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, home price appreciation, and low existing home turnover. These developments have impacted the U.S. housing market, including the residential repair and remodel and residential new construction markets, and have contributed to a slowdown in the U.S. housing industry that continued through 2024 into 2025. In addition, looking ahead, we believe that the demand for our products could face pressure from increases in tariffs and other inflationary pressures, the potential for trade disruption through embargoes, sanctions and import and export controls, and labor shortages and workforce disruption in the home building and remodeling industry due to immigration enforcement activities. 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 formations; savings rates; employment conditions; and emerging trends, such as the increased popularity of home-based remote working environments. Residential mortgage rates have risen in recent years and we believe many homeowners who secured mortgages with lower interest rates will be inclined to stay longer in existing homes, which could benefit R&R demand over the near-to-medium term. On the other hand, we are experiencing low existing home turnover, which we believe may be currently hindering any significant growth in R&R activity.
According to the Joint Center For Housing Studies’ Leading Indicator of Remodeling Activity (“LIRA”) Index, spending for R&R is expected to increase in 2025 over 2024, particularly later in the year. 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 $509 billion in 2025, compared to the $503 billion, $510 billion, and $515 billion in 2024, 2023, and 2022, respectively, but up significantly from the $407 billion in 2021 and the $363 billion in 2020. As the median age of U.S. housing stock continues to increase 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 2022. 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 approximately 145 million existing homes will drive demand for R&R projects.
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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, and therefore we are actively pursuing multi-family business as part of our sales growth strategy.
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 2024 residential housing starts for single family units and multi-family units were up 7% and down 27%, respectively, compared to full year 2023. We believe the overall increase for single family starts was driven by builders adding more supply to a market with a significant housing shortage and by stabilizing economic conditions. We believe multi-family starts were down due to the elevated interest rate environment and 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 market and navigate the changes in the macro-economic environment.
Commodity Nature of Our Products
Many of the building products we distribute including lumber and 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 that is 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 loss provision for the lower-of-cost-or-net-realizable-value position on certain products in our inventory that are 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, our profitability 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 in the industry publication, Random Lengths, for the periods indicated below.
2024 versus 2023 2023 versus 2022 2022 versus 2021
Increase (decrease) in composite lumber prices (2.5)% (47)% (10)%
Increase (decrease) in composite panel prices 1.2% (32)% (18)%
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.
Cost and Availability of the Products We Distribute
Our gross profit is equal to our 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 2024, 2023 and 2022, no one supplier represented more than 10% of our consolidated Cost of products sold.
The specialty products we distribute are available from select domestic and international suppliers from which we have established and cultivated relationships. The structural products we distribute are available from a variety of suppliers in both the U.S. and Canada.
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Pandemics and Public Health Crisis
The impact of disease outbreaks, epidemics, or pandemics and other public health crises 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 the COVID-19 pandemic, or related containment measures and government responses are highly uncertain and cannot be predicted.
Results of Operations
Fiscal 2024 Compared to Fiscal 2023
The following table sets forth our results of operations for fiscal 2024 and fiscal 2023, both of which were comprised of 52 weeks.
Fiscal 2024 % of
Net
Sales Fiscal 2023 % of
Net
Sales
($ amounts in thousands)
Net sales $ 2,952,532 $ 3,136,381
Gross profit 489,139 16.6% 527,017 16.8%
Selling, general, and administrative 365,532 12.4% 355,819 11.3%
Depreciation and amortization 38,488 1.3% 32,043 1.0%
Amortization of deferred gains on real estate (3,934) (0.1)% (3,934) (0.1)%
Gain from sale of properties, net (272) —% — —%
Other operating expenses 1,755 0.1% 4,640 0.1%
Operating income 87,570 3.0% 138,449 4.4%
Interest expense, net 19,364 0.7% 23,746 0.8%
Settlement of defined benefit pension plan (2,481) (0.1)% 30,440 1.0%
Other expense, net — —% 2,377 0.1%
Income before provision for income taxes 70,687 2.4% 81,886 2.6%
Provision for income taxes 17,571 0.6% 33,350 1.1%
Net income $ 53,116 1.8% $ 48,536 1.5%
The following table sets forth changes in net sales by product category.
Fiscal 2024 Fiscal 2023
($ amounts in thousands)
Net sales by product category
Specialty products $ 2,045,910 69.3 % $ 2,184,240 69.6 %
Structural products 906,622 30.7 % 952,141 30.4 %
Total net sales $ 2,952,532 100.0 % $ 3,136,381 100.0 %
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The following table sets forth gross margin dollars and percentages by product category.
Fiscal 2024 Fiscal 2023
($ amounts in thousands)
Gross profit by product category:
Specialty products $ 397,625 $ 420,794
Structural products 91,514 106,223
Total gross profit $ 489,139 $ 527,017
Gross Margin % 16.6% 16.8%
Gross margin % by product category:
Specialty products 19.4% 19.3%
Structural products 10.1% 11.2%
Fiscal 2024 Compared to Fiscal 2023
For fiscal 2024, we generated net sales of $3.0 billion, a decrease of $184 million, or 5.9 percent, compared to fiscal 2023. The Company’s gross margin percentage decreased from 16.8 percent to 16.6 percent year over year. The decrease in the Company’s net sales was driven by both specialty products (down 6.3 percent) and structural products (down 4.8 percent) due to price deflation for both specialty and structural products that was partially offset by volume increases for specialty products. The decrease in the Company’s gross margin percentage was driven by structural products (decrease of 110 basis points) partially offset by an increase of 10 basis points for specialty products. Company gross profit and Company gross margin percentage for specialty products reflect the positive impact of a net benefit of $12.7 million for import duty items in the current fiscal year. The import duty items were related to changes in retroactive rates for anti-dumping duties resulting in a credit to cost of products sold of $20.7 million, partially offset by classification adjustments for certain goods imported by the Company that resulted in a net increase in Cost of products sold of $8.0 million for the current year. Not including this net $12.7 million benefit, the Company’s gross margin percentage would have been 16.1 percent in the current year.
Net sales of specialty products, which includes product types such as engineered wood, siding, millwork, outdoor living products, specialty lumber and panels, and industrial products, decreased $138.3 million, or 6.3 percent, to $2.0 billion in fiscal 2024 . The overall decrease in specialty products net sales was due to price deflation for all specialty product types, partially offset by volume increases for all specialty product types except industrial. Specialty products gross profit decreased $23.2 million to $397.6 million in the current year. Specialty products gross margin percentage increased to 19.4 percent for fiscal 2024 compared to 19.3 percent for fiscal 2023. Gross profit and gross margin percentage for specialty products benefited in the current year from the aforementioned net $12.7 million benefit related to import duty items. Excluding this net benefit, gross margin percentage for specialty products was 18.8 percent for the current year.
Net sales of structural products, which includes product types such as lumber, plywood, oriented strand board, rebar, and remesh, decreased overall by $45.5 million, or 4.8 percent, to $907 million in fiscal 2024. This overall decrease in net sales was primarily due to market-based price deflation for all structural product types and lower volume for lumber, partially offset by volume gains for panels. Gross profit for structural products decreased in the current year by $14.7 million, or 14 percent, to $91.5 million from $106.2 million in the prior year period due to lower sales in the current year. Compared to fiscal year 2023, average composite pricing for lumber in the U.S. decreased 2.5 percent while panel prices increased 1.2 percent. Structural products gross margin percentage for fiscal 2024 was 10.1 percent, down from 11.2 percent in the prior fiscal year, which was primarily attributable to the aforementioned price deflation.
Our selling, general, and administrative (“SG&A”) expenses increased 2.7 percent overall, or $9.7 million , compared to fiscal 2023. In the current year, SG&A expenses were higher for payroll and payroll-related expenses driven by increased logistics costs due to higher volumes, expenses associated with our digital transformation, legal expenses associated with duty-related matters, and bad debt related to a customer bankruptcy. These SG&A increases were partially offset by lower commission expense and lower share-based compensation expense. Depreciation and amortization expense increased 20.1 percent compared to fiscal 2023 due to a higher base of amortizable and depreciable assets throughout fiscal 2024 when compared to the prior fiscal year, resulting from our continued focus on capital investment. Other operating expenses decreased $2.9 million compared to fiscal 2023 primarily due to lower restructuring related costs, including severance payments. Restructuring related costs incurred in fiscal 2023 included costs related to our leadership transition.
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Interest expense, net, decreased by 18.5 percent, or $4.4 million, compared to fiscal 2023. The decrease is primarily due to the net interest income associated with the refunded antidumping duties described in Note 1, Summary of Significant Accounting Policies , under the heading Inventory.
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 the insurance company. During fiscal 2024, we received cash refunds of $2.5 million related to the settlement when the separate pension trust entity was closed. The settlement of the frozen defined benefit pension plan did 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 24.9 percent and 40.7 percent for fiscal 2024 and fiscal 2023, 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 percent. 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 did 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 percent. Our effective income tax rates for both fiscal years were 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 2024 was $53.1 million, or $6.19 per diluted share, versus $48.5 million, or $5.39 per diluted share, in the prior fiscal year. Our net income for fiscal 2024 increased primarily due to the lack of the defined benefit pension plan settlement cost incurred in fiscal 2023, the aforementioned net benefit of $12.7 million for import duty items, lower net interest expense and lower income tax provision in the current year, partially offset by lower gross profit, higher SG&A expense, and higher depreciation expense in the current year.
Results of Operations
Fiscal 2023 Compared to Fiscal 2022
For a comparison of the Company’s results of operations for the fiscal year ended December 30, 2023 to the fiscal year ended December 31, 2022, refer to Item 7 of the Company’s Annual Report on Form 10-K for fiscal 2023 filed with the SEC on February 20, 2024.
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 Lease Obligations, 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/cash equivalents on hand, 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/cash equivalents on hand, cash flows from our operations, and financing arrangements. As of December 28, 2024, we had $505.6 million of cash and cash equivalents plus $346.2 million of availability on our revolving credit facility.
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Sources and Uses of Cash
Operating Activities
Net cash provided by operating activities totaled $85.2 million for fiscal 2024 compared to $306.3 million for fiscal 2023. The decrease in cash provided by operating activities for fiscal 2024 was primarily the result of changes in working capital, particularly with respect to changes in inventory and other current assets within fiscal 2024 when compared to changes in inventory and other current assets within fiscal 2023. Additionally, net income was lower in fiscal 2024 when the non-cash reclassification from accumulated other comprehensive loss of $30.4 million in fiscal 2023 is considered in the net income comparison between fiscal 2024 and fiscal 2023.
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 in fiscal 2023 compared to fiscal 2022, 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.
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 this acquisition. The changes in working capital components resulted in an increase in cash due to a decrease in accounts receivable of $101.3 million and a decrease in 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.
Investing Activities
Net cash used in investing activities was $39.2 million during fiscal 2024, primarily for capital expenditures. Our investing activities in fiscal 2024 reflected continuing improvements to our distribution facilities, upgrades to our fleet, and digital transformation.
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.
Financing Activities
Net cash used in financing activities was $62.1 million for fiscal 2024. Of this amount $45.3 million was used to repurchase our common stock under authorized share repurchase programs and remit excise taxes due on fiscal 2023 share repurchases, $3.4 million was used to repurchase shares to satisfy employee payroll and tax withholdings for vesting of share-based compensation, and $13.4 million was used for payments on finance lease obligations.
Net cash used in financing activities was $56.6 million for 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 for fiscal 2022, which was primarily driven by $66.4 million used to repurchase our common stock under our share repurchase program, including the accelerated share repurchase agreement (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.
Share Repurchase Programs
As discussed elsewhere in this Form 10-K, during fiscal years 2024, 2023, and 2022 we used cash of $45.0 million, $42.1
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million, and $66.4 million, respectively, to repurchase shares of our common stock under repurchase programs authorized by our Board of Directors, excluding excise tax due on the 2024 and 2023 repurchases. As of December 28, 2024, we had $46.5 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 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 28, 2024 and December 30, 2023 is presented in the following table:
December 28, 2024 December 30, 2023
(In thousands)
Current assets included in net working capital:
Accounts receivable, less allowance for doubtful accounts $ 225,837 $ 228,410
Inventories, net 355,909 343,638
581,746 572,048
Current liabilities included in net working capital:
Accounts payable 170,202 157,931
Net working capital $ 411,544 $ 414,117
As of December 28, 2024, and December 30, 2023, debt and finance leases consisted of the following:
December 28, 2024 December 30, 2023
(In thousands)
Senior secured notes (1)
$ 300,000 $ 300,000
Revolving credit facility (2)
— —
Finance lease obligations (3)
292,543 285,426
592,543 585,426
Unamortized debt issuance costs (2,437) (3,246)
Unamortized bond discount costs (2,502) (3,011)
587,604 579,169
Less: current portions of finance leases 12,541 11,178
Total debt and finance leases, net of current portions $ 575,063 $ 567,991
(1) As of December 28, 2024 and December 30, 2023, 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 $295.1 million and $293.7 million as of December 28, 2024 and December 30, 2023, respectively. This presentation is net of their discount of $2.5 million and $3.0 million and the combined carrying value of our debt issuance costs of $2.4 million and $3.2 million as of December 28, 2024 and December 30, 2023, respectively. Our senior secured notes are presented in this table at their face value.
(2) No borrowings were outstanding during fiscal 2024 or fiscal 2023. Available borrowing capacity under this revolving credit facility was $346.2 million and $346.5 million on December 28, 2024 and December 30, 2023, respectively. Available borrowing capacity is net of undrawn letters of credit commitments.
(3) Refer to Note 13, Lease Commitments , in Item 8 of this Annual Report for interest rates associated with finance lease obligations.
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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 time as long as we remain in compliance with the related covenants. As of December 28, 2024, 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 28, 2024, 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 $346.2 million on December 28, 2024.
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. Our total finance lease commitments totaled $292.5 million and $285.4 million as of December 28, 2024 and December 30, 2023, respectively. Of the $292.5 million of finance lease commitments as of December 28, 2024, $242.8 million related to real estate and $49.8 million related to equipment. 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. As of December 28, 2024, $12.5 million of our finance leases are classified as current liabilities.
The real estate finance leases noted above include $125.1 million and $125.0 million as of December 28, 2024 and December 30, 2023, respectively, for sale-leasebacks of real estate in fiscal 2019 and 2020 that did not qualify for sale treatment for accounting purposes.
Off-Balance Sheet Arrangements
As of December 28, 2024 and December 30, 2023, we did not have any off-balance sheet arrangements other than short-term inventory commitments in the normal course of our business. Our purchase order commitments are based on near-term needs and are typically fulfilled by vendors within short time horizons. We do not have significant agreements for the purchase of inventory specifying minimum quantities or set prices that exceed expected requirements or that we cannot be cancel within 30 to 60 days.
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.
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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.
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 income tax rate is based on our taxable 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 income tax expense and in evaluating our income tax positions. We establish allowances to remove some or all of the income tax benefit of any of our income 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 income tax position was originally taken. For purposes of evaluating whether or not an income 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 income tax position, and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other income 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 an income 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 an allowance is audited and finally resolved. The number of years with open income tax audits varies depending on the tax jurisdiction. The income tax benefit that has been previously subject to an allowance 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.
Income tax law requires items to be included in the income tax return at different times than when these items are reflected in the consolidated financial statements. As a result, the annual income tax rate reflected in our consolidated financial statements is different from that reported in our income tax return (our cash income tax rate). Some of these differences are permanent, such as expenses that are not deductible in our income tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred income tax assets and liabilities. Deferred income tax assets and liabilities are determined based on temporary differences between the financial reporting and income tax bases of assets and liabilities. The income tax rates used to determine deferred income tax assets or liabilities are the enacted income 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 income 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 income tax benefits associated with deferred income 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 income 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 income tax benefit associated with a deferred income tax asset. As of December 28, 2024, positive evidence continued to outweigh negative evidence, as such no valuation allowance was deemed necessary except to the extent
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of certain state net operating losses. The valuation allowance related to our net operating losses as of December 28, 2024 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 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 consist 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 gross profit, 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 28, 2024, the carrying value of our goodwill was $55.4 million, which represented 3.5% of our consolidated assets.
Between our annual impairment assessment for fiscal 2024 and 2023, 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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