Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 6, 2020

HILLMAN COMPANIES 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2020
Commission file number 1-13293
The Hillman Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware   23-2874736
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

10590 Hamilton Avenue 45231
Cincinnati , Ohio
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (513851-4900
Securities registered pursuant to Section 12(g) of the Act: None
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 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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes      No  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Trading symbols Name of Each Exchange on Which Registered
11.6% Junior Subordinated Debentures   None
Preferred Securities Guaranty                   None
On August 6, 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 symbol HLM.Pr.


Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
INDEX
 
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

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Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands, except per share amounts)

  June 27,
2020
December 28,
2019
ASSETS
Current assets:
Cash and cash equivalents $ 18,604    $ 19,973   
Accounts receivable, net of allowances of $1,444 ($1,891 - 2019) 148,798    88,374   
Inventories, net 319,395    323,496   
Other current assets 7,495    8,828   
Total current assets 494,292    440,671   
Property and equipment, net of accumulated depreciation of $211,133 ($179,791 - 2019) 192,092    205,160   
Goodwill 817,099    819,077   
Other intangibles, net of accumulated amortization of $260,870 ($232,060 - 2019) 853,400    882,430   
Operating lease right of use assets 80,405    81,613   
Deferred tax asset 1,916    702   
Other assets 11,298    11,557   
Total assets $ 2,450,502    $ 2,441,210   
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 128,661    $ 125,042   
Current portion of debt and capital leases 11,400    11,358   
Current portion of operating lease liabilities 11,844    11,459   
Accrued expenses:
Salaries and wages 18,251    12,937   
Pricing allowances 8,164    6,553   
Income and other taxes 6,287    5,248   
Interest 24,110    14,726   
Other accrued expenses 28,226    21,545   
Total current liabilities 236,943    208,868   
Long term debt 1,596,388    1,584,289   
Deferred tax liabilities 186,892    196,437   
Operating lease liabilities 72,615    73,227   
Other non-current liabilities 31,443    33,287   
Total liabilities $ 2,124,281    $ 2,096,108   
Commitments and contingencies (Note 6)
Stockholder's Equity:
Preferred stock, $.01 par, 5,000 shares authorized, none issued or outstanding at June 27, 2020 and December 28, 2019        
Common stock, $.01 par, 5,000 shares authorized, issued and outstanding at June 27, 2020 and December 28, 2019        
Additional paid-in capital 556,028    553,359   
Accumulated deficit (190,197)   (176,217)  
Accumulated other comprehensive loss (39,610)   (32,040)  
Total stockholder's equity 326,221    345,102   
Total liabilities and stockholder's equity $ 2,450,502    $ 2,441,210   
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(dollars in thousands)


Thirteen Weeks Ended
June 27, 2020
Thirteen Weeks Ended
June 29, 2019
Twenty-six Weeks Ended
June 27, 2020
Twenty-six Weeks Ended
June 29, 2019
Net sales $ 346,710    $ 324,628    $ 642,546    $ 612,287   
Cost of sales (exclusive of depreciation and amortization shown separately below) 196,402    181,309    362,813    347,230   
Selling, general and administrative expenses 94,970    96,883    184,723    188,718   
Depreciation 17,230    16,655    34,747    32,471   
Amortization 14,865    14,684    29,713    29,449   
Management fees to related party 196    125    321    256   
Other expense 2,319    6,426    55    5,352   
Income from operations 20,728    8,546    30,174    8,811   
Interest expense, net 23,878    26,064    47,058    52,627   
Interest expense on junior subordinated debentures 3,184    3,152    6,336    6,304   
(Gain) loss on mark-to-market adjustment of interest rate swap (308)   1,789    1,942    2,902   
Investment income on trust common securities (94)   (94)   (189)   (189)  
Loss before income taxes (5,932)   (22,365)   (24,973)   (52,833)  
Income tax (benefit) expense (1,703)   (2,869)   (10,993)   1,931   
Net loss $ (4,229)   $ (19,496)   $ (13,980)   $ (54,764)  
Net loss from above $ (4,229)   $ (19,496)   $ (13,980)   $ (54,764)  
Other comprehensive loss:
Foreign currency translation adjustments 3,643    2,547    (7,570)   5,326   
Total other comprehensive income (loss) 3,643    2,547    (7,570)   5,326   
Comprehensive loss $ (586)   $ (16,949)   $ (21,550)   $ (49,438)  

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
  Twenty-six Weeks Ended
June 27, 2020
Twenty-six Weeks Ended
June 29, 2019
Cash flows from operating activities:
Net loss $ (13,980)   $ (54,764)  
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 64,460    61,920   
Deferred income taxes (10,632)   1,326   
Deferred financing and original issue discount amortization 1,879    1,859   
Stock-based compensation expense 2,669    662   
Asset impairment 210    6,800   
Gain on disposal of property and equipment (337)   (121)  
Change in fair value of contingent consideration (1,300)      
Other non-cash interest and change in value of interest rate swap 1,942    2,902   
Changes in operating items:
Accounts receivable (61,318)   (13,394)  
Inventories 592    (2,000)  
Other assets 1,307    9,485   
Accounts payable 4,475    7,540   
Other accrued liabilities 12,306    7,764   
Accrued interest 9,384    (5,206)  
Net cash provided by operating activities 11,657    24,773   
Cash flows from investing activities:
Acquisition of business, net of cash received (800)      
Capital expenditures (22,196)   (27,771)  
Proceeds from sale of property and equipment     7,612   
Net cash used in investing activities (22,996)   (20,159)  
Cash flows from financing activities:
Repayments of senior term loans (5,304)   (7,956)  
Borrowings on revolving credit loans 66,000    12,500   
Repayments of revolving credit loans (50,000)   (20,200)  
Principal payments under finance and capitalized lease obligations (411)   (283)  
Net cash provided by (used in) financing activities 10,285    (15,939)  
Effect of exchange rate changes on cash (315)   44   
Net decrease in cash and cash equivalents (1,369)   (11,281)  
Cash and cash equivalents at beginning of period 19,973    28,234   
Cash and cash equivalents at end of period $ 18,604    $ 16,953   
Supplemental disclosure of cash flow information:
Interest paid on junior subordinated debentures, net $ 4,076    $ 6,115   
Interest paid 33,922    54,072   
Income taxes paid 100    400   

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
(dollars in thousands)
Common Stock Additional Paid-in-capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders Equity
Twenty-six weeks ended June 27, 2020
Balance at December 28, 2019 $     $ 553,359    $ (176,217)   $ (32,040)   $ 345,102   
Net loss —    —    (9,751)   —    (9,751)  
Stock-based compensation —    1,145    —    —    1,145   
Change in cumulative foreign currency translation adjustment  —    —    —    (11,213)   (11,213)  
Balance at March 28, 2020     554,504    (185,968)   (43,253)   325,283   
Net loss —    —    (4,229)   —    (4,229)  
Stock-based compensation —    1,524    —    —    1,524   
Change in cumulative foreign currency translation adjustment  —    —    —    3,643    3,643   
Balance at June 27, 2020 556,028    (190,197)   (39,610)   326,221   
Twenty-six weeks ended June 29, 2019
Balance at December 29, 2018 $     $ 549,528    $ (72,831)   $ (37,590)   $ 439,107   
Net loss —    —    (35,268)   —    (35,268)  
Stock-based compensation —    361    —    —    361   
Change in cumulative foreign currency translation adjustment  —    —    —    2,779    2,779   
Balance at March 30, 2019     549,889    (108,099)   (34,811)   406,979   
Net loss —    —    (19,496)   —    (19,496)  
Stock-based compensation —    301    —    —    301   
Change in cumulative foreign currency translation adjustment  —    —    —    2,547    2,547   
Balance at June 29, 2019 $     $ 550,190    $ (127,595)   $ (32,264)   $ 390,331   

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
 

1. Basis of Presentation:
The accompanying unaudited financial statements include the condensed consolidated accounts of The Hillman Companies, Inc. and its wholly-owned subsidiaries (collectively “Hillman” or the “Company”) for the twenty-six weeks ended June 27, 2020. Unless the context requires otherwise, references to "Hillman," "we," "us," "our," or "our Company" refer to The Hillman Companies, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The Hillman Companies, Inc. is a wholly-owned subsidiary of HMAN Intermediate II Holdings Corp., and a wholly-owned subsidiary of HMAN Group Holdings Inc. (“Holdco”).

The accompanying unaudited condensed consolidated financial statements present information in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. Accordingly, they do not include all information or footnotes required by U.S. generally accepted accounting principles for complete financial statements. Operating results for the twenty-six weeks ended June 27, 2020 do not necessarily indicate the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report filed on Form 10-K for the year ended December 28, 2019.

2. Summary of Significant Accounting Policies:
The significant accounting policies should be read in conjunction with the significant accounting policies included in the Form 10-K for the year ended December 28, 2019.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses for the reporting periods. Actual results may differ from these estimates.
The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates, employment rates and health insurance coverage, the speed of the anticipated recovery, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts COVID-19 as of June 27, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to the carrying value of the goodwill and other long-lived assets. While there was not a material impact to the Company’s consolidated financial statements as of and for the quarter ended June 27, 2020, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
Deferral of Trust Distributions:
On April 3, 2020, the Company announced that it is deferring the payment of distributions to holders of the Trust Preferred Securities to preserve liquidity due to the uncertainty of the financial impact of the COVID-19 pandemic, beginning with the April 2020 distribution. Pursuant to the Indenture that governs the Trust Preferred Securities, the Company is able to defer distribution payments to holders of the Trust Preferred Securities for a period that cannot exceed 60 months (the “Extension Period”). During the Extension Period, the Company is required to accrue the full amount of all distributions payable, and such deferred distributions will be immediately payable by the Company at the end of the Extension Period. As a result, the Company will accrue $0.241667 per share for each fiscal month that falls within the Extension Period. The Company will continue deferral of the distribution payments during this period of uncertainty with the COVID-19 pandemic and plans to resume distribution payments once economic and market conditions improve.

Reclassifications:
The Company reclassified the mark-to-market adjustment of our interest rate swap from other income/expense to its own line on the income statement below income from operations. The reclassifications had no impact on the prior periods’ statement of financial position, net income (loss), cash flows, or stockholder’s equity.

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Revenue Recognition:
Revenue is recognized when control of goods or services is transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.
The Company offers a variety of sales incentives to its customers primarily in the form of discounts and rebates. Discounts are recognized in the consolidated financial statements at the date of the related sale. Rebates are based on the revenue to date and the contractual rebate percentage to be paid. A portion of the cost of the rebate is allocated to each underlying sales transaction. Discounts and rebates are included in the determination of net sales.
The Company also establishes reserves for customer returns and allowances. The reserve is established based on historical rates of returns and allowances. The reserve is adjusted quarterly based on actual experience. Returns and allowances are included in the determination of net sales.
The following table displays our disaggregated revenue by product category:

Thirteen weeks ended June 27, 2020
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
Fastening and Hardware $ 190,572    $     $ 34,726    $ 225,298   
Personal Protective 78,927        66    78,993   
Keys and Key Accessories     30,649    220    30,869   
Engraving     11,542    1    11,543   
Resharp     7        7   
Consolidated $ 269,499    $ 42,198    $ 35,013    $ 346,710   
Thirteen weeks ended June 29, 2019
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
Fastening and Hardware $ 163,889    $     $ 37,011    $ 200,900   
Personal Protective 62,516            62,516   
Keys and Key Accessories     46,872    1,033    47,905   
Engraving     13,305    2    13,307   
Resharp                
Consolidated $ 226,405    $ 60,177    $ 38,046    $ 324,628   

Twenty-six weeks ended June 27, 2020
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
Fastening and Hardware $ 340,956    $     $ 60,047    $ 401,003   
Personal Protective 141,720        66    141,786   
Keys and Key Accessories     74,027    1,249    75,276   
Engraving     24,461    3    24,464   
Resharp     17        17   
Consolidated $ 482,676    $ 98,505    $ 61,365    $ 642,546   
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Twenty-six weeks ended June 29, 2019
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
Fastening and Hardware $ 301,664    $     $ 64,886    $ 366,550   
Personal Protective 126,343            126,343   
Keys and Key Accessories     90,488    1,813    92,301   
Engraving     27,090    3    27,093   
Resharp                
Consolidated $ 428,007    $ 117,578    $ 66,702    $ 612,287   

The following table disaggregates our revenue by geographic location:

Thirteen weeks ended June 27, 2020
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
United States $ 265,702    $ 41,837    $     $ 307,539   
Canada 1,272    361    35,013    36,646   
Mexico 2,525            2,525   
Consolidated $ 269,499    $ 42,198    $ 35,013    $ 346,710   
Thirteen weeks ended June 29, 2019
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
United States $ 221,672    $ 59,746    $ 281,418   
Canada 1,457    431    38,046    39,934   
Mexico 3,276            3,276   
Consolidated $ 226,405    $ 60,177    $ 38,046    $ 324,628   

Twenty-six weeks ended June 27, 2020
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
United States $ 475,376    $ 97,683    $     $ 573,059   
Canada 2,541    822    61,365    64,728   
Mexico 4,759            4,759   
Consolidated $ 482,676    $ 98,505    $ 61,365    $ 642,546   

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Table of Contents
THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Twenty-six weeks ended June 29, 2019
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
United States $ 419,737    $ 116,787    $     $ 536,524   
Canada 2,423    791    66,702    69,916   
Mexico 5,847            5,847   
Consolidated $ 428,007    $ 117,578    $ 66,702    $ 612,287   

Our revenue by geography is allocated based on the location of our sales operations. Our Fastening, Hardware, and Personal Protective Solutions segment contains sales of Big Time Products ("Big Time") personal protective equipment into Canada. Our Consumer Connected Solutions segment contains sales of MinuteKey into Canada.
Fastening, Hardware, and Personal Protective Solutions revenues consist primarily of the delivery of fasteners, anchors, specialty fastening products, and personal protective equipment such as gloves and eye-wear as well as in-store merchandising services for the related product category.
Consumer Connected Solutions revenues consist primarily of sales of keys and identification tags through self service key duplication and engraving kiosks. It also includes our associate-assisted key duplication systems and key accessories.
Canada revenues consist primarily of the delivery to Canadian customers of fasteners and related hardware items, threaded rod, keys, key duplicating systems, accessories, personal protective equipment, and identification items as well as in-store merchandising services for the related product category.
The Company’s performance obligations under its arrangements with customers are providing products, in-store merchandising services, and access to key duplicating and engraving equipment. Generally, the price of the merchandising services and the access to the key duplicating and engraving equipment is included in the price of the related products. Control of products is transferred at the point in time when the customer accepts the goods. The Company’s obligation to provide in-store service and access to key duplicating and engraving equipment is satisfied when control of the related products is transferred. Therefore, 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.

3. Recent Accounting Pronouncements:

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this ASU in the first quarter of fiscal 2020, and it did not have a material impact on the Company's Condensed Consolidated Financial Statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting which provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating contracts and the optional expedients provided by the new standard.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)


4. Acquisitions

On February 19, 2020, the Company acquired the assets of Instafob LLC ("Instafob") for a cash payment of $800 and a total purchase price of $2,618, which includes $1,818 in contingent and non-contingent considerations that remains payable to the seller. The financial results of Instafob reside within the Company's Consumer Connected Solutions segment and have been determined to be immaterial for purposes of additional disclosure.
5. Goodwill and Other Intangible Assets:
Goodwill amounts by reportable segment are summarized as follows:
Goodwill at Acquisitions Dispositions Adjustments
Other (1)
Goodwill at
December 28, 2019 June 27, 2020
Fastening, Hardware, and Personal Protection
$ 567,847    $     $     $     $ (704)   $ 567,143   
Consumer Connected Solutions 222,096                    222,096   
Canada 29,134                (1,274)