10-K: Annual report pursuant to Section 13 and 15(d)
Published on March 30, 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission file number 1-13293
The Hillman Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
23-2874736 |
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
10590 Hamilton Avenue
Cincinnati, Ohio
|
45231 |
(Address of principal executive offices) |
(Zip Code) |
Registrant's telephone number, including area code: (513) 851-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Each Exchange on Which Registered |
11.6% Junior Subordinated Debentures |
None |
Preferred Securities Guaranty |
None |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ¨ NO ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
¨ |
Accelerated filer |
¨ |
Non-accelerated filer |
x (Do not check if a smaller reporting company)
|
Smaller reporting company |
¨ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES ¨ NO ý
On March 30, 2017, 5,000 shares of the Registrant's common stock were issued and outstanding and 4,217,724 Trust Preferred Securities were issued and outstanding by the Hillman Group Capital Trust. The Trust Preferred Securities trade on the NYSE Amex under the symbol "HLM.Pr." The aggregate market value of the Trust Preferred Securities held by non-affiliates at June 30, 2016 was $137,286,916.
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PART I
Forward-Looking Statements
Certain disclosures related to acquisitions, refinancing, capital expenditures, resolution of pending litigation, and realization of deferred tax assets contained in this annual report involve substantial risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” “project,” or the negative of such terms or other similar expressions.
These forward-looking statements are not historical facts, but rather are based on our current expectations, assumptions, and projections about future events. Although we believe that the expectations, assumptions, and projections on which these forward-looking statements are based are reasonable, they nonetheless could prove to be inaccurate, and as a result, the forward-looking statements based on those expectations, assumptions, and projections also could be inaccurate. Forward-looking statements are not guarantees of future performance. Instead, forward-looking statements are subject to known and unknown risks, uncertainties, and assumptions that may cause our strategy, planning, actual results, levels of activity, performance, or achievements to be materially different from any strategy, planning, future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Actual results could differ materially from those currently anticipated as a result of a number of factors, including the risks and uncertainties discussed under the caption “Risk Factors” set forth in Item 1A of this annual report. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward-looking statements.
All forward-looking statements attributable to the Company or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this annual report; they should not be regarded as a representation by the Company or any other individual. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this annual report might not occur or might be materially different from those discussed.
Item 1 – Business.
General
The Hillman Companies, Inc. 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 Group, Inc. and its wholly-owned subsidiaries (collectively, “Hillman Group”), which had net sales of approximately $814.9 million in 2016. 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, key duplication systems, and accessories; builder's hardware; 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 and maintenance of appropriate in-store inventory levels.
Our headquarters are located at 10590 Hamilton Avenue, Cincinnati, Ohio. We maintain a website at www.hillmangroup.com. Information contained or linked on our website is not incorporated by reference into this annual report and should not be considered a part of this annual report.
Background
On June 30, 2014, affiliates of CCMP Capital Advisors, LLC (“CCMP”) and Oak Hill Capital Partners III, L.P., Oak Hill Capital Management Partners III, L.P., and OHCP III HC RO, L.P. (collectively, “Oak Hill Funds”), together with certain current and former members of Hillman's management, consummated a merger transaction (the “Merger Transaction”) pursuant to the terms of an Agreement and Plan of Merger dated as of May 16, 2014. As a result of the Merger Transaction, The Hillman Companies, Inc. remained a wholly-owned subsidiary of OHCP HM Acquisition Corp., which changed its name to HMAN Intermediate II Holdings Corp. (“Predecessor Holdco”), and became a wholly-owned subsidiary of HMAN Group Holdings Inc. (“Successor Holdco” or “Holdco”). The total consideration paid in the Merger Transaction was approximately $1.5 billion including repayment of outstanding debt and including the value of our outstanding Junior Subordinated Debentures ($105.4 million liquidation value at the time of the Merger Transaction).
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Hillman Group
We are organized as five separate business segments, the largest of which is (1) Hillman Group operating primarily in the United States. The other business segments consist of subsidiaries of the Hillman Group operating in (2) Canada under the names The Hillman Group Canada ULC and H. Paulin & Co., (3) Mexico under the name SunSource Integrated Services de Mexico S.A. de C.V., (4) Florida under the name All Points Industries, and (5) Australia under the name The Hillman Group Australia Pty. Ltd. In the year ended December 31, 2016, we decided to exit the Australia market following the withdrawal from Australia of a key customer and recorded charges of $1.0 million related to the write-off of inventory and other assets.
We provide merchandising services and products such as fasteners and related hardware items; threaded rod and metal shapes; keys, key duplication systems, and accessories; builder's hardware; and identification items, such as tags and letters, numbers, and signs, to retail outlets, primarily hardware stores, home centers and mass merchants, pet supply stores, grocery stores, and drug stores. We complement our extensive product selection with regular retailer visits by our field sales and service organization.
We market and distribute approximately 114,000 stock keeping units (“SKUs”) of small, hard-to-find and hard-to-manage hardware items. We function as a category manager for retailers and support these products with in-store service, high order fill rates, and rapid delivery of products sold. Sales and service representatives regularly visit retail outlets to review stock levels, reorder items in need of replacement, and interact with the store management to offer new product and merchandising ideas. Thousands of items can be actively managed with the retailer experiencing a substantial reduction of in-store labor costs and replenishment paperwork. Service representatives also assist in organizing the products in a consumer-friendly manner. We complement our broad range of products with merchandising services such as displays, product identification stickers, retail price labels, store rack and drawer systems, assistance in rack positioning and store layout, and inventory restocking services. We regularly refresh retailers' displays with new products and package designs utilizing color-coding to simplify the shopping experience for consumers and improve the attractiveness of individual store displays.
We operate from 19 strategically located distribution centers in the United States, Canada, and Mexico and are recognized for providing retailers with industry leading fill-rates and lead times. Our main distribution centers utilize state-of-the-art warehouse management systems (“WMS”) to ship customer orders within 48 hours while achieving a very high order fill rate. We utilize third-party logistics providers to warehouse and ship customer orders in the U.S., Mexico, and Australia.
We also design, manufacture, and market industry-leading identification and duplication equipment for home, office, automotive, and specialty keys. In 2000, we revolutionized the key duplication market with the patent-protected Axxess Key Duplication System™ which provided the ability to accurately identify and duplicate a key to store associates with little or no experience. In 2007, we upgraded our key duplication technology with Precision Laser Key™ utilizing innovative digital and laser imaging to identify a key and duplicate the cut-pattern automatically. In 2011, we introduced the innovative FastKey™ consumer-operated key duplication system which utilizes technology from the Precision Laser Key System™. In 2016, we delivered our most innovative and effective key duplication equipment with the introduction of KeyKrafter™. The KeyKrafter™ provides significant reduction in duplication time while increasing accuracy and ease of use. Through our creative use of technology and efficient use of inventory management systems, the sale of our products have proven to be a profitable revenue source for big box retailers. Our duplication systems have been placed in over 25,000 retail locations to date and are supported by our sales and service representatives.
In addition, we supply a variety of innovative options of consumer-operated vending systems for engraving specialty items such as pet identification tags, luggage tags, and other engraved identification tags. We have developed unique engraving systems leveraging state-of-the-art technologies to provide a customized solution for mass merchant and pet supply retailers. To date, approximately 10,000 of our engraving systems have been placed in retail locations which are also supported by our sales and service representatives.
Products and Suppliers
Our vast product portfolio is recognized by top retailers across North America for providing consistent quality and innovation to DIYers and professional contractors. Our product strategy concentrates on providing total project solutions for common and unique home improvement projects. Our portfolio provides retailers the assurance that their shoppers can find the right product at the right price within an ‘easy to shop' environment.
We currently manage a worldwide supply chain of approximately 800 vendors, the largest of which accounted for approximately 4.3% of the Company's annual purchases and the top five of which accounted for approximately 18% of its
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annual purchases. Our vendor quality control procedures include on-site evaluations and frequent product testing. Vendors are also evaluated based on delivery performance and the accuracy of their shipments.
Fasteners
Fasteners remain the core of our business and the product line encompasses what we believe to be one of the largest selections among suppliers servicing the hardware retail segment. The fastener line includes standard and specialty nuts, bolts, washers, screws, anchors, and picture hanging items. We offer zinc, chrome, and galvanized plated steel fasteners in addition to stainless steel, brass, and nylon fasteners in this vast line of products. In addition, we carry a complete line of indoor and outdoor project fasteners for use with drywall and deck construction.
We keep the fastener category vibrant and refreshed for retailers by providing a continuous stream of new products. Some of our recent offerings include an expansion of Hillman's WeatherMaxx™ stainless steel fasteners. We believe that the fast-growing category provides consumers with value and performance in exterior applications and incremental margins for retailers. WeatherMaxx™ features a variety of packaging options to assist consumers to find the right quantity for large or small projects. In addition, the Tite-Series marks our expansion into the fast growing and highly profitable construction fastener segment. The Tite-Series features fasteners for common new construction and remodeling projects such as deck building, roof repair, landscaping, and gutter repair. We believe that the Tite-Series offers enhanced performance with an easy-start, type 17 bit, serrated threads, and reduced torque requirements. The program also features an innovative new merchandising format which we believe allows retailers to increase holding power while displaying products in a neat and organized system.
In 2015, we continued to expand a new line of hand driven nails, deck screws, and drywall screws. The new program features a comprehensive offering for DIYers and professional contractors across a good, better, best value platform. The program is marketed under the prominent Hillman brand and introduces three new categories: Fas-N-Tite, DeckPlus, and PowerPro, allowing shoppers to choose their desired quality level. Our new offering was the result of extensive consumer research and contains proprietary performance features that we believe will positively influence end-users' purchase decision. The packaging and merchandising utilizes large product images, impactful graphics, and mounted product samples so that shoppers can easily navigate the display and locate items quickly.
We expanded our mass merchant fastener program in over 3,500 stores across the U.S. The line targets consumers visiting mass merchants, grocery, and department stores who desire to purchase their hardware needs while shopping for grocery and general merchandise needs. The product offering provides convenience to the light-duty DIYer and solutions to common home improvement projects. The program utilizes our proven packaging and merchandising best practices that simplify consumers' shopping experience. We believe that this new line is among the most comprehensive and innovative in this market segment which is growing in popularity due to busy consumers who prefer one-stop shopping superstores.
In 2016, we continued to expand our fastener presence beyond retailers' ‘brick and mortar' locations by supporting the e-commerce segment. We supported e-commerce requests and now have over 25,000 items available for sale on retailers' websites. We supported direct-to-store and direct-to-consumer fulfillment for consumers who choose to order fasteners directly from retailers' websites. Consumers can visit the retailer's website, select their desired fasteners, pay by credit card, and pick up their order at the retailer's store or choose to have the order shipped to the address of the consumer's choice. We continue to support retailers' requests to expand their on-line offerings in 2017.
Fasteners generated approximately 64.3% of our total revenues in 2016, as compared to 65.8% in 2015 and 64.5% in 2014.
Keys and Key Accessories
We design and manufacture proprietary equipment which forms the cornerstone for our key duplication business. Our key duplication system is offered in various retail channels including mass merchants, home centers, automotive parts retailers, franchise and independent (“F&I”) hardware stores, and grocery/drug chains; it can also be found in many service-based businesses like parcel shipping outlets.
We market multiple separate key duplication systems. The Axxess Precision Key Duplication System™ is marketed to national retailers requiring a key duplication program easily mastered by novice associates, while the Hillman Key Program targets the F&I hardware retailers with a machine that works well in businesses with lower turnover and highly skilled employees. There are over 25,000 Axxess Programs placed in North American retailers including Home Depot, Lowe's, and Walmart.
We introduced the Precision Laser Key System™ in 2007. This system uses a digital optical camera, lasers, and proprietary software to scan a customer's key. The system identifies the key and retrieves the key's specifications, including the appropriate blank and cutting pattern, from a comprehensive database. This technology automates nearly every aspect of key duplication
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and provides the ability for every store associate to cut a key accurately. We have placed approximately 2,900 of these key duplicating systems in North American retailers and we believe that we are well-positioned to capitalize on this technology.
In 2011, we launched the innovative FastKey™ consumer-operated key duplication system with Walmart in 1,000 high volume stores. FastKey™ utilizes technology from the Precision Laser Key System™ and combines a consumer-friendly vending system which allows retail shoppers to duplicate the most popular home, office, and small lock keys. The FastKey™ system covers a large percentage of the key market and features a unique key sleeve that ensures proper insertion, alignment, and duplication of the key. Consumers who attempt to duplicate keys not included in the FastKey™ system receive a ‘service slip' identifying their key and referring them to the main Hillman key cutting location within the store. The FastKey™ system has demonstrated the ability to increase overall key sales at the store retail level.
In 2016, we delivered our most innovative and effective key duplication equipment with the introduction of KeyKrafter™. The KeyKrafter™ provides significant reduction in duplication time while increasing accuracy and ease of use.
In addition to key duplication, we have an exclusive, strategic partnership with Sid Tool Co., Inc. (acting through its Class C Solutions Group) for the distribution of the proprietary PC+© Code Cutter machine which produces automobile keys based on a vehicle's identification number. The Code Cutter machines are marketed to automotive dealerships, auto rental agencies, and various companies with truck and vehicle fleets. Since its introduction, over 7,900 PC+© units and over 9,100 of the newer Flash Code Cutter units have been sold.
We also market keys and key accessories in conjunction with our duplication systems. Our proprietary key offering features the universal blank which uses a "universal" keyway to replace up to five original equipment keys. This innovative system allows a retailer to duplicate 99% of the key market while stocking less than 100 SKUs. We continually refresh the retailer's key offering by introducing decorated and licensed keys and accessories. Our Wackey™ and Fanatix™ lines feature decorative themes of art and popular licenses such as NFL, Disney, Breast Cancer Awareness, M&M's, and Harley Davidson to increase the purchase frequency and average transaction value per key. We also market a successful line of decorative and licensed lanyards. We have taken the key and key accessory categories from a price sensitive commodity to a fashion driven business and have significantly increased retail pricing and gross margins.
Keys, key accessories, and Code Cutter units represented approximately 14.8% of our total revenues in 2016, as compared to 15.6% in 2015 and 16.6% in 2014.
Engraving
Our engraving business focuses on the growing consumer spending trends surrounding personalized and pet identification. Innovation has played a major role in the development of our engraving business unit. From the original Quick-Tag™ consumer-operated vending system to the proprietary laser system of TagWorks, we continue to lead the industry with consumer-friendly engraving solutions.
Quick-Tag™ is a patented, consumer-operated vending system that custom engraves and dispenses pet identification tags, military-style I.D. tags, holiday ornaments, and luggage tags. Styles include NFL and NCAA logo military tags. Quick-Tag™ is an easy, convenient means for the consumer to custom-engrave tags and generates attractive margins for the retailer. We have placed over 4,700 Quick-Tag™ machines in retail outlets throughout the U.S. and Canada. In addition to placements in retail outlets, we have placed machines inside theme parks such as Disney, Sea World, and Universal Studios.
In 2010, we launched the next generation engraving platform with our new FIDO™ system. This new engraving program integrates a fun attractive design with a user interface that provides new features for the consumer. The individual tag is packaged in a mini cassette and the machine's mechanism flips the tag to allow engraving on both sides. The user interface features a loveable dog character that guides the consumer through the engraving process. We have placed approximately 3,100 FIDO™ systems in PETCO stores as of December 31, 2016.
In 2011, we acquired the innovative TagWorks engraving system featuring patented technology, unique product portfolio, and attractive off-board merchandising. The TagWorks system utilizes laser printing technology and allows consumers to watch the engraving process. The off-board merchandising allows premium-priced tags to be displayed in store-front locations and is effective at increasing the average price per transaction.
We design, manufacture, and assemble the engraving equipment in our Tempe, Arizona facility. Engraving products represented approximately 6.8% of our total revenues in 2016, as compared to 6.5% in 2015 and 6.7% in 2014.
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Letters, Numbers, and Signs
Letters, numbers, and signs (“LNS”) includes product lines that target both the homeowner and commercial user. Product lines within this category include individual and/or packaged letters, numbers, signs, safety related products (e.g., 911 signs), driveway markers, and a diversity of sign accessories, such as sign frames.
Through a series of strategic acquisitions, exclusive partnerships, and organic product developments, we have created an LNS program which gives retailers one of the largest product offerings available in this category. This SKU intensive product category is considered a staple for retail hardware departments and is typically merchandised in eight linear feet of retail space containing hundreds of SKUs. In addition to the core product program, we provide our customers with retail support including custom plan-o-grams and merchandising solutions.
We have demonstrated the continual launch of new products to match the needs of DIY and commercial end-users. We recently introduced popular programs such as high-end address plaques and numbers, the custom create-a-sign program, and commercial signs.
Our LNS program can be found in big box retailers, mass merchants, and pet supply accounts. In addition, we have product placement in F&I hardware retailers.
The LNS category represented approximately 4.8% of our total revenues in 2016, 2015 and 2014.
Threaded Rod
We are a leading supplier of metal shapes and threaded rod in the retail market. The SteelWorks™ threaded rod product includes hot and cold rolled rod, both weld-able and plated, as well as a complete offering of All-Thread rod in galvanized steel, stainless steel, and brass.
The SteelWorks™ program is carried by many top retailers, including Lowe's and Menards, and through cooperatives such as Ace Hardware. In addition, we are the primary supplier of metal shapes to many wholesalers throughout the country.
Threaded rod generated approximately 4.6% of our total revenues in 2016, as compared to 4.2% in 2015 and 4.5% in 2014.
Builder's Hardware
The builder's hardware category includes a variety of common household items such as coat hooks, door stops, hinges, gate latches, hasps, and decorative hardware.
We market the builder's hardware products under the Hardware Essentials™ brand and provide the retailer with an innovative merchandising solution. The Hardware Essentials™ program utilizes modular packaging, color coding, and integrated merchandising to simplify the shopping experience for consumers. Colorful signs, packaging, and installation instructions guide the consumer quickly and easily to the correct product location. Hardware Essentials™ provides retailers and consumers decorative upgrade opportunities through the introduction of high-end finishes such as satin nickel, pewter, and antique bronze.
The combination of merchandising, upgraded finishes, and product breadth is designed to improve the retailer's performance. The addition of the builder's hardware product line exemplifies our strategy of leveraging our core competencies to further penetrate customer accounts with new product offerings. In 2016, we expanded the placement of the Hardware Essentials™ line in the F&I channel. The F&I channel provided successful conversions in over 400 new locations in 2016.
As of December 31, 2016, the Hardware Essentials™ line was placed in over 3,600 retail locations and generated approximately 4.7% of our total revenues in 2016, as compared to 3.1% in 2015 and 2.9% in 2014.
Markets and Customers
We sell our products to national accounts such as Lowe's, Home Depot, Walmart, Tractor Supply, Menards, PetSmart, and PETCO. Our status as a national supplier of proprietary products to big box retailers allows us to develop a strong market position and high barriers to entry within our product categories.
We service more than 15,000 F&I retail outlets. These individual dealers are typically members of the larger cooperatives, such as True Value, Ace Hardware, and Do-It-Best. We ship directly to the cooperative's retail locations and also supply many items to the cooperative's central warehouses. These central warehouses distribute to their members that do not have a requirement for
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Hillman's in-store service. These arrangements reduce credit risk and logistic expenses for us while also reducing central warehouse inventory and delivery costs for the cooperatives.
A typical hardware store maintains thousands of different items in inventory, many of which generate small dollar sales but large profits. It is difficult for a retailer to economically monitor all stock levels and to reorder the products from multiple vendors. This problem is compounded by the necessity of receiving small shipments of inventory at different times and stocking the goods. The failure to have these small items available will have an adverse effect on store traffic, thereby possibly denying the retailer the opportunity to sell items that generate higher dollar sales.
We sell our products to approximately 26,000 customers, the top five of which accounted for approximately $441.9 million of our total revenue in 2016. For the year ended December 31, 2016, Lowe's was the single largest customer, representing approximately $173.5 million of our total revenues, Home Depot was the second largest at approximately $137.5 million, and Walmart was the third largest at approximately $64.5 million of our total revenue. No other customer accounted for more than 5.0% of total revenue in 2016. In each of the years ended December 31, 2016, 2015, and 2014, we derived over 10% of our total revenues from Lowe's and Home Depot which operated in the following segments: United States excluding All Points, All Points, Canada, and Mexico.
Our telemarketing activity sells to thousands of smaller hardware outlets and non-hardware accounts. We are also pursuing new business internationally in such places as Canada, Mexico, Central America, and the Caribbean. See Note 17 - Segment Reporting and Geographic Information, of Notes to Consolidated Financial Statements.
Sales and Marketing
We provide product support, customer service, and high profit margins for our retail distribution partners. We believe that our competitive advantage is in our ability to provide a greater level of customer service than our competitors.
Service is the hallmark of Hillman company-wide. The national accounts field service organization consists of approximately 535 employees and 40 field managers focusing on big box retailers, pet super stores, large national discount chains, and grocery stores. This organization reorders products, details store shelves, and sets up in-store promotions. Many of our largest customers use electronic data interchange (“EDI”) for handling of orders and invoices.
We employ what we believe to be the largest direct sales force in the industry. The sales force, which consists of approximately 220 employees and is managed by 22 field managers, focuses on the F&I customers. The depth of the sales and service team enables us to maintain consistent call cycles ensuring that all customers experience proper stock levels and inventory turns. This team also prepares custom plan-o-grams of displays to fit the needs of any store and establishes programs that meet customers' requirements for pricing, invoicing, and other needs. This group also benefits from daily internal support from our inside sales and customer service teams. On average, each sales representative is responsible for approximately 58 full service accounts that the sales representative calls on approximately every two weeks.
These efforts, coupled with those of the marketing department, allow the sales force to sell and support our product lines. Our marketing department provides support through the development of new products and categories, sales collateral material, promotional items, merchandising aids, and custom signage. Marketing services such as advertising, graphic design, and trade show management are also provided to the sales force. The department is organized along our three marketing competencies: product management, channel marketing, and marketing communications.
Competition
Our primary competitors in the national accounts marketplace for fasteners are Illinois Tool Works Inc., Dorman Products Inc., Midwest Fastener Corporation, Primesource Building Products, Inc, and competition from direct import by our customers. Competition is based primarily on in-store service and price. Other competitors are local and regional distributors. Competitors in the pet tag market are specialty retailers, direct mail order, and retailers with in-store mail order capability. The Quick-Tag™, FIDO™, and TagWorks systems have patent protected technology that is a major barrier to entry and helps to preserve this market segment.
The principal competitors for our F&I business are Midwest Fastener and Hy-Ko Products Company (“Hy-Ko”) in the hardware store marketplace. Midwest Fastener primarily focuses on fasteners, while Hy-Ko is the major competitor in LNS products and keys/key accessories. The hardware outlets that purchase our products without regularly scheduled sales representative visits may also purchase products from local and regional distributors and cooperatives. We compete primarily on field service, merchandising, as well as product availability, price, and depth of product line.
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Insurance Arrangements
Under our current insurance programs, commercial umbrella coverage is obtained for catastrophic exposure and aggregate losses in excess of expected claims. Since 1991, we have retained the exposure on certain expected losses related to workers' compensation, general liability, and automobile. We also retain the exposure on expected losses related to health benefits of certain employees. We believe that our present insurance is adequate for our businesses. See Note 13 - Commitments and Contingencies, of Notes to Consolidated Financial Statements.
Employees
As of December 31, 2016, we had 3,045 full time and part time employees, none of which were covered by a collective bargaining agreement. In our opinion, employee relations are good.
Backlog
We do not consider the sales backlog to be a significant indicator of future performance due to the short order cycle of our business. Our sales backlog from ongoing operations was approximately $9.0 million as of December 31, 2016 and approximately $8.9 million as of December 31, 2015. We expect to realize the entire December 31, 2016 backlog during 2017.
Where You Can Find More Information
We file quarterly reports on Form 10-Q and annual reports on Form 10-K and furnish current reports on Form 8-K and other information with the Securities and Exchange Commission (the “Commission”). You may read and copy any reports, statements, or other information filed by the Company at the Commission's public reference rooms at 100 F Street, N.E., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for more information on the public reference rooms. The Commission also maintains an Internet site at www.sec.gov that contains quarterly, annual, and current reports, proxy and information statements, and other information regarding issuers, like Hillman, that file electronically with the Commission.
In addition, our quarterly reports on Form 10-Q and annual reports on Form 10-K are available free of charge on our website at www.hillmangroup.com as soon as reasonably practicable after such reports are electronically filed with the Commission. We are providing the address to our website solely for the information of investors. We do not intend the address to be an active link or to incorporate the contents of the website into this report.
Item 1A - Risk Factors.
You should carefully consider the following risks. However, the risks set forth below are not the only risks that we face, and we face other risks which have not yet been identified or which are not yet otherwise predictable. If any of the following risks occur or are otherwise realized, our business, financial condition, and results of operations could be materially adversely affected. You should consider carefully the risks described below and all other information in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and schedules thereto.
Risks Relating to Our Business
Unfavorable economic conditions may adversely affect our business, results of operations, financial condition, and cash flows.
Our business is impacted by general economic conditions in the U.S., Canada, and other international markets, particularly the U.S. retail markets including hardware stores, home centers, mass merchants, and other retailers. The current and future economic conditions in the U.S. and internationally, including, without limitation, the level of consumer debt, high levels of unemployment, higher interest rates, and the ability of our customers to obtain credit, may cause a continued or further decline in business and consumer spending.
Adverse changes in economic conditions, including inflation, recession, or instability in the financial markets or credit markets may either lower demand for our products or increase our operational costs, or both. Such conditions may also materially impact our customers, suppliers, and other parties with whom we do business and may result in financial difficulties leading to restructurings, bankruptcies, liquidations, and other unfavorable events for our customers, suppliers, and other service providers. Our revenue will be adversely affected if demand for our products declines. The impact of unfavorable economic conditions may also impair the ability of our customers to pay for products they have purchased and could have a material adverse effect on our results of operations, financial condition, and results of operations.
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We operate in a highly competitive industry, which may have a material adverse effect on our business, financial condition, and results of operations.
The retail industry is highly competitive, with the principal methods of competition being product innovation, price, quality of service, quality of products, product availability and timeliness, credit terms, and the provision of value-added services, such as merchandising design, in-store service, and inventory management. We encounter competition from a large number of regional and national distributors, some of which have greater financial resources than us and may offer a greater variety of products. If these competitors are successful, our business, financial condition, and results of operations may be materially adversely affected.
To compete successfully, we must develop and commercialize a continuing stream of innovative new products that create consumer demand.
Our long-term success in the current competitive environment depends on our ability to develop and commercialize a continuing stream of innovative new products, including those in our new mass merchant fastener program, which create and maintain consumer demand. We also face the risk that our competitors will introduce innovative new products that compete with our products. Our strategy includes increased investment in new product development and continued focus on innovation. There are, nevertheless, numerous uncertainties inherent in successfully developing and commercializing innovative new products on a continuing basis, and new product launches may not provide expected growth results.
Our business may be adversely affected by seasonality.
In general, we have experienced seasonal fluctuations in sales and operating results from quarter to quarter. Typically, the first calendar quarter is the weakest due to the effect of weather on home projects and the construction industry. If adverse weather conditions persist on a regional or national basis into the second or other calendar quarters, our business, financial condition, and results of operations may be materially adversely affected.
Large customer concentration and the inability to penetrate new channels of distribution could adversely affect our business.
Our three largest customers constituted approximately $375.5 million of net sales and $24.4 million of the year-end accounts receivable balance for 2016. Each of these customers is a big box chain store. Our results of operations depend greatly on our ability to maintain existing relationships and arrangements with these big box chain stores. To the extent that the big box chain stores are materially adversely impacted by the current slow growth economy, this could have a negative effect on our results of operations. The loss of one of these customers or a material adverse change in the relationship with these customers could have a negative impact on our business. Our inability to penetrate new channels of distribution may also have a negative impact on our future sales and business.
Successful sales and marketing efforts depend on our ability to recruit and retain qualified employees.
The success of our efforts to grow our business depends on the contributions and abilities of key executives, our sales force, and other personnel, including the ability of our sales force to achieve adequate customer coverage. We must therefore continue to recruit, retain, and motivate management, sales, and other personnel to maintain our current business and to support our projected growth. A shortage of these key employees might jeopardize our ability to implement our growth strategy.
We are exposed to adverse changes in currency exchange rates.
Exposure to foreign currency risk exists because we, through our global operations, enter into transactions and make investments denominated in multiple currencies. Our predominant exposures are in Canadian, Australian, Mexican, and Asian currencies, including the Chinese Renminbi (“RMB”). In preparing our consolidated financial statements, for foreign operations with functional currencies other than the U.S. dollar, asset and liability accounts are translated at current exchange rates, and income and expenses are translated using weighted-average exchange rates. With respect to the effects on translated earnings, if the U.S. dollar strengthens relative to local currencies, our earnings could be negatively impacted. We do not make a practice of hedging our non-U.S. dollar earnings.
We source many products from China and other Asian countries for resale in other regions. To the extent that the RMB or other currencies appreciate with respect to the U.S. dollar, we may experience cost increases on such purchases. The RMB depreciated against the U.S. dollar by 7.18% in 2016 and 4.4% in 2015, and appreciated against the U.S. dollar by 2.5% in 2014. Significant appreciation of the RMB or other currencies in countries where we source our products could adversely impact our profitability. In addition, our foreign subsidiaries may purchase certain products from their vendors denominated in
9
U.S. dollars. If the U.S. dollar strengthens compared to the local currencies, it may result in margin erosion. We have a practice of hedging some of our Canadian subsidiary's purchases denominated in U.S. dollars. We may not be successful at implementing customer pricing or other actions in an effort to mitigate the related cost increases and thus our results of operations may be adversely impacted.
Our results of operations could be negatively impacted by inflation or deflation in the cost of raw materials, freight, and energy.
Our products are manufactured of metals, including but not limited to steel, aluminum, zinc, and copper. Additionally, we use other commodity-based materials in the manufacture of LNS that are resin-based and subject to fluctuations in the price of oil. We are also exposed to fluctuations in the price of diesel fuel in the form of freight surcharges on customer shipments and the cost of gasoline used by the field sales and service force. Continued inflation over a period of years would result in significant increases in inventory costs and operating expenses. If we are unable to mitigate these inflation increases through various customer pricing actions and cost reduction initiatives, our financial condition may be adversely affected. Conversely, in the event that there is deflation, we may experience pressure from our customers to reduce prices. There can be no assurance that we would be able to reduce our cost base (through negotiations with suppliers or other measures) to offset any such price concessions which could adversely impact our results of operations and cash flows.
We are subject to the risks of doing business internationally.
A portion of our revenue is generated outside the United States, primarily from customers located in Canada, Mexico, Australia, Latin America, and the Caribbean. Because we sell our products and services outside the United States, our business is subject to risks associated with doing business internationally, which include:
• |
changes in a specific country's or region's political and cultural climate or economic condition; |
• |
unexpected or unfavorable changes in foreign laws and regulatory requirements; |
• |
difficulty of effective enforcement of contractual provisions in local jurisdictions; |
• |
inadequate intellectual property protection in foreign countries; |
• |
the imposition of duties and tariffs and other trade barriers; |
• |
trade-protection measures, import or export licensing requirements such as Export Administration Regulations promulgated by the U.S. Department of Commerce, Economic Sanctions Laws and Regulations administered by the Office of Foreign Assets Control, and fines, penalties, or suspension or revocation of export privileges; |
• |
violations of the United States Foreign Corrupt Practices Act; |
• |
the effects of applicable and potentially adverse foreign tax law changes; |
• |
significant adverse changes in foreign currency exchange rates; |
• |
longer accounts receivable cycles; |
• |
managing a geographically dispersed workforce; and |
• |
difficulties associated with repatriating cash in a tax-efficient manner. |
Any failure to adapt to these or other changing conditions in foreign countries in which we do business could have an adverse effect on our business and financial results.
Our business is subject to risks associated with sourcing product from overseas.
We import large quantities of our fastener products. Substantially all of our import operations are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries from which our products and materials are manufactured or imported may, from time to time, impose additional quotas, duties, tariffs, or other restrictions on their imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our suppliers' failure to comply with customs regulations or similar laws, could harm our business.
If any of our existing vendors fail to meet our needs, we believe that sufficient capacity exists in the open market to supply any shortfall that may result. However, it is not always possible to replace a vendor on short notice without disruption in our
10
operations which may require more costly expedited transportation expense and replacement of a major vendor is often at higher prices.
Our ability to import products in a timely and cost-effective manner may also be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes, severe weather, or increased homeland security requirements in the U.S. and other countries. These issues could delay importation of products or require us to locate alternative ports or warehousing providers to avoid disruption to customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on our business and financial condition.
Acquisitions have formed a significant part of our growth strategy in the past and may continue to do so. If we are unable to identify suitable acquisition candidates or obtain financing needed to complete an acquisition, our growth strategy may not succeed.
Historically, our growth strategy has relied on acquisitions that either expand or complement our businesses in new or existing markets. However, there can be no assurance that we will be able to identify or acquire acceptable acquisition candidates on terms favorable to us and in a timely manner, if at all, to the extent necessary to fulfill our growth strategy.
The process of integrating acquired businesses into our operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention, and there can be no assurance that we will be able to successfully integrate acquired businesses into our operations. Additionally, we may not achieve the anticipated benefits from any acquisition.
Unfavorable changes in the current economic environment may make it difficult to acquire businesses in order to further our growth strategy. We will continue to seek acquisition opportunities both to expand into new markets and to enhance our position in our existing markets. However, our ability to do so will depend on a number of factors, including our ability to obtain financing that we may need to complete a proposed acquisition opportunity which may be unavailable or available on terms that are not advantageous to us. If financing is unavailable, we may be forced to forego otherwise attractive acquisition opportunities which may have a negative effect on our ability to grow.
If we were required to write down all or part of our goodwill or indefinite-lived trade names, our results of operations could be materially adversely affected.
We have $615.7 million of goodwill and $85.3 million of indefinite-lived trade names recorded on our Consolidated Balance Sheet at December 31, 2016. We are required to periodically determine if our goodwill or indefinite-lived trade names have become impaired, in which case we would write down the impaired portion of the intangible asset. If we were required to write down all or part of our goodwill or indefinite-lived trade names, our net income could be materially adversely affected.
Our success is highly dependent on information and technology systems.
We believe that our proprietary computer software programs are an integral part of our business and growth strategies. We depend on our information systems to process orders, to manage inventory and accounts receivable collections, to purchase, sell, and ship products efficiently and on a timely basis, to maintain cost-effective operations, and to provide superior service to our customers. If these systems are damaged, intruded upon, shutdown, or cease to function properly (whether by planned upgrades, force majeure, telecommunications failures, hardware or software break-ins or viruses, other cyber-security incidents, or otherwise), we may suffer disruption in our ability to manage and operate our business.
There can be no assurance that the precautions which we have taken against certain events that could disrupt the operations of our information systems will prevent the occurrence of such a disruption. Any such disruption could have a material adverse effect on our business and results of operations.
In addition, we are in the process of implementing a new enterprise resource planning (“ERP”) system to improve our business capabilities. Although it is not anticipated, any disruptions, delays, or deficiencies in the design and/or implementation of the new ERP system, or our inability to accurately predict the costs of such initiatives or our failure to generate revenue and corresponding profits from such activities and investments, could impact our ability to perform necessary business operations, which could adversely affect our reputation, competitive position, business, results of operations, and financial condition.
Unauthorized disclosure of sensitive or confidential customer, employee, supplier, or Company information, whether through a breach of our computer systems, including cyber-attacks or otherwise, could severely harm our business.
11
As part of our business, we collect, process, and retain sensitive and confidential personal information about our customers, employees, and suppliers. Despite the security measures we have in place, our facilities and systems, and those of the retailers and other third party distributors with which we do business, may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. Any security breach involving the misappropriation, loss, or other unauthorized disclosure of confidential customer, employee, supplier, or Company information, whether by us or by the retailers and other third party distributors with which we do business, could result in losses, severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations, and have a material adverse effect on our business, results of operations, and financial condition. The regulatory environment related to information security, data collection, and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.
Failure to adequately protect intellectual property could adversely affect our business.
Intellectual property rights are an important and integral component of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright, and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business.
Regulations related to conflict minerals could adversely impact our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as “conflict minerals”, originating from the Democratic Republic of Congo (“DRC”) and adjoining countries. These rules could adversely affect the sourcing, supply, and pricing of materials used in our products, as the number of suppliers who provide conflict-free minerals may be limited. We may also suffer harm to our image if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to modify our products to avoid the use of such materials. We may also face challenges in satisfying customers who may require that our products be certified as containing conflict-free minerals.
We are subject to legal proceedings and legal compliance risks.
We are involved in various legal proceedings, which from time to time may involve class action lawsuits, state and federal governmental inquiries, audits and investigations, environmental matters, employment, tort, state false claims act, consumer litigation, and intellectual property litigation. At times, such matters may involve executive officers and other management. Certain of these legal proceedings may be a significant distraction to management and could expose us to significant liability, including settlement expenses, damages, fines, penalties, attorneys' fees and costs, and non-monetary sanctions, any of which could have a material adverse effect on our business and results of operations.
Increases in the cost of employee health benefits could impact our financial results and cash flows.
Our expenses relating to employee health benefits are significant. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform have resulted and could continue to result in significant changes to the U.S. healthcare system. Unfavorable changes in the cost of such benefits could have a material adverse effect on our financial results and cash flows.
Risks Relating to Our Indebtedness
We have significant indebtedness that could affect operations and financial condition and prevent us from fulfilling our obligations under our indebtedness.
We have a significant amount of indebtedness. On December 31, 2016, total indebtedness was $975.3 million, consisting of $108.7 million of indebtedness of Hillman and $866.6 million of indebtedness of Hillman Group.
Our substantial indebtedness could have important consequences to investors in Hillman securities. For example, it could:
• |
make it more difficult for us to satisfy obligations to holders of our indebtedness; |
• |
increase our vulnerability to general adverse economic and industry conditions; |
12
• |
require the dedication of a substantial portion of cash flow from operations to payments on indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, research and development efforts, and other general corporate purposes; |
• |
limit flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
• |
place us at a competitive disadvantage compared to competitors that have less debt; and |
• |
limit our ability to borrow additional funds. |
In addition, the indenture governing Hillman Group's notes and senior secured credit facilities contain financial and other restrictive covenants that limit the ability to engage in activities that may be in our long-term best interests. The failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all outstanding debts.
Despite current indebtedness levels, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.
We may be able to incur substantial additional indebtedness in the future. The terms of the indenture do not fully prohibit us from doing so. The senior secured credit facilities permit additional borrowing of $64.4 million on the revolving credit facility. If new debt is added to our current debt levels, the related risks that we now face could intensify.
The failure to meet certain financial covenants required by our credit agreements may materially and adversely affect assets, financial position, and cash flows.
Certain aspects of our credit agreements require the maintenance of a leverage ratio and limit our ability to incur debt, make investments, make dividend payments to holders of the Trust Preferred Securities, or undertake certain other business activities. In particular, our maximum allowed senior secured net leverage requirement is 6.50x as of December 31, 2016. A breach of the leverage covenant, or any other covenants, could result in an event of default under the credit agreements. Upon the occurrence of an event of default under the credit agreements, all amounts outstanding, together with accrued interest, could be declared immediately due and payable by our lenders. If this happens, our assets may not be sufficient to repay in full the payments due under the credit agreements. The current credit market environment and other macro-economic challenges affecting the global economy may adversely impact our ability to borrow sufficient funds or sell assets or equity in order to pay existing debt.
We are subject to fluctuations in interest rates.
On June 30, 2014, we closed on a $620.0 million senior secured credit facility (the “Senior Facilities”), consisting of a $550.0 million term loan and a $70.0 million revolving credit facility (the “Revolver”).
All of our indebtedness incurred in connection with the Senior Facilities has variable interest rates. Increases in borrowing rates will increase our cost of borrowing, which may adversely affect our results of operations and financial condition.
Restrictions imposed by the indenture governing the notes, and by our Senior Facilities and our other outstanding indebtedness, may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.
The terms of our Senior Facilities and the indenture governing the notes restrict us from engaging in specified types of transactions. These covenants restrict our ability and the ability of our restricted subsidiaries, among other things, to:
• |
incur or guarantee additional indebtedness; |
• |
pay dividends on our capital stock or redeem, repurchase, or retire our capital stock or indebtedness; |
• |
make investments, loans, advances, and acquisitions; |
• |
pay dividends or other amounts to us from our restricted subsidiaries; |
• |
engage in transactions with our affiliates; |
• |
sell assets, including capital stock of our subsidiaries; |
• |
consolidate or merge; and |
• |
create liens. |
13
In addition, the Revolver requires us to comply, under certain circumstances, with a maximum senior secured net leverage ratio covenant. Our ability to comply with this covenant can be affected by events beyond our control, and we may not be able to satisfy them. A breach of this covenant would be an event of default. In the event of a default under the Revolver, those lenders could elect to declare all amounts outstanding under the Revolver to be immediately due and payable or terminate their commitments to lend additional money, which would also lead to a cross-default and cross-acceleration of amounts owing under the Senior Facilities. If the indebtedness under our Senior Facilities or the notes were to be accelerated, our assets may not be sufficient to repay such indebtedness in full. In particular, note holders will be paid only if we have assets remaining after we pay amounts due on our secured indebtedness, including our Senior Facilities. We have pledged a significant portion of our assets as collateral under our Senior Facilities.
We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our Senior Facilities and the indenture governing the notes restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
Our ability to repay our debt is affected by the cash flow generated by our subsidiaries.
Our subsidiaries own substantially all of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness will be dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment, or otherwise. Unless they are guarantors of the notes, our subsidiaries will not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture governing the notes limits the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
Volatility and weakness in bank and capital markets may adversely affect credit availability and related financing costs for us.
Bank and capital markets can experience periods of volatility and disruption. If the disruption in these markets is prolonged, our ability to refinance, and the related cost of refinancing, some or all of our debt could be adversely affected. Additionally, during periods of volatile credit markets, there is a risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments. Although we currently can access the bank and capital markets, there is no assurance that such markets will continue to be a reliable source of financing for us. These factors, including the tightening of credit markets, could adversely affect our ability to obtain cost-effective financing. Increased volatility and disruptions in the financial markets also could make it more difficult and more expensive for us to refinance outstanding indebtedness and obtain financing. In addition, the adoption of new statutes and regulations, the implementation of recently enacted laws or new interpretations or the enforcement of older laws and regulations applicable to the financial markets or the financial services industry could result in a reduction in the amount of available credit or an increase in the cost of credit. Disruptions in the financial markets can also adversely affect our lenders, insurers, customers, and other counterparties. Any of these results could results in a material adverse effect to our business, financial condition, and results of operations.
14
Item 1B - Unresolved Staff Comments.
None.
Item 2 – Properties.
As of December 31, 2016, our principal office, manufacturing, and distribution properties were as follows:
Business Segment |
Approximate
Square
Footage
|
Description |
||
United States, excluding All Points |
||||
Cincinnati, Ohio |
270,000 |
Office, Distribution |
||
Forest Park, Ohio |
385,000 |
Office, Distribution |
||
Jacksonville, Florida |
97,000 |
Distribution |
||
Lewisville, Texas |
81,000 |
Distribution |
||
Fairfield, Ohio |
164,000 |
Distribution |
||
Parma, Ohio |
16,000 |
Office, Distribution |
||
Rialto, California |
402,000 |
Distribution |
||
Shafter, California |
134,000 |
Distribution |
||
Tempe, Arizona |
184,000 |
Office, Mfg., Distribution |
||
United States, All Points |
||||
Pompano Beach, Florida |
39,000 |
Office, Distribution |
||
Canada |
||||
Burnaby, British Columbia |
29,000 |
Distribution |
||
Edmonton, Alberta |
41,000 |
Distribution |
||
Laval, Quebec |
36,000 |
Distribution |
||
Milton, Ontario |
37,000 |
Manufacturing |
||
Mississauga, Ontario |
25,000 |
Distribution |
||
Moncton, New Brunswick |
16,000 |
Office, Distribution |
||
Pickering, Ontario |
301,000 |
Distribution |
||
Scarborough, Ontario |
372,000 |
Office, Mfg., Distribution |
||
Winnipeg, Manitoba |
40,000 |
Distribution |
||
Mexico |
||||
Monterrey |
13,000 |
Distribution |
All of the Company's facilities are leased, with the exception of one distribution facility located in Scarborough, Ontario. In the opinion of the Company's management, the Company's existing facilities are in good condition.
Item 3 – Legal Proceedings.
We are subject to various claims and litigation that arise in the normal course of business. For a description of our material legal proceedings, see Note 13 - Commitments and Contingencies, to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.
Item 4 – Mine Safety Disclosures.
Not Applicable.
15
PART II
Item 5 – Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Stock Exchange Listing
Our common stock does not trade and is not listed on or quoted in an exchange or other market. The Trust Preferred Securities trade under the ticker symbol "HLM.Pr." on the NYSE Amex. The following table sets forth the high and low sales prices as reported on the NYSE Amex for the Trust Preferred Securities.
2016 |
High |
Low |
|||||
First Quarter |
$ |
31.94 |
$ |
30.03 |
|||
Second Quarter |
33.50 |
31.31 |
|||||
Third Quarter |
34.74 |
32.47 |
|||||
Fourth Quarter |
33.58 |
32.30 |
|||||
2015 |
High |
Low |
|||||
First Quarter |
$ |
33.45 |
$ |
25.50 |
|||
Second Quarter |
30.00 |
27.31 |
|||||
Third Quarter |
30.33 |
28.83 |
|||||
Fourth Quarter |
30.97 |
29.25 |
The Trust Preferred Securities have a liquidation value of $25.00 per security. As of March 3, 2017, there were 347 holders of Trust Preferred Securities. As of March 30, 2017, the total number of Trust Preferred Securities outstanding was 4,217,724. As of March 30, 2017, our total number of shares of common stock outstanding was 5,000, held by one stockholder.
Distributions
We pay interest to the Hillman Group Capital Trust (the “Trust”) on the junior subordinated debentures underlying the Trust Preferred Securities at the rate of 11.6% per annum on their face amount of $105.4 million, or $12.2 million per annum in the aggregate. The Trust distributes an equivalent amount to the holders of the Trust Preferred Securities. For the years ended December 31, 2016 and 2015, we paid $12.2 million per year in interest on the junior subordinated debentures, which was equivalent to the amounts distributed by the Trust for the same periods.
Pursuant to the indenture that governs the Trust Preferred Securities, the Trust is able to defer distribution payments to holders of the Trust Preferred Securities for a period that cannot exceed 60 months (the “Deferral Period”). During the Deferral Period, we are required to accrue the full amount of all interest payable, and such deferred interest payments are immediately payable at the end of the Deferral Period. There were no deferrals of distribution payments to holders of the Trust Preferred Securities in 2016 or 2015.
The interest payments on the junior subordinated debentures underlying the Trust Preferred Securities are deductible for federal income tax purposes under current law and will remain our obligation until the Trust Preferred Securities are redeemed or upon their maturity in 2027.
For more information on the Trust and junior subordinated debentures, see “Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Unregistered Sales of Equity Securities
We made no sales of our equity securities during the year ended December 31, 2016.
Issuer Purchases of Equity Securities
We made no repurchases of our equity securities during the year ended December 31, 2016.
16
Item 6 – Selected Financial Data.
Our operations for the periods presented prior to June 30, 2014 are referenced herein as the Predecessor or Predecessor Operations. Our operations for the periods presented since the Merger Transaction are referenced herein as the Successor or Successor Operations and include the effects of our debt refinancing.
The following table sets forth selected consolidated financial data of the Predecessor for the six months ended June 29, 2014, as of and for the years ended December 31, 2013, and 2012; and consolidated financial data of the Successor as of and for the six months ended December 31, 2014 and for the years ended December 31, 2015 and 2016. See the accompanying Notes to Consolidated Financial Statements and “Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations” for information regarding the acquisition of the Company by affiliates of CCMP and the Oak Hill Funds and the Company's debt refinancing as well as other acquisitions that affect comparability.
Successor |
Predecessor |
|||||||||||||||||
(dollars in thousands) |
Year Ended 12/31/16 |
Year Ended 12/31/15 |
Period from 6/30/2014 Through 12/31/14 |
Six Months Ended 6/29/14 |
Year Ended 12/31/13 |
Year Ended 12/31/12 |
||||||||||||
Income Statement Data: |
||||||||||||||||||
Net sales |
$ |
814,908 |
$ |
786,911 |
$ |
377,292 |
$ |
357,377 |
$ |
701,641 |
$ |
555,465 |
||||||
Cost of Sales (exclusive of depreciation and amortization) |
437,896 |
435,529 |
193,221 |
183,342 |
359,326 |
275,016 |
||||||||||||
Acquisition and integration expense (1)
|
— |
257 |
22,719 |
31,681 |
8,638 |
3,031 |
||||||||||||
Income (loss) from operations |
41,515 |
27,398 |
8,241 |
(39,388 |
) |
56,441 |
40,968 |
|||||||||||
Net loss |
(14,206 |
) |
(23,083 |
) |
(18,937 |
) |
(44,526 |
) |
(1,148 |
) |
(7,234 |
) |
||||||
Balance Sheet Data at December 31: |
||||||||||||||||||
Total assets |
$ |
1,781,636 |
$ |
1,844,999 |
$ |
1,880,230 |
N/A |
$ |
1,255,465 |
$ |
1,163,514 |
|||||||
Long-term debt & capital lease obligations (2)
|
536,572 |
570,277 |
547,857 |
N/A |
385,955 |
313,439 |
||||||||||||
11.6% Junior Subordinated Debentures |
108,704 |
108,704 |
108,704 |
N/A |
108,704 |
108,704 |
||||||||||||
6.375% Senior Notes |
330,000 |
330,000 |
330,000 |
N/A |
— |
— |
||||||||||||
10.875% Senior Notes |
— |
— |
— |
N/A |
265,000 |
265,000 |
(1) |
Acquisition and integration expenses for investment banking, legal, and other professional fees incurred in connection with the Merger Transaction and previous acquisitions. |
(2) |
Includes current portion of long-term debt (at face value) and capitalized lease obligations. |
Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion provides information which our management believes is relevant to an assessment and understanding of our operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and related notes and schedules thereto appearing elsewhere herein. In addition, see “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information”, as well as “Risk Factors” in Item 1A of this Annual Report.
General
Hillman is 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 Group, Inc. and its wholly-owned subsidiaries (collectively, “Hillman Group”), which had net sales of approximately $814.9 million in 2016. We sell our 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, key duplication systems, and accessories; builder's hardware; and identification items, such as tags and letters, numbers, and signs. We support our product sales with services that include the design and installation of merchandising systems and maintenance of appropriate in-store inventory levels.
17
Merger Transaction
On June 30, 2014, affiliates of CCMP Capital Advisors, LLC (“CCMP”) and Oak Hill Capital Partners III, L.P., Oak Hill Capital Management Partners III, L.P. and OHCP III HC RO, L.P. (collectively, “Oak Hill Funds”), together with certain current and former members of Hillman's management, consummated a merger transaction (the “Merger Transaction”) pursuant to the terms of an Agreement and Plan of Merger dated as of May 16, 2014. As a result of the Merger Transaction, The Hillman Companies, Inc. remained a wholly-owned subsidiary of OHCP HM Acquisition Corp., which changed its name to HMAN Intermediate II Holdings Corp. (“Predecessor Holdco”), and became a wholly-owned subsidiary of HMAN Group Holdings Inc. (“Successor Holdco” or “Holdco”). The total consideration paid in the Merger Transaction was approximately $1.5 billion including repayment of outstanding debt and including the value of our outstanding junior subordinated debentures ($105.4 million liquidation value at the time of the Merger Transaction).
Prior to the Merger Transaction, the Oak Hill Funds owned 95.6% of the Predecessor Holdco's outstanding common stock and certain current and former members of management owned 4.4% of the Predecessor Holdco's outstanding common stock. Upon consummation of the Merger Transaction, affiliates of CCMP owned 80.4% of the Successor Holdco's outstanding common stock, the Oak Hill Funds owned 16.9% of the Successor Holdco's outstanding common stock, and certain current and former members of management owned 2.7% of the Successor Holdco's outstanding common stock.
Our consolidated balance sheet and its related statements of comprehensive loss, cash flows, and stockholders' equity for the periods presented prior to June 30, 2014 are referenced herein as the predecessor financial statements (the “Predecessor”). Our consolidated balance sheets as of December 31, 2016 and 2015 and its related statements of comprehensive loss, cash flows, and stockholders' equity for the periods presented subsequent to the Merger Transaction are referenced herein as the successor financial statements (the “Successor”).
Financing Arrangements
In the second half of 2014, we completed various refinance activities, including the entering into a $620.0 million senior secured credit facility (the “Senior Facilities”), consisting of a $550.0 million term loan and a $70.0 million revolving credit facility (“Revolver”) and issuing $330.0 million aggregate principal amount of senior notes due July 15, 2022 (the “6.375% Senior Notes”). See Note 6 - Long-Term Debt, of the Notes to Consolidated Financial Statements.
Current Economic Conditions
Our business is impacted by general economic conditions in the North American and international markets, particularly the U.S. and Canadian retail markets including hardware stores, home centers, mass merchants, and other retailers.
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 significant variety 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 decreased in value relative to the RMB by approximately by 2.5% in 2014, and increased by 4.4% in 2015, and increased by 7.2% during the year ended December 31, 2016. The U.S. dollar increased in value relative to the Taiwan dollar by approximately 5.9% in 2014, increased by 3.8% in 2015, and declined by 1.2% during the year ended December 31, 2016.
In addition, the negotiated purchase price of our products may be dependent upon market fluctuations in the cost of raw materials such as 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 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 are also exposed to risk of unfavorable changes in 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 9.1% in 2014, increased by 19.3% in 2015, and decreased by 3.0% in 2016. In response, we have implemented price increases in the Canada operating segment during 2015 and 2016. We may take future pricing action, when warranted, in an attempt to offset a portion of product cost increases. The ability of our operating divisions to institute price increases and seek price concessions, as appropriate, is dependent on competitive market conditions.
18
Product Revenues
The following is revenue based on products for our significant product categories:
Successor |
Predecessor |
|||||||||||||||
(dollars in thousands) |
Twelve Months Ended December 31, 2016 |
Twelve Months Ended December 31, 2015 |
Period from June 30, 2014 through December 31, 2014 |
Six months ended June 29, 2014 |
||||||||||||
Net sales |
||||||||||||||||
Keys |
$ |
92,586 |
$ |
93,840 |
$ |
48,327 |
$ |
45,511 |
||||||||
Engraving |
55,588 |
51,175 |
25,465 |
24,065 |
||||||||||||
Letters, numbers and signs |
38,751 |
37,645 |
19,439 |
16,145 |
||||||||||||
Fasteners |
524,177 |
518,162 |
241,636 |
232,222 |
||||||||||||
Threaded rod |
37,873 |
32,836 |
16,269 |
16,535 |
||||||||||||
Code cutter |
2,318 |
2,452 |
1,425 |
1,392 |
||||||||||||
Builders hardware |
38,086 |
24,568 |
10,482 |
10,106 |
||||||||||||
Other |
25,529 |
26,233 |
14,249 |
11,401 |
||||||||||||
Consolidated net sales |
$ |
814,908 |
$ |
786,911 |
$ |
377,292 |
$ |
357,377 |
Results of Operations
Results of operations for the years ended December 31, 2016 and 2015:
Twelve Months Ended December 31, 2016 |
Twelve Months Ended December 31, 2015 |
||||||||||||
(dollars in thousands) |
Amount |
% of Total |
Amount |
% of Total |
|||||||||
Net sales |
$ |
814,908 |
100.0 |
% |
$ |
786,911 |
100.0 |
% |
|||||
Cost of sales (exclusive of depreciation and amortization shown separately below) |
437,896 |
53.7 |
% |
435,529 |
55.3 |
% |
|||||||
Selling, general and administrative expenses |
265,763 |
32.6 |
% |
252,545 |
32.1 |
% |
|||||||
Transaction, acquisition and integration (a)
|
— |
— |
% |
257 |
— |
% |
|||||||
Depreciation |
32,245 |
4.0 |
% |
29,027 |
3.7 |
% |
|||||||
Amortization |
37,905 |
4.7 |
% |
38,003 |
4.8 |
% |
|||||||
Management fees to related party |
550 |
0.1 |
% |
630 |
0.1 |
% |
|||||||
Other expense (income), net |
(966 |
) |
(0.1 |
)% |
3,522 |
0.4 |
% |
||||||
Income from operations |
41,515 |
5.1 |
% |
27,398 |
3.5 |
% |
|||||||
Interest expense, net of investment income |
63,411 |
7.8 |
% |
62,815 |
8.0 |
% |
|||||||
Loss before income taxes |
(21,896 |
) |
(2.7 |
)% |
(35,417 |
) |
(4.5 |
)% |
|||||
Income tax benefit |
(7,690 |
) |
(0.9 |
)% |
(12,334 |
) |
(1.6 |
)% |
|||||
Net loss |
$ |
(14,206 |
) |
(1.7 |
)% |
$ |
(23,083 |
) |
(2.9 |
)% |
(a) Represents expenses for investment banking, legal, and other professional fees incurred in connection with the Merger Transaction.
Year Ended December 31, 2016 vs December 31, 2015
Net Sales
Net sales for the year ended December 31, 2016 were $814.9 million, or $3.22 million per shipping day, compared to net sales of $786.9 million, or $3.11 million per shipping day for the year ended December 31, 2015. The sales per shipping day for 2016 was approximately 3.6% higher than the sales per shipping day in 2015. The primary contributor for the higher sales during 2016 was $17.1 million in higher sales to national accounts driven by the completion of a construction fastener products
19
(“CFP”) product line rollout in 2015, $11.0 million in higher sales to traditional and regional hardware stores driven by new stores, and $5.2 million from an automotive fastener rollout in 2016. These increases were partially offset by a $3.0 million decrease in sales in Canada due to currency exchange rates and softening demand in the retail and industrial markets.
Cost of Sales
Our cost of sales was $437.9 million, or 53.7% of net sales, for the year ended December 31, 2016, an increase of $2.4 million compared to $435.5 million, or 55.3% of net sales, for the year ended December 31, 2015. The decrease of 1.6% in cost of sales, expressed as a percent of net sales, in 2016 compared to 2015 was due primarily to the $15.0 million reduction in air freight costs, domestic sourcing, and other costs associated with the introduction of the new CFP line in the prior year.
Expenses
Operating expenses were $11.5 million higher for the year ended December 31, 2016 compared to the year ended December 31, 2015. The following changes in underlying trends impacted the change in operating expenses:
• |
Selling expense was $114.2 million in the year ended December 31, 2016, an increase of $6.2 million compared to $108.0 million for the year ended December 31, 2015. The increase in selling expense was primarily due to $7.4 million increase in compensation and benefits expense to accommodate sales growth with big box retail and traditional customers that was partially offset by a decrease in expenses associated with new product and customer rollouts.
|
• |
Warehouse and delivery expenses were $105.9 million for the year ended December 31, 2016, an increase of $5.6 million compared to warehouse and delivery expenses of $100.3 million for the year ended December 31, 2015. The increase in warehouse and delivery expenses was primarily due to $3.0 million increase in compensation and benefits expense, $1.2 million increase in storage to accommodate sales growth with big box retail and traditional customers, and $0.6 million increase in freight. Additionally, we incurred approximately $1.1 million of warehouse expense in 2016 associated with the opening of a West Coast hub which we expect to provide leverage and distribution efficiency.
|
• |
General and administrative (“G&A”) expenses were $45.6 million in the year ended December 31, 2016, an increase of $1.3 million compared to $44.3 million in the year ended December 31, 2015. The increase was primarily due to $4.0 million in higher compensation and benefits, $1.2 million in higher legal fees in 2016 related to our lawsuit against Minute Key Inc. (see Note 13 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional information), and $1.0 million increase in stock compensation expense. These increases were partially offset by a $5.5 million decrease in consulting expense as compared to the year ended December 31, 2015.
|
• |
Depreciation expense was $32.2 million in the year ended December 31, 2016 compared to $29.0 million in the year ended December 31, 2015. The primary reason for the increase in depreciation expense was the fixed asset additions of key and engraving machines and software related to our ERP system.
|
• |
Amortization expense of $37.9 million in the year ended December 31, 2016 is consistent with the amortization expense of $38.0 million in the year ended December 31, 2015.
|
• |
Other income was $1.0 million for the year ended December 31, 2016 compared to the other expense of $3.5 million in the year ended December 31, 2015. The decrease in expense was primarily due to the gain on interest rate swaps when adjusted to fair value and gains on currency revaluation.
|
Interest expense, net, was $63.4 million for the year ended December 31, 2016 compared to $62.8 million in the year ended December 31, 2015. The increase in interest expense was the result of the variable component of our interest rate swaps which started on October 1, 2015 (see Note 11 - Derivatives and Hedging of the Notes to Consolidated Financial Statements for additional information).
Results of Operations
Results of operations for the years ended December 31, 2015 and 2014:
20
Successor |
Predecessor |
|||||||||||||||||||||
Twelve Months Ended December 31, 2015 |
Period from
June 30, 2014 through
December 31, 2014
|
Six months ended
June 29, 2014
|
||||||||||||||||||||
(dollars in thousands) |
Amount |
% of Total |
Amount |
% of
Total
|
Amount |
% of
Total
|
||||||||||||||||
Net sales |
$ |
786,911 |
100.0 |
% |
$ |
377,292 |
100.0 |
% |
$ |
357,377 |
100.0 |
% |
||||||||||
Cost of sales (exclusive of depreciation and amortization shown separately below) |
435,529 |
55.3 |
% |
193,221 |
51.2 |
% |
183,342 |
51.3 |
% |
|||||||||||||
Selling, general and administrative expenses |
252,545 |
32.1 |
% |
115,854 |
30.7 |
% |
156,762 |
43.9 |
% |
|||||||||||||
Transaction, acquisition and integration (a) |
257 |
— |
% |
22,719 |
6.0 |
% |
31,681 |
8.9 |
% |
|||||||||||||
Depreciation |
29,027 |
3.7 |
% |
17,277 |
4.6 |
% |
14,149 |
4.0 |
% |
|||||||||||||
Amortization |
38,003 |
4.8 |
% |
19,128 |
5.1 |
% |
11,093 |
3.1 |
% |
|||||||||||||
Management fees to related party |
630 |
0.1 |
% |
276 |
0.1 |
% |
15 |
— |
% |
|||||||||||||
Other expense (income), net |
3,522 |
0.4 |
% |
576 |
0.2 |
% |
(277 |
) |
(0.1 |
)% |
||||||||||||
Income (loss) from operations |
27,398 |
3.5 |
% |
8,241 |
2.2 |
% |
(39,388 |
) |
(11.0 |
)% |
||||||||||||
Interest expense, net of investment income |
62,815 |
8.0 |
% |
33,366 |
8.8 |
% |
29,266 |
8.2 |
% |
|||||||||||||
Loss before income taxes |
(35,417 |
) |
(4.5 |
)% |
(25,125 |
) |
(6.7 |
)% |
(68,654 |
) |
(19.2 |
)% |
||||||||||
Income tax benefit |
(12,334 |
) |
(1.6 |
)% |
(6,188 |
) |
(1.6 |
)% |
(24,128 |
) |
(6.8 |
)% |
||||||||||
Net loss |
$ |
(23,083 |
) |
(2.9 |
)% |
$ |
(18,937 |
) |
(5.0 |
)% |
$ |
(44,526 |
) |
(12.5 |
)% |
(a) Represents expenses for investment banking, legal, and other professional fees incurred in connection with the Merger Transaction.
Successor Year Ended December 31, 2015 vs Predecessor Period of January 1 - June 29, 2014
Net Sales
Net sales for the year ended December 31, 2015 were $786.9 million, or $3.11 million per shipping day, compared to net sales of $357.4 million, or $2.84 million per shipping day for the first six months of 2014. An increase in revenue of $429.5 million was directly attributable to comparing operating results of 253 shipping days in the full year of 2015 to the results from 126 shipping days in the first six months of 2014. The sales per shipping day of $3.11 million in the full year of 2015 was approximately 9.7% higher than the sales per shipping day of $2.84 million in the first six months of 2014. The primary contributor for the higher average sales per day during 2015 was the inclusion of the new CFP line which accounted for approximately $41.0 million of additional net sales, or $0.16 million per shipping day.
Cost of Sales
Our cost of sales was $435.5 million, or 55.3% of net sales, for the year ended December 31, 2015, an increase of $252.2 million compared to $183.3 million, or 51.3% of net sales, in the six month period ended June 29, 2014. The increase was primarily due to 253 shipping days in the year ended December 31, 2015 as compared to 126 shipping days in the six month period ended June 30, 2014. In addition, the higher sales volume which included the growth in sales of lower margin CFP line products and the higher product costs in the Hillman Canada division as a result of the unfavorable currency exchange on their inventory purchases made in U.S. dollar transactions also had a major impact on the increase as a percent of net sales.
Expenses
Operating expenses were $110.6 million higher for the year ended December 31, 2015 compared to the six month period ended June 29, 2014. The increase in operating expenses is primarily due to the longer 253 shipping day period in the year ended December 31, 2015 which provided unfavorable operating expense variances as compared to the 126 shipping day period in the six month period ended June 29, 2014. The 2015 period includes incremental costs resulting from higher sales volume, introduction of the CFP line, and higher amortization expense related to intangible assets acquired in connection with the Merger Transaction. The first six months of 2014 also includes a significant amount of operating expenses as a result of administrative, stock compensation, and transaction expense incurred in connection with the Merger Transaction. The following changes in underlying trends impacted the change in operating expenses:
21
• |
Selling expense was $108.0 million, or 13.7% of net sales, in the year ended December 31, 2015, an increase of $52.7 million compared to $55.3 million, or 15.5% of net sales, in the six month period ended June 29, 2014. The selling expense expressed as a percentage on net sales decreased in the year ended December 31, 2015 compared to the six month period ended June 29, 2014 primarily as a result of lower sales service payroll and payroll benefit related expenditures and a lower amount of customer display costs.
|
• |
Warehouse and delivery expenses were $100.3 million, or 12.7% of net sales, in the year ended December 31, 2015, an increase of $58.9 million compared to warehouse and delivery expenses of $41.4 million, or 11.6% of net sales, in the six month period ended June 29, 2014. The warehouse and delivery expense expressed as a percentage of net sales was 12.7% in the year ended December 31, 2015 compared to 11.6% in the six month period ended June 29, 2014 as a result of higher overall operating expenses for the separate distribution center dedicated to the shipment of the new CFP line, higher warehouse labor and freight expense in the previously existing distribution centers, and further costs incurred in the new product roll-out to a major Canadian customer.
|
• |
General and administrative (“G&A”) expenses were $44.3 million, or 5.5% of net sales in the year ended December 31, 2015, a decrease of $15.7 million compared to $60.0 million or 16.8% of net sales in the six month period ended June 29, 2014. The G&A expense expressed as a percentage of net sales decreased in the year ended December 31, 2015 compared to the six month period ended June 29, 2014 primarily as a result of stock compensation expense, which is included in G&A. Stock compensation expense was $1.3 million in the year ended December 31, 2015 compared to $39.2 million in the six month period ended June 29, 2014. The stock compensation expense in the 2014 period resulted from an increase in the fair value of the underlying common stock and accelerated vesting of stock options in connection with the Merger Transaction.
|
• |
Transaction, acquisition, and integration ("TA&I") expenses were $0.3 million in the year ended December 31, 2015 compared to $31.7 million in the six month period ended June 29, 2014. The first six months of 2014 contain costs for investment banking, legal, and other expenses incurred in connection with the Merger Transaction.
|
• |
Depreciation expense was $29.0 million in the year ended December 31, 2015 compared to $14.1 million in the six month period ended June 29, 2014. The increase in depreciation expense was the result of comparing the full year of 2015 to the six months period in 2014. In addition, the value of fixed assets subject to depreciation in the 2015 period was increased in connection with the Merger Transaction.
|
• |
Amortization expense was $38.0 million in the year ended December 31, 2015 compared to $11.1 million in the six month period ended June 29, 2014. The increase in amortization was the result of the full year of 2015 compared to the six months period in 2014 and an increase in intangible assets subject to amortization acquired in the Merger Transaction.
|
• |
Other expense was $3.5 million for the year ended December 31, 2015 compared to the other income of $0.3 million in the six month period ended June 29, 2014. The increase in expense was primarily due to the loss on interest rate swaps when adjusted to fair value which were partially offset by gains on FX forward currency contracts.
|
Interest expense, net, was $62.8 million for the year ended December 31, 2015 compared to $29.3 million in the six month period ended June 29, 2014. The increase in interest expense was the result of the full year of 2015 compared to the six months period in 2014 and the increase in debt acquired in connection with the Merger Transaction.
Successor Year Ended December 31, 2015 vs Successor Period of June 30 – December 31, 2014
Net Sales
Net sales for the year ended December 31, 2015 were $786.9 million, or $3.11 million per shipping day, compared to net sales of $377.3 million, or $2.99 million per shipping day for the last six months of 2014. The increase in revenue of $409.6 million was primarily related to comparing operating results of 253 shipping days in the full year of 2015 to the results from 126 shipping days in the last six months of 2014. The sales per shipping day of $3.11 million in the year ended December 31, 2015 was approximately 3.9% higher than the sales per shipping day of $2.99 million in the last six months of 2014 as a result of the introduction of the CFP line in the 2015 period.
Cost of Sales
Our cost of sales was $435.5 million, or 55.3% of net sales, in the year ended December 31, 2015, an increase of $242.3 million compared to $193.2 million, or 51.2% of net sales, in the six month period from June 30 through December 31, 2014. The increase was primarily due to 253 shipping days in the full year of 2015 as compared to 126 shipping days in the six month
22
period in 2014. The increase in the cost of sales as a percentage of net sales was the result of high initial start-up costs and lower product margins associated with the introduction of the CFP line and the higher product costs in the Hillman Canada division as a result of the devaluation of the Canadian dollar on their inventory purchases denominated in U.S. dollars during the year ended December 31, 2015.
Expenses
Operating expenses for the year ended December 31, 2015 were $148.2 million higher when compared to the last six months of 2014. The increase in operating expenses was primarily due to the longer 253 day ship period in the full year of 2015 which provided unfavorable operating expense variances as compared to the 126 day ship period in the last six months of 2014. In addition to the higher sales volume, the high initial start-up costs associated with the introduction of the CFP line and higher amortization expense related to intangible assets acquired in connection with the Merger Transaction had a major impact on the increase in operating expenses in the year ended December 31, 2015. The six month period from June 30 to December 31, 2014 also includes a significant amount of operating expenses as a result of administrative, stock compensation, and transaction expense incurred in connection with the Merger Transaction. The following changes in underlying trends impacted the change in operating expenses:
• |
Selling expense was $108.0 million, or 13.7% of net sales, in the year ended December 31, 2015, an increase of $54.8 million compared to $53.2 million, or 14.1% of net sales, for the last six months of 2014. The selling expense expressed as a percentage of net sales decreased slightly in the year ended December 31, 2015 compared to the last six months of 2014 as a result of lower selling salaries, wages, and related payroll taxes and benefits which were partially offset by higher customer display expense.
|
• |
Warehouse and delivery expense was $100.3 million, or 12.7% of net sales, in the year ended December 31, 2015, an increase of $55.7 million compared to warehouse and delivery expense of $44.6 million, or 11.8% of net sales, in the last six months of 2014. The increase in warehouse and delivery expense in the year ended December 31, 2015 compared to the last six months of 2014 was a result of 253 shipping days in the full year of 2015 compared to 126 shipping days in the last six months of 2014. In addition to the impact of days, warehouse and delivery expenses increased as a result of the roll-out of the new CFP line in 2015 as well as a major customer roll-out and the associated costs in Canada.
|
• |
G&A expenses were $44.3 million, or 5.5% of net sales, in the year ended December 31, 2015, an increase of $26.3 million compared to $18.0 million, or 4.7% of net sales in the last six months of 2014. The increase in G&A expense expressed as a percentage of net sales in the year ended December 31, 2015 compared to the last six months of 2014 was primarily due to increases of $5.6 million in consulting and $2.5 million in severance expenses related to business restructuring.
|
• |
TA&I expenses were $0.3 million in the year ended December 31, 2015 compared to $22.7 million for the last six months of 2014. The six month 2014 period contained investment banking, legal, and other expenses incurred in connection with the Merger Transaction.
|
• |
Depreciation expense was $29.0 million in the year ended December 31, 2015, an increase of $11.7 million compared to $17.3 million for the last six months of 2014. The increase in depreciation expense was primarily the result of comparing the longer full year 2015 period to the last six months of 2014.
|
• |
Amortization expense was $38.0 million in the year ended December 31, 2015, an increase of $18.9 million compared to $19.1 million for the last six months of 2014. The increase in amortization expense was primarily the result of comparing the longer full year of 2015 period to the last six months of 2014.
|
• |
Other expense was $3.5 million in the year ended December 31, 2015 compared to $0.6 million for the last six months of 2014. The increase in other expense was due to comparing the longer full year period of 2015 to the six month period in 2014 and the loss on interest rate swaps when adjusted to fair value which were partially offset by gains on FX forward currency contracts.
|
Interest expense, net, was $62.8 million in the year ended December 31, 2015 compared to $33.4 million for the last six months of 2014. The increase in interest expense was the result of comparing the longer full year period of 2015 to the last six months of 2014, offset by $2.4 million of interest expense on the 10.875% Senior Notes for the month of July 2014, prior to their cancellation in connection with the Merger Transaction. This was in addition to the July 2014 interest on the 6.375% Senior Notes acquired in connection with the Merger Transaction.
23
Results of Operations – Operating Segments
The following table provides supplemental information of our sales and profitability by operating segment (in thousands):
Successor |
Predecessor |
|||||||||||||||
Twelve Months Ended December 31, 2016 |
Twelve Months Ended December 31, 2015 |
Period from
6/30/2014
through
12/31/2014
|
Six Months
Ended
6/29/2014
|
|||||||||||||
Segment Revenues |
||||||||||||||||
United States, excluding All Points |
$ |
658,742 |
$ |
626,283 |
$ |
293,219 |
$ |
269,009 |
||||||||
All Points |
18,784 |
19,375 |
9,362 |
10,238 |
||||||||||||
Canada |
130,255 |
133,152 |
70,566 |
73,867 |
||||||||||||
Mexico |
6,637 |
6,831 |
3,507 |
3,620 |
||||||||||||
Australia |
490 |
1,270 |
638 |
643 |
||||||||||||
Total revenues |
$ |
814,908 |
$ |
786,911 |
$ |
377,292 |
$ |
357,377 |
||||||||
Segment Income (Loss) from Operations |
||||||||||||||||
United States, excluding All Points |
$ |
40,409 |
$ |
32,031 |
$ |
5,072 |
$ |
(44,830 |
) |
|||||||
All Points |
1,739 |
1,407 |
655 |
896 |
||||||||||||
Canada |
932 |
(5,436 |
) |
3,189 |
4,214 |
|||||||||||
Mexico |
(400 |
) |
403 |
73 |
446 |
|||||||||||
Australia |
(1,165 |
) |
(1,007 |
) |
(748 |
) |
(114 |
) |
||||||||
Total income (loss) from operations |
$ |
41,515 |
$ |
27,398 |
$ |
8,241 |
$ |
(39,388 |
) |
Year Ended December 31, 2016 vs December 31, 2015
Net Sales
Net sales for the year ended December 31, 2016 increased $28.0 million compared to the net sales for the year ended December 31, 2015. The United States, excluding All Points operating segment, increased net sales by $32.5 million. The increase was due to $17.1 million in higher sales to our big box retail customers on higher demand and the completion of the new CFP product line rollout in 2015, $11.0 million in higher sales to traditional and regional hardware stores driven by new stores, and $5.2 million from an automotive fastener rollout in 2016. Net sales for our Canada operating segment decreased by $3.0 million due to the impact of unfavorable conversion of their local currency to U.S. dollars. The revenue impact of the remaining operating segments was not material to the overall variance between the two periods.
Income (loss) from Operations
Income from operations for the year ended December 31, 2016 increased $14.1 million compared to the year ended December 31, 2015.
Income from operations of our United States, excluding All Points segment increased by approximately $8.4 million in the year ended December 31, 2016 to $40.4 million as compared to $32.0 million in the year ended December 31, 2015. In addition to the sales increase discussed above, cost of sales expressed as a percentage of net sales decreased from 52.1% in 2015 to 50.6%
in 2016 due to reduced costs driven by our strategic sourcing initiatives and lower air freight costs, domestic sourcing, and other costs associated with the introduction of the new CFP line in the prior year. Gross margin improvement of $25.2 million was partially offset by increases in selling costs of $7.9 million, warehouse and delivery cost of $7.4 million, and depreciation expense of $3.4 million associated with the higher sales volume and inflation. General and administrative costs decreased $1.9 million due to lower consulting fees in 2016.
Income from operations of our Canada segment increased by $6.4 million in the year ended December 31, 2016 to $0.9 million as compared to a loss from operations of $5.4 million in the year ended December 31, 2015. Cost of sales expressed as a percentage of net sales decreased from 68.1% in 2015 to 66.4% in 2016 due to the implementation of price increases and customer mix that translated to $1.3 million improvement in gross margin compared to 2015 despite lower sales due to the unfavorable impact of currency conversion rates. Operating costs decreased $3.5 million primarily due to higher selling and warehousing costs in 2015 for a new customer roll out. Other income was $0.7 million in 2016 compared to other expense of $0.6 million primarily as a result of exchange rate gains in 2016 compared to losses in 2015.
In the year ended December 31, 2016, we decided to exit the Australia market following the withdrawal from Australia of a key customer and we recorded charges of $1.0 million related to the write-off of inventory and other assets.
24
Successor Year Ended December 31, 2015 vs Predecessor Period of January 1 – June 29, 2014
Net Sales
Net sales for the year ended December 31, 2015 were $786.9 million, or $3.11 million per shipping day, compared to net sales of $357.4 million, or $2.84 million per shipping day for the six month period ended June 29, 2014. The increase in revenue of $429.5 million was directly attributable to comparing operating results of 253 shipping days in the full year of 2015 to the results from 126 shipping days during the six month period ended June 29, 2014. The U.S. operating segment net sales per shipping day of $2.48 million for the year ended December 31, 2015 was $0.35 million or 16.4% more than net sales of $2.13 million per shipping day for the six months ended June 29, 2014. The primary reason for the increase in net sales per day in the year ended December 31, 2015 compared to the six month 2014 period was the inclusion of the new CFP line which accounted for approximately $41.0 million of additional sales. The Canada operating segment net sales per shipping day of $526 thousand for the year ended December 31, 2015 was $60 thousand or 10.2% less than net sales of $586 thousand per shipping day for the six months ended June 29, 2014. The decrease in net sales per day in the year ended December 31, 2015 compared to the six month 2014 period was primarily the result of the negative impact of the currency exchange rates. The revenue impact of the remaining operating segments was not material to the overall variance between the two periods.
Income (loss) from Operations
Income from operations for the year ended December 31, 2015 increased $66.8 million compared to the six month period ended June 29, 2014.
Income from operations of our United States, excluding All Points segment increased by $76.9 million in the year ended December 31, 2015 to income of $32.0 million as compared to a loss of $44.8 million in the six months ended June 29, 2014. The loss in the six months ended June 29, 2014 was driven primarily by $70.9 million in operating expense related to the Merger Transaction consisting of $39.2 million in stock compensation expense and $31.7 million in investment banking, legal, and other transaction related expenses. Excluding the $70.9 Merger Transaction expenses, the increase in income from operations was attributable to comparing operating results of 253 shipping days in the full year of 2015 to the results from 126 shipping days during the six month period ended June 29, 2014. The increase in sales from the new CFP line was partially offset by increased costs associated with the introduction of the new line. Cost of sales for the U.S. segment was 52.1% of net sales for the year ended December 31, 2015, compared to 47.6% of net sales in the six months ended June 29, 2014. Depreciation and amortization expense for the U.S. segment was $62.9 million for the year ended December 31, 2015, compared to $23.4 million in the six months ended June 29, 2014 due to the full year of 2015 compared to the six month period in 2014 and the increase in the value of fixed and intangible assets in connection with the Merger Transaction.
Income (Loss) from operations of our Canada segment decreased by $9.6 million in the year ended December 31, 2015 to a loss of $5.4 million as compared to income from operations of $4.2 million in the six months ended June 29, 2014. Cost of sales for the Canada segment was 68.1% of net sales for the year ended December 31, 2015 compared to 62.2% of net sales in the six months ended June 29, 2014. The Canada segment cost of sales expressed as a percentage of net sales increased in the 2015 period compared to the 2014 period as a result of higher U.S. dollar denominated product costs and unfavorable currency exchange between the Canadian dollar and U.S. dollar. The Canada segment SG&A expense, excluding stock compensation expense, increased to 32.5% of net sales in the year ended December 31, 2015 compared to 30.2% in the six months ended June 29, 2014 due to new customer rollout costs in 2015. Depreciation and amortization expense for the Canada segment was $3.5 million for the year ended December 31, 2015, compared to $1.7 million in the six months ended June 29, 2014. The full year of 2015 compared to the six month period in 2014 and the increase in the value of fixed and intangible assets in connection with the Merger Transaction accounted for the majority of the increase in depreciation and amortization expense.
Successor Year Ended December 31, 2015 vs Successor Period of June 30 – December 31, 2014
Net Sales
Net sales for the year ended December 31, 2015 were $786.9 million, or 3.11 million per shipping day, compared to net sales of $377.3 million, or $2.99 million per shipping day for the last six months of 2014. The increase in revenue of $409.6 million was directly attributable to comparing operating results of 253 shipping days during full year 2015 to the results from 126 shipping days for the last six months of 2014. The U.S. operating segment net sales per shipping day of $2.48 million for the year ended December 31, 2015 was $0.15 million or 6.4% more than net sales of $2.33 million per shipping day for the last six months of 2014. The primary reason for the increase in net sales on a per day basis in the year ended December 31, 2015 compared to the last six months of 2014 was the inclusion of the CFP line. The Canada operating segment net sales per shipping day of $526.0 thousand for the year ended December 31, 2015 was $34.0 thousand or 5.4% less than net sales of $560.0 thousand per
25
shipping day for the last six months of 2014. The decrease in net sales on a per day basis for the year ended December 31, 2015 compared to the last six months of 2014 was primarily the result of the negative impact of the currency exchange rates. The revenue impact of the remaining operating segments was not material to the overall variance between the two periods.
Income (loss) from Operations
Income from operations for the year ended December 31, 2015 increased $19.2 million compared to the six month period ended December 31, 2014.
Income from operations of our United States, excluding All Points segment increased by $26.9 million in the year ended December 31, 2015 to $32.0 million as compared to $5.1 million in the six months ended December 31, 2014. The increase in income from operations was attributable to comparing operating results of 253 shipping days in the full year of 2015 to the results from 126 shipping days during the six month period ended December 31, 2014. The increase in sales from the new CFP line was partially offset by increased costs associated with the introduction of the new line. Cost of sales for the U.S. segment was 52.1% of net sales for the year ended December 31, 2015, compared to 47.3% of net sales in the six months ended December 31, 2014. Merger Transaction related expense for the U.S. segment was $0.3 million for the year ended December 31, 2015 compared to $22.1 million for the six months ended December 31, 2014 for investment banking, legal, and other expenses incurred in connection with the Merger Transaction.
Income (Loss) from operations of our Canada segment decreased by $8.6 million in the year ended December 31, 2015 to a loss of $5.4 million as compared to income from operations of $3.2 million in the six months ended December, 2014. Cost of sales for the Canada segment was 68.1% of net sales for the year ended December 31, 2015 compared to 64.6% of net sales in the six months ended December 31, 2014. The Canada segment cost of sales expressed as a percentage of net sales increased in the 2015 period compared to the 2014 period as a result of higher U.S. dollar denominated product costs and unfavorable currency exchange between the Canadian dollar and U.S. dollar. The Canada segment incurred additional SG&A expense of $1.9 million for new customer rollout costs in the year ended December 31, 2015.
Income Taxes
Year Ended December 31, 2016 vs December 31, 2015
In the year ended December 31, 2016, we recorded an income tax benefit of $7.7 million on a pre-tax loss of $21.9 million. The effective income tax rate was 35.1% for the year ended December 31, 2016. In the year ended December 31, 2015, we recorded an income tax benefit of $12.3 million on a pre-tax loss of $35.4 million. The effective income tax rate was 34.8% for the year ended December 31, 2015.
The effective income tax rate differed from the federal statutory tax rate in the year ended December 31, 2016 primarily due to an increase in the reserve for unrecognized tax benefits. In addition, due to the cumulative loss recognized in previous years and in the current year in Australia, any tax benefit recorded is offset by the valuation allowance recorded against the subsidiary's loss. While the tax benefit is offset by the valuation allowance, the loss decreases total income utilized in calculating the effective rate during the year ended December 31, 2016. The effective income tax rate in the year ended December 31, 2016 was also affected by the benefit recorded to reconcile the 2015 income tax return as filed to the tax provision recorded for financial statement purposes. The remaining differences between the effective income tax rate and the federal statutory rate in the year ended December 31, 2016 were primarily due to state and foreign income taxes.
Year Ended December 31, 2015 vs. December 31, 2014
The effective income tax rate was 34.8% for the twelve month period ended December 31, 2015, 24.6% for the six month Successor period from June 30, 2014 through December 31, 2014, and 35.1% for the six month Predecessor period ended June 29, 2014.
The effective income tax rate differed from the federal statutory rate in the twelve month period ended December 31, 2015 primarily due to the increase in the valuation reserve recorded against certain deferred tax assets. The effective income tax rate also differed from the federal statutory rate in the twelve month period ended December 31, 2015 due to the effect of undistributed earnings and profits from a foreign subsidiary.
The effective income tax rate differed from the federal statutory rate in the six month Successor period June 30, 2014 through December 31, 2014 and the six month Predecessor period ended June 29, 2014 primarily due to certain non-deductible costs associated with the Merger Transaction. The effective income tax rate also differed from the federal statutory rate in the six
26
month Successor period June 30, 2014 through December 31, 2014 and the six month Predecessor period ended June 29, 2014 due to a current period benefit caused by the effect of changes in certain state income tax rates on the Company's deferred tax assets and liabilities.
The remaining differences between the federal statutory rate and the effective tax rate in the twelve month period ended December 31, 2015, the six month Successor period June 30, 2014 through December 31, 2014, and the six month Predecessor period ended June 29, 2014 were primarily due to state and foreign income taxes. See Note 5 - Income Taxes, of Notes to Consolidated Financial Statements for income taxes and disclosures related to 2015 and 2014 income tax events.
Liquidity and Capital Resources
Cash Flows
The statements of cash flows reflect the changes in cash and cash equivalents for the years ended December 31, 2016 (Successor), December 31, 2015 (Successor), the six months ended December 31, 2014 (Successor), and the six months period ended June 29, 2014 (Predecessor) by classifying transactions into three major categories: operating, investing, and financing activities. The cash flows from the Merger Transaction are separately discussed below.
Merger Transaction
In connection with the Merger Transaction, Successor Holdco issued common stock for $542.9 million in cash. Proceeds from borrowings under the Senior Facilities provided an additional $566.0 million and proceeds from the 6.375% Senior Notes provided $330.0 million, less net aggregate financing fees of $26.4 million. The debt and equity proceeds were used to repay the existing senior debt, 10.875% Senior Notes, and accrued interest thereon of $657.6 million, to repurchase the existing shareholders' common equity and stock options of $729.6 million. The remaining proceeds were used to pay transaction expenses of $22.0 million and prepaid expenses of $0.1 million.
Operating Activities
Net cash provided by operating activities for the year ended December 31, 2016 was approximately $77.5 million. Operating cash flows for the year ended December 31, 2016 were favorably impacted by our focus on reducing net working capital which translated to improvements in accounts receivable and inventory. Net cash used for operating activities for the year ended December 31, 2015 was approximately $2.2 million and was unfavorably impacted by an increase in inventory of approximately $49.0 million related to the rollouts of the new CFP line and new customers in 2015. Excluding $40.2 million in cash used for the Merger Transaction, net cash provided by operating activities for the six months ended December 31, 2014 was $28.0 million and was the result of the net loss of $3.1 million adjusted for non-cash items. Net cash provided by operating activities for the six months period ended June 29, 2014 of $11.7 million was favorably impacted by increases in the accounts payable and accrued liabilities that were primarily used for seasonal increases in accounts receivable and inventory.
Investing Activities
Net cash used for investing activities was $41.4 million and $26.0 million for the years ended December 31, 2016 and 2015, respectively. The primary use of cash in both periods was our investment in new, state of the art key cutting technology, the KeyKrafter™, as well as engraving machines and the implementation of our ERP system in Canada. Additionally, in the year ended December 31, 2015, we received $2.2 million in proceeds from the sale of property and equipment. Excluding $729.6 million in cash used for the Merger Transaction, net cash used by investing activities for the six months ended December 31, 2014 was $15.0 million of capital expenditures related primarily to key duplicating and engraving machines and our ERP system. Capital expenditures for the six months ended June 29, 2014 totaled $12.9 million, consisting primarily of investments in our key duplicating and engraving machines.
Financing Activities
Net cash used for financing activities was $33.2 million for the year ended December 31, 2016. The borrowings on revolving credit loans provided $16.0 million. The Company used $44.0 million of cash for the repayment of revolving credit loans and $5.5 million for principal payments on the senior term loans.
Net cash provided by financing activities was $22.2 million for the year ended December 31, 2015. The borrowings on revolving credit loans provided $55.0 million. The Company used $27.0 million of cash for the repayment of revolving credit loans and $5.5 million for principal payments on the senior term loans.
27
Excluding $763.2 million in net cash provided by borrowings and capital contributions related to the Merger Transaction, net cash used for financing activities was $17.9 million for the period from June 30, 2014 through December 31, 2014. The Company used $16.0 million of cash for the repayment of revolving credit loans and $2.8 million of cash for the repayment of senior term loans. Net cash used for financing activities was $0.6 million for the six months ended June 29, 2014. The Company received cash of $0.5 million from the exercise of Holdco stock options and used cash to pay $1.0 million in principal payments on the senior term loans under the Senior Facilities.
Liquidity
We believe that projected cash flows from operations and Revolver availability will be sufficient to fund working capital and capital expenditure needs for the next 12 months.
Our working capital (current assets minus current liabilities) position of $214.2 million as of December 31, 2016 represents a decrease of $34.1 million from the December 31, 2015 level of $248.3 million.
Contractual Obligations
Our contractual obligations as of December 31, 2016 are summarized below:
Payments Due |
|||||||||||||||||||
(dollars in thousands) |
Total |
Less Than
One Year
|
1 to 3
Years
|
3 to 5
Years
|
More Than
Five Years
|
||||||||||||||
Junior Subordinated Debentures (1)
|
$ |
108,704 |
$ |
— |
$ |
— |
$ |
— |
$ |
108,704 |
|||||||||
Interest on Jr Subordinated Debentures |
131,488 |
12,231 |
24,463 |
24,463 |
70,331 |
||||||||||||||
Long Term Senior Term Loans |
536,250 |
5,500 |
11,000 |
519,750 |
|||||||||||||||
Bank Revolving Credit Facility |
— |
— |
— |
— |
— |
||||||||||||||
6.375% Senior Notes |
330,000 |
— |
— |
— |
330,000 |
||||||||||||||
KeyWorks License Agreement |
1,548 |
389 |
737 |
422 |
— |
||||||||||||||
Interest payments (2)
|
222,486 |
45,187 |
89,672 |
77,108 |
10,519 |
||||||||||||||
Operating Leases |
63,351 |
10,281 |
17,136 |
11,745 |
24,189 |
||||||||||||||
Deferred Compensation Obligations |
1,787 |
271 |
— |
— |
1,516 |
||||||||||||||
Capital Lease Obligations |
322 |
143 |
160 |
19 |
— |
||||||||||||||
Other Obligations |
1,684 |
678 |
805 |
201 |
— |
||||||||||||||
Uncertain Tax Position Liabilities |
2,060 |
58 |
— |
1,676 |
326 |
||||||||||||||
Total Contractual Cash Obligations (3)
|
$ |
1,399,680 |
$ |
74,738 |
$ |
143,973 |
$ |
635,384 |
$ |
545,585 |
(1) |
The Junior Subordinated Debentures liquidation value is approximately $108,704. |
(2) |
Interest payments for borrowings under the Senior Facilities, the 6.375% Senior Notes, and Revolver borrowings. Interest payments on the variable rate Senior Term Loans were calculated using the actual interest rate of 4.5%, excluding the impact of interest rate swaps, as of December 31, 2016. Interest payments on the 6.375% Senior Notes were calculated at their fixed rate and interest payments on Revolver borrowings were calculated using the adjusted interest rate of 3.95%.
|
(3) |
All of the contractual obligations noted above are reflected on the Company's consolidated balance sheet as of December 31, 2016 except for the interest payments, purchase obligations, and operating leases.
|
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.
Debt Covenants
Terms of the Senior Facilities subject us to a revolving facility test condition whereby a senior secured leverage ratio covenant of no greater than 6.5 times last twelve months Adjusted EBITDA comes into effect if more than 35% of the total Revolver commitment is drawn or utilized in letters of credit at the end of a fiscal quarter. If this covenant comes into effect, it may restrict our ability to incur debt, make investments, pay interest on the junior subordinated debentures, or undertake certain
28
other business activities. As of December 31, 2016, the Revolver loan amount of $0.0 million and outstanding letters of credit of approximately $5.6 million represented 8% of total revolving commitments and this financial covenant was not in effect. The occurrence of an event of default permits the lenders under the Senior Facilities to accelerate repayment of all amounts due. Below are the calculations of the financial covenant with the Senior Facilities requirement for the twelve trailing months ended December 31, 2016.
(dollars in thousands) |
Actual |
Ratio Requirement |
||||
Secured Leverage Ratio |
||||||
Term B-2 Loan |
$ |
536,250 |
||||
Revolving credit facility |
— |
|||||
Capital leases & other obligations |
322 |
|||||
Cash and cash equivalents |
(14,106 |
) |
||||
Total debt |
$ |
522,466 |
||||
Pro-forma Adjusted EBITDA (1) |
$ |
122,977 |
||||
Leverage ratio (must be below requirement) |
4.25 |
6.50 |
(1) Pro-forma Adjusted EBITDA for the twelve months ended December 31, 2016 is presented in the following pro-forma Adjusted EBITDA section.
Adjusted EBITDA
Pro-forma Adjusted EBITDA is not a presentation made in accordance with U.S. generally accepted accounting principles (“GAAP”), and as such, should not be considered a measure of financial performance or condition, liquidity, or profitability. It should not be considered an alternative to GAAP-based net income or income from operations or operating cash flows. Further, because not all companies use identical calculations, amounts reflected by Hillman as pro-forma Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Management believes the information shown below is relevant as it presents the amounts used to calculate covenants which are provided to our lenders. Non-compliance with our debt covenants could result in the requirement to immediately repay all amounts outstanding under such agreements.
The reconciliation of Net loss to pro-forma adjusted EBITDA for the years ended December 31, 2016, 2015, and 2014 follows:
29
(dollars in thousands) |
Year
Ended
2016
|
Year
Ended
2015
|
Year
Ended
2014 (1)
|
||||||||
Net loss |
$ |
(14,206 |
) |
$ |
(23,083 |
) |
$ |
(63,463 |
) |
||
Income tax benefit |
(7,690 |
) |
(12,334 |
) |
(30,316 |
) |
|||||
Interest expense, net |
51,181 |
50,584 |
50,400 |
||||||||
Interest expense on junior subordinated debentures |
12,608 |
12,609 |
12,610 |
||||||||
Investment income on trust common securities |
(378 |
) |
(378 |
) |
(378 |
) |
|||||
Depreciation |
32,245 |
29,027 |
31,426 |
||||||||
Amortization |
37,905 |
38,003 |
30,221 |
||||||||
EBITDA |
111,665 |
94,428 |
30,500 |
||||||||
Stock compensation expense |
2,280 |
1,290 |
39,904 |
||||||||
Management fees |
550 |
630 |
291 |
||||||||
Foreign exchange (gain) loss |
73 |
5,170 |
(550 |
) |
|||||||
Acquisition and integration expense |
— |
257 |
57,834 |
||||||||
Legal fees and settlements |
2,886 |
1,739 |
1,170 |
||||||||
Restructuring costs |
4,771 |
9,934 |
1,303 |
||||||||
Other adjustments |
(705 |
) |
1,756 |
986 |
|||||||
Adjusted EBITDA |
$ |
121,520 |
$ |
115,204 |
$ |
131,438 |
|||||
Pro-forma purchasing savings (2)
|
1,457 |
— |
3,322 |
||||||||
2015 costs to enter CFP market (3)
|
— |
15,048 |
— |
||||||||
2015 costs for Canadian Tire new business |
— |
1,855 |
— |
||||||||
Pro-Forma Adjusted EBITDA |
$ |
122,977 |
$ |
132,107 |
$ |
134,760 |
(1) |
For purposes of the Adjusted EBITDA computation, the predecessor six month period ended June 29, 2014 was combined with the successor six month period ended December 31, 2014. |
(2) |
Represents the pro-forma impact of run-rate cost savings (net of cost increases and amounts already realized) agreed with vendors, based on savings calculated against forecasted stock keeping unit volume and negotiated price changes from our top suppliers. |
(3) |
Represents the amounts spent on airfreight, other expedited delivery costs, and higher domestic sourcing costs to procure CFP product for the Company's entrance into the CFP market. |
Related Party Transactions
The Successor has recorded aggregate management fee charges and expenses from the Oak Hill Funds and CCMP of approximately $0.6 million and for the years ended December 31, 2016 and December 31, 2015, respectively. The Predecessor recorded aggregate management fee charges and expenses from the Oak Hill Funds of $15.0 thousand for the six month period ended June 29, 2014 and $0.3 million for the six month period ended December 31, 2014.
We recorded proceeds from the sale of Holdco stock to members of management and the Board of Directors of $500 for the year ended December 31, 2016, $400 for the year ended December 31, 2015 and $1,000 for the six months ended December 31, 2014. We recorded the purchase of Holdco stock from a former member of management of $540 for the year ended December 31, 2015.
Gregory Mann and Gabrielle Mann are employed by Hillman. Hillman leases an industrial warehouse and office facility from companies under the control of the Manns. We have recorded rental expense for the lease of this facility on an arm's length basis. Our rental expense for the lease of this facility was $0.3 million for the years ended December 31, 2016 and December 31, 2015, respectively. In the six month period ended December 31, 2014, the Successor's rental expense for the lease of this facility was $0.1 million. In the six month period ended June 29, 2014, the Predecessor's rental expense for the lease of this facility was $0.2 million.
The Company entered into three leases for five properties containing industrial warehouse, manufacturing plant, and office facilities on February 19, 2013. The owners of the properties under one lease are relatives of Richard Paulin, who is employed by The Hillman Group Canada ULC, and the owner of the properties under the other two leases is a company which is owned
30
by Richard Paulin and certain of his relatives. We have recorded rental expense for the three leases on an arm's length basis. The Successor's rental expense for these facilities was $0.6 million for the years ended December 31, 2016 and December 31, 2015, respectively. In the six month period ended December 31, 2014, the Successor's rental expense for these facilities was $0.4 million. In the six month period ended June 29, 2014, the Predecessor's rental expense for these facilities was $0.4 million.
Critical Accounting Policies and Estimates
Our accounting policies are more fully described in Note 2 - Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements. As disclosed in that note, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events cannot be predicted with certainty and, therefore, actual results could differ from those estimates. The following section describes our critical accounting policies.
Revenue Recognition:
Revenue is recognized when products are shipped or delivered to customers depending upon when title and risks of ownership have passed and the collection of the relevant receivables is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore excluded from revenues in the consolidated statements of comprehensive loss.
We offer a variety of sales incentives to our customers primarily in the form of discounts, rebates, and slotting fees. Discounts are recognized in the financial statements at the date of the related sale. Rebates are based on the revenue to date and the contractual rebate percentage to be paid. A portion of the cost of the rebate is allocated to each underlying sales transaction. Discounts, rebates, and slotting fees are included in the determination of net sales.
We also establish reserves for customer returns and allowances. The reserve is established based on historical rates of returns and allowances. The reserve is adjusted quarterly based on actual experience. Returns and allowances are included in the determination of net sales.
We have determined that our customer product sales arrangements contain multiple elements. The following is a description of the elements present in the typical Hillman sales arrangements:
• |
One-time design and set-up of a customized store display. |
• |
One-time cost of customized store display (such as racks and hooks) and merchandising materials (such as point of sale signage) to hold solely Hillman products. |
• |
One-time opening order sales of Hillman products for store display. |
• |
On-going store visits by Hillman sales and service representatives for order taking, maintaining store displays, and exploring new sales opportunities. |
• |
On-going reorder sales of Hillman products used in store display. |
After consideration of the guidance provided in Accounting Standards Codification (“ASC”) 605-25-25, we have determined that all elements would be considered together under the same one unit of accounting.
Accounts Receivable and Allowance for Doubtful Accounts:
We establish the allowance for doubtful accounts using the specific identification method and also provide a reserve in the aggregate. The estimates for calculating the aggregate reserve are based on historical information which includes the aging of customer receivables and adjustments for any collectability concerns. We have not made any material changes to the accounting methodology used to establish and adjust our aggregate reserve during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our aggregate reserve. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 5% change in our aggregate reserve at December 31, 2016 would have affected net earnings by less than $0.1 million. Increases to the allowance for doubtful accounts result in a corresponding expense. We write off individual accounts receivable when they become uncollectible. The allowance for doubtful accounts was $0.9 million and $0.6 million as of December 31, 2016 and 2015, respectively.
31
Inventory Realization:
Inventories consisting predominantly of finished goods are valued at the lower of cost or market, cost being determined principally on the weighted average cost method. Excess and obsolete inventories are carried at net realizable value. The historical usage rate is the primary factor used in assessing the net realizable value of excess and obsolete inventory. A reduction in the carrying value of an inventory item from cost to market is recorded for inventory with no usage in the twenty-four month period or with excess on-hand quantities as determined based on product category and stage in the product life cycle. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our excess and obsolete inventory reserve. However, if our estimates regarding excess and obsolete inventory are inaccurate, we may be exposed to losses or gains that could be material. A 5% difference in actual excess and obsolete inventory reserved for at December 31, 2016, would have affected net earnings by less than $1 million in fiscal 2016.
Goodwill:
We have adopted guidance regarding the testing for goodwill impairment that permits us to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then we would perform the two-step goodwill impairment test. The first step, used to identify potential impairment, is a comparison of a reporting unit’s estimated fair value to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, applicable goodwill is considered to be not impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of the impairment, if any. The second step requires us to calculate an implied fair value of goodwill at the reporting unit level. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.
Our annual impairment assessment is performed for the reporting units as of October 1. In 2016 and 2015, we did not conduct an optional qualitative assessment of possible goodwill impairment for any reporting unit, rather we went directly to performance of the quantitative assessment. An independent appraiser assessed the value of our reporting units based on a discounted cash flow model and multiple of earnings. Assumptions critical to our fair value estimates under the discounted cash flow model include the discount rate, projected average revenue growth and projected long-term growth rates in the determination of terminal values. The results of the quantitative assessment in 2016 and 2015 indicated that the fair value of each reporting unit was in excess of its carrying value.
In 2016 and 2015, the fair value of each reporting unit except the United States excluding All Points reporting unit, was in excess of its carrying value by more than 10%. In 2016 and 2015, the fair value of United States, excluding All Points reporting unit, exceeded its carrying value by approximately 4% and 5%, respectively. A 100 basis point decrease in the projected long-term growth rate or a 100 basis point increase in the discount rate for this reporting unit could decrease the fair value by enough to result in some impairment based on the current forecast model. Future declines in the market and deterioration in earnings could lead to a step 2 calculation to quantify a potential impairment. The United States, excluding All Points reporting unit had goodwill totaling $580.4 million at December 31, 2016.
In considering the step zero approach to testing goodwill for impairment, we performed a qualitative analysis in 2014 which evaluated factors including, but not limited to, macro-economic conditions, market and industry conditions, internal cost factors, competitive environment, results of past impairment tests, and the operational stability and overall financial performance of the reporting units. During the fourth quarter of 2014, we utilized a qualitative assessment for reporting units where no significant change occurred and no potential impairment indicators existed since the previous evaluation of goodwill, and concluded it is more-likely-than-not that the fair value was more than its carrying value on a reporting unit basis. No impairment charges were recorded in 2014 as a result of the qualitative annual impairment assessment.
Long-Lived Assets:
We evaluate our long-lived assets for impairment and will continue to evaluate them based on the estimated undiscounted future cash flows as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. No impairment charges were recognized for long-lived assets in the years ended December 31, 2016, 2015, or 2014.
Income Taxes:
Deferred income taxes are computed using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the temporary differences are expected to reverse.
32
Valuation allowances are provided for tax benefits where it is more likely than not that certain tax benefits will not be realized. Adjustments to valuation allowances are recorded for changes in utilization of the tax related item. For additional information, see Note 5 - Income Taxes, of the Notes to the Consolidated Financial Statements.
In accordance with guidance regarding the accounting for uncertainty in income taxes, we recognize a tax position if, based solely on its technical merits, it is more likely than not to be sustained upon examination by the relevant taxing authority.
If a tax position does not meet the more likely than not recognition threshold, we do not recognize the benefit of that position in our financial statements. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements.
Recent Accounting Pronouncements:
Recently issued accounting standards are described in Note 3 - Recent Accounting Pronouncements of the Notes to Consolidated Financial Statements.
Item 7A – Quantitative and Qualitative Disclosures About Market Risk.
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 swap and interest rate cap transactions only to the extent considered necessary to meet our objectives.
Based on our exposure to variable rate borrowings at December 31, 2016, after consideration of our LIBOR 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 $4.1 million.
Foreign Currency Exchange
We are exposed to foreign exchange rate changes of the Australian, Canadian, and Mexican currencies as it impacts the $136.4 million tangible and intangible net asset value of our Australian, Canadian, and Mexican subsidiaries as of December 31, 2016. The foreign subsidiaries net tangible assets were $67.9 million and the net intangible assets were $68.5 million as of December 31, 2016.
We utilize foreign exchange forward contracts to manage the exposure to currency fluctuations in the Canadian dollar versus the U.S. Dollar. See Note 11 - Derivatives and Hedging, of the Notes to the Consolidated Financial Statements.
Item 8 – Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page(s) |
|
Consolidated Financial Statements: |
|
Financial Statement Schedule: |
|
33
Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of The Hillman Companies, Inc. and its consolidated subsidiaries; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of The Hillman Companies, Inc. and its consolidated subsidiaries are being made only in accordance with authorizations of management and directors of The Hillman Companies, Inc. and its consolidated subsidiaries, as appropriate; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of The Hillman Companies, Inc. and its consolidated subsidiaries that could have a material effect on the consolidated financial statements.
Our management, with the participation of our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2016, the end of our fiscal year. Management based its assessment on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed under the direction of management.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation.
Based on its assessment, our management has concluded that our internal control over financial reporting was effective, as of December 31, 2016, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. We reviewed the results of management's assessment with the Audit Committee of The Hillman Companies, Inc.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
/s/ GREGORY J. GLUCHOWSKI, JR. |
/s/ JEFFREY S. LEONARD |
|||
Gregory J. Gluchowski, Jr. |
Jeffrey S. Leonard |
|||
President and Chief Executive Officer |
Chief Financial Officer |
|||
Dated: |
March 30, 2017 |
Dated: |
March 30, 2017 |
34
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Hillman Companies, Inc.:
We have audited the accompanying consolidated balance sheets of The Hillman Companies, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2016 (Successor), the six months ended December 31, 2014 (Successor), and the six months ended June 29, 2014 (Predecessor). In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II - Valuation Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Hillman Companies, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2016 (Successor), the six months ended December 31, 2014 (Successor), and the six months ended June 29, 2014 (Predecessor), in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Cincinnati, Ohio
March 30, 2017
35
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31, 2016 |
December 31, 2015 |
||||||
ASSETS |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ |
14,106 |
$ |
11,385 |
|||
Accounts receivable, net of allowances of $907 ($601 - 2015) |
71,082 |
73,581 |
|||||
Inventories, net |
220,893 |
243,683 |
|||||
Deferred income taxes, net |
— |
13,881 |
|||||
Other current assets |
13,086 |
10,541 |
|||||
Total current assets |
319,167 |
353,071 |
|||||
Property and equipment, net of accumulated depreciation of $74,713 ($43,074 - 2015) |
119,428 |
110,392 |
|||||
Goodwill |
615,682 |
615,515 |
|||||
Other intangibles, net of accumulated amortization of $94,658 ($56,782 - 2015) |
715,812 |
753,483 |
|||||
Other assets |
11,547 |
12,538 |
|||||
Total assets |
$ |
1,781,636 |
$ |
1,844,999 |
|||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||
Current liabilities: |
|||||||
Accounts payable |
$ |
61,906 |
$ |
65,008 |
|||
Current portion of senior term loans |
5,500 |
5,500 |
|||||
Current portion of capitalized lease and other obligations |
143 |
217 |
|||||
Accrued expenses: |
|||||||
Salaries and wages |
8,303 |
5,408 |
|||||
Pricing allowances |
4,982 |
7,216 |
|||||
Income and other taxes |
3,208 |
2,982 |
|||||
Interest |
9,776 |
9,843 |
|||||
Other accrued expenses |
11,146 |
8,548 |
|||||
Total current liabilities |
104,964 |
104,722 |
|||||
Long-term debt |
973,455 |
1,004,819 |
|||||
Deferred income taxes, net |
237,312 |
259,213 |
|||||
Other non-current liabilities |
7,979 |
7,701 |
|||||
Total liabilities |
1,323,710 |
1,376,455 |
|||||
Commitments and Contingencies (Note 13) |
— |
— |
|||||
Stockholders' Equity: |
|||||||
Preferred stock, $.01 par, 5,000 shares authorized, none issued and outstanding at December 31, 2016 and 2015 |
— |
— |
|||||
Common stock, $.01 par, 5,000 shares authorized, issued and outstanding at December 31, 2016 and 2015 |
— |
— |
|||||
Additional paid-in capital |
548,534 |
545,754 |
|||||
Accumulated deficit |
(56,226 |
) |
(42,020 |
) |
|||
Accumulated other comprehensive loss |
(34,382 |
) |
(35,190 |
) |
|||
Total stockholders' equity |
457,926 |
468,544 |
|||||
Total liabilities and stockholders' equity |
$ |
1,781,636 |
$ |
1,844,999 |
The Notes to Consolidated Financial Statements are an integral part of these statements.
36
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(dollars in thousands)
Successor |
Predecessor |
|||||||||||||||
Year Ended
12/31/2016
|
Year Ended
12/31/2015
|
Period from 06/30/2014 through 12/31/2014 |
Six Months
Ended
06/29/2014
|
|||||||||||||
Net sales |
$ |
814,908 |
$ |
786,911 |
$ |
377,292 |
$ |
357,377 |
||||||||
Cost of sales (exclusive of depreciation and amortization shown separately below) |
437,896 |
435,529 |
193,221 |
183,342 |
||||||||||||
Selling, general and administrative expenses |
265,763 |
252,545 |
115,854 |
156,762 |
||||||||||||
Transaction, acquisition, and integration expenses |
— |
257 |
22,719 |
31,681 |
||||||||||||
Depreciation |
32,245 |
29,027 |
17,277 |
14,149 |
||||||||||||
Amortization |
37,905 |
38,003 |
19,128 |
11,093 |
||||||||||||
Management fees to related party |
550 |
630 |
276 |
15 |
||||||||||||
Other (income) expense |
(966 |
) |
3,522 |
576 |
(277 |
) |
||||||||||
Income from operations |
41,515 |
27,398 |
8,241 |
(39,388 |
) |
|||||||||||
Interest expense, net |
51,181 |
50,584 |
27,250 |
23,150 |
||||||||||||
Interest expense on junior subordinated debentures |
12,608 |
12,609 |
6,305 |
6,305 |
||||||||||||
Investment income on trust common securities |
(378 |
) |
(378 |
) |
(189 |
) |
(189 |
) |
||||||||
Loss before income taxes |
(21,896 |
) |
(35,417 |
) |
(25,125 |
) |
(68,654 |
) |
||||||||
Income tax benefit |
(7,690 |
) |
(12,334 |
) |
(6,188 |
) |
(24,128 |
) |
||||||||
Net loss |
$ |
(14,206 |
) |
$ |
(23,083 |
) |
$ |
(18,937 |
) |
$ |
(44,526 |
) |
||||
Net loss from above |
$ |
(14,206 |
) |
$ |
(23,083 |
) |
$ |
(18,937 |
) |
$ |
(44,526 |
) |
||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation adjustments |
808 |
(22,666 |
) |
(12,524 |
) |
(95 |
) |
|||||||||
Total other comprehensive income (loss) |
808 |
(22,666 |
) |
(12,524 |
) |
(95 |
) |
|||||||||
Comprehensive loss |
$ |
(13,398 |
) |
$ |
(45,749 |
) |
$ |
(31,461 |
) |
$ |
(44,621 |
) |
The Notes to Consolidated Financial Statements are an integral part of these statements.
37
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Successor |
Predecessor |
|||||||||||||||
Year Ended
12/31/2016
|
Year Ended
12/31/2015
|
Period from 06/30/2014 through 12/31/2014 |
Six months Ended
06/29/2014
|
|||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net loss |
$ |
(14,206 |
) |
$ |
(23,083 |
) |
$ |
(18,937 |
) |
$ |
(44,526 |
) |
||||
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
|
||||||||||||||||
Depreciation and amortization |
70,150 |
67,030 |
36,405 |
25,242 |
||||||||||||
(Gain) loss on dispositions of property and equipment |
364 |
(405 |
) |
120 |
— |
|||||||||||
Deferred income taxes |
(8,076 |
) |
(13,216 |
) |
(7,226 |
) |
(24,458 |
) |
||||||||
Deferred financing and original issue discount amortization |
2,627 |
2,718 |
2,405 |
1,374 |
||||||||||||
Stock-based compensation expense |
2,280 |
1,290 |
675 |
39,229 |
||||||||||||
Loss on disposition of Australia assets |
1,047 |
— |
— |
— |
||||||||||||
Other non-cash interest and change in value of interest rate swap |
(706 |
) |
1,629 |
935 |
— |
|||||||||||
Changes in operating items: |
||||||||||||||||
Accounts receivable |
2,485 |
11,471 |
22,434 |
(25,267 |
) |
|||||||||||
Inventories |
23,668 |
(48,982 |
) |
(14,641 |
) |
(17,851 |
) |
|||||||||
Other assets |
(2,697 |
) |
(1,956 |
) |
(8,397 |
) |
8,799 |
|||||||||
Accounts payable |
(2,280 |
) |
1,013 |
6,187 |
20,811 |
|||||||||||
Interest payable on junior subordinated debentures |
— |
— |
(1,019 |
) |
1,019 |
|||||||||||
Other accrued liabilities |
2,931 |
907 |
(28,291 |
) |
31,183 |
|||||||||||
Other items, net |
(94 |
) |
(593 |
) |
(2,799 |
) |
(3,843 |
) |
||||||||
Net cash provided by (used for) operating activities |
77,493 |
(2,177 |
) |
(12,149 |
) |
11,712 |
||||||||||
Cash flows from investing activities: |
||||||||||||||||
Acquisition of Hillman Companies, Inc. |
— |
— |
(729,616 |
) |
— |
|||||||||||
Capital expenditures |
(41,355 |
) |
(28,199 |
) |
(14,975 |
) |
(12,933 |
) |
||||||||
Proceeds from sale of property and equipment |
— |
2,182 |
— |
— |
||||||||||||
Net cash used for investing activities |
(41,355 |
) |
(26,017 |
) |
(744,591 |
) |
(12,933 |
) |
||||||||
Cash flows from financing activities: |
||||||||||||||||
Borrowings of senior term loans |
— |
— |
550,000 |
— |
||||||||||||
Repayments of senior term loans |
(5,500 |
) |
(5,500 |
) |
(387,157 |
) |
(992 |
) |
||||||||
Borrowings of revolving credit loans |
16,000 |
55,000 |
16,000 |
— |
||||||||||||
Repayments of revolving credit loans |
(44,000 |
) |
(27,000 |
) |
(16,000 |
) |
— |
|||||||||
Principal payments under capitalized lease obligations |
(215 |
) |
(158 |
) |
(112 |
) |
(84 |
) |
||||||||
Borrowings of senior notes |
— |
— |
330,000 |
— |
||||||||||||
Repayment of senior notes |
— |
— |
(265,000 |
) |
— |
|||||||||||
Repurchase Holdco stock from a former member of management |
— |
(540 |
) |
— |
— |
|||||||||||
Proceeds from sale of Holdco stock |
500 |
400 |
— |
474 |
||||||||||||
Proceeds from sale of successor equity securities |
— |
— |
542,929 |
— |
||||||||||||
Capital contribution from board member |
— |
— |
1,000 |
— |
||||||||||||
Financing fees |
— |
— |
(26,355 |
) |
— |
|||||||||||
Repayments of other credit obligations |
— |
— |
(70 |
) |
— |
|||||||||||
Net cash (used for) provided by financing activities |
(33,215 |
) |
22,202 |
745,235 |
(602 |
) |
||||||||||
Effect of exchange rate changes on cash |
(202 |
) |
(1,108 |
) |
(3,040 |
) |
(116 |
) |
||||||||
Net increase (decrease) in cash and cash equivalents |
2,721 |
(7,100 |
) |
(14,545 |
) |
(1,939 |
) |
|||||||||
Cash and cash equivalents at beginning of period |
11,385 |
18,485 |
33,030 |
34,969 |
||||||||||||
Cash and cash equivalents at end of period |
$ |
14,106 |
$ |
11,385 |
$ |
18,485 |
$ |
33,030 |
The Notes to Consolidated Financial Statements are an integral part of these statements.
38
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(dollars in thousands)
Common
Stock
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
(Loss)
|
Total Stockholders' Equity |
|||||||||||||||
Balance at December 31, 2013 - Predecessor |
$ |
— |
$ |
292,989 |
$ |
(26,199 |
) |
$ |
(4,871 |
) |
$ |
261,919 |
|||||||
Net loss |
— |
— |
(44,526 |
) |
— |
(44,526 |
) |
||||||||||||
FMV adjustment to common stock with put options |
— |
(4,876 |
) |
— |
— |
(4,876 |
) |
||||||||||||
Exercise of stock options |
— |
804 |
— |
— |
804 |
||||||||||||||
Change in cumulative foreign currency translation adjustment |
— |
— |
— |
(95 |
) |
(95 |
) |
||||||||||||
Balance at June 29, 2014 - Predecessor |
— |
288,917 |
(70,725 |
) |
(4,966 |
) |
213,226 |
||||||||||||
Close Predecessor's stockholders' equity at merger date |
— |
(288,917 |
) |
70,725 |
4,966 |
(213,226 |
) |
||||||||||||
Capital contribution from parent |
— |
542,929 |
— |
— |
542,929 |
||||||||||||||
Net loss |
— |
— |
(18,937 |
) |
— |
(18,937 |
) |
||||||||||||
Stock based compensation |
— |
675 |
— |
— |
675 |
||||||||||||||
Proceeds from sale of 1,000 Holdco shares to Board member |
— |
1,000 |
— |
— |
1,000 |
||||||||||||||
Change in cumulative foreign currency translation adjustment |
— |
— |
— |
(12,524 |
) |
(12,524 |
) |
||||||||||||
Balance at December 31, 2014 - Successor |
— |
544,604 |
(18,937 |
) |
(12,524 |
) |
513,143 |
||||||||||||
Net loss |
— |
— |
(23,083 |
) |
— |
(23,083 |
) |
||||||||||||
Stock based compensation |
— |
1,290 |
— |
— |
1,290 |
||||||||||||||
Purchase of 540 Holdco shares from former member of management |
— |
(540 |
) |
— |
— |
(540 |
) |
||||||||||||
Proceeds from sale of 400 Holdco shares of stock |
— |
400 |
— |
— |
400 |
||||||||||||||
Change in cumulative foreign currency translation adjustment |
— |
— |
— |
(22,666 |
) |
(22,666 |
) |
||||||||||||
Balance at December 31, 2015 - Successor |
— |
545,754 |
(42,020 |
) |
(35,190 |
) |
468,544 |
||||||||||||
Net loss |
— |
— |
(14,206 |
) |