NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
BlueLinx is a leading U.S. wholesale distributor of residential and commercial building products with both branded and private-label SKUs across product categories such as lumber, panels, engineered wood, siding, millwork, metal building products, and other construction materials. With a strong market position, broad geographic coverage footprint servicing 40 states, and the strength of a locally focused sales force, we distribute our comprehensive range of products to over 15,000 national, regional, and local dealers, specialty distributors, national home centers, and manufactured housing customers. BlueLinx is able to provide a wide range of value added services and solutions to our customers and suppliers. Our Consolidated Financial Statements include the accounts of BlueLinx Holdings Inc. and its wholly owned subsidiaries. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated. On April 13, 2018, we completed the acquisition of Cedar Creek Holdings, Inc. (“Cedar Creek”). Results for Cedar Creek are included in the consolidated financial information presented herein.
We operate on a 5-4-4 fiscal calendar. Our fiscal year ends on the Saturday closest to December 31 of that fiscal year and may comprise 53 weeks in certain years. Our 2020 fiscal year contained 53 weeks and ended on January 2, 2021. Fiscal 2019 contained 52 weeks and ended on December 28, 2019.
Reclassification of Prior Period Presentation
We have reclassified certain costs within the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 28, 2019 from selling, general, and administrative to amortization of deferred gains on real estate and other operating expenses. These costs primarily relate to the amortization of gains from prior real estate sales and the integration of the acquisition of Cedar Creek, respectively.
Additionally, an adjustment has been made to the Consolidated Statements of Cash Flows for the year ended December 28, 2019 to include outstanding payments as part of the change in accounts payable within cash flows from operating activities. In previous periods this change was included within cash flows from financing activities.
Use of Estimates
Our financial statements are prepared in conformity with U.S. GAAP, which requires us to make estimates based on assumptions about current, and for some estimates, future economic and market conditions, which affect reported amounts and related disclosures in our financial statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. Some of our estimates may be affected by the ongoing novel coronavirus (“COVID-19”) pandemic. The severity, magnitude, and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing, and difficult to predict. As a result, our accounting estimates and assumptions may change over time in response to COVID-19.
Recent Accounting Standards - Recently Issued
Income Taxes. In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740 and also clarifies and amends existing guidance to improve consistent application. The amendments in this standard are effective for interim periods and fiscal years beginning after December 15, 2020. Early adoption is permitted. We have assessed the impact of the new guidance, and determined it will not have an impact on the Company’s consolidated financial position, results of operations, or cash flows.
Credit Impairment Losses. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This ASU sets forth a current expected credit loss (“CECL”) model which requires the measurement of all expected credit losses for financial instruments or other assets (e.g., trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model, is
applicable to the measurement of credit losses on financial assets measured at amortized cost, and applies to some off-balance sheet credit exposures. The standard also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. ASU 2019-10 extended the effective date to interim and annual periods beginning after December 15, 2022, for certain public business entities, including smaller reporting companies. We have not completed our assessment of the standard, but we do not expect adoption of the standard to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
Recent Accounting Standards - Recently Adopted
Defined Benefit Pension Plan. In August 2018, the FASB issued ASU No. 2018-14, “Compensation-Retirement-Benefits-Defined Benefit Plans-General (Subtopic 715-20).” The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing six previously required disclosures and adding two. The ASU eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The ASU also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. We adopted this standard effective for fiscal year 2020. The adoption of the standard did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, “Fair Value (“FV”) Measurement (Topic 820).” In addition to making certain modifications, the standard removes the requirements to disclose: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the FV hierarchy; (ii) the policy for timing transfers between levels; and (iii) the valuation process for Level 3 FV measurements. The standard will require public entities to disclose: (a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 FV measurements held at the end of the reporting period; and (b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 FV measurements. The additional disclosure requirements should be applied prospectively for the most recent interim or annual period presented in the fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented. We adopted this standard effective December 29, 2019, the first day of our 2020 fiscal year. The adoption of this standard did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
Goodwill. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350).” This standard is intended to simplify the test for goodwill impairments by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new ASU, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We elected to early adopt this standard effective the first day of the fourth quarter of 2019, which corresponds with the date of our annual goodwill impairment testing date. The adoption of the standard did not have a material impact on Company's consolidated financial position, results of operations, or cash flows.
Leases. In 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Topic 842 establishes a new lease accounting model for leases. The most significant changes include the clarification of the definition of a lease, the requirement for lessees to recognize for all leases a right-of-use asset and a corresponding lease liability in the consolidated balance sheet, and additional quantitative and qualitative disclosures which are designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. Expenses are recognized in the consolidated statement of income in a manner similar to previous accounting guidance. Lessor accounting under the new standard is substantially unchanged. We adopted this standard, and all related amendments thereto, effective December 30, 2018, the first day of our 2019 fiscal year, using a prospective approach, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods presented. We have elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We have made an accounting policy election to keep leases with an initial term of 12 months or less off of the consolidated balance sheet. The adoption of Topic 842 had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated statements of operations and comprehensive income (loss). There also was no impact to our debt covenant calculations. The most significant impact was the recognition of right-of-use assets and corresponding lease liabilities of $57.5 million on the consolidated balance sheet. Additionally, $1.7 million of deferred gains associated with sale-leaseback transactions was recorded as a cumulative-effect
adjustment to accumulated deficit. See Note 12, Lease Commitments, for additional disclosures regarding our lease commitments.
Cloud Computing Arrangements. In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal Use-Software (Subtopic 350-40).” This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). We early adopted this standard effective December 30, 2018, the first day of our 2019 fiscal year and did so prospectively. Costs that have been recorded have been classified as other current and other non-current assets. The adoption of the standard did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
Comprehensive Income. In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220).” This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income (loss) (“AOCI”) to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. We adopted this standard effective December 30, 2018, the first day of our 2019 fiscal year. We did not exercise the option to make this reclassification.
Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration we expected to be entitled to in exchange for those goods or services. The timing of revenue recognition largely is dependent on shipping terms. Revenue is recorded at the time of shipment for terms designated free on board (“FOB”) shipping point. For sales transactions designated FOB destination, revenue is recorded when the product is delivered to the customer’s delivery site.
All revenues recognized are net of trade allowances, cash discounts, and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Adjustments to earnings resulting from revisions to estimates on discounts and returns have been immaterial for each of the reported periods.
In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis. Customer consigned inventory is maintained and stored by certain customers; however, ownership and risk of loss remains with us.
Leases
We are the lessee in a lease contract when we obtain the right to control an asset associated with a particular lease. For operating leases, we record a right-of-use ("ROU") asset that represents our right to use an underlying asset for the lease term, and a corresponding lease liability that represents our obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Financing ROU assets associated with finance leases are included in property and equipment. Leases with a lease term of 12 months or less at inception are not recorded on our consolidated balance sheet and are expensed on a straight-line basis over the lease term in our consolidated statement of operations. We determine the lease term by assuming the exercise of renewal options that are reasonably certain. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future lease payments. When our contracts contain lease and non-lease components, we account for both components as a single lease component. See Note 12, Lease Commitments, for further discussion.
Accounts Receivable
Accounts receivable are stated at net realizable value, do not bear interest, and consist of amounts owed for orders shipped to customers. Management establishes an overall credit policy for sales to customers. The allowance for doubtful accounts is determined based on a number of factors including specific customer account reviews, historical loss experience, current economic trends, and the creditworthiness of significant customers based on ongoing credit evaluations.
Inventory Valuation
The cost of all inventories is determined by the moving average cost method. We have included all material charges directly or indirectly incurred in bringing inventory to its existing condition and location. We evaluate our inventory value at
the end of each quarter to ensure that inventory, when viewed by category, is carried at the lower of cost and net realizable value, which also considers items that may be damaged, excess, and obsolete inventory.
Consideration Received from Vendors and Paid to Customers
Each year, we enter into agreements with many of our vendors providing for inventory purchase rebates, generally based on achievement of specified volume purchasing levels. We also receive rebates related to price protection and various marketing allowances that are common industry practice. We accrue for the receipt of vendor rebates based on purchases, and also reduce inventory to reflect the net acquisition cost (purchase price less expected purchase rebates).
In addition, we enter into agreements with many of our customers to offer customer rebates, generally based on achievement of specified sales levels and various marketing allowances that are common industry practice. We accrue for the payment of customer rebates based on sales to the customer, and also reduce sales to reflect the net sales (sales price less expected customer rebates). Adjustments to earnings resulting from revisions to rebate estimates have been immaterial.
Shipping and Handling
Outbound shipping and handling costs included in “Selling, general, and administrative” expenses were $151.2 million and $150.4 million for fiscal 2020 and fiscal 2019, respectively. Shipping and handling costs include amounts related to the administration of our logistical infrastructure, handling of material in our warehouses, and amounts pertaining to the delivery of products to our customers, such as fuel and maintenance costs for our mobile fleet, wages for our drivers, and third party freight charges.
Property and Equipment
Property and equipment are recorded at cost. Lease obligations for which we assume or retain substantially all the property rights and risks of ownership are capitalized. Amortization of assets recorded under finance leases is included in “Depreciation and amortization” expense. Replacements of major units of property are capitalized and the replaced properties are retired. Replacements of minor components of property and repair and maintenance costs are charged to expense as incurred.
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets included in the table below. Upon retirement or disposition of assets, cost and accumulated depreciation are removed from the related accounts and any gain or loss is included in income.
Property and equipment consisted of the following asset classes with the following general range of estimated useful lives:
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General Range of Estimated Useful Lives in Years
|
|
January 2, 2021
|
|
December 28, 2019
|
|
|
(In thousands)
|
Land and land improvements
|
7 - 15(1)
|
|
$
|
18,808
|
|
|
$
|
21,409
|
|
Buildings
|
15 - 33
|
|
165,541
|
|
|
167,249
|
|
Machinery and equipment
|
3 - 7
|
|
113,364
|
|
|
117,682
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|
Construction in progress
|
|
|
2,222
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|
|
1,727
|
|
|
|
|
299,935
|
|
|
308,067
|
|
Accumulated depreciation
|
|
|
(121,223)
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|
|
(112,299)
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|
Property and equipment, net
|
|
|
$
|
178,712
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|
|
$
|
195,768
|
|
(1) The range of estimated useful lives for the “Land and land improvements” asset class applies only to land improvements.
Income Taxes
We account for deferred income taxes using the liability method. Accordingly, we recognize deferred tax assets and liabilities based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. All deferred tax assets and liabilities are classified as noncurrent in our consolidated balance sheet. A valuation allowance is recorded to reduce deferred tax assets when necessary. For additional information about our income taxes, see Note 5, Income Taxes.
Insurance and Self-Insurance
For fiscal 2020 and 2019, the Company was insured for its non-union and certain unionized employee health benefits. Health benefits for some unionized employees for fiscal 2020 and 2019 were paid directly to a union trust, depending upon the union-negotiated benefit arrangement.
For fiscal 2020 and 2019, the Company was self-insured, up to certain limits, for workers’ compensation losses, general liability, and automotive liability losses, all subject to varying “per occurrence” retentions or deductible limits. The Company provides for estimated costs to settle both known claims and claims incurred but not yet reported by making periodic prepayments, considering our retention and stop loss limits. Liabilities of the Company associated with these claims are estimated, in part, by considering the frequency and severity of historical claims, both specific to us, as well as industry-wide loss experience and other actuarial assumptions. We determine our insurance obligations with the assistance of actuarial firms. Since there are many estimates and assumptions involved in recording insurance liabilities, and in the case of workers’ compensation, a significant period of time elapses before the ultimate resolution of claims, differences between actual future events, and prior estimates and assumptions could result in adjustments to these liabilities. The Company has deposits on hand with certain third-party insurance administrators and insurance carriers to cover its obligation for future payment of claims. These deposits are recorded in other current and non-current assets in our consolidated balance sheets.
2. Revenue Recognition
We recognize revenue when the following criteria are met: (1) Contract with the customer has been identified; (2) Performance obligations in the contract have been identified; (3) Transaction price has been determined; (4) The transaction price has been allocated to the performance obligations; and (5) When (or as) performance obligations are satisfied.
Contracts with our customers are generally in the form of standard terms and conditions of sale. From time to time, we may enter into specific contracts with some of our larger customers, which may affect delivery terms. Performance obligations in our contracts generally consist solely of delivery of goods. For all sales channel types, consisting of warehouse, direct, and reload sales, we typically satisfy our performance obligations upon shipment. Our customer payment terms are typical for our industry, and may vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not deemed to be significant by us. For certain sales channels and/or products, our standard terms of payment may be as early as ten days.
In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis. Customer consigned inventory is maintained and stored by certain customers; however, ownership and risk of loss remains with us.
All revenues recognized are net of trade allowances (i.e., rebates), cash discounts and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Adjustments to earnings resulting from revisions to estimates on discounts and returns have been insignificant for each of the reported periods. Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration.
The following table presents our revenues disaggregated by revenue source. Prior year amounts have been reclassified to conform to the current year product mix of structural and specialty products. Sales and usage-based taxes are excluded from revenues.
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Fiscal Year Ended
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|
January 2, 2021
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|
December 28, 2019
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(In thousands)
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Structural products
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$
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1,232,203
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|
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$
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861,687
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Specialty products
|
1,865,125
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|
|
1,775,581
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Total net sales
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$
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3,097,328
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|
|
$
|
2,637,268
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|
The following table presents our revenues disaggregated by sales channel. Warehouse sales are delivered from our warehouses to our customers. Reload sales are similar to warehouse sales but are shipped from third-party warehouses where we store owned products to enhance operating efficiencies. This channel is employed primarily to service strategic customers that would be less economical to service from our warehouses, and to distribute large volumes of imported products from port
facilities. Direct sales are shipped from the manufacturer to the customer without our taking physical possession of the inventory and, as a result, typically generate lower margins than our warehouse and reload distribution channels. This distribution channel requires the lowest amount of committed capital and fixed costs. In addition, from time to time, we may also make changes to certain intercompany allocations amongst sales channels. Sales and usage-based taxes are excluded from revenues.
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Fiscal Year Ended
|
|
January 2, 2021
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|
December 28, 2019
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(In thousands)
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Warehouse and reload
|
$
|
2,617,850
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|
|
$
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2,206,260
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Direct
|
525,650
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|
|
470,786
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|
Cash discounts and rebates
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(46,172)
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|
|
(39,778)
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|
Total net sales
|
$
|
3,097,328
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|
|
$
|
2,637,268
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|
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general, and administrative expense.
We have made an accounting policy election to treat outbound shipping and handling activities as an expense.
3. Goodwill and Other Intangible Assets
In connection with the acquisition of Cedar Creek in 2018, we acquired certain intangible assets. As of January 2, 2021, our intangible assets consist of goodwill and other intangible assets including customer relationships, noncompete agreements, and trade names.
Goodwill
Goodwill is the excess of the cost of an acquired entity over the fair value of tangible and intangible assets (including customer relationships, noncompete agreements, and trade names) acquired and liabilities assumed under acquisition accounting for business combinations.
During the year ended December 29, 2018, we allocated the fair values of assets acquired and liabilities assumed in the acquisition of Cedar Creek, and recognized $47.8 million in goodwill.
Goodwill is not subject to amortization, but must be tested for impairment at least annually. This test requires us to assign goodwill to a reporting unit and to determine if the fair value of the reporting unit’s goodwill is less than its carrying amount. We evaluate goodwill for impairment as the first day of our fourth quarter, which was September 27, 2020 for fiscal 2020. We performed a quantitative analysis of our goodwill using a combined discounted cash flow and guideline public company approach. Based on management’s assessment, no impairment was indicated.
In addition, we will evaluate the carrying value of goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amounts may be impaired. Such events and indicators may include, without limitation, significant declines in the industries in which our products are used, significant changes in capital market conditions, and significant changes in our market capitalization. No such indicators were present in fiscal 2020 and fiscal 2019.
Definite-Lived Intangible Assets
At January 2, 2021, in connection with the acquisition of Cedar Creek, we had definite-lived intangible assets that related to customer relationships, noncompete agreements, and trade names.
The gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets at January 2, 2021 were as follows:
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|
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|
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Weighted Average Remaining Useful Lives
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Gross Carrying Amounts
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|
Accumulated Amortization
|
(1)
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Net Carrying Amounts
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|
|
|
|
(In thousands)
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Customer relationships
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9
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|
$
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25,500
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|
|
$
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(9,926)
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|
|
$
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15,574
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|
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Noncompete agreements
|
1
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|
8,254
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|
|
(5,595)
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|
|
2,659
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|
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Trade names
|
1
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|
6,826
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|
|
(6,170)
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|
|
656
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|
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Total
|
|
|
$
|
40,580
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|
|
$
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(21,691)
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|
|
$
|
18,889
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|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
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|
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|
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|
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|
|
|
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|
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(1) Intangible assets except customer relationships are amortized on straight line basis. Customer relationships are amortized on a double declining balance method.
The gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets at December 28, 2019 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Useful Lives
|
|
Gross Carrying Amounts
|
|
Accumulated Amortization
|
(1)
|
Net Carrying Amounts
|
|
|
|
|
(In thousands)
|
|
Customer relationships
|
10
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|
$
|
25,500
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|
|
$
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(6,770)
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|
|
$
|
18,730
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|
|
Noncompete agreements
|
2
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|
8,254
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|
|
(3,532)
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|
|
4,722
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|
|
Trade names
|
1
|
|
6,826
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|
|
(3,894)
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|
|
2,932
|
|
|
Total
|
|
|
$
|
40,580
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|
|
$
|
(14,196)
|
|
|
$
|
26,384
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|
|
|
|
|
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|
|
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|
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(1) Intangible assets except customer relationships are amortized on straight line basis. Customer relationships are amortized on a double declining balance method.
Amortization Expense
Amortization expense for the definite-lived intangible assets was $7.5 million and $8.1 million for the years ended January 2, 2021, and December 28, 2019, respectively.
Estimated annual amortization expense for definite-lived intangible assets over the next five fiscal years is as follows:
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Fiscal Year Ended
|
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Estimated Amortization
|
|
|
(In thousands)
|
2021
|
|
$
|
5,321
|
|
2022
|
|
2,763
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|
2023
|
|
1,807
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|
2024
|
|
1,505
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|
2025
|
|
1,423
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|
4. Assets Held for Sale and Net Gain on Disposition
As of January 2, 2021, two properties were designated as “held for sale,” and, as of December 28, 2019, three properties had been designated as “held for sale.” As of January 2, 2021, and December 28, 2019, the net book value of total assets “held for sale” was $1.3 million and $1.1 million, respectively, and was included in “Other current assets” in our Consolidated Balance Sheets. Properties held for sale as of January 2, 2021 consisted of two former distribution facilities located in Midfield, Alabama, and Houston, Texas. We plan to sell these properties within the next 12 months. At the time of designation, we ceased recognizing depreciation expense on these assets. We continue to actively market all properties that are designated as “held for sale.” During the year ended January 2, 2021, we removed our Grand Rapids facility from “held for sale” as we decided to restart operations at this facility.
During the year ended January 2, 2021, we sold one non-operating distribution facility previously designated as “held for sale,” as well as certain equipment. We recognized a gain of $1.3 million in the Consolidated Statements of Operations as a result of this sale.
5. Income Taxes
In fiscal 2020, our total statutory rate was 25.8 percent which was comprised of the federal statutory income tax rate of 21.0 percent and our blended state statutory rate of 4.8 percent. In fiscal 2019, our total statutory rate was 27.3 percent which was comprised of the federal statutory income tax rate of 21.0 percent and our blended state statutory rate of 6.3 percent. Our blended state rate is impacted by our federal income taxes and, as a result, may differ from year to year based on our federal taxable income. Our effective tax rate is impacted by the effects of permanent differences and discrete (one-time) items occurring throughout our fiscal year.
For fiscal 2020 and fiscal 2019, our effective tax was 14.9 percent and 18.3 percent, respectively.
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|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 2, 2021
|
|
Fiscal Year Ended December 28, 2019
|
|
(In thousands)
|
Income (loss) before provision for (benefit from) income taxes
|
$
|
95,081
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|
|
$
|
(21,608)
|
|
|
|
|
|
Federal income taxes:
|
|
|
|
Current
|
$
|
19,673
|
|
|
$
|
35
|
|
Deferred
|
(9,038)
|
|
|
(3,202)
|
|
State income taxes:
|
|
|
|
Current
|
2,946
|
|
|
(403)
|
|
Deferred
|
618
|
|
|
(382)
|
|
Provision for (benefit from) income taxes
|
$
|
14,199
|
|
|
$
|
(3,952)
|
|
|
|
|
|
Effective tax rate
|
14.9
|
%
|
|
18.3
|
%
|
Our provision for (benefit from) income taxes is reconciled to the federal statutory amount as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 2, 2021
|
|
Fiscal Year Ended December 28, 2019
|
|
(In thousands)
|
Federal income taxes (benefit) computed at the federal statutory tax rate
|
$
|
19,967
|
|
|
$
|
(4,538)
|
|
State income taxes (benefit), net of federal benefit
|
4,636
|
|
|
(1,752)
|
|
Valuation allowance change arising from state net operating losses
|
(4,101)
|
|
|
(550)
|
|
Valuation allowance change arising from interest deduction limitation
|
(4,806)
|
|
|
4,806
|
|
Uncertain tax positions
|
(1,879)
|
|
|
(1,514)
|
|
Permanent differences arising from compensation
|
500
|
|
|
67
|
|
Other
|
(118)
|
|
|
(471)
|
|
Provision for (benefit from) income taxes
|
$
|
14,199
|
|
|
$
|
(3,952)
|
|
In accordance with the intraperiod tax allocation provisions of U.S. GAAP, we are required to consider all items (including items recorded in other comprehensive income) in determining the amount of tax expense or benefit that should be allocated between continuing operations and other comprehensive income. In fiscal year 2020, there is tax expense allocated to the income from continuing operations and tax benefit allocated to the income from other comprehensive income. In fiscal year 2019, there is a tax benefit allocated to the loss from continuing operations and tax expense allocated to the income from other comprehensive income. While the income tax provision from continuing operations is reported in our Consolidated Statements of Operations and Comprehensive Income (Loss), the income tax (benefit) or expense on other comprehensive income or (loss) is recorded directly to accumulated other comprehensive loss, which is a component of stockholders’ equity (deficit).
Our financial statements contain certain deferred tax assets which primarily resulted from tax benefits associated with the loss before income taxes in prior years, as well as net deferred income tax assets resulting from other temporary differences related to certain reserves, pension obligations, and differences between book and tax depreciation and amortization. We record a valuation allowance against our net deferred tax assets when we determine that, based on the weight of available evidence, it is more likely than not that our net deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences can be carried under tax law. For fiscal 2020 and fiscal 2019, the components of our net deferred income tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
|
(In thousands)
|
Deferred income tax assets:
|
|
|
|
Inventory reserves
|
$
|
2,896
|
|
|
$
|
2,525
|
|
Compensation-related accruals
|
6,524
|
|
|
3,523
|
|
Accounts receivable
|
704
|
|
|
628
|
|
Interest expense limitation
|
—
|
|
|
4,767
|
|
Property and equipment
|
50,117
|
|
|
32,080
|
|
Operating lease liability
|
13,266
|
|
|
13,820
|
|
Pension
|
7,374
|
|
|
7,594
|
|
Benefit from NOL carryovers
|
8,010
|
|
|
25,731
|
|
Other
|
585
|
|
|
689
|
|
Total gross deferred income tax assets
|
89,476
|
|
|
91,357
|
|
Less: valuation allowances
|
(7,287)
|
|
|
(16,194)
|
|
Total net deferred income tax assets
|
$
|
82,189
|
|
|
$
|
75,163
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
Intangible assets
|
$
|
(5,688)
|
|
|
$
|
(7,107)
|
|
Operating lease asset
|
(12,848)
|
|
|
(13,820)
|
|
Other
|
(754)
|
|
|
(243)
|
|
Total deferred income tax liabilities
|
(19,290)
|
|
|
(21,170)
|
|
Deferred income tax asset, net
|
$
|
62,899
|
|
|
$
|
53,993
|
|
The change in valuation allowance noted above is exclusive of items that do not impact income from continuing operations, but are reflected in the change in deferred income tax assets and liabilities in the Consolidated Balance Sheets as disclosed in the components of net deferred income tax assets. Activity in our deferred tax asset valuation allowance for fiscal 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
|
(In thousands)
|
Balance as of beginning of the fiscal year
|
$
|
16,194
|
|
|
$
|
12,348
|
|
Valuation allowance provided for taxes related to:
|
|
|
|
State net operating loss carryforwards
|
(4,101)
|
|
|
(960)
|
|
Disallowed interest limitation under the Tax Act and CARES
|
(4,806)
|
|
|
4,806
|
|
Balance as of end of the fiscal year
|
$
|
7,287
|
|
|
$
|
16,194
|
|
We have recorded income tax and related interest liabilities where we believe certain of our tax positions are not more likely than not to be sustained if challenged. These balances are included in other noncurrent liabilities in our Consolidated Balance Sheets.
The following table summarizes the activity related to our gross unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
|
($ in thousands)
|
Balance at beginning of the fiscal year
|
$
|
4,245
|
|
|
$
|
5,843
|
|
Reductions due to lapse of applicable statute of limitations
|
(1,983)
|
|
|
(1,598)
|
|
Balance at end of the fiscal year
|
$
|
2,262
|
|
|
$
|
4,245
|
|
Included in the unrecognized tax benefits as of January 2, 2021 and December 28, 2019, were $2.1 million and $4.0 million, respectively of tax benefits that, if recognized, would reduce our annual effective tax rate for fiscal 2020 and 2019. No penalties were accrued for either 2020 or 2019. We believe that it is reasonably possible that approximately $0.7 million of our remaining unrecognized tax benefit may be recognized by the end of fiscal 2021 as a result of a lapse of statute of limitations related to our uncertain tax positions.
Impacts of the Tax Act and CARES
In December of 2017, the U.S. enacted comprehensive tax legislation under the Tax Cuts and Jobs Act, (“The Tax Act”), which made broad and complex changes to the tax code. During fiscal 2019, we recorded a valuation allowance of $4.8 million primarily related to interest disallowed for deduction related to changes included in the Tax Act. In March of 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security (“CARES” Act). CARES included a provision which raised the level of deductibility for previously disallowed interest which had been enacted under the Tax Act. During fiscal 2020, because of the provision included in CARES, we benefited from the release of the $4.8 million in valuation allowance which we had recorded in during fiscal 2019 under the provisions of the Tax Act.
Net Operating Losses
At the end of fiscal 2019, our federal net operating losses were $80.6 million. Based on our taxable income for fiscal 2020, we have fully utilized all our previously remaining federal net operating losses and have none remaining.
At the end of fiscal 2020, our gross state net operating loss carryovers are $162.6 million and our net state NOL carryovers are $8.0 million, of which $7.3 million is subject to a valuation allowance and could be limited under Internal Revenue Code (“IRC”) Section 382. Our state net operating loss carryovers will expire in 1 to 20 years. For fiscal 2020, we reversed $4.1 million in valuation allowance against our state net operating losses. Based on our taxable income for 2020 in the states where we have net operating loss carryforwards, we believe we will be able to utilize the state net operating losses that were previously reserved by this valuation allowance. We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2017 through 2020 tax years generally remain subject to examination by federal and most state and foreign tax authorities.
Although we believe our estimates are reasonable in the carrying value of our valuation allowances against our deferred tax items, the ultimate determination of the appropriate amounts of valuation allowance involves significant judgement.
Assessing our Deferred Tax Assets
Quarterly, we assess the carrying value of our deferred tax assets for impairment by evaluating the weight of available evidence at the end of each fiscal quarter. In our evaluation of the weight of available evidence at the end of fiscal 2020, we considered the recent reported income in the current year, as well as the reported losses for 2019 and 2018, which resulted in a three-year cumulative income situation as positive evidence which carried substantial weight. While this was substantial, it was not the only evidence we evaluated. We also considered evidence related to the four sources of taxable income, to determine whether such positive evidence outweighed the negative evidence. The evidence considered included:
•future reversals of existing taxable temporary differences;
•future taxable income exclusive of reversing temporary differences and carryforwards;
•taxable income in prior carryback years, if carryback is permitted under the tax law; and
•tax planning strategies.
In addition to the positive evidence discussed above, we considered as positive evidence forecasted future taxable income, the detail scheduling of timing of the reversal of our deferred tax assets and liabilities, and the evidence from business and tax planning strategies. At the end of fiscal 2020 and 2019, in our evaluation of the weight of available evidence, we concluded that our deferred tax assets were not impaired.
6. Long-Term Debt
As of January 2, 2021, and December 28, 2019, long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
(In thousands)
|
Revolving Credit Facility (1)
|
$
|
288,247
|
|
|
$
|
326,496
|
|
Term Loan Facility (2)
|
43,204
|
|
|
146,674
|
|
Finance lease obligations (3)
|
273,118
|
|
|
198,011
|
|
|
604,569
|
|
|
671,181
|
|
Unamortized debt issuance costs
|
(9,010)
|
|
|
(12,555)
|
|
|
595,559
|
|
|
658,626
|
|
Less: current maturities of long-term debt
|
6,846
|
|
|
8,662
|
|
Long-term debt, net of current maturities
|
$
|
588,713
|
|
|
$
|
649,964
|
|
(1) The average effective interest rate was 3.3 percent and 4.8 percent for the years ended January 2, 2021 and December 28, 2019, respectively.
(2) The average interest rate, exclusive of fees and prepayment penalties, was 8.2 percent and 9.3 percent for the years ended January 2, 2021 and December 28, 2019, respectively.
(3) Refer to Note 12, Lease Commitments, for interest rates associated with finance lease obligations.
Revolving Credit Facility
In April 2018, we entered into an Amended and Restated Credit Agreement, with certain of our subsidiaries as borrowers (together with us, the “Borrowers”) or guarantors thereunder, Wells Fargo Bank, National Association, in its capacity as administrative agent (“Wells Fargo”), and certain other financial institutions party thereto. The Amended and Restated Credit Agreement was further amended in January 2020 to provide that (i) the “Seasonal Period” run from November 15, 2019, through July 15, 2020, for the calendar year 2019, and from December 15 of each calendar year through April 15 of each immediately succeeding calendar year for the calendar year 2020 and thereafter, and (ii) the measurement period in the definition of “Cash Dominion Event” will be five consecutive business days instead of three consecutive business days (as amended, the “Revolving Credit Agreement”). The Revolving Credit Agreement provides for a senior secured asset-based revolving loan and letter of credit facility (the “Revolving Credit Facility”) of up to $600 million and an uncommitted accordion feature that permits the Borrowers, with consent of the lenders, to increase the facility by an aggregate additional principal amount of up to $150 million, which will allow borrowings of up to $750 million under the Revolving Credit Facility. Letters of credit in an aggregate amount of up to $30 million are also available under the Revolving Credit Agreement, which would reduce the amount of the revolving loans available under the Revolving Credit Facility. The maturity date of the Revolving Credit Agreement is October 10, 2022. The Borrowers’ obligations under the Revolving Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets (other than real property), including inventories, accounts receivable, and proceeds from those items.
Borrowings under the Revolving Credit Agreement are subject to availability under the Borrowing Base (as that term is defined in the Revolving Credit Agreement). The Borrowers are required to repay revolving loans thereunder to the extent that such revolving loans exceed the Borrowing Base then in effect. The Revolving Credit Facility may be prepaid in whole or in part from time to time without penalty or premium, but including all breakage costs incurred by any lender thereunder.
The Revolving Credit Agreement provides for interest on the loans at a rate per annum equal to (i) the London Inter-bank Offered Rate (“LIBOR”) plus a margin ranging from 1.75 percent to 2.25 percent, with the amount of such margin determined based upon the average of the Borrowers’ excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on LIBOR, or (ii) the administrative agent’s base rate plus a margin ranging from 0.75 percent to 1.25 percent, with the amount of such margin determined based upon the average of the Borrowers’ excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on the base rate.
In the event excess availability falls below the greater of (i) $50 million and (ii) 10 percent of the lesser of (a) the Borrowing Base and (b) the maximum permitted credit at such time, the Revolving Credit Agreement requires maintenance of a fixed charge coverage ratio of 1.0 to 1.0 until such time as the Borrowers’ excess availability has been at least the greater of (i)
$50 million and (ii) 10 percent of the lesser of (a) the Borrowing Base and (b) the maximum permitted credit at such time for a period of 30 consecutive days.
The Revolving Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type as well as customary events of default.
As of January 2, 2021, we had outstanding borrowings of $288.2 million and excess availability of $184.3 million under our Revolving Credit Facility. As of December 28, 2019, we had outstanding borrowings of $326.5 million and excess availability of $80.0 million under our Revolving Credit Facility. Our average effective interest rate under the facility was approximately 3.3 percent and 4.8 percent for the years ended January 2, 2021 and December 28, 2019, respectively.
We were in compliance with all covenants under the Revolving Credit Agreement as of January 2, 2021.
Term Loan Facility
In April 2018, in connection with the acquisition of Cedar Creek, we entered into a Credit and Guaranty Agreement by and among the Company, as borrower, certain of our subsidiaries, as guarantors, HPS Investment Partners, LLC, as administrative agent and collateral agent (“HPS”) and certain other financial institutions as parties thereto. In October 2019, the Credit and Guaranty Agreement was amended to, among other things, permit real estate sale leaseback transactions. The Credit and Guaranty Agreement was further amended in fiscal January 2020, and February 2020 (as amended, the “Term Loan Agreement”). The Term Loan Agreement provides for a senior secured term loan facility in an aggregate principal amount of $180 million (the “Term Loan Facility”). The maturity date of the Term Loan Agreement is October 13, 2023. The proceeds from the Term Loan Facility were used to fund a portion of the cash consideration payable in connection with the acquisition of Cedar Creek and to fund transaction costs in connection with the acquisition and the Term Loan Facility.
The January 2020 amendment extended the period for satisfying the designated outstanding principal balance level required to maintain the modified “Total Net Leverage Ratio” covenant levels for the 2019 fourth and subsequent quarters under the Term Loan Facility. The principal balance level was satisfied on January 31, 2020, through repayments from the real estate financing transactions described in Note 12, Lease Commitments. On February 28, 2020, we further amended our Term Loan Facility to provide that we will not be subject to the facility’s quarterly “Total Net Leverage Ratio” covenant from and after the time, and then for so long as, the principal balance level under the facility is less than $45 million. The Term Loan Facility balance fell below $45 million during October 2020 and remained below that amount for the remainder of fiscal 2020; we were no longer subject to the quarterly “Total Net Leverage Ratio” covenant starting for the fourth quarter of 2020.
In connection with the Term Loan Agreement, the Company and certain of our subsidiaries also entered into a Pledge and Security Agreement with HPS (the “Term Loan Security Agreement”). Pursuant to the Term Loan Security Agreement and other “Collateral Documents” (as such term is defined in the Term Loan Agreement), the obligations under the Term Loan Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets, including inventories, accounts receivable, real property, and proceeds from those items.
The Term Loan Agreement requires monthly interest payments, and quarterly principal payments of $311,190, in arrears. The Term Loan Agreement also requires certain mandatory prepayments of outstanding loans, subject to certain exceptions, including prepayments commencing with the fiscal year ending December 28, 2019, based on a percentage of excess cash flow (as defined in the Term Loan Agreement for such fiscal year). The remaining balance is due on the loan maturity date of October 13, 2023.
The Term Loan Facility may be prepaid in whole or in part from time to time after the first anniversary thereof, subject to payment of the “Prepayment Premium” (as such term is defined in the Term Loan Agreement) if such voluntary prepayment does not otherwise constitute an exception to the Prepayment Premium under the Term Loan Agreement and is made prior to the fourth anniversary of the closing date of the Term Loan Agreement, and all breakage costs incurred by any lender thereunder.
Borrowings under the Term Loan Agreement may be made as Base Rate Loans or Eurodollar Rate Loans. The Base Rate Loans bear interest at the rate per annual equal to: (i) the greatest of the (a) U.S. prime lending rate published in The Wall Street Journal, (b) the Federal Funds Effective Rate plus 0.50 percent, and (c) the sum of the Adjusted Eurodollar Rate of one month plus 1.00 percent, provided that the Base Rate shall at no time be less than 2.00 percent per annum; and (ii) plus the Applicable Margin, as described below. Eurodollar Rate Loans bear interest at the rate per annum equal to: (i) the ICE Benchmark Administration LIBOR Rate, provided that the Adjusted Eurodollar Rate shall at no time be less than 1.00 percent per annum;
plus (ii) the Applicable Margin. The Applicable Margin is 6.00 percent with respect to Base Rate Loans and 7.00 percent with respect to Eurodollar Rate Loans.
The Term Loan Agreement also contains representations, warranties, and affirmative and negative covenants customary for financing transactions of this type, and customary events of default.
We had outstanding borrowings of $43.2 million and $146.7 million under our Term Loan Facility as of January 2, 2021 and December 28, 2019, respectively. Our average interest under the facility, exclusive of fees and prepayment premiums, was approximately 8.2 percent and 9.3 percent for the years ended January 2, 2021 and December 28, 2019, respectively.
We were in compliance with all covenants under the Term Loan Facility as of January 2, 2021.
Our remaining scheduled principal payments of the Term Loan through 2023 as of January 2, 2021, is as follows:
|
|
|
|
|
|
Fiscal Year Ended
|
Remaining principal payments
|
|
($ in thousands)
|
2021
|
$
|
1,245
|
|
2022
|
1,245
|
|
2023
|
40,714
|
|
Finance Lease Obligations
Our finance lease liabilities consist of leases related to equipment and vehicles, and real estate, with the majority of those finance leases related to real estate. For more information on our finance lease obligations, refer to Note 12, Lease Commitments.
7. Fair Value Measurements
We determine a fair value measurement based on the assumptions a market participant would use in pricing an asset or liability, in accordance with ASC 820 - Fair Value Measurement. The fair value measurement guidance established a three level hierarchy making a distinction between market participant assumptions based on (i) unadjusted quoted prices for identical assets or liabilities in an active market (Level 1), (ii) quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability (Level 2), and (iii) prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (Level 3).
Fair value measurements for defined benefit pension plan
The fair value hierarchy discussed above not only is applicable to assets and liabilities that are included in our consolidated balance sheets, but also is applied to certain other assets that indirectly impact our consolidated financial statements. For example, we sponsor and contribute to a single-employer defined benefit pension plan (see Note 8, Employee Benefits). Assets contributed by us become the property of the pension plan. Even though the Company no longer has control over these assets, we are indirectly impacted by subsequent fair value adjustments to these assets. The actual return on these assets impacts our future net periodic benefit cost, as well as amounts recognized in our consolidated balance sheets. The Company uses the fair value hierarchy to measure the fair value of assets held by our pension plan. We believe the pension plan asset fair value valuation to comprise Level 2 in the fair value hierarchy. Level 2 assets held in the pension plan under U.S. GAAP consist of collective investment trust assets.
Fair value measurements for financial instruments
Carrying amounts for our financial instruments are not significantly different from their fair value.
8. Employee Benefits
Single-Employer Defined Benefit Pension Plan
We sponsor a noncontributory defined benefit pension plan administered solely by us (the “pension plan”). Most of the participants in the plan are inactive, with all remaining active participants no longer accruing benefits, and the plan is closed to new entrants. Our funding policy for the pension plan is based on actuarial calculations and the applicable requirements of federal law. Benefits under the pension plan primarily are related to years of service.
The following tables set forth the change in projected benefit obligation and the change in plan assets for the pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
|
(In thousands)
|
Change in projected benefit obligation:
|
|
|
|
Projected benefit obligation at beginning of period
|
$
|
107,026
|
|
|
$
|
107,909
|
|
Service cost
|
—
|
|
|
190
|
|
Interest cost
|
2,892
|
|
|
3,730
|
|
Actuarial loss
|
9,813
|
|
|
11,156
|
|
Curtailment gain
|
—
|
|
|
(349)
|
|
Benefits paid
|
(5,904)
|
|
|
(15,610)
|
|
Projected benefit obligation at end of period
|
$
|
113,827
|
|
|
$
|
107,026
|
|
Change in plan assets:
|
|
|
|
Fair value of assets at beginning of period
|
$
|
83,606
|
|
|
$
|
81,241
|
|
Actual return on plan assets
|
11,948
|
|
|
15,464
|
|
Employer contributions
|
1,493
|
|
|
2,511
|
|
Benefits paid
|
(5,904)
|
|
|
(15,610)
|
|
Fair value of assets at end of period
|
91,143
|
|
|
83,606
|
|
Net unfunded status of plan
|
$
|
(22,684)
|
|
|
$
|
(23,420)
|
|
The accumulated benefit obligation for the pension plan was $113.8 million and $107.0 million at January 2, 2021, and December 28, 2019, respectively. We recognize the unfunded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our pension plan in our Consolidated Balance Sheets, with a corresponding adjustment to AOCI, net of tax. On January 2, 2021, we measured the fair value of our plan assets and benefit obligations. As of January 2, 2021, and December 28, 2019, the net unfunded status of our benefit plan was $22.7 million and $23.4 million, respectively.
Starting in 2018, we have elected to utilize a full yield curve approach in the estimation service and interest cost components for pension (income)/expense recognized during the fiscal year by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant projected cash flows. We have made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change does not affect the measurement of our total benefit obligations.
Actuarial gains and losses occur when actual experience differs from the estimates used to determine the components of net periodic pension cost, and when certain assumptions used to determine the fair value of the plan assets or projected benefit obligation are updated, including but not limited to, changes in the discount rate, plan amendments, differences between actual and expected returns on plan assets, mortality assumptions, and plan re-measurement.
We amortize a portion of unrecognized actuarial gains and losses for the pension plan into our Consolidated Statements of Operations and Comprehensive Income (Loss). The amount recognized in the current year’s operations is based on amortizing the unrecognized gains or losses for the pension plan that exceed the larger of 10% of the projected benefit obligation or the fair value of plan assets, also known as the corridor. In the current fiscal year, the amount representing the unrecognized gain or loss that exceeds the corridor is amortized over the estimated average remaining life expectancy of participants, as almost all the participants in the plan are inactive.
The net adjustment to other comprehensive income (loss) for fiscal 2020 and fiscal 2019, was a $1.4 million loss and a $2.6 million gain, respectively. The adjustments are primarily due to the actuarial loss in fiscal 2020 and the amortization of the unrecognized pension gain in 2019.
The decrease in the unfunded obligation for the fiscal year was approximately $0.7 million and was primarily comprised of $9.8 million of actuarial losses, $11.9 million of investment gains, $1.5 million of pension contributions (comprised of cash contributions and lease payments for the properties contributed to the pension plan in 2013), and a charge of $2.9 million due to current year interest cost. The net periodic pension credit was $0.9 million in fiscal 2020 compared to $0.1 million in fiscal 2019, driven primarily by a reduction in the interest cost on the projected benefit obligation. The most significant change in the obligation was due to the decline in benefits paid from 2019 to 2020 resulting from the lump sum payout made to qualifying participants during 2019.
The unfunded status recorded as Pension Benefit Obligation on our Consolidated Balance Sheets for the pension plan is set forth in the following table, along with the unrecognized actuarial loss, which is presented as part of Accumulated Other Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
|
(In thousands)
|
Unfunded Status
|
$
|
(22,684)
|
|
|
$
|
(23,420)
|
|
Unrecognized actuarial loss
|
32,921
|
|
|
31,221
|
|
Net amount recognized
|
$
|
10,237
|
|
|
$
|
7,801
|
|
Amounts recognized on the balance sheet consist of:
|
|
|
|
Accrued pension liability
|
$
|
(22,684)
|
|
|
$
|
(23,420)
|
|
Accumulated other comprehensive loss (pre-tax)
|
32,921
|
|
|
31,221
|
|
Net amount recognized
|
$
|
10,237
|
|
|
$
|
7,801
|
|
The net periodic pension credit for the pension plan included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 2, 2021
|
|
Fiscal Year Ended December 28, 2019
|
|
(In thousands)
|
Service cost
|
$
|
—
|
|
|
$
|
190
|
|
Interest cost on projected benefit obligation
|
2,892
|
|
|
3,730
|
|
Expected return on plan assets
|
(4,840)
|
|
|
(5,162)
|
|
Amortization of unrecognized loss
|
1,052
|
|
|
1,158
|
|
Net periodic pension credit for the pension plan
|
$
|
(896)
|
|
|
$
|
(84)
|
|
The following assumptions were used to determine the projected benefit obligation at the measurement date and the net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
Projected benefit obligation:
|
|
|
|
Discount rate
|
2.51
|
%
|
|
3.21
|
%
|
Average rate of increase in future compensation levels
|
N/A
|
|
N/A
|
Net periodic pension:
|
|
|
|
Discount rate
|
2.79
|
%
|
|
3.20
|
%
|
Average rate of increase in future compensation levels
|
N/A
|
|
Graded 5.5-2.5%
|
Expected long-term rate of return on plan assets
|
6.00
|
%
|
|
6.00
|
%
|
Our estimates of the amount and timing of our future funding obligations for our defined benefit pension plan are based upon various assumptions specified above. These assumptions include, but are not limited to, the discount rate, projected return on plan assets, and mortality rates. The rate of increase in future compensation levels has a minimal effect on both the projected benefit obligation and net periodic pension cost, as almost all the participants in the plan are inactive, the majority of the remaining active participants are no longer accruing benefits, and the plan is closed to new entrants.
Projected return on plan assets. Pension plan assets are managed under a balanced portfolio allocation policy comprised of two major components: a return-seeking portion and a liability-matching portion. The expected role of return-seeking investments is to achieve a reasonable long-term growth of pension assets with a prudent level of risk, while the role of liability-matching investments is to provide a partial hedge against liability performance associated with changes in interest rates. The objective within return-seeking investments is to achieve asset diversity in order to balance return and volatility. We employ a designated fiduciary to manage the day to day investment responsibilities for pension plan assets and relationships with certain agents, advisors, and other fiduciaries.
The discount rate. We utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve of high-quality corporate bonds used in determination of the benefit obligation to the relevant
projected cash flows. We have made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates.
Mortality rates. The valuations and assumptions reflect adoption of the Society of Actuaries updated RP-2014 mortality tables, with a “blue collar employee” adjustment for non-annuitants and a BlueLinx custom adjustment projected from 2015 for annuitants. Additionally, we use the most current generational projection scales, which were MP-2020 as of January 2, 2021, and MP-2019 as of December 28, 2019.
Plan Assets and Long-Term Rate of Return
Fiscal 2020
We base the asset return assumption on current and expected asset allocations, as well as historical and expected returns on the plan asset categories. The allocation of the plan’s assets impacts our expected return on plan assets. The expected return on plan assets is based on a targeted allocation consisting of return-seeking securities (including public equity, real assets, and diversified credit investment strategies), liability-matching securities (fixed income), and cash and cash equivalents. Our net benefit cost increases as the expected return on plan assets decreases. We believe that our actual long-term asset allocations on average will approximate our targeted allocation. Our targeted allocation is driven by our investment strategy to earn a reasonable rate of return while maintaining risk at acceptable levels through the diversification of investments across and within various asset categories. For fiscal 2020, we used a 6.00% expected rate of return on plan assets.
The investment policy for the pension plan, in general, is to achieve a reasonable long-term rate of return on plan assets with an acceptable level of risk in order to maintain adequate funding levels. The pension plan’s Investment Committee establishes risk mitigation policies and regularly monitors investment performance and investment allocation policies, with a third-party investment advisor executing on these strategies. We employ a designated fiduciary to manage the day to day investment responsibilities for pension plan assets and relationships with certain agents, advisors, and other fiduciaries.
The current targets, adjusted to exclude non-GAAP BlueLinx real-estate holdings, and actual investment allocation, by asset category as of January 2, 2021, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Current Target Allocation
|
|
Actual Allocation, January 2, 2021
|
Return-seeking securities
|
|
70
|
%
|
|
71
|
%
|
Liability-matching securities
|
|
28
|
%
|
|
26
|
%
|
Cash and cash equivalents
|
|
2
|
%
|
|
3
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
The following table sets forth by level, within the fair value hierarchy (as defined in Note 7, Fair Value Measurements), pension plan assets at their fair values as of January 2, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Quoted prices in active markets of identical assets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant other unobservable inputs
(Level 3)
|
|
Total
|
|
|
(In thousands)
|
Return-seeking securities
|
|
|
|
|
|
|
|
|
Collective investment trust(1)
|
|
$
|
—
|
|
|
$
|
64,870
|
|
|
$
|
—
|
|
|
$
|
64,870
|
|
Liabilities-matching securities:
|
|
|
|
|
|
|
|
|
Collective investment trust(2)
|
|
—
|
|
|
23,905
|
|
|
—
|
|
|
23,905
|
|
Cash and cash equivalents
|
|
2,371
|
|
|
—
|
|
|
—
|
|
|
2,371
|
|
Total
|
|
$
|
2,371
|
|
|
$
|
88,775
|
|
|
$
|
—
|
|
|
$
|
91,146
|
|
(1) This category is comprised of a collective investment trust of equity funds that track the MCSI World Index, and a collective investment trust that holds publicly traded listed infrastructure securities.
(2) This category consists of a collective investment trust investing in Treasury STRIPS.
The fair value of the Level 1 assets was based on quoted prices in active markets for the identical assets. The fair value of the Level 2 assets was determined by management based on an assessment of valuations provided by asset management entities and was calculated by aggregating market prices for all underlying securities.
Investment objectives for our pension plan assets are:
•Matching Plan liability performance
•Diversifying risk
•Achieving a target investment return
We believe that there are no significant concentrations of risk within our plan assets as of January 2, 2021. We comply with the rules and regulations promulgated under the Employee Retirement Income Security Act of 1974 (“ERISA”) and we prohibit investments and investment strategies not allowed by ERISA.
Fiscal 2019
The following table sets forth by level, within the fair value hierarchy, pension plan assets at their fair values as of December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Quoted prices in active markets of identical assets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant other unobservable inputs
(Level 3)
|
|
Total
|
|
|
(In thousands)
|
Return-seeking securities
|
|
|
|
|
|
|
|
|
Collective investment trust(1)
|
|
$
|
—
|
|
|
$
|
57,966
|
|
|
$
|
—
|
|
|
$
|
57,966
|
|
Liabilities-matching securities:
|
|
|
|
|
|
|
|
|
Collective investment trust(2)
|
|
—
|
|
|
24,801
|
|
|
—
|
|
|
24,801
|
|
Cash and cash equivalents
|
|
888
|
|
|
—
|
|
|
—
|
|
|
888
|
|
Total:
|
|
$
|
888
|
|
|
$
|
82,767
|
|
|
$
|
—
|
|
|
$
|
83,655
|
|
(1) This category is comprised of a collective investment trust of equity funds that track the MCSI World Index, and a collective investment trust that holds publicly traded listed infrastructure securities.
(2) This category consists of a collective investment trust investing in Treasury STRIPS.
Pension Plan Cash Flows
Our estimated normal future benefit payments to pension plan participants are as follows:
|
|
|
|
|
|
Fiscal Year Ended
|
(In thousands)
|
2021
|
$
|
6,798
|
|
2022
|
6,577
|
|
2023
|
6,629
|
|
2024
|
6,635
|
|
2025
|
6,644
|
|
Thereafter
|
32,135
|
|
We fund the pension plan liability in accordance with the limits imposed by ERISA, federal income tax laws, and the funding requirements of the Pension Protection Act of 2006 (“Pension Act”). We are required to make cash contributions to the pension plan totaling approximately $0.3 million for fiscal funding year 2021.
Multiemployer Pension Plans
We are involved in various multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with certain collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are generally responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the funded status of an MEPP and legal requirements such as those of the Pension Act, which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions, and the utilization of extended amortization provisions. A FIP or RP requires a particular MEPP to adopt measures to correct its underfunded status. These measures may include, but are not limited to: an increase in our contribution rate to the applicable CBA, a reallocation of the contributions already being made by participating employers for various benefits to individuals participating in the MEPP, and/or a reduction in the benefits to be paid to future and/or current retirees.
We could also be obligated to make future payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce our number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closures, assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) generally would equal our proportionate share of the plan’s unfunded vested benefits.
The following table lists our participation in our multiemployer plans which we deem significant. “Contributions” represent the amounts contributed to the plan during the fiscal years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions (In millions)
|
Pension Fund:
|
EIN/Pension Plan Number
|
Pension Act Zone Status
|
FIP/RP Status
|
Surcharge
|
|
2020
|
|
2019
|
Central States, Southeast and Southwest Areas Pension Fund
|
366044243
|
Critical and Declining
(January 1, 2020)
|
RP
|
No
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
Total
|
|
|
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
Our contributions to this plan are approximately 0.10 percent of total contributions, which is less than the required disclosure threshold of 5 percent of total plan contributions. However, this plan is deemed significant for disclosure as it is severely underfunded. Our current CBA that requires contributions to the plan expires on December 31, 2022. In May 2020, we received a demand letter for payment resulting from our partial withdrawal in 2018 from the Central States Plan and started making payments in June 2020. These payments are payable monthly for a period of 20 years. Our liability for the remainder of these payments was $8.0 million as of January 2, 2021. We may, in the future, record an additional liability if required by an event of our complete withdrawal from the plan or a mass withdrawal. Our most recent contingent withdrawal liability was estimated at approximately $60.7 million, for a complete withdrawal occurring in 2021. In the case of a complete withdrawal or a mass withdrawal, the Central States Plan could demand yearly payments of approximately $1.0 million, which do not include payments for the partial withdrawal of approximately $0.6 million annually. In a complete withdrawal, the payments would not amortize the liability fully; however, payments for a complete withdrawal are limited to a 20-year period. In the case of a mass withdrawal, the liability would not amortize fully under current government regulations, and payments would continue indefinitely.
Defined Contribution Plans
Our employees also participate in two defined contribution plans: the BlueLinx Corporation Hourly Savings Plan covering hourly employees, and the BlueLinx Corporation Salaried Savings Plan covering salaried employees. Discretionary contributions to the plans are based on employee contributions and compensation, and, in certain cases, participants in the hourly savings plan also receive employer contributions based on union negotiated match amounts. Employer contributions to the hourly savings plan for both fiscal 2019 and 2020 were $0.7 million.
Employer contributions totaling $1.8 million for the salaried savings plan for fiscal 2020 have been deferred until the first quarter of 2021. Employer contributions to the salaried savings plan for fiscal 2019 of $1.7 million were deferred and paid in the third quarter of fiscal 2020.
9. Share-Based Compensation
We have three stock-based compensation plans covering officers, directors, certain employees, and consultants: the 2004 Equity Incentive Plan (the “2004 Plan”), the 2006 Long-Term Equity Incentive Plan (the “2006 Plan”), and the 2016 Amended and Restated Long-Term Incentive Plan (the “2016 Plan”). The plans are designed to motivate and retain individuals who are responsible for the attainment of our primary long-term performance goals. The plans provide a means whereby the participants develop a further sense of proprietorship and personal involvement in our development and financial success, thereby advancing the interests of the Company and its stockholders. Although we do not have a formal policy on the matter, we issue new shares of our common stock to participants upon the exercise of options or upon the vesting of restricted stock, restricted stock units, or performance shares, out of the total amount of common shares applicable for issuance or vesting under the aforementioned plans. Shares are available for new issuance only under the 2016 Plan. The 2004 and 2006 Plans have no shares remaining for issuance. Remaining 2006 Plan shares are outstanding only for the vesting of outstanding equity awards.
The 2016 Plan permits the grant of nonqualified stock options, incentive stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance shares, performance units, cash-based awards, and other share-based awards to participants of the 2016 Plan selected by our Board of Directors or a committee of the Board that administers the 2016 Plan. We reserved 810,200 shares of our common stock for issuance under the 2016 Plan. The terms and conditions of awards under the 2016 Plan are determined by the Compensation Committee. Some of the awards issued under both the 2006 and 2016 Plans are subject to accelerated vesting in the event of a change in control as such an event is defined in the respective Plan documents.
For all awards designated as equity awards, we recognize compensation expense equal to the grant-date fair value for all share-based payment awards that are expected to vest, as described further below, in “Compensation Expense.” This expense is recorded on a straight-line basis over the requisite service period of the entire award, unless the awards are subject to market or performance conditions, in which case we recognize compensation expense over the requisite service period of each separate vesting tranche, to the extent the occurrence of such conditions are probable.
All compensation expense related to our share-based payment awards is recorded in “Selling, general, and administrative” expense in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Restricted Stock Units
During fiscal 2020 and in prior years, the Board of Directors was granted restricted stock units with a one-year vesting period, although a pro-rated portion may vest prior to the one-year period, with the remainder forfeited, if a Director chooses not to stand for re-election before the one-year vesting period has elapsed. All vested director grants settle at the earlier of ten years from the vesting date or retirement from the Board of Directors. These awards are time-based and are not based upon attainment of performance goals.
During fiscal 2019 and 2020, the Board of Directors granted restricted stock units to certain of our employees and executive officers. Certain of the restricted stock units granted in fiscal 2019 and 2020 vest in equal annual increments over the three years after the date of grant. Of the remaining restricted stock units granted in fiscal 2019 certain of the awards vest on the third anniversary of the date of grant if certain performance conditions are met prior to the vesting date, and the remaining restricted stock units granted in fiscal 2019 vest at the end of the Company’s second fiscal quarter in 2022 if certain performance conditions are met as of the vesting date.
As of January 2, 2021, there was approximately $6.2 million of total unrecognized compensation expense related to restricted stock units. The unrecognized compensation expense is expected to be recognized over a weighted average term of 1.9 years. As of January 2, 2021, the weighted average remaining contractual term for our restricted stock units was 1.9 years, and the maximum contractual term was 3.0 years.
The following table summarizes activity for our restricted stock units during fiscal 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Number of
Awards
|
|
Weighted
Average Fair
Value
|
Outstanding as of December 28, 2019
|
492,167
|
|
|
$
|
24.45
|
|
Granted
|
415,133
|
|
|
8.52
|
|
Vested(1)
|
(125,723)
|
|
|
8.15
|
|
Forfeited
|
(56,094)
|
|
|
21.04
|
|
Outstanding as of January 2, 2021
|
725,483
|
|
|
$
|
15.61
|
|
(1)The total fair value of restricted stock units vested in fiscal 2020 and 2019 was $1.0 million and $1.9 million, respectively.
For fiscal 2019, the weighted average grant date fair value of restricted stock units granted was $19.96.
Compensation Expense
Total share-based compensation expense from our share-based awards was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
|
(In thousands)
|
Restricted Stock Units
|
$
|
5,992
|
|
|
$
|
2,592
|
|
|
|
|
|
Total
|
$
|
5,992
|
|
|
$
|
2,592
|
|
We do not estimate forfeitures, but adjust for them as they occur.
We recognized related income tax benefits in fiscal years 2020 and 2019 of $1.5 million and $0.7 million, respectively, which were fully realized in fiscal 2020 and 2019. We include the benefits of tax deductions in excess of recognized compensation expense as a net operating cash outflow in our Consolidated Statements of Cash Flows when present. There were no excess tax benefits in fiscal 2020 or fiscal 2019.
10. Income (loss) per Common Share
We calculate basic income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding, excluding unvested restricted stock units. We calculate diluted income (loss) per share using the treasury stock method, by dividing net income (loss) by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including restricted stock units. The following table shows the computation of basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
January 2, 2021
|
|
December 28, 2019 (1)
|
|
($ in thousands, except per share data)
|
Net income (loss)
|
$
|
80,882
|
|
|
$
|
(17,656)
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
9,422
|
|
|
9,355
|
|
Dilutive effect of share-based awards
|
41
|
|
|
—
|
|
Weighted average shares outstanding - diluted
|
9,463
|
|
|
9,355
|
|
|
|
|
|
Basic income (loss) per share
|
$
|
8.58
|
|
|
$
|
(1.89)
|
|
Diluted income (loss) per share
|
$
|
8.55
|
|
|
$
|
(1.89)
|
|
(1) Basic and diluted loss per share are equivalent for fiscal 2019 due to a net loss for the period, and all outstanding share-based awards would be anti-dilutive.
For fiscal years 2020 and 2019, we excluded 725,483 and 490,194 unvested share-based awards, respectively, from the diluted income per share calculation because they were either anti-dilutive or “out of the money.” Outstanding share based awards not included in diluted loss per share consisted of restricted stock units.
11. Related Party Transactions
D. Wayne Trousdale, the Company’s former Vice Chairman, Operating Companies, who served until April 2019, and which we now have an active consulting agreement with, owns approximately 33.33% of a limited liability company that owns and leases six facilities to us. During fiscal 2019 and 2020, approximately $2.1 million and $1.9 million, respectively, in aggregate rent and related amounts was paid to the limited liability company for these properties. Mr. Trousdale’s interest in these amounts for fiscal 2019 and 2020 was approximately $0.7 million and $0.6 million, respectively.
12. Lease Commitments
We have operating and finance leases for certain of our distribution facilities, office space, land, mobile fleet, and equipment. Many of our leases are non-cancelable and typically have a defined initial lease term, and some provide options to renew at our election for specified periods of time. The majority of our leases have remaining lease terms of 1 year to 15 years, some of which include one or more options to extend the leases for 5 years. Our leases generally provide for fixed annual rentals. Certain of our leases include provisions for escalating rent based on, among other things, contractually defined increases and/or changes in the Consumer Price Index (“CPI”). The known changes to lease payments are included in the lease liability at lease commencement. Unknown changes related to CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. In addition, a subset of our vehicle lease cost is considered variable. Some of our leases require us to pay taxes, insurance, and maintenance expenses associated with the leased assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We determine if an arrangement is a lease at inception and assess lease classification as either operating or finance at lease inception or modification. Operating lease right-of use (“ROU”) assets and liabilities are presented separately on the consolidated balance sheets. Finance lease ROU assets are included in property and equipment and the finance lease obligations are presented separately in the consolidated balance sheet. When a lease does not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. We have also made the accounting policy election to not separate lease components from non-lease components related to our mobile fleet asset class.
Finance Lease Liabilities
Our finance lease liabilities consist of leases related to equipment and vehicles, and real estate. As noted in the table below, a majority of our finance leases, formally known as capital leases, relate to real estate.
During 2017 and 2018, we entered into real estate financing transactions on warehouse facilities in Tampa, FL; Ft. Worth, TX; Bellingham, PA; Frederick, MD; Lawrenceville, GA; and Raleigh, NC. These transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms of 15 years with multiple 5-year renewal options, with one having a single 10-year renewal option. We accounted for these transactions in accordance with the FASB ASC Topic 840, which was the lease accounting standard in effect at the inception of these arrangements. We have recorded these transactions as finance lease liabilities on our balance sheet. As of January 2, 2021, and December 28, 2019, total unrecognized deferred gains related to these transactions were $82.0 million and $85.8 million, respectively.
On May 19, 2019, we completed a real estate financing transaction on a warehouse facility in University Park, IL for net proceeds of $21.8 million. On June 20, 2019, we completed a real estate financing transaction on a warehouse facility in Yulee, FL for net proceeds of $13.3 million. These two transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms of 15 years with multiple 5-year renewal options. Gross proceeds of these transactions were $45.0 million.
During the first quarter of fiscal 2020, we completed several real estate financing transactions. On December 31, 2019, we completed real estate financing transactions on warehouse facilities in Madison, TN; Kansas City, MO; Richmond, VA; and Bridgeton, MO for aggregate net proceeds of $27.2 million. On January 31, 2020, we completed real estate financing transactions on warehouse facilities in Charlotte, NC; Memphis, TN; Independence, KY; San Antonio, TX; Portland, ME; Denville, NJ; Yaphank, NY; Pensacola, FL; and Tallmadge, OH for aggregate net proceeds of $34.1 million. On February 28, 2020, we completed a real estate financing transaction on a warehouse facility in Elkhart, IN for net proceeds of $7.5 million.
These transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms from 15 years to 18 years with multiple 5-year renewal options. Gross proceeds of these transactions were $78.3 million.
We determined that the transactions in fiscal 2019 and in the first quarter of the fiscal 2020 did not qualify as sales in accordance with ASC 842. Therefore, for accounting purposes, the transactions were not accounted for as sale-leaseback transactions, and no gain or loss was recorded. We determined that these leases qualified for finance lease treatment and recorded them accordingly. The net book value of the assets related to these transactions remains on our books as property and equipment and we continue to depreciate the assets over their remaining useful lives.
On August 14, 2020, we entered into a sale-leaseback arrangement on our warehouse facility in Denver, CO. We determined that this transaction qualified as a sale in accordance with ASC 842 and the lease qualified for operating lease treatment. Gross proceeds of this transaction were $11.0 million and we recognized a related gain of $8.7 million. Upon completion of the transaction, we entered into a long-term lease on the property for an initial term of five years with multiple 5-year renewal options. Net proceeds of the transaction were $10.6 million, which were used to pay down our Term Loan Facility.
The following table presents our assets and liabilities related to our leases as of January 2, 2021 and December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
(In thousands)
|
Assets
|
Classification
|
|
|
|
Operating lease right-of-use assets
|
Operating lease right-of-use assets
|
$
|
51,142
|
|
|
$
|
54,408
|
|
Finance lease right-of-use assets (1)
|
Property and equipment, net
|
148,561
|
|
|
141,922
|
|
Total lease right-of-use assets
|
|
$
|
199,703
|
|
|
$
|
196,330
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current portion
|
|
|
|
|
Operating lease liabilities
|
Operating lease liabilities - short term
|
$
|
6,076
|
|
|
$
|
7,317
|
|
Finance lease liabilities
|
Finance lease liabilities - short term
|
5,675
|
|
|
6,486
|
|
Non-current portion
|
|
|
|
|
Operating lease liabilities
|
Operating lease liabilities - long term
|
44,965
|
|
|
47,091
|
|
Finance lease liabilities
|
Finance lease liabilities - long term
|
267,443
|
|
|
191,525
|
|
Total lease liabilities
|
|
$
|
324,159
|
|
|
$
|
252,419
|
|
(1) Finance lease right-of-use assets are presented net of accumulated amortization of $58.6 million and $30.8 million as of January 2, 2021 and December 28, 2019, respectively.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 2, 2021
|
|
Fiscal Year Ended December 28, 2019
|
|
|
(In thousands)
|
Operating lease cost:
|
$
|
12,634
|
|
|
$
|
12,115
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
$
|
14,193
|
|
|
$
|
9,990
|
|
Interest on lease liabilities
|
23,809
|
|
|
17,249
|
|
Total finance lease costs
|
$
|
38,002
|
|
|
$
|
27,239
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 2, 2021
|
|
Fiscal Year Ended December 28, 2019
|
|
|
(In thousands)
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from operating leases
|
$
|
12,256
|
|
|
$
|
11,885
|
|
Operating cash flows from finance leases
|
23,809
|
|
|
17,249
|
|
Financing cash flows from finance leases
|
$
|
8,662
|
|
|
$
|
9,992
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
|
Operating leases
|
$
|
4,442
|
|
|
$
|
775
|
|
Finance leases
|
$
|
3,833
|
|
|
$
|
15,041
|
|
Supplemental balance sheet information for right-of-use assets related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
|
(In thousands)
|
Finance leases
|
|
|
|
Property and equipment
|
$
|
207,147
|
|
|
$
|
172,720
|
|
Accumulated depreciation
|
(58,586)
|
|
|
(30,798)
|
|
Property and equipment, net
|
$
|
148,561
|
|
|
$
|
141,922
|
|
Weighted Average Remaining Lease Term (in years)
|
|
|
|
Operating leases
|
11.14
|
|
11.71
|
Finance leases
|
16.08
|
|
17.12
|
Weighted Average Discount Rate
|
|
|
|
Operating leases
|
9.28
|
%
|
|
9.34
|
%
|
Finance leases
|
9.87
|
%
|
|
10.11
|
%
|
The major categories of our finance lease liabilities as of January 2, 2021 and December 28, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2021
|
|
December 28, 2019
|
|
(In thousands)
|
Equipment and vehicles
|
$
|
29,434
|
|
|
$
|
32,471
|
|
Real estate
|
243,684
|
|
|
165,540
|
|
Total finance leases
|
$
|
273,118
|
|
|
$
|
198,011
|
|
As of January 2, 2021, maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Finance leases
|
|
(In thousands)
|
2021
|
$
|
11,215
|
|
|
$
|
30,159
|
|
2022
|
9,161
|
|
|
29,453
|
|
2023
|
8,400
|
|
|
29,189
|
|
2024
|
7,283
|
|
|
28,649
|
|
2025
|
7,392
|
|
|
28,102
|
|
Thereafter
|
44,092
|
|
|
380,511
|
|
Total lease payments
|
$
|
87,543
|
|
|
$
|
526,063
|
|
Less: imputed interest
|
(36,502)
|
|
|
(252,945)
|
|
Total
|
$
|
51,041
|
|
|
$
|
273,118
|
|
On December 28, 2019, maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Finance leases
|
|
(In thousands)
|
2020
|
$
|
11,348
|
|
|
$
|
24,002
|
|
2021
|
10,111
|
|
|
23,052
|
|
2022
|
8,048
|
|
|
22,230
|
|
2023
|
7,330
|
|
|
21,854
|
|
2024
|
6,413
|
|
|
21,380
|
|
Thereafter
|
50,901
|
|
|
327,439
|
|
Total lease payments
|
$
|
94,151
|
|
|
$
|
439,957
|
|
Less: imputed interest
|
(39,743)
|
|
|
(241,946)
|
|
Total
|
$
|
54,408
|
|
|
$
|
198,011
|
|
13. Commitments and Contingencies
Environmental and Legal Matters
From time to time, we are involved in various proceedings incidental to our businesses, and we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Although the ultimate outcome of these proceedings cannot be determined with certainty, based on presently available information, management believes that adequate reserves have been established for probable losses with respect thereto and receivables recorded for expected receipts from settlements. Management further believes that, while the ultimate outcome of these matters could be material to operating results in any given quarter, they will not have a materially adverse effect on our long-term financial condition, our results of operations, or our cash flows.
Collective Bargaining Agreements
As of January 2, 2021, we employed approximately 2,100 employees and less than one percent of our employees are employed on a part-time basis. Approximately 22 percent of our employees were represented by various local labor unions with terms and conditions of employment governed by CBAs. Six CBAs covering approximately six percent of our employees are up for renewal in fiscal 2021.
14. Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) is a measure of income which includes both net income (loss) and other comprehensive income (loss). Our other comprehensive income (loss) results from items deferred from recognition into our Consolidated Statements of Operations and Comprehensive Income (Loss). Accumulated other comprehensive income (loss) is separately presented on our Consolidated Balance Sheets as part of common stockholders’ equity (deficit). Other comprehensive income (loss) was $(1.4) million and $2.6 million for fiscal 2020 and fiscal 2019, respectively.
The changes in accumulated balances for each component of other comprehensive income (loss) for fiscal 2019 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation, net
of tax
|
|
Impact of defined benefit pension, net of tax
|
|
Other, net of tax
|
|
Total
|
|
(In thousands)
|
December 29, 2018, ending balance, net of tax
|
$
|
660
|
|
|
$
|
(38,001)
|
|
|
$
|
212
|
|
|
$
|
(37,129)
|
|
Other comprehensive income (loss), net of tax (1)
|
6
|
|
|
2,560
|
|
|
—
|
|
|
2,566
|
|
December 28, 2019, ending balance, net of tax
|
$
|
666
|
|
|
$
|
(35,441)
|
|
|
$
|
212
|
|
|
$
|
(34,563)
|
|
Other comprehensive income (loss), net of tax (2)
|
(6)
|
|
|
(1,414)
|
|
|
(9)
|
|
|
(1,429)
|
|
January 2, 2021, ending balance, net of tax
|
$
|
660
|
|
|
$
|
(36,855)
|
|
|
$
|
203
|
|
|
$
|
(35,992)
|
|
(1) For fiscal 2019, there was $3.5 million of impact related to our defined pension for related actuarial adjustments and amortization of unrecognized amounts from the prior year, net of taxes of $0.9 million. There was a tax benefit of $0.7 million allocated to the loss from continuing operations and tax expense allocated to the income from other comprehensive income.
(2) For fiscal 2020, there was $1.7 million of impact related to our defined pension for related actuarial adjustments and amortization of unrecognized amounts from the prior year, net of taxes of $0.3 million. There was a tax expense of $0.4 million allocated to the income from continuing operations and tax benefit allocated to the loss from other comprehensive income.