10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 3, 2022
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 25, 2022
OR
For the transition period from ______ to ______
Commission file number 001-39609
(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(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
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, 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 ☒
On August 2, 2022, 194,394,767 shares of common stock, par value $0.0001 per share, were outstanding.
HILLMAN SOLUTIONS CORP. 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
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands, except per share amounts)
June 25, 2022 |
December 25, 2021 |
||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowances of $ |
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Inventories, net | |||||||||||
Other current assets | |||||||||||
Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation of $ |
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Goodwill | |||||||||||
Other intangibles, net of accumulated amortization of $ |
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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 finance lease liabilities | |||||||||||
Current portion of operating lease liabilities | |||||||||||
Accrued expenses: | |||||||||||
Salaries and wages | |||||||||||
Pricing allowances | |||||||||||
Income and other taxes | |||||||||||
Interest | |||||||||||
Other accrued liabilities | |||||||||||
Total current liabilities | |||||||||||
Long-term debt | |||||||||||
Deferred tax liabilities | |||||||||||
Operating lease liabilities | |||||||||||
Other non-current liabilities | |||||||||||
Total liabilities | $ | $ | |||||||||
Commitments and contingencies (Note 7) | |||||||||||
Stockholders' equity: | |||||||||||
Common stock, $ |
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Additional paid-in capital | |||||||||||
Accumulated deficit | ( |
( |
|||||||||
Accumulated other comprehensive income (loss) | ( |
( |
|||||||||
Total stockholders' equity | |||||||||||
Total liabilities and stockholders' equity | $ | $ |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Page 3
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(dollars in thousands, except per share amounts)
Thirteen Weeks Ended June 25, 2022 |
Thirteen Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 25, 2022 |
Twenty-six Weeks Ended June 26, 2021 |
||||||||||||||||||||
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, net | ( |
( |
( |
( |
|||||||||||||||||||
Income (loss) from operations | |||||||||||||||||||||||
Interest expense, net | |||||||||||||||||||||||
Interest expense on junior subordinated debentures | |||||||||||||||||||||||
(Gain) loss on mark-to-market adjustments | ( |
( |
|||||||||||||||||||||
Investment income on trust common securities | ( |
( |
|||||||||||||||||||||
Income (loss) before income taxes | ( |
( |
|||||||||||||||||||||
Income tax provision (benefit) | ( |
||||||||||||||||||||||
Net income (loss) | $ | $ | ( |
$ | $ | ( |
|||||||||||||||||
Basic income (loss) per share | $ | $ | ( |
$ | $ | ( |
|||||||||||||||||
Weighted average basic shares outstanding | |||||||||||||||||||||||
Diluted income (loss) per share | $ | $ | ( |
$ | $ | ( |
|||||||||||||||||
Weighted average diluted shares outstanding | |||||||||||||||||||||||
Net income (loss) from above | $ | $ | ( |
$ | $ | ( |
|||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||
Foreign currency translation adjustments | ( |
( |
|||||||||||||||||||||
Hedging activity | |||||||||||||||||||||||
Total other comprehensive income (loss) | ( |
||||||||||||||||||||||
Comprehensive income (loss) | $ | $ | $ | $ | ( |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Page 4
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
Twenty-six Weeks Ended June 25, 2022 |
Twenty-six Weeks Ended June 26, 2021 |
||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | $ | ( |
||||||||
Adjustments to reconcile net income (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 | |||||||||||
Change in fair value of contingent consideration | ( |
( |
|||||||||
Other non-cash interest and change in fair value of interest rate swap | ( |
||||||||||
Changes in operating items: | |||||||||||
Accounts receivable, net | ( |
( |
|||||||||
Inventories, net | ( |
( |
|||||||||
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 lease obligations | ( |
( |
|||||||||
Proceeds from exercise of stock options | |||||||||||
Cash payments related to hedging activities | ( |
|
|||||||||
Net cash provided by financing activities | |||||||||||
Effect of exchange rate changes on cash | |||||||||||
Net increase (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
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
(dollars in thousands)
Common Stock | ||||||||||||||||||||||||||||||||||||||
Shares (in thousands) | Amount | Additional Paid-in-capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||
Twenty-six weeks ended June 25, 2022 | ||||||||||||||||||||||||||||||||||||||
Balance at December 25, 2021 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | ( |
— | ( |
||||||||||||||||||||||||||||||||
Stock option activity, stock awards and employee stock purchase plan | 53 | — | — | — | ||||||||||||||||||||||||||||||||||
Hedging activity | — | — | — | — | ||||||||||||||||||||||||||||||||||
Change in cumulative foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||||||||||||||||
Balance at March 26, 2022 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | ||||||||||||||||||||||||||||||||||
Stock option activity, stock awards and employee stock purchase plan | 223 | — | — | — | ||||||||||||||||||||||||||||||||||
Hedging activity | — | — | — | — | ||||||||||||||||||||||||||||||||||
Change in cumulative foreign currency translation adjustment | — | — | — | — | ( |
( |
||||||||||||||||||||||||||||||||
Balance at June 25, 2022 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||
Twenty-six weeks ended June 26, 2021 | ||||||||||||||||||||||||||||||||||||||
Balance at December 26, 2020 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | ( |
— | ( |
||||||||||||||||||||||||||||||||
Stock option activity, stock awards and employee stock purchase plan | 268 | — | — | — | ||||||||||||||||||||||||||||||||||
Change in cumulative foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||||||||||||||||
Balance at March 27, 2021 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | ( |
— | ( |
||||||||||||||||||||||||||||||||
Stock option activity, stock awards and employee stock purchase plan | 18 | — | — | — | ||||||||||||||||||||||||||||||||||
Change in cumulative foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||||||||||||||||
Balance at June 26, 2021 | $ | $ | $ | ( |
$ | ( |
$ | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Page 6
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying condensed financial statements include the consolidated accounts of the Hillman Solutions Corp. and its wholly-owned subsidiaries (collectively “Hillman” or the “Company”). The accompanying unaudited financial statements include the condensed consolidated accounts of the Company for the thirteen and twenty-six weeks ended June 25, 2022. Unless the context requires otherwise, references to "Hillman," "we," "us," "our," or "our Company" refer to Hillman Solutions Corp. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
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 thirteen and twenty-six weeks ended June 25, 2022 do not necessarily indicate the results that may be expected for the full year. For further information, refer to the Consolidated Financial Statements for the year ended December 25, 2021 and notes thereto included in the Form 10-K filed on March 16, 2022 with the Securities and Exchange Commission (“SEC”).
On July 14, 2021, privately held HMAN Group Holdings Inc. ("Old Hillman"), 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, the "Merger Agreement”) by and among Landcadia, Helios Sun Merger Sub, a wholly-owned subsidiary of Landcadia (“Merger Sub”), HMAN Group Holdings Inc., a Delaware corporation (“Hillman Holdco”) and CCMP Sellers’ Representative, LLC, a Delaware Limited Liability Company in its capacity as the Stockholder Representative thereunder (the “Stockholder Representative”). Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Hillman Holdco with Hillman Holdco surviving the merger as a wholly owned subsidiary of New Hillman, which was renamed “Hillman Solutions Corp.” (the “Merger” and together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). Unless the context indicates otherwise, the discussion of the Company and its financial condition and results of operations is with respect to New Hillman following the closing date and Old Hillman prior to the closing date. See Note 3 - Merger Agreement for more information.
“Hillman Solutions Corp.,” “HMAN Group Holdings Inc.,” and “The Hillman Companies, Inc.” are holding companies with no other operations, cash flows, material assets or liabilities other than the equity interests in “The Hillman Group, Inc.,” which is the borrower under our credit facility.
In connection with the closing of the Business Combination on July 14, 2021, Landcadia changed its name from “Landcadia Holdings III, Inc." to “Hillman Solutions Corp.” and the Company’s common stock and warrants began trading on The Nasdaq Stock Market under the trading symbols “HLMN” and “HLMNW”, respectively. As of December 25, 2021, the Company exercised and redeemed all outstanding warrants.
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 filed on March 16, 2022 with the SEC.
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
Page 7
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts COVID-19 as of June 25, 2022 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 Condensed Consolidated Financial Statements as of and for the thirteen and twenty-six weeks ended June 25, 2022, 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 Condensed 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.
The Company offers a variety of sales incentives to its customers primarily in the form of discounts and rebates. Discounts are
recognized in the Condensed 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 25, 2022 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
Fastening and Hardware | $ | $ | $ | $ | |||||||||||||||||||
Personal Protective | |||||||||||||||||||||||
Keys and Key Accessories | |||||||||||||||||||||||
Engraving and Resharp | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
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 and Resharp | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
Page 8
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Twenty-six weeks ended June 25, 2022 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
Fastening and Hardware | $ | $ | $ | $ | |||||||||||||||||||
Personal Protective | |||||||||||||||||||||||
Keys and Key Accessories | |||||||||||||||||||||||
Engraving and 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 and Resharp | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
The following table disaggregates our revenue by geographic location:
Thirteen weeks ended June 25, 2022 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
United States | $ | $ | $ | $ | |||||||||||||||||||
Canada | |||||||||||||||||||||||
Mexico | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
Thirteen weeks ended June 26, 2021 | |||||||||||||||||||||||
Hardware and Protective Solutions | Robotics and Digital Solutions | Canada | Total Revenue | ||||||||||||||||||||
United States | $ | $ | $ | $ | |||||||||||||||||||
Canada | |||||||||||||||||||||||
Mexico | |||||||||||||||||||||||
Consolidated | $ | $ | $ | $ |
Page 9
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Twenty-six weeks ended June 25, 2022 | |||||||||||||||||||||||
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 | $ | $ | $ | $ |
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 Products 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.
The Company used the practical expedient regarding the existence of a significant financing component as payments are due in less than one year after delivery of the products.
Page 10
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
3. Merger Agreement:
On July 14, 2021, the Merger between Old Hillman and Landcadia was consummated. Pursuant to the Merger Agreement, at the closing date of the Merger, the outstanding shares of Old Hillman common stock were converted into 91,220,901 shares of New Hillman common stock as calculated pursuant to the Merger Agreement.
The Merger was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP ("Generally Accepted Accounting Principles"). Under this method of accounting, Landcadia is treated as the “acquired” company for financial reporting purposes.
This determination was based primarily on Old Hillman having the ability to appoint a majority of the initial Board of Directors of the combined entity, Old Hillman's senior management comprising the majority of the senior management of the combined company, and the ongoing operations of Old Hillman comprising the ongoing operations of the combined company. Accordingly, for accounting purposes, the Merger was treated as the equivalent of New Hillman issuing shares for the net assets of Landcadia, accompanied by a recapitalization. The net assets of Landcadia were stated at carrying value, with no goodwill or other intangible assets recorded. The historical statements of the combined entity prior to the Merger are presented as those of Old Hillman with the exception of the shares and par value of equity recast to reflect the exchange ratio on the Closing Date, adjusted on a retroactive basis. A summary of the impact of the reverse recapitalization on the cash, cash equivalents and restricted cash, change in net assets and the change in common shares is included in the tables below.
Landcadia cash and cash equivalents (1)
|
$ | |||||||
PIPE investment proceeds (2)
|
||||||||
Less cash paid to underwriters and other transaction costs, net of tax(3)
|
( |
|||||||
Net change in cash and cash equivalents as a result of recapitalization | $ | |||||||
Prepaid expenses and other current assets (1)
|
||||||||
Accounts payable and other accrued expenses (1)
|
( |
|||||||
Warrant liabilities (1)(4)
|
( |
|||||||
Change in net assets as a result of recapitalization | $ |
The change in number of shares outstanding as a result of the reverse recapitalization is summarized as follows:
Common shares issued to New Hillman Shareholders (5)
|
||||||||
Shares issued to SPAC sponsors and public shareholders (6)
|
||||||||
Common shares issued to PIPE investors (2)
|
||||||||
Common Shares outstanding immediately after the Business Combination |
1.These assets and liabilities represent the reported balances as of the Closing Date immediately prior to the Business
Combination. The recapitalization of the assets and liabilities from Landcadia's balance sheet was a non-cash financing
activity.
2.In connection with the Business Combination, Landcadia entered into subscription agreements with certain investors (the “PIPE Investors”), pursuant to which it issued 37,500,000 shares of common stock at $10.00 per share (the “PIPE Shares”) for an aggregate purchase price of $375,000 (the “PIPE Financing”), which closed simultaneously with the consummation of the Business Combination.
3.In connection with the Business Combination, the Company incurred $36,140 of transaction costs, net of tax, consisting of underwriting, legal and other professional fees which were recorded as accumulated deficit as a reduction of proceeds.
4.The warrants acquired in the Merger include (a) redeemable warrants issued by Landcadia and sold as part of the units in the Landcadia IPO (whether they were purchased in the Landcadia IPO or thereafter in the open market), which are exercisable for an aggregate of 16,666,628 shares of common stock at a purchase price of $11.50 per share (the “Public Warrants”) and (b) warrants issued by Landcadia to the sponsors in a private placement simultaneously with
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HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
the closing of the Landcadia IPO, which are exercisable for an aggregate of 8,000,000 shares of common stock at a purchase price of $11.50 per share (the “Private Placement Warrants”).
5.The Company issued 91,220,901 common shares in exchange for 553,439 Old Hillman common shares resulting in an exchange ratio of 164.83 . This exchange ratio was applied to Old Hillman's common shares which further impacted common stock held at par value and additional paid in capital, as well as the calculation of weighted average shares outstanding and loss per common share.
4. Recent Accounting Pronouncements:
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standard.
In January 2021, FASB issued ASU 2021-01, Reference Rate Reform, to expand the scope of ASU 2020-04 by allowing an entity to apply the optional expedients, by stating that a change to the interest rate used for margining, discounting or contract price alignment for a derivative is not considered to be a change to the critical terms of the hedging relationship that requires designation. The entity may apply the contract modification relief provided in ASU 2020-04 and continue to account for the derivative in the same manner that existed prior to the changes resulting from reference rate reform or the discounting transition. The Company is currently evaluating its contracts and the optional expedients provided by the new standard.
On October 28, 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and
Contract Liabilities from Contracts with Customers, which amends Accounting Standards Codification ("ASC") 805 to require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. This update is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to 1) the recognition of an acquired contract liability, and 2) payment terms and their effect on subsequent revenue recognized by the acquirer. The amendment is effective on fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact provided by the new standard.
On March 28, 2022, the FASB issued ASU 2022-01, which clarifies the guidance in ASC Topic 815, Derivatives and Hedging on fair value hedge accounting of interest rate risk for portfolios of financial assets. The ASU amends the guidance in ASU 2017-12 which established the "last-of-layer" method for making the fair value hedge accounting for these portfolios more accessible. ASU 2022-01 renames that method the "portfolio layer'' method. Under current guidance, the last-of-layer method enables an entity to apply fair value hedging to a stated amount of a closed portfolio of prepayable financial assets without having to consider prepayment risk or credit risk when measuring those assets. ASU 2022-01 expands the scope of this guidance to allow entities to apply the portfolio layer method to portfolios of all financial assets, including both prepayable and non-prepayable financial assets. The amendment is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact provided by the new standard.
5. Acquisitions:
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HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 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.
On March 7, 2022, the Company completed its acquisition of the Irvine, California-based Monkey Hook, LLC ("Monkey Hook") for a total purchase price of $2,800 , which includes $300 in holdback that remains payable to the seller. Monkey Hook products are designed to hang artwork on drywall where no stud is present. Monkey Hook sells its products throughout North America and its financial results reside in the Company's Hardware and Protective Solutions reportable segment. The total purchase price is preliminary as the Company is in the process of finalizing certain working capital adjustments.
6. Goodwill and Other Intangible Assets:
Goodwill amounts by reportable segment are summarized as follows:
Goodwill at |
Acquisitions (1)
|
Dispositions |
Other (2)
|
Goodwill at | |||||||||||||||||||||||||
December 25, 2021 | June 25, 2022 | ||||||||||||||||||||||||||||
Hardware and Protective Solutions | $ | $ | ( |
$ | $ | $ | |||||||||||||||||||||||
Robotics and Digital Solutions | |||||||||||||||||||||||||||||
Canada | ( |
||||||||||||||||||||||||||||
Total | $ | $ | ( |
$ | $ | ( |
$ |
(1)The amount relates to the Ozco acquisition, see Note 5 - Acquisitions for additional information.
(2)The "Other" change to goodwill relates to adjustments resulting from fluctuations in foreign currency exchange rates for the Canada and Mexico reporting units.
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HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Other intangibles, net, as of June 25, 2022 and December 25, 2021 consist of the following:
Estimated Useful Life (Years) |
June 25, 2022 | December 25, 2021 | |||||||||||||||||||||
Customer relationships | - | $ | $ | ||||||||||||||||||||
Trademarks - Indefinite | Indefinite | ||||||||||||||||||||||
Trademarks - Other | - | ||||||||||||||||||||||
Technology and patents | - | ||||||||||||||||||||||
Intangible assets, gross | |||||||||||||||||||||||
Less: Accumulated amortization | |||||||||||||||||||||||
Other intangibles, net | $ | $ |
The amortization expense for intangible assets, including the adjustments resulting from fluctuations in foreign currency exchange rates for the thirteen and twenty-six weeks ended June 25, 2022 was $15,566 and $31,087 , respectively. Amortization expense for the thirteen and twenty-six weeks ended June 26, 2021 was $15,414 and $30,323 , respectively.
7. Commitments and Contingencies:
The Company self-insures its general liability including product liability, automotive and workers' compensation losses up to $500 per occurrence. Catastrophic coverage has been purchased from third party insurers for occurrences up to and aggregate limits of $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 $2,711 recorded for such risks is adequate as of June 25, 2022.
As of June 25, 2022, the Company has provided certain vendors and insurers letters of credit aggregating to $32,790 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 $300 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 $2,498 recorded for such risks is adequate as of June 25, 2022.
The Company imports large quantities of fastener products which are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements and bilateral actions. The Company could be subject to the assessment of additional duties and interest if it or its suppliers fail to comply with customs regulations or similar laws. The U.S. Department of Commerce has received requests from petitioners to conduct administrative reviews of compliance with anti-dumping duty and countervailing duty laws for certain nail products sourced from Asian countries. The Company sourced products under review from vendors in China and Taiwan during the periods selected for review. The Company accrues for the duty expense once it is determined to be probable and the amount can be reasonably estimated.
On June 1, 2021, Hy-Ko Products Company LLC ("Hy-Ko"), a manufacturer of key duplication machines, filed a complaint for patent infringement against Hillman 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
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HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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. 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.
On August 2, 2021, Hy-Ko filed an Amended Complaint which did not deviate substantially from the initial Complaint. Hillman responded on August 16, 2021, by filing a Motion to Dismiss the conversion and replevin claims because they are barred by the statute of limitations. In its Motion to Dismiss, Hillman also requested that the Court strike numerous paragraphs of Hy-Ko's Amended Complaint that, on their face, have nothing to do with Hy-Ko's patent infringement, unfair competition, or conversion and replevin claims. Hillman also requested that the Court order Hy-Ko to provide a more definite statement regarding its unfair competition claim. Briefing on Hillman's Motion to Dismiss was completed on September 14, 2021. On January 14, 2022, the Court denied Hillman’s motion. Hillman filed an answer with counterclaims (for declaratory judgment and for breach of a prior settlement agreement) on February 1, 2022 and Hy-Ko responded to that pleading on February 22, 2022.
The Court held a claim construction hearing on February 17, 2022. On March 10, 2022, the Court issued its claim construction order, and on March 24, 2022, Hillman filed objections to certain aspects of the claim construction order. Those objections were overruled by Order dated May 2, 2022. On April 11, 2022, Hy-Ko filed a notice withdrawing certain claims from its infringement contentions. On May 3, 2022, Hy-Ko filed a motion for judgment on the pleadings, seeking dismissal of certain Hillman counterclaims. The Court denied that motion by Order dated June 14, 2022. The parties conducted a mediation on June 28, 2022, with the mediator issuing a June 29, 2022 Report stating that the mediation has been suspended. The discovery deadline is July 22, 2022. Trial has been set for October 3, 2022.
Hillman believes Hy-Ko’s claims are without merit and that it has substantial defenses to Hy-Ko's claims.
8. Related Party Transactions:
The Company has recorded aggregate management fee charges and expenses from CCMP Capital Advisors, LLC and Oak Hill Funds of $88 and $214 for the thirteen and twenty-six weeks ended June 26, 2021. Subsequent to the Business Combination on July 14, 2021, the Company is no longer being charged management fees. See Note 3 - Merger Agreement for additional details on the Business Combination. Two members of our Board of Directors, Rich Zannino and Joe Scharfenberger, are partners at CCMP. Another director, Teresa Gendron, is the CFO of Jefferies.
At the Closing, Hillman, the Sponsors, CCMP Investors and the Oak Hill Investors entered into the A&R Registration Rights Agreement, pursuant to which, among other things, the parties to the A&R Registration Rights Agreement agreed not to effect any sale or distribution of any equity securities of Hillman held by any of them during the lock-up period described therein and were granted certain registration rights with respect to their respective shares of Hillman common stock, in each case, on the terms and subject to the conditions therein.
Page 15
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
9. 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 25, 2022 and the thirteen and twenty-six weeks ended June 26, 2021, the Company applied an estimated annual effective tax rate based on expected annual pre-tax income to the interim period pre-tax loss to calculate the income tax benefit.
For the thirteen and twenty-six weeks ended June 25, 2022, the effective income tax rate was 42.2 % and 44.4 %, respectively. The Company recorded an income tax provision for the thirteen weeks ended June 25, 2022 of $6,424 and an income tax provision for the twenty-six weeks ended June 25, 2022 of $5,532 . The effective tax rate for the thirteen and twenty-six weeks ended June 25, 2022 was primarily the result of an estimated increase in Global intangible low-taxed income ("GILTI") from the Company's Canadian operations. Non-deductible stock compensation and state and foreign income taxes also contributed to an increase to the effective tax rate.
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.
10. Long-Term Debt:
The following table summarizes the Company’s debt:
June 25, 2022 | December 25, 2021 | ||||||||||
Revolving loans | $ | $ | |||||||||
Senior term loan, due 2028 | |||||||||||
Finance leases | |||||||||||
Unamortized discount on Senior term loan | ( |
( |
|||||||||
Current portion of long-term debt and financing lease liabilities | ( |
( |
|||||||||
Deferred finance fees | ( |
( |
|||||||||
Total long-term debt, net | $ | $ |
As of June 25, 2022, the ABL Revolver had an outstanding amount of $117,000 and outstanding letters of credit of $32,790 . The Company has $100,210 of available borrowings under the revolving credit facility as a source of liquidity as of June 25, 2022.
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 1) the right to obtain substantially all of the economic benefits from the use of the asset and 2) 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 16
HILLMAN SOLUTIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The components of operating and finance lease costs for the thirteen and twenty-six weeks ended June 25, 2022 and thirteen and twenty-six weeks ended June 26, 2021 were as follows:
Thirteen Weeks Ended June 25, 2022 |
Thirteen Weeks Ended June 26, 2021 |
Twenty-six Weeks Ended June 25, 2022 |
Twenty-six Weeks Ended June 26, 2021 |
|||||||||||||||||||||||
Operating lease costs | $ | $ | $ | $ | ||||||||||||||||||||||
Short term lease costs | ||||||||||||||||||||||||||
Variable lease costs | ||||||||||||||||||||||||||
Finance lease costs: | ||||||||||||||||||||||||||
Amortization of right of use assets | ||||||||||||||||||||||||||
Interest on lease liabilities |
Rent expense is recognized on a straight-line basis over the expected lease term. Rent expense totaled $7,639 and $14,812 in the thirteen and twenty-six weeks ended June 25, 2022, respectively, and $6,702 and $12,986 in the thirteen and twenty-six weeks ended June 26, 2021, respectively. Rent expense includes operating lease costs as well as expenses for non-lease components such as common area maintenance, real estate taxes, real estate insurance, variable costs related to our leased vehicles and also short-term rental expenses.
The implicit rate is not determinable in most of the Company’s leases, as such management uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of June 25, 2022 and December 25, 2021:
June 25, 2022 | December 25, 2021 | |||||||||||||||||||||||||
Operating Leases | Finance Leases | Operating Leases | Finance Leases | |||||||||||||||||||||||
Weighted average remaining lease term |