What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-03 · 265 added, 183 removed, 180 unchanged (71% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BlueLinx is a leading U.S.

wholesale distributor of residential and commercial building products with both branded and private-label stock keeping units (“SKUs”).

With a strong market position, broad geographic coverage footprint servicing 40 states, and the strength of a locally focused sales force, we distribute our comprehensive range of products to over 15,000 national, regional, and local dealers, specialty distributors, national home centers, and manufactured housing customers.

BlueLinx is able to provide a wide range of value added services and solutions to our customers and suppliers.

We are headquartered in Georgia, with executive offices located at 1950 Spectrum Circle, Marietta, Georgia, and we operate our distribution business through a broad network of distribution centers.

As a “two-step” wholesale distributor of building products, BlueLinx stocks products from leading manufacturers and supplies these products to a broad range of customers, including lumber yards, dealers, home centers, and hardware stores.

These customers then serve residential and commercial builders and contractors in their respective geographic areas.

BlueLinx plays a critical role in enabling its lumber yard, dealer, and home center customers to offer a broad range of products and brands, as most of BlueLinx’s customers do not have the capability to purchase and warehouse directly from the manufacturers for such a large set of SKUs.

Similarly, BlueLinx provides value to its manufacturing partners by enabling access to the fragmented network of lumber yards and dealers that the manufacturers could not adequately serve directly.

Our place in this distribution model of building products provides easy access to the marketplace for our suppliers and the value proposition of rapid delivery on an as-needed basis to our customers from our network of warehouse facilities.

In addition to its broad portfolio of building products, BlueLinx also offers a wide array of custom cutting and fabrication services for the wood products industry.

We distribute products in two principal categories:

About Our Business

We are BlueLinx:

a leading wholesale distributor of residential and commercial building products in the United States.

We are a “two-step” distributor.

Two-step distributors purchase products from manufacturers and distribute those products to dealers and other suppliers in local markets, who then sell those products to end users.

We carry a broad portfolio of both branded and private-label stock keeping units (“SKUs”) across two principal product categories:

specialty products and structural products.

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

Specialty products represented between 49 percent and 60 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 40 percent and 51 percent of our net sales over the past twelve months.

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

(“Cedar Creek”).

Cedar Creek was established in 1977 as a wholesale building materials distribution company that distributed wood products across the United States.

Its products included specialty lumber, oriented strand board, siding, cedar, spruce, engineered wood products, and other building products.

This acquisition allowed us to expand our product offerings, while maintaining our existing geographical footprint.

Recent Developments - Update on Impact of COVID-19 Pandemic

On March 11, 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization.

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 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.

Specialty products include items such as engineered wood, industrial products, cedar, moulding, siding, metal products, and insulation.

Structural products include items such as lumber, plywood, oriented strand board, rebar, and remesh.

We also provide a wide range of value-added services and solutions aimed at relieving distribution and logistics challenges for our customers and suppliers, while enhancing their marketing and inventory management capabilities.

We sell products through three main distribution channels, consisting of warehouse sales, reload sales, and direct sales.

Warehouse sales, which generate the majority of our sales, are delivered from our warehouses to our customers.

Reload sales are similar to warehouse sales but are shipped from warehouses, most of which are operated by third-parties, where we store owned products to enhance operating efficiencies.

This channel is employed primarily to service strategic customers that would be less economical to service from our warehouses, and to distribute large volumes of imported products from port facilities.

Direct sales are shipped from the manufacturer to the customer without our taking physical possession of the inventory and, as a result, typically generate lower margins than our warehouse and reload distribution channels.

This distribution channel, however, requires the lowest amount of committed capital and fixed costs.

With a strong market position, broad geographic coverage footprint servicing 40 states, and the strength of a locally focused sales force, as a two-step wholesale distributor, we distribute our comprehensive range of products from over 750 suppliers, including some of the leading manufacturers in the industry, such as Ply Gem, Huber Engineered Woods, Georgia-Pacific, James Hardie, Fiberon, Oldcastle APG and Weyerhaeuser, and supply products to a broad base of over 15,000 national, regional, and local dealers, specialty distributors, national home centers, and manufactured housing customers.

Many of our customers then serve residential and commercial builders and contractors in their respective geographic areas and local markets.

As a truly entrenched value-added partner in a complex and demanding building products supply chain, we play a critical role in enabling our customers to offer a broad range of products and brands, as most of our customers do not have the capability to purchase and warehouse products directly from manufacturers for such a large set of SKUs.

The depth of our geographic footprint supports meaningful customer proximity across all markets in which we operate, enabling faster and more efficient service.

Similarly, we provide value to our supplier partners by enabling access to the large and fragmented network of lumber yards and dealers that those suppliers could not adequately serve directly.

Our position in this distribution model for building products provides easy access to the marketplace for our suppliers and the value proposition of rapid delivery on an as-needed basis to our customers from our network of warehouse facilities.

Industry Overview

Our products are available across large and attractive end markets, including residential new construction and residential repair and remodel, which together account for approximately 85 percent of the end market mix for our addressable building material market served via two-step distribution based on our estimates.

We also estimate the remaining 15 percent is accounted for by commercial construction.

We believe that there are favorable underlying fundamental factors that will drive long-term growth across the end markets in which we operate.

Residential New Construction

We estimate that residential new home construction (including single-family and multi-family homes) accounts for approximately 40 percent of the end market mix for our addressable building material market served via two-step distribution.

The pace of housing starts, with which our business is correlated, is driven by demographic and population shifts, mortgage interest rates (which remain at historic lows), the ability of builders to obtain skilled labor, and builders’ economic outlook.

single family housing starts peaked in 2005, before experiencing a downturn through 2011.

Since 2011, we have experienced the continuing recovery of residential new construction, which has translated into increased demand for the products we sell.

Our large footprint, strong customer relationships, and comprehensive offering of leading products and brands positions us to capitalize on continued growth in the new housing market.

According to the U.S.

Census Bureau and the U.S.

Department of Housing and Urban Development, 2020 single family housing starts in the United States were approximately 1 million, an increase of 12 percent above 2019 housing starts.

We believe there is significant pent-up demand for housing and the market will see continued growth.

The monthly single family residential home supply continues to remain in line with the 20-year average and significantly below the peak levels observed in 2008 and 2009.

For most of the last decade, housing production has lagged population growth and household formation and Freddie Mac estimates that the housing supply at the end of 2020 was 3.8 million units short of the level needed to match long-term demand.

Harvard University’s Joint Center for Housing Studies estimates total annual housing construction through 2028 should be on the order of 1.5 million units, or about 120,000 higher than in 2020.

Based on these data points, we believe there are fundamental factors driving significant opportunity in the residential new home construction end-market for building products of which we are well positioned to serve.

Residential Repair and Remodel

We estimate that residential repair and remodel spending accounts for approximately 45 percent of the end market mix for our addressable building material market served via two-step distribution.

Repair and remodel sales tend to be less cyclical than new construction, particularly for exterior products that are exposed to the elements and where maintenance is less likely to be deferred.

We expect that factors including the total installed base of U.S.

homes, overall age of the U.S.

housing stock, rising home prices supporting increased underlying home equity and availability of consumer capital will drive continued growth in repair and remodel spending.

The Leading Indicator of Remodeling Activity (LIRA) projects spending on home improvement projects to rise 9.2 percent year-over-year in 2021 and 12.3 percent year-over-year for the four quarters ending in the third quarter of fiscal 2022.

According to the U.S.

Census Bureau and Department of Housing and Urban Development, the median home age in the U.S.

increased from 23 years in 1985 to 39 years in 2019 and approximately 80 percent of the current housing stock was built prior to 1999.

We believe the increasing average age of the nation’s 125 million existing homes will continue to drive demand for repair and remodel projects.

The annual U.S.

homes installed base is projected to continue to increase through 2025, which is positive for both residential repair and remodel spending as well as for residential construction.

We are positioned to capitalize on this projected growth, as repair and remodel spending drives a significant portion of our sales.

Increased home improvement spending has also benefited from the COVID-19 pandemic, as homeowners are spending more time at home and are investing more in their homes as a result.

Outdoor and exterior projects make heavy use of outdoor living products like composite decking and fencing, and other aesthetically focused exterior products like siding and trim, which are key and growing product categories for us.

Impact of the COVID-19 Pandemic on Our Industry and Our Business

Beginning in mid-March 2020, local, state, provincial and federal authorities began issuing stay-at-home orders in response to the spread of the coronavirus disease, or COVID-19, which quickly spread throughout the United States and worldwide.

As COVID-19 began to have an effect in North America, the resulting stay-at-home orders significantly impacted new home starts, as builders responded to a sharp drop in buyer traffic and contracts for new homes.

Housing starts dropped in March and April of 2020, typically months of robust homebuilding activity as the start of the construction season.

Following a mid-2020 pause, new construction rebounded quickly.

Likewise, the National Association of Homebuilders’ Builder Confidence Index, recovered to pre-pandemic levels in 2020 and remains above the 20-year average.

The COVID-19 pandemic has motivated many urban high-rise condominium and apartment dwellers to seek out single-family residences in suburban areas where they will have more space for working from home and outdoor spaces for leisure.

This trend has generated additional demand for new single-family homes and spurred builders to increase the pace of new construction.

Like many other companies in the United States and globally, our results were impacted by the COVID-19 pandemic during the early spring of 2020.

However, throughout the pandemic, our business was designated as “essential” and as the stay-at-home orders have eased and as residential construction has recovered, our performance has similarly improved.

Since the onset of the COVID-19 pandemic, we have focused on protecting the health and safety of our team members while maintaining our operations and continuing to meet the needs of our customers.

We undertook a number of precautionary measures during 2020 in order to ensure we maintained a strong liquidity position, including reducing operating expenses and management and board salaries, extending payment terms, furloughing a portion of our salaried workforce initially and ultimately eliminating several of those salaried employees by year end, and freezing most discretionary capital expenditures throughout the initial phases of the pandemic.

In 2021, we benefited from a leaner cost structure, improved operational efficiency, lower working capital

requirements, pricing discipline and better inventory management.

In addition, while some of our suppliers and other parts of the supply chain were disrupted by the lockdown measures, lumber and panel prices have returned to more normalized levels following a period of record prices and high volatility in the second half of 2020 and the first nine months of 2021 due to heightened overall demand for construction and labor pressures across the supply chain.

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

The extent of the impact of the pandemic on our business and sales for the remaining three months of fiscal 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, or future ones, 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 serve.

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 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

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.

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.

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 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 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.

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.

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 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.

Depending on the nature and circumstances of our business in any given year, we may increase our inventory in the fourth quarter in anticipation of higher demand in the first half of the coming year to meet expected customer demand for our products.

Commodity Markets

Our operating results are sensitive to fluctuations in commodity markets, specifically commodity markets for wood-based commodities that we classify as structural products.

When prices fluctuate in the commodity markets which impact us, we may immediately adjust the end price of our products to compensate for the changes in market prices, which is common for businesses with inventories impacted by commodity price fluctuations.

When we change our prices in response to market fluctuations, we will often see immediate impacts in our operating results.

When market prices increase, this impact can be beneficial.

Conversely, when market prices decrease, the impact can be negative because we are adjusting the selling prices for inventory often purchased at higher market prices.

Fluctuations in the commodity markets during the last 18 months have had a significant impact on our operating results for the periods presented in this quarterly report, of which we discuss in more detail elsewhere in this report.

Supply Constraints

Our operating results are impacted by the availability of the products we sell in the markets in which we do business.

When our inventory supply is constrained, our operating results may be impacted by lower sales volumes.

While supply constraints may negatively impact our sales volumes, they may also have a positive impact on our net sales and overall profitability.

This is because supply constraints can cause prices to increase.

Under these circumstances, we may sell less product by volume but at a higher price which could have a positive impact on our levels of sales and profitability.

Conversely, rapid changes in supply levels, such as the sudden increase in availability of a product where the supply was previously constrained, may have a negative impact on our operating results especially in situations where the demand does not also increase proportionally with supply increases.

Our Culture and Management Focus

We remain committed to driving a culture of profitable growth within new and existing product lines and geographies, while positioning the company for long-term value creation.

The following initiatives represent key areas of our management team’s focus:

Foster a performance-driven culture committed to profitable growth.

We are currently focused on enhancing the customer experience;

accelerating organic growth within specific product and solutions offerings where we are

uniquely advantaged;

and deploying capital to drive sustained margin expansion, grow free cash flow conversion and maintain continued profitable growth.

Migrate revenue mix toward higher-margin specialty product categories.

We intend to pursue a revenue mix increasingly weighted toward higher-margin, in-demand specialty product categories.

Management also intends to expand on value-added service offerings designed to simplify complex customer sourcing requirements, together with marketing, inventory and pricing services afforded by our national platform.

Maintain a disciplined capital structure and pursue high-return investments that support growth.

On a trailing twelve-month basis, we have significantly transformed our balance sheet, underscored by a material reduction in net leverage and improved access to liquidity.

Given this, we intend to accelerate capital investments designed to improve the efficiency and reliability of existing assets, including distribution centers and fleet assets.

In the fourth quarter 2021, we intend to invest up to $10 million in our fleet and facilities to improve operational performance and productivity.

Factors That Affect Our Operating Results

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Results of Operations

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

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

Third Quarter of Fiscal 2021 % of

Sales Third Quarter of Fiscal 2020 % of

(In thousands) (In thousands)

8 unchanged sentences

Interest expense, net 8,313 0.9% 10,776 1.2%

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

Other income, net (704) (0.1)% (238) (0.0)%

Income before provision for income taxes 63,430 6.5% 70,918 8.1%

1 unchanged sentence

Net income $ 47,198 4.9% $ 55,116 6.3%

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

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

First Nine Months of Fiscal 2021 % of

Sales First Nine Months of Fiscal 2020 % of

(In thousands) (In thousands)

8 unchanged sentences

Interest expense, net 33,690 1.0% 36,691 1.6%

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)%

Other income, net (1,335) 0.0% (58) 0.0%

Income before provision for income taxes 295,402 8.9% 75,238 3.4%

Provision for income taxes 72,886 2.2% 14,214 0.6%

Net income $ 222,516 6.7% $ 61,024 2.7%

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

The following table sets forth net sales by product category for the three and nine month periods ending October 2, 2021, and September 26, 2020:

Three Months Ended Nine Months Ended

October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020

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

6 unchanged sentences

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

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

Three Months Ended Nine Months Ended

October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020

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

6 unchanged sentences

Total gross margin % 15.8 % 18.3 % 17.7 % 15.8 %

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 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 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 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 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 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 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.

Third Quarter of Fiscal 2021 Compared to Third Quarter of Fiscal 2020

For the third quarter of fiscal 2021, we generated net sales of $970.8 million, an increase of $99.8 million when compared to the third quarter of fiscal 2020 and overall gross margin percentage decreased from 18.3 percent to 15.8 percent year over year.

Our third quarter net income was $47.2 million, or $ 4.74 per diluted share, versus $55.1 million, or $5.72 per diluted share, in the prior-year period.

The significant decline in the market value of higher-cost commodity wood product inventory sold during the third quarter was the primary contributor to our overall gross profit and gross margin percentage decline and year-over-year decrease in profitability.

Net sales of specialty products, which includes engineered wood, industrial products, cedar, moulding, siding, metal products and insulation, increased $145.0 million to $641.0 million in the third quarter.

Elevated demand for construction materials, along with continued supply constraints, contributed to multiple supplier-led price increases throughout the third quarter of fiscal 2021, resulting in improved revenue growth.

Specialty sales volumes declined by lower-double digits percentages overall versus the prior-year period primarily attributable to widespread supply constraints, which impacted many product categories, including engineered wood and specialty lumber and panels.

In contrast, we did see increases in sales volume among certain products within our specialty products category, such as in our moulding, siding, and industrial products.

Specialty products gross profit increased $61.6 million to $147.7 million, with a year-over-year improvement of approximately 560 basis points in specialty gross margin to 23.0 percent for the third quarter of fiscal 2021, compared to 17.4 percent in the third quarter of fiscal 2020.

The increase in specialty gross margin percentage of 5.6 percent over the prior year period is primarily attributable to substantial increases in pricing for our specialty products.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, declined $45.3 million to $329.8 million in the third quarter of fiscal 2021 due to price deflation for commodity wood products.

Structural sales volumes declined overall versus the prior-year period as we implemented commodity risk mitigation actions in

response to historic fluctuations in the commodity markets impacting our structural products.

Commodity wood market pricing began to decline in May and continued to drop through August before beginning to stabilize in September to levels more consistent with five-year historical averages.

Through centralized purchasing and consignment, we were able to reduce wood-based commodity price deflation risk.

Our structural gross margin percentage for the third quarter of fiscal 2021 was 1.7%, down from 19.6% in the prior year period primarily driven by commodity price deflation during the quarter, and was impacted by the release of a lower of cost or net realizable reserve of $16.7 million which we accrued for in the second quarter of fiscal 2021 as commodity prices began a sustained decline.

The inventory impacted by this reserve was sold to customers during the third quarter of fiscal 2021.

Our selling, general, and administrative expenses decreased 4.8 percent, or $3.8 million, compared to the third quarter of fiscal 2020.

The decrease in sales, general, and administrative expenses is due to decreases in our sales commissions and incentive programs of approximately $3.3 million related to a decrease in gross profit, decreases in our delivery and logistical costs of approximately $1.8 million, offset by an increase among remaining general and administrative costs categories, primarily insurance, of approximately $1.3 million.

Depreciation and amortization expense decreased 2.9 percent, compared to the third quarter of fiscal 2020.

Our decrease in depreciation and amortization is due to a lower base of amortizable and depreciable assets throughout the third quarter of fiscal 2021 when compared the prior year period.

The decrease in gains from sales of property in the amount of $8.7 million is due to the sale-leaseback of one of our properties located in Denver, Colorado during the third quarter fiscal 2020 compared to no sale of property during the third quarter fiscal 2021.

Other operating expenses decreased 65.2 percent, or $0.4 million, compared to the third quarter of fiscal 2020 primarily due to a decrease in integration and restructuring related costs reported in the third quarter of fiscal 2020.

Interest expense, net, decreased by 22.9 percent, or $2.5 million, compared to the third 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 fiscal 2021, under which borrowings bore a higher interest rate than under our Revolving Credit Facility combined with lower interest costs resulting from the recent amendments to our Revolving Credit Facility.

Other expense (income), net, decreased $0.5 million compared to the third quarter of fiscal 2020 due to a benefit of $0.4 million resulting from the re-negotiation of one of our multi-employer pension plan liabilities which resulted in a lower liability estimated over the life of our agreement with the pension plan.

Our effective tax rate was 25.6 percent and 22.3 percent for the third quarter of fiscal 2021 and 2020, respectively.

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

Our effective tax rate for the third quarter of fiscal 2020 was additionally impacted by a discrete tax benefit resulting from the effect of the partial release of our valuation allowance for previously nondeductible interest resulting from changes allowed under Section 163(j) of the Internal Revenue Code (“IRC”) as a result of 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.

For the third quarter of fiscal 2021, our net income decreased by $7.9 million from the prior year period due primarily to a decrease in gross profit driven by commodity price deflation earlier in the quarter, that had a direct impact on our structural product sales and gross profit, in conjunction with lower gains from sales of property and a higher income tax expense resulting from our higher effective tax rate.

This decrease was offset by reductions in our selling, general, and administrative and interest expenses.

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

For the nine months ended October 2, 2021, we generated net sales of $3.3 billion, an increase of $1.1 billion when compared to the prior-year period.

Our nine month 2021 net income was $222.5 million, or $22.91 per diluted share, versus $61.0 million, or $6.48 per diluted share, in the prior-year period.

A rapid and significant increase in the market pricing for our commodity wood products in the first five months of fiscal 2021 drove dramatic improvement in gross profit margins for our structural products, when compared to the same prior year period.

Substantial increases in our specialty products also drove increases in our profitability.

Net sales of specialty products, which includes engineered wood, industrial products, cedar, moulding, siding, metal products and insulation, increased $512.2 million to $1.9 billion in the first nine months of fiscal 2021.

Elevated demand for construction materials, along with continued supply constraints, contributed to multiple supplier-led price increases throughout the first nine months of fiscal 2021, which we capitalized on, resulting in improved revenue growth and margin expansion among our specialty products.

Specialty sales volumes were flat versus the prior-year period despite widespread supply constraints which impacted most products within our specialty category.

Specialty products gross profit increased $188.4 million to $421.2

million, with a year-over-year improvement of approximately 540 basis points in specialty gross margin to 22.4 percent.

The increase in our specialty products gross margin percentages during the first nine months of fiscal 2021 was the result of substantial increase in pricing driven by increased demand paired with the supply constrained environment.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, increased $560.1 million to $1.4 billion in the first nine months of fiscal 2021 due to significant price increases for commodity wood products occurring during in the first five months of fiscal 2021.

This price inflation impacted the market value of our existing commodity wood product inventory on-hand through May after which prices declined through August 2021.

Structural volumes decreased during the nine month period as we implemented commodity risk mitigation actions in response to historic fluctuations in the commodity markets impacting our structural products.

Structural gross profit margins for the first nine months of fiscal 2021 were 11.5 percent compared to 13.9 percent in the prior year period, a decline of approximately 240 basis points, due to wood-based commodity market volatility.

For the first nine months of fiscal 2021, selling, general, and administrative expenses increased 6.0 percent, or $13.5 million, compared to the first nine months of fiscal 2020.

The increase in sales, general, and administrative expenses is due to increases in our sales commissions and incentives of approximately $7.8 million, payroll and other related cost of $1.7 million, and general and administrative costs of approximately $4.0 million, which includes increases in cost categories such as insurance.

Depreciation and amortization expense decreased 1.6 percent, or $0.4 million, compared to the first nine months of fiscal 2020.

The decrease in depreciation and amortization expense is due to a lower base of amortizable and depreciable assets throughout the first nine months of fiscal 2021 when compared to the prior year period.

During the first nine months of fiscal 2020, we completed the sale leaseback of one of our Denver facilities which resulted in a gain from the sale of property of $8.7 million during the period.

During the first quarter of fiscal 2021, we completed the sale of our Birmingham dark property which resulted in a gain from the sale of property of $1.3 million.

We completed no additional property sales during the remainder of the first nine months of fiscal 2021 which is resulting in a decrease in gains from sales of property of $7.9 million when compared to the prior year period.

Other operating expenses decreased 82.2 percent, or $5.5 million, compared to the first nine months of fiscal 2020 primarily due to a decrease in spending related to integration and restructuring related costs reported during the first nine months of fiscal 2020.

Our interest expense, net, for the first nine months of fiscal 2021, decreased by 8.2 percent, or $3.0 million, compared to the prior year period.

The decrease is primarily due to reduction of interest expense of $8.8 million resulting from lower debt, including the repayment in full of our former Term Loan Facility at the end of the first quarter of fiscal 2021, under which borrowings bore a higher interest rate than under our Revolving Credit Facility.

Interest savings resulting from the repayment of our term loan facility at the end of the first quarter of fiscal 2021 combined with lower interest costs resulting from the renegotiation of our revolving credit facility in the third quarter of fiscal 2021.

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 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.

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.

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.

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.

Our other expense (income), net, also decreased by $1.3 million compared to the first nine months of fiscal 2020.

The decrease in other expense (income), net is resulting from a benefit of $0.4M resulting from the re-negotiation of one of our multi-employer pension plan liabilities which resulted in a lower estimated liability over the life of our agreement with the pension plan combined with the reduction of other immaterial expenses incurred in the prior year period.

Our effective tax rate was 24.7 percent and 18.9 percent for the first nine months of fiscal 2021 and 2020, respectively.

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

Our effective tax rate for the first nine months of fiscal 2020 was additionally impacted by a discrete tax benefit resulting from the effect of the partial release of our valuation allowance for previously nondeductible interest resulting from changes allowed under Section 163(j) of the Internal Revenue Code (“IRC”) as a result of 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 for the first nine months of fiscal 2021 increased $161.5 million from the prior year period primarily due to the increase in gross profit resulting from substantial price increases impacting our specialty products combined with benefits from commodity price inflation during the nine month period when compared to prior year.

Increases in gross profit were offset by gains from the sales of property during the nine month period.

Additionally, net income benefited from slightly lower interest expense offset by higher income tax expense, resulting from our higher effective tax rate.

Liquidity and Capital Resources

We expect our primary sources of liquidity to be cash flows from sales in the normal course of our operations and borrowings under our Revolving Credit Facility.

We expect our primary sources of liquidity to be cash flows from sales in the normal course of our operations and borrowings under our Revolving Credit Facility, among other sources.

We expect that these sources will fund our ongoing cash requirements for the foreseeable future.

We believe that our sales in the normal course of our operations, and amounts currently available from our Revolving Credit Facility and other sources, will be sufficient to fund our routine operations, including working capital requirements, for at least the next twelve months.

On October 25, 2021, we consummated a $300 million private offering of Senior Secured Notes.

We used the majority of net proceeds from the offering to repay borrowings under our ABL credit facility.

Closing of Senior Secured Notes of $300M at 6.0% Due 2029

On October 25, 2021, we closed a private offering of $300 million at 6.0% senior secured notes to persons reasonably believed to be “qualified institutional buyers,” as defined in Rule 144A under the Securities Act of 1933, as amended (“The Securities Act”), and to non-U.S.

persons outside the United States under Regulation S under the Securities Act.

The 2029 Notes were issued to investors at 98.625% of their principal amount and will mature on November 15, 2029.

Our obligations under these senior secured notes will be guaranteed by our domestic subsidiaries that are co-borrowers under or guarantee our revolving credit facility.

The senior secured notes and the related guarantees will be secured by a first-priority security interest in substantially all of our guarantor’s existing and future assets (other than receivables, inventory, deposit accounts, securities accounts, business interruption insurance and other related assets, subject to certain exceptions and customary permitted liens).

The senior secured notes and the related guarantees will also be secured on a second-priority basis by a lien on our revolving credit facility collateral.

The majority of net proceeds from the offering of the senior secured notes were used to repay borrowings under our revolving credit facility.

Revolving Credit Facility

In April 2018, we amended and restated our Revolving Credit Facility to provide for a senior secured revolving loan and letter of credit facility of up to $600 million and an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to $150 million.

In April 2018, we amended and restated our Revolving Credit Facility with Wells Fargo Bank, National Association, and in August 2021, we amended the facility to, among other things, extend the maturity date of the facility and reduce the interest rate on borrowing under the facility (as amended, the “Revolving Credit Facility”).

The Revolving Credit Facility provides for senior secured revolving loan and letter of credit facility of up to $600.0 million and an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to $150.0 million.

If we obtain the full amount of the additional increases in commitments, the Revolving Credit Facility will allow borrowings of up to $750.0 million.

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If excess availability falls below the greater of (i) $50.0 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) $50.0 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 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 October 2, 2021, we had outstanding borrowings of $223.1 million and excess availability of $351.9 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.

Our average effective interest rate was 2.0 percent and 2.8 percent for the quarters ended October 2, 2021 and January 2, 2021, respectively.

For the quarter ended September 26, 2020, our average effective interest rate was 2.7 percent.

We were in compliance with all covenants under the Revolving Credit Facility as of October 2, 2021.

persons outside the United States under Regulation S under the Securities Act.

The 2029 Notes were issued to investors at 98.625% of their principal amount and will mature on November 15, 2029.

The majority of the net proceeds from the offering of the senior secured notes will be used to repay borrowings under our revolving credit facility.

In conjunction with this offering, we have reduced the limit of our revolving credit facility from $600 million to $350 million.

All other terms of our revolving credit facility remain the same as our Second Amendment entered on August 2, 2021.

Term Loan Facility

We previously had a term loan facility that we entered into in April 2018 with HPS Investments Partners, LLC, as administrative and collateral agent, and certain other financial institutions party thereto (the “Term Loan Facility”), with a maturity date of October 13, 2023.

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.

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 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.

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

On April 2, 2021, we repaid the remaining outstanding principal balance of the Term Loan Facility and extinguished the debt.

As a result, as of October 2, 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 fiscal 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 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.

There were no prepayment premiums associated with the repayment of indebtedness for the three month period ended October 2, 2021 and for the three month period ended September 26, 2020, prepayment premiums were $0.3 million.

Prepayment premiums were $0.9 million and $2.6 million for the nine month periods ended October 2, 2021 and September 26, 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 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

In addition, during the second quarter of fiscal 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 $276.9 million as of October 2, 2021.

Of the $276.9 million of finance lease commitments as of October 2, 2021, $243.2 million related to real estate and $33.7 million related to equipment.

LIBOR Interest Rates

Our Revolving Credit Facility includes available interest rate options based on the London Inter-bank Offered Rate (“LIBOR”).

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Operating Activities

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.

Net cash provided by operating activities for the first nine months of fiscal 2021 was $126.9 million, compared to net cash provided by operating activities of $74.4 million in the first nine months of fiscal 2020.

The increase in cash provided by operating activities during the first nine 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.

The first nine months of fiscal 2021 also included approximately $82.6 million in cash income tax obligations payments when compared to the prior year period, which benefited from our remaining federal net operating loss carry-forward of $80.6 million which were used in fiscal 2020.

Investing Activities

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.

Net cash used in investing activities for the first nine months of fiscal 2021 was $2.8 million compared to net cash used in investing activities of $8.8 million in the first nine 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 fiscal 2021, combined with the sale of our non-operating facility in Birmingham, Alabama during the first quarter of fiscal 2021, both of

which were partially offset by $3.5 million increase in investments in property and equipment, specifically investments in both our fleet and facilities.

Financing Activities

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.

Net cash used in financing activities totaled $124.0 million for the first nine months of fiscal 2021, compared to net cash used in financing activities of $84.7 million for the first nine months of fiscal 2020.

The increase in net cash used in financing activities is primarily due to an increase of $314.3 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, partially offset by an increase in borrowings of $358.3 million from our Revolving Credit Facility, and $78.3 million in proceeds from real estate financing transactions completed in the first nine months of fiscal 2020, with no such transactions completed in the first nine months of fiscal 2021.

Stock Repurchase Program

On August 23, 2021, we announced that our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $25.0 million of our common stock.

Under the stock repurchase program approved by our Board of Directors, we may repurchase our common stock at any time or from time to time, without prior notice, subject to prevailing market conditions and other considerations.

Our repurchases, if any, may be made through a variety of methods, which may include open market purchases, privately negotiated transactions or pursuant to a trading plan that may be adopted in accordance with the Securities and Exchange Commission Rule 10b5-1.

As of the date of this filing, we have made no repurchases of our common stock under this program.

Operating Working Capital

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Selected financial information

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

October 2, 2021 January 2, 2021 September 26, 2020

(In thousands)

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Operating working capital $ 571,212 $ 470,670 $ 445,820

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 $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

Operating working capital of $571.2 million as of October 2, 2021, compared to $470.7 million as of January 2, 2021, increased on a net basis by approximately $100.5 million.

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

Accounts payable, also increased due to the inflation of product costs.

Operating working capital of $571.2 million as of October 2, 2021, compared to $445.8 million as of September 26, 2020, increased by $125.4 million.

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

Investments in Property and Equipment

Our investments in capital assets consist of cash paid for owned assets and the inception of financing lease arrangements for long-lived assets to support our distribution infrastructure.

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

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.

During the third quarter of fiscal 2021, we invested $2.5 million in cash in investments in long-lived assets.

For the first nine months of fiscal 2021, we invested $5.4 million in cash and entered into finance leases totaling $10.5 million, for a total investment of $15.9 million.

In the fourth quarter 2021, we intend to invest up to $10 million in our fleet and facilities to improve operational performance and productivity.

Critical Accounting Policies

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industry conditions;

and liquidity and capital resources.

commodity markets;

supple constraints and liquidity and capital resources.

Forward-looking statements are based on estimates and assumptions made by our management that, although believed by us to be reasonable, are inherently uncertain.

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• our cash flows and capital resources may be insufficient to make required payments on our indebtedness or future indebtedness;

• the instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business, including requiring us to maintain a minimum level of excess liquidity;

• the instruments, including the notes, governing our indebtedness contain various covenants limiting the discretion of our management in operating our business, including requiring us to maintain a minimum level of excess liquidity;

• borrowings under our Revolving Credit Facility bear interest at a variable rate, which subjects us to interest rate risk, which could cause our debt service obligations to increase significantly;

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• the risk that changes in, or interpretation of, accounting principles could result in unfavorable accounting changes.

• the notes will be structurally subordinated to all indebtedness of the issuer’s existing and future subsidiaries that are not and do not become guarantors of the notes;

• subsidiary guarantees of indebtedness under our secured Revolving Credit Facility may be released in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the notes;

• the issuer may not be able to purchase the notes upon a Change of Control Triggering Event;

• investors may not be able to determine when a change of control has occurred following a sale of “substantially all” of our assets;

• there are significant restrictions on your ability to transfer or resell your notes;

• your ability to transfer the notes may be limited by the absence of an active trading market, and an active trading market may not develop for the notes;

federal and state laws permit courts to void guarantees under certain circumstances;

• we are not providing all of the information that would be required if this offering were being registered with the SEC;

• redemption may adversely affect your return on the notes;

• the credit ratings assigned to the notes may not reflect all risks of an investment in the notes;

• changes in our credit ratings could adversely affect the market prices or liquidity of the notes;

• other secured indebtedness, including indebtedness under our Revolving Credit Facility with respect to the Priority RCF Collateral, are senior to the notes to the extent of the value of the collateral securing such indebtedness on a first-priority basis;

• the value of the collateral securing the notes may not be sufficient to satisfy our obligations under the notes;

• sales of assets by the Company and guarantors could reduce the pool of assets that will secure the notes and the guarantees;

• rights of holders of notes in the collateral may be adversely affected by bankruptcy proceedings.

Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements.

We expressly disclaim any obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.

THIRD-PARTY INFORMATION

This report contains references to industry data and information from third parties including U.S.

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While we believe the information is reliable, we have not independently verified it and cannot guarantee its accuracy or completeness.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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What changed 10-Q

Item 2. Management’s Discussion and Analysis