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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 29, 2018
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
Commission file number: 1-32383
 
 
 
 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12540147&doc=11
BlueLinx Holdings Inc.
 
 
(Exact name of registrant as specified in its charter)
 
 
Delaware
77-0627356
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
4300 Wildwood Parkway, Atlanta, Georgia
30339
(Address of principal executive offices)
(Zip Code)
 
(770) 953-7000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company þ
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Emerging growth company o
(If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
                                                                                             
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of November 8, 2018 there were 9,293,794 shares of BlueLinx Holdings Inc. common stock, par value $0.01, outstanding.





BLUELINX HOLDINGS INC.
Form 10-Q
For the Quarterly Period Ended September 29, 2018
 
INDEX
 
PAGE 
 
 
 
 
 
 


1




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net sales
$
859,776

 
$
479,318

 
$
2,190,215

 
$
1,381,927

Cost of sales
768,021

 
418,773

 
1,939,484

 
1,206,402

Gross profit
91,755

 
60,545

 
250,731

 
175,525

Operating expenses (income):
 

 
 

 
 

 
 

Selling, general, and administrative
87,692

 
47,088

 
238,655

 
149,290

Gains from sales of property

 

 

 
(6,700
)
Depreciation and amortization
8,068

 
2,249

 
18,177

 
6,865

Total operating expenses
95,760

 
49,337

 
256,832

 
149,455

Operating income (loss)
(4,005
)
 
11,208

 
(6,101
)
 
26,070

Non-operating expenses (income):
 

 
 

 
 

 
 

Interest expense
13,273

 
5,670

 
33,947

 
16,279

Other income, net
(94
)
 
(271
)
 
(282
)
 
(549
)
Income (loss) before provision for
(benefit from) income taxes
(17,184
)
 
5,809

 
(39,766
)
 
10,340

Provision for (benefit from) income taxes
(7,288
)
 
123

 
(7,885
)
 
832

Net income (loss)
$
(9,896
)
 
$
5,686

 
$
(31,881
)
 
$
9,508


 
 
 
 
 
 
 
Basic earnings (loss) per share
$
(1.07
)
 
$
0.63

 
$
(3.46
)
 
$
1.05

Diluted earnings (loss) per share
$
(1.07
)
 
$
0.62

 
$
(3.46
)
 
$
1.04

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 

 
 

 
 

 
 

Net income (loss)
$
(9,896
)
 
$
5,686

 
$
(31,881
)
 
$
9,508

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation, net of tax

 

 
(3
)
 
14

Amortization of unrecognized pension
loss, net of tax
201

 
260

 
605

 
796

Pension curtailment, net of tax

 

 

 
(592
)
Other

 

 

 

Total other comprehensive income (loss)
201

 
260

 
602

 
218

Comprehensive income (loss)
$
(9,695
)
 
$
5,946

 
$
(31,279
)
 
$
9,726

 
See accompanying Notes.
 


2




BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
September 29, 2018
 
December 30, 2017
ASSETS
Current assets:
 
 
 
Cash
$
7,630

 
$
4,696

Receivables, less allowances of $4,278 and $2,761, respectively
285,489

 
134,072

Inventories, net
401,222

 
187,512

Other current assets
44,947

 
17,124

Total current assets
739,288

 
343,404

Property and equipment:
 

 
 

Land and land improvements
22,513

 
30,802

Buildings
178,698

 
84,781

Machinery and equipment
112,770

 
70,596

Construction in progress
1,812

 
570

Property and equipment, at cost
315,793

 
186,749

Accumulated depreciation
(102,865
)
 
(102,977
)
Property and equipment, net
212,928

 
83,772

Goodwill and other intangibles, net
74,172

 

Deferred tax asset
45,964

 
53,853

Other non-current assets
19,200

 
13,066

Total assets
$
1,091,552

 
$
494,095

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 

 
 

Accounts payable
$
153,814

 
$
70,623

Bank overdrafts
36,264

 
21,593

Accrued compensation
7,611

 
9,229

Current maturities of long-term debt, net of discount and debt issuance
costs of $64 and $0, respectively
1,736

 

Capital leases - short-term
8,058

 
3,552

Real estate deferred gains - short-term
5,330

 
1,836

Other current liabilities
21,528

 
10,772

Total current liabilities
234,341

 
117,605

Non-current liabilities:
 

 
 

Long-term debt, net of discount and debt issuance costs
of $13,280 and $3,792, respectively
579,380

 
276,677

Capital leases - long-term
145,175

 
14,007

Real estate deferred gains - long-term
86,768

 
10,485

Pension benefit obligation
25,616

 
30,360

Other non-current liabilities
18,048

 
9,959

Total liabilities
1,089,328

 
459,093

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

Common Stock, $0.01 par value, Authorized - 20,000,000 shares,
Issued and Outstanding - 9,288,673 and 9,100,923, respectively
92

 
91

Additional paid-in capital
258,088

 
259,588

Accumulated other comprehensive loss
(35,905
)
 
(36,507
)
Accumulated stockholders’ deficit
(220,051
)
 
(188,170
)
Total stockholders’ equity
2,224

 
35,002

Total liabilities and stockholders’ equity
$
1,091,552

 
$
494,095


See accompanying Notes.

3




BLUELINX HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
Net cash used in operating activities
$
(59,293
)
 
$
(38,278
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Proceeds from sale of assets
107,972

 
27,461

Acquisition of business, net of cash acquired - see Note 2
(353,094
)
 

Property and equipment investments
(1,872
)
 
(241
)
Net cash provided by (used in) investing activities
(246,994
)
 
27,220

 
 
 
 
Cash flows from financing activities:
 

 
 

Borrowings from revolving credit facilities
736,254

 
329,936

Repayments on revolving credit facilities
(503,577
)
 
(288,841
)
Borrowings from term loan
180,000

 

Repayments on term loan
(900
)
 

Principal payments on mortgage
(97,847
)
 
(28,976
)
Bank overdrafts
14,671

 
(55
)
Debt issuance costs
(10,470
)
 

Payments on capital lease obligations
(5,890
)
 
(2,446
)
Repurchase of shares to satisfy employee tax withholdings
(3,020
)
 

Cash released from escrow related to the mortgage

 
1,490

Net cash provided by financing activities
309,221

 
11,108

 
 
 
 
Net change in cash
2,934

 
50

Cash at beginning of period
4,696

 
5,540

Cash at end of period
$
7,630

 
$
5,590


See accompanying Notes.

4




BLUELINX HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2018
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of BlueLinx Holdings Inc. and its wholly owned subsidiaries (the “Company”). These financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted (“GAAP”) in the United States (“U.S.”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K (the “Annual Report on Form 10-K”) for the year ended December 30, 2017, as filed with the Securities and Exchange Commission on March 1, 2018.
Our financial condition as of, and our operating results for, the three- and nine-month periods ended September 29, 2018 are not necessarily indicative of the financial condition and results that may be expected for the full year ending December 29, 2018 or any other interim period. Certain prior period amounts have been reclassified to conform to the current period's presentation. These reclassifications did not materially impact the Company's operating income (loss) or consolidated net income (loss).
Inventory Valuation
Inventories are valued at the lower of cost or net realizable value. The Company’s inventory is comprised of finished goods. Cost is determined based on the moving average cost method of inventory valuation. We evaluated our inventory value at the end of each quarter to ensure that inventory, when viewed by category, is carried at lower of cost and net realizable value. In valuing inventory, the Company is required to make assumptions regarding the level of reserves required to value potentially obsolete or over-valued items at the lower of cost or net realizable value. As of September 29, 2018, and December 30, 2017, the Company decreased the value of inventory on hand by $5.2 million and $0, respectively, as a result of a decline in commodity pricing.
Recently Adopted Accounting Standards
Revenue from Contracts with Customers. In 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”) that superseded existing revenue recognition guidance. Under this ASU and subsequently issued amendments, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received. The standard was effective for the first interim period within annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016Entities were permitted to adopt the standard using a “full retrospective” approach (retrospectively to each prior reporting period presented) or a “modified retrospective” approach (reporting the cumulative effect as of the date of adoption).
On December 31, 2017, the first day of our fiscal 2018 year, we adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of that date. Results for reporting periods beginning after the first day of fiscal 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under the previous accounting standard, ASC 605.
There was no adjustment due to the cumulative impact of adopting ASC 606 (See Note 4).
Accounting Standards Effective in Future Years
Leases. In 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This update will require leases with durations greater than twelve months to be recognized on the balance sheet and is effective for interim and annual

5




reporting periods beginning after December 15, 2018. We will adopt this standard, and all related amendments thereto, effective December 30, 2018, the first day of our fiscal 2019 year.
We have not completed our assessment, but the adoption of this standard will have a significant impact on our Condensed Consolidated Balance Sheets. However, we do not expect the adoption to have a significant impact on the recognition, measurement or presentation of lease expense within the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) or the Condensed Consolidated Statements of Cash Flows. Information about our undiscounted future lease payments and the timing of those payments is presented in Note 13, “Lease Commitments,” in our Annual Report on Form 10-K.
Goodwill. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350).” This standard is intended to simplify the test for goodwill impairments by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new ASU, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The accounting standard will be effective for reporting periods beginning after December 15, 2019, and early adoption is permitted. We have not completed our assessment of the standard but we do not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Comprehensive Income. In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220).” This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income (loss) (“AOCI”) to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. We have not completed our assessment, but the adoption of the standard may impact tax amounts stranded in AOCI related to our pension plans. We will adopt this standard effective December 30, 2018, the first day of our fiscal 2019 year.
Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, “Fair Value (“FV”) Measurement (Topic 820)”. In addition to making certain modifications, the standard removes the requirements to disclose: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the FV hierarchy; (ii) the policy for timing transfers between levels; and (iii) the valuation process for Level 3 FV measurements. The standard will require public entities to disclose: (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 FV measurements held at the end of the reporting period; and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 FV measurements. The additional disclosure requirements should be applied prospectively for the most recent interim or annual period presented in the fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented. The amendments in this standard are effective for fiscal years ending after December 15, 2019. Early adoption is permitted, and an entity may early adopt the removed or modified disclosures and delay the adoption of new disclosures until the effective date. We have not completed our assessment of the standard but we do not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
Defined Benefit Pension Plan. In August 2018, the FASB issued ASU No. 2018-14, “Compensation-Retirement-Benefits-Defined Benefit Plans-General (Subtopic 715-20)”. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing six previously required disclosures and adding two. The amendments also clarify certain disclosure requirements. The amendments in this standard are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We have not completed our assessment of the standard but we do not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
2. Acquisition
On April 13, 2018, we completed the acquisition of Cedar Creek Holdings, Inc. (“Cedar Creek”) for a preliminary purchase price of approximately $361.8 million. The acquisition was completed pursuant to the terms of an Agreement and Plan of Merger (the "Merger Agreement"), dated as of March 9, 2018, by and among BlueLinx Corporation, one of our wholly owned subsidiaries, Panther Merger Sub, Inc., a wholly-owned subsidiary of

6




BlueLinx Corporation ("Merger Sub"), Cedar Creek, and CharlesBank Equity Fund VII, Limited Partnership (“CharlesBank”). Upon closing the transactions contemplated by the Merger Agreement, among other things, Merger Sub was merged with and into Cedar Creek, with Cedar Creek surviving the acquisition as one of our indirect wholly-owned subsidiaries. As a result of the acquisition, we increased the number of our distribution facilities to approximately 70 facilities, and increased the number of our full-time employees to over 2,500. The merger allowed us to expand our product offerings, while maintaining our existing geographical footprint.

Cedar Creek was established in 1977 as a wholesale building materials distribution company that distributes wood products across the United States. Its products include specialty lumber, oriented strand board, siding, cedar, spruce, engineered wood products and other building products.

The acquisition is being accounted for under the acquisition method of accounting. The assets acquired, liabilities assumed and the results of operations of the acquired business are included in our consolidated results since April 13, 2018.

The acquired business contributed net sales and net loss of $706.6 million and $0.2 million, respectively, to the Company for the period from April 13, 2018, to September 29, 2018. The net loss for the period from April 13, 2018, to September 29, 2018, included integration-related costs and the negative impact of selling a higher cost Cedar Creek inventory recorded at fair value. The following unaudited consolidated pro forma information presents consolidated information as if the acquisition had occurred on January 1, 2017:
 
 
Pro forma
 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share data)
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net sales
 
$
859,776

 
$
841,330

 
$
2,592,597

 
$
2,459,713

Net income (loss)
 
(6,219
)
 
8,033

 
(5,455
)
 
(20,477
)
Earnings (loss) per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.67
)
 
$
0.88

 
$
(0.59
)
 
$
(2.27
)
Diluted
 
(0.67
)
 
0.87

 
(0.59
)
 
(2.27
)

The pro forma amounts above have been calculated in accordance with GAAP after applying the Company's accounting policies and adjusting: (i) the three- and nine-months ended September 29, 2018, to reflect a $0.9 million and $11.8 million, respectively, charge related to an inventory step-up adjustment, and the three and nine months ended September 30, 2017, for $0 and $11.8 million, respectively; (ii) the three- and nine-months ended September 29, 2018, for $3.8 million and $37.9 million, respectively, for transaction related costs, and the three- and nine-months ended September 30, 2017, for $0 and $37.9 million, respectively. Due to the net loss for the three- and nine-month periods ended September 29, 2018, and for the nine-month period ended September 30, 2017, 0 incremental shares, 0.1 million incremental shares and 0.2 million incremental shares, respectively, from share-based compensation arrangements were excluded from the computation of diluted weighted average shares outstanding, in both periods, because their effect would be anti-dilutive. The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the acquisition, are presented for illustrative purposes only, and are not necessarily indicative of results that would have been achieved had the acquisition occurred as of January 1, 2017, or of future operating performance.

7




The purchase price of Cedar Creek consisted of the following items:
 
 
(In thousands)
Consideration paid to shareholders and amounts paid to creditors:
 
 
Payments to Cedar Creek shareholders[1]
 
$
166,447

 
Subordinated unsecured note (due to shareholder)[2]
 
 
13,743

 
Seller’s transaction costs paid by Company
 
 
7,349

 
Add: pay off of Cedar Creek debt[3]
 
 
174,213

 
Total preliminary cash purchase price
 
$
361,752

 
_____________
[1]
Payments to Cedar Creek’s shareholders include the purchase of common stock and certain escrow adjustments.
[2]
The Cedar Creek note payable to a shareholder of $13.7 million was paid in full upon the acquisition of Cedar Creek and included $10 million in subordinated debt and $3.7 million in accrued interest.
[3]
To finance the acquisition of Cedar Creek, the Company amended and restated its Revolving Credit Facility to increase the availability thereunder to $600.0 million and also entered into a new $180.0 million senior secured Term Loan Facility (See Note 6).


The purchase is subject to a customary post-closing adjustment for, among other things, the final working capital of the acquired business.

The excess of total preliminary purchase price, which includes the aggregate cash consideration paid in excess of the fair value of the tangible and intangible assets acquired, was recorded as goodwill. The goodwill recognized is attributable to the expected operating synergies and growth potential that the Company expects to realize from the acquisition. None of the goodwill generated from the acquisition is deductible for tax purposes.

When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. As of September 29, 2018, the purchase price allocation for the acquisition was preliminary and subject to completion. Adjustments to the current fair value estimates in the table below may occur as the process conducted for valuation and assessments is finalized, including tax assets, liabilities and other attributes. We expect to complete the purchase price allocation during the 12-month period following the acquisition date, in line with the acquisition method of accounting, during which time the value of the assets and liabilities may be revised as appropriate.

The following table summarizes the preliminary values of the assets acquired and liabilities assumed at the date of the acquisition:
(In thousands)
Preliminary Allocation as of September 29, 2018
Cash and net working capital assets
(excluding inventory)
$
90,768

Inventory

159,227

Property and equipment

71,352

Other, net
 
6,992

Intangible assets and goodwill:



Customer relationships

25,500

Non-compete agreements

8,254

Trade names

6,826

Favorable leasehold interests

800

Goodwill

36,787

Capital leases and other liabilities

(44,754
)
   Cash purchase price
$
361,752



8




3. Goodwill and Other Intangible Assets
In connection with the acquisition of Cedar Creek, we acquired certain intangible assets. As of September 29, 2018, our intangible assets consist of goodwill and other intangible assets including customer relationships, noncompete agreements, trade names, and favorable leasehold interests.
Goodwill
Goodwill is the excess of the cost of an acquired entity over the fair value of tangible and intangible assets (including customer relationships, noncompete agreements, trade names and favorable lease interests) acquired and liabilities assumed under acquisition accounting for business combinations.
During the nine-months ended September 29, 2018, we preliminarily allocated the fair values of assets acquired and liabilities assumed in the acquisition of Cedar Creek and recognized $36.8 million in goodwill. This amount is subject to change.
Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to a reporting unit and to determine if the implied fair value of the reporting unit’s goodwill is less than its carrying amount. We evaluate goodwill for impairment during the fourth quarter of each fiscal year. In addition, we will evaluate the carrying values of these assets 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.
Definite-Lived Intangible Assets.
At September 29, 2018, in connection with the acquisition of Cedar Creek, we had definite-lived intangible assets that related to customer relationships, noncompete agreements, trade names and favorable leasehold interests.
At September 29, 2018, the gross carrying amounts, the accumulated amortization and the net carrying amounts of our definite-lived intangible assets were as follows:
(In thousands)
 
Gross carrying amounts
 
Accumulated
Amortization
[2] 
Net carrying amounts
Customer relationships
 
$
25,500

 
$
(1,962
)
 
$
23,538

Noncompete agreements
 
 
8,254

 
 
(952
)
 
 
7,302

Trade names
 
 
6,826

 
 
(1,050
)
 
 
5,776

Favorable leasehold interests[1]
 
 
800

 
 
(31
)
 
 
769

Total
 
$
41,380

 
$
(3,995
)
 
$
37,385

____________________
[1] Amortized to rent expense
[2] Intangible assets except customer relationships are amortized on straight line basis. Customer relationships are amortized on a double declining balance method.
Amortization Expense
The weighted average estimated useful life remaining for customer relationships, noncompete agreements, trade names and favorable leasehold interest is approximately 12 years, 4 years, 3 years and 12 years respectively. Amortization expense for the definite-lived intangible assets was $2.1 million and $4.0 million for the three- and nine-month periods ended September 29, 2018, respectively. There were no amortization charges for the comparative periods of the prior year.




9




Estimated annual amortization expense for definite-lived intangible assets over the next five fiscal years is as follows:
(In thousands)
 
Estimated Amortization
2019
 
$
8,152

2020
 
7,527

2021
 
5,035

2022
 
3,183

2023
 
1,873



4. Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration we expected to be entitled to in exchange for those goods or services.

Contracts with our customers are generally in the form of standard terms and conditions of sale. From time to time, we may enter into specific contracts with some of our larger customers, which may affect delivery terms. Performance obligations in our contracts generally consist solely of delivery of goods. For all sales channel types, consisting of warehouse, direct, and reload sales, we typically satisfy our performance obligations upon shipment. Our customer payment terms are typical for our industry, and may vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not deemed to be significant by us. For certain sales channels and/or products, our standard terms of payment may be as early as ten days.
In addition, we provide inventory to certain customers through pre-arranged agreements on a consignment basis. Customer consigned inventory is maintained and stored by certain customers; however, ownership and risk of loss remains with us. When the consigned inventory is sold by the customer, we recognize revenue, net of trade allowances.
All revenues recognized are net of trade allowances (i.e., rebates), cash discounts and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Adjustments to earnings resulting from revisions to estimates on discounts and returns have been insignificant for each of the reported periods. Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration.
The following table presents our revenues disaggregated by revenue source. Sales and usage-based taxes are excluded from revenues.
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Structural products
$
387,347

 
$
228,424

 
$
1,016,806

 
$
633,036

Specialty products
481,946

 
254,476

 
1,185,332

 
758,788

Other[1]
(9,517
)
 
(3,582
)
 
(11,923
)
 
(9,897
)
Total net sales
$
859,776

 
$
479,318

 
$
2,190,215

 
$
1,381,927

____________________________________ 
[1]“Other” includes unallocated allowances and discounts. Beginning third quarter 2018 allowances and discounts are allocated to product categories where available. Prior year and nine months ended periods have been updated for this presentation.

10




The following table presents our revenues disaggregated by sales channel. Sales and usage-based taxes are excluded from revenues.
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Warehouse
$
685,468

 
$
361,992

 
$
1,723,103

 
$
1,034,580

Direct
153,847

 
89,242

 
402,420

 
274,482

Reload and service revenue
32,116

 
35,915

 
95,300

 
95,817

Customer discounts and rebates
(11,655
)
 
(7,831
)
 
(30,608
)
 
(22,952
)
Total net sales
$
859,776

 
$
479,318

 
$
2,190,215

 
$
1,381,927



Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general, and administrative expense.

We have made an accounting policy election to treat any common carrier shipping and handling activities as a fulfillment cost, rather than as a separate obligation or separate promised service.



11




5. Long-Term Debt
As of September 29, 2018, and December 30, 2017, long-term debt consisted of the following:
 
  
 
  
September 29,
 
  December 30,  
(In thousands)
  
      Maturity Date      
  
2018
 
2017
Revolving Credit Facility (net of discounts and debt issuance
costs of $6.2 million and $3.1 million at September 29, 2018
and December 30, 2017, respectively)
  
October 10, 2022
   
   $
409,112

   
   $
179,569

Mortgage Note Payable (net of discounts and debt issuance
costs of $0 million and $0.8 million at September 29, 2018
and December 30, 2017, respectively)
 
NA
 
 

 
 
97,108

Term Loan Facility (net of discounts and debt issuance costs
of $7.1 million and $0 million at September 29, 2018
and December 30, 2017, respectively)
  
October 13, 2023
   
 
172,004

   
 

Total debt
  
 
   
 
581,116

   
 
276,677

Less: current portion of long-term debt
  
 
   
 
(1,736
)
   
 

Long-term debt, net
  
 
   
$
579,380

   
$
276,677


Revolving Credit Facility
On April 13, 2018, in connection with the acquisition Cedar Creek, we entered into an Amended and Restated Credit Agreement, with certain of our subsidiaries as borrowers (together with us, the “Borrowers”) or guarantors thereunder, Wells Fargo Bank, National Association, in its capacity as administrative agent (“Wells Fargo”), and certain other financial institutions party thereto (the “Revolving Credit Agreement”). The Revolving Credit Agreement provides for a senior secured asset-based revolving loan and letter of credit facility (the “Revolving Credit Facility”) of up to $600 million and an uncommitted accordion feature that permits the Borrowers to increase the facility by an aggregate additional principal amount of up to $150 million, which will allow borrowings of up to $750 million under the Revolving Credit Facility. Letters of credit in an aggregate amount of up to $30 million are also available under the Revolving Credit Agreement, which would reduce the amount of the revolving loans available under the Revolving Credit Facility. The maturity date of the Revolving Credit Agreement is October 10, 2022. The Revolving Credit Agreement amended and restated the Borrowers’ existing $335 million secured revolving credit facility, dated October 10, 2017, as amended. The proceeds from the Revolving Credit Facility were used to repay outstanding obligations under the Borrowers’ existing revolving credit facility, to fund a portion of the cash consideration payable in connection with the acquisition of Cedar Creek, to fund transaction costs in connection with the acquisition and the amendment of the Revolving Credit Facility, to provide working capital and for other general corporate purposes.
In connection with the execution and delivery of the Revolving Credit Agreement, we also entered into, with certain of our subsidiaries, a Guaranty and Security Agreement with Wells Fargo (the “Revolving Guaranty and Security Agreement”). Pursuant to the Revolving Guaranty and Security Agreement, the Borrowers’ obligations under the Revolving Credit Agreement 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 Agreement will be subject to availability under the Borrowing Base (as that term is defined in the Revolving Credit Agreement). The Borrowers will be 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.
The Revolving Credit Agreement provides for interest on the loans at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.75 percent to 2.25 percent, with the amount of such margin determined based upon the average of the Borrowers’ excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on LIBOR, or (ii) the administrative agent’s base rate plus a margin ranging from 0.75 percent to 1.25 percent, with the amount of such margin determined based upon the average of the

12




Borrowers’ excess availability for the immediately preceding fiscal quarter as calculated by the administrative agent, for loans based on the base rate.
In the event excess availability falls below the greater of (i) $50 million and (ii) 10 percent of the lesser of (a) the Borrowing Base and (b) the maximum permitted credit at such time, the Revolving Credit Agreement requires maintenance of a fixed charge coverage ratio of 1.0 to 1.0 until such time as the Borrowers’ excess availability has been at least the greater of (i) $50 million and (ii) 10 percent of the lesser of (a) the Borrowing Base and (b) the maximum permitted credit at such time for a period of 30 consecutive days.
The Revolving Credit Agreement also contains representations and warranties and affirmative and negative covenants customary for financings of this type as well as customary events of default.
As of September 29, 2018, we had outstanding borrowings of $415.4 million, excess availability of $122.8 million, and a weighted average interest rate of 4.2 percent under our Revolving Credit Facility. As of December 30, 2017, our principal balance was $182.7 million, excess availability was $63.3 million, and our weighted average interest rate was 4.2 percent under our Revolving Credit Agreement.
We were in compliance with all covenants under the Credit Agreement as of September 29, 2018.
Term Loan Facility
On April 13, 2018, in connection with the acquisition of Cedar Creek, we entered into the a new credit and guaranty agreement (the “Term Loan Agreement”) with WHOS Investment Partners, LLC, as administrative agent and collateral agent (“HPS”) and certain other financial institutions as party thereto. The Term Loan Agreement provides for a senior secured first lien loan facility in an aggregate principal amount of $180 million (the “Term Loan Facility”). The maturity date of the Term Loan Agreement is October 13, 2023. The proceeds from the Term Loan Facility were used to fund a portion of the cash consideration payable in connection with the acquisition of Cedar Creek and to fund transaction costs in connection with the acquisition and the Term Loan Facility.
In connection with the execution and delivery of the Term Loan Agreement, we also entered into a pledge and security agreement with HPS (the “Term Loan Security Agreement”). Pursuant to the Term Loan Security Agreement and other “Collateral Documents” (as such term is defined in the Term Loan Agreement), the obligations under the Term Loan Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets, including inventories, accounts receivable, real property, and proceeds from those items.
The Term Loan Agreement requires monthly interest payments, and quarterly principal payments of $450,000, in arrears. The Term Loan Agreement also requires certain mandatory prepayments of outstanding loans, subject to certain exceptions, including prepayments commencing with the fiscal year ending December 28, 2019, based on a percentage of excess cash flow (as defined in the Term Loan Agreement for such fiscal year). The remaining balance is due on the loan maturity date of October 13, 2023.
The Term Loan Facility may be prepaid in whole or in part from time to time, subject to payment of the “Prepayment Premium” (as such term is defined in the Term Loan Agreement) if such voluntary prepayment does not otherwise constitute an exception to the Prepayment Premium under the Term Loan Agreement and is made prior to the fourth anniversary of the closing date of the Term Loan Agreement, and all breakage costs incurred by any lender thereunder.
Borrowings under the Term Loan Agreement may be made as Base Rate Loans or Eurodollar Rate Loans. The Base Rate Loans will bear interest at the rate per annual equal to (i) the greatest of the (a) U.S. prime lending rate published in The Wall Street Journal, (b) the Federal Funds Effective Rate plus 0.50 percent, and (c) the sum of the Adjusted Eurodollar Rate of one month plus 1.00 percent, provided that the Base Rate shall at no time be less than 2.00 percent per annum; and (ii) plus the Applicable Margin, as described below. Eurodollar Rate Loans will bear interest at the rate per annum equal to (i) the ICE Benchmark Administration LIBOR Rate, provided that the Adjusted Eurodollar Rate shall at no time be less than 1.00 percent per annum; plus (ii) the Applicable Margin. The Applicable Margin will be 6.00 percent with respect to Base Rate Loans and 7.00 percent with respect to Eurodollar Rate Loans.
The Term Loan Agreement requires maintenance of a total net leverage ratio of 8.25 to 1.00 for the fiscal quarter ending September 29, 2018, and such required covenant level reduces over the term of the Term Loan Facility as

13




set forth in the Term Loan Agreement. As of September 29, 2018, we were in compliance with the total net leverage ratio.
The Term Loan Agreement also contains representations, warranties, affirmative and negative covenants customary for financing transactions of this type, and customary events of default.
As of September 29, 2018, we had outstanding borrowings of $179.1 million under our Term Loan Credit Facility and a stated interest rate of 9.2 percent per annum. At December 30, 2017, there were no outstanding borrowings under our Term Loan Credit Facility.
We were in compliance with all covenants under the Term Loan Agreement as of September 29, 2018.
Our remaining principal payment schedule for each of the next five years and thereafter is as follows:
(In thousands)
 
 
2018
 
$
450

2019
 
 
1,800

2020
 
 
1,800

2021
 
 
1,800

2022
 
 
1,800

Thereafter
 
 
171,450


6. Net Periodic Pension Cost
The following table shows the components of our net periodic pension cost (benefit):
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Service cost
$
133

 
$
133

 
$
399

 
$
499

Interest cost on projected benefit obligation
963

 
1,153

 
2,889

 
3,509

Expected return on plan assets
(1,327
)
 
(1,684
)
 
(3,981
)
 
(4,852
)
Amortization of unrecognized loss
271

 
260

 
813

 
796

Net periodic pension cost (benefit)
$
40

 
$
(138
)
 
$
120

 
$
(48
)

7. Stock Compensation
Cash-Settled Stock Appreciation Rights (“SARs”)
During fiscal 2016, we granted certain executives and employees cash-settled SARs. The cash-settled SARs vested on July 16, 2018. On the vesting date, half of the vested value of the cash-settled SARs became payable within thirty days of the vesting date, and the remainder payable within one year of the vesting date. The exercise price for the cash-settled SARs was amended so that it is based a 20 day trading average of the Company’s common stock through the vesting date, in excess of the $7.00 grant date valuation.
As of September 29, 2018, there were 222,500 cash-settled SARs issued and outstanding. On December 30, 2017, we had accrued a total liability of approximately $1.0 million for the cash-settled SARs. On September 29, 2018, the total liability was approximately $7.2 million, which reflects the fair value of the remaining SARs valued at the vesting date.

14




The following table summarizes the assumptions used to compute the current fair value of our cash-settled SARs:
 
 
September 29, 2018[1]
 
December 30, 2017[2]
Stock price
 
$
38.17

 
$
9.76

Expected volatility
 
Not applicable

 
33.80
%
Risk-free interest rate
 
Not applicable

 
1.55
%
Expected term (in years)
 
0

 
0.54

Expected dividend yield
 
Not applicable

 
Not applicable


__________________________ 
[1]Reflects the exercise price based on the 20 day trading average through vesting date (June 18, 2018 - July 16, 2018).
[2]Reflects an assumed exercise price based on the closing stock price, as per the original SARs Agreement. The closing stock price used in the analysis was the closing stock price on the last trading day of the fiscal quarter.
Stock Compensation Expense
During the three months ended September 29, 2018 and September 30, 2017, we incurred stock compensation expense of $1.7 million and $0.3 million, respectively. During the nine months ended September 29, 2018 and September 30, 2017, we incurred stock compensation expense of $14.7 million and $1.8 million, respectively. The increase in our stock compensation expense for the three- and nine-month periods of fiscal 2018 is attributable to cash-settled SARs.
8. Lease Commitments
Capital Leases
We have entered into certain long-term, non-cancelable capital leases for real estate, along with certain logistics equipment and vehicles. The real estate leases contain customary extension option periods and annual fixed rent escalations. As of September 29, 2018, the acquisition value and net book value of all assets under capital leases was $166.5 million and $143.7 million, respectively.
At September 29, 2018, our total commitments under capital leases recorded in the Unaudited Condensed Consolidated Balance Sheets within “capital leases - short term” and “capital leases - long term” were as follows:
(In thousands)
Principal[1]
 
Interest
2018
$
2,118

 
$
3,523

2019
7,498

 
13,802

2020
6,749

 
13,425

2021
4,389

 
13,127

2022
3,620

 
12,921

Thereafter
128,859

 
182,788

Total
$
153,233

 
$
239,586

_____________________________ 
[1] Our principal amounts include negative amortization. Negative amortization occurs for us on some of our real estate leases because of the structure of the lease payments where the cash payment is applied to both interest and principal and wherein a calculated interest rate results in interest exceeding principal. The remaining amount of interest owed is added to the principal, resulting in the principal payment appearing as a negative.
In the case of certain of our real estate capital leases, negative amortization may occur because of a required allocation between land and building. Under the capital lease rules of the current lease accounting standard, ASC 840 (Leases), the lease payment is bifurcated between land and building, if certain conditions are met. In these cases, the portion of the payment attributed to the building is capitalized at the lesser of net present value or fair market value, and the interest rate is thus determined as the previously unknown variable; while the portion of the rental payment attributed to land is treated as rental expense.
Sale-Leaseback Transactions

15




On January 10, 2018, we completed sale-leaseback transactions on four distribution centers. We sold these properties for gross proceeds of $110.0 million. As a result of the sale-leaseback transactions, we recognized capital lease assets and obligations totaling $95.1 million on these properties, and a total deferred gain of $83.9 million, which will be amortized over the lives of the applicable leases, in accordance with U.S. GAAP. These capital lease obligations are reflected in the capital lease table above.
9. Commitments and Contingencies
Environmental and Legal Matters
From time to time, we are involved in various proceedings incidental to our businesses, and we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Although the ultimate outcome of these proceedings cannot be determined with certainty, based on presently available information management believes that adequate reserves have been established for probable losses with respect thereto. Management further believes that the ultimate outcome of these matters could be material to operating results in any given quarter but will not have a materially adverse effect on our long-term financial condition, our results of operations, or our cash flows.
Collective Bargaining Agreements
As of September 29, 2018, we had over 2,500 employees on a full-time basis, of which approximately 1,100 were former employees of Cedar Creek. Additionally, as of September 29, 2018, approximately 20 percent of our employees were represented by various local labor union Collective Bargaining Agreements (“CBAs”). As of September 29, 2018, approximately 5 percent of our employees are covered by CBAs that are up for renewal in fiscal 2018 or are currently expired and under negotiation.
10. Accumulated Other Comprehensive Loss
Comprehensive income (loss) is a measure of income (loss) which includes both net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) results from items deferred from recognition into our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Accumulated other comprehensive income (loss) is separately presented on our Condensed Consolidated Balance Sheets as part of common stockholders’ equity.
The changes in balances for each component of accumulated other comprehensive loss for the nine months ended September 29, 2018, were as follows:
(In thousands)
Foreign currency, net
of tax
 
Defined
benefit pension
plan, net of tax
 
Other,
net of tax
 
Total Accumulated Other Comprehensive Loss
December 30, 2017, beginning balance
$
674

 
$
(37,393
)
 
$
212

 
$
(36,507
)
Other comprehensive income (loss), net of tax [1]
(3
)
 
605

 

 
602

September 29, 2018, ending balance, net of tax
$
671

 
$
(36,788
)
 
$
212

 
$
(35,905
)
________________________________ 
[1] For the nine months ended September 29, 2018, the actuarial loss recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) as a component of net periodic pension cost was $0.8 million, net of tax of $0.2 million (See Note 7).
11. Earnings (Loss) per Share
We calculate basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. We calculate diluted earnings per share by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including restricted stock units, performance shares, and performance units. Due to the net loss for the three- and nine-month periods ended September 29, 2018, 0 and 0.1 million, respectively, of incremental shares from share-based compensation arrangements were excluded from the computation of diluted weighted average shares outstanding, in both periods, because their effect would be anti-dilutive.

16




The reconciliation of basic earnings (loss) and diluted earnings (loss) per common share for the three- and nine-month periods of fiscal 2018 and 2017 were as follows:
 
Three Months Ended
 
Nine Months Ended
(in thousands, except per share data)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net income (loss)
$
(9,896
)
 
$
5,686

 
$
(31,881
)
 
$
9,508

 
 
 
 
 
 
 
 
Basic weighted shares outstanding
9,274

 
9,079

 
9,209

 
9,033

Dilutive effect of share-based awards

 
164

 

 
152

Diluted weighted average shares outstanding
$
9,274

 
$
9,243

 
$
9,209

 
$
9,185

 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
(1.07
)
 
$
0.63

 
$
(3.46
)
 
$
1.05

Diluted earnings (loss) per share
$
(1.07
)
 
$
0.62

 
$
(3.46
)
 
$
1.04



17




ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) has been derived from our historical financial statements and is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. This MD&A section should be read in conjunction with our condensed consolidated financial statements and notes to those statements included in Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 30, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”). This MD&A section is not a comprehensive discussion and analysis of our financial condition and results of operations, but rather updates disclosures made in the aforementioned filing.
The discussion below contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance, liquidity levels or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will be,” “will likely continue,” “will likely result” or words or phrases of similar meaning. All of these forward-looking statements are based on estimates and assumptions made by our management that, although believed by us to be reasonable, are inherently uncertain. Forward-looking statements involve risks and uncertainties, including, but not limited to, economic, competitive, governmental, and technological factors outside of our control that may cause our business, strategy, or actual results to differ materially from the forward-looking statements. These risks and uncertainties may include those discussed under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 30, 2017, as filed with the SEC, and other factors, some of which may not be known to us. We operate in a changing environment in which new risks can emerge from time to time. It is not possible for management to predict all of these risks, nor can it assess the extent to which any factor, or a combination of factors, may cause our business, strategy, or actual results to differ materially from those contained in forward-looking statements. Factors you should consider that could cause these differences include, among other things:
the imposition or threat of protectionist trade policies or import or export tariffs;
modified or new global or regional trade agreements;
changes in the prices, supply and/or demand for products which we distribute;
inventory management and commodities pricing;
new housing starts and inventory levels of existing homes for sale;
general economic and business conditions in the U.S.;
acceptance by our customers of our privately branded products;
financial condition and creditworthiness of our customers;
supply from our key vendors;
reliability of the technologies we utilize;
activities of competitors;
changes in significant operating expenses;
fuel costs;
risk of losses associated with accidents;
exposure to product liability claims;
changes in the availability of capital and interest rates;
adverse weather patterns or conditions;
acts of cyber intrusion;
our ability to realize anticipated synergies from the acquisition of Cedar Creek and to integrate Cedar Creek’s business;

18




risk of loss of material customers, suppliers, or product lines in connection with the acquisition;
the significant indebtedness that we have incurred in connection with the Cedar Creek acquisition;
charges or other liabilities relating to the Cedar Creek acquisition;
variations in the performance of the financial markets, including the credit markets; and
other factors described herein and in Item 1A of our Annual Report on Form 10-K for the year ended December 30, 2017, as filed with the SEC and as supplemented in the Company’s quarterly report on Form 10-Q for the quarters ended March 31, 2018, and June 30, 2018.
Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.
Executive Level Overview
Background
We are a leading distributor of building and industrial products in the U.S. We are headquartered in Atlanta, Georgia, with executive offices located at 4300 Wildwood Parkway, Atlanta, Georgia, and we operate our distribution business through a broad network of distribution centers. We serve many major metropolitan areas in the U.S. and deliver building and industrial products to a variety of wholesale and retail customers. We distribute products in two principal categories: structural products and specialty products. Structural products include plywood, oriented strand board, rebar and remesh, lumber and other wood products primarily used for structural support, walls, and flooring in construction projects. Structural products represented approximately 45 percent of our year-to-date fiscal 2018 net sales. Specialty products include exterior roofing, insulation, moulding, engineered wood products, vinyl products (used primarily in siding), metal products (excluding rebar and remesh), spruce and cedar. Specialty products accounted for approximately 55 percent of our year-to-date fiscal 2018 net sales. 
Recent Developments
Acquisition of Cedar Creek
On April 13, 2018, we completed our previously announced acquisition of Cedar Creek for a preliminary aggregate purchase price of approximately $361.8 million. As a result of the acquisition, we increased the number of our distribution facilities to approximately 70 facilities, and increased the number of our full-time employees to over 2,500.
The assets acquired and liabilities assumed and the results of operations of the acquired business are included in our consolidated results since April 13, 2018.
Revolving Credit Facility
On April 13, 2018, in connection with the acquisition of Cedar Creek, we amended and restated our Revolving Credit Facility to increase the aggregate commitments to $600.0 million (an increase of $265.0 million). The Amended Revolving Credit Facility also provides for an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to $150.0 million, subject to certain conditions, including lender consent. A portion of the proceeds from the Revolving Credit Facility were used to fund the purchase price for Cedar Creek, transaction costs in connection with the amendment and restatement of the Revolving Credit Facility, and transaction costs in connection with the acquisition of Cedar Creek.
Term Loan Facility
On April 13, 2018, in connection with the acquisition of Cedar Creek, we entered into the Term Loan Agreement with HPS and other financial institutions as party thereto. The Term Loan Agreement provides for a $180.0 million Term Loan Facility secured substantially by all our assets. The proceeds from the Term Loan were used to fund a portion of the purchase price for Cedar Creek, and to fund transaction costs of the Term Loan and transaction costs in connection with the acquisition of Cedar Creek.

19




Industry Conditions
Many of the factors that cause our operations to fluctuate are seasonal or cyclical in nature. Our operating results have historically been correlated with the level of single-family residential housing starts in the U.S. At any time, 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, importantly, consumer confidence. Since 2011, the U.S. housing market has shown steady improvement. Recent data as of September 29, 2018 on single-family residential housing starts and permits continue to suggest potential near-term challenges, but we continue to believe the housing market improvement trend will continue in the long term, and that we are well-positioned to support our customers.
Our operating results are also affected by commodity pricing, and during the third quarter of 2018 the industry experienced a rapid decline in commodity prices, including with respect to panels and framing lumber. The decline negatively impacted our financial results, particularly our margins. We continue to closely monitor these pricing trends, and will work to manage our business, inventory levels, and costs, accordingly.
Results of Operations
The following table sets forth our results of operations for the third quarter of fiscal 2018 and fiscal 2017:
(Dollars in thousands)
Third Quarter of Fiscal 2018
 
% of
Net
Sales
 
Third Quarter of Fiscal 2017
 
% of
Net
Sales
Net sales
$
859,776

 
100.0%
 
$
479,318

 
100.0%
 
 
 
 
 
 
 
 
Gross profit
91,755

 
10.7%
 
60,545

 
12.6%
Selling, general, and administrative
87,692

 
10.2%
 
47,088

 
9.8%
Gains from sales of property

 
—%
 

 
—%
Depreciation and amortization
8,068

 
0.9%
 
2,249

 
0.5%
Operating income (loss)
(4,005
)
 
(0.5)%
 
11,208

 
2.3%
Interest expense
13,273

 
1.5%
 
5,670

 
1.2%
Other income, net
(94
)
 
—%
 
(271
)
 
(0.1)%
Income (loss) before provision for
(benefit from) income taxes
(17,184
)
 
(2.0)%
 
5,809

 
1.2%
Provision for (benefit from) income taxes
(7,288
)
 
(0.8)%
 
123

 
—%
Net income (loss)
$
(9,896
)
 
(1.2)%
 
$
5,686

 
1.2%

The following table sets forth our results of operations for the nine-month periods of fiscal 2018 and fiscal 2017:
(Dollars in thousands)
First Nine Months of
Fiscal 2018[1]
 
% of
Net
Sales
 
First Nine Months of Fiscal 2017
 
% of
Net
Sales
Net sales
$
2,190,215

 
100.0%
 
$
1,381,927

 
100.0%
 
 
 
 
 
 
 
 
Gross profit
250,731

 
11.4%
 
175,525

 
12.7%
Selling, general, and administrative
238,655

 
10.9%
 
149,290

 
10.8%
Gains from sales of property

 
—%
 
(6,700
)
 
(0.5)%
Depreciation and amortization
18,177

 
0.8%
 
6,865

 
0.5%
Operating income (loss)
(6,101
)
 
(0.3)%
 
26,070

 
1.9%
Interest expense
33,947

 
1.5%
 
16,279

 
1.2%
Other income, net
(282
)
 
—%
 
(549
)
 
—%
Income (loss) before provision for
(benefit from) income taxes
(39,766
)
 
(1.8)%
 
10,340

 
0.7%
Provision for (benefit from) income taxes
(7,885
)
 
(0.4)%
 
832

 
0.1%
Net income (loss)
$
(31,881
)
 
(1.5)%
 
$
9,508

 
0.7%

20




____________________________ 
[1]The first nine-months of fiscal 2018 includes incremental operating results for Cedar Creek from April 13, 2018, to September 29, 2018.

The following table sets forth net sales by product category for the three- and nine-month periods of fiscal 2018 and 2017:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
[1] 
September 30, 2017
Structural products
$
387,347

 
$
228,424

 
$
1,016,806

 
$
633,036

Specialty products
481,946

 
254,476

 
1,185,332

 
758,788

Other[2]
(9,517
)
 
(3,582
)
 
(11,923
)
 
(9,897
)
Net sales
$
859,776

 
$
479,318

 
$
2,190,215

 
$
1,381,927

________________________
[1]Fiscal 2018 includes incremental operating results for Cedar Creek from April 13, 2018, to September 29, 2018.
[2] ”Other” includes unallocated allowances, and discounts. Beginning third quarter 2018 allowances and discounts are allocated to product categories where available. Prior year and nine months ended periods have been updated for this presentation.
The following table sets forth gross profit and gross margin percentages by product category for the three- and nine-month periods of fiscal 2018 and 2017:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29, 2018
 
September 30, 2017
 
September 29, 2018 [1]
 
September 30, 2017
Structural products
$
21,720

 
$
21,199

 
$
83,046

 
$
58,489

Specialty products
74,502

 
39,326

 
183,516

 
115,586

Other[2]
(4,467
)
 
20

 
(15,831
)
 
1,450

Gross profit
$
91,755

 
$
60,545

 
$
250,731

 
$
175,525

Gross margin percentage by category
 

 
 

 
 

 
 

Structural products
5.6
%
 
9.3
%
 
8.2
%
 
9.2
%
Specialty products
15.5
%
 
15.5
%
 
15.5
%
 
15.2
%
Total gross margin percentage
10.7
%
 
12.6
%
 
11.4
%
 
12.7
%
____________________
[1]Fiscal 2018 includes incremental operating results for Cedar Creek from April 13, 2018, to September 29, 2018.
[2] ”Other” includes adjustment for lower of cost or net realizable value of $5.2 million for the three- and nine- month periods, inventory acquisition step-up charge of $0.8 million for the three months ended September 29, 2018, $11.8 million for the nine months ended September 29, 2018, unallocated allowances and discounts. Beginning third quarter 2018 allowances and discounts are allocated to product categories where available. Prior year and nine months ended periods have been updated for this presentation.
Third Quarter of Fiscal 2018 Compared to Third Quarter of Fiscal 2017
Net sales.  For the third quarter of fiscal 2018, net sales increased 79.4 percent, or $380.5 million, compared to the third quarter of fiscal 2017. Sales growth was largely driven by the acquisition of Cedar Creek and the inclusion of Cedar Creek’s sales revenue of 348.6 million in the third quarter of 2018, versus the exclusion of such sales results during the comparable period of the prior year.
Gross profit and gross margin.  For the third quarter of fiscal 2018, gross profit increased by $31.2 million, or 51.5 percent, with gross margin of 10.7 percent, compared to 12.6 percent in the third quarter of fiscal 2017. The increase in gross profit was due to the acquisition of Cedar Creek, while the decrease in gross margin percentage was primarily driven by declining commodity pricing during the current period, as well as a lower of cost or net realizable value adjustment on inventory of $5.2 million and acquisition related inventory step-up charges of $0.9 million.
Selling, general, and administrative expenses.  The increase in selling, general, and administrative expenses of 86.2 percent, or $40.6 million, for the third quarter of fiscal 2018, compared to the third quarter of fiscal 2017, is primarily due to: (i) the acquisition of Cedar Creek and the inclusion of expenses from the acquired business for the third

21




quarter of 2018, versus the comparable period of the prior year; (ii) $3.8 million in charges for legal, professional and other integration costs related to the Cedar Creek acquisition; and (iii) $6.5 million in costs related to multi-employer pension plan withdrawal.
Depreciation and amortization expense. For the third quarter of fiscal 2018, depreciation and amortization expense increased by $5.8 million to $8.1 million due to the acquisition of Cedar Creek, which resulted in a higher depreciable asset base and the addition of amortizable intangible assets. During the third quarter of fiscal 2018 Cedar Creek added $3.3 million and $2.1 million to our depreciation and amortization expense, respectively.
Interest expense. Interest expense increased by $7.6 million for the third quarter of fiscal 2018, compared to the third quarter of fiscal 2017. The increase was largely attributable to a higher average debt balance over the period, coupled with a higher average interest rate on outstanding debt. We increased our outstanding debt to finance the acquisition of Cedar Creek, incurred transaction costs that are amortized as interest expense, and incurred capital lease interest of $3.7 million, versus $0.6 million during the comparable period of the prior year.
Provision for income taxes. Our effective tax rate was 42.4 percent and 2.1 percent for the third quarter of fiscal 2018 and 2017, respectively. The effective tax rate for the third quarter of fiscal 2018 was impacted by: (i) the inclusion of Cedar Creek’s operations from April 13, 2018, to September 29, 2018; (ii) the permanent addback of certain nondeductible expenses including transaction costs related to the Cedar Creek acquisition; (iii) the discrete tax benefit of $0.6 million for stock vesting; and (iv) the effect of the valuation allowance for separate company state income tax losses generated during the third quarter of fiscal 2018.  The effective tax rate for the third quarter of fiscal 2017 was reduced by the utilization of our net operating loss deferred tax asset and the corresponding release of the valuation allowance due to net income generated during the third quarter of fiscal 2017.  The effect of the valuation allowance for the third quarter of fiscal 2017 was impacted by alternative minimum tax and state income taxes recorded on a separate company basis.

Net income (loss). Net income (loss) was substantially impacted by the factors described above including: (i) higher selling, general, and administrative expenses resulting from the acquisition of Cedar Creek and related transaction fees; (ii) higher depreciation and amortization expenses due to the increase in depreciable assets and the addition of amortizable intangible assets; and (iii) increased interest expense due to higher interest rates on outstanding debt and higher average outstanding loan balances.
First Nine Months of Fiscal 2018 Compared to First Nine Months of Fiscal 2017
Net sales.  For the first nine months of fiscal 2018, net sales increased 58.5 percent, or $808.3 million, compared to the first nine months of fiscal 2017. Sales growth was largely driven by the acquisition of Cedar Creek and the inclusion of Cedar Creek’s sales revenue of $706.6 million from April 13, 2018, to September 29, 2018, versus the exclusion of such sales results during the comparable period of the prior year.
Gross profit and gross margin.  For the first nine months of fiscal 2018, gross profit increased by $75.2 million, or 42.8 percent, with gross margin of 11.4 percent, compared to 12.7 percent for the first nine months of fiscal 2017. Gross margin was negatively impacted by the acquisition related inventory step-up charge of $11.8 million, the lower of cost or net realizable value adjustment on inventory of $5.2 million, and declining commodity pricing during the current period.
Selling, general, and administrative expenses.  The increase in selling, general, and administrative expenses of 59.9 percent, or $89.4 million, for the first nine months of fiscal 2018, compared to the first nine months of fiscal 2017 was primarily due to: (i) the acquisition of Cedar Creek and the inclusion of expenses from the acquired business from April 13, 2018, to September 29, 2018, versus the comparable period of the prior year; (ii) $19.1 million in charges for legal, professional and other integration costs related to the Cedar Creek acquisition; and (iii) $14.7 million in expenses related to cash-settled stock appreciation rights and other share based compensation in fiscal 2018.
Gains from sales of property. Gains from sales and leaseback of property in the first nine months of fiscal 2018 were deferred, due to the rules of accounting for sale and leaseback transactions, and are amortized as a credit to selling, general, and administrative expenses in the amount of approximately $1.3 million per fiscal quarter. The accounting treatment of gains from sale and leaseback transactions differs from that of sale transactions with no leaseback, as sales of property without leaseback are allowed immediate and full gain recognition in the period of the sale. Sales of property with no leaseback in the first nine months of fiscal 2017 resulted in gains recognized of $6.7 million.

22




Depreciation and amortization expense. For the first nine months of fiscal 2018, depreciation and amortization expense increased by $11.3 million to $18.2 million due to the acquisition of Cedar Creek, which resulted in a higher depreciable asset base and the addition of depreciable intangible assets. During the first nine months of fiscal 2018, Cedar Creek added $6.2 million and $4.0 million to our depreciation and amortization expense, respectively.
Interest expense. Interest expense increased by $17.7 million for the first nine months of fiscal 2018, compared to the first nine months of fiscal 2017. The increase was largely attributable to a higher average debt balance over the period, coupled with a higher average interest rate on outstanding debt. We increased our outstanding debt to finance the acquisition of Cedar Creek and incurred transaction costs that are amortized as interest expense. During the nine months ended September 29, 2018, we incurred debt modification fees of $2.2 million related to the mortgage, and capital lease interest of $9.5 million during the first nine months of fiscal 2018 versus $1.2 million during the comparable period of fiscal 2017, partially offset by a decrease in mortgage interest expense of $3.0 million.
Provision for income taxes. Our effective tax rate was 19.8 percent and 8.0 percent for the first nine months of fiscal 2018 and 2017, respectively. The effective tax rate for the first nine months of fiscal 2018 was impacted by: (i) the inclusion of Cedar Creek’s operations from April 13, 2018, to September 29, 2018; (ii) the permanent addback of certain nondeductible expenses including transaction costs related to the Cedar Creek acquisition; and (iii) the effect of the valuation allowance for separate company state losses. The effective tax rate for the first nine months of fiscal 2017 was reduced by the utilization of our net operating loss deferred tax asset and the corresponding release of the valuation allowance due to net income generated during the first nine months of fiscal 2017.  The effect of the valuation allowance for the first nine months of fiscal 2017 was impacted by alternative minimum tax and state income taxes recorded on a separate company basis.
Net income (loss). Net income (loss) was substantially impacted by the factors described above including: (i) higher selling, general and administrative expenses resulting from the acquisition of Cedar Creek and related transaction fees totaling $19.1 million; (ii) higher depreciation and amortization expenses due to the increase in depreciable assets and the addition of amortizable intangible assets; (iii) increased interest expense due to higher interest rates on outstanding debt and higher average outstanding loan balances as we increased borrowings on our Revolving Credit Facility and added a new Term Loan Facility; and (iv) $14.7 million of additional expense recognized for cash-settled stock appreciation rights and other share based compensation.

Seasonality
We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors common in the building products distribution industry. The first and fourth fiscal quarters are typically our slowest quarters, due to the impact of poor weather on the construction market. Our second and third fiscal quarters are typically our strongest quarters, reflecting a substantial increase in construction, due to more favorable weather conditions. Our working capital generally increases in the fiscal second and third quarters, reflecting increased seasonal demand.
Liquidity and Capital Resources
We expect our primary sources of liquidity to be cash flows from sales in the normal course of our operations and borrowings under our Revolving Credit Facility. We expect that these sources will fund our ongoing cash requirements for the foreseeable future. We believe that sales in the normal course of our operations and amounts currently available from our Revolving Credit Facility and other sources will be sufficient to fund our routine operations, including working capital requirements, for at least the next 12 months.
Long-Term Debt
As of September 29, 2018, and December 30, 2017, long-term debt consisted of the following:

23




 
  
 
  
September 29,
 
  December 30,  
(In thousands)
  
      Maturity Date      
  
2018
 
2017
Revolving Credit Facility (net of discounts and debt issuance
costs of $6.2 million and $3.1 million at September 29, 2018
and December 30, 2017, respectively)
  
October 10, 2022
   
   $
409,112

   
   $
179,569

Mortgage Note Payable (net of discounts and debt issuance
costs of $0 million and $0.8 million at September 29, 2018
and December 30, 2017, respectively)
 
NA
 
 

 
 
97,108

Term Loan Facility (net of discounts and debt issuance costs
of $7.1 million and $0 million at September 29, 2018
and December 30, 2017, respectively)
  
October 13, 2023
   
 
172,004

   
 

Total debt
  
 
   
 
581,116

   
 
276,677

Less: current portion of long-term debt
  
 
   
 
(1,736
)
   
 

Long-term debt, net
  
 
   
$
579,380

   
$
276,677

Revolving Credit Facility
On April 13, 2018, we amended and restated our Revolving Credit Facility to provide for a senior secured revolving loan and letter of credit facility of up to $600 million and an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to $150 million. If we obtain the full amount of the additional increases in commitments, the Revolving Credit Facility will allow borrowings of up to $750 million. Borrowings under the Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the Revolving Credit Agreement). Letters of credit in an aggregate amount of up to $30 million are also available under the Revolving Credit Agreement, which would reduce the amount of the revolving loans available under the Revolving Credit Facility. The Revolving Credit Agreement provides for interest at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.75 percent to 2.25 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on LIBOR, or (ii) the administrative agent’s base rate plus a margin ranging from 0.75 percent to 1.25 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate.
If excess availability falls below the greater of (i) $50 million and (ii) 10 percent of the lesser of (a) the borrowing base and (b) the maximum permitted credit at such time, the Revolving Credit Agreement requires maintenance of a fixed charge coverage ratio of 1.0 to 1.0 until excess availability has been at least the greater of (i) $50 million and (ii) 10 percent of the lesser of (a) the borrowing base and (b) the maximum permitted credit at such time for a period of 30 consecutive days.
As of September 29, 2018, we had outstanding borrowings of $415.4 million and excess availability of $122.8 million under our Revolving Credit Facility with a weighted average interest rate of 4.2 percent. As of December 30, 2017 our principal balance was $182.7 million, excess availability was $63.3 million and our stated interest rate was 4.2 percent.
Term Loan Facility
On April 13, 2018, we entered into the Term Loan Agreement with HPS and certain other financial institutions as party thereto. The Term Loan Agreement provides for a Term Loan Facility of $180 million secured by substantially all of our assets. Borrowings under the Term Loan Agreement may be made as Base Rate Loans or Eurodollar Rate Loans. The Base Rate Loans will bear interest at the rate per annual equal to (i) the greatest of the (a) U.S. prime lending rate published in The Wall Street Journal, (b) the Federal Funds Effective Rate plus 0.50 percent, and (c) the sum of the Adjusted Eurodollar Rate of one month plus 1.00 percent, provided that the Base Rate shall at no time be less than 2.00 percent per annum; and (ii) plus the Applicable Margin, as described below. Eurodollar Rate Loans will bear interest at the rate per annum equal to (i) the ICE Benchmark Administration LIBOR Rate, provided that the Adjusted Eurodollar Rate shall at no time be less than 1.00 percent per annum; plus (ii) the Applicable Margin. The Applicable Margin will be 6.00 percent with respect to Base Rate Loans and 7.00 percent with respect to Eurodollar Rate Loans.

24




The Term Loan Agreement requires maintenance of a total net leverage ratio of 8.25 to 1.00 for the fiscal quarter ending September 29, 2018, and such required covenant level reduces over the term of the Term Loan Facility as set forth in the Term Loan Agreement.
As of September 29, 2018, we had outstanding borrowings of $179.1 million under our Term Loan Credit Facility and a stated interest rate of 9.2 percent per annum.
Mortgage Payoff and Capital Lease Commitments
On January 10, 2018, we completed sale-leaseback transactions on four distribution centers. We sold these properties for gross proceeds of $110.0 million. As a result of the transactions, we recognized capital lease assets and obligations totaling $95.1 million on these properties, and a total deferred gain of $83.9 million, which will be amortized over the lives of the applicable leases, in accordance with U.S. GAAP. The net proceeds received from the transactions were used to pay the remaining balance of our mortgage of $97.8 million, in its entirety, in the first quarter of fiscal 2018.
Our total capital lease commitments, which substantially relate to leases of property, totaled $153.2 million as of September 29, 2018.
Sources and Uses of Cash
Operating Activities
Net cash used in operating activities for the first nine months of fiscal 2018 was $59.3 million, compared to net cash used in operating activities of $38.3 million in the first nine months of fiscal 2017. The use of net cash in operating activities was substantially higher due to increased working capital, as well as transaction costs related to the Cedar Creek acquisition. Accounts receivable increased by $151.4 million during the first nine months of fiscal 2018. Inventory increased by $213.7 million in the first nine months of fiscal 2018, which reflects the addition of the Cedar Creek business. The increases in accounts receivable and inventories were partially offset by increases in accounts payable.
Investing Activities
Net cash used in investing activities for the first nine months of fiscal 2018 was $247.0 million compared to net cash provided by investing activities of $27.2 million in the first nine months of fiscal 2017. The net cash used primarily related to the $353.1 million net cash paid for the acquisition of Cedar Creek during the second quarter of 2018, and the proceeds from the sale of assets of $108 million.
Financing Activities
Net cash provided by financing activities totaled $309.2 million for the first nine months of fiscal 2018, primarily reflecting the increase in our Revolving Credit Facility and the addition of the new Term Loan Facility, partially offset by $503.6 million in repayments of our Revolving Credit Facility, debt issuance costs relating to our Revolving Credit Facility and Term Loan Facility, and a $97.8 million pay-off of our mortgage loan.

25




Operating Working Capital [1] 
Selected financial information (in thousands)
 
September 29, 2018
 
December 30, 2017
 
September 30, 2017
Current assets:
 
 
 
 
 
Cash
$
7,630

 
$
4,696

 
$
5,590

Receivables, less allowance for doubtful accounts
285,489

 
134,072

 
173,748

Inventories, net
401,222

 
187,512

 
206,788

Other current assets
44,947

 
17,124

 
21,063

Total current assets
$
739,288

 
$
343,404

 
$
407,189

 
 
 
 
 
 
Current liabilities:
 

 
 

 
 
Accounts payable
$
153,814

 
$
70,623

 
$
97,606

Bank overdrafts
36,264

 
21,593

 
21,641

Accrued compensation
7,611

 
9,229

 
8,491

Current maturities of long-term debt, net of discount
1,736

 

 
54,521

Capital leases - short-term
8,058

 
3,552

 
3,423

Real estate deferred gains - short-term
5,330

 
1,836

 
1,836

Other current liabilities
21,528

 
10,772

 
9,822

Total current liabilities
$
234,341

 
$
117,605

 
$
197,340

 
 
 
 
 
 
Operating working capital
$
506,683

 
$
225,799

 
$
264,370

___________________________ 
[1] Operating working capital is defined as current assets less current liabilities plus the current portion of long-term debt.
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. Management of operating working capital helps us monitor our progress in meeting our goals to enhance our return on working capital assets.
Operating working capital of $506.7 million at September 29, 2018, compared to $225.8 million as of December 30, 2017, increased on a net basis by approximately $280.9 million, primarily as a result of the acquisition of Cedar Creek. Accounts receivable and inventory increased by $151.4 million and $213.7 million, respectively, offset by an increase in accounts payable of $83.2 million.
Operating working capital increased from September 30, 2017, to September 29, 2018, by $242.3 million, primarily driven by the acquisition of Cedar Creek in the second quarter of 2018.
Critical Accounting Policies
The preparation of our consolidated financial statements and related disclosures in conformity with GAAP requires our management to make judgments and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. There have been no material changes to our critical accounting policies from the information provided in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.

26




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a Smaller Reporting Company, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Our management performed an evaluation, as of the end of the period covered by this report on Form 10-Q, under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
During the period covered by this report, there have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On April 13, 2018, we acquired Cedar Creek Holdings Inc. in a business combination. We are currently in the process of integrating policies, processes, information technology systems and other components of internal controls over financial reporting of the combined business. We believe that we will be able to maintain sufficient controls over the substantive results of financial reporting of Cedar Creek and its subsidiaries, but because of the size, complexity and timing of the integration, the internal controls over financial reporting of Cedar Creek have been excluded from management’s assessment of the Company’s internal control over financial reporting for the quarter ended September 29, 2018, and will be excluded for the year ended December 29, 2018.




27




PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the third quarter of fiscal 2018, there were no material changes to our legal proceedings as disclosed in our Annual Report on Form 10-K for the year ended December 30, 2017. Additionally, we are, and from time to time may be, a party to routine legal proceedings incidental to the operation of our business. The outcome of any pending or threatened proceedings is not expected to have a material adverse effect on our financial condition, operating results, or cash flows, based on our current understanding of the relevant facts. Legal expenses incurred related to these contingencies are generally expensed as incurred.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 30, 2017, as supplemented by the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2018.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company’s common stock repurchase activity for each month of the quarter ended September 29, 2018:
 
  
 
 
  Total Number  
  
 
 
 
 
 
 
Shares
Average Price
Period
 
 
Purchased[1]
  Paid Per Share  
July 1 - August 4, 2018
 
31,297

  
$
34.12

August 5 - September 1, 2018
 

  
$

September 2 - September 29, 2018
 
2,879

  
$
31.49

Total
 
 
34,176

  
 
 
 
 
 
 
 
 
 
 
[1] 
The Company did not repurchase any of its equity securities during the period covered by this report pursuant to any publicly announced plan or program, and no such plan or program is presently in effect. All purchases reflected in the table above pertain to purchases of common stock by the Company in connection with tax withholding obligations of the Company’s employees upon the vesting of such employees’ restricted stock awards.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.

28




ITEM 6. EXHIBITS

Exhibit
Number
 
Description
31.1
*
31.2
*
32.1
**
32.2
**
101.Def
 
Definition Linkbase Document.
101.Pre
 
Presentation Linkbase Document.
101.Lab
 
Labels Linkbase Document.
101.Cal
 
Calculation Linkbase Document.
101.Sch
 
Schema Document.
101.Ins
 
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
 
 
 
 
*
Filed herewith.
 
**
Exhibit is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended.


29




SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.