Overview
BlueLinx is a leadingU.S. wholesale distributor of residential and commercial building products with both branded and private-label stock keeping units ("SKUs"). With a strong market position, broad geographic coverage footprint servicing 40 states, and the strength of a locally focused sales force, we distribute our comprehensive range of products to over 15,000 national, regional, and local dealers, specialty distributors, national home centers, and manufactured housing customers.BlueLinx is able to provide a wide range of value added services and solutions to our customers and suppliers. We are headquartered inGeorgia , with executive offices located at1950 Spectrum Circle ,Marietta, Georgia , and we operate our distribution business through a broad network of distribution centers. As a "two-step" wholesale distributor of building products,BlueLinx stocks products from leading manufacturers and supplies these products to a broad range of customers, including lumber yards, dealers, home centers, and hardware stores. These customers then serve residential and commercial builders and contractors in their respective geographic areas.BlueLinx plays a critical role in enabling its lumber yard, dealer, and home center customers to offer a broad range of products and brands, as most ofBlueLinx's customers do not have the capability to purchase and warehouse directly from the manufacturers for such a large set of SKUs. Similarly,BlueLinx provides value to its manufacturing partners by enabling access to the fragmented network of lumber yards and dealers that the manufacturers could not adequately serve directly. Our place in this distribution model of building products provides easy access to the marketplace for our suppliers and the value proposition of rapid delivery on an as-needed basis to our customers from our network of warehouse facilities. In addition to its broad portfolio of building products,BlueLinx also offers a wide array of custom cutting and fabrication services for the wood products industry. We distribute products in two principal categories: specialty products and structural products. Specialty products include primarily engineered wood products, moulding, siding and trim, cedar, metal products (excluding rebar and remesh), and insulation. Specialty products represented between 54 percent and 65 percent of our net sales over the past twelve months. Structural products include primarily plywood, oriented strand board, rebar and remesh, lumber, spruce and other wood products primarily used for structural support in construction projects. Structural products represented between 35 percent and 46 percent of our net sales over the past twelve months. OnApril 13, 2018 , we completed the acquisition ofCedar Creek Holdings, Inc. ("Cedar Creek"). Cedar Creek was established in 1977 as a wholesale building materials distribution company that distributed wood products acrossthe United States . Its products included specialty lumber, oriented strand board, siding, cedar, spruce, engineered wood products, and other building products. This acquisition allowed us to expand our product offerings, while maintaining our existing geographical footprint. Recent Developments - Update on Impact of COVID-19 Pandemic OnMarch 11, 2020 , a novel strain of coronavirus ("COVID-19") was declared a global pandemic by theWorld Health Organization . In response to the pandemic, governmental authorities around the world implemented numerous measures to combat the virus, such as travel bans and restrictions, quarantines, "shelter-in-place" orders, and business shutdowns. These measures have been successful to various degrees in containing and reducing the spread of the COVID-19 virus in many locations, and many governmental authorities have eased restrictions and executed plans to re-open businesses. To date, our business has been designated as "essential" in all states in which we operate, and we have continued to operate and provide services to our customers and suppliers. As vaccination availability becomes more widespread in theU.S. and other major countries across the world and the percentage of vaccinated individuals grows rapidly, the impact of the pandemic may subside to some degree. However, the rates of infection, hospitalization, and mortality associated with the virus continue to fluctuate. The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional, and national economies. During the recently completed quarter, we continued to practice safety and hygiene protocols consistent with theCenters for Disease Control and Prevention ("CDC") and local guidance. While the pandemic continued to impact many aspects of our business and operations during the quarter, that impact was offset by the continued inflation in our product pricing. Our net sales and gross margin increased, largely driven by the continued elevation of wood-based commodity pricing over the course of the quarter and secondarily driven by the Company's policies of pursuing disciplined pricing strategies and gross margin enhancement. For the first quarter of 2021, net sales increased$363.4 million and net income improved$62.6 million , compared to the first quarter of 2020. 17 -------------------------------------------------------------------------------- The extent of the impact of the pandemic on our business and sales for the remaining nine months of 2021 will depend on future developments, including, among others, the duration of the pandemic, the success of actions taken by governmental authorities to contain the pandemic and address its impact, the success of local return to work and business reopening plans, the success of vaccination efforts, and the impact the COVID-19 pandemic has on demand in the markets we service. The trajectory of the pandemic continues to evolve rapidly, and we cannot predict the extent to which our financial condition, results of operations, or cash flows will ultimately be impacted. We are closely monitoring the impact of the pandemic on industry conditions, the progress of local return to office and reopening plans, and any pandemic-related restrictions. Industry Conditions Many of the factors that cause our operations to fluctuate have been seasonal or cyclical in nature and we expect that to continue. Our operating results are affected by commodity markets, primarily in the markets for wood-based commodities that we classify as structural products. Due to supply constraints, lumber and panel commodity index prices started increasing during the third quarter of 2020 and they continued to increase throughout the first quarter of 2021. These market trends resulted in substantially favorable revenue and gross margin comparisons in the first quarter of 2021 for our structural products and our business as a whole. Wood-based commodity index prices remained at elevated levels at the beginning of the second quarter as supply constraints continued. Until supply constraints are relieved, we anticipate that lumber and panel index prices will remain elevated. Historically, our operating results have also been generally correlated with the level of single-family residential housing starts in theU.S. However, at any time, the demand for new homes is dependent on a variety of factors, including job growth, changes in population and demographics, the availability and cost of mortgage financing, the supply of new and existing homes, and consumer confidence. The COVID-19 pandemic has had a significant negative effect on single family housing starts during the first half of 2020. However, housing starts have rebounded since the third quarter of 2020. TheU.S. Census Bureau reported that single family housing starts were up 20 percent for the first quarter of 2021 compared to the first quarter of 2020. During the first quarter of 2021, housing starts grew 16 percent in January, 2 percent in February, and 40 percent in March, all compared to the same months in 2020. Additionally,March 2021 data from theNational Association of Home Builders/Wells Fargo Housing Market Index shows a positive outlook in builder confidence in the market for newly built single-family homes. Low interest rates, shortages in existing home inventory, and a potential growing trend toward relocating away from populated metropolitan areas to areas with single-family homes may help drive long-term improvement in single-family housing starts. Factors That Affect Our 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; changes in the prices, supply, and/or demand for products that we distribute; the cyclical nature of the industry in which we operate; housing market conditions; the COVID-19 pandemic and other contagious illness outbreaks and their potential effects on our industry; effective inventory management relative to our sales volume or the prices of the products we produce; information technology security and business interruption risks; increases in petroleum prices; 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; exposure to product liability and other claims and legal proceedings related to our business and the products we distribute; natural disasters, catastrophes, fire, or other unexpected events; successful implementation of our strategy; wage increases or work stoppages by our union employees; costs imposed by federal, state, local, and other regulations; compliance costs associated with federal, state, and local environmental protection laws; our level of indebtedness and our ability to incur additional debt to fund future needs; the risk that our cash flows and capital resources may be insufficient to service our existing or future indebtedness; the covenants of the instruments governing our indebtedness limiting the discretion of our management in operating our business; 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; changes in our product mix; shareholder activism; potential acquisitions and the integration and completion of such acquisitions; the possibility that the value of our deferred tax assets could become impaired; changes in our expected annual effective tax rate could be volatile; the costs and liabilities related to our participation in multi-employer pension plans could increase; the possibility that we could be the subject of securities class action litigation due to stock price volatility; and changes in, or interpretation of, accounting principles. 18 -------------------------------------------------------------------------------- Results of Operations The following table sets forth our results of operations for the first quarter of fiscal 2021 and fiscal 2020: % of % of First Quarter of Net First Quarter of Net Fiscal 2021 Sales Fiscal 2020 Sales (In thousands) (In thousands) Net sales$ 1,025,469 100.0%$ 662,070 100.0% Gross profit 180,392 17.6% 93,209 14.1% Selling, general, and administrative 75,560 7.4% 74,588 11.3% Depreciation and amortization 7,465 0.7% 7,635 1.2% Amortization of deferred gains on real estate (984) (0.1)% (984) (0.1)% Gains from sales of property (1,287) (0.1)% (525) (0.1)% Other operating expenses 112 0.0% 4,165 0.6% Operating income 99,526 9.7% 8,330 1.3% Interest expense, net 16,234 1.6% 14,380 2.2% Other income, net (314) (0.0)% (237) (0.0)% Income (loss) before provision for income taxes 83,606 8.2% (5,813) (0.9)% Provision for (benefit from) income taxes 21,746 2.1% (5,026) (0.8)% Net income (loss)$ 61,860 6.0%$ (787) (0.1)%
The following table sets forth net sales by product category for the three-month
periods ending
Three Months Ended April 3, 2021 March 28, 2020 Net sales by category ($ in thousands) Structural products$ 462,409 45 %$ 240,722 36 % Specialty products 563,060 55 % 421,348 64 % Net sales$ 1,025,469 100 %$ 662,070 100 %
The following table sets forth gross profit and gross margin percentages by product category for the three-month periods of fiscal 2021 and 2020:
Three Months Ended April 3, 2021 March 28, 2020 Gross profit $ by category ($ in thousands) Structural products$ 71,857 $ 24,214 Specialty products 108,535 68,995 Gross profit$ 180,392 $ 93,209 Gross margin percentage by category Structural products 15.5 % 10.1 % Specialty products 19.3 % 16.4 % Total gross margin % 17.6 % 14.1 % 19
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First Quarter of Fiscal 2021 Compared to First Quarter of Fiscal 2020
Net sales. For the first quarter of fiscal 2021, net sales increased 54.9 percent, or$363.4 million , compared to the first quarter of fiscal 2020. The sales increase was primarily a result of wood-based commodity price inflation in our structural category and supply-driven pricing increases in our specialty category, partially offset by a slight decline in sales volume attributable to supply constraints. Persistent imbalances between supply and demand provided pricing momentum that drove pricing up throughout the last nine months past levels where we expected them to begin to affect demand. Product scarcity has reduced resistance to price increases, further amplifying inflation across all product categories. Gross profit and gross margin. For the first quarter of fiscal 2021, gross profit increased 93.5 percent, or$87.2 million , compared to the first quarter of fiscal 2020. Gross margin percentage increased to 17.6 percent, for the first quarter of fiscal 2021, compared to 14.1 percent in the first quarter of fiscal 2020. Gross margin percentage increased due to rapidly increasing market pricing, a result of unprecedented demand, paired with abnormally low supply. Additionally, throughout this period lead times for products extended, further promoting higher margins as prices escalated prior to receiving the product. Selling, general, and administrative expenses. For the first quarter of fiscal 2021, selling, general, and administrative expenses increased 1.3 percent, or$1.0 million , compared to the first quarter of fiscal 2020. The increase in sales, general, and administrative expenses is primarily due to an increase in our sales commissions of approximately$2.7 million combined with an increase in our variable incentive compensation of approximately$0.9 million , offset by a reduction in our payroll costs of approximately$2.9 million , in addition to other reductions within our operating expenses. Depreciation and amortization expense. For the first quarter of fiscal 2021, depreciation and amortization expense decreased 2.2 percent, or$0.2 million , compared to the first quarter of fiscal 2020. The decrease in depreciation and amortization expense is due to a lower base of depreciable assets throughout the first quarter of 2021 when compared to the first quarter of fiscal 2020. Gains from sales of property. For the first quarter of fiscal 2021, gains from sales of property increased$0.8 million compared to the first quarter of 2020 as result of the sale of our non-operating facility in Birmingham during the first quarter of 2021 and no property sales during the first quarter of 2020. Other operating expenses. For the first quarter of fiscal 2021, other operating expenses decreased$4.1 million compared to the first quarter of fiscal 2020 primarily due to a decrease in spending related to the integration of the Cedar Creek acquisition and lower real estate financing costs compared to those reported in the first quarter of 2020 that were associated with our prior year real estate financing transactions. Interest expense, net. For the first quarter of fiscal 2021, interest expense, net, increased by 12.9 percent, or$1.9 million , compared to the first quarter of fiscal 2020. The increase is largely attributable to$5.8 million in debt issuance costs expensed in the first quarter of fiscal 2021 related to the extinguishment of our former Term Loan Facility, offset by a reduction in our interest expense resulting from our lower levels of indebtedness combined with favorable benefits from lower LIBOR rates when compared to the prior year. Other income, net. For the first quarter of fiscal 2021, other income, net, increased$0.1 million compared to the first quarter of fiscal 2020. The increase is due to a higher level of pension benefit cost amortization in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. Provision for (benefit from) income taxes. Our effective tax rate was 26.0 percent and 86.5 percent for the first quarter of fiscal 2021 and 2020, respectively. Our effective tax rate for the first quarter of fiscal 2021 was impacted by the permanent addback of certain nondeductible expenses, including meals and entertainment and executive compensation, slightly offset by the benefit from state net operating loss carryforwards we anticipate being able to utilize based on our taxable income through the end of the first quarter of fiscal 2021, combined with a benefit from the vesting of restricted stock units, which occurred during the period. Our effective tax rate for the three months endedMarch 28, 2020 , was primarily impacted by a discrete tax benefit of$3.9 million resulting from the release of the valuation allowance associated with nondeductible interest expense under Section 163(j) of the Internal Revenue Code ("IRC") as a result of changes allowed under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act that was enacted onMarch 27, 2020 which raised the allowable percentage of deductible interest from 30 percent to 50 percent of adjusted taxable income. Net income (loss). Our net loss improved to net income from the prior year period due primarily to increased gross product margins resulting from price inflation and scarcity of products and overall reduced operating expenses and secondarily to the Company's policies pursuing increased margins on sales of products. 20 --------------------------------------------------------------------------------
Seasonality
We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors common in the building products distribution industry. The first and fourth fiscal quarters are typically our lower volume quarters, due to the impact of less favorable weather on the construction market. Our second and third fiscal quarters are typically our higher volume quarters, reflecting an increase in construction, due to more favorable weather conditions. In past years, assuming no change in underlying inventory costs, our working capital has increased in the fiscal second and third quarters, reflecting general increases in seasonal demand. During the fiscal second and third quarters of 2020, our inventory working capital balance decreased despite increasing commodity prices, reflecting enhancements in our working capital management throughout the year. However, during the fourth quarter of 2020 and the first quarter of 2021, our inventory working capital balance increased largely due to increased sales levels. Due to the COVID-19 pandemic, it remains a possibility that we could experience changes to our typical seasonality trends during the rest of 2021. Liquidity and Capital Resources We expect our primary sources of liquidity to be cash flows from sales in the normal course of our operations and borrowings under our Revolving Credit Facility. We expect that these sources will fund our ongoing cash requirements for the foreseeable future. We believe that our sales in the normal course of our operations, and amounts currently available from our Revolving Credit Facility and other sources, will be sufficient to fund our routine operations, including working capital requirements, for at least the next twelve months. Revolving Credit Facility InApril 2018 , we amended and restated our Revolving Credit Facility to provide for a senior secured revolving loan and letter of credit facility of up to$600 million and an uncommitted accordion feature that permits us to increase the facility by an aggregate additional principal amount of up to$150 million . If we obtain the full amount of the additional increases in commitments, the Revolving Credit Facility will allow borrowings of up to$750 million . Borrowings under the Revolving Credit Facility are subject to availability under the Borrowing Base (as that term is defined in the Revolving Credit Facility). Letters of credit in an aggregate amount of up to$30 million are also available under the Revolving Credit Facility, which would reduce the amount of the revolving loans available thereunder. Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to (i) LIBOR plus a margin ranging from 1.75 percent to 2.25 percent, with the margin determined based upon average excess availability for the immediately preceding fiscal quarter for loans based on LIBOR, or (ii) the administrative agent's base rate plus a margin ranging from 0.75 percent to 1.25 percent, with the margin based upon average excess availability for the immediately preceding fiscal quarter for loans based on the base rate. If excess availability falls below the greater of (i)$50 million and (ii) 10 percent of the lesser of (a) the borrowing base and (b) the maximum permitted credit at such time, the Revolving Credit Facility requires maintenance of a fixed charge coverage ratio of 1.0 to 1.0 until excess availability has been at least the greater of (i)$50 million and (ii) 10 percent of the lesser of (a) the borrowing base and (b) the maximum permitted credit at such time for a period of 30 consecutive days. As ofApril 3, 2021 , we had outstanding borrowings of$358.5 million and excess availability of$238.1 million under our Revolving Credit Facility. As ofJanuary 2, 2021 , had outstanding borrowings of$288.2 million and excess availability of$184.3 million under out Revolving Credit Facility. Our average effective interest rate was 2.4 percent and 2.8 percent for the quarters endedApril 3, 2021 andJanuary 2, 2021 , respectively. For the quarter endedMarch 28, 2020 , our average effective interest rate was 4.2 percent. We were in compliance with all covenants under the Revolving Credit Facility as ofApril 3, 2021 . Term Loan Facility We previously had a term loan facility that we entered into inApril 2018 withHPS Investments Partners, LLC , as administrative and collateral agent, and certain other financial institutions party thereto (the "Term Loan Facility"), with a maturity date ofOctober 13, 2023 . The Term Loan Facility provided for a senior secured first lien loan facility in an initial aggregate principal amount of$180 million and was secured by a security interest in substantially all of our assets. Prepayment premiums associated with the repayment of indebtedness were$0.9 million and$2.1 million for the three-month periods endedApril 3, 2021 andMarch 28, 2020 , respectively. 21 -------------------------------------------------------------------------------- As ofJanuary 2, 2021 , we had outstanding borrowings of$43.2 million under the Term Loan Facility. OnApril 2, 2021 , we repaid the remaining outstanding principal balance of the Term Loan Facility and, as a result, as ofApril 3, 2021 , we had no outstanding borrowings under the Term Loan Facility, which has been extinguished. In connection with our repayment of the outstanding principal balance in full onApril 2, 2021 , we expensed$5.8 million debt issuance costs that we had been amortizing in connection with our former Term Loan Facility. These costs are included within interest expense, net, on the Condensed Consolidated Statements of Operations and reported separately as an adjustment to net income in our Condensed Consolidated Statements of Cash Flows. Our average interest rate under the facility, exclusive of fees and prepayment premiums, was approximately 8.0 percent for the quarters endedApril 3, 2021 , andJanuary 2, 2021 . ForMarch 28, 2020 , our average interest rate under the facility, exclusive of fees and prepayment premiums, was approximately 8.7 percent. Finance Lease Commitments Our finance lease liabilities consist of leases related to equipment and vehicles, and to real estate, with the majority of those finance lease commitments relating to the real estate financing transactions that we have completed in recent years. During fiscal 2017 and 2018, we completed real estate financing transactions on six warehouse facilities; during fiscal 2019, we completed real estate financing transactions on two warehouse facilities; and, during fiscal 2020, we completed real estate financing transactions on fourteen warehouse facilities. We recognized finance lease assets and obligations as a result of each of these transactions. In addition, during the first quarter of 2021, we recorded finance leases of$10.2 million related to new tractors put into service as part of our mobile fleet. Our total finance lease commitments, including the properties associated with these transactions, totaled$281.3 million as ofApril 3, 2021 . Of the$281.3 million of finance lease commitments as ofApril 3, 2021 ,$243.7 million related to real estate and$37.6 million related to equipment. Interest Rates Our Revolving Credit Facility includes available interest rate options based on the London Inter-bank Offered Rate ("LIBOR"). Certain LIBOR rates will be discontinued after 2021, while other rates will be discontinued in 2023. TheU.S. and other countries are currently working to replace LIBOR with alternative reference rates. The consequences of these developments with respect to LIBOR cannot be entirely predicted; however, we do not believe that the discontinuation of LIBOR as a reference rate in our loan agreement will have a material adverse effect on our financial position or materially affect our interest expense. Sources and Uses of Cash Operating Activities Net cash used in operating activities for the first three months of fiscal 2021 was$24.6 million , compared to net cash used in operating activities of$59.2 million in the first three months of fiscal 2020. The decrease in cash used by operating activities during the first three months of fiscal 2021 was primarily a result of the net income for the current year period compared to a loss in the prior year period, combined with an increase in our accounts payable balance compared to the prior year period. Investing Activities Net cash provided by investing activities for the first three months of fiscal 2021 was$0.7 million compared to net cash used in investing activities of$1.2 million in the first three months of fiscal 2020. The increase in net cash provided by investing activities was primarily due to proceeds received from the sale of our non-operating facility in Birmingham during the first quarter of 2021. Financing Activities Net cash provided by financing activities totaled$24.0 million for the first three months of fiscal 2021, compared to net cash provided by financing activities of$61.3 million for the first three months of fiscal 2020. The decrease in net cash provided by financing activities is primarily due to an increase of$16.8 million in repayments on our Revolving Credit Facility and Term Loan Facility, including the repayment of the remaining outstanding balance on our Term Loan Facility, and reduction of$78.3 million in proceeds from real estate financing transactions completed in the first three months of fiscal 2020, with no such transactions completed in the first three months of fiscal 2021, partially offset by an increase in borrowings of$58.0 million from our Revolving Credit Facility. 22 -------------------------------------------------------------------------------- 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 cash, 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 April 3, 2021 January 2, 2021 March 28, 2020 (In thousands) Current assets: Cash $ 179 $ 82$ 12,558 Receivables, less allowance for doubtful accounts 418,815 293,643 247,940 Inventories, net 376,423 342,108 378,634$ 795,417 $ 635,833 $ 639,132 Current liabilities: Accounts payable$ 218,975 $ 165,163 $ 162,398 $ 218,975 $ 165,163 $ 162,398 Operating working capital$ 576,442 $
470,670
Operating working capital of$576.4 million as ofApril 3, 2021 , compared to$470.7 million as ofJanuary 2, 2021 , increased on a net basis by approximately$105.8 million . The increase in operating working capital is primarily driven by an increase in accounts receivable and an increase in inventory, both of which continue to be effected by the inflationary environment impacting our net sales and product costs. The net increase in current assets was offset by an increase in accounts payable, also due to the inflation of product costs. Operating working capital of$576.4 million as ofApril 3, 2021 , compared to$476.7 million as ofMarch 28, 2020 , increased by$99.7 million . The increase in operating working capital is primarily driven by an increase in accounts receivable, offset by an increase in accounts payable, both largely due to the inflationary environment impacting our net sales and product costs.
Investments in Capital Assets
Our investments in capital assets consist of cash paid for owned assets and the inception of financing lease arrangements for long-lived assets to support our distribution infrastructure. The gross value of these assets are included in "Property and equipment, at cost" on our condensed consolidated balance sheet. For the first quarter endedApril 3, 2021 , we invested$1.1 million in cash in investments in long-lived assets and entered into finance leases related to new tractors put into service as part of our mobile fleet totaling approximately$10.2 million , for a total investment of$11.3 million in capital assets during the quarter. 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 endedJanuary 2, 2021 .
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," "expect," "estimate," "intend," "project," "plan," "will be," "will likely continue," "will likely result" or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties that may cause our business, 23 -------------------------------------------------------------------------------- strategy, or actual results to differ materially from the forward-looking statements. The forward-looking statements in this report include statements about the COVID-19 pandemic, its duration and effects, and its potential effects on our business and results of operations; 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 discussed under the heading "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year endedJanuary 2, 2021 , and those discussed elsewhere in this report (including Item 1A of Part II of this report) and in future reports that we file with theSEC . 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: •the risk that we may experience pricing and product cost variability; •the fact that our earnings are highly dependent on volumes; •the fact that our industry is highly fragmented and competitive and, that if we are unable to compete effectively, our net sales and operating results may be reduced; •the fact that 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 out net income; •the risk that adverse housing market conditions may negatively impact our business, liquidity, and results of operations, and increase the credit risk from our customers; •the full effect of the COVID-19 pandemic on our business is unknown, and it may adversely affect our business and results from operations; •our ability 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; •information technology security risks and business interruption risks, which may cause us to incur increasing costs in an effort to minimize and/or respond to those risks; •the risk of increases in petroleum prices, which could adversely affect our results of operations; •consolidation among competitors, suppliers, and customers could negatively impact our business; •the risk of disintermediation; •the risk of 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; •business disruptions; •the risk of exposure 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; •the risk that our business operations could suffer significant losses from natural disasters, catastrophes, fire, or other unexpected events; •that fact that a significant percentage of our employees are unionized, and wage increases or work stoppages by our unionized employees may reduce our results of operations; •the risk that federal, state, local, and other regulations could impose substantial costs and restrictions on our operations that would reduce our net income; •the fact that 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; •our level of indebtedness could limit our financial and operating activities and adversely affect our ability to incur additional debt to fund future needs; •our cash flows and capital resources may be insufficient to make required payments on our indebtedness or future indebtedness; •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; •borrowings under our revolving credit facility bear interest at a variable rate, which subjects us to interest rate risk, which could cause our debt service obligations to increase significantly; •we may still incur more debt, which could increase the risks relating to indebtedness; •the fact that we have sold and leased back certain of our distribution centers under long-term non-cancelable leases, and may enter into similar transactions in the future; 24 -------------------------------------------------------------------------------- •the fact that many of our distribution centers are leased, and if we close a leased distribution center, we will still be obligated under the applicable lease; •changes in our product mix could adversely affect our results of operations; •the risk of adjustments in the future based on actual development experience because we establish insurance-related deductible/retention reserves based on historical loss development factors; •our strategy includes pursuing acquisitions, which we may be unsuccessful in making and integrating mergers, acquisitions, and investments, and completing divestitures; •the risk that the activities of activist stockholders could have a negative impact on our business and results of operations; •the risk that the value of our deferred tax assets could become impaired, which could materially and adversely affect our operating results; •the risk that our expected annual effective tax rate could be volatile and materially change as a result of changes in mix of earnings and other factors; •the risk that changes in actuarial assumptions for our pension plan could impact our financial results, and funding requirements are mandated by the federal government; •the risk that costs and liabilities related to our participation in multi-employer pension plans could increase; •the risk that 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; and •the risk that changes in, or interpretation of, accounting principles could result in unfavorable accounting changes. 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. 25
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