NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
BlueLinx is a wholesale distributor of building and industrial products in the U.S. Our Consolidated Financial Statements include the accounts of BlueLinx Holdings Inc. and its wholly owned subsidiaries. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated.
Fiscal years 2019 and 2018 were each comprised of 52 weeks. Our fiscal year ends on the Saturday closest to December 31 of that fiscal year, and may comprise 53 weeks in certain years.
Use of Estimates
We are required to make estimates and assumptions when preparing our Consolidated Financial Statements in accordance with U.S. GAAP. These estimates and assumptions affect the amounts reported in our Consolidated Financial Statements and the accompanying notes. Actual results could differ materially from those estimates.
Subsequent Events
We evaluated subsequent events through the date that our Consolidated Financial Statements were issued. Except as described in Note 16, no matters were identified that required adjustment of the Consolidated Financial Statements or additional disclosure.
Recent Accounting Standards - Recently Issued
Credit Impairment Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This ASU sets forth a current expected credit loss (“CECL”) model which requires the measurement of all expected credit losses for financial instruments or other assets (e.g., trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model, is applicable to the measurement of credit losses on financial assets measured at amortized cost, and applies to some off-balance sheet credit exposures. The standard also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. ASU 2019-10 extended the effective date to interim and annual periods beginning after December 15, 2022, for certain public business entities, including smaller reporting companies. We have not completed our assessment of the standard, but we do not expect adoption of the standard to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
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: (a) 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 (b) 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 beginning 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 adoption of the standard to have a material impact on the Company's consolidated financial position, results of operations, or 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 adoption of the standard to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
Income Taxes. In December 2019, the FASB issued ASU No.2019-12, “Income taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. The amendments in this standard are effective for interim periods and fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently assessing the impact of the new guidance, but do not expect it to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
Recent Accounting Standards - Recently Adopted
Leases. In 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Topic 842 establishes a new lease accounting model for leases. The most significant changes include the clarification of the definition of a lease, the requirement for lessees to recognize for all leases a right-of-use asset and a corresponding lease liability in the consolidated balance sheet, and additional quantitative and qualitative disclosures which are designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. Expenses are recognized in the consolidated statement of income in a manner similar to current accounting guidance. Lessor accounting under the new standard is substantially unchanged. We adopted this standard, and all related amendments thereto, effective December 30, 2018, the first day of our 2019 fiscal year, using a prospective transition approach, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods presented. We have elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We have made an accounting policy election to keep leases with an initial term of 12 months or less off of the consolidated balance sheet. The adoption of Topic 842 had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated statements of operations and comprehensive loss. There also was no impact to our debt covenant calculations. The most significant impact was the recognition of right-of-use assets and corresponding lease liabilities of $57.5 million on the consolidated balance sheet. Additionally, $1.7 million of deferred gains associated with sale-leaseback transactions was recorded as a cumulative-effect adjustment to accumulated deficit. See Note 13 “Lease Commitments” for additional disclosures regarding our lease commitments.
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. We adopted this standard effective December 30, 2018, the first day of our 2019 fiscal year. We did not exercise the option to make this reclassification.
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. We elected to early adopt this standard effective the first day of the fourth quarter of 2019, which corresponds with the date of our annual goodwill impairment testing date. The adoption of the standard did not have a material impact on Company's consolidated financial position, results of operations, or cash flows.
Cloud Computing Arrangements. In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal Use-Software (Subtopic 350-40).” This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). We early adopted this standard effective December 30, 2018, the first day of our 2019 fiscal year and did so prospectively. Costs that have been recorded have been classified as other current and other non-current assets. The adoption of the standard did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
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. The timing of revenue recognition largely is dependent on shipping terms. Revenue is recorded at the time of shipment for terms designated free on board (“FOB”) shipping point. For sales transactions designated FOB destination, revenue is recorded when the product is delivered to the customer’s delivery site.
All revenues recognized are net of trade allowances, 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.
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.
Leases
We are the lessee in a lease contract when we obtain the right to control an asset associated with a particular lease. For operating leases, we record a right-of-use ("ROU") asset that represents our right to use an underlying asset for the lease term, and a corresponding lease liability that represents our obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Financing ROU assets associated with finance leases are included in property and equipment. Leases with a lease term of 12 months or less at inception are not recorded on our consolidated balance sheet and are expensed on a straight-line basis over the lease term in our consolidated statement of income. We determine the lease term by assuming the exercise of renewal options that are reasonably certain. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. When our contracts contain lease and non-lease components, we account for both components as a single lease component. See Note 13 for further discussion.
Accounts Receivable
Accounts receivable are stated at net realizable value, do not bear interest, and consist of amounts owed for orders shipped to customers. Management establishes an overall credit policy for sales to customers. The allowance for doubtful accounts is determined based on a number of factors including specific customer account reviews, historical loss experience, current economic trends, and the creditworthiness of significant customers based on ongoing credit evaluations.
Inventory Valuation
The cost of all inventories is determined by the moving average cost method. We have included all material charges directly or indirectly incurred in bringing inventory to its existing condition and location. We evaluate our inventory value at the end of each quarter to ensure that inventory, when viewed by category, is carried at the lower of cost and net realizable value, which also considers items that may be damaged, excess, and obsolete inventory.
Consideration Received from Vendors and Paid to Customers
Each year, we enter into agreements with many of our vendors providing for inventory purchase rebates, generally based on achievement of specified volume purchasing levels. We also receive rebates related to price protection and various marketing allowances that are common industry practice. We accrue for the receipt of vendor rebates based on purchases, and also reduce inventory to reflect the net acquisition cost (purchase price less expected purchase rebates).
In addition, we enter into agreements with many of our customers to offer customer rebates, generally based on achievement of specified sales levels and various marketing allowances that are common industry practice. We accrue for the payment of customer rebates based on sales to the customer, and also reduce sales to reflect the net sales (sales price less expected customer rebates). Adjustments to earnings resulting from revisions to rebate estimates have been immaterial.
Shipping and Handling
Outbound shipping and handling costs included in “Selling, general, and administrative” expenses were $133.6 million and $121.8 million for fiscal 2019 and fiscal 2018, respectively.
Property and Equipment
Property and equipment are recorded at cost. Lease obligations for which we assume or retain substantially all the property rights and risks of ownership are capitalized. Amortization of assets recorded under capital leases is included in “Depreciation and amortization” expense. Replacements of major units of property are capitalized and the replaced properties are retired. Replacements of minor components of property and repair and maintenance costs are charged to expense as incurred.
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives for land improvements, buildings, and machinery and equipment range from 7 to 15 years, 15 to 33 years, and 3 to 7 years, respectively. Upon retirement or disposition of assets, cost and accumulated depreciation are removed from the related accounts and any gain or loss is included in income.
Income Taxes
We account for deferred income taxes using the liability method. Accordingly, we recognize deferred tax assets and liabilities based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. All deferred tax assets and liabilities are classified as noncurrent in our consolidated balance sheet. A valuation allowance is recorded to reduce deferred tax assets when necessary. For additional information about our income taxes, see Note 6, “Income Taxes.”
Insurance and Self-Insurance
For fiscal 2019 and 2018, the Company was insured for its non-union and certain unionized employee health benefits. Health benefits for some unionized employees for fiscal 2019 and 2018 were paid directly to a union trust, depending upon the union-negotiated benefit arrangement.
For fiscal 2019 and 2018, the Company was self-insured, up to certain limits, for workers’ compensation losses, general liability, and automotive liability losses, all subject to varying “per occurrence” retentions or deductible limits. The Company provides for estimated costs to settle both known claims and claims incurred but not yet reported by making periodic prepayments, considering our retention and stop loss limits. Liabilities of the Company associated with these claims are estimated, in part, by considering the frequency and severity of historical claims, both specific to us, as well as industry-wide loss experience and other actuarial assumptions. We determine our insurance obligations with the assistance of actuarial firms. Since there are many estimates and assumptions involved in recording insurance liabilities, and in the case of workers’ compensation, a significant period of time elapses before the ultimate resolution of claims, differences between actual future events, and prior estimates and assumptions could result in adjustments to these liabilities. The Company has deposits on hand with certain third-party insurance administrators and insurance carriers to cover its obligation for future payment of claims. These deposits are recorded in other current and non-current assets in our consolidated balance sheets.
2. Acquisition
On April 13, 2018, we completed the acquisition of Cedar Creek Holdings, Inc. (“Cedar Creek”) for a 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 approximately 2,600. The merger allowed us to expand our product offerings while expanding 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 was 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.
We estimate that the acquired business contributed net sales and a net loss of approximately $1.0 billion and approximately $2.5 million, respectively, to the Company for the period from April 13, 2018, to December 29, 2018. The net income for the period from April 13, 2018, to December 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
|
|
|
|
Fiscal 2018
|
|
|
|
(In thousands, except per share data)
|
|
Net sales
|
|
$
|
3,262,433
|
|
|
Net loss
|
|
(18,129
|
)
|
|
Loss per common share:
|
|
|
|
Basic
|
|
$
|
(1.96
|
)
|
|
Diluted
|
|
(1.96
|
)
|
The pro forma amounts above have been calculated in accordance with U.S. GAAP after applying the Company's accounting policies, which assigns certain acquisition costs to the reporting period prior to the acquisition. As a result, an inventory step-up adjustment for $11.8 million and transaction costs for $44.3 million were attributed to the 2017 pro forma period. Due to the pro forma net loss for fiscal year ended December 29, 2018, incremental shares from share-based compensation arrangements of 38,137 were excluded from the computation of diluted weighted average shares outstanding, 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.
As part of the acquisition, a total of $7.1 million was withheld from the purchase price and placed in escrow with certain third parties to serve as a source of recovery for certain potential indemnification claims under the Merger Agreement. As of the end of 2018, amounts held in escrow were $6.0 million. The remaining amounts were distributed from escrow in January 2019 to the Company and former stockholders of Cedar Creek..
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 9).
The excess of total 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. The following table summarizes the values of the assets acquired and liabilities assumed at the date of the acquisition:
|
|
|
|
|
|
|
|
|
Allocation as of December 29, 2018
|
|
|
(In thousands)
|
|
Cash and net working capital assets
(excluding inventory)
|
$
|
88,318
|
|
|
Inventory
|
159,227
|
|
|
Property and equipment
|
71,203
|
|
|
Other, net
|
(1,395
|
)
|
|
Intangible assets and goodwill:
|
|
|
Customer relationships
|
25,500
|
|
|
Non-compete agreements
|
8,254
|
|
|
Trade names
|
6,826
|
|
|
Favorable leasehold interests
|
800
|
|
|
Goodwill
|
47,772
|
|
|
Capital leases and other liabilities
|
(44,753
|
)
|
|
Cash purchase price
|
$
|
361,752
|
|
3. Revenue Recognition
We recognize revenue when the following criteria are met: (1) Contract with the customer has been identified; (2) Performance obligations in the contract have been identified; (3) Transaction price has been determined; (4) The transaction price has been allocated to the performance obligations; and (5) When (or as) 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.
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.
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.
In 2019, we changed our internal product hierarchy. The following table presents our revenues disaggregated by revenue source. Prior year amounts have been reclassified to conform to the current year product mix of structural and specialty products. Sales and usage-based taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
|
(In thousands)
|
|
Structural products
|
$
|
862,270
|
|
|
$
|
1,044,348
|
|
|
Specialty products
|
1,774,998
|
|
|
1,818,502
|
|
|
Total net sales
|
$
|
2,637,268
|
|
|
$
|
2,862,850
|
|
Also due to the acquisition and integration of Cedar Creek, our reload sales are less distinct from warehouse sales as they have been classified in prior periods. The following table presents our revenues disaggregated by sales channel. Prior year amounts have been reclassified to conform to the current year revenues disaggregated by sales channel. Sales and usage-based taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
|
(In thousands)
|
|
Warehouse and reload
|
$
|
2,206,260
|
|
|
$
|
2,373,928
|
|
|
Direct
|
470,786
|
|
|
526,900
|
|
|
Cash discounts and rebates
|
(39,778
|
)
|
|
(37,978
|
)
|
|
Total net sales
|
$
|
2,637,268
|
|
|
$
|
2,862,850
|
|
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 outbound shipping and handling activities as an expense.
4. Goodwill and Other Intangible Assets
In connection with the acquisition of Cedar Creek, we acquired certain intangible assets. As of December 28, 2019, our intangible assets consist of goodwill and other intangible assets including customer relationships, noncompete agreements, and trade names.
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, and trade names) acquired and liabilities assumed under acquisition accounting for business combinations.
During the year ended December 29, 2018, we allocated the fair values of assets acquired and liabilities assumed in the acquisition of Cedar Creek, and recognized $47.8 million in goodwill.
Goodwill is not subject to amortization, but must be tested for impairment at least annually. As of September 29, 2019, the first day of our fourth quarter and our designated goodwill impairment testing date, we early adopted ASU 2017-04. 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 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. Our one reporting unit has a negative carrying amount of net assets, and based on management’s assessment, no impairment was indicated for fiscal 2019.
In addition, we will evaluate the carrying value of goodwill 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 December 28, 2019, in connection with the acquisition of Cedar Creek, we had definite-lived intangible assets that related to customer relationships, noncompete agreements, and trade names.
At December 28, 2019, the gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amounts
|
|
Accumulated Amortization
|
(1)
|
Net Carrying Amounts
|
|
|
|
(In thousands)
|
|
Customer relationships
|
|
$
|
25,500
|
|
|
$
|
(6,770
|
)
|
|
$
|
18,730
|
|
|
Noncompete agreements
|
|
8,254
|
|
|
(3,532
|
)
|
|
4,722
|
|
|
Trade names
|
|
6,826
|
|
|
(3,894
|
)
|
|
2,932
|
|
|
Total
|
|
$
|
40,580
|
|
|
$
|
(14,196
|
)
|
|
$
|
26,384
|
|
(1) 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, and trade names is approximately 10 years, 2 years, and 1 year, respectively. Amortization expense for the definite-lived intangible assets was $8.1 million and $6.2 million for the years ended December 28, 2019, and December 29, 2018, respectively.
Estimated annual amortization expense for definite-lived intangible assets over the next five fiscal years is as follows:
|
|
|
|
|
|
|
|
|
|
|
Estimated Amortization
|
|
|
|
(In thousands)
|
|
2020
|
|
$
|
7,461
|
|
|
2021
|
|
4,973
|
|
|
2022
|
|
3,111
|
|
|
2023
|
|
1,807
|
|
|
2024
|
|
1,505
|
|
5. Assets Held for Sale and Net Gain on Disposition
In fiscal 2019, we designated certain non-operating properties as held for sale. At the time of designation, we ceased recognizing depreciation expense on these assets. As of December 28, 2019, three properties were designated as held for sale, and, as of December 29, 2018, seven properties had been designated as held for sale. As of December 28, 2019, and December 29, 2018, the net book value of total assets held for sale was $1.1 million and $3.1 million, respectively, and was included in “Other current assets” in our Consolidated Balance Sheets. Properties held for sale as of December 28, 2019, consisted of three former distribution facilities located in the Midwest and Southeast. We plan to sell these properties within the next 12 months. We continue to actively market all properties that are designated as held for sale.
During the year ended December 28, 2019, we sold five non-operating distribution facilities previously designated as “held for sale,” as well as certain equipment. We recognized a gain of $13.1 million in the Consolidated Statements of Operations as a result of these sales.
6. Income Taxes
Our (benefit from) provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended December 28,
2019
|
|
Fiscal Year
Ended December 29,
2018
|
|
|
(In thousands)
|
|
Federal income taxes:
|
|
|
|
|
Current
|
$
|
35
|
|
|
$
|
(99
|
)
|
|
Deferred
|
(3,202
|
)
|
|
(13,092
|
)
|
|
State income taxes:
|
|
|
|
|
|
Current
|
(403
|
)
|
|
3,786
|
|
|
Deferred
|
(382
|
)
|
|
(2,749
|
)
|
|
Benefit from income taxes
|
$
|
(3,952
|
)
|
|
$
|
(12,154
|
)
|
The federal statutory income tax rate was 21%. Our benefit from income taxes is reconciled to the federal statutory amount as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended December 28,
2019
|
|
Fiscal Year
Ended December 29,
2018
|
|
|
(In thousands)
|
|
Benefit from income taxes computed at the federal statutory tax rate
|
$
|
(4,538
|
)
|
|
$
|
(12,643
|
)
|
|
Benefit from state income taxes, net of federal benefit
|
(1,752
|
)
|
|
(2,498
|
)
|
|
Valuation allowance change
|
4,256
|
|
|
1,974
|
|
|
Transaction costs
|
—
|
|
|
1,327
|
|
|
Nondeductible executive compensation
|
67
|
|
|
936
|
|
|
Share-based compensation - excess tax benefit
|
—
|
|
|
(1,494
|
)
|
|
Other nondeductible items
|
354
|
|
|
344
|
|
|
Prior period true-up
|
(382
|
)
|
|
—
|
|
|
Uncertain tax positions
|
(1,514
|
)
|
|
(951
|
)
|
|
Tax rate change used to measure deferred taxes
|
(433
|
)
|
|
681
|
|
|
Other
|
(10
|
)
|
|
170
|
|
|
Benefit from income taxes
|
$
|
(3,952
|
)
|
|
$
|
(12,154
|
)
|
The change in valuation allowance noted above is exclusive of items that do not impact income from continuing operations, but are reflected in the change in deferred income tax assets and liabilities in the Consolidated Balance Sheets as disclosed in the components of net deferred income tax assets table below.
In accordance with the intraperiod tax allocation provisions of U.S. GAAP, we are required to consider all items (including items recorded in other comprehensive income) in determining the amount of tax expense or benefit that should be allocated between continuing operations and other comprehensive income. In fiscal year 2019, there is a tax benefit allocated to the loss from continuing operations and tax expense allocated to the income from other comprehensive income. For fiscal 2018, there was no intraperiod tax allocation since there was a loss in continuing operations along with a loss in other comprehensive income. While the income tax provision from continuing operations is reported in our Consolidated Statements of Operations and Comprehensive Loss, the income tax expense on other comprehensive income is recorded directly to accumulated other comprehensive loss, which is a component of stockholders’ deficit.
Our financial statements contain certain deferred tax assets which primarily resulted from tax benefits associated with the loss before income taxes in prior years, as well as net deferred income tax assets resulting from other temporary differences related to certain reserves, pension obligations, and differences between book and tax depreciation and amortization. We record a valuation allowance against our net deferred tax assets when we determine that, based on the weight of available evidence, it is more likely than not that our net deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences can be carried under tax law.
In our evaluation of the weight of available evidence at the end of fiscal 2019, we considered the recent reported loss generated in the current year and prior year (adjusted for unusual one-time items) and income generated in 2017, including the prior year income from Cedar Creek, which resulted in a three-year cumulative income situation as positive evidence which carried substantial weight. While this was substantial, it was not the only evidence we evaluated. We also considered evidence related to the four sources of taxable income, to determine whether such positive evidence outweighed the negative evidence. The evidence considered included:
|
|
|
|
•
|
future reversals of existing taxable temporary differences;
|
|
|
|
|
•
|
future taxable income exclusive of reversing temporary differences and carryforwards;
|
|
|
|
|
•
|
taxable income in prior carryback years, if carryback is permitted under the tax law; and
|
|
|
|
|
•
|
tax planning strategies.
|
At the end of fiscal 2019 and 2018, in our evaluation of the weight of available evidence, we concluded that the weight of the positive evidence outweighed the negative evidence. In addition to the positive evidence discussed above, we considered as positive evidence forecasted future taxable income, the detail scheduling of the timing of the reversal of our deferred tax assets and liabilities, and the evidence from business and tax planning strategies described below. For fiscal 2019, we have, however, recorded valuation allowances for the amount of disallowed interest calculated pursuant to the changes made by the Tax Cuts and Jobs Act of 2017 (“The Tax Act”) in the amount of $4.8 million. The remaining valuation allowance of $11.4 million was primarily related to separate company state net operating loss carryforwards. For fiscal 2018, the valuation allowance of $12.3 million was primarily related to separate company state net operating loss carryforwards. Although we believe our estimates are reasonable, the ultimate determination of the appropriate amount of valuation allowance involves significant judgments. We believe that the change in control under Internal Revenue Code Section 382, resulting from the completion of the secondary offering on October 23, 2017, will not cause any of our federal net operating losses to expire unused as management has been effectively implementing a real estate strategy involving the sale and leaseback of real estate that is further supported by the transactions involving four warehouses in January 2018 and two warehouses during 2019. Subsequent to December 28, 2019, the Company executed three more transactions, involving a total of 14 more locations (See Notes 13 and 16 for more detail). Additionally, the acquisition of Cedar Creek did not generate any limitations under Section 382 on Cedar Creek’s tax assets.
The components of our net deferred income tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
2019
|
|
December 29,
2018
|
|
|
(In thousands)
|
|
Deferred income tax assets:
|
|
|
|
|
Inventory reserves
|
$
|
2,525
|
|
|
$
|
2,826
|
|
|
Compensation-related accruals
|
3,523
|
|
|
4,717
|
|
|
Accruals and reserves
|
149
|
|
|
339
|
|
|
Accounts receivable
|
628
|
|
|
586
|
|
|
Interest expense limitation
|
4,767
|
|
|
3,169
|
|
|
Property and equipment
|
32,080
|
|
|
21,547
|
|
|
Operating lease liability
|
13,820
|
|
|
—
|
|
|
Pension
|
7,594
|
|
|
8,031
|
|
|
Benefit from NOL carryovers (1)
|
25,731
|
|
|
32,325
|
|
|
Other
|
540
|
|
|
418
|
|
|
Total gross deferred income tax assets
|
91,357
|
|
|
73,958
|
|
|
Less: valuation allowances
|
(16,194
|
)
|
|
(12,348
|
)
|
|
Total net deferred income tax assets
|
75,163
|
|
|
61,610
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
Intangible assets
|
(7,107
|
)
|
|
(8,665
|
)
|
|
Operating lease asset
|
(13,820
|
)
|
|
—
|
|
|
Other
|
(243
|
)
|
|
(300
|
)
|
|
Total deferred income tax liabilities
|
(21,170
|
)
|
|
(8,965
|
)
|
|
Deferred income tax asset, net
|
$
|
53,993
|
|
|
$
|
52,645
|
|
|
|
|
|
(1)
|
Our federal NOL carryovers are $61.8 million, and will expire in 11 to 16 years. Our state NOL carryovers are $241.3 million, and will expire in 1 to 20 years.
|
Activity in our deferred tax asset valuation allowance for fiscal 2019 and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended December 28,
2019
|
|
Fiscal Year
Ended December 29,
2018
|
|
|
(In thousands)
|
|
Balance as of beginning of the year
|
$
|
12,348
|
|
|
$
|
10,415
|
|
|
Valuation allowance provided for taxes related to:
|
|
|
|
|
|
Loss before income taxes
|
3,846
|
|
|
1,933
|
|
|
Balance as of end of the year
|
$
|
16,194
|
|
|
$
|
12,348
|
|
We have recorded income tax and related interest liabilities where we believe certain of our tax positions are not more likely than not to be sustained if challenged. These balances are included in other noncurrent liabilities in our Consolidated Balance Sheets. The following table summarizes the activity related to our gross unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
|
Balance at beginning of fiscal year
|
$
|
5,843
|
|
|
$
|
184
|
|
|
Additions for tax positions in prior years
|
—
|
|
|
6,663
|
|
|
Reductions due to lapse of applicable statute of limitations
|
(1,598
|
)
|
|
(1,004
|
)
|
|
Balance at end of fiscal year
|
$
|
4,245
|
|
|
$
|
5,843
|
|
Included in the unrecognized tax benefits as of December 28, 2019, and December 29, 2018, were $4.0 million and $5.5 million, respectively, of tax benefits that, if recognized, would reduce our annual effective tax rate for fiscal 2018. For fiscal 2019, we accrued interest related to these unrecognized tax benefits of $0.2 million, all of which is reported in “Interest expense” in our Consolidated Statements of Operations and Comprehensive Loss. For fiscal 2018, we also accrued interest related to these unrecognized tax benefits of $0.9 million, of which $0.3 million of this amount is reported in “Interest expense” in our Consolidated Statement of Operations and Comprehensive Loss. The remaining $0.6 million of interest, as well as the gross addition for tax positions in prior years of $6.7 million disclosed above in the tabular reconciliation, were recorded through goodwill as part of the purchase accounting for the acquisition of Cedar Creek. No penalties were accrued for either fiscal 2019 or 2018. We believe that it is reasonably possible that approximately $0.9 million of our remaining unrecognized tax benefit may be recognized by the end of fiscal 2020 as a result of a lapse of statute of limitations.
We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2016 through 2019 tax years generally remain subject to examination by federal and most state and foreign tax authorities.
7. Long-Term Debt
As of December 28, 2019, and December 29, 2018, long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
December 29,
|
|
|
|
Maturity Date
|
|
2019
|
|
2018
|
|
|
|
|
|
(In thousands)
|
|
Revolving Credit Facility (net of discounts and debt issuance costs of $4.5 million and $6.0 million at December 28, 2019 and December 29, 2018, respectively)
|
|
October 10, 2022
|
|
$
|
322,041
|
|
|
$
|
327,319
|
|
|
Term Loan Facility (net of discounts and debt issuance costs of $8.1 million and $6.7 million at December 28, 2019 and December 29, 2018, respectively)
|
|
October 13, 2023
|
|
138,574
|
|
|
172,356
|
|
|
Total debt
|
|
|
|
460,615
|
|
|
499,675
|
|
|
Less: current portion of long-term debt
|
|
|
|
(2,176
|
)
|
|
(1,736
|
)
|
|
Long-term debt, net
|
|
|
|
$
|
458,439
|
|
|
$
|
497,939
|
|
Revolving Credit Facility
In April 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 Amended and Restated Credit Agreement was further amended in January 2020, as described in Note 16 (as amended, 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, with consent of the lenders, 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 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 are subject to availability under the Borrowing Base (as that term is defined in the Revolving Credit Agreement). The Borrowers are 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 December 28, 2019, we had outstanding borrowings of $326.5 million, excess availability of $80.0 million, and a weighted average interest rate of 3.9% under our Revolving Credit Facility. As of December 29, 2018, we had outstanding borrowings of $333.3 million, excess availability of $91.7 million, and a weighted average interest rate of 4.6%.
We were in compliance with all covenants under the Revolving Credit Agreement as of December 28, 2019.
Term Loan Facility
In April 2018, in connection with the acquisition of Cedar Creek, we entered into a Credit and Guaranty Agreement by and among the Company, as borrower, certain of our subsidiaries, as guarantors, HPS Investment Partners, LLC, as administrative agent and collateral agent (“HPS”) and certain other financial institutions as parties thereto. In October 2019, the Credit and Guaranty Agreement was amended to, among other things, permit real estate sale leaseback transactions and modify the “Total Net Leverage Ratio” beginning in the third quarter of 2019. The Credit and Guaranty Agreement was further amended in January 2020, and February 2020, as described in Note 16 (as amended, the “Term Loan Agreement”). The Term Loan Agreement provides for a senior secured term 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 Term Loan Agreement, the Company and certain of our subsidiaries 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 after the first anniversary thereof, 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 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 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 is 6.00 percent with respect to Base Rate Loans and 7.00 percent with respect to Eurodollar Rate Loans.
The Term Loan Agreement also contains representations, warranties, and affirmative and negative covenants customary for financing transactions of this type, and customary events of default.
The Term Loan Facility requires maintenance of a total net leverage ratio of 6.25 to 1.00 for the quarter ending December 28, 2019, and such required covenant level generally reduces over the term of the Term Loan Facility as set forth in the Term Loan Agreement.
As of December 28, 2019, we had outstanding borrowings of $146.7 million under our Term Loan Facility and a stated interest rate of 8.7 percent per annum.
We were in compliance with all covenants under the Term Loan Facility as of December 28, 2019.
Our remaining scheduled principal payments of the Term Loan through 2023 as of December 28, 2019, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2020
|
|
|
$
|
2,250
|
|
|
2021
|
|
|
1,800
|
|
|
2022
|
|
|
1,800
|
|
|
Thereafter
|
|
|
140,824
|
|
Subsequent to the end of fiscal 2019, we used proceeds from our real estate financing transactions to reduce the remaining scheduled principal payments by $68.7 million. As a result, required principal payments after 2022 were reduced to approximately $72.0 million.
2006 Commercial Mortgage-Backed Securities (“CMBS”) Mortgage Loan
Our 2006 CMBS mortgage loan, which was paid in full in January 2018, was secured by substantially all of the Company’s owned distribution facilities and a first priority pledge of the equity in the Company’s subsidiaries which held the real property that secured the mortgage loan.
8. Fair Value Measurements
We determine a fair value measurement based on the assumptions a market participant would use in pricing an asset or liability, in accordance with Accounting Standards Codification (“ASC”) 820 - Fair Value Measurement (“ASC 820”). The fair value measurement guidance established a three level hierarchy making a distinction between market participant assumptions based on (i) unadjusted quoted prices for identical assets or liabilities in an active market (Level 1), (ii) quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability (Level 2), and (iii) prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (Level 3).
Fair value measurements for defined benefit pension plan
The fair value hierarchy discussed above not only is applicable to assets and liabilities that are included in our consolidated balance sheets, but also is applied to certain other assets that indirectly impact our consolidated financial statements. For example, we sponsor and contribute to a single-employer defined benefit pension plan (see Note 9). Assets contributed by us become the property of the pension plan. Even though the Company no longer has control over these assets, we are indirectly impacted by subsequent fair value adjustments to these assets. The actual return on these assets impacts our future net periodic benefit cost, as well as amounts recognized in our consolidated balance sheets. The Company uses the fair value hierarchy to measure the fair value of assets held by our pension plan. We believe the pension plan asset fair value valuation to comprise Level 2 in the fair value hierarchy. Level 2 assets held in the pension plan under GAAP consist of collective investment trust assets.
Fair value measurements for financial instruments
Carrying amounts for our financial instruments are not significantly different from their fair value.
9. Employee Benefits
Single-Employer Defined Benefit Pension Plan
We sponsor a noncontributory defined benefit pension plan administered solely by us (the “pension plan”). Most of the participants in the plan are inactive, with all remaining active participants no longer accruing benefits, and the plan is closed to new entrants. Our funding policy for the pension plan is based on actuarial calculations and the applicable requirements of federal law. Benefits under the pension plan primarily are related to years of service.
The following tables set forth the change in projected benefit obligation and the change in plan assets for the pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
2019
|
|
December 29,
2018
|
|
|
(In thousands)
|
|
Change in projected benefit obligation:
|
|
|
|
|
Projected benefit obligation at beginning of period
|
$
|
107,909
|
|
|
$
|
118,812
|
|
|
Service cost
|
190
|
|
|
534
|
|
|
Interest cost
|
3,730
|
|
|
3,853
|
|
|
Actuarial loss (gain)
|
11,156
|
|
|
(9,732
|
)
|
|
Curtailment gain
|
(349
|
)
|
|
—
|
|
|
Benefits paid
|
(15,610
|
)
|
|
(5,558
|
)
|
|
Projected benefit obligation at end of period
|
107,026
|
|
|
107,909
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
Fair value of assets at beginning of period
|
81,241
|
|
|
88,452
|
|
|
Actual return (loss) on plan assets
|
15,464
|
|
|
(6,321
|
)
|
|
Employer contributions
|
2,511
|
|
|
4,668
|
|
|
Benefits paid
|
(15,610
|
)
|
|
(5,558
|
)
|
|
Fair value of assets at end of period
|
83,606
|
|
|
81,241
|
|
|
Net unfunded status of plan
|
$
|
(23,420
|
)
|
|
$
|
(26,668
|
)
|
We recognize the unfunded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our pension plan in our Consolidated Balance Sheets, with a corresponding adjustment to AOCI, net of tax. On
December 28, 2019, we measured the fair value of our plan assets and benefit obligations. As of December 28, 2019, and December 29, 2018, the net unfunded status of our benefit plan was $23.4 million and $26.7 million, respectively.
Lump sum payout. During 2019, we amended the BlueLinx Corporation Hourly Retirement Plan in order to offer a lump sum payout option to certain terminated vested participants in the plan whose present value of benefit payments exceeded $5,000. This option was available to these participants from September 1, 2019, through October 25, 2019, with a payment date of November 1, 2019. Total lump sum payments under this option were $9.7 million, and were funded with existing plan assets. The lump sum payments decreased our projected benefit obligation by approximately $12.2 million. Because the amount that was settled was greater than the sum of the service cost and interest cost, we incurred settlement expense of $2.8 million.
Starting in 2018, we have elected to utilize a full yield curve approach in the estimation service and interest cost components for pension (income)/expense recognized during the fiscal year by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant projected cash flows. We have made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change does not affect the measurement of our total benefit obligations.
Actuarial gains and losses occur when actual experience differs from the estimates used to determine the components of net periodic pension cost, and when certain assumptions used to determine the fair value of the plan assets or projected benefit obligation are updated, including but not limited to, changes in the discount rate, plan amendments, differences between actual and expected returns on plan assets, mortality assumptions, and plan re-measurement.
We amortize a portion of unrecognized actuarial gains and losses for the pension plan into our Consolidated Statements of Operations and Comprehensive Loss. The amount recognized in the current year’s operations is based on amortizing the unrecognized gains or losses for the pension plan that exceed the larger of 10% of the projected benefit obligation or the fair value of plan assets, also known as the corridor. In the current fiscal year, the amount representing the unrecognized gain or loss that exceeds the corridor is amortized over the estimated average remaining life expectancy of participants, as almost all the participants in the plan are inactive.
The net adjustment to other comprehensive income (loss) for fiscal 2019 and fiscal 2018, was a $2.6 million gain and a $0.6 million loss, respectively, primarily from the net actuarial gain (loss) for those fiscal periods.
The decrease in the unfunded obligation for the fiscal year was approximately $3.3 million and was primarily comprised of $11.2 million of actuarial losses, $15.5 million of investment gains, $2.5 million of pension contributions, and a charge of $3.9 million due to current year service and interest cost. The net periodic pension credit was $0.1 million in fiscal 2019, from a cost of $0.2 million in fiscal 2018, driven primarily by a reduction in investment returns associated with the matching duration of return seeking assets.
The unfunded status recorded as Pension Benefit Obligation on our Consolidated Balance Sheets for the pension plan is set forth in the following table, along with the unrecognized actuarial loss, which is presented as part of Accumulated Other Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
2019
|
|
December 29,
2018
|
|
|
(In thousands)
|
|
Unfunded status
|
$
|
(23,420
|
)
|
|
$
|
(26,668
|
)
|
|
Unrecognized actuarial loss
|
31,221
|
|
|
34,699
|
|
|
Net amount recognized
|
$
|
7,801
|
|
|
$
|
8,031
|
|
|
Amounts recognized on the balance sheet consist of:
|
|
|
|
|
|
|
Accrued pension liability
|
$
|
(23,420
|
)
|
|
$
|
(26,668
|
)
|
|
Accumulated other comprehensive loss (pre-tax)
|
31,221
|
|
|
34,699
|
|
|
Net amount recognized
|
$
|
7,801
|
|
|
$
|
8,031
|
|
The portion of estimated net loss for the pension plan that is expected to be amortized from accumulated other comprehensive loss into net periodic cost over the next fiscal year is approximately $1.0 million.
The accumulated benefit obligation for the pension plan was $107.0 million and $107.4 million at December 28, 2019, and December 29, 2018, respectively.
Net periodic pension cost (credit) for the pension plan included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
December 28,
2019
|
|
Fiscal Year Ended
December 29,
2018
|
|
|
(In thousands)
|
|
Service cost
|
$
|
190
|
|
|
$
|
534
|
|
|
Interest cost on projected benefit obligation
|
3,730
|
|
|
3,853
|
|
|
Expected return on plan assets
|
(5,162
|
)
|
|
(5,309
|
)
|
|
Amortization of unrecognized loss
|
1,158
|
|
|
1,084
|
|
|
Net periodic pension cost (credit)
|
$
|
(84
|
)
|
|
$
|
162
|
|
The following assumptions were used to determine the projected benefit obligation at the measurement date and the net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
Projected benefit obligation:
|
|
|
|
|
Discount rate
|
3.21
|
%
|
|
4.37
|
%
|
|
Average rate of increase in future compensation levels
|
Graded 5.5-2.5%
|
|
|
Graded 5.5-2.5%
|
|
|
Net periodic pension cost:
|
|
|
|
|
|
|
Discount rate
|
3.20
|
%
|
|
3.69
|
%
|
|
Average rate of increase in future compensation levels
|
Graded 5.5-2.5%
|
|
|
Graded 5.5-2.5%
|
|
|
Expected long-term rate of return on plan assets
|
6.00
|
%
|
|
6.00
|
%
|
Our estimates of the amount and timing of our future funding obligations for our defined benefit pension plan are based upon various assumptions specified above. These assumptions include, but are not limited to, the discount rate, projected return on plan assets, and mortality rates. The rate of increase in future compensation levels has a minimal effect on both the projected benefit obligation and net periodic pension cost, as almost all the participants in the plan are inactive, the majority of the remaining active participants are no longer accruing benefits, and the plan is closed to new entrants.
Projected return on plan assets. Pension plan assets are managed under a balanced portfolio allocation policy comprised of two major components: a return-seeking portion and a liability-matching portion. The expected role of return-seeking investments is to achieve a reasonable long-term growth of pension assets with a prudent level of risk, while the role of liability-matching investments is to provide a partial hedge against liability performance associated with changes in interest rates. The objective within return-seeking investments is to achieve asset diversity in order to balance return and volatility. We employ a designated fiduciary to manage the day to day investment responsibilities for pension plan assets and relationships with certain agents, advisors, and other fiduciaries.
The discount rate. We utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant projected cash flows. We have made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates.
Mortality rates. The valuations and assumptions reflect adoption of the Society of Actuaries updated RP-2014 mortality tables, with a “blue collar employee” adjustment for non-annuitants and a BlueLinx custom adjustment for annuitants. Additionally, we use the most current generational projection scales, which were MP-2019 as of December 28, 2019, and MP-2018 as of December 29, 2018.
Plan Assets and Long-Term Rate of Return
Fiscal 2019
We base the asset return assumption on current and expected asset allocations, as well as historical and expected returns on the plan asset categories. The allocation of the plan’s assets impacts our expected return on plan assets. The expected return on plan assets is based on a targeted allocation consisting of return-seeking securities (including public equity, real assets, and diversified credit investment strategies), liability-matching securities (fixed income), and cash and cash equivalents. Our net benefit cost increases as the expected return on plan assets decreases. We believe that our actual long-term asset allocations on
average will approximate our targeted allocation. Our targeted allocation is driven by our investment strategy to earn a reasonable rate of return while maintaining risk at acceptable levels through the diversification of investments across and within various asset categories. For fiscal 2019, we used a 6.00% expected rate of return on plan assets.
The investment policy for the pension plan, in general, is to achieve a reasonable long-term rate of return on plan assets with an acceptable level of risk in order to maintain adequate funding levels. The pension plan’s Investment Committee establishes risk mitigation policies and regularly monitors investment performance and investment allocation policies, with a third-party investment advisor executing on these strategies. We employ a designated fiduciary to manage the day to day investment responsibilities for pension plan assets and relationships with certain agents, advisors, and other fiduciaries.
The current targets, adjusted to exclude non-GAAP BlueLinx real-estate holdings, and actual investment allocation, by asset category as of December 28, 2019, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Target Allocation
|
|
Actual Allocation, December 29, 2019
|
|
Return-seeking securities
|
|
70
|
%
|
|
69
|
%
|
|
Liability-matching securities
|
|
28
|
%
|
|
30
|
%
|
|
Cash and cash equivalents
|
|
2
|
%
|
|
1
|
%
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
The following table sets forth by level, within the fair value hierarchy (as defined in Note 8), pension plan assets at their fair values as of December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in active markets of identical assets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant other unobservable inputs
(Level 3)
|
|
Total
|
|
|
|
(In thousands)
|
|
Return-seeking securities
|
|
|
|
|
|
|
|
|
|
Collective investment trust (1)
|
|
$
|
—
|
|
|
$
|
57,966
|
|
|
$
|
—
|
|
|
$
|
57,966
|
|
|
Liability-matching securities
|
|
|
|
|
|
|
|
|
|
Collective investment trusts (2)
|
|
—
|
|
|
24,801
|
|
|
—
|
|
|
24,801
|
|
|
Cash and cash equivalents
|
|
888
|
|
|
—
|
|
|
—
|
|
|
888
|
|
|
Total
|
|
$
|
888
|
|
|
$
|
82,767
|
|
|
$
|
—
|
|
|
$
|
83,655
|
|
(1) This category is comprised of a collective investment trust of equity funds that track the MCSI World Index, and a collective investment trust that holds publicly traded listed infrastructure securities.
(2) This category is consists of a collective investment trust investing in Treasury STRIPS.
The fair value of the Level 1 assets was based on quoted prices in active markets for the identical assets. The fair value of the Level 2 assets was determined by management based on an assessment of valuations provided by asset management entities and was calculated by aggregating market prices for all underlying securities.
Investment objectives for our pension plan assets are:
•Matching Plan liability performance
•Diversifying risk
•Achieving a target investment return
We believe that there are no significant concentrations of risk within our plan assets as of December 28, 2019. We comply with the rules and regulations promulgated under the Employee Retirement Income Security Act of 1974 (“ERISA”) and we prohibit investments and investment strategies not allowed by ERISA.
Fiscal 2018
The following table sets forth by level, within the fair value hierarchy, pension plan assets at their fair values as of December 29, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in active markets of identical assets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant other unobservable inputs
(Level 3)
|
|
Total
|
|
|
|
(In thousands)
|
|
Return-seeking securities
|
|
|
|
|
|
|
|
|
|
Collective investment trust (1)
|
|
$
|
—
|
|
|
$
|
55,766
|
|
|
$
|
—
|
|
|
$
|
55,766
|
|
|
Liability-matching securities
|
|
|
|
|
|
|
|
|
|
Collective investment trusts (2)
|
|
—
|
|
|
24,649
|
|
|
—
|
|
|
24,649
|
|
|
Cash and cash equivalents
|
|
853
|
|
|
—
|
|
|
—
|
|
|
853
|
|
|
Total
|
|
$
|
853
|
|
|
$
|
80,415
|
|
|
$
|
—
|
|
|
$
|
81,268
|
|
(1) This category is comprised of a collective investment trust of equity funds that track the MCSI World Index, and a collective investment trust that holds publicly traded listed infrastructure securities.
(2) This category is consists of a collective investment trust investing in Treasury STRIPS.
Pension Plan Cash Flows
Our estimated normal future benefit payments to pension plan participants are as follows:
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
(In thousands)
|
|
2020
|
$
|
6,352
|
|
|
2021
|
6,465
|
|
|
2022
|
6,518
|
|
|
2023
|
6,557
|
|
|
2024
|
6,539
|
|
|
Thereafter
|
32,200
|
|
We fund the pension plan liability in accordance with the limits imposed by ERISA, federal income tax laws, and the funding requirements of the Pension Protection Act of 2006. We are required to make four quarterly cash contributions to the pension plan totaling approximately $2.0 million for fiscal funding year 2020.
Multiemployer Pension Plans
We are involved in various multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with certain collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are generally responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the funded status of an MEPP and legal requirements such as those of the Pension Protection Act of 2006 (“Pension Act”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions, and the utilization of extended amortization provisions. A FIP or RP requires a particular MEPP to adopt measures to correct its underfunded status. These measures may include, but are not limited to: an increase in our contribution rate to the applicable CBA, a reallocation of the contributions already being made by participating employers for various benefits to individuals participating in the MEPP, and/or a reduction in the benefits to be paid to future and/or current retirees.
We could also be obligated to make future payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce our number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closures, assuming the MEPP has unfunded
vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) generally would equal our proportionate share of the plan’s unfunded vested benefits.
The following table lists our participation in our multiemployer plans which we deem significant. “Contributions” represent the amounts contributed to the plan during the fiscal years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions (in millions)
|
|
Pension Fund:
|
EIN/Pension Plan Number
|
Pension Act Zone Status
|
FIP/RP Status
|
Surcharge
|
|
2019
|
|
2018
|
|
Central States, Southeast and Southwest Areas Pension Fund (1)
|
366044243
|
Critical and Declining
(January 1, 2019)
|
RP
|
No
|
|
0.3
|
|
|
0.4
|
|
|
Other
|
|
|
|
|
|
0.3
|
|
|
0.1
|
|
|
Total
|
|
|
|
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
(1) Our contributions to this plan are approximately 0.10% of total contributions, which is less than the required disclosure threshold of 5% of total plan contributions. However, this plan is deemed significant for disclosure as it is severely underfunded. Additionally, we increased our estimated partial withdrawal liability related to the closure of certain facilities to $8.1 million in fiscal 2019, from $7.1 million in fiscal 2018. We may, in the future, record an additional liability if required by an event of our withdrawal from the plan or a mass withdrawal. Our most recent contingent withdrawal liability was estimated at approximately $51.1 million, for a complete withdrawal occurring in fiscal 2020. In the case of a complete withdrawal or a mass withdrawal, our payments to the Central States Plan would include yearly payments of approximately $1.0 million, which do not include payments for the partial withdrawal of approximately $0.6 million annually. In a complete withdrawal, the current payments would not amortize the liability fully; however, payments for a complete withdrawal are limited to a 20-year period. In the case of a mass withdrawal, the liability would not amortize fully under current government regulations, and payments would continue indefinitely.
Defined Contribution Plans
Our employees also participate in two defined contribution plans: the BlueLinx Corporation Hourly Savings Plan covering hourly employees, and the BlueLinx Corporation Salaried Savings Plan covering salaried employees. Discretionary contributions to the plans are based on employee contributions and compensation, and, in certain cases, participants in the hourly savings plan also receive employer contributions based on union negotiated match amounts. Employer contributions to the hourly savings plan for fiscal 2019 and fiscal 2018 were $0.7 million and $0.6 million, respectively.
Employer contributions totaling $1.7 million for the salaried savings plan for fiscal 2019 have been deferred until the first quarter of 2020. Employer contributions to the salaried savings plan for fiscal 2018 of $1.8 million were deferred and paid in the first quarter of fiscal 2019.
10. Share-Based Compensation
We have three stock-based compensation plans covering officers, directors, certain employees, and consultants: the 2004 Equity Incentive Plan (the “2004 Plan”), the 2006 Long-Term Equity Incentive Plan (the “2006 Plan”), and the 2016 Amended and Restated Long-Term Incentive Plan (the “2016 Plan”). The plans are designed to motivate and retain individuals who are responsible for the attainment of our primary long-term performance goals. The plans provide a means whereby the participants develop a further sense of proprietorship and personal involvement in our development and financial success, thereby advancing the interests of the Company and its stockholders. Although we do not have a formal policy on the matter, we issue new shares of our common stock to participants upon the exercise of options or upon the vesting of restricted stock, restricted stock units, or performance shares, out of the total amount of common shares applicable for issuance or vesting under the aforementioned plans. Shares are available for new issuance only under the 2016 Plan. The 2004 and 2006 Plans have no shares remaining for issuance. Remaining 2004 Plan shares are outstanding only for the exercise of currently outstanding options and 2006 Plan shares are outstanding only for the vesting of outstanding equity awards and the exercise of currently outstanding options.
The 2016 Plan permits the grant of nonqualified stock options, incentive stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance shares, performance units, cash-based awards, and other share-based awards to participants of the 2016 Plan selected by our Board of Directors or a committee of the Board that administers the 2016 Plan. We reserved 810,200 shares of our common stock for issuance under the 2016 Plan. The terms and conditions of awards under the 2016 Plan are determined by the Compensation Committee. Some of the awards issued under both the 2006 and 2016 Plans
are subject to accelerated vesting in the event of a change in control as such an event is defined in the respective Plan documents.
For all awards designated as equity awards, we recognize compensation expense equal to the grant-date fair value for all share-based payment awards that are expected to vest, as described further below, in “Compensation Expense.” This expense is recorded on a straight-line basis over the requisite service period of the entire award, unless the awards are subject to market or performance conditions, in which case we recognize compensation expense over the requisite service period of each separate vesting tranche, to the extent the occurrence of such conditions are probable.
All compensation expense related to our share-based payment awards is recorded in “Selling, general, and administrative” expense in the Consolidated Statements of Operations and Comprehensive Loss.
Cash-Settled 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 no later than August 15, 2019. The exercise price for the cash-settled SARs was amended so that it was based on a 20-day trading average of the Company’s common stock through the vesting date, in excess of the $7.00 grant date valuation. There was no remaining liability at the end of 2019.
During fiscal 2017, certain individuals were no longer employed with the Company, and their cash-settled SAR agreements allowed for a partial accelerated vesting (of 27,385 cash-settled SARs) and a partial forfeiture (of 20,615 cash-settled SARs), pro-rated based on employment dates. At that time, half of the accelerated vested value of the cash-settled SARs, as valued at the closing stock price on the deemed exercise date, was paid to those participants, with the remaining half payable on July 16, 2019. These payments, and the accrued liability for the remaining half payable in fiscal 2019, were immaterial.
At December 28, 2019, there were no cash-settled SARs issued and outstanding, and we recognized expense of approximately $0.0 million and $13.2 million in fiscal 2019 and 2018, respectively, related to these awards.
Restricted Stock Units
During fiscal 2019 and in prior years, the Board of Directors was granted restricted stock units with a one-year vesting period, although a pro-rated portion may vest prior to the one-year period, with the remainder forfeited, if a Director chooses not to stand for re-election before the one-year vesting period has elapsed. All vested director grants settle at the earlier of ten years from the vesting date or retirement from the Board of Directors. These awards are time-based and are not based upon attainment of performance goals.
During fiscal 2018 and 2019, the Board of Directors granted restricted stock units to certain of our employees and executive officers. Certain of the restricted stock units granted in fiscal 2018 and 2019 vest in equal annual increments over the three years after the date of grant. The remaining restricted stock units granted in fiscal 2018 vest on the third anniversary of the date of grant if certain performance conditions are met prior to the vesting date, and the remaining restricted stock units granted in fiscal 2019 vest at the end of the Company’s second fiscal quarter in 2022 if certain performance conditions are met as of the vesting date.
As of December 28, 2019, there was approximately $7.5 million of total unrecognized compensation expense related to restricted stock units. The unrecognized compensation expense is expected to be recognized over a weighted average term of 2.2 years. As of December 28, 2019, the weighted average remaining contractual term for our restricted stock units was 2.2 years, and the maximum contractual term was 3.0 years.
The following table summarizes activity for our restricted stock units during fiscal 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
|
Number of
Awards
|
|
Weighted
Average Fair
Value
|
|
Outstanding as of December 29, 2018
|
194,222
|
|
|
$
|
33.29
|
|
|
Granted
|
389,940
|
|
|
19.96
|
|
|
Vested (1)
|
(82,570
|
)
|
|
22.92
|
|
|
Forfeited
|
(11,443
|
)
|
|
32.26
|
|
|
Outstanding as of December 28, 2019
|
490,149
|
|
|
$
|
24.45
|
|
|
|
|
|
(1)
|
The total fair value of restricted stock units vested in fiscal 2019 and 2018 was $1.9 million and $1.7 million, respectively.
|
Compensation Expense
Total share-based compensation expense from our share-based awards was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
|
(In thousands)
|
|
Restricted Stock and Restricted Stock Units
|
$
|
2,592
|
|
|
$
|
1,350
|
|
|
Performance Shares
|
—
|
|
|
788
|
|
|
Cash-settled Stock Appreciation Rights
|
—
|
|
|
13,173
|
|
|
Total
|
$
|
2,592
|
|
|
$
|
15,311
|
|
We do not estimate forfeitures, but adjust for them as they occur.
We recognized related income tax benefits in fiscal years 2019 and 2018 of $0.7 million and $3.9 million, respectively, which were fully realized in fiscal 2019 and 2018. We present the benefits of tax deductions in excess of recognized compensation expense as a net operating cash outflow in our Consolidated Statements of Cash Flows when present. There was no excess tax benefit in fiscal 2019, and an excess tax benefit of $1.5 million in fiscal 2018.
11. Loss per Common Share
We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding, excluding unvested restricted shares. We calculate diluted earnings per share using the treasury stock method, 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 awards and units, performance shares, and stock options.
The following table shows the computation of basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 28, 2019(1)
|
|
December 29, 2018(1)
|
|
|
(In thousands, except per share data)
|
|
Net loss
|
$
|
(17,656
|
)
|
|
$
|
(48,053
|
)
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
9,355
|
|
|
9,230
|
|
|
Dilutive effect of share-based awards
|
—
|
|
|
—
|
|
|
Diluted weighted average shares outstanding
|
9,355
|
|
|
9,230
|
|
|
|
|
|
|
|
Basic loss per share
|
$
|
(1.89
|
)
|
|
$
|
(5.21
|
)
|
|
Diluted loss per share
|
$
|
(1.89
|
)
|
|
$
|
(5.21
|
)
|
(1) Basic and diluted loss per share are equivalent for fiscal 2019 and 2018, due to net losses for the periods, and all outstanding share-based awards would be antidilutive.
For fiscal years 2019 and 2018, we excluded 490,149 and 194,222 unvested (or unexercised, in the case of options) share-based awards, respectively, from the diluted earnings per share calculation because they were either anti-dilutive or “out of the money.” Outstanding share based awards not included in diluted loss per share consisted of the following securities:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
Performance shares
|
—
|
|
|
58,818
|
|
|
Restricted stock units
|
490,149
|
|
|
135,404
|
|
|
Total excluded from diluted earnings per share
|
490,149
|
|
|
194,222
|
|
12. Related Party Transactions
D. Wayne Trousdale, the Company’s former Vice Chairman, Operating Companies, who served until April 2019, owns approximately 33.33% of a limited liability company that owns and leases six facilities to us. During fiscal 2018 and 2019, approximately $1.5 million and $2.1 million, respectively, in aggregate rent and related amounts was paid to the limited liability company for these properties. Mr. Trousdale’s interest in these amounts for fiscal 2018 and 2019 was approximately $0.5 million and $0.7 million, respectively.
13. Lease Commitments
Effective December 30, 2018, we adopted ASU No. 2016-02, “Leases (Topic 842)” using the modified retrospective method, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods presented. We have elected the package of practical expedients permitted under the transition guidance within the new standard. This election allowed us to carry forward our historical lease classification. The adoption of this standard resulted in the recording of operating lease right-of-use (“ROU”) assets and corresponding operating lease liabilities of $57.5 million on the consolidated balance sheet as of December 30, 2018 (adoption date), the first day of fiscal 2019, which amortizes over the lease term.
We determine if an arrangement is a lease at inception and assess lease classification as either operating or finance at lease inception or upon modification. Our operating and finance (formerly capital) lease portfolio includes leases for real estate, certain logistics equipment, and vehicles. The majority of our leases have remaining lease terms of one year to 15 years, some of which include one or more options to extend the leases for five years. Operating lease ROU assets and corresponding liabilities are presented separately on the consolidated balance sheets. Finance lease assets are included in property and equipment, and the finance lease obligations are presented separately in the consolidated balance sheet. We have also made the accounting policy election to not separate lease components from non lease components related to leases of several trucks during the second and third quarters of 2019.
When a lease does not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments.
A portion of our real estate lease cost is generally subject to annual changes in the Consumer Price Index (“CPI”). The known changes to lease payments are included in the lease liability at lease commencement. Unknown changes related to CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. In addition, a subset of our vehicle lease cost is considered variable.
The components of lease expense were as follows:
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Fiscal Year Ended December 28, 2019
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(In thousands)
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Operating lease cost:
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$
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12,115
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Finance lease cost:
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Amortization of right-of-use assets
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$
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9,712
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Interest on lease liabilities
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15,303
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Total finance lease costs
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$
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25,015
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Supplemental cash flow information related to leases for fiscal 2019 was as follows:
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Fiscal Year Ended December 28, 2019
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(In thousands)
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Cash paid for amounts included in the measurement of lease liabilities
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Operating cash flows from operating leases
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$
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11,885
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Operating cash flows from finance leases
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15,303
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Financing cash flows from finance leases
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9,853
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Right-of-use assets obtained in exchange for lease obligations
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Operating leases
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$
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775
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Finance leases
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15,041
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Supplemental balance sheet information for right-of-use assets related to leases for fiscal 2019 was as follows:
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December 28, 2019
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(In thousands)
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Finance leases
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Property and equipment
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$
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156,770
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Accumulated depreciation
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(23,364
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)
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Property and equipment, net
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$
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133,406
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Weighted Average Remaining Lease Term (in years)
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Operating leases
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11.71
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Finance leases
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17.9
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Weighted Average Discount Rate
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Operating leases
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9.34
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%
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Finance leases
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10.33
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%
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The major categories of our finance lease liabilities as of December 28, 2019 are as follows:
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December 28, 2019
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(In thousands)
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Equipment and vehicles
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$
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32,471
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Real estate
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120,525
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Total finance leases
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$
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152,996
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As of December 28, 2019, maturities of lease liabilities were as follows:
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Operating leases
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Finance leases
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(In thousands)
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2020
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$
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11,348
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$
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20,291
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2021
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10,111
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19,258
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2022
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8,048
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18,350
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2023
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7,330
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17,887
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2024
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6,413
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17,324
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Thereafter
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50,901
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284,277
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Total lease payments
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$
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94,151
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$
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377,387
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Less: imputed interest
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(39,743
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)
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(224,391
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)
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Total
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$
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54,408
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$
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152,996
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Real Estate Transactions
During fiscal 2018, we completed sale-leaseback transactions on distribution centers located in Bellingham, Massachusetts; Raleigh, North Carolina; Frederick, Maryland; and Lawrenceville, Georgia. As a result of these transactions, we recognized a capital lease asset and obligation totaling $95.1 million. We recorded deferred gains of $83.9 million on the sale-leaseback properties in fiscal 2018.
During fiscal 2019, we completed real estate financing transactions on distribution centers located in Yulee, Florida; and University Park, Illinois. The aggregate gross proceeds for these real estate transactions were $45 million. We determined that the transactions did not qualify as sales in accordance with ASC Topic 842 and, for accounting purposes, the transactions were not accounted for as sale-leaseback transactions. When this occurs, the real estate transaction is accounted for as a financing transaction, whereby the cash received is recorded as a financing obligation in our consolidated balance sheets in other current liabilities and in noncurrent liabilities as real estate financing obligations. The assets related to these transactions remain on our books and we continue to depreciate them.
At December 28, 2019, our future minimum payments related to the financing obligations under these real estate financing transactions were as follows:
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(In thousands)
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2020
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$
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3,711
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2021
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3,794
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2022
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3,880
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2023
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3,967
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Thereafter
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47,218
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In the first quarter of 2020, we completed real estate financing transactions on fourteen of our distribution facilities for aggregate gross proceeds of $78.3 million. The transactions are described in further detail in Note 16.
14. 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 (“CBAs”)
As of December 28, 2019, we employed approximately 2,200 persons on a full-time basis. Approximately 20% of our employees were covered by CBAs negotiated between the company and various local unions. Three of those CBAs covering approximately 30 employees are up for renewal in fiscal 2020, or are currently expired and under negotiations.
15. Accumulated Other Comprehensive Loss
Comprehensive income (loss) is a measure of income which includes both net loss and other comprehensive income (loss). Our other comprehensive income (loss) results from items deferred from recognition into our Consolidated Statements of Operations and Comprehensive Loss. Accumulated other comprehensive loss is separately presented on our Consolidated Balance Sheets as part of common stockholders’ deficit. Other comprehensive income (loss) was $2.6 million and $(0.6) million for fiscal 2019 and fiscal 2018, respectively.
The changes in accumulated balances for each component of other comprehensive loss for fiscal 2018 and 2019 were as follows:
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Foreign
currency translation, net
of tax
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Amortization of unrecognized pension gain (loss), net of tax
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Other, net of tax
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Total
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(In thousands)
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December 30, 2017, ending balance, net of tax
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$
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674
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$
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(37,393
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)
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$
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212
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$
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(36,507
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)
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Other comprehensive income (loss), net of tax (1)
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(14
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)
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(608
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)
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—
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(622
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)
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December 29, 2018, ending balance, net of tax
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$
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660
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$
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(38,001
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)
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$
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212
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$
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(37,129
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)
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Other comprehensive income (loss), net of tax (2)
|
6
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2,560
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—
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|
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2,566
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December 28, 2019, ending balance, net of tax
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$
|
666
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$
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(35,441
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)
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$
|
212
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|
$
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(34,563
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)
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(1) For fiscal 2018, there was $0.8 million of unrecognized actuarial loss based on updated actuarial assumptions, net of taxes of $0.2 million. There was no intraperiod income tax allocation since there was a loss in continuing operations along with a loss in other comprehensive income.
(2) For fiscal 2019, there was $3.5 million of unrecognized actuarial gain based on updated actuarial assumptions, net of taxes of $0.9 million. There was a tax benefit of $0.7 million allocated to the loss from continuing operations and tax expense allocated to the income from other comprehensive income.
16. Subsequent Events
Real Estate Transactions
On December 31, 2019, we completed real estate financing transactions with respect to four warehouse facilities for aggregate net proceeds of approximately $27.2 million; on January 31, 2020, we completed real estate financing transactions with respect to nine warehouse facilities for aggregate net proceeds of $34.1 million; and on February 28, 2020, we completed a real estate financing transaction with respect to a warehouse facility for net proceeds of approximately $7.5 million. The real estate financing transactions were completed through sale-leaseback arrangements. All net proceeds from these transactions were used to repay indebtedness under the Term Loan Facility, and following these repayments, the principal balance of the Term Loan Facility was approximately $77.4 million. Upon completion of these transactions, we entered into long-term leases on the properties for initial terms from fifteen to eighteen years with multiple five-year renewal options.
Amendments to the Term Loan Facility
On December 31, 2019, we amended our Term Loan Facility to extend the period for satisfying the designated outstanding principal balance level required to maintain the modified “Total Net Leverage Ratio” covenant levels for the 2019 fourth and subsequent quarters under the Term Loan Facility. The principal balance level was satisfied on January 31, 2020, through repayments from the sale-leaseback transactions described in this Note under the heading “Real Estate Transactions” above.
On February 28, 2020, we further amended our Term Loan Facility to provide that we will not be subject to the facility’s quarterly “Total Net Leverage Ratio” covenant from and after the time, and then for so long as, the principal balance level under the facility is less than $45 million.
Amendment to the Revolving Credit Facility
On January 31, 2020, we amended our Revolving Credit Facility to provide that (i) the “Seasonal Period” run from November 15, 2019, through July 15, 2020, for the calendar year 2019, and from December 15 of each calendar year through April 15 of each immediately succeeding calendar year for the calendar year 2020 and thereafter, and (ii) the measurement period in the definition of “Cash Dominion Event” will be five consecutive business days instead of three consecutive business days.