filings.toolsItem 8. Financial Statements and Supplementary Data
134K characters. Original on sec.gov · Markdown
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 sheets of Builders FirstSource, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 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, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
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 Impairment Test - West Geographic Reporting Unit
As described in Notes 2 and 5 to the consolidated financial statements, the Company’s consolidated goodwill balance was $3.5 billion as of December 31, 2022, a portion of which relates to the Company’s West geographic operating segment. The Company’s reporting units are aligned with their three geographic operating segments. 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 evaluating goodwill for impairment, 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 impairment test of the West geographic reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the West reporting unit and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumption related to expected future revenues.
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 developing the fair value estimate of the West reporting unit; evaluating the appropriateness of the discounted cash flow methodology; testing the completeness and accuracy of underlying data used in the discounted cash flow methodology; and evaluating the reasonableness of the significant assumption related to expected future revenues. Evaluating management’s significant assumption related to expected future revenues involved evaluating whether the assumption used was reasonable considering the current and past performance of the West reporting unit, relevant industry forecasts, and consistency with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 28, 2023
We have served as the Company’s auditor since 1999.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
C****ONSOLIDATED STATEMENT OF OPERATIONS
| Years Ended December 31, | ||||||||||||
| (in thousands, except per share amounts) | 2022 | 2021 | 2020 | |||||||||
| Net sales | $ | 22,726,418 | $ | 19,893,856 | $ | 8,558,874 | ||||||
| Cost of sales | 14,982,039 | 14,042,900 | 6,336,290 | |||||||||
| Gross margin | 7,744,379 | 5,850,956 | 2,222,584 | |||||||||
| Selling, general and administrative expenses | 3,974,173 | 3,463,532 | 1,678,730 | |||||||||
| Income from operations | 3,770,206 | 2,387,424 | 543,854 | |||||||||
| Interest expense, net | 198,373 | 135,877 | 135,688 | |||||||||
| Income before income taxes | 3,571,833 | 2,251,547 | 408,166 | |||||||||
| Income tax expense | 822,464 | 526,131 | 94,629 | |||||||||
| Net income | $ | 2,749,369 | $ | 1,725,416 | $ | 313,537 | ||||||
| Net income per share: | ||||||||||||
| Basic | $ | 16.98 | $ | 8.55 | $ | 2.69 | ||||||
| Diluted | $ | 16.82 | $ | 8.48 | $ | 2.66 | ||||||
| Weighted average common shares: | ||||||||||||
| Basic | 161,960 | 201,839 | 116,611 | |||||||||
| Diluted | 163,481 | 203,470 | 117,917 |
The accompanying notes are an integral part of these consolidated financial statements.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
C****ONSOLIDATED BALANCE SHEET
| (in thousands, except per share amounts) | December 31, 2022 | December 31, 2021 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 80,445 | $ | 42,603 | ||||
| Accounts receivable, less allowances of $67,980 and $39,510 at December 31, 2022 and December 31, 2021, respectively | 1,448,139 | 1,708,796 | ||||||
| Other receivables | 234,966 | 255,075 | ||||||
| Inventories, net | 1,426,196 | 1,626,244 | ||||||
| Contract assets | 183,700 | 207,587 | ||||||
| Other current assets | 124,201 | 127,964 | ||||||
| Total current assets | 3,497,647 | 3,968,269 | ||||||
| Property, plant and equipment, net | 1,567,631 | 1,385,441 | ||||||
| Operating lease right-of-use assets, net | 485,704 | 457,833 | ||||||
| Goodwill | 3,456,854 | 3,270,192 | ||||||
| Intangible assets, net | 1,550,944 | 1,603,409 | ||||||
| Other assets, net | 36,380 | 29,199 | ||||||
| Total assets | $ | 10,595,160 | $ | 10,714,343 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 803,479 | $ | 1,093,370 | ||||
| Accrued liabilities | 739,009 | 718,904 | ||||||
| Contract liabilities | 193,178 | 216,097 | ||||||
| Current portion of operating lease liabilities | 100,758 | 96,680 | ||||||
| Current maturities of long-term debt | 6,355 | 3,660 | ||||||
| Total current liabilities | 1,842,779 | 2,128,711 | ||||||
| Noncurrent portion of operating lease liabilities | 404,463 | 375,289 | ||||||
| Long-term debt, net of current maturities, discounts and issuance costs | 2,977,842 | 2,926,122 | ||||||
| Deferred income taxes | 269,660 | 362,121 | ||||||
| Other long-term liabilities | 137,850 | 119,619 | ||||||
| Total liabilities | 5,632,594 | 5,911,862 | ||||||
| Commitments and contingencies (Note 13) | ||||||||
| 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 shares authorized; 138,864 and 179,820 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively | 1,389 | 1,798 | ||||||
| Additional paid-in capital | 4,257,667 | 4,260,670 | ||||||
| Retained earnings | 703,510 | 540,013 | ||||||
| Total stockholders' equity | 4,962,566 | 4,802,481 | ||||||
| Total liabilities and stockholders' equity | $ | 10,595,160 | $ | 10,714,343 |
The accompanying notes are an integral part of these consolidated financial statements.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
C****ONSOLIDATED STATEMENT OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| (in thousands) | 2022 | 2021 | 2020 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 2,749,369 | $ | 1,725,416 | $ | 313,537 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 497,140 | 547,352 | 116,566 | |||||||||
| Amortization of debt discount, premium and issuance costs | 4,837 | 3,869 | 3,508 | |||||||||
| Loss on extinguishment of debt | 27,387 | 3,027 | 6,700 | |||||||||
| Deferred income taxes | (92,461 | ) | (34,573 | ) | 16,614 | |||||||
| Stock-based compensation expense | 31,337 | 31,486 | 17,022 | |||||||||
| Bad debt expense | 38,921 | 20,451 | 4,720 | |||||||||
| Net gain on sales of assets and asset impairments | (1,965 | ) | (32,421 | ) | (1,067 | ) | ||||||
| Changes in assets and liabilities, net of assets acquired and liabilities assumed: | ||||||||||||
| Receivables | 381,223 | (474,362 | ) | (251,632 | ) | |||||||
| Inventories | 271,889 | (282,165 | ) | (220,101 | ) | |||||||
| Contract assets | 24,051 | (103,326 | ) | (12,631 | ) | |||||||
| Other current assets | 15,173 | (33,489 | ) | (19,743 | ) | |||||||
| Other assets and liabilities | 15,189 | (1,155 | ) | 50,370 | ||||||||
| Accounts payable | (314,004 | ) | 191,885 | 160,947 | ||||||||
| Accrued liabilities | (15,766 | ) | 91,419 | 55,361 | ||||||||
| Contract liabilities | (33,089 | ) | 90,135 | 19,896 | ||||||||
| Net cash provided by operating activities | 3,599,231 | 1,743,549 | 260,067 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Cash used for acquisitions, net of cash acquired | (628,014 | ) | (1,206,471 | ) | (32,643 | ) | ||||||
| Proceeds from divestiture of business | — | 76,162 | — | |||||||||
| Purchases of property, plant and equipment | (340,152 | ) | (227,891 | ) | (112,082 | ) | ||||||
| Proceeds from sale of property, plant and equipment | 10,687 | 13,560 | 8,500 | |||||||||
| Net cash used in investing activities | (957,479 | ) | (1,344,640 | ) | (136,225 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Borrowings under revolving credit facility | 5,881,000 | 3,125,000 | 891,000 | |||||||||
| Repayments under revolving credit facility | (6,205,000 | ) | (2,612,000 | ) | (843,000 | ) | ||||||
| Proceeds from long-term debt and other loans | 1,001,500 | 1,000,000 | 895,625 | |||||||||
| Repayments of long-term debt and other loans | (616,222 | ) | (554,677 | ) | (618,542 | ) | ||||||
| Payments of debt extinguishment costs | (20,672 | ) | (4,950 | ) | (22,686 | ) | ||||||
| Payments of loan costs | (16,797 | ) | (19,450 | ) | (13,800 | ) | ||||||
| Exercise of stock options | 589 | 726 | 1,424 | |||||||||
| Repurchase of common stock | (2,628,308 | ) | (1,714,761 | ) | (4,153 | ) | ||||||
| Net cash (used in) provided by financing activities | (2,603,910 | ) | (780,112 | ) | 285,868 | |||||||
| Net change in cash and cash equivalents | 37,842 | (381,203 | ) | 409,710 | ||||||||
| Cash and cash equivalents at beginning of period | 42,603 | 423,806 | 14,096 | |||||||||
| Cash and cash equivalents at end of period | $ | 80,445 | $ | 42,603 | $ | 423,806 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 169,390 | $ | 105,570 | $ | 110,600 | ||||||
| Cash paid for income taxes | 936,424 | 633,060 | 43,400 | |||||||||
| Supplemental disclosures of non-cash activities: | ||||||||||||
| Non-cash consideration for the BMC Merger | $ | — | $ | 3,658,362 | $ | — | ||||||
| Accrued purchases of property, plant and equipment | 10,797 | 8,052 | 1,962 | |||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | 100,843 | 64,939 | 42,606 | |||||||||
| Assets acquired under finance lease obligations | — | 1,644 | 16,964 | |||||||||
| Amounts accrued for repurchases of common stock | 44,447 | 51,545 | — |
The accompanying notes are an integral part of these consolidated financial statements.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
C****ONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
| Additional | ||||||||||||||||||||
| Common Stock | Paid-in | Retained | ||||||||||||||||||
| (in thousands) | Shares | Amount | Capital | Earnings | Total | |||||||||||||||
| 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 | |||||||||||||||
| Merger consideration | 89,586 | 896 | 3,657,466 | — | 3,658,362 | |||||||||||||||
| Vesting of restricted stock units | 1,168 | 11 | (11 | ) | — | — | ||||||||||||||
| Stock-based compensation expense | — | — | 31,486 | — | 31,486 | |||||||||||||||
| Repurchase of common stock (1) | (27,459 | ) | (274 | ) | — | (1,747,777 | ) | (1,748,051 | ) | |||||||||||
| Exercise of stock options | 90 | 1 | 739 | — | 740 | |||||||||||||||
| Shares withheld for restricted stock units vested | (394 | ) | (4 | ) | (18,251 | ) | — | (18,255 | ) | |||||||||||
| Net income | — | — | — | 1,725,416 | 1,725,416 | |||||||||||||||
| Balance at December 31, 2021 | 179,820 | 1,798 | 4,260,670 | 540,013 | 4,802,481 | |||||||||||||||
| Vesting of restricted stock units | 1,329 | 13 | (13 | ) | — | — | ||||||||||||||
| Stock-based compensation expense | — | — | 31,337 | — | 31,337 | |||||||||||||||
| Repurchase of common stock (2) | (41,853 | ) | (418 | ) | — | (2,585,872 | ) | (2,586,290 | ) | |||||||||||
| Exercise of stock options | 60 | 1 | 588 | — | 589 | |||||||||||||||
| Shares withheld for restricted stock units vested | (492 | ) | (5 | ) | (34,915 | ) | — | (34,920 | ) | |||||||||||
| Net income | — | — | — | 2,749,369 | 2,749,369 | |||||||||||||||
| Balance at December 31, 2022 | 138,864 | $ | 1,389 | $ | 4,257,667 | $ | 703,510 | $ | 4,962,566 |
(1)
During the year ended December 31, 2021, we repurchased and retired 27.5 million shares of our common stock at an average price of $63.66 per share, for $1.7 billion, inclusive of fees, pursuant to the repurchase program authorized by our board of directors in August 2021, and further expanded by our board of directors in November 2021. The primary purpose of the repurchase program was to offset dilution from the BMC Merger.
(2)
During the year ended December 31, 2022, we repurchased and retired 41.9 million shares of our common stock at an average price of $61.79 per share, for $2.6 billion, inclusive of fees, pursuant to the repurchase program authorized by our board of directors in February 2021, and further expanded by our board of directors in May 2022 and November 2022. The primary purpose of the repurchase program was to offset dilution from the BMC Merger.
The accompanying notes are an integral part of these consolidated financial statements.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
N****OTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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. The company operates 569 locations in 42 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.
2. 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 credit losses, employee compensation programs, depreciation and amortization periods, income taxes, inventory values, insurance programs, goodwill, other intangible assets and long-lived assets.
Reclassifications
Certain prior periods’ amounts have been reclassified to conform to the current year presentation, including presenting bad debt expense on the face of the consolidated statement of cash flows and changing the composition of our product categories, including a decrease to four product categories. Reclassifications had no impact on net income, total assets and liabilities, stockholders’ equity, or cash flows as previously reported. As a result of these changes, prior period amounts, as disclosed in this Note 2 under Revenue Recognition, have been reclassified to conform to the current year presentation.
Segments
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, 2022, these product and service offerings are distributed across 569 locations operating in 42 states across the United States.
Given the span and depth of our geographical reach, our locations are organized into three geographical divisions (East, Central, and West), which are also our operating segments. Our operating divisions are organized on a geographical basis to facilitate a disaggregated management of the Company and to respond to the local needs of the customers in the markets we serve. All of our segments have similar customers, products and services, and distribution methods.
Due to these similarities, along with the similar economic profitability achieved across all our operating segments, we aggregate our three operating segments into one reportable segment in accordance with GAAP. 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 accounting policies of our operating segments are consistent with the accounting policies described in this Note 2 to these consolidated financial statements. Since the Company operates in one reportable segment, the primary measures reviewed by the CODM, including revenue, gross margin and income before income taxes, are shown in these consolidated financial statements. Our segments do not have any revenues or long-lived assets located in foreign countries.
Business Combinations
When they meet the requirements under ASC 805, Business Combinations, merger and acquisition transactions are accounted for using the acquisition method, and accordingly the results of operations of the acquiree are included in the Company’s consolidated financial statements from the acquisition date. The consideration transferred is allocated to the identifiable assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with any excess recorded as goodwill. Transaction-related costs are expensed in the period the costs are incurred. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill.
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.
The timing of revenue recognition, invoicing and cash collection results in accounts receivable, unbilled receivables, contract assets and contract liabilities. Contract assets include unbilled amounts when the revenue recognized exceeds the amount billed to the customer, and amounts representing a right to payment from previous performance that is conditional on something other than passage of time, such as retainage. Contract liabilities consist of customer advances and deposits, and deferred revenue.
The following table disaggregates our net sales by product category for the years ended December 31:
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Lumber & lumber sheet goods | $ | 8,088,147 | $ | 8,455,046 | $ | 3,076,376 | ||||||
| Manufactured products | 5,692,406 | 4,404,054 | 1,640,460 | |||||||||
| Windows, doors & millwork | 4,790,820 | 3,400,907 | 1,629,179 | |||||||||
| Specialty building products & services | 4,155,045 | 3,633,849 | 2,212,859 | |||||||||
| Net sales | $ | 22,726,418 | $ | 19,893,856 | $ | 8,558,874 |
Net sales from installation and construction services represents less than 10% of the Company’s net sales for each period presented.
Through December 31, 2022, 2021, and 2020, we recognized as revenue substantially all of the contract liabilities balance at December 31, 2021, 2020, and 2019, respectively.
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 receivables and income tax receivables.
Our customer mix is a balance of large national homebuilders, regional homebuilders, local and custom homebuilders and repair and remodeling contractors as well as multifamily builders. For the year ended December 31, 2022, our top 10 customers accounted for approximately 18% of our net sales, with our largest customer accounting for approximately 5% of net sales.
The allowance for credit losses 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 $17.6 million and $17.7 million at December 31, 2022 and 2021, respectively. The activity in this reserve was not significant for each year presented.
The following table shows the changes in our allowance for credit losses:
| (in thousands) | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Balance at January 1, | $ | 21,761 | $ | 5,774 | $ | 5,936 | ||||||
| Additions | 38,921 | 20,451 | 4,720 | |||||||||
| Deductions (write-offs, net of recoveries) | (10,299 | ) | (4,464 | ) | (4,882 | ) | ||||||
| Balance at December 31, | $ | 50,383 | $ | 21,761 | $ | 5,774 |
Accounts receivable consisted of the following at December 31:
| (in thousands) | ||||||||
| 2022 | 2021 | |||||||
| Accounts receivable | $ | 1,516,119 | $ | 1,748,306 | ||||
| Less: allowances for returns and credit losses | (67,980 | ) | (39,510 | ) | ||||
| Accounts receivable, net | $ | 1,448,139 | $ | 1,708,796 |
Inventories
Inventories consist principally of materials purchased for resale, including lumber and lumber sheet goods, windows, doors and millwork and other building products, as well as certain manufactured products and are stated at the lower of cost or 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. 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. Materials purchased from our largest single supplier represented approximately 8% of our total materials purchased in 2022.
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 totaled $641.8 million, $512.8 million and $347.7 million in 2022, 2021 and 2020, respectively.
Income Taxes
We account for income taxes utilizing the asset and 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, discounts and premiums incurred in connection with term debt 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 8.
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 | 7 to 10 years |
| Furniture, fixtures and information technology | 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 furniture, fixtures and information technology and generally depreciated using the straight-line method over the estimated useful lives of the assets, generally three years.
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.
Under the Leases topic of the Codification, lessees are 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 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.
We have certain lease agreements that are subject to changes based on the Consumer Price Index or another referenced index. In the event of changes to the relevant index, lease liabilities are not remeasured and incremental costs are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred.
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. The legal costs associated with these claims are included in these developed provisions. We discount our worker’s compensation, general liability, and auto liability insurance reserves based upon estimated future payment streams at our risk-free rate. Our total insurance reserve balances were $187.9 million and $171.1 million as of December 31, 2022 and 2021, respectively. Of these balances $108.7 million and $103.0 million were recorded as other long-term liabilities as of December 31, 2022 and 2021, respectively. Included in these reserve balances as of December 31, 2022 and 2021, were approximately $17.4 million and $12.6 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:
| Years Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
| Numerator: | ||||||||||||
| Net income | $ | 2,749,369 | $ | 1,725,416 | $ | 313,537 | ||||||
| Denominator: | ||||||||||||
| Weighted average shares outstanding, basic | 161,960 | 201,839 | 116,611 | |||||||||
| Dilutive effect of options and RSUs | 1,521 | 1,631 | 1,306 | |||||||||
| Weighted average shares outstanding, diluted | 163,481 | 203,470 | 117,917 | |||||||||
| Net income per share: | ||||||||||||
| Basic | $ | 16.98 | $ | 8.55 | $ | 2.69 | ||||||
| Diluted | $ | 16.82 | $ | 8.48 | $ | 2.66 | ||||||
| Antidilutive and contingent RSUs excluded from diluted EPS | 99 | 225 | 291 |
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 10. We issue new common stock shares upon exercises of stock options and vesting of restricted stock units (“RSU”). We recognize the effect of pre-vesting forfeitures in the period they actually occur.
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:
| 2022 | 2021 | 2020 | ||||||||||
| Expected volatility (company) | 53.0 | % | 51.3 | % | 40.0 | % | ||||||
| Expected volatility (peer group median) | 34.6 | % | 42.9 | % | 40.0 | % | ||||||
| Correlation between the company and peer group median | 0.6 | 0.6 | 0.5 | |||||||||
| Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
| Risk-free rate | 1.7 | % | 0.3 | % | 0.9 | % |
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, 2022 and 2021, 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 2030 notes, 4.25% 2032 notes, 6.375% 2032 notes, and Revolving facility at amortized cost. The fair values of the 2030 notes, 4.25% 2032 notes, and 6.375% 2032 notes at December 31, 2022 were approximately $489.5 million, $1,059.5 million and $659.8 million respectively, and were determined using Level 2 inputs based on market prices. The carrying amount of the Revolving facility at December 31, 2022 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 Revolving 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. Comprehensive income is equal to net income for the years ended December 31, 2022, 2021, and 2020.
Recently Issued Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers which intends to address diversity and inconsistency in the accounting related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. This standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We have elected to early adopt this guidance effective July 1, 2022, and have determined there is no material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and further amended in December 2022 by ASU No. 2022-06 which extends the sunset date. 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 optional expedients in this update are effective, as elected, beginning March 12, 2020 through December 31, 2024 and may be elected by topic. We have not elected adoption of this optional guidance and do not intend to elect this guidance before the sunset date of December 31, 2024, as there is no material impact on our consolidated financial statements.
3. Business Combinations
On April 1, 2022, we acquired certain assets and operations of Panel Truss of Longview, Inc., Panel Truss – Hearne, LLC, Case-Hill, Inc., Panel Truss-Dallas, LLC, Truss Ops Trucking, LLC and Truss Ops, LLC (the “Texas Panel Truss Businesses”), and Panel Truss – Oakwood, LLC, Panel Truss – Townville, LLC and Panel Truss – Ringgold, LLC (the “East Panel Truss Businesses”) for $89.1 million and $79.6 million, respectively. Each of the acquired businesses provides building components primarily to multifamily markets, serving such markets in Texas, Georgia and South Carolina.
On April 1, 2022, we acquired substantially all of the assets and operations of Valley Truss Co., Inc. (“Valley Truss”) for $31.6 million. Valley Truss is a manufacturer of floor and roof trusses located in Boise, Idaho.
On July 1, 2022, we acquired substantially all of the assets and operations of Odds-N-Ends, Inc., d/b/a HomCo Lumber & Hardware (“HomCo”) for $32.1 million. HomCo operates a lumberyard and hardware store business located in Flagstaff, Arizona.
On September 1, 2022, we acquired Trussway, LLC and its subsidiaries (“Trussway”) for $274.8 million, net of cash. Trussway is a manufacturer of floor and roof trusses, serving markets in Texas, Florida, Virginia, Colorado, and Georgia.
On September 1, 2022, we acquired Fulcrum Building Group Holdings, LLC and its subsidiaries (“Fulcrum”) for $122.3 million, net of cash. Fulcrum is a multibrand operator of lumberyards and millwork facilities located in Florida and Alabama.
On October 3, 2022, we acquired certain assets and the operations of Pima Door and Supply and Sunrise Carpentry (“Pima”) for $9.7 million. Pima produces and installs pre-hung doors and supplies windows, millwork, and trim in the Phoenix, Arizona area.
Each of these acquisitions was funded with a combination of cash on hand and borrowings under our Revolving credit facility. These transactions were accounted for by the acquisition method, and accordingly the results of operations have been included in the Company’s consolidated financial statements from the acquisition date. 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. Pro forma results of operations as well as net sales and income attributable to the acquisitions discussed above are not presented as these acquisitions did not have a material impact on our results of operations, individually or in the aggregate.
The following table summarizes the aggregate fair values of the assets acquired and liabilities assumed for these acquisitions during the year ended December 31, 2022:
| Total Acquisitions | ||||
| (in thousands) | ||||
| Cash and cash equivalents | $ | 9,133 | ||
| Accounts receivable | 138,044 | |||
| Other receivables | 1,247 | |||
| Inventories | 71,842 | |||
| Contract assets | 163 | |||
| Other current assets | 4,740 | |||
| Property, plant and equipment | 49,421 | |||
| Operating lease right-of-use assets | 30,326 | |||
| Goodwill | 186,662 | |||
| Intangible assets | 250,090 | |||
| Total assets | $ | 741,668 | ||
| Accounts payable | $ | 19,979 | ||
| Accrued liabilities | 30,614 | |||
| Operating lease liabilities | 30,326 | |||
| Finance lease liabilities | 2,163 | |||
| Contract liabilities | 10,169 | |||
| Total liabilities | $ | 93,251 | ||
| Total purchase consideration | $ | 648,417 | ||
| Less: accrued contingent consideration and purchase price adjustments | (11,270 | ) | ||
| Less: cash acquired | (9,133 | ) | ||
| Total cash consideration, net of cash acquired | $ | 628,014 |
On January 1, 2021, we completed our all stock merger transaction with BMC Stock Holdings, Inc., a Delaware corporation (“BMC”), 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 Builders FirstSource, Inc. (the “BMC Merger”). On January 1, 2022, we completed a legal entity reorganization pursuant to which, among other things, BMC was merged with and into Builders FirstSource, Inc., with Builders FirstSource, Inc. continuing as the surviving corporation. The BMC Merger expands the Company’s geographic reach and value-added offerings.
The BMC Merger was accounted for by the acquisition method, and accordingly the results of operations have been included in the Company’s consolidated financial statements from the acquisition date. Net sales and income before income taxes attributable to BMC were $6.5 billion and $789.5 million, respectively, for the year ended December 31, 2021. Income before income taxes attributable to BMC reflects an increase in depreciation and amortization expense related to the recording of these assets at fair value as of the acquisition date and is also impacted by changes in the business post-acquisition. The consideration transferred was allocated to the identifiable assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with the excess recorded as goodwill of $1.8 billion, which is not deductible for tax purposes. Identifiable tangible assets acquired and liabilities assumed included Current assets of $1.2 billion (including Cash and cash equivalents of $167.5 million, Accounts receivable of $428.2 million, and Inventories of $460.1 million), Property, plant and equipment of $555.2 million, Operating lease right-of-use assets of $179.1 million, Current liabilities of $526.1 million, and Other long-term liabilities (including long-term debt) of $944.1 million. The fair value of acquired intangible assets of $1.5 billion was primarily related to customer relationships which will be amortized over a useful life of approximately 12.5 years. Immediately following the BMC Merger, the Company settled certain assumed long-term debt of $359.8 million using cash on hand. We incurred transaction-related costs of $17.6 million and $22.5 million related to the BMC Merger in the years ended December 31, 2021 and 2020, respectively, which are included in selling,
general and administrative expenses in the accompanying consolidated statement of operations. The accounting for the BMC Merger is complete and no measurement period adjustments were recognized in the current period.
The consideration transferred was determined as the sum of the following: (A) the price per share of the Company’s common stock (“BFS common stock”) of $40.81 (based on the closing price per share of BFS common stock on December 31, 2020), multiplied by each of: (1) the approximately 88.7 million shares of BFS common stock issued to BMC stockholders in the BMC Merger (based on the number of shares of BMC common stock outstanding on December 31, 2020, multiplied by the exchange ratio as set forth in the Merger Agreement); and (2) the approximately 0.9 million shares of BFS common stock issued to holders of outstanding BMC restricted stock awards in connection with the BMC Merger (based on the number of BMC restricted stock awards outstanding as of December 31, 2020 (with performance-based awards vesting at target level of performance), multiplied by the exchange ratio as set forth in the Merger Agreement); plus (B) the fair value attributable to fully vested, outstanding options for BMC common stock held by current BMC employees that were assumed by the Company at the effective time and became options to purchase BFS common stock, with the number of shares and exercise price adjusted by the exchange ratio.
The following table reflects the unaudited pro forma operating results for the Company which gives effect to the BMC Merger as if it had occurred on January 1, 2020. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of future results. The pro forma financial information includes the historical results of the Company and BMC adjusted for certain items, which are described below, and does not include the effects of any synergies or cost reduction initiatives related to the BMC Merger.
| Twelve Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Net sales | $ | 19,893,856 | $ | 12,766,114 | ||||
| Net income | 1,874,632 | 240,699 |
Pro forma net income reflects the following adjustments:
Property, plant and equipment and intangible assets are assumed to be recorded at their estimated fair values as of January 1, 2020, and are depreciated or amortized over their estimated useful lives from that date.
Transaction-related expenses of $17.6 million incurred in 2021 are assumed to have occurred on January 1, 2020, and are presented as an expense during the twelve months ended December 31, 2020.
Interest expense related to certain assumed long-term debt settled in connection with the BMC Merger has been adjusted.
Cost of sales related to the sell-through of inventory stepped-up in value in connection with the BMC Merger has been adjusted and is presented as cost of sales for the year ended December 31, 2020.
All other acquisitions during the year ended December 31, 2021, resulted in total consideration transferred of $1.4 billion. The consideration transferred was allocated to the identifiable assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with the excess recorded as goodwill of $743.2 million. The fair value of acquired intangible assets was $372.1 million. The accounting for these acquisitions is complete and no measurement period adjustments were recognized in the current period. Pro forma results of operations as well as net sales and income attributable to these other acquisitions discussed are not presented as these acquisitions did not have a material impact on our results of operations, individually or in the aggregate.
4**.** Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Land and improvements | $ | 343,230 | $ | 329,354 | ||||
| Buildings and improvements | 605,042 | 565,546 | ||||||
| Machinery and equipment | 1,084,467 | 937,648 | ||||||
| Furniture, fixtures and information technology | 158,541 | 138,115 | ||||||
| Construction in progress | 206,129 | 80,500 | ||||||
| Finance lease right-of-use assets | 7,968 | 6,054 | ||||||
| Property, plant and equipment | 2,405,377 | 2,057,217 | ||||||
| Less: accumulated depreciation | 837,746 | 671,776 | ||||||
| Property, plant and equipment, net | $ | 1,567,631 | $ | 1,385,441 |
Depreciation expense was $194.6 million, $189.3 million and $94.5 million, of which $48.7 million, $43.5 million, and $20.8 million was included in cost of sales, for the years ended December 31, 2022, 2021, and 2020, 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:
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Land and improvements | $ | 108,278 | $ | 110,878 | ||||
| Buildings and improvements | 117,440 | 119,240 | ||||||
| Assets held under other finance obligations | 225,718 | 230,118 | ||||||
| Less: accumulated amortization | 27,753 | 24,309 | ||||||
| Assets held under other finance obligations, net | $ | 197,965 | $ | 205,809 |
5. Goodwill
The following table sets forth the changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2021:
| (in thousands) | ||||
| Balance as of December 31, 2020 (1) | $ | 785,305 | ||
| BMC Merger | 1,751,604 | |||
| All other acquisitions | 743,207 | |||
| Gypsum Divestiture | (9,924 | ) | ||
| Balance as of December 31, 2021 (1) | $ | 3,270,192 | ||
| Acquisitions | 186,662 | |||
| Balance as of December 31, 2022 (1) | $ | 3,456,854 |
(1) Goodwill is presented net of accumulated impairment losses of $44.6 million.
In 2022, the change in the carrying amount of goodwill is attributable to acquisitions. 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. The $186.7 million of goodwill recognized from the 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 an 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 three geographic 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 goodwill for impairment at December 31, 2022, 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 2022, 2021, and 2020.
6. Intangible Assets
The following table presents intangible assets as of December 31:
| 2022 | 2021 | |||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
| (in thousands) | ||||||||||||||||
| Customer relationships | $ | 2,029,955 | $ | (606,532 | ) | $ | 1,781,264 | $ | (328,540 | ) | ||||||
| Trade names | 201,861 | (164,797 | ) | 201,861 | (155,141 | ) | ||||||||||
| Subcontractor relationships | 5,440 | (5,440 | ) | 5,440 | (3,757 | ) | ||||||||||
| Non-compete agreements | 14,919 | (5,685 | ) | 13,519 | (3,243 | ) | ||||||||||
| Developed technology | 95,600 | (14,377 | ) | 95,600 | (3,594 | ) | ||||||||||
| Total intangible assets | $ | 2,347,775 | $ | (796,831 | ) | $ | 2,097,684 | $ | (494,275 | ) |
During the years ended December 31, 2022, 2021, and 2020, we recorded amortization expense in relation to the above-listed intangible assets of $302.6 million, $358.1 million, and $22.1 million, respectively. We recorded no intangible asset impairment charges for the years ended December 31, 2022, 2021 or 2020.
In connection with the current year acquisitions, we recorded intangible assets of $250.1 million, which includes $248.7 million of customer relationships and $1.4 million of non-compete agreements. The weighted average useful lives of the acquired intangible assets are 5.1 years in total, 5.1 years for customer relationships and 5.0 years for non-compete agreements. The fair value of acquired customer relationship intangible assets was primarily estimated by applying the multiperiod excess earnings method, which involved the use of significant estimates and assumptions primarily related to forecasted revenue growth rates, gross margin, contributory asset charges, customer attrition rates, and market-participant discount rates. These measures are 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 following table presents the estimated amortization expense for intangible assets for the years ending December 31 (in thousands):
| (in thousands) | ||||
| 2023 | $ | 325,749 | ||
| 2024 | 263,329 | |||
| 2025 | 190,795 | |||
| 2026 | 166,933 | |||
| 2027 | 146,190 | |||
| Thereafter | 457,948 | |||
| Total future net intangible amortization expense | $ | 1,550,944 |
7. Accrued Liabilities
Accrued liabilities consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| (in thousands) | ||||||||
| Accrued payroll and other employee related expenses | $ | 400,711 | $ | 385,800 | ||||
| Self-insurance reserves | 79,252 | 68,060 | ||||||
| Accrued business taxes | 77,438 | 81,055 | ||||||
| Accrued rebates payable | 51,714 | 51,805 | ||||||
| Amounts accrued for repurchases of common stock | 44,447 | 51,545 | ||||||
| Accrued interest | 34,327 | 31,666 | ||||||
| Other | 51,120 | 48,973 | ||||||
| Total accrued liabilities | $ | 739,009 | $ | 718,904 |
8. Long-Term Debt
Long-term debt consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| (in thousands) | ||||||||
| Revolving credit facility (1) | $ | 264,000 | $ | 588,000 | ||||
| 4.25% 2032 notes | 1,300,000 | 1,000,000 | ||||||
| 6.375% 2032 notes | 700,000 | — | ||||||
| 2030 notes | 550,000 | 550,000 | ||||||
| 2027 notes | — | 612,500 | ||||||
| Other finance obligations | 197,281 | 202,995 | ||||||
| Finance lease obligations | 4,105 | 3,787 | ||||||
| 3,015,386 | 2,957,282 | |||||||
| Unamortized debt discount/premium and debt issuance costs | (31,189 | ) | (27,500 | ) | ||||
| 2,984,197 | 2,929,782 | |||||||
| Less: current maturities of long-term debt | 6,355 | 3,660 | ||||||
| Long-term debt, net of current maturities, discounts and issuance costs | $ | 2,977,842 | $ | 2,926,122 |
(1) The weighted average interest rate was 3.7% and 2.8% as of December 31, 2022 and 2021, respectively.
2020 Debt Transactions
Refinancing Transactions
In February 2020, the Company completed a private offering of $550.0 million in aggregate principal amount of its 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 previous revolving credit 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.
We incurred $8.3 million of various third-party fees and expenses which were 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.
In addition, 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. 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.
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 previous revolving credit 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 recorded as a reduction to long-term debt. In addition, we incurred $5.5 million of various third-party fees and expenses, recorded as a reduction to long-term debt, which together with the discount will be amortized over the contractual life of the 2027 notes using the effective interest method.
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 recorded to interest expense.
2021 Debt Transactions
Revolving Credit Facility Amendments
On January 29, 2021, the Company amended its revolving credit 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 to extend the maturity date from November 2023 to January 2026. All other material terms of the credit facility remain unchanged from those of the previous agreement. In connection with this amendment, we expensed approximately $1.0 million of unamortized debt issuance costs related to exiting lenders to interest expense. Approximately $4.3 million of new debt issuance costs related to the amendment will be amortized over the remaining contractual life.
On December 17, 2021, the Company amended its revolving credit facility to extend the maturity by 11 months to December 17, 2026. Additionally, the amendment reduced the interest rates and commitment fee under the credit facility by 0.500% and 0.175%, respectively. All other material terms of the credit facility remained unchanged from those of the previous agreement. In connection with this amendment, we incurred approximately $1.5 million of new debt issuance costs which, together with the previous unamortized debt issuance costs, will be deferred and amortized over the remaining contractual lift.
Notes Repurchase Transactions
On March 3, 2021, pursuant to the optional call feature in the indenture governing our 2027 notes, $82.5 million of 2027 notes were redeemed at a redemption price equal to 103% of the principal amount of the notes, plus accrued and unpaid interest. In connection with this redemption, we recognized a loss on extinguishment of $3.6 million, which was recorded to interest expense in second quarter of 2021. Of this loss, approximately $2.5 million was attributable to the payment of redemption premiums on the extinguished notes and $1.1 million was attributable to the write-off of unamortized net debt discount and debt issuance costs.
On December 3, 2021, we redeemed an additional $82.5 million of 2027 notes at a redemption price equal to 103% of the principal amount of the notes, plus accrued and unpaid interest. In connection with this redemption, we recognized a loss on extinguishment of $3.5 million, which was recorded to interest expense in the fourth quarter of 2021. Of this loss, approximately $2.5 million was attributable to the payment of redemption premiums on the extinguished notes and $1.0 million was attributable to the write-off of unamortized net debt discount and debt issuance costs
Notes Offering Transaction
On July 23, 2021, the Company completed a private offering of $1.0 billion in aggregate principal amount of 4.25% 2032 notes at an issue price equal to 100% of their par value. Net proceeds from the offering were used to repay indebtedness outstanding under the Revolving facility and related transaction fees and expenses, with the remaining net proceeds used for general corporate purposes. In connection with the offering, we incurred $13.7 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 4.25% 2032 notes using the effective interest method. The 4.25% 2032 notes are discussed in more detail below.
2022 Debt Transactions
Notes Offering Transactions
On January 21, 2022, the Company completed a private offering of an additional $300.0 million in aggregate principal amount of 4.25% 2032 notes at an issue price equal to 100.50% of par value. The net proceeds from the offering were used to repay indebtedness outstanding under the Revolving facility and pay related transaction fees and expenses. The 4.25% 2032 notes issued in January 2022 form part of the same series of notes as the $1.0 billion of 4.25% 2032 notes issued in July 2021.
The additional $1.5 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 offering, we incurred approximately $4.4 million of various third-party fees and expenses which have been recorded as a reduction to long-term debt. The debt premium and third-party costs will be amortized over the contractual life of the 4.25% 2032 notes using the effective interest method.
On June 15, 2022, the Company completed a private offering of $700.0 million in aggregate principal amount of 6.375% 2032 notes at an issue price equal to 100% of par value. Subsequently, on June 16, 2022, the Company redeemed the remaining $612.5 million of 2027 notes.
In connection with the issuance of the 6.375% 2032 notes, we incurred $10.4 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 6.375% 2032 notes using the effective interest method.
The Company concluded the redemption of the 2027 notes was a debt extinguishment and recorded a loss on debt extinguishment of $27.4 million in interest expense in the second quarter of 2022. Of this loss, approximately $20.7 million was attributable to the payment of the redemption premium on the extinguished notes and $6.7 million was attributable to the write-off of unamortized debt issuance costs and debt premium.
Revolving Credit Facility Amendments
On February 4, 2022, we amended our revolving credit facility to increase the total commitments by an aggregate amount of $400.0 million, resulting in a total $1.8 billion revolving credit facility. All other material terms of the credit facility remain unchanged from those of the previous agreement. Effective with this amendment, the eurodollar rate loans and related interest rate benchmark were changed to term SOFR. The applicable margin ranges for term SOFR loans were amended to be from 1.35% to 1.60% and there are no changes to base rate loan borrowings. In connection with this amendment, we incurred approximately $2.0 million of new debt issuance costs which have been recorded as other assets and will be amortized straight-line through December 2026.
Subsequent to year-end, on January 17, 2023, the Company extended a portion of the existing $1.8 billion Revolving facility. Under this new agreement, we have a total of $1,620.0 million commitments with a maturity date of January 17, 2028 (the “2028 facility”) and $180.0 million commitments with a maturity date of December 17, 2026 (the “2026 facility”). Additionally, the amendment includes additional interest pricing tiers for the amounts under the 2028 facility, which will now range from 1.10% to 1.60% in the case of SOFR loans, and 0.00% to 0.50% in the case of base rate loans. The letters of credit under the 2028 facility will be now assessed at a rate between 1.00% to 1.50% based on the average excess availability. There were no changes to the pricing tiers related to borrowings made under the 2026 facility or letters of credit, and all other material terms of the credit facility remain unchanged from those of the previous agreement. In connection with this amendment, we incurred approximately $1.2 million of new debt issuance costs which, together with the previous unamortized debt issuance costs, will be deferred and amortized over the remaining contractual lift. The Revolving facility is discussed in more detail below.
Revolving Credit Facility
As of December 31, 2022, the Revolving facility provides for a $1.8 billion 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 Revolving 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, 2022, we had $264.0 million in outstanding borrowings under our Revolving facility and our net excess borrowing availability was $1,407.1 million after being reduced by outstanding letters of credit of approximately $128.9 million.
As of December 31, 2022, borrowings under the Revolving facility bear interest, at our option, at either the SOFR or a base rate, plus, in each case, an applicable margin. The applicable margin ranges from 1.35% to 1.60% per annum in the case of term SOFR loans and 0.25% to 0.50% per annum in the case of base rate loans. The margin in either case is based on a measure of availability under the Revolving facility. As noted above, on January 17, 2023, these margins were amended for the 2028 facility SOFR loans and base rate loans, but remain unchanged for the 2026 facility SOFR loans and base rate loans. A commitment fee, currently 0.20% per annum, is charged on the unused amount of the Revolving facility based on quarterly average loan utilization. Letters of credit under the Revolving facility are assessed at a rate equal to 1.25% or 1.50%, based on the average excess availability, 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 Revolving facility are guaranteed jointly and severally by the Company and all other subsidiaries that guarantee our 2030 notes, our 4.25% 2032 notes, and our 6.375% 2032 notes (such subsidiaries, the “Debt Guarantors”). All obligations and the guarantees of those obligations are secured by substantially all of the assets of the Company and the Debt Guarantors, subject to certain exceptions and permitted liens, including, with respect to the Revolving facility, a first-priority security interest in such assets that constitute Revolving 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 that is not ABL Collateral.
The Revolving 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 Revolving 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 $180.0 million as of December 31, 2022.
Senior Secured Notes due 2030
As of December 31, 2022, 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 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 the Debt Guarantors. Subject to certain exceptions, future subsidiaries that guarantee the Revolving facility, the 2032 notes or certain other indebtedness will also guarantee the 2030 notes.
The 2030 notes constitute senior unsecured obligations of the Company and the Debt Guarantors, pari passu in right of payment with all of the existing and future senior indebtedness of the Company, including indebtedness under the Revolving facility, and the 2032 notes. The 2030 notes are also (i) effectively subordinated to all existing and future secured indebtedness of the Company and the Debt Guarantors 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 Debt 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.
Senior Secured Notes due 2032
As described above, during 2022, the Company issued $300.0 million of 4.25% 2032 notes, which form part of the same series of notes as the $1.0 billion of 4.25% 2032 notes issued in July 2021, and $700.0 million of 6.375% 2032 notes (collectively, the “2032 notes”). The 4.25% 2032 notes mature on February 1, 2032, with interest accruing at a rate of 4.25% per annum and interest payable semi-annually on February 1 and August 1 of each year. The 6.375% 2032 notes mature on June 15, 2032, with interest accruing at a rate of 6.375% per annum and interest payable semi-annually on June 15 and December 15 of each year.
The terms of the 4.25% 2032 notes and the 6.375% 2032 notes are governed by the indentures, dated as of July 23, 2021 and June 15, 2022 (collectively the “2032 Indentures”), respectively, contain consistent terms and are among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee.
The 2032 notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior unsecured basis, by the Debt Guarantors. Subject to certain exceptions, future subsidiaries that guarantee the Revolving facility, the 2030 notes or certain other indebtedness will also guarantee the 2032 notes.
The 2032 notes constitute senior unsecured obligations of the Company and Debt Guarantors, pari passu in right of payment, with all of the existing and future senior indebtedness of the Company, including indebtedness under the Revolving facility and the 2030 notes, effectively subordinated to all existing and future secured indebtedness of the Company and the Debt Guarantors (including indebtedness under the Revolving facility and 2032 notes) to the extent of the value of the assets securing such indebtedness, senior to all of the future subordinated indebtedness of the Company and the Debt Guarantors and structurally subordinated to any existing and future indebtedness and other liabilities, including preferred stock, of the Company’s subsidiaries that do not guarantee the 2032 notes.
The 2032 Indentures contain 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.
The Company may redeem the 2032 notes within five years from the date of issuance, in whole or in part, at a redemption price equal to 100% of the principal amount of each of the 2032 notes plus the “applicable premium” set forth in the 2032 Indentures. The Company may, within three years of the date of issuance, redeem up to 40% of the aggregate principal amount of each of the 2032 notes with the net cash proceeds of one or more equity offerings at a premium of the principal amount thereof, as described in the 2032 Indentures, plus accrued and unpaid interest, if any, to the redemption date. After the five-year period from original issuance, the Company may redeem each of the 2032 notes at the redemption prices set forth in the 2032 Indentures, plus accrued and unpaid interest, if any, to the redemption date. If the Company experiences certain change of control triggering events, holders of each of the 2032 notes may require it to repurchase all or part of their notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.
As of December 31, 2022 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, 2022 were as follows:
| (in thousands) | ||||
| 2023 | $ | - | ||
| 2024 | - | |||
| 2025 | - | |||
| 2026 | 264,000 | |||
| 2027 | - | |||
| Thereafter | 2,550,000 | |||
| Total long-term debt | $ | 2,814,000 |
9. Leases and Other Finance Obligations
Right-of-use assets and lease liabilities consisted of the following as of December 31:
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Assets | ||||||||
| Operating lease right-of-use assets, net | $ | 485,704 | $ | 457,833 | ||||
| Finance lease right-of-use assets, net (included in property, plant and equipment, net) | 4,398 | 4,111 | ||||||
| Total right-of-use assets | $ | 490,102 | $ | 461,944 | ||||
| Liabilities | ||||||||
| Current | ||||||||
| Current portion of operating lease liabilities | $ | 100,758 | $ | 96,680 | ||||
| Current portion of finance lease liabilities (included in current maturities of long-term debt) | 2,122 | 1,439 | ||||||
| Noncurrent | ||||||||
| Noncurrent portion of operating lease liabilities | 404,463 | 375,289 | ||||||
| Noncurrent portion of finance lease liabilities (included in long-term debt, net of current maturities) | 1,983 | 2,348 | ||||||
| Total lease liabilities | $ | 509,326 | $ | 475,756 |
Total lease costs consisted of the following for the years ended December 31:
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Operating lease costs (1) | $ | 144,755 | $ | 133,009 | $ | 85,798 | ||||||
| Finance lease costs: | ||||||||||||
| Amortization of finance lease right-of-use assets | 1,876 | 2,166 | 6,325 | |||||||||
| Interest on finance lease liabilities | 179 | 360 | 1,424 | |||||||||
| Variable lease costs | 30,590 | 27,276 | 17,607 | |||||||||
| Total lease costs | $ | 177,400 | $ | 162,811 | $ | 111,154 |
(1) Includes short-term lease costs and sublease income which were not material for either period.
Future maturities of lease liabilities as of December 31, 2022 were as follows:
| Finance Leases | Operating Leases | |||||||
| (in thousands) | ||||||||
| 2023 | $ | 2,292 | $ | 120,633 | ||||
| 2024 | 1,278 | 107,644 | ||||||
| 2025 | 394 | 87,448 | ||||||
| 2026 | 128 | 73,368 | ||||||
| 2027 | 126 | 58,731 | ||||||
| Thereafter | 184 | 161,259 | ||||||
| Total lease payments | 4,402 | 609,083 | ||||||
| Less: amount representing interest | (297 | ) | (103,862 | ) | ||||
| Present value of lease liabilities | 4,105 | 505,221 | ||||||
| Less: current portion | (2,122 | ) | (100,758 | ) | ||||
| Long-term lease liabilities, net of current portion | $ | 1,983 | $ | 404,463 |
Weighted average lease terms and discount rates as of December 31 were as follows:
| 2022 | 2021 | |||||||
| Weighted average remaining lease term (years) | ||||||||
| Operating leases | 6.4 | 6.3 | ||||||
| Finance leases | 2.6 | 3.4 | ||||||
| Weighted average discount rate | ||||||||
| Operating leases | 5.6 | % | 5.3 | % | ||||
| Finance leases | 5.7 | % | 4.4 | % |
The following table presents cash paid for amounts included in the measurement of lease liabilities for the years ended December 31:
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
| Operating cash flows from operating leases | $ | 125,311 | $ | 118,314 | $ | 82,559 | ||||||
| Operating cash flows from finance leases | 179 | 360 | 1,424 | |||||||||
| Financing cash flows from finance leases | 1,844 | 2,709 | 13,409 |
Our lease agreements do not impose any significant restrictions or covenants on us. As of December 31, 2022, we do not have any material leases that have been signed but have not yet commenced and are not reflected on our consolidated balance sheet. Leases with related parties are not significant as of and for the years ended December 31, 2022, 2021, and 2020.
Other Finance Obligations
In addition to the operating and finance lease arrangements described above, the Company is party to 118 individual property lease agreements with a single lessor as of December 31, 2022. 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.
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, 2022, other finance obligations consist of $197.3 million, with cash payments of $23.1 million for the year ended December 31, 2022. 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, 2022 were as follows (in thousands):
| (in thousands) | ||||
| 2023 | $ | 16,407 | ||
| 2024 | 16,359 | |||
| 2025 | 16,355 | |||
| 2026 | 16,134 | |||
| 2027 | 16,073 | |||
| Thereafter | 136,525 | |||
| Total | $ | 217,853 |
10. 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, 2022, the Company had reserved 15.1 million shares of common stock for the grant of awards under the 2014 Plan, subject to adjustment as provided by the 2014 Plan. In 2020, the number of shares available under the 2014 Plan had been adjusted to allow for the assumption of options and shares granted in connection with the BMC Merger. 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, 2022, 7.5 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 RSUs with variable payout provisions, an additional 1.0 million shares would be included in the shares available for future issuance under the 2014 Plan.
Previous Incentive Plans
We were authorized to issue shares of common stock pursuant to awards granted in various forms under our 1998 Stock Incentive Plan, 2005 Equity Incentive Plan, and 2007 Incentive Plan. No further grants will be made under these plans and all remaining awards granted under these plans are fully vested and exercisable.
Stock Options
The following table summarizes our stock option activity:
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Remaining | Aggregate | ||||||||||||||
| Options | Price | Years | Intrinsic Value | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Outstanding at December 31, 2021 | 193 | $ | 9.60 | |||||||||||||
| Exercised | (60 | ) | $ | 9.86 | ||||||||||||
| Forfeited | (3 | ) | $ | 12.29 | ||||||||||||
| Outstanding at December 31, 2022 | 130 | $ | 9.41 | 2.2 | $ | 7,216 | ||||||||||
| Exercisable at December 31, 2022 | $ | 130 | $ | 9.41 | 2.2 | $ | 7,216 |
The outstanding options at December 31, 2022 include 96,000 options under the 2014 plan, 11,000 options under the 2007 Plan, 5,000 options under the 2005 Plan and 18,000 options under the 1998 Plan. As of December 31, 2022, all outstanding options under the 2014 Plan, the 2007 Plan, the 2005 Plan and the 1998 Plan were exercisable. There were no options granted during the years ended December 31, 2022, 2021 or 2020. The total intrinsic value of options exercised during the years ended December 31, 2022, 2021, and 2020 were $3.6 million, $7.0 million and $4.8 million, respectively. Vesting of all of our stock options is contingent solely on continuous employment over the requisite service period.
Restricted Stock Units
The total outstanding RSUs at December 31, 2022 include 1.7 million units granted under the 2014 Plan.
Time Based Restricted Stock Unit Grants
The Company grants RSUs to employees under our 2014 Incentive Plan for which vesting is based solely on continuous employment over the requisite service period. The following table summarizes activity for RSUs subject solely to service conditions for the year ended December 31, 2022:
| Weighted | ||||||||
| Average Grant | ||||||||
| Shares | Date Fair Value | |||||||
| (in thousands) | ||||||||
| Nonvested at December 31, 2021 | 1,283 | $ | 30.97 | |||||
| Granted | 737 | $ | 62.46 | |||||
| Vested | (669 | ) | $ | 28.77 | ||||
| Forfeited | (127 | ) | $ | 53.62 | ||||
| Nonvested at December 31, 2022 | 1,224 | $ | 48.78 |
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, 2022, 2021 and 2020 were $62.46, $47.36, and $19.54, respectively.
Performance, Market and Service Condition Based Restricted Stock Unit Grants
The Company grants RSUs to employees under our 2014 Incentive Plan, that generally vest based on the Company’s level of achievement of performance goals relating to return on invested capital over a three-year period (“performance condition”) as well as continued employment during the performance period (“service condition”). The total number of shares of common stock that may be earned from the performance condition ranges from zero to 200% of the RSUs granted. The number of shares earned from the performance condition may be further increased by 10% or decreased by 10% based on the Company’s total shareholder return relative to a peer group during the performance period (“market condition”). The following table summarizes activity for these RSUs for the year ended December 31, 2022:
| Weighted | ||||||||
| Average Grant | ||||||||
| Shares | Date Fair Value | |||||||
| (in thousands) | ||||||||
| Nonvested at December 31, 2021 | 775 | $ | 25.85 | |||||
| Granted | 163 | $ | 70.77 | |||||
| Performance & market award achievement adjustment (1) | 313 | $ | 15.04 | |||||
| Vested | (660 | ) | $ | 14.74 | ||||
| Forfeited | (98 | ) | $ | 56.80 | ||||
| Nonvested at December 31, 2022 | 493 | $ | 42.59 |
(1) Represents RSUs granted prior to 2022 for which the performance and market achievement period was completed in 2022, resulting in incremental unit awards granted. These incremental awards are also included in the amount vested in 2022.
The weighted average grant date fair value of RSUs for which vesting is subject to performance, market and service conditions granted during the years ended December 31, 2022, 2021 and 2020 were $70.77, $41.62 and $23.18, respectively.
Our results of operations include stock compensation expense of $31.3 million, $31.5 million and $17.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. We recognized excess tax benefits for stock options exercised and RSUs vested of $16.2 million, $8.7 million and $2.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. The total fair value of options vested during the years ended December 31, 2021, and 2020 were $0.1 million and $0.1 million, respectively. There were no options vested during the year ended December 31, 2022. The total fair value of RSUs vested during the years ended December 31, 2022, 2021 and 2020 were $29.0 million, $22.9 million and $11.3 million, respectively.
As of December 31, 2022, there was approximately $52.5 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.
11. Income Taxes
The components of income tax expense included in continuing operations were as follows for the years ended December 31:
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | 789,465 | $ | 475,737 | $ | 66,017 | ||||||
| State | 125,460 | 84,967 | 11,998 | |||||||||
| 914,925 | 560,704 | 78,015 | ||||||||||
| Deferred: | ||||||||||||
| Federal | (73,016 | ) | (33,803 | ) | 16,270 | |||||||
| State | (19,445 | ) | (770 | ) | 344 | |||||||
| (92,461 | ) | (34,573 | ) | 16,614 | ||||||||
| Income tax expense | $ | 822,464 | $ | 526,131 | $ | 94,629 |
Temporary differences, which give rise to deferred tax assets and liabilities, were as follows as of December 31:
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Deferred tax assets related to: | ||||||||
| Accrued expenses | $ | 33,146 | $ | 31,828 | ||||
| Insurance reserves | 33,824 | 32,080 | ||||||
| Stock-based compensation expense | 5,696 | 5,008 | ||||||
| Accounts receivable | 16,480 | 8,742 | ||||||
| Inventories | 14,965 | 10,387 | ||||||
| Operating loss and credit carryforwards | 14,221 | 18,356 | ||||||
| Operating lease liabilities | 119,232 | 113,273 | ||||||
| Other | 4,751 | 3,098 | ||||||
| 242,315 | 222,772 | |||||||
| Valuation allowance | - | (2,573 | ) | |||||
| Total deferred tax assets | 242,315 | 220,199 | ||||||
| Deferred tax liabilities related to: | ||||||||
| Prepaid expenses | (7,953 | ) | (8,960 | ) | ||||
| Goodwill and other intangible assets | (231,223 | ) | (307,165 | ) | ||||
| Property, plant and equipment | (158,173 | ) | (156,315 | ) | ||||
| Operating lease right-of-use assets | (114,626 | ) | (109,880 | ) | ||||
| Total deferred tax liabilities | (511,975 | ) | (582,320 | ) | ||||
| Net deferred tax liability | $ | (269,660 | ) | $ | (362,121 | ) |
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:
| 2022 | 2021 | 2020 | |||||||||||
| Statutory federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||
| State income taxes, net of federal income tax | 2.3 | 3.2 | 3.7 | ||||||||||
| Stock-based compensation windfall benefit | (0.5 | ) | (0.4 | ) | (0.5 | ) | |||||||
| Permanent difference - 162(m) limitation | 0.3 | 0.3 | 0.5 | ||||||||||
| Permanent difference - credits | (0.2 | ) | (0.9 | ) | (1.7 | ) | |||||||
| Permanent difference - other | 0.0 | 0.2 | 0.3 | ||||||||||
| Other | 0.1 | — | (0.1 | ) | |||||||||
| 23.0 | % | 23.4 | % | 23.2 | % |
We have $32.9 million of state net operating loss carryforwards and $0.8 million of state tax credit carryforwards expiring at various dates through 2035. We also have $58.4 million of federal net operating loss carryforwards expiring at various dates through 2034. 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 $16.3 million and $14.5 million as of December 31, 2022 and 2021, respectively, with $1.8 million, $5.3 million, and $7.2 million recorded in the Company’s consolidated statement of operations for the years ended December 31, 2022, 2021, and 2020. 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 2022, 2021 or 2020.
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 2018. We are currently under IRS audit for various aspects of our 2019 and 2020 tax years. We report income-based tax in 41 states with various years open to examination.
12. Employee Benefit Plans
We maintain active defined contribution 401(k) plans under which our employees are eligible to participate in the plan 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 $36.4 million, $30.2 million and $8.1 million in 2022, 2021 and 2020, respectively, for contributions to the plan.
We maintain one active defined benefit post-retirement plan which provides income at a defined percentage of a participant’s salary for a period after retirement. The plan is not material and is fully funded by investments segregated for the sole purpose of funding 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, 2022, 2021 and 2020 were not significant.
13. Commitments and Contingencies
As of December 31, 2022, we had outstanding letters of credit totaling $128.9 million under our Revolving 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.
14. Related Party Transactions
A member of the Company’s board of directors was an executive officer of one of our customers, Ashton Woods USA, L.L.C., during 2022. Accounts receivable due from and net sales to Ashton Woods USA, L.L.C. were approximately 1% of our total accounts receivable and our total net sales, respectively, for the year ended December 31, 2022. 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, 2022, 2021 or 2020.
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, 2022, 2021, or 2020.
15. Subsequent Events
Debt Transactions
As discussed in Note 8, on January 17, 2023, the Company amended its revolving credit facility to extend the maturity on a portion of the total commitments by 13 months to January 17, 2028, and to include additional pricing tiers for the applicable margin.
Business Combinations
On February 1, 2023, the Company acquired certain assets and the operations of Noltex for approximately $83.0 million, subject to customary and other purchase price adjustments. The accounting for this business combination has not been completed at the date of this filing given the proximity of the acquisition date.
I****tem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
I****tem 9A. Controls and Procedures
Disclosure Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”) conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report.
Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are attached as exhibits to this annual report. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation. The evaluation of our disclosure controls and procedures included a review of their objectives and design, the Company’s implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this annual report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our quarterly reports on Form 10-Q and in annual report on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis, and to maintain them as dynamic systems that change as conditions warrant.
Conclusions regarding Disclosure Controls. Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of December 31, 2022, we maintained disclosure controls and procedures that were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. 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 GAAP. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our 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 existing policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework set forth in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2022.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting. During the period covered by this report there were no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Previous: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations · Next: Item 9B. Other Information