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I

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission File Number 0-51357

 

BUILDERS FIRSTSOURCE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

52-2084569

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

2001 Bryan Street, Suite 1600

 

 

Dallas, Texas

 

75201

(Address of principal executive offices)

 

(Zip Code)

(214880-3500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common stock, par value $0.01 per share

BLDR

NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Small reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the issuer’s common stock, par value $0.01, outstanding as of April 29, 2020 was 116,610,833.

 

 

 

 

 

 


 

BUILDERS FIRSTSOURCE, INC.

Index to Form 10-Q

 

 

 

 

 

Page

 

 

PART I — FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements

 

3

 

 

Condensed Consolidated Statement of Operations and Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2020 and 2019

 

3

 

 

Condensed Consolidated Balance Sheet (Unaudited) as of March 31, 2020 and December 31, 2019

 

4

 

 

Condensed Consolidated Statement of Cash Flows (Unaudited) for the Three Months Ended March 31, 2020 and 2019

 

5

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2020 and March 31, 2019

 

6

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

23

Item 4.

 

Controls and Procedures

 

23

 

 

PART II — OTHER INFORMATION

 

25

Item 1.

 

Legal Proceedings

 

25

Item 1A.

 

Risk Factors

 

25

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

Item 3.

 

Defaults Upon Senior Securities

 

27

Item 4.

 

Mine Safety Disclosures

 

27

Item 5.

 

Other Information

 

27

Item 6.

 

Exhibits

 

28

 

 

 

2


 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

 

 

Three Months Ended

March 31,

 

 

2020

 

 

2019

 

 

(Unaudited)

(In thousands, except per share amounts)

 

Net sales

$

1,787,021

 

 

$

1,631,300

 

Cost of sales

 

1,321,608

 

 

 

1,189,325

 

Gross margin

 

465,413

 

 

 

441,975

 

Selling, general and administrative expenses

 

404,466

 

 

 

370,084

 

Income from operations

 

60,947

 

 

 

71,891

 

Interest expense, net

 

51,931

 

 

 

24,901

 

Income before income taxes

 

9,016

 

 

 

46,990

 

Income tax expense

 

249

 

 

 

11,282

 

        Net income

$

8,767

 

 

$

35,708

 

        Comprehensive income

$

8,767

 

 

$

35,708

 

Net income per share:

 

 

 

 

 

 

 

Basic

$

0.08

 

 

$

0.31

 

Diluted

$

0.07

 

 

$

0.31

 

Weighted average common shares:

 

 

 

 

 

 

 

Basic

 

116,258

 

 

 

115,425

 

Diluted

 

117,494

 

 

 

116,531

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

3


 

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

 

 

March 31,

2020

 

 

December 31,

2019

 

 

(Unaudited)

(In thousands, except per share amounts)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

163,872

 

 

$

14,096

 

Accounts receivable, less allowances of $18,496 and $13,492 at March 31, 2020 and

   December 31, 2019, respectively

 

702,192

 

 

 

614,946

 

Other receivables

 

54,647

 

 

 

77,447

 

Inventories, net

 

640,048

 

 

 

561,255

 

Other current assets

 

44,122

 

 

 

39,123

 

Total current assets

 

1,604,881

 

 

 

1,306,867

 

Property, plant and equipment, net

 

730,738

 

 

 

721,887

 

Operating lease right-of-use assets, net

 

285,964

 

 

 

292,684

 

Goodwill

 

777,283

 

 

 

769,022

 

Intangible assets, net

 

132,165

 

 

 

128,388

 

Deferred income taxes

 

8,393

 

 

 

8,417

 

Other assets, net

 

21,934

 

 

 

22,225

 

Total assets

$

3,561,358

 

 

$

3,249,490

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

551,548

 

 

 

436,823

 

Accrued liabilities

 

223,319

 

 

 

308,950

 

Current portion of operating lease liabilities

 

61,628

 

 

 

61,653

 

Current maturities of long-term debt

 

22,518

 

 

 

13,875

 

Total current liabilities

 

859,013

 

 

 

821,301

 

Noncurrent portion of operating lease liabilities

 

230,355

 

 

 

236,948

 

Long-term debt, net of current maturities, debt discount, and debt issuance costs

 

1,545,211

 

 

 

1,277,398

 

Deferred income taxes

 

37,496

 

 

 

36,645

 

Other long-term liabilities

 

55,745

 

 

 

52,245

 

Total liabilities

 

2,727,820

 

 

 

2,424,537

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000 shares authorized; zero shares issued and outstanding

 

 

 

 

 

Common stock, $0.01 par value, 200,000 shares authorized; 116,545 and 116,052 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

1,165

 

 

 

1,161

 

Additional paid-in capital

 

574,769

 

 

 

574,955

 

Retained earnings

 

257,604

 

 

 

248,837

 

Total stockholders' equity

 

833,538

 

 

 

824,953

 

Total liabilities and stockholders' equity

$

3,561,358

 

 

$

3,249,490

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


 

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

Three months ended

March 31,

 

 

2020

 

 

2019

 

 

(Unaudited)

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

8,767

 

 

$

35,708

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

29,400

 

 

 

23,576

 

Amortization of debt issuance costs and debt discount

 

684

 

 

 

1,149

 

Loss (gain) on extinguishment of debt

 

5,349

 

 

 

(680

)

Deferred income taxes

 

875

 

 

 

9,638

 

Stock compensation expense

 

3,254

 

 

 

2,659

 

Gain on sale of assets

 

(133

)

 

 

(464

)

Changes in assets and liabilities, net of assets acquired and liabilities assumed:

 

 

 

 

 

 

 

Receivables

 

(61,998

)

 

 

22,703

 

Inventories

 

(78,591

)

 

 

(38,603

)

Other current assets

 

(5,000

)

 

 

4,732

 

Other assets and liabilities

 

26,286

 

 

 

(1,319

)

Accounts payable

 

108,295

 

 

 

47,371

 

Accrued liabilities

 

(87,842

)

 

 

(100,395

)

Net cash provided by (used in) operating activities

 

(50,654

)

 

 

6,075

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(28,498

)

 

 

(21,524

)

Proceeds from sale of property, plant and equipment

 

538

 

 

 

720

 

Cash used for acquisitions

 

(15,893

)

 

 

 

Net cash used in investing activities

 

(43,853

)

 

 

(20,804

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

681,000

 

 

 

374,000

 

Repayments under revolving credit facility

 

(398,000

)

 

 

(331,000

)

Proceeds from long-term debt and other loans

 

550,000

 

 

 

 

Repayments of long-term debt and other loans

 

(554,263

)

 

 

(24,440

)

Payments of debt extinguishment costs

 

(22,686

)

 

 

 

Payments of loan costs

 

(8,332

)

 

 

 

Exercise of stock options

 

398

 

 

 

216

 

Repurchase of common stock

 

(3,834

)

 

 

(2,450

)

Net cash provided by financing activities

 

244,283

 

 

 

16,326

 

Net change in cash and cash equivalents

 

149,776

 

 

 

1,597

 

Cash and cash equivalents at beginning of period

 

14,096

 

 

 

10,127

 

Cash and cash equivalents at end of period

$

163,872

 

 

$

11,724

 

Supplemental disclosure of non-cash activities

Purchases of property, plant and equipment included in accounts payable were $5.2 million and $1.9 million for the three months ended March 31, 2020 and 2019, respectively.

The Company acquired assets under operating lease obligations of $9.5 million and $15.7 million for the three months ended March 31, 2020 and 2019, respectively.  Additionally, the Company acquired assets under finance lease obligations of $2.7 million and $2.7 million for the three months ended March 31, 2020 and 2019, respectively.  

The Company made cash payment for interest of $21.7 million and $33.6 million for the three months ended March 31, 2020 and 2019, respectively.

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Additional Paid

 

 

Retained

Earnings

 

 

 

 

 

 

Common Stock

 

 

in

 

 

(Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit)

 

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Balance at December 31, 2018

 

 

115,078

 

 

$

1,151

 

 

$

560,221

 

 

$

34,966

 

 

$

596,338

 

Vesting of restricted stock units

 

 

662

 

 

 

7

 

 

 

(7

)

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

2,659

 

 

 

 

 

 

2,659

 

Exercise of stock options

 

 

59

 

 

 

 

 

 

216

 

 

 

 

 

 

216

 

Shares withheld for restricted stock units vested

 

 

(196

)

 

 

(2

)

 

 

(2,448

)

 

 

 

 

 

(2,450

)

Net income

 

 

 

 

 

 

 

 

 

 

 

35,708

 

 

 

35,708

 

Balance at March 31, 2019

 

 

115,603

 

 

$

1,156

 

 

$

560,641

 

 

$

70,674

 

 

$

632,471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

116,052

 

 

$

1,161

 

 

$

574,955

 

 

$

248,837

 

 

$

824,953

 

Vesting of restricted stock units

 

 

579

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

3,254

 

 

 

 

 

 

3,254

 

Exercise of stock options

 

 

82

 

 

 

 

 

 

398

 

 

 

 

 

 

398

 

Shares withheld for restricted stock units vested

 

 

(168

)

 

 

(2

)

 

 

(3,832

)

 

 

 

 

 

(3,834

)

Net income

 

 

 

 

 

 

 

 

 

 

 

8,767

 

 

 

8,767

 

Balance at March 31, 2020

 

 

116,545

 

 

$

1,165

 

 

$

574,769

 

 

$

257,604

 

 

$

833,538

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

6


 

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 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):

 

 

Three Months Ended

March 31,

 

 

2020

 

 

2019

 

Lumber & lumber sheet goods

$

552,481

 

 

$

517,689

 

Manufactured products

 

354,457

 

 

 

317,352

 

Windows, doors & millwork

 

391,317

 

 

 

353,390

 

Gypsum, roofing & insulation

 

110,852

 

 

 

120,919

 

Siding, metal & concrete products

 

168,885

 

 

 

149,918

 

Other building products & services

 

209,029

 

 

 

172,032

 

Net sales

$

1,787,021

 

 

$

1,631,300

 

 

7


 

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 March 31, 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 $36.6 million and $38.6 million as of March 31, 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):  

 

 

Three Months Ended

March 31,

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

Net income

$

8,767

 

 

$

35,708

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

116,258

 

 

 

115,425

 

Dilutive effect of options and RSUs

 

1,236

 

 

 

1,106

 

Weighted average shares outstanding, diluted

 

117,494

 

 

 

116,531

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

Basic

$

0.08

 

 

$

0.31

 

Diluted

$

0.07

 

 

$

0.31

 

 

 

 

 

 

 

 

 

Antidilutive and contingent options and RSUs excluded

   from diluted EPS

 

217

 

 

 

1,451

 

 

 

8


 

4. Debt

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

 

 

March 31,

2020

 

 

December 31,

2019

 

2023 facility (1)

$

310,000

 

 

$

27,000

 

2024 notes

 

 

 

 

503,923

 

2024 term loan (2)

 

52,000

 

 

 

52,000

 

2027 notes

 

427,500

 

 

 

475,000

 

2030 notes

 

550,000

 

 

 

 

Other finance obligations

 

220,127

 

 

 

221,726

 

Finance lease obligations

 

19,491

 

 

 

20,333

 

 

 

1,579,118

 

 

 

1,299,982

 

Unamortized debt discount and debt issuance costs

 

(11,389

)

 

 

(8,709

)

 

 

1,567,729

 

 

 

1,291,273

 

Less: current maturities of long-term debt

 

22,518

 

 

 

13,875

 

Long-term debt, net of current maturities

$

1,545,211

 

 

$

1,277,398

 

 

 

(1)

The weighted average interest rate was 4.1% and 4.4% as of March 31, 2020 and December 31, 2019, respectively.

 

(2)

The weighted average interest rate was 4.7% and 5.6% as of March 31, 2020 and December 31, 2019, respectively.

2020 Debt Transactions

In February 2020, the Company completed a private offering of $550.0 million in aggregate principal amount of 5.0% unsecured senior notes due 2030 (“2030 notes”) at an issue price equal to 100% of 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 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”) 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.

Senior Unsecured Notes due 2030

As of March 31, 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.

 

9


 

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.

Fair Value

As of March 31, 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 March 31, 2020 were approximately $419.4 million, $503.4 million and $45.6 million, respectively, and were determined using Level 2 inputs based on market prices. The carrying value of the 2023 facility at March 31, 2020 approximates fair value as the rates are comparable to those at which we could currently borrow under similar terms, are variable and incorporate a measure of our credit risk. As such, the fair value of the 2023 facility was also classified as Level 2 in the hierarchy.

We were not in violation of any covenants or restrictions imposed by any of our debt agreements at March 31, 2020.

 

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.

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.

10


 

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

 

Accounts receivable

$

2,353

 

Inventory

 

202

 

Property, plant and equipment

 

74

 

Other assets

 

94

 

Goodwill (Note 6)

 

8,261

 

Intangible assets (Note 7)

 

9,440

 

Total assets acquired

 

20,424

 

Accounts payable and accrued liabilities

 

(4,531

)

Total liabilities assumed

 

(4,531

)

Total net assets acquired

$

15,893

 

 

6. Goodwill

The following table sets forth the changes in the carrying amount of goodwill by reportable segment for the three months ended March 31, 2020 (in thousands):

 

 

 

 

Northeast

 

 

Southeast

 

 

South

 

 

West

 

 

Total

 

Balance as of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

97,102

 

$

60,691

 

$

343,919

 

$

311,946

 

$

813,658

 

Accumulated impairment losses

 

 

(494

)

 

(615

)

 

(43,527

)

 

 

 

(44,636

)

 

 

 

96,608

 

 

60,076

 

 

300,392

 

 

311,946

 

 

769,022

 

Acquisitions

 

 

 

 

8,261

 

 

 

 

 

 

8,261

 

Balance as of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

97,102

 

$

68,952

 

$

343,919

 

$

311,946

 

$

821,919

 

Accumulated impairment losses

 

 

(494

)

 

(615

)

 

(43,527

)

 

 

 

(44,636

)

 

 

$

96,608

 

$

68,337

 

$

300,392

 

$

311,946

 

$

777,283

 

 

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.

 

7. Intangible Assets

The following table presents intangible assets as of:

 

 

  

March 31, 2020

 

 

December 31, 2019

 

 

  

Gross

Carrying

Amount

 

  

Accumulated

Amortization

 

 

Gross

Carrying

Amount

 

  

Accumulated

Amortization

 

 

  

(In thousands)

 

Customer relationships 

  

$

191,305

  

  

$

(81,619

 

$

183,445

  

  

$

(77,016

Trade names

 

 

52,061

 

 

 

(36,556

)

 

 

51,361

 

 

 

(36,082

)

Subcontractor relationships

 

 

5,440

 

 

 

(584

)

 

 

4,700

 

 

 

(131

)

Non-compete agreements

 

 

3,719

 

 

 

(1,601

)

 

 

3,579

 

 

 

(1,468

)

Total intangible assets

 

$

252,525

 

 

$

(120,360

)

 

$

243,085

 

 

$

(114,697

)

 

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, respectively.

 

11


 

During the three months ended March 31, 2020, we recorded amortization expense in relation to the above-listed intangible assets of $5.7 million.  During the three months ended March 31, 2019, we recorded amortization expense in relation to the above-listed intangible assets of $3.9 million.

 

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

 

2020 (from April 1, 2020)

  

$

16,262

  

2021 

  

 

20,231

  

2022 

  

 

18,671

  

2023 

  

 

15,408

  

2024 

  

 

14,094

  

Thereafter

 

 

47,499

 

Total future net intangible amortization expense

 

$

132,165

 

 

 

8. Employee Stock-Based Compensation

 

Time Based Restricted Stock Unit Grants

In the first quarter of 2020, our board of directors granted 291,000 RSUs to employees under our 2014 Incentive Plan for which vesting is based solely on continuous employment over the requisite service period. 206,000 of the RSUs vest at 33% per year at each anniversary of the grant date over the next three years and 85,000 of the RSUs cliff vest on the second anniversary of the grant date. The weighted average grant date fair value for these RSUs was $22.71 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 2020, our board of directors granted 206,000 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. 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:

 

Expected volatility (company)

40.0%

 

Expected volatility (peer group median)

40.0%

 

Correlation between the company and peer group median

0.5

 

Expected dividend yield

0.0%

 

Risk-free rate

0.9%

 

 

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


 

9. 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,

 

 

2020

 

 

2019

 

Statutory federal income tax rate

 

21.0

 

 

21.0

%

State income taxes, net of federal income tax

 

2.2

 

 

 

4.2

 

Stock compensation windfall benefit

 

(16.0

 

 

(0.1

Permanent differences and other

 

(4.4

)

 

 

(1.1

)

 

 

2.8

%

 

 

24.0

%

 

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. We are currently evaluating the impact of the CARES Act on our consolidated financial statements.  

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.

10. Commitments and Contingencies

As of March 31, 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, 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.

 

 

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”).    

13


 

The Company has nine operating segments aligned with its nine geographical regions (Regions 1 through 9). While all of our operating segments have products, distribution methods and customers of a similar nature, certain of our operating segments have been aggregated due to also containing similar economic characteristics, resulting in the following composition of reportable segments:

 

Regions 1 and 2 have been aggregated to form the “Northeast” reportable segment

 

Regions 3 and 5 have been aggregated to form the “Southeast” reportable segment  

 

Regions 4 and 6 have been aggregated to form the “South” reportable segment

 

Region 7, 8 and 9 have been aggregated to form the “West” reportable segment

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.  

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):

 

 

 

Three months ended March 31, 2020

 

Reportable segments

 

Net Sales

 

 

Depreciation &

Amortization

 

 

Interest

 

 

Income before

income taxes

 

Northeast

 

$

295,573

 

 

$

3,497

 

 

$

4,931

 

 

$

4,616

 

Southeast

 

 

400,384

 

 

 

3,843

 

 

 

5,306

 

 

 

16,577

 

South

 

 

499,804

 

 

 

6,831

 

 

 

5,664

 

 

 

23,333

 

West

 

 

516,767

 

 

 

7,594

 

 

 

9,322

 

 

 

4,420

 

Total reportable segments

 

 

1,712,528

 

 

 

21,765

 

 

 

25,223

 

 

 

48,946

 

All other

 

 

74,493

 

 

 

7,635

 

 

 

26,708

 

 

 

(39,930

)

Total consolidated

 

$

1,787,021

 

 

$

29,400

 

 

$

51,931

 

 

$

9,016

 

 

 

 

 

Three months ended March 31, 2019

 

Reportable segments

 

Net Sales

 

 

Depreciation &

Amortization

 

 

Interest

 

 

Income before

income taxes

 

Northeast

 

$

285,789

 

 

$

3,205

 

 

$

5,177

 

 

$

7,244

 

Southeast

 

 

386,673

 

 

 

3,033

 

 

 

5,582

 

 

 

17,256

 

South

 

 

458,609

 

 

 

4,832

 

 

 

5,900

 

 

 

29,010

 

West

 

 

436,313

 

 

 

6,364

 

 

 

8,741

 

 

 

(404

)

Total reportable segments

 

 

1,567,384

 

 

 

17,434

 

 

 

25,400

 

 

 

53,106

 

All other

 

 

63,916

 

 

 

6,142

 

 

 

(499

)

 

 

(6,116

)

Total consolidated

 

$

1,631,300

 

 

$

23,576

 

 

$

24,901

 

 

$

46,990

 

 

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.   

 

 

14


 

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 three months ended March 31, 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 three months ended March 31, 2020 or 2019.

 

 

13. Subsequent Events

In April 2020, we 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 Company intends to use the net proceeds from the offering to repay the funds drawn under its revolving credit facility and to pay related transaction fees and expenses, with any remaining net proceeds to be used for general corporate purposes.  

 

 

15


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year ended December 31, 2019 included in our most recent annual report on Form 10-K. The following discussion and analysis should also be read in conjunction with the unaudited condensed consolidated financial statements appearing elsewhere in this report. In this quarterly report on Form 10-Q, 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.

Cautionary Statement

Statements in this report and the schedules hereto that are not purely historical facts or that necessarily depend upon future events, including statements about expected market share gains, forecasted financial performance or other statements about anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  Readers are cautioned not to place undue reliance on forward-looking statements. In addition, oral statements made by our directors, officers and employees to the investor and analyst communities, media representatives and others, depending upon their nature, may also constitute forward-looking statements. As with the forward-looking statements included in this report, these forward-looking statements are by nature inherently uncertain, and actual results may differ materially as a result of many factors.  All forward-looking statements are based upon information available to Builders FirstSource, Inc. on the date this report was submitted.  Builders FirstSource, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks or uncertainties related to the recent novel coronavirus disease 2019 (“COVID-19”) pandemic, the Company’s growth strategies, including gaining market share, or the Company’s revenues and operating results being highly dependent on, among other things, the homebuilding industry, lumber prices and the economy.  Builders FirstSource, Inc. may not succeed in addressing these and other risks.  Further information regarding factors that could affect our financial and other results can be found in the risk factors section of Builders FirstSource, Inc.’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.  Consequently, all forward-looking statements in this report are qualified by the factors, risks and uncertainties contained therein.

COMPANY OVERVIEW

We are a leading supplier and manufacturer of building materials, manufactured components and construction services to professional contractors, sub-contractors and consumers. The Company operates approximately 400 locations in 40 states across the United States. Given the span and depth of our geographical reach, our locations are organized into nine geographical regions (Regions 1 through 9), which are also our operating segments, and these are further aggregated into four reportable segments: Northeast, Southeast, South and West. All of our segments have similar customers, products and services, and distribution methods. Our financial statements contain additional information regarding segment performance which is discussed in Note 11 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.

We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, vinyl windows, custom millwork and trim, as well as engineered wood that we design, cut, and assemble for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods and various window, door and millwork lines. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.

We group our building products into six product categories:

 

Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing.

 

Manufactured Products. Manufactured products consist of wood floor and roof trusses, steel roof trusses, wall panels, stairs, and engineered wood.

 

Windows, Door & Millwork. Windows & doors are comprised of the manufacturing, assembly, and distribution of windows and the assembly and distribution of interior and exterior door units. Millwork includes interior trim and custom features that we manufacture under the Synboard ® brand name.  

 

Gypsum, Roofing & Insulation. Gypsum, roofing, & insulation include wallboard, ceilings, joint treatment and finishes.  

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Siding, Metal, and Concrete. Siding, metal, and concrete includes vinyl, composite, and wood siding, exterior trim, other exteriors, metal studs and cement.

 

Other Building Products & Services. Other building products & services are comprised of products such as cabinets and hardware as well as services such as turn-key framing, shell construction, design assistance, and professional installation spanning the majority of our product categories.

Our operating results are dependent on the following trends, events and uncertainties, some of which are beyond our control:

 

Homebuilding Industry. Our business is driven primarily by the residential new construction market and the residential repair and remodel market, which are in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, housing affordability, foreclosure rates, the availability of skilled construction labor, and the health of the economy and mortgage markets. According to the U.S. Census Bureau, the seasonally adjusted annualized rates for U.S. total housing starts and U.S. single-family housing starts were 1.2 million and 0.9 million, respectively, as of March 31, 2020. However, both total and single-family housing starts remain below the normalized historical annual averages (from 1959 through 2019) of 1.5 million and 1.1 million, respectively.

In March of 2020, the U.S. economy began to see significant disruption and uncertainty from the impacts of the COVID-19 pandemic.  The extent and duration of this disruption and uncertainty are yet to be fully known, and we expect to experience a decline in housing starts, reduced sales demand, increased margin pressures and increased operating costs as a result.  In addition to the COVID-19 effect, we may continue to experience pressure on our gross margins due to lower levels of housing starts versus historical norms, increased competition for homebuilder business and cyclical fluctuations in commodity prices.  Although, there has been a trend of consolidation within the building products supply industry over the past several years, our industry remains highly fragmented and competitive and we will continue to face significant competition from local and regional suppliers. While it is uncertain how long demand will be disrupted due to the current pandemic, we still believe there are several meaningful trends that indicate U.S. housing demand will rebound and continue to trend towards recovering to the historical average. These trends include relatively low interest rates, the aging of housing stock and normal population growth due to immigration and birth rate exceeding death rate. While the rate of market growth has recently been disrupted, industry forecasters, including the National Association of Homebuilders (“NAHB”), expect to see housing demand return and continue to increase in future years.

 

Targeting Large Production Homebuilders. In recent years, the homebuilding industry has undergone consolidation, and the larger homebuilders have increased their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we are facing in servicing large homebuilders with certain profitability expectations. Additionally, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.

 

Repair and remodel end market.  Although the repair and remodel end market is influenced by housing starts to a lesser degree than the homebuilding market, the repair and remodel end market is still dependent upon some of the same factors as the homebuilding market, including demographic trends, interest rates, consumer confidence, employment rates and the health of the economy and home financing markets. The repair and remodel end market has been disrupted by the COVID-19 pandemic and while the extent of these disruptions and uncertainties are yet to be fully known, we expect to experience reduced sales demand, increased margin pressures and increased operating costs in this area of our business as a result.  We expect that our ability to remain competitive in this space will depend on our continued ability to provide a high level of customer service coupled with a broad product offering.  

 

Use of Prefabricated Components. Homebuilders are increasingly using prefabricated components in order to realize increased efficiency, overcome skilled construction labor shortages and improve quality. Shortening cycle time from start to completion is a key imperative of the homebuilders during periods of strong consumer demand. We continue to see the demand for prefabricated components increasing within the residential new construction market as the availability of skilled construction labor remains limited.

 

Economic Conditions. Economic changes both nationally and locally in our markets impact our financial performance. The building products supply industry is highly dependent upon new home construction and subject to cyclical market changes. Our operations are subject to fluctuations arising from changes in supply and demand, national and local economic conditions, labor costs and availability, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, housing starts, the high cost of land development, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. The disruptions and uncertainties as a result of the ensuing COVID-19 pandemic are expected to have a significant impact on our current and potentially future operating results.

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Housing Affordability. The affordability of housing can be a key driver in demand for our products. Home affordability is influenced by a number of economic factors, such as the level of employment, consumer confidence, consumer income, the supply of houses, the availability of financing and interest rates. Changes in the inventory of available homes as well as economic factors relative to home prices could result in changes to the affordability of homes. As a result, homebuyer demand may shift towards smaller, or larger, homes creating fluctuations in demand for our products.

 

Cost of Materials. Prices of wood products, which are subject to cyclical market fluctuations, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production inputs for our manufactured and prefabricated products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are oftentimes passed on to our customers, but our pricing quotation periods and market competition may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products. Our inability to pass on material price increases to our customers could adversely impact our operating results.

 

Controlling Expenses. Another important aspect of our strategy is controlling costs and striving to be a low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.   The disruptive impacts of the COVID-19 pandemic on our operating expenses could be significant.

 

Multi-Family and Light Commercial Business. Our primary focus has been, and continues to be, on single-family residential new construction and the repair and remodel end market. However, we will continue to identify opportunities for profitable growth in the multi-family and light commercial markets.

 

Capital Structure: As a result of our historical growth through acquisitions, we have substantial indebtedness. We strive to optimize our capital structure to ensure that our financial needs are met in light of economic conditions, business activities, organic investments, opportunities for growth through acquisition and the overall risk characteristics of our underlying assets. In addition to these factors, we also evaluate our capital structure on the basis of our leverage ratio, our liquidity position, our debt maturity profile and market interest rates. As such, we may enter into various debt or equity transactions in order to appropriately manage and optimize our capital structure and liquidity needs.

RECENT DEVELOPMENTS

Debt Transactions

In February 2020, the Company completed a private offering of $550.0 million in aggregate principal amount of 5.0% unsecured senior notes due 2030 (“2030 notes”) at an issue price equal to 100% of their par value. The proceeds from 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 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”) and to pay related transaction fees and expenses.  Further, in April 2020, we issued an additional $350 million in aggregate principal amount of our 2027 notes.  Collectively, these transactions have extended our debt maturity profile and strengthened our liquidity position.

These transactions are described in Notes 4 and 13 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call our notes, repay debt, repurchase shares of our common stock or otherwise enter into transactions regarding its capital structure.

Business Combinations

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 is described in Note 5 to the consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.

Retirement of President and Chief Executive Officer

On January 10, 2020, Mr. Crow notified our Board of his decision to retire as President and Chief Executive Officer of the Company during 2020 after assisting the Board in hiring his replacement. However, Mr. Crow has agreed to defer his retirement and stay on as CEO until the COVID-19 situation stabilizes and the Company can resume normal operations. Mr. Crow has also agreed to continue with the Company in a consulting capacity for a period of time following the appointment of a new Chief Executive Officer to assist in the transition.

18


 

CURRENT OPERATING CONDITIONS AND OUTLOOK

Though the level of housing starts remains below the historical average, the homebuilding industry has improved since 2011. However, in March of 2020, the U.S. economy began to see significant disruption and uncertainty from the impacts of the COVID-19 pandemic.  While the extent of these disruptions and uncertainties is yet to be fully known, we expect to experience reduced sales demand, increased margin pressures and increased operating costs as a result.  For the first quarter of 2020, actual U.S. total housing starts were 0.3 million, a 22.3% increase compared to the first quarter of 2019. Actual U.S. single-family starts were 0.2 million in the first quarter of 2020, a 12.4% increase compared to the same quarter a year ago. Recent forecasts from a composite of third party sources, including the NAHB, estimate 1.2 million U.S. total housing starts and 0.8 million U.S single family housing starts for the full year 2020, which are decreases of 7.2% and 7.1%, respectively from 2019 primarily as a result of ensuing disruptions from the COVID-19 pandemic. In addition, the Home Improvement Research Institute (“HIRI”) is forecasting sales in the professional repair and remodel end market to decrease approximately 10.0% in 2020 compared to 2019.

Our net sales for the first quarter of 2020 increased 9.5% from the same period last year. Acquisitions accounted for 3.5% of our sales growth in the first quarter of 2020, while commodity price inflation and one more selling day increased our sales by 0.4% and 1.7%, respectively.  Excluding the impact of acquisitions, commodity price inflation and the impact of one more selling day,