March 27, 2020 - 10-K: Annual report pursuant to Section 13 and 15(d)

Form: 10-K

Documents

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 28, 2019

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.)

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 ☒

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 ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark 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. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):



Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒ (Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

On March 27, 2020, 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 30, 2019 was $143,613,502.

PART I

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. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. 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 our current expectations, assumptions, and projections about future events. Although we believe 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 our 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, as defined herein, 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.

Item 1 – Business.

General

The Hillman Companies, Inc. and its wholly-owned subsidiaries (collectively, “Hillman” or “Company”) are one of the largest providers of hardware-related products and related merchandising services to retail markets in North America. Our principal business is operated through our wholly-owned subsidiary, The Hillman Group, Inc. and its wholly-owned subsidiaries (collectively, “Hillman Group”), which had net sales of approximately $1,214.4 million in 2019. Hillman Group sells its products to hardware stores, home centers, mass merchants, pet supply stores, and other retail outlets principally in the United States, Canada, Mexico, 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; personal protective equipment, such as gloves and eye-wear; and identification items, such as tags and letters, numbers, and signs. We support product sales with services that include design and installation of merchandising systems and maintenance of appropriate in-store inventory levels.

Our headquarters are located at 10590 Hamilton Avenue, Cincinnati, Ohio. We maintain 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.

On August 16, 2019, we acquired the assets of Sharp Systems, LLC ("Resharp"), a California-based innovative developer of automated knife sharpening systems, for a cash payment of $3.0 million and contingent consideration valued at $18.1 million. The maximum payout for the contingent consideration is $25.0 million plus 1.8% of net knife-sharpening revenues for five years after the $25.0 million is fully paid. Resharp has business operations in the United States and its financial results reside within our Consumer Connected Solutions segment.

On October 1, 2018, we completed the acquisition of NB Parent Company, Inc. and its affiliated companies including Big Time Products, LLC and Rooster Products International, Inc. (collectively, "Big Time"), a leading provider of Personal Protective Solutions and work gear products for a purchase price of approximately $348.8 million. With the addition of Big Time, Hillman’s product portfolio now spans the hardware, automotive, garden, and cleaning categories and includes Big Time’s industry-leading brands such as Firm Grip, AWP, McGuire-Nicholas, Grease Monkey, and Gorilla Grip, which are sold throughout retailers in North America. Big Time has operations in the United States, Canada, and Mexico and is included in our Fastening, Hardware, and Personal Protective Solutions segment.

On August 10, 2018, we completed the acquisition of Minute Key Holdings, Inc. (“MinuteKey”), an innovative leader in self-service key duplicating kiosks, for a total consideration reflecting an enterprise value of $156.3 million. We believe that the combination of MinuteKey's self service kiosk business with Hillman's existing key duplication platform will create additional growth opportunities. MinuteKey has operations in the United States and Canada and is included in our Consumer Connected Solutions segment.

On November 8, 2017, we entered into an Asset Purchase Agreement with Hargis Industries, LP doing business as ST Fastening Systems ("STFS") and other related parties pursuant to which Hillman acquired substantially all of the assets, and assumed certain liabilities, of STFS. STFS, which is located in Tyler, Texas, specializes in manufacturing and distributing threaded self-drilling fasteners, foam closure strips, and other accessories to the steel-frame, post-frame, and residential building markets. Pursuant to the terms of the Agreement, we paid a cash purchase price of approximately $47.3 million. The STFS business is included in our Fastening, Hardware, and Personal Protective Solutions segment.

Hillman Group

We are comprised of three separate operating business segments: (1) Fastening, Hardware, and Personal Protective Solutions, (2) Consumer Connected Solutions, and (3) Canada.

In the fourth quarter of 2019, the Company implemented a plan to restructure the management and operations of our U.S. business to achieve synergies and cost savings associated with the recent acquisitions. The restructuring plan includes management realignment, integration of sales and operations functions, and strategic review of our product offerings. We incurred charges of $9.5 million in the year ended December 28, 2019, primarily related to inventory valuation adjustments and severance (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional details).

In connection with the restructuring, and to better support the review of our results, we have revised the classification of certain product categories and associated costs within our operating segment reporting structure. In the fourth quarter of 2019, we moved from a geographic segment structure to a hybrid product based and geographic structure. This change aligns the reportable segments with the information reviewed by our chief operating decision maker. Concurrent with this change, the Company has revised prior period segment information to be consistent with the current period presentation. There was no impact on previously reported consolidated revenues, total operating expenditures, operating income or net income as a result of these changes.

We provide products such as fasteners and related hardware items; threaded rod and metal shapes; keys, key duplication systems, and accessories; builder's hardware; personal protective equipment, such as gloves and eye-wear; 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. We complement our extensive product selection with regular retailer visits by our field sales and service organization.

We market and distribute a wide variety of stock keeping units (“SKUs”) of small, hard-to-find and hard-to-manage hardware items. We function as a category manager for retailers and support 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 manner. We complement our broad range of products with 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. We regularly refresh 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.

We operate from 25 strategically located distribution centers in North America. Our main distribution centers utilize state-of-the-art warehouse management systems (“WMS”) to ship customer orders within 48 hours while achieving a very high order fill rate. We also supplement our operations with third-party logistics providers to warehouse and ship customer orders in the certain areas.

Products and Suppliers

Our product strategy concentrates on providing total project solutions using the latest technology for common and unique home improvement projects. Our portfolio provides retailers the assurance that their shoppers can find the right product at the right price within an 'easy to shop' environment.

We currently manage a worldwide supply chain comprised of a large number of vendors, the largest of which accounted for approximately 2.8% of the Company's annual purchases and the top five of which accounted for approximately 11.6% of its annual purchases. Our 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.

Fastening, Hardware, and Personal Protective Solutions

Fastening and Hardware Solutions

Fastening and hardware remains the core of our business. The product line encompasses one of the largest selections among suppliers servicing the retail hardware industry. Fastening solutions consist of three categories: core fasteners, construction fasteners, and anchors. Core fasteners include nuts, bolts, screws, washers, and specialty items. Construction fasteners include deck, drywall, metal screws, and both hand driven and collated nails. Anchors include hollow wall and solid wall items such as plastic anchors, toggle bolts, concrete screws, and wedge anchors. Hardware consists of builders’ hardware, threaded rod and metal shapes, picture hanging, home décor, and letters, numbers, and signs (“LNS”).

There are several brands within the Fastening product category. The core fastener line is marketed under the Hillman name for its brand. Construction fasteners have several brands including: PowerPro™, Deckplus™, and Fas-n-Tite™. Our premium line of PowerPro™ products are specifically engineered for ultimate performance with the most advanced materials, coatings, and designs and have earned the reputation and trust of both professionals and homeowners through its availability in retailers nationwide.

The builder's hardware category includes a variety of common household items such as coat hooks, door stops, hinges, gate latches, and decorative hardware. We market the builder's hardware products under the Hardware Essentials™ brand and provide the retailer with innovation in both product and merchandising solutions. 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 in store while digital content including pictures and videos assist the on-line journey. Hardware Essentials™ provides retailers and consumers decorative upgrade opportunities through contemporary finishes and designs.

The wall hanging category includes traditional picture hanging hardware and the High & Mighty™ series of tool-free wall hangers, decorative hooks and floating shelves that was launched in 2017.

We are the leading supplier of metal shapes and threaded rod in the retail market. The SteelWorks™ threaded rod product includes hot and cold rolled rod, both weldable 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 and Menard's, and through cooperatives such as Ace Hardware. In addition, we are the primary supplier of metal shapes to many wholesalers throughout the country.

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.

On November 8, 2017, we acquired STFS. STFS, which is located in Tyler, Texas, specializes in manufacturing and distributing threaded self-drilling fasteners, foam closure strips, and other accessories to the steel-frame, post-frame, and residential building markets. STFS added $51.4 million, $47.2 million and $5.9 million in revenue for the years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.

Fastening and hardware solutions generated approximately $607.2 million of revenues in 2019, as compared to $581.3 million in 2018 and $529.0 million in 2017.

Personal Protective Solutions

In October 2018, we completed the acquisition of NB Parent Company, Inc. and its affiliated companies including Big Time Products, LLC and Rooster Products International, Inc. (collectively, "Big Time"), a leading provider of personal protective and work gear products. With the addition of Big Time, our product portfolio now spans the hardware, automotive, garden, and cleaning categories and includes Big Time’s industry-leading brands such as Firm Grip, AWP, McGuire-Nicholas, Grease Monkey, and Gorilla Grip, which are sold throughout retailers in North America. Big Time’s high-quality products like gloves, wearable tool storage, jobsite storage and kneepads, as well as outstanding customer service and award-winning packaging have had a dramatic impact on the industry.

Personal protective solutions generated approximately $245.8 million and $55.4 million of revenues in the years ended December 28, 2019 and December 29, 2018, respectively. There were no sales of personal protective solutions prior to the Big Time acquisition.

Consumer Connected Solutions

Our Consumer Connected Solutions segment consists primarily of key duplication and engraving solutions that are tailored to the unique need of the consumer. We provide these offerings in retail and other high-traffic locations offering customized licensed and unlicensed products targeted to consumers in the respective locations. It also includes our associate-assisted key duplication systems and key accessories. Our programs include product and category management, merchandising services, and access to our proprietary key duplicating equipment.

Keys and Key Accessories

We design and manufacture proprietary equipment which forms the cornerstone for our key duplication business. Our 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. We design, manufacture, and assemble the key duplication kiosks in our Tempe, Arizona facility.

This proprietary equipment for key duplication varies by retail channel to fit that channel’s specific needs. The Hillman key program targets the F&I hardware retailers with a traditional machine that works well in businesses with lower turnover and highly skilled employees. The Axxess Precision Key Duplication System™ continues to be the most prevalent system with approximately 8,000 programs placed and marketed to national retailers requiring a high volume key duplication program easily mastered by novice associates. Our Precision Laser Key System™ 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. Approximately 2,700 of these key duplicating systems are in service throughout North American retailers. The Hillman KeyKrafter™ is our most innovative and effective key duplication equipment. It provides significant reduction in duplication time while increasing accuracy and ease of use. Additionally, with the KeyKrafter™ solution, the capability exists for consumers to securely store and retrieve digital back-ups of their key without the original though the revolutionary Hillman KeyHero™ smart phone application. There are over 5,400 KeyKrafter™ programs placed in North American retailers. Finally, in the automotive key space, we offer the SmartBox Automotive Key Programmer which is a tool to quickly and easily pair transponder keys, remotes, and smart keys. There are over 2,800 SmartBox programs placed in retailers throughout North America.

In 2018, we completed the acquisition of MinuteKey, the world's first self-service key duplication machine. The accuracy of robotics technology put to work in an innovative way makes MinuteKey machines easy to use, convenient and fast. The kiosk is completely self-service and has a 100% customer satisfaction guarantee. We have over 6,000 MinuteKey machines located in high-traffic locations of some of the largest retailers throughout North America.

We also market keys and key accessories in conjunction with our duplication systems. Our proprietary key offering features the universal blank which uses a "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. We continually refresh the retailer's key offering by introducing decorated and licensed keys and accessories. Our Wackey™ and Fanatix™ lines feature decorative themes of art and popular licenses such as NFL, Disney, Breast Cancer Awareness, and M&M's to increase personalization, purchase frequency and average transaction value per key. We also market a successful line of decorative and licensed lanyards.

Keys and key accessories generated approximately $185.5 million of revenues in 2019, as compared to $143.9 million in 2018 and $115.9 million in 2017.

Engraving

In addition, we supply a variety of innovative options of consumer-operated vending systems such as Quick-Tag™, TagWorks™, and FIDO™ for engraving specialty items such as pet identification tags, luggage tags, and other engraved identification tags. We have developed unique engraving systems leveraging state-of-the-art technologies to provide a customized solution for mass merchant, pet supply retailers, and other high traffic areas such as theme parks. As of December 29, 2018, over 7,500 of our engraving systems are in service in retail locations which are also supported by our sales and service representatives.

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

We design, manufacture, and assemble the engraving kiosks in our Tempe, Arizona facility. Engraving generated approximately $50.6 million of revenues in 2019, as compared to $52.1 million in 2018 and $55.7 million in 2017.

Canada

Our 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 aftermarket distributors, and other retail outlets and industrial Original Equipment Manufacturers (“OEMs”) in Canada. The product lines offered in our Canada segment are consistent with the product offerings detailed above. The Canada segment also produces made to order screws and self-locking fasteners for automotive suppliers, OEMs, and industrial distributors.

Our Canada segment generated approximately $125.3 million of revenues in 2019, as compared to $141.4 million in 2018 and $137.8 million in 2017.

Markets and Customers

We sell our products to national accounts such as Lowe's, Home Depot, Walmart, Tractor Supply, Menard's, PetSmart, and PETCO. Our status as a national supplier of proprietary products to big box retailers allows us to develop a strong market position and high barriers to entry within our product categories.

We service a wide variety of F&I retail outlets. These individual dealers are typically members of the larger cooperatives, such as Ace Hardware, True Value, and Do-It-Best. We ship directly to the cooperative's retail locations and also supply 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 us 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 possibly denying the retailer the opportunity to sell items that generate higher dollar sales.

We sell our products to a large volume of customers, the top three of which accounted for approximately $637.0 million, or approximately 52%, of our total revenue in 2019. For the year ended December 28, 2019, Home Depot was the single largest customer, representing approximately $291.9 million of our total revenues, Lowe's was the second largest at approximately $251.3 million, and Walmart was the third largest at approximately $93.9 million of our total revenue. No other customer accounted for more than 5.0% of total revenue in 2019. In each of the years ended December 28, 2019, December 29, 2018 and December 30, 2017, we derived over 10% of our total revenues from Lowe's and Home Depot which operated in each of our operating segments.

In 2019, Hillman continued to expanded its B2B eCommerce platform allowing certain customers to order online through the Company’s website, www.hillmangroup.com. The B2B eCommerce platform features over 50,000 items available for sale online and over 2,500 customers are enrolled with the online ordering platform. We continue to support direct-to-store and direct-to-consumer fulfillment for consumers who choose to order fasteners directly from retailers' websites, supporting over 30,000 items that are available for sale.

Sales and Marketing

We provide product support and customer service for our retail distribution partners. We believe that our competitive advantage is in our ability to provide a greater level of customer service than our competitors.

Service is the hallmark of Hillman company-wide. The national accounts field service organization consists of approximately 650 employees and 50 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 our largest customers use electronic data interchange (“EDI”) for processing of orders and invoices.

We employ what we believe to be the largest direct sales force in the industry. The sales force, which consists of approximately 250 employees and is managed by 30 field managers, focuses on the F&I customers. The depth of the sales and service team enables us to maintain consistent call cycles ensuring that all customers experience proper stock levels and inventory turns. This team also prepares 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 our inside sales and customer service teams. On average, each sales representative is responsible for approximately 60 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 sell and support our product lines. Our 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 to the sales force. The department is organized along our three marketing competencies: product management, channel marketing, and marketing communications.

Competition

Our primary competitors in the national accounts marketplace for fasteners are Illinois Tool Works Inc., Dorman Products Inc., Midwest Fastener Corporation, Primesource Building Products, Inc., and competition from direct import by our customers. Our national competitors for gloves and personal protective equipment include West Chester Protective Gear, PIP, Iron Clad and MidWest Quality Gloves, Inc. 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 helps to preserve this market segment.

The principal competitors for our F&I business are Midwest Fastener and Hy-Ko Products Company (“Hy-Ko”) in the hardware store marketplace. Midwest Fastener primarily focuses on fasteners, while Hy-Ko is the major competitor in LNS products and keys/key accessories. The hardware outlets that purchase our products without regularly scheduled sales representative visits may also purchase products from local and regional distributors and cooperatives. We compete primarily on field service, merchandising, as well as product availability, price, and depth of product line.

Insurance Arrangements

Under our current insurance programs, commercial umbrella coverage is obtained for catastrophic exposure and aggregate losses in excess of expected claims. We retain the exposure on certain expected losses related to workers' compensation, general liability, and automobile claims. We also retain the exposure on expected losses related to health benefits of certain employees. We believe that our present insurance is adequate for our businesses. See Note 15 - Commitments and Contingencies, of Notes to Consolidated Financial Statements.

Employees

As of December 28, 2019, we had 3,764 full time and part time employees, none of which were covered by a collective bargaining agreement. In our opinion, employee relations are good.

Backlog

We do not consider the sales backlog to be a significant indicator of future performance due to the short order cycle of our business. Our sales backlog from ongoing operations was approximately $19.2 million as of December 28, 2019 and approximately $14.9 million as of December 29, 2018. We expect to realize the entire December 28, 2019 backlog during fiscal 2020.

Where You Can Find More Information

We file quarterly reports on Form 10-Q and annual reports on Form 10-K and furnish current reports on Form 8-K and other information with the Securities and Exchange Commission (the “Commission”). 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, annual reports on Form 10-K, current reports on Form 8-K, and all amendments to those reports, are available free of charge on our website at www.hillmangroup.com as soon as reasonably practicable after such reports are electronically filed with the Commission. We are providing the address to our website solely for the information of investors. We do not intend the address to be an active link or to incorporate the contents of the website into this report.

Item 1A - Risk Factors.

You should carefully consider the following risks. However, the risks set forth below are not the only risks that we face, 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, our business, financial condition, and results of operations could be materially adversely affected. You should carefully consider the risks described below and all other information in this Annual Report on Form 10-K, including our Consolidated Financial Statements and the related Notes to Consolidated Financial Statements and schedules thereto.

Risks Relating to Our Business

Unfavorable economic conditions may adversely affect our business, results of operations, financial condition, and cash flows.

Our business is impacted by general economic conditions in North American and other international markets, particularly the U.S. retail markets including hardware stores, home centers, mass merchants, and other retailers. The current and future economic conditions in the U.S. and internationally, including, without limitation, the level of consumer debt, higher interest rates, and the ability of our customers to obtain credit, may cause a continued or further decline in business and consumer spending.

Adverse changes in economic conditions, including inflation, recession, or instability in the financial markets or credit markets may either lower demand for our products or increase our operational costs, or both. Such conditions may also materially impact our customers, suppliers, and other parties with whom we do business and may result in financial difficulties leading to restructurings, bankruptcies, liquidations, and other unfavorable events for our customers, suppliers, and other service providers. Our revenue will be adversely affected if demand for our products declines. The impact of unfavorable economic conditions may also impair the ability of our customers to pay for products they have purchased and could have a material adverse effect on our results of operations, financial condition, and results of operations.

In December 2019 an outbreak of a novel strain of coronavirus ("COVID-19") originated in Wuhan, China, and has since spread to a number of other countries, including the United States. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. While all of our operations are located in North America, we participate in a global supply chain, and the existence of a worldwide pandemic and the reactions of governments around the world in response to COVID-19 to regulate the flow of labor and products may impact our ability to conduct normal business operations, which could adversely affect our results of operations and liquidity. If we need to close any of our facilities or a critical number of our employees become too ill to work, our distribution network could be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse business consequences due to COVID-19, demand for our products could also be materially adversely affected in a rapid manner. Global health concerns, such as COVID-19, could also result in social, economic, and labor instability in the countries and localities in which we, our suppliers, and our customers operate. Any of these uncertainties could have a material adverse effect on our business, financial condition or results of operations.

We operate 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. We encounter competition from a large number of regional

and national distributors, some of which have greater financial resources than us and may offer a greater variety of products. If these competitors are successful, our business, financial condition, and results of operations may be materially adversely affected.

To compete successfully, we 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. We also face the risk that our competitors will introduce innovative new products that compete with our products. Our 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.

Our business may be adversely affected by seasonality.

In general, we have 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, our 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 our business.

Our three largest customers constituted approximately $637.0 million of net sales and $37.2 million of the year-end accounts receivable balance for 2019. Each of these customers is a big box chain store. Our 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 changing retail landscape, 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 our business. Our inability to penetrate new channels of distribution, including ecommerce, may also have a negative impact on our future sales and business.

Successful sales and marketing efforts depend on our ability to recruit and retain qualified employees.

The success of our 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. We 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 our ability to implement our growth strategy.

We are exposed to adverse changes in currency exchange rates.

Exposure to foreign currency risk exists because we, through our global operations, enter into transactions and make investments denominated in multiple currencies. Our predominant exposures are in Canadian, Mexican, and Asian currencies, including the Chinese Yuan (“CNY”). In preparing our Consolidated 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, our earnings could be negatively impacted. We do not make a practice of hedging our non-U.S. dollar earnings.

We source many products from China and other Asian countries for resale in other regions. To the extent that the CNY or other currencies appreciate with respect to the U.S. dollar, we may experience cost increases on such purchases. The U.S. dollar increased in value relative to the CNY by 1.7% in 2019, increased by 5.7% in 2018 and decreased by 6.3% in 2017. Significant appreciation of the CNY or other currencies in countries where we source our products could adversely impact our profitability. In addition, our foreign subsidiaries in Canada and Mexico 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. We have a practice of hedging some of our Canadian subsidiary's purchases denominated in U.S. dollars. We 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.

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

Our products are manufactured of metals, including but not limited to steel, aluminum, zinc, and copper. Additionally, we use other commodity-based materials in the manufacture of LNS that are resin-based and subject to fluctuations in the price of oil. We are 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 we are unable to mitigate these inflation increases through various customer pricing actions and cost reduction initiatives, our financial condition may be adversely affected. Conversely, in the event that there is deflation, we may experience pressure from our customers to reduce prices. There can be no assurance that we 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 our results of operations and cash flows.

We are subject to the risks of doing business internationally.

A portion of our revenue is generated outside the United States, primarily from customers located in Canada, Mexico, Latin America, and the Caribbean. Because we sell our products and services outside the United States, our business is subject to risks associated with doing business internationally, which include:


•	changes in a specific country's or region's political and cultural climate or economic condition;


•	unexpected or unfavorable changes in foreign laws and regulatory requirements;


•	difficulty of effective enforcement of contractual provisions in local jurisdictions;


•	inadequate intellectual property protection in foreign countries;


•	the imposition of duties and tariffs and other trade barriers;


•	trade-protection measures, import or export licensing requirements such as Export Administration Regulations promulgated by the U.S. Department of Commerce, Economic Sanctions Laws and Regulations administered by the Office of Foreign Assets Control, and fines, penalties, or suspension or revocation of export privileges;


•	violations of the United States Foreign Corrupt Practices Act;


•	the effects of applicable and potentially adverse foreign tax law changes;


•	significant adverse changes in foreign currency exchange rates;


•	longer accounts receivable cycles;


•	managing a geographically dispersed workforce; and


•	difficulties associated with repatriating cash in a tax-efficient manner.

Any failure to adapt to these or other changing conditions in foreign countries in which we do business could have an adverse effect on our business and financial results.

Our business is subject to risks associated with sourcing product from overseas.

We import a significant amount of our products and rely on foreign sources to meet our supply demands at prices that support our current operating margins. Substantially all of our import operations are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements or unilateral actions. The U.S. tariffs on steel and aluminum and other imported goods have materially increased the costs of many of our foreign sourced products, and any escalation in the tariffs will increase the impact. In order to sustain current operating margins while the tariffs are in effect, we must be able to increases prices with our customers and find alternative, similarly priced sources that are not subject to the tariffs. If we are unable to effectively implement these countermeasures, our operating margins will be impacted.

In addition, the countries from which our 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 our suppliers' failure to comply with customs regulations or similar laws, could harm our business.

If any of our existing vendors fail to meet our needs, we believe that sufficient capacity exists in the open market to supply any shortfall that may result. However, it is not always possible to replace a vendor on short notice without disruption in our

operations which may require more costly expedited transportation expense and replacement of a major vendor is often at higher prices.

Our 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 us 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 our business and financial condition.

Further, our business could be adversely affected by the recent outbreak of the COVID-19 respiratory illness. This situation is evolving and any further significant spread of this virus may have a material and adverse effect on our business which could include temporary closures of our facilities, the facilities of our suppliers, and other disruptions caused to us, our suppliers or customers as a result of this virus. This may adversely affect our results of operations, financial position, and cash flows.

Acquisitions have formed a significant part of our growth strategy in the past and may continue to do so. If we are unable to identify suitable acquisition candidates, successfully integrate an acquired business, or obtain financing needed to complete an acquisition, our growth strategy may not succeed.

Historically, our growth strategy has relied on acquisitions that either expand or complement our businesses in new or existing markets. However, there can be no assurance that we will be able to identify or acquire acceptable acquisition candidates on terms favorable to us and in a timely manner, if at all, to the extent necessary to fulfill our growth strategy.

The process of integrating acquired businesses into our operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention, and there can be no assurance that we will be able to successfully integrate acquired businesses into our operations. Additionally, we may not achieve the anticipated benefits from any acquisition.

Unfavorable changes in 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 we were required to write down all or part of our goodwill or indefinite-lived trade names, our results of operations could be materially adversely affected.

We have $819.1 million of goodwill and $85.5 million of indefinite-lived trade names recorded on our accompanying Consolidated Balance Sheets at December 28, 2019. We are 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. If we were required to write down all or part of our goodwill or indefinite-lived trade names, our net income could be materially adversely affected.

Our success is highly dependent on information and technology systems.

We believe that our proprietary computer software programs are an integral part of our business and growth strategies. We depend 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), we may suffer disruption in our ability to manage and operate our business.

There can be no assurance that the precautions which we have 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 our business and results of operations.

In addition, we are in the process of expanding our enterprise resource planning (“ERP”) system to improve our business capabilities. Although it is not anticipated, any disruptions, delays, or deficiencies in the design and/or implementation of the ERP system, or our inability to accurately predict the costs of such initiatives or our failure to generate revenue and

corresponding profits from such activities and investments, could impact our ability to perform necessary business operations, which could adversely affect our reputation, competitive position, business, results of operations, and financial condition.

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 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. We attempt 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.

Regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as “conflict minerals”, originating from the Democratic Republic of Congo (“DRC”) and adjoining countries. These rules could adversely affect the sourcing, supply, and pricing of materials used in our products, as the number of suppliers who provide conflict-free minerals may be limited. We may also suffer harm to our image if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to modify our products to avoid the use of such materials. We may also face challenges in satisfying customers who may require that our products be certified as containing conflict-free minerals.

We are subject to legal proceedings and legal compliance risks.

We are involved in various legal proceedings, which from time to time may involve lawsuits, state and federal governmental inquiries, audits and investigations, environmental matters, employment, tort, state false claims act, consumer litigation, and intellectual property litigation. At times, such matters may involve executive officers and other management. Certain of these legal proceedings may be a significant distraction to management and could expose us to significant liability, including settlement expenses, damages, fines, penalties, attorneys' fees and costs, and non-monetary sanctions, any of which could have a material adverse effect on our business and results of operations.

Increases in the cost of employee health benefits could impact our financial results and cash flows.

Our expenses relating to employee health benefits are significant. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform have resulted and could continue to result in significant changes to the U.S. healthcare system. Unfavorable changes in the cost of such benefits could have a material adverse effect on our financial results and cash flows.

Risks Relating to Our Indebtedness

We have significant indebtedness that could affect operations and financial condition and prevent us from fulfilling our obligations under our indebtedness.

We have a significant amount of indebtedness. On December 28, 2019, total indebtedness was $1,601.6 million, consisting of $108.7 million of indebtedness of Hillman and $1,492.9 million of indebtedness of Hillman Group.

Our substantial indebtedness could have important consequences. For example, it could:


•	make it more difficult for us to satisfy obligations to holders of our indebtedness;


•	increase our 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 us at a competitive disadvantage compared to competitors that have less debt; and


•	limit our ability to borrow additional funds.

In addition, the indenture governing Hillman Group's notes and senior secured credit facilities contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our 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.

Despite current indebtedness levels, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.

We may be able to incur substantial additional indebtedness in the future. The terms of the indenture do not fully prohibit us from doing so. The senior secured credit facilities permit additional borrowing of $120.0 million on the revolving credit facility. If new debt is added to our current debt levels, the related risks that we now face could intensify.

The failure to meet certain financial covenants required by our credit agreements may materially and adversely affect assets, financial position, and cash flows.

Certain aspects of our 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 minimum allowed fixed charge coverage ratio requirement is 1.0x as of December 28, 2019. A breach of the 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.

We are subject to fluctuations in interest rates.

On May 31, 2018 we entered into a new credit agreement that includes a funded term loan for $530.0 million and a unfunded delayed draw term loan facility ("DDTL") for $165.0 million (collectively, "2018 Term Loan"). Concurrently, we also entered into a new asset-based revolving credit agreement ("ABL Revolver") for $150.0 million. We utilized the full $165.0 million DDTL to finance the MinuteKey acquisition on August 10, 2018. On October 1, 2018, we entered into an amendment (the "Amendment") to the aforementioned 2018 Term Loan agreement which provided an additional $365.0 million of incremental term loan proceeds. On November 15, 2019, the Company entered into an amendment (the "ABL Amendment") to the aforementioned ABL Revolver agreement which provided an additional $100.0 million of revolving credit, bringing the total available to $250.0 million.

All of our indebtedness incurred in connection with the 2018 Term Loan and ABL Revolver has variable interest rates. Increases in borrowing rates will increase our cost of borrowing, which may adversely affect our results of operations and financial condition. Furthermore, regulatory changes, such as the announcement of the United Kingdom’s Financial Conduct Authority to phase out the London Interbank Offered Rate ("LIBOR") by the end of 2021, may adversely affect our floating rate debt and interest rate derivatives. If LIBOR ceases to exist, we may need to renegotiate any credit agreements or interest rate derivatives agreements extending beyond 2021 that utilize LIBOR as a factor in determining the interest rate or hedge rate, which could adversely impact our cost of debt.

Restrictions imposed by the indenture governing the 6.375% Senior Notes, and by our Senior Facilities and our other outstanding indebtedness, may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.

The terms of our Senior Facilities and the indenture governing the notes restrict us from engaging in specified types of transactions. These covenants restrict our ability and the ability of our restricted subsidiaries, among other things, to:


•	incur or guarantee additional indebtedness;


•	pay dividends on our capital stock or redeem, repurchase, or retire our capital stock or indebtedness;


•	make investments, loans, advances, and acquisitions;


•	pay dividends or other amounts to us from our restricted subsidiaries;


•	engage in transactions with our affiliates;


•	sell assets, including capital stock of our subsidiaries;


•	consolidate or merge; and


•	create liens.

In addition, the ABL Revolver requires us to maintain inventory and accounts receivable balances to collateralize the underlying loan with a maximum allowable borrowing limit of $250.0 million. Our ability to comply with this covenant can be affected by events beyond our control, and we may not be able to satisfy them. A breach of this covenant would be an event of default. In the event of a default under the ABL Revolver, those lenders could elect to declare all amounts outstanding under the ABL Revolver to be immediately due and payable or terminate their commitments to lend additional money, which would also lead to a cross-default and cross-acceleration of amounts owing under the Senior Facilities. If the indebtedness under our Senior Facilities or the notes were to be accelerated, our assets may not be sufficient to repay such indebtedness in full. In particular, note holders will be paid only if we have assets remaining after we pay amounts due on our secured indebtedness, including our Senior Facilities. We have pledged a significant portion of our assets as collateral under our Senior Facilities.

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our Senior Facilities and the indenture governing the notes restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

Our ability to repay our debt is affected by the cash flow generated by our subsidiaries.

Our subsidiaries own substantially all of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness will be dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment, or otherwise. Unless they are guarantors of the notes, our subsidiaries will not have any obligation to pay amounts due on the notes or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture governing the notes limits the ability of our subsidiaries to incur

consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

Volatility and weakness in bank and capital markets may adversely affect credit availability and related financing costs for us.

Bank and capital markets can experience periods of volatility and disruption. If the disruption in these markets is prolonged, our ability to refinance, and the related cost of refinancing, some or all of our debt could be adversely affected. Additionally, during periods of volatile credit markets, there is a risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments. Although we currently can access the bank and capital markets, there is no assurance that such markets will continue to be a reliable source of financing for us. These factors, including the tightening of credit markets, could adversely affect our ability to obtain cost-effective financing. Increased volatility and disruptions in the financial markets also could make it more difficult and more expensive for us to refinance outstanding indebtedness and obtain financing. In addition, the adoption of new statutes and regulations, the implementation of recently enacted laws or new interpretations or the enforcement of older laws and regulations applicable to the financial markets or the financial services industry could result in a reduction in the amount of available credit or an increase in the cost of credit. Disruptions in the financial markets can also adversely affect our lenders, insurers, customers, and other counterparties. Any of these results could cause a material adverse effect to our business, financial condition, and results of operations.

Item 1B - Unresolved Staff Comments.

None.

Item 2 – Properties.

As of December 28, 2019, our principal office, manufacturing, and distribution properties were as follows:



Business Segment	Approximate Square Footage	Description
Fastening, Hardware, and Personal Protective Solutions & Consumer Connected Solutions
Cincinnati, Ohio	270,000	Office, Distribution
Dallas, Texas	166,000	Distribution
Forest Park, Ohio	385,000	Office, Distribution
Jacksonville, Florida	97,000	Distribution
Rialto, California	402,000	Distribution
Shafter, California	134,000	Distribution
Tempe, Arizona	184,000	Office, Mfg., Distribution

Fastening, Hardware, and Personal Protective Solutions
Atlanta, Georgia	14,000	Office
Guadalajara, Mexico	12,000	Office, Distribution
Guleph, Ontario	25,000	Distribution
Parma, Ohio	16,000	Office, Distribution
Pompano Beach, Florida	39,000	Office, Distribution
Monterrey, Mexico	13,000	Distribution
Rome, Georgia	14,000	Office
San Antonio, Texas	150,000	Office, Distribution
Shannon, Georgia	300,000	Distribution
Springdale, Ohio	28,000	Mfg., Distribution
Tyler, Texas ⁽¹⁾	202,000	Office, Mfg., Distribution

Consumer Connected Solutions
Boulder, Colorado	20,000	Office, Distribution

Canada
Burnaby, British Columbia	29,000	Distribution
Edmonton, Alberta	100,000	Distribution
Laval, Quebec	34,000	Distribution
Milton, Ontario	26,000	Manufacturing
Moncton, New Brunswick	16,000	Distribution
Pickering, Ontario	110,000	Distribution
Scarborough, Ontario	304,000	Office, Mfg., Distribution
Toronto, Ontario	385,000	Office, Distribution
Winnipeg, Manitoba	42,000	Distribution


(1)	The Company leases two facilities in Tyler, Texas. The first is a 139,000 square foot facility located at 2329 E. Commerce Street used for manufacturing and distribution. The second is a 63,000 square foot facility located at 6357 Reynolds Road used for offices, manufacturing, and distribution.

All of the Company's facilities are leased. In the opinion of the Company's management, the Company's existing facilities are in good condition.

Item 3 – Legal Proceedings.

We are subject to various claims and litigation that arise in the normal course of business. For a description of our material legal proceedings, see Note 15 - Commitments and Contingencies, to the accompanying Consolidated Financial Statements included in this Annual Report on Form 10-K.

Item 4 – Mine Safety Disclosures.

Not Applicable.

PART II

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

Stock Exchange Listing

Our 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.



2019	High		Low
First Quarter	$	34.18	$	30.49
Second Quarter	35.37		32.16
Third Quarter	36.21		33.85
Fourth Quarter	36.88		33.67
2018	High		Low
First Quarter	$	36.78	$	29.63
Second Quarter	34.40		26.41
Third Quarter	32.00		29.86
Fourth Quarter	30.94		26.00

The Trust Preferred Securities have a liquidation value of $25.00 per security. As of March 27, 2020, the total number of Trust Preferred Securities outstanding was 4,217,724. As of March 27, 2020, our total number of shares of common stock outstanding was 5,000, held by one stockholder.

Distributions

We pay 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 28, 2019 and December 29, 2018, we paid $11.2 million and $12.2 million, respectively, per year in interest on the junior subordinated debentures, which was equivalent to the amounts distributed by the Trust for the same periods. As of December 28, 2019 $1.0 million remained payable on our balance sheet due to the timing of our year end.

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, we are required to accrue the full amount of all interest payable, and such deferred interest payments are immediately payable at the end of the Deferral Period. There were no deferrals of distribution payments to holders of the Trust Preferred Securities in 2019 or 2018.

The interest payments on the junior subordinated debentures underlying the Trust Preferred Securities are subject to the interest expense limitations arising from the Tax Cuts and Jobs Act (the “2017 Tax Act”) (see Note 6 - Income Taxes for further information) and will remain our obligation 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.”

Unregistered Sales of Equity Securities

We made no sales of our equity securities during the year ended December 28, 2019.

Issuer Purchases of Equity Securities

We made no repurchases of our equity securities during the year ended December 28, 2019.

Item 6 – Selected Financial Data.

The following table sets forth selected consolidated financial data for the years ended December 31, 2015 and 2016, December 30, 2017, December 29, 2018, and December 28, 2019.



(dollars in thousands)	Year Ended 12/28/2019			Year Ended 12/29/2018			Year Ended 12/30/2017		Year Ended 12/31/2016			Year Ended 12/31/2015
Income Statement Data:
Net sales	$	1,214,362		$	974,175		$	838,368	$	814,908		$	786,911
Cost of Sales (exclusive of depreciation and amortization)	693,881			537,885			455,717		438,418			436,004
Income from operations	7,695			27,443			35,504		40,809			29,027
Net income (loss)	(103,386		)	(69,641		)	58,648		(14,206		)	(23,083		)
Balance Sheet Data:
Total assets	$	2,441,210		$	2,431,470		$	1,799,217	$	1,781,636		$	1,844,999
Long-term debt & finance lease obligations ^{(1) (2)}	1,162,928			1,167,676			550,685		536,572			570,277
11.6% Junior Subordinated Debentures	108,704			108,704			108,704		108,704			108,704
6.375% Senior Notes	330,000			330,000			330,000		330,000			330,000


(1)	Includes current portion of long-term debt (at face value) and finance lease obligations in 2019, and capitalized lease obligations in 2015-2016.


(2)	In 2018 we refinanced our term loan, see Note 7 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information on our current debt.

Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion provides information which our management believes is relevant to an assessment and understanding of our operations and financial condition. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements and schedules thereto appearing elsewhere herein. In addition, see “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information”, as well as “Risk Factors” in Item 1A of this Annual Report.

General

Hillman is one of the largest providers of hardware-related products and related merchandising services to retail markets in North America. Our principal business is operated through our wholly-owned subsidiary, The Hillman Group, Inc. and its wholly-owned subsidiaries (collectively, “Hillman Group”), which had net sales of approximately $1,214.4 million in 2019. We sell our products to hardware stores, home centers, mass merchants, pet supply stores, and other retail outlets principally in the United States, Canada, Mexico, Latin America, and the Caribbean. Product lines include thousands of small parts such as fasteners and related hardware items; personal protective equipment, threaded rod and metal shapes; keys, key duplication systems, and accessories; builder's hardware; and identification items, such as tags and letters, numbers, and signs. We support our product sales with services that include the design and installation of merchandising systems and maintenance of appropriate in-store inventory levels.

In the year ended December 28, 2019, we recorded an impairment loss of $7.9 million related to the disposal of our FastKey self-service key duplicating kiosks and related assets.

On July 1, 2019, the Company acquired the assets of West Coast Washers, Inc for a total purchase price of $3.1 million. The financial results of West Coast Washers, Inc. reside within the Company's Fastening, Hardware, and Personal Protective Equipment operating segment. See Note 5 - Acquisitions of the Notes to Consolidated Financial Statements for additional information.

In the fourth quarter of 2019, we implemented a plan to restructure the management and operations of our U.S. business to achieve synergies and cost savings associated with the recent acquisitions. The restructuring plan includes management realignment, integration of sales and operations functions, and strategic review of our product offerings. We incurred charges of $9.5 million in the year ended December 28, 2019, primarily related to inventory valuation adjustments and severance (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional details). We expect to incur restructuring related charges in our United States segment over the next year as we implement the plan.

On November 25, 2019, we entered into an amendment of our asset-based revolving credit agreement which provided for an additional $100.0 million of revolving credit, $12.5 million for the Canadian Borrower and $87.5 million for the US Borrowers, bringing the total to $250.0 million. After the amendment, $200.0 million of the revolving credit facilities under the amendment is available to the US Borrowers and $50.0 million of the revolving credit facilities under the amendment is available to the Canadian Borrower, in each case, subject to a borrowing base. See Note 7 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information.

Current Economic Conditions

Our business is impacted by general economic conditions in the North American and international markets, particularly the U.S. and Canadian retail markets including hardware stores, home centers, mass merchants, and other retailers.

We are exposed to the risk of unfavorable changes in foreign currency exchange rates for the U.S. dollar versus local currency of our suppliers located primarily in China and Taiwan. We purchase a significant variety of our products for resale from multiple vendors located in China and Taiwan. The purchase price of these products is routinely negotiated in U.S. dollar amounts rather than the local currency of the vendors and our suppliers' profit margins decrease when the U.S. dollar declines in value relative to the local currency. This puts pressure on our suppliers to increase prices to us. The U.S. dollar decreased in value relative to the CNY by approximately by 6.3% in 2017, increased by 5.7% in 2018, and increased by 1.7% in 2019. The

U.S. dollar decreased in value relative to the Taiwan dollar by approximately 8.5% in 2017, increased by 3.3% in 2018, and decreased by 0.2% in 2019.

In addition, the negotiated purchase price of our products may be dependent upon market fluctuations in the cost of raw materials such as steel, zinc, and nickel used by our vendors in their manufacturing processes. The final purchase cost of our products may also be dependent upon inflation or deflation in the local economies of vendors in China and Taiwan that could impact the cost of labor used in the manufacturing of our products. We identify the directional impact of changes in our product cost, but the quantification of each of these variable impacts cannot be measured as to the individual impact on our product cost with a sufficient level of precision.

We are also exposed to risk of unfavorable changes in Canadian dollar exchange rate versus the U.S. dollar. Our sales in Canada are denominated in Canadian dollars while a majority of the products are sourced in U.S. dollars. A weakening of the Canadian dollar versus the U.S. dollar results in lower sales in terms of U.S. dollars while the cost of sales remains unchanged. We have a practice of hedging some of our Canadian subsidiary's purchases denominated in U.S. dollars. The U.S. dollar decreased in value relative to the Canadian dollar by approximately 6.6% in 2017, increased by 8.7% in 2018, and decreased by 4.1% in 2019. We may take pricing action, when warranted, in an attempt to offset a portion of product cost increases. The ability of our operating divisions to institute price increases and seek price concessions, as appropriate, is dependent on competitive market conditions.

We import large quantities of products which are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements and bilateral actions. The recently implemented U.S. tariffs on steel and aluminum and other imported goods has increased our product costs and required us to increase prices on the affected products.

Product Revenues

The following is revenue based on products for our significant product categories and operating segments:



	Fastening, Hardware, and Personal Protective Solutions		Consumer Connected Solutions		Canada		Total Revenue
Year Ended December 28, 2019
Fastening and hardware	$	607,247	$	—	$	121,242	$	728,489
Personal protective	245,769		—		—		245,769
Keys and key accessories	—		185,451		4,009		189,460
Engraving	—		50,613		9		50,622
Resharp	—		22		—		22
Consolidated	$	853,016	$	236,086	$	125,260	$	1,214,362

Year Ended December 29, 2018
Fastening and hardware	$	581,269	$	—	$	137,186	$	718,455
Personal protective	55,448		—		—		55,448
Keys and key accessories	—		143,898		4,217		148,115
Engraving	—		52,145		12		52,157
Resharp	—		—		—		—
Consolidated	$	636,717	$	196,043	$	141,415	$	974,175

Year Ended December 30, 2017
Fastening and hardware	$	528,969	$	—	$	133,082	$	662,051
Personal protective	—		—		—		—
Keys and key accessories	—		115,924		4,706		120,630
Engraving	—		55,674		13		55,687
Resharp	—		—		—		—
Consolidated	$	528,969	$	171,598	$	137,801	$	838,368

Results of Operations

Results of operations for the years ended December 28, 2019 and December 29, 2018:



	Year Ended December 28, 2019					Year Ended December 29, 2018
(dollars in thousands)	Amount			% of Net Sales		Amount			% of Net Sales
Net sales	$	1,214,362		100.0	%	$	974,175		100.0	%
Cost of sales (exclusive of depreciation and amortization shown separately below)	693,881			57.1	%	537,885			55.2	%
Selling, general and administrative expenses	382,131			31.5	%	320,543			32.9	%
Depreciation	65,658			5.4	%	46,060			4.7	%
Amortization	58,910			4.9	%	44,572			4.6	%
Management fees to related party	562			—	%	546			0.1	%
Other (income) expense, net	5,525			0.5	%	(2,874		)	(0.3	)%
Income from operations	7,695			0.6	%	27,443			2.8	%
Interest expense, net	113,843			9.4	%	82,775			8.5	%
Refinancing charges	—			—	%	11,632			1.2	%
Mark-to-market adjustment of interest rate swap	2,608			0.2	%	607			0.1	%
Loss before income taxes	(108,756		)	(9.0	)%	(67,571		)	(6.9	)%
Income tax expense (benefit)	(5,370		)	(0.4	)%	2,070			0.2	%
Net (loss) income	$	(103,386	)	(8.5	)%	$	(69,641	)	(7.1	)%

Year Ended December 28, 2019 vs December 29, 2018

Net Sales

Net sales for the year ended December 28, 2019 were $1,214.4 million, or $4.8 million per shipping day, compared to net sales of $974.2 million, or $3.9 million per shipping day for the year ended December 29, 2018, an increase of approximately $240.2 million. The increase was primarily driven by the acquisitions of MinuteKey in the third quarter of 2018 and Big Time in the fourth quarter of 2018. The acquisitions increased revenue $227.6 million in the year ended December 28, 2019 as compared to the year ended December 29, 2018. Construction fastener products and builders hardware sales increased $19.2 million and $6.4 million, respectively, due to new product line roll outs with customers. Additionally, sales decreased $7.8 million due to the closure of a manufacturing facility in Canada and exiting the related product lines (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).

Cost of Sales

Our cost of sales ("COS") is exclusive of depreciation and amortization expense. COS was $693.9 million, or 57.1% of net sales, for the year ended December 28, 2019, an increase of $156.0 million compared to $537.9 million, or 55.2% of net sales, for the year ended December 29, 2018. The increase of 1.9% in cost of sales, expressed as a percent of net sales, in 2019 compared to 2018 was primarily due to the following items:


•	A higher mix of personal protective equipment.


•	In the year ended December 28, 2019, we had inventory valuation adjustments in our Fastening, Hardware, and Personal Protective Solutions segment of $5.7 million primarily related to strategic review of our product offerings and restructuring activities (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).


•	Net sales was reduced by $7.2 million in the year ended December 28, 2019 for payments made to customers associated with the new product line roll outs for construction fastener products and builders hardware.


•	We recorded a reduction of $3.8 million in cost of sales recorded in 2018 due to an adjustment of our accrual for anti-dumping duties based on the final results of the Department of Commerce’s administrative review of nails from China (see Note 15 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional information).


•	The remaining increase was driven by higher product cost due to tariffs.


•	These increases were partially offset by lower inventory valuation adjustments in our Canada segment of $5.5 million driven by charges taken in 2018 related to exiting certain lines of business and rationalizing stock keeping units (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).

Expenses

Operating expenses and other income (expenses) were $103.9 million higher for the year ended December 28, 2019 compared to the year ended December 29, 2018. The following changes in underlying trends impacted the change in operating expenses:

•

Selling expense was $156.8 million in the year ended December 28, 2019, an increase of $22.8 million compared to $134.0 million for the year ended December 29, 2018. The acquisition of MinuteKey in the third quarter of 2018 and Big Time in the fourth quarter of 2018 added $24.9 million in selling expense for the year ended December 28, 2019 as compared to 2018. These increases were offset by a decrease of $3.3 million for the cost of updating customer store labels for a new pricing program in 2018.

•

Warehouse and delivery expenses were $142.3 million for the year ended December 28, 2019, an increase of $17.3 million compared to warehouse and delivery expenses of $124.9 million for the year ended December 29, 2018. The acquisition of MinuteKey in the third quarter of 2018 and Big Time in the fourth quarter of 2018 added $7.5 million in warehouse expense for the year ended December 28, 2019. We incurred $4.6 million of higher expense for increases in labor, benefits, freight, and equipment costs. We also incurred additional warehouse expense of $3.8 million in 2019 related to restructuring activities in our Canada segment (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).

•

General and administrative (“G&A”) expenses were $83.0 million in the year ended December 28, 2019, an increase of $21.4 million compared to $61.6 million in the year ended December 29, 2018. The increase was primarily due to the acquisitions of Big Time and MinuteKey, which added $10.1 million an G&A expense in the current year. We also incurred $5.4 million of additional expense for retention and long term incentive compensation plans introduced in the fourth quarter of 2018. Additionally, we incurred severance and related charges of $3.9 million related to corporate restructuring activities (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information). Finally, we incurred $1.6 million of higher compensation and benefits expense in the current year. These increases were partially offset by lower acquisition related charges in the year ended December 28, 2019.


•	Depreciation expense was $65.7 million in the year ended December 28, 2019 compared to $46.1 million in the year ended December 29, 2018. The increase was primarily due to the acquisitions of Big Time and MinuteKey, which added $9.2 million in depreciation expense in the current year. The remaining increase was driven by our investment in key duplicating machines and merchandising racks.


•	Amortization expense of $58.9 million in the year ended December 28, 2019 compared to $44.6 million in the year ended December 29, 2018. The increase was primarily due to the acquisitions of Big Time and MinuteKey, which added $14.3 million an amortization expense in the current year.

•

Other expense of $5.5 million for the year ended December 28, 2019 increased $8.4 million compared to income of $2.9 million in the year ended December 29, 2018. In the year ended December 28, 2019, other expense consisted of an impairment charge of $7.0 million related to the loss on the disposal of our FastKey self-service key duplicating kiosks. These losses were offset by a gain on the sale of machinery and equipment of $0.4 million (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information), and exchange rate gains of $0.7 million. Other income of $2.9 million for the year ended December 29, 2018 consisted of a $5.3 million net gain on the sale and disposal of property, plant, and equipment associated with the restructuring of the Canada segment (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information). The gain was partially offset by $2.0 million of exchange rate losses.

Interest expense, net, of $113.8 million for the year ended December 28, 2019 increased $31.1 million, compared to $82.8 million for the year ended December 29, 2018. During 2018, we refinanced our term loan and revolver, increasing the outstanding term loan by approximately $527.5 million. This activity, along with additional draws on our revolving credit facility during the year, led to increased interest expense in the year ended December 28, 2019. In connection with the refinancing, we incurred $11.6 million in refinancing charges during the year ended December 29, 2018. See Note 7 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information.

Results of Operations

Results of operations for the years ended December 29, 2018 and December 30, 2017:



	Year Ended December 29, 2018					Year Ended December 30, 2017
(dollars in thousands)	Amount			% of Total		Amount			% of Total
Net sales	$	974,175		100.0	%	$	838,368		100.0	%
Cost of sales (exclusive of depreciation and amortization shown separately below)	537,885			55.2	%	455,717			54.4	%
Selling, general and administrative expenses	320,543			32.9	%	274,044			32.7	%
Depreciation	46,060			4.7	%	34,016			4.1	%
Amortization	44,572			4.6	%	38,109			4.5	%
Management fees to related party	546			0.1	%	519			0.1	%
Other (income) expense, net	(2,874		)	(0.3	)%	459			0.1	%
Income from operations	27,443			2.8	%	35,504			4.2	%
Interest expense, net	82,775			8.5	%	63,248			7.5	%
Refinancing charges	11,632			1.2	%	—			—	%
Mark-to-market adjustment of interest rate swap	607			0.1	%	(1,481		)	(0.2	)%
Loss before income taxes	(67,571		)	(6.9	)%	(26,263		)	(3.1	)%
Income tax expense (benefit)	2,070			0.2	%	(84,911		)	(10.1	)%
Net income (loss)	$	(69,641	)	(7.1	)%	$	58,648		7.0	%

Year Ended December 29, 2018 vs Year Ended December 30, 2017

Net Sales

Net sales for the year ended December 29, 2018 were $974.2 million, or $3.9 million per shipping day, compared to net sales of $838.4 million, or $3.3 million per shipping day, for the year ended December 30, 2017. The increase was primarily driven by the acquisitions of ST Fastening Systems in the fourth quarter of 2017, MinuteKey in the third quarter of 2018, and Big Time in the fourth quarter of 2018. The acquisitions increased revenue $115.4 million in the year ended December 28, 2019 as compared to the year ended December 29, 2018. Sales of hurricane related products increased $7.9 million. Key and key accessory sales increased by $6.5 million primarily due to the key program roll out to a new key customer in 2018. Automotive keys increased $6.1 million due to the launch of a new product for duplication of programmable key remotes.

Cost of Sales

Our cost of sales was $537.9 million, or 55.2% of net sales, for the year ended December 29, 2018, an increase of $82.2 million compared to $455.7 million, or 54.4% of net sales, for the year ended December 30, 2017. The increase of 0.8% in cost of sales, expressed as a percent of net sales, in 2018 compared to 2017 was primarily due to the following items:


•	We recorded inventory valuation adjustments in our Canada segment of $9.8 million driven by exiting certain lines of business and rationalizing stock keeping units (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).


•	This additional expense was partially offset by an adjustment to our accrual for anti-dumping duties. We recorded a reduction of $3.8 million in cost of sales in the year ended December 28, 2019 due to an adjustment to our accrual for anti-dumping duties (see Note 15 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional information).


•	The remaining increase in in cost of sales, expressed as a percent of net sales, was the result of higher sales and product costs attributed to commodity inflation and tariffs.

Expenses

Operating expenses and other income (expenses) were $61.7 million higher for the year ended December 29, 2018 compared to the year ended December 30, 2017. The following changes in underlying trends impacted the change in operating expenses:

•

Selling expense was $134.0 million in the year ended December 29, 2018, an increase of $14.1 million compared to $119.9 million for the year ended December 30, 2017. The acquisition of ST Fastening Systems, Minute Key, and Big Time added $13.1 million of selling expense in the year ended December 29, 2018. The remaining increase in selling expense was primarily due to $0.9 million of additional expense for updating customer store labels for a new pricing program with the remaining increase due to higher labor and benefit costs.

•

Warehouse and delivery expenses were $124.9 million for the year ended December 29, 2018, an increase of $14.1 million compared to warehouse and delivery expenses of $110.8 million for the year ended December 30, 2017. The acquisition of ST Fastening Systems, Minute Key, and Big Time added $7.5 million of warehouse expense in the year ended December 29, 2018. Additionally, we incurred $4.6 million of higher expense for increases in labor, benefits, freight, and equipment costs. We also incurred additional warehouse expense of $2.2 million related to restructuring activities in our Canada segment (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).

•

G&A expenses were $61.6 million in the year ended December 29, 2018 an increase of $18.3 million compared to $43.4 million in the year ended December 30, 2017. The acquisition of ST Fastening Systems, Minute Key, and Big Time added $10.6 million of G&A expense in the year ended December 29, 2018. In the year ended December 29, 2018, we incurred an additional $11.2 million in acquisition related costs associated with MinuteKey and Big Time. The increased acquisition expenses were partially offset by lower variable compensation expense in the year ended December 29, 2018.

•

Depreciation expense was $46.1 million in the year ended December 29, 2018 compared to $34.0 million in the year ended December 30, 2017. The acquisition of ST Fastening Systems, Minute Key, and Big Time added $6.5 million of depreciation expense in the year ended December 29, 2018. The remaining increase was driven by our continued investment in new, state of the art key cutting technology, the KeyKrafter™ and the implementation of our ERP system in Canada.


•	Amortization expense was $44.6 million in the year ended December 29, 2018 compared to $38.1 million in the year ended December 30, 2017. The acquisition of ST Fastening Systems, Minute Key, and Big Time added $6.6 million of amortization expense in the year ended December 29, 2018.

•

Other income was $2.9 million for the year ended December 29, 2018, an increase of $3.3 million compared to a loss of $0.5 million in the year ended December 30, 2017. Other income of $2.9 million for the year ended December 29, 2018 consisted of a $5.3 million net gain on the sale and disposal of property, plant, and equipment associated with the restructuring of the Canada segment, (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information). The current year gain was offset by $2.0 million of exchange rate losses. Other income for the year ended December 30, 2017 included $1.3 million of exchange rate gains. These gains were offset by net impairment losses of $1.9 million as we exited certain lines of business. In both years we incurred immaterial losses on the disposal of fixed assets.

Interest expense, net, was $82.8 million for the year ended December 29, 2018, an increase of $19.5 million, compared to $63.2 million for the year ended December 30, 2017. During 2018 we refinanced our term loan and revolver, increasing the outstanding term loan by approximately $527.5 million. In connection with the refinancing, we incurred $11.6 million in refinancing charges. The increase in the term loan and additional draws on our revolving credit facility during the year led to increased interest expense. See Note 7 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information.

Results of Operations – Operating Segments

The following table provides supplemental information of our sales and profitability by operating segment (in thousands):

Fastening, Hardware, and Personal Protective Solutions



	Year Ended December 28, 2019		Year Ended December 29, 2018		Year Ended December 30, 2017
Fastening, Hardware, and Personal Protective Solutions
Segment Revenues	$	853,016	$	636,717	$	528,969
Segment Income from Operations	$	14,204	$	18,555	$	7,765

Year Ended December 28, 2019 vs December 29, 2018

Net Sales

Fastening, Hardware, and Personal Protective Solutions net sales for the year ended December 28, 2019 increased by $216.3 million from the prior year. The primary drivers of this increase were:


•	The acquisition of Big Time in the fourth quarter of 2018 increased revenue $190.3 million in the year ended December 28, 2019.


•	Construction fastener products and builders hardware sales increased $19.2 million and $6.4 million, respectively, due to new product line roll outs with customers.

Income (Loss) from Operations

Income from operations of our Fastening, Hardware, and Personal Protective Solutions operating segment decreased by approximately $4.4 million in the year ended December 28, 2019 to $14.2 million from $18.6 million in the year ended December 29, 2018. The increased sales noted above were offset by increased cost of sales and increased selling, general and administrative expenses as outlined below:

Cost of sales as a percentage of net sales was 62.0% in the year ended December 28, 2019, an increase of 5.3% from 56.7% in the year ended December 29, 2018. The primary drivers of this increase were:


•	Cost of sales as a percentage of net sales was primarily driven by a higher mix of personal protective equipment.


•	Inventory valuation adjustments were $5.7 million in the current year primarily related to restructuring activities (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).


•	Net sales was reduced by $7.2 million in the year ended December 28, 2019 for payments made to customers associated with the new product line roll outs for construction fastener products and builders hardware.


•	We recorded a reduction of $3.8 million in cost of sales recorded in 2018 due to an adjustment of our accrual for anti-dumping duties based on the final results of the Department of Commerce’s administrative review of nails from China (see Note 15 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional information).

Operating expenses increased $52.3 million in our Fastening, Hardware, and Personal Protective Solutions segment primarily due to:


•	The acquisition of Big Time in the fourth quarter of 2018 increased SG&A $22.0 million and $10.6 million in amortization expense in the year ended December 28, 2019.


•	Warehouse costs, excluding the acquisition of Big Time, increased $6.8 million primarily driven by increased labor, benefits, freight and maintenance costs.


•	We incurred $4.4 million of additional expense for retention and long term incentive compensation plans introduced in the fourth quarter of 2018.


•	Additionally, we incurred severance and related charges of $3.2 million related to corporate restructuring activities (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).

Year Ended December 29, 2018 vs December 30, 2017

Net Sales

Net sales for our Fastening, Hardware, and Personal Protective Solutions operating segment increased by $107.7 million in the year ended December 29, 2018 primarily due to:


•	The acquisition of ST Fastening Systems in the fourth quarter of 2017 added $41.4 million in net sales.


•	The acquisition of Big Time in the fourth quarter of 2018 added $55.4 million in net sales.


•	Hurricane related sales increased $7.9 million in the year ended December 29, 2018.

Income (Loss) from Operations

Income from operations of our Fastening, Hardware, and Personal Protective Solutions segment increased by approximately $10.8 million in the year ended December 29, 2018 to $18.6 million as compared to $7.8 million in the year ended December 30, 2017. The increases in sales were partially offset by increased COS and SG&A costs. Cost of sales as a percentage of net sales was 56.7% in the year ended December 29, 2018, an increase of 0.2% from 56.5% in the year ended December 30, 2017. SG&A increased $25.5 million in the year ended December 29, 2018. The primary drivers of this increase were:


•	The acquisition of ST Fastening Systems in the fourth quarter of 2017 which added $10.5 million in SG&A expense.


•	The acquisition of Big Time in the fourth quarter of 2018 added $8.0 million in SG&A expense.


•	We incurred $5.1 million of acquisition related expenses associated with Big Time.


•	We incurred $1.1 million of additional expense for retention and long term incentive compensation plans introduced in the fourth quarter of 2018.

Consumer Connected Solutions



	Year Ended December 28, 2019		Year Ended December 29, 2018		Year Ended December 30, 2017
Consumer Connected Solutions
Segment Revenues	$	236,086	$	196,043	$	171,598
Segment Income from Operations	$	3,385	$	17,705	$	24,800

Year Ended December 28, 2019 vs December 29, 2018

Net Sales

Net sales for our Consumer Connected Solutions operating segment increased $40.0 million in the year ended December 28, 2019 compared to the net sales for 2018 primarily due to:


•	The acquisition of Minute Key in the third quarter of 2018, which increased revenue $37.3 million in the year ended December 28, 2019.


•	Automotive key sales increased $4.2 million in the year ended December 28, 2019.

Income (Loss) from Operations

Income from operations of our Consumer Connected Solutions operating segment decreased by approximately $14.3 million in the year ended December 28, 2019 to $3.4 million from $17.7 million in the year ended December 29, 2018. The increased sales were offset by increased SG&A, depreciation and amortization expenses as outlined below:


•	The acquisition of MinuteKey added $20.5 million in SG&A expenses, $8.5 million in depreciation and $3.7 million in amortization expense in the year ended December 28, 2019.


•	We incurred $7.7 million of impairment charges in 2019 related to the loss on the disposal of our FastKey self-service key duplicating kiosks.


•	Depreciation expense, excluding MinuteKey, increased $4.4 million driven by our continued investment in key duplicating machines.


•	We incurred $1.5 million in legal fees related to the ongoing litigation with KeyMe, Inc (see Note 15 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional information).


•	We incurred $1.0 million of additional expense for retention and long term incentive compensation plans introduced in the fourth quarter of 2018.

Year Ended December 29, 2018 vs December 30, 2017

Net Sales

Net sales for our Consumer Connected Solutions operating segment increased $24.4 million in the year ended December 29, 2018 as compared to 2017 primarily due to:


•	The increase in sales was primarily driven by the acquisition of MinuteKey in the third quarter of 2018 which added $18.6 million to net sales.


•	Key and key accessory sales increased by $6.5 million primarily due to the key program roll out to a new key customer in 2018.


•	Automotive keys increased $6.1 million due to the launch of a new product for duplication of programmable key remotes.


•	These increases were offset by lower key sales to big box customers and lower engraving sales.

Income (Loss) from Operations

Income from operations of our Consumer Connected Solutions operating segment decreased $7.1 million the year ended December 29, 2018 to $17.7 million as compared to $24.8 million in the year ended December 30, 2017. The increases in net sales were offset by increased operating expenses as outlined below:


•	The acquisition of MinuteKey added $12.7 million in SG&A expenses, $4.7 million in depreciation and $2.2 million in amortization expense in the year ended December 29, 2018.


•	We incurred $5.2 million in acquisition related expense associated with MinuteKey.


•	Depreciation expense increased $3.0 million due to our continued investment in key and engraving machines.

Canada



	Year Ended December 28, 2019			Year Ended December 29, 2018			Year Ended December 30, 2017
Canada
Segment Revenues	$	125,260		$	141,415		$	137,801
Segment Income (Loss) from Operations	$	(9,894	)	$	(8,817	)	$	2,939

Year Ended December 28, 2019 vs December 29, 2018

Net Sales

Net sales in our Canada operating segment decreased by $16.2 million in the year ended December 28, 2019 primarily due to:.


•	The unfavorable impact of conversion of the local currency to U.S. dollars.


•	The closure of a manufacturing facility in Canada and exiting the related product lines resulted in to $7.8 million in lower sales.

Income (Loss) from Operations

Income from operations of our Canada segment decreased by $1.1 million in the year ended December 28, 2019 to a loss of $9.9 million as compared to a loss of $8.8 million in the year ended December 29, 2018. The decrease in sales was offset by lower COS as percentage of sales. Additionally, we incurred higher other expense in the year ended December 28, 2019.

•

COS as a percentage of net sales decreased 5.3% from 74.4% in the year ended December 29, 2018 to 69.1% in the year ended December 28, 2019 primarily due to $9.8 million of inventory valuation adjustments taken in 2018 in our Canada segment driven by exiting certain lines of business and rationalizing stock keeping units as compared to inventory adjustments of $4.3 million in the year ended December 28, 2019 (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information).

•

Other income and expense decreased $2.4 million to income of $1.1 million in the current year compared with income of $3.5 million in the year ended December 29, 2018. Other income for the year ended December 28, 2019 included a gain on the sale of machinery and equipment of $0.4 million (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information), and exchange rate gains of $0.7 million. Other income for the year ended December 29, 2018 consisted of a $5.3 million net gain on the sale and disposal of property, plant, and equipment associated with the restructuring of the Canada segment, (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information). The gain in the year ended December 29, 2018 was offset by $1.8 million exchange rate losses of exchange rate losses.

Year Ended December 29, 2018 vs December 30, 2017

Net Sales

Net sales for our Canada operating segment increased by $3.6 million in the year ended December 29, 2018 primarily due to the roll out of wall anchor and builders hardware products to retail customers.

Income (Loss) from Operations

Income from operations of our Canada segment decreased by $11.8 million in the year ended December 29, 2018 to a loss of $8.8 million as compared to income of $2.9 million in the year ended December 30, 2017. The increase in sales was offset by net restructuring charges of $8.3 million consisting of inventory valuation adjustments, asset impairments, labor and severance, and consulting costs, partially offset by a gain on the sale of real estate (see Note 14 - Restructuring of the Notes to Consolidated Financial Statements for additional information). Additionally, in the year ended December 29, 2018 we incurred exchange rate losses of $1.8 million compared to gains of $0.9 million in the year ended December 30, 2017.

Income Taxes

Year Ended December 28, 2019 vs December 29, 2018

In the year ended December 28, 2019, we recorded an income tax benefit of $5.4 million on a pre-tax loss of $108.8 million. The effective income tax rate was 4.9% for the year ended December 28, 2019. In the year ended December 29, 2018, we recorded income tax expense of $2.1 million on a pre-tax loss of $67.6 million. The effective income tax rate was (3.1)% for the year ended December 29, 2018.

In 2019, the Company's effective tax rate differed from the federal statutory tax rate primarily due to valuation allowances recorded for the Company's non-deductible interest expense as well as certain state net operating losses ("NOLs"). The Company recorded $16.7 million in income tax expense attributable to a valuation allowance recorded on the Company's non-deductible interest expense. The Company anticipates that approximately $72.0 million of the $114.2 million in interest expense will be considered non-deductible for the 2019 period. Additionally, the Company recorded $2.7 million in income tax expense attributable to state NOLs that are expected to expire prior to their utilization.

The effective income tax rate differed from the federal statutory tax rate in the year ended December 29, 2018 primarily due to the provisions established with the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). We recorded approximately $11.7 million in income tax expense attributable to certain provisions of the 2017 Tax Act. The Company recorded a valuation allowance of $6.1 million for certain U.S. federal net operating losses that are subject to the dual consolidated loss limitation rules. Additionally, the Company recorded $2.2 million in income tax expense for certain non-deductible acquisition costs attributable to the MinuteKey and Big Time acquisitions. The remaining differences between the effective income tax rate and the federal statutory rate in the year ended December 29, 2018 were attributable to state and foreign income taxes.

Year Ended December 29, 2018 vs December 30, 2017

In the year ended December 29, 2018, we recorded an income tax benefit of $2.1 million on a pre-tax loss of $67.6 million. The effective income tax rate was (3.1)% for the year ended December 29, 2018. In the year ended December 30, 2017, we recorded an income tax benefit of $84.9 million on a pre-tax loss of $26.3 million. The effective income tax rate was 323.3% for the year ended December 30, 2017.

rules. Additionally, the Company recorded $2.2 million in income tax expense for certain non-deductible acquisition costs attributable to the MinuteKey and Big Time acquisitions. The remaining differences between the effective income tax rate and the federal statutory rate in the year ended December 29, 2018 were attributable to state and foreign income taxes.

On December 22, 2017, the 2017 Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes included, among other things, a permanent corporate rate reduction to 21% from 35%, implementing a modified territorial system including a mandatory deemed repatriation on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”), and providing for additional first-year depreciation that allows full expensing of qualified property placed into service after September 27, 2017.

During 2017, the Company recorded a provisional $75 million deferred income tax benefit for the remeasurement of its net deferred tax liabilities. Additionally, the Company did not record a provision for the Transition Tax in 2017 given the lack of historical earnings in the Company's foreign subsidiaries. During 2018, the Company did not significantly adjust the provisional estimate from the provisional calculations. In 2018, the Company became subject to certain provisions of the 2017 Tax Act including computations related to Global Intangible Low Taxed Income ("GILTI"), and the IRC §163(j) interest limitation ("Interest Limitation") (see Note 6 - Income Taxes of the Notes to Consolidated Financial Statements for additional information).

Liquidity and Capital Resources

Cash Flows

The statements of cash flows reflect the changes in cash and cash equivalents for the years ended December 28, 2019, December 29, 2018, and December 30, 2017 by classifying transactions into three major categories: operating, investing, and financing activities.

Operating Activities

Net cash provided by operating activities for the year ended December 28, 2019 was approximately $52.4 million. Operating cash flows for the year ended December 28, 2019 were unfavorably impacted by lower net income driven by increased interest expense, partially offset by improvements in working capital. Net cash provided by operating activities for the year ended December 29, 2018 was approximately $7.5 million and was unfavorably impacted by lower net income driven by increased interest expense and acquisition related costs along with an increase in inventory due to commodity inflation and new business wins. This was partially offset by an increase in accounts payable due to changes in payment terms and increased inventory purchases and a decrease in accounts receivable. Net cash provided by operating activities for the year ended December 30, 2017 was approximately $82.9 million and was favorably impacted by our focus on reducing net working capital which translated to improvements in inventory and accounts payable.

Investing Activities

Net cash used for investing activities was $53.5 million, $572.6 million, and $100.1 million for the years ended December 28, 2019, December 29, 2018 and December 30, 2017, respectively. In the year ending December 28, 2019 we acquired Resharp and West Coast Washers for approximately $6.1 million. In the year ended December 29, 2018 we acquired MinuteKey and Big Time and made a final working capital true up payment for ST Fastening Systems which equated a total net cash outflow of approximately $501.0 million. Additionally, in the year ended December 30, 2017, we acquired STFS with a cash payment of $47.2 million (see Note 5 - Acquisitions of the Notes to Consolidated Financial Statements for additional information). Finally, cash was used in all periods to invest in our investment in new key duplicating kiosks and machines. In 2019, we also received $10.4 million in cash proceeds from the sale of a building and machinery in Canada and a building in Georgia.

Financing Activities

Net cash used for financing activities was $7.1 million for the year ended December 28, 2019. The borrowings on revolving credit loans provided $43.5 million. The Company used $38.7 million of cash for the repayment of revolving credit loans and $10.6 million for principal payments on the senior term loans. On November 15, 2019, we amended the ABL Revolver agreement which provided an additional $100.0 million of revolving credit, bringing the total available to $250.0 million. In connection with the amendment we paid $1.4 million in fees.

Net cash provided by financing activities was $581.9 million for the year ended December 29, 2018. On May 31, we entered into a new term credit agreement consisting of a new funded term loan of $530.0 million and $165.0 million delayed draw term

loan facility. Concurrently, we entered into a new $150.0 million asset-based revolving credit agreement. The proceeds were used to refinance in full all outstanding revolving credit and term loans under the existing credit agreement. In the third quarter of 2018, we drew $165.0 million on the delayed draw facility of the term loan to finance the MinuteKey acquisition. In the fourth quarter, we amended the credit agreement and added an additional $365.0 million in incremental term loans to finance the acquisition of Big Time. We paid approximately $20.5 million in fees associated with the refinancing activities in the year ended December 28, 2019. See Note 7 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information on the refinancing. Our revolver draws, net, were a source of cash of $88.7 million in the year ended December 28, 2019. Additionally, in the year ended December 29, 2018 we paid a dividend of $3.8 million to Holdco for the purchase of shares of Holdco stock from former members of management.

Net cash used for financing activities was $14.4 million for the year ended December 30, 2017. The borrowings on revolving credit loans provided $35.5 million. The Company used $16.0 million of cash for the repayment of revolving credit loans and $5.5 million for principal payments on the senior term loans.

Liquidity

We believe that projected cash flows from operations and Revolver availability will be sufficient to fund working capital and capital expenditure needs for the next 12 months.

Our working capital (current assets minus current liabilities) position of $231.8 million as of December 28, 2019 represents a decrease of $48.2 million from the December 29, 2018 level of $280.0 million.

Contractual Obligations

Our contractual obligations as of December 28, 2019 are summarized below:



			Payments Due
(dollars in thousands)	Total		Less Than One Year		1 to 3 Years		3 to 5 Years		More Than Five Years
Junior Subordinated Debentures ⁽¹⁾	$	108,704	$	—	$	—	$	—	$	108,704
Interest on Jr Subordinated Debentures	94,793		12,231		24,463		24,463		33,636
Long Term Senior Term Loans	1,047,653		10,609		21,218		21,218		994,608
Bank Revolving Credit Facility	113,000		—		—		—		113,000
6.375% Senior Notes	330,000		—		330,000		—		—
KeyWorks License Agreement	422		350		72		—		—
Interest payments⁽²⁾	381,971		84,604		156,606		121,921		18,840
Operating Leases	114,758		17,525		29,881		23,761		43,591
Deferred Compensation Obligations	1,911		355		—		—		1,556
Finance Lease Obligations	2,551		873		1,168		510		—
Other Obligations	8,210		2,492		4,274		1,444		—
Uncertain Tax Position Liabilities	1,101		1,101		—		—		—
Total Contractual Cash Obligations ⁽³⁾	$	2,205,074	$	130,140	$	567,682	$	193,317	$	1,313,935


(1)	The Junior Subordinated Debentures liquidation value is approximately $108,704.

(2)

Interest payments for borrowings under the Senior Facilities, the 6.375% Senior Notes, and Revolver borrowings. Interest payments on the variable rate Senior Term Loans were calculated using the actual interest rate of 5.70% as of December 28, 2019. Interest payments on the 6.375% Senior Notes were calculated at their fixed rate. Interest payments on the variable rate Revolver borrowings were calculated using the actual interest rate of 3.59% as of December 28, 2019.


(3)	All of the contractual obligations noted above are reflected on the Company's Consolidated Balance Sheet as of December 28, 2019 except for the interest payments. Contingent consideration related to the acquisition of Resharp of $18,100 is not included in the chart above due to uncertainty about timing of the payments.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

Related Party Transactions

The Company has recorded aggregate management fee charges and expenses from the Oak Hill Funds and CCMP of approximately $0.6 million for each of the years ended December 28, 2019 and December 29, 2018, and $0.5 million for the year ended December 30, 2017.

We recorded proceeds from the sale of Holdco stock to members of management and the Board of Directors of $0.8 million for the year ended December 28, 2019 and $0.5 million for the year ended December 30, 2017. No such sales were recorded in the year ended December 29, 2018.

In the year ended December 29, 2018, the Company paid a dividend of approximately $3.8 million to Holdco for the purchase of 4,200 shares of Holdco stock from former members of management. No such dividends were paid in fiscal 2019 or fiscal 2017.

Gregory Mann and Gabrielle Mann are employed by the Company. The Company leases an industrial warehouse and office facility from companies under the control of the Manns. We have recorded rental expense for the lease of this facility on an arm's length basis. Our rental expense for the lease of this facility was $0.4 million for each of the years ended December 28, 2019, December 29, 2018, and December 30, 2017.

During 2019, 2018 and 2017, the Company had three leases for five properties containing industrial warehouse, manufacturing plant, and office facilities in Canada. The owners of the properties under one lease are relatives of Richard Paulin, who was employed by The Hillman Group Canada ULC until his retirement effective April 30, 2017, and the owner of the properties under the other two leases is a company which is owned by Richard Paulin and certain of his relatives. We have recorded rental expense for the three leases on an arm's length basis. Rental expense for these facilities was $0.6 million for the years ended December 28, 2019, and December 29, 2018 and $0.7 million for the year ended December 30, 2017.

Douglas J. Cahill is currently Hillman’s President and CEO and is also a former Managing Director of CCMP Capital Advisors, LP ("CCMP"). CCMP’s private equity fund CCMP Capital Investors III, L.P. (“CCMP III”), together with its related fund vehicles, owns approximately 80.4% of Holdco's outstanding common stock as of December 28, 2019. Mr. Cahill has retained a carried interest in CCMP III and the fair value of this carried interest, which is based on the overall performance of CCMP III, is contingent on several factors. As of December 28, 2019, the fair value of the carried interest is not estimable in accordance with ASC 405 - Contingencies.

Critical Accounting Policies and Estimates

Our accounting policies are more fully described in Note 2 - Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements. As disclosed in that note, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events cannot be predicted with certainty and, therefore, actual results could differ from those estimates. The following section describes our critical accounting policies.

Revenue Recognition:

Revenue is recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

We offer a variety of sales incentives to our customers primarily in the form of discounts, rebates, and slotting fees. Discounts are recognized in the Consolidated Financial Statements at the date of the related sale. Rebates are based on the revenue to date and the contractual rebate percentage to be paid. A portion of the cost of the rebate is allocated to each underlying sales transaction. Discounts, rebates, and slotting fees are included in the determination of net sales.

We also establish reserves for customer returns and allowances. The reserve is established based on historical rates of returns and allowances. The reserve is adjusted quarterly based on actual experience. Returns and allowances are included in the determination of net sales.

Our performance obligations under our arrangements with customers are providing products, in-store merchandising services, and access to key duplicating and engraving equipment. Generally, the price of the merchandising services and the access to the

key duplicating and engraving equipment is included in the price of the related products. Control of products is transferred at the point in time when the customer accepts the goods. We used judgement in applying the revenue standard in determining the time at which to recognize revenue for the in-store services and the access to key duplicating and engraving equipment. Our obligation to provide in-store service and access to key duplicating and engraving equipment is satisfied when control of the related products is transferred. Therefore, consistent with the practice prior to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"), the entire amount of consideration related to the sale of products, in-store merchandising services, and access to key duplicating and engraving equipment is recognized upon the customer’s acceptance of the products. The revenues for all performance obligations are recognized upon the customer's acceptance of the products.

The costs to obtain a contract are insignificant, and generally contract terms do not extend beyond one year. Therefore, these costs are expensed as incurred. Freight and shipping costs and the cost of our in-store merchandising services teams are recognized in selling, general, and administrative expense when control over products is transferred to the customer.

We used the practical expedient regarding the existence of a significant financing component as payments are due in less than one year after delivery of the products.

See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for information on disaggregated revenue by product category.

Inventory Realization:

Inventories consisting predominantly of finished goods are valued at the lower of cost or net realizable value, cost being determined principally on the weighted average cost method. The historical usage rate is the primary factor used in assessing the net realizable value of excess and obsolete inventory. A reduction in the carrying value of an inventory item from cost to net realizable value is recorded for inventory with excess on-hand quantities as determined based on historic and projected sales, product category, and stage in the product life cycle. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our excess and obsolete inventory reserve. However, if our estimates regarding excess and obsolete inventory are inaccurate, we may be exposed to losses or gains that could be material. A 5% difference in actual excess and obsolete inventory reserved for at December 28, 2019, would have affected net earnings by approximately $1.0 million in fiscal 2019.

Goodwill:

We have adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment which eliminates Step 2 from the goodwill impairment test and instead requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If, after assessing the totality of events or circumstances, we determine that the fair value of a reporting unit is less than the carrying value, then we would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

Our annual impairment assessment is performed for the reporting units as of October 1. In 2019, 2018, and 2017, an independent appraiser assessed the value of our reporting units based on a discounted cash flow model and multiple of earnings. Assumptions critical to our fair value estimates under the discounted cash flow model include the discount rate, projected average revenue growth and projected long-term growth rates in the determination of terminal values. The results of the quantitative assessments in 2019, 2018, and 2017 indicated that the fair value of each reporting unit was in excess of its carrying value.

Intangible Assets:

We evaluate our indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually or more frequently if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. In connection with the evaluation, an independent appraiser assessed the fair value of our indefinite-lived intangible assets based on a relief from royalties, excess earnings, and lost profits discounted cash flow model. Assumptions critical to our fair value estimates under the discounted cash flow model include the discount rate, projected average revenue growth and projected long-term growth rates in the determination of terminal values. An impairment charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date. No impairment charges related to indefinite-lived intangible assets were recorded in 2019, 2018, or 2017 as a result of the quantitative annual impairment test.

Income Taxes:

Deferred income taxes are computed using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Valuation allowances are provided for tax benefits where it is more likely than not that certain tax benefits will not be realized. Adjustments to valuation allowances are recorded for changes in utilization of the tax related item. For additional information, see Note 6 - Income Taxes, of the Notes to Consolidated Financial Statements.

In accordance with guidance regarding the accounting for uncertainty in income taxes, we recognize a tax position if, based solely on its technical merits, it is more likely than not to be sustained upon examination by the relevant taxing authority.

If a tax position does not meet the more likely than not recognition threshold, we do not recognize the benefit of that position in our financial statements. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements.

Business Combinations:

As we enter into business combinations, we perform acquisition accounting requirements including the following:

•Identifying the acquirer

•Determining the acquisition date

•Recognizing and measuring the identifiable assets acquired and the liabilities assumed, and

•Recognizing and measuring goodwill or a gain from a bargain purchase

We complete valuation procedures and record the resulting fair value of the acquired assets and assumed liabilities based upon the valuation of the business enterprise and the tangible and intangible assets acquired. Enterprise value allocation methodology requires management to make assumptions and apply judgment to estimate the fair value of assets acquired and liabilities assumed. If estimates or assumptions used to complete the enterprise valuation and estimates of the fair value of the acquired assets and assumed liabilities significantly differed from assumptions made, the resulting difference could materially affect the fair value of net assets.

The calculation of the fair value of the tangible assets, including property, plant and equipment, utilizes the cost approach, which computes the cost to replace the asset, less accrued depreciation resulting from physical deterioration, functional obsolescence and external obsolescence. The calculation of the fair value of the identified intangible assets are determined using cash flow models following the income approach or a discounted market-based methodology approach. Significant inputs include estimated revenue growth rates, gross margins, operating expenses, and estimated attrition, royalty and discount rates. Goodwill is recorded as the difference in the fair value of the acquired assets and assumed liabilities and the purchase price.We estimate the fair value of liabilities for contingent consideration by applying a scenario-based method, estimating (probability-weighted) payments based on the likelihood of achieving the milestones and payments corresponding to each milestone. We then estimate the present-value of the expected payments from the time at which the obligations are settled by applying a discount rate that appropriately captures a market participant’s view of the risk associated with the payments.

Recent Accounting Pronouncements:

Recently issued accounting standards are described in Note 3 - Recent Accounting Pronouncements of the Notes to Consolidated Financial Statements.

Item 7A – Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Exposure

We are exposed to the impact of interest rate changes as borrowings under the Senior Facilities bear interest at variable interest rates. It is our policy to enter into interest rate swap and interest rate cap transactions only to the extent considered necessary to meet our objectives.

Based on our exposure to variable rate borrowings at December 28, 2019, after consideration of our LIBOR floor rate and interest rate swap agreements, a one percent (1%) change in the weighted average interest rate for a period of one year would change the annual interest expense by approximately $10.1 million.

Foreign Currency Exchange

We are exposed to foreign exchange rate changes of the Canadian and Mexican currencies as it impacts the $149.3 million tangible and intangible net asset value of our Canadian and Mexican subsidiaries as of December 28, 2019. The foreign subsidiaries net tangible assets were $83.9 million and the net intangible assets were $65.4 million as of December 28, 2019.

We utilize foreign exchange forward contracts to manage the exposure to currency fluctuations in the Canadian dollar versus the U.S. Dollar. See Note 12 - Derivatives and Hedging, of the Notes to Consolidated Financial Statements.

Item 8 – Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND

FINANCIAL STATEMENT SCHEDULE



	Page(s)
Report of Management on Internal Control Over Financial Reporting	35
Report of Independent Registered Public Accounting Firm	36
Consolidated Financial Statements:
Consolidated Balance Sheets	37
Consolidated Statements of Comprehensive Income (Loss)	38
Consolidated Statements of Cash Flows	39
Consolidated Statements of Stockholder's Equity	40
Notes to Consolidated Financial Statements	41
Financial Statement Schedule:
Valuation Accounts	75

Report of Management on Internal Control Over Financial Reporting

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

Our management, with the participation of our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 28, 2019, the end of our fiscal year. Management based its assessment on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed under the direction of management.

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

Based on its assessment, our management has concluded that our internal control over financial reporting was effective, as of December 28, 2019, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. We reviewed the results of management's assessment with the Audit Committee of The Hillman Companies, Inc.

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



/s/ DOUGLAS J. CAHILL		/s/ ROBERT O. KRAFT

Douglas J. Cahill		Robert O. Kraft
President and Chief Executive Officer		Chief Financial Officer
Dated:	March 27, 2020	Dated:	March 27, 2020

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

The Hillman Companies, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of The Hillman Companies, Inc. and subsidiaries (the Company) as of December 28, 2019 and December 29, 2018, the related consolidated statements of comprehensive income (loss), stockholder’s equity, and cash flows for each of the years in the three‑year period ended December 28, 2019, and the related notes and financial statement schedule II - Valuation Accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 28, 2019, in conformity with U.S. generally accepted accounting principles.

Changes in Accounting Principles

As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases as of December 30, 2018 due to the adoption of Accounting Standards Update (ASU) 2016-12, Leases (Topic 842).

As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition as of December 31, 2017 due to the modified retrospective adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2010.

Cincinnati, Ohio

March 27, 2020

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)



	December 28, 2019			December 29, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	19,973		$	28,234
Accounts receivable, net of allowances of $1,891 ($846 - 2018)	88,374			110,799
Inventories, net	323,496			320,281
Other current assets	8,828			18,727
Total current assets	440,671			478,041
Property and equipment, net of accumulated depreciation of $179,791 ($131,169 - 2018)	205,160			208,279
Goodwill	819,077			803,847
Other intangibles, net of accumulated amortization of $232,060 ($176,677 - 2018)	882,430			930,525
Operating lease right of use assets	81,613			—
Deferred tax asset	702			—
Other assets	11,557			10,778
Total assets	$	2,441,210		$	2,431,470
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	125,042		$	135,059
Current portion of debt and capital lease obligations	11,358			10,985
Current portion of operating lease liabilities	11,459			—
Accrued expenses:
Salaries and wages	12,937			9,881
Pricing allowances	6,553			5,404
Income and other taxes	5,248			3,325
Interest	14,726			15,423
Other accrued expenses	21,545			17,941
Total current liabilities	208,868			198,018
Long-term debt	1,584,289			1,586,084
Deferred income taxes, net	196,437			200,696
Operating lease liabilities	73,227			—
Other non-current liabilities	33,287			7,565
Total liabilities	2,096,108			1,992,363

Commitments and Contingencies (Note 15)	—			—
Stockholder's Equity:
Preferred stock, $.01 par, 5,000 shares authorized, none issued and outstanding at December 28, 2019 and December 29, 2018	—			—
Common stock, $.01 par, 5,000 shares authorized, issued and outstanding at December 28, 2019 and December 29, 2018	—			—
Additional paid-in capital	553,359			549,528
Accumulated deficit	(176,217		)	(72,831		)
Accumulated other comprehensive loss	(32,040		)	(37,590		)
Total stockholder's equity	345,102			439,107
Total liabilities and stockholder's equity	$	2,441,210		$	2,431,470

The Notes to Consolidated Financial Statements are an integral part of these statements.

THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)



	Year Ended December 28, 2019		Year Ended December 29, 2018		Year Ended December 30, 2017
Net sales	$	1,214,362	$	974,175	$	838,368
Cost of sales (exclusive of depreciation and amortization shown separately below)	693,881		537,885		455,717
Selling, general and administrative expenses	382,131		320,543		274,044
Depreciation	65,658		46,060		34,016

10590 Hamilton Avenue

Cincinnati

(Address of principal executive offices)

(Zip Code)