Hillman Solutions Corp. — Q3 2022 Form 10-Q
Reporting period: Thirteen weeks ended September 24, 2022, compared with the thirteen weeks ended September 25, 2021. Year-to-date figures cover 39 weeks. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Hillman supplies hardware-related products and merchandising services to retail markets in North America. Its reportable segments are Hardware and Protective Solutions, Robotics and Digital Solutions, and Canada. The company filed this unaudited quarterly report on November 3, 2022.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Net sales | $378.5 | $364.5 | $1,135.7 | $1,081.5 |
| Operating income (loss) | $(0.4) | $(13.3) | $36.2 | $12.0 |
| Net income (loss) | $(9.5) | $(32.5) | $(2.5) | $(44.9) |
| Diluted earnings (loss) per share | $(0.05) | $(0.19) | $(0.01) | $(0.38) |
| Adjusted EBITDA (non-GAAP) | $59.0 | $56.5 | $165.3 | $168.8 |
- Q3 sales rose about 3.9%; year-to-date sales increased about 5.0%. Management attributed growth mainly to price increases, while noting lower demand and volumes in several product categories.
- Cost of sales was 56.7% of sales in Q3 versus 65.0% a year earlier; year to date it was 57.1% versus 60.5%. The comparisons benefited from a $32.0 million inventory valuation charge in Q3 2021 tied to exiting certain COVID-related protective products.
- Operating margin was approximately (0.1)% in Q3 versus (3.6)% in Q3 2021, and 3.2% year to date versus 1.1%. SG&A rose to $133.2 million for Q3 from $110.4 million, primarily reflecting higher litigation-related G&A; year-to-date SG&A increased $40.7 million.
- Q3 Adjusted EBITDA increased despite the GAAP operating loss, with the reconciliation adding back $25.3 million of litigation expense. Year-to-date Adjusted EBITDA declined about 2.1%. Adjusted EBITDA is a company-defined non-GAAP measure and may not be comparable with similarly named measures from other issuers.
- Interest expense, net was $14.7 million in Q3 and $38.9 million year to date. The year-to-date comparison improved from $50.0 million of interest expense in 2021, when the company also had refinancing charges and junior subordinated debenture interest.
- Cash from operations was $63.1 million for the 39 weeks, versus $105.3 million used in the prior-year period. Capital expenditures were $46.4 million; investing cash use was $48.9 million. Cash ended at $29.2 million, up from $14.6 million at year-end 2021.
Balance sheet, debt and liquidity
- At September 24, 2022, current assets were $716.2 million and current liabilities $268.8 million, for working capital of $447.4 million. Total assets were $2.575 billion and stockholders’ equity $1.167 billion.
- Reported current and long-term debt and finance lease liabilities totaled $926.6 million on the balance sheet. The debt note lists $951.3 million of gross debt and finance lease balances before unamortized discounts, fees, and current classification.
- The ABL revolving facility was amended in July 2022, increasing commitments to $375 million and extending maturity to July 29, 2027. It had $100.0 million drawn, $32.8 million of letters of credit, and $195.4 million available under borrowing-base provisions.
- Management said operating cash flows and revolver availability should be sufficient for working capital, capital expenditures, and other liquidity needs over the next 12 months and beyond. This is management’s assessment, not a guarantee.
Material changes and segment trends
- Hardware and Protective Solutions: Q3 revenue rose to $271.9 million from $261.5 million, driven by $24.2 million of hardware price increases, partly offset by lower volumes and a $10.5 million decline in protective-product sales. Segment operating income was $7.1 million versus a $24.9 million loss; the prior-year period included the $32.0 million inventory charge.
- Robotics and Digital Solutions: Q3 revenue fell to $65.6 million from $67.5 million, with lower retail foot traffic affecting key and engraving sales. The segment posted a $14.1 million operating loss versus $11.2 million of income, primarily due to litigation-related expense.
- Canada: Q3 revenue increased to $41.1 million from $35.5 million, mainly from $7.5 million of price increases partly offset by lower volume. Operating income improved to $6.5 million from $0.4 million; management cited pricing actions, restructuring, and facility consolidation.
- For the first 39 weeks, revenue grew in all three segments, but segment operating income declined in Robotics and Digital Solutions. Pricing contributed materially to reported sales growth while lower demand pressured volumes.
Outlook, risks and unusual items
- The filing provides no quantified full-year revenue, earnings, or EBITDA guidance. Management’s stated liquidity outlook is described above.
- On October 7, 2022, after the quarter ended, a jury found Hillman infringed two Hy-Ko patents and awarded $16.0 million in damages as a one-time lump-sum royalty; it found no willful infringement. The filing says the award was recorded in the quarter ended September 24, 2022. Hillman disagrees with the verdict and award and said it expected no impact on ongoing operations. The court had dismissed Hy-Ko’s Lanham Act claim, and Hy-Ko had dropped two other patent claims before trial.
- Management identifies exposure to inflation, weaker demand, transportation and supply-chain costs, tariffs and duties, customer concentration, competition, foreign exchange, interest rates, and litigation. The company reports that a 1% change in its weighted-average interest rate would change annual interest expense by approximately $5.2 million, after considering swaps and the LIBOR floor.
- The company self-insures certain liability and health claims and discloses potential customs and anti-dumping duty exposure. It also had $32.8 million of letters of credit outstanding for vendor and insurance requirements.
- Management reported no material changes to the risk factors previously disclosed in its 2021 Form 10-K, no material changes in internal control over financial reporting during the period, and effective disclosure controls as of September 24, 2022.
Most important facts for investors to verify
- How much of sales growth is sustainable pricing versus underlying volume, particularly as management reported lower demand in several categories.
- The final financial and operational implications of the Hy-Ko verdict, including any appeal, further proceedings, or changes to the recorded litigation exposure.
- Whether operating cash generation can support capital spending and working capital needs, given the year-to-date operating cash flow decline and reliance on revolving-credit availability.
- Debt costs and liquidity under changing interest rates, including the effect of the company’s swaps, borrowing-base availability, and the ABL facility’s terms.
- Whether litigation-related costs, higher operating expenses, and the year-to-date Adjusted EBITDA trend affect future profitability; assess the company’s non-GAAP adjustments against GAAP results.