MasterBrand, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements contained in this Quarterly Report on Form 10-Q, other than purely historical information, including, but not limited to, estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements. Statements preceded by, followed by or that otherwise include the word “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may,” and “could” are generally forward-looking in nature and not historical facts. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management. Although we believe that these statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those indicated in such statements. These factors include those listed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 within Part I, Item 1A and in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2024 within Part II, Item 1A. The forward-looking statements included in this document are made as of the date of this Quarterly Report on Form 10-Q and, except pursuant to any obligations to disclose material information under the federal securities laws, we undertake no obligation to update, amend or clarify any forward-looking statements to reflect events, new information or circumstances occurring after the date of this Quarterly Report on Form 10-Q. Some of the important factors that could cause our actual results to differ materially from those projected in any such forward-looking statements include: ◦ Our ability to develop and expand our business; ◦ Our ability to develop new products or respond to changing consumer preferences and purchasing practices; ◦ Our anticipated financial resources and capital spending; ◦ Our ability to manage costs; ◦ Our ability to effectively manage manufacturing operations and capacity, or an inability to maintain the quality of our products; ◦ The impact of our dependence on third parties to source raw materials and our ability to obtain raw materials in a timely manner or fluctuations in raw material costs; ◦ Our ability to accurately price our products; ◦ Our projections of future performance, including future revenues, capital expenditures, gross margins, and cash flows; ◦ The effects of competition and consolidation of competitors in our industry; ◦ Costs of complying with evolving tax and other regulatory requirements and the effect of actual or alleged violations of tax, environmental or other laws; ◦ The effect of climate change and unpredictable seasonal and weather factors; ◦ Conditions in the housing market in the United States and Canada; ◦ The expected strength of our existing customers and consumers and any loss or reduction in business from one or more of our key customers or increased buying power of large customers; ◦ Information systems interruptions or intrusions or the unauthorized release of confidential information concerning customers, employees, or other third parties; ◦ Worldwide economic, geopolitical and business conditions and risks associated with doing business on a global basis; ◦ The effects of a public health crisis or other unexpected event; ◦ The inability to recognize, or delays in obtaining, anticipated benefits of the acquisition of Supreme Cabinetry Brands, Inc. (the “Acquisition”), including synergies, which may be affected by, among other things, competition, the ability of the combined company to grow and manage growth profitably, maintain relationships with customers and suppliers and retain key employees; ◦ The impact of our current and any additional future debt obligations on our business, current and future operations, profitability and our ability to meet other obligations; ◦ Business disruption following the Acquisition; ◦ Diversion of management time on Acquisition-related issues; ◦ The reaction of customers and other persons to the Acquisition; and 22 Table of Contents ◦ Other statements contained in this Quarterly Report on Form 10-Q regarding items that are not historical facts or that involve predictions. Introduction Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is a supplement to the accompanying condensed consolidated financial statements of MasterBrand and its consolidated subsidiaries and provides additional information on our business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. MD&A is organized as follows: • Overview : This section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends. • Basis of Presentation : This section provides a discussion of the basis on which our condensed consolidated financial statements were prepared. • Results of Operations : Our consolidated financial statements are based on a 52- or 53-week fiscal year ending on the last Sunday in December in each calendar year. This section provides an analysis of our results of operations for the thirteen and twenty-six weeks ended June 30, 2024 as compared to June 25, 2023. Unless the context otherwise requires, references to years and quarters contained in this Quarterly Report on Form 10-Q pertain to our fiscal years and fiscal quarters. Additionally, unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to: (1) “2024,” or “fiscal 2024” refers to our 2024 fiscal year that is a 52-week period that will end on December 29, 2024; and (2) “2023,” or “fiscal 2023” refers to our 2023 fiscal year that was a 53-week period that ended on December 31, 2023. Furthermore, unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to: (1) “the second quarter of 2024” refers to the thirteen week period that ended on June 30, 2024; (2) “the second quarter of 2023” refers to the thirteen week period that ended on June 25, 2023; (3) “the first half of 2024” refers to the twenty-six weeks ended June 30, 2024; and (4) “the first half of 2023” refers to the twenty-six weeks ended June 25, 2023. • Liquidity and Capital Resources : This section provides a discussion of our financial condition and an analysis of our cash flows for our twenty-six week period that ended on June 30, 2024 as compared to our twenty-six week period that ended on June 25, 2023. This section also provides a discussion of our ability to fund our future commitments and ongoing operating activities through internal and external sources of capital. • Recently Issued Accounting Standards : This section identifies our adoption of recently issued accounting standards. • Critical Accounting Estimates : This section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application. Overview Founded ~ 70 years ago, we are the largest manufacturer of residential cabinets in North America. Our superior product quality, innovative design and service excellence drives a compelling value proposition. We have insight into the fashion and features consumers desire, which we use to tailor our product lines across price points. Our volume leadership allows us to achieve an advantaged cost structure and service platform by standardizing product platforms and components to the greatest extent possible—resulting in an improved facility footprint and an efficient supply chain. Further, our decades of experience have informed how we use global geographies to optimize procurement and manufacturing costs. Finally, with the most extensive dealer network throughout the United States and Canada, we have an advantaged distribution model that cannot be easily replicated. We expect to further extend our competitive advantages by using technology and data to enhance the consumer’s experience from visualization to ordering to delivery and installation. 23 Table of Contents Basis of Presentation Our consolidated financial statements are based on a 52- or 53-week fiscal year ending on the last Sunday in December in each calendar year and have been principally derived from the consolidated financial statements of our Company and its consolidated subsidiaries using the historical results of operations, and historical basis of assets and liabilities. Our condensed consolidated financial statements have been prepared in accordance with GAAP. Results of Operations The following discussion of condensed consolidated results of operations refers to the thirteen weeks ended June 30, 2024 compared to the thirteen weeks ended June 25, 2023. Thirteen Weeks Ended June 30, 2024 Compared to the Thirteen Weeks Ended June 25, 2023 Thirteen Weeks Ended (U.S. Dollars presented in millions) June 30, 2024 $ change % change June 25, 2023 NET SALES $ 676.5 $ (18.6) (2.7) % $ 695.1 Cost of products sold 445.5 (13.4) (2.9) % 458.9 GROSS PROFIT 231.0 (5.2) (2.2) % 236.2 Selling, general and administrative expenses 146.7 5.0 3.5 % 141.7 Amortization of intangible assets 3.7 (0.3) (7.5) % 4.0 Restructuring charges 2.8 (0.3) (9.7) % 3.1 OPERATING INCOME 77.8 (9.6) (11.0) % 87.4 Interest expense 20.6 3.4 19.8 % 17.2 Other (income) expense, net (2.9) (3.4) n/m (1) 0.5 INCOME BEFORE TAXES 60.1 (9.6) (13.8) % 69.7 Income tax expense 14.8 (3.7) (20.0) % 18.5 NET INCOME $ 45.3 $ (5.9) (11.5) % $ 51.2 ___________ (1) Not meaningful. Net sales Net sales were $676.5 million for the thirteen weeks ended June 30, 2024 compared to $695.1 million for the thirteen weeks ended June 25, 2023, a decrease of $18.6 million, or 2.7 percent. The lower net sales, compared to the thirteen weeks ended June 25, 2023, were driven by the combined net impact of price and mix on our overall average selling price, partially offset by an increase in sales unit volume. The increased sales unit volume offset 40.0 percent of the gross year-over-year decrease in net sales. Overall end-market demand was softer in the second quarter of 2024 as compared to the second quarter of 2023 in the repair and remodel markets, while single-family new construction strengthened in the second quarter of 2024. Compared to the thirteen weeks ended June 25, 2023, net sales to dealers, whose end customers include builders, professional trades and home remodelers, declined $26.0 million, or 6.9 percent, and net sales to retailers, including through their respective retail internet website portals, declined $6.3 million, or 2.6 percent. Net sales directly to builders was up $13.7 million, or 17.5 percent. Foreign currency impact was unfavorable by $0.4 million during the thirteen weeks ended June 30, 2024 as compared to the thirteen weeks ended June 25, 2023. 24 Table of Contents Cost of products sold Cost of products sold decreased by $13.4 million, or 2.9 percent, to $445.5 million (65.9 percent of net sales) in the thirteen weeks ended June 30, 2024 as compared to $458.9 million (66.0 percent of net sales) in the thirteen weeks ended June 25, 2023. The $13.4 million decrease in cost of products sold, as well as the improvement in cost of products sold as a percentage of net sales, is due primarily to the combined net impact of price and mix compared to the thirteen weeks ended June 25, 2023. This overall decrease was also a function of a year-over-year increase in realized savings from various cost reduction actions and carry over deflation in commodity costs and inbound transportation. The overall decrease was partially offset by $2.2 million of insurance recoveries in the second quarter of 2023 related to the tornado at our Jackson, GA facility, which did not recur in the current year, and the impact of increased sales unit volume, which offset 37.9 percent of the gross year-over-year decrease in cost of products sold. Selling, general and administrative expenses Selling, general and administrative expenses increased by $5.0 million, or 3.5 percent, to $146.7 million (21.7 percent of net sales) in the thirteen weeks ended June 30, 2024 compared to $141.7 million (20.4 percent of net sales) in the thirteen weeks ended June 25, 2023. The increase in the second quarter of 2024 is primarily due to acquisition-related costs ($4.4 million) associated with the acquisition of Supreme , increased professional support fees ($4.3 million), and increased associate-related costs ($4.1 million), including salaries and incentive compensation. These increases are partially offset by lower distribution and commission costs ($6.8 million), as a result of the decrease in net sales. Restructuring charges Restructuring charges were $2.8 million in the thirteen weeks ended June 30, 2024, which was comparable to restructuring charges of $3.1 million in the thirteen weeks ended June 25, 2023. Charges in both periods are largely related to severance costs and other employee-related costs in order to better align our workforce with our forecasted demand within our manufacturing footprint. Interest expense Interest expense was $20.6 million in the thirteen weeks ended June 30, 2024 as compared to $17.2 million in the thirteen weeks ended June 25, 2023. The increase in the second quarter of 2024 is due primarily to $6.5 million of nonrecurring interest expense incurred in the second quarter of fiscal 2024 in connection with the debt refinancing transaction, including the write-off of deferred financing fees. This increase was partially offset by the favorable impact of lower outstanding debt in the second quarter of 2024 as compared to the second quarter of 2023, as strong cash from operations throughout fiscal 2023 was used, in part, to pay down our revolving credit facility and term loan included as part of the 2022 Credit Agreement. Other (income) expense, net Other income, net was $2.9 million in the thirteen weeks ended June 30, 2024, an increase of $3.4 million as compared to other expense, net of $0.5 million in the thirteen weeks ended June 25, 2023. This increase was due primarily to transactional foreign currency gains in the second quarter of 2024. Income taxes Our condensed consolidated income before taxes, income tax expense, and effective tax rate for the thirteen weeks ended June 30, 2024 and June 25, 2023 were as follows: Thirteen Weeks Ended (U.S. Dollars presented in millions, except percentages) June 30, 2024 June 25, 2023 Income before taxes $ 60.1 $ 69.7 Income tax expense 14.8 18.5 Effective tax rate 24.6 % 26.5 % 25 Table of Contents The effective income tax rates for the thirteen weeks ended June 30, 2024 and June 25, 2023, were 24.6 percent and 26.5 percent , respectively. The net decrease in the effective tax rate between the periods is primarily due to the mix of earnings in jurisdictions with differing tax rates, discrete adjustments, including the stock compensation windfall benefit for shares which vested and changes due to final tax return filings, state and local income taxes and deferred tax liability for foreign earnings, partially offset by changes in foreign income inclusions with offsetting foreign tax credits. The difference between our effective income tax rate for the thirteen weeks ended June 30, 2024 , and the U.S. statutory rate of 21.0 percent is due to the unfavorable impact of state and local income taxes, nondeductible compensation and foreign income inclusions with offsetting tax credits, partially offset by the stock compensation windfall benefit for shares which vested and the mix of earnings in jurisdictions with differing tax rates. The difference between our effective income tax rate for the thirteen weeks ended June 25, 2023, and the U.S. statutory rate of 21.0 percent is due to the unfavorable changes in state and local income taxes, nondeductible compensation, foreign income inclusions with offsetting foreign tax credits and recognition of a deferred tax liability for foreign earnings, partially offset by the mix of earnings in jurisdictions with differing tax rates. The following discussion of condensed consolidated results of operations refers to the twenty-six weeks ended June 30, 2024 compared to the twenty-six weeks ended June 25, 2023. Twenty-six Weeks Ended June 30, 2024 Compared to the Twenty-six Weeks Ended June 25, 2023 Twenty-six Weeks Ended (U.S. Dollars presented in millions) June 30, 2024 $ change % change June 25, 2023 NET SALES $ 1,314.6 $ (57.2) (4.2) % $ 1,371.8 Cost of products sold 878.9 (52.1) (5.6) % 931.0 GROSS PROFIT 435.7 (5.1) (1.2) % 440.8 Selling, general and administrative expenses 284.5 7.5 2.7 % 277.0 Amortization of intangible assets 7.4 (0.6) (7.5) % 8.0 Restructuring charges 3.2 0.5 18.5 % 2.7 OPERATING INCOME 140.6 (12.5) (8.2) % 153.1 Interest expense 34.7 0.1 0.3 % 34.6 Other (income) expense, net (3.2) (4.1) n/m (1) 0.9 INCOME BEFORE TAXES 109.1 (8.5) (7.2) % 117.6 Income tax expense 26.3 (5.1) (16.2) % 31.4 NET INCOME $ 82.8 $ (3.4) (3.9) % $ 86.2 ___________ (1) Not meaningful. Net sales Net sales were $1,314.6 million for the twenty-six weeks ended June 30, 2024 compared to $1,371.8 million for the twenty-six weeks ended June 25, 2023, a decrease of $57.2 million, or 4.2 percent. The lower net sales, compared to the twenty-six weeks ended June 25, 2023, were driven by the combined net impact of price and mix on our overall average selling price, partially offset by an increase in sales unit volume. The increased sales unit volume offset 15.5 percent of the gross year over year decrease in net sales. Overall end-market demand was softer in the first half of 2024 as compared to the first half of 2023 in the repair and remodel markets, while single-family new construction strengthened in the first half of 2024. Compared to the twenty-six weeks ended June 25, 2023, net sales to dealers, whose end customers include builders, professional trades and home remodelers, declined $57.8 million, or 8.0 percent, and net sales to retailers, including through their respective retail internet website portals, declined $21.9 million, or 4.4 percent. Net sales directly to builders increased $22.5 million, or 15.0 percent. Foreign currency impact was unfavorable by $0.3 million during the twenty-six weeks ended June 30, 2024 as compared to the twenty-six weeks ended June 25, 2023. 26 Table of Contents Cost of products sold Cost of products sold decreased by $52.1 million, or 5.6 percent, to $878.9 million (66.9 percent of net sales) in the twenty-six weeks ended June 30, 2024 as compared to $931.0 million (67.9 percent of net sales) in the twenty-six weeks ended June 25, 2023. The $52.1 million decrease in cost of products sold, as well as the improvement in cost of products sold as a percentage of net sales in the first half of 2024, is due primarily to the combined net impact of price and mix. This overall decrease was also a function of a year-over-year increase in realized savings from various cost reduction actions, carry over deflation in commodity costs and inbound transportation, and $7.2 million of net incremental costs in the first half of 2023 ( $9.4 million of gross costs, less $2.2 million of insurance recoveries) related to the tornado at the Jackson, GA facility that did not recur in the current year . This overall decrease was partially offset by the impact of increased sales unit volume, which offset 12.0 percent of the gross year-over-year decrease in cost of products sold. Selling, general and administrative expenses Selling, general and administrative expenses increased by $7.5 million, or 2.7 percent, to $284.5 million (21.6 percent of net sales) in the twenty-six weeks ended June 30, 2024 compared to $277.0 million (20.2 percent of net sales) in the twenty-six weeks ended June 25, 2023. The increase in the first half of 2024 is primarily due to increased associate-related costs ($10.4 million), including salaries and incentive compensation, professional support fees ($5.9 million), and acquisition-related costs ($4.4 million). These increases are partially offset by lower distribution and commission costs ($10.7 million), as a result of the decrease in net sales. The first half of 2023 included $2.2 million of costs directly related to the separation from Fortune Brands, which did not recur in 2024. Restructuring charges Restructuring charges were $3.2 million in the twenty-six weeks ended June 30, 2024, which was comparable to restructuring charges of $2.7 million in the twenty-six weeks ended June 25, 2023. Charges in both periods are largely related to severance costs and other employee-related costs in order to better align our workforce with our forecasted demand within our manufacturing footprint. Interest expense Interest expense was $34.7 million in the twenty-six weeks ended June 30, 2024 as compared to $34.6 million in the twenty-six weeks ended June 25, 2023. The first half of 2024 includes $6.5 million of nonrecurring interest expense incurred in connection with the debt refinancing transaction, including the write-off of deferred financing fees. This increase was partially offset by the favorable impact of lower outstanding debt in the first half of 2024 as compared to the first half of 2023, as strong cash from operations throughout fiscal 2023 was used, in part, to pay down our revolving credit facility and term loan included as part of the 2022 Credit Agreement. Other (income) expense, net Other income, net was $3.2 million in the twenty-six weeks ended June 30, 2024, an increase of $4.1 million as compared to other expense, net of $0.9 million in the twenty-six weeks ended June 25, 2023. This increase was due primarily to transactional foreign currency gains recorded in the first half of 2024. Income taxes Our condensed consolidated income before taxes, income tax expense, and effective tax rate for the twenty-six week periods ended June 30, 2024 and June 25, 2023 were as follows: Twenty-six Weeks Ended (U.S. Dollars presented in millions, except percentages) June 30, 2024 June 25, 2023 Income before taxes $ 109.1 $ 117.6 Income tax expense 26.3 31.4 Effective tax rate 24.1 % 26.7 % 27 Table of Contents The effective income tax rates for the twenty-six weeks ended June 30, 2024 and June 25, 2023, were 24.1 percent and 26.7 percent, respectively. The net decrease in the effective tax rate between the periods is primarily due to the mix of earnings in jurisdictions with differing tax rates, discrete adjustments, including the stock compensation windfall benefit for shares which vested and changes due to final tax return filings, state and local income taxes and deferred tax liability for foreign earnings, partially offset by changes in foreign income inclusions with offsetting foreign tax credits. The difference between our effective income tax rate for the twenty-six weeks ended June 30, 2024 , and the U.S. statutory rate of 21.0 percent is due to the unfavorable impact of state and local income taxes, foreign income inclusions with offsetting tax credits and nondeductible compensation, partially offset by the stock compensation windfall benefit for shares which vested and the mix of earnings in jurisdictions with differing tax rates. The difference between our effective income tax rate for the twenty-six weeks ended June 25, 2023, and the U.S. statutory rate of 21.0 percent is due to unfavorable changes in state and local income taxes, nondeductible compensation, foreign income inclusions with offsetting foreign tax credits, recognition of a deferred tax liability for foreign earnings and changes due to foreign tax return filings, partially offset by the mix of earnings in jurisdictions with differing tax rates. LIQUIDITY AND CAPITAL RESOURCES Our operating income is generated by our subsidiaries. There are generally no restrictions on the ability of our subsidiaries to pay dividends or make other distributions to MasterBrand, other than the fact our subsidiaries have financial obligations that must be satisfied before funding us and such dividends are subject to applicable local law and may be limited due to terms of other contractual arrangements, including our indebtedness. We periodic ally review our portfolio of brands, manufacturing and supply chain footprint, and evaluate potential strategic transactions to increase stockholder value. However, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, or what impact any such transactions could have on our results of operations, cash flows or financial condition. Our cash flows from operations, borrowing availability and overall liquidity are subject to certain risks and uncertainties, including those described in the section entitled “Risk Factors” within Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2024 within Part II, Item 1A. On November 18, 2022, we entered into a 5-year, $1.25 billion credit agreement, consisting of a $750.0 million term loan and a $500.0 million revolving credit facility. The 2022 Credit Agreement was secured by certain assets as well as the guarantee of certain of our subsidiaries. On June 27, 2024, the Company refinanced this debt by completing the Offering of $700.0 million aggregate principal amount of the Senior Notes and entered into the 2024 Credit Agreement. The Company used the funds from the refinancing transaction, and cash on-hand, to: 1) refinance the 2022 Credit Agreement (including repaying all amounts outstanding under the existing term loan, inclusive of accrued and unpaid interest), 2) fund the previously announced acquisition of Supreme on July 10, 2024, and 3) to pay all fees and expenses related to the foregoing transactions. In July 2024, upon closing, we funded the acquisition with a combination of cash on hand and $430.0 million of proceeds from the revolving credit facility provided for by the 2024 Credit Agreement (see Note 9, “Debt” and Note 16, “Subsequent Events” for further details). The Senior Notes will mature on July 15, 2032. Interest on the Senior Notes will accrue at a rate of 7.00 percent per annum and will be payable semi-annually in arrears on January 15 and July 15, beginning on January 15, 2025. The Indenture contains certain covenants, including, but not limited to, limitations and restrictions on the ability of the Company and its restricted subsidiaries (as defined in the Indenture) to (i) incur additional indebtedness and guarantee indebtedness, (ii) make restricted payments, (iii) create, incur or assume liens or use assets as security in other transactions, (iv) merge, consolidate, or sell, transfer, lease or dispose of substantially all of their assets, (v) sell or transfer certain assets, (vi) enter into or conduct transactions with affiliates of the Company and (vii) agree to certain restrictions or encumbrances on the ability of restricted subsidiaries to pay dividends, make loans or advances or to otherwise transfer property or assets to the Company or other restricted subsidiaries. These covenants are subject to a number of important conditions, qualifications, exceptions and limitations. The Indenture also includes customary events of default. Certain of the foregoing covenants will be suspended in the event that (i) the Senior Notes receive investment grade ratings from any two of Fitch Ratings Inc., Moody’s Investors Service, Inc. or S&P Global Ratings and (ii) no default or event of default has occurred and is continuing under the Indenture. The Company was in compliance with all of its debt covenants under the Indenture as of June 30, 2024. 28 Table of Contents The revolving credit facility under the 2024 Credit Agreement is not subject to amortization and will mature in June 2029. The 2024 Credit Agreement is secured by certain assets as well as the guarantee of certain of our subsidiaries. Interest rates on the revolving credit facility are variable based on the SOFR, or, at the Company’s option, at a base reference rate equal to the highest of (i) the federal funds rate plus 0.50 percent, (ii) the rate of interest last quoted by the Administrative Agent (as defined in the 2024 Credit Agreement) as its “prime rate” and (iii) the one-month SOFR rate plus 1.00 percent (the “Base Rate”), plus, as applicable, a margin ranging from 1.625 percent to 2.25 percent per annum for SOFR-based loans and ranging from 0.625 percent to 1.25 percent per annum for Base Rate-based loans, in each case, depending on the Company’s net leverage ratio. The Company will also pay customary agency fees and a commitment fee based on the daily unused portion of the revolving credit facility ranging from 0.200 percent to 0.300 percent per annum, depending on its net leverage ratio. The 2024 Credit Agreement contains customary representations and warranties, affirmative covenants, and restrictive covenants. The restrictive covenants limit the Company and its subsidiaries’ ability to, among other things, (i) incur indebtedness, (ii) create liens on the Company’s or such subsidiaries’ assets, (iii) engage in fundamental changes, (iv) make investments, (v) sell or otherwise dispose of assets, (vi) engage in sale-leaseback transactions, (vii) make restricted payments, (viii) engage in certain transactions with affiliates and (ix) enter into agreements restricting the ability of the Company’s subsidiaries to make distributions to the Company or incur liens on their assets. The 2024 Credit Agreement also contains a financial covenant that does not permit the Company to allow its net leverage ratio to exceed (i) in the case of any fiscal quarter ending on or prior to December 31, 2024, 3.50 to 1:00 and (ii) in the case of any fiscal quarter ending on or following March 31, 2025, 3.25 to 1:00 or, if the Company consummates any material acquisition, then the Company’s net leverage ratio shall not exceed 3.75 to 1.00 for the applicable fiscal quarter in which such acquisition is consummated and the three consecutive fiscal quarters thereafter. The Company is also required to maintain a minimum interest coverage ratio of 3.00 to 1.00. The 2024 Credit Agreement also contains customary events of default. The occurrence of an event of default could result in the termination of commitments under the revolving credit facility, the acceleration of all outstanding amounts thereunder and the requirement to cash collateralize outstanding letters of credit. The Company was in compliance with all of its debt covenants under the 2024 Credit Agreement as of June 30, 2024. As of June 30, 2024, we had $688.9 million outstanding in third-party borrowings, net of deferred financing fees. We may also incur additional indebtedness in the future. Cash Flows Below is a summary of cash flows for the twenty-six weeks ended June 30, 2024 and June 25, 2023. Twenty-six Weeks Ended (U.S. Dollars presented in millions) June 30, 2024 June 25, 2023 Net cash provided by operating activities $ 96.1 $ 194.0 Net cash used in investing activities (11.9) (11.2) Net cash used in financing activities (40.3) (172.0) Effect of foreign exchange rate changes on cash and cash equivalents (3.2) (1.7) Net increase in cash and cash equivalents $ 40.7 $ 9.1 Net cash provided by operating activities was $96.1 million in the first half of 2024 as compared to $194.0 million in the first half of 2023. In the first half of 2024, accounts receivable increased $10.5 million from the low fiscal 2023 ending balance resulting from strong cash collection efforts. In the first half of 2023, our accounts receivable decreased $53.9 million as a result of improvements in our collection processes throughout 2023. In the first half of 2024, the movement in inventory was $20.7 million unfavorable, reflective of the normal seasonal build in inventory from year-end. The first half of 2023 had favorable movement in inventory of $54.0 million. In 2022, we executed an intentional build in inventory in the first half of the year in order to mitigate the impact of an uncertain and volatile global supply chain environment. The favorable inventory movement in the first half of 2023 reflected our efforts to more efficiently manage our inventory levels in the supply chain environment, which have continued through the first half of 2024. Accounts payable was $21.8 million favorable in the first half of 2024, reflective of the increased purchasing associated with the higher inventory balance from year-end, as compared to unfavorable accounts payable movement of $39.6 million in the first half of 2023 as a result of decreased purchasing levels aligned with our inventory management. 29 Table of Contents Net cash used in investing activities was $11.9 million in the first half of 2024, compared to net cash used in investing activities of $11.2 million in first half of 2023. The year-over-year increase is due to increased capital expenditures as compared to the prior year, offset by the proceeds from the sale of a former manufacturing facility site in the second quarter of 2024. Net cash used in financing activities was $40.3 million in the twenty-six weeks ended June 30, 2024 as compared to cash used of $172.0 million in the twenty-six weeks ended June 25, 2023. In the first half of 2023, we used strong cash flows from operations to pay down $164.4 million of debt. In the first half of 2024, our $712.5 million term loan was repaid, and replaced with $700.0 of Senior Notes as a result of the refinancing transaction completed in the second quarter. The first half of 2024 also included the payment of $15.2 million of financing fees. We believe that our cash and cash equivalent balances, along with available cash from operating cash flows and credit facilities, will be adequate to fund our typical needs, including working capital requirements and projected capital expenditures. We also believe we have access to additional funds from capital markets to fund strategic initiatives, including the acquisition of Supreme, which was completed on July 10, 2024. RECENTLY ISSUED ACCOUNTING STANDARDS As discussed in Note 2, "Recently Issued Accounting Standards," of our unaudited condensed consolidated financial statements, there are no recently issued accounting pronouncements that we have adopted and which have had a material effect on our results of operations, cash flows or financial condition. CRITICAL ACCOUNTING ESTIMATES We prepare our condensed consolidated financial statements in conformity with GAAP. This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Our critical accounting estimates requiring significant judgement that could materially impact our results of operations, financial position and cash flows are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Since the date of the Company’s most recent Annual Report, there have been no material changes in our critical accounting estimates or assumptions. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.