August 12, 2019 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

Form: 10-Q

Documents

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 June 29, 2019

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.)

Registrant’s telephone number, including area code: (513) 851-4900

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 ☒ 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 ☒ 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):

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 ☒

Securities registered pursuant to Section 12(b) of the Act:



Title of Class	Trading symbols	Name of Each Exchange on Which Registered
11.6% Junior Subordinated Debentures		None
Preferred Securities Guaranty		None

On August 12, 2019, 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.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Comprehensive Loss	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
SIGNATURES		34

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Table of Contents

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(dollars in thousands, except per share amounts)



	June 29, 2019			December 29, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	16,953		$	28,234
Accounts receivable, net of allowances of $1,097 ($846 - 2018)	125,056			110,799
Inventories, net	324,585			320,281
Other current assets	7,299			18,727
Total current assets	473,893			478,041
Property and equipment, net of accumulated depreciation of $149,434 ($131,169 - 2018)	203,037			208,279
Goodwill	806,031			803,847
Other intangibles, net of accumulated amortization of $202,561 ($176,677 - 2018)	900,273			930,525
Operating lease right of use assets	70,854			—
Other assets	10,498			10,778
Total assets	$	2,464,586		$	2,431,470
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	143,397		$	135,059
Current portion of debt and capital leases	11,235			10,985
Current portion of operating lease liabilities	11,600			—
Accrued expenses:
Salaries and wages	15,969			9,881
Pricing allowances	6,959			5,404
Income and other taxes	5,079			3,325
Interest	10,217			15,423
Other accrued expenses	20,970			17,941
Total current liabilities	225,426			198,018
Long term debt	1,572,775			1,586,084
Deferred income taxes, net	202,739			200,696
Operating lease liabilities	61,893			—
Other non-current liabilities	11,422			7,565
Total liabilities	$	2,074,255		$	1,992,363
Commitments and contingencies (Note 5)
Stockholder's Equity:
Preferred stock, $.01 par, 5,000 shares authorized, none issued or outstanding at June 29, 2019 and December 29, 2018	—			—
Common stock, $.01 par, 5,000 shares authorized, issued and outstanding at June 29, 2019 and December 29, 2018	—			—
Additional paid-in capital	550,190			549,528
(Accumulated deficit) retained earnings	(127,595		)	(72,831		)
Accumulated other comprehensive loss	(32,264		)	(37,590		)
Total stockholder's equity	390,331			439,107
Total liabilities and stockholder's equity	$	2,464,586		$	2,431,470

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

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(dollars in thousands)



	Thirteen Weeks Ended June 29, 2019			Thirteen Weeks Ended June 30, 2018			Twenty-six Weeks Ended June 29, 2019			Twenty-six Weeks Ended June 30, 2018
Net sales	$	324,628		$	246,154		$	612,287		$	453,749
Cost of sales (exclusive of depreciation and amortization shown separately below)	181,309			134,027			347,230			243,617
Selling, general and administrative expenses	96,883			78,797			188,718			149,873
Depreciation	16,655			9,535			32,471			18,477
Amortization	14,684			9,712			29,449			19,435
Management fees to related party	125			134			256			262
Other expense (income)	8,215			578			8,254			(403		)
Income from operations	6,757			13,371			5,909			22,488
Interest expense, net	26,064			14,361			52,627			27,932
Interest expense on junior subordinated debentures	3,152			3,152			6,304			6,304
Refinancing charges	—			8,542			—			8,542
Investment income on trust common securities	(94		)	(94		)	(189		)	(189		)
Loss before income taxes	(22,365		)	(12,590		)	(52,833		)	(20,101		)
Income tax (benefit) expense	(2,869		)	941			1,931			3,747
Net loss	$	(19,496	)	$	(13,531	)	$	(54,764	)	$	(23,848	)
Net loss from above	$	(19,496	)	$	(13,531	)	$	(54,764	)	$	(23,848	)
Other comprehensive income (loss):
Foreign currency translation adjustments	2,547			(3,643		)	5,326			(6,682		)
Total other comprehensive income (loss)	2,547			(3,643		)	5,326			(6,682		)
Comprehensive loss	$	(16,949	)	$	(17,174	)	$	(49,438	)	$	(30,530	)

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

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands)



	Twenty-six Weeks Ended June 29, 2019			Twenty-six Weeks Ended June 30, 2018
Cash flows from operating activities:
Net loss	$	(54,764	)	$	(23,848	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	61,920			37,912
Deferred income taxes	1,326			3,847
Deferred financing and original issue discount amortization	1,859			1,142
Stock-based compensation expense	662			992
Loss on debt restructuring	—			8,542
Asset impairment	6,800			—
(Gain) loss on disposal of property and equipment	(121		)	53
Other non-cash interest and change in value of interest rate swap	2,902			(1,418		)
Changes in operating items:
Accounts receivable	(13,394		)	(17,687		)
Inventories	(2,000		)	(33,069		)
Other assets	9,485			(5		)
Accounts payable	7,540			46,237
Other accrued liabilities	2,558			(6,828		)
Net cash provided by operating activities	24,773			15,870
Cash flows from investing activities:
Capital expenditures	(27,771		)	(40,065		)
Proceeds from sale of property and equipment	7,612			—
Net cash used for investing activities	(20,159		)	(40,065		)
Cash flows from financing activities:
Repayments of senior term loans	(7,956		)	(530,750		)
Borrowings on senior term loans	—			530,000
Financing fees	—			(11,752		)
Borrowings on revolving credit loans	12,500			92,000
Repayments of revolving credit loans	(20,200		)	(54,500		)
Principal payments under finance and capitalized lease obligations	(283		)	(73		)
Proceeds from exercise of stock options	—			200
Net cash (used for) provided by financing activities	(15,939		)	25,125
Effect of exchange rate changes on cash	44			(208		)
Net (decrease) increase in cash and cash equivalents	(11,281		)	722
Cash and cash equivalents at beginning of period	28,234			9,937
Cash and cash equivalents at end of period	$	16,953		$	10,659
Supplemental disclosure of cash flow information:
Interest paid on junior subordinated debentures, net	$	6,115		$	6,115
Interest paid	54,072			24,364
Income taxes paid	400			632

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

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

(dollars in thousands)



	Common Stock		Additional Paid-in-capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Stockholders Equity
Twenty-six weeks ended June 29, 2019
Balance at December 29, 2018	$	—	$	549,528		$	(72,831	)	$	(37,590	)	$	439,107
Net Loss	—		—			(35,268		)	—			(35,268		)
Stock-based compensation	—		361			—			—			361
Change in cumulative foreign currency translation adjustment	—		—			—			2,779			2,779
Balance at March 30, 2019	$	—	$	549,889		$	(108,099	)	$	(34,811	)	$	406,979
Net Loss	—		—			(19,496		)	—			(19,496		)
Stock-based compensation	—		301			—			—			301
Change in cumulative foreign currency translation adjustment	—		—			—			2,547			2,547
Balance at June 29, 2019	$	—	$	550,190		$	(127,595	)	$	(32,264	)	$	390,331


Twenty-six weeks ended June 30, 2018
Balance at December 30, 2017	$	—	$	551,518		$	2,422		$	(26,537	)	$	527,403
Net Loss	—		—			(10,317		)	—			(10,317		)
Stock-based compensation	—		487			—			—			487
Change in cumulative foreign currency translation adjustment	—		—			—			(3,039		)	(3,039		)
Cumulative effect of change in accounting principles	—		—			(7,852		)	—			(7,852		)
Other	—		15			(4		)	—			11
Balance at March 31, 2018	$	—	$	552,020		$	(15,751	)	$	(29,576	)	$	506,693
Net Loss	—		—			(13,531		)	—			(13,531		)
Stock-based compensation	—		505			—			—			505
Proceeds from exercise of stock options	—		200			—			—			200
Change in cumulative foreign currency translation adjustment	—		—			—			(3,643		)	(3,643		)
Other	—		(10		)	—			—			(10		)
Balance at June 30, 2018	$	—	$	552,715		$	(29,282	)	$	(33,219	)	$	490,214

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

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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. and its wholly-owned subsidiaries (collectively “Hillman” or the “Company”) for the twenty-six weeks ended June 29, 2019. Unless the context requires otherwise, references to "Hillman," "we," "us," "our," or "our Company" refer to The Hillman Companies, Inc. and its wholly-owned subsidiaries. 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 twenty-six weeks ended June 29, 2019 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 29, 2018.

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 29, 2018.

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 and rebates 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.

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

The following table displays our disaggregated revenue by product category.



	Thirteen weeks ended June 29, 2019
	Fastening Solutions	Home and Access Solutions	Consumer Connected Solutions	Personal Protective Solutions	Total Revenue
United States	125,368	67,511	28,299	60,239	281,417
Canada	31,107	6,938	432	1,458	39,935
Other	2,246	214	—	816	3,276
Consolidated	158,721	74,663	28,731	62,513	324,628

	Thirteen weeks ended June 30, 2018
	Fastening Solutions	Home and Access Solutions	Consumer Connected Solutions	Personal Protective Solutions	Total Revenue
United States	121,591	64,836	15,129	—	201,556
Canada	35,834	6,730	2	—	42,566
Other	1,769	263	—	—	2,032
Consolidated	159,194	71,829	15,131	—	246,154



	Twenty-six weeks ended June 29, 2019
	Fastening Solutions	Home and Access Solutions	Consumer Connected Solutions	Personal Protective Solutions	Total Revenue
United States	228,243	130,195	55,686	122,395	536,519
Canada	54,806	11,894	794	2,424	69,918
Other	3,860	469	—	1,521	5,850
Consolidated	286,909	142,558	56,480	126,340	612,287

	Twenty-six weeks ended June 30, 2018
	Fastening Solutions	Home and Access Solutions	Consumer Connected Solutions	Personal Protective Solutions	Total Revenue
United States	220,032	125,532	31,224	—	376,788
Canada	60,331	12,815	6	—	73,152
Other	3,347	462	—	—	3,809
Consolidated	283,710	138,809	31,230	—	453,749

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.

Home and access solutions revenues consist primarily of the delivery of keys and key accessories, builders' hardware, wall hanging, threaded rod products, letters, numbers, and signs ("LNS") as well as in-store merchandising services for the related product categories and access to our proprietary key duplicating equipment.

Consumer connected solutions revenues consist primarily of sales of keys and identification tags through self-service key duplicating machines and engraving kiosks.

Personal protective solutions revenues consist primarily of the delivery of personal protective equipment such as gloves, soft sided tool storage, and eye-wear 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

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

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 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.

Long Lived Assets:

The Company evaluates its long-lived assets, including definite-lived intangibles assets, for impairment including an evaluation based on the estimated undiscounted future cash flows as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. In the thirteen and twenty-six weeks ended June 29, 2019, the Company recorded an impairment loss of $6,800 related to the loss on the disposal of its FastKey self-service key duplicating kiosks and related assets. No such impairment charges were recorded in the thirteen and twenty-six weeks ended June 30, 2018.

3. Recent Accounting Pronouncements:

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. Effective December 30, 2018, the Company adopted the comprehensive new lease standard issued by the FASB. The most significant impact was the recognition of right-of-use ("ROU") assets and liabilities for operating leases and finance leases applicable to lessees. The Company elected to utilize the transition guidance within the new standard which allows the Company to carry forward its historical lease classification(s). Operating and finance lease ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. As the implicit rate is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The Company elected to not separate lease and non-lease components for all classes of underlying assets in which it is the lessee and made an accounting policy election to not account for leases within an initial term of 12 months or less on the Condensed Consolidated Balance Sheet. The expected lease terms include options to extend or terminate the lease when it is reasonably certain the Company will exercise such option. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term. As of December 30, 2018, Company recorded an Operating ROU Asset of $76,737 and a Finance ROU Asset of $680 within our Condensed Consolidated Balance Sheet. Short-term and long-term operating lease liabilities were recorded as $12,579 and $66,703, respectively. Short-term and long-term finance lease liabilities were determined to be $442 and $524 respectively. The adoption of this guidance did not have an impact on net income. See Note 11 - Leases of the Notes to the Condensed Consolidated Financial Statement for full lease disclosures.

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.

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

4. Acquisitions

Minute Key Holdings, Inc.

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. MinuteKey is headquartered in Boulder, Colorado and has operations in the United States and Canada. MinuteKey is included in the Company's United States and Canada reportable segments.

Measurement period adjustments for the thirteen and twenty-six weeks ended June 29, 2019 were immaterial. See Note 5 - Goodwill and Other Intangible Assets, The following table reconciles the fair value of the acquired assets and assumed liabilities (net of purchase price accounting adjustments) to the total purchase price of the MinuteKey acquisition:



Cash	$	1,791
Inventory	3,952
Other current assets	766
Property and equipment	29,888
Goodwill	59,237
Customer relationships	50,000
Technology	19,000
Trade names	5,400
Other non-current assets	16
Total assets acquired	170,050
Less:
Liabilities assumed	(13,761		)
Total purchase price	$	156,289

Net sales and operating loss of the acquired business included in the Company's condensed consolidated statement of comprehensive income for thirteen weeks ended June 29, 2019 were approximately $13,592 and $1,020, respectively. Net sales and operating loss for twenty-six weeks ended June 29, 2019 were approximately $25,322 and $2,561, 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.

Big Time Products

On October 1, 2018, the Company acquired NB Parent Company, Inc. and its affiliated companies including Big Time Products, LLC and Rooster Products International, Inc. (collectively, "Big Time"), a leading provider of personal protection and work gear products ranging from work gloves, tool belts and jobsite storage for a purchase price of $348,834. Big Time has business operations throughout North America and its financial results reside in the Company's United States, Canada and Mexico reportable segments.

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

The Company is in the process of obtaining additional information necessary to finalize the valuation of the assets acquired and liabilities assumed including income tax related amounts. Therefore, the preliminary fair values set forth below are subject to adjustment as additional information is obtained and the valuations are completed. Measurement period adjustments for the thirteen and twenty-six weeks ended June 29, 2019 were immaterial. See Note 5 - Goodwill and Other Intangible Assets, The following table reconciles the preliminary fair value of the acquired assets and assumed liabilities (net of purchase price accounting adjustments) to the total purchase price of the Big Time acquisition:



Cash	$	2,507
Accounts receivable	41,039
Inventory	42,303
Other current assets	1,623
Property and equipment	3,703
Goodwill	127,296
Customer relationships	189,000
Trade names	21,000
Other non-current assets	159
Total assets acquired	428,630
Less:
Liabilities assumed	(79,796		)
Total purchase price	$	348,834

The amount of net sales and operating income from Big Time included in the Company's condensed consolidated statement of comprehensive income for thirteen weeks ended June 29, 2019 was approximately $62,513 and $6,520, respectively. Net sales and operating income from Big Time for twenty-six weeks ended June 29, 2019 was approximately $126,340 and $12,295, respectively. The following table provides unaudited pro forma results of the combined entities of Hillman and Big Time Products, had the acquisition occurred at the beginning of fiscal 2018:



	(Unaudited) Fiscal Period Ended
	Thirteen weeks ended June 29, 2019		Thirteen weeks ended June 30, 2018		Twenty-six weeks ended June 29, 2019		Twenty-six weeks ended June 30, 2018
Net revenues	324,628		304,834		612,287		565,641
Net loss	(19,496	)	(16,020	)	(54,764	)	(29,342	)

The pro forma results are based on assumptions that the Company believes are reasonable under certain circumstances. The pro forma results presented are not intended to be indicative of results that may occur in the future. The underlying pro forma information includes historical results of the Company, the Company's financing arrangements related to the Big Time acquisition, and certain purchase price accounting adjustments, including amortization of acquired intangibles.

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

5. Goodwill and Other Intangible Assets:

Goodwill amounts by operating segment are summarized as follows:



	Goodwill at		Acquisitions		Dispositions		Other⁽¹⁾		Goodwill at
	December 29, 2018		Acquisitions		Dispositions		Other⁽¹⁾		June 29, 2019
United States	$	772,213	$	—	$	—	$	921	$	773,134
Canada	27,938		—		—		1,176		29,114
Other	3,696		—		—		87		3,783
Total	$	803,847	$	—	$	—	$	2,184	$	806,031


(1)	These amounts relate to adjustments resulting from fluctuations in foreign currency exchange rates and adjustments to the opening balance sheet for the acquisitions of MinuteKey and Big Time Products. These acquisitions were completed in the third and fourth quarters of 2018, respectively.

Other intangibles, net, as of June 29, 2019 and December 29, 2018 consist of the following:



	Estimated Useful Life (Years)	June 29, 2019		December 29, 2018
Customer relationships	13-20	$	941,197	$	939,880
Trademarks - Indefinite	Indefinite	85,500		85,228
Trademarks - Other	5-15	26,700		26,700
Technology and patents	7-12	49,437		55,394
Intangible assets, gross		1,102,834		1,107,202
Less: Accumulated amortization		202,561		176,677
Other intangibles, net		$	900,273	$	930,525

The amortization expense for amortizable assets including the adjustments resulting from fluctuations in foreign currency exchange rates was $14,684 and $29,449 for the thirteen and twenty-six weeks ended June 29, 2019, respectively. Amortization expense for the thirteen and twenty-six weeks ended June 30, 2018 was $9,712 and $19,435, respectively.

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 twenty-six weeks ended June 29, 2019 and the thirteen and twenty-six weeks ended June 30, 2018, the Company did not adjust goodwill to fair values as a result of any impairment analyses. In the thirteen and twenty-six weeks ended June 29, 2019, the Company recorded an impairment charge of $2,125 related to the loss on the disposal of our FastKey self-service key duplicating kiosks and related intangible assets. There were no such impairment charges taken in the thirteen and twenty-six weeks ended June 30, 2018.

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 $60,000. 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 $1,943 recorded for such risks is adequate as of June 29, 2019.

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As of June 29, 2019, the Company has provided certain vendors and insurers letters of credit aggregating $11,736 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 $2,379 recorded for such risks is adequate as of June 29, 2019.

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 selected for 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 twenty-six weeks ended June 30, 2018, which is included in Cost of Goods Sold on the Condensed Consolidated Statement of Comprehensive Loss. There were no related charges in the thirteen and twenty-six weeks ended June 29, 2019.

On June 3, 2019, The Hillman Group, Inc. ("Hillman Group") filed a complaint for patent infringement against KeyMe, Inc., a provider of self-service key duplication kiosks, in the United States District Court for the Eastern District of Texas (Marshall Division). Hillman Group’s complaint alleges that KeyMe’s self-named and “Locksmith in a Box” key duplication kiosks infringe U.S. Patent Nos. 8,979,446 and 9,914,179, which are assigned to Hillman Group, and seeks damages and injunctive relief against KeyMe. KeyMe later filed two motions on July 25, 2019, the first seeking to dismiss Hillman Group's complaint under Rule 12(b)(3) of the Federal Rules of Civil Procedure for improper venue, or in the alternative, to move the case from Marshall, Texas to the Southern District of New York. KeyMe’s second motion seeks to transfer the venue of the case from Texas to New York under 28 U.S.C. § 1404. It is not yet possible to assess the impact, if any, that the lawsuit will have on the Company.

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

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 $125 and $256 for the thirteen and twenty-six weeks ended June 29, 2019, respectively, and $134 and $262 for the thirteen and twenty-six weeks ended June 30, 2018, respectively.

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 $88 and $175 for the thirteen and twenty-six weeks ended June 29, 2019, respectively, and $88 and $175 for the thirteen and twenty-six weeks ended June 30, 2018, respectively.

The Hillman Group Canada ULC, a 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 incurred for these leases was $161 and $323 for the thirteen and twenty-six weeks ended June 29, 2019, respectively, and $167 and $337 for the thirteen and twenty-six weeks ended June 30, 2018, respectively.

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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 twenty-six weeks ended June 29, 2019 and the thirteen and twenty-six weeks ended June 30, 2018, the Company applied an estimated annual effective tax rate to the interim period pre-tax loss to calculate the income tax benefit or provision.

For the thirteen and twenty-six weeks ended June 29, 2019, the effective income tax rate was 12.8% and (3.7)%, respectively. The Company recorded income tax benefit and income tax provision for the thirteen and twenty-six weeks ended June 29, 2019 of $(2,869) and $1,931, respectively. The effective tax rate for the thirteen and twenty-six weeks ended June 29, 2019 was primarily the result of the IRC Section 163(j) interest limitation. Consistent with prior periods, the primary impact of the effective tax rate differential for the thirteen weeks ended June 29, 2019 was due to the Company recording a valuation allowance on its interest limitation. In addition to the valuation allowance on the interest limitation, the effective income tax rate differed from the federal statutory tax rate for the twenty-six weeks ended June 29, 2019 due to certain non-deductible expenses, Global Intangible Low-Taxed Income ("GILTI"), and state and foreign income taxes.

The effective income tax rate for the thirteen and twenty-six weeks ended June 30, 2018 was (7.5)% and (18.6)%, respectively. The Company recorded income tax provision for the thirteen and twenty-six weeks ended June 30, 2018 of $941 and $3,747, respectively. The negative effective income tax rate for the thirteen and twenty-six weeks ended June 30, 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 rate in the thirteen and twenty-six weeks ended June 30, 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.

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 June 29, 2019		Twenty-six Weeks Ended June 29, 2019
Facility consolidation ⁽¹⁾
Labor expense	$	369	$	511
Consulting and legal fees	51		116
Other	552		676
Exit of certain lines of business ⁽²⁾
Inventory valuation adjustments	116		9
Loss (gain) on disposal of assets	72		(397		)
Other	141		322
Total	$	1,301	$	1,237


(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 Loss.


(2)	As part of the restructuring, the Company is exiting a manufacturing business line. Related charges included gains and losses on disposals of assets, and other expenses, which were included other income and expense, and SG&A on the Condensed Consolidated Statement of Comprehensive Loss, respectively.

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The following represents the roll forward of restructuring reserves for the current period:



	Balance at December 29, 2018		Impact to Earnings	Cash Paid		Balance at June 29, 2019
Severance and related	$	1,537	—	(876	)	$	661

10. Long Term Debt:

The following table summarizes the Company’s debt:



	June 29, 2019			December 29, 2018
Revolving loans	$	100,500		$	108,200
Senior term loan, due 2025	1,050,306			1,058,263
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 & finance leases	2,133			1,213
	1,591,643			1,606,380
(Add) unamortized premium on 11.6% Junior Subordinated Debentures	16,818			17,498
(Subtract) unamortized discount on Senior term loan	(8,798		)	(9,558		)
(Subtract) current portion of long term debt, capital leases and finance leases	(11,235		)	(10,985		)
(Subtract) deferred financing fees	(15,653		)	(17,251		)
Total long term debt, net	$	1,572,775		$	1,586,084

As of June 29, 2019, there was $1,050,306 outstanding under the 2018 Term Loan. As of June 29, 2019, the Company had $100,500 outstanding under the ABL Revolver along with $11,736 of letters of credit. The Company has approximately $37,764 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 13 - Fair Value Measurements.

11. Leases

Lessee

The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. The Company leases certain distribution center locations, vehicles, forklifts, computer equipment, and its corporate headquarters with expiration dates through 2032. Certain lease arrangements include escalating rent payments and options to extend the lease term. Expected lease terms include these options to extend or terminate the lease when it is reasonably certain the Company will exercise the option. The Company's leasing arrangements do not contain material residual value guarantees nor material restrictive covenants.

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The components of operating and finance lease cost for the thirteen and twenty-six weeks ended June 29, 2019 were as follows:



	Thirteen Weeks Ended June 29, 2019		Twenty-six Weeks Ended June 29, 2019
Operating lease cost	$	4,575	$	9,298
Short term lease costs	742		1,975
Variable lease costs	352		540
Finance lease cost:
Amortization of right of use assets	143		235
Interest on lease liabilities	28		43

Rent expense is recognized on a straight-line basis over the expected lease term. Rent expense totaled $5,669 and $4,429 in the thirteen weeks ended June 29, 2019 and thirteen weeks ended June 30, 2018, respectively. Rent expense totaled $11,813 and $8,824 in the twenty-six weeks ended June 29, 2019 and twenty-six weeks ended June 30, 2018, respectively. Rent expense includes operating lease cost as well as expense for non-lease components such as common area maintenance, real estate taxes, real estate insurance, variable costs related to our leased vehicles and also short-term rental expenses.

The implicit rate is not determinable in most of the Company’s leases, as such management uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of June 29, 2019:

(1) Upon adoption of the new lease standard, discount rates used for existing operating leases were established on January 1, 2019.

Supplemental balance sheet information related to the Company's finance leases as of June 29, 2019:



	June 29, 2019
Finance lease assets, net, included in property plant and equipment	$	1,922

Current portion of long-term debt	626
Long-term debt, less current portion	1,507
Total principal payable on finance leases	2,133

Supplemental cash flow information related to our operating leases was as follows for the twenty-six weeks ended June 29, 2019:



	Twenty-six Weeks Ended June 29, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases	$	9,129
Operating cash outflow from finance leases	31
Financing cash outflow from finance leases	283

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Maturities of our lease liabilities for all operating and finance leases are as follows as of June 29, 2019:



	Operating Leases			Finance Leases
Less than one year	$	15,960		$	755
1 to 2 years	13,546			617
2 to 3 years	11,541			468
3 to 4 years	9,866			371
4 to 5 years	8,296			218
After 5 years	34,265			—
Total future minimum rental commitments	93,474			2,429
Less - amounts representing interest	(19,981		)	(296		)
Present value of lease liabilities	$	73,493		$	2,133

As of June 29, 2019, the Company has additional operating leases for warehouse equipment and a new office building being constructed by the Company’s landlord that had not yet commenced with estimated future minimum rental commitments of approximately $21,232.

As of December 29, 2018, minimum lease payments under non-cancellable operating leases by period were expected to be as follows:



	Operating Leases
Less than one year	$	17,326
1 to 2 years	14,736
2 to 3 years	13,305
3 to 4 years	12,012
4 to 5 years	9,541
After 5 years	16,664
Total future minimum rental commitments	83,584

Lessor

The Company has certain arrangements for key duplication equipment under which we are the lessor. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material.

12. 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 January 8, 2018, the Company entered into a forward Interest Rate Swap Agreement ("2018 Swap 1") 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 Swap 1 has a determined interest rate of 2.3% plus the applicable interest rate margin of 4.0% for an effective rate of 6.3%.

On November 8, 2018, the Company entered into another new forward Interest Rate Swap Agreement ("2018 Swap 2") with three-year terms for $60,000 notional amount. The forward start date of the 2018 Swap 2 was November 30, 2018 and the

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termination date is November 30, 2022. The 2018 Swap 2 has an interest rate of 2.4% plus the applicable interest rate margin of 4.0% for an effective rate of 6.4%.

The fair value of the 2018 Swaps were $3,886 as of June 29, 2019. These were reported on the condensed consolidated balance sheet in other non-current liabilities. An increase in other expense was recorded in the statement of comprehensive loss for the unfavorable change of $2,902 in fair value since December 29, 2018.

The fair value of 2018 Swap 1 was $394 as of December 29, 2018 and it was reported on the consolidated balance sheet in other non-current assets. The fair value of 2018 Swap 2 was $1,378 and it was reported on the consolidated balance sheet in other non-current liabilities as of December 29, 2018.

The Company's interest rate swap agreements do 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 2018 and 2019 the Company entered into multiple foreign currency forward contracts. 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$3,626 and C$5,790 as of June 29, 2019 and December 29, 2018, respectively. The total fair value of the outstanding foreign currency forward contracts was $73 as of June 29, 2019 and was reported on the condensed consolidated balance sheet in other current assets. The total fair value of the outstanding foreign currency forward contracts was $152 as of December 29, 2018 and was reported on the condensed consolidated balance sheet in other current liabilities. An increase in other income of $146, including contracts settled during the twenty-six weeks ended June 29, 2019, was recorded in the statement of comprehensive loss for the change in fair value from December 29, 2018.

The Company's foreign currency forward contracts do 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 13 - Fair Value Measurements.

13. 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:

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	As of June 29, 2019
	Level 1		Level 2			Level 3		Total
Trading securities	$	1,687	$	—		$	—	$	1,687
Interest rate swaps	—		(3,886		)	—		(3,886		)
Foreign exchange forward contracts	—		73			—		73

	As of December 29, 2018
	Level 1		Level 2			Level 3		Total
Trading securities	$	1,905	$	—		$	—	$	1,905
Interest rate swaps	—		(984		)	—		(984		) <

10590 Hamilton Avenue

Cincinnati

(Address of principal executive offices)

(Zip Code)