Hillman Solutions (US:HLMN)2022-03-16 12:30markdown Part I [Item 1. Business](index=2&type=section&id=Item%201.%20Business) Hillman Solutions Corp. is a leading North American hardware provider, publicly traded since 2021, with $1.426 billion in net sales - Hillman is a major provider of hardware products and services in North America, with **2021 net sales of approximately $1.426 billion**[14](index=14&type=chunk) - On July 14, 2021, the company completed a business combination with SPAC Landcadia Holdings III, Inc., becoming Hillman Solutions Corp. and trading on Nasdaq under "HLMN"[16](index=16&type=chunk) - In connection with the SPAC merger, Hillman entered into a new Term Credit Agreement for an **$835.0 million** term loan and a **$200.0 million** delayed draw facility, refinancing its existing debt[17](index=17&type=chunk) - The company acquired OZCO, a manufacturer of hardware for outdoor structures, for **$38.9 million** on April 16, 2021, financed by an incremental **$35.0 million** term loan[18](index=18&type=chunk) [Business Segments](index=3&type=section&id=Business%20Segments) The company operates three segments: Hardware and Protective Solutions, Robotics and Digital Solutions, and Canada, with Hardware as the largest revenue driver Segment Revenue (2019-2021) | Segment | 2021 Revenue (in millions) | 2020 Revenue (in millions) | 2019 Revenue (in millions) | | :--- | :--- | :--- | :--- | | Hardware and Protective Solutions | $1,025.0 | $1,024.4 | $853.0 | | Robotics and Digital Solutions | $249.5 | $209.3 | $236.1 | | Canada | $151.5 | $134.6 | $125.3 | - The Hardware and Protective Solutions segment includes fasteners (Hillman, PowerPro), builder's hardware (Hardware Essentials®), wall hanging (Ook®, High & Mighty®), metal shapes (SteelWorks®), LNS, and personal protective gear (Firm Grip®, AWP®)[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) - The Robotics and Digital Solutions segment features self-service key duplication (MinuteKey) and engraving (Quick-Tag®) kiosks, along with associate-assisted systems (KeyKrafter®)[37](index=37&type=chunk)[39](index=39&type=chunk)[44](index=44&type=chunk) [Markets and Customers](index=6&type=section&id=Markets%20and%20Customers) Hillman's sales are highly concentrated with Home Depot and Lowe's, which together accounted for approximately **48%** of total revenue in 2021 Top Customer Revenue Concentration (2021) | Customer | Revenue (in millions) | % of Total Revenue | | :--- | :--- | :--- | | Home Depot | $385.0 | 27.0% | | Lowe's | $294.1 | 20.6% | | **Total Top 2** | **$679.1** | **47.6%** | - The company serves national accounts including Home Depot, Lowe's, Menard's, PETCO, PetSmart, Tractor Supply, and Walmart[51](index=51&type=chunk) [Competition](index=8&type=section&id=Competition) Hillman faces competition in fasteners and personal protective equipment, leveraging product innovation and in-store merchandising for competitive advantage - Primary competitors for fasteners in national accounts are Primesource Building Products, Inc., Midwest Fastener Corporation, Illinois Tool Works Inc., and Spectrum Brands[58](index=58&type=chunk) - Competition for gloves and personal protective equipment includes West Chester Protective Gear, PIP, Iron Clad, and MidWest Quality Gloves, Inc[58](index=58&type=chunk) [Human Capital Resources](index=8&type=section&id=Human%20Capital%20Resources) As of December 25, 2021, Hillman employed **4,212** full-time and part-time employees, with a focus on health, safety, diversity, and inclusion - The company had **4,212** full and part-time employees as of December 25, 2021, with no union representation[61](index=61&type=chunk) - Hillman has implemented measures to protect its workforce in response to COVID-19, adhering to CDC and local health authority guidance[62](index=62&type=chunk) [Item 1A. Risk Factors](index=9&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from economic conditions, COVID-19, competition, customer concentration, and substantial debt - The business is sensitive to economic conditions, consumer confidence, and trends in home repair, remodeling, and new construction[69](index=69&type=chunk) - The COVID-19 pandemic poses ongoing risks to demand, the global supply chain, and supplier reliability, which could materially affect business operations[71](index=71&type=chunk)[74](index=74&type=chunk) - The company has **high customer concentration**, with its two largest customers accounting for approximately **48%** of net sales in 2021[81](index=81&type=chunk) - As of December 25, 2021, total indebtedness was **$945.8 million**. This **substantial debt** increases vulnerability to adverse economic conditions and limits operational flexibility[118](index=118&type=chunk)[119](index=119&type=chunk) - Credit agreements contain restrictive covenants that limit the company's ability to incur additional debt, pay dividends, make investments, and engage in other strategic activities[121](index=121&type=chunk)[126](index=126&type=chunk) [Item 1B. Unresolved Staff Comments](index=23&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments - None[132](index=132&type=chunk) [Item 2. Properties](index=24&type=section&id=Item%202.%20Properties) Hillman operates numerous leased office, manufacturing, and distribution facilities across North America, all considered in good condition - All of the company's principal office, manufacturing, and distribution properties are leased[134](index=134&type=chunk) Key Leased Facilities | Location | Approx. Square Footage | Description | | :--- | :--- | :--- | | Cincinnati, Ohio | 270,000 | Office, Distribution | | Forest Park, Ohio | 385,000 | Office, Distribution | | Rialto, California | 402,000 | Distribution | | Tempe, Arizona | 184,000 | Office, Mfg., Distribution | | Toronto, Ontario | 453,000 | Office, Distribution | [Item 3. Legal Proceedings](index=24&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various legal proceedings, including a patent infringement lawsuit regarding its key duplication machines, which management intends to defend vigorously - On June 1, 2021, Hy-Ko Products Company LLC filed a patent infringement complaint against Hillman Group regarding its key duplication machines[506](index=506&type=chunk) - Management and legal counsel believe Hy-Ko's claims are without merit and intend to defend the suit vigorously. An estimate of possible loss cannot be made at this stage[509](index=509&type=chunk) [Item 4. Mine Safety Disclosures](index=25&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not Applicable[136](index=136&type=chunk) Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=25&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq under 'HLMN', has never paid cash dividends, and completed warrant redemption in late 2021 - The company's common stock is traded on The Nasdaq Stock Market under the symbol 'HLMN'[138](index=138&type=chunk) - The company has never declared or paid cash dividends on its common stock and does not intend to in the foreseeable future[139](index=139&type=chunk) - On December 30, 2021, the company announced the completed redemption of its outstanding warrants[146](index=146&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Fiscal 2021 net sales reached **$1.426 billion**, but a **$38.3 million** net loss occurred due to inventory charges and higher SG&A, with liquidity from its ABL Revolver [Results of Operations](index=31&type=section&id=Results%20of%20Operations) For fiscal 2021, net sales grew to **$1.426 billion**, but net loss widened to **$38.3 million** due to a **$32.0 million** inventory write-down and increased SG&A expenses Consolidated Results of Operations (2020 vs 2021) | (dollars in thousands) | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Net sales | $1,425,967 | $1,368,295 | +$57,672 | | Cost of sales | $859,557 | $781,815 | +$77,742 | | Gross Profit % | 39.7% | 42.9% | -3.2% | | Income from operations | $10,314 | $65,766 | -$55,452 | | Net loss | $(38,332) | $(24,499) | -$13,833 | | Adjusted EBITDA | $207,418 | $221,215 | -$13,797 | - The increase in cost of sales in 2021 was primarily due to a **$32.0 million** inventory valuation adjustment related to exiting certain COVID-19 product categories, plus inflation in commodities and transportation[169](index=169&type=chunk) - SG&A expenses increased by **$39.4 million** in 2021, driven by higher variable selling expenses, increased warehouse and delivery costs from volume and inflation, and higher G&A costs including stock compensation and legal fees related to the merger[170](index=170&type=chunk)[175](index=175&type=chunk) Consolidated Results of Operations (2019 vs 2020) | (dollars in thousands) | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Net sales | $1,368,295 | $1,214,362 | +$153,933 | | Cost of sales | $781,815 | $693,881 | +$87,934 | | Gross Profit % | 42.9% | 42.9% | 0.0% | | Income from operations | $65,766 | $7,695 | +$58,071 | | Net loss | $(24,499) | $(85,479) | +$60,980 | | Adjusted EBITDA | $221,215 | $178,658 | +$42,557 | [Non-GAAP Financial Measures](index=39&type=section&id=Non-GAAP%20Financial%20Measures) The company uses Adjusted EBITDA, a non-GAAP measure, which was **$207.4 million** in 2021, with significant add-backs for depreciation, stock compensation, and a one-time inventory revaluation charge Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | **Net loss** | **$(38,332)** | **$(24,499)** | **$(85,479)** | | Income tax benefit | (11,784) | (9,439) | (23,277) | | Interest expense, net | 68,779 | 99,103 | 113,843 | | Depreciation & Amortization | 120,729 | 126,915 | 124,568 | | EBITDA (Calculated) | $139,392 | $192,080 | $129,655 | | Stock compensation expense | 15,255 | 5,125 | 2,981 | | Litigation expense | 12,602 | 7,719 | 1,463 | | Acquisition and integration expense | 11,123 | 9,832 | 12,557 | | Inventory revaluation charges | 32,026 | — | — | | Other Adjustments | (3,000) | 6,459 | 22,002 | | **Adjusted EBITDA** | **$207,418** | **$221,215** | **$178,658** | [Liquidity and Capital Resources](index=44&type=section&id=Liquidity%20and%20Capital%20Resources) In 2021, operating activities used **$110.3 million** cash, while financing provided **$193.3 million** from the SPAC merger and PIPE investment, used to refinance debt, with **$124.1 million** available under the ABL Revolver Summary of Cash Flows (in millions) | Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash (used for)/provided by operating activities | $(110.3) | $92.1 | $52.4 | | Net cash used for investing activities | $(90.5) | $(46.1) | $(53.5) | | Net cash provided by/(used for) financing activities | $193.3 | $(45.1) | $(7.1) | - In connection with its merger, the company refinanced its debt, entering a new term loan facility for **$835.0 million** and redeeming its **6.375%** Senior Notes and **11.6%** Junior Subordinated Debentures[215](index=215&type=chunk) - As of December 25, 2021, the company had **$124.1 million** of available borrowings under its ABL Revolver, which is a primary source of liquidity[220](index=220&type=chunk) [Critical Accounting Policies and Estimates](index=45&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Management identifies critical accounting policies including revenue recognition, inventory realization, and goodwill impairment testing, which involve significant estimates and judgment - Inventory realization is a critical estimate. A **5% difference** in the actual excess and obsolete inventory reserve would have affected net earnings by approximately **$2.0 million** in fiscal 2021[231](index=231&type=chunk) - In the 2021 goodwill impairment test, the fair value of the Protective Solutions reporting unit exceeded its carrying value by approximately **5%**, and the Fastening and Hardware Solutions reporting unit exceeded its carrying value by approximately **23%**[234](index=234&type=chunk) - The carrying value of goodwill for the Protective Solutions and Fastening and Hardware reporting units was **$128.8 million** and **$424.1 million**, respectively, as of December 25, 2021[235](index=235&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=48&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks from interest rate fluctuations and foreign currency exchange rates, which it manages using interest rate swaps and foreign currency forward contracts - A **one percent (1%) change** in the weighted average interest rate for one year would change the annual interest expense by approximately **$5.2 million**[245](index=245&type=chunk) - The company is exposed to foreign exchange risk related to its Canadian and Mexican subsidiaries, which had a combined net asset value of **$169.9 million** as of December 25, 2021[246](index=246&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=49&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for 2021 and 2020, with an **unqualified auditor's opinion** and critical audit matters related to goodwill valuation and the SPAC merger accounting - The independent auditor's report from KPMG LLP expresses an **unqualified opinion** on the consolidated financial statements[259](index=259&type=chunk) - Critical audit matters identified were the valuation of goodwill for two reporting units and the determination of HMAN as the accounting acquirer in the reverse recapitalization with Landcadia[263](index=263&type=chunk)[268](index=268&type=chunk) Consolidated Balance Sheet Highlights (in thousands) | | Dec 25, 2021 | Dec 26, 2020 | | :--- | :--- | :--- | | Total current assets | $668,309 | $553,707 | | Goodwill | $825,371 | $816,200 | | Total assets | $2,562,922 | $2,468,618 | | Total current liabilities | $277,296 | $311,911 | | Long-term debt | $906,531 | $1,535,508 | | Total liabilities | $1,412,827 | $2,104,031 | | Total stockholders' equity | $1,150,095 | $364,587 | Consolidated Statements of Comprehensive Loss Highlights (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net sales | $1,425,967 | $1,368,295 | $1,214,362 | | Income from operations | $10,314 | $65,766 | $7,695 | | Net loss | $(38,332) | $(24,499) | $(85,479) | | Basic and diluted loss per share | $(0.28) | $(0.27) | $(0.96) | [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=100&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[526](index=526&type=chunk) [Item 9A. Controls and Procedures](index=100&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were **effective** as of December 25, 2021, having remediated a prior year **material weakness** related to deferred income taxes - Management concluded that disclosure controls and procedures were **effective** as of December 25, 2021[527](index=527&type=chunk) - A **material weakness** from the prior year related to the valuation allowance against deferred income taxes was remediated as of December 25, 2021[535](index=535&type=chunk)[536](index=536&type=chunk) - Remediation actions included engaging third-party tax consultants, creating a technical review committee, and hiring more tax staff[536](index=536&type=chunk) Part III [Item 10. Directors, Executive Officers, and Corporate Governance](index=102&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%2C%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement, with a code of ethics available on the company's website - Information about directors, officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement[543](index=543&type=chunk) - A code of ethics has been adopted and is available on the company's website[544](index=544&type=chunk) [Item 11. Executive Compensation](index=102&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2022 Proxy Statement[545](index=545&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=102&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) This section provides equity compensation plan information, with **13,960,739 securities** to be issued at a weighted-average exercise price of **$8.15**, and additional details incorporated from the 2022 Proxy Statement Equity Compensation Plan Information | Plan Category | Number of securities to be issued upon exercise | Weighted-average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity Compensation plans approved by shareholders | 13,960,739 | $8.15 | 7,713,585 | | Total | 13,960,739 | $8.15 | 7,713,585 | - Additional information on beneficial ownership is incorporated by reference from the 2022 Proxy Statement[547](index=547&type=chunk) [Item 13. Certain Relationships and Related Transactions](index=102&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions) Information concerning related person transactions and director independence is incorporated by reference from the company's 2022 Proxy Statement - Information regarding certain relationships and related transactions is incorporated by reference from the 2022 Proxy Statement[548](index=548&type=chunk) [Item 14. Principal Accounting Fees and Services](index=103&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) The company's independent registered public accounting firm is KPMG, LLP, with information regarding their fees and services incorporated by reference from the 2022 Proxy Statement - The company's independent registered public accounting firm is KPMG, LLP[549](index=549&type=chunk) - Information regarding principal accounting fees and services is incorporated by reference from the 2022 Proxy Statement[549](index=549&type=chunk) Part IV [Item 15. Exhibits, Financial Statement Schedules](index=103&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists documents filed as part of the Form 10-K, including financial statements and a comprehensive list of exhibits such as the Merger Agreement and credit agreements - This section contains the financial statements referenced in Item 8[552](index=552&type=chunk) - A list of exhibits is provided, including the Agreement and Plan of Merger, credit agreements, and various management and compensatory plan documents[552](index=552&type=chunk)[553](index=553&type=chunk)