Hillman Solutions Corp.: Form 10-Q for the period ended Sep 30, 2023

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 $398.9 million in the thirteen weeks ended September 30, 2023 and $1,128.7 million in the thirty-nine weeks ended September 30, 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, and Mexico. 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

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 thirty-nine weeks ended September 30, 2023, the Cybersecurity Incident related costs net of an expected insurance receivable totaled $1.0 million. There were no additional expenses recorded in the thirteen weeks ended September 30, 2023. 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, housing market trends, 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 5.8% in the thirty-nine weeks ended September 30, 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 4.9% in the thirty-nine weeks ended September 30, 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 0.2% in the thirty-nine weeks ended September 30, 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 September 30, 2023 vs the Thirteen weeks ended September 24, 2022

FINANCIAL SUMMARY AND OTHER KEY METRICS

• Net sales for the thirteen weeks ended September 30, 2023 were $398.9 million compared to net sales of $378.5 million for the thirteen weeks ended September 24, 2022, an increase of approximately $20.4 million or 5.4%.
• Net income for the thirteen weeks ended September 30, 2023 was $5.1 million, or $0.03 per diluted share, compared to a net loss of $9.5 million, or $(0.05) per diluted share for the thirteen weeks ended September 24, 2022.
• Adjusted EBITDA(1) totaled $66.8 million versus $59.0 million in the thirteen weeks ended September 30, 2023 and in the thirteen weeks ended September 24, 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 September 30, 2023 and the thirteen weeks ended September 24, 2022.

(dollars in thousands)

(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

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

Hardware and Protective Solutions net sales increased by $25.4 million in the thirteen weeks ended September 30, 2023 due to the following:

• Hardware net sales increased by $17.5 million driven by $13.8 million of volume increases driven by new business wins and promotions and $3.7 million in price increases in response to inflationary cost pressures in the market.
• Protective equipment net sales increased by $8.0 million primarily due to $8.8 million in increased volume driven by timing of promotional and seasonal sales partially offset by $1.3 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 September 30, 2023 decreased by $0.9 million primarily driven by decreased volume in full-service key and engraving sales.

Canada net sales decreased by $4.1 million primarily due to volume decreases of $2.5 million along with an unfavorable impact of the exchange rate from Canadian dollars to U.S. dollars.

Cost of Sales (excluding depreciation and amortization)

The following table summarizes cost of sales by segment:

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

Robotics and Digital Solutions cost of sales as a percentage of net sales increased primarily due to increased product and shipping costs as well as a reduced volume of engraving sales.

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:

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

• Warehouse expense increased $3.8 million due to higher sales volumes, inflation, and additional costs associated with opening a new distribution center in the current year.
• General and administrative (“G&A”) increased by $0.8 million. The increase was primarily driven by increased stock-based compensation expense.
• Selling expense increased by $0.6 million primarily due to higher variable compensation and benefit expense in relation to the increased sales in the quarter.

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

• Warehouse expense decreased by $0.2 million primarily due to the shift from full-service keys, which have a higher warehousing cost, to self-service keys.
• G&A decreased by $25.1 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 $0.4 million primarily due to variable selling expenses related to self-service key sales.

Canada SG&A decreased due to the following:

• Warehouse expense decreased by $0.5 million primarily due to lower sales volumes along with improved operational efficiencies.
• G&A was comparable to prior year quarter.
• Selling expense increased by $0.2 million primarily due to increased variable selling expenses.

Other Operating Expenses

Amortization and depreciation expense in the thirteen weeks ended September 30, 2023 was comparable to the prior year quarter.

In the thirteen weeks ended September 30, 2023, other income (expense) consisted primarily of a $1.6 million gain 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).

In the thirteen weeks ended September 24, 2022, other income (expense) consisted primarily of a $0.7 million loss on the revaluation of the contingent consideration associated with the acquisition of Resharp and Instafob. We also recorded exchange rate losses of $0.6 million in the thirteen weeks ended September 24, 2022.

Income (Loss) from Operations

Income from operations in our Hardware and Protective Solutions segment increased $11.3 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 increased $26.8 million. The $26.8 million increase is primarily due to reduced legal and consulting expense in 2023, as 2022 saw increased legal expense associated with the litigation with Hy-Ko Products Company LLC along with a decrease in depreciation expense of $0.4 million due to certain assets becoming fully depreciated. This was partially offset by a decrease of $2.3 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 $2.9 million primarily due to the changes in sales and offsetting changes in cost of sales and SG&A expenses described above in addition to exchange rate losses of $0.4 million. In the thirteen weeks ended September 24, 2022 Canada recorded exchange rate gains of $0.2 million.

Interest expense, net, increased $2.0 million due higher interest rates in the thirteen weeks ended September 30, 2023, partially offset by a reduction in outstanding debt.

Income Taxes

For the thirteen weeks ended September 30, 2023 and thirteen weeks ended September 24, 2022, the effective income tax rate was 71.9% and 37.5%, respectively. The Company recorded an income tax provision for the thirteen weeks ended September 30, 2023 of $13.0 million based on a pre-tax income of $18.0 million, and an income tax benefit for the thirteen weeks ended September 24, 2022 of $5.7 million based on a pre-tax loss of $(15.1) million.

In 2023, 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. 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.

Thirty-nine weeks ended September 30, 2023 vs the Thirty-nine weeks ended September 24, 2022

FINANCIAL SUMMARY AND OTHER KEY METRICS

• Net sales for the thirty-nine weeks ended September 30, 2023 were $1,128.7 million compared to net sales of $1,135.7 million for the thirty-nine weeks ended September 24, 2022, a decrease of approximately $7.0 million or 0.6%.
• Net income for the thirty-nine weeks ended September 30, 2023 was $0.5 million, or $0.00 per diluted share, compared to net loss of $2.5 million, or $(0.01) per diluted share for the thirty-nine weeks ended September 24, 2022.
• Adjusted EBITDA(1) totaled $165.0 million versus $165.3 million in the thirty-nine weeks ended September 30, 2023 and thirty-nine weeks ended September 24, 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 thirty-nine weeks ended September 30, 2023 and the thirty-nine weeks ended September 24, 2022.

(dollars in thousands)

(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

The decline in total net sales during the thirty-nine weeks ended September 30, 2023 was driven primarily driven by the factors described below:

Hardware and Protective Solutions net sales increased by $5.3 million in thirty-nine weeks ended September 30, 2023 due to the following:

• Hardware net sales increased by $32.5 million driven by $22.6 million in price increases in response to inflationary cost pressures in the market and $9.9 million in increased volume due to new business wins.
• Protective equipment net sales decreased by $27.2 million primarily due to a $30.1 million decrease in volume driven in part by $16.8 million of COVID-19 related sales in 2022 with no material comparable COVID-19 sales in 2023, partially offset by $2.8 million in price increases.

Robotics and Digital Solutions net sales in the thirty-nine weeks ended September 30, 2023 decreased by $2.1 million compared to the thirty-nine weeks ended September 24, 2022 primarily due to decreases in full-service key and engraving volume.

Canada net sales decreased by $10.2 million primarily due to $6.1 million unfavorable impact of the exchange rate from Canadian dollars to U.S. dollars along with volume decreases of $3.2 million.

Cost of Sales (excluding depreciation and amortization)

The following table summarizes cost of sales by segment:

Hardware and Protective Solutions cost of sales as a percentage of net sales decreased primarily due to the impact of the price increases referenced above partially offset by higher 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 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:

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

• Warehouse expense increased $1.2 million due to higher sales volumes, inflation, and additional costs associated with opening a new distribution center in the current year.
• General and administrative (“G&A”) increased by $0.5 million. The increase was primarily driven by increased stock-based compensation expense.

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

• G&A decreased by $28.5 million. The decrease was primarily related to reduced legal and consulting expense in 2023 as 2022 saw $29.0 million in legal expense associated with the litigation with Hy-Ko Products Company LLC.
• Warehouse expense decreased by $2.1 million primarily due to the shift from full-service keys, which have a higher warehousing cost, to self-service keys.
• Selling expense increased by $1.4 million primarily due to higher variable selling expenses related to self-service key sales and increased variable compensation.

Canada SG&A decreased due to the following:

• Warehouse expense decreased by $2.2 million primarily due to lower sales volume and improved operational efficiencies.
• G&A decreased by $0.2 million primarily due to decreased variable compensation.

Other Operating Expenses

Depreciation expense in the thirty-nine weeks ended September 30, 2023 increased $3.2 million due to increased capital spend on key duplicating kiosks and machines, merchandising racks, and facility relocations.

Amortization expense in the thirty-nine weeks ended September 30, 2023 was comparable to prior year.

In the thirty-nine weeks ended September 30, 2023, other expense consisted primarily of a $2.6 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 received $0.6 million in benefits from the state and local governments associated with our new facilities in the thirty-nine weeks ended September 30, 2023. We also recorded exchange rate gains of $0.4 million in the thirty-nine weeks ended September 30, 2023.

In the thirty-nine weeks ended September 24, 2022, other income consisted primarily of a $2.9 million gain on the revaluation of the contingent consideration associated with the acquisition of Resharp and Instafob.

Income from Operations

Income from operations in our Hardware and Protective Solutions segment increased $3.7 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 increased by $24.0 million primarily due to the changes in sales, cost of sales, and SG&A expenses described above, offset by an increase of $5.5 million million in other income driven by the changes in revaluation of the contingent consideration described above.

Canada's income from operations decreased by $7.2 million primarily due to the changes in sales, cost of sales, and SG&A expenses described above. Canada also recorded exchange rate losses of $0.4 million in the thirty-nine weeks ended September 30, 2023.

Interest Expense

Interest expense, net, increased $14.0 million due higher interest rates in the thirty-nine weeks ended September 30, 2023, partially offset by a reduction in outstanding debt.

Income Taxes

For the thirty-nine weeks ended September 30, 2023 and thirty-nine weeks ended September 24, 2022, the effective income tax rate was 87.5% and 5.5%, respectively. The Company recorded an income tax provision for the thirty-nine weeks ended September 30, 2023 of $3,278 based on pre-tax income of $3,748, and an income tax benefit for the thirty-nine weeks ended September 24, 2022 of $(0.1) million based on a pre-tax loss of $(2.7) million.

In 2023, the Company's 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.

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)

(1) Includes consulting and other costs associated with severance related to our 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.

30 | September 30 2023 Form 10-Q

LIQUIDITY AND CAPITAL RESOURCES

Our working capital (current assets minus current liabilities) position of $362.4 million as of September 30, 2023 represents a decrease of $53.8 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:

Operating Cash Flows:

Net Cash provided by operating activities for the thirty-nine weeks ended September 30, 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 recent supply chain challenges and inflation. Additionally we saw increased accounts payable due to the timing of purchases and payments.

Net cash provided by operating activities for the thirty-nine weeks ended September 24, 2022 was unfavorably impacted by (1) reduced accounts payable resulting from lower purchases and (2) increased accounts receivable and inventory resulting from price increases and inflation.

Investing Cash Flows:

Capital Expenditures:

Cash of $52.1 million and $46.4 million was used in the thirty-nine weeks ended September 30, 2023 and thirty-nine weeks ended September 24, 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 thirty-nine weeks ended September 24, 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 thirty-nine weeks ended September 30, 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 $86.4 million of cash for principal payments on the senior term loan. In August 2023, the Company made a $80.0 million dollar prepayment against the outstanding term loan balance without payment of a premium or penalty. As of September 30, 2023, we have outstanding borrowings of $754.0 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 $25.0 million in the thirty-nine weeks ended September 30, 2023 as part of our plan to pay down debt. In the thirty-nine weeks ended September 24, 2022, revolver draws, net of repayments, provided $7.0 million of cash.

Stock Option Exercises:

In the thirty-nine weeks ended September 30, 2023 and thirty-nine weeks ended September 24, 2022 the Company received $1.6 million and $1.9 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 September 30, 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.

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 September 30, 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 $4.4 million.

FOREIGN CURRENCY EXCHANGE

We are exposed to foreign exchange rate changes of the Canadian and Mexican currencies as they impact the $151.2 million tangible and intangible net asset value of our Canadian and Mexican subsidiaries as of September 30, 2023. The foreign subsidiaries net tangible assets were $93.6 million and the net intangible assets were $57.6 million as of September 30, 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.

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 September 30, 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 thirteen weeks ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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”).