Hillman Solutions Corp. — Q2 2023 Form 10-Q
Reporting period: 13 weeks and 26 weeks ended July 1, 2023, compared with the periods ended June 25, 2022. Amounts below are in U.S. dollars; financial figures are rounded to millions.
Business context
Hillman supplies hardware, fasteners, keys, personal protective equipment, identification products, and related merchandising and kiosk services, primarily to North American retailers. Its three segments are Hardware and Protective Solutions, Robotics and Digital Solutions, and Canada. The Canada segment was realigned in Q1 2023 to include Canada-based Protective Solutions and MinuteKey businesses; prior-period segment figures were reclassified for comparison.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $380.0 | $394.1 | $729.7 | $757.1 |
| Operating income | $20.8 | $27.8 | $21.9 | $36.6 |
| Net income (loss) | $4.5 | $8.8 | $(4.6) | $6.9 |
| Diluted EPS | $0.02 | $0.04 | $(0.02) | $0.04 |
| Adjusted EBITDA* | $58.0 | $62.3 | $98.2 | $106.3 |
Q2 sales declined 3.6% year over year; operating margin was 5.5%, versus 7.0%, and cost of sales was 57.0% of sales, versus 55.9%. First-half sales also declined 3.6%; operating margin was 3.0%, versus 4.8%, and cost of sales was 57.7%, versus 57.2%. First-half adjusted EBITDA margin was 13.5%, down from 14.0%.
- Sales drivers: Q2 Hardware and Protective Solutions sales fell 3.1%, Robotics and Digital Solutions fell 2.0%, and Canada fell 7.9%. Lower protective-equipment volume, including the absence of comparable 2022 COVID-related sales, and a Canadian-dollar translation headwind were notable factors. In the first half, hardware price increases partly offset lower volume and a sharp decline in protective-equipment sales.
- Profit and interest: Q2 net income fell despite a $1.8 million tax benefit, as operating income decreased and net interest expense rose $5.5 million. First-half net interest expense increased $12.0 million; the resulting pre-tax loss was partly offset by a $9.7 million tax benefit. Management expects the year-to-date tax benefit to reverse into a tax provision by year-end, based on its forecast of full-year positive income.
- Cash flow: First-half operating cash flow was $115.0 million, compared with $14.8 million. Management attributed the improvement primarily to lower inventory and higher accounts payable, including purchase-payment timing. Capital expenditures were $37.0 million, versus $28.9 million. Cash increased $6.6 million to $37.7 million.
- Liquidity and debt: Working capital was $383.6 million, down from $416.2 million at year-end 2022. The company reported $818.8 million of long-term debt, net, plus $11.2 million of current debt and finance-lease liabilities. Gross debt, finance leases, and other obligations totaled $851.5 million before discounts and deferred financing fees, down from $918.8 million at year-end. Revolver borrowings were $8.0 million, with $283.1 million of available capacity. The company said it expects sufficient operating cash flow for short-term needs, while noting capital-market access is not assured.
*Adjusted EBITDA is a non-GAAP measure; the filing provides reconciliations to GAAP results.
Material changes, outlook, and risks
- Q2 and first-half operating income declined substantially. First-half declines affected all segments, with Hardware and Protective Solutions operating income down 93.5% and Canada down 39.5%; Robotics and Digital Solutions was down 16.2%.
- Interest costs increased amid higher rates. The company amended its term loan and interest-rate swaps on June 30, 2023 to replace LIBOR benchmarks with SOFR. It estimates that a one-percentage-point change in the weighted average interest rate would change annual interest expense by approximately $4.8 million, after swaps and the SOFR floor.
- A late-May ransomware incident temporarily affected certain IT systems and shipping operations. Systems and operations were restored during the following week. Net costs after an expected insurance receivable were $1.0 million in Q2; additional costs are expected, but management does not expect the incident to be material to full-year fiscal 2023 results. The ultimate direct and indirect impact could not be estimated.
- Other watch items include inflation and shipping/product costs, consumer and retail demand, sourcing and commodity costs, foreign-exchange exposure, tariffs and possible import-duty assessments, customer concentration, and litigation. The company self-insures certain liability and health claims. Management said ordinary-course litigation is not expected to materially affect results; the filing reports no material changes to previously disclosed risk factors.
- No specific sales or earnings guidance is provided in the supplied filing text. Management forecasts positive full-year income and sufficient operating cash flow for near-term liquidity needs.
Important facts for investors to verify
- Whether sales and segment profitability stabilize, especially in Hardware and Protective Solutions and Canada, and whether price increases offset product, shipping, and volume pressures.
- How much of the first-half operating cash flow reflects sustainable working-capital improvement versus inventory and payment timing.
- Debt repayment capacity and interest-rate sensitivity, including the effects of SOFR pricing and the approaching July 2024 expiration of the disclosed interest-rate swaps.
- The ultimate cybersecurity incident costs, insurance recoveries, and any data, regulatory, or operational consequences.
- Whether the forecasted full-year positive income is achieved and the interim tax benefit reverses as management expects.