NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2020
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim Condensed Consolidated Financial Statements include the accounts of BlueLinx Holdings Inc. and its wholly owned subsidiaries (“the Company”). We derived the condensed consolidated balance sheet at September 26, 2020, from the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 (the “Fiscal 2019 Form 10-K”), as filed with the Securities and Exchange Commission on March 11, 2020. In the opinion of our management, the condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of our statements of operations and comprehensive income (loss) for the three and nine months ended September 26, 2020, and September 28, 2019, our balance sheets at September 26, 2020, and December 28, 2019, our statements of cash flows for the nine months ended September 26, 2020, and September 28, 2019, and our statements of stockholders’ equity (deficit) for the three and nine months ended September 26, 2020, and September 28, 2019.
We have condensed or omitted certain notes and other information from the interim condensed consolidated financial statements presented in this report. Therefore, these condensed consolidated interim financial statements should be read in conjunction with the Fiscal 2019 Form 10-K. In addition, certain prior period amounts have been reclassified to conform to the current period's presentation. These reclassifications did not materially impact operating income or consolidated net income (loss). The results for the three and nine months ended September 26, 2020, are not necessarily indicative of results that may be expected for the full year ending January 2, 2021, or any other interim period.
We operate on a 5-4-4 fiscal calendar. Our fiscal year ends on the Saturday closest to December 31 of that fiscal year and may comprise 53 weeks in certain years. Our 2020 fiscal year contains 53 weeks and ends on January 2, 2021. Fiscal 2019 contained 52 weeks and ended on December 28, 2019.
Our financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which requires us to make estimates based on assumptions about current and, for some estimates, future economic and market conditions, which affect reported amounts and related disclosures in our financial statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. Some of our estimates may be affected by the ongoing novel coronavirus (“COVID-19”) pandemic. The severity, magnitude, and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing, and difficult to predict. As a result, our accounting estimates and assumptions may change over time in response to COVID-19.
On April 13, 2018, we completed the acquisition of Cedar Creek Holdings, Inc. (“Cedar Creek”). Results for Cedar Creek are included in the consolidated financial information presented herein.
Reclassification of Prior Period Presentation
An adjustment has been made to the Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2019, to include outstanding payments as part of the change in accounts payable within cash flows from operating activities. In previous periods, this change was included within cash flows from financing activities.
We have reclassified certain costs within the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 26, 2020, and the three and nine months ended September 28, 2019, from selling, general and administrative to other operating expenses. These costs primarily relate to the integration of the acquisition of Cedar Creek.
Recently Adopted Accounting Standards
Leases. In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” Topic 842 established a new lease accounting model. The most significant changes included 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 were designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. Expenses were recognized in the consolidated statement of income in a manner similar to prior accounting guidance. Lessor accounting under the new standard was 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 modified retrospective approach, which applied 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, allowed 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. We implemented internal controls and a lease accounting information system to enable the preparation of financial information required by the new standard. The adoption of Topic 842 had a material impact on our condensed consolidated balance sheets but did not have a material impact on our condensed consolidated statements of operations and comprehensive loss. The most significant impact was the recognition of right-of-use assets and lease liabilities of $57.5 million on the condensed consolidated balance sheet as of the adoption date. Additionally, $1.7 million of deferred gains associated with sale-leaseback transactions was recorded as a cumulative-effect adjustment to accumulated deficit.
Accounting Standards Effective in Future Periods
Credit Impairment Losses. In June 2016, the FASB issued 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 of ASU 2016-13 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 the adoption 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 post-retirement plans by removing six previously required disclosures and adding two. The amendments also clarify certain other disclosure requirements. The amendments in this standard are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We have not completed our assessment of the standard, but we do not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations, 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 the adoption to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
2. Goodwill and Other Intangible Assets
In connection with the acquisition of Cedar Creek, we acquired certain intangible assets. As of September 26, 2020, 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. As of September 26, 2020, goodwill was $47.8 million.
Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to a reporting unit and to determine if the fair value of the reporting unit’s goodwill is less than its carrying amount. We evaluate goodwill for impairment during the fourth quarter of each fiscal year. In addition, we will evaluate the carrying value for impairment between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Such events and indicators may include, without limitation, significant declines in the industries in which our products are used, significant changes in capital market conditions, and significant changes in our market capitalization. Our one reporting unit has a fair value that exceeds its book value as of September 26, 2020.
Definite-Lived Intangible Assets
On September 26, 2020, the gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets were as follows:
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Gross carrying amounts
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Accumulated
Amortization
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(1)
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Net carrying amounts
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(In thousands)
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Customer relationships
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$
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25,500
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$
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(9,131)
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$
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16,369
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Noncompete agreements
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8,254
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(5,079)
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3,175
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Trade names
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6,826
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(5,601)
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1,225
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Total
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$
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40,580
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$
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(19,811)
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$
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20,769
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(1) Intangible assets, except customer relationships, are amortized on a 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 $1.8 million and $5.6 million for the three- and nine-month periods ended September 26, 2020, respectively. For the three- and nine-month periods ended September 28, 2019, amortization expense was $2.0 million and $6.1 million, respectively.
Estimated amortization expense for definite-lived intangible assets for the remaining portion of 2020 and the next five fiscal years is as follows:
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Estimated Amortization
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(In thousands)
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2020
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$
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1,823
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2021
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5,321
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2022
|
|
2,763
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2023
|
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1,807
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2024
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1,505
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2025
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1,423
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3. Revenue Recognition
We recognize revenue when control of promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Contracts with our customers are generally in the form of standard terms and conditions of sale. From time to time, we may enter into specific contracts, which may affect delivery terms. Performance obligations in our contracts generally consist solely of delivery of goods. For all sales channel types, consisting of warehouse, direct, and reload sales, we typically satisfy our performance obligations upon shipment. Our customer payment terms are typical for our industry and may vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not deemed to be significant by us. For certain sales channels and/or products, our standard terms of payment may be as early as ten days.
In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis. Customer consigned inventory is maintained and stored by certain customers; however, ownership and risk of loss remain with us.
All revenues recognized are net of trade allowances (i.e., rebates), cash discounts, and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Adjustments to earnings resulting from revisions to estimates on discounts and returns have been insignificant for each of the reported periods. Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration.
The following table presents our revenues disaggregated by revenue source. Certain 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.
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Three Months Ended
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Nine Months Ended
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September 26, 2020
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September 28, 2019
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September 26, 2020
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September 28, 2019
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(In thousands)
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(In thousands)
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Structural products
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$
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375,072
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$
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225,689
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$
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865,302
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$
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646,646
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Specialty products
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495,991
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452,976
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1,366,607
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1,377,168
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Total net sales
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$
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871,063
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$
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678,665
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$
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2,231,909
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$
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2,023,814
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The following table presents our revenues disaggregated by sales channel. Following the acquisition and integration of Cedar Creek, our reload sales were less distinct from warehouse sales, as they have been classified in prior periods. In addition, from time to time we may also make changes to certain intercompany allocations amongst sales channels. As a result, certain prior period amounts have been reclassified to conform to the current period revenues disaggregated by sales channel. Such reclassifications do not have an impact on total net sales as reported in any period. Sales and usage-based taxes are excluded from revenues.
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Three Months Ended
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Nine Months Ended
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September 26, 2020
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September 28, 2019
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September 26, 2020
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September 28, 2019
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(In thousands)
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(In thousands)
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Warehouse and reload
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$
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745,185
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$
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589,550
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$
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1,901,285
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$
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1,706,800
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Direct
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138,750
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102,480
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363,250
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347,692
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Customer discounts and rebates
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(12,872)
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(13,365)
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(32,626)
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(30,678)
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Total net sales
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$
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871,063
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|
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$
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678,665
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$
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2,231,909
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|
$
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2,023,814
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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. Assets Held for Sale
Two of our non-operating properties were designated as held for sale as of September 26, 2020. These properties consisted of two former distribution facilities located in the Midwest and Southeast. We vacated these properties and designated them as
held for sale during fiscal 2019 due to their proximity to other locations after the Cedar Creek acquisition. During the three-month period ended September 26, 2020, one property identified as held for sale during fiscal 2019 was returned to operations as we decided to restart operations at our owned Grand Rapids facility. As of September 26, 2020, and December 28, 2019, the net book value of total assets held for sale was $0.7 million and $1.1 million, respectively, and was included in “Other current assets” in our Condensed Consolidated Balance Sheets. We continue to actively market all properties that are designated as held for sale, and we plan to sell these properties within the next 12 months.
5. Long-Term Debt
As of September 26, 2020, and December 28, 2019, long-term debt consisted of the following:
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September 26, 2020
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December 28, 2019
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(In thousands)
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Revolving Credit Facility (1)
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$
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262,975
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$
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326,496
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Term Loan Facility (2)
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57,813
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146,674
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Finance lease obligations (3)
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273,222
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198,011
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594,010
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671,181
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Unamortized debt issuance costs
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(10,004)
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(12,555)
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584,006
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|
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658,626
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Less: current maturities of long-term debt
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7,004
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|
|
8,662
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Long-term debt, net of current maturities
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$
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577,002
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|
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$
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649,964
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(1) The weighted average interest rate was 2.5 percent and 3.9 percent as of September 26, 2020 and December 28, 2019, respectively.
(2) The weighted average interest rate was 8.0 percent and 8.7 percent as of September 26, 2020 and December 28, 2019, respectively.
(3) Refer to Note 8, Leases, for interest rates associated with finance lease obligations.
Revolving Credit Facility
We have a revolving credit facility that we entered into in April 2018 with Wells Fargo Bank, National Association, as administrative agent, and certain other financial institutions party thereto (the “Revolving Credit Facility”), with a maturity date of October 10, 2022. The Revolving Credit facility includes a committed senior secured asset-based revolving loan and letter of credit facility of up to $600 million, and an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to $150 million. Our obligations under the Revolving Credit Facility are secured by a security interest in substantially all of our assets other than real property.
Loans under the Revolving Credit Facility bear interest 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 our 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 our excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on the base rate.
We amended the Revolving Credit Facility on January 31, 2020, to provide that (i) the “Seasonal Period” will 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. The adjustment to the Seasonal Period better aligns advance rates under the Revolving Credit Facility with the seasonality in our business and provided us with an enhanced borrowing base and greater liquidity through July 15, 2020.
As of September 26, 2020, we had outstanding borrowings of $263.0 million, excess availability of $202.1 million, and a weighted average interest rate of 2.5 percent. As of December 28, 2019, our principal balance was $326.5 million, excess availability was $80.0 million, and our weighted average interest rate was 3.9 percent.
The Revolving Credit Facility contains certain financial and other covenants, and our right to borrow under the Revolving Credit Facility is conditioned upon, among other things, our compliance with these covenants. We were in compliance with all covenants under the Revolving Credit Facility as of September 26, 2020.
Term Loan Facility
We have a term loan facility that we entered into in April 2018 with HPS Investments Partners, LLC, as administrative and collateral agent, and certain other financial institutions party thereto (the “Term Loan Facility”), with a maturity date of October 13, 2023. The Term Loan Facility provides for a senior secured first lien loan facility in an initial aggregate principal amount of $180 million and is secured by a security interest in substantially all of our assets.
The Term Loan Facility requires monthly interest payments, and also requires quarterly principal payments of $402,282, in arrears, with the remaining balance due on the maturity date. The Term Loan Facility also requires certain mandatory prepayments of outstanding loans, subject to certain exceptions. The Term Loan Facility required maintenance of a total net leverage ratio of 8.75 to 1.00 for the quarter ending September 26, 2020. We were in compliance with all covenants under the Term Loan Facility as of September 26, 2020.
Borrowings under the Term Loan Facility may be made as Base Rate Loans or Eurodollar Rate Loans. The Base Rate Loans will bear interest at the rate per annum 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; plus (ii) the Applicable Margin, as described below. Eurodollar Rate Loans will bear interest at the rate per annum equal to (i) the ICE Benchmark Administration LIBOR Rate, provided that the Adjusted Eurodollar Rate shall at no time be less than 1.00 percent per annum; plus (ii) the Applicable Margin. The Applicable Margin will be 6.00 percent with respect to Base Rate Loans and 7.00 percent with respect to Eurodollar Rate Loans.
We amended the Term Loan Facility on December 31, 2019, to extend the period for satisfying the designated principal balance level required to maintain the modified total net leverage ratio covenant levels for the 2019 fourth and subsequent quarters thereunder, which was satisfied on January 31, 2020, through repayments from proceeds from the real estate financing transactions described in Note 8. On February 28, 2020, we further amended the Term Loan Facility to provide that we would not be subject to the facility’s 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. On April 1, 2020, we amended the Term Loan Facility to, among other things, modify the total net leverage ratio covenant levels for the 2020 second and third quarters. All other total net leverage ratio covenant levels for prior and future quarters were unchanged.
As of September 26, 2020, we had outstanding borrowings of $57.8 million under the Term Loan Facility and an interest rate of 8.0 percent per annum. As of December 28, 2019, our principal balance was $146.7 million with an interest rate of 8.7 percent per annum. The decrease in the outstanding borrowings was due to the principal payments described above and the net proceeds of the real estate financing transactions described in Note 8 being applied to the Term Loan Facility.
On October 2, 2020, we reduced the principal balance of the Term Loan Facility to $44.4 million, and as a result we are no longer subject to the Facility’s total net leverage ratio covenant beginning with our 2020 fourth quarter.
Finance Lease Obligations
Our finance lease liabilities consist of leases related to equipment and vehicles, and real estate, with the majority of those finance leases related to real estate. For more information on our finance lease obligations, refer to Note 8, Leases.
6. Net Periodic Pension (Benefit) Cost
The following table shows the components of our net periodic pension (benefit) cost:
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|
Three Months Ended
|
|
Nine Months Ended
|
|
September 26, 2020
|
|
September 28, 2019
|
|
September 26, 2020
|
|
September 28, 2019
|
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(In thousands)
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(In thousands)
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Service cost
|
$
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—
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$
|
29
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|
|
$
|
—
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|
|
$
|
190
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|
Interest cost on projected benefit obligation
|
723
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|
|
881
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|
|
2,169
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|
|
2,899
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|
Expected return on plan assets
|
(1,210)
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|
|
(1,339)
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|
|
(3,630)
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|
|
(3,828)
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Amortization of unrecognized loss
|
263
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|
|
278
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|
|
789
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|
|
857
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|
Net periodic pension (benefit) cost
|
$
|
(224)
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|
$
|
(151)
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|
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$
|
(672)
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|
$
|
118
|
|
7. Stock Compensation
Stock Compensation Expense
During the three months ended September 26, 2020, and September 28, 2019, we incurred stock compensation expense of $1.1 million and $1.2 million, respectively. During the nine months ended September 26, 2020, and September 28, 2019, we incurred stock compensation expense of $2.9 million and $2.5 million, respectively. The increase in our stock compensation expense for the nine-month period is attributable to having more outstanding equity-based awards during these periods than in the prior year and the vesting of awards in connection with the departure of certain employees.
8. Leases
We have operating and finance leases for certain of our distribution facilities, office space, land, mobile fleet, and equipment. Many of our leases are non-cancelable and typically have a defined initial lease term, and some provide options to renew at our election for specified periods of time. The majority of our leases have remaining lease terms of 1 year to 15 years, some of which include one or more options to extend the leases for 5 years. Our leases generally provide for fixed annual rentals. Certain of our leases include provisions for escalating rent based on, among other things, contractually defined increases and/or changes in the Consumer Price Index (“CPI”). Some of our leases require us to pay taxes, insurance, and maintenance expenses associated with the leased assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We determine if an arrangement is a lease at inception and assess lease classification as either operating or finance at lease inception or modification. Operating lease right-of use (“ROU”) assets and liabilities are presented separately on the condensed consolidated balance sheets. Finance lease ROU assets are included in property and equipment and the finance lease obligations are presented separately in the condensed consolidated balance sheet. 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. We have also made the accounting policy election to not separate lease components from non-lease components related to our mobile fleet asset class.
Finance Lease Liabilities
Our finance lease liabilities consist of leases related to equipment and vehicles, and real estate. As noted in the table below, a majority of our finance leases, formally known as capital leases, relate to real estate.
During 2017 and 2018, we entered into real estate financing transactions on warehouse facilities in Tampa, FL; Ft. Worth, TX; Bellingham, PA; Frederick, MD; Lawrenceville, GA; and Raleigh, NC. These transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms of 15 years with multiple 5-year renewal options, with one having a single 10-year renewal option. We accounted for these transactions in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 840, which was the lease accounting standard in effect at the inception of these arrangements. We have recorded these transactions as finance lease liabilities on our balance sheet. As of September 26, 2020, and December 28, 2019, total unrecognized deferred gains related to these transactions were $83.0 million and $85.8 million, respectively.
On May 19, 2019, we completed a real estate financing transaction on a warehouse facility in University Park, IL for net proceeds of $21.8 million. On June 20, 2019, we completed a real estate financing transaction on a warehouse facility in Yulee, FL for net proceeds of $13.3 million. These two transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms of 15 years with multiple 5-year renewal options. Gross proceeds of these transactions were $45.0 million.
During the first quarter of fiscal 2020, we completed several real estate financing transactions. On December 31, 2019, we completed real estate financing transactions on warehouse facilities in Madison, TN; Kansas City, MO; Richmond, VA; and Bridgeton, MO for aggregate net proceeds of $27.2 million. On January 31, 2020, we completed real estate financing transactions on warehouse facilities in Charlotte, NC; Memphis, TN; Independence, KY; San Antonio, TX; Portland, ME; Denville, NJ; Yaphank, NY; Pensacola, FL; and Tallmadge, OH for aggregate net proceeds of $34.1 million. On February 28, 2020, we completed a real estate financing transaction on a warehouse facility in Elkhart, IN for net proceeds of $7.5 million. These transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms from 15 years to 18 years with multiple 5-year renewal options. Gross proceeds of these transactions were $78.3 million.
We determined that the transactions in fiscal 2019 and in the first quarter of the current fiscal year did not qualify as sales in accordance with ASC 842. Therefore, for accounting purposes, the transactions were not accounted for as sale-leaseback transactions, and no gain or loss was recorded. We determined that these leases qualified for finance lease treatment and recorded them accordingly. The net book value of the assets related to these transactions remains on our books as property and equipment and we continue to depreciate the assets over their remaining useful lives.
On August 14, 2020, we entered into a sale-leaseback arrangement on our warehouse facility in Denver, CO. We determined that this transaction qualified as a sale in accordance with ASC 842 and the lease qualified for operating lease treatment. Gross proceeds of this transaction were $11.0 million and we recognized a related gain of $8.7 million. Upon completion of the transaction, we entered into a long-term lease on the property for an initial term of five years with multiple 5-year renewal options. Net proceeds of the transaction were $10.6 million, which were used to pay down our Term Loan Facility.
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 following table presents our assets and liabilities related to our leases as of September 26, 2020 and December 28, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2020
|
|
December 28, 2019
|
(In thousands)
|
Assets
|
Classification
|
|
|
|
Operating lease right-of-use assets
|
Operating lease right-of-use assets
|
$
|
53,124
|
|
|
$
|
54,408
|
|
Finance lease right-of-use assets (1)
|
Property and equipment, net
|
151,017
|
|
|
141,922
|
|
Total lease right-of-use assets
|
|
$
|
204,141
|
|
|
$
|
196,330
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current portion
|
|
|
|
|
Operating lease liabilities
|
Operating lease liabilities - short term
|
$
|
6,926
|
|
|
$
|
7,317
|
|
Finance lease liabilities
|
Finance lease liabilities - short term
|
5,469
|
|
|
6,486
|
|
Non-current portion
|
|
|
|
|
Operating lease liabilities
|
Operating lease liabilities - long term
|
45,883
|
|
|
47,091
|
|
Finance lease liabilities
|
Finance lease liabilities - long term
|
267,753
|
|
|
191,525
|
|
Total lease liabilities
|
|
$
|
326,031
|
|
|
$
|
252,419
|
|
(1) Finance lease right-of-use assets are presented net of accumulated amortization of $55.9 million and $30.8 million as of September 26, 2020 and December 28, 2019, respectively.
The components of lease expense were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 26, 2020
|
|
September 28, 2019
|
September 26, 2020
|
|
September 28, 2019
|
|
(In thousands)
|
|
(In thousands)
|
Operating lease cost:
|
$
|
3,108
|
|
|
$
|
2,911
|
|
|
$
|
9,206
|
|
|
$
|
9,047
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
$
|
4,648
|
|
|
$
|
2,699
|
|
|
$
|
11,526
|
|
|
$
|
8,722
|
|
Interest on lease liabilities
|
4,949
|
|
|
4,347
|
|
|
17,670
|
|
|
12,216
|
|
Total finance lease costs
|
$
|
9,597
|
|
|
$
|
7,046
|
|
|
$
|
29,196
|
|
|
$
|
20,938
|
|
Supplemental cash flow information related to leases was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 26, 2020
|
|
September 28, 2019
|
|
September 26, 2020
|
|
September 28, 2019
|
|
(In thousands)
|
|
(In thousands)
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
3,029
|
|
|
$
|
2,990
|
|
|
$
|
8,662
|
|
|
$
|
8,957
|
|
Operating cash flows from finance leases
|
4,949
|
|
|
4,347
|
|
|
17,670
|
|
|
12,216
|
|
Financing cash flows from finance leases
|
$
|
2,893
|
|
|
$
|
2,421
|
|
|
$
|
7,327
|
|
|
$
|
6,652
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
|
|
|
|
|
Operating leases
|
$
|
3,640
|
|
|
$
|
—
|
|
|
$
|
3,668
|
|
|
$
|
—
|
|
Finance leases
|
$
|
3,145
|
|
|
$
|
14,403
|
|
|
$
|
3,145
|
|
|
$
|
18,652
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2020
|
|
December 28, 2019
|
|
(In thousands)
|
Finance leases
|
|
|
|
Property and equipment
|
$
|
206,920
|
|
|
$
|
172,720
|
|
Accumulated depreciation
|
(55,903)
|
|
|
(30,798)
|
|
Property and equipment, net
|
$
|
151,017
|
|
|
$
|
141,922
|
|
Weighted Average Remaining Lease Term (in years)
|
|
|
|
Operating leases
|
11.12
|
|
11.71
|
Finance leases
|
16.29
|
|
17.12
|
Weighted Average Discount Rate
|
|
|
|
Operating leases
|
9.24
|
%
|
|
9.34
|
%
|
Finance leases
|
9.86
|
%
|
|
10.11
|
%
|
The major categories of our finance lease liabilities as of September 26, 2020 and December 28, 2019 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2020
|
|
December 28, 2019
|
|
(In thousands)
|
Equipment and vehicles
|
$
|
29,451
|
|
|
$
|
32,471
|
|
Real estate
|
243,771
|
|
|
165,540
|
|
Total finance leases
|
$
|
273,222
|
|
|
$
|
198,011
|
|
As of September 26, 2020, maturities of lease liabilities were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Finance leases
|
|
(In thousands)
|
2020
|
$
|
11,727
|
|
|
$
|
6,729
|
|
2021
|
9,383
|
|
|
30,025
|
|
2022
|
8,641
|
|
|
29,325
|
|
2023
|
7,286
|
|
|
28,996
|
|
2024
|
7,590
|
|
|
28,376
|
|
Thereafter
|
45,803
|
|
|
408,808
|
|
Total lease payments
|
$
|
90,430
|
|
|
$
|
532,259
|
|
Less: imputed interest
|
(37,621)
|
|
|
(259,037)
|
|
Total
|
$
|
52,809
|
|
|
$
|
273,222
|
|
On December 28, 2019, maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Finance leases
|
|
(In thousands)
|
2020
|
$
|
11,348
|
|
|
$
|
24,002
|
|
2021
|
10,111
|
|
|
23,052
|
|
2022
|
8,048
|
|
|
22,230
|
|
2023
|
7,330
|
|
|
21,854
|
|
2024
|
6,413
|
|
|
21,380
|
|
Thereafter
|
50,901
|
|
|
327,439
|
|
Total lease payments
|
$
|
94,151
|
|
|
$
|
439,957
|
|
Less: imputed interest
|
(39,743)
|
|
|
(241,946)
|
|
Total
|
$
|
54,408
|
|
|
$
|
198,011
|
|
9. Commitments and Contingencies
Environmental and Legal Matters
From time to time, we are involved in various proceedings incidental to our businesses, and we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Although the ultimate outcome of these proceedings cannot be determined with certainty, based on presently available information management believes that adequate reserves have been established for probable losses with respect thereto and receivables recorded for expected receipts from settlements. Management further believes that, while the ultimate outcome of one or more of these matters could be material to operating results in any given quarter, it will not have a materially adverse effect on our consolidated financial condition, our results of operations, or our cash flows.
Collective Bargaining Agreements
As of September 26, 2020, we had 2,000 employees on a full-time basis, and approximately 22 percent of our employees were represented by various local labor union Collective Bargaining Agreements (“CBAs”). Approximately 1 percent of our employees are covered by three CBAs that are up for renewal in fiscal 2020. As of September 26, 2020, one of these CBAs was renewed and the remaining two are expected to be renegotiated before the end of the year.
10. Accumulated Other Comprehensive Loss
Comprehensive loss includes both net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) results from items deferred from recognition into our Condensed Consolidated Statements of Operations and Comprehensive Loss. Accumulated other comprehensive loss is separately presented on our Condensed Consolidated Balance Sheets as part of stockholders’ equity (deficit).
The changes in balances for each component of accumulated other comprehensive loss for the nine months ended September 26, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency, net
of tax
|
|
Defined
benefit pension
plan, net of tax
|
|
Other,
net of tax
|
|
Total Accumulated Other Comprehensive Loss
|
|
(In thousands)
|
December 28, 2019, beginning balance
|
$
|
666
|
|
|
$
|
(35,441)
|
|
|
$
|
212
|
|
|
$
|
(34,563)
|
|
Other comprehensive income, net of tax (1)
|
8
|
|
|
604
|
|
|
(10)
|
|
|
602
|
|
September 26, 2020, ending balance, net of tax
|
$
|
674
|
|
|
$
|
(34,837)
|
|
|
$
|
202
|
|
|
$
|
(33,961)
|
|
(1) For the nine months ended September 26, 2020, the actuarial loss recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) as a component of net periodic pension cost was $0.8 million, net of tax of $0.2 million. Please see Note 6, Net Periodic Pension (Benefit) Cost, for further information.
11. Income Taxes
Our effective tax rate for the three months ended September 26, 2020, and September 28, 2019, was 22.3 percent and (3.6) percent, respectively. Our effective tax rate for the three months ended September 26, 2020, was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and officer’s compensation, and the effect of the partial valuation allowance for separate company state income tax losses and previously nondeductible interest under 163(j) of the Internal Revenue Code (“IRC”). Our effective tax rate for the three months ended September 28, 2019, was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, and the effect of the partial valuation allowance for separate company state income tax losses and consolidated interest expense limitation, including $0.6 million in discrete tax expense related to prior periods. In addition, we recorded discrete tax expense of $0.2 million for a shortfall on the vesting of our restricted stock units, which was offset by a $0.2 million discrete tax benefit for claiming tax credits.
Our effective tax rate was 18.9 percent and (0.9) percent, for the first nine months of fiscal 2020 and 2019, respectively. Our effective tax rate for the nine months ended September 26, 2020, was impacted by (i) the discrete tax benefit of $3.9 million resulting from the release of the valuation allowance associated with the nondeductible interest expense under Section 163(j) of the IRC as a result of changes under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act (which was enacted on March 27, 2020, and contained, among other things, several tax-based measures meant to counteract the effects of the COVID-19 pandemic) to increase the allowable percentage from 30 percent of adjusted taxable income to 50 percent of adjusted taxable income, (ii) recording discrete tax expense of $0.4 million for a shortfall on the vesting of our restricted stock units, (iii) the permanent addback of certain nondeductible expenses, including meals and entertainment and nondeductible compensation, and (iv) the effect of the partial valuation allowance for separate company state income tax losses and previously nondeductible interest expense under Section 163(j) of the IRC. Our effective tax rate for the nine months ended September 28, 2019, was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation and the effect of the valuation allowance for separate company state income tax losses and consolidated interest expense limitation, including $0.6 million in discrete tax expense related to prior periods. In addition, during the first nine months of fiscal 2019, we recorded discrete tax expense of $0.2 million for a shortfall on vesting of our restricted stock units, which was offset by a $0.2 million discrete tax benefit for claiming state tax credits.
Our financial statements contain certain deferred tax assets which primarily resulted from tax benefits associated with temporary differences related to certain reserves, pension obligations, differences between book and tax depreciation and amortization, realized gains upon the sales of real estate, and both federal and state net operating losses. Currently, we have a valuation allowance that covers (i) certain company state net operating loss carryforwards and (ii) disallowed interest calculated pursuant to the changes made by the Tax Cuts and Jobs Act of 2017, as adjusted by the CARES Act.
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 forward under tax law. At the end of each quarter, we evaluate the weight of available evidence (both positive and negative). We considered the recent reported income generated in the current quarter and prior years (adjusted for unusual one-time items) and income generated in 2017, including the prior year income from Cedar Creek. 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 the 2020 and 2019 fiscal third quarters, 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 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. Although we believe our estimates are reasonable, the ultimate determination of the appropriate amount of valuation allowance involves significant judgments.
One of our long-standing deferred tax assets has been our net operating losses for federal income tax purposes. With our real estate sales discussed in Note 8 and our net income during the first nine months of 2020, we believe we will fully utilize all of our remaining federal net operating losses upon filing of our 2020 federal income tax return in 2021. In addition, we believe that the change in control under IRC 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 be limited as we have effectively implemented a real estate strategy involving the sale and leaseback of real estate. Those sale and leaseback transactions involved four warehouses in January 2018, two warehouses during 2019, and fifteen warehouses in 2020. Additionally, the acquisition of Cedar Creek did not generate any limitations under IRC Section 382 on Cedar Creek’s tax assets.
12. Income (Loss) per Share
We calculate basic income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. We calculate diluted income (loss) per share using the treasury stock method, by dividing net income (loss) by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including restricted stock units, and performance units. Due to the financial results for the three- and nine-month periods ended September 28, 2019, 0.1 million and 0.0 million of incremental shares were excluded from the computation of diluted weighted averages outstanding, because their effect would be anti-dilutive.
The reconciliation of basic net income (loss) and diluted net income (loss) per common share for the three- and nine-month periods ended September 26, 2020, and September 28, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 26, 2020
|
|
September 28, 2019
|
|
September 26, 2020
|
|
September 28, 2019
|
|
(In thousands, except per share data)
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
55,116
|
|
|
$
|
(7,043)
|
|
|
$
|
61,024
|
|
|
$
|
(7,461)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
9,461
|
|
|
9,366
|
|
|
9,408
|
|
|
9,351
|
|
Dilutive effect of share-based awards
|
170
|
|
|
—
|
|
|
11
|
|
|
—
|
|
Weighted-average shares outstanding - diluted
|
9,631
|
|
|
9,366
|
|
|
9,419
|
|
|
9,351
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
$
|
5.83
|
|
|
$
|
(0.75)
|
|
|
$
|
6.49
|
|
|
$
|
(0.80)
|
|
Diluted income (loss) per share
|
$
|
5.72
|
|
|
$
|
(0.75)
|
|
|
$
|
6.48
|
|
|
$
|
(0.80)
|
|