10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 12, 2019
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 28, 2019
Commission file number 1-13293
The Hillman Companies, Inc.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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, |
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(Address of principal executive offices) |
(Zip Code) |
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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):
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
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☒ (Do not check if a smaller reporting company)
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Smaller reporting company |
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Emerging growth company |
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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 |
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Preferred Securities Guaranty |
None |
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On November 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.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION |
PAGE |
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Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II. OTHER INFORMATION |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Page 2
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands, except per share amounts)
September 28, 2019 |
December 29, 2018 |
||||||
ASSETS |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ |
$ |
|||||
Accounts receivable, net of allowances of $1,343 ($846 - 2018) |
|||||||
Inventories, net |
|||||||
Other current assets |
|||||||
Total current assets |
|||||||
Property and equipment, net of accumulated depreciation of $164,299 ($131,169 - 2018) |
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Goodwill |
|||||||
Other intangibles, net of accumulated amortization of $217,105 ($176,677 - 2018) |
|||||||
Operating lease right of use assets |
— |
||||||
Other assets |
|||||||
Total assets |
$ |
$ |
|||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||
Current liabilities: |
|||||||
Accounts payable |
$ |
$ |
|||||
Current portion of debt and capital leases |
|||||||
Current portion of operating lease liabilities |
— |
||||||
Accrued expenses: |
|||||||
Salaries and wages |
|||||||
Pricing allowances |
|||||||
Income and other taxes |
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Interest |
|||||||
Other accrued expenses |
|||||||
Total current liabilities |
|||||||
Long term debt |
|||||||
Deferred income taxes, net |
|||||||
Operating lease liabilities |
— |
||||||
Other non-current liabilities |
|||||||
Total liabilities |
$ |
$ |
|||||
Commitments and contingencies (Note 5) |
|||||||
Stockholder's Equity: |
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Preferred stock, $.01 par, 5,000 shares authorized, none issued or outstanding at September 28, 2019 and December 29, 2018 |
|||||||
Common stock, $.01 par, 5,000 shares authorized, issued and outstanding at September 28, 2019 and December 29, 2018 |
|||||||
Additional paid-in capital |
|||||||
(Accumulated deficit) retained earnings |
( |
) |
( |
) |
|||
Accumulated other comprehensive loss |
( |
) |
( |
) |
|||
Total stockholder's equity |
|||||||
Total liabilities and stockholder's equity |
$ |
$ |
|||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(dollars in thousands)
Thirteen Weeks Ended September 28, 2019 |
Thirteen Weeks Ended September 29, 2018 |
Thirty-nine Weeks Ended September 28, 2019 |
Thirty-nine Weeks Ended September 29, 2018 |
||||||||||||
Net sales |
$ |
$ |
$ |
$ |
|||||||||||
Cost of sales (exclusive of depreciation and amortization shown separately below) |
|||||||||||||||
Selling, general and administrative expenses |
|||||||||||||||
Depreciation |
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Amortization |
|||||||||||||||
Management fees to related party |
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Other expense |
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Income from operations |
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Interest expense, net |
|||||||||||||||
Interest expense on junior subordinated debentures |
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Loss (gain) on mark-to-market adjustment of interest rate swap |
( |
) |
( |
) |
|||||||||||
Refinancing charges |
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Investment income on trust common securities |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Loss before income taxes |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Income tax (benefit) expense |
( |
) |
( |
) |
( |
) |
|||||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
Net loss from above |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
Other comprehensive income (loss): |
|||||||||||||||
Foreign currency translation adjustments |
( |
) |
( |
) |
|||||||||||
Total other comprehensive income (loss) |
( |
) |
( |
) |
|||||||||||
Comprehensive loss |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
Thirty-nine Weeks Ended September 28, 2019 |
Thirty-nine Weeks Ended September 29, 2018 |
||||||
Cash flows from operating activities: |
|||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|||||||
Depreciation and amortization |
|||||||
Deferred income taxes |
( |
) |
|||||
Deferred financing and original issue discount amortization |
|||||||
Stock-based compensation expense |
|||||||
Loss on debt restructuring |
|||||||
Asset impairment |
|||||||
(Gain) loss on disposal of property and equipment |
( |
) |
|||||
Other non-cash interest and change in value of interest rate swap |
( |
) |
|||||
Changes in operating items: |
|||||||
Accounts receivable |
( |
) |
( |
) |
|||
Inventories |
( |
) |
( |
) |
|||
Other assets |
( |
) |
|||||
Accounts payable |
|||||||
Other accrued liabilities |
( |
) |
|||||
Net cash provided by operating activities |
|||||||
Cash flows from investing activities: |
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Acquisition of business, net of cash received |
( |
) |
( |
) |
|||
Capital expenditures |
( |
) |
( |
) |
|||
Proceeds from sale of property and equipment |
|||||||
Net cash used for investing activities |
( |
) |
( |
) |
|||
Cash flows from financing activities: |
|||||||
Repayments of senior term loans |
( |
) |
( |
) |
|||
Borrowings on senior term loans |
|||||||
Financing fees |
( |
) |
|||||
Borrowings on revolving credit loans |
|||||||
Repayments of revolving credit loans |
( |
) |
( |
) |
|||
Principal payments under finance and capitalized lease obligations |
( |
) |
( |
) |
|||
Proceeds from exercise of stock options |
|||||||
Proceeds from sale of Holdco stock |
|||||||
Dividend to Holdco |
( |
) |
|||||
Net cash (used for) provided by financing activities |
( |
) |
|||||
Effect of exchange rate changes on cash |
|||||||
Net decrease in cash and cash equivalents |
( |
) |
( |
) |
|||
Cash and cash equivalents at beginning of period |
|||||||
Cash and cash equivalents at end of period |
$ |
$ |
|||||
Supplemental disclosure of cash flow information: |
|||||||
Interest paid on junior subordinated debentures, net |
$ |
$ |
|||||
Interest paid |
|||||||
Income taxes paid |
|||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5
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 |
||||||||||||||||
Thirty-nine weeks ended September 28, 2019 |
||||||||||||||||||||
Balance at December 29, 2018 |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||
Net loss |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||
Stock-based compensation |
— |
— |
— |
|||||||||||||||||
Change in cumulative foreign currency translation adjustment |
— |
— |
— |
|||||||||||||||||
Balance at March 30, 2019 |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||
Net loss |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||
Stock-based compensation |
— |
— |
— |
|||||||||||||||||
Change in cumulative foreign currency translation adjustment |
— |
— |
— |
|||||||||||||||||
Balance at June 29, 2019 |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||
Net loss |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||
Stock-based compensation |
— |
— |
— |
|||||||||||||||||
Proceed from sale of Holdco shares of stock |
— |
— |
— |
|||||||||||||||||
Change in cumulative foreign currency translation adjustment |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||
Balance at September 28, 2019 |
( |
) |
( |
) |
||||||||||||||||
Thirty-nine weeks ended September 29, 2018 |
||||||||||||||||||||
Balance at December 30, 2017 |
$ |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||
Net loss |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||
Stock-based compensation |
— |
— |
— |
|||||||||||||||||
Change in cumulative foreign currency translation adjustment |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||
Cumulative effect of change in accounting principles |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||
Other |
— |
( |
) |
— |
||||||||||||||||
Balance at March 31, 2018 |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||
Net loss |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||
Stock-based compensation |
— |
— |
— |
|||||||||||||||||
Proceeds from exercise of stock options |
— |
— |
— |
|||||||||||||||||
Change in cumulative foreign currency translation adjustment |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||
Other |
— |
( |
) |
— |
— |
( |
) |
|||||||||||||
Balance at June 30, 2018 |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||
Net loss |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||
Stock-based compensation |
— |
— |
— |
|||||||||||||||||
Cumulative effect of change in accounting principles |
— |
— |
— |
|||||||||||||||||
Dividend to Holdco |
— |
( |
) |
— |
— |
( |
) |
|||||||||||||
Change in cumulative foreign currency translation adjustment |
— |
— |
— |
|||||||||||||||||
Other |
— |
( |
) |
— |
— |
( |
) |
|||||||||||||
Balance at September 29, 2018 |
( |
) |
( |
) |
||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 6
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 thirty-nine weeks ended September 28, 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 thirty-nine weeks ended September 28, 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.
Reclassifications:
Certain amounts in the prior year consolidated financial statements were reclassified to conform to the current year’s presentation. The reclassifications were primarily related to the reclassification of the mark-to-market adjustment of our interest rate swap from other income/expense to its own line on the income statement below income from operations. The reclassification had no impact on the prior periods’ statement of financial position, net income (loss), cash flows, or stockholder’s equity.
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.
Page 7
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 September 28, 2019 |
||||||||||||||
|
Fastening
Solutions
|
Home and Access Solutions |
Consumer Connected Solutions |
Personal Protective Solutions |
Total Revenue |
||||||||||
United States |
||||||||||||||
Canada |
||||||||||||||
Other |
||||||||||||||
Consolidated |
||||||||||||||
Thirteen weeks ended September 29, 2018 |
||||||||||||||
Fastening Solutions |
Home and Access Solutions |
Consumer Connected Solutions |
Personal Protective Solutions |
Total Revenue |
||||||||||
United States |
||||||||||||||
Canada |
||||||||||||||
Other |
||||||||||||||
Consolidated |
||||||||||||||
Thirty-nine weeks ended September 28, 2019 |
||||||||||||||
Fastening Solutions |
Home and Access Solutions |
Consumer Connected Solutions |
Personal Protective Solutions |
Total Revenue |
||||||||||
United States |
||||||||||||||
Canada |
||||||||||||||
Other |
||||||||||||||
Consolidated |
||||||||||||||
Thirty-nine weeks ended September 29, 2018 |
||||||||||||||
Fastening Solutions |
Home and Access Solutions |
Consumer Connected Solutions |
Personal Protective Solutions |
Total Revenue |
||||||||||
United States |
||||||||||||||
Canada |
||||||||||||||
Other |
||||||||||||||
Consolidated |
||||||||||||||
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
Page 8
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, 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:
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 $72,785 and a Finance ROU Asset of $672 within our Condensed Consolidated Balance Sheet. Short-term and long-term operating lease liabilities were recorded as $12,040 and $63,291 , respectively. Short-term and long-term finance lease liabilities were determined to be $436 and $477 respectively. The adoption of this guidance did not have an impact on net income. During the thirteen weeks ended September 28, 2019 the Company corrected its method for determining the incremental borrowing rate. This correction resulted in an immaterial correction to the Company’s opening operating lease liability at December 30, 2018 and the interest on lease liabilities in the thirteen and thirty-nine weeks ended September 28, 2019. 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.
Page 9
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.
The following table reconciles the final 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 |
$ |
|||
Inventory |
||||
Other current assets |
||||
Property and equipment |
||||
Goodwill |
||||
Customer relationships |
||||
Technology |
||||
Trade names |
||||
Other non-current assets |
||||
Total assets acquired |
||||
Less: |
||||
Liabilities assumed |
( |
) |
||
Total purchase price |
$ |
|||
Net sales and operating income of the acquired business included in the Company's condensed consolidated statement of comprehensive income for thirteen weeks ended September 28, 2019 were approximately $15,689 and $206 , respectively. Net sales and operating loss for thirty-nine weeks ended September 28, 2019 were approximately $41,011 and $2,355 , 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.
Page 10
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Measurement period adjustments for the thirteen and thirty-nine weeks ended September 28, 2019 were immaterial. See Note 5 - Goodwill and Other Intangible Assets. The following table reconciles the final 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 |
$ |
|||
Accounts receivable |
||||
Inventory |
||||
Other current assets |
||||
Property and equipment |
||||
Goodwill |
||||
Customer relationships |
||||
Trade names |
||||
Other non-current assets |
||||
Total assets acquired |
||||
Less: |
||||
Liabilities assumed |
( |
) |
||
Total purchase price |
$ |
|||
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 September 28, 2019 was approximately $59,092 and $4,548 , respectively. Net sales and operating income from Big Time for thirty-nine weeks ended September 28, 2019 was approximately $185,432 and $16,843 , 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:
Thirteen weeks ended September 29, 2018 |
Thirty-nine weeks ended September 29, 2018 |
||||
Net revenues |
|||||
Net loss |
( |
) |
( |
) |
|
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.
Page 11
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Sharp Systems, LLC
On August 16, 2019, the Company acquired the assets of Sharp Systems, LLC ("Resharp"), a California-based innovative developer of automated knife sharpening systems, for a total purchase price of $21,100, including a contingent consideration provision with an estimated fair value of $18,100 , with a maximum payout of $25,000 plus 1.8% of net knife-sharpening revenues for five years after the $25,000 is fully paid. Contingent consideration to be paid subsequent to September 28, 2019 is contingent upon several business performance metrics over a multi-year period. An amount of the acquisition consideration totaling $18,100 remains payable to the seller. Resharp's financial results reside within the Company's United States reportable segment.
The following table reconciles the estimated fair value of the acquired assets to the net cash paid during the thirteen and thirty-nine weeks ended September 28, 2019:
Property and equipment |
|||
Goodwill |
|||
Technology |
|||
Total assets acquired |
|||
Less: |
|||
Contingent consideration payable |
( |
) |
|
Net cash paid |
|||
Net sales and operating results of the acquired business included in the Company's condensed consolidated statement of comprehensive income for thirteen weeks ended September 28, 2019 and for thirty-nine weeks ended September 28, 2019 were immaterial. Unaudited pro forma financial information has not been presented for Resharp as the financial results of Resharp were insignificant to the financial results of the Company on a standalone basis.
Other Acquisitions
5. Goodwill and Other Intangible Assets:
Goodwill amounts by operating segment are summarized as follows:
Goodwill at |
Acquisitions(1)
|
Dispositions |
Adjustments(2)
|
Other (3)
|
Goodwill at |
||||||||||||||||||
December 29, 2018 |
September 28, 2019 |
||||||||||||||||||||||
United States |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
Canada |
|||||||||||||||||||||||
Other |
( |
) |
|||||||||||||||||||||
Total |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||
(1) |
See Note 4 - Acquisitions of the Notes to condensed consolidated financial statements for additional information regarding the acquisition of Resharp in 2019.
|
(2) |
These amounts relate to opening balance sheet adjustments resulting from the acquisitions of MinuteKey and Big Time Products. These adjustments were primarily related to $ |
Page 12
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(3) |
The "Other" change to goodwill relates to adjustments resulting from fluctuations in foreign currency exchange rates for the Canada and Mexico reporting units. |
Other intangibles, net, as of September 28, 2019 and December 29, 2018 consist of the following:
Estimated Useful Life (Years) |
September 28, 2019 |
December 29, 2018 |
|||||||
Customer relationships |
13-20 |
$ |
$ |
||||||
Trademarks - Indefinite |
Indefinite |
||||||||
Trademarks - Other |
5-15 |
||||||||
Technology and patents |
7-12 |
||||||||
Intangible assets, gross |
|||||||||
Less: Accumulated amortization |
|||||||||
Other intangibles, net |
$ |
$ |
|||||||
The amortization expense for amortizable assets including the adjustments resulting from fluctuations in foreign currency exchange rates was $14,665 and $44,114 for the thirteen and thirty-nine weeks ended September 28, 2019, respectively. Amortization expense for the thirteen and thirty-nine weeks ended September 29, 2018 was $10,437 and $29,872 , 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 thirty-nine weeks ended September 28, 2019 and the thirteen and thirty-nine weeks ended September 29, 2018, the Company did not adjust goodwill to fair values as a result of any impairment analyses. In the thirty-nine weeks ended September 28, 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 weeks ended September 28, 2019 nor the thirteen and thirty-nine weeks ended September 29, 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 $1,968 recorded for such risks is adequate as of September 28, 2019.
As of September 28, 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 $2,162 recorded for such risks is adequate as of September 28, 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
Page 13
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 thirty-nine weeks ended September 29, 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 thirty-nine weeks ended September 28, 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. After the United States Patent and Trademark Office issued U.S. Patent No. 10,400,474 to Hillman Group on September 3, 2019, Hillman Group filed a motion the same day to amend its initial complaint to add the new patent to the litigation. The Texas court granted the motion on September 13, 2019. KeyMe filed two motions in the case 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. Briefing was completed on these motions on September 25, 2019, and they await a decision from the Texas court.
On August 16, 2019, KeyMe filed a complaint for patent infringement against Hillman Group in the United States District Court for the District of Delaware. KeyMe alleges that Hillman’s KeyKrafter key duplication machines and MinuteKey self-service key duplication kiosks infringe KeyMe’s U.S. Patent No. 8,682,468 when those machines are used in conjunction with Hillman’s KeyHero system. KeyMe seeks damages and injunctive relief against Hillman. Hillman filed an answer to KeyMe’s complaint on October 23, 2019, and asserted counterclaims seeking declaratory judgments of invalidity and noninfringement of U.S. Patent No. 8,682,468.
Management and legal counsel for the Company are of the opinion that the plaintiff’s claim is without merit and the Company should prevail in defending the suit. The Company is unable to estimate the possible loss or range of loss at this early stage in the case.
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 $140 and $396 for the thirteen and thirty-nine weeks ended September 28, 2019, respectively, and $134 and $396 for the thirteen and thirty-nine weeks ended September 29, 2018, respectively.
The Company recorded proceeds from the sale of Holdco stock to members of management and the Board of Directors of $750 for the thirty-nine weeks ended September 28, 2019. There were no sales the thirty-nine weeks ended September 29, 2018.
In the 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 thirty-nine weeks ended September 28, 2019.
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
Page 14
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
the thirteen and thirty-nine weeks ended September 28, 2019, respectively, and $87 and $262 for the thirteen and thirty-nine weeks ended September 29, 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 $163 and $486 for the thirteen and thirty-nine weeks ended September 28, 2019, respectively, and $164 and $501 for the thirteen and thirty-nine weeks ended September 29, 2018, respectively.
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 28, 2019 and the thirteen and thirty-nine weeks ended September 29, 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 thirty-nine weeks ended September 28, 2019, the effective income tax rate was 20.6 % and 2.6 %, respectively. The Company recorded income tax benefit for the thirteen and thirty-nine weeks ended September 28, 2019 of $(3,775 ) and $(1,844 ), respectively. The effective tax rate for the thirteen and thirty-nine weeks ended September 28, 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 September 28, 2019 was due to the Company recording a valuation allowance on its interest limitation carryforward. In addition to the interest limitation, the effective income tax rate differed from the federal statutory tax rate for the thirty-nine weeks ended September 28, 2019 due to certain non-deductible expenses, and state and foreign income taxes.
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. The following is a summary of the charges incurred:
Page 15
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Thirteen Weeks Ended September 28, 2019 |
Thirteen Weeks Ended September 29, 2018 |
Thirty-nine Weeks Ended September 28, 2019 |
Thirty-nine Weeks Ended September 29, 2018 |
||||||||||||
Facility consolidation (1)
|
|||||||||||||||
Labor expense |
$ |
$ |
$ |
$ |
|||||||||||
Inventory valuation adjustments |
|||||||||||||||
Consulting and legal fees |
|||||||||||||||
Other |
|||||||||||||||
Exit of certain lines of business (2)
|
|||||||||||||||
Inventory valuation adjustments |
|||||||||||||||
Loss (gain) on disposal of assets |
( |
) |
( |
) |
|||||||||||
Severance |
|||||||||||||||
Other |
|||||||||||||||
Total |
$ |
$ |
$ |
$ |
|||||||||||
(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. |
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 September 28, 2019 |
|||||||||||
Severance and related |
$ |
( |
) |
$ |
||||||||||
10. Long Term Debt:
The following table summarizes the Company’s debt:
September 28, 2019 |
December 29, 2018 |
||||||
Revolving loans |
$ |
$ |
|||||
Senior term loan, due 2025 |
|||||||
Junior Subordinated Debentures - Common |
|||||||
Capital & finance leases |
|||||||
(Add) unamortized premium on 11.6% Junior Subordinated Debentures |
|||||||
(Subtract) unamortized discount on Senior term loan |
( |
) |
( |
) |
|||
(Subtract) current portion of long term debt, capital leases and finance leases |
( |
) |
( |
) |
|||
(Subtract) deferred financing fees |
( |
) |
( |
) |
|||
Total long term debt, net |
$ |
$ |
|||||
As of September 28, 2019, there was $1,050,306 outstanding under the 2018 Term Loan. As of September 28, 2019, the Company had $103,000 outstanding under the ABL Revolver along with $11,736 of letters of credit. The Company has approximately $35,264 of available borrowings under the ABL Revolver as a source of liquidity.
Page 16
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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.
The components of operating and finance lease cost for the thirteen and thirty-nine weeks ended September 28, 2019 were as follows:
Thirteen Weeks Ended September 28, 2019 |
Thirty-nine Weeks Ended September 28, 2019 |
|||||||
Operating lease cost |
$ |
$ |
||||||
Short term lease costs |
||||||||
Variable lease costs |
||||||||
Finance lease cost: |
||||||||