10-K: Annual report pursuant to Section 13 and 15(d)
Published on March 31, 2011
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
Commission file number 1-13293
The Hillman Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 23-2874736 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
10590 Hamilton Avenue Cincinnati, Ohio |
45231 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (513) 851-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Each Exchange on Which Registered |
|
11.6% Junior Subordinated Debentures | None | |
Preferred Securities Guaranty | None |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ¨ NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES ¨ NO x
On March 31, 2011, 5,000 shares of the Registrants common stock were issued and outstanding and 4,217,724 Trust Preferred Securities were issued and outstanding by the Hillman Group Capital Trust. The Trust Preferred Securities trade on the NYSE Amex under the symbol HLM.Pr. The aggregate market value of the Trust Preferred Securities held by non-affiliates at June 30, 2010 was $121,175,211.
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General
The Hillman Companies, Inc. and its wholly owned subsidiaries (collectively Hillman or the Company) are one of the largest providers of hardware-related products and related merchandising services to retail markets in North America. The Companys principal business is operated through its wholly-owned subsidiary, The Hillman Group, Inc. (the Hillman Group) which had net sales of approximately $462.4 million in 2010. The Hillman Group sells its products to hardware stores, home centers, mass merchants, pet supply stores, and other retail outlets principally in the United States, Canada, Mexico, Australia, Latin America and the Caribbean. Product lines include thousands of small parts such as fasteners and related hardware items; threaded rod and metal shapes; keys, key duplication systems and accessories; builders hardware; and identification items, such as tags and letters, numbers, and signs. The Company supports its product sales with value added services including design and installation of merchandising systems and maintenance of appropriate in-store inventory levels.
The Companys headquarters are located at 10590 Hamilton Avenue, Cincinnati, Ohio. The Company maintains a website at http://www.hillmangroup.com. Information contained or linked on our website is not incorporated by reference into this annual report and should not be considered a part of this annual report.
Background
On May 28, 2010, Hillman was acquired by affiliates of Oak Hill Capital Partners (OHCP) and certain members of Hillmans management and Board of Directors. Pursuant to the terms and conditions of an Agreement and Plan of Merger dated as of April 21, 2010, the Company was merged with an affiliate of OHCP with the Company surviving the merger (the Merger Transaction). As a result of the Merger Transaction, Hillman is a wholly-owned subsidiary of OHCP HM Acquisition Corp. (Holdco). The total consideration paid in the Merger Transaction was $832.7 million which includes $11.5 million for the Quick Tag license and related patents, repayment of outstanding debt and the net value of the Companys outstanding junior subordinated debentures ($105.4 million liquidation value, net of $3.3 million in trust common securities, at the time of the merger).
Prior to the Merger Transaction, affiliates of Code Hennessy & Simmons LLC (CHS) owned 49.3% of the Companys outstanding common stock and 54.6% of the Companys voting common stock, Ontario Teachers Pension Plan (OTPP) owned 28.0% of the Companys outstanding common stock and 31.0% of the Companys voting common stock and HarbourVest Partners VI owned 8.7% of the Companys outstanding common stock and 9.7% of the Companys voting common stock. Certain current and former members of management owned 13.7% of the Companys outstanding common stock and 4.4% of the Companys voting common stock. Other investors owned 0.3% of the Companys common stock and 0.3% of the Companys voting common stock.
The Companys consolidated balance sheet as of May 28, 2010 and its related statements of operations, cash flows and changes in stockholders equity for the periods presented prior to May 28, 2010 are referenced herein as the predecessor financial statements (the Predecessor or Predecessor Financial Statements). The Companys consolidated balance sheet as of December 31, 2010 and its related statements of operations, cash flows and changes in stockholders equity for the periods presented subsequent to the Merger Transaction are referenced herein as the successor financial statements (the Successor or Successor Financial Statements). The Predecessor Financial Statements do not reflect certain transaction amounts that were incurred at the close of the Merger Transaction. Such transaction amounts include the write-off of $5.0 million in deferred financing fees associated with the Predecessor debt obligations.
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Recent Developments
On December 29, 2010, the Hillman Group entered into a Stock Purchase Agreement by and among Serv-A-Lite Products, Inc. (Servalite), Thomas Rowe, Mary Jennifer Rowe and the Hillman Group, whereby the Hillman Group acquired all of the equity interest of Servalite. The aggregate purchase price, including acquisition costs, was $21.3 million paid in cash at closing. Servalite, an East Moline, Illinois based distributor of specialty fasteners and electrical parts is expected to strengthen the Companys position in providing value-added products and service to home centers and hardware retailers.
On March 16, 2011, Hillman Group closed its acquisition of TAGWORKS, L.L.C. (TagWorks), an Arizona limited liability company (the TagWorks Acquisition) for an initial purchase price of approximately $40.0 million in cash. In addition, subject to fulfillment of certain conditions, Hillman Group will pay additional consideration of $12.5 million to the sellers of TagWorks on October 31, 2011, and an additional earn-out payment of up to $12.5 million in 2012.
Founded in 2007, TagWorks provides innovative pet ID tag programs to a leading pet products chain retailer using a unique, patent-protected / patent-pending technology and product portfolio. In conjunction with this agreement, Hillman Group entered into an agreement with KeyWorks-KeyExpress, LLC (KeyWorks), a company affiliated with TagWorks, to assign its patent-pending retail key program technology to Hillman Group and to continue to work collaboratively with us to develop next generation key duplicating technology.
In connection with the TagWorks Acquisition, Hillman Group completed an offering of $50 million aggregate principal amount of its 10.875% Senior Notes due 2018 (the new notes). The Hillman Group previously issued $150 million aggregate principal amount of its 10.875% Senior Notes due 2018 in May 2010 (together with the new notes, the notes). The Hillman Group used the net proceeds from the offering of the new notes to fund the acquisition of TagWorks, to repay a portion of the indebtedness under its revolving credit facility and to pay related fees, expenses and other related payments. The notes are guaranteed by The Hillman Companies, Hillman Investment Company and all of the domestic subsidiaries of The Hillman Group.
For additional information on certain details of the transactions, see Item 7 - Managements Discussion and Analysis of Financial Conditions and Results of Operations.
The Hillman Group
The Company is organized as a single business segment, The Hillman Group. A subsidiary of the Hillman Group operates in (1) Canada under the name The Hillman Group Canada, Ltd., (2) Mexico under the name SunSource Integrated Services de Mexico SA de CV, (3) primarily in Florida under the name All Points Industries, Inc. and (4) Australia under the name The Hillman Group Australia Pty. Ltd. Retail outlets served by Hillman include hardware stores, home centers, mass merchants, pet supply stores, grocery stores and drug stores. Through its field sales and service organization, Hillman complements its extensive product selection with value-added services for the retailer.
Sales and service representatives regularly visit retail outlets to review stock levels, reorder items in need of replacement, and interact with the store management to offer new product and merchandising ideas. Thousands of items can be actively managed with the retailer experiencing a substantial reduction in paperwork and labor costs. Service representatives also assist in organizing the products in a consumer-friendly manner. Hillman complements its broad range of products with value-added merchandising services such as displays, product identification stickers, retail price stickers, store rack and drawer systems, assistance in rack positioning and store layout, and inventory restocking services. Hillman regularly introduces new products and package designs with color-coding for ease of shopping by consumers and modifies rack designs to improve the attractiveness of individual store displays. Hillman functions as a merchandising manager for retailers and supports this service with high order fill rates and rapid delivery of products sold.
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The Company ships its products from 12 strategically located distribution centers in the United States, Canada and Mexico (See Item 2 Properties). The Company closed its distribution center in Green Island, NY in March 2009 and closed its Portland, OR distribution center in October 2010. The impact of closing these facilities was not material to Company operations. Customer orders processed from these facilities were shifted to existing facilities in Forest Park, OH, LaCrosse, WI and Shafter, CA. Hillman utilizes a third-party logistics provider to warehouse and ship customer orders in Mexico. Currently, orders are shipped within 48 hours and, for the year ended December 31, 2010, the Company had a 97.5% order fill rate.
Hillman also manufactures and markets a value-added mix of high-tech and conventional products in two core product categories: key duplication systems and identification systems. The patent-protected Axxess Precision Key Duplication System has proven to be a profitable revenue source within Big Box retailers. The technology developed for this system revolutionized the key duplicating process utilizing computer aided alignment, indexing and duplication of keys. This system has been placed in over 14,300 retail locations to date and is supported by Hillman sales and service representatives.
In addition, Hillman offers Quick-Tag, a commercialized, consumer-operated vending system which provides custom engraved specialty items, such as pet identification tags, luggage tags and other engraved identification tags. To date, more than 2,700 Quick-Tag machines have been placed in retail locations which are being supported by Hillmans sales and service representatives.
Products and Suppliers
Hillman currently purchases its products from approximately 750 vendors, the largest of which accounted for approximately 7.6% of the Companys annual purchases and the top five of which accounted for approximately 23.9% of its annual purchases. About 41.1% of Hillmans annual purchases are from non-U.S. suppliers, with the balance from U.S. manufacturers and master distributors. The Companys vendor quality control procedures include on-site evaluations and frequent product testing. Vendors are also evaluated based on delivery performance and the accuracy of their shipments.
Fasteners
Fasteners still remain the core of Hillmans business and the product line encompasses more than 40,000 stock keeping units (SKUs), which management believes to be one of the largest selections among suppliers servicing the hardware retail segment. The fastener line includes standard and specialty nuts, bolts, washers, screws, anchors, and picture hanging items. Hillman offers zinc, chrome, and galvanized plated steel fasteners in addition to stainless steel, brass, and nylon fasteners in this vast line of products. In addition, the Company carries a complete line of indoor and outdoor project fasteners for use with drywall and deck construction.
Some of the Companys latest offerings include WallDog, which is an innovative, all steel, one-piece screw anchor which features high profile threads for easy fastening into drywall and masonry base materials. In addition, the new Agri Center marked Hillmans expansion into the fast growing and highly fragmented Agricultural hardware segment. The Agri Center features accessories and fasteners commonly used for the repair and maintenance of trailers and implementation equipment. The program also features an innovative new merchandising format which allows retailers to increase holding power while displaying products in a neat and organized system.
Further, the Companys chrome and automotive fastener lines are offered primarily to franchise and independent hardware stores and automotive parts retailers. Management believes that these two lines are among the most comprehensive in the retail market and are growing in popularity with both the automotive and motorcycle industries. Other new fastener offerings include construction lags, suspended ceiling fasteners, wire goods, painted and specialty finished screws, stainless steel outdoor screws and anchor bolts.
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The acquisition of Servalite, which was completed on December 29, 2010, expanded the Companys line of specialty fasteners and electrical parts. It also strengthens our position of providing value-added products and services to home centers and hardware retailers. Hillman management believes that the core competencies developed over time in the management of the fastener product line have enabled Hillman to leverage its scale and expertise to broaden its product offerings efficiently.
Fasteners generated approximately 55.8% of the Companys total revenues in 2010, as compared to 55.3% in 2009.
Keys and Key Accessories
Hillman designs and manufactures state-of-the-art, proprietary equipment which forms the cornerstone for the Companys key duplication business. The Hillman key duplication system is offered in various retail channels including mass merchants, home centers, automotive parts retailers, franchise and independent hardware stores, and grocery/drug chains; it can also be found in many service-based businesses like parcel shipping outlets.
Hillman markets its key duplication system under two different brands. The Axxess Precision Key Duplication System© is marketed to national retailers requiring a key duplication program easily mastered by novice associates, while the Hillman Key Program targets the franchise hardware and independent retailers, with a machine that works well in businesses with lower turnover and highly skilled employees. There are over 14,300 Axxess Programs placed in North American retailers including Wal-Mart, Kmart, Sears, The Home Depot, Lowes and Menards.
A new key duplication system, the Precision Laser Key System, was introduced to select test markets in 2007. This system uses a digital optical camera and proprietary software to scan a customers key. The system identifies the key and retrieves the keys specifications, including the appropriate blank and cutting pattern, from a comprehensive database. This new technology also eliminates the effect of natural wear on the customers key by reproducing the original key pattern. Hillman has placed approximately 700 of these new key duplicating systems in North American retailers and management believes that the Company is well-positioned to capitalize on this new technology.
In addition to key duplication, Hillman has an exclusive, strategic partnership with Barnes Distribution for the distribution of the proprietary PC+© Code Cutter which produces automobile keys based on a vehicles identification number. The Code Cutter machines are marketed to automotive dealerships, auto rental agencies and various companies with truck and vehicle fleets. Since its introduction, over 7,900 PC+© units and 8,100 of the newer Flash Code Cutter units have been sold.
Hillman also markets key accessories in conjunction with its key duplication systems. Popular accessories include the Key Light, Valet KeyChain, Fanatix key identifiers, key coils and key clips. The line of key accessories includes a broad range of products such as key chains, tags, lights, floats, holders, whistles and a host of other miscellaneous complementary items. Additionally, new fashion key and accessory programs have been introduced recently, including DIVA and licensed programs featuring NFL, MLB, Disney, Harley Davidson and other popular licensed properties. Hillman has taken the key and key accessory categories from a price sensitive commodity to a fashion driven business and has significantly increased retail pricing and gross margins.
In conjunction with the TagWorks Acquisition, Hillman Group also signed a definitive 17-year agreement with KeyWorks to assign its patent-pending retail key program technology to Hillman Group. This collaboration is expected to provide a unique opportunity to develop next generation key duplicating technology.
Keys, key accessories and Code Cutter units represented approximately 22.8% of the Companys total revenues in 2010, as compared to 22.0% in 2009.
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Engraving
Quick-Tag is a patented, state-of-the-art consumer-operated vending system that custom engraves and dispenses specialty products such as pet identification tags, military-style I.D. tags, holiday ornaments and luggage tags. Styles include NFL and NCAA logo military tags. Quick-Tag is an easy, convenient means for the consumer to custom engrave tags while shopping at large format retail stores such as Wal-Mart and PETCO. Hillman has placed over 2,700 Quick-Tag machines in retail outlets throughout the United States and Canada.
Innovation has played a major role in the development of the Companys Quick-Tag machine. Using an interactive touch screen, customers input information such as a pet name and telephone number, and the systems proprietary technology engraves the tag in less than two minutes. The Quick-Tag system does not require incremental labor and generates high levels of customer satisfaction and attractive margins for the retailer. This custom engraving system generates retail profit per square foot over seven times the typical retail average. In addition to the placements in retail outlets, the Company has placed machines inside theme parks such as Disney, Sea World, and Universal Studios.
In 2010, Hillman initiated deliveries of its new FIDO engraving system to PETCO. This new engraving program integrates a fun attractive design with a user interface that provides new features for the customer. The individual tag is packaged in a mini cassette and the machines mechanism flips the tag to allow engraving on both sides. The user interface features a loveable dog character that guides the customer through the engraving process. Initial reaction to the new machine has been very positive. Hillman has placed approximately 113 FIDO systems in PETCO stores as of December 31, 2010.
Hillman purchases a wide variety of materials and components to manufacture the Axxess Key Duplication and Quick-Tag engraving machines, many of which are manufactured to its specifications. Management does not believe that it is dependent on any one supplier. The machine components do not generally require proprietary technology. Hillman has identified or used alternate suppliers for its primary sourcing needs.
On March 16, 2011, Hillman Group completed the TagWorks Acquisition. TagWorks provides innovative pet ID tag programs to leading pet products chain retailers using a unique, patent-protected / patent-pending technology and product portfolio.
Engraving products represented approximately 6.3% of the Companys total revenues in 2010, as compared to 7.8% in 2009.
Letters, Numbers and Signs
Letters, Numbers and Signs (LNS) includes utilitarian product lines that target both the homeowner and commercial user. Product lines within this category include individual and/or packaged letters, numbers, signs, safety related products (e.g. 911 signs), driveway markers, and a diversity of sign accessories, such as sign frames.
Hillman markets LNS products under the Hillman Sign Center brand. Through a series of strategic acquisitions, exclusive partnerships, and organic product development, the Hillman LNS program gives retailers one of the largest product offerings available in this category. This SKU intensive product category is considered a staple for retail hardware departments and is typically merchandised in eight linear feet of retail space containing hundreds of SKUs. In addition to the core product program, Hillman provides its customers with value-added retail support including custom plan-o-grams and merchandising solutions which incorporate a wide variety of space-utilizing merchandisers.
The Hillman LNS program can be found in Big Box retailers, mass merchants, and pet supply accounts. In addition, Hillman has product placement in franchise and independent hardware retailers.
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The LNS category represented approximately 7.5% of the Companys total revenues in each of the years of 2010 and 2009.
Threaded Rod
Hillman is now a leading supplier of metal shapes and threaded rod in the retail market. The SteelWorks threaded rod line includes hot and cold rolled rod, both weld-able and plated, as well as a complete offering of All-Thread rod in galvanized steel, stainless steel, and brass.
The SteelWorks program is carried by many top retailers, including Lowes, Menards, and Sears, and through cooperatives such as Ace and True Value. In addition, Hillman is the primary supplier of metal shapes to many wholesalers throughout the country.
Threaded rod generated approximately 6.5% of the Companys total revenues in 2010, as compared to 6.6% in 2009.
Builders Hardware
In 2007, the Company entered the residential Builders Hardware market by selling its newly developed product line to Canadian Tire, a Canadian retailer with 497 stores. The Builders Hardware category includes a variety of common household items such as coat hooks, door stops, hinges, gate latches, hasps and decorative hardware.
Hillman markets the Builders Hardware products under the Hardware Essentials brand and provides the retailer with an innovative merchandising solution. The Hardware Essentials program utilizes modular packaging, color coding and integrated merchandising to simplify the shopping experience for consumers. Colorful signs, packaging and installation instructions guide the consumer quickly and easily to the correct product location. Hardware Essentials provides retailers and consumers decorative upgrade opportunities through the introduction of high-end finishes such as satin nickel, pewter and antique bronze.
The combination of merchandising, upgraded finishes and product breadth is designed to improve the retailers performance. The addition of the Builders Hardware product line exemplifies the Companys strategy of leveraging its core competencies to further penetrate customer accounts with new product offerings. In 2010, the Company expanded the placement of the Hardware Essentials line to customers including Sears, Fred Meyer and Kent Building Supply.
The Builders Hardware category generated approximately 1.1% of the Companys total revenues in 2010, as compared to 0.8% in 2009.
Markets and Customers
Hillman sells its products to national accounts such as Lowes, Home Depot, Wal-Mart, Tractor Supply, Sears, Menards and PETCO. Hillmans status as a national supplier of proprietary products to Big Box retailers allows it to develop a strong market position and high barriers to entry within its product categories.
Hillman services more than 13,000 franchise and independent (F&I) retail outlets. These individual dealers are typically members of the larger cooperatives, such as True Value, Ace, and Do-It-Best. The Company sells directly to the cooperatives retail locations and also supplies many items to the cooperatives central warehouses. These central warehouses distribute to their members that do not have a requirement for Hillmans in-store service. These arrangements reduce credit risk and logistic expenses for Hillman while also reducing central warehouse inventory and delivery costs for the cooperatives.
A typical hardware store maintains thousands of different items in inventory, many of which generate small dollar sales but large profits. It is difficult for a retailer to economically monitor all stock levels and to reorder the products from multiple vendors.
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The problem is compounded by the necessity of receiving small shipments of inventory at different times and having to stock the goods. The failure to have these small items available will have an adverse effect on store traffic, thereby denying the retailer the opportunity to sell items that generate higher dollar sales.
Hillman sells its products to approximately 18,000 customers, the top five of which accounted for approximately 48.4% of its total revenue in 2010. Lowes is the single largest customer, representing approximately 24.3% of total revenue, Home Depot is the second largest at approximately 11.7% and Wal-Mart is the third largest at approximately 7.8% of total revenue. No other customer accounted for more than 5.0% of the Companys total revenue in 2010.
The Companys telemarketing activity sells to thousands of smaller hardware outlets and non-hardware accounts. New business is also being pursued internationally in such places as Australia, Canada, Mexico, South and Central America, and the Caribbean.
Sales and Marketing
The Hillman Group provides product support, customer service and profit opportunities for its retail distribution partners. The Company believes its competitive advantage is in its ability to provide a greater level of customer service than its competitors.
As a company, service is the hallmark of Hillman. The national accounts field service organization consists of over 469 employees and 33 field managers focusing on Big Box retailers, pet super stores, large national discount chains and grocery stores. This organization reorders products, details store shelves, and sets up in-store promotions. Many of the Companys largest customers use electronic data interchange (EDI) for handling of orders and invoices.
The Company employs what it believes to be the largest factory direct sales force in the industry. The sales force which consists of 209 people, and is managed by 18 field managers, focuses on the F&I customers. The depth of the sales and service team enables Hillman to maintain consistent call cycles ensuring that all customers experience proper stock levels and inventory turns. This team also builds custom plan-o-grams of displays to fit the needs of any store, as well as establishing programs that meet customers requirements for pricing, invoicing, and other needs. This group also benefits from daily internal support from the inside sales and customer service teams. Each sales representative is responsible for approximately 56 full service accounts that they call on approximately every two weeks.
These efforts, coupled with those of the marketing department, allow the sales force to not only sell products, but sell merchandising and technological support capabilities as well. Hillmans marketing department provides support through the development of new products, sales collateral material, promotional items, merchandising aids and custom signage. Marketing services such as advertising, graphic design, and trade show management are also provided. The department is organized along Hillmans three marketing competencies: product management, channel marketing and marketing communications.
Competition
The primary competitors in the national accounts marketplace for fasteners are ITW Inc., Dorman Inc., Crown Bolt LLC., Midwest Fasteners, and the Newell Group. Competition is based primarily on in-store service and price. Other competitors are local and regional distributors. Competitors in the pet tag market are specialty retailers, direct mail order and retailers with in-store mail order capability. The Quick-Tag system has patent protected proprietary technology that is a major barrier to entry and preserves this market segment.
The principal competitors for Hillmans F&I business are Midwest Fasteners and Hy-Ko in the hardware store marketplace. Midwest Fasteners primarily focuses on fasteners, while Hy-Ko is the major competitor in LNS products and keys/key accessories. Management estimates that Hillman sells to approximately 63% of the full service hardware stores in
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the F&I marketplace. The hardware outlets that purchase products but not services from Hillman also purchase products from local and regional distributors and cooperatives. Hillman competes primarily on field service, merchandising, as well as product availability, price and depth of product line.
Insurance Arrangements
Under the Companys current insurance programs, commercial umbrella coverage is obtained for catastrophic exposure and aggregate losses in excess of expected claims. Since October 1991, the Company has retained the exposure on certain expected losses related to workers compensation, general liability and automobile. The Company also retains the exposure on expected losses related to health benefits of certain employees. The Company believes that its present insurance is adequate for its businesses. See Note 17, Commitments and Contingencies, of Notes to Consolidated Financial Statements.
Employees
As of December 31, 2010, the Company had 1,930 full time and part time employees, none of which were covered by a collective bargaining agreement. In the opinion of management, employee relations are good.
Backlog
The Company does not consider the sales backlog to be a significant indicator of future performance due to the short order cycle of its business. The Companys sales backlog from ongoing operations was approximately $3.2 million as of December 31, 2010 and approximately $3.5 million as of December 31, 2009.
Where You Can Find More Information
The Company files quarterly reports on Form 10-Q and annual reports on Form 10-K and furnishes current reports on Form 8-K, and other information with the Securities and Exchange Commission (the Commission). You may read and copy any reports, statements, or other information filed by the Company at the Commissions public reference rooms at 100 F Street, N.E., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for more information on the public reference rooms. The Commission also maintains an Internet site at http://www.sec.gov that contains quarterly, annual, and current reports, proxy and information statements, and other information regarding issuers, like Hillman, that file electronically with the Commission.
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An investment in the Companys securities involves certain risks as discussed below. However, the risks set forth below are not the only risks the Company faces, and it faces other risks which have not yet been identified or which are not yet otherwise predictable. If any of the following risks occur or are otherwise realized, the Companys business, financial condition and results of operations could be materially adversely affected. You should consider carefully the risks described below and all other information in this annual report, including the Companys financial statements and the related notes and schedules thereto, prior to making an investment decision with regard to the Companys securities.
Current economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers and others with which we do business to suffer financial hardship, all of which could adversely impact our business, results of operations, financial condition and cash flows.
Our business, financial condition and results of operations have and may continue to be affected by various economic factors. The U.S. economy has undergone a period of recession and the future economic environment may continue to be less favorable than that of recent years. This slowdown has, and could further lead to, reduced consumer and business spending in the foreseeable future, including by our customers. In addition, economic conditions, including decreased access to credit, may result in financial difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for our customers, suppliers and other service providers. If such conditions continue or further deteriorate in 2011 or through fiscal 2012, our industry, business and results of operations may be severely impacted.
The Companys business is impacted by general economic conditions in the U.S. and international markets, particularly the U.S. retail markets including hardware stores, home centers, mass merchants, and other retailers. In recent quarters, operations have been negatively impacted by the general downturn in the U.S. economy, including higher unemployment figures, and the contraction of the retail market. Although there have been certain signs of improvement in the economy, generally such conditions are not expected to improve significantly in the near term and may have the effect of reducing consumer spending which could adversely affect our results of operations during the next year.
The Company operates in a highly competitive industry, which may have a material adverse effect on its business, financial condition and results of operations.
The retail industry is highly competitive, with the principal methods of competition being price, quality of service, quality of products, product availability, credit terms and the provision of value-added services, such as merchandising design, in-store service and inventory management. The Company encounters competition from a large number of regional and national distributors, some of which have greater financial resources than the Company and may offer a greater variety of products. If these competitors are successful, the Companys business, financial condition and results of operations may be materially adversely affected.
If the current weakness continues in the retail markets including hardware stores, home centers, mass merchants and other retail outlets in North America, or general recessionary conditions worsen, it could have a material adverse effect on the Companys business.
The Companys business has been adversely affected by the decline in the North American economy, particularly with respect to retail markets including hardware stores, home centers, lumberyards and mass merchants. It is possible this softness will continue or further deteriorate in 2011 or through fiscal 2012. To the extent it persists or deteriorates, there is likely to be an unfavorable impact on demand for Company products which could have a material adverse effect on sales, earnings and cash flows. In addition, due to current economic conditions, it is possible certain customers credit-worthiness may erode resulting in increased write-offs of customer receivables.
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The Companys business, financial condition and results of operations may be materially adversely affected by seasonality.
In general, the Company has experienced seasonal fluctuations in sales and operating results from quarter to quarter. Typically, the first calendar quarter is the weakest due to the effect of weather on home projects and the construction industry.
Large customer concentration and the inability to penetrate new channels of distribution could adversely affect the business.
The Companys three largest customers constituted approximately 43.7% of net sales and 52.5% of the year-end accounts receivable balance for 2010. Each of these customers is a Big Box chain store. As a result, the Companys results of operations depend greatly on our ability to maintain existing relationships and arrangements with these Big Box chain stores. To the extent the Big Box chain stores are materially adversely impacted by the current economic slowdown, this could have a negative effect on our results of operations. The loss of one of these customers or a material adverse change in the relationship with these customers could have a negative impact on business. The Companys inability to penetrate new channels of distribution may also have a negative impact on its future sales and business.
Successful sales and marketing efforts depend on the Companys ability to recruit and retain qualified employees.
The success of the Companys efforts to grow its business depends on the contributions and abilities of key executives, its sales force and other personnel, including the ability of its sales force to achieve adequate customer coverage. The Company must therefore continue to recruit, retain and motivate management, sales and other personnel to maintain its current business and support its projected growth. A shortage of these key employees might jeopardize the Companys ability to implement its growth strategy.
The Company is exposed to adverse changes in currency exchange rates.
Exposure to foreign currency risk results because the Company, through its global operations, enters into transactions and makes investments denominated in multiple currencies. The Companys predominant exposures are in Mexican, Canadian and Asian currencies, including the Chinese Renminbi (RMB). In preparing its financial statements, for foreign operations with functional currencies other than the U.S. dollar, asset and liability accounts are translated at current exchange rates, and income and expenses are translated using weighted-average exchange rates. With respect to the effects on translated earnings, if the U.S. dollar strengthens relative to local currencies, the Companys earnings could be negatively impacted. The Company does not make a practice of hedging its non-U.S. dollar earnings.
The Company sources many products from China and other Asian countries for resale in other regions. To the extent the RMB or other currencies appreciate with respect to the U.S. dollar, the Company may experience cost increases on such purchases. The RMB appreciated approximately 3% versus the U.S. dollar in 2010 and remained substantially unchanged in 2009. The RMB currency fluctuation in 2010 and 2009 has not generated significant material cost increases for products sourced from China, however further significant appreciation of the RMB or other currencies in countries where the Company sources product could adversely impact profitability. The Company may not be successful at implementing customer pricing or other actions in an effort to mitigate the related cost increases and thus its results of operations may be adversely impacted.
The Companys results of operations could be negatively impacted by inflation or deflation in the cost of raw materials, freight and energy.
The Companys products are manufactured of metals, including but not limited to steel, aluminum, zinc, and copper. Additionally, the Company uses other commodity based materials in the manufacture of LNS that are resin based and subject to fluctuations in the price of oil. The Company is also exposed to fluctuations in the price of diesel
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fuel in the form of freight surcharges on customer shipments and the cost of gasoline used by the field sales and service force. As described in more detail in Item 7 hereto, the Company has been negatively impacted by commodity and freight inflation in recent years. Continued inflation over a period of years would result in significant increases in inventory costs and operating expenses. If the Company is unable to mitigate these inflation increases through various customer pricing actions and cost reduction initiatives, its financial condition may be adversely affected. Conversely, in the event there is deflation, the Company may experience pressure from its customers to reduce prices. There can be no assurance that the Company would be able to reduce its cost base (through negotiations with suppliers or other measures) to offset any such price concessions which could adversely impact results of operations and cash flows.
The Companys business is subject to risks associated with sourcing product from overseas.
The Company imports large quantities of its fastener products. Substantially all of its import operations are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries from which the Companys products and materials are manufactured or imported may, from time to time, impose additional quotas, duties, tariffs or other restrictions on its imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or the Companys suppliers failure to comply with customs regulations or similar laws, could harm the Companys business.
The Companys ability to import products in a timely and cost-effective manner may also be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes, severe weather or increased homeland security requirements in the U.S. and other countries. These issues could delay importation of products or require the Company to locate alternative ports or warehousing providers to avoid disruption to customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on the Companys business and financial condition.
Acquisitions have formed a significant part of our growth strategy in the past and may continue to do so. If we are unable to identify suitable acquisition candidates or obtain financing needed to complete an acquisition, our growth strategy may not succeed.
Historically, the Companys growth strategy has relied on acquisitions that either expand or complement its businesses in new or existing markets. However, there can be no assurance that the Company will be able to identify or acquire acceptable acquisition candidates on terms favorable to the Company and in a timely manner, if at all, to the extent necessary to fulfill Hillmans growth strategy.
The process of integrating acquired businesses into the Companys operations, including recently acquired Servalite, may result in unforeseen difficulties and may require a disproportionate amount of resources and managements attention, and there can be no assurance that Hillman will be able to successfully integrate acquired businesses into its operations.
The current economic environment may make it difficult to acquire businesses in order to further our growth strategy. We will continue to seek acquisition opportunities both to expand into new markets and to enhance our position in our existing markets. However, our ability to do so will depend on a number of factors, including our ability to obtain financing that we may need to complete a proposed acquisition opportunity which may be unavailable or available on terms that are not advantageous to us. If financing is unavailable, we may be forced to forego otherwise attractive acquisition opportunities which may have a negative effect on our ability to grow.
If the Company were required to write down all or part of its goodwill or indefinite-lived tradenames, its results of operations could be materially adversely affected.
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As a result of the Merger Transaction and the December 2010 acquisition of Servalite, the Company has $439.6 million of goodwill and $48.9 million of indefinite-lived tradenames recorded on its Consolidated Balance Sheet at December 31, 2010. The Company is required to periodically determine if its goodwill or indefinite-lived tradenames have become impaired, in which case it would write down the impaired portion of the intangible asset. If the Company were required to write down all or part of its goodwill or indefinite-lived tradenames, its net income could be materially adversely affected.
The Companys success is highly dependent on information and technology systems.
The Company believes that its proprietary computer software programs are an integral part of its business and growth strategies. Hillman depends on its information systems to process orders, to manage inventory and accounts receivable collections, to purchase, sell and ship products efficiently and on a timely basis, to maintain cost-effective operations and to provide superior service to its customers. There can be no assurance that the precautions which the Company has taken against certain events that could disrupt the operations of its information systems will prevent the occurrence of such a disruption. Any such disruption could have a material adverse effect on the Companys business and results of operations.
Risks relating to the Senior Notes and our Indebtedness
The Company has significant indebtedness that could affect operations and financial condition and prevent the Company from fulfilling its obligations under the notes.
The Company has a significant amount of indebtedness. On December 31, 2010, total indebtedness was $556.1 million, consisting of $105.4 million of indebtedness of Hillman and $450.7 million of indebtedness of Hillman Group.
The Companys substantial indebtedness could have important consequences to investors in Hillman securities. For example, it could:
| make it more difficult for the Company to satisfy obligations to holders of the notes; |
| increase the Companys vulnerability to general adverse economic and industry conditions; |
| require the dedication of a substantial portion of cash flow from operations to payments on indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; |
| limit flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| place the Company at a competitive disadvantage compared to competitors that have less debt; and |
| limit the Companys ability to borrow additional funds. |
In addition, the indenture and new senior secured credit facilities contain financial and other restrictive covenants that will limit the ability to engage in activities that may be in the Companys long-term best interests. The failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all outstanding debts.
The decline of general economic conditions in the U.S. capital markets over the past two years has significantly reduced the availability of credit for a number of companies. This may impact our ability to borrow additional funds, if necessary.
Despite current indebtedness levels, the Company and its subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with the Companys substantial leverage.
The Company and its subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indenture do not fully prohibit the Company or its subsidiaries from doing so. The new senior secured credit facilities permit additional
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borrowing of up to $30 million on the revolving credit facility and all of those borrowings would rank senior to the notes and the guarantees. If new debt is added to our current debt levels, the related risks that the Company and its subsidiaries now face could intensify.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
The ability to make payments on and to refinance our indebtedness, including the notes, and to fund planned capital expenditures and research and development efforts, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
The Company cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule or that future borrowings will be available under our new credit facility in an amount sufficient to enable the Company to pay its indebtedness, including the notes, or to fund its other liquidity needs. The Company may need to refinance all or a portion of its indebtedness, including the notes on or before maturity. The Company cannot assure you that it will be able to refinance any of its indebtedness, including our new credit facility and the notes, on commercially reasonable terms or at all.
The failure to meet certain financial covenants required by our credit agreements may materially and adversely affect assets, financial position and cash flows.
Certain of the Companys credit agreements require the maintenance of certain interest coverage and leverage ratios and limit our ability to incur debt, make investments, make dividend payments to holders of the Trust Preferred Securities or undertake certain other business activities. In particular, our maximum allowed leverage requirement is 6.75x, excluding the junior subordinated debentures, as of December 31, 2010. A breach of the leverage covenant, or any other covenants, could result in an event of default under the credit agreements. Upon the occurrence of an event of default under the credit agreements, all amounts outstanding, together with accrued interest, could be declared immediately due and payable by our lenders. If this happens, our assets may not be sufficient to repay in full the payments due under the credit agreements. The current credit market environment and other macro-economic challenges affecting the global economy may adversely impact our ability to borrow sufficient funds or sell assets or equity in order to pay existing debt.
The Company is permitted to create unrestricted subsidiaries, which are not to be subject to any of the covenants in the indenture, and the Company may not be able to rely on the cash flow or assets of those unrestricted subsidiaries to pay our indebtedness.
Unrestricted subsidiaries are not subject to the covenants under the indenture governing the notes. Unrestricted subsidiaries may enter into financing arrangements that limit their ability to make loans or other payments to fund payments in respect of the notes. Accordingly, the Company may not be able to rely on the cash flow or assets of unrestricted subsidiaries to pay any of our indebtedness, including the notes.
The Company is subject to fluctuations in interest rates.
All of our indebtedness incurred in connection with the Bank Financing has variable rate interest. Increases in borrowing rates will increase our cost of borrowing, which may affect our results of operations and financial condition.
The Company may choose to redeem notes when prevailing interest rates are relatively low.
The Company may choose to redeem the notes from time to time, especially when prevailing interest rates are lower than the rate borne by the notes. If prevailing rates are lower at the time of redemption, an investor would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the notes being redeemed. The redemption right also may adversely impact an investors ability to sell notes as the optional redemption date or period approaches.
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Federal and state statutes allow courts, under specific circumstances, to void guarantees and require note holders to return payments received from guarantors.
Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
| received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and |
| was insolvent or rendered insolvent by reason of such incurrence; or |
| was engaged in a business or transaction for which the guarantors remaining assets constituted unreasonably small capital; or |
| intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. |
In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:
| the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; or |
| if the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or |
| it could not pay its debts as they become due. |
On the basis of historical financial information, recent operating history and other factors, the Companys management believes that each guarantor, after giving effect to its guarantee of the notes, will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not have incurred debts beyond its ability to pay such debts as they mature. The Companys management can make no assurances as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.
The Company may not be able to fulfill its repurchase obligations with respect to the notes upon a change of control.
If the Company experiences certain specific change of control events, the Company will be required to offer to repurchase all of our outstanding notes at 101% of the principal amount of such notes plus accrued and unpaid interest to the date of repurchase. The Company can make no assurances that it will have available funds sufficient to pay the change of control purchase price for any or all of the notes that might be tendered in the change of control offer.
The definition of change of control in the indenture governing the notes includes a phrase relating to the direct or indirect sale, transfer, conveyance or other disposition of all or substantially all of our and our restricted subsidiaries assets, taken as a whole. Although there is a limited body of case law interpreting the phrase substantially all, there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of notes to require us to repurchase such notes as a result of a sale, transfer, conveyance or other disposition of less than all of our and our restricted subsidiaries assets taken as a whole to another person or group may be uncertain. In addition, a recent Delaware Chancery Court decision
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raised questions about the enforceability of provisions, which are similar to those in the indenture governing the notes, related to the triggering of a change of control as a result of a change in the composition of a board of directors. Accordingly, the ability of a holder of notes to require us to repurchase notes as a result of a change in the composition of our board of directors may be uncertain.
In addition, our new credit facility contains, and any future credit agreement likely will contain, restrictions or prohibitions on our ability to repurchase the notes under certain circumstances. If a change of control event occurs at a time when we are prohibited from repurchasing the notes, we may seek the consent of our lenders to purchase the notes or could attempt to refinance the borrowings that contain these prohibitions or restrictions. If we do not obtain our lenders consent or refinance these borrowings, we will not be able to repurchase the notes. Accordingly, the holders of the notes may not receive the change of control purchase price for their notes in the event of a sale or other change of control, which will give the trustee and the holders of the notes the right to declare an event of default and accelerate the repayment of the notes.
A financial failure by us or our subsidiaries may result in the assets of any or all of those entities becoming subject to the claims of all creditors of those entities.
A financial failure by us or our subsidiaries could affect payment of the notes if a bankruptcy court were to substantively consolidate us and our subsidiaries. If a bankruptcy court substantively consolidated us and our subsidiaries, the assets of each entity would become subject to the claims of creditors of all entities. This would expose holders of notes not only to the usual impairments arising from bankruptcy, but also to potential dilution of the amount ultimately recoverable because of the larger creditor base. Furthermore, forced restructuring of the notes could occur through the cram-down provisions of the bankruptcy code. Under these provisions, the notes could be restructured over your objections as to their general terms, primarily interest rate and maturity.
Your right to receive payments on the notes could be adversely affected if any of our non-guarantor subsidiaries declare bankruptcy, liquidate, or reorganize.
Some but not all of our subsidiaries will guarantee the notes. In the event of a bankruptcy, liquidation or reorganization of any of our non-guarantor subsidiaries, holders of their indebtedness and their trade creditors will generally be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to us.
As of December 31, 2010, the notes were effectively junior to $1.6 million of indebtedness and other liabilities (including trade payables) of our non-guarantor subsidiaries. Our non-guarantor subsidiaries held $1.8 million of our consolidated assets as of December 31, 2010.
Item 1B Unresolved Staff Comments.
None.
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The Companys principal office, manufacturing and distribution properties are as follows:
Location |
Approximate Square Footage |
Description |
||||
Cincinnati, Ohio |
248,200 | Office, Distribution | ||||
Forest Park, Ohio |
335,700 | Distribution | ||||
Tempe, Arizona |
184,100 | Office, Mfg., Distribution | ||||
Jacksonville, Florida |
96,500 | Distribution | ||||
Shafter, California |
84,000 | Distribution | ||||
Lewisville, Texas |
80,500 | Distribution | ||||
LaCrosse, Wisconsin |
48,000 | Distribution | ||||
Goodlettsville, Tennessee |
72,000 | Mfg., Distribution | ||||
East Moline, Illinois |
111,300 | Office, Distribution | ||||
Pompano Beach, Florida |
38,800 | Office, Distribution | ||||
Monterrey, Mexico |
13,200 | Distribution | ||||
Mississauga, Ontario |
34,700 | Office, Distribution |
With the exception of Goodlettsville, Tennessee, all of the Companys facilities are leased. In the opinion of management, the Companys existing facilities are in good condition.
On May 4, 2010, Hy-Ko Products, Inc. filed a complaint against Hillman Group, and Kaba Ilco Corp., a manufacturer of blank replacement keys, in the United States District Court for the Northern District of Ohio Eastern Division, alleging that the defendants engaged in violations of federal and state antitrust laws regarding their business practices relating to automatic key machines and replacement keys. Hy-Ko Products May 4, 2010 filing against the Company is based, in part, on the Companys previously-filed claim against Hy-Ko Products alleging infringement of certain patents of the Company. A claim construction hearing on the Companys patent infringement claim against Hy-Ko Products occurred in September 2010 and a ruling is expected in the first half of 2011.
In its antitrust claim against the Company, Hy-Ko Products is seeking monetary damages which would be trebled under the antitrust laws, interest and attorneys fees as well as injunctive relief. The antitrust claim against the Company has been stayed pending the resolution of the patents claim against Hy-Ko Products. Because the lawsuit is in a preliminary stage, it is not yet possible to assess the impact that the lawsuit will have on the Company. However, the Company believes that it has meritorious defenses and intends to defend the lawsuit vigorously.
In addition, legal proceedings are pending which are either in the ordinary course of business or incidental to the Companys business. Those legal proceedings incidental to the business of the Company are generally not covered by insurance or other indemnity. In the opinion of 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.
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Item 5 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Stock Exchange Listing
The Companys common stock does not trade and is not listed on or quoted in an exchange or other market. The Trust Preferred Securities trade under the ticker symbol HLM.Pr on the NYSE Amex (formerly the American Stock Exchange). The following table sets forth the high and low closing sale prices as reported on the NYSE Amex for the Trust Preferred Securities.
2010 |
High | Low | ||||||
First Quarter |
$ | 27.00 | $ | 25.35 | ||||
Second Quarter |
28.74 | 26.40 | ||||||
Third Quarter |
28.90 | 27.25 | ||||||
Fourth Quarter |
29.25 | 28.07 | ||||||
2009 |
High | Low | ||||||
First Quarter |
$ | 13.00 | $ | 3.56 | ||||
Second Quarter |
21.50 | 10.00 | ||||||
Third Quarter |
25.30 | 20.80 | ||||||
Fourth Quarter |
26.00 | 21.00 |
The Trust Preferred Securities have a liquidation value of $25.00 per security. As of March 4, 2011, there were 483 holders of Trust Preferred Securities. As of March 31, 2011, the total number of Trust Preferred Securities outstanding was 4,217,724. As of March 31, 2011, the Companys total number of shares of Common Stock outstanding was 5,000, held by one (1) common stockholder.
Distributions
The Company pays interest to the Hillman Group Capital Trust (the Trust) on the Junior Subordinated Debentures underlying the Trust Preferred Securities at the rate of 11.6% per annum on their face amount of $105.4 million, or $12.2 million per annum in the aggregate. The Trust distributes an equivalent amount to the holders of the Trust Preferred Securities. For the years ended December 31, 2010 and 2009, the Company paid $12.2 million and $12.4 million per year, respectively, in interest on the Junior Subordinated Debentures, which was equivalent to the amounts distributed by the Trust for the same periods.
Pursuant to the Indenture that governs the Trust Preferred Securities, the Trust was able to defer distribution payments to holders of the Trust Preferred Securities for a period that cannot exceed 60 months (the Deferral Period). During the Deferral Period, the Company was required to accrue the full amount of all interest payable, and such deferred interest payments were immediately payable by the Company at the end of the Deferral Period. In the first six months of 2009, the Company accrued $6.3 million in interest payable to the Trust on the Junior Subordinated Debentures. On July 31, 2009, the Trust resumed payments of monthly distributions and paid all amounts accrued during the six month Deferral Period.
The interest payments on the Junior Subordinated Debentures underlying the Trust Preferred Securities are deductible for federal income tax purposes by the Company under current law and will remain an obligation of the Company until the Trust Preferred Securities are redeemed or upon their maturity in 2027.
For more information on the Trust and Junior Subordinated Debentures, see Item 7-Managements Discussion and Analysis of Financial Condition and Results of Operations.
Issuer Purchases of Equity Securities
The Company made no repurchases of its equity securities during 2010.
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Item 6 Selected Financial Data.
As a result of the Merger Transaction, the Companys operations for the periods presented subsequent to the May 28, 2010 acquisition by an affiliate of OHCP, certain members of management and Board of Directors are referenced herein as the successor operations (the Successor or Successor Operations) and include the effects of the Companys debt refinancing. The Companys operations for the periods presented prior to the Merger Transaction are referenced herein as the predecessor operations (the Predecessor or Predecessor Operations).
The following table sets forth selected consolidated financial data of the Predecessor as of and for the five months ended May 28, 2010 and the years ended December 31, 2009, 2008, 2007, and 2006; and consolidated financial data of the Successor as of and for the seven months ended December 31, 2010. See the accompanying Notes to Consolidated Financial Statements and Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations for information regarding the acquisition of the Company by an affiliate of OHCP and the Companys debt refinancing as well as other acquisitions that affect comparability.
Successor | Predecessor | |||||||||||||||||||||||
(dollars in thousands) | Seven Months Ended |
Five Months Ended |
Year Ended December 31, | |||||||||||||||||||||
12/31/10 | 5/28/10 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Income Statement Data: |
||||||||||||||||||||||||
Net sales |
$ | 276,680 | $ | 185,716 | $ | 458,161 | $ | 481,923 | $ | 445,628 | $ | 423,901 | ||||||||||||
Gross profit |
140,126 | 95,943 | 233,519 | 237,276 | 229,895 | 220,450 | ||||||||||||||||||
Acquisition and integration expense (2) |
11,150 | 11,342 | | | | | ||||||||||||||||||
Extinguishment of debt |
| | | | | 726 | ||||||||||||||||||
Net loss |
(8,038 | ) | (25,208 | ) | (1,230 | ) | (1,165 | ) | (7,922 | ) | (6,333 | ) | ||||||||||||
Balance Sheet Data at December 31: |
||||||||||||||||||||||||
Total assets |
$ | 1,052,778 | N/A | $ | 628,481 | $ | 650,677 | $ | 660,358 | $ | 653,882 | |||||||||||||
Long-term debt & capital lease obligations (1) |
300,714 | N/A | 208,163 | 253,069 | 281,800 | 284,406 | ||||||||||||||||||
10.875% Senior Notes |
150,000 | N/A | | | | | ||||||||||||||||||
Mandatorily redeemable preferred stock |
| N/A | 111,452 | 100,146 | 89,773 | 80,494 | ||||||||||||||||||
Management purchased preferred options |
| N/A | 6,617 | 6,016 | 5,298 | 4,659 |
(1) | Includes current portion of long-term debt and capitalized lease obligations. |
(2) | Acquisition and integration expenses for investment banking, legal and other professional fees incurred in connection with the Merger Transaction. |
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Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operation.
The following discussion provides information which management believes is relevant to an assessment and understanding of the Companys operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and related notes and schedules thereto appearing elsewhere herein.
Forward-Looking Statements
Certain disclosures related to acquisitions, refinancing, capital expenditures, resolution of pending litigation and realization of deferred tax assets contained in this annual report involve substantial risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by terminology such as may, will, should, could, would, expect, plan, anticipate, believe, estimate, continue, project or the negative of such terms or other similar expressions.
These forward-looking statements are not historical facts, but rather are based on managements current expectations, assumptions and projections about future events. Although management believes that the expectations, assumptions and projections on which these forward-looking statements are based are reasonable, they nonetheless could prove to be inaccurate, and as a result, the forward-looking statements based on those expectations, assumptions and projections also could be inaccurate. Forward-looking statements are not guarantees of future performance. Instead, forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause the Companys strategy, planning, actual results, levels of activity, performance, or achievements to be materially different from any strategy, planning, future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Actual results could differ materially from those currently anticipated as a result of a number of factors, including the risks and uncertainties discussed under captions Risk Factors set forth in Item 1A of this annual report. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward-looking statements.
All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements included in this annual report; they should not be regarded as a representation by the Company or any other individual. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur or be materially different from those discussed.
General
The Hillman Companies, Inc. and its wholly owned subsidiaries (collectively Hillman or the Company), which had net sales of approximately $462.4 million in 2010, are one of the largest providers of hardware-related products and related merchandising services to the retail markets in North America. The Companys principal business is operated through its wholly-owned subsidiary, The Hillman Group, Inc. (the Hillman Group). A subsidiary of the Hillman Group operates in (1) Canada under the name The Hillman Group Canada, Ltd., (2) Mexico under the name SunSource Integrated Services de Mexico SA de CV, (3) primarily in Florida under the name All Points Industries, Inc., and (4) Australia under the name The Hillman Group Australia Pty. Ltd. The Hillman Group sells its product lines and provides its services to hardware stores, home centers, mass merchants, pet supply stores, and other retail outlets principally in the United States, Canada, Mexico, Latin America and the Caribbean. Product lines include thousands of small parts such as fasteners and related hardware items; threaded rod and metal shapes; keys, key duplication systems and accessories; and identification items, such as, tags and letters, numbers, and signs (LNS). Services offered include design and installation of merchandising systems and maintenance of appropriate in-store inventory levels.
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Merger Transaction
On May 28, 2010, Hillman was acquired by affiliates of Oak Hill Capital Partners (OHCP) and certain members of Hillmans management and Board of Directors. Pursuant to the terms and conditions of an Agreement and Plan of Merger dated as of April 21, 2010, the Company was merged with an affiliate of OHCP with the Company surviving the merger (the Merger Transaction). As a result of the Merger Transaction, Hillman is a wholly-owned subsidiary of OHCP HM Acquisition Corp. (Holdco). The total consideration paid in the Merger Transaction was $832.7 million which includes $11.5 million for the Quick Tag license and related patents, repayment of outstanding debt and the net value of the Companys outstanding junior subordinated debentures ($105.4 million liquidation value at the time of the merger).
Prior to the Merger Transaction, affiliates of Code Hennessy & Simmons LLC (CHS) owned 49.3% of the Companys outstanding common stock and 54.6% of the Companys voting common stock, Ontario Teachers Pension Plan (OTPP) owned 28.0% of the Companys outstanding common stock and 31.0% of the Companys voting common stock and HarbourVest Partners VI owned 8.7% of the Companys outstanding common stock and 9.7% of the Companys voting common stock. Certain current and former members of management owned 13.7% of the Companys outstanding common stock and 4.4% of the Companys voting common stock. Other investors owned 0.3% of the Companys common stock and 0.3% of the Companys voting common stock.
Financing Arrangements
On May 28, 2010, the Company and certain of its subsidiaries closed on a $320.0 million senior secured first lien credit facility (the Senior Facilities), consisting of a $290.0 million term loan and a $30.0 million revolving credit facility (Revolver). The term loan portion of the Senior Facilities has a six year term and the Revolver has a five year term. The Senior Facilities provide borrowings at interest rates based on a EuroDollar rate plus a margin of 3.75% (the EuroDollar Margin), or a base rate (the Base Rate) plus a margin of 2.75% (the Base Rate Margin). The EuroDollar rate is subject to a minimum floor of 1.75% and the Base Rate is subject to a minimum floor of 2.75%.
Concurrently with the consummation of the Merger Transaction, Hillman Group issued $150.0 million aggregate principal amount of its 10.875% senior notes due 2018 (the 10.875% Senior Notes), which are guaranteed by Hillman, Hillman Investment and all of Hillman Groups domestic subsidiaries. Hillman Group pays interest on the 10.875% Senior Notes semi-annually on June 1 and December 1 of each year.
Prior to the consummation of the Merger Transaction, the Company, through Hillman Group, was party to a Senior Credit Agreement (the Old Credit Agreement), consisting of a $20.0 million revolving credit line and a $235.0 million term loan. The facilities under the Old Credit Agreement had a maturity date of March 31, 2012. In addition, the Company, through Hillman Group, had issued $49.8 million in aggregate principal amount of unsecured subordinated notes to a group of investors, including affiliates of AEA Investors LP, CIG & Co. and several private investors that were scheduled to mature on September 30, 2012. In connection with the Merger Transaction, both the Old Credit Agreement and the subordinated note issuance were repaid and terminated.
The Senior Facilities contain financial and operating covenants. These covenants require the Company to maintain certain financial ratios, including an interest coverage ratio and leverage ratios. These debt agreements provide for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, cross-defaults, bankruptcy events, failure to pay judgments, attachment of its assets, change of control and the issuance of an order of dissolution. Certain of these events of default are subject to notice and cure periods or materiality thresholds. The occurrence of an event of default permits the lenders under the Senior Facilities to accelerate repayment of all amounts due.
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In connection with the TagWorks Acquisition, Hillman Group completed an offering of $50 million aggregate principal amount of its 10.875% Senior Notes due 2018. The Hillman Group previously issued $150 million aggregate principal amount of its 10.875% Senior Notes due 2018 in May 2010. The notes are guaranteed by The Hillman Companies, Hillman Investment Company and all of the domestic subsidiaries of The Hillman Group.
The Company pays interest to the Hillman Group Capital Trust (Trust) on the Junior Subordinated Debentures underlying the Trust Preferred Securities at the rate of 11.6% per annum on their face amount of $105.4 million, or $12.2 million per annum in the aggregate. The Trust distributes an equivalent amount to the holders of the Trust Preferred Securities. In order to retain capital, the Companys Board of Directors determined to temporarily defer interest payments on the Junior Subordinated Debentures and the Trust determined to defer the payment of cash distributions to holders of Trust Preferred Securities beginning with the January 2009 distribution. The Companys decision to defer the payment of interest on the Junior Subordinated Debentures was designed to ensure that the Company preserve cash and maintain its compliance with the financial covenants contained in its Senior Credit and Subordinated Debt Agreements. Pursuant to the Indenture that governs the Trust Preferred Securities, the Trust is able to defer distribution payments to holders of the Trust Preferred Securities for a period that cannot exceed 60 months (the Deferral Period). During the Deferral Period, the Company is required to accrue the full amount of all interest payable, and such deferred interest payable was immediately payable by the Company at the end of the Deferral Period. On July 31, 2009, the Company ended the Deferral Period and the Trust resumed monthly distributions and paid all deferred distributions to holders of the Trust Preferred Securities.
On June 24, 2010, the Company entered into an effective forward Interest Rate Swap Agreement (the 2010 Swap) with a two-year term for a notional amount of $115.0 million. The effective date of the 2010 Swap is May 31, 2011 and its termination date is May 31, 2013. The 2010 Swap fixes the interest rate at 2.47% plus applicable interest rate margin. This interest rate swap qualifies for hedge accounting based on the shortcut method under ASC 815, Derivatives and Hedging.
Acquisitions
On December 29, 2010, the Hillman Group entered into a Stock Purchase Agreement (the Agreement) by and among Serv-A-Lite Products, Inc. (Servalite), Thomas Rowe, Mary Jennifer Rowe, and the Hillman Group, whereby the Hillman Group acquired all of the equity interest of Servalite. The aggregate purchase price was $21.3 million paid in cash at closing. Servalite has a broad offering of over 50,000 fasteners and hard to find parts which are sold primarily into the retail hardware market. Servalites breadth of product in specialty fasteners and electrical parts strengthens Hillmans position of providing value-added products and services to hardware retailers.
On March 16, 2011, Hillman Group completed the TagWorks Acquisition for an initial purchase price of approximately $40.0 million in cash. In addition, subject to fulfillment of certain conditions, Hillman Group will pay additional consideration of $12.5 million to the sellers of TagWorks on October 31, 2011, and an additional earn-out payment of up to $12.5 million in 2012. In conjunction with this agreement, Hillman Group entered into an agreement with KeyWorks, a company affiliated with TagWorks, to assign its patent-pending retail key program technology to Hillman Group. The closing of the TagWorks Acquisition occurred concurrently with the closing of the new notes offering.
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Product Revenues
The following is revenue based on products for the Companys significant product categories (in thousands):
Successor | Predecessor | |||||||||||||||
Seven Months Ended December 31, 2010 |
Five Months Ended May 28, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
|||||||||||||
Net sales |
||||||||||||||||
Keys |
$ | 48,897 | $ | 32,716 | $ | 78,012 | $ | 80,754 | ||||||||
Engraving |
17,038 | 12,242 | 35,518 | 40,945 | ||||||||||||
Letters, numbers and signs |
22,026 | 12,859 | 34,287 | 34,671 | ||||||||||||
Fasteners |
154,319 | 103,457 | 253,703 | 261,646 | ||||||||||||
Threaded rod |
17,360 | 12,471 | 30,118 | 37,145 | ||||||||||||
Code cutter |
1,844 | 1,377 | 3,353 | 4,934 | ||||||||||||
Builders hardware |
3,137 | 1,753 | 3,832 | 1,606 | ||||||||||||
Other |
12,059 | 8,841 | 19,338 | 20,222 | ||||||||||||
Consolidated net sales |
$ | 276,680 | $ | 185,716 | $ | 458,161 | $ | 481,923 | ||||||||
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Results of Operations
Sales and Profitability for the seven months ended December 31, 2010, five months ended May 28, 2010 and the year ended December 31, 2009:
Successor | Predecessor | |||||||||||||||||||||||
Seven Months ended | Five Months ended | Year ended | ||||||||||||||||||||||
December 31, 2010 | May 28, 2010 | December 31, 2009 | ||||||||||||||||||||||
(dollars in thousands) | % of | % of | % of | |||||||||||||||||||||
Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||
Net sales |
$ | 276,680 | 100.0 | % | $ | 185,716 | 100.0 | % | $ | 458,161 | 100.0 | % | ||||||||||||
Cost of sales (exclusive of depreciation and amortization shown below) |
136,554 | 49.4 | % | 89,773 | 48.3 | % | 224,642 | 49.0 | % | |||||||||||||||
Gross profit |
140,126 | 50.6 | % | 95,943 | 51.7 | % | 233,519 | 51.0 | % | |||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Selling |
45,883 | 16.6 | % | 33,568 | 18.1 | % | 77,099 | 16.8 | % | |||||||||||||||
Warehouse & delivery |
30,470 | 11.0 | % | 19,945 | 10.7 | % | 48,496 | 10.6 | % | |||||||||||||||
General & administrative |
14,407 | 5.2 | % | 10,284 | 5.5 | % | 24,818 | 5.4 | % | |||||||||||||||
Stock compensation expense |
| | % | 19,053 | 10.3 | % | 8,737 | 1.9 | % | |||||||||||||||
Total SG&A |
90,760 | 32.8 | % | 82,850 | 44.6 | % | 159,150 | 34.7 | % | |||||||||||||||
Acquisition and integration |
11,150 | 4.0 | % | 11,342 | 6.1 | % | | | % | |||||||||||||||
Depreciation |
11,007 | 4.0 | % | 7,283 | 3.9 | % | 16,993 | 3.7 | % | |||||||||||||||
Amortization |
10,669 | 3.9 | % | 2,678 | 1.4 | % | 6,912 | 1.5 | % | |||||||||||||||
Management fees |
| | % | 438 | 0.2 | % | 1,010 | 0.2 | % | |||||||||||||||
Total operating expenses |
123,586 | 44.7 | % | 104,591 | 56.3 | % | 184,065 | 40.2 | % | |||||||||||||||
Other income (expense) |
145 | 0.1 | % | (114 | ) | (0.1 | %) | (120 | ) | (0.0 | %) | |||||||||||||
Income (loss) from operations |
16,685 | 6.0 | % | (8,762 | ) | (4.7 | %) | 49,334 | 10.8 | % | ||||||||||||||
Interest expense |
20,712 | 7.5 | % | 8,327 | 4.5 | % | 15,521 | 3.4 | % | |||||||||||||||
Interest expense on mandatorily redeemable preferred stock & management purchased preferred options |
| | % | 5,488 | 3.0 | % | 12,312 | 2.7 | % | |||||||||||||||
Interest expense on junior subordinated debentures |
7,356 | 2.7 | % | 5,254 | 2.8 | % | 12,820 | 2.8 | % | |||||||||||||||
Investment income on trust common securities |
(220 | ) | (0.1 | %) | (158 | ) | (0.1 | %) | (378 | ) | (0.1 | %) | ||||||||||||
(Loss) income before taxes |
(11,163 | ) | (4.0 | %) | (27,673 | ) | (14.9 | %) | 9,059 | 2.0 | % | |||||||||||||
Income tax (benefit) provision |
(3,125 | ) | (1.1 | %) | (2,465 | ) | (1.3 | %) | 10,289 | 2.2 | % | |||||||||||||
Net loss |
$ | (8,038 | ) | (2.9 | %) | $ | (25,208 | ) | (13.6 | %) | $ | (1,230 | ) | (0.3 | %) | |||||||||
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Current Economic Conditions
The U.S. economy has undergone a period of recession and the future economic environment may continue to be less favorable than that of recent years. This slowdown has, and could further lead to, reduced consumer and business spending in the foreseeable future, including by our customers. In addition, economic conditions, including decreased access to credit, may result in financial difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for our customers, suppliers and other service providers. If such conditions continue or further deteriorate in 2011 or through fiscal 2012, our industry, business and results of operations may be severely impacted.
The Companys business is impacted by general economic conditions in the U.S. and international markets, particularly the U.S. retail markets including hardware stores, home centers, mass merchants, and other retailers. In recent quarters, operations have been negatively impacted by the general downturn in the U.S. economy, including higher unemployment figures, and the contraction of the retail market. Although there have been certain signs of improvement in the economy, generally such conditions are not expected to improve significantly in the near term and may have the effect of reducing consumer spending which could adversely affect our results of operations during the next year.
The Company is sensitive to inflation or deflation present in the economies of the United States and foreign suppliers located primarily in Taiwan and China. For the several years leading up to 2009, the rapid growth in Chinas economic activity produced significantly rising costs of certain imported fastener products. In addition, the cost of commodities such as copper, zinc, aluminum, nickel, and plastics used in the manufacture of other Company products increased sharply. Further, increases in the cost of diesel fuel contributed to transportation rate increases. The trend of rising commodity costs accelerated in the first half of 2008. In the latter half of 2008 and during the first half of 2009, national and international economic difficulties began a reversal of the trend of rising costs for our products and commodities used in the manufacture of our products, including a decrease in the cost of oil and diesel fuel. During the second half of 2009 and throughout 2010, the Company has seen an end to decreasing costs and, in certain instances, moderate increases in the costs for our products and commodities used in the manufacture of our products. While inflation and resulting cost increases over a period of years would result in significant increases in inventory costs and operating expenses, the opposite is true when exposed to a prolonged period of cost decreases. The ability of the Companys operating divisions to institute price increases and seek price concessions, as appropriate, is dependent on competitive market conditions.
Predecessor Five Month Period of January 1 May 28, 2010 vs Predecessor Period of the Year Ended December 31, 2009
Revenues
Net sales for the Predecessor period of January 1 May 28, 2010 (the 2010 five month period) were $185.7 million, or $1.77 million per shipping day, compared to net sales for the year ended December 31, 2009 of $458.2 million, or $1.84 million per shipping day. The decrease in revenues of $272.5 million was directly attributable to comparing operating results of 105 shipping days in the 2010 five month period to the results from 249 shipping days in 2009. The sales per shipping day of $1.77 million in the 2010 five month period were approximately 3.8% lower than the sales per shipping day of $1.84 million in the 2009. The decrease in sales per day for the 2010 five month period was the result of higher seasonal sales per day during the June through December period included in the twelve months of 2009 as compared to the average sales per day for the January to May 2010 period.
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Gross Profit
The Companys gross profit percentage was 51.7% in the 2010 five month period compared to 51.0% in the year 2009. The Company experienced a significant increase in the unit cost of inventory during most of 2008 as a result of increases in related commodities used in our products such as steel, zinc, nickel, aluminum, copper and plastics. The higher unit costs negatively impacted gross profit during the first half of 2009 as the higher unit cost product sold through inventory. In 2009, commodity prices moderated and, in particular, the cost of steel based fasteners sourced primarily from Taiwan and China returned to the levels prior to the significant price increases seen in 2008. The gross profit in the first five months of 2010 benefited from the lower product costs experienced in the second half of 2009.
Expenses
Operating expenses for the period of January 1 May 28, 2010 were $104.6 million compared to $184.1 million for the year ended December 31, 2009. The decrease in operating expenses is primarily due to the shorter 105 day ship period in the 2010 five month period which provided certain favorable operating expense variances as compared to the 249 day ship period for the year of 2009. The following changes in underlying trends also impacted the change in operating expenses:
| Warehouse and delivery expense was $19.9 million, or 10.7% of net sales, in the 2010 five month period compared to $48.5 million, or 10.6% of net sales in the year of 2009. Freight expense, the largest component of warehouse and delivery expense, was 4.1% of net sales in the 2010 five month period. The 4.1% rate was unchanged from the same rate in 2009. |
| Stock compensation expenses from stock options primarily related to the 2004 Merger Transaction resulted in a charge of $19.1 million in the 2010 five month period. The change in the fair value of the Class B Common Stock is included in stock compensation expense and this resulted in an additional charge of $13.9 million. The significant increase in the fair value of the Class B Common Stock in this predecessor period resulted from the acquisition price paid by OHCP for the Company. In addition, a stock compensation charge of $3.7 million was recorded for the increase in the fair value of the common stock options. The stock compensation expense was $8.7 million for year ended December 31, 2009. |
| Acquisition and integration expense of $11.3 million in the 2010 five month period represents one-time charges for investment banking, legal and other expenses incurred in connection with the Merger Transaction. There were no acquisition and integration expenses for the year ended December 31, 2009. |
| Amortization expense was $2.7 million in the 2010 five month period. The estimated annualized rate of approximately $6.4 million was comparable to the amortization expense of $6.9 million for year ended December 31, 2009. |
| Interest expense was $8.3 million in the 2010 five month period compared to $15.5 million for year ended December 31, 2009. The 2010 five month period included a $1.6 million interest charge for the termination of the 2008 Swap. |
| Interest expense on the mandatorily redeemable preferred stock and management purchased preferred options were $5.5 million in the 2010 five month period. The estimated annual rate of approximately $13.2 million was comparable to the interest expense of $12.3 million for year ended December 31, 2009. |
Successor Seven Month Period of May 28 to December 31, 2010 vs Predecessor Period of the Year Ended December 31, 2009
Revenues
Net sales for the Successor period of May 28 December 31, 2010 (the 2010 seven month period) were $276.7 million, or $1.92 million per shipping day, compared to net sales for the year ended December 31, 2009 of $458.2 million, or $1.84 million per shipping day. The decrease in revenues of $181.5 million was directly attributable to comparing operating results of 144 shipping days in the 2010 seven month period to the results from
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249 shipping days in 2009. However, the sales per shipping day of $1.92 million in the 2010 seven month period were approximately 4.3% higher than the sales per shipping day of $1.84 million in the year ended December 31, 2009. The increase in sales per day for the 2010 seven month period was the result of higher seasonal sales per day during the June through December period as compared to the average sales per day for the January through December period of 2009.
Gross Profit
The Companys gross profit percentage was 50.6% in the 2010 seven month period compared to 51.0% in the year of 2009. The Company experienced a moderate increase in the unit cost of its products during the last seven months of 2010. The increases came in related commodities used in our products such as steel, zinc, nickel, aluminum, copper and plastics. The higher unit cost of our products negatively impacted gross profit in the 2010 seven month period. In 2009, commodity prices moderated from the high points experienced in 2008 and average product costs decreased during that period of time. The Company anticipates that the average unit cost of its products will trend higher during 2011.
Expenses
Operating expenses for the 2010 seven month period ended December 31, 2010 were $123.6 million compared to $184.1 million for the year ended December 31, 2009. The decrease in operating expenses is primarily due to the 144 day shipping period in the 2010 seven month period as compared to the 249 day shipping period in the twelve months of 2009. The following changes in underlying trends also impacted the change in operating expenses:
| Warehouse and delivery expense was $30.5 million, or 11.0% of net sales, in the 2010 seven month period compared to $48.5 million, or 10.6% of net sales in the year of 2009. Freight expense, the largest component of warehouse and delivery expense, increased from 4.1% of net sales in 2009 to 4.8% of net sales in the 2010 seven month period. The freight costs in the 2010 seven month period included the negative impact of higher fuel surcharges and lower average customer order sizes. |
| No stock compensation expense was recorded in the 2010 seven month period. Stock compensation expense in future periods is dependent on the valuation of underlying shares due to the classification of liability based awards. The stock compensation expense was $8.7 million in the year ended December 31, 2009. |
| Acquisition and integration expense of $11.2 million in the 2010 seven month period represents one-time charges for legal, professional, diligence and other expenses incurred by the Successor in connection with the Merger Transaction. There were no acquisition and integration expenses in 2009. |
| Amortization expense was $10.7 million in the 2010 seven month period, or an estimated annualized rate of approximately $18.3 million compared to amortization expense of $6.9 million for year ended December 31, 2009. The higher annual rate of amortization expense for the 2010 seven month period was due to the increase in intangible assets subject to amortization acquired as a result of the Merger Transaction. |
| Interest expense was $20.7 million in the 2010 seven month period, or an estimated annual rate of approximately $35.5 million compared to interest expense of $15.5 million for the year ended December 31, 2009. The increase in estimated annualized amount of interest expense was primarily the result of the higher level of debt outstanding following the Merger Transaction. |
| The Successor incurred no interest expense in the 2010 seven month period on mandatorily redeemable preferred stock and management purchased options as a result of their redemption in connection with the Merger Transaction. The interest expense on these securities was $12.3 million for year ended December 31, 2009. |
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Results of Operations (continued)
Sales and Profitability for each of the Years Ended December 31,
(dollars in thousands) | 2009 | 2008 | ||||||||||||||
% of | % of | |||||||||||||||
Amount | Total | Amount | Total | |||||||||||||
Net sales |
$ | 458,161 | 100.0 | % | $ | 481,923 | 100.0 | % | ||||||||
Cost of sales (exclusive of depreciation and amortization shown below) |
224,642 | 49.0 | % | 244,647 | 50.8 | % | ||||||||||
Gross profit |
233,519 | 51.0 | % | 237,276 | 49.2 | % | ||||||||||
Operating expenses: |
||||||||||||||||
Selling |
77,099 | 16.8 | % | 82,312 | 17.1 | % | ||||||||||
Warehouse & delivery |
48,496 | 10.6 | % | 55,781 | 11.6 | % | ||||||||||
General & administrative |
24,818 | 5.4 | % | 20,776 | 4.3 | % | ||||||||||
Stock compensation expense |
8,737 | 1.9 | % | 2,481 | 0.5 | % | ||||||||||
Total SG&A |
159,150 | 34.7 | % | 161,350 | 33.5 | % | ||||||||||
Acquisition and integration |
| 0.0 | % | | 0.0 | % | ||||||||||
Depreciation |
16,993 | 3.7 | % | 17,835 | 3.7 | % | ||||||||||
Amortization |
6,912 | 1.5 | % | 7,073 | 1.5 | % | ||||||||||
Management fees |
1,010 | 0.2 | % | 1,043 | 0.2 | % | ||||||||||
Total operating expenses |
184,065 | 40.2 | % | 187,301 | 38.9 | % | ||||||||||
Other expense |
(120 | ) | 0.0 | % | (2,250 | ) | -0.5 | % | ||||||||
Income from operations |
49,334 | 10.8 | % | 47,725 | 9.9 | % | ||||||||||
Interest expense |
15,521 | 3.4 | % | 20,545 | 4.3 | % | ||||||||||
Interest expense on mandatorily redeemable preferred stock & management purchased preferred options |
12,312 | 2.7 | % | 11,091 | 2.3 | % | ||||||||||
Interest expense on junior subordinated debentures |
12,820 | 2.8 | % | 12,609 | 2.6 | % | ||||||||||
Investment income on trust common securities |
(378 | ) | -0.1 | % | (378 | ) | -0.1 | % | ||||||||
Income before taxes |
9,059 | 2.0 | % | 3,858 | 0.8 | % | ||||||||||
Income tax provision |
10,289 | 2.2 | % | 5,023 | 1.0 | % | ||||||||||
Net loss |
$ | (1,230 | ) | -0.3 | % | $ | (1,165 | ) | -0.2 | % | ||||||
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Predecessor Period for the Year Ended December 31, 2009 vs Predecessor Period for the Year Ended December 31, 2008
Revenues
Net sales for the year of 2009 were $458.2 million compared to net sales of $481.9 million for the year of 2008. The decrease in revenues of $23.7 million, or 4.9%, was a result of the depressed economic conditions which caused a contraction in the residential construction market and a decrease in activity among our retail customers.
Gross Profit
The Companys gross profit of 51.0% in 2009 increased compared to 49.2% in 2008. For most of 2009, the Company was able to procure inventory items at lower unit costs than during the same prior year period as a result of decreased prices for commodities such as steel, plastics, aluminum, nickel, copper, and zinc. In particular, the cost of steel based fasteners sourced primarily from Taiwan and China returned to the levels prior to the price increases seen in the second and third quarters of 2008. The Company was able to implement pricing actions during 2008 to recoup a portion of the cost increases received from suppliers. This was followed by a reduction in commodity costs in the second half of 2008 which resulted in lower supplier prices.
Expenses
Operating expenses for the year of 2009 were $184.1 million compared to $187.3 million for the year of 2008. The decrease in operating expenses in 2009 was primarily due to the impact of lower sales volume on variable expenses such as warehouse labor, freight and shipping supplies. The following changes in underlying trends also impacted the change in operating expenses:
| Selling expense was $77.1 million, or 16.8% of net sales, in 2009 compared to $82.3 million, or 17.1% of net sales in 2008. Selling expenses decreased $5.2 million, or 6.3%, primarily as a result of headcount reductions , reduced commissions on lower franchise and independent sales, and reduced auto and travel related expenses to provide service and merchandising to our customers. |
| Warehouse and delivery expense was $48.5 million, or 10.6% of net sales, in 2009 compared to $55.8 million or 11.6% of net sales in 2008. Freight expense, the largest component of warehouse and delivery expense, decreased from 4.6% of net sales in 2008 to 4.1% of net sales in 2009. The reduction in freight expense as a percentage of sales in 2009 resulted from a reduced level of fuel surcharges, the negotiation of more favorable freight contracts and the implementation of shipping and handling efficiencies. Operational improvements to the order fulfillment process continued to produce lower labor costs and shipping supply expense in 2009. |
| General and administrative (G&A) expenses of $24.8 million in 2009 were $4.0 million more than 2008. The increase in G&A expenses was primarily the result of the investment performance of securities held in the nonqualified deferred compensation plans Rabbi Trust which provided an unfavorable adjustment of $0.3 million in 2009 and a favorable adjustment of $1.4 million in 2008. In both years, an offsetting adjustment was recorded in other income (expense). In addition, professional and legal costs increased by $1.2 million in 2009 and administrative salaries, bonuses and benefits increased by $1.2 million as a result of higher EBITDA earnings in 2009. |
| Stock compensation expenses of $8.7 million were $6.3 million more than 2008. The stock compensation expense is derived from the changes in value of common stock and stock options primarily related to the Merger Transaction. The changes in the fair value of the Class B Common Stock are included in stock compensation expense and this resulted in a charge of $4.7 million in 2009 compared to a gain of $1.0 million in 2008. |
| Depreciation expense decreased $0.8 million from $17.8 million in 2008 to $17.0 million in 2009. The decreased depreciation was a result of less capital spending in 2009 for the placement of Quick-Tag and key duplicating machines which were partially offset by additional depreciation primarily for the Enterprise Resource Planning software (ERP) which became operational in 2009. |
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| Interest expense decreased $5.0 million to $15.5 million in 2009 from $20.5 million in 2008. The decrease in interest expense was primarily the result of a decrease in the Companys outstanding debt and lower borrowing costs on the variable rate Term Loan. |
Income Taxes
Successor Seven Month Period Ended December 31, 2010, Predecessor Five Month Period Ended May 28, 2010 and Predecessor Year Ended December 31, 2009
The effective income tax rates were 28.0% for the seven month successor period ended December 31, 2010, 8.9% for the five month predecessor period ended May 28, 2010 and 113.6% for the twelve month predecessor period ended December 31, 2009. The change in effective income tax rate differed from the federal statutory rate in the seven month successor period ended December 31, 2010 primarily due to the increase in the valuation reserve recorded against certain deferred tax assets in addition to the effect of state rates. The change in the effective income tax rate differed from the federal statutory rate in the five month predecessor period ended May 28, 2010 and the twelve month predecessor period ended December 31, 2009 primarily due to the effect of nondeductible interest on mandatorily redeemable preferred stock and nondeductible stock based compensation expense in addition to the effect of state rates. See Note 6, Income Taxes, of Notes to Consolidated Financial Statements for income taxes and disclosures related to 2010 and 2009 income tax events.
Predecessor Periods for the Years Ended December 31, 2009 and 2008
The effective income tax rates were 113.6% and 130.2% for the years ended December 31, 2009 and 2008, respectively. The change in effective income tax rate differed from the federal statutory rate primarily due to the effect of nondeductible interest on mandatorily redeemable preferred stock and nondeductible stock based compensation expense in addition to the effect of state rates. See Note 6, Income Taxes, of Notes to Consolidated Financial Statements for income taxes and disclosures related to 2009 and 2008 income tax events.
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Liquidity and Capital Resources
Cash Flows
The statements of cash flows reflect the changes in cash and cash equivalents for the seven months ended December 31, 2010 (Successor), the five months ended May 28, 2010 (Predecessor) and the years ended December 31, 2009 and 2008 (Predecessor) by classifying transactions into three major categories: operating, investing and financing activities. The cash flows from the Merger Transaction are separately discussed below.
Merger Transaction
In connection with the Merger Transaction, the Company issued common stock for $308.6 million in cash. Proceeds from borrowings under the Senior Facilities provided an additional $290.6 million and proceeds from the 10.875% Senior Notes provided $150.0 million, less aggregate financing fees of $15.7 million. The debt and equity proceeds were used to repay the existing senior and subordinated debt and accrued interest thereon of $199.1 million, to repurchase the existing shareholders common equity, preferred equity and stock options of $506.4 million, and to purchase the Quick Tag license for $11.5 million. The remaining proceeds were used to pay transaction expenses of $16.4 million and prepaid expenses of $0.1 million.
Operating Activities
Excluding $17.5 million in cash used for the Merger Transaction, net cash provided by operating activities for the year ended December 31, 2010 of $28.2 million was the result of the net loss adjusted for non-cash charges of $25.0 million for depreciation, amortization, deferred taxes, deferred financing, stock-based compensation and interest on mandatorily redeemable preferred stock and management purchased options in addition to cash related adjustments of $3.2 million for routine operating activities represented by changes in inventories, accounts receivable, accounts payable, accrued liabilities and other assets. In 2010, routine operating activities provided cash through an increase in accounts payable of $8.9 million and accrued liabilities of $8.2 million. This was partially offset by an increase in accounts receivable of $2.1 million, inventories of $8.7 million and other of $3.1 million.
Net cash provided by operating activities for the year ended December 31, 2009 of $72.0 million was generated by the net loss adjusted for non-cash charges of $55.1 million for depreciation, amortization, dispositions of equipment, deferred taxes, deferred financing, stock-based compensation and interest on mandatorily redeemable preferred stock which was in addition to cash related adjustments of $18.1 million for routine operating activities represented by changes in inventories, accounts receivable, accounts payable, accrued liabilities and other assets. In 2009, routine operating activities provided cash through a decrease in inventories of $18.3 million, accounts receivable of $1.6 million, other assets of $1.0 million and an increase in accrued liabilities of $3.6 million. Accounts payable accounted for the remaining $6.2 million decrease of cash provided by operating activities. The large decrease in inventories resulted from product cost reductions and the implementation of new inventory management processes which reduced the inventory requirements.
Net cash provided by operating activities for the year ended December 31, 2008 of $37.6 million was generated by the net loss adjusted for non-cash charges of $43.3 million for depreciation, amortization, dispositions of equipment, deferred taxes, deferred financing, stock-based compensation and interest on mandatorily redeemable preferred stock which was partially offset by cash related adjustments of $4.6 million for routine operating activities represented by changes in inventories, accounts receivable, accounts payable, accrued liabilities and other assets. In 2008, routine operating activities used cash for an increase in inventories of $3.5 million and accounts receivable of $4.4 million. Accounts payable, accrued liabilities and other items accounted for the remaining $3.3 million increase of cash provided by operating activities.
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Investing Activities
The Company used cash of $11.5 million from the Merger Transaction to purchase the licensing rights and related patents for the Quick Tag business. Excluding the $11.5 million used for the Quick Tag acquisition, net cash used for investing activities was $37.7 million for the year ended December 31, 2010. The Company used $21.3 million for the acquisition of Servalite and $1.3 million to purchase the licensing rights for the Laser Key business. Capital expenditures for the year totaled $15.1 million, consisting of $9.1 million for key duplicating machines, $1.7 million for engraving machines, and $4.3 million for computer software and equipment.
Net cash used for investing activities was $13.0 million for the year ended December 31, 2009. Capital expenditures for the year totaled $13.0 million, consisting of $7.4 million for key duplicating machines, $0.5 million for engraving machines, $3.8 million for computer software and equipment and $1.3 million for plant equipment and other equipment purchases.
Net cash used for investing activities was $13.4 million for the year ended December 31, 2008. Capital expenditures for the year totaled $13.4 million, consisting of $7.3 million for key duplicating machines, $1.4 million for engraving machines, $3.4 million for computer software and equipment and $1.3 million for plant equipment and other equipment purchases.
Financing Activities
Excluding $29.0 million in cash provided by borrowings related to the Merger Transaction, net cash used for financing activities was $0.1 million for the year ended December 31, 2010. The net cash used was primarily related to the principal payments on the senior term loans of $11.0 million and further payments of $0.6 million on the revolving credit facility and $0.5 million on capitalized lease obligations which were offset by new borrowings on the revolving credit facility of $12.0 million.
Net cash used for financing activities was $49.0 million for the year ended December 31, 2009. The net cash used was primarily related to the principal payments of $45.0 million on the senior term loan.
Net cash used for financing activities was $29.0 million for the year ended December 31, 2008. The net cash used was primarily related to the principal payments of $28.6 million on the senior term loan.
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Liquidity
Management believes projected cash flows from operations and revolver availability will be sufficient to fund working capital and capital expenditure needs for the next 12 months.
The Companys working capital (current assets minus current liabilities) position of $120.4 million as of December 31, 2010, represents an increase of $9.8 million from the December 31, 2009 level of $110.6 million as follows:
(dollars in thousands) | ||||
Amount | ||||
Decrease in cash and cash equivalents |
$ | (9,579 | ) | |
Increase in accounts receivable, net |
4,753 | |||
Increase in inventories, net |
14,519 | |||
Increase in other current assets |
744 | |||
Increase in deferred taxes |
1,277 | |||
Increase in accounts payable |
(9,233 | ) | ||
Decrease in senior term loans & capital lease obligations |
6,938 | |||
Decrease in accrued salaries and wages |
1,546 | |||
Increase in accrued pricing allowances |
(38 | ) | ||
Increase in accrued income and other taxes |
(135 | ) | ||
Decrease in accrued interest |
790 | |||
Increase in other accrued liabilities |
(1,752 | ) | ||
Net increase in working capital for the year ended December 31, 2010 |
$ | 9,830 | ||
The increase in the Companys working capital as of December 31, 2010 was primarily the result of the December 29, 2010 acquisition of Servalite which added $8,469 in working capital.
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Contractual Obligations
The Companys contractual obligations in thousands of dollars as of December 31, 2010 are summarized below:
Payments Due | ||||||||||||||||||||
Contractual Obligations | Total | Less Than One Year |
1 to 3 Years |
3 to 5 Years |
More Than Five Years |
|||||||||||||||
Junior Subordinated Debentures (1) |
$ | 115,837 | $ | | $ | | $ | | $ | 115,837 | ||||||||||
Long Term Senior Term Loans |
288,550 | 2,900 | 5,800 | 5,800 | 274,050 | |||||||||||||||
Bank Revolving Credit Facility |
12,000 | | | | 12,000 | |||||||||||||||
10.875% Senior Notes |
150,000 | | | | 150,000 | |||||||||||||||
Interest payments (2) |
204,715 | 32,123 | 63,767 | 63,129 | 45,696 | |||||||||||||||
Operating Leases |
31,847 | 8,060 | 10,294 | 5,027 | 8,466 | |||||||||||||||
Deferred Compensation Obligations |
3,478 | 227 | 454 | 454 | 2,343 | |||||||||||||||
Capital Lease Obligations |
189 | 38 | 74 | 60 | 17 | |||||||||||||||
Purchase Obligations |
875 | 350 | 525 | | | |||||||||||||||
Other Assets |
167 | | 63 | | 104 | |||||||||||||||
Other Long Term Obligations |
2,268 | 1,000 | 774 | 191 | 303 | |||||||||||||||
Uncertain Tax Position Liabilities |
4,433 | | 1,438 | | 2,995 | |||||||||||||||
Total Contractual Cash Obligations (3) |
$ | 814,359 | $ | 44,698 | $ | 83,189 | $ | 74,661 | $ | 611,811 | ||||||||||
(1) | The junior subordinated debentures liquidation value is approximately $108,704. |
(2) | Interest payments for Long Term Senior Term Loans and the 10.875% Senior Notes. |
Interest payments on the variable rate Long Term Senior Term Loans were calculated using the actual interest rate of 5.50% as of December 31, 2010, excluding possible impact of 2010 Swap. Interest payments on the 10.875% Senior Notes were calculated at their fixed rate.
(3) | All of the contractual obligations noted above are reflected on the Companys consolidated balance sheet as of December 31, 2010 except for the interest payments and operating leases. |
The Company has a purchase agreement with its supplier of key blanks which requires minimum purchases of 100 million key blanks per year. To the extent minimum purchases of key blanks are below 100 million, the Company must pay the supplier $.0035 per key multiplied by the shortfall. Since the inception of the contract in 1998, the Company has purchased more than requisite 100 million key blanks per year from the supplier. The Company extended this contract in 2009 for an additional four years.
Off-Balance Sheet Arrangements
The Company does 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.
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Borrowings
As of December 31, 2010, the Company had $12.1 million available under its secured credit facilities. The Company had approximately $300.7 million of outstanding debt under its secured credit facilities at December 31, 2010, consisting of $288.5 million in a term loan, $12.0 million in revolving credit borrowings and $0.2 million in capitalized lease obligations. The term loan consisted of a $288.5 million Term B-2 Loan at a three (3) month LIBOR rate plus margin of 5.50%. The revolver borrowings (the Revolver) consisted of $12.0 million currently at a three (3) month LIBOR rate plus margin of 5.50%. The capitalized lease obligations were at various interest rates.
At December 31, 2010 and 2009, the Company borrowings were as follows:
December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
(dollars in thousands) |
Facility Amount |
Outstanding Amount |
Interest Rate |
Facility Amount |
Outstanding Amount |
Interest Rate |
||||||||||||||||||
Term B-1 Loan |
$ | | | $ | 17,992 | 3.02 | % | |||||||||||||||||
Term B-2 Loan |
288,550 | 5.50 | % | 139,857 | 4.77 | % | ||||||||||||||||||
Total Term Loans |
288,550 | 157,849 | ||||||||||||||||||||||
Revolving credit facility |
$ | 30,000 | 12,000 | 5.50 | % | $ | 20,000 | | | |||||||||||||||
Capital leases & other obligations |
164 | various | 494 | various | ||||||||||||||||||||
Total secured credit |
300,714 | 158,343 | ||||||||||||||||||||||
10.875% senior notes |
150,000 | 10.875 | % | | | |||||||||||||||||||
Unsecured subordinated notes |
| | 49,820 | 12.50 | % | |||||||||||||||||||
Total borrowings |
$ | 450,714 | $ | 208,163 | ||||||||||||||||||||
On May 28, 2010, the Company and certain of its subsidiaries closed the Senior Facilities, consisting of a $290.0 million term loan and a $30.0 million Revolver. The term loan portion of the Senior Facilities has a six year term and the Revolver has a five year term. The Senior Facilities provide borrowings at interest rates based on a EuroDollar rate plus a margin of 3.75%, or a base rate plus a margin of 2.75%. The EuroDollar rate is subject to a minimum floor of 1.75% and the Base Rate is subject to a minimum floor of 2.75%.
Concurrently with the consummation of the Merger Transaction, Hillman Group issued $150.0 million aggregate principal amount of its 10.875% Senior Notes, which are guaranteed by Hillman Companies and its domestic subsidiaries other than the Hillman Group Capital Trust. Hillman Group pays interest on the 10.875% Senior Notes semi-annually on June 1 and December 1 of each year.
Prior to the consummation of the Merger Transaction, the Company, through Hillman Group, was party to the Old Credit Agreement, consisting of a $20.0 million revolving credit line and a $235.0 million term loan. The facilities under the Old Credit Agreement had a maturity date of March 31, 2012. In addition, the Company, through Hillman Group, had issued $49.8 million in aggregate principal amount of unsecured subordinated notes to a group of investors, including affiliates of AEA Investors LP, CIG & Co. and several private investors that were scheduled to mature on September 30, 2012. In connection with the Merger Agreement, both the Old Credit Agreement and the subordinated note issuance were repaid and terminated.
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The Companys Senior Facilities require the maintenance of certain interest coverage and leverage ratios and limits the ability of the Company to incur debt, make investments, make dividend payments to holders of the Trust Preferred Securities or undertake certain other business activities. Upon the occurrence of an event of default under the credit agreements, all amounts outstanding, together with accrued interest, could be declared immediately due and payable by our lenders. Below are the calculations of the financial covenants with the Senior Facilities requirement for the twelve months ended December 31, 2010:
(dollars in thousands) | Ratio | |||||||
Actual | Requirement | |||||||
Leverage Ratio |
||||||||
Adjusted EBITDA (1) |
$ | 82,388 | ||||||
Senior term loan balance |
288,550 | |||||||
Revolver |
12,000 | |||||||
Capital leases and other credit obligations |
164 | |||||||
Senior notes |
150,000 | |||||||
Total indebtedness |
$ | 450,714 | ||||||
Leverage ratio (must be below requirement) |
5.47 | 6.75 | ||||||
Interest Coverage Ratio |
||||||||
Adjusted EBITDA (1) |
$ | 82,388 | ||||||
Cash interest expense (2) |
$ | 27,120 | ||||||
Interest coverage ratio (must be above requirement) |
3.04 | 2.00 | ||||||
Secured Leverage Ratio |
||||||||
Senior term loan balance |
$ | 288,550 | ||||||
Revolver |
12,000 | |||||||
Capital leases and other credit obligations |
164 | |||||||
Total debt |
$ | 300,714 | ||||||
Adjusted EBITDA (1) |
$ | 82,388 | ||||||
Leverage ratio (must be below requirement) |
3.65 | 4.25 | ||||||
(1) | Adjusted EBITDA is a non-GAAP measure defined as income from operations ($7,923) plus depreciation ($18,290), amortization ($13,347), stock compensation expense ($19,053), restructuring costs ($1,236), acquisition and integration expenses ($22,492), management fees ($438) and less foreign exchange gains ($391). |
(2) | Includes cash interest expense on senior term loans, capitalized lease obligations, senior notes and subordinated notes. |
Related Party Transactions
The Predecessor was obligated to pay management fees to a subsidiary of CHS in the amount of $58 thousand per month. The Predecessor was also obligated to pay transaction fees to a subsidiary of OTPP in the amount of $26 thousand per month, plus out of pocket expenses. The Successor has no management fee charges for the seven month period ended December 31, 2010. The Predecessor has recorded aggregate management and transaction fee charges and expenses from CHS and OTPP of $438 thousand for the five month period ended May 28, 2010. The Predecessor also recorded aggregate management and transaction fee charges and expenses from CHS and OTPP of $1.0 million for each of the years ended December 31, 2009 and 2008.
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Gregory Mann and Gabrielle Mann are employed by the All Points subsidiary of Hillman. All Points leases an industrial warehouse and office facility from companies under the control of the Manns. The Predecessor and Successor have recorded rental expense for the lease of this facility on an arms length basis. The Successor recorded rental expense for the lease of this facility in the amount of $181 thousand for the seven month period ended December 31, 2010. The Predecessor recorded rental expense for the lease of this facility in the amount of $130 thousand for the five month period ended May 28, 2010 and $311 thousand and $302 thousand for the years ended December 31, 2009 and 2008, respectively.
Critical Accounting Policies and Estimates
The Companys accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, of 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 of America 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 the Companys critical accounting policies.
Revenue Recognition:
Revenue is recognized when products are shipped or delivered to customers depending upon when title and risks of ownership have passed and the collection of the relevant receivables is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Sales tax collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore excluded from revenues in the consolidated statements of operations.
The Company offers a variety of sales incentives to its customers primarily in the form of discounts, rebates and slotting fees. Discounts are recognized in the financial statements at the date of the related sale. Rebates are estimated based on the revenue to date and the contractual rebate percentage to be paid. A portion of the estimated cost of the rebate is allocated to each underlying sales transaction. Slotting fees are used on an infrequent basis and are not considered to be significant. Discounts, rebates and slotting fees 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.
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 information. Increases to the allowance for doubtful accounts result in a corresponding expense. The Company writes off individual accounts receivable accounts when they become uncollectible. The allowance for doubtful accounts was $520 thousand and $514 thousand as of December 31, 2010 and 2009, respectively.
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Inventory Realization:
Inventories consisting predominantly of finished goods are valued at the lower of cost or market, cost being determined principally on the weighted average cost method. Excess and obsolete inventories are carried at net realizable value. The historical usage rate is the primary factor used by the Company in assessing the net realizable value of excess and obsolete inventory. A reduction in the carrying value of an inventory item from cost to market is recorded for inventory with no usage in the preceding twenty-four month period or with on-hand quantities in excess of twenty-four months average usage. The inventory reserve amounts were $11.0 million and $7.1 million at December 31, 2010 and 2009, respectively.
Goodwill and Other Intangible Assets:
Goodwill represents the excess purchase cost over the fair value of net assets of companies acquired in business combinations. Goodwill is an indefinite lived asset and is tested for impairment at least annually or more frequently if a triggering event occurs. If the carrying amount of goodwill is greater than the fair value, impairment may be present. In connection with the Merger Transaction, an independent appraiser assessed the value of its goodwill based on a discounted cash flow model and multiple of earnings. Assumptions critical to the Companys 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 Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually. The Company tests intangible assets for impairment 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 Merger Transaction, an independent appraiser assessed the value of its intangible assets based on a relief from royalties, excess earnings, and lost profits discounted cash flow model. Assumptions critical to the Companys evaluation of indefinite-lived intangible assets for impairment include the discount rate, royalty rates used in its evaluation of trade names, 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.
The Companys annual impairment test is performed as of October 1. The estimated fair value of the reporting unit substantially exceeded its carrying cost. The October 1 goodwill and intangible impairment test data aligns the impairment test with the preparation of the Companys annual strategic plan and allows additional time for a more thorough analysis by the Companys independent appraiser. No impairment charges were recorded by the Company as a result of the annual impairment testing.
Long-Lived Assets:
The Company evaluates its long-lived assets for financial impairment and will continue to evaluate them 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. No impairment charges were recognized for long-lived assets in the years ended December 31, 2010 and 2009.
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 the Consolidated Financial Statements.
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Risk Insurance Reserves:
The Company self insures its product liability, automotive, workers compensation and general liability losses up to $250 thousand per occurrence. Catastrophic coverage has been purchased from third party insurers for occurrences in excess of $250 thousand up to $40 million. The two risk areas involving the most significant accounting estimates are workers compensation and automotive liability. Actuarial valuations performed by the Companys outside risk insurance expert were used to form the basis for workers compensation and automotive liability loss reserves. The actuary contemplated the Companys 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 the liability recorded for such risk insurance reserves is adequate as of December 31, 2010, but due to judgments inherent in the reserve estimation process it is possible the ultimate costs will differ from this estimate.
The Company self-insures its group health claims up to an annual stop loss limit of $200 thousand per participant. Aggregate coverage is maintained for annual group health insurance claims in excess of 125% of expected claims. Historical group insurance loss experience forms the basis for the recognition of group health insurance reserves.
Common Stock:
After consummation of the Merger Transaction, Hillman has one class of Common Stock. All outstanding shares of Hillman common stock are owned by Holdco. Under the terms of the Stockholders Agreement for the Holdco Common Stock, management shareholders have the ability to put their shares back to Holdco under certain conditions, including death or disability. Accounting Standards Codification (ASC) 480-10-S99 requires shares to be classified outside of permanent equity if they can be redeemed and the redemption is not solely within control of the issuer. Further, if it is determined that redemption of the shares is probable, the shares are marked to redemption value, which equals fair value, at each balance sheet date with the change in value recorded in additional paid-in capital. The 198.4 shares of common stock held by management are recorded outside permanent equity and were adjusted to the fair value of $12,247 as of December 31, 2010.
According to the executive services agreement (ESA), the fair value of the management owned common stock is to be determined by the Board of Directors using an enterprise basis and taking into account all relevant market factors.
The fair value of the Successor Common Stock and Predecessor Class A Common Stock and the Class B Common Stock have been calculated at each balance sheet date by estimating the enterprise value of the Company less the redemption value of all obligations payable in preference to the common stock. These obligations include the long term debt, senior notes, bank revolving credit and the Trust Preferred Securities. In addition, the Predecessor obligations included the Class A Preferred stock and options issued thereon, the Hillman Investment Company Class A Preferred Stock and options issued thereon. The remainder is divided by the fully diluted common shares outstanding to arrive at a fair value per common share outstanding.
The enterprise value of the Company is determined based on the earnings before interest, taxes, depreciation and amortization adjusted for management fees, stock compensation costs, and other acquisition and integration related general and administrative costs (Adjusted EBITDA) for the most recent twelve month period multiplied by a valuation multiple. As of December 31, 2010, 2009, and 2008, the Company has applied valuation multiples of 9.83x, 8.00x, and 8.00x, respectively, to trailing twelve months Adjusted EBITDA in determining enterprise value. Management periodically reviews the appropriateness of this multiple and notes that it is consistent with comparable distribution companies.
A change of 0.1 in the valuation multiple used to calculate the enterprise value adjusts the per share fair value of the Successor Common Stock by $25.
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The calculation of the fair value of the Successor Common Stock as of December 31, 2010 and the Predecessor Class A Common Stock and Class B Common Stock as of December 31, 2009 and 2008, respectively, is detailed below:
Successor | Predecessor | Predecessor | ||||||||||||
(dollars in thousands) | December 31, | December 31, | December 31, | |||||||||||
2010 | 2009 | 2008 | ||||||||||||
Trailing twelve fiscal months EBITDA (1) |
$ | 85,056 | $ | 83,303 | $ | 77,391 | ||||||||
Valuation Multiple (2) |
9.83 | 8.00 | 8.00 | |||||||||||
Hillman Enterprise Value Excluding Servalite |
835,717 | 666,424 | 619,128 | |||||||||||
Servalite Fair Value (3) |
21,335 | | | |||||||||||
Hillman Enterprise Value |
857,052 | 666,424 | 619,128 | |||||||||||
Less: |
||||||||||||||
Senior term loans |
288,550 | 157,849 | 202,849 | |||||||||||
Bank revolving credit |
12,000 | | | |||||||||||
10.875% senior notes |
150,000 | | | |||||||||||
Unsecured subordinated notes |
| 49,820 | 49,820 | |||||||||||
Junior subordinated debentures redemption value, net (4) |
105,446 | 105,446 | 105,446 | |||||||||||
Total Debt |
555,996 | 313,115 | 358,115 | |||||||||||
Plus: |
||||||||||||||
Cash |
7,585 | 17,164 | 7,133 | |||||||||||
Proceeds from option exercise |
32,284 | | | |||||||||||
Less: |
||||||||||||||
Accrued Hillman Investment Company Class A Preferred (5) |
| 117,434 | 105,038 | |||||||||||
Accrued Hillman Class A Preferred (5) |
| 173,358 | 154,297 | |||||||||||
| 290,792 | 259,335 | ||||||||||||
Common Equity Value |
340,925 | 79,681 | 8,811 | |||||||||||
Liquidity & Minority Discount on Common Only (6) |
| 23,904 | 2,643 | |||||||||||
Discounted Common Equity Value |
340,925 | 55,777 | 6,168 | |||||||||||
Fully-diluted Common Shares outstanding |
340,925 | 10,227 | 10,309 | |||||||||||
Fully-diluted Discounted Value Per Common Share |
$ | 1,000 | $ | 5,454 | $ | 598 | ||||||||
(1) | - | EBITDA is calculated for the most recent four fiscal quarters as follows: |
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Income from operations |
$ | 7,923 | $ | 49,334 | $ | 47,725 | ||||||
Depreciation and amortization |
31,637 | 23,905 | 24,908 | |||||||||
Management fees |
438 | 1,010 | 1,043 | |||||||||
Stock compensation expense |
19,053 | 8,737 | 2,481 | |||||||||
Acquisition and integration |
22,492 | | | |||||||||
Exchange rate (gain) loss |
(391 | ) | (536 | ) | 980 | |||||||
Excess legal on patent litigation |
1,897 | | | |||||||||
Royalty on engraving products |
771 | | | |||||||||
Other adjustments |
1,236 | 853 | 254 | |||||||||
EBITDA |
$ | 85,056 | $ | 83,303 | $ | 77,391 | ||||||
The other adjustments include one time restructuring costs and professional fees.
(2) | - | The Company periodically reviews the valuation multiple used and notes that it is consistent with comparable multiples used for distribution companies. | ||
(3) | - | As Servalite was acquired on December 29, 2010, the purchase price was deemed the most accurate measure of enterprise value. | ||
(4) | - | The value of the junior subordinated debentures is the redemption value of $25 per share. | ||
(5) | - | Redemption value of all preferred shares and options thereon, less any applicable strike price. | ||
(6) | - | Under the terms of the ESA agreement with management shareholders of the Predecessor Company, the redemption of shares is subject to a discount given the lack of a public market for the shares. A 30% discount was applied to the Predecessor equity value to adjust for the lack of an active market for the shares. |
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Stock-Based Compensation:
The Company has a stock-based employee compensation plan. The options have certain put features and, therefore, liability classification is required. The Company has elected to use the intrinsic value method to value the common option in accordance with ASC Topic 718, Compensation-Stock Compensation. See Note 14, Stock-Based Compensation, of the Notes to the Consolidated Financial Statements for further information.
Fair Value of Financial Instruments:
Cash, restricted investments, accounts receivable, short-term borrowings, accounts payable and accrued liabilities are reflected in the consolidated financial statements at book value due to the short-term nature of these instruments. The carrying amounts of the long-term debt under the revolving credit facility and variable rate senior term loan approximate the fair value at December 31, 2010 and 2009. The fair values of the fixed rate senior notes at December 31, 2010 and junior subordinated debentures at December 31, 2010 and 2009 were determined utilizing current trading prices obtained from indicative market data. See Note 16, Fair Value Measurements of the Notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements:
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurement. This guidance amends ASC Topic 820 to require new disclosures for fair value measurements and provides clarification for existing disclosure requirements. The guidance requires new disclosures about transfers in and out of Levels 1 and 2 and further descriptions for the reasons for the transfers. The guidance also requires more detailed disclosure about the activity within Level 3 fair value measurements. The Company adopted the guidance on January 1, 2010, except for the requirements related to Level 3 disclosures, which will be effective for annual and interim reporting periods beginning after December 15, 2010. This guidance requires expanded disclosures only, and did not and is not expected to have a material impact on the Companys consolidated results of operations or financial condition.
In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events. This ASU amends certain recognition and disclosure requirements concerning subsequent events. This update addresses the interaction of the requirements of the ASC with the SECs reporting requirements. The update requires an entity to evaluate subsequent events through the date that the financial statements are issued. The update also provides that a filer is not required to disclose the date through which subsequent events have been evaluated. All the amendments in this update are effective upon issuance of the final update. The adoption of this amendment did not have a material impact on the Companys consolidated results of operations or financial conditions.
In December 2010, the FASB issued ASU No. 2010-29, Business Combinations. This ASU addresses the diversity in practice about the interpretation of the pro-forma revenue and earnings disclosure requirements for business combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This update also expands the supplemental pro-forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro-forma adjustments directly attributable to the business combination included in the reported pro-forma revenue and earnings. All amendments in the update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of this update is not expected to have a material impact on the Companys consolidated results of operations or financial condition.
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Item 7A Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to the impact of interest rate changes as borrowings under the Senior Credit Agreement bear interest at variable interest rates. It is the Companys policy to enter into interest rate swap transactions only to the extent considered necessary to meet its objectives.
On August 28, 2006, the Company entered into an Interest Rate Swap Agreement (2006 Swap) with a two-year term for a notional amount of $50.0 million. The 2006 Swap fixed the interest rate at 5.375% plus applicable interest rate margin. The 2006 Swap expired on August 28, 2008.
On August 29, 2008, the Company entered into an Interest Rate Swap Agreement (2008 Swap) with a three-year term for a notional amount of $50.0 million. The 2008 Swap fixed the interest rate at 3.41% plus applicable interest rate margin. The 2008 Swap was terminated on May 24, 2010.
On June 24, 2010, the Company entered into a forward Interest Rate Swap Agreement (2010 Swap) with a two-year term for a notional amount of $115.0 million. The effective date of the 2010 Swap is May 31, 2011 and its termination date is May 31, 2013. The 2010 Swap fixes the interest rate at 2.47% plus the applicable interest rate margin. This interest rate swap qualifies for hedge accounting based on the shortcut method under ASC 815, Derivatives and Hedging.
Based on Hillmans exposure to variable rate borrowings at December 31, 2010, 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 $3.0 million excluding any impact from the interest rate swap.
The Company is exposed to foreign exchange rate changes of the Canadian and Mexican currencies as it impacts the $8.3 million net asset value of its Canadian and Mexican subsidiaries as of December 31, 2010. Management considers the Companys exposure to foreign currency translation gains or losses to be immaterial.
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Item 8 Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page(s) | ||
Report of Management on Internal Control Over Financial Reporting |
43 | |
44-45 | ||
Consolidated Financial Statements: |
||
46-47 | ||
48 | ||
49 | ||
50 | ||
51-96 | ||
Financial Statement Schedule: |
||
97 |
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Report of Management on Internal Control Over Financial Reporting
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 of America. 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 of America, 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.
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 31, 2010, the end of our fiscal year. Management based its assessment on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Managements 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, management has concluded that our internal control over financial reporting was effective as of December 31, 2010, 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 of America. We reviewed the results of managements assessment with the Audit Committee of The Hillman Companies, Inc.
This annual report does not include an attestation report of the Companys independent registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.
/S/ MAX W. HILLMAN | /S/ JAMES P. WATERS | |
Max W. Hillman | James P. Waters | |
Chief Executive Officer | Chief Financial Officer | |
Dated: March 31, 2011 | Dated: March 31, 2011 |
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders of
The Hillman Companies, Inc.
We have audited the accompanying consolidated balance sheets of The Hillman Companies, Inc. and subsidiaries (a Delaware corporation) (the Company) as of December 31, 2010, and the related consolidated statements of operations, stockholders equity and cash flows for the seven months ended December 31, 2010 (Successor) and the five months ended May 28, 2010 (Predecessor). In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index appearing under Valuation Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Hillman Companies, Inc. and subsidiaries as of December 31, 2010, and the results of its operations and its cash flows for the seven months ended December 31, 2010 (Successor) and five months ended May 28, 2010 (Predecessor) in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
Cincinnati, Ohio
March 31, 2011
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders of
The Hillman Companies, Inc.
We have audited the accompanying consolidated balance sheets of The Hillman Companies, Inc. and subsidiaries (a Delaware corporation) (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders equity and cash flows for each of the two years in the period ended December 31, 2009. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Valuation Accounts. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Hillman Companies, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material aspects, the information set forth therein.
As discussed in Note 18 (not presented herein), the consolidated balance sheets as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders equity and cash flows for each of the two years in the period ending December 31, 2009 have been restated to correct a misstatement in the recording of the provision for income taxes.
Also, as presented in Note 24, the notes to the consolidated financial statements have been adjusted to include supplemental consolidating guarantor and non-guarantor financial information as of December 31, 2009 and December 31, 2008 and for the years then ended. We were not engaged to audit, review, or apply any procedures to the supplemental consolidating guarantor and non-guarantor financial information as of December 31, 2010 and for the five months ended May 28, 2010 and the seven months ended December 31, 2010 and, accordingly, we do not express an opinion or any other form of assurance on such information.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Cincinnati, Ohio
March 26, 2010, except for Note 18 (not presented herein) and Note 24, as to which the dates are May 3, 2010 and March 31, 2011, respectively.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Successor | Predecessor | |||||||||||
December 31, 2010 |
December 31, 2009 |
|||||||||||
ASSETS | ||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 7,585 | $ | 17,164 | ||||||||
Restricted investments |
227 | 334 | ||||||||||
Accounts receivable |
56,510 | 51,757 | ||||||||||
Inventories |
97,701 | 83,182 | ||||||||||
Deferred income taxes |
9,377 | 8,100 | ||||||||||
Other current assets |
3,401 | 2,657 | ||||||||||
Total current assets |
174,801 | 163,194 | ||||||||||
Property and equipment |
52,512 | 47,565 | ||||||||||
Goodwill |
439,589 | 257,806 | ||||||||||
Other intangibles |
363,076 | 146,640 | ||||||||||
Restricted investments |
3,251 | 2,709 | ||||||||||
Deferred income taxes |
379 | 418 | ||||||||||
Deferred financing fees |
14,322 | 5,690 | ||||||||||
Investment in trust common securities |
3,261 | 3,261 | ||||||||||
Other assets |
1,587 | 1,198 | ||||||||||
Total assets |
$ | 1,052,778 | $ | 628,481 | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) | ||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 28,424 | $ | 19,191 | ||||||||
Current portion of senior term loans |
2,900 | 9,519 | ||||||||||
Current portion of capitalized lease and other obligations |
30 | 349 | ||||||||||
Accrued expenses: |
||||||||||||
Salaries and wages |
6,078 | 7,624 | ||||||||||
Pricing allowances |
5,355 | 5,317 | ||||||||||
Income and other taxes |
2,039 | 1,904 | ||||||||||
Interest |
1,409 | 2,199 | ||||||||||
Deferred compensation |
227 | 334 | ||||||||||
Other accrued expenses |
7,899 | 6,147 | ||||||||||
Total current liabilities |
54,361 | 52,584 | ||||||||||
Long-term senior term loans |
285,650 | 148,330 | ||||||||||
Bank revolving credit |
12,000 | | ||||||||||
Long-term capitalized lease and other obligations |
134 | 145 | ||||||||||
Long-term senior notes |
150,000 | | ||||||||||
Long-term unsecured subordinated notes |
| 49,820 | ||||||||||
Junior subordinated debentures |
115,837 | 115,716 | ||||||||||
Mandatorily redeemable preferred stock |
| 111,452 | ||||||||||
Management purchased preferred options |
| 6,617 | ||||||||||
Deferred compensation |
3,251 | 2,709 | ||||||||||
Deferred income taxes |
129,284 | 50,169 | ||||||||||
Accrued dividends on preferred stock |
| 75,580 | ||||||||||
Other non-current liabilities |
2,283 | 18,467 | ||||||||||
Total liabilities |
752,800 | 631,589 | ||||||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
46
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Successor | Predecessor | |||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) (CONTINUED) | December 31, 2010 |
December 31, 2009 |
||||||||||
Common stock with put options: |
||||||||||||
Common stock, $.01 par, 5,000 shares authorized, 198.4 issued and outstanding at December 31, 2010. |
12,247 | | ||||||||||
Class A Common stock, $.01 par, zero authorized and outstanding at December 31, 2010; 23,141 shares authorized, 395.7 issued and outstanding at December 31, 2009. |
| 2,158 | ||||||||||
Class B Common stock, $.01 par, zero authorized, issued and outstanding at December 31, 2010; 2,500 shares authorized, 970.6 issued and outstanding at December 31, 2009. |
| 5,293 | ||||||||||
Commitments and contingencies (Note 17) |
||||||||||||
Stockholders Equity (Deficit): |
||||||||||||
Preferred Stock: |
||||||||||||
Preferred stock, $.01 par, 5,000 shares authorized, none issued and outstanding at December 31, 2010. |
| | ||||||||||
Class A Preferred stock, $.01 par, zero authorized, issued and outstanding at December 31, 2010; $1,000 liquidation value, 238,889 shares authorized, 82,104.8 issued and outstanding at December 31, 2009. |
| 1 | ||||||||||
Common Stock: |
||||||||||||
Common stock, $.01 par, 5,000 shares authorized, 4,801.6 issued and outstanding at December 31, 2010. |
| | ||||||||||
Class A Common stock, $.01 par, zero authorized, issued and outstanding at December 31, 2010; 23,141 shares authorized, 5,805.3 issued and outstanding at December 31, 2009. |
| | ||||||||||
Class C Common stock, $.01 par, zero authorized, issued and outstanding at December 31, 2010; 30,109 shares authorized, 2,787.1 issued and outstanding at December 31, 2009. |
| | ||||||||||
Additional paid-in capital |
296,394 | 10,302 | ||||||||||
Accumulated deficit |
(8,038 | ) | (19,377 | ) | ||||||||
Accumulated other comprehensive loss |
(625 | ) | (1,485 | ) | ||||||||
Total stockholders equity (deficit) |
287,731 | (10,559 | ) | |||||||||
Total liabilities and stockholders equity (deficit) |
$ | 1,052,778 | $ | 628,481 | ||||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
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Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
Successor | Predecessor | |||||||||||||||||||
Seven Months ended December 31, 2010 |
Five Months ended May 28, 2010 |
Year ended December 31, 2009 |
Year ended December 31, 2008 |
|||||||||||||||||
Net sales |
$ | 276,680 | $ | 185,716 | $ | 458,161 | $ | 481,923 | ||||||||||||
Cost of sales (exclusive of depreciation and amortization shown separately below) |
136,554 | 89,773 | 224,642 | 244,647 | ||||||||||||||||
Gross profit |
140,126 | 95,943 | 233,519 | 237,276 | ||||||||||||||||
Operating expenses: |
||||||||||||||||||||
Selling, general and administrative expenses |
90,760 | 82,850 | 159,150 | 161,350 | ||||||||||||||||
Acquisition and integration (Note 22) |
11,150 | 11,342 | | | ||||||||||||||||
Depreciation |
11,007 | 7,283 | 16,993 | 17,835 | ||||||||||||||||
Amortization |
10,669 | 2,678 | 6,912 | 7,073 | ||||||||||||||||
Management and transaction fees to related party |
| 438 | 1,010 | 1,043 | ||||||||||||||||
Total operating expenses |
123,586 | 104,591 | 184,065 | 187,301 | ||||||||||||||||
Other income (expense), net |
145 | (114 | ) | (120 | ) | (2,250 | ) | |||||||||||||
Income (loss) from operations |
16,685 | (8,762 | ) | 49,334 | 47,725 | |||||||||||||||
Interest expense, net |
20,712 | 8,327 | 15,521 | 20,545 | ||||||||||||||||
Interest expense on mandatorily redeemable preferred stock and management purchased options |
| 5,488 | 12,312 | 11,091 | ||||||||||||||||
Interest expense on junior subordinated debentures |
7,356 | 5,254 | 12,820 | 12,609 | ||||||||||||||||
Investment income on trust common securities |
(220 | ) | (158 | ) | (378 | ) | (378 | ) | ||||||||||||
(Loss) income before income taxes |
(11,163 | ) | (27,673 | ) | 9,059 | 3,858 | ||||||||||||||
Income tax (benefit) provision |
(3,125 | ) | (2,465 | ) | 10,289 | 5,023 | ||||||||||||||
Net loss |
$ | (8,038 | ) | $ | (25,208 | ) | $ | (1,230 | ) | $ | (1,165 | ) | ||||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
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Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Successor | Predecessor | |||||||||||||||||||
Seven Months | Five Months | Year | Year | |||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||
December 31, | May 28, | December 31, | December 31, | |||||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net loss |
$ | (8,038 | ) | $ | (25,208 | ) | $ | (1,230 | ) | $ | (1,165 | ) | ||||||||
Adjustments to reconcile net loss to net cash provided by (used for) operating activities: |
||||||||||||||||||||
Depreciation and amortization |
21,676 | 9,961 | 23,905 | 24,908 | ||||||||||||||||
Dispositions of property and equipment |
60 | 74 | 243 | 75 | ||||||||||||||||
Deferred income tax provision (benefit) |
(5,660 | ) | (1,921 | ) | 8,673 | 3,476 | ||||||||||||||
Deferred financing and original issue discount amortization |
1,294 | 515 | 1,275 | 1,294 | ||||||||||||||||
Interest on mandatorily redeemable preferred stock and management purchased options |
| 5,488 | 12,312 | 11,091 | ||||||||||||||||
Stock-based compensation expense |
| 19,053 | 8,737 | 2,481 | ||||||||||||||||
Changes in operating items: |
||||||||||||||||||||
Accounts receivable |
14,686 | (16,816 | ) | 1,633 | (4,428 | ) | ||||||||||||||
Inventories |
(11,661 | ) | 2,959 | 18,282 | (3,488 | ) | ||||||||||||||
Other assets |
(1,156 | ) | 124 | 949 | (740 | ) | ||||||||||||||
Accounts payable |
7,051 | 1,830 | (6,219 | ) | 2,177 | |||||||||||||||
Other accrued liabilities |
(5,780 | ) | 4,352 | 3,627 | 569 | |||||||||||||||
Other items, net |
(1,273 | ) | (894 | ) | (190 | ) | 1,342 | |||||||||||||
Net cash provided by (used for) operating activities |
11,199 | (483 | ) | 71,997 | 37,592 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Payments for Quick Tag and Laser Key licenses |
(12,750 | ) | | | | |||||||||||||||
Servalite acquisition |
(21,335 | ) | | | | |||||||||||||||
Capital expenditures |
(9,675 | ) | (5,411 | ) | (12,971 | ) | (13,409 | ) | ||||||||||||
Net cash used for investing activities |
(43,760 | ) | (5,411 | ) | (12,971 | ) | (13,409 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Borrowings of senior term loans |
290,000 | | | | ||||||||||||||||
Repayments of senior term loans |
(149,756 | ) | (9,544 | ) | (45,000 | ) | (28,626 | ) | ||||||||||||
Borrowings of revolving credit loans |
12,600 | | | 24,250 | ||||||||||||||||
Repayments of revolving credit loans |
(600 | ) | | | (24,250 | ) | ||||||||||||||
Principal payments under capitalized lease obligations |
(50 | ) | (459 | ) | (394 | ) | (343 | ) | ||||||||||||
Repayments of unsecured subordinated notes |
(49,820 | ) | | | | |||||||||||||||
Borrowings of senior notes |
150,000 | | | | ||||||||||||||||
Financing fees, net |
(15,729 | ) | | (2,921 | ) | | ||||||||||||||
Purchase of predecessor equity securities |
(506,407 | ) | | | | |||||||||||||||
Proceeds from sale of successor equity securities |
308,641 | | (1,141 | ) | | |||||||||||||||
Borrowings under other credit obligations |
| | 461 | | ||||||||||||||||
Net cash provided by (used for) financing activities |
38,879 | (10,003 | ) | (48,995 | ) | (28,969 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents |
6,318 | (15,897 | ) | 10,031 | (4,786 | ) | ||||||||||||||
Cash and cash equivalents at beginning of period |
1,267 | 17,164 | 7,133 | 11,919 | ||||||||||||||||
Cash and cash equivalents at end of period |
$ | 7,585 | $ | 1,267 | $ | 17,164 | $ | 7,133 | ||||||||||||
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
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Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(dollars in thousands)
Accumulated Other |
Total Stockholders |
|||||||||||||||||||||||||||||||||||
Predecessor | Successor | Additional | ||||||||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Common | Paid-in | Accumulated | Comprehensive | Comprehensive | Equity | |||||||||||||||||||||||||||||
Class A | Class C | Class A | Stock | Capital | Deficit | Income (Loss) | Income (Loss) | (Deficit) | ||||||||||||||||||||||||||||
Balance at December 31, 2007 - Predecessor |
$ | | $ | | $ | 1 | $ | | $ | 44,164 | $ | (16,982 | ) | $ | (411 | ) | $ | 26,772 | ||||||||||||||||||
Net loss |
| | | | | (1,165 | ) | | $ | (1,165 | ) | (1,165 | ) | |||||||||||||||||||||||
Class A Common Stock FMV adjustment (2) |
| | | | 170 | | | 170 | ||||||||||||||||||||||||||||
Dividends to shareholders |
| | | | (15,141 | ) | | | (15,141 | ) | ||||||||||||||||||||||||||
Stock-based compensation |
| | | | 16 | | | 16 | ||||||||||||||||||||||||||||
Change in cumulative foreign translation adjustment (1) |
| | | | | | 74 | 74 | 74 | |||||||||||||||||||||||||||
Change in derivative security value (1) |
| | | | | | (1,248 | ) | (1,248 | ) | (1,248 | ) | ||||||||||||||||||||||||
Comprehensive loss |
$ | (2,339 | ) | |||||||||||||||||||||||||||||||||
Balance at December 31, 2008 - Predecessor |
| | 1 | | 29,209 | (18,147 | ) | (1,585 | ) | 9,478 | ||||||||||||||||||||||||||
Net loss |
| | | | | (1,230 | ) | | $ | (1,230 | ) | (1,230 | ) | |||||||||||||||||||||||
Class A Common Stock FMV adjustment (2) |
| | | | (1,995 | ) | | | (1,995 | ) | ||||||||||||||||||||||||||
Dividends to shareholders |
| | | | (16,912 | ) | | | (16,912 | ) | ||||||||||||||||||||||||||
Change in cumulative foreign translation adjustment (1) |
| | | | | | (197 | ) | (197 | ) | (197 | ) | ||||||||||||||||||||||||
Change in derivative security value (1) |
| | | | | | 297 | 297 | 297 | |||||||||||||||||||||||||||
Comprehensive loss |
$ | (1,130 | ) | |||||||||||||||||||||||||||||||||
Balance at December 31, 2009 - Predecessor |
| | 1 | | 10,302 | (19,377 | ) | (1,485 | ) | (10,559 | ) | |||||||||||||||||||||||||
Net loss |
| | | | | (25,208 | ) | | $ | (25,208 | ) | (25,208 | ) | |||||||||||||||||||||||
Class A Common Stock FMV adjustment (2) |
| | | | (5,650 | ) | | | | (5,650 | ) | |||||||||||||||||||||||||
Dividends to shareholders |
| | | | (7,583 | ) | | | | (7,583 | ) | |||||||||||||||||||||||||
Change in cumulative foreign translation adjustment (1) |
| | | | | | 17 | 17 | 17 | |||||||||||||||||||||||||||
Change in derivative security value (1) |
| | | | | | 1,161 | 1,161 | 1,161 | |||||||||||||||||||||||||||
Comprehensive loss |
$ | (24,030 | ) | |||||||||||||||||||||||||||||||||
Balance at May 28, 2010 - Predecessor |
| | 1 | | (2,931 | ) | (44,585 | ) | (307 | ) | (47,822 | ) | ||||||||||||||||||||||||
Close stockholders deficit at merger date |
| | (1 | ) | | 2,931 | 44,585 | 307 | 47,822 | |||||||||||||||||||||||||||
Issuance of 5,000 shares of common stock |
| | | | 308,641 | | | 308,641 | ||||||||||||||||||||||||||||
Transfer of 200.8 shares of common stock to mezzazine |
| | | | (12,397 | ) | | | (12,397 | ) | ||||||||||||||||||||||||||
Balance at May 28, 2010 - Successor |
| | | | 296,244 | | | 296,244 | ||||||||||||||||||||||||||||
Net loss |
| | | | | (8,038 | ) | | $ | (8,038 | ) | (8,038 | ) | |||||||||||||||||||||||
Sale of 150 Holdco common shares (3) |
| | | | 150 | | | 150 | ||||||||||||||||||||||||||||
Change in cumulative foreign translation adjustment (1) |
| | | | | | (1 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||
Change in derivative security value (1) |
| | | | | | (624 | ) | (624 | ) | (624 | ) | ||||||||||||||||||||||||
Comprehensive loss |
$ | (8,663 | ) | |||||||||||||||||||||||||||||||||
Balance at December 31, 2010 - Successor |
$ | | $ | | $ | | $ | | $ | 296,394 | $ | (8,038 | ) | $ | (625 | ) | $ | 287,731 | ||||||||||||||||||
(1) | The cumulative foreign translation adjustment and change in derivative security value are net of taxes and represent the only items of other comprehensive income (loss). |
(2) | Management of the Predecessor Company controlled 395.7 shares of Class A common stock at December 31, 2009 and 412.0 shares of Class A common stock at December 31, 2008. These shares contained a put feature that allowed redemption at the holders option. These shares were classified as temporary equity and were adjusted to fair value. See Note 13, Common and Preferred Stock, for further details. |
(3) | In December 2010, a former member of management sold 150.0 shares of Holdco to a member of the Board of Directors. |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
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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. (Hillman Companies) and its wholly-owned subsidiaries (collectively Hillman or the Company). All significant intercompany balances and transactions have been eliminated.
On May 28, 2010, Hillman Companies was acquired by an affiliate of Oak Hill Capital Partners (OHCP) and certain members of Hillmans management and Board of Directors. Pursuant to the terms and conditions of an Agreement and Plan of Merger dated as of April 21, 2010, the Company was merged with an affiliate of OHCP with the Company surviving the merger (the Merger Transaction). As a result of the Merger Transaction, Hillman Companies is a wholly-owned subsidiary of OHCP HM Acquisition Corp. (Holdco). The total consideration paid in the Merger Transaction was $832,679 which includes $11,500 for the Quick Tag license and related patents, the repayment of outstanding debt and the net value of the Companys outstanding junior subordinated debentures ($105,443 liquidation value at the time of the merger).
Prior to the Merger Transaction, affiliates of Code Hennessy & Simmons LLC (CHS) owned 49.3% of the Companys outstanding common stock and 54.6% of the Companys voting common stock, Ontario Teachers Pension Plan (OTPP) owned 28.0% of the Companys outstanding common stock and 31.0% of the Companys voting common stock and HarbourVest Partners VI (HarbourVest) owned 8.7% of the Companys outstanding common stock and 9.7% of the Companys voting common stock. Certain current and former members of management owned 13.7% of the Companys outstanding common stock and 4.4% of the Companys voting common stock. Other investors owned 0.3% of the Companys common stock and 0.3% of the Companys voting common stock.
The Companys consolidated balance sheet as of May 28, 2010 and its related statements of operations, cash flows and changes in stockholders equity for the periods presented prior to May 28, 2010 are referenced herein as the predecessor financial statements (the Predecessor or Predecessor Financial Statements). The Companys consolidated balance sheet as of December 31, 2010 and its related statements of operations, cash flows and changes in stockholders equity for the periods presented subsequent to the Merger Transaction are referenced herein as the successor financial statements (the Successor or Successor Financial Statements). The Predecessor Financial Statements do not reflect certain transaction amounts that were incurred at the close of the Merger Transaction. Such transaction amounts include the write-off of $5,010 in deferred financing fees associated with the Predecessor debt obligations.
The Successor Financial Statements reflect the preliminary allocation of the aggregate purchase price of $832,679, including the value of the Companys junior subordinated debentures, to the assets and liabilities of Hillman based on fair values at the date of the Merger Transaction in accordance with ASC Topic 805, Business Combinations. The Company is in the process of finalizing its fair value evaluation of certain assets and liabilities acquired in connection with the Merger Transaction. Thus, the allocation of the purchase price is subject to change.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. | Basis of Presentation (continued): |
The Companys financial statements have been presented on the basis of push down accounting in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 805-50-S99 (Prior authoritative literature: Staff Accounting Bulletin No. 54 Application of Push Down Basis of Accounting in Financial Statements of Subsidiaries Acquired by Purchase). FASB ASC 805-50-S99 states that the push down basis of accounting should be used in a purchase transaction in which the entity becomes wholly-owned by another entity. Under the push down basis of accounting, certain transactions incurred by the parent company which would otherwise be accounted for in the accounts of the parent are pushed down and recorded on the financial statements of the subsidiary. Accordingly, certain items resulting from the OHCP Merger Transaction have been recorded on the financial statements of the Company.
The following tables reconcile the fair value of the acquired assets and assumed liabilities to the total purchase price:
Amount | ||||
Cash paid as merger consideration |
$ | 715,736 | ||
Cash paid for Quick Tag license and related patents |
11,500 | |||
Fair value of consideration transferred |
$ | 727,236 | ||
Cash |
$ | 1,267 | ||
Accounts Receivable |
68,573 | |||
Inventory |
78,911 | |||
Other current assets |
11,629 | |||
Property and equipment |
53,607 | |||
Goodwill |
432,405 | |||
Intangible assets |
366,400 | |||
Other non-current assets |
3,748 | |||
Total assets acquired |
1,016,540 | |||
Less: |
||||
Accounts payable |
(21,021 | ) | ||
Deferred income taxes |
(133,282 | ) | ||
Junior subordinated debentures |
(105,443 | ) | ||
Junior subordinated debentures premium |
(7,378 | ) | ||
Other liabilities assumed |
(22,180 | ) | ||
Net assets acquired |
$ | 727,236 | ||
The following table indicates the unaudited pro-forma financial statements of the Company for the years ended December 31, 2010 (excludes acquisition and integration charges of $22,492 as discussed in Note 22), 2009, and 2008. The pro-forma financial statements give effect to the Merger Transaction, subsequent refinancing and the acquisitions described in Note 4, Acquisitions, as if they had occurred on January 1, 2008.
2010 | 2009 | 2008 | ||||||||||
Net Sales |
483,434 | 477,969 | 501,589 | |||||||||
Net Income |
8,789 | 1,515 | 347 |
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. | Basis of Presentation (continued): |
The pro-forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro-forma results are not necessarily indicative of the operating results that would have occurred if the acquisition had been effective January 1, 2008, nor are they intended to be indicative of results that may occur in the future. The underlying pro-forma information includes the historical results of the Company, the Companys financing arrangements, and certain purchase accounting adjustments.
Nature of Operations:
The Company is one of the largest providers of value-added merchandising services and hardware-related products to retail markets in North America through its wholly-owned subsidiary, The Hillman Group, Inc. (the Hillman Group). A subsidiary of the Hillman Group operates in Canada under the name The Hillman Group Canada, Ltd. and another in Mexico under the name SunSource Integrated Services de Mexico SA de CV. The Hillman Group provides merchandising services and products such as fasteners and related hardware items; threaded rod and metal shapes; keys, key duplication systems and accessories; and identification items, such as tags and letters, numbers and signs, to retail outlets, primarily hardware stores, home centers and mass merchants. The Company has approximately 18,000 customers, the largest three of which accounted for 43.7% of net sales in 2010.
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 market value. The Company has foreign bank balances of approximately $1,299 and $363 at December 31, 2010 and 2009, 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 Companys 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 Companys employees. See Note 11, Deferred Compensation Plans.
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 $520 and $514 as of December 31, 2010 and 2009, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. | Summary of Significant Accounting Policies: (continued) |
Inventories:
Inventories consisting predominantly of finished goods are valued at the lower of cost or market, cost being determined principally on the weighted average cost method. Excess and obsolete inventories are carried at net realizable value. The historical usage rate is the primary factor used by the Company in assessing the net realizable value of excess and obsolete inventory. A reduction in the carrying value of an inventory item from cost to market is recorded for inventory with no usage in the preceding 24 month period or with on hand quantities in excess of 24 months average usage. The inventory reserve amounts were $11,010 and $7,145 at December 31, 2010 and 2009, respectively.
Property and Equipment:
Property and equipment, including assets acquired under capital leases, are carried at cost and include expenditures for new facilities and major renewals. Maintenance and repairs are charged to expense as incurred. 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 from operations.
Costs incurred to develop software for internal use are capitalized and amortized over the estimated useful life of the software. Costs related to maintenance of internal-use software are expensed as incurred. Costs used for the development of internal-use software were capitalized in the amount of $1,134 in the Successor seven month period ended December 31, 2010, $246 in the Predecessor period ended May 28, 2010 and $2,837 and $1,985 for the years ended December 31, 2009 and 2008, respectively.
Depreciation:
For financial accounting purposes, depreciation, including that related to plant and equipment acquired under capital leases, is computed on the straight-line method over the estimated useful lives of the assets, generally three to ten years or over the terms of the related leases, whichever is shorter.
Goodwill and Other Intangible Assets:
Goodwill represents the excess purchase cost over the fair value of net assets of companies acquired in business combinations. Goodwill is an indefinite lived asset and is tested for impairment at least annually or more frequently if a triggering event occurs. If the carrying amount of goodwill is greater than the fair value, impairment may be present. In connection with the Merger Transaction, an independent appraiser assessed the value of its goodwill based on a discounted cash flow model and multiple of earnings. Assumptions critical to the Companys 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 Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually. The Company also tests for impairment 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 Merger Transaction, an independent appraiser assessed the value of its intangible assets based on a relief from royalties, excess earnings, and lost profits discounted cash flow model. Assumptions critical to the Companys evaluation of indefinite-lived intangible assets for impairment include the discount rate, royalty rates used in its evaluation of trade names,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. | Summary of Significant Accounting Policies: (continued) |
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 were recorded by the Company as a result of the annual impairment testing in the seven month period ended December 31, 2010 or the years ended December 31, 2009 and 2008.
Long-Lived Assets:
The Company evaluates its long-lived assets for financial 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. No impairment charges were recognized for long-lived assets in the seven months ended December 31, 2010 or the years ended December 31, 2009 and 2008.
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.
Risk Insurance Reserves:
The Company self insures its product liability, automotive, workers compensation and general liability losses up to $250 per occurrence. Catastrophic coverage has been purchased from third party insurers for occurrences in excess of $250 up to $40,000. The two risk areas involving the most significant accounting estimates are workers compensation and automotive liability. Actuarial valuations performed by the Companys outside risk insurance expert were used to form the basis for workers compensation and automotive liability loss reserves. The actuary contemplated the Companys 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 the liability recorded for such risk insurance reserves is adequate as of December 31, 2010, but due to judgments inherent in the reserve estimation process, it is possible the ultimate costs will differ from this estimate.
The Company self-insures its group health claims up to an annual stop loss limit of $200 per participant. Aggregate coverage is maintained for annual group health insurance claims in excess of 125% of expected claims. Historical group insurance loss experience forms the basis for the recognition of group health insurance reserves.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. | Summary of Significant Accounting Policies: (continued) |
Retirement Benefits:
Certain employees of the Company are covered under a profit-sharing and retirement savings plan (defined contribution 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 employees compensation. The matching contribution for all eligible employees was reduced to 25% of each dollar contributed up to 6% of the employees compensation in February 2009, but was reinstated at the 50% level in July 2009. 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.
The Companys defined contribution plan costs were $710 in the Successor seven month period ended December 31, 2010, $594 in the Predecessor five month period ended May 28, 2010 and $1,035 and $1,368 for the years ended December 31, 2009 and 2008, respectively.
Revenue Recognition:
Revenue is recognized when products are shipped or delivered to customers depending upon when title and risks of ownership have passed and the collection of the relevant receivables is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Sales tax collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore excluded from revenues in the consolidated statements of operations.
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 estimated based on the revenue to date and the contractual rebate percentage to be paid. A portion of the estimated cost of the rebate is allocated to each underlying sales transaction. Rebates and discounts 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.
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 Companys consolidated statements of operations. The Companys shipping and handling costs were $16,105 in the Successor seven month period ended December 31, 2010, $3,153 in the Predecessor period ended May 28, 2010 and $16,667 and $19,393 for the years ended December 31, 2009, and 2008, respectively.
Research and Development:
The Company expenses research and development costs consisting primarily of internal wages and benefits in connection with improvements to the key duplicating and engraving machines. The Companys research and development costs were $476 in the Successor seven month period ended December 31, 2010, $446 in the Predecessor period ended May 28, 2010 and $1,198 and $998 for the years ended December 31, 2009 and 2008, respectively.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. | Summary of Significant Accounting Policies: (continued) |
Common Stock:
After consummation of the Merger Transaction, Hillman Companies has one class of Common Stock. All outstanding shares of Hillman Companies common stock are owned by Holdco.
Under the terms of the Stockholders Agreement for the Holdco Common Stock, management shareholders have the ability to put their shares back to Holdco under certain conditions, including death or disability. ASC 480-10-S99 requires shares to be classified outside of permanent equity if they can be redeemed and the redemption is not solely within control of the issuer. Further, if it is determined that redemption of the shares is probable the shares are marked to market at each balance sheet date with the change in fair value recorded in additional paid-in capital. Accordingly, the 198.4 shares of common stock held by management are recorded outside permanent equity and have been adjusted to the fair value of $12,247 as of December 31, 2010. See Note 13, Common and Preferred Stock.
Stock Based Compensation:
The Company has a stock-based employee compensation plan, which is more fully described in Note 14, Stock Based Compensation. The options have certain put features available to the holder and, therefore, liability classification is required. The Company has elected to use the intrinsic value method to value the common option in accordance with ASC Topic 718, Compensation-Stock Compensation.
Fair Value of Financial Instruments:
Cash, restricted investments, accounts receivable, short-term borrowings, accounts payable and accrued liabilities 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 amounts of the long-term debt under the revolving credit facility and variable rate senior term loan approximate the fair value at December 31, 2010 and 2009 because of the short maturity of these instruments. The fair values of the fixed rate senior notes at December 31, 2010 and junior subordinated debentures at December 31, 2010 and 2009 were determined utilizing current trading prices obtained from indicative market data. See Note 16, Fair Value Measurements.
Interest Rate Swaps
The Company uses derivative instruments, consisting primarily of interest rate swap agreements, to manage exposure to changes in the future cash flows of some of our long-term debt. The Company enters into interest rate swap transactions with financial institutions acting as the counter-party. The Company does not use derivative instruments for trading or other speculative 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, we discontinue hedge accounting and recognize all subsequent derivative gains and losses in our income statement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. | Summary of Significant Accounting Policies: (continued) |
Derivative instruments designated in hedging relationships that mitigate exposure to the variability in future cash flows of our variable-rate debt are considered cash flow hedges. We record all derivative instruments in other assets or other liabilities on our 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 and reclassified to interest expense when the hedged debt affects interest expense. Instruments not qualifying for hedge accounting are recognized in interest expense in the period of the change. Hedge transactions that qualify for hedge accounting using the short-cut method have no net effect on our consolidated results of operations. See Note 15, Derivatives and Hedging.
Translation of Foreign Currencies:
The translation of the Companys 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 stockholders equity.
Comprehensive Income (Loss):
The components of comprehensive loss were as follows:
Successor | Predecessor | |||||||||||||||||||
Seven Months | Five Months | Year | Year | |||||||||||||||||
ended | ended | ended | ended | |||||||||||||||||
December 31, | May 28, | December 31, | December 31, | |||||||||||||||||
2010 | 2010 | 2009 | 2008 | |||||||||||||||||
Net loss |
$ | (8,038 | ) | $ | (25,208 | ) | $ | (1,230 | ) | $ | (1,165 | ) | ||||||||
Foreign currency translation adjustment, net |
(1 | ) | 17 | (197 | ) | 74 | ||||||||||||||
Change in derivative security value, net (1) |
(624 | ) | 1,161 | 297 | (1,248 | ) | ||||||||||||||
Comprehensive loss |
$ | (8,663 | ) | $ | (24,030 | ) | $ | (1,130 | ) | $ | (2,339 | ) | ||||||||
(1) | Utilizing an income tax rate of 38.6%, 38.7%, 38.7%, and 38.5% for the periods ended December 31, 2010, May 28, 2010, December 31, 2009 and 2008, respectively. |
The accumulated other comprehensive loss of $625 at December 31, 2010 consisted of $1 for the cumulative change in foreign currency translation adjustment and $624 for the cumulative change in derivative security value.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 for the reporting period. Actual results may differ from these estimates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
3. | Recent Accounting Pronouncements: |
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurement. This guidance amends Accounting Standards Codification (ASC) Topic 820 to require new disclosures for fair value measurements and provides clarification for existing disclosure requirements. The guidance requires new disclosures about transfers in and out of Levels 1 and 2 and further descriptions for the reasons for the transfers. The guidance also requires more detailed disclosure about the activity within Level 3 fair value measurements. The Company adopted the guidance on January 1, 2010, except for the requirements related to Level 3 disclosures, which will be effective for annual and interim reporting periods beginning after December 15, 2010. This guidance requires expanded disclosures only, and did not and is not expected to have a material impact on the Companys consolidated results of operations or financial condition.
In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events. This ASU amends certain recognition and disclosure requirements concerning subsequent events. This update addresses the interaction of the requirements of the ASC with the SECs reporting requirements. The update requires an entity to evaluate subsequent events through the date that the financial statements are issued. The update also provides that a filer is not required to disclose the date through which subsequent events have been evaluated. All the amendments in this update are effective upon issuance of the final update. The adoption of this amendment did not have a material impact on the Companys consolidated results of operations or financial condition.
In December 2010, the FASB issued ASU No. 2010-29, Business Combinations. This ASU addresses the diversity in practice about the interpretation of the pro-forma revenue and earnings disclosure requirements for business combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This update also expands the supplemental pro-forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro-forma adjustments directly attributable to the business combination included in the reported pro-forma revenue and earnings. All amendments in the update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of this update is not expected to have a material impact on the Companys consolidated results of operations or financial condition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
4. | Acquisitions: |
On December 29, 2010, the Hillman Group entered into a Stock Purchase Agreement (the Agreement) by and among Serv-A-Lite Products, Inc. (Servalite), Thomas Rowe, Mary Jennifer Rowe, and the Hillman Group, whereby the Hillman Group acquired all of the equity interest of Servalite. The aggregate purchase price was $21,335 paid in cash at closing.
The following table reconciles the fair value of the acquired assets and assumed liabilities to the total purchase price:
Account receivable |
$ | 2,623 | ||
Inventory |
5,817 | |||
Other current assets |
144 | |||
Deferred income taxes |
1,259 | |||
Property and equipment |
49 | |||
Goodwill |
7,184 | |||
Intangibles |
6,095 | |||
Total assets acquired |
23,171 | |||
Less: |
||||
Liabilities assumed |
1,836 | |||
Total purchase price |
$ | 21,335 | ||
The excess of the purchase price over the net assets has been preliminarily allocated to goodwill and intangible assets by management pending final valuation by an independent appraisal. The intangible assets and goodwill are expected to be deductible for income tax purposes over a 15 year life.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
5. | Related Party Transactions: |
The Predecessor was obligated to pay management fees to a subsidiary of CHS in the amount of $58 per month. The Predecessor was also obligated to pay transaction fees to a subsidiary of OTPP in the amount of $26 per month, plus out of pocket expenses. The Successor has no management fee charges for the seven month period ended December 31, 2010. The Predecessor has recorded aggregate management and transaction fee charges and expenses from CHS and OTPP of $438 for the five month period ended May 28, 2010. The Predecessor also recorded aggregate management and transaction fee charges and expenses from CHS and OTPP of $1,010 and $1,043 for each of the years ended December 31, 2009 and 2008, respectively.
Gregory Mann and Gabrielle Mann are employed by the All Points subsidiary of Hillman. All Points leases an industrial warehouse and office facility from companies under the control of the Manns. The Predecessor and Successor have recorded rental expense for the lease of this facility on an arms length basis. The Successor recorded rental expense for the lease of this facility in the amount of $181 for the seven month period ended December 31, 2010. The Predecessor recorded rental expense for the lease of this facility in the amount of $130 for the five month period ended May 28, 2010 and $311 and $302 for the years ended December 31, 2009 and 2008, respectively.
6. | Income Taxes: |
The components of the Companys income tax provision for the three years ended December 31, 2010 were as follows:
Successor | Predecessor | |||||||||||||||||||
Seven Months ended December 31, 2010 |
Five Months ended May 28, 2010 |
Year ended December 31, 2009 |
Year ended December 31, 2008 |
|||||||||||||||||
Current: |
||||||||||||||||||||
Federal & State |
$ | 96 | $ | 83 | $ | 1,579 | $ | 878 | ||||||||||||
Foreign |
108 | 73 | 102 | 104 | ||||||||||||||||
Total current |
204 | 156 | 1,681 | 982 | ||||||||||||||||
Deferred: |
||||||||||||||||||||
Federal & State |
(4,348 | ) | (2,063 | ) | 7,907 | 4,545 | ||||||||||||||
Foreign |
38 | 91 | 196 | (469 | ) | |||||||||||||||
Total deferred |
(4,310 | ) | (1,972 | ) | 8,103 | 4,076 | ||||||||||||||
Valuation allowance |
981 | (649 | ) | 505 | (35 | ) | ||||||||||||||
Provision for income taxes |
$ | (3,125 | ) | $ | (2,465 | ) | $ | 10,289 | $ | 5,023 | ||||||||||
The Company has U.S. federal net operating loss (NOL) carryforwards for tax purposes, totaling $52,517 as of December 31, 2010, that are available to offset future taxable income. These carryforwards expire from 2023 to 2030. Management estimates that these losses will be fully utilized prior to the expiration date. No valuation allowance has been provided against the federal NOL. In addition, the Companys foreign subsidiaries have NOL carryforwards aggregating $1,029 which expire from 2027 to 2030. Management estimates that these losses will be fully utilized prior to the expiration date. No valuation allowance has been provided against the foreign NOL.
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Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
6. | Income Taxes: (continued) |
The Company has state net operating loss carryforwards with an aggregate tax benefit of $2,691 which expire from 2011 to 2030. Management estimates that the Company will not be able to fully absorb some of the loss carryforwards in certain states before they expire. A valuation allowance with a year-end balance of $82 has been established for these deferred tax assets. In 2010, the valuation allowance for state net operating loss carryforwards increased by $34 in the Predecessor period and $38 in the Successor period. The increase was primarily a result of the increase in the related state net operating losses in the current year.
The Company has a federal capital loss carryforward of $1,652 as of December 31, 2010. This loss is available to offset future capital gains. This loss will expire from 2013 to 2014 if not utilized. Management has recorded a valuation allowance of $608 for this capital loss carryforward to fully offset the deferred tax asset in 2010. Management estimates that the utilization of this capital loss carryforward is uncertain due to the short carryforward period and the uncertainty of generating sufficient capital gains in the carryforward period. In 2010, the valuation allowance for the capital loss carryforward was decreased by $31 in the Predecessor period and $3 in the Successor period. The decrease was attributed to utilization in the carryforward period. The Company has $292 of general business tax credit carryforwards which expire from 2011 to 2029. A valuation allowance of $251 has been established for these tax credits.
In 2010, a deferred tax asset was recorded for costs that were capitalized in connection with the 2010 Merger Transaction. Certain of these capitalized costs are not amortized under the tax law and can only be recovered for tax purposes under certain circumstances. The Company has established a valuation allowance of $914 in the Predecessor period and $973 in the Successor period for the entire amount of the deferred tax asset related to these non-amortizable capitalized costs. Also in 2010, the Company decreased the valuation reserve previously recorded for the 2004 Merger Transaction costs. The decrease of $1,557 was recorded in the Predecessor period.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
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Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
6. | Income Taxes: (continued) |
The table below reflects the significant components of the Companys net deferred tax assets and liabilities at December 31, 2010 and 2009:
Successor | Predecessor | |||||||||||||||||||
As of December 31, 2010 | As of December 31, 2009 | |||||||||||||||||||
Current | Non-current | Current | Non-current | |||||||||||||||||
Deferred Tax Asset: |
||||||||||||||||||||
Inventory |
$ | 6,576 | $ | | $ | 5,163 | $ | | ||||||||||||
Bad debt reserve |
752 | | 724 | | ||||||||||||||||
Casualty loss reserve |
386 | 368 | 325 | 478 | ||||||||||||||||
Accrued bonus / deferred compensation |
1,062 | 1,319 | 1,975 | 1,312 | ||||||||||||||||
Medical insurance reserve |
277 | | 374 | | ||||||||||||||||
Accrued resets and buy backs |
314 | | | | ||||||||||||||||
Interest exp. on Purchased Preferred Stock Options |
| | | 4,293 | ||||||||||||||||
Compensation expense on Preferred Stock Options |
| | | 5,477 | ||||||||||||||||
Original issue discount amortization |
| 537 | | 355 | ||||||||||||||||
Derivative security value |
| 392 | | 733 | ||||||||||||||||
Transaction costs |
| 5,171 | | 2,009 | ||||||||||||||||
Federal / foreign net operating loss |
| 18,695 | | 5,958 | ||||||||||||||||
State net operating loss |
| 2,691 | | 1,591 | ||||||||||||||||
Unrecognized tax benefit |
| (4,433 | ) | | (2,879 | ) | ||||||||||||||
Federal capital loss carryforwards |
| 608 | | 657 | ||||||||||||||||
Tax credit carryforwards |
| 2,489 | | 2,181 | ||||||||||||||||
All other items |
746 | 607 | 584 | 794 | ||||||||||||||||