Item 1. Financial Statements (unaudited)
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 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 565 locations in 42 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, 2021 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, 2021 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, 2021 included in our most recent annual report on Form 10-K (“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.
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 our CEO, whom we have determined to be our chief operating decision maker, including revenue, gross margin and income before income taxes, are shown in these condensed consolidated financial statements.
Comprehensive Income
Comprehensive income is equal to net income for all periods presented.
Reclassifications
Certain prior periods’ amounts have been reclassified to conform to the current year presentation, including presenting contract assets and contract liabilities separately on the face of the financial statements, whereas, these contract assets and contract liabilities had previously been presented as a component of accounts receivable and accrued liabilities, respectively. These reclassifications had no impact on net income, total assets and liabilities, stockholders’ equity, or cash flows as previously reported. We have changed the composition of our product categories, resulting in a decrease to four product categories. As a result of this change, prior period amounts have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers which intends to address diversity and inconsistency in the accounting related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. This standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
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 optional expedients in this update are effective, as elected, beginning March 12, 2020 through December 31, 2022 and may be elected by topic. We have not elected adoption of this optional guidance and do not intend to elect this guidance before the sunset date of December 31, 2022, as there is no material impact on our consolidated financial statements.
7
2. Revenue
The following table disaggregates our sales by product category (in thousands):
|
|
Three Months Ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Lumber & lumber sheet goods |
|
$ |
2,325,355 |
|
|
$ |
1,769,299 |
|
Manufactured products |
|
|
1,354,587 |
|
|
|
860,913 |
|
Windows, doors & millwork |
|
|
1,011,572 |
|
|
|
736,156 |
|
Specialty building products & services |
|
|
989,617 |
|
|
|
807,407 |
|
Net sales |
|
$ |
5,681,131 |
|
|
$ |
4,173,775 |
|
Net sales from installation and construction services were less than 10% of the Company’s net sales for each period presented.
The timing of revenue recognition, invoicing and cash collection results in accounts receivable, unbilled receivables, contract assets and contract liabilities. Contract assets include unbilled amounts when the revenue recognized exceeds the amount billed to the customer, and amounts representing a right to payment from previous performance that is conditional on something other than passage of time, such as retainage. Contract liabilities consist of deferred revenue and customer advances and deposits.
For the three months ended March 31, 2022 and 2021, we recognized as revenue approximately 70% and 78% of the contract liabilities balance at December 31, 2021 and 2020, 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:
|
|
Three Months Ended
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands, except per share amounts) |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
639,640 |
|
|
$ |
172,580 |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic |
|
|
177,120 |
|
|
|
206,571 |
|
Dilutive effect of options and RSUs |
|
|
2,426 |
|
|
|
2,053 |
|
Weighted average shares outstanding, diluted |
|
|
179,546 |
|
|
|
208,624 |
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.61 |
|
|
$ |
0.84 |
|
Diluted |
|
$ |
3.56 |
|
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
Antidilutive and contingent RSUs excluded from diluted EPS |
|
71 |
|
|
78 |
|
8
4. Accrued Liabilities
Accrued liabilities consisted of the following as of:
|
|
March 31,
2022 |
|
|
December 31,
2021 |
|
|
|
(in thousands) |
|
Accrued payroll and other employee related expenses |
|
$ |
303,935 |
|
|
$ |
385,800 |
|
Income taxes payable |
|
|
154,406 |
|
|
|
2,230 |
|
Accrued business taxes |
|
|
118,077 |
|
|
|
81,055 |
|
Self-insurance reserves |
|
|
72,413 |
|
|
|
68,060 |
|
Accrued rebates payable |
|
|
30,925 |
|
|
|
51,805 |
|
Amounts accrued for repurchases of common stock |
|
|
11,917 |
|
|
|
51,545 |
|
Accrued interest |
|
|
25,432 |
|
|
|
31,666 |
|
Other |
|
|
55,268 |
|
|
|
46,743 |
|
Total accrued liabilities |
|
$ |
772,373 |
|
|
$ |
718,904 |
|
5. Long-Term Debt
Long-term debt consisted of the following as of:
|
|
March 31,
2022 |
|
|
December 31,
2021 |
|
|
|
(in thousands) |
|
2026 revolving credit facility (1) |
|
$ |
756,000 |
|
|
$ |
588,000 |
|
2027 notes |
|
|
612,500 |
|
|
|
612,500 |
|
2030 notes |
|
|
550,000 |
|
|
|
550,000 |
|
2032 notes |
|
|
1,300,000 |
|
|
|
1,000,000 |
|
Other finance obligations |
|
|
202,263 |
|
|
|
202,995 |
|
Finance lease obligations |
|
|
3,419 |
|
|
|
3,787 |
|
|
|
|
3,424,182 |
|
|
|
2,957,282 |
|
Unamortized debt discount/premium and debt issuance costs |
|
|
(29,639 |
) |
|
|
(27,500 |
) |
|
|
|
3,394,543 |
|
|
|
2,929,782 |
|
Less: current maturities of long-term debt |
|
|
2,914 |
|
|
|
3,660 |
|
Long-term debt, net of current maturities, discounts and issuance costs |
|
$ |
3,391,629 |
|
|
$ |
2,926,122 |
|
|
(1) |
The weighted average interest rate was 3.5% and 2.8% as of March 31, 2022 and December 31, 2021, respectively. |
2022 Debt Transactions
On January 21, 2022, the Company completed a private offering of an additional $300.0 million in aggregate principal amount of 4.25% senior unsecured notes due 2032 (“2032 notes”) at an issue price equal to 100.50% of par value. The net proceeds from the offering were used to repay indebtedness outstanding under our $1.4 billion revolving credit facility (“2026 facility”) and pay related transaction fees and expenses.
The additional $1.5 million in proceeds received in excess of par value represents a debt premium which has been recorded as an increase to long-term debt. In connection with the offering, we incurred approximately $4.4 million of various third-party fees and expenses which have been recorded as a reduction to long-term debt. The debt premium and third-party costs will be amortized over the contractual life of the 2032 notes using the effective interest method.
On February 4, 2022, the Company amended the 2026 facility to increase the total commitments by an aggregate amount of $400.0 million resulting in a new $1.8 billion amended credit facility. All other material terms of the credit facility remain unchanged from those of the previous agreement. Effective with this amendment, the eurodollar rate loans and related interest rate benchmark were changed to the Secured Overnight Financing Rate (“SOFR”). The applicable margin ranges for Term SOFR loans were amended to be from 1.35% to 1.60% and there are no changes to base rate loan borrowings. In connection with this amendment, we incurred approximately $2.0 million of new debt issuance costs which have been recorded as other assets and will be amortized straight-line through December 2026. The 2026 facility is discussed in more detail below.
9
2026 Revolving Credit Facility
The 2026 facility provides for a $1.8 billion revolving credit line to be used for working capital, general corporate purposes and funding capital expenditures and growth opportunities. In addition, we may use borrowings under the 2026 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, 2022, we had $756.0 million in outstanding borrowings under our 2026 facility and our net excess borrowing availability was $917.1 million after being reduced by outstanding letters of credit totaling $126.9 million.
Borrowings under the 2026 facility bear interest, at our option, at either a Term SOFR rate or a base rate, plus, in each case, an applicable margin. The applicable margin ranges from 1.35% to 1.60% per annum in the case of Term SOFR loans and 0.25% to 0.50% per annum in the case of base rate loans. The margin in either case is based on a measure of availability under the 2026 facility. A commitment fee, currently 0.20% per annum, is charged on the unused amount of the revolver based on quarterly average loan utilization. Letters of credit under the 2026 facility are assessed at a rate equal to 1.25% or 1.50%, based on the average excess availability, as well as a fronting fee at a rate of 0.125% per annum. These fees are payable quarterly in arrears at the end of March, June, September, and December.
All obligations under the 2026 facility are guaranteed jointly and severally by the Company and all other subsidiaries that guarantee the 6.75% senior secured notes due 2027 (“2027 notes”), our 5.00% senior unsecured notes due 2030 (the “2030 notes”), and our 2032 notes (such subsidiaries, the “Debt Guarantors”). All obligations and the guarantees of those obligations are secured by substantially all of the assets of the Company and the Debt Guarantors subject to certain exceptions and permitted liens, including with respect to the 2026 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 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 facility also contains a financial covenant requiring the satisfaction of a minimum fixed charge ratio of 1.00 to 1.00 if our excess availability falls below the greater of $80.0 million or 10% of the maximum borrowing amount, which was $180.0 million as of March 31, 2022.
Senior Unsecured Notes due 2032
As of March 31, 2022, we have $1.3 billion outstanding in aggregate principal amount of the 2032 notes, which mature on February 1, 2032. Interest accrues on the 2032 notes at a rate of 4.25% per annum and is payable semi-annually on February 1 and August 1 of each year.
The terms of the 2032 notes are governed by the indenture, dated as of the July 23, 2021 (the “2032 Indenture”), among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee. The 2032 notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior unsecured basis, by the Debt Guarantors. Subject to certain exceptions, future subsidiaries that guarantee the 2026 facility, the 2027 notes, the 2030 notes or certain other indebtedness will also guarantee the 2032 notes.
The 2032 notes constitute senior unsecured obligations of the Company and Debt Guarantors, pari passu in right of payment with all of the existing and future senior indebtedness of the Company, including indebtedness under the 2026 facility, the 2027 notes and the 2030 notes, effectively subordinated to all existing and future secured indebtedness of the Company and the Debt Guarantors (including indebtedness under the 2026 facility and the 2027 notes) to the extent of the value of the assets securing such indebtedness, senior to all of the future subordinated indebtedness of the Company and the Debt Guarantors and structurally subordinated to any existing and future indebtedness and other liabilities, including preferred stock, of the Company’s subsidiaries that do not guarantee the 2032 notes.
10
The 2032 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 August 1, 2026, the Company may redeem the 2032 notes in whole or in part at a redemption price equal to 100% of the principal amount of the 2032 notes plus the “applicable premium” set forth in the 2032 Indenture. At any time on or after August 1, 2026, the Company may redeem the 2032 notes at the redemption prices set forth in the 2032 Indenture, plus accrued and unpaid interest, if any, to the redemption date. At any time prior to August 1, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2032 notes with the net cash proceeds of one or more equity offerings, as described in the 2032 Indenture, at a price equal to 104.25% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. If the Company experiences certain change of control triggering events, holders of the 2032 notes may require it to repurchase all or part of their 2032 notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.
Fair Value
As of March 31, 2022 and December 31, 2021, 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, 2032 notes and 2026 facility at amortized cost. The fair values of the 2027 notes, 2030 notes and 2032 notes at March 31, 2022 were approximately $636.2 million $542.4 million and $1,212.3 million, respectively, and were determined using Level 2 inputs based on market prices. The carrying value of the 2026 facility at March 31, 2022 approximates fair value as the rates are comparable to those at which we could currently borrow under similar terms, are variable and incorporate a measure of our credit risk. As such, the fair value of the 2026 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, 2022.
6. Employee Stock-Based Compensation
Time Based Restricted Stock Unit Grants
In the first three months of 2022, our board of directors granted 156,700 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. All of these RSUs vest at 33% per year at each anniversary of the grant date over the next three years. The weighted average grant date fair value for these RSUs was $69.11 per unit, which was based on the closing stock price on the respective grant dates.
Performance, Market and Service Condition Based Restricted Stock Unit Grants
In the first three months of 2022, our board of directors granted 150,600 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 $70.77 per unit, which was determined using the Monte Carlo simulation model applying the following assumptions:
Expected volatility (company) |
53.0% |
|
Expected volatility (peer group median) |
34.6% |
|
Correlation between the Company and peer group median |
0.6 |
|
Expected dividend yield |
0.0% |
|
Risk-free rate |
1.7% |
|
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.
11
7. Income Taxes
A reconciliation of the statutory federal income tax rate to our effective rate for continuing operations is provided below:
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
Statutory federal income tax rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
State income taxes, net of federal income tax |
|
|
2.9 |
|
|
|
1.7 |
|
Stock-based compensation windfall benefit |
|
|
(1.7 |
) |
|
|
(1.9 |
) |
Permanent differences and other |
|
|
— |
|
|
|
(0.7 |
) |
|
|
|
22.2 |
% |
|
|
20.1 |
% |
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.
8. Commitments and Contingencies
As of March 31, 2022, we had outstanding letters of credit totaling $126.9 million under our 2026 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.
9. Related Party Transactions
An executive officer of one of our customers, Ashton Woods USA, L.L.C., serves as a member of the Company’s board of directors. Accounts receivable due from and net sales to Ashton Woods USA, L.L.C. were approximately 1% of our total accounts receivable and our total net sales, respectively, as of March 31, 2022 and December 31, 2021, and for the three months ended March 31, 2022 and 2021. 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, 2022 or 2021.
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, 2022 or 2021.
12
10. Subsequent Events
Business Combinations
On April 1, 2022, we completed two transactions to acquire certain assets and the operations of (i) Panel Truss of Longview, Inc., Panel Truss – Hearne, LLC, Case-Hill, Inc., Panel Truss-Dallas, LLC, Truss Ops Trucking, LLC and Truss Ops, LLC (the “Texas Panel Truss Businesses”), and Panel Truss – Oakwood, LLC Panel Truss – Townville, LLC and Panel Truss – Ringgold, LLC (the “East Panel Truss Businesses”) and (ii) Valley Truss Co., Inc. (“Valley Truss”) for $169.4 million in cash and $31.2 million in cash, respectively, subject to certain closing adjustments.
Each of the Texas Panel Truss Businesses and the East Panel Truss Businesses provide building components primarily to multi-family markets, with the Texas Panel Truss Businesses primarily serving such markets in Texas and East Panel Truss Businesses primarily serving such markets in Georgia and South Carolina.
Valley Truss is a manufacturer of floor and roof trusses located in Boise, Idaho. Each of these acquisitions were funded with a combination of cash on hand and borrowings under our 2026 facility.
The accounting for these business combinations have not been completed at the date of this filing given the proximity to the acquisition date for each acquisition. The acquisitions 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.
Company Shares Repurchases
On May 9, 2022, the Company’s board of directors authorized a new share repurchase program of $2.0 billion, which replaces the previous $1.0 billion authorization announced on February 18, 2022.
13