BLUELINX HOLDINGS INC. 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. This section of this Form 10-K does not address certain items regarding the fiscal year endedJanuary 2, 2021 ("fiscal 2020"). Discussion and analysis of fiscal 2020 and year-to-year comparisons between fiscal 2021 and fiscal 2020 not included in this Form 10-K can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2022 .
Executive Level Overview
Company Background
BlueLinx is a leading wholesale distributor of residential and commercial building products inthe United States . We are a "two-step" distributor. Two-step distributors purchase products from manufacturers and distribute those products to dealers and other suppliers in local markets, who then sell those products to end users. We carry a broad portfolio of both branded and private-label stock keeping units ("SKUs") across two principal product categories: specialty products and structural products. Specialty products include items such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products. Structural products include items such as lumber, plywood, oriented strand board, rebar, and remesh. We also provide a wide range of value-added services and solutions aimed at relieving distribution and logistics challenges for our customers and suppliers, while enhancing their marketing and inventory management capabilities. We sell products through three main distribution channels, consisting of warehouse sales, reload sales, and direct sales. Warehouse sales, which generate the majority of our sales, are delivered from our warehouses to our customers. Reload sales are similar to warehouse sales but are shipped from warehouses, most of which are operated by third-parties, where we store owned products to enhance operating efficiencies. This channel is employed primarily to service strategic customers that would be less economical to service from our warehouses, and to distribute large volumes of imported products from port facilities. Direct sales are shipped from the manufacturer to the customer without our taking physical possession of the inventory and, as a result, typically generate lower margins than our warehouse and reload distribution channels. This distribution channel, however, requires the lowest amount of committed capital and fixed costs. We have a strong market position and a broad geographic coverage footprint servicing all 50 states, where we maintain locations that serve 75 percent of the highest growth metropolitan statistical areas as it relates to forecasted housing starts and repair and remodel spend. With the strength of a locally focused sales force, we distribute a comprehensive range of products from over 750 suppliers. Our suppliers include some of the leading manufacturers in the industry, such as Allura, Arauco, Fiberon,Georgia-Pacific ,Huber Engineered Woods ,James Hardie , Louisiana-Pacific, Oldcastle APG, Ply Gem, Roseburg, Royal and Weyerhaeuser. We supply products to a broad base of customers including national home centers, pro dealers, cooperatives, specialty distributors, regional and local dealers and industrial manufacturers. Many of our customers serve residential and commercial builders, contractors and remodelers in their respective geographic areas and local markets. As a value-added partner in a complex and demanding building products supply chain, we play a critical role in enabling our customers to offer a broad range of products and brands, as most of our customers do not have the capability to purchase and warehouse products directly from manufacturers for such a large set of SKUs. The depth of our geographic footprint supports meaningful customer proximity across all the markets in which we operate, enabling faster and more efficient service. Similarly, we provide value to our supplier partners by enabling access to the large and fragmented network of lumber yards and dealers these suppliers could not adequately serve directly. Our position in this distribution model for building products provides easy access to the marketplace for our suppliers and a value proposition of rapid delivery on an as-needed basis to our customers from our network of warehouse facilities.
Significant Recent Transactions and Developments
Share Repurchase Program
OnAugust 23, 2021 , our Board of Directors approved a stock repurchase program pursuant to which authorized us to repurchase up to$25.0 million of our common stock. During the first quarter of fiscal 2022, we repurchased 81,331 shares of our common stock under this program at an average price of$79.03 per share. OnMay 3, 2022 , our Board of Directors 26 -------------------------------------------------------------------------------- increased our share repurchase authorization to$100.0 million and we entered into an Accelerated Share Repurchase Agreement ("ASR Agreement") withJefferies LLC to repurchase$60.0 million of our common stock. Under the ASR Agreement, we received initial delivery of 553,584 shares of common stock onMay 3, 2022 representing approximately 65 percent of the total number of shares of common stock initially underlying the ASR Agreement, based on our closing stock price of$70.45 onMay 2, 2022 . Final settlement of the shares of common stock repurchased under the ASR Agreement occurred onSeptember 15, 2022 based on the average of the daily volume-weighted average price of our common stock during the repurchase period under the ASR Agreement, less a discount and other adjustments pursuant to the terms and conditions of the ASR Agreement. At settlement, we received an additional 247,431 shares of common stock. Under our ASR Agreement, we repurchased a total of 801,015 shares of our common stock at an average price of$74.90 per share. As ofDecember 31, 2022 , we have repurchased a total of 882,346 shares for$66.4 million under our$100.0 million share repurchase program, including 801,015 shares purchased through the ASR Agreement, at an average price of$75.28 per share and we have a remaining authorization amount of$33.6 million .
Acquisition of Vandermeer
OnOctober 3, 2022 , we announced that we entered into and closed on a Stock Purchase Agreement (the "Purchase Agreement") withVandermeer Forest Products, Inc. ("Vandermeer"), resulting in our acquisition of Vandermeer. Vandermeer is a premier wholesale distributor of building products. Vandermeer was founded in 1972 and serves more than 250 customers across thePacific Northwest ,Alaska ,Hawaii ,British Columbia andAlberta from distribution facilities inKent ,Spokane , andMarysville, Washington . The acquisition of Vandermeer adds three distribution facilities inWashington state and provides direct access toSeattle andPortland , two of the top 15 highest growth repair and remodel and new construction markets inthe United States . Additionally, we now have coast-to-coast reach and serve all 50 states. Vandermeer's product offering and sales mix are similar to ours, with specialty products contributing to the majority of its revenue and gross profit. We believe this acquisition aligns to our specialty products strategy, establishes a meaningful growth platform in thePacific Northwest , increases our market penetration in key specialty product categories, such as siding and engineered wood, and strengthens strategic supplier relationships. Under the Purchase Agreement, we acquired all of the outstanding capital stock of Vandermeer for an aggregate purchase price of approximately$63.4 million , on a debt-free, cash-free basis, subject to customary post-closing adjustments in respect of net working capital, cash, transaction expenses and indebtedness. In addition, we acquired Vandermeer'sSpokane, Washington distribution facility and related real estate from the sole shareholder of Vandermeer for approximately$3.6 million , resulting in an aggregate purchase price of$67.0 million for the business and real property, which we funded with cash on hand. For further information about this acquisition, see Note 2, Business Combination.
Purchase of Real Estate Properties Previously Contributed to the BlueLinx Defined Benefit Pension Plan
In October of 2022, we notified participants of the BlueLinx Corporation Hourly Retirement Plan (the "plan") that, after careful consideration, we intended to terminate the plan and transfer the management and delivery of continuing benefits associated with the plan to a highly rated and qualified insurance company with pension termination experience. The process for terminating a pension plan involves several regulatory steps and approvals, and typically takes 12 to 18 months to complete. During fiscal 2013, and as previously disclosed, we contributed two properties to the plan in lieu of a cash contribution and entered into a lease for each of these properties. As a component of our plan to terminate the plan, we repurchased these two real estate properties that were held by the plan for$11.1 million , which terminated the associated leases. The repurchase in 2022 included certain land and buildings, located inCharleston, S.C. andBuffalo, N.Y. , valued at approximately$11.1 million by independent appraisals prior to the purchase. At the time of repurchase, we were leasing the contributed properties from the plan for an initial term of 20 years with two five-year extension options and had continued to use the properties in our distribution operations since their contribution in fiscal 2013. Each lease provided us a right of first refusal on any subsequent sale by the plan and a repurchase option. At the time of our initial contribution of the properties, the plan engaged an independent fiduciary who managed the properties on behalf of the plan. The plan's independent fiduciary evaluated the property purchase on behalf of the plan and negotiated the terms of the sale. The repurchase amount is included in pension contributions within the operating activities section of our consolidated statements of cash flow for the year endedDecember 31, 2022 . At the time of our initial contribution of the properties in fiscal 2013, we determined that the contribution of the properties did not meet the accounting definition of a plan asset within the scope of relevant accounting guidance. Accordingly, the contributed properties were not considered a contribution for financial reporting purposes at that time and, as a result, have not been included in plan assets and have had no impact on the net pension liability recorded on our consolidated balance sheets prior to fiscal 2022. We have continued to depreciate the carrying value of the properties in our financial statements, and no gain or loss was recognized at the initial contribution date for financial reporting purposes. As ofDecember 31, 2022 , the cash 27 --------------------------------------------------------------------------------
purchase price of the properties of
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 the products we manufacture and distribute; and (iii) cost and availability of the products we distribute. These factors 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 theU.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 theU.S. housing market, including the residential repair and remodel and residential new construction end markets, and have contributed to a recent slowdown in theU.S. housing industry. However, we believe that several factors, including the current high levels of home equity, the fundamental undersupply of housing in theU.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.
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; 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' LIRA Index, R&R demand is
expected to return to more normalized levels, following two consecutive years
(2020 and 2021) of elevated R&R activity fueled by pandemic-induced changes in
housing and lifestyle decisions. 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 $485.0 billion by the end of 2023,
up from $363.0 billion at the end of 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
a home in the U.S. increased from 23 years in 1985 to 39 years in 2019.
Moreover, approximately 80 percent of the current housing stock was built prior
to 1999. We believe the increasing average age of the nation's approximate 142
million existing homes will continue to drive demand for repair and remodel
projects.
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 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 theU.S. Census Bureau and theU.S. Department of Housing and Urban Development , during the fourth quarter of fiscal 2022, single family housing starts inthe United States were approximately 19 percent lower compared to the third quarter of fiscal 2022 and approximately 8 percent lower than that of the first quarter of fiscal 2020, prior to the COVID-19 28 -------------------------------------------------------------------------------- pandemic, indicating a market slow down following two years of favorable market conditions. As of the end of fiscal 2022, the month's supply of inventory of new homes was nine months, above the 20-year average of six months. For most of the last decade, housing production has lagged population growth and household formation.
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 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
2022 versus 2021 2021 versus 2020 2020 versus 2019
Increase (decrease) in composite lumber
prices (10)% 50% 59%
Increase (decrease) in composite panel
prices (18)% 85% 56%
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 and leveled off closer to the
five-year average for the remainder of the year, 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.
Cost and Availability of the Products We Distribute
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 theU.S. andCanada . As a result of lagging effects of the COVID-19 pandemic, manufacturing output was impacted on the specialty side, and to a lesser extent, the structural side, of our business during the first half of fiscal 2022. Supply constraints, which arose from reduced mill output as a result of the pandemic, had an impact on both the availability and pricing of our structural products, which contributed to increased market prices throughout the first half of the year. Reduced manufacturing capacity combined with increased demand for our specialty products also had an impact on the products we distribute in this 29 -------------------------------------------------------------------------------- category, namely vinyl siding, during the first half of 2022. During the back half of fiscal 2022, we saw easing supply constraints, which resulted in increased availability and decreased market prices. We expect supply for our products to be more readily available in fiscal 2023.
COVID-19 Pandemic
The global impact of the COVID-19 pandemic has affected our operational and financial performance to varying degrees. 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.
CARES Act
In an attempt to assist businesses during the COVID-19 pandemic,Congress enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act onMarch 27, 2020 . The CARES Act contained several provisions, including tax-based measures, meant to counteract the effects of the COVID-19 pandemic. After review of the many provisions, we took advantage of several of the provisions, including the deferral of our defined benefit plan pension contribution, deferral of the payment of employer payroll taxes, and the increase in the percentage of allowable percentage of interest expense under Section 163(j) of the Internal Revenue Code ("IRC"). During fiscal 2020, as a result of the CARES Act, we elected to defer the payment of employer payroll taxes that would normally be paid during fiscal 2020. The total amount of our payroll tax deferral under the CARES Act was approximately$6.3 million . These taxes were required to be paid in two tranches, with 50 percent due by the end of 2021 and 50 percent due by the end of 2022. We made payments of approximately$3.2 million inDecember 2021 and$3.1 million inDecember 2022 .
Results of Operations
Fiscal 2022 Compared to Fiscal 2021
The following table sets forth our results of operations for fiscal 2022 and fiscal 2021, both of which were comprised of 52 weeks.
% of % of
Net Net
Fiscal 2022 Sales Fiscal 2021 Sales
($ in thousands)
Net sales $ 4,450,214 100.0% $ 4,277,178 100.0%
Gross profit 832,984 18.7% 778,427 18.2%
Selling, general, and administrative 366,305 8.2% 322,205 7.5%
Depreciation and amortization 27,613 0.6% 28,192 0.7%
Amortization of deferred gains on real estate (3,934) (0.1)% (3,935) (0.1)%
Gains from sales of property (144) 0.0% (8,427) (0.2)%
Other operating expenses 4,057 0.1% 2,315 0.1%
Operating income 439,087 9.9% 438,077 10.2%
Interest expense, net 42,272 0.9% 45,507 1.1%
Other expense (income), net 2,054 0.0% (1,306) 0.0%
Income before provision for income taxes 394,761 8.9% 393,876 9.2%
Provision for income taxes 98,585 2.2% 97,743 2.3%
Net income $ 296,176 6.7% $ 296,133 6.9%
The following table sets forth changes in net sales by product category.
Fiscal 2022 Fiscal 2021
($ in thousands)
Net sales by product category
Specialty products $ 2,871,628 64.5 % $ 2,520,305 58.9 %
Structural products 1,578,586 35.5 % 1,756,873 41.1 %
Total net sales $ 4,450,214 100.0 % $ 4,277,178 100.0 %
30--------------------------------------------------------------------------------
The following table sets forth gross margin dollars and percentages by product category versus comparable prior periods.
Fiscal 2022 Fiscal 2021
($ in thousands)
Gross profit by product category:
Specialty products $ 640,370 $ 561,520
Structural products 192,614 216,907
Total gross profit $ 832,984 $ 778,427
Gross margin % by product category
Specialty products 22.3 % 22.3 %
Structural products 12.2 % 12.3 %
Total gross margin % 18.7 % 18.2 %
Discussion of Results of Operations for Fiscal 2022 Compared to Fiscal 2021
For fiscal 2022, we generated net sales of
Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products, increased$351.3 million to$2.9 billion in fiscal 2022. Strategic pricing of our specialty products during fiscal 2022 resulted in improved revenue and gross profit growth, partially offset by lower volume when compared to the prior-year period, where we saw historically strong demand. Specialty products gross profit increased$78.9 million to$640.4 million , with specialty gross margin remaining flat at 22.3 percent for fiscal 2022 compared to fiscal 2021. Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased$178.3 million to$1.6 billion in fiscal 2022. The decrease in wood-based commodity prices of our structural products and modestly lower volume are the primary contributors to the decrease in net sales for fiscal 2022. Our structural gross profit decreased$24.3 million to$192.6 million and our structural gross margin percentage for fiscal 2022 decreased to 12.2 percent from 12.3 percent in the prior-year period, primarily attributable to the decrease in wood-based commodity prices of our structural products, partially offset by strategic structural product inventory management. Our selling, general, and administrative expenses increased 13.7 percent, or$44.1 million , compared to fiscal 2021. The increase in sales, general, and administrative expenses is due primarily to increases in logistics expenses of$17.4 million related to increased delivery costs, primarily resulting from increases in fuel prices,$22.3 million related to key growth and productivity initiatives, and$4.5 million related to higher variable incentive compensation, such as sales commissions and stock compensation. The decrease in gains from sales of property in fiscal 2022 from fiscal 2021 in the amount of$8.3 million is due to the sale of two non-operational properties during fiscal 2021, which resulted in a larger gain as compared to the sale of assets previously held for sale during the same period in 2022. Other operating expenses increased$1.7 million compared to fiscal 2021 primarily due to higher restructuring related costs, including severance payments, incurred in fiscal 2022. Interest expense, net, decreased by 7.1 percent, or$3.2 million , compared to fiscal 2021. The decrease is primarily due to$7.4 million in debt issuance costs expensed in fiscal 2021 related to the extinguishment of our former term loan facility and credit limit reduction of our revolving credit facility, partially offset by an increase due to capital structure mix changes, as our senior secured notes carry a higher interest rate than our former revolving credit facility. Other expense (income), net, increased$3.4 million compared to fiscal 2021 primarily due to an increase in other non-operating expenses. Our effective tax rate was 25.0 percent and 24.8 percent for fiscal 2022 and fiscal 2021, respectively. Our effective tax rate for both periods was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation. Each period also includes a benefit from the vesting of restricted stock units during fiscal 2022 and fiscal 2021. Our effective tax rate for fiscal 2021 also benefited from the partial release of our valuation allowance for state net operating loss carryforwards as compared to fiscal 2022. 31 -------------------------------------------------------------------------------- Our net income for fiscal 2022 was$296.2 million , or$31.51 per diluted share, versus$296.1 million , or$29.99 per diluted share, in the prior-year period due primarily to an increase in gross profit driven by strategic pricing related to our specialty products, in conjunction with lower interest expense. This was offset by increases in our operating expenses and income tax expense.
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 9, Long-Term Debt; •Lease agreements which have fixed lease payment obligations, as discussed in Note 14, Lease Commitments. 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. Sources and Uses of Cash Operating Activities 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 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 theBlueLinx 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$98.7 million during fiscal 2022, which was primarily driven by$63.8 million in cash, net of cash acquired, used to fund our acquisition of Vandermeer in the fourth quarter of fiscal 2022, as well as$35.9 million in cash paid for investments in our business to improve operational performance and productivity throughout fiscal 2022. Net cash used in investing activities was$4.1 million during fiscal 2021, which was primarily driven by cash paid for investments in equipment of$14.4 million throughout fiscal 2021, partially offset by cash received from the sale of real estate of$10.3 million . Financing Activities Net cash used in financing activities was$87.9 million during fiscal 2022, which was primarily driven by$66.4 million spent repurchasing our common stock under our announced share repurchase program, including the ASR Agreement. Additionally,$10.5 million was spent in connection with the repurchase of shares to satisfy employee tax withholdings on the vesting of restricted stock units and$10.9 million was spent for principal payments on our finance lease obligations. Net cash used in financing activities was$55.8 million during fiscal 2021, which primarily reflected the repayments of the remaining$43.2 million balance on our term loan and net repayments on our revolving credit facility of$286.6 million , in addition to 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 sale of our senior secured notes, net of discount, of$295.9 million . 32 --------------------------------------------------------------------------------
Share Repurchase Program
As discussed elsewhere in this Form 10-K, during fiscal 2022, we repurchased a total of 882,346 shares for$66.4 million under our share repurchase program, including shares purchased through the ASR Agreement, at an average price of$75.28 per share. As ofDecember 31, 2022 , we have a remaining authorization amount of$33.6 million . Operating Working Capital Operating working capital is an important measurement we use to determine the efficiencies of our operations and our ability to readily convert assets into cash. Operating working capital is defined as the sum of cash, receivables, and inventory less accounts payable. Management of operating working capital helps us monitor our progress in meeting our goals to enhance our return on working capital assets. Selected financial information December 31, 2022 January 1, 2022 (In thousands) Current assets: Cash and cash equivalents $ 298,943 $ 85,203 Accounts receivable, less allowance for doubtful accounts 251,555 339,637 Inventories, net 484,313 488,458$ 1,034,811 $ 913,298 Current liabilities: Accounts payable $ 151,626$ 180,000 $ 151,626$ 180,000 Operating working capital $ 883,185$ 733,298 Operating working capital increased by$149.9 million to$883.2 million as ofDecember 31, 2022 from$733.3 million as ofJanuary 1, 2022 . The increase in operating working capital is primarily due to an increase in cash of$213.7 million and a decrease in accounts payable of$28.4 million , partially offset by a decrease in accounts receivable of$88.1 million , and a decrease in inventory of$4.1 million . The increase in cash was driven in large part by the reduction in accounts receivable due to improved collection efforts throughout fiscal 2022, as well as strong operating performance. The decrease in inventory reflects our strategic inventory management efforts throughout fiscal 2022. The decrease in accounts payable is due to the decrease in inventory and the timing of cash disbursements. Debt and Credit Sources As ofDecember 31, 2022 , andJanuary 1, 2022 , long-term debt consisted of the following: December 31, 2022 January 1, 2022 (In thousands) Senior secured notes (1) $ 300,000$ 300,000 Revolving credit facility (2) - - Finance lease obligations (3) 273,075 274,717 573,075 574,717 Unamortized debt issuance costs (4,057)
(4,701)
Unamortized bond discount costs (3,519)
(4,028)
565,499 565,988
Less: current maturities of long-term debt 7,089
7,864
Long-term debt, net of current maturities $ 558,410 $
558,124
(1) As ofDecember 31, 2022 andJanuary 1, 2022 , our long-term debt was comprised of$300.0 million of senior secured notes issued inOctober 2021 . These notes are presented under the long-term debt caption of our balance sheet at$292.4 million and$291.3 million atDecember 31, 2022 andJanuary 1, 2022 , respectively. This presentation is net of their discount of 33 --------------------------------------------------------------------------------
(2) The average effective interest rate was zero percent and 2.5 percent for the
years ended
(3) Refer to Note 14, Lease Commitments, for interest rates associated with finance lease obligations.
Senior Secured Notes
InOctober 2021 , we completed a private offering of$300.0 million of our six percent senior secured notes due 2029 (the "2029 Notes"), and in connection therewith we entered into an indenture (the "Indenture") with the guarantors party thereto andTruist Bank , as trustee and collateral agent. The 2029 Notes were issued to investors at 98.625 percent of their principal amount and will mature onNovember 15, 2029 . The majority of net proceeds from the offering of the 2029 Notes were used to repay borrowings under our revolving credit facility, as defined below.
Revolving Credit Facility
InApril 2018 , we entered into a revolving credit facility withWells Fargo Bank, National Association , as administrative agent ("the Agent"), and certain other financial institutions party thereto. InAugust 2021 , we entered into a second amendment to our revolving credit facility to, among other things, extend the maturity date of the facility toAugust 2, 2026 , and reduce the interest rate on borrowings under the facility (as amended, the "Revolving Credit Facility"). InOctober 2021 , in conjunction with the offering of our 2029 Notes, we reduced the credit limit of the Revolving Credit Facility from$600.0 million to$350.0 million . In conjunction with the reduction in the credit limit of our Revolving Credit Facility, we expensed approximately$1.6 million of debt issuance costs during the fourth quarter of 2021. These costs are included within interest expense, net on the consolidated statements of operations and reported separately as an adjustment to net income in our consolidated statements of cash flows. The Revolving Credit Facility provides for a senior secured asset-based revolving loan and letter of credit facility of up to$350.0 million . The Borrowers' obligations under the Revolving Credit Facility are secured by a security interest in substantially all of our and our subsidiaries' assets (other than real property), including inventories, accounts receivable, and proceeds from those items. Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.25 percent to 1.75 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on LIBOR, or (ii) the Agent's base rate plus a margin ranging from 0.25 percent to 0.75 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate. Our Revolving Credit Facility includes available interest rate options based on LIBOR, which will be discontinued as an available rate option afterJune 30, 2023 . Under the terms of the facility, LIBOR will be replaced with SOFR with respect to the applicable variable rate interest options thereunder, with effect on or beforeJune 30, 2023 . Borrowings under the Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the revolving credit agreement). The Borrowers are required to repay revolving loans thereunder to the extent that such revolving loans exceed the Borrowing Base then in effect. The Revolving Credit Facility may be prepaid in whole or in part from time to time without penalty or premium, but including all breakage costs incurred by any lender thereunder. As ofDecember 31, 2022 , we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of$645.4 million under our Revolving Credit Facility. As ofJanuary 1, 2022 , we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of$431.7 million under our Revolving Credit Facility. Available borrowing capacity under our Revolving Credit Facility was$346.5 million onDecember 31, 2022 andJanuary 1, 2022 , respectively. Our average effective interest rate under the facility was zero percent and 2.5 percent for the years endedDecember 31, 2022 andJanuary 1, 2022 , respectively. The Revolving Credit Facility contains certain financial and other covenants, and our right to borrow under the Revolving Credit Facility is conditioned upon, among other things, our compliance with these covenants. We were in compliance with all covenants under the Revolving Credit Facility as ofDecember 31, 2022 .
Term Loan Facility
OnApril 2, 2021 , we repaid the remaining outstanding principal balance of our former term loan facility, and, as a result, as ofJanuary 1, 2022 andDecember 31, 2022 , we had zero outstanding borrowings under the term loan facility, which has been extinguished. In connection with our repayment of the outstanding principal balance in full onApril 2, 2021 , we expensed$5.8 34 -------------------------------------------------------------------------------- million of debt issuance costs that we were amortizing in connection with our former term loan facility. These costs are included within interest expense, net on the consolidated statements of operations and reported separately as an adjustment to net income in our consolidated statements of cash flows.
As the facility was paid in full as of
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. We recognized$9.1 million and$10.5 million for tractors acquired as a component of our fleet investment plan during fiscal 2022 and fiscal 2021, respectively. Our total finance lease commitments totaled$273.1 million and$274.7 million as ofDecember 31, 2022 andJanuary 1, 2022 , respectively. Of the$273.1 million of finance lease commitments as ofDecember 31, 2022 ,$243.8 million related to real estate and$29.3 million related to equipment. Of the$274.7 million of finance lease commitments as ofJanuary 1, 2022 ,$244.0 million related to real estate and$30.7 million related to equipment.
Investments in Property and Equipment
Our investments in capital assets consist of cash paid for owned assets and the inception of financing lease arrangements for long-lived assets to support our distribution infrastructure. The gross value of these assets are included in property and equipment, at cost on our consolidated balance sheet. For fiscal 2022, we invested$45.0 million in long-lived assets primarily related to investments in our distribution facilities and to a lesser extent, upgrading our fleet, which includes$35.9 million in cash investments and$9.1 million in new finance leases recognized for tractors acquired as a component of our fleet investment plan. For fiscal 2021, we invested$25.0 million in long-lived assets primarily related to investments in our distribution facilities and to a lesser extent, upgrading our fleet, which includes$14.4 million in cash investments and$10.5 million in new finance leases recognized for tractors acquired as a component of our fleet investment plan.
Pension Funding Obligations
We were required to make cash contributions during fiscal 2021 and fiscal 2020 totaling approximately$0.3 million , and$0.8 million , respectively, relating to our fiscal 2021 and fiscal 2020 funding year pension contributions. We continue to evaluate pension funding obligations and requirements in order to meet our obligations. See Note 11, Employee Benefits, in the notes to the consolidated financial statements for more information related to our defined benefit pension plan and our plan to terminate.
Interest Rates
Our Revolving Credit Facility includes available interest rate options based on LIBOR, which will be discontinued as an available rate option afterJune 30, 2023 . Under the terms of our Revolving Credit Facility, LIBOR will be replaced with SOFR with respect to the applicable variable rate interest options thereunder, with effect on or beforeJune 30, 2023 . There can be no assurances as to whether SOFR will be a more or less favorable reference rate than LIBOR, and the consequences of replacing LIBOR with SOFR cannot be entirely predicted. However, at this time, we do not believe that the replacement of LIBOR by SOFR as a reference rate in our revolving credit facility will have a material adverse effect on our financial position or materially affect our interest expense.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in theU.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; (4) goodwill; and (5) pension benefit obligation. 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 35 --------------------------------------------------------------------------------
expected, it is reasonably possible that the judgments and estimates described below could change, which may result in our recording additional pension liabilities, or increased tax 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 the notes to consolidated financial statements.
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 8, Income Taxes, in the notes to the consolidated financial statements. 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 ofDecember 31, 2022 , positive evidence continued to outweigh negative evidence, as 36 -------------------------------------------------------------------------------- such no valuation allowance was deemed necessary except to the extent of certain state net operating losses. The valuation allowances related to our net operating losses as ofDecember 31, 2022 was approximately$4.1 million . See Note 8, Income Taxes, in the notes to consolidated financial statements.
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 is not subject to amortization, and is tested for impairment at least annually. We perform our annual goodwill impairment test as of the first day of our fiscal fourth quarter. This test requires us to assign goodwill to a reporting unit and to determine if the fair value of the reporting unit's goodwill is less than its carrying amount. We have identified that we have a single reporting unit and we assign our goodwill to that reporting unit. As ofDecember 31, 2022 , our goodwill was$55.4 million . We also evaluate goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would indicate the carrying amounts may be impaired. Such events and indicators may include, without limitation, significant declines in the industries in which our products are used, significant changes in capital market conditions, and significant changes in our market capitalization. Pension Benefit Obligation As discussed in Note 11, Employee Benefits, in the notes to consolidated financial statements, our pension benefit obligation was$82.7 million and exceeded the fair value of pension plan assets of$81.2 million , resulting in an unfunded obligation of$1.5 million . The estimation of the pension benefit obligation is dependent on actuarial methods and the selection of assumptions, such as the applicable discount rate and mortality rates. These assumptions have a significant effect on the projected benefit obligation.
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
the notes to consolidated financial statements.
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