Hillman Solutions Corp. — Q3 2023 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 30, 2023; comparisons are to the periods ended September 24, 2022. Dollar amounts below are in millions unless noted. Hillman supplies hardware-related products and merchandising services through Hardware and Protective Solutions, Robotics and Digital Solutions, and Canada segments.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Net sales | $398.9 | $378.5 | $1,128.7 | $1,135.7 |
| Income (loss) from operations | $34.7 | $(0.4) | $56.6 | $36.2 |
| Net income (loss) | $5.1 | $(9.5) | $0.5 | $(2.5) |
| Diluted EPS | $0.03 | $(0.05) | $0.00 | $(0.01) |
| Adjusted EBITDA (non-GAAP) | $66.8 | $59.0 | $165.0 | $165.3 |
- Q3 sales increased 5.4%; year-to-date sales declined 0.6%. Q3 operating margin was 8.7%, versus negative 0.1% in the prior-year quarter; net margin was 1.3%, versus negative 2.5%.
- Q3 cost of sales was 55.8% of sales, compared with 56.7%; SG&A was 28.4%, down from 35.2%. Year-to-date operating margin improved to 5.0% from 3.2%, while Adjusted EBITDA was essentially flat.
- Q3 sales growth came mainly from Hardware and Protective Solutions (+9.4%), including higher hardware volume and pricing and seasonal protective-equipment sales. Robotics and Digital Solutions declined 1.4%, and Canada declined 9.4%. For the first 39 weeks, Canada sales fell 7.6%, partly due to currency translation; Robotics and Digital Solutions fell 1.1%.
- Q3 income improved substantially in part because Robotics and Digital Solutions had lower legal and consulting costs than in 2022, when it recorded significant Hy-Ko litigation expense. Year-to-date, that segment’s operating income also benefited from the lower litigation expense; Canada operating income declined.
Cash flow, debt and liquidity
- For the first 39 weeks, operating cash flow was $171.5 million, investing cash flow was $(52.8) million, and financing cash flow was $(111.8) million. Cash increased $8.2 million to $39.3 million.
- Operating cash flow benefited from a $92.8 million reduction in inventory and higher accounts payable; management linked the inventory decline to its initiative to reduce stock built up amid prior supply-chain constraints and inflation. Capital expenditures were $52.1 million.
- At September 30, total debt and finance obligations before unamortized discounts and fees were approximately $811.1 million, including $754.0 million of term loans and $47.0 million drawn on the revolver. The company made an $80.0 million term-loan prepayment in August. Net long-term debt reported on the balance sheet was $780.0 million.
- Cash was $39.3 million; working capital was $362.4 million, down from $416.2 million at December 31, 2022. Revolver availability was $251.9 million, after considering the borrowing base and $35.9 million of outstanding letters of credit.
- Net interest expense rose to $52.9 million for the 39 weeks from $38.9 million, primarily due to higher interest rates. After swaps and the SOFR floor, management estimated that a 1 percentage-point rate change would affect annual interest expense by approximately $4.4 million.
Outlook, risks and notable items
- The filing provides no specific revenue or earnings guidance. Management expects operating cash flow to meet short-term liquidity needs and access to capital markets to continue, while noting that market disruption could affect future liquidity.
- A ransomware attack in late May 2023 disrupted certain IT systems and shipping operations. Systems and shipping were restored the following week. Costs net of expected insurance receivables were $1.0 million year to date, with no additional Q3 expense recorded. Further costs are expected; management said the ultimate impact cannot be estimated but is not expected to be material to full-year 2023 results.
- Management cites consumer spending and housing trends, inflation and sourcing costs, competition, customer concentration, seasonality, foreign exchange, tariffs and import duties, and cybersecurity as risks. The filing notes possible additional anti-dumping and countervailing duties for certain nail products sourced from China and Taiwan; related exposure is not quantified here.
- Contingent consideration for prior acquisitions had a $12.5 million fair value at September 30; the liability is based on estimates and actual payments may differ materially. The company reported no impairment-triggering events for goodwill or indefinite-lived intangibles during the periods presented.
- The Canada segment was realigned in Q1 2023 to include Canada-based Protective Solutions and MinuteKey businesses; prior-period segment presentation was reclassified. On November 2, 2023, the board adopted an executive severance plan, a subsequent event described in the filing.
- Income tax expense was unusually high relative to pretax income: the effective rate was 71.9% in Q3 and 87.5% year to date, reflecting state and foreign taxes and certain nondeductible expenses.
Key facts for investors to verify
- Whether cash generation remains strong after the substantial inventory reduction, and whether working capital normalizes.
- Progress on debt reduction, future interest expense, revolver availability, and the impact of floating rates despite swaps.
- Whether sales and margins hold up if consumer demand weakens, and whether Canada’s sales and operating performance recover.
- Final cybersecurity-related costs, insurance recoveries, and any consequences of the ongoing data-access assessment.
- Potential exposure to import-duty reviews, contingent consideration estimates, and the cost implications of the new executive severance plan.