Notes to Consolidated Financial Statements
January 1, 2017
1. Description of Business and Basis of Presentation
Business
Smart & Final Stores, Inc., a Delaware corporation ("SFSI" or the "Successor" and, collectively with its wholly owned
subsidiaries, the "Company"), is engaged primarily in the business of selling fresh perishables and everyday grocery items, together with foodservice, packaging and janitorial products. The Company
operates non-membership, warehouse-style stores offering products in a range of product sizes.
SFSI
was formed in connection with the acquisition of the "Smart & Final" and "Cash & Carry" store businesses through the purchase of all of the outstanding common stock of
Smart & Final Holdings Corp., a Delaware corporation (the "Predecessor" or "SFHC"), on November 15, 2012. The principal acquiring entities were affiliates of Ares Management, L.P.
("Ares"), and the acquisition is referred to as the "Ares Acquisition."
The
Company operates non-membership warehouse-style grocery stores under the "Smart & Final" banner in California, Arizona, and Nevada. These stores are operated through the
Company's principal subsidiary, Smart & Final Stores LLC, a California limited liability company and an indirect wholly owned subsidiary of SFSI ("Smart & Final Stores"), and
other related entities. Beginning in 2008, the Company began opening an expanded Smart & Final store format named "Smart & Final
Extra
!"
("
Extra
!"). At January 1, 2017, the Company operated 246 stores, including 172
Extra!
format
stores, under the "Smart & Final" banner.
The
Company also operates non-membership warehouse-style grocery stores in Washington, Oregon, California, Idaho, Utah, and Nevada under the "Cash & Carry" banner. At
January 1, 2017, the Company operated 59 "Cash & Carry" stores.
The
Company classifies its operations into two reportable segments: "Smart & Final" and "Cash and Carry." For additional information on these segments, see Note 14, Segment
Information.
The
Company's wholly owned subsidiary, Smart & Final de Mexico S.A. de C.V. ("SF Mexico"), is a Mexican holding company that owns 50% of a joint venture. The other 50% of
the joint venture is owned by Grupo Calimax S.A. de C.V., an entity comprising the investment interests of a family group which is also the owner of the Calimax grocery store chain in Mexico.
At January 1, 2017, this joint venture operated 15 "Smart & Final" format stores in Northwestern Mexico, similar in concept to the Company's U.S. "Smart & Final" stores. This
joint venture operates the Mexico stores as a Mexican domestic corporation under the name Smart & Final del Noroeste, S.A. de C.V. ("SFDN").
The
Company's 50% joint venture interest is accounted for by the equity method of accounting. The investment in SFDN at each reporting fiscal year-end is reported in the consolidated
balance sheets under "Equity investment in joint venture." The carrying value of the investment as of January 1, 2017 and January 3, 2016 represents undistributed earnings of the joint
venture and an $8.0 million fair value purchase accounting adjustment recorded as a result of the Ares Acquisition. The "Retained earnings" on SFSI's consolidated balance sheets included
earnings of SFDN of $1.5 million and $1.4 million at January 1, 2017 and January 3, 2016, respectively. As of December 30, 2012, SFDN has declared dividends of
$15.4 million, representing earnings through 2011. Of the $15.4 million declared dividends, SFDN paid $0.8 million during the year ended January 1, 2017,
$0.6 million during the year ended December 29, 2013 and $11.6 million during the period January 2,
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Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
1. Description of Business and Basis of Presentation (Continued)
2012
through November 14, 2012. At the end of fiscal years 2016 and 2015, the Company revalued the dividend receivable due to exchange rate fluctuations and recorded exchange losses of
$0.4 million and $0.4 million, respectively. The undistributed earnings after 2011 are considered retained indefinitely for reinvestment and, accordingly, no provision is made for U.S.
federal and state income taxes and foreign income taxes. See Note 9, Income Taxes.
Secondary Public Offering
On April 24, 2015, certain of the Company's stockholders completed a secondary public offering (the "Secondary Offering") of 10,900,000
shares of Common Stock. The Company did not sell any shares in the Secondary Offering and did not receive any proceeds from the sales of shares by the selling stockholders. Following the Secondary
Offering, affiliates of Ares held approximately 60% of the Company's issued and outstanding shares of Common Stock. See Note 16, Stockholders' Equity.
Basis of Presentation
The accompanying consolidated financial statements present the financial position, and results of operations and cash flows of SFSI as of
January 1, 2017 and January 3, 2016, and for the years ended January 1, 2017, January 3, 2016 and December 28, 2014.
The
consolidated financial statements include the accounts of the Company and have been prepared in accordance with U.S. GAAP. All significant intercompany accounts and
transactions have been eliminated in consolidation.
On
September 19, 2014, SFSI's board of directors and stockholders approved a 190-for-one stock split on Common Stock. The accompanying consolidated financial statements and notes
thereto give retroactive effect to the stock split for all periods presented.
2. Summary of Significant Accounting Policies
Fiscal Years
The Company's fiscal year is the 52- or 53-week period that ends on the Sunday closest to December 31. Fiscal years 2016, 2015, and 2014
ended on January 1, 2017, January 3, 2016 and December 28, 2014, respectively. Each fiscal year typically consists of twelve-week periods in the first, second and fourth quarters
and a sixteen-week period in the third quarter. Fiscal years 2016 and 2014 are 52-week fiscal years. Fiscal year 2015 is a 53-week fiscal year and the fourth quarter consisted of a thirteen-week
period, ending on January 3, 2016.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. All
credit card, debit card and electronic benefits transfer transactions that process in less than seven days are classified as cash equivalents. The amounts due from banks for these transactions
classified as cash equivalents was $28.0 million and $32.2 million as of January 1, 2017 and January 3, 2016, respectively. The carrying amount of cash equivalents is
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Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
approximately
the same as their respective fair values due to the short-term maturity of these instruments.
Accounts Receivable, Net
Accounts receivable generally represent billings to customers, billings to vendors for earned rebates and allowances, receivables from SFDN, and
other items. The receivable from SFDN primarily relates to billings for the shipment of inventory product to SFDN. The following table sets forth the major components of accounts receivable for each
fiscal year-end (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Trade
|
|
$
|
2,973
|
|
$
|
3,231
|
|
Vendor
|
|
|
20,884
|
|
|
16,947
|
|
SFDN
|
|
|
1,237
|
|
|
1,792
|
|
Other
|
|
|
6,715
|
|
|
5,334
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,809
|
|
$
|
27,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company evaluates the collectability of accounts receivable and determines the appropriate reserve for doubtful accounts based on analysis of historical trends of write-offs and
recoveries on various levels of aged receivables. When the Company becomes aware of the deteriorated collectability of a specific account, additional reserves are made to reduce the net recognized
receivable to the amount reasonably expected to be collectible or zero. When the specific account is determined to be uncollectible, the net recognized receivable is written off in its entirety
against such reserves.
The
Company is exposed to credit risk on trade accounts receivable. The Company provides credit to certain trade customers in the ordinary course of business and performs ongoing credit
evaluations. Concentrations of credit risk with respect to trade accounts receivable are limited due to the number of customers comprising the Company's customer base. The Company currently believes
the allowance for doubtful accounts is sufficient to cover customer credit risks.
Inventories
Inventories consist of merchandise purchased for resale which is stated at the weighted-average cost (which approximates first-in, first-out
("FIFO")) or market. The Company provides for estimated inventory losses between physical inventory counts at its stores based upon historical inventory losses as a percentage of sales. The provision
is adjusted periodically to reflect updated trends of actual physical inventory count results. The Company had reserves for inventory losses and slow-moving inventory of $9.7 million and
$7.0 million as of January 1, 2017 and January 3, 2016, respectively.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include primarily prepaid rent, insurance, property taxes, income taxes receivable and other current
assets. As of January 1, 2017 and January 3, 2016, prepaid expenses and other current assets included $28.7 million and $11.8 million of income taxes receivable,
respectively.
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Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost or estimated fair value based on purchase accounting and depreciated or amortized using the
straight-line method. Leased property meeting certain criteria is capitalized and the amortization is based on the straight-line method over the term of the lease.
The
estimated useful lives are as follows:
|
|
|
Buildings and improvements
|
|
20 - 25 years
|
Fixtures and equipment
|
|
3 - 10 years
|
Leasehold improvements
|
|
Lesser of lease term or useful life of improvement
|
Costs
of normal maintenance and repairs and minor replacements are charged to expense when incurred. Major replacements, remodeling or betterments of properties are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is included in the consolidated
statements of operations and comprehensive income (loss).
Included
in property, plant, and equipment are costs associated with the selection and procurement of real estate sites of $3.1 million and $3.0 million at
January 1, 2017 and January 3, 2016, respectively. These costs are amortized over the remaining lease term of the successful sites with which they are associated.
In
accordance with Accounting Standards Codification ("ASC") 360,
Property, Plant, and Equipment
("ASC 360"), the Company reviews its
long-lived assets, including property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company
groups and evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. The Company regularly reviews its
stores' operating performance for indicators of impairment. Factors it considers important that could trigger an impairment review include a significant underperformance relative to expected
historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized to the extent the sum of the estimated discounted future cash flows from the use of the asset is less than the carrying value. The
Company measured the fair value of its long-lived assets on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. See Note 6, Fair Value Measurements. As a
result of such reviews, the Company recorded a pre-tax impairment loss of $1.2 million, $1.4 million and $0.7 million for the years ended January 1, 2017, January 3,
2016 and December 28, 2014, respectively, in the Smart & Final segment. The impairment losses were reported within "Operating and administrative expenses" on the Company's consolidated
statements of operations and comprehensive income (loss).
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Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
Capitalized Software
Capitalized software costs are comprised of third-party purchased software costs, capitalized costs associated with internally developed
software including internal direct labor costs, and installation costs. Such capitalized costs are amortized over the period that the benefits of the software are fully realizable and enhance the
operations of the business, ranging from three to seven years, using the straight-line method.
Capitalized
software costs, like other long-lived assets as required by ASC 360, are subject to review for impairment whenever events or changes in circumstances indicate that the
carrying amount of the capitalized software may not be recoverable, whether it is in use or under development. Impairment is recognized to the extent the sum of the estimated discounted future cash
flows from the use of the capitalized software is less than the carrying value. As a result of such reviews, the Company recorded a pre-tax impairment loss of $0.1 million and
$0.3 million in each of the years ended January 1, 2017 and December 28, 2014, in the Smart & Final segment, which was reported within "Operating and administrative
expenses" on the Company's consolidated statements of operations and comprehensive income (loss). The Company did not report any impairment loss for the year ended January 3, 2016.
Goodwill and Intangible Assets
In connection with the Ares Acquisition, the intangible assets were adjusted and recorded at fair market value in accordance with ASC
Topic 805,
Business Combinations
("ASC 805").
During
the year ended December 28, 2014, the Company acquired the Sun Harvest trademark. A fee incurred to acquire the trademark of $0.1 million was capitalized as
Signature brands and is amortized over a term of 5 years.
During
the fourth quarter of 2015, the Company acquired certain assets, including 33 store leases and related fixtures, equipment and liquor licenses, of Haggen Operations
Holdings, LLC and Haggen Opco South, LLC (together, "Haggen"). The Company recorded leasehold interests at fair value as of the acquisition dates. Acquired leasehold interests are finite
lived intangible assets amortized straight-line over their estimated useful benefit period which is typically the lease term. During the year ended January 1, 2017, leasehold interests was
increased for additional acquisition-related transaction costs and adjustments of $0.4 million. Amortization expense reported within "Cost of sales, buying and occupancy" on the Company's
consolidated statements of operations and comprehensive income (loss) was $3.6 million and $0.2 million for the year ended January 1, 2017 and January 3, 2016,
respectively.
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Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
The
following table summarizes the components of other intangible assets, net at January 1, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value at
Acquisition
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
January 1, 2017
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
265,000
|
|
$
|
|
|
$
|
265,000
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Signature brands
|
|
|
67,100
|
|
|
(13,886
|
)
|
|
53,214
|
|
Leasehold interests
|
|
|
55,129
|
|
|
(3,824
|
)
|
|
51,305
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
|
123,229
|
|
|
(18,710
|
)
|
|
104,519
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
388,229
|
|
$
|
(18,710
|
)
|
$
|
369,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the components of other intangible assets, net at January 3, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value at
Acquisition
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
January 3, 2016
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
265,000
|
|
$
|
|
|
$
|
265,000
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Signature brands
|
|
|
67,100
|
|
|
(10,528
|
)
|
|
56,572
|
|
Leasehold interests
|
|
|
54,750
|
|
|
(200
|
)
|
|
54,550
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
|
122,850
|
|
|
(11,728
|
)
|
|
111,122
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
387,850
|
|
$
|
(11,728
|
)
|
$
|
376,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
recorded fair market value for each of the trade names was determined by estimating the amount of royalty income that could be generated from the trade name if it was licensed to a
third-party owner and discounting the resulting cash flows using the weighted-average cost of capital for each respective trade name.
The
finite-lived intangible assets are amortized over their estimated useful benefit period and have the following weighted-average amortization periods:
|
|
|
Signature brands
|
|
20 years
|
Leasehold interests
|
|
24 years
|
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Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
Signature brands are amortized on a straight-line basis. Amortization expense reported within
"Operating and administrative expenses" on the Company's consolidated statements of operations and comprehensive income (loss) was $3.4 million, $3.7 million and $3.7 million for
the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively.
Amortization
of the finite-lived intangible assets over the next five fiscal years is as follows (in thousands):
|
|
|
|
|
2017
|
|
$
|
6,982
|
|
2018
|
|
|
6,982
|
|
2019
|
|
|
6,976
|
|
2020
|
|
|
7,094
|
|
2021
|
|
|
6,761
|
|
Thereafter
|
|
|
69,724
|
|
|
|
|
|
|
|
|
$
|
104,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
accordance with ASC 350,
IntangiblesGoodwill and Other
("ASC 350"), goodwill and intangible assets with indefinite lives
are evaluated on an annual basis for impairment during the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The annual evaluation of
impairment for fiscal year 2016 was performed as of December 4, 2016. The Company evaluates goodwill for impairment by comparing the fair value of each reporting unit to its carrying value
including the associated goodwill. The Company has designated its reporting units to be its Smart & Final stores and Cash & Carry stores. The Company determines the fair value of the
reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the fair value of the
reporting unit exceeds the carrying value of the net assets, including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit's net assets, including
goodwill, exceeds the fair value of the reporting unit, then the Company determines the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill
exceeds its implied value, then an impairment of goodwill has occurred and the Company would recognize an impairment charge for the difference between the carrying amount and the implied fair value of
goodwill. For the years ended January 1, 2017, January 3, 2016 and December 28, 2014, the Company did not recognize any goodwill impairment loss as a result of such evaluation.
The
Company evaluates its indefinite-lived intangible assets associated with trade names by comparing the fair value of each trade name with its carrying value. The Company determines
the fair value of the indefinite-lived trade names using a "relief from royalty payments" methodology. This methodology involves estimating reasonable royalty rates for each trade name and applying
these royalty rates to a revenue stream and discounting the resulting cash flows to determine fair value. For the years ended January 1, 2017, January 3, 2016 and December 28,
2014, the Company did not recognize any indefinite-lived trade name impairment loss as a result of such evaluation.
Finite-lived
intangible assets, like other long-lived assets as required by ASC 360, are subject to review for impairment whenever events or changes in circumstances indicate that the
carrying amount of the finite-lived intangible asset may not be recoverable. Impairment is recognized to the extent the
78
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
sum
of the discounted estimated future cash flows from the use of the finite-lived intangible asset is less than the carrying value. The Company did not recognize any impairment loss as a result of
such evaluation during any of the periods presented.
Purchase Accounting
The Company evaluates whether a transaction or other event meets the definition of a business combination. A business consists of inputs and
processes that have the ability to create outputs. Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, tangible and intangible assets
acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date in our consolidated financial statements. The excess of the fair value of consideration
transferred over the fair value of the net assets acquired, if any, is recorded as goodwill. For the Ares Acquisition, the excess of the purchase price over the sum of the amounts assigned to the
tangible and intangible net assets acquired of $611.2 million was recorded as goodwill. The intangible assets recorded related to the Ares Acquisition are not expected to be deductible for tax
purposes as the acquisition of the Predecessor was a stock purchase. See Note 3, Ares Acquisition.
An
acquired group of assets that do not meet the definition of a business are accounted for as an asset acquisition. Asset acquisitions are accounted for using a cost accumulation
approach, whereby the total consideration paid is allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. See Note 19, Haggen Transaction.
These
estimates of fair values, the allocation of the purchase price and other factors are subject to significant judgments and the use of estimates. The inputs used in the fair value
analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. See Note 6, Fair Value Measurements.
Other Assets
Other assets primarily consist of assets held in trusts for certain retirement plans (see Note 8, Retirement Benefit Plans and
Postretirement and Postemployment Benefit Obligations), insurance recovery receivables related to self-insurance, liquor licenses and other miscellaneous assets. As of January 1, 2017 and
January 3, 2016, other assets included a dividend receivable from SFDN to SF Mexico of $1.3 million and $2.4 million, respectively.
Accounts Payable
The Company's banking arrangements provide for the daily replenishment and limited monthly advanced payments of vendor payable accounts as
checks are presented or payments are demanded. The checks and the advanced payments outstanding in these bank accounts were $56.7 million and $38.0 million at January 1, 2017 and
January 3, 2016, respectively, and are included in "Accounts payable" in the consolidated balance sheets.
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Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
Other Long-Term Liabilities
Other long-term liabilities include primarily general liabilities, workers' compensation liabilities, liabilities for deferred compensation
plan, leasehold interests and other miscellaneous long-term liabilities. As a result of the Ares Acquisition, leasehold interests were adjusted and recorded at fair market value in accordance with ASC
805. At November 15, 2012, the fair value of the lease obligations was $9.8 million. As of January 1, 2017 and January 3, 2016, leasehold interests, related to Ares
Acquisition, of $6.6 million and $7.6 million, net of accumulated amortization of $3.2 million and $2.2 million, respectively, are included in other long-term liabilities.
These leasehold interests are amortized over their estimated useful benefit periods, which is typically the lease term. The weighted-average amortization period is 14 years.
Lease Accounting
Certain of the Company's operating leases provide for minimum annual payments that increase over the life of the lease. The aggregate minimum
annual payments are charged to expense on a straight-line basis beginning when the Company takes possession of the property and extending over the term of the related lease. The amount by which
straight-line rent expense exceeds actual lease payment requirements in the early years of the leases is accrued as deferred minimum rent and reduced in later years when the actual cash payment
requirements exceed the straight-line expense.
ASC 410,
Asset Retirement and Environmental Obligations
("ASC 410"), requires an entity to recognize a liability for the fair value of a conditional
asset retirement obligation if the fair value of the liability can be reasonably estimated. Due to the nature of the Company's business, its asset retirement obligation with respect to owned or leased
properties is not significant.
Store Opening and Closing Costs
New store opening costs consisting primarily of rent, store payroll and general operating costs are charged to expense as incurred prior to the
store opening.
In
the event a leased store is closed before the expiration of the associated lease, the discounted remaining lease obligation less estimated sublease rental income, asset impairment
charges related to improvements and fixtures, inventory write-downs and other miscellaneous closing costs associated with the disposal activity are recognized when the store closes.
During
the year ended January 1, 2017, the Company closed eight operating stores, resulting in an asset impairment loss of $0.7 million and lease obligation expense of
$2.9 million, which were reported within "Operating and administrative expenses" on the accompanying consolidated statements of operations and comprehensive income.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with ASC 718,
CompensationStock
Compensation
("ASC 718"). ASC 718 requires all share-based payments to be recognized in the statements of operations and comprehensive income as compensation expense based on
the fair value of an award over its requisite service period, taking into consideration estimated forfeiture rates.
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Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
Under
the fair value recognition provisions of ASC 718, the Company measures share-based compensation cost at the grant date based on the fair value of the award and recognizes
share-based compensation cost as an expense over the award's vesting period. As share-based compensation expense recognized in the consolidated statements of operations and comprehensive income (loss)
of the Company is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures. The Company's forfeiture rate assumption used in determining its
share-based compensation expense is estimated primarily based upon historical data. The actual forfeiture rate could differ from these estimates.
The
Company uses the Black-Scholes-Merton option-pricing model to determine the grant date fair value for each stock option grant. The Black-Scholes-Merton option-pricing model requires
extensive use of subjective assumptions. Application of alternative assumptions could produce significantly different estimates of the fair value of share-based compensation and, consequently, the
related amounts recognized in the Company's consolidated statements of operations and comprehensive income (loss). The Company recognizes compensation cost for graded vesting awards as if they were
granted in multiple awards. Management believes the use of this "multiple award" method is preferable because a stock option grant with graded vesting is effectively a series of individual grants that
vest over various periods and management believes that this method provides for better matching of compensation costs with the associated services rendered throughout the applicable vesting periods.
With
certain exceptions, stock options granted after the Ares Acquisition and prior to the closing of the IPO gave the Company repurchase rights. As a result of the Company's ability to
exercise such repurchase rights and the underlying provisions of such repurchase rights, the Company did not record any share-based compensation expense related to these grants prior to the closing of
the IPO. See Note 12, Share-Based Compensation.
Significant Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Such
estimates and assumptions could affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from the sale of products are recognized at the point of sale. Discounts provided to customers at the time of sale are recognized as a
reduction in sales as the products are sold. Returns are also recognized as a reduction in sales and are immaterial in relation to total sales. The Company collects sales tax on taxable products
purchased by its customers and remits such collections to the appropriate taxing authority in accordance with local laws. Sales tax collections are presented in the consolidated statements of
operations and comprehensive income (loss) on a net basis and, accordingly, are excluded from reported revenues.
Proceeds
from the sale of the Company's Smart & Final gift cards are recorded as a liability at the time of sale, and recognized as sales when they are redeemed by the customer.
The Smart & Final gift
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Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
cards
do not have an expiration date and the Company is not required to escheat the value of unredeemed gift cards in the applicable jurisdictions. The Company has determined a gift card breakage rate
based upon historical redemption patterns. Estimated breakage amounts are accounted for under the redemption recognition method, which results in recognition of estimated breakage income in proportion
to actual gift card redemptions.
Cost of Sales, Buying and Occupancy
The major categories of costs included in cost of sales, buying and occupancy are cost of goods, distribution costs, costs of the Company's
buying department and store occupancy costs, net of earned vendor rebates and other allowances. Distribution costs consist of all warehouse receiving and inspection costs, warehousing costs, all
transportation costs associated with shipping goods from the Company's warehouses to its stores, and other costs of its distribution network. The Company does not exclude any material portion of these
costs from cost of sales.
Vendor Rebates and Other Allowances
As a component of the Company's consolidated procurement program, the Company frequently enters into contracts with vendors that provide for
payments of rebates or other allowances. As prescribed by ASC 605,
Revenue Recognition
, these vendor payments are reflected in the carrying value of
the inventory when earned or as progress is made toward earning the rebate or allowance and as a component of cost of sales as the inventory is sold. Certain of these vendor contracts provide for
rebates and other allowances that are contingent upon the Company meeting specified performance measures such as a cumulative level of purchases over a specified period of time. Such contingent
rebates and other allowances are given accounting recognition at the point at which achievement of the specified performance measures are deemed to be probable and reasonably estimable.
Operating and Administrative Expenses
The major categories of operating and administrative expenses include store direct expenses associated with displaying and selling at the store
level, primarily labor and related fringe benefit costs, advertising and marketing costs, overhead costs and corporate office costs.
The
Company charges to expense the costs of advertising as incurred. Total advertising expense reported within "Operating and administrative expenses" on the Company's consolidated
statements of operations and comprehensive income (loss) was $44.3 million, $37.9 million, and $32.0 million for the years ended January 1, 2017, January 3, 2016 and
December 28, 2014, respectively.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740,
Income Taxes
("ASC 740"). In
accordance with ASC 740, the Company recognizes deferred tax assets and liabilities based on the liability method, which requires an adjustment to the deferred tax asset or liability to reflect income
tax rates currently in effect. When income tax rates increase or decrease, a corresponding adjustment to income tax expense is recorded by applying the rate change to the cumulative temporary
differences. ASC 740 prescribes the recognition threshold and measurement principles for financial statement
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Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
disclosure
of tax positions taken or expected to be taken on a tax return. ASC 740 requires the Company to determine whether it is "more likely than not" that a tax position will be sustained upon
examination by the appropriate taxing authorities before any part of the benefit can be recognized. Additionally, ASC 740 provides guidance on recognition measurement, derecognition, classification,
related interest and penalties, accounting in interim periods, disclosure and transition.
On
March 30, 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions including the
accounting for income taxes, forfeitures and statutory tax withholding requirements. Under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in
additional paid-in capital ("APIC"). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated.
ASU 2016-09 also will allow an employer to make a policy election to account for forfeitures as they occur and to repurchase more of an employee's shares than it can today for tax withholding purposes
without triggering liability accounting. The new standard also amends the presentation of employee share-based payment-related items in the statement of cash flows by requiring that excess income tax
benefits and deficiencies be classified in cash flows from operating activities (which the Company previously included in cash flows from financing activities), and that cash paid to taxing
authorities arising from the withholding of shares from employees be classified in cash flows from financing activities (which is consistent with the Company's past practice). ASU 2016-09 is effective
for annual reporting periods beginning after December 15, 2016. Early adoption is permitted in any annual or interim period for which financial statements have not been issued, but all of the
guidance must be adopted in the same period. The Company elected early adoption of ASU 2016-09 in the second quarter of 2016. As a result of the adoption of ASU 2016-09, in the second quarter of 2016,
the Company recognized excess tax benefits as income tax benefit. There was no change to retained earnings with respect to excess tax benefits. The treatment of forfeitures has not changed as the
Company has elected to continue its current practice of estimating the number of forfeitures. As such, the adoption of ASU 2016-09 had no cumulative effect on retained earnings. With the adoption of
ASU 2016-09, the Company has elected to present the cash flow statement on a prospective transition method and no prior periods have been adjusted.
Foreign Currency Translations
The Company's joint venture in Mexico uses the Mexican Peso as its functional currency. The joint venture's assets and liabilities are
translated into U.S. dollars at the exchange rates prevailing at the balance sheet dates. Revenue and expense accounts are translated into U.S. dollars at
average exchange rates during the year. Foreign exchange translation adjustments are included in "Accumulated other comprehensive income (loss)," which is reflected as a separate component of
stockholders' equity, in the accompanying consolidated balance sheets.
Derivative Financial Instruments
The Company uses interest rate swaps to manage its exposure to adverse fluctuations in interest rates. The contracts are accounted for in
accordance with ASC 815,
Derivatives and Hedging
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Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
("ASC 815").
ASC 815 requires every derivative instrument to be recorded in the Company's consolidated balance sheets as either an asset or liability measured at its fair value. The Company
designates its interest rate swaps as cash flow hedges and formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk
management objectives and strategies for undertaking the hedge transaction. Accordingly, changes in estimated fair value related to the interest rate swaps are recognized in "Accumulated other
comprehensive income (loss)" in the consolidated statements of stockholders' equity and recognized in the consolidated statements of operations and comprehensive income (loss) when the hedged items
affect earnings. See Note 5, Derivative Financial Instruments.
Debt Discount and Deferred Financing Costs
Costs incurred in connection with the placement of long-term debt paid directly to the Company's lenders are treated as a debt discount. Costs
incurred in connection with the placement of long-term debt paid to third parties are treated as debt issuance costs and are amortized to interest expense over the term of the related debt using the
effective interest method.
On
November 15, 2012, debt issuance costs and fees paid to the lenders related to the Ares Acquisition, totaling $17.5 million, were recorded as a reduction to debt and are
amortized to interest expense over the terms of the underlying debt instruments using the effective interest method. At January 1, 2017 and
January 3, 2016, the debt discount was $5.7 million and $4.8 million, respectively (net of accumulated amortization of $6.0 million and $4.9 million, respectively).
See Note 4, Debt.
On
November 15, 2012, debt issuance costs and fees paid to parties other than the lenders related to the Ares Acquisition, totaling $17.2 million, have been capitalized and
are amortized to interest expense over the terms of the underlying debt instruments using the effective interest method. At January 1, 2017 and January 3, 2016, these debt issuance costs
were $4.4 million and $4.2 million, respectively (net of accumulated amortization of $7.5 million and $6.0 million, respectively).
Effective
beginning January 4, 2016, the Company adopted ASU No. 2015-03,
Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of
Debt Issuance Costs
("ASU 2015-03"). As a result of the adoption of ASU 2015-03, the Company presented capitalized debt issuance costs in its consolidated balance sheets as a
direct reduction to debt and the new guidance was retrospectively applied to all prior periods presented in its consolidated balance sheets. Prior to the adoption of ASU 2015-03, deferred
financing costs were presented as an asset in the Company's consolidated balance sheets.
Self-Insurance
The Company has various insurance programs related to its risks and costs associated with workers' compensation and general liability claims.
The Company has elected to purchase third-party insurance to cover the risk in excess of certain dollar limits established for each respective program.
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Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
The Company has recorded self-insurance accruals of $51.7 million and $36.2 million as of January 1,
2017 and January 3, 2016, respectively related to its workers' compensation and general liability programs. Included in this aggregate accrual are amounts of $11.7 million as of
January 1, 2017 related to the risk in excess of certain dollar limits related to the Company's workers compensation California self-insured program and its general liability program. The
Company has also recorded a corresponding insurance recovery receivable of $11.7 million as of January 1, 2017 from its third-party insurance carriers related to the risk in excess of certain
dollar limits related to its workers compensation California self-insured program and its general liability program.
The
Company establishes estimated accruals for its insurance programs based on available claims data, historical trends and experience, and projected ultimate costs of the claims. These
accruals are based on estimates prepared with the assistance of outside actuaries and consultants, and the ultimate cost of these claims may vary from initial estimates and established accruals. The
actuaries periodically update their estimates and the Company records such adjustments in the period in which such determination is made.
The
accrued obligation for these self-insurance programs and the corresponding insurance recovery receivable are included in "Other long-term liabilities" and "Other assets",
respectively, in the consolidated balance sheets.
Fair Value of Financial Instruments
The Company's financial instruments recorded in the consolidated balance sheets include cash and cash equivalents, accounts receivable,
derivatives, investments in affiliates, accounts payable, accrued expenses and long-term variable rate debt. The carrying amounts of cash and cash equivalents, accounts receivable, derivatives, equity
investment in joint venture, accounts payable and accrued expenses approximate fair value.
The
Company's debt is not listed or traded on an established market. For the purpose of determining the fair value of the Company's first lien term loan facility (as amended, the "Term
Loan Facility"), the administrative agent has provided to the Company the fair value of the Term Loan Facility based upon orderly trading activity and related closing prices for actual trades of the
Term Loan Facility as well as indications of interest by prospective buyers and sellers and related bid/ask prices. As of January 1, 2017, the carrying value of the Term Loan Facility
approximates fair value based upon valuations received from the administrative agent, which reflected a pricing valuation of 99.75% of carrying value. The carrying value of the Term Loan Facility was
$625.0 million, compared to an indicated fair value of $623.4 million as of January 1, 2017. The Company's estimates of the fair value of long-term debt were classified as
Level 2 in the fair value hierarchy.
The
Company's consolidated financial statements reflect its investment in Sprouts Farmers Market, Inc. ("Sprouts") through the Company's supplemental deferred compensation plan.
The investment is presented at fair market value.
Accounting for Retirement Benefit Plans
The Company accounts for its retirement benefit plans and postretirement and postemployment benefit obligations in accordance with ASC 715,
CompensationRetirement Benefits
("ASC 715").
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Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
ASC 715
requires the Company to recognize the overfunded or underfunded status of a defined benefit plan, measured as the difference between the fair value of plan assets and the plan's benefit
obligation, as an asset or liability in its consolidated balance sheets and to recognize changes to that funded status in the year in which the changes occur through accumulated other comprehensive
income (loss). See Note 8, Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations. ASC 715 also requires measurement of the funded status of a plan as of the
Company's consolidated balance sheet dates.
Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the fiscal period.
Diluted
earnings per share is calculated by dividing net income by the weighted average number of shares outstanding, plus, where applicable, shares that would have been outstanding
related to dilutive stock options and unvested restricted stock.
Reclassifications
Certain reclassifications were made to the prior period financial statements to conform to current period presentation. See Note 2,
Significant Accounting PoliciesDebt Discount and Debt Issuance Costs.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(Topic 606)
("ASU 2014-09"). ASU 2014-09 is a comprehensive new revenue recognition model that requires an entity to recognize revenue to depict the transfer of goods or
services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires expanded disclosures about revenue
recognition. In adopting ASU 2014-09, entities may use either a full retrospective or a modified retrospective approach. ASU 2014-09 was to be effective for the first interim period
within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. In August 2015, the FASB issued ASU No. 2015-14,
Revenue
from Contracts with Customers: Deferral of the Effective Date
, which defers the effective date of ASU 2014-09 for all entities by one year. During 2016, the FASB issued
additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients.
Because
the standard will impact various business processes, systems and controls of the Company, a project team has been formed to evaluate and guide the implementation. To date, the
Company has performed a preliminary detailed review of key contracts and comparing historical accounting policies and practices to the new standard, including principal versus agent considerations as
amended through ASU 2016-08,
Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)
("ASU 2016-08"). The Company's operations
are primarily engaged in the business of selling fresh perishables and everyday grocery items, together with foodservice, packaging and janitorial products. Revenues from the sale of such products are
recognized at the point of sale. The Company is
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Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
continuing
to evaluate the impact ASU 2014-09, ASU 2016-08 and other amendments and related interpretive guidance will have on our consolidated financial statements. The Company currently
anticipates utilizing the modified retrospective method of adoption allowed by the standard, and plans to adopt the standard as of January 1, 2018.
In
July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330)
:
Simplifying the Measurement of
Inventory
("ASU 2015-11"). The amendments in ASU 2015-11 do not apply to inventory that is measured using last-in, first-out ("LIFO") or the retail inventory method. The
amendments apply to all other inventory, which includes inventory that is measured using FIFO or average cost. An entity should measure inventory within the scope of ASU 2015-11 at the lower of cost
and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in ASU 2015-11 are effective for fiscal years
beginning after December 15, 2016, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2015-11 will have a material impact on the Company's
consolidated financial statements.
In
November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
("ASU 2015-17"), which requires
entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. ASU 2015-17 simplifies the current guidance in ASC Topic 740,
Income Taxes
, which
requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet.
ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Although early adoption is permitted for all entities as of the
beginning of an interim or annual reporting period, the Company decided not to early adopt ASU 2015-17. The Company does not expect the adoption of ASU 2015-17 will have a material impact on the
Company's consolidated financial statements.
In
January 2016, the FASB issued ASU No. 2016-01,
Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities
("ASU 2016-01"). The amendments in ASU 2016-01 require an entity to measure equity investments that do not result in
consolidation and are not accounted for under the equity method at fair value with changes in fair value recognized in net income. The amendments also require an entity to present separately in other
comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the
liability at fair value in accordance with the fair value option for financial instruments. The requirement to disclose the method(s) and significant assumptions used to estimate the fair value for
financial instruments measured at amortized cost on the balance sheet has been eliminated by the amendments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2016-01 will have a material impact on the Company's consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
("ASU 2016-02"). ASU 2016-02 will require
organizations that lease assets, referred to as "lessees", to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. A lessee will be
required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash
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Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
flows
arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on
the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet. As a result, lessees will be required to put most leases on their balance sheets while
recognizing expense on their income statements in a manner similar to current accounting. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. ASU 2016-02 also may require additional disclosures, including qualitative and quantitative requirements, providing additional information about the amounts recorded in the
financial statements. The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.
On
March 9, 2016, the FASB issued ASU No. 2016-04,
LiabilitiesExtinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage
for Certain Prepaid Stored-Value Products
("ASU 2016-04"). ASU 2016-04 requires issuers of prepaid stored-value products redeemable for goods, services or cash at third-party
merchants to derecognize liabilities related to those products for breakage, or the value of prepaid stored-value products that is not redeemed by consumers for goods, services or cash. An entity that
expects to be entitled to a breakage amount for a liability resulting from the sale of a prepaid stored-value product within the scope of ASU 2016-04 is required to derecognize the liability related
to expected breakage in proportion to the pattern of rights expected to be exercised by the consumer only if it is probable that a significant reversal of the recognized breakage amount will not
occur. If an entity does not expect to be entitled to a breakage amount, it is required to derecognize the related liability when the likelihood of a consumer exercising its remaining rights becomes
remote. Entities will apply the guidance using either a modified retrospective approach with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption or a full
retrospective approach. The guidance is for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not
expect the adoption of ASU 2016-04 will have a material impact on the Company's consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13,
Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments
("ASU 2016-13"). ASU 2016-13 replaces the incurred loss impairment methodology under current GAAP. The new guidance requires immediate recognition of estimated
credit losses expected to occur for most financial assets and certain other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances
rather than reductions in the amortized cost of the securities. It is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods.
Early adoption for annual reporting periods beginning after December 15, 2018 is permitted. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings
as of the beginning of the first effective reporting period. The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15
, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments
("ASU 2016-15"). ASU 2016-15 is intended to reduce diversity in practice of how certain transactions are classified in the statement of cash flows. ASU 2016-15
addresses the classification of various transactions, including, among other things, debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent
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Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
consideration
payments made after a business combination, distributions received from equity method investments, and beneficial interests in securitization transactions. ASU 2016-15 is effective for
public entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
The Company does not expect the adoption of ASU 2016-15 will have a material impact on the Company's consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
("ASU
2016-16"). ASU 2016-16 is intended to simplify the accounting for income taxes related to intra-entity asset transfers. It allows an entity to recognize the tax expense from the sale of an asset in
the seller's tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. ASU 2016-16 is effective for public entities for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only in the first quarter of 2017. The Company is currently evaluating
this guidance and the impact it will have on its consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task
Force)
("ASU 2016-18"). ASU 2016-18 provides specific guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. This
guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance requires a retrospective
transition method to each period presented. The Company does not expect the adoption of ASU 2016-18 will have a material impact on the Company's consolidated financial statements.
In
December 2016, the FASB issued ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with
Customers
("ASU 2016-20"). ASU 2016-20 addresses various technical corrections and improvements to Topic 606 and other Topics amended by ASU 2014-09. This guidance is effective
for interim and annual reporting periods beginning after December 15, 2017. This guidance must be applied prospectively to transactions occurring within the period of adoption. The Company is
currently evaluating the impact of this guidance on its consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
("ASU 2017-01").
ASU 2017-01 narrows the definition of a "business". This standard provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. This guidance is
effective for interim and annual reporting periods beginning after December 15, 2017. This guidance must be applied prospectively to transactions occurring within the period of adoption. The
Company does not expect the adoption of ASU 2017-01 will have a material impact on the Company's consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04
, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
("ASU 2017-04"). ASU 2017-04 eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying
amount exceeds the reporting unit's fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. This guidance must be applied on a prospective basis. The
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Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
2. Summary of Significant Accounting Policies (Continued)
Company
does not expect the adoption of ASU 2017-04 will have a material impact on the Company's consolidated financial statements.
3. Ares Acquisition
On November 15, 2012, pursuant to the Purchase and Sale Agreement (the "Acquisition Agreement") dated as of October 9, 2012, among the stockholders of the Predecessor (the
"Sellers") and affiliates of Ares (the "Buyers"), the Ares Acquisition was consummated. Upon completion of the Ares Acquisition, each share of common stock of the Predecessor was cancelled and
converted into the right
to receive cash for aggregate cash consideration of approximately $669.5 million. In addition, payments in satisfaction of Predecessor stock options aggregated $54.2 million.
The
Ares Acquisition was financed by:
-
-
Borrowings consisting of (i) a $525.0 million, 7-year Term Loan Facility; (ii) a $195.0 million, 8-year second lien
term loan credit facility (the "Second Lien Term Loan Facility"); (iii) a $150.0 million, 5-year asset-based revolving credit facility (the "Revolving Credit Facility"), which was drawn
for $10.0 million at closing of the Ares Acquisition, (see Note 4, Debt); and
-
-
Equity investment of $290.0 million from affiliates of Ares, $9.2 million from certain management employees of the Predecessor
and $10.9 million from the management equity rollover.
The
Acquisition Agreement further provided that any income tax refunds or credits actually received by the Company relating to the Predecessor tax periods or any benefit of any
overpayment of income taxes relating to the Predecessor tax periods that is applied to a Successor taxable period would inure to the benefit of the Sellers. During the years ended December 28,
2014 and December 29, 2013, the Company paid a total of $0.2 million and $16.7 million, respectively, to the Sellers related to the Predecessor tax periods. No payment was made
during the years ended January 1, 2017 and January 3, 2016. As of January 1, 2017, the Company has a payable to the Sellers of $2.5 million.
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Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
4. Debt
Current portion of debt at January 1, 2017 and January 3, 2016 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Revolving Credit Facility
|
|
$
|
64,000
|
|
$
|
5,000
|
|
Less:
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(1,648
|
)
|
|
(1,096
|
)
|
|
|
|
|
|
|
|
|
Total current portion of debt
|
|
$
|
62,352
|
|
$
|
3,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt at January 1, 2017 and January 3, 2016 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Term Loan Facility
|
|
$
|
625,000
|
|
$
|
594,907
|
|
Less:
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(2,709
|
)
|
|
(3,112
|
)
|
Discount on debt issuance
|
|
|
(5,703
|
)
|
|
(4,839
|
)
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
616,588
|
|
$
|
586,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
conjunction with the Ares Acquisition, Smart & Final Stores LLC ("Smart & Final Stores") entered into three financing arrangements effective November 15,
2012, including two term loan agreements: the Term Loan Facility and a second lien term loan facility (the "Second Lien Term Loan Facility") and an asset-based lending facility (the "Revolving Credit
Facility").
The
Term Loan Facility originally had a term of seven years and originally provided financing of up to a maximum of $525.0 million in term loans. At November 15, 2012, the
Term Loan Facility was drawn to provide $525.0 million in gross proceeds as a part of the funding for the Ares Acquisition.
All
obligations under the Term Loan Facility are secured by (1) a first- priority security interest in substantially all of the property and assets of, as well as the equity
interests owned by, Smart & Final Stores and SF CC Intermediate Holdings, Inc., a direct wholly owned subsidiary of SFSI ("Intermediate Holdings"), and the other guarantors, with certain
exceptions, and (2) a second-priority security interest in the Revolving Credit Facility collateral.
Initially,
borrowings under the Term Loan Facility bore interest at an applicable margin of 3.50% plus, at Smart & Final Stores' option, a fluctuating rate equal to the highest of
(1) the federal funds rate plus 0.50%, (2) a rate of interest published by
The Wall Street Journal
as the "Prime Rate," and (3) a
LIBOR loan rate based on LIBOR plus 1.00% (the "ABR Borrowings"). Eurocurrency Borrowings (as defined in the credit agreement governing the Term Loan Facility) bore interest at the adjusted LIBOR
rate, which is the greater of (a) the LIBOR rate in effect for the applicable interest period divided by one, minus the Statutory Reserves (as defined in the credit agreement governing the Term
Loan Facility) applicable to such Eurocurrency Borrowing, if any, and (b) 1.25% plus the applicable Eurocurrency (as defined in the credit agreement governing the Term Loan Facility) loan rate
margin of 4.50%.
91
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
4. Debt (Continued)
The
Term Loan Facility contains a provision for quarterly amortization of principal in the amount of 0.25% of the aggregate principal amount of the term loans outstanding under the Term
Loan Facility beginning March 31, 2013. As a result of prior prepayments, quarterly amortization of the principal amount is no longer required. The Term Loan Facility may be prepaid, in whole
or in part, at any time but Smart & Final Stores must pay a prepayment premium of 1.00% of the principal amount of the term loans so prepaid if the prepayment occurs as a result of a repricing
transaction and is effective prior to March 21, 2017. Mandatory prepayments are required (i) in the amount of the net proceeds of a sale of assets, subject to the priority of the
Revolving Credit Facility collateral, and (ii) in the amount of certain excess cash flows, adjusted by any voluntary prepayments. The Term Loan Facility has no financial covenant requirements.
The Term Loan Facility contains covenants that would restrict our ability to pay cash dividends.
The
Second Lien Term Loan Facility had a term of eight years and provided $195.0 million in gross proceeds at November 15, 2012. On December 19, 2013, the Company
paid off the Second Lien Term Loan Facility.
On
September 29, 2014, the Company used the net proceeds from the IPO to repay borrowings of approximately $115.5 million under the Term Loan Facility. Consequently, the
Company recorded a loss on the early extinguishment of debt of $2.2 million related to the write-off of unamortized debt discount and deferred financing costs during the year ended
December 28, 2014. Quarterly amortization of the principal amount is no longer required as a result of this prepayment.
During
the year ended December 28, 2014, the Company made principal amortization payments of $5.4 million.
During
the second quarter of 2015, the Company amended the Term Loan Facility to reduce (i) the ABR Borrowings applicable margin from 2.75% to 2.25%, (ii) the Eurocurrency
Borrowings applicable margin from 3.75% to 3.25% and (iii) the Adjusted LIBOR floor rate from 1.00% to 0.75% (the "Third Amendment"). The November 15, 2019 maturity date remained
unchanged. Consequently, during the second quarter of 2015, the Company recorded a loss on the early extinguishment of debt of $2.2 million related to fees and the write-off of unamortized debt
discount and deferred financing costs. The Company incurred $1.1 million of fees in connection with the Third Amendment. Approximately $0.1 million of these fees were recorded as
deferred financing costs and are being amortized over the remaining term of the Term Loan Facility.
During
the third quarter of 2016, the Company amended the Term Loan Facility (the "Fourth Amendment") to increase the size of the Term Loan Facility by $30.1 million, from
$594.9 million to $625.0 million, and to extend the original November 15, 2019 maturity date to November 15, 2022. Additionally, in connection with the Fourth Amendment,
the Eurocurrency Borrowings applicable margin increased from 3.25% to 3.50%. Consequently, during the third quarter of 2016, the Company recorded a loss on the early extinguishment of debt of
$5.0 million including $2.6 million of fees paid in connection with the amendment and the write-off of $2.4 million of unamortized debt discount and debt issuance costs. The
Company incurred $7.2 million of fees in connection with the Fourth Amendment. Approximately $1.2 million of these fees were recorded as debt issuance costs and approximately
$3.4 million of these fees were recorded as debt discount. They are both amortized over the remaining term of the Term Loan Facility. As of January 1, 2017 and January 3, 2016,
the
92
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
4. Debt (Continued)
weighted-average
interest rate on the amount outstanding under the Term Loan Facility was 4.41% and 4.00%, respectively.
The
Revolving Credit Facility originally provided financing of up to $150.0 million (including up to $50.0 million for the issuance of letters of credit) subject to a
borrowing base, for a term of five years. The borrowing base is a formula based on certain eligible inventory and receivables, minus certain reserves.
All
obligations under the Revolving Credit Facility are secured by (1) a first-priority security interest in the accounts receivable, inventory, cash and cash equivalents, and
related assets of Smart & Final Stores and Intermediate Holdings and the other guarantors under the facility, and (2) a second- priority security interest in substantially all of the
other property and assets of, as well as the equity interests owned by, Smart & Final Stores and Intermediate Holdings and the other guarantors under the facility.
Borrowings
under the Revolving Credit Facility bear interest at an applicable margin plus, at Smart & Final Stores' option, a fluctuating rate equal to either (1) adjusted
LIBOR (defined as a rate equal to the LIBOR rate in effect for the applicable interest period, as adjusted for statutory reserves) or (2) the alternate base rate (defined as a fluctuating rate
equal to the highest of (x) the federal funds effective rate plus 0.50%, (y) the interest rate announced by the administrative agent as its "Prime Rate" and (z) the adjusted LIBOR
rate for an interest period of one month plus 1.00%). The applicable margin is determined by a pricing grid based on the facility availability.
During
the third quarter of 2016, the Company amended the Revolving Credit Facility (the "Second Amendment") to increase the committed amount to $200.0 million. Additionally, the
maturity date was extended from November 15, 2017 to the earlier of (a) July 19, 2021 and (b) to the extent the Term Loan Facility (and any refinancing of the Term Loan
Facility) has not been paid in full, the date that is 60 days prior to the earliest scheduled maturity date of the Term Loan Facility (or such refinancing of the Term Loan Facility). In
addition, the applicable margin ranges were reduced with respect to (i) alternate base rate loans to 0.25% to 0.50% from 0.25% to 0.75% and (ii) LIBOR rate loans to 1.25% to 1.50% from
1.25% to 1.75%. The Company incurred $1.0 million of fees in connection with the Second Amendment. All of these fees were recorded as debt issuance costs and amortized over the remaining term
of the Revolving Credit Facility.
At
January 1, 2017 and January 3, 2016, the alternate base rate was 3.75% and 3.50%, respectively and the applicable margin for alternate base rate loans was 0.25%, for a
total rate of 4.00% and 3.75%, respectively. The calculated borrowing base of the Revolving Credit Facility was $196.9 million and $175.1 million at January 1, 2017 and
January 3, 2016, respectively. As of January 1, 2017 and January 3, 2016, the amount outstanding under the Revolving Credit Facility was $64.0 million and
$5.0 million, respectively.
The
Revolving Credit Facility also provides for a $65.0 million sub-limit for letters of credit, of which the Company had $29.9 million and $25.1 million outstanding
as of January 1, 2017 and January 3, 2016, respectively. As of January 1, 2017 and January 3, 2016, the amount available for borrowing under the Revolving Credit Facility
was $103.0 million and $119.9 million, respectively. The Revolving Credit Facility does not include financial covenant requirements unless a defined covenant
93
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
4. Debt (Continued)
trigger
event has occurred and is continuing. As of January 1, 2017 and January 3, 2016, no trigger event had occurred.
Aggregate
future principal payments of the Company's debt are as follows (in thousands):
|
|
|
|
|
Fiscal Year:
|
|
|
|
|
2017
|
|
$
|
64,000
|
|
2018
|
|
|
|
|
2019
|
|
|
|
|
2020
|
|
|
|
|
2021
|
|
|
|
|
Thereafter
|
|
|
625,000
|
|
|
|
|
|
|
Total
|
|
$
|
689,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Derivative Financial Instruments
On April 15, 2013, the Company entered into a five-year interest rate swap agreement (the "Swap") to fix the LIBOR component of interest under the Term Loan Facility at 1.7325% on
a variable notional amount starting at $422.7 million and declining to $359.7 million for the period from September 30, 2014 through March 29, 2018. The Swap has been
designated as a cash flow hedge against LIBOR interest rate movements and formally assessed, both at inception and at least quarterly thereafter, as to whether it was effective in offsetting changes
in cash flows of the hedged item. The portion of the change in fair value attributable to hedge ineffectiveness was recorded in "Interest expense, net" in the consolidated statements of operations and
comprehensive income (loss). The portion of the change in fair value attributable to hedge effectiveness, net of income tax effects, was recorded to "Accumulated other comprehensive income (loss)" in
the consolidated statements of stockholders' equity.
On
May 30, 2013, the Company entered into an amendment to the Swap to change the fixed LIBOR component to 1.5995% and the floor rate to 1.00%.
On
May 12, 2015, the Company entered into a second amendment to the Swap to change the fixed LIBOR component to 1.47675% and the floor rate to 0.75% on a variable notional amount
starting at $410.9 million for the period from June 30, 2015 through March 29, 2018.
As
of January 1, 2017 and January 3, 2016, the fair value carrying amount of the Company's interest rate swaps are recorded as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Other assets
|
|
$
|
83
|
|
$
|
542
|
|
Accrued expenses
|
|
|
(1,144
|
)
|
|
(2,177
|
)
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
$
|
(1,061
|
)
|
$
|
(1,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
5. Derivative Financial Instruments (Continued)
The
following tables summarize the loss recognized in accumulated other comprehensive income ("AOCI") and the amount of gain reclassified from AOCI into earnings for the year ended
January 1, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
Amount of Loss
Recognized
in AOCI on
Derivative,
Net of Tax
(Effective Portion)
|
|
Amount of Loss
Recognized
in Earnings on
Derivative,
Net of Tax
(Ineffective Portion)
|
|
Interest rate swaps
|
|
$
|
360
|
|
$
|
15
|
|
6. Fair Value Measurements
The Company applies the provisions of ASC 820,
Fair Value Measurements and Disclosures
("ASC 820"), for its financial and
nonfinancial assets and liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1Quoted
prices for identical instruments in active markets
Level 2Quoted
prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in
which all significant inputs and significant value drivers are observable in active markets
Level 3Valuations
derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
95
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
6. Fair Value Measurements (Continued)
The
Company's assets and liabilities measured at fair value on a recurring basis are summarized in the following table by the type of inputs applicable to the fair value measurements (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at January 1, 2017
|
|
Description
|
|
Total as of
January 1,
2017
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assetscash and cash equivalents that fund supplemental executive retirement plan and deferred compensation plan
|
|
$
|
3,192
|
|
$
|
3,192
|
|
$
|
|
|
$
|
|
|
Other assetsassets that fund supplemental executive retirement plan
|
|
|
3,303
|
|
|
3,303
|
|
|
|
|
|
|
|
Other assetsdeferred compensation plan investment in Sprouts
|
|
|
2,413
|
|
|
2,413
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
(1,061
|
)
|
|
|
|
|
(1,061
|
)
|
|
|
|
Other long-term liabilitiesdeferred compensation plan
|
|
|
(17,723
|
)
|
|
(1,915
|
)
|
|
(15,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(9,876
|
)
|
$
|
6,993
|
|
$
|
(16,869
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
Investments include money market funds of $3.2 million, market index funds of $3.3 million and an investment in Sprouts of $2.4 million with the
corresponding deferred compensation liabilities of $1.9 million. The fair values of these investments are based on quoted market prices in an active market.
Level 2
Liabilities include $15.8 million of deferred compensation liabilities, the fair value of which is based on quoted prices of similar assets traded in active
markets, and $1.1 million of derivatives, which are interest rate hedges. The fair values of the derivatives are determined based primarily on a
96
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
6. Fair Value Measurements (Continued)
third-party
pricing model that applies observable credit spreads to each exposure to calculate a credit risk adjustment and the inputs are changed only when corroborated by observable market data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at January 3, 2016
|
|
Description
|
|
Total as of
January 3,
2016
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assetscash and cash equivalents that fund supplemental executive retirement plan and deferred compensation plan
|
|
$
|
2,027
|
|
$
|
2,027
|
|
$
|
|
|
$
|
|
|
Other assetsassets that fund supplemental executive retirement plan
|
|
|
2,643
|
|
|
2,643
|
|
|
|
|
|
|
|
Other assetsdeferred compensation plan investment in Sprouts
|
|
|
4,787
|
|
|
4,787
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
(1,635
|
)
|
|
|
|
|
(1,635
|
)
|
|
|
|
Other long-term liabilitiesdeferred compensation plan
|
|
|
(21,401
|
)
|
|
(4,787
|
)
|
|
(16,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(13,579
|
)
|
$
|
4,670
|
|
$
|
(18,249
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
Investments include money market funds of $2.0 million, market index funds of $2.6 million and an investment in Sprouts of $4.8 million with the
corresponding deferred compensation liabilities of $4.8 million. The fair values of these investments are based on quoted market prices in an active market.
Level 2
Liabilities include $16.6 million of deferred compensation liabilities, the fair value of which is based on quoted prices of similar assets traded in active
markets, and $1.6 million of derivatives, which are interest rate hedges. The fair values of the derivatives are determined based primarily on third-party pricing model that applies observable
credit spreads to each exposure to calculate a credit risk adjustment and the inputs are changed only when corroborated by observable market data.
Certain
assets are measured at fair value on a nonrecurring basis, which means the assets are not measured at fair value on an ongoing basis but, rather, are subject to fair value
adjustments only in certain circumstances (for example, when there is evidence of impairment). See Note 2, Summary of Significant Accounting PoliciesProperty, Plant and Equipment,
Capitalized Software and Goodwill and Intangible Assets. The fair value measurements were determined using available market capitalization rates and public comparable store sales data at the
measurement dates. The Company classifies the measurements as Level 3.
97
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
7. Lease Obligations
The principal real and personal properties leased by the Company include store, office and warehouse
buildings and delivery and computer equipment. As of January 1, 2017, 293 of the Company's operating stores are leased directly from third-party lessors and eight stores were on real property
that is ground leased from third-party lessors. These leases had an average remaining lease term of approximately 8.91 years as of January 1, 2017. These leases generally contain renewal
options, at the Company's election, and require the Company to pay costs such as real estate taxes and common area maintenance. Certain leases include rent escalation clauses or provide for rental
payments in excess of the minimum based upon the store's sales levels.
Lease
expense for operating leases reported within "Cost of sales, buying and occupancy" on the Company's consolidated statements of operations and comprehensive income (loss) was
$123.1 million, $98.3 million, and $85.5 million for the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively. All lease expenses
were paid to third-party lessors.
Aggregate
minimum future lease payments for real property, including sale leaseback store properties, as well as equipment and other property at January 1, 2017, are as follows
(in thousands):
|
|
|
|
|
|
|
Operating
Leases
|
|
Fiscal Year:
|
|
|
|
|
2017
|
|
$
|
129,841
|
|
2018
|
|
|
126,614
|
|
2019
|
|
|
119,504
|
|
2020
|
|
|
115,039
|
|
2021
|
|
|
105,505
|
|
Thereafter
|
|
|
840,003
|
|
|
|
|
|
|
Future minimum lease payments
|
|
$
|
1,436,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company has subtenant agreements under which it will receive rent as follows (in thousands):
|
|
|
|
|
2017
|
|
$
|
2,141
|
|
2018
|
|
|
1,484
|
|
2019
|
|
|
1,225
|
|
2020
|
|
|
841
|
|
2021
|
|
|
718
|
|
Thereafter
|
|
|
1,600
|
|
|
|
|
|
|
Future minimum subtenant rent
|
|
$
|
8,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the fourth quarter of 2011, the Predecessor sold 39 store properties and one warehouse distribution facility to three different buyers. Concurrent with the sales, the Predecessor
entered into
20-year operating leases with two options to extend the term for a period of 10 years each for three store properties sold, 20-year operating leases with six options to extend the term for a
period of five years each for 36 store properties sold, and a 10-year operating lease with four options to extend the term for a period of five years each for one warehouse distribution facility sold.
The transactions were
98
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
7. Lease Obligations (Continued)
accounted
for as sale and leaseback. During the second quarter of 2012, three additional store properties were sold. Concurrent with the sales, the Predecessor entered into 25-year operating leases
with five options to extend the term for a period of five years. The transactions were also accounted for as sale and leaseback. These leases require the Company to pay costs such as real estate taxes
and repair and maintenance. Certain leases include rent escalation clauses. During 2015, two store properties were sold to two different buyers. Concurrent with the sales, the Company entered into
20-year operating leases with two options to extend the term for a period of five years, and one final extension of 59 months.
The
future minimum lease payments under the terms of the related lease agreements at January 1, 2017, are as follows (in thousands):
|
|
|
|
|
|
|
Operating
Leases
|
|
Fiscal Year:
|
|
|
|
|
2017
|
|
$
|
17,814
|
|
2018
|
|
|
17,850
|
|
2019
|
|
|
17,985
|
|
2020
|
|
|
18,088
|
|
2021
|
|
|
18,135
|
|
Thereafter
|
|
|
166,571
|
|
|
|
|
|
|
Future minimum lease payments
|
|
$
|
256,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations
Defined Benefit Retirement Plan
The Company has a funded noncontributory qualified defined benefit retirement plan (the "Single-Employer Plan") that, prior to June 1,
2008, covered substantially all full-time employees following a vesting period of five years of service (the "Pension Participants") and provided defined benefits based on years of service and final
average salary. The Predecessor froze the accruing of future benefits for the Pension Participants (the "Frozen Pension Participants") effective June 1, 2008, with the exception of
approximately 450 hourly paid employees in the Company's distribution and transportation operations who remain eligible for pension benefits under the prior terms (the "Active Pension
Participants"). No new employees are eligible for participation in the Single Employer Plan after June 1, 2008, with the exception of new hires in the Company's eligible distribution and
transportation operations. Frozen Pension Participants will continue to accrue service for vesting purposes only and future payments from the Single-Employer Plan will be in accordance with the
Single-Employer Plan's retirement payment provisions. The Company funds the Single-Employer Plan with annual contributions as required by the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). The Company uses a measurement date of December 31 for the Single-Employer Plan. In 2016, the Society of Actuaries released updated mortality scales. In consideration of
these scales, the Company modified the mortality assumptions used in determining its defined benefit retirement plan obligation as of January 1, 2017. The impact of these new mortality
assumptions has resulted in a
99
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
decrease
to the Company's defined benefit retirement plan obligation and a decrease in future related expense.
As
of January 1, 2017, the funded status of the accumulated benefit obligation was 66.9%. The Company expects to fund a minimum required contribution of $11.7 million
during fiscal year 2017.
The
following tables set forth the changes in benefit obligation and plan assets of this plan for the periods below (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
Benefit obligation, beginning of period
|
|
$
|
(205,393
|
)
|
$
|
(214,216
|
)
|
Service cost
|
|
|
(1,483
|
)
|
|
(1,507
|
)
|
Interest cost
|
|
|
(9,470
|
)
|
|
(9,115
|
)
|
Actuarial (loss) gain
|
|
|
(10,254
|
)
|
|
15,216
|
|
Benefits paid
|
|
|
4,742
|
|
|
4,229
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of period
|
|
$
|
(221,858
|
)
|
$
|
(205,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of period
|
|
$
|
132,793
|
|
$
|
133,883
|
|
Actual return of plan assets, net of expenses
|
|
|
7,632
|
|
|
(5,041
|
)
|
Employer contribution
|
|
|
8,810
|
|
|
8,180
|
|
Benefits paid
|
|
|
(4,742
|
)
|
|
(4,229
|
)
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of period
|
|
|
144,493
|
|
|
132,793
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(77,365
|
)
|
|
(72,600
|
)
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(77,365
|
)
|
$
|
(72,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
before income tax effect recognized in the consolidated balance sheets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Postretirement and postemployment benefits
|
|
$
|
(77,365
|
)
|
$
|
(72,600
|
)
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(77,365
|
)
|
$
|
(72,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
Amounts
before income tax effect recognized in accumulated other comprehensive loss consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Net actuarial loss
|
|
$
|
(17,269
|
)
|
$
|
(5,253
|
)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(17,269
|
)
|
$
|
(5,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
2017, no accumulated other comprehensive loss is expected to be recognized as a component of net periodic benefit cost.
The
following table shows the projected benefit obligation, the accumulated benefit obligation and the plan assets, in dollar amounts and as a percentage of the projected benefit
obligation and the accumulated benefit obligation, respectively, as of each fiscal year-end (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Projected benefit obligation
|
|
$
|
221,858
|
|
$
|
205,393
|
|
Accumulated benefit obligation
|
|
|
215,953
|
|
|
201,466
|
|
Fair value of plan assets
|
|
|
144,493
|
|
|
132,793
|
|
Fair value of plan assets as a percentage of the projected benefit obligation
|
|
|
65.1
|
%
|
|
64.7
|
%
|
Fair value of plan assets as a percentage of the accumulated benefit obligation
|
|
|
66.9
|
%
|
|
65.9
|
%
|
The
components included in the net periodic benefit cost and the increase in minimum liability included in other comprehensive (loss) income for the periods indicated are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Fiscal Year
2014
|
|
Service cost component
|
|
$
|
1,483
|
|
$
|
1,507
|
|
$
|
1,099
|
|
Interest cost component
|
|
|
9,470
|
|
|
9,115
|
|
|
8,480
|
|
Expected return on plan assets
|
|
|
(9,394
|
)
|
|
(9,775
|
)
|
|
(9,105
|
)
|
Amortization of net actuarial gain
|
|
|
|
|
|
|
|
|
(699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,559
|
|
$
|
847
|
|
$
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a result of the Predecessor freezing plan benefits for substantially all of the Pension Participants effective June 1, 2008, the amortization of the unrecognized net actuarial
loss (in excess of 10% of the greater of the projected benefit obligation or the fair value of plan assets) has been amortized on a straight-line basis over the expected average future lifetime of
inactive participants expected to benefit under the plan.
101
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
The
weighted-average assumptions used to determine benefit obligations for this plan at fiscal year-end were as follows:
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Discount rate
|
|
|
4.30
|
%
|
|
4.60
|
%
|
Rate of compensation increase
|
|
|
3.00
|
|
|
2.50
|
|
The
Company determines the discount rate assumption based on the internal rate of return for a portfolio of high quality bonds, with a minimum rating of Moody's AA Corporate and with
maturities that are consistent with the projected future cash flow obligations.
The
weighted-average assumptions used to determine net periodic benefit cost for each of the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Fiscal Year
2014
|
|
Discount rate
|
|
|
4.60
|
%
|
|
4.25
|
%
|
|
5.15
|
%
|
Expected long-term return on plan assets
|
|
|
7.00
|
|
|
7.25
|
|
|
7.25
|
|
Rate of compensation increase
|
|
|
2.50
|
|
|
2.50
|
|
|
2.50
|
|
The
Company determines the expected long-term rate of return on plan assets based upon recommendations from its pension plan's investment advisors and using an allocation approach that
considers diversification and rebalancing for a portfolio of assets invested over a long-term time horizon. The approach relies on the historical returns of the plan's portfolio and relationships
between equities and fixed income investments, consistent with the widely accepted capital market principle that a diversified portfolio with a larger allocation to equity investments can generate a
greater return over the long run. Additionally, the Company monitors the mix of investments in its portfolio to ensure alignment with its expected long-term pension obligations. The Company reviews
the expected long-term rate of return annually, and revise it as appropriate.
Plan
assets are managed by outside investment managers and rebalanced among managers periodically at the Company's direction to realign assets to the target allocation. The managers
allocate assets to individual investments within guidelines specified by the Company. The Company's strategy with respect to the plan asset investments has been to allocate a larger proportion to
equities to achieve returns that sufficiently grow assets to cover the benefit obligations within acceptable risk parameters.
102
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
The plan asset allocation at the end of 2016 and 2015, and target allocation for 2017, in percentages, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
Allocation
2017
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Equity securities
|
|
|
60
|
%
|
|
60
|
%
|
|
62
|
%
|
Debt securities
|
|
|
37
|
|
|
34
|
|
|
34
|
|
Cash and cash equivalents
|
|
|
3
|
|
|
6
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes plan assets measured at fair value on January 1, 2017 and January 3, 2016 respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Asset category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities(1)
|
|
$
|
87,198
|
|
$
|
62,655
|
|
$
|
24,543
|
|
$
|
|
|
Debt securities(2)
|
|
|
48,927
|
|
|
29,159
|
|
|
19,319
|
|
|
449
|
|
Cash and cash equivalents(3)
|
|
|
8,368
|
|
|
8,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
144,493
|
|
$
|
100,182
|
|
$
|
43,862
|
|
$
|
449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2016
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Asset category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities(1)
|
|
$
|
82,286
|
|
$
|
62,541
|
|
$
|
19,745
|
|
$
|
|
|
Debt securities(2)
|
|
|
45,527
|
|
|
26,501
|
|
|
18,554
|
|
|
472
|
|
Cash and cash equivalents(3)
|
|
|
4,980
|
|
|
4,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
132,793
|
|
$
|
94,022
|
|
$
|
38,299
|
|
$
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Equity
securities include U.S. and foreign exchange traded common and preferred stocks and mutual funds. Common and preferred shares issued by U.S. and non-U.S.
corporations are traded actively on exchanges and price quotes for these shares are readily available. Holdings of corporate stock are categorized as Level 1 investments. The securities
categorized as Level 2 investments are American Depository Receipts. While these securities are traded in an active market, the trustee uses several observable market based inputs, such as
exchange rates, to obtain the pricing of the securities.
103
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
-
(2)
-
Debt
securities include the debt of the U.S. Treasury and U.S. and foreign corporate issuers. U.S. Treasury notes and bonds are actively traded and price quotes for
these securities are readily available. Holdings of U.S. Treasury notes and bonds are categorized as Level 1 investments. Corporate bond securities of U.S. and foreign corporate issuers are
valued by independent pricing sources using a variety of market sources and observed market movements. Holdings of U.S. and foreign corporate issuers' debt securities are categorized as Level 2
investments. Infrequently traded corporate bonds and asset-backed securities, requiring valuation using observable as well as unobservable inputs, such as the estimation of the market manager for the
security, are categorized as Level 3 investments.
-
(3)
-
Cash
and cash equivalents include short-term U.S. government investment notes, short-term money market mutual funds, accrued income and cash held on account. Cash
held on account and short- term U.S. government investment notes (including accrued income thereon) for which there is an active market and daily pricing for the security are categorized as
Level 1 investments.
|
|
|
|
|
|
|
Fair Value
Measurements
Using Significant
Unobservable
Inputs
(Level 3)
|
|
Ending balance at January 3, 2016
|
|
$
|
472
|
|
Actual return on plan assets:
|
|
|
|
|
Assets held at end of year
|
|
|
(5
|
)
|
Assets sold during the year
|
|
|
|
|
Purchases, sales and settlements
|
|
|
(18
|
)
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
|
|
Ending balance at January 1, 2017
|
|
$
|
449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurements
Using Significant
Unobservable
Inputs
(Level 3)
|
|
Ending balance at December 28, 2014
|
|
$
|
445
|
|
Actual return on plan assets:
|
|
|
|
|
Assets held at end of year
|
|
|
40
|
|
Assets sold during the year
|
|
|
|
|
Purchases, sales and settlements
|
|
|
(13
|
)
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
|
|
Ending balance at January 3, 2016
|
|
$
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company seeks to maximize medium- to long-term returns of overall pension plan assets with reasonable levels of investment risk. One element of controlling overall investment risk is
through
104
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
diversification
of asset allocation, among domestic and international equity and debt instruments. The plan's equity investments include foreign and domestic exchange traded equities across a range of
industries and countries, but primarily in the domestic markets. The plan's debt securities are primarily invested in government and corporate issuers primarily in the domestic market.
The
following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
|
|
|
|
|
2017
|
|
$
|
6,169
|
|
2018
|
|
|
6,669
|
|
2019
|
|
|
7,232
|
|
2020
|
|
|
7,548
|
|
2021
|
|
|
8,162
|
|
2022 - 2026
|
|
|
48,864
|
|
Multi-employer Pension Plan
The Company participates in and contributes to a multi-employer pension plan on behalf of union employees in its Cash & Carry operations.
At January 1, 2017 and January 3, 2016, there were 214 and 206 union employees covered under this plan, respectively. The Company's employer contributions and corresponding pension
expense for this plan were $1.4 million, $1.4 million and $1.3 million for the years ended January 1, 2017, January 3, 2016 and December 28, 2014,
respectively.
The
multi-employer plan is the Western Conference of Teamsters Pension Plan (the "Teamsters Plan"), which was established pursuant to the Western Conference of Teamsters Pension
Agreement and Declaration of Trust dated April 26, 1955 ("Trust Agreement"). The Teamsters Plan (EIN 91-6145047; Plan Number 001) provides and maintains retirement, death
and termination benefits for employees in collective bargaining units represented by local unions affiliated with the Western Conference of Teamsters. The Teamsters Plan is subject to the provisions
of ERISA, as amended.
The
Trust Agreement provides that the trustees of the Teamsters Plan shall establish and adjust the levels of prospective plan benefits so that employer contributions received by the
Teamsters Plan will always meet the minimum funding standards of Section 302 of ERISA and Section 412 of the Internal Revenue Code of 1986. The trustees have established a funding policy
that specifies funding targets that may result in more rapid funding than prescribed by the minimum funding standards and that provides for benefit adjustments based on specified funding targets. The
Teamsters Plan's actuary has advised the Company that the minimum funding requirements of ERISA are being met as of January 1, 2016 (based on the most recent information available).
As
of January 1, 2016, the Teamsters Plan actuarial present value of accumulated plan benefits was $41,074.2 million and the actuarial value of assets for funding the
standard account was $37,692.7 million, resulting in a funded percentage of 91.7%. The Teamsters Plan covered approximately 563,000 participants as of December 31, 2015. Approximately
1,500 employers participate in the Teamsters Plan and total employer contributions for the plan year ended December 31, 2015, aggregated $1,596.4 million.
105
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
Defined Contribution Plan
The Company offers all qualified employees the opportunity to participate in a defined contribution plan, which is qualified under the
requirements of Section 401(k) of the Internal Revenue Code of 1986, as amended. The Smart & Final 401(k) Savings Plan (the "S&F Savings Plan") covers all of the Company's employees who
have completed at least three months of service. The Company automatically enrolls newly eligible employees into the S&F Savings Plan at 5% of their eligible compensation unless they choose to opt out
of such enrollment. The S&F Savings Plan allowed participants to contribute up to 100% of their eligible compensation, not exceeding $18,000 for participants under the age of 50 or $24,000 for
employees at the age of 50 or over for 2016 and 2015, respectively. For Frozen Pension Participants, the Company matched 50% of each dollar contributed up to 6% of the participant's eligible
compensation during 2016 and 2015. For Active Pension Participants, the Company matched 33% of each dollar contributed up to 6% of the participant's eligible compensation during 2016 and 2015.
Contributions made to the S&F Savings Plan were $6.4 million, $5.4 million and $4.4 million for the years ended January 1, 2017, January 3, 2016 and
December 28, 2014, respectively.
Deferred Compensation Plan
The Company maintains a contributory, nonqualified deferred compensation plan which, for each year, permits key employees and members of our
board of directors to elect to defer up to 100% of their compensation for such year until retirement. The retirement benefit to be provided under the plan is a function of the participant's deferred
compensation and earnings thereupon. The plan is designed to primarily fund the retirement benefit liability through maintenance of certain
investments, including participant cash deferrals. The liability to the deferred compensation plan participants was $17.8 million and $21.5 million at January 1, 2017 and
January 3, 2016, respectively, and is included in "Other long-term liabilities" in the consolidated balance sheets. The Company has certain investments, including corporate-owned life insurance
policies, which had a market value that offset the participant liabilities at each of these measurement dates.
Supplemental Executive Retirement Plan
The Company maintains a noncontributory, nonqualified defined benefit supplemental executive retirement plan (the "SERP"), which provides
supplemental income payments for certain current and former corporate officers in retirement. No new participants are eligible for participation and service and compensation accruals were frozen
effective June 1, 2008. Accordingly, the retirement benefit for SERP participants who remained employed by the Company was frozen, and future service or compensation increases will not adjust
the SERP benefit amount. In 2016, the Society of Actuaries released revised mortality scales. In consideration of these scales, the Company modified the mortality assumptions used in determining its
SERP obligation as of January 1, 2017. The impact of these new mortality assumptions has resulted in a decrease to the Company's SERP obligation and a decrease in future related expense.
The
liability to SERP participants was $31.7 million and $32.3 million at January 1, 2017 and January 3, 2016, respectively, and is included in
"Post-retirement and post-employment benefits" in the Company's consolidated balance sheets. The Company uses a measurement date of December 31 for
106
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
the
SERP. To provide partial funding for the SERP, the Company invests in corporate-owned life insurance policies. The cash surrender value of these policies was $19.6 million and
$19.2 million at January 1, 2017 and January 3, 2016, respectively, and is included in "Other assets" in the Company's consolidated balance sheets.
The
following tables set forth the changes in benefit obligation and plan assets for each of the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Benefit obligation, beginning of period
|
|
$
|
(32,331
|
)
|
$
|
(33,145
|
)
|
Interest cost
|
|
|
(1,158
|
)
|
|
(1,101
|
)
|
Actuarial loss
|
|
|
(240
|
)
|
|
(153
|
)
|
Benefits paid
|
|
|
2,008
|
|
|
2,068
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of period
|
|
|
(31,721
|
)
|
|
(32,331
|
)
|
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
2,008
|
|
|
2,068
|
|
Benefits paid
|
|
|
(2,008
|
)
|
|
(2,068
|
)
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(31,721
|
)
|
|
(32,331
|
)
|
Unrecognized net actuarial loss
|
|
|
1,468
|
|
|
1,228
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
$
|
(30,253
|
)
|
$
|
(31,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
before income tax effect recognized in the consolidated balance sheets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Other accrued liabilities
|
|
$
|
(2,037
|
)
|
$
|
(1,906
|
)
|
Postretirement and postemployment benefits
|
|
|
(29,684
|
)
|
|
(30,425
|
)
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(31,721
|
)
|
$
|
(32,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
before income tax effect recognized in accumulated other comprehensive income (loss) consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Net actuarial loss
|
|
$
|
(1,468
|
)
|
$
|
(1,228
|
)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(1,468
|
)
|
$
|
(1,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
During 2017, no accumulated other comprehensive loss is expected to be recognized as a component of net periodic benefit cost.
The
projected benefit obligation for this plan was $31.7 million and $32.3 million at January 1, 2017 and January 3, 2016, respectively.
The
components included in the net periodic benefit cost for each of the periods indicated are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Fiscal Year
2014
|
|
Interest cost component
|
|
$
|
1,158
|
|
$
|
1,101
|
|
$
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,158
|
|
$
|
1,101
|
|
$
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average assumptions used to determine benefit obligations at the fiscal year ends indicated are as follows:
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Discount rate
|
|
|
3.55
|
%
|
|
3.69
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
N/A
|
|
The
weighted-average assumptions used to determine net periodic benefit cost for each of the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Fiscal Year
2014
|
|
Discount rate
|
|
|
3.69
|
%
|
|
3.42
|
%
|
|
4.14
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
The
following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
|
|
|
|
|
Fiscal Year:
|
|
|
|
|
2017
|
|
$
|
2,008
|
|
2018
|
|
|
2,080
|
|
2019
|
|
|
2,080
|
|
2020
|
|
|
2,292
|
|
2021
|
|
|
2,578
|
|
2022 - 2026
|
|
|
11,735
|
|
Postretirement and Postemployment Benefit Obligations
The Company provides health care benefits for certain retired employees. Prior to June 1, 2008, substantially all full-time employees
could become eligible for such benefits if they reached retirement age while still working for the Company. The Company froze the accruing of benefits for eligible
108
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
participants
effective June 1, 2008. Participants who were eligible for a retiree medical benefit and retired prior to June 1, 2009 continued to be eligible for retiree medical coverage.
The Company retains the right to make further amendments to the benefit formula and eligibility requirements. This postretirement health care plan is contributory with participants' contributions
adjusted annually. The plan limits benefits to the lesser of the actual cost for the medical coverage selected or a defined dollar benefit based on years of service, applicable to eligible retirees.
The Company uses a measurement date of December 31 for this health care plan. In 2016, the Society of Actuaries released revised mortality tables. In consideration of these tables, the Company
modified the mortality assumptions used in determining its postretirement health care plan obligation as of January 1, 2017. The impact of these
new mortality assumptions has resulted in a decrease to the Company's postretirement health care plan obligation and a decrease in future related expense.
The
reconciliation of benefit obligation and plan assets for 2016 and 2015 are aggregated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
Benefit obligation, beginning of period
|
|
$
|
(14,827
|
)
|
$
|
(15,824
|
)
|
Service cost
|
|
|
(380
|
)
|
|
(389
|
)
|
Interest cost
|
|
|
(634
|
)
|
|
(633
|
)
|
Plan participants' contributions
|
|
|
(482
|
)
|
|
(418
|
)
|
Actuarial gain (loss)
|
|
|
60
|
|
|
1,348
|
|
Benefits paid
|
|
|
1,383
|
|
|
1,089
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of period
|
|
|
(14,880
|
)
|
|
(14,827
|
)
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
901
|
|
|
671
|
|
Plan participants' contributions
|
|
|
482
|
|
|
418
|
|
Benefits paid
|
|
|
(1,383
|
)
|
|
(1,089
|
)
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(14,880
|
)
|
|
(14,827
|
)
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(14,880
|
)
|
$
|
(14,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
before income tax effect recognized in the consolidated balance sheets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Other accrued liabilities
|
|
$
|
(936
|
)
|
$
|
(860
|
)
|
Postretirement and postemployment benefits
|
|
|
(13,944
|
)
|
|
(13,967
|
)
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(14,880
|
)
|
$
|
(14,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
Amounts
before income tax effect recognized in accumulated other comprehensive income (loss) consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Net actuarial gain
|
|
$
|
1,487
|
|
$
|
1,471
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
1,487
|
|
$
|
1,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
2017, no accumulated other comprehensive income is expected to be recognized as a component of net periodic benefit cost.
The
components included in the postretirement benefit cost for each of the periods indicated are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Fiscal Year
2014
|
|
Service cost component
|
|
$
|
380
|
|
$
|
389
|
|
$
|
314
|
|
Interest cost component
|
|
|
634
|
|
|
633
|
|
|
652
|
|
Amortization of net actuarial gain
|
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,014
|
|
$
|
1,022
|
|
$
|
901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average discount rate used to determine benefit obligations for this plan was 4.20% and 4.40% for the years ended January 1, 2017 and January 3, 2016,
respectively.
The
weighted-average discount rate used to determine net periodic benefit cost was 4.40%, 4.10% and 4.80% for the years ended January 1, 2017, January 3, 2016 and
December 28, 2014, respectively.
For
measurement purposes, the Company used the following assumptions in regard to health care cost trends:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Health care cost trend rate assumed for next year
|
|
|
7.00
|
%
|
|
7.50
|
%
|
|
8.00
|
%
|
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)
|
|
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2022
|
|
|
2020
|
|
|
2020
|
|
The
annual rate of health care cost of covered claims is assumed to be 7.00% for 2017 and 2018 and assumed to decrease by 0.50% per year beginning in 2019 until an ultimate trend rate of
5.00% is reached in 2022 and to remain at that level thereafter.
110
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
8. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations (Continued)
The Company offers a defined dollar benefit plan providing a maximum fixed dollar amount of
coverage that does not increase with medical inflation. A one-percentage-point change in the assumed health care cost trend rates would have the following effects (in thousands):
|
|
|
|
|
|
|
|
|
|
1-Percentage
Point
Increase
|
|
1-Percentage
Point
Decrease
|
|
Effect on total service and interest cost components of net periodic expense
|
|
$
|
4
|
|
$
|
(6
|
)
|
Effect on accumulated postretirement benefit obligation
|
|
|
70
|
|
|
(98
|
)
|
The
following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
|
|
|
|
|
Fiscal Year:
|
|
|
|
|
2017
|
|
$
|
697
|
|
2018
|
|
|
736
|
|
2019
|
|
|
790
|
|
2020
|
|
|
819
|
|
2021
|
|
|
864
|
|
2022 - 2026
|
|
|
4,763
|
|
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax
111
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
9. Income Taxes (Continued)
purposes.
The significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Employee benefits, including postretirement reserves
|
|
$
|
37,437
|
|
$
|
36,420
|
|
Net operating loss and tax credit carryforwards
|
|
|
7,783
|
|
|
6,485
|
|
Operating reserves and accruals
|
|
|
42,752
|
|
|
33,848
|
|
Inventories
|
|
|
3,929
|
|
|
3,374
|
|
Other
|
|
|
(2,517
|
)
|
|
246
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
89,384
|
|
|
80,373
|
|
Valuation allowance
|
|
|
(1,501
|
)
|
|
(1,306
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
87,883
|
|
|
79,067
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(63,092
|
)
|
|
(51,759
|
)
|
Intangible assets
|
|
|
(132,588
|
)
|
|
(133,589
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(195,680
|
)
|
|
(185,348
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(107,797
|
)
|
$
|
(106,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
effective tax rate was 18.7% for the year ended January 1, 2017, 37.6% for the year ended January 3, 2016, and 33.7% for the year ended
December 28, 2014. Reconciliation between the federal statutory income tax rate of 35% and the effective tax rate for each year is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Fiscal Year
2014
|
|
Income tax at federal statutory rate
|
|
$
|
3,819
|
|
$
|
21,477
|
|
$
|
17,490
|
|
Equity earnings not subject to U.S. tax
|
|
|
(534
|
)
|
|
(482
|
)
|
|
(363
|
)
|
State income taxes, net of federal tax benefit
|
|
|
(276
|
)
|
|
2,457
|
|
|
1,570
|
|
Federal tax credits
|
|
|
(714
|
)
|
|
(448
|
)
|
|
(692
|
)
|
Foreign taxes, net of credits
|
|
|
16
|
|
|
(21
|
)
|
|
134
|
|
State EZ credits
|
|
|
|
|
|
202
|
|
|
(302
|
)
|
Insurance Proceeds & Cash Surrender Value
|
|
|
(745
|
)
|
|
288
|
|
|
(296
|
)
|
Permanent re-investment in foreign operations
|
|
|
|
|
|
(202
|
)
|
|
|
|
Excess Tax BenefitShare Based Comp
|
|
|
(3,061
|
)
|
|
|
|
|
|
|
Uncertain Tax Positions
|
|
|
(1,657
|
)
|
|
|
|
|
|
|
Debt Issuance Costs
|
|
|
582
|
|
|
|
|
|
|
|
Other items, net
|
|
|
533
|
|
|
(169
|
)
|
|
(687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision
|
|
$
|
(2,037
|
)
|
$
|
23,102
|
|
$
|
16,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
adoption of ASU 2016-09 significantly impacts both the timing and method of how the tax effects of share-based awards are recognized. ASU 2016-09 requires the income tax effects to
be recognized in the provision for income taxes when the awards vest or are settled whereas previously
112
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
9. Income Taxes (Continued)
such
income tax benefits were recognized as part of additional paid-in capital and could not be recognized until they were realized through a reduction in income taxes payable. These combined effects
had the impact of decreasing the Company's provision for income taxes by $3.1 million and the Company's effective tax rate by 28% in 2016. Excluding the adoption of ASU 2016-09, the Company's
provision for income taxes and effective tax rate in fiscal year 2016 would have been $1.02 million and 9%, respectively.
The
significant components of the provision for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Fiscal Year
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,173
|
)
|
$
|
14,352
|
|
$
|
17,350
|
|
State
|
|
|
1,337
|
|
|
5,176
|
|
|
3,126
|
|
Foreign
|
|
|
268
|
|
|
249
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(568
|
)
|
|
19,777
|
|
|
20,680
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(276
|
)
|
|
3,897
|
|
|
(2,650
|
)
|
State
|
|
|
(1,193
|
)
|
|
(572
|
)
|
|
(1,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,469
|
)
|
|
3,325
|
|
|
(3,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
(2,037
|
)
|
$
|
23,102
|
|
$
|
16,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
January 1, 2017, the Company had no federal net operating loss carryforwards, and approximately $16.0 million (gross) of net operating loss carryforwards for state
income tax purposes, which begin to expire in 2017.
The
total tax credits available were $4.6 million at January 1, 2017. These tax credits primarily include California state tax incentive programs designed to encourage
employers hiring from targeted groups. The California state tax credits will begin to expire in 2024.
In
assessing the realizability of deferred tax assets included in the consolidated balance sheets, management considers whether it is more likely than not that some portion or all of the
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
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In accordance with
this policy and the requirements of ASC 740, a valuation allowance of $1.5 million is retained against certain California tax credits and certain California and Florida net operating loss
carryforwards. The net change during the year in total valuation allowance was approximately $0.2 million.
The
Company has not recorded U.S. income tax expense for the undistributed earnings pertaining to the 2012 to 2016 SFDN operations. As of January 1, 2017 and January 3,
2016, the undistributed earnings were $6.4 million and $4.9 million, respectively. The Company intends to leave the 2012 to 2016 undistributed income permanently reinvested offshore. The
amount of earnings designated as
113
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
9. Income Taxes (Continued)
indefinitely
reinvested offshore is based upon the actual deployment of such earnings in offshore assets and expectations of the future cash needs of the U.S. and foreign entities.
In
July 2006, the FASB issued further guidance to clarify the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and
applies to all tax positions related to income taxes. A reconciliation of the beginning and ending amount of unrecognized tax benefits, including accrued interest and penalties, is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Balance at beginning of fiscal year
|
|
$
|
2,569
|
|
$
|
1,675
|
|
Additions based on tax positions related to current period
|
|
|
|
|
|
|
|
Additions based on tax positions related to prior periods
|
|
|
|
|
|
715
|
|
Accrued interest and penalty
|
|
|
73
|
|
|
179
|
|
Reductions due to lapse of the applicable statute of limitations
|
|
|
(1,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of fiscal year
|
|
$
|
841
|
|
$
|
2,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of January 1, 2017 and January 3, 2016, the total amounts of unrecognized tax benefits were $0.8 million and $2.6 million, respectively. If the entire
liability were recognized, only $0.1 million would affect the effective tax rate.
The
Company does not anticipate any of its unrecognized tax benefits, as disclosed above, to be settled in the next 12 months. The Company's policy is to accrue any interest and
penalties related to unrecognized tax benefits in its income tax expense. For the year ended January 1, 2017, approximately $73,000 was recorded as interest and penalties. For the year ended
January 3, 2016, approximately $154,000 was recorded as interest and penalties.
As
of January 1, 2017, the Company's federal tax returns for the periods ended December 30, 2012 and December 29, 2013 were under examination by the Internal Revenue
Service (the "IRS"). The Company was advised that the IRS field examination team has accepted the Company's tax positions and is currently preparing its final report on the 2012/2013 examination to
send to the congressional Joint Committee on Taxation for review. On February 14, 2017, the Company was advised that the congressional Joint Committee on Taxation completed its review of the
audit findings and took no exceptions to the conclusions reached by the IRS. The audit resulted in a refund of approximately $5.7 million.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and Mexico. The Company is no longer subject to U.S.
federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2011.
The
tax years which remain subject to examination or are being examined by major tax jurisdictions as of January 1, 2017 include fiscal years 2012 through 2016 for state purposes
and 2012 through 2016 for federal purposes.
114
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
10. Related Party Transactions
As of January 1, 2017 and January 3, 2016, funds affiliated with Ares hold 1.1% and 9.9% of the outstanding loans under the Term Loan Facility, respectively, and receive
payments representing their pro rata portion of such loans. In connection with the Ares Acquisition, on November 15, 2012, we entered into Management Services Agreements with certain affiliates
of Ares Management (the "Management Services Agreements"). Each Management Services Agreement provides for reimbursement of the applicable manager's and its affiliates' out-of-pocket expenses in
connection with the management services. During the years ended January 1, 2017, January 3, 2016 and December 28, 2014, fees and other expenses paid to Ares were
$0.2 million, $0.3 million and $0.1 million, respectively.
11. Employment Agreements
Effective with the Ares Acquisition on November 15, 2012, SFSI entered into an employment agreement with David G. Hirz (the "2012 Hirz Agreement") and a Fair Competition
Agreement wherein Mr. Hirz agreed to various non-competition and non-solicitation covenants. In connection with the IPO, SFSI entered into a new employment agreement with David G. Hirz
(the "2014 Hirz Agreement").
On
July 20, 2016, SFSI entered into an amended and restated employment agreement with David G. Hirz which agreement replaces and supersedes all prior employment agreements
between the Company and Mr. Hirz (the "2016 Hirz Agreement"). The 2016 Hirz Agreement provides, among other provisions, for Mr. Hirz to: (a) serve as the Chief Executive Officer
and President of the Company for a three-year term with automatic one-year renewals, (b) be nominated to serve as a director on SFSI's board of directors for so long as he remains employed by
the Company, (c) be compensated through base salary, bonus, benefits and expense reimbursement, (d) be considered for annual grant of equity awards on terms determined by the SFSI's
board of directors or the Compensation Committee of such board (the "Compensation Committee"), and (e) have his existing option and restricted stock agreements amended to reflect various
changes resulting from a termination event.
12. Share-Based Compensation
2014 Incentive Plan
Effective September 23, 2014, and in connection with the IPO, SFSI adopted the Smart & Final Stores, Inc. 2014 Stock
Incentive Plan (the "2014 Incentive Plan"), which provides for the issuance of equity-based incentive awards not to exceed 5,500,000 shares of Common Stock to eligible employees, consultants and
non-employee directors in the form of stock options, restricted stock, other stock-based awards and performance-based cash awards. In addition, a number of shares of Common Stock equal to the number
of shares of Common Stock underlying stock options that were previously issued under the 2012 Incentive Plan (as defined below) and that expire, terminate or are cancelled for any reason without being
exercised in full will be available for issuance under the 2014 Incentive Plan.
Effective
September 23, 2014, SFSI's board of directors and the Compensation Committee of SFSI's board of directors (the "Compensation Committee") granted 458,645 shares of
restricted stock to eligible employees under the 2014 Incentive Plan. These grants were awards with time-based vesting
115
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
12. Share-Based Compensation (Continued)
terms,
and generally vest over four years, subject to continuous employment. The grant date fair value was $12.00 per share of restricted stock based on the price of Common Stock sold in the IPO.
During the year ended January 3, 2016, SFSI's board of directors and the Compensation Committee granted a total of 29,662 shares of restricted stock to eligible employees and directors under
the 2014 Incentive Plan. These grants were awards with time-based vesting terms. Certain of these grants are awards that vest over three years and certain of these grants are awards that vest over
four years, and each is subject to continuous employment or service. During the year ended January 3, 2016, there were 44,284 shares of restricted stock retained by the Company to fund
the grantee's income tax obligations in connection with the vesting of such awards. During the year ended January 1, 2017, 413,330 shares of restricted stock were granted to certain management
employees and non-employee directors under the 2014 Incentive Plan. These awards have time-based vesting terms subject to continuous employment or service with the Company. Except for the shares
granted to non-employee directors, which vest in equal installments of 25% over a four-year period from the grant date, these grants vest in equal installments of 33
1
/
3
% each year over
a three-year period from the grant date. During the year ended January 1, 2017, 50,773 shares of restricted stock were surrendered to the Company to cover the grantee's minimum income tax
obligations in connection with the vesting of restricted stock awards.
Effective
September 23, 2014, SFSI's board of directors and the Compensation Committee also granted stock options to purchase up to a total of 1,543,592 shares of Common Stock to
certain management employees and non-employee directors under the 2014 Incentive Plan. The stock options have time-based vesting terms. These stock options collectively with the stock options to
purchase up to 6,335,550 shares of Common Stock described below under "2012 Incentive Plan," are referred to herein as the "Time-Based Options." Of the Time-Based Options granted on
September 23, 2014, stock options to purchase up to 638,889 shares of Common Stock vest over a five-year period from the grant date, with 10% vesting on the first and second anniversaries of
the grant date, 20% vesting on the third and fourth anniversaries of the grant date and 40% vesting on the fifth anniversary of the grant date, and stock options to purchase up to 524,999 shares of
Common Stock vest over a five-year period from the grant date with 20% vesting at the end of each year. The majority of the Time-Based Options granted under the 2014 Incentive Plan (to purchase up to
379,704 shares of Common Stock) vest over a four-year period from the grant date with 25% vesting at the end of each year. During the year ended January 3, 2016, SFSI's board of directors
granted stock options to purchase up to a total of 28,294 shares of Common Stock which vest over a four-year period from the grant date with 25% vesting at the end of each year. All of the Time-Based
Options granted have a 10-year term and are subject to continuous employment or service. During the year ended January 1, 2017, stock options to purchase up to 589,074 shares of Common Stock
were granted to certain management employees under the 2014 Incentive Plan. These awards vest in equal installments of 25% each year over a four-year period from the grant date subject to continuous
employment with the Company.
On
September 22, 2014, stock options to purchase up to an aggregate 821,370 shares of Common Stock previously granted on May 30, 2014 and June 6, 2014 under the 2012
Incentive Plan were cancelled and new grants of stock options to purchase up to 598,987 shares of Common Stock and 222,383 shares of restricted stock were granted to the same individuals under the
2014 Incentive Plan. These grants were awards with time-based vesting terms, and vest over various years from grant date with various percentages vesting on each anniversary of the original grant
dates through May 30, 2019. These grants under the 2014 Incentive Plan are in addition to the aforementioned grants of
116
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
12. Share-Based Compensation (Continued)
458,645 shares
of restricted stock and aforementioned grants of stock options to purchase up to 1,543,592 shares of Common Stock.
The
following table summarizes the restricted stock award activity under the 2014 Incentive Plan for the year ended January 1, 2017:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding at December 28, 2014
|
|
|
681,028
|
|
$
|
10.89
|
|
Granted
|
|
|
29,662
|
|
|
16.01
|
|
Forfeited
|
|
|
(29,058
|
)
|
|
12.00
|
|
Vested
|
|
|
(122,496
|
)
|
|
12.00
|
|
|
|
|
|
|
|
|
|
Outstanding at January 3, 2016
|
|
|
559,136
|
|
$
|
10.86
|
|
Granted
|
|
|
413,330
|
|
|
15.55
|
|
Forfeited
|
|
|
(19,153
|
)
|
|
13.70
|
|
Vested
|
|
|
(127,386
|
)
|
|
12.28
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
825,927
|
|
$
|
12.92
|
|
|
|
|
|
|
|
|
|
Exercisable at January 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company recorded share-based compensation expense related to the restricted stock awards of $4.5 million, $3.2 million and $0.9 million for the years ended
January 1, 2017, January 3, 2016 and December 28, 2014, respectively. As of January 1, 2017, the unrecognized compensation cost was $4.8 million and related
weighted-average period over which Time-Based Option expense was expected to be recognized was approximately 1.55 years.
117
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
12. Share-Based Compensation (Continued)
The following table summarizes the Time-Based Option activity under the 2014 Incentive Plan for the year ended January 1, 2017 (dollars in thousands except weighted average
exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 28, 2014
|
|
|
2,131,468
|
|
$
|
12.00
|
|
9.75 years
|
|
|
|
|
Granted
|
|
|
28,294
|
|
|
16.43
|
|
|
|
|
|
|
Forfeited
|
|
|
(36,612
|
)
|
|
12.00
|
|
|
|
|
|
|
Exercised
|
|
|
(29,232
|
)
|
|
12.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 3, 2016
|
|
|
2,093,918
|
|
$
|
12.06
|
|
8.74 years
|
|
$
|
12,878
|
|
Granted
|
|
|
589,074
|
|
|
15.63
|
|
|
|
|
|
|
Forfeited
|
|
|
(67,247
|
)
|
|
12.43
|
|
|
|
|
|
|
Exercised
|
|
|
(37,037
|
)
|
|
12.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
2,578,708
|
|
|
12.87
|
|
8.10 years
|
|
$
|
4,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 1, 2017
|
|
|
552,675
|
|
$
|
12.06
|
|
7.73 years
|
|
$
|
1,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after January 1, 2017
|
|
|
1,974,031
|
|
$
|
13.04
|
|
8.18 years
|
|
$
|
2,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value represents the difference between the closing stock price of our common stock and the exercise price of outstanding, in-the-money options. Our closing stock
price as reported on NYSE as of December 30, 2016 (the last trading day of fiscal year 2016) was $14.10.
The
fair value of the Time-Based Options was estimated on the date of grant using the Black-Scholes-Merton option-pricing model based on the assumptions in the following table:
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
Dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
33.75%
|
|
34.26%
|
Risk-free interest rates
|
|
1.36%
|
|
1.80%
|
Expected terms
|
|
6.23 years
|
|
6.26 years
|
Weighted-average fair value of options granted
|
|
$5.51
|
|
$6.06
|
The
expected volatility for all Time-Based Options was based on utilizing comparable peer group share price volatility adjusted for the Company's debt to equity leverage, including the
effect of the Ares Acquisition. The risk-free interest rate was based on the traded zero-coupon U.S. Treasury bond with a term equal to the grant's expected life. The term of the Time-Based Options
was derived based on the "simplified method" calculation. The simplified method allows companies that do not have sufficient historical experience to provide a reasonable basis for an estimate to
instead estimate the expected term of a "plain vanilla" option by averaging the time to vesting and the full term of the option. ("Plain vanilla" options are options with the following
characteristics: (1) the options are granted at-the-money; (2) exercisability is conditional only upon performing service through the vesting date; (3) if an employee terminates
service prior to vesting, the employee would forfeit the options;
118
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
12. Share-Based Compensation (Continued)
(4) if
an employee terminates service after vesting, the employee would have a limited time to exercise the options; and (5) the options are nontransferable and non-hedgeable.) The
Company periodically evaluates the applicability of using the simplified method with respect to the characteristics noted above with respect to its options and will continue to so evaluate as the
Company gains historical experience.
The estimated forfeiture rate of 5.0% was based on projected forfeitures primarily based on the historical experience of the Company.
The
Company recorded share-based compensation expense for Time-Based Options granted under the 2014 Incentive Plan of $3.3 million, $3.2 million and $1.0 million for
the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively. As of January 1, 2017, the unrecognized compensation cost was $4.3 million and
related weighted-average period over which Time-Based Option expense was expected to be recognized was approximately 2.03 years.
2012 Incentive Plan
Effective November 15, 2012, SFSI adopted the SF CC Holdings, Inc. 2012 Stock Incentive Plan (the "2012 Incentive Plan"), which
provides for the issuance of equity-based incentive awards not to exceed 11,400,000 shares of Common Stock. Effective upon closing of the IPO, no new awards may be granted under the 2012 Incentive
Plan.
The
following table summarizes the Time-Based Option activity under the 2012 Incentive Plan for the years ended January 1, 2017 and January 3, 2016 (dollars in thousands
except weighted average exercise price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 28, 2014
|
|
|
5,354,200
|
|
$
|
6.58
|
|
8.11 years
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(44,536
|
)
|
|
6.58
|
|
|
|
|
|
|
Exercised
|
|
|
(56,054
|
)
|
|
6.56
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 3, 2016
|
|
|
5,253,610
|
|
|
6.59
|
|
7.09 years
|
|
$
|
61,072
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(60,496
|
)
|
|
6.59
|
|
|
|
|
|
|
Exercised
|
|
|
(393,528
|
)
|
|
6.66
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
4,799,586
|
|
|
6.58
|
|
6.10 years
|
|
$
|
36,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 1, 2017
|
|
|
3,751,470
|
|
|
6.58
|
|
6.09 years
|
|
$
|
28,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after January 1, 2017
|
|
|
1,043,398
|
|
|
6.59
|
|
6.11 years
|
|
$
|
7,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
12. Share-Based Compensation (Continued)
The
Company recorded share-based compensation expense for Time-Based Options granted under the 2012 Incentive Plan of $2.0 million, $3.6 million and $9.5 million for
the years ended January 1, 2017, January 3, 2016 and December 28, 2014, respectively. As of January 1, 2017, the unrecognized compensation cost was $0.8 million and
related weighted-average period over which Time-Based Option expense was expected to be recognized was approximately 0.88 years.
In
connection with the Ares Acquisition on November 15, 2012, certain stock options to purchase shares of common stock of the Predecessor were converted into 3,625,580 stock
options to purchase Common Stock (the "Rollover Options"). In the event of a participant's termination of employment for cause or
upon discovery that the participant engaged in detrimental activity, if the Company elected to exercise its repurchase right, it was required to do so within a 180-day period commencing on the later
of (i) the date of termination and (ii) the date on which such Rollover Option was exercised. In the event of a participant's termination of employment for any other reason, the
repurchase right was required to be exercised by the Company during the 90-day period following the date of termination.
The
following table summarizes the Rollover Option activity for the years ended January 1, 2017 and January 3, 2016 (dollars in thousands except weighted average exercise
price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 28, 2014
|
|
|
2,700,850
|
|
$
|
2.26
|
|
3.07 years
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 3, 2016
|
|
|
2,700,850
|
|
|
2.26
|
|
2.05 years
|
|
$
|
43,078
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(765,597
|
)
|
|
2.09
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
1,935,253
|
|
|
2.33
|
|
1.37 years
|
|
$
|
22,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 1, 2017
|
|
|
1,935,253
|
|
|
2.33
|
|
1.37 years
|
|
$
|
22,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
13. Accumulated Other Comprehensive Income (Loss)
The following table represents the changes in AOCI by each component for the years ended January 1, 2017 and January 3, 2016, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Defined Benefit
Retirement Plan
|
|
Cash Flow
Hedging Activity
|
|
Foreign Currency
Translation
|
|
Total
|
|
Balance at December 28, 2014
|
|
$
|
(3,956
|
)
|
$
|
385
|
|
$
|
(846
|
)
|
$
|
(4,417
|
)
|
OCI before reclassification
|
|
|
956
|
|
|
(1,375
|
)
|
|
(1,120
|
)
|
|
(1,539
|
)
|
Amounts reclassified out of AOCI
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fiscal year 2015 OCI
|
|
|
956
|
|
|
(1,407
|
)
|
|
(1,120
|
)
|
|
(1,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2016
|
|
$
|
(3,000
|
)
|
$
|
(1,022
|
)
|
$
|
(1,966
|
)
|
$
|
(5,988
|
)
|
OCI before reclassification
|
|
|
(7,332
|
)
|
|
345
|
|
|
(623
|
)
|
|
(7,610
|
)
|
Amounts reclassified out of AOCI
|
|
|
|
|
|
15
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fiscal year 2016 OCI
|
|
|
(7,332
|
)
|
|
360
|
|
|
(623
|
)
|
|
(7,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
$
|
(10,332
|
)
|
$
|
(662
|
)
|
$
|
(2,589
|
)
|
$
|
(13,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table represents the items reclassified out of each component of AOCI and the related tax effects for the year ended January 1, 2017:
|
|
|
|
|
|
Details about AOCI Components (in thousands)
|
|
Amount
Reclassified
from AOCI
|
|
Location within Statement of Operations and
Comprehensive Income (Loss)
|
Gains (losses) on cash flow hedges
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
25
|
|
Interest income (expense)
|
|
|
|
|
|
|
|
|
|
25
|
|
Total before income tax
|
|
|
|
(10
|
)
|
Income tax (provision) benefit
|
|
|
|
|
|
|
|
|
$
|
15
|
|
Reclassification of adjustments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the year
|
|
$
|
15
|
|
Total reclassifications, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table represents the items reclassified out of each component of AOCI and the related tax effects for the year ended January 3, 2016:
|
|
|
|
|
|
Details about AOCI Components (in thousands)
|
|
Amount
Reclassified
from AOCI
|
|
Location within Statement of Operations and
Comprehensive Income (Loss)
|
Gains (losses) on cash flow hedges
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(53
|
)
|
Interest income (expense)
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
Total before income tax
|
|
|
|
21
|
|
Income tax (provision) benefit
|
|
|
|
|
|
|
|
|
$
|
(32
|
)
|
Reclassification of adjustments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the year
|
|
$
|
(32
|
)
|
Total reclassifications, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
14. Segment Information
The Company is a value-oriented retailer serving a diverse demographic of household and business
customers through two complementary store banners. The "Smart & Final" business focuses on both household and business customers, and the "Cash & Carry" business focuses primarily on
restaurants, caterers and a wide range of other foodservice businesses. The Company's chief operating decision maker ("CODM") regularly reviews the operating performance of each of the store banners
including measures of performance based on income (loss) from operations. The Company considers each of the store banners to be an operating segment and has further concluded that presenting
disaggregated information of these two operating segments provides meaningful information as certain economic characteristics are dissimilar as well as the characteristics of the customer base served.
The
"Corporate/Other" category is comprised primarily of corporate overhead support expenses and administrative expenses incidental to the activities of the reportable segments, interest
expense and other costs associated with the Company's debt obligations, equity earnings in its joint venture, and income taxes.
For
the year ended January 1, 2017, the operating information and total assets for the reportable segments are shown as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart & Final
|
|
Cash & Carry
|
|
Corporate/
Other
|
|
Consolidated
|
|
Net sales
|
|
$
|
3,400,755
|
|
$
|
941,040
|
|
$
|
|
|
$
|
4,341,795
|
|
Cost of sales, distribution and store occupancy
|
|
|
2,894,222
|
|
|
808,258
|
|
|
9,811
|
|
|
3,712,291
|
|
Operating and administrative expenses
|
|
|
444,318
|
|
|
66,688
|
|
|
71,480
|
|
|
582,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
62,215
|
|
$
|
66,094
|
|
$
|
(81,291
|
)
|
$
|
47,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,875,954
|
|
$
|
347,646
|
|
$
|
(271,181
|
)
|
$
|
1,952,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany receivable (payable)
|
|
$
|
353,721
|
|
$
|
1,458
|
|
$
|
(355,179
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in joint venture
|
|
$
|
|
|
$
|
|
|
$
|
14,366
|
|
$
|
14,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
406,662
|
|
$
|
204,580
|
|
$
|
|
|
$
|
611,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
135,677
|
|
$
|
10,074
|
|
$
|
5,485
|
|
$
|
151,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired in Haggen Transaction
|
|
$
|
2,257
|
|
$
|
|
|
$
|
|
|
$
|
2,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
74,609
|
|
$
|
3,958
|
|
$
|
8,448
|
|
$
|
87,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
14. Segment Information (Continued)
For
the year ended January 3, 2016, the operating information and total assets for the reportable segments are shown as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart & Final
|
|
Cash & Carry
|
|
Corporate/
Other
|
|
Consolidated
|
|
Net sales
|
|
$
|
3,036,949
|
|
$
|
934,031
|
|
$
|
|
|
$
|
3,970,980
|
|
Cost of sales, distribution and store occupancy
|
|
|
2,561,035
|
|
|
802,115
|
|
|
8,970
|
|
|
3,372,120
|
|
Operating and administrative expenses
|
|
|
372,011
|
|
|
64,368
|
|
|
67,616
|
|
|
503,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
103,903
|
|
$
|
67,548
|
|
$
|
(76,586
|
)
|
$
|
94,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 3, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,615,564
|
|
$
|
314,549
|
|
$
|
(108,824
|
)
|
$
|
1,821,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany receivable (payable)
|
|
$
|
205,705
|
|
$
|
(24,342
|
)
|
$
|
(181,363
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in joint venture
|
|
$
|
|
|
$
|
|
|
$
|
12,763
|
|
$
|
12,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
406,662
|
|
$
|
204,580
|
|
$
|
|
|
$
|
611,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended January 3, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
122,808
|
|
$
|
7,616
|
|
$
|
6,579
|
|
$
|
137,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired in Haggen Transaction
|
|
$
|
66,440
|
|
$
|
|
|
$
|
|
|
$
|
66,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
56,936
|
|
$
|
3,351
|
|
$
|
8,479
|
|
$
|
68,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 28, 2014, the operating information and total assets for the reportable segments are shown as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart & Final
|
|
Cash & Carry
|
|
Corporate/
Other
|
|
Consolidated
|
|
Net sales
|
|
$
|
2,668,933
|
|
$
|
865,311
|
|
$
|
|
|
$
|
3,534,244
|
|
Cost of sales, distribution and store occupancy
|
|
|
2,252,698
|
|
|
746,102
|
|
|
8,155
|
|
|
3,006,955
|
|
Operating and administrative expenses
|
|
|
319,864
|
|
|
57,963
|
|
|
60,701
|
|
|
438,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
96,371
|
|
$
|
61,246
|
|
$
|
(68,856
|
)
|
$
|
88,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 28, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,581,414
|
|
$
|
262,660
|
|
$
|
(114,782
|
)
|
$
|
1,729,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany receivable (payable)
|
|
$
|
256,743
|
|
$
|
(69,539
|
)
|
$
|
(187,204
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in joint venture
|
|
$
|
|
|
$
|
|
|
$
|
11,924
|
|
$
|
11,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
406,662
|
|
$
|
204,580
|
|
$
|
|
|
$
|
611,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended December 28, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
106,528
|
|
$
|
5,229
|
|
$
|
5,642
|
|
$
|
117,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
50,405
|
|
$
|
3,659
|
|
$
|
10,130
|
|
$
|
64,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
14. Segment Information (Continued)
The Company categorizes its products into two groups: perishable and non-perishable products.
Perishable product categories include fresh produce and floral, meat and seafood dairy and cheese, service deli, and bulk foods. Non-perishable product categories include grocery, foodservice,
packaging, beverage, frozen, and restaurant equipment and janitorial supplies. The following is a breakdown of the Company's total consolidated sales by perishable and non-perishable sales mix:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Perishables
|
|
|
37.0
|
%
|
|
36.8
|
%
|
|
36.0
|
%
|
Non-perishables
|
|
|
63.0
|
|
|
63.2
|
|
|
64.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Commitments and Contingencies
Legal Actions
On February 11, 2016, the Company received a subpoena from the District Attorney for the County of Yolo, California, seeking information
concerning its handling, disposal and reverse logistics of potential hazardous waste at its stores and distribution centers in California. The Company has provided information and is cooperating with
the authorities from multiple counties in California in connection with this ongoing matter. In the fourth quarter of 2016, the Company recorded a loss related to this matter in an amount considered
to be immaterial. At this time, the Company cannot reasonably estimate possible additional loss or range of additional loss that may arise from this matter or whether this matter will have a material
impact on its financial condition or operating results.
The
Company is engaged in various other legal actions, claims and proceedings in the ordinary course of business, including claims related to employment related matters, breach of
contracts, products liabilities and intellectual property matters resulting from its business activities. The Company does not believe that the ultimate determination of these actions, claims and
proceedings will either individually or in the aggregate have a material adverse effect on its consolidated results of operations or financial position.
16. Stockholders' Equity
On April 24, 2015, certain of the Company's stockholders completed the Secondary Offering. The Company did not sell any shares in the Secondary Offering and did not receive any
proceeds from the sales of shares by the selling stockholders. Following the Secondary Offering, affiliates of Ares held approximately 60% of the Company's issued and outstanding shares of Common
Stock. In accordance with the Registration Rights Agreement among SFSI and its pre-IPO stockholders the selling shareholders paid the underwriting discounts and commissions from their transaction
proceeds and the Company incurred approximately $0.9 million of other offering expenses in connection with the Secondary Offering.
124
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
17. Earnings Per Share
Basic earnings per share represents net income for the period shares of Common Stock were outstanding, divided by the weighted average number of shares of Common Stock outstanding for
the applicable period. Diluted earnings per share represents net income divided by the weighted average number of shares of Common Stock outstanding for the applicable period, inclusive of the effect
of dilutive securities such as outstanding stock options.
A
reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Fiscal Year
2014
|
|
Net income
|
|
$
|
12,948
|
|
$
|
38,262
|
|
$
|
33,118
|
|
Weighted average shares outstanding for basic EPS
|
|
|
72,727,071
|
|
|
73,121,964
|
|
|
61,455,584
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Assumed exercise of time-based options and vesting of restricted stock
|
|
|
5,299,088
|
|
|
4,019,657
|
|
|
2,385,534
|
|
Weighted average shares and share equivalents outstanding for diluted EPS
|
|
|
78,026,159
|
|
|
77,141,621
|
|
|
63,841,118
|
|
Basic earnings per share:
|
|
$
|
0.18
|
|
$
|
0.52
|
|
$
|
0.54
|
|
Diluted earnings per share:
|
|
$
|
0.17
|
|
$
|
0.50
|
|
$
|
0.52
|
|
Potentially
dilutive securities representing 923,668, 22,158 and 1,596,950 shares of Common Stock for the year ended January 1, 2017, January 3, 2016 and
December 28, 2014, respectively, were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.
The
Company elected early adoption of ASU 2016-09 in the second quarter of 2016. Under the new guidance, the Company no longer records excess tax benefits in additional paid-in capital
(APIC). Instead, the Company recognizes all excess tax benefits ("windfalls") as income tax expense or benefit in the income statement. As a result of including income tax effects from windfalls in
income tax expense, the calculation of both basic and diluted earnings per share was affected. Under the treasury stock method used to calculate diluted earnings per share, windfalls are included in
the proceeds assumed to be used to purchase shares. Under the new guidance, windfalls are recognized in net income and thus no longer included in assumed proceeds under the treasury stock method. In
effect, fewer shares are assumed to be repurchased. This generally increases the dilutive effect of share options and restricted stock.
18. Equity Method Investment
SFSI's wholly owned subsidiary, SF Mexico, is a Mexican holding company that owns 50 percent of SFDN. The other 50 percent of the joint venture is owned by Grupo
Calimax S.A. de C.V., an entity comprising the investment interests of a family group who are also the owners of the Calimax grocery store chain in Mexico. At January 1, 2017, this joint
venture operated 15 "Smart & Final" format stores in northwestern Mexico, similar in concept to the Company's U.S. stores. This joint venture operates the Mexico stores as a Mexican domestic
corporation under the name Smart & Final del
125
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
18. Equity Method Investment (Continued)
Noroeste, S.A.
de C.V.. The Company's equity method investment in SFDN is approximately $14.4 million and $12.8 million at January 1, 2017 and January 3, 2016,
respectively, which is included in "Equity investment in joint venture" in the consolidated balance sheets. Summarized financial information for SFDN is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Current assets
|
|
$
|
13,148
|
|
$
|
15,943
|
|
Noncurrent assets
|
|
|
12,211
|
|
|
12,028
|
|
Current liabilities
|
|
|
9,994
|
|
|
13,223
|
|
Noncurrent liabilities
|
|
|
2,579
|
|
|
5,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Fiscal Year
2014
|
|
Sales
|
|
$
|
81,775
|
|
$
|
80,775
|
|
$
|
80,667
|
|
Gross profit
|
|
|
14,989
|
|
|
15,284
|
|
|
14,574
|
|
Income from continuing operations
|
|
|
3,050
|
|
|
2,748
|
|
|
2,074
|
|
Net income
|
|
|
3,050
|
|
|
2,748
|
|
|
2,074
|
|
Undistributed
earnings of SFDN included in the Company's retained earnings were $6.4 million and $4.9 million as of January 1, 2017 and January 3, 2016,
respectively.
19. Haggen Transaction
On October 2, 2015, Smart & Final Stores entered into an Asset Purchase Agreement with Haggen whereby Smart & Final Stores agreed to become a "stalking horse bidder"
to acquire certain assets, including 28 store leases and related assets, of Haggen. On November 24, 2015 and December 22, 2015, Smart & Final Stores entered into additional Asset
Purchase Agreements to acquire five more store leases and related assets of Haggen (all collectively, the "Asset Purchase Agreements" and the transactions, collectively, the "Haggen Transaction"). The
initial purchase price for all 33 store leases and related assets was $67.9 million, subject to certain adjustments. The Haggen Transaction closed in December 2015. During the year ended
January 1, 2017, the purchase price was increased for additional acquisition-related transaction costs and adjustments of $0.5 million.
The
aggregate consideration paid in the Haggen Transaction was as follows (in thousands):
|
|
|
|
|
Aggregate purchase price (excluding adjustments)
|
|
$
|
67,827
|
|
Less closing adjustments
|
|
|
(3,449
|
)
|
|
|
|
|
|
Cash paid pursuant to the Asset Purchase Agreements
|
|
|
64,378
|
|
Acquisition related costs
|
|
|
4,035
|
|
|
|
|
|
|
Total consideration paid
|
|
$
|
68,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
cash consideration paid at the closing of the Haggen Transaction was based in part on estimated closing adjustments, including an estimated adjustment (i) related to repairs
to roof, building structure and mechanical systems (including HVAC, plumbing and electrical but excluding refrigeration systems) and (ii) reasonably required to bring the properties into
compliance with laws applicable to
126
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
19. Haggen Transaction (Continued)
conducting
a retail grocery business (the "Property Condition Adjustment"). The Property Condition Adjustment, which resulted in a reduction of $3.4 million to the total cash purchase price, is
subject to certain caps and floors per property and is subject to adjustment, in each case as set forth in the
applicable Asset Purchase Agreement. Any adjustment to the purchase price resulting from final agreement by the parties will be accounted for as an adjustment to the cost of the assets acquired and
allocated based on their initial relative fair values.
Furthermore,
direct acquisition-related transaction costs totaling $4.0 million, including success, consulting, legal and accounting fees were capitalized in the periods incurred
and included in the total cost of acquiring the assets.
Pursuant
to the Asset Purchase Agreements, the Company acquired certain leasehold interests in California, as well as associated improvements, fixtures, equipment, permits and licenses
of Haggen. Haggen retained inventory, pharmacy assets, prescription files and certain other assets with respect to each of the stores. Prior to closing of the transaction, store operations were ceased
and no customer base, employee base, market distribution system, operating rights (other than liquor licenses), physical facilities (other than the store lease and related fixed assets/equipment), or
processes were acquired for value. As of the end of the second quarter of 2016, the Company had reopened the 33 stores under its
Extra
! store format.
The Haggen Transaction did not meet the definition of a business acquisition and was accounted for as an asset acquisition using a cost accumulation approach. The total consideration paid was
allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. The determination of fair value used to allocate the total consideration paid is based on various
factors including quoted market prices, expected future cash flows, current replacement costs, market rate assumptions, useful lives and appropriate discount and growth rates.
The
total cost allocated to the assets acquired is as follows (in thousands):
|
|
|
|
|
Leasehold interests
|
|
$
|
55,129
|
|
Fixtures and equipment
|
|
|
11,281
|
|
Transferrable liquor licenses
|
|
|
2,003
|
|
|
|
|
|
|
Total cost of net assets acquired
|
|
$
|
68,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
leasehold interests are finite-lived intangible assets amortized over their estimated useful benefit period which is typically the lease term. Fixtures and equipment are
finite-lived tangible assets which are depreciated or amortized over their estimated useful lives. Transferrable liquor licenses are indefinite-lived intangible assets which are evaluated for
impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. See Note 2, Significant Accounting Policies. The transaction has been
treated as an asset acquisition for tax purposes.
20. Share Repurchase Program
On August 31, 2015, SFSI's board of directors authorized a share repurchase program of up to $25.0 million, inclusive of commissions, for repurchase of shares of Common
Stock, to be financed from cash on hand and executed over a period of time. Repurchases under this share repurchase program commenced on November 20, 2015 and concluded on August 30,
2016.
127
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
20. Share Repurchase Program (Continued)
During
the third quarter of 2016, SFSI's board of directors authorized an additional share repurchase program to repurchase up to $25.0 million, inclusive of commissions, of
shares of Common Stock. Repurchases under this share repurchase program commenced on September 19, 2016 and may occur through August 31, 2017.
The
specific timing and amount of the repurchases will be dependent on market conditions, applicable laws and other factors. In connection with the share repurchase program, the Company
may acquire shares in open market transactions (including pursuant to plans adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended) or privately negotiated
transactions.
During
the year ended January 1, 2017, the Company repurchased 2,398,521 shares of Common Stock through open market purchases for an aggregate cost of $33.5 million. The
repurchased shares are no longer deemed issued and outstanding.
21. Quarterly Information (Unaudited)
The following is a summary of the unaudited quarterly financial information for fiscal year 2016 and fiscal year 2015 (in thousands, except per share data):
Smart & Final Stores, Inc. and Subsidiaries
Summary of Quarterly Results of Operations
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016
|
|
|
|
Twelve Weeks
Ended
March 27, 2016
|
|
Twelve Weeks
Ended
June 19, 2016
|
|
Sixteen Weeks
Ended
October 9, 2016
|
|
Twelve Weeks
Ended
January 1, 2017
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net sales
|
|
$
|
908,453
|
|
$
|
1,038,281
|
|
$
|
1,394,429
|
|
$
|
1,000,632
|
|
Cost of sales, buying and occupancy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
780,102
|
|
|
881,067
|
|
|
1,191,400
|
|
|
859,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
128,351
|
|
|
157,214
|
|
|
203,029
|
|
|
140,910
|
|
Operating and administrative expenses
|
|
|
125,082
|
|
|
138,819
|
|
|
183,402
|
|
|
135,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,269
|
|
|
18,395
|
|
|
19,627
|
|
|
5,727
|
|
Interest expense, net
|
|
|
7,311
|
|
|
7,441
|
|
|
9,977
|
|
|
7,925
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
4,978
|
|
|
|
|
Equity in earnings of joint venture
|
|
|
444
|
|
|
284
|
|
|
502
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(3,598
|
)
|
|
11,238
|
|
|
5,174
|
|
|
(1,903
|
)
|
Income tax benefit (provision)
|
|
|
1,960
|
|
|
(3,432
|
)
|
|
1,859
|
|
|
1,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,638
|
)
|
$
|
7,806
|
|
$
|
7,033
|
|
$
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share(a)
|
|
$
|
(0.02
|
)
|
$
|
0.11
|
|
$
|
0.10
|
|
$
|
0.00
|
|
Diluted (loss) earnings per share(a)
|
|
$
|
(0.02
|
)
|
$
|
0.10
|
|
$
|
0.09
|
|
$
|
0.00
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
73,189,149
|
|
|
73,197,064
|
|
|
72,601,724
|
|
|
71,962,127
|
|
Diluted
|
|
|
73,189,149
|
|
|
78,907,184
|
|
|
77,705,917
|
|
|
71,962,127
|
|
128
Table of Contents
Smart & Final Stores, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
January 1, 2017
21. Quarterly Information (Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2015
|
|
|
|
Twelve Weeks
Ended
March 22, 2015
|
|
Twelve Weeks
Ended
June 14, 2015
|
|
Sixteen Weeks
Ended
October 4, 2015
|
|
Thirteen Weeks
Ended
January 3, 2016
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net sales
|
|
$
|
822,170
|
|
$
|
905,121
|
|
$
|
1,246,063
|
|
$
|
997,626
|
|
Cost of sales, buying and occupancy
|
|
|
700,005
|
|
|
763,538
|
|
|
1,058,824
|
|
|
849,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
122,165
|
|
|
141,583
|
|
|
187,239
|
|
|
147,873
|
|
Operating and administrative expenses
|
|
|
106,951
|
|
|
114,131
|
|
|
157,040
|
|
|
125,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
15,214
|
|
|
27,452
|
|
|
30,199
|
|
|
22,000
|
|
Interest expense, net
|
|
|
7,998
|
|
|
7,676
|
|
|
9,333
|
|
|
7,680
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
2,192
|
|
|
|
|
|
|
|
Equity in earnings of joint venture
|
|
|
515
|
|
|
392
|
|
|
138
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,731
|
|
|
17,976
|
|
|
21,004
|
|
|
14,653
|
|
Income tax provision
|
|
|
(2,848
|
)
|
|
(6,938
|
)
|
|
(8,624
|
)
|
|
(4,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,883
|
|
$
|
11,038
|
|
$
|
12,380
|
|
$
|
9,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share(a)
|
|
$
|
0.07
|
|
$
|
0.15
|
|
$
|
0.17
|
|
$
|
0.14
|
|
Diluted earnings per share(a)
|
|
$
|
0.06
|
|
$
|
0.14
|
|
$
|
0.16
|
|
$
|
0.13
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
73,084,282
|
|
|
73,090,917
|
|
|
73,116,746
|
|
|
73,191,829
|
|
Diluted
|
|
|
76,654,281
|
|
|
76,893,066
|
|
|
77,404,466
|
|
|
77,497,406
|
|
-
(a)
-
Per
share amounts for the quarters and full fiscal years have been calculated separately. Accordingly, weighted quarterly amounts may not add to the fiscal year
amounts because of differences in the average common shares outstanding during each period.
129
Table of Contents
SCHEDULE ICONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Smart & Final Stores, Inc. (Parent Company Only)
CONDENSED BALANCE SHEETS
(Amounts in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
January 3,
2016
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23
|
|
$
|
921
|
|
Intercompany receivable
|
|
|
40,986
|
|
|
197,109
|
|
Prepaid expenses
|
|
|
|
|
|
108
|
|
Intercompany note
|
|
|
1,406
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
42,415
|
|
|
207,138
|
|
Investment in subsidiaries
|
|
|
537,064
|
|
|
382,740
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
579,479
|
|
$
|
589,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
485
|
|
$
|
432
|
|
Intercompany payable
|
|
|
26,745
|
|
|
22,875
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
27,230
|
|
|
23,307
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
Issued and outstanding shares72,930,653 and 73,789,608 at January 1, 2017 and January 3, 2016, respectively
|
|
|
73
|
|
|
74
|
|
Additional paid-in capital
|
|
|
500,666
|
|
|
502,304
|
|
Retained earnings
|
|
|
65,093
|
|
|
70,181
|
|
Accumulated other comprehensive loss
|
|
|
(13,583
|
)
|
|
(5,988
|
)
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
552,249
|
|
|
566,571
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
579,479
|
|
$
|
589,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
130
Table of Contents
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Fiscal Year
2014
|
|
Operating and administrative expenses
|
|
$
|
12,903
|
|
$
|
14,182
|
|
$
|
15,892
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,903
|
)
|
|
(14,182
|
)
|
|
(15,892
|
)
|
Intercompany interest income, net
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(12,871
|
)
|
|
(14,182
|
)
|
|
(15,892
|
)
|
Income tax benefit
|
|
|
8,584
|
|
|
5,588
|
|
|
6,268
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in net income of subsidiaries
|
|
|
(4,287
|
)
|
|
(8,594
|
)
|
|
(9,624
|
)
|
Equity in net income of subsidiaries, net of tax
|
|
|
17,235
|
|
|
46,856
|
|
|
42,742
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12,948
|
|
|
38,262
|
|
|
33,118
|
|
Minimum pension obligation adjustment, net of income tax (benefit) expense of $(4,908), $640 and $(21,744), respectively
|
|
|
(7,332
|
)
|
|
956
|
|
|
(32,480
|
)
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
Gain (loss), net of income tax (benefit) expense of $(230), $(917) and $(1,670), respectively
|
|
|
345
|
|
|
(1,375
|
)
|
|
(2,504
|
)
|
Reclassification adjustments, net of income tax expense (benefit) of $(10), $(21) and $6, respectively
|
|
|
15
|
|
|
(32
|
)
|
|
9
|
|
Foreign currency translation
|
|
|
(623
|
)
|
|
(1,120
|
)
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(7,595
|
)
|
|
(1,571
|
)
|
|
(35,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
5,353
|
|
$
|
36,691
|
|
$
|
(2,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
131
Table of Contents
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2016
|
|
Fiscal Year
2015
|
|
Operating activities
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(3,966
|
)
|
$
|
(169
|
)
|
Investing activities
|
|
|
|
|
|
|
|
Dividend received from subsidiary
|
|
|
25,000
|
|
|
10,000
|
|
Issuance of note to subsidiary
|
|
|
(8,000
|
)
|
|
(9,000
|
)
|
Payments received from subsidiaries on note
|
|
|
15,594
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
32,594
|
|
|
1,000
|
|
Financing activities
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
4,667
|
|
|
719
|
|
Payment of minimum withholding taxes on net share settlement of stock option exercise
|
|
|
(669
|
)
|
|
(694
|
)
|
Payments of public offering issuance costs
|
|
|
|
|
|
(214
|
)
|
Excess tax benefits related to share-based payments
|
|
|
|
|
|
358
|
|
Stock repurchases
|
|
|
(33,524
|
)
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(29,526
|
)
|
|
40
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(898
|
)
|
|
871
|
|
Cash and cash equivalents at beginning of period
|
|
|
921
|
|
|
50
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
23
|
|
$
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
132
Table of Contents
SCHEDULE ICONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Smart & Final Stores, Inc. (Parent Company Only)
Notes to Condensed Financial Information
Note 1: Basis of presentation
Smart & Final Stores, Inc. (the "Parent Company") is a holding company with no material operations of its own and conducts
substantially all of its activities through its direct wholly
owned subsidiary, SF CC Intermediate Holdings, Inc. and its subsidiaries and affiliate. The Parent Company was incorporated in October 2012 and became the ultimate parent company of our
business in November 2012, pursuant to the acquisition by Ares Management LLC ("Ares Management") on November 15, 2012 (the "Ares Acquisition").
The
accompanying condensed financial information includes the accounts of the Parent Company and, on an equity basis, its direct and indirect subsidiaries and affiliate. Accordingly,
this condensed financial information has been presented on a "parent-only" basis. Under a parent-only presentation, the Parent Company's investment in subsidiaries is presented under the equity method
of accounting.
This
parent-only condensed financial information should be read in conjunction with the consolidated financial statements of Smart & Final Stores, Inc. and Subsidiaries
(the "Company") included elsewhere herein.
Note 2: Guarantees and restrictions
Smart & Final Stores LLC, a subsidiary of the Company, had $594.9 million of principal amount of long-term debt outstanding
under the First Lien Term Loan Facility as of January 3, 2016. Under the terms of the First Lien Term Loan Credit Agreement dated November 15, 2012 (the "Agreement"), SF CC
Intermediate Holdings, Inc. guaranteed the payment of all principal and interest. During the third quarter of 2016, the Company amended the First Lien Term Loan Facility (the "Fourth
Amendment") to increase the size of the First Lien Term Loan Facility by $30.1 million, from $594.9 million to $625.0 million, and to extend the original November 15, 2019
maturity date to November 15, 2022. Additionally, in connection with the Fourth Amendment, the Eurocurrency Borrowings applicable margin was increased from 3.25% to 3.50%. The debt includes
restrictions on the ability of Smart & Final Stores LLC and its subsidiaries to incur additional liens and indebtedness, make investments, loans and advances, pay dividends and enter
into sale and lease back transactions, among other restrictions. The restricted net assets of the Company's consolidated subsidiaries is approximately $402.0 million as of January 1,
2017.
133
Table of Contents