Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

October 26, 2020

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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 September 26, 2020
OR
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
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.   
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 October 26, 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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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands, except per share amounts)

  September 26,
2020
December 28,
2019
ASSETS
Current assets:
Cash and cash equivalents $ 32,936  $ 19,973 
Accounts receivable, net of allowances of $1,617 ($1,891 - 2019)
148,354  88,374 
Inventories, net 338,191  323,496 
Other current assets 23,946  8,828 
Total current assets 543,427  440,671 
Property and equipment, net of accumulated depreciation of $225,253 ($179,791 - 2019)
182,937  205,160 
Goodwill 817,781  819,077 
Other intangibles, net of accumulated amortization of $275,972 ($232,060 - 2019)
839,322  882,430 
Operating lease right of use assets 78,546  81,613 
Deferred tax asset 1,514  702 
Other assets 11,154  11,557 
Total assets $ 2,474,681  $ 2,441,210 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 166,771  $ 125,042 
Current portion of debt and capital leases 11,423  11,358 
Current portion of operating lease liabilities 12,235  11,459 
Accrued expenses:
Salaries and wages 27,011  12,937 
Pricing allowances 8,664  6,553 
Income and other taxes 6,824  5,248 
Interest 17,583  14,726 
Other accrued expenses 29,704  21,545 
Total current liabilities 280,215  208,868 
Long term debt 1,562,428  1,584,289 
Deferred tax liabilities 187,938  196,437 
Operating lease liabilities 70,474  73,227 
Other non-current liabilities 32,524  33,287 
Total liabilities $ 2,133,579  $ 2,096,108 
Commitments and contingencies (Note 6)
Stockholder's Equity:
Preferred stock, $0.01 par, 5,000 shares authorized, none issued or outstanding at September 26, 2020 and December 28, 2019
   
Common stock, $0.01 par, 5,000 shares authorized, issued and outstanding at September 26, 2020 and December 28, 2019
   
Additional paid-in capital 557,177  553,359 
Accumulated deficit (179,535) (176,217)
Accumulated other comprehensive loss (36,540) (32,040)
Total stockholder's equity 341,102  345,102 
Total liabilities and stockholder's equity $ 2,474,681  $ 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 INCOME (LOSS) (Unaudited)
(dollars in thousands)


Thirteen Weeks Ended
September 26, 2020
Thirteen Weeks Ended
September 28, 2019
Thirty-nine Weeks Ended
September 26, 2020
Thirty-nine Weeks Ended
September 28, 2019
Net sales $ 398,680  $ 317,277  $ 1,041,226  $ 929,564 
Cost of sales (exclusive of depreciation and amortization shown separately below) 227,481  176,586  590,294  523,816 
Selling, general and administrative expenses 107,333  99,329  292,056  288,047 
Depreciation 15,926  16,269  50,673  48,740 
Amortization 14,883  14,665  44,596  44,114 
Management fees to related party 130  140  451  396 
Other (income) expense (2,175) 335  (2,120) 5,687 
Income from operations 35,102  9,953  65,276  18,764 
Interest expense, net 20,688  24,882  67,746  77,509 
Interest expense on junior subordinated debentures 3,219  3,152  9,555  9,456 
(Gain) loss on mark-to-market adjustment of interest rate swap (773) 315  1,169  3,217 
Investment income on trust common securities (94) (95) (283) (284)
Income (loss) before income taxes 12,062  (18,301) (12,911) (71,134)
Income tax (benefit) expense 1,400  (3,775) (9,593) (1,844)
Net income (loss) $ 10,662  $ (14,526) $ (3,318) $ (69,290)
Net income (loss) from above $ 10,662  $ (14,526) $ (3,318) $ (69,290)
Other comprehensive income (loss):
Foreign currency translation adjustments 3,070  (1,705) (4,500) 3,621 
Total other comprehensive income (loss) 3,070  (1,705) (4,500) 3,621 
Comprehensive income (loss) $ 13,732  $ (16,231) $ (7,818) $ (65,669)

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)
  Thirty-nine Weeks Ended
September 26, 2020
Thirty-nine Weeks Ended
September 28, 2019
Cash flows from operating activities:
Net loss $ (3,318) $ (69,290)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 95,269  92,854 
Deferred income taxes (9,182) (2,522)
Deferred financing and original issue discount amortization 2,805  2,779 
Stock-based compensation expense 3,818  1,906 
Asset impairment 210  6,896 
Gain on disposal of property and equipment (23) (123)
Change in fair value of contingent consideration (1,300)  
Other non-cash interest and change in value of interest rate swap 1,245  3,217 
Changes in operating items:
Accounts receivable (60,470) (4,707)
Inventories (16,793) (13,232)
Other assets (15,276) 2,212 
Accounts payable 42,201  4,508 
Other accrued liabilities 28,402  10,369 
Net cash provided by operating activities 67,588  34,867 
Cash flows from investing activities:
Acquisition of business, net of cash received (800) (6,135)
Capital expenditures (29,182) (41,097)
Proceeds from sale of property and equipment   9,929 
Net cash used in investing activities (29,982) (37,303)
Cash flows from financing activities:
Repayments of senior term loans (7,956) (7,956)
Borrowings on revolving credit loans 78,000  27,500 
Repayments of revolving credit loans (94,000) (32,700)
Principal payments under finance and capitalized lease obligations (624) (484)
Proceeds from sale of Holdco stock   750 
Net cash used by financing activities (24,580) (12,890)
Effect of exchange rate changes on cash (63) 34 
Net increase (decrease) in cash and cash equivalents 12,963  (15,292)
Cash and cash equivalents at beginning of period 19,973  28,234 
Cash and cash equivalents at end of period $ 32,936  $ 12,942 
Supplemental disclosure of cash flow information:
Interest paid on junior subordinated debentures, net $ 9,272  $ 9,172 
Interest paid 59,147  77,340 
Income taxes paid 475  700 

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
Thirty-nine weeks ended September 26, 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 —  1,525  —  —  1,525 
Change in cumulative foreign currency translation adjustment  —  —  —  3,643  3,643 
Balance at June 27, 2020   556,029  (190,197) (39,610) 326,222 
Net income —  —  10,662  —  10,662 
Stock-based compensation —  1,148  —  —  1,148 
Change in cumulative foreign currency translation adjustment  —  —  —  3,070  3,070 
Balance at September 26, 2020 $   $ 557,177  $ (179,535) $ (36,540) $ 341,102 
Thirty-nine weeks ended September 28, 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 
Net loss —  —  (14,526) —  (14,526)
Stock-based compensation —  1,244  —  —  1,244 
Dividend to Holdco —  750  —  —  750 
Change in cumulative foreign currency translation adjustment  —  —  —  (1,705) (1,705)
Balance at September 28, 2019 $   $ 552,184  $ (142,121) $ (33,969) $ 376,094 

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 thirty-nine weeks ended September 26, 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 thirty-nine weeks ended September 26, 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 September 26, 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 September 26, 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.

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 loss, cash flows, or stockholder’s equity.

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.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 September 26, 2020
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
Fastening and Hardware $ 202,876  $   $ 38,383  $ 241,259 
Personal Protective 97,431    12  97,443 
Keys and Key Accessories   44,974  790  45,764 
Engraving   14,205  2  14,207 
Resharp   7    7 
Consolidated $ 300,307  $ 59,186  $ 39,187  $ 398,680 
Thirteen weeks ended September 28, 2019
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
Fastening and Hardware $ 163,860  $   $ 31,362  $ 195,222 
Personal Protective 59,087      59,087 
Keys and Key Accessories   49,230  1,170  50,400 
Engraving   12,556  1  12,557 
Resharp   11    11 
Consolidated $ 222,947  $ 61,797  $ 32,533  $ 317,277 
Thirty-nine weeks ended September 26, 2020
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
Fastening and Hardware $ 543,832  $   $ 98,430  $ 642,262 
Personal Protective 239,151    78  239,229 
Keys and Key Accessories   119,001  2,039  121,040 
Engraving   38,666  5  38,671 
Resharp   24    24 
Consolidated $ 782,983  $ 157,691  $ 100,552  $ 1,041,226 
Thirty-nine weeks ended September 28, 2019
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
Fastening and Hardware $ 465,524  $   $ 96,248  $ 561,772 
Personal Protective 185,430      185,430 
Keys and Key Accessories   139,718  2,983  142,701 
Engraving   39,646  4  39,650 
Resharp   11    11 
Consolidated $ 650,954  $ 179,375  $ 99,235  $ 929,564 

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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The following table disaggregates our revenue by geographic location:

Thirteen weeks ended September 26, 2020
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
United States $ 295,689  $ 58,566  $   $ 354,255 
Canada 2,292  620  39,187  42,099 
Mexico 2,326      2,326 
Consolidated $ 300,307  $ 59,186  $ 39,187  $ 398,680 

Thirteen weeks ended September 28, 2019
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
United States $ 218,585  $ 61,241  $   $ 279,826 
Canada 1,622  556  32,533  34,711 
Mexico 2,740      2,740 
Consolidated $ 222,947  $ 61,797  $ 32,533  $ 317,277 

Thirty-nine weeks ended September 26, 2020
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
United States $ 771,064  $ 156,249  $   $ 927,313 
Canada 4,833  1,442  100,552  106,827 
Mexico 7,086      7,086 
Consolidated $ 782,983  $ 157,691  $ 100,552  $ 1,041,226 

Thirty-nine weeks ended September 28, 2019
Fastening, Hardware, and Personal Protective Solutions Consumer Connected Solutions Canada Total Revenue
United States $ 638,322  $ 178,028  $   $ 816,350 
Canada 4,045  1,347  99,235  104,627 
Mexico 8,587      8,587 
Consolidated $ 650,954  $ 179,375  $ 99,235  $ 929,564 

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.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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.


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.
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THE HILLMAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
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 September 26, 2020
Fastening, Hardware, and Personal Protection
$ 567,847  $   $   $   $ (604) $ 567,243 
Consumer Connected Solutions 222,096          222,096 
Canada 29,134        (692) 28,442 
Total $ 819,077  $   $   $   $ (1,296) $ 817,781 
 
(1)The "Other" change to goodwill relates to adjustments resulting from fluctuations in foreign currency exchange rates for the Canada and Mexico reporting units.
Other intangibles, net, as of September 26, 2020 and December 28, 2019 consist of the following: 
Estimated
Useful Life
(Years)
September 26, 2020 December 28, 2019
Customer relationships 13 - 20 $ 939,908  $ 941,305 
Trademarks - Indefinite Indefinite 85,262  85,517 
Trademarks - Other 7 - 15 26,400  26,700 
Technology and patents 7 - 12 63,724  60,968 
Intangible assets, gross 1,115,294  1,114,490 
Less: Accumulated amortization 275,972  232,060 
Other intangibles, net $