What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-28 compared with 2020-08-03 · 137 added, 144 removed, 197 unchanged (59% of the section changed)

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We distribute products in two principal categories:

structural products and specialty products.

Structural products include primarily plywood, oriented strand board, rebar and remesh, lumber, spruce and other wood products primarily used for structural support in construction projects.

Structural products represented between 31 percent and 37 percent of our net sales over the past twelve months.

specialty products and structural products.

Specialty products include primarily engineered wood products, moulding, siding and trim, cedar, metal products (excluding rebar and remesh), and insulation.

Specialty products represented between 55 percent and 65 percent of our net sales over the past twelve months.

Structural products include primarily plywood, oriented strand board, rebar and remesh, lumber, spruce and other wood products primarily used for structural support in construction projects.

Structural products represented between 35 percent and 45 percent of our net sales over the past twelve months.

On April 13, 2018, we completed the acquisition of Cedar Creek.

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In response to the pandemic, governmental authorities around the world implemented numerous measures to combat the virus, such as travel bans and restrictions, quarantines, “shelter-in-place” orders, and business shutdowns.

Over the course of the second quarter, these measures were successful in containing and reducing the spread of the COVID-19 virus in many locations, and many governmental authorities have begun to ease restrictions and execute plans to re-open businesses.

However, the rates of infection, hospitalization, and mortality associated with the virus continue to fluctuate, and in some cases, they have increased, in many U.S.

These measures have been successful to various degrees in containing and reducing the spread of the COVID-19 virus in many locations, and many governmental authorities have eased restrictions and executed plans to re-open businesses.

However, the rates of infection, hospitalization, and mortality associated with the virus continue to fluctuate, and the rates have increased or rebounded in many U.S.

states and localities, causing governmental authorities to consider new or reinstated mitigation measures.

The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional, and national economies.

We began preparations for the pandemic in late February, and in early March we implemented policies and procedures to protect our associates, serve our customers, and support our suppliers.

We also moved quickly to develop plans and take actions designed to give us financial and operating flexibility during the pandemic and over the course of the second quarter we continued to execute on those plans.

We also moved quickly to develop and execute plans and take actions designed to give us financial and operating flexibility during the pandemic.

To date, our business has been designated as “essential” in all states in which we operate, and we have continued to operate and provide service to our customers and suppliers.

Also, notably, we have not experienced any significant supply chain disruptions as a result of the pandemic, and our supply chain has remained intact in all material respects.

During the quarter, our cross-functional COVID-19 Disaster Response Team implemented safety and hygiene protocols consistent with the Centers for Disease Control and Prevention (“CDC”) and local guidance, including mandating the use of face coverings where their use is required by local order;

implementing enhanced cleaning and disinfecting procedures;

using social distancing guidelines and physical separation where required;

establishing more restrictive travel policies;

implementing no-contact rules and visitor guidelines;

implementing enhanced safety procedures for our drivers such as including contactless delivery procedures;

using mobile work arrangements for employees whose work can be done remotely;

and developing rapid response procedures for presumptive and confirmed COVID-19 cases at any of our locations.

We also took action on plans designed to reduce our cost structure, strengthen our balance sheet, and further increase liquidity in response to the pandemic.

We took steps to reduce operating costs and optimize liquidity by pausing new hiring;

limiting non-essential spending;

closely monitoring and reviewing credit lines, open orders, overpaid accounts, and receivables aging;

making substantial headcount and variable operating expense reductions in local markets correlating to demand declines;

closely assessing and monitoring inventory availability and purchasing;

placing approximately 15 percent of our corporate workforce on furlough, and making targeted reductions in corporate headcount;

utilizing certain provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act;

and ongoing review and monitoring of payroll and branch expenses.

some of these actions are temporary in nature, we expect to sustain many of the cost reduction actions long-term, and we continue to remain focused on our cost structure and liquidity as the pandemic continues.

Overall, the impact of the pandemic on our business during the second quarter of 2020 was not as significant as we originally anticipated.

Net sales and gross margin declined in April relative to the prior year period, but the commodity market for structural products began to stabilize and rebound in May and June.

For the second quarter of 2020, net sales declined $7.7 million , primarily driven by the 2019 discontinuation of a siding product, and net income improved $0.4 million compared to the second quarter of 2019.

For the first six months of 2020, net sales increased $15.7 million and net income improved $6.3 million as we moved from a net loss for the first six months of 2019 to net income for the first six months of 2020.

The extent of the impact of the pandemic on our business and sales for the second half of 2020 will depend on future developments, including, among others, the duration of the pandemic, the success of actions taken by governmental authorities to contain the pandemic and address its impact, the success of local return to work and business reopening plans, and the impact the COVID-19 pandemic has on demand in the markets we service.

The trajectory of the pandemic continues to evolve rapidly, and we cannot predict the extent to which our financial condition, results of operations, or cash flows will ultimately be impacted.

During the recently completed quarter, we continued to practice safety and hygiene protocols consistent with the Centers for Disease Control and Prevention (“CDC”) and local guidance.

We also continued our efforts to reduce operating costs and optimize liquidity and took actions designed to sustain many of our first and second quarter cost reduction actions long-term.

Cost structure and liquidity will remain as areas of acute focus for us as the pandemic continues.

While the pandemic continued to impact many aspects of our business and operations during the quarter, that impact was offset by the recovery in single-family residential housing starts and the rapid escalation in wood-based commodity pricing.

Our net sales and gross margin increased, largely driven by the significant increase in wood-based commodity pricing over the course of the quarter.

For the third quarter of 2020, net sales increased $192.4 million and net income improved $62.2 million, compared to the third quarter of 2019.

For the first nine months of 2020, net sales increased $208.1 million and net income improved $68.5 million as we moved from a net loss for the first nine months of 2019 to net income for the first nine months of 2020.

The extent of the impact of the pandemic on our business and sales for the remaining three months of 2020 and into fiscal 2021 will depend on future developments, including, among others, the duration of the pandemic, the success of actions taken by governmental authorities to contain the pandemic and address its impact, the success of local return to work and business reopening plans, and the impact the COVID-19 pandemic has on demand in the markets we service.

The trajectory of the pandemic continues to evolve rapidly, and we cannot predict the extent to which our financial condition, results of operations,

or cash flows will ultimately be impacted.

We are closely monitoring the impact of the pandemic on industry conditions, the progress of local return to work and reopening plans, and any pandemic-related restrictions that may have an impact on our business.

Industry Conditions

Many of the factors that cause our operations to fluctuate have historically been seasonal or cyclical in nature and we expect that to continue.

Our operating results have historically been generally correlated with the level of single-family residential housing starts in the U.S.

Many of the factors that cause our operations to fluctuate have been seasonal or cyclical in nature and we expect that to continue.

Our operating results are affected by commodity markets, primarily in the markets for wood-based commodities that we classify as structural products.

After declining in the early part of April, lumber and panel commodity index prices significantly increased through the end of the third quarter, with the average prices for both more than doubling from the third quarter of 2019.

These market trends resulted in substantially favorable revenue and gross margin comparisons in the third quarter of 2020 for our structural products and our business as a whole.

Wood-based commodity index prices began to decline at the beginning of the fourth quarter as supply constraints show indications of abating.

We anticipate that lumber and panel index prices will generally continue to trend downward from their peak levels at the end of the third quarter.

Historically, our operating results have also been generally correlated with the level of single-family residential housing starts in the U.S.

However, 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 consumer confidence.

The COVID-19 pandemic had a significant negative effect on single family housing starts during the second quarter of 2020.

Census Bureau reported that single family housing starts were down 13 percent for the second quarter of 2020 compared to the second quarter of 2019.

However, the trend showed strong improvement over the course of the quarter.

Housing starts declined 23 percent in April, 15 percent in May, and 2 percent in June, all compared to the same months in 2019.

Additionally, July data from the National Association of Home Builders/Wells Fargo Housing Market Index shows a positive outlook in builder confidence in the market for newly built single-family homes.

Low interest rates, shortages in existing home inventory, and a growing trend toward relocating away from populated metropolitan areas to areas with single-family homes may help drive long-term improvement in single-family housing starts.

Our operating results are also affected by commodity pricing, primarily the markets for wood-based commodities that we classify as structural products.

After declining in the early part of April, lumber and panel prices increased for the balance of the quarter, staying at or above price levels from the second quarter of 2019.

These market trends resulted in favorable revenue comparisons and enhanced gross margins in the second quarter of 2020 for many of the structural products that we sell.

The COVID-19 pandemic has had a significant negative effect on single family housing starts during the first half of 2020.

However, housing starts have rebounded during the third quarter of 2020.

Census Bureau reported that single family housing starts were up 17 percent for the third quarter of 2020 compared to the third quarter of 2019.

During the quarter, housing starts grew 12 percent in July, 15 percent in August, and 24 percent in September, all compared to the same months in 2019.

Additionally, October data from the National Association of Home Builders/Wells Fargo Housing Market Index shows a record positive outlook in builder confidence in the market for newly built single-family homes.

Low interest rates, shortages in existing home inventory, and a potential growing trend toward relocating away from populated metropolitan areas to areas with single-family homes may help drive long-term improvement in single-family housing starts.

Factors That Affect Our Operating Results

Our results of operations and financial performance are influenced by a variety of factors, including the following:

the COVID-19 pandemic and other contagious illness outbreaks and their potential effects on our industry, suppliers and supply chains, and customers, our business, results of operations, cash flows, financial condition, and future prospects;

changes in the prices, supply and/or demand for products that we distribute;

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repair and remodeling activity;

general economic and business conditions in the U.S.;

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tariffs, anti-dumping and counter-vailing duties, anti-dumping charges, and similar import costs and restrictions;

and variations in the performance of the financial markets, including the credit markets.

variations in the performance of the financial markets, including the credit markets.

Results of Operations

The following table sets forth our results of operations for the second quarter of fiscal 2020 and fiscal 2019 :

Second Quarter of Fiscal 2020

Second Quarter of Fiscal 2019

(In thousands)

The following table sets forth our results of operations for the third quarter of fiscal 2020 and fiscal 2019:

Third Quarter of Fiscal 2020 % of

Sales Third Quarter of Fiscal 2019 % of

(In thousands) (In thousands)

Net sales $ 871,063 100.0% $ 678,665 100.0%

Gross profit 159,460 18.3% 93,713 13.8%

Selling, general, and administrative 78,992 9.1% 76,095 11.2%

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Interest expense, net 10,776 1.2% 13,409 2.0%

Other expense (income), net

Income before provision for income taxes

Other income, net (238) (0.0)% (317) (0.0)%

Income (loss) before provision for income taxes 70,918 8.1% (6,799) (1.0)%

Provision for income taxes 15,802 1.8% 244 0.0%

The following table sets forth our results of operations for the six -month periods of fiscal 2020 and fiscal 2019:

First Six Months of Fiscal 2020

First Six Months of 2019

(In thousands)

Net income (loss) $ 55,116 6.3% $ (7,043) (1.0)%

The following table sets forth our results of operations for the nine-month periods of fiscal 2020 and fiscal 2019:

First Nine Months of Fiscal 2020 % of

Sales First Nine Months of Fiscal 2019 % of

(In thousands) (In thousands)

Net sales $ 2,231,909 100.0% $ 2,023,814 100.0%

Gross profit 353,489 15.8% 273,925 13.5%

Selling, general, and administrative 222,306 10.0% 215,330 10.6%

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Interest expense, net 36,691 1.6% 40,527 2.0%

Other expense, net

Other income, net (58) (0.0)% (212) (0.0)%

Income (loss) before benefit from income taxes 75,238 3.4% (7,392) (0.4)%

Benefit from income taxes

Provision for income taxes 14,214 0.6% 69 0.0%

Net income (loss) $ 61,024 2.7% $ (7,461) (0.4)%

The following table sets forth net sales by product category for the three and six -month periods ending June 27, 2020 , and June 29, 2019 :

Three Months Ended

Six Months Ended

June 27, 2020

June 29, 2019

June 27, 2020

June 29, 2019

(In thousands)

The following table sets forth net sales by product category for the three and nine-month periods ending September 26, 2020, and September 28, 2019:

Three Months Ended Nine Months Ended

September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019

(In thousands) (In thousands)

Structural products $ 375,072 $ 225,689 $ 865,302 $ 646,646

Specialty products 495,991 452,976 1,366,607 1,377,168

The following table sets forth gross profit and gross margin percentages by product category for the three and six -month periods of fiscal 2020 and 2019 :

Three Months Ended

Six Months Ended

June 27, 2020

June 29, 2019

June 27, 2020

June 29, 2019

(Dollars in thousands)

Net sales $ 871,063 $ 678,665 $ 2,231,909 $ 2,023,814

The following table sets forth gross profit and gross margin percentages by product category for the three and nine-month periods of fiscal 2020 and 2019:

Three Months Ended Nine Months Ended

September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019

(Dollars in thousands) (Dollars in thousands)

Structural products $ 73,370 $ 20,229 $ 120,673 $ 56,284

Specialty products 86,090 73,484 232,816 217,641

Gross profit $ 159,460 $ 93,713 $ 353,489 $ 273,925

Gross margin percentage by category

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Specialty products 17.4 % 16.2 % 17.0 % 15.8 %

Second Quarter of Fiscal 2020 Compared to Second Quarter of Fiscal 2019

For the second quarter of fiscal 2020 , net sales decreased 1.1 percent , or $7.7 million , compared to the second quarter of fiscal 2019 .

The sales decrease was driven by the loss of $15.9 million of sales related to a siding program that was discontinued in conjunction with our Cedar Creek integration activities in the prior year, partially offset by an increase in sales volume for our structural products and commodity price inflation.

Total 18.3 % 13.8 % 15.8 % 13.5 %

Third Quarter of Fiscal 2020 Compared to Third Quarter of Fiscal 2019

For the third quarter of fiscal 2020, net sales increased 28.3 percent, or $192.4 million, compared to the third quarter of fiscal 2019.

The sales increase was primarily a result of wood-based commodity price inflation, partially offset by a slight decline in sales volume attributable to supply outages in structural products occurring toward the second half of the quarter.

Gross profit and gross margin.

For the second quarter of fiscal 2020 , gross profit increased by $6.7 million , or 7.1 percent , compared to the second quarter of fiscal 2019 , primarily due to improved gross margins on both our specialty and structural products businesses.

Gross margin during the same period was 14.4 percent , an increase compared to 13.3 percent in the second quarter of fiscal 2019 .

For the third quarter of fiscal 2020, gross profit increased by $65.7 million, or 70.2 percent, compared to the third quarter of fiscal 2019, primarily due to improved gross margins on both our specialty and structural products businesses.

Gross margin during the same period was 18.3 percent, an increase compared to 13.8 percent in the third quarter of fiscal 2019.

Selling, general, and administrative expenses.

The decrease in selling, general, and administrative expenses of 0.6 percent , or $0.4 million , for the second quarter of fiscal 2020 , compared to the second quarter of fiscal 2019 , is primarily due to decreases in our operational and logistics expenses, along with reductions in our fixed cost structure, partially offset by an increase in incentive compensation of approximately $4.0 million .

The increase in selling, general, and administrative expenses of 3.8 percent, or $2.9 million, for the third quarter of fiscal 2020, compared to the third quarter of fiscal 2019, is primarily due to an increase in variable incentive compensation of approximately $6.6 million and higher sales commissions of approximately $2.9 million, offset by reductions in our fixed cost structure, combined with decreases in our operational expenses.

Depreciation and amortization expense.

For the second quarter of fiscal 2020 , depreciation and amortization expense decreased by $0.4 million to $7.1 million due to a lower base of depreciable assets.

For the third quarter of fiscal 2020, depreciation and amortization expense decreased b y $0.5 million to $7.1 million due to a lower base of depreciable assets.

Gains from sales of property.

Gains from sales of property decreased by $9.8 million for the second quarter of fiscal 2020 , compared to the second fiscal quarter of 2019 , as we sold no property during the second quarter of 2020 .

Gains from sales of property increased by $8.6 million for the third quarter of fiscal 2020, compared to the third fiscal quarter of 2019, as we completed the sale and leaseback of our Denver facility in August 2020 and we sold no property during the third quarter of 2019.

Other operating expenses.

For the second quarter of fiscal 2020 , other operating expenses decreased by $2.0 million , or 50.3 percent , compared to the second quarter of fiscal 2019 , primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition, partially offset by severance expense incurred in relation to headcount reductions that occurred during the quarter.

For the third quarter of fiscal 2020, other operating expenses decreased by $3.2 million, or 83.9 percent, compared to the third quarter of fiscal 2019, primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition.

Interest expense, net.

Interest expense decreased by $2.2 million for the second quarter of fiscal 2020 , compared to the second quarter of fiscal 2019 .

The decrease was largely attributable to a decrease in the average debt balance, as well as a reduction in the variable LIBOR rate that is a component of the interest rate on the Revolving Credit Facility and Term Loan Facility.

Interest expense decreased by $2.6 million for the third quarter of fiscal 2020, compared to the third quarter of fiscal 2019.

The decrease was largely attributable to a decrease in the average bank debt balance, as well as a reduction in the variable LIBOR rate that is a component of the interest rate on the Revolving Credit Facility and Term Loan Facility.

Provision for income taxes.

Our effective tax rate was 33.9 percent and 27.2 percent for the second quarter of fiscal 2020 and 2019 , respectively.

Our effective tax rate for the second quarter of fiscal 2020 was impacted by (i) discrete tax expense of $0.4 million for a shortfall on restricted stock unit vesting, (ii) the permanent addback of certain nondeductible expenses, including meals and entertainment and officer’s compensation, and (iii) the effect of the partial valuation allowance for separate company state income tax losses and previously nondeductible interest under 163(j) of the IRC.

Our effective tax rate for the second quarter of fiscal 2019 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, and the effect of the partial valuation allowance for separate company state income tax losses.

Our effective tax rate was 22.3 percent and (3.6) percent for the third quarter of fiscal 2020 and 2019, respectively.

Our effective tax rate for the third quarter of fiscal 2020 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and officer’s compensation, and the effect of the partial valuation allowance for separate company state income tax losses and previously nondeductible interest under 163(j) of the IRC.

Our effective tax rate for the third quarter of fiscal 2019 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, and the effect of the partial valuation allowance for separate company state income tax losses and consolidated interest expense limitation, including $0.6 million in discrete tax expense related to prior periods.

In addition, we recorded discrete tax expense of $0.2 million for a shortfall on vesting of our restricted stock units, which was offset by a $0.2 million discrete tax benefit for claiming state tax credits.

Our net income improved over the prior year period due to increased gross margins and reduced costs.

First Six Months of Fiscal 2020 Compared to First Six Months of Fiscal 2019

For the first six months of fiscal 2020 , net sales increased 1.2 percent , or $15.7 million , compared to the first six months of fiscal 2019 .

The sales increase was driven by higher sales volumes and commodity price inflation, partially offset by the loss of $47.8 million of sales related to a siding program that was discontinued in conjunction with our Cedar Creek integration activities in the prior year.

Net income (loss).

Our net loss improved to net income from the prior year period due to increased gross margins resulting from wood-based commodity price inflation for our structural products and overall reduced costs.

First Nine Months of Fiscal 2020 Compared to First Nine Months of Fiscal 2019

For the first nine months of fiscal 2020, net sales increased 10.3 percent, or $208.1 million, compared to the first nine months of fiscal 2019.

The sales increase was driven by wood-based commodity price inflation and higher sales volume, partially offset by the loss of $50.5 million of sales related to a siding program that was discontinued in conjunction with our Cedar Creek integration activities in the prior year.

Gross profit and gross margin.

For the first six months of fiscal 2020 , gross profit increased by $13.8 million , or 7.7 percent , compared to the first six months of fiscal 2019 , primarily due to increased sales revenue and improved gross margins on both our specialty and structural products businesses.

Gross margin during the same period was 14.3 percent , an increase compared to 13.4 percent in the first six months of fiscal 2019 .

For the first nine months of fiscal 2020, gross profit increased by $79.6 million, or 29.0 percent, compared to the first nine months of fiscal 2019, primarily due to increased sales revenue and improved gross margins on both our specialty and structural products businesses from price inflation and higher sales volume.

Gross margin during the same period was 15.8 percent, an increase compared to 13.5 percent in the first nine months of fiscal 2019.

Selling, general, and administrative expenses.

The increase in selling, general, and administrative expenses of 2.9 percent , or $4.1 million , for the first six months of fiscal 2020 , compared to the first six months of fiscal 2019 , is primarily due to an increase in incentive compensation of approximately $4.0 million .

The increase in selling, general, and administrative expenses of 3.2 percent, or $7.0 million, for the first nine months of fiscal 2020, compared to the first nine months of fiscal 2019, is primarily due to an increase in variable incentive compensation of approximately $10.0 million and higher sales commission of approximately $4.5 million, offset by reductions in our fixed cost structure, combined with decreases in our operational expenses.

Depreciation and amortization expense.

For the first six months of fiscal 2020 , depreciation and amortization expense decreased by $0.1 million to $14.7 million compared to the first six months of fiscal 2019 , due to a lower base of depreciable assets.

For the first nine months of fiscal 2020, depreciation and amortization expense decreased by $0.6 million to $21.8 million compared to the first nine months of fiscal 2019, due to a lower base of depreciable assets.

Gains from sales of property.

Gains from sales of property decreased by $9.2 million for the first six months of fiscal 2020 , compared to the first six months of fiscal 2019 , due to only minor adjustments to previous transactions being recorded in 2020.

Gains from sales of property decreased by $0.6 million for the first nine months of fiscal 2020, compared to the first nine months of fiscal 2019, due to lower net proceeds from property sales in the current year period.

Other operating expenses.

For the first six months of fiscal 2020 , other operating expenses decreased by $3.1 million , or 33.9 percent , compared to the first six months of fiscal 2019 , primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition, partially offset by severance expense incurred in relation to headcount reductions that occurred during the quarter.

For the first nine months of fiscal 2020, other operating expenses decreased by $6.3 million, or 48.4 percent, compared to the first nine months of fiscal 2019, primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition, partially offset by severance expense incurred in relation to headcount reductions that occurred throughout the period.

Interest expense.

Interest expense decreased by $1.2 million for the first six months of fiscal 2020 , compared to the first six months of fiscal 2019 .

Benefit from income taxes.

Our effective tax rate was (36.8) percent and 29.5 percent for the first six months of fiscal 2020 and 2019 , respectively.

Our effective tax rate for the first six months of fiscal 2020 was impacted by (i) the discrete tax benefit of $3.9 million resulting from the release of the valuation allowance associated with the nondeductible interest expense under IRC Section 163(j) as a result of the CARES Act changing the allowable percentage from 30 percent of adjusted taxable income to 50 percent of adjusted taxable income, (ii) recording discrete tax expense of $0.4 million for a shortfall on vesting of our restricted stock units, (iii) the permanent addback of certain nondeductible expenses, including meals and entertainment and nondeductible compensation, and (iv) the effect of the partial valuation allowance for separate company state income tax losses and previously nondeductible interest expense under Section 163(j) of the IRC.

Our effective tax rate for the first six months of fiscal 2019 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, and the effect of the partial valuation allowance for separate company state income tax losses.

Interest expense decreased by $3.8 million for the first nine months of fiscal 2020, compared to the first nine months of fiscal 2019.

Provision for income taxes.

Our effective tax rate was 18.9 percent and (0.9) percent for the first nine months of fiscal 2020 and 2019, respectively.

Our effective tax rate for the first nine months of fiscal 2020 was impacted by (i) the discrete tax benefit of $3.9 million resulting from the release of the valuation allowance associated with the nondeductible interest expense under IRC Section 163(j) as a result of the CARES Act changing the allowable percentage from 30 percent of adjusted taxable income to 50 percent of adjusted taxable income, (ii) recording discrete tax expense of $0.4 million for a shortfall on vesting of our restricted stock units, (iii) the permanent addback of certain nondeductible expenses, including meals and entertainment and nondeductible compensation, and (iv) the effect of the partial valuation allowance for separate company state income tax losses and previously nondeductible interest expense under Section 163(j) of the IRC.

Our effective tax rate for the first nine months of fiscal 2019 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, and the effect of the partial valuation allowance for separate company state income tax losses and consolidated interest expense limitations, including $0.6 million in discrete tax expense related to prior periods..

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Our net loss improved to net income from the prior year period due to higher sales, increased gross margins, and reduced costs associated with the acquisition of Cedar Creek.

Acquisition related costs declined from $11.3 million in the first nine fiscal months of 2019 to $1.8 million in the same period in 2020.

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 lower volume quarters, due to the impact of poor weather on the construction market.

The first and fourth fiscal quarters are typically our lower volume quarters, due to the impact of less favorable weather on the construction market.

Our second and third fiscal quarters are typically our higher volume quarters, reflecting an increase in construction, due to more favorable weather conditions.

Assuming no change in underlying inventory costs, our working capital generally increases in the fiscal second and third quarters, reflecting increased seasonal demand.

However, due to the COVID-19 pandemic, we could experience disruptions to our typical seasonality trends during the rest of 2020.

In past years, assuming no change in underlying inventory costs, our working capital has increased in the fiscal second and third quarters, reflecting general increases in seasonal demand.

During the fiscal second and third quarters of 2020, our inventory working capital balance decreased despite increasing commodity prices, reflecting enhancements in our working capital management throughout the year.

Due to the COVID-19 pandemic, it remains a possibility that we could experience changes to our typical seasonality trends during the rest of 2020 and into 2021.

Liquidity and Capital Resources

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We amended the Revolving Credit Facility on January 31, 2020, to provide that (i) the “Seasonal Period” will run from November 15, 2019, through July 15, 2020, for the calendar year 2019, and from December 15 of each calendar year through April 15 of each immediately succeeding calendar year for the calendar year 2020 and thereafter, and (ii) the measurement period in the definition of “Cash Dominion Event” will be five consecutive business days instead of three consecutive business days.

As of June 27, 2020 , we had outstanding borrowings of $322.2 million , excess availability of $138.1 million , and a weighted average interest rate of 2.6 percent under the Revolving Credit Facility.

As of September 26, 2020, we had outstanding borrowings of $263.0 million, excess availability of $202.1 million, and a weighted average interest rate of 2.5 percent under the Revolving Credit Facility.

As of December 28, 2019, our principal balance was $326.5 million, excess availability was $80.0 million, and our weighted average interest rate was 3.9 percent.

We were in compliance with all covenants under the Revolving Credit Facility as of June 27, 2020 .

We were in compliance with all covenants under the Revolving Credit Facility as of September 26, 2020.

Term Loan Facility

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The Base Rate Loans will bear interest at the rate per annum 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;

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;

plus (ii) the Applicable Margin, as described below.

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On February 28, 2020, we further amended the Term Loan Facility to provide that we would not be subject to the facility’s total net leverage ratio covenant from and after the time, and then for so long as, the principal balance level under the facility is less than $45 million.

On April 1, 2020, we amended the Term Loan Facility by, among other

things, modifying the total net leverage ratio covenant levels for the 2020 second and third quarters.

On April 1, 2020, we amended the Term Loan Facility by, among other things, modifying the total net leverage ratio covenant levels for the 2020 second and third quarters.

All other total net leverage ratio covenant levels for prior and future quarters were unchanged.

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In addition, proceeds from the sale of “Specified Properties” will be used for the repayment of indebtedness under the Term Loan Facility, subject to payment of an applicable prepayment premium, or, under certain circumstances, repayment of indebtedness under our Revolving Credit Facility.

Unless and until the total net leverage ratio covenant is eliminated, the Term Loan Facility requires maintenance of a total net leverage ratio of 8.75 to 1.00 for the quarter ending June 27, 2020 , and the third quarter of 2020, and 5.25 to 1.00 for the fourth quarter of 2020, with ratio levels generally reducing over the remaining term of the Term Loan Facility.

The calculation of the total net leverage ratio for any period is generally determined by taking our “Consolidated Total Debt” and dividing it by our “Consolidated EBITDA,” as those terms are defined in the Term Loan Facility.

“Consolidated Total Debt” is generally determined by adding the balance of our term loan, the prior month’s average balance of our Revolving Credit Facility, and our equipment finance lease liability, and reducing that amount by unrestricted cash up to $10.0 million.

On June 27, 2020 , the Term Loan Facility balance was $68.8 million , the average balance of the Revolving Credit Facility for the prior month was $320.1 million , our equipment finance lease liability was $29.2 million , and unrestricted cash was $10.0 million .

Liabilities related to sale-leaseback transactions are excluded from the calculation.

“Consolidated EBITDA” is generally determined by taking the Adjusted EBITDA that we report for the most recent four consecutive quarters and adjusting items specified under the Term Loan Facility.

The adjustments to Adjusted EBITDA for calculating Consolidated EBITDA under the Term Loan Facility as of the end of the second quarter of 2020 for the most recent four consecutive quarters were approximately $3.0 million .

We were in compliance with all covenants under the Term Loan Facility as of June 27, 2020 .

As of June 27, 2020 , we had outstanding borrowings of $68.8 million under our Term Loan Facility and an interest rate of 8.0 percent per annum.

Prepayment premiums associated with the repayment of indebtedness were $0.3 million and $2.6 million for the three and nine-month periods ended September 26, 2020, respectively.

For the nine-month period ended September 28, 2019, prepayment premiums were $0.5 million.

No prepayment premiums were paid during the three-month period ending September 28, 2019.

The Term Loan Facility required maintenance of a total net leverage ratio of 8.75 to 1.00 for the quarter ending September 26, 2020.

We were in compliance with all covenants under the Term Loan Facility as of September 26, 2020.

As of September 26, 2020 , we had outstanding borrowings of $57.8 million under our Term Loan Facility and an interest rate of 8.0 percent per annum.

As of December 28, 2019, our principal balance was $146.7 million with an interest rate of 8.7 percent per annum.

The decrease in the outstanding borrowings was due to net proceeds of the real estate financing transactions described in Note 8 being applied to the Term Loan Facility.

The decrease in the outstanding borrowings was due to required quarterly principal payments and net proceeds of the real estate financing transactions described in Note 8 being applied to the Term Loan Facility.

On October 2, 2020, we reduced the principal balance of the Term Loan Facility to $44.4 million, and as a result we are no longer subject to the Facility’s total net leverage ratio covenant beginning with our 2020 fourth quarter.

Finance Lease Commitments

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We recognized finance lease assets and obligations as a result of each of these transactions.

Our total finance lease commitments, including the properties associated with these transactions, totaled $272.6 million as of June 27, 2020 .

Our total finance lease commitments, including the properties associated with these transactions, totaled $273.2 million as of September 26, 2020.

Interest Rates

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Operating Activities

Net cash provided by operating activities for the first six months of fiscal 2020 was $12.9 million , compared to net cash used in operating activities of $53.0 million in the first six months of fiscal 2019 .

The increase in cash provided by operating activities during the first six months of fiscal 2020 was a result of reporting net income for the current period and a decrease in working capital compared to the prior year period.

Net cash provided by operating activities for the first nine months of fiscal 2020 was $74.4 million, compared to net cash used in operating activities of $37.6 million in the first nine months of fiscal 2019.

The increase in cash provided by operating activities during the first nine months of fiscal 2020 was a result of increased net income for the current year period, combined with improvements in our working capital balances compared to the prior year period.

Investing Activities

Net cash used in investing activities for the first six months of fiscal 2020 was $1.7 million compared to net cash provided by investing activities of $15.0 million in the first six months of fiscal 2019 .

The net cash provided by investing activities in the prior year was due to $6.0 million that was returned from escrow after the Cedar Creek acquisition was finalized and $10.8 million of proceeds from asset sales, offset by cash paid for property and equipment investments of $1.8 million ;

cash paid for property and equipment investments was consistent in both periods.

Net cash provided by investing activities for the first nine months of fiscal 2020 was $8.8 million compared to net cash provided by investing activities of $16.4 million in the first nine months of fiscal 2019.

The decrease in net cash provided by investing activities was due to $6.0 million that was returned from escrow after the Cedar Creek acquisition was finalized in the prior year and declines in proceeds from the sales of assets as well as cash investments in property and equipment.

For further details on our investments in property and equipment, refer to the “Investments in Capital Assets” section below.

Financing Activities

Net cash used in financing activities totaled $11.4 million for the first six months of fiscal 2020 , compared to net cash provided by financing activities of $41.8 million for the first six months of fiscal 2019 .

The decrease in net cash provided by financing activities is primarily due to an increase in repayments on our Revolving Credit Facility and Term Loan Facility of $70.8 million and a reduction in borrowings on our Revolving Credit Facility of $15.3 million , offset by an increase in proceeds from real estate financing transactions of $33.4 million .

Net cash used in financing activities totaled $84.7 million for the first nine months of fiscal 2020, compared to net cash provided by financing activities of $25.1 million for the first nine months of fiscal 2019.

The decrease in net cash provided by financing activities is primarily due to an increase in repayments on our Revolving Credit Facility and Term Loan Facility of $171.3 million, offset by an increase in borrowings on our Revolving Credit Facility of $29.3 million and an increase in proceeds from real estate financing transactions of $33.5 million.

Operating Working Capital (1)

Selected financial information

June 27, 2020

December 28, 2019

June 29, 2019

September 26, 2020 December 28, 2019 September 28, 2019

(In thousands)

Current assets:

Cash $ 10,154 $ 11,643 $ 12,847

Receivables, less allowance for doubtful accounts 308,584 192,872 243,905

Inventories, net 306,030 345,806 362,389

$ 624,768 $ 550,321 $ 619,141

Current liabilities:

Accounts payable (2)

$ 178,948 $ 132,348 $ 179,376

Operating working capital $ 445,820 $ 417,973 $ 439,765

(1) Operating working capital is defined as the sum of cash, receivables, and inventory less accounts payable.

(2) Accounts payable includes outstanding payments of $19.5 million , $16.1 million , and $37.1 million as of June 27, 2020 , December 28, 2019 , and June 29, 2019 , respectively.

(2) Accounts payable includes outstanding payments of $17.8 million, $16.1 million, and $39.8 million as of September 26, 2020, December 28, 2019, and September 28, 2019, respectively.

Outstanding payments represent outstanding checks and electronic payments that have not been presented for payment as of the end of the period;

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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 of $431.2 million on June 27, 2020 , compared to $418.0 million as of December 28, 2019 , increased on a net basis by approximately $13.3 million .

The increase in operating working capital is primarily driven by seasonal increases in accounts receivable, offset by decreases in inventory due to the company’s tighter management of inventory levels.

The net increase in current assets was offset by an increase in accounts payable due to recent inventory purchases during the month of June.

Operating working capital of $431.2 million on June 27, 2020 , compared to $458.5 million as of June 29, 2019 , decreased by $27.3 million , driven by decreases in the company’s inventory level, offset by a decrease in accounts payable.

Operating working capital of $445.8 million on September 26, 2020, compared to $418.0 million as of December 28, 2019, increased on a net basis by approximately $27.8 million.

The increase in operating working capital is primarily driven by increases in accounts receivable, offset by decreases in inventory due to tighter management.

The net increase in current assets was offset by an increase in accounts payable due to recent inventory purchases during the month of September.

Operating working capital of $445.8 million on September 26, 2020, compared to $439.8 million as of September 28, 2019, increased by $6.0 million, driven by an increase in accounts receivable, offset by a decrease in inventory due to tighter management of inventory levels.

Investments in Capital Assets

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 condensed consolidated balance sheet.

For the third quarter ended September 26, 2020, we invested $0.2 million in cash related to investments in long-lived assets and entered into finance leases totaling $3.1 million, for a total investment of $3.3 million.

For the first nine months of 2020, we invested $1.9 million in cash and entered into finance leases totaling $3.1 million, for a total investment of $5.0 million.

Critical Accounting Policies

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Factors that may cause these differences include, among other things:

fluctuations in commodity prices;

inventory management;

changes in prices, supply and/or demand for products that we distribute;

adverse housing market conditions;

levels of new residential housing starts and residential repair and remodeling activity;

the COVID-19 pandemic and other contagious illness outbreaks and their potential effects on our industry, suppliers and supply chain, and customers, and our business, results of operations, cash flows, financial condition, and future prospects;

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our ability to monetize real estate assets;

fluctuations in commodity prices;

adverse housing market conditions;

disintermediation by customers and suppliers;

changes in prices, supply and/or demand for our products;

inventory management;

competitive industry pressures;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis