BlueLinx Holdings Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS About Our Business BlueLinx is 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 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 over 40 states, and the strength of a locally focused sales force, as a two-step wholesale distributor, we distribute a 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, Allura, James Hardie, Fiberon, Royal, Oldcastle APG, Louisiana-Pacific, and Weyerhaeuser. We 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 whom then serve residential and commercial builders and contractors in their respective geographic areas and local markets. As a value-added partner in a complex and demanding building products supply chain, we play a critical role in enabling our customers to offer a broad range of products and brands, as most of our customers do not have the capability to purchase and warehouse products directly from manufacturers for such a large set of SKUs. The depth of our geographic footprint supports meaningful customer proximity across all the markets in which we operate, enabling faster and more efficient service. Similarly, we provide value to our supplier partners by enabling access to the large and fragmented network of lumber yards and dealers 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 repair and remodel and residential new construction, 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 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 year-over-year increases in spending on home improvement projects will peak at 19.7 percent in the third quarter of this year before sliding downward to 15.1 percent in the first quarter of 2023. 17 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 142 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. 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. U.S. 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, 2021 single family housing starts in the United States were approximately 1.6 million, an increase of 16 percent above 2020 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. Seasonality We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors common in the building products distribution industry. The first and fourth quarters are typically our lower volume quarters due to the impact of unfavorable weather on the construction market. Our second and third 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 second and third quarters, reflecting general increases in seasonal demand. 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 18 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: 1. Foster a performance-driven culture committed to profitable growth. This includes enhancing the customer experience; accelerating organic growth within specific product and solutions offerings where the Company is uniquely advantaged; and deploying capital to drive sustained margin expansion, grow cash flow and maintain continued profitable growth. 2. Migrate sales mix toward higher-margin specialty product categories. The Company intends to pursue a revenue mix increasingly weighted toward higher-margin, specialty product categories such as engineered wood, moulding, millwork, decking and industrial products. Additionally, the Company intends to expand its value-added service offerings designed to simplify complex customer sourcing requirements, together with marketing, inventory and pricing services afforded by the Company’s national platform. 3. Maintain a disciplined capital structure and pursue high-return investments that increase the value of the Company. The Company intends to maintain a disciplined capital structure while at the same time investing in its business to modernize its trailer fleet and distribution facilities and to improve operational performance. The Company also continues to evaluate potential acquisition targets that complement its existing capabilities, grow its specialty products business, increase customer exposure, expand its geographic reach, or a combination thereof. We invested $2.5 million in our business during the first quarter of fiscal 2022 to improve operational performance and productivity. Factors That Affect Operating Results Our results of operations and financial performance are influenced by a variety of factors, including the following: pricing and product cost variability; volumes of product sold; competition; changes in the supply and/or demand for products that we distribute; the cyclical nature of the industry in which we operate; housing market conditions; consolidation among competitors, suppliers, and customers; disintermediation risk; loss of products or key suppliers and manufacturers; our dependence on international suppliers and manufacturers for certain products; potential acquisitions and the integration and completion of such acquisitions; business disruptions; effective inventory management relative to our sales volume or the prices of the products we produce; information technology security risks and business interruption risks; the ability to attract, train, and retain highly qualified associates and other key personnel while controlling related labor costs; exposure to product liability and other claims and legal proceedings related to our business and the products we distribute; natural disasters, catastrophes, fire, or other unexpected events; successful implementation of our strategy; wage increases or work stoppages by our union employees; costs imposed by federal, state, local, and other regulations; compliance costs associated with federal, state, and local environmental protection laws; the COVID-19 pandemic and other contagious illness outbreaks and their potential effects on our industry; regulations concerning mandatory COVID-19 vaccines; fluctuations in our operating results; our level of indebtedness and our ability to incur additional debt to fund future needs; the covenants of the instruments governing our indebtedness limiting the discretion of our management in operating the business; variable interest rate risk under certain indebtedness; the fact that we have consummated certain sale leaseback transactions with resulting long-term non-cancelable leases, many of which are or will be finance leases; the fact that we lease many of our distribution centers, and we would still be obligated under these leases even if we close a leased distribution center; inability to raise funds necessary to finance a required repurchase of our senior secured notes; inability to successfully execute the ASR; a lowering or withdrawal of debt ratings; changes in our product mix; increases in petroleum prices; shareholder activism; changes in insurance-related deductible/retention reserves based on actual loss experience; the possibility that the value of our deferred tax assets could become impaired; changes in our expected annual effective tax rate could be volatile; changes in actuarial assumptions for our pension plan; the costs and liabilities related to our participation in multi-employer pension plans could increase; the risk that our cash flows and capital resources may be insufficient to service our existing or future indebtedness; the possibility that we could be the subject of securities class action litigation due to stock price volatility; activities of activist shareholders; indebtedness terms that limit our ability to pay dividends on common stock; and changes in, or interpretation of, accounting principles. 19 Results of Operations The following table sets forth our results of operations for the first quarter of fiscal 2022 and fiscal 2021: First Quarter of Fiscal 2022 % of Net Sales First Quarter of Fiscal 2021 % of Net Sales (In thousands) (In thousands) Net sales $ 1,302,305 100.0% $ 1,025,469 100.0% Gross profit 291,051 22.3% 180,392 17.6% Selling, general, and administrative 91,289 7.0% 75,560 7.4% Depreciation and amortization 6,746 0.5% 7,465 0.7% Amortization of deferred gains on real estate (984) (0.1)% (984) (0.1)% Gains from sales of property — 0.0% (1,287) (0.1)% Other operating expenses 838 0.1% 112 —% Operating income 193,162 14.8% 99,526 9.7% Interest expense, net 11,293 0.9% 16,234 1.6% Other expense (income), net 1,138 0.1% (314) (0.0)% Income before provision for income taxes 180,731 13.9% 83,606 8.2% Provision for income taxes 47,322 3.6% 21,746 2.1% Net income $ 133,409 10.2% $ 61,860 6.0% The following table sets forth net sales by product category for the three-month periods ending April 2, 2022, and April 3, 2021: Three Months Ended April 2, 2022 April 3, 2021 Net sales by category ($ in thousands) Specialty products $ 767,907 59 % $ 563,060 55 % Structural products 534,398 41 % 462,409 45 % Net sales $ 1,302,305 100 % $ 1,025,469 100 % The following table sets forth gross profit and gross margin percentages by product category for the three-month periods of fiscal 2022 and 2021: Three Months Ended April 2, 2022 April 3, 2021 Gross profit $ by category ($ in thousands) Specialty products $ 184,099 $ 108,535 Structural products 106,952 71,857 Gross profit $ 291,051 $ 180,392 Gross margin percentage by category Specialty products 24.0 % 19.3 % Structural products 20.0 % 15.5 % Total gross margin % 22.3 % 17.6 % 20 First Quarter of Fiscal 2022 Compared to First Quarter of Fiscal 2021 For the first quarter of fiscal 2022, we generated net sales of $1.3 billion, an increase of $276.8 million when compared to the first quarter of fiscal 2021 and overall gross margin percentage increased from 17.6 percent to 22.3 percent year over year. Our first quarter net income was $133.4 million, or $13.19 per diluted share, versus $61.9 million, or $6.28 per diluted share, in the prior-year period. The continued robust demand for building products and increased wood-based commodity prices are the primary contributors to the increase in our overall profitability year over year. Net sales of specialty products, which includes products such as engineered wood, industrial products, cedar, moulding, siding, metal products and insulation, increased $204.8 million to $767.9 million in the first quarter of fiscal 2022. Continued strong demand for building products, along with continued supply constraints, contributed to multiple supplier-led price increases throughout the first quarter of fiscal 2022, resulting in improved revenue growth. Specialty products gross profit increased $75.6 million to $184.1 million, with a year-over-year improvement of 470 basis points in specialty gross margin to 24.0 percent for the first quarter of fiscal 2022, compared to 19.3 percent in the first quarter of fiscal 2021. The increase in specialty gross margin percentage 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, increased $72.0 million to $534.4 million in the first quarter of fiscal 2022 due to continued strong demand for building products and increased wood-based commodity prices. Our structural gross margin percentage for the first quarter of fiscal 2022 was 20.0 percent, up from 15.5 percent in the prior-year period, primarily attributable to substantial increases in pricing for our structural products. Our selling, general, and administrative expenses increased 20.8 percent, or $15.7 million, compared to the first quarter of fiscal 2021. The increase in sales, general, and administrative expenses is due to increases in our sales commissions, driven by an increase in gross profit, and incentive programs of approximately $8.9 million, increases in our delivery and logistical costs of approximately $5.3 million, and an increase among remaining operating cost categories of approximately $1.5 million. Depreciation and amortization expense decreased 9.6 percent, compared to the first quarter of fiscal 2021. Our decrease in depreciation and amortization is due to a lower base of amortizable and depreciable assets throughout the first quarter of fiscal 2022 when compared the prior-year period. The decrease in gains from sales of property in the amount of $1.3 million is due to the sale of our Birmingham property during the first quarter of fiscal 2021 compared to no sale of property during the first quarter of fiscal 2022. Other operating expenses increased $0.7 million compared to the first quarter of fiscal 2021 primarily due to restructuring related costs, including severance, incurred in the first quarter of fiscal 2022. Interest expense, net, decreased by 30.4 percent, or $4.9 million, compared to the first quarter of fiscal 2021. The decrease is primarily due 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. Other expense (income), net, increased $1.5 million compared to the first quarter of fiscal 2021 primarily due to an increase in other non-operating expenses. Our effective tax rate was 26.2 percent and 26.0 percent for the first quarter of fiscal 2022 and 2021, respectively. Our effective tax rate for both periods was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, slightly offset by a benefit from the vesting of restricted stock units, which occurred during each period. Our effective tax rate for the three months ended April 3, 2021 also benefited from the partial release of our valuation allowance for state net operating loss carryforwards we anticipated being able to utilize based on our taxable income through the end of the first quarter of fiscal 2021. For the first quarter of fiscal 2022, our net income increased by $71.5 million from the prior-year period due primarily to an increase in gross profit driven by continued demand and beneficial pricing of our products, in conjunction with lower interest expense. This increase was partially offset by increases in our selling, general, and administrative and income tax expenses. 21 Liquidity and Capital Resources We expect our primary sources of liquidity to be cash flows from sales and operating activities in the normal course of our operations and availability from our revolving credit facility, as needed. We expect that these sources will be sufficient to fund our ongoing cash requirements for the foreseeable future. Senior Secured Notes In October 2021, we entered into an indenture (the “Indenture”) with the guarantors party thereto and Truist Bank, as trustee and collateral agent, in connection with a private offering of $300 million of our six percent senior secured notes due 2029 (the “2029 Notes”). The 2029 Notes were issued to investors at 98.625 percent of their principal amount and will mature on November 15, 2029. The majority of net proceeds from the offering of the 2029 Notes were used to repay borrowings under our revolving credit facility. Revolving Credit Facility In April 2018, we entered into a revolving credit facility with Wells Fargo Bank, National Association, as administrative agent (“the Agent”), and certain other financial institutions party thereto. In August 2021, we entered into a second amendment to our revolving credit facility to, among other things, extend the maturity date of the facility to August 2, 2026, and reduce the interest rate on borrowings under the facility (as amended, the “revolving credit facility”). As amended, the revolving credit facility provides for a senior secured asset-based revolving loan and letter of credit facility of up to $350 million. The Borrowers’ obligations under the revolving credit facility are secured by a security interest in substantially all of our and our subsidiaries’ assets (other than real property), including inventories, accounts receivable, and proceeds from those items. Borrowings under the revolving credit facility bear interest at a rate per annum equal to (i) London Inter-bank Offered Rate (“LIBOR”) plus a margin ranging from 1.25 percent to 1.75 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on LIBOR, or (ii) the Agent’s base rate plus a margin ranging from 0.25 percent to 0.75 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate. Borrowings under the revolving credit facility are subject to availability under the Borrowing Base (as that term is defined in the revolving credit agreement). The Borrowers are required to repay revolving loans thereunder to the extent that such revolving loans exceed the Borrowing Base then in effect. The revolving credit facility may be prepaid in whole or in part from time to time without penalty or premium, but including all breakage costs incurred by any lender thereunder. As of April 2, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $420.9 million under our revolving credit facility. As of January 1, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $431.7 million under our revolving credit facility. Our average effective interest rate under the facility was zero percent and 2.4 percent for the quarters ended April 2, 2022, and April 3, 2021, respectively. The revolving credit facility contains certain financial and other covenants, and our right to borrow under the revolving credit facility is conditioned upon, among other things, our compliance with these covenants. We were in compliance with all covenants under the revolving credit facility as of April 2, 2022. 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 January 1, 2022 and April 2, 2022, we had zero outstanding borrowings under the term loan facility, which has been extinguished. In connection with our repayment of the outstanding principal balance in full on April 2, 2021, we expensed $5.8 million of debt issuance costs that we were amortizing in connection with our former term loan facility. These costs are included within interest expense, net on the condensed consolidated statements of operations and reported separately as an adjustment to net income in our condensed consolidated statements of cash flows. There were no prepayment premiums associated with the repayment of indebtedness for the three-month period ended April 2, 2022. Prepayment premiums were $0.9 million for the three-month period ended April 3, 2021. 22 Finance Lease Commitments Our finance lease liabilities consist of leases related to equipment and vehicles, and to real estate, with the majority of those finance lease commitments relating to the real estate financing transactions that we have completed in recent years. During fiscal 2017 and 2018, we completed real estate financing transactions on six warehouse facilities; during fiscal 2019, we completed real estate financing transactions on two warehouse facilities; and, during fiscal 2020, we completed real estate financing transactions on fourteen warehouse facilities. We recognized finance lease assets and obligations as a result of each of these transactions. Our total finance lease commitments totaled $271.9 million as of April 2, 2022. Of the $271.9 million of finance lease commitments as of April 2, 2022, $242.0 million related to real estate and $29.9 million related to equipment. Interest Rates Our revolving credit facility includes available interest rate options based on LIBOR. Certain LIBOR rates were discontinued after 2021, while other rates will be discontinued in 2023. The U.S. and other countries are currently working to replace LIBOR with alternative reference rates. The consequences of these developments with respect to LIBOR cannot be entirely predicted; however, we do not believe that the discontinuation of LIBOR as a reference rate in our loan agreement will have a material adverse effect on our financial position or materially affect our interest expense. Sources and Uses of Cash Operating Activities Net cash provided by operating activities for the first three months of fiscal 2022 was $2.2 million, compared to net cash used in operating activities of $24.6 million in the first three months of fiscal 2021. The increase in cash provided by operating activities during the first three months of fiscal 2022 was primarily a result of the increase in net income for the current-year period compared to the prior-year period and an increase in our taxes payable balance compared to the prior-year period, partially offset by an increase in accounts receivable and inventories in the current-year period compared to the prior-year period. Investing Activities Net cash used in investing activities for the first three months of fiscal 2022 was $2.5 million compared to net cash provided by investing activities of $0.7 million in the first three months of fiscal 2021. The increase in net cash used in investing activities was primarily due to higher proceeds received during the first quarter of 2021 from the sale of our non-operating facility in Birmingham and higher spend on property and equipment in the current year-period compared to the prior-year period. Financing Activities Net cash used in financing activities totaled $10.5 million for the first three months of fiscal 2022, compared to net cash provided by financing activities of $24.0 million for the first three months of fiscal 2021. The increase in net cash used in financing activities is primarily due to borrowings of $262.2 million from our revolving credit facility, partially offset by $235.1 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, in the first three months of fiscal 2021, with no such transactions completed in the first three months of fiscal 2022. Additionally, we spent $6.4 million repurchasing our common stock under our announced repurchase program during the first three months of fiscal 2022, with no such transactions completed in the first three 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 program, 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 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 April 2, 2022, we have repurchased 81,331 shares for $6.4 million under this program and we have a remaining authorization amount of $18.6 million. On May 3, 2022, we announced that our Board of Directors has increased our share repurchase authorization to $100.0 million, up $75.0 million from the previous program, and that we have entered into an Accelerated Share Repurchase agreement (“ASR”) with Jeffries LLC to repurchase $60.0 million of our common stock. 23 Operating Working Capital Operating working capital is an important measurement we use to determine the efficiencies of our operations and our ability to readily convert assets into cash. Operating working capital is defined as the sum of cash, receivables, and inventory, less accounts payable. Management of working capital helps us monitor our progress in meeting our goals to enhance working capital assets. Selected financial information April 2, 2022 January 1, 2022 April 3, 2021 (In thousands) Current assets: Cash and cash equivalents $ 74,438 $ 85,203 $ 179 Receivables, less allowance for doubtful accounts 497,056 339,637 418,815 Inventories, net 562,555 488,458 376,423 $ 1,134,049 $ 913,298 $ 795,417 Current liabilities: Accounts payable $ 230,072 $ 180,000 $ 218,975 $ 230,072 $ 180,000 $ 218,975 Operating working capital $ 903,977 $ 733,298 $ 576,442 Operating working capital of $904.0 million as of April 2, 2022, compared to $733.3 million as of January 1, 2022, increased on a net basis by approximately $170.7 million. The increase in operating working capital is primarily driven by an increase in accounts receivable from our continued increase in net sales along with an increase in inventory, which continues to be affected by the inflationary environment for building materials. The net increase in current assets was offset by an increase in accounts payable, also affected by the inflationary environment for building products. Operating working capital of $904.0 million as of April 2, 2022, compared to $576.4 million as of April 3, 2021, increased by $327.5 million. The increase in operating working capital is primarily driven by an increase in inventory, which continues to be affected by the inflationary environment for building products, along with an increase in accounts receivable and cash from our continued increase in net sales. The net increase in current assets was offset by an increase in accounts payable, also affected by the inflationary environment for building products. 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. For the first quarter ended April 2, 2022, we invested $2.5 million in cash investments in long-lived assets primarily related to investments in our distribution branches and to a lesser extent, upgrading our fleet. Critical Accounting Policies The preparation of our consolidated financial statements and related disclosures in conformity with GAAP requires our management to make judgments and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. There have been no material changes to our critical accounting policies from the information provided in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022. Forward-Looking Statements This report contains forward-looking statements. 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, 24 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; anticipated effects of adopting certain accounting standards; estimated future annual amortization expense; potential changes to estimates made in connection with revenue recognition; the expected outcome of legal proceedings; industry conditions; seasonality; 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. Forward-looking statements involve risks and uncertainties that may cause our business, strategy, or actual results to differ materially from the forward-looking statements. These risks and uncertainties include those discussed under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended January 1, 2022, and those discussed elsewhere in this report (including Item 1A of Part II of this report) and in future reports that we file with the SEC. We operate in a changing environment in which new risks can emerge from time to time. It is not possible for management to predict all of these risks, nor can it assess the extent to which any factor, or a combination of factors, may cause our business, strategy, or actual results to differ materially from those contained in forward-looking statements. Factors that may cause these differences include, among other things: • we may experience pricing and product cost variability; • our earnings are highly dependent on volumes; • our industry is highly fragmented and competitive and if we are unable to compete effectively, our net sales and operating results may be reduced; • our industry is highly cyclical, and prolonged periods of weak demand or excess supply may reduce our net sales and/or margins, which may cause us to incur losses or reduce our net income; • adverse housing market conditions may negatively impact our business, liquidity, and results of operations, and increase the credit risk from our customers; • consolidation among competitors, suppliers, and customers could negatively impact our business; • we are subject to disintermediation risk; • loss of key products or key suppliers and manufacturers could affect our financial health; • our dependence on international suppliers and manufacturers for certain products exposes us to risks that could affect our financial condition; • our strategy includes pursuing acquisitions, and we may be unsuccessful in making and integrating mergers, acquisitions and investments, and completing divestitures; • we may incur business disruptions resulting from a variety of possible causes; • we may be unable to effectively manage our inventory relative to our sales volume or as the prices of the products we distribute fluctuate, which could affect our business, financial condition, and operating results; • we are subject to information technology security risks and business interruption risks and may incur increasing costs in an effort to minimize and/or respond to those risks; • our success depends on our ability to attract, train, and retain highly qualified associates and other key personnel while controlling related labor costs; • we are exposed to product liability and other claims and legal proceedings related to our business and the products we distribute, which may exceed the coverage of our insurance; • our business operations could suffer significant losses from climate changes, natural disasters, catastrophes, fire, or other unexpected events; • our operating results depend on the successful implementation of our strategy and we may not be able to implement our strategic initiatives successfully, on a timely basis, or at all; • a significant percentage of our employees are unionized, and wage increases or work stoppages by our unionized employees may reduce our results of operations; • federal, state, local, and other regulations could impose substantial costs and restrictions on our operations that would reduce our net income; • we are subject to federal, state, and local environmental protection laws and may have to incur significant costs to comply with these laws and regulations in the future; • the ongoing effect of the COVID-19 pandemic and other widespread public health crises may adversely affect our business and results from operations; • our vaccination policies and governmental regulations concerning mandatory COVID-19 vaccination of employees could have a material adverse impact on our business and results of operations; • our future operating results may fluctuate significantly, and our current operating results may not be a good indication of our future performance; • fluctuations in our quarterly financial results could affect our stock price in the future; • our level of indebtedness could limit our financial and operating activities and adversely affect our ability to incur additional debt to fund future needs; 25 • 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; • 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; • despite our current levels of debt, we may still incur more debt, which would increase the risks described in these risk factors relating to indebtedness; • we have sold and leased back certain of our distribution centers under long-term non-cancelable leases, and we may enter into similar transactions in the future. All of these leases are (or will be) finance leases, and our debt and interest expense may increase as a result; • many of our distribution centers are leased, and if we close a leased distribution center before expiration of the lease, we will still be obligated under the applicable lease, and we may be unable to renew the leases at the end of their terms; • we may not have or be able to raise the funds necessary to finance a required repurchase of our senior secured notes; • constraints, volatility or disruptions in the capital markets or other factors affecting the amount and timing of share repurchases; • our ability to successfully execute the ASR; • the number of shares that will be delivered to the Company under the ASR; • whether or not the Company will continue, and the timing of, any open market repurchases; • a lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital; • a change in our product mix could adversely affect our results of operations; • if petroleum or energy prices increase, our results of operations could be adversely affected; • we establish insurance-related deductible/retention reserves based on historical loss development factors, which could lead to adjustments in the future based on actual development experience; • the value of our deferred tax assets could become impaired, which could materially and adversely affect our operating results; • our expected annual effective tax rate could be volatile and materially change as a result of changes in mix of earnings and other factors; • changes in actuarial assumptions for our pension plan could impact our financial results, and funding requirements are mandated by the Federal government; • costs and liabilities related to our participation in multi-employer pension plans could increase; • our cash flows and capital resources may be insufficient to make required payments on our indebtedness or future indebtedness; • we could be the subject of securities class action litigation due to stock price volatility, which could divert management’s attention and adversely affect our results of operations; • the activities of activist stockholders could have a negative impact on our business and results of operations; • the terms of our revolving credit facility and senior secured notes place restrictions on our ability to pay dividends on our common stock, so any returns to stockholders may be limited to the value of their stock; • changes in, or interpretation of, accounting principles could result in unfavorable accounting changes. 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. 26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.