BlueLinx Holdings Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm s (PCAOB ID: 42 ) 40 Report of Independent Registered Public Accounting Firm (PCAOB ID: 243) 42 Consolidated Statements of Operations and Comprehensive Income 43 Consolidated Balance Sheets 44 Consolidated Statements of Stockholders’ Equity (Deficit) 45 Consolidated Statements of Cash Flows 46 Notes to Consolidated Financial Statements 47 39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of BlueLinx Holdings Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of BlueLinx Holdings Inc. (the Company) as of December 31, 2022 and January 1, 2022, the related consolidated statements of operations and comprehensive income, stockholders’ equity (deficit) and cash flows for each of the two fiscal years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the two fiscal years in the period ended December 31, 2022 in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 21, 2023 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of the Pension Benefit Obligation Description of the Matter As discussed in Note 11 of the consolidated financial statements, the Company’s pension benefit obligation was $82.7 million and exceeded the fair value of pension plan assets of $81.2 million, resulting in an unfunded obligation of $1.5 million. The estimation of the pension benefit obligation is dependent on actuarial methods and the selection of assumptions, such as the applicable discount rate and mortality rates. Auditing the valuation of the pension benefit obligation was complex due to the judgmental nature of the actuarial assumptions used in the valuation process. These assumptions have a significant effect on the pension benefit obligation. 40 How We Addressed the Matter in Our Audit We tested controls that address the risks of material misstatements related to the valuation of the pension benefit obligation. For example, we tested controls over management’s review of the methodology used, significant actuarial assumptions, including management’s review of the selected discount and mortality rates with the Company’s external actuary, and the completeness and accuracy of the data inputs provided to the external actuary. To test the pension benefit obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above, and the underlying data used by the Company. We compared the actuarial assumptions used by management to its historical accounting practices and evaluated the change in the pension benefit obligation from the prior year due to the change in interest cost, actuarial loss and benefits paid. In addition, we involved an actuarial specialist to assist with our procedures. For example, the discount rate reflects the rates at which benefits could effectively be settled and is based on current investment yields of high-quality corporate bonds. The Company uses an actuarially-developed full yield curve approach in establishing its discount rate. We evaluated management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments. As part of this assessment, we developed an upper and lower yield curve using high quality bonds with characteristics appropriate for testing the development of the Company’s yield curve to evaluate its reasonability. To evaluate the mortality rate, we assessed whether the information was consistent with publicly available information, and whether any entity-specific adjustments were applied. We also tested the completeness and accuracy of the underlying data, including the participant data provided to management’s actuarial specialists. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2021. Atlanta, Georgia February 21, 2023 41 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of BlueLinx Holdings Inc. and subsidiaries Marietta, Georgia Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statement of stockholders’ equity (deficit) of BlueLinx Holdings, Inc. (the “Company”) as of January 2, 2021, the related consolidated statements of operations and comprehensive income and cash flows for the year ended January 2, 2021 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 2, 2021, and the results of its operations and its cash flows for the year then ended , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ BDO USA, LLP We served as the Company's auditor from 2015 until 2021. Atlanta, Georgia March 3, 2021 42 BLUELINX HOLDINGS INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Fiscal Year Ended December 31, 2022 Fiscal Year Ended January 1, 2022 Fiscal Year Ended January 2, 2021 (In thousands, except per share data) Net sales $ 4,450,214 $ 4,277,178 $ 3,097,328 Cost of sales 3,617,230 3,498,751 2,619,594 Gross profit 832,984 778,427 477,734 Operating expenses: Selling, general, and administrative 366,305 322,205 314,228 Depreciation and amortization 27,613 28,192 28,901 Amortization of deferred gains on real estate ( 3,934 ) ( 3,935 ) ( 4,008 ) Gains from sales of property ( 144 ) ( 8,427 ) ( 10,529 ) Other operating expenses 4,057 2,315 6,901 Total operating expenses 393,897 340,350 335,493 Operating income 439,087 438,077 142,241 Non-operating expenses (income): Interest expense, net 42,272 45,507 47,414 Other expense (income), net 2,054 ( 1,306 ) ( 254 ) Income before provision for income taxes 394,761 393,876 95,081 Provision for income taxes 98,585 97,743 14,199 Net income $ 296,176 $ 296,133 $ 80,882 Basic income per share $ 31.75 $ 30.80 $ 8.58 Diluted income per share $ 31.51 $ 29.99 $ 8.55 Comprehensive income: Net income $ 296,176 $ 296,133 $ 80,882 Other comprehensive (loss) income: Actuarial gain (loss) on defined benefit plan, net of tax ( 3,057 ) 5,546 ( 2,202 ) Amortization of unrecognized pension gain, net of tax 627 1,064 788 Other 378 22 ( 15 ) Total other comprehensive (loss) income ( 2,052 ) 6,632 ( 1,429 ) Comprehensive income $ 294,124 $ 302,765 $ 79,453 See the accompanying notes to the consolidated financial statements. 43 BLUELINX HOLDINGS INC. CONSOLIDATED BALANCE SHEETS December 31, 2022 January 1, 2022 (In thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 298,943 $ 85,203 Accounts receivable, less allowances of $ 3,449 and $ 4,024 , respectively 251,555 339,637 Inventories, net 484,313 488,458 Other current assets 42,121 31,869 Total current assets 1,076,932 945,167 Property and equipment, net 205,609 181,154 Operating lease right-of-use assets 45,717 49,568 Goodwill 55,372 47,772 Intangible assets, net 34,989 13,603 Deferred tax assets 56,169 60,285 Other non-current assets 15,254 19,905 Total assets $ 1,490,042 $ 1,317,454 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 151,626 $ 180,000 Accrued compensation 22,556 22,363 Taxes payable — 6,138 Finance lease liabilities - short-term 7,089 7,864 Operating lease liabilities - short-term 7,432 5,145 Real estate deferred gains - short-term 3,935 3,934 Pension benefit obligation - short-term 1,521 — Other current liabilities 16,518 18,347 Total current liabilities 210,677 243,791 Non-current liabilities: Long-term debt, net of debt issuance costs of $ 4,057 and $ 4,701 , respectively 292,424 291,271 Finance lease liabilities - long-term 265,986 266,853 Operating lease liabilities - long-term 40,011 44,526 Real estate deferred gains - long-term 70,403 74,206 Pension benefit obligation - long-term — 11,605 Other non-current liabilities 20,512 21,953 Total liabilities 900,013 954,205 Commitments and contingencies STOCKHOLDERS’ EQUITY Common Stock, $ 0.01 par value, 20,000,000 shares authorized, 9,048,603 and 9,725,760 outstanding on December 31, 2022 and January 1, 2022, respectively 90 97 Additional paid-in capital 200,748 268,085 Accumulated other comprehensive loss ( 31,412 ) ( 29,360 ) Accumulated stockholders’ equity 420,603 124,427 Total stockholders’ equity 590,029 363,249 Total liabilities and stockholders’ equity $ 1,490,042 $ 1,317,454 See the accompanying notes to the consolidated financial statements. 44 BLUELINX HOLDINGS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings (Accumulated Deficit) Stockholders’ Equity (Deficit) Total Shares Amount (In thousands) Balance, December 28, 2019 9,366 $ 94 $ 260,974 $ ( 34,563 ) $ ( 252,588 ) $ ( 26,083 ) Net income — — — — 80,882 80,882 Impact of defined pension plan, net of tax — — — ( 1,414 ) — ( 1,414 ) Vesting of restricted stock units 127 1 — — — 1 Compensation related to share-based grants — — 5,992 — — 5,992 Repurchase of shares to satisfy employee tax withholdings ( 30 ) — ( 271 ) — — ( 271 ) Other — — — ( 15 ) — ( 15 ) Balance, January 2, 2021 9,463 $ 95 $ 266,695 $ ( 35,992 ) $ ( 171,706 ) $ 59,092 Net income — — — — 296,133 296,133 Impact of defined pension plan, net of tax — — — 6,610 — 6,610 Vesting of restricted stock units 379 2 — — — 2 Compensation related to share-based grants — — 6,590 — — 6,590 Repurchase of shares to satisfy employee tax withholdings ( 116 ) — ( 5,193 ) — — ( 5,193 ) Other — — ( 7 ) 22 — 15 Balance, January 1, 2022 9,726 $ 97 $ 268,085 $ ( 29,360 ) $ 124,427 $ 363,249 Net income — — — — 296,176 296,176 Impact of defined pension plan, net of tax — — — ( 2,430 ) — ( 2,430 ) Vesting of restricted stock units 337 3 ( 3 ) — — — Compensation related to share-based grants — — 9,617 — — 9,617 Repurchase of shares to satisfy employee tax withholdings ( 132 ) ( 1 ) ( 10,533 ) — — ( 10,534 ) Common stock repurchase and retirement ( 882 ) ( 9 ) ( 66,418 ) — — ( 66,427 ) Other — — — 378 — 378 Balance, December 31, 2022 9,049 $ 90 $ 200,748 $ ( 31,412 ) $ 420,603 $ 590,029 See the accompanying notes to the consolidated financial statements. 45 BLUELINX HOLDINGS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended December 31, 2022 Fiscal Year Ended January 1, 2022 Fiscal Year Ended January 2, 2021 (In thousands) Cash flows from operating activities: Net income $ 296,176 $ 296,133 $ 80,882 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization 27,613 28,192 28,901 Amortization of debt discount and issuance costs 1,153 1,411 3,881 Adjustment to debt issuance cost associated with term loan/revolver — 7,394 — Gains from sales of property ( 144 ) ( 8,427 ) ( 10,529 ) Deferred income tax 5,289 356 ( 8,420 ) Share-based compensation 9,617 6,590 5,992 Amortization of deferred gain from real estate ( 3,934 ) ( 3,935 ) ( 4,008 ) Changes in operating assets and liabilities: Accounts receivable 101,266 ( 45,994 ) ( 100,771 ) Inventories 20,759 ( 146,350 ) 3,698 Accounts payable ( 31,808 ) 14,837 32,815 Taxes payable ( 6,138 ) ( 1,709 ) 10,156 Pension contributions ( 11,876 ) ( 1,100 ) ( 1,493 ) Other current assets ( 11,635 ) 712 ( 9,546 ) Other assets and liabilities 3,959 ( 3,087 ) 23,461 Net cash provided by operating activities 400,297 145,023 55,019 Cash flows from investing activities: Acquisition of business, net of cash acquired ( 63,767 ) — — Proceeds from sale of assets 964 10,327 12,849 Property and equipment investments ( 35,886 ) ( 14,415 ) ( 3,689 ) Net cash provided by (used in) investing activities ( 98,689 ) ( 4,088 ) 9,160 Cash flows from financing activities: Borrowings on revolving credit facilities — 949,080 843,905 Repayments on revolving credit facilities — ( 1,235,724 ) ( 882,155 ) Repayments on term loan — ( 43,204 ) ( 103,470 ) Proceeds from senior secured notes — 295,861 — Proceeds from real estate financing transactions — — 78,263 Common stock repurchase and retirement ( 66,427 ) — — Debt financing costs — ( 5,459 ) ( 3,350 ) Repurchase of shares to satisfy employee tax withholdings ( 10,534 ) ( 5,193 ) ( 271 ) Principal payments on finance lease liabilities ( 10,907 ) ( 11,175 ) ( 8,662 ) Net cash used in financing activities ( 87,868 ) ( 55,814 ) ( 75,740 ) Net change in cash and cash equivalents 213,740 85,121 ( 11,561 ) Cash and cash equivalents at beginning of period 85,203 82 11,643 Cash and cash equivalents at end of period $ 298,943 $ 85,203 $ 82 Supplemental cash flow information: Net income tax payments during the period $ 111,197 $ 98,855 $ 14,377 Interest paid during the period $ 44,054 $ 33,236 $ 43,502 Noncash transactions: Additions of fleet assets under finance leases $ 9,092 $ 10,549 $ 3,833 See the accompanying notes to the consolidated financial statements. 46 BLUELINX HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation BlueLinx is a leading wholesale distributor of residential and commercial building products in the United States. We are a “two-step” distributor. Two-step distributors purchase products from manufacturers and distribute those products to dealers and other suppliers in local markets, who then sell those products to end users. We carry a broad portfolio of both branded and private-label stock keeping units (“SKUs”) across two principal product categories: specialty products and structural products. Specialty products include items such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products. Structural products include items such as lumber, plywood, oriented strand board, rebar, and remesh. We also provide a wide range of value-added services and solutions aimed at relieving distribution and logistics challenges for our customers and suppliers, while enhancing their marketing and inventory management capabilities. Our consolidated financial statements include the accounts of BlueLinx Holdings Inc. and its wholly owned subsidiaries. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated. 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 contained 52 weeks and ended on December 31, 2022. Fiscal 2021 contained 52 weeks and ended on January 1, 2022. Fiscal 2020 contained 53 weeks and ended on January 2, 2021. Reclassification of Prior Period Presentation For the years ended January 1, 2022 and January 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 year ended December 31, 2022. Our reclassifications are limited to the operating activities section and include presenting pension contributions, which were previously presented within the change of other assets and liabilities, as an individual item within changes in operating assets and liabilities. These reclassifications, we believe, provide an enhanced level of transparency with regards to the presentation of our statement of cash flows. Use of Estimates Our financial statements are prepared in conformity with 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. The global impact of the COVID-19 pandemic may also affect our accounting estimates, which may materially change from period to period due to changing market factors. We regularly evaluate these significant factors and make adjustments where facts and circumstances dictate. Revenue Recognition We recognize revenue when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration we expected to be entitled to in exchange for those goods or services. The timing of revenue recognition largely is dependent on shipping terms. Revenue is recorded at the time of shipment for terms designated free on board (“FOB”) shipping point. For sales transactions designated FOB destination, revenue is recorded when the product is delivered to the customer’s delivery site. All revenues recognized are net of trade allowances, cash discounts, and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Adjustments to earnings resulting from revisions to estimates on discounts and returns have been immaterial for each of the reported periods. 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 remains with us. 47 Shipping and Handling Outbound shipping and handling costs included in “Selling, general, and administrative” expenses were $ 160.3 million, $ 149.2 million, and $ 151.2 million for fiscal 2022, fiscal 2021, and fiscal 2020, respectively. Shipping and handling costs include amounts related to the administration of our logistical infrastructure, handling of material in our warehouses, and amounts pertaining to the delivery of products to our customers, such as fuel and maintenance costs for our mobile fleet, wages for our drivers, and third party freight charges. Cash and Cash Equivalents Cash equivalents consist of short-term investments that have an original maturity of three months or less at the date of purchase. At December 31, 2022 and January 1, 2022, the majority of our cash and cash equivalents were comprised of money market funds that are broadly diversified and invested in high-quality, short-duration securities, including U.S. government agency securities, and similar instruments. We have significant amounts of cash and cash equivalents that are in excess of federally insured limits. Though we have not experienced any losses on our cash and cash equivalents to date and we do not anticipate incurring any losses, we cannot be assured that we will not experience losses on our cash and cash equivalents. Accounts Receivable Accounts receivable are stated at net realizable value, do not bear interest, and consist of amounts owed for orders shipped to customers. Management establishes an overall credit policy for sales to customers. The allowance for doubtful accounts is determined based on a number of factors including specific customer account reviews, historical loss experience, current economic trends, and the creditworthiness of significant customers based on ongoing credit evaluations. Inventory Valuation The cost of all inventories is determined by the moving average cost method. We have included all material charges directly or indirectly 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. As of December 31, 2022, we recorded a lower of cost or net realizable value reserve of $ 2.6 million and no reserve as of January 1, 2022. Consideration Received from Vendors and Paid to Customers Each fiscal year, we enter into agreements with many of our vendors providing for inventory purchase rebates, generally based on achievement of specified volume purchasing levels. We also receive rebates related to price protection and various marketing allowances that are common industry practice. We accrue for the receipt of vendor rebates based on purchases, and also reduce inventory to reflect the net acquisition cost (purchase price less expected purchase rebates). In addition, we enter into agreements with many of our customers to offer customer rebates, generally based on achievement of specified sales levels and various marketing allowances that are common industry practice. We accrue for the payment of customer rebates based on sales to the customer, and also reduce sales to reflect the net sales (sales price less expected customer rebates). Adjustments to earnings resulting from revisions to rebate estimates have been immaterial. Property and Equipment Property and equipment are recorded at cost. Lease obligations for which we assume or retain substantially all the property rights and risks of ownership are capitalized. Amortization of assets recorded under finance leases is included in “Depreciation and amortization” expense. Replacements of major units of property are capitalized and the replaced properties are retired. Replacements of minor components of property and repair and maintenance costs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from seven to 15 years for land improvements, 15 to 33 years for buildings, and three to seven years for machinery and equipment. Upon retirement or disposition of assets, cost and accumulated depreciation are removed from the related accounts and any gain or loss is included in income. We assess long-lived assets other than goodwill for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. If it is determined that the carrying amount of an asset is not recoverable, we compare the carrying amount of the asset to its fair value as estimated using discounted expected future cash flows, market values or replacement values for similar assets. The amount by which the carrying amount exceeds the fair value of the asset, if any, is recognized as an impairment loss. 48 Assets Held for Sale Certain assets and liabilities met the held for sale classification criteria as of January 1, 2022. Assets and liabilities held for sale are recorded at the lower of their carrying value or fair value less estimated cost to sell and are classified within other current assets and other current liabilities, respectively, in the consolidated balance sheets. Depreciation is suspended on assets upon classification as held for sale. As of December 31, 2022, we had no assets or liabilities classified as held for sale. Assets 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 included current liabilities, such as accounts payable, directly associated with those assets held for sale that were be transferred with the assets held for sale. We planned to sell these assets and transfer these liabilities within the next 12 months. Self-Insurance The Company is self-insured for its non-union and certain unionized employee health benefits. We have purchased stop-loss insurance in order to establish certain limits to our exposure on a per claim basis, both individually and in the aggregate. Health benefits for some unionized employees for fiscal 2022 and 2021 were paid directly to a union trust, depending upon the union-negotiated benefit arrangement. The Company is also self-insured, up to certain limits, for workers’ compensation losses, general liability, and automotive liability losses, all subject to varying “per occurrence” retentions or deductible limits. The Company provides for estimated costs to settle both known claims and claims incurred but not yet reported by making periodic prepayments, considering our retention and stop loss limits. Liabilities of the Company associated with these claims are estimated, in part, by considering the frequency and severity of historical claims, both specific to us, as well as industry-wide loss experience and other actuarial assumptions. We determine our insurance obligations with the assistance of actuarial firms. Since there are many estimates and assumptions involved in recording insurance liabilities, and in the case of workers’ compensation, a significant period of time elapses before the ultimate resolution of claims, differences between actual future events, and prior estimates and assumptions could result in adjustments to these liabilities. The Company has deposits on hand with certain third-party insurance administrators and insurance carriers to cover its obligation for future payment of claims. These deposits are recorded in other current and non-current assets in our consolidated balance sheets. Leases We are the lessee in a lease contract when we obtain the right to control an asset associated with a particular lease. For operating leases, we record a right-of-use ("ROU") asset that represents our right to use an underlying asset for the lease term, and a corresponding lease liability that represents our obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Financing ROU assets associated with finance leases are included in property and equipment. Leases with a lease term of 12 months or less at inception are not recorded on our consolidated balance sheet and are expensed on a straight-line basis over the lease term in our consolidated statement of operations and comprehensive income. We determine the lease term by assuming the exercise of renewal options that are reasonably certain. As most of our leases do 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 lease payments. When our contracts contain lease and non-lease components, we account for both components as a single lease component. See Note 14, Lease Commitments, for further discussion. Income Taxes We account for deferred income taxes using the liability method. Accordingly, we recognize deferred tax assets and liabilities based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. All deferred tax assets and liabilities are classified as noncurrent in our consolidated balance sheet. A valuation allowance is recorded to reduce deferred tax assets when necessary. For additional information about our income taxes, see Note 8, Income Taxes . Pension We sponsor a noncontributory defined benefit pension plan administered solely by us (the “pension plan”). Most of the participants in the plan are inactive, with all remaining active participants no longer accruing benefits, and the plan is closed to new entrants. Our funding policy for the pension plan is based on actuarial calculations and the applicable requirements of federal law. Benefits under the pension plan primarily are related to years of service. We are involved in various multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with certain collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are generally responsible with the other participating employers for any plan underfunding. Our contributions 49 to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the funded status of an MEPP and legal requirements such as those of the Pension Act, which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Fair Value Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Authoritative guidance for fair value measurements establishes a three-level hierarchy that prioritizes the inputs to valuation models based upon the degree to which they are observable. The three levels of the fair value measurement hierarchy are as follows: • Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date • Level 2 - Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly • Level 3 - Inputs are unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions The fair value measurement guidance also establishes, as a practical expedient, that certain investments are not to be classified in the fair value hierarchy when they are measured at fair value using net asset value ("NAV"). The carrying value of the Company’s cash, cash equivalents, trade receivables, and trade payables approximate their fair values because of their short-term nature. See Note 10, Fair Value Measurements , for additional information with respect to the Company’s fair value measurements. Business Combinations We account for business combinations by recognizing the assets acquired and liabilities assumed at the acquisition date fair value. In valuing certain acquired assets and liabilities, fair value estimates use Level 3 inputs, including future expected cash flows and discount rates. Goodwill is measured as the excess of consideration transferred over the fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments arising from new facts and circumstances are recorded to the consolidated statements of operations. The results of operations of acquisitions are reflected in our consolidated financial statements from the date of acquisition. Recent Accounting Standards - Adopted 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. We adopted this standard in the first quarter of 2022 and the implementation did not have a material impact to our 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. Our revolving credit agreement, as further discussed in Note 9, Long-Term Debt , to these 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 50 from the LIBOR to a new interest rate index. We adopted this standard prospectively in the first quarter of 2022. The implementation did not have a material impact to our 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 our consolidated financial statements. 2. Business Combination On October 3, 2022, we acquired all the outstanding stock of Vandermeer Forest Products (“Vandermeer”), a premier wholesale distributor of building products, for preliminary total consideration of $ 69.3 million. Preliminary total consideration includes a purchase price of $ 67.0 million plus a preliminary estimate for cash acquired and net adjustments for working capital related to the transaction. The purchase price of $ 67.0 million includes $ 63.4 million for the business and $ 3.6 million for a distribution facility and real estate located in Spokane, Washington, which was acquired in transaction. The acquisition was funded with cash on hand. Vandermeer was founded in 1972 and serves more than 250 customers across the Pacific Northwest, Alaska, Hawaii, British Columbia and Alberta from distribution facilities in Kent, Spokane, and Marysville, Washington. The acquisition of Vandermeer provides us with direct access to customers within Seattle and Portland, two of the top 15 highest growth repair and remodel and new construction markets in the United States. Additionally, with our acquisition of Vandermeer, we now have coast-to-coast reach and serve all 50 states. The Vandermeer acquisition has been accounted for as a business combination using the acquisition method, and the Vandermeer results of operations are included in our results of operations from the October 3, 2022 acquisition date through the end of fiscal 2022. Vandermeer contributed revenues of $ 25.5 million from October 3, 2022 through the end of fiscal 2022. The assets acquired and liabilities assumed were recognized at their acquisition date fair values. The acquisition accounting, including fair value estimations, is subject to change as we finalize all assessments over the assets and liabilities that were acquired on the acquisition date. The primary area of the preliminary acquisition accounting that is not yet finalized relates to settlement of the holdback liability, specifically as it relates to adjustments for final working capital balances. The following table summarizes the components of the preliminary consideration: Preliminary Consideration Transferred (In thousands) Cash consideration paid to and on behalf of shareholder $ 62,929 Holdback liability (1) 6,344 Total preliminary consideration transferred 69,273 (1) Included in the total preliminary consideration as of December 31, 2022 is a $ 6.3 million holdback liability held in escrow for general representations and warranties of the seller that is scheduled to be settled approximately 18 months after the acquisition date. The excess of total purchase price, which includes the aggregate cash consideration paid in excess of the fair value of the tangible and intangible assets acquired, was recorded as goodwill. The goodwill recognized is attributable to the expected operating synergies and growth potential that we expect to realize from the acquisition. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce. We intend to make a 338(h)(10) tax election which will allow us to deduct goodwill generated from the acquisition for tax purposes. 51 When determining the fair values of assets acquired and liabilities assumed, management made estimates, judgments and assumptions. The following table summarizes the preliminary values of the assets acquired and liabilities assumed at the date of the acquisition: Preliminary Allocation as of Acquisition Date (In thousands) Estimated fair value of identifiable assets acquired and liabilities assumed Cash 5,506 Accounts receivable 13,180 Inventory 16,538 Property, plant and equipment 3,955 Operating lease right-of-use assets 714 Prepaid expenses and other assets 701 Intangible assets and goodwill: Customer relationships 23,000 Trade names 1,000 Non-compete agreements 700 Goodwill 7,600 Accounts payable ( 1,738 ) Accrued compensation ( 994 ) Operating lease liability ( 714 ) Other current liabilities ( 175 ) Total estimated fair value of net assets acquired $ 69,273 The estimated useful life for the customer relationships, trade names, and non-compete agreements is 12 years, three years , and five years , respectively. 3 . 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. As of the end of fiscal 2022, we recorded a lower of cost or net realizable value reserve of $ 2.6 million as a result of the decrease in the value of our structural lumber and panel inventory related to the decline in wood-based commodity prices as of the end of the period. As of the end of fiscal 2021, we assessed the carrying value of our inventory and determined it was presented at the lower of cost or net realizable value and that a reserve was not necessary. 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) the 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. 52 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 remains 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. Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 (In thousands) Specialty products $ 2,871,628 $ 2,520,305 $ 1,865,125 Structural products 1,578,586 1,756,873 1,232,203 Total net sales $ 4,450,214 $ 4,277,178 $ 3,097,328 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 non-warehouse locations, 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. Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 (In thousands) Warehouse and reload $ 3,714,898 $ 3,513,277 $ 2,617,850 Direct 815,864 832,871 525,650 Cash discounts and rebates ( 80,548 ) ( 68,970 ) ( 46,172 ) Total net sales $ 4,450,214 $ 4,277,178 $ 3,097,328 Practical Expedients and Exemptions We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general, and administrative expense. We have made an accounting policy election to treat outbound shipping and handling activities as a selling, general and administrative expense. 5. Goodwill and Other Intangible Assets As of December 31, 2022 and January 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. 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 as of the first day of our fourth quarter, which was October 2, 2022 for fiscal 2022. We 53 completed our annual assessment of goodwill in the fourth quarter of fiscal 2022 using a qualitative approach. The qualitative goodwill impairment assessment requires us to evaluate factors, based on the weight of evidence, to determine whether our single reporting unit's carrying value would more likely than not exceed its fair value. As part of our goodwill qualitative testing process for our reporting unit, we evaluate various factors that are specific to the reporting unit, as well as industry and macroeconomic factors, in order to determine whether they are reasonably likely to have a material impact on the fair value of our reporting unit. Based on the qualitative analysis performed in fiscal 2022, we concluded that there were no changes that were reasonably likely to cause the fair value of our reporting unit to be less than its carrying value and determined that there was no impairment of our goodwill. In addition, we will evaluate the carrying value of goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amounts may be impaired. Such events and indicators may include, without limitation, significant declines in the industries in which our products are used, significant changes in capital market conditions, and significant changes in our market capitalization. No such indicators were present in fiscal 2022 and fiscal 2021. The following table provides information related to the carrying amount of our goodwill: Total Carrying Amount (In thousands) Balance at January 2, 2021 $ 47,772 Acquisitions — Balance at January 1, 2022 $ 47,772 Acquisitions 7,600 Balance at December 31, 2022 $ 55,372 Definite-Lived Intangible Assets The gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets at December 31, 2022 were as follows: Weighted Average Remaining Useful Lives Gross Carrying Amounts Accumulated Amortization (1) Net Carrying Amounts (In thousands) Customer relationships 10 $ 48,500 $ ( 15,093 ) $ 33,407 Non-compete agreements 5 8,954 ( 8,289 ) 665 Trade names 3 7,826 ( 6,909 ) 917 Total $ 65,280 $ ( 30,291 ) $ 34,989 (1) Intangible assets except customer relationships are amortized on straight line basis. Certain of our customer relationships are amortized on a double declining balance method and certain others are amortized on a straight line basis. The gross carrying amounts, accumulated amortization, and net carrying amounts of our definite-lived intangible assets at January 1, 2022 were as follows: Weighted Average Remaining Useful Lives Gross Carrying Amounts Accumulated Amortization (1) Net Carrying Amounts (In thousands) Customer relationships 8 $ 25,500 $ ( 12,492 ) $ 13,008 Non-compete agreements 1 8,254 ( 7,659 ) 595 Trade names — 6,826 ( 6,826 ) — Total $ 40,580 $ ( 26,977 ) $ 13,603 54 (1) Intangible assets except customer relationships are amortized on straight line basis. Customer relationships are amortized on a double declining balance method. Amortization Expense Amortization expense for the definite-lived intangible assets was $ 3.4 million, $ 5.3 million, and $ 7.5 million for the years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. Estimated annual amortization expense for definite-lived intangible assets over the next five fiscal years is as follows: Fiscal Year Ended Estimated Amortization (In thousands) 2023 $ 4,232 2024 3,930 2025 3,765 2026 3,471 2027 3,340 6. Property, Plant and Equipment Property, plant and equipment as of December 31, 2022 and January 1, 2022, consisted of the following: December 31, 2022 January 1, 2022 (In thousands) Land and land improvements $ 24,829 $ 19,679 Buildings 179,936 169,730 Machinery and equipment 138,351 120,091 Construction in progress 17,753 8,753 360,869 318,253 Accumulated depreciation ( 155,260 ) ( 137,099 ) Property and equipment, net $ 205,609 $ 181,154 Depreciation expense was $ 24.2 million, $ 22.8 million, and $ 21.3 million for the years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. 7. Assets Held for Sale As of December 31, 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 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 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 were to 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. 55 8. Income Taxes In fiscal 2022, our statutory rate was 25.4 percent and it was comprised of the federal statutory income tax rate of 21.0 percent and our blended state statutory rate of 4.4 percent. In fiscal 2021, our statutory rate was 25.8 percent and it was comprised of the federal statutory income tax rate of 21.0 percent and our blended state statutory rate of 4.8 percent. In fiscal 2020, our statutory rate was 25.8 percent and it was comprised of the federal statutory income tax rate of 21.0 percent and our blended state statutory rate of 4.8 percent. Our blended state rate is impacted by the mix of our income earned in various states and our federal taxable income, both of which may differ from year to year. Our effective tax rate is impacted by the effects of permanent differences occurring throughout our fiscal year. For fiscal 2022, fiscal 2021, and fiscal 2020, our effective tax was 25.0 percent, 24.8 percent, and 14.9 percent, respectively. Fiscal Year Ended December 31, 2022 Fiscal Year Ended January 1, 2022 Fiscal Year Ended January 2, 2021 (In thousands) Income before provision for income taxes $ 394,761 $ 393,876 $ 95,081 Federal income taxes: Current $ 75,617 $ 78,005 $ 19,673 Deferred 3,184 ( 1,585 ) ( 9,038 ) State income taxes: Current 17,679 19,382 2,946 Deferred 2,105 1,941 618 Provision for income taxes $ 98,585 $ 97,743 $ 14,199 Effective tax rate 25.0 % 24.8 % 14.9 % Our provision for income taxes is reconciled to the federal statutory amount as follows: Fiscal Year Ended December 31, 2022 Fiscal Year Ended January 1, 2022 Fiscal Year Ended January 2, 2021 (In thousands) Federal income taxes computed at the federal statutory tax rate $ 82,898 $ 82,628 $ 19,967 State income taxes, net of federal benefit 16,171 18,970 4,636 Valuation allowance change arising from state net operating losses ( 193 ) ( 3,018 ) ( 4,101 ) Valuation allowance change arising from interest deduction limitation — — ( 4,806 ) Uncertain tax positions ( 333 ) 91 ( 1,879 ) Permanent differences arising from compensation ( 71 ) 686 500 Other 113 ( 1,614 ) ( 118 ) Provision for income taxes $ 98,585 $ 97,743 $ 14,199 At December 31, 2022, we recorded an income tax receivable of $ 9.9 million and is included within other current assets on our consolidated balance sheets. Our financial statements contain certain deferred tax assets which primarily result from other temporary differences related to certain reserves, pension obligations, differences between book and tax depreciation and amortization, and state net operating losses. We record a valuation allowance against our net deferred tax assets when we determine that, based on the weight of available evidence, it is more likely than not that our net deferred tax assets will not be realized. For fiscal 2022 and fiscal 2021, the components of our net deferred income tax assets are as follows: 56 December 31, 2022 January 1, 2022 (In thousands) Deferred income tax assets: Inventory reserves $ 5,268 $ 4,283 Compensation-related accruals 5,807 6,457 Accounts receivable 612 632 Property and equipment 44,870 47,857 Operating lease liability 13,134 13,087 Pension 2,885 4,415 Benefit from net operating loss carryovers 4,995 5,408 Other 397 251 Total gross deferred income tax assets 77,968 82,390 Less: valuation allowances ( 4,076 ) ( 4,269 ) Total net deferred income tax assets $ 73,892 $ 78,121 Deferred income tax liabilities: Intangible assets $ ( 4,559 ) $ ( 4,749 ) Operating lease asset ( 12,250 ) ( 12,611 ) Other ( 914 ) ( 476 ) Total deferred income tax liabilities ( 17,723 ) ( 17,836 ) Deferred income tax asset, net $ 56,169 $ 60,285 Activity in our deferred tax asset valuation allowance for fiscal 2022 and 2021 was as follows: December 31, 2022 January 1, 2022 (In thousands) Balance as of beginning of the fiscal year $ 4,269 $ 7,287 Valuation allowance provided for taxes related to: State net operating loss carryforwards ( 193 ) ( 3,018 ) Balance as of end of the fiscal year $ 4,076 $ 4,269 We have recorded income tax and related interest liabilities where we believe certain of our tax positions are not more likely than not to be sustained if challenged. These balances are included in other noncurrent liabilities in our consolidated balance sheets. The following table summarizes the activity related to our gross unrecognized tax benefits: December 31, 2022 January 1, 2022 ($ in thousands) Balance at beginning of the fiscal year $ 2,205 $ 2,262 Reductions due to lapse of applicable statute of limitations ( 333 ) ( 57 ) Balance at end of the fiscal year $ 1,872 $ 2,205 Included in the unrecognized tax benefits as of December 31, 2022 and January 1, 2022, were approximately $ 1.9 million and $ 2.2 million, respectively of tax benefits that, if recognized, would reduce our annual effective tax rate for fiscal 2022 and 2021. No penalties were accrued for either 2022 or 2021. We have accrued interest associated with our unrecognized tax benefits which we release as those benefits are realized due to the lapse of applicable statute of limitations. Interest expense associate with our unrecognized tax benefits is reported as interest expense, net in our consolidated statement of operations and comprehensive income. 57 Impacts of the Tax Act and CARES In December of 2017, the U.S. enacted comprehensive tax legislation under the Tax Cuts and Jobs Act, (“The Tax Act”), which made broad and complex changes to the tax code. During fiscal 2019, we recorded a valuation allowance of $ 4.8 million primarily related to interest disallowed for deduction related to changes included in the Tax Act. In March of 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. CARES included a provision which raised the level of deductibility for previously disallowed interest which had been enacted under the Tax Act. During fiscal 2020, because of the provision included in CARES, we benefited from the release of the $ 4.8 million in valuation allowance which we had recorded during fiscal 2019 under the provisions of the Tax Act. We had no impact to our income tax provision in fiscal 2021 or 2022 from either The Tax Act nor CARES. Net Operating Losses At the end of fiscal 2021, our gross state net operating loss carryovers were $ 98.6 million and our tax-effected state net operating loss carryovers were $ 5.4 million, of which $ 4.3 million was subject to a valuation allowance arising from expiration date when considered in conjunction with state limitations related to Internal Revenue Code (“IRC”) Section 382. At the end of fiscal 2022, our gross state net operating loss carryovers were $ 92.2 million and our tax-effected state net operating loss carryovers were $ 5.0 million, of which $ 4.1 million was subject to a valuation allowance arising from expiration dates when considered in conjunction with state limitation related to IRC Section 382. Our state net operating loss carryovers will expire in 1 to 20 years. During fiscal 2021, we reversed $ 3.0 million in valuation allowance against our state net operating losses. Based on our taxable income for 2021 in the states where we have net operating loss carryforwards, we believe we will be able to utilize this amount of state net operating losses that were previously reserved by this valuation allowance. We file U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations and may be subject to audit based on periods that are not limited by applicable statutes. Our U.S. federal income tax returns for tax years 2019, 2020 and 2021 remain subject to audit under the federal statute of limitations. Our auditable state income tax returns vary depending on the jurisdiction and its applicable statute of limitations. Although we believe our estimates are reasonable in the carrying value of our valuation allowances against our deferred tax items, the ultimate determination of the appropriate amounts of valuation allowance involves significant judgement. Assessing our 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 fiscal 2022, we considered the recent reported income in the current year, as well as the reported income for 2021 and 2020, 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 future taxable income, the future timing of the reversal of our deferred tax assets and liabilities, and the evidence from business and tax planning strategies. At the end of fiscal 2022 and 2021, in our evaluation of the weight of available evidence, we concluded that our deferred tax assets were not impaired other than $ 4.1 million of the state net operating losses. 58 9. Long-Term Debt As of December 31, 2022, and January 1, 2022, long-term debt consisted of the following: December 31, 2022 January 1, 2022 (In thousands) Senior secured notes (1) $ 300,000 $ 300,000 Revolving credit facility (2) — — Finance lease obligations (3) 273,075 274,717 573,075 574,717 Unamortized debt issuance costs ( 4,057 ) ( 4,701 ) Unamortized bond discount costs ( 3,519 ) ( 4,028 ) 565,499 565,988 Less: current maturities of long-term debt 7,089 7,864 Long-term debt, net of current maturities $ 558,410 $ 558,124 (1) As of December 31, 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 balance sheet at $ 292.4 million and $ 291.3 million at December 31, 2022 and January 1, 2022, respectively. This presentation is net of their discount of $ 3.5 million and $ 4.0 million and the combined carrying value of our debt issuance costs of $ 4.1 million and $ 4.7 million at December 31, 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 2.5 percent for the years ended December 31, 2022 and January 1, 2022, respectively. (3) Refer to Note 14, Lease Commitments , for interest rates associated with finance lease obligations. Senior Secured Notes In October 2021, we completed a private offering of $ 300.0 million of our six percent senior secured notes due 2029 (the “2029 Notes”), 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”). In October 2021, in conjunction with the offering of our 2029 Notes, we reduced the credit limit of the Revolving Credit Facility from $ 600.0 million to $ 350.0 million. In conjunction with the reduction in the credit limit of our Revolving Credit Facility, we expensed approximately $ 1.6 million of debt issuance costs during the fourth quarter of 2021. These costs are included within interest expense, net on the consolidated statements of operations and reported separately as an adjustment to net income in our consolidated statements of cash flows. The Revolving Credit Facility provides for a senior secured asset-based revolving loan and letter of credit facility of up to $ 350.0 million. 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. Our Revolving Credit Facility includes available interest rate options based on LIBOR, which will be discontinued as an available rate option after June 30, 2023. Under the terms of the facility, LIBOR will be replaced with the Secured Overnight 59 Financing Rate (“SOFR”) with respect to the applicable variable rate interest options thereunder, with effect on or before June 30, 2023. 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. As of December 31, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $ 645.4 million under our Revolving Credit Facility. 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. Available borrowing capacity under our Revolving Credit Facility was $ 346.5 million on December 31, 2022 and January 1, 2022, respectively. Our average effective interest rate under the facility was zero percent and 2.5 percent for the years ended December 31, 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 December 31, 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 December 31, 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 consolidated statements of operations and reported separately as an adjustment to net income in our 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 and 8.0 percent for the years ended December 31, 2022 and January 1, 2022, respectively. 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 14, Lease Commitments . 10. Fair Value Measurements Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Disclosures are required for certain assets and liabilities that are measured at fair value on a nonrecurring basis in periods after initial recognition. Such measurements of fair value relate primarily to assets and liabilities measured at fair value in connection with business combinations and asset impairments. For more information on business combinations, see Note 2, Business Combination . There were no material long-lived asset impairments during the fiscal years 2022, 2021, and 2020. Fair Value of Debt The estimated fair value of the Company’s 2029 Notes, as defined above, was determined based on Level 2 input using observable market prices in less active markets. The carrying amount of the Company’s Revolving Credit Facility approximates its fair value as the interest rate is variable and reflective of market rates. The following table presents the carrying value and fair value of the Company’s 2029 Notes: December 31, 2022 January 1, 2022 Carrying Value Fair Value Carrying Value Fair Value (In thousands) 2029 Notes $ 300,000 $ 283,558 $ 300,000 $ 367,569 60 Fair Value of Defined Benefit Pension Plan The fair value hierarchy not only is applicable to assets and liabilities that are included in our consolidated balance sheets, but also is applied to certain other assets that indirectly impact our consolidated financial statements. For example, we sponsor and contribute to a single-employer defined benefit pension plan (see Note 11, Employee Benefits ). Assets contributed by us become the property of the pension plan. Even though the Company no longer has control over these assets, we are indirectly impacted by subsequent fair value adjustments to these assets. The actual return on these assets impacts our future net periodic benefit cost, as well as amounts recognized in our consolidated balance sheets. The Company uses the fair value hierarchy to measure the fair value of assets held by our pension plan where applicable. Certain investments are measured using the net asset value ("NAV") per share as a practical expedient and have not been classified in the fair value hierarchy. 11. Employee Benefits Single-Employer Defined Benefit Pension Plan We sponsor a noncontributory defined benefit pension plan administered solely by us (the “plan”). Most of the participants in the plan are inactive, with all remaining active participants no longer accruing benefits, and the plan is closed to new entrants. Our funding policy for the plan is based on actuarial calculations and the applicable requirements of federal law. Benefits under the plan primarily are related to years of service. In October 2022, we notified participants of the plan that, after careful consideration, we intended to terminate the plan and transfer the management and delivery of continuing benefits associated with the plan to a highly rated and qualified insurance company with pension termination experience. The process for terminating a pension plan involves several regulatory steps and approvals, and typically takes 12 to 18 months to complete. During fiscal 2013, and as previously disclosed, we contributed two properties to the plan in lieu of a cash contribution and entered into a lease for each of these properties. As a component of our plan to terminate the plan, we repurchased these two real estate properties that were held by the plan for $ 11.1 million, which terminated the associated leases. The repurchase in 2022 included certain land and buildings, located in Charleston, S.C. and Buffalo, N.Y., valued at approximately $ 11.1 million by independent appraisals prior to the purchase. At the time of repurchase, we were leasing the contributed properties from the plan for an initial term of 20 years with two five-year extension options and had continued to use the properties in our distribution operations since their contribution in fiscal 2013. Each lease provided us a right of first refusal on any subsequent sale by the plan and a repurchase option. At the time of our initial contribution of the properties, the plan engaged an independent fiduciary who managed the properties on behalf of the plan. The plan’s independent fiduciary evaluated the property purchase on behalf of the plan and negotiated the terms of the sale. The repurchase amount is included in pension contributions within the operating activities section of our consolidated statements of cash flow for the year ended December 31, 2022. Our actuarial assumptions for the plan as of fiscal year ended December 31, 2022 include considerations for termination of the plan. We estimate our plan termination will be completed during fiscal 2023, at which time we expect to record a non-cash, pre-tax pension settlement charge equal to the balance of our accumulated other comprehensive loss, which is $ 27.4 million as of December 31, 2022. 61 The following tables set forth the change in projected benefit obligation and the change in plan assets for the pension plan: December 31, 2022 January 1, 2022 (In thousands) Change in projected benefit obligation: Projected benefit obligation at beginning of period $ 105,874 $ 113,827 Interest cost 2,424 2,019 Actuarial gain ( 19,687 ) ( 4,106 ) Benefits paid ( 5,859 ) ( 5,866 ) Projected benefit obligation at end of period $ 82,752 $ 105,874 Change in plan assets: Fair value of assets at beginning of period $ 94,269 $ 91,143 Actual return on plan assets ( 19,055 ) 7,892 Employer contributions 11,876 1,100 Benefits paid ( 5,859 ) ( 5,866 ) Fair value of assets at end of period 81,231 94,269 Net unfunded status of plan $ ( 1,521 ) $ ( 11,605 ) The accumulated benefit obligation for the pension plan was $82.7 million and $ 105.9 million at December 31, 2022 and January 1, 2022, respectively. We recognize the unfunded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our pension plan in our consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax. As of December 31, 2022 and January 1, 2022, the net unfunded status of our benefit plan was $ 1.5 million and $ 11.6 million, respectively. As discussed above, we estimate our plan termination will be completed during fiscal 2023. Accordingly, we have recognized the net unfunded status of our benefit plan as of December 31, 2022 as a current liability in our consolidated balance sheet. We have elected to utilize a full yield curve approach in the estimation service and interest cost components for pension (income)/expense recognized during the fiscal year by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant projected cash flows. Actuarial gains and losses occur when actual experience differs from the estimates used to determine the components of net periodic pension cost, including the difference between the actual and expected return plan assets and when certain assumptions used to determine the projected benefit obligation are updated for plan re-measurement, including but not limited to, changes in the discount rate, plan amendments, mortality and other assumptions. We amortize a portion of unrecognized actuarial gains and losses for the pension plan into our consolidated statements of operations and comprehensive income (loss). The amount recognized in the current year’s operations is based on amortizing the unrecognized gains or losses for the pension plan that exceed the larger of 10% of the projected benefit obligation or the fair value of plan assets, also known as the corridor. In the current fiscal year, the amount representing the unrecognized gain or loss that exceeds the corridor is amortized over the estimated average remaining life expectancy of participants, as almost all the participants in the plan are inactive. The net adjustment to other comprehensive income (loss) for fiscal 2022 and fiscal 2021 was a $ 2.4 million net of tax loss and a $ 6.6 million net of tax gain, respectively. The adjustments in both fiscal years are primarily due to a combination of actuarial adjustments at year end in addition to the amortization of unrealized gain and/or losses throughout the fiscal year. The decrease in the unfunded obligation for the fiscal year was approximately $ 10.1 million and was primarily comprised of $ 19.7 million of actuarial gain, $ 19.1 million of negative investment returns, $ 11.9 million of pension contributions (comprised of our re-purchase of properties previously contributed to the plan in 2013 and their respective annual lease payments), and a charge of $ 2.4 million due to current year interest cost. The net periodic pension credit was $ 1.4 million in fiscal 2022 compared to $ 1.3 million in fiscal 2021, driven primarily by a reduction in the interest cost on the projected benefit obligation. 62 The unfunded status recorded as pension benefit obligation on our consolidated balance sheets for the plan is set forth in the following table, along with the unrecognized actuarial loss, which is presented as part of accumulated other comprehensive loss: December 31, 2022 January 1, 2022 (In thousands) Unfunded status $ ( 1,521 ) $ ( 11,605 ) Unrecognized actuarial loss 27,438 24,200 Net amount recognized $ 25,917 $ 12,595 Amounts recognized on the balance sheet consist of: Accrued pension liability $ ( 1,521 ) $ ( 11,605 ) Accumulated other comprehensive loss (pre-tax) 27,438 24,200 Net amount recognized $ 25,917 $ 12,595 The net periodic pension credit for the plan included the following: Fiscal Year Ended December 31, 2022 Fiscal Year Ended January 1, 2022 (In thousands) Service cost $ — $ — Interest cost on projected benefit obligation 2,424 2,019 Expected return on plan assets ( 4,706 ) ( 4,560 ) Amortization of unrecognized loss 835 1,283 Net periodic pension credit for the pension plan $ ( 1,447 ) $ ( 1,258 ) The following assumptions were used to determine the projected benefit obligation at the measurement date and the net periodic pension cost: December 31, 2022 January 1, 2022 Projected benefit obligation: Discount rate 5.34 % 2.90 % Average rate of increase in future compensation levels N/A N/A Net periodic pension: Discount rate 2.38 % 1.84 % Average rate of increase in future compensation levels N/A N/A Expected long-term rate of return on plan assets 5.20 % 5.20 % Our estimates of the amount and timing of our future funding obligations for our defined benefit pension plan are based upon various assumptions specified above. These assumptions include, but are not limited to, the discount rate, projected return on plan assets, and mortality rates. The rate of increase in future compensation levels has no effect on both the projected benefit obligation and net periodic pension cost, as almost all the participants in the plan are inactive, the remaining active participants are no longer accruing benefits, and the plan is closed to new entrants. Assumptions for plan termination settlement liability estimate. Plan liabilities will be settled through a lump sum offer to certain participants followed by an annuity buyout for remaining participants. The cost of this settlement is developed relative to the plan-based accounting obligations, segmented by participant status and other demographic subgroups where appropriate. The primary drivers of cost are lump sum election rates, the cost of lump sums relative to accounting obligations, and the cost to purchase annuities for participants not electing lump sums. Projected return on plan assets. Pension plan assets are managed under a balanced portfolio allocation policy comprised of two major components: a return-seeking portion and a liability-matching portion. The expected role of return-seeking investments is to achieve a reasonable long-term growth of pension assets with a prudent level of risk, while the role of liability-matching investments is to provide a partial hedge against liability performance associated with changes in interest rates. The objective within return-seeking investments is to achieve asset diversity in order to balance return and volatility. We employ a designated fiduciary to manage the day-to-day investment responsibilities for pension plan assets and relationships with certain agents, advisors, and other fiduciaries. 63 The discount rate. We utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve of high-quality corporate bonds used in determination of the benefit obligation to the relevant projected cash flows. We have made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. Mortality rates. For fiscal year ended December 31, 2022, in conjunction with our decision to terminate the plan, the valuations and assumptions reflect adoption of the Society of Actuaries RP-2018 mortality tables with generational mortality improvement and adjustments to reflect the characteristics of the plan in conjunction actuarial assumptions customary in the insurance industry. For fiscal year ended January 1, 2022, the valuations and assumptions reflect adoption of the Society of Actuaries updated RP-2014 mortality tables, with a “blue collar employee” adjustment for non-annuitants and a BlueLinx custom adjustment projected from 2015 for annuitants. Additionally, we use the most current generational mortality improvement projection scales, which was MP-2021 as of January 1, 2022. Plan Assets and Long-Term Rate of Return Fiscal 2022 We base the asset return assumption on current and expected asset allocations, as well as historical and expected returns on the plan asset categories. The allocation of the plan’s assets impacts our expected return on plan assets. The expected return on plan assets is based on a targeted allocation consisting of return-seeking securities (including public equity, real assets, and diversified credit investment strategies), liability-matching securities (fixed income), and cash and cash equivalents. Our net benefit cost increases as the expected return on plan assets decreases. We believe that our actual long-term asset allocations on average will approximate our targeted allocation. Our targeted allocation is driven by our investment strategy to earn a reasonable rate of return while maintaining risk at acceptable levels through the diversification of investments across and within various asset categories. For fiscal 2022, we used a 5.20 % expected rate of return on plan assets. The investment policy for the pension plan, in general, is to achieve a reasonable long-term rate of return on plan assets with an acceptable level of risk in order to maintain adequate funding levels. The pension plan’s Investment Committee establishes risk mitigation policies and regularly monitors investment performance and investment allocation policies, with a third-party investment advisor executing on these strategies. We employ a designated fiduciary to manage the day to day investment responsibilities for pension plan assets and relationships with certain agents, advisors, and other fiduciaries. In conjunction with the decision to terminate the plan, the target allocation of plan assets was adjusted to mitigate funded status risk and support full settlement of assets and liabilities during fiscal 2023. The current targets and actual investment allocation by asset category as of December 31, 2022, consisted of the following: Type Current Target Allocation Actual Allocation, December 31, 2022 Global equity 4.0 % 2.8 % Diversified credit 3.0 % 2.8 % Real assets 3.0 % 2.7 % Liability-hedging 87.0 % 73.0 % Cash 3.0 % 18.8 % Total 100 % 100 % 64 The following table sets forth by level, within the fair value hierarchy, as defined in Note 1, Summary of Significant Accounting Policies , and further discussed in Note 10, Fair Value Measurements , pension plan assets at their fair values as of December 31, 2022: Type Quoted prices in active markets of identical assets (Level 1) Significant other observable inputs (Level 2) Significant other unobservable inputs (Level 3) Assets measured at net asset value (NAV) (3) Total (In thousands) Return-seeking securities Investments in trusts and funds (1) $ — $ — $ — $ 6,683 $ 6,683 Liabilities-matching securities: Investments in trusts and funds (2) — — — 59,295 59,295 Cash and cash equivalents 15,253 — — — 15,253 Total $ 15,253 $ — $ — $ 65,978 $ 81,231 (1) This category is comprised of a collective investment trust of equity funds that track the MSCI All Country World global equity index, a collective investment trust that holds publicly traded listed infrastructure securities, and a pooled investment fund. (2) This category consists of a collective investment trust investing in Treasury STRIPS, in addition to a collective investment fund that tracks to U.S. government bond indexes, and pooled investment funds. (3) Investments that are measured at net asset value (“NAV”) (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value of the Level 1 assets was based on quoted prices in active markets for the identical assets. Certain investments are measured at fair value using the net asset value ("NAV") per share as a practical expedient and have not been classified in the fair value hierarchy. Investment objectives for our pension plan assets are: • Matching plan liability performance • Diversifying risk • Achieving a target investment return We believe that there are no significant concentrations of risk within our plan assets as of December 31, 2022. We comply with the rules and regulations promulgated under the Employee Retirement Income Security Act of 1974 (“ERISA”) and we prohibit investments and investment strategies not allowed by ERISA. Fiscal 2021 We base the asset return assumption on current and expected asset allocations, as well as historical and expected returns on the plan asset categories. The allocation of the plan’s assets impacts our expected return on plan assets. The expected return on plan assets is based on a targeted allocation consisting of return-seeking securities (including public equity, real assets, and diversified credit investment strategies), liability-matching securities (fixed income), and cash and cash equivalents. Our net benefit cost increases as the expected return on plan assets decreases. We believe that our actual long-term asset allocations on average will approximate our targeted allocation. Our targeted allocation is driven by our investment strategy to earn a reasonable rate of return while maintaining risk at acceptable levels through the diversification of investments across and within various asset categories. For fiscal 2021, we used a 5.20 % expected rate of return on plan assets. The investment policy for the pension plan, in general, is to achieve a reasonable long-term rate of return on plan assets with an acceptable level of risk in order to maintain adequate funding levels. The pension plan’s Investment Committee establishes risk mitigation policies and regularly monitors investment performance and investment allocation policies, with a third-party investment advisor executing on these strategies. We employ a designated fiduciary to manage the day to day investment responsibilities for pension plan assets and relationships with certain agents, advisors, and other fiduciaries. 65 The current targets, adjusted to exclude non-GAAP BlueLinx real-estate holdings, and actual investment allocation, by asset category as of January 1, 2022, consisted of the following: Type Current Target Allocation Actual Allocation, January 1, 2022 Global equity 44.4 % 47.2 % Diversified credit 16.7 % 16.5 % Real assets 8.9 % 10.0 % Liability-hedging 27.8 % 23.8 % Cash 2.2 % 2.5 % Total 100 % 100 % The following table sets forth by level, within the fair value hierarchy, as defined in Note 1, Summary of Significant Accounting Policies , and further discussed in Note 10, Fair Value Measurements , pension plan assets at their fair values as of January 1, 2022: Type Quoted prices in active markets of identical assets (Level 1) Significant other observable inputs (Level 2) Significant other unobservable inputs (Level 3) Assets measured at net asset value (NAV) (3) Total (In thousands) Return-seeking securities Investments in trusts and funds (1) $ — $ — $ — $ 69,397 $ 69,397 Liabilities-matching securities: Investments in trusts and funds (2) — — — 22,473 22,473 Cash and cash equivalents 2,399 — — — 2,399 Total: $ 2,399 $ — $ — $ 91,870 $ 94,269 (1) This category is comprised of a collective investment trust of equity funds that track the MCSI World Index, a collective investment trust that holds publicly traded listed infrastructure securities, and a pooled investment fund. (2) This category consists of a collective investment trust investing in Treasury STRIPS, in addition to a collective investment fund that tracks to U.S. government bond indexes, and a pooled investment fund. (3) Investments that are measured at net asset value (“NAV”) (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value of the Level 1 assets was based on quoted prices in active markets for the identical assets. Certain investments are measured at fair value using the net asset value ("NAV") per share as a practical expedient and have not been classified in the fair value hierarchy. Investment objectives for our pension plan assets are: • Matching plan liability performance • Diversifying risk • Achieving a target investment return We believe that there are no significant concentrations of risk within our plan assets as of January 1, 2022. We comply with the rules and regulations promulgated under the Employee Retirement Income Security Act of 1974 (“ERISA”) and we prohibit investments and investment strategies not allowed by ERISA. 66 Pension Plan Cash Flows Our estimated future benefit payments to pension plan participants are as follows: Fiscal Year Ended (In thousands) 2023 $ 82,752 2024 — 2025 — 2026 — 2027 — Thereafter — We expect all of the plan’s assets to be distributed in fiscal 2023 in connection with our plan to terminate the plan. We fund the pension plan liability in accordance with the limits imposed by ERISA, federal income tax laws, and the funding requirements of the Pension Protection Act of 2006 (“Pension Act”). We are not required to make any cash contributions to the pension plan for fiscal funding year 2022. Multiemployer Pension Plans We are involved in various multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with certain collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are generally responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the funded status of an MEPP and legal requirements such as those of the Pension Act, which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions, and the utilization of extended amortization provisions. A FIP or RP requires a particular MEPP to adopt measures to correct its underfunded status. These measures may include, but are not limited to: an increase in our contribution rate to the applicable CBA, a reallocation of the contributions already being made by participating employers for various benefits to individuals participating in the MEPP, and/or a reduction in the benefits to be paid to future and/or current retirees. We could also be obligated to make future payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce our number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closures, assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) generally would equal our proportionate share of the plan’s unfunded vested benefits. The following table lists our participation in our multiemployer plans which we deem significant. “Contributions” represent the amounts contributed to the plan during the fiscal years presented: Contributions (In millions) Pension Fund: EIN/Pension Plan Number Pension Act Zone Status FIP/RP Status Surcharge 2022 2021 Central States, Southeast and Southwest Areas Pension Fund 366044243 Critical and Declining (January 1, 2020) RP No $ 0.4 $ 0.3 Total $ 0.4 $ 0.3 Our contributions to this plan are approximately 0.1 percent of total contributions, which is less than the required disclosure threshold of five percent of total plan contributions. However, this plan is deemed significant for disclosure as it is severely underfunded. Our current CBA that requires contributions to the plan expired on December 31, 2022. In May 2020, we received a demand letter for payment resulting from our partial withdrawal in 2018 from the Central States Plan and started making payments in June 2020. These payments are payable monthly for a period of 20 years. Our liability for the remainder of these payments was $ 7.0 million as of December 31, 2022. We may, in the future, record an additional liability if required by an event of our complete withdrawal from the plan or a mass withdrawal. Our most recent contingent withdrawal liability was estimated at approximately $ 60.4 million for a complete withdrawal occurring in 2023. In the case of a complete withdrawal or a mass withdrawal, the Central States Plan could demand yearly payments of approximately $ 1.1 million, which do not include 67 payments for the partial withdrawal of approximately $ 0.6 million annually. In a complete withdrawal, the payments would not amortize the liability fully; however, payments for a complete withdrawal are limited to a 20 -year period. In the case of a mass withdrawal, the liability would not amortize fully under current government regulations, and payments would continue indefinitely. Defined Contribution Plans Our employees also participate in two defined contribution plans: the BlueLinx Corporation Hourly Savings Plan covering hourly employees, and the BlueLinx Corporation Salaried Savings Plan covering salaried employees. Discretionary contributions to the plans are based on employee contributions and compensation, and, in certain cases, participants in the hourly savings plan also receive employer contributions based on union negotiated match amounts. Employer contributions to the hourly savings plan for fiscal years 2022 and 2021 were approximately $ 0.8 million and $ 0.7 million, respectively. Employer contributions to the salaried savings plan for fiscal 2022 were approximately $ 4.0 million, of which $ 2.1 million was for fiscal 2021. 12. Share-Based Compensation On May 20, 2021 at the Annual Meeting of Shareholders, our stockholders approved the BlueLinx Holding, Inc. 2021 Long-Term Incentive Plan (the “2021 Plan”), which the Board of Directors had previously approved. The 2021 Plan permits the grant of nonqualified stock options, incentive stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance shares, performance units, cash-based awards, and other share-based awards to participants of the 2021 Plan selected by our Board of Directors or a committee of the Board that administers the 2021 Plan. We reserved 750,000 shares of our common stock for issuance under the 2021 Plan. The terms and conditions of awards under the 2021 Plan are determined by the Human Capital and Compensation Committee. Some of the awards issued under the 2021 Plan are subject to accelerated vesting in the event of a change in control as such an event is defined in the respective Plan documents. Shares are available for new issuance only under the 2021 Plan. The 2006 and 2016 Plans have no shares remaining for issuance. Remaining 2006 and 2016 Plan shares are outstanding only for the vesting of outstanding equity awards. The 2021 Plan is designed to motivate and retain individuals who are responsible for the attainment of our primary long-term performance goals. The 2021 Plan provides a means whereby the participants develop a further sense of proprietorship and personal involvement in our development and financial success, thereby advancing the interests of the Company and its stockholders. Although we do not have a formal policy on the matter, we issue new shares of our common stock to participants upon the exercise of options or upon the vesting of restricted stock, restricted stock units, or performance shares, out of the total amount of common shares available for issuance or vesting under the aforementioned plan. Restricted Stock Units During fiscal 2022 and fiscal 2021, the directors on our Board of Directors were granted restricted stock units with a one-year vesting period. These awards are time-based and are not based upon attainment of performance goals. The grants will settle after one year, although a pro-rated portion of the award may vest and settle prior to the one-year period, with the remainder forfeited if the director is not standing for re-election or upon retirement from the Board of Directors. During fiscal 2020, the Board of Directors were granted restricted stock units with a one-year vesting period, although a pro-rated portion could vest prior to the one-year period, with the remainder forfeited, if a director chose not to stand for re-election before the one-year vesting period elapsed. The fiscal 2020 grants settle at the earlier of ten years from the vesting date or retirement from the Board of Directors, whichever comes first. During fiscal 2022, the Board of Directors granted restricted stock units to certain of our employees and executive officers. Certain of the restricted stock units granted in fiscal 2022 vest in equal annual increments over the three years after the date of grant and certain others vest on the third anniversary of the date of grant if certain performance conditions are met as of the vesting date. During fiscal 2021 and fiscal 2020, the Board of Directors granted restricted stock units to certain of our employees and executive officers. Certain of the restricted stock units granted in fiscal 2021 and fiscal 2020 vest in equal annual increments over the three years after the date of grant. 68 The following table summarizes activity for our restricted stock units during fiscal 2022: Restricted Stock Units Number of Awards Weighted Average Grant-Date Fair Value Outstanding as of January 1, 2022 488,614 $ 26.13 Granted 228,274 $ 69.86 Vested (1) ( 338,145 ) $ 26.33 Forfeited ( 53,334 ) $ 22.00 Outstanding as of December 31, 2022 325,409 $ 57.27 (1) The total fair value of restricted stock units vested in fiscal 2022, fiscal 2021, and fiscal 2020 was $ 26.8 million, $ 6.4 million and $ 1.0 million, respectively. Compensation Expense We recognize compensation expense equal to the grant-date fair value, which is generally based on the fair market value of our common stock on the date of grant, for all share-based payment awards that are expected to vest. This expense is recorded on a straight-line basis over the requisite service period of the entire award, unless the awards are subject to market or performance conditions, in which case, we recognize compensation expense over the requisite service period of each separate vesting tranche, to the extent the occurrence of such conditions are probable. We account for share-based payment award forfeitures as they occur, rather than making estimates of future forfeitures. All compensation expense related to our share-based payment awards is recorded in “Selling, general, and administrative” expense in the consolidated statements of operations and comprehensive income. Total share-based compensation expense, net of forfeitures, from our share-based awards was as follows: Fiscal Year Ended December 31, 2022 Fiscal Year Ended January 1, 2022 Fiscal Year Ended January 2, 2021 (In thousands) Restricted Stock Units $ 9,617 $ 6,590 $ 5,992 Total $ 9,617 $ 6,590 $ 5,992 We recognized related income tax benefits in fiscal years 2022, 2021, and 2020 of $ 3.8 million, $ 1.7 million, and $ 1.5 million, respectively, which were fully realized in fiscal years 2022, 2021, and 2020 . We include the benefits of tax deductions in excess of recognized compensation expense as a component of our provision for income taxes in our consolidated statements of operations and comprehensive income when present. There were $ 2.1 million and $ 0.9 million of excess tax benefits in fiscal 2022 and fiscal 2021 and no excess tax benefits in fiscal 2020 . As of December 31, 2022, there was approximately $ 13.4 million of total unrecognized compensation expense related to restricted stock units. The unrecognized compensation expense is expected to be recognized over a weighted average term of 2.2 years. 13. Income per Common 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 69 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 fiscal 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 further reduced the weighted average number of common shares outstanding used to calculate basic income per share and diluted income per share for fiscal 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 fiscal 2022, fiscal 2021, and fiscal 2020 were as follows: Fiscal Year Ended December 31, 2022 January 1, 2022 January 2, 2021 ($ in thousands, except per share data) Net income $ 296,176 $ 296,133 $ 80,882 Weighted average shares outstanding - basic 9,328 9,615 9,422 Dilutive effect of share-based awards 70 261 41 Weighted average shares outstanding - diluted 9,398 9,876 9,463 Basic income per share $ 31.75 $ 30.80 $ 8.58 Diluted income per share $ 31.51 $ 29.99 $ 8.55 Approximately 100,000 , 128,000 , and 725,000 weighted-average share-based awards were excluded from the computation of income per share assuming dilution for fiscal years 2022, 2021, and 2020, respectively, as the awards would have been anti-dilutive for the periods presented. 14. Lease Commitments 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 consolidated balance sheets. Finance lease ROU assets are included in property and equipment and the finance lease obligations are presented separately in the 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. 70 The following table presents our assets and liabilities related to our leases as of December 31, 2022 and January 1, 2022: Lease assets and liabilities December 31, 2022 January 1, 2022 (In thousands) Assets Classification Operating lease right-of-use assets Operating lease right-of-use assets $ 45,717 $ 49,568 Finance lease right-of-use assets (1) Property and equipment, net 132,748 143,851 Total lease right-of-use assets $ 178,465 $ 193,419 Liabilities Current portion Operating lease liabilities Operating lease liabilities - short term $ 7,432 $ 5,145 Finance lease liabilities Finance lease liabilities - short term 7,089 7,864 Non-current portion Operating lease liabilities Operating lease liabilities - long term 40,011 44,526 Finance lease liabilities Finance lease liabilities - long term 265,986 266,853 Total lease liabilities $ 320,518 $ 324,388 (1) Finance lease right-of-use assets are presented net of accumulated amortization of $ 90.1 million and $ 73.7 million as of December 31, 2022 and January 1, 2022, respectively. The components of lease expense were as follows: Components of lease expense Fiscal Year Ended December 31, 2022 Fiscal Year Ended January 1, 2022 Fiscal Year Ended January 2, 2021 (In thousands) Operating lease cost: Operating lease cost $ 11,963 $ 11,626 $ 12,634 Sublease income ( 2,704 ) ( 2,555 ) ( 2,466 ) Total operating lease costs $ 9,259 $ 9,071 $ 10,168 Finance lease cost: Amortization of right-of-use assets $ 16,350 $ 15,183 $ 14,193 Interest on lease liabilities 24,469 24,847 23,809 Total finance lease costs $ 40,819 $ 40,030 $ 38,002 Cash flow information related to leases was as follows: Cash flow information Fiscal Year Ended December 31, 2022 Fiscal Year Ended January 1, 2022 Fiscal Year Ended January 2, 2021 (In thousands) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 11,614 $ 10,782 $ 12,256 Operating cash flows from finance leases 24,469 24,847 23,809 Financing cash flows from finance leases $ 10,907 $ 11,175 $ 8,662 71 Non-cash supplemental cash flow information related to leases was as follows: Non-cash information Fiscal Year Ended December 31, 2022 Fiscal Year Ended January 1, 2022 Fiscal Year Ended January 2, 2021 (In thousands) Right-of-use assets obtained in exchange for lease obligations Operating leases (1) $ 7,968 $ 5,663 $ 4,442 Finance leases 9,092 10,549 3,833 (1) Includes operating lease right-of-use assets obtained in acquisition in fiscal 2022. See Note 2, Business Combination , for further information. Supplemental balance sheet information for right-of-use assets related to leases was as follows: Balance sheet information December 31, 2022 January 1, 2022 (In thousands) Finance leases Property and equipment $ 222,839 $ 217,592 Accumulated depreciation ( 90,091 ) ( 73,741 ) Property and equipment, net $ 132,748 $ 143,851 Weighted Average Remaining Lease Term (in years) Operating leases 9.21 10.75 Finance leases 13.97 15.06 Weighted Average Discount Rate Operating leases 8.54 % 9.01 % Finance leases 8.87 % 10.00 % The major categories of our finance lease liabilities as of December 31, 2022 and January 1, 2022 are as follows: Category December 31, 2022 January 1, 2022 (In thousands) Equipment and vehicles $ 29,300 $ 30,710 Real estate 243,775 244,007 Total finance leases $ 273,075 $ 274,717 Under the short-term lease exception provided within ASC 842, we do not record a lease liability or right-of-use asset for any leases that have a lease term of 12 months or less at commencement. Below is a summary of undiscounted finance and operating lease liabilities that have initial terms in excess of one year as of December 31, 2022. The table also includes a reconciliation of the future undiscounted cash flows to the present value of the finance and operating lease liabilities included in the consolidated balance sheets, including options to extend lease terms that are reasonably certain of being exercised. 72 Operating leases Finance leases (In thousands) 2023 $ 11,358 $ 31,121 2024 10,312 31,836 2025 9,057 28,988 2026 5,743 32,553 2027 4,474 26,970 Thereafter 32,711 524,869 Total lease payments $ 73,655 $ 676,337 Less: imputed interest ( 26,212 ) ( 403,262 ) Total $ 47,443 $ 273,075 15. 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 these matters could be material to operating results in any given quarter, they will not have a materially adverse effect on our long-term financial condition, our results of operations, or our cash flows. Collective Bargaining Agreements As of December 31, 2022, we employed approximately 2,100 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”). Five CBAs covering approximately five percent of our associates are up for renewal in fiscal 2023, which we expect to renegotiate by the end of fiscal 2023. 16. Accumulated Other Comprehensive Income (Loss) Comprehensive income (loss) is a measure of income which includes both net income (loss) and other comprehensive income (loss). Our other comprehensive income (loss) results from items deferred from recognition into our consolidated statements of operations and comprehensive income (Loss). Accumulated other comprehensive income (loss) is separately presented on our consolidated balance sheets as part of common stockholders’ equity (deficit). 73 The changes in accumulated balances for each component of other comprehensive income (loss) for fiscal 2022, fiscal 2021, and fiscal 2020 were as follows: Impact of defined benefit pension, net of tax Other, net of tax Total (In thousands) December 28, 2019, ending balance, net of tax $ ( 35,441 ) $ 878 $ ( 34,563 ) Other comprehensive loss, net of tax (1) ( 1,414 ) ( 15 ) ( 1,429 ) January 2, 2021, ending balance, net of tax $ ( 36,855 ) $ 863 $ ( 35,992 ) Other comprehensive income, net of tax (2) 6,610 22 6,632 January 1, 2022, ending balance, net of tax $ ( 30,245 ) $ 885 $ ( 29,360 ) Other comprehensive income (loss), net of tax (3) ( 2,430 ) 378 ( 2,052 ) December 31, 2022, ending balance, net of tax $ ( 32,675 ) $ 1,263 $ ( 31,412 ) (1) For fiscal 2020, there was $ 1.7 million of impact related to our defined pension for related actuarial adjustments and amortization of unrecognized amounts from the prior year, net of taxes of $ 0.3 million. There was a tax benefit of $ 0.4 million allocated to the loss from continuing operations and tax expense allocated to the income from other comprehensive income. (2) For fiscal 2021, there was $ 6.6 million of impact related to our defined pension for related actuarial adjustments and amortization of unrecognized amounts from the prior year, net of taxes of $ 2.1 million. (3) For fiscal 2022, there was $ 2.4 million of impact related to our defined pension for related actuarial adjustments and amortization of unrecognized amounts from the prior year, net of taxes of $ 0.8 million. 74 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.