BlueLinx Holdings Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS About Our Business BlueLinx is a leading wholesale distributor of residential and commercial building products in the United States. We are a “two-step” distributor. Two-step distributors purchase products from manufacturers and distribute those products to dealers and other suppliers in local markets, who then sell those products to end users. We carry a broad portfolio of both branded and private-label stock keeping units (“SKUs”) across two principal product categories: specialty products and structural products. Specialty products include items such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products. Structural products include items such as lumber, plywood, oriented strand board, rebar, and remesh. We also provide a wide range of value-added services and solutions aimed at relieving distribution and logistics challenges for our customers and suppliers, while enhancing their marketing and inventory management capabilities. We sell products through three main distribution channels, consisting of warehouse sales, reload sales, and direct sales. Warehouse sales, which generate the majority of our sales, are delivered from our warehouses to our customers. Reload sales are similar to warehouse sales but are shipped from warehouses, most of which are operated by third parties, where we store owned products to enhance operating efficiencies. This channel is employed primarily to service strategic customers that would be less economical to service from our warehouses, and to distribute large volumes of imported products from port facilities. Direct sales are shipped from the manufacturer to the customer without our taking physical possession of the inventory and, as a result, typically generate lower margins than our warehouse and reload distribution channels. This distribution channel, however, requires the lowest amount of committed capital and fixed costs. 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, 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. As a value-added partner in a complex and demanding building products supply chain, we play a critical role in enabling our customers to offer a broad range of products and brands, as most of our customers do not have the capability to purchase and warehouse products directly from manufacturers for such a large set of SKUs. The depth of our geographic footprint supports meaningful customer proximity across all the markets in which we operate, enabling faster and more efficient service. Similarly, we provide value to our supplier partners by enabling access to the large and fragmented network of lumber yards and dealers 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. Industry Overview Our products are available across large and attractive end markets, including residential repair and remodel and residential new construction, which together account for approximately 85 percent of the end market mix for our addressable building material market served via two-step distribution based on our estimates. We also estimate the remaining 15 percent is accounted for by commercial construction. 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 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. 17 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. We believe R&R demand is driven by a myriad of factors including, but not limited to: home prices and affordability; raw materials prices; the pace of new household formation; savings rates; employment conditions; and emerging trends, such as the increased popularity of home-based remote working environments. 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’ 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. 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. housing stock increases over time, we anticipate U.S. R&R spending will also increase. According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, the median age of a home in the U.S. increased from 23 years in 1985 to 39 years in 2019. Moreover, approximately 80 percent of the current housing stock was built prior to 1999. We believe the increasing average age of the nation’s approximate 144 million existing homes will continue to drive demand for repair and remodel projects. Residential New Construction We estimate that demand from the residential new construction market, including single-family and multi-family units, accounts for approximately 40 percent of our annual sales. We believe demand for residential new construction is driven by a myriad of factors including, but not limited to: mortgage rates, which recently reached multi-year highs; lending standards; home affordability; employment conditions; savings rates; the rate of population growth and new household formation; builder activity levels; the level of existing home inventory on the market; and consumer sentiment. According to the U.S. Census Bureau and the U.S. 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. 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 challenges in the macro-economic environment. Seasonality 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. The first and fourth quarters have historically been our lower volume quarters due to the impact of unfavorable weather on the residential repair and remodel and residential new home construction markets, among other factors. Our second and third quarters have historically been higher volume quarters compared to the first and fourth quarters, reflecting an increase in repair and remodel and residential new home construction activities due to more favorable seasonal conditions. 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 impact our sales volumes, we have returned to more normalized supply chain conditions and manufacturing output. 18 Commodity Markets Our operating results are sensitive to fluctuations in commodity markets, specifically commodity markets for wood-based commodities that we classify as structural products. When prices fluctuate in the commodity markets which impact us, we may immediately adjust the end price of our products to compensate for the changes in market prices, which is common for businesses with inventories impacted by commodity price fluctuations. When we change our prices in response to market fluctuations, we will often see immediate impacts in our operating results. When market prices increase, this impact can be beneficial. Conversely, when market prices decrease, the impact can be negative because we are adjusting the selling prices for inventory often purchased at higher market prices. See Note 3, Inventories , 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 Our operating results are impacted by the availability of the products we sell in the markets in which we do business. When our inventory supply is constrained, our operating results may be impacted by lower sales volumes. While supply constraints may negatively impact our sales volumes, they may also have a positive impact on our net sales and overall profitability. This is because supply constraints can cause prices to increase. Under these circumstances, we may sell less product by volume, but at a higher price which could have a positive impact on our levels of sales and profitability. Conversely, rapid changes in supply levels, such as the sudden increase in availability of a product where the supply was previously constrained, may have a negative impact on our operating results especially in situations where the demand does not also increase proportionally with supply increases. Our Culture and Management Focus We remain committed to driving a culture of profitable growth within new and existing product lines and geographies, while positioning the Company for long-term value creation. The following initiatives represent key areas of our management team’s focus: 1. Foster a performance-driven culture committed to profitable growth. This includes enhancing the customer experience; accelerating organic growth within specific product and solutions offerings where the Company is uniquely advantaged; and deploying capital to drive sustained margin expansion, grow cash flow and maintain continued profitable growth. 2. Migrate sales mix toward higher-margin specialty product categories. The Company is pursuing a revenue mix increasingly weighted toward higher-margin, specialty product categories such as engineered wood, siding, millwork, outdoor living, specialty lumber and panels, and industrial products. Additionally, the Company is expanding its value-added service offerings designed to simplify complex customer sourcing requirements and provide enhanced service capabilities afforded by the Company’s national platform. 3. Maintain a disciplined capital structure and pursue high-return investments that increase the value of the Company. The Company is maintaining a disciplined capital structure while at the same time investing in its business to modernize its distribution facilities, as well as its tractor and trailer fleet, and to improve operational performance. The Company also continues to evaluate potential acquisition targets that complement its existing capabilities, grow its specialty products business, increase customer exposure, expand its geographic reach, or a combination thereof. We invested $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 Our results of operations and financial performance are influenced by a variety of factors, including the following: pricing and product cost variability; volumes of product sold; competition; changes in the supply and/or demand for products that we distribute; the cyclical nature of the industry in which we operate; housing market conditions; consolidation among competitors, suppliers, and customers; disintermediation risk; loss of products or key suppliers and manufacturers; our dependence on international suppliers and manufacturers for certain products; potential acquisitions and the integration and completion of such acquisitions; business disruptions; effective inventory management relative to our sales volume or the prices of the products we produce; information technology security risks and business interruption risks; the ability to attract, train, and retain highly qualified associates and other key personnel while controlling related labor costs; exposure to product liability and other claims and legal proceedings related to our business and the products we distribute; natural disasters, catastrophes, fire, wars or other unexpected events; successful implementation of our strategy; wage increases or work stoppages by our union employees; costs 19 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; fluctuations in our operating results; our level of indebtedness and our ability to incur additional debt to fund future needs; the covenants of the instruments governing our indebtedness limiting the discretion of our management in operating the business; 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; inability to raise funds necessary to finance a required repurchase of our senior secured notes; a lowering or withdrawal of debt ratings; changes in our product mix; increases in petroleum prices; changes in insurance-related deductible/retention reserves based on actual loss experience; the possibility that the value of our deferred tax assets could become impaired; changes in our expected annual effective tax rate could be volatile; changes in actuarial assumptions for our pension plan; the costs and liabilities related to our participation in multi-employer pension plans could increase; the risk that our cash flows and capital resources may be insufficient to service our existing or future indebtedness; variable interest rate risk under certain indebtedness; changes in, or interpretation of, accounting principles; significant stock price fluctuation; the possibility that we could be the subject of securities class action litigation due to stock price volatility; 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; and indebtedness terms that limit our ability to pay dividends on common stock. 20 Results of Operations 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 Net Sales Third Quarter of Fiscal 2022 % of Net Sales (In thousands) (In thousands) Net sales $ 809,981 100.0% $ 1,060,761 100.0% Gross profit 139,246 17.2% 189,376 17.9% Selling, general, and administrative 91,354 11.3% 91,678 8.6% Depreciation and amortization 8,089 1.0% 6,688 0.6% Amortization of deferred gains on real estate (984) (0.1)% (983) (0.1)% Other operating expenses 1,131 0.1% 1,267 0.1% Operating income 39,656 4.9% 90,726 8.6% Interest expense, net 5,577 0.7% 10,444 1.0% Other expense, net 594 0.1% (361) (0.0)% Income before provision for income taxes 33,485 4.1% 80,643 7.6% Provision for income taxes 9,103 1.1% 21,134 2.0% Net income $ 24,382 3.0% $ 59,509 5.6% 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 Net Sales First Nine Months of Fiscal 2022 % of Net Sales (In thousands) (In thousands) Net sales $ 2,423,852 100.0% $ 3,602,445 100.0% Gross profit 408,588 16.9% 681,835 18.9% Selling, general, and administrative 271,278 11.2% 274,305 7.6% Depreciation and amortization 23,758 1.0% 19,952 0.6% Amortization of deferred gains on real estate (2,952) (0.1)% (2,951) (0.1)% Gains from sales of property — 0.0% (144) (0.0)% Other operating expenses 5,240 0.2% 2,731 0.1% Operating income 111,264 4.6% 387,942 10.8% Interest expense, net 19,575 0.8% 32,992 0.9% Other expense, net 1,782 0.1% 916 0.0% Income before provision for income taxes 89,907 3.7% 354,034 9.8% Provision for income taxes 23,247 1.0% 89,844 2.5% Net income $ 66,660 2.8% $ 264,190 7.3% 21 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) Specialty products $ 558,851 $ 724,323 $ 1,697,679 $ 2,280,090 Structural products 251,130 336,438 726,173 1,322,355 Total net sales $ 809,981 $ 1,060,761 $ 2,423,852 $ 3,602,445 Percentage of total net sales by product category Specialty products 69.0 % 68.3 % 70.0 % 63.3 % Structural products 31.0 % 31.7 % 30.0 % 36.7 % 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 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) Specialty products $ 110,898 $ 151,428 $ 326,366 $ 515,781 Structural products 28,348 37,948 82,222 166,054 Total gross profit $ 139,246 $ 189,376 $ 408,588 $ 681,835 Gross margin % by product category Specialty products 19.8 % 20.9 % 19.2 % 22.6 % Structural products 11.3 % 11.3 % 11.3 % 12.6 % Total gross margin % 17.2 % 17.9 % 16.9 % 18.9 % 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 $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. 22 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 27.2 percent and 26.2 percent for the third 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 third quarter of each year. 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 $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 $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. 23 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 25.9 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 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. Senior Secured 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 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. Revolving Credit Facility 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. 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). The Borrowers are required to repay revolving loans thereunder to the extent that such revolving loans exceed the Borrowing Base then in effect. 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 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 24 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 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 $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. Interest Rates 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 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 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 $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 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. 25 Operating Working Capital Operating working capital is an important measurement we use to determine the efficiencies of our operations and our ability to readily convert assets into cash. Operating working capital is defined as the sum of receivables and inventory, less accounts payable. Management of working capital helps us monitor our progress in meeting our goals to enhance working capital assets. Selected financial information September 30, 2023 December 31, 2022 October 1, 2022 (In thousands) Current assets: Receivables, less allowance for doubtful accounts $ 297,568 $ 251,555 $ 360,535 Inventories, net 364,162 484,313 535,979 $ 661,730 $ 735,868 $ 896,514 Current liabilities: Accounts payable $ 202,256 $ 151,626 $ 208,197 $ 202,256 $ 151,626 $ 208,197 Operating working capital $ 459,474 $ 584,242 $ 688,317 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. 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 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 Part 2, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Forward-Looking Statements This report contains forward-looking statements. Forward-looking statements include, without limitation, any statement that predicts, forecasts, indicates or implies future results, performance, liquidity levels or achievements, and may contain the words “believe,” “anticipate,” “could,” “expect,” “estimate,” “intend,” “may,” “project,” “plan,” “should,” “will,” “will be,” “will likely continue,” “will likely result,” “would” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties that may cause our business, strategy, or actual results to differ materially from the forward-looking statements. The forward-looking statements in this report include statements about anticipated effects of adopting certain accounting standards; estimated future annual amortization expense; potential changes to estimates made in connection with revenue recognition; the expected outcome of legal proceedings; industry conditions; seasonality; and liquidity and capital resources. Forward-looking statements are based on estimates and assumptions made by our management that, although believed by us to be reasonable, are inherently uncertain. Forward-looking statements involve risks and uncertainties that may cause our business, strategy, or actual results to differ materially from the forward-looking statements. These risks and uncertainties include those 26 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. It is not possible for management to predict all of these risks, nor can it assess the extent to which any factor, or a combination of factors, may cause our business, strategy, or actual results to differ materially from those contained in forward-looking statements. Factors that may cause these differences include, among other things: • we may experience pricing and product cost variability; • our earnings are highly dependent on volumes; • our industry is highly fragmented and competitive and if we are unable to compete effectively, our net sales and operating results may be reduced; • our industry is highly cyclical, and prolonged periods of weak demand or excess supply may reduce our net sales and/or margins, which may cause us to incur losses or reduce our net income; • adverse housing market conditions may negatively impact our business, liquidity, and results of operations, and increase the credit risk from our customers; • consolidation among competitors, suppliers, and customers could negatively impact our business; • we are subject to disintermediation risk; • loss of key products or key suppliers and manufacturers could affect our financial health; • our dependence on international suppliers and manufacturers for certain products exposes us to risks that could affect our financial condition and expose us to certain additional risks; • 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; • we may be unable to effectively manage our inventory relative to our sales volume or as the prices of the products we distribute fluctuate, which could affect our business, financial condition, and operating results; • we are subject to information technology security risks and business interruption risks and may incur increasing costs in an effort to minimize and/or respond to those risks; • our success depends on our ability to attract, train, and retain highly qualified associates and other key personnel while controlling related labor costs; • we are exposed to product liability and other claims and legal proceedings related to our business and the products we distribute, which may exceed the coverage of our insurance; • our business operations could suffer significant losses from climate changes, natural disasters, catastrophes, fire, or other unexpected events; • our operating results depend on the successful implementation of our strategy and we may not be able to implement our strategic initiatives successfully, on a timely basis, or at all; • a significant percentage of our employees are unionized, and wage increases or work stoppages by our unionized employees may reduce our results of operations; • federal, state, local, and other regulations could impose substantial costs and restrictions on our operations that would reduce our net income; • we are subject to federal, state, and local environmental protection laws and may have to incur significant costs to comply with these laws and regulations in the future; • 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; • our future operating results may fluctuate significantly, and our current operating results may not be a good indication of our future performance; • fluctuations in our quarterly financial results could affect our stock price in the future; • our level of indebtedness could limit our financial and operating activities and adversely affect our ability to incur additional debt to fund future needs; • the instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business, including requiring us to maintain a minimum level of excess liquidity; • despite our current levels of debt, we may still incur more debt, which would increase the risks described in these risk factors relating to indebtedness; • we have sold and leased back certain of our distribution centers under long-term non-cancelable leases, and we may enter into similar transactions in the future. All of these leases are (or will be) finance leases, and our debt and interest expense may increase as a result; 27 • many of our distribution centers are leased, and if we close a leased distribution center before expiration of the lease, we will still be obligated under the applicable lease, and we may be unable to renew the leases at the end of their terms; • we may not have or be able to raise the funds necessary to finance a required repurchase of our senior secured notes; • a lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital; • a change in our product mix could adversely affect our results of operations; • if the cost of fuel, third-party freight or other energy prices increase or availability of third-party freight providers is reduced, our results of operations could be adversely affected; • we establish insurance-related deductible/retention reserves based on historical loss development factors, which could lead to adjustments in the future based on actual development experience; • the value of our deferred tax assets could become impaired, which could materially and adversely affect our operating results; • our expected annual effective tax rate could be volatile and materially change as a result of changes in mix of earnings and other factors; • changes in actuarial assumptions for our pension plan could impact our financial results, and funding requirements are mandated by the Federal government; • costs and liabilities related to our participation in multi-employer pension plans could increase; • our cash flows and capital resources may be insufficient to make required payments on our indebtedness or future indebtedness; • borrowings under our revolving credit facility bears interest at a variable rate, which subjects us to interest rate risk, which could cause our debt service obligations to increase significantly; • changes in, or interpretation of, accounting principles could result in unfavorable accounting changes; • our stock price may fluctuate significantly; • we could be the subject of securities class action litigation due to stock price volatility, which could divert management’s attention and adversely affect our results of operations; • if securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline; • the activities of activist stockholders could have a negative impact on our business and results of operations; and • the terms of our revolving credit facility and senior secured notes place restrictions on our ability to pay dividends on our common stock, so any returns to stockholders may be limited to the value of their stock. Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. 28