ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidatedfinancial statements and related notes and other financial information appearingelsewhere in this Form 10-K. In addition to historical information, thefollowing discussion and other parts of this Form 10-K containforward-looking information that involves risks and uncertainties. Our actual resultscould differ materially from those anticipated by this forward-looking informationdue to the factors discussed under “Risk Factors,” “Cautionary Statement ConcerningForward-Looking Statements,” and elsewhere in this Form 10-K.
Factors That Affect Our Operating Results and Trends
Our results of operations and financial performance are influenced by a variety of factors, including: (i) general economic and industry conditions affecting demand in the housing market; (ii) the commoditized nature of many of the products we manufacture and distribute; and (iii) cost and availability of the products we distribute. These factors, and the related trends and uncertainties, have historically produced cyclicality in our results of operations, and we expect this cyclicality to continue in future periods.
General Economic Conditions Affecting Demand
Many of the factors that cause our operations to fluctuate are seasonal or cyclical in nature. Historically, our operating results have also been correlated with the level of single-family residential housing starts in the U.S. The demand for new homes is dependent on a variety of factors, including job growth, changes in population and demographics, the availability and cost of mortgage financing, the supply of new and existing homes, and consumer confidence. Certain developments have led to a more challenging macro-economic environment, such as broad-based inflation, the rapid rise in mortgage rates, and home price appreciation. These developments have impacted the U.S. housing market, including the residential repair and remodel and residential new construction end markets, and have contributed to a recent slowdown in the U.S. housing industry. However, we believe that several factors, including the current high levels of home equity, the fundamental undersupply of housing in the U.S., repair and remodel activity, and demographic shifts, among others, will support demand for our products. For additional information regarding the risk factors impacting our business, refer to Part I, Item 1A, Risk Factors, in this Annual Report.
Industry Conditions Affecting Demand
Residential Repair and Remodel
We estimate that demand from the residential Repair and Remodel market (“R&R”) accounts for approximately 45 percent of our annual sales. Historically, R&R demand conditions have tended to be less cyclical when compared to the residential new construction market, particularly for exterior products that are exposed to the elements and where maintenance is less likely to be deferred for long periods of time. We believe R&R demand is driven by a myriad of factors including, but not limited to: home prices and affordability; macro-economic conditions and expectations around inflationary rate, unemployment rate, interest rate, and economic output; raw materials prices; the pace of new household formation; savings rates; employment conditions; and emerging trends, such as the increased popularity of home-based remote working environments. With mortgage rates having risen to multi-year highs, we believe many homeowners who secured a lower interest mortgage will be inclined to stay longer in existing homes, which could benefit R&R demand over the near-to-medium term.
According to the Joint Center For Housing Studies’ Leading Indicator of Remodeling Activity (“LIRA”) Index, R&R demand returned to more normalized levels in 2023 and 2022 following two consecutive years in 2021 and 2020 of elevated R&R activity fueled by pandemic-induced changes in housing and lifestyle decisions. Spending for R&R is expected to shrink in 2024 for the first time since 2010, but should begin to improve late in the year. At the same time, the total market size of the U.S. R&R market remains significant, with total U.S. homeowner improvements and repairs spending expected to be approximately $450 billion in 2024, down from $481 billion in 2023, but still up significantly from $363 billion in 2020.
Further, as the median age of U.S. housing stock increases over time, we anticipate domestic R&R spending will also increase. According to the U.S. Census Bureau and Department of Housing and Urban Development, the median age of an owner-occupied home in the U.S. increased from 23 years in 1985 to 40 years in 2021. Moreover, approximately 75 percent of the current owner-occupied housing stock was built prior to 1999. We believe the increasing average age of the nation’s approximate 144 million existing homes will continue to drive demand for repair and remodel projects.
Residential New Construction
We estimate that demand from the residential new construction market, including single-family and multi-family units, accounts for approximately 40 percent of our annual sales. We believe our products are more likely to be used in single-family construction than in multi-family units.
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We believe demand for residential new construction is driven by a myriad of factors including, but not limited to: mortgage rates, which recently reached multi-year highs; lending standards; home affordability; employment conditions; savings rates; the rate of population growth and new household formation; builder activity levels; the level of existing home inventory on the market; and consumer sentiment.
According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, for full year 2023 residential housing starts for single family units and multi-family units were down 6% and 13%, respectively, compared to full year 2022. We believe the overall decrease for single family starts reflected higher mortgage rates, partially offset by demand for new homes due to the decrease in the level of existing home inventory. We also believe multi-family starts were down due mainly to recent overbuilding of multi-family units in many cities.
We believe our scale, national footprint, strategic supplier relationships, key national customer relationships, and breadth of market leading products and brands position us to serve the residential new construction end market and navigate the changes in the macro-economic environment.
Commodity Nature of Our Products
Many of the building products we distribute, including lumber, as well as panels, such as oriented strand board (“OSB”) and plywood, are commodities that are widely available from various suppliers with prices and volumes determined frequently in a market based on participants' perceptions and expectations of short-term supply and demand factors. The selling price of our commodity products is based on the current market purchase price to replace those products in our inventory, plus adders for our shipping, handling, overhead costs, and our profit margin. At certain times, particularly in a dynamic inflationary commodity market, the selling price for any one or more of the products we distribute, especially those of a commodity nature, may well exceed our purchase price because our prices are based on current replacement cost. At certain other times, the selling price may fall below our purchase price for the same reasons, requiring us to incur short-term losses on specific sales transactions and/or recognize a reserve for the lower of cost or net realizable value respective to our inventory of products of a commodity nature. Therefore, our profitability depends, in significant part, on the impact of commodity prices along with inventory levels. In addition to prices, it is also dependent on managing our cost structure, particularly shipping and handling costs, which represent significant components of our operating costs. Composite lumber and panel prices have been historically volatile.
The following table represents the percentage price changes on a year-over-year basis of the average monthly composite prices for lumber and average monthly composite prices for panels as reflected by Random Lengths, an industry publication, for the periods noted below. In addition to the year-over-year average monthly price changes, composite lumber and composite panel prices for the past three years were exceptionally volatile when compared to historical prices over the last seven years. During 2021, both composite lumber and composite panel prices experienced the largest difference between high and low price levels within a calendar year than any year in the last seven years.
Calendar Year Ended
December 31
Increase (decrease) in composite lumber prices (47)% (10)% 50%
Increase (decrease) in composite panel prices (32)% (18)% 85%
During 2020, pricing for these products declined starting in March 2020, but rebounded during the remaining portion of the second quarter, significantly increasing during most of the third quarter. A two-month decline began in the final weeks of the third quarter and lasted until December 2020. In December 2020, pricing began to rapidly increase towards all-time highs. These market trends resulted in substantial favorable revenue and gross margin comparisons for fiscal 2020 for our structural products and our business as a whole. In 2021, wood-based commodity index prices began January at record or near-record highs and remained at elevated levels through the first quarter and into the second quarter. Prices continued to increase to a historical peak in May 2021 and then began to decline through the end of the second quarter and throughout the third quarter of 2021. During the fourth quarter, prices began to rise again ending 2021, and beginning 2022, at historically elevated levels. During 2022, prices remained at elevated levels through the end of the first quarter, then began to sharply decline over the course of the second quarter. Prices rebounded slightly at the beginning of the third quarter, but in August 2022 resumed their decline over the remainder of the year, ending the year below the five-year average. During 2023, prices improved slightly during the first and second quarters and peaked during the third quarter, declining again during the fourth quarter and still ending the year below the five-year average. There is significant uncertainty regarding future trends in lumber and panel index prices. We continue to closely monitor these pricing trends, and work to manage our business, inventory levels, and costs accordingly.
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Cost and Availability of the Products We Distribute
Our gross profit is net sales less the cost of the products sold. Substantially all of the amount reported in Cost of products sold is composed of cost to purchase inventory for resale to customers, including the cost of inbound freights, volume incentives, and inventory adjustments. During fiscal 2023, 2022 or 2021, no one supplier represented more than 10% of our consolidated Cost of products sold.
The specialty products we distribute are available from select suppliers from which we have established and cultivated relationships in the specific markets we serve. The structural products we distribute are available from a variety of suppliers in both the U.S. and Canada.
Pandemics
The impact of disease-related pandemics can affect our operational and financial performance to varying degrees, such as the COVID-19 global pandemic did. The extent of the effects of future public health crises, including a resurgence of COVID, or related containment measures and government responses are highly uncertain and cannot be predicted.
Results of Operations
Fiscal 2023 Compared to Fiscal 2022
The following table sets forth our results of operations for fiscal 2023 and fiscal 2022, both of which were comprised of 52 weeks.
Fiscal 2023 % ofNetSales Fiscal 2022 % ofNetSales
($ amounts in thousands)
Amortization of deferred gains on real estate (3,934) (0.1)% (3,934) (0.1)%
Gain from sale of properties, net — 0.0% (144) 0.0%
Settlement of frozen defined benefit pension plan 30,440 1.0% — 0.0%
The following table sets forth changes in net sales by product category.
($ amounts in thousands)
Net sales by product category
The following table sets forth gross margin dollars and percentages by product category versus comparable prior periods.
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($ amounts in thousands)
Gross profit by product category:
Gross margin % by product category
Specialty products 19.3 % 22.3 %
Structural products 11.2 % 12.2 %
Total gross margin % 16.8 % 18.7 %
Discussion of Results of Operations for Fiscal 2023 Compared to Fiscal 2022
For fiscal 2023, we generated net sales of $3.1 billion, a decrease of $1.3 billion when compared to fiscal 2022, and gross margin decreased from 18.7% to 16.8% year over year. The decreases in net sales and overall gross margin percentage compared to the prior fiscal year were primarily due to price deflation combined with lower sales volumes in our specialty and structural products, reflecting changing market conditions that have returned to normalized levels.
Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products,decreased$687.4 millionto $2.2 billionin fiscal 2023. The decrease was due to price deflation combined with lower sales volume across all product categories as we return to more normalized market conditions.Specialty products gross profit decreased$219.6 million to $420.8 million, with a year-over-year decrease of 300 basis points in specialty gross margin to 19.3% for fiscal 2023, compared to 22.3% for fiscal 2022. The decrease in specialty products gross margin percentage over the prior fiscal year was also attributable to the year-over-year price and sales volume normalization.
Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $626.4 million to$952.1 millionin fiscal 2023 primarily due to price deflation in the wood-based commodity markets represented by the declines in the average composite price of framing lumber and structural panels, which were 47% and 32%, respectively, in addition to lower sales volumes. Our structural gross margin percentage of fiscal 2023 was 11.2%, down from 12.2% in the prior fiscal year, primarily attributable to price deflation in the wood-based commodity markets represented by the aforementioned year-over-year declines in the average composite price of framing lumber and structural panels. The impacts of these factors on the gross margin percentage in fiscal 2023 were partially offset by our consistent focus on pricing discipline and inventory management, as well as favorable changes in our net provisions for inventory reserves in the current fiscal year. Fiscal 2023 was favorably impacted by a net $2.6 million inventory reserve release, while net inventory reserve provisions of $2.6 million were recorded in fiscal 2022. For more details on our lower of cost or market reserves for inventories, see Note 3, Inventories, in Item 8 of this Annual Report.
Our selling, general, and administrative (“SG&A”) expensesdecreased2.9 percent overall,or$10.5 million, compared to fiscal 2022 primarily due to decreases in delivery expenses, variable compensation, professional fees and non-employee labor, partially offset by increases in technology costs, employee benefits costs, and $5.9 million of full-year incremental operating expenses in fiscal 2023 related to our acquisition of Vandermeer that occurred in the fourth quarter of fiscal 2022. Depreciation and amortization expense increased 16.0% compared to fiscal 2022 due to a higher base of amortizable and depreciable assets throughout fiscal 2023 when compared to the prior fiscal year, resulting from our continued focus on capital investment and increased intangible assets related to our Vandermeer acquisition.Other operating expensesincreased$0.6 millioncompared to fiscal 2022 primarily due to restructuring related costs, including severance payments, incurred in fiscal 2023 due to our leadership transition.
Interest expense, net, decreased by 43.8 percent, or $18.5 million, compared to fiscal 2022. The decrease is primarily due to the generation of higher interest income, given our year-over-year increase in cash and cash equivalents generating interest income at higher interest rates than in the prior year.
During the fourth quarter of fiscal 2023, we settled our frozen defined benefit pension plan by transferring future financial responsibilities for the plan to a highly rated insurance company through the purchase of an annuity. The accounting for this settlement resulted in the non-cash reclassification of $34.9 million, including net deferred income taxes of $4.5 million, from accumulated other comprehensive loss to earnings. The settlement also required the Company, as plan sponsor, to make a final $6.9 million cash contribution to the plan trust in order for the plan trust to have sufficient assets to purchase the annuity from
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the insurance company. The settlement of the frozen defined benefit pension plan does not result in any changes to the multi-employer pension plans in which some of our union employees participate.
Our effective income tax rate was 40.7%and25.0%for fiscal 2023 and fiscal 2022, respectively. The higher effective rate in fiscal 2023 was due primarily to the one-time accounting for the settlement of our frozen defined benefit pension plan, as described above, which increased the effective income tax rate by 14.8%. The reclassification of $30.4 million to pre-tax earnings resulted in $12.2 million income tax expense (of which $4.5 million was reclassified from accumulated other comprehensive loss) related to the one-time settlement of our frozen defined benefit pension plan, which will not result in cash tax payments. Removing the income tax effects related to the one-time settlement of our frozen defined benefit pension plan, our effective income tax rate for fiscal 2023 would have been approximately 25.9%. Our effective income tax rate for both fiscal years was impacted by state taxes as well as the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, offset by a benefit from vesting of share-based compensation.
Our net income for fiscal 2023 was $48.5 million, or $5.39 per diluted share, versus $296.2 million, or $31.51 per diluted share, in the prior fiscal year. Our net income for fiscal 2023 decreased primarily due to a decrease in gross profit driven by lower sales volume particularly for our engineered wood products, lumber, and panels, along with declines in pricing and the accounting for the settlement of our frozen defined benefit pension plan. This decrease was partially offset by favorable net interest income in the current fiscal year.
Results of Operations
Fiscal 2022 Compared to Fiscal 2021
For a comparison of the Company’s results of operations for the fiscal year ended December 31, 2022 to the fiscal year ended January 1, 2022, refer to Item 7 of the Company’s Annual Report on Form 10-K for fiscal 2022 filed with the SEC on February 21, 2023.
Liquidity and Capital Resources
We expect our material cash requirements for the foreseeable future, including the next 12 months will be for our:
•Periodic estimated income tax payments, as required;
•Periodic interest payments associated with our senior secured notes, as discussed in Note 8, Debt and Finance Leases, in Item 8 of this Annual Report;
•Lease agreements which have fixed lease payment obligations, as discussed in Note 13, Lease Commitments, in Item 8 of this Annual Report.
Our purchase orders are based on near-term needs and are typically fulfilled by our vendors within short time horizons. We do not have significant agreements for the purchase of inventory specifying minimum quantities or set prices that exceed our expected requirements or that cannot be canceled by us within 30 to 60 days.
We expect our primary sources of liquidity for the next 12 months to be cash flows from sales and operating activities in the normal course of our operations and availability from our revolving credit facility, as needed, and we expect that these sources will be sufficient to fund our ongoing cash requirements for the foreseeable future, including at least the next 12 months. We expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements. As of December 30, 2023, we had $521.7 million of cash and cash equivalents plus $346.5 million of availability on our revolving credit facility.
Sources and Uses of Cash
Operating Activities
Net cash provided by operating activities totaled $306.3 million for fiscal 2023 compared to $400.3 million for fiscal 2022. The decrease in cash provided by operating activities during fiscal 2023 was primarily the result of a decrease in net income for the current fiscal year compared to the prior fiscal year, partially offset by higher cash generated from changes in working capital in fiscal 2023. For working capital, the change in inventory increased $120.1 million for fiscal 2023 as a result of lower product cost and our continuing efforts to better manage inventory on hand. The change in accounts payable increased $37.8 million for fiscal 2023 due to the timing of payments. These increases in cash from working capital changes were partially offset by a decrease in the change for accounts receivable of $78.1 million for fiscal 2023 due to lower sales in the fourth quarter of fiscal 2023 compared to the fourth quarter of fiscal 2022.
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Net cash provided by operating activities totaled $400.3 million during fiscal 2022. This cash activity was primarily driven by net income of $296.2 million combined with changes in our working capital components after adjusting for the impact of working capital related to our acquisition of Vandermeer. See Note 2, Business Combination, in Item 8 of this Annual Report for more information about our acquisition and related working capital amounts acquired. The changes in working capital components resulted in an increase in cash due to a decrease in accounts receivables of $101.3 million and a decrease inventory of $20.8 million, partially offset by a decrease in accounts payable of $31.8 million. During fiscal 2022, we completed the repurchase of properties previously contributed to the BlueLinx Corporation Hourly Retirement Plan for $11.1 million. The cash outflow associated with the purchase of these properties is included in pension contributions within the operating activities section of our consolidated statement of cash flows for fiscal 2022.
Net cash provided by operating activities totaled $145.0 million during fiscal 2021. This cash activity was primarily driven by net income of $296.1 million, which included a non-cash charge for debt-issuance costs expensed during the period for our extinguished term loan facility and reduced revolving credit facility of $7.4 million in addition to a non-cash adjustment for our gains on sales of property of $8.4 million, combined with changes in our working capital components. The changes in working capital components included a decrease in cash due to an increase in accounts receivable of $46.0 million and an increase inventory of $146.4 million, partially offset by an increase in cash due to an increase in accounts payable of $14.8 million.
Investing Activities
Net cash used ininvesting activities was$26.9 millionduring fiscal 2023, primarily for capital expenditures. Our investing activities in fiscal 2023 reflected continuing improvements to our distribution facilities and upgrades to our fleet.
Net cash used in investing activities was $98.7 million during fiscal 2022, which was primarily driven by cash of $63.8 million used for the acquisition of Vandermeer and capital expenditures of $35.9 million throughout fiscal 2022, partially offset by cash received from the sale of real estate of $1.0 million.
Net cash used in investing activities was $4.1 million during fiscal 2021, which was primarily driven by cash paid for capital expenditures of $14.4 million, partially offset by cash received from the sale of real estate of $10.3 million.
Financing Activities
Net cash used in financing activities was $56.6 million during fiscal 2023. Of this amount $42.1 million was used to repurchase our common stock under authorized share repurchase programs, $5.3 million was used to repurchase shares to satisfy employee payroll and tax withholdings for vesting of share-based compensation, and $9.2 million was used for payments on finance lease obligations.
Net cash used in financing activities was $87.9 million during fiscal 2022, which was primarily driven by $66.4 million used to repurchase our common stock under our share repurchase program, including the ASR Agreement. Additionally, $10.5 million was used to repurchase shares to satisfy employee tax withholdings on the vesting of restricted stock units, and $10.9 million was for payments on our finance lease obligations.
Net cash used in financing activities was $55.8 million during fiscal 2021, which reflected the repayment of the remaining $43.2 million balance on our former term loan, net repayments on our revolving credit facility of $286.6 million, principal payments on finance lease obligations of $11.2 million, debt financing costs of $5.5 million, and repurchase of shares to satisfy employee tax withholdings on the vesting of restricted stock units of $5.2 million, all of which were partially offset by proceeds from the issuance of our 2029 Notes of $295.9 million, net of discount.
Share Repurchase Programs
As discussed elsewhere in this Form 10-K, during fiscal 2023 and fiscal 2022, we used cash of $42.1 million and $66.4 million, respectively, to repurchase shares of our common stock under repurchase programs authorized by our Board of Directors. As of December 30, 2023, we have $91.4 million of remaining repurchase authorization under the $100 million program approved by our Board of Directors on October 31, 2023. Under this share repurchase program, we may repurchase our common stock from time to time, without prior notice, subject to prevailing market conditions and other considerations. Repurchases may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, accelerated share repurchase programs, tender offers or pursuant to a trading plan that may be adopted in accordance with the Securities and Exchange Commission Rule 10b5-1.
Net Working Capital
Net working capital is an important measurement we use to determine the efficiencies of our operations and our ability to readily convert assets into cash. Net working capital is defined as the sum of accounts receivable and inventory, less accounts
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payable. This metric differs from traditional working capital in that it excludes certain current assets and current liabilities that are reported in our consolidated balance sheet. Our net working capital as of December 30, 2023 and December 31, 2022 is presented in the following table:
(In thousands)
Current assets included in net working capital:
Accounts receivable, less allowance for doubtful accounts $ 228,410 $ 251,555
Current liabilities included in net working capital:
Net working capital decreased by $170.1 million to $414.1 million as of December 30, 2023 from $584.2 million as of December 31, 2022. The decrease in net working capital was primarily due to an increase in accounts payable of $6.3 million, a decrease in accounts receivable of $23.1 million, and a decrease in inventory of $140.7 million. The decrease in accounts receivable was due to lower revenue in fiscal 2023. The significant decrease in inventory reflects lower product costs and our our continuing strategic inventory management efforts.
Debt and Credit Sources
As of December 30, 2023, and December 31, 2022, debt and finance leases consisted of the following:
(In thousands)
Revolving credit facility (2) — —
Unamortized debt issuance costs (3,246) (4,057)
Unamortized bond discount costs (3,011) (3,519)
Less: current portions of finance leases 11,178 7,089
Total debt and finance leases, net of current portions $ 567,991 $ 558,410
(1) As of December 30, 2023 and December 31, 2022, our long-term debt was comprised of $300.0 million of senior secured notes issued in October 2021. These notes are presented under the long-term debt caption of our balance sheet at $293.7 million and $292.4 million as of December 30, 2023 and December 31, 2022, respectively. This presentation is net of their discount of $3.0 million and $3.5 million and the combined carrying value of our debt issuance costs of $3.2 million and $4.1 million as of December 30, 2023 and December 31, 2022, respectively. Our senior secured notes are presented in this table at their face value.
(2) No borrowings were outstanding during fiscal 2023 or fiscal 2022. Available borrowing capacity under this revolving credit facility was $346.5 million and $346.5 million on December 30, 2023 and December 31, 2022, respectively.
(3) Refer to Note 13, Lease Commitments, in Item 8 of this Annual Report for interest rates associated with finance lease obligations.
Senior Secured Notes
In October 2021, we completed a private offering of $300.0 million of our six percent senior secured notes due 2029 (the “2029 Notes”). Interest is payable semi-annually. Our 2029 Notes mature on November 15, 2029, and no principal is due until that
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time as long as we remain in compliance with the related covenants. As of December 30, 2023, we were in compliance with these covenants.
Revolving Credit Facility
Our amended revolving credit facility matures on August 2, 2026 provided we remain in compliance with the related covenants. As of December 30, 2023, we were in compliance with these covenants.
Any outstanding borrowings under the revolving credit facility bear interest at a rate per annum equal to (i) Adjusted Term Secured Overnight Financing Rate (“SOFR”) (calculated as SOFR plus 0.1%) plus a margin ranging from 1.25% to 1.75%, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on SOFR, or (ii) the agent’s base rate (as that term is defined in the revolving credit agreement) plus a margin ranging from 0.25% to 0.75%, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate.
Borrowings under the Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the revolving credit agreement). The Company is 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.
Available borrowing capacity under our Revolving Credit Facility was $346.5 million on December 30, 2023.
Finance Lease Commitments
Our finance lease liabilities consist of leases related to equipment and vehicles, and to real estate, with the majority of those finance lease commitments relating to the real estate financing transactions that we completed in recent years. Our total finance lease commitments totaled $285.4 million and $273.1 million as of December 30, 2023 and December 31, 2022, respectively. Of the $285.4 million of finance lease commitments as of December 30, 2023, $243.2 million related to real estate and $42.3 million related to equipment. Of the $273.1 million of finance lease commitments as of December 31, 2022, $243.8 million related to real estate and $29.3 million related to equipment. As of December 30, 2023, $11.2 million of our finance leases are classified as current liabilities.
Pension Funding Obligations
During the fourth quarter of fiscal 2023, we settled our frozen defined benefit pension plan by transferring future financial responsibility to a highly rated insurance company through the purchase of an annuity. We do not anticipate any additional funding obligations related to this pension plan. Some of our union employees continue to participate in multi-employer pension plans, and those plans were not impacted by the settlement of the frozen defined benefit pension plan.
Off-Balance Sheet Arrangements
As of December 30, 2023 and December 31, 2022, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe that our most critical accounting policies and estimates relate to: (1) revenue recognition; (2) income taxes; (3) business combinations; and (4) goodwill.
Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. All of these estimates reflect our best judgment about current and, for some estimates, future economic and market conditions and their potential effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that the judgments and estimates described below could change, which may result in our recording additional expenses or additional liabilities, among other effects.
Management has discussed the development, selection, and disclosure of critical accounting policies and estimates with the audit committee of the Company’s board of directors. While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, actual results ultimately may differ from these estimates and assumptions. For a discussion of the Company’s significant accounting policies, see Note 1, Summary of Significant Accounting Policies, in Item 8 of this Annual Report.
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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. For us, this generally means that we recognize revenue when title to our products is transferred to our customers. Title usually transfers upon shipment to, or receipt at, our customers’ locations, as determined by the specific sales terms of each transaction. Our customers can earn certain incentives including, but not limited to, cash discounts and rebates. These incentives are deducted from revenue recognized. In preparing the financial statements, management must make estimates related to the contractual terms, customer performance, and sales volume to determine the total amounts recorded as deductions from revenue. Management also considers past results in making such estimates. The actual amounts ultimately paid may be different from our estimates, and recorded once they have been determined.
Income Taxes
Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Judgment is required in determining our annual tax expense and in evaluating our tax positions. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain based upon one of the following: (1) the tax position is not “more likely than not” to be sustained; (2) the tax position is “more likely than not” to be sustained, but for a lesser amount; or (3) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings, and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other tax positions taken. We adjust these reserves, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit. Refer to Note 7, Income Taxes, in Item 8 of this Annual Report.
A number of years may elapse before a particular matter for which we have established a reserve is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the “more likely than not” recognition threshold would be recognized in our income tax expense in the first interim period when the uncertainty disappears under any one of the following conditions: (1) the tax position is “more likely than not” to be sustained; (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation; or (3) the statute of limitations for the tax position has expired. Settlement of any particular issue would usually require the use of cash.
Tax law requires items to be included in the tax return at different times than when these items are reflected in the consolidated financial statements. As a result, the annual tax rate reflected in our consolidated financial statements is different from that reported in our tax return (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are the enacted tax rates in effect for the year and manner in which the differences are expected to reverse. Based on the evaluation of available information, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that realizing these benefits is considered more likely than not.
We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our forecasted taxable income using both historical and projected future operating results, the reversal of existing taxable temporary differences, taxable income in prior carryback years (if permitted), and the availability of tax planning strategies. A valuation allowance is required to be established unless management determines that it is more likely than not that we will ultimately realize the tax benefit associated with a deferred tax asset. As of December 30, 2023, positive evidence continued to outweigh negative evidence, as such no valuation allowance was deemed necessary except to the extent of certain state net operating losses. The valuation allowance related to our net operating losses as of December 30, 2023 was approximately $3.5 million. See Note 7, Income Taxes, in Item 8 of this Annual Report.
Business Combinations
We account for business combinations by recognizing the assets acquired and liabilities assumed at the acquisition date fair value. In valuing certain acquired assets and liabilities, fair value estimates use Level 3 inputs, including future expected cash flows and discount rates. Goodwill is measured as the excess of consideration transferred over the fair values of the assets
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acquired and the liabilities assumed. While we use our best estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments arising from new facts and circumstances are recorded to the consolidated statements of operations. The results of operations of acquisitions are reflected in our consolidated financial statements from the date of acquisition.
Accounting for business combinations requires our management to make significant estimates and assumptions about intangible assets, obligations assumed and pre-acquisition contingencies, including uncertain tax positions and tax-related valuation allowances and reserves, where applicable. Critical inputs and assumptions in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from customer relationships and developed technologies; the acquired Company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined Company’s product portfolio; and discount rates.
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Estimates are used in the determination of the fair values of identifiable asset acquired, including intangible assets, and liabilities assumed in a business combination, but the initial carrying value assigned to goodwill is of a residual nature. Goodwill is not subject to amortization, but must be tested for impairment at least annually using either a qualitative method or a quantitative method. Goodwill may also need to be assessed for impairment between the annual assessments if an event occurs or circumstances change that would indicate the carrying value of goodwill may be impaired. Such interim events and circumstances can include significant declines in the industries in which our products are used, significant changes in capital market conditions, and significant changes in our market capitalization.
Goodwill is assessed for impairment at the reporting unit level and the assessment must determine if the fair value of the reporting unit, including the goodwill, is less than its carrying value. For entities like us that consists of a single reporting unit, goodwill is assessed at the enterprise level. In performing a qualitative assessment, potential impairment indicators must be evaluated to determine if it is “more likely than not that the fair value of the reporting unit is less than its carrying amount.” Such evaluations involve estimates of the significance and materiality of any identified impairment indicators. For a quantitative assessment, we utilize a combination of the present value of expected cash flows and the guideline public companies method to determine the estimated fair value of our enterprise. This present value model requires management to estimate future cash flows, the timing of the future cash flows, and a discount rate (based on a weighted-average cost of capital), which represents the time value of money and the inherent risk and uncertainty of the future cash flows. These estimates can have material influences on a goodwill assessment.
We perform our annual goodwill assessment as of the first day of our fiscal fourth quarter. Based on the results of our most recent annual assessment, which was quantitative, our goodwill was not impaired. As of December 30, 2023, the carrying value of our goodwill was $55.4 million, which represented less than 4% of our consolidated assets.
Between our annual impairment assessment for fiscal 2023 and 2022, we noted no interim events or circumstances to indicate that the carrying value of our goodwill was impaired. Therefore, we relied on our annual assessments.
Recently Issued Accounting Pronouncements
For a summary of recent accounting pronouncements applicable to our consolidated financial statements, see Note 1, Summary of Significant Accounting Policies, in Item 8 of this Annual Report.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks as part of our on-going business operations. Our exposure includes commodity price risk and interest rate risk.
Commodity Price Risk
Although we have no material financial instruments as of December 30, 2023 and December 31, 2022 that are directly exposed to commodity price risk, many of the building products that we inventory and distribute, including oriented strand board (“OSB”), plywood, lumber, and rebar, are commodities whose price is determined by the market’s supply and demand for such products. Prices of commodity products can also change as a result of national and international economic conditions, labor and freight costs, competition, market speculation, government regulation, and trade policies, as well as from periodic delays in the delivery of products. Short-term increases in the cost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers, but our pricing quotation periods and pricing pressure from our competitors may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases in freight costs on our products. We may enter into derivative financial instruments to mitigate the potential impact of commodity price fluctuations on our results of operations or cash flows; as of December 30, 2023 and December 31, 2022, we had no such derivative financial instruments in place. For further discussion of commodity price risk, refer to Item 1A, Risk Factors, and to the section under the heading “Commodity Nature of Our Products” within“Factors That Affect Our Operating Results and Trends” in Item 7 of this Annual Report on Form 10-K.
Interest Rate Risk
We may be exposed to changes in interest rates for our outstanding debt. Changes in market interest rates could affect our interest expense. We are exposed to interest rate risk arising from fluctuations in variable-rate SOFR, or other applicable benchmark rate, when we have amounts outstanding on our revolving credit facility. As of December 30, 2023 and December 31, 2022, we had no outstanding borrowings on our revolving credit facility. Our senior secured notes bear interest at a fixed rate, therefore, our interest expense related to these notes would not be affected by an increase in market interest rates if we remain in compliance with the related debt covenants, but interest rate changes could impact the terms and pricing of any future refinancings of our term debt. We may enter into derivative financial instruments to mitigate the potential impact of interest rate risk on our results of operations or cash flows; as of December 30, 2023 and December 31, 2022, we had no such derivative financial instruments in place. For further discussion of our indebtedness and related interest rate risk, refer to Note 8, Debt and Finance Leases in Item 8 and to Item 1A, Risk Factors of this Annual Report.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
Page
Report of Independent Registered Public Accounting Firms (PCAOB ID: 42) 39
Consolidated Statements of Operations and Comprehensive Income 41
Consolidated Balance Sheets 42
Consolidated Statements of Stockholders’ Equity 43
Consolidated Statements of Cash Flows 44
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies 45
Business Combination 52
Inventories 53
Revenue Recognition 53
Goodwill and Other Intangible Assets 54
Property, Plant and Equipment 56
Income Taxes 56
Debt and Finance Leases 60
Fair Value 62
Employee Retirement Plans 62
Share-Based Compensation 69
Stockholders’ Equity, Earnings Per Share and Share Repurchases 70
Lease Commitments 72
Commitments and Contingencies 75
Accumulated Other Comprehensive Income (Loss) 76
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of BlueLinx Holdings Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BlueLinx Holdings Inc. (the Company) as of December 30, 2023 and December 31, 2022, the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 30, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2023 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 20, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Goodwill
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2021.
Atlanta, Georgia
February 20, 2024
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BLUELINX HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(In thousands, except per share amounts)
Operating expenses (income):
Amortization of deferred gains on real estate (3,934) (3,934) (3,935)
Gain from sale of properties, net — (144) (8,427)
Non-operating expenses (income):
Settlement of frozen defined benefit pension plan 30,440 — —
Comprehensive income:
Other comprehensive income (loss):
See the accompanying notes to the consolidated financial statements.
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BLUELINX HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
Current assets:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Taxes payable 9,584 —
Finance lease liabilities - current 11,178 7,089
Operating lease liabilities - current 6,284 7,432
Real estate deferred gains - current 3,935 3,935
Non-current liabilities:
Operating lease liabilities - non-current 32,519 40,011
Real estate deferred gains - non-current 66,599 70,403
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred Stock, $0.01 par value, 30,000,000 shares authorized, none issued — —
Accumulated other comprehensive loss — (31,412)
See the accompanying notes to the consolidated financial statements.
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BLUELINX HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Shares Amount
(In thousands)
Other comprehensive income — — — 6,632 — 6,632
Vesting of restricted stock units 379 2 (2) — — —
Compensation related to share-based grants — — 6,590 — — 6,590
Other — — (5) — — (5)
Other comprehensive loss — — — (2,052) — (2,052)
Vesting of restricted stock units 337 3 (3) — — —
Compensation related to share-based grants — — 9,617 — — 9,617
Common stock repurchases and retirements (882) (9) (66,418) — — (66,427)
Vesting of restricted stock units 170 2 (2) — — —
Compensation related to share-based grants — — 12,055 — — 12,055
Common stock repurchases and retirements (506) (5) (42,462) — — (42,467)
There has been no activity for Preferred Stock.
See the accompanying notes to the consolidated financial statements.
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BLUELINX HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to cash provided by operations:
Settlement of frozen defined benefit pension plan 30,440 — —
Amortization of debt discount and issuance costs 1,319 1,153 1,411
Adjustment to debt issuance cost associated with term loan/revolver — — 7,394
Gains from sales of property — (144) (8,427)
Amortization of deferred gains from real estate (3,934) (3,934) (3,935)
Other income statement items (909) — —
Changes in operating assets and liabilities, net of business acquisition:
Cash flows from investing activities:
Acquisition of business, net of cash acquired 300 (63,767) —
Proceeds from sales of assets and properties 357 964 10,327
Cash flows from financing activities:
Borrowings on revolving credit facilities — — 949,080
Repayments on revolving credit facilities — — (1,235,724)
Repayments on term loan — — (43,204)
Proceeds from senior secured notes — — 295,861
Debt financing costs — — (5,459)
Principal payments on finance lease liabilities (9,208) (10,907) (11,175)
Cash and cash equivalents at beginning fiscal year 298,943 85,203 82
Supplemental cash flow information:
See the accompanying notes to the consolidated financial statements.
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BLUELINX HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
BlueLinx Holdings Inc., including subsidiaries (collectively, the “Company”), is a leading wholesale distributor of residential and commercial building products in the United States. The Company is a “two-step” distributor. Two-step distributors purchase products from manufacturers and distribute those products to dealers and other suppliers in local markets, who then sell those products to end users. The Company carries a broad portfolio of both branded and private-label stock keeping units (“SKUs”) across two principal product categories: specialty products and structural products. Specialty products include items such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products. Structural products include items such as lumber, plywood, oriented strand board, rebar, and remesh. The Company also provides a wide range of value-added services and solutions aimed at relieving distribution and logistics challenges for its customers and suppliers, while enhancing their marketing and inventory management capabilities.
The Company’s 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.
The Company operates on a 5-4-4 fiscal calendar. Its fiscal year ends on the Saturday closest to December 31 of that fiscal year and may comprise 53 weeks in certain years. The Company’s 2023 fiscal year contained 52 weeks and ended on December 30, 2023 (fiscal 2023”). Fiscal 2022 contained 52 weeks and ended on December 31, 2022 (“fiscal 2022”). Fiscal 2021 contained 53 weeks and ended on January 1, 2022 (“fiscal 2021”).
Use of Estimates
The Company’s financial statements are prepared in conformity with U.S. GAAP, which requires management and advisors of the Company 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 its financial statements. Although these current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from expectations, which could materially affect the Company’s financial position, results of operations and cash flows.
The impacts of national and global events may also affect the Company’s accounting estimates, which may materially change from period to period due to such events. The Company’s management and its advisors regularly evaluate these significant factors and make adjustments where facts and circumstances dictate.
Revenue Recognition and Cost of Products Sold
The Company recognizes 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.
More specifically, revenue is recognized when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration the Company is entitled to receive 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, which is a point in time. 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 has not been material for each of the reported periods. Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. The Company estimates these amounts based on the expected amount to be provided to customers and then reduces the amount of revenue recognized. The Company believes that there will not be significant changes to its estimates of variable consideration. Sales and usage-based taxes are excluded from revenues.
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BLUELINX HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Contracts with customers are generally in the form of standard terms and conditions of sale. From time to time, the Company may enter into specific contracts, which may affect delivery terms. Performance obligations in contracts with customers generally consist solely of delivery of goods. For all sales channel types, consisting of warehouse, direct, and reload sales, the Company typically satisfies its performance obligations upon shipment. Customer payment terms are typical for the Company’s industry, and may vary by the type and location of customers and by the products or services offered. The time period between invoicing and when payment is due is not deemed to be significant. For certain sales channels and/or products, standard payment terms may be as early as ten days.
In addition, the Company provides 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 the Company.
Costs to obtain customer contracts are generally expensed as incurred. The Company generally expenses sales commissions when incurred because the amortization period would typically be one year or less. These costs are recorded within selling, general, and administrative (“SG&A”)expense.
The Company has made an accounting policy election to treat outbound shipping and handling activities as an SG&A expense. Shipping and handling costs include amounts related to the administration of the Company’s logistical infrastructure, handling of material in its warehouses, and amounts pertaining to the delivery of products to customers, such as fuel and maintenance costs for its mobile fleet, wages for its drivers, and third-party freight charges.
Substantially all of the amount reported in Cost of products sold on the Company’s consolidated statement of operations is composed of cost to purchase inventory for resale to customers, including the cost of inbound freight, volume incentives, and inventory adjustments. During fiscal 2023, 2022 or 2021, no one supplier represented more than 10% of the Company’s consolidated Cost of products sold.
Cash and Cash Equivalents
As of December 30, 2023 and December 31, 2022, the majority of the Company’s cash and cash equivalents were comprised of short-term funds that the Company can liquidate on demand. These funds invest in instruments that have a weighted-average maturity of three months or less, including cash, U.S. Treasury bills, notes and other obligations issued or guaranteed as to principal and interest by the U.S. Government or its agencies, and repurchase agreements secured by such obligations or cash. The Company’s policy is to classify such short-term highly liquid investments as cash equivalents. Also, the Company has cash deposits with financial institutions that are typically in excess of federally insured limits. Though the Company has not experienced any losses on its cash deposits to date and does not currently anticipate incurring any such losses, there can be no assurance that the Company will not experience lossesin the future.
Based on the legal form and nature of any restrictions that may be placed by third parties on certain amounts of cash transferred by the Company to external entities, the Company’s accounting policy is to classify such unexpended amounts as either restricted cash, other current assets, or other assets in its consolidated balance sheet. As of December 30, 2023 and December 31, 2022, the Company had $10.5 million and $10.4 million, respectively, reported within Other non-current assets on its consolidated balance sheets for amounts transferred to a third party related to certain of the Company’s self-insured risks for events that have occurred but have not been settled by, or are not yet known to, the Company. See the subsequent section of this note under the heading, Self Insurance. The Company had no amounts reported as restricted cash on it consolidated balance sheets as of December 30, 2023 and December 31, 2022.
Accounts Receivable and Allowance
Accounts receivable are stated at net realizable value, do not bear interest, and consist of amounts owed for orders shipped to customers. The Company has established an overall credit policy for sales to customers.
Under the provisions of ASC No. 323, Financial Instruments-Credit Losses, that apply to the Company’s trade accounts receivable, a current expected credit loss (“CECL”) model is required. The CECL impairment model requires an estimate of expected credit losses, measured over the contractual life of a trade receivable, that considers forecasts of future economic conditions in addition to information about past events and current conditions. The Company’s 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. The Company believes that its accounts receivable are homogenous and concluded that they can be grouped into one pool when applying the CECL model. The Company determined that historical loss information is a reasonable basis on which to determine expected credit
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BLUELINX HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
losses for accounts receivable because the composition of the receivables at the most recent reporting date is consistent with that used in developing the historical credit-loss percentages. During fiscal year 2023 and 2022, the Company recorded provisions for doubtful accounts of$0.6 million and$0.7 million, respectively, and recorded charge offs net of recoveries of$0.6 millionand$1.3 million, respectively, against the allowance for accounts receivable.
Inventory Valuation
The Company’s inventory is comprised of substantially finished goods that we purchase for resale to our customers. The cost of all inventories is determined by the moving average cost method. The Company includes all material charges directly or indirectly incurred in bringing inventory to its existing condition and location. Inventory carrying values are evaluated at the end of each fiscal quarter to ensure that inventory, when viewed by category, is carried at the lower of cost or net realizable value, which also considers items that may be considered damaged, excess, and obsolete inventory. As of December 31, 2022 and December 30, 2023, the Company had a lower-of-cost-or-net-realizable-value inventory reserve of $2.6 million and zero, respectively.
Consideration Received from Vendors and Paid to Customers
Each fiscal year, the Company enters into agreements with certain vendors to provide inventory purchase rebates, generally based on achievement of specified volume purchasing levels. The Company also receives rebates related to price protection and various marketing allowances that are common industry practice. The Company accrues for the receipt of vendor rebates based on purchases, and also reduce the carrying value of the related inventory to reflect the net acquisition cost (purchase price less expected purchase rebates).
In addition, the Company enters into agreementswith many of its customers to offer customer rebates, generally based on achievement of specified sales levels and various marketing allowances that are common industry practice. The Company accrues for the payment of customer rebates based on sales to the customer, and also reduce its sales to report net sales (sales price less expected customer rebates). Adjustments to earnings resulting from revisions to rebate estimates have historically not been material.
Property and Equipment
Property and equipment are recorded at cost. Lease obligations for which the Company assumes 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, which range from seven to 15 years for land improvements, 15 to 33 years for buildings, and three to seven years for machinery and equipment. 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.
The Company assesses long-lived assets other than goodwill for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. If it is determined that the carrying amount of an asset is not recoverable, the Company compares the carrying amount of the asset to its fair value as estimated using discounted expected future cash flows, market values or replacement values for similar assets. The amount by which the carrying amount exceeds the fair value of the asset, if any, is recognized as an impairment loss.
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BLUELINX HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Other Intangible Assets
Goodwill
Goodwill is not subject to amortization but must be assessed for impairment at least annually. Since the Company operates within one single reporting unit, goodwill is assessed at the enterprise level. The Company performs its annual assessment of goodwill as of the first day of its fourth fiscal quarter, which was October 1, 2023 for fiscal 2023. Since the Company operates within a single reporting unit, goodwill is evaluated at the enterprise level.
The annual assessment for fiscal 2023 utilized a quantitative approach and was performed by the Company with the assistance of independent third-party experts. An assessment under the quantitative approach requires the Company to determine the enterprise’s fair value and then compare that fair value to the carrying value of the enterprise, including goodwill, in order to determine if goodwill is impaired. Based on this assessment, the estimated fair value of the enterprise exceeded its carrying value, including goodwill. Therefore, the Company concluded that goodwill was not impaired.
For fiscal 2022, the Company conducted its annual impairment assessment for goodwill using a qualitative approach. A qualitative approach requires an assessment that evaluates various factors that are specific to the Company, as well as industry and macroeconomic factors, in order to determine whether impairment indicators are present. If impairment indicators are present, the Company must then determine if such indicators are more likely than not to cause the fair value of the enterprise to be less than its carrying amount. Based on the qualitative analysis performed in fiscal 2022, the Company concluded that no such impairment indicators were present, and therefore goodwill was not impaired.
In addition, the Company willevaluate the carrying value of goodwill for impairment between annual impairment assessments if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Such events and indicators may include significant declines in the industries in which our products are used, significant changes in capital market conditions, or significant changes in our market capitalization. No such material indicators were noted during fiscal 2023 and fiscal 2022 between the annual impairment assessments.
Other Intangible Assets
For all reporting periods presented, the Company’s other intangible assets have estimated finite lives and are therefore subject to amortization. These assets are subject to impairment testing if events or circumstances occur that indicate the carrying amounts may be impaired. No such indicators were noted in fiscal 2023 or fiscal 2022, and therefore no impairments were recorded.
Self-Insurance
The Company is self-insured for its non-union and certain unionized employee health benefits. The Company purchases stop-loss insurance in order to establish certain limits to its exposure on a per claim basis, both individually and in the aggregate. Health benefits for some unionized employees for fiscal 2023, 2022 and 2021 were paid directly to a union trust, depending upon the union-negotiated benefit arrangement.
The Company is also 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. It is the Company’s policy to self-insure, up to certain limits, traditional risks including workers’ compensation, comprehensive general liability, and auto liability. The Company’s self-insured deductible for each claim involving workers’ compensation, comprehensive general liability (including product liability claims), and auto liability is limited to $0.8 million, $0.8 million, and $2.0 million, respectively. The Company is also self-insured up to certain limits for the majority of its medical benefit plans ($0.3 million per occurrence). A provision for claims under this self-insured program, based on our estimate of the aggregate liability for claims incurred, is revised and recorded annually. The estimate is derived from both internal and external sources including but not limited to actuarial estimates. The actuarial estimates are subject to uncertainty from various sources, including, among others, changes in claim reporting patterns, claim settlement patterns, judicial decisions, legislation, and economic conditions. Although the Company believes that the actuarial estimates are reasonable, significant differences related to the items noted above could materially affect the Company’s self-insurance obligations, future expense and cash flow. As of December 30, 2023 and December 31, 2022, the self-insurance liabilities totaled $13.8 million and $15.3 million, respectively.
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BLUELINX HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 the Company, as well as industry-wide loss experience and other actuarial assumptions. The Company determines its 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 the Company’s consolidated balance sheets.
Leases
The Company is the lessee in a lease contract when it obtains the right to control an asset associated with a particular lease. For operating leases, the Company records a right-of-use ("ROU") asset that represents its right to use an underlying asset for the lease term, and a corresponding lease liability that represents the Company’s 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 the Company’s consolidated balance sheet and are expensed on a straight-line basis over the lease term in the consolidated statement of operations and comprehensive income. The Company determines the lease term by assuming the exercise of renewal options that are reasonably certain to occur. As most of the Company’s leases do not provide an implicit interest rate, the Company’s incremental borrowing rate, based on the information available at the commencement date, is used in determining the present value of future lease payments. When contracts contain lease and non-lease components, both components are accounted for as a single lease component. See Note 13, Lease Commitments, for additional information.
Income Taxes
The Company accounts for deferred income taxes using the liability method. Accordingly, deferred tax assets and liabilities are recognized 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 the Company’s consolidated balance sheet. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not (likelihood of more than 50%) that some portion or all the deferred tax asset will not be realized.
For additional information, see Note 7, Income Taxes.
Pension Plans
Prior to December 5, 2023, the Company sponsored a noncontributory defined benefit pension plan (the “DB Pension Plan”). Most of the participants in the DB Pension Plan are inactive, with all remaining active participants no longer accruing benefits, and the plan is closed to new entrants. The funding policy for the DB Pension Plan is based on actuarial calculations and the applicable requirements of federal law. Benefits under the plan primarily are related to years of service. The Company’s accounting policy election is to measure plan assets and benefit obligations as of December 31, which is the month-end that is closest to the Company’s fiscal year-end. As further disclosed in Note 10, Employee Retirement Plans, the Company, as sponsor, settled the frozen DB Pension Plan in December 2023.
The Company is 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, the Company is generally responsible with the other participating employers for any plan underfunding. The Company’s contributions to a particular MEPP are established by the applicable CBAs; however, the Company’s 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. The settlement of the DB Pension Plan did not result in any changes to the multi-employer pension plans in which some of the Company’s union employees participate.
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Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Authoritative guidance for fair value measurements establishes a three-level hierarchy that prioritizes the inputs to valuation models based upon the degree to which they are observable. The three levels of the fair value measurement hierarchy are as follows:
•Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date
•Level 2 - Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
•Level 3 - Inputs are unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions
Assets acquired and liabilities assumed by the Company through a business combination are initially recorded at their acquisition-date fair values.
For the Company’s frozen defined benefit pension plan that was settled on December 5, 2023, the funded position of this plan, which was reflected in the Company’s consolidated balance sheet prior to settlement, is determined in part by the fair value of the assets held by the pension plan at the end of each reporting period. As of December 31, 2022, the underfunded position was $1.5 million. As of December 30, 2023, this amount was zero due to the settlement. See Note 10, Employee Retirement Plans.
The Company has no assets or liabilities for which their carrying values are remeasured to fair value at the end of each reporting period. However, the Company is required to disclose the fair values for certain assets and liabilities. See Note 9, Fair Value, for additional information.
Business Combinations
The Company accounts for business combinations by recognizing the assets acquired and liabilities assumed at the acquisition-date fair value. In valuing certain acquired assets and liabilities, fair value estimates use Level 3 inputs, including future expected cash flows and discount rates. Goodwill is measured as the excess of consideration transferred over the fair values of the assets acquired and the liabilities assumed. While the Company, sometimes with the assistance of third-party experts, uses its best estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date, such estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which can last up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments arising from new facts and circumstances are recorded to the consolidated statements of operations. The results of operations of acquisitions are reflected in the Company’s consolidated financial statements from the date of acquisition.
Share-Based Compensation Expense
The Company recognizes compensation expense equal to the grant-date fair value, which is generally based on the fair market value of the Company’s common stock on the date of grant, for all share-based payment awards that are expected to vest. For service-based grants, expense is recorded on a straight-line basis over the requisite service period of the entire award. For performance-based awards, the Company recognizes compensation expense over each separate vesting tranche to the extent the achievement of the performance goal is deemed to be probable at the end of each reporting period. Forfeitures are accounted for as they actually occur, and compensation expense is adjusted accordingly so that it reflects cumulative expense only for the number of grants that actually vested prior to the forfeiture event. Compensation expense related to share-based payment awards is generally recorded in SG&A expense in the consolidated statements of operations.
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Repurchases of Common Stock
The Company may make authorized repurchases of its common stock from time to time, without prior notice, subject to prevailing market conditions and other considerations. Repurchases may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, accelerated share repurchase programs, tender offers, or pursuant to a trading plan that may be adopted in accordance with the Securities and Exchange Commission Rule 10b5-1. Repurchased shares of the Company’s common stock are retired by the Company and are not reported as treasury stock. The portion of the cost to repurchase common stock that is in excess of par value is charged to additional paid-in capital within stockholders’ equity.
Direct costs incurred by the Company to repurchase its common stock, such as broker commissions and excise taxes, are considered part of the cost to repurchase the common stock. Effective January 1, 2023, if the cost of net share repurchases made by publicly traded U.S. company exceeds $1 million annually, the cost of the repurchased shares is subject to a 1% excise tax as a result of the Inflation Reduction Act of 2022. For any reporting period, the costs of repurchased shares reported on the Company’s consolidated statement of stockholders’ equity may differ from the amount reported on the Company’s consolidated statement of cash flows due to the timing of remittances for excise taxes which are made in accordance with applicable law.
Advertising Cost
Advertising costs are expensed as incurred and totaled $2.1 million, $2.6 million, and $1.8 million for the fiscal years 2023, 2022 and 2021, respectively.
Recent Accounting Standards - Adopted
The Company did not adopt any new accounting standards during fiscal 2023. The following accounting standards were adopted during fiscal 2022 and fiscal 2021.
Credit Impairment Losses. In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 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 former incurred loss model 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. The Company adopted this standard on a modified retrospective basis in the first quarter of 2022 and the implementation did not have a material impact to the Company’s consolidated financial statements.
Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The standard provides temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the discontinuation of the publication of certain tenors of the London Inter-bank Offered Rate (“LIBOR”) on December 31, 2021, with complete elimination of the publication of the LIBOR by June 30, 2023. The amendments in this ASU are elective and apply to all entities that have contracts referencing the LIBOR. The Company’s revolving credit agreement, as further discussed in Note 8, Long-Term Debt, to these consolidated financial statements, was amended on June 27, 2023, to replace references to LIBOR with Secured Overnight Financing Rate (“SOFR”) for determining interest payable on current and future borrowings. The guidance in this ASU provides a practical expedient which simplifies accounting analyses under current U.S. GAAP for contract modifications if the change is directly related to a change from the LIBOR to a new interest rate index. The Company adopted this standard prospectively in the first quarter of 2022. The implementation did not have a material impact on the Company’s condensed consolidated financial statements or to any key terms of our revolving credit agreement other than the discontinuation of LIBOR.
Income Taxes. In December 2019, the FASB issued 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 were effective for interim periods and fiscal years beginning after December 15, 2020. The Company adopted this standard effective for fiscal year 2021. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
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Recent Accounting Standards - Adoption Pending
Segment Reporting Improvements. On November 27, 2023, the FASB issued ASU No. 2023-07, Segment Reporting—Improvements to Reportable Segment Disclosures (“ASU 2023-07”). The FASB issued the new guidance primarily to provide financial statement users with more disaggregated expense information about a public business entity’s (“PBE”) reportable segment(s). This ASU will require PBEs to provide incremental disclosures related to the entity’s reportable segment(s), including disclosures for expenses that are both 1) significant to each reportable segment and are provided regularly to the Chief Operating Decision Maker (“CODM”) or easily computed from information regularly provided to the CODM and 2) included in the reported measure of segment profit or loss used by the CODM to assess performance and allocate resources. If a PBE does not disclose any significant segment expenses for a reportable segment, it is required to disclose narratively the nature of the expenses used by the CODM to manage each segment’s operations. Under the provisions of this ASU, all of the disclosures required in the segment guidance, including disclosing a measure of segment profit or loss used by the CODM and reporting significant segment expenses, applies to all PBEs, including those with a single operating or reportable segment. However, this ASU does not change the definition of a segment, the method for determining segments, or the criteria for aggregating operating segments into reportable segments. ASU 2023-07 will be effective for the Company’s annual reporting periods beginning in fiscal 2024 and all interim reporting periods beginning in fiscal 2025. At adoption, the disclosures are retrospectively presented for all comparative periods presented. Since this new ASU addresses only disclosures, the Company does not expect the adoption of this ASU to have any material effects on its financial condition, results of operations or cash flows. The Company is currently evaluating any new disclosures that may be required upon adoption of ASU 2023-07.
Income Tax Disclosure Improvement. On December 14, 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures, which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. Under the new guidance, entities must consistently categorize and provide greater disaggregation of information in the rate reconciliation. They must also further disaggregate income taxes paid. The ASU’s disclosure requirements apply to all entities subject to ASC 740. The overall objective of these disclosure requirements is for an entity, particularly an entity operating in multiple jurisdictions, to disclose sufficient information to enable users of financial statements to understand the nature and magnitude of factors contributing to the difference between the effective tax rate and the statutory tax rate. ASU 2023-09 will be effective for the Company for the fiscal 2025 annual reporting period. Since this new ASU addresses only disclosures, the Company does not expect the adoption of this ASU to have any material effects on its financial condition, results of operations or cash flows. The Company is currently evaluating any new disclosures that may be required upon adoption of ASU 2023-09.
2. Business Combination
As previously disclosed, on October 3, 2022 the Company acquired all the outstanding stock of Vandermeer Forest Products (“Vandermeer”), a wholesale distributor of building products, for preliminary consideration of $69.3 million, which included $5.5 million of cash acquired. The purchase price also included $3.6 million for a distribution facility and real estate located in Spokane, Washington, which were acquired in this transaction. During the first quarter of fiscal 2023, $0.3 million was received by the Company for adjustments to Vandermeer’s working capital balances, reducing total consideration from $69.3 million to $69.0 million. The measurement period is now closed.
The acquisition of Vandermeer provides the Company with direct access to customers in the states of Oregon and Washington. With the acquisition of Vandermeer, the Company now serves all 50 states. Vandermeer’s results of operations are included in the Company’s results of operations beginning on the October 3, 2022 acquisition date. Vandermeer contributed revenues of $25.5 million from the October 3, 2022 acquisition date through the end of fiscal 2022.
The acquisition was accounted for as a business combination using the acquisition method. The assets acquired and liabilities assumed were recognized at their acquisition date fair values. The following table summarizes the components of the consideration, as adjusted in the first quarter of 2023 for the working capital adjustment:
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(In thousands)
Estimated fair value of identifiable assets acquired and liabilities assumed:
Accounts receivable 13,180
Property, plant and equipment 3,955
Operating lease right-of-use assets 714
Prepaid expenses and other assets 101
Intangible assets:
Customer relationships 23,000
Non-compete agreements 700
Accounts payable (1,738)
Accrued compensation (994)
Operating lease liability (714)
Other current liabilities (75)
Total identifiable net assets 61,373
Total consideration $ 68,973
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 we expect to realize from the acquisition. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce. The Company made a 338(h)(10) tax election to allow for the deductibility of goodwill recognized from the acquisition.
At acquisition, $6.3 million of the cash consideration paid by the Company was placed into a bank escrow account for the purpose of paying third parties for obligations that were assumed by the seller. During the third quarter of fiscal 2023, $1.6 million of this escrow balance was returned to the seller under the terms of the stock purchase agreement and the escrow arrangement that provide for scheduled return of the unused balance in the escrow account. As of December 30, 2023, the remaining balance in the escrow account is $4.8 million and any unused amount remaining in this escrow account will be released to the seller approximately 18 months after the acquisition date.
The estimated useful life for the customer relationships, trade names, and non-compete agreements is 12 years, 3 years, and 5 years, respectively.
3. Inventories
The Company’s inventories as of the end of fiscal 2023 and fiscal 2022 consisted almost entirely of finished goods inventory, with an immaterial amount of work-in-process inventory.
As of the end of fiscal 2022, the Company had a lower-of-cost-or-net-realizable-value inventory reserve of $2.6 million as a result of the decrease in the value of our structural lumber and panel inventory related to the decline in wood-based commodity prices. As of December 30, 2023, the Company had no inventory reserve.
4. Revenue Recognition
The following table presents the Company’s revenues disaggregated by revenue source. Sales and usage-based taxes are excluded from revenues. No single customer of the Company generated 10% or more of the Company’s total net sales during fiscal years 2023, 2022 or 2021.
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Fiscal Year Ended
(In thousands)
The following table presents the Company’s revenues disaggregated by sales channel. Warehouse sales are delivered from the Company’s warehouses. Reload sales are similar to warehouse sales but are shipped from non-warehouse locations, most of which are operated by third parties, where the Company stores owned products to enhance operating efficiencies. The reload channel is employed primarily to service strategic customers that are less economical to service from Company warehouses, and to distribute large volumes of imported products from port facilities. Direct sales are shipped from the manufacturer to the customer and therefore the Company does not take taking physical possession of the inventory and, as a result, typically generate lower margins than the warehouse and reload distribution channels. The direct distribution channel requires the lowest amount of committed capital and fixed costs.
Fiscal Year Ended
(In thousands)
The Company generally expenses sales commissions when incurred because the amortization period would typically be one year or less. These costs are recorded within SG&A expense.
The Company has made an accounting policy election to treat outbound shipping and handling activities as an SG&A expense. Shipping and handling costs include amounts related to the administration of the Company’s logistical infrastructure, handling of material in its warehouses, and amounts pertaining to the delivery of products to customers, such as fuel and maintenance costs for mobile fleet, wages for drivers, and third party freight charges. These expenses were $152.3 million, $160.3 million, and $149.2 million for fiscal 2023, fiscal 2022, and fiscal 2021, respectively.
5. Goodwill and Other Intangible Assets
As of December 30, 2023 and December 31, 2022, 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 the acquisition method accounting for business combinations. The Company’s goodwill as of December 30, 2023 originated as follows: $47.8 million from the 2018 acquisition of Cedar Creek and $7.6 million from the 2022 acquisition of Vandermeer.
Goodwill is not subject to amortization but must be tested for impairment at least annually at the reporting unit level. Since the Company operates within a single reporting unit, goodwill is evaluated at the enterprise level. The Company evaluates goodwill for impairment as of the first day of its fiscal fourth quarter, which was October 1, 2023 for fiscal 2023. The annual assessment for fiscal 2023 utilized a quantitative approach and was performed by the Company with the assistance of a independent third-party expert. Based on this assessment, the Company concluded that its goodwill was not impaired and therefore no impairment charge was needed.
The Company completed its annual assessment of goodwill in the fourth quarter of fiscal 2022 using a qualitative approach. Based on the qualitative analysis performed in fiscal 2022, the Company noted no changes that were reasonably likely to cause the fair value of the enterprise to be less than its carrying value and therefore concluded that goodwill was not impaired.
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In addition, the Company mustevaluate the carrying value of goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would indicate that the carrying amount of goodwill may be impaired. Such events and indicators may include significant declines in the industries in which the Company’s products are used, significant changes in capital market conditions, and significant changes in the Company’s market capitalization. No such indicators were identified in fiscal 2023 or fiscal 2022.
The following table provides information related to the carrying amount of the Company’s goodwill:
Total Carrying Amount
(In thousands)
Business combination 7,600
Definite-Lived Intangible Assets
The gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets as of December 30, 2023 were as follows:
($ amounts in thousands)
(1) Intangible assets except customer relationships are amortized on straight line basis. Certain of our customer relationships are amortized on a double declining balance method and certain others are amortized on a straight line basis.
The gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets as of December 31, 2022 were as follows:
($ amounts in thousands)
(1) Intangible assets except customer relationships are amortized on straight line basis. Customer relationships are amortized on a double declining balance method.
Definite-lived intangible assets are subject to impairment testing if events or circumstances occur that indicate the carrying amounts may be impaired. No such indicators were present in fiscal 2023 and fiscal 2022.
Amortization Expense
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Amortization expense for the definite-lived intangible assets was $4.2 million, $3.4 million, and $5.3 million for the years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
Estimated annual amortization expense for definite-lived intangible assets over the next five fiscal years is as follows:
Fiscal Year Ended Estimated Amortization
(In thousands)
6. Property and Equipment
Property, plant and equipment as of December 30, 2023 and December 31, 2022, consisted of the following:
(In thousands)
Depreciation expense for property, plant and equipment was $27.8 million, $24.2 million, and $22.8 million for the years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively. See Note 13, Lease Commitments, for disclosure about the Company’s property and equipment that is held under finance lease obligations.
7. Income Taxes
In fiscal 2023, the Company’s statutory income tax rate was 25.3 percent and it was comprised of the federal statutory income tax rate of 21.0 percent and the blended state statutory income tax rate of 4.3 percent. In fiscal 2022, the Company’s statutory income tax rate was 25.4 percent and it was comprised of the federal statutory income tax rate of 21.0 percent and the blended state statutory income tax rate of 4.4 percent. In fiscal 2021, the Company’s statutory income tax rate was 25.8 percent and it was comprised of the federal statutory income tax rate of 21.0 percent and the blended state statutory income rate of 4.8 percent. The Company’s blended state income tax rate is impacted by the mix of income earned in various states and by the Company’s federal taxable income, both of which may differ from year to year. The Company’s effective income tax rate is impacted by the effects of permanent differences occurring throughout the fiscal year.
For fiscal 2023, fiscal 2022, and fiscal 2021, the Company’s effective income tax rate was 40.7 percent, 25.0 percent, and 24.8 percent, respectively.
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($ amounts in thousands)
Federal income taxes:
State income taxes:
The accounting for the one-time settlement for the single-employer defined benefit pension plan increased the effective income tax rate for fiscal 2023 by 14.8%.
The Company’s provisions for income taxes are reconciled to the federal statutory amounts as follows:
(In thousands)
Pension plan settlement (1) 12,150 — —
Permanent differences arising from compensation 746 (71) 686
(1) $4.5 million was reclassified from accumulated other comprehensive income (loss)
As of December 30, 2023, an income tax payable of $8.5 million is included on the Company’s consolidated balance sheet along with $1.1 million attributed to franchise taxes payable for a total of $9.6 million. As of December 31, 2022, a current income tax receivable of $9.9 million is included within Other current assets on the Company’s consolidated balance sheet.
The Company’s financial statements contain certain deferred tax assets which primarily result from other temporary differences related to certain reserves, accrued liabilities, pension obligations, differences between book and tax depreciation and amortization, and state net operating losses. The Company records a valuation allowance against deferred tax assets when it is determined, based on the weight of available evidence, that it is more likely than not that some or all of the Company’s deferred tax assets will not be realized in the future. For fiscal 2023 and fiscal 2022, components of the Company’s deferred income tax assets and deferred income tax liabilities are as follows:
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(In thousands)
Deferred income tax assets:
Compensation-related accruals 7,794 5,807
Benefit from net operating loss carryovers 4,317 4,995
Total gross deferred income tax assets 71,230 77,968
Less: valuation allowances (3,456) (4,076)
Total net deferred income tax assets $ 67,774 $ 73,892
Deferred income tax liabilities:
Total deferred income tax liabilities (14,518) (17,723)
Activity in the Company’s deferred tax asset valuation allowance for fiscal 2023 and 2022 was as follows:
(In thousands)
Balance as of beginning of the fiscal year $ 4,076 $ 4,269
Valuation allowance increases (decreases) related to:
State net operating loss carryforwards (620) (193)
Balance as of end of the fiscal year $ 3,456 $ 4,076
The Company has recorded income tax and related interest liabilities where it believe certain tax positions are not more likely than not to be sustained if challenged. These balances are included in other noncurrent liabilities in the Company’s consolidated balance sheets.
The following table summarizes the activity related to our gross unrecognized tax benefits:
(In thousands)
Balance at beginning of the fiscal year $ 1,872 $ 2,205
Additions for tax positions of current year 1,765 —
Reductions due to lapse of applicable statute of limitations (356) (333)
Balance at end of the fiscal year $ 3,281 $ 1,872
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Included in the unrecognized tax benefits as of December 30, 2023 and December 31, 2022, were approximately $1.5 million and $1.9 million, respectively of tax benefits that, if recognized, would reduce the Company’s annual effective tax rate for fiscal 2023 and 2022. No penalties were accrued for either 2023 or 2022. The Company has accrued interest associated with its unrecognized tax benefits which it releases as those benefits are realized due to the lapse of applicable statute of limitations. Interest expense associated with the Company’s unrecognized tax benefits is reported as interest expense, net in the Company’s consolidated statement of operations and comprehensive income. Such interest expense has not been material in any reporting period presented herein.
Net Operating Losses
At the end of fiscal 2023, the Company’s gross state net operating loss carryovers were $81.0 million and its tax-effected state net operating loss carryovers were $4.3 million, of which $3.5 million was subject to a valuation allowance arising from expiration dates when considered in conjunction with state limitations related to Internal Revenue Code (“IRC”) Section 382. At the end of fiscal 2022, the Company’s gross state net operating loss carryovers were $92.2 million and tax-effected state net operating loss carryovers were $5.0 million, of which $4.1 million was subject to a valuation allowance arising from expiration dates when considered in conjunction with state limitation related to IRC Section 382. The Company’s state net operating loss carryovers will expire in 1 to 20 years.
Federal and State Tax Filings
The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations and may be subject to audit based on periods that are not limited by applicable statutes. The Company’s U.S. federal income tax returns for tax years 2020, 2021 and 2022 remain subject to audit under the federal statute of limitations. The Company’s auditable state income tax returns vary depending on the jurisdiction and its applicable statute of limitations.
Assessing Deferred Tax Assets
Quarterly, the Company assesses the carrying value of its deferred tax assets for impairment by evaluating the weight of available evidence at the end of each fiscal quarter. In the evaluation of the weight of available evidence at the end of fiscal 2023, the Company considered the recent reported income in the current year, as well as the reported income for 2022 and 2021, 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 evaluated. The Company 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, the Company considered as positive evidence forecasted future taxable income, the future timing of the reversal of its deferred tax assets and liabilities, and the evidence from business and tax planning strategies. At the end of fiscal 2023 and fiscal 2022, in the Company’s evaluation of the weight of available evidence, the Company concluded that its deferred tax assets were not impaired other than $3.5 million of the state net operating losses.
Although the Company believes its estimates are reasonable in the carrying value of its valuation allowances against our deferred tax items, the ultimate determination of the appropriate amounts of valuation allowance involves significant judgement.
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8. Debt and Finance Leases
As of December 30, 2023, and December 31, 2022, outstanding debt and finance leases consisted of the following:
(In thousands)
Revolving credit facility (2) — —
Unamortized debt issuance costs (4) (3,246) (4,057)
Unamortized bond discount costs (4) (3,011) (3,519)
Less: current portions of finance leases 11,178 7,089
Total debt and finance leases, net of current portions $ 567,991 $ 558,410
(1) As of December 30, 2023 and December 31, 2022, long-term term debt was comprised of $300.0 million of senior secured notes issued in October 2021. These notes are presented under the long-term debt caption of the Company’s consolidated balance sheets at $293.7 million and $292.4 million as of December 30, 2023 and December 31, 2022, respectively. This presentation is net of discount of $3.0 million and $3.5 million and the combined carrying value of debt issuance costs of $3.2 million and $4.1 million as of December 30, 2023 and December 31, 2022, respectively. The senior secured notes are presented in the above table at face value and have an annual interest rate of 6.0% through maturity.
(2) No borrowings were outstanding during fiscal 2023 or fiscal 2022. Available borrowing capacity under this revolving credit facility was $346.5 million and $346.5 million on December 30, 2023 and December 31, 2022, respectively. The available borrowing capacity reflects undrawn letters of credit.
(3) Refer to Note 13, Lease Commitments, for interest rates associated with finance lease obligations.
(4) Interest expense, net on the Company’s consolidated statement of operations for fiscal 2023 and 2022 reflects amortization of debt issuance costs and bond discount costs of $1.3 million and $1.2 million, respectively.
Senior Secured Notes
In October, 2021, the Company and certain subsidiaries completed a private offering of $300.0 million of 6.0% percent senior secured notes due 2029 (the “2029 Notes”), and in connection therewith entered into an indenture (the “Indenture”) with the subsidiary guarantors and Truist Bank, as trustee and collateral agent. The 2029 Notes were issued to investors at 98.625 percent of their principal amount. The 2029 Notes are secured by a first-priority security interest in substantially all of the Company’s assets, other than accounts receivables, inventory, deposit accounts, securities accounts, business interruption insurance and other related assets. The majority of net proceeds from the offering of the 2029 Notes were used to repay borrowings under the Company’s Revolving Credit Facility, as described below. The 2029 Notes will mature on November 15, 2029, however at the sole discretion of the Company, the notes may be redeemed, in whole or in part, prior to scheduled maturity. Early redemptions made by the Company prior to November 15, 2026 would require the Company to pay a redemption premium, as defined in the Indenture. Interest expense for the 2029 Notes totaled $18.0 million for fiscal 2023 and fiscal 2022.
Revolving Credit Facility
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In April 2018, the Company and certain subsidiaries entered into the Amended and Restated Credit Agreement for a revolving credit facility with Wells Fargo Bank, National Association, as administrative agent (“the Agent”), and certain other financial institutions. In August 2021, the Company entered into a second amendment to this revolving credit facility to, among other things, extend the maturity date of the facility to August 2, 2026, and reduce the interest rate on borrowings under the facility, and in June 2023, the Company entered into a third amendment to this revolving credit facility to, among other things, replace the interest rate based on the London interbank offered rate (“LIBOR”) thereunder with an interest rate based on the secured overnight financing rate (“SOFR”) and a customary spread adjustment (as amended, the “Revolving Credit Facility”). In October 2021, in conjunction with the offering of the 2029 Notes, the Company reduced the credit limit of the Revolving Credit Facility from $600.0 million to $350.0 million. In conjunction with the reduction in the credit limit of the Revolving Credit Facility, the Company expensed approximately $1.6 million of unamortized debt issuance costs during the fourth quarter of fiscal 2021. These costs are included within interest expense, net on the consolidated statements of operations and reported separately as an adjustment to net income in the consolidated statements of cash flows. The Revolving Credit Facility provides for a senior secured asset-based revolving loan and letter of credit facility of up to $350.0 million, as amended. The obligations under the Revolving Credit Facility are secured by a security interest in substantially all of the Company’s and its subsidiaries’ assets (other than real property), including inventories, accounts receivable, and proceeds from those items, under the Amended and Restated Guaranty and Security Agreement.
From and after June 30, 2023, borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to (i) Adjusted Term SOFR (calculated as SOFR plus 0.1%) plus a margin ranging from 1.25 percent to 1.75 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on SOFR, or (ii) the Agent’s base rate plus a margin ranging from 0.25 percent to 0.75 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate.
Prior to June 30, 2023, borrowings under the Revolving Credit Facility bore interest at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.25 percent to 1.75 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on LIBOR, or (ii) the Agent’s base rate plus a margin ranging from 0.25 percent to 0.75 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate.
Borrowings under the Revolving Credit Facility are subject to availability under the borrowing base (as that term is defined in the revolving credit agreement). The Company would be required to repay the Revolving Credit Facility to the extent that such revolving borrowings 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.
As of December 30, 2023, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $868.2 million under our Revolving Credit Facility. As of December 31, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $645.4 million under our Revolving Credit Facility. Available borrowing capacity under our Revolving Credit Facility was $346.5 million and $346.5 million on December 30, 2023 and December 31, 2022, respectively.
During fiscal 2023 and fiscal 2022, the Company incurred no interest expense for the Revolving Credit Facility since no borrowings were outstanding during either fiscal year. During fiscal 2023 and fiscal 2022, the Company incurred $1.0 million and $1.0 million, respectively, of fees associated with the Revolving Credit Facility, primarily unused line fees. These expenses are included in Interest expense, net on the Company‘s consolidated statement of operations.
Debt Covenants
The Revolving Credit Facility and the 2029 Notes contain various covenants and restrictions, including customary financial covenants. The Company’s right to make draws on the Revolving Credit Facility may be conditioned upon, among other things, compliance with these covenants. The Company was in compliance with all covenants as of December 30, 2023. These covenants also limit the Company’s ability to, among other things: incur additional debt; grant liens on assets; make investments; repurchase stock; pay dividends and make distributions; sell or acquire assets, including certain real estate assets, outside the ordinary course of business; engage in transactions with affiliates; and make fundamental business changes.
Former Term Loan Facility
On April 2, 2021, the Company repaid the remaining outstanding principal balance of its former term loan facility, the Credit and Guaranty Agreement, as amended . In connection with this repayment, the Company expensed $5.8 million of unamortized
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debt issuance costs associated with the former term loan facility. These costs are included within interest expense, net on the consolidated statements of operations and reported separately as an adjustment to net income in our consolidated statements of cash flows.
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 13, Lease Commitments.
9. Fair Value
Assets and Liabilities Measured at Fair Value on a Recurring Basis
For the Company’s frozen defined benefit pension plan that was settled on December 5, 2023, the funded position of this plan, which was reflected in the Company’s consolidated balance sheet prior to settlement, is determined in part by the fair value of the assets held by the pension plan at the end of each reporting period. As of December 31, 2022, the underfunded position was $1.5 million. As of December 30, 2023, this amount was zero due to the settlement. See Note 10, Employee Retirement Plans.
The Company has no other assets or liabilities for which the carrying value is remeasured to fair value at the end of each reporting period. The Company has not elected the fair value reporting option for any of its financial instruments.
Fair Value Disclosures
The fair value of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities, to the extent the underlying liability will be settled in cash, approximates the carrying values because of the short-term nature of these instruments.
Debt
The estimated fair value of the Company’s 2029 Notes was determined based on Level 2 input using observable market prices in less active markets and is presented below:
Carrying Value Fair Value Carrying Value Fair Value
(In thousands)
The fair values of the 2029 Notes as of December 30, 2023 and December 31, 2022 were significantly influenced by the 6.0% annual interest rate borne by the 2029 Notes, which was below market interest rates as of both dates.
The carrying amount of the Company’s Revolving Credit Facility, which had no borrowings outstanding during fiscal 2023 or fiscal 2022, approximates its fair value as the interest rate is variable and reflective of market interest rates.
10. Employee Retirement Plans
Multiemployer Pension Plans
The Company is involved in various multiemployer pension plans (“MEPPs”) that provide retirement and certain disability benefits to certain union employees in accordance with certain collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, the Company is generally responsible with the other participating employers for any plan underfunding. The Company’s contributions to a particular MEPP are established by the applicable CBAs; however, 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 the Company’s contribution rate to the applicable CBA, a reallocation of the contributions already being made by participating employers for
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various benefits to individuals participating in the MEPP, and/or a reduction in the benefits to be paid to future and/or current retirees.
The Company could also be obligated to make future payments to MEPPs if it either ceases to have an obligation to contribute to the MEPP or significantly reduces its contributions to the MEPP because the Company reduced its 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 the Company’s proportionate share of the plan’s unfunded vested benefits.
The following table lists the Company’s participation in its multiemployer plans which the Company deems significant. “Contributions” represent the amounts contributed to the plan during the fiscal years presented: