BlueLinx Holdings Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS BLUELINX HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 Net sales $ 1,307,913 $ 698,776 $ 2,333,382 $ 1,360,846 Cost of sales 1,056,741 597,956 1,901,818 1,166,817 Gross profit 251,172 100,820 431,564 194,029 Operating expenses (income): Selling, general, and administrative 87,010 70,694 162,569 145,281 Depreciation and amortization 7,080 7,063 14,545 14,698 Amortization of deferred gains on real estate ( 984 ) ( 984 ) ( 1,967 ) ( 1,967 ) Gains from sales of property — — ( 1,287 ) ( 525 ) Other operating expenses 871 1,962 983 6,127 Total operating expenses 93,977 78,735 174,843 163,614 Operating income 157,195 22,085 256,721 30,415 Non-operating expenses (income): Interest expense, net 9,143 11,535 25,377 25,915 Other expense (income), net ( 314 ) 417 ( 628 ) 180 Income before provision for (benefit from) income taxes 148,366 10,133 231,972 4,320 Provision for (benefit from) income taxes 34,908 3,438 56,654 ( 1,588 ) Net income $ 113,458 $ 6,695 $ 175,318 $ 5,908 Basic income per share $ 11.88 $ 0.71 $ 18.44 $ 0.63 Diluted income per share $ 11.61 $ 0.71 $ 18.15 $ 0.63 Comprehensive income: Net income $ 113,458 $ 6,695 $ 175,318 $ 5,908 Other comprehensive income: Amortization of unrecognized pension gain, net of tax 246 114 485 310 Other 6 19 17 3 Total other comprehensive income 252 133 502 313 Comprehensive income $ 113,710 $ 6,828 $ 175,820 $ 6,221 See accompanying Notes. 1 BLUELINX HOLDINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) July 3, 2021 January 2, 2021 ASSETS Current assets: Cash $ 179 $ 82 Receivables, less allowances of $ 5,140 and $ 4,123 , respectively 437,217 293,643 Inventories, net 425,714 342,108 Other current assets 36,280 32,581 Total current assets 899,390 668,414 Property and equipment, at cost 307,728 299,935 Accumulated depreciation ( 127,252 ) ( 121,223 ) Property and equipment, net 180,476 178,712 Operating lease right-of-use assets 49,478 51,142 Goodwill 47,772 47,772 Intangible assets, net 15,830 18,889 Deferred tax assets 68,743 62,899 Other non-current assets 19,093 20,302 Total assets $ 1,280,782 $ 1,048,130 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 227,100 $ 165,163 Accrued compensation 16,267 24,751 Taxes payable 17,941 7,847 Current maturities of long-term debt, net of debt issuance costs of $ 0 and $ 74 , respectively — 1,171 Finance lease liabilities - short-term 6,379 5,675 Operating lease liabilities - short-term 4,936 6,076 Real estate deferred gains - short-term 4,040 4,040 Other current liabilities 13,035 14,309 Total current liabilities 289,698 229,032 Non-current liabilities: Long-term debt, net of debt issuance costs of $ 2,184 and $ 8,936 , respectively 318,226 321,270 Finance lease liabilities - long-term 272,817 267,443 Operating lease liabilities - long-term 44,897 44,965 Real estate deferred gains - long-term 76,108 78,009 Pension benefit obligation 20,878 22,684 Other non-current liabilities 24,976 25,635 Total liabilities 1,047,600 989,038 Commitments and Contingencies STOCKHOLDERS’ EQUITY: Common Stock, $ 0.01 par value, 20,000,000 shares authorized, 9,709,613 and 9,462,774 outstanding on July 3, 2021 and January 2, 2021, respectively 97 95 Additional paid-in capital 264,963 266,695 Accumulated other comprehensive loss ( 35,490 ) ( 35,992 ) Accumulated stockholders’ equity (deficit) 3,612 ( 171,706 ) Total stockholders’ equity 233,182 59,092 Total liabilities and stockholders’ equity $ 1,280,782 $ 1,048,130 See accompanying Notes. 2 BLUELINX HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands) (Unaudited) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Equity (Deficit) Stockholders’ Equity Total Shares Amount Balance, January 2, 2021 9,463 $ 95 $ 266,695 $ ( 35,992 ) $ ( 171,706 ) $ 59,092 Net income — — — — 61,860 61,860 Foreign currency translation, net of tax — — — ( 6 ) — ( 6 ) Impact of pension plan, net of tax — — — 239 — 239 Vesting of restricted stock units 8 — — — — — Compensation related to share-based grants — — 1,410 — — 1,410 Repurchase of shares to satisfy employee tax withholdings ( 3 ) — ( 99 ) — — ( 99 ) Other — — — 17 — 17 Balance, April 3, 2021 9,468 95 268,006 ( 35,742 ) ( 109,846 ) 122,513 Net income — — — — 113,458 113,458 Foreign currency translation, net of tax — — — 6 — 6 Impact of pension plan, net of tax — — — 246 — 246 Vesting of restricted stock units 355 2 — — — 2 Compensation related to share-based grants — — 1,992 — — 1,992 Repurchase of shares to satisfy employee tax withholdings ( 113 ) — ( 5,033 ) — — ( 5,033 ) Other — — ( 2 ) — — ( 2 ) Balance, July 3, 2021 9,710 $ 97 $ 264,963 $ ( 35,490 ) $ 3,612 $ 233,182 See accompanying Notes. 3 BLUELINX HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands) (Unaudited) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Stockholders’ Deficit Total Shares Amount Balance, December 28, 2019 9,366 $ 94 $ 260,974 $ ( 34,563 ) $ ( 252,588 ) $ ( 26,083 ) Net loss — — — — ( 787 ) ( 787 ) Foreign currency translation, net of tax — — — 3 — 3 Impact of pension plan, net of tax — — — 196 — 196 Vesting of restricted stock units 2 — — — — — Compensation related to share-based grants — — 1,004 — — 1,004 Repurchase of shares to satisfy employee tax withholdings ( 1 ) — ( 7 ) — — ( 7 ) Other — — 9 ( 19 ) — ( 10 ) Balance, March 28, 2020 9,367 94 261,980 ( 34,383 ) ( 253,375 ) ( 25,684 ) Net income — — — — 6,695 6,695 Foreign currency translation, net of tax — — — 17 — 17 Impact of pension plan, net of tax — — — 114 — 114 Vesting of restricted stock units 122 1 — — — 1 Compensation related to share-based grants — — 854 — — 854 Repurchase of shares to satisfy employee tax withholdings ( 28 ) — ( 247 ) — — ( 247 ) Other — — — 2 — 2 Balance, June 27, 2020 9,461 $ 95 $ 262,587 $ ( 34,250 ) $ ( 246,680 ) $ ( 18,248 ) See accompanying Notes. 4 BLUELINX HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended July 3, 2021 June 27, 2020 Cash flows from operating activities: Net income $ 175,318 $ 5,908 Adjustments to reconcile net income to cash provided by operations: Provision for (benefit from) income taxes 56,654 ( 1,588 ) Depreciation and amortization 14,545 14,698 Amortization of debt issuance costs 1,032 1,903 Adjustments to debt issuance costs associated with term loan 5,791 — Gains from sales of property ( 1,287 ) ( 525 ) Amortization of deferred gains from real estate ( 1,967 ) ( 1,967 ) Share-based compensation 3,402 1,858 Changes in operating assets and liabilities: Accounts receivable ( 143,574 ) ( 71,770 ) Inventories ( 83,606 ) 31,827 Accounts payable 61,937 26,572 Prepaid and other current assets ( 4,509 ) ( 3,200 ) Other assets and liabilities ( 61,135 ) 9,185 Net cash provided by operating activities 22,601 12,901 Cash flows from investing activities: Proceeds from sale of assets 2,100 102 Property and equipment investments ( 2,900 ) ( 1,752 ) Net cash used in investing activities ( 800 ) ( 1,650 ) Cash flows from financing activities: Borrowings on revolving credit facilities 638,183 350,236 Repayments on revolving credit facilities ( 606,019 ) ( 354,509 ) Repayments on term loan ( 43,204 ) ( 77,852 ) Proceeds from real estate financing transactions — 78,263 Debt financing costs ( 861 ) ( 2,665 ) Repurchase of shares to satisfy employee tax withholdings ( 5,132 ) ( 254 ) Principal payments on finance lease liabilities ( 4,671 ) ( 4,583 ) Net cash used in financing activities ( 21,704 ) ( 11,364 ) Net change in cash 97 ( 113 ) Cash at beginning of period 82 11,643 Cash at end of period $ 179 $ 11,530 Supplemental Cash Flow Information Net income tax payment (refunds) during the period $ 52,615 $ ( 223 ) Interest paid during the period $ 18,744 $ 24,416 See accompanying Notes. 5 BLUELINX HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 3, 2021 (Unaudited) 1. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited interim Condensed Consolidated Financial Statements include the accounts of BlueLinx Holdings Inc. and its wholly owned subsidiaries (the “Company”). We derived the condensed consolidated balance sheet at July 3, 2021, from the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021 (the “Fiscal 2020 Form 10-K”), as filed with the Securities and Exchange Commission on March 3, 2021. In the opinion of our management, the condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of our statements of operations and comprehensive income for the three- and six-months ended July 3, 2021, and June 27, 2020, our balance sheets at July 3, 2021, and January 2, 2021, our statements of stockholders’ equity (deficit) for the six months ended July 3, 2021, and June 27, 2020, and our statements of cash flows for the six months ended July 3, 2021, and June 27, 2020. We have condensed or omitted certain notes and other information from the interim condensed consolidated financial statements presented in this report. Therefore, these condensed consolidated interim financial statements should be read in conjunction with the Fiscal 2020 Form 10-K. In addition, certain prior period amounts have been reclassified to conform to the current period's presentation. These reclassifications did not impact operating income or consolidated net income. The results for the three- and six-months ended July 3, 2021 are not necessarily indicative of results that may be expected for the full year ending January 1, 2022, or any other interim period. We operate on a 5-4-4 fiscal calendar. Our fiscal year ends on the Saturday closest to December 31 of that fiscal year and may comprise 53 weeks in certain years. Our 2021 fiscal year contains 52 weeks and ends on January 1, 2022. Fiscal 2020 contained 53 weeks and ended on January 2, 2021. Our financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which requires us to make estimates based on assumptions about current and, for some estimates, future economic and market conditions, which affect reported amounts and related disclosures in our financial statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. Some of our estimates may be affected by the ongoing novel coronavirus (“COVID-19”) pandemic. The severity, magnitude, and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing, and difficult to predict. As a result, our accounting estimates and assumptions may change over time in response to the continuing COVID-19 pandemic. On April 13, 2018, we completed the acquisition of Cedar Creek Holdings, Inc. (“Cedar Creek”). Results for Cedar Creek are included in the consolidated financial information presented herein. Reclassification of Prior Period Presentation We have reclassified certain costs within the Condensed Consolidated Statements of Operations and Comprehensive Income for the three- and six-months ended June 27, 2020, from selling, general and administrative to amortization of deferred gains on real estate. These amounts relate to the amortization of deferred gains from real estate transactions in 2017 and 2018. Refer to Note 9, Leases. Additionally, we reclassified amounts in other comprehensive income from foreign currency translation, net of tax, to other, for the six-months ended July 3, 2021, and three- and six-months ended June 27, 2020. We have reclassified certain payables within the Condensed Consolidated Balance Sheets for the year ended January 2, 2021, from other current liabilities to taxes payable. These payables relate to amounts due to various tax authorities. Recently Adopted Accounting Standards Income Taxes . In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards 6 Codification (“ASC”) 740 and also clarifies and amends existing guidance to improve consistent application. The amendments in this standard are effective for interim periods and fiscal years beginning after December 15, 2020. Early adoption is permitted. We adopted this standard for the first fiscal quarter of 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. Defined Benefit Pension Plan . In August 2018, the FASB issued ASU No. 2018-14, “Compensation-Retirement-Benefits-Defined Benefit Plans-General (Subtopic 715-20).” The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing six previously required disclosures and adding two. The ASU also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost, and the benefit obligation for postretirement healthcare benefits. We adopted this standard effective for fiscal year 2020. The adoption of this standard did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows. Fair Value Measurement . In August 2018, the FASB issued ASU No. 2018-13, “Fair Value (“FV”) Measurement (Topic 820).” In addition to making certain modifications, the standard removed the requirements to disclose: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the FV hierarchy; (ii) the policy for timing transfers between levels; and (iii) the valuation process for Level 3 FV measurements. The standard requires public entities to disclose: (a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 FV measurements held at the end of the reporting period; and (b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 FV measurements. The additional disclosure requirements are applied prospectively for the most recent interim or annual period presented in the fiscal year of adoption. All other amendments are applied retrospectively to all periods presented. We adopted this standard effective December 29, 2019, the first day of our 2020 fiscal year. The adoption of this standard did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows. Accounting Standards Effective in Future Periods Credit Impairment Losses. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This ASU sets forth a current expected credit loss (“CECL”) model which requires the measurement of all expected credit losses for financial instruments or other assets (e.g., trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model, is applicable to the measurement of credit losses on financial assets measured at amortized cost, and applies to some off-balance sheet credit exposures. The standard also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. ASU 2019-10 extended the effective date of ASU 2016-13 to interim and annual periods beginning after December 15, 2022, for certain public business entities, including smaller reporting companies. We have not completed our assessment of the standard, but we do not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations, or cash flows. 2. Inventories Our inventories consist almost entirely of finished goods inventory, with an immaterial amount of work-in-process inventory. The cost of all inventories is determined by the moving average cost method. We have included all material charges directly incurred in bringing inventory to its existing condition and location. We evaluate our inventory value at the end of each quarter to ensure that inventory, when viewed by category, is carried at the lower of cost and net realizable value, which also considers items that may be considered damaged, excess, and obsolete inventory. For the three- and six-month periods ended July 3, 2021, we recorded a lower of cost or net realizable value reserve of $ 16.7 million resulting from the decrease in value of our structural lumber inventory related to the decline in wood-based commodity prices during the second quarter of 2021. 3. Goodwill and Other Intangible Assets In connection with the acquisition of Cedar Creek, we acquired certain intangible assets. As of July 3, 2021, our intangible assets consist of goodwill and other intangible assets including customer relationships, noncompete agreements, and trade names. 7 Goodwill Goodwill is the excess of the cost of an acquired entity over the fair value of tangible and intangible assets (including customer relationships, noncompete agreements, and trade names) acquired, and liabilities assumed, under acquisition accounting for business combinations. As of July 3, 2021, goodwill was $ 47.8 million. Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to a reporting unit and to determine if the fair value of the reporting unit’s goodwill is less than its carrying amount. We evaluate goodwill for impairment during the fourth quarter of each fiscal year. In addition, we will evaluate the carrying value for impairment between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Such events and indicators may include, without limitation, significant declines in the industries in which our products are used, significant changes in capital market conditions, and significant changes in our market capitalization. No such indicators were present during the second quarter of fiscal 2021. Our one reporting unit has a fair value that exceeds its carrying value as of July 3, 2021. Definite-Lived Intangible Assets On July 3, 2021, the gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets were as follows: Intangible Asset Weighted Average Remaining Useful Lives Gross Carrying Amounts Accumulated Amortization (1) Net Carrying Amounts (Years) (In thousands) Customer relationships 9 $ 25,500 $ ( 11,297 ) $ 14,203 Noncompete agreements 1 8,254 ( 6,627 ) 1,627 Trade names < 1 6,826 ( 6,826 ) — Total $ 40,580 $ ( 24,750 ) $ 15,830 (1) Intangible assets, except customer relationships, are amortized on a straight-line basis. Customer relationships are amortized on a double declining balance method. During the second quarter of 2021, our trade names intangible asset became fully amortized. Amortization Expense Amortization expense for our definite-lived intangible assets was $ 1.2 million and $ 3.1 million for the three- and six-month periods ended July 3, 2021, respectively. For the three- and six-month periods ended June 27, 2020, amortization expense was $ 1.8 million and $ 3.8 million, respectively. Estimated amortization expense for definite-lived intangible assets for the remaining portion of 2021 and the next five fiscal years is as follows: Fiscal year Estimated Amortization (In thousands) 2021 $ 2,261 2022 2,763 2023 1,807 2024 1,505 2025 1,423 2026 1,423 8 4. 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) Transaction price has been allocated to the performance obligations; and (5) When (or as) performance obligations are satisfied. Contracts with our customers are generally in the form of standard terms and conditions of sale. From time to time, we may enter into specific contracts, which may affect delivery terms. Performance obligations in our contracts generally consist solely of delivery of goods. For all sales channel types, consisting of warehouse, direct, and reload sales, we typically satisfy our performance obligations upon shipment. Our customer payment terms are typical for our industry, and may vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not deemed to be significant by us. For certain sales channels and/or products, our standard terms of payment may be as early as ten days. In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis. Customer consigned inventory is maintained and stored by certain customers; however, ownership and risk of loss remain with us. All revenues recognized are net of trade allowances (i.e., rebates), cash discounts, and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Adjustments to earnings resulting from revisions to estimates on discounts and returns have been insignificant for each of the reported periods. Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration. The following table presents our revenues disaggregated by revenue source. Certain prior year amounts have been reclassified to conform to the current year product mix of structural and specialty products. Sales and usage-based taxes are excluded from revenues. Three Months Ended Six Months Ended Product type July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 (In thousands) (In thousands) Structural products $ 632,724 $ 249,542 $ 1,095,571 $ 490,310 Specialty products 675,189 449,234 1,237,811 870,536 Total net sales $ 1,307,913 $ 698,776 $ 2,333,382 $ 1,360,846 The following table presents our revenues disaggregated by sales channel. Warehouse sales are delivered from our warehouses. Reload sales are similar to warehouse sales but are shipped from third-party warehouses where we store owned products to enhance our operating efficiencies. This channel is employed primarily to service strategic customers that would be less economical to service from our warehouses, and to distribute large volumes of imported products from port facilities. Direct sales are shipped from the manufacturer to the customer without our taking physical possession of the inventory and, as a result, typically generate lower margins than our warehouse and reload distribution channels. This distribution channel requires the lowest amount of committed capital and fixed costs. Following the acquisition and integration of Cedar Creek, our reload sales were less distinct from warehouse sales, as they have been classified in prior periods. Sales and usage-based taxes are excluded from revenues. Three Months Ended Six Months Ended Sales channel July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 (In thousands) (In thousands) Warehouse and reload $ 1,062,149 $ 601,279 $ 1,911,569 $ 1,163,472 Direct 265,280 107,848 456,409 217,129 Customer discounts and rebates ( 19,516 ) ( 10,351 ) ( 34,596 ) ( 19,755 ) Total net sales $ 1,307,913 $ 698,776 $ 2,333,382 $ 1,360,846 9 5. Assets Held for Sale As of July 3, 2021, and January 2, 2021, the net book value of total assets held for sale was $ 0.9 million and $ 1.3 million, respectively, and was included in “Other current assets” in our Condensed Consolidated Balance Sheets. Only one of our non-operating properties was designated as “held for sale” as of July 3, 2021. This property is a former distribution facility located in Houston, Texas. We vacated this property and designated it as held for sale during fiscal 2020. We continue to actively market this property, and we plan to sell this property within the next 12 months. 6. Long-Term Debt As of July 3, 2021, and January 2, 2021, long-term debt consisted of the following: Debt categories July 3, 2021 January 2, 2021 (In thousands) Revolving Credit Facility (1) $ 320,410 $ 288,247 Term Loan Facility (2) — 43,204 Finance lease obligations (3) 279,196 273,118 599,606 604,569 Unamortized debt issuance costs ( 2,184 ) ( 9,010 ) 597,422 595,559 Less: current maturities of long-term debt 6,379 6,846 Long-term debt, net of current maturities $ 591,043 $ 588,713 (1) The average effective interest rate was 2.5 percent and 2.8 percent for the quarters ended July 3, 2021 and January 2, 2021, respectively. (2) The average interest rate, exclusive of fees and prepayment premiums, was 8.0 percent for the quarter ended January 2, 2021. (3) Refer to Note 9, Leases , for interest rates associated with finance lease obligations. Revolving Credit Facility We have a revolving credit facility that we entered into in April 2018 with Wells Fargo Bank, National Association, as administrative agent (“the Agent”), and certain other financial institutions party thereto (the “Revolving Credit Facility”), with a maturity date of October 10, 2022. The Revolving Credit facility includes a committed senior secured asset-based 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. Our obligations under the Revolving Credit Facility are secured by a security interest in substantially all of our assets other than real property. Loans under the Revolving Credit Facility bear interest at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.75 percent to 2.25 percent, with the amount of such margin determined based upon the average of our excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on LIBOR, or (ii) the administrative agent’s base rate plus a margin ranging from 0.75 percent to 1.25 percent, with the amount of such margin determined based upon the average of our excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on the base rate. As of July 3, 2021, we had outstanding borrowings of $ 320.4 million and excess availability of $ 276.2 million under our Revolving Credit Facility. 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. Our average effective interest rate under the facility was 2.5 percent and 2.8 percent for the quarters ended July 3, 2021 and January 2, 2021, respectively. For the quarter ended June 27, 2020, our average effective interest rate under the Revolving Credit Facility was 3.1 percent. The Revolving Credit Facility contains certain financial and other covenants, and our right to borrow under the Revolving Credit Facility is conditioned upon, among other things, our compliance with these covenants. We were in compliance with all covenants under the Revolving Credit Facility as of July 3, 2021. On August 2, 2021, we entered into a Second Amendment (“the Amendment”) to the Revolving Credit Facility. The Amendment amends the Revolving Credit Facility to, among other things, (i) extend the maturity date of the facility from October 10, 2022, to August 2, 2026, (ii) reduce the interest rate on borrowings under the facility, (iii) amend the borrowing base to include a certain portion of the assets of acquired companies prior to the conduct of a field exam or appraisals thereof by 10 Wells Fargo, (iv) modify certain definitions and various affirmative and negative covenants to provide additional flexibility for the Company, and (v) add customary LIBOR replacement language. For more information on the Amendment, refer to Note 14, Subsequent Event . Term Loan Facility We previously had a term loan facility that we entered into in April 2018 with HPS Investments Partners, LLC, as administrative and collateral agent, and certain other financial institutions party thereto (the “Term Loan Facility”), with a maturity date of October 13, 2023. The Term Loan Facility provided for a senior secured first lien loan facility in an initial aggregate principal amount of $ 180 million and was secured by a security interest in substantially all of our assets. As of January 2, 2021, we had outstanding borrowings of $ 43.2 million under the Term Loan Facility. On April 2, 2021, we repaid the remaining outstanding principal balance of the Term Loan Facility, and, as a result, as of July 3, 2021, we had no outstanding borrowings under the Term Loan Facility, which has been extinguished. In connection with our repayment of the outstanding principal balance in full on April 2, 2021, we expensed $ 5.8 million of debt issuance costs during the first quarter of 2021 that we had been amortizing in connection with our former Term Loan Facility. These costs are included within interest expense, net, on the Condensed Consolidated Statements of Operations and reported separately as an adjustment to net income in our Condensed Consolidated Statements of Cash Flows. Our average interest rate under the facility, exclusive of fees and prepayment premiums, was approximately 8.0 percent for the quarter ended January 2, 2021. 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 9, Leases . 7. Net Periodic Pension Benefit The following table shows the components of our net periodic pension benefit: Three Months Ended Six Months Ended Pension-related items July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 (In thousands) (In thousands) Service cost (1) $ — $ — $ — $ — Interest cost on projected benefit obligation 505 723 1,010 1,446 Expected return on plan assets ( 1,140 ) ( 1,210 ) ( 2,280 ) ( 2,420 ) Amortization of unrecognized gain 321 263 642 526 Net periodic pension benefit $ ( 314 ) $ ( 224 ) $ ( 628 ) $ ( 448 ) (1) Service cost is not a part of our net periodic pension benefit as our pension plan is frozen for all participants. The net periodic pension benefit is included in other expense (income), net, in our Condensed Consolidated Statement of Operations and Comprehensive Income. 8. Stock Compensation During the three- and six-month periods ended July 3, 2021, we incurred stock compensation expense of $ 2.0 million and $ 3.4 million, respectively. For the three- and six-month periods ended June 27, 2020, we incurred stock compensation expense of $ 0.9 million and $ 1.9 million. The increase in our stock compensation expense for the three- and six-month periods are attributable to having more outstanding equity-based awards during this period than in the prior year and the vesting of awards in connection with the departure of certain employees. 9. Leases We have operating and finance leases for certain of our distribution facilities, office space, land, mobile fleet, and equipment. Many of our leases are non-cancelable and typically have a defined initial lease term, and some provide options to renew at our election for specified periods of time. The majority of our leases have remaining lease terms of 1 year to 15 years, some of which include one or more options to extend the leases for 5 years. Our leases generally provide for fixed annual rentals. Certain of our leases include provisions for escalating rent based on, among other things, contractually defined increases and/or 11 changes in the Consumer Price Index (“CPI”). The known changes to lease payments are included in the lease liability at lease commencement. Unknown changes related to CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. In addition, a subset of our vehicle lease cost is considered variable. Some of our leases require us to pay taxes, insurance, and maintenance expenses associated with the leased assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We determine if an arrangement is a lease at inception and assess lease classification as either operating or finance at lease inception or modification. Operating lease right-of use (“ROU”) assets and liabilities are presented separately on the condensed consolidated balance sheets. Finance lease ROU assets are included in property and equipment and the finance lease obligations are presented separately in the condensed consolidated balance sheet. When a lease does not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. We have also made the accounting policy election to not separate lease components from non-lease components related to our mobile fleet asset class. Finance Lease Liabilities Our finance lease liabilities consist of leases related to equipment and vehicles, and real estate. As noted in the table below, a majority of our finance leases, formally known as capital leases, relate to real estate. During 2017 and 2018, we entered into real estate financing transactions on warehouse facilities in Tampa, FL; Ft. Worth, TX; Bellingham, PA; Frederick, MD; Lawrenceville, GA; and Raleigh, NC. These transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms of 15 years with multiple 5 -year renewal options, with one having a single 10 -year renewal option. We accounted for these transactions in accordance with the FASB’s Accounting Standards Codification (“ASC”) Topic 840, which was the lease accounting standard in effect at the inception of these arrangements. We have recorded these transactions as finance lease liabilities on our balance sheet. As of July 3, 2021, and January 2, 2021, total unrecognized deferred gains related to these transactions were $ 80.1 million and $ 82.0 million, respectively. During 2019, we entered into real estate financing transactions on two warehouse facilities. On May 19, 2019, we completed a real estate financing transaction on a warehouse facility in University Park, IL for net proceeds of $ 21.8 million. On June 20, 2019, we completed a real estate financing transaction on a warehouse facility in Yulee, FL for net proceeds of $ 13.3 million. These two transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms of 15 years with multiple 5 -year renewal options. Gross proceeds of these transactions were $ 45.0 million. During fiscal 2020, we completed several real estate financing transactions. On December 31, 2019, we completed real estate financing transactions on warehouse facilities in Madison, TN; Kansas City, MO; Richmond, VA; and Bridgeton, MO for aggregate net proceeds of $ 27.2 million. On January 31, 2020, we completed real estate financing transactions on warehouse facilities in Charlotte, NC; Memphis, TN; Independence, KY; San Antonio, TX; Portland, ME; Denville, NJ; Yaphank, NY; Pensacola, FL; and Tallmadge, OH for aggregate net proceeds of $ 34.1 million. On February 28, 2020, we completed a real estate financing transaction on a warehouse facility in Elkhart, IN for net proceeds of $ 7.5 million. These transactions were completed pursuant to sale-leaseback arrangements, and upon their completion, we entered into long-term leases on the properties for initial terms from 15 years to 18 years with multiple 5 -year renewal options. Gross proceeds of these transactions were $ 78.3 million. We determined that the transactions in fiscal 2019 and 2020 did not qualify as sales in accordance with ASC 842. Therefore, for accounting purposes, the transactions were not accounted for as sale-leaseback transactions, and no gain or loss was recorded. We determined that these leases qualified for finance lease treatment and recorded them accordingly. The net book value of the assets related to these transactions remains on our books as property and equipment and we continue to depreciate the assets over their remaining useful lives. During the first and second quarters of 2021, we recorded finance leases of $ 10.2 million and $ 0.3 million, respectively, related to new tractors put into service as part of our mobile fleet. These leases were entered into for a period of four years each. Additionally, during the second quarter of 2021, we recorded operating leases totaling $ 5.0 million related to warehouse facilities in Milwaukee, WI, and Statesville, NC. Each lease was entered into for an initial period of ten years , and has two five-year renewal options. 12 The following table presents our assets and liabilities related to our leases as of July 3, 2021 and January 2, 2021: Lease assets and liabilities July 3, 2021 January 2, 2021 (In thousands) Assets Classification Operating lease right-of-use assets Operating lease right-of-use assets $ 49,478 $ 51,142 Finance lease right-of-use assets (1) Property and equipment, net 152,510 148,561 Total lease right-of-use assets $ 201,988 $ 199,703 Liabilities Current portion Operating lease liabilities Operating lease liabilities - short term $ 4,936 $ 6,076 Finance lease liabilities Finance lease liabilities - short term 6,379 5,675 Non-current portion Operating lease liabilities Operating lease liabilities - long term 44,897 44,965 Finance lease liabilities Finance lease liabilities - long term 272,817 267,443 Total lease liabilities $ 329,029 $ 324,159 (1) Finance lease right-of-use assets are presented net of accumulated amortization of $ 66.8 million and $ 58.6 million as of July 3, 2021 and January 2, 2021, respectively. The components of lease expense were as follows: Three Months Ended Six Months Ended Components of lease expense July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 (In thousands) (In thousands) Operating lease cost: $ 2,934 $ 2,977 $ 5,984 $ 6,098 Finance lease cost: Amortization of right-of-use assets $ 4,210 $ 3,513 $ 8,197 $ 6,878 Interest on lease liabilities 6,241 6,557 12,399 12,721 Total finance lease costs $ 10,451 $ 10,070 $ 20,596 $ 19,599 Supplemental cash flow information related to leases was as follows: Three Months Ended Six Months Ended Cash flow information July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 (In thousands) (In thousands) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,807 $ 2,860 $ 5,372 $ 5,663 Operating cash flows from finance leases 6,241 6,557 12,399 12,721 Financing cash flows from finance leases $ 2,542 $ 2,403 $ 4,671 $ 4,583 Right-of-use assets obtained in exchange for lease obligations Operating leases $ 5,106 $ — $ 5,106 $ — Finance leases $ 338 $ — $ 10,549 $ — 13 Supplemental balance sheet information related to leases was as follows: Balance sheet information July 3, 2021 January 2, 2021 (In thousands) Finance leases Property and equipment $ 219,264 $ 207,147 Accumulated depreciation ( 66,754 ) ( 58,586 ) Property and equipment, net $ 152,510 $ 148,561 Weighted Average Remaining Lease Term (in years) Operating leases 10.94 11.14 Finance leases 16.19 16.08 Weighted Average Discount Rate Operating leases 8.98 % 9.28 % Finance leases 9.83 % 9.87 % The major categories of our finance lease liabilities as of July 3, 2021 and January 2, 2021 are as follows: Category July 3, 2021 January 2, 2021 (In thousands) Equipment and vehicles $ 36,080 $ 29,434 Real estate 243,116 243,684 Total finance leases $ 279,196 $ 273,118 As of July 3, 2021, maturities of lease liabilities were as follows: Fiscal year Operating leases Finance leases (In thousands) 2021 $ 10,429 $ 16,744 2022 9,589 32,495 2023 8,349 32,191 2024 7,877 31,575 2025 7,878 27,850 Thereafter 43,766 380,072 Total lease payments $ 87,888 $ 520,927 Less: imputed interest ( 38,055 ) ( 241,731 ) Total $ 49,833 $ 279,196 14 On January 2, 2021, maturities of lease liabilities were as follows: Fiscal year Operating leases Finance leases (In thousands) 2021 $ 11,215 $ 30,159 2022 9,161 29,453 2023 8,400 29,189 2024 7,283 28,649 2025 7,392 28,102 Thereafter 44,092 380,511 Total lease payments $ 87,543 $ 526,063 Less: imputed interest ( 36,502 ) ( 252,945 ) Total $ 51,041 $ 273,118 10. Commitments and Contingencies Environmental and Legal Matters From time to time, we are involved in various proceedings incidental to our businesses, and we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Although the ultimate outcome of these proceedings cannot be determined with certainty, based on presently available information management believes that adequate reserves have been established for probable losses with respect thereto and receivables recorded for expected receipts from settlements. Management further believes that, while the ultimate outcome of one or more of these matters could be material to our operating results in any given quarter, it will not have a materially adverse effect on our consolidated financial condition, our results of operations, or our cash flows. Collective Bargaining Agreements As of July 3, 2021, we employed approximately 2,100 employees and less than 1 percent of our employees are employed on a part-time basis. Approximately 23 percent of our employees were represented by various local labor unions with terms and conditions of employment subject to Collective Bargaining Agreements (“CBAs”) negotiated between the Company and local labor unions. Six CBAs covering approximately six percent of our employees are up for renewal in fiscal 2021, with two having been successfully renegotiated earlier this year. We expect to renegotiate the remaining CBAs by the end of the year. 11. Accumulated Other Comprehensive Loss Comprehensive income includes both net income and other comprehensive income. Other comprehensive income results from items deferred from recognition into our Condensed Consolidated Statements of Operations and Comprehensive Income. Accumulated other comprehensive loss is separately presented on our Condensed Consolidated Balance Sheets as part of stockholders’ equity. The changes in balances for each component of accumulated other comprehensive loss for the six months ended July 3, 2021, were as follows: Foreign currency, net of tax Defined benefit pension plan, net of tax Other, net of tax Total Accumulated Other Comprehensive Loss (In thousands) January 2, 2021, beginning balance, net of tax $ 660 $ ( 36,855 ) $ 203 $ ( 35,992 ) Other comprehensive income, net of tax (1) — 485 17 502 July 3, 2021, ending balance, net of tax $ 660 $ ( 36,370 ) $ 220 $ ( 35,490 ) (1) For the six months ended July 3, 2021, the actuarial gain recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income as a component of net periodic pension benefit was $ 0.7 million, net of tax of $ 0.2 million. Please see Note 7, Net Periodic Pension Benefit , for further information. 15 12. Income Taxes Effective Tax Rate Our effective tax rate for the three months ended July 3, 2021, and June 27, 2020, was 23.5 percent and 33.9 percent, respectively. Our effective tax rate for the six months ended July 3, 2021, and June 27, 2020, was 24.4 percent and ( 36.8 ) percent, respectively. Our effective tax rate for the three- and six-months ended July 3, 2021 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, slightly offset by the partial release of the valuation allowance for state net operating loss carryforwards we anticipate being able to utilize based on our taxable income through the end of the second quarter of fiscal 2021, combined with a benefit from the vesting of restricted stock units, which occurred during the period. Our effective tax rate for the three- and six-months ended June 27, 2020 was primarily impacted by a discrete tax benefit of $ 3.9 million resulting from the release of the valuation allowance associated with nondeductible interest expense under Section 163(j) of the Internal Revenue Code (“IRC”) as a result of changes allowed under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that was enacted on March 27, 2020 which raised the allowable percentage of deductible interest from 30 percent to 50 percent of adjusted taxable income. Our effective tax rate for the same periods was further impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, and the effect of the partial valuation allowance for separate company state income tax losses, combined with expense related to the vesting of restricted stock units. Deferred Tax Assets Quarterly, we assess the carrying value of our deferred tax assets for impairment by evaluating the weight of available evidence at the end of each fiscal quarter. In our evaluation of the weight of available evidence at the end of the current quarter, we considered the recent reported income in the current quarter, as well as the reported income for 2020 and the reported losses for 2019 and 2018, which resulted in a three-year cumulative income situation as positive evidence which carried substantial weight. While this was substantial, it was not the only evidence we evaluated. We also considered evidence related to the four sources of taxable income to determine whether such positive evidence outweighed the negative evidence. The evidence considered included: • future reversals of existing taxable temporary differences; • future taxable income exclusive of reversing temporary differences and carryforwards; • taxable income in prior carryback years, if carryback is permitted under the tax law; and • tax planning strategies. In addition to the positive evidence discussed above, we considered as positive evidence forecasted taxable income, the detail scheduling of timing of the reversal of our deferred tax assets and liabilities, and the evidence from business and tax planning strategies. As of July 3, 2021, in our evaluation of the weight of available evidence, we concluded that our net deferred tax assets were not impaired. 13. Income per Share We calculate basic income per share by dividing net income by the weighted average number of common shares outstanding. We calculate diluted income per share using the treasury stock method, by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including restricted stock units . 16 The reconciliation of basic net income and diluted net income per common share for the three- and six-month periods ended July 3, 2021, and June 27, 2020, were as follows: Three Months Ended Six Months Ended July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020 (In thousands, except per share data) (In thousands, except per share data) Net income $ 113,458 $ 6,695 $ 175,318 $ 5,908 Weighted average shares outstanding - basic 9,549 9,395 9,507 9,381 Dilutive effect of share-based awards 226 7 150 2 Weighted average share outstanding - diluted 9,775 9,402 9,657 9,383 Basic income per share $ 11.88 $ 0.71 $ 18.44 $ 0.63 Diluted income per share $ 11.61 $ 0.71 $ 18.15 $ 0.63 14. Subsequent Event On August 2, 2021, we amended the Revolving Credit Facility by entering into a Second Amendment (the “Amendment”) to the Amended and Restated Credit Agreement among the Company, certain of the Company’s subsidiaries, as borrowers (together with the Company, the “Borrowers”) or guarantors thereunder, Wells Fargo Bank, National Association, in its capacity as administrative agent (“Agent”), and certain other financial institutions party thereto (as amended, supplemented or modified from time to time, the “Credit Agreement”). The Amendment amends the Credit Agreement to, among other things, (i) extend the maturity date of the Revolving Credit Facility from October 10, 2022, to August 2, 2026, (ii) amend the Borrowing Base (as such term is defined in the Credit Agreement) to include a certain portion of the assets of acquired companies prior to the conduct of a field exam or appraisals thereof by the Agent, (iii) modify certain definitions and various affirmative and negative covenants in the Credit Agreement to provide additional flexibility for the Company, and (iv) add customary LIBOR replacement language. In addition, as amended, the Credit Agreement provides for interest on borrowings under the Revolving Credit Facility at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.25 percent to 1.75 percent, with the amount of such margin determined based upon the average of the Borrowers’ excess availability for the immediately preceding fiscal quarter as calculated by the Agent, for loans based on LIBOR, or (ii) the base rate plus a margin ranging from 0.25 percent to 0.75 percent, with the amount of such margin determined based upon the average of the Borrowers’ excess availability for the immediately preceding fiscal quarter as calculated by the Agent, for loans based on the base rate, reflecting a decrease of 0.50 percent to the upper limit of each respective margin tier. All other material terms of the Credit Agreement, as amended, remain unchanged. 17