filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Builders FirstSource, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Builders FirstSource, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive income, of changes in stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Quantitative Impairment Test
As described in Notes 2 and 6 to the consolidated financial statements, the Company’s consolidated goodwill balance was $785.3 million as of December 31, 2020, and $77.1 million of the goodwill balance was assessed utilizing a quantitative assessment. Goodwill is tested for impairment on an annual basis and between annual tests whenever impairment is indicated. This annual test takes place as of December 31 each year. Impairment losses are recognized whenever the carrying amount of a reporting unit exceeds its fair value. In performing the quantitative impairment test, management developed the fair value using a discounted cash flow methodology. The significant assumptions used in the discounted cash flow methodology are the discount rate, the terminal value and the expected future revenues and profitability.
The principal considerations for our determination that performing procedures relating to the goodwill quantitative impairment test is a critical audit matter are the significant judgment by management when determining the fair value of any reporting unit where a goodwill quantitative impairment test was performed; this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the terminal value and expected future profitability.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment test, including management’s controls over the goodwill quantitative impairment test. These procedures also included, among others, testing management’s process for determining the fair value of any reporting unit where a goodwill quantitative impairment test was performed; evaluating the appropriateness of the discounted cash flow methodology; testing the completeness, accuracy, and relevance of underlying data used in the discounted cash flow methodology; and evaluating the reasonableness of significant assumptions related to the terminal value and expected future profitability. Evaluating management’s assumptions related to the terminal value and expected future profitability involved evaluating whether the assumptions used were reasonable considering the current and past performance of the reporting unit, relevant industry forecasts, consistency with evidence obtained in other areas of the audit, and in the case of terminal value, consideration of relevant market transactions.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 26, 2021
We have served as the Company’s auditor since 1999.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
| Years Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
| Net sales | $ | 8,558,874 | $ | 7,280,431 | $ | 7,724,771 | ||||||
| Cost of sales | 6,336,290 | 5,303,602 | 5,801,831 | |||||||||
| Gross margin | 2,222,584 | 1,976,829 | 1,922,940 | |||||||||
| Selling, general and administrative expenses | 1,678,730 | 1,584,523 | 1,553,972 | |||||||||
| Income from operations | 543,854 | 392,306 | 368,968 | |||||||||
| Interest expense, net | 135,688 | 109,551 | 108,213 | |||||||||
| Income before income taxes | 408,166 | 282,755 | 260,755 | |||||||||
| Income tax expense | 94,629 | 60,946 | 55,564 | |||||||||
| Net income | $ | 313,537 | $ | 221,809 | $ | 205,191 | ||||||
| Comprehensive income | $ | 313,537 | $ | 221,809 | $ | 205,191 | ||||||
| Net income per share: | ||||||||||||
| Basic | $ | 2.69 | $ | 1.92 | $ | 1.79 | ||||||
| Diluted | $ | 2.66 | $ | 1.90 | $ | 1.76 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 116,611 | 115,713 | 114,586 | |||||||||
| Diluted | 117,917 | 117,025 | 116,554 |
The accompanying notes are an integral part of these consolidated financial statements.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||||
| (In thousands, except per share amounts) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 423,806 | $ | 14,096 | ||||
| Accounts receivable, less allowances of $17,637 and $13,492 at December 31, 2020 and 2019, respectively | 880,018 | 614,946 | ||||||
| Other receivables | 76,436 | 77,447 | ||||||
| Inventories, net | 784,527 | 561,255 | ||||||
| Other current assets | 58,895 | 39,123 | ||||||
| Total current assets | 2,223,682 | 1,306,867 | ||||||
| Property, plant and equipment, net | 749,130 | 721,887 | ||||||
| Operating lease right-of-use assets, net | 274,562 | 292,684 | ||||||
| Goodwill | 785,305 | 769,022 | ||||||
| Intangible assets, net | 119,882 | 128,388 | ||||||
| Deferred income taxes | 4,653 | 8,417 | ||||||
| Other assets, net | 16,457 | 22,225 | ||||||
| Total assets | $ | 4,173,671 | $ | 3,249,490 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | 600,357 | 436,823 | ||||||
| Accrued liabilities | 385,536 | 308,950 | ||||||
| Current portion of operating lease liabilities | 61,625 | 61,653 | ||||||
| Current maturities of long-term debt | 27,335 | 13,875 | ||||||
| Total current liabilities | 1,074,853 | 821,301 | ||||||
| Noncurrent portion of operating lease liabilities | 219,239 | 236,948 | ||||||
| Long-term debt, net of current maturities, debt discount, premium and issuance costs | 1,596,905 | 1,277,398 | ||||||
| Deferred income taxes | 49,495 | 36,645 | ||||||
| Other long-term liabilities | 80,396 | 52,245 | ||||||
| Total liabilities | 3,020,888 | 2,424,537 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.01 par value, 10,000 shares authorized; zero shares issued and outstanding | — | — | ||||||
| Common stock, $0.01 par value, 300,000 and 200,000 shares authorized at December 31, 2020 and 2019, respectively; 116,829 and 116,052 shares issued and outstanding at December 31, 2020 and 2019, respectively | 1,168 | 1,161 | ||||||
| Additional paid-in capital | 589,241 | 574,955 | ||||||
| Retained earnings | 562,374 | 248,837 | ||||||
| Total stockholders’ equity | 1,152,783 | 824,953 | ||||||
| Total liabilities and stockholders’ equity | $ | 4,173,671 | $ | 3,249,490 |
The accompanying notes are an integral part of these consolidated financial statements.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | ||||||||||
| (In thousands) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 313,537 | $ | 221,809 | $ | 205,191 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 116,566 | 100,038 | 97,906 | |||||||||
| Amortization of debt discount, premium and issuance costs | 3,508 | 3,880 | 4,642 | |||||||||
| Loss (gain) on extinguishment of debt | 6,700 | 8,189 | (3,170 | ) | ||||||||
| Deferred income taxes | 16,614 | 50,994 | 51,823 | |||||||||
| Stock compensation expense | 17,022 | 12,239 | 14,420 | |||||||||
| Net gain on sales of assets and asset impairments | (1,067 | ) | (949 | ) | (1,393 | ) | ||||||
| Changes in assets and liabilities, net of assets acquired and liabilities assumed: | ||||||||||||
| Receivables | (259,543 | ) | 42,789 | (9,221 | ) | |||||||
| Inventories | (220,101 | ) | 44,202 | (5,425 | ) | |||||||
| Other current assets | (19,743 | ) | 4,674 | (10,356 | ) | |||||||
| Other assets and liabilities | 50,370 | 1,611 | 5,637 | |||||||||
| Accounts payable | 160,947 | 4,070 | (89,392 | ) | ||||||||
| Accrued liabilities | 75,257 | 10,500 | 22,168 | |||||||||
| Net cash provided by operating activities | 260,067 | 504,046 | 282,830 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of property, plant and equipment | (112,082 | ) | (112,870 | ) | (101,411 | ) | ||||||
| Proceeds from sale of property, plant and equipment | 8,500 | 6,545 | 4,753 | |||||||||
| Cash used for acquisitions | (32,643 | ) | (92,855 | ) | — | |||||||
| Net cash used in investing activities | (136,225 | ) | (199,180 | ) | (96,658 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Borrowings under revolving credit facility | 891,000 | 1,040,000 | 1,662,000 | |||||||||
| Repayments under revolving credit facility | (843,000 | ) | (1,192,000 | ) | (1,833,000 | ) | ||||||
| Proceeds from long-term debt and other loans | 895,625 | 478,375 | 3,818 | |||||||||
| Repayments of long-term debt and other loans | (618,542 | ) | (610,834 | ) | (65,312 | ) | ||||||
| Payments of debt extinguishment costs | (22,686 | ) | (2,301 | ) | (134 | ) | ||||||
| Payments of loan costs | (13,800 | ) | (8,618 | ) | — | |||||||
| Exercise of stock options | 1,424 | 4,873 | 3,945 | |||||||||
| Repurchase of common stock | (4,153 | ) | (10,392 | ) | (4,895 | ) | ||||||
| Net cash provided by (used in) financing activities | 285,868 | (300,897 | ) | (233,578 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | 409,710 | 3,969 | (47,406 | ) | ||||||||
| Cash and cash equivalents at beginning of period | 14,096 | 10,127 | 57,533 | |||||||||
| Cash and cash equivalents at end of period | $ | 423,806 | $ | 14,096 | $ | 10,127 |
| Supplemental disclosures of cash flow information: | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash paid for interest (1) | $ | 110,600 | $ | 100,354 | $ | 107,668 | ||||||
| Cash paid for income taxes | 43,400 | 18,107 | 3,153 | |||||||||
| Supplemental disclosure of non-cash activities: | ||||||||||||
| Accrued purchases of property, plant and equipment | $ | 1,962 | $ | 3,378 | $ | 2,350 | ||||||
| Acquisition of assets under operating lease obligations | 42,606 | 86,373 | — | |||||||||
| Acquisition of assets under finance and capital lease obligations | 16,964 | 16,462 | 10,198 |
| (1) | Includes $22.7 million, $2.3 million and $0.1 million in payments of debt extinguishment costs which are classified as financing outflows in the accompanying consolidated statement of cash flows for the years ended December 31 2020, 2019, and 2018, respectively. These payments were recorded to interest expense in the accompanying consolidated statement of operations and comprehensive income for their respective years. |
|---|
The accompanying notes are an integral part of these consolidated financial statements.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
| Common Stock | Additional Paid in | Retained Earnings (Accumulated | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Amount | Capital | Deficit) | Total | |||||||||||||||||
| (In thousands) | |||||||||||||||||||||
| Balance at December 31, 2017 | 113,572 | $ | 1,136 | $ | 546,766 | $ | (171,693 | ) | $ | 376,209 | |||||||||||
| Vesting of restricted stock units | 975 | 10 | (10 | ) | — | — | |||||||||||||||
| Shares withheld for restricted stock units vested | (239 | ) | (2 | ) | (4,893 | ) | — | (4,895 | ) | ||||||||||||
| Exercise of stock options | 770 | 7 | 3,938 | — | 3,945 | ||||||||||||||||
| Stock compensation expense | — | — | 14,420 | — | 14,420 | ||||||||||||||||
| Cumulative effect adjustment | — | — | — | 1,468 | 1,468 | ||||||||||||||||
| Net income | — | — | — | 205,191 | 205,191 | ||||||||||||||||
| Balance at December 31, 2018 | 115,078 | 1,151 | 560,221 | 34,966 | 596,338 | ||||||||||||||||
| Vesting of restricted stock units | 735 | 7 | (7 | ) | — | — | |||||||||||||||
| Shares withheld for restricted stock units vested | (196 | ) | (2 | ) | (2,448 | ) | — | (2,450 | ) | ||||||||||||
| Repurchase of common stock (1) | (460 | ) | (4 | ) | — | (7,938 | ) | (7,942 | ) | ||||||||||||
| Exercise of stock options | 895 | 9 | 4,950 | — | 4,959 | ||||||||||||||||
| Stock compensation expense | — | — | 12,239 | — | 12,239 | ||||||||||||||||
| Net income | — | — | — | 221,809 | 221,809 | ||||||||||||||||
| Balance at December 31, 2019 | 116,052 | 1,161 | 574,955 | 248,837 | 824,953 | ||||||||||||||||
| Vesting of restricted stock units | 732 | 7 | (7 | ) | — | — | |||||||||||||||
| Shares withheld for restricted stock units vested | (190 | ) | (2 | ) | (4,151 | ) | — | (4,153 | ) | ||||||||||||
| Exercise of stock options | 235 | 2 | 1,422 | — | 1,424 | ||||||||||||||||
| Stock compensation expense | — | — | 17,022 | — | 17,022 | ||||||||||||||||
| Net income | — | — | — | 313,537 | 313,537 | ||||||||||||||||
| Balance at December 31, 2020 | 116,829 | $ | 1,168 | $ | 589,241 | $ | 562,374 | $ | 1,152,783 |
| (1) | During the year ended December 31, 2019, we repurchased and retired 460,000 shares of our common stock, at an average price of $17.24 per share, for $7.9 million pursuant to the repurchase program authorized by our board of directors in February 2019. The primary purpose of the repurchase program was to offset dilution from employee stock awards. |
|---|
The accompanying notes are an integral part of these consolidated financial statements.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Description of the Business
Builders FirstSource, Inc., a Delaware corporation formed in 1998, is a leading supplier of building materials, manufactured components and construction services to professional contractors, sub-contractors, and consumers. Following the merger with BMC Stock Holdings, Inc. on January 1, 2021, which is discussed in more detail in Note 18, the company operates approximately 550 locations in 40 states across the United States.
In this annual report, references to the “Company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries, unless otherwise stated or the context otherwise requires.
- Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements present the results of operations, financial position, and cash flows of Builders FirstSource, Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
Estimates are used when accounting for items such as revenue, vendor rebates, allowance for returns, discounts and doubtful accounts, employee compensation programs, depreciation and amortization periods, income taxes, inventory values, insurance programs, goodwill, other intangible assets and long-lived assets.
Revenue Recognition
We recognize revenue as performance obligations are satisfied by transferring control of a promised good or service to a customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We generally classify our revenues into two types: (i) distribution sales; or (ii) sales related to contracts with service elements.
Distribution sales typically consist of the sale of building products we manufacture and the resale of purchased building products. We recognize revenue related to distribution sales at a point in time upon delivery of the ordered goods to our customers. Payment terms related to distribution sales are not significant as payment is generally received shortly after the point of sale.
Our contracts with service elements primarily relate to installation and construction services. We evaluate whether multiple contracts should be combined and accounted for as a single contract and whether a single or combined contract should be accounted for as a single performance obligation or multiple performance obligations. If a contract is separated into more than one performance obligation, we allocate the transaction price to each performance obligation generally based on observable standalone selling prices of the underlying goods or services. Revenue related to contracts with service elements is generally recognized over time based on the extent of progress towards completion of the performance obligation because of continuous transfer of control to the customer. We consider costs incurred to be indicative of goods and services delivered to the customer. As such, we use a cost-based input method to recognize revenue on our contracts with service elements as it best depicts the transfer of assets to our customers. Payment terms related to sales for contracts with service elements are specific to each customer and contract. However, they are considered to be short-term in nature as payments are normally received either throughout the life of the contract or shortly after the contract is complete.
Contract costs include all direct material and labor, equipment costs and those indirect costs related to contract performance. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are determinable. Prepayments for materials or services are deferred until such materials have been delivered or services have been provided. All sales recognized are net of allowances for discounts and estimated returns, based on historical experience. The Company records sales incentives provided to customers as a reduction of revenue. We present all sales tax on a net basis in our consolidated financial statements.
Costs to obtain contracts are expensed as incurred as our contracts are typically completed in one year or less, and where applicable, we generally would incur these costs whether or not we ultimately obtain the contract. We do not disclose the value of our remaining performance obligations on uncompleted contracts as our contracts generally have a duration of one year or less.
Cash and Cash Equivalents & Checks Outstanding
Cash and cash equivalents consist of cash on hand and all highly liquid investments with an original maturity date of three months or less. Also included in cash and cash equivalents are proceeds due from credit card transactions that generally settle within two business days. We maintain cash at financial institutions in excess of federally insured limits. Further, we maintain various banking relationships with different financial institutions. Accordingly, when there is a negative net book cash balance resulting from outstanding checks that had not yet been paid by any single financial institution, they are reflected in accounts payable on the accompanying consolidated balance sheets.
Accounts Receivable
We extend credit to qualified professional homebuilders and contractors, in many cases on a non-collateralized basis. Accounts receivable potentially expose us to concentrations of credit risk. Because our customers are dispersed among our various markets, our credit risk to any one customer or geographic economy is not significant. Other receivables consist primarily of vendor rebates receivable.
Our customer mix is a balance of large national homebuilders, regional homebuilders, local and custom homebuilders and repair and remodeling contractors as well as multi-family builders. For the year ended December 31, 2020, our top 10 customers accounted for approximately 15.8% of our net sales, and no single customer accounted for more than 6% of net sales.
The allowance for doubtful accounts is based on management’s assessment of the amount which may become uncollectible in the future and is estimated using specific review of problem accounts, overall portfolio quality, current and forecasted economic conditions that may affect the customer’s ability to pay, and historical experience. Accounts receivable are written off when deemed uncollectible.
We also establish reserves for credit memos and customer returns. The reserve balance was $11.9 million and $7.6 million at December 31, 2020 and 2019, respectively. The activity in this reserve was not significant for each year presented.
Accounts receivable consisted of the following at December 31:
| 2020 | 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||
| Accounts Receivable | $ | 897,655 | $ | 628,438 | ||||
| Less: allowances for returns and doubtful accounts | 17,637 | 13,492 | ||||||
| Accounts receivable, net | $ | 880,018 | $ | 614,946 |
The following table shows the changes in our allowance for doubtful accounts:
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||||||
| Balance at January 1, | $ | 5,936 | $ | 6,195 | $ | 4,973 | ||||||
| Additions | 4,720 | 5,811 | 5,284 | |||||||||
| Deductions (write-offs, net of recoveries) | (4,882 | ) | (6,070 | ) | (4,062 | ) | ||||||
| Balance at December 31, | $ | 5,774 | $ | 5,936 | $ | 6,195 | ||||||
Inventories
Inventories consist principally of materials purchased for resale, including lumber, lumber sheet goods, windows, doors and millwork, as well as certain manufactured products and are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method, the use of which approximates the first-in, first-out method. We accrue for shrink based on the actual historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions. These estimates are compared with actual results as physical inventory counts are taken and reconciled to the general ledger.
During the year, we monitor our inventory levels by market and record provisions for excess inventories based on slower moving inventory. We define potential excess inventory as the amount of inventory on hand in excess of the historical usage, excluding special order items purchased in the last six months. We then apply our judgment as to forecasted demand and other factors, including liquidation value, to determine the required adjustments to net realizable value. Our inventories are generally not susceptible to technological obsolescence.
Our arrangements with vendors provide for rebates of a specified amount of consideration, payable when certain measures, generally related to a stipulated level of purchases, have been achieved. We account for estimated rebates as a reduction of the prices of the vendor’s inventory until the product is sold, at which time such rebates reduce cost of sales in the accompanying consolidated statement of operations and comprehensive income. Throughout the year we estimate the amount of the rebates based upon the expected level of purchases. We continually evaluate and revise these estimates as necessary based on actual purchase levels.
We source products from a large number of suppliers. No materials purchased from any single supplier represented more than 6% of our total materials purchased in 2020.
Shipping and Handling Costs
Handling costs incurred in manufacturing activities are included in cost of sales. All other shipping and handling costs are included in selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive income and totaled $347.7 million, $332.5 million and $322.9 million in 2020, 2019 and 2018, respectively.
Income Taxes
We account for income taxes utilizing the liability method described in the Income Taxes topic of the FASB Accounting Standards Codification (“Codification”). Deferred income taxes are recorded to reflect consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which differences are expected to affect taxable earnings. We record a valuation allowance to reduce deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Warranty Expense
We have warranty obligations with respect to most manufactured products; however, the liability for the warranty obligations is not significant as a result of third-party inspection and acceptance processes.
Debt Issuance Costs and Debt Discount/Premium
Loan costs are capitalized upon the issuance of long-term debt and amortized over the life of the related debt. Debt issuance costs associated with term debt are presented as a reduction to long-term debt. Debt issuance costs associated with revolving debt arrangements are presented as a component of other assets. Debt issuance costs incurred in connection with revolving debt arrangements are amortized using the straight-line method. Debt issuance costs incurred in connection with term debt are amortized using the effective interest method. Debt discounts and premiums are amortized over the life of the related debt using the effective interest method. Amortization of debt issuance costs, discounts and premiums are included in interest expense. Upon changes to our debt structure, we evaluate debt issuance costs, discounts and premiums in accordance with the Debt topic of the Codification. We adjust debt issuance costs, discounts and premiums as necessary based on the results of this evaluation, as discussed in Note 9.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. The estimated lives of the various classes of assets are as follows:
| Buildings and improvements | 10 to 40 years | |||
|---|---|---|---|---|
| Machinery and equipment | 3 to 10 years | |||
| Furniture and fixtures | 3 to 5 years | |||
| Leasehold improvements | The shorter of the estimated useful life or the remaining lease term |
Major additions and improvements are capitalized, while maintenance and repairs that do not extend the useful life of the property are charged to expense as incurred. Gains or losses from dispositions of property, plant and equipment are recorded in the period incurred. We also capitalize certain costs of computer software developed or obtained for internal use, including interest, provided that those costs are not research and development, and certain other criteria are met. Internal use computer software costs are included in machinery and equipment and generally depreciated using the straight-line method over the estimated useful lives of the assets, generally three years.
We periodically evaluate the commercial and strategic operation of the land, related buildings and improvements of our facilities. In connection with these evaluations, some facilities may be consolidated, and others may be sold or leased. Nonoperating assets primarily related to land and building real estate assets associated with location closures that are actively being marketed for sale within a year are classified as assets held for sale and recorded at fair value, usually the quoted market price obtained from an independent third-party less the cost to sell. Until the assets are sold, an estimate of the fair value is reassessed at each reporting period. Net gains or losses related to the sale of real estate and equipment or impairment adjustments related to assets held for sale are recorded as selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive income.
Leases
We lease certain land, buildings, rolling stock and other types of equipment for use in our operations. These leases typically have initial terms ranging from five to 15 years. Many of our leases contain renewal options which are exercisable at our discretion. These renewal options generally have terms ranging from one to five years. We also lease certain properties from related parties, including current employees and non-affiliate stockholders.
We determine if an arrangement is a lease at the inception of the arrangement. Lease liabilities are recognized based on the present value of lease payments over the lease term at the arrangement’s commencement date. Right-of-use assets are recognized based on the amount of the measurement of the lease liability adjusted for any lease payments made to the lessor at or before the commencement date, minus any lease incentives received and any initial direct costs incurred. Renewal options are included in the calculation of our right-of-use assets and lease liabilities when it is determined that they are reasonably certain of exercise based on an analysis of the relevant facts and circumstances. As the implicit rate of return of our lease agreements is usually not readily determinable, we generally use our incremental borrowing rate in determining the present value of lease payments. We determine our incremental borrowing rate based on information available to us at the lease commencement date. Certain of our lease arrangements contain lease and non-lease components. We have elected to account for non-lease components as a part of the related lease components for all of our leases. Leases with an initial term of 12 months or less are not recognized on our balance sheet. We recognize the expense for these leases on a straight-line basis over the lease term.
Certain of our leases are subject to variable lease payments based on various measures, such as rent escalations determined by percentage changes in the consumer price index. As these types of variable lease payments are determined on a basis other than an index or a rate, they are generally excluded from the calculation of lease liabilities and right-of-use assets and are expensed as incurred.
In addition, we have residual value guarantees on certain equipment leases. Under these leases, we have the option of (a) purchasing the equipment at the end of the lease term, (b) arranging for the sale of the equipment to a third party, or (c) returning the equipment to the lessor to sell the equipment. If the sales proceeds in any case are less than the residual value, we are required to reimburse the lessor for the deficiency up to a specified level as stated in each lease agreement. If the sales proceeds exceed the residual value, we are entitled to all of such excess amounts.
In February 2016, the FASB issued an update to the existing guidance under the Leases topic of the Codification. Under the new guidance, lessees are now required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
We adopted this guidance on January 1, 2019 by applying the provisions of this guidance on a modified retrospective basis as of the effective date. As such, comparative periods have not been restated and the disclosures required under the new standard have not been provided for periods prior to January 1, 2019. We elected the package of practical expedients whereby we were not required to: i) reassess whether any expired or existing contracts are or contain leases, ii) reassess the lease classification of existing leases and iii) reassess initial direct costs for any existing leases. We did not elect the hindsight practical expedient or the practical expedient related to land easements. We have assessed and updated our business processes, systems and controls to ensure compliance with the recognition and disclosure requirements of the new standard.
Long-Lived Assets
We evaluate our long-lived assets, other than goodwill, for impairment when events or changes in circumstances indicate, in our judgment, that the carrying amount of such assets may not be recoverable. The determination of whether or not impairment exists is based on our estimate of undiscounted future cash flows before interest attributable to the assets as compared to the net carrying amount of the assets. If impairment is indicated, the amount of the impairment recognized is determined by estimating the fair value of the assets based on estimated discounted future cash flows and recording a provision for loss if the carrying amount is greater than estimated fair value. The net carrying amount of assets identified to be disposed of in the future is compared to their estimated fair value, usually the quoted market price obtained from an independent third-party less the cost to sell, to determine if impairment exists. Until the assets are disposed of, an estimate of the fair value is reassessed when related events or circumstances change.
Insurance
We have established insurance programs to cover certain insurable risks consisting primarily of physical loss to property, business interruptions resulting from such loss, workers’ compensation, employee healthcare, and comprehensive general and auto liability. Third party insurance coverage is obtained for exposures above predetermined deductibles as well as for those risks required to be insured by law or contract. On a quarterly basis, we engage an external actuarial professional to independently assess and estimate the total liability outstanding. Provisions for losses are developed from these valuations which rely upon our past claims experience, which considers both the frequency and settlement of claims. We discount our workers’ compensation liability based upon estimated future payment streams at our risk-free rate. Our total insurance reserve balances were $90.8 million and $87.0 million as of December 31, 2020 and 2019, respectively. Of these balances $52.1 million and $49.0 million were recorded as other long-term liabilities as of December 31, 2020 and 2019, respectively. Included in these reserve balances as of December 31, 2020 and 2019, were approximately $5.7 million and $8.6 million, respectively, of claims that exceeded stop-loss limits and are expected to be recovered under insurance policies which are also recorded as other receivables and other assets in the accompanying consolidated balance sheet.
Net Income per Common Share
Net income per common share, or earnings per share (“EPS”), is calculated in accordance with the Earnings per Share topic of the Codification which requires the presentation of basic and diluted EPS. Basic EPS is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common shares.
The table below presents the calculation of basic and diluted EPS for the years ended December 31:
| 2020 | 2019 | 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands, except per share amounts) | |||||||||||
| Numerator: | |||||||||||
| Net income | $ | 313,537 | $ | 221,809 | $ | 205,191 | |||||
| Denominator: | |||||||||||
| Weighted average shares outstanding, basic | 116,611 | 115,713 | 114,586 | ||||||||
| Dilutive effect of options and RSUs | 1,306 | 1,312 | 1,968 | ||||||||
| Weighted average shares outstanding, diluted | 117,917 | 117,025 | 116,554 | ||||||||
| Net income per share: | |||||||||||
| Basic | $ | 2.69 | $ | 1.92 | $ | 1.79 | |||||
| Diluted | $ | 2.66 | $ | 1.90 | $ | 1.76 | |||||
| Antidilutive and contingent options and RSUs excluded from diluted EPS | 291 | 402 | 682 |
Goodwill and Other Intangible Assets
Intangibles subject to amortization
We recognize an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset or liability. Impairment losses are recognized if the carrying amounts of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its estimated fair value.
Goodwill
We recognize goodwill as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is tested for impairment on an annual basis and between annual tests whenever impairment is indicated. This annual test takes place as of December 31 each year. Impairment losses are recognized whenever the carrying amount of a reporting unit exceeds its fair value.
Stock-based Compensation
We have four stock-based employee compensation plans, which are described more fully in Note 11. We issue new common stock shares upon exercises of stock options and vesting of RSUs. We recognize the effect of pre-vesting forfeitures in the period they actually occur.
We did not grant any options during the years ended December 31, 2020, 2019, or 2018.
The fair value of RSU awards which are subject to or contain market conditions is estimated on the date of grant using the Monte Carlo simulation model with the following weighted average assumptions for the year ended December 31:
| 2020 | 2019 | 2018 | ||||||
|---|---|---|---|---|---|---|---|---|
| Expected volatility (company) | 40.0% | 38.3% | 53.9% | |||||
| Expected volatility (peer group median) | 40.0% | 33.2% | 28.4% | |||||
| Correlation between the company and peer group median | 0.5 | 0.5 | 0.39 | |||||
| Expected dividend yield | 0.0% | 0.0% | 0.0% | |||||
| Risk-free rate | 0.9% | 2.6% | 2.3% |
The expected volatilities and correlation are based on the historical daily returns of our common stock and the common stocks of the constituents of the Company’s peer group over the most recent period equal to the measurement period. The expected dividend yield is based on our history of not paying regular dividends in the past and our current intention to not pay regular dividends in the foreseeable future. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant and has a term equal to the measurement period.
Fair Value
The Fair Value Measurements and Disclosures topic of the Codification provides a framework for measuring the fair value of assets and liabilities and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:
Level 1 — unadjusted quoted prices for identical assets or liabilities in active markets accessible by us
Level 2 — inputs that are observable in the marketplace other than those inputs classified as Level 1
Level 3 — inputs that are unobservable in the marketplace and significant to the valuation
If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.
As of December 31, 2020 and 2019 the Company does not have any financial instruments which are measured at fair value on a recurring basis. We have elected to report the value of our 6.75% senior secured notes due 2027 (“2027 notes”), 5.00% senior secured notes due 2030 (“2030 notes”) and $900.0 million revolving credit facility (“2023 facility”) at amortized cost. The fair values of the 2027 notes and 2030 notes at December 31, 2020 were approximately $844.5 million and $593.3 million, respectively, and were determined using Level 2 inputs based on market prices. The carrying amount of the 2023 facility at December 31, 2020 approximates fair value as the rates are comparable to those at which we could currently borrow under similar terms, are variable and incorporate a measure of our credit risk. As such, the fair value of the 2023 facility was also classified as Level 2 in the hierarchy.
Comprehensive Income
Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It consists of net income and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net income. We had no items of other comprehensive income for the years ended December 31, 2020, 2019, and 2018.
Recently Issued Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The purpose of ASU 2020-04 is to provide optional guidance for a period of time related to accounting for reference rate reform on financial reporting. It is intended to reduce the potential burden of reviewing contract modifications related to discontinued rates. The amendments and expedients in this update are effective as of March 12, 2020 through December 31, 2022 and may be elected by topic. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In December 2019, the FASB issued an update to existing guidance under the Income Taxes topic of the FASB Accounting Standards Codification (“Codification”). This updated guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in the Income Taxes topic. This guidance is effective for public companies annual and interim periods beginning after December 15, 2020 with early adoption permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements in ASC 820. ASU 2018-13 is effective for the Company’s annual and interim periods beginning on January 1, 2020. Certain disclosures in ASU 2018-13 are required to be applied prospectively, while others require retrospective application. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued an update to existing guidance under the Investments topic of the Codification. This update introduced a new impairment model for financial assets, known as the current expected credit losses (“CECL”) model that is based on expected losses rather than incurred losses. The CECL model requires an entity to estimate credit losses on financial assets, including trade accounts receivable, based on historical information, current information and reasonable and supportable forecasts. Under this guidance companies record an allowance through earnings for expected credit losses upon initial recognition of the financial asset. We adopted the aspects of this guidance applicable to us on a modified retrospective basis as of January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.
- Revenue
The following table disaggregates our net sales by product category for the years ended December 31:
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||||||
| Lumber & lumber sheet goods | $ | 3,076,376 | $ | 2,251,580 | $ | 2,902,155 | ||||||
| Manufactured products | 1,640,460 | 1,449,550 | 1,392,043 | |||||||||
| Windows, doors & millwork | 1,629,179 | 1,542,924 | 1,445,858 | |||||||||
| Gypsum, roofing & insulation | 514,638 | 528,571 | 528,439 | |||||||||
| Siding, metal & concrete products | 773,640 | 712,644 | 697,744 | |||||||||
| Other building & product services | 924,581 | 795,162 | 758,532 | |||||||||
| Total net sales | $ | 8,558,874 | $ | 7,280,431 | $ | 7,724,771 |
Information regarding disaggregation of net sales by segment is discussed in Note 15 to the condensed consolidated financial statements. Sales related to contracts with service elements represents less than 10% of the Company’s net sales for each period presented.
The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, contract assets and contract liabilities. Contract asset balances were not significant as of December 31, 2020 or December 31, 2019. Contract liabilities consist of deferred revenue and customer advances and deposits. Contract liability balances are included in accrued liabilities on our consolidated balance sheet and were $58.5 million and $38.6 million as of December 31, 2020 and December 31, 2019, respectively.
- Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
| 2020 | 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||
| Land | $ | 206,321 | $ | 198,123 | ||||
| Buildings and improvements | 386,922 | 374,909 | ||||||
| Machinery and equipment | 517,543 | 439,449 | ||||||
| Furniture, fixtures and computer equipment | 102,309 | 92,094 | ||||||
| Construction in progress | 16,568 | 29,175 | ||||||
| Finance lease right-of-use assets | 43,256 | 37,153 | ||||||
| Property, plant and equipment | 1,272,919 | 1,170,903 | ||||||
| Less: accumulated depreciation | 523,789 | 449,016 | ||||||
| Property, plant and equipment, net | $ | 749,130 | $ | 721,887 |
Depreciation expense was $94.5 million, $84.0 million and $74.4 million, of which $20.8 million, $19.7 million and $18.6 million was included in cost of sales, for the years ended December 31, 2020, 2019, and 2018, respectively.
Included in property, plant and equipment are certain assets held under other finance obligations. These assets are recorded at the present value of the lease payments and include land, buildings and equipment. Amortization charges associated with assets held under other finance obligations are included in depreciation expense.
The following balances held under other finance obligations are included on the accompanying consolidated balance sheet as of December 31:
| 2020 | 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||
| Land | $ | 116,638 | $ | 118,403 | ||||
| Buildings and improvements | 131,390 | 136,620 | ||||||
| Assets held under other finance obligations | 248,028 | 255,023 | ||||||
| Less: accumulated amortization | 25,015 | 18,741 | ||||||
| Assets held under other finance obligations, net | $ | 223,013 | $ | 236,282 |
- 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. This acquisition was funded with a combination of cash on hand and borrowings under our 2023 facility.
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. This acquisition was funded with cash on hand.
These transactions were accounted for by the acquisition method, and accordingly their results of operations have been included in the Company’s consolidated financial statements from their respective acquisition dates. The purchase price was allocated to the assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill. The fair value of acquired intangible assets of $13.6 million,
primarily related to customer relationships, was estimated by applying an income approach. That measure is based on significant Level 3 inputs not observable in the market. Key assumptions developed based on the Company’s historical experience, future projections and comparable market data include future cash flows, long-term growth rates, attrition rates and discount rates.
The operating results of the acquisitions have been included in the consolidated statements of operations and comprehensive income from their acquisition dates through December 31, 2020. Net sales and net income attributable these acquisitions were $29.2 million and $2.5 million, respectively, for the year ended December 31, 2020.
Pro forma results of operations attributable to these acquisitions are not presented as they did not have a material impact on our results of operations, individually or in the aggregate. We did not incur any significant acquisition related costs attributable to these transactions.
The following table summarizes the aggregate fair values of the assets acquired and liabilities assumed for these acquisitions during the year ended December 31, 2020, (in thousands):
| Accounts receivable | $ | 4,518 | ||
|---|---|---|---|---|
| Inventory | 3,171 | |||
| Other current assets | 28 | |||
| Property, plant and equipment (includes finance lease right-of-use assets) | 275 | |||
| Operating lease right-of-use assets | 3,422 | |||
| Goodwill (Note 6) | 16,284 | |||
| Intangible assets (Note 7) | 13,570 | |||
| Total assets acquired | 41,268 | |||
| Accounts payable and accrued liabilities | (5,203 | ) | ||
| Operating lease liabilities | (3,422 | ) | ||
| Total liabilities assumed | (8,625 | ) | ||
| Total net assets acquired | $ | 32,643 |
In connection with the acquisition of Bianchi and KBS, we entered into real estate leases with the sellers for Bianchi’s and KBS’s operating locations. The purchase agreement for Bianchi also contains an earn-out provision contingent upon continued employment and the achievement of specified revenue and profitability targets through fiscal year 2022. This earn-out provision could result in an additional cash payment to the seller ranging from zero to $1.5 million depending on the level of achievement of the specified targets. Future payments related to this earn-out provision will be included as compensation expense in the consolidated statement of operations and comprehensive income over the period earned.
- Goodwill
The following table sets forth the changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2020 and 2019 (in thousands):
| Northeast | Southeast | South | West | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of December 31, 2018 | ||||||||||||||||
| Goodwill | $ | 97,102 | $ | 60,691 | $ | 329,662 | $ | 297,592 | $ | 785,047 | ||||||
| Accumulated impairment losses | (494 | ) | (615 | ) | (43,527 | ) | — | (44,636 | ) | |||||||
| 96,608 | 60,076 | 286,135 | 297,592 | 740,411 | ||||||||||||
| Acquisitions | — | — | 14,257 | 14,354 | 28,611 | |||||||||||
| Balance as of December 31, 2019 | ||||||||||||||||
| Goodwill | $ | 97,102 | $ | 60,691 | $ | 343,919 | $ | 311,946 | $ | 813,658 | ||||||
| Accumulated impairment losses | (494 | ) | (615 | ) | (43,527 | ) | — | (44,636 | ) | |||||||
| 96,608 | 60,076 | 300,392 | 311,946 | 769,022 | ||||||||||||
| Acquisitions | — | 8,261 | 8,022 | — | 16,284 | |||||||||||
| Balance as of December 31, 2020 | ||||||||||||||||
| Goodwill | $ | 97,102 | $ | 68,952 | $ | 351,941 | $ | 311,946 | $ | 829,941 | ||||||
| Accumulated impairment losses | (494 | ) | (615 | ) | (43,527 | ) | — | (44,636 | ) | |||||||
| $ | 96,608 | $ | 68,337 | $ | 308,414 | $ | 311,946 | $ | 785,305 |
In 2020, the change in the carrying amount of goodwill was attributable to our acquisitions of Bianchi and KBS. The amount allocated to goodwill is attributable to the assembled workforces acquired, expected synergies, and expected growth from the new markets the Company entered into. All of the goodwill recognized from these acquisitions is expected to be tax deductible and will be amortized ratably over a 15-year period for tax purposes.
We closely monitor trends in economic factors and their effects on operating results to determine if an impairment trigger was present that would warrant a reassessment of the recoverability of the carrying amount of goodwill prior to the required annual impairment test in accordance with the Intangibles – Goodwill and Other topic of the Codification.
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 value. 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 value, 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.
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. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations and assumptions about our strategic plans with regard to our operations. Due to the uncertainties associated with such estimates, actual results could differ from such estimates resulting in further impairment of goodwill.
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. The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses our projections of financial performance for a five-year period. The significant assumptions used in the discounted cash flow methodology are the discount rate, the terminal value and the expected future revenues and profitability.
We recorded no goodwill impairment charges in 2020, 2019, and 2018.
- Intangible Assets
The following table presents intangible assets as of December 31:
| 2020 | 2019 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
| (In thousands) | ||||||||||||||||
| Customer relationships | $ | 195,435 | $ | (94,690 | ) | $ | 183,445 | $ | (77,016 | ) | ||||||
| Trade names | 52,061 | (38,138 | ) | 51,361 | (36,082 | ) | ||||||||||
| Subcontractor relationships | 5,440 | (1,944 | ) | 4,700 | (131 | ) | ||||||||||
| Non-compete agreements | 3,719 | (2,001 | ) | 3,579 | (1,468 | ) | ||||||||||
| Total intangible assets | $ | 256,655 | $ | (136,773 | ) | $ | 243,085 | $ | (114,697 | ) |
During the years ended December 31, 2020, 2019, and 2018, we recorded amortization expense in relation to the above-listed intangible assets of $22.1 million, $16.1 million, and $23.5 million, respectively. We recorded no intangible asset impairment charges for the years ended December 31, 2020, 2019 or 2018.
In connection with the acquisitions of Bianchi and KBS, we recorded intangible assets of $13.6 million, which includes $12.0 million of customer relationships, $0.8 million of subcontractor relationships, $0.1 million of non-compete agreements and $0.7 million of trade names. The weighted average useful lives of the acquired assets are 7.8 years in total, 8.5 years for customer relationships, 3.0 years for subcontractor relationships, 3.0 years for non-compete agreements and 3.0 years for trade names, respectively.
The following table presents the estimated amortization expense for intangible assets for the years ending December 31 (in thousands):
| 2021 | $ | 21,120 | ||
|---|---|---|---|---|
| 2022 | 19,427 | |||
| 2023 | 16,050 | |||
| 2024 | 14,640 | |||
| 2025 | 12,439 | |||
| Thereafter | 36,206 | |||
| Total future net intangible amortization expense | $ | 119,882 |
- Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
| December 31, 2020 | December 31, 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Accrued payroll and other employee related expenses | $ | 176,379 | $ | 152,869 | ||||
| Contract liabilities | 58,455 | 38,559 | ||||||
| Customer obligations | 18,592 | 11,612 | ||||||
| Self-insurance reserves | 38,642 | 37,955 | ||||||
| Accrued business taxes | 58,953 | 32,604 | ||||||
| Accrued interest | 13,567 | 12,256 | ||||||
| Other | 20,948 | 23,095 | ||||||
| Total accrued liabilities | $ | 385,536 | $ | 308,950 |
- Long-Term Debt
Long-term debt consisted of the following (in thousands):
| December 31, 2020 | December 31, 2019 | ||||||
|---|---|---|---|---|---|---|---|
| 2023 facility (1) | $ | 75,000 | $ | 27,000 | |||
| 2024 notes | — | 503,923 | |||||
| 2024 term loan (2) | — | 52,000 | |||||
| 2027 notes | 777,500 | 475,000 | |||||
| 2030 notes | 550,000 | — | |||||
| Other finance obligations (Note 10) | 216,072 | 221,726 | |||||
| Finance lease obligations (Note 10) | 23,873 | 20,333 | |||||
| 1,642,445 | 1,299,982 | ||||||
| Unamortized debt discount/premium and debt issuance costs | (18,205 | ) | (8,709 | ) | |||
| 1,624,240 | 1,291,273 | ||||||
| Less: current maturities of long-term debt and lease obligations | 27,335 | 13,875 | |||||
| Long-term debt, net of current maturities | $ | 1,596,905 | $ | 1,277,398 |
| (1) | The weighted average interest rate was 3.8% and 4.4% as of December 31, 2020 and 2019, respectively. |
|---|
| (2) | The weighted average interest rate was 4.3% and 5.6% as of December 31, 2020 and 2019, respectively. |
|---|
2018 Debt Transactions
In the fourth quarter of 2018, the Company executed a series of open market purchases of its 2024 notes. These transactions resulted in $53.6 million in aggregate principal amount of the 2024 notes being repurchased at prices ranging from 91.5% to 94.25% of par value. Following these transactions, there was $696.4 million of 2024 notes which remain outstanding.
These repurchases of the 2024 notes were considered to be debt extinguishments. As such, we recognized a gain on debt extinguishment of $3.2 million which was recorded as a component of interest expense in the accompanying consolidated statement of operations and comprehensive income for the year ended December 31, 2018. Of this gain, approximately $3.7 million was attributable to the repurchase of the notes at a discount to par value which was partially offset by a $0.5 million write-off of unamortized debt issuance costs associated with the 2024 Notes repurchased.
2019 Debt Transactions
Note Repurchase Transactions
In the first quarter of 2019, the Company executed a series of open market purchases of its 2024 notes. These transactions resulted in $20.4 million in aggregate principal amount of the 2024 notes being repurchased at prices ranging from 94.9% to 95.9% of par value.
These repurchases of the 2024 notes were considered to be debt extinguishments. As such, we recognized a gain on debt extinguishment of $0.7 million which was recorded as a component of interest expense in the first quarter of 2019. Of this gain, approximately $0.9 million was attributable to the repurchase of the notes at a discount to par value which was partially offset by a $0.2 million write-off of unamortized debt issuance costs associated with the 2024 notes repurchased.
Refinancing Transactions
In April 2019, the Company extended the maturity date of its revolving credit facility by 20 months to November 22, 2023. All other material terms of the 2023 facility remain unchanged from those of the previous agreement.
In connection with the 2023 facility amendment we incurred $1.2 million in lender and third-party fees which, together with $5.9 million in remaining unamortized debt issuance costs, have been recorded as other assets and are being amortized over the remaining contractual life of the 2023 facility on a straight-line basis.
In May 2019, we completed a private offering of $400.0 million in aggregate principal amount of 2027 notes at an issue price equal to 100% of their par value. The proceeds from the issuance of the 2027 notes were used, together with cash on hand, to purchase $97.0 million in aggregate principal amount of 2024 notes, to repay $300.0 million of the 2024 term loan and to pay related transaction fees and expenses.
In connection with the issuance of the 2027 notes, we incurred $6.1 million of various third-party fees and expenses. Of these costs, $2.1 million were recorded to interest expense in the second quarter of 2019. The remaining $4.0 million in costs incurred have been recorded as a reduction to long-term debt and are being amortized over the contractual life of the 2027 notes using the effective interest method. Further, we recorded an additional $2.2 million to interest expense in the second quarter of 2019 related to the write-off of unamortized debt discount and debt issuance costs in connection with the partial repayment of the 2024 term loan.
In July 2019, we completed a private offering of an additional $75.0 million in aggregate principal amount of 2027 notes at an issue price of 104.5% of their par value. The proceeds from the issuance of the 2027 notes were used together with cash on hand to redeem an additional $75.0 million in aggregate principal amount of 2024 notes and to pay related transaction fees and expenses.
The additional $3.4 million in proceeds received in excess of par value represents a debt premium which has been recorded as an increase to long-term debt. In connection with the issuance of the additional 2027 notes, we incurred $1.3 million of various third-party fees and expenses which have been recorded as a reduction to long-term debt. These third party costs and the debt premium are being amortized over the contractual life of the 2027 notes using the effective interest method.
The redemption of the 2024 notes was considered to be an extinguishment. As such, we recognized a loss on extinguishment of $3.1 million which was recorded to interest expense in the third quarter of 2019. Of this loss, $2.2 million was attributable to the call premium paid to the lenders and $0.9 million was attributable to the write-off of unamortized debt issuance costs associated with the extinguished 2024 notes.
Term Loan Repayment
In November 2019, we repaid $105.1 million of the 2024 term loan using cash on hand. In connection with this repayment we recognized a loss on extinguishment of $3.5 million related to the write-off of unamortized debt discount and debt issuance costs. This loss on extinguishment was recorded to interest expense in the fourth quarter of 2019.
2020 Debt Transactions
As further described in more detail below, 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.
First Quarter 2020 Refinancing Transactions
In February 2020, the Company completed a private offering of $550.0 million in aggregate principal amount of 2030 notes at an issue price equal to 100% of par value. The net proceeds from the issuance of the 2030 notes were used together with a borrowing on our $900.0 million 2023 facility to redeem the remaining $503.9 million in outstanding aggregate principal amount of 2024 notes and $47.5 million in aggregate principal amount of 2027 notes and to pay related transaction fees and expenses.
In connection with the issuance of the 2030 notes, we incurred $8.3 million of various third-party fees and expenses. These costs have been recorded as a reduction to long-term debt and are being amortized over the contractual life of the 2030 notes using the effective interest method.
As the Company concluded that the redemption of the 2024 notes and 2027 notes were debt extinguishments, the Company recorded a loss on extinguishment of $28.0 million in interest expense in the first quarter of 2020. Of this loss, approximately $22.7 million was attributable to the payment of redemption premiums on the extinguished notes and $5.3 million was attributable to the write-off of unamortized debt issuance costs and debt premium.
Second Quarter 2020 Debt Transaction
In April 2020, the Company completed a private offering of an additional $350.0 million in aggregate principal amount of 2027 notes at an issue price of 98.75% of par value. The net proceeds from the issuance of the 2027 notes were used to repay the funds borrowed under the 2023 facility and to pay related transaction fees and expenses, with the remaining net proceeds used for general corporate purposes.
The Company recognized the $4.4 million in proceeds received below par value as a debt discount, which is recorded as a reduction to long-term debt. In connection with the issuance of the 2027 notes, we incurred $5.5 million of various third-party fees and expenses, which have been recorded as a reduction to long-term debt. These third-party costs and the debt discount will be amortized over the contractual life of the 2027 notes using the effective interest method.
Fourth Quarter 2020 Term Loan Repayment
In November 2020, we repaid the remaining $52.0 million of the 2024 term loan using cash on hand. In connection with this repayment we recognized a loss on extinguishment of $1.4 million related to the write-off of unamortized debt discount and debt issuance costs. This loss on extinguishment was recorded to interest expense in the accompanying consolidated statement of operations and comprehensive income in the fourth quarter of 2020.
2023 Revolving Credit Facility
As of December 31, 2020, the 2023 facility provides for a $900.0 million revolving credit line to be 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 repayment and consolidation. The available borrowing capacity, or borrowing base, is derived from a percentage of the
Company’s eligible receivables and inventory, as defined by the agreement, subject to certain reserves. 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.
As of December 31, 2020, borrowings under the 2023 facility bear interest, at our option, at either a eurodollar rate or a base rate, plus, in each case, an applicable margin. The applicable margin ranges from 1.25% to 1.75% per annum in the case of eurodollar rate loans and 0.25% to 0.75% per annum in the case of base rate loans. The margin in either case is based on a measure of availability under the 2023 facility. A variable commitment fee, currently 0.375% per annum, is charged on the unused amount of the revolver based on quarterly average loan utilization. Letters of credit under the 2023 facility are assessed at a rate equal to the applicable eurodollar margin, currently 1.25%, as well as a fronting fee at a rate of 0.125% per annum. These fees are payable quarterly in arrears at the end of March, June, September, and December.
All obligations under the 2023 facility are guaranteed jointly and severally by the Company and all other subsidiaries that guarantee the 2027 notes and 2030 notes. All obligations and the guarantees of those obligations are secured by substantially all of the assets of the Company and the guarantors subject to certain exceptions and permitted liens, including with respect to the 2023 facility, a first-priority security interest in such assets that constitute ABL Collateral (as defined below) and a second-priority security interest in such assets that constitute Notes Collateral (as defined below).
“ABL Collateral” includes substantially all presently owned and after-acquired accounts receivable, inventory, rights of unpaid vendors with respect to inventory, deposit accounts, commodity accounts, securities accounts and lock boxes, investment property, cash and cash equivalents, and general intangibles, books and records, supporting obligations and documents and related letters of credit, commercial tort claims or other claims related to and proceeds of each of the foregoing. “Notes Collateral” includes all collateral which is not ABL Collateral.
The 2023 facility contains restrictive covenants which, among other things, limit the Company’s ability to incur additional indebtedness, incur liens, engage in mergers or other fundamental changes, sell certain assets, pay dividends, make acquisitions or investments, prepay certain indebtedness, change the nature of our business, and engage in certain transactions with affiliates. In addition, the 2023 facility also contains a financial covenant requiring the satisfaction of a minimum fixed charge ratio of 1.00 to 1.00 if our excess availability falls below the greater of $80.0 million or 10% of the maximum borrowing amount, which was $90.0 million as of December 31, 2020.
On January 29, 2021, the Company amended the 2023 facility to 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. As amended, borrowings under the 2023 facility bear interest, at our option, at either the eurodollar rate or base rate plus, in each case, an applicable margin. The applicable margin ranges from 1.50% to 2.00% per annum in the case of eurodollar rate loans and 0.50% to 1.00% per annum in the case of base rate loans. The margin in either case is based on a measure of availability under the 2023 facility.
Senior Secured Notes due 2027
As of December 31, 2020, we have $777.5 million outstanding in aggregate principal amount of the 2027 notes which mature on June 1, 2027. Interest accrues on the 2027 notes at a rate of 6.75% per annum and is payable semi-annually on June 1 and December 1 of each year.
The terms of the 2027 notes are governed by the indenture, dated as of the May 30, 2019 (the “2027 Indenture”), among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee and as notes collateral agent. The 2027 notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior secured basis, by certain of the Company’s direct and indirect wholly owned subsidiaries (the “Guarantors”). All obligations under the 2027 notes, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and the Guarantors subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute Notes Collateral and a second-priority security interest in such assets that constitute ABL Collateral.
The 2027 Indenture contains restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional debt or issue preferred stock, create liens, create restrictions on the Company’s subsidiaries’ ability to make payments to the Company, pay dividends and make other distributions in respect of the Company’s and its subsidiaries’ capital stock, make certain investments or certain other restricted payments, guarantee indebtedness, designate unrestricted subsidiaries, sell certain kinds of assets, enter into certain types of transactions with affiliates, and effect mergers and consolidations.
At any time prior to June 1, 2022, the Company may redeem the 2027 notes in whole or in part at a redemption price equal to 100% of the principal amount of the 2027 notes plus the “applicable premium” set forth in the 2027 Indenture. At any time on or after June 1, 2022, the Company may redeem the 2027 notes at the redemption prices set forth in the 2027 Indenture, plus accrued and unpaid interest, if any, to the redemption date. At any time and from time to time during the 36-month period following the Closing Date, the Company may redeem up to 10% of the aggregate principal amount of the 2027 notes during each twelve-month period commencing on the Closing Date at a redemption price of 103% of the aggregate principal amount thereof plus accrued and unpaid interest to the redemption date. In addition, at any time prior to June 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 2027 notes with the net cash proceeds of one or more equity offerings, as described in the 2027 Indenture, at a price equal to 106.750% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. If the Company experiences certain change of control events, holders of the 2027 notes may require it to repurchase all or part of their 2027 notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.
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.
Senior Secured Notes due 2030
As of December 31, 2020, we have $550.0 million outstanding in aggregate principal amount of the 2030 notes, which mature on March 1, 2030. Interest accrues on the 2030 notes at a rate of 5.00% per annum and is payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2020.
The terms of the 2030 notes are governed by the indenture, dated as of the February 11, 2020 (the “2030 Indenture”), among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee. The 2030 notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior unsecured basis, by each of the Company’s direct and indirect wholly owned subsidiaries (the “Guarantors”) that guarantee its obligations under the Company’s 2023 Facility and the 2027 Secured Notes. Subject to certain exceptions, future subsidiaries that guarantee the Senior Secured Credit Facilities, the 2027 notes or certain other indebtedness will also guarantee the 2030 notes.
The 2030 notes constitute senior unsecured obligations of the Company and the Guarantors, pari passu in right of payment with all of the existing and future senior indebtedness of the Company, including indebtedness under the 2027 notes. The 2030 notes are also (i) effectively subordinated to all existing and future secured indebtedness of the Company and the Guarantors (including under the 2027 notes) to the extent of the value of the assets securing such indebtedness, (ii) senior to all of the future subordinated indebtedness of the Company and the Guarantors, and (iii) structurally subordinated to any existing and future indebtedness and other liabilities, including preferred stock, of the Company’s subsidiaries that do not guarantee the 2030 notes.
The 2030 Indenture contains restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional debt or issue preferred stock, create liens, create restrictions on the Company’s subsidiaries’ ability to make payments to the Company, pay dividends and make other distributions in respect of the Company’s and its subsidiaries’ capital stock, make certain investments or certain other restricted payments, guarantee indebtedness, designate unrestricted subsidiaries, sell certain kinds of assets, enter into certain types of transactions with affiliates, and effect mergers and consolidations.
At any time prior to March 1, 2025, the Company may redeem the 2030 notes in whole or in part at a redemption price equal to 100% of the principal amount of the 2030 notes plus the “applicable premium” set forth in the 2030 Indenture. In addition, at any time prior to March 1, 2023, the Company may redeem up to 40% of the aggregate principal amount of the 2030 notes with the net cash proceeds of one or more equity offerings, as described in the 2030 Indenture, at a price equal to 105.0% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. At any time on or after March 1, 2025, the Company may redeem the 2030 notes at the redemption prices set forth in the 2030 Indenture, plus accrued and unpaid interest, if any, to the redemption date. If the Company experiences certain change of control events, holders of the 2030 notes may require it to repurchase all or part of their 2030 notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.
As of December 31, 2020 we were not in violation of any covenants or restrictions imposed by any of our debt agreements.
Future maturities of long-term debt as of December 31, 2020 were as follows (in thousands):
| Year ending December 31, | ||||
|---|---|---|---|---|
| 2021 | $ | — | ||
| 2022 | — | |||
| 2023 | 75,000 | |||
| 2024 | — | |||
| 2025 | — | |||
| Thereafter | 1,327,500 | |||
| Total long-term debt (including current maturities) | $ | 1,402,500 |
- Leases and Other Finance Obligations
Right-of-use assets and lease liabilities consisted of the following as of December 31 (in thousands):
| 2020 | 2019 | ||||||
|---|---|---|---|---|---|---|---|
| Assets | |||||||
| Operating lease right-of-use assets, net | $ | 274,562 | $ | 292,684 | |||
| Finance lease right-of-use assets, net (included in property, plant and equipment, net) | 34,905 | 32,070 | |||||
| Total right-of-use assets | $ | 309,467 | $ | 324,754 | |||
| Liabilities | |||||||
| Current | |||||||
| Current portion of operating lease liabilities | $ | 61,625 | $ | 61,653 | |||
| Current portion of finance lease liabilities (included in current maturities of long-term debt) | 12,178 | 10,378 | |||||
| Noncurrent | |||||||
| Noncurrent portion of operating lease liabilities | $ | 219,239 | $ | 236,948 | |||
| Noncurrent portion of finance lease liabilities (included in long-term debt, net of current maturities) | 11,695 | 9,955 | |||||
| Total lease liabilities | $ | 304,737 | $ | 318,934 |
Total lease costs consisted of the following for the years ended December 31 (in thousands):
| 2020 | 2019 | ||||||
|---|---|---|---|---|---|---|---|
| Operating lease costs* | $ | 85,798 | $ | 84,603 | |||
| Finance lease costs: | |||||||
| Amortization of finance lease right-of-use assets | 6,325 | 5,177 | |||||
| Interest on finance lease liabilities | 1,424 | 1,115 | |||||
| Variable lease costs | 17,607 | 15,441 | |||||
| Total lease costs | $ | 111,154 | $ | 106,336 |
| *** | Includes short-term lease costs and sublease income which were not material for the years ended December 31, 2020 and December 31, 2019. |
|---|
Future maturities of lease liabilities as of December 31, 2020 were as follows (in thousands):
| Finance Leases | Operating Leases | |||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | $ | 13,242 | $ | 76,567 | ||||
| 2022 | 8,934 | 63,879 | ||||||
| 2023 | 2,953 | 49,546 | ||||||
| 2024 | 250 | 38,208 | ||||||
| 2025 | 67 | 28,958 | ||||||
| Thereafter | — | 84,959 | ||||||
| Total lease payments | 25,446 | 342,117 | ||||||
| Less: amount representing interest | (1,573 | ) | (61,253 | ) | ||||
| Present value of lease liabilities | 23,873 | 280,864 | ||||||
| Less: current portion | (12,178 | ) | (61,625 | ) | ||||
| Long-term lease liabilities, net of current portion | $ | 11,695 | $ | 219,239 |
Weighted average lease terms and discount rates as of December 31 were as follows:
| 2020 | 2019 | ||||||
|---|---|---|---|---|---|---|---|
| Weighted average remaining lease term (years) | |||||||
| Operating leases | 6.3 | 6.3 | |||||
| Finance leases | 2.1 | 2.0 | |||||
| Weighted average discount rate | |||||||
| Operating leases | 6.3 | % | 6.6 | % | |||
| Finance leases | 5.9 | % | 6.0 | % |
The following table presents cash paid for amounts included in the measurement of lease liabilities for the years ended December 31 (in thousands):
| 2020 | 2019 | ||||||
|---|---|---|---|---|---|---|---|
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||
| Operating cash flows from operating leases | $ | 82,559 | $ | 81,488 | |||
| Operating cash flows from finance leases | 1,424 | 1,115 | |||||
| Financing cash flows from finance leases | 13,409 | 11,477 |
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, these guarantees have not been recognized in the calculation of our right-of-use assets and lease liabilities. Our lease agreements do not impose any significant restrictions or covenants on us. As of December 31, 2020, future lease payments related to leases which have been signed, but have not yet commenced are not significant and are not reflected on our consolidated balance sheet as of December 31, 2020. Leases with related parties are not significant as of or for the years ended December 31, 2020, 2019 or 2018.
Other Finance Obligations
In addition to the operating and finance lease arrangements described above, the Company is party to 131 individual property lease agreements with a single lessor as of December 31, 2020. These lease agreements had initial terms ranging from nine to 15 years with renewal options in five-year increments providing for up to approximately 30-year total lease terms. A related agreement between the lessor and the Company gives the Company the right to acquire a limited number of the leased facilities at fair market value. These purchase rights represent a form of continuing involvement with these properties, which precluded sale-leaseback accounting. As a result, the Company treats all of the properties that it leases from this lessor as a financing arrangement. The Company is also party to certain additional agreements with the same lessor which commit the Company to perform certain repair and maintenance obligations under the leases in a specified manner and timeframe.
We were deemed the owner of certain of our facilities during their construction period based on an evaluation made in accordance with the Leases topic of the Codification. Effectively, a sale and leaseback of these facilities occurred when construction was completed and the lease term began. These transactions did not qualify for sale-leaseback accounting. As a result, the Company treats the lease of these facilities as a financing arrangement.
As of December 31, 2020, other finance obligations consist of $216.1 million, with cash payments of $20.9 million for the year ended December 31, 2020. These other finance obligations are included on the consolidated balance sheet as part of long-term debt. The related assets are recorded as components of property, plant, and equipment on the consolidated balance sheet.
Future maturities for other finance obligations as of December 31, 2020 were as follows (in thousands):
| 2021 | $ | 17,196 | ||
|---|---|---|---|---|
| 2022 | 16,811 | |||
| 2023 | 16,818 | |||
| 2024 | 16,835 | |||
| 2025 | 16,836 | |||
| Thereafter | 174,300 | |||
| Total | $ | 258,796 |
- Employee Stock-Based Compensation
2014 Incentive Plan
Under our 2014 Incentive Plan (“2014 Plan”), as amended, the Company is authorized to grant awards in the form of incentive stock options, non-qualified stock options, restricted stock shares, restricted stock units, other common stock-based awards and cash-based awards. As of December 31, 2020, the Company had reserved 8.5 million shares of common stock for the grant of awards under the 2014 Plan, subject to adjustment as provided by the 2014 Plan. All shares under the Plan may be made subject to options, stock appreciation rights (“SARs”), or stock-based awards. Stock options and SARs granted under the 2014 Plan may not have a term exceeding 10 years from the date of grant. The 2014 Plan also provides that all awards will become fully vested and/or exercisable upon a change in control (as defined in the 2014 Plan) if those awards (i) are not assumed or equitably substituted by the surviving entity or (ii) have been assumed or equitably substituted by the surviving entity, and the grantee’s employment is terminated under certain circumstances. Other specific terms for awards granted under the 2014 Plan shall be determined by our Compensation Committee (or the board of directors if so determined by the board of directors). Awards granted under the 2014 Plan generally vest ratably over a three to four-year period or cliff vest after a period of three to four years. As of December 31, 2020, 2.6 million shares were available for issuance under the 2014 Plan. If it is assumed that shares will be issued at the target vesting amount for outstanding restricted stock units (“RSUs”) with variable payout provisions, an additional 0.8 million shares would be included in the shares available for future issuance under the 2014 Plan. In connection with the BMC Merger, an additional 6.6 million shares of common stock for the grant of awards were added to the 2014 Plan.
2007 Incentive Plan
Under our 2007 Incentive Plan (“2007 Plan”), the Company was authorized to grant awards in the form of incentive stock options, non-qualified stock options, restricted stock, other common stock-based awards and cash-based awards. Stock options and SARs granted under the 2007 Plan may not have a term exceeding 10 years from the date of grant. The 2007 Plan also provided that all awards will become fully vested and/or exercisable upon a change in control (as defined in the 2007 Plan). Historically, awards granted under the 2007 Plan generally vested ratably over a three to four-year period. As of May 24, 2017, no further grants will be made under the 2007 plan.
2005 Equity Incentive Plan
Under our 2005 Equity Incentive Plan (“2005 Plan”), we were authorized to grant stock-based awards in the form of incentive stock options, non-qualified stock options, restricted stock and other common stock-based awards. Stock options and SARs granted under the 2005 Plan could not have a term exceeding 10 years from the date of grant. The 2005 Plan also provided that all awards become fully vested and/or exercisable upon a change in control (as defined in the 2005 Plan). Historically, awards granted under the 2005 Plan generally vested ratably over a three-year period. As of June 27, 2015, no further grants will be made under the 2005 Plan.
1998 Stock Incentive Plan
Under the Builders FirstSource, Inc. 1998 Stock Incentive Plan (“1998 Plan”), we were authorized to issue shares of common stock pursuant to awards granted in various forms, including incentive stock options, non-qualified stock options and other stock-based awards. The 1998 Plan also authorized the sale of common stock on terms determined by our board of directors. Historically, stock options granted under the 1998 Plan generally cliff vested after a period of seven to nine years with certain option grants subject to acceleration if certain financial targets were met. As of January 1, 2005, no further grants will be made under the 1998 Plan.
Stock Options
The following table summarizes our stock option activity:
| Options | Weighted Average Exercise Price | Weighted Average Remaining Years | Aggregate Intrinsic Value | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | (In thousands) | |||||||||||||||
| Outstanding at December 31, 2019 | 434 | $ | 6.81 | |||||||||||||
| Granted | — | $ | — | |||||||||||||
| Exercised | (235 | ) | $ | 6.06 | ||||||||||||
| Forfeited | — | $ | — | |||||||||||||
| Outstanding at December 31, 2020 | 199 | $ | 7.68 | 4.1 | $ | 6,590 | ||||||||||
| Exercisable at December 31, 2020 | 187 | $ | 7.34 | 4.0 | $ | 6,249 |
The outstanding options at December 31, 2020 include 92,000 options under the 2014 plan, 54,000 options under the 2007 Plan, 25,000 options under the 2005 Plan and 28,000 options under the 1998 Plan. As of December 31, 2020, 80,000 options under the 2014 Plan and all the outstanding options under the 2007 Plan, the 2005 Plan and the 1998 Plan were exercisable. There were no options granted during the years ended December 31, 2020, 2019 or 2018. The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 were $4.8 million, $12.5 million and $10.9 million, respectively. Vesting of all of our stock options is contingent solely on continuous employment over the requisite service period.
Outstanding and exercisable stock options at December 31, 2020 were as follows (shares in thousands):
| Outstanding | Exercisable | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices | Shares | Weighted Average Exercise Price | Weighted Average Remaining Years | Shares | Weighted Average Exercise Price | |||||||||||||||
| $3.15 - $3.19 | 28 | $ | 3.15 | 3.1 | 28 | $ | 3.15 | |||||||||||||
| $6.35 - $6.59 | 55 | $ | 6.48 | 4.7 | 55 | $ | 6.48 | |||||||||||||
| $7.67- $12.94 | 116 | $ | 9.36 | 4.1 | 104 | $ | 8.94 | |||||||||||||
| $3.15 - $12.94 | 199 | $ | 7.68 | 4.1 | 187 | $ | 7.34 |
Restricted Stock Units
The outstanding RSUs at December 31, 2020 include 2,349,000 units granted under the 2014 Plan.
The following table summarizes activity for RSUs subject solely to service conditions for the year ended December 31, 2020 (shares in thousands):
| Shares | Weighted Average Grant Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Nonvested at December 31, 2019 | 1,131 | $ | 15.73 | |||||
| Granted | 739 | $ | 19.54 | |||||
| Vested | (464 | ) | $ | 16.14 | ||||
| Forfeited | (5 | ) | $ | 15.78 | ||||
| Nonvested at December 31, 2020 | 1,401 | $ | 17.60 |
The weighted average grant date fair value of RSUs for which vesting is subject solely to service conditions granted during the years ended December 31, 2020, 2019 and 2018 were $19.54, $14.29, and $20.23, respectively.
The following table summarizes activity for RSUs for which vesting is subject to both performance and service conditions for the year ended December 31, 2020 (shares in thousands):
| Shares | Weighted Average Grant Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Nonvested at December 31, 2019 | 692 | $ | 16.11 | |||||
| Granted | 272 | $ | 23.18 | |||||
| Vested | (135 | ) | $ | 15.77 | ||||
| Forfeited | — | $ | — | |||||
| Nonvested at December 31, 2020 | 829 | $ | 18.48 |
The weighted average grant date fair value of RSUs for which vesting is subject to both performance and service conditions granted during the years ended December 31, 2020, 2019 and 2018 were $23.18, $14.42 and $21.15, respectively.
The following table summarizes activity for RSUs for which vesting is subject to both market and service conditions for the year ended December 31, 2020 (shares in thousands):
| Shares | Weighted Average Grant Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Nonvested at December 31, 2019 | 253 | $ | 17.31 | |||||
| Granted | — | $ | — | |||||
| Vested | (134) | $ | 12.81 | |||||
| Forfeited | — | $ | — | |||||
| Nonvested at December 31, 2020 | 119 | $ | 22.39 |
The weighted average grant date fair value of RSUs for which vesting is subject to both market and service conditions granted during the year ended December 31, 2018 was $21.96. There were no RSUs granted during the year ended December 31, 2020 or 2019 for which vesting was subject to both market and service conditions.
Our results of operations include stock compensation expense of $17.0 million, $12.2 and $14.4 for the years ended December 31, 2020, 2019 and 2018, respectively. We recognized excess tax benefits for stock options exercised and RSUs vested of $2.1 million, $2.2 million and $4.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. The total fair value of options vested during the years ended December 31, 2020, 2019, and 2018 were $0.1 million, $0.3 million and $2.7 million, respectively. The total fair value of RSUs vested during the years ended December 31, 2020, 2019 and 2018 were $11.3 million, $9.8 million and $10.4 million, respectively.
As of December 31, 2020, there was approximately $21.6 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.1 years.
- Income Taxes
The components of income tax expense included in continuing operations were as follows for the years ended December 31:
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | 66,017 | $ | 3,678 | $ | (1,831 | ) | |||||
| State | 11,998 | 6,274 | 5,572 | |||||||||
| 78,015 | 9,952 | 3,741 | ||||||||||
| Deferred: | ||||||||||||
| Federal | 16,270 | 45,955 | 45,934 | |||||||||
| State | 344 | 5,039 | 5,889 | |||||||||
| 16,614 | 50,994 | 51,823 | ||||||||||
| Income tax expense | $ | 94,629 | $ | 60,946 | $ | 55,564 |
Temporary differences, which give rise to deferred tax assets and liabilities, were as follows as of December 31:
| 2020 | 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||
| Deferred tax assets related to: | ||||||||
| Accrued expenses | $ | 19,182 | $ | 8,219 | ||||
| Insurance reserves | 16,582 | 14,277 | ||||||
| Stock-based compensation expense | 3,549 | 3,325 | ||||||
| Accounts receivable | 4,726 | 3,799 | ||||||
| Inventories | 6,152 | 5,394 | ||||||
| Operating loss and credit carryforwards | 10,812 | 13,821 | ||||||
| Operating lease liabilities | 70,216 | 74,650 | ||||||
| Other | 3,746 | 1,677 | ||||||
| 134,965 | 125,162 | |||||||
| Valuation allowance | (2,409 | ) | (2,409 | ) | ||||
| Total deferred tax assets | 132,556 | 122,753 | ||||||
| Deferred tax liabilities related to: | ||||||||
| Prepaid expenses | (3,914 | ) | (2,393 | ) | ||||
| Goodwill and other intangible assets | (47,490 | ) | (37,426 | ) | ||||
| Property, plant and equipment | (57,353 | ) | (37,991 | ) | ||||
| Operating lease right-of-use assets | (68,641 | ) | (73,171 | ) | ||||
| Total deferred tax liabilities | (177,398 | ) | (150,981 | ) | ||||
| Net deferred tax liability | $ | (44,842 | ) | $ | (28,228 | ) |
A reconciliation of the statutory federal income tax rate to our effective rate for continuing operations is provided below for the years ended December 31:
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Statutory federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
| State income taxes, net of federal income tax | 3.7 | 2.8 | 4.3 | |||||||||
| Stock compensation windfall benefit | (0.5 | ) | (0.8 | ) | (1.6 | ) | ||||||
| Permanent difference – 162(m) limitation | 0.5 | 0.4 | 0.6 | |||||||||
| Permanent difference – credits | (1.7 | ) | (2.3 | ) | (4.6 | ) | ||||||
| Permanent difference – other | 0.3 | 0.7 | 1.4 | |||||||||
| Other | (0.1 | ) | (0.2 | ) | 0.2 | |||||||
| 23.2 | % | 21.6 | % | 21.3 | % |
We have $201.7 million of state net operating loss carryforwards and $3.6 million of state tax credit carryforwards expiring at various dates through 2037. We evaluate our deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. In accordance with the Income Taxes topic of the Codification we assess whether it is more likely than not that some or all of
our deferred tax assets will not be realized. Significant judgment is required in estimating valuation allowances for deferred tax assets and in making this determination, we consider all available positive and negative evidence and make certain assumptions. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in the applicable carryforward period. Changes in our estimates of future taxable income and tax planning strategies will affect our estimate of the realization of the tax benefits of these tax carryforwards.
We base our estimate of deferred tax assets and liabilities on current tax laws and rates. In certain cases, we also base our estimate on business plan forecasts and other expectations about future outcomes. Changes in existing tax laws or rates could affect our actual tax results, and future business results may affect the amount of our deferred tax liabilities or the valuation of our deferred tax assets over time. Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods, as well as the residential homebuilding industry’s cyclicality and sensitivity to changes in economic conditions, it is possible that actual results could differ from the estimates used in previous analyses.
The balance for uncertain tax positions, excluding penalties and interest, was $9.2 million and $2.0 million as of December 31, 2020 and 2019, respectively, with $7.2 million recorded in the Company’s consolidated statement of operations and comprehensive income for the year ended December 31, 2020, and with no significant amounts recorded in the years ended December 31, 2019 or 2018. We accrue interest and penalties on our uncertain tax positions as a component of our provision for income taxes. We accrued no significant interest and penalties in 2020, 2019 or 2018.
We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Based on completed examinations and the expiration of statutes of limitations, we have concluded all U.S. federal income tax matters for years through 2014. We are currently under IRS audit for various aspects of our 2015, 2016 and 2017 tax years. We report in 41 states with various years open to examination.
- Employee Benefit Plans
We maintain one active defined contribution 401(k) plan. Our employees are eligible to participate in the plans subject to certain employment eligibility provisions. Participants can contribute up to 75% of their annual compensation, subject to federally mandated maximums. Participants are immediately vested in their own contributions. We match a certain percentage of the contributions made by participating employees, subject to IRS limitations. Our matching contributions are subject to a pro-rata five-year vesting schedule. We recognized expense of $8.1 million, $7.8 million and $6.8 million in 2020, 2019 and 2018, respectively, for contributions to the plan.
The Company contributes to multiple collectively bargained union retirement plans including multiemployer plans. The Company does not administer the multiemployer plans, and contributions are determined in accordance with the provisions of negotiated labor contracts. The risks of participating in multiemployer plans are different from single-employer plans. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to a multiemployer plan, the unfunded obligations of that multiemployer plan may be borne by the remaining participating employers. If the Company chooses to stop participating in a multiemployer plan, the Company may be required to pay that plan an amount (“withdrawal liability”) based on the plan’s formula and the underfunded status of the plan attributable to the Company. Contributions to the plans for the years ended December 31, 2020, 2019 and 2018 were not significant.
- Commitments and Contingencies
As of December 31, 2020, we had outstanding letters of credit totaling $78.0 million under our 2023 facility that principally support our self-insurance programs.
The Company has a number of known and threatened construction defect legal claims. While these claims are generally covered under the Company’s existing insurance programs to the extent any loss exceeds the deductible, there is a reasonable possibility of loss that is not able to be estimated at this time because (i) many of the proceedings are in the discovery stage, (ii) the outcome of future litigation is uncertain, and/or (iii) the complex nature of the claims. Although the Company cannot estimate a reasonable range of loss based on currently available information, the resolution of these matters could have a material adverse effect on the Company's financial position, results of operations or cash flows.
In addition, we are involved in various other claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of such claims and lawsuits. Although the ultimate disposition of these other proceedings cannot be predicted with certainty, management believes the outcome of any such claims that
are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on our consolidated financial position, cash flows or results of operations. However, there can be no assurances that future adverse judgments and costs would not be material to our results of operations or liquidity for a particular period.
- Segment and Product Information
We offer an integrated solution to our customers providing manufacturing, supply, and installation of a full range of structural and related building products. We provide a wide variety of building products and services directly to homebuilder customers. We manufacture floor trusses, roof trusses, wall panels, stairs, millwork, windows, and doors. We also provide a full range of construction services. For the period ended December 31, 2020, these product and service offerings are distributed across approximately 400 locations operating in 40 states across the United States, which have been organized into nine geographical regions. Centralized financial and operational oversight, including resource allocation and assessment of performance on an income from continuing operations before income taxes basis, is performed by our CEO, whom we have determined to be our chief operating decision maker (“CODM”).
The Company has nine operating segments aligned with its nine geographical regions (Regions 1 through 9). While all of our operating segments have similar categories of products, distribution methods and customers, certain of our operating segments have been aggregated due to also containing similar economic characteristics, resulting in the following composition of reportable segments:
| • | Regions 1 and 2 have been aggregated to form the “Northeast” reportable segment |
|---|
| • | Regions 3 and 5 have been aggregated to form the “Southeast” reportable segment |
|---|
| • | Regions 4 and 6 have been aggregated to form the “South” reportable segment |
|---|
| • | Region 7, 8 and 9 have been aggregated to form the “West” reportable segment |
|---|
In addition to our reportable segments, our consolidated results include corporate overhead, other various operating activities, including closed locations, that are not internally allocated to a geographical region nor separately reported to the CODM, and certain reconciling items primarily related to allocations of corporate overhead and rent expense, which have collectively been presented as “All Other”. The accounting policies of the segments are consistent with those described in Note 2, except for noted reconciling items.
The following tables present Net sales, Income before income taxes and certain other measures for the reportable segments, reconciled to consolidated total operations, for the years ended December 31, (in thousands):
| 2020 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Reportable segments | Net Sales | Depreciation & Amortization | Interest | Income before income taxes | ||||||||||||
| Northeast | $ | 1,323,972 | $ | 14,271 | $ | 21,899 | $ | 56,574 | ||||||||
| Southeast | 1,947,888 | 15,908 | 25,602 | 139,017 | ||||||||||||
| South | 2,346,160 | 27,904 | 26,971 | 163,224 | ||||||||||||
| West | 2,639,133 | 31,160 | 41,073 | 156,744 | ||||||||||||
| Total reportable segments | 8,257,153 | 89,243 | 115,545 | 515,559 | ||||||||||||
| All other | 301,721 | 27,323 | 20,143 | (107,393 | ) | |||||||||||
| Total consolidated | $ | 8,558,874 | $ | 116,566 | $ | 135,688 | $ | 408,166 | ||||||||
| 2019 | ||||||||||||||||
| Reportable segments | Net Sales | Depreciation & Amortization | Interest | Income before income taxes | ||||||||||||
| Northeast | $ | 1,293,472 | $ | 13,060 | $ | 20,994 | $ | 56,573 | ||||||||
| Southeast | 1,599,426 | 12,517 | 21,580 | 83,722 | ||||||||||||
| South | 1,860,653 | 19,714 | 22,218 | 113,359 | ||||||||||||
| West | 2,205,224 | 26,978 | 36,475 | 89,206 | ||||||||||||
| Total reportable segments | 6,958,775 | 72,269 | 101,267 | 342,860 | ||||||||||||
| All other | 321,656 | 27,769 | 8,284 | (60,105 | ) | |||||||||||
| Total consolidated | $ | 7,280,431 | $ | 100,038 | $ | 109,551 | $ | 282,755 |
| 2018 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Reportable segments | Net Sales | Depreciation & Amortization | Interest | Income before income taxes | ||||||||||||
| Northeast | $ | 1,304,855 | $ | 13,318 | $ | 23,740 | $ | 36,382 | ||||||||
| Southeast | 1,684,842 | 11,622 | 25,373 | 67,424 | ||||||||||||
| South | 2,015,807 | 20,746 | 25,764 | 111,308 | ||||||||||||
| West | 2,394,253 | 26,744 | 38,804 | 108,181 | ||||||||||||
| Total reportable segments | 7,399,757 | 72,430 | 113,681 | 323,295 | ||||||||||||
| All other | 325,014 | 25,476 | (5,468 | ) | (62,540 | ) | ||||||||||
| Total consolidated | $ | 7,724,771 | $ | 97,906 | $ | 108,213 | $ | 260,755 |
Asset information by segment is not reported internally or otherwise reviewed by the CODM nor does the company earn revenues or have long-lived assets located in foreign countries.
- Related Party Transactions
Certain members of the Company’s board of directors also serve on the board of directors of one of our suppliers, PGT, Inc. In addition, as of January 1, 2021 a new member of the Company’s board of directors is an executive officer of one of our customers, Ashton Woods USA, L.L.C. Further, the Company has entered into certain leases of land and buildings with certain employees or non-affiliate stockholders. Activity associated with these related party transactions was not significant as of or for the years ended December 31, 2020, 2019 or 2018.
Transactions between the Company and other related parties occur in the ordinary course of business. However, the Company carefully monitors and assesses related party relationships. Management does not believe that any of these transactions with related parties had a material impact on the Company’s results for the years ended December 31, 2020, 2019 or 2018.
- Unaudited Quarterly Financial Data
The following tables summarize the consolidated quarterly results of operations for 2020 and 2019 (in thousands, except per share amounts):
| 2020 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||
| Net sales | $ | 1,787,021 | $ | 1,945,643 | $ | 2,295,450 | $ | 2,530,760 | ||||||||||||
| Gross margin | 465,413 | 517,332 | 570,651 | 669,188 | ||||||||||||||||
| Net income | 8,767 | 78,924 | 85,932 | 139,914 | ||||||||||||||||
| Net income per share | ||||||||||||||||||||
| Basic | $ | 0.08 | $ | 0.68 | $ | 0.74 | $ | 1.20 | ||||||||||||
| Diluted | $ | 0.07 | $ | 0.67 | $ | 0.73 | $ | 1.18 |
| 2019 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||
| Net sales | $ | 1,631,300 | $ | 1,904,523 | $ | 1,981,035 | $ | 1,763,573 | ||||||||||||
| Gross margin | 441,975 | 517,156 | 541,142 | 476,556 | ||||||||||||||||
| Net income | 35,708 | 66,604 | 78,130 | 41,367 | ||||||||||||||||
| Net income per share | ||||||||||||||||||||
| Basic | $ | 0.31 | $ | 0.58 | $ | 0.68 | $ | 0.36 | ||||||||||||
| Diluted | $ | 0.31 | $ | 0.57 | $ | 0.67 | $ | 0.35 |
Earnings per share is computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not equal the annual earnings per share.
- Subsequent Events
Business Combination
On January 1, 2021, we completed our previously announced all stock merger transaction with BMC Stock Holdings, Inc., a Delaware corporation (“BMC”), issuing approximately 89.6 million shares of common stock, pursuant to the Agreement and Plan of Merger, dated as of August 26, 2020 (as amended, restated, supplemented, or otherwise modified from time to time, the “Merger Agreement”), by and among Builders FirstSource, Inc., Boston Merger Sub I Inc., a Delaware corporation and direct wholly owned subsidiary of Builders FirstSource, Inc. (“Merger Sub”) and BMC. On the terms and subject to the conditions set forth in the Merger Agreement, on January 1, 2021, Merger Sub merged with and into BMC, with BMC continuing as the surviving corporation and a wholly owned subsidiary of the Company (the “BMC Merger”).
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.
The accounting for the BMC Merger has not been completed at the date of this filing given the proximity to the acquisition date and the ongoing assessment of the value and allocation of the purchase price to the assets acquired and liabilities assumed of BMC. The purchase price will be allocated to the net assets acquired based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill.
Debt Transactions
As discussed in Note 9, 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.
As discussed in Note 9, 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.
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