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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, 2013

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)

Registrant’s 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  x    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 registrant’s 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 28, 2014, 5,000 shares of the Registrant’s 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 28, 2013 was $126,320,834.

 

 

 


Table of Contents

PART I

Item 1 - Business.

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 Company’s principal business is operated through its wholly-owned subsidiary, The Hillman Group, Inc. (the “Hillman Group”), which had net sales of approximately $701.6 million in 2013. The Hillman Group sells our 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; builder’s hardware; and identification items, such as tags and letters, numbers, and signs. The Company supports our product sales with value added services including design and installation of merchandising systems and maintenance of appropriate in-store inventory levels.

The Company’s headquarters are located at 10590 Hamilton Avenue, Cincinnati, Ohio. The Company maintains a website at 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 Hillman’s 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”).

Prior to the Merger Transaction, affiliates of Code Hennessy & Simmons LLC (“CHS”) owned 49.3% of the Company’s outstanding common stock and 54.6% of the Company’s voting common stock, Ontario Teacher’s Pension Plan (“OTPP”) owned 28.0% of the Company’s outstanding common stock and 31.0% of the Company’s voting common stock and HarbourVest Partners VI owned 8.7% of the Company’s outstanding common stock and 9.7% of the Company’s voting common stock. Certain current and former members of management owned 13.7% of the Company’s outstanding common stock and 4.4% of the Company’s voting common stock. Other investors owned 0.3% of the Company’s outstanding common stock and 0.3% of the Company’s voting common stock.

Recent Developments

On February 19, 2013, the Company acquired all of the issued and outstanding Class A common shares of H. Paulin & Co., Limited (the “Paulin Acquisition”). The aggregate purchase price of the Paulin Acquisition was $103.4 million paid in cash. On March 31, 2013, H. Paulin & Co., Limited was amalgamated with The Hillman Group Canada ULC and continues as a division operating under the trade name of H. Paulin & Co. (“Paulin”).

Paulin is a leading distributor and manufacturer of fasteners, fluid system products, automotive parts, and screw machine components. Manufacturing processes include cold heading, nut forming, metal stamping, screw machine, adhesive coating and packaging. Typical industries served are retail hardware, industrial, and automotive.

The Paulin retail hardware arm services approximately 6,000 customers across Canada. Paulin is able to provide private labeling, design in-store displays, and special merchandising to meet customer requirements. In 2013, Paulin secured two significant new business opportunities and has established itself as a key player in the Canadian retail fastener business.

 

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H. Paulin & Co.’s industrial divisions manufacture cold headed products, metal stampings, screw machining products, self-locking fasteners, as well as a wide range of custom parts for automotive, agricultural, electronic, and appliance industries. All divisions are ISO 9001 certified. ISO 9000 is a series of standards, developed and published by the International Organization for Standardization (ISO), that define, establish, and maintain an effective quality assurance system for manufacturing and service industries. The standards are available through national standards bodies. ISO 9001 deals with the requirements that organizations wishing to meet the standard must fulfill.

H. Paulin & Co.’s automotive division competes in the Canadian and U.S. small replacement parts markets. Key customers include AutoZone, Advanced Auto, NAPA Canada, and numerous regional customers in the U.S. In 2013, Paulin secured significant new sales of fasteners in approximately 200 AutoZone stores.

The Hillman Group

The Company is organized as five separate business segments, the largest of which is (1) the Hillman Group operating primarily in the United States. The other business segments consist of subsidiaries of the Hillman Group operating in (2) Canada under the names The Hillman Group Canada ULC and H. Paulin & Co., (3) Mexico under the name SunSource Integrated Services de Mexico S.A. de C.V., (4) Florida under the name All Points Industries, Inc., and (5) Australia under the name The Hillman Group Australia Pty. Ltd. 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; builder’s hardware; and identification items, such as tags and letters, numbers, and signs, to retail outlets, primarily hardware stores, home centers and mass merchants, pet supply stores, grocery stores, and drug stores. Through our field sales and service organization, Hillman complements our extensive product selection with value-added services for the retailer.

Hillman markets and distributes approximately 130,000 stock keeping units (“SKUs”) of small, hard-to-find and hard-to-manage hardware items. Hillman functions as a category manager for retailers and supports these products with in-store service, high order fill rates, and rapid delivery of products sold. 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 of in-store labor costs and replenishment paperwork. Service representatives also assist in organizing the products in a consumer-friendly mann er. Hillman complements our broad range of products with value-added merchandising services such as displays, product identification stickers, retail price labels, store rack and drawer systems, assistance in rack positioning and store layout, and inventory restocking services. Hillman regularly refreshes retailers’ displays with new products and package designs utilizing color-coding to simplify the shopping experience for consumers and improve the attractiveness of individual store displays.

The Company ships our products from 17 strategically located distribution centers in the United States, Canada, Mexico, and Australia, and is recognized for providing retailers with industry leading fill-rates and lead times. Hillman’s main distribution centers utilize state-of-the-art warehouse management systems (“WMS”) to ship customer orders within 48 hours while achieving a 97.3% order fill rate. Hillman utilizes third-party logistics providers to warehouse and ship customer orders in Mexico and Australia.

Hillman also designs, manufactures, and markets industry-leading identification and duplication equipment for home, office, automotive, and specialty keys. In early 2000, the Company revolutionized the key duplication market with the patent-protected Axxess Key Duplication System™ which provided the ability to accurately identify and duplicate a key to store associates with little or no experience. In 2007, Hillman upgraded our key duplication technology with Precision Laser Key™ utilizing innovative digital and laser imaging to identify a key and duplicate the cut-pattern automatically. Through the Company’s creative use of technology and efficient use of inventory management systems, Hillman has proven to be a profitable revenue source within big box retailers. The Company’s duplication systems have been placed in over 13,000 retail locations to date and are supported by Hillman sales and service representatives.

 

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In addition, Hillman applies a variety of innovative options of consumer-operated vending systems for engraving specialty items such as pet identification tags, luggage tags, and other engraved identification tags. The Company has developed unique engraving systems leveraging state-of-the-art technologies to provide a customized solution for mass merchant and pet supply retailers. To date, approximately 6,800 Hillman engraving systems have been placed in retail locations which are also supported by Hillman’s sales and service representatives.

Products and Suppliers

Hillman’s vast product portfolio is recognized by top retailers across North America for providing consistent quality and innovation to DIYers and professional contractors. The Company’s product strategy concentrates on providing total project solutions for common and unique home improvement projects. Hillman’s portfolio provides retailers the assurance that their shoppers can find the right product at the right price within an ‘easy to shop’ environment.

The Company currently manages a worldwide supply chain of approximately 639 vendors, the largest of which accounted for approximately 5.0% of the Company’s annual purchases and the top five of which accounted for approximately 18.0% of our annual purchases. About 46.0% of Hillman’s annual purchases are from non-U.S. suppliers, with the balance from U.S. manufacturers and master distributors. The Company’s 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 remain the core of Hillman’s business and the product line encompasses more than 105,000 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.

The Company keeps the fastener category vibrant and refreshed for retailers by providing a continuous stream of new products. Some of the Company’s recent offerings include an expansion of Hillman’s WeatherMaxx™ stainless steel fasteners. The fast-growing category provides consumers with value-added performance in exterior applications and incremental margins for retailers. The new WeatherMaxx™ features a variety of packaging options ensuring consumers find the right quantity for large or small projects. In addition, the Tite-Series marks Hillman’s expansion into the fast growing and highly profitable construction fastener segment. The Tite-Series features fasteners for common new construction and remodeling projects such as deck building, roof repair, landscaping, and gutter repair. The Tite-Series offers enhanced performance with an easy-start, type 17 bit, serrated threads, and reduced torque requirements. 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.

In 2013, the Company launched a new mass merchant fastener program. The new line targets consumers visiting mass merchants, grocery, and department stores who desire to purchase their hardware needs while shopping for grocery and general merchandise needs. The product offering provides convenience to the light-duty DIYer and solutions to common home improvement projects. The program also features bold color-coded packaging and merchandising allowing consumers to easily navigate the display and locate items quickly. The Company’s management believes that this new line is among the most comprehensive and innovative in this market segment which is growing in popularity due to busy consumers who prefer one-stop shopping superstores. Other new fastener offerings include new hobby and craft hardware, ProCrafter™ woodworking screws, electrical sockets, and specialty connectors.

 

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Also in 2013, Hillman continued to expand our fastener presence beyond retailers’ ‘brick and mortar’ locations by entering into the e-commerce segment. Hillman supported e-commerce requests by posting over 20,000 items available for sale on retailers’ websites. The Company supported direct to store and direct to consumer fulfillment for consumers who chose to order fasteners directly from retailers’ websites. Consumers could visit the retailer’s website, select their desired fasteners, pay by credit card, and pick-up their order at the retailer’s store or choose to have the order shipped to the address of the consumer’s choice. The Company plans to continue to support retailers’ requests to expand their on-line offering in 2014.

Fasteners generated approximately 64.2% of the Company’s total revenues in 2013, as compared to 55.6% in 2012 and 55.2% in 2011. The increase in 2013 is primarily due to the acquisition of Paulin in February 2013.

Keys and Key Accessories

Hillman designs and manufactures proprietary equipment which forms the cornerstone for the Company’s 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 (“F&I”) hardware stores, and grocery/drug chains; it can also be found in many service-based businesses like parcel shipping outlets.

Hillman markets multiple separate key duplication systems. 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 F&I hardware retailers, with a machine that works well in businesses with lower turnover and highly skilled employees. There are over 13,000 Axxess Programs placed in North American retailers including Home Depot, Lowe’s, Walmart, Menards, Kmart, and Sears.

Hillman introduced the Precision Laser Key System™ in 2007. This system uses a digital optical camera, lasers, and proprietary software to scan a customer’s key. The system identifies the key and retrieves the key’s specifications, including the appropriate blank and cutting pattern, from a comprehensive database. This technology automates nearly every aspect of key duplication and provides the ability for every store associate to cut a key accurately. Hillman has placed approximately 1,400 of these key duplicating systems in North American retailers and the Company’s management believes that the Company is well-positioned to capitalize on this technology.

In 2013, Hillman expanded the launch of the innovative FastKey™ consumer-operated key duplication system to approximately 700 Walmart stores and intends to add another 300 Walmart stores in 2014. FastKey™ utilizes technology from the Precision Laser Key System™ and combines a consumer-friendly vending system which allows retail shoppers to duplicate the most popular home, office, and small lock keys. The FastKey™ system covers a large percentage of the key market and features a unique key sleeve that ensures proper insertion, alignment, and duplication of the key. Consumers who attempt to duplicate keys not included in the FastKey™ system receive a ‘service slip’ identifying their key and referring them to the main Hillman key cutting location within the store. The FastKey™ market test has demonstrated the ability to increase overall key sales at the store retail level.

In addition to key duplication, Hillman has an exclusive, strategic partnership with Barnes Distribution for the distribution of the proprietary PC+© Code Cutter machine which produces automobile keys based on a vehicle’s 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 8,000 PC+© units and over 8,600 of the newer Flash Code Cutter units have been sold.

Hillman also markets keys and key accessories in conjunction with our duplication systems. Hillman’s proprietary key offering features the universal blank which uses a

 

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‘universal’ keyway to replace up to five original equipment keys. This innovative system allows a retailer to duplicate 99% of the key market while stocking less than 100 SKUs. Hillman continually refreshes the retailer’s key offering by introducing decorated and licensed keys and accessories. The Company’s Wackey™ and Fanatix™ lines feature decorative themes of art and popular licenses such as NFL, Disney, Breast Cancer Awareness, M&M’s, and Harley Davidson to increase the purchase frequency and average transaction value per key. In 2012, the Company introduced a successful line of decorative and licensed lanyards. 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.

Keys, key accessories, and Code Cutter units represented approximately 17.1% of the Company’s total revenues in 2013, as compared to 20.8% in 2012 and 21.9% in 2011.

Engraving

Hillman’s engraving business focuses on the growing consumer spending trends surrounding personalized and pet identification. Innovation has played a major role in the development of the Company’s engraving business unit. From the original Quick-Tag™ consumer-operated vending system to the proprietary laser system of TagWorks, Hillman continues to lead the industry with consumer-friendly engraving solutions.

Quick-Tag™ is a patented, consumer-operated vending system that custom engraves and dispenses 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 and generates attractive margins for the retailer. Hillman has placed over 2,700 Quick-Tag™ machines in retail outlets throughout the U.S. and Canada. In addition to placements in retail outlets, the Company has placed machines inside theme parks such as Disney, Sea World, and Universal Studios.

In 2010, Hillman launched the next generation engraving platform with our new FIDO™ system. This new engraving program integrates a fun attractive design with a user interface that provides new features for the consumer. The individual tag is packaged in a mini cassette and the machine’s mechanism flips the tag to allow engraving on both sides. The user interface features a loveable dog character that guides the consumer through the engraving process. Hillman has placed approximately 1,100 FIDO™ systems in PETCO stores as of December 31, 2013.

In 2011, Hillman acquired the innovative TagWorks engraving system featuring patented technology, unique product portfolio, and attractive off-board merchandising. The TagWorks system utilizes laser printing technology and allows consumers to watch the engraving process. The off-board merchandising allows premium-priced tags to be displayed in store-front locations and is effective at increasing the average price per transaction.

Hillman designs, manufactures, and assembles the engraving equipment in the Company’s Tempe, Arizona facility. Engraving products represented approximately 6.9% of the Company’s total revenues in 2013, as compared to 8.8% in 2012.

Letters, Numbers, and Signs

Letters, numbers, and signs (“LNS”) includes 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.

Through a series of strategic acquisitions, exclusive partnerships, and organic product developments, Hillman has created an LNS program which 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 our customers with value-added retail support including custom plan-o-grams and merchandising solutions.

 

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Hillman has demonstrated the continual launch of new products to match the needs of DIY and commercial end-users. Hillman recently introduced popular programs such as high-end address plaques and numbers, the custom create-a-sign program, and commercial signs. The Company also introduced innovative solar technology to add an element of illumination to the core category.

The Hillman LNS program can be found in big box retailers, mass merchants, and pet supply accounts. In addition, Hillman has product placement in F&I hardware retailers.

The LNS category represented approximately 4.9% of the Company’s total revenues in 2013, as compared to 5.8% in 2012.

Threaded Rod

Hillman is a leading supplier of metal shapes and threaded rod in the retail market. The SteelWorks™ threaded rod product 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 Lowe’s, Menards, and Sears, and through cooperatives such as Ace Hardware. In addition, Hillman is the primary supplier of metal shapes to many wholesalers throughout the country.

Threaded rod generated approximately 4.5% of the Company’s total revenues in 2013, as compared to 6.0% in 2012.

Builder’s Hardware

The builder’s 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 builder’s 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 retailer’s performance. The addition of the builder’s hardware product line exemplifies the Company’s strategy of leveraging our core competencies to further penetrate customer accounts with new product offerings. In 2012, the Company expanded the placement of the Hardware Essentials™ line in the F&I channel. The F&I channel provided successful conversions in over 650 new locations.

As of December 31, 2013, the Hardware Essentials™ line is placed in over 2,500 retail locations and generated approximately 2.5% of the Company’s total revenues in 2013, as compared to 2.9% in 2012.

Markets and Customers

Hillman sells our products to national accounts such as Lowe’s, Home Depot, Walmart, Tractor Supply, Sears, Menards, PetSmart, and PETCO. Hillman’s 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 our product categories.

 

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Hillman services more than 15,000 F&I retail outlets. These individual dealers are typically members of the larger cooperatives, such as True Value, Ace Hardware, and Do-It-Best. The Company ships directly to the cooperative’s retail locations and also supplies many items to the cooperative’s central warehouses. These central warehouses distribute to their members that do not have a requirement for Hillman’s 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. This problem is compounded by the necessity of receiving small shipments of inventory at different times and stocking 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 our products to approximately 26,000 customers, the top five of which accounted for approximately 43.9% of the Company’s total revenue in 2013. For the year ended December 31, 2013, Lowe’s was the single largest customer, representing approximately 17.8% of the Company’s total revenue, Home Depot was the second largest at approximately 15.5%, and Walmart was the third largest at approximately 6.3% of the Company’s total revenue. No other customer accounted for more than 5.0% of the Company’s total revenue in 2013.

The Company’s telemarketing activity sells to thousands of smaller hardware outlets and non-hardware accounts. The Company is also pursuing new business internationally in such places as Canada, Mexico, Australia, South and Central America, and the Caribbean. See Note 21, Segment Reporting and Geographic Information, of Notes to Consolidated Financial Statements.

Sales and Marketing

Hillman provides product support, customer service, and profit opportunities for our retail distribution partners. The Company believes that our competitive advantage is in our ability to provide a greater level of customer service than our competitors.

Company-wide, service is the hallmark of Hillman. The national accounts field service organization consists of over 600 employees and 43 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 Company’s 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 over 320 employees and is managed by 21 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 and establishes programs that meet customers’ requirements for pricing, invoicing, and other needs. This group also benefits from daily internal support from the Company’s inside sales and customer service teams. On average, each sales representative is responsible for approximately 54 full service accounts that the sales representative calls 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. Hillman’s marketing department provides support through the development of new products and categories, 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 Hillman’s three marketing competencies: product management, channel marketing, and marketing communications.

 

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Competition

The Company’s primary competitors in the national accounts marketplace for fasteners are Illinois Tool Works Inc., Dorman Products Inc., Crown Bolt LLC., Midwest Fastener Corporation, Prime Source Building Products, Inc., and Nova Capital. 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™, FIDO™, and TagWorks systems have patent protected technology that is a major barrier to entry and preserves this market segment.

The principal competitors for Hillman’s F&I business are Midwest Fastener and Hy-Ko Products Company (“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. The Company’s management estimates that Hillman sells to approximately 63% of the full service hardware stores in 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 Company’s current insurance programs, commercial umbrella coverage is obtained for catastrophic exposure and aggregate losses in excess of expected claims. Since 1991, the Company has retained the exposure on certain expected losses related to worker’s 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 our present insurance is adequate for our businesses. See Note 17, Commitments and Contingencies, of Notes to Consolidated Financial Statements.

Employees

As of December 31, 2013, the Company had 2,570 full time and part time employees, none of which were covered by a collective bargaining agreement. In the opinion of the Company’s 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 our business. The Company’s sales backlog from ongoing operations was approximately $4.4 million as of December 31, 2013 and approximately $4.8 million as of December 31, 2012.

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 Commission’s 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 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.

In addition, our quarterly reports on Form 10-Q and annual reports on Form 10-K are available free of charge on the Company’s website at www.hillmangroup.com as soon as reasonably practicable after such reports are electronically filed with the SEC. The Company is providing the address to its website solely for the information of investors. The Company does not intend the address to be an active link or to incorporate the contents of the website into this report.

 

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Item 1A - Risk Factors.

An investment in the Company’s securities involves certain risks as discussed below. However, the risks set forth below are not the only risks that the Company faces, and we face 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 Company’s 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 Company’s financial statements and the related notes and schedules thereto, prior to making an investment decision with regard to the Company’s securities.

A prolonged economic downturn 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 is experiencing an uneven recovery following a protracted slowdown, and the future economic environment may continue to be challenging. The economic slowdown has led to reduced consumer and business spending and any delay in the recovery could lead to further reduced 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 deteriorate in 2014 or through 2015, our industry, business, and results of operations may be materially adversely impacted.

The Company’s business is impacted by general economic conditions in the U.S., Canada, and other 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 slow growth 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 and stabilization of domestic credit markets from the height of the financial crisis, general expectations do not call for significant economic growth to return 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.

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 Company’s business.

In the past several years, the Company’s 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 that this softness will continue or further deteriorate in 2014 or through 2015. To the extent that this decline 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 that certain customers’ credit-worthiness may erode and result in increased write-offs of customer receivables.

The Company operates in a highly competitive industry, which may have a material adverse effect on our business, financial condition, and results of operations.

The retail industry is highly competitive, with the principal methods of competition being product innovation, price, quality of service, quality of products, product availability and timeliness, 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

 

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which have greater financial resources than the Company and may offer a greater variety of products. If these competitors are successful, the Company’s business, financial condition, and results of operations may be materially adversely affected.

To compete successfully, the Company must develop and commercialize a continuing stream of innovative new products that create consumer demand.

Our long-term success in the current competitive environment depends on our ability to develop and commercialize a continuing stream of innovative new products, including those in our new mass merchant fastener program, which create and maintain consumer demand. The Company also faces the risk that our competitors will introduce innovative new products that compete with the Company’s products. The Company’s strategy includes increased investment in new product development and continued focus on innovation. There are, nevertheless, numerous uncertainties inherent in successfully developing and commercializing innovative new products on a continuing basis, and new product launches may not provide expected growth results.

The Company’s business may be 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. If adverse weather conditions persist on a regional or national basis into the second or other calendar quarters, the Company’s business, financial condition, and results of operations may be materially adversely affected.

Large customer concentration and the inability to penetrate new channels of distribution could adversely affect the Company’s business.

The Company’s three largest customers constituted approximately 39.7% of net sales and 44.2% of the year-end accounts receivable balance for 2013. Each of these customers is a big box chain store. As a result, the Company’s results of operations depend greatly on our ability to maintain existing relationships and arrangements with these big box chain stores. To the extent that 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 the Company’s business. The Company’s inability to penetrate new channels of distribution may also have a negative impact on our future sales and business.

Successful sales and marketing efforts depend on the Company’s ability to recruit and retain qualified employees.

The success of the Company’s efforts to grow our business depends on the contributions and abilities of key executives, our sales force and other personnel, including the ability of our sales force to achieve adequate customer coverage. The Company must therefore continue to recruit, retain and motivate management, sales, and other personnel to maintain our current business and to support our projected growth. A shortage of these key employees might jeopardize the Company’s ability to implement our growth strategy.

The Company is exposed to adverse changes in currency exchange rates.

Exposure to foreign currency risk results because the Company, through our global operations, enters into transactions and makes investments denominated in multiple currencies. The Company’s predominant exposures are in Canadian, Australian, Mexican, and Asian currencies, including the Chinese Renminbi (“RMB”). In preparing the Company’s 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 Company’s earnings could be negatively impacted. The Company does not make a practice of hedging our non-U.S. dollar earnings.

 

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The Company sources many products from China and other Asian countries for resale in other regions. To the extent that 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 against the U.S. dollar by 2.8% in 2013, 1.0% in 2012, and 4.6% in 2011. Significant appreciation of the RMB or other currencies in countries where the Company sources our products could adversely impact the Company’s profitability. In addition, the Company’s foreign subsidiaries may purchase certain products from their vendors denominated in U.S. dollars. If the U.S. dollar strengthens compared to the local currencies, it may result in margin erosion. The Company has a practice of hedging some of its Canadian subsidiary’s purchases denominated in U.S. dollars. The Company may not be successful at implementing customer pricing or other actions in an effort to mitigate the related cost increases and thus our results of operations may be adversely impacted.

The Company’s results of operations could be negatively impacted by inflation or deflation in the cost of raw materials, freight, and energy.

The Company’s 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 fuel in the form of freight surcharges on customer shipments and the cost of gasoline used by the field sales and service force. 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, the Company’s financial condition may be adversely affected. Conversely, in the event that there is deflation, the Company may experience pressure from our customers to reduce prices. There can be no assurance that the Company would be able to reduce our cost base (through negotiations with suppliers or other measures) to offset any such price concessions which could adversely impact the Company’s results of operations and cash flows.

The Company’s business is subject to risks associated with sourcing product from overseas.

The Company imports large quantities of our fastener products. Substantially all of our 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 Company’s products and materials are manufactured or imported may, from time to time, impose additional quotas, duties, tariffs, or other restrictions on their imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or the Company’s suppliers’ failure to comply with customs regulations or similar laws, could harm the Company’s business.

The Company’s 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 Company’s business and financial condition.

Acquisitions have formed a significant part of our growth strategy in the past, including the acquisition of Paulin in 2013, 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 Company’s growth strategy has relied on acquisitions that either expand or complement our businesses in new or existing markets, including the Paulin Acquisition in 2013, which expanded our presence in Canada. However, there can be no assurance that

 

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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 Hillman’s growth strategy.

The process of integrating acquired businesses, including Paulin, into the Company’s operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention, and there can be no assurance that Hillman will be able to successfully integrate acquired businesses into our 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 our goodwill or indefinite-lived tradenames, our results of operations could be materially adversely affected.

As a result of the Merger Transaction and the subsequent acquisitions of Servalite, TagWorks, Ook, and Paulin, the Company has $466.2 million of goodwill and $54.1 million of indefinite-lived trade names recorded on our Consolidated Balance Sheet at December 31, 2013. The Company is required to periodically determine if our goodwill or indefinite-lived trade names have become impaired, in which case we would write down the impaired portion of the intangible asset. If the Company were required to write down all or part of our goodwill or indefinite-lived trade names, our net income could be materially adversely affected.

The Company’s success is highly dependent on information and technology systems.

The Company believes that our proprietary computer software programs are an integral part of our business and growth strategies. Hillman depends on our 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 our customers. If these systems are damaged, intruded upon, shutdown, or cease to function properly (whether by planned upgrades, force majeure, telecommunications failures, hardware or software break-ins or viruses, other cyber-security incidents, or otherwise), the Company may suffer disruption in its ability to manage and operate its business.

There can be no assurance that the precautions which the Company has taken against certain events that could disrupt the operations of our information systems will prevent the occurrence of such a disruption. Any such disruption could have a material adverse effect on the Company’s business and results of operations.

Unauthorized disclosure of sensitive or confidential customer, employee, supplier or Company information, whether through a breach of our computer systems, including cyber attacks or otherwise, could severely harm our business.

As part of our business, we collect, process, and retain sensitive and confidential personal information about our customers, employees and suppliers. Despite the security measures we have in place, our facilities and systems, and those of the retailers and other third party distributors with which we do business, may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer, employee, supplier or Company information, whether by us or by the retailers and other third party distributors with which we do business, could result in losses, severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business, results of operations and financial condition. The regulatory

 

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environment related to information security, data collection and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs.

Failure to adequately protect intellectual property could adversely affect our business.

Intellectual property rights are an important and integral component of our business. The Company attempts to protect our intellectual property rights through a combination of patent, trademark, [copyright] and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business.

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 our obligations under the notes.

The Company has a significant amount of indebtedness. On December 31, 2013, total indebtedness was $756.4 million, consisting of $105.4 million of indebtedness of Hillman and $651.0 million of indebtedness of Hillman Group.

The Company’s 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 Company’s 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 Company’s ability to borrow additional funds.

In addition, the indenture governing our notes and senior secured credit facilities contain financial and other restrictive covenants that will limit the ability to engage in activities that may be in the Company’s 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 several years has 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 may still be able to incur substantially more debt. This could further exacerbate the risks associated with the Company’s substantial leverage.

The Company may be able to incur substantial additional indebtedness in the future. The terms of the indenture do not fully prohibit the Company or our subsidiaries from doing so. The senior secured credit facilities permit additional borrowing of up to $30.0 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 our subsidiaries now face could intensify.

 

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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 credit facility in an amount sufficient to enable the Company to pay our indebtedness, including the notes, or to fund our other liquidity needs. The Company may need to refinance all or a portion of our indebtedness, including the notes on or before maturity. The Company cannot assure you that we will be able to refinance any of our indebtedness, including our 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 Company’s credit agreements require the maintenance of a leverage ratio 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 4.75x, excluding the junior subordinated debentures, as of December 31, 2013. 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 Senior Secured Credit Facilities 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 investor’s 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 guarantor’s 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 Company’s management believes that each guarantor, after giving effect to its guarantee of the notes, will not be insolvent, have unreasonably small capital for the business in which it is engaged, or have incurred debts beyond its ability to pay such debts as they mature. The Company’s 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 our 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 restricted subsidiaries’ assets taken as a whole to another person or group may be uncertain. In addition, a recent Delaware Chancery Court decision 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.

 

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In addition, our 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 holders’ objections as to their general terms, primarily interest rate and maturity.

A holder’s 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 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, 2013, the notes were effectively junior to $29.2 million of indebtedness and other current liabilities (including trade payables) of our non-guarantor subsidiaries. Our non-guarantor subsidiaries held $153.5 million of our consolidated assets as of December 31, 2013.

Item 1B - Unresolved Staff Comments.

None.

 

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Item 2 - Properties.

As of December 31, 2013, the Company’s principal office, manufacturing, and distribution properties were as follows:

 

Business Segment

   Approximate
Square
Footage
    

Description

United States, excluding All Points

     

Cincinnati, Ohio

     270,000      

Office, Distribution

Forest Park, Ohio

     385,000      

Office, Distribution

Jacksonville, Florida

     97,000      

Distribution

Lewisville, Texas

     81,000      

Distribution

Shafter, California

     134,000      

Distribution

Tempe, Arizona

     184,000      

Office, Mfg., Distribution

United States, All Points

     

Pompano Beach, Florida

     39,000      

Office, Distribution

Canada

     

Burnaby, British Columbia

     29,000      

Distribution

Edmonton, Alberta

     41,000      

Distribution

Laval, Quebec

     36,000      

Distribution

Milton, Ontario

     27,000      

Manufacturing

Mississauga, Ontario

     65,000      

Manufacturing, Distribution

Moncton, New Brunswick

     13,000      

Office, Distribution

Pickering, Ontario

     191,000      

Distribution

Scarborough, Ontario

     372,000      

Office, Mfg., Distribution

Winnipeg, Manitoba

     40,000      

Distribution

Mexico

     

Monterrey

     13,000      

Distribution

Australia

     

Melbourne

     16,000      

Distribution

All of the Company’s facilities are leased, with the exception of one distribution facility located in Scarborough, ON. In the opinion of the Company’s management, the Company’s existing facilities are in good condition.

Item 3 - Legal Proceedings.

The information set forth under Note 17, Commitments and Contingencies, to the accompanying consolidated financial statements included in this Annual Report on Form 10-K is incorporated herein by reference.

Item 4 - Mine Safety Disclosures.

Not Applicable.

 

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PART II

Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Stock Exchange Listing

The Company’s 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. The following table sets forth the high and low sales prices as reported on the NYSE Amex for the Trust Preferred Securities.

 

2013

   High      Low  

First Quarter

   $ 32.99       $ 29.98   

Second Quarter

     34.00         25.32   

Third Quarter

     31.00         28.68   

Fourth Quarter

     31.02         29.75   

2012

   High      Low  

First Quarter

   $ 31.50       $ 29.00   

Second Quarter

     31.00         29.50   

Third Quarter

     30.83         29.41   

Fourth Quarter

     31.28         29.51   

The Trust Preferred Securities have a liquidation value of $25.00 per security. As of March 21, 2014, there were 411 holders of Trust Preferred Securities. As of March 28, 2014, the total number of Trust Preferred Securities outstanding was 4,217,724. As of March 28, 2014, the Company’s total number of shares of common stock outstanding was 5,000, held by one 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, 2013 and 2012, the Company paid $12.2 million per year 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 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 payments are immediately payable by the Company at the end of the Deferral Period. There were no deferrals of distribution payments to holders of the Trust Preferred Securities in 2013 or 2012.

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-Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Issuer Purchases of Equity Securities

The Company made no repurchases of our equity securities during 2013.

 

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Item 6 - Selected Financial Data.

As a result of the Merger Transaction, the Company’s 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 or Successor Operations and include the effects of the Company’s debt refinancing. The Company’s operations for the periods presented prior to the Merger Transaction are referenced herein as 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 as of and for the year ended December 31, 2009; and consolidated financial data of the Successor as of and for the years ended December 31, 2013, 2012, and 2011 and as of and for the seven months ended December 31, 2010. See the accompanying Notes to Consolidated Financial Statements and “Item 7 - Management’s 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 Company’s debt refinancing as well as other acquisitions that affect comparability.

 

     Successor      Predecessor  
(dollars in thousands)    Year
Ended
12/31/13
    Year
Ended
12/31/12
    Year
Ended
12/31/11
    Seven
Months
Ended
12/31/10
     Five
Months
Ended
5/28/10
    Year
Ended
12/31/09
 

Income Statement Data:

             

Net sales

   $ 701,641      $ 555,465      $ 506,526      $ 276,680       $ 185,716      $ 458,161   

Cost of Sales (exclusive of depreciation and amortization)

     359,326        275,016        252,491        136,554         89,773        224,642   

Acquisition and integration expense (1)

     8,638        3,031        2,805        11,150         11,342        —     

Net loss

     (1,148     (7,234     (9,779     (8,038      (25,208     (1,230
 

Balance Sheet Data at December 31:

             

Total assets

   $ 1,264,856      $ 1,175,793      $ 1,127,851      $ 1,052,778         N/A      $ 628,481   

Long-term debt & capital lease obligations (2)

     385,955        313,439        315,709        300,714         N/A        208,163   

10.875% Senior Notes

     265,000        265,000        200,000        150,000         N/A        —     

Mandatorily redeemable preferred stock

     —          —          —          —           N/A        111,452   

Management purchased preferred options

     —          —          —          —           N/A        6,617   

 

(1) Acquisition and integration expenses for investment banking, legal, and other professional fees incurred in connection with the Merger Transaction and subsequent acquisitions.
(2) Includes current portion of long-term debt (at face value) and capitalized lease obligations.

 

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Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion provides information which the Company’s management believes is relevant to an assessment and understanding of the Company’s operations and financial condition. This discussion should be read in conjunction with the 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, as amended. 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 management’s current expectations, assumptions, and projections about future events. Although management believes that the expectations, assumptions, and projections on which these forward-looking statements are based are reasonable, they nonetheless could prove to be inaccurate, and as a result, the forward-looking statements based on those expectations, assumptions, and projections also could be inaccurate. Forward-looking statements are not guarantees of future performance. Instead, forward-looking statements are subject to known and unknown risks, uncertainties, and assumptions that may cause the Company’s strategy, planning, actual results, levels of activity, performance, or achievements to be materially different from any strategy, planning, future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Actual results could differ materially from those currently anticipated as a result of a number of factors, including the risks and uncertainties discussed under the caption “Risk Factors” set forth in Item 1A of 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 our 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 might be materially different from those discussed.

General

Hillman is one of the largest providers of hardware-related products and related merchandising services to retail markets in North America. The Company’s principal business is operated through our wholly-owned subsidiary, The Hillman Group, Inc. (the “Hillman Group”), which had net sales of approximately $701.6 million in 2013. The Hillman Group sells our 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; builder’s hardware; and identification items, such as tags and letters, numbers, and signs. The Company supports our product sales with value added services including 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 OHCP and certain members of Hillman’s 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 Transaction. As a result of the Merger Transaction, Hillman is a wholly-owned subsidiary of 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 Company’s outstanding junior subordinated debentures ($105.4 million liquidation value, net of $3.3 million in trust common securities, at the time of the merger).

Financing Arrangements

On May 28, 2010, the Company and certain of our 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 had a six year term and the Revolver had 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 was subject to a minimum floor of 1.75% and the Base Rate was subject to a minimum floor of 2.75%.

Concurrently with the Merger Transaction, Hillman Group issued $150.0 million aggregate principal amount of senior notes due 2018 (the “10.875% Senior Notes”). On March 16, 2011, Hillman Group completed an offering of $50.0 million aggregate principal amount of 10.875% Senior Notes. Hillman Group received a premium of approximately $4.6 million on the $50.0 million 10.875% Senior Notes offering. On December 21, 2012, Hillman Group completed an offering of $65.0 million aggregate principal amount of 10.875% Senior Notes. Hillman Group received a premium of approximately $4.2 million on the $65.0 million 10.875% Senior Notes offering. The 10.875% Senior Notes are guaranteed by The Hillman Companies, Inc., Hillman Investment Company, and all of the domestic subsidiaries of Hillman Group. Hillman Group pays interest on the 10.875% Senior Notes semi-annually on June 1 and December 1 of each year.

The Senior Facilities contain financial and operating covenants. These covenants require the Company to maintain certain financial ratios, including a secured leverage ratio. 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, terminate commitments, direct borrower to pay Collateral Agent additional cash collateral, and enforce any and all rights.

The Company pays interest to 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. 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 a Deferral Period, the Company is required to accrue the full amount of all interest payable, and such deferred interest payable would become immediately payable by the Company at the end of the Deferral Period. There were no deferrals of distribution payments to holders of the Trust Preferred Securities in 2013 or 2012.

 

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Effective April 18, 2011, the Company completed an amendment to the credit agreement governing our Senior Facilities. The Senior Facilities amendment eliminated the total leverage and interest coverage covenants and reduced the secured leverage covenant to 4.75x with no future step downs. The term loan pricing was modified to reduce the Eurodollar Margin and the Base Rate Margin by 25 basis points and reduce the floor on Eurodollar and Base Rate Loans by an additional 25 basis points. In connection with the amendment to the credit agreement, the Company incurred loan discount costs of $1.25 million. As the modification of the Senior Facilities agreement was not substantial, the unamortized loan discount and debt issuance costs will be amortized over the term of the amended Senior Facilities.

Effective November 4, 2011, the Company entered into a Joinder Agreement to our credit agreement under the existing Senior Facilities (the “2011 Incremental Facility”). The 2011 Incremental Facility increased the aggregate term loan commitments available to Hillman Group under the Senior Facilities by $30.0 million. In connection with the 2011 Incremental Facility, the Company incurred loan discount costs of approximately $0.8 million. As the modification of the Senior Facilities agreement was not substantial, the unamortized loan discount costs will be amortized over the term of the amended Senior Facilities. The Company used the proceeds for general corporate purposes.

Effective November 7, 2012, the Company entered into a Joinder Agreement to our credit agreement under the existing Senior Facilities (the “2012 Incremental Facility”). The 2012 Incremental Facility increased the aggregate term loan commitments available to Hillman Group under the Senior Facilities by $76.8 million. Subject to the conditions precedent to each funding date described in Section 17 of the 2012 Incremental Facility, the Company may make two drawings under the 2012 Incremental Facility on any business day after November 7, 2012 and prior to April 1, 2013. The Company drew down on funds from the 2012 Incremental Facility in order to fund the permitted acquisition of Paulin on February 19, 2013. The proceeds from the 2012 Incremental Facility were also used for general corporate purposes. The aggregate principal amount of commitments under the Senior Facilities, after giving effect to the 2012 Incremental Facility, was $420.0 million.

Effective February 14, 2013, the Company completed an amendment to the credit agreement governing our Senior Facilities. The Senior Facilities amendment modified the term loan pricing to reduce the EuroDollar margin by 50 basis points to 3.00% and reduce the EuroDollar floor on EuroDollar loans by an additional 25 basis points to 1.25%. This amendment modified the term loan pricing to reduce the base rate margin by 50 basis points to 2.00% and reduce the floor on base rate loans by an additional 25 basis points to 2.25%. This amendment also extends the maturity date of the term loan facilities by one year to May 28, 2017.

Effective December 19, 2013, the Company completed an amendment to the credit agreement governing our Senior Facilities. The Senior Facilities amendment modified the term loan pricing to reduce the EuroDollar margin by 25 basis points to 2.75% and reduce the EuroDollar floor on EuroDollar term loans by an additional 25 basis points to 1.00%. This amendment modified the term loan pricing to reduce the base rate margin by 25 basis points to 1.75% and reduce the floor on base rate term loans by an additional 25 basis points to 2.00%. The Company was in compliance with all provisions and covenants of the amended Senior Facilities as of December 31, 2013.

 

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Acquisitions

On March 16, 2011, Hillman Group acquired all of the membership interests in TagWorks L.L.C., an Arizona limited liability company (the “TagWorks Acquisition”), for an initial purchase price of approximately $40.0 million in cash. In addition, upon the fulfillment of certain conditions, Hillman Group paid additional consideration of $12.5 million to the sellers of TagWorks on October 31, 2011, and also paid an additional earn-out payment of $12.5 million in March 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. Effective December 31, 2011, TagWorks was merged with and into Hillman Group, with Hillman Group as the surviving entity.

On December 1, 2011, the Hillman Group purchased certain assets of Micasa Trading Corporation (“Micasa”), a Florida based producer of the Ook brand of picture hangers and related products (the “Ook Acquisition”). The aggregate purchase price was $14.8 million paid in cash.

On February 19, 2013, the Company acquired all of the issued and outstanding Class A common shares of H. Paulin & Co., Limited (the “Paulin Acquisition”). The aggregate purchase price of the Paulin Acquisition was $103.4 million paid in cash. On March 31, 2013, H. Paulin & Co., Limited was amalgamated with The Hillman Group Canada ULC and continues as a division operating under the trade name of H. Paulin & Co. (“Paulin”).

Product Revenues

The following is revenue based on products for the Company’s significant product categories (in thousands):

 

     Year Ended December 31,  
     2013      2012      2011  

Net sales

        

Keys

   $ 90,518       $ 86,943       $ 85,410   

Engraving

     48,442         48,979         41,734   

Letters, numbers and signs

     34,045         32,251         33,079   

Fasteners

     450,234         308,770         279,564   

Threaded rod

     31,802         33,326         31,135   

Code cutter

     2,680         2,851         3,312   

Builders hardware

     17,320         16,370         10,080   

Other

     26,600         25,975         22,212   
  

 

 

    

 

 

    

 

 

 

Consolidated net sales

   $ 701,641       $ 555,465       $ 506,526   
  

 

 

    

 

 

    

 

 

 

 

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Results of Operations

Sales and profitability for the years ended December 31, 2013 and 2012:

 

     Year ended
December 31, 2013
    Year ended
December 31, 2012
 
(dollars in thousands)    Amount     % of
Total
    Amount     % of
Total
 

Net sales

   $ 701,641        100.0   $ 555,465        100.0

Cost of sales (exclusive of depreciation and amortization shown below)

     359,326        51.2     275,016        49.5

Selling

     102,354        14.6     90,498        16.3

Warehouse & delivery

     78,606        11.2     58,097        10.5

General & administrative

     44,691        6.4     39,735        7.2

Acquisition and integration

     8,638        1.2     3,031        0.5

Depreciation

     24,796        3.5     22,009        4.0

Amortization

     22,112        3.2     21,752        3.9

Management and transaction fees to related party

     77        0.0     155        0.0

Other (income) expense, net

     4,600        0.7     4,204        0.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     56,441        8.0     40,968        7.4

Interest expense

     48,138        6.9     41,138        7.4

Interest expense on junior subordinated debentures

     12,610        1.8     12,610        2.3

Investment income on trust common securities

     (378     (0.1 %)      (378     (0.1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before taxes

     (3,929     (0.6 %)      (12,402     (2.2 %) 

Income tax benefit

     (2,781     (0.4 %)      (5,168     (0.9 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,148     (0.2 %)    $ (7,234     (1.3 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Current Economic Conditions

The Company’s 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 uneven recovery of the U.S. economy and high unemployment figures. Conditions are not expected to improve significantly in the near term and there still exists concern about downside risk to future growth and the high unemployment rate. These factors may have the effect of reducing consumer spending which could adversely affect our results of operations during the current year and beyond.

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. Unfavorable exchange rate fluctuations have increased the costs for many of our products. The Company took pricing action in 2011 and 2012 in an attempt to offset a portion of the product cost increases. The ability of the Company’s operating divisions to institute price increases and seek price concessions, as appropriate, is dependent on competitive market conditions.

Year Ended December 31, 2013 vs Year Ended December 31, 2012

Revenues

Net sales for the year ended December 31, 2013 were $701.6 million, an increase of $146.1 million compared to net sales of $555.5 million for the year ended December 31, 2012. The increase in revenue was primarily attributable to the acquisition of the Paulin business in 2013 which contributed approximately $130.4 million in incremental net sales to the 2013 period. Our national accounts, All Points, Mexico, and F&I businesses provided favorable revenue gains compared to the prior year, however a decline in retail activity and a reduced level of product penetration in the 2013 period resulted in revenue decreases from the prior year in our engraving and regional accounts.

 

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Expenses

Operating expenses were substantially higher for the year ended December 31, 2013 than for the year ended December 31, 2012. The primary reasons for the increase in operating expenses were the inclusion of the Paulin business for approximately ten months of 2013 and the increase in stock compensation expense. These costs were partially offset by the settlement of the Hy-Ko antitrust case and legal costs related to the Hy-Ko patent infringement and antitrust litigation recorded in 2012. The following changes in underlying trends also impacted the change in operating expenses:

 

    The Company’s cost of sales was $359.3 million, or 51.2% of net sales, in the year ended December 31, 2013 compared to $275.0 million, or 49.5% of net sales, in the year ended December 31, 2012. The cost of sales percentage in the 2013 period was higher than the comparable 2012 period as a result of the inclusion of the Paulin business which increased cost of sales by 2.5% expressed as a percent of sales. The favorable change in the cost of sales percentage for 2013 excluding Paulin was the result of favorable changes in product cost and sales mix.

 

    Selling expense was $102.4 million, or 14.6% of net sales, in the year ended December 31, 2013 compared to $90.5 million, or 16.3% of net sales, in the year ended December 31, 2012. Selling expense of approximately $9.6 million was attributable to the new Paulin business in the 2013 period. In 2013, selling expense excluding the Paulin business expressed as a percentage of sales was approximately equal to the prior year.

 

    Warehouse and delivery expense was $78.6 million, or 11.2% of net sales, in 2013, an increase of $20.5 million compared to warehouse and delivery expense of $58.1 million, or 10.5% of net sales, in 2012. Warehouse and delivery expense of approximately $18.6 million was attributable to the new Paulin business in the year of 2013. The costs in the remaining Hillman businesses were up approximately $1.9 million from the prior year period primarily from increased warehouse lease cost and freight on customer shipments.

 

    G&A expenses were $44.7 million, or 6.4% of net sales in 2013, an increase of $5.0 million compared to $39.7 million, or 7.2% of net sales in 2012. G&A expenses in the 2013 period included approximately $9.0 million in stock compensation cost and approximately $8.3 million in costs from the new Paulin business. G&A expenses in 2012 included approximately $11.7 million in legal fees and settlements related to the Hy-Ko patent infringement and antitrust cases.

 

    Acquisition and integration costs were $8.6 million for the year ended December 31, 2013 primarily as a result of charges for investment banking, legal, and other expenses incurred in connection with the acquisition of Paulin. The acquisition and integration costs were $3.0 million for the year ended December 31, 2012 as a result of charges for investment banking, legal, and other expenses incurred in connection with the acquisitions of Paulin and Ook.

 

    Depreciation expense was $24.8 million for the year ended December 31, 2013 compared to $22.0 million for the prior year. The higher amount of depreciation expense for the 2013 period was primarily due to the additional depreciation expense of the fixed assets acquired as a result of the Paulin Acquisition.

 

    Amortization expense was $22.1 million for the year ended December 31, 2013 compared to $21.8 million for the prior year. The slightly higher amount of amortization expense for the 2013 period was due to the additional amortization expense of certain intangible assets acquired as a result of the Paulin Acquisition.

 

    Interest expense, net, was $48.1 million for the year ended December 31, 2013 compared to $41.1 million in the prior year. The increase in interest expense was primarily the result of the Company’s higher borrowing levels in both the $265.0 million aggregate principal amount of the 10.875% Senior Notes and the Senior Facilities during 2013 compared to 2012.

 

    Other (income) expense, net was $4.6 million for the year ended December 31, 2013 compared to $4.2 million for the year ended December 31, 2012. The other expenses incurred in 2013 and 2012 were primarily the result of the restructuring costs incurred to streamline the warehouse distribution system.

 

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Results of Operations

Sales and profitability for the year ended December 31, 2012 and December 31, 2011:

 

     Year ended
December 31, 2012
    Year ended
December 31, 2011
 
(dollars in thousands)    Amount     % of
Total
    Amount     % of
Total
 

Net sales

   $ 555,465        100.0   $ 506,526        100.0

Cost of sales (exclusive of depreciation and amortization shown below)

     275,016        49.5     252,491        49.8

Selling

     90,498        16.3     85,326        16.8

Warehouse & delivery

     58,097        10.5     55,063        10.9

General & administrative

     39,735        7.2     29,377        5.8

Acquisition and integration

     3,031        0.5     2,805        0.6

Depreciation

     22,009        4.0     21,333        4.2

Amortization

     21,752        3.9     20,717        4.1

Management and transaction fees to related party

     155        0.0     110        0.0

Other (income) expense, net

     4,204        0.8     851        0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     40,968        7.4     38,453        7.6

Interest expense

     41,138        7.4     40,679        8.0

Interest expense on junior subordinated debentures

     12,610        2.3     12,610        2.5

Investment income on trust common securities

     (378     (0.1 %)      (378     (0.1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before taxes

     (12,402     (2.2 %)      (14,458     (2.9 %) 

Income tax benefit

     (5,168     (0.9 %)      (4,679     (0.9 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (7,234     (1.3 %)    $ (9,779     (1.9 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Year Ended December 31, 2012 vs Year Ended December 31, 2011

Revenues

Net sales for the year ended December 31, 2012 were $555.5 million compared to net sales for the year ended December 31, 2011 of $506.5. The increase in revenues of $49.0 million was primarily attributable to an improvement in retail activity and certain pricing actions taken in early 2012 resulted in further revenue improvement over the prior year in our F&I hardware accounts, Regional accounts, the All Points division, and for Home Depot. In addition, revenue increased from having a full year of the newly acquired TagWorks and Ook businesses which contributed approximately $16.3 million in incremental net sales to 2012.

Expenses

Operating expenses were substantially higher for the year ended December 31, 2012 than for the year ended December 31, 2011. The primary reasons for the increase in operating expenses were the settlement of the Hy-Ko antitrust case and increase in legal costs related to the Hy-Ko patent infringement and antitrust litigation together with the inclusion of the newly acquired Ook business in the full year of 2012. In addition, the TagWorks business was acquired in March 2011 and therefore contributed approximately nine months of operating expenses to 2011 and twelve months of operating expenses to 2012. The following changes in underlying trends also impacted the change in operating expenses:

 

    The Company’s cost of sales was $275.0 million, or 49.5% of net sales, in the year ended December 31, 2012 compared to $252.5 million, or 49.8% of net sales, in the year ended December 31, 2011. The cost of sales percentage was comparable for the two periods as unfavorable changes in product cost and sales mix have been offset by pricing actions.

 

    Selling expense was $90.5 million, or 16.3% of net sales, in the year ended December 31, 2012 compared to $85.3 million, or 16.8% of net sales, in the year ended December 31, 2011. The TagWorks Acquisition and Ook Acquisition contributed to the higher sales volume in 2012, which resulted in higher variable service cost than 2011. The 2012 selling expense was less than 2011 when expressed as a percentage of net sales.

 

    Warehouse and delivery expense was $58.1 million, or 10.5% of net sales, in 2012 compared to $55.1 million, or 10.9% of net sales, in 2011. The higher sales volume in 2012 resulted in higher overall costs for warehouse labor and freight used to process and deliver customer orders. However, as a result of operating efficiencies, these costs decreased from 2011 when expressed as a percentage of net sales.

 

    G&A expenses were $39.7 million in 2012 compared to $29.4 million in 2011. The increase in G&A expenses was primarily the result of the settlement cost of the previously pending Hy-Ko antitrust case and higher legal expense on the Hy-Ko patent infringement and antitrust cases.

 

    Acquisition and integration expense of $3.0 million for the year ended December 31, 2012 represents charges for investment banking, legal and other expenses incurred in connection with the acquisitions of Paulin and Ook. The Company incurred $2.8 million for the year ended December 31, 2011 for banking, legal, and other professional fees incurred in connection with the Merger Transaction, Servalite Acquisition, TagWorks Acquisition, Ook Acquisition, and start-up of operations for the Hillman Group Australia Pty, Ltd. (“Hillman Australia”).

 

    Depreciation expense was $22.0 million for 2012 compared to $21.3 million for 2011. The increase in annual depreciation expense in 2012 was the result of the increase in fixed assets subject to depreciation acquired through capital additions.

 

    Amortization expense was $21.8 million for the year ended December 31, 2012 compared to $20.7 million for the prior year. The higher amortization expense in 2012 was the result of the increase in intangible assets subject to amortization acquired in the Ook Acquisition.

 

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    Interest expense was $41.1 million for the year ended December 31, 2012 compared to $40.7 million in the prior year. The increase in interest expense for 2012 was primarily the result of the higher level of debt outstanding.

 

    Other (income) expense, net was $4.2 million for the year ended December 31, 2012 compared to $0.9 million for the year ended December 31, 2011. The increase in other expenses was primarily the result of the restructuring costs incurred to move the TagWorks operation and streamline the warehouse distribution system.

Income Taxes

Year Ended December 31, 2013 and Year Ended December 31, 2012

The effective income tax rates were 70.8% and 41.7% for the twelve month periods ended December 31, 2013 and 2012, respectively. The effective income tax rate differed from the federal statutory rate in the twelve month periods ended December 31, 2013 and 2012 primarily due to a decrease in the reserve for unrecognized tax benefits, as well as the effect of foreign and state taxes. The effective income tax rate also differed from the federal statutory rate in the twelve month period ended December 31, 2013 due to the decrease in the valuation reserve recorded against certain deferred tax assets 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 2013 and 2012 income tax events.

Year Ended December 31, 2012 and Year Ended December 31, 2011

The effective income tax rates were 41.7% and 32.4% for the twelve month periods ended December 31, 2012 and 2011, respectively. The effective income tax rate differed from the federal statutory rate in the twelve month period ended December 31, 2012 primarily due to a decrease in the reserve for unrecognized tax benefits. The effective income tax rate differed from the federal statutory rate in the twelve month period ended December 31, 2011 primarily due to the increase in the valuation reserve recorded against certain deferred tax assets in addition to the effect of state rates. The effective income tax rate differed from the federal statutory rate in the twelve month periods ended December 31, 2012 and 2011 due to the effect of foreign and state taxes. See Note 6, Income Taxes, of Notes to Consolidated Financial Statements for income taxes and disclosures related to 2012 and 2011 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 years ended December 31, 2013, 2012, and 2011 by classifying transactions into three major categories: operating, investing, and financing activities.

Operating Activities

Net cash provided by operating activities for the year ended December 31, 2013 of $41.5 million was generated by the net loss of $1.1 million adjusted for non-cash charges of $54.0 million for depreciation, amortization, dispositions of equipment, deferred taxes, deferred financing, stock-based compensation, and other non-cash interest which was partially offset by cash related adjustments of $12.5 million for routine operating activities represented by changes in inventories, accounts receivable, accounts payable, accrued liabilities, and other assets. In 2013, routine operating activities used cash for an increase in inventories of $11.5 million, an increase in accounts receivable of $9.1 million and other assets of $4.1 million while operating activities provided cash from an increase in accounts payable of $8.4 million, an increase of accrued liabilities of $2.7 million and an increase in other items of $1.1 million.

Net cash provided by operating activities for the year ended December 31, 2012 of $23.3 million was generated by the net loss of $7.2 million adjusted for non-cash charges of $33.3 million for depreciation, amortization, dispositions of equipment, deferred taxes, deferred financing, stock-based compensation, and other non-cash interest which was partially offset by cash related adjustments of $10.0 million for routine operating activities represented by changes in inventories, accounts receivable, accounts payable, accrued liabilities, and other assets. In 2012, routine operating activities used cash for an increase in inventories of $10.2 million, an increase in other assets of $4.1, and a decrease in accounts payable of $2.2 million while operating activities provided cash from a decrease in accounts receivable of $1.4 million, an increase of accrued liabilities of $5.0 million, and other items of $0.1 million.

Net cash provided by operating activities for the year ended December 31, 2011 of $24.5 million was generated by the net loss of $9.8 million adjusted for non-cash charges of $31.4 million for depreciation, amortization, dispositions of equipment, deferred taxes, deferred financing, and other non-cash interest which was partially offset by cash related adjustments of $6.9 million for routine operating activities represented by changes in inventories, accounts receivable, accounts payable, accrued liabilities, and other assets. In 2011, routine operating activities used cash for an increase in accounts receivable of $4.6 million, an increase in inventories of $2.4, and an increase in other assets of $4.0 million. Accounts payable, accrued liabilities, and other items accounted for the remaining $4.1 million increase of cash provided by operating activities.

Investing Activities

Net cash used for investing activities was $140.7 million for the year ended December 31, 2013. The Company used $103.4 million for the Paulin Acquisition. Capital expenditures for the year totaled $38.0 million, consisting of $22.8 million for key duplicating machines, $5.4 million for engraving machines, $5.7 million for computer software and equipment, and $4.1 million for plant equipment and other equipment purchases. The Company received $0.8 million in proceeds from the sale of property and equipment.

Net cash used for investing activities was $24.3 million for the year ended December 31, 2012. Capital expenditures for the year totaled $24.3 million, consisting of $12.1 million for key duplicating machines, $5.5 million for engraving machines, $5.6 million for computer software and equipment, and $1.1 million for plant equipment and other equipment purchases.

 

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Net cash used for investing activities was $73.5 million for the year ended December 31, 2011. The Company used $40.3 million for the TagWorks Acquisition and $15.3 million for the Ook Acquisition. Capital expenditures for the year totaled $17.9 million, consisting of $8.8 million for key duplicating machines, $4.5 million for engraving machines, $3.4 million for computer software and equipment, and $1.2 million for plant equipment and other equipment purchases.

Financing Activities

Net cash provided by financing activities was $69.0 million for the year ended December 31, 2013. The borrowings on senior term loans provided $73.6 million, including the discount of $3.2 million and were used to pay the purchase price of the Paulin Acquisition. Other borrowings, net, used an additional $0.9 million in cash.

Net cash provided by financing activities was $54.4 million for the year ended December 31, 2012. The borrowings on senior notes provided $69.2 million, including the premium received of $4.2 million, and were used together with the net proceeds from the term loan financing to pay a portion of the purchase price of the Paulin Acquisition, to repay a portion of indebtedness under the revolving credit facility, and for general Company purposes. During 2012, the Company used cash to make payments of $12.4 million for additional acquisition consideration and $3.2 million for principal payments on the senior term loans. Other borrowings, net provided an additional $0.8 million in cash.

Net cash provided by financing activities was $53.8 million for the year ended December 31, 2011. The borrowings on senior notes and senior term loans provided $81.3 million, net of financing fees, which was used primarily for the acquisitions discussed in “Investing Activities” and other Company purposes. During 2011, the Company used cash to make payments of $12.5 million for additional acquisition consideration, $12.0 million on the revolving credit loans, and $3.0 million for principal payments on the senior term loans.

Liquidity

The Company’s management believes that projected cash flows from operations and revolver availability will be sufficient to fund working capital and capital expenditure needs for the next 12 months.

The Company’s working capital (current assets minus current liabilities) position of $238.8 million as of December 31, 2013 represents an increase of $44.9 million from the December 31, 2012 level of $193.9 million. The primary reason for the increase in working capital was the addition of working capital provided in the Paulin Acquisition which was partially offset by the reduction of cash used for this acquisition.

 

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Contractual Obligations

The Company’s contractual obligations as of December 31, 2013 are summarized below:

 

            Payments Due  
(dollars in thousands)    Total      Less Than
One Year
     1 to 3
Years
     3 to 5
Years
     More Than
Five Years
 

Junior Subordinated Debentures (1)

   $ 114,941       $ —         $ —         $ —         $ 114,941   

Interest on Jr Subordinated Debentures

     168,182         12,231         24,463         24,463         107,025   

Long Term Senior Term Loans

     385,399         3,968         7,936         373,495         —     

10.875% Senior Notes

     265,000         —           —           265,000         —     

KeyWorks License Agreement

     2,804         434         822         764         784   

Interest payments (2)

     176,665         43,282         86,161         46,902         320   

Operating Leases

     67,294         10,680         13,850         10,276         32,488   

Deferred Compensation Obligations

     4,386         2,856         —           —           1,530   

Capital Lease Obligations

     594         239         310         45         —     

Purchase Obligations

     1,196         321         350         350         175   

Other Obligations

     1,832         770         850         212         —     

Uncertain Tax Position Liabilities

     2,024         —           —           —           2,024   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Cash Obligations (3)

   $ 1,190,317       $ 74,781       $ 134,742       $ 721,507       $ 259,287   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 3.75% as of December 31, 2013. 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 Company’s consolidated balance sheet as of December 31, 2013 except for the interest payments, purchase obligations, and operating leases.

The Company has a purchase agreement with our 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 the requisite 100 million key blanks per year from the supplier. In 2013, the Company extended this contract for an additional three 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, 2013, the Company had $26.1 million available under our secured credit facilities. The Company had approximately $386.0 million of outstanding debt under our secured credit facilities at December 31, 2013, consisting of $385.4 million in term loans and $0.6 million in capitalized lease and other obligations. The term loans consisted of $385.4 million in Term B-2 Loans at a three month LIBOR rate plus margin of 3.75%. The capitalized lease and other obligations were at various interest rates.

At December 31, 2013 and 2012, the Company borrowings were as follows:

 

     December 31, 2013     December 31, 2012  
(dollars in thousands)    Facility
Amount
     Outstanding
Amount
     Interest
Rate
    Facility
Amount
     Outstanding
Amount
     Interest
Rate
 

Term B-2 Loan

      $ 385,399         3.75      $ 312,375         5.00
     

 

 

         

 

 

    

Total Term Loans

        385,399              312,375      

Revolving credit facility

   $ 30,000         —           —        $ 30,000         —           —     

Capital leases & other obligations

        556         various           1,064         various   
     

 

 

         

 

 

    

Total secured credit

        385,955              313,439      

10.875% senior notes

        265,000         10.875        265,000         10.875
     

 

 

         

 

 

    

Total borrowings

      $ 650,955            $ 578,439      
     

 

 

         

 

 

    

Descriptions of the Company’s credit agreement governing the Senior Facilities, as amended, and the 10.875% Senior Notes are contained in the “Financing Arrangements” section of this annual report on Form 10-K.

The Company’s Senior Facilities require the maintenance of the secured leverage ratio described above and limit 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 agreement, all amounts outstanding, together with accrued interest, could be declared immediately due and payable by our lenders. Below are the calculations of the financial covenant, as amended on April 18, 2011, with the Senior Facilities requirement for the twelve months ended December 31, 2013:

 

(dollars in thousands)    Actual      Ratio
Requirement
 

Secured Leverage Ratio

     

Senior term loan balance

   $ 385,399      

Revolver

     —        

Capital leases and other credit obligations

     556      
  

 

 

    

Total debt

   $ 385,955      
  

 

 

    

Adjusted EBITDA (1)

   $ 127,240      

Leverage ratio (must be below requirement)

     3.03         4.75   
  

 

 

    

 

 

 

 

(1) Adjusted EBITDA is a non-GAAP measure defined as income from operations ($56,441) plus depreciation ($24,796), amortization ($22,112), stock compensation expense ($9,006), restructuring costs ($4,382), acquisition and integration expenses ($8,638), foreign exchange losses ($2,252), management fees ($77), and minus other ($464).

 

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Related Party Transactions

The Company has recorded management fee charges and expenses from OHCP of $77 thousand for the year ended December 31, 2013, $155 thousand for the year ended December 31, 2012, and $110 thousand for the year ended December 31, 2011.

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 Company has recorded rental expense for the lease of this facility on an arm’s length basis. The rental expense for the lease of this facility in the amount of $311 thousand for the years ended December 31, 2013, 2012, and 2011.

In connection with the Paulin Acquisition, the Company entered into three leases on February 19, 2013 for five properties containing industrial warehouse, manufacturing plant, and office facilities. The owners of the properties under one lease are relatives of Richard Paulin, who is employed by The Hillman Group Canada ULC, and the owner of the properties under the other two leases is a company which is owned by Richard Paulin and certain of his relatives. The Company has recorded rental expense for the three leases on an arm’s length basis. The rental expense for the three leases was $687 thousand for the year ended December 31, 2013.

Critical Accounting Policies and Estimates

The Company’s 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 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 Company’s 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 taxes 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 comprehensive loss.

The Company offers a variety of sales incentives to our 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. 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 when they become uncollectible. The allowance for doubtful accounts was $0.7 million and $1.1 million as of December 31, 2013 and 2012, 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 $11.3 million and $6.9 million at December 31, 2013 and 2012, 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 assessed for impairment at least annually, or more frequently if a triggering event occurs. If the carrying amount of a reporting unit is greater than the fair value, impairment may be present. ASC 350 permits an entity to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the two-step goodwill impairment model. If it is determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment.

The quantitative assessment for goodwill impairment is a two-step test. Under the first step, the fair value of each reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the Company must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with ASC 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

The Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually or more frequently if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. ASC 350 permits an entity to assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount before applying the two-step impairment model. In connection with the evaluation, 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. 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 Company’s annual impairment assessment is performed for the reporting units as of October 1. The estimated fair value of each reporting unit subject to the impairment test exceeded its carrying cost. The October 1 goodwill and intangible impairment test data aligns the impairment assessment with the preparation of the Company’s annual strategic plan and allows additional time for a more thorough analysis by the Company’s independent appraiser. An independent appraiser assessed the value of The Company’s reporting units based on a discounted cash flow model and multiple of earnings. Assumptions critical to the Company’s 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. No impairment charges were recorded by the Company in 2013, 2012, or 2011 as a result of the annual impairment assessments.

 

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Long-Lived Assets:

The Company evaluates our long-lived assets for 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, 2013, 2012, or 2011.

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.

Risk Insurance Reserves:

The Company self-insures our product liability, automotive, workers’ compensation, and general liability losses up to $250.0 thousand per occurrence. Catastrophic coverage has been purchased from third party insurers for occurrences in excess of $250.0 thousand up to $40.0 million. The two risk areas involving the most significant accounting estimates are workers’ compensation and automotive liability. Actuarial valuations performed by the Company’s outside risk insurance expert were used to form the basis for workers’ compensation and automotive liability loss reserves. The actuary contemplated the Company’s specific loss history, actual claims reported, and industry trends among statistical and other factors to estimate the range of reserves required. Risk insurance reserves are comprised of specific reserves for individual claims and additional amounts expected for development of these claims, as well as for incurred but not yet reported claims. The Company believes that the liability recorded for such risk insurance reserves is adequate as of December 31, 2013.

The Company self-insures our group health claims up to an annual stop loss limit of $200.0 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. The Company believes the liability recorded for such insurance reserves is adequate as of December 31, 2013.

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 Company determined that redemption of the shares is probable as they can be put back to Holdco upon death or disability. The common stock held by management is recorded outside permanent equity and was adjusted to the fair value of $16,975 as of December 31, 2013 and $14,116 as of December 31, 2012.

As of December 31, 2013 and 2012, the fair value of the management owned common stock was based upon independent valuation appraisals of the common stock. An independent appraiser assessed the value of the Company’s common stock based on a discounted cash flow model and multiple of earnings. Assumptions critical to the Company’s common stock

 

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value 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. In periods prior to December 31, 2012, the fair value of the management owned common stock was determined by the Board of Directors using an enterprise basis and taking into account all relevant market factors.

The fair value of the common stock has been calculated at each balance sheet date prior to December 31, 2012 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. The remainder was divided by the fully diluted common shares outstanding to arrive at a fair value per common share outstanding.

The enterprise value of the Company was 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, 2011, the Company applied a valuation multiple of 9.78x to trailing twelve months Adjusted EBITDA in determining enterprise value. Management periodically reviews the appropriateness of this multiple and notes that it was consistent with comparable distribution companies.

A change of 0.1 in the valuation multiple used to calculate the enterprise value at December 31, 2011 adjusted the per share fair value of the common stock by approximately $26.85.

The calculation of the fair value of the common stock as of December 31, 2011 is detailed below together with the presentation of the fair value of the common stock as of December 31, 2013 and 2012:

 

(dollars in thousands)    December 31,
2013 (5)
     December 31,
2012 (5)
     December 31,
2011
 

Trailing twelve fiscal months EBITDA (1)

         $ 92,262   

Valuation Multiple (2)

           9.78   
        

 

 

 

Hillman Enterprise Value Excluding Ook

           902,462   

Ook Fair Value (3)

           15,323   
        

 

 

 

Hillman Enterprise Value

           917,785   

Less:

        

Senior term loans

           315,575   

10.875% senior notes

           200,000   

Junior subordinated debentures redemption value, net (4)

           105,446   
        

 

 

 

Total Debt

           621,021   

Plus:

        

Cash

           12,027   

Proceeds from option exercise

           33,314   
  

 

 

    

 

 

    

 

 

 

Common Equity Value (6)

     601,882         402,802         342,105   

Fully-diluted Common Shares outstanding

     354,071         349,480         342,105   
  

 

 

    

 

 

    

 

 

 

Fully-diluted Value Per Common Share

   $ 1,699.9       $ 1,152.6       $ 1,000.0   
  

 

 

    

 

 

    

 

 

 

 

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(1)    -    EBITDA is calculated for the most recent four fiscal quarters as follows:

 

     December 31,
2011
 

Income from operations

   $ 38,453   

Depreciation and amortization

     42,050   

Management fees

     110   

Acquisition and integration

     2,805   

Exchange rate (gain) loss

     446   

Restructuring cost

     2,113   

Excess legal on patent litigation

     665   

Litigation settlement cost

     2,120   

Consigned inventory cost

     1,118   

Other adjustments

     2,382   
  

 

 

 

EBITDA

   $ 92,262   
  

 

 

 

The other adjustments include 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)    -    Ook was acquired on December 1, 2011 and its purchase price was deemed the accurate measure of enterprise value.
(4)    -    The value of the junior subordinated debentures is the redemption value of $25 per share.
(5)    -    At December 31, 2013 and 2012, common stock valuations were performed by an independent appraiser based upon a discounted cash flow model and multiple of earnings. The Company used this valuation in its determination of common equity value.
(6)    -    At December 31, 2013 and 2012, the Common Equity Value included proceeds from option exercise of $47,500 and $41,210, respectively.

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 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:

The carrying amounts of the Company’s cash, restricted investments, accounts receivable, short-term borrowings, accounts payable, and accrued liabilities approximate fair value because of the short term maturity 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, 2013 and 2012 as the interest rate is variable and approximates current market rates. The fair values of the fixed rate senior notes and junior subordinated debentures were determined utilizing current trading prices obtained from indicative market data at December 31, 2013 and 2012, respectively. See Note 16, Fair Value Measurements of the Notes to the Consolidated Financial Statements.

 

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Recent Accounting Pronouncements:

In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, “Comprehensive Income”. The update amended the Accounting Standards Codification (“ASC”) to require entities to provide information about amounts reclassified out of other comprehensive income by component. The Company is required to present, either on the face of the financial statements or in the notes, the amounts reclassified from other comprehensive income to the respective line items in the Consolidated Statements of Comprehensive Income. This amendment was effective for interim and annual periods beginning after December 15, 2012. The adoption of this amendment did not have an impact on the Company’s disclosure or the Company’s consolidated results of operations or financial condition.

On July 18, 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Topic 740 does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The objective of the amendments in this update is to eliminate that diversity in practice. The update is effective for fiscal years and interim periods within those years beginning after December 15, 2013. We are currently evaluating the impact of adopting ASU 2013-11 on the consolidated financial statements.

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 Facilities bear interest at variable interest rates. It is the Company’s policy to enter into interest rate swap and interest rate cap transactions only to the extent considered necessary to meet our objectives.

Based on the Company’s exposure to variable rate borrowings less amounts hedged by interest rate caps at December 31, 2013, 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 $1.6 million.

The Company is exposed to foreign exchange rate changes of the Australian, Canadian and Mexican currencies as it impacts the $121.6 million tangible and intangible net asset value of our Australian, Canadian, and Mexican subsidiaries as of December 31, 2013. The foreign subsidiaries net tangible assets were $76.4 million and the net intangible assets were $45.2 million as of December 31, 2013.

The Company utilizes foreign exchange forward contracts to manage the exposure to currency fluctuations in the Canadian dollar versus the U.S. dollar.

 

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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

     42   

Report of Independent Registered Public Accounting Firm

     43   

Consolidated Financial Statements:

  

Consolidated Balance Sheets

     44-45   

Consolidated Statements of Comprehensive Loss

     46   

Consolidated Statements of Cash Flows

     47   

Consolidated Statements of Stockholders’ Equity

     48   

Notes to Consolidated Financial Statements

     49-94   

Financial Statement Schedule:

  

Valuation Accounts

     95   

 

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Report of Management on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of The Hillman Companies, Inc. and its consolidated subsidiaries; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of The Hillman Companies, Inc. and its consolidated subsidiaries are being made only in accordance with authorizations of management and directors of The Hillman Companies, Inc. and its consolidated subsidiaries, as appropriate; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of The Hillman Companies, Inc. and its consolidated subsidiaries that could have a material effect on the consolidated financial statements.

The Company’s 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, 2013, the end of our fiscal year. Management based its assessment on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The scope of the assessment included all of the consolidated operations of the Company except for H. Paulin & Co. (“Paulin”), which was acquired on February 19, 2013. The net sales and total assets of Paulin represented 18.6% and 10.7%, respectively, of consolidated net sales and total assets of the Company for the year and as of ended December 31, 2013. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed under the direction of management.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation.

Based on its assessment, the Company’s management has concluded that our internal control over financial reporting was effective, as of December 31, 2013, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. We reviewed the results of management’s assessment with the Audit Committee of The Hillman Companies, Inc.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

/s/ JAMES P. WATERS     /s/ ANTHONY A. VASCONCELLOS
James P. Waters     Anthony A. Vasconcellos
Chief Executive Officer     Chief Financial Officer
Dated: March 28, 2014     Dated: March 28, 2014

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

The Hillman Companies, Inc.:

We have audited the accompanying consolidated balance sheets of The Hillman Companies, Inc. and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II - Valuation Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit 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 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, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, 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 28, 2014

 

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Table of Contents

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

     December 31,
2013
     December 31,
2012
 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 34,969       $ 65,548   

Restricted investments

     2,856         846   

Accounts receivable, net

     87,515         62,344   

Inventories, net

     177,580         113,838   

Deferred income taxes

     11,096         10,464   

Other current assets

     9,082         8,506   
  

 

 

    

 

 

 

Total current assets

     323,098         261,546   

Property and equipment, net

     95,818         68,492   

Goodwill

     466,227         455,338   

Other intangibles, net

     362,365         366,644   

Restricted investments

     1,530         3,399   

Deferred financing fees

     9,798         12,858   

Investment in trust common securities

     3,261         3,261   

Other assets

     2,759         4,255   
  

 

 

    

 

 

 

Total assets

   $ 1,264,856       $ 1,175,793   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

   $ 44,369       $ 32,571   

Current portion of senior term loans

     3,968         3,200   

Current portion of capitalized lease and other obligations

     219         819   

Accrued expenses:

     

Salaries and wages

     11,864         9,351   

Pricing allowances

     6,210         4,057   

Income and other taxes

     3,121         2,492   

Interest

     2,674         2,868   

Deferred compensation

     2,856         846   

Other accrued expenses

     9,031         11,397   
  

 

 

    

 

 

 

Total current liabilities

     84,312         67,601   

Long-term senior term loans

     377,641         307,727   

Long-term capitalized lease and other obligations

     337         245   

Long-term senior notes

     271,750         272,942   

Junior subordinated debentures

     114,941         115,132   

Deferred compensation

     1,530         3,399   

Deferred income taxes

     120,060         117,949   

Other non-current liabilities

     15,391         6,187   
  

 

 

    

 

 

 

Total liabilities

     985,962         891,182   
  

 

 

    

 

 

 

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 BALANCE SHEETS

(dollars in thousands)

 

     December 31,
2013
    December 31,
2012
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (CONTINUED)     

Common stock with put options:

    

Common stock, $.01 par, 5,000 shares authorized, 161.2 issued and outstanding at December 31, 2013 and 198.3 issued and outstanding at December 31, 2012.

     16,975        14,116   
  

 

 

   

 

 

 

Commitments and contingencies (Note 17)

    

Stockholders’ Equity:

    

Preferred Stock:

    

Preferred stock, $.01 par, 5,000 shares authorized, none issued and outstanding at December 31, 2013 and 2012.

     —          —     

Common Stock:

    

Common stock, $.01 par, 5,000 shares authorized, 4,838.8 issued and outstanding at December 31, 2013 and 4,801.7 issued and outstanding at December 31, 2012.

     —          —     

Additional paid-in capital

     292,989        294,675   

Accumulated deficit

     (26,199     (25,051

Accumulated other comprehensive (loss) income

     (4,871     871   
  

 

 

   

 

 

 

Total stockholders’ equity

     261,919        270,495   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,264,856      $ 1,175,793   
  

 

 

   

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

 

45


Table of Contents

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(dollars in thousands)

 

     Year Ended December 31,  
     2013     2012     2011  

Net sales

   $ 701,641      $ 555,465      $ 506,526   

Cost of sales (exclusive of depreciation and amortization shown separately below)

     359,326        275,016        252,491   

Selling, general and administrative

     225,651        188,330        169,766   

Acquisition and integration (Note 22)

     8,638        3,031        2,805   

Depreciation

     24,796        22,009        21,333   

Amortization

     22,112        21,752        20,717   

Management and transaction fees to related party

     77        155        110   

Other expense, net

     4,600        4,204        851   
  

 

 

   

 

 

   

 

 

 

Income from operations

     56,441        40,968        38,453   

Interest expense, net

     48,138        41,138        40,679   

Interest expense on junior subordinated debentures

     12,610        12,610        12,610   

Investment income on trust common securities

     (378     (378     (378
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (3,929     (12,402     (14,458

Income tax benefit

     (2,781     (5,168     (4,679
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,148   $ (7,234   $ (9,779
  

 

 

   

 

 

   

 

 

 

Net loss (from above)

   $ (1,148   $ (7,234   $ (9,779

Other comprehensive (loss) income:

      

Foreign currency translation adjustments

     (5,742     1,051        (179

Interest rate swap, net of tax

     —          —          624   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (5,742     1,051        445   
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (6,890   $ (6,183   $ (9,334
  

 

 

   

 

 

   

 

 

 

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)

 

     Year Ended December 31,  
     2013     2012     2011  

Cash flows from operating activities:

      

Net loss

   $ (1,148   $ (7,234   $ (9,779

Adjustments to reconcile net loss to net cash provided by operating activities:

      

Depreciation and amortization

     46,908        43,761        42,050   

Loss on dispositions of property and equipment

     777        292        53   

Deferred income tax benefit

     (3,624     (5,613     (4,227

Deferred financing and original issue discount amortization

     2,492        2,180        2,011   

Stock-based compensation expense

     9,006        714        —     

Other non-cash interest and change in value of interest rate swap

     (418     (787     1,250   

Changes in operating items:

      

Accounts receivable

     (9,098     1,459        (4,579

Inventories

     (11,467     (10,239     (2,379

Other assets

     (4,089     (4,109     (4,047

Accounts payable

     8,409        (2,184     600   

Other accrued liabilities

     2,712        4,968        2,217   

Other items, net

     1,065        72        1,291   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     41,525        23,280        24,461   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Paulin Acquisition

     (103,416     —          —     

Ook acquisition

     —          —          (15,323

Tagworks acquisition

     —          —          (40,271

Capital expenditures

     (38,038     (24,305     (17,927

Proceeds from sale of property and equipment

     799        3        —     
  

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

     (140,655     (24,302     (73,521
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Borrowings of senior term loans

     76,800        —          30,000   

Repayments of senior term loans

     (3,776     (3,200     (2,975

Discount on senior term loans

     (3,152     —          (2,000

Borrowings of revolving credit loans

     —          19,000        9,444   

Repayments of revolving credit loans

     —          (19,000     (21,444

Payment of additional acquisition consideration

     —          (12,387     (12,490

Principal payments under capitalized lease obligations

     (503     (47     (30

Borrowings of senior notes

     —          65,000        50,000   

Premium on senior notes

     —          4,225        4,625   

Financing fees, net

     —          —          (1,372

Borrowings under other credit obligations

     324        1,119        —     

Repayments of other credit obligations

     (683     (297     —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     69,010        54,413        53,758   
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (459     130        (256

Net (decrease) increase in cash and cash equivalents

     (30,579     53,521        4,442   

Cash and cash equivalents at beginning of period

     65,548        12,027        7,585   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 34,969      $ 65,548      $ 12,027   
  

 

 

   

 

 

   

 

 

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

 

47


Table of Contents

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands)

 

     Common
Stock
     Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity
 

Balance at December 31, 2010

     —           296,394        (8,038     (625     287,731   

Net loss

     —           —          (9,779     —          (9,779

Sale of 150 Holdco common shares (4)

     —           150        —          —          150   

Change in cumulative foreign translation adjustment (1)

     —           —          —          (179     (179

Change in derivative security value due to de-designation (1)

     —           —          —          624        624   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     —           296,544        (17,817     (180     278,547   

Net loss

     —           —          (7,234     —          (7,234

FMV adjustment to common stock with put options (2)

     —           (1,869     —          —          (1,869

Change in cumulative foreign translation adjustment (1)

     —           —          —          1,051        1,051   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     —           294,675        (25,051     871        270,495   

Net loss

     —             (1,148       (1,148

FMV adjustment to common stock with put options (2)

     —           (6,791         (6,791

Adjustment to common stock with expired put options (3)

     —           5,105            5,105   

Change in cumulative foreign translation adjustment (1)

     —               (5,742     (5,742
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ —         $ 292,989      $ (26,199   $ (4,871   $ 261,919   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The cumulative foreign translation adjustment and change in derivative security value are the only items of other comprehensive income (loss).
(2) Management of the Company controlled 161.2 shares of common stock at December 31, 2013. These shares contain a put feature that allows redemption at the holder’s 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) Former management of the Company controlled 51.9 shares of common stock at December 31, 2013. These shares do not contain the put feature that allows redemption at the holder’s option.
(4) In January 2011, the Company 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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Table of Contents

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

1. Basis of Presentation:

The accompanying financial statements include the consolidated accounts of The Hillman Companies, Inc. and its wholly-owned subsidiaries (collectively “Hillman” or the “Company”). All significant intercompany balances and transactions have been eliminated.

On May 28, 2010, The Hillman Companies, Inc. was acquired by an affiliate of Oak Hill Capital Partners (“OHCP”) and certain members of Hillman’s 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, The Hillman Companies, Inc. is a wholly-owned subsidiary of OHCP HM Acquisition Corp. (“Holdco”).

The Company’s 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. 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 Merger Transaction have been recorded on the financial statements of the Company.

Nature of Operations:

The Company is comprised of five separate business segments, the largest of which is (1) The Hillman Group, Inc. (the “Hillman Group”) operating primarily in the United States. The other business segments consist of separate subsidiaries of the Hillman Group operating in (2) Canada under the names The Hillman Group Canada ULC and H. Paulin & Co., (3) Mexico under the name SunSource Integrated Services de Mexico S.A. de C.V., (4) Florida under the name All Points Industries, Inc., and (5) Australia under the name The Hillman Group Australia Pty. Ltd. 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; builder’s hardware; and identification items, such as tags and letters, numbers, and signs, to retail outlets, primarily hardware stores, home centers and mass merchants, pet supply stores, grocery stores, and drug stores. The Canada segment also produces fasteners, stampings, fittings, and processes threaded parts for automotive suppliers, industrial Original Equipment Manufacturers (“OEMs”), and industrial distributors. Through our field sales and service organization, Hillman complements our extensive product selection with value-added services for the retailer. The Company has approximately 26,000 customers, the largest three of which accounted for 39.7%, 40.1%, and 41.0% of net sales in 2013, 2012, and 2011, respectively.

 

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Table of Contents

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

2. Summary of Significant Accounting Policies:

Cash and Cash Equivalents:

Cash and cash equivalents consist of commercial paper, U.S. Treasury obligations, and other liquid securities purchased with initial maturities less than 90 days and are stated at cost which approximates fair value. The Company has foreign bank balances of approximately $6,701 and $2,201 at December 31, 2013 and 2012, 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 our credit risk is minimal.

Restricted Investments:

The Company’s restricted investments are trading securities carried at fair market value which represent assets held in a Rabbi Trust to fund deferred compensation liabilities owed to the Company’s employees. See Note 11, Deferred Compensation Plan.

Accounts Receivable and Allowance for Doubtful Accounts:

The Company establishes the allowance for doubtful accounts using the specific identification method and also provides a reserve in the aggregate. The estimates for calculating the aggregate reserve are based on historical collection experience. Increases to the allowance for doubtful accounts result in a corresponding expense. The Company writes off individual accounts receivable when collection becomes improbable. The allowance for doubtful accounts was $703 and $1,105 as of December 31, 2013 and 2012, respectively.

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 $11,321 and $6,944 at December 31, 2013 and 2012, 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 and placed in to service in the amounts of $2,298, $5,685, and $161 for the years ended December 31, 2013, 2012, and 2011, respectively.

 

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Table of Contents

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

2. Summary of Significant Accounting Policies: (continued)

 

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 two to 27 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 assessed for impairment at least annually, or more frequently if a triggering event occurs. If the carrying amount of a reporting unit is greater than the fair value, impairment may be present. ASC 350 permits an entity to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the two-step goodwill impairment model. If it is determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment.

The quantitative assessment for goodwill impairment is a two-step test. Under the first step, the fair value of each reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the Company must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with ASC 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.

The Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually or more frequently if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. ASC 350 permits an entity to assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount before applying the two-step impairment model. In connection with the evaluation, 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. 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 Company’s annual impairment assessment is performed for the reporting units as of October 1. The estimated fair value of each reporting unit subject to the impairment test exceeded its carrying cost. The October 1 goodwill and intangible impairment test data aligns the impairment assessment with the preparation of the Company’s annual strategic plan and allows additional time for a more thorough analysis by the Company’s independent appraiser. An independent appraiser assessed the value of The Company’s reporting units based on a discounted cash flow model and multiple of earnings. Assumptions critical to the Company’s 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. No impairment charges were recorded by the Company in 2013, 2012, or 2011 as a result of the annual impairment assessment.

 

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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)

 

Long-Lived Assets:

The Company evaluates our long-lived assets for impairment including an evaluation based on the estimated undiscounted future cash flows as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. No impairment charges were recognized for long-lived assets in the years ended December 31, 2013, 2012, or 2011.

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 our product liability, automotive, workers’ compensation, and general liability losses up to $250 per occurrence. Catastrophic coverage has been purchased from third party insurers for occurrences in excess of $250 up to $40,000. The two risk areas involving the most significant accounting estimates are workers’ compensation and automotive liability. Actuarial valuations performed by the Company’s outside risk insurance expert were used to form the basis for workers’ compensation and automotive liability loss reserves. The actuary contemplated the Company’s specific loss history, actual claims reported, and industry trends among statistical and other factors to estimate the range of reserves required. Risk insurance reserves are comprised of specific reserves for individual claims and additional amounts expected for development of these claims, as well as for incurred but not yet reported claims. The Company believes the liability recorded for such risk insurance reserves is adequate as of December 31, 2013.

The Company self-insures our 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. The Company believes the liability recorded for such health insurance reserves is adequate as of December 31, 2013.

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 employee’s compensation. In addition, the plan provides an annual contribution in amounts authorized by the Board of Directors, subject to the terms and conditions of the plan.

 

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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)

 

Paulin sponsors a Deferred Profit Sharing Plan (“DPSP”) and a Group Registered Retirement Savings Plan (“RRSP”) for all qualified, full time employees, with at least two years of continuous service. DPSP is an employer-sponsored profit sharing plan registered as a trust with the Canada Revenue Agency (“CRA”). On a periodic basis, Paulin shares business profits with employees by contributing to the DPSP on each employee’s behalf. Employees do not contribute to the DPSP. There is no minimum required contribution; however, DPSPs are subject to maximum contribution limits set by the CRA. The DPSP is offered in conjunction with a RRSP. Depending on the level of seniority and Paulin’s profits, required employee contributions to the RRSP vary from one to five percent of the employee’s gross earnings. All eligible employees may contribute an additional voluntary amount of up to eight percent of the employee’s gross earnings. Paulin is required to match 100% of all employee required contributions, where profit criteria are met. The assets of the RRSP are held separately from those of Paulin in independently administered funds.

The Company’s defined contribution plan costs were $1,843, $1,426, and $1,327 in the years ended December 31, 2013, 2012, and 2011, 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 taxes 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 comprehensive loss.

The Company offers a variety of sales incentives to our 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. 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.

Shipping and Handling:

The costs incurred to ship product to customers, including freight and handling expenses, are included in selling, general and administrative (“SG&A”) expenses on the Company’s consolidated statements of comprehensive loss. The Company’s shipping and handling costs were $26,095, $23,067, and $21,695 in the years ended December 31, 2013, 2012, and 2011, 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 Company’s research and development costs were $1,366, $1,222, and $1,187 in the years ended December 31, 2013, 2012, and 2011, 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, The Hillman Companies, Inc. has one class of common stock. All outstanding shares of The Hillman Companies, Inc. 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 fair value at each balance sheet date with the change in fair value recorded in additional paid-in capital. The Company determined that redemption of the shares is probable as they can be put back to Holdco upon death or disability. Accordingly, the 161.2 and 198.3 shares of common stock held by management as of December 31, 2013 and 2012, respectively, were recorded outside permanent equity. These shares have been adjusted to the fair value of $16,975 as of December 31, 2013 and $14,116 as of December 31, 2012.

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 options 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, 2013 and 2012 because the interest rate is variable and approximates current market rates. The fair values of the fixed rate senior notes and junior subordinated debentures at December 31, 2013 and 2012 were determined utilizing current trading prices obtained from indicative market data. See Note 16, Fair Value Measurements.

Derivatives and Hedging:

The Company uses derivative financial instruments to manage our exposures to (1) interest rate fluctuations on our floating rate senior debt; (2) price fluctuations in metal commodities used in our key products; and (3) fluctuations in foreign currency exchange rates. The Company measures those instruments at fair value and recognizes changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures. The Company enters into derivative instrument transactions with financial institutions acting as the counter-party. The Company does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.

 

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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)

 

The relationships between hedging instruments and hedged items are formally documented, in addition to the risk management objective and strategy for each hedge transaction. For interest rate swaps, the notional amounts, rates, and maturities of our interest rate swaps are closely matched to the related terms of hedged debt obligations. The critical terms of the interest rate swap are matched to the critical terms of the underlying hedged item to determine whether the derivatives used for hedging transactions are highly effective in offsetting changes in the cash flows of the underlying hedged item. If it is determined that a derivative ceases to be a highly effective hedge, the hedge accounting is discontinued and all subsequent derivative gains and losses are recognized in the statement of comprehensive income or loss.

Derivative instruments designated in hedging relationships that mitigate exposure to the variability in future cash flows of the variable-rate debt, variable cost of key products and foreign currency exchange rates are considered cash flow hedges. The Company records all derivative instruments in other assets or other liabilities on the consolidated balance sheets at their fair values. If the derivative is designated as a cash flow hedge and the hedging relationship qualifies for hedge accounting, the effective portion of the change in the fair value of the derivative is recorded in other comprehensive income or loss. Instruments not qualifying for hedge accounting are recognized in the statement of comprehensive income or loss in the period of the change. See Note 15, Derivatives and Hedging.

Translation of Foreign Currencies:

The translation of the Company’s Canadian, Mexican, and Australian 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 or loss in stockholders’ equity.

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 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.

Reclassifications:

Certain amounts in the prior year financial statements were reclassified to conform to the current year’s presentation. These reclassifications had no impact on the prior periods’ net income or shareholders’ equity.

 

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

3. Recent Accounting Pronouncements:

In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, “Comprehensive Income”. The update amended the Accounting Standards Codification (“ASC”) to require entities to provide information about amounts reclassified out of other comprehensive income by component. The Company is required to present, either on the face of the financial statements or in the notes, the amounts reclassified from other comprehensive income to the respective line items in the Consolidated Statements of Comprehensive Income. This amendment was effective for interim and annual periods beginning after December 15, 2012. The adoption of this amendment did not have an impact on the Company’s disclosure or the Company’s consolidated results of operations or financial condition.

On July 18, 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Topic 740 does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The objective of the amendments in this update is to eliminate that diversity in practice. The update is effective for fiscal years and interim periods within those years beginning after December 15, 2013. We are currently evaluating the impact of adopting ASU 2013-11 on the consolidated financial statements.

 

4. Acquisitions:

On February 19, 2013, the Company acquired all of the issued and outstanding Class A common shares of H. Paulin & Co., Limited (the “Paulin Acquisition”). The aggregate purchase price of the Paulin Acquisition was $103,416 paid in cash. On March 31, 2013, H. Paulin & Co., Limited was amalgamated with The Hillman Group Canada ULC and continues as a division operating under the trade name of H. Paulin & Co. (“Paulin”).

Paulin is a leading Canadian distributor and manufacturer of fasteners, fluid system products, automotive parts, and retail hardware components. Paulin’s distribution facilities are located across Canada in Vancouver, Edmonton, Winnipeg, Toronto, Montreal, and Moncton, as well as in Flint, Michigan and Cleveland, Ohio. Paulin’s manufacturing facilities are located in Ontario, Canada. Paulin’s annual revenues were approximately $146,389 and $145,700 for 2013 and 2012, respectively.

The following table reconciles the estimated fair value of the acquired assets and assumed liabilities to the total purchase price of the Paulin Acquisition:

 

Accounts receivable

   $ 17,259   

Inventory

     55,552   

Other current assets

     2,701   

Property and equipment

     16,121   

Goodwill

     11,687   

Intangibles

     18,967   
  

 

 

 

Total assets acquired

     122,287   

Less:

  

Deferred income taxes

     5,437   

Liabilities assumed

     13,434   
  

 

 

 

Total purchase price

   $ 103,416   
  

 

 

 

The excess of the purchase price over the net assets has been allocated to goodwill and intangible assets based upon an independent valuation appraisal. The Company has made a Section 338(g) election which will impact the deductibility of goodwill for tax purposes.

 

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

3. Acquisitions: (continued)

 

The following table indicates the unaudited pro-forma financial statements of the Company for the years ended December 31, 2013 and 2012. The pro-forma financial statements give effect to the acquisition of Paulin as if it had occurred on January 1, 2012:

 

     2013     2012  

Net Sales

   $ 717,571      $ 701,123   

Net Loss

     (1,613     (7,460

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, 2012, 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 and Paulin, the Company’s financing arrangements related to the Paulin Acquisition, and certain purchase accounting adjustments.

On December 1, 2011, the Hillman Group purchased certain assets of Micasa Trading Corporation (“Micasa”), a Miami, Florida-based producer of the Ook™ brand of picture hangers and related products (“Ook” or the “Ook Acquisition”). The aggregate purchase price was $14,811 paid in cash. The asset acquisition met the definition of a business for business combinations.

Micasa was established in 1964 and developed into a major supplier of picture hanging fasteners and innovative parts within the retail hardware market. The Ook™ brand’s excellence in this specialty category strengthens Hillman’s position of providing value-added products and services to home centers and hardware retailers.

The following table reconciles the estimated fair value of the acquired Ook Acquisition assets and assumed liabilities to the total purchase price:

 

Account receivable

   $ 2,186   

Inventory

     2,082   

Deferred income taxes

     854   

Goodwill

     3,765   

Intangibles

     7,690   
  

 

 

 

Total assets acquired

     16,577   

Less:

  

Liabilities assumed

     1,766   
  

 

 

 

Total purchase price

   $ 14,811   
  

 

 

 

The excess of the purchase price over the net assets has been allocated to goodwill and intangible assets based upon an independent valuation appraisal. The intangible assets and goodwill are deductible for income tax purposes over a 15 year life.

 

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

4. Acquisitions: (continued)

 

On March 16, 2011, Hillman Group acquired all of the membership interests in TagWorks L.L.C., an Arizona limited liability company (the “TagWorks Acquisition”), for an initial purchase price of approximately $40,000 in cash.

In addition, Hillman Group paid additional consideration of $12,500 to the sellers of TagWorks on October 31, 2011, and also paid additional consideration of $12,500 on March 30, 2012. The March 30, 2012 additional consideration was contingent on the successful achievement of defined revenue and earnings targets for the year ended December 31, 2011.

Founded in 2007, TagWorks provided 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 the TagWorks Acquisition, Hillman Group entered into a seventeen (17) year 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.

The closing of the TagWorks Acquisition occurred concurrently with the offering of $50,000 aggregate principal amount of Hillman Group’s 10.875% Senior Notes due 2018. Hillman Group used the net proceeds of the note offering to fund the TagWorks Acquisition, to repay a portion of indebtedness under our revolving credit facility and to pay related transaction and financing fees. The notes are guaranteed by The Hillman Companies, Inc., Hillman Investment Company, and all of the domestic subsidiaries of Hillman Group.

The following table reconciles the estimated fair value of the acquired TagWorks assets and assumed liabilities to the total purchase price:

 

Account receivable

   $ 735   

Inventory

     1,086   

Other current assets

     217   

Deferred income taxes

     24   

Property and equipment

     17,403   

Goodwill

     14,996   

Intangibles

     34,840   
  

 

 

 

Total assets acquired

     69,301   

Less:

  

Liabilities assumed

     4,622   
  

 

 

 

Total purchase price

   $ 64,679   
  

 

 

 

The excess of the purchase price over the net assets has been allocated to goodwill and intangible assets based upon an independent valuation appraisal. The intangible assets and goodwill are deductible for income tax purposes over a 15 year life.

Effective December 31, 2011, TagWorks was merged with and into Hillman Group, with Hillman Group as the surviving entity.

 

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

5. Related Party Transactions:

The company has recorded management fee charges and expenses from OHCP of $77, $155, and $110 for the years ended December 31, 2013, 2012, and 2011, 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 Company has recorded rental expense for the lease of this facility on an arm’s length basis. The rental expense for the lease of this facility was $311 for each of the years ended December 31, 2013, 2012, and 2011.

In connection with the Paulin Acquisition, the Company entered into three leases on February 19, 2013 for five properties containing industrial warehouse, manufacturing plant, and office facilities. The owners of the properties under one lease are relatives of Richard Paulin, who is employed by The Hillman Group Canada ULC, and the owner of the properties under the other two leases is a company which is owned by Richard Paulin and certain of his relatives. The Company has recorded rental expense for the three leases on an arm’s length basis. The rental expense for the three leases was $687 for the year ended December 31, 2013.

 

6. Income Taxes:

The components of the Company’s income tax provision for the three years ended December 31, 2013 were as follows:

 

     Year Ended December 31,  
     2013     2012     2011  

Current:

      

Federal & State

   $ 552      $ 206      $ 217   

Foreign

     795        344        317   
  

 

 

   

 

 

   

 

 

 

Total current

     1,347        550        534   
  

 

 

   

 

 

   

 

 

 

Deferred:

      

Federal & State

     (2,857     (5,000     (5,119

Foreign

     (890     (746     (271
  

 

 

   

 

 

   

 

 

 

Total deferred

     (3,747     (5,746     (5,390
  

 

 

   

 

 

   

 

 

 

Valuation allowance

     (381     28        177   
  

 

 

   

 

 

   

 

 

 

Provision (benefit) for income taxes

   $ (2,781   $ (5,168   $ (4,679
  

 

 

   

 

 

   

 

 

 

The Company has U.S. federal net operating loss (“NOL”) carryforwards for tax purposes, totaling $54,349 as of December 31, 2013, that are available to offset future taxable income. These carry forwards expire from 2023 to 2032. Management estimates that the Company will not be able to utilize some of the loss carryforwards before they expire due to limitations imposed by Internal Revenue Code Section 382. A valuation allowance with a year-end balance of $6 has been recorded for these deferred tax assets. In addition, the Company’s foreign subsidiaries have NOL carryforwards aggregating $5,895 which expire from 2027 to 2033. Management has recorded a valuation reserve of $507 against the deferred tax assets recorded for the foreign subsidiary.

 

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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 $2,524 which expire from 2014 to 2032. Management estimates that the Company will not be able to utilize some of the loss carryforwards in certain states before they expire. A valuation allowance with a year-end balance of $219 has been recorded for these deferred tax assets. In 2013, the valuation allowance for state net operating loss carryforwards decreased by $149. The decrease was primarily a result of a change in the estimation of the utilization of the net operating losses in the carryforward years. In conjunction with the Paulin Acquisition, the Company has recorded a valuation reserve with a year-end balance of $92 to fully offset the deferred tax asset on a foreign exchange loss carryforward. Management estimated that the Company may not be able to realize the benefit of this deferred tax asset.

The Company fully utilized its federal capital loss carryforward as of December 31, 2013. Management had previously recorded a valuation allowance for this capital loss carryforward to fully offset the deferred tax asset at 2012. In 2013, the valuation allowance for the capital loss carryforward was decreased by $374 due to utilization in the current period. The Company has $232 of general business tax credit carryforwards which expire from 2017 to 2031. A valuation allowance of $149 has been established for these tax credits. The Company has $50 of foreign tax credit carryforwards which expire from 2020 to 2022. The valuation allowance has been reduced by $29 for these tax credits in the current period due to a change in an estimate of foreign source income to be realized in the future.

A deferred tax asset of $1,940 has been recorded for costs that were capitalized in connection with the Merger Transaction. Costs totaling $5,013 were capitalized in connection with the Merger Transaction including $1,138 of investment banking fees, $1,370 of consulting fees, $1,964 of legal and accounting fees, and $541 of other miscellaneous transaction costs. 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 $1,940 for the entire amount of the deferred tax asset related to these non-amortizable capitalized costs.

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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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 Company’s net deferred tax assets and liabilities at December 31, 2013 and 2012:

 

     As of December 31, 2013     As of December 31, 2012  
     Current     Non-current     Current     Non-current  

Deferred Tax Asset:

        

Inventory

   $ 8,377      $ —        $ 5,994      $ —     

Bad debt reserve

     978        —          1,116        —     

Casualty loss reserve

     297        410        708        308   

Accrued bonus / deferred compensation

     1,805        4,608        1,546        1,592   

Litigation settlement accrual

     —          546        —          —     

Derivative security value

     (120     —          740        —     

Medical insurance reserve

     355        —          508        —     

Deferred lease incentive

     —          389        —          422   

Original issue discount amortization

     —          596        —          536   

Transaction costs

     —          3,454        —          3,348   

Federal / foreign net operating loss

     —          20,595        —          23,164   

State net operating loss

     —          2,524        —          2,963   

Unrecognized tax benefit

     —          (2,024     —          (3,002

Federal capital loss carryforwards

     —          —          —          374   

Tax credit carryforwards

     —          2,881        —          2,618   

All other items

     10        718        578        835   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross deferred tax assets

     11,702        34,697        11,190        33,158   

Valuation allowance for deferred tax assets

     (606     (2,302     (726     (2,374
  

 

 

   

 

 

   

 

 

   

 

 

 

Net deferred tax assets

   $ 11,096      $ 32,395      $ 10,464      $ 30,784   
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred Tax Liability:

        

Intangible asset amortization

   $ —        $ 135,335      $ —        $ 135,946   

Property and equipment

     —          17,106        —          12,504   

All other items

     —          14        —          283   
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax liabilities

   $ —        $ 152,455      $ —        $ 148,733   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net deferred tax liability

     $ 108,964        $ 107,485   
    

 

 

     

 

 

 

Long term net deferred tax liability

     $ 120,060        $ 117,949   

Current net deferred tax asset

       11,096          10,464   

Long term net deferred tax asset

       —            —     
    

 

 

     

 

 

 

Net deferred tax liability

     $ 108,964        $ 107,485   
    

 

 

     

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

6. Income Taxes: (continued)

 

Realization of the net deferred tax assets is dependent on the reversal of deferred tax liabilities and generating sufficient taxable income prior to their expiration. Although realization is not assured, management estimates it is more likely than not that the net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced.

Hillman is subject to income taxes in the United States and in certain foreign jurisdictions. In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2013, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $1,260 of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested.

Below is a reconciliation of statutory income tax rates to the effective income tax rates for the periods indicated:

 

     Year Ended December 31,  
     2013     2012     2011  

Statutory federal income tax rate

     35.0     35.0     35.0

Non-U.S. taxes and the impact of non-U.S. losses for which a current tax benefit is not available

     -19.6     -6.1     -0.9

State and local income taxes, net of U.S. federal income tax benefit

     -0.1     1.9     2.5

Adjustment of reserve for change in valuation allowance and other items

     15.0     1.2     -1.2

Adjustment for change in tax law

     8.9     -0.4     -2.6

Adjustment of unrecognized tax benefits

     36.6     11.6     0.0

Permanent differences:

      

Acquisition and related transaction costs

     -4.0     -0.9     0.0

Meals and entertainment expense

     -3.5     -1.1     -0.9

Other permanent differences

     0.0     0.0     0.0

Reconciliation of tax provision to return

     2.0     0.5     0.5

Reconciliation of other adjustments

     0.5     0.0     0.0
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     70.8     41.7     32.4
  

 

 

   

 

 

   

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

6. Income Taxes: (continued)

 

On September 13, 2013, the US Treasury and IRS issued final Tangible Property Regulations (“TPR”) under IRC Section 162 and IRC Section 263(a). These regulations address the acquisition, production and improvement of tangible property, and also the disposition of property. The regulations are not effective until tax years beginning on or after January 1, 2014; however, certain portions may require an accounting method change on a retroactive basis, thus requiring an IRC Section 481(a) adjustment related to fixed and real asset deferred taxes. The accounting rules under ASC 740 treat the release of the regulations as a change in tax law as of the date of issuance and require the Company to determine whether there will be an impact on its financial statements. Any such impact of the final tangible property regulations would affect temporary deferred taxes only and result in a balance sheet reclassification between current and deferred taxes. The Company is currently analyzing the expected impacts of the TPR but does not believe that they will have a material impact on the Company’s consolidated financial statements. The Company will continue to monitor the impact of any future changes to the TPR on the Company prospectively.

The Company has recorded a $1,538 decrease in the reserve for unrecognized tax benefits in the twelve month period ended December 31, 2013 related to the expiration of the statute of limitations for an earlier year. The unrecognized tax benefits are shown in the financial statements as a reduction of the deferred tax asset for the Company’s net operating loss carryforwards. The Company has increased its reserve for unrecognized tax benefits $560 in the twelve month period ended December 31, 2013 related to items previously recognized by the acquired company in its financial statements. A summary of the changes for the last three years follows:

 

     2013     2012     2011  

Unrecognized tax benefits - January 1

   $ 3,002      $ 4,440      $ 4,433   

Gross increases - tax positions in current period

     —          —          7   

Gross increases - tax positions in prior period

     560        —          —     

Gross decreases - tax positions in prior period

     (1,538     (1,438     —     
  

 

 

   

 

 

   

 

 

 

Unrecognized tax benefits - December 31

   $ 2,024      $ 3,002      $ 4,440   
  

 

 

   

 

 

   

 

 

 

Amount of unrecognized tax benefit that, if recognized would affect the company’s effective tax rate

   $ 2,024      $ 3,002      $ 4,440   
  

 

 

   

 

 

   

 

 

 

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. In conjunction with the adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB No. 109, “Accounting for Income Taxes”, which was codified in ASC 740-10, the Company has not recognized any adjustment of interest or penalties in its consolidated financial statements due to its net operating loss position. The Company does not anticipate a decrease in the unrecognized tax benefits for the tax year ending December 31, 2014.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

6. Income Taxes: (continued)

 

The Company files a consolidated income tax return in the U.S. and numerous consolidated and separate income tax returns in various states and foreign jurisdictions. As of December 31, 2013, with a few exceptions, the Company is no longer subject to U.S. federal, state, and foreign tax examinations by tax authorities for the tax years prior to 2010. However, the IRS can make adjustments to losses carried forward by the Company from 2006 forward and utilized on its federal return.

 

7. Property and Equipment:

Property and equipment, net, consists of the following at December 31, 2013 and 2012:

 

     Estimated              
     Useful Life              
     (Years)    2013      2012  

Land

   n/a    $ 1,166       $ 531   

Buildings

   27      2,758         778   

Leasehold improvements

   3-10      5,808         5,044   

Machinery and equipment

   2-10      143,002         102,494   

Furniture and fixtures

   3-5      1,102         835   

Construction in process

        3,352         2,899   
     

 

 

    

 

 

 

Property and equipment, gross

        157,188         112,581   

Less: Accumulated depreciation

        61,370         44,089   
     

 

 

    

 

 

 

Property and equipment, net

      $ 95,818       $ 68,492   
     

 

 

    

 

 

 

Machinery and equipment includes capitalized software of $13,270 and $10,972 as of December 31, 2013 and 2012, respectively. Capitalized interest of $182 and $109 was recorded for the years ended December 31, 2013 and 2012, respectively.

The depreciation expense for depreciable assets was $24,796, $22,009, and $21,333 for the years ended December 31, 2013, 2012, and 2011, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

8. Other Intangibles:

Definite-lived intangible assets are amortized over their useful lives and are subject to impairment testing. The values assigned to intangible assets in connection with the Merger Transaction and the acquisitions of Servalite, TagWorks, Ook, and Paulin were determined through separate independent appraisals. In connection with the Merger Transaction, the Company acquired the Quick-Tag™ license for consideration amounting to $11,500. Other intangibles, net as of December 31, 2013 and 2012 consist of the following:

 

     Estimated              
     Useful Life    December 31,      December 31,  
     (Years)    2013      2012  

Customer relationships

   20    $ 341,500       $ 328,382   

Trademarks - All Others

   Indefinite      54,082         49,413   

Trademarks - TagWorks

   5      240         240   

Patents

   5-20      20,250         20,250   

Quick Tag license

   6      11,500         11,500   

Laser Key license

   5      1,250         1,250   

KeyWorks license

   10      4,100         4,100   

Non compete agreements

   5-10      4,450         4,450   

Lease agreement

   0.5      —           240   
     

 

 

    

 

 

 

Intangible assets, gross

        437,372         419,825   

Less: Accumulated amortization

        75,007         53,181   
     

 

 

    

 

 

 

Other intangibles, net

      $ 362,365       $ 366,644   
     

 

 

    

 

 

 

The amortization expense for amortizable assets was $22,112, $21,752, and $20,717 for the years ended December 31, 2013, 2012, and 2011, respectively. For the years ending December 31, 2014, 2015, 2016, 2017, and 2018 the amortization expense for amortizable assets is estimated to be $22,200, $21,539, $19,608, $18,754, and $18,754, respectively.

 

9. Long-Term Debt:

On May 28, 2010, the Company and certain of its subsidiaries completed the financing on a $320,000 senior secured first lien credit facility (the “Senior Facilities”), consisting of a $290,000 term loan and a $30,000 revolving credit facility (“Revolver”). The term loan portion of the Senior Facilities had a six year term and the Revolver had a five year term. Prior to a subsequent amendment, the Senior Facilities provided 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 was subject to a minimum floor of 1.75% and the Base Rate was subject to a minimum floor of 2.75%.

The Senior Facilities contain financial and operating covenants which require the Company to maintain certain financial ratios, including a secured leverage ratio. This debt agreement provides 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

9. Long-Term Debt: (continued)

 

Effective April 18, 2011, the Company completed an amendment to the credit agreement governing our Senior Facilities. The Senior Facilities amendment eliminated the total leverage and interest coverage covenants and reduced the secured leverage covenant to 4.75x with no future step downs. The term loan pricing was modified to reduce the Eurodollar Margin and the Base Rate Margin by 25 basis points and reduce the floor on Eurodollar and Base Rate Loans by an additional 25 basis points. In connection with the amendment to the credit agreement, the Company incurred loan discount costs of $1,250. As the modification of the Senior Facilities agreement was not substantial, the unamortized loan discount and debt issuance costs will be amortized over the term of the amended Senior Facilities.

Effective November 4, 2011, the Company entered into a Joinder Agreement to our credit agreement under the existing Senior Facilities (the “2011 Incremental Facility”). The 2011 Incremental Facility increased the aggregate term loan commitments available to Hillman Group under the Senior Facilities by $30,000. In connection with the 2011 Incremental Facility, the Company incurred loan discount costs of $750. The modification of the Senior Facilities agreement was not substantial and the unamortized loan discount costs are amortized over the term of the amended Senior Facilities. The aggregate principal amount of commitments under the Senior Facilities, after giving effect to the 2011 Incremental Facility, was $350,000. The Company used the proceeds for general corporate purposes.

Effective November 7, 2012, the Company entered into a Joinder Agreement (the “2012 Incremental Facility”) to our credit agreement under the existing $320,000 Senior Secured First Lien Credit Facility (the “Senior Facilities”). The 2012 Incremental Facility increased the aggregate term loan commitments available to Hillman Group under the Senior Facilities by $76,800. Subject to the conditions precedent to each funding date described in Section 17 of the 2012 Incremental Facility, the Company could make two drawings under the 2012 Incremental Facility on any business day after November 7, 2012 and prior to April 1, 2013. On February 19, 2013, the Company drew down on funds from the 2012 Incremental Facility in order to fund the permitted Paulin Acquisition. The aggregate principal amount of commitments under the Senior Facilities, after giving effect to the 2012 Incremental Facility, was $420,000.

Effective February 14, 2013, the Company completed an amendment to the credit agreement governing our Senior Facilities. The Senior Facilities amendment modified the term loan pricing to reduce the EuroDollar margin by 50 basis points to 3.00% and reduce the EuroDollar floor on EuroDollar loans by an additional 25 basis points to 1.25%. This amendment modified the term loan pricing to reduce the base rate margin by 50 basis points to 2.00% and reduce the floor on base rate loans by an additional 25 basis points to 2.25%. This amendment also extends the maturity date of the term loan facilities by one year to May 28, 2017.

Effective December 19, 2013, the Company completed an amendment to the credit agreement governing our Senior Facilities. The Senior Facilities amendment modified the term loan pricing to reduce the EuroDollar margin by 25 basis points to 2.75% and reduce the EuroDollar floor on EuroDollar term loans by an additional 25 basis points to 1.00%. This amendment modified the term loan pricing to reduce the base rate margin by 25 basis points to 1.75% and reduce the floor on base rate term loans by an additional 25 basis points to 2.00%. The Company was in compliance with all provisions and covenants of the amended Senior Facilities as of December 31, 2013.

Concurrently with the Merger Transaction, Hillman Group issued $150,000 aggregate principal amount of our senior notes due 2018 (the “10.875% Senior Notes”). On March 16, 2011, Hillman Group completed an offering of $50,000 aggregate principal amount of

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

9. Long-Term Debt: (continued)

 

10.875% Senior Notes. Hillman Group received a premium of $4,625 on the $50,000 10.875% Senior Notes offering. On December 21, 2012, Hillman Group completed an offering of $65,000 aggregate principal amount of 10.875% Senior Notes. Hillman Group received a premium of $4,225 on the $65,000 10.875% Senior Notes offering. The 10.875% Senior Notes are guaranteed by The Hillman Companies, Inc., Hillman Investment Company, and all of the domestic subsidiaries of Hillman Group. Hillman Group pays interest on the 10.875% Senior Notes semi-annually on June 1 and December 1 of each year.

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 $105,443, or $12,231 per annum in the aggregate. The Trust will redeem the Trust Preferred Securities when the Junior Subordinated Debentures are repaid, or at maturity on September 30, 2027. The Trust distributes an equivalent amount to the holders of the Trust Preferred Securities. 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 a Deferral Period, the Company is required to accrue the full amount of all interest payable, and such deferred interest payable would become immediately payable by the Company at the end of the Deferral Period. There were no deferrals of distribution payments to holders of the Trust Preferred Securities in 2013 or 2012.

As of December 31, 2013 and 2012, long-term debt is summarized as follows:

 

     2013      2012  

Revolving credit agreement

   $ —         $ —     

Term Loan B

     381,609         310,927   

10.875% Senior Notes

     271,750         272,942   

Capital leases and other obligations

     556         1,064   
  

 

 

    

 

 

 
     653,915         584,933   

Less: amounts due in one year

     4,187         4,019   
  

 

 

    

 

 

 

Long-term debt

   $ 649,728       $ 580,914   
  

 

 

    

 

 

 

The aggregate minimum principal maturities of the long-term debt, excluding the discount of $3,790 on Term Loan B and unamortized premium of $6,750 on the 10.875% Senior Notes, for each of the five years following December 31, 2013 are as follows:

 

     Amount  

2014

   $ 4,187   

2015

     4,125   

2016

     4,104   

2017

     373,539   

2018

     265,000   

2019 and thereafter

     —     

As of December 31, 2013, the Company had $26,121 available under our revolving credit agreement and letter of credit commitments outstanding of $3,879. The Company had outstanding debt of $385,955 under our secured credit facilities at December 31, 2013, consisting of $385,399 in Term B-2 loans and $556 in capitalized lease and other

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

9. Long-Term Debt: (continued)

 

obligations. The term loan consisted of $385,399 in Term B-2 Loans currently at a three (3) month LIBOR rate of 3.75%. The capitalized lease and other obligations were at various interest rates.

 

10. Leases:

Certain warehouse, office space, and equipment are leased under capital and operating leases with terms in excess of one year. Future minimum lease payments under non-cancellable leases consisted of the following at December 31, 2013:

 

     Capital
Leases
    Operating
Leases
 

2014

   $ 239      $ 10,680   

2015

     169        7,597   

2016

     141        6,253   

2017

     45        5,300   

2018

     —          4,976   

Later years

     —          32,488   
  

 

 

   

 

 

 

Total minimum lease payments

     594      $ 67,294   
    

 

 

 

Less amounts representing interest

     (38  
  

 

 

   

Present value of net minimum lease payments (including $219 currently payable)

   $ 556     
  

 

 

   

The rental expense for all operating leases was $11,788, $8,787, and $9,039 for the years ended December 31, 2013, 2012, and 2011, respectively. Certain leases are subject to terms of renewal and escalation clauses.

 

11. Deferred Compensation Plan:

The Company maintains a deferred compensation plan for key employees (the “Nonqualified Deferred Compensation Plan” or “NQDC”) which allows the participants to defer up to 25% of salary and commissions and up to 100% of bonuses to be paid during the year and invest these deferred amounts into certain Company directed mutual fund investments, subject to the election of the participants. The Company is permitted to make a 25% matching contribution on deferred amounts up to $10, subject to a five year vesting schedule.

As of December 31, 2013 and 2012, the Company’s consolidated balance sheets included $4,386 and $4,245, respectively, in restricted investments representing the assets held in mutual funds to fund deferred compensation liabilities owed to the Company’s current and former employees. The current portion of the restricted investments was $2,856 and $846 as of December 31, 2013 and 2012, respectively.

The assets held in the NQDC are classified as an investment in trading securities. The Company recorded trading gains and offsetting compensation expense of $364, $329, and $19 for the years ended December 31, 2013, 2012, and 2011, respectively.

During the years ended December 31, 2013, 2012, and 2011, distributions from the deferred compensation plan aggregated $864, $357, and $233, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

12. Guaranteed Preferred Beneficial Interest in the Company’s Junior Subordinated Debentures:

In September 1997, The Hillman Group Capital Trust, a Grantor trust, completed a $105,446 underwritten public offering of 4,217,724 11.6% Trust Preferred Securities (“TOPrS”). The Trust invested the proceeds from the sale of the preferred securities in an equal principal amount of 11.6% Junior Subordinated Debentures of Hillman due September 2027.

The Trust distributes monthly cash payments it receives from the Company as interest on the debentures to preferred security holders at an annual rate of 11.6% on the liquidation amount of $25.00 per preferred security.

In connection with the public offering of TOPrS, the Trust issued $3,261 of trust common securities to the Company. The Trust invested the proceeds from the sale of the trust common securities in an equal principal amount of 11.6% Junior Subordinated Debentures of Hillman due September 2027. The Trust distributes monthly cash payments it receives from the Company as interest on the debentures to the Company at an annual rate of 11.6% on the liquidation amount of the common security.

The Company may defer interest payments on the debentures at any time, for up to 60 consecutive months. If this occurs, the Trust will also defer distribution payments on the preferred securities. The deferred distributions, however, will accumulate interest at a rate of 11.6% per annum. The Trust will redeem the preferred securities when the debentures are repaid, or at maturity on September 30, 2027. The Company may redeem the debentures before their maturity at a price equal to 100% of the principal amount of the debentures redeemed, plus accrued interest. When the Company redeems any debentures before their maturity, the Trust will use the cash it receives to redeem preferred securities and common securities as provided in the trust agreement. The Company guarantees the obligations of the Trust on the Trust Preferred Securities.

The Company has determined that the Trust is a variable interest entity and the holders of the Trust Preferred Securities are the primary beneficiaries of the Trust. Accordingly, the Company has de-consolidated the Trust. Summarized below is the financial information of the Trust as of December 31, 2013:

 

Non-current assets - junior subordinated debentures - preferred

   $ 111,680   

Non-current assets - junior subordinated debentures - common

     3,261   
  

 

 

 

Total assets

   $ 114,941   
  

 

 

 

Non-current liabilities - trust preferred securities

   $ 111,680   

Stockholder’s equity - trust common securities

     3,261   
  

 

 

 

Total liabilities and stockholders’ equity

   $ 114,941   
  

 

 

 

The non-current assets for the Trust relate to its investment in the 11.6% junior subordinated deferrable interest debentures of Hillman due September 30, 2027.

The TOPrS constitute mandatorily redeemable financial instruments. The Company guarantees the obligations of the Trust on the Trust Preferred Securities. Accordingly, the guaranteed preferred beneficial interest in the Company’s junior subordinated debentures is presented in long-term liabilities in the accompanying consolidated balance sheet.

 

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12. Guaranteed Preferred Beneficial Interest in the Company’s Junior Subordinated Debentures: (continued)

 

On May 28, 2010, the Junior Subordinated Debentures were recorded at the fair value of $116,085 based on the price underlying the Trust Preferred Securities of $26.75 per share upon close of trading on the NYSE Amex on that date plus the liquidation value of the trust common securities. The Company is amortizing the premium on the Junior Subordinated Debentures of $7,381 over their remaining life.

 

13. Common and Preferred Stock:

Common Stock

After consummation of the Merger Transaction, The Hillman Companies, Inc. has one class of common stock. All outstanding shares of The Hillman Companies, Inc. 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 redemption value which equals fair value at each balance sheet date with the change in fair value recorded in additional paid-in capital. Accordingly, the 161.2 and 198.3 shares of common stock held by management as of December 31, 2013 and 2012, respectively, were recorded outside permanent equity. These shares have been adjusted to the fair value of $16,975 as of December 31, 2013 and $14,116 as of December 31, 2012.

Preferred Stock

The Hillman Companies has one class of preferred stock, with 5,000 shares authorized and none issued or outstanding as of December 31, 2013.

 

14. Stock-Based Compensation:

OHCP HM Acquisition Corp. 2010 Stock Option Plan:

Effective May 28, 2010, Holdco established the OHCP HM Acquisition Corp. 2010 Stock Option Plan, as amended (the “Option Plan”), pursuant to which Holdco may grant options for up to an aggregate of 49,239 shares of its common stock. The Option Plan is administered by a committee of the Holdco board of directors. Such committee determines the terms of each option grant under the Option Plan, except that the exercise price of any granted option may not be lower than the fair market value of one share of common stock of Holdco as of the date of grant.

Under the Option Plan, Holdco granted 32,284 options in 2010, 1,030 options in 2011, 7,375 options in 2012, and 8,550 options in 2013. The options were granted with an exercise price which was equal to the grant date fair value of the underlying securities. As of December 31, 2013, options for a total of 4,733 shares have been canceled and options for 183 shares have been exercised.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

14. Stock-Based Compensation: (continued)

 

Option holders are not required by the terms of the Option Agreement or the Stockholders Agreement to hold the shares for any period of time following exercise. Liability classification is required because this arrangement permits the holders to put the shares back without being exposed to the risks and rewards of the shares for a reasonable period of time. Consistent with past practice, the Company has elected to use the intrinsic value method to value the options. The stock option liability was $9,618 and $714 as of December 31, 2013 and 2012, respectively.

Stock options granted to management under the Option Plan are divided into three equal vesting tranches. The first tranche is a service-based award which vests ratably over five years, subject to the optionee’s continued employment with the Company on each vesting date. The Company will recognize compensation costs for the portion of the awards that are service based on a straight-line basis over the requisite service period for the entire award. The second tranche is performance-based and vests ratably over five years (if granted prior to 2013) or four years (if granted during 2013), subject to both the optionee’s continued employment on each vesting date and the achievement of Company performance targets. Again, compensation costs will be recognized for the performance based awards over the requisite service period for each of the five or four, as applicable, separate vesting service periods. However, if achievement of the applicable performance target is not probable, no compensation cost will be recorded. The third tranche of each stock option grant is outcome-based and depends on OHCP receiving a certain rate of return upon a change in control, provided that the optionee is still employed by the Company at the time of such change in control. This provision would be viewed as having a performance condition due to the change in control requirement and that condition would only be probable at the time that the change in control occurred, and accordingly, the Company will not recognize compensation expense for the third tranche until a change in control is deemed to be probable.

The Company has elected to use the intrinsic value method to value the options at the end of each reporting period. The intrinsic value of the common shares exceeded the exercise price of the options at December 31, 2013, and therefore, compensation expense of $9,006 was recorded in the accompanying consolidated statements of comprehensive loss for the year ended December 31, 2013. The intrinsic value of the common shares exceeded the exercise price of the options at December 31, 2012, and therefore, compensation expense of $714 was recorded in the accompanying consolidated statements of comprehensive loss for the year ended December 31, 2012. The intrinsic value of the common shares was equal to the exercise price at December 31, 2011, and therefore, no compensation expense was recorded in the accompanying consolidated statements of comprehensive loss for the year ended December 31, 2011.

OHCP HM Acquisition Corp. Deferred Stock Unit Plan U.S.:

Effective December 31, 2013, Holdco established the OHCP HM Acquisition Corp. Deferred Stock Unit Plan U.S. for Senior Officers (the “DSU Plan”). The DSU Plan permits an eligible executive to elect to have a short-term incentive award to be paid in the form of deferred stock units, which are bookkeeping entries equivalent in value to one share of Holdco common stock. The number of deferred stock units to be credited to a DSU Plan participant’s account is determined by dividing the amount of the participant’s short-term incentive award to be deferred into deferred stock units by the Fair Market Value (as defined in the Option Plan) of a share of common stock on December 31st of the calendar year in which occurred the end of the performance period to which the short-term incentive award applies. Deferred stock units are redeemable and the value thereof payable upon the termination of employment or death of DSU Plan participant.

Under the DSU Plan, Holdco granted 780 deferred stock units in 2013.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

15. Derivatives and Hedging:

The Company uses derivative financial instruments to manage our exposures to (1) interest rate fluctuations on our floating rate senior debt; (2) price fluctuations in metal commodities used in our key products; and (3) fluctuations in foreign currency exchange rates. The Company measures those instruments at fair value and recognizes changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures.

Interest Rate Swap Agreements - On June 24, 2010, the Company entered into a forward Interest Rate Swap Agreement (the “2010 Swap”) with a two-year term for a notional amount of $115,000. The forward start date of the 2010 Swap was May 31, 2011 and it terminated on May 31, 2013. The 2010 Swap fixed the interest rate at 2.47% plus the applicable interest rate margin.

The 2010 Swap was initially designated as a cash flow hedge. Effective April 18, 2011, the Company executed the second amendment to the credit agreement which modified the interest rate on the Senior Facilities. The critical terms for the 2010 Swap no longer matched the terms of the amended Senior Facilities and the 2010 Swap was de-designated. As a result, $643 of previously unrecognized losses recorded as a component of other comprehensive income or loss was recognized as interest expense in year ended December 31, 2011. The 2011 adjustments of $284 to the fair value of the 2010 Swap were recorded as a reduction in interest expense in the statement of comprehensive loss for the favorable change in fair value since December 31, 2010.

At December 31, 2012, the fair value of the 2010 Swap was $(418) and was reported on the consolidated balance sheet in other current liabilities with a reduction in interest expense recorded in the statement of comprehensive loss for the favorable change of $787 in fair value since December 31, 2011.

At December 31, 2013, the 2010 Swap had no value. The 2013 adjustments of $418 to the fair value of the 2010 Swap were recorded as a reduction in interest expense in the statement of comprehensive loss for the favorable change in fair value since December 31, 2012.

Interest Rate Cap Agreements - On May 20, 2013, the Company entered into an Interest Rate Cap Agreement (the “2013 Rate Cap No. 1”) with a two-year term for a notional amount of $150,000 and the maximum LIBOR interest rate set at 1.25%. 2013 Rate Cap No. 1 became effective on May 28, 2013 and is scheduled to mature on May 28, 2015.

On May 20, 2013, the Company entered into an Interest Rate Cap Agreement (the “2013 Rate Cap No. 2”) with a two-year term for a notional amount of $75,000 and the maximum LIBOR interest rate set at 1.25%. 2013 Rate Cap No. 2 became effective on May 28, 2013 and is scheduled to mature on May 28, 2015.

As of December 31, 2013, the fair value of the interest rate caps of $53 was reported on the consolidated balance sheet in non-current other assets. The Company’s interest rate cap agreements did not qualify for hedge accounting treatment because they did not meet the provisions specified in ASC 815, Derivatives and Hedging, (“ASC 815”). Accordingly, the unrealized loss of $81 on these derivatives was recognized in current earnings in other expense.

 

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15. Derivatives and Hedging: (continued)

 

Metal Swap Agreements - On April 20, 2012, the Company entered into a Commodity Metal Swap Agreement (the “2012 Metal Swap No. 1”) with an approximate eight-month term for 35 MT of copper at a notional amount of $294.7. The maturity date was December 31, 2012 and the 2012 Metal Swap No. 1 fixed the copper price at $8.42 per MT.

On May 30, 2012, the Company entered into a Commodity Metal Swap Agreement (the “2012 Metal Swap No. 2”) with an approximate seven-month term for 10 MT of copper at a notional amount of $77.9. The maturity date was December 31, 2012 and the 2012 Metal Swap No. 2 fixed the copper price at $7.79 per MT.

On May 30, 2012, the Company entered into a Commodity Metal Swap Agreement (the “2012 Metal Swap No. 3”) with an approximate ten-month term for 35 MT of copper at a notional amount of $272.5. The maturity date was March 31, 2013 and the 2012 Metal Swap No. 3 fixed the copper price at $7.785 per MT.

The Company uses metal commodity swap agreements to hedge anticipated purchases of key blanks which can fluctuate with changes in copper prices. The Company’s current metal swap agreements did not qualify for hedge accounting treatment because they did not meet the provisions specified in ASC 815. Accordingly, the gain or loss on these derivatives was recognized in current earnings.

At December 31, 2012, the fair value of 2012 Metal Swap No. 1 was $17 and was reported on the consolidated balance sheet in other current assets with a decrease in cost of sales recorded in the statement of comprehensive loss for the favorable change in fair value since the inception date in the second quarter of 2012. At December 31, 2012, the fair value of 2012 Metal Swap No. 2 and 2012 Metal Swap No. 3 was ($6) and was reported on the consolidated balance sheet in other current liabilities with an increase in cost of sales recorded in the statement of comprehensive loss for the unfavorable change in fair value since the inception dates in the second quarter of 2012.

As of December 31, 2013, each of the 2012 metal swap agreements have expired and had no value.

Foreign Currency Forward Contract - On December 18, 2012, the Company entered into a Foreign Currency Forward Contract (the “2012 FX Contract”) with an approximate six-month term for a notional amount of C$105,000. The 2012 FX Contract maturity date was May 21, 2013 and fixed the Canadian to U.S. dollar forward exchange rate at 0.9989. The purpose of the 2012 FX Contract was to manage the Company’s exposure to fluctuations in the exchange rate of the Canadian dollar investment used in the Paulin Acquisition.

At December 31, 2012, the fair value of the 2012 FX Contract was ($1,475) and was reported on the consolidated balance sheet in other current liabilities with an increase in other expense recorded in the statement of comprehensive loss for the unfavorable change in fair value since its inception.

The 2012 FX Contract was settled in connection with the Paulin Acquisition. Prior to its settlement on February 19, 2013, an increase in other expense of $1,138 was recorded in the statement of comprehensive loss for the unfavorable change in fair value from December 31, 2012. The Company’s 2012 FX Contract did not qualify for hedge accounting treatment because it did not meet the provisions specified in ASC 815. Accordingly, the gain or loss on these derivatives was recognized in current earnings.

 

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15. Derivatives and Hedging: (continued)

 

During 2013, the Company entered into multiple foreign currency forward contracts (the “2013 FX Contracts”) with maturity dates ranging from July 2013 to December 2014 and a total notional amount of $42,050. The 2013 FX Contracts fixed the Canadian to U.S. dollar forward exchange rate at points ranging from 1.02940 to 1.08210. The purpose of the 2013 FX Contracts was to manage the Company’s exposure to fluctuations in the exchange rate of the Canadian dollar. The Company’s 2013 FX Contracts did not qualify for hedge accounting treatment because they did not meet the provisions specified in ASC 815. Accordingly, the gain or loss on these derivatives was recognized in current earnings.

At December 31, 2013, the fair value of the 2013 FX Contracts was ($42) and was reported on the consolidated balance sheet in other current liabilities with an increase in other expense of $42 recorded in the statement of comprehensive loss.

The Company does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.

 

16. Fair Value Measurements:

The Company uses the accounting guidance that applies to all assets and liabilities that are being measured and reported on a fair value basis. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

Level 1:    Quoted market prices in active markets for identical assets or liabilities.
Level 2:    Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3:    Unobservable inputs reflecting the reporting entity’s own assumptions.

The accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize the use of unobservable inputs. An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement.

 

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16. Fair Value Measurements: (continued)

 

The following tables set forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis during the period, by level, within the fair value hierarchy:

 

                                                   
     As of December 31, 2013  
     Level 1      Level 2     Level 3      Total  

Trading securities

   $ 4,386       $ —        $ —         $ 4,386   

Interest rate caps

     —           53        —           53   

Foreign exchange forward contracts

     —           (42     —           (42

 

                                                   
     As of December 31, 2012  
     Level 1      Level 2     Level 3      Total  

Trading securities

   $ 4,245       $ —        $ —         $ 4,245   

Interest rate swap

     —           (418     —           (418

Foreign exchange forward contract

     —           (1,475     —           (1,475

Metal commodity swaps

     —           (11     —           (11

Trading securities are valued using quoted prices on an active exchange. Trading securities represent assets held in a Rabbi Trust to fund deferred compensation liabilities and are included as restricted investments on the accompanying consolidated balance sheets.

The unrealized gains on these securities of $364, $329, and $19 were recorded as other income by the Company for the years ended December 31, 2013, 2012, and 2011, respectively. An offsetting entry for the same amount, increasing the deferred compensation liability and compensation expense within SG&A, was also recorded for the years ended December 31, 2013, 2012, and 2011.

The Company utilizes interest rate cap and interest rate swap contracts to manage our targeted mix of fixed and floating rate debt, and these contracts are valued using observable benchmark rates at commonly quoted intervals for the full term of the cap and swap contracts. As of December 31, 2013, the interest rate caps were included in other non-current assets on the accompanying consolidated balance sheet. As of December 31, 2012 the interest rate swap was included in other current liabilities on the accompanying consolidated balance sheet. As of December 31, 2013 the interest rate swap had expired and had no value.

The Company utilizes foreign exchange forward contracts to manage our exposure to currency fluctuations in the Canadian dollar versus the U.S. dollar. The forward contracts were valued using observable benchmark rates at commonly quoted intervals during the term of the forward contract. The foreign exchange forward contracts were included in other current liabilities as of December 31, 2013 and December 31, 2012 on the accompanying consolidated balance sheets.

The Company utilizes metal commodity swap contracts to manage our exposure to price fluctuations in metal commodities used in our key products, and these swaps are valued using observable benchmark rates at commonly quoted intervals for the full term of the swaps. The metal commodity swap contracts were included in other current assets and liabilities as of December 31, 2012 on the accompanying consolidated balance sheet. As of December 31, 2013, all of the 2012 metal commodity swap contracts have expired and had no value.

 

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16. Fair Value Measurements: (continued)

 

The fair value of the Company’s fixed rate senior notes and junior subordinated debentures as of December 31, 2013 and 2012 were determined by utilizing current trading prices obtained from indicative market data. As a result, the fair value measurement of the Company’s senior term loans is considered to be Level 2.

 

     December 31, 2013      December 31, 2012  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

10.875% Senior Notes

   $ 271,750       $ 285,538       $ 272,942       $ 283,881   

Junior Subordinated Debentures

     114,941         131,480         115,132         128,949   

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short term maturity of these instruments and the carrying value of the variable rate senior term loans approximates fair value as the interest rate is variable and approximates current market rates.

 

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17. Commitments and Contingencies:

The Company self-insures our product liability, automotive, workers’ compensation, and general liability losses up to $250 per occurrence. Catastrophic coverage has been purchased from third party insurers for occurrences in excess of $250 up to $40,000. The two risk areas involving the most significant accounting estimates are workers’ compensation and automotive liability. Actuarial valuations performed by the Company’s outside risk insurance expert were used by the Company’s management to form the basis for workers’ compensation and automotive liability loss reserves. The actuary contemplated the Company’s specific loss history, actual claims reported, and industry trends among statistical and other factors to estimate the range of reserves required. Risk insurance reserves are comprised of specific reserves for individual claims and additional amounts expected for development of these claims, as well as for incurred but not yet reported claims. The Company believes that the liability of approximately $1,832 recorded for such risk insurance reserves is adequate as of December 31, 2013.

As of December 31, 2013, the Company has provided certain vendors and insurers letters of credit aggregating $3,879 related to our product purchases and insurance coverage of product liability, workers’ compensation and general liability.

The Company self-insures our group health claims up to an annual stop loss limit of $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. Provisions for losses expected under these programs are recorded based on an analysis of historical insurance claim data and certain actuarial assumptions. The Company believes that the liability of approximately $2,200 recorded for such group health insurance reserves is adequate as of December 31, 2013.

On November 23, 2011, Steelworks Hardware LLC, the owner of the Steelworks trademark and a party to a licensing and marketing agreement with Hillman that originated in 2005 and automatically renewed for a three year period beginning in May 2010, filed a complaint against Hillman Group, Ace Hardware Corporation, Lowe’s Companies, Inc., Lowe’s Home Centers, Inc. and True Value Company in the United States District Court for the Northern District of Illinois Eastern Division. The complaint alleged a series of claims against Hillman Group and the other named defendants, including trademark and trade dress infringement in violation of the Lanham Act, violations of Illinois Consumer Fraud and Unfair Trade Practices Acts, and common law breach of contract, conspiracy and tort claims.

On March 20, 2012, the Company agreed to pay $1,635 to Steelworks Hardware LLC in full settlement of all alleged claims and plaintiff legal fees in this matter. The settlement cost and plaintiff legal fees were recorded in our consolidated results of operations for the year ended December 31, 2011.

On May 4, 2010, Hy-Ko 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 May 4, 2010 filing against the Company was based, in part, on the Company’s previously-filed claim against Hy-Ko alleging infringement of certain patents of the Company. A claim construction hearing on the Company’s patent infringement claim against Hy-Ko occurred in September 2010. A ruling on the claim construction hearing was handed down on November 22, 2011 and was favorable to the Company’s position.

 

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17. Commitments and Contingencies: (continued)

 

On November 7, 2012, the Company entered into a mutual release, covenant not to sue, patent license, and settlement agreement with Hy-Ko for settlement of both the antitrust case and patent infringement case. In consideration for a payment from Hy-Ko, the Company granted fully paid-up, worldwide, non-transferable, irrevocable, non-exclusive licenses under two of the Company’s patents for several of Hy-Ko’s existing commercialized automated key-cutting equipment. In addition, the Company agreed to make a payment to Hy-Ko in full settlement of all alleged claims in the antitrust matter. All claims and counterclaims between Hy-Ko and the Company in both the patent case and the antitrust case have been dismissed with prejudice. The sale of the license and the settlement cost were recorded in net sales and SG&A expense, respectively, in our consolidated results of operations for the year ended December 31, 2012.

On October 1, 2013, the Company filed a complaint against Minute Key Inc., a manufacturer of fully-automatic, self-service key duplication kiosks, in the United States District Court for the Southern District of Ohio Western Division, seeking a declaratory judgment of non-infringement and invalidity of a U.S. patent issued to Minute Key Inc. on September 10, 2013. The Company’s filing against Minute Key Inc. was in response to a letter dated September 10, 2013 in which Minute Key Inc. alleged that the Company’s FastKey™ product infringes the newly-issued patent.

On October 23, 2013, Minute Key Inc. filed an answer and counterclaim against the Company alleging patent infringement and requesting that the court dismiss the Company’s complaint and enter judgment against the Company that the Company is willfully and deliberately infringing the patent, granting a permanent injunction, and awarding unspecified monetary damages to Minute Key Inc.

Because the lawsuit is in a preliminary stage, it is not yet possible to assess the impact, if any, that the lawsuit will have on the Company. However, the Company believes that it has a meritorious claim and meritorious defenses to the counterclaim and intends to pursue the lawsuit vigorously.

In addition, legal proceedings are pending which are either in the ordinary course of business or incidental to the Company’s business. Those legal proceedings incidental to the business of the Company are generally not covered by insurance or other indemnity. In the opinion of the Company’s management, the ultimate resolution of the pending litigation matters will not have a material adverse effect on the consolidated financial position, operations, or cash flows of the Company.

 

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18. Statements of Cash Flows:

Supplemental disclosures of cash flows information are presented below:

 

     Year Ended December 31,  
     2013      2012      2011  

Cash paid during the period for:

        

Interest on junior subordinated debentures

   $ 12,232       $ 12,232       $ 12,232   
  

 

 

    

 

 

    

 

 

 

Interest

   $ 45,260       $ 38,880       $ 38,192   
  

 

 

    

 

 

    

 

 

 

Income taxes

   $ 1,078       $ 479       $ 749   
  

 

 

    

 

 

    

 

 

 

Non-cash investing activities:

        

Property and equipment purchased with capital lease

   $ 358       $ 155       $ —     
  

 

 

    

 

 

    

 

 

 

 

19. Quarterly Data (unaudited):

 

2013

   Total     Fourth     Third      Second      First  

Net sales

   $ 701,641      $ 172,629      $ 192,382       $ 192,711       $ 143,919   

Income from operations

     56,441        8,655        22,429         17,573         7,784   

Net (loss) income

     (1,148     (2,974     1,748         4,663         (4,585

 

2012

   Total     Fourth     Third      Second      First  

Net sales

   $ 555,465      $ 131,682      $ 148,169       $ 147,241       $ 128,373   

Income from operations

     40,968        3,611        13,581         14,941         8,835   

Net (loss) income

     (7,234     (6,810     1,107         1,056         (2,587

 

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20. Concentration of Credit Risks:

Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company places our cash and cash equivalents with high credit quality financial institutions. Concentrations of credit risk with respect to sales and trade receivables are limited due to the large number of customers comprising the Company’s customer base and their dispersion across geographic areas. The Company performs periodic credit evaluations of our customers’ financial condition and generally does not require collateral.

For the year ended December 31, 2013, the largest three customers accounted for 39.7% of sales and 44.2% of the year-end accounts receivable balance. For the year ended December 31, 2012, the largest three customers accounted for 40.1% of sales and 49.7% of the year-end accounts receivable balance. For the year ended December 31, 2011, the largest three customers accounted for 41.0% of sales and 52.0% of the year-end accounts receivable balance. No other customer accounted for more than 5.0% of the Company’s total sales in 2013, 2012, or 2011.

Concentration of credit risk with respect to purchases and trade payables are limited due to the large number of vendors comprising the Company’s vendor base, with dispersion across different industries and geographic areas. The Company’s largest vendor in terms of annual purchases accounted for 5.0% of the Company’s total purchases and 2.0% of the Company’s total trade payables on December 31, 2013. The Company’s largest vendor in terms of annual purchases accounted for 6.7% of the Company’s total purchases and 4.7% of the Company’s total trade payables on December 31, 2012. The Company’s largest vendor in terms of annual purchases accounted for 10.0% of the Company’s total purchases and 3.9% of the Company’s total trade payables on December 31, 2011.

 

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21. Segment Reporting and Geographic Information:

The Company’s segment reporting structure uses the Company’s management reporting structure as the foundation for how the Company manages our business. The Company periodically evaluates our segment reporting structure in accordance with ASC 350-20-55 and has concluded that it has five reportable segments as of December 31, 2013. During 2013, the operations of Paulin were combined into the operations of the Canada segment. The United States segment, excluding All Points and the Canada segment are considered material by Company’s management as of December 31, 2013. The segments are as follows:

 

  United States - excluding the All Points division

 

  All Points

 

  Canada

 

  Mexico

 

  Australia

The United States segment distributes fasteners and related hardware items, threaded rod, keys, key duplicating systems, and accessories, and identification items, such as tags and letters, numbers, and signs to hardware stores, home centers, mass merchants, and other retail outlets primarily in the United States. This segment also provides innovative pet ID tag programs to a leading pet products chain retailer using a unique, patent-protected/patent-pending technology and product portfolio.

The All Points segment is a Florida-based distributor of commercial and residential fasteners catering to the hurricane protection industry in the southern United States. All Points has positioned itself as a major supplier to manufacturers of railings, screen enclosures, windows, and hurricane shutters.

The Canada segment distributes fasteners and related hardware items, threaded rod, keys, key duplicating systems, accessories, and identification items, such as tags and letters, numbers, and signs to hardware stores, home centers, mass merchants, industrial distributors, automotive after market distributors, and other retail outlets and industrial Original Equipment Manufacturers (“OEMs”) in Canada. The Canada segment also produces fasteners, stampings, fittings, and processes threaded parts for automotive suppliers and industrial OEMs.

The Mexico segment distributes fasteners and related hardware items to hardware stores, home centers, mass merchants, and other retail outlets in Mexico.

The Australia segment distributes keys, key duplicating systems, and accessories to home centers and other retail outlets in Australia.

The Company uses profit or loss from operations to evaluate the performance of our segments. Profit or loss from operations is defined as income from operations before interest and tax expenses. Hillman accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Segment revenue excludes intersegment sales related to the sales or transfer of products between segments which is consistent with the segment revenue information provided to the Company’s chief operating decision maker. Segment Income (Loss) from Operations for Mexico and Australia include insignificant costs allocated from the United States, excluding All Points segment, while the remaining operating segments do not include any allocations.

 

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21. Segment Reporting and Geographic Information (continued):

 

The table below presents revenues and income from operations for the reportable segments for the years ended December 31, 2013, 2012, and 2011.

 

     Year Ended December 31,  
     2013     2012     2011  

Revenues

      

United States, excluding All Points

   $ 541,037      $ 517,135      $ 473,431   

All Points

     20,798        18,837        15,236   

Canada

     132,158        12,555        11,762   

Mexico

     6,842        6,268        5,832   

Australia

     806        670        265   
  

 

 

   

 

 

   

 

 

 

Total revenues

   $ 701,641      $ 555,465      $ 506,526   
  

 

 

   

 

 

   

 

 

 

Segment Income from Operations

      

United States, excluding All Points

   $ 52,255      $ 42,896      $ 38,075   

All Points

     1,737        881        487   

Canada

     2,847        (3,050     (727

Mexico

     629        787        942   

Australia

     (1,027     (546     (324
  

 

 

   

 

 

   

 

 

 

Total segment income from operations

   $ 56,441      $ 40,968      $ 38,453   
  

 

 

   

 

 

   

 

 

 

 

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21. Segment Reporting and Geographic Information (continued):

 

Assets by segment as of December 31, 2013 and 2012 were as follows:

 

     Year Ended December 31,  
     2013      2012  

Assets:

     

United States, excluding All Points

   $ 936,008       $ 1,133,824   

All Points

     8,379         7,298   

Canada

     300,906         15,477   

Mexico

     17,964         17,816   

Australia

     1,599         1,378   
  

 

 

    

 

 

 

Total Assets

   $ 1,264,856       $ 1,175,793   
  

 

 

    

 

 

 
     Year Ended December 31,  
     2013      2012  

Cash & cash equivalents

     

United States, excluding All Points

   $ 27,632       $ 62,918   

All Points

     714         429   

Canada

     5,039         1,084   

Mexico

     1,570         1,066   

Australia

     14         51   
  

 

 

    

 

 

 

Consolidated cash & cash equivalents

   $ 34,969       $ 65,548   
  

 

 

    

 

 

 

Following is revenue based on products for the Company’s significant product categories:

 

     Year Ended December 31,  
     2013      2012      2011  

Net sales

        

Keys

   $ 90,518       $ 86,943       $ 85,410   

Engraving

     48,442         48,979         41,734   

Letters, numbers and signs

     34,045         32,251         33,079   

Fasteners

     450,234         308,770         279,564   

Threaded rod

     31,802         33,326         31,135   

Code cutter

     2,680         2,851         3,312   

Builders hardware

     17,320         16,370         10,080   

Other

     26,600         25,975         22,212   
  

 

 

    

 

 

    

 

 

 

Consolidated net sales

   $ 701,641       $ 555,465       $ 506,526   
  

 

 

    

 

 

    

 

 

 

 

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22. Acquisition and Integration Expenses:

For the year ended December 31, 2013, the Company incurred $8,638 of expenses for banking, legal, and other professional fees incurred in connection with the Paulin Acquisition.

For the year ended December 31, 2012, the Company incurred $3,031 of expenses for banking, legal, and other professional fees incurred in connection with the Ook Acquisition and the Paulin Acquisition.

For the year ended December 31, 2011, the Company incurred $2,805 of expenses for banking, legal, and other professional fees incurred in connection with the Merger Transaction, Servalite Acquisition, TagWorks Acquisition, Ook Acquisition, and the start-up of operations for Hillman Australia.

 

23. Supplemental Consolidating Guarantor and Non-Guarantor Financial Information:

The 10.875% Senior Notes, of which $265,000 aggregate principal amount was outstanding as of December 31, 2013, were issued by the Hillman Group and are fully and unconditionally guaranteed on a joint and several basis by The Hillman Companies, Inc., Hillman Investment Company and certain of the Company’s wholly owned subsidiaries. The non-guarantor information presented represents the Australian, Canadian, and Mexican subsidiaries.

The following financial information presents consolidating statements of comprehensive loss, balance sheets, and cash flows for the Hillman Group, all guarantor subsidiaries, all non-guarantor subsidiaries, and the eliminations necessary to provide the consolidated results for the Hillman Companies and subsidiaries. For purposes of this presentation, investments in subsidiaries have been accounted for using the equity method of accounting. The principal consolidating adjustments eliminate investment in subsidiary and intercompany balances and transactions.

 

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23. Supplemental Consolidating Guarantor and Non-Guarantor Financial Information (continued):

 

Consolidating Statements of Comprehensive Loss

For the year ended December 31, 2013

(Amounts in thousands)

 

     Guarantors
The Hillman
Companies, Inc.
    Issuer
The Hillman
Group, Inc.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Net sales

   $ —        $ 529,949      $ 31,886      $ 139,806      $ —        $ 701,641   

Cost of sales (exclusive of depreciation and amortization shown separately below)

     —          251,491        22,836        84,999        —          359,326   

Selling, general and administrative expenses

     9,370        168,073        6,589        41,619        —          225,651   

Acquisition and integration expense

     —          2,931        74        5,633        —          8,638   

Depreciation

     —          22,381        85        2,330        —          24,796   

Amortization

     18,058        3,087        —          967        —          22,112   

Intercompany administrative (income) expense

     —          (348     —          348        —          —     

Management and transaction fees to related party

     —          77        —          —          —          77   

Other (income) expense, net

     (364     3,661        (158     1,461        —          4,600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     (27,064     78,596        2,460        2,449        —          56,441   

Intercompany interest (income) expense

     (12,232     12,259        —          (27     —          —     

Interest (income) expense, net

     (190     41,930        —          6,398        —          48,138   

Interest expense on junior subordinated debentures

     12,610        —          —          —          —          12,610   

Investment income on trust common securities

     (378     —          —          —          —          (378
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in subsidiaries’ income

     (26,874     24,407        2,460        (3,922     —          (3,929

Equity in subsidiaries’ income (loss)

     21,936        (2,471     —          —          (19,465     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (4,938     21,936        2,460        (3,922     (19,465     (3,929

Income tax provision (benefit)

     (3,790     —          867        142        —          (2,781
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (1,148   $ 21,936      $ 1,593      $ (4,064   $ (19,465   $ (1,148
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

            

Foreign currency translation adjustments

     —          (5,643     —          (99     —          (5,742
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (1,148   $ 16,293      $ 1,593      $ (4,163   $ (19,465   $ (6,890
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

23. Supplemental Consolidating Guarantor and Non-Guarantor Financial Information (continued):

 

Consolidating Statements of Comprehensive Loss

For the year ended December 31, 2012

(Amounts in thousands)

 

     Guarantors
The Hillman
Companies, Inc.
    Issuer
The Hillman
Group, Inc.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Net sales

   $ —        $ 517,135      $ 18,837      $ 19,493      $ —        $ 555,465   

Cost of sales (exclusive of depreciation and amortization shown separately below)

     —          247,976        14,162        12,878        —          275,016   

Selling, general and administrative expenses

     1,043        174,667        3,717        8,903        —          188,330   

Acquisition and integration expense

     —          3,031        —          —          —          3,031   

Depreciation

     —          21,839        88        82        —          22,009   

Amortization

     18,058        3,298        —          396        —          21,752   

Intercompany administrative (income) expense

     —          (347     —          347        —          —     

Management and transaction fees to related party

     —          155        —          —          —          155   

Other (income) expense, net

     (358     4,877        (11     (304     —          4,204   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     (18,743     61,639        881        (2,809     —          40,968   

Intercompany interest (income) expense

     (12,232     12,232        —          —          —          —     

Interest (income) expense, net

     (279     41,415        —          2        —          41,138   

Interest expense on junior subordinated debentures

     12,610        —          —          —          —          12,610   

Investment income on trust common securities

     (378     —          —          —          —          (378
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in subsidiaries’ income

     (18,464     7,992        881        (2,811     —          (12,402

Equity in subsidiaries’ income (loss)

     4,774        (2,023     —          —          (2,751     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (13,690     5,969        881        (2,811     (2,751     (12,402

Income tax provision (benefit)

     (6,456     1,195        333        (240     —          (5,168
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (7,234   $ 4,774      $ 548      $ (2,571   $ (2,751   $ (7,234
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

            

Foreign currency translation adjustments

     —          —          —          1,051        —          1,051   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (7,234   $ 4,774      $ 548      $ (1,520   $ (2,751   $ (6,183
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

23. Supplemental Consolidating Guarantor and Non-Guarantor Financial Information (continued):

 

Consolidating Statements of Comprehensive Loss

For the year ended December 31, 2011

(Amounts in thousands)

 

     Guarantors
The Hillman
Companies, Inc.
    Issuer
The Hillman
Group, Inc.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  

Net sales

   $ —        $ 465,033      $ 23,634      $ 17,859      $ —        $ 506,526   

Cost of sales (exclusive of depreciation and amortization shown separately below)

     —          227,641        14,627        10,223        —          252,491   

Selling, general and administrative expenses

     19        155,891        7,026        6,830        —          169,766   

Acquisition and integration expense

     —          2,642        —          163        —          2,805   

Depreciation

     —          21,139        121        73        —          21,333   

Amortization

     18,433        2,077        207        —          —          20,717   

Intercompany administrative (income) expense

     —          (240     —          238        2        —     

Management and transaction fees to related party

     —          110        —          —          —          110   

Other (income) expense, net

     (19     447        (16     441        (2     851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     (18,433     55,326        1,669        (109     —          38,453   

Intercompany interest (income) expense

     (12,231     12,231        —          —          —          —     

Interest (income) expense, net

     (426     41,105        —          —          —          40,679   

Interest expense on junior subordinated debentures

     12,610        —          —          —          —          12,610   

Investment income on trust common securities

     (378     —          —          —          —          (378
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in subsidiaries’ income

     (18,008     1,990        1,669        (109     —          (14,458

Equity in subsidiaries’ income (loss)

     2,677        836        —          —          (3,513     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (15,331     2,826        1,669        (109     (3,513     (14,458

Income tax provision (benefit)

     (5,552     149        608        116        —          (4,679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (9,779   $ 2,677      $ 1,061      $ (225   $ (3,513   $ (9,779
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

            

Foreign currency translation adjustments

     —          —          —          (179     —          (179

Change in derivative security value

     —          624        —          —          —          624   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (9,779   $ 3,301      $ 1,061      $ (404   $ (3,513   $ (9,334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

23. Supplemental Consolidating Guarantor and Non-Guarantor Financial Information (continued):

 

Consolidating Balance Sheet

As of December 31, 2013

(Amounts in thousands)

 

     Guarantors
The Hillman
Companies, Inc.
    Issuer
The Hillman
Group, Inc.
     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
ASSETS              

Current assets

             

Cash and cash equivalents

   $ 1      $ 27,553       $ 792      $ 6,623      $ —        $ 34,969   

Restricted investments

     2,856        —           —          —          —          2,856   

Accounts receivable

     —          71,173         1,043        15,299        —          87,515   

Inventories

     —          101,386         10,048        66,450        (304     177,580   

Deferred income taxes

     10,041        —           830        830        (605     11,096   

Other current assets

     —          6,006         322        2,754        —          9,082   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     12,898        206,118         13,035        91,956        (909     323,098   

Intercompany notes receivable

     105,446        103,422         —          (103,422     (105,446     —     

Intercompany interest receivable

     —          1,975         —          —          (1,975     —     

Investments in subsidiaries

     (648,310     28,122         507        263,216        356,465        —     

Property and equipment

     —          81,406         400        14,012        —          95,818   

Goodwill

     418,947        24,512         2,701        19,787        280        466,227   

Other intangibles

     293,774        42,959         250        25,382        —          362,365   

Restricted investments

     1,530        —           —          —          —          1,530   

Deferred income taxes

     31,349        —           (616     2,095        (32,828     —     

Deferred financing fees

     —          9,798         —          —          —          9,798   

Investment in trust common securities

     3,261        —           —          —          —          3,261   

Other assets

     —          2,442         25        292        —          2,759   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 218,895      $ 500,754       $ 16,302      $ 313,318      $ 215,587      $ 1,264,856   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Current liabilities

             

Accounts payable

   $ —        $ 25,610       $ 1,036      $ 17,723      $ —        $ 44,369   

Current portion of senior term loans

     —          3,968         —          —          —          3,968   

Intercompany interest payable

     —          —           —          1,975        (1,975  

Current portion of capitalized lease and other obligations

     —          219         —          —          —          219   

Accrued expenses:

             

Salaries and wages

     —          8,462         287        3,115        —          11,864   

Pricing allowances

     —          3,791         1        2,418        —          6,210   

Income and other taxes

     (568     2,267         30        1,392        —          3,121   

Interest

     —          2,674         —          —          —          2,674   

Deferred compensation

     2,856        —           —          —          —          2,856   

Other accrued expenses

     —          6,191         261        2,579        —          9,031   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     2,288        53,182         1,615        29,202        (1,975     84,312   

 

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Table of Contents

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

 

23. Supplemental Consolidating Guarantor and Non-Guarantor Financial Information (continued):

 

Consolidating Balance Sheet

As of December 31, 2013

(Amounts in thousands)

 

     Guarantors
The Hillman
Companies, Inc.
    Issuer
The Hillman
Group, Inc.
    Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
LIABILITIES AND STOCKHOLDERS’ EQUITY (CONTINUED)              

Intercompany debt payable

     —          105,446        —           —          (105,446     —     

Long term senior term loans

     —          377,641        —           —          —          377,641   

Long term portion of capitalized lease and other obligations

     —          337        —           —          —          337   

Long term senior notes

     —          271,750        —           —          —          271,750   

Junior subordinated debentures

     114,941        —          —           —          —          114,941   

Deferred compensation

     1,530        —          —           —          —          1,530   

Deferred income taxes, net

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