What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-02 · 129 added, 73 removed, 280 unchanged (42% of the section changed)

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With mortgage rates having risen to multi-year highs, we believe many homeowners who secured a lower interest mortgage will be inclined to stay longer in existing homes, which could benefit R&R demand over the near-to-medium term.

According to the Joint Center For Housing Studies’ LIRA Index, R&R demand is expected to return to more normalized levels, following several consecutive years of elevated R&R activity fueled by pandemic-induced changes in housing and lifestyle decisions.

However, the total market size of the U.S.

According to the Joint Center For Housing Studies’ Leading Indicator of Housing Activity (“LIRA”) Index, R&R demand is expected to return to more normalized levels, following several consecutive years of elevated R&R activity fueled by pandemic-induced changes in housing and lifestyle decisions.

However, according to LIRA Index, the total market size of the U.S.

R&R market remains significant, with total U.S.

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Census Bureau and the U.S.

Department of Housing and Urban Development, during the first quarter of fiscal 2023, single family housing starts in the United States, seasonally adjusted, were approximately 29 percent lower compared to the first quarter of fiscal 2022 and approximately 13 percent lower 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 first quarter of fiscal 2023, the month’s supply of inventory of new homes was eight months, above the 20-year average of six months.

Department of Housing and Urban Development, during the second quarter of fiscal 2023, single family housing starts in the United States, seasonally adjusted, were approximately 14 percent lower compared to the second quarter of fiscal 2022 and approximately 20 percent higher than that of the second quarter of fiscal 2020, at the start of the COVID-19 pandemic, indicating a market normalization following two years of historic market conditions.

As of the end of the second quarter of fiscal 2023, the month’s supply of inventory of new homes was seven months, above the 20-year average of six months .

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

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Our historical patterns of seasonality were impacted by the COVID-19 pandemic which caused supply and demand imbalances impacting our sales volumes.

During the first quarter of 2023, we experienced some seasonal impacts to our sales volumes from weather conditions.

While there is continued uncertainty surrounding certain macro-economic environment developments that may impact our seasonality trends, we expect to return to more normalized seasonality trends in the near term given recent easing supply constraints and increased manufacturing output.

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

When prices fluctuate in the commodity markets which impact us, we may immediately adjust the end price of our products to compensate for the changes in market prices, which is common for

businesses with inventories impacted by commodity price fluctuations.

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

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

When we change our prices in response to market

fluctuations, we will often see immediate impacts in our operating results.

When market prices increase, this impact can be beneficial.

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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 $9.0 million in our business during the first quarter of fiscal 2023 to improve operational performance and productivity.

We invested $14.0 million in our business during the first six months of fiscal 2023 to improve operational performance and productivity.

Factors That Affect Operating Results

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the potential to incur more debt;

the fact that we have consummated certain sale leaseback transactions

with resulting long-term non-cancelable leases, many of which are or will be finance leases;

the fact that we lease many of our distribution centers, and we would still be obligated under these leases even if we close a leased distribution center;

the fact that we have consummated certain sale leaseback transactions with resulting long-term non-cancelable leases, many of which are or will be finance leases;

the fact that we lease many of our

distribution centers, and we would still be obligated under these leases even if we close a leased distribution center;

inability to raise funds necessary to finance a required repurchase of our senior secured notes;

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Results of Operations

The following table sets forth our results of operations for the first quarter of fiscal 2023 and fiscal 2022:

First Quarter of Fiscal 2023 % of

Sales First Quarter of Fiscal 2022 % of

The following table sets forth our results of operations for the second quarter of fiscal 2023 and fiscal 2022:

Second Quarter of Fiscal 2023 % of

Sales Second Quarter of Fiscal 2022 % of

(In thousands) (In thousands)

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Amortization of deferred gains on real estate (984) (0.1)% (984) (0.1)%

Gains from sales of property — 0.0% (144) (0.0)%

Other operating expenses 993 0.1% 626 0.1%

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Net income $ 24,466 3.0% $ 71,272 5.8%

The following table sets forth net sales by product category for the three-month periods ending April 1, 2023 and April 2, 2022:

Three Months Ended

April 1, 2023 April 2, 2022

Net sales by product category ($ in thousands)

The following table sets forth our results of operations for the first six month periods of fiscal 2023 and fiscal 2022:

First Six Months of Fiscal 2023 % of

Sales First Six Months of Fiscal 2022 % of

(In thousands) (In thousands)

Net sales $ 1,613,871 100.0% $ 2,541,684 100.0%

Gross profit 269,342 16.7% 492,459 19.4%

Selling, general, and administrative 179,924 11.1% 182,627 7.2%

Depreciation and amortization 15,669 1.0% 13,264 0.5%

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

Gains from sales of property — 0.0% (144) (0.0)%

Other operating expenses 4,109 0.3% 1,464 0.1%

Operating income 71,608 4.4% 297,216 11.7%

Interest expense, net 13,998 0.9% 22,548 0.9%

Other expense, net 1,188 0.1% 1,277 0.1%

Income before provision for income taxes 56,422 3.5% 273,391 10.8%

Provision for income taxes 14,144 0.9% 68,710 2.7%

Net income $ 42,278 2.6% $ 204,681 8.1%

The following table sets forth net sales by product category for the three and six-month periods ending July 1, 2023 and July 2, 2022:

Three Months Ended Six Months Ended

July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022

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

Specialty products $ 570,990 $ 787,860 $ 1,138,828 $ 1,555,767

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Total net sales $ 815,967 $ 1,239,379 $ 1,613,871 $ 2,541,684

The following table sets forth gross profit and gross margin percentages by product category for the three-month periods of fiscal 2023 and 2022:

Three Months Ended

April 1, 2023 April 2, 2022

Gross profit by product category ($ in thousands)

Percentage of total net sales by product category

Specialty products 70.0 % 63.6 % 70.6 % 61.2 %

Structural products 30.0 % 36.4 % 29.4 % 38.8 %

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 of fiscal 2023 and 2022:

Three Months Ended Six Months Ended

July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022

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

Specialty products $ 108,841 $ 180,254 $ 215,468 $ 364,353

Structural products 26,962 21,154 53,874 128,106

Total gross profit $ 135,803 $ 201,408 $ 269,342 $ 492,459

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Total gross margin % 16.6 % 16.3 % 16.7 % 19.4 %

First Quarter of Fiscal 2023 Compared to First Quarter of Fiscal 2022

For the first quarter of fiscal 2023, we generated net sales of $797.9 million, a decrease of $504.4 million when compared to the first quarter of fiscal 2022 and the overall gross margin percentage decreased from 22.3 percent to 16.7 percent year over year.

The decline in overall profitability compared to the prior year was primarily due to lower sales volume for our specialty products, particularly our engineered wood products, and year-over-year declines in the average composite prices of our structural products.

Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products, decreased $200.1 million to $567.8 million in the first quarter of fiscal 2023.

The decline was due to lower sales volume, primarily related to engineered wood products.

Specialty products gross profit decreased $77.5 million to $106.6 million, with a year-over-year decline of 520 basis points in specialty gross margin to 18.8 percent for the first quarter of fiscal 2023, compared to 24.0 percent in the first quarter of fiscal 2022.

The decrease in specialty gross margin percentage over the prior-year period is attributable to lower sales volume, primarily related to engineered wood products, as well as modest declines in pricing for our specialty products given the change in market conditions.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $304.3 million to $230.1 million in the first quarter of fiscal 2023 due to the decline in the average composite price of framing lumber and structural panels, as well as lower structural panels volume.

Our structural gross margin percentage for the first quarter of fiscal 2023 was 11.7 percent, down from 20.0 percent in the prior-year period, primarily attributable to year-over-year declines in the average composite price of framing lumber and structural panels.

Our selling, general, and administrative expenses, which includes approximately $2.0 million of incremental operating expenses related to our Vandermeer acquisition, remained relatively flat overall compared to the first quarter of fiscal 2022.

Depreciation and amortization expense increased 14.4 percent, compared to the first quarter of fiscal 2022.

The increase in depreciation and amortization is due to a higher base of amortizable and depreciable assets throughout the first quarter of fiscal 2023 when compared the prior-year period, resulting from our continued focus on capital investment and increased intangible assets related to our Vandermeer acquisition.

Other operating expenses increased $2.3 million compared to the first quarter of fiscal 2022 primarily due to restructuring related costs, including severance, incurred in the first quarter of fiscal 2023 due to our leadership transition.

Interest expense, net, decreased by 31.9 percent, or $3.6 million, compared to the first quarter of fiscal 2022.

The decrease is primarily due to the generation of higher interest income on our cash on hand.

Our effective tax rates were 26.5 percent and 26.2 percent for the first quarter of fiscal 2023 and 2022, 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 net income for the first quarter of fiscal 2023 was $17.8 million, or $1.94 per diluted share, versus $133.4 million, or $13.19 per diluted share, in the prior-year period due primarily to a decrease in gross profit driven by lower specialty sales volume, particularly for our engineered wood products, and declines in pricing related to our specialty and structural products, in conjunction with higher operating expenses.

This was offset by lower interest expense and income tax expense.

Second Quarter of Fiscal 2023 Compared to Second Quarter of Fiscal 2022

For the second quarter of fiscal 2023, we generated net sales of $816.0 million, a decrease of $423.4 million when compared to the second quarter of fiscal 2022 and the overall gross margin percentage increased from 16.3 percent to 16.6 percent year over year.

The decline in net sales compared to the prior year was primarily due to price deflation related to our specialty and structural products, combined with lower sales volumes for our specialty products as we return to more normalized market conditions.

Gross profit in the second fiscal quarter of fiscal 2022 was negatively impacted by a lower of cost or net realizable value reserve of $9.8 million for our structural products resulting from significant deflation in the wood-based commodity markets during the period.

Due to more stabilized market conditions in the wood-based commodity markets during the second quarter of fiscal 2023, there was no need for a lower of cost or net realizable value reserve for our structural products.

Market conditions, combined with our continued focus on pricing discipline and inventory management, resulted in a higher overall gross margin percentage compared to the second quarter of fiscal 2022.

Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products, decreased $216.9 million to $571.0 million in the second quarter of fiscal 2023.

The decline was due to price deflation combined with lower sales volume, primarily related to engineered wood products and other specialty products, as we return to more normalized market conditions.

Specialty products gross profit decreased $71.4 million to $108.8 million, with a year-over-year decline of 380 basis points in specialty gross margin to 19.1 percent for the second quarter of fiscal 2023, compared to 22.9 percent in the second quarter of fiscal 2022.

The decrease in specialty gross margin percentage over the prior-year period is also attributable to the year over year price and volume normalization.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $206.5 million to $245.0 million in the second quarter of fiscal 2023 primarily due to price deflation in the wood-based commodity markets represented by the year over year decline in the average composite price of framing lumber and structural panels, which were 49% and 39%, respectively.

Our structural gross margin percentage for the second quarter of fiscal 2023 was 11.0 percent, up from 4.7 percent in the prior-year period, primarily attributable to stabilization in the wood-based commodity markets for our structural products when compared to the second quarter of fiscal 2022 combined with our continued focus on pricing discipline and inventory management.

Our structural gross margin percentage for the second quarter of fiscal 2022 was impacted by a lower of cost or net realizable value for our structural products of $9.8 million.

We determined a reserve for the lower of cost or net realizable value for our structural products was not required as of July 1, 2023.

For more details on our lower of cost or market reserves for inventories, please see Note 3, Inventories.

Our selling, general, and administrative expenses, which includes approximately $2.0 million of incremental operating expenses related to our Vandermeer acquisition, decreased $2.6 million compared to the second quarter of fiscal 2022 primarily due to a decrease in lower delivery costs and variable compensation.

Depreciation and amortization expense increased 22.0 percent, compared to the second quarter of fiscal 2022.

The increase in depreciation and amortization is due to a higher base of amortizable and depreciable assets throughout the second quarter of fiscal 2023 when compared the prior-year period, resulting from our continued focus on capital investment and increased intangible assets related to our Vandermeer acquisition.

Other operating expenses increased $0.4 million compared to the second quarter of fiscal 2022 primarily due to restructuring related costs, including severance, incurred in the second quarter of fiscal 2023.

Interest expense, net, decreased by 43.9 percent, or $4.9 million, compared to the second quarter of fiscal 2022.

The decrease is primarily due to the generation of higher interest income, given our year over year increase in cash that is generating interest at higher rates than last year.

Our effective tax rates were 24.0 percent and 23.1 percent for the second quarter of fiscal 2023 and 2022, respectively.

Our effective tax rate for both periods was impacted by state taxes as well as 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 is typical for the second quarter of each year.

Our net income for the second quarter of fiscal 2023 was $24.5 million, or $2.70 per diluted share, versus $71.3 million, or $7.48 per diluted share, in the prior-year period.

On an adjusted basis, our net income for the second quarter of fiscal 2023 was $26.4 million, or $2.91 per diluted share, versus $72.6 million or $7.63 per diluted share, in the prior-year period.

Decreases in our net income and earnings per diluted share were due primarily to a decrease in gross profit driven by price deflation and lower specialty sales volume, particularly for our engineered wood products, and declines in pricing related to our structural products.

This was offset by lower operating expense, net interest expense and income tax expense during the period.

First Six Months of Fiscal 2023 Compared to First Six Months of Fiscal 2022

For the first six months of fiscal 2023, we generated net sales of $1.6 billion, a decrease of $927.8 million when compared to the first six months of fiscal 2022 and the overall gross margin percentage decreased from 19.4 percent to 16.7 percent year over year.

The decline in net sales compared to the prior year was primarily due to price deflation impacting our specialty and structural products, combined with lower sales volumes for our specialty products as we return to more normalized market conditions.

Gross profit in first six months of fiscal 2022 was negatively impacted by a lower of cost or net realizable value reserve of $9.8 million for our structural products resulting from significant deflation in the wood-based commodity markets during the period.

Due to more stabilized market conditions in the wood-based commodity during the first six months of fiscal 2023, the period was not impacted by a lower of cost or net realizable value reserve for our structural products.

The decline in overall gross margin percentage compared to the prior year was primarily due to price deflation impacting our specialty and structural products, combined with lower sales volumes for our specialty products, as we return to more normalized market conditions.

Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products, decreased $416.9 million to $1.1 billion in the first six months of fiscal 2023.

The decline was due to lower pricing deflation, combined with sales volume, primarily related to engineered wood products and other specialty products.

Specialty products gross profit decreased $148.9 million to $215.5 million, with a year-over-year decline of 450 basis points in specialty gross margin to 18.9 percent for the first six months of fiscal 2023, compared to 23.4 percent in the first six months of fiscal 2022.

The decrease in specialty gross margin percentage over the prior-year period is also attributable to the year over year price and volume normalization.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $510.9 million to $475.0 million in the first six months of fiscal 2023 primarily due to price deflation in the wood-based commodity markets represented by the decline in the average composite price of framing lumber and structural panels, which were 60% and 51%, respectively.

Our structural gross margin percentage for the first six months of fiscal 2023 was 11.3 percent, down from 13.0 percent in the prior-year period, primarily attributable to price deflation in the wood-based commodity markets represented by year-over-year declines in the average composite price of framing lumber and structural panels as we continued our focus on pricing discipline and inventory management.

The second quarter of fiscal 2022 was impacted by a lower of cost or net realizable value reserve for our structural products of $9.8 million.

We determined a reserve for the lower of cost or net realizable value reserve for our structural products was not required for the first six months of fiscal 2023.

For more details on our lower of cost or market reserves for inventories, please see Note 3 , Inventories.

Our selling, general, and administrative expenses, which includes approximately $4.0 million of incremental operating expenses related to our Vandermeer acquisition, decreased $2.7 million compared to the first six months of fiscal 2022 primarily due to a decrease in delivery expenses and variable compensation.

Depreciation and amortization expense increased 18.1 percent, compared to the first six months of fiscal 2022.

The increase in depreciation and amortization is due to a higher base of amortizable and depreciable assets throughout the first six months of fiscal 2023 when compared the prior-year period, resulting from our continued focus on capital investment and increased intangible assets related to our Vandermeer acquisition.

Other operating expenses increased $2.6 million compared to the first six months of fiscal 2022 primarily due to restructuring related costs, including severance, incurred in the first quarter of fiscal 2023 due to our leadership transition.

Interest expense, net, decreased by 37.9 percent, or $8.6 million, compared to the first six months of fiscal 2022.

The decrease is primarily due to the generation of higher interest income, given our year over year increase in cash that is generating interest at higher rates than last year.

Our effective tax rates were 25.1 percent and 25.1 percent for the first six months of fiscal 2023 and 2022, respectively.

Our effective tax rate for both periods was impacted by state taxes as well as the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, offset by a benefit from the vesting of restricted stock units, which is typical for the first six months of each year.

Our net income for the first six months of fiscal 2023 was $42.3 million, or $4.67 per diluted share, versus $204.7 million, or $21.07 per diluted share, in the prior-year period.

On an adjusted basis, our net income for the first six months of fiscal 2023 was $49.6 million, or $5.48 per diluted share, versus $208.6 million or $21.48 per diluted share, in the prior-year period due primarily to a decrease in gross profit driven by lower specialty sales volume, particularly for our engineered wood products, and declines in pricing related to our specialty and structural products.

This was offset by lower operating expenses, net interest expense 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 that these sources will be sufficient to fund our ongoing cash requirements for at least the next 12 months and into the foreseeable future.

We expect that these sources will be sufficient to fund our ongoing cash requirements for at least the next 12 months.

Senior Secured Notes

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The majority of net proceeds from the offering of the 2029 Notes were used to repay borrowings under our Revolving Credit Facility.

As of April 1, 2023 and December 31, 2022, the fair value of our 2029 Notes was approximately $276.8 million and $283.6 million, respectively, which are designated as Level 2 in the fair value hierarchy.

As of July 1, 2023 and December 31, 2022, the fair value of our 2029 Notes was approximately $274.0 million and $283.6 million, respectively, which are designated as Level 2 in the fair value hierarchy.

Our valuation technique is based primarily on observable market prices in less active markets.

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Our revolving credit facility, entered into with Wells Fargo Bank, National Association, as administrative agent (the “Agent”), and certain other financial institutions party thereto, provides for a senior secured asset-based revolving loan and letter of credit facility of up to $350.0 million.

Our obligations under the Revolving Credit Facility are secured by a security interest in substantially all of our and our subsidiaries’ assets (other than real property), including inventories, accounts receivable, and proceeds from those items.

Borrowings under our Revolving Credit Facility bear interest at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.25 percent to 1.75 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on LIBOR, or (ii) the Agent’s base rate plus a margin ranging from 0.25 percent to 0.75 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate.

Our Revolving Credit Facility includes available interest rate options based on LIBOR, which will be discontinued as an available rate option after June 30, 2023.

Under the terms of the facility, LIBOR will be replaced with the Secured Overnight Financing Rate (“SOFR”) with respect to the applicable variable rate interest options thereunder, with effect on or before June 30, 2023.

Our obligations under the Revolving Credit Facility (as defined below) are secured by a security

interest in substantially all of our and our subsidiaries’ assets (other than real property), including inventories, accounts receivable, and proceeds from those items.

On June 27, 2023, we entered into a third amendment to the credit facility to, among other things, replace the interest rate based on LIBOR applicable to borrowings under the Credit Agreement with an interest rate based on the SOFR and a customary spread adjustment (as amended, the “Revolving Credit Facility”).

Our Revolving Credit Facility includes available interest rate options and was previously based on LIBOR, which was discontinued as an available rate option after June 30, 2023.

Borrowings under our Revolving Credit Facility bear interest at a rate per annum equal to (i) Adjusted Term SOFR (calculated as SOFR plus 0.1%) plus a margin ranging from 1.25 percent to 1.75 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on SOFR, or (ii) the Agent’s base rate plus a margin ranging from 0.25 percent to 0.75 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate.

Borrowings under our Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the Revolving Credit Agreement).

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Our 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 1, 2023, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $722.7 million under our Revolving Credit Facility.

As of July 1, 2023, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $764.8 million under our Revolving Credit Facility.

As of December 31, 2022, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $645.4 million under our Revolving Credit Facility.

Available borrowing capacity under our Revolving Credit Facility was $346.5 million on April 1, 2023 and December 31, 2022.

Our average effective interest rate under the facility was zero percent for the quarters ended April 1, 2023 and April 2, 2022.

Available borrowing capacity under our Revolving Credit Facility was $346.5 million on July 1, 2023 and December 31, 2022.

Our average effective interest rate under the Revolving Credit Facility was zero percent for the quarters ended July 1, 2023 and July 2, 2022.

Our 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 our Revolving Credit Facility as of April 1, 2023.

We were in compliance with all covenants under our Revolving Credit Facility as of July 1, 2023.

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 completed in recent years.

Our total finance lease commitments totaled $270.8 million and $273.1 million as of April 1, 2023 and December 31, 2022, respectively.

Of the $270.8 million of finance lease commitments as of April 1, 2023, $243.6 million related to real estate and $27.2 million related to equipment.

Our total finance lease commitments totaled $271.2 million and $273.1 million as of July 1, 2023 and December 31, 2022, respectively.

Of the $271.2 million of finance lease commitments as of July 1, 2023, $243.4 million related to real estate and $27.7 million related to equipment.

Of the $273.1 million of finance lease commitments as of December 31, 2022, $243.8 million related to real estate and $29.3 million related to equipment.

Interest Rates

Our Revolving Credit Facility includes available interest rate options based on LIBOR, which will be discontinued as an available rate option after June 30, 2023.

Under the terms of our Revolving Credit Facility, LIBOR will be replaced with SOFR with respect to the applicable variable rate interest options thereunder, with effect on or before June 30, 2023.

There can be no assurances as to whether SOFR will be a more or less favorable reference rate than LIBOR, and the consequences of replacing LIBOR with SOFR cannot be entirely predicted.

However, at this time, we do not believe that the replacement of LIBOR by SOFR as a reference rate in our revolving credit facility will have a material adverse effect on our financial position or materially affect our interest expense.

Our Revolving Credit Facility includes available interest rate options and was previously based on LIBOR, which was discontinued as an available rate option after June 30, 2023.

On June 27, 2023, we amended our existing Revolving Credit Facility, under which LIBOR was replaced with SOFR with respect to the applicable variable rate interest options thereunder.

Sources and Uses of Cash

Operating Activities

Net cash provided by operating activities for the first three months of fiscal 2023 was $89.0 million, compared to net cash provided by operating activities of $2.2 million in the first three months of fiscal 2022.

The increase in cash provided by operating activities during the first three months of fiscal 2023 was primarily a result of higher cash generated from changes in working capital components, including the decrease in inventory and increase in accounts payable, offset by the increase in accounts receivable in the current-year period.

Net cash provided by operating activities for the first six months of fiscal 2023 was $153.1 million, compared to net cash provided by operating activities of $103.4 million in the first six months of fiscal 2022.

The increase in cash provided by operating activities during the first six months of fiscal 2023 was primarily a result of higher cash generated from changes in working capital components, including the decrease in inventory and increase in accounts payable, offset by the increase in accounts receivable in the current-year period.

This was partially offset by a decrease 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 2023 was $9.0 million compared to net cash used in investing activities of $2.5 million in the first three months of fiscal 2022.

Net cash used in investing activities for the first six months of fiscal 2023 was $13.9 million compared to net cash used in investing activities of $6.4 million in the first six months of fiscal 2022.

The increase in net cash used in investing activities was primarily due to higher spend on property and equipment in the current year-period compared to the prior-year period.

Financing Activities

Net cash used in financing activities totaled $2.7 million for the first three months of fiscal 2023, compared to net cash used in financing activities of $10.5 million for the first three months of fiscal 2022.

The decrease in net cash used in financing activities is primarily due to the repurchase our common stock under our announced share repurchase program during the first three months of fiscal 2022, with no such transactions completed in the first three months of fiscal 2023.

Net cash used in financing activities totaled $19.8 million for the first six months of fiscal 2023, compared to net cash used in financing activities of $77.3 million for the first six months of fiscal 2022.

The decrease in net cash used in financing activities is primarily due to the decrease in cash used for share repurchases.

During the first six months of fiscal 2023, we repurchased $12 million of our common stock under our announced share repurchase program.

During the first six months ended 2022, we repurchased $66.4 million of our common stock under our announced repurchase program, including $60.0 million for our accelerated share repurchase ASR agreement.

Stock Repurchase Program

As of April 1, 2023, we have a remaining authorization amount of $33.6 million under our $100.0 million share repurchase program.

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.

As of July 1, 2023, we have a remaining authorization amount of $22.0 million under our $100.0 million share repurchase program.

With the remaining availability under the share 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.

During the second quarter of fiscal 2023, we repurchased 141,705 shares of our common stock under the share repurchase program at an average price of $81.85 per share.

Operating Working Capital

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Selected financial information

April 1, 2023 December 31, 2022 April 2, 2022

July 1, 2023 December 31, 2022 July 2, 2022

(In thousands)

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Operating working capital $ 483,523 $ 584,242 $ 760,792

Operating working capital of $531.2 million as of April 1, 2023, compared to $584.2 million as of December 31, 2022, decreased on a net basis by approximately $53.1 million.

Operating working capital of $483.5 million as of July 1, 2023, compared to $584.2 million as of December 31, 2022, decreased on a net basis by approximately $100.7 million.

The decrease in operating working capital is primarily driven by the decrease in inventory, which reflects our strategic inventory management efforts, and the increase in accounts payable due to timing of cash disbursements.

This was partially offset by the increase in accounts receivable from net sales.

Operating working capital of $531.2 million as of April 1, 2023, compared to $829.5 million as of April 2, 2022, decreased on a net basis by approximately $298.4 million.

The decrease in operating working capital is primarily driven by the decrease in accounts receivable due to the decrease in net sales and improved collection efforts, as well as the decrease in inventory, which reflects our strategic inventory management efforts and a deflationary pricing environment.

This was partially offset by the decrease in accounts payable due to the decrease in inventory and the timing of cash disbursements.

This was partially offset by the increase in accounts receivable due to the impacts of sequential sales increases and timing of cash receipts.

Investments in Property and Equipment

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

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

For the first quarter ended April 1, 2023, we invested $9.0 million in cash investments in long-lived assets primarily related to investments in our distribution facilities and to a lesser extent, upgrading our fleet.

The gross value of these assets is included in property and equipment,

at cost on our condensed consolidated balance sheet.

For the first six months of fiscal 2023, we invested $14.0 million in cash investments in long-lived assets primarily related to investments in our distribution facilities and to a lesser extent, upgrading our fleet.

We also added $3.4 million in new finance leases during the second fiscal quarter of 2023 for new forklifts to enhance our logistical network.

Critical Accounting Policies

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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