Hillman Solutions Corp. — Q1 2022 Form 10-Q
Business context and period. Hillman supplies hardware-related products and merchandising services to North American retailers, including fasteners, protective equipment, keys, and self-service key and engraving kiosks. This unaudited report covers the 13 weeks ended March 26, 2022; comparisons are with the 13 weeks ended March 27, 2021. Amounts below are in U.S. dollars unless noted. The 2021 comparison predates Hillman’s July 2021 business combination and reflects Old Hillman’s historical results.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $363.0 million | $341.3 million |
| Gross margin | 41.2% | 41.0% |
| Operating income | $8.8 million (2.4% margin) | $5.8 million (1.7% margin) |
| Net loss | $1.9 million; $(0.01) per share | $9.0 million; $(0.10) per share |
| Adjusted EBITDA | $44.0 million (12.1% of sales) | $47.8 million (14.0% of sales) |
| Cash from operating activities | $(3.6) million | $(45.4) million |
| Cash and cash equivalents | $19.4 million at March 26, 2022 | $14.6 million at December 25, 2021 |
Investing cash outflow was $15.0 million, including $12.5 million of capital expenditures and $2.5 million paid for the Monkey Hook acquisition. Financing provided $24.5 million, including $27.0 million of net revolver borrowings. Working capital was $438.0 million, up from $391.0 million at year-end 2021.
Debt at quarter-end included $120.0 million drawn on the ABL revolver, an $848.9 million senior term loan, and $2.3 million of finance leases before discounts and fees. The company reported $97.2 million of available revolver borrowings after outstanding letters of credit. Management said operating cash flows and revolver availability were expected to fund liquidity and capital needs in the short and long term. A 1 percentage-point change in the weighted average interest rate was estimated to change annual interest expense by approximately $5.5 million, after swaps and the LIBOR floor.
Material changes and management commentary
- Sales increased $21.7 million, or about 6%. Fastening and hardware sales rose $22.7 million, primarily from pricing actions tied to product, transportation, and personnel inflation. Keys and accessories gained $6.3 million as retail traffic and machine access improved after pandemic restrictions. Protective-product sales fell $7.2 million as COVID-related demand declined.
- Consolidated cost of sales was 58.8% of sales versus 59.0% a year earlier, but SG&A rose to 31.6% of sales from 30.2%. Management cited higher marketing, variable compensation, wages, fuel, and transportation costs.
- Adjusted EBITDA declined $3.8 million despite higher sales. Hardware and Protective Solutions reported a $2.4 million operating loss versus $6.1 million of income, with inflation and lower high-margin protective-product sales among the cited factors. Robotics and Digital Solutions operating income increased to $7.9 million from $0.2 million; Canada improved to $3.4 million from a $0.4 million loss, aided by currency and lower operating expenses.
- Operating cash use improved substantially from the prior-year $45.4 million, but was affected by higher inventory for the busy season and new business wins, as well as higher receivables from increased sales.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific numerical earnings or sales guidance. Management’s liquidity outlook relies on projected operating cash flows and continued access to the ABL revolver and capital markets.
- Key risks discussed include inflation and supply-chain, raw-material, fuel, and transportation costs; tariffs and customs compliance; currency movements; customer concentration; seasonality; competition; COVID-19 impacts; and economic conditions affecting retail, home renovation, and construction spending.
- Hy-Ko’s patent-infringement and related claims involving Hillman key-duplication machines remained in litigation. Hillman intended to defend the case, but stated it could not estimate a possible loss or range of loss. Trial was scheduled for October 2022, and discovery was ongoing at the filing date.
- Q1 other income included a $1.5 million gain from revaluing contingent consideration and approximately $0.8 million of foreign-exchange gains. The contingent consideration liability was $10.8 million; actual earn-out payments may differ materially from estimated fair value.
- Hillman acquired Monkey Hook on March 7, 2022 for a preliminary purchase price of $2.8 million, including a $0.3 million holdback. The filing also describes a new Shannon, Georgia operating lease expected to begin in late 2022, with estimated minimum commitments of approximately $26.7 million.
- The company reported no material changes to the risk factors in its 2021 Form 10-K, no material changes to internal control during the quarter, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether pricing actions continue to offset inflation and transportation costs without further margin pressure, particularly in Hardware and Protective Solutions.
- Whether inventory and receivables convert to cash and whether revolver availability remains adequate as seasonal working-capital needs change.
- Debt-service costs, floating-rate exposure, and the continued effectiveness and coverage of interest-rate swaps.
- Developments and potential financial exposure in the Hy-Ko litigation, for which no loss estimate was available.
- Actual performance and purchase-accounting adjustments for Monkey Hook, and any changes in contingent earn-out valuations or payments.