Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion provides information which our management believes is relevant to an assessment and understanding of our operations and financial condition. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements and schedules thereto appearing elsewhere herein. In addition, see “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information”, as well as “Risk Factors” in Item 1A of this Annual Report.
General
Hillman is 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 our wholly-owned subsidiary, The Hillman Group, Inc. and its wholly-owned subsidiaries (collectively, “Hillman Group”), which had net sales of approximately $1,214.4 million in 2019. We sell our 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; personal protective equipment, threaded rod and metal shapes; keys, key duplication systems, and accessories; builder's hardware; and identification items, such as tags and letters, numbers, and signs. We support our product sales with services that include the design and installation of merchandising systems and maintenance of appropriate in-store inventory levels.
In the year ended December 28, 2019, we recorded an impairment loss of $7.9 million related to the disposal of our FastKey self-service key duplicating kiosks and related assets.
On August 16, 2019, we acquired the assets of Sharp Systems, LLC ("Resharp"), a California-based innovative developer of automated knife sharpening systems, for a cash payment of $3.0 million and contingent consideration valued at $18.1 million. The maximum payout for the contingent consideration is $25.0 million plus 1.8% of net knife-sharpening revenues for five years after the $25.0 million is fully paid. Resharp has business operations in the United States and its financial results reside within our Consumer Connected Solutions reportable segment.
On July 1, 2019, the Company acquired the assets of West Coast Washers, Inc for a total purchase price of $3.1 million. The financial results of West Coast Washers, Inc. reside within the Company's Fastening, Hardware, and Personal Protective Equipment operating segment. See Note 5 - Acquisitions of the Notes to Consolidated Financial Statements for additional information.
In the fourth quarter of 2019, we implemented a plan to restructure the management and operations of our U.S. business to achieve synergies and cost savings associated with the recent acquisitions. The restructuring plan includes management realignment, integration of sales and operations functions, and strategic review of our product offerings. We incurred charges of $9.5 million in the year ended December 28, 2019, primarily related to inventory valuation adjustments and severance (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional details). We expect to incur restructuring related charges in our United States segment over the next year as we implement the plan.
On November 25, 2019, we entered into an amendment of our asset-based revolving credit agreement which provided for an additional $100.0 million of revolving credit, $12.5 million for the Canadian Borrower and $87.5 million for the US Borrowers, bringing the total to $250.0 million. After the amendment, $200.0 million of the revolving credit facilities under the amendment is available to the US Borrowers and $50.0 million of the revolving credit facilities under the amendment is available to the Canadian Borrower, in each case, subject to a borrowing base. See Note 7 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information.
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.
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 decreased in value relative to the CNY by approximately by 6.3% in 2017, increased by 5.7% in 2018, and increased by 1.7% in 2019. The
U.S. dollar decreased in value relative to the Taiwan dollar by approximately 8.5% in 2017, increased by 3.3% in 2018, and decreased by 0.2% in 2019.
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 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 decreased in value relative to the Canadian dollar by approximately 6.6% in 2017, increased by 8.7% in 2018, and decreased by 4.1% in 2019. We may take pricing action, when warranted, in an attempt to offset a 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.
We import large quantities of products which are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements and bilateral actions. The recently implemented U.S. tariffs on steel and aluminum and other imported goods has increased our product costs and required us to increase prices on the affected products.
Product Revenues
The following is revenue based on products for our significant product categories and operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fastening, Hardware, and Personal Protective Solutions
|
|
Consumer Connected Solutions
|
|
Canada
|
|
Total Revenue
|
|
Year Ended December 28, 2019
|
|
|
|
|
|
|
|
|
Fastening and hardware
|
$
|
607,247
|
|
|
$
|
—
|
|
|
$
|
121,242
|
|
|
$
|
728,489
|
|
|
Personal protective
|
245,769
|
|
|
—
|
|
|
—
|
|
|
245,769
|
|
|
Keys and key accessories
|
—
|
|
|
185,451
|
|
|
4,009
|
|
|
189,460
|
|
|
Engraving
|
—
|
|
|
50,613
|
|
|
9
|
|
|
50,622
|
|
|
Resharp
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
|
Consolidated
|
$
|
853,016
|
|
|
$
|
236,086
|
|
|
$
|
125,260
|
|
|
$
|
1,214,362
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 29, 2018
|
|
|
|
|
|
|
|
|
Fastening and hardware
|
$
|
581,269
|
|
|
$
|
—
|
|
|
$
|
137,186
|
|
|
$
|
718,455
|
|
|
Personal protective
|
55,448
|
|
|
—
|
|
|
—
|
|
|
55,448
|
|
|
Keys and key accessories
|
—
|
|
|
143,898
|
|
|
4,217
|
|
|
148,115
|
|
|
Engraving
|
—
|
|
|
52,145
|
|
|
12
|
|
|
52,157
|
|
|
Resharp
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consolidated
|
$
|
636,717
|
|
|
$
|
196,043
|
|
|
$
|
141,415
|
|
|
$
|
974,175
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 30, 2017
|
|
|
|
|
|
|
|
|
Fastening and hardware
|
$
|
528,969
|
|
|
$
|
—
|
|
|
$
|
133,082
|
|
|
$
|
662,051
|
|
|
Personal protective
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Keys and key accessories
|
—
|
|
|
115,924
|
|
|
4,706
|
|
|
120,630
|
|
|
Engraving
|
—
|
|
|
55,674
|
|
|
13
|
|
|
55,687
|
|
|
Resharp
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consolidated
|
$
|
528,969
|
|
|
$
|
171,598
|
|
|
$
|
137,801
|
|
|
$
|
838,368
|
|
Results of Operations
Results of operations for the years ended December 28, 2019 and December 29, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
(dollars in thousands)
|
Amount
|
|
% of
Net Sales
|
|
Amount
|
|
% of
Net Sales
|
|
Net sales
|
$
|
1,214,362
|
|
|
100.0
|
%
|
|
$
|
974,175
|
|
|
100.0
|
%
|
|
Cost of sales (exclusive of depreciation and amortization shown separately below)
|
693,881
|
|
|
57.1
|
%
|
|
537,885
|
|
|
55.2
|
%
|
|
Selling, general and administrative expenses
|
382,131
|
|
|
31.5
|
%
|
|
320,543
|
|
|
32.9
|
%
|
|
Depreciation
|
65,658
|
|
|
5.4
|
%
|
|
46,060
|
|
|
4.7
|
%
|
|
Amortization
|
58,910
|
|
|
4.9
|
%
|
|
44,572
|
|
|
4.6
|
%
|
|
Management fees to related party
|
562
|
|
|
—
|
%
|
|
546
|
|
|
0.1
|
%
|
|
Other (income) expense, net
|
5,525
|
|
|
0.5
|
%
|
|
(2,874
|
)
|
|
(0.3
|
)%
|
|
Income from operations
|
7,695
|
|
|
0.6
|
%
|
|
27,443
|
|
|
2.8
|
%
|
|
Interest expense, net
|
113,843
|
|
|
9.4
|
%
|
|
82,775
|
|
|
8.5
|
%
|
|
Refinancing charges
|
—
|
|
|
—
|
%
|
|
11,632
|
|
|
1.2
|
%
|
|
Mark-to-market adjustment of interest rate swap
|
2,608
|
|
|
0.2
|
%
|
|
607
|
|
|
0.1
|
%
|
|
Loss before income taxes
|
(108,756
|
)
|
|
(9.0
|
)%
|
|
(67,571
|
)
|
|
(6.9
|
)%
|
|
Income tax expense (benefit)
|
(5,370
|
)
|
|
(0.4
|
)%
|
|
2,070
|
|
|
0.2
|
%
|
|
Net (loss) income
|
$
|
(103,386
|
)
|
|
(8.5
|
)%
|
|
$
|
(69,641
|
)
|
|
(7.1
|
)%
|
Year Ended December 28, 2019 vs December 29, 2018
Net Sales
Net sales for the year ended December 28, 2019 were $1,214.4 million, or $4.8 million per shipping day, compared to net sales of $974.2 million, or $3.9 million per shipping day for the year ended December 29, 2018, an increase of approximately $240.2 million. The increase was primarily driven by the acquisitions of MinuteKey in the third quarter of 2018 and Big Time in the fourth quarter of 2018. The acquisitions increased revenue $227.6 million in the year ended December 28, 2019 as compared to the year ended December 29, 2018. Construction fastener products and builders hardware sales increased $19.2 million and $6.4 million, respectively, due to new product line roll outs with customers. Additionally, sales decreased $7.8 million due to the closure of a manufacturing facility in Canada and exiting the related product lines (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).
Cost of Sales
Our cost of sales ("COS") is exclusive of depreciation and amortization expense. COS was $693.9 million, or 57.1% of net sales, for the year ended December 28, 2019, an increase of $156.0 million compared to $537.9 million, or 55.2% of net sales, for the year ended December 29, 2018. The increase of 1.9% in cost of sales, expressed as a percent of net sales, in 2019 compared to 2018 was primarily due to the following items:
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|
|
|
•
|
A higher mix of personal protective equipment.
|
|
|
|
|
•
|
In the year ended December 28, 2019, we had inventory valuation adjustments in our Fastening, Hardware, and Personal Protective Solutions segment of $5.7 million primarily related to strategic review of our product offerings and restructuring activities (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).
|
|
|
|
|
•
|
Net sales was reduced by $7.2 million in the year ended December 28, 2019 for payments made to customers associated with the new product line roll outs for construction fastener products and builders hardware.
|
|
|
|
|
•
|
We recorded a reduction of $3.8 million in cost of sales recorded in 2018 due to an adjustment of our accrual for anti-dumping duties based on the final results of the Department of Commerce’s administrative review of nails from China (see Note 15 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional information).
|
|
|
|
|
•
|
The remaining increase was driven by higher product cost due to tariffs.
|
|
|
|
|
•
|
These increases were partially offset by lower inventory valuation adjustments in our Canada segment of $5.5 million driven by charges taken in 2018 related to exiting certain lines of business and rationalizing stock keeping units (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).
|
Expenses
Operating expenses and other income (expenses) were $103.9 million higher for the year ended December 28, 2019 compared to the year ended December 29, 2018. The following changes in underlying trends impacted the change in operating expenses:
|
|
|
|
•
|
Selling expense was $156.8 million in the year ended December 28, 2019, an increase of $22.8 million compared to $134.0 million for the year ended December 29, 2018. The acquisition of MinuteKey in the third quarter of 2018 and Big Time in the fourth quarter of 2018 added $24.9 million in selling expense for the year ended December 28, 2019 as compared to 2018. These increases were offset by a decrease of $3.3 million for the cost of updating customer store labels for a new pricing program in 2018.
|
|
|
|
|
•
|
Warehouse and delivery expenses were $142.3 million for the year ended December 28, 2019, an increase of $17.3 million compared to warehouse and delivery expenses of $124.9 million for the year ended December 29, 2018. The acquisition of MinuteKey in the third quarter of 2018 and Big Time in the fourth quarter of 2018 added $7.5 million in warehouse expense for the year ended December 28, 2019. We incurred $4.6 million of higher expense for increases in labor, benefits, freight, and equipment costs. We also incurred additional warehouse expense of $3.8 million in 2019 related to restructuring activities in our Canada segment (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).
|
|
|
|
|
•
|
General and administrative (“G&A”) expenses were $83.0 million in the year ended December 28, 2019, an increase of $21.4 million compared to $61.6 million in the year ended December 29, 2018. The increase was primarily due to the acquisitions of Big Time and MinuteKey, which added $10.1 million an G&A expense in the current year. We also incurred $5.4 million of additional expense for retention and long term incentive compensation plans introduced in the fourth quarter of 2018. Additionally, we incurred severance and related charges of $3.9 million related to corporate restructuring activities (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information). Finally, we incurred $1.6 million of higher compensation and benefits expense in the current year. These increases were partially offset by lower acquisition related charges in the year ended December 28, 2019.
|
|
|
|
|
•
|
Depreciation expense was $65.7 million in the year ended December 28, 2019 compared to $46.1 million in the year ended December 29, 2018. The increase was primarily due to the acquisitions of Big Time and MinuteKey, which added $9.2 million in depreciation expense in the current year. The remaining increase was driven by our investment in key duplicating machines and merchandising racks.
|
|
|
|
|
•
|
Amortization expense of $58.9 million in the year ended December 28, 2019 compared to $44.6 million in the year ended December 29, 2018. The increase was primarily due to the acquisitions of Big Time and MinuteKey, which added $14.3 million an amortization expense in the current year.
|
|
|
|
|
•
|
Other expense of $5.5 million for the year ended December 28, 2019 increased $8.4 million compared to income of $2.9 million in the year ended December 29, 2018. In the year ended December 28, 2019, other expense consisted of an impairment charge of $7.0 million related to the loss on the disposal of our FastKey self-service key duplicating kiosks. These losses were offset by a gain on the sale of machinery and equipment of $0.4 million (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information), and exchange rate gains of $0.7 million. Other income of $2.9 million for the year ended December 29, 2018 consisted of a $5.3 million net gain on the sale and disposal of property, plant, and equipment associated with the restructuring of the Canada segment (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information). The gain was partially offset by $2.0 million of exchange rate losses.
|
Interest expense, net, of $113.8 million for the year ended December 28, 2019 increased $31.1 million, compared to $82.8 million for the year ended December 29, 2018. During 2018, we refinanced our term loan and revolver, increasing the outstanding term loan by approximately $527.5 million. This activity, along with additional draws on our revolving credit facility during the year, led to increased interest expense in the year ended December 28, 2019. In connection with the refinancing, we incurred $11.6 million in refinancing charges during the year ended December 29, 2018. See Note 7 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information.
Results of Operations
Results of operations for the years ended December 29, 2018 and December 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 29, 2018
|
|
Year Ended
December 30, 2017
|
|
(dollars in thousands)
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
|
Net sales
|
$
|
974,175
|
|
|
100.0
|
%
|
|
$
|
838,368
|
|
|
100.0
|
%
|
|
Cost of sales (exclusive of depreciation and amortization shown separately below)
|
537,885
|
|
|
55.2
|
%
|
|
455,717
|
|
|
54.4
|
%
|
|
Selling, general and administrative expenses
|
320,543
|
|
|
32.9
|
%
|
|
274,044
|
|
|
32.7
|
%
|
|
Depreciation
|
46,060
|
|
|
4.7
|
%
|
|
34,016
|
|
|
4.1
|
%
|
|
Amortization
|
44,572
|
|
|
4.6
|
%
|
|
38,109
|
|
|
4.5
|
%
|
|
Management fees to related party
|
546
|
|
|
0.1
|
%
|
|
519
|
|
|
0.1
|
%
|
|
Other (income) expense, net
|
(2,874
|
)
|
|
(0.3
|
)%
|
|
459
|
|
|
0.1
|
%
|
|
Income from operations
|
27,443
|
|
|
2.8
|
%
|
|
35,504
|
|
|
4.2
|
%
|
|
Interest expense, net
|
82,775
|
|
|
8.5
|
%
|
|
63,248
|
|
|
7.5
|
%
|
|
Refinancing charges
|
11,632
|
|
|
1.2
|
%
|
|
—
|
|
|
—
|
%
|
|
Mark-to-market adjustment of interest rate swap
|
607
|
|
|
0.1
|
%
|
|
(1,481
|
)
|
|
(0.2
|
)%
|
|
Loss before income taxes
|
(67,571
|
)
|
|
(6.9
|
)%
|
|
(26,263
|
)
|
|
(3.1
|
)%
|
|
Income tax expense (benefit)
|
2,070
|
|
|
0.2
|
%
|
|
(84,911
|
)
|
|
(10.1
|
)%
|
|
Net income (loss)
|
$
|
(69,641
|
)
|
|
(7.1
|
)%
|
|
$
|
58,648
|
|
|
7.0
|
%
|
Year Ended December 29, 2018 vs Year Ended December 30, 2017
Net Sales
Net sales for the year ended December 29, 2018 were $974.2 million, or $3.9 million per shipping day, compared to net sales of $838.4 million, or $3.3 million per shipping day, for the year ended December 30, 2017. The increase was primarily driven by the acquisitions of ST Fastening Systems in the fourth quarter of 2017, MinuteKey in the third quarter of 2018, and Big Time in the fourth quarter of 2018. The acquisitions increased revenue $115.4 million in the year ended December 28, 2019 as compared to the year ended December 29, 2018. Sales of hurricane related products increased $7.9 million. Key and key accessory sales increased by $6.5 million primarily due to the key program roll out to a new key customer in 2018. Automotive keys increased $6.1 million due to the launch of a new product for duplication of programmable key remotes.
Cost of Sales
Our cost of sales was $537.9 million, or 55.2% of net sales, for the year ended December 29, 2018, an increase of $82.2 million compared to $455.7 million, or 54.4% of net sales, for the year ended December 30, 2017. The increase of 0.8% in cost of sales, expressed as a percent of net sales, in 2018 compared to 2017 was primarily due to the following items:
|
|
|
|
•
|
We recorded inventory valuation adjustments in our Canada segment of $9.8 million driven by exiting certain lines of business and rationalizing stock keeping units (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).
|
|
|
|
|
•
|
This additional expense was partially offset by an adjustment to our accrual for anti-dumping duties. We recorded a reduction of $3.8 million in cost of sales in the year ended December 28, 2019 due to an adjustment to our accrual for anti-dumping duties (see Note 15 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional information).
|
|
|
|
|
•
|
The remaining increase in in cost of sales, expressed as a percent of net sales, was the result of higher sales and product costs attributed to commodity inflation and tariffs.
|
Expenses
Operating expenses and other income (expenses) were $61.7 million higher for the year ended December 29, 2018 compared to the year ended December 30, 2017. The following changes in underlying trends impacted the change in operating expenses:
|
|
|
|
•
|
Selling expense was $134.0 million in the year ended December 29, 2018, an increase of $14.1 million compared to $119.9 million for the year ended December 30, 2017. The acquisition of ST Fastening Systems, Minute Key, and Big Time added $13.1 million of selling expense in the year ended December 29, 2018. The remaining increase in selling expense was primarily due to $0.9 million of additional expense for updating customer store labels for a new pricing program with the remaining increase due to higher labor and benefit costs.
|
|
|
|
|
•
|
Warehouse and delivery expenses were $124.9 million for the year ended December 29, 2018, an increase of $14.1 million compared to warehouse and delivery expenses of $110.8 million for the year ended December 30, 2017. The acquisition of ST Fastening Systems, Minute Key, and Big Time added $7.5 million of warehouse expense in the year ended December 29, 2018. Additionally, we incurred $4.6 million of higher expense for increases in labor, benefits, freight, and equipment costs. We also incurred additional warehouse expense of $2.2 million related to restructuring activities in our Canada segment (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).
|
|
|
|
|
•
|
G&A expenses were $61.6 million in the year ended December 29, 2018 an increase of $18.3 million compared to $43.4 million in the year ended December 30, 2017. The acquisition of ST Fastening Systems, Minute Key, and Big Time added $10.6 million of G&A expense in the year ended December 29, 2018. In the year ended December 29, 2018, we incurred an additional $11.2 million in acquisition related costs associated with MinuteKey and Big Time. The increased acquisition expenses were partially offset by lower variable compensation expense in the year ended December 29, 2018.
|
|
|
|
|
•
|
Depreciation expense was $46.1 million in the year ended December 29, 2018 compared to $34.0 million in the year ended December 30, 2017. The acquisition of ST Fastening Systems, Minute Key, and Big Time added $6.5 million of depreciation expense in the year ended December 29, 2018. The remaining increase was driven by our continued investment in new, state of the art key cutting technology, the KeyKrafter™ and the implementation of our ERP system in Canada.
|
|
|
|
|
•
|
Amortization expense was $44.6 million in the year ended December 29, 2018 compared to $38.1 million in the year ended December 30, 2017. The acquisition of ST Fastening Systems, Minute Key, and Big Time added $6.6 million of amortization expense in the year ended December 29, 2018.
|
|
|
|
|
•
|
Other income was $2.9 million for the year ended December 29, 2018, an increase of $3.3 million compared to a loss of $0.5 million in the year ended December 30, 2017. Other income of $2.9 million for the year ended December 29, 2018 consisted of a $5.3 million net gain on the sale and disposal of property, plant, and equipment associated with the restructuring of the Canada segment, (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information). The current year gain was offset by $2.0 million of exchange rate losses. Other income for the year ended December 30, 2017 included $1.3 million of exchange rate gains. These gains were offset by net impairment losses of $1.9 million as we exited certain lines of business. In both years we incurred immaterial losses on the disposal of fixed assets.
|
Interest expense, net, was $82.8 million for the year ended December 29, 2018, an increase of $19.5 million, compared to $63.2 million for the year ended December 30, 2017. During 2018 we refinanced our term loan and revolver, increasing the outstanding term loan by approximately $527.5 million. In connection with the refinancing, we incurred $11.6 million in refinancing charges. The increase in the term loan and additional draws on our revolving credit facility during the year led to increased interest expense. See Note 7 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information.
Results of Operations – Operating Segments
The following table provides supplemental information of our sales and profitability by operating segment (in thousands):
Fastening, Hardware, and Personal Protective Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended
December 30, 2017
|
|
Fastening, Hardware, and Personal Protective Solutions
|
|
|
|
|
|
|
Segment Revenues
|
$
|
853,016
|
|
|
$
|
636,717
|
|
|
$
|
528,969
|
|
|
Segment Income from Operations
|
$
|
14,204
|
|
|
$
|
18,555
|
|
|
$
|
7,765
|
|
Year Ended December 28, 2019 vs December 29, 2018
Net Sales
Fastening, Hardware, and Personal Protective Solutions net sales for the year ended December 28, 2019 increased by $216.3 million from the prior year. The primary drivers of this increase were:
|
|
|
|
•
|
The acquisition of Big Time in the fourth quarter of 2018 increased revenue $190.3 million in the year ended December 28, 2019.
|
|
|
|
|
•
|
Construction fastener products and builders hardware sales increased $19.2 million and $6.4 million, respectively, due to new product line roll outs with customers.
|
Income (Loss) from Operations
Income from operations of our Fastening, Hardware, and Personal Protective Solutions operating segment decreased by approximately $4.4 million in the year ended December 28, 2019 to $14.2 million from $18.6 million in the year ended December 29, 2018. The increased sales noted above were offset by increased cost of sales and increased selling, general and administrative expenses as outlined below:
Cost of sales as a percentage of net sales was 62.0% in the year ended December 28, 2019, an increase of 5.3% from 56.7% in the year ended December 29, 2018. The primary drivers of this increase were:
|
|
|
|
•
|
Cost of sales as a percentage of net sales was primarily driven by a higher mix of personal protective equipment.
|
|
|
|
|
•
|
Inventory valuation adjustments were $5.7 million in the current year primarily related to restructuring activities (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).
|
|
|
|
|
•
|
Net sales was reduced by $7.2 million in the year ended December 28, 2019 for payments made to customers associated with the new product line roll outs for construction fastener products and builders hardware.
|
|
|
|
|
•
|
We recorded a reduction of $3.8 million in cost of sales recorded in 2018 due to an adjustment of our accrual for anti-dumping duties based on the final results of the Department of Commerce’s administrative review of nails from China (see Note 15 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional information).
|
Operating expenses increased $52.3 million in our Fastening, Hardware, and Personal Protective Solutions segment primarily due to:
|
|
|
|
•
|
The acquisition of Big Time in the fourth quarter of 2018 increased SG&A $22.0 million and $10.6 million in amortization expense in the year ended December 28, 2019.
|
|
|
|
|
•
|
Warehouse costs, excluding the acquisition of Big Time, increased $6.8 million primarily driven by increased labor, benefits, freight and maintenance costs.
|
|
|
|
|
•
|
We incurred $4.4 million of additional expense for retention and long term incentive compensation plans introduced in the fourth quarter of 2018.
|
|
|
|
|
•
|
Additionally, we incurred severance and related charges of $3.2 million related to corporate restructuring activities (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).
|
Year Ended December 29, 2018 vs December 30, 2017
Net Sales
Net sales for our Fastening, Hardware, and Personal Protective Solutions operating segment increased by $107.7 million in the year ended December 29, 2018 primarily due to:
|
|
|
|
•
|
The acquisition of ST Fastening Systems in the fourth quarter of 2017 added $41.4 million in net sales.
|
|
|
|
|
•
|
The acquisition of Big Time in the fourth quarter of 2018 added $55.4 million in net sales.
|
|
|
|
|
•
|
Hurricane related sales increased $7.9 million in the year ended December 29, 2018.
|
Income (Loss) from Operations
Income from operations of our Fastening, Hardware, and Personal Protective Solutions segment increased by approximately $10.8 million in the year ended December 29, 2018 to $18.6 million as compared to $7.8 million in the year ended December 30, 2017. The increases in sales were partially offset by increased COS and SG&A costs. Cost of sales as a percentage of net sales was 56.7% in the year ended December 29, 2018, an increase of 0.2% from 56.5% in the year ended December 30, 2017. SG&A increased $25.5 million in the year ended December 29, 2018. The primary drivers of this increase were:
|
|
|
|
•
|
The acquisition of ST Fastening Systems in the fourth quarter of 2017 which added $10.5 million in SG&A expense.
|
|
|
|
|
•
|
The acquisition of Big Time in the fourth quarter of 2018 added $8.0 million in SG&A expense.
|
|
|
|
|
•
|
We incurred $5.1 million of acquisition related expenses associated with Big Time.
|
|
|
|
|
•
|
We incurred $1.1 million of additional expense for retention and long term incentive compensation plans introduced in the fourth quarter of 2018.
|
Consumer Connected Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended
December 30, 2017
|
|
Consumer Connected Solutions
|
|
|
|
|
|
|
Segment Revenues
|
$
|
236,086
|
|
|
$
|
196,043
|
|
|
$
|
171,598
|
|
|
Segment Income from Operations
|
$
|
3,385
|
|
|
$
|
17,705
|
|
|
$
|
24,800
|
|
Year Ended December 28, 2019 vs December 29, 2018
Net Sales
Net sales for our Consumer Connected Solutions operating segment increased $40.0 million in the year ended December 28, 2019 compared to the net sales for 2018 primarily due to:
|
|
|
|
•
|
The acquisition of Minute Key in the third quarter of 2018, which increased revenue $37.3 million in the year ended December 28, 2019.
|
|
|
|
|
•
|
Automotive key sales increased $4.2 million in the year ended December 28, 2019.
|
Income (Loss) from Operations
Income from operations of our Consumer Connected Solutions operating segment decreased by approximately $14.3 million in the year ended December 28, 2019 to $3.4 million from $17.7 million in the year ended December 29, 2018. The increased sales were offset by increased SG&A, depreciation and amortization expenses as outlined below:
|
|
|
|
•
|
The acquisition of MinuteKey added $20.5 million in SG&A expenses, $8.5 million in depreciation and $3.7 million in amortization expense in the year ended December 28, 2019.
|
|
|
|
|
•
|
We incurred $7.7 million of impairment charges in 2019 related to the loss on the disposal of our FastKey self-service key duplicating kiosks.
|
|
|
|
|
•
|
Depreciation expense, excluding MinuteKey, increased $4.4 million driven by our continued investment in key duplicating machines.
|
|
|
|
|
•
|
We incurred $1.5 million in legal fees related to the ongoing litigation with KeyMe, Inc (see Note 15 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional information).
|
|
|
|
|
•
|
We incurred $1.0 million of additional expense for retention and long term incentive compensation plans introduced in the fourth quarter of 2018.
|
Year Ended December 29, 2018 vs December 30, 2017
Net Sales
Net sales for our Consumer Connected Solutions operating segment increased $24.4 million in the year ended December 29, 2018 as compared to 2017 primarily due to:
|
|
|
|
•
|
The increase in sales was primarily driven by the acquisition of MinuteKey in the third quarter of 2018 which added $18.6 million to net sales.
|
|
|
|
|
•
|
Key and key accessory sales increased by $6.5 million primarily due to the key program roll out to a new key customer in 2018.
|
|
|
|
|
•
|
Automotive keys increased $6.1 million due to the launch of a new product for duplication of programmable key remotes.
|
|
|
|
|
•
|
These increases were offset by lower key sales to big box customers and lower engraving sales.
|
Income (Loss) from Operations
Income from operations of our Consumer Connected Solutions operating segment decreased $7.1 million the year ended December 29, 2018 to $17.7 million as compared to $24.8 million in the year ended December 30, 2017. The increases in net sales were offset by increased operating expenses as outlined below:
|
|
|
|
•
|
The acquisition of MinuteKey added $12.7 million in SG&A expenses, $4.7 million in depreciation and $2.2 million in amortization expense in the year ended December 29, 2018.
|
|
|
|
|
•
|
We incurred $5.2 million in acquisition related expense associated with MinuteKey.
|
|
|
|
|
•
|
Depreciation expense increased $3.0 million due to our continued investment in key and engraving machines.
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended
December 30, 2017
|
|
Canada
|
|
|
|
|
|
|
Segment Revenues
|
$
|
125,260
|
|
|
$
|
141,415
|
|
|
$
|
137,801
|
|
|
Segment Income (Loss) from Operations
|
$
|
(9,894
|
)
|
|
$
|
(8,817
|
)
|
|
$
|
2,939
|
|
Year Ended December 28, 2019 vs December 29, 2018
Net Sales
Net sales in our Canada operating segment decreased by $16.2 million in the year ended December 28, 2019 primarily due to:.
|
|
|
|
•
|
The unfavorable impact of conversion of the local currency to U.S. dollars.
|
|
|
|
|
•
|
The closure of a manufacturing facility in Canada and exiting the related product lines resulted in to $7.8 million in lower sales.
|
Income (Loss) from Operations
Income from operations of our Canada segment decreased by $1.1 million in the year ended December 28, 2019 to a loss of $9.9 million as compared to a loss of $8.8 million in the year ended December 29, 2018. The decrease in sales was offset by lower COS as percentage of sales. Additionally, we incurred higher other expense in the year ended December 28, 2019.
|
|
|
|
•
|
COS as a percentage of net sales decreased 5.3% from 74.4% in the year ended December 29, 2018 to 69.1% in the year ended December 28, 2019 primarily due to $9.8 million of inventory valuation adjustments taken in 2018 in our Canada segment driven by exiting certain lines of business and rationalizing stock keeping units as compared to inventory adjustments of $4.3 million in the year ended December 28, 2019 (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).
|
|
|
|
|
•
|
Other income and expense decreased $2.4 million to income of $1.1 million in the current year compared with income of $3.5 million in the year ended December 29, 2018. Other income for the year ended December 28, 2019 included a gain on the sale of machinery and equipment of $0.4 million (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information), and exchange rate gains of $0.7 million. Other income for the year ended December 29, 2018 consisted of a $5.3 million net gain on the sale and disposal of property, plant, and equipment associated with the restructuring of the Canada segment, (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information). The gain in the year ended December 29, 2018 was offset by $1.8 million exchange rate losses of exchange rate losses.
|
Year Ended December 29, 2018 vs December 30, 2017
Net Sales
Net sales for our Canada operating segment increased by $3.6 million in the year ended December 29, 2018 primarily due to the roll out of wall anchor and builders hardware products to retail customers.
Income (Loss) from Operations
Income from operations of our Canada segment decreased by $11.8 million in the year ended December 29, 2018 to a loss of $8.8 million as compared to income of $2.9 million in the year ended December 30, 2017. The increase in sales was offset by net restructuring charges of $8.3 million consisting of inventory valuation adjustments, asset impairments, labor and severance, and consulting costs, partially offset by a gain on the sale of real estate (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information). Additionally, in the year ended December 29, 2018 we incurred exchange rate losses of $1.8 million compared to gains of $0.9 million in the year ended December 30, 2017.
Income Taxes
Year Ended December 28, 2019 vs December 29, 2018
In the year ended December 28, 2019, we recorded an income tax benefit of $5.4 million on a pre-tax loss of $108.8 million. The effective income tax rate was 4.9% for the year ended December 28, 2019. In the year ended December 29, 2018, we recorded income tax expense of $2.1 million on a pre-tax loss of $67.6 million. The effective income tax rate was (3.1)% for the year ended December 29, 2018.
In 2019, the Company's effective tax rate differed from the federal statutory tax rate primarily due to valuation allowances recorded for the Company's non-deductible interest expense as well as certain state net operating losses ("NOLs"). The Company recorded $16.7 million in income tax expense attributable to a valuation allowance recorded on the Company's non-deductible interest expense. The Company anticipates that approximately $72.0 million of the $114.2 million in interest expense will be considered non-deductible for the 2019 period. Additionally, the Company recorded $2.7 million in income tax expense attributable to state NOLs that are expected to expire prior to their utilization.
The effective income tax rate differed from the federal statutory tax rate in the year ended December 29, 2018 primarily due to the provisions established with the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). We recorded approximately $11.7 million in income tax expense attributable to certain provisions of the 2017 Tax Act. The Company recorded a valuation allowance of $6.1 million for certain U.S. federal net operating losses that are subject to the dual consolidated loss limitation rules. Additionally, the Company recorded $2.2 million in income tax expense for certain non-deductible acquisition costs attributable to the MinuteKey and Big Time acquisitions. The remaining differences between the effective income tax rate and the federal statutory rate in the year ended December 29, 2018 were attributable to state and foreign income taxes.
Year Ended December 29, 2018 vs December 30, 2017
In the year ended December 29, 2018, we recorded an income tax benefit of $2.1 million on a pre-tax loss of $67.6 million. The effective income tax rate was (3.1)% for the year ended December 29, 2018. In the year ended December 30, 2017, we recorded an income tax benefit of $84.9 million on a pre-tax loss of $26.3 million. The effective income tax rate was 323.3% for the year ended December 30, 2017.
The effective income tax rate differed from the federal statutory tax rate in the year ended December 29, 2018 primarily due to the provisions established with the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). We recorded approximately $11.7 million in income tax expense attributable to certain provisions of the 2017 Tax Act. The Company recorded a valuation allowance of $6.1 million for certain U.S. federal net operating losses that are subject to the dual consolidated loss limitation
rules. Additionally, the Company recorded $2.2 million in income tax expense for certain non-deductible acquisition costs attributable to the MinuteKey and Big Time acquisitions. The remaining differences between the effective income tax rate and the federal statutory rate in the year ended December 29, 2018 were attributable to state and foreign income taxes.
On December 22, 2017, the 2017 Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes included, among other things, a permanent corporate rate reduction to 21% from 35%, implementing a modified territorial system including a mandatory deemed repatriation on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”), and providing for additional first-year depreciation that allows full expensing of qualified property placed into service after September 27, 2017.
During 2017, the Company recorded a provisional $75 million deferred income tax benefit for the remeasurement of its net deferred tax liabilities. Additionally, the Company did not record a provision for the Transition Tax in 2017 given the lack of historical earnings in the Company's foreign subsidiaries. During 2018, the Company did not significantly adjust the provisional estimate from the provisional calculations. In 2018, the Company became subject to certain provisions of the 2017 Tax Act including computations related to Global Intangible Low Taxed Income ("GILTI"), and the IRC §163(j) interest limitation ("Interest Limitation") (see Note 6 - Income Taxes of the Notes to Consolidated Financial Statements for additional information).
Liquidity and Capital Resources
Cash Flows
The statements of cash flows reflect the changes in cash and cash equivalents for the years ended December 28, 2019, December 29, 2018, and December 30, 2017 by classifying transactions into three major categories: operating, investing, and financing activities.
Operating Activities
Net cash provided by operating activities for the year ended December 28, 2019 was approximately $52.4 million. Operating cash flows for the year ended December 28, 2019 were unfavorably impacted by lower net income driven by increased interest expense, partially offset by improvements in working capital. Net cash provided by operating activities for the year ended December 29, 2018 was approximately $7.5 million and was unfavorably impacted by lower net income driven by increased interest expense and acquisition related costs along with an increase in inventory due to commodity inflation and new business wins. This was partially offset by an increase in accounts payable due to changes in payment terms and increased inventory purchases and a decrease in accounts receivable. Net cash provided by operating activities for the year ended December 30, 2017 was approximately $82.9 million and was favorably impacted by our focus on reducing net working capital which translated to improvements in inventory and accounts payable.
Investing Activities
Net cash used for investing activities was $53.5 million, $572.6 million, and $100.1 million for the years ended December 28, 2019, December 29, 2018 and December 30, 2017, respectively. In the year ending December 28, 2019 we acquired Resharp and West Coast Washers for approximately $6.1 million. In the year ended December 29, 2018 we acquired MinuteKey and Big Time and made a final working capital true up payment for ST Fastening Systems which equated a total net cash outflow of approximately $501.0 million. Additionally, in the year ended December 30, 2017, we acquired STFS with a cash payment of $47.2 million (see Note 5 - Acquisitions of the Notes to Consolidated Financial Statements for additional information). Finally, cash was used in all periods to invest in our investment in new key duplicating kiosks and machines. In 2019, we also received $10.4 million in cash proceeds from the sale of a building and machinery in Canada and a building in Georgia.
Financing Activities
Net cash used for financing activities was $7.1 million for the year ended December 28, 2019. The borrowings on revolving credit loans provided $43.5 million. The Company used $38.7 million of cash for the repayment of revolving credit loans and $10.6 million for principal payments on the senior term loans. On November 15, 2019, we amended the ABL Revolver agreement which provided an additional $100.0 million of revolving credit, bringing the total available to $250.0 million. In connection with the amendment we paid $1.4 million in fees.
Net cash provided by financing activities was $581.9 million for the year ended December 29, 2018. On May 31, we entered into a new term credit agreement consisting of a new funded term loan of $530.0 million and $165.0 million delayed draw term
loan facility. Concurrently, we entered into a new $150.0 million asset-based revolving credit agreement. The proceeds were used to refinance in full all outstanding revolving credit and term loans under the existing credit agreement. In the third quarter of 2018, we drew $165.0 million on the delayed draw facility of the term loan to finance the MinuteKey acquisition. In the fourth quarter, we amended the credit agreement and added an additional $365.0 million in incremental term loans to finance the acquisition of Big Time. We paid approximately $20.5 million in fees associated with the refinancing activities in the year ended December 28, 2019. See Note 7 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information on the refinancing. Our revolver draws, net, were a source of cash of $88.7 million in the year ended December 28, 2019. Additionally, in the year ended December 29, 2018 we paid a dividend of $3.8 million to Holdco for the purchase of shares of Holdco stock from former members of management.
Net cash used for financing activities was $14.4 million for the year ended December 30, 2017. The borrowings on revolving credit loans provided $35.5 million. The Company used $16.0 million of cash for the repayment of revolving credit loans and $5.5 million for principal payments on the senior term loans.
Liquidity
We believe 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) position of $231.8 million as of December 28, 2019 represents a decrease of $48.2 million from the December 29, 2018 level of $280.0 million.
Contractual Obligations
Our contractual obligations as of December 28, 2019 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
|
|
(dollars in thousands)
|
Total
|
|
Less Than
One Year
|
|
1 to 3
Years
|
|
3 to 5
Years
|
|
More Than
Five Years
|
|
Junior Subordinated Debentures (1)
|
$
|
108,704
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
108,704
|
|
|
Interest on Jr Subordinated Debentures
|
94,793
|
|
|
12,231
|
|
|
24,463
|
|
|
24,463
|
|
|
33,636
|
|
|
Long Term Senior Term Loans
|
1,047,653
|
|
|
10,609
|
|
|
21,218
|
|
|
21,218
|
|
|
994,608
|
|
|
Bank Revolving Credit Facility
|
113,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
113,000
|
|
|
6.375% Senior Notes
|
330,000
|
|
|
—
|
|
|
330,000
|
|
|
—
|
|
|
—
|
|
|
KeyWorks License Agreement
|
422
|
|
|
350
|
|
|
72
|
|
|
—
|
|
|
—
|
|
|
Interest payments (2)
|
381,971
|
|
|
84,604
|
|
|
156,606
|
|
|
121,921
|
|
|
18,840
|
|
|
Operating Leases
|
114,758
|
|
|
17,525
|
|
|
29,881
|
|
|
23,761
|
|
|
43,591
|
|
|
Deferred Compensation Obligations
|
1,911
|
|
|
355
|
|
|
—
|
|
|
—
|
|
|
1,556
|
|
|
Finance Lease Obligations
|
2,551
|
|
|
873
|
|
|
1,168
|
|
|
510
|
|
|
—
|
|
|
Other Obligations
|
8,210
|
|
|
2,492
|
|
|
4,274
|
|
|
1,444
|
|
|
—
|
|
|
Uncertain Tax Position Liabilities
|
1,101
|
|
|
1,101
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total Contractual Cash Obligations (3)
|
$
|
2,205,074
|
|
|
$
|
130,140
|
|
|
$
|
567,682
|
|
|
$
|
193,317
|
|
|
$
|
1,313,935
|
|
|
|
|
|
(1)
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The Junior Subordinated Debentures liquidation value is approximately $108,704.
|
|
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|
|
(2)
|
Interest payments for borrowings under the Senior Facilities, the 6.375% Senior Notes, and Revolver borrowings. Interest payments on the variable rate Senior Term Loans were calculated using the actual interest rate of 5.70% as of December 28, 2019. Interest payments on the 6.375% Senior Notes were calculated at their fixed rate. Interest payments on the variable rate Revolver borrowings were calculated using the actual interest rate of 3.59% as of December 28, 2019.
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(3)
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All of the contractual obligations noted above are reflected on the Company's Consolidated Balance Sheet as of December 28, 2019 except for the interest payments. Contingent consideration related to the acquisition of Resharp of $18,100 is not included in the chart above due to uncertainty about timing of the payments.
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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.
Related Party Transactions
The Company has recorded aggregate management fee charges and expenses from the Oak Hill Funds and CCMP of approximately $0.6 million for each of the years ended December 28, 2019 and December 29, 2018, and $0.5 million for the year ended December 30, 2017.
We recorded proceeds from the sale of Holdco stock to members of management and the Board of Directors of $0.8 million for the year ended December 28, 2019 and $0.5 million for the year ended December 30, 2017. No such sales were recorded in the year ended December 29, 2018.
In the year ended December 29, 2018, the Company paid a dividend of approximately $3.8 million to Holdco for the purchase of 4,200 shares of Holdco stock from former members of management. No such dividends were paid in fiscal 2019 or fiscal 2017.
Gregory Mann and Gabrielle Mann are employed by the Company. The Company leases an industrial warehouse and office facility from companies under the control of the Manns. We have recorded rental expense for the lease of this facility on an arm's length basis. Our rental expense for the lease of this facility was $0.4 million for each of the years ended December 28, 2019, December 29, 2018, and December 30, 2017.
During 2019, 2018 and 2017, the Company had three leases for five properties containing industrial warehouse, manufacturing plant, and office facilities in Canada. The owners of the properties under one lease are relatives of Richard Paulin, who was employed by The Hillman Group Canada ULC until his retirement effective April 30, 2017, and the owner of the properties under the other two leases is a company which is owned by Richard Paulin and certain of his relatives. We have recorded rental expense for the three leases on an arm's length basis. Rental expense for these facilities was $0.6 million for the years ended December 28, 2019, and December 29, 2018 and $0.7 million for the year ended December 30, 2017.
Douglas J. Cahill is currently Hillman’s President and CEO and is also a former Managing Director of CCMP Capital Advisors, LP ("CCMP"). CCMP’s private equity fund CCMP Capital Investors III, L.P. (“CCMP III”), together with its related fund vehicles, owns approximately 80.4% of Holdco's outstanding common stock as of December 28, 2019. Mr. Cahill has retained a carried interest in CCMP III and the fair value of this carried interest, which is based on the overall performance of CCMP III, is contingent on several factors. As of December 28, 2019, the fair value of the carried interest is not estimable in accordance with ASC 405 - Contingencies.
Critical Accounting Policies and Estimates
Our accounting policies are more fully described in Note 2 - Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements. As disclosed in that note, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events cannot be predicted with certainty and, therefore, actual results could differ from those estimates. The following section describes our critical accounting policies.
Revenue Recognition:
Revenue is recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
We offer a variety of sales incentives to our customers primarily in the form of discounts, rebates, and slotting fees. Discounts are recognized in the Consolidated Financial Statements at the date of the related sale. Rebates are based on the revenue to date and the contractual rebate percentage to be paid. A portion of the cost of the rebate is allocated to each underlying sales transaction. Discounts, rebates, and slotting fees are included in the determination of net sales.
We also establish 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.
Our performance obligations under our 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. We used judgement in applying the revenue standard in determining the time at which to recognize revenue for the in-store services and the access to key duplicating and engraving equipment. Our obligation to provide in-store service and access to key duplicating and engraving equipment is satisfied when control of the related products is transferred. Therefore, consistent with the practice prior to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"), the entire amount of consideration related to the sale of products, in-store merchandising services, and access to key duplicating and engraving equipment is recognized upon the customer’s acceptance of the products. The revenues for all performance obligations are recognized upon the customer's acceptance of the products.
The costs to obtain a contract are insignificant, and generally contract terms do not extend beyond one year. Therefore, these costs are expensed as incurred. Freight and shipping costs and the cost of our in-store merchandising services teams are recognized in selling, general, and administrative expense when control over products is transferred to the customer.
We 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.
See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for information on disaggregated revenue by product category.
Inventory Realization:
Inventories consisting predominantly of finished goods are valued at the lower of cost or net realizable value, cost being determined principally on the weighted average cost method. The historical usage rate is the primary factor used in assessing the net realizable value of excess and obsolete inventory. A reduction in the carrying value of an inventory item from cost to net realizable value is recorded for inventory with excess on-hand quantities as determined based on historic and projected sales, product category, and stage in the product life cycle. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our excess and obsolete inventory reserve. However, if our estimates regarding excess and obsolete inventory are inaccurate, we may be exposed to losses or gains that could be material. A 5% difference in actual excess and obsolete inventory reserved for at December 28, 2019, would have affected net earnings by approximately $1.0 million in fiscal 2019.
Goodwill:
We have adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment which eliminates Step 2 from the goodwill impairment test and instead requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If, after assessing the totality of events or circumstances, we determine that the fair value of a reporting unit is less than the carrying value, then we would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
Our annual impairment assessment is performed for the reporting units as of October 1. In 2019, 2018, and 2017, an independent appraiser assessed the value of our reporting units based on a discounted cash flow model and multiple of earnings. Assumptions critical to our fair value estimates under the discounted cash flow model include the discount rate, projected average revenue growth and projected long-term growth rates in the determination of terminal values. The results of the quantitative assessments in 2019, 2018, and 2017 indicated that the fair value of each reporting unit was in excess of its carrying value.
Intangible Assets:
We evaluate our indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually or more frequently if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. In connection with the evaluation, an independent appraiser assessed the fair value of our indefinite-lived intangible assets based on a relief from royalties, excess earnings, and lost profits discounted cash flow model. Assumptions critical to our fair value estimates under the discounted cash flow model include the discount rate, projected average revenue growth and projected long-term growth rates in the determination of terminal values. An impairment charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date. No impairment charges related to indefinite-lived intangible assets were recorded in 2019, 2018, or 2017 as a result of the quantitative annual impairment test.
Income Taxes:
Deferred income taxes are computed using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Valuation allowances are provided for tax benefits where it is more likely than not that certain tax benefits will not be realized. Adjustments to valuation allowances are recorded for changes in utilization of the tax related item. For additional information, see Note 6 - Income Taxes, of the Notes to Consolidated Financial Statements.
In accordance with guidance regarding the accounting for uncertainty in income taxes, we recognize a tax position if, based solely on its technical merits, it is more likely than not to be sustained upon examination by the relevant taxing authority.
If a tax position does not meet the more likely than not recognition threshold, we do not recognize the benefit of that position in our financial statements. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements.
Business Combinations:
As we enter into business combinations, we perform acquisition accounting requirements including the following:
•Identifying the acquirer
•Determining the acquisition date
•Recognizing and measuring the identifiable assets acquired and the liabilities assumed, and
•Recognizing and measuring goodwill or a gain from a bargain purchase
We complete valuation procedures and record the resulting fair value of the acquired assets and assumed liabilities based upon the valuation of the business enterprise and the tangible and intangible assets acquired. Enterprise value allocation methodology requires management to make assumptions and apply judgment to estimate the fair value of assets acquired and liabilities assumed. If estimates or assumptions used to complete the enterprise valuation and estimates of the fair value of the acquired assets and assumed liabilities significantly differed from assumptions made, the resulting difference could materially affect the fair value of net assets.
The calculation of the fair value of the tangible assets, including property, plant and equipment, utilizes the cost approach, which computes the cost to replace the asset, less accrued depreciation resulting from physical deterioration, functional obsolescence and external obsolescence. The calculation of the fair value of the identified intangible assets are determined using cash flow models following the income approach or a discounted market-based methodology approach. Significant inputs include estimated revenue growth rates, gross margins, operating expenses, and estimated attrition, royalty and discount rates. Goodwill is recorded as the difference in the fair value of the acquired assets and assumed liabilities and the purchase price.We estimate the fair value of liabilities for contingent consideration by applying a scenario-based method, estimating (probability-weighted) payments based on the likelihood of achieving the milestones and payments corresponding to each milestone. We then estimate the present-value of the expected payments from the time at which the obligations are settled by applying a discount rate that appropriately captures a market participant’s view of the risk associated with the payments.
Recent Accounting Pronouncements:
Recently issued accounting standards are described in Note 3 - Recent Accounting Pronouncements of the Notes to Consolidated Financial Statements.
Item 7A – 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.
Based on our exposure to variable rate borrowings at December 28, 2019, 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 $10.1 million.
Foreign Currency Exchange
We are exposed to foreign exchange rate changes of the Canadian and Mexican currencies as it impacts the $149.3 million tangible and intangible net asset value of our Canadian and Mexican subsidiaries as of December 28, 2019. The foreign subsidiaries net tangible assets were $83.9 million and the net intangible assets were $65.4 million as of December 28, 2019.
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 Consolidated Financial Statements.
Item 8 – Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
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Page(s)
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Consolidated Financial Statements:
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Financial Statement Schedule:
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Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of The Hillman Companies, Inc. and its consolidated subsidiaries; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of The Hillman Companies, Inc. and its consolidated subsidiaries are being made only in accordance with authorizations of management and directors of The Hillman Companies, Inc. and its consolidated subsidiaries, as appropriate; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of The Hillman Companies, Inc. and its consolidated subsidiaries that could have a material effect on the consolidated financial statements.
Our management, with the participation of our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 28, 2019, the end of our fiscal year. Management based its assessment on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed under the direction of management.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation.
Based on its assessment, our management has concluded that our internal control over financial reporting was effective, as of December 28, 2019, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. We reviewed the results of management's assessment with the Audit Committee of The Hillman Companies, Inc.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
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/s/ DOUGLAS J. CAHILL
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/s/ ROBERT O. KRAFT
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Douglas J. Cahill
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Robert O. Kraft
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President and Chief Executive Officer
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Chief Financial Officer
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Dated:
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March 27, 2020
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Dated:
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March 27, 2020
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
The Hillman Companies, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of The Hillman Companies, Inc. and subsidiaries (the Company) as of December 28, 2019 and December 29, 2018, the related consolidated statements of comprehensive income (loss), stockholder’s equity, and cash flows for each of the years in the three‑year period ended December 28, 2019, and the related notes and financial statement schedule II - Valuation Accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 28, 2019, in conformity with U.S. generally accepted accounting principles.
Changes in Accounting Principles
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases as of December 30, 2018 due to the adoption of Accounting Standards Update (ASU) 2016-12, Leases (Topic 842).
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition as of December 31, 2017 due to the modified retrospective adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2010.
Cincinnati, Ohio
March 27, 2020
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
|
|
|
|
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|
|
|
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|
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December 28, 2019
|
|
December 29, 2018
|
|
ASSETS
|
|
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|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
19,973
|
|
|
$
|
28,234
|
|
|
Accounts receivable, net of allowances of $1,891 ($846 - 2018)
|
88,374
|
|
|
110,799
|
|
|
Inventories, net
|
323,496
|
|
|
320,281
|
|
|
Other current assets
|
8,828
|
|
|
18,727
|
|
|
Total current assets
|
440,671
|
|
|
478,041
|
|
|
Property and equipment, net of accumulated depreciation of $179,791 ($131,169 - 2018)
|
205,160
|
|
|
208,279
|
|
|
Goodwill
|
819,077
|
|
|
803,847
|
|
|
Other intangibles, net of accumulated amortization of $232,060 ($176,677 - 2018)
|
882,430
|
|
|
930,525
|
|
|
Operating lease right of use assets
|
81,613
|
|
|
—
|
|
|
Deferred tax asset
|
702
|
|
|
—
|
|
|
Other assets
|
11,557
|
|
|
10,778
|
|
|
Total assets
|
$
|
2,441,210
|
|
|
$
|
2,431,470
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
125,042
|
|
|
$
|
135,059
|
|
|
Current portion of debt and capital lease obligations
|
11,358
|
|
|
10,985
|
|
|
Current portion of operating lease liabilities
|
11,459
|
|
|
—
|
|
|
Accrued expenses:
|
|
|
|
|
Salaries and wages
|
12,937
|
|
|
9,881
|
|
|
Pricing allowances
|
6,553
|
|
|
5,404
|
|
|
Income and other taxes
|
5,248
|
|
|
3,325
|
|
|
Interest
|
14,726
|
|
|
15,423
|
|
|
Other accrued expenses
|
21,545
|
|
|
17,941
|
|
|
Total current liabilities
|
208,868
|
|
|
198,018
|
|
|
Long-term debt
|
1,584,289
|
|
|
1,586,084
|
|
|
Deferred income taxes, net
|
196,437
|
|
|
200,696
|
|
|
Operating lease liabilities
|
73,227
|
|
|
—
|
|
|
Other non-current liabilities
|
33,287
|
|
|
7,565
|
|
|
Total liabilities
|
2,096,108
|
|
|
1,992,363
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 15)
|
—
|
|
|
—
|
|
|
Stockholder's Equity:
|
|
|
|
|
Preferred stock, $.01 par, 5,000 shares authorized, none issued and outstanding at December 28, 2019 and December 29, 2018
|
—
|
|
|
—
|
|
|
Common stock, $.01 par, 5,000 shares authorized, issued and outstanding at December 28, 2019 and December 29, 2018
|
—
|
|
|
—
|
|
|
Additional paid-in capital
|
553,359
|
|
|
549,528
|
|
|
Accumulated deficit
|
(176,217
|
)
|
|
(72,831
|
)
|
|
Accumulated other comprehensive loss
|
(32,040
|
)
|
|
(37,590
|
)
|
|
Total stockholder's equity
|
345,102
|
|
|
439,107
|
|
|
Total liabilities and stockholder's equity
|
$
|
2,441,210
|
|
|
$
|
2,431,470
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended December 30, 2017
|
|
Net sales
|
$
|
1,214,362
|
|
|
$
|
974,175
|
|
|
$
|
838,368
|
|
|
Cost of sales (exclusive of depreciation and amortization shown separately below)
|
693,881
|
|
|
537,885
|
|
|
455,717
|
|
|
Selling, general and administrative expenses
|
382,131
|
|
|
320,543
|
|
|
274,044
|
|
|
Depreciation
|
65,658
|
|
|
46,060
|
|
|
34,016
|
|
|
Amortization
|
58,910
|
|
|
44,572
|
|
|
38,109
|
|
|
Management fees to related party
|
562
|
|
|
546
|
|
|
519
|
|
|
Other (income) expense
|
5,525
|
|
|
(2,874
|
)
|
|
459
|
|
|
Income from operations
|
7,695
|
|
|
27,443
|
|
|
35,504
|
|
|
Interest expense, net
|
101,613
|
|
|
70,545
|
|
|
51,018
|
|
|
Interest expense on junior subordinated debentures
|
12,608
|
|
|
12,608
|
|
|
12,608
|
|
|
Investment income on trust common securities
|
(378
|
)
|
|
(378
|
)
|
|
(378
|
)
|
|
Loss (gain) on mark-to-market adjustment of interest rate swap
|
2,608
|
|
|
607
|
|
|
(1,481
|
)
|
|
Refinancing costs
|
—
|
|
|
11,632
|
|
|
—
|
|
|
Loss before income taxes
|
(108,756
|
)
|
|
(67,571
|
)
|
|
(26,263
|
)
|
|
Income tax expense (benefit)
|
(5,370
|
)
|
|
2,070
|
|
|
(84,911
|
)
|
|
Net income (loss)
|
$
|
(103,386
|
)
|
|
$
|
(69,641
|
)
|
|
$
|
58,648
|
|
|
Net income (loss) from above
|
$
|
(103,386
|
)
|
|
$
|
(69,641
|
)
|
|
$
|
58,648
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
5,550
|
|
|
(11,053
|
)
|
|
7,845
|
|
|
Total other comprehensive income (loss)
|
5,550
|
|
|
(11,053
|
)
|
|
7,845
|
|
|
Comprehensive income (loss)
|
$
|
(97,836
|
)
|
|
$
|
(80,694
|
)
|
|
$
|
66,493
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended
December 30, 2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(103,386
|
)
|
|
$
|
(69,641
|
)
|
|
$
|
58,648
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
124,568
|
|
|
90,632
|
|
|
72,125
|
|
|
(Gain) loss on dispositions of property and equipment
|
(573
|
)
|
|
(5,988
|
)
|
|
1,140
|
|
|
Impairment of long lived assets
|
7,887
|
|
|
837
|
|
|
1,569
|
|
|
Deferred income taxes
|
(5,679
|
)
|
|
394
|
|
|
(85,874
|
)
|
|
Deferred financing and original issue discount amortization
|
3,726
|
|
|
2,455
|
|
|
2,530
|
|
|
Loss on debt restructuring
|
—
|
|
|
11,632
|
|
|
—
|
|
|
Stock-based compensation expense
|
2,981
|
|
|
1,590
|
|
|
2,484
|
|
|
Gain on disposition of Australia assets
|
—
|
|
|
—
|
|
|
(638
|
)
|
|
Other non-cash interest and change in value of interest rate swap
|
2,608
|
|
|
607
|
|
|
(1,481
|
)
|
|
Changes in operating items:
|
|
|
|
|
|
|
Accounts receivable
|
22,863
|
|
|
7,934
|
|
|
(2,777
|
)
|
|
Inventories
|
(3,205
|
)
|
|
(68,978
|
)
|
|
13,800
|
|
|
Other assets
|
2,878
|
|
|
(1,496
|
)
|
|
517
|
|
|
Accounts payable
|
(11,975
|
)
|
|
41,092
|
|
|
9,305
|
|
|
Other accrued liabilities
|
9,666
|
|
|
(3,523
|
)
|
|
11,562
|
|
|
Net cash provided by operating activities
|
52,359
|
|
|
7,547
|
|
|
82,910
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired
|
(6,135
|
)
|
|
(500,989
|
)
|
|
(47,188
|
)
|
|
Capital expenditures
|
(57,753
|
)
|
|
(71,621
|
)
|
|
(51,410
|
)
|
|
Proceeds from sale of property and equipment
|
10,400
|
|
|
—
|
|
|
—
|
|
|
Other investing activities
|
—
|
|
|
—
|
|
|
(1,500
|
)
|
|
Net cash used for investing activities
|
(53,488
|
)
|
|
(572,610
|
)
|
|
(100,098
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Borrowings on senior term loans, net of discount
|
—
|
|
|
1,050,050
|
|
|
—
|
|
|
Repayments of senior term loans
|
(10,608
|
)
|
|
(532,488
|
)
|
|
(5,500
|
)
|
|
Borrowings of revolving credit loans
|
43,500
|
|
|
165,550
|
|
|
35,500
|
|
|
Repayments of revolving credit loans
|
(38,700
|
)
|
|
(76,850
|
)
|
|
(16,000
|
)
|
|
Financing fees
|
(1,412
|
)
|
|
(20,520
|
)
|
|
—
|
|
|
Principal payments under capitalized lease obligations
|
(683
|
)
|
|
(235
|
)
|
|
(124
|
)
|
|
Dividend to Holdco
|
—
|
|
|
(3,780
|
)
|
|
—
|
|
|
Proceeds from exercise of stock options
|
100
|
|
|
200
|
|
|
—
|
|
|
Proceeds from sale of Holdco stock
|
750
|
|
|
—
|
|
|
500
|
|
|
Net cash provided by (used for) financing activities
|
(7,053
|
)
|
|
581,927
|
|
|
14,376
|
|
|
Effect of exchange rate changes on cash
|
(79
|
)
|
|
1,433
|
|
|
(1,357
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
(8,261
|
)
|
|
18,297
|
|
|
(4,169
|
)
|
|
Cash and cash equivalents at beginning of period
|
28,234
|
|
|
9,937
|
|
|
14,106
|
|
|
Cash and cash equivalents at end of period
|
$
|
19,973
|
|
|
$
|
28,234
|
|
|
$
|
9,937
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained Earnings (Accumulated Deficit)
|
|
Accumulated
Other
Comprehensive
(Loss)
|
|
Total
Stockholder's
Equity
|
|
Balance at December 31, 2016
|
$
|
—
|
|
|
$
|
548,534
|
|
|
$
|
(56,226
|
)
|
|
$
|
(34,382
|
)
|
|
$
|
457,926
|
|
|
Net Income
|
—
|
|
|
—
|
|
|
58,648
|
|
|
—
|
|
|
58,648
|
|
|
Stock-based compensation
|
—
|
|
|
2,484
|
|
|
—
|
|
|
—
|
|
|
2,484
|
|
|
Proceeds from sale of Holdco shares of stock
|
—
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
|
Change in cumulative foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
7,845
|
|
|
7,845
|
|
|
Balance at December 30, 2017
|
$
|
—
|
|
|
$
|
551,518
|
|
|
$
|
2,422
|
|
|
$
|
(26,537
|
)
|
|
$
|
527,403
|
|
|
Net Loss
|
—
|
|
|
—
|
|
|
(69,641
|
)
|
|
—
|
|
|
(69,641
|
)
|
|
Stock-based compensation
|
—
|
|
|
1,590
|
|
|
—
|
|
|
—
|
|
|
1,590
|
|
|
Proceeds from exercise of stock options
|
—
|
|
|
200
|
|
|
—
|
|
|
—
|
|
|
200
|
|
|
Dividend to Holdco
|
—
|
|
|
(3,780
|
)
|
|
—
|
|
|
—
|
|
|
(3,780
|
)
|
|
Cumulative effect of change in accounting principals
|
—
|
|
|
—
|
|
|
(5,612
|
)
|
|
—
|
|
|
(5,612
|
)
|
|
Change in cumulative foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,053
|
)
|
|
(11,053
|
)
|
|
Balance at December 29, 2018
|
$
|
—
|
|
|
$
|
549,528
|
|
|
$
|
(72,831
|
)
|
|
$
|
(37,590
|
)
|
|
$
|
439,107
|
|
|
Net Loss
|
—
|
|
|
—
|
|
|
(103,386
|
)
|
|
—
|
|
|
(103,386
|
)
|
|
Stock-based compensation
|
—
|
|
|
2,981
|
|
|
—
|
|
|
—
|
|
|
2,981
|
|
|
Proceeds from exercise of stock options
|
—
|
|
|
100
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
Proceeds from sale of Holdco shares of stock
|
—
|
|
|
750
|
|
|
—
|
|
|
—
|
|
|
750
|
|
|
Change in cumulative foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
5,550
|
|
|
5,550
|
|
|
Balance at December 28, 2019
|
$
|
—
|
|
|
$
|
553,359
|
|
|
$
|
(176,217
|
)
|
|
$
|
(32,040
|
)
|
|
$
|
345,102
|
|
The Notes to Consolidated Financial Statements are an integral part of these statements.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of The Hillman Companies, Inc. and its wholly-owned subsidiaries (collectively “Hillman” or the “Company”). 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. The Consolidated Financial Statements included herein have been prepared in accordance with accounting standards generally accepted in the United States of America (U.S. GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. References to 2019, 2018, and 2017 are for fiscal years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
We are a wholly-owned subsidiary of HMAN Group Holdings Inc. (“Holdco”). Affiliates of CCMP Capital Advisors, LLC (“CCMP”) own 80.4% of Holdco's outstanding common stock, affiliates of 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”) own 16.9% of Holdco's outstanding common stock, and certain current and former members of management own 2.7% of Holdco's outstanding common stock.
The Company has a 52-53 week fiscal year ending on the last Saturday in December 2017. In a 52 week fiscal year, each of the Company’s quarterly periods will comprise 13 weeks. The additional week in a 53 week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. The Company’s first 53 week fiscal year will occur in fiscal year 2022.
Nature of Operations:
The Company is comprised of three separate operating business segments: (1) Fastening, Hardware, and Personal Protective Solutions, (2) Consumer Connected Solutions, and (3) Canada.
In the fourth quarter of 2019, the Company implemented a plan to restructure the management and operations of our U.S. business to achieve synergies and cost savings associated with the recent acquisitions. The restructuring plan includes management realignment, integration of sales and operations functions, and strategic review of our product offerings (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional details). In connection with the restructuring, and to better support the review of our results, the Company revised the classification of certain product categories and associated costs within the operating segment reporting structure. In the fourth quarter of 2019, the Company moved from a geographic segment structure to a hybrid product based and geographic structure. This change aligns the reportable segments with the information reviewed by the chief operating decision maker. Concurrent with this change, the Company has revised prior period segment information to be consistent with the current period presentation. There was no impact on previously reported consolidated revenues, total operating expenditures, operating income or net income as a result of these changes.
Hillman Group provides and, on a limited basis, produces products such as fasteners and related hardware items; threaded rod and metal shapes; keys, key duplication systems, and accessories; personal protective equipment such as gloves and eye-wear; builder's hardware; and identification items, such as tags and letters, numbers, and signs, to retail outlets, primarily hardware stores, home centers and mass merchants, pet supply stores, grocery stores, and drug stores. The Canada segment also produces fasteners, stampings, fittings, and processes threaded parts for automotive suppliers, industrial Original Equipment Manufacturers (“OEMs”), and industrial distributors.
On November 8, 2017, the Company entered into an Asset Purchase Agreement with Hargis Industries, LP doing business as ST Fastening Systems ("STFS") and other related parties, pursuant to which Hillman acquired substantially all of the assets and assumed certain liabilities of STFS. STFS, located in Tyler, Texas, specializes in manufacturing and distributing threaded self-drilling fasteners, foam closure strips, and other accessories to the steel-frame, post-frame, and residential building markets. Pursuant to the terms of the Asset Purchase Agreement, the Company paid a purchase price of $47,339 which reflects finalized purchase price accounting adjustments as of December 29, 2018. STFS resides within the Company's Fastening, Hardware, and Personal Protection Solutions reportable segment. See Note 5 - Acquisitions for additional information.
On August 10, 2018, the Company completed the acquisition of Minute Key Holdings, Inc. ("MinuteKey"), an innovative leader in self-service key duplicating kiosks for a total consideration of $156,289, which reflects finalized purchase accounting adjustments as of December 28, 2019. MinuteKey has existing operations in the United States and Canada and be included in Hillman's Consumer Connected Solutions reportable segments. See Note 5 - Acquisitions for additional information.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
On October 1, 2018, the Company completed the acquisition of Big Time Products ("Big Time"), a leading provider of personal protective and work gear products ranging from work gloves, tool belts and jobsite storage, for total consideration of $348,834, which reflects finalized purchase accounting adjustments as of December 28, 2019. Big Time has existing operations throughout North America and its operating results reside within the Company's Fastening, Hardware, and Personal Protective Solutions reportable segment. See Note 5 - Acquisitions for additional information.
On August 16, 2019, the Company acquired the assets of Sharp Systems, LLC ("Resharp"), a California-based innovative developer of automated knife sharpening systems, for a total purchase price of $21,100. Resharp has existing operations in the United States and its operating results reside within the Company's Consumer Connected Solutions reportable segment. See Note 5 - Acquisitions for additional information.
Reclassifications:
Certain amounts in the prior year Consolidated Financial Statements and in the Notes to Consolidated Financial Statements were reclassified to conform to the current year’s presentation. The reclassifications were primarily related to our efforts to realign our operating segment structure to conform with management review of our results. Additionally, the Company reclassified the mark-to-market adjustment of our interest rate swap from other income/expense to its own line on the income statement below income from operations. This had no impact on the prior periods’ statement of financial position, net income (loss), cash flows, or stockholder’s equity.
2. Summary of Significant Accounting Policies:
Cash and Cash Equivalents:
Cash and cash equivalents consist of commercial paper, U.S. Treasury obligations, and other liquid securities purchased with initial maturities less than 90 days and are stated at cost which approximates fair value. The Company has foreign bank balances of approximately $9,301 and $6,943 at December 28, 2019 and December 29, 2018, respectively. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances. Management believes its credit risk is minimal.
Restricted Investments:
The Company's restricted investments are trading securities carried at fair market value which represent assets held in a Rabbi Trust to fund deferred compensation liabilities owed to the Company's employees. The current portion of the investments is included in other current assets and the long term portion in other assets on the accompanying Consolidated Balance Sheets. See Note 9 - Deferred Compensation Plan.
Accounts Receivable and Allowance for Doubtful Accounts:
The Company establishes the allowance for doubtful accounts using the specific identification method and also provides a reserve in the aggregate. The estimates for calculating the aggregate reserve are based on historical collection experience. Increases to the allowance for doubtful accounts result in a corresponding expense. The Company writes off individual accounts receivable when collection becomes improbable. The allowance for doubtful accounts was $1,891 and $846 as of December 28, 2019 and December 29, 2018, respectively.
In the years ended December 28, 2019 and December 29, 2018, the Company entered into agreements to sell, on an ongoing basis and without recourse, certain trade accounts receivable. The buyer is responsible for servicing the receivables. The sale of the receivables is accounted for in accordance with Financial Accounting Standards Board (“FASB”) ASC 860, Transfers and Servicing. Under that guidance, receivables are considered sold when they are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the receivables, and the Company has surrendered control over the transferred receivables. The Company has received proceeds from the sales of trade accounts receivable of approximately $292,432 and $215,833 for the years ended December 28, 2019 and December 29, 2018, respectively, and has included the proceeds in net cash provided by operating activities in the Consolidated Statements of Cash Flows. Related to the sale of accounts receivable, the Company recorded losses of approximately $2,923 and $2,233 for the years ended December 28, 2019 and December 29, 2018, respectively.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Inventories:
Inventories consisting predominantly of finished goods are valued at the lower of cost or net realizable value, cost being determined principally on the weighted average cost method. The historical usage rate is the primary factor used in assessing the net realizable value of excess and obsolete inventory. A reduction in the carrying value of an inventory item from cost to net realizable value is recorded for inventory with excess on-hand quantities as determined based on historic and projected sales, product category, and stage in the product life cycle.
Property and Equipment:
Property and equipment are carried at cost and include expenditures for new facilities and major renewals. For financial accounting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets, generally two to 25 years. Assets acquired under capital leases are depreciated over the terms of the related leases. Maintenance and repairs are charged to expense as incurred. The Company capitalizes certain costs that are directly associated with the development of internally developed software, representing the historical cost of these assets. Once the software is completed and placed into service, such costs are amortized over the estimated useful lives. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts, and the resulting gain or loss is reflected in income (loss) from operations.
Property and equipment, net, consists of the following at December 28, 2019 and December 29, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
|
|
|
|
|
(Years)
|
|
2019
|
|
2018
|
|
Land
|
n/a
|
|
$
|
—
|
|
|
$
|
20
|
|
|
Buildings
|
25
|
|
—
|
|
|
341
|
|
|
Leasehold improvements
|
life of lease
|
|
10,982
|
|
|
8,273
|
|
|
Machinery and equipment
|
2-10
|
|
308,096
|
|
|
271,061
|
|
|
Computer equipment and software
|
2-5
|
|
60,412
|
|
|
53,471
|
|
|
Furniture and fixtures
|
6-8
|
|
2,749
|
|
|
2,629
|
|
|
Construction in process
|
|
|
2,712
|
|
|
3,653
|
|
|
Property and equipment, gross
|
|
|
384,951
|
|
|
339,448
|
|
|
Less: Accumulated depreciation
|
|
|
179,791
|
|
|
131,169
|
|
|
Property and equipment, net
|
|
|
$
|
205,160
|
|
|
$
|
208,279
|
|
Goodwill:
The Company has adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test and instead requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If, after assessing the totality of events or circumstances, the Company determines that the fair value of a reporting unit is less than the carrying value, then the Company would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The Company’s annual impairment assessment is performed for its reporting units as of October 1st. An independent appraiser assessed the value of the reporting units based on a discounted cash flow model and multiple of earnings. Assumptions critical to our fair value estimates under the discounted cash flow model include the discount rate, projected average revenue growth and projected long-term growth rates in the determination of terminal values. The results of the quantitative assessment in 2019, 2018, and 2017 indicated that the fair value of each reporting unit was in excess of its carrying value. Therefore goodwill was not impaired as of our annual testing dates. In our annual review of goodwill for impairment in the fourth quarter of 2019, the fair value of each reporting unit exceeded its carrying value by over 5% of its carrying value.
No impairment charges were recorded in the years ended December 28, 2019, December 29, 2018, or December 30, 2017.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Goodwill amounts by reportable segment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at
|
|
|
|
|
|
|
|
|
|
Goodwill at
|
|
|
|
December 29, 2018
|
|
Acquisitions(1)
|
|
Disposals
|
|
Adjustments(2)
|
|
Other(3)
|
|
December 28, 2019
|
|
Fastening, Hardware, and Personal Protection
|
|
$
|
564,143
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,540
|
|
|
$
|
164
|
|
|
$
|
567,847
|
|
|
Consumer Connected Solutions
|
|
211,766
|
|
|
9,382
|
|
|
—
|
|
|
948
|
|
|
—
|
|
|
222,096
|
|
|
Canada
|
|
27,938
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,196
|
|
|
29,134
|
|
|
Total
|
|
$
|
803,847
|
|
|
$
|
9,382
|
|
|
$
|
—
|
|
|
$
|
4,488
|
|
|
$
|
1,360
|
|
|
$
|
819,077
|
|
|
|
|
|
(1)
|
See Note 5 - Acquisitions for additional information regarding the Resharp acquisition.
|
|
|
|
|
(2)
|
These amounts related to opening balance sheet adjustments from the acquisition of MinuteKey and Big Time. These adjustments were primarily related to $2,087 increase in inventory reserve and a $1,106 increase in assumed liabilities for Big Time, as well as a $633 increase in assumed liabilities for MinuteKey. These acquisitions were completed in the third and fourth quarter of 2018, respectively and purchase price accounting adjustments are finalized as of the current period.
|
|
|
|
|
(3)
|
The "Other" change to goodwill relates to adjustments resulting from fluctuations in foreign currency exchange rates for the Canada and Mexico reporting units.
|
Intangible Assets:
Intangible assets are stated at the lower of cost or fair value. With the exception of certain trade names, intangible assets are amortized on a straight-line basis over periods ranging from 5 to 20 years, representing the period over which the Company expects to receive future economic benefits from these assets.
Other intangibles, net, as of December 28, 2019 and December 29, 2018 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Useful Life
(Years)
|
|
December 28, 2019
|
|
December 29, 2018
|
|
Customer relationships
|
13-20
|
|
$
|
941,305
|
|
|
$
|
939,880
|
|
|
Trademarks - Indefinite
|
Indefinite
|
|
85,517
|
|
|
85,228
|
|
|
Trademarks - Other
|
5-15
|
|
26,700
|
|
|
26,700
|
|
|
Technology and patents
|
7-12
|
|
60,968
|
|
|
55,394
|
|
|
Intangible assets, gross
|
|
|
1,114,490
|
|
|
1,107,202
|
|
|
Less: Accumulated amortization
|
|
|
232,060
|
|
|
176,677
|
|
|
Intangible assets, net
|
|
|
$
|
882,430
|
|
|
$
|
930,525
|
|
Estimated annual amortization expense for intangible assets subject to amortization at December 28, 2019 for the next five fiscal years is as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Amortization Expense
|
|
2020
|
|
$
|
59,262
|
|
|
2021
|
|
$
|
59,262
|
|
|
2022
|
|
$
|
59,262
|
|
|
2023
|
|
$
|
59,262
|
|
|
2024
|
|
$
|
59,262
|
|
The Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually or more frequently if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
intangible asset is below its carrying amount. In connection with the evaluation, an independent appraiser assessed the fair value of our indefinite-lived intangible assets based on a relief from royalties model. An impairment charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date. No impairment charges related to indefinite-lived intangible assets were recorded by the Company in 2019, 2018, or 2017 as a result of the quantitative annual impairment test.
Long-Lived Assets:
The Company evaluates its long-lived assets, including definite-lived intangibles assets, for impairment including an evaluation based on the estimated undiscounted future cash flows as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. In the year ended December 28, 2019, the Company recorded an impairment charge of $7,887 related to the loss on the disposal of our FastKey self-service duplicating kiosks and related assets in our Consumer Connected Solutions operating segment. In the year ended December 29, 2018, the Company recorded an impairment charge of $837 related to exiting certain lines of business in our Canada segment, see Note 14 - Restructuring for more details. In the fiscal year ended December 30, 2017, the Company recorded impairment charges of $1,569 related to the exit of a pilot program in the kiosk business in our Consumer Connected Solutions operating segment. All of the aforementioned impairment charges incurred were included within the respective other income/expense on the Consolidated Statements of Comprehensive Income (Loss). Approximately 95% of the Company’s long-lived assets are held within the United States.
Income Taxes:
Deferred income taxes are computed using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Valuation allowances are provided for tax benefits where management estimates it is more likely than not that certain tax benefits will not be realized. Adjustments to valuation allowances are recorded for changes in utilization of the tax related item. See Note 6 - Income Taxes for additional information.
In accordance with guidance regarding the accounting for uncertainty in income taxes, the Company recognizes a tax position if, based solely on its technical merits, it is more likely than not to be sustained upon examination by the relevant taxing authority. If a tax position does not meet the more likely than not recognition threshold, the Company does not recognize the benefit of that position in its Consolidated Financial Statements. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to be recognized in the Consolidated Financial Statements.
Contingent Consideration:
Contingent Consideration relates to the potential payment for an acquisition that is contingent upon the achievement of the acquired business meeting certain product development milestones and/or certain financial performance milestones. The Company records contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred. The estimated fair value of the contingent consideration was determined using a Monte Carlo analysis examining the frequency and mean value of the resulting 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 assumptions utilized in the calculation based on financial performance milestones include projected revenue and/or EBITDA amounts, volatility and discount rates. For potential payments related to product development milestones, we estimated the fair value based on the probability of achievement of such milestones. The assumptions utilized in the calculation of the acquisition date fair value include probability of success and the discount rates. Contingent consideration involves certain assumptions requiring significant judgment and actual results may differ from assumed and estimated amounts.
Risk Insurance Reserves:
The Company self-insures our product liability, automotive, workers' compensation, and general liability losses up to $250 per occurrence. Our policy is to estimate reserves based upon a number of factors, including known claims, estimated incurred but not reported claims, and third-party actuarial analysis. The third-party actuarial analysis is based on historical information
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
along with certain assumptions about future events. These reserves are classified as other current and other long-term liabilities within the balance sheets.
The Company self-insures our 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.
Retirement Benefits:
Certain employees of the Company are covered under a profit-sharing and retirement savings plan. The plan provides for a matching contribution for eligible employees of 50% of each dollar contributed by the employee up to 6% of the employee's compensation. In addition, the plan provides an annual contribution in amounts authorized by the Board of Directors, subject to the terms and conditions of the plan.
Hillman Canada sponsors a Deferred Profit Sharing Plan (“DPSP”) and a Group Registered Retirement Savings Plan (“RRSP”) for all qualified, full-time employees, with at least three months of continuous service. DPSP is an employer-sponsored profit sharing plan registered as a trust with the Canada Revenue Agency (“CRA”). On a periodic basis, Hillman Canada shares business profits with employees by contributing to the DPSP on each employee's behalf. Employees do not contribute to the DPSP. There is no minimum required contribution; however, DPSPs are subject to maximum contribution limits set by the CRA. The DPSP is offered in conjunction with a RRSP. All eligible employees may contribute an additional voluntary amount of up to eight percent of the employee's gross earnings. Hillman Canada is required to match 100% of all employee contributions up to 2% of the employee's compensation. The assets of the RRSP are held separately from those of Hillman Canada in independently administered funds.
Retirement benefit costs were $2,725, $2,567, and $2,222 in the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
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 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 rebate 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 HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The following table disaggregates our revenue by product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fastening, Hardware, and Personal Protective Solutions
|
|
Consumer Connected Solutions
|
|
Canada
|
|
Total Revenue
|
|
Year Ended December 28, 2019
|
|
|
|
|
|
|
|
|
Fastening and Hardware
|
$
|
607,247
|
|
|
$
|
—
|
|
|
$
|
121,242
|
|
|
$
|
728,489
|
|
|
Personal Protective
|
245,769
|
|
|
—
|
|
|
—
|
|
|
245,769
|
|
|
Keys and Key Accessories
|
—
|
|
|
185,451
|
|
|
4,009
|
|
|
189,460
|
|
|
Engraving
|
—
|
|
|
50,613
|
|
|
9
|
|
|
50,622
|
|
|
Resharp
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
|
Consolidated
|
$
|
853,016
|
|
|
$
|
236,086
|
|
|
$
|
125,260
|
|
|
$
|
1,214,362
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 29, 2018
|
|
|
|
|
|
|
|
|
Fastening and Hardware
|
$
|
581,269
|
|
|
$
|
—
|
|
|
$
|
137,186
|
|
|
$
|
718,455
|
|
|
Personal Protective
|
55,448
|
|
|
—
|
|
|
—
|
|
|
55,448
|
|
|
Keys and Key Accessories
|
—
|
|
|
143,898
|
|
|
4,217
|
|
|
148,115
|
|
|
Engraving
|
—
|
|
|
52,145
|
|
|
12
|
|
|
52,157
|
|
|
Resharp
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consolidated
|
$
|
636,717
|
|
|
$
|
196,043
|
|
|
$
|
141,415
|
|
|
$
|
974,175
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 30, 2017
|
|
|
|
|
|
|
|
|
Fastening and Hardware
|
$
|
528,969
|
|
|
$
|
—
|
|
|
$
|
133,082
|
|
|
$
|
662,051
|
|
|
Personal Protective
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Keys and Key Accessories
|
—
|
|
|
115,924
|
|
|
4,706
|
|
|
120,630
|
|
|
Engraving
|
—
|
|
|
55,674
|
|
|
13
|
|
|
55,687
|
|
|
Resharp
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consolidated
|
$
|
528,969
|
|
|
$
|
171,598
|
|
|
$
|
137,801
|
|
|
$
|
838,368
|
|
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The following table disaggregates our revenue by geographic location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fastening, Hardware, and Personal Protective Solutions
|
|
Consumer Connected Solutions
|
|
Canada
|
|
Total Revenue
|
|
Year Ended December 28, 2019
|
|
|
|
|
|
|
|
|
United States
|
$
|
835,957
|
|
|
$
|
234,216
|
|
|
$
|
—
|
|
|
$
|
1,070,173
|
|
|
Canada
|
5,905
|
|
|
1,870
|
|
|
125,260
|
|
|
133,035
|
|
|
Mexico
|
11,154
|
|
|
—
|
|
|
—
|
|
|
11,154
|
|
|
Consolidated
|
$
|
853,016
|
|
|
$
|
236,086
|
|
|
$
|
125,260
|
|
|
$
|
1,214,362
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 29, 2018
|
|
|
|
|
|
|
|
|
United States
|
$
|
626,490
|
|
|
$
|
195,538
|
|
|
$
|
—
|
|
|
$
|
822,028
|
|
|
Canada
|
1,944
|
|
|
505
|
|
|
141,415
|
|
|
143,864
|
|
|
Mexico
|
8,283
|
|
|
—
|
|
|
—
|
|
|
8,283
|
|
|
Consolidated
|
$
|
636,717
|
|
|
$
|
196,043
|
|
|
$
|
141,415
|
|
|
$
|
974,175
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 30, 2017
|
|
|
|
|
|
|
|
|
United States
|
$
|
522,002
|
|
|
$
|
171,598
|
|
|
$
|
—
|
|
|
$
|
693,600
|
|
|
Canada
|
—
|
|
|
—
|
|
|
137,801
|
|
|
137,801
|
|
|
Mexico
|
6,967
|
|
|
—
|
|
|
—
|
|
|
6,967
|
|
|
Consolidated
|
$
|
528,969
|
|
|
$
|
171,598
|
|
|
$
|
137,801
|
|
|
$
|
838,368
|
|
Our revenue by geography is allocated based on the location of our sales operations. Our Fastening, Hardware, and Personal Protective Solutions contains sales of Big Time personal protective equipment into Canada. Our Consumer Connected Solutions contains sales of MinuteKey Canada.
Fastening, Hardware, and Personal 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.
Consumer Connected 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. Judgment was required in applying the new revenue standard in determining the time at which to recognize revenue for the in-store services and the access to key duplicating and engraving equipment. The Company’s obligation to provide in-store service and access to key duplicating and engraving equipment is satisfied when control of the related products is transferred. Therefore, consistent with the practice prior to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"), the entire amount of consideration related to the sale of products, in-store merchandising services, and access to key duplicating and engraving
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
equipment is recognized upon the customer’s acceptance of the products. The revenues for all performance obligations are recognized upon the customer's acceptance of the products.
The costs to obtain a contract are insignificant, and generally contract terms do not extend beyond one year. Therefore, these costs are expensed as incurred. Freight and shipping costs and the cost of our in-store merchandising services teams are recognized in selling, general, and administrative expense when control over products is transferred to the customer.
The Company used the practical expedient regarding the existence of a significant financing component as payments are due in less than one year after delivery of the products.
Shipping and Handling:
The costs incurred to ship product to customers, including freight and handling expenses, are included in selling, general, and administrative (“SG&A”) expenses on the Company's Consolidated Statements of Comprehensive Income (Loss).
Shipping and handling costs were $47,713, $42,458, and $39,205 in the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
Research and Development:
The Company expenses research and development costs consisting primarily of internal wages and benefits in connection with improvements to the Company's fastening product lines along with the key duplicating and engraving machines. The Company's research and development costs were $2,075, $2,181, and $2,216 in the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
Common Stock:
The Hillman Companies, Inc. has one class of common stock. All outstanding shares of The Hillman Companies, Inc. common stock are owned by Holdco. The management shareholders of Holdco do not have the ability to put their shares back to Holdco.
Stock Based Compensation:
The Company has a stock-based employee compensation plan pursuant to which Holdco may grant options, stock appreciation rights, restricted stock, and other stock-based awards. Hillman reflects the options granted by HoldCo in its stand-alone Consolidated Financial Statements in accordance with ASC 718. The Company uses a Black-Scholes option pricing model to determine the fair value of stock options on the dates of grant. The Black-Scholes pricing model requires various assumptions, including expected term, which is based on our historical experience and expected volatility which is estimated based on the average historical volatility of similar entities with publicly traded shares. The Company also makes assumptions regarding the risk-free interest rate and the expected dividend yield. The risk-free interest rate is based on the U.S. Treasury interest rate whose term is consistent with the expected term of the share-based award. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to do so in the future. Determining the fair value of stock options at the grant date requires judgment, including estimates for the expected life of the share-based award, stock price volatility, dividend yield, and interest rate. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
Stock-based compensation expense is recognized using a fair value based recognition method. Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite vesting period or performance period of the award on a straight-line basis. The stock-based compensation expense is recorded in general and administrative expenses. The plan is more fully described in Note 11 - Stock Based Compensation.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Fair Value of Financial Instruments:
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. A fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. Whenever possible, quoted prices in active markets are used to determine the fair value of the Company's financial instruments.
Derivatives and Hedging:
The Company uses derivative financial instruments to manage its exposures to (1) interest rate fluctuations on its 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. The Company enters into derivative instrument transactions with financial institutions acting as the counter-party. The Company does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.
The relationships between hedging instruments and hedged items are formally documented, in addition to the risk management objective and strategy for each hedge transaction. For interest rate swaps, the notional amounts, rates, and maturities of our interest rate swaps are closely matched to the related terms of hedged debt obligations. The critical terms of the interest rate swap are matched to the critical terms of the underlying hedged item to determine whether the derivatives used for hedging transactions are highly effective in offsetting changes in the cash flows of the underlying hedged item. If it is determined that a derivative ceases to be a highly effective hedge, the hedge accounting is discontinued and all subsequent derivative gains and losses are recognized in the statement of comprehensive income or loss.
Derivative instruments designated in hedging relationships that mitigate exposure to the variability in future cash flows of the variable-rate debt and foreign currency exchange rates are considered cash flow hedges. The Company records all derivative instruments in other assets or other liabilities on the Consolidated Balance Sheets at their fair values. If the derivative is designated as a cash flow hedge and the hedging relationship qualifies for hedge accounting, the effective portion of the change in the fair value of the derivative is recorded in other comprehensive income or loss. The change in fair value for instruments not qualifying for hedge accounting are recognized in the statement of comprehensive income or loss in the period of the change. See Note 12 - Derivatives and Hedging.
Translation of Foreign Currencies:
The translation of the Company's Canadian and Mexican local currency based financial statements into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in stockholder's equity.
Use of Estimates in the Preparation of Financial Statements:
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses for the reporting period. Actual results may differ from these estimates.
3. Recent Accounting Pronouncements:
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). On December 31, 2017, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as a $5,612 reduction to the opening balance of retained earnings with corresponding decreases to other current assets and other assets of $3,846 and $3,370, respectively, an increase of $637 to other accrued expenses, and a decrease of $2,241 in deferred tax liabilities. The cumulative adjustment
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
primarily relates to payments to customers. The Company will now recognize certain payments as a reduction of revenue when the payment is made as opposed to over the life of the master service agreement. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The impact to revenues for the year ended December 28, 2019 and December 29, 2018 as a result of applying ASU 2014-09 were immaterial. A majority of revenue continues to be recognized when products are shipped or delivered to customers. The Company expects the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Subsequently, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements and ASU 2018-10, Codification Improvements to Topic 842, Leases. Effective December 30, 2018, the Company adopted the comprehensive new lease standard issued by the FASB. The most significant impact was the recognition of right-of-use ("ROU") assets and liabilities for operating and finance leases applicable to lessees. The Company elected to utilize the transition guidance within the new standard that allowed the Company to carry forward its historical lease classification(s). Operating and finance ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. As the implicit rate is not determinable for most of the Company's leases, management uses the Company's incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The Company elected to not separate lease and non-lease components for all classes of underlying assets in which it is the lessee and made an accounting policy election to not account for leases within an initial term of 12 months or less on the accompanying Consolidated Balance Sheets. The expected lease terms include options to extend or terminate the lease when its reasonably certain that the Company will exercise such option. Lease expense for minimum lease payments is recognized over a straight-line basis over the expected lease term. As of December 30, 2018, the Company recorded an Operating ROU Asset of $72,785 and a Finance ROU Asset of $672 within our Consolidated Balance Sheets. Short-term and long-term operating lease liabilities were recorded as $12,040 and $63,291, respectively. Short-term and long-term finance lease liabilities were determined to be $436 and $477, respectively. The adoption of this guidance did not have an impact on net income. Refer to Note 8 - Leases for full lease-related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is still in the process of evaluating the impact of this new guidance, however we anticipate adoption will not have a material impact on the Company's Consolidated Financial Statements.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”), which amends the FASB Accounting Standards Codification and XBRL Taxonomy based on the Tax Cuts and Jobs Act (the “Act”) that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 (“SAB 118”) that was released by the Securities and Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits and may additionally have international tax consequences for many companies that operate internationally. The Company has evaluated the impact of the Act as well as the guidance of SAB 118 and incorporated the changes into the determination of a reasonable estimate of its deferred tax liability and appropriate disclosures in the Notes to Consolidated Financial Statements. Refer to Note 6 - Income Taxes.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, ("ASC 350-40") requiring a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The Company early adopted this ASU in the third quarter of 2018, and it did not have a material impact on the Company's Consolidated Financial Statements.
4. Related Party Transactions:
The Company has recorded aggregate management fee charges and expenses from CCMP and Oak Hill Funds of $562, $546, and $519 for the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company recorded proceeds from the sale of Holdco stock to members of management and the Board of Directors of $750 for the year ended December 28, 2019 and $500 for the year ended December 30, 2017. There were no sales the year ended December 29, 2018.
In the year ended December 29, 2018, the Company paid a dividend of approximately $3,780 to Holdco for the purchase of 4,200 shares of Holdco stock from former members of management. No such dividends were paid in fiscal 2019 nor fiscal 2017.
Gregory Mann and Gabrielle Mann are employed by Hillman. Hillman leases an industrial warehouse and office facility from companies under the control of the Manns. The Company has recorded rental expense for the lease of this facility on an arm's length basis. Rental expense for the lease of this facility was $350 for the year ended December 28, 2019, $350 for the year ended December 29, 2018, and $353 for the year ended December 30, 2017.
During the years ended December 28, 2019, December 29, 2018, and December 30, 2017, The Hillman Group Canada ULC, subsidiary of the Company, was a party to three leases for five properties containing industrial warehouse, manufacturing plant, and office facilities on February 19, 2013. The owners of the properties under one lease are relatives of Richard Paulin, who was employed by The Hillman Group Canada ULC until his retirement effective April 30, 2017, and the owner of the properties under the other two leases is a company which is owned by Richard Paulin and certain of his relatives. The rental expense for the three leases was $648 for the year ended December 28, 2019, $664 for the year ended December 29, 2018, and $663 for the year ended December 30, 2017.
Douglas J. Cahill is currently Hillman’s President and CEO and is also a former Managing Director of CCMP Capital Advisors, LP ("CCMP"). CCMP’s private equity fund CCMP Capital Investors III, L.P. (“CCMP III”), together with its related fund vehicles, owns approximately 80.4% of Holdco's outstanding common stock as of December 28, 2019. Mr. Cahill has retained a carried interest in CCMP III and the fair value of this carried interest, which is based on the overall performance of CCMP III, is contingent on several factors. As of December 28, 2019, the fair value of the carried interest is not estimable in accordance with ASC 405 - Contingencies.
5. Acquisitions
ST Fastening Systems
On November 8, 2017, the Company entered into an Asset Purchase Agreement with Hargis Industries, LP doing business as ST Fastening Systems and other related parties pursuant to which Hillman acquired substantially all of the assets, and assumed certain liabilities, of STFS. STFS, which is located in Tyler, Texas, specializes in manufacturing and distributing threaded self-drilling fasteners, foam closure strips, and other accessories to the steel-frame, post-frame, and residential building markets. Pursuant to the terms of the Agreement, Hillman paid a cash purchase price of $47,339. The transaction was financed with additional borrowings under the Company's revolving credit facility. The STFS business is included in the Company’s Fastening, Hardware, and Personal Protective Solutions segment.
The following table reconciles the fair value of the acquired assets and assumed liabilities to the finalized total purchase price of the STFS acquisition:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
3,975
|
|
|
Inventory
|
|
7,820
|
|
|
Property and equipment
|
|
16,281
|
|
|
Goodwill
|
|
9,045
|
|
|
Customer relationships
|
|
13,500
|
|
|
Other non-current assets
|
|
6
|
|
|
Total assets acquired
|
|
50,627
|
|
|
Less:
|
|
|
|
Liabilities assumed
|
|
(3,288
|
)
|
|
Total purchase price
|
|
$
|
47,339
|
|
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The excess of the purchase price over the net assets has been allocated to goodwill and intangibles based on a valuation appraisal. The customer relationships have been assigned a useful life of 13 years based on the limited turnover and long-standing relationships STFS has with its existing customer base. The acquired customer relationships were valued using the discounted cash flow approach, and significant assumptions used in the valuation included the customer attrition rate assumed and the expected level of future sales.
Pro forma financial information has not been presented for STFS as the financial results of STFS were insignificant to the financial results of the Company on a standalone basis.
Minute Key Holdings, Inc.
On August 10, 2018, the Company completed the acquisition of Minute Key Holdings, Inc. ("MinuteKey"), an innovative leader in self-service key duplicating kiosks, for a total consideration reflecting an enterprise value of $156,289. The Company financed the acquisition with the unfunded delayed draw term loan facility of $165,000. MinuteKey is headquartered in Boulder, Colorado and has operations in the United States and Canada. MinuteKey will be included in the Company's Consumer Connected Solutions reportable segments.
The following table reconciles the fair value of the acquired assets and assumed liabilities to the finalized total purchase price of the MinuteKey acquisition:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,791
|
|
|
Inventory
|
|
3,952
|
|
|
Other current assets
|
|
766
|
|
|
Property and equipment
|
|
29,888
|
|
|
Goodwill
|
|
59,237
|
|
|
Customer relationships
|
|
50,000
|
|
|
Developed technology
|
|
19,000
|
|
|
Trade names
|
|
5,400
|
|
|
Other non-current assets
|
|
16
|
|
|
Total assets acquired
|
|
170,050
|
|
|
Less:
|
|
|
|
Liabilities assumed
|
|
(13,761
|
)
|
|
Total purchase price
|
|
$
|
156,289
|
|
Pro forma financial information has not been presented for MinuteKey as their associated financial results are insignificant to the financial results of the Company on a standalone basis.
Big Time Products
On October 1, 2018, the Company acquired NB Parent Company, LLC. and its affiliated companies including Big Time Products, LLC (collectively, "Big Time"), a leading provider of personal protective and work gear products ranging from work gloves, tool belts and jobsite storage for a purchase price of $348,834. Coinciding with the Big Time acquisition, the Company entered into an amendment (the "Amendment") to the Company's existing term loan credit agreement dated May 31, 2018 (the "Term Credit Agreement"). The Amendment provided approximately $365,000 of incremental term loans. Refer to Note 7 - Long-Term Debt for further details on the Term Credit Agreement and the associated Amendment. Big Time has business operations throughout North America and its financial results reside in the Company's Fastening, Hardware, and Personal Protective Solutions reporting segment.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The following table reconciles the fair value of the acquired assets and assumed liabilities to the finalized total purchase price of the Big Time acquisition:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,507
|
|
|
Accounts receivable
|
|
40,828
|
|
|
Inventory
|
|
40,216
|
|
|
Other current assets
|
|
1,623
|
|
|
Property and equipment
|
|
3,703
|
|
|
Goodwill
|
|
130,863
|
|
|
Customer Relationships
|
|
189,000
|
|
|
Trade names
|
|
21,000
|
|
|
Other non-current assets
|
|
159
|
|
|
Total assets acquired
|
|
429,899
|
|
|
Less:
|
|
|
|
Liabilities assumed
|
|
(81,065
|
)
|
|
Total purchase price
|
|
$
|
348,834
|
|
The following table provides unaudited pro forma results of the combined entities of Hillman and Big Time, had the acquisition occurred at the beginning of fiscal 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
Fiscal Year-ended
|
|
|
2018
|
|
2017
|
|
Net revenues
|
$
|
1,139,562
|
|
|
$
|
1,045,447
|
|
|
Net earnings (loss)
|
$
|
(74,976
|
)
|
|
$
|
52,010
|
|
The pro forma results are based on assumptions that the Company believes are reasonable under certain circumstances. The pro forma results presented are not intended to be indicative of results that may occur in the future. The underlying pro forma information includes historical results of the Company, the Company's financing arrangements related to the Big Time acquisition, and certain purchase price accounting adjustments, including amortization of acquired intangibles.
Sharp Systems, LLC
On August 16, 2019, the Company acquired the assets of Sharp Systems, LLC ("Resharp"), a California-based innovative developer of automated knife sharpening systems, for a total purchase price of $21,100, including a contingent consideration provision with an estimated fair value of $18,100, with a maximum payout of $25,000 plus 1.8% of net knife-sharpening revenues for five years after the $25,000 is fully paid. Contingent consideration to be paid subsequent to December 28, 2019 is contingent upon several business performance metrics over a multi-year period. An amount of of the acquisition consideration totaling $18,100 remains payable to the seller. Resharp has existing operations in the United States and its operating results reside within the Company's Consumer Connected Solutions reportable segment.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The following table reconciles the fair value of the acquired assets and assumed liabilities to the finalized total purchase price of the Resharp acquisition:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
218
|
|
|
Goodwill
|
|
9,382
|
|
|
Technology
|
|
11,500
|
|
|
Total assets acquired
|
|
21,100
|
|
|
Less:
|
|
|
|
Contingent consideration payable
|
|
(18,100
|
)
|
|
Net cash paid
|
|
$
|
3,000
|
|
Pro forma financial information has not been presented for Resharp as their associated financial results are insignificant to the financial results of the Company on a standalone basis.
Other Acquisitions
On July 1, 2019, the Company acquired the assets of West Coast Washers, Inc. for a total purchase price of $3,135. The financial results of West Coast Washers, Inc. reside within the Company's Fastening, Hardware, and Personal Protective Solutions reportable segment and have been determined to be immaterial for purposes of additional disclosure.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
6. Income Taxes:
Loss before income taxes are comprised of the following components for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended
December 30, 2017
|
|
|
|
|
United States based operations
|
$
|
(101,197
|
)
|
|
$
|
(53,254
|
)
|
|
$
|
(24,624
|
)
|
|
|
Non-United States based operations
|
(7,559
|
)
|
|
(14,317
|
)
|
|
(1,639
|
)
|
|
|
Loss before income taxes
|
$
|
(108,756
|
)
|
|
$
|
(67,571
|
)
|
|
$
|
(26,263
|
)
|
Below are the components of the Company's income tax (benefit) provision for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended
December 30, 2017
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal & State
|
$
|
1,235
|
|
|
$
|
263
|
|
|
$
|
164
|
|
|
|
Foreign
|
611
|
|
|
67
|
|
|
814
|
|
|
|
Total current
|
1,846
|
|
|
330
|
|
|
978
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal & State
|
(23,675
|
)
|
|
(11,679
|
)
|
|
(85,461
|
)
|
|
|
Foreign
|
(2,625
|
)
|
|
(4,741
|
)
|
|
(1,989
|
)
|
|
|
Total deferred
|
(26,300
|
)
|
|
(16,420
|
)
|
|
(87,450
|
)
|
|
|
Valuation allowance
|
19,084
|
|
|
18,160
|
|
|
1,561
|
|
|
|
Income tax expense/(benefit)
|
$
|
(5,370
|
)
|
|
$
|
2,070
|
|
|
$
|
(84,911
|
)
|
The Company has U.S. federal net operating loss (“NOL”) carryforwards totaling $149,754 as of December 28, 2019 that are available to offset future taxable income. These carryforwards expire from 2027 to 2038. Approximately $59,611 of the U.S. federal NOLs were acquired with the MinuteKey purchase in 2018. The MinuteKey NOLs are subject to limitation under IRC §382 from current and prior ownership changes. The Company noted that $2,503 of the MinuteKey NOLs are expected to expire prior to their utilization and has recorded a valuation allowance of $526 for the MinuteKey NOLs. In addition, the Company's foreign subsidiaries have NOL carryforwards aggregating $27,008. A portion of these carryforwards expire from 2035 to 2039. Management anticipates utilizing all foreign NOLs prior to their expiration.
The Company has state NOL carryforwards with an aggregate tax benefit of $5,426 which expire from 2019 to 2039. The Company has recorded a valuation allowance of $2,709 in fiscal 2019 for the state NOLs expected to expire prior to utilization.
The Company has $908 of general business tax credit carryforwards which expire from 2019 to 2039. A valuation allowance of $287 has been maintained for a portion of these tax credits. The Company has $822 of foreign tax credit carryforwards which expire from 2019 to 2025. A valuation allowance of $822 has been established for these credits given insufficient foreign source income projected to utilize these credits.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The table below reflects the significant components of the Company's net deferred tax assets and liabilities at December 28, 2019 and December 29, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 28, 2019
|
|
As of December 29, 2018
|
|
|
|
Non-current
|
|
Non-current
|
|
Deferred Tax Asset:
|
|
|
|
|
|
Inventory
|
|
$
|
10,043
|
|
|
$
|
12,798
|
|
|
Bad debt reserve
|
|
868
|
|
|
838
|
|
|
Casualty loss reserve
|
|
498
|
|
|
405
|
|
|
Accrued bonus / deferred compensation
|
|
5,174
|
|
|
3,517
|
|
|
Deferred rent
|
|
80
|
|
|
995
|
|
|
Derivative security value
|
|
845
|
|
|
362
|
|
|
Interest limitation
|
|
30,533
|
|
|
14,187
|
|
|
Lease liabilities
|
|
16,487
|
|
|
—
|
|
|
Deferred revenue - shipping terms
|
|
315
|
|
|
301
|
|
|
Medical insurance reserve
|
|
—
|
|
|
12
|
|
|
Original issue discount amortization
|
|
3,372
|
|
|
3,649
|
|
|
Transaction costs
|
|
2,302
|
|
|
2,301
|
|
|
Federal / foreign net operating loss
|
|
38,478
|
|
|
47,171
|
|
|
State net operating loss
|
|
5,426
|
|
|
6,650
|
|
|
Tax credit carryforwards
|
|
2,636
|
|
|
4,984
|
|
|
All other
|
|
401
|
|
|
36
|
|
|
Gross deferred tax assets
|
|
117,458
|
|
|
98,206
|
|
|
Valuation allowance for deferred tax assets
|
|
(34,877
|
)
|
|
(24,993
|
)
|
|
Net deferred tax assets
|
|
$
|
82,581
|
|
|
$
|
73,213
|
|
|
Deferred Tax Liability:
|
|
|
|
|
|
Intangible asset amortization
|
|
$
|
227,007
|
|
|
$
|
238,929
|
|
|
Property and equipment
|
|
34,218
|
|
|
34,327
|
|
|
Lease assets
|
|
16,473
|
|
|
—
|
|
|
All other items
|
|
618
|
|
|
653
|
|
|
Deferred tax liabilities
|
|
$
|
278,316
|
|
|
$
|
273,909
|
|
|
Net deferred tax liability
|
|
$
|
195,735
|
|
|
$
|
200,696
|
|
Realization of the net deferred tax assets is dependent on the reversal of deferred tax liabilities and generating sufficient taxable income prior to their expiration. Although realization is not assured, management estimates it is more likely than not that the net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced. In 2019, the Company established a valuation allowance in the amount of $16,720 against the portion of interest expense that is not currently deductible for domestic federal income tax due to the Tax Cuts and Jobs Act of 2017 ("2017 Tax Act") effective for the first year beginning after December 31, 2017. In addition, the Company established a valuation allowance of $2,709 on U.S. state NOLs due to the Company's inability to utilize the losses prior to expiration. Lastly, the Company liquidated its Luxembourg entity as of December 28, 2019 and is no longer reporting the Company's $23,600 of dual consolidated losses that were subject to a full valuation allowance. With this liquidation, the Company removed $9,579 from the cumulative valuation allowance for deferred tax assets.
Hillman considers the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. The Company has not recorded a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes of undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. Should management decide to repatriate the foreign earnings, the Company would need to adjust the income tax provision in the period the earnings will no longer be indefinitely invested outside the United States.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Below is a reconciliation of statutory income tax rates to the effective income tax rates for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended December 30, 2017
|
|
Statutory federal income tax rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
|
Non-U.S. taxes and the impact of non-U.S. losses for which a current tax benefit is not available
|
|
0.3
|
%
|
|
0.9
|
%
|
|
6.9
|
%
|
|
State and local income taxes, net of U.S. federal income tax benefit
|
|
3.9
|
%
|
|
(0.5
|
)%
|
|
3.4
|
%
|
|
Change in valuation allowance and other items
|
|
(18.9
|
)%
|
|
(21.7
|
)%
|
|
(6.5
|
)%
|
|
Adjustment for change in tax law
|
|
—
|
%
|
|
(0.9
|
)%
|
|
281.4
|
%
|
|
Adjustment of unrecognized tax benefits
|
|
—
|
%
|
|
—
|
%
|
|
1.4
|
%
|
|
Permanent differences:
|
|
|
|
|
|
|
|
Acquisition and related transaction costs
|
|
—
|
%
|
|
(2.7
|
)%
|
|
—
|
%
|
|
Meals and entertainment expense
|
|
(0.2
|
)%
|
|
(0.3
|
)%
|
|
(0.9
|
)%
|
|
Reconciliation of tax provision to return
|
|
(0.2
|
)%
|
|
—
|
%
|
|
1.7
|
%
|
|
Reconciliation of other adjustments
|
|
(1.0
|
)%
|
|
1.1
|
%
|
|
0.9
|
%
|
|
Effective income tax rate
|
|
4.9
|
%
|
|
(3.1
|
)%
|
|
323.3
|
%
|
The Company's reserve for unrecognized tax benefits remains unchanged for the year ended December 28, 2019. A balance of $1,101 of unrecognized tax benefit is shown in the financial statements at December 28, 2019 as a reduction of the deferred tax asset for the Company's NOL carryforward.
The following is a summary of the changes for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended
December 30, 2017
|
|
Unrecognized tax benefits - beginning balance
|
|
$
|
1,101
|
|
|
$
|
1,101
|
|
|
$
|
2,060
|
|
|
Gross increases - tax positions in current period
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Gross increases - tax positions in prior period
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Gross decreases - tax positions in prior period
|
|
—
|
|
|
—
|
|
|
(959
|
)
|
|
Unrecognized tax benefits - ending balance
|
|
$
|
1,101
|
|
|
$
|
1,101
|
|
|
$
|
1,101
|
|
|
Amount of unrecognized tax benefit that, if recognized would affect the Company's effective tax rate
|
|
$
|
1,101
|
|
|
$
|
1,101
|
|
|
$
|
1,101
|
|
Tax Cuts and Jobs Act (the "2017 Tax Act")
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, among other things, a permanent corporate rate reduction to 21% requiring a remeasurement of the Company’s U.S. net deferred tax liabilities, a change in U.S. international taxation to a modified territorial system including a mandatory deemed repatriation on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”), and providing for additional first-year depreciation that allows full expensing of qualified property placed into service after September 27, 2017.
During 2017, the Company recorded a provisional $75,000 deferred income tax benefit associated with the provisions of the 2017 Tax Act based on currently available information. The Company did not record a provision for the Transition Tax in 2017 given the lack of historical earnings in the Company's foreign subsidiaries. Additionally, the Company recorded a provisional
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
$807 valuation allowance on its foreign tax credit deferred tax asset given insufficient foreign source income projected to utilize the credits. The Company did not significantly adjust the estimate from the 2017 provisional calculations.
During 2018, the Company became subject to additional provisions of the 2017 Tax Act including computations related to Global Intangible Low Taxed Income ("GILTI") and the IRC §163(j) interest limitation (Interest Limitation). In 2019, our effective tax rate includes $16,720 in income tax expense, a (15.4)% impact to the effective tax rate, related to the Interest Limitation. Our 2018 effective tax rate includes the impact both GILTI and the Interest Limitation, which was approximately $11,700 in income tax expense, a (17.3)% impact to the effective tax rate.
The Company files a consolidated income tax return in the U.S. and numerous consolidated and separate income tax returns in various states and foreign jurisdictions. The Company is not under any significant audits for the period ended December 28, 2019.
7. Long-Term Debt:
The following table summarizes the Company’s debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
Revolving loans
|
$
|
113,000
|
|
|
$
|
108,200
|
|
|
Senior Term Loan, due 2025
|
1,047,653
|
|
|
1,058,263
|
|
|
6.375% Senior Notes, due 2022
|
330,000
|
|
|
330,000
|
|
|
11.6% Junior Subordinated Debentures - Preferred
|
105,443
|
|
|
105,443
|
|
|
Junior Subordinated Debentures - Common
|
3,261
|
|
|
3,261
|
|
|
Finance leases & other obligations
|
2,275
|
|
|
1,213
|
|
|
|
1,601,632
|
|
|
1,606,380
|
|
|
Unamortized premium on 11.6% Junior Subordinated Debentures
|
16,110
|
|
|
17,498
|
|
|
Unamortized discount on Senior Term Loan
|
(8,040
|
)
|
|
(9,558
|
)
|
|
Current portion of long term debt and capital leases
|
(11,358
|
)
|
|
(10,985
|
)
|
|
Deferred financing fees
|
(14,055
|
)
|
|
(17,251
|
)
|
|
Total long term debt, net
|
$
|
1,584,289
|
|
|
$
|
1,586,084
|
|
Revolving Loans and Term Loans
On May 31, 2018 the Company entered into a new credit agreement that includes a funded term loan for $530,000 and a unfunded delayed draw term loan facility ("DDTL") for $165,000 (collectively, "2018 Term Loan"). Concurrently, the Company also entered into a new asset-based revolving credit agreement ("ABL Revolver") for $150,000. The proceeds from the 2018 Term Loan and ABL Revolver were used to refinance previous debt obligations, revolvers and the associated fees and expenses. As mentioned in Note 5 - Acquisitions, the Company utilized the full $165,000 DDTL to finance the MinuteKey acquisition on August 10, 2018. Both the 2018 Term Loan and ABL Revolver require the Company to maintain certain financial and non-financial covenants. As of December 28, 2019, the Company is in compliance with all financial and non-financial debt covenants with our existing obligations and agreements with external lenders.
On October 1, 2018, the Company entered into an amendment (the "Term Amendment") to the aforementioned 2018 Term Loan agreement which provided an additional $365,000 of incremental term loan proceeds. These proceeds from the Amendment were used to (1) finance the acquisition of Big Time, (2) refinance certain pre-existing Big Time indebtedness, and (3) pay related transaction costs. Refer to Note 5 - Acquisitions for additional Big Time acquisition details.
On November 15, 2019, the Company entered into an amendment (the "ABL Amendment") to the aforementioned ABL Revolver agreement which provided an additional $100,000 of revolving credit, bringing the total available to $250,000.
The interest rate on the 2018 Term Loan is, at the discretion of the Company, either the adjusted London Interbank Offered Rate ("LIBOR") rate plus 4.00% per annum for LIBOR loans or an alternate base rate plus 3.00% per annum. The 2018 Term Loan
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
is payable in fixed installments of approximately $2,652 per quarter, with a balloon payment scheduled on the loan's maturity date of May 31, 2025.
The interest rate for the ABL Revolver is, at the discretion of the Company, either (1) adjusted LIBOR plus a margin of 1.25% to 1.75% per annum or (2) an alternate base rate plus a margin varying from 0.25% to 0.75% per annum. The maturity date for the ABL Revolver is November 15, 2024, provided that, if the 6.375% Senior Notes with a maturity date of July 15, 2022 remain outstanding in a principal amount in excess of $50,000 on April 15, 2022, the maturity date shall be April 15, 2022, unless, at the Company's sole discretion, the Company elects to take a reserve against the borrowing base in an amount equal to the amount of such excess and, after giving effect thereto, availability as of such date is equal to or greater than $30,000. Portions of the ABL Revolver are separately available for borrowing by the Company's United States subsidiary and Canadian subsidiary for $200,000 and $50,000, respectively.
In connection with the 2019 ABL Revolver refinancing activities, the Company recorded an additional $1,412 in deferred financing fees which are recorded as other non-current assets on the accompanying Consolidated Balance Sheets.
In connection with the 2018 refinancing activities, the Company recorded $14,293 in deferred financing fees and $9,950 in discount which were recorded as long term debt on the accompanying Consolidated Balance Sheets as of December 29, 2018. In connection with the ABL Revolver, the Company recorded $1,841 in deferred financing fees which were recorded as other non-current assets on the accompanying Consolidated Balance Sheets as of December 29, 2018.
The amounts outstanding under the 2018 Term Loan and ABL Revolver are guaranteed by the Company and, subject to certain exceptions, the Company's wholly-owned domestic subsidiaries and are secured by substantially all of the Company's and guarantor's assets.
As of December 28, 2019, the Revolver had an outstanding amount of $113,000 and outstanding letters of credit of approximately $17,001. The Company has approximately $119,999 of available borrowings under the revolving credit facility as a source of liquidity as of December 28, 2019.
6.375% Senior Notes, due 2022
On June 30, 2014, Hillman Group issued $330,000 aggregate principal amount of its senior notes due July 15, 2022 (the “6.375% Senior Notes”), which are guaranteed by The Hillman Companies, Inc. and its domestic subsidiaries other than the Hillman Group Capital Trust. Hillman Group pays interest on the 6.375% Senior Notes semi-annually on January 15 and July 15 of each fiscal year.
Guaranteed Preferred Beneficial Interest in the Company's Junior Subordinated Debentures
In September 1997, The Hillman Group Capital Trust ("Trust"), a Grantor trust, completed a $105,443 underwritten public offering of 4,217,724 Trust Preferred Securities (“TOPrS”). The Trust invested the proceeds from the sale of the preferred securities in an equal principal amount of 11.6% Junior Subordinated Debentures of Hillman due September 30, 2027.
The Company pays interest to the Trust on the Junior Subordinated Debentures underlying the TOPrS at the rate of 11.6% per annum on their face amount of $105,443, or $12,231 per annum in the aggregate. The Trust distributes monthly cash payments it receives from the Company as interest on the debentures to preferred security holders at an annual rate of 11.6% on the liquidation amount of $25.00 per preferred security. Pursuant to the Indenture that governs the TOPrS, the Trust is able to defer distribution payments to holders of the TOPrS for a period that cannot exceed 60 months (the “Deferral Period”). During a Deferral Period, the Company is required to accrue the full amount of all interest payable, and such deferred interest payable would become immediately payable by the Company at the end of the Deferral Period. There were no deferrals of distribution payments to holders of the Trust Preferred Securities in 2019 nor 2018.
In connection with the public offering of TOPrS, the Trust issued $3,261 of trust common securities to the Company. The Trust invested the proceeds from the sale of the trust common securities in an equal principal amount of 11.6% Junior Subordinated Debentures of Hillman due September 30, 2027. The Trust distributes monthly cash payments it receives from the Company as interest on the debentures to the Company at an annual rate of 11.6% on the liquidation amount of the common security.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company has determined that the Trust is a variable interest entity and the holders of the TOPrS are the primary beneficiaries of the Trust. Accordingly, the Company does not consolidate the Trust. Summarized below is the financial information of the Trust as of December 28, 2019:
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
Amount
|
|
Non-current assets - junior subordinated debentures - preferred
|
|
$
|
121,553
|
|
|
Non-current assets - junior subordinated debentures - common
|
|
3,261
|
|
|
Total assets
|
|
$
|
124,814
|
|
|
Non-current liabilities - trust preferred securities
|
|
$
|
121,553
|
|
|
Stockholder's equity - trust common securities
|
|
3,261
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
124,814
|
|
The non-current assets for the Trust relate to its investment in the 11.6% junior subordinated deferrable interest debentures of Hillman due September 30, 2027.
The TOPrS constitute mandatory redeemable financial instruments. The Company guarantees the obligations of the Trust on the TOPrS. Accordingly, the guaranteed preferred beneficial interest in the Company's junior subordinated debentures is presented in long-term liabilities in the accompanying Consolidated Balance Sheets.
On June 30, 2014, the junior subordinated debentures were recorded at the fair value of $131,141 based on the price underlying the Trust Preferred Securities of $30.32 per share upon close of trading on the NYSE Amex on that date plus the liquidation value of the trust common securities. The Company is amortizing the premium on the junior subordinated debentures of $22,437 over their remaining life. Unamortized premium on the junior subordinated debentures was $16,110 and $17,498 as of December 28, 2019 and December 29, 2018, respectively.
The aggregate minimum principal maturities of the long-term debt obligations for each of the five years following December 28, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
2020
|
|
$
|
10,609
|
|
|
2021
|
|
10,609
|
|
|
2022
|
|
340,609
|
|
|
2023
|
|
10,609
|
|
|
2024
|
|
123,609
|
|
|
Thereafter
|
|
1,103,312
|
|
|
|
|
$
|
1,599,357
|
|
Note that future finance lease payments were excluded from the maturity schedule above. Refer to Note 8 - Leases.
Additional information with respect to the Company's fixed rate senior notes and junior subordinated debentures is included in Note 13 - Fair Value Measurements.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
8. Leases:
Lessee
The Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. The Company leases certain distribution center locations, vehicles, forklifts, computer equipment, and its corporate headquarters with expiration dates through 2032. Certain lease arrangements include escalating rent payments and options to extend the lease term. Expected lease terms include these options to extend or terminate the lease when it is reasonably certain the Company will exercise the option. The Company's leasing arrangements do not contain material residual value guarantees nor material restrictive covenants.
The components of operating and finance lease cost for the year ended December 28, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Operating lease cost
|
|
$
|
19,456
|
|
|
Short term lease costs
|
|
2,587
|
|
|
Variable lease costs
|
|
2,731
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right of use assets
|
|
616
|
|
|
Interest on lease liabilities
|
|
115
|
|
Rent expense is recognized on a straight-line basis over the expected lease term. Rent expense totaled $24,774, $19,281 and $16,814 in the year ended December 28, 2019, December 29, 2018 and December 30, 2017, respectively. Rent expense includes operating lease cost as well as expense for non-lease components such as common area maintenance, real estate taxes, real estate insurance, variable costs related to our leased vehicles and also short-term rental expenses.
The implicit rate is not determinable in most of the Company’s leases, as such management uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases(1)
|
|
Finance Leases
|
|
Weighted average remaining lease term
|
|
7.88
|
|
|
3.46
|
|
|
Weighted average discount rate
|
|
7.81
|
%
|
|
6.49
|
%
|
(1) Upon adoption of the new lease standard, discount rates used for existing operating leases were established on December 30, 2018.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Supplemental balance sheet information related to the Company's finance leases as of December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
Finance lease assets, net, included in property plant and equipment
|
|
$
|
2,101
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
749
|
|
|
Long-term debt, less current portion
|
|
1,526
|
|
|
Total principal payable on finance leases
|
|
$
|
2,275
|
|
Supplemental cash flow information related to our operating leases was as follows for the year ended December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash outflow from operating leases
|
|
$
|
18,668
|
|
|
Operating cash outflow from finance leases
|
|
104
|
|
|
Financing cash outflow from finance leases
|
|
683
|
|
As of December 28, 2019, our future minimum rental commitments are immaterial for lease agreements beginning after the current reporting period. Maturities of our lease liabilities for all operating and finance leases are as follows as of December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Less than one year
|
|
$
|
17,525
|
|
|
$
|
873
|
|
|
1 to 2 years
|
|
15,956
|
|
|
712
|
|
|
2 to 3 years
|
|
13,925
|
|
|
456
|
|
|
3 to 4 years
|
|
12,045
|
|
|
383
|
|
|
4 to 5 years
|
|
11,716
|
|
|
127
|
|
|
After 5 years
|
|
43,591
|
|
|
—
|
|
|
Total future minimum rental commitments
|
|
114,758
|
|
|
2,551
|
|
|
Less - amounts representing interest
|
|
(30,072
|
)
|
|
(276
|
)
|
|
Present value of lease liabilities
|
|
$
|
84,686
|
|
|
$
|
2,275
|
|
As of December 29, 2018, minimum lease payments under non-cancellable operating leases by period were expected to be as follows:
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Less than one year
|
|
$
|
17,326
|
|
|
1 to 2 years
|
|
14,736
|
|
|
2 to 3 years
|
|
13,305
|
|
|
3 to 4 years
|
|
12,012
|
|
|
4 to 5 years
|
|
9,541
|
|
|
After 5 years
|
|
16,664
|
|
|
Total future minimum rental commitments
|
|
$
|
83,584
|
|
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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.
9. Deferred Compensation Plan:
The Company maintains a deferred compensation plan for key employees (the “Nonqualified Deferred Compensation Plan” or “NQDC”) which allows the participants to defer up to 25% of salary and commissions and up to 100% of bonuses to be paid during the year and invest these deferred amounts into certain Company directed mutual fund investments, subject to the election of the participants. The Company is permitted to make a 25% matching contribution on deferred amounts up to $10, subject to a five year vesting schedule.
As of December 28, 2019 and December 29, 2018, the Company's Consolidated Balance Sheets included $1,911 and $1,905, respectively, in restricted investments representing the assets held in mutual funds to fund deferred compensation liabilities owed to the Company's current and former employees. The current portion of the restricted investments was $355 and $545 as of December 28, 2019 and December 29, 2018, respectively, and is included in other current assets on the accompanying Consolidated Balance Sheets. The assets held in the NQDC are classified as an investment in trading securities, accordingly, the investments are marked-to-market, see Note 13 - Fair Value Measurements of the Notes to Consolidated Financial Statements for additional detail.
During the years ended December 28, 2019, December 29, 2018, and December 30, 2017 distributions from the deferred compensation plan aggregated $686, $849, and $289, respectively.
10. Equity and Accumulated Other Comprehensive Income:
Common Stock
The Hillman Companies, Inc. has one class of common stock. All outstanding shares of The Hillman Companies, Inc. common stock are owned by Holdco. The management shareholders of Holdco do not have the ability to put their shares back to Holdco.
Preferred Stock
The Hillman Companies, Inc. has one class of preferred stock, with 5,000 shares authorized and none issued or outstanding as of December 28, 2019 and December 29, 2018.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Accumulated Other Comprehensive Loss
The following is the detail of the change in the Company's accumulated other comprehensive loss from December 31, 2016 to December 28, 2019 including the effect of significant reclassifications out of accumulated other comprehensive income (net of tax):
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Balance at December 31, 2016
|
$
|
(34,382
|
)
|
|
Other comprehensive income before reclassifications
|
8,483
|
|
|
Amounts reclassified from other comprehensive income¹
|
(638
|
)
|
|
Net current period other comprehensive loss
|
7,845
|
|
|
Balance at December 30, 2017
|
(26,537
|
)
|
|
Other comprehensive income before reclassifications
|
(11,104
|
)
|
|
Amounts reclassified from other comprehensive income²
|
51
|
|
|
Net current period other comprehensive income
|
(11,053
|
)
|
|
Balance at December 29, 2018
|
(37,590
|
)
|
|
Other comprehensive loss before reclassifications
|
5,533
|
|
|
Amounts reclassified from other comprehensive income³
|
17
|
|
|
Net current period other comprehensive income
|
5,550
|
|
|
Balance at December 28, 2019
|
$
|
(32,040
|
)
|
|
|
|
|
1.
|
In the year ended December 30, 2017, the Company fully liquidated its Australian subsidiary and reclassified the cumulative translation adjustment to income. The $638 gain was recorded as other income on the Consolidated Statement of Comprehensive Income (Loss).
|
|
|
|
|
2.
|
In the year ended December 29, 2018, the Company fully liquidated four subsidiaries within the Canada reportable segment: Hillman Group GP1, LLC, Hillman Group GP2, LLC, HGC1 Financing LP, and HGC2 Holding LP and reclassified the cumulative translation adjustment to income. The $51 loss was recorded as other income on the Consolidated Statement of Comprehensive Income (Loss).
|
|
|
|
|
3.
|
In the year ended December 28, 2019, the Company fully liquidated its Luxembourg subsidiary which results resides within the Canada reportable segment. The $17 loss was recorded as other income on the Consolidated Statement of Comprehensive Income (Loss).
|
11. Stock Based Compensation:
HMAN Group Holdings Inc. 2014 Equity Incentive Plan
Effective June 30, 2014, Holdco established the HMAN Group Holdings Inc. 2014 Equity Incentive Plan (the “2014 Equity Incentive Plan”), pursuant to which Holdco may grant options, stock appreciation rights, restricted stock, and other stock-based awards for up to an aggregate of 44,021 shares of its common stock. Effective August 10, 2018, the number of shares within the stock option pool increased to 50,000. Effective July 29, 2019 the number of shares within the pool increased to 84,008.
The 2014 Equity Incentive Plan is administered by a committee of the Holdco board of directors. Such committee determines the terms of each stock-based award grant under the 2014 Equity Incentive Plan, except that the exercise price of any granted options and the grant price of any granted stock appreciation rights may not be lower than the fair market value of one share of common stock of Holdco as of the date of grant.
The fair value of 58,860 time-vested options outstanding as of December 28, 2019 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield equaling 0%, risk-free interest rate from
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1.27% to 3.17%, expected volatility assumed to be 31.5%, and expected term of 6.25 years. The fair value of an option in whole dollars was $334.25.
In the year ended December 30, 2017, the Company modified the vesting period of the outstanding awards, reducing the vesting period to four years from five years. The modification of the vesting term resulted in $687 of additional expense for the year ended December 30, 2017.
Stock option compensation expense of $2,312, $1,590, and $1,984 was recognized in the accompanying Consolidated Statements of Comprehensive Income (Loss) for the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively. As of December 28, 2019, there was $12,323 of unrecognized compensation expense for unvested common options. The expense will be recognized as a charge to earnings over a weighted average period of approximately 3.32 years.
As of December 28, 2019, there were 22,840 performance-based stock options outstanding that ultimately vest depending upon satisfaction of conditions that only arise in the event of a sale of the Company. No compensation expense will be recognized on these stock options unless it becomes probable the performance conditions will be satisfied.
A summary of stock option activity for the year ended December 28, 2019 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Weighted Average
Exercise Price Per Share
(in whole dollars)
|
|
Weighted Average Remaining
Contractual Term
(Years)
|
|
Outstanding at December 29, 2018
|
47,542
|
|
|
$
|
1,036
|
|
|
7 years
|
|
|
Exercisable at December 29, 2018
|
—
|
|
|
—
|
|
|
—
|
|
|
Granted
|
38,603
|
|
|
$
|
—
|
|
|
—
|
|
|
Exercised or converted
|
100
|
|
|
—
|
|
|
—
|
|
|
Forfeited or expired
|
4,345
|
|
|
$
|
—
|
|
|
—
|
|
|
Outstanding at December 28, 2019
|
81,700
|
|
|
$
|
1,207
|
|
|
8 years
|
|
|
Exercisable at December 28, 2019
|
27,822
|
|
|
$
|
1,000
|
|
|
5 years
|
|
In fiscal year ended December 28, 2019, 100 options were exercised. In fiscal year ended December 29, 2018, 200 options were exercised. There were no options exercised in fiscal year ended December 30, 2017. The aggregate intrinsic value of options outstanding as of December 28, 2019 was $11,997.
As of December 28, 2019, there were 2,143 shares of restricted stock outstanding under the 2014 Equity Incentive Plan. The shares were granted at the grant date fair value of the underlying common stock securities. The restrictions lapse in one quarter increments on each of the three anniversaries of the award date, and one quarter on the completion of the relocation the recipient to the Cincinnati area or earlier in the event of a change in control. The number of unvested shares of restricted stock was 2,143 as of December 28, 2019 however expense is recognized over the service period. The weighted average grant date fair value of unvested restricted stock was $1,168 as of December 28, 2019. There were no restricted shares granted during fiscal year ended December 29, 2018.
A summary of the Company's restricted stock activity for the year ended December 28, 2019 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant Date
Fair Value
|
|
Unvested at December 29, 2018
|
|
275
|
|
|
$
|
1,000
|
|
|
Granted
|
|
2,143
|
|
|
1,168
|
|
|
Vested
|
|
(275
|
)
|
|
1,000
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
Unvested at December 28, 2019
|
|
2,143
|
|
|
$
|
1,168
|
|
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Restricted stock compensation expense of $669, $0, and $500 was recognized in the accompanying Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
12. Derivatives and Hedging:
The Company uses derivative financial instruments to manage its exposures to (1) interest rate fluctuations on its 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 September 3, 2014, the Company entered into two forward Interest Rate Swap Agreements (the “2014 Swaps”) with three-year terms for notional amounts of $90,000 and $40,000. The forward start date of the 2014 Swaps was October 1, 2015 and the termination date was September 30, 2018. The 2014 Swaps fixed the interest rate at 2.2% plus the applicable interest rate margin of 3.5% and the effective rate of 5.7%. The 2014 Swaps were terminated on September 30, 2018.
On January 8, 2018, the Company entered into a new forward Interest Rate Swap Agreement ("2018 Swap 1") with three-year terms for $90,000 notional amount. 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 fixed interest rate of 2.3% plus the applicable interest rate margin of 4.0% for an effective rate of 6.3%.
On November 8, 2018, the Company entered into another new forward Interest Rate Swap Agreement ("2018 Swap 2") with three-year terms for $60,000 notional amount. The forward start date of the 2018 Swap 2 was November 30, 2018 and the termination date is November 30, 2022. The 2018 Swap 2 has a fixed interest rate of 3.1% plus the applicable interest rate margin of 4.0% for an effective rate of 7.1%.
The fair value of the 2018 Swaps were $3,592 as of December 28, 2019 and they were reported on the accompanying Consolidated Balance Sheets in other non-current liabilities. The total impact of all the interest rate swaps to other (income) expense recorded in the Consolidated Statement of Comprehensive Income (Loss) was an unfavorable change of $2,608 in fair value since December 29, 2018.
The fair value of the 2018 Swap 1 was $394 as of December 29, 2018 and was reported on the accompanying Consolidated Balance Sheets within other current assets. The fair value of the 2018 Swap 2 was $1,378 and was reported on the accompanying Consolidated Balance Sheets within other current liabilities as of December 29, 2018. The total impact resulted in a decrease in other (income) expense recorded in the Consolidated Statement of Comprehensive Income (Loss) for the unfavorable change of $592 in fair value since December 30, 2017.
The Company's interest rate swap agreements did not qualify for hedge accounting treatment because they did not meet the provisions specified in ASC 815, Derivatives and Hedging (“ASC 815”).
Foreign Currency Forward Contracts
During fiscal 2017, 2018, and 2019, the Company entered into multiple foreign currency forward contracts. The purpose of the Company's foreign currency forward contracts is to manage the Company's exposure to fluctuations in the exchange rate of the Canadian dollar.
The total notional amount of contracts outstanding was C$1,326 and C$5,790 as of December 28, 2019 and December 29, 2018, respectively. The total fair value of the foreign currency forward contracts was $12 and $(152) as of December 28, 2019 and December 29, 2018, respectively, and was reported on the accompanying Consolidated Balance Sheets in other current liabilities. An increase (decrease) in other income of $50 and $(384) was recorded in the Consolidated Statement of Comprehensive Income (Loss) for the change in fair value during years ended December 28, 2019 and December 29, 2018, respectively.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company's foreign currency forward contracts did not qualify for hedge accounting treatment because they did not meet the provisions specified in ASC 815. Accordingly, the gain or loss on these derivatives was recognized in other (income) expense in the Consolidated Statement of Comprehensive Income (Loss).
The Company does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.
Additional information with respect to the fair value of derivative instruments is included in Note 13 - Fair Value Measurements.
13. Fair Value Measurements:
The Company uses the accounting guidance that applies to all assets and liabilities that are being measured and reported on a fair value basis. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories.
|
|
|
|
|
|
Level 1:
|
Quoted market prices in active markets for identical assets or liabilities.
|
|
|
|
|
|
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data.
|
|
|
|
|
|
|
Level 3:
|
Unobservable inputs reflecting the reporting entity's own assumptions.
|
The accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize the use of unobservable inputs. An asset or liability's level is based on the lowest level of input that is significant to the fair value measurement.
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 December 28, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Trading securities
|
$
|
1,911
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,911
|
|
|
Interest rate swaps
|
—
|
|
|
(3,592
|
)
|
|
—
|
|
|
(3,592
|
)
|
|
Foreign exchange forward contracts
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
|
Contingent consideration payable
|
—
|
|
|
—
|
|
|
(18,100
|
)
|
|
(18,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
As of December 29, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Trading securities
|
$
|
1,905
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,905
|
|
|
Interest rate swaps
|
—
|
|
|
(984
|
)
|
|
—
|
|
|
(984
|
)
|
|
Foreign exchange forward contracts
|
—
|
|
|
(152
|
)
|
|
—
|
|
|
(152
|
)
|
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 restricted investments on the accompanying 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 December 28, 2019 and December 29, 2018, the interest rate swaps were included in other non-current and current liabilities, respectively, on the accompanying Consolidated Balance Sheets.
The Company utilizes foreign exchange forward contracts to manage our exposure to currency fluctuations in the Canadian dollar versus the U.S. dollar. The forward contracts were valued using observable benchmark rates at commonly quoted
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
intervals during the term of the forward contract. As of December 28, 2019 and December 29, 2018, the foreign exchange forward contracts were included in other current liabilities on the accompanying Consolidated Balance Sheets.
The contingent consideration represents future potential earn-out payments related to the Resharp acquisition in fiscal 2019. Refer to Note 5 - Acquisitions for additional details. The estimated fair value of the contingent earn-out 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 as well as the projection risk. The carrying amount of the liability may fluctuate significantly, and actual amounts paid may be materially different from the liability's estimated value. As of December 28, 2019, the contingent consideration was recorded as $2,275 within other current liabilities and $15,825 within non-current liabilities on the accompanying Consolidated Balance Sheets.
The fair value of the Company's fixed rate senior notes and junior subordinated debentures as of December 28, 2019 and December 29, 2018 were determined by utilizing current trading prices obtained from indicative market data. As a result, the fair value measurement of the Company's senior term loans is considered to be Level 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
6.375% Senior Notes
|
$
|
327,222
|
|
|
$
|
305,250
|
|
|
$
|
326,110
|
|
|
$
|
267,300
|
|
|
Junior Subordinated Debentures
|
124,814
|
|
|
148,731
|
|
|
126,202
|
|
|
130,636
|
|
Cash, restricted investments, accounts receivable, short-term borrowings and accounts payable are reflected in the 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 December 28, 2019 and December 29, 2018 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 December 28, 2019 and December 29, 2018 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.
Additional information with respect to the derivative instruments is included in Note 12 - Derivatives and Hedging. Additional information with respect to the Company's fixed rate senior notes and junior subordinated debentures is included in Note 7 - Long-Term Debt.
14. Restructuring
Canadian Restructuring Plan
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. Plans were finalized during the fourth quarter of 2018. The Company expects to incur restructuring related charges and capital expenditures in our Canada segment over the next year as plans are finalized. Charges incurred in the current year include:
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Facility consolidation (1)
|
|
|
|
|
Inventory valuation adjustments
|
$
|
3,799
|
|
|
$
|
8,694
|
|
|
Labor expense
|
1,751
|
|
|
503
|
|
|
Consulting and legal fees
|
225
|
|
|
314
|
|
|
Other
|
2,710
|
|
|
116
|
|
|
Gain on sale of building
|
—
|
|
|
(6,104
|
)
|
|
Severance
|
617
|
|
|
—
|
|
|
|
|
|
|
|
Exit of certain lines of business (2)
|
|
|
|
|
Inventory valuation adjustments
|
535
|
|
|
1,152
|
|
|
Asset impairments
|
(458
|
)
|
|
837
|
|
|
Severance
|
—
|
|
|
2,749
|
|
|
Other
|
488
|
|
|
—
|
|
|
Total
|
$
|
9,667
|
|
|
$
|
8,261
|
|
|
|
|
|
(1)
|
Facility consolidation includes inventory valuation adjustments associated with SKU rationalization, labor expense related to organizing inventory and equipment in preparation for the facility consolation, consulting and legal fees related to the project, the gain on the sale of an existing building, and other expenses. The labor, consulting, and legal expenses were included in selling, general and administrative expense ("SG&A") on the Consolidated Statement of Comprehensive Income (Loss). The inventory valuation adjustments were included in cost of sales on the Consolidated Statement of Comprehensive Income (Loss).
|
|
|
|
|
(2)
|
As part of the restructuring, the Company is exiting a manufacturing business line. Related charges included adjustments to write inventory down to net realizable value, asset impairment charges, and employee severance, which were included in cost of sales, other income and expense, and SG&A on the Consolidated Statement of Comprehensive Income (Loss), respectively.
|
The following represents the roll forward of restructuring reserves for the year ended December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 29, 2018
|
|
Impact to Earnings
|
|
Cash Paid
|
|
Balance as of December 28, 2019
|
|
Severance and related expense
|
$
|
1,537
|
|
|
$
|
617
|
|
|
$
|
(1,033
|
)
|
|
$
|
1,121
|
|
During the year ended December 28, 2019, the Company paid approximately $1,033 in severance and related expense related to the Canada Restructuring Plan.
United States Restructuring Plan
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 recent acquisitions described in Note 5 - Acquisitions. 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 expects to incur restructuring related charges in the Fastening, Hardware, and Personal Protective Solutions segment and in the Consumer Connected Solutions segment over the next fiscal year as the plans are implemented. Charges incurred in the current year include:
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Inventory valuation adjustments
|
|
$
|
5,707
|
|
|
Severance
|
|
3,820
|
|
|
Total
|
|
$
|
9,527
|
|
The following represents a roll forward of the restructuring reserves for the year ended December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 29, 2018
|
|
Impact to Earnings
|
|
Cash Paid
|
|
Balance as of December 28, 2019
|
|
Severance and related expense
|
$
|
—
|
|
|
$
|
3,820
|
|
|
$
|
(534
|
)
|
|
$
|
3,286
|
|
During the year ended December 28, 2019, the Company paid approximately $534 in severance and related expense related to the United States Restructuring Plan.
15. Commitments and Contingencies:
The Company self-insures our product liability, automotive, workers' compensation, and general liability losses up to $250 per occurrence. Catastrophic coverage has been purchased from third party insurers for occurrences in excess of $250 up to $60,000. The two risk areas involving the most significant accounting estimates are workers' compensation and automotive liability. Actuarial valuations performed by the Company's third-party risk insurance expert were used by the Company's management to form the basis for workers' compensation and automotive liability loss reserves. The actuary contemplated the Company's specific loss history, actual claims reported, and industry trends among statistical and other factors to estimate the range of reserves required. Risk insurance reserves are comprised of specific reserves for individual claims and additional amounts expected for development of these claims, as well as for incurred but not yet reported claims. The Company believes that the liability of approximately $1,977 recorded for such risk insurance reserves is adequate as of December 28, 2019.
As of December 28, 2019, the Company has provided certain vendors and insurers letters of credit aggregating $17,001 related to our product purchases and insurance coverage of product liability, workers' compensation, and general liability.
The Company self-insures our 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 $2,464 recorded for such group health insurance reserves is adequate as of December 28, 2019.
The Company imports large quantities of fastener products which are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements and bilateral actions. The Company could be subject to the assessment of additional duties and interest if it or its suppliers fail to comply with customs regulations or similar laws. The U.S. Department of Commerce (the "Department”) has received requests from petitioners to conduct administrative reviews of compliance with anti-dumping duty and countervailing duty laws for certain nails products sourced from Asian countries. The Company sourced products under review from vendors in China and Taiwan during the periods selected for review. The Company accrues for the duty expense once it is determined to be probable and the amount can be reasonably estimated. On March 16, 2018, the Department published updated results, which were finalized upon the completion of review of appeals in April 2018. Based on final results, our liability was reduced to $2,446. The Company recorded income of $3,829 in fiscal 2018, which is included in Cost of Sales on the Company's Consolidated Statement of Comprehensive Income (Loss). In fiscal 2017, the Company recorded an expense of $6,274 based on our initial assessment of this matter. There were no related charges in fiscal 2019.
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). 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.
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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.
On August 16, 2019, KeyMe filed a complaint for patent infringement against Hillman Group in the United States District Court for the District of Delaware. KeyMe alleges that Hillman’s KeyKrafter key duplication machines and MinuteKey self-service key duplication kiosks infringe KeyMe’s U.S. Patent No. 8,682,468 when those machines are used in conjunction with Hillman’s KeyHero system. KeyMe seeks damages and injunctive relief against Hillman Group. 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. The Delaware Court has not yet issued a Scheduling Order in the case.
Management and legal counsel for the Company are of the opinion that KeyMe's claim is without merit and the Company should prevail in defending the suit. The Company is unable to estimate the possible loss or range of loss at this early stage in the case.
In addition, legal proceedings are pending which are either in the ordinary course of business or incidental to the Company's business. Those legal proceedings incidental to the business of the Company are generally not covered by insurance or other indemnity. In the opinion of the Company's management, the ultimate resolution of the pending litigation matters will not have a material adverse effect on the consolidated financial position, operations, or cash flows of the Company.
16. Statement of Cash Flows:
Supplemental disclosures of cash flows information are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended
December 30, 2017
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
Interest on junior subordinated debentures
|
|
$
|
11,211
|
|
|
$
|
12,230
|
|
|
$
|
12,230
|
|
|
Interest
|
|
$
|
94,461
|
|
|
$
|
56,879
|
|
|
$
|
48,511
|
|
|
Income taxes, net of refunds
|
|
$
|
(489
|
)
|
|
$
|
1,027
|
|
|
$
|
295
|
|
17. Quarterly Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
Net sales
|
|
$
|
287,659
|
|
|
$
|
324,628
|
|
|
$
|
317,277
|
|
|
$
|
284,798
|
|
|
$
|
1,214,362
|
|
|
Income (loss) from operations
|
|
265
|
|
|
8,546
|
|
|
9,952
|
|
|
(11,068
|
)
|
|
7,695
|
|
|
Net loss
|
|
(35,268
|
)
|
|
(19,495
|
)
|
|
(14,526
|
)
|
|
(34,097
|
)
|
|
(103,386
|
)
|
|
2018
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
Net sales
|
|
$
|
207,595
|
|
|
$
|
246,154
|
|
|
$
|
243,839
|
|
|
$
|
276,587
|
|
|
$
|
974,175
|
|
|
Income (loss) from operations
|
|
8,060
|
|
|
13,011
|
|
|
6,647
|
|
|
(275
|
)
|
|
27,443
|
|
|
Net loss
|
|
(10,317
|
)
|
|
(13,531
|
)
|
|
(10,708
|
)
|
|
(35,085
|
)
|
|
(69,641
|
)
|
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
18. Concentration of Credit Risks:
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company places its cash and cash equivalents with high credit quality financial institutions. Concentrations of credit risk with respect to sales and trade receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across geographic areas. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral.
For the year ended December 28, 2019, the largest three customers accounted for 52.5% of sales and 42.0% of the year-end accounts receivable balance. For the year ended December 29, 2018, the largest three customers accounted for 50.7% of sales and 48.8% of the year-end accounts receivable balance. No other customer accounted for more than 5.0% of the Company's total sales in 2019, 2018, or 2017.
In each of the years ended December 28, 2019, December 29, 2018, and December 30, 2017, the Company derived over 10% of its total revenues from two separate customers which operated in each of the operating segments. The following table presents revenue from the above mentioned customers as percentage of total revenue for each of the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 28, 2019
|
|
Year Ended December 29, 2018
|
|
Year Ended December 30, 2017
|
|
Lowe's
|
20.7
|
%
|
|
20.8
|
%
|
|
21.1
|
%
|
|
Home Depot
|
24.0
|
%
|
|
21.8
|
%
|
|
16.7
|
%
|
19. Segment Reporting and Geographic Information:
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 December 28, 2019.
The segments are as follows:
|
|
|
|
•
|
Fastening, Hardware, and Personal Protective Solutions
|
|
|
|
|
•
|
Consumer Connected Solutions
|
The Fastening, Hardware, and Personal Protective Solutions segment distributes fasteners and related hardware items, threaded rod, personal protective equipment, and letters, numbers, and signs to hardware stores, home centers, mass merchants, and other retail outlets primarily in the United States and Mexico.
The Consumer Connected Solutions segment consists of key duplication and engraving kiosks that can be operated directly by the consumer. The kiosks operate in retail and other high-traffic locations offering customized licensed and unlicensed products targeted to consumers in the respective locations. It also includes our associate-assisted key duplication systems and key accessories.
The Canada segment distributes fasteners and related hardware items, threaded rod, keys, key duplicating systems, accessories, personal protective equipment, and identification items, such as tags and letters, numbers, and signs to hardware stores, home centers, mass merchants, industrial distributors, automotive aftermarket distributors, and other retail outlets and industrial Original Equipment Manufacturers (“OEMs”) in Canada. The Canada segment also produces fasteners, stampings, fittings, and processes threaded parts for automotive suppliers and industrial OEMs.
The Company uses profit or loss from operations to evaluate the performance of its segments, and does not include segment assets or non-operating income/expense items for management reporting purposes. Profit or loss from operations is defined as income from operations before interest and tax expenses. Segment revenue excludes sales between segments, which is consistent with the segment revenue information provided to the Company's chief operating decision maker ("CODM").
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
In the year ended December 29, 2018 the Company acquired Minute Key and Big Time (see Note 5 - Acquisitions of the Notes to Consolidated Financial Statements for additional information). Minute Key is included in our Consumer Connected Solutions segment while Big Time is included in our Fastening, Hardware, and Personal Protective Solutions segment. In the year ended December 30, 2017 the Company acquired STFS which is included in our Fastening, Hardware, and Personal Protective Solutions segment.
The table below presents revenues and income (loss) from operations for the reportable segments for the years ended December 28, 2019, December 29, 2018, and December 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 28, 2019
|
|
Year Ended
December 29, 2018
|
|
Year Ended December 30, 2017
|
|
Revenues
|
|
|
|
|
|
|
|
Fastening, Hardware, and Personal Protective Solutions
|
|
$
|
853,016
|
|
|
$
|
636,717
|
|
|
$
|
528,969
|
|
|
Consumer Connected Solutions
|
|
236,086
|
|
|
196,043
|
|
|
171,598
|
|
|
Canada
|
|
125,260
|
|
|
141,415
|
|
|
137,801
|
|
|
Total revenues
|
|
$
|
1,214,362
|
|
|
$
|
974,175
|
|
|
$
|
838,368
|
|
|
Segment Income (Loss) from Operations
|
|
|
|
|
|
|
|
Fastening, Hardware, and Personal Protective Solutions
|
|
$
|
14,204
|
|
|
$
|
18,555
|
|
|
$
|
7,765
|
|
|
Consumer Connected Solutions
|
|
3,385
|
|
|
17,705
|
|
|
24,800
|
|
|
Canada
|
|
(9,894
|
)
|
|
(8,817
|
)
|
|
2,939
|
|
|
Total segment income from operations
|
|
$
|
7,695
|
|
|
$
|
27,443
|
|
|
$
|
35,504
|
|
20. Subsequent Events
COVID-19
On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. As of the date of this filing, our distribution centers remain open in the US, Canada, and Mexico. The Company cannot reasonably estimate the length or severity of this pandemic, or the extent to which the disruption may materially impact our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.
Financial Statement Schedule:
Schedule II - VALUATION ACCOUNTS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Deducted From
Assets in
Balance Sheet
|
|
|
Allowance for
Doubtful
Accounts
|
|
Ending Balance - December 31, 2016
|
$
|
907
|
|
|
Additions charged to cost and expense
|
282
|
|
|
Deductions due to:
|
|
|
Others
|
(68
|
)
|
|
Ending Balance - December 30, 2017
|
1,121
|
|
|
Additions charged to cost and expense
|
(40
|
)
|
|
Deductions due to:
|
|
|
Others
|
(235
|
)
|
|
Ending Balance - December 29, 2018
|
846
|
|
|
Additions charged to cost and expense
|
790
|
|
|
Deductions due to:
|
|
|
Others
|
255
|
|
|
Ending Balance - December 28, 2019
|
$
|
1,891
|
|
