the third quarter of fiscal 2026 to leave out earnout gains and costs. Under the old definition, last year's second quarter was $50.4 million, and the 16% gain is measured against a restated $50.9 million.² Over the past twelve months, net income included about $4.0 million of pre-tax earnout gains that adjusted EBITDA strips out, so those gains helped the record trailing net income of $85.8 million.³

The quarter made up for a weak start. First-half diluted earnings per share were $2.69, up 8% from $2.48, because first-quarter earnings per share fell 4% to $1.35.¹ First-half gross margin slipped to 23.9% of sales from 24.4%.²

Cash flow was steadier than earnings. First-half operating cash flow rose 6% to $75.5 million, and after $22.4 million of capital spending, free cash flow rose 14% to $53.1 million.¹ Free cash flow is operating cash flow minus spending on property, plant and equipment. Hawkins put $41.7 million of it into $18.6 million of buybacks, $15.0 million of debt paydown and $8.1 million of dividends.² Working capital rose $18 million from the end of fiscal 2026, as building inventory used $14.6 million of cash and higher receivables used $9.9 million.³ In fiscal 2026, the last full year, operating cash flow of $144.3 million minus $58.2 million of capital spending left about $86.1 million. That covered the $15.7 million of dividends paid more than five times, and Hawkins plans about $55 million of capital spending in fiscal 2027.⁴

All $229.0 million of debt sits on a $400.0 million revolving credit line, a borrowing limit Hawkins can draw and repay, that matures April 25, 2030. Cash was $7.1 million, so net debt was about $221.9 million.¹ Hawkins puts leverage at 1.22 times trailing adjusted EBITDA, down from 1.37 times at the end of fiscal 2026 and 1.54 times a year earlier. In May, management said it expected leverage of about 1x adjusted EBITDA by the end of fiscal 2027, and the $14.0 million Eagle Labs purchase came after this quarter's 1.22x.² Net debt against trailing adjusted EBITDA of $188.0 million is about 1.18 times. The loan rules cap leverage at 3.5 times and require fixed charges to be covered at least 1.15 times. Hawkins was in compliance at quarter end and expects to stay in compliance for the next 12 months.³ Trailing twelve-month operating income of about $126.6 million covered $11.8 million of net interest about 11 times. Interest fell after $50.0 million of net debt repayments over the past year, the effective rate was 4.3%, and a quarter-point move in rates changes annual interest by about $0.4 million.⁴ The line is secured by substantially all of the company's personal property, so lenders are paid ahead of shareholders.⁵

In the second quarter Hawkins bought back 87,381 shares for $11.6 million, an average of $133.07 a share. It says the main goal of buybacks is to offset dilution from stock awards.¹ Shares outstanding fell to 20,674,812 at quarter end from 20,752,138 at the end of March, and 598,967 shares remain under the board's authorization.² Dilution from stock pay is small: 104,211 unvested restricted shares and up to 40,962 performance shares for fiscal 2027 together equal less than 1% of the 20,792,062 shares on the 10-Q cover. Hawkins also says it could borrow more or sell stock for strategic reasons.³

Sellers of acquired businesses are owed earnouts, extra payments tied to performance, carried at $50.5 million in total. WaterSurplus accounts for $46.0 million of that, against a maximum of $53.7 million tied to its gross profit over five years.¹ The Water Solutions earnout's measuring period ended September 27, 2026, and it is now carried at the agreed settlement amount of $4.5 million.² Hawkins kept buying. It paid about $1.6 million for Dave Symonds & Associates, a Florida distributor, on September 1, and about $14.0 million for Eagle Labs on September 29, after the quarter closed.³ Symonds sells water treatment products, and Eagle Labs adds two locations in the Dallas-Fort Worth region.⁴

Management's own outlook, a goal rather than a promise, is that second-half trends will look like the first half. It also warns that a one-time $6.2 million reduction in overhead in last year's second half will not recur this year.¹ Last year's $8.1 million write-down of the Water Solutions earnout was a non-cash gain that adjusted EBITDA excludes; $6.2 million of it came in the second half, and in the third quarter it lowered overhead $4.6 million from a year earlier.² Management expects a full-year tax rate of about 25% to 27%, and it has said it expects to keep paying down debt during fiscal 2027. The tax rate should ease: it was about 27% for the first half, and the full-year guide of 25% to 27% implies a second-half rate no higher than that.³ The board declared a $0.20 quarterly dividend, payable November 25, 2026, to holders of record on November 11.⁴

The stock closed at $132.27 on October 23 and $135.44 at 4 p.m. on October 26, a 2.4% rise on the day, before the results came out.¹ That move came before the results, which Hawkins planned to release after the close at about 4:10 p.m., and our price file has no trade since then. The file starts in mid-September, with a close of $121.62 on September 15, so we cannot show the high and low for the past year.² At $135.44, Hawkins trades at about 16.2 times trailing adjusted EBITDA once net debt is added to its $2.82 billion market value. It bought its own stock in the second quarter at an average of $133.07, close to that price.³

The bull case: organic growth is back at 11%, Water Treatment is winning volume in its busiest season, and the operating margin widened even with more low-margin bulk sales.¹ That is partly what management said fiscal 2027 would bring, growth in revenue and operating income in every segment, though Food & Health Sciences operating income fell to $7.0 million from $7.4 million this quarter. It has also said it expects leverage of about 1 times adjusted EBITDA by the end of fiscal 2027, against 1.22 times now.² Cash is the other support: leverage sits far below the 3.5 times cap, and debt paydown keeps cutting interest.³

The bear case, strongest point first. The price already assumes growth: about 33 times trailing earnings, while first-half earnings per share rose 8%.¹ Second, the second half faces a harder comparison, because last year's one-time $6.2 million earnout gain will not repeat, and this quarter itself had $1.3 million of tariff refunds. Third, Food & Health Sciences profit is shrinking, with lower margins in food and pharmaceutical products.² Fourth, Hawkins does not hedge its chemical purchases, so cost spikes can squeeze margins, as the LIFO charge and unrecovered fuel costs did this quarter. Fifth, its 10-K names efforts to ban chemicals such as fluoride in food and drinking water as a risk.³

What would prove the bear case wrong is a third quarter that grows through the missing one-off. Water Treatment sales are seasonally lower outside April to September, and last year's third quarter had $244.1 million of sales and earned $0.69 a diluted share.¹ Its overhead was $4.6 million lower than a year before because of a fair value cut to the Water Solutions earnout. After tax at that quarter's 27% rate, that cut was worth about $0.16 a share, leaving an underlying base of about $0.53.² Interest costs have also fallen, from $3.4 million in that quarter to $2.6 million in the second quarter, worth about $0.03 a share, so beating $0.69 needs roughly 23% underlying growth, about what the second quarter delivered but well above the first half's pace.³ On the other side, last year's third quarter was a weak base, with Food & Health Sciences sales down 10%. We lean NO only narrowly, because management says the second half will look like the first.⁴ Dates to watch are the November 11 dividend record date, the November 25 payment, the third-quarter report with no date set yet (last year's came on January 28), and the end of a $60 million interest rate swap on May 1, 2027.⁵

The 10-Q gives Eagle Labs' price, about $14.0 million, but not its revenue, profit or how Hawkins paid for it, so its effect on earnings and debt is unknown.

The release books $1.3 million of tariff refunds in the quarter but does not say whether more will follow.

We found no transcript of a call on these results, so management's answers on pricing, volumes and Eagle Labs are not in this report.

The $4.5 million Water Solutions settlement amount is set, but the filings we read give no payment date.

The 10-K names fluoride bans as a risk, but we found no figure for how much of Hawkins's sales fluoride makes up.

The results came out after the October 26 close, and our price file has no trade since, so the market's verdict is not yet in this report.