NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 30, 2019
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of BlueLinx Holdings Inc. and its wholly owned subsidiaries (the “Company”). These financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted (“GAAP”) in the United States (“U.S.”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K (the “Annual Report on Form 10-K”) for the year ended
December 29, 2018
, as filed with the Securities and Exchange Commission on March 13, 2019.
Our financial condition as of, and our operating results for, the
three
-month period ended
March 30, 2019
, are not necessarily indicative of the financial condition and results that may be expected for the full year ending
December 28, 2019
, or any other interim period. Certain prior period amounts have been reclassified to conform to the current period's presentation. These reclassifications did not materially impact the Company's operating income (loss) or consolidated net income (loss).
Inventory Valuation
The Company’s inventory is comprised of finished goods. Inventories are valued at the lower of cost or net realizable value. Cost is determined based on the moving average cost method of inventory valuation. We evaluate our inventory value at the end of each quarter to ensure that inventory, when viewed by category, is carried at lower of cost and net realizable value. In valuing inventory, the Company is required to make assumptions regarding the level of reserves required to value potentially obsolete or over-valued items at the lower of cost or net realizable value.
Recently Adopted Accounting Standards
Leases.
In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” Topic 842 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 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. Lease expenses will continue to be recognized in the consolidated statement of income in a manner similar to prior 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 fiscal 2019 year, using a modified retrospective 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. We implemented internal controls and a lease accounting information system to enable the preparation of financial information required by the new standard. The adoption of Topic 842 had a material impact on our condensed consolidated balance sheets but did not have an impact on our condensed consolidated statements of operations and comprehensive loss. The most significant impact was the recognition of right-of-use assets and lease liabilities of
$57.5 million
in 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 8 “Leases” for additional disclosures regarding our lease commitments.
Comprehensive Income
. In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220).” This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income (loss) (“AOCI”) to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard was effective for interim and annual reporting periods beginning after December 15, 2018. We did not exercise the option to make this reclassification.
Accounting Standards Effective in Future Years
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. The accounting standard will be effective for reporting periods beginning after December 15, 2019, and early adoption is permitted. We have not completed our assessment of the standard but we do not expect adoption to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Fair Value Measurement.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value (“FV”) Measurement (Topic 820).” Among other modifications, the standard removes the requirements to disclose: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the FV hierarchy; (ii) the policy for timing transfers between levels; and (iii) the valuation process for Level 3 FV measurements. The standard will require public entities to disclose: (a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 FV measurements held at the end of the reporting period; and (b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 FV measurements. The additional disclosure requirements should be applied prospectively for the most recent interim or annual period presented in the fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented. The amendments in this standard are effective for fiscal years ending after December 15, 2019. Early adoption is permitted, and an entity may adopt the removed or modified disclosures and delay the adoption of new disclosures until the effective date. We have not completed our assessment of the standard but we do not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Defined Benefit Pension Plan
. In August 2018, the FASB issued ASU No. 2018-14, “Compensation-Retirement-Benefits-Defined Benefit Plans-General (Subtopic 715-20).” The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing six previously required disclosures and adding two. The amendments also clarify certain other disclosure requirements. The amendments in this standard are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We have not completed our assessment of the standard but we do not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
2. Acquisition
On April 13, 2018, we completed the acquisition of Cedar Creek Holdings, Inc. (“Cedar Creek”) for a purchase price of approximately
$361.8 million
. The acquisition was completed pursuant to the terms of an Agreement and Plan of Merger (the "Merger Agreement"), dated as of March 9, 2018, by and among BlueLinx Corporation, one of our wholly owned subsidiaries, Panther Merger Sub, Inc., a wholly-owned subsidiary of BlueLinx Corporation ("Merger Sub"), Cedar Creek, and CharlesBank Equity Fund VII, Limited Partnership (“CharlesBank”). Upon closing the transactions contemplated by the Merger Agreement, among other things, Merger Sub was merged with and into Cedar Creek, with Cedar Creek surviving the merger as one of our indirect wholly-owned subsidiaries. The merger allowed us to expand our product offerings, while maintaining our existing geographical footprint.
Cedar Creek was established in 1977 as a wholesale building materials distribution company that distributes wood products across the United States. Its products include specialty lumber, oriented strand board, siding, cedar, spruce, engineered wood products and other building products.
The acquisition was accounted for under the acquisition method of accounting. The assets acquired, liabilities assumed and the results of operations of the acquired business are included in our consolidated results since April 13, 2018.
The following unaudited consolidated pro forma information presents consolidated information as if the acquisition had occurred on January 1, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
Three Months Ended
|
|
(In thousands, except per share data)
|
|
March 30, 2019
|
|
March 31, 2018
|
|
Net sales
|
|
$
|
638,701
|
|
|
$
|
784,267
|
|
|
Net loss
|
|
(3,294
|
)
|
|
(9,109
|
)
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
Basic
|
|
$
|
(0.35
|
)
|
|
$
|
(1.00
|
)
|
|
Diluted
|
|
(0.35
|
)
|
|
(1.00
|
)
|
The pro forma amounts above have been calculated in accordance with GAAP after applying the Company's accounting policies and adjusting the three-months ended March 30, 2019 and March 31, 2018 for
$3.4 million
and
$2.2 million
, respectively, for transaction related costs, net of tax. Due to the net loss for the three-month periods ended March 30, 2019, and March 31, 2018,
0.1 million
and
0.2 million
, respectively, of incremental shares from share-based compensation arrangements were excluded from the computation of diluted weighted average shares outstanding because their effect would be anti-dilutive. The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the acquisition, are presented for illustrative purposes only, and are not necessarily indicative of results that would have been achieved had the acquisition occurred as of January 1, 2017, or of future operating performance.
The purchase price of Cedar Creek consisted of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Consideration paid to shareholders and amounts paid to creditors:
|
|
|
|
Payments to Cedar Creek shareholders
[1]
|
|
$
|
166,447
|
|
|
|
Subordinated unsecured note (due to shareholder)
[2]
|
|
|
13,743
|
|
|
|
Seller’s transaction costs paid by Company
|
|
|
7,349
|
|
|
|
Add: pay off of Cedar Creek debt
[3]
|
|
|
174,213
|
|
|
|
Total cash purchase price
|
|
$
|
361,752
|
|
|
_____________
|
|
|
|
|
|
[1]
|
Payments to Cedar Creek’s shareholders include the purchase of common stock and certain escrow adjustments.
|
|
|
|
|
|
|
[2]
|
The Cedar Creek note payable to a shareholder of $13.7 million was paid in full upon the acquisition of Cedar Creek and included $10 million in subordinated debt and $3.7 million in accrued interest.
|
|
|
|
|
|
|
[3]
|
To finance the acquisition of Cedar Creek, the Company amended and restated its Revolving Credit Facility to increase the availability thereunder to $600.0 million and also entered into a new $180.0 million senior secured Term Loan Facility (See Note 5).
|
The excess of total purchase price, which includes the aggregate cash consideration paid in excess of the fair value of the tangible and intangible assets acquired, was recorded as goodwill. The goodwill recognized is attributable to the expected operating synergies and growth potential that the Company expects to realize from the acquisition. None of the goodwill generated from the acquisition is deductible for tax purposes.
The following table summarizes the values of the assets acquired and liabilities assumed at the date of the acquisition:
|
|
|
|
|
|
|
|
(In thousands)
|
Allocation as of December 29, 2018
|
|
Cash and net working capital assets
(excluding inventory)
|
$
|
88,318
|
|
|
Inventory
|
|
159,227
|
|
|
Property and equipment
|
|
71,203
|
|
|
Other, net
|
|
(1,395
|
)
|
|
Intangible assets and goodwill:
|
|
|
|
|
Customer relationships
|
|
25,500
|
|
|
Non-compete agreements
|
|
8,254
|
|
|
Trade names
|
|
6,826
|
|
|
Favorable leasehold interests
|
|
800
|
|
|
Goodwill
|
|
47,772
|
|
|
Finance leases and other liabilities
|
|
(44,753
|
)
|
|
Cash purchase price
|
$
|
361,752
|
|
3. Goodwill and Other Intangible Assets
In connection with the acquisition of Cedar Creek, we acquired certain intangible assets. As of
March 30, 2019
, our intangible assets consist of goodwill and other intangible assets including customer relationships, noncompete agreements, trade names, and favorable leasehold interests.
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, trade names and favorable lease interests) acquired, and liabilities assumed, under acquisition accounting for business combinations.
As of
March 30, 2019
, goodwill was
$47.8 million
.
Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to a reporting unit and to determine if the implied fair value of the reporting unit’s goodwill is less than its carrying amount. We evaluate goodwill for impairment during the fourth quarter of each fiscal year. In addition, we will
evaluate the carrying values of these assets for impairment between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amounts may be impaired. Such events and indicators may include, without limitation, significant declines in the industries in which our products are used, significant changes in capital market conditions and significant changes in our market capitalization.
Definite-Lived Intangible Assets.
At
March 30, 2019
, in connection with the acquisition of Cedar Creek, we had definite-lived intangible assets that related to customer relationships, noncompete agreements, trade names and favorable leasehold interests.
At
March 30, 2019
, the gross carrying amounts, the accumulated amortization and the net carrying amounts of our definite-lived intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Gross carrying amounts
|
|
Accumulated
Amortization
|
[2]
|
Net carrying amounts
|
|
Customer relationships
|
|
$
|
25,500
|
|
|
$
|
(4,087
|
)
|
|
$
|
21,413
|
|
|
Noncompete agreements
|
|
|
8,254
|
|
|
|
(1,984
|
)
|
|
|
6,270
|
|
|
Trade names
|
|
|
6,826
|
|
|
|
(2,188
|
)
|
|
|
4,638
|
|
|
Favorable leasehold interests
[1]
|
|
|
800
|
|
|
|
(64
|
)
|
|
|
736
|
|
|
Total
|
|
$
|
41,380
|
|
|
$
|
(8,323
|
)
|
|
$
|
33,057
|
|
____________________
[1]
Amortized to rent expense
[2]
Intangible assets except customer relationships are amortized on straight line basis. Customer relationships are amortized on a double declining balance method.
Amortization Expense
The weighted average estimated useful life remaining for customer relationships, noncompete agreements, trade names and favorable leasehold interest is approximately
12 years
,
4 years
,
3 years
and
12 years
, respectively. Amortization expense for the definite-lived intangible assets was
$2.1 million
for the
three
-month period ended
March 30, 2019
. There were
no
amortization charges for the comparative periods of the prior year.
Estimated annual amortization expense for definite-lived intangible assets over the next
five
fiscal years is as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Estimated Amortization
|
|
2019
|
|
$
|
8,152
|
|
|
2020
|
|
7,527
|
|
|
2021
|
|
5,035
|
|
|
2022
|
|
3,183
|
|
|
2023
|
|
1,873
|
|
4. Revenue Recognition
We recognize revenue when control of promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Contracts with our customers are generally in the form of standard terms and conditions of sale. From time to time, we may enter into specific contracts 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. When the consigned inventory is sold by the customer, we recognize revenue, net of trade allowances.
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.
With the acquisition and integration of Cedar Creek, we changed our internal product hierarchy. The following table presents our revenues disaggregated by revenue source. Certain prior year amounts have been reclassified to conform to the current year product mix of structural and specialty products. Sales and usage-based taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(In thousands)
|
March 30, 2019
|
|
March 31, 2018
|
|
Structural products
|
$
|
197,492
|
|
|
$
|
176,481
|
|
|
Specialty products
|
437,672
|
|
|
258,589
|
|
|
Other
|
3,537
|
|
|
2,417
|
|
|
Total net sales
|
$
|
638,701
|
|
|
$
|
437,487
|
|
The following table presents our revenues disaggregated by sales channel. Sales and usage-based taxes are excluded from revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(In thousands)
|
March 30, 2019
|
|
March 31, 2018
|
|
Warehouse
|
$
|
504,274
|
|
|
$
|
333,306
|
|
|
Direct
|
123,404
|
|
|
82,942
|
|
|
Reload and service revenue
|
18,905
|
|
|
28,270
|
|
|
Customer discounts and rebates
|
(7,882
|
)
|
|
(7,031
|
)
|
|
Total net sales
|
$
|
638,701
|
|
|
$
|
437,487
|
|
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 any common carrier shipping and handling activities as a fulfillment cost, rather than as a separate obligation or separate promised service.
5. Long-Term Debt
As of
March 30, 2019
, and
December 29, 2018
, long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30,
|
|
December 29,
|
|
(In thousands)
|
|
Maturity Date
|
|
2019
|
|
2018
|
|
Revolving Credit Facility (net of discounts and debt issuance
costs of $5.7 million and $6.0 million at March 30, 2019
and December 29, 2018, respectively)
|
|
October 10, 2022
|
|
$
|
387,866
|
|
|
$
|
327,319
|
|
|
Term Loan Facility (net of discounts and debt issuance costs
of $6.6 million and $6.7 million at March 30, 2019
and December 29, 2018, respectively)
|
|
October 13, 2023
|
|
|
171,585
|
|
|
|
172,356
|
|
|
Total debt
|
|
|
|
|
559,451
|
|
|
|
499,675
|
|
|
Less: current portion of long-term debt
|
|
|
|
|
(1,736
|
)
|
|
|
(1,736
|
)
|
|
Long-term debt, net
|
|
|
|
$
|
557,715
|
|
|
$
|
497,939
|
|
Revolving Credit Facility
On April 13, 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, and certain other financial institutions party thereto (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 to increase the facility by an aggregate additional principal amount of up to
$150 million
, which would allow borrowings of up to
$750 million
under the Revolving Credit Facility. Letters of credit in an aggregate amount of up to
$30 million
are also available under the Revolving Credit Agreement, which would reduce the amount of the revolving loans available under the Revolving Credit Facility. The maturity date of the Revolving Credit Agreement is October 10, 2022. The Borrowers’ obligations under the Revolving Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets (other than real property), including inventories, accounts receivable, and proceeds from those items.
Borrowings under the Revolving Credit Agreement are subject to availability under the Borrowing Base (as that term is defined in the Revolving Credit Agreement). The Borrowers are required to repay revolving loans thereunder to the extent that such revolving loans exceed the Borrowing Base then in effect. The Revolving Credit Facility may be prepaid in whole or in part from time to time without penalty or premium, but including all breakage costs incurred by any lender thereunder.
The Revolving Credit Agreement provides for interest on the loans at a rate per annum equal to (i)
LIBOR
plus a margin ranging from
1.75 percent
to
2.25 percent
, with the amount of such margin determined based upon the average of the Borrowers’ excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on LIBOR, or (ii) the administrative
agent’s base rate
plus a margin ranging from
0.75 percent
to
1.25 percent
, with the amount of such margin determined based upon the average of the Borrowers’ excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on the base rate.
In the event excess availability falls below the greater of (i)
$50 million
and (ii)
10 percent
of the lesser of (a) the Borrowing Base and (b) the maximum permitted credit at such time, the Revolving Credit Agreement requires maintenance of a fixed charge coverage ratio of
1.0
to
1.0
until such time as the Borrowers’ excess availability has been at least the greater of (i)
$50 million
and (ii)
10 percent
of the lesser of (a) the Borrowing Base and (b) the maximum permitted credit at such time for a period of 30 consecutive days.
The Revolving Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type as well as customary events of default.
As of
March 30, 2019
, we had outstanding borrowings of
$393.5 million
, excess availability of
$113.8 million
, and a weighted average interest rate of
4.6 percent
under our Revolving Credit Facility. As of
December 29, 2018
, our principal balance was
$333.3 million
, excess availability was
$91.7 million
, and our weighted average interest rate was
4.2 percent
under our Revolving Credit Facility.
We were in compliance with all covenants under the Revolving Credit Agreement as of
March 30, 2019
.
Term Loan Facility
On April 13, 2018, in connection with the acquisition of Cedar Creek, we entered into a credit and guaranty agreement with WHOS Investment Partners, LLC, as administrative agent and collateral agent (“HPS”) and certain other financial institutions as party thereto. On February 28, 2019, the credit and guaranty agreement was amended to, among other things, permit certain real estate sale leaseback transactions and modify the total net leverage ratio beginning in the first quarter of 2019 (as amended, the “Term Loan Agreement”). The Term Loan Agreement provides for a senior secured first lien 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 obligations under the Term Loan Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets, including inventories, accounts receivable, real property, and proceeds from those items.
The Term Loan Agreement requires monthly interest payments, and quarterly principal payments of
$450,000
, in arrears. The Term Loan Agreement also requires certain mandatory prepayments of outstanding loans, subject to certain exceptions, including prepayments commencing with the fiscal year ending December 28, 2019, based on a percentage of excess cash flow (as defined in the Term Loan Agreement for such fiscal year). The remaining balance is due on the loan maturity date of October 13, 2023.
The Term Loan Facility may be prepaid in whole or in part from time to time, 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 on or prior to February 28, 2023, 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 will 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 will bear interest at the rate per annum equal to (i) the
ICE Benchmark Administration LIBOR Rate
, provided that the Adjusted
Eurodollar Rate
shall at no time be less than
1.00 percent
per annum; plus (ii) the Applicable Margin. The Applicable Margin will be
6.00 percent
with respect to Base Rate Loans and
7.00 percent
with respect to Eurodollar Rate Loans.
The Term Loan Agreement requires maintenance of a total net leverage ratio of
8.00
to
1.00
for the fiscal quarter ending
March 30, 2019
, and such required covenant level generally reduces over the term of the Term Loan Facility as set forth in the Term Loan Agreement.
As of
March 30, 2019
, we were in compliance with the total net leverage ratio.
The Term Loan Agreement also contains representations, warranties, affirmative and negative covenants customary for financing transactions of this type, and customary events of default.
As of
March 30, 2019
, we had outstanding borrowings of
$178.2 million
under our Term Loan Credit Facility and an interest rate of
9.5 percent
per annum. At
December 29, 2018
, our principal balance was
$179.1 million
with an interest rate of
9.3 percent
per annum.
We were in compliance with all covenants under the Term Loan Agreement as of
March 30, 2019
.
Our remaining principal payment schedule for each of the next
five
years and thereafter is as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
2019
|
|
$
|
900
|
|
|
2020
|
|
|
2,250
|
|
|
2021
|
|
|
1,800
|
|
|
2022
|
|
|
1,800
|
|
|
Thereafter
|
|
|
171,450
|
|
6. Net Periodic Pension Cost
The following table shows the components of our net periodic pension cost (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(In thousands)
|
March 30, 2019
|
|
March 31, 2018
|
|
Service cost
|
$
|
113
|
|
|
$
|
133
|
|
|
Interest cost on projected benefit obligation
|
1,045
|
|
|
963
|
|
|
Expected return on plan assets
|
(1,194
|
)
|
|
(1,327
|
)
|
|
Amortization of unrecognized loss
|
300
|
|
|
271
|
|
|
Net periodic pension cost (benefit)
|
$
|
264
|
|
|
$
|
40
|
|
During the first quarter of fiscal 2019, we renegotiated our collective bargaining agreement with a unionized location. This collective bargaining agreement covers a number of specific items such as wages, medical coverage, and certain other benefit programs, including pension plan participation. As a result of this renegotiation,
29
of the participants in the plan are no longer accruing future years of service under the applicable pension plan, which triggered a curtailment. As a result of the curtailment, we performed a revaluation of plan assets and liabilities. The related pension benefit obligation decreased
$0.2 million
as a result of changes in valuation assumptions. An overall increase in plan asset valuation was accompanied by an increase to accumulated other comprehensive income of
$1.5 million
, which was recorded in other comprehensive loss on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). No intraperiod income tax effect was required to be recorded as a result of the curtailment.
7. Stock Compensation
Cash-Settled Stock Appreciation Rights (“SARs”)
During fiscal 2016, we granted certain executives and employees cash-settled SARs. The cash-settled SARs vested on July 16, 2018. On the vesting date, half of the vested value of the cash-settled SARs became payable within
thirty
days of the vesting date, and the remainder payable within
one
year of the vesting date. The exercise price for the cash-settled SARs was amended so that it is based on a
20
day trading average of the Company’s common stock through the vesting date, in excess of the
$7.00
grant date valuation.
On
March 30, 2019
, the total liability was approximately
$7.2 million
, which reflected the remaining payable balance.
Stock Compensation Expense
During the three months ended
March 30, 2019
and
March 31, 2018
, we incurred stock compensation expense of
$0.7 million
and
$9.2 million
, respectively. The decrease in our stock compensation expense for the
three
-month period of fiscal 2019 is attributable to cash-settled SARs expense in the prior year.
8. Leases
Effective December 30, 2018, we adopted ASU No. 2016-02, “Leases (Topic 842)” using the modified retrospective method, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods presented. We have elected the package of practical expedients permitted under the transition guidance within the new standard. This election allowed us to carry forward our historical lease classification. The adoption of this standard resulted in the recording of operating lease right-of-use (ROU) assets and corresponding operating lease liabilities of
$57.5 million
on the condensed consolidated balance sheet as of December 30, 2018, which amortizes over the lease term.
Our operating and finance (formerly capital) lease portfolio includes leases for real estate, certain logistics equipment and vehicles. The majority of our leases have remaining lease terms of
1 year
to
15 years
, some of which include one or more options to extend the leases for
5 years
. Operating lease ROU assets and liabilities are presented separately on the condensed consolidated balance sheets. Finance lease assets are included in property and equipment and the finance lease obligations are presented separately in the condensed consolidated balance sheet.
A portion of our real estate lease cost is generally subject to annual changes in the Consumer Price Index (CPI). The changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. In addition, a subset of our vehicle lease cost is considered variable.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
March 30, 2019
|
|
|
|
|
Operating lease cost
|
$
|
3,144
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
$
|
2,896
|
|
|
|
Interest on lease liabilities
|
3,248
|
|
|
|
Total finance lease costs
|
$
|
6,144
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
March 30, 2019
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from operating leases
|
$
|
2,903
|
|
|
|
Operating cash flows from finance leases
|
3,248
|
|
|
|
Financing cash flows from finance leases
|
2,187
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
|
Operating leases
|
—
|
|
|
|
Finance leases
|
787
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
March 30, 2019
|
|
|
|
|
Finance leases
|
|
|
|
Property and equipment
|
$
|
152,355
|
|
|
|
Accumulated depreciation
|
(16,691
|
)
|
|
|
Property and equipment, net
|
$
|
135,664
|
|
|
|
Weighted Average Remaining Lease Term (in years)
|
|
|
|
Operating leases
|
12.22
|
|
|
|
Finance leases
|
21.64
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
Operating leases
|
9.42
|
%
|
|
|
Finance leases
|
10.60
|
%
|
As of
March 30, 2019
, maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Operating leases
|
|
Finance leases
|
|
2019
|
$
|
9,709
|
|
|
$
|
15,911
|
|
|
2020
|
8,550
|
|
|
20,313
|
|
|
2021
|
7,076
|
|
|
17,664
|
|
|
2022
|
6,193
|
|
|
16,678
|
|
|
2023
|
5,402
|
|
|
16,095
|
|
|
Thereafter
|
50,860
|
|
|
295,927
|
|
|
Total lease payments
|
$
|
87,790
|
|
|
$
|
382,588
|
|
|
Less: imputed interest
|
(32,173
|
)
|
|
(232,724
|
)
|
|
Total
|
$
|
55,617
|
|
|
$
|
149,864
|
|
At
December 29, 2018
, our total operating lease commitments were as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
$
|
11,980
|
|
|
2020
|
9,928
|
|
|
2021
|
8,435
|
|
|
2022
|
8,066
|
|
|
2023
|
7,539
|
|
|
Thereafter
|
60,847
|
|
|
Total
|
$
|
106,795
|
|
9. Commitments and Contingencies
Environmental and Legal Matters
From time to time, we are involved in various proceedings incidental to our businesses, and we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Although the ultimate outcome of these proceedings cannot be determined with certainty, based on presently available information management believes that adequate reserves have been established for probable losses with respect thereto. Management further believes that while the ultimate outcome of one or more of these matters could be material to operating results in any given quarter, it will not have a materially adverse effect on our long-term financial condition, our results of operations, or our cash flows.
Collective Bargaining Agreements
As of
March 30, 2019
, we had over
2,200
employees on a full-time basis. Additionally, as of
March 30, 2019
, approximately
20 percent
of our employees were represented by various local labor union Collective Bargaining Agreements (“CBAs”). As of
March 30, 2019
, approximately
5 percent
of our employees are covered by CBAs that are up for renewal in fiscal 2019 or are currently expired and under negotiation.
10. Accumulated Other Comprehensive Loss
Comprehensive income (loss) is a measure of income (loss) which includes both net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) results from items deferred from recognition into our Condensed Consolidated Statements of Operations and Comprehensive Loss. Accumulated other comprehensive loss is separately presented on our Condensed Consolidated Balance Sheets as part of stockholders’ deficit.
The changes in balances for each component of accumulated other comprehensive loss for the
three
months ended
March 30, 2019
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Foreign currency, net
of tax
|
|
Defined
benefit pension
plan, net of tax
|
|
Other,
net of tax
|
|
Total Accumulated Other Comprehensive Loss
|
|
December 29, 2018, beginning balance
|
$
|
660
|
|
|
$
|
(38,001
|
)
|
|
$
|
212
|
|
|
$
|
(37,129
|
)
|
|
Other comprehensive income, net of tax
[1]
|
7
|
|
|
1,077
|
|
|
15
|
|
|
1,099
|
|
|
March 30, 2019, ending balance, net of tax
|
$
|
667
|
|
|
$
|
(36,924
|
)
|
|
$
|
227
|
|
|
$
|
(36,030
|
)
|
____
____________________________
[1]
For the
three
months ended
March 30, 2019
, the actuarial loss recognized in the Condensed Consolidated Statements of Operations and Comprehensive Loss as a component of net periodic pension cost was
$1.1 million
, net of tax of
$0.4 million
. Please see Note 6, Net Periodic Pension Cost, for further information.
11. Earnings (Loss) per Share
We calculate basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. We calculate diluted earnings per share by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including restricted stock units, performance shares, and performance units. Due to the financial results for the
three
-month periods ended
March 30, 2019
and
March 31, 2018
,
0.1 million
and
0.2 million
, respectively, of incremental shares from share-based compensation arrangements were excluded from the computation of diluted weighted average shares outstanding, because their effect would be anti-dilutive.
The reconciliation of basic loss and diluted loss per common share for the
three
-month periods of fiscal
2019
and
2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands, except per share data)
|
March 30, 2019
|
|
March 31, 2018
|
|
Net loss
|
$
|
(6,719
|
)
|
|
$
|
(13,427
|
)
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
9,337
|
|
|
9,137
|
|
|
Dilutive effect of share-based awards
|
—
|
|
|
—
|
|
|
Weighted-average shares outstanding - diluted
|
9,337
|
|
|
9,137
|
|
|
|
|
|
|
|
Basic loss per share
|
$
|
(0.72
|
)
|
|
$
|
(1.47
|
)
|
|
Diluted loss per share
|
$
|
(0.72
|
)
|
|
$
|
(1.47
|
)
|