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.
Page 13
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.
Page 14
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.
Page 15
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 | $ |
Page 16
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 | |||||||||||