BLDR Builders First Source Inc

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

Builders FirstSource, Inc., a Delaware corporation formed in 1998, is a leading supplier and manufacturer of building materials, manufactured components and construction services to professional homebuilders, sub-contractors, remodelers and consumers.  The Company operates approximately 400 locations in 40 states across the United States. In this quarterly report, references to the “Company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all recurring adjustments and normal accruals necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. Intercompany transactions are eliminated in consolidation.

The condensed consolidated balance sheet as of December 31, 2019 is derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. This condensed consolidated balance sheet as of December 31, 2019 and the unaudited condensed consolidated financial statements included herein should be read in conjunction with the more detailed audited consolidated financial statements for the year ended December 31, 2019 included in our most recent annual report on Form 10-K. Accounting policies used in the preparation of these unaudited condensed consolidated financial statements are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in our Form 10-K.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued an update to existing guidance under the Income Taxes topic of the FASB Accounting Standards Codification (“Codification”). This updated guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in the Income Taxes topic. This guidance is effective for public companies annual and interim periods beginning after December 15, 2020 with early adoption permitted. 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 introduced a new impairment model for financial assets, known as the current expected credit losses (“CECL”) model that is based on expected losses rather than incurred losses. The CECL model requires an entity to estimate credit losses on financial assets, including trade accounts receivable, based on historical information, current information and reasonable and supportable forecasts. Under this guidance companies record an allowance through earnings for expected credit losses upon initial recognition of the financial asset. We adopted the aspects of this guidance applicable to us on a modified retrospective basis as of January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.

2. Revenue

The following table disaggregates our sales by product category (in thousands):

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Information regarding disaggregation of sales by segment is discussed in Note 11 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 June 30, 2020 or December 31, 2019. Contract liabilities consist of deferred revenue and customer advances and deposits. Contract liability balances are included in accrued liabilities on our consolidated balance sheet and were $49.7 million and $38.6 million as of June 30, 2020 and December 31, 2019, respectively.

3. Net Income per Common Share

Net income per common 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 (in thousands, except per share amounts):  

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4. Debt

Long-term debt consisted of the following (in thousands):

2020 Debt Transactions

During the six months ended June 30, 2020, the Company executed several debt transactions which are described in more detail below.  These transactions include: (i) private offering of $550.0 million in aggregate principal amount of 5.0% unsecured senior notes due 2030 (“2030 notes”), (ii) redemption of the remaining $503.9 million in outstanding aggregate principal amount of 5.625% senior secured notes due 2024 (“2024 notes”) and $47.5 million in aggregate principal amount of 6.75% senior secured notes due 2027 (“2027 notes”), (iii) private offering of $350.0 million in aggregate principal amount of 6.75% senior secured notes due 2027.  These transactions collectively have extended our debt maturity profile and strengthened our liquidity position.  

First Quarter 2020 Refinancing Transactions

In February 2020, the Company completed a private offering of $550.0 million in aggregate principal amount of 2030 notes at an issue price equal to 100% of par value. The net proceeds from the issuance of the 2030 notes were used together with a borrowing on our $900.0 million revolving credit facility (“2023 facility”) to redeem the remaining $503.9 million in outstanding aggregate principal amount of 2024 notes and $47.5 million in aggregate principal amount of 2027 notes and to pay related transaction fees and expenses.

In connection with the issuance of the 2030 notes, we incurred $8.3 million of various third-party fees and expenses. These costs have been recorded as a reduction to long-term debt and are being amortized over the contractual life of the 2030 notes using the effective interest method.

As the Company concluded that the redemption of the 2024 notes and 2027 notes were debt extinguishments, the Company recorded a loss on extinguishment of $28.0 million in interest expense in the first quarter of 2020. Of this loss, approximately $22.7 million was attributable to the payment of redemption premiums on the extinguished notes and $5.3 million was attributable to the write-off of unamortized debt issuance costs and debt premium.

Second Quarter 2020 Debt Transaction

In April 2020, the Company completed a private offering of an additional $350.0 million in aggregate principal amount of 2027 notes at an issue price of 98.75% of par value.  The net proceeds from the issuance of the 2027 notes were used to repay the funds drawn under the 2023 facility and to pay related transaction fees and expenses, with the remaining net proceeds used for general corporate purposes.

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The Company recognized the $4.4 million in proceeds received below par value as a debt discount, which is recorded as a reduction to long-term debt.  In connection with the issuance of the 2027 notes, we incurred $5.5 million of various third-party fees and expenses, which have been recorded as a reduction to long-term debt.  These third-party costs and the debt discount will be amortized over the contractual life of the 2027 notes using the effective interest method.

Senior Unsecured Notes due 2030

As of June 30, 2020, we have $550.0 million outstanding in aggregate principal amount of the 2030 notes, which mature on March 1, 2030. Interest accrues on the 2030 notes at a rate of 5.00% per annum and is payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2020.

The terms of the 2030 notes are governed by the indenture, dated as of the February 11, 2020 (the “Indenture”), among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee. The 2030 notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior unsecured basis, by each of the Company’s direct and indirect wholly owned subsidiaries (the “Guarantors”) that guarantee its obligations under the Company’s 2023 Facility and existing senior secured term loan facility (the “2024 term loan,” and, together with the 2023 facility, the “Senior Secured Credit Facilities”) and the 2027 Secured Notes. Subject to certain exceptions, future subsidiaries that guarantee the Senior Secured Credit Facilities, the 2027 notes or certain other indebtedness will also guarantee the 2030 notes.

The 2030 notes constitute senior unsecured obligations of the Company and the Guarantors, pari passu in right of payment with all of the existing and future senior indebtedness of the Company, including indebtedness under the Senior Secured Credit Facilities and the 2027 notes. The 2030 notes are also (i) effectively subordinated to all existing and future secured indebtedness of the Company and the Guarantors (including under the Senior Secured Credit Facilities and the 2027 notes) to the extent of the value of the assets securing such indebtedness, (ii) senior to all of the future subordinated indebtedness of the Company and the Guarantors, and (iii) structurally subordinated to any existing and future indebtedness and other liabilities, including preferred stock, of the Company’s subsidiaries that do not guarantee the 2030 notes.

The Indenture contains restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional debt or issue preferred stock, create liens, create restrictions on the Company’s subsidiaries’ ability to make payments to the Company, pay dividends and make other distributions in respect of the Company’s and its subsidiaries’ capital stock, make certain investments or certain other restricted payments, guarantee indebtedness, designate unrestricted subsidiaries, sell certain kinds of assets, enter into certain types of transactions with affiliates, and effect mergers and consolidations.

At any time prior to March 1, 2025, the Company may redeem the 2030 notes in whole or in part at a redemption price equal to 100% of the principal amount of the 2030 notes plus the “applicable premium” set forth in the Indenture. In addition, at any time prior to March 1, 2023, the Company may redeem up to 40% of the aggregate principal amount of the 2030 notes with the net cash proceeds of one or more equity offerings, as described in the Indenture, at a price equal to 105.0% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date.  At any time on or after March 1, 2025, the Company may redeem the 2030 notes at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to the redemption date. If the Company experiences certain change of control events, holders of the 2030 notes may require it to repurchase all or part of their 2030 notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.

We were not in violation of any covenants or restrictions imposed by any of our debt agreements at June 30, 2020.

Fair Value

As of June 30, 2020 and December 31, 2019, the Company does not have any financial instruments which are measured at fair value on a recurring basis. We have elected to report the value of our 2027 notes, 2030 notes, 2024 term loan and 2023 facility at amortized cost. The fair values of the 2027 notes, 2030 notes and the 2024 term loan at June 30, 2020 were approximately $797.5 million, $519.8 million and $50.2 million, respectively, and were determined using Level 2 inputs based on market prices.

5. Business Combination

On January 9, 2020, we acquired certain assets and operations of Bianchi & Company, Inc. (“Bianchi”) for $15.9 million in cash. Located in Charlotte, North Carolina, Bianchi is a supplier and installer of interior and exterior millwork. This acquisition was funded with a combination of cash on hand and borrowings under our 2023 facility.

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This transaction was accounted for by the acquisition method, and accordingly the results of operations have been included in the Company’s consolidated financial statements from the acquisition date. 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 $9.4 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. Pro forma results of operations as well as net sales and income attributable to Bianchi are not presented as this acquisition did not have a material impact on our results of operations. We did not incur any significant acquisition related costs attributable to this transaction.

The following table summarizes the aggregate fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

6. Goodwill

The following table sets forth the changes in the carrying amount of goodwill by reportable segment for the six months ended June 30, 2020 (in thousands):

In 2020, the change in the carrying amount of goodwill is attributable to our acquisition of Bianchi.  The amount allocated to goodwill is attributable to the assembled workforce of Bianchi as well as expected growth from the expanded millwork product and service operations acquired.  All of the goodwill recognized from this acquisition is expected to be deductible for tax purposes and will be amortized ratably over a 15-year period for tax purposes.

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7. Intangible Assets

The following table presents intangible assets as of:

In connection with the acquisition of Bianchi, we recorded intangible assets of $9.4 million, which includes $7.9 million of customer relationships, $0.7 million of subcontractor relationships, $0.7 million of trade names and $0.1 million of non-compete agreements. The weighted average useful lives of the acquired assets are 8.2 years in total, 9.3 years for customer relationships, 3.0 years for subcontractor relationships, 3.0 years for trade names and 3.0 years for non-compete agreements.

During the three and six months ended June 30, 2020, we recorded amortization expense in relation to the above-listed intangible assets of $5.6 million and $11.3 million, respectively.  During the three and six months ended June 30, 2019, we recorded amortization expense in relation to the above-listed intangible assets of $3.9 million and $7.7 million, respectively.

The following table presents the estimated amortization expense for these intangible assets for the years ending December 31 (in thousands):

8. Employee Stock-Based Compensation

Time Based Restricted Stock Unit Grants

In the first six months of 2020, our board of directors granted 714,000 RSUs to employees and eligible directors under our 2014 Incentive Plan for which vesting is based solely on continuous employment over the requisite service period. 512,000 of the RSUs vest at 33% per year at each anniversary of the grant date over the next three years, 64,000 of the RSUs cliff vest on the fourth anniversary of the grant date, 85,000 of the RSUs cliff vest on the second anniversary of the grant date and 53,000 of the RSUs cliff vest on the first anniversary of the grant date. The weighted average grant date fair value for these RSUs was $19.23 per unit, which was based on the closing stock price on the respective grant dates.

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Performance, Market and Service Condition Based Restricted Stock Unit Grants

In the first six months of 2020, our board of directors granted 272,000 RSUs to employees under our 2014 Incentive Plan, that cliff vest on the third anniversary of the grant date based on the Company’s level of achievement of performance goals relating to return on invested capital (“ROIC”) over a three-year period (“performance condition”) as well as continued employment during the performance period (“service condition”). The total number of shares of common stock that may be earned from the performance condition ranges from zero to 200% of the RSUs granted. The number of shares earned from the performance condition may be further increased by 10% or decreased by 10% based on the Company’s total shareholder return relative to a peer group during the performance period (“market condition”). The average grant date fair value for these RSUs, with consideration of the market condition, was $23.18 per unit, which was determined using the Monte Carlo simulation model using the following assumptions:

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.

9. Income Taxes

A reconciliation of the statutory federal income tax rate to our effective rate for continuing operations is provided below:

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") into law. The CARES Act is a relief package intended to assist many aspects of the American economy disrupted by the COVID-19 pandemic. Consistent with provisions provided under the CARES act, we have elected to defer the remission of certain payroll taxes through the end of 2020, with 50% of these deferred payroll taxes to be remitted by December 31, 2021 and the remaining 50% due by December 31, 2022. This is expected to provide us with approximately $35 million of additional liquidity during the current year. We do not currently expect the CARES Act to have a material impact on our financial results, including our annual estimated effective tax rate.

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, particularly due to economic disruptions related to the COVID-19 pandemic, it is possible that actual results could differ from the estimates used in previous analyses.

Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position.

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10. Commitments and Contingencies

As of June 30, 2020, 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 and there is a reasonable possibility of loss that is not able to be estimated at this time, 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.

11. Segment 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 are organized into nine geographical regions.  Centralized financial and operational oversight, including resource allocation and assessment of performance on an income 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 products, distribution methods and customers of a similar nature, certain of our operating segments have been aggregated due to also containing similar economic characteristics, resulting in the following composition of reportable segments:

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 as a single unit to the CODM, and certain reconciling items primarily related to allocations of corporate overhead and rent expense, which have collectively been presented as “All Other”.  The accounting policies of the segments are consistent with those referenced in Note 1, except for noted reconciling items.  

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The following tables present Net sales, income before income taxes and certain other measures for the reportable segments, reconciled to total consolidated operations, for the periods indicated (in thousands):

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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.   

12. Related Party Transactions

Certain members of the Company’s board of directors serve on the board of directors for one of our suppliers, PGT Innovations, 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 six months ended June 30, 2020 or 2019.

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 six months ended June 30, 2020 or 2019.

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