Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Form 10-K. In addition to historical information, the following discussion and other parts of this Form 10-K contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by this forward-looking information due to the factors discussed under “Risk Factors,” “Cautionary Statement Concerning Forward-Looking Statements,” and elsewhere in this Form 10-K.
Factors That Affect Our Operating Results and Trends
Our results of operations and financial performance are influenced by a variety of factors, including: (i) general economic and industry conditions affecting demand in the housing market; (ii) the commoditized nature of many of the products we manufacture and distribute; and (iii) cost and availability of the products we distribute. These factors, and the related trends and uncertainties, have historically produced cyclicality in our results of operations, and we expect this cyclicality to continue in future periods .
General Economic Conditions Affecting Demand
Many of the factors that cause our operations to fluctuate are seasonal or cyclical in nature. Historically, our operating results have also been correlated with the level of single-family residential housing starts in the U.S. The demand for new homes is dependent on a variety of factors, including job growth, changes in population and demographics, the availability and cost of mortgage financing, the supply of new and existing homes, and consumer confidence. Certain developments have led to a more challenging macro-economic environment, such as broad-based inflation, the rapid rise in mortgage rates, and home price appreciation. These developments have impacted the U.S. housing market, including the residential repair and remodel and residential new construction end markets, and have contributed to a recent slowdown in the U.S. housing industry. However, we believe that several factors, including the current high levels of home equity, the fundamental undersupply of housing in the U.S., repair and remodel activity, and demographic shifts, among others, will support demand for our products. For additional information regarding the risk factors impacting our business, refer to Part I, Item 1A, Risk Factors, in this Annual Report.
Industry Conditions Affecting Demand
Residential Repair and Remodel
We estimate that demand from the residential Repair and Remodel market (“R&R”) accounts for approximately 45 percent of our annual sales. Historically, R&R demand conditions have tended to be less cyclical when compared to the residential new construction market, particularly for exterior products that are exposed to the elements and where maintenance is less likely to be deferred for long periods of time. We believe R&R demand is driven by a myriad of factors including, but not limited to: home prices and affordability; macro-economic conditions and expectations around inflationary rate, unemployment rate, interest rate, and economic output; raw materials prices; the pace of new household formation; savings rates; employment conditions; and emerging trends, such as the increased popularity of home-based remote working environments. With mortgage rates having risen to multi-year highs, we believe many homeowners who secured a lower interest mortgage will be inclined to stay longer in existing homes, which could benefit R&R demand over the near-to-medium term.
According to the Joint Center For Housing Studies’ Leading Indicator of Remodeling Activity (“LIRA”) Index, R&R demand returned to more normalized levels in 2023 and 2022 following two consecutive years in 2021 and 2020 of elevated R&R activity fueled by pandemic-induced changes in housing and lifestyle decisions. Spending for R&R is expected to shrink in 2024 for the first time since 2010, but should begin to improve late in the year. At the same time, the total market size of the U.S. R&R market remains significant, with total U.S. homeowner improvements and repairs spending expected to be approximately $450 billion in 2024, down from $481 billion in 2023, but still up significantly from $363 billion in 2020.
Further, as the median age of U.S. housing stock increases over time, we anticipate domestic R&R spending will also increase. According to the U.S. Census Bureau and Department of Housing and Urban Development, the median age of an owner-occupied home in the U.S. increased from 23 years in 1985 to 40 years in 2021. Moreover, approximately 75 percent of the current owner-occupied housing stock was built prior to 1999. We believe the increasing average age of the nation’s approximate 144 million existing homes will continue to drive demand for repair and remodel projects.
Residential New Construction
We estimate that demand from the residential new construction market, including single-family and multi-family units, accounts for approximately 40 percent of our annual sales. We believe our products are more likely to be used in single-family construction than in multi-family units.
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We believe demand for residential new construction is driven by a myriad of factors including, but not limited to: mortgage rates, which recently reached multi-year highs; lending standards; home affordability; employment conditions; savings rates; the rate of population growth and new household formation; builder activity levels; the level of existing home inventory on the market; and consumer sentiment.
According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, for full year 2023 residential housing starts for single family units and multi-family units were down 6% and 13%, respectively, compared to full year 2022. We believe the overall decrease for single family starts reflected higher mortgage rates, partially offset by demand for new homes due to the decrease in the level of existing home inventory. We also believe multi-family starts were down due mainly to recent overbuilding of multi-family units in many cities.
We believe our scale, national footprint, strategic supplier relationships, key national customer relationships, and breadth of market leading products and brands position us to serve the residential new construction end market and navigate the changes in the macro-economic environment.
Commodity Nature of Our Products
Many of the building products we distribute, including lumber, as well as panels, such as oriented strand board (“OSB”) and plywood, are commodities that are widely available from various suppliers with prices and volumes determined frequently in a market based on participants' perceptions and expectations of short-term supply and demand factors. The selling price of our commodity products is based on the current market purchase price to replace those products in our inventory, plus adders for our shipping, handling, overhead costs, and our profit margin. At certain times, particularly in a dynamic inflationary commodity market, the selling price for any one or more of the products we distribute, especially those of a commodity nature, may well exceed our purchase price because our prices are based on current replacement cost. At certain other times, the selling price may fall below our purchase price for the same reasons, requiring us to incur short-term losses on specific sales transactions and/or recognize a reserve for the lower of cost or net realizable value respective to our inventory of products of a commodity nature. Therefore, our profitability depends, in significant part, on the impact of commodity prices along with inventory levels. In addition to prices, it is also dependent on managing our cost structure, particularly shipping and handling costs, which represent significant components of our operating costs. Composite lumber and panel prices have been historically volatile.
The following table represents the percentage price changes on a year-over-year basis of the average monthly composite prices for lumber and average monthly composite prices for panels as reflected by Random Lengths, an industry publication, for the periods noted below. In addition to the year-over-year average monthly price changes, composite lumber and composite panel prices for the past three years were exceptionally volatile when compared to historical prices over the last seven years. During 2021, both composite lumber and composite panel prices experienced the largest difference between high and low price levels within a calendar year than any year in the last seven years.
Calendar Year Ended
December 31
2023 versus 2022 2022 versus 2021 2021 versus 2020
Increase (decrease) in composite lumber prices (47)% (10)% 50%
Increase (decrease) in composite panel prices (32)% (18)% 85%
During 2020, pricing for these products declined starting in March 2020, but rebounded during the remaining portion of the second quarter, significantly increasing during most of the third quarter. A two-month decline began in the final weeks of the third quarter and lasted until December 2020. In December 2020, pricing began to rapidly increase towards all-time highs. These market trends resulted in substantial favorable revenue and gross margin comparisons for fiscal 2020 for our structural products and our business as a whole. In 2021, wood-based commodity index prices began January at record or near-record highs and remained at elevated levels through the first quarter and into the second quarter. Prices continued to increase to a historical peak in May 2021 and then began to decline through the end of the second quarter and throughout the third quarter of 2021. During the fourth quarter, prices began to rise again ending 2021, and beginning 2022, at historically elevated levels. During 2022, prices remained at elevated levels through the end of the first quarter, then began to sharply decline over the course of the second quarter. Prices rebounded slightly at the beginning of the third quarter, but in August 2022 resumed their decline over the remainder of the year, ending the year below the five-year average. During 2023, prices improved slightly during the first and second quarters and peaked during the third quarter, declining again during the fourth quarter and still ending the year below the five-year average. There is significant uncertainty regarding future trends in lumber and panel index prices. We continue to closely monitor these pricing trends, and work to manage our business, inventory levels, and costs accordingly.
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Cost and Availability of the Products We Distribute
Our gross profit is net sales less the cost of the products sold. Substantially all of the amount reported in Cost of products sold is composed of cost to purchase inventory for resale to customers, including the cost of inbound freights, volume incentives, and inventory adjustments. During fiscal 2023, 2022 or 2021, no one supplier represented more than 10% of our consolidated Cost of products sold.
The specialty products we distribute are available from select suppliers from which we have established and cultivated relationships in the specific markets we serve. The structural products we distribute are available from a variety of suppliers in both the U.S. and Canada.
Pandemics
The impact of disease-related pandemics can affect our operational and financial performance to varying degrees, such as the COVID-19 global pandemic did. The extent of the effects of future public health crises, including a resurgence of COVID, or related containment measures and government responses are highly uncertain and cannot be predicted.
Results of Operations
Fiscal 2023 Compared to Fiscal 2022
The following table sets forth our results of operations for fiscal 2023 and fiscal 2022, both of which were comprised of 52 weeks.
Fiscal 2023 % of
Net
Sales Fiscal 2022 % of
Net
Sales
($ amounts in thousands)
Net sales $ 3,136,381 $ 4,450,214
Gross profit 527,017 16.8% 832,984 18.7%
Selling, general, and administrative 355,819 11.3% 366,305 8.2%
Depreciation and amortization 32,043 1.0% 27,613 0.6%
Amortization of deferred gains on real estate (3,934) (0.1)% (3,934) (0.1)%
Gain from sale of properties, net — 0.0% (144) 0.0%
Other operating expenses 4,640 0.1% 4,057 0.1%
Operating income 138,449 4.4% 439,087 9.9%
Interest expense, net 23,746 0.8% 42,272 0.9%
Settlement of frozen defined benefit pension plan 30,440 1.0% — 0.0%
Other expense (income), net 2,377 0.1% 2,054 0.0%
Income before provision for income taxes 81,886 2.6% 394,761 8.9%
Provision for income taxes 33,350 1.1% 98,585 2.2%
Net income $ 48,536 1.5% $ 296,176 6.7%
The following table sets forth changes in net sales by product category.
Fiscal 2023 Fiscal 2022
($ amounts in thousands)
Net sales by product category
Specialty products $ 2,184,240 69.6 % $ 2,871,628 64.5 %
Structural products 952,141 30.4 % 1,578,586 35.5 %
Total net sales $ 3,136,381 100.0 % $ 4,450,214 100.0 %
The following table sets forth gross margin dollars and percentages by product category versus comparable prior periods.
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Fiscal 2023 Fiscal 2022
($ amounts in thousands)
Gross profit by product category:
Specialty products $ 420,794 $ 640,370
Structural products 106,223 192,614
Total gross profit $ 527,017 $ 832,984
Gross margin % by product category
Specialty products 19.3 % 22.3 %
Structural products 11.2 % 12.2 %
Total gross margin % 16.8 % 18.7 %
Discussion of Results of Operations for Fiscal 2023 Compared to Fiscal 2022
For fiscal 2023, we generated net sales of $3.1 billion , a decrease of $1.3 billion when compared to fiscal 2022, and gross margin decreased from 18.7% to 16.8% year over year. The decreases in net sales and overall gross margin percentage compared to the prior fiscal year were primarily due to price deflation combined with lower sales volumes in our specialty and structural products, reflecting changing market conditions that have returned to normalized levels.
Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products, decreased $687.4 million to $2.2 billion in fiscal 2023 . The decrease was due to price deflation combined with lower sales volume across all product categories as we return to more normalized market conditions. Specialty products gross profit decreased $219.6 million to $420.8 million , with a year-over-year decrease of 300 basis points in specialty gross margin to 19.3% for fiscal 2023, compared to 22.3% for fiscal 2022. The decrease in specialty products gross margin percentage over the prior fiscal year was also attributable to the year-over-year price and sales volume normalization.
Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $626.4 million to $952.1 million in fiscal 2023 primarily due to price deflation in the wood-based commodity markets represented by the declines in the average composite price of framing lumber and structural panels, which were 47% and 32%, respectively, in addition to lower sales volumes. Our structural gross margin percentage of fiscal 2023 was 11.2%, down from 12.2% in the prior fiscal year, primarily attributable to price deflation in the wood-based commodity markets represented by the aforementioned year-over-year declines in the average composite price of framing lumber and structural panels. The impacts of these factors on the gross margin percentage in fiscal 2023 were partially offset by our consistent focus on pricing discipline and inventory management, as well as favorable changes in our net provisions for inventory reserves in the current fiscal year. Fiscal 2023 was favorably impacted by a net $2.6 million inventory reserve release, while net inventory reserve provisions of $2.6 million were recorded in fiscal 2022. For more details on our lower of cost or market reserves for inventories, see Note 3, Inventories, in Item 8 of this Annual Report.
Our selling, general, and administrative (“SG&A”) expenses decreased 2.9 percent overall, or $10.5 million , compared to fiscal 2022 primarily due to decreases in delivery expenses, variable compensation, professional fees and non-employee labor, partially offset by increases in technology costs, employee benefits costs, and $5.9 million of full-year incremental operating expenses in fiscal 2023 related to our acquisition of Vandermeer that occurred in the fourth quarter of fiscal 2022. Depreciation and amortization expense increased 16.0% compared to fiscal 2022 due to a higher base of amortizable and depreciable assets throughout fiscal 2023 when compared to the prior fiscal year, resulting from our continued focus on capital investment and increased intangible assets related to our Vandermeer acquisition. Other operating expenses increased $0.6 million compared to fiscal 2022 primarily due to restructuring related costs, including severance payments, incurred in fiscal 2023 due to our leadership transition.
Interest expense, net, decreased by 43.8 percent, or $18.5 million, compared to fiscal 2022. The decrease is primarily due to the generation of higher interest income, given our year-over-year increase in cash and cash equivalents generating interest income at higher interest rates than in the prior year.
During the fourth quarter of fiscal 2023, we settled our frozen defined benefit pension plan by transferring future financial responsibilities for the plan to a highly rated insurance company through the purchase of an annuity. The accounting for this settlement resulted in the non-cash reclassification of $34.9 million, including net deferred income taxes of $4.5 million, from accumulated other comprehensive loss to earnings. The settlement also required the Company, as plan sponsor, to make a final $6.9 million cash contribution to the plan trust in order for the plan trust to have sufficient assets to purchase the annuity from
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the insurance company. The settlement of the frozen defined benefit pension plan does not result in any changes to the multi-employer pension plans in which some of our union employees participate.
Our effective income tax rate was 40.7% and 25.0% for fiscal 2023 and fiscal 2022, respectively. The higher effective rate in fiscal 2023 was due primarily to the one-time accounting for the settlement of our frozen defined benefit pension plan, as described above, which increased the effective income tax rate by 14.8%. The reclassification of $30.4 million to pre-tax earnings resulted in $12.2 million income tax expense (of which $4.5 million was reclassified from accumulated other comprehensive loss) related to the one-time settlement of our frozen defined benefit pension plan, which will not result in cash tax payments. Removing the income tax effects related to the one-time settlement of our frozen defined benefit pension plan, our effective income tax rate for fiscal 2023 would have been approximately 25.9%. Our effective income tax rate for both fiscal years was impacted by state taxes as well as the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, offset by a benefit from vesting of share-based compensation.
Our net income for fiscal 2023 was $48.5 million, or $5.39 per diluted share, versus $296.2 million, or $31.51 per diluted share, in the prior fiscal year. Our net income for fiscal 2023 decreased primarily due to a decrease in gross profit driven by lower sales volume particularly for our engineered wood products, lumber, and panels, along with declines in pricing and the accounting for the settlement of our frozen defined benefit pension plan. This decrease was partially offset by favorable net interest income in the current fiscal year.
Results of Operations
Fiscal 2022 Compared to Fiscal 2021
For a comparison of the Company’s results of operations for the fiscal year ended December 31, 2022 to the fiscal year ended January 1, 2022, refer to Item 7 of the Company’s Annual Report on Form 10-K for fiscal 2022 filed with the SEC on February 21, 2023.
Liquidity and Capital Resources
We expect our material cash requirements for the foreseeable future, including the next 12 months will be for our:
• Periodic estimated income tax payments, as required;
• Periodic interest payments associated with our senior secured notes, as discussed in Note 8, Debt and Finance Leases, in Item 8 of this Annual Report;
• Lease agreements which have fixed lease payment obligations, as discussed in Note 13, Lease Commitments, in Item 8 of this Annual Report.
Our purchase orders are based on near-term needs and are typically fulfilled by our vendors within short time horizons. We do not have significant agreements for the purchase of inventory specifying minimum quantities or set prices that exceed our expected requirements or that cannot be canceled by us within 30 to 60 days.
We expect our primary sources of liquidity for the next 12 months to be cash flows from sales and operating activities in the normal course of our operations and availability from our revolving credit facility, as needed, and we expect that these sources will be sufficient to fund our ongoing cash requirements for the foreseeable future, including at least the next 12 months. We expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements. As of December 30, 2023, we had $521.7 million of cash and cash equivalents plus $346.5 million of availability on our revolving credit facility.
Sources and Uses of Cash
Operating Activities
Net cash provided by operating activities totaled $306.3 million for fiscal 2023 compared to $400.3 million for fiscal 2022. The decrease in cash provided by operating activities during fiscal 2023 was primarily the result of a decrease in net income for the current fiscal year compared to the prior fiscal year, partially offset by higher cash generated from changes in working capital in fiscal 2023. For working capital, the change in inventory increased $120.1 million for fiscal 2023 as a result of lower product cost and our continuing efforts to better manage inventory on hand. The change in accounts payable increased $37.8 million for fiscal 2023 due to the timing of payments. These increases in cash from working capital changes were partially offset by a decrease in the change for accounts receivable of $78.1 million for fiscal 2023 due to lower sales in the fourth quarter of fiscal 2023 compared to the fourth quarter of fiscal 2022.
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Net cash provided by operating activities totaled $400.3 million during fiscal 2022. This cash activity was primarily driven by net income of $296.2 million combined with changes in our working capital components after adjusting for the impact of working capital related to our acquisition of Vandermeer. See Note 2, Business Combination, in Item 8 of this Annual Report for more information about our acquisition and related working capital amounts acquired. The changes in working capital components resulted in an increase in cash due to a decrease in accounts receivables of $101.3 million and a decrease inventory of $20.8 million, partially offset by a decrease in accounts payable of $31.8 million. During fiscal 2022, we completed the repurchase of properties previously contributed to the BlueLinx Corporation Hourly Retirement Plan for $11.1 million. The cash outflow associated with the purchase of these properties is included in pension contributions within the operating activities section of our consolidated statement of cash flows for fiscal 2022.
Net cash provided by operating activities totaled $145.0 million during fiscal 2021. This cash activity was primarily driven by net income of $296.1 million, which included a non-cash charge for debt-issuance costs expensed during the period for our extinguished term loan facility and reduced revolving credit facility of $7.4 million in addition to a non-cash adjustment for our gains on sales of property of $8.4 million, combined with changes in our working capital components. The changes in working capital components included a decrease in cash due to an increase in accounts receivable of $46.0 million and an increase inventory of $146.4 million, partially offset by an increase in cash due to an increase in accounts payable of $14.8 million.
Investing Activities
Net cash used in investing activities was $26.9 million during fiscal 2023, primarily for capital expenditures. Our investing activities in fiscal 2023 reflected continuing improvements to our distribution facilities and upgrades to our fleet.
Net cash used in investing activities was $98.7 million during fiscal 2022, which was primarily driven by cash of $63.8 million used for the acquisition of Vandermeer and capital expenditures of $35.9 million throughout fiscal 2022, partially offset by cash received from the sale of real estate of $1.0 million.
Net cash used in investing activities was $4.1 million during fiscal 2021, which was primarily driven by cash paid for capital expenditures of $14.4 million, partially offset by cash received from the sale of real estate of $10.3 million.
Financing Activities
Net cash used in financing activities was $56.6 million during fiscal 2023. Of this amount $42.1 million was used to repurchase our common stock under authorized share repurchase programs, $5.3 million was used to repurchase shares to satisfy employee payroll and tax withholdings for vesting of share-based compensation, and $9.2 million was used for payments on finance lease obligations.
Net cash used in financing activities was $87.9 million during fiscal 2022, which was primarily driven by $66.4 million used to repurchase our common stock under our share repurchase program, including the ASR Agreement. Additionally, $10.5 million was used to repurchase shares to satisfy employee tax withholdings on the vesting of restricted stock units, and $10.9 million was for payments on our finance lease obligations.
Net cash used in financing activities was $55.8 million during fiscal 2021, which reflected the repayment of the remaining $43.2 million balance on our former term loan, net repayments on our revolving credit facility of $286.6 million, principal payments on finance lease obligations of $11.2 million, debt financing costs of $5.5 million, and repurchase of shares to satisfy employee tax withholdings on the vesting of restricted stock units of $5.2 million, all of which were partially offset by proceeds from the issuance of our 2029 Notes of $295.9 million, net of discount.
Share Repurchase Programs
As discussed elsewhere in this Form 10-K, during fiscal 2023 and fiscal 2022, we used cash of $42.1 million and $66.4 million, respectively, to repurchase shares of our common stock under repurchase programs authorized by our Board of Directors. As of December 30, 2023, we have $91.4 million of remaining repurchase authorization under the $100 million program approved by our Board of Directors on October 31, 2023. Under this share repurchase program, we may repurchase our common stock from time to time, without prior notice, subject to prevailing market conditions and other considerations. Repurchases may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, accelerated share repurchase programs, tender offers or pursuant to a trading plan that may be adopted in accordance with the Securities and Exchange Commission Rule 10b5-1.
Net Working Capital
Net working capital is an important measurement we use to determine the efficiencies of our operations and our ability to readily convert assets into cash. Net working capital is defined as the sum of accounts receivable and inventory, less accounts
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payable. This metric differs from traditional working capital in that it excludes certain current assets and current liabilities that are reported in our consolidated balance sheet. Our net working capital as of December 30, 2023 and December 31, 2022 is presented in the following table:
December 30, 2023 December 31, 2022
(In thousands)
Current assets included in net working capital:
Accounts receivable, less allowance for doubtful accounts $ 228,410 $ 251,555
Inventories, net 343,638 484,313
$ 572,048 $ 735,868
Current liabilities included in net working capital:
Accounts payable $ 157,931 $ 151,626
$ 157,931 $ 151,626
Net working capital $ 414,117 $ 584,242
Net working capital decreased by $170.1 million to $414.1 million as of December 30, 2023 from $584.2 million as of December 31, 2022. The decrease in net working capital was primarily due to an increase in accounts payable of $6.3 million, a decrease in accounts receivable of $23.1 million, and a decrease in inventory of $140.7 million. The decrease in accounts receivable was due to lower revenue in fiscal 2023. The significant decrease in inventory reflects lower product costs and our our continuing strategic inventory management efforts.
Debt and Credit Sources
As of December 30, 2023, and December 31, 2022, debt and finance leases consisted of the following:
December 30, 2023 December 31, 2022
(In thousands)
Senior secured notes (1)
$ 300,000 $ 300,000
Revolving credit facility (2)
— —
Finance lease obligations (3)
285,426 273,075
585,426 573,075
Unamortized debt issuance costs (3,246) (4,057)
Unamortized bond discount costs (3,011) (3,519)
579,169 565,499
Less: current portions of finance leases 11,178 7,089
Total debt and finance leases, net of current portions $ 567,991 $ 558,410
(1) As of December 30, 2023 and December 31, 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 $293.7 million and $292.4 million as of December 30, 2023 and December 31, 2022, respectively. This presentation is net of their discount of $3.0 million and $3.5 million and the combined carrying value of our debt issuance costs of $3.2 million and $4.1 million as of December 30, 2023 and December 31, 2022, respectively. Our senior secured notes are presented in this table at their face value.
(2) No borrowings were outstanding during fiscal 2023 or fiscal 2022. Available borrowing capacity under this revolving credit facility was $346.5 million and $346.5 million on December 30, 2023 and December 31, 2022, respectively.
(3) Refer to Note 13, Lease Commitments , in Item 8 of this Annual Report 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”). Interest is payable semi-annually. Our 2029 Notes mature on November 15, 2029, and no principal is due until that
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time as long as we remain in compliance with the related covenants. As of December 30, 2023, we were in compliance with these covenants.
Revolving Credit Facility
Our amended revolving credit facility matures on August 2, 2026 provided we remain in compliance with the related covenants. As of December 30, 2023, we were in compliance with these covenants.
Any outstanding borrowings under the revolving credit facility bear interest at a rate per annum equal to (i) Adjusted Term Secured Overnight Financing Rate (“SOFR”) (calculated as SOFR plus 0.1%) plus a margin ranging from 1.25% to 1.75%, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on SOFR, or (ii) the agent’s base rate (as that term is defined in the revolving credit agreement) plus a margin ranging from 0.25% to 0.75%, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate.
Borrowings under the Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the revolving credit agreement). The Company is 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.
Available borrowing capacity under our Revolving Credit Facility was $346.5 million on December 30, 2023.
Finance Lease Commitments
Our finance lease liabilities consist of leases related to equipment and vehicles, and to real estate, with the majority of those finance lease commitments relating to the real estate financing transactions that we completed in recent years. Our total finance lease commitments totaled $285.4 million and $273.1 million as of December 30, 2023 and December 31, 2022, respectively. Of the $285.4 million of finance lease commitments as of December 30, 2023, $243.2 million related to real estate and $42.3 million related to equipment. Of the $273.1 million of finance lease commitments as of December 31, 2022, $243.8 million related to real estate and $29.3 million related to equipment. As of December 30, 2023, $11.2 million of our finance leases are classified as current liabilities.
Pension Funding Obligations
During the fourth quarter of fiscal 2023, we settled our frozen defined benefit pension plan by transferring future financial responsibility to a highly rated insurance company through the purchase of an annuity. We do not anticipate any additional funding obligations related to this pension plan. Some of our union employees continue to participate in multi-employer pension plans, and those plans were not impacted by the settlement of the frozen defined benefit pension plan.
Off-Balance Sheet Arrangements
As of December 30, 2023 and December 31, 2022, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe that our most critical accounting policies and estimates relate to: (1) revenue recognition; (2) income taxes; (3) business combinations; and (4) goodwill.
Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. All of these estimates reflect our best judgment about current and, for some estimates, future economic and market conditions and their potential effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that the judgments and estimates described below could change, which may result in our recording additional expenses or additional liabilities, among other effects.
Management has discussed the development, selection, and disclosure of critical accounting policies and estimates with the audit committee of the Company’s board of directors. While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, actual results ultimately may differ from these estimates and assumptions. For a discussion of the Company’s significant accounting policies, see Note 1, Summary of Significant Accounting Policies , in Item 8 of this Annual Report.
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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. For us, this generally means that we recognize revenue when title to our products is transferred to our customers. Title usually transfers upon shipment to, or receipt at, our customers’ locations, as determined by the specific sales terms of each transaction. Our customers can earn certain incentives including, but not limited to, cash discounts and rebates. These incentives are deducted from revenue recognized. In preparing the financial statements, management must make estimates related to the contractual terms, customer performance, and sales volume to determine the total amounts recorded as deductions from revenue. Management also considers past results in making such estimates. The actual amounts ultimately paid may be different from our estimates, and recorded once they have been determined.
Income Taxes
Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Judgment is required in determining our annual tax expense and in evaluating our tax positions. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain based upon one of the following: (1) the tax position is not “more likely than not” to be sustained; (2) the tax position is “more likely than not” to be sustained, but for a lesser amount; or (3) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings, and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other tax positions taken. We adjust these reserves, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit. Refer to Note 7, Income Taxes , in Item 8 of this Annual Report.
A number of years may elapse before a particular matter for which we have established a reserve is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the “more likely than not” recognition threshold would be recognized in our income tax expense in the first interim period when the uncertainty disappears under any one of the following conditions: (1) the tax position is “more likely than not” to be sustained; (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation; or (3) the statute of limitations for the tax position has expired. Settlement of any particular issue would usually require the use of cash.
Tax law requires items to be included in the tax return at different times than when these items are reflected in the consolidated financial statements. As a result, the annual tax rate reflected in our consolidated financial statements is different from that reported in our tax return (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are the enacted tax rates in effect for the year and manner in which the differences are expected to reverse. Based on the evaluation of available information, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that realizing these benefits is considered more likely than not.
We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our forecasted taxable income using both historical and projected future operating results, the reversal of existing taxable temporary differences, taxable income in prior carryback years (if permitted), and the availability of tax planning strategies. A valuation allowance is required to be established unless management determines that it is more likely than not that we will ultimately realize the tax benefit associated with a deferred tax asset. As of December 30, 2023, positive evidence continued to outweigh negative evidence, as such no valuation allowance was deemed necessary except to the extent of certain state net operating losses. The valuation allowance related to our net operating losses as of December 30, 2023 was approximately $3.5 million. See Note 7, Income Taxes , in Item 8 of this Annual Report.
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
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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.
Accounting for business combinations requires our management to make significant estimates and assumptions about intangible assets, obligations assumed and pre-acquisition contingencies, including uncertain tax positions and tax-related valuation allowances and reserves, where applicable. Critical inputs and assumptions in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from customer relationships and developed technologies; the acquired Company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined Company’s product portfolio; and discount rates.
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Estimates are used in the determination of the fair values of identifiable asset acquired, including intangible assets, and liabilities assumed in a business combination, but the initial carrying value assigned to goodwill is of a residual nature. Goodwill is not subject to amortization, but must be tested for impairment at least annually using either a qualitative method or a quantitative method. Goodwill may also need to be assessed for impairment between the annual assessments if an event occurs or circumstances change that would indicate the carrying value of goodwill may be impaired. Such interim events and circumstances can include significant declines in the industries in which our products are used, significant changes in capital market conditions, and significant changes in our market capitalization.
Goodwill is assessed for impairment at the reporting unit level and the assessment must determine if the fair value of the reporting unit, including the goodwill, is less than its carrying value. For entities like us that consists of a single reporting unit, goodwill is assessed at the enterprise level. In performing a qualitative assessment, potential impairment indicators must be evaluated to determine if it is “more likely than not that the fair value of the reporting unit is less than its carrying amount.” Such evaluations involve estimates of the significance and materiality of any identified impairment indicators. For a quantitative assessment, we utilize a combination of the present value of expected cash flows and the guideline public companies method to determine the estimated fair value of our enterprise. This present value model requires management to estimate future cash flows, the timing of the future cash flows, and a discount rate (based on a weighted-average cost of capital), which represents the time value of money and the inherent risk and uncertainty of the future cash flows. These estimates can have material influences on a goodwill assessment.
We perform our annual goodwill assessment as of the first day of our fiscal fourth quarter. Based on the results of our most recent annual assessment, which was quantitative, our goodwill was not impaired. As of December 30, 2023, the carrying value of our goodwill was $55.4 million, which represented less than 4% of our consolidated assets.
Between our annual impairment assessment for fiscal 2023 and 2022, we noted no interim events or circumstances to indicate that the carrying value of our goodwill was impaired. Therefore, we relied on our annual assessments.
Recently Issued Accounting Pronouncements
For a summary of recent accounting pronouncements applicable to our consolidated financial statements, see Note 1, Summary of Significant Accounting Policies , in Item 8 of this Annual Report.
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