Hillman Solutions Corp.: Form 10-Q for the period ended Sep 28, 2024

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 30, 2023.

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 our and our customers’, suppliers’ and other business partners’ 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 cyber security 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; or (11) 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 22, 2024. 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, Hillman Solutions Corp. and its wholly-owned subsidiaries (collectively, “Hillman Group”), which had net sales of $393.3 million in the thirteen weeks ended September 28, 2024 and $1,123.0 million in the thirty-nine weeks ended September 28, 2024. Hillman sells its products to hardware stores, home improvement centers, mass merchants, pet supply stores, and other retail outlets principally in the United States, Canada, and Mexico. Product lines include thousands of small hardware parts such as fasteners and related 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

Acquisition of Koch Industries, Inc.

On January 11, 2024, we completed the acquisition of Koch Industries, Inc. ("Koch"), a provider and merchandiser of rope and twine, chain and wire rope, and related hardware products for a total purchase price of $23.8 million. Koch has business operations throughout North America and its financial results reside in our Hardware and Protective Solutions reportable segment.

Term Loan Repricing

On March 26, 2024, we entered into a Repricing Amendment (2024 Repricing Amendment) on our existing Senior Term Loan due July 14, 2028. The 2024 Repricing Amendment (i) reduces the interest rate per annum and (ii) implements a 1% prepayment premium for the existing Term Loan to apply to Repricing Transactions that occur within six months after the effective date of the 2024 Repricing Amendment. In connection with the closing of the 2024 Repricing Amendment, we expensed $3.0 million consisting of $1.6 million of existing fees written off and $1.5 million in new fees expensed. We capitalized an additional $33.0 thousand primarily for the payment of upfront lender fees (original issue discount).

Acquisition of Intex DIY, Inc.

On August 23, 2024, the Company completed the acquisition of Intex DIY, Inc. ("Intex"), a leading supplier of wiping cloths, consumable rags, and cleaning textiles for a total purchase price of $34.0 million. This acquisition expands Hillman’s offerings in the cleaning products category. Intex is based in Georgia and sells to customers located throughout North America and its financial results will reside in the Company's Hardware and Protective Solutions reportable segment.

True Value Bankruptcy

On October 14, 2024, True Value Company, LLC and certain of its affiliates (collectively, "True Value"), a hardware brand and wholesaler selling to 4,500 independently operated locations, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware. True Value accounted for $9.7 million and $29.4 million of our net sales for the thirteen and thirty-nine weeks ended September 28, 2024, equating to approximately 3% of our net sales in each period. Of our net sales to True Value, approximately 77% are sales made directly to independently owned True Value locations and approximately 23% are made to True Value's wholesale warehouse.

Additionally, True Value accounted for approximately $8.8 million of our accounts receivable, net of rebates and discounts, as of the October 14, 2024 Chapter 11 bankruptcy filing date. True Value accounted for approximately $7.9 million of our accounts receivable, net of rebates and discounts, as of September 28, 2024.

Concurrent with the announcement of the Chapter 11 bankruptcy filing, True Value also announced that it had entered into an agreement to sell substantially all of its business operations to another home improvement industry peer as a "stalking horse", or lead, bidder and would initiate a competitive bidding process under Section 363 of the bankruptcy code designed to achieve the highest or otherwise best value for True Value.

We are currently assessing the impacts of True Value's Chapter 11 reorganization and proposed sale on our future net sales to True Value and on the collectibility of our outstanding accounts receivable. We believe the Chapter 11 reorganization will negatively impact future net sales; however, such impact could be partially offset by the ability of the independently owned locations, which are not debtors subject to the Chapter 11 filing, to purchase our products through other hardware wholesalers that are also our customers. With respect to collectibility of our accounts receivable outstanding as of September 28, 2024, we recorded a charge of $7.8 million representing the net receivable balances less the amount we expect to recover as an administrative claim pursuant to Section 503(b)(9) of the bankruptcy code. The loss was recorded in selling, warehouse, general and administrative expenses. We recorded an additional $0.9 million in reserve in the fourth quarter for receivables generated in the fourth quarter through the bankruptcy date.

If True Value were unsuccessful with their Chapter 11 reorganization, and instead the business were liquidated, the potential adverse effects due to the loss of sales to the True Value warehouse, on our business, financial condition and results of operations would be more significant.

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 improvement 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, particularly those located in China and Taiwan, because we purchase a majority of our products for resale from multiple vendors located in these countries. 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 declined in value relative to the CNY by approximately 1.3% in the thirty-nine weeks ended September 28, 2024, increased by 2.9% in 2023, and increased by 8.3% during 2022. The U.S. dollar increased in value relative to the Taiwan dollar by approximately 3.0% in the thirty-nine weeks ended September 28, 2024, declined by 0.4% in 2023, and increased by 10.8% in 2022.

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 increased in value relative to the Canadian dollar by approximately 2.1% in the thirty-nine weeks ended September 28, 2024, declined by 2.4% in 2023, and increased by 5.7% in 2022.

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 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 or maintain 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 28, 2024 vs the Thirteen weeks ended September 30, 2023

FINANCIAL SUMMARY AND OTHER KEY METRICS

• Net sales for the thirteen weeks ended September 28, 2024 were $393.3 million compared to net sales of $398.9 million for the thirteen weeks ended September 30, 2023, a decrease of approximately $5.6 million or 1.4%.
• Net income for the thirteen weeks ended September 28, 2024 was $7.4 million, or $0.04 per diluted share, compared to net income of $5.1 million, or $0.03 per diluted share for the thirteen weeks ended September 30, 2023.
• Adjusted EBITDA(1) totaled $72.6 million versus $66.8 million in the thirteen weeks ended September 28, 2024 and in the thirteen weeks ended September 30, 2023, 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 28, 2024 and the thirteen weeks ended September 30, 2023.

(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 decrease in total net sales during the third quarter of 2024 was driven primarily driven by the factors described below:

Hardware and Protective Solutions' net sales increased by $0.3 million in the thirteen weeks ended September 28, 2024 due to the following:

• Hardware net sales decreased by $3.7 million primarily due to decreased volume driven by market softness, partially offset by $10.3 million in additional sales related to the Koch acquisition.
• Protective equipment net sales increased by $4.0 million primarily driven by $6.6 million in additional sales related to the Intex acquisition, partially offset by decreased volume.

Robotics and Digital Solutions net sales in the thirteen weeks ended September 28, 2024 decreased by $3.3 million primarily driven by decreased volume of key and engraving sales.

Canada net sales decreased by $2.6 million primarily due to price decreases of $1.6 million and 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 product and shipping costs.

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

Canada cost of sales as a percentage of net sales decreased primarily due to decreased 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:

• General and administrative (“G&A”) increased $11.8 million. The increase was primarily due to a write off of $7.5 million of accounts receivable, net, due to True Value declaring bankruptcy. See Note 17 - Subsequent Events of the Notes to Condensed Consolidated Financial Statements for additional information. The remaining increase was driven by an increase in compensation and benefit expense and an increased investment into information technology.
• Selling expense increased by $3.3 million primarily due to increased compensation and benefit expense.
• Warehouse expense decreased $0.5 million primarily due to lower sales volumes along with improved operational efficiencies.

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

• Selling expense increased $0.7 million primarily due to increased variable selling expenses due to the shift from full-service keys to self-service keys, which have a higher variable selling cost.
• G&A increased by $0.9 million primarily driven by increased compensation expense along with a $0.3 million write off of accounts receivable, net, due to True Value declaring bankruptcy. See Note 17 -

Subsequent Events of the Notes to Condensed Consolidated Financial Statements for additional information.

• Warehouse expense decreased by $0.4 million primarily due to the shift from full-service keys, which have a higher warehousing cost, to self-service keys.

Canada SG&A increased due to the following:

• Selling expense increased by $0.5 million primarily due to increased variable compensation expenses.
• Warehouse expense increased by $0.4 million primarily due to costs associated with our distribution center relocation.
• G&A increased by $0.2 million primarily due to severance costs associated with restructuring and increased compensation and benefit expense.

Other Operating Expenses

Depreciation expense increased $3.5 million due to capital spend on key duplicating kiosks and merchandising racks.

Amortization expense in the thirteen weeks ended September 28, 2024 decreased by $0.2 million primarily due to lower intangible asset balances following the write down of the carrying values of intangible assets to their fair value as a result of exiting a specific product line that occurred in the fourth quarter of 2023.

In the thirteen weeks ended September 28, 2024, other income (expense) consisted primarily of a $0.5 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 addition, we recorded income related to certain rebates received of $0.3 million along with exchange rate gains of $0.1 million in the thirteen weeks ended September 28, 2024.

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.

Income from Operations

Income from operations in our Hardware and Protective Solutions segment decreased $1.3 million due to the changes in net sales, cost of sales, and SG&A expenses described above.

Income from operations in our Robotics and Digital Solutions segment decreased $5.4 million. The $5.4 million decrease is primarily due to the changes in net sales, cost of sales, and SG&A expenses described above, in addition to an increase in depreciation expense of $1.8 million due to capital spend on engraving and key duplication kiosks and machines and a decrease of $1.1 million in other income driven by the changes in revaluation of the contingent consideration described above.

Canada's income from operations decreased by $1.1 million primarily due to the changes in net sales, cost of sales and SG&A expenses described above. In the thirteen weeks ended September 28, 2024, Canada recorded exchange rate gains of $0.2 million and in the thirteen weeks ended September 30, 2023, Canada recorded exchange rate gains of $0.1 million.

Interest expense, net, decreased $1.6 million in the thirteen weeks ended September 28, 2024, primarily due to a reduction in outstanding debt and a reduction in interest rate spreads driven by the debt repricing in the first quarter of 2024 (see Note 9 - Long-term Debt of the Notes to Condensed Consolidated Financial Statements for additional information).

Income Taxes

For the thirteen weeks ended September 28, 2024 and thirteen weeks ended September 30, 2023, the effective income tax rate was 37.0% and 71.9%, respectively. The Company recorded an income tax provision for the thirteen weeks ended September 28, 2024 of $4.4 million based on a pre-tax income of $11.8 million, and 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.

In 2024, the effective tax rate differed from the U.S. federal statutory tax rate 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 2023, the effective tax rate differed from the U.S. federal statutory tax rate due to state and foreign income taxes and certain non-deductible expenses.

Thirty-nine weeks ended September 28, 2024 vs the Thirty-nine Weeks Ended

September 30, 2023

FINANCIAL SUMMARY AND OTHER KEY METRICS

• Net sales for the thirty-nine weeks ended September 28, 2024 were $1,123.0 million compared to net sales of $1,128.7 million in the thirty-nine weeks ended September 30, 2023, a decrease of approximately $5.6 million or 0.5%.
• Net income for the thirty-nine weeks ended September 28, 2024 was $18.5 million, or $0.09 per diluted share, compared to $0.5 million, or $0.00 per diluted share for the thirty-nine weeks ended September 30, 2023.
• Adjusted EBITDA(1) totaled $193.2 million versus $165.0 million in the thirty-nine weeks ended September 28, 2024 and in the thirty-nine weeks ended September 30, 2023, 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 28, 2024 and the thirty-nine weeks ended September 30, 2023.

(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 decrease in total net sales during the thirty-nine weeks ended September 28, 2024 was primarily driven by the factors described below:

Hardware and Protective Solutions' net sales increased by $15.6 million in the thirty-nine weeks ended September 28, 2024 due to the following:

• Hardware net sales increased by $11.7 million primarily driven by $31.7 million in additional sales related to the Koch acquisition offset by $13.0 million and $6.7 million in decreased volume and price, respectfully.
• Protective equipment net sales increased by $3.9 million primarily driven by $6.6 million in additional sales related to the Intex acquisition offset by $2.3 million in decreased volume.

Robotics and Digital Solutions net sales in the thirty-nine weeks ended September 28, 2024 decreased by $13.9 million primarily driven by decreased volume of key and engraving sales.

Canada net sales decreased by $7.4 million primarily due to price decreases of $4.5 million, volume decreases of $1.5 million, and 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 product and inbound shipping costs.

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

Canada cost of sales as a percentage of net sales decreased primarily due to decreased inbound 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:

• General and administrative (“G&A”) increased $19.2 million. The increase was due to a write off of $7.5 million of accounts receivable, net, due to True Value declaring bankruptcy. See Note 17 - Subsequent Events of the Notes to Condensed Consolidated Financial Statements for additional information. The remaining increase was driven by an increase in stock-based compensation expense, compensation and benefit expense, and an increased investment into information technology.
• Selling expense increased by $10.6 million primarily due to increased compensation and benefit expense.
• Warehouse expense increased $0.8 million due to inflation in labor and shipping costs.

Robotics and Digital Solutions SG&A was comparable to prior year.

Canada SG&A increased due to the following:

• Selling expense increased by $1.5 million primarily due to increased compensation and benefit expense.
• G&A increased by $1.0 million primarily driven by severance costs associated with restructuring and increased compensation and benefit expense.
• Warehouse expense increased $0.6 million primarily due to inflation in labor and shipping costs along with costs associated with our distribution center relocation.

Other Operating Expenses

Depreciation expense increased $5.6 million due to capital spend on merchandising racks.

Amortization expense in the thirty-nine weeks ended September 28, 2024 decreased by $0.9 million primarily due to lower intangible asset balances following the write down of the carrying values of intangible assets to their fair value as a result of exiting a specific product line that occurred in the fourth quarter of 2023.

In the thirty-nine weeks ended September 28, 2024, other income (expense) consisted primarily of a $0.3 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). In addition, we recorded exchange rate losses of $0.3 million in the thirty-nine weeks ended September 28, 2024. Offsetting the loss was income from certain rebates received.

In the thirty-nine weeks ended September 30, 2023, other income (expense) consisted primarily of a $2.6 million loss on the revaluation of the contingent consideration associated with the acquisition of Resharp and Instafob. We also 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. In addition, we recorded exchange rate gains of $0.4 million in the thirty-nine weeks ended September 30, 2023.

Income from Operations

Income from operations in our Hardware and Protective Solutions segment increased $27.4 million due to the changes in net sales, cost of sales, and SG&A expenses described above.

Income from operations in our Robotics and Digital Solutions segment decreased $7.2 million. The $7.2 million decrease is primarily due to the changes in net sales, cost of sales, and SG&A expenses described above, including a decrease of $2.2 million in other expense driven by the changes in revaluation of the contingent consideration described above.

Canada's income from operations decreased by $2.0 million primarily due to the changes in net sales, cost of sales and SG&A expenses described above, in addition to exchange rate losses of $0.3 million in the thirty-nine weeks ended September 28, 2024 and exchange rate gains of $0.3 million in the thirty-nine weeks ended September 30, 2023.

Interest expense, net, decreased $8.6 million in the thirty-nine weeks ended September 28, 2024, primarily due to a reduction in outstanding debt and a reduction in interest rate spreads driven by the debt repricing in the first quarter of 2024 (see Note 9 - Long-term Debt of the Notes to Condensed Consolidated Financial Statements for additional information).

Income Taxes

For the thirty-nine weeks ended September 28, 2024 and thirty-nine weeks ended September 30, 2023, the effective income tax rate was 32.8% and 87.5%, respectively. The Company recorded an income tax provision for the thirty-nine weeks ended September 28, 2024 of $9.0 million based on a pre-tax income of $27.5 million, and an income tax provision for the thirty-nine weeks ended September 30, 2023 of $3.3 million based on a pre-tax income of $3.7 million.

In 2024, the effective tax rate differed from the U.S. federal statutory tax rate 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 2023, the Company's effective tax rate differed from the U.S. federal statutory tax rate due to state and foreign income taxes and certain non-deductible expenses.

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 as well as 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 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.

(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 Koch Industries, Inc. and Intex DIY, Inc acquisitions and the CCMP secondary offerings in 2023.

(4) In the first quarter of 2024, we entered into a Repricing Amendment (2024 Repricing Amendment) on our existing Senior Term Loan due July 14, 2028 (see Note 9 - Long-term Debt of the Notes to Condensed Consolidated Financial Statements for additional information).

(5) Bankruptcy related reserves includes amounts written off in connection with the True Value Chapter 11 bankruptcy filing on October 14, 2024 (see Note 17 - Subsequent Events of the Notes to Condensed Consolidated Financial Statements for additional information).

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.

33 | September 28, 2024 Form 10-Q

LIQUIDITY AND CAPITAL RESOURCES

Our working capital position, which we define as current assets minus current liabilities, of $355.3 million as of September 28, 2024 represents an increase of $30.4 million from the December 30, 2023 level of $324.9 million. $19.6 million of the increase is related the acquisition of Koch Industries Inc that occurred in January 2024 and $21.5 million of the increase is related to the Intex DIY acquisition that occurred in August 2024. 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 condensed consolidated statements of cash flows:

Operating Cash Flows:

Net cash provided by operating activities for the thirty-nine weeks ended September 28, 2024 was unfavorably impacted by increases in accounts receivable due to the seasonality of our business as well as accounts receivable generated by the Koch business post acquisition. Additionally, we saw increased accounts payable due to the timing of inventory purchases and payments.

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 inflation and supply chain challenges. Additionally, we saw increased accounts payable due to the timing of inventory purchases and payments.

Investing Cash Flows:

Capital Expenditures:

Cash of $64.2 million and $52.1 million was used in the thirty-nine weeks ended September 28, 2024 and thirty-nine weeks ended September 30, 2023, respectively, to invest in new key duplicating and engraving kiosks and merchandising racks.

Acquisitions:

On January 11, 2024, the Company completed the acquisition of Koch Industries, Inc. ("Koch"), a premier provider and merchandiser of rope and twine, chain and wire rope, and related hardware products for a total purchase price of $23.8 million. See Note 4 - Acquisitions of the Notes to Condensed Consolidated Financial Statements for additional information.

On August 23, 2024, the Company completed the acquisition of Intex DIY, Inc. ("Intex"), a leading supplier of wiping cloths, consumable rags, and cleaning textiles for a total purchase price of $34.0 million. 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 September 28, 2024, we have outstanding borrowings of $747.6 million on the term loan. In August 2023, the Company made a $80.0 million prepayment against the outstanding term loan balance without payment of a premium or penalty. See Note 9 - Long-term Debt of the Notes to Condensed Consolidated Financial Statements for additional information.

ABL Revolver:

We drew approximately $77.0 million on our revolver in the thirty-nine weeks ended September 28, 2024, primarily to fund seasonal inventory purchases along with the acquisitions of Koch and Intex referenced above. We were able to fully repay the draws during the thirty-nine weeks ended September 28, 2024 using cash generated from our operations. On a net basis, the activity on the revolver had no impact to our cash flows used for financing activities in the thirty-nine weeks ended September 28, 2024.

In the thirty-nine weeks ended September 30, 2023, revolver repayments, net of draws, used $25.0 million of cash as part of our plan to pay down debt.

Stock Option Exercises:

In the thirty-nine weeks ended September 28, 2024 and thirty-nine weeks ended September 30, 2023 the Company received $8.9 million and $1.6 million from the exercise of stock options, respectfully.

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 28, 2024, 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 30, 2023, as filed with the Securities and Exchange Commission on February 22, 2024.

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 28, 2024, 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 $3.9 million.

FOREIGN CURRENCY EXCHANGE

We are exposed to foreign exchange rate changes of the Canadian and Mexican currencies as they impact the $143.4 million tangible and intangible net asset value of our Canadian and Mexican subsidiaries as of September 28, 2024. The foreign subsidiaries' net tangible assets were $88.3 million and the net intangible assets were $55.1 million as of September 28, 2024.

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 28, 2024, 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 28, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On January 11, 2024, the Company completed the acquisition of Koch Industries, Inc. ("Koch") and on August 23, 2024, the Company completed its acquisition of Intex DIY, Inc. ("Intex"). SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. Accordingly, management has not assessed Koch's or Intex's internal control over financial reporting as of September 28, 2024.

There have been no material changes to the risks from those disclosed in the Form 10-K filed on February 22, 2024 with the Securities and Exchange Commission (“SEC”).