NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of BlueLinx Holdings Inc. and its wholly owned subsidiaries (the “Company”). These financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted (“GAAP”) in the United States (“U.S.”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K (the “Annual Report on Form 10-K”) for the year ended
December 30, 2017
, as filed with the Securities and Exchange Commission on March 1, 2018.
Our financial condition as of, and our operating results for, the three- and six-month periods ended June 30, 2018 are not necessarily indicative of the financial condition and results that may be expected for the full year ending December 29, 2018 or any other interim period. Certain prior period amounts have been reclassified to conform to the current period's presentation. These reclassifications did not materially impact the Company's operating income (loss) or consolidated net income (loss).
Acquisition of Cedar Creek
On April 13, 2018, we completed our previously announced acquisition of Cedar Creek Holdings, Inc. ("Cedar Creek"). Upon closing of the acquisition, Cedar Creek became one of our indirect wholly-owned subsidiaries. As a result of the acquisition, we increased the number of our distribution facilities to approximately
70
facilities, and increased the number of our full-time employees to over
2,500
persons.
The preliminary aggregate purchase price was approximately
$361.8 million
, consisting of: (i) payments to Cedar Creek’s shareholders in exchange for common stock valued at approximately $
166.4 million
; (ii)
$13.7 million
to pay off debt to a subordinated shareholder; (iii)
$174.2 million
to pay off an existing Cedar Creek debt; and (iv)
$7.3 million
in transaction costs paid on behalf of the seller. The final purchase price is subject to a customary post-closing adjustment for, among other things, final working capital of the acquired business (See Note 2).
The assets acquired and liabilities assumed and the results of operations of the acquired business are included in our consolidated results for the period from April 13, 2018, to June 30, 2018.
Revolving Credit Facility
On April 13, 2018, in connection with the acquisition of Cedar Creek, we amended and restated our existing credit agreement, pursuant to which we increased the aggregate commitments of our senior-secured asset-based revolving loan and letter of credit facility (the “Revolving Credit Facility”) to
$600.0 million
(an increase of
$265.0 million
). The amended Revolving Credit Facility also provides for an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to
$150.0 million
, subject to certain conditions, including lender consent. A portion of the proceeds from the Revolving Credit Facility were used to fund the purchase price for Cedar Creek, transaction costs in connection with amending and restating the Revolving Credit Facility, and transaction costs in connection with the acquisition of Cedar Creek (See Note 6).
Term Loan Facility
On April 13, 2018, in connection with the acquisition of Cedar Creek, we entered into a new credit and guaranty agreement (the “Term Loan Agreement”) with HPS Investment Partners, LLC, as administrative agent and collateral agent (“HPS”) and certain other financial institutions party thereto. The Term Loan Agreement provides for a senior secured first lien term loan facility in an aggregate principal amount of
$180.0 million
(the “Term Loan Facility”). The
proceeds from the Term Loan Facility were used to fund a portion of the purchase price for Cedar Creek, to fund transaction costs of the Term Loan Facility, and transaction costs in connection with the acquisition of Cedar Creek (See Note 6).
Recently Adopted Accounting Standards
Revenue from Contracts with Customers.
In 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606) (“ASC 606”)” that superseded existing revenue recognition guidance. Under this ASU and subsequently issued amendments, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received. The standard was effective for the first interim period within annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016
.
Entities were permitted to adopt the standard using a “full retrospective” approach (retrospectively to each prior reporting period presented) or a “modified retrospective” approach (reporting the cumulative effect as of the date of adoption).
On December 31, 2017, the first day of our fiscal 2018 year, we adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of that date. Results for reporting periods beginning after the first day of fiscal 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under the previous accounting standard, ASC 605.
There was no adjustment due to the cumulative impact of adopting ASC 606 (See Note 4).
Standards Effective in Future Years
Leases.
In 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This standard will require leases with durations greater than twelve months to be recognized on the balance sheet and is effective for interim and annual reporting periods beginning after December 15, 2018. We will adopt this standard, and all related amendments thereto, effective January 1, 2019.
We have not completed our assessment, but the adoption of this standard may have a significant impact on our Condensed Consolidated Balance Sheets. However, we do not expect the adoption to have a significant impact on the recognition, measurement or presentation of lease expense within the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) or the Condensed Consolidated Statements of Cash Flows. Information about our undiscounted future lease payments and the timing of those payments is presented in Note 13, “Lease Commitments,” in our Annual Report on Form 10-K.
Goodwill.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350).” This standard is intended to simplify the test for goodwill impairments by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new ASU, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The accounting standard will be effective for reporting periods beginning after December 15, 2019. We have not completed our assessment of the standard but we do not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations and cash flows. We will adopt this standard effective January 1, 2019.
Comprehensive Income
. In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220).” This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income (loss) (“AOCI”) to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. We have not completed our assessment, but the adoption of the standard may impact tax amounts stranded in AOCI related to our pension plans. We will adopt this standard effective January 1, 2019.
2. Acquisition
On April 13, 2018, we completed our previously announced acquisition of Cedar Creek for a preliminary purchase price of approximately
$361.8 million
. The acquisition was completed pursuant to the terms of an Agreement and Plan of Merger (the "Merger Agreement"), dated as of March 9, 2018, by and among BlueLinx Corporation, one of our wholly owned subsidiaries, Panther Merger Sub, Inc., a wholly-owned subsidiary of BlueLinx Corporation ("Merger Sub"), Cedar Creek, and CharlesBank Equity Fund VII, Limited Partnership (“CharlesBank”). Upon closing the transactions contemplated by the Merger Agreement, among other things, Merger Sub was merged with and into Cedar Creek, with Cedar Creek surviving the acquisition as one of our indirect wholly-owned subsidiaries. As a result of the acquisition, we increased the number of our distribution facilities to approximately
70
facilities, and increased the number of our full-time employees to over
2,500
persons.
Cedar Creek was established in 1977 as a wholesale building materials distribution company, that distributes wood products across the United States. Its products include specialty lumber, oriented strand board, siding, cedar, spruce, engineered wood products and other building products.
The acquisition is being accounted for under the acquisition method of accounting. The assets acquired and liabilities assumed and the results of operations of the acquired business are included in our consolidated results for the period from April 13, 2018, to June 30, 2018.
The acquired business contributed net sales and net income of
$358.1 million
and
$1.2 million
, respectively, to the Company for the period from April 13, 2018, to June 30, 2018. The net income for the period from April 13, 2018, to June 30, 2018 included integration-related costs and the negative impact of selling a higher cost Cedar Creek inventory recorded at fair value. The following unaudited consolidated pro forma information presents consolidated information as if the acquisition had occurred on January 1, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands, except per share data)
|
|
June 30, 2018
|
|
July 1, 2017
|
|
June 30, 2018
|
|
July 1, 2017
|
Net sales
|
|
$
|
948,555
|
|
|
$
|
848,644
|
|
|
$
|
1,732,822
|
|
|
$
|
1,618,383
|
|
Net income (loss)
|
|
9,180
|
|
|
5,963
|
|
|
(1,439
|
)
|
|
(30,290
|
)
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.00
|
|
|
$
|
0.66
|
|
|
$
|
(0.16
|
)
|
|
$
|
(3.36
|
)
|
Diluted
|
|
0.98
|
|
|
0.65
|
|
|
(0.16
|
)
|
|
(3.36
|
)
|
The pro forma amounts above have been calculated in accordance with GAAP after applying the Company's accounting policies and adjusting: (i) the three and six months ending June 30, 2018, to reflect a
$10.9 million
charge related to an inventory step-up adjustment, and the three and six months ended July 1, 2017, for
$0
and
$11.6 million
, respectively; (ii) the three and six months ending June 30, 2018, for
$30.4 million
and
$34.0 million
, respectively, for transaction related costs, and the three and six months ended July 1, 2017, for
$0
and
$34.0 million
, respectively. Due to the net loss for the six-month periods ended
June 30, 2018
and 2017,
$0.1 million
of incremental shares from share-based compensation arrangements were excluded from the computation of diluted weighted average shares outstanding, in both periods, because their effect would be anti-dilutive. The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the acquisition, are presented for illustrative purposes only, and are not necessarily indicative of results that would have been achieved had the acquisition occurred as of January 1, 2017, or of future operating performance.
The following table describes the payments to Cedar Creek’s equity holders and the debt paid and incurred in connection with the acquisition:
|
|
|
|
|
|
|
|
|
(In thousands)
|
Consideration paid to shareholders and amounts paid to creditors:
|
|
|
Payments to Cedar Creek shareholders
[1]
|
|
$
|
166,447
|
|
|
Subordinated unsecured note (due to shareholder)
[2]
|
|
|
13,743
|
|
|
Seller’s transaction costs paid by Company
|
|
|
7,349
|
|
|
Add: pay off of Cedar Creek debt:
|
|
|
|
|
Credit agreement
[3]
|
|
|
174,213
|
|
|
Total preliminary cash purchase price
|
|
$
|
361,752
|
|
|
_____________
|
|
|
[1]
|
Payments to Cedar Creek’s shareholders include the purchase of common stock and certain escrow adjustments.
|
|
|
|
[2]
|
The Cedar Creek note payable to a shareholder of $13.7 million was paid in full upon the acquisition of Cedar Creek and included $10 million in subordinated debt and $3.7 million in accrued interest.
|
|
|
|
[3]
|
To finance the acquisition of Cedar Creek, the Company amended and restated its Revolving Credit Facility to increase the availability thereunder to $600.0 million, with an uncommitted accordion feature of up to $150.0 million, and also entered into a new $180.0 million senior secured Term Loan Facility (See Note 6).
|
The excess of total preliminary purchase price, which includes the aggregate cash consideration paid in excess of the fair value of the tangible and intangible assets acquired, was recorded as goodwill. The goodwill recognized is attributable to the expected operating synergies and growth potential that the Company expects to realize from the acquisition. Additional goodwill generated from the acquisition is not deductible for tax purposes.
When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. These estimates, judgments and assumptions are subject to change upon final valuation and should be treated as preliminary values. Changes to the preliminary estimates will be made as soon as practicable, but no later than one year following the acquisition date.
The final allocation of purchase consideration, based on final valuations, could include changes in the estimated fair value of inventories; property, plant and equipment; customer relationships, noncompete agreements, trade names, and other intangibles; and deferred income taxes. The information below represents the preliminary purchase price allocation:
|
|
|
|
|
|
|
|
(In thousands)
|
Cash and net working capital assets
(excluding inventory)
|
|
$
|
90,768
|
|
Inventory
|
|
|
159,041
|
|
Property and equipment
|
|
|
70,386
|
|
Other, net
|
|
|
8,045
|
|
Intangible assets and goodwill:
|
|
|
|
|
Customer relationships
|
|
|
26,500
|
|
Non-compete agreements
|
|
|
7,980
|
|
Trade names
|
|
|
6,826
|
|
Favorable leasehold interests
|
|
|
800
|
|
Goodwill
|
|
|
36,159
|
|
Capital leases and other liabilities
|
|
|
(44,753
|
)
|
Cash purchase price
|
|
$
|
361,752
|
|
3. Goodwill and Other Intangible Assets
In connection with the acquisition of Cedar Creek, we acquired certain intangible assets. As of June 30, 2018, our intangible assets consists of goodwill and other intangible assets including customer relationships, noncompete agreements, trade names, and favorable leasehold interests.
Goodwill
Goodwill is the excess of the cost of an acquired entity over the fair value of tangible and intangible assets (including customer relationships, noncompete agreements, trade names and favorable lease interests) acquired and liabilities assumed under acquisition accounting for business combinations.
During the six months ended June 30, 2018, we preliminarily allocated the fair values of assets acquired and liabilities assumed in the acquisition of Cedar Creek and recognized
$36.1 million
in goodwill. This amount is subject to change.
Definite-Lived Intangible Assets.
At June 30, 2018, in connection with the acquisition of Cedar Creek, we had definite-lived intangible assets that related to customer relationships, noncompete agreements, trade names and favorable leasehold interests.
At June 30, 2018, the gross carrying amounts, the accumulated amortization and the net carrying amounts of our definite-lived intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Gross carrying amounts
|
|
Accumulated
Amortization
|
[2]
|
Net carrying amounts
|
Customer relationships
|
|
$
|
26,500
|
|
|
$
|
(934
|
)
|
|
$
|
25,566
|
|
Noncompete agreements
|
|
|
7,980
|
|
|
|
(450
|
)
|
|
|
7,530
|
|
Trade names
|
|
|
6,826
|
|
|
|
(480
|
)
|
|
|
6,346
|
|
Favorable leasehold interests
[1]
|
|
|
800
|
|
|
|
(12
|
)
|
|
|
788
|
|
Total
|
|
$
|
42,106
|
|
|
$
|
(1,876
|
)
|
|
$
|
40,230
|
|
____________________
[1]
Amortized to rent expense
[2]
Intangible assets except customer relationships are amortized on straight line basis. Customer relationships are amortized on a double declining balance method.
Amortization Expense
The weighted average estimated useful life remaining for customer relationships, noncompete agreements, trade names and favorable leasehold interest is approximately
12 years
,
4 years
,
3 years
and
12 years
respectively. Amortization expense for the definite-lived intangible assets was
$1.9 million
for both the three and six-month periods ended June 30, 2018. There were no amortization charges for the comparative periods of the prior year. Total estimated annual amortization expense for definite-lived intangible assets over the next
five
fiscal years is approximately
$8.5 million
per year.
Valuation of Goodwill
The carrying values of our goodwill will be tested for impairment annually using a measurement date of October 1. In addition, we evaluate the carrying values of these assets for impairment between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amounts may be impaired. Such events and indicators may include, without limitation, significant declines in the industries in which our products are used, significant changes in capital market conditions and significant changes in our market capitalization.
4. Revenue Recognition
We recognize revenue when (or as) the following criteria are met: i) contract with the customer has been identified; ii) performance obligations in the contract have been identified; iii) transaction price has been determined; iv) the
transaction price has been allocated to the performance obligations; and v) the related performance obligations are satisfied.
Contracts with our customers are generally in the form of standard terms and conditions of sale. From time to time, we may enter into specific contracts with some of our larger customers, which may affect delivery terms. Performance obligations in our contracts generally consist solely of delivery of goods. For all sales channel types, consisting of warehouse, direct, and reload sales, we typically satisfy our performance obligations upon shipment. Our customer payment terms are typical for our industry, and may vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not deemed to be significant by us. For certain sales channels and/or products, our standard terms of payment may be as early as
ten
days.
In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis. Customer consigned inventory is maintained and stored by certain customers; however, ownership and risk of loss remains with us. When the consigned inventory is sold by the customer, we recognize revenue on a gross basis, and subsequently adjust for trade allowances at month-end.
All revenues recognized are net of trade allowances (i.e., rebates), cash discounts and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Adjustments to earnings resulting from revisions to estimates on discounts and returns have been insignificant for each of the reported periods. Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration.
The following table presents our revenues disaggregated by revenue source. Sales and usage-based taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30, 2018
|
|
July 1, 2017
|
|
June 30, 2018
|
|
July 1, 2017
|
Structural products
|
$
|
422,464
|
|
|
$
|
213,986
|
|
|
$
|
628,861
|
|
|
$
|
404,699
|
|
Specialty products
|
473,410
|
|
|
263,749
|
|
|
704,891
|
|
|
502,868
|
|
Other
[1]
|
(2,922
|
)
|
|
(3,734
|
)
|
|
(3,313
|
)
|
|
(4,958
|
)
|
Total net sales
|
$
|
892,952
|
|
|
$
|
474,001
|
|
|
$
|
1,330,439
|
|
|
$
|
902,609
|
|
____________________________________
[1]
“Other” includes unallocated allowances and discounts.
The following table presents our revenues disaggregated by sales channel. Sales and usage-based taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30, 2018
|
|
July 1, 2017
|
|
June 30, 2018
|
|
July 1, 2017
|
Warehouse
|
$
|
704,328
|
|
|
$
|
353,157
|
|
|
$
|
1,037,633
|
|
|
$
|
672,588
|
|
Direct
|
165,630
|
|
|
97,729
|
|
|
248,572
|
|
|
185,240
|
|
Reload and service revenue
|
34,914
|
|
|
31,515
|
|
|
63,184
|
|
|
59,902
|
|
Variable consideration
|
(11,920
|
)
|
|
(8,400
|
)
|
|
(18,950
|
)
|
|
(15,121
|
)
|
Total net sales
|
$
|
892,952
|
|
|
$
|
474,001
|
|
|
$
|
1,330,439
|
|
|
$
|
902,609
|
|
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general, and administrative expense.
We have made an accounting policy election to treat any common carrier shipping and handling activities as a fulfillment cost, rather than as a separate obligation or separate promised service.
5. Other Current Liabilities
The following table shows the components of other current liabilities:
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2018
|
|
December 30, 2017
[2]
|
Employee benefits
[1]
|
$
|
7,750
|
|
|
$
|
2,169
|
|
Insurance reserves and retention
|
3,239
|
|
|
4,070
|
|
State income taxes payable
|
3,230
|
|
|
14
|
|
Property, sales, and other non-income taxes payable
|
5,270
|
|
|
3,226
|
|
Accrued interest and other
|
2,416
|
|
|
1,293
|
|
Total
|
$
|
21,905
|
|
|
$
|
10,772
|
|
________________________________
[1]
As of
June 30, 2018
, included
$6.6 million
due to the current portion of cash-settled Stock Appreciation Rights (See Note 8). On December 30, 2017, this balance included
$1.0 million
of 401(k) match that was paid in the first quarter of fiscal 2018.
[2]
Original presentation of other current liabilities as of December 30, 2017 in the Annual Report on Form 10-K included short-term capital lease obligations and the current portion of deferred gain on sale-leaseback transactions, which are now separately stated on our Condensed Consolidated Balance Sheets.
6. Long-Term Debt
As of June 30, 2018 and December 30, 2017, long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 30,
|
(In thousands)
|
|
Maturity Date
|
|
2018
|
|
2017
|
Revolving Credit Facility (net of deferred financing
fees of $6.0 million and $3.1 million at June 30,
2018 and December 30, 2017, respectively)
|
|
October 10, 2022
|
|
$
|
443,586
|
|
|
$
|
179,569
|
|
Mortgage Note Payable (net of deferred financing fees
of $0 million and $0.8 million at June 30, 2018
and December 30, 2017, respectively)
|
|
NA
|
|
|
—
|
|
|
|
97,108
|
|
Term Loan Facility (net of deferred financing fees
of $6.4 million and $0 million at June 30, 2018
and December 30, 2017, respectively)
|
|
October 13, 2023
|
|
|
173,205
|
|
|
|
—
|
|
Total debt
|
|
|
|
|
616,791
|
|
|
|
276,677
|
|
Less: current portion of long-term debt
|
|
|
|
|
(1,736
|
)
|
|
|
—
|
|
Long-term debt, net
|
|
|
|
$
|
615,055
|
|
|
$
|
276,677
|
|
Revolving Credit Facility
On April 13, 2018, we entered into an Amended and Restated Credit Agreement, with certain of our subsidiaries as borrowers (together with us, the “Borrowers”) or guarantors thereunder, Wells Fargo Bank, National Association, in its capacity as administrative agent (“Wells Fargo”), and certain other financial institutions party thereto (the “Revolving Credit Agreement”). The Revolving Credit Agreement provides for a senior secured revolving loan and letter of credit facility of up to
$600 million
and an uncommitted accordion feature that permits the Borrowers to increase the facility by an aggregate additional principal amount of up to
$150 million
. If the Borrowers obtain the full amount of the additional increases in commitments, the Revolving Credit Facility will allow borrowings of up to
$750 million
. Letters of credit in an aggregate amount of up to
$30 million
are also available under the Revolving Credit Agreement, which would reduce the amount of the revolving loans available under the Revolving Credit Facility. The maturity date of the Revolving Credit Agreement is October 10, 2022. The Revolving Credit Agreement amends and restates the Borrowers’ existing
$335 million
secured revolving credit facility, dated October 10, 2017, as amended. The proceeds from the Revolving Credit Facility were used to repay outstanding obligations under the Borrowers’ existing revolving credit facility, to fund a portion of the cash consideration payable in connection with
the acquisition of Cedar Creek, to fund transaction costs in connection with the acquisition and the amendment of the Revolving Credit Facility, to provide working capital and for other general corporate purposes.
In connection with the execution and delivery of the Revolving Credit Agreement, we also entered into, with certain of our subsidiaries, a Guaranty and Security Agreement with Wells Fargo (the “Revolving Guaranty and Security Agreement”). Pursuant to the Revolving Guaranty and Security Agreement, the Borrowers’ obligations under the Revolving Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets (other than real property), including inventories, accounts receivable, and proceeds from those items.
Borrowings under the Revolving Credit Agreement will be subject to availability under the Borrowing Base (as that term is defined in the Revolving Credit Agreement). The Borrowers will be required to repay revolving loans thereunder to the extent that such revolving loans exceed the Borrowing Base then in effect. The Revolving Credit Facility may be prepaid in whole or in part from time to time without penalty or premium, but including all breakage costs incurred by any lender thereunder.
The Revolving Credit Agreement provides for interest on the loans at a rate per annum equal to (i)
LIBOR
plus a margin ranging from
1.75 percent
to
2.25 percent
, with the amount of such margin determined based upon the average of the Borrowers’ excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on LIBOR, or (ii) the administrative
agent’s base rate
plus a margin ranging from
0.75 percent
to
1.25 percent
, with the amount of such margin determined based upon the average of the Borrowers’ excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on the base rate.
In the event excess availability falls below the greater of (i)
$50 million
and (ii)
10 percent
of the lesser of (a) the borrowing base and (b) the maximum permitted credit at such time, the Revolving Credit Agreement requires maintenance of a fixed charge coverage ratio of
1.0
to
1.0
until such time as the Borrowers’ excess availability has been at least the greater of (i)
$50 million
and (ii)
10 percent
of the lesser of (a) the borrowing base and (b) the maximum permitted credit at such time for a period of 30 consecutive days.
The Revolving Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type as well as customary events of default.
As of June 30, 2018, we had outstanding borrowings of
$449.6 million
, excess availability of
$133.6 million
, and a weighted average interest rate of
4.1 percent
under our Revolving Credit Facility. As of December 30, 2017 our principal balance was
$182.7 million
, excess availability was
$63.3 million
and our weighted average interest rate was
4.2 percent
under our Revolving Credit Agreement.
We were in compliance with all covenants under the Credit Agreement as of June 30, 2018.
Term Loan Facility
On April 13, 2018, we entered into the Term Loan Agreement with HPS and certain other financial institutions as party thereto. The Term Loan Agreement provides for a Term Loan Facility of
$180 million
. The maturity date of the Term Loan Agreement is October 13, 2023. The proceeds from the Term Loan Facility were used to fund a portion of the cash consideration payable in connection with the acquisition of Cedar Creek and to fund transaction costs in connection with the acquisition and the Term Loan Facility.
In connection with the execution and delivery of the Term Loan Agreement, we also entered into a pledge and security agreement with HPS (the “Term Loan Security Agreement”). Pursuant to the Term Loan Security Agreement and other “Collateral Documents” (as such term is defined in the Term Loan Agreement), the Borrower’s obligations under the Term Loan Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets, including inventories, accounts receivable, real property, and proceeds from those items.
The Term Loan Agreement requires monthly interest payments, and quarterly principal payments of
$450,000
, in arrears. The Term Loan Agreement also requires certain mandatory prepayments of outstanding loans, subject to certain exceptions, including prepayments commencing with the fiscal year ending December 28, 2019 based on a percentage of excess cash flow (as defined in the Term Loan Agreement for such fiscal year). The remaining balance is due on the loan maturity date of October 13, 2023.
The Term Loan Facility may be prepaid in whole or in part from time to time, subject to payment of the “Prepayment Premium” (as such term is defined in the Term Loan Agreement) if such voluntary prepayment does not otherwise constitute an exception to the Prepayment Premium under the Term Loan Agreement and is made prior to the fourth anniversary of the closing date of the Term Loan Agreement, and all breakage costs incurred by any lender thereunder.
The Term Loan Agreement provides for interest on the term loan at a rate per annum equal to (i)
LIBOR
(subject to a
1.00 percent
floor) plus a margin of
7.00 percent
for loans based on LIBOR, or (ii) the administrative
agent’s base rate
(subject to a
2.00 percent
floor) plus a margin of
6.00 percent
, for loans based on the base rate.
The Term Loan Agreement requires maintenance of a total net leverage ratio of
8.25
to
1.00
for the fiscal quarter ending September 29, 2018, and such required covenant level reduces over the term of the Term Loan Facility as set forth in the Term Loan Agreement.
The Term Loan Agreement also contains representations and warranties and affirmative and negative covenants customary for financing transactions of this type, as well as customary events of default.
As of June 30, 2018, we had outstanding borrowings of
$179.6 million
under our Term Loan Credit Facility and a stated interest rate of
9.09 percent
per annum. At December 30, 2017, there were no outstanding borrowings under our Term Loan Credit Facility.
We were in compliance with all covenants under the Term Loan Agreement as of June 30, 2018.
Our remaining principal payment schedule for each of the next
five
years and thereafter is as follows:
|
|
|
|
|
|
(In thousands)
|
|
|
2018
|
|
$
|
900
|
|
2019
|
|
|
1,800
|
|
2020
|
|
|
1,800
|
|
2021
|
|
|
1,800
|
|
2022
|
|
|
1,800
|
|
Thereafter
|
|
|
171,450
|
|
7. Net Periodic Pension Cost
The following table shows the components of our net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30, 2018
|
|
July 1, 2017
|
|
June 30, 2018
|
|
July 1, 2017
|
Service cost
|
$
|
133
|
|
|
$
|
183
|
|
|
$
|
266
|
|
|
$
|
366
|
|
Interest cost on projected benefit obligation
|
963
|
|
|
1,178
|
|
|
1,926
|
|
|
2,356
|
|
Expected return on plan assets
|
(1,327
|
)
|
|
(1,584
|
)
|
|
(2,654
|
)
|
|
(3,168
|
)
|
Amortization of unrecognized loss
|
271
|
|
|
268
|
|
|
542
|
|
|
536
|
|
Net periodic pension cost
|
$
|
40
|
|
|
$
|
45
|
|
|
$
|
80
|
|
|
$
|
90
|
|
8. Stock Compensation
Cash-Settled Stock Appreciation Rights (“SARs”)
During fiscal 2016, we granted certain executives and employees cash-settled SARs. The cash-settled SARs vest on July 16, 2018, unless otherwise specifically amended. On the vesting date, half of any vested value of the cash-settled SARs will become payable within
thirty
days of the vesting date, and the remainder payable within
one
year of the vesting date. The exercise price for the cash-settled SARs was amended so that it is based on a
20
trading day average of the Company’s common stock through the vesting date, in excess of the
$7.00
grant date valuation.
As of
June 30, 2018
, there were
445,000
cash-settled SARs issued and outstanding. On December 30, 2017, we had accrued a total liability of approximately
$1.0 million
for the cash-settled SARs. On
June 30, 2018
, we increased the total liability to approximately
$13.3 million
, based on the assumptions below, which were largely driven by an increase in our stock price.
The following table summarizes the assumptions used to compute the current fair value of our cash-settled SARs:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
[1]
|
|
December 30, 2017
[2]
|
Stock price
|
|
$
|
37.44
|
|
|
$
|
9.76
|
|
Expected volatility
|
|
65.04
|
%
|
|
33.80
|
%
|
Risk-free interest rate
|
|
1.73
|
%
|
|
1.55
|
%
|
Expected term (in years)
|
|
0.04
|
|
|
0.54
|
|
Expected dividend yield
|
|
Not applicable
|
|
|
Not applicable
|
|
__________________________
[1]
Reflects an assumed exercise price based on the
20
trading day average. The
20
trading day average was based on the
20
trading days prior to the last trading day of the fiscal quarter, inclusive of the last trading day.
[2]
Reflects an assumed exercise price based on the closing stock price, as per the original SARs Agreement. The closing stock price used in the analysis was the closing stock price on the last trading day of the fiscal quarter.
Stock Compensation Expense
During the three months ended June 30, 2018 and July 1, 2017 we incurred stock based compensation expense of
$3.8 million
and
$0.7 million
respectively. During the six months ended June 30, 2018 and July 1, 2017 we incurred stock compensation expense of
$13.0 million
and
$1.5 million
, respectively. The increase in our stock compensation expense for the three and six-month periods of fiscal 2018 is attributable to cash-settled stock appreciation rights.
9. Lease Commitments
Capital Leases
We have entered into certain long-term, non-cancelable capital leases for real estate, along with certain logistics equipment and vehicles. The real estate leases contain customary extension option periods and annual fixed rent escalations. As of
June 30, 2018
, the acquisition value and net book value of all assets under capital leases was
$167.5 million
and
$148.0 million
, respectively.
At
June 30, 2018
, our total commitments under capital leases recorded in the Condensed Consolidated Balance Sheets within “capital leases - short term” and “capital leases - long term” were as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
Principal
[1]
|
|
Interest
|
2018
|
$
|
4,553
|
|
|
$
|
7,244
|
|
2019
|
7,464
|
|
|
13,801
|
|
2020
|
6,758
|
|
|
13,425
|
|
2021
|
4,446
|
|
|
13,129
|
|
2022
|
3,782
|
|
|
12,923
|
|
Thereafter
|
128,309
|
|
|
182,819
|
|
Total
|
$
|
155,312
|
|
|
$
|
243,341
|
|
_____________________________
[1]
Our principal amounts include negative amortization. Negative amortization occurs for us on some of our real estate leases because of the structure of the lease payments where the cash payment is applied to both interest and principal and wherein a calculated interest rate results in interest exceeding principal. The remaining amount of interest owed is added to the principal, resulting in the principal payment appearing as a negative.
In the case of certain of our real estate capital leases, negative amortization may occur because of a required allocation between land and building. Under the capital lease rules of the current lease accounting standard, ASC 840 (Leases), the lease payment is bifurcated between land and building, if certain conditions are met. In these cases, the portion of the payment attributed to the building is capitalized at the lesser of net present value or fair market value, and the interest rate is thus determined as the previously unknown variable; while the portion of the rental payment attributed to land is treated as rental expense.
Sale-Leaseback Transactions
On January 10, 2018, we completed sale-leaseback transactions on
four
distribution centers. We sold these properties for gross proceeds of
$110.0 million
. As a result of the sale-leaseback transactions, we recognized capital lease assets and obligations totaling
$95.1 million
on these properties, and a total deferred gain of
$83.9 million
, which will be amortized over the lives of the applicable leases, in accordance with U.S. GAAP. These capital lease obligations are reflected in the capital lease table above.
10. Commitments and Contingencies
Environmental and Legal Matters
From time to time, we are involved in various proceedings incidental to our businesses, and we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Although the ultimate outcome of these proceedings cannot be determined with certainty, based on presently available information management believes that adequate reserves have been established for probable losses with respect thereto. Management further believes that the ultimate outcome of these matters could be material to operating results in any given quarter but will not have a materially adverse effect on our long-term financial condition, our results of operations, or our cash flows.
Collective Bargaining Agreements
As of
June 30, 2018
, we employed over
2,500
persons on a full-time basis, of which approximately
1,100
were former employees of Cedar Creek. Additionally, at
June 30, 2018
, approximately
20 percent
of our employees were represented by various local labor union Collective Bargaining Agreements (“CBAs”). As of June 30, 2018, approximately
6 percent
of our employees are covered by CBAs that are up for renewal in fiscal 2018 or are currently expired and under negotiation.
11. Accumulated Other Comprehensive Loss
Comprehensive income (loss) is a measure of income (loss) which includes both net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) results from items deferred from recognition into our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Accumulated other comprehensive income (loss) is separately presented on our Condensed Consolidated Balance Sheets as part of common stockholders’ equity.
The changes in balances for each component of accumulated other comprehensive loss for the
six
months ended June 30, 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Foreign currency, net
of tax
|
|
Defined
benefit pension
plan, net of tax
|
|
Other,
net of tax
|
|
Total Accumulated Other Comprehensive Loss
|
December 30, 2017, beginning balance
|
$
|
674
|
|
|
$
|
(37,393
|
)
|
|
$
|
212
|
|
|
$
|
(36,507
|
)
|
Other comprehensive income (loss), net of tax
[1]
|
(3
|
)
|
|
404
|
|
|
—
|
|
|
401
|
|
June 30, 2018, ending balance, net of tax
|
$
|
671
|
|
|
$
|
(36,989
|
)
|
|
$
|
212
|
|
|
$
|
(36,106
|
)
|
____
____________________________
[1]
For the
six
months ended
June 30, 2018
, the actuarial loss recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) as a component of net periodic pension cost was
$0.5 million
, net of tax of
$0.1 million
(See Note 7).
12. Earnings (Loss) per Share
We calculate basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. We calculate diluted earnings per share by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including restricted stock units, performance shares, and performance units. Due to the net loss for the three- and six-month periods ended
June 30, 2018
,
$0.1 million
of incremental shares from share-based compensation arrangements were excluded from the computation of diluted weighted average shares outstanding, in both periods, because their effect would be anti-dilutive.
The reconciliation of basic earnings (loss) and diluted earnings (loss) per common share for the three- and six-month periods of fiscal 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(in thousands, except per share data)
|
June 30, 2018
|
|
July 1, 2017
|
|
June 30, 2018
|
|
July 1, 2017
|
Net income (loss)
|
$
|
(8,558
|
)
|
|
$
|
3,238
|
|
|
$
|
(21,985
|
)
|
|
$
|
3,822
|
|
|
|
|
|
|
|
|
|
Basic weighted shares outstanding
|
9,215
|
|
|
9,055
|
|
|
9,176
|
|
|
9,011
|
|
Dilutive effect of share-based awards
|
—
|
|
|
135
|
|
|
—
|
|
|
130
|
|
Diluted weighted average shares outstanding
|
9,215
|
|
|
9,190
|
|
|
9,176
|
|
|
9,141
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
(0.93
|
)
|
|
$
|
0.36
|
|
|
$
|
(2.40
|
)
|
|
$
|
0.42
|
|
Diluted earnings (loss) per share
|
$
|
(0.93
|
)
|
|
$
|
0.35
|
|
|
$
|
(2.40
|
)
|
|
$
|
0.42
|
|