The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
For the years ended December 31, 2019, 2018 and 2017, the Company retired assets subject to other finance obligations of $0.6 million, $0.6 million and $14.0 million and extinguished the related other finance obligations of $0.6 million, $0.7 million and $11.7 million, respectively.
The Company purchased equipment which was financed through finance lease obligations of $16.5 million, and capital lease obligations of $10.2 million and $14.2 million in the years ended December 31, 2019, 2018 and 2017, respectively. In addition, purchases of property, plant and equipment included in accounts payable were $3.4 million, $2.4 million and $3.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES 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 approximately 400 locations in 40 states across the United States.
In this annual report, references to the “Company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries, unless otherwise stated or the context otherwise requires.
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 doubtful accounts, employee compensation programs, depreciation and amortization periods, income taxes, inventory values, insurance programs, goodwill, other intangible assets and long-lived assets.
Revenue Recognition
We recognize revenue as performance obligations are satisfied by transferring control of a promised good or service to a customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We generally classify our revenues into two types: (i) distribution sales; or (ii) sales related to contracts with service elements.
Distribution sales typically consist of the sale of building products we manufacture and the resale of purchased building products. We recognize revenue related to distribution sales at a point in time upon delivery of the ordered goods to our customers. Payment terms related to distribution sales are not significant as payment is generally received shortly after the point of sale.
Our contracts with service elements primarily relate to installation and construction services. We evaluate whether multiple contracts should be combined and accounted for as a single contract and whether a single or combined contract should be accounted for as a single performance obligation or multiple performance obligations. If a contract is separated into more than one performance obligation, we allocate the transaction price to each performance obligation generally based on observable standalone selling prices of the underlying goods or services. Revenue related to contracts with service elements is generally recognized over time based on the extent of progress towards completion of the performance obligation because of continuous transfer of control to the customer. We consider costs incurred to be indicative of goods and services delivered to the customer. As such, we use a cost based input method to recognize revenue on our contracts with service elements as it best depicts the transfer of assets to our customers. Payment terms related to sales for contracts with service elements are specific to each customer and contract. However, they are considered to be short-term in nature as payments are normally received either throughout the life of the contract or shortly after the contract is complete.
Contract costs include all direct material and labor, equipment costs and those indirect costs related to contract performance. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are determinable. Prepayments for materials or services are deferred until such materials have been delivered or services have been provided. All sales recognized are net of allowances for discounts and estimated returns, based on historical experience. The Company records sales incentives provided to customers as a reduction of revenue. We present all sales tax on a net basis in our consolidated financial statements.
39
Costs to obtain contracts are expensed as incurred as our contracts are typically completed in one year or less, and where applicable, we generally would incur these costs whether or not we ultimately obtain the contract. We do not disclose the value of our remaining performance obligations on uncompleted contracts as our contracts generally have a duration of one year or less.
Cash and Cash Equivalents & Checks Outstanding
Cash and cash equivalents consist of cash on hand and all highly liquid investments with an original maturity date of three months or less. Also included in cash and cash equivalents are proceeds due from credit card transactions that generally settle within two business days. We maintain cash at financial institutions in excess of federally insured limits. Further, we maintain various banking relationships with different financial institutions. Accordingly, when there is a negative net book cash balance resulting from outstanding checks that had not yet been paid by any single financial institution, they are reflected in accounts payable on the accompanying consolidated balance sheets.
Accounts Receivable
We extend credit to qualified professional homebuilders and contractors, in many cases on a non-collateralized basis. Accounts receivable potentially expose us to concentrations of credit risk. Because our customers are dispersed among our various markets, our credit risk to any one customer or geographic economy is not significant. Other receivables consist primarily of vendor rebates receivable.
Our customer mix is a balance of large national homebuilders, regional homebuilders, local and custom homebuilders and repair and remodeling contractors as well as multi-family builders. For the year ended December 31, 2019, our top 10 customers accounted for approximately 15.3% of our net sales, and no single customer accounted for more than 5% of net sales.
The allowance for doubtful accounts is based on management’s assessment of the amount which may become uncollectible in the future and is estimated using specific review of problem accounts, overall portfolio quality, current 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 $7.6 million and $6.9 million at December 31, 2019 and 2018, respectively. The activity in this reserve was not significant for each year presented.
Accounts receivable consisted of the following at December 31:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Accounts Receivable
|
|
$
|
628,438
|
|
|
$
|
667,224
|
|
Less: allowances for returns and doubtful accounts
|
|
|
13,492
|
|
|
|
13,054
|
|
Accounts receivable, net
|
|
$
|
614,946
|
|
|
$
|
654,170
|
|
The following table shows the changes in our allowance for doubtful accounts:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Balance at January 1,
|
|
$
|
6,195
|
|
|
$
|
4,973
|
|
|
$
|
5,922
|
|
Additions
|
|
|
5,811
|
|
|
|
5,284
|
|
|
|
197
|
|
Deductions (write-offs, net of recoveries)
|
|
|
(6,070
|
)
|
|
|
(4,062
|
)
|
|
|
(1,146
|
)
|
Balance at December 31,
|
|
$
|
5,936
|
|
|
$
|
6,195
|
|
|
$
|
4,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories consist principally of materials purchased for resale, including lumber, lumber sheet goods, windows, doors and millwork, as well as certain manufactured products and are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method, the use of which approximates the first-in, first-out method. We accrue for shrink based on the actual historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions. These estimates are compared with actual results as physical inventory counts are taken and reconciled to the general ledger.
40
During the year, we monitor our inventory levels by market and record provisions for excess inventories based on slower moving inventory. We define potential excess inventory as the amount of inventory on hand in excess of the historical usage, excluding special order items purchased in the last six months. We then apply our judgment as to forecasted demand and other factors, including liquidation value, to determine the required adjustments to net realizable value. Our inventories are generally not susceptible to technological obsolescence.
Our arrangements with vendors provide for rebates of a specified amount of consideration, payable when certain measures, generally related to a stipulated level of purchases, have been achieved. We account for estimated rebates as a reduction of the prices of the vendor’s inventory until the product is sold, at which time such rebates reduce cost of sales in the accompanying consolidated statement of operations and comprehensive income. Throughout the year we estimate the amount of the rebates based upon the expected level of purchases. We continually evaluate and revise these estimates as necessary based on actual purchase levels.
We source products from a large number of suppliers. No materials purchased from any single supplier represented more than 8% of our total materials purchased in 2019.
Shipping and Handling Costs
Handling costs incurred in manufacturing activities are included in cost of sales. All other shipping and handling costs are included in selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive income and totaled $332.5 million, $322.9 million and $296.2 million in 2019, 2018 and 2017, respectively.
Income Taxes
We account for income taxes utilizing the liability method described in the Income Taxes topic of the FASB Accounting Standards Codification (“Codification”). Deferred income taxes are recorded to reflect consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which differences are expected to affect taxable earnings. We record a valuation allowance to reduce deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Warranty Expense
We have warranty obligations with respect to most manufactured products; however, the liability for the warranty obligations is not significant as a result of third-party inspection and acceptance processes.
Debt Issuance Costs and Debt Discount/Premium
Loan costs are capitalized upon the issuance of long-term debt and amortized over the life of the related debt. Debt issuance costs associated with term debt are presented as a reduction to long-term debt. Debt issuance costs associated with revolving debt arrangements are presented as a component of other assets. Debt issuance costs incurred in connection with revolving debt arrangements are amortized using the straight-line method. Debt issuance costs incurred in connection with term debt are amortized using the effective interest method. Debt discounts and premiums are amortized over the life of the related debt using the effective interest method. Amortization of debt issuance costs, discounts and premiums are included in interest expense. Upon changes to our debt structure, we evaluate debt issuance costs, discounts and premiums in accordance with the Debt topic of the Codification. We adjust debt issuance costs, discounts and premiums as necessary based on the results of this evaluation, as discussed in Note 9.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. The estimated lives of the various classes of assets are as follows:
|
|
Buildings and improvements
|
|
10 to 40 years
|
|
|
Machinery and equipment
|
|
3 to 10 years
|
|
|
Furniture and fixtures
|
|
3 to 5 years
|
|
|
Leasehold improvements
|
|
The shorter of the estimated useful life or the remaining lease term
|
41
Major additions and improvements are capitalized, while maintenance and repairs that do not extend the useful life of the property are charged to expense as incurred. Gains or losses from dispositions of property, plant and equipment are recorded in the period incurred. We also capitalize certain costs of computer software developed or obtained for internal use, including interest, provided that those costs are not research and development, and certain other criteria are met. Internal use computer software costs are included in machinery and equipment and generally depreciated using the straight-line method over the estimated useful lives of the assets, generally three years.
We periodically evaluate the commercial and strategic operation of the land, related buildings and improvements of our facilities. In connection with these evaluations, some facilities may be consolidated, and others may be sold or leased. Nonoperating assets primarily related to land and building real estate assets associated with location closures that are actively being marketed for sale within a year are classified as assets held for sale and recorded at fair value, usually the quoted market price obtained from an independent third-party less the cost to sell. Until the assets are sold, an estimate of the fair value is reassessed at each reporting period. Net gains or losses related to the sale of real estate and equipment or impairment adjustments related to assets held for sale are recorded as selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive income.
Leases
We lease certain land, buildings, rolling stock and other types of equipment for use in our operations. These leases typically have initial terms ranging from one to 15 years. Many of our leases contain renewal options which are exercisable at our discretion. These renewal options generally have terms ranging from one to five years. We also lease certain properties from related parties, including current employees and non-affiliate stockholders.
We determine if an arrangement is a lease at the inception of the arrangement. Lease liabilities are recognized based on the present value of lease payments over the lease term at the arrangement’s commencement date. Right-of-use assets are recognized based on the amount of the measurement of the lease liability adjusted for any lease payments made to the lessor at or before the commencement date, minus any lease incentives received and any initial direct costs incurred. Renewal options are included in the calculation of our right-of-use assets and lease liabilities when it is determined that they are reasonably certain of exercise based on an analysis of the relevant facts and circumstances. As the implicit rate of return of our lease agreements is usually not readily determinable, we generally use our incremental borrowing rate in determining the present value of lease payments. We determine our incremental borrowing rate based on information available to us at the lease commencement date. Certain of our lease arrangements contain lease and non-lease components. We have elected to account for non-lease components as a part of the related lease components for all of our leases. Leases with an initial term of 12 months or less are not recognized on our balance sheet. We recognize the expense for these leases on a straight-line basis over the lease term.
Certain of our leases are subject to variable lease payments based on various measures, such as rent escalations determined by percentage changes in the consumer price index. As these types of variable lease payments are determined on a basis other than an index or a rate, they are generally excluded from the calculation of lease liabilities and right-of-use assets and are expensed as incurred.
In addition, we have residual value guarantees on certain equipment leases. Under these leases, we have the option of (a) purchasing the equipment at the end of the lease term, (b) arranging for the sale of the equipment to a third party, or (c) returning the equipment to the lessor to sell the equipment. If the sales proceeds in any case are less than the residual value, we are required to reimburse the lessor for the deficiency up to a specified level as stated in each lease agreement. If the sales proceeds exceed the residual value, we are entitled to all of such excess amounts.
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 value 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 value 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 value is greater than estimated fair value. The net carrying value 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.
42
Insurance
We have established insurance programs to cover certain insurable risks consisting primarily of physical loss to property, business interruptions resulting from such loss, workers’ compensation, employee healthcare, and comprehensive general and auto liability. Third party insurance coverage is obtained for exposures above predetermined deductibles as well as for those risks required to be insured by law or contract. On a quarterly basis, we engage an external actuarial professional to independently assess and estimate the total liability outstanding. Provisions for losses are developed from these valuations which rely upon our past claims experience, which considers both the frequency and settlement of claims. We discount our workers’ compensation liability based upon estimated future payment streams at our risk-free rate. Our total insurance reserve balances were $87.0 million and $84.7 million as of December 31, 2019 and 2018, respectively. Of these balances $49.0 million and $49.4 million were recorded as other long-term liabilities as of December 31, 2019 and 2018, respectively. Included in these reserve balances as of December 31, 2019 and 2018, were approximately $8.6 million and $9.1 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:
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
221,809
|
|
|
$
|
205,191
|
|
|
$
|
38,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
115,713
|
|
|
|
114,586
|
|
|
|
112,587
|
|
Dilutive effect of options and RSUs
|
|
1,312
|
|
|
|
1,968
|
|
|
|
3,010
|
|
Weighted average shares outstanding, diluted
|
|
117,025
|
|
|
|
116,554
|
|
|
|
115,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.92
|
|
|
$
|
1.79
|
|
|
$
|
0.34
|
|
Diluted
|
$
|
1.90
|
|
|
$
|
1.76
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive and contingent options and RSUs excluded
from diluted EPS
|
|
402
|
|
|
|
682
|
|
|
|
215
|
|
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 value 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.
43
Stock-based Compensation
We have four stock-based employee compensation plans, which are described more fully in Note 11. We issue new common stock shares upon exercises of stock options and vesting of RSUs. We recognize the effect of pre-vesting forfeitures in the period they actually occur.
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:
|
|
2019
|
|
|
2018
|
|
|
2017
|
Expected volatility (company)
|
|
38.3%
|
|
|
53.9%
|
|
|
73.7%
|
Expected volatility (peer group median)
|
|
33.2%
|
|
|
28.4%
|
|
|
33.8%
|
Correlation between the company and peer group median
|
|
0.5
|
|
|
0.39
|
|
|
0.33
|
Expected dividend yield
|
|
0.0%
|
|
|
0.0%
|
|
|
0.0%
|
Risk-free rate
|
|
2.6%
|
|
|
2.3%
|
|
|
1.5%
|
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.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the year ended December 31:
|
|
|
2017
|
Expected life
|
|
|
6.0 years
|
Expected volatility
|
|
|
59.2%
|
Expected dividend yield
|
|
|
0.0%
|
Risk-free rate
|
|
|
2.2%
|
The expected life represents the period of time the options are expected to be outstanding. Historically, 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. We did not grant any options during the years ended December 31, 2019 or 2018.
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.
44
As of December 31, 2019 and 2018 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 5.625% senior secured notes due 2024 (“2024 notes”), 6.75% senior secured notes due 2027 (“2027 notes”), $52.0 million senior secured term loan facility due 2024 (“2024 term loan”) and $900.0 million revolving credit facility (“2023 facility”) at amortized cost. The fair values of the 2024 notes, 2027 notes and the 2024 term loan at December 31, 2019 were approximately $525.1 million, $522.5 million and $52.2 million, respectively, and were determined using Level 2 inputs based on market prices. The carrying value of the 2023 facility at December 31, 2019 approximates fair value as the rates are comparable to those at which we could currently borrow under similar terms, are variable and incorporate a measure of our credit risk. As such, the fair value of the 2023 facility was also classified as Level 2 in the hierarchy.
Supplemental Cash Flow Information
Supplemental cash flow information was as follows for the years ended December 31:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Cash payments for interest (1)
|
|
$
|
100,354
|
|
|
$
|
107,668
|
|
|
$
|
193,429
|
|
Cash payments for income taxes
|
|
|
18,107
|
|
|
|
3,153
|
|
|
|
5,643
|
|
(1)
|
Includes $2.3 million, $0.1 million and $48.7 million in payments of debt extinguishment costs which are classified as financing outflows in the accompanying consolidated statement of cash flows for the years ended December 31 2019, 2018, and 2017, respectively. These payments were recorded to interest expense in the accompanying consolidated statement of operations and comprehensive income for their respective years.
|
Comprehensive Income
Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It consists of net income and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net income. We had no items of other comprehensive income for the years ended December 31, 2019, 2018, and 2017.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued an update to existing guidance under the Incomes Taxes topic of the Codification. This updated guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in the Income Taxes topic. This guidance is effective for public companies annual and interim periods beginning after December 15, 2020 with early adoption permitted. We are currently evaluating the impact of this update on our consolidated financial statements.
In June 2016, the FASB issued an update to existing guidance under the Investments topic of the Codification. This update introduces a new impairment model for financial assets, known as the current expected credit losses (“CECL”) model that is based on expected losses rather than incurred losses. The CECL model requires an entity to estimate credit losses on financial assets, including trade accounts receivable, based on historical information, current information and reasonable and supportable forecasts. Under this guidance companies will record an allowance through earnings for expected credit losses upon initial recognition of the financial asset. The aspects of this guidance applicable to us will be required to be adopted on a modified retrospective basis. This update is effective for public companies for annual and interim periods beginning after December 15, 2019. As such, this guidance will be effective for us on January 1, 2020. The adoption of this guidance will not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued an update to the existing guidance under the Leases topic of the Codification. Under the new guidance, lessees are now required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
45
We adopted this guidance on January 1, 2019 by applying the provisions of this guidance on a modified retrospective basis as of the effective date. As such, comparative periods have not been restated and the disclosures required under the new standard have not been provided for periods prior to January 1, 2019. We elected the package of practical expedients whereby we were not required to: i) reassess whether any expired or existing contracts are or contain leases, ii) reassess the lease classification of existing leases and iii) reassess initial direct costs for any existing leases. We did not elect the hindsight practical expedient or the practical expedient related to land easements. We have assessed and updated our business processes, systems and controls to ensure compliance with the recognition and disclosure requirements of the new standard.
Adoption of the new standard resulted in the recording of right-of-use assets and lease liabilities of $269.7 million and $267.5 million, respectively, as of January 1, 2019 to recognize operating leases, primarily related to real estate and rolling stock, which were not recognized on our balance sheet under previous guidance. Further, the adoption of this guidance had no impact to our remaining other finance obligations as they continue to fail to meet the sale-leaseback requirements of the new standard. The adoption of this guidance did not have a material impact on our condensed consolidated statement of operations and comprehensive income or on our condensed consolidated statement of cash flows as our leases retained their classifications as determined under previous guidance.
3. Revenue
The following table disaggregates our net sales by product category for the years ended December 31:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Lumber & lumber sheet goods
|
|
$
|
2,251,580
|
|
|
$
|
2,902,155
|
|
|
$
|
2,510,945
|
|
Manufactured products
|
|
|
1,449,550
|
|
|
|
1,392,043
|
|
|
|
1,208,555
|
|
Windows, doors & millwork
|
|
|
1,542,924
|
|
|
|
1,445,858
|
|
|
|
1,360,567
|
|
Gypsum, roofing & insulation
|
|
|
528,571
|
|
|
|
528,439
|
|
|
|
538,378
|
|
Siding, metal & concrete products
|
|
|
712,644
|
|
|
|
697,744
|
|
|
|
655,889
|
|
Other building & product services
|
|
|
795,162
|
|
|
|
758,532
|
|
|
|
759,875
|
|
Total net sales
|
|
$
|
7,280,431
|
|
|
$
|
7,724,771
|
|
|
$
|
7,034,209
|
|
Information regarding disaggregation of net sales by segment is discussed in Note 15 to the condensed consolidated financial statements. Sales related to contracts with service elements represents less than 10% of the Company’s net sales for each period presented.
The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, contract assets and contract liabilities. Contract asset balances were not significant as of December 31, 2019 or December 31, 2018. Contract liabilities consist of deferred revenue and customer advances and deposits. Contract liability balances are included in accrued liabilities on our consolidated balance sheet and were $38.6 million and $42.1 million as of December 31, 2019 and December 31, 2018, respectively.
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
198,123
|
|
|
$
|
198,304
|
|
Buildings and improvements
|
|
|
374,909
|
|
|
|
358,411
|
|
Machinery and equipment
|
|
|
439,449
|
|
|
|
403,765
|
|
Furniture, fixtures and computer equipment
|
|
|
92,094
|
|
|
|
78,910
|
|
Construction in progress
|
|
|
29,175
|
|
|
|
20,810
|
|
Finance lease right-of-use assets
|
|
|
37,153
|
|
|
|
—
|
|
Property, plant and equipment
|
|
|
1,170,903
|
|
|
|
1,060,200
|
|
Less: accumulated depreciation
|
|
|
449,016
|
|
|
|
390,125
|
|
Property, plant and equipment, net
|
|
$
|
721,887
|
|
|
$
|
670,075
|
|
46
Depreciation expense was $84.0 million, $74.4 million and $71.1 million, of which $19.7 million, $18.6 million and $9.8 million was included in cost of sales, for the years ended December 31, 2019, 2018, and 2017, 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:
|
|
2019
|
|
|
2018*
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
118,403
|
|
|
$
|
118,677
|
|
Buildings and improvements
|
|
|
136,620
|
|
|
|
142,345
|
|
Machinery and equipment
|
|
|
—
|
|
|
|
27,188
|
|
Assets held under other finance obligations
|
|
|
255,023
|
|
|
|
288,210
|
|
Less: accumulated amortization
|
|
|
18,741
|
|
|
|
21,786
|
|
Assets held under other finance obligations, net
|
|
$
|
236,282
|
|
|
$
|
266,424
|
|
*
|
Totals as of December 31, 2018 included assets which, under previous guidance, were held under capital leases. As of December 31, 2019 these assets are now presented as finance lease right-of-use assets as reflected in the table above.
|
5. Business Combinations
On July 1, 2019, we acquired certain assets and the operations of Sun State Components (“Sun State”) for $42.5 million in cash. Sun State is comprised of three truss locations, which are located in Las Vegas, Nevada; Surprise, Arizona; and Kingman, Arizona. Sun State manufactures roof trusses and floor trusses and distributes lumber and related products to residential homebuilders and commercial contractors.
On December 9, 2019 we acquired certain assets and the operations of Raney Components, LLC and Raney Construction, Inc. (collectively “Raney”) for $59.0 million in cash, subject to certain adjustments. Located in Groveland, Florida, Raney is a vertically-integrated manufacturer and installer of residential structures for production builder customers. Raney combines sub-contractor labor and material supply to place concrete slabs, install masonry block for exterior walls, set wall panels and roof trusses, frame interior walls and install roof decking. The acquisitions of Sun State and Raney were funded with a combination of cash on hand and borrowings under our 2023 facility.
These transactions were accounted for by the acquisition method, and accordingly their results of operations have been included in the Company’s consolidated financial statements from their respective acquisition dates. The purchase price was allocated to the assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill. The fair value of acquired intangible assets of $41.3 million, primarily related to customer relationships, was estimated by applying an income approach. That measure is based on significant Level 3 inputs not observable in the market. Key assumptions developed based on the Company’s historical experience, future projections and comparable market data include future cash flows, long-term growth rates, attrition rates and discount rates.
The operating results of the acquisitions have been included in the consolidated statements of operations and comprehensive income from their acquisition dates through December 31, 2019. Net sales and net income attributable these acquisitions were $29.3 million and $1.3 million, respectively, for the year ended December 31, 2019.
Pro forma results of operations attributable to these acquisitions are not presented as they did not have a material impact on our results of operations, individually or in the aggregate. We did not incur any significant acquisition related costs attributable to these transactions.
47
The following table summarizes the aggregate fair values of the assets acquired and liabilities assumed for these acquisitions for the year ended December 31, 2019, (in thousands):
Accounts receivable
|
|
$
|
12,390
|
|
Inventory
|
|
|
8,561
|
|
Other current assets
|
|
|
306
|
|
Property, plant and equipment (includes finance lease right-of-use assets)
|
|
|
18,925
|
|
Operating lease right-of-use assets
|
|
|
12,955
|
|
Goodwill (Note 6)
|
|
|
28,611
|
|
Intangible assets (Note 7)
|
|
|
41,300
|
|
Total assets acquired
|
|
|
123,048
|
|
Accounts payable and accrued liabilities
|
|
|
(15,123
|
)
|
Operating lease liabilities
|
|
|
(11,264
|
)
|
Finance lease liabilities
|
|
|
(3,806
|
)
|
Total liabilities assumed
|
|
|
(30,193
|
)
|
Total net assets acquired
|
|
$
|
92,855
|
|
In connection with the acquisition of Sun State, we entered into real estate leases with the sellers for Sun State’s three operating locations. Of the $42.5 million in cash consideration, $33.9 million was paid to the sellers at closing with the remaining amount payable to the sellers on the first anniversary of the acquisition date. The remaining amount payable to the sellers is included in accounts payable and accrued liabilities in the table above.
In connection with the acquisition of Raney, we entered into real estate leases with the seller for Raney’s operating locations. The purchase agreement for Raney also contains an earn-out provision contingent upon continued employment and the achievement of specified revenue and profitability targets for fiscal year 2020. This earn-out provision could result in an additional cash payment to the seller ranging from zero to $5.0 million depending on the level of achievement of the specified targets. Future payments related to this earn-out provision will be included as compensation expense in the consolidated statement of operations and comprehensive income over the period earned.
6. Goodwill
The following table sets forth the changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2019 and 2018 (in thousands):
|
|
|
Northeast
|
|
|
Southeast
|
|
|
South
|
|
|
West
|
|
|
Total
|
|
Balance as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
97,102
|
|
$
|
60,691
|
|
$
|
329,662
|
|
$
|
297,592
|
|
$
|
785,047
|
|
Accumulated impairment losses
|
|
|
(494
|
)
|
|
(615
|
)
|
|
(43,527
|
)
|
|
—
|
|
|
(44,636
|
)
|
|
|
|
96,608
|
|
|
60,076
|
|
|
286,135
|
|
|
297,592
|
|
|
740,411
|
|
Acquisitions
|
|
|
—
|
|
|
—
|
|
|
14,257
|
|
|
14,354
|
|
|
28,611
|
|
Balance as of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
97,102
|
|
$
|
60,691
|
|
$
|
343,919
|
|
$
|
311,946
|
|
$
|
813,658
|
|
Accumulated impairment losses
|
|
|
(494
|
)
|
|
(615
|
)
|
|
(43,527
|
)
|
|
—
|
|
|
(44,636
|
)
|
|
|
$
|
96,608
|
|
$
|
60,076
|
|
$
|
300,392
|
|
$
|
311,946
|
|
$
|
769,022
|
|
In 2019, the change in the carrying amount of goodwill was attributable to our acquisitions of Sun State and Raney. The amount allocated to goodwill is attributable to the assembled workforces acquired, expected synergies, and expected growth from the new markets the Company entered into. All of the goodwill recognized from these acquisitions is expected to be tax deductible and will be amortized ratably over a 15-year period for tax purposes.
We closely monitor trends in economic factors and their effects on operating results to determine if an impairment trigger was present that would warrant a reassessment of the recoverability of the carrying amount of goodwill prior to the required annual impairment test in accordance with the Intangibles – Goodwill and Other topic of the Codification.
48
In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If it is concluded that it is more likely than not that the fair value of the reporting unit is not less than its carrying value, then no further testing of the goodwill is required. However, if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative goodwill impairment test. This test identifies both the existence of and the amount of goodwill impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount goodwill is not impaired. If the carrying amount of a reporting unit exceeds its fair value an impairment loss is recognized in amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.
The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Our reporting units are aligned with our nine geographic regions which are also determined to be our operating segments. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations and assumptions about our strategic plans with regard to our operations. Due to the uncertainties associated with such estimates, actual results could differ from such estimates resulting in further impairment of goodwill.
In evaluating our goodwill for impairment at December 31, 2019, $77.1 million of our goodwill balance was assessed utilizing a quantitative assessment. In performing the quantitative impairment test at December 31, 2019, we developed a range of fair values using a five-year 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 2019, 2018, and 2017.
7. Intangible Assets
The following table presents intangible assets as of December 31:
|
|
2019
|
|
|
2018
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
|
(In thousands)
|
|
Customer relationships
|
|
$
|
183,445
|
|
|
$
|
(77,016
|
)
|
|
$
|
149,045
|
|
|
$
|
(63,187
|
)
|
Trade names
|
|
|
51,361
|
|
|
|
(36,082
|
)
|
|
|
51,361
|
|
|
|
(34,065
|
)
|
Subcontractor relationships
|
|
|
4,700
|
|
|
|
(131
|
)
|
|
|
—
|
|
|
|
—
|
|
Non-compete agreements
|
|
|
3,579
|
|
|
|
(1,468
|
)
|
|
|
1,379
|
|
|
|
(1,379
|
)
|
Favorable lease intangibles
|
|
|
—
|
|
|
|
—
|
|
|
|
6,409
|
|
|
|
(6,409
|
)
|
Total intangible assets
|
|
$
|
243,085
|
|
|
$
|
(114,697
|
)
|
|
$
|
208,194
|
|
|
$
|
(105,040
|
)
|
Unfavorable lease obligations (included in Accrued
liabilities and Other long-term liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(19,597
|
)
|
|
$
|
19,597
|
|
During the years ended December 31, 2019, 2018, and 2017, we recorded amortization expense in relation to the above-listed intangible assets of $16.1 million, $23.5 million, and $21.9 million, respectively. We recorded no intangible asset impairment charges for the years ended December 31, 2019, 2018 or 2017.
In connection with the acquisitions of Sun State and Raney, we recorded intangible assets of $41.3 million, which includes $34.4 million of customer relationships, $4.7 million of subcontractor relationships and $2.2 million of non-compete agreements. The weighted average useful lives of the acquired assets are 7.7 years in total, 8.5 years for customer relationships, 3.0 years for subcontractor relationships and 5.0 years for non-compete agreements, respectively.
49
The following table presents the estimated amortization expense for these intangible assets for the years ending December 31 (in thousands):
2020
|
|
$
|
20,235
|
|
2021
|
|
|
18,642
|
|
2022
|
|
|
17,171
|
|
2023
|
|
|
14,513
|
|
2024
|
|
|
13,270
|
|
Thereafter
|
|
|
44,557
|
|
Total future net intangible amortization expense
|
|
$
|
128,388
|
|
8. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Accrued payroll and other employee related expenses
|
|
$
|
152,869
|
|
|
$
|
145,313
|
|
Contract liabilities
|
|
|
38,559
|
|
|
|
42,054
|
|
Customer obligations
|
|
|
11,612
|
|
|
|
11,762
|
|
Self-insurance reserves
|
|
|
37,955
|
|
|
|
35,304
|
|
Accrued business taxes
|
|
|
32,604
|
|
|
|
28,954
|
|
Accrued interest
|
|
|
12,256
|
|
|
|
13,164
|
|
Other
|
|
|
23,095
|
|
|
|
15,975
|
|
Total accrued liabilities
|
|
$
|
308,950
|
|
|
$
|
292,526
|
|
9. Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
December 31,
2019
|
|
|
December 31,
2018
|
|
2023 facility (1)
|
$
|
27,000
|
|
|
$
|
179,000
|
|
2024 notes
|
|
503,923
|
|
|
|
696,361
|
|
2024 term loan (2)
|
|
52,000
|
|
|
|
458,250
|
|
2027 notes
|
|
475,000
|
|
|
|
—
|
|
Other finance obligations (Note 10)
|
|
221,726
|
|
|
|
227,071
|
|
Finance lease obligations (Note 10)
|
|
20,333
|
|
|
|
16,445
|
|
|
|
1,299,982
|
|
|
|
1,577,127
|
|
Unamortized debt discount/premium and debt issuance costs
|
|
(8,709
|
)
|
|
|
(15,833
|
)
|
|
|
1,291,273
|
|
|
|
1,561,294
|
|
Less: current maturities of long-term debt and lease obligations
|
|
13,875
|
|
|
|
15,565
|
|
Long-term debt, net of current maturities
|
$
|
1,277,398
|
|
|
$
|
1,545,729
|
|
(1)
|
The weighted average interest rate was 4.4% and 3.9% as of December 31, 2019 and 2018, respectively.
|
(2)
|
The weighted average interest rate was 5.6% and 5.2% as of December 31, 2019 and 2018, respectively.
|
2017 Debt Transactions
During the year ended December 31, 2017, the Company executed several debt transactions which are described in more detail below. These transactions included a repricing and extension of our previous term loan as well as increasing the borrowing capacity and extending the maturity of our previous revolving credit facility and the complete extinguishment of our previously outstanding 10.75% senior unsecured notes due 2023 (“2023 notes”).
50
Term Loan Amendment
On February 23, 2017, we repriced our previous term loan through an amendment and extension of the term loan credit agreement providing for a $467.7 million senior secured term loan facility due 2024. This repricing reduced the interest rate by 0.75% and extended the maturity by 19 months to February 29, 2024. Deutsche Bank AG New York Branch continues to serve as administrative agent and collateral agent under the 2024 term loan agreement.
In connection with the 2024 term loan amendment we recognized $0.4 million in interest expense for the year ended December 31, 2017 related to the write-off of unamortized debt discount and debt issuance costs. We incurred $1.2 million in lender fees which, together with $10.0 million in remaining unamortized debt discount and debt issuance costs, have been recorded as a reduction of long-term debt and are being amortized over the remaining contractual life of the 2024 term loan using the effective interest method. In addition, we also incurred $1.4 million in various third-party fees and expenses related to the 2024 term loan amendment which were recorded to interest expense for the year ended December 31, 2017.
Revolving Credit Facility Amendment
On March 22, 2017, the Company extended the maturity date and increased the revolving commitments under its previous revolving credit facility. This transaction resulted in an amended and restated $900.0 million revolving credit facility and extended the maturity by 20 months to March 22, 2022. SunTrust Bank continues to serve as administrative agent and collateral agent under the agreement. All other material terms of the revolving credit facility were unchanged from those of the previous agreement.
In connection with this amendment, we recognized $0.6 million in interest expense for the year ended December 31, 2017 related to the write-off of unamortized debt issuance costs. We incurred $1.6 million in lender and third-party fees which, together with $8.5 million in remaining unamortized debt issuance costs, have been recorded as other assets and are being amortized over the remaining contractual life on a straight-line basis.
2023 Notes Redemption
In December 2017, the Company exercised its contractual right to redeem $367.6 million in aggregate principal amount of 2023 Notes at a total redemption price of 113.249%, plus accrued and unpaid interest. The redemption of the 2023 Notes was funded with a combination of borrowings under the 2023 facility and cash on hand.
The redemption of the 2023 notes was considered to be a debt extinguishment. As such, we recognized a loss on extinguishment of $56.3 million which was recorded as a component of interest expense in the accompanying consolidated statement of operations and comprehensive income for the year ended December 31, 2017. Of this $56.3 million loss, $48.7 million was attributable to the payment of the redemption premium and $7.6 million was attributable to the write-off of unamortized debt issuance costs associated with the redeemed notes.
2018 Debt Transactions
In the fourth quarter of 2018, the Company executed a series of open market purchases of its 2024 notes. These transactions resulted in $53.6 million in aggregate principal amount of the 2024 notes being repurchased at prices ranging from 91.5% to 94.25% of par value. Following these transactions, there was $696.4 million of 2024 notes which remain outstanding.
These repurchases of the 2024 notes were considered to be debt extinguishments. As such, we recognized a gain on debt extinguishment of $3.2 million which was recorded as a component of interest expense in the accompanying consolidated statement of operations and comprehensive income for the year ended December 31, 2018. Of this gain, approximately $3.7 million was attributable to the repurchase of the notes at a discount to par value which was partially offset by a $0.5 million write-off of unamortized debt issuance costs associated with the 2024 Notes repurchased.
2019 Debt Transactions
During the year ended December 31, 2019, the Company executed several debt transactions which are described in more detail below. These transactions include: (i) open market purchases of our 2024 notes, (ii) extension of the maturity of our 2023 facility and (iii) privately negotiated purchases of our 2024 notes and partial repayments of our 2024 term loan with the proceeds from the issuance of 2027 notes and cash on hand. These transactions collectively have extended our debt maturity profile and reduced the amount of long-term debt outstanding.
51
First Quarter 2019 Note Repurchase Transactions
In the first quarter of 2019, the Company executed a series of open market purchases of its 2024 notes. These transactions resulted in $20.4 million in aggregate principal amount of the 2024 notes being repurchased at prices ranging from 94.9% to 95.9% of par value.
These repurchases of the 2024 notes were considered to be debt extinguishments. As such, we recognized a gain on debt extinguishment of $0.7 million which was recorded as a component of interest expense in the first quarter of 2019. Of this gain, approximately $0.9 million was attributable to the repurchase of the notes at a discount to par value which was partially offset by a $0.2 million write-off of unamortized debt issuance costs associated with the 2024 notes repurchased.
Second Quarter 2019 Refinancing Transactions
In April 2019, the Company extended the maturity date of its revolving credit facility by 20 months to November 22, 2023. All other material terms of the 2023 facility remain unchanged from those of the previous agreement.
In connection with the 2023 facility amendment we incurred $1.2 million in lender and third-party fees which, together with $5.9 million in remaining unamortized debt issuance costs, have been recorded as other assets and are being amortized over the remaining contractual life of the 2023 facility on a straight-line basis.
In May 2019, we completed a private offering of $400.0 million in aggregate principal amount of 2027 notes at an issue price equal to 100% of their par value. The proceeds from the issuance of the 2027 notes were used, together with cash on hand, to purchase $97.0 million in aggregate principal amount of 2024 notes, to repay $300.0 million of the 2024 term loan and to pay related transaction fees and expenses.
In connection with the issuance of the 2027 notes, we incurred $6.1 million of various third-party fees and expenses. Of these costs, $2.1 million were recorded to interest expense in the second quarter of 2019. The remaining $4.0 million in costs incurred have been recorded as a reduction to long-term debt and are being amortized over the contractual life of the 2027 notes using the effective interest method. Further, we recorded an additional $2.2 million to interest expense in the second quarter of 2019 related to the write-off of unamortized debt discount and debt issuance costs in connection with the partial repayment of the 2024 term loan.
Third Quarter 2019 Refinancing Transactions
In July 2019, we completed a private offering of an additional $75.0 million in aggregate principal amount of 2027 notes at an issue price of 104.5% of their par value. The proceeds from the issuance of the 2027 notes were used together with cash on hand to redeem an additional $75.0 million in aggregate principal amount of 2024 notes and to pay related transaction fees and expenses.
The additional $3.4 million in proceeds received in excess of par value represents a debt premium which has been recorded as an increase to long-term debt. In connection with the issuance of the additional 2027 notes, we incurred $1.3 million of various third-party fees and expenses which have been recorded as a reduction to long-term debt. These third party costs and the debt premium are being amortized over the contractual life of the 2027 notes using the effective interest method.
The redemption of the 2024 notes was considered to be an extinguishment. As such, we recognized a loss on extinguishment of $3.1 million which was recorded to interest expense in the third quarter of 2019. Of this loss, $2.2 million was attributable to the call premium paid to the lenders and $0.9 million was attributable to the write-off of unamortized debt issuance costs associated with the extinguished 2024 notes.
Fourth Quarter 2019 Term Loan Repayment
In November 2019, we repaid $105.1 million of the 2024 term loan using cash on hand. In connection with this repayment we recognized a loss on extinguishment of $3.5 million related to the write-off of unamortized debt discount and debt issuance costs. This loss on extinguishment was recorded to interest expense in the fourth quarter of 2019.
2024 Term Loan Credit Agreement
As of December 31, 2019, we have $52.0 million outstanding under the 2024 term loan, which matures on February 29, 2024. The 2024 term loan bears interest based on either a eurodollar or base rate (a rate equal to the highest of an agreed commercially available benchmark rate, the federal funds effective rate plus 0.50% or the eurodollar rate plus 1.0%, as selected by the Company) plus, in each case, an applicable margin. The applicable margin in the 2024 term loan is (x) 3% in the case of Eurodollar rate loans and (y) 2% in the case of base rate loans.
52
2023 Revolving Credit Facility
The 2023 facility provides for a $900.0 million revolving credit line to be used for working capital, general corporate purposes and funding capital expenditures and growth opportunities. In addition, we may use the 2023 facility to facilitate debt repayment and consolidation. The available borrowing capacity, or borrowing base, is derived from a percentage of the Company’s eligible receivables and inventory, as defined by the agreement, subject to certain reserves. As of December 31, 2019, we had $27.0 million in outstanding borrowings under our 2023 facility and our net excess borrowing availability was $681.2 million after being reduced by outstanding letters of credit of approximately $82.2 million.
Borrowings under the 2023 facility bear interest, at our option, at either a eurodollar rate or a base rate, plus, in each case an applicable margin. The applicable margin ranges from 1.25% to 1.75% per annum in the case of eurodollar rate loans and 0.25% to 0.75% per annum in the case of base rate loans. The margin in either case is based on a measure of availability under the 2023 facility. A variable commitment fee, currently 0.375% per annum, is charged on the unused amount of the revolver based on quarterly average loan utilization. Letters of credit under the 2023 facility are assessed at a rate equal to the applicable eurodollar margin, currently 1.25%, as well as a fronting fee at a rate of 0.125% per annum. These fees are payable quarterly in arrears at the end of March, June, September, and December.
All obligations under the 2024 term loan and 2023 facility are guaranteed jointly and severally by the Company and all other subsidiaries that guarantee the 2024 notes and 2027 notes. All obligations and the guarantees of those obligations are secured by substantially all of the assets of the Company and the guarantors subject to certain exceptions and permitted liens, including (i) with respect to the 2024 term loan, 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), and (ii) with respect to the 2023 facility, a first-priority security interest in such assets that constitute ABL Collateral and a second-priority security interest in such assets that constitute Notes Collateral.
“ABL Collateral” includes substantially all presently owned and after-acquired accounts receivable, inventory, rights of unpaid vendors with respect to inventory, deposit accounts, commodity accounts, securities accounts and lock boxes, investment property, cash and cash equivalents, and general intangibles, books and records, supporting obligations and documents and related letters of credit, commercial tort claims or other claims related to and proceeds of each of the foregoing. “Notes Collateral” includes all collateral which is not ABL collateral.
The 2024 term loan and the 2023 facility contain restrictive covenants which, among other things, limit the Company’s ability to incur additional indebtedness, incur liens, engage in mergers or other fundamental changes, sell certain assets, pay dividends, make acquisitions or investments, prepay certain indebtedness, change the nature of our business, and engage in certain transactions with affiliates. In addition, the 2023 facility also contains a financial covenant requiring the satisfaction of a minimum fixed charge ratio of 1.00 to 1.00 if our excess availability falls below the greater of $80.0 million or 10% of the maximum borrowing amount, which was $80.0 million as of December 31, 2019.
Senior Secured Notes due 2024
As of December 31, 2019 we have $503.9 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.
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, are secured by substantially all of the assets of the Company and the Guarantors subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute Notes Collateral (as defined above) and a second-priority security interest in such assets that constitute ABL Collateral (as defined above).
The Notes Collateral Agent became a party to the ABL/Bond Intercreditor Agreement, dated as of May 29, 2013, among SunTrust Bank, as agent under the Company’s 2023 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 2024 term loan, Wilmington Trust, National Association, the Company and the Guarantors. These documents 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 2023 facility and the 2024 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 2023 facility.
53
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 on or 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. 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.
Senior Secured Notes due 2027
As of December 31, 2019, we have $475.0 million outstanding in aggregate principal amount of the 2027 notes which mature on June 1, 2027. Interest accrues on the 2027 notes at a rate of 6.75% per annum and is payable semi-annually on June 1 and December 1 of each year.
The terms of the 2027 notes are governed by the indenture, dated as of the May 30, 2019 (the “Indenture”), among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee and as notes collateral agent. The 2027 notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior secured basis, by certain of the Company’s direct and indirect wholly owned subsidiaries (the “Guarantors”). All obligations under the 2027 notes, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and the Guarantors subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute Notes Collateral (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 Indenture contains restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional debt or issue preferred stock, create liens, create restrictions on the Company’s subsidiaries’ ability to make payments to the Company, pay dividends and make other distributions in respect of the Company’s and its subsidiaries’ capital stock, make certain investments or certain other restricted payments, guarantee indebtedness, designate unrestricted subsidiaries, sell certain kinds of assets, enter into certain types of transactions with affiliates, and effect mergers and consolidations.
At any time prior to June 1, 2022, the Company may redeem the 2027 notes in whole or in part at a redemption price equal to 100% of the principal amount of the 2027 notes plus the “applicable premium” set forth in the Indenture. At any time on or after June 1, 2022, the Company may redeem the 2027 notes at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to the redemption date. At any time and from time to time during the 36-month period following the Closing Date, the Company may redeem up to 10% of the aggregate principal amount of the 2027 notes during each twelve-month period commencing on the Closing Date at a redemption price of 103% of the aggregate principal amount thereof plus accrued and unpaid interest to the redemption date. In addition, at any time prior to June 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 2027 notes with the net cash proceeds of one or more equity offerings, as described in the Indenture, at a price equal to 106.750% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. If the Company experiences certain change of control events, holders of the 2027 notes may require it to repurchase all or part of their 2027 notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.
As of December 31, 2019 we were not in violation of any covenants or restrictions imposed by any of our debt agreements.
54
Future maturities of long-term debt as of December 31, 2019 were as follows (in thousands):
Year ending December 31,
|
|
|
|
|
2020
|
|
$
|
—
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
27,000
|
|
2024
|
|
|
555,923
|
|
Thereafter
|
|
|
475,000
|
|
Total long-term debt (including current maturities)
|
|
$
|
1,057,923
|
|
10. Leases and Other Finance Obligations
Right-of-use assets and lease liabilities consisted of the following as of December 31, 2019 (in thousands):
Assets
|
|
|
|
|
Operating lease right-of-use assets, net
|
|
$
|
292,684
|
|
Finance lease right-of-use assets, net (included in property, plant and equipment, net)
|
|
|
32,070
|
|
Total right-of-use assets
|
|
$
|
324,754
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Current portion of operating lease liabilities
|
|
$
|
61,653
|
|
Current portion of finance lease liabilities (included in current maturities of long-term debt)
|
|
|
10,378
|
|
Noncurrent
|
|
|
|
|
Noncurrent portion of operating lease liabilities
|
|
$
|
236,948
|
|
Noncurrent portion of finance lease liabilities (included in long-term debt, net of current maturities)
|
|
|
9,955
|
|
Total lease liabilities
|
|
$
|
318,934
|
|
Total lease costs consisted of the following for the year ended December 31, 2019 (in thousands):
Operating lease costs*
|
|
$
|
84,603
|
|
Finance lease costs:
|
|
|
|
|
Amortization of finance lease right-of-use assets
|
|
|
5,177
|
|
Interest on finance lease liabilities
|
|
|
1,115
|
|
Variable lease costs
|
|
|
15,441
|
|
Total lease costs
|
|
$
|
106,336
|
|
*
|
Includes short-term lease costs and sublease income which were not material for the year ended December 31, 2019.
|
Future maturities of lease liabilities as of December 31, 2019 were as follows (in thousands):
|
|
Finance Leases
|
|
|
Operating Leases
|
|
2020
|
|
$
|
11,331
|
|
|
$
|
78,375
|
|
2021
|
|
|
7,169
|
|
|
|
69,775
|
|
2022
|
|
|
2,860
|
|
|
|
55,685
|
|
2023
|
|
|
442
|
|
|
|
42,359
|
|
2024
|
|
|
209
|
|
|
|
32,099
|
|
Thereafter
|
|
|
—
|
|
|
|
87,402
|
|
Total lease payments
|
|
|
22,011
|
|
|
|
365,695
|
|
Less: amount representing interest
|
|
|
(1,678
|
)
|
|
|
(67,094
|
)
|
Present value of lease liabilities
|
|
|
20,333
|
|
|
|
298,601
|
|
Less: current portion
|
|
|
(10,378
|
)
|
|
|
(61,653
|
)
|
Long-term lease liabilities, net of current portion
|
|
$
|
9,955
|
|
|
$
|
236,948
|
|
55
Future maturities of lease obligations as of December 31, 2018 were as follows (in thousands):
|
|
Capital Leases
|
|
|
Operating Leases
|
|
2019
|
|
$
|
10,784
|
|
|
$
|
77,297
|
|
2020
|
|
|
5,392
|
|
|
|
63,633
|
|
2021
|
|
|
1,242
|
|
|
|
51,804
|
|
2022
|
|
|
—
|
|
|
|
37,054
|
|
2023
|
|
|
—
|
|
|
|
23,327
|
|
Thereafter
|
|
|
—
|
|
|
|
57,000
|
|
Total minimum lease payments
|
|
|
17,418
|
|
|
$
|
310,115
|
|
Less: amount representing interest
|
|
|
(973
|
)
|
|
|
|
|
Present value of lease liabilities
|
|
|
16,445
|
|
|
|
|
|
Less: current portion
|
|
|
(10,039
|
)
|
|
|
|
|
Long-term lease liabilities, net of current portion
|
|
$
|
6,406
|
|
|
|
|
|
Weighted average lease terms and discount rates as of December 31, 2019 were as follows:
Weighted average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
6.3
|
|
Finance leases
|
|
|
2.0
|
|
Weighted average discount rate
|
|
|
|
|
Operating leases
|
|
|
6.6
|
%
|
Finance leases
|
|
|
6.0
|
%
|
The following table presents cash paid for amounts included in the measurement of lease liabilities as well as supplemental noncash information for the year ended December 31, 2019 (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
81,488
|
|
Operating cash flows from finance leases
|
|
|
1,115
|
|
Financing cash flows from finance leases
|
|
|
11,477
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
|
86,148
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
|
16,462
|
|
The guarantees under these leases for the residual values of equipment at the end of the respective operating lease periods approximated $4.8 million as of December 31, 2019. Based upon the expectation that none of these leased assets will have a residual value at the end of the lease term that is materially less than the value specified in the related operating lease agreement or that we will purchase the equipment at the end of the lease term, we do not believe it is probable that we will be required to fund any amounts under the terms of these guarantee arrangements. Accordingly, these guarantees have not been recognized in the calculation of our right-of-use assets and lease liabilities. Our lease agreements do not impose any significant restrictions or covenants on us. As of December 31, 2019, we had future lease payments of $2.2 million related to leases which have been signed, but have not yet commenced. As such, these lease payments are not reflected on our consolidated balance sheet as of December 31, 2019. Leases with related parties are not significant as of or for the years ended December 31, 2019, 2018 or 2017.
Other Finance Obligations
In addition to the operating and finance lease arrangements described above, the Company is party to 139 individual property lease agreements with a single lessor as of December 31, 2019. These lease agreements have initial terms ranging from nine to 15 years (expiring through 2021) and renewal options in five-year increments providing for up to approximately 30-year total lease terms. A related agreement between the lessor and the Company gives the Company the right to acquire a limited number of the leased facilities at fair market value. These purchase rights represent a form of continuing involvement with these properties, which precluded sale-leaseback accounting. As a result, the Company treats all of the properties that it leases from this lessor as a financing arrangement. The Company is also party to certain additional agreements with the same lessor which commit the Company to perform certain repair and maintenance obligations under the leases in a specified manner and timeframe.
56
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, 2019, other finance obligations consist of $221.7 million, with cash payments of $21.0 million for the year ended December 31, 2019. 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, 2019 were as follows (in thousands):
2020
|
|
$
|
18,091
|
|
2021
|
|
|
17,610
|
|
2022
|
|
|
17,456
|
|
2023
|
|
|
17,465
|
|
2024
|
|
|
17,482
|
|
Thereafter
|
|
|
200,562
|
|
Total
|
|
$
|
288,666
|
|
11. 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. The Company has reserved 8.5 million shares of common stock for the grant of awards under the 2014 Plan, subject to adjustment as provided by the 2014 Plan. All 8.5 million 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, 2019, 4.2 million shares were available for issuance under the 2014 Plan.
2007 Incentive Plan
Under our 2007 Incentive Plan (“2007 Plan”), the Company was authorized to grant awards in the form of incentive stock options, non-qualified stock options, restricted stock, other common stock-based awards and cash-based awards. Stock options and SARs granted under the 2007 Plan may not have a term exceeding 10 years from the date of grant. The 2007 Plan also provided that all awards will become fully vested and/or exercisable upon a change in control (as defined in the 2007 Plan). Historically, awards granted under the 2007 Plan generally vested ratably over a three to four-year period. As of May 24, 2017, no further grants will be made under the 2007 plan.
2005 Equity Incentive Plan
Under our 2005 Equity Incentive Plan (“2005 Plan”), we were authorized to grant stock-based awards in the form of incentive stock options, non-qualified stock options, restricted stock and other common stock-based awards. Stock options and SARs granted under the 2005 Plan could not have a term exceeding 10 years from the date of grant. The 2005 Plan also provided that all awards become fully vested and/or exercisable upon a change in control (as defined in the 2005 Plan). Historically, awards granted under the 2005 Plan generally vested ratably over a three-year period. As of June 27, 2015, no further grants will be made under the 2005 Plan.
57
1998 Stock Incentive Plan
Under the Builders FirstSource, Inc. 1998 Stock Incentive Plan (“1998 Plan”), we were authorized to issue shares of common stock pursuant to awards granted in various forms, including incentive stock options, non-qualified stock options and other stock-based awards. The 1998 Plan also authorized the sale of common stock on terms determined by our board of directors. Historically, stock options granted under the 1998 Plan generally cliff vested after a period of seven to nine years with certain option grants subject to acceleration if certain financial targets were met. As of January 1, 2005, no further grants will be made under the 1998 Plan.
Stock Options
The following table summarizes our stock option activity:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Years
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Outstanding at December 31, 2018
|
|
|
1,332
|
|
|
$
|
5.97
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(895
|
)
|
|
$
|
5.54
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3
|
)
|
|
$
|
10.82
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
434
|
|
|
$
|
6.81
|
|
|
|
4.4
|
|
|
$
|
8,072
|
|
Exercisable at December 31, 2019
|
|
|
396
|
|
|
$
|
6.43
|
|
|
|
4.1
|
|
|
$
|
7,510
|
|
The outstanding options at December 31, 2019 include 124,000 options under the 2014 plan, 95,000 options under the 2007 Plan, 132,000 options under the 2005 Plan and 83,000 options under the 1998 Plan. As of December 31, 2019, 86,000 options under the 2014 Plan, 95,000 options under the 2007 Plan, 132,000 options under the 2005 Plan and 83,000 options under the 1998 Plan were exercisable. The weighted average grant date fair value of options granted during the year ended December 31, 2017 was $7.26. There were no options granted during the years ended December 31, 2019 or 2018. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 were $12.5 million, $10.9 million and $16.4 million, respectively. Vesting of all of our stock options is contingent solely on continuous employment over the requisite service period.
Outstanding and exercisable stock options at December 31, 2019 were as follows (shares in thousands):
|
|
Outstanding
|
|
|
Exercisable
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Years
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
$3.15 - $3.19
|
|
|
114
|
|
|
$
|
3.16
|
|
|
|
2.8
|
|
|
|
114
|
|
|
$
|
3.16
|
|
$6.35 - $6.59
|
|
|
79
|
|
|
$
|
6.48
|
|
|
|
5.7
|
|
|
|
66
|
|
|
$
|
6.45
|
|
$7.67- $12.94
|
|
|
241
|
|
|
$
|
8.64
|
|
|
|
4.7
|
|
|
|
216
|
|
|
$
|
8.14
|
|
$3.15 - $12.94
|
|
|
434
|
|
|
$
|
6.81
|
|
|
|
4.4
|
|
|
|
396
|
|
|
$
|
6.43
|
|
Restricted Stock Units
The outstanding restricted stock units (“RSUs”) at December 31, 2019 include 1,999,000 units granted under the 2014 Plan and 77,000 units granted under the 2007 Plan.
The following table summarizes activity for RSUs subject solely to service conditions for the year ended December 31, 2019 (shares in thousands):
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Nonvested at December 31, 2018
|
|
|
908
|
|
|
$
|
16.25
|
|
Granted
|
|
|
772
|
|
|
$
|
14.29
|
|
Vested
|
|
|
(504
|
)
|
|
$
|
14.45
|
|
Forfeited
|
|
|
(45
|
)
|
|
$
|
15.88
|
|
Nonvested at December 31, 2019
|
|
|
1,131
|
|
|
$
|
15.73
|
|
58
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, 2019, 2018 and 2017 were $14.29, $20.23, and $14.60, respectively.
The following table summarizes activity for RSUs subject to both performance and service conditions for the year ended December 31, 2019 (shares in thousands):
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Nonvested at December 31, 2018
|
|
|
556
|
|
|
$
|
15.16
|
|
Granted
|
|
|
397
|
|
|
$
|
14.42
|
|
Vested
|
|
|
(231
|
)
|
|
$
|
10.94
|
|
Forfeited
|
|
|
(30
|
)
|
|
$
|
16.02
|
|
Nonvested at December 31, 2019
|
|
|
692
|
|
|
$
|
16.11
|
|
The weighted average grant date fair value of RSUs for which vesting is subject to both performance and service conditions granted during the years ended December 31, 2019, 2018 and 2017 were $14.42, $21.15 and $15.38, respectively.
The following table summarizes activity for RSUs subject to both market and service conditions for the year ended December 31, 2019 (shares in thousands):
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Nonvested at December 31, 2018
|
|
|
500
|
|
|
$
|
12.78
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
Vested
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(247
|
)
|
|
$
|
8.13
|
|
Nonvested at December 31, 2019
|
|
|
253
|
|
|
$
|
17.31
|
|
The weighted average grant date fair value of RSUs for which vesting is subject to both market and service conditions granted during the years ended December 31, 2018 and 2017 were $21.96, and $11.49, respectively. There were no RSUs granted during the year ended December 31, 2019 for which vesting was subject to both market and service conditions.
Our results of operations include stock compensation expense of $12.2 million ($9.2 million net of taxes), $14.4 million ($10.7 million net of taxes) and $13.5 million ($8.2 million net of taxes) for the years ended December 31, 2019, 2018 and 2017, respectively. We recognized excess tax benefits for stock options exercised and RSUs vested of $2.2 million, $4.2 million and $5.1 million for the years ended December 31, 2019, 2018 and 2017, respectively. The total fair value of options vested during the years ended December 31, 2019, 2018, and 2017 were $0.3 million, $2.7 million and $2.7 million, respectively. The total fair value of RSUs vested during the years ended December 31, 2019, 2018 and 2017 were $9.8 million, $10.4 million and $6.9 million, respectively.
As of December 31, 2019, there was $17.4 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 1.9 years.
59
12. Income Taxes
The components of income tax expense (benefit) included in continuing operations were as follows for the years ended December 31:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,678
|
|
|
$
|
(1,831
|
)
|
|
$
|
1,831
|
|
State
|
|
|
6,274
|
|
|
|
5,572
|
|
|
|
2,213
|
|
|
|
|
9,952
|
|
|
|
3,741
|
|
|
|
4,044
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
45,955
|
|
|
|
45,934
|
|
|
|
49,710
|
|
State
|
|
|
5,039
|
|
|
|
5,889
|
|
|
|
(606
|
)
|
|
|
|
50,994
|
|
|
|
51,823
|
|
|
|
49,104
|
|
Income tax expense
|
|
$
|
60,946
|
|
|
$
|
55,564
|
|
|
$
|
53,148
|
|
Temporary differences, which give rise to deferred tax assets and liabilities, were as follows as of December 31:
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Deferred tax assets related to:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
8,219
|
|
|
$
|
10,019
|
|
Insurance reserves
|
|
|
14,277
|
|
|
|
13,245
|
|
Stock-based compensation expense
|
|
|
3,325
|
|
|
|
4,770
|
|
Accounts receivable
|
|
|
3,799
|
|
|
|
3,892
|
|
Inventories
|
|
|
5,394
|
|
|
|
13,348
|
|
Operating loss and credit carryforwards
|
|
|
13,821
|
|
|
|
38,813
|
|
Operating lease liabilities
|
|
|
74,650
|
|
|
|
—
|
|
Other
|
|
|
1,677
|
|
|
|
—
|
|
|
|
|
125,162
|
|
|
|
84,087
|
|
Valuation allowance
|
|
|
(2,409
|
)
|
|
|
(2,409
|
)
|
Total deferred tax assets
|
|
|
122,753
|
|
|
|
81,678
|
|
Deferred tax liabilities related to:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(2,393
|
)
|
|
|
(2,845
|
)
|
Goodwill and other intangible assets
|
|
|
(37,426
|
)
|
|
|
(28,055
|
)
|
Property, plant and equipment
|
|
|
(37,991
|
)
|
|
|
(26,670
|
)
|
Operating lease right-of-use assets
|
|
|
(73,171
|
)
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
(1,342
|
)
|
Total deferred tax liabilities
|
|
|
(150,981
|
)
|
|
|
(58,912
|
)
|
Net deferred tax asset (liability)
|
|
$
|
(28,228
|
)
|
|
$
|
22,766
|
|
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:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Statutory federal income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal income tax
|
|
|
2.8
|
|
|
|
4.3
|
|
|
|
7.7
|
|
Valuation allowance
|
|
|
—
|
|
|
|
—
|
|
|
|
(3.1
|
)
|
Stock compensation windfall benefit
|
|
|
(0.8
|
)
|
|
|
(1.6
|
)
|
|
|
(5.5
|
)
|
Enactment of federal income tax rate change
|
|
|
—
|
|
|
|
—
|
|
|
|
31.5
|
|
Permanent difference – 162(m) limitation
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
0.8
|
|
Permanent difference – credits
|
|
|
(2.3
|
)
|
|
|
(4.6
|
)
|
|
|
(9.6
|
)
|
Permanent difference – other
|
|
|
0.7
|
|
|
|
1.4
|
|
|
|
0.9
|
|
Other
|
|
|
(0.2
|
)
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
21.6
|
%
|
|
|
21.3
|
%
|
|
|
57.8
|
%
|
60
On December 22, 2017, the President signed into law the 2017 Tax Act. The 2017 Tax Act reduced the statutory federal corporate tax rate from 35% to 21% for periods beginning after December 31, 2017. The Income Taxes topic of the Codification requires that the effect of a tax rate change on deferred tax assets and liabilities be recognized in the period the rate change was enacted. As such, we recorded income tax expense of $29.0 million for the year ended December 31, 2017 related to the revaluation of our net deferred tax assets.
We have $274.1 million of state net operating loss carryforwards and $3.8 million of state tax credit carryforwards expiring at various dates through 2039. 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 $2.0 million and $0.3 million as of December 31, 2019 and 2018, respectively with no significant impact recorded in the Company’s consolidated statement of operations and comprehensive income for the years ended December 31, 2019, 2018 or 2017. 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 2019, 2018 or 2017.
We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Based on completed examinations and the expiration of statutes of limitations, we have concluded all U.S. federal income tax matters for years through 2014. We are currently under IRS audit for various aspects of our 2015, 2016 and 2017 tax years. We report in 41 states with various years open to examination.
13. Employee Benefit Plans
We maintain one active defined contribution 401(k) plan. Our employees are eligible to participate in the plans subject to certain employment eligibility provisions. Participants can contribute up to 75% of their annual compensation, subject to federally mandated maximums. Participants are immediately vested in their own contributions. We match a certain percentage of the contributions made by participating employees, subject to IRS limitations. Our matching contributions are subject to a pro-rata five-year vesting schedule. We recognized expense of $7.8 million, $6.8 million and $4.6 million in 2019, 2018 and 2017, respectively, for contributions to the plan.
The Company contributes to multiple collectively bargained union retirement plans including multiemployer plans. The Company does not administer the multiemployer plans, and contributions are determined in accordance with the provisions of negotiated labor contracts. The risks of participating in multiemployer plans are different from single-employer plans. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to a multiemployer plan, the unfunded obligations of that multiemployer plan may be borne by the remaining participating employers. If the Company chooses to stop participating in a multiemployer plan, the Company may be required to pay that plan an amount (“withdrawal liability”) based on the plan’s formula and the underfunded status of the plan attributable to the Company. Contributions to the plans for the years ended December 31, 2019, 2018 and 2017 were not significant.
61
14. Commitments and Contingencies
As of December 31, 2019, we had outstanding letters of credit totaling $82.2 million under our 2023 facility that principally support our self-insurance programs.
The Company has a number of known and threatened construction defect legal claims. While these claims are generally covered under the Company’s existing insurance programs to the extent any loss exceeds the deductible, there is a reasonable possibility of loss that is not able to be estimated at this time because (i) many of the proceedings are in the discovery stage, (ii) the outcome of future litigation is uncertain, and/or (iii) the complex nature of the claims. Although the Company cannot estimate a reasonable range of loss based on currently available information, the resolution of these matters could have a material adverse effect on the Company's financial position, results of operations or cash flows.
In addition, we are involved in various other claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of such claims and lawsuits. Although the ultimate disposition of these other proceedings cannot be predicted with certainty, management believes the outcome of any such claims that are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on our consolidated financial position, cash flows or results of operations. However, there can be no assurances that future adverse judgments and costs would not be material to our results of operations or liquidity for a particular period.
15. 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 have been organized into nine geographical regions. Centralized financial and operational oversight, including resource allocation and assessment of performance on an income from continuing operations before income taxes basis, is performed by our CEO, whom we have determined to be our chief operating decision maker (“CODM”).
The Company has nine operating segments aligned with its nine geographical regions (Regions 1 through 9). While all of our operating segments have similar categories of products, distribution methods and customers, certain of our operating segments have been aggregated due to also containing similar economic characteristics, resulting in the following composition of reportable segments:
|
•
|
Regions 1 and 2 have been aggregated to form the “Northeast” reportable segment
|
|
•
|
Regions 3 and 5 have been aggregated to form the “Southeast” reportable segment
|
|
•
|
Regions 4 and 6 have been aggregated to form the “South” reportable segment
|
|
•
|
Region 7, 8 and 9 have been aggregated to form the “West” reportable segment
|
In addition to our reportable segments, our consolidated results include corporate overhead, other various operating activities that are not internally allocated to a geographical region nor separately reported to the CODM, and certain reconciling items primarily related to allocations of corporate overhead and rent expense, which have collectively been presented as “All Other”. The accounting policies of the segments are consistent with those described in Note 2, except for noted reconciling items.
62
The following tables present Net sales, Income before income taxes and certain other measures for the reportable segments, reconciled to consolidated total operations, for the years ended December 31, (in thousands):
|
|
2019
|
|
Reportable segments
|
|
Net Sales
|
|
|
Depreciation &
Amortization
|
|
|
Interest
|
|
|
Income before
income taxes
|
|
Northeast
|
|
$
|
1,295,643
|
|
|
$
|
13,077
|
|
|
$
|
20,694
|
|
|
$
|
56,012
|
|
Southeast
|
|
|
1,610,156
|
|
|
|
12,586
|
|
|
|
21,729
|
|
|
|
83,466
|
|
South
|
|
|
1,866,891
|
|
|
|
19,753
|
|
|
|
22,309
|
|
|
|
113,550
|
|
West
|
|
|
2,253,854
|
|
|
|
27,599
|
|
|
|
37,513
|
|
|
|
86,144
|
|
Total reportable segments
|
|
|
7,026,544
|
|
|
|
73,015
|
|
|
|
102,245
|
|
|
|
339,172
|
|
All other
|
|
|
253,887
|
|
|
|
27,023
|
|
|
|
7,306
|
|
|
|
(56,417
|
)
|
Total consolidated
|
|
$
|
7,280,431
|
|
|
$
|
100,038
|
|
|
$
|
109,551
|
|
|
$
|
282,755
|
|
|
|
|
|
|
|
2018
|
|
Reportable segments
|
|
Net Sales
|
|
|
Depreciation &
Amortization
|
|
|
Interest
|
|
|
Income before
income taxes
|
|
Northeast
|
|
$
|
1,309,391
|
|
|
$
|
13,338
|
|
|
$
|
23,198
|
|
|
$
|
36,354
|
|
Southeast
|
|
|
1,700,317
|
|
|
|
11,661
|
|
|
|
25,599
|
|
|
|
67,465
|
|
South
|
|
|
2,020,258
|
|
|
|
20,758
|
|
|
|
25,816
|
|
|
|
111,515
|
|
West
|
|
|
2,448,581
|
|
|
|
27,268
|
|
|
|
39,961
|
|
|
|
106,525
|
|
Total reportable segments
|
|
|
7,478,547
|
|
|
|
73,025
|
|
|
|
114,574
|
|
|
|
321,859
|
|
All other
|
|
|
246,224
|
|
|
|
24,881
|
|
|
|
(6,361
|
)
|
|
|
(61,104
|
)
|
Total consolidated
|
|
$
|
7,724,771
|
|
|
$
|
97,906
|
|
|
$
|
108,213
|
|
|
$
|
260,755
|
|
|
|
2017
|
|
Reportable segments
|
|
Net Sales
|
|
|
Depreciation &
Amortization
|
|
|
Interest
|
|
|
Income before
income taxes
|
|
Northeast
|
|
$
|
1,251,951
|
|
|
$
|
12,972
|
|
|
$
|
20,314
|
|
|
$
|
41,445
|
|
Southeast
|
|
|
1,535,785
|
|
|
|
10,338
|
|
|
|
22,742
|
|
|
|
50,513
|
|
South
|
|
|
1,826,140
|
|
|
|
18,991
|
|
|
|
22,720
|
|
|
|
88,893
|
|
West
|
|
|
2,173,806
|
|
|
|
26,763
|
|
|
|
31,801
|
|
|
|
85,513
|
|
Total reportable segments
|
|
|
6,787,682
|
|
|
|
69,064
|
|
|
|
97,577
|
|
|
|
266,364
|
|
All other
|
|
|
246,527
|
|
|
|
23,929
|
|
|
|
95,597
|
|
|
|
(174,435
|
)
|
Total consolidated
|
|
$
|
7,034,209
|
|
|
$
|
92,993
|
|
|
$
|
193,174
|
|
|
$
|
91,929
|
|
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.
16. Related Party Transactions
Certain members of the Company’s board of directors also serve on the board of directors of one of our suppliers, PGT, Inc. 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, 2019, 2018 or 2017.
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, 2019, 2018 or 2017.
63
17. Unaudited Quarterly Financial Data
The following tables summarize the consolidated quarterly results of operations for 2019 and 2018 (in thousands, except per share amounts):
|
|
2019
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
Net sales
|
|
$
|
1,631,300
|
|
|
$
|
1,904,523
|
|
|
$
|
1,981,035
|
|
|
$
|
1,763,573
|
|
|
|
Gross margin
|
|
|
441,975
|
|
|
|
517,156
|
|
|
|
541,142
|
|
|
|
476,556
|
|
|
|
Net income
|
|
|
35,708
|
|
(1)
|
|
66,604
|
|
(2)
|
|
78,130
|
|
(3)
|
|
41,367
|
|
(4)
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
(1)
|
$
|
0.58
|
|
(2)
|
$
|
0.68
|
|
(3)
|
$
|
0.36
|
|
(4)
|
|
Diluted
|
|
$
|
0.31
|
|
(1)
|
$
|
0.57
|
|
(2)
|
$
|
0.67
|
|
(3)
|
$
|
0.35
|
|
(4)
|
|
|
|
2018
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
Net sales
|
|
$
|
1,700,436
|
|
|
$
|
2,089,888
|
|
|
$
|
2,118,467
|
|
|
$
|
1,815,980
|
|
|
|
Gross margin
|
|
|
411,052
|
|
|
|
496,328
|
|
|
|
522,781
|
|
|
|
492,779
|
|
|
|
Net income
|
|
|
23,220
|
|
|
|
56,622
|
|
|
|
73,328
|
|
|
|
52,021
|
|
(5)
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
0.49
|
|
|
$
|
0.64
|
|
|
$
|
0.45
|
|
(5)
|
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
0.49
|
|
|
$
|
0.63
|
|
|
$
|
0.45
|
|
(5)
|
|
(1)
|
Includes a gain on debt extinguishment of $0.7 million as discussed in Note 9.
|
(2)
|
Includes the write-off of debt discount and debt issuance costs of $2.2 million and financing costs of $2.1 million as discussed in Note 9.
|
(3)
|
Includes a loss on debt extinguishment of $3.1 million as discussed in Note 9.
|
(4)
|
Includes a loss on debt extinguishment of $3.5 million as discussed in Note 9.
|
(5)
|
Includes a gain on debt extinguishment of $3.2 million as discussed in Note 9.
|
Earnings per share is computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not equal the annual earnings per share.
18. Subsequent Events
Business Combination
On January 9, 2020 we acquired certain assets and the operations of Bianchi & Company, Inc. (“Bianchi”) for $17.2 million in cash, subject to certain adjustments. Located in Charlotte, North Carolina, Bianchi is a supplier and installer of interior and exterior doors, crown moldings, open stair rail, chair rail, wainscoting, commercial hollow metal frames and doors and other custom millwork. This acquisition was funded with a combination of cash on hand and borrowings under our 2023 facility.
The accounting for this acquisition has not been completed at the date of this filing given the proximity to the acquisition date. The acquisition will be accounted for by the acquisition method, and accordingly the results of operations will be included in the Company’s consolidated financial statements from the acquisition date. The purchase price will be allocated to the net assets acquired based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill.
Debt Transaction
In February 2020, we completed a private offering of $550.0 million in aggregate principal amount of 5.0% unsecured senior notes due 2030 (“2030 notes”) at an issue price equal to 100% of their par value. The proceeds from this offering were used together with borrowing under our 2023 facility to redeem the remaining $503.9 million in aggregate principal amount of 2024 notes outstanding at a redemption price of 104.2% of their par value and $47.5 million in aggregate principal amount of 2027 notes at a redemption price of 103.0% of their par value.
64