Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018
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 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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
ý  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Emerging growth company
 
¨
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    YES  ¨    NO  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
On November 9, 2018, 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 symbol HLM.Pr.

Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

INDEX
 
PART I. FINANCIAL INFORMATION
PAGE
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


Page 2 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands, except per share amounts)


 
September 29,
2018
 
December 30,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,173

 
$
9,937

Accounts receivable, net of allowances of $1,031 ($1,121 - 2017)
94,334

 
78,994

Inventories, net
268,517

 
219,479

Other current assets
7,778

 
11,850

Total current assets
378,802

 
320,260

Property and equipment, net of accumulated depreciation of $122,458 ($98,674 - 2017)
204,997

 
153,143

Goodwill
678,416

 
620,503

Other intangibles, net of accumulated amortization of $162,528 ($132,659 - 2017)
736,263

 
693,195

Other assets
11,594

 
12,116

Total assets
$
2,010,072

 
$
1,799,217

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
115,608

 
$
74,051

Current portion of debt and capital leases
7,482

 
5,706

Accrued expenses:
 
 
 
Salaries and wages
10,826

 
9,784

Pricing allowances
5,149

 
5,908

Income and other taxes
4,488

 
4,146

Interest
4,521

 
9,717

Other accrued expenses
18,229

 
19,911

Total current liabilities
166,303

 
129,223

Long term debt
1,204,647

 
989,674

Deferred income taxes, net
151,462

 
145,728

Other non-current liabilities
6,880

 
7,189

Total liabilities
$
1,529,292

 
$
1,271,814

Commitments and contingencies (Note 5)
 
 
 
Stockholder's Equity:
 
 
 
Preferred stock, $.01 par, 5,000 shares authorized, none issued or outstanding at September 29, 2018 and December 30, 2017
—

 
—

Common stock, $.01 par, 5,000 shares authorized, issued and outstanding at September 29, 2018 and December 30, 2017
—

 
—

Additional paid-in capital
549,159

 
551,518

(Accumulated deficit) retained earnings
(37,950
)
 
2,422

Accumulated other comprehensive loss
(30,429
)
 
(26,537
)
Total stockholder's equity
480,780

 
527,403

Total liabilities and stockholder's equity
$
2,010,072

 
$
1,799,217

The accompanying notes are an integral part of these consolidated financial statements.


Page 3 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(dollars in thousands)



 
Thirteen Weeks Ended
September 29, 2018
 
Thirteen Weeks Ended
September 30, 2017
 
Thirty-nine Weeks Ended
September 29, 2018
 
Thirty-nine Weeks Ended
September 30, 2017
Net sales
$
243,839

 
$
218,955

 
$
697,588

 
$
631,994

Cost of sales (exclusive of depreciation and amortization shown separately below)
130,321

 
119,468

 
373,938

 
341,315

Selling, general and administrative expenses
83,575

 
69,165

 
233,448

 
203,091

Depreciation
12,004

 
7,300

 
30,481

 
25,473

Amortization
10,437

 
9,500

 
29,872

 
28,442

Management fees to related party
134

 
127

 
396

 
390

Other (income) expense
462

 
(589
)
 
59

 
(2,303
)
Income from operations
6,906

 
13,984

 
29,394

 
35,586

Interest expense, net
16,122

 
12,787

 
44,054

 
37,960

Interest expense on junior subordinated debentures
3,152

 
3,152

 
9,456

 
9,456

Refinancing charges
—

 
—

 
8,542

 
—

Investment income on trust common securities
(95
)
 
(95
)
 
(284
)
 
(284
)
Loss before income taxes
(12,273
)
 
(1,860
)
 
(32,374
)
 
(11,546
)
Income tax expense (benefit)
(1,565
)
 
(538
)
 
2,182

 
(4,759
)
Net loss
$
(10,708
)
 
$
(1,322
)
 
$
(34,556
)
 
$
(6,787
)
Net loss from above
$
(10,708
)
 
$
(1,322
)
 
$
(34,556
)
 
$
(6,787
)
Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,790

 
4,601

 
(3,892
)
 
10,034

Total other comprehensive (loss) income
2,790

 
4,601

 
(3,892
)
 
10,034

Comprehensive (loss) income
$
(7,918
)
 
$
3,279

 
$
(38,448
)
 
$
3,247


The accompanying notes are an integral part of these consolidated financial statements.



Page 4 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)

 
Thirty-nine Weeks Ended
September 29, 2018
 
Thirty-nine Weeks Ended
September 30, 2017
Cash flows from operating activities:
 
 
 
Net loss
$
(34,556
)
 
$
(6,787
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
60,353

 
53,915

Deferred income taxes
1,876

 
(5,920
)
Deferred financing and original issue discount amortization
1,522

 
1,907

Stock-based compensation expense
1,219

 
2,025

Loss on debt restructuring
8,542

 
—

Asset impairment
832

 
—

Loss on disposal of property and equipment
300

 
20

Other non-cash interest and change in value of interest rate swap
(1,677
)
 
(984
)
Changes in operating items:
 
 
 
Accounts receivable
(16,059
)
 
(12,393
)
Inventories
(45,687
)
 
1,311

Other assets
(1,089
)
 
(583
)
Accounts payable
38,482

 
10,735

Other accrued liabilities
(8,205
)
 
10,173

Other items, net
—

 
8

Net cash provided by operating activities
5,853

 
53,427

Cash flows from investing activities:
 
 
 
Acquisition of business, net of cash received
(154,498
)
 
—

Capital expenditures
(54,222
)
 
(35,864
)
Other items, net
—

 
(1,500
)
Net cash used for investing activities
(208,720
)
 
(37,364
)
Cash flows from financing activities:
 
 
 
Repayments of senior term loans
(532,488
)
 
(4,125
)
Borrowings on senior term loans
695,000

 
—

Financing fees
(12,717
)
 
—

Borrowings on revolving credit loans
117,500

 
5,000

Repayments of revolving credit loans
(62,500
)
 
(5,000
)
Principal payments under capitalized lease obligations
(160
)
 
(104
)
Proceeds from exercise of stock options
200

 
—

Dividend to Holdco
(3,780
)
 
—

Net cash provided by (used in) financing activities
201,055

 
(4,229
)
Effect of exchange rate changes on cash
48

 
(1,450
)
Net (decrease) increase in cash and cash equivalents
(1,764
)
 
10,384

Cash and cash equivalents at beginning of period
9,937

 
14,106

Cash and cash equivalents at end of period
$
8,173

 
$
24,490

Supplemental disclosure of cash flow information:
 
 
 
Interest paid on junior subordinated debentures, net
$
9,172

 
$
9,172

Interest paid
44,773

 
41,047

Income taxes paid
632

 
253


The accompanying notes are an integral part of these consolidated financial statements.

Page 5 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

 

1. Basis of Presentation:
The accompanying unaudited financial statements include the condensed consolidated accounts of The Hillman Companies, Inc. (“Hillman Companies”) and its wholly-owned subsidiaries (collectively “Hillman” or the “Company”). All significant intercompany balances and transactions have been eliminated. The Hillman Companies, Inc. is a wholly-owned subsidiary of HMAN Intermediate II Holdings Corp., and a wholly-owned subsidiary of HMAN Group Holdings Inc. (“Holdco”).

The accompanying unaudited condensed consolidated financial statements present information in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. Accordingly, they do not include all information or footnotes required by U.S. generally accepted accounting principles for complete financial statements. Operating results for the thirty-nine weeks ended September 29, 2018 do not necessarily indicate the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report filed on Form 10-K for the year ended December 30, 2017.

2. Summary of Significant Accounting Policies:
The significant accounting policies should be read in conjunction with the significant accounting policies included in the Form 10-K for the year ended December 30, 2017.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses for the reporting periods. Actual results may differ from these estimates.

Revenue Recognition:
Revenue is recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.
The Company offers a variety of sales incentives to its customers primarily in the form of discounts, rebates, and slotting fees. Discounts are recognized in the consolidated 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.
The Company also establishes 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.

Page 6 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

The following table disaggregates our revenue by product category.

 
Thirteen Weeks Ended September 29, 2018
 
United States
 
Canada
 
Other
 
Consolidated
Fastening Solutions
114,285

 
28,018

 
1,717

 
144,020

Custom Solutions
62,384

 
1,826

 
21

 
64,231

Home Solutions
27,781

 
7,578

 
229

 
35,588

Total Revenue
204,450

 
37,422

 
1,967

 
243,839

 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended September 30, 2017
 
United States
 
Canada
 
Other
 
Consolidated
Fastening Solutions
97,514

 
28,442

 
1,599

 
127,555

Custom Solutions
55,323

 
1,821

 
15

 
57,159

Home Solutions
26,868

 
7,167

 
206

 
34,241

Total Revenue
179,705

 
37,430

 
1,820

 
218,955


 
Thirty-nine weeks ended September 29, 2018
 
United States
 
Canada
 
Other
 
Consolidated
Fastening Solutions
334,231

 
85,997

 
5,064

 
425,292

Custom Solutions
168,828

 
4,641

 
47

 
173,516

Home Solutions
78,179

 
19,936

 
665

 
98,780

Total Revenue
581,238

 
110,574

 
5,776

 
697,588

 
 
 
 
 
 
 
 
 
Thirty-nine weeks ended September 30, 2017
 
United States
 
Canada
 
Other
 
Consolidated
Fastening Solutions
284,657

 
82,908

 
4,519

 
372,084

Custom Solutions
158,011

 
5,074

 
36

 
163,121

Home Solutions
77,889

 
18,310

 
590

 
96,789

Total Revenue
520,557

 
106,292

 
5,145

 
631,994



Fastening solutions revenues consist primarily of the delivery of fasteners, anchors, and specialty products as well as in-store merchandising services for the related product category.
Custom solutions revenues consist primarily of the delivery of keys and key accessories, pet tags, and letters, numbers, and signs (“LNS”) as well as in-store merchandising services for the related product categories and access to our proprietary key duplicating and engraving equipment.
Home solutions revenues consist primarily of the delivery of builders’ hardware, wall hanging, and threaded rod products as well as in-store merchandising services for the related product category.
The Company’s performance obligations under its arrangements with customers are providing products, in-store merchandising services, and access to key duplicating and engraving equipment. Generally, the price of the merchandising services and the access to the key duplicating and engraving equipment is included in the price of the related products. Control of products is transferred at the point in time when the customer accepts the goods. Judgment was required in applying the new revenue standard in determining the time at which to recognize revenue for the in-store services and the access to key duplicating and engraving equipment. The Company’s obligation to provide in-store service and access to key duplicating and engraving equipment is satisfied when control of the related products is transferred. Therefore, consistent with the practice prior to the adoption of ASC 606, the entire amount of consideration related to the sale of products, in-store merchandising services, and

Page 7 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

access to key duplicating and engraving equipment is recognized upon the customer’s acceptance of the products. The revenues for all performance obligations are recognized upon the customer's acceptance of the products.
The costs to obtain a contract are insignificant, and generally contract terms do not extend beyond one year. Therefore, these costs are expensed as incurred. Freight and shipping costs and the cost of our in-store merchandising services teams are recognized in selling, general, and administrative expense when control over products is transferred to the customer.
The Company used the practical expedient regarding the existence of a significant financing component as payments are due in less than one year after delivery of the products.

3. Recent Accounting Pronouncements:
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). On December 31, 2017, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as a $7,852 reduction to the opening balance of retained earnings with corresponding decreases to other current assets and other assets of $3,846 and $3,370, respectively, and an increase of $637 to other accrued expenses. The cumulative adjustment primarily relates to payments to customers. The Company will now recognize certain payments as a reduction of revenue when the payment is made as opposed to over the life of the master service agreement. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The impact to revenues for the thirteen and thirty-nine weeks ended September 29, 2018 as a result of applying Topic 606 was immaterial. A majority of our revenue continues to be recognized when products are shipped or delivered to customers. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Subsequently, in July 2018 the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements and ASU 2018-10, Codification Improvements to Topic 842, Leases. 
The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. The new guidance will be effective for public business entities for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption will be permitted for all entities. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients.The Company had operating leases with remaining rental payments of approximately $72,426 as of December 30, 2017, and the Company has assets that are deployed with customers that may qualify as leases under the new standard.  The discounted minimum remaining rental payments will be the starting point for determining the right-of-use asset and lease liability.  ASU 2018-10 was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. ASU 2018-11 provides an optional transition method in addition to the existing modified retrospective transition method by allowing a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption which allows entities to apply the provisions of the updated guidance at the effective date. The updated guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of implementing this guidance on its Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this ASU on its Condensed Consolidated Financial Statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. The Company does not expect the provisions of this ASU to have a material impact on its Condensed Consolidated Financial Statements.


Page 8 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”), which amends the FASB Accounting Standards Codification and XBRL Taxonomy based on the Tax Cuts and Jobs Act (the “Act”) that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 (“SAB 118”) that was released by the Securities and Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits and may additionally have international tax consequences for many companies that operate internationally. The Company has evaluated the impact of the Act as well as the guidance of SAB 118 and incorporated the changes into the determination of a reasonable estimate of its deferred tax liability and appropriate disclosures in the notes to its consolidated financial statements (See Note 8 - Income Taxes).

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework. The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company does not expect the provisions of this ASU to have a material impact on its Condensed Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, requiring a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The Company early adopted this ASU in the third quarter of 2018, it did not have a material impact on the financial statements.


4. Acquisitions

On August 10, 2018, the Company completed the acquisition of Minute Key Holdings, Inc. (“MinuteKey”), an innovative leader in self-service key duplicating kiosks for a total consideration reflecting an enterprise value of $156,289.  The Company financed the acquisition with the unfunded delayed draw term loan facility of $165,000. The Company believes that the combination of MinuteKey's self service kiosk business with Hillman's existing key duplication platform will create additional growth opportunities. MinuteKey has operations in the United States and Canada and will fall into the Company's United States and Canada reportable segments.

The following table reconciles the preliminary estimated fair value of the acquired assets and assumed liabilities to the total purchase price of the MinuteKey acquisition:
Cash
 
$
1,791

Inventory
 
4,266

Other current assets
 
756

Property and equipment
 
30,597

Goodwill
 
58,503

Customer relationships
 
49,000

Technology
 
19,000

Trade names
 
5,400

Patents
 
356

Other non-current assets
 
17

Total assets acquired
 
169,686

Less:
 
 
Liabilities assumed
 
13,397

Total purchase price
 
$
156,289



Page 9 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

The excess of the purchase price over the net assets has been allocated to goodwill and intangibles based on an independent valuation appraisal.
The amount of net sales and operating loss of the acquired business included in the Company's consolidated statement of comprehensive income for the thirty-nine weeks ended September 29, 2018 were approximately $7,342 and $(608), respectively. Unaudited pro forma financial information has not been presented for MinuteKey as the financial results of MinuteKey were insignificant to the financial results of the Company on a standalone basis.
Subsequent to quarter end, on October 1, 2018, the Company completed the acquisition of Big Time Products ("Big Time"), a leading provider of personal protection and work gear products for a purchase price of approximately $346,000. The acquisition was financed with additional term loan funding of $365,000. All requisite business combination disclosures required under the FASB Accounting Standards Codification Topic 805, “Business Combinations,” cannot be made as of the financial statements issuance date for the acquisition of Big Time, given the acquisition date.
In connection with the acquisitions, the Company incurred approximately $4,479 and $6,939 of acquisition related charges in the thirteen and thirty-nine weeks ended September 29, 2018, respectively. These costs are included in selling, general, and administrative expense ("SG&A") on the Condensed Consolidated Statement of Comprehensive Income (Loss).
5. Goodwill and Other Intangible Assets:    
Goodwill amounts by reporting unit are summarized as follows: 
 
Goodwill at
Acquisitions (1)
Dispositions
Other (2)
Goodwill at
 
December 30, 2017
September 29, 2018
United States
$
586,437

$
58,667

$
—

$
—

$
645,104

Canada
30,372

—

—

(940
)
29,432

Mexico
3,694

—

—

186

3,880

Total
$
620,503

$
58,667

$
—

$
(754
)
$
678,416

 
(1)
These amounts relate to the acquisition of MinuteKey in the third quarter of 2018 and adjustments to the opening balance sheet for the acquisition of ST Fastening Systems ("STFS"). STFS was acquired in the fourth quarter of 2017.
(2)
These amounts relate to adjustments resulting from fluctuations in foreign currency exchange rates.
Other intangibles, net, as of September 29, 2018 and December 30, 2017 consist of the following: 
 
Estimated
Useful Life
(Years)
September 29, 2018
December 30, 2017
Customer relationships
13-20
$
751,634

$
703,399

Trademarks - All Others
Indefinite
85,586

85,759

Technology
8
19,000

—

Trade Names
15
5,400

—

Trademarks - TagWorks
5
300

300

KeyWorks license
7
4,447

4,455

Patents
7-15
32,424

31,941

Intangible assets, gross
 
898,791

825,854

Less: Accumulated amortization
 
162,528

132,659

Other intangibles, net
 
$
736,263

$
693,195


Page 10 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

The amortization expense for amortizable assets including the adjustments resulting from fluctuations in foreign currency exchange rates was $10,437 and $29,872 for the thirteen and thirty-nine weeks ended September 29, 2018 and $9,500 and $28,442 for the thirteen and thirty-nine weeks ended September 30, 2017.

The Company tests goodwill and indefinite-lived intangible assets for impairment annually. Impairment is also tested when events or changes in circumstances indicate that the carrying values of the assets may be greater than their fair values. During the thirteen and thirty-nine weeks ended September 29, 2018 and the thirteen and thirty-nine weeks ended September 30, 2017, the Company did not adjust goodwill or intangible assets to their fair values as a result of any impairment analyses.

In 2017, the fair value of each reporting unit, except the United States, was in excess of its carrying value by more than 10%. In 2017, the fair value of United States reporting unit exceeded its carrying value by approximately 4%. 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 potential impairment.

6. Commitments and Contingencies:

The Company self-insures its product liability, automotive, workers' compensation, and general liability losses up to $250 per occurrence. Catastrophic coverage has been purchased from third party insurers for occurrences in excess of $250 up to $40,000. The two risk areas involving the most significant accounting estimates are workers' compensation and automotive liability. Actuarial valuations performed by the Company's outside risk insurance expert were used by the Company's management to form the basis for workers' compensation and automotive liability loss reserves. The actuary contemplated the Company's specific loss history, actual claims reported, and industry trends among statistical and other factors to estimate the range of reserves required. Risk insurance reserves are comprised of specific reserves for individual claims and additional amounts expected for development of these claims, as well as for incurred but not yet reported claims. The Company believes that the liability of approximately $2,107 recorded for such risks is adequate as of September 29, 2018.

As of September 29, 2018, the Company has provided certain vendors and insurers letters of credit aggregating $6,936 related to our product purchases and insurance coverage for product liability, workers’ compensation, and general liability.

The Company self-insures group health claims up to an annual stop loss limit of $250 per participant. Historical group insurance loss experience forms the basis for the recognition of group health insurance reserves. Provisions for losses expected under these programs are recorded based on an analysis of historical insurance claim data and certain actuarial assumptions. The Company believes that the liability of approximately $1,814 recorded for such risks is adequate as of September 29, 2018.

The Company imports large quantities of fastener products which are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements and bilateral actions. The Company could be subject to the assessment of additional duties and interest if it or its suppliers fail to comply with customs regulations or similar laws. The U.S. Department of Commerce (the "Department”) has received requests from petitioners to conduct administrative reviews of compliance with anti-dumping duty and countervailing duty laws for certain nails products sourced from Asian countries. The Company sourced products under review from vendors in China and Taiwan during the periods currently open for review, and it is at least reasonably possible that the Company may be subject to additional duties pending the results of the review. The Company accrues for the duty expense once it is determined to be probable and the amount can be reasonably estimated. On March 16, 2018, the Department published updated results, which were finalized upon the completion of review of appeals in April 2018. 
Based on the final results, our liability was reduced to $2,146 at March 31, 2018 from $6,274 at December 30, 2017. The Company recorded income of $0 and $4,128 in the thirteen and thirty-nine weeks ended September 29, 2018, which is included in Cost of Goods Sold on the Condensed Consolidated Statement of Comprehensive Income (Loss). In the thirteen and thirty-nine weeks ended September 30, 2017, the Company recorded expense of $4,128 and $6,274, respectively, based on the Department's initial assessments.

On October 1, 2013, The Hillman Group, Inc. ("Hillman Group") filed a complaint against Minute Key Inc., a manufacturer of fully-automatic, self-service key duplication kiosks, in the United States District Court for the Southern District of Ohio (Western Division), seeking a declaratory judgment of non-infringement and invalidity of a U.S. patent issued to Minute Key Inc. on September 10, 2013. Hillman Group's filing against Minute Key Inc. was in response to a letter dated September 10, 2013 in which Minute Key Inc. alleged that Hillman Group's FastKey™ product infringes the newly-issued patent. On October 23, 2013, Minute Key Inc. filed an answer and counterclaim against the Hillman Group alleging patent infringement. Minute

Page 11 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

Key Inc. also requested that the court dismiss the Hillman Group's complaint, enter judgment against the Hillman Group that the Company is willfully and deliberately infringing the patent, grant a permanent injunction, and award unspecified monetary damages to Minute Key Inc.

Minute Key Inc. later filed two motions on March 17, 2014 seeking to voluntarily withdraw its counterclaim alleging infringement by Hillman Group and also to dismiss Hillman Group's complaint for non-infringement and invalidity. Shortly after an April 23, 2014 court-ordered mediation, Minute Key Inc. provided Hillman Group with a covenant promising not to sue for infringement of two of its patents against any existing Hillman Group product, including the FastKey™ and Key Express™ products.

Hillman Group filed a motion on May 9, 2014 seeking to add additional claims to the case against Minute Key Inc. under Federal and Ohio state unfair competition statutes. These claims relate to Minute Key Inc.'s business conduct during competition with Hillman Group over a mutual client.
In an August 15, 2014 order, the court granted Minute Key Inc.'s March 17, 2014 motions to dismiss the claims relating to patent infringement and also granted Hillman Group's May 9, 2014 motion to add its unfair competition claims.
Hillman Group formally amended its complaint to add the unfair competition claims on September 4, 2014, and Minute Key Inc. answered on September 29, 2014 without filing any counterclaims. Minute Key Inc. filed a motion on October 1, 2014 to move the case from Cincinnati to either the District of Colorado or the Western District of Arkansas. The court denied that motion on February 3, 2015.

As a result of the Minute Key Inc. covenant not to sue, the Company's FastKey™ and Key Express™ products no longer face any threat of patent infringement liability from two of Minute Key Inc.'s patents. The scope of the lawsuit changed from a bilateral dispute over patent infringement to a lawsuit solely about Minute Key Inc.'s business conduct. Minute Key Inc. filed a motion for summary judgment on February 8, 2016. The court denied that motion on July 8, 2016. Following the denial of Minute Key Inc.’s summary judgment motion, a jury trial was held between August 24, 2016 and September 6, 2016. The jury returned a verdict in Hillman Group’s favor on September 6, 2016 finding that Minute Key Inc.’s actions violated the Federal Lanham Act and the Ohio Deceptive Trade Practices Act. Following this verdict against Minute Key Inc., Hillman Group filed post-trial motions for recovery of its costs, attorney fees, pre-and post-judgment interest, and an injunction.

Minute Key Inc. also filed a post-trial motion to set aside the jury verdict. On March 29, 2018, the court denied Minute Key’s motion, finding that there was sufficient evidence presented at trial to permit the jury to reach its September 6, 2016 verdict. Minute Key appealed the court’s decision on the motion and the jury verdict itself to the United States Court of Appeals for the Federal Circuit on April 27, 2018. On May 23, 2018, the parties filed a joint motion in the Court of Appeals requesting that the appeal be deactivated until Hillman’s post-trial motions are decided in the district court, and the Court of Appeals granted the motion and deactivated the appeal on May 29, 2018.

In view of the Company’s agreement to acquire Minute Key, the parties filed a joint motion in the district court on June 7, 2018 requesting that the district court hold all decisions on post-trial motions in abeyance pending the closing of the acquisition. The district court granted the motion on June 12, 2018 and stayed the proceedings. Following completion of the Company’s acquisition of Minute Key, the parties filed a joint motion on September 11, 2018 to lift the stay, vacate the Court’s September 8, 2016 judgment, and dismiss the case, including all pending post-trial motions. The court granted the motion on September 12, 2018, closing the district court case.

Minute Key moved to voluntarily dismiss its appeal in the United States Court of Appeals for the Federal Circuit on October 1, 2018, and the Court of Appeals granted the motion and dismissed the appeal on October 4, 2018. This dismissal ends all litigation between the Company and Minute Key.

In addition, legal proceedings are pending which are either in the ordinary course of business or incidental to the Company's business. Those legal proceedings incidental to the business of the Company are generally not covered by insurance or other indemnity. In the opinion of the Company's management, the ultimate resolution of the pending litigation matters will not have a material adverse effect on the consolidated financial position, operations, or cash flows of the Company.

7. Related Party Transactions


Page 12 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

The Company has recorded aggregate management fee charges and expenses from CCMP Capital Advisors, LLC (“CCMP”), 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”) of $134 and $396 for the thirteen and thirty-nine weeks ended September 29, 2018 and $127 and $390 for the thirteen and thirty-nine weeks ended September 30, 2017.

Gregory Mann and Gabrielle Mann are employed by Hillman. The Company leases an industrial warehouse and office facility from companies under the control of the Manns. The rental expense for the lease of this facility was $87 and $262 for the thirteen and thirty-nine weeks ended September 29, 2018 and $88 and $265 for the thirteen and thirty-nine weeks ended September 30, 2017.

The Hillman Group Canada ULC subsidiary of Hillman entered into three leases for five properties containing an 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 was employed by The Hillman Group Canada ULC until his retirement effective April 30, 2017, and the owner of the properties under the other two leases is a company which is owned by Richard Paulin and certain of his relatives. The rental expense for the three leases was $164 and $501 for the thirteen and thirty-nine weeks ended September 29, 2018 and $164 and $473 for the thirteen and thirty-nine weeks ended September 30, 2017.

In the thirteen and thirty-nine weeks ended September 29, 2018 the Company paid a dividend of approximately $3,780 to Holdco for the purchase of 4,200 shares of Holdco stock from former members of management. No such dividends were paid in the thirteen and thirty-nine weeks ended September 30, 2017.


8. Income Taxes:

Accounting Standards Codification 740 (“ASC 740”) requires companies to apply their estimated annual effective tax rate on a year-to-date basis in each interim period. These rates are derived, in part, from expected annual pre-tax income or loss. In the thirteen and thirty-nine weeks ended September 29, 2018 and the thirteen and thirty-nine weeks ended September 30, 2017, the Company applied an estimated annual effective tax rate to the interim period pre-tax income (loss) to calculate the income tax expense (benefit).

For the thirteen and thirty-nine weeks ended September 29, 2018, the effective income tax rate was 12.8% and (6.7)%. The Company recorded income tax (benefit)/expense for the thirteen and thirty-nine weeks ended September 29, 2018 of $(1,565) and $2,182. The negative effective tax rate for the thirteen and thirty-nine weeks ended September 29, 2018 was primarily the result of the new provisions introduced by the Tax Cuts and Jobs Act (the "Tax Act") including the new provision on Global Intangible Low-Taxed Income ("GILTI") and the IRC Section 163(j) interest limitation. The effective income tax rate differed from the federal statutory tax rate in the thirteen and thirty-nine weeks ended September 29, 2018 due to recognizing no benefit on losses in jurisdictions where valuation allowances are recorded against net deferred tax assets, certain non-deductible expenses, and several aspects of the Tax Act.

The effective income tax rate was 28.9% and 41.2% for the thirteen and thirty-nine weeks ended September 30, 2017. The Company recorded income tax expense/(benefit) for the thirteen and thirty-nine weeks ended September 30, 2017 of $(538) and $(4,759), respectively. The effective income tax rate differed from the federal statutory tax rate in the thirteen and thirty-nine weeks ended September 30, 2017 primarily due to the decrease in the valuation allowance attributable to a foreign subsidiary and certain non-deductible expenses. Additionally, the effective income tax rate differed from the federal statutory tax rate in the thirteen and thirty-nine weeks ended September 30, 2017 due in part to a tax benefit recorded in the current period from the reconciliation of a prior year’s tax return to the amount reported for tax provision purposes. The remaining differences between the effective income tax rate and the federal statutory rate in the thirteen and thirty-nine weeks ended September 30, 2017 were due to state and foreign income taxes.

In December 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes included, among other things, several new taxes that may impact the Company’s 2018 effective tax rate. The new taxes include: GILTI, Foreign Derived Intangible Income (FDII), Base Erosion and Anti-Abuse Tax (BEAT), and an IRC Section 163(j) interest limitation (Interest Limitation).  For the thirty-nine weeks ended September 29, 2018, we have not recorded provisional estimates in our effective tax rate for FDII or BEAT because we currently estimate that these provisions of the Tax Act will not apply in 2018. However, the Company may be subject to GILTI, which is a tax on foreign income in excess of a deemed return on tangible assets of foreign subsidiaries. The Company currently included a provisional estimated increase to

Page 13 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

the effective tax rate related to GILTI income from its foreign subsidiaries. Companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for temporary differences including outside basis differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in the effective tax rate calculation. Lastly, the Company recorded a provisional increase to income tax expense for recording a $7,843 valuation allowance on the Company’s Interest Limitation for 2018. The Company will continue to refine our provisional estimates for our computations of the GILTI, FDII, BEAT and the valuation allowance recorded on the Interest Limitation as we gather additional information.

In accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”), the provisional amounts recorded represent reasonable estimates of the effects of the Tax Act for which the analysis is not yet complete. As the Company completes its analysis of the Tax Act, including collecting, preparing and analyzing necessary information, performing and refining calculations and obtaining additional guidance from the U.S. Internal Revenue Services (IRS), U.S. Treasury Department, FASB or other standard setting and regulatory bodies on the Tax Act, it may record adjustments to the provisional amounts, which may be material. In accordance with SAB 118, the Company’s accounting for the tax effects of the Tax Act will be completed during the measurement period, which should not extend beyond one year from the enactment date.


9. Restructuring

During 2018, the Company initiated plans to restructure the operations of the Canada segment. The restructuring seeks to streamline operations in the greater Toronto area by consolidating facilities, exiting certain lines of business, and rationalizing stock keeping units (“SKUs”). The intended result of the Canada restructuring will be a more streamlined and scalable operation focused on delivering optimal service and a broad offering of products across the Company's core categories. The Company expects to incur increased restructuring related charges and capital expenditures in our Canada segment over the next year as plans are finalized and implemented. Charges incurred in the current year include:
 
 
Thirteen Weeks Ended
September 29, 2018
 
Thirty-nine Weeks Ended
September 29, 2018
Facility consolidation (1)
 
 
 
   Labor expense
$
243

 
$
334

   Consulting and legal fees
87

 
242

   Other
6

 
11

Exit of certain lines of business (2)
 
 
 
   Inventory valuation adjustments
1,152

 
1,152

   Asset impairments
796

 
796

   Severance
239

 
239

Total
$
2,523

 
$
2,774


(1)
Facility consolidation includes labor expense related to organizing inventory and equipment in preparation for the facility consolation, consulting and legal fees related to the project, and other expenses. These expenses were included in SG&A on the Condensed Consolidated Statement of Comprehensive Income (Loss).
(2)
As part of the restructuring, the Company is exiting a manufacturing business line. Related charges included adjustments to write inventory down to net realizable value, asset impairment charges, and employee severance, which were included in cost of goods sold, other income and expense, and SG&A on the Condensed Consolidated Statement of Comprehensive Income (Loss), respectively.



Page 14 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

10. Long Term Debt:

The following table summarizes the Company’s debt:
 
September 29, 2018
 
December 30, 2017
Revolving loans
$
74,500

 
$
19,500

Senior term loan, due 2021
—

 
530,750

Senior term loan, due 2025
693,264

 
—

6.375% Senior Notes, due 2022
330,000

 
330,000

11.6% Junior Subordinated Debentures - Preferred
105,443

 
105,443

Junior Subordinated Debentures - Common
3,261

 
3,261

Capital leases & other obligations
1,149

 
435

 
1,207,617

 
989,389

(Add) unamortized premium on 11.6% Junior Subordinated Debentures
17,827

 
18,771

(Subtract) unamortized discount on Senior term loan
(814
)
 
—

(Subtract) current portion of long term debt and capital leases
(7,482
)
 
(5,706
)
(Subtract) deferred financing fees
(12,501
)
 
(12,780
)
Total long term debt, net
$
1,204,647

 
$
989,674


On May 31, 2018, the Company entered into a new credit agreement consisting of a new funded term loan of $530,000 and an unfunded delayed draw term loan facility ("DDTL") of $165,000 ("2018 Term Loan"). Concurrently, the Company also entered into a new $150,000 asset-based revolving credit agreement ("ABL Revolver"). The proceeds from the 2018 Term Loan and ABL Revolver were used to refinance in full all outstanding revolving loans and term loans under the existing agreements and to pay fees and other expenses related to the 2018 Term Loan and ABL revolver. The 2018 Term Loan and ABL Revolver require the Company to maintain certain financial and non-financial covenants. On August 10, 2018, the Company drew the full $165,000 on the DDTL to finance the acquisition of MinuteKey.

The interest rate on the 2018 Term Loan is, at the Company's option, either adjusted LIBOR plus 3.5% per annum or an alternate base rate plus 2.5% per annum. The Term Loan will be payable in quarterly installments equal to .25% of the original principal amount, increased by the funding under the DDTL. The maturity date for the 2018 Term Loan is May 31, 2025. The amounts outstanding under the 2018 Term Loan are guaranteed by the Company and, subject to certain exceptions, the Company's wholly-owned domestic subsidiaries and are secured by substantially all of the Company's and the guarantors’ assets.

A portion of the ABL Revolver is available for borrowing by the Company's US subsidiary ($112,500) and a portion is available for borrowing by the Company's Canadian subsidiary ($37,500), in each case subject to a borrowing base. The interest rate for the ABL Revolver is, at the Company's option, either adjusted LIBOR (or a Canadian banker’s acceptance rate in the case of Canadian loans) plus a margin of 1.25% to 1.75% per annum based on availability or an alternate base rate (or a Canadian prime rate or alternate base rate in the case of Canadian loans) plus a margin varying from 0.25% to 0.75% per annum based on availability. The stated maturity date of the ABL Revolver is May 31, 2023. Amounts outstanding under the ABL revolver are guaranteed by the Company's wholly-owned domestic subsidiaries and are secured by substantially all of the Company's and the guarantors’ assets, plus, in the case of amounts borrowed by the Company's Canadian subsidiary, its and its wholly-owned Canadian subsidiary’s assets, which guarantee the Canadian portion under the ABL Credit Agreement.

In connection with the 2018 Term Loan, the Company recorded $8,755 in deferred financing fees and $825 in discount which are recorded as long term debt on the Condensed Consolidated Balance Sheet. In connection with the ABL Revolver, the Company recorded $1,841 in deferred financing fees which are recorded as other non-current assets on the Condensed Consolidated Balance Sheet. Additionally, the Company expensed approximately $8,542 in debt issuance costs which was recorded as refinancing charges in the thirty-nine weeks ended September 29, 2018.
 

Page 15 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

As of September 29, 2018, there was $693,264 outstanding under the 2018 Term Loan. As of September 29, 2018, the Company had $74,500 outstanding under the ABL Revolver along with $6,936 of letters of credit. The Company has approximately $68,564 of available borrowings under the ABL Revolver as a source of liquidity.

Additional information with respect to the fair value of the Company’s fixed rate senior notes and junior subordinated debentures is included in Note 12 - Fair Value Measurements.

11. Derivatives and Hedging:

The Company uses derivative financial instruments to manage our exposures to (1) interest rate fluctuations on our floating rate senior debt and (2) fluctuations in foreign currency exchange rates. The Company measures those instruments at fair value and recognizes changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures.
Interest Rate Swap Agreements
On September 3, 2014, the Company entered into two forward Interest Rate Swap Agreements (the “2014 Swaps”) with three-year terms for notional amounts of $90,000 and $40,000. The forward start date of the 2014 Swaps was October 1, 2015 and the termination date is September 30, 2018. The 2014 Swaps fix the interest rate at 2.2% plus the applicable interest rate margin of 3.5% for an effective rate of 5.7%. The interest rate on the term loan was 5.7% at September 29, 2018.
On January 8, 2018, the Company entered into a forward Interest Rate Swap Agreement (the "2018 Swap") with three-year terms for notional amounts of $90,000. The forward start date of the 2018 Swap was September 30, 2018 and the termination date is June 30, 2021. The 2018 Swaps fix the interest rate at 2.3% plus the applicable interest rate margin of 3.5% for an effective rate of 5.8%.
The 2014 Swaps were terminated in September 2018 and therefore had a fair value of zero as of September 29, 2018. The fair value of the 2018 Swap was $1,300 as of September 29, 2018. These were reported on the condensed consolidated balance sheet in other non-current assets. An increase in other expense recorded in the statement of comprehensive loss for the favorable change of $1,677 in fair value since December 30, 2017.
The total fair value of the 2014 Swaps was $392 as of December 30, 2017 and was reported on the condensed consolidated balance sheet in other current liabilities.
The Company's interest rate swap agreements did not qualify for hedge accounting treatment because they did not meet the provisions specified in ASC 815, Derivatives and Hedging (“ASC 815”). Accordingly, the gain or loss on these derivatives was recognized in current earnings.
Foreign Currency Forward Contracts
During 2017 and 2018 the Company entered into multiple foreign currency forward contracts. The table below summarizes the maturity dates and the fixed exchange rates of the contracts outstanding at:
 
September 29, 2018
 
December 30, 2017
Maturity date range:
 
 
 
   Minimum
October 2018
 
January 2018
   Maximum
December 2018
 
April 2018
Fixed exchange rate range:
 
 
 
   Minimum
1.2942
 
1.3201
   Maximum
1.3200
 
1.3498

The purpose of the Company's foreign currency forward contracts is to manage the Company's exposure to fluctuations in the exchange rate of the Canadian dollar.
The total notional amount of contracts outstanding was C$8,690 and C$2,993 as of September 29, 2018 and December 30, 2017, respectively. The total fair value of the outstanding foreign currency forward contracts was $64 and $140 as of

Page 16 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

September 29, 2018 and December 30, 2017, respectively, and was reported on the condensed consolidated balance sheet in other current liabilities. An increase in other income of $8, including contracts settled during the thirty-nine weeks ended September 29, 2018, was recorded in the statement of comprehensive income (loss) for the change in fair value from December 30, 2017.
The Company's foreign currency forward contracts did not qualify for hedge accounting treatment because they did not meet the provisions specified in ASC 815. Accordingly, the gain or loss on these derivatives was recognized in current earnings.
The Company does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.
Additional information with respect to the fair value of derivative instruments is included in Note 12 - Fair Value Measurements.

12. Fair Value Measurements:

The Company uses the accounting guidance that applies to all assets and liabilities that are being measured and reported on a fair value basis. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1:
 
Quoted market prices in active markets for identical assets or liabilities.
Level 2:
 
Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3:
 
Unobservable inputs reflecting the reporting entity’s own assumptions.
The following tables set forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis during the period, by level, within the fair value hierarchy:
 

 
As of September 29, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Trading securities
$
2,109

 
$
—

 
$
—

 
$
2,109

Interest rate swaps
—

 
1,300

 
—

 
1,300

Foreign exchange forward contracts
—

 
(64
)
 
—

 
(64
)
 
 
 
 
 
 
 
 
 
As of December 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Trading securities
$
2,294

 
$
—

 
$
—

 
$
2,294

Interest rate swaps
—

 
(392
)
 
—

 
(392
)
Foreign exchange forward contracts
—

 
(140
)
 
—

 
(140
)

Trading securities are valued using quoted prices on an active exchange. Trading securities represent assets held in a Rabbi Trust to fund deferred compensation liabilities and are included as other assets on the accompanying condensed consolidated balance sheets.

The Company utilizes interest rate swap contracts to manage our targeted mix of fixed and floating rate debt, and these contracts are valued using observable benchmark rates at commonly quoted intervals for the full term of the swap contracts. As of September 29, 2018, the 2018 Swap was recorded as other non-current assets on the accompanying condensed consolidated balance sheets. As of December 30, 2017, the 2014 Swaps were included in other current liabilities on the accompanying condensed consolidated balance sheets.


Page 17 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

The Company utilizes foreign exchange forward contracts to manage our exposure to currency fluctuations in the Canadian dollar versus the U.S. dollar. The forward contracts were valued using observable benchmark rates at commonly quoted intervals during the term of the forward contract. As of September 29, 2018 and December 30, 2017, the foreign exchange forward contracts were included in other current liabilities on the accompanying condensed consolidated balance sheets.
The fair value of the Company's fixed rate senior notes and junior subordinated debentures as of September 29, 2018 and December 30, 2017 were determined by utilizing current trading prices obtained from indicative market data. As a result, the fair value measurements of the Company's senior term notes and debentures are considered to be Level 2.
 
 
 
September 29, 2018
 
December 30, 2017
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
6.375% Senior Notes
 
$
325,833

 
$
296,175

 
$
325,000

 
$
325,050

Junior Subordinated Debentures
 
126,531

 
130,594

 
127,475

 
148,098


Cash, accounts receivable, accounts payable, and accrued liabilities are reflected in the condensed consolidated financial statements at book value, which approximates fair value, due to the short-term nature of these instruments. The carrying amount of the long-term debt under the revolving credit facility approximates the fair value at September 29, 2018 and December 30, 2017 as the interest rate is variable and approximates current market rates. The Company also believes the carrying amount of the long-term debt under the senior term loan approximates the fair value at September 29, 2018 and December 30, 2017 because, while subject to a minimum LIBOR floor rate, the interest rate approximates current market rates of debt with similar terms and comparable credit risk.

13. Segment Reporting:

The Company’s segment reporting structure uses the Company’s management reporting structure as the foundation for how the Company manages its business. The Company periodically evaluates its segment reporting structure in accordance with ASC 350-20-55 and has concluded that it has three reportable segments as of September 29, 2018: The United States, Canada, and All Other. The United States segment and the Canada segment are considered material by the Company’s management as of September 29, 2018. The Company's other segments have been combined in the "All Other" category. The Company evaluates the performance of its segments based on revenue and income (loss) from operations, and does not include segment assets or nonoperating income/expense items for management reporting purposes.

The table below presents revenues and income (loss) from operations for our reportable segments for the thirteen and thirty-nine weeks ended September 29, 2018 and thirteen and thirty-nine weeks ended September 30, 2017.
 

 
 
Thirteen Weeks Ended
September 29, 2018
 
Thirteen Weeks Ended
September 30, 2017
 
Thirty-nine Weeks Ended
September 29, 2018
 
Thirty-nine Weeks Ended
September 30, 2017
Revenues
 
 
 
 
 
 
 
 
United States
 
$
204,450

 
$
179,705

 
$
581,238

 
$
520,557

Canada
 
37,422

 
37,430

 
110,574

 
106,292

All Other
 
1,967

 
1,820

 
5,776

 
5,145

Total revenues
 
$
243,839

 
$
218,955

 
$
697,588

 
$
631,994

Segment income (loss) from operations
 
 
 
 
 
 
 
 
United States
 
$
8,101

 
$
12,352

 
$
30,452

 
$
31,739

Canada
 
(1,514
)
 
1,480

 
(1,671
)
 
3,140

All Other
 
319

 
152

 
613

 
707

Total income from operations
 
$
6,906

 
$
13,984

 
$
29,394

 
$
35,586


Page 18 
Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)

14. Subsequent Events:

On October 1, 2018, the Company completed the acquisition of Big Time Products ("Big Time"), a leading provider of personal protection and work gear products for a purchase price of approximately $346,000. The acquisition was financed with additional term loan funding of $365,000. The Company entered into an amendment (the “Amendment”) to the term loan credit agreement dated as of May 31, 2018, which provided for $365 million of incremental term loans. The Amendment provided that the pricing for all funded term loans, including all existing term loans and the new incremental term loans, are at the either adjusted LIBOR plus 4.00% per annum or an alternate base rate plus 3.00% per annum, which reflects a 0.50% per annum margin increase with respect to the existing term loans. The new incremental term loans otherwise have the same terms, including guarantees, collateral, and a stated maturity of May 31, 2025, as the existing term loans. See Note 10 - Long Term Debt for additional details on the outstanding term loan.

Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides information which the Company’s management believes is relevant to an assessment and understanding of the Company’s operations and financial condition. This discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes in addition to the consolidated statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2017.

Forward-Looking Statements

Certain disclosures related to acquisitions, refinancing, capital expenditures, resolution of pending litigation, and realization of deferred tax assets contained in this quarterly 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. In some cases, you can identify forward-looking statements 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 management’s current expectations, assumptions, and projections about future events. Although management believes 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 the Company’s 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 the Company’s Annual Report on Form 10-K for the year ended December 30, 2017. 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 report and the risks and uncertainties discussed under the caption “Risk Factors” set forth in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 30, 2017; they should not be regarded as a representation by the Company or any other individual. We undertake no obligation to update publicly 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 report might not occur or be materially different from those discussed.

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 the wholly-owned subsidiary, The Hillman Group, Inc. and its wholly-owned subsidiaries (collectively, “Hillman Group”). Hillman Group sells its products to hardware stores, home centers, mass merchants, pet supply

Page 19 

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 design and installation of merchandising systems and maintenance of appropriate in-store inventory levels.

On May 31, 2018, we entered into a new term credit agreement consisting of a a new funded term loan of $530 million and $165 million delayed draw term loan facility. Concurrently, we entered into a new $150 million asset-based revolving credit agreement. The proceeds were used to refinance in full all outstanding revolving credit and term loans under the existing credit agreement.We recorded a loss on the refinancing of $8.5 million related to deferred financing costs in the thirty-nine weeks ended September 29, 2018. See Note 10 - Long Term Debt of the Notes to the Condensed Consolidated Financial statements for additional information.

On August 10, 2018, we completed the acquisition of Minute Key Holdings, Inc. (“MinuteKey”), an innovative leader in self-service key duplicating kiosks. We paid a cash purchase price of approximately $156.3 million. See Note 4 - Acquisitions of the Notes to the Condensed Consolidated Financial statements for additional information on the acquisition. We financed the acquisition by drawing $165 million on the delayed draw facility of our Term Loan (see Note 10 - Long Term Debt of the Notes to the Condensed Consolidated Financial statements for additional information).

On October 1, 2018, subsequent to quarter end, we completed the acquisition of Big Time Products ("Big Time"), a leading provider of personal protection and work gear products. The acquisition will enable us to expand into adjacent categories with Big Time’s expansive and innovative products in the hardware, automotive, garden, and cleaning industries that include work gloves, household gloves, knee pads, tool rigs and aprons, and job site storage. We paid a cash purchase price of approximately $346 million and financed the transaction through incremental term loans of $365 million.

As part of the ongoing restructuring of our Canada segment operations, we are finalizing additional restructuring plans that may include consolidating facilities, exiting certain lines of business, and rationalizing stock keeping units (“SKUs”).  The intended result of the Canada restructuring will be a more streamlined and scalable operation focused on delivering optimal service and a broad offering of products across our core categories. We incurred charges of $2.5 million and $2.8 million in the thirteen and thirty-nine weeks ended September 29, 2018, respectively, and expect to incur increased restructuring related charges and capital expenditures in our Canada segment over the next year as we finalize and implement the plan. See Note 9 - Restructuring of the Notes to the Condensed Consolidated Financial statements for additional information.

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 increased in value relative to the CNY by approximately 7.2% in 2016, decreased by 6.3% in 2017, and increased by 5.6% during the thirty-nine weeks ended September 29, 2018. The U.S. dollar declined in value relative to the Taiwan dollar by approximately 1.2% in 2016, declined by 8.5% in 2017, and increased by 2.8% during the thirty-nine weeks ended September 29, 2018.
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 the Canadian dollar exchange rate versus the U.S. dollar. Our sales in Canada are denominated in Canadian dollars while a majority of the products are sourced in U.S. dollars. A weakening of the Canadian dollar versus the U.S. dollar results in lower sales in terms of U.S. dollars while the cost of sales remains unchanged. We have a practice of hedging some of our Canadian subsidiary's purchases denominated in U.S. dollars. The U.S. dollar

Page 20 

decreased in value relative to the Canadian dollar by approximately 3.0% in 2016, decreased by 6.6% in 2017, and increased by 3.2% during the thirty-nine weeks ended September 29, 2018. We may take pricing action, when warranted, in an attempt to offset a portion of product cost increases. The ability of our operating divisions to institute price increases and seek price concessions, as appropriate, is dependent on competitive market conditions.
We import large quantities of products which are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements and bilateral actions. We expect that the recently implemented U.S. tariffs on steel and aluminum and other imported goods will impact product costs during the fourth quarter of 2018. This required us to take pricing action to offset the increasing product costs. The price increase will be effective in the fourth quarter of 2018. The recently announced tariffs did not have a material impact on our results of operations in the third quarter of 2018.

Results of Operations
The following analysis of results of operations includes a brief discussion of the factors that affected our operating results and a comparative analysis of the thirteen and thirty-nine weeks ended September 29, 2018 and the thirteen and thirty-nine weeks ended September 30, 2017.
Thirteen Week Period Ended September 29, 2018 vs the Thirteen Week Period Ended September 30, 2017

 
Thirteen Weeks Ended
September 29, 2018
 
Thirteen Weeks Ended
September 30, 2017
(dollars in thousands)
Amount
 
% of
Net Sales
 
Amount
 
% of
Net Sales
Net sales
$
243,839

 
100.0
 %
 
$
218,955

 
100.0
 %
Cost of sales (exclusive of depreciation and amortization shown separately below)
130,321

 
53.4
 %
 
119,468

 
54.6
 %
Selling, general and administrative expenses
83,575

 
34.3
 %
 
69,165

 
31.6
 %
Depreciation
12,004

 
4.9
 %
 
7,300

 
3.3
 %
Amortization
10,437

 
4.3
 %
 
9,500

 
4.3
 %
Other (income) expense
596

 
0.2
 %
 
(462
)
 
(0.2
)%
Income from operations
6,906

 
2.8
 %
 
13,984

 
6.4
 %
Interest expense, net of investment income
19,179

 
7.9
 %
 
15,844

 
7.2
 %
Refinancing charges
—

 
—
 %
 
—

 
—
 %
Loss before income taxes
(12,273
)
 
(5.0
)%
 
(1,860
)
 
(0.8
)%
Income tax benefit
(1,565
)
 
(0.6
)%
 
(538
)
 
(0.2
)%
Net loss
$
(10,708
)
 
(4.4
)%
 
$
(1,322
)
 
(0.6
)%
 

Net Sales
Net sales for the third quarter of 2018 were $243.8 million, an increase of approximately $24.9 million compared to net sales of $219.0 million for the third quarter of 2017. The increase from prior year was primarily due to the acquisition of ST Fastening Systems in the fourth quarter of 2017 which added approximately $12.0 million in net sales in the third quarter of 2018. Additionally, the acquisition of MinuteKey in the third quarter of 2018 added approximately $7.3 million in net sales. Key and key accessory sales increased $3.4 million in our traditional market due to a key program roll out to a new customer. Finally, sales of hurricane related products increased $2.4 million.
Cost of Sales
Our cost of sales was $130.3 million, or 53.4% of net sales, in the third quarter of 2018, an increase of approximately $10.9 million compared to $119.5 million, or 54.6% of net sales, in the third quarter of 2017. The decrease of 1.2% in cost of sales, expressed as a percent of net sales, in the third quarter of 2018 compared to the third quarter of 2017 was primarily due to $4.1

Page 21 

million of anti-dumping duties expensed in the third quarter of 2017. See Note 6 - Commitments and Contingencies of the Notes to the Condensed Consolidated Financial statements for additional information.
Expenses
Selling, general, and administrative ("SG&A") expenses were approximately $83.6 million in the thirteen weeks ended September 29, 2018, an increase of approximately $14.4 million, compared to $69.2 million in the thirteen weeks ended September 30, 2017. The following changes in underlying trends impacted the change in operating expenses:

•
Selling expense was $35.3 million in the third quarter of 2018, an increase of $4.8 million compared to $30.5 million in the third quarter of 2017. The increase in selling expense was primarily due to the acquisition of MinuteKey which added $3.4 million in selling expense in the third quarter. Additionally, labor and benefit costs increased $1.1 million. Finally, the acquisition of ST Fastening Systems added $0.7 million in selling expense in the current year. These increases were offset by a decrease of $0.5 million in the cost of updating customer store labels for the implementation of a new pricing program.

•
Warehouse and delivery expenses were $31.7 million in the third quarter of 2018, an increase of $3.6 million compared to $28.1 million in the third quarter of 2017. The increase was primarily due the acquisition of ST Fastening Systems, which added $1.5 million in warehouse and delivery expense in the current year. Labor, benefits, freight and maintenance costs increased $1.4 million from the prior year. Finally, we incurred $0.3 million of additional warehouse costs in the third quarter of 2018 related to the restructuring of our Canada segment, see Note 9 - Restructuring of the Notes to the Condensed Consolidated Financial statements for additional information.

•
General and administrative (“G&A”) expenses were $16.6 million in the third quarter of 2018, an increase of $6.1 million compared to $10.5 million in the third quarter of 2017. The increase was primarily due to $4.5 million in acquisition related costs associated with MinuteKey and Big Time. Additionally, the acquisitions of MinuteKey and ST Fastening Systems added $1.3 million and $1.1 million, respectively, in G&A expense in the current year. These increases were offset by reductions in corporate overhead charges.

Depreciation expense was $12.0 million in the third quarter of 2018 compared to depreciation expense of $7.3 million in the third quarter of 2017. The increase in depreciation expense was due to $1.6 million in additional depreciation from the acquisition of MinuteKey and $0.5 million from the acquisition of ST Fastening Systems. The remaining increase was driven by 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. Amortization expense was $10.4 million in the third quarter of 2018 compared to $9.5 million in the third quarter of 2017. The increase in amortization expense was driven by the acquisitions of ST Fastening Systems in the fourth quarter of 2017 and MinuteKey in the third quarter of 2018.

Other expense was $0.6 million in the third quarter of 2018 compared to other income of $0.5 million in the third quarter of 2017. In the third quarter of 2018, we recorded an asset impairment of $0.8 million related to restructuring activities in our Canada segment. See Note 9 - Restructuring of the Notes to the Condensed Consolidated Financial statements for additional information.We recorded immaterial exchange rate losses in the third quarter of 2018 as compared to a gain of $0.3 million in the third quarter of 2017. The remainder of other income and expense for both periods is management fees, the gain or loss on the mark-to-market adjustment of our interest rate swap, and losses on the disposal of fixed assets.

In the second quarter of 2018, we refinanced our term loan and revolver. In the third quarter of 2018 we drew $165 million on the delayed draw facility of the revolver. This activity, along with additional draws on our revolving credit facility during the year led to increased interest expense. See Note 10 - Long Term Debt of the Notes to the Condensed Consolidated Financial statements for additional information.



Page 22 

Thirty-nine Week Period Ended September 29, 2018 vs the Thirty-nine Week Period Ended September 30, 2017

 
Thirty-nine Weeks Ended
September 29, 2018
 
Thirty-nine Weeks Ended
September 30, 2017
(dollars in thousands)
Amount
 
% of
Net Sales
 
Amount
 
% of
Net Sales
Net sales
$
697,588

 
100.0
 %
 
$
631,994

 
100.0
 %
Cost of sales (exclusive of depreciation and amortization shown separately below)
373,938

 
53.6
 %
 
341,315

 
54.0
 %
Selling, general and administrative expenses
233,448

 
33.5
 %
 
203,091

 
32.1
 %
Depreciation
30,481

 
4.4
 %
 
25,473

 
4.0
 %
Amortization
29,872

 
4.3
 %
 
28,442

 
4.5
 %
Other (income) expense
455

 
0.1
 %
 
(1,913
)
 
(0.3
)%
Income from operations
29,394

 
4.2
 %
 
35,586

 
5.6
 %
Interest expense, net of investment income
53,226

 
7.6
 %
 
47,132

 
7.5
 %
Refinancing charges
8,542

 
1.2
 %
 
—

 
—
 %
Loss before income taxes
(32,374
)
 
(4.6
)%
 
(11,546
)
 
(1.8
)%
Income tax expense (benefit)
2,182

 
0.3
 %
 
(4,759
)
 
(0.8
)%
Net loss
$
(34,556
)
 
(5.0
)%
 
$
(6,787
)
 
(1.1
)%
 

Net Sales
Net sales for the thirty-nine weeks ended September 29, 2018 were $697.6 million, an increase of approximately $65.6 million compared to net sales of $632.0 million for the thirty-nine weeks ended September 30, 2017. The increase from prior year was primarily due to the acquisition of ST Fastening Systems in the fourth quarter of 2017 which added approximately $35.7 million in net sales in 2018. Key and key accessory sales increased by $10.8 million primarily due to the key program roll out to a new key customer in 2018. Sales of hurricane related products increased $8.2 million. The acquisition of MinuteKey in the third quarter of 2018 added sales of $7.3 million. Lastly, sales in Canada, excluding acquisitions, increased by $4.1 million primarily due to the roll out of wall anchor and builders' hardware products to retail customers.
Cost of Sales
Our cost of sales was $373.9 million, or 53.6% of net sales, in the thirty-nine weeks ended September 29, 2018, an increase of approximately $32.6 million compared to $341.3 million, or 54.0% of net sales, in the thirty-nine weeks ended September 30, 2017. The decrease of 0.4% in cost of sales, expressed as a percent of net sales, was primarily driven by adjustments to our accrual for anti-dumping duties. In the thirty-nine weeks ended September 29, 2018 we recorded reduction of $4.1 million in cost of sales due to an adjustment of our accrual for anti-dumping duties based on the final results of the Department of Commerce’s administrative review of nails from China. In the thirty-nine weeks ended September 30, 2017 we recorded expense of $6.3 million in cost of sales due to an adjustment to our accrual for anti-dumping duties based on the preliminary review results available at that time. See Note 6 - Commitments and Contingencies of the Notes to the Condensed Consolidated Financial statements for additional information. This reduction was partially offset by the impact of commodity inflation which increased our cost of sales.
Expenses
Selling, general, and administrative ("SG&A") expenses were approximately $233.4 million in the thirty-nine weeks ended September 29, 2018, an increase of approximately $30.4 million, compared to $203.1 million in the thirty-nine weeks ended September 30, 2017. The following changes in underlying trends impacted the change in operating expenses:

•
Selling expense was $99.2 million in the thirty-nine weeks ended September 29, 2018, an increase of $10.6 million compared to $88.6 million in the thirty-nine weeks ended September 30, 2017. The increase in selling expense was

Page 23 

primarily due to increasing labor and benefit costs of $3.3 million and the $2.0 million cost of updating customer store labels for a new pricing program. Additionally, the acquisitions of MinuteKey and ST Fastening Systems added $3.4 million and $2.0 million, respectively, in selling expense in the current year.

•
Warehouse and delivery expenses were $92.8 million in the thirty-nine weeks ended September 29, 2018, an increase of $10.2 million compared to $82.6 million in the thirty-nine weeks ended September 30, 2017. The increase was primarily due to the acquisition of ST Fastening Systems, which added $4.1 million in warehouse and delivery expense in the current year. Labor, benefit, freight, and maintenance costs also increased $3.8 million from the prior year. We incurred $1.3 million in additional expense to relocate our distribution center in Dallas, Texas to a larger facility in the same area in order to optimize our distribution network. Finally, we incurred additional warehouse expense of $0.6 million related to restructuring activities in our Canada segment (see Note 9 - Restructuring of the Notes to the Condensed Consolidated Financial statements for additional information).

•
General and administrative (“G&A”) expenses were $41.5 million in the thirty-nine weeks ended September 29, 2018, an increase of $9.6 million compared to $31.9 million in the thirty-nine weeks ended September 30, 2017. The increase was primarily due to $6.9 million in acquisition cots related to MinuteKey and Big Time. Additionally, the acquisition of ST Fastening Systems added $2.9 million in G&A expense in the current year.

Depreciation expense was $30.5 million in the thirty-nine weeks ended September 29, 2018 compared to depreciation expense of $25.5 million in the thirty-nine weeks ended September 30, 2017. The increase in depreciation expense was due to $1.6 million in additional depreciation from the acquisition of MinuteKey and $1.5 million from the acquisition of ST Fastening Systems. The remaining increase was driven by new, state of the art key cutting technology, the KeyKrafter™, as well as engraving machines and the implementation of our ERP system in Canada. Amortization expense was $29.9 million in the thirty-nine weeks ended September 29, 2018 compared to $28.4 million in the thirty-nine weeks ended September 30, 2017. The increase amortization was driven by the acquisitions of ST Fastening Systems in the fourth quarter of 2017 and MinuteKey in the third quarter of 2018.

Other expense was $0.5 million in the thirty-nine weeks ended September 29, 2018 compared to other income of $1.9 million in the thirty-nine weeks ended September 30, 2017. We recorded an exchange rate loss of $0.8 million in the thirty-nine weeks ended September 29, 2018 as compared to a gain of $1.3 million in the thirty-nine weeks ended September 30, 2017. Additionally, in the thirty-nine weeks ended September 29, 2018 we recorded an asset impairment of $0.8 million related to restructuring activities in our Canada segment. See Note 9 - Restructuring of the Notes to the Condensed Consolidated Financial statements for additional information. These losses were offset by gains on the mark to market adjustment of our interest rate swap. In the thirty-nine weeks ended September 29, 2018, we recorded a gain of $1.7 million on the mark to market adjustments on the interest rate swaps as compared to a gain of $1.0 million in the thirty-nine weeks ended September 30, 2017. The remainder of other income and expense for both periods is management fees and losses on the disposal of fixed assets.

In the third quarter of 2018, we refinanced our term loan and revolving credit facility, incurring a loss of $8.5 million related to deferred financing costs and additional interest expense. See Note 10 - Long Term Debt of the Notes to the Condensed Consolidated Financial statements for additional information.


Page 24 

Results of Operations – Operating Segments

The following table provides supplemental information regarding our net sales and profitability by operating segment for the thirteen and thirty-nine weeks ended September 29, 2018 and the thirteen and thirty-nine weeks ended September 30, 2017 (dollars in thousands):
 
 
 
Thirteen Weeks Ended
September 29, 2018
 
Thirteen Weeks Ended
September 30, 2017
 
Thirty-nine Weeks Ended
September 29, 2018
 
Thirty-nine Weeks Ended
September 30, 2017
Revenues
 
 
 
 
 
 
 
 
United States
 
$
204,450

 
$
179,705

 
$
581,238

 
$
520,557

Canada
 
37,422

 
37,430

 
110,574

 
106,292

All Other
 
1,967

 
1,820

 
5,776

 
5,145

Total revenues
 
$
243,839

 
$
218,955

 
$
697,588

 
$
631,994

Segment income (loss) from operations
 
 
 
 
 
 
 
 
United States
 
$
8,101

 
$
12,352

 
$
30,452

 
$
31,739

Canada
 
(1,514
)
 
1,480

 
(1,671
)
 
3,140

All Other
 
319

 
152

 
613

 
707

Total income from operations
 
$
6,906

 
$
13,984

 
$
29,394

 
$
35,586

The Thirteen Week Period Ended September 29, 2018 vs the Thirteen Week Period Ended September 30, 2017

Net Sales
Net sales for the thirteen weeks ended September 29, 2018 increased $24.9 million compared to the net sales for the thirteen weeks ended September 30, 2017.

For the United States operating segment, net sales increased by $24.7 million primarily due to the acquisition of ST Fastening Systems in the fourth quarter of 2017 which added $12.0 million in net sales in the third quarter of 2018 and the acquisition of MinuteKey which added sales of $7.2 million in our United States operating segment. Key and key accessory sales increased $3.4 million in our traditional market due to a key program roll out to a new customer. Finally, sales of hurricane related products increased $2.4 million.

Net sales for our Canada operating segment were consistent with the comparable prior year period.

Income from Operations
Income from operations for the thirteen weeks ended September 29, 2018 decreased $7.1 million compared to income from operations for the thirteen weeks ended September 30, 2017.

Income from operations of our United States segment decreased by approximately $4.3 million in the thirteen weeks ended September 29, 2018 to $8.1 million as compared to $12.4 million in the thirteen weeks ended September 30, 2017. The increase in sales was offset by higher operating costs as we incurred $4.5 million in acquisition related costs for MinuteKey and Big Time. Labor, benefit, and freight costs increased $2.7 million from prior year. The acquisitions of ST Fastening Systems and MinuteKey also contributed $0.4 million and $(0.6) million, respectively, in income from operations in the third quarter of 2018.

Loss from operations in our Canada segment for the thirteen weeks ended September 29, 2018 of $1.5 million was $3.0 million lower than income of $1.5 million in the thirteen weeks ended September 30, 2017. In the thirteen weeks ended September 29, 2018 we incurred $2.5 million in restructuring related charges for our Canada segment consisting of inventory write offs, asset impairments, labor and severance, and consulting costs, see Note 9 - Restructuring of the Notes to the Condensed Consolidated Financial statements for additional information. Finally, we experienced rising labor, freight, and warehouse maintenance charges of $0.4 million.

Page 25 

The Thirty-nine Week Period Ended September 29, 2018 vs the Thirty-nine Week Period Ended September 30, 2017

Net Sales
Net sales for the thirty-nine weeks ended September 29, 2018 increased $65.6 million compared to the net sales for the thirty-nine weeks ended September 30, 2017. For the United States operating segment, net sales increased by $60.7 million primarily due to the acquisition of ST Fastening Systems in the fourth quarter of 2017 which added $35.7 million in net sales in the thirty-nine weeks ended September 29, 2018. Key and key accessory sales increased by $10.8 million primarily due to the key program roll out to a new key customer in 2018. Sales of hurricane related products increased $8.2 million. The acquisition of MinuteKey in the third quarter of 2018 added sales of $7.2 million.

Net sales for our Canada operating segment increased by $4.3 million primarily due to the roll out of wall anchor and builders' hardware products to retail customers.

Income from Operations
Income from operations for the thirty-nine weeks ended September 29, 2018 decreased $6.2 million compared to income from operations for the thirty-nine weeks ended September 30, 2017.

Income from operations of our United States segment decreased by approximately $1.3 million in the thirty-nine weeks ended September 29, 2018 to $30.5 million as compared to $31.7 million in the thirty-nine weeks ended September 30, 2017. The increase in sales was partially offset by higher operating costs as labor, benefit, and freight costs increased $6.6 million compared to the prior year. We also incurred $6.9 million of acquisition related costs driven by MinuteKey and Big Time, $2.0 million in costs of updating customer store labels for a new pricing program, and $1.3 million in additional expense to relocate our distribution center in Dallas, Texas to a larger facility in the same area in order to optimize our distribution network. The acquisitions of ST Fastening Systems and MinuteKey contributed $2.4 million and $(0.6) million, respectively, in income from operations in the first half of 2018.

Loss from operations in our Canada segment for the thirty-nine weeks ended September 29, 2018 of $1.7 million decreased $4.8 million as compared to income of $3.1 million in the thirty-nine weeks ended September 30, 2017 as the increase in sales was offset by restructuring charges of $2.8 million in restructuring related charges for our Canada segment consisting of inventory write offs, asset impairments, labor and severance, and consulting costs, see Note 9 - Restructuring of the Notes to the Condensed Consolidated Financial statements for additional information.We experienced rising labor, freight, and warehouse maintenance charges of $1.7 million. Finally, we incurred an additional $1.0 million in costs related to completing the implementation of our ERP system.


Income Taxes

In the thirteen weeks ended September 29, 2018, we recorded an income tax benefit of $1.6 million on pre-tax loss of $12.3 million. The effective income tax rate was 12.8% for the thirteen weeks ended September 29, 2018. In the thirty-nine weeks ended September 29, 2018, we recorded an income tax provision of $2.2 million on pre-tax loss of $32.4 million. The effective income tax rate was (6.7)% for the thirty-nine weeks ended September 29, 2018.

In the thirteen weeks ended September 30, 2017, we recorded an income tax benefit of $0.5 million on a pre-tax loss of $1.9 million. The effective income tax rate was 28.9% for the thirteen weeks ended September 30, 2017. In the thirty-nine weeks ended September 30, 2017, we recorded an income tax benefit of $4.8 million on a pre-tax loss of $11.5 million. The effective income tax rate was 41.2% for the thirty-nine weeks ended September 30, 2017.

The effective income tax rate differed from the federal statutory tax rate in the thirteen and thirty-nine weeks ended September 29, 2018 due to new provisions introduced by the Tax Cuts and Jobs Act (the "Tax Act") including the new provision on Global Intangible Low-Taxed Income ("GILTI") and the IRC Section 163(j) interest limitation. In addition, the effective income tax rate was adversely impacted by non-deductible acquisition costs relating to MinuteKey and Big Time Products. The remaining differences were due to the lack of any income tax benefit recognized on losses in jurisdictions where valuation allowances are recorded against net deferred tax assets.


Page 26 

The effective income tax rate differed from the federal statutory tax rate in the thirteen and thirty-nine weeks ended September 30, 2017 primarily due to the decrease in the valuation allowance attributable to a foreign subsidiary and certain non-deductible expenses. The remaining differences between the effective income tax rate and the federal statutory rate in the thirteen and thirty-nine weeks ended September 30, 2017 were due to state and foreign income taxes.


Liquidity and Capital Resources

The statements of cash flows reflect the changes in cash and cash equivalents for the thirty-nine weeks ended September 29, 2018 and the thirty-nine weeks ended September 30, 2017 by classifying transactions into three major categories: operating, investing, and financing activities.

Net cash provided by operating activities for the thirty-nine weeks ended September 29, 2018 was $5.9 million as compared to $53.4 million in the comparable prior year period. Operating cash flows for the thirty-nine weeks ended September 29, 2018 were unfavorably impacted by an increase in inventory due to commodity inflation and new business wins. Accounts receivable also increased due to higher sales. This was partially offset by an increase in accounts payable due to changes in payment terms and increased inventory purchases. Operating cash flows for the thirty-nine weeks ended September 30, 2017 were unfavorably impacted by an increase in accounts receivable due to higher sales. This was partially offset by an increase in accounts payable associated with inventory purchases and accrued liabilities for anti-dumping duties.

Net cash used by investing activities was $208.7 million and $37.4 million for the thirty-nine weeks ended September 29, 2018 and the thirty-nine weeks ended September 30, 2017, respectively. In the thirty-nine weeks ended September 29, 2018 we acquired MinuteKey for a net cash payment of $154,498. See Note 4 - Acquisitions of the Notes to the Condensed Consolidated Financial statements for additional information. The other 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. In 2018, we also invested capital in relocating two distribution centers.

Net cash provided by financing activities was $201.1 million for the thirty-nine weeks ended September 29, 2018. During the thirty-nine weeks ended September 29, 2018, we entered into a new term credit agreement consisting of a new funded term loan of $530 million and $165 million delayed draw term loan facility. Concurrently, we entered into a new $150 million asset-based revolving credit agreement. The proceeds were used to refinance in full all outstanding revolving credit and term loans under the existing credit agreement. In the third quarter of 2018, we drew $165.0 million on the delayed draw facility of the term loan to finance the MinuteKey acquisition.We paid approximately $12.7 million in fees associated with the refinancing activities in the thirty-nine weeks ended September 29, 2018. See Note 10 - Long Term Debt of the Notes to the Condensed Consolidated Financial statements for additional information on the current quarter refinancing. Our revolver draws, net, were a source of cash of $55.0 million in the thirty-nine weeks ended September 29, 2018. Additionally, in the thirty-nine weeks ended September 29, 2018 we paid a dividend of $3.8 million to Holdco for the purchase of shares of Holdco stock from former members of management.

Net cash used by financing activities was $4.2 million for the thirty-nine weeks ended September 30, 2017. We used cash to pay $4.1 million in principal payments on the senior term loan under the Senior Facilities.

Management believes that projected cash flows from operations and revolver availability will be sufficient to fund working capital, capital expenditure, and acquisition related needs for the next 12 months. Our working capital (current assets minus current liabilities) position of $212.5 million as of September 29, 2018 represents an increase of $21.5 million from the December 30, 2017 level of $191.0 million.


Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

Page 27 
Table of Contents

Significant accounting policies and estimates are summarized in the notes to the condensed consolidated financial statements. Some accounting policies require management to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts, and other information from outside sources, as appropriate. Management believes that these estimates and assumptions are reasonable based on the facts and circumstances as of September 29, 2018, however, actual results may differ from these estimates under different assumptions and circumstances.
There have been no material changes, other than revenue recognition discussed below, to our critical accounting policies and estimates which are discussed in the “Critical Accounting Policies and Estimates” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Annual Report on Form 10-K for the year ended December 30, 2017, as filed with the Securities and Exchange Commission. In addition, our most significant accounting policies are discussed in Note 2 and elsewhere in the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 30, 2017.
Revenue Recognition:

Revenue is recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
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 consolidated 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.
Our performance obligations under our arrangements with customers are providing products, in-store merchandising services, and access to key duplicating and engraving equipment. Generally, the price of the merchandising services and the access to the key duplicating and engraving equipment is included in the price of the related products. Control of products is transferred at the point in time when the customer accepts the goods. Judgment was required in applying the new revenue standard in determining the time at which to recognize revenue for the in-store services and the access to key duplicating and engraving equipment. Our obligation to provide in-store service and access to key duplicating and engraving equipment is satisfied when control of the related products is transferred. Therefore, consistent with the practice prior to the adoption of ASC 606, the entire amount of consideration related to the sale of products, in-store merchandising services, and access to key duplicating and engraving equipment is recognized upon the customer’s acceptance of the products. The revenues for all performance obligations are recognized upon the customer's acceptance of the products.
The costs to obtain a contract are insignificant, and generally contract terms do not extend beyond one year. Therefore, these costs are expensed as incurred. Freight and shipping costs and the cost of our in-store merchandising services teams are recognized in selling, general, and administrative expense when control over products is transferred to the customer.
We used the practical expedient regarding the existence of a significant financing component as payments are due in less than one year after delivery of the products.
See Note 2 - Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial statements for information on disaggregated revenue by product category.
Recent Accounting Pronouncements

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

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Page 28 
Table of Contents


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 September 29, 2018, 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 $6.4 million.

Foreign Currency Exchange
We are exposed to foreign exchange rate changes of the Canadian and Mexican currencies as they impact the $128.6 million tangible and intangible net asset value of our Canadian and Mexican subsidiaries as of September 29, 2018. The foreign subsidiaries net tangible assets were $60.3 million and the net intangible assets were $68.3 million as of September 29, 2018.
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 Condensed Consolidated Financial Statements.
Item 4.
Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of September 29, 2018, in ensuring that material information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the thirty-nine weeks ended September 29, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We modified existing internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standards related to revenue recognition to facilitate its adoption on December 31, 2017. There were no significant changes to our internal control over financial reporting due to the adoption of this new standard.


Page 29 
Table of Contents

PART II
OTHER INFORMATION
Item 1. – Legal Proceedings.
We are subject to various claims and litigation that arise in the normal course of business. In the opinion of our management, the ultimate resolution of the pending litigation matters will not have a material adverse effect on our consolidated financial position, operations, or cash flows.
Item 1A – Risk Factors.
There have been no material changes to the risks from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 30, 2017.
Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds.
Not Applicable
Item 3. – Defaults Upon Senior Securities.
Not Applicable
Item 4. – Mine Safety Disclosures.
Not Applicable
Item 5. – Other Information.
Not Applicable

Page 30 
Table of Contents

Item 6. – Exhibits.
a)
Exhibits, including those incorporated by reference.
31.1 *
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Exchange Act
31.2 *
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Exchange Act
32.1 *
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 *
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 *
Supplemental Financial Information for The Hillman Companies, Inc.
101
The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2018 filed with the Securities and Exchange Commission on November 9, 2018, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of September 29, 2018 and December 30, 2017, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ended September 29, 2018 and the thirteen and thirty-nine weeks ended September 30, 2017, (iii) Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 29, 2018 and the thirteen and thirty-nine weeks ended September 30, 2017, and (iv) Notes to Condensed Consolidated Financial Statements.
*
Filed herewith.
 


Page 31 
Table of Contents

SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE HILLMAN COMPANIES, INC.
 
 
 
 
/s/    Robert O. Kraft
 
/s/    Nicholas P. Ruffing        
Robert O. Kraft
 
Nicholas P. Ruffing
Chief Financial Officer
 
Controller
 
 
(Chief Accounting Officer)
DATE: November 9, 2018


Page 32