What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-31 compared with 2023-08-01 · 98 added, 108 removed, 301 unchanged (41% of the section changed)

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

We have a strong market position and a broad geographic coverage footprint servicing all 50 states, where we maintain locations that serve 75 percent of the highest growth metropolitan statistical areas as it relates to forecasted housing starts and repair and remodel spend.

We have a strong market position and a broad geographic coverage footprint servicing all 50 states, and we maintain locations that serve 75 percent of the highest growth metropolitan statistical areas based on forecasted housing starts and repair and remodel spend.

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, Louisiana-Pacific, Oldcastle APG, Ply Gem, Roseburg, Royal and Weyerhaeuser.

We supply products to a broad base of 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 customers including national home centers, pro dealers, cooperatives, specialty distributors, regional and local dealers, lumber yards 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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We also estimate the remaining 15 percent is accounted for by commercial construction.

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.

Broad-based inflation, the rise in mortgage rates, home price appreciation and other recent developments have led to a more challenging recent macro-economic environment.

These developments, in turn, impacted the U.S.

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

However, we continue to 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 demand from the residential repair and remodel market (“R&R”) accounts for approximately 45 percent of our annual sales.

Historically, R&R demand has tended to be less cyclical when compared to the residential new construction

market, particularly for exterior products that are exposed to the elements and where maintenance is less likely to be deferred for long periods of time.

Historically, R&R demand has tended to be less cyclical when compared to the residential new construction market, 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 believe R&R demand is driven by a myriad of factors including, but not limited to:

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

homeowner improvements and repairs spending expected to be approximately $457.0 billion by the end of 2023, up from $363.0 billion at the end of 2020.

homeowner improvements and repairs projected to fall from $489 billion to $452 billion over the coming four quarters.

Further, as the median age of U.S.

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Census Bureau and the U.S.

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 .

Department of Housing and Urban Development, during the third quarter of 2023, average single-family and multi-family combined housing starts in the United States, seasonally adjusted, were approximately six percent lower compared to the third quarter of 2022.

As of the end of the third quarter of 2023, the months supply of inventory of new homes was almost at 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.

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.

While there is continued uncertainty surrounding certain macro-economic environment developments that impact our sales volumes, we have returned to more normalized supply chain conditions and manufacturing output.

Commodity Markets

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

We invested $18.9 million in our business during the first nine months of fiscal 2023 to improve operational performance and productivity.

Factors That Affect Operating Results

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wage increases or work stoppages by our union employees;

costs imposed by federal, state, local, and other regulations;

imposed by federal, state, local, and other regulations;

compliance costs associated with federal, state, and local environmental protection laws;

costs associated with federal law and regulations regarding importation of products;

global pandemics, such as COVID-19, and other widespread public health crises and their potential effects on our business;

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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 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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unfavorable securities or industry analyst publications;

volatility or disruptions in the capital markets or other factors affecting the amount and timing of share repurchases and whether or not the Company will continue, and the timing of, any open market repurchases;

activities of activist shareholders;

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Results of Operations

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

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

Third Quarter of Fiscal 2023 % of

Sales Third Quarter of Fiscal 2022 % of

(In thousands) (In thousands)

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Amortization of deferred gains on real estate (984) (0.1)% (983) (0.1)%

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

Other operating expenses 1,131 0.1% 1,267 0.1%

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Net income $ 24,382 3.0% $ 59,509 5.6%

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

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

First Nine Months of Fiscal 2023 % of

Sales First Nine Months of Fiscal 2022 % of

(In thousands) (In thousands)

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Net income $ 66,660 2.8% $ 264,190 7.3%

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

The following table sets forth net sales by product category for the three and nine month periods ending September 30, 2023 and October 1, 2022:

Three Months Ended Nine Months Ended

September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022

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 of fiscal 2023 and 2022:

Three Months Ended Six Months Ended

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

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

Three Months Ended Nine Months Ended

September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022

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

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Total gross margin % 17.2 % 17.9 % 16.9 % 18.9 %

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.

Third Quarter of Fiscal 2023 Compared to Third Quarter of Fiscal 2022

For the third quarter of fiscal 2023, we generated net sales of $810.0 million, a decrease of $250.8 million when compared to the third quarter of fiscal 2022 and gross margin percentage decreased from 17.9 percent to 17.2 percent year over year.

The decline in net sales compared to the prior year period was primarily due to price deflation and lower sales volume for both specialty and structural products, reflecting changing market conditions.

The decline in gross margin percentage was attributable to our specialty products, as discussed below.

Net sales of specialty products, which includes products such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products, decreased $165.5 million to $558.9 million in the third quarter of fiscal 2023.

The decline was due to price deflation combined with lower sales volume across several product categories as we return to more normalized market conditions.

Specialty products gross profit decreased $40.5 million to $110.9 million, with a year over year decline of 110 basis points in specialty gross margin to 19.8 percent for the third quarter of fiscal 2023, compared to 20.9 percent in the third 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.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $85.3 million to $251.1 million in the third quarter of fiscal 2023 primarily due to price deflation in the wood-based commodity markets represented by the year-over-year declines in the average composite price of framing lumber and structural panels, which were 26% and 5%, respectively.

Our structural gross margin percentage for the third quarter of fiscal 2023 was 11.3 percent, the same as the 11.3 percent in the prior-year period.

Our structural gross margin percentage for the third quarter of fiscal 2022 reflects a $5.7 million favorable impact for the partial release of an inventory reserve recorded in the second quarter of fiscal 2022, while a $0.6 million reserve provision for our structural lumber inventory was recorded in the third quarter of fiscal 2023 to reflect the lower of cost or net realizable value.

However, the gross margin percentage for third quarter of fiscal 2023 remained consistent with the prior-year period due to our continued focus on pricing discipline and inventory management.

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.

Our selling, general, and administrative expenses, which includes approximately $1.9 million of incremental operating expenses related to our Vandermeer acquisition, decreased $0.3 million compared to the third quarter of fiscal 2022 primarily due to lower delivery costs and variable compensation.

Depreciation and amortization expense increased 20.9 percent, compared to the third quarter of fiscal 2022 due to a higher base of amortizable and depreciable assets throughout the third quarter of fiscal 2023 when compared to the prior-year period, resulting from our continued focus on capital investment and increased intangible assets related to our Vandermeer acquisition.

Interest expense, net, decreased by 46.6 percent, or $4.9 million, compared to the third 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.

Our effective tax rates were 27.2 percent and 26.2 percent for the third quarter of fiscal 2023 and 2022, respectively.

Our net income for the third quarter of fiscal 2023 was $24.4 million, or $2.71 per diluted share, versus $59.5 million, or $6.38 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 sales volume, particularly for our engineered wood products and lumber, along with declines in pricing.

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

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

For the first nine months of fiscal 2023, we generated net sales of $2.4 billion, a decrease of $1.2 billion when compared to the first nine months of fiscal 2022 and gross margin percentage decreased from 18.9 percent to 16.9 percent year over year.

The declines in net sales and overall gross margin percentage compared to the prior year period were primarily due to price deflation combined with lower sales volumes in our specialty and structural products, reflecting changing 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 $582.4 million to $1.7 billion in the first nine months of fiscal 2023.

The decline was due to pricing deflation combined with lower sales volume across several product categories as we return to more normalized market conditions.

Specialty products gross profit decreased $189.4 million to $326.4 million, with a year over year decline of 340 basis points in specialty gross margin to 19.2 percent for the first nine months of fiscal 2023, compared to 22.6 percent in the first nine 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.

Net sales of structural products, which includes products such as lumber, plywood, oriented strand board, rebar, and remesh, decreased $596.2 million to $726.2 million in the first nine 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 52% and 40%, respectively.

Our structural gross margin percentage for the first nine months of fiscal 2023 was 11.3 percent, down from 12.6 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.

The impacts of these factors on the gross margin percentage in the first nine months of fiscal 2023 were partially offset by our continued focus on pricing discipline and inventory management, as well as favorable changes in our net provisions for inventory reserves in the current period.

The first nine months of fiscal 2023 were favorably impacted by a $2.0 million, net inventory reserve release, while inventory reserve provisions of $4.1 million, net were recorded in the first nine months of fiscal 2022.

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.

Our selling, general, and administrative expenses, which includes approximately $5.6 million of incremental operating expenses related to our Vandermeer acquisition, decreased $3.0 million compared to the first nine months of fiscal 2022 primarily due to a decrease in delivery expenses and variable compensation.

Depreciation and amortization expense increased 19.1 percent, compared to the first nine months of fiscal 2022 due to a higher base of amortizable and depreciable assets throughout the first nine 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 $2.5 million compared to the first nine months of fiscal 2022 primarily due to restructuring related costs, including severance expenses incurred in fiscal 2023 due to our leadership transition.

Interest expense, net, decreased by 40.7 percent, or $13.4 million, compared to the first nine 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.

Our effective tax rates were 25.9 percent and 25.4 percent for the first nine 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.

Our net income for the first nine months of fiscal 2023 was $66.7 million, or $7.38 per diluted share, versus $264.2 million, or $27.82 per diluted share, in the prior-year period.

Our net income for the first nine months of fiscal 2023 decreased due primarily to a decrease in gross profit driven by lower sales volume, particularly for our engineered wood products, lumber, and panels, along with declines in pricing.

This was partially offset by net interest expense and income tax expense.

Liquidity and Capital Resources

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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 the private offering of $300 million of our 6 percent senior secured notes due 2029 (the “2029 Notes”).

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

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

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.

As of September 30, 2023 and December 31, 2022, the fair value of our 2029 Notes was approximately $271.5 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 (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.

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”).

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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 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 September 30, 2023, we had zero outstanding borrowings and excess availability, including cash in qualified accounts, of $816.3 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 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.

Available borrowing

capacity under our Revolving Credit Facility was $346.5 million as of September 30, 2023 and December 31, 2022.

Our average effective interest rate under the Revolving Credit Facility was zero percent for the fiscal quarters ended September 30, 2023 and October 1, 2022 since no borrowings were outstanding during the periods.

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 July 1, 2023.

We were in compliance with all covenants under our Revolving Credit Facility as of September 30, 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 $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.

Our total finance lease commitments totaled $277.3 million and $273.1 million as of September 30, 2023 and December 31, 2022, respectively.

Of the $277.3 million of finance lease commitments as of September 30, 2023, $243.3 million related to real estate and $34.0 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.

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Operating Activities

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.

Net cash provided by operating activities for the first nine months of fiscal 2023 was $230.7 million, compared to net cash provided of $246.0 million in the first nine months of fiscal 2022.

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

Investing Activities

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.

Net cash used in investing activities for the first nine months of fiscal 2023 was $18.7 million compared to net cash used of $18.4 million in the first nine months of fiscal 2022.

The change was primarily due to lower cash proceeds from sales of assets during the current year-period compared to the prior-year period.

Financing Activities

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.

Net cash used in financing activities totaled $41.1 million for the first nine months of fiscal 2023, compared to net cash used of $83.4 million for the first nine months of fiscal 2022.

The change in net cash used in financing activities was primarily due to a decrease in cash used for repurchases of our common stock under our announced share repurchase program.

During the first nine months of fiscal 2023, we repurchased $29.3 million of our common stock compared to $66.4 million during the first nine months of fiscal 2022.

Stock Repurchase Program

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.

During the third quarter of fiscal 2023, we repurchased 216,507 shares of our common stock under our share repurchase program at an average price of $84.93 per share.

As of September 30, 2023, we had a remaining authorization amount of approximately $3.7 million under the program, which was fully utilized in early fiscal October 2023.

On October 31, 2023, the Company’s Board of Directors authorized a new share repurchase program for $100 million.

Under the new 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

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

September 30, 2023 December 31, 2022 October 1, 2022

(In thousands)

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Operating working capital $ 459,474 $ 584,242 $ 688,317

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.

Operating working capital of $459.5 million as of September 30, 2023, compared to $584.2 million as of December 31, 2022, decreased on a net basis by approximately $124.8 million.

This 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 due to the impacts of sequential sales increases and timing of cash receipts.

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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 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.

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

For the first nine months of fiscal 2023, we invested $18.9 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 $11.3 million in new finance leases during the third fiscal quarter of 2023 for new forklifts and tractors to enhance our logistical network.

Critical Accounting Policies

The preparation of our consolidated financial statements and related disclosures in conformity with GAAP requires our management to make judgments and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes.

There have been no material changes to our critical accounting policies from the information provided in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

There have been no material changes to our critical accounting policies from the information provided in Part 2, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Forward-Looking Statements

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

These risks and uncertainties include those discussed under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, and those discussed elsewhere in this report (including Item 1A of Part II of this report) and in future reports that we file with the SEC.

These risks and uncertainties include those

discussed under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, and those discussed elsewhere in this report and in future reports that we file with the SEC.

We operate in a changing environment in which new risks can emerge from time to time.

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• our strategy includes pursuing acquisitions, and we may be unsuccessful in making and integrating mergers, acquisitions and investments;

• constraints, volatility or disruptions in the capital markets or other factors affecting the amount and timing of share repurchases and whether or not the Company will continue, and the timing of, any open market repurchases;

• we may incur business disruptions resulting from a variety of possible causes;

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• we are subject to federal, state, and local environmental protection laws and may have to incur significant costs to comply with these laws and regulations in the future;

• we are subject to federal law and regulations regarding the importation of products and may have to incur significant costs to comply with these laws and regulations in the future;

• the effect of global pandemics, such as COVID-19, and other widespread public health crises and governmental rules and regulations and our policies related to such may adversely affect our business and results from operations;

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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