What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-05-04 · 151 added, 87 removed, 212 unchanged (53% of the section changed)

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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.

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.

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

As vaccination availability becomes more widespread in the U.S.

and other major countries across the world and the percentage of vaccinated individuals grows rapidly, the impact of the pandemic may subside to some degree.

However, the rates of infection, hospitalization, and mortality associated with the virus continue to fluctuate.

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.

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.

While the pandemic continued to impact many aspects of our business and operations during the quarter, that impact was offset by the continued inflation in our product pricing.

Our net sales and gross margin increased, largely driven by the continued elevation of wood-based commodity pricing over the course of the quarter and secondarily driven by the Company’s policies of pursuing disciplined pricing strategies and gross margin enhancement.

For the first quarter of 2021, net sales increased $363.4 million and net income improved $62.6 million, compared to the first quarter of 2020.

The extent of the impact of the pandemic on our business and sales for the remaining nine months of 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, the success of vaccination efforts, and the impact the COVID-19 pandemic has on demand in the markets we service.

These measures had a significant adverse impact on many sectors of the economy, including distribution services.

However, throughout the pandemic, our business was designated as “essential,” and we were able to continue to operate and provide services to our customers and suppliers.

In many states in which we operate, many of these restrictions have lapsed or been rescinded, and as vaccines have become widely available in many parts of the United States and other major countries around the world, the impact of the pandemic has subsided to some degree.

However, as a result of the rise of the COVID-19 variants in certain parts of the United States, some governmental authorities are considering the re-institution of various restrictive measures.

The extent of the impact of the pandemic on our business and sales for the remaining six months of 2021 will depend on future developments, including, among others, the extent and scope of the rise of existing and additional COVID-19 variants, the success of vaccination efforts, the success of actions taken by governmental authorities to contain these variants and the pandemic and address their impact, the overall duration of the pandemic, 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 office and reopening plans, and any pandemic-related restrictions.

We are closely monitoring the development and spread of COVID-19 variants, the impact of the pandemic on industry conditions, the progress of local return to office and reopening plans, and any pandemic-related restrictions.

We are in the process of implementing return to work plans for our corporate headquarters and warehouse

facilities, and we continue to practice safety and hygiene protocols consistent with the Center for Disease Control and Prevention (“CDC”) and local guidance.

Industry Conditions

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

Due to supply constraints, lumber and panel commodity index prices started increasing during the third quarter of 2020 and they continued to increase throughout the first quarter of 2021.

These market trends resulted in substantially favorable revenue and gross margin comparisons in the first quarter of 2021 for our structural products and our business as a whole.

Due to supply constraints, lumber and panel commodity index prices started increasing during the third quarter of 2020 and they continued to increase into the second quarter of 2021.

Wood-based commodity index prices remained at elevated levels at the beginning of the second quarter as supply constraints continued.

Until supply constraints are relieved, we anticipate that lumber and panel index prices will remain elevated.

Towards the end of the second quarter, lumber commodity pricing decreased as supply increased.

However, the increase in supply was limited to lumber inventories and panel commodity prices remained at elevated levels.

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 has had a significant negative effect on single family housing starts during the first half of 2020.

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

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

Census Bureau reported that single family housing starts were up 20 percent for the first quarter of 2021 compared to the first quarter of 2020.

During the first quarter of 2021, housing starts grew 16 percent in January, 2 percent in February, and 40 percent in March, all compared to the same months in 2020.

Additionally, March 2021 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.

Census Bureau reported that single family housing starts were up 42 percent for the second quarter of 2021 compared to the second quarter of 2020.

During the second quarter of 2021, housing starts grew 54 percent in April, 48 percent in May, and 28 percent in June, all compared to the same months in 2020.

Additionally, June 2021 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 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.

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Results of Operations

The following table sets forth our results of operations for the first quarter of fiscal 2021 and fiscal 2020:

First Quarter of Fiscal 2021 % of

Sales First Quarter of Fiscal 2020 % of

The following table sets forth our results of operations for the second quarter of fiscal 2021 and fiscal 2020:

Second Quarter of Fiscal 2021 % of

Sales Second Quarter of Fiscal 2020 % of

(In thousands) (In thousands)

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Interest expense, net 9,143 0.7% 11,535 1.7%

Other income, net (314) (0.0)% (237) (0.0)%

Income (loss) before provision for income taxes 83,606 8.2% (5,813) (0.9)%

Other expense (income), net (314) 0.0% 417 0.1%

Income before provision for income taxes 148,366 11.3% 10,133 1.5%

Provision for income taxes 34,908 2.7% 3,438 0.5%

Net income $ 113,458 8.7% $ 6,695 1.0%

The following table sets forth our results of operations for the first six-month periods of fiscal 2021 and fiscal 2020:

First Six Months of Fiscal 2021 % of

Sales First Six Months of Fiscal 2020 % of

(In thousands) (In thousands)

Net sales $ 2,333,382 100.0% $ 1,360,846 100.0%

Gross profit 431,564 18.5% 194,029 14.3%

Selling, general, and administrative 162,569 7.0% 145,281 10.7%

Depreciation and amortization 14,545 0.6% 14,698 1.1%

Amortization of deferred gains on real estate (1,967) (0.1)% (1,967) (0.1)%

Gains from sales of property (1,287) (0.1)% (525) 0.0%

Other operating expenses 983 0.0% 6,127 0.5%

Operating income 256,721 11.0% 30,415 2.2%

Interest expense, net 25,377 1.1% 25,915 1.9%

Other expense (income), net (628) 0.0% 180 0.0%

Income before provision for (benefit from) income taxes 231,972 9.9% 4,320 0.3%

Provision for (benefit from) income taxes 56,654 2.4% (1,588) (0.1)%

Net income (loss) $ 61,860 6.0% $ (787) (0.1)%

The following table sets forth net sales by product category for the three-month periods ending April 3, 2021, and March 28, 2020:

Three Months Ended

April 3, 2021 March 28, 2020

Net sales by category ($ in thousands)

Net income $ 175,318 7.5% $ 5,908 0.4%

The following table sets forth net sales by product category for the three- and six-month periods ending July 3, 2021, and June 27, 2020:

Three Months Ended Six Months Ended

July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020

Net sales by category ($ in thousands) ($ in thousands)

Structural products $ 632,724 $ 249,542 $ 1,095,571 $ 490,310

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Net sales $ 1,307,913 $ 698,776 $ 2,333,382 $ 1,360,846

The following table sets forth gross profit and gross margin percentages by product category for the three-month periods of fiscal 2021 and 2020:

Three Months Ended

April 3, 2021 March 28, 2020

Gross profit $ by category ($ in thousands)

Percentage of total net sales by category

Structural products 48 % 36 % 47 % 36 %

Specialty products 52 % 64 % 53 % 64 %

Total 100 % 100 % 100 % 100 %

The following table sets forth gross profit and gross margin percentages by product category for the three- and six-month periods of fiscal 2021 and 2020:

Three Months Ended Six Months Ended

July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020

Gross profit $ by category ($ in thousands) ($ in thousands)

Structural products $ 86,177 $ 23,089 $ 158,034 $ 47,308

Specialty products 164,995 77,731 273,530 146,721

Gross profit $ 251,172 $ 100,820 $ 431,564 $ 194,029

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Total gross margin % 19.2 % 14.4 % 18.5 % 14.3 %

First Quarter of Fiscal 2021 Compared to First Quarter of Fiscal 2020

For the first quarter of fiscal 2021, net sales increased 54.9 percent, or $363.4 million, compared to the first quarter of fiscal 2020.

The sales increase was primarily a result of wood-based commodity price inflation in our structural category and supply-driven pricing increases in our specialty category, partially offset by a slight decline in sales volume attributable to supply constraints.

Persistent imbalances between supply and demand provided pricing momentum that drove pricing up throughout the last nine months past levels where we expected them to begin to affect demand.

Product scarcity has reduced resistance to price increases, further amplifying inflation across all product categories.

Second Quarter of Fiscal 2021 Compared to Second Quarter of Fiscal 2020

For the second quarter of fiscal 2021, net sales increased 87.2 percent, or $609.1 million, compared to the second quarter of fiscal 2020.

The sales increase was primarily a result of supply-driven pricing increases in our specialty products category and wood-based commodity price inflation in our structural products category, partially offset by a slight decline in structural sales volume attributable to supply constraints and commodity risk management.

In our specialty products categories, sales volumes increased overall versus the prior-year period primarily driven by engineered wood, industrial products, and siding categories, offset by decreases in specialty lumber.

Supply disruption continued for many of our specialty product categories which contributed to progressive price increases throughout the second quarter, which when combined with the improvement in sales volumes, resulted in significant net sales growth.

In our structural products category, imbalances between supply and demand continued throughout most of the second quarter of fiscal 2021, but started to align toward the end of the second quarter, driving lumber commodity prices down in late May and during the month of June.

Panel commodity prices, however, did not experience the same price decreases during the period.

Gross profit and gross margin.

For the first quarter of fiscal 2021, gross profit increased 93.5 percent, or $87.2 million, compared to the first quarter of fiscal 2020.

Gross margin percentage increased to 17.6 percent, for the first quarter of fiscal 2021, compared to 14.1 percent in the first quarter of fiscal 2020.

Gross margin percentage increased due to rapidly increasing market pricing, a result of unprecedented demand, paired with abnormally low supply.

Additionally, throughout this period lead times for products extended, further promoting higher margins as prices escalated prior to receiving the product.

For the second quarter of fiscal 2021, gross profit increased 149.1 percent, or $150.4 million, compared to the second quarter of fiscal 2020.

Gross margin percentage increased to 19.2 percent, for the second quarter of fiscal 2021, compared to 14.4 percent in the second quarter of fiscal 2020.

Gross margin percentage increased due to the overall continued increase in market pricing compared to the same period in the prior year, which is a result of demand continuing to exceed supply.

Gross margin percentages for our specialty products increased to 24.4 percent for the second quarter of fiscal 2021, compared to 17.3 percent in the second quarter of fiscal 2020.

Specialty gross profit also benefited from increased volume in our engineered wood, industrial products, and siding categories in the second quarter of fiscal 2021.

Gross margin percentages for our structural products increased to 13.6 percent for the second quarter of fiscal 2021, compared to 9.3 percent in the second quarter of fiscal 2020.

Our structural gross margin for the second quarter of fiscal 2021 was impacted by a lower of cost or net realizable reserve of $16.7 million resulting from the decline in value of our structural lumber inventory related to the decrease in wood-based commodity prices during the period.

This reserve will be included in structural gross profit in the third quarter of fiscal 2021 as the inventory associated with the adjustment is sold to customers.

Selling, general, and administrative expenses.

For the first quarter of fiscal 2021, selling, general, and administrative expenses increased 1.3 percent, or $1.0 million, compared to the first quarter of fiscal 2020.

The increase in sales, general, and administrative expenses is primarily due to an increase in our sales commissions of approximately $2.7 million combined with an increase in our variable incentive compensation of approximately $0.9 million, offset by a reduction in our payroll costs of approximately $2.9 million, in addition to other reductions within our operating expenses.

For the second quarter of fiscal 2021, selling, general, and administrative expenses increased 23.1 percent, or $16.3 million, compared to the second quarter of fiscal 2020.

The increase in sales, general, and administrative expenses is due to increases in our sales commissions and incentives of approximately $8.4 million, warehouse and delivery costs of approximately $4.9 million, and general and administrative costs of approximately $3.0 million.

Depreciation and amortization expense.

For the first quarter of fiscal 2021, depreciation and amortization expense decreased 2.2 percent, or $0.2 million, compared to the first quarter of fiscal 2020.

The decrease in depreciation and amortization expense is due to a lower base of depreciable assets throughout the first quarter of 2021 when compared to the first quarter of fiscal 2020.

For the second quarter of fiscal 2021, depreciation and amortization expense increased 0.2 percent, compared to the second quarter of fiscal 2020.

The increase in depreciation and amortization is due to additional depreciation related the new trucks added to our mobile fleet under finances leases in the first quarter of 2021, which was partially offset by a lower base of depreciable assets throughout the second quarter of 2021 when compared to the second quarter of fiscal 2020.

Other operating expenses.

For the second quarter of fiscal 2021, other operating expenses decreased 55.6 percent, or $1.1 million, compared to the second quarter of fiscal 2020 primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition and restructuring related costs reported in the second quarter of 2020.

Interest expense, net.

For the second quarter of fiscal 2021, interest expense, net, decreased by 20.7 percent, or $2.4 million, compared to the second quarter of fiscal 2020.

The decrease is primarily due to the reduction of debt, including the repayment in full of our former Term Loan Facility at the end of the first quarter of 2021, under which borrowings bore a higher interest rate than under our Revolving Credit Facility.

Other expense (income), net.

For the second quarter of fiscal 2021, other expense (income), net, decreased $0.7 million compared to the second quarter of fiscal 2020.

The decrease is due to a higher level of pension benefit amortization in the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020, offset by the absence of other immaterial expenses incurred in the prior year period.

Provision for income taxes.

Our effective tax rate was 23.5 percent and 33.9 percent for the second quarter of fiscal 2021 and 2020, respectively.

Our effective tax rate for the second quarter of fiscal 2021 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, slightly offset by a benefit from the vesting of restricted stock units, which occurred during the period.

Our effective tax rate for the second quarter of fiscal 2020 was primarily impacted by a discrete tax benefit of $3.9 million resulting from the release of the valuation allowance associated with nondeductible interest expense under Section 163(j) of the Internal Revenue Code (“IRC”) as a result of changes allowed under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that was enacted on March 27, 2020 which raised the allowable percentage of deductible interest from 30 percent to 50 percent of adjusted taxable income.

Our effective tax rate for the same periods was further 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 net income increased by $106.8 million from the prior year period due primarily to increased sales and gross product margins resulting from price inflation.

First Six Months of Fiscal 2021 Compared to First Six Months of Fiscal 2020

For the first six months of fiscal 2021, net sales increased 71.5 percent, or $972.5 million, compared to the first six months of fiscal 2020.

The sales increase was primarily a result of supply-driven pricing increases in our specialty products category and wood-based commodity price inflation in our structural products category, partially offset by a slight decline in overall sales volume generally attributable to supply constraints.

In our specialty products category, sales volumes increased overall primarily driven by engineered wood, industrial products, and siding categories, offset by decreases in specialty lumber.

Supply disruptions continued for many of our specialty product categories which contributed to progressive price increases throughout the first six months of fiscal 2021, which when combined with the improvement in sales volumes resulted in improved net sales growth.

In our structural products category, demand continued to exceed supply throughout most of the first six months of fiscal 2021, but started to align toward the end of first six months of fiscal 2021, driving lumber commodity prices down in late May and during the month of June.

Panel commodity prices, however, did not experience the same price decreases during the period.

Gross profit and gross margin.

For the first six months of fiscal 2021, gross profit increased 122.4 percent, or $237.5 million, compared to the first six months of fiscal 2020.

Gross margin percentage increased to 18.5 percent, for the first six months of fiscal 2021, compared to 14.3 percent for the first six months of fiscal 2020.

Gross margin percentage increased due to the overall continued increase in market pricing compared to the same period in the prior year, which is a result of a continued

increase in demand, paired with continued low supply.

Gross margin percentages for our specialty products increased to 22.1 percent for the first six months of fiscal 2021, compared to 16.9 percent in the first six months of fiscal 2020.

Gross margin percentages for our structural products increased to 14.4 percent for the first six months of fiscal 2021, compared to 9.6 percent in the first six months of fiscal 2020.

Our structural gross margin for the first six months of fiscal 2021 was impacted by a lower of cost or net realizable value reserve of $16.7 million resulting from the decline in value of our structural lumber inventory related to the decrease in wood-based commodity prices during the second quarter of fiscal 2021.

This reserve will be included in structural gross profit in the third quarter of fiscal 2021 as the inventory associated with the adjustment is sold to customers.

Selling, general, and administrative expenses.

For the first six months of fiscal 2021, selling, general, and administrative expenses increased 11.9 percent, or $17.3 million, compared to the first six months of fiscal 2020.

The increase in sales, general, and administrative expenses is due to increases in our sales commissions and incentives of approximately $11.7 million, warehouse and delivery costs of approximately $1.0 million, and general and administrative costs of approximately $4.6 million.

Depreciation and amortization expense.

For the first six months of fiscal 2021, depreciation and amortization expense decreased 1.0 percent, or $0.2 million, compared to the first six months of fiscal 2020.

The decrease in depreciation and amortization expense is due to a lower base of depreciable assets throughout the first six months of fiscal 2021 when compared to the first six months of fiscal 2020.

Gains from sales of property.

For the first quarter of fiscal 2021, gains from sales of property increased $0.8 million compared to the first quarter of 2020 as result of the sale of our non-operating facility in Birmingham during the first quarter of 2021 and no property sales during the first quarter of 2020.

For the first six months of fiscal 2021, gains from sales of property increased $0.8 million compared to the first six months of fiscal 2020 due to the sale of our non-operating facility in Birmingham during the first quarter of 2021 and no property sales during the first six months of fiscal 2020.

Other operating expenses.

For the first quarter of fiscal 2021, other operating expenses decreased $4.1 million compared to the first quarter of fiscal 2020 primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition and lower real estate financing costs compared to those reported in the first quarter of 2020 that were associated with our prior year real estate financing transactions.

For the first six months of fiscal 2021, other operating expenses decreased 84.0 percent, or $5.1 million, compared to the first six months of fiscal 2020 primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition and restructuring related costs reported during the first six months of fiscal 2020.

Interest expense, net.

For the first quarter of fiscal 2021, interest expense, net, increased by 12.9 percent, or $1.9 million, compared to the first quarter of fiscal 2020.

The increase is largely attributable to $5.8 million in debt issuance costs expensed in the first quarter of fiscal 2021 related to the extinguishment of our former Term Loan Facility, offset by a reduction in our interest expense resulting from our lower levels of indebtedness combined with favorable benefits from lower LIBOR rates when compared to the prior year.

Other income, net.

For the first quarter of fiscal 2021, other income, net, increased $0.1 million compared to the first quarter of fiscal 2020.

The increase is due to a higher level of pension benefit cost amortization in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020.

For the first six months of fiscal 2021, interest expense, net, decreased by 2.1 percent, or $0.5 million, compared to the first six months of fiscal 2020.

The decrease is primarily due to reduction of debt, including the repayment in full of our former Term Loan Facility at the end of the first quarter of 2021, under which borrowings bore a higher interest rate than under our Revolving Credit Facility.

This was offset by the $5.8 million in debt issuance costs expensed during the first quarter of fiscal 2021 related to the extinguishment of our former Term Loan Facility.

Other expense (income), net.

For the first six months of fiscal 2021, other expense (income), net, decreased $0.8 million compared to the first six months of fiscal 2020.

Provision for (benefit from) income taxes.

Our effective tax rate was 26.0 percent and 86.5 percent for the first quarter of fiscal 2021 and 2020, respectively.

Our effective tax rate for the first quarter of fiscal 2021 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, slightly offset by the benefit from state net operating loss carryforwards we anticipate being able to utilize based on our taxable income through the end of the first quarter of fiscal 2021, combined with a benefit from the vesting of restricted stock units, which occurred during the period.

Our effective tax rate for the three months ended March 28, 2020, was primarily impacted by a discrete tax benefit of $3.9 million resulting from the release of the valuation allowance associated with nondeductible interest expense under Section 163(j) of the Internal Revenue Code (“IRC”) as a result of changes allowed under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that was enacted on March 27, 2020 which raised the allowable percentage of deductible interest from 30 percent to 50 percent of adjusted taxable income.

Net income (loss).

Our net loss improved to net income from the prior year period due primarily to increased gross product margins resulting from price inflation and scarcity of products and overall reduced operating expenses and secondarily to the Company’s policies pursuing increased margins on sales of products.

Our effective tax rate was 24.4 percent and (36.8) percent for the first six months of fiscal 2021 and 2020, respectively.

Our effective tax rate for the first six months of fiscal 2021 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, slightly offset by a benefit from the vesting of restricted stock units, which occurred during the period.

Our effective tax rate for the first six months of fiscal 2020 was primarily impacted by a discrete tax benefit of $3.9 million resulting from the release of the valuation allowance associated with nondeductible interest expense under Section 163(j) of the Internal Revenue Code (“IRC”) as a result of changes allowed under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that was enacted on March 27, 2020 which raised the allowable percentage of deductible interest from 30 percent to 50 percent of adjusted taxable income.

Our net income increased $169.4 million from the prior year period due primarily to increased gross product margins resulting from price inflation and scarcity of products and secondarily to the Company’s policies pursuing increased margins on sales of products.

We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors common in the building products distribution industry.

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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.

However, during the fourth quarter of 2020 and the first quarter of 2021, our inventory working capital balance increased largely due to increased sales levels.

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

However, during the fourth quarter of 2020 and the first and second quarters of 2021, our inventory working capital balance increased largely due to increased sales levels resulting from wood-based commodity market inflation as well as supply driven pricing increases for many of our specialty products.

Given recent market volatility in the industry, it remains a possibility that we could experience changes to our typical seasonality trends during the rest of 2021.

Liquidity and Capital Resources

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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 Facility 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 April 3, 2021, we had outstanding borrowings of $358.5 million and excess availability of $238.1 million under our Revolving Credit Facility.

As of January 2, 2021, had outstanding borrowings of $288.2 million and excess availability of $184.3 million under out Revolving Credit Facility.

Our average effective interest rate was 2.4 percent and 2.8 percent for the quarters ended April 3, 2021 and January 2, 2021, respectively.

For the quarter ended March 28, 2020, our average effective interest rate was 4.2 percent.

We were in compliance with all covenants under the Revolving Credit Facility as of April 3, 2021.

As of July 3, 2021, we had outstanding borrowings of $320.4 million and excess availability of $276.2 million under our Revolving Credit Facility.

As of January 2, 2021, we had outstanding borrowings of $288.2 million and excess availability of $184.3 million under out Revolving Credit Facility.

Our average effective interest rate was 2.5 percent and 2.8 percent for the quarters ended July 3, 2021 and January 2, 2021, respectively.

For the quarter ended June 27, 2020, our average effective interest rate was 3.1 percent.

We were in compliance with all covenants under the Revolving Credit Facility as of July 3, 2021.

On August 2, 2021, we entered into a Second Amendment (“the Amendment”) to the Revolving Credit Facility.

The Amendment amends the Revolving Credit Facility to, among other things, (i) extend the maturity date of the facility from October 10, 2022, to August 2, 2026, (ii) reduce the interest rate on borrowings under the facility, (iii) amend the borrowing base to include a certain portion of the assets of acquired companies prior to the conduct of a field exam or appraisals thereof by Wells Fargo, (iv) modify certain definitions and various affirmative and negative covenants to provide additional flexibility for the Company, and (v) add customary LIBOR replacement language.

Term Loan Facility

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The Term Loan Facility provided for a senior secured first lien loan facility in an initial aggregate principal amount of $180 million and was secured by a security interest in substantially all of our assets.

Prepayment premiums associated with the repayment of indebtedness were $0.9 million and $2.1 million for the three-month periods ended April 3, 2021 and March 28, 2020, respectively.

As of January 2, 2021, we had outstanding borrowings of $43.2 million under the Term Loan Facility.

On April 2, 2021, we repaid the remaining outstanding principal balance of the Term Loan Facility and, as a result, as of April 3, 2021, we had no outstanding borrowings under the Term Loan Facility, which has been extinguished.

In connection with our repayment of the outstanding principal balance in full on April 2, 2021, we expensed $5.8 million debt issuance costs that we had been amortizing in connection with our former Term Loan Facility.

On April 2, 2021, we repaid the remaining outstanding principal balance of the Term Loan Facility and, as a result, as of July 3, 2021, we had no outstanding borrowings under the Term Loan Facility, which has been extinguished.

In connection with our repayment of the outstanding principal balance in full on April 2, 2021, we expensed $5.8 million debt issuance costs during the first quarter of 2021 that we had been amortizing in connection with our former Term Loan Facility.

These costs are included within interest expense, net, on the Condensed Consolidated Statements of Operations and reported separately as an adjustment to net income in our Condensed Consolidated Statements of Cash Flows.

Our average interest rate under the facility, exclusive of fees and prepayment premiums, was approximately 8.0 percent for the quarters ended April 3, 2021, and January 2, 2021.

For March 28, 2020, our average interest rate under the facility, exclusive of fees and prepayment premiums, was approximately 8.7 percent.

Our average interest rate under the facility, exclusive of fees and prepayment premiums, was approximately 8.0 percent for the quarter ended January 2, 2021.

We made no prepayment premiums associated with the repayment of indebtedness for the three-month period ended July 3, 2021 as we terminated the Term Loan Facility during the first quarter of 2021.

For the three-month period ended June 27, 2020, prepayment premiums were $0.2 million.

Prepayment premiums were $0.9 million and $2.3 million for the six-month periods ended July 3, 2021 and June 27, 2020, respectively.

Finance Lease Commitments

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

In addition, during the first quarter of 2021, we recorded finance leases of $10.2 million related to new tractors put into service as part of our mobile fleet.

Our total finance lease commitments, including the properties associated with these transactions, totaled $281.3 million as of April 3, 2021.

Of the $281.3 million of finance lease commitments as of April 3, 2021, $243.7 million related to real estate and $37.6 million related to equipment.

In addition, during the second quarter of 2021, we recorded finance leases of $0.3 million related to new tractors put into service as part of our mobile fleet.

Our total finance lease commitments, including the properties associated with the aforementioned transactions, totaled $279.2 million as of July 3, 2021.

Of the $279.2 million of finance lease commitments as of July 3, 2021, $243.1 million related to real estate and $36.1 million related to equipment.

Interest Rates

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Operating Activities

Net cash used in operating activities for the first three months of fiscal 2021 was $24.6 million, compared to net cash used in operating activities of $59.2 million in the first three months of fiscal 2020.

The decrease in cash used by operating activities during the first three months of fiscal 2021 was primarily a result of the net income for the current year period compared to a loss in the prior year period, combined with an increase in our accounts payable balance compared to the prior year period.

Net cash provided by operating activities for the first six months of fiscal 2021 was $22.6 million, compared to net cash provided by operating activities of $12.9 million in the first six months of fiscal 2020.

The increase in cash provided by operating activities during the first six months of fiscal 2021 was primarily a result of the increase in net income and our accounts payable balance compared to the prior year period, partially offset by increases in our accounts receivable and inventory balances compared to the prior year period.

Investing Activities

Net cash provided by investing activities for the first three months of fiscal 2021 was $0.7 million compared to net cash used in investing activities of $1.2 million in the first three months of fiscal 2020.

The increase in net cash provided by investing activities was primarily due to proceeds received from the sale of our non-operating facility in Birmingham during the first quarter of 2021.

Net cash used in investing activities for the first six months of fiscal 2021 was $0.8 million compared to net cash used in investing activities of $1.7 million in the first six months of fiscal 2020.

The decrease in net cash used by investing activities was primarily due to an increase in proceeds received from the sale of several assets during the second quarter of 2021, combined

with the sale of our non-operating facility in Birmingham during the first quarter of 2021, both of which were partially offset by an increase in investments in property and equipment.

Financing Activities

Net cash provided by financing activities totaled $24.0 million for the first three months of fiscal 2021, compared to net cash provided by financing activities of $61.3 million for the first three months of fiscal 2020.

The decrease in net cash provided by financing activities is primarily due to an increase of $16.8 million in repayments on our Revolving Credit Facility and Term Loan Facility, including the repayment of the remaining outstanding balance on our Term Loan Facility, and reduction of $78.3 million in proceeds from real estate financing transactions completed in the first three months of fiscal 2020, with no such transactions completed in the first three months of fiscal 2021, partially offset by an increase in borrowings of $58.0 million from our Revolving Credit Facility.

Net cash used in financing activities totaled $21.7 million for the first six months of fiscal 2021, compared to net cash used in financing activities of $11.4 million for the first six months of fiscal 2020.

The increase in net cash used in financing activities is primarily due to an increase of $216.9 million in repayments on our Revolving Credit Facility and Term Loan Facility, including the repayment of the remaining outstanding balance on our Term Loan Facility, and reduction of $78.3 million in proceeds from real estate financing transactions completed in the first six months of fiscal 2020, with no such transactions completed in the first six months of fiscal 2021, partially offset by an increase in borrowings of $287.9 million from our Revolving Credit Facility.

Operating Working Capital

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Selected financial information

April 3, 2021 January 2, 2021 March 28, 2020

July 3, 2021 January 2, 2021 June 27, 2020

(In thousands)

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Operating working capital $ 636,010 $ 470,670 $ 431,231

Operating working capital of $576.4 million as of April 3, 2021, compared to $470.7 million as of January 2, 2021, increased on a net basis by approximately $105.8 million.

The increase in operating working capital is primarily driven by an increase in accounts receivable and an increase in inventory, both of which continue to be effected by the inflationary environment impacting our net sales and product costs.

Operating working capital of $636.0 million as of July 3, 2021, compared to $470.7 million as of January 2, 2021, increased on a net basis by approximately $165.3 million.

The increase in operating working capital was primarily driven by an increase in accounts receivable and an increase in inventory, both of which balances were higher due to the inflationary environment impacting our net sales and product costs.

The net increase in current assets was offset by an increase in accounts payable, also due to the inflation of product costs.

Operating working capital of $576.4 million as of April 3, 2021, compared to $476.7 million as of March 28, 2020, increased by $99.7 million.

The increase in operating working capital is primarily driven by an increase in accounts receivable, offset by an increase in accounts payable, both largely due to the inflationary environment impacting our net sales and product costs.

Operating working capital of $636.0 million as of July 3, 2021, compared to $431.2 million as of June 27, 2020, increased by $204.8 million.

The increase in operating working capital was primarily driven by an increase in accounts receivable and an increase in inventory, offset by an increase in accounts payable, both largely due to the inflationary environment in our industry impacting our net sales and product costs.

Investments in Capital Assets

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The gross value of these assets are included in “Property and equipment, at cost” on our condensed consolidated balance sheet.

For the first quarter ended April 3, 2021, we invested $1.1 million in cash in investments in long-lived assets and entered into finance leases related to new tractors put into service as part of our mobile fleet totaling approximately $10.2 million, for a total investment of $11.3 million in capital assets during the quarter.

During the second quarter of fiscal 2021, we invested $1.8 million in cash in investments in long-lived assets and entered into finance leases related to new tractors put into service as part of our mobile fleet totaling approximately $0.3 million, for a total investment of $2.1 million in capital assets during the quarter.

For the first six months of fiscal 2021, we invested $2.9 million in cash and entered into finance leases totaling $10.5 million, for a total investment of $13.4 million.

Critical Accounting Policies

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Forward-looking statements include, without limitation, any statement that predicts, forecasts, indicates or implies 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.

Forward-looking statements involve risks and uncertainties that may cause our business,

strategy, or actual results to differ materially from the forward-looking statements.

Forward-looking statements involve risks and uncertainties that may cause our business, strategy, or actual results to differ materially from the forward-looking statements.

The forward-looking statements in this report include statements about the COVID-19 pandemic, its duration and effects, and its potential effects on our business and results of operations;

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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