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Item 7. Management’s Discussion and Analysis

2021-03-03 compared with 2020-03-11 · 244 added, 208 removed, 126 unchanged (78% of the section changed)

8 unchanged sentences

Company Background

BlueLinx is a leading distributor of building and industrial products in the U.S.

With a combination of market position and geographic coverage, the buying power of centralized procurement, and the strength of a locally-focused sales force and service-driven logistics and operations team, BlueLinx is able to provide a wide range of value-added services and solutions to our customers and suppliers.

We are headquartered in Georgia, with executive offices located at 1950 Spectrum Circle, Suite 300, Marietta, Georgia, and we operate our distribution business through a broad network of distribution centers.

We serve many major metropolitan areas in the U.S.

and deliver building and industrial products to a variety of wholesale and retail customers.

We distribute products in two principal categories:

structural products and specialty products.

Structural products include plywood, oriented strand board, rebar and remesh, lumber, spruce, and other wood products primarily used for structural support, and walls in construction projects.

Structural products represented approximately 33% of our fiscal 2019 net sales.

Specialty products include engineered wood products, moulding, siding (including vinyl products), cedar, metal products (excluding rebar and remesh), and insulation.

Specialty products accounted for approximately 67% of our fiscal 2019 net sales.

BlueLinx is a leading U.S.

wholesale distributor of residential and commercial building products with both branded and private-label SKUs across product categories such as lumber, panels, engineered wood, siding, millwork, metal building products, and other construction materials.

With a strong market position, broad geographic coverage footprint servicing 40 states, and the strength of a locally focused sales force, we distribute our comprehensive range of products to over 15,000 national, regional, and local dealers, specialty distributors, national home centers, and manufactured housing customers.

BlueLinx is able to provide a wide range of value added services and solutions to our customers and suppliers.

We are headquartered in Georgia, with executive offices located at 1950 Spectrum Circle, Marietta, Georgia, and we operate our distribution business through a broad network of distribution centers.

As a “two-step” wholesale distributor of building products, BlueLinx stocks products from leading manufacturers, such as Huber Engineered Woods, James Hardie, Georgia Pacific, Weyerhaeuser, and Oldcastle, and supplies these products to a broad range of customers, including lumber yards, dealers, home centers, and hardware stores.

These customers then serve residential and commercial builders and contractors in their respective geographic areas.

BlueLinx plays a critical role in enabling its lumber yard, dealer, and home center customers to offer a broad range of products and brands, as most of BlueLinx’s customers do not have the capability to purchase and warehouse directly from the manufacturers for such a large set of SKUs.

Similarly, BlueLinx provides value to its manufacturer partners by enabling access to the fragmented network of lumber yards and dealers that the manufacturers could not adequately serve directly.

Our place in this distribution model of building products provides easy access to the marketplace for our suppliers and the value proposition of rapid delivery on an as-needed basis to our customers from our network of warehouse facilities.

In addition to its broad portfolio of building products, BlueLinx also offers a wide array of custom cutting and fabrication services for the wood products industry.

Recent Developments

Term Loan Facility

In October 2019, we amended our Term Loan Facility to, among other things, permit real estate sale leaseback transactions and modify the “Total Net Leverage Ratio” covenant beginning in the third quarter of 2019.

The amendment also established a designated outstanding principal balance level required to maintain the modified “Total Net Leverage Ratio” covenant levels for the 2019 fourth quarter and subsequent quarters.

The principal balance level was satisfied on January 31, 2020, through repayments from the real estate financing transactions described below under “Real Estate Transactions” and in Note 16 to the Consolidated Financial Statements.

On February 28, 2020, we further amended our Term Loan Facility to provide that we will not be subject to the facility’s quarterly “Total Net Leverage Ratio” covenant from and after the time, and then for so long as, the principal balance level under the facility is less than $45 million.

Revolving Credit Facility

In January 2020, we amended our Revolving Credit Facility to (i) modify the “Seasonal Period” to run from November 15, 2019, through July 15, 2020, for the calendar year 2019, and to run from December 15 of each calendar year through April 15 of each immediately succeeding calendar year for the calendar year 2020 and thereafter, and (ii) extend the measurement period in the definition of “Cash Dominion Event” from three consecutive business days to five consecutive business days.

The amendment, which is described further in Note 16 to the Consolidated Financial Statements, better aligns advance rates under the facility with the seasonality associated with our business.

Real Estate Transactions

During the second quarter of 2019, we completed real estate financing transactions on two of our distribution centers.

We sold these properties for gross proceeds of $45.0 million.

As a result of these real estate financing transactions, we recognized financing obligations in the amount of the sales price, which will be amortized over the shorter of the lives of the leases or financing obligations.

These transactions were completed through sale-leaseback arrangements, and were accounted for as financing transactions, in accordance with U.S.

Net proceeds were used to reduce our outstanding Term Loan Facility balance.

On December 31, 2019, we completed real estate financing transactions on four distribution centers for gross proceeds of $33.2 million.

On January 31, 2020, we completed additional real estate financing transactions on nine distribution centers for gross proceeds of $37.0 million.

And on February 28, 2020, we completed one additional real estate financing transaction transaction for gross proceeds of $8.1 million.

These transactions, which were completed through sale-leaseback arrangements, were accounted for as financing transactions and we recognized financing obligations in the amount of the sales price, which will be amortized over the shorter of the lives of the leases or financing obligations under U.S.

Net proceeds from these transactions were used to further reduce our outstanding Term Loan Facility balance.

Industry Conditions

Many of the factors that cause our operations to fluctuate are seasonal or cyclical in nature.

Our operating results have historically been correlated with the level of single-family residential housing starts in the U.S.

At any time, 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.

Since 2011, the U.S.

housing market has generally shown improvement.

Single-family residential housing starts and permits trended upward at the end of 2019, and we believe the housing market improvement trend will continue in the long term, and that we are well-positioned to support our customers.

Our operating results are also affected by commodity pricing.

During 2019, framing lumber commodity prices recovered slightly from their significant 2018 declines, but commodity prices for wood panels continued the decline that began in 2018.

These commodity pricing trends negatively impacted our financial results in fiscal 2019.

During the first quarter of fiscal 2020, we completed real estate financing transactions through sale-leaseback arrangements on fourteen of our distribution facilities.

Gross proceeds for these transactions were $78.3 million.

Net proceeds from these transactions were used to repay indebtedness under our Term Loan Facility.

Upon completion of the transactions, we entered into long-term leases with multiple renewal options on the properties.

These real estate financing transactions were accounted for as finance leases, in accordance with generally accepted accounting principles in the United States (“U.S.

Additionally, during the third quarter of fiscal 2020, we completed a real estate financing transaction through a sale-leaseback arrangement on one distribution facility.

Gross proceeds for this transaction were $11.0 million and we recognized a gain of $8.7 million on the sale of this facility.

Net proceeds from this transaction were used to repay indebtedness under our Term Loan Facility.

Upon completion of the transaction, we entered into a long-term lease with multiple renewal options on the property.

The real estate financing transaction was accounted for as a sale and the lease was accounted for as an operating lease, in accordance with U.S.

These transactions are described in further detail in Note 12, Lease Commitments, in the Notes to the Consolidated Financial Statements.

Factors That Affect Our Operating Results and Trends

Our results of operations and financial performance are influenced by a variety of factors, including:

(i) the commodity nature of the products we manufacture and distribute;

(ii) general economic and industry conditions affecting demand in the housing market;

and (iii) cost and availability of the products we distribute.

These factors have historically produced cyclicality in our results of operations, and we expect this cyclicality to continue in future periods .

Commodity Nature of Our Products

Many of the building products we distribute, including OSB, plywood, and lumber, 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, 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 which, in a dynamic inflationary commodity market, may at times well exceed our purchase price.

At certain other times, the selling price for any one or more of the products we distribute, especially those of a commodity nature, may fall below our purchase costs for the same reasons, requiring us to incur short-term losses on specific sales transactions.

Therefore, our profitability with respect to these commodity products depends, in significant part, on commodity prices in addition to managing our cost structure, particularly shipping and handling costs, which represent significant components of our operating costs.

Composite structural panel and lumber prices have been historically volatile.

The following table represents the percentage price changes on a year over year basis of the average composite panel, including certain panel subcategories, and average composite lumber prices as reflected by Random Lengths, an industry publication, for the periods noted below.

In addition to the year-over-year average price changes, 2020 was a year of exceptional price volatility when compared to historical results over the last eight years as both composite panel and composite lumber prices experienced the largest difference between high and low price levels within a calendar year.

Pricing for these products declined starting in March, 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.

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.

Wood-based commodity index prices began January at record or near-record highs and remain at elevated levels.

There is much 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.

Factors That Affect Our Operating Results

Our results of operations and financial performance are influenced by a variety of factors, including the following:

operational disruption associated with the integration of the Cedar Creek business with ours;

changes in the prices, supply, and/or demand for products that we distribute, including potential changes driven by the spread of contagious illnesses;

inventory management and commodities pricing;

new housing starts;

general economic and business conditions in the U.S.;

disintermediation by our customers and suppliers;

acceptance by our customers of our branded and privately branded products;

new or increased tariffs, duties (including anti-dumping and countervailing duties), and customs restrictions on the products we import;

financial condition and credit worthiness of our customers;

supply from key vendors;

reliability of the technologies we utilize;

activities of competitors;

changes in significant operating expenses;

risk of losses associated with accidents;

exposure to product liability claims and other legal proceedings;

changes in the availability of capital and interest rates;

adverse weather patterns or conditions;

acts of cyber intrusion or other disruptions to our information technology systems;

variations in the performance of the financial markets, including the credit markets;

the risk factors discussed under Item 1A Risk Factors and elsewhere in this Annual Report on Form 10-K.

Key Business Metrics

Net sales result primarily from the distribution of products to dealers, industrial manufacturers, manufactured housing producers, and home improvement retailers.

All revenues recognized are net of trade allowances, cash discounts, and sales returns.

In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis.

When the consigned inventory is sold by the customer, we also recognize revenue net of trade allowances.

Net sales may not be comparable year-over-year due to acquisitions, closed facilities, and market-driven fluctuations in the prices of the inventories we sell.

Gross profit primarily represents revenues less the product cost from our suppliers (net of earned rebates and discounts), including the cost of inbound freight.

The costs of outbound freight, purchasing, receiving, and warehousing are included in selling, general, and administrative expenses within operating expenses.

Our gross profit may not be comparable to that of other companies, as other companies may include all or some of the costs related to their distribution network in cost of sales.

Market price fluctuations, particularly on structural products vulnerable to commodity price variability, may impact our gross profit.

Calendar Year Ended

2020 versus 2019 2019 versus 2018

Increase (decrease) in composite lumber prices 59% (23)%

Increase (decrease) in Western SPF lumber prices 45% (20)%

Increase (decrease) in Southern pine lumber prices 53% (22)%

Increase (decrease) in composite panel prices 56% (27)%

Increase (decrease) in Western fir plywood prices 22% (16)%

Increase (decrease) in Southern pine plywood prices 29% (18)%

Increase (decrease) in OSB prices 99% (38)%

General Economic and Industry 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.

The COVID-19 pandemic had a significant negative effect on single family housing starts in April and May.

However, housing starts rebounded during the second half of the year.

Low interest rates, shortages in existing home inventory, and a potential growing trend toward relocating away from populated metropolitan areas to areas with single-family homes may help sustain the improvement in

single-family housing starts.

We believe the housing market improvement trend will continue in the long term, and that we are well-positioned to support our customers.

For additional information regarding the risk factors impacting our business, please refer to Part I, Item 1A, Risk Factors.

Cost And Availability of the Products We Distribute

The structural products we distribute are available from variety of suppliers.

The specialty products we distribute are available from select suppliers from which we have established and cultivated relationships in the specific markets we serve.

As a result of the COVID-19 pandemic, manufacturing output was impacted on both the structural and specialty sides of our business.

Supply constraints which arose from reduced mill output as a result of the pandemic had an impact on both the availability and pricing of our structural products which contributed to increased market prices throughout the year.

Reduced manufacturing capacity combined with increased demand for our specialty products also had an impact on the products we distribute in this category, namely vinyl siding.

The continued availability of both structural and specialty products may have an impact on our operating results and are discussed in more detail in Part I, Item 1A, Risk Factors .

COVID-19 Pandemic

We began preparations for the COVID-19 pandemic in late February 2020, and in early March 2020 we implemented policies and procedures to protect our associates, serve our customers, and support our suppliers.

We also moved quickly to develop and execute plans and take actions designed to give financial and operating flexibility during the pandemic.

To date, our business has been designated as “essential” in all states in which we operate, and we have continued to operate and provide service to our customers and suppliers.

During fiscal 2020, and into 2021, we have continued to practice safety and hygiene protocols consistent with the Centers for Disease Control and Prevention (“CDC”) and local guidance.

We also continued our efforts to reduce operating costs and optimize liquidity and took actions designed to sustain many of our first and second quarter cost reduction actions long-term.

Cost structure and liquidity will remain areas of acute focus for us as the pandemic continues.

While the pandemic impacted many aspects of our business and operations during fiscal 2020, that impact was offset by the recovery in single-family residential housing starts and the escalation in wood-based commodity pricing.

Our net sales and gross margin increased, largely driven by the significant increase in wood-based pricing.

For fiscal 2020, net sales increased $460.1 million compared to fiscal 2019 and net income improved $98.5 million as we moved from a net loss for fiscal 2019 to net income for fiscal 2020.

The extent of the impact of the pandemic on our business for fiscal 2021 will depend on future developments, including, among others, the duration of the pandemic, the success of actions taken by governmental authorities to contain the pandemic and address its impact, the success of local return to work and business reopening plans, and the impact the COVID-19 pandemic has on the supply chain, pricing, and demand in the markets we service.

The trajectory of the pandemic continues to evolve rapidly, and we cannot predict the extent to which our financial condition, results of operation, or cash flows will ultimately be impacted.

We are closely monitoring the impact of the pandemic on industry conditions, the progress of local return to work and reopening plans, and any pandemic related restrictions that may have an impact on our business.

In an attempt to assist businesses during the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act on March 27, 2020.

The CARES Act contained several provisions, including tax-based measures, meant to counteract the effects of the COVID-19 pandemic.

After review of the many provisions, we took advantage of several of the provisions, including the deferral of our defined benefit plan pension contribution, deferral of the payment of employer payroll taxes, and the increase in the percentage of allowable percentage of interest expense under Section 163(j) of the Internal Revenue Code (“IRC”).

During fiscal 2020, as a result of the CARES Act, we were able to recognize discrete tax benefits during the year of $4.8 million resulting from the release of the valuation allowance associated with nondeductible interest expense as the CARES Act increased the allowable percentage from 30 percent to 50 percent of adjusted taxable income.

We also elected to defer the payment of employer payroll taxes that would normally be paid during fiscal 2020.

These taxes are required to be paid in two tranches, with 50 percent due by the end of 2021 and 50 percent due by the end of 2022.

We expect to make payments of $3.2 million by December 2021 and the remaining $3.1 million by December 2022.

Finally, we elected to defer defined benefit plan pension contributions totaling $0.6 million required during fiscal 2020 until December 31, 2020.

We were required to pay

interest on the contributions in accordance with the provision included in the CARES Act.

We made the contributions, including interest, of $0.6 million, on December 15, 2020.

Results of Operations

Fiscal 2020 Compared to Fiscal 2019

The following table sets forth our results of operations for fiscal 2019 and fiscal 2018 , which both comprised 52 weeks.

(Dollars in thousands)

The following table sets forth our results of operations for fiscal 2020 and fiscal 2019, which were comprised of 53 and 52 weeks, respectively.

Fiscal 2020 % of

Sales Fiscal 2019 % of

($ in thousands)

Net sales $ 3,097,328 100.0% $ 2,637,268 100.0%

Gross profit 477,734 15.4% 356,915 13.5%

Selling, general, and administrative 314,228 10.1% 291,526 11.1%

Gains from sales of property

Depreciation and amortization 28,901 0.9% 30,232 1.1%

Operating income (loss)

Amortization of deferred gains on real estate (4,008) (0.1)% (3,960) (0.2)%

Gains from sales of property (10,529) (0.3)% (13,082) (0.5)%

Other operating expenses 6,901 0.2% 17,045 0.6%

Operating income 142,241 4.6% 35,154 1.3%

Interest expense, net 47,414 1.5% 54,218 2.1%

Other expense (income), net

Loss before benefit from income taxes

Benefit from income taxes

Other (income) expense, net (254) 0.0% 2,544 0.1%

Income (loss) before provision for (benefit from) income taxes 95,081 3.1% (21,608) (0.8)%

Provision for (benefit from) income taxes 14,199 0.5% (3,952) (0.1)%

Net income (loss) $ 80,882 2.6% $ (17,656) (0.7)%

The following table sets forth changes in net sales by product category.

Prior year amounts have been reclassified to conform to the current year product mix of structural and specialty products.

Prior year amounts have been reclassified to conform to the current year mix of structural and specialty products.

Fiscal 2020 Fiscal 2019

($ in thousands)

Sales by category

Net sales by category

Structural products $ 1,232,203 39.8 % $ 861,687 32.7 %

Specialty products 1,865,125 60.2 % 1,775,581 67.3 %

Total net sales $ 3,097,328 100.0 % $ 2,637,268 100.0 %

The following table sets forth gross margin dollars and percentages by product category versus comparable prior periods.

Prior year amounts have been reclassified to conform to the current year product mix of structural and specialty products.

(Dollars in thousands)

Fiscal 2020 Fiscal 2019

($ in thousands)

Gross profit $ by category:

1 unchanged sentence

Specialty products 319,577 281,958

Inventory adjustments (1)

Total Gross Profit $ 477,734 $ 356,915

3 unchanged sentences

Total gross margin % 15.4 % 13.5 %

(1) “Inventory adjustments” includes an adjustment for lower of cost or net realizable value of $0.3 million for fiscal 2018, and an inventory acquisition step-up charge of $11.8 million for fiscal 2018.

Discussion of Results of Operations

Net sales of $2.6 billion in fiscal 2019 decreased by 7.9% , or $0.2 billion , from fiscal 2018 .

The sales decrease was driven by declines in wood-based commodity prices and supplier and sales disruptions associated with our Cedar Creek integration activities, including the discontinuation of a siding program that impacted sales in 2019.

The declines were partially offset by the acquisition of Cedar Creek and the inclusion of Cedar Creek’s sales revenue for all of fiscal year 2019 as opposed to the inclusion of such sales from April 13, 2018, to December 29, 2018, in the prior year.

Net sales of $3.1 billion in fiscal 2020 increased by 17.4 percent, or $0.5 billion, from fiscal 2019.

The sales increase was primarily a result of wood-based commodity price inflation, partially offset by a slight decline in sales volume attributable to supply outages in structural products occurring during the second half of fiscal 2020.

The COVID-19 pandemic created unprecedented market conditions on the supply and demand of our products.

As the severity of the COVID-19 pandemic initially became apparent, manufacturers ran fewer shifts out of an abundance of caution creating supply bottlenecks.

In addition, productivity was negatively impacted by COVID-19 employee illnesses from our supply partners.

At the same time, after an initial decline in single family housing starts and repair and remodeling activities, the housing market became more robust during fiscal year 2020 and the growth rate for single family housing starts was 11.5 percent, while housing repair and remodeling activity was estimated to have grown by 3.5 percent.

The impact of the reduced supply coupled with increasing demand led to a historically high increase in wood-based commodity prices after the pandemic began.

Full year structural product net sales, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, were $1.2 billion and the impact of the record wood-based commodity price inflation occurring in the second half of the year is estimated to have increased net sales by approximately $210 million to $230 million.

Gross profit.

Total gross profit for fiscal 2020 was $477.7 million, compared to $356.9 million in fiscal 2019.

Gross margin increased to 13.5% in fiscal 2019, compared to 11.6% in fiscal 2018.

Gross margin percentage increased due to greater stability in commodity prices relative to the prior year period.

Gross profit increased as a result of commodity price stability, efficiencies, and cost savings gained in connection with the integration of the Cedar Creek business, and the acquisition of Cedar Creek and the inclusion of Cedar Creek’s gross profit for all of fiscal year 2019 as opposed to the inclusion of such gross profit only from April 13, 2018, to December 29, 2018, in the prior year.

Gross margin increased to 15.4 percent in fiscal 2020, compared to 13.5 percent in fiscal 2019.

Gross margin percentage increased primarily due to wood-based commodity price inflation in our structural product category as we were selling lower costed inventory during a period of rapidly increasing commodity prices.

This was largely a result of the extension of lead times during the increase in the second half of the year and tightened supply due to the pandemic, paired with strong demand.

Specialty products margins benefited from mix shifts to higher margin categories, paired with pricing strategies focused in key products categories such as engineered wood and millwork products.

Selling, general, and administrative expenses.

Selling, general, and administrative (“SG&A”) expenses for fiscal 2020 were $314.2 million, compared to $291.5 million, for fiscal 2019.

The decrease was primarily due to:

(i) approximately $10.0 million of transaction-related expenses that were incurred in the prior year period in connection with the Cedar Creek acquisition;

(ii) the consolidation of overlapping locations after the Cedar Creek acquisition;

and (iii) a reduction of operating costs in response to decreases in sales volumes during fiscal 2019.

The decrease was partially offset by the inclusion of Cedar Creek expenses for the full year, versus the period from April 13, 2018, to December 29, 2018, in the prior year, and $9.9 million in additional logistics and third-party freight expenses related to delivery of product to our customers as we took steps to enhance customer service and operational performance.

Gains from sales of property.

Total gains from sales of property in fiscal 2019 were $13.1 million .

Gains from the sale and leaseback of properties in fiscal 2018 were deferred, due to the accounting rules for sale and leaseback transactions, and are amortized as a credit to SG&A expenses.

The amortization of deferred gain was $4.0 million and $5.1 million in fiscal 2019 and 2018, respectively.

The accounting treatment of gains from sale and leaseback transactions differs from that of outright sale transactions, as sales of property without leasebacks are allowed immediate and full gain recognition in the period of the sale.

The increase was primarily due to higher variable incentive compensation of approximately $13.1 million, higher sales commissions of approximately $10.0 million, and increased operational expenses related to higher than anticipated sales volume.

Our cost reduction actions taken in the second quarter, focused primarily on labor, realized approximately $10.5 million of savings for the Company, annualized to $13.9 million.

These savings were offset by additional payroll and other operating expenses attributable to the additional fiscal week in fiscal 2020.

Depreciation and amortization expense.

For fiscal 2019 , depreciation and amortization expense increased by $4.4 million to $30.2 million primarily due to the inclusion of Cedar Creek depreciable assets for the full year, versus the period from April 13, 2018, to December 29, 2018 in the prior year.

Depreciation and amortization expense for fiscal 2020 was $28.9 million, compared to $30.2 million, for fiscal 2019, a decrease of $1.3 million.

This decrease was primarily due to certain assets becoming fully depreciated during 2020.

Gains from sales of property.

Total gains from sales of property in fiscal 2020 were $10.5 million compared to $13.1 million in fiscal 2019, a decrease of 19.5 percent.

In fiscal 2020, the majority of our real estate transactions were sale leaseback transactions where we were not allowed to recognize a gain under U.S.

GAAP, with the exception of the sale leaseback of our Denver facility.

In fiscal 2019, the majority of our real estate transactions were largely typical sale transactions where we were allowed to recognize a gain under U.S.

Other operating expenses.

Other operating expenses were $6.9 million in fiscal 2020 compared to $17.0 million in fiscal 2019, a decrease of 59.5 percent.

The decrease is primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition, partially offset by severance expense incurred in relation to headcount reductions that occurred throughout the period.

Interest expense, net.

Interest expense for fiscal 2020 was $47.4 million, compared to $54.2 million for fiscal 2019.

The increase of $6.9 million was largely attributable to a higher average debt balance over the period due to the acquisition of Cedar Creek during fiscal 2018.

Benefit from income taxes.

Our effective tax rate was 18.3% and 20.2% for fiscal 2019 and fiscal 2018 , respectively.

Our effective tax rate for fiscal 2019 was impacted by:

(i) the effect of the valuation allowance for disallowed interest expense stemming from federal tax reforms, and separate company state income taxes;

(ii) the tax benefit related to the lapse of statutes of limitations from uncertain tax positions;

(iii) changes in the state effective tax rate used to value deferred tax assets;

and (iv) the permanent addback of certain nondeductible expenses including executive compensation and nondeductible meals and entertainment.

Our effective tax rate for fiscal 2018 was impacted by:

(i) the permanent addback of certain nondeductible expenses including transaction costs related to the Cedar Creek acquisition, executive compensation, and excess tax benefits on share-based compensation;

(ii) the tax benefit related to the lapse of statutes of limitations for uncertain tax positions;

(iii) the effect of the valuation allowance for separate company state income tax losses;

and (iv) changes in the state effective tax rate used to value deferred tax assets.

The decrease of $6.8 million was largely attributable to a decrease in the bank debt balance of $141.8 million, comprised of decreases in our Term Loan Facility of $103.5 million and Revolving Credit Facility of $38.3 million, respectively, as well as a reduction in the variable LIBOR rate that is a component of the interest rate on our bank debt instruments.

Other expense (income), net.

Other expense (income), net was $(0.3) million in fiscal 2020 compared to $2.5 million in fiscal 2019, a decrease of $2.8 million.

The decrease was due to expenses related to the lump sum payout offer made in fiscal 2019 to certain eligible retirees in the BlueLinx Hourly Retirement plan instead of receiving their typical payment streams.

Provision for (benefit from) income taxes.

Our effective tax rate was 14.9 percent and 18.3 percent for fiscal 2020 and fiscal 2019, respectively.

Primary drivers of the decline in our effective tax rate in fiscal 2020 versus fiscal 2019 included the

release of valuation allowances associated with state net operating losses and our previously nondeductible interest expense, both of which we believe we will be able to realize based on our positive taxable income for fiscal 2020.

Our effective tax rate for fiscal 2020 was impacted by the effect of the release of our valuation allowance for disallowed interest expense stemming from federal tax reforms, and the CARES Act , the partial release of our valuation allowance for state net operating losses that we anticipate being able to utilize, the tax benefit related to the lapse of statutes of limitations from uncertain tax positions (FIN 48), changes in the state effective tax rate used to value deferred tax assets, and the permanent addback of certain nondeductible expenses including executive compensation and nondeductible meals and entertainment.

Our effective tax rate for fiscal 2019 was impacted by the effect of the valuation allowance for disallowed interest expense stemming from federal tax reforms and certain state net operating losses, the tax benefit related to the lapse of statutes of limitations from uncertain tax positions (FIN 48), changes in the state effective tax rate used to value deferred tax assets, and the permanent addback of certain nondeductible expenses including executive compensation and nondeductible meals and entertainment.

Our effective tax rate moving forward will continue to be subject to fluctuations in quarters throughout the year because of various factors.

These factors include the impact of permanent items combined with the timing of discrete items such as equity compensation windfalls and/or shortfalls, which occur as our equity compensation grants become vested throughout the year, any potential releases of our valuation allowance against net operating loss carryforwards, and the annual impact of the expiration of the statute of limitations associated with our uncertain tax positions (FIN 48).

The magnitude of the impact to our effective tax rate in any given quarter resulting from the vesting of our equity compensation grants can vary depending in our stock price at the time of vesting.

The impact to our effective rate tax rate resulting from the expiration of the statute of limitations associated with our uncertain tax positions (FIN 48) occurred in the fourth quarter of both fiscal 2020 and 2019, the timing of which we expect to continue into future periods.

Liquidity and Capital Resources

We expect our primary sources of liquidity to be cash flows from sales in the normal course of our operations and amounts currently available from our Revolving Credit Facility.

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 our primary sources of liquidity to be cash flows from sales in the normal course of our operations and availability from our Revolving Credit Facility.

We expect that these sources will be sufficient to fund our ongoing cash requirements for the foreseeable future, including at least the next twelve months.

Sources and Uses of Cash

Operating Activities

During fiscal 2019 , cash flows used in operating activities totaled $9.6 million .

This cash activity was primarily driven by a net loss of $17.7 million which included a non-cash gain on sale of property of $13.1 million and changes in working capital components, including an increase in cash used by accounts payable of $15.5 million , an increase in cash provided by accounts receivable of $15.6 million , and a decrease in cash used by other assets and liabilities of $10.9 million .

Fiscal 2020 cash flows provided by operating activities totaled $55.0 million.

This cash activity was primarily driven by changes in working capital components, including an increase in cash provided by accounts payable of $25.0 million, and an increase in cash provided by accounts receivable of $60.0 million, partially offset by a net loss of $48.1 million.

This cash activity was primarily driven by net income of $80.9 million, which included a non-cash gain on sale of property of $10.5 million and changes in working capital components.

The changes in working capital components included an increase in cash due to a decrease in inventory of $3.7 million and an increase in accounts payable of $32.8 million and a decrease in cash due to an increase in accounts receivable of $100.8 million.

Fiscal 2019 cash flows used in operating activities totaled $10.3 million.

This cash activity was primarily driven by a net loss of $17.7 million, which included a non-cash gain on sale of property of $13.1 million and changes in working capital components.

The changes in working capital components included an increase in cash due to a decrease in accounts receivable of $15.6 million and a decrease in cash due to an increase in inventory of $4.0 million and a decrease in accounts payable of $16.8 million.

Investing Activities

During fiscal 2019 , our net cash provided by investing activities was $21.1 million , which was substantially driven by cash received from property sales of $19.9 million , as well as cash received of $6.0 million that was held by third parties in connection with our 2018 acquisition of Cedar Creek, offset by cash paid for equipment of $4.8 million .

During fiscal 2018 , our net cash used in investing activities was $242.7 million , which was substantially driven by the cash paid for the acquisition of Cedar Creek, net of cash acquired, of $348.1 million, offset by cash received from property sales and sale-leaseback transactions of $108.1 million.

During fiscal 2020, our net cash provided by investing activities was $9.2 million, which was substantially driven by cash received from the sale of real estate of $12.8 million, offset by cash paid for investments in equipment of $3.7 million.

During fiscal 2019, our net cash provided by investing activities was $21.1 million, which was substantially driven by cash received from the sale of real estate of $19.9 million, in addition to $6.0 million of cash returned from escrow related to the acquisition of Cedar Creek, offset by cash paid for investments in equipment of $4.8 million.

Financing Activities

Net cash used in financing activities was $8.9 million during fiscal 2019 , which primarily reflected repayments on our term loan of $32.4 million and net repayments on our Revolving Credit Facility of $6.8 million , offset by proceeds from real estate financing transactions of $44.9 million , and payments on finance leases of $9.9 million .

Net cash provided by financing activities was $205.4 million during fiscal 2018 , which primarily reflected the addition of our new Term Loan Facility of $180.0 million, and net borrowings on our Revolving Credit Facility of $150.6 million, offset by payments of principal on our 2006 CMBS mortgage loan of $97.8 million, which were largely derived from sales of property and sale-leaseback transactions.

The addition of our Term Loan Facility and increased borrowings on our Revolving Credit Facility was due to our acquisition of Cedar Creek.

Net cash used in financing activities was $75.7 million during fiscal 2020, which primarily reflected repayments on our term loan of $103.5 million and net repayments on our Revolving Credit Facility of $38.3 million, in addition to payments on

finance leases of $8.7 million and debt financing costs of $3.4 million, all of which were partially offset by proceeds from real estate financing transactions of $78.3 million.

Net cash used in financing activities was $8.1 million during fiscal 2019, which primarily reflected repayments on our term loan of $32.4 million and net repayments on our Revolving Credit Facility of $6.8 million, in addition to payments on our finance leases of $10.0 million and debt financing costs of $3.6 million, all of which were partially offset by proceeds from real estate financing transactions of $44.9 million.

Operating Working Capital

Operating working capital is an important measurement we use to determine the efficiencies of our operations and our ability to readily convert assets into cash.

Operating working capital is defined as current assets less current liabilities plus the current portion of long-term debt.

Operating working capital is defined as the sum of cash, receivables, and inventory less accounts payable.

Management of operating working capital helps us monitor our progress in meeting our goals to enhance our return on working capital assets.

Selected financial information

December 28, 2019

December 29, 2018

January 2, 2021 December 28, 2019

(In thousands)

Current assets:

Cash $ 82 $ 11,643

Receivables, less allowance for doubtful accounts 293,643 192,872

Inventories, net 342,108 345,806

Other current assets

Total current assets

$ 635,833 $ 550,321

Current liabilities:

Accounts payable $ 165,163 $ 132,348

Accrued compensation

Current maturities of long-term debt, net of discount

Finance leases - short-term

Real estate deferred gains - short-term

Operating lease liabilities - short-term

Other current liabilities

Total current liabilities

$ 165,163 $ 132,348

Operating working capital $ 470,670 $ 417,973

Operating working capital increased to $409.1 million as of December 28, 2019 , from $404.8 million as of December 29, 2018 .

The increase in operating working capital is primarily due to a decrease in accounts payable of $16.8 million and a decrease in other current liabilities of $13.7 million , offset by a decrease in receivables of $15.6 million , a decrease in other current assets of $12.9 million , and the establishment in 2019 under ASC 842 of the operating lease liabilities - short-term category of $7.3 million .

Operating working capital increased to $470.7 million as of January 2, 2021, from $418.0 million as of December 28, 2019.

The increase in operating working capital is primarily due to an increase in accounts receivable of $100.8 million, offset by a decrease in cash of $11.6 million and an increase in accounts payable of $32.8 million.

The increases in accounts receivable and accounts payable are due primarily to wood-based commodity price inflation, which impacted sales dollars and the cost of inventory as reflected in accounts receivable and accounts payable balances.

Debt and Credit Sources

As of December 28, 2019 and December 29, 2018 , long-term debt consisted of the following:

Maturity Date

As of January 2, 2021 and December 28, 2019, long-term debt consisted of the following:

January 2, 2021 December 28, 2019

(In thousands)

Revolving Credit Facility (net of discounts and debt issuance costs of $4.5 million and $6.0 million at December 28, 2019 and December 29, 2018, respectively)

October 10, 2022

Term Loan Facility (net of discounts and debt issuance costs of $8.1 million and $6.7 million at December 28, 2019 and December 29, 2018, respectively)

October 13, 2023

current portion of long-term debt

Long-term debt, net

Revolving Credit Facility $ 288,247 $ 326,496

In April 2018 we amended and restated our Revolving Credit Facility to provide for a senior secured revolving loan and letter of credit facility of up to $600 million and an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to $150 million.

Term Loan Facility 43,204 146,674

Finance lease obligations 273,118 198,011

604,569 671,181

Unamortized debt issuance costs (9,010) (12,555)

595,559 658,626

current maturities of long-term debt 6,846 8,662

Long-term debt, net of current maturities $ 588,713 $ 649,964

Revolving Credit Facility

In April 2018 we amended and restated our Revolving Credit Facility, which is secured by substantially all of our assets, to provide for a senior secured revolving loan and letter of credit facility of up to $600 million and an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to $150 million.

If we obtain the full amount of the additional increases in commitments, the Revolving Credit Facility will allow borrowings of up to $750 million.

Borrowings under the Revolving Credit Facility are subject to availability under the “Borrowing Base” (as that term is defined in the Revolving Credit Facility).

The Borrowing Base is calculated based upon our outstanding accounts receivable, subject to certain adjustments.

Letters of credit in an aggregate amount of up to $30 million are also available under the Revolving Credit Facility, which would reduce the amount of the revolving loans available under the facility.

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In January 2020, we amended the Revolving Credit Facility to (i) modify the “Seasonal Period” to run from November 15, 2019, through July 15, 2020, for the calendar year 2019, and to run from December 15 of each calendar year through April 15 of each immediately succeeding calendar year for the calendar year 2020 and thereafter, and (ii) extend the measurement period in the definition of “Cash Dominion Event” from three consecutive business days to five consecutive business days.

The amendment, which is described further in Note 16 to the Consolidated Financial Statements, better aligns advance rates under the facility with the seasonality associated with our business.

As of December 28, 2019 , we had outstanding borrowings of $326.5 million, excess availability of $80.0 million, and a weighted average interest rate of 3.9% under our Revolving Credit Facility.

As of December 29, 2018 , we had outstanding borrowings of $333.3 million , excess availability of $91.7 million and a weighted average interest rate of 4.6% under the facility.

We were in compliance with all covenants under the Revolving Credit Facility as of December 28, 2019 .

The amendment better aligns advance rates under the facility with the seasonality associated with our business.

As of January 2, 2021, we had outstanding borrowings of $288.2 million and excess availability of $184.3 million under our Revolving Credit Facility.

As of December 28, 2019, we had outstanding borrowings of $326.5 million and excess availability of $80.0 million under our Revolving Credit Facility.

Our average effective interest rate under the facility was approximately 3.3 percent and 4.8 percent for the years ended January 2, 2021 and December 28, 2019, respectively.

We were in compliance with all covenants under the Revolving Credit Facility as of January 2, 2021.

Term Loan Facility

In April 2018, we entered into a Credit and Guaranty Agreement with HPS Investment Partners, LLC, and other financial institutions as party thereto.

The agreement provides for a Term Loan Facility of $180.0 million secured substantially by all our assets.

The agreement provides for a Term Loan Facility of $180.0 million secured by substantially all of our assets.

Borrowings under the Term Loan Facility may be made as Base Rate Loans or Eurodollar Rate Loans.

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The Applicable Margin will be 6.00 percent with respect to Base Rate Loans and 7.00 percent with respect to Eurodollar Rate Loans.

In October 2019, we amended the Term Loan Facility to, among other things, permit real estate sale leaseback transactions and modify the “Total Net Leverage Ratio” covenant beginning in the third quarter of 2019.

In December 2019, we amended the Term Loan Facility to extend the period for satisfying the designated outstanding principal balance level, and the principal balance level was satisfied on January 31, 2020, through repayments from real estate financing transactions as described in Note 16 to our Consolidated Financial Statements.

In October 2019, we amended the Term Loan Facility to, among other things, permit real estate sale leaseback transactions.

During fiscal 2020, in December 2019, we amended the Term Loan Facility to extend the period for satisfying the designated outstanding principal balance level, and the principal balance level was satisfied on January 31, 2020, through repayments from real estate financing transactions.

During the fourth quarter of 2020, we reduced the principal balance outstanding under the Term Loan Facility below $45 million and were no longer subject to this covenant.

We do not anticipate future borrowings under the Term Loan Facility and expect to not be subject to the Total Net Leverage ratio covenant in the future.

The Term Loan Facility permits us to enter into real estate sale leaseback transactions with the net proceeds therefrom to be used for repayment of indebtedness under the facility, subject to payment of an applicable prepayment premium.

In addition, proceeds from the sale of “Specified Properties” will be used for the repayment of indebtedness under the Term Loan Facility, subject to payment of an applicable prepayment premium, or, under certain circumstances, repayment of indebtedness under our Revolving Credit Facility.

The Term Loan Facility required maintenance of a total net leverage ratio of 6.25 to 1.00 for the fiscal quarter ending December 28, 2019 , and such required covenant level generally reduces on a quarterly basis over the term of the Term Loan Facility.

As of December 28, 2019 , we had outstanding borrowings of $146.7 million under our Term Loan Facility and a stated interest rate of 8.7 percent per annum.

We were in compliance with all covenants under the Term Loan Facility as of December 28, 2019 .

2006 CMBS Mortgage Loan

Our 2006 CMBS mortgage loan, which was paid in full in the first quarter of 2018, was secured by substantially all of the Company’s owned distribution facilities and a first priority pledge of the equity in the Company’s subsidiaries which held the real property that secured the mortgage loan.

proceeds from the sale of “Specified Properties” will be used for the repayment of indebtedness under the Term Loan Facility, subject to payment of an applicable prepayment premium, or, under certain circumstances, repayment of indebtedness under our Revolving Credit Facility.

Prepayment premiums associated with the repayment of indebtedness were $3.0 million and $0.5 million for fiscal 2020 and 2019, respectively.

We had outstanding borrowings of $43.2 million and $146.7 million under our Term Loan Facility as of January 2, 2021 and December 28, 2019, respectively.

Our average interest rate under the facility, exclusive of fees and prepayment premiums, was approximately 8.2 percent and 9.3 percent for the years ended January 2, 2021 and December 28, 2019, respectively.

We were in compliance with all covenants under the Term Loan Facility as of January 2, 2021.

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 have completed in recent years.

During fiscal 2017 and 2018, we completed real estate financing transactions on six warehouse facilities, during fiscal 2019, we completed real estate financing transactions on two warehouse facilities;

and during fiscal 2020, we completed real estate financing transactions on fourteen warehouse facilities.

We recognized financing lease assets and obligations as a result of each of these transactions.

Our total finance lease commitments, including the properties associated with these transactions, totaled $273.1 million and $198.0 million as of January 2, 2021 and December 28, 2019, respectively.

Of the $273.1 million of finance lease commitments as of January 2, 2021, $243.7 million related to real estate and $29.4 million related to equipment.

Of the $198.0 million of finance lease commitments as of December 28, 2019, $165.5 million related to real estate and $32.5 million related to equipment.

Investments in Capital Assets

Our investments in capital assets consist of cash paid for owned assets and the inception of financing lease arrangements for long-lived assets to support our distribution infrastructure.

The gross value of these assets are included in their respective category in the “Property and equipment, at cost” section on our consolidated balance sheet.

For fiscal 2020, we invested $3.7 million in cash related to investments in long-lived assets and entered into finance leases totaling $3.8 million, for a total investment of $7.5 million.

For fiscal 2019, we invested $4.8 million in cash related to investments in long-lived assets and entered into finance lease agreements totaling $15.0 million, for a total investments of $19.8 million.

Pension Funding Obligations

We were required to make four quarterly cash contributions during 2019 and 2020 totaling approximately $1.8 million, relating to our fiscal 2019 funding year pension contributions.

In 2012, we obtained a funding waiver for that plan year, which was repaid over the successive five-year period, through the 2017 funding year ending September 15, 2018, with principal and interest payments totaling approximately $0.7 million each year.

In 2013, we contributed real property to the pension plan to satisfy minimum contribution requirements.

Although such real property contribution was recognized for funding purposes, it was not recognized under GAAP, as this transaction did not meet the requirements to qualify as a sale under GAAP.

We were required to make cash contributions of during 2020 and 2021 totaling approximately $0.9 million, relating to our fiscal 2020 funding year pension contributions.

We continue to evaluate pension funding obligations and requirements in order to meet our obligations while maintaining flexibility for working capital requirements.

See Note 9 to our Consolidated Financial Statements.

See Note 8, Employee Benefits , in the Notes to the Consolidated Financial Statements.

Interest Rates

Our Revolving Credit Facility and our Term Loan Facility include available interest rate options based on LIBOR.

It is widely expected that LIBOR will be discontinued after 2021, and the U.S.

and other countries are currently working to replace LIBOR with alternative reference rates.

The consequences of these development with respect to LIBOR cannot be entirely predicted;

however, we do not believe that the discontinuation of LIBOR as a reference rate in our loan agreements will have a material adverse effect on our financial position or materially affect our interest expense.

Off-Balance Sheet Arrangements

As of December 28, 2019 , we did not have any material off-balance sheet arrangements.

As of January 2, 2021, we did not have any material off-balance sheet arrangements.

Critical Accounting Policies

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(1) revenue recognition;

(2) our defined benefit pension plan;

(2) goodwill;

and (3) income taxes.

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.

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 pension liabilities, or increased tax liabilities, among other effects.

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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 to our Notes to Consolidated Financial Statements.

For a discussion of the Company’s significant accounting policies, see Note 1, Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements.

Revenue Recognition

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and (5) When (or as) performance obligations are satisfied.

generally means that we recognize revenue when title to our products is transferred to our customers.

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.

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The actual amounts ultimately paid may be different from our estimates, and recorded once they have been determined.

Defined Benefit Pension Plan

We sponsor and contribute to a defined benefit pension plan.

Most of the participants in the plan are inactive, with all remaining active participants no longer accruing benefits;

and the plan is closed to new entrants.

Management is required to make certain critical estimates related to actuarial assumptions used to determine our pension expense and related obligation.

We believe the most critical assumptions are related to (1) the discount rate used to determine the present value of the liabilities and (2) the expected long-term rate of return on plan assets.

All of our actuarial assumptions are reviewed annually, or upon any mid-year curtailment or settlement, should any such event occur.

Changes in these assumptions could have a material impact on the measurement of our pension expense and related obligation.

At each measurement date, we determine the discount rate by reference to rates of high-quality, long-term corporate bonds that mature in a pattern similar to the future payments we anticipate making under the plan.

As of December 28, 2019 , and December 29, 2018 , the weighted-average discount rate used to compute our benefit obligation was 3.21% and 4.37% , respectively.

The expected long-term rate of return on plan assets is based upon the long-term outlook of our investment strategy as well as our historical returns and volatilities for each asset class.

We also review current levels of interest rates and inflation to assess the reasonableness of our long-term rates.

Our pension plan investment objective is to ensure our plan has sufficient funds to meet its benefit obligations when they become due.

As a result, we periodically revise asset allocations, where appropriate, to improve returns and manage risk.

The weighted-average expected long-term rate of return used to calculate our pension expense was 6.00% for both fiscal 2019 and fiscal 2018 .

The impact of a 0.25% change in these critical assumptions is as follows:

Change in Assumption

Effect on 2020 Pension Expense

Effect on Accrued Pension Liability at December 28, 2019

(In thousands)

0.25% decrease in discount rate

0.25% increase in discount rate

0.25% decrease in expected long-term rate of return on assets

0.25% increase in expected long-term rate of return on assets

As almost all of the participants in the pension plan are inactive, we amortize actuarial gains and losses over the estimated average remaining life expectancy of the inactive participants, rather than the estimated average remaining service period of the active participants.

The sensitivity analysis presented above reflects these assumptions.

Goodwill is not subject to amortization, and is tested for impairment at least annually.

We perform our annual goodwill impairment test as of the first day of our fiscal fourth quarter.

This test requires us to assign goodwill to a reporting unit and to determine if the fair value of the reporting unit’s goodwill is less than its carrying amount.

We have identified that we have a single reporting unit and we assign our goodwill to that reporting unit.

As of January 2, 2021, our goodwill was $47.8 million.

We also evaluate goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amounts may be impaired.

Such events and indicators may include, without limitation, significant declines in the industries in which our products are used, significant changes in capital market conditions, and significant changes in our market capitalization.

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.

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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 6 of the Notes to Consolidated Financial Statements.

Refer to Note 5, Income Taxes , in the Notes to the Consolidated Financial Statements.

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:

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;

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Settlement of any particular issue would usually require the use of cash.

On December 22, 2017, the U.S.

government enacted tax legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).

The Tax Act provides for significant changes to tax law for tax years beginning after December 31, 2017, including, but not limited to, the reduction of the U.S.

federal corporate income tax rate from 35% to 21%, repeal of the corporate alternative minimum tax (“AMT”), and additional limitations on the deductibility of interest expense and executive compensation.

On March 27, 2020, the U.S.

government enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which contained a tax provision that increased the allowable deductible percentage of interest expense from 30 percent to 50

This resulted in the company being able to immediately recognize a $3.9 million benefit in the first quarter of 2020.

As a result of our income in 2020, we were able to release the remaining valuation allowance at year end.

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.

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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 28, 2019, positive evidence continues to outweigh negative evidence, so no valuation allowance was deemed necessary except to the extent of our disallowed interest expense and our separate company state NOLs.

The valuation allowances related to our disallowed interest expense and separate company state NOLs approximate $4.8 million and $11.4 million, respectively, for a total of approximately $16.2 million of valuation allowance.

See Note 6 of the Notes to Consolidated Financial Statements.

As of January 2, 2021, positive evidence continued to outweigh negative evidence, so no valuation allowance was deemed necessary except to the extent of certain state NOLs.

The valuation allowances related to our NOLs approximate $7.3 million.

See Note 5, Income Taxes , in the Notes to Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

For a summary of recent accounting pronouncements applicable to our consolidated financial statements, see Note 1 of the Notes to Consolidated Financial Statements.

For a summary of recent accounting pronouncements applicable to our consolidated financial statements, see Note 1, Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis