Hillman Solutions Corp. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 30, 2023 (52 weeks), compared with the 53-week year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Hillman supplies hardware, protective equipment, keys, and engraving products, along with retail merchandising and in-store services.
Financial performance and position
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $1,476.5 million | $1,486.3 million |
| Gross profit margin | 43.9% | 43.0% |
| Operating income / margin | $60.9 million / 4.1% | $39.9 million / 2.7% |
| Net loss | $9.6 million; $(0.05) per diluted share | $16.4 million; $(0.08) per diluted share |
| Adjusted EBITDA | $219.4 million; 14.9% of sales | $210.2 million; 14.1% of sales |
| Cash from operating activities | $238.0 million | $119.0 million |
| Capital expenditures | $65.8 million | $69.6 million |
Interest expense rose to $68.3 million from $54.6 million, primarily reflecting higher interest rates. At year-end, cash was $38.6 million, working capital was $324.9 million, and total indebtedness was $760.9 million, including $751.9 million of term loans. The $375 million asset-based revolver had no borrowings outstanding; availability was $246.8 million after borrowing-base limits and letters of credit.
Operating cash flow benefited from inventory reduction. Inventory fell to $382.7 million from $489.3 million; management said inventory levels normalized in the fourth quarter after the company worked down approximately $180 million from its inventory channels. Hillman reported $166 million of debt paydown during 2023. The term loan matures in 2028; the revolver commitment matures in 2027, subject to its stated maturity provisions.
Changes versus the prior year
- Sales declined 0.7%, but sales per shipping day increased to $5.86 million from $5.81 million. The comparison includes four fewer shipping days in 2023; management attributed much of the reported sales decrease to the extra week in 2022.
- Hardware and Protective Solutions sales increased 0.6% to $1,074.6 million. Fastening and hardware growth, including price increases and new business, was partly offset by lower protective-equipment sales, including the absence of material comparable COVID-related sales.
- Robotics and Digital Solutions sales were essentially flat at $245.4 million. Canada sales declined 9.0% to $156.5 million, reflecting lower demand and unfavorable currency translation.
- Operating income improved by $21.0 million. A major contributor was $32.9 million less litigation expense in Robotics and Digital Solutions than in 2022, when Hy-Ko-related legal costs were elevated. Higher interest expense and a fourth-quarter product-line impairment tempered the improvement.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific 2024 revenue or earnings guidance. Management expects operating cash flows and revolver availability to meet working-capital and capital needs for the next 12 months, and plans $65–$75 million of 2024 capital expenditures. The $19.9 million year-end backlog is expected to be realized during fiscal 2024; the company says backlog is not a significant performance indicator because orders have short cycles.
- Management commentary: Management cited weaker U.S. existing-home sales as a headwind, while highlighting its field service network, customer relationships, new business wins, and inventory normalization. It expects these competitive strengths to support continued customer wins.
- Fourth-quarter charges: After deciding to exit certain retail locations and markets for a product line, Hillman recorded $19.6 million of intangible-asset impairment and a $5.0 million inventory valuation adjustment. Together these totaled $24.6 million and were added back in the company’s Adjusted EBITDA reconciliation. The filing reports the intangible impairment in other expense and the inventory adjustment in cost of sales.
- Goodwill sensitivity: No goodwill impairment was recorded in the annual test, but fair value exceeded carrying value by only about 4% for Hardware Solutions and 6% for Protective Solutions. Management disclosed that relatively modest adverse changes in specified discount-rate or growth assumptions could result in impairment.
- Concentration and operating risks: Home Depot and Lowe’s accounted for 43.4% of FY2023 revenue. Other key risks include variable-rate debt, dependence on imported products and exposure to tariffs and supply-chain disruption, commodity and freight costs, seasonality, and foreign-exchange movements.
- Cybersecurity: A May 2023 ransomware incident led to temporary system suspensions; operational systems were restored over the following week. Some confidential personal information of employees and selected dependents was accessed. Reported incident costs net of an expected insurance receivable were $1.0 million; remediation was substantially concluded by year-end. The company expects ongoing security investment.
- Legal matters: The Hy-Ko patent litigation was settled for $18.5 million, with a 10-year covenant not to sue covering specified key duplication and identification patents. Management says other ordinary-course litigation is not expected to materially affect financial condition, results, or cash flows. The filing also identifies potential import-duty exposure related to certain nail products.
- Subsequent event: Hillman completed its acquisition of Koch Industries on January 11, 2024, for approximately $24.0 million; its results are expected in Hardware and Protective Solutions.
Important facts for investors to verify
- Whether inventory reduction and associated working-capital cash generation are sustainable, and whether inventory levels support customer service without excess or obsolete stock.
- Whether underlying operating improvement persists after accounting for the unusually high prior-year litigation expense and FY2023 impairment charges; review the company’s Adjusted EBITDA definition and reconciliation alongside GAAP results.
- Debt repayment capacity and interest-rate exposure: all senior secured facility borrowings are variable-rate, though swaps hedge portions of exposure. Management estimates a 1% rate change would affect annual interest expense by about $3.9 million after floors and swaps.
- Customer concentration and exposure to demand in home improvement retail, particularly at Home Depot and Lowe’s, as well as the effects of housing activity and Canadian demand and currency.
- Potential further impairment of goodwill or intangible assets, particularly given the limited valuation cushions disclosed for the Hardware Solutions and Protective Solutions reporting units.
- Cyber incident follow-up, including insurance recovery, any related claims or costs, and whether the incident has continuing operational or data-security effects.
- Execution and financial contribution of the Koch acquisition, and the extent to which 2024 capital spending and other cash requirements affect debt reduction and liquidity.