Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the selected financial data and the consolidated financial statements and related notes contained in Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data of this annual report on Form 10-K, respectively. See “Risk Factors” contained in Item 1A. Risk Factors of this annual report on Form 10-K and “Cautionary Statement” contained in Item 1. Business of this annual report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.

OVERVIEW

We are a leading supplier and manufacturer of building materials, manufactured components and construction services to professional contractors, sub-contractors and consumers. Following the BMC Merger, the Company operates approximately 550 locations in 40 states across the United States. Given the span and depth of our geographical reach, prior to the BMC Merger our locations were organized into nine geographical regions (Regions 1 through 9), which were also our operating segments, and these were further aggregated into four reportable segments: Northeast, Southeast, South and West. Following the BMC Merger, we will re-evaluate our operating and reportable segments for future reporting periods. All of our segments have similar customers, products and services, and distribution methods. Our financial statements contain additional information regarding segment performance which is discussed in Note 15 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, vinyl windows, custom millwork and trim, as well as engineered wood that we design, cut, and assemble for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods and various window, door and millwork lines. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.

We group our building products into six product categories:

	•	Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing.

	•	Manufactured Products. Manufactured products consist of wood floor and roof trusses, steel roof trusses, wall panels, stairs, and engineered wood.

	•	Windows, Door & Millwork. Windows & doors are comprised of the manufacturing, assembly, and distribution of windows and the assembly and distribution of interior and exterior door units. Millwork includes interior trim and custom features that we manufacture under the Synboard ® brand name.

	•	Gypsum, Roofing & Insulation. Gypsum, roofing, & insulation include wallboard, ceilings, joint treatment and finishes.

	•	Siding, Metal, and Concrete. Siding, metal, and concrete includes vinyl, composite, and wood siding, exterior trim, other exteriors, metal studs and cement.

	•	Other Building Products & Services. Other building products & services are comprised of products such as cabinets and hardware as well as services such as turn-key framing, shell construction, design assistance, and professional installation spanning the majority of our product categories.

Our operating results are dependent on the following trends, strategies, events and uncertainties, some of which are beyond our control:

	•	Homebuilding Industry and Market Competition. Our business is driven primarily by the residential new construction market and the residential repair and remodel market, which are in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, housing affordability, household formation, land development costs, the availability of skilled construction labor, and the health of the economy and mortgage markets. According to the U.S. Census Bureau, annual U.S. total and single-family housing starts were 1.4 million and 1.0 million, respectively, in 2020. Due to increased competition for homebuilder business and cyclical fluctuations in commodity prices, we may experience pressure on our gross margins. In addition to these factors, there has been a trend of consolidation within the building products supply industry. However, our industry remains highly fragmented and competitive and we will continue to face significant competition from local and regional suppliers. We believe there are several meaningful trends that indicate U.S. housing demand will continue to grow, including historically low interest rates, the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate. Building upon the current rate of market growth, industry forecasters, including the National Association of Homebuilders (“NAHB”), expect to see continued increases in housing demand over the next year.

	•	Effect of COVID-19 Pandemic. In March of 2020, the U.S. economy began to see significant disruption, uncertainty and record high levels of unemployment as a result of the COVID-19 pandemic. While the COVID-19 pandemic did not have a materially adverse impact on our financial results in 2020, the extent and duration of any future impact resulting from the pandemic is not fully known, and we may experience a decline in housing starts, reduced sales demand, volatility in commodity prices, challenges in the supply chain, increased margin pressures and/or increased operating costs as a result.

	•	Targeting Large Production Homebuilders. In recent years, the homebuilding industry has undergone consolidation, and the larger homebuilders have increased their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we are facing in servicing large homebuilders with certain profitability expectations. Additionally, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.

	•	Repair and remodel end market. Although the repair and remodel end market is influenced by housing starts to a lesser degree than the homebuilding market, the repair and remodel end market is still dependent upon some of the same factors as the homebuilding market, including demographic trends, interest rates, consumer confidence, employment rates and the health of the economy and home financing markets. The repair and remodel end market has been impacted by the COVID-19 pandemic and while the extent of this impact and related uncertainties are yet to be fully known, we may experience reduced sales demand, increased margin pressures and/or increased operating costs in this area of our business as a result. We expect that our ability to remain competitive in this space will depend on our continued ability to provide a high level of customer service coupled with a broad product offering.

	•	Use of Prefabricated Components. Homebuilders are increasingly using prefabricated components in order to realize increased efficiency, overcome skilled construction labor shortages and improve quality. Shortening cycle time from start to completion is a key imperative of the homebuilders during periods of strong consumer demand. We continue to see the demand for prefabricated components increasing within the residential new construction market as the availability of skilled construction labor remains limited.

	•	Economic Conditions. Economic changes both nationally and locally in our markets impact our financial performance. The building products supply industry is highly dependent upon new home construction and subject to cyclical market changes. Our operations are subject to fluctuations arising from changes in supply and demand, national and local economic conditions, labor costs and availability, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, housing starts, the high cost of land development, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. The disruptions and uncertainties as a result of the ensuing COVID-19 pandemic may have a significant impact on our future operating results.

	•	Housing Affordability. The affordability of housing can be a key driver in demand for our products. Home affordability is influenced by a number of economic factors, such as the level of employment, consumer confidence, consumer income, supply of houses, the availability of financing and interest rates. Changes in the inventory of available homes as well as economic factors relative to home prices could result in changes to the affordability of homes. As a result, homebuyer demand may shift towards smaller, or larger, homes creating fluctuations in demand for our products.

	•	Cost of Materials. Prices of wood products, which are subject to cyclical market fluctuations, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production inputs for our manufactured and prefabricated products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are oftentimes passed on to our customers, but our pricing quotation periods and market competition may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products. Our inability to pass on material price increases to our customers could adversely impact our operating results.

	•	Controlling Expenses. Another important aspect of our strategy is controlling costs and striving to be a low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.

	•	Multi-Family and Light Commercial Business. Our primary focus has been, and continues to be, on single-family residential new construction and the repair and remodel end market. However, we will continue to identify opportunities for profitable growth in the multi-family and light commercial markets.

	•	Capital Structure. As a result of our historical growth through acquisitions, we had $1,642.4 million of indebtedness as of December 31, 2020. We strive to optimize our capital structure to ensure that our financial needs are met in light of economic conditions, business activities, organic investments, opportunities for growth through acquisition and the overall risk characteristics of our underlying assets. In addition to these factors, we also evaluate our capital structure on the basis of our leverage ratio, our liquidity position, our debt maturity profile and market interest rates. As such, we may enter into various debt or equity transactions in order to appropriately manage and optimize our capital structure and liquidity needs.

RECENT DEVELOPMENTS

General

On January 1, 2021, we completed our previously announced all stock merger transaction with BMC. The BMC Merger will be accounted for using the acquisition method of accounting, and Builders FirstSource, Inc. will be treated as the accounting acquirer. The operating results of BMC will be reported as part of the Company beginning on the closing date of the BMC Merger and as such, the historical financial condition, results of operations and cash flows of the Company presented in this annual report do not include BMC.

COVID-19 Pandemic

The COVID-19 pandemic resulted in significant disruption to the U.S. economy in 2020 and impacted our operations and those of our customers. Despite experiencing disruptions to our operations and implementing a number of health and safety precautions as a result of the pandemic, our financial results and financial condition were not materially adversely affected by the pandemic. In most of the states in which we operate, construction was deemed an essential activity and, as a result, our operations faced limited temporary closures early on in the pandemic. Furthermore, housing starts and repair and remodeling activity generally increased throughout our markets in 2020 despite the pandemic.

Despite the limited impact of the COVID-19 pandemic on our 2020 financial results, the extent to which the pandemic may impact our results in future periods is uncertain and will depend upon, among other things, the duration and severity of the outbreak or subsequent outbreaks, related government responses, such as required physical distancing or restrictions on business operations and travel, the pace of recovery of economic activity and the impact to consumers, the effectiveness of available vaccines, and any potential supply disruptions, all of which are uncertain and difficult to predict in light of the rapidly evolving landscape. Refer to Part I, Item 1A. Risk Factors for a full discussion of the risks associated with the COVID-19 pandemic.

Business Combinations

On January 9, 2020, we acquired certain assets and operations of Bianchi & Company, Inc. (“Bianchi”) for $15.9 million in cash. Located in Charlotte, North Carolina, Bianchi is a supplier and installer of interior and exterior millwork.

On November 2, 2020 we acquired certain assets and operations of Kansas Building Supply Company, Inc. (“KBS”) for $16.8 million in cash. Located in Overland Park, Kansas, KBS is a supplier for interior and exterior doors, windows, millwork cabinetry, and hardware.

These acquisitions are described in Note 5 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Debt Transactions

During the year ended December 31, 2020, the Company executed several debt transactions, including the redemption of $503.9 million in outstanding aggregate principal amount of 5.625% senior secured notes due 2024 (“2024 notes”), the redemption of $47.5 million in aggregate principal amount of 6.75% senior secured notes due 2027 (“2027 notes”), and repayment of $52.0 million of our senior secured term loan facility due 2024 (“2024 term loan”). The repayments of our 2024 notes and 2027 notes were funded with the proceeds of the issuance of $550.0 million in aggregate principal amount of 5.00% unsecured senior notes due 2030 (“2030 notes”) and borrowings on our $900.0 million revolving credit facility (“2023 facility”). The repayment of our 2024 term loan was funded with cash on hand. The Company also issued an additional $350.0 million in aggregate principal amount of our 2027 notes.

On January 29, 2021, the Company amended the 2023 facility to, among other things, increase the total commitments by an aggregate amount of $500.0 million resulting in a new $1.4 billion amended credit facility, and extended the maturity date from November 2023 to January 2026.

On February 16, 2021, pursuant to the optional call feature in the 2027 Indenture, the Company gave notice that on March 3, 2021, $82.5 million of 2027 notes will be redeemed at a redemption price equal to 103% of the principal amount of the notes, plus accrued and unpaid interest.

These transactions are described in Notes 9 and 18 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K. Collectively, these transactions have extended our debt maturity. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call our notes, repay debt, repurchase shares of our common stock or otherwise enter into transactions regarding its capital structure.

Retirement of President and Chief Executive Officer

In January 2020, Mr. Chad Crow notified our Board of his decision to retire as President and Chief Executive Officer of the Company during 2020 after assisting the Board in hiring his replacement. Mr. Crow will continue to serve as the Company’s Chief Executive Officer for a transition period of 90 days after the BMC Merger, following which BMC’s former Chief Executive Officer, and the recently appointed President of the Company, Mr. Dave Flitman, will succeed Mr. Crow as Chief Executive Officer of the Company.

Composition of the Board of Directors of the Company

As a result of the BMC Merger, effective January 1, 2021, the size of the board of directors was increased to twelve directors, with seven directors designated by the Company and five directors designated by BMC.

CURRENT OPERATING CONDITIONS AND OUTLOOK

According to the U.S. Census Bureau, actual U.S. total housing starts for the year ended December 31, 2020 were 1.4 million, an increase of 7.0% compared to the year ended December 31, 2019. Actual U.S. single-family housing starts for the year ended December 31, 2020 were 1.0 million, an increase of 11.7% compared to the year ended December 31 2019. A composite of third party sources, including the NAHB, are forecasting 1.5 million U.S. total housing starts and 1.1 million U.S. single-family housing starts for 2021, which are increases of 6.0% and 11.0%, respectively, from 2020. In addition, in its September 2020 semi-annual forecast, the Home Improvement Research Institute (“HIRI”) forecasted sales in the professional repair and remodel end market to increase approximately 5.3% in 2021 compared to 2020.

Our net sales for the year ended December 31, 2020 increased 17.6% over the same period last year. Commodity price inflation increased our net sales in 2020 by an estimated 9.0%, while acquisitions and one more selling day increased our sales by 2.5% and 0.5%, respectively. Excluding the impact of commodity price inflation, acquisitions and the impact of one more selling day, we achieved 5.6% net sales growth in the single-family, multi-family and repair and remodel/other end markets. Our gross margin percentage decreased by 1.2% during the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily attributable to margin pressures as a result of commodity price inflation. Our selling, general and administrative expenses, as a percentage of net sales, were 19.6% in 2020, a 2.2% decrease from 21.8% in 2019, primarily driven by the effect of leverage from commodity price inflation in our net sales in the year ended December 31, 2020 compared to the year ended December 31, 2019.

We believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics compared to historical new construction levels. We feel we are well-positioned to take advantage of the construction activity in our markets and to increase our market share, which may include strategic acquisitions. We will continue to focus on working capital by closely monitoring the credit exposure of our customers, remaining focused on maintaining the right level of inventory and by working with our vendors to improve payment terms and pricing on our products. We strive to achieve the appropriate balance of short-term expense control while maintaining the expertise and capacity to grow the business as market conditions continue to improve. In addition, optimization of our capital structure will continue to be a key area of focus for the Company.

RESULTS OF OPERATIONS

A discussion regarding our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018 can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 21, 2020.

20****20 Compared with 201****9

The following table sets forth the percentage relationship to net sales of certain costs, expenses and income items for the years ended December 31:

		2020				2019
Net sales			100.0	%			100.0	%
Cost of sales			74.0	%			72.8	%
Gross margin			26.0	%			27.2	%
Selling, general and administrative expenses			19.6	%			21.8	%
Income from operations			6.4	%			5.4	%
Interest expense, net			1.6	%			1.5	%
Income tax expense			1.1	%			0.8	%
Net income			3.7	%			3.1	%

Net Sales. Net sales for the year ended December 31, 2020 were $8,558.9 million, a 17.6% increase from net sales of $7,280.4 million for 2019. Core organic growth increased net sales by 5.6%, commodity price inflation accounted for another 9.0% of the change, while acquisitions and one additional selling day accounted for 2.5% and 0.5%, respectively, of the increase. Core organic growth came primarily from increased sales volume within our single-family end market.

The following table shows net sales classified by major product category for the years ended December 31, (dollars in millions):

		2020								2019
		Net sales				% of Sales				Net sales				% of Sales				% Change
Lumber & lumber sheet goods		$	3,076.4				35.9	%		$	2,251.6				30.9	%			36.6	%
Manufactured products			1,640.5				19.2	%			1,449.5				19.9	%			13.2	%
Windows, doors & millwork			1,629.2				19.0	%			1,542.9				21.2	%			5.6	%
Gypsum, roofing & insulation			514.6				6.0	%			528.6				7.3	%			(2.6	)%
Siding, metal & concrete products			773.6				9.0	%			712.6				9.8	%			8.6	%
Other building products & services			924.6				10.9	%			795.2				10.9	%			16.3	%
Total sales		$	8,558.9				100.0	%		$	7,280.4				100.0	%			17.6	%

We achieved increased net sales in all our product categories, except in the gypsum, roofing & insulation category, in part due to higher sales volumes in our single-family end market and as a result of our continued efforts to focus on higher margin opportunities through both acquisition targets and core organic growth, as well as the impact of commodity price inflation, primarily on the lumber & lumber sheet goods category, in the period.

Gross Margin. Gross margin increased $245.8 million to $2,222.6 million. Our gross margin percentage decreased to 26.0% in 2020 from 27.2% in 2019, a 1.2% decrease. The decrease was primarily attributable to the impact of commodity price inflation during the year ended December 31, 2020 relative to our short-term customer pricing commitments.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $94.2 million, or 5.9%, and as a percentage of net sales decreased to 19.6% from 21.8% in 2019. This increase in selling, general and administrative expenses was primarily driven by higher variable compensation expense, professional service expense, and depreciation expense, which were partially offset by lower fuel costs, as well as lower travel and entertainment costs, resulting from changed behavior during the pandemic. We expect these variable costs to increase post pandemic. Contributing to the decrease as a percentage of net sales was the effect of commodity price inflation on our net sales in the year ended December, 31 2020.

Interest Expense, Net. Interest expense was $135.7 million in 2020, an increase of $26.1 million from 2019. This increase in interest expense is primarily due to one-time charges of $29.4 million related to debt transactions executed in 2020, compared to one-time charges of $10.2 million related to debt transactions executed in 2019. Adjusting for the one-time charges, interest expense increased for the year ended December 31, 2020 due to higher outstanding debt balance as compared to the year ended December 31, 2019, partially offset by the effect of lower interest rates.

Income Tax Expense. We recorded income tax expense of $94.6 million during the year ended December 31, 2020 compared to income tax expense of $60.9 million during the year ended December 31, 2019, an increase of $33.7 million, primarily as a result of our higher profitability in 2020 compared to 2019. Our effective tax rate was 23.2% for the year ended December 31, 2020 compared to 21.6% for the year ended December 31, 2019.

Results by Reportable Segment

The following tables show net sales and income before income taxes by reportable segment excluding the “All Other” caption as shown in Note 15 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K (dollars in thousands):

		Year ended December 31,
		Net sales																				Income before income taxes
						% of net								% of net												% of net								% of net
		2020				sales				2019				sales				% change				2020				sales				2019				sales				% change
Northeast		$	1,323,972				16.0	%		$	1,293,472				18.6	%			2.4	%		$	56,574				4.3	%		$	56,573				4.4	%			—
Southeast			1,947,888				23.6	%			1,599,426				23.0	%			21.8	%			139,017				7.1	%			83,722				5.2	%			66.0	%
South			2,346,160				28.4	%			1,860,653				26.7	%			26.1	%			163,224				7.0	%			113,359				6.1	%			44.0	%
West			2,639,133				32.0	%			2,205,224				31.7	%			19.7	%			156,744				5.9	%			89,206				4.0	%			75.7	%
		$	8,257,153				100	%		$	6,958,775				100.0	%						$	515,559				6.2	%		$	342,860				4.9	%

We have four reportable segments based on an aggregation of the geographic regions in which we operate. While there is some geographic similarity between our reportable segments and the regions as defined by the U.S. Census Bureau, our reportable segments do not necessarily fully align with any single U.S. Census Bureau region.

According to the U.S. Census Bureau, actual single-family housing starts for the year ended December 31, 2020 increased 7.4%, 13.6%, 11.4%, and 12.4% in the Northeast, Midwest, South and West regions, respectively, compared to the year ended December 31, 2019. For the year ended December 31, 2020, our net sales increased in the Northeast, Southeast, South and West reportable segments primarily due to an increase in sales volume across the majority of our product categories, and commodity price inflation compared to the year ended December 31, 2019. We achieved increased profitability in our Southeast, South, and West reportable segments largely due to sales volume growth. However, profitability declined in our Northeast reportable segment largely due to the impact of the COVID-19 pandemic on net sales and the impact of gross margin compression from commodity price inflation.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and to fund capital expenditures and potential future growth opportunities. Our capital resources at December 31, 2020 consist of cash on hand and borrowing availability under our 2023 facility.

Our 2023 facility will be primarily used for working capital, general corporate purposes, and funding capital expenditures and growth opportunities. In addition, we may use the 2023 facility to facilitate debt consolidation. Availability under the 2023 facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables which include progress billings and credit card receivables, and qualified cash that all meet specific criteria contained within the credit agreement, minus agent specified reserves. Net excess borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and letters of credit.

The following table shows our borrowing base and excess availability as of December 31, 2020 and 2019 (in millions):

	As of
	December 31, 2020				December 31, 2019
Accounts Receivable Availability	$	608.8			$	413.0
Inventory Availability		514.7				370.0
Other Receivables Availability		50.9				29.8
Gross Availability		1,174.4				812.8
Less:
Agent Reserves		(40.6	)			(26.6	)
Plus:
Cash in Qualified Accounts		413.9				4.2
Borrowing Base		1,547.7				790.4
Aggregate Revolving Commitments		900.0				900.0
Maximum Borrowing Amount (lesser of Borrowing Base and Aggregate Revolving Commitments)		900.0				790.4
Less:
Outstanding Borrowings		(75.0	)			(27.0	)
Letters of Credit		(78.0	)			(82.2	)
Net Excess Borrowing Availability on Revolving Facility	$	747.0			$	681.2

As of December 31, 2020, we had $75.0 million in outstanding borrowings under our 2023 facility and our net excess borrowing availability was $747.0 million after being reduced by outstanding letters of credit of approximately $78.0 million. Excess availability must equal or exceed a minimum specified amount, currently $90.0 million, or we are required to meet a fixed charge coverage ratio of 1:00 to 1:00. We were not in violation of any covenants or restrictions imposed by any of our debt agreements at December 31, 2020.

Liquidity

Our liquidity at December 31, 2020 was $1,170.8 million, which consists of net borrowing availability under the 2023 facility and cash on hand.

Our level of indebtedness results in significant interest expense and could have the effect of, among other things, reducing our flexibility to respond to changing business and economic conditions. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call our notes, repay debt, or otherwise enter into transactions regarding its capital structure.

Should the current industry conditions deteriorate or we pursue additional acquisitions, we may be required to raise additional funds through the sale of capital stock or debt in the public capital markets or in privately negotiated transactions. There can be no assurance that any of these financing options would be available on favorable terms, if at all. Alternatives to help supplement our liquidity position could include, but are not limited to, idling or permanently closing additional facilities, adjusting our headcount in response to current business conditions, attempts to renegotiate leases, managing our working capital and/or divesting of non-core businesses. There are no assurances that these steps would prove successful or materially improve our liquidity position.

On January 29, 2021, the Company amended the 2023 facility to, among other things, increase the total commitments by an aggregate amount of $500.0 million resulting in a new $1.4 billion amended credit facility, and extended the maturity date from November 2023 to January 2026.

Consolidated Cash Flows

A discussion regarding our consolidated cash flows for the year ended December 31, 2020 compared to the year ended December 31, 2019 is presented below. A discussion regarding our consolidated cash flows for the year ended December 31, 2019 compared to the year ended December 31, 2018 can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 21, 2020.

2020 Compared with 2019

Cash provided by operating activities was $260.1 million and $504.0 million in 2020 and 2019, respectively. The $243.9 million decrease in cash provided by operations was largely the result of a working capital increase of $263.2 million in 2020 compared to a working capital decrease of $106.2 million in 2019. This change in working capital was primarily due to the timing and impact of changes in commodity prices on the value of cash received from customers, inventory purchases and cash paid to vendors during the year ended December 31, 2020 compared to the year ended December 31, 2019.

Cash used in investing activities was $136.2 million and $199.2 million in 2020 and 2019, respectively. This decrease in cash used in investing activities was primarily due to $32.6 million in cash used for our acquisitions of Bianchi and KBS in 2020, compared to $92.9 million in cash used for our acquisitions of Sun State Components, Raney Components, LLC and Raney Construction, Inc. in 2019.

Cash provided by financing activities was $285.9 million in 2020, compared to cash used in financing activities of $300.9 million in 2019. Cash provided by financing activities for the year 2020 was primarily related to the net proceeds received from the Company’s financing transactions during the period, including the issuance of $550.0 million of 2030 notes and the issuance of $350.0 million of 2027 notes. The proceeds from these issuances were offset by the redemption of the remaining $503.9 million in outstanding aggregate principal amount of 2024 notes, $47.5 million in aggregate principal amount of senior secured notes due 2027, and the repayment of the remaining $52.0 million term loan.

Capital Expenditures

Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have for the most part remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. Following the BMC Merger, we expect our 2021 capital expenditures to be in the range of approximately $210 million to $230 million primarily related to rolling stock, equipment and facility improvements to support our operations.

DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes our contractual obligations as of December 31, 2020 (in thousands):

		Payments Due by Period
Contractual obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Long-term debt		$	1,402,500			$	—			$	75,000			$	—			$	1,327,500
Interest on long-term debt(1)			607,797				86,534				172,368				159,963				188,932
Other finance obligations(2)			258,796				17,196				33,629				33,671				174,300
Finance lease obligations(2)			25,446				13,242				11,887				317				—
Operating leases (2)			342,117				76,567				113,425				67,166				84,959
Total contractual cash obligations		$	2,636,656			$	193,539			$	406,309			$	261,117			$	1,775,691

(1)	We had $75.0 million in outstanding borrowings under the 2023 facility as of December 31, 2020. Borrowings under the 2023 facility bear interest at a variable rate. Therefore, actual interest may differ from the amounts presented above due to interest rate changes or any future borrowing activity under the 2023 facility.

(2)	Future commitments for other finance obligations, finance lease obligations and operating lease obligations associated with real estate, vehicle, and other various equipment.

Purchase orders entered into in the ordinary course of business are excluded from the above table because they are payable within one year. Amounts for which we are liable under purchase orders are reflected on our consolidated balance sheet as accounts payable. Where it makes economic sense to do so, we plan to lease certain equipment during 2021 to support anticipated sales growth.

OTHER CASH OBLIGATIONS NOT REFLECTED IN THE BALANCE SHEET

In addition to the lease obligations included in the above table, we have residual value guarantees on certain equipment leases. Under these leases we have the option of (1) purchasing the equipment at the end of the lease term, (2) arranging for the sale of the equipment to a third party, or (3) returning the equipment to the lessor to sell the equipment. If the sales proceeds in either case are less than the residual value, then we are required to reimburse the lessor for the deficiency up to a specified level as stated in each lease agreement. The guarantees under these leases for the residual values of equipment at the end of the respective operating lease periods approximated $4.5 million as of December 31, 2020.

Based upon the expectation that none of these leased assets will have a residual value at the end of the lease term that is materially less than the value specified in the related operating lease agreement or that we will purchase the equipment at the end of the lease term, we do not believe it is probable that we will be required to fund any amounts under the terms of these guarantee arrangements. Accordingly, no accruals have been recognized for these guarantees.

In addition, the Company is party to certain agreements related to its other finance obligations which commit the Company to perform certain repairs and maintenance obligations under the leases in a specified manner and timeframe. As of December 31, 2020 our obligations under these agreements have largely been completed with the remainder expected to be completed within the next year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those that both are important to the accurate portrayal of a company’s financial condition and results, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In order to prepare financial statements that conform to generally accepted accounting principles, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

We have identified the following accounting policy that requires us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.

Goodwill. Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. At December 31, 2020, our goodwill balance was $785.3 million, representing 18.8% of our total assets.

We test goodwill for impairment in the fourth quarter of each year or at any other time when impairment indicators exist. Examples of such indicators that could cause us to test goodwill for impairment between annual tests include a significant change in the business climate, unexpected competition or a significant deterioration in market share. We may also consider market capitalization relative to our net assets. Housing starts are a significant sales driver for us. If there is a significant decline or an expected decline in housing starts, this could adversely affect our expectations for a reporting unit and the value of that reporting unit.

The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Our reporting units are aligned with our nine geographic regions which are also determined to be our operating segments. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If it is concluded that it is more likely than not that the fair value of the reporting unit is not less than its carrying amount, then no further testing of the goodwill is required.

However, if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative goodwill impairment test. This test identifies both the existence of and the amount of goodwill impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount goodwill is not impaired. If the carrying amount of a reporting unit exceeds its fair value an impairment loss is recognized in amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.

In performing our annual goodwill impairment tests at December 31, 2020, we first assessed qualitative factors relative to each of our reporting units to determine if it was more likely than not that the fair value of our reporting units were less than their carrying amounts. Examples of such factors we considered in this assessment included the amount of cushion from prior quantitative goodwill impairment tests, significant changes in the goodwill balance, the presence of any known or forecasted declines in operating performance, market conditions, market share or any other negative factors.

For reporting units where we determined that it was more likely than not that the fair values were less than their carrying amounts, we performed a quantitative goodwill impairment test. In evaluating our goodwill for impairment at December 31, 2020, $77.1 million of our goodwill balance was assessed utilizing a quantitative assessment. In performing the quantitative impairment test at December 31, 2020, we developed the fair value using a discounted cash flow methodology. Inherent in such fair value determinations are significant assumptions relating to future cash flows, expected future revenues, expected future profitability, the discount rate, the terminal value, and our interpretation of current economic indicators and market conditions and their impact on our strategic plans and operations. Due to the uncertainties associated with such estimates, interpretations and assumptions, actual results could differ from projected results, which could result in impairment of goodwill being recorded.

Significant information and assumptions utilized in estimating future cash flows for quantitative goodwill impairment analyses include projections of revenue growth utilizing publicly available industry information such as lumber commodity prices and housing start forecasts developed by industry forecasters, including the NAHB. Expected future profitability reflects current headcount levels and cost structure and are flexed in future years based upon historical trends at various revenue levels. Long-term growth was based upon terminal value earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples of 6.0x to reflect the relevant expected acquisition price. A discount rate of 11.0% was used and is intended to reflect the weighted average cost of capital for a potential market participant and includes all risks of ownership and the associated risks of realizing the stream of projected future cash flows. Decreasing the long-term growth to an EBITDA multiple of 5.0x, or increasing the discount rate by 1.0% to 12.0%, would not have changed the results of our impairment testing.

At December 31, 2020, the fair values of each of our reporting units were substantially in excess of their respective carrying amounts. Factors that could negatively impact the estimated fair value of our reporting units and potentially trigger additional impairment include, but are not limited to, unexpected competition, lower than expected housing starts, an increase in market participant weighted average cost of capital, increases in material or labor cost, and significant declines in our market capitalization. Future impairment of goodwill would have the effect of decreasing our earnings or increasing our losses in such period, but would not impact our current outstanding debt obligations or compliance with covenants contained in the related debt agreements. We did not have any goodwill impairments in 2020, 2019 or 2018.

RECENTLY ISSUED ACCOUNTING STANDARDS

Information regarding recent accounting pronouncements is discussed in Note 2 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.