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 Nine Months Ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Net sales $ 970,842 $ 871,063 $ 3,304,224 $ 2,231,909 Cost of sales 817,515 711,603 2,719,333 1,878,420 Gross profit 153,327 159,460 584,891 353,489 Operating expenses (income): Selling, general, and administrative 76,176 79,976 238,746 225,258 Depreciation and amortization 6,884 7,087 21,429 21,785 Amortization of deferred gains on real estate ( 984 ) ( 984 ) ( 2,951 ) ( 2,952 ) Gains from sales of property — ( 8,684 ) ( 1,287 ) ( 9,209 ) Other operating expenses 212 609 1,197 6,736 Total operating expenses 82,288 78,004 257,134 241,618 Operating income 71,039 81,456 327,757 111,871 Non-operating expenses (income): Interest expense, net 8,313 10,776 33,690 36,691 Other income, net ( 704 ) ( 238 ) ( 1,335 ) ( 58 ) Income before provision for income taxes 63,430 70,918 295,402 75,238 Provision for income taxes 16,232 15,802 72,886 14,214 Net income $ 47,198 $ 55,116 $ 222,516 $ 61,024 Basic income per share $ 4.85 $ 5.83 $ 23.23 $ 6.49 Diluted income per share $ 4.74 $ 5.72 $ 22.91 $ 6.48 Comprehensive income: Net income $ 47,198 $ 55,116 $ 222,516 $ 61,024 Other comprehensive income: Amortization of unrecognized pension gain, net of tax 238 294 723 604 Other 7 ( 5 ) 24 ( 2 ) Total other comprehensive income 245 289 747 602 Comprehensive income $ 47,443 $ 55,405 $ 223,263 $ 61,626 See accompanying Notes. 1 BLUELINX HOLDINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) October 2, 2021 January 2, 2021 ASSETS Current assets: Cash $ 186 $ 82 Receivables, less allowances of $ 4,471 and $ 4,123 , respectively 344,974 293,643 Inventories, net 436,438 342,108 Other current assets 38,828 32,581 Total current assets 820,426 668,414 Property and equipment, at cost 309,108 299,935 Accumulated depreciation ( 131,587 ) ( 121,223 ) Property and equipment, net 177,521 178,712 Operating lease right-of-use assets 51,178 51,142 Goodwill 47,772 47,772 Intangible assets, net 14,699 18,889 Deferred tax assets 70,683 62,899 Other non-current assets 20,052 20,302 Total assets $ 1,202,331 $ 1,048,130 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 210,386 $ 165,163 Accrued compensation 18,330 24,751 Taxes payable 6,488 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 5,606 5,675 Operating lease liabilities - short-term 4,881 6,076 Real estate deferred gains - short-term 4,040 4,040 Other current liabilities 13,527 14,309 Total current liabilities 263,258 229,032 Non-current liabilities: Long-term debt, net of debt issuance costs of $ 3,608 and $ 8,936 , respectively 219,541 321,270 Finance lease liabilities - long-term 271,314 267,443 Operating lease liabilities - long-term 46,412 44,965 Real estate deferred gains - long-term 75,157 78,009 Pension benefit obligation 19,926 22,684 Other non-current liabilities 24,497 25,635 Total liabilities 920,105 989,038 Commitments and Contingencies STOCKHOLDERS’ EQUITY: Common Stock, $ 0.01 par value, 20,000,000 shares authorized, 9,723,838 and 9,462,774 outstanding on October 2, 2021 and January 2, 2021, respectively 97 95 Additional paid-in capital 266,564 266,695 Accumulated other comprehensive loss ( 35,245 ) ( 35,992 ) Accumulated stockholders’ equity (deficit) 50,810 ( 171,706 ) Total stockholders’ equity 282,226 59,092 Total liabilities and stockholders’ equity $ 1,202,331 $ 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 Net income — $ — $ — $ — $ 47,198 $ 47,198 Foreign currency translation, net of tax — — — 7 — 7 Impact of pension plan, net of tax — — — 238 — 238 Vesting of restricted stock units 14 — — — — — Compensation related to share-based grants — — 1,608 — — 1,608 Repurchase of shares to satisfy employee tax withholdings — — ( 3 ) — — ( 3 ) Other — — ( 4 ) — — ( 4 ) Balance, October 2, 2021 9,724 $ 97 $ 266,564 $ ( 35,245 ) $ 50,810 $ 282,226 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 ) Net income — — — — 55,116 55,116 Foreign currency translation, net of tax — — — ( 12 ) — ( 12 ) Impact of pension plan, net of tax — — — 294 — 294 Vesting of restricted stock units 1 — — — — — Compensation related to share-based grants — — 1,057 — — 1,057 Repurchase of shares to satisfy employee tax withholdings — — ( 1 ) — — ( 1 ) Other — — — 7 — 7 Balance, September 26, 2020 9,462 $ 95 $ 263,643 $ ( 33,961 ) $ ( 191,564 ) $ 38,213 See accompanying Notes. 4 BLUELINX HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended October 2, 2021 September 26, 2020 Cash flows from operating activities: Net income $ 222,516 $ 61,024 Adjustments to reconcile net income to cash provided by operations: Provision for income taxes 72,886 14,214 Depreciation and amortization 21,429 21,785 Amortization of debt issuance costs 1,560 2,888 Adjustments to debt issuance costs associated with term loan 5,791 — Gains from sales of property ( 1,287 ) ( 9,209 ) Amortization of deferred gains from real estate ( 2,951 ) ( 2,951 ) Share-based compensation 5,010 2,915 Changes in operating assets and liabilities: Accounts receivable ( 51,331 ) ( 115,712 ) Inventories ( 94,330 ) 39,776 Accounts payable 45,223 46,600 Other current assets ( 7,083 ) ( 1,380 ) Pension contributions ( 325 ) ( 142 ) Other assets and liabilities ( 90,249 ) 14,588 Net cash provided by operating activities 126,859 74,396 Cash flows from investing activities: Proceeds from sale of assets 2,652 10,742 Property and equipment investments ( 5,424 ) ( 1,943 ) Net cash provided by (used in) investing activities ( 2,772 ) 8,799 Cash flows from financing activities: Borrowings on revolving credit facilities 900,006 541,700 Repayments on revolving credit facilities ( 965,142 ) ( 605,221 ) Repayments on term loan ( 43,204 ) ( 88,861 ) Proceeds from real estate financing transactions — 78,263 Debt financing costs ( 2,811 ) ( 2,983 ) Repurchase of shares to satisfy employee tax withholdings ( 5,135 ) ( 255 ) Principal payments on finance lease liabilities ( 7,697 ) ( 7,327 ) Net cash used in financing activities ( 123,983 ) ( 84,684 ) Net change in cash 104 ( 1,489 ) Cash at beginning of period 82 11,643 Cash at end of period $ 186 $ 10,154 Supplemental Cash Flow Information Net income tax payment during the period $ 82,596 $ 610 Interest paid during the period $ 26,382 $ 33,716 See accompanying Notes. 5 BLUELINX HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 2, 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 October 2, 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 nine months ended October 2, 2021, and September 26, 2020, our balance sheets at October 2, 2021, and January 2, 2021, our statements of stockholders’ equity (deficit) for the nine months ended October 2, 2021, and September 26, 2020, and our statements of cash flows for the nine months ended October 2, 2021, and September 26, 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. The results for the three and nine months ended October 2, 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. Reclassification of Prior Period Presentation We have reclassified certain costs within the Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 26, 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 nine months ended October 2, 2021, and three and nine months ended September 26, 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 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 6 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 month periods ended October 2, 2021, we released 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, accrued during the second quarter of fiscal 2021, as the inventory impacted by the reserve was sold to customers. The lower of cost of net realizable value reserve of $ 16.7 million had no net impact on the nine month period ended October 2, 2021. 3. Goodwill and Other Intangible Assets In connection with the acquisition of Cedar Creek on April 13, 2018, we acquired certain intangible assets. As of October 2, 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 October 2, 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 third quarter of fiscal 2021. Our one reporting unit has a fair value that exceeds its carrying value as of October 2, 2021. Definite-Lived Intangible Assets On October 2, 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 $ ( 11,912 ) $ 13,588 Noncompete agreements 1 8,254 ( 7,143 ) 1,111 Trade names 0 6,826 ( 6,826 ) — Total $ 40,580 $ ( 25,881 ) $ 14,699 (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 fiscal 2021, our trade names intangible asset became fully amortized. Amortization Expense Amortization expense for our definite-lived intangible assets was $ 1.1 million and $ 4.2 million for the three and nine month periods ended October 2, 2021, respectively. For the three and nine month periods ended September 26, 2020, amortization expense was $ 1.8 million and $ 5.6 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 $ 1,131 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 Nine Months Ended Product type October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 (In thousands) (In thousands) Structural products $ 329,818 $ 375,072 $ 1,425,389 $ 865,302 Specialty products 641,024 495,991 1,878,835 1,366,607 Total net sales $ 970,842 $ 871,063 $ 3,304,224 $ 2,231,909 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 warehouses, most of which are operated by third-parties, 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. Sales and usage-based taxes are excluded from revenues. Three Months Ended Nine Months Ended Sales channel October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 (In thousands) (In thousands) Warehouse and reload $ 783,758 $ 745,185 $ 2,695,326 $ 1,901,285 Direct 204,524 138,750 660,934 363,250 Customer discounts and rebates ( 17,440 ) ( 12,872 ) ( 52,036 ) ( 32,626 ) Total net sales $ 970,842 $ 871,063 $ 3,304,224 $ 2,231,909 5. Assets Held for Sale As of October 2, 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- 9 operating properties was designated as “held for sale” as of October 2, 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 October 2, 2021, and January 2, 2021, long-term debt consisted of the following: Debt categories October 2, 2021 January 2, 2021 (In thousands) Revolving Credit Facility (1) $ 223,149 $ 288,247 Term Loan Facility (2) — 43,204 Finance lease obligations (3) 276,920 273,118 500,069 604,569 Unamortized debt issuance costs ( 3,608 ) ( 9,010 ) 496,461 595,559 Less: current maturities of long-term debt 5,606 6,846 Long-term debt, net of current maturities $ 490,855 $ 588,713 (1) The average effective interest rate was 2.0 percent and 2.8 percent for the quarters ended October 2, 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. On August 2, 2021, we entered into a second amendment to the facility to, among other things, extend the maturity date of the facility to August 2, 2026, and reduce the interest rate on borrowings under the facility (as amended, the “Revolving Credit Facility”) . The Revolving Credit Facility includes a committed senior secured asset-based revolving loan and letter of credit facility of up to $ 600.0 million, and an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to $ 150.0 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 1.25 percent to 1.75 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 0.25 percent to 0.75 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 October 2, 2021, we had outstanding borrowings of $ 223.1 million and excess availability of $ 351.9 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 2.0 percent and 2.8 percent for the quarters ended October 2, 2021 and January 2, 2021, respectively. For the quarter ended September 26, 2020, our average effective interest rate under the Revolving Credit Facility was 2.7 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 October 2, 2021. On October 25, 2021, we closed a private offering of $ 300.0 million at 6.0 % senior secured notes to persons reasonably believed to be “qualified institutional buyers,” as defined in Rule 144A under the Securities Act of 1933, as amended (“The Securities Act”), and to non-U.S. persons outside the United States under Regulation S under the Securities Act. The 2029 Notes were issued to investors at 98.625 % of their principal amount and will mature on November 15, 2029. The majority of 10 net proceeds from the offering of the senior secured notes were used to repay borrowings under our Revolving Credit Facility. In conjunction with this offering, we reduced the limit of the Revolving Credit Facility from $ 600.0 million to $ 350.0 million. Term Loan Facility As of January 2, 2021, we had outstanding borrowings of $ 43.2 million under our 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 October 2, 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 fiscal 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 Nine Months Ended Pension-related items October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 (In thousands) (In thousands) Service cost (1) $ — $ — $ — $ — Interest cost on projected benefit obligation 505 723 1,515 2,169 Expected return on plan assets ( 1,140 ) ( 1,210 ) ( 3,420 ) ( 3,630 ) Amortization of unrecognized gain 321 263 963 789 Net periodic pension benefit $ ( 314 ) $ ( 224 ) $ ( 942 ) $ ( 672 ) (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 nine month periods ended October 2, 2021, we incurred stock compensation expense of $ 1.6 million and $ 5.0 million, respectively. For the three and nine month periods ended September 26, 2020, we incurred stock compensation expense of $ 1.1 million and $ 2.9 million. The increase in our stock compensation expense for the three and nine month periods ended 2021 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. In addition, the stock price has increased during fiscal year 2021 compared to 2020. 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 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. 11 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 the first and second quarters of fiscal 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 fiscal 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. The following table presents our assets and liabilities related to our leases as of October 2, 2021 and January 2, 2021: Lease assets and liabilities October 2, 2021 January 2, 2021 (In thousands) Assets Classification Operating lease right-of-use assets Operating lease right-of-use assets $ 51,178 $ 51,142 Finance lease right-of-use assets (1) Property and equipment, net 148,426 148,561 Total lease right-of-use assets $ 199,604 $ 199,703 Liabilities Current portion Operating lease liabilities Operating lease liabilities - short term $ 4,881 $ 6,076 Finance lease liabilities Finance lease liabilities - short term 5,606 5,675 Non-current portion Operating lease liabilities Operating lease liabilities - long term 46,412 44,965 Finance lease liabilities Finance lease liabilities - long term 271,314 267,443 Total lease liabilities $ 328,213 $ 324,159 (1) Finance lease right-of-use assets are presented net of accumulated amortization of $ 70.8 million and $ 58.6 million as of October 2, 2021 and January 2, 2021, respectively. The components of lease expense were as follows: Three Months Ended Nine Months Ended Components of lease expense October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 (In thousands) (In thousands) Operating lease cost: $ 2,959 $ 3,108 $ 8,942 $ 9,206 Finance lease cost: Amortization of right-of-use assets $ 4,012 $ 4,648 $ 12,209 $ 11,526 Interest on lease liabilities 6,244 4,949 18,659 17,670 Total finance lease costs $ 10,256 $ 9,597 $ 30,868 $ 29,196 12 Supplemental cash flow information related to leases was as follows: Three Months Ended Nine Months Ended Cash flow information October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 (In thousands) (In thousands) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,822 $ 3,029 $ 8,193 $ 8,662 Operating cash flows from finance leases 6,244 4,949 18,659 17,670 Financing cash flows from finance leases $ 3,026 $ 2,893 $ 7,697 $ 7,327 Right-of-use assets obtained in exchange for lease obligations Operating leases $ 217 $ 3,640 $ 5,508 $ 3,668 Finance leases $ — $ 3,145 $ 10,549 $ 3,145 Supplemental balance sheet information related to leases was as follows: Balance sheet information October 2, 2021 January 2, 2021 (In thousands) Finance leases Property and equipment $ 219,192 $ 207,147 Accumulated depreciation ( 70,766 ) ( 58,586 ) Property and equipment, net $ 148,426 $ 148,561 Weighted Average Remaining Lease Term (in years) Operating leases 10.86 11.14 Finance leases 16.05 16.08 Weighted Average Discount Rate Operating leases 9.00 % 9.28 % Finance leases 9.94 % 9.87 % The major categories of our finance lease liabilities as of October 2, 2021 and January 2, 2021 are as follows: Category October 2, 2021 January 2, 2021 (In thousands) Equipment and vehicles $ 33,717 $ 29,434 Real estate 243,203 243,684 Total finance leases $ 276,920 $ 273,118 13 As of October 2, 2021, maturities of lease liabilities were as follows: Fiscal year Operating leases Finance leases (In thousands) 2021 $ 10,134 $ 8,238 2022 9,402 32,495 2023 7,943 32,191 2024 8,207 31,575 2025 7,322 27,850 Thereafter 42,310 379,747 Total lease payments $ 85,318 $ 512,096 Less: imputed interest ( 34,025 ) ( 235,176 ) Total $ 51,293 $ 276,920 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 October 2, 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 three 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. 14 The changes in balances for each component of accumulated other comprehensive loss for the nine months ended October 2, 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) 7 723 17 747 October 2, 2021, ending balance, net of tax $ 667 $ ( 36,132 ) $ 220 $ ( 35,245 ) (1) For the nine months ended October 2, 2021, the actuarial gain recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income as a component of net periodic pension benefit was $ 0.9 million, net of tax of $ 0.2 million. Please see Note 7, Net Periodic Pension Benefit , for further information. 12. Income Taxes Effective Tax Rate Our effective tax rate for the three months ended October 2, 2021, and September 26, 2020, was 25.6 percent and 22.3 percent, respectively. Our effective tax rate for the nine months ended October 2, 2021, and September 26, 2020, was 24.7 percent and 18.9 percent, respectively. Our effective tax rate for the three and nine months ended October 2, 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 third quarter of fiscal 2021. Our effective tax rate for the three and nine months ended September 26, 2020 was primarily impacted by a discrete tax benefit 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 October 2, 2021, in our evaluation of the weight of available evidence, we concluded that our net deferred tax assets were not impaired. 15 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 . The reconciliation of basic net income and diluted net income per common share for the three and nine month periods ended October 2, 2021, and September 26, 2020, were as follows: Three Months Ended Nine Months Ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 (In thousands, except per share data) (In thousands, except per share data) Net income $ 47,198 $ 55,116 $ 222,516 $ 61,024 Weighted average shares outstanding - basic 9,721 9,461 9,579 9,408 Dilutive effect of share-based awards 232 170 135 11 Weighted average share outstanding - diluted 9,953 9,631 9,714 9,419 Basic income per share $ 4.85 $ 5.83 $ 23.23 $ 6.49 Diluted income per share $ 4.74 $ 5.72 $ 22.91 $ 6.48 14. Subsequent Event Closing of Senior Secured Notes of $300M at 6.0% Due 2029 On October 25, 2021, we closed a private offering of $ 300 million at 6.0 % senior secured notes to persons reasonably believed to be “qualified institutional buyers,” as defined in Rule 144A under The Securities Act of 1933, and to non-U.S. persons outside the United States under Regulation S under the Securities Act. The 2029 Notes were issued to investors at 98.625 % of their principal amount and will mature on November 15, 2029. Our obligations under these senior secured notes are guaranteed by our domestic subsidiaries that are co-borrowers under or guarantee our Revolving Credit Facility. The senior secured notes and the related guarantees are secured by a first-priority security interest in substantially all of our guarantor’s existing and future assets (other than receivables, inventory, deposit accounts, securities accounts, business interruption insurance and other related assets), subject to certain exceptions and customary permitted liens. The senior secured notes and the related guarantees are also secured on a second-priority basis by a lien on our Revolving Credit Facility collateral. The majority of net proceeds from the offering of the senior secured notes were used to repay borrowings under our Revolving Credit Facility. In conjunction with the closing of the senior secured notes offering, we reduced the limit under our Revolving Credit Facility from $ 600 million to $ 350 million. 16