The accompanying notes are an integral part of these condensed consolidated financial statements.
For the nine months ended September 30, 2016 and 2015 the Company retired assets subject to lease finance obligations of $34.4 million and $1.4 million and extinguished the related lease finance obligation of $39.4 million and $1.5 million, respectively.
The company purchased equipment which was financed through capital lease obligations of $8.0 million and $0.7 million in the nine months ended September 30, 2016 and 2015, respectively.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
Basis of Presentation
Builders FirstSource, Inc., a Delaware corporation formed in 1998, is a leading supplier of building materials, manufactured components and construction services to professional contractors, sub-contractors, and consumers. Following our acquisition of ProBuild Holdings LLC (“ProBuild”) in July 2015, the company operates 400 locations in 40 states across the United States. In this quarterly report, references to the “Company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries (including ProBuild as of July 31, 2015), unless otherwise stated or the context otherwise requires.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all recurring adjustments and normal accruals necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. All significant intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of December 31, 2015 is derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. This condensed consolidated balance sheet as of December 31, 2015 and the unaudited condensed consolidated financial statements included herein should be read in conjunction with the more detailed audited consolidated financial statements for the year ended December 31, 2015 included in our most recent annual report on Form 10-K. Accounting policies used in the preparation of these unaudited condensed consolidated financial statements are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in our Form 10-K.
Recent Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (“FASB”) issued an update to the existing guidance under the
Statement of Cash Flows
topic. This update
clarifies the classification of certain transactions in the statement of cash flows. This update requires application using a retrospective transition method.
This update is effective for public companies for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments in this update are adopted in the same period. We are currently evaluating the impact of this guidance on our financial statements.
In March 2016, the FASB issued an update to the existing guidance under the
Compensation-Stock Compensation
topic. This update simplifies several aspects of accounting for stock compensation including accounting for income taxes, classification of awards as liabilities or equity, forfeitures and classification on the statement of cash flows. This update is effective for public companies for annual and interim reporting periods beginning after December 15, 2016. Early adoption is permitted with adjustments reflected as of the beginning of the fiscal year of adoption. The various aspects of this guidance require prospective, retrospective, or modified retrospective application. We are currently evaluating the impact of this guidance on our financial statements.
In February 2016, the FASB issued an update to the existing guidance under
Leases
topic.
Under the new guidance, lessees will be 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. This update requires a modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements. This update is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.
We are currently evaluating the impact of this guidance on our financial statements.
In July 2015 the FASB issued an update to the existing guidance under the
Inventory
topic of the Codification. This update changes the subsequent measurement of inventory from lower of cost or market to lower of cost and net realizable value. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption of this guidance is permitted as of the beginning of an interim or annual reporting period. This guidance requires prospective application. We do not expect the adoption of this guidance to have an impact on our financial statements.
In August 2014, the FASB issued an update to the existing guidance under the
Presentation of Financial Statements
topic
of the Codification. This update requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year of the date the financial statements
6
are issued and to provide related disclosures, if required. This new guidance is effective for the annu
al period ending after December
15, 2016, and for annual and interim perio
ds thereafter. Early adoption is permitted, but not required.
We do not expect the adoption of this guidance to have an impact on our financial statements
.
In May 2014, the FASB issued an update to the existing guidance under the
Revenue Recognition
topic of the Codification which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new guidance was originally effective for annual reporting periods beginning after December 15, 2016. However, in July 2015 the FASB approved an optional one year deferral of the effective date to annual reporting periods beginning after December 15, 2017. As such, this guidance will be effective for us beginning on January 1, 2018. Early adoption is permitted; however, this guidance cannot be adopted earlier than the original effective date. This guidance allows either full retrospective or modified retrospective methods of adoption. Subsequent to issuance of the original update the FASB issued several updates amending this new guidance. In April 2016, the FASB issued an update clarifying issues related to identifying performance obligations and licensing. In May 2016, the FASB issued an update regarding the assessment of collectability criteria, presentation of sales taxes, measurement of noncash consideration and transition guidance for completed contracts and contract modifications. While we are still evaluating the impact of these updates on our financial statements, we anticipate this guidance will primarily impact our contracts with service elements and certain classifications within the statement of operations.
2.
Acquisitions
ProBuild Acquisition
On July 31, 2015, we acquired all of the operating affiliates of ProBuild through the purchase of all issued and outstanding equity interests of ProBuild for $1.63 billion in cash, subject to certain adjustments. The purchase price was funded by the net proceeds received from concurrent financing transactions. Previously headquartered in Denver, Colorado, ProBuild is one of the nation’s largest professional building materials suppliers. As a result of the ProBuild acquisition, the Company has a greater diversification of products and services and a significantly expanded geographic footprint.
The ProBuild acquisition was accounted for by the acquisition method, and accordingly the results of operations were included in the Company’s consolidated financial statements from the acquisition date. The purchase price was allocated to the assets acquired based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill. All final purchase accounting adjustments related to this acquisition, which primarily reflect the final purchase price allocations and other revisions to the methodology and assumptions associated with the intangible asset valuations, have been recorded as of December 31, 2015. The fair value of acquired intangible assets of $184.5 million, primarily related to tradenames, customer relationships and lease contract intangibles, was estimated by applying an income approach. That measure is based on significant Level 3 inputs not observable in the market. Key assumptions developed based on the Company’s historical experience, future projections and comparable market data include future cash flows, long-term growth rates, royalty rates, attrition rates and discount rates.
We incurred $8.8 million and $20.3 million in costs related to the acquisition of ProBuild during the three and nine months ended September 30, 2015, respectively. These costs include due diligence costs and transaction costs to complete the acquisition, and were recognized in selling, general and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2015. We did not incur any acquisition costs related to ProBuild during the three and nine months ended September 30, 2016.
7
The following table summarizes the aggregate fair values of the assets acquired and liabilities assumed at the acquisition date for ProBuild, net of cash (in thousands):
|
|
|
|
Accounts receivable
|
$
|
470,105
|
|
Other receivables
|
|
34,718
|
|
Inventory
|
|
411,160
|
|
Other current assets
|
|
12,101
|
|
Property, plant and equipment
|
|
658,540
|
|
Assets held for sale
|
|
10,911
|
|
Goodwill
|
|
602,690
|
|
Intangible assets
|
|
184,509
|
|
Other assets
|
|
2,016
|
|
Total assets acquired
|
|
2,386,750
|
|
Checks outstanding
|
|
(32,378
|
)
|
Current maturities of long term debt and lease obligations
|
|
(25,456
|
)
|
Accounts payable
|
|
(339,673
|
)
|
Accrued liabilities
|
|
(210,436
|
)
|
Other long-term liabilities
|
|
(53,703
|
)
|
Long-term debt and lease obligations, net of current maturities
|
|
(262,390
|
)
|
Total liabilities assumed
|
|
(924,036
|
)
|
Total net assets acquired
|
$
|
1,462,714
|
|
All of the goodwill and intangible assets recognized from the ProBuild acquisitions are expected to be deductible for tax purposes, with the goodwill recognized from these acquisitions being amortized ratably over a 15 year period. The ProBuild acquisition was treated as an asset purchase for tax purposes.
The operating results of this acquisition have been included in the consolidated statements of operations and comprehensive income (loss) from the acquisition date through September 30, 2016. For the three months ended September 30, 2016, net sales and net income attributable to ProBuild were approximately $1,256.9 million and $69.3 million, respectively. For the nine months ended September 30, 2016, net sales and net income attributable to ProBuild were approximately $3,429.0 million and $131.4 million, respectively. Net sales and net income attributable to ProBuild were $811.9 million and $24.8 million, respectively, for the period of August 1, 2015 through September 30, 2015. Net income attributable to ProBuild does not include an allocation of the additional interest expense incurred by the Company as a result of the ProBuild acquisition financing transactions.
The following table reflects the unaudited pro forma operating results for the Company for the three and nine months ended September 30, 2015 which gives effect to the acquisition of ProBuild as if it had occurred on January 1, 2014. 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 ProBuild adjusted for certain items, which are described below, and does not include the effects of any synergies or cost reduction initiatives related to the acquisition of ProBuild.
|
Three Months
Ended
September 30, 2015
|
|
|
Nine Months Ended
September 30, 2015
|
|
(Unaudited pro-forma)
(in thousands, except per share amounts)
|
Net sales
|
$
|
1,698,971
|
|
|
$
|
4,610,937
|
Net income (loss)
|
$
|
22,449
|
|
|
$
|
(84)
|
Basic net income (loss) per share
|
$
|
0.21
|
|
|
$
|
(0.00)
|
Diluted net income (loss) per share
|
$
|
0.20
|
|
|
$
|
(0.00)
|
Pro forma net income (loss) for the three and nine months ended September 30, 2015 reflects adjustments primarily related to depreciation and amortization, the conversion from last-in, first-out to first-in, first out inventory valuation, and interest expense. Pro forma net income (loss) was adjusted to exclude transaction-related expenses of $33.3 million ($22.8 million incurred by the Company and $10.5 million incurred by ProBuild) and $46.7 million ($34.4 million incurred by the Company and $12.3 million incurred by ProBuild) in the three and nine months ended September 30, 2015, respectively.
8
Alaska Truss Acquisition
On May 13, 2016 the Company acquired certain assets and the operations of Alaska Truss Manufacturing, LLC and ATM, LLC (collectively “Alaska Truss”) for cash of $4.0 million and $1.0 million of other consideration, subject to certain adjustments. Of the total consideration, $3.4 million was allocated to tangible assets acquired, primarily property, plant and equipment, $0.8 million was allocated to intangible assets and $0.8 million was allocated to goodwill.
Based in Chugiak, Alaska, Alaska Truss supplies roof trusses to both residential and commercial contractors throughout the greater Anchorage area. Acquisition costs related to Alaska Truss were not material in the three or nine months ended September 30, 2016. Pro forma results of operations are not presented as this acquisition is not material.
3.
Net Income (Loss) per Common Share
Net income (loss) per common share (“EPS”) is calculated in accordance with the
Earnings per Share
topic of the FASB Accounting Standards Codification (“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.
Our restricted stock shares include rights to receive dividends that are not subject to the risk of forfeiture even if the underlying restricted stock shares on which the dividends were paid do not vest. In accordance with the
Earnings per Share
topic of the Codification, unvested share-based payment awards that contain non-forfeitable rights to dividends are deemed participating securities and should be considered in the calculation of basic EPS. Since the restricted stock shares do not include an obligation to share in losses, they will be included in our basic EPS calculation in periods of net income and excluded from our basic EPS calculation in periods of net loss. Accordingly, there were 13,000 restricted stock shares excluded from our calculation of basic EPS for the three and nine months ended September 30, 2015 as we generated a net loss. There were no outstanding restricted stock shares as of September 30, 2016.
For the purpose of computing diluted EPS, weighted average shares outstanding have been adjusted for common shares underlying 3.5 million options and 2.1 million restricted stock units (“RSUs”) for the three months and nine months ended September 30, 2016. There were no outstanding warrants as of September 30, 2016 as all of the remaining stock warrants were exercised in the second quarter of 2015.
For the purpose of computing diluted EPS, options to purchase 5.5 million shares of common stock and 1.5 million RSUs were not included in the computations of diluted EPS for the three and nine months ended September 30, 2015 because their effect was anti-dilutive. Incremental shares attributable to average warrants outstanding during the nine months ended September 30, 2015 were not included in the computation of diluted EPS for the nine months ended September 30, 2015 as their effect was anti-dilutive.
The table below presents a reconciliation of weighted average common shares used in the calculation of basic and diluted EPS (in thousands):
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average shares for basic EPS
|
|
111,187
|
|
|
|
105,856
|
|
|
|
110,487
|
|
|
|
101,096
|
|
Dilutive effect of options and RSUs
|
|
3,086
|
|
|
|
—
|
|
|
|
2,906
|
|
|
|
—
|
|
Weighted average shares for diluted EPS
|
|
114,273
|
|
|
|
105,856
|
|
|
|
113,393
|
|
|
|
101,096
|
|
9
4.
Debt
Long-term debt and lease obligations consisted of the following (in thousands):
|
September 30,
2016
|
|
|
December 31,
2015
|
|
2021 notes
|
$
|
—
|
|
|
$
|
350,000
|
|
2023 notes
|
|
417,608
|
|
|
|
700,000
|
|
2024 notes
|
|
750,000
|
|
|
|
—
|
|
2015 facility
|
|
89,000
|
|
|
|
60,000
|
|
2015 term loan
|
|
468,825
|
|
|
|
598,625
|
|
Lease finance obligations
|
|
241,364
|
|
|
|
280,909
|
|
Capital lease obligations
|
|
8,246
|
|
|
|
8,159
|
|
|
|
1,975,043
|
|
|
|
1,997,693
|
|
Unamortized debt discount and debt issuance costs
|
|
(31,241
|
)
|
|
|
(46,022
|
)
|
|
|
1,943,802
|
|
|
|
1,951,671
|
|
Less: current maturities of long-term debt and lease obligations
|
|
18,985
|
|
|
|
29,153
|
|
Long-term debt and lease obligations, net of current maturities
|
$
|
1,924,817
|
|
|
$
|
1,922,518
|
|
2016 Debt Transactions
During the nine months ended September 30, 2016, the Company executed several debt transactions which are described in more detail below. These transactions include two debt exchanges, complete extinguishment of our 7.625% senior secured notes due 2021 (“2021 notes”), as well as repricing and partially repaying our $600.0 million term loan facility due 2022 (“2015 term loan”). These transactions have extended our debt maturity profile and reduced our annual cash interest on a go forward basis.
Note Exchange Transactions
On February 12, 2016, we completed separate privately negotiated note exchange transactions in which $218.6 million in aggregate principal amount of our 10.75% senior unsecured notes due 2023 (“2023 notes”) was exchanged for $207.6 million in aggregate principal amount of our previously outstanding 2021 notes. On February 29, 2016, we completed additional separate privately negotiated note exchange transactions in which $63.8 million in aggregate principal amount of our 2023 notes was exchanged for $60.0 million in aggregate principal amount of our previously outstanding 2021 notes.
The note exchange transactions were considered to be debt extinguishments. As such, we recognized a net gain of $7.8 million which was recorded as an offset to interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2016. Of this $7.8 million gain, $14.8 million was attributable to the reduction in outstanding principal which was partially offset by the write-off of $7.0 million of unamortized debt issuance costs associated with the 2023 notes which were extinguished in the exchange transactions.
In connection with issuance of the 2021 notes in the exchange transactions, we incurred $4.9 million of various third-party fees and expenses. These costs were previously recorded as a reduction to long-term debt and were subsequently written off to interest expense in the third quarter of 2016 in connection with the extinguishment of the 2021 notes as described in the “2016 Refinancing Transactions” section below.
Note Redemption Transaction
In May 2016, the Company exercised its contractual right to redeem $35.0 million in aggregate principal amount of 2021 notes at a price of 103.0%, plus accrued and unpaid interest. The redemption transaction was considered to be a debt extinguishment. As such, we recognized a loss of $1.7 million which was recorded as a component of interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2016. Of this $1.7 million loss,
$1.0 million was attributable to the payment of the redemption premium and $0.7 million was attributable to the write-off of unamortized debt issuance costs associated with the redeemed notes.
2016 Refinancing Transactions
In August 2016, we completed a private offering of $750.0 million in aggregate principal amount of 5.625% senior secured notes due 2024 (“2024 notes”) at an issue price equal to 100% of their face value. At the same time the Company also repriced its 2015 term loan. This repricing lowered the applicable margin to 3.75% in the case of Eurodollar loans and 2.75% in the case of base
10
rate loans. This reduction represents a 1.25% decrease in the applicable margin for both Eurodollar and base rate loans. In connection with the repricing, the mandatory quarterly principal repayments were reduced from $1.375 million to $
1.175 million. All other material terms of the 2015 term loan remain unchanged.
The proceeds from the issuance of the 2024 notes were used, together with cash on hand and borrowings on the $800.0 million senior secured revolving credit facility due 2020 (“2015 facility”), to fully redeem the $582.6 million in aggregate outstanding principal amount of 2021 notes, to pay down $125.9 million of the 2015 term loan and to pay related transaction fees and expenses.
The redemption of the 2021 notes was considered to be a debt extinguishment. As such, we recognized a loss of $43.9 million which was recorded as a component of interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2016. Of this $43.9 million loss,
$33.3 million was attributable to the payment of the redemption premium and $10.6 million was attributable to the write-off of unamortized debt issuance costs associated with the redeemed notes. In addition, in connection with the repricing and pay down of the 2015 term loan we recognized $8.2 million in interest expense in the third quarter of 2016 related to the write-off of unamortized debt discount and debt issuance costs.
In connection with the issuance of the 2024 notes and the 2015 term loan repricing, we incurred approximately $12.0 million of various third-party fees and expenses. Of these costs $10.5 million were allocated to the 2024 notes and have been recorded as a reduction to long-term debt. These costs will be amortized over the contractual life of the 2024 notes using the effective interest method. The remaining $1.5 million in costs incurred were allocated to the 2015 term loan. Of this $1.5 million, $1.2 million was recorded to interest expense in the third quarter of 2016. The remaining $0.3 million of new third-party costs together with $10.9 million in remaining unamortized debt discount and debt issuance costs have been recorded as a reduction of long-term debt and will be amortized over the remaining contractual life of the 2015 term loan using the effective interest method.
Senior Secured Notes due 2024
As of September 30, 2016 we have $750.0 million outstanding in aggregate principal amount of the 2024 notes which mature on September 1, 2024. Interest accrues on the 2024 notes at a rate of 5.625% per annum and is payable semi-annually on March 1 and September 1 of each year, commencing on March 1, 2017.
The terms of the 2024 notes are governed by the indenture, dated as of August 22, 2016 (the “Indenture”), among the Company, the guarantors named therein (the “Guarantors”) and Wilmington Trust, National Association, as trustee (the “Trustee”) and notes collateral agent (the “Notes Collateral Agent”). The 2024 notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior secured basis, by certain of our direct and indirect wholly owned subsidiaries. All obligations under the 2024 notes, and the guarantees of those obligations, will be secured by substantially all of the assets of the Company and the Guarantors subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute Notes Collateral (as defined below) and a second-priority security interest in such assets that constitute ABL Collateral (as defined below).
“ABL Collateral” includes substantially all presently owned and after-acquired accounts, inventory, rights of an unpaid vendor with respect to inventory, deposit accounts, investment property, cash and cash equivalents, and instruments and chattel paper and general intangibles, books and records and documents related to and proceeds of each of the foregoing. “Notes Collateral” includes all collateral which is not ABL Collateral.
The ABL/Bond Intercreditor Agreement, dated as of May 29, 2013, among SunTrust Bank, as agent under the Company’s 2015 facility, the Wilmington Trust, National Association, the Company and the Guarantors, and the Pari Passu Intercreditor Agreement, dated as of July 31, 2015, among Deutsche Bank AG New York Branch, as term collateral agent under the Company’s 2015 term loan, Wilmington Trust, National Association, the Company and the Guarantors, in each case will be joined by the Notes Collateral Agent and together will govern all arrangements in respect of the priority of the security interests in the ABL Collateral and the Notes Collateral among the parties to the Indenture, the 2015 facility and the 2015 term loan. The 2024 notes constitute senior secured obligations of the Company and Guarantors, rank senior in right of payment to all future debt of the Company and Guarantors that is expressly subordinated in right of payment to the 2024 notes, and rank equally in right of payment with all existing and future liabilities of the Company and Guarantors that are not so subordinated, including the 2015 facility.
The 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 September 1, 2019, the Company may redeem the 2024 notes in whole or in part at a redemption price equal to 100% of the principal amount of the 2024 notes plus the “applicable premium” set forth in the Indenture. At any time on or
11
after September 1, 2019, the Company may redeem the 2024 notes at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to the redemption date. At any time and from time to time
during the 36-month period following August 22, 2016 (“the Closing Date”), the Company may redeem up to 10% of the aggregate principal amount of the 2024 notes during each twelve-month period commencing on the Closing Date at a redemption price of 103% of
the aggregate principal amount thereof plus accrued and unpaid interest to the redemption date. In addition, at any time prior to September 1, 2019, the Company may redeem up to 40% of the aggregate principal amount of the 2024 notes with the net cash proc
eeds of one or more equity offerings, as described in the Indenture, at a price equal to 105.625% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. If the Company experiences certain change of control events
, holders of the 2024 notes may require it to repurchase all or part of their 2024 notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.
2015 Facility Borrowings
As of September 30, 2016, we have $89.0 million in borrowings outstanding under our $800.0 million senior secured revolving credit facility (“2015 facility”). During the first nine months of 2016, we borrowed $707.0 million, primarily related to the transactions described above, and repaid $678.0 million at a weighted average interest rate of 2.5%.
2015 Term Loan
As of September 30, 2016, we have $468.8 million in borrowings outstanding under our 2015 facility term loan at a weighted average interest rate of 5.9%. During the first nine months of 2016 we repaid $129.8 million of the 2015 term loan.
We were not in violation of any covenants or restrictions imposed by any of our debt agreements at September 30, 2016.
Fair Value
As of September 30, 2016 and December 31, 2015 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 2023 notes, 2024 notes, and 2015 term loan at amortized cost. The fair values of the 2023 notes, the 2024 notes and the 2015 term loan at September 30, 2016 were approximately $541.2 million, $772.5 million and $471.2 million, respectively, and were determined using Level 2 inputs based on market prices.
12
5.
Employee Stock-Based Compensation
Time Based Restricted Stock Unit Grants
In the first quarter of 2016, our board of directors granted 625,000 RSUs to employees and eligible directors under our 2007 and 2014 Incentive Plans for which vesting is based on continuous employment over the requisite service period. 530,000 of the RSUs vest at 33% per year at each anniversary of the grant date over the next three years, 63,000 RSUs vest at 25% per year at each anniversary of the grant date over the next four years and 32,000 RSUs vest 100% at the first anniversary of the grant date. The weighted average grant date fair value for these RSUs was $10.52 per share, which was based on the closing stock price on the grant dates.
Performance and Service Condition Based Restricted Stock Unit Grants
In the first quarter of 2016, our board of directors granted 265,000 RSUs to employees under our 2014 Incentive Plan, which vest if the compound annual growth rate of the Company’s total sales in 2018 over 2015 exceeds a composite annual growth rate based on single-family housing starts, multi-family housing starts, and growth in repair and remodeling sales over the same period. Assuming continued employment and if the performance vesting condition is achieved, these awards will cliff vest on the third anniversary of the grant date. The weighted average grant date fair value for these RSUs was $10.96 per share, which was based on the closing stock price on the grant dates.
Market and Service Condition Based Restricted Stock Unit Grants
In the first quarter of 2016, our board of directors granted 265,000 RSUs to employees under our 2014 Incentive Plan for which vesting is contingent upon the Company’s total shareholder return exceeding that of the Company’s peer group over a three year measurement period. Assuming continued employment and if the market vesting condition is met, these awards will cliff vest on the third anniversary of the grant date. The weighted average grant date fair value for these RSUs was $7.58 per share, which was determined using the Monte Carlo simulation model using the following weighted average assumptions:
Expected volatility (company)
|
53.6%
|
|
Expected volatility (peer group median)
|
17.3%
|
|
Correlation between the company and peer group median
|
0.47
|
|
Expected dividend yield
|
0.00%
|
|
Risk-free rate
|
1.29%
|
|
The expected volatilities are based on the historical volatilities 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.
Stock Option Grant
In the first quarter of 2016, our board of directors granted 63,000 stock options to employees under our 2014 Incentive Plan. All the awards vest at 25% per year at each anniversary of the grant date over four years. The exercise price for the options was $6.59 per share, which was the closing stock price on the grant date. The weighted average grant date fair value of the options was $3.71 and was determined using the Black-Scholes option-pricing model with the following weighted average assumptions:
Expected life
|
6.0 years
|
|
Expected volatility
|
60.88%
|
|
Expected dividend yield
|
0.00%
|
|
Risk-free rate
|
1.41%
|
|
The expected life represents the period of time the options are expected to be outstanding. We used the simplified method for determining the expected life assumption due to limited historical exercise experience on our stock options. The expected volatility is based on the historical volatility of our common stock over the most recent period equal to the expected life of the option. 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 expected life of the options.
13
6.
Income Taxes
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 carryback or carryforward periods. We consider nature, frequency, and severity of current and cumulative losses, as well as historical and forecasted financial results, the overall business environment, our industry's historic cyclicality, the reversal of existing deferred tax liabilities, and tax planning strategies in our assessment. 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 recorded a full valuation allowance in 2008 due to our cumulative three year loss position at that time, compounded by the negative industry-wide business trends and outlook. At December 31, 2015, we reported a valuation allowance of $136.5 million against our deferred income tax assets, representing a full valuation allowance against our net deferred income tax assets. Historically weak housing market conditions have contributed to our cumulative loss position for the past several years. In the second quarter of 2016, we moved from a cumulative loss position over the previous three years to a cumulative income position for the first time since we established the full valuation allowance in 2008. Absent the effect of the Company’s debt refinance transaction, we continued that trend of profitability in the third quarter of 2016. With this positive historical evidence and the projection of future profitability resulting in taxable income, management determined that there was sufficient positive evidence to conclude that it is more likely than not that the valuation allowance should be released against our net federal and some state deferred tax assets, resulting in $128.6 million benefit being recognized in our provision for income taxes for the nine months ended September 30, 2016.
As of September 30, 2016, we have certain states where we are not currently projecting future taxable income levels that would be sufficient to utilize the carryover net operating losses and as such continue to maintain a partial valuation allowance against certain of these state deferred tax assets. We will continue to evaluate our projections of future taxable income related to these states to assess whether it is more likely than not that some or all of these state deferred tax assets will realizable in the future.
We recorded reductions to the valuation allowance of $117.6 million and $128.6 million for the three and nine months ended September 30, 2016, respectively against our net deferred tax assets as we released valuation allowances on our net deferred tax assets as noted above. We recorded net increases to the valuation allowance of $1.1 million and $2.9 million for the three and nine months ended September 30, 2015 against our net deferred tax assets as we generated net operating losses during those periods. Our effective tax rate was 2,179.7% and (810.9%) for the three and nine months ended September 30, 2016, respectively. Our effective tax rate was (12.8%) and (8.7%) for the three and nine months ended September 30, 2015, respectively. We have calculated the provision for income taxes during the third quarter interim reporting period by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. We used a discrete effective tax rate method to calculate income tax expense for the first two quarters of 2016.
Section 382 of the Internal Revenue Code imposes annual limitations on the utilization of net operating loss (“NOL”) carryforwards, other tax carryforwards, and certain built-in losses upon an ownership change as defined under that section. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in the Company’s stock by more than 50 percentage points over a three year testing period (“Section 382 Ownership Change”). If the Company were to experience a Section 382 Ownership Change, an annual limitation would be imposed on certain of the Company’s tax attributes, including NOL and capital loss carryforwards, and certain other losses, credits, deductions or tax basis.
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.
Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position.
14
7.
Commitments and Contingencies
We are a party to various legal proceedings in the ordinary course of business. Although the ultimate disposition of these proceedings cannot be predicted with certainty, management believes the outcome of any claim that is 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 costs related to legal proceedings would not be material to our results of operations or liquidity for a particular period.
8.
Segment and Product Information
We offer an integrated solution to our customers providing manufacturing, supply, and installation of a full range of structural and related building products. We provide a wide variety of building products and services directly to homebuilder customers. We manufacture floor trusses, roof trusses, wall panels, stairs, millwork, windows, and doors. We also provide a full range of construction services. These product and service offerings are distributed across approximately 400 locations operating in 40 states across the United States, which were reorganized into nine geographical regions following the ProBuild acquisition. Centralized financial and operational oversight, including resource allocation and assessment of performance on an income (loss) before income taxes basis, is performed by our CEO, whom we have determined to be our chief operating decision maker (“CODM”).
As a result of the reorganization following the ProBuild acquisition, the Company has nine operating segments aligned with its nine geographical regions (Regions 1 through 9). While all of our operating segments have products, distribution methods and customers of a similar nature, certain of our operating segments have been aggregated due to also containing similar economic characteristics, resulting in the following composition of reportable segments:
|
•
|
Regions 1 and 2 have been aggregated to form the “Northeast” reportable segment
|
|
•
|
Regions 3 and 5 have been aggregated to form the “Southeast” reportable segment
|
|
•
|
Regions 4 and 6 have been aggregated to form the “South” reportable segment
|
|
•
|
Region 7, 8 and 9 have been aggregated to form the “West” reportable segment, which was acquired entirely through the ProBuild acquisition.
|
In addition to our reportable segments, our consolidated results include corporate overhead, other various operating activities that are not internally allocated to a geographical region nor separately reported to the CODM, and certain reconciling items primarily related to allocations of corporate overhead and rent expense, which have collectively been presented as “All Other”. The accounting policies of the segments are consistent with those referenced in Note 1, except for noted reconciling items.
15
The
following tables present Net sales, income (loss) before income taxes and certain other measures for the reportable segments, reconciled to consolidated total continuing operations, for the periods indicated (in thousands):
|
|
Three months ended September 30, 2016
|
|
Reportable segments
|
|
Net Sales
|
|
|
Depreciation & Amortization
|
|
|
Interest
|
|
|
Income (loss)
before income
taxes
|
|
Northeast
|
|
$
|
328,529
|
|
|
$
|
4,009
|
|
|
$
|
5,058
|
|
|
$
|
10,611
|
|
Southeast
|
|
|
356,856
|
|
|
|
2,665
|
|
|
|
5,456
|
|
|
|
9,194
|
|
South
|
|
|
456,239
|
|
|
|
5,174
|
|
|
|
5,925
|
|
|
|
19,629
|
|
West
|
|
|
564,728
|
|
|
|
7,790
|
|
|
|
7,185
|
|
|
|
30,840
|
|
Total reportable segments
|
|
|
1,706,352
|
|
|
|
19,638
|
|
|
|
23,624
|
|
|
|
70,274
|
|
All other
|
|
|
39,606
|
|
|
|
5,914
|
|
|
|
68,666
|
|
|
|
(76,307
|
)
|
Total consolidated
|
|
$
|
1,745,958
|
|
|
$
|
25,552
|
|
|
$
|
92,290
|
|
|
$
|
(6,033
|
)
|
|
|
Nine months ended September 30, 2016
|
|
Reportable segments
|
|
Net Sales
|
|
|
Depreciation & Amortization
|
|
|
Interest
|
|
|
Income (loss)
before income
taxes
|
|
Northeast
|
|
$
|
912,314
|
|
|
$
|
14,897
|
|
|
$
|
13,817
|
|
|
$
|
25,693
|
|
Southeast
|
|
|
1,032,930
|
|
|
|
9,079
|
|
|
|
14,703
|
|
|
|
26,680
|
|
South
|
|
|
1,296,461
|
|
|
|
17,320
|
|
|
|
16,886
|
|
|
|
53,610
|
|
West
|
|
|
1,474,524
|
|
|
|
27,308
|
|
|
|
20,422
|
|
|
|
57,837
|
|
Total reportable segments
|
|
|
4,716,229
|
|
|
|
68,604
|
|
|
|
65,828
|
|
|
|
163,820
|
|
All other
|
|
|
104,143
|
|
|
|
18,297
|
|
|
|
104,488
|
|
|
|
(148,678
|
)
|
Total consolidated
|
|
$
|
4,820,372
|
|
|
$
|
86,901
|
|
|
$
|
170,316
|
|
|
$
|
15,142
|
|
|
|
Three months ended September 30, 2015
|
|
Reportable segments
|
|
Net Sales
|
|
|
Depreciation & Amortization
|
|
|
Interest
|
|
|
Income (loss)
before income
taxes
|
|
Northeast
|
|
$
|
236,757
|
|
|
$
|
1,455
|
|
|
$
|
2,580
|
|
|
$
|
13,543
|
|
Southeast
|
|
|
290,407
|
|
|
|
1,635
|
|
|
|
4,187
|
|
|
|
7,454
|
|
South
|
|
|
360,138
|
|
|
|
4,062
|
|
|
|
3,917
|
|
|
|
17,084
|
|
West
|
|
|
352,496
|
|
|
|
2,285
|
|
|
|
2,551
|
|
|
|
21,247
|
|
Total reportable segments
|
|
|
1,239,798
|
|
|
|
9,437
|
|
|
|
13,235
|
|
|
|
59,328
|
|
All other
|
|
|
36,265
|
|
|
|
14,416
|
|
|
|
32,770
|
|
|
|
(67,092
|
)
|
Total consolidated
|
|
$
|
1,276,063
|
|
|
$
|
23,853
|
|
|
$
|
46,005
|
|
|
$
|
(7,764
|
)
|
|
|
Nine months ended September 30, 2015
|
|
Reportable segments
|
|
Net Sales
|
|
|
Depreciation & Amortization
|
|
|
Interest
|
|
|
Income (loss)
before income
taxes
|
|
Northeast
|
|
$
|
348,666
|
|
|
$
|
1,981
|
|
|
$
|
4,289
|
|
|
$
|
17,179
|
|
Southeast
|
|
|
631,401
|
|
|
|
3,108
|
|
|
|
10,433
|
|
|
|
10,837
|
|
South
|
|
|
682,094
|
|
|
|
7,148
|
|
|
|
8,751
|
|
|
|
24,307
|
|
West
|
|
|
352,496
|
|
|
|
2,285
|
|
|
|
2,550
|
|
|
|
21,246
|
|
Total reportable segments
|
|
|
2,014,657
|
|
|
|
14,522
|
|
|
|
26,023
|
|
|
|
73,569
|
|
All other
|
|
|
93,913
|
|
|
|
16,113
|
|
|
|
40,162
|
|
|
|
(84,830
|
)
|
Total consolidated
|
|
$
|
2,108,570
|
|
|
$
|
30,635
|
|
|
$
|
66,185
|
|
|
$
|
(11,261
|
)
|
16
Asset information by segment is not reported internally or otherwise reviewed by the CODM nor does the Company earn revenues or have long-lived assets located in foreign countries. The Company’s ne
t sales by product category for the periods indicated were as follows (in thousands):
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Lumber & lumber sheet goods
|
$
|
588,354
|
|
|
$
|
407,642
|
|
|
$
|
1,604,575
|
|
|
$
|
662,250
|
|
Windows, doors & millwork
|
|
351,933
|
|
|
|
276,095
|
|
|
|
1,001,313
|
|
|
|
529,511
|
|
Manufactured products
|
|
307,326
|
|
|
|
227,175
|
|
|
|
839,185
|
|
|
|
408,655
|
|
Gypsum, roofing & insulation
|
|
147,861
|
|
|
|
110,451
|
|
|
|
399,642
|
|
|
|
133,859
|
|
Siding, metal & concrete products
|
|
155,026
|
|
|
|
112,636
|
|
|
|
423,421
|
|
|
|
132,914
|
|
Other building products & services
|
|
195,458
|
|
|
|
142,064
|
|
|
|
552,236
|
|
|
|
241,381
|
|
Net sales
|
$
|
1,745,958
|
|
|
$
|
1,276,063
|
|
|
$
|
4,820,372
|
|
|
$
|
2,108,570
|
|
In the above presentation of the Company’s Net sales by product category, prior periods have been revised to reflect a categorization of the Company’s install material sales within the respective product categories. Install labor sales are reflected in the “Other building products & services” category. The revised presentation of the Company’s prior quarterly periods is as follows (in thousands):
|
|
Three Months Ended
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
June 30,
2015
|
|
|
March 31,
2015
|
|
Lumber & lumber sheet goods
|
|
$
|
458,907
|
|
|
$
|
446,133
|
|
|
$
|
140,302
|
|
|
$
|
114,306
|
|
Windows, doors & millwork
|
|
|
306,791
|
|
|
|
308,423
|
|
|
|
137,959
|
|
|
|
115,457
|
|
Manufactured products
|
|
|
240,749
|
|
|
|
232,762
|
|
|
|
102,639
|
|
|
|
78,841
|
|
Gypsum, roofing & insulation
|
|
|
112,012
|
|
|
|
131,213
|
|
|
|
13,021
|
|
|
|
10,387
|
|
Siding, metal & concrete products
|
|
|
118,924
|
|
|
|
131,962
|
|
|
|
11,253
|
|
|
|
9,025
|
|
Other building products & services
|
|
|
159,731
|
|
|
|
205,362
|
|
|
|
56,347
|
|
|
|
42,970
|
|
Net Sales
|
|
$
|
1,397,114
|
|
|
$
|
1,455,855
|
|
|
$
|
461,521
|
|
|
$
|
370,986
|
|
9.
Related Party Transactions
Floyd F. Sherman, our chief executive officer, and Brett Milgrim, a member of the Company’s board of directors, serve on the board of directors for PGT, Inc. We purchased windows from PGT, Inc. totaling $3.3 million and $3.0 million for the three months ended September 30, 2016 and 2015 respectively. We purchased windows from PGT, Inc. totaling $8.0 million and $6.7 million for the nine months ended September 30, 2016 and 2015 respectively. We had accounts payable to PGT, Inc. in the amounts of $1.5 million and $1.1 million as of September 30, 2016 and December 31, 2015, respectively.
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 three and nine months ended September 30, 2016 and 2015.
10.
Subsequent Event
In October 2016, we purchased $50.0 million in aggregate principal amount of our 2023 notes pursuant to the terms of a cash tender offer at a price of 117.0% of par value plus accrued and unpaid interest. The purchase of the 2023 notes was funded with cash on hand and borrowings under our 2015 facility. Following this transaction, we have $367.6 million in 2023 notes outstanding and $116.0 million in outstanding borrowings under our 2015 facility.
17