# Hillman Solutions Corp.: Form 10-Q for the period ended Jul 1, 2023

- Company: [Hillman Solutions Corp.](/companies/hlmn.md) (CIK 1822492)
- Form: 10-Q
- Filed: 2023-08-08
- Accepted by EDGAR: Aug 8, 2023, 07:35 ET
- Period: 2023-07-01
- Accession: 0001822492-23-000147
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1822492/000182249223000147/hlm-20230701.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1822492/000182249223000147/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-07-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-02 to 2023-07-01 | $380.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-07-01 | $729.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2023-04-02 to 2023-07-01 | $111.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-01-01 to 2023-07-01 | $222.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-02 to 2023-07-01 | $20.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-07-01 | $21.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-02 to 2023-07-01 | −$1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-07-01 | −$9.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-02 to 2023-07-01 | $4.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-07-01 | −$4.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-02 to 2023-07-01 | $0.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-07-01 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-02 to 2023-07-01 | $0.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-07-01 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-02 to 2023-07-01 | 195,528,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-07-01 | 194,596,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-07-01 | $115.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-07-01 | $37.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2023-07-01 | $37.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-07-01 | $637.2m | us-gaap:AssetsCurrent |
| Total assets | at 2023-07-01 | $2.47bn | us-gaap:Assets |
| Current liabilities | at 2023-07-01 | $253.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-07-01 | $1.31bn | us-gaap:Liabilities |
| Long-term debt | at 2023-07-01 | $818.8m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2023-07-01 | $1.16bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,381 characters.

The following discussion provides information which the Company’s management believes is relevant to an assessment and understanding of the Company’s operations and financial condition. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes in addition to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

### FORWARD-LOOKING STATEMENTS

This quarterly report contains certain forward-looking statements, including, but not limited to, certain disclosures related to acquisitions, refinancing, capital expenditures, resolution of pending litigation, and realization of deferred tax assets, which are not historical facts and are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements.

All forward-looking statements are made in good faith by the Company and are intended to qualify for the safe harbor from liability established by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. You should not rely on these forward-looking statements as predictions of future events. Words such as "expect," "estimate," "project," "budget," "forecast," "anticipate," "intend," "plan," “target”, “goal”, "may," "will," "could," "should," "believes," "predicts," "potential," "continue," and similar expressions are intended to identify such forward-looking statements. These forward-looking statements include, without limitation, the Company’s expectations with respect to future performance. These forward-looking statements involve significant risks and uncertainties that could cause the actual results to differ materially from the expected results. Most of these factors are outside the Company's control and are difficult to predict. Factors that may cause such differences include, but are not limited to: (1) unfavorable economic conditions that may affect operations, financial condition and cash flows including spending on home renovation or construction projects, inflation, recessions, instability in the financial markets or credit markets; (2) increased supply chain costs, including raw materials, sourcing, transportation and energy; (3) the highly competitive nature of the markets that we serve; (4) the ability to continue to innovate with new products and services; (5) direct and indirect costs associated with the May 2023 ransomware attack, and our receipt of expected insurance receivables associated with that cybersecurity incident; (6) seasonality; (7) large customer concentration; (8) the ability to recruit and retain qualified employees; (9) the outcome of any legal proceedings that may be instituted against the Company; (10) adverse changes in currency exchange rates; (11) the impact of COVID-19 on the Company’s business; or (12) regulatory changes and potential legislation that could adversely impact financial results. The foregoing list of factors is not exclusive, and readers should also refer to those risks that are included in the Company’s filings with the Securities and Exchange Commission (“SEC”), including the Annual Report on Form 10-K filed on February 27, 2023. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward looking statements.

Except as required by applicable law, the Company does not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements in this communication to reflect any change in its expectations or any change in events, conditions or circumstances on which any such statement is based.

### GENERAL

Hillman Solutions Corp. and its wholly-owned subsidiaries (collectively, “Hillman” or “Company”) are one of the largest providers of hardware-related products and related merchandising services to retail markets in North America. Our principal business is operated through our wholly-owned subsidiary, The Hillman Solutions Corp. and its wholly-owned subsidiaries (collectively, “Hillman Group”), which had net sales of $380.0 million in the thirteen weeks ended July 1, 2023 and $729.7 million in the twenty-six weeks ended July 1, 2023. Hillman Group sells its products to hardware stores, home centers, mass merchants, pet supply stores, and other retail outlets principally in the United States, Canada, Mexico, Latin America, and the Caribbean. Product lines include thousands of small parts such as fasteners and related hardware items; threaded rod and metal shapes; keys and accessories; builder's hardware; personal protective equipment, such as gloves and eyewear; and identification items, such as tags and letters, numbers, and signs. We support product sales with services that include design and installation of merchandising systems, maintenance of appropriate in-store inventory levels, and break-fix for our robotics kiosks.

### RECENT DEVELOPMENTS

On June 30, 2023, the Company amended its term loan credit agreement and its interest rate swap agreements to change the benchmark rate from LIBOR to SOFR, and had previously amended the ABL revolver to do the same on July 29, 2022.

In late May 2023, we experienced a ransomware attack relating to certain systems on our network (the “Cybersecurity Incident”). We promptly initiated an investigation, engaged the services of cyber-security experts and outside advisors and worked with appropriate law enforcement authorities to contain, assess and remediate the Cybersecurity Incident. We are engaged in an ongoing process of assessing data accessed during the course of the Cybersecurity Incident and will notify applicable regulatory agencies and individuals as appropriate.

The Cybersecurity Incident affected certain of our information technology systems, and as part of the containment effort, we suspended affected systems and elected to temporarily suspend additional systems in an abundance of caution. We reactivated and restored our operational systems over the course of the week following the Cybersecurity Incident.

In the second quarter of fiscal 2023, we incurred non-recurring costs, net of an expected insurance receivable from our cyber insurance carrier, of $1.0 million for the second quarter. We are working diligently with our insurance carrier on claims to recover costs incurred.

We expect to incur ongoing costs related to this Cybersecurity Incident, as well as costs for ongoing efforts to enhance data security in response to ongoing developments in the cybersecurity landscape. We are unable to estimate the ultimate direct and indirect financial impacts of this Cybersecurity Incident, though it is not expected to be material to our full year fiscal 2023 financial results.

In the first quarter of 2023, the Company realigned its Canada segment to include the Canada-based Protective Solutions and MinuteKey businesses, which are now operating under the Canada segment leadership team. Previously, the results of the Canada-based Protective Solutions business were reported in the Hardware and Protective Solutions segment and the Canada-based MinuteKey business was reported in the Robotics and Digital Solutions segment and were operating under those respective segment leadership teams. Certain amounts in the prior year presentation between segments were reclassified to conform to the current year’s presentation.

### IMPACT OF GLOBAL ECONOMIC CONDITIONS ON OUR RESULTS OF OPERATIONS

Our business is impacted by general economic conditions in the North American markets, particularly the U.S. and Canadian retail markets including hardware stores, home centers, mass merchants, and other retailers. Changes in current economic conditions, including inflationary pressures in the cost of inventory, transportation, and employee compensation, foreign currency volatility, and concerns of a potential recession, have impacted consumer discretionary income levels and spending. Consumer discretionary income levels and spending impact the purchasing trends of our products by our retail customers. Any adverse trends in discretionary income and consumer spending could have a material adverse effect on our business or operating results.

We are exposed to the risk of unfavorable changes in foreign currency exchange rates for the U.S. dollar versus local currency of our suppliers located primarily in China and Taiwan. We purchase a majority of our products for resale from multiple vendors located in China and Taiwan. The purchase price of these products is routinely negotiated in U.S. dollar amounts rather than the local currency of the vendors and our suppliers' profit margins decrease when the U.S. dollar declines in value relative to the local currency. This puts pressure on our suppliers to increase prices to us. The U.S. dollar increased in value relative to the CNY by approximately 5.1% in the twenty-six weeks ended July 1, 2023, increased by 8.3% in 2022, and declined by 2.6% during 2021. The U.S. dollar increased in value relative to the Taiwan dollar by approximately 1.3% in the twenty-six weeks ended July 1, 2023, increased by 10.8% in 2022, and declined by 1.4% in 2021.

We are also exposed to risk of unfavorable changes in the Canadian dollar exchange rate versus the U.S. dollar. Our sales in Canada are denominated in Canadian dollars, while a majority of the products are sourced in U.S.

dollars. A weakening of the Canadian dollar versus the U.S. dollar results in lower sales in terms of U.S. dollars while the cost of sales remains unchanged. We have a practice of hedging some of our Canadian subsidiary's purchases denominated in U.S. dollars. The U.S. dollar declined in value relative to the Canadian dollar by approximately 2.2% in the twenty-six weeks ended July 1, 2023, increased by 5.7% in 2022, and declined by 0.2% in 2021.

In addition, the negotiated purchase price of our products may be dependent upon market fluctuations in the cost of raw materials (i.e. steel, zinc, and nickel) used by our vendors in their manufacturing processes. The final purchase cost of our products may also be dependent upon inflation or deflation in the local economies of vendors in China and Taiwan that could impact the cost of labor and materials used in the manufacturing of our products. We identify the directional impact of changes in our product cost, but the quantification of each of these variable impacts cannot be measured as to the individual impact on our product cost with a sufficient level of precision. We may take pricing action, when warranted, in an attempt to offset a portion of product cost increases. The ability of our operating divisions to implement price increases and seek price concessions, as appropriate, is dependent on competitive market conditions.

We import products which are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements and bilateral actions. The U.S. tariffs on steel and aluminum and other imported goods have increased our product costs and required us to increase prices on the affected products.

Thirteen weeks ended July 1, 2023 vs the Thirteen weeks ended June 25, 2022

### FINANCIAL SUMMARY AND OTHER KEY METRICS

- Net sales for the thirteen weeks ended July 1, 2023 were $380.0 million compared to net sales of $394.1 million for the thirteen weeks ended June 25, 2022, a decrease of approximately $(14.1) million or (3.6)%.
- Net income for the thirteen weeks ended July 1, 2023 was $4.5 million, or $0.02 per diluted share, compared to a net income of $8.8 million, or $0.04 per diluted share for the thirteen weeks ended June 25, 2022.
- Adjusted EBITDA(1) totaled $58.0 million versus $62.3 million in the thirteen weeks ended July 1, 2023 and in the thirteen weeks ended June 25, 2022, respectively.

### RESULTS OF OPERATIONS

The following analysis of results of operations includes a brief discussion of the factors that affected our operating results and a comparative analysis of the thirteen weeks ended July 1, 2023 and the thirteen weeks ended June 25, 2022.

*(dollars in thousands)*

|  | Thirteen Weeks Ended July 1, 2023 Amount | % of Net Sales | Thirteen Weeks Ended June 25, 2022 Amount | % of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $380,019 | 100.0% | $394,114 | 100.0% |
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 216,499 | 57.0% | 220,146 | 55.9% |
| Selling, warehouse, general and administrative expenses | 111,452 | 29.3% | 118,229 | 30.0% |
| Depreciation | 13,800 | 3.6% | 14,172 | 3.6% |
| Amortization | 15,578 | 4.1% | 15,566 | 3.9% |
| Other expense (income), net | 1,893 | 0.5% | (1,772) | (0.4)% |
| Income from operations | 20,797 | 5.5% | 27,773 | 7.0% |
| Interest expense, net | 18,075 | 4.8% | 12,533 | 3.2% |
| Income before income taxes | 2,722 | 0.7% | 15,240 | 3.9% |
| Income tax (benefit) expense | (1,823) | (0.5)% | 6,424 | 1.6% |
| Net income | $4,545 | 1.2% | $8,816 | 2.2% |
| Adjusted EBITDA(1) | $57,982 | 15.3% | $62,276 | 15.8% |

(1) Adjusted EBITDA is a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information, including our definition and our use of Adjusted EBITDA, and for a reconciliation from net income to Adjusted EBITDA.

### Net Sales by Segment

|  | Thirteen weeks ended July 1, 2023 | % of Net Sales | Thirteen weeks ended June 25, 2022 | % of Net Sales | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Hardware and Protective Solutions | $268,794 | 70.7% | $277,438 | 70.4% | $(8,644) | (3.1)% |
| Robotics and Digital Solutions | 62,456 | 16.4% | 63,716 | 16.2% | (1,260) | (2.0)% |
| Canada | 48,769 | 12.8% | 52,960 | 13.4% | (4,191) | (7.9)% |
| Consolidated | $380,019 |  | $394,114 |  | $(14,095) |  |

The decline in total net sales during the second quarter of 2023 was driven primarily driven by the factors described below:

Hardware and Protective Solutions net sales decreased by $8.6 million in thirteen weeks ended July 1, 2023 due to the following:

- Hardware net sales increased by $0.1 million driven by volume decreases of $7.0 million partially off set by $7.1 million in price increases in response to inflationary cost pressures in the market.
- Protective equipment net sales decreased by $8.7 million primarily due to $7.8 million decrease in volume driven by timing of promotional and seasonal sales along with $2.1 million of COVID-19 related sales in 2022 with no material comparable COVID-19 sales in 2023.

Robotics and Digital Solutions net sales in the thirteen weeks ended July 1, 2023 decreased by $1.3 million primarily driven by decreased volume in full-service key and engraving sales.

Canada net sales decreased by $4.2 million primarily due to $2.6 million unfavorable impact of the exchange rate from Canadian dollars to U.S. dollars along with decreased volume.

### Cost of Sales (excluding depreciation and amortization)

The following table summarizes cost of sales by segment:

|  | Thirteen weeks ended July 1, 2023 | % of Segment Net Sales | Thirteen weeks ended June 25, 2022 | % of Segment Net Sales | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Hardware and Protective Solutions | $168,490 | 62.7% | $170,827 | 61.6% | $(2,337) | (1.4)% |
| Robotics and Digital Solutions | 17,659 | 28.3% | 18,495 | 29.0% | (836) | (4.5)% |
| Canada | 30,350 | 62.2% | 30,824 | 58.2% | (474) | (1.5)% |
| Consolidated | $216,499 | 57.0% | $220,146 | 55.9% | $(3,647) | (1.7)% |

Hardware and Protective Solutions cost of sales as a percentage of net sales increased primarily due increased shipping and product costs.

Robotics and Digital Solutions cost of sales as a percentage of net sales decreased primarily due to a shift in product mix from full-service to self-service keys.

Canada cost of sales as a percentage of net sales increased primarily due increased shipping and product costs.

### Selling, Warehouse, and General and Administrative Expenses

The following table summarizes selling, warehouse, and general and administrative expense ("SG&A") by segment:

|  | Thirteen weeks ended July 1, 2023 | % of Segment Net Sales | Thirteen weeks ended June 25, 2022 | % of Segment Net Sales | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Hardware and Protective Solutions | $77,295 | 28.8% | $78,683 | 28.4% | $(1,388) | (1.8)% |
| Robotics and Digital Solutions | 22,862 | 36.6% | 26,245 | 41.2% | (3,383) | (12.9)% |
| Canada | 11,295 | 23.2% | 13,301 | 25.1% | (2,006) | (15.1)% |
| Consolidated | $111,452 | 29.3% | $118,229 | 30.0% | $(6,777) | (5.7)% |

Hardware and Protective Solutions SG&A decreased due to the following:

- Warehouse expense decreased $1.5 million due to lower sales volumes.
- General and administrative (“G&A”) increased by $1.6 million. The increase was primarily driven by increased stock-based compensation expense.
- Selling expense decreased by $1.5 million primarily due to lower variable compensation and benefit expense in the thirteen weeks ended July 1, 2023.

Robotics and Digital Solutions SG&A decreased due to the following:

- Warehouse expense decreased by $1.0 million primarily due to the shift from full-service keys, which have a higher warehousing cost, to self-service keys.
- G&A decreased by $2.6 million. The decrease was primarily related to reduced legal and consulting expense in 2023 as 2022 saw increased legal expense associated with the litigation with Hy-Ko Products Company LLC. This was partially offset by increased stock compensation expense.
- Selling expense increased by $0.3 million primarily due to variable selling expenses related to self-service key sales in the thirteen weeks ended July 1, 2023.

Canada SG&A decreased due to the following:

- Warehouse expense decreased by $1.1 million primarily due to lower sales volumes along with improved operational efficiencies.
- G&A decreased by $0.8 million primarily due to reduced variable compensation and stock-based compensation expense.

### Other Operating Expenses

Depreciation expense decreased $0.4 million due to certain assets becoming fully depreciated.

Amortization expense was comparable to prior year quarter.

In the thirteen weeks ended July 1, 2023, other expense consisted primarily of a $2.5 million loss on the revaluation of the contingent consideration associated with the acquisition of Resharp and Instafob, (see Note 15 - Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements for additional information). We also recorded exchange rate gains of $0.3 million in the thirteen weeks ended July 1, 2023.

In the thirteen weeks ended June 25, 2022, other income consisted primarily of a $2.2 million gain on the revaluation of the contingent consideration associated with the acquisition of Resharp and Instafob. We also recorded exchange rate losses of $0.2 million in the thirteen weeks ended June 25, 2022.

### Income from Operations

|  | Thirteen weeks ended July 1, 2023 | Thirteen weeks ended June 25, 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Hardware and Protective Solutions | $4,367 | $10,079 | $(5,712) | (56.7)% |
| Robotics and Digital Solutions | 10,374 | 10,305 | 69 | 0.7% |
| Canada | 6,056 | 7,389 | (1,333) | (18.0)% |
| Total segment income from operations | $20,797 | $27,773 | $(6,976) | (25.1)% |

Income from operations in our Hardware and Protective Solutions segment decreased $5.7 million due to the changes in sales, cost of sales, and SG&A expenses described above.

Income from operations in our Robotics and Digital Solutions segment was comparable to prior year quarter. The $0.1 million increase is primarily due to the decrease in cost of sales, and SG&A expenses described above, along with a decrease in depreciation expense of $1.6 million due to certain assets becoming fully depreciated. This was partially offset by an increase of $4.6 million in other expense driven by the changes in revaluation of the contingent consideration described above along with decreased sales.

Canada's income from operations decreased by $1.3 million primarily due to the changes in sales, cost of sales, and SG&A expenses described above. Canada also recorded exchange rate losses of $0.3 million in the thirteen weeks ended June 25, 2022.

### Interest Expense

Interest expense, net, increased $5.5 million due higher interest rates in the thirteen weeks ended July 1, 2023.

### Income Taxes

For the thirteen weeks ended July 1, 2023 and thirteen weeks ended June 25, 2022, the effective income tax rate was (67.0)% and 42.2%, respectively. The Company recorded an income tax benefit for the thirteen weeks ended July 1, 2023 of $1.8 million based on a pre-tax income of $2.7 million, and an income tax provision for the thirteen weeks ended June 25, 2022 of $6.4 million based on a pre-tax income of $15.2 million.

In 2023, the Company's effective tax rate differed from the U.S. federal statutory tax rate primarily due to Global Intangible Low-Taxed Income ("GILTI") from the Canadian subsidiary. In addition, the effective tax rate differed from the U.S. federal statutory tax rate for 2023 due to state and foreign income taxes and certain non-deductible expenses. Given that the Company is forecasting positive income for the full fiscal year, the Company anticipates that the quarterly income tax benefit recorded through July 1, 2023 will reverse to an income tax provision by the end of the fiscal year. See Note 8 - Income Taxes of the Notes to Condensed Consolidated Financial Statements for additional information.

In 2022, the effective rate differed from the federal statutory rate due to non-deductible stock compensation, an estimated increase in GILTI from the Company's Canadian operations, and state and foreign income taxes.

twenty-six weeks ended July 1, 2023 vs the twenty-six weeks ended June 25, 2022

### FINANCIAL SUMMARY AND OTHER KEY METRICS

- Net sales for the twenty-six weeks ended July 1, 2023 were $729.7 million compared to net sales of $757.1 million for the twenty-six weeks ended June 25, 2022, a decrease of approximately $27.4 million or 3.6%.
- Net loss for the twenty-six weeks ended July 1, 2023 was $(4.6) million, or $(0.02) per diluted share, compared to net income of $6.9 million, or $0.04 per diluted share for the twenty-six weeks ended June 25, 2022.
- Adjusted EBITDA(1) totaled $98.2 million versus $106.3 million in the twenty-six weeks ended July 1, 2023 and twenty-six weeks ended June 25, 2022, respectively.

### RESULTS OF OPERATIONS

The following analysis of results of operations includes a brief discussion of the factors that affected our operating results and a comparative analysis of the twenty-six weeks ended July 1, 2023 and the twenty-six weeks ended June 25, 2022.

*(dollars in thousands)*

|  | Twenty-six weeks ended July 1, 2023 Amount | % of Net Sales | Twenty-six weeks ended June 25, 2022 Amount | % of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $729,726 | 100.0% | $757,127 | 100% |
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 421,008 | 57.7% | 433,419 | 57.2% |
| Selling, warehouse, general and administrative expenses | 222,517 | 30.5% | 232,767 | 30.7% |
| Depreciation | 30,505 | 4.2% | 27,426 | 3.6% |
| Amortization | 31,150 | 4.3% | 31,087 | 4.1% |
| Other expense (income), net | 2,660 | 0.4% | (4,194) | (0.6)% |
| Income from operations | 21,886 | 3.0% | 36,622 | 4.8% |
| Interest expense, net | 36,152 | 5.0% | 24,161 | 3.2% |
| (Loss) income before income taxes | (14,266) | (2.0)% | 12,461 | 1.6% |
| Income tax expense (benefit) | (9,679) | (1.3)% | 5,532 | 0.7% |
| Net (loss) income | $(4,587) | (0.6)% | $6,929 | 0.9% |
| Adjusted EBITDA(1) | $98,168 | 13.5% | $106,287 | 14.0% |

(1) Adjusted EBITDA is a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information, including our definition and our use of Adjusted EBITDA, and for a reconciliation from net (loss) income to Adjusted EBITDA.

### Net Sales by Segment

|  | Twenty-six weeks ended July 1, 2023 | % of Net Sales | Twenty-six weeks ended June 25, 2022 | % of Net Sales | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Hardware and Protective Solutions | $522,645 | 71.6% | $542,815 | 71.7% | $(20,170) | (3.7)% |
| Robotics and Digital Solutions | 123,522 | 16.9% | 124,693 | 16.5% | (1,171) | (0.9)% |
| Canada | 83,559 | 11.5% | 89,619 | 11.8% | (6,060) | (6.8)% |
| Consolidated | $729,726 |  | $757,127 |  | $(27,401) |  |

The decline in total net sales during the twenty-six weeks ended July 1, 2023 was driven primarily driven by the factors described below:

Hardware and Protective Solutions net sales decreased by $20.2 million in twenty-six weeks ended July 1, 2023 due to the following:

- Hardware net sales increased by $15.0 million driven by $18.9 million in price increases in response to inflationary cost pressures in the market, partially offset by lower volume.
- Protective equipment net sales decreased by $35.2 million primarily due to a $22.1 million decrease in volume driven by timing of seasonal and promotional sales, along with $15.5 million of COVID-19 related sales in 2022 with no material comparable COVID-19 sales in 2023.

Robotics and Digital Solutions net sales in the twenty-six weeks ended July 1, 2023 decreased by $1.2 million compared to the twenty-six weeks ended June 25, 2022 primarily due to decreases in full-service key and engraving volume.

Canada net sales decreased by $6.1 million primarily due to $4.9 million unfavorable impact of the exchange rate from Canadian dollars to U.S. dollars along with decreased volume.

### Cost of Sales (excluding depreciation and amortization)

The following table summarizes cost of sales by segment:

|  | Twenty-six weeks ended July 1, 2023 | % of Segment Net Sales | Twenty-six weeks ended June 25, 2022 | % of Segment Net Sales | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Hardware and Protective Solutions | $332,323 | 63.6% | $342,656 | 63.1% | $(10,333) | (3.0)% |
| Robotics and Digital Solutions | 36,045 | 29.2% | 38,153 | 30.6% | (2,108) | (5.5)% |
| Canada | 52,640 | 63.0% | 52,610 | 58.7% | 30 | 0.1% |
| Consolidated | $421,008 | 57.7% | $433,419 | 57.2% | $(12,411) | (2.9)% |

Hardware and Protective Solutions cost of sales as a percentage of net sales increased primarily due to increased shipping and product costs.

Robotics and Digital Solutions cost of sales as a percentage of net sales improved primarily due to a shift in product mix from full-service to self-service keys.

Canada cost of sales as a percentage of net sales increased primarily due to increased shipping and product costs.

### Selling, Warehouse, and General and Administrative Expenses

The following table summarizes selling, warehouse, and general and administrative expense ("SG&A") by segment:

|  | Twenty-six weeks ended July 1, 2023 | % of Segment Net Sales | Twenty-six weeks ended June 25, 2022 | % of Segment Net Sales | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Hardware and Protective Solutions | $153,556 | 29.4% | $157,235 | 29.0% | $(3,679) | (2.3)% |
| Robotics and Digital Solutions | 46,800 | 37.9% | 51,150 | 41.0% | (4,350) | (8.5)% |
| Canada | 22,161 | 26.5% | 24,382 | 27.2% | (2,221) | (9.1)% |
| Consolidated | $222,517 | 30.5% | $232,767 | 30.7% | $(10,250) | (4.4)% |

Hardware and Protective Solutions SG&A decreased due to the following:

- Warehouse expense decreased $2.6 million due to lower sales volumes.
- Selling expense decreased by $0.8 million primarily due to lower variable compensation in the twenty-six weeks ended July 1, 2023.

Robotics and Digital Solutions SG&A decreased due to the following:

- G&A decreased by $3.4 million. The decrease was primarily related to reduced legal and consulting expense in 2023, 2022 saw increased legal expense associated with the litigation with Hy-Ko Products Company LLC.
- Warehouse expense decreased by $1.9 million primarily due to the shift from full-service keys, which have a higher warehousing cost, to self-service keys.
- Selling expense increased by $1.0 million primarily due to higher variable selling expenses related to self-service key sales and increased variable compensation in the twenty-six weeks ended July 1, 2023.

Canada SG&A decreased due to the following:

- Warehouse expense decreased by $1.6 million primarily due to lower sales volume and improved operational efficiencies.
- G&A increased by $0.3 million primarily due to decreased variable compensation.

### Other Operating Expenses

Depreciation expense increased $3.1 million due to increased capital spend on key duplicating kiosks and machines, merchandising racks, and facility relocations.

Amortization expense was comparable to prior year quarter.

In the twenty-six weeks ended July 1, 2023, other expense consisted primarily of a $4.2 million loss on the revaluation of the contingent consideration associated with the acquisition of Resharp and Instafob, (see Note 15 - Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements for additional information). We also recorded exchange rate gains of $0.4 million in the twenty-six weeks ended July 1, 2023.

In the twenty-six weeks ended June 25, 2022, other income consisted primarily of a $3.6 million gain on the revaluation of the contingent consideration associated with the acquisition of Resharp and Instafob. We also recorded exchange rate gains of $0.5 million in the twenty-six weeks ended June 25, 2022.

### Income from Operations

|  | Twenty-six weeks ended July 1, 2023 | Twenty-six weeks ended June 25, 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Hardware and Protective Solutions | $531 | $8,132 | $(7,601) | (93.5)% |
| Robotics and Digital Solutions | 14,836 | 17,707 | (2,871) | (16.2)% |
| Canada | 6,519 | 10,783 | (4,264) | (39.5)% |
| Total segment income from operations | $21,886 | $36,622 | $(14,736) | (40.2)% |

Income from operations in our Hardware and Protective Solutions segment decreased $7.6 million due to the changes in sales, cost of sales, and SG&A expenses described above.

Income from operations in our Robotics and Digital Solutions segment decreased by $2.9 million primarily due to the changes in sales, cost of sales, and SG&A expenses described above, offset by an increase of $7.8 million in other income driven by the changes in revaluation of the contingent consideration described above.

Canada's income from operations decreased by $4.3 million primarily due to the changes in sales, cost of sales, and SG&A expenses described above. Canada also recorded exchange rate gains of $0.2 million in the twenty-six weeks ended July 1, 2023.

### Interest Expense

Interest expense, net, increased $12.0 million due higher interest rates in the twenty-six weeks ended July 1, 2023.

### Income Taxes

For the twenty-six weeks ended July 1, 2023 and twenty-six weeks ended June 25, 2022, the effective income tax rate was 67.8% and 44.4%, respectively. The Company recorded an income tax benefit for the twenty-six weeks ended July 1, 2023 of $9,679 based on a pre-tax loss of $14,266, and an income tax provision for the twenty-six weeks ended June 25, 2022 of $5.5 million based on a pre-tax income of $12.5 million.

In 2023, the Company's effective tax rate differed from the U.S. federal statutory tax rate primarily due to Global Intangible Low-Taxed Income ("GILTI") from the Canadian subsidiary. In addition, the effective tax rate differed from the U.S. federal statutory tax rate for 2023 due to state and foreign income taxes and certain non-deductible expenses. The Company anticipates that the income tax benefit recorded through July 1, 2023 will reverse to an income tax provision by the end of the fiscal year based on the forecasted income throughout the remainder of the year.

In 2022, the effective rate differed from the federal statutory rate due to non-deductible stock compensation, an estimated increase in GILTI from the Company's Canadian operations, and state and foreign income taxes.

### NON-GAAP FINANCIAL MEASURES

Adjusted EBITDA is a non-GAAP financial measure and is the primary basis used to measure the operational strength and performance of our businesses, as well as to assist in the evaluation of underlying trends in our businesses. This measure eliminates the significant level of noncash depreciation and amortization expense that results from the capital-intensive nature of our businesses and from intangible assets recognized in business combinations. It is also unaffected by our capital and tax structures, as our management excludes these results when evaluating our operating performance. Our management uses this financial measure to evaluate our consolidated operating performance and the operating performance of our operating segments and to allocate resources and capital to our operating segments. Additionally, we believe that Adjusted EBITDA is useful to investors because it is one of the bases for comparing our operating performance with that of other companies in our industries, although our measure of Adjusted EBITDA may not be directly comparable to similar measures used by other companies.

The following table presents a reconciliation of Net (loss) income, the most directly comparable financial measure under GAAP, to Adjusted EBITDA for the periods presented:

*(dollars in thousands)*

|  | Thirteen Weeks Ended July 1, 2023 | Thirteen Weeks Ended June 25, 2022 | Twenty-six Weeks Ended July 1, 2023 | Twenty-six Weeks Ended June 25, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $4,545 | $8,816 | $(4,587) | $6,929 |
| Income tax (benefit) expense | (1,823) | 6,424 | (9,679) | 5,532 |
| Interest expense, net | 18,075 | 12,533 | 36,152 | 24,161 |
| Depreciation | 13,800 | 14,172 | 30,505 | 27,426 |
| Amortization | 15,578 | 15,566 | 31,150 | 31,087 |
| EBITDA | $50,175 | $57,511 | $83,541 | $95,135 |
| Stock compensation expense | 3,405 | 2,286 | 6,042 | 8,304 |
| Restructuring and other(1) | 1,440 | 513 | 2,848 | 565 |
| Litigation expense (2) | — | 2,703 | 260 | 3,713 |
| Transaction and integration expense (3) | 510 | 1,438 | 1,310 | 2,215 |
| Change in fair value of contingent consideration | 2,452 | (2,175) | 4,167 | (3,645) |
| Adjusted EBITDA | $57,982 | $62,276 | $98,168 | $106,287 |

(1) Includes consulting and other costs associated with distribution center relocations and corporate restructuring activities. 2023 includes costs associated with the Cybersecurity Incident that occurred in May 2023, see Note 6 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements for additional information.

(2) Litigation expense includes legal fees associated with our litigation with Hy-Ko Products Company LLC.

(3) Transaction and integration expense includes professional fees and other costs related to the CCMP secondary offerings in 2022 and 2023.

The following tables presents a reconciliation of segment operating income, the most directly comparable financial measure under GAAP, to segment Adjusted EBITDA for the periods presented.

| Thirteen weeks ended July 1, 2023 | Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Operating income | $4,367 | $10,374 | $6,056 | $20,797 |
| Depreciation and amortization | 19,028 | 9,110 | 1,240 | 29,378 |
| Stock compensation expense | 2,865 | 329 | 211 | 3,405 |
| Restructuring and other | 1,128 | 202 | 110 | 1,440 |
| Litigation expense | — | — | — | — |
| Transaction and integration expense | 459 | 51 | — | 510 |
| Change in fair value of contingent consideration | — | 2,452 | — | 2,452 |
| Adjusted EBITDA | $27,847 | $22,518 | $7,617 | $57,982 |

| Thirteen weeks ended June 25, 2022 | Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Operating income | $10,079 | $10,305 | $7,389 | $27,773 |
| Depreciation and amortization | 17,664 | 10,845 | 1,229 | 29,738 |
| Stock compensation expense | 1,374 | 220 | 692 | 2,286 |
| Restructuring and other | 479 | 34 | — | 513 |
| Litigation expense | — | 2,703 | — | 2,703 |
| Transaction and integration expense | 1,240 | 198 | — | 1,438 |
| Change in fair value of contingent consideration | — | (2,175) | — | (2,175) |
| Adjusted EBITDA | $30,836 | $22,130 | $9,310 | $62,276 |

| Twenty-six weeks ended July 1, 2023 | Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Operating income | $531 | $14,836 | $6,519 | $21,886 |
| Depreciation and amortization | 37,571 | 21,675 | 2,409 | 61,655 |
| Stock compensation expense | 5,070 | 611 | 361 | 6,042 |
| Restructuring and other | 2,385 | 353 | 110 | 2,848 |
| Litigation expense | — | 260 | — | 260 |
| Transaction and integration expense | 1,169 | 141 | — | 1,310 |
| Change in fair value of contingent consideration | — | 4,167 | — | 4,167 |
| Adjusted EBITDA | $46,726 | $42,043 | $9,399 | $98,168 |

30 \| July 1, 2023 Form 10-Q

| Twenty-six weeks ended June 25, 2022 | Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Operating income | $8,132 | $17,707 | $10,783 | $36,622 |
| Depreciation and amortization | 34,720 | 21,328 | 2,465 | 58,513 |
| Stock compensation expense | 6,562 | 1,050 | 692 | 8,304 |
| Restructuring and other | 525 | 40 | — | 565 |
| Litigation expense | — | 3,713 | — | 3,713 |
| Transaction and integration expense | 1,927 | 288 | — | 2,215 |
| Change in fair value of contingent consideration | — | (3,645) | — | (3,645) |
| Adjusted EBITDA | $51,866 | $40,481 | $13,940 | $106,287 |

### LIQUIDITY AND CAPITAL RESOURCES

Our working capital (current assets minus current liabilities) position of $383.6 million as of July 1, 2023 represents a decrease of $32.6 million from the December 31, 2022 level of $416.2 million. We expect to generate sufficient operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets, although there can be no assurance of our ability to do so. However, disruption and volatility in the global capital markets, could impact our capital resources and liquidity in the future.

The following table presents the key categories of our consolidated statements of cash flows:

|  | Twenty-six weeks ended July 1, 2023 | Twenty-six weeks ended June 25, 2022 | $ Change |
| --- | ---: | ---: | ---: |
| Net cash provided by operating activities | $115,046 | $14,773 | $100,273 |
| Net cash used for investing activities | (37,554) | (31,421) | (6,133) |
| Net cash (used for) provided by financing activities | (69,963) | 19,290 | (89,253) |
| Net increase in cash and cash equivalents | 6,575 | 3,118 | 3,457 |

### Operating Cash Flows:

Net Cash provided by operating activities for the twenty-six weeks ended July 1, 2023 was favorably impacted by reduced inventory as part of the company's ongoing strategic initiative to lower inventory on hand during 2023 following the build up of inventory in prior years due to inflation and recent supply chain challenges. Additionally we saw increased accounts payable due to the timing of inventory purchases and payments.

Net cash provided by operating activities for the twenty-six weeks ended June 25, 2022 was unfavorably impacted by (1) increased inventory for the spring and summer busy season and new business wins, and (2) an increase in accounts receivable due to higher sales.

### Investing Cash Flows:

### Capital Expenditures:

Cash of $37.0 million and $28.9 million was used in the twenty-six weeks ended July 1, 2023 and twenty-six weeks ended June 25, 2022, respectively, to invest in: new engraving and key duplicating kiosks in the RDS segment, new merchandising racks, and leasehold improvements in new distribution facilities in the Hardware and Protective Solutions segment.

### Acquisitions:

During the twenty-six weeks ended June 25, 2022 we acquired Monkey Hook for a total purchase price of $2.8 million, which included $0.3 million in hold-back that remained payable to the seller as of December 31, 2022. In the twenty-six weeks ended July 1, 2023, hold-back of $0.3 million was paid to satisfy the full purchase price. See Note 4 - Acquisitions of the Notes to Condensed Consolidated Financial Statements for additional information.

### Financing Cash Flows:

### Term Loan:

The Company used $4.3 million of cash for principal payments on the senior term loan. As of July 1, 2023, we have outstanding borrowings of $836.1 million on the term loan. See Note 9 - Long-term Debt of the Notes to Condensed Consolidated Financial Statements for additional information.

### ABL Revolver:

Our revolver repayments, net of draws, used cash of $64.0 million in the twenty-six weeks ended July 1, 2023 as part of our plan to pay down debt. In the twenty-six weeks ended June 25, 2022 revolver draws, net of repayments, provided $24.0 million of cash.

### Stock Option Exercises:

In the twenty-six weeks ended July 1, 2023 and twenty-six weeks ended June 25, 2022 the Company received $0.6 million and $1.1 million from the exercise of stock options, respectively.

### OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Significant accounting policies and estimates are summarized in the Notes to the Condensed Consolidated Financial Statements. Some accounting policies require management to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts, and other information from outside sources, as appropriate. Management believes that these estimates and assumptions are reasonable based on the facts and circumstances as of July 1, 2023, however, actual results may differ from these estimates under different assumptions and circumstances.

There have been no material changes to our critical accounting policies and estimates which are discussed in the “Critical Accounting Policies and Estimates” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on February 27, 2023.

### Recent Accounting Pronouncements

See “Note 3 - Recent Accounting Pronouncements” of the Notes to Condensed Consolidated Financial Statements.

## Market risk

As filed, 1,696 characters.

### INTEREST RATE EXPOSURE

We are exposed to the impact of interest rate changes as borrowings under the Senior Facilities bear interest at variable interest rates. It is our policy to enter into interest rate swaps only to the extent considered necessary to meet our objectives.

Based on our exposure to variable rate borrowings at July 1, 2023, after consideration of our SOFR floor rate and interest rate swap agreements, a one percent (1%) change in the weighted average interest rate for a period of one year would change the annual interest expense by approximately $4.8 million.

### FOREIGN CURRENCY EXCHANGE

We are exposed to foreign exchange rate changes of the Canadian and Mexican currencies as they impact the $158.7 million tangible and intangible net asset value of our Canadian and Mexican subsidiaries as of July 1, 2023. The foreign subsidiaries net tangible assets were $99.5 million and the net intangible assets were $59.2 million as of July 1, 2023.

We utilize foreign exchange forward contracts to manage the exposure to currency fluctuations in the Canadian dollar versus the U.S. Dollar. See Note 14 - Derivatives and Hedging of the Condensed Notes to the accompanying Condensed Consolidated Financial Statements.

### COMMODITY PRICE RISK

Our transportation costs are exposed to fluctuations in the price of fuel and some of our products contain commodity-priced materials. The Company regularly monitors commodity trends and works to mitigate any material exposure to commodity price risk by having alternative sourcing plans in place, limiting supplier concentrations, passing commodity-related inflation to customers, and continuing to scale its distribution networks.

## Controls and procedures

As filed, 1,350 characters.

### DISCLOSURE CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of July 1, 2023, in ensuring that material information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

### CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the twenty-six weeks ended July 1, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 166 characters.

There have been no material changes to the risks from those disclosed in the Form 10-K filed on February 27, 2023 with the Securities and Exchange Commission (“SEC”).

Filed Aug 8, 2023.
Source: SEC EDGAR, the filing index for accession 0001822492-23-000147. Last ingested by Listed: Nov 6, 2026, 12:41 ET. No prices; not investment advice.