What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-02 compared with 2022-05-03 · 164 added, 95 removed, 258 unchanged (50% of the section changed)

6 unchanged sentences

specialty products and structural products.

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

Specialty products include items such as engineered wood, siding, millwork, outdoor living, specialty lumber and industrial products.

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

6 unchanged sentences

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.

With a strong market position, a broad geographic coverage footprint servicing over 45 states, where our locations are in approximately 75 percent of the highest growth metropolitan statistical areas, combined with the strength of a locally focused sales force, we distribute a comprehensive range of products from over 750 suppliers.

Our suppliers include some of the leading manufacturers in the industry, such as Allura, Arauco, Fiberon, Georgia-Pacific, Huber Engineered Woods, James Hardie, Louisiana-Pacific, Oldcastle APG, Ply Gem, Roseburg, Royal and Weyerhaeuser.

We supply products to a broad base of over 15,000 total customers including national home centers, pro dealers, cooperatives, specialty distributors, regional and local dealers and industrial manufacturers.

Many of our customers serve residential and commercial builders, contractors and remodelers 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.

1 unchanged sentence

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.

Our position in this distribution model for building products provides easy access to the marketplace for our suppliers and a 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.

We estimate the remaining approximately 15 percent of end market mix is accounted for by commercial construction.

Certain recent changes in macro-economic factors, such as escalating home prices, may put pressure on the overall housing market, including the residential repair and remodel and residential new construction end markets.

Given these developments, we anticipate a slowdown of the housing industry over the coming quarters.

However, we believe that several factors, including the current high levels of home equity, recent work from home trends, the undersupply of housing in the United States, and the strength of housing starts compared to pre-COVID levels, among others, will continue to support demand for our products and 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.

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 for long periods of time.

We expect that current 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.

According to the U.S.

4 unchanged sentences

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.

2 unchanged sentences

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.

The pace of housing starts, with which a portion of our business is correlated, is driven by demographic and population shifts, mortgage interest rates (which are low compared to the 40-year average), 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.

We believe our large footprint, strong customer relationships, and comprehensive offering of leading products and brands position 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.

Department of Housing and Urban Development, June 2022 single family housing starts in the United States were approximately two percent lower compared to that of May 2022, but approximately 28 percent higher than that of February 2020, prior to the COVID-19 pandemic.

The monthly single family residential home supply is in line with the 25-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.

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.

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

We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors common in the building products distribution industry, such as weather conditions and other seasonal factors.

As a result, our quarterly sales volumes may trend higher in quarters when weather conditions and other seasonal factors are more favorable, reflecting an increase in activity in the residential repair and remodel and residential new home construction markets.

Conversely, when weather conditions and other seasonal factors are less favorable, we may experience declines in sales volumes.

Commodity Markets

4 unchanged sentences

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.

Fluctuations in the commodity markets during the last two years 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

1 unchanged sentence

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.

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.

9 unchanged sentences

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.

The Company intends to pursue a revenue mix increasingly weighted toward higher-margin, specialty product categories such as engineered wood, siding, millwork, outdoor living, specialty lumber 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.

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 intends to maintain a disciplined capital structure while at the same time investing in its business to modernize its tractor 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.

We invested $4.4 million and $6.9 million in capital for our business during the three and six month periods ending July 2, 2022, respectively, to improve operational performance and productivity.

Factors That Affect Operating Results

15 unchanged sentences

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;

natural disasters, catastrophes, fire, wars or other unexpected events;

successful implementation of our strategy;

20 unchanged sentences

changes in actuarial assumptions for our pension plan;

the costs and liabilities related to our participation in multi-employer pension plans could increase;

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;

4 unchanged sentences

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

Sales First Quarter of Fiscal 2021 % of

The following table sets forth our results of operations for the second quarter of fiscal 2022 and fiscal 2021:

Second Quarter of Fiscal 2022 % of

Sales Second Quarter of Fiscal 2021 % of

(In thousands) (In thousands)

12 unchanged sentences

Net income $ 71,272 5.8% $ 113,458 8.7%

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)

The following table sets forth our results of operations for the first six month periods of fiscal 2022 and fiscal 2021:

First Six Months of Fiscal 2022 % of

Sales First Six Months of Fiscal 2021 % of

(In thousands) (In thousands)

Net sales $ 2,541,684 100.0% $ 2,333,382 100.0%

Gross profit 492,459 19.4% 431,564 18.5%

Selling, general, and administrative 182,627 7.2% 162,569 7.0%

Depreciation and amortization 13,264 0.5% 14,545 0.6%

Amortization of deferred gains on real estate (1,968) (0.1)% (1,967) (0.1)%

Gains from sales of property (144) 0.0% (1,287) (0.1)%

Other operating expenses 1,464 0.1% 983 0.0%

Operating income 297,216 11.7% 256,721 11.0%

Interest expense, net 22,548 0.9% 25,377 1.1%

Other expense (income), net 1,277 0.1% (628) (0.0)%

Income before provision for income taxes 273,391 10.8% 231,972 9.9%

Provision for income taxes 68,710 2.7% 56,654 2.4%

Net income $ 204,681 8.1% $ 175,318 7.5%

The following table sets forth net sales by product category for the three and six month periods ending July 2, 2022 and July 3, 2021:

Three Months Ended Six Months Ended

July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021

Net sales by product category (In thousands) (In thousands)

Specialty products $ 787,860 $ 675,189 $ 1,555,767 $ 1,237,811

Structural products 451,519 632,724 985,917 1,095,571

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)

Total net sales $ 1,239,379 $ 1,307,913 $ 2,541,684 $ 2,333,382

Percentage of total net sales by product category

Specialty products 63.6 % 51.6 % 61.2 % 53.0 %

Structural products 36.4 % 48.4 % 38.8 % 47.0 %

Gross profit $ 291,051 $ 180,392

Gross margin percentage by category

Total net sales 100.0 % 100.0 % 100.0 % 100.0 %

The following table sets forth gross profit and gross margin percentages by product category for the three and six month periods ending July 2, 2022 and July 3, 2021:

Three Months Ended Six Months Ended

July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021

Gross profit by product category (In thousands) (In thousands)

Specialty products $ 180,254 $ 164,995 $ 364,353 $ 273,530

Structural products 21,154 86,177 128,106 158,034

Total gross profit $ 201,408 $ 251,172 $ 492,459 $ 431,564

Gross margin % by product category

Specialty products 22.9 % 24.4 % 23.4 % 22.1 %

Structural products 4.7 % 13.6 % 13.0 % 14.4 %

Total gross margin % 16.3 % 19.2 % 19.4 % 18.5 %

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.

The following table sets forth our structural product gross profit and gross margin percentage, excluding the impact of our lower of cost or net realizable value reserve, for the three and six month periods ending July 2, 2022 and July 3, 2021:

Three Months Ended Six Months Ended

Structural products July 2, 2022 July 3, 2021 July 2, 2022 July 3, 2021

(In thousands) (In thousands)

Net sales $ 451,519 $ 632,724 $ 985,917 $ 1,095,571

Gross profit, as reported 21,154 86,177 128,106 158,034

lower of cost or net realizable value reserve 9,776 16,693 9,776 16,693

Gross profit, excluding reserve $ 30,930 $ 102,870 $ 137,882 $ 174,727

Gross margin %, excluding reserve 6.9 % 16.3 % 14.0 % 15.9 %

Second Quarter of Fiscal 2022 Compared to Second Quarter of Fiscal 2021

For the second quarter of fiscal 2022, we generated net sales of $1.2 billion, a decrease of $68.5 million when compared to the second quarter of fiscal 2021 and overall gross margin percentage decreased from 19.2 percent to 16.3 percent year over year.

Our second quarter net income was $71.3 million, or $7.48 per diluted share, versus $113.5 million, or $11.61 per diluted share, in the prior-year period.

The significant decrease in wood-based commodity prices is the primary contributor to the decline in our overall sales and profitability year over year, partially offset by improvements in pricing of our specialty products.

Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and industrial products, increased $112.7 million to $787.9 million in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021.

Strategic pricing of our specialty products throughout the second quarter of fiscal 2022 resulted in improved revenue and gross profit growth, partially offset by slightly lower volume when compared to the prior-year period, where we saw historically strong demand.

Specialty products gross profit increased $15.3 million to $180.3 million, with a year-over-year decline of 150 basis points in specialty gross margin to 22.9 percent for the second quarter of fiscal 2022 compared to 24.4 percent in the second quarter of fiscal 2021.

The decrease in specialty gross margin percentage over the prior-year period is primarily attributable to some price volatility during the second quarter of fiscal 2022 related to certain of our specialty products, such as treated lumber and panels.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $181.2 million to $451.5 million in the second quarter of fiscal 2022.

The significant decrease in wood-based commodity prices of our structural products resulted in the decrease of revenue and gross profit for the second quarter of fiscal 2022.

Our structural gross margin percentage for the second quarter of fiscal 2022 was 4.7 percent, down from 13.6 percent in the prior-year period, also primarily attributable to the significant decrease in wood-based commodity prices.

Our structural gross margin percentage includes a lower of cost or net realizable value reserve of $9.8 million recorded as of the end of the second quarter of fiscal 2022 compared to $16.7 million recorded as of the end of the second quarter of fiscal 2021, both of which were recorded in response to the decline in wood-based commodity prices as of the end of each fiscal quarter.

Excluding the impact of the lower of cost or net realizable value reserve, our structural gross margin percentage for the second quarter of fiscal 2022 and 2021 would have been 6.9 percent and 16.3 percent, respectively.

Our selling, general, and administrative expenses increased 5.0 percent, or $4.3 million, compared to the second quarter of fiscal 2021.

The increase in selling, general, and administrative expenses is due primarily to increases in logistical expenses of $5.3 million related to inflation in our delivery costs, including third-party delivery services and fuel costs, along with net increases of $3.2 million related to higher payroll costs and other strategic investments in our workforce and business.

These net increases were partially offset by reduced variable incentive compensation, which includes sales commissions and stock compensation, of $4.2 million.

Depreciation and amortization expense decreased 7.9 percent, compared to the second quarter of fiscal 2021.

The decrease in depreciation and amortization is due to a lower base of amortizable and depreciable assets throughout the second quarter of fiscal 2022 when compared to the prior-year period.

The increase in gains from sales of property in the amount of $0.1 million is due to the sale of assets previously classified as held for sale during the second quarter of fiscal 2022 compared to no sale of property during the second quarter of fiscal 2021.

Other operating expenses decreased $0.2 million compared to the second quarter of fiscal 2021 primarily due to lower other operating expenses incurred in the second quarter of fiscal 2022.

Interest expense, net, increased by 23.1 percent, or $2.1 million, compared to the second quarter of fiscal 2021.

The increase is primarily due to capital structure mix changes, as our senior secured notes carry a higher interest rate than our former revolving credit facility.

Our effective tax rate was 23.1 percent and 23.5 percent for the second 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.

Each period also includes a benefit from the vesting of restricted stock units, which had a greater impact on the three months ended July 2, 2022 and July 3, 2021 due to the timing of the vesting of our restricted stock awards.

Our effective tax rate for the three months ended July 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 second quarter of fiscal 2021.

For the second quarter of fiscal 2022, our net income decreased by $42.2 million from the prior-year period due primarily to a decrease in gross profit driven by a significant decrease in wood-based commodity prices, in conjunction with some increases in our operating expenses along with higher interest expense.

This was partially offset by a decrease in our income tax expense.

First Six Months of Fiscal 2022 Compared to First Six Months of Fiscal 2021

For the first six months of fiscal 2022, we generated net sales of $2.5 billion, an increase of $208.3 million when compared to the first six months of fiscal 2021, and overall gross margin percentage increased from 18.5 percent to 19.4 percent year over year.

Our net income for the first six months of fiscal 2022 was $204.7 million, or $21.07 per diluted share, versus $175.3 million, or $18.15 per diluted share, in the prior-year period.

Strategic pricing of our specialty products is the primary contributor to the increase in our overall sales and profitability year over year, partially offset by a decline in wood-based commodity prices impacting our structural products.

Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and industrial products, increased $318.0 million to $1.6 billion in the first six months of fiscal 2022.

Strategic pricing of our specialty products during the first six months of fiscal 2022 resulted in improved revenue and gross profit growth compared to the prior-year period.

Specialty products gross profit increased $90.8 million to $364.4 million, with a year-over-year improvement of 130 basis points in specialty gross margin to 23.4 percent for the first six months of fiscal 2022 compared to 22.1 percent in the first six months of fiscal 2021.

The increase in specialty gross margin percentage over the prior-year period is primarily attributable to benefits from strategic pricing for our specialty products.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $109.7 million to $985.9 million in the first six months of fiscal 2022.

The decrease in wood-based commodity prices of our structural products is the primary contributor to the decrease of revenue and gross profit for the first six months of fiscal 2022.

Our structural gross margin percentage for the first six months of fiscal 2022 was 13.0 percent, down from 14.4 percent in the prior-year period, also primarily attributable to the decrease in wood-based commodity prices impacting our structural products.

Our structural gross margin percentage for the first six months of fiscal 2022 and the first six months of fiscal 2021 was also impacted by a lower of cost or net realizable value reserve of $9.8 million and $16.7 million, respectively, recorded as of the end of the second quarter of both comparable periods in response to the decline in wood-based commodity prices.

Excluding the impact of the lower of cost or net realizable value reserve, our structural gross margin percentage for the first six months of fiscal 2022 and 2021 would have been 14.0 percent and 15.9 percent, respectively.

Our selling, general, and administrative expenses increased 12.3 percent, or $20.1 million, compared to the first six months of fiscal 2021.

The increase in sales, general, and administrative expenses is due primarily to increases in logistical expenses of $10.6 million related to inflation in our delivery costs, including third-party delivery services and fuel costs, along with net increases of $5.7 million related to higher payroll costs and other strategic investments in our workforce and business, combined with increases in variable incentive compensation, which includes sales commissions and stock compensation, of $3.8 million.

Depreciation and amortization expense decreased 8.8 percent, compared to the first six months of fiscal 2021.

The decrease in depreciation and amortization is due to a lower base of amortizable and depreciable assets throughout the first six months of fiscal 2022 when compared to the prior-year period.

The decrease in gains from sales of property in the amount of $1.1 million is due to the sale of our Birmingham property during the first six months of fiscal 2021, which resulted in a larger gain as compared to the sale of assets previously held for sale during the same period in 2022.

Other operating expenses increased $0.5 million compared to the first six months of fiscal 2021 primarily due to restructuring related costs, including severance, incurred in the first six months of fiscal 2022.

Interest expense, net, decreased by 11.1 percent, or $2.8 million, compared to the first six months of fiscal 2021.

The decrease is primarily due to $5.8 million in debt issuance costs expensed in the first six months of fiscal 2021 related to the extinguishment of our former term loan facility, partially offset by an increase due to capital structure mix changes, as our senior secured notes carry a higher interest rate than our former revolving credit facility.

Other expense (income), net, increased $1.9 million compared to the first six months of fiscal 2021 primarily due to an increase in other non-operating expenses.

Our effective tax rate was 25.1 percent and 24.4 percent for the first six months 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.

Our effective tax rate for the six months ended July 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 six months of fiscal 2021.

For the first six months of fiscal 2022, our net income increased by $29.4 million from the prior-year period due primarily to an increase in gross profit driven by strategic pricing of our specialty products, in conjunction with lower interest expense.

This was partially offset by increases in our operating expenses and income tax expense.

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 our primary sources of liquidity to be cash flows from sales and operating activities in the normal course of our operations and availability of our revolving credit facility, as needed.

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

2 unchanged sentences

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.

The majority of net proceeds from the offering of the 2029 Notes were used to repay borrowings under our revolving credit facility, as defined below.

Revolving Credit Facility

7 unchanged sentences

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 July 2, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $451.4 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.

Our average effective interest rate under the facility was zero percent and 2.5 percent for the quarters ended July 2, 2022 and July 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.

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

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 July 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.

There were no prepayment premiums associated with the repayment of indebtedness for the three and six month period ended July 2, 2022.

There were no prepayment premiums associated with the repayment of indebtedness for the three month period ended July 3, 2021.

Prepayment premiums were $0.9 million for the six month period ended July 3, 2021.

Finance Lease Commitments

4 unchanged sentences

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.

Our total finance lease commitments totaled $271.4 million as of July 2, 2022.

Of the $271.4 million of finance lease commitments as of July 2, 2022, $243.8 million related to real estate and $27.6 million related to equipment.

For the three and six months ended July 2, 2022, we recognized $2.3 million in new finance leases for tractors acquired as a component of our fleet investment plan.

For the three and six months ended July 3, 2021, we recognized $0.3 million and $10.5 million, respectively, in new finance leases for tractors acquired to support our fleet investment plan in fiscal 2021.

Interest Rates

6 unchanged sentences

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.

Net cash provided by operating activities for the first six months of fiscal 2022 was $103.4 million, compared to net cash provided by operating activities of $22.6 million in the first six months of fiscal 2021.

The increase in cash provided by operating activities during the first six months of fiscal 2022 was primarily a result of working capital changes, including the reduction of accounts receivable, which resulted in $60.6 million more cash provided by operating activities in the current-year period compared to the prior-year period, and the $29.4 million increase in net income for 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.

Net cash used in investing activities for the first six months of fiscal 2022 was $6.4 million, compared to net cash used in investing activities of $0.8 million in the first six months of fiscal 2021.

The increase in net cash used in investing activities was primarily due to higher capital investments during the first six months of fiscal 2022.

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.

Net cash used in financing activities totaled $77.3 million for the first six months of fiscal 2022, compared to net cash used in financing activities of $21.7 million for the first six months of fiscal 2021.

The increase in net cash used in financing activities is primarily due to the $66.4 million spent repurchasing our common stock under our announced repurchase program, including the ASR Agreement, as defined below, during the first six months of fiscal 2022, with no such transactions completed in the first six months of fiscal 2021.

Additionally, we made $649.2 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 borrowings of $638.2 million from our revolving credit facility, in the first six months of fiscal 2021, with no such transactions completed in the first six months of fiscal 2022.

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.

On May 3, 2022, we announced that our Board of Directors increased our share repurchase authorization to $100.0 million, up $75.0 million from the previous program, and that we entered into an Accelerated Share Repurchase Agreement (“ASR Agreement”) with Jefferies LLC (“Jefferies”) to repurchase $60.0 million of our common stock.

Under the ASR Agreement, we received initial delivery of 553,584 shares of common stock on May 3, 2022 representing approximately 65 percent of the total number of shares of common stock initially underlying the ASR Agreement, based on our closing stock price of $70.45 on May 2, 2022.

The total number of shares repurchased under the ASR Agreement is based on the average of the daily volume-weighted average price of our common stock during the repurchase period under the ASR Agreement, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR Agreement.

At settlement, under certain circumstances, Jefferies may be required to deliver additional shares of common stock to us, or, under certain circumstances, we may be required to make a cash payment or to deliver shares of our common stock to Jefferies.

Final settlement of the shares of common stock repurchased under the ASR Agreement could occur as early as the third quarter of fiscal 2022.

With the remaining availability under the stock repurchase 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, accelerated share repurchase programs, tender offers or pursuant to a trading plan that may be adopted in accordance with the Securities and Exchange Commission Rule 10b5-1.

As of July 2, 2022, we have repurchased 634,915 shares for $66.4 million under this program, including shares purchased through the ASR Agreement, and we have a remaining authorization amount of $33.6 million.

Operating Working Capital

3 unchanged sentences

Selected financial information

April 2, 2022 January 1, 2022 April 3, 2021

July 2, 2022 January 1, 2022 July 3, 2021

(In thousands)

8 unchanged sentences

Operating working capital $ 865,744 $ 733,298 $ 636,010

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.

Operating working capital of $865.7 million as of July 2, 2022, compared to $733.3 million as of January 1, 2022, increased on a net basis by approximately $132.4 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 materials, along with an increase in accounts receivable 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.

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.

Operating working capital of $865.7 million as of July 2, 2022, compared to $636.0 million as of July 3, 2021, increased on a net basis by $229.7 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 cash due to our improved operating performance, including increased net income, as well as a decrease in accounts receivable from our improved collection efforts.

The net increase in current assets was offset by an increase in accounts payable, also affected by the inflationary environment for building products.

2 unchanged sentences

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.

For the first six months of fiscal 2022, we invested $9.2 million in long-lived assets primarily related to investments in our distribution branches and to a lesser extent, upgrading our fleet, which includes $6.9 million in cash investments and $2.3 million in new finance leases recognized for tractors acquired as a component of our fleet investment plan.

Critical Accounting Policies

4 unchanged sentences

Forward-looking statements include, without limitation, any statement that predicts, forecasts, indicates or implies future results, performance, liquidity levels or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will be,” “will likely continue,” “will likely result” or words or phrases of similar meaning.

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

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

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

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

65 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis