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Item 2. Management’s Discussion and Analysis

2022-11-01 compared with 2022-08-02 · 142 added, 139 removed, 283 unchanged (50% of the section changed)

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

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.

With a strong market position, a broad geographic coverage footprint, 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.

We supply products to a broad base of over 15,000 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.

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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.

Similarly, we provide value to our supplier partners by enabling access to the large and fragmented network of lumber yards and dealers these 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 a value proposition of rapid delivery on an as-needed basis to our customers from our network of warehouse facilities.

On October 3, 2022, we announced and closed on our acquisition of Vandermeer Forest Products, Inc.

(“Vandermeer”).

Vandermeer is a premier wholesale distributor of building products.

Vandermeer was founded in 1972 and serves more than 250 customers across the Pacific Northwest, Alaska, Hawaii, British Columbia and Alberta from distribution facilities in Kent, Spokane, and Marysville, Washington.

The acquisition of Vandermeer adds three distribution branches in Washington state and provides direct access to Seattle and Portland, two of the top 15 metropolitan statistical areas in the United States.

Additionally, we now have coast-to-coast reach and serve all 50 states.

Vandermeer’s product offering and sales mix is similar to ours, with specialty products contributing to the majority of its revenue and gross profit.

We believe this acquisition aligns to our specialty products strategy, establishes a meaningful growth platform in the Pacific Northwest, increases our market penetration in key specialty product categories, such as siding and engineered wood, and strengthens strategic supplier relationships.

Industry Overview

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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.

Certain developments have led to a more challenging macro-economic environment, such as broad-based inflation, the rapid rise in mortgage rates, and home price appreciation.

These developments have impacted the U.S.

housing market, including the residential repair and remodel and residential new construction end markets.

Such developments have caused a recent slowdown in the U.S.

housing industry.

However, we believe that several factors, including the current high levels of home equity, the fundamental undersupply of housing in the U.S., repair and remodel activity, and demographic shifts, among others, will support demand for our products.

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 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.

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.

According to the U.S.

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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.

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.

We believe the increasing average age of the nation’s approximate 142 million existing homes will continue to drive demand for repair and remodel projects.

The October 20, 2022 Leading Indicator of Remodeling Activity, published by the Joint Center for Housing Studies, projects year-over-year increases in spending on home improvement projects will shrink from 16.1 percent in 2022 to 6.5 percent by the third quarter of 2023.

Home improvement spending has also benefited from the increase in remote working environments, 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.

We expect that current factors, including the overall age of the U.S.

housing stock and rising home prices supporting increased home equity values, will drive repair and remodel spending.

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 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.

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.

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 is approaching the 40-year average, the ability of builders to obtain skilled labor, and builders’ economic outlook.

According to the U.S.

Census Bureau and the U.S.

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 opportunity in the residential new home construction end-market for building products of which we are well positioned to serve.

Department of Housing and Urban Development, during the third quarter of fiscal 2022, single family housing starts in the United States were approximately 20 percent lower compared to the second quarter of fiscal 2022 and approximately 13 percent higher than that of the first quarter of fiscal 2020, prior to the COVID-19 pandemic, indicating a market slow down following two years of favorable market conditions.

As of the end of the third quarter of fiscal 2022, the month’s supply of inventory of new homes was eight months, above the 20-year average of six months.

For most of the last decade, housing production has lagged population growth and household formation.

We believe our scale, national footprint, strategic supplier relationships, key national customer relationships, and breadth of market leading products and brands position us to serve the residential new construction end market and navigate the changes in the macro-economic environment.

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.

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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 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.

See Note 2 to the condensed consolidated financial statements and Results of Operations below for discussion of the impact of fluctuations in commodity markets on results for the periods presented.

Supply Constraints

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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 $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.

Through October 3, 2022, we have taken the following capital allocation actions, all of which were funded with cash on hand:

• During the three and nine month periods ending October 1, 2022, we invested $12.2 million and $19.1 million, respectively, in capital for our business to improve operational performance and productivity.

• During the first nine months of fiscal 2022, we repurchased 882,346 shares of our common stock for $66.4 million under our share repurchase program, including shares purchased through the ASR Agreement, as defined below, at an average price of $75.28 per share.

• On October 3, 2022, we announced and closed on the acquisition of Vandermeer for $67.0 million, which aligns to our specialty products strategy, establishes a meaningful growth platform in a new geographic area, the Pacific Northwest, increases market penetration in key specialty product categories, and strengthens strategic supplier relationships.

Factors That Affect Operating Results

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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;

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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;

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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;

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Results of Operations

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

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

Third Quarter of Fiscal 2022 % of

Sales Third Quarter of Fiscal 2021 % of

(In thousands) (In thousands)

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Net income $ 59,509 5.6% $ 47,198 4.9%

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

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

First Nine Months of Fiscal 2022 % of

Sales First Nine Months of Fiscal 2021 % of

(In thousands) (In thousands)

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Net income $ 264,190 7.3% $ 222,516 6.7%

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

The following table sets forth net sales by product category for the three and nine month periods ending October 1, 2022 and October 2, 2021:

Three Months Ended Nine Months Ended

October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021

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

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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

The following table sets forth gross profit and gross margin percentages by product category for the three and nine month periods ending October 1, 2022 and October 2, 2021:

Three Months Ended Nine Months Ended

October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021

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

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Total gross margin % 17.9 % 15.8 % 18.9 % 17.7 %

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

Non-GAAP Financial Measures

To provide investors with additional information regarding our financial results, we prepare certain financial measures that are not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”).

We use these supplemental non-GAAP measures to evaluate financial performance and analyze the underlying trends in our business.

We believe these non-GAAP measures are useful because they permit investors to better understand changes over comparative periods by providing financial results that are unaffected by certain items that may not be indicative of ongoing operating performance.

While we believe that these non-GAAP measures are useful to investors when evaluating our business, they are not prepared and presented in accordance with GAAP, and therefore should be considered supplemental in nature.

These non-GAAP measures should not be considered in isolation or as a substitute for other financial performance measures presented in accordance with GAAP.

The following table presents a reconciliation of gross profit, the most directly comparable financial measure as measured in accordance with GAAP, to gross profit, excluding the impact of our lower of cost or net realizable value reserve for the three and nine month periods ending October 1, 2022 and October 2, 2021:

Three Months Ended Nine Months Ended

Structural products October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021

(In thousands) (In thousands)

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lower of cost or net realizable value reserve 4,087 — 4,087 —

release of lower of cost or net realizable value reserve $ (9,776) $ (16,693) $ — $ —

Gross profit, excluding reserve $ 32,259 $ (11,059) $ 170,141 $ 163,668

Gross margin %, excluding reserve 9.6 % (3.4) % 12.9 % 11.5 %

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.

Third Quarter of Fiscal 2022 Compared to Third Quarter of Fiscal 2021

For the third quarter of fiscal 2022, we generated net sales of $1.1 billion, an increase of $89.9 million when compared to the third quarter of fiscal 2021 and overall gross margin percentage increased from 15.8 percent to 17.9 percent year over year.

Our third quarter net income was $59.5 million, or $6.38 per diluted share, versus $47.2 million, or $4.74 per diluted share, in the prior-year period.

Improvements in pricing of our specialty and structural products was the primary contributor to the increase in our overall sales and profitability year over year.

Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and industrial products, increased $83.3 million to $724.3 million in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021.

Strategic pricing of our specialty products throughout the third quarter of fiscal 2022 resulted in improved revenue and gross profit growth, with volume relatively flat, when compared to the prior-year period.

Specialty products gross profit increased $3.7 million to $151.4 million, with a year-over-year decline of 210 basis points in specialty gross margin to 20.9 percent for the third quarter of fiscal 2022 compared to 23.0 percent in the third quarter of fiscal 2021.

The decrease in specialty gross margin percentage over the prior-year period is primarily attributable to price volatility during the third quarter of fiscal 2022 related to easing supply constraints across certain of our specialty products, particularly millwork.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, increased $6.6 million to $336.4 million in the third quarter of fiscal 2022.

The increase in the average framing lumber commodity price of our structural products resulted in the increase of revenue and gross profit for the third quarter of fiscal 2022, with volume relatively flat compared to the prior-year period.

Our structural gross margin percentage for the third quarter of fiscal 2022 was 11.3 percent, up from 1.7 percent in the prior-year period, also primarily attributable to the increase in the average framing lumber commodity price of our structural products, as well as our continued improvement in managing structural inventory.

Our structural gross margin percentage for the third quarter of fiscal 2022 includes the $5.7 million favorable impact of the partial release of our reserve recorded in the second quarter of fiscal 2022.

Our structural gross margin percentage for the third quarter of fiscal 2021 includes the $16.7 million favorable impact of the full release of our reserve recorded in the second quarter of fiscal 2021.

Excluding the net impact of the lower of cost or net realizable value reserve, our structural gross margin percentage for the third quarter of fiscal 2022 and 2021 would have been 9.6 percent and (3.4) percent, respectively.

Our selling, general, and administrative expenses increased 20.4 percent, or $15.5 million, compared to the third quarter of fiscal 2021.

The increase in selling, general, and administrative expenses is due primarily to an increase of $8.8 million related to key growth and productivity initiatives, an increase in logistical expenses of $5.1 million related to inflation in our delivery costs, including third-party delivery services and fuel costs, and $1.6 million related to higher variable incentive compensation, such as sales commissions and stock compensation.

Depreciation and amortization expense decreased $0.2 million compared to the third quarter of fiscal 2021.

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

Other operating expenses increased $1.1 million compared to the third quarter of fiscal 2021 primarily due to restructuring related costs, including severance, incurred in the third quarter of fiscal 2022.

Interest expense, net, increased by 25.6 percent, or $2.1 million, compared to the third 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 was 26.2 percent and 25.6 percent for the third 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.

Our effective tax rate for the third quarter of fiscal 2021 also benefited from the partial release of our valuation allowance for state net operating loss carryforwards.

For the third quarter of fiscal 2022, our net income increased by 26.1 percent, or $12.3 million, compared to the prior-year period due primarily to an increase in gross profit driven by improvements primarily related to price.

This was partially offset by some increases in our operating expenses along with higher interest expense and higher income tax expense.

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

For the first nine months of fiscal 2022, we generated net sales of $3.6 billion, an increase of $298.2 million when compared to the first nine months of fiscal 2021, and overall gross margin percentage increased from 17.7 percent to 18.9 percent year over year.

Our net income for the first nine months of fiscal 2022 was $264.2 million, or $27.82 per diluted share, versus $222.5 million, or $22.91 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.

Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and industrial products, increased $401.3 million to $2.3 billion in the first nine months of fiscal 2022.

Strategic pricing of our specialty products during the first nine months 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 $94.6 million to $515.8 million, with a year-over-year improvement of 20 basis points in specialty gross margin to 22.6 percent for the first nine months of fiscal 2022 compared to 22.4 percent in the first nine 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.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $103.0 million to $1.3 billion in the first nine months of fiscal 2022.

The decrease in wood-based commodity prices of our structural products and slightly lower volume are the primary contributors to the decrease in net sales for the first nine months of fiscal 2022.

While our structural gross profit was generally consistent, our structural gross margin percentage for the first nine months of fiscal 2022 increased to 12.6 percent from 11.5 percent in the prior-year period, primarily attributable to strategic structural product management.

Our structural gross margin percentage for the first nine months of fiscal 2022 was also impacted by a lower of cost or net realizable value reserve of $4.1 million, net recorded during the nine-month period 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 nine months of fiscal 2022 would have been 12.9 percent, which is an improvement of 140 basis points compared to the prior-year period.

Our selling, general, and administrative expenses increased 14.9 percent, or $35.6 million, compared to the first nine months of fiscal 2021.

The increase in sales, general, and administrative expenses is due primarily to increases in logistical expenses of $15.6 million related to inflation in our delivery costs, including third-party delivery services and fuel costs, $14.6 million related to key growth and productivity initiatives, and $5.4 million related to higher variable incentive compensation, such as sales commissions and stock compensation.

Depreciation and amortization expense decreased $1.5 million compared to the first nine months of fiscal 2021.

The decrease in depreciation and amortization is due to a lower base of amortizable and depreciable assets throughout the first nine 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 nine 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 $1.5 million compared to the first nine months of fiscal 2021 primarily due to restructuring related costs, including severance, incurred in the first nine months of fiscal 2022.

Interest expense, net, decreased by 2.1 percent, or $0.7 million, compared to the first nine months of fiscal 2021.

The decrease is primarily due to $5.8 million in debt issuance costs expensed in the first nine months of fiscal 2021 related to the extinguishment of our former term loan facility, 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 $2.3 million compared to the first nine months of fiscal 2021 primarily due to an increase in other non-operating expenses.

Our effective tax rate was 25.4 percent and 24.7 percent for the first nine 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.

Each period also includes a benefit from the vesting of restricted stock units

during the first nine months of fiscal 2022 and 2021.

Our effective tax rate for the nine months ended October 2, 2021 also benefited from the partial release of our valuation allowance for state net operating loss carryforwards.

For the first nine months of fiscal 2022, our net income increased by 18.7 percent, or $41.7 million, compared to the prior-year period due primarily to an increase in gross profit driven by strategic pricing related to our specialty products, in conjunction with lower interest expense.

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

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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”).

In October 2021, we completed a private offering of $300 million of our six percent senior secured notes due 2029 (the “2029 Notes”), and in connection therewith we entered into an indenture (the “Indenture”) with the guarantors party thereto and Truist Bank, as trustee and collateral agent.

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

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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 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 2.5 percent for the quarters ended July 2, 2022 and July 3, 2021, respectively.

As of October 1, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, was $575.8 million under our Revolving Credit Facility.

As of January 1, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, was $431.7 million under our Revolving Credit Facility.

Our average effective interest rate under the facility was zero percent and 2.6 percent for the quarters ended October 1, 2022 and January 1, 2022, 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 July 2, 2022.

We were in compliance with all covenants under the Revolving Credit Facility as of October 1, 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 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.

On April 2, 2021, we repaid the remaining outstanding principal balance of our former term loan facility, and, as a result, as of January 1, 2022 and October 1, 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 in the first quarter of fiscal 2021 that we were amortizing in connection with our former term loan

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 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.

There were no prepayment premiums associated with the repayment of indebtedness for the three month period ended October 2, 2021.

Prepayment premiums were $0.9 million for the nine month period ended October 2, 2021.

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 $271.4 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.

Our finance lease liabilities consist of leases related to equipment and vehicles, and real estate, with the majority of those finance lease commitments relating to real estate financing transactions that we have completed in recent years.

Our finance lease commitments totaled $272.7 million as of October 1, 2022.

Of the $272.7 million of finance lease commitments as of October 1, 2022, $243.9 million related to real estate and $28.8 million related to equipment.

For the three and nine months ended October 1, 2022, we recognized $3.3 million and $6.0 million, respectively, in new finance leases for tractors acquired as a component of our fleet investment plan.

For the three and nine months ended October 2, 2021, we recognized zero and $10.5 million, respectively, in new finance leases for tractors acquired to support our fleet investment plan in fiscal 2021.

Interest Rates

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Operating Activities

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.

Net cash provided by operating activities for the first nine months of fiscal 2022 was $246.0 million, compared to net cash provided by operating activities of $126.9 million in the first nine months of fiscal 2021.

The increase in cash provided by operating activities during the first nine months of fiscal 2022 was primarily a result of working capital changes, including the reduction of inventory and accounts receivable, which resulted in $46.8 million and $30.4 million, respectively, more cash provided by operating activities in the current-year period compared to the prior-year period, and the $41.7 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 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.

Net cash used in investing activities for the first nine months of fiscal 2022 was $18.4 million, compared to net cash used in investing activities of $2.8 million in the first nine months of fiscal 2021.

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

Financing Activities

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.

Net cash used in financing activities totaled $83.4 million for the first nine months of fiscal 2022, compared to net cash used in financing activities of $124.0 million for the first nine months of fiscal 2021.

The decrease in net cash used in financing activities is primarily due to the net repayment of $65.1 million on our revolving credit facility and the $43.2 million repayment of the remaining outstanding balance on our term loan facility during the first nine months of fiscal 2021, with no such transactions completed in the first nine months of fiscal 2022.

This is partially offset by $66.4 million spent repurchasing our common stock under our announced share repurchase program, including the ASR Agreement, as defined below, during the first nine months of fiscal 2022, with no such transactions completed in the first nine months of fiscal 2021.

Stock Repurchase Program

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

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.

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

During the first quarter of fiscal 2022, we repurchased 81,331 shares of our common stock under this program at an average price of $79.03 per share.

On May 3, 2022, our Board of Directors increased our share repurchase authorization to $100.0 million and we entered into an Accelerated Share Repurchase Agreement (“ASR Agreement”) with Jefferies LLC 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.

Final settlement of the shares of common stock repurchased under the ASR Agreement occurred on September 15, 2022 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 other adjustments pursuant to the terms and conditions of the ASR Agreement.

At settlement, we received an additional 247,431 shares of common stock.

Under our ASR Agreement, we repurchased a total of 801,015 shares of our common stock at an average price of $74.90 per share.

As of October 1, 2022, we have repurchased a total of 882,346 shares for $66.4 million under our share repurchase program, including shares purchased through the ASR Agreement, at an average price of $75.28 per share and we have a remaining authorization amount of $33.6 million.

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

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Selected financial information

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

October 1, 2022 January 1, 2022 October 2, 2021

(In thousands)

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Operating working capital $ 917,681 $ 733,298 $ 571,212

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 $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.

Operating working capital of $917.7 million as of October 1, 2022, compared to $733.3 million as of January 1, 2022, increased by approximately $184.4 million.

The increase in operating working capital is primarily driven by an increase in cash due to our improved operating performance, including increased net income, as well as an increase in inventory, which continues to be affected by the inflationary environment for building products, and an increase in accounts receivable from our continued increase in net sales.

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

Operating working capital of $917.7 million as of October 1, 2022, compared to $571.2 million as of October 2, 2021, increased by $346.5 million.

Additionally, lower accounts payable contributed to higher operating working capital due to timing of cash disbursements.

Investments in Property and Equipment

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

For the first 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.

For the first nine months of fiscal 2022, we invested $25.1 million in long-lived assets primarily related to investments in our distribution branches and to a lesser extent, upgrading our fleet, which includes $19.1 million in cash investments and $6.0 million in new finance leases recognized for tractors acquired as a component of our fleet investment plan.

Critical Accounting Policies

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• 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;

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• 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;

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis