Hillman Solutions Corp. — Q2 2022 Form 10-Q
Reporting period: 13 weeks ended June 25, 2022; year-to-date figures cover 26 weeks. Dollar amounts are in millions unless stated otherwise. Comparisons are with the corresponding 2021 periods.
Business context and reporting period
Hillman supplies hardware, fasteners, personal protective products, keys and key-duplication systems, and related merchandising services to North American retailers. It reports three segments: Hardware and Protective Solutions, Robotics and Digital Solutions, and Canada. Results are affected by seasonality, and the filing cautions that interim results do not necessarily indicate full-year results.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $394.1 | $375.7 | $757.1 | $717.0 |
| Gross margin | 44.1% | 42.5% | 42.8% | 41.8% |
| Operating income | $27.8 | $19.5 | $36.6 | $25.3 |
| Operating margin | 7.0% | 5.2% | 4.8% | 3.5% |
| Net income (loss) | $8.8 | $(3.4) | $6.9 | $(12.4) |
| Diluted EPS | $0.04 | $(0.04) | $0.04 | $(0.14) |
| Adjusted EBITDA (non-GAAP) | $62.3 | $64.5 | $106.3 | $112.3 |
First-half operating cash flow was $14.7 million, compared with $59.8 million used in the prior-year period. Capital expenditures were $28.9 million; investing cash outflow was $31.4 million. Cash ended the period at $17.7 million. Working capital was $461.4 million, and the current ratio was approximately 2.6.
At June 25, 2022, total borrowings including finance leases were $966.8 million: $846.7 million of term loans, $117.0 million drawn on the revolver, and $3.1 million of finance leases. Cash less these borrowings implies net debt of approximately $949.1 million. The balance sheet reports $929.2 million of long-term debt net of discounts and fees, plus $11.9 million of current debt and finance lease liabilities. Revolver availability was $100.2 million after outstanding letters of credit.
Material changes versus prior comparable periods
- Q2 sales rose 4.9%; first-half sales rose 5.6%. Management attributed growth primarily to price increases, partly offset by weaker volumes and demand.
- Q2 operating income increased to $27.8 million, while Adjusted EBITDA declined 3.4%. First-half operating income increased, but Adjusted EBITDA declined 5.3%.
- Hardware and Protective Solutions first-half operating income fell to $8.1 million from $16.0 million, as higher selling, warehouse and other expenses offset growth. Robotics and Digital Solutions and Canada reported higher first-half operating income.
- First-half cash flow from operations improved from a substantial prior-year use of cash, but remained constrained by inventory buildup for the busy season and higher receivables from sales growth.
- Reported share counts and per-share comparisons are affected by the July 2021 SPAC business combination: weighted-average basic shares were about 194 million in 2022 versus about 91 million in 2021.
Outlook, commentary, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management said operating cash flows and revolver availability should be sufficient for working capital, capital spending, and other liquidity needs over the next 12 months and beyond.
- Pricing, costs and demand: Price increases supported sales and margins, but lower demand reduced volumes. Management cited inflation in wages, fuel, transportation and product inputs, as well as retail softness and lower demand for COVID-related protective products.
- Liquidity and financing: On July 29, 2022, after quarter-end, the company amended its ABL facility, increasing commitments to $375 million and extending maturity to July 29, 2027. The facility is subject to borrowing-base limits. A 1% change in weighted-average interest rates was estimated to change annual interest expense by approximately $5.4 million after considering swaps and the LIBOR floor.
- Unusual items: A $2.2 million Q2 and $3.6 million first-half gain from remeasurement of acquisition-related contingent consideration benefited other income. First-half Adjusted EBITDA was also reduced by higher stock compensation and operating costs; this non-GAAP measure excludes specified items and may not be comparable with other companies’ measures.
- Contingencies and risks: Hy-Ko’s patent-infringement and related claims concerning key-duplication machines remained pending; trial was set for October 2022, and mediation had been suspended. Hillman said it believed the claims were without merit. The filing also discusses potential customs and anti-dumping duties on certain imported nail products, self-insurance exposures, foreign-exchange and commodity risks, customer concentration, supply costs, and macroeconomic conditions. The amount of any potential additional anti-dumping liability is not clearly stated.
- Other commitments: Two leases expected to commence later in 2022 carry estimated future minimum commitments of approximately $26.7 million and $4.3 million. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether price increases continue to offset lower volumes and inflation, and how segment profitability develops—particularly in Hardware and Protective Solutions.
- Whether operating cash flow improves as inventory and receivables convert to cash, and whether revolver availability remains adequate.
- Floating-rate debt exposure, interest-rate swap coverage, and the terms and borrowing-base availability of the amended $375 million ABL facility.
- Developments and potential financial consequences of the Hy-Ko litigation and any customs or anti-dumping duty reviews.
- The sustainability of earnings excluding contingent-consideration gains and other adjustments, and the comparability of Adjusted EBITDA with GAAP results.