NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 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
nine
-month periods ended
September 29, 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).
Inventory Valuation
Inventories are valued at the lower of cost or net realizable value. The Company’s inventory is comprised of finished goods. Cost is determined based on the moving average cost method of inventory valuation. We evaluated our inventory value at the end of each quarter to ensure that inventory, when viewed by category, is carried at lower of cost and net realizable value. In valuing inventory, the Company is required to make assumptions regarding the level of reserves required to value potentially obsolete or over-valued items at the lower of cost or net realizable value. As of September 29, 2018, and December 30, 2017, the Company decreased the value of inventory on hand by
$5.2 million
and
$0
, respectively, as a result of a decline in commodity pricing.
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).
Accounting Standards Effective in Future Years
Leases.
In 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This update 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 December 30, 2018, the first day of our fiscal 2019 year.
We have not completed our assessment, but the adoption of this standard will 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, and early adoption is permitted. 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.
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 December 30, 2018, the first day of our fiscal 2019 year.
Fair Value Measurement.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value (“FV”) Measurement (Topic 820)”. In addition to making certain modifications, the standard removes the requirements to disclose: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the FV hierarchy; (ii) the policy for timing transfers between levels; and (iii) the valuation process for Level 3 FV measurements. The standard will require public entities to disclose: (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 FV measurements held at the end of the reporting period; and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 FV measurements. The additional disclosure requirements should be applied prospectively for the most recent interim or annual period presented in the fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented. The amendments in this standard are effective for fiscal years ending after December 15, 2019. Early adoption is permitted, and an entity may early adopt the removed or modified disclosures and delay the adoption of new disclosures until the effective date. 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.
Defined Benefit Pension Plan
. In August 2018, the FASB issued ASU No. 2018-14, “Compensation-Retirement-Benefits-Defined Benefit Plans-General (Subtopic 715-20)”. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing six previously required disclosures and adding two. The amendments also clarify certain disclosure requirements. The amendments in this standard are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. 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.
2. Acquisition
On April 13, 2018, we completed the acquisition of Cedar Creek Holdings, Inc. (“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
. The merger allowed us to expand our product offerings, while maintaining our existing geographical footprint.
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, liabilities assumed and the results of operations of the acquired business are included in our consolidated results since April 13, 2018.
The acquired business contributed net sales and net loss of
$706.6 million
and
$0.2 million
, respectively, to the Company for the period from April 13, 2018, to
September 29, 2018
. The net loss for the period from April 13, 2018, to
September 29, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands, except per share data)
|
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
Net sales
|
|
$
|
859,776
|
|
|
$
|
841,330
|
|
|
$
|
2,592,597
|
|
|
$
|
2,459,713
|
|
Net income (loss)
|
|
(6,219
|
)
|
|
8,033
|
|
|
(5,455
|
)
|
|
(20,477
|
)
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.67
|
)
|
|
$
|
0.88
|
|
|
$
|
(0.59
|
)
|
|
$
|
(2.27
|
)
|
Diluted
|
|
(0.67
|
)
|
|
0.87
|
|
|
(0.59
|
)
|
|
(2.27
|
)
|
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
nine
-months ended
September 29, 2018
, to reflect a
$0.9 million
and
$11.8 million
, respectively, charge related to an inventory step-up adjustment, and the three and
nine
months ended
September 30, 2017
, for
$0
and
$11.8 million
, respectively; (ii) the three- and
nine
-months ended
September 29, 2018
, for
$3.8 million
and
$37.9 million
, respectively, for transaction related costs, and the three- and
nine
-months ended
September 30, 2017
, for
$0
and
$37.9 million
, respectively. Due to the net loss for the three- and
nine
-month periods ended
September 29, 2018
, and for the nine-month period ended September 30, 2017,
0
incremental shares,
0.1 million
incremental shares and
0.2 million
incremental shares, respectively, 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 purchase price of Cedar Creek consisted of the following items:
|
|
|
|
|
|
|
|
|
(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
[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 and also entered into a new $180.0 million senior secured Term Loan Facility (See Note 6).
|
The purchase is subject to a customary post-closing adjustment for, among other things, the final working capital of the acquired business.
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. None of the goodwill generated from the acquisition is deductible for tax purposes.
When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. As of September 29, 2018, the purchase price allocation for the acquisition was preliminary and subject to completion. Adjustments to the current fair value estimates in the table below may occur as the process conducted for valuation and assessments is finalized, including tax assets, liabilities and other attributes. We expect to complete the purchase price allocation during the 12-month period following the acquisition date, in line with the acquisition method of accounting, during which time the value of the assets and liabilities may be revised as appropriate.
The following table summarizes the preliminary values of the assets acquired and liabilities assumed at the date of the acquisition:
|
|
|
|
|
(In thousands)
|
Preliminary Allocation as of September 29, 2018
|
Cash and net working capital assets
(excluding inventory)
|
$
|
90,768
|
|
Inventory
|
|
159,227
|
|
Property and equipment
|
|
71,352
|
|
Other, net
|
|
6,992
|
|
Intangible assets and goodwill:
|
|
|
|
Customer relationships
|
|
25,500
|
|
Non-compete agreements
|
|
8,254
|
|
Trade names
|
|
6,826
|
|
Favorable leasehold interests
|
|
800
|
|
Goodwill
|
|
36,787
|
|
Capital leases and other liabilities
|
|
(44,754
|
)
|
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
September 29, 2018
, our intangible assets consist 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
nine
-months ended
September 29, 2018
, we preliminarily allocated the fair values of assets acquired and liabilities assumed in the acquisition of Cedar Creek and recognized
$36.8 million
in goodwill. This amount is subject to change.
Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to a reporting unit and to determine if the implied fair value of the reporting unit’s goodwill is less than its carrying amount. We evaluate goodwill for impairment during the fourth quarter of each fiscal year. In addition, we will
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.
Definite-Lived Intangible Assets.
At
September 29, 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
September 29, 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
|
|
$
|
25,500
|
|
|
$
|
(1,962
|
)
|
|
$
|
23,538
|
|
Noncompete agreements
|
|
|
8,254
|
|
|
|
(952
|
)
|
|
|
7,302
|
|
Trade names
|
|
|
6,826
|
|
|
|
(1,050
|
)
|
|
|
5,776
|
|
Favorable leasehold interests
[1]
|
|
|
800
|
|
|
|
(31
|
)
|
|
|
769
|
|
Total
|
|
$
|
41,380
|
|
|
$
|
(3,995
|
)
|
|
$
|
37,385
|
|
____________________
[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
$2.1 million
and
$4.0 million
for the three- and
nine
-month periods ended
September 29, 2018
, respectively. There were no amortization charges for the comparative periods of the prior year.
Estimated annual amortization expense for definite-lived intangible assets over the next
five
fiscal years is as follows:
|
|
|
|
|
|
(In thousands)
|
|
Estimated Amortization
|
2019
|
|
$
|
8,152
|
|
2020
|
|
7,527
|
|
2021
|
|
5,035
|
|
2022
|
|
3,183
|
|
2023
|
|
1,873
|
|
4. Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration we expected to be entitled to in exchange for those goods or services.
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, net of trade allowances.
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
|
|
Nine Months Ended
|
(In thousands)
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
Structural products
|
$
|
387,347
|
|
|
$
|
228,424
|
|
|
$
|
1,016,806
|
|
|
$
|
633,036
|
|
Specialty products
|
481,946
|
|
|
254,476
|
|
|
1,185,332
|
|
|
758,788
|
|
Other
[1]
|
(9,517
|
)
|
|
(3,582
|
)
|
|
(11,923
|
)
|
|
(9,897
|
)
|
Total net sales
|
$
|
859,776
|
|
|
$
|
479,318
|
|
|
$
|
2,190,215
|
|
|
$
|
1,381,927
|
|
____________________________________
[1]
“Other” includes unallocated allowances and discounts. Beginning third quarter 2018 allowances and discounts are allocated to product categories where available. Prior year and nine months ended periods have been updated for this presentation.
The following table presents our revenues disaggregated by sales channel. Sales and usage-based taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
Warehouse
|
$
|
685,468
|
|
|
$
|
361,992
|
|
|
$
|
1,723,103
|
|
|
$
|
1,034,580
|
|
Direct
|
153,847
|
|
|
89,242
|
|
|
402,420
|
|
|
274,482
|
|
Reload and service revenue
|
32,116
|
|
|
35,915
|
|
|
95,300
|
|
|
95,817
|
|
Customer discounts and rebates
|
(11,655
|
)
|
|
(7,831
|
)
|
|
(30,608
|
)
|
|
(22,952
|
)
|
Total net sales
|
$
|
859,776
|
|
|
$
|
479,318
|
|
|
$
|
2,190,215
|
|
|
$
|
1,381,927
|
|
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. Long-Term Debt
As of
September 29, 2018
, and December 30, 2017, long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29,
|
|
December 30,
|
(In thousands)
|
|
Maturity Date
|
|
2018
|
|
2017
|
Revolving Credit Facility (net of discounts and debt issuance
costs of $6.2 million and $3.1 million at September 29, 2018
and December 30, 2017, respectively)
|
|
October 10, 2022
|
|
$
|
409,112
|
|
|
$
|
179,569
|
|
Mortgage Note Payable (net of discounts and debt issuance
costs of $0 million and $0.8 million at September 29, 2018
and December 30, 2017, respectively)
|
|
NA
|
|
|
—
|
|
|
|
97,108
|
|
Term Loan Facility (net of discounts and debt issuance costs
of $7.1 million and $0 million at September 29, 2018
and December 30, 2017, respectively)
|
|
October 13, 2023
|
|
|
172,004
|
|
|
|
—
|
|
Total debt
|
|
|
|
|
581,116
|
|
|
|
276,677
|
|
Less: current portion of long-term debt
|
|
|
|
|
(1,736
|
)
|
|
|
—
|
|
Long-term debt, net
|
|
|
|
$
|
579,380
|
|
|
$
|
276,677
|
|
Revolving Credit Facility
On April 13, 2018, in connection with the acquisition Cedar Creek, 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 asset-based revolving loan and letter of credit facility (the “Revolving 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
, which will allow borrowings of up to
$750 million
under the Revolving Credit Facility. 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 amended and restated 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
September 29, 2018
, we had outstanding borrowings of
$415.4 million
, excess availability of
$122.8 million
, and a weighted average interest rate of
4.2 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
September 29, 2018
.
Term Loan Facility
On April 13, 2018, in connection with the acquisition of Cedar Creek, we entered into the a new credit and guaranty agreement (the “Term Loan Agreement”) with WHOS Investment Partners, LLC, as administrative agent and collateral agent (“HPS”) and certain other financial institutions as party thereto. The Term Loan Agreement provides for a senior secured first lien loan facility in an aggregate principal amount of
$180 million
(the “Term Loan Facility”). 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 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.
Borrowings under the Term Loan Agreement may be made as Base Rate Loans or Eurodollar Rate Loans. The Base Rate Loans will bear interest at the rate per annual equal to (i) the greatest of the (a)
U.S. prime lending rate
published in The Wall Street Journal, (b) the
Federal Funds Effective Rate
plus
0.50 percent
, and (c) the sum of the Adjusted
Eurodollar Rate
of one month plus
1.00 percent
, provided that the
Base Rate
shall at no time be less than
2.00 percent
per annum; and (ii) plus the Applicable Margin, as described below. Eurodollar Rate Loans will bear interest at the rate per annum equal to (i) the
ICE Benchmark Administration LIBOR Rate
, provided that the Adjusted
Eurodollar Rate
shall at no time be less than
1.00 percent
per annum; plus (ii) the Applicable Margin. The Applicable Margin will be
6.00 percent
with respect to Base Rate Loans and
7.00 percent
with respect to Eurodollar Rate Loans.
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.
As of September 29, 2018, we were in compliance with the total net leverage ratio.
The Term Loan Agreement also contains representations, warranties, affirmative and negative covenants customary for financing transactions of this type, and customary events of default.
As of
September 29, 2018
, we had outstanding borrowings of
$179.1 million
under our Term Loan Credit Facility and a stated interest rate of
9.2 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
September 29, 2018
.
Our remaining principal payment schedule for each of the next
five
years and thereafter is as follows:
|
|
|
|
|
|
(In thousands)
|
|
|
2018
|
|
$
|
450
|
|
2019
|
|
|
1,800
|
|
2020
|
|
|
1,800
|
|
2021
|
|
|
1,800
|
|
2022
|
|
|
1,800
|
|
Thereafter
|
|
|
171,450
|
|
6. Net Periodic Pension Cost
The following table shows the components of our net periodic pension cost (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In thousands)
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
Service cost
|
$
|
133
|
|
|
$
|
133
|
|
|
$
|
399
|
|
|
$
|
499
|
|
Interest cost on projected benefit obligation
|
963
|
|
|
1,153
|
|
|
2,889
|
|
|
3,509
|
|
Expected return on plan assets
|
(1,327
|
)
|
|
(1,684
|
)
|
|
(3,981
|
)
|
|
(4,852
|
)
|
Amortization of unrecognized loss
|
271
|
|
|
260
|
|
|
813
|
|
|
796
|
|
Net periodic pension cost (benefit)
|
$
|
40
|
|
|
$
|
(138
|
)
|
|
$
|
120
|
|
|
$
|
(48
|
)
|
7. Stock Compensation
Cash-Settled Stock Appreciation Rights (“SARs”)
During fiscal 2016, we granted certain executives and employees cash-settled SARs. The cash-settled SARs vested on July 16, 2018. On the vesting date, half of the vested value of the cash-settled SARs became 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 a
20
day trading average of the Company’s common stock through the vesting date, in excess of the
$7.00
grant date valuation.
As of
September 29, 2018
, there were
222,500
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
September 29, 2018
, the total liability was approximately
$7.2 million
, which reflects the fair value of the remaining SARs valued at the vesting date.
The following table summarizes the assumptions used to compute the current fair value of our cash-settled SARs:
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
[1]
|
|
December 30, 2017
[2]
|
Stock price
|
|
$
|
38.17
|
|
|
$
|
9.76
|
|
Expected volatility
|
|
Not applicable
|
|
|
33.80
|
%
|
Risk-free interest rate
|
|
Not applicable
|
|
|
1.55
|
%
|
Expected term (in years)
|
|
0
|
|
|
0.54
|
|
Expected dividend yield
|
|
Not applicable
|
|
|
Not applicable
|
|
__________________________
[1]
Reflects the exercise price based on the
20
day trading average through vesting date (June 18, 2018 - July 16, 2018).
[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
September 29, 2018
and
September 30, 2017
, we incurred stock compensation expense of
$1.7 million
and
$0.3 million
, respectively. During the
nine
months ended
September 29, 2018
and
September 30, 2017
, we incurred stock compensation expense of
$14.7 million
and
$1.8 million
, respectively. The increase in our stock compensation expense for the three- and
nine
-month periods of fiscal 2018 is attributable to cash-settled SARs.
8. 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
September 29, 2018
, the acquisition value and net book value of all assets under capital leases was
$166.5 million
and
$143.7 million
, respectively.
At
September 29, 2018
, our total commitments under capital leases recorded in the Unaudited Condensed Consolidated Balance Sheets within “capital leases - short term” and “capital leases - long term” were as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
Principal
[1]
|
|
Interest
|
2018
|
$
|
2,118
|
|
|
$
|
3,523
|
|
2019
|
7,498
|
|
|
13,802
|
|
2020
|
6,749
|
|
|
13,425
|
|
2021
|
4,389
|
|
|
13,127
|
|
2022
|
3,620
|
|
|
12,921
|
|
Thereafter
|
128,859
|
|
|
182,788
|
|
Total
|
$
|
153,233
|
|
|
$
|
239,586
|
|
_____________________________
[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.
9. 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
September 29, 2018
, we had over
2,500
employees on a full-time basis, of which approximately
1,100
were former employees of Cedar Creek. Additionally, as of
September 29, 2018
, approximately
20 percent
of our employees were represented by various local labor union Collective Bargaining Agreements (“CBAs”). As of
September 29, 2018
, approximately
5 percent
of our employees are covered by CBAs that are up for renewal in fiscal 2018 or are currently expired and under negotiation.
10. 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
nine
months ended
September 29, 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
|
)
|
|
605
|
|
|
—
|
|
|
602
|
|
September 29, 2018, ending balance, net of tax
|
$
|
671
|
|
|
$
|
(36,788
|
)
|
|
$
|
212
|
|
|
$
|
(35,905
|
)
|
____
____________________________
[1]
For the
nine
months ended
September 29, 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
$0.8 million
, net of tax of
$0.2 million
(See Note 7).
11. 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
nine
-month periods ended
September 29, 2018
,
0
and
0.1 million
, respectively, 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
nine
-month periods of fiscal 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands, except per share data)
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
Net income (loss)
|
$
|
(9,896
|
)
|
|
$
|
5,686
|
|
|
$
|
(31,881
|
)
|
|
$
|
9,508
|
|
|
|
|
|
|
|
|
|
Basic weighted shares outstanding
|
9,274
|
|
|
9,079
|
|
|
9,209
|
|
|
9,033
|
|
Dilutive effect of share-based awards
|
—
|
|
|
164
|
|
|
—
|
|
|
152
|
|
Diluted weighted average shares outstanding
|
$
|
9,274
|
|
|
$
|
9,243
|
|
|
$
|
9,209
|
|
|
$
|
9,185
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
(1.07
|
)
|
|
$
|
0.63
|
|
|
$
|
(3.46
|
)
|
|
$
|
1.05
|
|
Diluted earnings (loss) per share
|
$
|
(1.07
|
)
|
|
$
|
0.62
|
|
|
$
|
(3.46
|
)
|
|
$
|
1.04
|
|