Hillman Solutions Corp. — Q3 2021 Form 10-Q
Reporting period: Thirteen weeks ended September 25, 2021; year-to-date figures cover thirty-nine weeks. Amounts below are in U.S. dollars. Hillman supplies hardware-related products and merchandising services, including fasteners, personal protective equipment, key duplication and engraving systems. On July 14, 2021, it completed its business combination with Landcadia and began trading as HLMN.
Financial performance
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Net sales | $364.5 million | $398.7 million | $1,081.5 million | $1,041.2 million |
| Gross margin, excluding depreciation and amortization | 35.0% | 42.9% | 39.5% | 43.3% |
| Operating income (loss) | $(13.3) million | $35.1 million | $12.0 million | $65.3 million |
| Net income (loss) | $(32.5) million | $9.3 million | $(44.9) million | $(10.5) million |
| Adjusted EBITDA | $56.5 million | $75.0 million | $168.8 million | $178.1 million |
| Operating cash flow | Not presented separately | Not presented separately | $(105.3) million | $67.6 million |
Q3 sales declined 8.6%; year-to-date sales increased 3.9%. Q3 diluted loss per share was $0.19, versus earnings of $0.10 a year earlier. Adjusted EBITDA is a non-GAAP measure. The filing attributes weaker profitability primarily to the $32.0 million inventory valuation charge for exiting certain COVID-related protective product categories, inflation and lower sales in hardware and protective products.
Balance sheet, debt and liquidity
- At September 25, cash was $14.4 million, current assets $676.1 million and current liabilities $302.8 million; working capital was $373.3 million.
- Debt table showed $926.7 million of gross borrowings and finance leases, including $851.0 million under the term loan and $74.0 million under the revolver. Net carrying value of long-term debt was $890.6 million. Cash was $7.1 million lower than at year-end 2020.
- The revolver had approximately $150.1 million of available borrowing capacity, after $74.0 million drawn and $25.9 million in letters of credit. Management said projected operating cash flows and revolver availability should cover working capital and capital expenditures for the next 12 months.
- Operating cash use reflected a $110.1 million inventory increase, among other working-capital movements. Investing cash use was $76.1 million, including the $39.1 million OZCO acquisition and capital expenditures. Financing cash provided was $173.7 million, including proceeds from the business combination and PIPE, alongside significant debt refinancing and repayments.
Material changes and unusual items
- Q3 revenue fell $34.2 million year over year, principally as personal protective equipment sales declined $25.9 million; hardware and Canada sales also decreased. Keys and key accessories increased $7.6 million as retail access recovered from pandemic restrictions.
- The $32.0 million inventory valuation charge was recorded in cost of sales after Hillman decided to exit selected wipes, sprays, masks and glove categories. Management expected the charge to be one-time.
- In July, Hillman refinanced its debt, issued new term loans and redeemed its 6.375% senior notes and 11.6% junior subordinated debentures. The refinancing generated $8.1 million in charges; the company also paid $21.0 million in financing fees recorded as financing cash flow.
- Hillman acquired OZCO for $39.1 million in April. Its preliminary purchase-price allocation included $9.5 million of goodwill and $30.1 million of identified intangibles.
- The business combination and PIPE substantially increased shares outstanding; the filing reported 187.6 million shares issued as of September 25, 2021. Warrants are recorded as liabilities, with a $4.0 million Q3 fair-value loss.
Outlook, commentary and risks
The filing provides no numerical revenue or earnings guidance. Management said it expected adequate liquidity over the next 12 months and continued to monitor demand and preserve cash. It cautioned that COVID-19 developments, supply-chain and workforce disruption, inflation in product, freight and personnel costs, currency movements, and floating-rate debt could affect results and liquidity. A 1 percentage-point change in weighted average interest rates was estimated to change annual interest expense by approximately $5.1 million after swaps and the LIBOR floor.
Hillman reported that the KeyMe patent disputes were globally resolved in June 2021. A separate patent and related claims brought by Hy-Ko remained pending; Hillman said it intended to defend the claims and could not estimate a possible loss. Management stated disclosure controls and procedures were not effective as of September 25, 2021. It also said the previously identified material weakness in tax accounting controls had been remediated.
Important facts for investors to verify
- Whether the $32.0 million inventory charge was indeed one-time and how the product-category exit affects future sales and margins.
- Whether working-capital demands, especially inventory, continue to consume operating cash and whether revolver availability remains adequate.
- Debt costs, refinancing terms, floating-rate exposure and the impact of interest-rate or reference-rate changes.
- Progress and potential exposure in the Hy-Ko litigation, for which the company could not estimate a loss.
- Remediation and ongoing effectiveness of financial reporting controls, particularly given the reported ineffective disclosure controls.
- Performance trends by segment: Hardware and Protective Solutions weakened sharply, while Robotics and Digital Solutions improved; Canada sales and profitability differed between quarterly and year-to-date comparisons.