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 U.S. GAAP. All significant intercompany accounts and transactions have been eliminated.
Fiscal years
2016
,
2015
, and
2014
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.
Recent Accounting Standards - Recently Issued
Revenue from Contracts with Customers
. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which deferred the effective date by one year to December 15, 2017, for interim and annual reporting periods beginning after that date. The FASB permitted early adoption of the standard, but not before the original effective date of December 15, 2016.
The Revenue Recognition ASUs referred to, above, outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersede most current revenue recognition guidance, including industry-specific guidance. The guidance is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. This guidance is effective for us beginning on January 1, 2018, and entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. We are evaluating whether we will adopt this guidance using the full retrospective or modified retrospective approach, and evaluating whether to early adopt this standard or adopt on the effective date. We plan to complete our evaluation in the second quarter of fiscal 2017.
We are concluding the assessment phase of implementing this guidance. We have evaluated each of the five steps in the new revenue recognition model, which are as follows: 1) Identify the contract with the customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue when (or as) performance obligations are satisfied. Our preliminary conclusion is that the determination of what constitutes a contract with our customers (step 1), our performance obligations under the contract (step 2), and the determination and allocation of the transaction price (steps 3 and 4) under the new revenue recognition model will not result in material changes in comparison to our current revenue recognition for our contracts with customers entered into in the normal course of operations. However, we have not yet finalized our analysis. Additionally, adoption of these provisions may affect sale recognition of properties under potential future sale and leaseback transactions.
Leases
. In February 2016, the FASB issued ASU 2016-02, “Leases.” The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either “finance” or “operating,” with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Early adoption is permitted. We are evaluating whether to early adopt this standard or adopt on the effective date. We plan to complete our evaluation in the third quarter of fiscal 2017.
Adoption of this standard may have a significant impact on our Consolidated Balance Sheets, especially pertaining to the capitalization of operating leases and transition provisions relating to potential sale-leaseback transactions. Although we have
not completed our assessment, we do not expect the adoption to change the recognition, measurement, or presentation of lease expenses within the Consolidated Statements of Operations and Cash Flows. For information about our current undiscounted future lease payments and the timing of those payments, see Note 13, “Lease Commitments.”
Recent Accounting Standards - Recently Adopted
Going Concern
. We have adopted ASU 2014-15, “Presentation of Financial Statements - Going Concern.” See Note 15.
Share-Based Compensation
. In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718).” This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation, and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. We early adopted the provisions of this accounting standard in the fourth quarter of 2016, and there were no adjustments resulting from our adoption of the provisions of this accounting standard.
Revenue Recognition
We recognize revenue when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, our price to the buyer is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership. 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.
In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis. Customer consigned inventory is maintained and stored by certain customers; however, ownership and risk of loss remains with us. When the consigned inventory is sold by the customer, we recognize revenue on a gross basis.
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.
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 or market, 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
Amounts billed to customers in sales transactions related to shipping and handling are classified as revenue. Shipping and handling costs included in “Selling, general, and administrative” expenses were
$89.0 million
,
$88.4 million
, and
$91.8 million
for fiscal
2016
, fiscal
2015
, and fiscal
2014
, 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. 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 in accordance with ASU 2015-17. We adopted these provisions prospectively on January 2, 2016, and prior periods were not retrospectively adjusted. A valuation allowance is recorded to reduce deferred tax assets when necessary. For additional information about our income taxes, see Note 5, “Income Taxes.”
Insurance and Self-Insurance
For fiscal 2016, the Company purchased an insurance policy for its non-union and certain unionized employee health benefits, and was fully insured for this obligation. For fiscal 2015, the Company was self-insured, up to certain limits, for non-union and certain unionized employee health benefits. Health benefits for some unionized employees for fiscal 2016 and 2015 were paid directly to a union trust, depending upon the union-negotiated benefit arrangement.
For fiscal 2016 and 2015, the Company was self-insured, up to certain limits, for most 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. Liabilities 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.
2. Assets Held for Sale
In fiscal
2016
, we designated certain non-operating properties as held for sale, due to strategic realignments of our business. At the time of designation, we ceased recognizing depreciation expense on these assets. As of
December 31, 2016
, and
January 2, 2016
, the net book value of total assets held for sale was
$2.7 million
and
$2.3 million
, respectively, and was included in “Other current assets” in our Consolidated Balance Sheets. Properties held for sale as of
December 31, 2016
, consisted of land in Newtown, Connecticut, and
three
warehouses, located in Lubbock, Texas; Allentown, Pennsylvania; and Virginia Beach, Virginia. We plan to sell these properties within the next twelve months. We continue to actively market all properties that are designated as held for sale.
3. Cash Held in Escrow
Cash held in escrow on our mortgage in fiscal 2016 consisted of
$1.0 million
held by the lender from the sale of the Wausau, Wisconsin distribution facility, which was applied to mortgage principal in January 2017, and
$0.5 million
held by the lender which may be used for capital improvements or applied to the mortgage. Cash held in escrow on our mortgage in fiscal 2015 consisted of amounts held in a cash collateral account, which was no longer required in fiscal 2016 by the Seventeenth Amendment to the mortgage. The remaining cash held in escrow includes amounts held in escrow related to insurance for workers’ compensation, auto liability, and general liability. Cash held in escrow is included in “Other current assets” and “Other non-current assets” on the accompanying Consolidated Balance Sheets.
The table below provides the balances of each individual component of cash held in escrow:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
January 2, 2016
|
|
(In thousands)
|
Cash in escrow
|
|
|
|
Mortgage
|
$
|
1,490
|
|
|
$
|
9,118
|
|
Insurance
|
7,449
|
|
|
7,437
|
|
Other
|
2,699
|
|
|
4,633
|
|
Total
|
$
|
11,638
|
|
|
$
|
21,188
|
|
4. Operational Efficiency Initiatives
During fiscal 2016, we announced operational efficiency initiatives which resulted in severance and employee benefits charges, which were substantially completed by the fourth quarter of fiscal 2016; as well as inventory initiatives that were fully completed in the third quarter of fiscal 2016.
Our facilities closure initiative involved the closure of
four
owned distribution centers, and a corresponding reduction in force of approximately
60
full-time employees. These closures and reductions in force were completed by the end of the third quarter of fiscal 2016. A
$1.2 million
severance and employee benefits charge was recorded in the second quarter of fiscal 2016 in “selling, general, and administrative” expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) at that time, and the corresponding liability for this initiative has been largely paid. A further closure of our Allentown, Pennsylvania distribution facility in the fourth quarter of fiscal 2016 as part of this initiative was immaterial. This initiative is deemed substantially complete.
Our inventory initiatives included a stock keeping unit (“SKU”) rationalization in local markets during the second and third quarters of fiscal 2016, resulting in the identification of certain less productive SKUs which we decided to discontinue offering. The SKU rationalization initiative was fully completed by the end of the third quarter of fiscal 2016.
The following table describes our total expenses recognized as a result of our total operational efficiency initiatives on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2016:
|
|
|
|
|
|
|
|
Fiscal Year Ended
December 31, 2016
|
|
|
(In millions)
|
Facilities closure initiative:
|
|
|
Severance and employee benefits
|
|
$
|
1.2
|
|
Inventory initiatives:
|
|
|
Cost of sales
|
|
2.2
|
|
Selling, general, and administrative
(1)
|
|
3.6
|
|
Total decrease to earnings
|
|
$
|
7.0
|
|
(1)
Primarily comprised of payments for material handling and delivery.
5. Income Taxes
Our provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended December 31,
2016
|
|
Fiscal Year
Ended January 2,
2016
|
|
Fiscal Year
Ended January 3,
2015
|
|
(In thousands)
|
Federal income taxes:
|
|
|
|
|
|
Current
|
$
|
232
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
—
|
|
|
—
|
|
|
—
|
|
State income taxes:
|
|
|
|
|
|
|
|
|
Current
|
962
|
|
|
235
|
|
|
160
|
|
Deferred
|
—
|
|
|
—
|
|
|
—
|
|
Foreign income taxes:
|
|
|
|
|
|
|
|
|
Current
|
(70
|
)
|
|
(68
|
)
|
|
134
|
|
Deferred
|
(3
|
)
|
|
(14
|
)
|
|
18
|
|
Provision for income taxes
|
$
|
1,121
|
|
|
$
|
153
|
|
|
$
|
312
|
|
The federal statutory income tax rate was
35%
. Our provision for income taxes is reconciled to the federal statutory amount as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended December 31,
2016
|
|
Fiscal Year
Ended January 2,
2016
|
|
Fiscal Year
Ended January 3,
2015
|
|
(In thousands)
|
Expense (benefit) from income taxes computed at the federal statutory tax rate
|
$
|
6,022
|
|
|
$
|
(3,998
|
)
|
|
$
|
(4,746
|
)
|
Expense (benefit) from state income taxes, net of federal benefit
|
595
|
|
|
(474
|
)
|
|
(623
|
)
|
Valuation allowance change
|
(6,319
|
)
|
|
4,318
|
|
|
5,656
|
|
Nondeductible items
|
403
|
|
|
288
|
|
|
232
|
|
Alternative minimum tax
|
232
|
|
|
—
|
|
|
—
|
|
Other
|
188
|
|
|
19
|
|
|
(207
|
)
|
Provision for income taxes
|
$
|
1,121
|
|
|
$
|
153
|
|
|
$
|
312
|
|
The change in valuation allowance is exclusive of items that do not impact income from continuing operations, but are reflected in the balance sheet change in deferred income tax assets and liabilities as disclosed in the components of net deferred income tax assets (liabilities) table below.
In accordance with the intraperiod tax allocation provisions of 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 2016, there was no intraperiod tax allocation because there were sufficient loss carryforwards to offset income from continuing operations. In fiscal 2015 and 2014, there were no intraperiod tax allocations since there was a loss in continuing operations along with a loss in other comprehensive income for these periods. While the income tax provision from continuing operations is reported in our Consolidated Statements of Operations and Comprehensive Income (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, 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.
In our evaluation of the weight of available evidence we considered recent reported losses as negative evidence which carried substantial weight, although we had net income in fiscal 2016. Therefore, we considered evidence related to the four sources of taxable income, to determine whether such positive evidence outweighed the negative evidence associated with the losses incurred. The positive evidence considered included:
•
taxable income in prior carryback years, if carryback is permitted under the tax law;
•
future reversals of existing taxable temporary differences;
•
tax planning strategies; and
•
future taxable income exclusive of reversing temporary differences and carryforwards.
During fiscal
2016
and
2015
, we weighed all available positive and negative evidence, and concluded that the weight of the negative evidence of cumulative losses over several years continued to outweigh the positive evidence. Based on the conclusions reached, we maintained a full valuation allowance during fiscal
2016
and
2015
.
The components of our net deferred income tax liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Deferred income tax assets:
|
|
|
|
Inventory reserves
|
$
|
2,088
|
|
|
$
|
3,007
|
|
Compensation-related accruals
|
4,465
|
|
|
4,819
|
|
Accruals and reserves
|
112
|
|
|
508
|
|
Accounts receivable
|
656
|
|
|
744
|
|
Restructuring costs
|
—
|
|
|
32
|
|
Intangible assets
|
583
|
|
|
—
|
|
Property and equipment
|
1,134
|
|
|
778
|
|
Pension
|
10,747
|
|
|
11,628
|
|
Benefit from net operating loss (“NOL”) carryovers
(1)
|
78,236
|
|
|
82,055
|
|
Other
|
194
|
|
|
371
|
|
Total gross deferred income tax assets
|
98,215
|
|
|
103,942
|
|
Less: Valuation allowances
|
(97,552
|
)
|
|
(103,311
|
)
|
Total net deferred income tax assets
|
663
|
|
|
631
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
Other
|
(663
|
)
|
|
(634
|
)
|
Total deferred income tax liabilities
|
(663
|
)
|
|
(634
|
)
|
Deferred income tax liabilities, net
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
|
(1)
|
Our federal NOL carryovers are
$187.1 million
and will
expire in 12 to 19 years
. Our state NOL carryovers are
$256.9 million
and will
expire in 1 to 20 years
.
|
Activity in our deferred tax asset valuation allowance for fiscal
2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended December 31,
2016
|
|
Fiscal Year
Ended January 2,
2016
|
|
(In thousands)
|
Balance as of beginning of the year
|
$
|
103,311
|
|
|
$
|
99,979
|
|
Valuation allowance provided for taxes related to:
|
|
|
|
|
|
(Income) loss before income taxes
|
(5,759
|
)
|
|
3,332
|
|
Balance as of end of the year
|
$
|
97,552
|
|
|
$
|
103,311
|
|
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. The following table summarizes the activity related to our unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of fiscal year
|
$
|
184
|
|
|
$
|
184
|
|
|
$
|
259
|
|
Increases related to current year tax positions
|
—
|
|
|
—
|
|
|
—
|
|
Additions for tax positions in prior years
|
—
|
|
|
—
|
|
|
—
|
|
Reductions for tax positions in prior years
|
—
|
|
|
—
|
|
|
—
|
|
Reductions due to lapse of applicable statute of limitations
|
—
|
|
|
—
|
|
|
(75
|
)
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
Balance at end of fiscal year
|
$
|
184
|
|
|
$
|
184
|
|
|
$
|
184
|
|
Included in the unrecognized tax benefits as of
December 31, 2016
, and
January 2, 2016
, were
$0.2 million
and
$0.2 million
, respectively, of tax benefits that, if recognized, would reduce our annual effective tax rate. We also accrued an immaterial amount of interest related to these unrecognized tax benefits during fiscal 2016 and 2015, and this amount is reported in “Interest expense” in our Consolidated Statements of Operations and Comprehensive Income (Loss). We do not expect our unrecognized tax benefits to change materially over the next twelve months.
We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2013 through 2016 tax years generally remain subject to examination by federal and most state and foreign tax authorities.
6. Revolving Credit Facilities
On November 3, 2016, we amended and extended our Credit Agreement with the Thirteenth Amendment to the Credit Agreement. This amendment extended the maturity date of the Credit Agreement to
July 15, 2018
, reduced the revolving loan limit by
$15.0 million
to
$335.0 million
and reduced the Tranche A Loan limit by
$4.0 million
to
$16.0 million
. Furthermore, the Credit Agreement, as amended, requires maintenance of a fixed charge coverage ratio of
1.2
to
1.0
in the event our excess availability falls below
$32.5 million
through
March 31, 2017
; and subsequently, the greater of a defined range, adjusted on a seasonal basis, of
$36.0 million
to
$42.0 million
and an amount equal to
12.5%
of the lesser of (a) the sum of the borrowing base and the Tranche A Loan borrowing base or (b) the maximum credit.
The Tranche A Loan limit shall be subject to automatic commitment reductions depending on the time of year, with the balance due and payable by
July 15, 2018
; provided, that all scheduled commitment reductions on or after
August 1, 2017
will be subject to satisfaction of certain conditions including a minimum excess availability threshold of at least
$50.0 million
after giving effect to any such required payment. If a scheduled commitment reduction is prohibited due to not satisfying those conditions, the required excess availability covenant shall be increased by the amount of any such prohibited commitment reduction.
As of
December 31, 2016
, we had outstanding borrowings of
$176.2 million
and excess availability of
$63.5 million
under the terms of the Credit Agreement, based on qualifying inventory and accounts receivable. The interest rate on the Credit Agreement was
4.6%
at
December 31, 2016
. Our obligations under the Credit Agreement are secured by a first priority security interest in all of our operating subsidiaries’ assets, including inventories, accounts receivable, and proceeds from those items, and are also secured by a second priority interest in the equity of our real estate subsidiaries which hold the real estate that secures our mortgage loan.
We were in compliance with all covenants under the Credit Agreement as of
December 31, 2016
.
7. Mortgage
Our mortgage loan was most recently extended and amended on March 24, 2016, with the Seventeenth Amendment to the mortgage loan. The mortgage is 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 hold the real property that secures the mortgage loan.
The Seventeenth Amendment extended the maturity of the mortgage to
July 1, 2019
, subject to a
$27.2 million
remaining principal payment (which was originally
$60.0 million
, reduced by an allocable
$32.8 million
of the total fiscal 2016 principal payments of
$41.4 million
) due no later than
July 1, 2017
, and a
$55.0 million
principal payment due no later than
July 1, 2018
, with the remaining balance due on
July 1, 2019
. Except as otherwise permitted in the Seventeenth Amendment, the net proceeds from any owned properties sold by us must exceed certain minimum release prices (unless otherwise agreed to by the
lender), and must be used to pay mortgage principal. These net proceeds will be included in the aforementioned principal payments. The mortgage requires monthly interest-only payments at an interest rate of
6.35%
.
|
|
|
|
|
|
Principal Payments
|
|
(In thousands)
|
2017
|
$
|
27,196
|
|
2018
|
55,000
|
|
2019
|
44,627
|
|
Total
|
$
|
126,823
|
|
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. 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 be Level 1 in the fair value hierarchy, as the assets held in the pension plan under GAAP consist of publicly traded securities.
Fair value measurements for financial instruments
Carrying amounts for our financial instruments are not significantly different from their fair value, with the exception of our mortgage. To determine the fair value of our mortgage, we used a discounted cash flow model. We believe the mortgage fair value valuation to be Level 2 in the fair value hierarchy, as the valuation model has inputs that are observable for substantially the full term of the liability. Assumptions critical to our fair value measurements in the period are present value factors used in determining fair value and an interest rate. At
December 31, 2016
, the discounted fair value of the mortgage was approximately
$3.7 million
more than the
$126.8 million
approximate carrying value of the mortgage. The fair value of our debt is not necessarily indicative of the amount at which we could settle our debt.
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 the majority of the 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 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Change in projected benefit obligation:
|
|
|
|
Projected benefit obligation at beginning of period
|
$
|
115,055
|
|
|
$
|
121,955
|
|
Service cost
|
996
|
|
|
1,104
|
|
Interest cost
|
4,901
|
|
|
5,099
|
|
Actuarial (gain) loss
|
2,094
|
|
|
(8,460
|
)
|
Curtailment gain
|
(181
|
)
|
|
(272
|
)
|
Benefits paid
|
(9,429
|
)
|
|
(4,371
|
)
|
Projected benefit obligation at end of period
|
113,436
|
|
|
115,055
|
|
Change in plan assets:
|
|
|
|
|
|
Fair value of assets at beginning of period
|
78,264
|
|
|
80,192
|
|
Actual return on plan assets
|
4,868
|
|
|
(2,820
|
)
|
Employer contributions
|
5,384
|
|
|
5,263
|
|
Benefits paid
|
(9,429
|
)
|
|
(4,371
|
)
|
Fair value of assets at end of period
|
79,087
|
|
|
78,264
|
|
Net unfunded status of plan
|
$
|
(34,349
|
)
|
|
$
|
(36,791
|
)
|
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 accumulated other comprehensive loss, net of tax. On
December 31, 2016
, we measured the fair value of our plan assets and benefit obligations. As of
December 31, 2016
, and
January 2, 2016
, the net unfunded status of our benefit plan was
$34.3 million
and
$36.8 million
, respectively.
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 Income (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
2016
, fiscal
2015
, and fiscal
2014
was a
$2.1 million
loss,
$0.4 million
gain; and a
$17.7 million
loss, respectively, primarily from the net recognized and unrecognized actuarial gain (loss) for those fiscal periods.
The decrease in the unfunded obligation for the fiscal year was approximately
$2.4 million
and was comprised of
$2.1 million
of actuarial losses,
$4.9 million
of asset gains,
$5.4 million
of pension contributions, and a charge of
$5.9 million
due to current year service and interest cost. The net periodic pension cost increased slightly to
$0.8 million
in fiscal 2016 from
$0.7 million
in fiscal 2015, driven primarily by the lower discount rate at the mid-year fiscal 2016 curtailment.
In fiscal 2016, a freeze of certain unionized participants in the pension plan, due to renegotiation of union contracts, resulted in a reduction in future years of service for the remaining active participants in the plan, which triggered a curtailment. As a result, there was an immaterial curtailment gain from the event which resulted in an immaterial decrease to the projected benefit obligation in fiscal 2016.
In fiscal 2016, we offered a lump sum payment of accrued pension benefits to certain terminated vested participants who had accrued pension benefits under a certain threshold. In fiscal 2016, we paid approximately
$4.3 million
from pension plan assets to the participants who accepted the offer, which completed the fiscal 2016 lump sum offer. This offer did not result in a settlement of our benefit obligation. We may offer other or all terminated vested participants a lump sum offer in the future, and future lump sum amounts, when paid, may result in a settlement of our benefit obligation.
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 31,
2016
|
|
January 2,
2016
|
|
(In thousands)
|
Unfunded status
|
$
|
(34,349
|
)
|
|
$
|
(36,791
|
)
|
Unrecognized prior service cost
|
—
|
|
|
1
|
|
Unrecognized actuarial loss
|
34,014
|
|
|
31,871
|
|
Net amount recognized
|
$
|
(335
|
)
|
|
$
|
(4,919
|
)
|
Amounts recognized on the balance sheet consist of:
|
|
|
|
|
|
Accrued pension liability
|
$
|
(34,349
|
)
|
|
$
|
(36,791
|
)
|
Accumulated other comprehensive loss (pre-tax)
|
34,014
|
|
|
31,872
|
|
Net amount recognized
|
$
|
(335
|
)
|
|
$
|
(4,919
|
)
|
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
$112.3 million
and
$114.0 million
at
December 31, 2016
, and
January 2, 2016
, respectively.
Net periodic pension cost for the pension plan included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
December 31,
2016
|
|
Fiscal Year Ended
January 2,
2016
|
|
Fiscal Year Ended
January 3,
2015
|
|
(In thousands)
|
Service cost
|
$
|
996
|
|
|
$
|
1,104
|
|
|
$
|
1,056
|
|
Interest cost on projected benefit obligation
|
4,901
|
|
|
5,099
|
|
|
5,123
|
|
Expected return on plan assets
|
(6,224
|
)
|
|
(6,172
|
)
|
|
(6,041
|
)
|
Amortization of unrecognized loss
|
1,126
|
|
|
699
|
|
|
763
|
|
Net periodic pension cost
|
$
|
799
|
|
|
$
|
730
|
|
|
$
|
901
|
|
The following assumptions were used to determine the projected benefit obligation at the measurement date and the net periodic pension cost:
|
|
|
|
|
|
|
|
December 31, 2016
|
|
January 2, 2016
|
Projected benefit obligation:
|
|
|
|
Discount rate
|
4.26
|
%
|
|
4.52
|
%
|
Average rate of increase in future compensation levels
|
Graded 5.5-2.5%
|
|
|
Graded 5.5-2.5%
|
|
Net periodic pension cost:
|
|
|
|
|
|
Discount rate
|
4.52
|
%
|
|
4.19
|
%
|
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
|
7.82
|
%
|
|
7.54
|
%
|
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, compensation increase rates, mortality rates, retirement patterns, and turnover rates.
Determination of expected long-term rate of return
In developing expected return assumptions for our pension plan, the most influential decision affecting long-term portfolio performance is the determination of overall asset allocation. An asset class is a group of securities that exhibit similar characteristics and behave similarly in the marketplace. The three main asset classes are equities, fixed income, and cash equivalents.
Upon calculation of the historical risk premium for each asset class, an expected rate of return can be established based on assumed 90-day Treasury bill rates. Based on the normal asset allocation structure of the portfolio (
61%
equities,
38%
fixed income, and
1%
other) with an assumed compound annualized risk free rate of
3.50%
, the expected overall portfolio return is
8.87%
offset by
0.39%
expense estimate, resulting in a
8.48%
net long term rate of return as of
December 31, 2016
, which is used to calculate 2017 pension expense.
Our percentage of fair value of total assets by asset category as of the applicable measurement dates are as follows:
|
|
|
|
|
|
|
|
Asset Category
|
|
December 31,
2016
|
|
January 2,
2016
|
Equity securities — domestic
|
|
49
|
%
|
|
59
|
%
|
Equity securities — international
|
|
12
|
%
|
|
14
|
%
|
Fixed income
|
|
38
|
%
|
|
24
|
%
|
Other
|
|
1
|
%
|
|
3
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
The fair value of our plan assets by asset category as of the applicable measurement dates are as follows:
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
December 31,
2016
|
|
January 2,
2016
|
|
|
(In thousands)
|
Equity securities — domestic
|
|
$
|
38,417
|
|
|
$
|
46,087
|
|
Equity securities — international
|
|
9,717
|
|
|
10,912
|
|
Fixed income
|
|
30,493
|
|
|
18,792
|
|
Other
|
|
460
|
|
|
2,473
|
|
Total
|
|
$
|
79,087
|
|
|
$
|
78,264
|
|
Plan assets are valued using quoted market prices in active markets, and we consider the investments to be Level 1 in the fair value hierarchy. See Note 8 for a discussion of the levels of inputs to determine fair value.
Investment policy and strategy
Plan assets are managed as a balanced portfolio comprised of two major components: an equity portion and a fixed income portion. The expected role of plan equity investments is to maximize the long-term real growth of fund assets, while the role of fixed income investments is to generate current income, provide for more stable periodic returns, and provide some downside protection against the possibility of a prolonged decline in the market value of equity investments. We review this investment policy statement at least once per year. In addition, the portfolio is reviewed quarterly to determine the deviation from target weightings and is rebalanced as necessary. Target allocations for fiscal 2017 are
55%
domestic and
10%
international equity investments,
30%
fixed income investments, and
5%
cash. The expected long-term rate of return for the plan’s total assets is based on the expected return of each of the above categories, weighted based on the target allocation for each class.
Our estimated future benefit payments reflecting expected future service are as follows:
|
|
|
|
|
Fiscal Year Ending
|
(In thousands)
|
2017
|
$
|
5,859
|
|
2018
|
6,132
|
|
2019
|
6,266
|
|
2020
|
6,500
|
|
2021
|
6,710
|
|
Thereafter
|
34,800
|
|
We currently are required to make
four
quarterly cash contributions totaling approximately
$3.6 million
for fiscal funding year 2017.
Multiemployer Pension Plans
We participate in several multiemployer pension plans (“MEPPs”) administered by labor unions that provide retirement benefits to certain union employees in accordance with certain 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
|
|
2016
|
|
2015
|
|
2014
|
Lumber Employees Local 786 Retirement Fund
(1)
|
516067407
|
Green
(September 1, 2015)
|
N/A
|
No
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
Central States, Southeast and Southwest Areas Pension Fund
(2)
|
366044243
|
Critical and Declining
(January 1, 2016)
|
RP
|
No
|
|
0.6
|
|
|
0.7
|
|
|
0.6
|
|
Other
|
|
|
|
|
|
0.4
|
|
|
1.2
|
|
|
—
|
|
Total
|
|
|
|
|
|
$
|
1.4
|
|
|
$
|
2.3
|
|
|
$
|
1.0
|
|
(1)
Our contributions for fiscal 2016 and 2015 exceeded
5%
of total plan contributions, and we were deemed to be a significant contributor to this plan. The plan fiscal year began on September 1, 2016, and to date, we have likely contributed over
5%
of the total plan’s contributions. The collective bargaining agreement requiring contributions to this plan expired on September 30, 2016, and we are currently negotiating a new agreement with the union.
(2)
We did not contribute more than
5%
of total plan contributions to this plan; however, this plan is deemed significant as it is severely underfunded, and we may, in the future, record a liability if required by an event of our withdrawal from the plan or a mass withdrawal. Our contingent fiscal 2016 withdrawal liability was estimated at approximately
$30.7 million
.
Defined Contribution Plans
Our employees also participate in
two
defined contribution plans: the “hourly savings plan” covering hourly employees, and the “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 2016 were
$0.2 million
, and were
$0.1 million
each during fiscal 2015 and fiscal 2014.
Employer contributions totaling
$0.9 million
for the salaried savings plan for fiscal 2016 have been deferred until the first quarter of 2017. Employer contributions to the salaried savings plan for fiscal 2015 of
$0.9 million
were deferred and paid in the first quarter of fiscal 2016; and the fiscal 2014 employer contributions to this plan of
$0.9 million
were paid in fiscal 2014.
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 2006 and 2004 Plans have
no
shares remaining for issuance. Remaining 2006 Plan shares are outstanding only for the vesting of outstanding equity awards and the exercise of currently outstanding options; and 2004 Plan shares are outstanding only for 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
263,500
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 2016 and 2006 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.
For outstanding awards designated as liability awards, which, as of December 31, 2016, solely consisted of awards where we intend to settle the awards in cash at the end of the vesting period, we utilize the Black-Scholes-Merton option pricing model (“Black-Scholes”), and record quarterly expense attributions of the awards based on estimates of the fair market value of the awards at the end of each quarter during the service period. The Black-Scholes model requires the input of highly subjective assumptions such as the expected stock price volatility.
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 Income (Loss).
Liability Awards - Cash-Settled SARs
During fiscal 2016, we granted certain executives and employees cash-settled SARs, which vest on July 16, 2018, at which time half of any appreciation over the
$7.00
exercise price will become payable within
thirty
days of the vesting date, and the remainder payable within
one
year. At
December 31, 2016
, there were
493,000
cash-settled SARs issued and outstanding, and we recognized expense of approximately
$0.4 million
in fiscal 2016 related to these awards.
The following table summarizes the assumptions used to compute the current fair value of our cash-settled SARs:
|
|
|
|
|
Expected volatility
|
|
71.81
|
%
|
Risk-free interest rate
|
|
1.04
|
%
|
Expected term (in years)
|
|
1.54
|
|
Expected dividend yield
|
|
Not applicable
|
|
Equity Awards - Restricted Stock, Restricted Stock Units, Performance Shares, and Stock Options
Restricted Stock
During fiscal
2016
, we did not grant any restricted stock awards. Our outstanding restricted stock awards vest either in equal annual increments over
three
years or cliff vest
three
years after the date of grant. These awards are time-based and are not based upon attainment of performance goals.
As of
December 31, 2016
, there was approximately
$0.3 million
of total unrecognized compensation expense related to restricted stock. The unrecognized compensation expense is expected to be recognized over the first
six months
of fiscal 2017. As of
December 31, 2016
, the weighted average remaining contractual term for our restricted stock was
six months
and the maximum contractual term was
3.0
years.
The following table summarizes activity for our restricted stock awards during fiscal
2016
:
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Number of
Awards
|
|
Weighted
Average Fair
Value
|
Outstanding as of January 2, 2016
|
170,335
|
|
|
$
|
14.60
|
|
Granted
|
—
|
|
|
—
|
|
Vested
(1)
|
(69,825
|
)
|
|
16.32
|
|
Forfeited
|
(1,950
|
)
|
|
18.29
|
|
Outstanding as of December 31, 2016
|
98,560
|
|
|
$
|
13.19
|
|
|
|
(1)
|
The total fair value vested in fiscal
2016
, fiscal
2015
, and fiscal
2014
was
$1.1 million
,
$1.5 million
, and
$2.4 million
, respectively.
|
Restricted Stock Units
During fiscal
2016
, the Board of Directors granted certain of our executive officers and directors restricted stock units. These awards are time-based and are not based upon attainment of performance goals. The awards granted in fiscal 2016 have a
two
-year cliff vesting for the executive officer award, and a
one
-year vesting period for the director grants. All vested director grants settle at the earlier of
ten
years from the vesting date or retirement from the Board of Directors, with the exception of a grant for
8,186
shares which was granted to a Board member with an immediate vesting, and settlement on March 31, 2017, or as soon as reasonably practicable within thirty days of March 31, 2017.
Restricted stock units granted prior to fiscal 2016 to employees and executive officers vest either in equal annual increments over
three
years or
three
years after the date of grant. Restricted stock unit awards granted in fiscal 2015 to directors had the one-year vesting period and extended settlement period as described above.
As of
December 31, 2016
, there was approximately
$1.0 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
1.02 years
. As of
December 31, 2016
, the weighted average remaining contractual term for our restricted stock units was
1.02 years
, and the maximum contractual term was
3.0
years.
The following table summarizes activity for our restricted stock units during fiscal
2016
:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Number of
Awards
|
|
Weighted
Average Fair
Value
|
Outstanding as of January 2, 2016
|
140,179
|
|
|
$
|
10.00
|
|
Granted
|
200,732
|
|
|
6.24
|
|
Vested
(1)
|
(65,711
|
)
|
|
9.61
|
|
Forfeited
|
(4,750
|
)
|
|
9.80
|
|
Outstanding as of December 31, 2016
|
270,450
|
|
|
$
|
7.32
|
|
|
|
(1)
|
The total fair value of restricted stock units vested in fiscal 2016 was
$0.6 million
.
No
restricted stock units vested in fiscal years
2015
or
2014
.
|
Performance shares
During fiscal years 2015 and 2013, the Board of Directors granted certain of our directors, executive officers, and employees awards of performance shares of our common stock. The performance shares are released only upon the successful achievement of specific, measurable performance criteria approved by the Compensation Committee, and, unless waived by the Compensation Committee as was done for certain 2013 performance share awards, the satisfaction of a service condition. The performance shares, when earned, vest in
three
equal tranches, though all tranches of the 2015 performance share awards will all vest if certain criteria determinable at the end of fiscal year 2017 is met, despite the criteria not having been met for fiscal 2015 or 2016. If the performance targets are not met at the end of fiscal 2017, the awards will be canceled.
Performance criteria for the 2013 awards was either met or waived, and all remaining 2013 awards vested in the first and second quarters of fiscal 2016. Performance criteria for the 2015 awards has not been met to date, and, as performance for fiscal year 2017 is currently not determinable, achievement of any such criteria cannot be considered “probable,” at this time.
As of
December 31, 2016
, there was approximately
$0.6 million
of total unrecognized compensation expense related solely to the 2015 performance share awards.
No
compensation expense has been recorded on these shares, as the likelihood of meeting the performance criteria is not determinable at this time. This determination will be re-evaluated in the second and third quarters of fiscal 2017, as information regarding the likelihood of achieving the final performance target will become more available. If the final performance criteria for these shares is met, the outstanding performance shares would vest in July and September of 2018, with a weighted average contractual term remaining of approximately
1.6
years on the original
three
-year contractual term.
The following table summarizes activity for our performance share awards during fiscal
2016
:
|
|
|
|
|
|
|
|
|
Performance Shares
|
|
Number of
Awards
|
|
Weighted
Average Fair
Value
|
Outstanding as of January 2, 2016
|
126,306
|
|
|
$
|
9.00
|
|
Granted
|
—
|
|
|
—
|
|
Vested
(1) (2)
|
(54,556
|
)
|
|
29.06
|
|
Forfeited
|
(4,750
|
)
|
|
9.80
|
|
Outstanding at December 31, 2016
|
67,000
|
|
|
$
|
9.35
|
|
|
|
(1)
|
The total fair value vested in each of fiscal
2016
and fiscal
2015
was
$1.6 million
. In fiscal
2014
, the total fair value vested was
$1.7 million
.
|
|
|
(2)
|
In prior fiscal years, certain participants in the 2013 performance share awards were no longer employed by the Company or otherwise eligible to meet the service condition of these awards. The Compensation Committee approved an amendment to the applicable Performance Share Award Agreements to allow these shares to vest, if and when they vested for individuals employed by the Company. These amendments were determined to be modifications of the awards, from equity-based awards to liability awards, and adjustments related to the difference in fair value were recorded in the prior fiscal years when this determination was made. These liability awards were subsequently marked
|
to market on a quarterly basis. The final remaining
46,941
shares of this type outstanding as of the fiscal 2015 year-end vested on or before June 2016, and
no
such shares remained outstanding as of December 31, 2016.
Stock Options
The tables below summarize activity and include certain additional information related to our outstanding stock options granted under the 2004 Plan and 2006 Plan for the year ended
December 31, 2016
. The maximum contractual term for stock options was
ten
years from the grant date, and the remaining outstanding final tranche of options as of
December 31, 2016
, presented below, expire on
March 10, 2018
. There were
no
new employee stock option grants and
no
stock option exercises during fiscal years
2016
,
2015
, and
2014
.
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
Outstanding as of January 2, 2016
|
75,900
|
|
|
$
|
47.70
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Expired
|
(900
|
)
|
|
140.10
|
|
Outstanding and exercisable as of December 31, 2016
|
75,000
|
|
|
$
|
46.60
|
|
Compensation Expense
Share-based compensation expense is recognized only for those awards that are expected to vest. At the beginning of fiscal 2016, we determined that our forfeiture rate was effectively
zero
, due to our re-evaluation of historical forfeiture experience at the end of fiscal 2015. In both fiscal 2015 and fiscal 2014, our forfeiture rate was estimated at approximately
13%
, based on a prior historical forfeiture rate experience. We recognized the effect of adjusting the estimated forfeiture rate to
zero
in the beginning of fiscal 2016, in accordance with our revised estimate. Therefore, our early adoption of ASU 2016-09 in the fourth quarter of fiscal 2016 had no material effect on our recognition of compensation expense.
Total share-based compensation expense from our share-based awards, net of estimated forfeitures, as described above, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2016
(1)
|
|
Fiscal Year Ended January 2, 2016
(1)
|
|
Fiscal Year Ended January 3, 2015
(1)
|
|
(In thousands)
|
Restricted Stock
|
$
|
983
|
|
|
$
|
1,606
|
|
|
$
|
1,941
|
|
Performance Shares
(2)
|
92
|
|
|
127
|
|
|
1,725
|
|
Cash-settled Stock Appreciation Rights
(4)
|
375
|
|
|
—
|
|
|
—
|
|
Restricted Stock Units and Options
(3)
|
889
|
|
|
94
|
|
|
174
|
|
Total
|
$
|
2,339
|
|
|
$
|
1,827
|
|
|
$
|
3,840
|
|
|
|
(1)
|
See “Performance shares”, above, for a discussion of the modifications to certain 2013 performance share awards originally recorded as equity awards and subsequently recorded as liability awards. This modification resulted in an adjustment to then immediately fully expense the awards reclassified as liability awards in the fiscal year modified, and to subsequently mark to market all outstanding liability awards on a quarterly basis. Share-based compensation expense relating to these shares was immaterial for fiscal 2016, and all of these awards fully vested in June 2016. A credit to share-based compensation expense of
$0.2 million
was recorded during fiscal 2015 on these performance shares, and expense of
$1.2 million
was recorded in fiscal 2014.
|
|
|
(2)
|
All compensation expense for performance shares is related to the 2013 Performance Share Awards, as
no
compensation expense is being recorded on the 2015 Performance Shares.
|
|
|
(3)
|
For all fiscal years presented, there was
no
compensation expense for options. All compensation expense presented pertains to Restricted Stock Units.
|
|
|
(4)
|
We began issuing these awards in fiscal 2016; therefore, there is
no
such expense for fiscal 2015 or fiscal 2014.
|
We recognized related income tax benefits in fiscal years
2016
,
2015
, and
2014
of
$0.9 million
,
$0.7 million
, and
$1.5 million
, respectively, which have been offset by a valuation allowance. We present the benefits of tax deductions in excess of recognized compensation expense as both a financing cash inflow and an operating cash outflow in our Consolidated Statements of Cash Flows when present. There were
no
material excess tax benefits in fiscal years
2016
,
2015
, and
2014
.
11. Earnings 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, performance shares, and stock options.
The following table shows the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
December 31, 2016
|
|
January 2,
2016
(1)
|
|
January 3,
2015
(1)
|
|
(In thousands, except per share data)
|
Net income (loss)
|
$
|
16,085
|
|
|
$
|
(11,576
|
)
|
|
$
|
(13,872
|
)
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
8,913
|
|
|
8,750
|
|
|
8,600
|
|
Dilutive effect of share-based awards
|
156
|
|
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
9,069
|
|
|
8,750
|
|
|
8,600
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
1.80
|
|
|
$
|
(1.32
|
)
|
|
$
|
(1.61
|
)
|
Diluted earnings per share
|
$
|
1.77
|
|
|
$
|
(1.32
|
)
|
|
$
|
(1.61
|
)
|
(1)
Basic and diluted earnings per share are equivalent for the fiscal
2015
and
2014
, due to net losses for the period, and all outstanding share-based awards would be antidilutive.
For fiscal years
2016
,
2015
, and
2014
, we excluded
289,333
,
512,720
, and
412,981
unvested 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 earnings per share consist of the following securities:
•
Unvested restricted stock awards of
78,333
,
170,334
, and
218,917
for fiscal years
2016
,
2015
, and
2014
, respectively, were anti-dilutive.
•
Performance shares, granted under our 2006 Plan in 2015 and 2013, which are issuable upon satisfaction of certain performance criteria. Unvested performance shares outstanding were
67,000
(out of the money),
126,306
(anti-dilutive), and
110,209
(anti-dilutive) for fiscal years
2016
,
2015
, and
2014
, respectively.
•
Unvested restricted stock units of
69,000
,
140,180
and
5,405
for fiscal years
2016
,
2015
, and
2014
, respectively, were anti-dilutive.
•
Unexercised stock options outstanding were
75,000
(out of the money),
75,900
(anti-dilutive), and
78,450
(anti-dilutive) for fiscal years
2016
,
2015
, and
2014
, respectively.
12. Related Party Transactions
Cerberus Capital Management, L.P., our majority shareholder, retains consultants who specialize in operations management and support, and who provide Cerberus with consulting advice concerning portfolio companies in which funds and accounts managed by Cerberus or its affiliates have invested. From time to time, Cerberus makes the services of these consultants available to Cerberus portfolio companies. We believe that any transactions that occurred in fiscal 2016, 2015, and 2014 were not material to our results of operations or financial position.
13. Lease Commitments
Operating Leases
The Company leases real property, logistics equipment, and office equipment under long-term, non-cancelable operating leases. Certain of our operating leases have extension options and escalation clauses. Our real estate leases also provide for payments of other costs such as real estate taxes, insurance, and common area maintenance, which are not included in rental expense, sublease income, or the future minimum rental payments as set forth below. Total rental expense was approximately
$4.2 million
,
$4.8 million
, and
$4.5 million
for fiscal
2016
,
2015
, and
2014
, respectively.
At
December 31, 2016
, our total operating lease commitments were as follows:
|
|
|
|
|
|
(In thousands)
|
2017
|
$
|
4,964
|
|
2018
|
4,629
|
|
2019
|
985
|
|
2020
|
196
|
|
2021
|
51
|
|
Thereafter
|
—
|
|
Total
|
$
|
10,825
|
|
Capital Leases
We have entered into certain long-term, non-cancelable capital leases for certain logistics equipment and vehicles. As of
December 31, 2016
, the acquisition value and net book value of assets under capital leases was
$20.8 million
and
$9.0 million
, respectively. As of
January 2, 2016
, the acquisition value and net book value of assets under capital leases was
$22.1 million
and
$11.5 million
, respectively.
At
December 31, 2016
, our total commitments under capital leases recorded in the Consolidated Balance Sheets in “other current liabilities” and “other non-current liabilities” were as follows:
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Interest
|
|
(In thousands)
|
2017
|
$
|
3,019
|
|
|
$
|
611
|
|
2018
|
3,197
|
|
|
432
|
|
2019
|
2,510
|
|
|
242
|
|
2020
|
2,021
|
|
|
92
|
|
2021
|
623
|
|
|
17
|
|
Thereafter
|
—
|
|
|
—
|
|
Total
|
$
|
11,370
|
|
|
$
|
1,394
|
|
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
As of
December 31, 2016
, we employed approximately
1,600
persons on a full-time basis. Approximately
35%
of our employees were represented by various local labor union CBAs, of which approximately
10%
of CBAs are up for renewal in fiscal 2017 or are currently expired and under negotiations.
15. Liquidity and ASU 2014-15
A portion of our debt is classified as “Current maturities of long-term debt” on our Condensed Consolidated Balance Sheet as of
December 31, 2016
, since it is due within the next twelve months. These amounts consist of a remaining
$27.2 million
principal reduction of our mortgage, which is due by
July 1, 2017
, and
$2.5 million
of the Tranche A Loan. We are actively engaged in marketing certain of our real estate holdings in order to meet the principal reduction date specified by our mortgage loan.
As of
December 31, 2016
, we had outstanding borrowings of
$176.2 million
and excess availability of
$63.5 million
under the terms of the U.S. revolving credit facility, based on qualifying inventory and accounts receivable.
As stated in Note 1, the FASB previously issued ASU 2014-15, “Presentation of Financial Statements - Going Concern,” which requires footnote disclosures concerning, among other matters, an entity’s ability to repay its obligations through normal operational or other sources over the following twelve months. We adopted this accounting standard in the fourth quarter of fiscal 2016. As previously stated in Note 7, “Mortgage,” and above, our mortgage requires a principal payment due no later than
July 1, 2017
, the remaining balance of which is
$27.2 million
. We note that our plans and intentions include potential sales of properties and sale and leaseback transactions, in order to meet our mortgage obligations.
16. Accumulated Other Comprehensive Loss
Comprehensive income (loss) is a measure of income which includes both net income (loss) and other comprehensive income (loss). Our other comprehensive 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 loss was
$1.9 million
,
$0.3 million
, and
$18.1 million
for fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively.
The changes in accumulated balances for each component of other comprehensive loss for fiscal
2014
,
2015
, and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation,
net
of tax
|
|
Amortization of unrecognized pension gain (loss), net of tax
|
|
Other, net of tax
|
|
Total
|
|
(In thousands)
|
January 4, 2014, beginning balance
|
$
|
1,636
|
|
|
$
|
(18,141
|
)
|
|
$
|
212
|
|
|
$
|
(16,293
|
)
|
Other comprehensive income (loss), net of tax
(1)
|
(481
|
)
|
|
(18,416
|
)
|
|
—
|
|
|
(18,897
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
(1)
|
—
|
|
|
765
|
|
|
—
|
|
|
765
|
|
January 3, 2015, ending balance, net of tax
|
$
|
1,155
|
|
|
$
|
(35,792
|
)
|
|
$
|
212
|
|
|
$
|
(34,425
|
)
|
Other comprehensive income (loss), net of tax
(2)
|
(759
|
)
|
|
699
|
|
|
—
|
|
|
(60
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
(2)
|
—
|
|
|
(289
|
)
|
|
—
|
|
|
(289
|
)
|
January 2, 2016, ending balance, net of tax
|
$
|
396
|
|
|
$
|
(35,382
|
)
|
|
$
|
212
|
|
|
$
|
(34,774
|
)
|
Other comprehensive income (loss), net of tax
(3)
|
264
|
|
|
(2,927
|
)
|
|
—
|
|
|
(2,663
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
(3)
|
—
|
|
|
786
|
|
|
—
|
|
|
786
|
|
December 31, 2016, ending balance, net of tax
|
$
|
660
|
|
|
$
|
(37,523
|
)
|
|
$
|
212
|
|
|
$
|
(36,651
|
)
|
(1)
For fiscal
2014
, there was
$0.8 million
of actuarial loss recognized in the statements of operations as a component of net periodic pension cost. There was
$18.4 million
of unrecognized actuarial loss based on updated actuarial assumptions. There was no intraperiod income tax allocation and the deferred tax benefit was fully offset by a valuation allowance.
(2)
For fiscal
2015
, there was
$0.3 million
of actuarial loss recognized in the statements of operations as a component of net periodic pension cost. There was
$0.7 million
of unrecognized actuarial gain based on updated actuarial assumptions. There was no intraperiod income tax allocation and the deferred tax benefit was fully offset by a valuation allowance.
(3)
For fiscal
2016
, there was
$0.8 million
of actuarial loss recognized in the statements of operations as a component of net periodic pension cost. There was
$2.9 million
of unrecognized actuarial loss based on updated actuarial assumptions (see Note 9). There was no intraperiod income tax allocation and the deferred tax benefit was fully offset by a valuation allowance.
17. Reverse Stock Split
Pursuant to the authorization granted by our stockholders at our Annual Meeting of Stockholders held on May 19, 2016, our board of directors approved a 1-for-10 Reverse Stock Split of our common stock, and a corresponding reduction in the number of authorized shares of common stock, from
200,000,000
to
20,000,000
. Our authorized number of shares of preferred stock remained unchanged at
30,000,000
. The Reverse Stock Split was effected on the close of business as of June 13, 2016, and our stock began trading on a reverse split-adjusted basis on June 14, 2016. All references made to share or per share amounts have been restated to reflect the effect of this 1-for-10 reverse stock split for all periods presented.