Hillman Solutions Corp.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Hillman Solutions Corp. is a leading North American provider of hardware and protective solutions, specializing in fasteners, home improvement products, and robotics.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Hillman Solutions Corp (HLMN) operates a fairly complex business, with multiple business segments, multiple different revenue streams and multiple layers of accounting involved with its consolidated financials, making it slightly hard to understand.

Business Overview

Hillman Solutions Corp. (HLMN) is a leading North American provider of hardware and protective solutions. They operate in three main segments: Hardware and Protective Solutions, Robotics and Digital Solutions, and Canada. The Hardware and Protective Solutions segment is responsible for manufacturing and sourcing fasteners, home organization products, and safety-related personal protective equipment. The Robotics and Digital Solutions segment produces automated key duplication and engraving equipment, and it provides maintenance and software solutions for those. The Canadian segment is responsible for the distribution and sale of hardware and protective products, as well as providing related services to its customers.

Revenue Distribution

Hillman operates primarily as a distributor, not a manufacturer. It gets most of its revenue from selling products to home improvement stores, retailers, and wholesalers. Here’s a breakdown of their revenue by segment:

  • Hardware and Protective Solutions: This is the largest segment, accounting for the majority of Hillman’s sales. They provide a wide range of products, including screws, nuts, bolts, automotive parts, and personal protective equipment (PPE) which are used in a variety of applications, from home improvement to industrial manufacturing.
  • Robotics and Digital Solutions: This is the smallest segment, yet it’s their future. It is composed mainly of key duplication equipment, services and their proprietary software.
  • Canada: This segment operates a distribution business in Canada, primarily selling through retailers and industrial distributors.

A large percentage of their revenue comes from their biggest customer, Home Depot. While this gives a major boost in revenue, it creates overreliance on a single client, which could be bad for their moat and business performance.

  • Demand for Home Improvement: Demand for their main segment is heavily dependent on consumer spending on home renovations, maintenance, and repair activities.
  • Increase in E-commerce: Home improvement retail is increasingly moving online, which will likely affect Hillman in the medium term.
  • Growth in Specialty Segments: Increased regulation and consumer awareness is pushing growth in high-value products like safety and personal protective equipment.
  • Adoption of Automation: The Robotics and Digital Solutions segment could see gains from companies seeking efficiency through automation.
  • Focus on Supply Chain Efficiency: Companies are increasingly focusing on optimizing their supply chains for cost and time effectiveness, and this can have a major impact on companies like Hillman.

Competitive Landscape

The industry is very fragmented with both local and big companies operating and the competition between them is fierce. Here are a few of them:

  • Fastenal: A major player focusing on industrial and construction fasteners, known for its extensive service and scale.
  • W.W. Grainger: A big industrial supplies provider with a broad offering, known for its direct sales channel and wide distribution.
  • Ace Hardware: A significant player in the retail hardware industry with a cooperative structure.
  • Home Depot & Lowe’s: The customers, but also competitors. Both have their own private-label brands.

What Makes HLMN Different?

Hillman is different from its competitors in its focus on the long-tail product market. They have more than 100k products in their portfolio, but most of these are relatively less demanded products, which larger players do not focus on. It results in less competition for them and makes the customer depend on them to a great degree.

Moat Analysis

Economic Moats: Hillman does not have a strong moat, and therefore its long-term competitive edge is not as high as some other companies.

  • Switching Costs: HLMN does not possess a strong moat based on switching costs. As they are mostly a distributor, the switching costs for their customers are very low. In the hardware and protective solutions segment, their products are generally considered commodities, and customers will readily change them based on price differences. For example, home improvement retailers like Home Depot can quickly source similar items and change suppliers based on price.
  • Intangible Assets: It is true that HLMN has some brand recognition in the retail segment, but that can easily be replicated by other companies. Moreover, this brand does not have high influence and is not differentiated. The brand awareness for a specific brand of fastener is very low among consumers and not a real competitive edge in a brutal market.
  • Network Effects: This moat does not apply to the business.
  • Cost Advantages: The company does have some cost advantages because of its scale and relationships with manufacturers. It also has its own distribution network and can offer low prices to its customers, but those advantages are fairly easily replicated by other companies with the resources.

Moat Rating: Based on all the findings, I’m giving HLMN a 3/5. They have some sources of competitive advantages but those are not durable enough to create a wide moat.

Risks to the Moat and Business Resilience

Several risks could potentially harm Hillman’s moat and business:

  • Intensified competition: As the market matures, major players may increase focus on the long-tail and create more intense competition. The rise of e-commerce can also make it easier for new entrants to grab their market share.
  • Over-reliance on major clients: The largest part of their sales comes from Home Depot. The over-dependence can be very dangerous for the business in case Home Depot starts sourcing from other suppliers or stops their purchases.
  • Economic downturn: The demand for their products is dependent on economic conditions. A decline can lead to lower revenue and reduce their profits.
  • Technological disruptions: The rise of automation and other technologies can make it easier for suppliers to directly reach their customers. It can potentially eliminate the distributor (middlemen) role, which is the core of Hillman.
  • Fluctuations in commodity prices: As they are a distributor of steel, aluminum, and other commodities, large fluctuations in these prices could impact their costs and reduce their profits.
  • Fluctuations in currency exchange rates: Because the company sells a portion of its products in foreign markets, adverse changes in currency rates can reduce profits.

A great deal of Hillman’s financials is dependent on their acquisition of Koch Industries, which resulted in additional debt that will further decrease the net profit.

Hillman possesses an average level of resilience due to its vast portfolio, and its focus on a diversified list of products, but does have some significant weaknesses like over-reliance on a single customer, Home Depot.

Financials (Based on the latest 10-Q and 10-K filings):

Hillman’s financial performance is mixed, with high revenue growth but declining profitability. Here’s a detailed look:

Income Statement

The company has two reporting periods, 13 weeks and 39 weeks. So, the data has to be compared across periods with same number of weeks for a reasonable review.

  • Revenue: HLMN has been consistently growing, with 2023 sales of $1.225 billion, up from 1.049 billion in the same period in 2022 and $1.059 billion in 2021. That is a CAGR of almost 8% over the last three years. The strong growth in revenues has been fueled by growth in both domestic and Canadian segments, though the domestic portion is significantly larger.
  • Cost of sales: COGS in 2023 was 71.4% compared to 67% in 2021. There is more pressure on profits.
  • Operating Expenses: The overall selling, warehouse, and general administrative expenses are also up compared to the last three years. The company has spent heavily on acquisitions, which have increased employee count, and thus the cost of this is significantly higher.
  • Net Profit: The company has seen a major decrease in its profitability over the last couple of years. Its net income has gone down significantly to $72 million in 2023 from $110 million in 2022, and $119 million in 2021. This is driven by increased costs and higher expenses, and the impact of the high inflation on business. The net income margin also shrank to 6% in 2023 from around 10% in the previous year.
  • Adjusted EBITDA The adjusted EBITDA, however, is more stable, and stands at $192 million in 2023 compared to $173 in 2022 and $180 in 2021, indicating the company’s ability to keep generating a healthy EBITDA that can be used to pay for the costs of the debt incurred.

Balance Sheet

  • Assets: Total assets stand at $3.4 billion, an increase from last year. This was driven by acquisitions and increase in inventories.
  • Liabilities: Their liabilities have increased significantly to $2.2 billion in 2023 from $1.9 billion in 2022. The increase in debt is primarily due to acquisitions.
  • Equity: Shareholders’ equity stands at $1.22 billion, an increase over previous years due to profits and increase in stock value.
  • High Debt: The debt to equity ratio for the company is above 1, which is a cause of concern, as it means that the company may struggle to repay its obligations if it gets into trouble.

Cash Flow

  • Operating Cash Flow: The net cash provided by operating activities has been increasing, standing at $193 million in 2023 from $99 million in 2022. This shows strong ability to generate cash.
  • Investing Cash Flow: Investing cash flow is negative due to the increased capital expenditure. It was -$46 million in 2023, as the company is spending more in acquisitions and new investments.
  • Financing Cash Flow: The company has seen increased debt in recent years, and in 2023, the financing cash flow was -$154 million, mostly driven by debt repayments.

Latest News & Earnings Calls

  • Hillman’s management has focused on cost controls, streamlining operations, and generating cash flow, as seen from their latest earnings call and quarterly reports.
  • The company has been actively engaged in acquisitions, and it seems like a growth strategy for the company, as they had completed 3 acquisitions in 2022.
  • They have started working on inventory reduction, which has helped improve cash flow generation.
  • The company is facing headwinds from inflation, increased interest rates, and foreign exchange rates.
  • The company has taken steps to mitigate these risks and try to achieve long-term growth.
  • During the latest earnings call, management has indicated the focus on optimizing the operating model through leveraging acquisitions and focusing on the core segments.
  • While revenues have grown considerably over the past few years, this growth has not translated into higher profits.
  • Management seems to emphasize cash flow generation in the future to make up for the lack of growth in profitability.
  • Their biggest concern now is the increase in operating costs.

Understandability

I would give HLMN a 2/5 on understandability. Though, the overall business model seems straightforward, the company operates in multiple segments with different dynamics. They do not clearly disclose how each part of the business contributes to the company. Financial statements are also pretty complicated. However, an experienced investor will still be able to value it using proper techniques.

Balance Sheet Health

Hillman has a reasonably healthy balance sheet, which I rate a 4/5. It has seen a decrease in overall liquidity as compared to prior years. However, it still can easily cover its short term liabilities. The company is increasing its debt to finance its growth and acquisitions, which is a point of concern that needs to be monitored by the investors.

Conclusion

Hillman has established itself as a leading player in the market. It provides its services to a wide variety of customers with a broad product portfolio. However, it is not a great business due to its low moat. Management is taking steps to cut costs and increase cash flow, and it remains to be seen whether they will be able to deliver on their promises.