BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
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 550 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, 2020 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, 2020 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, 2020 included in our most recent 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.
Segments
We offer an integrated solution to our customers by providing manufacturing, supply, and installation of a full range of structural and related building products 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 our approximately 550 locations operating in 40 states across the United States. Following the merger with BMC Stock Holdings, Inc. on January 1, 2021, which is discussed in Note 2 to these condensed consolidated financial statements, the Company reorganized the structure of its internal organization.
Given the span and depth of our geographical reach, our locations are organized into three geographical divisions (East, Central, and West), which are also our operating segments. Our operating divisions are organized on a geographical basis to facilitate a disaggregated management of the Company and to respond to the local needs of the customers in the markets we serve. All of our segments have similar customers, products and services, and distribution methods.
Due to these similarities, along with the similar economic profitability achieved across all our operating segments, we aggregate our three operating segments into one reportable segment. Centralized financial and operational oversight, including resource allocation and assessment of performance on an income (loss) from continuing operations before income taxes basis, is performed by our CEO, whom we have determined to be our chief operating decision maker (“CODM”).
The accounting policies of our operating segments are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in our Form 10-K. Since the Company operates in one reportable segment, the primary measures reviewed by the CODM, including revenue, gross profit and income before income taxes, are shown in these condensed consolidated financial statements.
Business Combinations
When they meet the requirements under ASC 805, Business Combinations, merger and acquisition transactions are accounted for using the acquisition method, and accordingly the results of operations of the acquiree are included in the Company’s consolidated financial statements from the acquisition date. The consideration transferred is allocated to the identifiable assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with any excess recorded as goodwill. Transaction-related costs are expensed in the period the costs are incurred. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill.
7
Comprehensive Income
Comprehensive income is equal to the net income for all periods presented.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The purpose of ASU 2020-04 is to provide optional guidance for a period of time related to accounting for reference rate reform on financial reporting. It is intended to reduce the potential burden of reviewing contract modifications related to discontinued rates. The amendments and expedients in this update are effective as of March 12, 2020 through December 31, 2022 and may be elected by topic. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In December 2019, the FASB issued an update to existing guidance under the Income Taxes topic of the FASB Accounting Standards Codification (“Codification”). This updated guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in the Income Taxes topic. This guidance is effective for public companies annual and interim periods beginning after December 15, 2020 with early adoption permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements.
2. Business Combination
On January 1, 2021, we completed our previously announced all stock merger transaction with BMC Stock Holdings, Inc., a Delaware corporation (“BMC”), pursuant to the Agreement and Plan of Merger, dated as of August 26, 2020 (as amended, restated, supplemented, or otherwise modified from time to time, the “Merger Agreement”), by and among Builders FirstSource, Inc., Boston Merger Sub I Inc., a Delaware corporation and direct wholly owned subsidiary of Builders FirstSource, Inc. (“Merger Sub”) and BMC. On the terms and subject to the conditions set forth in the Merger Agreement, on January 1, 2021, Merger Sub merged with and into BMC, with BMC continuing as the surviving corporation and a wholly owned subsidiary of Builders FirstSource, Inc. (the “BMC Merger”). The BMC Merger expands the Company’s geographic reach and value-added offerings.
The BMC Merger was accounted for by the acquisition method, and accordingly the results of operations have been included in the Company’s consolidated financial statements from the acquisition date. Net sales and income before income taxes attributable to BMC were $1.4 billion and $42.8 million, respectively, for the three months ended March 31, 2021. Income before income taxes attributable to BMC reflects an increase in depreciation and amortization expense related to the recording of these assets at fair value as of the acquisition date and is also impacted by changes in the business post-acquisition. The consideration transferred was allocated to the identifiable assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with the excess recorded as goodwill. We incurred transaction-related costs of $17.6 million related to the BMC Merger during the three months ended March 31, 2021 which are included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.
The consideration transferred was determined as the sum of the following: (A) the price per share of the Company’s common stock (“BFS common stock”) of $40.81 (based on the closing price per share of BFS common stock on December 31, 2020), multiplied by each of: (1) the approximately 88.7 million shares of BFS common stock issued to BMC stockholders in the BMC Merger (based on the number of shares of BMC common stock outstanding on December 31, 2020, multiplied by the exchange ratio as set forth in the Merger Agreement); and (2) the approximately 0.9 million shares of BFS common stock issued to holders of outstanding BMC restricted stock awards in connection with the BMC Merger (based on the number of BMC restricted stock awards outstanding as of December 31, 2020 (with performance-based awards vesting at target level of performance), multiplied by the exchange ratio as set forth in the Merger Agreement); plus (B) the fair value attributable to fully vested, outstanding options for BMC common stock held by current BMC employees that were assumed by the Company at the effective time and became options to purchase BFS common stock, with the number of shares and exercise price adjusted by the exchange ratio.
8
The calculation of consideration transferred is as follows:
(In thousands, except ratios and per share amounts)
|
Amount
|
|
Number of BMC common shares outstanding
|
|
67,568
|
|
Exchange ratio for common shares outstanding per Merger Agreement
|
|
1.3125
|
|
Shares of BFS common stock issued for BMC outstanding common
stock
|
|
88,683
|
|
Number of BMC stock awards that vested as a result of the BMC
Merger
|
|
688
|
|
Exchange ratio for stock awards expected to vest per Merger
Agreement
|
|
1.3125
|
|
Shares of BFS common stock issued for BMC vested equity awards
|
|
903
|
|
Price per share of BFS common stock
|
$
|
40.81
|
|
Fair value of BFS common stock issued for BMC outstanding common
stock and vested equity awards
|
$
|
3,655,988
|
|
Fair value of modified BMC fully vested, unexercised options
|
|
2,374
|
|
Total consideration transferred
|
$
|
3,658,362
|
|
|
|
|
|
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed for BMC (in thousands):
|
|
|
|
|
(In thousands)
|
|
Amount
|
|
Cash and cash equivalents
|
$
|
167,490
|
|
|
Accounts receivable
|
|
469,204
|
|
|
Other receivables
|
|
36,704
|
|
|
Inventories
|
|
460,146
|
|
|
Other current assets
|
|
32,891
|
|
|
Property, plant and equipment
|
|
555,170
|
|
|
Operating lease right-of-use assets
|
|
179,133
|
|
|
Goodwill
|
|
1,751,604
|
|
|
Intangible assets
|
|
1,470,000
|
|
|
Other assets
|
|
6,244
|
|
|
Total assets
|
$
|
5,128,586
|
|
|
Accounts payable
|
$
|
279,980
|
|
|
Accrued liabilities
|
|
246,119
|
|
|
Operating lease liabilities
|
|
180,650
|
|
|
Long-term debt
|
|
366,797
|
|
|
Deferred income taxes
|
|
349,971
|
|
|
Other long-term liabilities
|
|
46,707
|
|
|
Total liabilities
|
$
|
1,470,224
|
|
|
Total consideration transferred
|
$
|
3,658,362
|
|
|
The allocation of the consideration transferred for the BMC Merger is preliminary and based upon all information available to the Company at the time of filing, and is subject to change. The Company is in the process of finalizing its valuation of the identified acquired intangible assets, and therefore, the allocation of the consideration transferred for the BMC Merger is not complete. The fair value assigned above may be adjusted during the measurement period.
The preliminary fair value of acquired intangible assets of $1.5 billion, 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.
Immediately following the BMC Merger, the Company settled certain assumed long-term debt of $359.8 million using cash on hand.
The following table reflects the pro forma operating results for the Company which gives effect to the BMC Merger as if it had occurred on January 1, 2020. The pro forma results are based on assumptions that the Company believes are reasonable under the
9
circumstances. The pro forma results are not necessarily indicative of future results. The pro forma financial information includes the historical results of the Company and BMC adjusted for certain items, which are described below, and does not include the effects of any synergies or cost reduction initiatives related to the BMC Merger.
|
Three Months Ended
March 31,
|
|
(In thousands)
|
2021
|
|
|
2020
|
|
Net sales
|
$
|
4,173,775
|
|
|
$
|
2,707,900
|
|
Net income (loss)
|
|
231,991
|
|
|
|
(86,675)
|
|
Pro forma net income (loss) reflects the following adjustments:
|
•
|
Property, plant and equipment and intangible assets are assumed to be recorded at their estimated fair values as of January 1, 2020, and are depreciated or amortized over their estimated useful lives from that date.
|
|
•
|
Transaction-related expenses of $57.7 million are assumed to have occurred on January 1, 2020, and are presented as an expense during the three months ended March 31, 2020.
|
|
•
|
Interest expense related to certain assumed long-term debt settled in connection with the BMC Merger has been adjusted.
|
|
•
|
Expense incurred during the three months ended March 31, 2021 in relation to the sell-through of inventory which was stepped up in value in connection with the BMC Merger has been adjusted and is presented as an expense during the three months ended March 31, 2020.
|
3. Revenue
The following table disaggregates our sales by product category (in thousands):
|
Three Months Ended
March 31,
|
|
|
2021
|
|
|
2020
|
|
Lumber & lumber sheet goods
|
$
|
1,728,495
|
|
|
$
|
552,481
|
|
Manufactured products
|
|
816,133
|
|
|
|
354,457
|
|
Windows, doors & millwork
|
|
718,557
|
|
|
|
391,317
|
|
Gypsum, roofing & insulation
|
|
146,440
|
|
|
|
110,852
|
|
Siding, metal & concrete products
|
|
301,910
|
|
|
|
168,885
|
|
Other building products & services
|
|
462,240
|
|
|
|
209,029
|
|
Net sales
|
$
|
4,173,775
|
|
|
$
|
1,787,021
|
|
Net sales from installation and construction services was 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 are included in accounts receivable on our consolidated balance sheet and were $179.6 million and $57.3 million as of March 31, 2021 and December 31, 2020, respectively. 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 $121.2 million and $58.5 million as of March 31, 2021 and December 31, 2020, respectively. The increase in contract assets and liabilities during the three months ended March 31, 2021 was primarily related to contract assets and liabilities acquired in the BMC Merger.
4. 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.
10
The table below presents the calculation of basic and diluted EPS (in thousands, except per share amounts):
|
Three Months Ended
March 31,
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
172,580
|
|
|
$
|
8,767
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
206,571
|
|
|
|
116,258
|
|
Dilutive effect of options and RSUs
|
|
2,053
|
|
|
|
1,236
|
|
Weighted average shares outstanding, diluted
|
|
208,624
|
|
|
|
117,494
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.84
|
|
|
$
|
0.08
|
|
Diluted
|
$
|
0.83
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
Antidilutive and contingent options and RSUs excluded
from diluted EPS
|
|
78
|
|
|
|
217
|
|
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
330,701
|
|
|
$
|
206,321
|
|
Buildings and improvements
|
|
|
543,756
|
|
|
|
386,922
|
|
Machinery and equipment
|
|
|
812,919
|
|
|
|
517,543
|
|
Furniture, fixtures and computer equipment
|
|
|
124,427
|
|
|
|
102,309
|
|
Construction in progress
|
|
|
34,745
|
|
|
|
16,568
|
|
Finance lease right-of-use assets
|
|
|
7,934
|
|
|
|
43,256
|
|
Property, plant and equipment
|
|
|
1,854,482
|
|
|
|
1,272,919
|
|
Less: accumulated depreciation
|
|
|
556,726
|
|
|
|
523,789
|
|
Property, plant and equipment, net
|
|
$
|
1,297,756
|
|
|
$
|
749,130
|
|
Depreciation expense was $45.7 million and $23.7 million, of which $10.3 million and $5.0 million was included in cost of sales, for the three months ended March 31, 2021 and 2020, respectively.
Included in property, plant and equipment are certain assets held under other finance obligations. These assets are recorded at the present value of the lease payments and include land, buildings and equipment. Amortization charges associated with assets held under other finance obligations are included in depreciation expense.
The following balances held under other finance obligations are included on the accompanying consolidated balance sheets:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
114,938
|
|
|
$
|
116,638
|
|
Buildings and improvements
|
|
|
126,110
|
|
|
|
131,390
|
|
Assets held under other finance obligations
|
|
|
241,048
|
|
|
|
248,028
|
|
Less: accumulated amortization
|
|
|
23,597
|
|
|
|
25,015
|
|
Assets held under other finance obligations, net
|
|
$
|
217,451
|
|
|
$
|
223,013
|
|
11
6. Goodwill
The following table sets forth the changes in the carrying amount of goodwill for the three months ended March 31, 2021 (in thousands):
|
|
|
|
|
|
Balance as of December 31, 2020 (1)
|
|
|
$
|
785,305
|
|
BMC Merger
|
|
|
|
1,751,604
|
|
Balance as of March 31, 2021 (1)
|
|
|
$
|
2,536,909
|
|
|
(1)
|
Goodwill is presented net of accumulated impairment losses of $44.6 million.
|
In 2021, the change in the carrying amount of goodwill is attributable to the BMC Merger. As a result of the change in segments discussed in Note 1 to these condensed consolidated financial statements, the Company has determined that the reporting units used in the analysis of goodwill impairment should align with its three operating segments. As of March 31, 2021, no triggering events have occurred. The amount allocated to goodwill is attributable to the assembled workforce of BMC as well as expected growth from the expanded product and service offerings. The goodwill recognized from the BMC Merger will not be deductible for tax purposes.
7. Intangible Assets
The following table presents intangible assets as of:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
|
(In thousands)
|
|
Customer relationships
|
|
$
|
1,532,135
|
|
|
$
|
(155,107
|
)
|
|
$
|
195,435
|
|
|
$
|
(94,690
|
)
|
Trade names
|
|
|
185,361
|
|
|
|
(65,766
|
)
|
|
|
52,061
|
|
|
|
(38,138
|
)
|
Subcontractor relationships
|
|
|
5,440
|
|
|
|
(2,397
|
)
|
|
|
5,440
|
|
|
|
(1,944
|
)
|
Non-compete agreements
|
|
|
3,719
|
|
|
|
(2,135
|
)
|
|
|
3,719
|
|
|
|
(2,001
|
)
|
Total intangible assets
|
|
$
|
1,726,655
|
|
|
$
|
(225,405
|
)
|
|
$
|
256,655
|
|
|
$
|
(136,773
|
)
|
In connection with the BMC Merger, we recorded intangible assets of $1,470.0 million, which includes $1,336.7 million of customer relationships and $133.3 million of trade names. The weighted average useful lives of the acquired intangible assets are 11.3 years in total, 11.4 years for customer relationships and 5.5 years for trade names, respectively.
During the three months ended March 31, 2021 and 2020, we recorded amortization expense in relation to the above-listed intangible assets of $88.6 million and $5.7 million, respectively.
The following table presents the estimated amortization expense for intangible assets for the years ending December 31 (in thousands):
2021 (from April 1, 2021)
|
|
$
|
257,017
|
|
2022
|
|
|
207,258
|
|
2023
|
|
|
180,421
|
|
2024
|
|
|
159,158
|
|
2025
|
|
|
140,181
|
|
Thereafter
|
|
|
557,215
|
|
Total future net intangible amortization expense
|
|
$
|
1,501,250
|
|
12
8. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands) as of:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Accrued payroll and other employee related expenses
|
|
$
|
204,374
|
|
|
$
|
176,379
|
|
Contract liabilities
|
|
|
121,193
|
|
|
|
58,455
|
|
Accrued business taxes
|
|
|
91,982
|
|
|
|
46,717
|
|
Self-insurance reserves
|
|
|
73,814
|
|
|
|
38,642
|
|
Income taxes payable
|
|
|
70,216
|
|
|
|
12,236
|
|
Accrued interest
|
|
|
18,000
|
|
|
|
13,567
|
|
Accrued rebates payable
|
|
|
17,041
|
|
|
|
18,592
|
|
Other
|
|
|
32,304
|
|
|
|
20,948
|
|
Total accrued liabilities
|
|
$
|
628,924
|
|
|
$
|
385,536
|
|
9. Long-Term Debt
Long-term debt consisted of the following (in thousands) as of:
|
March 31,
2021
|
|
|
December 31,
2020
|
|
2026 revolving credit facility (1)
|
$
|
225,000
|
|
|
$
|
75,000
|
|
2027 notes
|
|
695,000
|
|
|
|
777,500
|
|
2030 notes
|
|
550,000
|
|
|
|
550,000
|
|
Other finance obligations
|
|
211,167
|
|
|
|
216,072
|
|
Finance lease obligations
|
|
7,714
|
|
|
|
23,873
|
|
|
|
1,688,881
|
|
|
|
1,642,445
|
|
Unamortized debt discount/premium and debt issuance costs
|
|
(16,638
|
)
|
|
|
(18,205
|
)
|
|
|
1,672,243
|
|
|
|
1,624,240
|
|
Less: current maturities of long-term debt and lease obligations
|
|
14,134
|
|
|
|
27,335
|
|
Long-term debt, net of current maturities
|
$
|
1,658,109
|
|
|
$
|
1,596,905
|
|
|
(1)
|
The weighted average interest rate was 2.7% and 3.8% as of March 31, 2021 and December 31, 2020, respectively.
|
2021 Debt Transactions
On January 29, 2021, the Company amended its revolving credit facility to increase the total commitments by an aggregate amount of $500.0 million resulting in a new $1.4 billion amended credit facility (the “2026 revolving credit facility”), and to extend the maturity date from November 2023 to January 2026. In connection with this amendment, we expensed approximately $1.0 million of unamortized debt issuance costs related to exiting lenders to interest expense in the accompanying condensed consolidated statement of operations during the three months ended March 31, 2021. Approximately $4.3 million of new debt issuance costs related to the amendment will be deferred through January 2026. The 2026 revolving credit facility is discussed in more detail below.
On March 3, 2021, pursuant to the optional call feature in the indenture governing our 6.75% senior secured notes due 2027 (the “2027 notes”), $82.5 million of 2027 notes were redeemed at a redemption price equal to 103% of the principal amount of the notes, plus accrued and unpaid interest. In connection with this redemption, we recognized a loss on extinguishment of $3.6 million, which was recorded to interest expense in the accompanying condensed consolidated statement of operations during the three months ended March 31, 2021. Of this loss, approximately $2.5 million was attributable to the payment of redemption premiums on the extinguished notes and $1.1 million was attributable to the write-off of unamortized net debt discount and debt issuance costs.
2026 Revolving Credit Facility
The 2026 revolving credit facility provides for a $1.4 billion revolving credit line to be used for working capital, general corporate purposes and funding capital expenditures and growth opportunities. In addition, we may use borrowings under the 2026 revolving credit 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 March 31, 2021, we had $225.0 million in outstanding borrowings under our 2026 revolving credit facility and our net excess borrowing availability was $1.0 billion after being reduced by outstanding letters of credit of approximately $136.7 million.
13
Borrowings under the 2026 revolving credit 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 1.50% to 2.00% per annum in the case of eurodollar rate loans and 0.50% to 1.00% per annum in the case of base rate loans. The margin in either case is based on a measure of availability under the 2026 revolving credit 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 2026 revolving credit facility are assessed at a rate equal to the applicable eurodollar margin, currently 1.50%, 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 2026 revolving credit facility are guaranteed jointly and severally by the Company and all other subsidiaries that guarantee the 2027 notes and our 5.00% unsecured senior notes due 2030 (the “2030 notes”). All obligations and the guarantees of those obligations are secured by substantially all of the assets of the Company and the guarantors subject to certain exceptions and permitted liens, including with respect to the 2026 revolving credit facility, a first-priority security interest in such assets that constitute ABL Collateral (as defined below) and a second-priority security interest in such assets that constitute Notes Collateral (as defined below).
“ABL Collateral” includes substantially all presently owned and after-acquired accounts receivable, inventory, rights of unpaid vendors with respect to inventory, deposit accounts, commodity accounts, securities accounts and lock boxes, investment property, cash and cash equivalents, and general intangibles, books and records, supporting obligations and documents and related letters of credit, commercial tort claims or other claims related to and proceeds of each of the foregoing. “Notes Collateral” includes all collateral that is not ABL Collateral.
The 2026 revolving credit facility contains restrictive covenants which, among other things, limit the Company’s ability to incur additional indebtedness, incur liens, engage in mergers or other fundamental changes, sell certain assets, pay dividends, make acquisitions or investments, prepay certain indebtedness, change the nature of our business, and engage in certain transactions with affiliates. In addition, the 2026 revolving credit 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 $140.0 million as of March 31, 2021.
Fair Value
As of March 31, 2021 and December 31, 2020, the Company does not have any financial instruments that are measured at fair value on a recurring basis. We have elected to report the value of our 2027 notes, 2030 notes and 2026 revolving credit facility at amortized cost. The fair values of the 2027 notes and 2030 notes at March 31, 2021 were approximately $749.9 million and $576.3 million, respectively, and were determined using Level 2 inputs based on market prices. The carrying value of the 2026 revolving credit facility at March 31, 2021 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 2026 revolving credit facility was also classified as Level 2 in the hierarchy.
We were not in violation of any covenants or restrictions imposed by any of our debt agreements at March 31, 2021.
14
10. Leases and Other Finance Obligations
Right-of-use assets and lease liabilities consisted of the following (in thousands) as of:
|
|
|
March 31,
2021
|
|
|
December
31, 2020
|
|
Assets
|
|
|
|
|
|
|
|
Operating lease right-of-use assets, net
|
|
$
|
442,440
|
|
$
|
274,562
|
|
Finance lease right-of-use assets, net (included in property, plant and equipment, net)
|
|
|
7,073
|
|
|
34,905
|
|
Total right-of-use assets
|
|
$
|
449,513
|
|
$
|
309,467
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
|
$
|
94,316
|
|
$
|
61,625
|
|
Current portion of finance lease liabilities (included in current maturities of long-term debt)
|
|
|
2,592
|
|
|
12,178
|
|
Noncurrent
|
|
|
|
|
|
|
|
Noncurrent portion of operating lease liabilities
|
|
$
|
356,549
|
|
$
|
219,239
|
|
Noncurrent portion of finance lease liabilities (included in long-term debt, net of current maturities)
|
|
|
5,122
|
|
|
11,695
|
|
Total lease liabilities
|
|
$
|
458,579
|
|
$
|
304,737
|
|
Total lease costs consisted of the following for the three months ended March 31 (in thousands):
|
|
|
2021
|
|
|
2020
|
|
Operating lease costs (1)
|
|
$
|
32,289
|
|
$
|
21,672
|
|
Finance lease costs:
|
|
|
|
|
|
|
|
Amortization of finance lease right-of-use assets
|
|
|
959
|
|
|
1,613
|
|
Interest on finance lease liabilities
|
|
|
194
|
|
|
314
|
|
Variable lease costs
|
|
|
6,772
|
|
|
4,249
|
|
Total lease costs
|
|
$
|
40,214
|
|
$
|
27,848
|
|
|
(1)
|
Includes short-term lease costs and sublease income which were not material for the three months ended March 31, 2021 and 2020.
|
Future maturities of lease liabilities as of March 31, 2021 were as follows (in thousands):
|
|
Finance
Leases
|
|
|
Operating
Leases
|
|
2021 (from April 1, 2021)
|
|
$
|
2,386
|
|
|
$
|
87,378
|
|
2022
|
|
|
1,794
|
|
|
|
104,414
|
|
2023
|
|
|
1,569
|
|
|
|
86,915
|
|
2024
|
|
|
720
|
|
|
|
69,772
|
|
2025
|
|
|
510
|
|
|
|
48,139
|
|
Thereafter
|
|
|
1,572
|
|
|
|
140,525
|
|
Total lease payments
|
|
|
8,551
|
|
|
|
537,143
|
|
Less: amount representing interest
|
|
|
(837
|
)
|
|
|
(86,278
|
)
|
Present value of lease liabilities
|
|
|
7,714
|
|
|
|
450,865
|
|
Less: current portion
|
|
|
(2,592
|
)
|
|
|
(94,316
|
)
|
Long-term lease liabilities, net of current portion
|
|
$
|
5,122
|
|
|
$
|
356,549
|
|
15
Weighted average lease terms and discount rates as of March 31, 2021 and December 31, 2020 were as follows:
|
|
|
March 31,
2021
|
|
|
|
December
31, 2020
|
|
Weighted average remaining lease term (years)
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
6.3
|
|
|
|
6.3
|
|
Finance leases
|
|
|
5.3
|
|
|
|
2.1
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
5.5
|
%
|
|
|
6.3
|
%
|
Finance leases
|
|
|
4.4
|
%
|
|
|
5.9
|
%
|
The following table presents cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31 (in thousands):
|
|
|
2021
|
|
|
2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
30,512
|
|
$
|
20,846
|
|
Operating cash flows from finance leases
|
|
|
194
|
|
|
314
|
|
Financing cash flows from finance leases
|
|
|
25,801
|
|
|
3,522
|
|
Residual value guarantees in our lease agreements are not material. Our lease agreements do not impose any significant restrictions or covenants on us. As of March 31, 2021, we do not have any material leases that have been signed, but have not yet commenced. Leases with related parties are not significant as of March 31, 2021 nor for the three months ended March 31, 2021 and 2020.
Other Finance Obligations
In addition to the operating and finance lease arrangements described above, the Company is party to 126 individual property lease agreements with a single lessor as of March 31, 2021. These lease agreements had initial terms ranging from nine to 15 years with renewal options in five-year increments providing for up to approximately 30-year total lease terms. A related agreement between the lessor and the Company gives the Company the right to acquire a limited number of the leased facilities at fair market value. These purchase rights represent a form of continuing involvement with these properties, which precluded sale-leaseback accounting. As a result, the Company treats all of the properties that it leases from this lessor as a financing arrangement.
We were deemed the owner of certain of our facilities during their construction period based on an evaluation made in accordance with the Leases topic of the Codification. Effectively, a sale and leaseback of these facilities occurred when construction was completed and the lease term began. These transactions did not qualify for sale-leaseback accounting. As a result, the Company treats the lease of these facilities as a financing arrangement.
As of March 31, 2021, other finance obligations consist of $211.2 million, with cash payments of $5.1 million for the three months ended March 31, 2021. 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 minimum commitments for other finance obligations as of March 31, 2021 were as follows (in thousands):
2021 (from April 1, 2021)
|
|
$
|
12,867
|
|
2022
|
|
|
16,818
|
|
2023
|
|
|
16,818
|
|
2024
|
|
|
16,835
|
|
2025
|
|
|
16,836
|
|
Thereafter
|
|
|
174,300
|
|
Total
|
|
$
|
254,474
|
|
16
11. Employee Stock-Based Compensation
Time Based Restricted Stock Unit Grants
In the first quarter of 2021, our board of directors granted 266,000 restricted stock units (“RSUs”) to employees under our 2014 Incentive Plan for which vesting is based solely on continuous employment over the requisite service period. 229,000 of the RSUs vest at 33% per year at each anniversary of the grant date over the next three years and 37,000 of the RSUs vest at 50% per year at each anniversary of the grant date over the next two years. The weighted average grant date fair value for these RSUs was $46.17 per unit, which was based on the closing stock price on the respective grant dates.
Performance and Service Condition Based Restrictive Stock Unit Grants
In the first quarter of 2021, our board of directors granted 37,000 RSUs to employees under our 2014 Incentive Plan for which vesting is based on the Company’s achievement of certain performance targets over a two-year period (“performance condition”) as well as continued employment during the performance period. Assuming continued employment and if the performance vesting condition is achieved, the awards will vest on the second anniversary of the grant date. The actual number of shares of common stock that may be earned ranges from zero to 120% of the RSUs granted. The weighted average grant date fair value for these RSUs was $40.81 per unit, which was based on the closing stock price on the grant date.
Performance, Market and Service Condition Based Restricted Stock Unit Grants
In the first quarter of 2021, our board of directors granted 186,000 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 over a three-year period (“performance condition”) as well as continued employment during the performance period. 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 $47.85 per unit, which was determined using the Monte Carlo simulation model using the following assumptions:
Expected volatility (company)
|
51.3%
|
|
Expected volatility (peer group median)
|
42.9%
|
|
Correlation between the Company and peer group median
|
0.6
|
|
Expected dividend yield
|
0.0%
|
|
Risk-free rate
|
0.3%
|
|
The expected volatilities and correlation are based on the historical daily returns of our common stock and the common stocks of the constituents of the Company’s peer group over the most recent period equal to the measurement period. The expected dividend yield is based on our history of not paying regular dividends in the past and our current intention to not pay regular dividends in the foreseeable future. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant and has a term equal to the measurement period.
12. Income Taxes
A reconciliation of the statutory federal income tax rate to our effective rate for continuing operations is provided below:
|
Three Months Ended
March 31,
|
|
|
2021
|
|
|
2020
|
|
Statutory federal income tax rate
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income taxes, net of federal income tax
|
|
1.7
|
|
|
|
2.2
|
|
Stock-based compensation windfall benefit
|
|
(1.9
|
)
|
|
|
(16.0
|
)
|
Permanent differences and other
|
|
(0.7
|
)
|
|
|
(4.4
|
)
|
|
|
20.1
|
%
|
|
|
2.8
|
%
|
17
We base our estimate of deferred tax assets and liabilities on current tax laws and rates. In certain cases, we also base our estimate on business plan forecasts and other expectations about future outcomes. Changes in existing tax laws or rates could affect our actual tax results, and future business results may affect the amount of our deferred tax liabilities or the valuation of our deferred tax assets over time. Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods, as well as the residential homebuilding industry’s cyclicality and sensitivity to changes in economic conditions, it is possible that actual results could differ from the estimates used in previous analyses.
Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position.
13. Commitments and Contingencies
As of March 31, 2021, we had outstanding letters of credit totaling $136.7 million under our 2026 revolving credit facility that principally support our self-insurance programs.
The Company has a number of known and threatened construction defect legal claims. While these claims are generally covered under the Company’s existing insurance programs to the extent any loss exceeds the deductible, there is a reasonable possibility of loss that is not able to be estimated at this time because (i) many of the proceedings are in the discovery stage, (ii) the outcome of future litigation is uncertain, and/or (iii) the complex nature of the claims. Although the Company cannot estimate a reasonable range of loss based on currently available information, the resolution of these matters could have a material adverse effect on the Company's financial position, results of operations or cash flows.
In addition, we are involved in various other claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of such claims and lawsuits. Although the ultimate disposition of these other proceedings cannot be predicted with certainty, management believes the outcome of any such claims that are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on our consolidated financial position, cash flows or results of operations. However, there can be no assurances that future adverse judgments and costs would not be material to our results of operations or liquidity for a particular period.
14. Related Party Transactions
Certain members of the Company’s board of directors also serve on the board of directors for one of our suppliers, PGT, Inc. In addition, a member of the Company’s board of directors is an executive officer of one of our customers, Ashton Woods USA, L.L.C. Further, the Company has entered into certain leases of land and buildings with certain employees or non-affiliate stockholders. Activity associated with these related party transactions was not significant as of or for the three months ended March 31, 2021 or 2020.
Transactions between the Company and other related parties occur in the ordinary course of business. However, the Company carefully monitors and assesses related party relationships. Management does not believe that any of these transactions with related parties had a material impact on the Company’s results for the three months ended March 31, 2021 or 2020.
15. Subsequent Events
On May 3, 2021, we acquired certain assets and the operations of John’s Lumber and Hardware Co. (“John’s Lumber”) for $24.9 million in cash, subject to certain adjustments. Located in the Detroit, Michigan metropolitan area, John’s Lumber is a supplier and installer of windows, doors, molding, trim, siding and decking. This acquisition was funded with a combination of cash on hand and borrowings under our 2026 revolving credit 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.
18