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 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Net sales $ 1,060,761 $ 970,842 $ 3,602,445 $ 3,304,224 Cost of sales 871,385 817,515 2,920,610 2,719,333 Gross profit 189,376 153,327 681,835 584,891 Operating expenses (income): Selling, general, and administrative 91,678 76,176 274,305 238,746 Depreciation and amortization 6,688 6,884 19,952 21,429 Amortization of deferred gains on real estate ( 983 ) ( 984 ) ( 2,951 ) ( 2,951 ) Gains from sales of property — — ( 144 ) ( 1,287 ) Other operating expenses 1,267 212 2,731 1,197 Total operating expenses 98,650 82,288 293,893 257,134 Operating income 90,726 71,039 387,942 327,757 Non-operating expenses (income): Interest expense, net 10,444 8,313 32,992 33,690 Other expense (income), net ( 361 ) ( 704 ) 916 ( 1,335 ) Income before provision for income taxes 80,643 63,430 354,034 295,402 Provision for income taxes 21,134 16,232 89,844 72,886 Net income $ 59,509 $ 47,198 $ 264,190 $ 222,516 Basic income per share $ 6.44 $ 4.85 $ 28.03 $ 23.23 Diluted income per share $ 6.38 $ 4.74 $ 27.82 $ 22.91 Comprehensive income: Net income $ 59,509 $ 47,198 $ 264,190 $ 222,516 Other comprehensive income: Amortization of unrecognized pension gain, net of tax 156 238 468 723 Other ( 24 ) 7 ( 24 ) 24 Total other comprehensive income 132 245 444 747 Comprehensive income $ 59,641 $ 47,443 $ 264,634 $ 223,263 See accompanying Notes. 1 BLUELINX HOLDINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) October 1, 2022 January 1, 2022 ASSETS Current assets: Cash and cash equivalents $ 229,364 $ 85,203 Receivables, less allowances of $ 4,365 and $ 4,024 , respectively 360,535 339,637 Inventories, net 535,979 488,458 Other current assets 32,309 31,869 Total current assets 1,158,187 945,167 Property and equipment, at cost 339,914 318,253 Accumulated depreciation ( 151,358 ) ( 137,099 ) Property and equipment, net 188,556 181,154 Operating lease right-of-use assets 50,311 49,568 Goodwill 47,772 47,772 Intangible assets, net 11,399 13,603 Deferred tax assets 61,224 60,285 Other non-current assets 16,127 19,905 Total assets $ 1,533,576 $ 1,317,454 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 208,197 $ 180,000 Accrued compensation 18,345 22,363 Taxes payable 6,750 6,138 Finance lease liabilities - short-term 8,732 7,864 Operating lease liabilities - short-term 7,028 5,145 Real estate deferred gains - short-term 3,935 3,934 Other current liabilities 20,191 18,347 Total current liabilities 273,178 243,791 Non-current liabilities: Long-term debt, net of debt issuance costs of $ 4,259 and $ 4,701 , respectively 292,094 291,271 Finance lease liabilities - long-term 264,004 266,853 Operating lease liabilities - long-term 43,492 44,526 Real estate deferred gains - long-term 71,353 74,206 Pension benefit obligation 9,216 11,605 Other non-current liabilities 22,542 21,953 Total liabilities 975,879 954,205 Commitments and Contingencies STOCKHOLDERS’ EQUITY: Common Stock, $ 0.01 par value, 20,000,000 shares authorized, 9,035,469 and 9,725,760 outstanding on October 1, 2022 and January 1, 2022, respectively 90 97 Additional paid-in capital 197,906 268,085 Accumulated other comprehensive loss ( 28,916 ) ( 29,360 ) Retained earnings 388,617 124,427 Total stockholders’ equity 557,697 363,249 Total liabilities and stockholders’ equity $ 1,533,576 $ 1,317,454 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 Retained Earnings Stockholders’ Equity Total Shares Amount Balance, January 1, 2022 9,726 $ 97 $ 268,085 $ ( 29,360 ) $ 124,427 $ 363,249 Net income — — — — 133,409 133,409 Impact of pension plan, net of tax — — — 156 — 156 Vesting of restricted stock units 11 — — — — — Compensation related to share-based grants — — 2,162 — — 2,162 Repurchase of shares to satisfy employee tax withholdings ( 5 ) — ( 393 ) — — ( 393 ) Common stock repurchase and retirement ( 81 ) ( 1 ) ( 6,426 ) — — ( 6,427 ) Other — — — 20 — 20 Balance, April 2, 2022 9,651 96 263,428 ( 29,184 ) 257,836 492,176 Net income — — — — 71,272 71,272 Impact of pension plan, net of tax — — — 156 — 156 Vesting of restricted stock units 181 2 — — — 2 Compensation related to share-based grants — — 1,775 — — 1,775 Repurchase of shares to satisfy employee tax withholdings ( 66 ) ( 1 ) ( 5,777 ) — — ( 5,778 ) Common stock repurchase and retirement ( 554 ) ( 5 ) ( 38,995 ) — — ( 39,000 ) Forward contract for accelerated share repurchase agreement — — ( 21,000 ) — — ( 21,000 ) Other — — 134 ( 20 ) — 114 Balance, July 2, 2022 9,212 92 199,565 ( 29,048 ) 329,108 499,717 Net income — — — — 59,509 59,509 Impact of pension plan, net of tax — — — 156 — 156 Vesting of restricted stock units 121 1 ( 1 ) — — — Compensation related to share-based grants — — 2,092 — — 2,092 Repurchase of shares to satisfy employee tax withholdings ( 51 ) ( 1 ) ( 3,618 ) — — ( 3,619 ) Common stock repurchase and retirement ( 247 ) ( 2 ) 2 — — — Other — — ( 134 ) ( 24 ) — ( 158 ) Balance, October 1, 2022 9,035 $ 90 $ 197,906 $ ( 28,916 ) $ 388,617 $ 557,697 3 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings (Accumulated 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 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 — — — 11 — 11 Balance, April 3, 2021 9,468 95 268,006 ( 35,742 ) ( 109,846 ) 122,513 Net income — — — — 113,458 113,458 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 ) 6 — 4 Balance, July 3, 2021 9,710 97 264,963 ( 35,490 ) 3,612 233,182 Net income — — — — 47,198 47,198 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 ) 7 — 3 Balance, October 2, 2021 9,724 $ 97 $ 266,564 $ ( 35,245 ) $ 50,810 $ 282,226 See accompanying Notes. 4 BLUELINX HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended October 1, 2022 October 2, 2021 Cash flows from operating activities: Net income $ 264,190 $ 222,516 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization 19,952 21,429 Amortization of debt discount and issuance costs 823 1,560 Adjustments to debt issuance costs associated with term loan — 5,791 Gains from sales of property ( 144 ) ( 1,287 ) Deferred income tax ( 939 ) ( 7,784 ) Amortization of deferred gains from real estate ( 2,951 ) ( 2,951 ) Share-based compensation 6,029 5,010 Changes in operating assets and liabilities: Accounts receivable ( 20,898 ) ( 51,331 ) Inventories ( 47,521 ) ( 94,330 ) Accounts payable 28,197 45,223 Taxes payable 612 ( 1,359 ) Other current assets ( 440 ) ( 6,247 ) Other assets and liabilities ( 874 ) ( 9,381 ) Net cash provided by operating activities 246,036 126,859 Cash flows from investing activities: Proceeds from sale of assets, net 648 2,652 Property and equipment investments ( 19,079 ) ( 5,424 ) Net cash used in investing activities ( 18,431 ) ( 2,772 ) Cash flows from financing activities: Borrowings on revolving credit facilities — 900,006 Repayments on revolving credit facilities — ( 965,142 ) Repayments on term loan — ( 43,204 ) Common stock repurchase and retirement ( 66,427 ) — Debt financing costs — ( 2,811 ) Repurchase of shares to satisfy employee tax withholdings ( 9,788 ) ( 5,135 ) Principal payments on finance lease liabilities ( 7,229 ) ( 7,697 ) Net cash used in financing activities ( 83,444 ) ( 123,983 ) Net change in cash and cash equivalents 144,161 104 Cash and cash equivalents at beginning of period 85,203 82 Cash and cash equivalents at end of period $ 229,364 $ 186 Supplemental cash flow information: Interest paid during the period 24,824 26,382 Taxes paid during the period 90,626 82,596 Non-cash transactions: Property and equipment acquired under finance leases 5,995 10,549 See accompanying Notes. 5 BLUELINX HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 1, 2022 (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 1, 2022 from the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (the “Fiscal 2021 Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”) on February 22, 2022. 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 1, 2022 and October 2, 2021, our balance sheets at October 1, 2022 and January 1, 2022, our statements of stockholders’ equity for the nine months ended October 1, 2022 and October 2, 2021, and our statements of cash flows for the nine months ended October 1, 2022 and October 2, 2021. 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 2021 Form 10-K. The results for the three and nine months ended October 1, 2022 are not necessarily indicative of results that may be expected for the full year ending December 31, 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 2022 fiscal year contains 52 weeks and ends on December 31, 2022. Fiscal 2021 contained 52 weeks and ended on January 1, 2022. 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. Reclassification of Prior Period Presentation For the nine months ended October 2, 2021, we have reclassified certain items within the presentation of our statement of cash flows to align with our statement of cash flows presentation for the nine months ended October 1, 2022. Our reclassifications are limited to the operating activities section and include presenting only the impact of deferred income taxes, instead of our full provision for income taxes, as a reconciling item for net income to cash provided by operating activities. We have also reclassified certain items previously presented individually, such as pension expense and pension contributions, to be included in the change of other assets and liabilities. In addition, we are presenting the change in taxes payable, previously included in other assets and liabilities, as a distinct line item in our reconciliation of net income to cash provided by operating activities. These reclassifications, we believe, provide an enhanced level of transparency with regards to the presentation of our statement of cash flows. Recently Adopted Accounting Standards Credit Impairment Losses. In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326).” This ASU sets forth a current expected credit loss (“CECL”) model which requires the measurement of all expected credit losses for financial instruments or other assets (e.g., trade receivables), held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the 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. The Company adopted this 6 standard in the first quarter of 2022 and the implementation did not have a material impact to the Company’s condensed consolidated financial statements. Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The standard provides temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the discontinuation of the publication of certain tenors of the London Inter-bank Offered Rate (“LIBOR”) on December 31, 2021, with complete elimination of the publication of the LIBOR by June 30, 2023. The amendments in this ASU are elective and apply to all entities that have contracts referencing the LIBOR. The Company’s revolving credit agreement, as further discussed in Note 6 to these condensed consolidated financial statements, currently references the LIBOR for determining interest payable on current and future borrowings and includes provisions for the use of alternative rates if the LIBOR is unavailable. The guidance in this ASU provides a practical expedient which simplifies accounting analyses under current U.S. GAAP for contract modifications if the change is directly related to a change from the LIBOR to a new interest rate index. The Company adopted this standard prospectively in the first quarter of 2022. The implementation did not have a material impact to the Company’s condensed consolidated financial statements or to any key terms of our revolving credit agreement other than the discontinuation of the LIBOR. Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740 and also clarifies and amends existing guidance to improve consistent application. The amendments in this standard are effective for interim periods and fiscal years beginning after December 15, 2020. We adopted this standard effective for fiscal year 2021. The adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements. 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 or net realizable value, which also considers items that may be considered damaged, excess, and obsolete inventory. During the second quarter of fiscal 2022, we recorded a lower of cost or net realizable value reserve of $ 9.8 million as a result of the decrease in the value of our structural lumber and panel inventory related to the decline in wood-based commodity prices as of the end of the period. In addition, volatility during the third quarter of fiscal 2022 also resulted in a decline in wood-based commodity prices as of the end of the period such that a lower of cost or net realizable value reserve of $ 4.1 million was required, resulting in a partial release of our reserve resulting in a net beneficial impact of $ 5.7 million for the third quarter of fiscal 2022. For the first nine months of fiscal 2022, the net impact of our lower of cost or net realizable value reserve on cost of sales was $ 4.1 million. During the second quarter of fiscal 2021, we recorded a lower of cost or net realizable value reserve of $ 16.7 million as a result of the decrease in the value of our structural lumber and panel inventory related to the decline in wood-based commodity prices as of the end of the period. During the third quarter of fiscal 2021, we released a lower of cost or net realizable value reserve of $ 16.7 million, as the inventory impacted by the reserve recorded in the second quarter of fiscal 2021 was sold to customers. For the first nine months of fiscal 2021, the net impact of our lower of cost or net realizable value reserve on cost of sales was zero . 3. Goodwill and Other Intangible Assets In connection with our past merger and acquisition activity, we acquired certain intangible assets. As of October 1, 2022, our intangible assets consist of goodwill and other intangible assets including customer relationships, noncompete agreements, and trade names. Goodwill Goodwill is the excess of the cost of an acquired entity over the fair value of tangible and intangible assets (including customer relationships, noncompete agreements, and trade names) acquired, and liabilities assumed, under acquisition accounting for business combinations. As of October 1, 2022, goodwill was $ 47.8 million. 7 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 2022. Our one reporting unit has a fair value that exceeds its carrying value as of October 1, 2022. Definite-Lived Intangible Assets On October 1, 2022, 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 (Years) Gross Carrying Amounts Accumulated Amortization (1) Net Carrying Amounts (In thousands) Customer relationships 8 $ 25,500 $ ( 14,101 ) $ 11,399 Noncompete agreements — 8,254 ( 8,254 ) — Trade names — 6,826 ( 6,826 ) — Total $ 40,580 $ ( 29,181 ) $ 11,399 (1) Intangible assets, except customer relationships, are amortized on a straight-line basis. Customer relationships are amortized on a double declining balance method. Amortization Expense Amortization expense for our definite-lived intangible assets was $ 0.5 million and $ 2.2 million for the three and nine month periods ended October 1, 2022, respectively. For the three and nine month periods ended October 2, 2021, amortization expense was $ 1.1 million and $ 4.2 million, respectively. Estimated amortization expense for definite-lived intangible assets for the remaining portion of 2022 and the next five fiscal years is as follows: Fiscal Year Estimated Amortization (In thousands) 2022 $ 512 2023 1,807 2024 1,505 2025 1,423 2026 1,423 2027 1,423 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 8 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. Sales and usage-based taxes are excluded from revenues. Three Months Ended Nine Months Ended Product type October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (In thousands) (In thousands) Specialty products $ 724,323 $ 641,024 $ 2,280,090 $ 1,878,835 Structural products 336,438 329,818 1,322,355 1,425,389 Total net sales $ 1,060,761 $ 970,842 $ 3,602,445 $ 3,304,224 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 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (In thousands) (In thousands) Warehouse and reload $ 889,349 $ 783,758 $ 2,987,636 $ 2,695,326 Direct 193,446 204,524 680,333 660,934 Customer discounts and rebates ( 22,034 ) ( 17,440 ) ( 65,524 ) ( 52,036 ) Total net sales $ 1,060,761 $ 970,842 $ 3,602,445 $ 3,304,224 5. Assets Held for Sale As of October 1, 2022, we had no assets or liabilities classified as “held for sale”. As of January 1, 2022, the net book value of total assets classified as “held for sale” was $ 2.6 million and was included in other current assets in our condensed consolidated balance sheet. As of January 1, 2022, the book value of total liabilities classified as “held for sale” was $ 1.9 million and was included in other current liabilities in our condensed consolidated balance sheet. Assets classified as “held for sale” as of January 1, 2022, consisted of fixed assets, at net book value, and current assets, including raw material and work in process inventory, affiliated with one of our business locations in the Midwest. Liabilities classified as “held for sale” as of January 1, 2022 included current liabilities, such as accounts payable, directly associated with those assets held for sale that will be transferred with the assets held for sale. As of January 1, 2022, we planned to sell these assets and transfer these liabilities within the next 12 months. During the second quarter of 2022, we completed the sale of assets and liabilities previously classified as held for sale. 9 6. Long-Term Debt As of October 1, 2022 and January 1, 2022, long-term debt consisted of the following: October 1, 2022 January 1, 2022 (In thousands) Senior secured notes (1) $ 300,000 $ 300,000 Revolving credit facility (2) — — Finance lease obligations (3) 272,736 274,717 572,736 574,717 Unamortized debt issuance costs ( 4,259 ) ( 4,701 ) Unamortized bond discount costs ( 3,647 ) ( 4,028 ) 564,830 565,988 Less: current maturities of long-term debt 8,732 7,864 Long-term debt, net of current maturities $ 556,098 $ 558,124 (1) As of October 1, 2022 and January 1, 2022, our long-term debt was comprised of $ 300.0 million of senior secured notes issued in October 2021. These notes are presented under the “Long-term debt” caption of our condensed consolidated balance sheets at $ 292.1 million and $ 291.3 million at October 1, 2022 and January 1, 2022, respectively. This presentation is net of their discount of $ 3.6 million and $ 4.0 million and the combined carrying value of our debt issuance costs of $ 4.3 million and $ 4.7 million at October 1, 2022 and January 1, 2022, respectively. Our senior secured notes are presented in this table at their face value. (2) The average effective interest rate was zero percent and 2.6 percent for the quarters ended October 1, 2022 and January 1, 2022, respectively. (3) Refer to Note 9, Leases , for interest rates associated with finance lease obligations. Senior Secured Notes In October 2021, we completed a private offering of $ 300 million of our six percent senior secured notes due 2029 (the “2029 Notes”), and in connection therewith we entered into an indenture (the “Indenture”) with the guarantors party thereto and Truist Bank, as trustee and collateral agent. The 2029 Notes were issued to investors at 98.625 percent of their principal amount and will mature on November 15, 2029. The majority of net proceeds from the offering of the 2029 Notes were used to repay borrowings under our revolving credit facility, as defined below. Revolving Credit Facility In April 2018, we entered into a revolving credit facility with Wells Fargo Bank, National Association, as administrative agent (“the Agent”), and certain other financial institutions party thereto. In August 2021, we entered into a second amendment to our revolving credit facility to, among other things, extend the maturity date of the facility to August 2, 2026, and reduce the interest rate on borrowings under the facility (as amended, the “Revolving Credit Facility”). As amended, the Revolving Credit Facility provides for a senior secured asset-based revolving loan and letter of credit facility of up to $ 350 million. The Borrowers’ obligations under the Revolving Credit Facility are secured by a security interest in substantially all of our and our subsidiaries’ assets (other than real property), including inventories, accounts receivable, and proceeds from those items. Borrowings 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 margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on LIBOR, or (ii) the Agent’s base rate plus a margin ranging from 0.25 percent to 0.75 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate. Borrowings under the Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the revolving credit agreement). The Borrowers are required to repay revolving loans thereunder to the extent that such revolving loans exceed the Borrowing Base then in effect. The Revolving Credit Facility may be prepaid in whole or in part from time to time without penalty or premium, but including all breakage costs incurred by any lender thereunder. 10 As of October 1, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $ 575.8 million under our Revolving Credit Facility. As of January 1, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $ 431.7 million under our Revolving Credit Facility. Our average effective interest rate under the facility was zero percent and 2.6 percent for the quarters ended October 1, 2022 and January 1, 2022, respectively. 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 1, 2022. Term Loan Facility On April 2, 2021, we repaid the remaining outstanding principal balance of our former term loan facility, and, as a result, as of January 1, 2022 and October 1, 2022, we had zero 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 that we were 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. As the facility was paid in full as of April 2, 2021, our average effective interest rate under the facility, exclusive of fees and prepayment premiums, was zero percent for the quarters ended October 1, 2022 and January 1, 2022. 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 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (In thousands) (In thousands) Service cost (1) $ — $ — $ — $ — Interest cost on projected benefit obligation 606 505 1,818 1,515 Expected return on plan assets ( 1,177 ) ( 1,140 ) ( 3,531 ) ( 3,420 ) Amortization of unrecognized gain 209 321 627 963 Net periodic pension benefit $ ( 362 ) $ ( 314 ) $ ( 1,086 ) $ ( 942 ) (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 1, 2022, we incurred stock compensation expense of $ 2.1 million and $ 6.0 million, respectively. For the three and nine month periods ended October 2, 2021, we incurred stock compensation expense of $ 1.6 million and $ 5.0 million, respectively. The increase in our stock compensation expense for the three month period ended October 1, 2022 compared to the prior-year period is primarily attributable to the timing of award vesting and associated expense recognition. The increase in our stock compensation expense for the nine month period ended October 1, 2022 compared to the prior-year period is primarily attributable to an increase in the number of awards granted, as well as the increase in the grant-date fair value, or the Company’s stock price, of awards currently vesting compared to the prior year. 11 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 one to 15 years, some of which include one or more options to extend the leases for five 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. 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 sheets. 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. The following table presents our assets and liabilities related to our leases as of October 1, 2022 and January 1, 2022: Lease assets and liabilities October 1, 2022 January 1, 2022 (In thousands) Assets Classification Operating lease right-of-use assets Operating lease right-of-use assets $ 50,311 $ 49,568 Finance lease right-of-use assets (1) Property and equipment, net 136,203 143,851 Total lease right-of-use assets $ 186,514 $ 193,419 Liabilities Current portion Operating lease liabilities Operating lease liabilities - short term $ 7,028 $ 5,145 Finance lease liabilities Finance lease liabilities - short term 8,732 7,864 Non-current portion Operating lease liabilities Operating lease liabilities - long term 43,492 44,526 Finance lease liabilities Finance lease liabilities - long term 264,004 266,853 Total lease liabilities $ 323,256 $ 324,388 (1) Finance lease right-of-use assets are presented net of accumulated amortization of $ 87.4 million and $ 73.7 million as of October 1, 2022 and January 1, 2022, respectively. 12 The components of lease expense were as follows: Three Months Ended Nine Months Ended Components of lease expense October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (In thousands) (In thousands) Operating lease cost: $ 2,529 $ 2,959 $ 7,625 $ 8,942 Finance lease cost: Amortization of right-of-use assets $ 5,098 $ 4,012 $ 13,698 $ 12,209 Interest on lease liabilities 6,104 6,244 18,384 18,659 Total finance lease costs $ 11,202 $ 10,256 $ 32,082 $ 30,868 Cash flow information related to leases was as follows: Three Months Ended Nine Months Ended Cash flow information October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (In thousands) (In thousands) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,562 $ 2,822 $ 7,713 $ 8,193 Operating cash flows from finance leases 6,104 6,244 18,384 18,659 Financing cash flows from finance leases $ 2,496 $ 3,026 $ 7,229 $ 7,697 Non-cash supplemental cash flow information related to leases was as follows: Three Months Ended Nine Months Ended Non-cash information October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (In thousands) (In thousands) Right-of-use assets obtained in exchange for lease obligations Operating leases $ 3,604 $ 217 $ 4,731 $ 5,508 Finance leases $ 3,279 $ — $ 5,995 $ 10,549 Supplemental balance sheet information related to leases was as follows: Balance sheet information October 1, 2022 January 1, 2022 (In thousands) Finance leases Property and equipment $ 223,642 $ 217,592 Accumulated depreciation ( 87,439 ) ( 73,741 ) Property and equipment, net $ 136,203 $ 143,851 Weighted Average Remaining Lease Term (in years) Operating leases 10.09 10.75 Finance leases 14.25 15.06 Weighted Average Discount Rate Operating leases 8.85 % 9.01 % Finance leases 8.94 % 10.00 % 13 The major categories of our finance lease liabilities as of October 1, 2022 and January 1, 2022 are as follows: Category October 1, 2022 January 1, 2022 (In thousands) Equipment and vehicles $ 28,842 $ 30,710 Real estate 243,894 244,007 Total finance leases $ 272,736 $ 274,717 As of October 1, 2022, maturities of lease liabilities were as follows: Fiscal year Operating leases Finance leases (In thousands) 2022 $ 3,214 $ 6,558 2023 11,039 32,943 2024 10,310 32,329 2025 9,323 28,709 2026 6,114 32,189 Thereafter 38,745 351,962 Total lease payments $ 78,745 $ 484,690 Less: imputed interest ( 28,225 ) ( 211,954 ) Total $ 50,520 $ 272,736 On January 1, 2022, maturities of lease liabilities were as follows: Fiscal year Operating leases Finance leases (In thousands) 2022 $ 9,376 $ 32,495 2023 9,134 32,115 2024 8,329 31,521 2025 8,329 27,994 2026 6,050 31,439 Thereafter 40,711 348,149 Total lease payments $ 81,929 $ 503,713 Less: imputed interest ( 32,258 ) ( 228,996 ) Total $ 49,671 $ 274,717 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 have been 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, results of operations, or cash flows. 14 Collective Bargaining Agreements As of October 1, 2022, we employed approximately 2,411 associates and less than one percent of our associates are employed on a part-time basis. Approximately 16 percent of our associates are represented by various local labor unions with terms and conditions of employment governed by Collective Bargaining Agreements (“CBAs”). Four CBAs covering approximately six percent of our associates are up for renewal in fiscal 2023, which we expect to renegotiate by the end of fiscal 2023. 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 nine months ended October 1, 2022 were as follows: Defined benefit pension plan, net of tax Other, net of tax Total Accumulated Other Comprehensive Loss January 1, 2022, beginning balance, net of tax $ ( 30,245 ) $ 885 $ ( 29,360 ) Other comprehensive income, net of tax 468 ( 24 ) 444 October 1, 2022, ending balance, net of tax $ ( 29,777 ) $ 861 $ ( 28,916 ) 12. Income Taxes Effective Tax Rate Our effective tax rate for the three months ended October 1, 2022 and October 2, 2021 was 26.2 percent and 25.6 percent, respectively. Our effective tax rate for the nine months ended October 1, 2022 and October 2, 2021 was 25.4 percent and 24.7 percent, respectively. Our effective tax rate for the three and nine months ended October 1, 2022 and October 2, 2021 were impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation. Each nine-month period also includes a benefit from the vesting of restricted stock units. Our effective tax rate for the three and nine months ended October 2, 2021 also benefited from the partial release of our valuation allowance for state net operating loss carryforwards we anticipated being able to utilize based on our taxable income through the end of the first nine months of fiscal 2021. 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 2021 and 2020 and the reported losses for 2019, 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 15 strategies. As of October 1, 2022, 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 . On August 23, 2021, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $ 25.0 million of our common stock. During the first quarter of fiscal 2022, we repurchased 81,331 shares of our common stock under this program at an average price of $ 79.03 per share. On May 3, 2022, our Board of Directors increased our share repurchase authorization to $ 100.0 million and we entered into an Accelerated Share Repurchase Agreement (“ASR Agreement”) with Jefferies LLC to repurchase $ 60.0 million of our common stock. Under the ASR Agreement, we received initial delivery of 553,584 shares of common stock on May 3, 2022 (the “Transaction Date”) representing approximately 65 percent of the total number of shares of common stock initially underlying the ASR Agreement based on our closing stock price of $ 70.45 on May 2, 2022. The initial delivery of 553,584 shares reduced the number of common shares outstanding on the Transaction Date and, as a result, reduced the weighted average number of common shares outstanding used to calculate basic income per share and diluted income per share for the nine month period ended October 1, 2022. Final settlement of the shares of common stock repurchased under the ASR Agreement occurred on September 15, 2022 based on the average of the daily volume-weighted average price of our common stock during the repurchase period under the ASR Agreement, less a discount and other adjustments pursuant to the terms and conditions of the ASR Agreement. At settlement, we received an additional 247,431 shares of common stock, which reduced the weighted average number of common shares outstanding used to calculate basic income per share and diluted income per share for the three and nine month periods ended October 1, 2022. Under our ASR Agreement, we repurchased a total of 801,015 shares of our common stock at an average price of $ 74.90 per share. The reconciliation of basic net income and diluted net income per common share for the three and nine month periods ended October 1, 2022 and October 2, 2021 were as follows: Three Months Ended Nine Months Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (In thousands, except per share data) (In thousands, except per share data) Net income $ 59,509 $ 47,198 $ 264,190 $ 222,516 Weighted-average shares outstanding - basic 9,230 9,721 9,425 9,579 Dilutive effect of share-based awards 98 232 72 135 Weighted-average shares outstanding - diluted 9,328 9,953 9,497 9,714 Basic income per share $ 6.44 $ 4.85 $ 28.03 $ 23.23 Diluted income per share $ 6.38 $ 4.74 $ 27.82 $ 22.91 Approximately 77,000 and 2,000 weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the three months ended October 1, 2022 and October 2, 2021, respectively, as the awards would have been anti-dilutive for the periods presented. Approximately 58,000 and 119,000 weighted-average share-based awards were excluded from the computation of earnings per share assuming dilution during the nine months ended October 1, 2022 and October 2, 2021, respectively, as the awards would have been anti-dilutive for the periods presented. 16 14. Subsequent Event On October 3, 2022, we announced that we entered into and closed on a Stock Purchase Agreement (the “Purchase Agreement”) with Vandermeer Forest Products, Inc., a Washington corporation (“Vandermeer”), and the sole shareholder of Vandermeer. Vandermeer is a premier wholesale distributor of building products, serving over 250 customers across the Pacific Northwest, Alaska, Hawaii, British Columbia, and Alberta. The acquisition of Vandermeer adds three distribution branches in Washington state and provides direct access to Seattle and Portland, two of the top 15 metropolitan statistical areas in the United States. Additionally, we now have coast-to-coast reach and serve all 50 states. Under the Purchase Agreement, we acquired all of the outstanding capital stock of Vandermeer for an aggregate purchase price of approximately $ 63.4 million, on a debt-free, cash-free basis, subject to customary post-closing adjustments in respect of net working capital, cash, transaction expenses and indebtedness. In addition, we acquired Vandermeer’s Spokane, Washington distribution facility and related real estate from the sole shareholder of Vandermeer for approximately $ 3.6 million, resulting in an aggregate purchase price of $ 67.0 million for the business and real property, which we funded with cash on hand. We are currently in the process of finalizing the accounting for this transaction and expect to complete our preliminary allocation of the purchase consideration by the end of fiscal 2022. 17