10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on July 29, 2021
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 2021
OR
For the transition period from ______ to ______
Commission file number 1-13293
The Hillman Companies, Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||
, | ||||||||||||||||||||
(Address of principal executive offices) | (Zip Code) |
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 | ☐ | |||||||||||||||||
☒ (Do not check if a smaller reporting company)
|
Smaller reporting company | |||||||||||||||||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 July 29, 2021, 5,000 shares of the Registrant’s common stock were issued and outstanding and 4,217,837 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 | |||||||
Item 1. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
PART II. OTHER INFORMATION | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 5. | ||||||||
Item 6. | ||||||||
Page 2
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands, except per share amounts)
June 26, 2021 |
December 26, 2020 |
||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowances of $ |
|||||||||||
Inventories, net | |||||||||||
Other current assets | |||||||||||
Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation of $ |
|||||||||||
Goodwill | |||||||||||
Other intangibles, net of accumulated amortization of $ |
|||||||||||
Operating lease right of use assets | |||||||||||
Deferred tax 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 | |||||||||||
Interest | |||||||||||
Other accrued expenses | |||||||||||
Total current liabilities | |||||||||||
Long term debt | |||||||||||
Deferred tax liabilities | |||||||||||
Operating lease liabilities | |||||||||||
Other non-current liabilities | |||||||||||
Total liabilities | $ | $ | |||||||||
Commitments and contingencies (Note 6) | |||||||||||
Stockholders' Equity: | |||||||||||
Preferred stock, $ |
|||||||||||
Common stock, $ |
|||||||||||
Additional paid-in capital | |||||||||||
Accumulated deficit | ( |
( |
|||||||||
Accumulated other comprehensive loss | ( |
( |
|||||||||
Total stockholders' equity | |||||||||||
Total liabilities and stockholders' 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 June 26, 2021 |
Thirteen Weeks Ended June 27, 2020 |
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
||||||||||||||||||||
Net sales | $ | $ | $ | $ | |||||||||||||||||||
Cost of sales (exclusive of depreciation and amortization shown separately below) | |||||||||||||||||||||||
Selling, general and administrative expenses | |||||||||||||||||||||||
Depreciation | |||||||||||||||||||||||
Amortization | |||||||||||||||||||||||
Management fees to related party | |||||||||||||||||||||||
Other (income) expense | ( |
( |
|||||||||||||||||||||
Income from operations | |||||||||||||||||||||||
Interest expense, net | |||||||||||||||||||||||
Interest expense on junior subordinated debentures | |||||||||||||||||||||||
(Gain) loss on mark-to-market adjustment of interest rate swap | ( |
( |
( |
||||||||||||||||||||
Investment income on trust common securities | ( |
( |
( |
( |
|||||||||||||||||||
Loss before income taxes | ( |
( |
( |
( |
|||||||||||||||||||
Income tax provision (benefit) | ( |
( |
( |
||||||||||||||||||||
Net loss | $ | ( |
$ | ( |
$ | ( |
$ | ( |
|||||||||||||||
Net loss from above | $ | ( |
$ | ( |
$ | ( |
$ | ( |
|||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||
Foreign currency translation adjustments | ( |
||||||||||||||||||||||
Total other comprehensive income (loss) | ( |
||||||||||||||||||||||
Comprehensive income (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)
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
||||||||||
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 | |||||||||||
Asset impairment | |||||||||||
(Gain) on disposal of property and equipment | ( |
||||||||||
Change in fair value of contingent consideration | ( |
( |
|||||||||
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 (used for) operating activities | ( |
||||||||||
Cash flows from investing activities: | |||||||||||
Acquisition of business, net of cash received | ( |
( |
|||||||||
Capital expenditures | ( |
( |
|||||||||
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 | |||||||||||
Net cash 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 | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||||||
Twenty-six weeks ended June 26, 2021 | ||||||||||||||||||||||||||||||||
Balance at December 26, 2020 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||
Net Loss | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||
Proceeds from exercise of stock options | — | — | — | |||||||||||||||||||||||||||||
Change in cumulative foreign currency translation adjustment | — | — | — | |||||||||||||||||||||||||||||
Balance at March 27, 2021 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||
Net Loss | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||
Proceeds from exercise of stock options | — | — | — | |||||||||||||||||||||||||||||
Change in cumulative foreign currency translation adjustment | — | — | — | |||||||||||||||||||||||||||||
Balance at June 26, 2021 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||
Twenty-six weeks ended June 27, 2020 | ||||||||||||||||||||||||||||||||
Balance at December 28, 2019 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||
Net Loss | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||
Change in cumulative foreign currency translation adjustment | — | — | — | ( |
( |
|||||||||||||||||||||||||||
Balance at March 28, 2020 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||
Net Loss | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||
Change in cumulative foreign currency translation adjustment | — | — | — | |||||||||||||||||||||||||||||
Balance at June 27, 2020 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||
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 twenty-six weeks ended June 26, 2021. 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 26, 2021 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 26, 2020.
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 26, 2020.
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.
The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates, employment rates and health insurance coverage, the speed of the anticipated recovery, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of June 26, 2021 and through the date of this report. The accounting matters assessed included, but were not limited to the carrying value of the goodwill and other long-lived assets. While there was not a material impact to the Company’s consolidated financial statements as of and for the quarter ended June 26, 2021, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s Consolidated Financial Statements in future reporting periods.
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.
Page 7
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company offers a variety of sales incentives to its customers primarily in the form of discounts and rebates. 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.
The following table displays our disaggregated revenue by product category:
Thirteen weeks ended June 26, 2021 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
Fastening and Hardware | $ | $ | $ | $ | |||||||||||||||||||
Personal Protective | |||||||||||||||||||||||
Keys and Key Accessories | |||||||||||||||||||||||
Engraving | |||||||||||||||||||||||
Resharp | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
Thirteen weeks ended June 27, 2020 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
Fastening and Hardware | $ | $ | $ | $ | |||||||||||||||||||
Personal Protective | |||||||||||||||||||||||
Keys and Key Accessories | |||||||||||||||||||||||
Engraving | |||||||||||||||||||||||
Resharp | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
Twenty-six weeks ended June 26, 2021 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
Fastening and Hardware | $ | $ | $ | $ | |||||||||||||||||||
Personal Protective | |||||||||||||||||||||||
Keys and Key Accessories | |||||||||||||||||||||||
Engraving | |||||||||||||||||||||||
Resharp | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
Page 8
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Twenty-six weeks ended June 27, 2020 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
Fastening and Hardware | $ | $ | $ | $ | |||||||||||||||||||
Personal Protective | |||||||||||||||||||||||
Keys and Key Accessories | |||||||||||||||||||||||
Engraving | |||||||||||||||||||||||
Resharp | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
The following table disaggregates our revenue by geographic location:
Thirteen weeks ended June 26, 2021 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
United States | $ | $ | $ | $ | |||||||||||||||||||
Canada | |||||||||||||||||||||||
Mexico | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
Thirteen weeks ended June 27, 2020 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
United States | $ | $ | $ | $ | |||||||||||||||||||
Canada | |||||||||||||||||||||||
Mexico | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
Twenty-six weeks ended June 26, 2021 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
United States | $ | $ | $ | $ | |||||||||||||||||||
Canada | |||||||||||||||||||||||
Mexico | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
Page 9
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Twenty-six weeks ended June 27, 2020 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
United States | $ | $ | $ | $ | |||||||||||||||||||
Canada | |||||||||||||||||||||||
Mexico | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
Our revenue by geography is allocated based on the location of our sales operations. Our Hardware and Protective Solutions segment contains sales of Big Time personal protective equipment into Canada. Our Robotics and Digital Solutions segment contains sales of MinuteKey Canada.
Hardware and Protective Solutions revenues consist primarily of the delivery of fasteners, anchors, specialty fastening products, and personal protective equipment such as gloves and eye-wear as well as in-store merchandising services for the related product category.
Robotics and Digital Solutions revenues consist primarily of sales of keys and identification tags through self service key duplication and engraving kiosks. It also includes our associate-assisted key duplication systems and key accessories.
Canada revenues consist primarily of the delivery to Canadian customers of fasteners and related hardware items, threaded rod, keys, key duplicating systems, accessories, personal protective equipment, and identification items 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, which occurs upon delivery of the products. Judgment is required in determining the time at which to recognize revenue for the in-store services and the access to key duplicating and engraving equipment. Revenue is recognized for in-store service and access to key duplicating and engraving equipment as the related products are delivered, which approximates a time-based recognition pattern. 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 delivery 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.
3. Recent Accounting Pronouncements:
Page 10
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
4. Acquisitions:
On April 16, 2021, the Company completed the acquisition of Oz Post International, LLC ("OZCO"), a leading manufacturer of superior quality hardware that offers structural fasteners and connectors used for decks, fences and other outdoor structures, for a total purchase price of $39,102 . The Company entered into an amendment ("OZCO Amendment") to the term loan credit agreement dated May 31, 2018 (the "2018 Term Loan"), which provided $35,000 of incremental term loan funds to be used to finance the acquisition. OZCO has business operations throughout North America and its financial results reside in the Company's Hardware and Protective Solutions reportable segment.
The following table reconciles the fair value of the acquired assets and assumed liabilities to the preliminary total purchase price of OZCO:
Accounts receivable | $ | ||||
Inventory | |||||
Other current assets | |||||
Property and equipment | |||||
Goodwill | |||||
Customer relationships | |||||
Trade names | |||||
Technology | |||||
Total assets acquired | |||||
Less: | |||||
Liabilities assumed | ( |
||||
Total purchase price | $ |
Pro forma financial information has not been presented for OZCO as their associated financial results are insignificant to the financial results of the Company on a standalone basis.
Page 11
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
5. Goodwill and Other Intangible Assets:
Goodwill amounts by reportable segment are summarized as follows:
Goodwill at |
Acquisitions (1)
|
Dispositions |
Other (2)
|
Goodwill at | |||||||||||||||||||||||||
December 26, 2020 | June 26, 2021 | ||||||||||||||||||||||||||||
Hardware and Protective Solutions | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Robotics and Digital Solutions | |||||||||||||||||||||||||||||
Canada | |||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ |
(1)See Note 4 - Acquisitions for additional information regarding the OZCO acquisition.
(2)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 June 26, 2021 and December 26, 2020 consist of the following:
Estimated Useful Life (Years) |
June 26, 2021 | December 26, 2020 | |||||||||||||||||||||
Customer relationships | - | $ | $ | ||||||||||||||||||||
Trademarks - Indefinite | Indefinite | ||||||||||||||||||||||
Trademarks - Other | - | ||||||||||||||||||||||
Technology and patents | - | ||||||||||||||||||||||
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 for the thirteen and twenty-six weeks ended June 26, 2021 was $15,414 and $30,323 , respectively. Amortization expense for the thirteen and twenty-six weeks ended June 27, 2020 was $14,865 and $29,713 , respectively.
6. Commitments and Contingencies:
The Company self-insures its product liability, automotive and workers' compensation losses up to $250 per occurrence. General liability losses are self-insured up to $500 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 $2,520 recorded for such risks is adequate as of June 26, 2021.
Page 12
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
As of June 26, 2021, the Company has provided certain vendors and insurers letters of credit aggregating $27,908 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 $2,300 recorded for such risks is adequate as of June 26, 2021.
On June 3, 2019, The Hillman Group, Inc. ("Hillman Group") filed a complaint for patent infringement against KeyMe, LLC ("KeyMe"), a provider of self-service key duplication kiosks, in the United States District Court for the Eastern District of Texas (Marshall Division). The case was assigned Civil Action No. 2:19-cv-0209. 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. Subsequently, Hillman Group filed a motion on September 4, 2019 to disqualify KeyMe's counsel Cooley LLP from the litigation due to Cooley's concurrent and prior representation of Hillman Group and predecessor-in-interest MinuteKey Holdings, Inc ("MinuteKey"). Hillman Group served its initial infringement contentions for the patents-in-suit on KeyMe on September 6, 2019, and KeyMe served its initial invalidity and unenforceability contentions for the patents-in-suit on Hillman Group on November 15, 2019. The parties filed a joint claim construction statement with the Court on January 31, 2020, setting forth the disputed constructions of terms and phrases recited in the asserted claims of the patents-in-suit. On February 14, 2020, the Court granted Hillman Group’s motion to disqualify Cooley LLP, and denied KeyMe’s pending venue-related motion to dismiss and motion to transfer without prejudice to refiling. The case was stayed until March 30, 2020 to permit KeyMe to retain new legal counsel. The parties filed a joint status report on March 25, 2020, and on March 27, 2020, the Texas Court set a new case schedule with a trial in early December 2020. On April 14, 2020, KeyMe re-filed a single motion to dismiss for improper venue, or in the alternative, to transfer the case to the Southern District of New York. After an oral hearing held on September 30, 2020, the Texas Court denied KeyMe’s motion to dismiss on November 13, 2020.
The Texas Court conducted a claim construction hearing in Marshall, TX, on June 23, 2020 to construe various disputed claim terms of the three patents-in-suit, and issued a claim construction order on July 2, 2020. On August 31, 2020, KeyMe filed two motions for partial summary judgment on portions of the case, and also filed a motion objecting to portions of the testimony of one of Hillman Group’s technical expert witnesses. At a pretrial conference held March 23, 2021, the Texas Court denied KeyMe's motion to exclude expert testimony and KeyMe's motion for summary judgment of no willful infringement in full. KeyMe's motion for summary judgment of non-infringement relating to U.S. Patent No. 10,400,474 was granted in-part and denied in-part; Hillman Group was permitted to proceed with a theory of infringement under the doctrine of equivalents at trial.
On March 2, 2020, Hillman Group filed a second complaint for patent infringement against KeyMe in the same Texas Court, alleging that KeyMe’s key duplication kiosks infringe Hillman Group’s U.S. Patent No. 10,577,830. The case was assigned Civil Action No. 2:20-cv-0070. Hillman Group added a second patent to the case, U.S. Patent No. 10,628,813, upon that patent's issuance on April 21, 2020. Upon issuance of U.S. Patent No. 10,737,336 to Hillman Group on August 10, 2020, Hillman Group moved for leave of Court to add that patent to the case; however, KeyMe opposed the motion.
KeyMe filed a motion to consolidate the two Texas patent cases involving KeyMe and Hillman Group on April 14, 2020. In addition, on April 30, 2020, KeyMe filed a substantially identical motion to dismiss the case for improper venue, or in the alternative, to transfer the case to the Southern District of New York. The Texas Court heard oral argument on the motion to consolidate, the motion to dismiss, and Hillman Group’s motion to add the ’336 patent on September 30, 2020. On October 23, 2020, the Texas Court granted KeyMe’s motion to consolidate the two Texas cases, and granted Hillman Group’s motion to add the ’336 patent. The Texas Court denied KeyMe’s motion to dismiss on November 13, 2020. On November 18, 2020, the Texas Court issued a new case schedule for the consolidated case, setting a trial date of April 5, 2021 for the six-patent case. The parties stipulated in November, 2020 that no new claim construction hearing would be held, and that selected constructions from the 2:19-cv-209 action that pertained to claims in the 2:20-cv-0070 action would govern. Fact discovery closed in the consolidated case on December 21, 2020, and expert discovery closed on January 22, 2021.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
On January 25, 2021, KeyMe filed a second summary judgment motion for a judgment of no willful infringement, and also filed another motion objecting to portions of the testimony of one of Hillman Group's technical expert witnesses. At a pretrial conference held March 23, 2021, the Texas Court denied both of KeyMe's motions in full.
On September 9, 2020, the parties conducted a mediation before Ret. District Judge David Folsom of the U.S. District Court of the Eastern District of Texas. Though substantive discussion took place, no agreement on resolution of the litigation was reached.
A jury trial was held in the Texas case from April 5-12, 2021 in Marshall, Texas. On April 12, 2021, the jury returned a verdict that KeyMe did not infringe any of the six asserted patents, and several of the asserted claims were invalid. Final judgment was entered on April 13, 2021. Both parties filed renewed motions for judgment as a matter of law on issues they did not prevail on at trial on May 11, 2021, and Hillman Group additionally filed a motion for a new trial on the same date.
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 Group’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 Group’s KeyHero system. Hillman Group 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. On May 4, 2020, the Delaware Court entered a scheduling order setting trial for November 2021. KeyMe served its initial infringement contentions on June 11, 2020, with Hillman Group serving its initial invalidity contentions on July 16, 2020. The Delaware Court held a claim construction hearing on November 24, 2020, and issued its claim construction order on January 25, 2021. Fact discovery closed in the Delaware case on January 28, 2021. KeyMe served its final infringement contentions on January 4, 2021; Hillman Group served its final invalidity contentions on January 18, 2021. Expert discovery closed on April 8, 2021. Following the close of discovery, Hillman Group filed a motion for summary judgment of noninfringement and no willful infringement in the case on April 15, 2021.
As of June 14, 2021, Hillman Group and KeyMe have globally resolved all pending legal disputes, including the Texas and Delaware district court actions discussed above.
On June 1, 2021, Hy-Ko Products Company LLC ("Hy-Ko"), a manufacturer of key duplication machines, filed a complaint for patent infringement against Hillman Group in the United States District Court for the Eastern District of Texas (Marshall Division). The case was assigned Civil Action No. 2:21-cv-0197. Hy-Ko's complaint alleges that Hillman's KeyKrafter and PKOR key duplication machines infringe U.S. Patent Nos. 9,656,332, 9,682,432, 9,687,920, and 10,421,113, which are assigned to Hy-Ko, and seeks damages and injunctive relief against Hillman Group. Hy-Ko's complaint additionally contains allegations of unfair competition under the Federal Lanham Act and conversion/receipt of stolen property, as well as a cause of action for "replevin" for return of stolen property.
Management and legal counsel for Hillman Group are still investigating this recent suit but are initially of the opinion that Hy-Ko's claims are without merit and Hillman Group intends to vigorously defend the claims. Hillman Group is unable to estimate the possible loss or range of loss at this early stage in the case.
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 $88 and $214 for the thirteen and twenty-six weeks ended June 26, 2021, respectively, and $196 and $321 for the thirteen and twenty-six weeks ended June 27, 2020, 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 $176 for the thirteen and twenty-six weeks ended June 26, 2021, respectively, and was $88 and $175 for the thirteen and twenty-six weeks ended June 27, 2020, respectively.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 26, 2021 and the thirteen and twenty-six weeks ended June 27, 2020, the Company applied an estimated annual effective tax rate to the interim period pre-tax loss to calculate the income tax benefit.
For the thirteen and twenty-six weeks ended June 26, 2021, the effective income tax rate was (73.0 )% and 29.7 %, respectively. The Company recorded an income tax provision for the thirteen weeks ended June 26, 2021 of $1,428 and an income tax benefit for the twenty-six weeks ended June 26, 2021 of $5,225 . The effective tax rate for the thirteen and twenty-six weeks ended June 26, 2021 was the result of an estimated increase in GILTI from the Company's Canadian operations, state and foreign income taxes, non-deductible transaction expenses, and non-deductible stock compensation.
For the thirteen and twenty-six weeks ended June 27, 2020, the effective income tax rate was 15.1 % and 20.6 %, respectively. The Company recorded an income tax benefit for the thirteen and twenty-six weeks ended June 27, 2020 of $895 and $5,132 , respectively. The effective tax rate for the thirteen and twenty-six weeks ended June 27, 2020 was primarily due to non-deductible stock compensation, and state and foreign income taxes.
9. Restructuring
Canada 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 restructuring activities to be completed in 2021. The following is a summary of the charges incurred:
Thirteen Weeks Ended June 26, 2021 |
Thirteen Weeks Ended June 27, 2020 |
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
||||||||||||||||||||
Facility consolidation (1)
|
|||||||||||||||||||||||
Labor expenses | $ | $ | $ | $ | |||||||||||||||||||
Consulting and legal fees | |||||||||||||||||||||||
Other expenses | ( |
||||||||||||||||||||||
Rent and related charges | |||||||||||||||||||||||
Severance | |||||||||||||||||||||||
Total | $ | $ | $ | $ |
(1)Facility consolidation includes labor expense related to organizing inventory and equipment in preparation for the facility consolidation, 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.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The following represents the roll forward of Canada restructuring reserves for the current period:
Severance and related expense | ||||||||
Balance as of December 28, 2019 | $ | |||||||
Restructuring Charges | ||||||||
Cash Paid | ( |
|||||||
Balance as of December 26, 2020 | $ | |||||||
Restructuring Charges | ||||||||
Cash Paid | ( |
|||||||
Balance as of June 26, 2021 | $ |
United States Restructuring
During fiscal 2019, the Company began implementing a plan to restructure the management and operations within the United States to achieve synergies and cost savings associated with the Company's acquisition activities. This restructuring includes management realignment, integration of sales and operating functions, and strategic review of the Company's product offerings. This plan was finalized during the fourth quarter of fiscal 2019. The Company incurred additional charges in fiscal 2020 and 2021 related to the consolidation of two of our distribution centers. Charges incurred in part of the United States Restructuring Plan included:
Thirteen Weeks Ended June 26, 2021 |
Thirteen Weeks Ended June 27, 2020 |
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
||||||||||||||||||||
Management realignment & integration | |||||||||||||||||||||||
Severance | $ | $ | $ | $ | |||||||||||||||||||
Facility closures | |||||||||||||||||||||||
Severance | |||||||||||||||||||||||
Other | $ | ||||||||||||||||||||||
Total | $ | $ | $ | $ |
The following represents the roll forward of United States restructuring reserves for the current period:
Severance and related expense | ||||||||
Balance as of December 28, 2019 | $ | |||||||
Restructuring Charges | ||||||||
Cash Paid | ( |
|||||||
Balance as of December 26, 2020 | $ | |||||||
Restructuring Charges | ||||||||
Cash Paid | ( |
|||||||
Balance as of June 26, 2021 | $ |
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
10. Long Term Debt:
The following table summarizes the Company’s debt:
June 26, 2021 | December 26, 2020 | ||||||||||
Revolving loans | $ | $ | |||||||||
Senior term loan, due 2025 | |||||||||||
Junior Subordinated Debentures - Common | |||||||||||
Capital & finance leases | |||||||||||
Unamortized premium on 11.6% Junior Subordinated Debentures | |||||||||||
Unamortized discount on Senior term loan | ( |
( |
|||||||||
Current portion of long term debt, capital leases and finance leases | ( |
( |
|||||||||
Deferred financing fees | ( |
( |
|||||||||
Total long term debt, net | $ | $ |
As of June 26, 2021, there was $1,066,740 outstanding under the 2018 Term Loan. As of June 26, 2021, the Company had $158,000 outstanding under the ABL Revolver along with $27,908 of letters of credit. The Company has approximately $64,092 of available borrowings under the ABL Revolver as a source of liquidity.
On April 16, 2021, the Company acquired Oz Post International, LLC ("OZCO"). The Company entered into an amendment ("OZCO Amendment") to the term loan credit agreement dated May 31, 2018 (the "2018 Term Loan"), which provided $35,000 of incremental term loan funds to be used to finance the acquisition. See Note 4 - Acquisitions for additional information regarding the OZCO acquisition.
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.
Page 17
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The components of operating and finance lease cost for the thirteen and twenty-six weeks ended June 26, 2021 and thirteen and twenty-six weeks ended June 27, 2020 were as follows:
Thirteen Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 26, 2021 |
Thirteen Weeks Ended June 27, 2020 |
Twenty-six Weeks Ended June 27, 2020 |
|||||||||||||||||||||||
Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
Short term lease costs | ||||||||||||||||||||||||||
Variable lease costs | ||||||||||||||||||||||||||
Finance lease cost: | ||||||||||||||||||||||||||
Amortization of right of use assets | ||||||||||||||||||||||||||
Interest on lease liabilities |
Rent expense totaled $6,702 and $12,986 in the thirteen and twenty-six weeks ended June 26, 2021, respectively, and $5,566 and $11,014 in the thirteen and twenty-six weeks ended June 27, 2020, 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 and finance leases were as follows as of June 26, 2021 and December 26, 2020:
June 26, 2021 | December 26, 2020 | |||||||||||||||||||||||||
Operating Leases | Finance Leases | Operating Leases | Finance Leases | |||||||||||||||||||||||
Weighted average remaining lease term | ||||||||||||||||||||||||||
Weighted average discount rate |
Supplemental balance sheet information related to the Company's finance leases was as follows as of June 26, 2021 and December 26, 2020:
June 26, 2021 | December 26, 2020 | |||||||||||||
Finance lease assets, net, included in property plant and equipment | $ | $ | ||||||||||||
Current portion of long-term debt | ||||||||||||||
Long-term debt, less current portion | ||||||||||||||
Total principal payable on finance leases |
Supplemental cash flow information related to the Company's operating leases was as follows for the twenty-six weeks ended June 26, 2021 and twenty-six weeks ended June 27, 2020:
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
|||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
Operating cash outflow from operating leases | $ | $ | ||||||||||||
Operating cash outflow from finance leases | ||||||||||||||
Financing cash outflow from finance leases |
Page 18
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Maturities of our lease liabilities for all operating and finance leases are as follows as of June 26, 2021:
Operating Leases | Finance Leases | |||||||||||||
Less than one year | $ | $ | ||||||||||||
1 to 2 years | ||||||||||||||
2 to 3 years | ||||||||||||||
3 to 4 years | ||||||||||||||
4 to 5 years | ||||||||||||||
After 5 years | ||||||||||||||
Total future minimum rental commitments | ||||||||||||||
Less - amounts representing interest | ( |
( |
||||||||||||
Present value of lease liabilities | $ | $ |
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 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 %. -year terms for notional amounts of $
On November 8, 2018, the Company entered into another new forward Interest Rate Swap Agreement ("2018 Swap 2") with 60,000 notional amount. The forward start date of the 2018 Swap 2 was November 30, 2018 and the termination date is November 30, 2022. The 2018 Swap 2 has determined interest rate of 3.1 % plus the applicable interest rate margin of 4.0 % for an effective rate of 7.1 %. -year terms for $
The fair value of the 2018 Swap 1 was $110 as of June 26, 2021 and it was reported on the Condensed Consolidated Balance Sheets within other accrued expenses. The fair value of the 2018 Swap 2 was $2,659 as of June 26, 2021 and it was reported on the Condensed Consolidated Balance Sheets within other non-current liabilities. A decrease in other expense was recorded in the Statement of Comprehensive Loss for the favorable change of $1,424 in fair value since December 26, 2020.
The fair value of 2018 Swap 1 was $709 as of December 26, 2020 and is reported within other accrued expenses. The fair value of 2018 Swap 2 was $3,484 as of December 26, 2020 and is reported within other non-current liabilities.
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.
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.
Page 19
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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:
As of June 26, 2021 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
Trading securities | $ | $ | $ | $ | |||||||||||||||||||
Interest rate swaps | ( |
( |
|||||||||||||||||||||
Contingent consideration payable | ( |
( |
|||||||||||||||||||||
As of December 26, 2020 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
Trading securities | $ | $ | $ | $ | |||||||||||||||||||
Interest rate swaps | ( |
( |
|||||||||||||||||||||
Contingent consideration payable | ( |
( |
Trading securities are valued using quoted prices on an active exchange. Trading securities represent assets held in a Rabbi Trust to fund deferred compensation liabilities and are included as other assets on the accompanying Condensed Consolidated Balance Sheets.
The Company utilizes interest rate swap contracts to manage our targeted mix of fixed and floating rate debt, and these contracts are valued using observable benchmark rates at commonly quoted intervals for the full term of the swap contracts. As of June 26, 2021 and December 26, 2020, the 2018 Swap 1 was recorded within other accrued expenses and the 2018 Swap 2 was recorded within other non-current liabilities on the accompanying Condensed Consolidated Balance Sheets.
The contingent consideration represents future potential earn-out payments related to the Resharp acquisition in fiscal 2019 and the Instafob acquisition in the first quarter of 2020. The estimated fair value of the contingent earn-outs was determined using a Monte Carlo analysis examining the frequency and mean value of the resulting earn-out payments. The resulting value captures the risk associated with the form of the payout structure. The risk neutral method is applied, resulting in a value that captures the risk associated with the form of the payout structure and the projection risk. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liability. As of June 26, 2021, the total contingent consideration was recorded as $1,264 of other accrued expenses and $11,695 in other non-current liabilities on the Condensed Consolidated Balance Sheets. As of December 26, 2020, the total contingent consideration was recorded as $417 of other accrued expenses and $13,780 in other non-current liabilities on the Condensed Consolidated Balance Sheets. As of June 26, 2021 compared to December 26, 2020, the Company recorded a $1,097 and $115 decrease in the Resharp and Instafob contingent consideration liability, respectively. The total $1,212 gain on the revaluation was determined by using a simulation model of the Monte Carlo analysis that included updated projections applicable to the liability as of June 26, 2021 compared to the prior valuation period and was recorded within other income in the Condensed Consolidated Statements of Comprehensive Income.
The fair value of the Company's fixed rate senior notes and junior subordinated debentures as of June 26, 2021 and December 26, 2020 were determined by utilizing current trading prices obtained from indicative market data. As a result, the fair value measurements of the Company's senior term notes and debentures are considered to be Level 2.
Page 20
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
June 26, 2021 | December 26, 2020 | |||||||||||||||||||||||||
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
|||||||||||||||||||||||
$ | $ | $ | $ | |||||||||||||||||||||||
Junior Subordinated Debentures |
Cash, accounts receivable, accounts payable, and accrued liabilities are reflected in the Condensed Consolidated Financial Statements at book value, which approximates fair value, due to the short-term nature of these instruments. The carrying amount of the long-term debt under the revolving credit facility approximates the fair value at June 26, 2021 and December 26, 2020 as the interest rate is variable and approximates current market rates. The Company also believes the carrying amount of the long-term debt under the senior term loan approximates the fair value at June 26, 2021 and December 26, 2020 because, while subject to a minimum LIBOR floor rate, the interest rate approximates current market rates of debt with similar terms and comparable credit risk.
14. Segment Reporting:
The Company’s segment reporting structure uses the Company’s management reporting structure as the foundation for how the Company manages its business. The Company periodically evaluates its segment reporting structure in accordance with ASC 350-20-55 and has concluded that it has three reportable segments as of June 26, 2021: Hardware and Protective Solutions, Robotics and Digital Solutions, and Canada. The Company evaluates the performance of its segments based on revenue and income (loss) from operations, and does not include segment assets nor non-operating income/expense items for management reporting purposes.
The table below presents revenues and income (loss) from operations for our reportable segments for the thirteen and twenty-six weeks ended June 26, 2021 and thirteen and twenty-six weeks ended June 27, 2020.
Thirteen Weeks Ended June 26, 2021 |
Thirteen Weeks Ended June 27, 2020 |
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
|||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||
Hardware and Protective Solutions | $ | $ | $ | $ | ||||||||||||||||||||||
Robotics and Digital Solutions | ||||||||||||||||||||||||||
Canada | ||||||||||||||||||||||||||
Total revenues | $ | $ | $ | $ | ||||||||||||||||||||||
Segment income (loss) from operations | ||||||||||||||||||||||||||
Hardware and Protective Solutions | $ | $ | $ | $ | ||||||||||||||||||||||
Robotics and Digital Solutions | ( |
|||||||||||||||||||||||||
Canada | ( |
|||||||||||||||||||||||||
Total income from operations | $ | $ | $ | $ |
15. Subsequent Events:
On July 14, 2021, subsequent to quarter end, the Company’s parent, HMan Group Holdings, Inc., and Landcadia Holdings III, Inc. (“Landcadia” and after the Business Combination described herein, “New Hillman”), a special purpose acquisition company ("SPAC") consummated the previously announced business combination (the “Closing”) pursuant to the terms of the Agreement and Plan of Merger, dated as of January 24, 2021 (as amended on March 12, 2021, and as it may be further amended or supplemented from time to time, the “Merger Agreement”). In accordance with the terms and subject to the conditions set forth in the Merger Agreement, Landcadia paid aggregate consideration in the form of New Hillman common stock calculated as described herein and equal to a value of approximately (i) $911,300,000 plus (ii) $28,280,000, such amount being the value of 2,828,000 shares of Class B common stock of Landcadia, valued at $10.00 per share, that TJF, LLC (“TJF
Page 21
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Sponsor”) and Jefferies Financial Group Inc., (“JFG Sponsor” and, together with TJF Sponsor, the “Sponsors”) agreed to forfeit at the Closing.
In connection with the Closing, the Company entered into a new credit agreement with Jefferies Finance LLC, as administrative agent, and the lenders and other parties thereto (the “Term Credit Agreement”), which provided for a new funded term loan facility of $835.0 million and a delayed draw term loan facility of $200.0 million (of which $16.0 million was drawn). The Company also also entered into an amendment to their existing asset-based revolving credit agreement (the “ABL Amendment”) with Barclays Bank PLC, as administrative agent, and the lenders and other parties thereto (the “ABL Credit Agreement”), increasing the aggregate commitments thereunder to $250.0 million, extended the maturity and conformed certain provisions to the Term Credit Agreement. The proceeds of the funded term loans under the Term Credit Agreement and revolving credit loans under the ABL Credit Agreement were used, together with other available cash, to (1) refinance in full all outstanding term loans and to terminate all outstanding commitments under the credit agreement, dated as of May 31, 2018, (2) refinance outstanding revolving credit loans, and (3) redeem in full senior notes due July 15, 2022 (the “6.375% Senior Notes”).
In anticipation of the Business Combination and the refinancings described above, on July 13, 2021, the Company delivered a notice to redeem in full 11.6% Junior Subordinated Debentures due September 30, 2027 (the “Junior Subordinated Debentures”) issued under the Indenture, dated as of September 5, 1997 (as amended and supplemented, the “Debentures Indenture”), between The Hillman Companies and The Bank of New York Mellon, a New York banking corporation, as Trustee (the “Trustee”) and deposited an amount with the Trustee sufficient to satisfy and discharge the Debentures Indenture, which is no longer in effect. Notices to redeem 4,217,837 trust preferred securities (the “Trust Preferred Securities”) issued in a public offering by the Hillman Group Capital Trust ("Trust") and 130,449 of trust common securities (the “Trust Common Securities”) issued by the Trust to Hillman Companies were also delivered on July 13, 2021. Upon the payment of the redemption price for the Debentures on August 12, 2021, the Trust will redeem the Trust Preferred Securities and the Trust Common Securities, which as of August 12, 2021 will no longer be deemed to be outstanding. The last day of trading for the Trust Preferred Securities on the New York Stock Exchange (the “NYSE”) will be August 11, 2021 and the Company is voluntarily delisting the Trust Preferred Securities from the NYSE.
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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides information which the Company’s management believes is relevant to an assessment and understanding of the Company’s operations and financial condition. This discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes in addition to the consolidated statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 26, 2020.
Forward-Looking Statements
Certain disclosures related to acquisitions, refinancing, capital expenditures, resolution of pending litigation, and realization of deferred tax assets contained in this quarterly report involve substantial risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” “project,” or the negative of such terms or other similar expressions.
These forward-looking statements are not historical facts, but rather are based on management’s current expectations, assumptions, and projections about future events. Although management believes that the expectations, assumptions, and projections on which these forward-looking statements are based are reasonable, they nonetheless could prove to be inaccurate, and as a result, the forward-looking statements based on those expectations, assumptions, and projections also could be inaccurate. Forward-looking statements are not guarantees of future performance. Instead, forward-looking statements are subject to known and unknown risks, uncertainties, and assumptions that may cause the Company’s strategy, planning, actual results, levels of activity, performance, or achievements to be materially different from any strategy, planning, future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Actual results could differ materially from those currently anticipated as a result of a number of factors, including the risks and uncertainties discussed under the caption “Risk Factors” set forth in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 26, 2020. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward-looking statements.
All forward-looking statements attributable to the Company or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this report and the risks and uncertainties discussed under the caption “Risk Factors” set forth in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 26, 2020; they should not be regarded as a representation by the Company or any other individual. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this report might not occur or be materially different from those discussed.
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General
The Hillman Companies, Inc. and its wholly-owned subsidiaries (collectively, "Hillman" or "Company") are one of the largest providers of hardware-related products and related merchandising services to retail markets in North America. Our principal business is operated through the wholly-owned subsidiary, The Hillman Group, Inc. and its wholly-owned subsidiaries (collectively, “Hillman Group”). Hillman Group sells its products to hardware stores, home centers, mass merchants, pet supply stores, and other retail outlets principally in the United States, Canada, Mexico, Latin America, and the Caribbean. Product lines include thousands of small parts such as fasteners and related hardware items; threaded rod and metal shapes; keys, key duplication systems, and accessories; builder's hardware; personal protective equipment; and identification items, such as tags and letters, numbers, and signs. We support our product sales with services that include design and installation of merchandising systems and maintenance of appropriate in-store inventory levels.
On July 14, 2021, subsequent to quarter end, the Company’s parent, HMan Group Holdings, Inc., and Landcadia Holdings III, Inc. (“Landcadia” and after the Business Combination described herein, “New Hillman”), a special purpose acquisition company ("SPAC") consummated the previously announced business combination (the “Closing”) pursuant to the terms of the Agreement and Plan of Merger, dated as of January 24, 2021 (as amended on March 12, 2021, and as it may be further amended or supplemented from time to time, the “Merger Agreement”). In accordance with the terms and subject to the conditions set forth in the Merger Agreement, Landcadia paid aggregate consideration in the form of New Hillman common stock calculated as described herein and equal to a value of approximately (i) $911,300,000 plus (ii) $28,280,000, such amount being the value of 2,828,000 shares of Class B common stock of Landcadia, valued at $10.00 per share, that TJF, LLC (“TJF Sponsor”) and Jefferies Financial Group Inc., (“JFG Sponsor” and, together with TJF Sponsor, the “Sponsors”) agreed to forfeit at the Closing.
In connection with the Closing, the Company entered into a new credit agreement with Jefferies Finance LLC, as administrative agent, and the lenders and other parties thereto (the “Term Credit Agreement”), which provided for a new funded term loan facility of $835.0 million and a delayed draw term loan facility of $200.0 million (of which $16.0 million was drawn). The Company also also entered into an amendment to their existing asset-based revolving credit agreement (the “ABL Amendment”) with Barclays Bank PLC, as administrative agent, and the lenders and other parties thereto (the “ABL Credit Agreement”), increasing the aggregate commitments thereunder to $250.0 million, extended the maturity and conformed certain provisions to the Term Credit Agreement. The proceeds of the funded term loans under the Term Credit Agreement and revolving credit loans under the ABL Credit Agreement were used, together with other available cash, to (1) refinance in full all outstanding term loans and to terminate all outstanding commitments under the credit agreement, dated as of May 31, 2018, (2) refinance outstanding revolving credit loans, and (3) redeem in full senior notes due July 15, 2022 (the “6.375% Senior Notes”).
In anticipation of the Business Combination and the refinancings described above, on July 13, 2021, the Company delivered a notice to redeem in full 11.6% Junior Subordinated Debentures due September 30, 2027 (the “Junior Subordinated Debentures”) issued under the Indenture, dated as of September 5, 1997 (as amended and supplemented, the “Debentures Indenture”), between The Hillman Companies and The Bank of New York Mellon, a New York banking corporation, as Trustee (the “Trustee”) and deposited an amount with the Trustee sufficient to satisfy and discharge the Debentures Indenture, which is no longer in effect. Notices to redeem 4,217,837 trust preferred securities (the “Trust Preferred Securities”) issued in a public offering by the Hillman Group Capital Trust ("Trust") and 130,449 of trust common securities (the “Trust Common Securities”) issued by the Trust to Hillman Companies were also delivered on July 13, 2021. Upon the payment of the redemption price for the Debentures on August 12, 2021, the Trust will redeem the Trust Preferred Securities and the Trust Common Securities, which as of August 12, 2021 will no longer be deemed to be outstanding. The last day of trading for the Trust Preferred Securities on the New York Stock Exchange (the “NYSE”) will be August 11, 2021 and the Company is voluntarily delisting the Trust Preferred Securities from the NYSE.
On April 16, 2021, the Company completed the acquisition of Oz Post International, LLC ("OZCO"), a leading manufacturer of superior quality hardware that offers structural fasteners and connectors used for decks, fences and other outdoor structures, for a total purchase price of $39,102. The Company entered into an amendment ("OZCO Amendment") to the term loan credit agreement dated May 31, 2018 (the "2018 Term Loan"), which provided $35,000 of incremental term loan funds to be used to finance the acquisition. Refer to Note 4 - Acquisitions for additional information.
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Current Economic Conditions
Our business is impacted by general economic conditions in the North American and international markets, particularly the U.S. and Canadian retail markets including hardware stores, home centers, mass merchants, and other retailers.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, and has since spread to a number of other countries, including the United States and Canada. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Efforts to contain the spread of COVID-19 intensified during our fiscal 2020 second quarter and remained in effect throughout our third quarter. Most states and municipalities within the U.S. enacted temporary closures of businesses, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. Within the United States and Canada, our business has been designated an essential business, which allows us to continue to serve customers that remain open.
While all of our operations are located in North America, we participate in a global supply chain, and the existence of a worldwide pandemic and the reactions of governments around the world in response to COVID-19 to regulate the flow of labor and products began to impact our business in March 2020. If we need to close any of our facilities or a critical number of our employees become too ill to work, our distribution network could be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse business consequences due to COVID-19, demand for our products could also be materially adversely affected in a rapid manner. The Company continues to experience customer demand both during the thirteen and twenty-six weeks ended June 26, 2021 and during the subsequent period. Our teams continue to monitor demand disruption and there can be no assurance as to the level of demand that will prevail through the remainder of fiscal 2021. A large portion of our customers continue to operate and sell our products, with some customers reducing operations or restricting some access to portions of the retail space. The magnitude of the financial impact on our quarterly and annual results is dependent on the duration of the COVID-19 pandemic and how quickly the U.S. and Canada economies resume normal operations.
An extended period of global supply chain, workforce availability, and economic disruption could materially affect the Company's business, the results of operations, financial condition, access to sources of liquidity, and the carrying value of goodwill and intangible assets. While a triggering event did not occur during the thirteen and twenty-six weeks ended June 26, 2021, a prolonged COVID-19 pandemic could negatively impact net sales growth, change key assumptions and other global and regional macroeconomic factors that could result in future impairment charges for goodwill, indefinite-lived intangible assets and definite lived intangible assets. The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot predict the extent to which our business, results of operations, financial condition, or liquidity will ultimately be impacted.
We are exposed to the risk of unfavorable changes in foreign currency exchange rates for the U.S. dollar versus local currency of our suppliers located primarily in China and Taiwan. We purchase a significant variety of our products for resale from multiple vendors located in China and Taiwan. The purchase price of these products is routinely negotiated in U.S. dollar amounts rather than the local currency of the vendors and our suppliers' profit margins decrease when the U.S. dollar declines in value relative to the local currency. This puts pressure on our suppliers to increase prices to us. The U.S. dollar increased in value relative to the CNY by approximately 1.7% in 2019, declined by 6.5% in 2020, and declined by 1.3% during the twenty-six weeks ended June 26, 2021. The U.S. dollar declined in value relative to the Taiwan dollar by approximately 0.2% in 2019, declined by 7.9% in 2020, and declined by 0.8% during the twenty-six weeks ended June 26, 2021.
In addition, the negotiated purchase price of our products may be dependent upon market fluctuations in the cost of raw materials such as steel, zinc, and nickel used by our vendors in their manufacturing processes. The final purchase cost of our products may also be dependent upon inflation or deflation in the local economies of vendors in China and Taiwan that could impact the cost of labor used in the manufacturing of our products. We identify the directional impact of changes in our product cost, but the quantification of each of these variable impacts cannot be measured as to the individual impact on our product cost with a sufficient level of precision.
We are also exposed to risk of unfavorable changes in the Canadian dollar exchange rate versus the U.S. dollar. Our sales in Canada are denominated in Canadian dollars while a majority of the products are sourced in U.S. dollars. A weakening of the Canadian dollar versus the U.S. dollar results in lower sales in terms of U.S. dollars while the cost of sales remains unchanged. We have a practice of hedging some of our Canadian subsidiary's purchases denominated in U.S. dollars. The U.S. dollar declined in value relative to the Canadian dollar by approximately 4.1% in 2019, declined by 1.9% in 2020, and declined by 4.2% during the twenty-six weeks ended June 26, 2021. We may take pricing action, when warranted, in an attempt to offset a
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portion of product cost increases. The ability of our operating divisions to institute price increases and seek price concessions, as appropriate, is dependent on competitive market conditions.
Results of Operations
The following analysis of results of operations includes a brief discussion of the factors that affected our operating results and a comparative analysis of the thirteen weeks ended June 26, 2021 and the thirteen weeks ended June 27, 2020.
Thirteen weeks ended June 26, 2021 vs the Thirteen weeks ended June 27, 2020
Thirteen Weeks Ended June 26, 2021 |
Thirteen Weeks Ended June 27, 2020 |
||||||||||||||||||||||
(dollars in thousands) | Amount | % of Net Sales |
Amount | % of Net Sales |
|||||||||||||||||||
Net sales | $ | 375,715 | 100.0 | % | $ | 346,710 | 100.0 | % | |||||||||||||||
Cost of sales (exclusive of depreciation and amortization shown separately below) | 215,967 | 57.5 | % | 196,402 | 56.6 | % | |||||||||||||||||
Selling, general and administrative expenses | 111,662 | 29.7 | % | 94,970 | 27.4 | % | |||||||||||||||||
Depreciation | 15,270 | 4.1 | % | 17,230 | 5.0 | % | |||||||||||||||||
Amortization | 15,414 | 4.1 | % | 14,865 | 4.3 | % | |||||||||||||||||
Other (income) expense | (2,107) | (0.6) | % | 2,515 | 0.7 | % | |||||||||||||||||
Income from operations | 19,509 | 5.2 | % | 20,728 | 6.0 | % | |||||||||||||||||
Interest expense, net of investment income | 22,217 | 5.9 | % | 26,968 | 7.8 | % | |||||||||||||||||
Mark-to-market adjustment of interest rate swap | (751) | (0.2) | % | (308) | (0.1) | % | |||||||||||||||||
Income (loss) before income taxes | (1,957) | (0.5) | % | (5,932) | (1.7) | % | |||||||||||||||||
Income tax expense (benefit) | 1,428 | 0.4 | % | (895) | (0.3) | % | |||||||||||||||||
Net income (loss) | $ | (3,385) | (0.9) | % | $ | (5,037) | (1.5) | % | |||||||||||||||
Adjusted EBITDA(1)
|
$ | 64,472 | 17.2 | % | $ | 61,610 | 17.8 | % |
(1)Adjusted EBITDA is a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information, including our definition and our use of Adjusted EBITDA, and for a reconciliation from net income to Adjusted EBITDA.
Net Sales
Net sales for the second quarter of 2021 were $375.7 million, an increase of approximately $29.0 million compared to net sales of $346.7 million for the second quarter of 2020. Sales of keys and key accessories increased $19.6 million, key and key accessory sales were negatively impacted in the prior year by reduced retail foot traffic and restricted access to key duplicating kiosks as a result of COVID-19. Sales of hardware products increased by $10.6 million driven by strong retail demand. Sales in Canada increased $11.2 million primarily driven by strong demand with big box retailers. Sales in Canada were negatively impacted by COVID-19 restrictions in 2020, we continue to see restrictions in certain provinces and retail locations in 2021. These increases were offset by a decrease in sales of personal protective equipment of $17.0 million due to lower demand for COVID-19 protective and cleaning equipment in the second quarter of 2021.
Cost of Sales
Our cost of sales was $216.0 million, or 57.5% of net sales, in the second quarter of 2021, an increase of approximately $19.6 million compared to $196.4 million, or 56.6% of net sales, in the second quarter of 2020. The increase of 0.9% in cost of sales, expressed as a percent of net sales, in the second quarter of 2021 compared to the second quarter of 2020 was primarily due to inflation along with the higher mix of sales of construction fastener products in the second quarter of 2021.
Expenses
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Selling, general, and administrative ("SG&A") expenses were approximately $111.7 million in the thirteen weeks ended June 26, 2021, an increase of approximately $16.7 million, compared to $95.0 million in the thirteen weeks ended June 27, 2020. The following changes in underlying trends impacted the change in operating expenses:
•Selling expense was $40.0 million in the second quarter of 2021, an increase of $5.0 million compared to $35.0 million in the second quarter of 2020. The increase in selling expense was primarily due to increased marketing, variable compensation, and travel and entertainment expense in the second quarter of 2021.
•Warehouse and delivery expenses were $44.2 million in the second quarter of 2021, an increase of $4.9 million compared to $39.3 million in the second quarter of 2020. The additional expense was primarily driven by higher sales volume and inflation.
•General and administrative (“G&A”) expenses were $27.4 million in the second quarter of 2021, an increase of $6.7 million compared to $20.7 million in the second quarter of 2020. In the second quarter of 2021 we incurred $9.6 million of legal and consulting expense associated with the pending merger with Landcadia along with increased legal fees associated with our litigation with KeyMe (see Note 6 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements for additional information) an increase of $7.1 million compared to the second quarter of 2020.
Depreciation expense was $15.3 million in the second quarter of 2021 compared to depreciation expense of $17.2 million in the second quarter of 2020. Amortization expense was $15.4 million in the second quarter of 2021 which was comparable to the second quarter of 2020.
Other income was $2.1 million in the second quarter of 2021 compared to other expense of $2.5 million in the second quarter of 2020. Other income in the second quarter of 2021 was comprised primarily of a $1.2 million gain on the revaluation of the contingent consideration associated with the acquisitions of Resharp and Instafob, (see Note 13 - Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements for additional information) along with exchange rate gains of $0.9 million. In the second quarter of 2020 other expense was comprised of a $3.1 million loss on the revaluation of the contingent consideration associated with the acquisition of Resharp, (see Note 13 - Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements for additional information) partially offset by exchange rate losses of $0.2 million.
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Twenty-six weeks ended June 26, 2021 vs the Twenty-six weeks ended June 27, 2020
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
||||||||||||||||||||||
(dollars in thousands) | Amount | % of Net Sales |
Amount | % of Net Sales |
|||||||||||||||||||
Net sales | $ | 716,996 | 100.0 | % | $ | 642,546 | 100.0 | % | |||||||||||||||
Cost of sales (exclusive of depreciation and amortization shown separately below) | 417,265 | 58.2 | % | 362,813 | 56.5 | % | |||||||||||||||||
Selling, general and administrative expenses | 214,841 | 30.0 | % | 184,723 | 28.7 | % | |||||||||||||||||
Depreciation | 31,611 | 4.4 | % | 34,747 | 5.4 | % | |||||||||||||||||
Amortization | 30,323 | 4.2 | % | 29,713 | 4.6 | % | |||||||||||||||||
Other (income) expense | (2,333) | (0.3) | % | 376 | 0.1 | % | |||||||||||||||||
Income from operations | 25,289 | 3.5 | % | 30,174 | 4.7 | % | |||||||||||||||||
Interest expense, net of investment income | 44,293 | 6.2 | % | 53,205 | 8.3 | % | |||||||||||||||||
Mark-to-market adjustment of interest rate swap | (1,424) | (0.2) | % | 1,942 | 0.3 | % | |||||||||||||||||
Income (loss) before income taxes | (17,580) | (2.5) | % | (24,973) | (3.9) | % | |||||||||||||||||
Income tax expense (benefit) | (5,225) | (0.7) | % | (5,132) | (0.8) | % | |||||||||||||||||
Net income (loss) | $ | (12,355) | (1.7) | % | $ | (19,841) | (3.1) | % | |||||||||||||||
Adjusted EBITDA(1)
|
$ | 112,278 | 15.7 | % | $ | 103,131 | 16.1 | % |
(1)Adjusted EBITDA is a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information, including our definition and our use of Adjusted EBITDA, and for a reconciliation from net income to Adjusted EBITDA.
Net Sales
Net sales for the twenty-six weeks ended June 26, 2021 were $717.0 million, an increase of approximately $74.5 million compared to net sales of $642.5 million for the twenty-six weeks ended June 27, 2020. Key and engraving sales increased $23.7 million and sales in Canada increased $19.3 million . Key and engraving sales and sales in Canada were both negatively impacted by low retail foot traffic and limited access to key and engraving machines in the twenty six weeks ended June 27, 2020 due to COVID-19. Sales of hardware products increased by $26.9 million driven by strong retail demand. Sales of personal protective equipment increased by $4.5 million due to continued demand for gloves and face masks .
Cost of Sales
Our cost of sales was $417.3 million, or 58.2% of net sales, in the twenty-six weeks ended June 26, 2021, an increase of approximately $54.5 million compared to $362.8 million, or 56.5% of net sales, in the twenty-six weeks ended June 27, 2020. The increase of 1.7% in cost of sales, expressed as a percent of net sales, in 2021 compared to the twenty-six weeks ended June 27, 2020 was primarily due to inflation along with the higher mix of sales of construction fastener products in the twenty-six weeks ended June 26, 2021.
Expenses
Selling, general, and administrative ("SG&A") expenses were approximately $214.8 million in the twenty-six weeks ended June 26, 2021, an increase of approximately $30.1 million, compared to $184.7 million in the twenty-six weeks ended June 27, 2020. The following changes in underlying trends impacted the change in operating expenses:
•Selling expense was $77.4 million in the twenty-six weeks ended June 26, 2021, an increase of $5.4 million compared to $72.0 million in the twenty-six weeks ended June 27, 2020. The increase in selling expense was primarily due to
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increased marketing, variable compensation, and travel and entertainment expense in the twenty-six weeks ended June 26, 2021.
•Warehouse and delivery expenses were $84.4 million in the twenty-six weeks ended June 26, 2021, an increase of $9.6 million compared to $74.8 million in the twenty-six weeks ended June 27, 2020. The additional expense was primarily driven by higher sales volume and inflation.
•General and administrative (“G&A”) expenses were $53.0 million in the twenty-six weeks ended June 26, 2021, an increase of $15.0 million compared to $38.0 million in the twenty-six weeks ended June 27, 2020. In the twenty-six weeks ended June 26, 2021 we incurred $18.4 million of legal and consulting expense associated with the pending merger with Landcadia along with increased legal fees associated with our litigation with KeyMe (see Note 6 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements for additional information) an increase of $14.8 million compared to the twenty-six weeks ended June 27, 2020.
Depreciation expense was $31.6 million in the twenty-six weeks ended June 26, 2021 compared to depreciation expense of $34.7 million in the twenty-six weeks ended June 27, 2020. Amortization expense was $30.3 million in the twenty-six weeks ended June 26, 2021 which was comparable to $29.7 million in the twenty-six weeks ended June 27, 2020.
Other income was $2.3 million in the twenty-six weeks ended June 26, 2021 compared to other expense of $0.4 million in the twenty-six weeks ended June 27, 2020. Other income in the twenty-six weeks ended June 26, 2021 was comprised primarily of a $1.2 million gain on the revaluation of the contingent consideration associated with the acquisitions of Resharp and Instafob, (see Note 13 - Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements for additional information) along with exchange rate gains of $1.2 million. In the twenty-six weeks ended June 27, 20200 other expense was comprised of exchange rate losses of $1.6 million partially offset by of a $1.3 million gain on the revaluation of the contingent consideration associated with the acquisition of Resharp, (see Note 13 - Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements for additional information).
Results of Operations – Operating Segments
The following tables provides supplemental information regarding our net sales and profitability by operating segment for the thirteen and twenty-six weeks ended June 26, 2021 and the thirteen and twenty-six weeks ended June 27, 2020 (dollars in thousands):
Hardware and Protective Solutions
Thirteen Weeks Ended June 26, 2021 |
Thirteen Weeks Ended June 27, 2020 |
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
|||||||||||||||||||||||
Hardware and Protective Solutions | ||||||||||||||||||||||||||
Revenues | $ | 263,129 | $ | 269,499 | $ | 514,058 | $ | 482,676 | ||||||||||||||||||
Segment income from operations | 9,995 | 24,423 | 16,045 | 33,276 | ||||||||||||||||||||||
Adjusted EBITDA(1)
|
36,114 | 45,704 | 65,146 | 71,366 |
(1)Adjusted EBITDA is a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information, including our definition and our use of Adjusted EBITDA, and for a reconciliation from net income to Adjusted EBITDA.
Thirteen weeks ended June 26, 2021 vs the Thirteen weeks ended June 27, 2020
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Net Sales
Net sales for our Hardware and Protective Solutions operating segment decreased by $6.4 million in thirteen weeks ended June 26, 2021 to $263.1 million as compared to $269.5 million in the thirteen weeks ended June 27, 2020. Sales of personal protective equipment decreased by $17.0 million due to high demand for gloves and face masks in 2020 as compared to the same period in 2021. This was partially offset by sales of hardware products, which increased by $10.6 million driven by strong retail demand.
Income from Operations
Income from operations of our Hardware and Protective Solutions operating segment decreased by approximately $14.4 million in the thirteen weeks ended June 26, 2021 to $10.0 million as compared to $24.4 million in the thirteen weeks ended June 27, 2020. The decrease was driven by the decreases in sales along with increased expenses.
•Cost of good sold increased by approximately $3.1 million in the thirteen weeks ended June 26, 2021 to $164.7 million as compared to $161.6 million in the thirteen weeks ended June 27, 2020. Cost of sales as a percentage of net sales was 62.6% in the thirteen weeks ended June 26, 2021, an increase of 2.6% from 60.0% in the thirteen weeks ended June 27, 2020. The increase in cost of sales as a percentage of net sales was primarily driven by inflation along with the higher mix of sales of construction fastener products in the thirteen weeks ended June 26, 2021.
•Warehouse expense increased $3.1 million in the thirteen weeks ended June 26, 2021 compared to the thirteen weeks ended June 27, 2020. The additional expense was primarily driven by higher sales volume and inflation.
•G&A expense increased $1.7 million in the thirteen weeks ended June 26, 2021 compared to the thirteen weeks ended June 27, 2020. The additional expense was primarily due to increased legal and consulting expense associated with the pending merger with Landcadia.
Twenty-six weeks ended June 26, 2021 vs the Twenty-six weeks ended June 27, 2020
Net Sales
Net sales for our Hardware and Protective Solutions operating segment increased by $31.4 million in twenty-six weeks ended June 26, 2021 to $514.1 million as compared to $482.7 million in the twenty-six weeks ended June 27, 2020. Sales of hardware products increased by $26.9 million driven by strong retail demand. Sales of personal protective equipment increased by $4.5 million due to continued demand for gloves and face masks.
Income from Operations
Income from operations of our Hardware and Protective Solutions operating segment decreased by approximately $17.2 million in the twenty-six weeks ended June 26, 2021 to $16.0 million as compared to $33.3 million in the twenty-six weeks ended June 27, 2020. The decrease was driven by the decreases in sales along with increased expenses.
•Cost of good sold increased by approximately $33.1 million in the twenty-six weeks ended June 26, 2021 to $514.1 million as compared to $482.7 million in the twenty-six weeks ended June 27, 2020. Cost of sales as a percentage of net sales was 63.2% in the twenty-six weeks ended June 26, 2021, an increase of 2.8% from 60.4% in the twenty-six weeks ended June 27, 2020. The increase in cost of sales as a percentage of net sales was primarily driven inflation along with the higher mix of sales of construction fastener products in the twenty-six weeks ended June 26, 2021.
•Warehouse expense increased $8.8 million in the twenty-six weeks ended June 26, 2021 compared to the twenty-six weeks ended June 26, 2021. The additional expense was primarily driven by higher sales volume and inflation.
•G&A expense increased $6.5 million in the twenty-six weeks ended June 26, 2021 compared to the twenty-six weeks ended June 26, 2021. The additional expense was primarily due to increased legal and consulting expense associated with the pending merger with Landcadia.
Robotics and Digital Solutions
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Thirteen Weeks Ended June 26, 2021 |
Thirteen Weeks Ended June 27, 2020 |
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
|||||||||||||||||||||||
Robotics and Digital Solutions | ||||||||||||||||||||||||||
Revenues | $ | 66,351 | $ | 42,198 | $ | 122,230 | $ | 98,505 | ||||||||||||||||||
Segment income from operations | 6,546 | (4,510) | 6,700 | 1,386 | ||||||||||||||||||||||
Adjusted EBITDA(1)
|
23,696 | 12,373 | 41,113 | 29,943 |
(1)Adjusted EBITDA is a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information, including our definition and our use of Adjusted EBITDA, and for a reconciliation from net income to Adjusted EBITDA.
Thirteen weeks ended June 26, 2021 vs the Thirteen weeks ended June 27, 2020
Net Sales
Net sales in our Robotics and Digital Solutions operating segment increased by $24.2 million in the thirteen weeks ended June 26, 2021 to $66.4 million as compared to $42.2 million in the thirteen weeks ended June 27, 2020. The increased sales were primarily due to an increase of $19.6 million in keys sales along with an increase of $4.5 million in engraving sales. Key sales in the second quarter of 2020 were negatively impacted by restricted access to retail key duplication services as a result of COVID-19 in certain markets. As the economy has started to reopen, our service team has worked closely with our customers to restore access to key duplicating services in 2021.
Income from Operations
Income from operations of our Robotics and Digital Solutions operating segment increased by approximately $11.1 million in the thirteen weeks ended June 26, 2021 to $6.5 million as compared to a $4.5 million loss in the thirteen weeks ended June 27, 2020. The increase was primarily due to the increased sales partially offset by increased legal and consulting expense associated with the pending merger with Landcadia along with increased legal fees associated with our litigation with KeyMe (see Note 6 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements for additional information), along with the gain on the revaluation of contingent consideration included in other income in the thirteen weeks ended June 26, 2021. In the second quarter of 2020 we recorded a loss of $3.1 million related to the revaluation of the contingent consideration associated with the acquisitions of Resharp and Instafob, (see Note 13 - Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements for additional information). In the first quarter of 2021, the contingent consideration revaluation adjustment was a gain of $1.2 million.
Twenty-six weeks ended June 26, 2021 vs the Twenty-six weeks ended June 27, 2020
Net Sales
Net sales in our Robotics and Digital Solutions operating segment increased by $23.7 million in the twenty-six weeks ended June 26, 2021 to $122.2 million as compared to $98.5 million in the twenty-six weeks ended June 27, 2020. The increased sales were primarily due to an increase of $18.4 million in keys sales along with an increase of $5.3 million in engraving sales. Key sales in the second quarter of 2020 were negatively impacted by restricted access to retail key duplication services as a result of COVID-19 in certain markets. As the economy has started to reopen, our service team has worked closely with our customers to restore access to key duplicating services in 2021.
Income from Operations
Income from operations of our Robotics and Digital Solutions operating segment increased by approximately $5.3 million in the twenty-six weeks ended June 26, 2021 to $6.7 million as compared to $1.4 million in the twenty-six weeks ended June 27, 2020. The increase was primarily due to the increased sales partially offset by increased legal and consulting expense associated with the pending merger with Landcadia along with increased legal fees associated with our litigation with KeyMe (see Note 6 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements for additional information), along with increased sales and marketing expenses.
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Canada
Thirteen Weeks Ended June 26, 2021 |
Thirteen Weeks Ended June 27, 2020 |
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
|||||||||||||||||||||||
Canada | ||||||||||||||||||||||||||
Revenues | $ | 46,235 | $ | 35,013 | $ | 80,708 | $ | 61,365 | ||||||||||||||||||
Segment income (loss) from operations | 2,968 | 815 | 2,544 | (4,488) | ||||||||||||||||||||||
Adjusted EBITDA(1)
|
4,662 | 3,533 | 6,019 | 1,822 |
(1)Adjusted EBITDA is a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information, including our definition and our use of Adjusted EBITDA, and for a reconciliation from net income to Adjusted EBITDA.
Thirteen weeks ended June 26, 2021 vs the Thirteen weeks ended June 27, 2020
Net Sales
Net sales in our Canada operating segment increased by $11.2 million in the thirteen weeks ended June 26, 2021 to $46.2 million as compared to $35.0 million in the thirteen weeks ended June 27, 2020. The increase was primarily due to strong demand for fastener and hardware products with big box retailers. Sales in Canada were negatively impacted by COVID-19 restrictions in 2020, we continue to see restrictions in certain provinces and retail locations in 2021.
Income from Operations
Income from operations of our Canada operating segment increased by approximately $2.2 million in the thirteen weeks ended June 26, 2021 to $3.0 million as compared to $0.8 million in the thirteen weeks ended June 27, 2020. The increase in sales was partially offset by increased variable labor and delivery costs.
Twenty-six weeks ended June 26, 2021 vs the Twenty-six weeks ended June 27, 2020
Net Sales
Net sales in our Canada operating segment increased by $19.3 million in the twenty-six weeks ended June 26, 2021 to $80.7 million as compared to $61.4 million in the twenty-six weeks ended June 27, 2020. The increase was primarily due to strong demand for fastening and hardware products with big box retailers. Sales in Canada were negatively impacted by COVID-19 restrictions in 2020, we continue to see restrictions in certain provinces and retail locations in 2021.
Income from Operations
Income from operations of our Canada operating segment increased by approximately $7.0 million in the twenty-six weeks ended June 26, 2021 to $2.5 million as compared to a loss of $4.5 million in the twenty-six weeks ended June 27, 2020. The increase in sales was partially offset by increased variable labor and delivery costs, partially offset by a $2.7 million decrease in restructuring related charges as compared to 2020 (see Note 9 - Restructuring of the Notes to Condensed Consolidated Financial Statements for additional information).
Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure and is the primary basis used to measure the operational strength and performance of our businesses as well as to assist in the evaluation of underlying trends in our businesses. This measure eliminates the significant level of noncash depreciation and amortization expense that results from the capital-intensive nature of our businesses and from intangible assets recognized in business combinations. It is also unaffected by our capital and tax structures, as our management excludes these results when evaluating our operating performance. Our management and Board of Directors use this financial measure to evaluate our consolidated operating performance and the operating performance of
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our operating segments and to allocate resources and capital to our operating segments. Additionally, we believe that Adjusted EBITDA is useful to investors because it is one of the bases for comparing our operating performance with that of other companies in our industries, although our measure of Adjusted EBITDA may not be directly comparable to similar measures used by other companies.
The following table presents a reconciliation of Net loss, the most directly comparable financial measures under GAAP, to Adjusted EBITDA for the periods presented:
Thirteen Weeks Ended June 26, 2021 |
Thirteen Weeks Ended June 27, 2020 |
Twenty-six Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 27, 2020 |
||||||||||||||||||||
Net loss | $ | (3,385) | $ | (5,037) | $ | (12,355) | $ | (19,841) | |||||||||||||||
Income tax benefit | 1,428 | (895) | (5,225) | (5,132) | |||||||||||||||||||
Interest expense, net | 19,159 | 23,878 | 38,178 | 47,058 | |||||||||||||||||||
Interest expense on junior subordinated debentures | 3,152 | 3,184 | 6,304 | 6,336 | |||||||||||||||||||
Investment income on trust common securities | (94) | (94) | (189) | (189) | |||||||||||||||||||
Depreciation | 15,270 | 17,230 | 31,611 | 34,747 | |||||||||||||||||||
Amortization | 15,414 | 14,865 | 30,323 | 29,713 | |||||||||||||||||||
Mark-to-market adjustment on interest rate swaps | (751) | (308) | (1,424) | 1,942 | |||||||||||||||||||
EBITDA | $ | 50,193 | $ | 52,823 | $ | 87,223 | $ | 94,634 | |||||||||||||||
Stock compensation expense | 1,796 | 1,524 | 3,537 | 2,669 | |||||||||||||||||||
Management fees | 88 | 196 | 214 | 321 | |||||||||||||||||||
Restructuring (1)
|
— | 980 | 109 | 2,710 | |||||||||||||||||||
Litigation expense (2)
|
6,322 | 1,893 | 10,282 | 2,674 | |||||||||||||||||||
Acquisition and integration expense (3)
|
3,299 | 661 | 8,139 | 990 | |||||||||||||||||||
Buy-back expense (4)
|
1,350 | — | 1,350 | — | |||||||||||||||||||
Anti-dumping duties (5)
|
2,636 | — | 2,636 | — | |||||||||||||||||||
Facility closures (6)
|
— | 433 | — | 433 | |||||||||||||||||||
Change in fair value of contingent consideration | (1,212) | 3,100 | (1,212) | (1,300) | |||||||||||||||||||
Adjusted EBITDA | $ | 64,472 | $ | 61,610 | $ | 112,278 | $ | 103,131 |
(1)Restructuring includes restructuring costs associated with restructuring in our Canada segment announced in 2018, including facility consolidation, severance, sale of property and equipment, and charges relating to exiting certain lines of business. Also included is restructuring in our United Stated business announced in 2019, including severance related to management realignment and the integration of sales and operating functions (see Note 9 - Restructuring of the Notes to Condensed Consolidated Financial Statements for additional information). Finally, includes consulting and other costs associated with streamlining our manufacturing and distribution operations.
(2)Litigation expense includes legal fees associated with our litigation with KeyMe, Inc. (see Note 6 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements for additional information).
(3)Acquisition and integration expense includes professional fees, non-recurring bonuses, and other costs related to the pending merger along with historical acquisitions.
(4)Infrequent buy backs associated with new business wins.
(5)Anti-dumping duties assessed related to the nail business for prior year purchases.
(6)Facility exits include costs associated with the closure of facilities in San Antonio, Texas.
The following tables presents a reconciliation of segment operating income, the most directly comparable financial measures under GAAP, to segment Adjusted EBITDA for the periods presented (amounts in thousands). Certain amounts in the prior year presentation between segments were reclassified to conform to the current year’s presentation.
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Thirteen weeks ended June 26, 2021 | Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Consolidated | |||||||||||||||||||
Operating income (loss) | $ | 9,995 | $ | 6,546 | $ | 2,968 | $ | 19,509 | |||||||||||||||
Depreciation and amortization | 17,397 | 11,593 | 1,694 | 30,684 | |||||||||||||||||||
Stock compensation expense | 1,552 | 244 | — | 1,796 | |||||||||||||||||||
Management fees | 76 | 12 | — | 88 | |||||||||||||||||||
Restructuring | — | — | — | — | |||||||||||||||||||
Litigation expense | — | 6,322 | — | 6,322 | |||||||||||||||||||
Acquisition and integration expense | 3,108 | 191 | — | 3,299 | |||||||||||||||||||
Buy-back expense | 1,350 | — | — | 1,350 | |||||||||||||||||||
Anti-dumping duties | 2,636 | — | — | 2,636 | |||||||||||||||||||
Change in fair value of contingent consideration | — | (1,212) | — | (1,212) | |||||||||||||||||||
Adjusted EBITDA | $ | 36,114 | $ | 23,696 | $ | 4,662 | $ | 64,472 |
Thirteen weeks ended June 27, 2020 | Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Consolidated | |||||||||||||||||||
Operating income (loss) | $ | 24,423 | $ | (4,510) | $ | 815 | $ | 20,728 | |||||||||||||||
Depreciation and amortization | 17,608 | 12,749 | 1,738 | 32,095 | |||||||||||||||||||
Stock compensation expense | 1,379 | 145 | — | 1,524 | |||||||||||||||||||
Management fees | 176 | 20 | — | 196 | |||||||||||||||||||
Restructuring | — | — | 980 | 980 | |||||||||||||||||||
Litigation expense | — | 1,893 | — | 1,893 | |||||||||||||||||||
Acquisition and integration expense | 498 | 163 | — | 661 | |||||||||||||||||||
Facility closures | 433 | — | — | 433 | |||||||||||||||||||
Change in fair value of contingent consideration | — | 3,100 | — | 3,100 | |||||||||||||||||||
Corporate and intersegment adjustments | 1,187 | (1,187) | — | — | |||||||||||||||||||
Adjusted EBITDA | $ | 45,704 | $ | 12,373 | $ | 3,533 | $ | 61,610 |
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Twenty-six weeks ended June 26, 2021 | Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Consolidated | |||||||||||||||||||
Operating income (loss) | $ | 16,045 | $ | 6,700 | $ | 2,544 | $ | 25,289 | |||||||||||||||
Depreciation and amortization | 34,520 | 23,974 | 3,440 | 61,934 | |||||||||||||||||||
Stock compensation expense | 3,056 | 481 | — | 3,537 | |||||||||||||||||||
Management fees | 185 | 29 | — | 214 | |||||||||||||||||||
Restructuring | 64 | 10 | 35 | 109 | |||||||||||||||||||
Litigation expense | — | 10,282 | — | 10,282 | |||||||||||||||||||
Acquisition and integration expense | 7,290 | 849 | — | 8,139 | |||||||||||||||||||
Buy-back expense | 1,350 | — | — | 1,350 | |||||||||||||||||||
Anti-dumping duties | 2,636 | — | — | 2,636 | |||||||||||||||||||
Change in fair value of contingent consideration | — | (1,212) | — | (1,212) | |||||||||||||||||||
Adjusted EBITDA | $ | 65,146 | $ | 41,113 | $ | 6,019 | $ | 112,278 |
Twenty-six weeks ended June 27, 2020 | Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Consolidated | |||||||||||||||||||
Operating income (loss) | $ | 33,276 | $ | 1,386 | $ | (4,488) | $ | 30,174 | |||||||||||||||
Depreciation and amortization | 34,462 | 26,398 | 3,600 | 64,460 | |||||||||||||||||||
Stock compensation expense | 2,330 | 339 | — | 2,669 | |||||||||||||||||||
Management fees | 280 | 41 | — | 321 | |||||||||||||||||||
Restructuring | — | — | 2,710 | 2,710 | |||||||||||||||||||
Litigation expense | — | 2,674 | — | 2,674 | |||||||||||||||||||
Acquisition and integration expense | 632 | 358 | — | 990 | |||||||||||||||||||
Facility closures | 433 | — | — | 433 | |||||||||||||||||||
Change in fair value of contingent consideration | — | (1,300) | — | (1,300) | |||||||||||||||||||
Corporate and intersegment adjustments | (47) | 47 | — | — | |||||||||||||||||||
Adjusted EBITDA | $ | 71,366 | $ | 29,943 | $ | 1,822 | $ | 103,131 |
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Income Taxes
For the thirteen weeks ended June 26, 2021, the Company recorded an income tax provision of $1.4 million based on a pre-tax loss of $2.0 million. The Company recorded an income tax benefit for the twenty-six weeks ended June 26, 2021 of $5.2 million based on a pre-tax loss of $17.6 million. The effective income tax rate was (73.0)% and 29.7% for the thirteen and twenty-six weeks ended June 26, 2021, respectively.
The effective rate differed from the federal statutory rate due to an estimated increase in GILTI from the Company's Canadian operations, state and foreign income taxes, and non-deductible stock compensation expenses.
For the thirteen weeks ended June 27, 2020, the Company recorded an income tax benefit of $0.9 million based on a pre-tax loss of $5.9 million. The Company recorded an income tax benefit for the twenty-six weeks ended June 27, 2020 of $5.1 million based on a pre-tax loss of $25.0 million. The effective income tax rate was 15.1% and 20.6% for the thirteen and twenty-six weeks ended June 27, 2020, respectively.
The effective income tax rate differed from the federal statutory tax rate in the thirteen and twenty-six weeks ended June 27, 2020 primarily due to non-deductible stock compensation expenses, and state and foreign income taxes.
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act included, among other things, corporate income tax relief in the form of accelerated alternative minimum tax ("AMT") refunds, allowed employers to defer certain payroll tax payments throughout 2020, and provided favorable corporate interest deductions for the 2020 reporting period.
Liquidity and Capital Resources
The statements of cash flows reflect the changes in cash and cash equivalents for the twenty-six weeks ended June 26, 2021 and the twenty-six weeks ended June 27, 2020 by classifying transactions into three major categories: operating, investing, and financing activities.
Net cash used for operating activities for the twenty-six weeks ended June 26, 2021 was $59.8 million as compared to $11.7 million of cash provided by operation activities in the comparable prior year period. Operating cash flows for the twenty-six weeks ended June 26, 2021 were unfavorably impacted by increased inventory for the spring and summer busy season and new business wins. Operating cash flows for the twenty-six weeks ended June 27, 2020 were unfavorably impacted by the increase in accounts receivable due to higher sales.
Net cash used for investing activities was $61.8 million and $23.0 million for the twenty-six weeks ended June 26, 2021 and the twenty-six weeks ended June 27, 2020, respectively. During the twenty-six weeks ended June 26, 2021, we acquired Oz Post International, LLC ("OZCO") for approximately $39.1 million, (see Note 4 - Acquisitions of the Notes to Condensed Consolidated Financial Statements for additional information). Excluding acquisitions, the primary use of cash in both periods was our investment in new key duplicating kiosks and machines.
Net cash provided by financing activities was $116.0 million for the twenty-six weeks ended June 26, 2021. Our revolver draws, net of repayments, provided cash of $86.0 million in the twenty-six weeks ended June 26, 2021. In the second quarter of 2021, we entered into an amendment ("OZCO Amendment") to the term loan credit agreement dated May 31, 2018, which provided $35,000 of incremental term loan funds to be used to finance the acquisition, (see Note 4 - Acquisitions of the Notes to Condensed Consolidated Financial Statements for additional information) Additionally, we used cash to pay $5.3 million in principal payments on the senior term loan under the Senior Facilities. Finally, in the twenty-six weeks ended June 26, 2021 the Company received $1.8 million on the exercise of stock options.
Net cash provided by financing activities was $10.3 million for the twenty-six weeks ended June 27, 2020. Revolver repayments were $16.0 million, net of draws, in the twenty-six weeks ended June 27, 2020. Additionally, we used cash to pay $5.3 million in principal payments on the senior term loan under the Senior Facilities.
Management believes that projected cash flows from operations and revolver availability will be sufficient to fund working capital and capital expenditure needs for the next 12 months. Our working capital (current assets minus current liabilities)
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position of $340.5 million as of June 26, 2021 represents an increase of $98.7 million from the December 26, 2020 level of $241.8 million. Because COVID-19 pandemic has not, as of the date of this report, had a materially negative impact on our operations or demand for our products, it has not had a materially negative impact on the Company's liquidity position. We have initiated mitigating efforts to manage non-critical capital spending, assess operating spend, and preserve cash. We expect to generate sufficient operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets, although there can be no assurance of our ability to do so. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Critical Accounting Policies and Estimates
Significant accounting policies and estimates are summarized in the notes to the condensed consolidated financial statements. Some accounting policies require management to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts, and other information from outside sources, as appropriate. Management believes that these estimates and assumptions are reasonable based on the facts and circumstances as of June 26, 2021, however, actual results may differ from these estimates under different assumptions and circumstances.
There have been no material changes to our critical accounting policies and estimates which are discussed in the “Critical Accounting Policies and Estimates” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Annual Report on Form 10-K for the year ended December 26, 2020, as filed with the Securities and Exchange Commission. In addition, our most significant accounting policies are discussed in Note 2 and elsewhere in the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 26, 2020.
Recent Accounting Pronouncements
See “Note 3 - Recent Accounting Pronouncements” of the Notes to Condensed Consolidated Financial Statements.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Exposure
We are exposed to the impact of interest rate changes as borrowings under the Senior Facilities bear interest at variable interest rates. It is our policy to enter into interest rate swap and interest rate cap transactions only to the extent considered necessary to meet our objectives. Furthermore, regulatory changes, such as the announcement of the United Kingdom’s Financial Conduct Authority to phase out the London Interbank Offered Rate ("LIBOR") by the end of 2021, may adversely affect our floating rate debt and interest rate derivatives. If LIBOR ceases to exist, we may need to renegotiate any credit agreements or interest rate derivatives agreements extending beyond 2021 that utilize LIBOR as a factor in determining the interest rate or hedge rate, which could adversely impact our cost of debt.
Based on our exposure to variable rate borrowings at June 26, 2021, after consideration of our LIBOR floor rate and interest rate swap agreements, a one percent (1%) change in the weighted average interest rate for a period of one year would change the annual interest expense by approximately $10.7 million.
Foreign Currency Exchange
We are exposed to foreign exchange rate changes of the Canadian and Mexican currencies as they impact the $174.9 million tangible and intangible net asset value of our Canadian and Mexican subsidiaries as of June 26, 2021. The foreign subsidiaries net tangible assets were $109.0 million and the net intangible assets were $65.9 million as of June 26, 2021.
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We utilize foreign exchange forward contracts to manage the exposure to currency fluctuations in the Canadian dollar versus the U.S. Dollar. See Note 12 - Derivatives and Hedging of the Notes to Condensed Consolidated Financial Statements.
Item 4.
Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective, as of June 26, 2021, in ensuring that material information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 26, 2020, management concluded that we did not design and maintain effective controls over the completeness and accuracy of the accounting for, and disclosure of, the valuation allowance against deferred income taxes. The material weakness resulted in material errors in the application of certain provisions of the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) related to the IRC §163(j) interest limitation (Interest Limitation). This material weakness resulted in material errors in our income tax benefit and deferred tax liabilities that were corrected through the restatement of the consolidated financial statements as of and for the years ended December 28, 2019 and December 29, 2018. Additionally, this material weakness could result in misstatements to the aforementioned account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
In response to the material weakness described above, management implemented changes to its internal control over financial reporting to remediate the control deficiencies that gave rise to the material weakness. Those changes included the engagement of third party consultants to assist with technical tax accounting research and application of guidance, the addition of a committee to review technical accounting issues and ensure we have the appropriate subject matter experts engaged, and hiring additional personnel in our tax department.
While significant progress has been made to enhance our internal control over financial reporting, we are still in the process of testing these recently implemented processes, procedures, and controls. Additional time is required to complete the assessment to ensure the sustainability of these procedures. We believe the above actions will be effective in remediating the material weaknesses described above. However, the material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
The remediation efforts are intended both to address the identified material weakness and to enhance our overall financial control environment. Management is committed to continuous improvement of the company’s internal control over financial reporting and will continue to diligently review the company’s internal control over financial reporting.
Changes in Internal Control over Financial Reporting
Except as described above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the twenty-six weeks ended June 26, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. – Legal Proceedings.
We are subject to various claims and litigation that arise in the normal course of business. In the opinion of our management, the ultimate resolution of the pending litigation matters will not have a material adverse effect on our condensed consolidated financial position, operations, or cash flows.
Item 1A – Risk Factors.
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There have been no material changes to the risks from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 26, 2020.
Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds.
Not Applicable.
Item 3. – Defaults Upon Senior Securities.
Not Applicable.
Item 4. – Mine Safety Disclosures.
Not Applicable.
Item 5. – Other Information.
Not Applicable.
Item 6. – Exhibits.
a) | Exhibits, including those incorporated by reference. |
31.1 *
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Exchange Act | ||||
31.2 *
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Exchange Act | ||||
32.1 *
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||
32.2 *
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||
101 | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 26, 2021 filed with the Securities and Exchange Commission on July 29, 2021, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets as of June 26, 2021 and December 26, 2020, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the thirteen and twenty-six weeks ended June 26, 2021 and the thirteen and twenty-six weeks ended June 27, 2020, (iii) Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended June 26, 2021 and the twenty-six weeks ended June 27, 2020, (iv) Condensed Consolidated Statements of Stockholders' Equity for the thirteen and twenty-six weeks ended June 26, 2021 and the thirteen and twenty-six weeks ended June 27, 2020, and (v) Notes to Condensed Consolidated Financial Statements. |
* | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE HILLMAN COMPANIES, INC.
/s/ Robert O. Kraft | /s/ Anne S. McCalla | |||||||
Robert O. Kraft | Anne S. McCalla | |||||||
Chief Financial Officer | Controller | |||||||
(Chief Accounting Officer) |
DATE: July 29, 2021
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