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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 24, 2022
OR
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 001-35588
Franchise Group, Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 27-3561876 |
(State of incorporation) | | (IRS employer identification no.) |
109 Innovation Court, Suite J
Delaware, Ohio 43015
(Address of principal executive offices)
(740) 363-2222
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock, par value $0.01 per share | FRG | NASDAQ Global Market |
7.50% Series A Cumulative Preferred Stock, par value $0.01 per share and liquidation preference of $25.00 per share | FRGAP | NASDAQ Global Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant's common stock, par value $0.01 value per share, as of October 31, 2022 was 38,205,831 shares.
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Form 10-Q for the Quarterly Period Ended September 24, 2022
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS (UNAUDITED)
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In thousands, except share count and per share data) | | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Revenues: | | | | | | | | |
Product | | $ | 922,887 | | | $ | 782,608 | | | $ | 2,854,060 | | | $ | 2,172,193 | |
Service and other | | 121,738 | | | 37,891 | | | 405,666 | | | 114,659 | |
Rental | | 6,851 | | | 8,327 | | | 22,217 | | | 26,077 | |
Total revenues | | 1,051,476 | | | 828,826 | | | 3,281,943 | | | 2,312,929 | |
Operating expenses: | | | | | | | | |
Cost of revenue: | | | | | | | | |
Product | | 604,969 | | | 485,682 | | | 1,822,334 | | | 1,347,673 | |
Service and other | | 8,878 | | | 8,737 | | | 26,273 | | | 10,076 | |
Rental | | 2,637 | | | 2,930 | | | 8,239 | | | 8,869 | |
Total cost of revenue | | 616,484 | | | 497,349 | | | 1,856,846 | | | 1,366,618 | |
Selling, general, and administrative expenses | | 390,999 | | | 276,714 | | | 1,173,633 | | | 780,416 | |
Goodwill impairment | | 70,000 | | | — | | | 70,000 | | | — | |
Total operating expenses | | 1,077,483 | | | 774,063 | | | 3,100,479 | | | 2,147,034 | |
Income (loss) from operations | | (26,007) | | | 54,763 | | | 181,464 | | | 165,895 | |
Other expense: | | | | | | | | |
Bargain purchase gain | | — | | | — | | | 3,514 | | | — | |
Gain on sale-leaseback transactions, net | | 9,371 | | | — | | | 59,225 | | | — | |
Other, net | | (11,278) | | | (13,090) | | | (20,400) | | | (49,816) | |
Interest expense, net | | (61,236) | | | (21,194) | | | (242,402) | | | (91,494) | |
Income (loss) from continuing operations before income taxes | | (89,150) | | | 20,479 | | | (18,599) | | | 24,585 | |
Income tax expense (benefit) | | 32,013 | | | (15,519) | | | 49,263 | | | (15,600) | |
Income (loss) from continuing operations | | (121,163) | | | 35,998 | | | (67,862) | | | 40,185 | |
Income from discontinued operations, net of tax | | — | | | 128,072 | | | — | | | 176,434 | |
Net income (loss) attributable to Franchise Group, Inc. | | $ | (121,163) | | | $ | 164,070 | | | $ | (67,862) | | | $ | 216,619 | |
| | | | | | | | |
Income (loss) per share from continuing operations: | | | | | | | | |
Basic | | $ | (3.09) | | | $ | 0.84 | | | $ | (1.85) | | | $ | 0.84 | |
Diluted | | (3.09) | | | 0.83 | | | (1.85) | | | 0.83 | |
| | | | | | | | |
Net income per share: | | | | | | | | |
Basic | | $ | (3.09) | | | $ | 4.02 | | | $ | (1.85) | | | $ | 5.23 | |
Diluted | | (3.09) | | | 3.96 | | | (1.85) | | | 5.14 | |
| | | | | | | | |
Weighted-average shares outstanding: | | | | | | | | |
Basic | | 39,941,287 | | | 40,229,232 | | | 40,201,666 | | | 40,171,458 | |
Diluted | | 39,941,287 | | | 40,973,736 | | | 40,201,666 | | | 40,931,423 | |
See accompanying notes to condensed consolidated financial statements.
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In thousands) | | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Net income (loss) | | $ | (121,163) | | | $ | 164,070 | | | $ | (67,862) | | | $ | 216,619 | |
Other comprehensive income (loss) | | | | | | | | |
Unrealized (gain) loss on interest rate swap agreement, net of taxes of $0, $0, $0, and $13, respectively | | — | | | — | | | — | | | 45 | |
Foreign currency translation adjustment | | — | | | — | | | — | | | 381 | |
Forward contracts related to foreign currency exchange rates | | — | | | — | | | — | | | — | |
Reclassification of unrealized loss on interest rate swap agreement and foreign currency translation adjustments realized upon disposal of business | | — | | | 973 | | | — | | | 973 | |
Other comprehensive income | | — | | | 973 | | | — | | | 1,399 | |
Comprehensive income (loss) | | $ | (121,163) | | | $ | 165,043 | | | $ | (67,862) | | | $ | 218,018 | |
See accompanying notes to condensed consolidated financial statements.
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
| | | | | | | | | | | | | | |
(In thousands, except share count and per share data) | | September 24, 2022 | | December 25, 2021 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 72,931 | | | $ | 292,714 | |
Current receivables, net | | 143,240 | | | 118,698 | |
Current securitized receivables, net | | 341,083 | | | 369,567 | |
Inventories, net | | 792,055 | | | 673,170 | |
Current assets held for sale | | 8,816 | | | — | |
Other current assets | | 27,128 | | | 24,063 | |
Total current assets | | 1,385,253 | | | 1,478,212 | |
Property, plant, and equipment, net | | 226,980 | | | 449,886 | |
Non-current receivables, net | | 10,249 | | | 11,755 | |
Non-current securitized receivables, net | | 44,801 | | | 47,252 | |
Goodwill | | 738,083 | | | 806,536 | |
Intangible assets, net | | 119,377 | | | 127,951 | |
Tradenames | | 222,703 | | | 222,687 | |
Operating lease right-of-use assets | | 884,197 | | | 714,741 | |
| | | | |
Investment in equity securities | | 13,261 | | | 35,249 | |
Other non-current assets | | 21,382 | | | 18,902 | |
Total assets | | $ | 3,666,286 | | | $ | 3,913,171 | |
Liabilities and Stockholders' Equity | | | | |
Current liabilities: | | | | |
Current installments of long-term obligations | | $ | 392,772 | | | $ | 486,170 | |
Current operating lease liabilities | | 178,622 | | | 173,101 | |
Accounts payable and accrued expenses | | 401,757 | | | 410,552 | |
| | | | |
Other current liabilities | | 37,672 | | | 50,833 | |
Total current liabilities | | 1,010,823 | | | 1,120,656 | |
Long-term obligations, excluding current installments | | 1,286,351 | | | 1,383,725 | |
Non-current operating lease liabilities | | 719,672 | | | 557,071 | |
| | | | |
Other non-current liabilities | | 103,683 | | | 88,888 | |
Total liabilities | | 3,120,529 | | | 3,150,340 | |
| | | | |
Stockholders' equity: | | | | |
Common stock, $0.01 par value per share, 180,000,000 shares authorized, 38,162,700 and 40,296,688 shares issued and outstanding at September 24, 2022 and December 25, 2021, respectively | | 382 | | | 403 | |
Preferred stock, $0.01 par value per share, 20,000,000 shares authorized, and 4,541,125 shares issued and outstanding at September 24, 2022 and December 25, 2021, respectively | | 45 | | | 45 | |
Additional paid-in capital | | 410,914 | | | 475,396 | |
Retained earnings | | 134,416 | | | 286,987 | |
Total equity | | 545,757 | | | 762,831 | |
Total liabilities and equity | | $ | 3,666,286 | | | $ | 3,913,171 | |
See accompanying notes to condensed consolidated financial statements.
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 24, 2022 |
(In thousands) | Common stock shares | | Common stock | | Preferred stock shares | | Preferred stock | | Additional paid-in-capital | | Accumulated other comprehensive loss | | Retained earnings | | Total Franchise Group equity |
Balance at June 25, 2022 | 40,359 | | | $ | 404 | | | 4,541 | | | $ | 45 | | | $ | 486,059 | | | $ | — | | | $ | 282,346 | | | $ | 768,854 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (121,163) | | | (121,163) | |
Exercise of stock options | 21 | | | — | | | — | | | — | | | (528) | | | — | | | — | | | (528) | |
Stock-based compensation expense, net | 10 | | | — | | | — | | | — | | | 3,237 | | | — | | | — | | | 3,237 | |
| | | | | | | | | | | | | | | |
Common dividend declared ($0.625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (24,639) | | | (24,639) | |
Preferred dividend declared ($0.469 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (2,128) | | | (2,128) | |
Repurchase of common stock | (2,227) | | | (22) | | | — | | | — | | | (77,854) | | | — | | | — | | | (77,876) | |
Balance at September 24, 2022 | 38,163 | | | $ | 382 | | | 4,541 | | | $ | 45 | | | $ | 410,914 | | | $ | — | | | $ | 134,416 | | | $ | 545,757 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 24, 2022 |
(In thousands) | Common stock shares | | Common stock | | Preferred stock shares | | Preferred stock | | Additional paid-in-capital | | Accumulated other comprehensive loss | | Retained earnings | | Total Franchise Group equity |
Balance at December 25, 2021 | 40,297 | | | $ | 403 | | | 4,541 | | | $ | 45 | | | $ | 475,396 | | | $ | — | | | $ | 286,987 | | | $ | 762,831 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | (67,862) | | | (67,862) | |
Exercise of stock options | 36 | | | — | | | — | | | — | | | (348) | | | — | | | — | | | (348) | |
Stock-based compensation expense, net | 57 | | | 1 | | | — | | | — | | | 13,720 | | | — | | | — | | | 13,721 | |
| | | | | | | | | | | | | | | |
Common dividend declared ($0.625 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (78,323) | | | (78,323) | |
Preferred dividend declared ($0.469 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (6,386) | | | (6,386) | |
Repurchase of stock | (2,227) | | | (22) | | | — | | | — | | | (77,854) | | | — | | | — | | | (77,876) | |
Balance at September 24, 2022 | 38,163 | | | $ | 382 | | | 4,541 | | | $ | 45 | | | $ | 410,914 | | | $ | — | | | $ | 134,416 | | | $ | 545,757 | |
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 25, 2021 |
(In thousands) | Common stock shares | | Common stock | | Preferred stock shares | | Preferred stock | | Additional paid-in-capital | | Accumulated other comprehensive loss | | Retained earnings | | Total Franchise Group equity |
Balance at June 26, 2021 | 40,208 | | | $ | 402 | | | 4,541 | | | $ | 45 | | | $ | 467,351 | | | $ | (973) | | | $ | 21,170 | | | $ | 487,995 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 164,070 | | | 164,070 | |
Total other comprehensive income | — | | | — | | | — | | | — | | | — | | | 973 | | | — | | | 973 | |
| | | | | | | | | | | | | | | |
Stock-based compensation expense, net | 29 | | | — | | | — | | | — | | | 4,054 | | | — | | | — | | | 4,054 | |
| | | | | | | | | | | | | | | |
Common dividend declared ($0.375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (15,482) | | | (15,482) | |
Preferred dividend declared ($0.469 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (2,128) | | | (2,128) | |
Balance at September 25, 2021 | 40,237 | | | $ | 402 | | | 4,541 | | | $ | 45 | | | $ | 471,405 | | | $ | — | | | $ | 167,630 | | | $ | 639,482 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 25, 2021 |
(In thousands) | Common stock shares | | Common stock | | Preferred stock shares | | Preferred stock | | Additional paid-in-capital | | Accumulated other comprehensive loss | | Retained earnings | | Total Franchise Group equity |
Balance at December 26, 2020 | 40,092 | | | $ | 401 | | | 1,250 | | | $ | 13 | | | $ | 382,383 | | | $ | (1,399) | | | $ | 3,769 | | | $ | 385,167 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 216,619 | | | 216,619 | |
Total other comprehensive income | — | | | — | | | — | | | — | | | — | | | 1,399 | | | — | | | 1,399 | |
Exercise of stock options | 36 | | | — | | | — | | | — | | | 385 | | | — | | | — | | | 385 | |
Stock-based compensation expense, net | 109 | | | 1 | | | — | | | — | | | 9,127 | | | — | | | — | | | 9,128 | |
Issuance of Series A Preferred Stock | — | | | — | | | 3,291 | | | 32 | | | 79,510 | | | — | | | — | | | 79,542 | |
Common dividend declared ($0.375 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (46,372) | | | (46,372) | |
Preferred dividend declared ($0.469 per share) | — | | | — | | | — | | | — | | | — | | | — | | | (6,386) | | | (6,386) | |
Balance at September 25, 2021 | 40,237 | | | $ | 402 | | | 4,541 | | | $ | 45 | | | $ | 471,405 | | | $ | — | | | $ | 167,630 | | | $ | 639,482 | |
See accompanying notes to condensed consolidated financial statements.
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | | | | | | | | |
| | Nine Months Ended |
(In thousands) | | September 24, 2022 | | September 25, 2021 |
Operating Activities | | | | |
Net income (loss) | | $ | (67,862) | | | $ | 216,619 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | |
Provision for doubtful accounts | | 97,575 | | | 2,010 | |
Goodwill impairment | | 70,000 | | | — | |
Depreciation, amortization, and impairment charges | | 62,381 | | | 50,127 | |
Amortization of deferred financing costs and prepayment penalties | | 15,069 | | | 72,316 | |
Amortization of securitized debt discount | | 71,446 | | | — | |
Stock-based compensation expense | | 14,147 | | | 9,561 | |
Change in fair value of investment | | 22,138 | | | (13,089) | |
Gain on sale-leaseback, bargain purchases, and sales of Company-owned stores, net | | (65,254) | | | (177,067) | |
Other non-cash items | | (2,265) | | | (391) | |
Changes in operating assets and liabilities | | (264,550) | | | (44,646) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Net cash provided by (used in) operating activities | | (47,175) | | | 115,440 | |
Investing Activities | | | | |
Purchases of property, plant, and equipment | | (39,127) | | | (37,957) | |
Proceeds from sale of property, plant, and equipment | | 268,239 | | | 3,384 | |
Acquisition of business, net of cash and restricted cash acquired | | (3,753) | | | (462,821) | |
Divestiture of business, net of cash and restricted cash sold | | — | | | 179,471 | |
Issuance of operating loans to franchisees | | — | | | (17,749) | |
Payments received on operating loans to franchisees | | — | | | 23,103 | |
Net cash provided by (used in) investing activities | | 225,359 | | | (312,569) | |
Financing Activities | | | | |
Dividends paid | | (82,019) | | | (50,016) | |
Issuance of long-term debt and other obligations | | 568,319 | | | 1,306,724 | |
Repayment of long-term debt and other obligations | | (802,268) | | | (1,042,256) | |
Issuance of common stock | | 83 | | | — | |
Issuance of preferred stock | | — | | | 79,542 | |
Payments for repurchase of common stock | | (77,876) | | | — | |
Principal payments of finance lease obligations | | (2,009) | | | — | |
Payment for debt issue costs and prepayment penalty on extinguishment | | (1,339) | | | (88,014) | |
Other stock compensation transactions | | (858) | | | (47) | |
Net cash provided by (used in) financing activities | | (397,967) | | | 205,933 | |
Effect of exchange rate changes on cash, net | | — | | | 34 | |
Net increase (decrease) in cash equivalents and restricted cash | | (219,783) | | | 8,838 | |
Cash, cash equivalents and restricted cash at beginning of period | | 292,714 | | | 151,502 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 72,931 | | | $ | 160,340 | |
Supplemental Cash Flow Disclosure | | | | |
Cash paid for taxes, net of refunds | | $ | 63,921 | | | $ | 39,618 | |
Cash paid for interest | | 63,072 | | | 79,074 | |
Accrued capital expenditures | | 4,528 | | | 3,496 | |
Non-cash proceeds from divestiture of Liberty Tax | | — | | | 59,680 | |
Capital expenditures funded by finance lease liabilities | | — | | | 1,211 | |
| | | | |
See accompanying notes to condensed consolidated financial statements.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Statements of Cash Flows. | | | | | | | | | | | | | | |
(In thousands) | | September 24, 2022 | | September 25, 2021 |
Cash and cash equivalents | | $ | 72,931 | | | $ | 159,972 | |
Restricted cash included in other non-current assets | | — | | | 368 | |
| | | | |
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | | $ | 72,931 | | | $ | 160,340 | |
Amounts included in other non-current assets represent those required to be set aside by a contractual agreement with an insurer for the payment of specific workers’ compensation claims.
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 24, 2022 and September 25, 2021
(1) Basis of Presentation
Unless otherwise stated, references to the "Company," "we," "us," and "our" in this Quarterly Report on Form 10-Q (this "Quarterly Report") refer to Franchise Group, Inc. and its direct and indirect subsidiaries on a consolidated basis. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's Form 10-K for the year ended December 25, 2021 that was filed with the Securities and Exchange Commission (“SEC”) on February 23, 2022 (the “Form 10-K”).
In the opinion of management, all adjustments (including those of a normal recurring nature) necessary for a fair presentation of such condensed consolidated financial statements in accordance with GAAP have been recorded. The December 25, 2021 balance sheet information was derived from the audited financial statements as of that date.
Repurchases of Common Stock
The Company's repurchases shares of its common stock through open market transactions. During the nine months ended September 24, 2022, all purchases of common stock under the Company's stock repurchase program were made at prices that exceeded the par value of the repurchased common stock, and the portions of the purchase prices that exceeded par value were charged to additional paid-in capital to the extent that an excess was present. Once additional paid-in capital is fully depleted, remaining excess of cost over par value is charged to retained earnings. Refer to “Note 10. Equity & Stock Compensation Plans” in this Quarterly Report for additional information regarding share repurchases.
Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, "Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which changes how companies will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard replaces the "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost (which generally will result in the earlier recognition of allowances for losses) and requires companies to record allowances for available-for-sale debt securities, rather than reduce the carrying amount. In addition, companies will have to disclose significantly more information, including information used to track credit quality by year of origination, for most financing receivables. The ASU should be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the standard is effective. The ASU is effective for the Company for the fiscal year beginning January 1, 2023. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company early adopted the ASU in the quarter ended September 24, 2022. Refer to "Note 5. Goodwill and Intangible Assets" for the calculation of the Company's impairment test after the adoption of ASU 2017-04.
The London Interbank Offered Rate ("LIBOR") is scheduled to be discontinued on June 30, 2023. In an effort to address the various challenges created by such discontinuance, the FASB issued an amendment to existing guidance, ASU No. 2020-04 "Reference Rate Reform." The amended guidance is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g. loans, debt securities, derivatives, borrowings) necessitated by the reference rate reform. It also provides option expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by the reference rate reform. As further described in "Note 7. Long-Term Obligations", the Company entered into an amendment to a debt agreement which changed the reference rate from LIBOR to Secured Overnight Financing Rate ("SOFR"). The adoption of ASU 2020-04 did not result in a material impact to the Company's financial results or disclosures.
(2) Acquisitions
The Company continually looks to diversify and grow its portfolio of brands through acquisitions. On September 27, 2021, the Company completed its acquisition (the "Sylvan Acquisition") of Sylvan Learning ("Sylvan"), and on November 22, 2021, the Company completed its acquisition (the "Badcock Acquisition" and, together with the Sylvan Acquisition "the “Acquisitions”) of W.S. Badcock Corporation ("Badcock").
Badcock Acquisition
On November 22, 2021, the Company completed the Badcock Acquisition. The preliminary fair value of the consideration transferred at the acquisition date was $548.8 million. For the nine months ended September 24, 2022, $0.8 million of acquisition fees had been incurred that are recorded in selling, general and administrative expenses.
The table below summarizes the unaudited preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Badcock Acquisition on November 22, 2021. The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in an adjustment to the preliminary values presented below. In the nine months ended September 24, 2022, the preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed were adjusted, which resulted in an increase to the bargain purchase gain of $3.5 million. The increase was primarily due to the valuation of the property, plant, and equipment partially offset by an increase in other long-term liabilities for deferred taxes. The Company expects to complete the purchase price allocation as soon as reasonably possible but not to exceed one year from the date of completion of the Badcock Acquisition.
| | | | | | | | |
(In thousands) | | Preliminary November 22, 2021 |
Cash and cash equivalents | | $ | 23,413 | |
Inventories, net | | 130,045 | |
Accounts receivable | | 411,268 | |
Other current assets | | 5,023 | |
Property, plant, and equipment | | 238,865 | |
Operating lease right-of-use assets | | 55,626 | |
Other non-current assets | | 2,506 | |
Total assets | | 866,746 | |
Current operating lease liabilities | | 12,070 | |
Accounts payable and accrued expenses | | 71,436 | |
Other current liabilities | | 18,942 | |
Current installments of long-term obligations | | 5,261 | |
Long-term obligations, excluding current installments | | 7,247 | |
Non-current operating lease liabilities | | 39,599 | |
Other long-term liabilities | | 27,849 | |
Total liabilities | | 182,404 | |
| | |
Bargain purchase gain | | (135,557) | |
| | |
Consideration transferred | | $ | 548,785 | |
Operating lease right-of-use assets of $55.6 million and operating and lease liabilities of $51.7 million, consist of leases for retail store locations, warehouses and office equipment.
Property, plant, and equipment consists of fixtures and equipment of $93.0 million, buildings and building improvements of $98.0 million, land and land improvements of $33.4 million, leasehold improvements of $23.7 million, and construction in progress of $1.4 million.
During the nine months ended September 24, 2022, the preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed were adjusted, which resulted in a $3.5 million increase to the bargain purchase gain for a
cumulative bargain purchase gain of $135.6 million. The adjustment is classified as "Bargain purchase gain" on the Consolidated Statements of Operations. The Company believes the seller in the Badcock Acquisition was willing to accept a bargain purchase price in return for the Company's ability to act more quickly, partially due to the Company's access to capital to complete the transaction, and with greater certainty than any other prospective acquirer. Additionally, the Company believes the seller in the Badcock Acquisition was motivated to complete the transaction as part of an overall repositioning of its business. Upon completion of this reassessment, the Company concluded that recording a bargain purchase gain with respect to the Badcock Acquisition was appropriate and required under GAAP. The tax impact related to the bargain purchase gain was non-taxable and impacted the Company's effective tax rate for the period.
Sylvan Acquisition
On September 27, 2021, the Company completed the Sylvan Acquisition. The fair value of the consideration transferred at the acquisition date was $82.9 million.
The table below summarizes the fair values of the identifiable assets acquired and liabilities assumed in the Sylvan Acquisition on September 27, 2021.
| | | | | | | | |
(In thousands) | | September 27, 2021 |
Cash and cash equivalents | | $ | 4,364 | |
Other current assets | | 3,592 | |
Property, plant, and equipment | | 26,324 | |
Goodwill | | 19,406 | |
Tradenames | | 24,987 | |
Operating lease right-of-use assets | | 2,874 | |
Other intangible assets | | 19,412 | |
Other non-current assets | | 185 | |
Total assets | | 101,144 | |
Current operating lease liabilities | | 891 | |
Accounts payable and accrued expenses | | 6,072 | |
Non-current operating lease liabilities | | 1,984 | |
Other long-term liabilities | | 9,320 | |
Total liabilities | | 18,267 | |
Consideration transferred | | $ | 82,877 | |
Other intangible assets consists of the franchise agreements of $18.3 million and proprietary content of $1.1 million.
Property, plant and equipment consists of fixtures and equipment of $0.3 million, leasehold improvements of $0.7 million, and software and electronic content of $25.3 million.
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The goodwill recognized is attributable to operational synergies in the expected franchise models and growth opportunities. None of the acquired goodwill is deductible for tax purposes.
Pet Supplies Plus Acquisition
On March 10, 2021, the Company completed its acquisition of Pet Supplies Plus. Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The goodwill recognized is attributable to operational synergies in the expected franchise models and growth opportunities. All of the acquired goodwill is deductible for tax purposes.
Wag N' Wash Acquisition
On February 22, 2022, the Company's Pet Supplies Plus segment completed the acquisition of Wag N' Wash, an emerging natural pet food, self-wash, and grooming franchise, for an all cash purchase price of $0.9 million, and five of the Wag N' Wash stores were subsequently sold to a franchisee for $0.6 million. The components of the purchase price allocation are not presented herein due to the immateriality of the transaction to the Company overall.
Pro forma financial information
The following unaudited consolidated pro forma summary has been prepared by adjusting the Company's historical data to give effect to the Acquisitions as if they had occurred on January 1, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pro forma (Unaudited) |
| | Three Months Ended | | Nine Months Ended |
(In thousands) | | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Revenue | | $ | 1,051,475 | | | $ | 1,071,394 | | | $ | 3,281,943 | | | $ | 3,216,259 | |
Net income (loss) | | (121,163) | | | 77,870 | | | (70,470) | | | 198,575 | |
Basic net income (loss) per share | | $ | (3.09) | | | $ | 1.88 | | | $ | (1.91) | | | $ | 4.78 | |
Diluted net income (loss) per share | | $ | (3.09) | | | $ | 1.85 | | | $ | (1.91) | | | $ | 4.70 | |
These unaudited pro forma results include adjustments such as inventory step-up, amortization of acquired intangible assets, depreciation of acquired property, equipment, and software and interest expense on debt financing in connection with the Acquisitions. Material, nonrecurring pro forma adjustments directly attributable to the Acquisitions include:
•Acquired inventory step-up to its fair value of $2.3 million is assumed to be recorded in the first quarter of 2020 and therefore removed from the nine months ended September 25, 2021.
•Acquisition transaction related costs of $4.9 million that were incurred during the nine months ended September 25, 2021 are assumed to have occurred on the pro forma close date of January 1, 2020, and recognized as if incurred in the first quarter of 2020.
The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the Acquisitions had been completed on the date indicated, nor is it indicative of the future operating results of the Company.
The unaudited pro forma results do not reflect events that either have occurred or may occur after the Acquisitions, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. They also do not give effect to certain charges that the Company expects to incur in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.
(3) Divestitures
Liberty Tax Divestiture
On July 2, 2021, the Company completed the sale of its Liberty Tax business (the "Liberty Transaction") to NextPoint Acquisition Corp. ("NextPoint") and received total consideration of approximately $255.3 million, consisting of approximately $181.2 million in cash and approximately $74.1 million in proportionate voting shares of NextPoint recorded as an investment in equity securities in "Investment in equity securities" on the Condensed Consolidated Balance Sheets. As a result of the Liberty Transaction, the financial position and results of operations of the Liberty Tax business are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for the three and nine months ended September 25, 2021.
The following is a Condensed Consolidated Statement of Operations for the Liberty Tax business. The amounts are included in "Income (loss) from discontinued operations, net of tax" in the Company's Condensed Consolidated Statements of Operations.
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | | | Nine Months Ended |
(In thousands) | | | | September 25, 2021 | | | | September 25, 2021 |
Revenue | | | | $ | 493 | | | | | $ | 107,486 | |
Selling, general, and administrative expenses | | | | 6,886 | | | | | 64,672 | |
Income from operations | | | | (6,393) | | | | | 42,814 | |
Other expense: | | | | | | | | |
Gain on sale of discontinued operations | | | | 173,699 | | | | | 173,699 | |
Other | | | | (3) | | | | | 165 | |
Interest expense, net | | | | (3) | | | | | (4) | |
Income before income taxes | | | | 167,300 | | | | | 216,674 | |
Income tax expense | | | | 39,228 | | | | | 40,240 | |
Net income attributable to discontinued operations | | | | $ | 128,072 | | | | | $ | 176,434 | |
The following is the operating and investing activities for the Liberty Tax business. These amounts are included in the Company's Condensed Consolidated Statement of Cash Flows.
| | | | | | | | | | |
| | | | Nine Months Ended |
(In thousands) | | | | September 25, 2021 |
Cash flows provided by operating activities from discontinued operations | | | | $ | 39,334 | |
Cash flows provided by investing activities from discontinued operations | | | | $ | 173,633 | |
Assets Held for Sale
As of September 24, 2022, the Company's Badcock segment was negotiating sale transactions for certain non-operating properties that it expects to sell within one year. The net book value of the properties of $8.8 million is classified as "Current assets held for sale" on the Condensed Consolidated Balance Sheets.
Sale-Leaseback Transactions
In the nine months ended September 24, 2022, the Company's Badcock segment sold a number of its retail locations, distribution centers, and its corporate headquarters for a total of $265.8 million, resulting in a net gain of $59.2 million, comprised of $64.7 million of gains and $5.5 million of losses. The corporate headquarters was sold in the three months ended September 24, 2022 for a total of $23.5 million, resulting in a net gain of $9.4 million, comprised of $10.6 million in gains and $1.2 million in losses. Contemporaneously with these sales, the Company entered into lease agreements pursuant to which the Company leased back the retail locations, distribution centers, and corporate headquarters, all of which are being accounted for as operating leases. The net gain has been recognized as "Gain on sale-leaseback transactions" on the Consolidated Statements of Operations for the three and nine months ended September 24, 2022.
(4) Accounts and Notes Receivable
Current and non-current receivables as of September 24, 2022 and December 25, 2021 are presented in the Condensed Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | |
(In thousands) | | September 24, 2022 | | December 25, 2021 |
Accounts receivable | | $ | 101,485 | | | $ | 86,087 | |
Notes receivable | | 1,160 | | | 1,735 | |
Income tax receivable | | 41,811 | | | 32,448 | |
Allowance for doubtful accounts | | (1,216) | | | (1,572) | |
|