UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
(cid:4) 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
(State or other jurisdiction of
incorporation or organization)
2001 Bryan Street, Suite 1600
Dallas, Texas
ff
(Address of principal
executive offices)
52-2084569
(I.R.S. Employer
Identification No.)
75201
(Zip Code)
Registrants telephone number, including area code:
(214) 880-3500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common stock, par value $0.01 per share
Name of Exchange on Which Registered
NASDAQ Stock Market LLC
g
g
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:3) No (cid:4)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:3)
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 (cid:3) No (cid:4)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted 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 and post such files). Yes (cid:3) No (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer,
ff
See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer (cid:3)
Emerging growth company (cid:4)
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. (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes (cid:4) No (cid:3)
(Do not check if a smaller reporting company)
Smaller reporting company (cid:4)
Non-accelerated filer (cid:4)
Accelerated filer (cid:4)
The aggregate market value of the registrants common stock held by non-affiliates of the registrant as of June 30, 2017 was approximately
$1,486.8 million based on the closing price per share on that date of $15.32 as reported on the NASDAQ Stock Market LLC.
The number of shares of the registrants common stock, par value $0.01, outstanding as of February 26, 2018 was 114,120,308.
Portions of the registrants definitive proxy statement for its annual meeting of stockholders to be held on May 23, 2018 are incorporated by reference
into Part II and Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
BUILDERS FIRSTSOURCE, INC.
Table of Contents to Form 10-K
PART I
Item 1. Business................................................................................................................................................................................
Item 1A. Risk Factors ...........................................................................................................................................................................
Item 1B. Unresolved Staff Comments..................................................................................................................................................
Item 2. Properties...............................................................................................................................................................................
Item 3. Legal Proceedings .................................................................................................................................................................
Item 4. Mine Safety Disclosures........................................................................................................................................................
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ...........
Item 6. Selected Financial Data .........................................................................................................................................................
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations ...............................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..............................................................................................
Item 8. Financial Statements and Supplementary Data .....................................................................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...............................................
Item 9A. Controls and Procedures........................................................................................................................................................
Item 9B. Other Information..................................................................................................................................................................
Item 10. Directors, Executive Officers and Corporate Governance ....................................................................................................
Item 11. Executive Compensation .......................................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .............................
Item 13. Certain Relationships and Related Transactions, and Director Independence......................................................................
Item 14. Principal Accountant Fees and Services................................................................................................................................
PART III
Item 15. Exhibits and Financial Statement Schedules.........................................................................................................................
Item 16 Form 10-K Summary.............................................................................................................................................................
PART IV
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Item 1. Business
CAUTIONARY SRR
TATEMENT
PART I
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 Companys growth strategies, including
gaining market share, or the Companys 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 the risk factors that could affect our financial and other results are included as Item 1A of this
annual report on Form 10-K.
OVERVIEW
In this annual report, unless otherwise stated or the context otherwise requires, references to the company, we, our, ours
or us refer to Builders FirstSource, Inc. and its consolidated subsidiaries, including ProBuild Holdings LLC (ProBuild), as of
July 31, 2015.
We are a leading supplier and manufacturer of building materials, manufactured components and construction services to
professional homebuilders, sub-contractors, remodelers and consumers. The Company operates 402 locations in 40 states across the
United States. We offer an integrated solution to our customers providing manufacturing, supply and installation of a full
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.
range of
ff
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, further aggregated into four reportable segments: Northeast, Southeast, South and
West. All of our segments have similar customers, products and services, and distribution methods as discussed below. Our financial
statements contain additional information regarding segment performance which is discussed in Note 14 to the consolidated financial
statements included in Item 8 of this annual report on Form 10-K.
Builders FirstSource, Inc. is a Delaware corporation formed in 1998 as BSL Holdings, Inc. On October 13, 1999, our name
changed to Builders FirstSource, Inc. Our common stock is listed on the NASDAQ Stock Market LLC under the ticker symbol
BLDR.
OUR INDUSTRY
We compete in the professional segment (Pro Segment) of the U.S. residential building products supply market. Suppliers in
the Pro Segment primarily focus on serving professional customers such as homebuilders and remodeling contractors. The Pro
Segment consists predominantly of small, privately owned suppliers, including framing and shell construction contractors, local and
regional materials distributors, single or multi-site lumberyards, and truss manufacturing and millwork operations. Because of the
predominance of smaller privately owned companies and the overall size and diversity of the target customer market, the Pro Segment
remains fragmented. There were only seven building product suppliers with manufacturing capabilities in the Pro Segment that
generated more than $500 million in sales, according to ProSales magazines 2016 ProSales 100 list. We were the largest building
product supplier with manufacturing capabilities on this list.
3
The residential building products industry is driven by the level of activity in both the U.S. residential new construction market
and the U.S. residential repair and remodeling market. Growth within these markets is linked to a number of key factors, including
demographic trends, housing demand, interest rates, employment levels, availability of credit, foreclosure rates, consumer confidence,
the availability of qualified tradesmen, and the state of the economy in general.
ff
The residential building products industry
d
is characterized by several key trends, including greater utilization of manufactured
components, an expanding role of the distributor in providing turn-key services and a consolidation of suppliers by homebuilders.
•
•
•
Prefabricated componentstt : Compared to conventional stick-build construction where builders cut and assemble lumber
at the job site with their own labor, prefabricated components are engineered in an offsite location using specialized
equipment and labor. This outsourced task allows for optimal material usage, lower overall labor costs and improved
quality of structural elements. In addition, using prefabricated components typically results in faster
construction because
fabrication can be automated and performed more systematically. As such, we believe there is a long term trend towards
increased use of prefabricated components by homebuilders.
ff
Turn-key services: Many homebuilders have taken a more limited role in the homebuilding process and have outsourced
certain key elements of the construction process, including process management, product selection, order input,
scheduling, framing and installation. As such, we believe that many homebuilders are increasingly looking to suppliers in
the Pro Segment to perform these critical functions, resulting in greater demand for integrated project services.
Consolidation of suppliers by homebuilders: We believe that homebuilders are increasingly looking to consolidate their
supplier base. Many homebuilders are seeking a more strategic relationship with suppliers that are able to offer a broad
range of products and services and, as a result, are allocating a greater share of wallet to a select number of larger, full
service suppliers. We believe this trend accelerated during the downturn which began in 2006 and continues in the current
housing market recovery.
The homebuilding industry experienced a significant downturn which began in 2006. During the downturn, many homebuilders
significantly decreased their housing starts because of lower demand and a surplus of both existing and new home inventory. The
weakness in the homebuilding industry resulted in a significant reduction in demand for our products and services. Beginning in late
2011, the industry began to stabilize and housing and remodeling activity has steadily strengthened since then. According to the U.S.
Census Bureau, the single-family residential construction market was an estimated $264.1 billion in 2017, which was 8.9% higher
than 2016, though still down significantly from the historical high of $413.2 billion in 2006. Further, according to the Home
Improvement Research Institute (HIRI), the professional repair and remodel end market was an estimated $103.4 billion in 2017,
which was 3.4% higher than 2016.
OUR CUSTOMERS
We serve a broad customer base in 40 states across the United States. We have a diverse geographic footprint
ff
as we have
operations in 75 of the top 100 U.S. Metropolitan Statistical Areas (MSAs), as ranked by single family housing permits based on
2017 U.S. Census data. In addition, approximately 83% of U.S. single-family housing permits in 2017 were issued in MSAs in which
we operate. Given the local nature of our business, we have historically and will continue to locate our facilities in close proximity to
our key customers and co-locate multiple operations in one facility to improve efficiency.
We have a diversified customer base, ranging from large production builders to small custom homebuilders, as well as multi-
family builders, repair and remodeling contractors and light commercial contractors. For the year ended December 31, 2017, our top
10 customers accounted for approximately 16.0% of sales, and no single customer accounted for more than 5% of sales. Our top 10
customers are comprised primarily of the largest production homebuilders, including publicly traded companies such as D.R. Horton,
Inc., Pulte Homes, Inc., Lennar Corporation, Beazer Homes USA, Inc., Hovnanian Enterprises, Inc., Taylor Morrison Home
Corporation and M/I Homes, Inc.
In addition to the largest production homebuilders, we also service and supply regional production and local custom
homebuilders as well as repair and remodeling contractors. These customers require high levels of service and a broad product
offering. Our sales team expects to work very closely with the designers on a day-to-day basis in order to ensure the appropriate
products are identified, ordered or produced and delivered on time to the building site. To account for these increased service costs,
pricing in the industry
is tied to the level of service provided and the volumes purchased.
d
4
OUR PRODUCTS AND SERVICES
We group our building products and services into six product categories:
Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood and oriented strand board
(OSB) products used in on-site house framing. Lumber & lumber sheet goods are our largest sales volume product category. The
products in this category are highly sensitive to fluctuations in market prices forff
such commodities.
Manufactured Products. Manufactured products are factory-built substitutes for job-site framing
ff
and include wood floor and
roof trusses, steel roof trusses, wall panels, stairs, and engineered wood that we design, cut, and assemble for each home. Our
manufactured products allow builders to build higher quality homes more efficiently. Roof trusses, floor trusses, wall panels and stair
units are built in a factory
application at many of our locations. Without manufactured products, builders construct these items on site, where weather and
variable labor quality can negatively impact construction cost, quality and installation time. In addition, engineered wood beams have
greater structural strength than conventional framing materials, allowing builders to frame houses with more open space creating a
wider variety of house designs. Engineered wood floors are also stronger and straighter than conventionally framed floors.
controlled environment. Engineered floors and beams are cut to the required size and packaged for the given
ff
Windows, Doors & Millwork.
MM
Windows & doors are comprised of the manufacturing, assembly and distribution of windows,
and the assembly and distribution of interior and exterior door units. We manufacture a portion of the vinyl windows that we distribute
in our plant in Houston, Texas which allows us to supply builders, primarily in the Texas market, with cost-competitive products. Our
pre-hung interior and exterior doors consist of a door slab with hinges and door jambs attached, reducing on-site installation time and
providing higher quality finished door units than those constructed on site. These products typically require a high degree of product
knowledge and training to sell. Millwork includes interior trim and custom features that we manufacture under the Synboard ® brand
name. Synboard is produced from extruded PVC and offers several advantages over traditional wood features, such as greater
durability and no ongoing maintenance such as periodic caulking and painting.
Gypsum, Roofing & Insulation.
II
Gypsum, roofing, and insulation include wallboard, ceilings, joint treatment and finishes.
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.
SS
Other building products & services consist of various products, including cabinets and
hardware. This category also includes services such as turn-key framing, shell construction, design assistance and professional
installation of products spanning all our product categories. We provide professional installation and turn-key services as a solution
for our homebuilder customers. Through our installation services program, we help homebuilders realize efficiencies through
improved scheduling, resulting in reduced cycle time and better cost controls. By utilizing an energy efficiency software program, we
also assist homebuilders in designing energy efficient homes in order to meet increasingly stringent energy rating requirements.
Upgrading to our premium windows, doors, and insulating products reduces overall cost to the homebuilder by minimizing costs of
the required heating/cooling system. We work closely with the homebuilder to select the appropriate mix of our products in order to
meet current and forthcoming energy codes. We believe these services require scale, capital and sophistication that smaller
competitors do not possess. We will continue to pursue profitable business in this category.
We compete in a fragmented
ff
marketplace. We believe our integrated approach and scale allow us to compete effectively
through our comprehensive product lines, prefabricated components, and value-added services combined with the knowledge of our
integrated sales forces to enable our homebuilder customers to complete construction more quickly, with higher quality and at a lower
cost. While we expect these benefits to be particularly valuable to our customers in market environments characterized by labor
shortages, sourcing challenges or sharply rising demand for new homes, we expect such benefits will also be increasingly valued and
demanded by our customers operating under normal market conditions.
MANUFACTURING
Our manufacturing facilities utilize the latest industry
leading technology and the highest quality materials to improve product
quality, increase efficiency, reduce lead times and minimize production errors. We manufacture products within two of our product
categories: manufactured products, and windows, doors & millwork.
d
Manufactured Products Trusses and Wall Panels. Truss and wall panel production has two steps design and fabrication.
Each house requires its own set of designed shop drawings, which vary by builder type: production versus custom builders. Production
builders use prototype house plans as they replicate houses. These house plans may be minimally modified to suit individual customer
demand. The number of changes made to a given prototype house, and the number of prototype houses used, varies by builder and
their construction and sales philosophy. We maintain an electronic master file of trusses and wall panels for each builders prototype
5
houses. There are three primary benefits to master filing. First, master filing is cost effective as the electronic master file is used rather
than designing the components individually each time the prototype house is built. Second, it improves design quality as a houses
design is based on the proven prototype except for any minor builder modifications. Third, master filing allows us to change one fileff
and update all related prototype house designs automatically as we improve the design over time or as the builder modifies the base
prototype house. We do not maintain a master fileff
builders, the components are designed individually for each house.
for custom builders who do not replicate houses, as it is not cost effective. For these
After we design shop drawings for a given house, we download the shop drawings into a proprietary software system to review
the design for potential errors and to schedule the job for production. The fabff
lumber to required lengths in accordance with the shop drawings. We download the shop drawings from our design department to
computerized saws. We assemble the cut lumber to form roof trusses, floor trusses or wall panels, and store the finished components
by house awaiting shipment to the job site.
rication process begins by cutting individual pieces of
We generate fabrication time standards for each component during the design step. We use these standards to measure
efficiency by comparing actual production time with the calculated standard. Each plants performance is benchmarked by comparing
efficiency across plants.
Manufactured Products Engineered Wood. As with trusses and wall panels, engineered wood components have a design and
fabrication step. We design engineered wood floors using a master filing system similar to the truss and wall panel system. Engineered
wood beams are designed to ensure the beam will be structurally sound in the given application. After the design phase, a printed
layout is generated. We use this layout to cut the engineered wood to the required length and assemble all of the components into a
house package. We design and fabricate engineered wood at many of our distribution locations.
Manufactured Products Stairs. We manufacture box stairs at some of our locations. After a house is framed, our salesman
takes measurements at the job site prior to manufacturing to account for any variation between the blueprints and the actual fraff med
house. We fabricate box stairs based on these measurements.
Custom Millwork. Our manufactured custom millwork consists primarily of exterior trim, interior and exterior doors, custom
windows, features and box columns. In addition, we sell many of these custom millwork products in a synthetic material that we sell
under our Synboard brand name.
We sand, cut, and shape sheets of 4 foot
ff
by 18 or 20 foot Celuka-blown, extruded PVC, or Synboard, to produce the desired
product. We produce exterior trim boards by cutting the Synboard into the same industry-standard dimensions used for wood-based
exterior trim boards. We form exterior features by assembling pieces of Synboard and other PVC-based moldings that have been cut,
heated and bent over forms to achieve the desired shape. For custom windows, we build the frame
from Synboard and glaze the glass
into place. We fabff
ricate box columns from sections of PVC that are cut on a 45 degree angle and mitered together.
ff
Windows. We manufacture a full
ff
line of traditional vinyl windows at an approximately 200,000 square foot manufacturing
rr
facility located in Houston, Texas. The process begins by purchasing vinyl lineal extrusions.
them together to formff
identically shaped glass with a sealing compound to create a glass unit with improved insulating capability.
glass unit and glaze it into the window frame and sash. The unit is completed when we install a balance to operate the window and add
a lock to secure the window in a closed position.
the window frame and sash. We then purchase sheet glass and cut it to size. We combine two pieces of
We cut these extrusions to size and join
We then insert the sealed
a
Pre-hung Doors. We pre-hang interior and exterior doors at many of our locations. We insert door slabs and pre-cut door jambs
into a door machine, which bores holes into the doors for the door hardware and applies the jambs and hinges to the door slab. We
then apply the casing that frames interior doors at a separate station. Exterior doors do not have a casing, and instead may have
sidelights applied to the sides of the door, a transom attached over the top of the door unit and a door sill applied to the threshold.
6
OUR STRATEGY
By pursuing the following strategies, we intend to build on our advantaged market position to create value for our shareholders
by increasing profits and net cash flow generation, while making us a more valuable partner to our customers. The resulting cash flow
should provide meaningful opportunities for debt reduction and increased investment in organic and acquisitive growth.
Leverage our competitive strengths to capitalize
tt
on housing market growth
As the U.S. housing market returns to a historically normalized level, we intend to leverage our core business strengths
including size, national footprint, unmatched scale in manufacturing capability, breadth of product portfolio, and end market exposure
to expand our sales and profit margins. Our customers continue to emphasize the importance of competitive pricing, a broad productdd
portfolio, sales force knowledge, labor-saving manufactured products, on-site services and overall ease of use with their building
products suppliers. Our comprehensive product offering, best in class sales force, strong strategic vendor relationships, and tenured
senior management team position us well to capitalize on strong demand in the new home construction market and the repair and
remodel segment. Our large delivery fleet, professional drivers, and comprehensive inventory management enable us to provide ju st-
in-time product delivery, ensuring a smoother and faster production cycle for the homebuilder. Our comprehensive network of
products, services and facilities provides a strategically advantaged service model which enhances our value to our customers and
provides a strong platform to capture above market growth.
Maximize our share of wallet by capturing above-market growth in our higher margin value added products
We believe our national manufacturing footprint and differentiated capabilities will allow us to capture above market growth in
our higher margin value-added products with single family homebuilders. We believe our value-added products address the growing
demand for ways to build homes more efficiently, addressing labor constraints and rising costs. We plan to accelerate this growth by
further expansion of our national manufacturing footprint to serve locations that do not currently have adequate access to these high
margin products. By focusing on our differentiated platform and broad product mix, we are able to offer a complete array of products
and services that would otherwise need to be sourced from various distributors, providing us an opportunity to capture a greater share
of wallet. Additionally, our national footprint provides customers with a consistent partner on projects regardless of where they are
located. This operational platform often will make us a preferred distributor for large scale national homebuilders while still providing
value to local and custom homebuilders looking for more efficient ways to build a home. We believe that customers will continue to
place an increased value on these capabilities, which further differentiates us from our competitors.
Optimize our highly scalable cost structure with operational excellence initiatives
We continue to focus on standardizing processes and technology-based workflows to minimize costs, streamline our operations
a
and enhance working capital
efficiency. We are implementing operational excellence initiatives that are designed to further improve
efficiency as well as customer service. These initiatives, including distribution and logistics, pricing and margin management, back
office efficiencies, customer integration and systems-enabled process improvements, should yield significant cost savings. The scope
and scale of our existing infrastructure, customer base, and logistical capabilities mean that improvements in efficiency, when
replicated across our network, can yield substantial profit margin expansion.
SALES AND MARKETING
We seek to attract and retain customers through exceptional customer service, leading product quality, broad product and
service offerings, and competitive pricing. This strategy is centered on building and maintaining strong customer relationships rather
than traditional marketing and advertising. We strive to add value for the homebuilders through shorter lead times, lower material
costs, faster project completion and higher quality. By executing this strategy, we believe we will continue to generate new business.
iencies, and regional aesthetic preferences. Next, the team determines the specific package of products that are
Our experienced, locally focused sales force is at the core of our sales effort. This sales effort involves deploying salespeople
who are skilled in housing construction to meet with a homebuilders construction superintendent, local purchasing agent, or local
executive with the goal of becoming their primary product supplier. If selected by the homebuilder, the salesperson and his or her
team review blueprints for the contracted homes and advise the homebuilder in areas such as opportunities for cost reduction,
increased energy efficff
needed to complete the project and schedules a sequence of site deliveries. Our large delivery fleet and comprehensive inventoryrr
product delivery, ensuring a smoother and faster production cycle for the
management systems enable us to provide just-in-time
homebuilder. Throughout the construction process, the salesperson makes frequent site visits to ensure timely delivery and proper
installation and to make suggestions for efficiency improvements. We believe this level of service is highly valued by our customers
and generates significant customer loyalty. At December 31, 2017, we employed approximately 1,900 sales representatives, who are
typically paid a commission based on gross margin dollars collected and work with approximately 1,600 sales coordinators and
product specialists.
7
BACKLOG
Due to the nature of our business, backlog information is not meaningful. While our customers may provide an estimate of their
order from them until just prior to the anticipated delivery dates. Accordingly, in
days.
future needs, in most cases we do not receive a firmff
many cases the time frame from receipt of a firmff
order to shipment does not exceed a fewff
MATERIALS AND SUPPLIER RELATIONSHIPS
We purchase inventory primarily for distribution, some of which is also utilized in our manufacturing plants. The key materials
we purchase include dimensional OSB, lumber and plywood along with engineered wood, windows, doors, millwork, gypsum and
roofing. Our largest suppliers are national companies such as Boise Cascade Company, Weyerhaeuser Company, Canfor Corporation,
Norbord, Inc., James Hardie Industries plc, National Gypsum Company, PlyGem Holdings, Inc., M I Windows and Doors, Inc.,
Andersen Corporation, Masonite International Corporation and JELD-WEN Inc. We believe there is sufficient supply in the
marketplace to competitively source most of our requirements without reliance on any particular supplier and that our diversity of
suppliers affords us purchasing flexibility. Due to our centralized procurement platform for commodity wood products and corporate
oversight of purchasing programs we believe we are better able to maximize the advantages of both our and our suppliers broad
geographic footprints and negotiate purchases across multiple markets to achieve more favorable contracts with respect to price, terms
of sale, and supply than our regional competitors. Additionally, for certain customers, we institute purchasing programs on commodity
wood products such as OSB and lumber to align portions of our procurement costs with our customer pricing commitments. We
balance our OSB and lumber purchases with a mix of contract and spot market purchases to ensure consistent supply of product
necessary to fulfill customer contracts, to source products at the lowest possible cost, and to minimize our exposure to the volatility of
commodity lumber prices.
We currently source products from approximately 6,000 suppliers in order to reduce our dependence on any single company and
to maximize purchasing leverage. Although no purchases from any single supplier represented more than 8% of our total materials
purchases for the year ended December 31, 2017, we believe we are one of the largest customers for many suppliers, and therefore
have significant purchasing leverage. We have found that using multiple suppliers ensures a stable source of products and the best
purchasing terms as the suppliers compete to gain and maintain our business.
We maintain strong relationships with our suppliers, and we believe opportunities exist to improve purchasing terms in the
n-time delivery to reduce our inventory carrying costs. We will continue to pursue
future, including inventory storage or just-i
additional procurement cost savings which would further enhance our margins and cash flow.
COMPETITION
We compete in the Pro Segment of the U.S. residential building products supply market. We have and will continue to
experience competition for homebuilder business due to the highly fragmented nature of the Pro Segment. Most of our competitors in
the Pro Segment are small, privately held local businesses. Most of these companies have limited access to capital and lack
sophisticated information technology systems and large-scale procurement capabilitie
s. We believe we have substantial competitive
advantages over these smaller competitors due to our long-standing customer relationships, local market knowledge and competitive
pricing. Our largest competitors in our markets include 84 Lumber Co., which is privately held, as well as BMC Stock Holdings, Inc.,
which is publicly held.
a
Our customers primarily consist of professional homebuilders and those that provide construction services to them, with whom
we focus on developing strong relationships. The principal methods of competition in the Pro Segment are the development of long-
term relationships with professional builders and retaining such customers by (i) delivering a fulff
time, and (ii) offering trade credit, competitive pricing and integrated service and product packages, such as turn-key framing and shell
construction, as well as manufactured components and installation. Our leading market positions in the highly competitive Pro
Segment create economies of scale that allow us to cost-effectively supply our customers, which both enhances profitability and
reduces the risk of losing customers to competitors.
l range of high-quality products on
EMPLOYEES
At December 31, 2017, we had approximately 15,000 employees. Approximately 2% of the workforce at our company are
members of nine different unions. We believe that we have good relations with our employees.
INFORMATION TECHNOLOGY SYSTEMS
Our operations are dependent upon our information technology systems, which encompass all of our major business functions.
Our primary enterprise resource planning (ERP) system, which we currently use for operations representing approximately 72% of
8
our sales, is a proprietary system that has been highly customized by our computer programmers. The materials required for thousands
of standard builder plans are stored by the system for rapid quoting or order entry. Hundreds of price lists are maintained on thousands
of SKUs, facilitating rapid price changes in a changing product cost environment. A customers order can be tracked at each stage of
the process and billing can be customized to reduce a customers administrative costs and speed payment.
We have a customized financial reporting system which consolidates financial, sales and workforce data from our ERP systems
and our human resource information system (HRIS). This technology platform provides management with robust corporate and
location level performance management by leveraging standardized metrics and analytics allowing us to plan, track and report
performance and compensation measures.
We have developed a proprietary program forff
use in our component plants. This software reviews product designs for errors,
schedules the plants and provides the data used to measure plant efficff
that have been integrated with our primary ERP system. These programs assist in various aspects of our business such as analyzing
blueprints to generate material lists, purchasing lumber products at the lowest cost, delivery management and resource planning and
scheduling.
iency. In addition, we have purchased several software products
ProBuild maintained multiple ERP systems to manage its operations. We are in the process of integrating the legacy ProBuild
information technology systems with ours which is an ongoing, multi-year process. We are currently expecting to complete the ERP
integration process in 2019.
SEASONALITY AND OTHER FACTORS
Our first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather
causing reduced construction activity during these quarters. In addition, quarterly results historically have reflected, and are expected
to continue to reflect, fluctuations from period to period arising from the following:
•
•
•
•
•
•
The volatility of lumber prices;
The cyclical nature of the homebuilding industry;
General economic conditions in the markets in which we compete;
The pricing policies of our competitors;
The production schedules of our customers; and
The effects of weather.
The composition and level of working capital typically change during periods of increasing sales as we carry more inventory
and receivables. Working capital levels typically increase in the second and third quarters of the year due to higher sales during the
peak residential construction season. These increases have in the past resulted in negative operating cash flows during this peak
season, which historically have been financed through available cash and our borrowing availability under credit facilities. Collection
of receivables and reduction in inventory levels following the peak building and construction season have in the past positively
impacted cash flow.
ff
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance
therewith, we file reports, proxy and information statements and other information with the Securities and Exchange Commission
(SEC). Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information
statements and other information and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available through the investor relations section of our website under the links to Financial
Information. Our Internet address is www.bldr.com. Reports are available on our website free of charge as soon as reasonably
practicable after we electronically fileff
them with, or furnish them to, the SEC. In addition, our officers and directors file with the SEC
initial statements of beneficial ownership and statements of change in beneficial ownership of our securities, which are also available
on our website at the same location. We are not including this or any other information on our website as a part of, nor incorporating it
by reference into, this Form 10-K or any of our other SEC filings.
In addition to our website, you may read and copy public reports we file with or furnish
ff
to the SEC at the SECs Public
Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains our reports, proxy and information
statements, and other information that we electronically file with, or furnish to, the SEC at www.sec.gov.
9
EXECUTIVE OFFICERS
M. Chad Crow, President, Chief Executive Officer
ff
and Director, age 49. Mr. Crow joined the Company in September 1999, and
has held several roles of increasing responsibility. Mr. Crow became a director in 2017 and President and CEO on December 29,
2017. In 2009, Mr. Crow was named Senior Vice President and Chief Financial Officer and in 2014 was promoted to President and
Chief Operating Officer. Prior to joining Builders FirstSource, he served in a variety of positions at Pier One Imports and Price
Waterhouse LLP. Mr. Crow received his B.B.A. degree from Texas Tech University.
Donald F. McAleenan, Senior Vice President and General Counsel, age 63. Mr. McAleenan has served as Senior Vice President
and General Counsel of the Company since 1998. Prior to joining the Company, Mr. McAleenan served as Vice President and Deputy
General Counsel of Fibreboard Corporation from 1992 to 1997. Mr. McAleenan was also Assistant General Counsel of AT&E
Corporation and spent nine years as a securities lawyer at two New York City law firms. Mr. McAleenan has a B.S. from Georgetown
University and a J.D. from New York University Law School.
Morris E. Tolly, Senior Vice President and Chief Operating Officer
ff
East, age 74. Mr. Tolly has served as a Senior Vice
President and Chief Operating Officer- East since February 2018. Prior to that he had served as Senior Vice President-Operations of
the Company since January 2007. Mr. Tolly has been with Builders FirstSource since 1998 when the Company acquired Pelican
Companies, Inc. (Pelican) and has over 40 years of experience in the building products industry. He served in a myriad of roles at
Pelican, including sales, Sales Manager and General Manager. Mr. Tolly was an Area Vice President responsible for 12 locations at
the time of Pelicans acquisition. In 2000, he was promoted to President of the companys Southeast Group, with responsibility for 48
locations.
Scott L. Robins, Senior Vice President and Chief Operating Officer West, age 51. Mr. Robins was appointed to his current
position on February 20, 2018. He had been a Senior Vice President Operations of the Company since the acquisition of ProBuild
Holdings LLC by the Company in July 2015 and with ProBuild prior to that since 2007. At the time of his promotion, he had
supervisory responsibility for 93 locations in eight states. Mr. Robins joined Hope Lumber Company in 2004 as a Vice President of
Operations, overseeing numerous operations in a three-state area, and continued in that role when Hope was acquired by ProBuild
Holdings LLC in 2007. Before then, he had worked in various operational and supply chain management positions with Andersen
Lumber and Stock Building Supply since 1988. Mr. Robins has 30 years of experience in the building products business. He holds a
B.A. in Finance from Weber State University.
Peter M. Jackson, Senior Vice President and Chief Financial Officer, age 46. Mr. Jackson joined the Company on November 4,
2016 as Senior Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Jackson was employed by Lennox
International, Inc. (Lennox). Since July 2014, Mr. Jackson had served as Vice President and CFO of Lennoxs Refrigeration
Segment. His previous positions at Lennox also included Vice President, Finance - Financial Planning and Analysis and Mergers and
Acquisitions as well as Vice President and Chief Financial Officer of Lennoxs Residential Heating and Cooling Segment. Before
joining Lennox, Mr. Jackson served in multiple financial leadership positions at SPX Corporation, General Electric, and Gerber
Scientific. Mr. Jackson is a certified public accountant and a graduate of General Electrics Experienced Financial Leadership
program. He holds an M.B.A. degree from Rensselaer Polytechnic Institute and a B.S. from Bryant University.
Item 1A. Risk Factors
Risks associated with our business, an investment in our securities, and with achieving the forward-looking statements contained
in this report or in our news releases, websites, public filings, investor and analyst conferences or elsewhere, include, but are not
limited to, the risk factors described below. Any of the risk factors described below could cause our actual results to differ materially
from expectations and could have a material adverse effect on our business, financial condition or operating results. We may not
succeed in addressing these challenges and risks.
The industry in which we operate is dependent upon the residential homebuilding industry, as well as the U.S. economy, the
credit markets and other important factors.
The building products industry is highly dependent on new home and multifamily construction, which in turn are dependent
upon a number of factors, including interest rates, consumer confidence, employment rates, foreclosure rates, housing inventory levels
and occupancy, housing demand and the health of the U.S. economy and mortgage markets. Unfavorable changes in demographics,
credit markets, consumer confidence, housing affordability, or housing inventory levels and occupancy, or a weakening of the U.S.
economy or of any regional or local economy in which we operate could adversely affect consumer spending, result in decreased
demand for our products, and adversely affect our business. Production of new homes and multifamily buildings may also decline
because of shortages of qualified tradesmen, reliance on inadequately capitalized builders and sub-contractors, and shortages of
suitable building lots and material. The homebuilding industry is currently experiencing a shortage of qualified, trained labor in many
areas, including those served by us. In addition, the building industry is subject to various local, state, and federal statutes, ordinances,
10
and regulations concerning zoning, building design and safety, construction, energy and water conservation and similar matters,
including regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can be built
within the boundaries of a particular area or in order to maintain certain areas as primarily or exclusively residential. Regulatory
restrictions may increase our operating expenses and limit the availability of suitable building lots forff
negatively affecff
production levels could have a significant adverse effect on our financial condition, operating results and cash flows.
t our sales and earnings. Because we have substantial fixed costs, relatively modest declines in our customers
our customers, which could
According to the U.S. Census Bureau, annual U.S. total and single-family housing starts were 1,202,900 and 848,900,
respectively, in 2017. However, both total and single-family housing starts remain well below the normalized historical averages
(from 1959 through 2017) of 1.5 million and 1.0 million, respectively. We believe the housing industry is currently experiencing a
shortage of skilled construction labor, which is constraining housing activity. Due to the lower levels in housing starts and increased
competition for homebuilder business, we have seen and may continue to experience downward competitive pressure on our gross
margins.
The building supply industry is subject to cyclical market pressures.
Prices of building products are subject to fluctuations arising from changes in supply and demand, national and international
economic conditions, labor costs, competition, market speculation, government regulation, and trade policies, as well as from periodic
delays in the delivery of lumber and other products. For example, prices of wood products, including lumber and panel products, are
subject to significant volatility and directly affect our sales and earnings. In particular, low prices for wood products over a sustained
period can adversely affect our financial condition, operating results and cash flows,
lumber sheet goods product category represented 35.7% of total sales for the year ended December 31, 2017. We have limited ability
to manage the timing and amount of pricing changes forff
based on available manufacturing capacity. A shortage of capacity or excess capacity in the industry can result in significant increases
or declines in prices for those building products, often within a short period of time. Such price fluctuations can adversely affect
financial condition, operating results and cash flows.
building products. In addition, the supply of building products fluctuat
as can excessive spikes in prices. Our lumber and
our
es
ff
ff
ff
In addition, the building products industry is cyclical in nature. The homebuilding industry has experienced growth in recent
years and industry forecasters expect to see continued improvement in the housing market in the near term. However, it is likely that
we will face future downturns in the homebuilding industry which could have an adverse effect on our operating results, financial
condition or cash flows. We are not able to predict the timing, severity or duration of any future downturns in the housing market.
rr
The building supply industry is seasonal.
Although weather patterns affect our operating results throughout the year, adverse weather historically has reduced
construction activity in the first and fourth quarters in the regions where we operate. To the extent that hurricanes, severe storms,
floods, other natural disasters or similar events occur in the regions in which we operate, our business may be adversely affected. We
anticipate that fluctuations from period to period will continue in the future.
Our industry is highly fragmented and competitive, and increased competitive pressure may adversely affect our results.
The building products supply industry is highly fragmented and competitive. We face, and will continue to face, significant
competition from local and regional building materials chains, as well as from privately-owned single site enterprises. Any of these
competitors may (1) foresee the course of market development more accurately than we do, (2) develop products that are superior to
our products, (3) have the ability to produce or supply similar products at a lower cost, (4) develop stronger relationships with local
homebuilders or commercial builders, (5) adapt more quickly to new technologies or evolving customer requirements than we do, or
(6) have access to financing on more favorable terms than we can obtain in the market. As a result, we may not be able to compete
successfully with them. In addition, home center retailers, which have historically concentrated their sales efforts on retail consumers
and small contractors, have intensified their marketing efforts to professional homebuilders in recent years and may continue to
intensify these efforts in the future. Furthermore, certain product manufacturers sell and distribute their products directly to production
homebuilders or commercial builders. The volume of such direct sales could increase in the future. Additionally, manufacturers of
products distributed by us may elect to sell and distribute directly to homebuilders or commercial builders in the future or enter into
exclusive supplier arrangements with other distributors. Consolidation of production homebuilders or commercial builders may result
in increased competition for their business. Finally, we may not be able to maintain our operating costs or product prices at a level
sufficiently low for us to compete effectively. If we are unable to compete effectively, our financial condition, operating results and
cash flows may be adversely affecff
ted.
We are subject to competitive pricing pressure from our customers.
Production homebuilders and multi-family builders historically have exerted and will continue to exert significant pressure on
their outside suppliers to keep prices low because of their market share and their ability to leverage such market share in the highly
11
fragmented building products supply industry. The housing industry downturn and its aftermath resulted in significantly increased
pricing pressures from production homebuilders and other customers. Over the past few years, these pricing pressures have adversely
affected our operating results and cash flows. In addition, continued consolidation among production homebuilders or multi-family
and commercial builders, or changes in such builders purchasing policies or payment practices, could result in additional pricing
pressure, and our financial condition, operating results and cash flows may be adversely affected.
Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability
to react to changes in the economy or our industry, and prevent us from meeting our obligations under our debt instruments.
As of December 31, 2017, our debt totaled $1,803.5 million, which includes $240.5 million of lease finance obligations and
capital lease obligations. We also have a $900.0 million revolving credit facility (2022 facility). As of December 31, 2017, we had
$350.0 million of outstanding borrowings and $84.9 million of letters of credit outstanding under the 2022 facility. In addition, we
have significant obligations under ongoing operating leases that are not reflected on our balance sheet.
Our substantial debt could have important consequences to us, including:
•
•
•
•
•
•
increasing our vulnerability to general economic and industry conditions;
requiring a substantial portion of our operating cash flow to be dedicated to the payment of principal and interest on our
indebtedness, therefore reducing our liquidity and our ability to use our cash flow to fund our operations, capital
expenditures, and future business opportunities;
exposing us to the risk of increased interest rates, and corresponding increased interest expense, because borrowings under
the 2022 facility and the $467.7 million senior secured term loan facility due 2024 (2024 term loan) are at variable rates
of interest;
limiting our ability to obtain additional financing for working capital,
acquisitions, and general corporate or other purposes;
a
capital expenditures, debt service requirements,
limiting our ability to adjust to changing marketplace conditions and placing us at a competitive disadvantage compared to
our competitors who may have less debt.
limiting our attractiveness as an investment opportunity for potential investors.
In addition, some of our debt instruments, including those governing the 2022 facility, the 2024 term loan, and the 5.625%
senior secured notes due 2024 (2024 notes), contain cross-default provisions that could result in our debt being declared
immediately due and payable under a number of debt instruments, even if we default on only one debt instrument. In such event, it is
unlikely that we would be able to satisfy our obligations under all of such accelerated indebtedness simultaneously.
Our financial condition and operating performance including that of our subsidiaries are also subject to prevailing economic and
competitive conditions and to certain financial, business and other factors beyond our control. There are no assurances that we will
maintain a level of liquidity sufficient to permit us to pay the principal, premium and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay
capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may
not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and
resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations in an effort to
meet our debt service and other obligations. The agreements governing the 2022 facility and the 2024 term loan and the indenture
governing our 2024 notes restrict our ability to dispose of assets and to use the proceeds from such dispositions. We may not be able
to consummate those dispositions or be able to obtain the proceeds that we could realize from them, and these proceeds may not be
adequate to meet any debt service obligations then due.
We may have future capital needs and may not be able to obtain additional financing on acceptable terms.
We are substantially reliant on cash on hand and borrowing availability under the 2022 facility, which totaled $494.3 million at
December 31, 2017, to provide working capital and fund
assuming the housing industry continues to improve. Our inability to renew, amend or replace the 2022 facility, the 2024 term loan or
the 2024 notes when required or when business conditions warrant could have a material adverse effect on our business, financial
condition and results of operations.
our operations. Our working capital requirements are likely to grow
ff
Economic and credit market conditions, the performance of our industry, and our financial performance, as well as other factors,
may constrain our financing abilities. Our ability to secure additional financing, if available, and to satisfy our financial obligations
12
under indebtedness outstanding from time to time will depend upon our future operating performance, the availability of credit,
economic conditions and financial, business and other factors, many of which are beyond our control. Any worsening of current
housing market conditions or the macroeconomic factors that affect our industry could require us to seek additional capital and have a
material adverse effect on our ability to secure such capital on favorable terms, if at all.
We may be unable to secure additional financing, financing on favorable terms or our operating cash flow may be insufficient to
satisfy our financial obligations under indebtedness outstanding from time to time, including the 2022 facility, the 2024 term loan, and
the 2024 notes. The agreements governing the 2022 facility and the 2024 term loan and the indenture governing the 2024 notes,
moreover, restrict the amount of permitted indebtedness allowed. In addition, if financing is not available when needed, or is available
on unfavorable terms, we may be unable to take advantage of business opportunities, including potential acquisitions, or respond to
competitive pressures, any of which could have a material adverse effect on our business, financial condition, and results of operations.
If additional funds are raised through the issuance of additional equity or convertible debt securities, our stockholders may experience
significant dilution.
We may incur additional indebtedness.
We may incur additional indebtedness in the future, including collateralized debt, subject to the restrictions contained in the
agreements governing the 2022 facility and the 2024 term loan and the indenture governing the 2024 notes. If new debt is added to our
current debt levels, the related risks that we now face could intensify.
Our debt instruments contain various covenants that limit our ability to operate our business.
Our financing arrangements, including the agreements governing the 2022 facility and the 2024 term loan and the indenture
governing the 2024 notes, contain various provisions that limit our ability to, among other things:
•
•
•
•
•
•
•
•
transfer or sell assets, including the equity interests of our restricted subsidiaries, or use asset sale proceeds;
incur additional debt;
pay dividends or distributions on our capital stock or repurchase our capital stock;
make certain restricted payments or investments;
create liens to secure debt;
enter into transactions with affiliates;
merge or consolidate with another company or continue to receive the benefits of these financing arrangements under a
change in control scenario (as defined in those agreements); and
engage in unrelated business activities.
The agreement governing the 2022 facility contains a financial
ff
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 $87.2 million as of December 31, 2017.
These provisions may restrict our ability to expand or fully pursue our business strategies. Our ability to comply with the
agreements governing the 2022 facility and the 2024 term loan and the indenture governing the 2024 notes may be affected by
changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory
developments, a change in control or other events beyond our control. The breach of any of these provisions, including those
contained in the 2022 facility and the 2024 term loan and the indenture governing the 2024 notes, could result in a default under our
indebtedness, which could cause those and other obligations to become due and payable. If any of our indebtedness is accelerated, we
may not be able to repay it.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to
increase significantly.
Interest rates may increase in the future. As a result, interest rates on our 2022 facility and our 2024 term loan could be higher or
lower than current levels. As of December 31, 2017, we had approximately $813.0 million, or 45.1%, of our outstanding debt at
variable interest rates. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even
though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our
indebtedness, would correspondingly decrease. At December 31, 2017, a 1.0% increase in interest rates on the 2024 term loan would,
subject to the interest rate floor specified in the agreement, result in approximately $4.6 million in additional interest expense annually.
13
At December 31, 2017, a 1.0% increase in interest rates on the 2022 facility would result in approximately
interest expense annually. The 2022 facility also assesses variable commitment and outstanding letter of credit fees based on quarterly
average loan utilization.
$3.5 million in additional
a
The agreements that govern our indebtedness contain various covenants that impose restrictions on us and certain of our
subsidiaries that may affect our ability to operate our businesses.
The agreements that govern our indebtedness contain various affirmative and negative covenants that may, subject to certain
significant exceptions, restrict the ability
and/or merge or consolidate with any other person or sell or convey certain of our assets to any one person. The ability of us and our
subsidiaries to comply with these provisions may be affected by events beyond our control. Failure to comply with these covenants
could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations.
of us and certain of our subsidiaries to, among other things, have liens on our property,
a
The loss of any of our significant customers or a reduction in the quantity of products they purchase could affect our financial
health.
Our ten largest customers generated approximately 16.0% of our sales for the year ended December 31, 2017. We cannot
guarantee that we will maintain or improve our relationships with these customers or that we will supply these customers at historical
levels. Moreover, during the downturn and in subsequent years, some of our homebuilder customers exited or severely curtailed
building activity in certain of our regions.
In addition, production homebuilders, multi-family builders and other customers may: (1) seek to purchase some of the products
that we currently sell directly from manufacturers, (2) elect to establish their own building products manufacturing and distribution
facilities or (3) give advantages to manufacturing or distribution intermediaries in which they have an economic stake. Continued
consolidation among production homebuilders could also result in a loss of some of our present customers to our competitors. The loss
of one or more of our significant customers or deterioration in our relations with any of them could significantly affect our financial
condition, operating results and cash flows. Furthermore, our customers are not required to purchase any minimum amount of
products from us. The contracts into which we have entered with most of our professional customers typically provide that we supply
particular products or services for a certain period of time when and if ordered by the customer. Should our customers purchase our
products in significantly lower quantities than they have in the past, such decreased purchases could have a material adverse effect
our financial condition, operating results and cash flows.
on
u
ff
A range of factors may make our quarterly revenues and earnings variable.
We have historically experienced, and in the future will continue to experience, variability in revenues and earnings on a
quarterly basis. The factors expected to contribute to this variability include, among others: (1) the volatility of prices of lumber, wood
products and other building products, (2) the cyclical nature of the homebuilding industry,
various areas that we serve, (4) the intense competition in the industry, including expansion and growth strategies by competitors, (5)
the production schedules of our customers, and (6) the effects of the weather. These factors, among others, make it difficult to project
our operating results on a consistent basis, which may affect the price of our stock.
(3) general economic conditions in the
d
Our continued success will depend on our ability to retain our key employees and to attract and retain new qualified
employees.
Our success depends in part on our ability to attract, hire, train and retain qualified managerial, operational, sales and other
personnel. We face significant competition for these types of employees in our industry
unsuccessful in attracting and retaining the personnel we require to conduct and expand our operations successfully. In addition, key
personnel may leave us and compete against us. Our success also depends to a significant extent on the continued service of our senior
management team. We may be unsuccessful in replacing key managers who either resign or retire. The loss of any member of our
senior management team or other experienced senior employees could impair our ability to execute our business plan, cause us to lose
customers and reduce our net sales, or lead to employee morale problems and/or the loss of other key employees. In any such event,
our financial condition, operating results and cash flows could be adversely affected.
and from other industries. We may be
d
Product shortages, loss of key suppliers, and our dependence on third-party suppliers and manufacturers could affect our
financial health.
Our ability to offer a wide variety of products to our customers is dependent upon our ability to obtain adequate product supply
from manufacturers and other suppliers. Generally, our products are obtainable from various sources and in sufficient quantities.
However, the loss of, or a substantial decrease in the availability of, products from our suppliers or the loss of key supplier
arrangements could adversely impact our financial condition, operating results, and cash flows.
14
Although in many instances we have agreements with our suppliers, these agreements are generally terminablea
by either party
on limited notice. Failure by our suppliers to continue to supply us with products on commercially reasonable terms, or at all, could
put pressure on our operating margins or have a material adverse effect on our financial condition, operating results and cash flows.
Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes, but not always
passed on to our customers. Our delayed ability to pass on material price increases to our customers could adversely impact our
financial condition, operating results and cash flows.
If the housing market declines, we may be required to take impairment charges relating to our operations or temporarily idle
or permanently close under-performing locations.
If conditions in the housing industry deteriorate we may need to take goodwill and/or asset impairment charges relating to
certain of our reporting units. Any such non-cash charges would have an adverse effect on our financial results. In addition, in
response to industry conditions, we may have to temporarily idle or permanently close certain facilities in under-performing regions.
Any such facility closures could have a significant adverse effect on our financial condition, operating results and cash flows.
The nature of our business exposes us to product liability, product warranty, casualty, construction defect, asbestos, vehicle
and other claims and legal proceedings.
We are involved in product liability, product warranty, casualty, construction defect, asbestos, vehicle and other claims relating
ff
to the products we manufacture and distribute, and services we provide or have provided that, if adversely determined, could adversely
affect our financial condition, operating results, and cash flows.
We rely on manufacturers and other suppliers to provide us with many
of the products we sell and distribute. Because we have no direct control over the quality of such products manufactured or supplied
by such third-party suppliers, we are exposed to risks relating to the quality of such products. The Company has a number of known
and threatened construction defect legal claims. We are also involved in several asbestos personal injury suits due to the alleged sale
of asbestos-containing products by legacy businesses that we acquired. In addition, we are exposed to potential claims arising from
the conduct of our respective employees and subcontractors, and builders and their subcontractors, for which we may be contractually
liable. Although we currently maintain what we believe to be suitable and adequate insurance in excess of our self-insured amounts,
there can be no assurance that we will be able to maintain such insurance on acceptablea
adequate protection against potential liabilities. Product liability, product warranty, casualty, construction defect, asbestos, vehicle,
and other claims can be expensive to defend and can divert the attention of management and other personnel for significant periods,
regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our products
and our company. In addition, we are involved on an ongoing basis in other types of legal proceedings. We cannot assure you that any
claims against us will not adversely affect our financial condition, operating results and cash flows.
current or future
terms or that such insurance will provide
d
ff
tt
We occupy most of our facilities under long-term non-cancelable leases. We may be unable to renew leases at the end of their
terms. If we close a facility,
we are still obligated under the applicable lease.
ff
Most of our facilities are leased. Many of our leases are non-cancelable, typically have initial expiration terms ranging from five
to 15 years and most provide options to renew for specified periods of time. We believe that leases we enter into in the future will
similar renewal options. If we close or idle a
likely be of the same terms (five to 15 years), will be non-cancelable and will feature
lease, which would include, among other things,
facility we would remain committed to perform our obligations under the applicablea
payment of the base rent, insurance, taxes and other expenses on the leased property for the balance of the lease term. Management
may explore offsets to remaining obligations such as subleasing opportunities or negotiated lease terminations. During the period from
2007 through 2017, we closed or idled a number of facilities for which we continue to remain liable. Our obligation to continue
making rental payments with respect to leases for closed or idled facilities could have a material adverse effect on our business and
results of operations. At the end of a lease term and any renewal period for a leased facility, for those locations where we have no
renewal options remaining, we may be unable to renew the lease without additional cost, if at all. If we are unable to renew our facility
ff
leases, we may close or, if possible, relocate the facility, which could subject us to additional costs and risks which could have a
material adverse effect on our business. Additionally, the revenue and profit generated at a relocated facility may not equal the
revenue and profit generated at the former operation.
ff
We are a holding company and conduct all of our operations through our subsidiaries.
We are a holding company that derives all of our operating income from our subsidiaries. All of our assets are held by our direct
and indirect subsidiaries. We rely on the earnings and cash flows of our subsidiaries, which are paid to us by our subsidiaries in the
form of dividends and other payments or distributions, to meet our debt service obligations. The ability of our subsidiaries to pay
dividends or make other payments or distributions to us will depend on their respective operating results and may be restricted by,
among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of
dividends and other distributions to us), the terms of existing and future indebtedness and other agreements of our subsidiaries, the
15
2022 facility, the 2024 term loan, the terms of the indentures governing the 2024 notes and the covenants of any future outstanding
indebtedness we or our subsidiaries incur.
We may be adversely affected by any disruption in our respective information technology systems.
Our operations are dependent upon our information technology systems, which encompass all of our major business functions.
Our ProBuild subsidiary currently maintains multiple ERP systems to manage its operations. We are in the process of integrating
ProBuilds systems with ours and are expecting to complete that process in 2019. We may encounter significant operational
disruptions and higher than expected costs in connection with the ongoing ERP integration process, which could have a material
adverse effect on our financial condition, operating results and cash flows. Our primary ERP system is a proprietary system that has
been highly customized by our computer programmers. Our centralized financial reporting system currently draws data from our ERPR
systems. We rely upon our information technology systems to manage and replenish inventory, to fill and ship customer orders on a
timely basis, and to coordinate our sales activities across all of our products and services. A substantial disruption in our information
technology systems for any prolonged time period (arising from, for example, system capacity limits from unexpected increases in our
volume of business, outages, or delays in our service) could result in delays in receiving inventory and supplies or filling customer
orders and adversely affect our customer service and relationships. Our systems might be damaged or interrupted by natural or man-
made events or by computer viruses, physical or electronic break-ins, or similar disruptions affecting the global Internet. There can be
no assurance that such delays, problems, or associated costs will not have a material adverse effect on our financial condition,
operating results and cash flows.
ff
We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks.
Our business employs systems that allow for the secure storage and transmission of customers and employees proprietary
information. Security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. We may
not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Any compromise of
our security could result in a violation of applicable privacy and other laws, significant legal and financ
ial exposure, damage to our
reputation and a loss of confidence in our security measures, which could harm our business. The regulatory environment related to
information security and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business,
and compliance with those requirements could result in additional costs. Our computer systems have been, and will likely continuen
to
be, subjected to computer viruses or other malicious codes, unauthorized access attempts and cyber- or phishing-attacks. These events
could compromise our confidential information, impede or interrupt our business operations, and may result in other negative
consequences, including remediation costs, loss of revenue, litigation and reputational damage. To date, we have not experienced a
material cybersecurity breach. As cyber-attacks become more sophisticated we may be required to incur significant costs to strengthen
our systems from outside intrusions and/or maintain insurance coverage related to the threat of such attacks. While we have
implemented administrative and technical controls and have taken other preventive actions to reduce the risk of cyber incidents and
protect our information technology, they may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other
security breaches to our computer systems.
ff
We are subject to payments-related risks that could increase our operating costs, expose us to fraud, subject us to potential
liability and potentially disrupt our business.
We accept payments using a variety of methods, including credit card, debit card, direct debit from a customers bank account,
consumer invoicing, and physical bank checks, and we may offer different payment options over time. These payment options subject
us to many compliance requirements, including, but not limited to, compliance with payment card association operating rules,
including data security rules, certification requirements, rules governing electronic funds transfers and Payment Card Industry Data
Security Standards. They also subject us to potential fraud by criminal elements seeking to discover and take advantage of security
vulnerabilities that may exist in some of these payment systems. For certain payment methods, including credit and debit cards, we
pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third
parties to provide payment processing services, including the processing of credit and debit cards, and it could disrupt our business if
these companies become unwilling or unable to provide these services to us. If we fail to comply with these rules or requirements, or
if our data security systems are breached or compromised, we may be liable for card issuing banks costs, subject to fines and higher
transaction fees, and lose our ability to accept credit and debit card payments fromff
our customers, process electronic funds transfers,
or facilitate other types of online payments, and our business and operating results could be adversely affected.
We may be adversely affected by any natural or man-made disruptions to our distribution and manufacturing facilities.
We currently maintain a broad network of distribution and manufacturing facilities throughout the U.S. Any widespread
disruption to our facilities resulting from fire, earthquake, weather-related events, an act of terrorism or any other cause could damage
a significant portion of our inventory and could materially impair our ability to distribute our products to customers. Moreover, we
could incur significantly higher costs and longer lead times associated with distributing our products to our customers during the time
16
that it takes for us to reopen or replace a damaged facility. In addition, any shortages of fuel or significant fuel cost increases could
disrupt our ability to distribute products to our customers. If any of these events were to occur, our financial condition, operating
results and cash flows could be materially adversely affected.
We may be unable to successfully implement our growth strategy, which includes increasing sales of our prefabricated
components and other value-added products, pursuing strategic acquisitions, opening new facilities and reducing our
outstanding debt.
Our long-term strategy depends in part on growing our sales of prefabricated components and other value-added products and
increasing our market share. If any of these initiatives are not successful, or require extensive investment, our growth may be limited,
and we may be unable to achieve or maintain expected levels of growth and profitability.
Our long-term business plan also provides forff
continued growth through strategic acquisitions and organic growth through the
construction of new facilities or the expansion of existing facilities. Failure to identify and acquire suitable acquisition candidates on
appropriate terms could have a material adverse effect on our growth strategy. Moreover, our liquidity position, or the requirements of
the 2022 facility, the 2024 term loan or the indentures governing the 2024 notes, could prevent us from obtaining the capital
to effect new acquisitions or expand our existing facilities. Our failure to make successful acquisitions or to build or expand needed
facilities, including manufacturing facilities, produce saleable product, or meet customer demand in a timely manner could adversely
affect our financial condition, operating results, and cash flows.
cash flows, or our decision to invest in strategic acquisitions or new facilities, could adversely affect our ability to reduce our
substantial outstanding debt.
A negative impact on our financial condition, operating results and
required
a
ff
In addition, although we have been successful in the past with the integration of numerous acquisitions, we may not be able to
fully integrate the operations of any future acquired businesses with our own in an efficient and cost-effective manner or without
significant disruption to our or the acquired companies existing operations. Moreover, acquisitions involve significant risks and
uncertainties, including uncertainties as to the future financial performance of the acquired business, the achievement of expected
cultures into our business, the potential loss of key employees,
synergies, difficulties integrating acquired personnel and corporate
es of
customers or suppliers, difficulties in integrating different computer and accounting systems, exposure to unforeseen liabiliti
acquired companies and the diversion of management attention and resources from existing operations. We may be unable to
successfully complete potential acquisitions due to multiple factors, such as issues related to regulatory review of the proposed
transactions. We may also be required to incur additional debt in order to consummate acquisitions in the future. Potential new debt
may be substantial and may limit our flexibility in using our cash flow from operations. Our failure to fully integrate future
acquired
businesses effectively or to manage other consequences of our acquisitions, including increased indebtedness, could prevent us from
remaining competitive and, ultimately, could adversely affect our financial condition, operating results and cash flows.
a
r
ff
ff
Federal, state, local and other regulations could impose substantial costs and/or restrictions on our operations that would
reduce our net income.
We are subject to various federal, state, local and other regulations, including, among other things, regulations promulgated by
to our fleet of delivery trucks, work safety regulations promulgated by the
the Department of Transportation and applicablea
Department of Labors Occupational Safety and Health Administration, employment regulations promulgated by the United States
Equal Employment Opportunity Commission, accounting standards issued by the Financial Accounting Standards Board (FASB) or
similar entities, state and local regulations relating to our escrow business, and state and local zoning restrictions and building codes.
More burdensome regulatory requirements in these or other areas may increase our general and administrative costs and adversely
affect our financial condition, operating results and cash flows.
applicable to our business could expose us to substantial penalties that could adversely affecff
and cash flows.
Moreover, failure to comply with the regulatory requirements
t our financial condition, operating results
ff
Recently enacted tax legislation as well as any future changes to tax laws and regulations could have an adverse impact on our
business.
On December 22, 2017, legislation commonly referred to as the Tax Cuts and Jobs Act (the 2017 Tax Act) became enacted
law. The 2017 Tax Act substantially changes several aspects of the Internal Revenue Code, some of which may have an adverse
impact on our business. Certain aspects of the 2017 Tax Act may make purchasing a home less attractive and thereforeff
adverse impact on our business. The 2017 Tax Act contains limitations on the ability of homeowners to deduct property taxes and
mortgage interest as well as limitations on an individual taxpayers ability
also raises the standard deduction. These changes could reduce the perceived affordability of homeownership, and therefore the
demand for homes, and/or have a moderating impact on home sales prices in areas with relatively high housing prices and/or high
state and local income taxes and real estate taxes, including in certain of our served markets such as California and New York. As a
to deduct state and local income taxes. The 2017 Tax Act
could have an
a
17
result, some communities in those locations could experience lower net orders and/or a tempering of average sales prices in futff urett
periods depending on how homebuyers react to the tax law changes under the 2017 Tax Act.
In addition, the 2017 Tax Act eliminates the ability for companies to carryback any future net operating losses (NOLs). While
indefinite carryforwards of future NOLs, the utilization of these NOLs is limited to 80% of taxable
year. Further, the 2017 Tax Act limits the ability for companies to deduct interest expense that exceeds 30%
the 2017 Tax Act provides forff
income in a carryforward
rr
of adjusted taxable income with disallowed interest for a given year allowed to be carried forward to future years indefinitely. These
limitations on the utilization of future NOLs and the deductibility of interest expense could adversely impact us in the future. Finally,
there can be no assurance that any future changes in federal and state tax laws and regulations will not have an adverse impact on our
financial condition, operating results and cash flows.
We are subject to potential exposure to environmental liabilities and are subject to environmental regulation.
We are subject to various federal, state and local environmental laws, ordinances and regulations. Although we believe that our
facilities are in material compliance with such laws, ordinances, and regulations, as owners and lessees of real property, we can be
held liable for the investigation or remediation of contamination on such properties, in some circumstances, without regard to whether
we knew of or were responsible for such contamination. No assurance can be provided that remediation may not be required in the
future as a result of spills or releases of petroleum products or hazardous substances, the discovery of unknown environmental
conditions, more stringent standards regarding existing residual contamination, or changes in legislation, laws, rules or regulations.
More burdensome environmental regulatory requirements may increase our general and administrative costs and adversely affecff
financial condition, operating results and cash flows.
t our
We may be adversely affected by uncertainty in the economy and financial markets, including as a result of terrorism or
unrest in the Middle East, Europe or elsewhere.
Instability in the economy and financial markets, including as a result of terrorism or unrest in the Middle East, Europe or
elsewhere, may result in a decrease in housing starts, which would adversely affect our business. In addition, such unrest or related
adverse developments, including a retaliatory military strike or terrorist attack, may cause unpredictable or unfavorable economic
conditions and could have a material adverse effect on our financial condition, operating results, and cash flows. Any shortages of fuel
or significant fuel cost increases related to geopolitical conditions could seriously disrupt our ability to distribute products to our
customers. In addition, domestic terrorist attacks may affect our ability to keep our operations and services functioning properly and
could have a material adverse effect on our financial condition, operating results and cash flows.
ff
Some Company Employees are Unionized.
Approximately 2% of the workforce at our company are members of nine different unions. There can be no assurance that
additional employees of our company will not conduct union organization campaigns or become union members in the future.
ff
The trading price of our common stock has been and may continue to be subject to wide fluctuations.
Between January 1, 2017 and December 31, 2017, the price of our common stock on the NASDAQ ranged from $10.57 to
$22.08 per share. Our stock price may fluctuate
Factors section. Additionally, our substantial indebtedness may hinder the demand for our common stock, which could have a
material adverse effect on the market price of our common stock.
in response to a number of events and factors, including those described in this Risk
ff
The price of our common stock is volatile and may decline.
The market price of our common stock historically has experienced and may continue to experience significant price
fluctuations similar to those experienced by the broader stock market in recent years. In addition, the price of our common stock may
fluctuate significantly in response to various factors, including:
•
•
•
•
•
actual or anticipated fluctuations in our results of operations;
announcements by us or our competitors of significant business developments, changes in customer relationships,
acquisitions, or expansion plans;
changes in the prices of products we sell;
involvement in litigation;
our sale of common stock or other securities in the future;
ff
18
•
•
•
•
•
•
market conditions in our industry;
changes in key personnel;
changes in market valuation or earnings of our competitors;
the trading volume of our common stock;
changes in the estimation of the future size and growth rate of our markets; and
general economic and market conditions;
Broad market and industry
d
factors may materially harm the market price of our common stock, regardless of our operating
performance. In the past, following periods of volatility in the market price of a companys securities, securities class action litigation
has often been instituted against that company.
If we were involved in any similar litigation we could incur substantial costs and our managements attention and resources
t our financial condition, results of operations and cash flows. As a result, it may be
could be diverted, which could adversely affecff
difficult for you to resell your shares of common stock in the future.
ff
Significant sales of our common stock, or the perception that significant sales may occur in the future, could adversely affect
the market price of our common stock.
The sale of substantial amounts of our common stock could adversely affect the price of our common stock. Sales of substantial
amounts of our common stock in the public market, and the availability of shares for future sale, including 2.1 million shares of our
common stock issuable as of December 31, 2017, upon exercise of outstanding vested and unvested options to acquire shares of our
common stock and through the conversion of 2.2 million restricted stock units under our stock incentive plans, could adversely affect
the prevailing market price of our common stock and could cause the market price of our common stock to remain low for a
substantial time. Additional stock grants may also be made under our incentive plans, including our 2014 Incentive Plan, as it may be
amended. The potential for future stock grants could have a negative effect on the market forff
raise additional capital.
our common stock and our ability to
We do not have any current plan to pay, and are restricted in our ability to pay, any dividends on our common stock, and as a
result, your only opportunity to achieve a return on your investment in our common stock is if the price of our common stock
increases.
We anticipate that we will retain all future
ff
earnings and other cash resources for the future operation and development of our
business. Accordingly, we do not intend to declare or pay regular cash dividends on our common stock in the near future.
Payment of
any future dividends will be at the discretion of our board of directors after taking into account many factors, including our operating
results, financial condition, current and anticipated cash needs and plans for expansion. The declaration and payment of any dividends
on our common stock is also restricted by the terms of our outstanding indebtedness.
ff
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We have a broad network of distribution and manufacturing facilities in 40 states throughout the U.S. Based on 2017
U.S. Census data, we have operations in 75 of the top 100 U.S. Metropolitan Statistical Areas, as ranked by single family housing
permits in 2017.
Distribution centers typically include 10 to 15 acres of outside storage, a 45,000 square foot warehouse, 4,000 square feet of
office space, and 15,000 square feet of covered storage. The outside area provides space for lumber storage and a staging area forff
delivery while the warehouse stores millwork, windows and doors. The distribution centers are usually located in industrial areas with
low cost real estate and easy access to freeways to maximize distribution efficiency and convenience. Many of our distribution centers
are situated on rail lines for efficient receipt of goods.
Our manufacturing facilities produce trusses, wall panels, engineered wood, stairs, windows, pre-hung doors and custom
millwork. In many cases, they are located on the same premises as our distribution facilities. Truss and panel manufacturing facilities
19
vary in size from 30,000 square feet to 60,000 square feet with 8 to 10 acres of outside storage for lumber and for finished goods. Our
window manufacturing facility in Houston, Texas has approximately 200,000 square feet.
We contractually lease 311 facilities and own 91 facilities. These leases typically have an initial operating lease term of 5 to
15 years and most provide options to renew for specified periods of time. A majority of our leases provide for fixed annual rentals.
Certain of our leases include provisions for escalating rent, as an example, based on changes in the consumer price index. Most of the
leases require us to pay taxes, insurance and common area maintenance expenses associated with the properties. As described in Note
8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K, 141 of our leased facilities are
subject to a sales-lease back transaction that is accounted for in our financial statements as owned assets with offsetting lease
financing obligations.
We operate a fleff et of approximately 10,800 rolling stock units, which includes approximately 4,600 trucks as well as forklifts
ff
and trailers to deliver products from our distribution and manufacturing centers to our customers job sites. Through our emphasis on
local market flexibility
and strategically placed locations, we minimize shipping and freight costs while maintaining a high degree of
local market expertise. Through knowledge of local homebuilder needs, customer coordination and rapida
working capital requirements and guard against out-of-stock products. We believe that this reliability is highly valued by our
customers and reinforces customer relationships.
restocking ability, we reduce
Item 3. Legal Proceedings
The Company has a number of known and threatened construction defect legal claims. While these claims are generally covered
under the Companys existing insurance programs to the extent any loss exceeds the deductible, there is a reasonable possibility ott
f
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 effecff
t 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 effecff
financial position, cash flows or results of operations. However, there can be no assurances that future
would not be material to our results of operations or liquidity for a particular period.
t on our consolidated
adverse judgments and costs
ff
Although our business and facilities are subject to federal, state and local environmental regulation, environmental regulation
does not have a material impact on our operations. We believe that our facilities are in material compliance with such laws and
regulations. As owners and lessees of real property, we can be held liablea
such properties, in some circumstances without regard to whether we knew of or were responsible for such contamination. Our current
expenditures with respect to environmental investigation and remediation at our facilities are minimal, although no assurance can be
as a result of spills or releases of petroleum products or
provided that more significant remediation may not be required in the future
hazardous substances or the discovery of unknown environmental conditions.
for the investigation or remediation of contamination on
rr
ff
Item 4. Mine Safety Disclosures
Not applicable.
20
PART II
CC
Item 5. Market for Registrants C
ommon
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Stock Market LLC under the symbol BLDR. On February 26, 2018, the closing
price of our common stock as reported on the NASDAQ Stock Market LLC was $20.51. The approximate number of stockholders of
record of our common stock on that date was 100, although we believe that the number of beneficial owners of our common stock is
substantially greater.
The table below sets forth the high and low sales prices of our common stock for the periods indicated:
2017
First quarter ............................................................................... $
Second quarter........................................................................... $
Third quarter ............................................................................. $
Fourth quarter............................................................................ $
2016
First quarter ............................................................................... $
Second quarter........................................................................... $
Third quarter ............................................................................. $
Fourth quarter............................................................................ $
High
Low
15.85
16.50
18.08
22.08
11.34
12.77
14.09
12.28
$
$
$
$
$
$
$
$
10.57
13.33
14.39
16.52
6.50
10.15
10.99
9.04
We have not declared or paid cash dividends in the two most recent fiscal years. Any future determination relating to dividend
policy will be made at the discretion of our board of directors and will depend on a number of factors, including restrictions in our
debt instruments, as well as our future earnings, capital requirements, financial condition, prospects and other factors that our board of
directors may deem relevant. Our debt agreements currently restrict our ability to pay dividends. See Managements Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources contained in Item 7 of this annual
report on Form 10-K.
Company Stock Repurchases
The following table provides information with respect to our purchases of Builders FirstSource, Inc. common stock during
d
the
fourth quarter of fiscal year 2017:
Period
October 1, 2017 October 31, 2017 ..............
November 1, 2017 November 30, 2017 ......
December 1, 2017 December 31, 2017 .......
Total........................................................
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
$
9,214
9,214
$
18.27
18.27
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
g
or Programs
Maximum
Number of
Shares That May
Yet be Purchased
Under the Plans
g
or Programs
The shares presented in the above
a
table represent stock tendered in order to meet tax withholding requirements for restricted
stock units vested.
21
The graph below matches the cumulative 5-Year total return of holders of Builders FirstSource, Inc.s common stock with the
assumes that the value of the
cumulative total returns of the Russell 2000 index and the S&P 600 Building Products index. The grapha
investment in our common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on 12/31/2012
and tracks it through 12/31/2017.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Builders FirstSource, Inc., the Russell 2000 Index,
and S&P 600 Building Products Index
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/12
12/13
12/14
12/15
12/16
12/17
Builders FirstSource, Inc.
Russell 2000
S&P 600 Building Products Index
*$100 invested on 12/31/12 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2018 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2018 Russell Investment Group. All rights reserved.
Builders FirstSource, Inc. ................................
Russell 2000 ....................................................
S&P 600 Building Products Index ..................
100.00
100.00
100.00
127.78
138.82
145.13
123.12
145.62
150.68
198.57
139.19
176.65
196.60
168.85
243.14
390.50
193.58
292.49
12/12
12/13
12/14
12/15
12/16
12/17
The stock price performance included in this graph is not necessarily indicative of future
ff
stock price performance.
The information regarding securities authorized for issuance under equity compensation plans appears in our definitive proxy
statement for our annual meeting of stockholders to be held on May 23, 2018 under the caption Equity Compensation Plan
Information, which information
is incorporated herein by reference.
ff
22
Item 6. Selected Financial Data
The following selected consolidated financial data for the years ended December 31, 2017, 2016 and 2015 and as of
December 31, 2017 and 2016 were derived from our consolidated financial statements which are included in Item 8 of this annual
report on Form 10-K. Selected consolidated financial data as of December 31, 2015 and as of and for the years ended December 31,
2014 and 2013 were derived from our consolidated financial statements, but are not included herein.
The following data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and
Results of Operations contained in Item 7 of this annual report on Form 10-K and with our consolidated financial statements and
related notes included in Item 8 of this annual report on Form 10-K.
2017
Year Ended December 31,
2015
(In thousands, except per share amounts)
2016
2014
2013
Statement of operations data:
Sales .................................................................................................. $7,034,209 $6,367,284 $3,564,425 $1,604,096 $1,489,892
319,920
Gross margin .....................................................................................
272,204
Selling, general and administrative expenses....................................
(42,691)
Net income (loss) (1)(2) ....................................................................
(0.44)
Net income (loss) per share basic................................................. $
Net income (loss) per share diluted.............................................. $
(0.44)
Balance sheet data (end of period):
Cash and cash equivalents................................................................. $
Total assets ........................................................................................
Total debt (including current portion)...............................................
Stockholders equity..........................................................................
Other financial data:
Depreciation and amortization .......................................................... $
54,696
505,436
343,567
15,368
1,596,748
1,360,412
144,341
1,727,391
1,442,288
38,781
3,006,124
1,784,420
376,209
2,909,887
1,802,052
309,620
2,882,038
1,951,671
149,195
901,458
810,703
(22,831)
356,997
307,387
18,150
574,065
374,903
40,200
92,993 $ 109,793 $
(0.22) $
(0.22) $
1.30 $
1.27 $
0.19 $
0.18 $
0.34 $
0.34 $
58,280 $
65,063 $
17,773 $
14,449 $
57,533 $
9,519 $
9,305
(1) As discussed in Note 11 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K, net
income includes $29.0 million in income tax expense attributable to revaluation of our net deferred tax assets resulting from the
enactment of the 2017 Tax Act. Net income includes a reduction to our valuation allowance of $131.7 million as we released the
valuation allowance against our net federal and certain state deferred tax assets for the year ended December 31, 2016. Net loss
includes a valuation allowance of $9.7 million against primarily all of our deferred tax assets for the year ended December 31,
2015. Net income includes a reduction to our valuation allowance of $7.2 million due to the utilization of net operating loss
carryforwards to reduce taxable income for the year ended December 31, 2014. Net loss includes a valuation allowance of $15.3
million against primarily all of our deferred tax assets for the year ended December 31, 2013.
(2) Net income for the years ended December 31, 2017 and 2016 includes losses on debt extinguishment and other financing
ff
costs
of $58.7 million and $56.9 million, respectively, resulting from multiple debt transactions executed in 2017 and 2016. Our 2017
and 2016 debt transactions are discussed in detail in Note 8 to the consolidated financial statements included in Item 8 of this
annual report on Form 10-K. Net loss for the year ended December 31, 2015 includes $38.6 million of acquisition and
transaction related costs associated with the ProBuild acquisition, including $13.2 million in commitment fees related to bridge
and backstop financing facilities incurred in connection with the financing of the ProBuild acquisition. In addition, net loss for
the year ended December 31, 2015 also includes $10.3 million related to non-cash interest expense from the amortization of
debt discount and deferred loan costs, and fair value adjustments related to our warrants. Net loss for the year ended
December 31, 2013 includes a $39.5 million prepayment penalty.
23
Item 7. Managements D
iscussion 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 selected
financial data and the consolidated financial statements and related notes contained in Item 6. Selected Financial Data and Item 8.
Financial Statements and Supplementary Data of this annual report on Form 10-K, respectively. See Risk Factors contained in
Item 1A. Risk Factors of this annual report on Form 10-K and Cautionary Statement contained in Item 1. Business of this annual
report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.
OVERVIEW
We are a leading supplier of building materials, manufactured components and construction services to professional contractors,
sub-contractors, and consumers. The Company operates 402 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 14 to the consolidated financial statements included in Item 8
of this annual report on Form 10-K.
We offer an integrated solution to our customers providing manufacturing, supply and installation of a full
ff
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 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.
Windows & doors are comprised of the manufacturing, assembly, and distribution of
MM
Gypsum, Roofing & Insulation.
II
Gypsum, roofing, & insulation include wallboard, ceilings, joint treatment and finishes.
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 are comprised of products such as cabinets and
Other Building Products & Services.
hardware as well as services such as turn-key framing, shell construction, design assistance, and professional installation
spanning the majority of our product categories.
SS
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, foreclosure rates, the availability of skilled construction labor, and the
health of the economy and mortgage markets. According to the U.S. Census Bureau, annual U.S. total and single-family
housing starts were 1,202,900 and 848,900, respectively, in 2017. However, both total and single-family housing starts
remain well below the normalized historical averages (from 1959 through 2017) of 1.5 million and 1.1 million,
respectively. We believe the housing industry is currently experiencing a shortage of skilled construction labor, which is
constraining housing activity. Due to the lower levels in housing starts and increased competition for homebuilder
business, we have seen and may continue to experience downward competitive pressure on our gross margins. In addition
to these factors, there has been a trend of consolidation within the building products supply industry. However, our
industry remains highly fragmented
and competitive and we will continue to face significant competition from local and
regional suppliers. We still believe there are several meaningful trends that indicate U.S. housing demand will recover to
the historical average in the long term and that the downturn in the housing industry was a trough in the cyclical nature of
the residential construction industry. These trends include relatively low interest rates, the aging of housing stock, and
normal population growth due to immigration and birthrate exceeding death rate. Industry forecasters, including the
ff
24
National Association of Homebuilders (NAHB), expect to see continued improvement in housing demand over the next
few years.
Targeting Large Production Homebuilders. Over the past ten 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. We expect that our ability to maintain strong
relationships with the largest builders will be vital to our ability to expand into new markets as well as grow our market
share. Additionally, we have been successful in expanding our custom homebuilder base while maintaining acceptable
credit standards.
rr
. Although the repair and remodel end market is influenced by housing starts to a lesser
Repair and remodel end market
degree than the homebuilding market, the repair and remodel end market is still dependent upon some of the same factors
ff
as the homebuilding market, including demographic trends, interest rates, consumer confidence, employment rates,
foreclosure rates, and the health of the economy and home financing markets. We expect that our ability to remain
competitive in this space as well as grow our market share 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 and improved quality. Shortening cycle time from start to completion is a key imperative of the
homebuilders during periods of strong consumer demand. While the conversion of customers to this product offering
slowed during the downturn, we see the demand for prefabricated components increasing as the residential new
construction market continues to strengthen and 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 availability of suitable
building lots, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and
homeowners.
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 sometimes passed on to our customers, but our pricing quotation periods 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 the 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.
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.
Reduction of Debt: As a result of our historical growth through acquisitions, we have substantial indebtedness. Debt
for the Company.
reduction will continue to be a key area of focus
ff
•
•
•
•
•
•
•
•
RECENT DEVELOPMENTS
During the year ended December 31, 2017, the Company executed three debt transactions which are described in Note 8 to the
consolidated financial statements included in Item 8 of this annual report on Form 10-K. These transactions further extended our debt
maturity profile and reduced our annual cash interest on a go forward
basis.
ff
On December 22, 2017, the 2017 Tax Act became enacted law. The effects of the 2017 Tax Act on our financial statements for
the year ended December 31, 2017 are discussed in more detail below as well as in Note 11 to the consolidated financial statements
included in Item 8 of this annual report on Form 10-K. The 2017 Tax Act, among several other substantial changes, reduces the
statutory federal income tax rate from 35% to 21% for periods beginning after December 31, 2017. We generally expect the 2017 Tax
Act to have a positive impact on our business due to the anticipated reduction in federal cash tax payments.
25
CURRENT OPERATING CONDITIONS AND OUTLOOK
Though the level of housing starts remains below the historical average, the homebuilding industry has shown improvement
since 2011. According to the U.S. Census Bureau, actual U.S. total housing starts for 2017 were 1,202,900, an increase of 2.5%
compared to 2016. Actual U.S. single-family housing starts forff
housing industry has strengthened over the past few years, the limited availability of credit to smaller homebuilders and potential
homebuyers, as well as the high demand for a limited supply of skilled construction labor, among other factors, have hampered a
stronger recovery. A composite of third party sources, including the NAHB, are forecasting 1,292,000 U.S. total housing starts and
921,000 U.S. single-family housing starts for 2018, which are increases of 7.4% and 8.5%, respectively, from 2017. In addition, the
Home Improvement Research Institute (HIRI) is forecasting
approximately 2.5% in 2018 compared to 2017.
sales in the professional repair and remodel end market to increase
2017 were 848,900, an increase of 8.6% compared to 2016. While the
ff
Our net sales for the year ended December 31, 2017 were up 10.5% over the same period last year. We estimate that our sales
volume increased 4.3%, while commodity price inflation resulted in an additional 6.2% increase in sales in 2017 compared to 2016.
For the year ended December 31, 2017 sales volume growth in single-family and the repair and remodel end market were partially
ily. Our gross margin percentage decreased by 0.5% during the year ended December 31, 2017
offset by declines in multi-famff
compared to the year ended December 31, 2016. Our gross margin percentage decreased primarily due to gross profit margin
compression on commodity products resulting from inflaff
continue to invest in our business to improve our operating efficiency, which has allowed us to better leverage our operating costs
against changes in net sales. Our selling, general and administrative expenses, as a percentage of net sales, were 20.5% for the year
ended December 31, 2017, a 0.9% decrease from 21.4% in 2016. The decrease in selling, general and administrative expenses, as a
percentage of net sales, was due to cost leverage as well as the decline in depreciation and amortization on acquired ProBuild assets,
partially offset by investments the Company made towards growth initiatives, including additional sales associates and new locations.
tion in the lumber and lumber sheet goods markets during most of 2017. We
We believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics. We feel we
are well-positioned to take advantage of the construction activity in our markets and to increase our market share, which may include
strategic acquisitions. We will continue to focus on working capital by closely monitoring the credit exposure of our customers and by
working with our vendors to improve our payment terms and pricing on our products. We strive to achieve the appropriate balance of
short-term expense control while maintaining the expertise and capacity to grow the business as market conditions improve. In
addition, debt reduction will continue to be a key area of focus
for the Company.
ff
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to sales of certain costs, expenses and income items for the years
ended December 31:
2017
2016
2015
Sales.........................................................................................
Cost of sales.............................................................................
Gross margin..................................................................
Selling, general and administrative expenses ..........................
Income from operations .................................................
Interest expense, net ................................................................
Income tax expense (benefit)...................................................
Net income (loss)............................................................
100.0%
75.4%
24.6%
20.5%
4.1%
2.7%
0.8%
0.6%
100.0%
74.9%
25.1%
21.4%
3.7%
3.3%
(1.9)%
2.3%
100.0%
74.7%
25.3%
22.7%
2.6%
3.1%
0.1%
(0.6)%
26
2017 Compared with 2016
Sales. Sales for the year ended December 31, 2017 were $7,034.2 million, a 10.5% increase from sales of $6,367.3 million for
2016. We estimate that our sales volume increased 4.3%, while commodity price inflation resulted in an additional 6.2% increase in
sales in 2017 compared to 2016. For the year ended December 31, 2017, sales volume growth in single-family and the repair and
remodel end market were partially offset by declines in multi-family.
The following table shows sales classified by major product category (dollars in millions):
2017
2016
Sales
% of Sales
Sales
% of Sales
% Change
Lumber & lumber sheet goods ............................................................ $ 2,510.9
1,208.5
Manufactured products........................................................................
1,360.6
Windows, doors & millwork ...............................................................
538.4
Gypsum, roofing & insulation.............................................................
655.9
Siding, metal & concrete products ......................................................
Other building products & services.....................................................
759.9
Total sales............................................................................................ $ 7,034.2
35.7% $ 2,131.4
17.2% 1,097.7
19.4% 1,286.2
520.0
7.6%
622.3
9.3%
10.8%
709.7
100.0% $ 6,367.3
33.5%
17.2%
20.2%
8.2%
9.8%
11.1%
100.0%
17.8%
10.1%
5.8%
3.5%
5.4%
7.1%
10.5%
We achieved increased net sales across all of our product categories. The impact of commodity price inflation in 2017 resulted
in the sales growth of our lumber and lumber sheet goods category exceeding the sales growth of our other product categories.
Gross Margin. Gross margin increased $130.6 million to $1,727.4 million. Our gross margin percentage decreased to 24.6% in
2017 from 25.1% in 2016, a 0.5% decrease. Our gross margin percentage decreased primarily due to gross profit margin compression
on commodity products resulting from inflation in the lumber and lumber sheet goods markets during most of 2017.
Selling, General and Administrative
ii
Expenses. Selling, general and administrative expenses increased $81.9 million, or 6.0%.
Our salaries and benefits expense was $935.5 million, an increase of $41.1 million from 2016, and stock compensation increased $3.0
million. Office general and administrative increased $13.9 million, delivery expense increased $10.1 million and occupancy expense
increased $5.9 million. In addition, we recognized a $4.2 million loss on the disposal of assets during the year ended December 31,
2017 compared to a gain of $5.0 million during the year ended December 31, 2016.
As a percentage of net sales, selling, general and administrative expenses decreased from 21.4% in 2016 to 20.5% in 2017 due
to cost leverage as well as the decline in depreciation and amortization on acquired ProBuild assets, partially offset by investments the
Company made towards growth initiatives, including additional sales associates and new locations.
Interest Expense, net. Interest expense was $193.2 million in 2017, a decrease of $21.5 million from 2016. This decrease was
largely attributable to the positive results of our debt transactions executed in fiscal years 2016 and 2017. Interest expense for the
years ended December 31, 2017 and 2016 included one-time charges related to the debt financing transactions of $58.7 million and
$57.0 million, respectively.
Income Tax Expense. We recorded income tax expense of $53.1 million during the year ended December 31, 2017 compared to
an income tax benefit of $122.7 million during the year ended December 31, 2016. Due to the enactment of the 2017 Tax Act, we
recorded income tax expense of $29.0 million for the year ended December 31, 2017 related to the revaluation of our net deferred tax
assets. We recorded reductions of $2.8 million and $131.7 million in the after tax non-cash valuation allowance on our net deferred tax
assets for the years ended December 31, 2017 and 2016, respectively. For the year ended December 31, 2017, our effective tax rate
was 57.8% largely due to the impact of the additional income tax expense recognized in connection with the enactment of the 2017
Tax Act. Our effective rate for the year ended December 31, 2016 was (566.1%) primarily due to the release of the valuation
allowance against our net federal and some state deferred tax assets in that period. Absent the effect of the 2017 Tax Act and the
changes to our valuation allowance, our effecff
2016, respectively.
tive rate would have been 29.4% and 41.8% for the years ended December 31, 2017 and
27
2016 Compared with 2015
Sales. Sales for the year ended December 31, 2016 were $6,367.3 million, a 78.6% increase from sales of $3,564.4 million for
2015. Net sales increased $2,659.1 million, or approximately 75%, due to the ProBuild acquisition. Excluding the impact of the
ProBuild acquisition, we estimate net sales increased $143.8 million, or approximately 4% due to increased volume.
The following table shows sales classified by major product category (dollars in millions):
2016
2015
Sales
% of Sales
Sales
% of Sales
% Change
Lumber & lumber sheet goods ............................................................ $ 2,131.4
1,097.7
Manufactured products........................................................................
1,286.2
Windows, doors & millwork ...............................................................
520.0
Gypsum, roofing & insulation.............................................................
622.3
Siding, metal & concrete products ......................................................
709.7
Other building products & services.....................................................
Total sales............................................................................................ $ 6,367.3
33.5% $ 1,129.7
635.3
17.2%
818.1
20.2%
264.9
8.2%
319.6
9.8%
396.8
11.1%
100.0% $ 3,564.4
31.7%
17.8%
23.0%
7.4%
9.0%
11.1%
100.0%
88.7%
72.8%
57.2%
96.3%
94.7%
78.9%
78.6%
Due to the ProBuild acquisition, we achieved increased net sales across all product categories. Our sales classification by
product categories has shifted as we diversified our product offerings to support a broader customer base across 40 states through the
ProBuild acquisition.
Gross Margin. Gross margin increased $695.3 million to $1,596.7 million. Of this increase, $656.8 million is due to the
ProBuild acquisition. Our gross margin percentage decreased to 25.1% in 2016 from 25.3% in 2015, a 0.2% decrease. Our gross
margin percentage decreased primarily due to the impact of commodity price inflation relative to our short-term customer pricing
commitments during the year ended December 31, 2016. However, this decrease was mostly offset by an increase in our gross margin
percentage largely attributable to the ProBuild acquisition, the result of ProBuilds higher mix of higher margin repair & remodel and
retail sales.
Selling, General and Administrative
ii
Expenses. Selling, general and administrative expenses increased $549.7 million, or 67.8%,
largely due to the ProBuild acquisition. Our salaries and benefits expense was $894.3 million, an increase of $383.7 million from
2015, largely due to increased full-time equivalent employees following the ProBuild acquisition. Delivery expense increased $65.9
million, office general and administrative expense increased $46.5 million, occupancy expense increased $45.9 million and intangible
asset amortization increased $10.7 million. These increases were primarily a result of the ProBuild acquisition, the related integration
activities and increased sales volume. These increases were partially offset by a $4.2 million decrease in facility closure costs.
As a percentage of net sales, selling, general and administrative expenses decreased from 22.7% in 2015 to 21.4% in 2016
largely due to the benefit of synergy cost savings. Synergy cost savings were primarily attributable to reduced payroll and benefits
expense, as well as decreased delivery costs and location consolidations.
Interest Expense, net. Interest expense was $214.7 million in 2016, an increase of $105.5 million from 2015. Of the $105.5
million increase, $49.6 million was attributable to increased interest expense associated with our increased debt balances following the
ProBuild acquisition financing and subsequent refinancing transactions, $28.1 million was attributable to losses on debt
extinguishment largely due to the payment of redemption premiums on our 2021 and 2023 notes, $17.6 million was related to
increased amortization and write-off of debt discount and debt issuance costs largely due to our debt transactions during the year
ended December 31, 2016, and $14.2 million was due to interest expense primarily related to lease obligations assumed in the
ProBuild acquisition. These increases were partially offset by a $4.6 million decrease in interest expense due to non-cash fair value
adjustments related to the exercise of all remaining stock warrants in 2015.
Income Tax Expense. We recorded an income tax benefit of $122.7 million during the year ended December 31, 2016 compared
to income tax expense of $4.4 million during the year ended December 31, 2015. In the third quarter of 2016, we released the
valuation allowance against our net federal
valuation allowance on our net deferred tax assets of $131.7 million during the year ended December 31, 2016 compared to an
increase of $9.7 million during the year ended December 31, 2015. Absent the valuation allowance our effective tax rate would have
been 41.8% and 28.5% for the years ended December 31, 2016 and 2015, respectively.
and some state deferred tax assets. We recorded a reduction
of the after-tax, non-cash
d
ff
28
Results by Reportable Segment
The following tables show net sales and income before income taxes by reportable segment excluding the All Other caption as
shown in Note 14 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K (dollars in
thousands):
Year ended December 31,
2017
% of net
sales
Net sales
2016
% of net
sales
% change
Northeast .......... $ 1,285,286
1,542,330
Southeast ..........
1,855,425
South.................
2,188,696
West..................
$ 6,871,737
18.7% $ 1,204,100
22.4% 1,362,259
27.0% 1,699,371
31.9% 1,939,206
100.0% $ 6,204,936
19.4%
22.0%
27.4%
31.2%
100.0%
2016
% of net
sales
Net sales
2015
% of net
sales
g
% change
Northeast .......... $ 1,204,100
1,362,259
Southeast ..........
1,699,371
South.................
1,939,206
West..................
$ 6,204,936
19.4% $ 626,985
22.0%
890,164
27.4% 1,015,556
31.2%
785,370
100.0% $ 3,318,075
18.9%
26.8%
30.6%
23.7%
100.0%
6.7% $
13.2%
9.2%
12.9%
2017
40,359
49,735
90,551
85,628
$ 266,273
Year ended December 31,
92.0% $
53.0%
67.3%
146.9%
2016
35,347
40,261
72,183
72,745
$ 220,536
Income before income taxes
% of net
sales
2016
35,347
3.1% $
40,261
3.2%
72,183
4.9%
3.9%
72,745
3.9% $ 220,536
% of net
sales
% change
2.9%
3.0%
4.2%
3.8%
3.6%
14.2%
23.5%
25.4%
17.7%
Income before income taxes
% of net
sales
2015
28,843
2.9% $
17,193
3.0%
53,435
4.2%
3.8%
35,230
3.6% $ 134,701
% of net
sales
g
% change
4.6%
1.9%
5.3%
4.5%
4.1%
22.5%
134.2%
35.1%
106.5%
We have four reportable segments based on an aggregation of the geographic regions in which we operate. While there is some
geographic similarity between our reportable segments and the regions as defined by the U.S. Census Bureau, our reportable segments
do not necessarily fully align with any single U.S. Census Bureau region.
According to the U.S. Census Bureau, actual single-family housing starts during the year ended December 31, 2017 increased
3.2%, 7.7%, 7.6% and 13.6% in the Northeast region, Midwest region, South region and West region, respectively. For the year ended
December 31, 2017, we achieved increased net sales and profitability compared to 2016 across all of our reportable segments, due to
the impact of commodity price inflation as well as an increase in sales volume.
According to the U.S. Census Bureau, actual single-family housing starts during the year ended December 31, 2016 increased
8.8%, 9.5%, 8.7% and 12.8% in the South region, Northeast region, West region and Midwest region, respectively. For the year ended
December 31, 2016, we achieved increased net sales and profitability compared to 2015 across all our reportable segments, primarily
due to the ProBuild acquisition and sales volume increases.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal
payments, and to fund capital
cash on hand and borrowing availability under our 2022 facility.
a
expenditures and potential future acquisitions. Our capital resources at December 31, 2017 consist of
Our 2022 facility will be primarily used for working capital, general corporate purposes, and funding acquisitions. In addition,
we may use the 2022 facility to facilitate debt repayment and consolidation. Availability under the 2022 facility is determined by a
borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables, including progress billings
and credit card receivables, and qualified cash that all meet specific criteria contained within the credit agreement, minus agent
specified reserves. Net excess borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and
letters of credit.
29
The following table shows our borrowing base and excess availability as of December 31, 2017 and 2016 (in millions):
As of
December 31,
2017
December 31,
2016
Accounts Receivable Availability...................................................... $
Inventory Availability ........................................................................
Other Receivables Availability ..........................................................
Gross Availability .........................................................................
$
437.2
380.8
39.2
857.2
403.5
332.0
27.9
763.4
Less:
Agent Reserves .............................................................................
(24.9)
(26.9)
Plus:
Cash in Qualified Accounts ..........................................................
Borrowing Base..................................................................................
Aggregate Revolving Commitments..................................................
Maximum Borrowing Amount (lesser of Borrowing Base and
Aggregate Revolving Commitments)..............................................
39.4
871.7
900.0
871.7
Less:
Outstanding Borrowings ...............................................................
Letters of Credit ............................................................................
Net Excess Borrowing Availability on Revolving Facility..... $
(350.0)
(84.9)
436.8
$
15.5
752.0
800.0
752.0
(84.8)
667.2
As of December 31, 2017, we had $350.0 million in outstanding borrowings under our 2022 facility and our net excess
borrowing availability was $436.8 million after being reduced by outstanding letters of credit of approximately $84.9 million. We are
required to meet a fixed
below the greater of $80.0 million or 10%
of the maximum borrowing amount, which was $87.2 million as of December 31, 2017. We were not in violation of any covenants or
restrictions imposed by any of our debt agreements at December 31, 2017.
charge coverage ratio of 1:00 to 1:00 if our excess availability falls
ff
ff
Liquidity
Our liquidity at December 31, 2017 was $494.3 million, which consists of net borrowing availability under the 2022 facility and
cash on hand. We are expecting continued improvement in the housing industry in 2018. Beyond 2018, it is difficult for us to predict
what will happen as our industry is dependent on a number of factors, including national economic conditions, employment levels, the
availability of credit for homebuilders and potential home buyers, the level of foreclosures, existing home inventory, and interest rates.
We have substantial indebtedness following our recent acquisitions, which increased our interest expense and could have the
effect of, among other things, reducing our flexibility to respond to changing business and economic conditions. 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 the 2024 notes, repay debt, or otherwise enter into transactions regarding its capital structure.
Should the current industry conditions deteriorate or we pursue additional acquisitions, we may be required to raise additional
funds through the sale of capital stock or debt in the public capital
markets or in privately negotiated transactions. There can be no
assurance that any of these financing options would be available on favorable terms, if at all. Alternatives to help supplement our
liquidity position could include, but are not limited to, idling or permanently closing additional facilities, adjusting our headcount in
response to current business conditions, attempts to renegotiate leases, managing our working capital and/or divesting of non-core
businesses. There are no assurances that these steps would prove successful or materially improve our liquidity position.
a
Consolidated Cash Flows
Cash provided by operating activities was $178.5 million and $158.2 million in 2017 and 2016, respectively. The increase in
cash provided by operations is due to increased sales and profitability during
increase in cash provided by operating activities was mostly offset by the working capital increase of $94.1 million for 2017
exceeding the working capital increase of $43.9 million in 2016. This increased investment in working capital is primarily related to
accounts receivable and inventory during the year ended December 31, 2017 compared to the prior year dued
to a $666.9 million
increase in sales over the same period. In addition, the larger increase in working capital for 2017 was also due to a decrease in
accrued liabilities in the current year compared to an increase in accrued liabilities in 2016. The decrease in accrued liabilities in 2017
is primarily due to a decrease in accruedr
were partially offset by the increase in accounts payable forff
in the current year.
interest attributable to the redemption of the 2023 notes in December 2017. These increases
2017 exceeding the increase in 2016 primarily due to increased purchases
the year ended December 31, 2017. However, this
d
30
Cash provided by operating activities was $158.2 million and $177.0 million in 2016 and 2015, respectively. Our working
capital increased $43.9 million in 2016 compared to a decrease of $99.0 million in 2015. The change in working capital is largely due
to the ProBuild acquisition, as well as increases in receivables and inventory and increased customer demand. These increases were
partially offset by increases in accounts payable and accrued liabilities largely dued
payable days. Cash interest payments increased $99.5 million in 2016 compared to 2015. The remaining change is due to an increase
in cash provided by operations primarily related to increased sales and profitability during the year ended December 31, 2016 as a
result of the ProBuild acquisition and higher sales volume.
to increased purchases and increased accounts
Cash used in investing activities was $59.4 million and $38.3 million in 2017 and 2016, respectively. The increase in cash used
in investing activities is largely due to a $19.7 million increase in capital expenditures in 2017 compared to 2016. The increase in
capital expenditures in 2017 largely relates to facility improvements and the purchase of machinery and equipment to support sales
growth.
Cash used in investing activities was $38.3 million and $1,508.0 million in 2016 and 2015, respectively. The change is primarily
due to $1,462.7 million in cash used for the ProBuild acquisition in 2015. The remaining change is largely due to an increase in
proceeds from the sale of property, plant and equipment and a decrease in capital expenditures in 2016 compared to 2015.
Cash used in financing activities was $76.0 million and $170.5 million for the years ended December 31, 2017 and 2016,
respectively. Cash used in financing activities in 2017 was primarily attributable to the $379.9 million in payments of long-term debt,
largely due to the extinguishment of our 2023 notes. In connection with the extinguishment of the 2023 notes we paid $48.7 million in
debt extinguishment costs. These payments were largely offset by $350.0 million in net borrowings under the 2022 facility. Cash used
in financing activities in 2016 largely relates to the debt transactions executed in that period which are described below.
Cash used in financing activities was $170.5 million in 2016 compared to cash provided by financing activities of $1,378.3
million in 2015. Cash used in financing activities in 2016 was primarily attributable to $807.5 million in payments of long-term d
ebt,
largely due to the extinguishment of our 2021 notes, the partial pay down of the 2015 term loan and 2023 notes. In addition, we repaid
$60.0 million, net, under the 2015 facility, paid $42.9 million of debt extinguishment costs and $15.7 million in debt issuance costs.
These payments were partially offset by $750.0 million in proceeds from the 2024 notes issuance. Cash provided by financing
activities for 2015 is attributable to the financing activities executed in connection with the ProBuild acquisition.
rr
Capital Expenditures
Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions.
a
Historically, capital
generated during the corresponding periods. We expect our 2018 capital expenditures to be in the range of approximately $120 million
to $130 million primarily related to rolling stock, equipment and facility improvements to support our operations.
expenditures have for the most part remained at relatively low levels in comparison to the operating cash flows
DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes our contractual obligations as of December 31, 2017 (in thousands):
Payments Due by Period
y
y
Contractual obligations
Long-term debt ......................................................................... $1,562,950 $
Interest on long-term debt(1)....................................................
Lease finance obligations(2) ....................................................
Capital lease obligations(2) ......................................................
Operating leases .......................................................................
Total contractual cash obligations............................................ $2,706,043 $
477,674
328,961
16,591
319,867
Total
Less than 1 year
1-3 years
3-5 years
9,400 $ 359,400 $
4,700 $
79,441
18,418
6,689
76,565
185,813 $ 329,038 $ 607,964 $
145,405
35,362
67,797
158,287
36,871
9,902
114,578
More than 5 years
1,189,450
94,541
238,310
60,927
1,583,228
(1) We had $350.0 million in outstanding borrowings under the 2022 facility as of December 31, 2017. Borrowings under the 2022
interest may differ from the amounts presented above due to interest rate
facility bear interest at a variable rate. Therefore, actual
changes or any future borrowing activity under the 2022 facility. The 2024 term loan also bears interest at a variable rate,
therefore actual interest may differ from the amounts presented above due to interest rate changes.
t
(2)
Future minimum commitments for lease finance obligations and capital
a
lease obligations.
The amounts reflected in the table above for operating leases represent future minimum lease payments under non-cancelable
operating leases with an initial or remaining term in excess of one year at December 31, 2017. Purchase orders entered into in the
ordinary course of business are excluded from the above table because they are payable within one year. Amounts for which we are
31
liable under purchase orders are reflected on our consolidated balance sheet as accounts payable and accrued liabilities. Where it
makes economic sense to do so, we plan to lease certain equipment during 2018 to support anticipated sales growth. These operating
leases are not included in the table above.
OTHER CASH OBLIGATIONS NOT REFLECTED IN THE BALANCE SHEET
In accordance with accounting principles generally accepted in the United States, commonly referred to as GAAP, our operating
leases are not recorded in our balance sheet. In addition to the lease obligations included in the above table, we have residual value
guarantees on certain equipment leases. Under these leases we have the option of (1) purchasing the equipment at the end of the lease
term, (2) arranging for the sale of the equipment to a third party, or (3) returning the equipment to the lessor to sell the equipment.
If
the sales proceeds in either case are less than the residual value, then we are required to reimburse the lessor for the deficiency up to a
specified level as stated in each lease agreement. The guarantees under these leases for the residual values of equipment at the end of
the respective operating lease periods approximated $5.6 million as of December 31, 2017.
qq
Based upon the expectation that none of these leased assets will have a residual value at the end of the lease term that is
materially less than the value specified in the related operating lease agreement or that we will purchase the equipment at the end of
the lease term, we do not believe it is probable that we will be required to fund any amounts under the terms of these guarantee
arrangements. Accordingly, no accruals have been recognized for these guarantees.
In addition, the Company is party to certain agreements related to its lease finance obligations which commit the Company to
perform certain repairs and maintenance obligations under the leases in a specified manner and timeframe that generally will occur
throughout the next year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those that both are important to the accurate portrayal of a companys financial
condition and
results, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that
are inherently uncertain.
ff
In order to prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts
reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to
the financial statements and the possibility that future
events may be significantly different from our expectations.
ff
We have identified the following accounting policy that requires us to make the most subjective or complex judgments in order
to fairly present our consolidated financial position and results of operations.
Goodwill. Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible
assets and identifiable intangible assets acquired, less liabilities assumed. At December 31, 2017, our goodwill balance was $740.4
million, representing 24.6% of our total assets.
We test goodwill forff
impairment in the fourth quarter of each year or at any other time when impairment indicators exist by
comparing the estimated implied value of a reporting units goodwill to its book value. Examples of such indicators that could cause
us to test goodwill for impairment between annual tests include a significant change in the business climate, unexpected competition
or a significant deterioration in market share. We may also consider market capitalization relative to our net assets. Housing starts are
a significant sales driver for us. If there is a significant decline or an expected decline in housing starts, this could adversely affect our
expectations for a reporting unit and the value of that reporting unit.
In connection with our annual goodwill impairment test in the fourth quarter of 2017 we elected to adopt updated guidance
which simplifies the accounting for goodwill impairment. This updated guidance is described in Note 2 to the consolidated financial
statements included in Item 8 of this annual report on Form 10-K.
The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Our
reporting units are aligned with our nine geographic regions which are also determined to be our operating segments. In evaluating
goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair
value of the reporting unit is less than its carryrr ing value. If it is concluded that it is not more likely than not that the fair value of the
reporting unit is less than its carrying value, then no further testing of the goodwill is required.
ff
However, if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount,
we perform a quantitative goodwill impairment test. This test identifies both the existence of and the amount of goodwill impairment
32
by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds
its carrying amount goodwill is not impaired. If the carrying amount of a reporting unit exceeds its fair value an impairment loss is
recognized in amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.
In performing our annual impairment tests at December 31, 2017, we developed a range of fair values for our reporting units
discounted cash flow methodology. Inherent in such fair value determinations are estimates relating to future cash
using a five-year
ff
flows, including revenue growth, gross margins, operating expenses and long-term growth rates, and our interpretation of current
economic indicators and market conditions and their impact on our strategic plans and operations. Due to the uncertainties associated
with such estimates, interpretations and assumptions, actual results could differ from projected results, which could result in
impairment of goodwill could be recorded.
Significant information and assumptions utilized in estimating future cash flows
ff
for our reporting units includes projections of
market share gains as well as publicly available industry information on projected single-family housing starts and lumber commodity
prices which are used to project revenue. Projected gross margins and operating expenses reflect current headcount levels and cost
structure and are flexed in future years based upon historical trends at various revenue levels. Long-term growth was based upon
terminal value earnings before interest, taxes, depreciation and amortization (EBITDA) multiples of 5.0x for all reporting units to
reflect the relevant expected acquisition price. A discount rate of 12.5% was used for all reporting units and is intended to reflect the
weighted average cost of capital for a potential market participant and includes all risks of ownership and the associated risks of
realizing the stream of projected future cash flows. Decreasing the long-term growth to an EBITDA multiple of 4.0x, or increasing the
discount rate by 1.0% to 13.5%, would not have changed the results of our impairment testing.
At December 31, 2017, the fair values of each of our reporting units were substantially in excess of their respective carrying
amounts. The excess (or cushion) of the fair values over the carrying amounts of our nine reporting units ranged from $122 million
to $315 million. Factors that could negatively impact the estimated fair value of our reporting units and potentially trigger additional
impairment include, but are not limited to, unexpected competition, lower than expected housing starts, an increase in market
participant weighted average cost of capital, increases in material or labor cost, and significant declines in our market capitalization.
Future impairment of goodwill would have the effect of decreasing our earnings or increasing our losses in such period, but would not
impact our current outstanding debt obligations or compliance with covenants contained in the related debt agreements. We did not
have any goodwill impairments in 2017, 2016 or 2015.
RECENTLY ISSUED ACCOUNTING STANDARDS
Information regarding recent accounting pronouncements is discussed in Note 2 to the consolidated financial statements
included in Item 8 of this annual report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We may experience changes in interest expense if changes in our debt occur. Changes in market interest rates could also affect
our interest expense. Our 2024 notes bear interest at a fixff ed rate, therefore, our interest expense related to these notes would not be
affected by an increase in market interest rates. Borrowings under the 2022 facility and the 2024 term loan bear interest at either a base
rate or eurodollar rate, plus, in each case, an applicable margin. At December 31, 2017, a 1.0% increase in interest rates on the 2024
term loan would, subject to the interest rate floor specified in the agreement, result in approximately $4.6 million in additional interest
expense annually. At December 31, 2017, a 1.0% increase in interest rates on the 2022 facility would result in approximately $3.5
million in additional interest expense annually. The 2022 facility also assesses variable commitment and outstanding letter of credit
fees based on quarterly average loan utilization.
We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production
inputs for our manufactured products that we deliver. Short-term changes in the cost of these materials and the related in-bound freight
costs, some of which are subject to significant fluctuations, are sometimes, but not always, passed on to our customers. Delays in our
ability to pass on material price increases to our customers can adversely impact our operating results.
ff
33
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ...............................................................................................................
Consolidated Statement of Operations and Comprehensive Income (Loss) for the years ended December 31, 2017, 2016
and 2015 .........................................................................................................................................................................................
Consolidated Balance Sheet at December 31, 2017 and 2016............................................................................................................
Consolidated Statement of Cash Flows for the years ended December 31, 2017, 2016 and 2015.....................................................
Consolidated Statement of Changes in Stockholders Equity for the years ended December 31, 2017, 2016 and 2015...................
Notes to Consolidated Financial Statements.......................................................................................................................................
35
37
38
39
40
41
34
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Builders FirstSource, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reportingii
We have audited the accompanying consolidated balance sheets of Builders FirstSource, Inc. and its subsidiaries (the Company) as
of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive income (loss), of changes
in stockholders equity and of cash flows for each of the three years in the period ended December 31, 2017, including the related
notes (collectively referred to as the consolidated financial statements). We also have audited the Company's internal control over
Framework (2013) issued
financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
II
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
II
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effeff ctiveness of internal control over financial reporting, included in Management's
Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the
Companys consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
r
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
to error or fraud, and performing procedures that respond to those risks. Such
consolidated financial statements, whether dued
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to thet
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect
on the financial statements.
a
35
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 1, 2018
We have served as the Companys auditor since 1999.
36
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
2017
2016
2015
Sales ............................................................................................................................ $
Cost of sales ................................................................................................................
Gross margin......................................................................................................
Selling, general and administrative expenses .............................................................
Income from operations.....................................................................................
Interest expense, net ....................................................................................................
Income (loss) before income taxes ....................................................................
Income tax expense (benefit) ......................................................................................
Net income (loss)............................................................................................... $
Comprehensive income (loss) ........................................................................... $
Net income (loss) per share:
(In thousands, except per share amounts)
7,034,209 $
5,306,818
1,727,391
1,442,288
285,103
193,174
91,929
53,148
38,781 $
38,781 $
6,367,284 $
4,770,536
1,596,748
1,360,412
236,336
214,667
21,669
(122,672)
144,341 $
144,341 $
3,564,425
2,662,967
901,458
810,703
90,755
109,199
(18,444)
4,387
(22,831)
(22,831)
Basic .................................................................................................................. $
Diluted ................................................................................................................ $
0.34 $
0.34 $
1.30 $
1.27 $
(0.22)
(0.22)
Weighted average common shares outstanding:
Basic ..................................................................................................................
Diluted ................................................................................................................
112,587
115,597
110,754
113,585
103,190
103,190
The accompanying notes are an integral part of these consolidated financial statements.
37
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
2017
2016
(In thousands, except per share amounts)
Current assets:
ASSETS
Cash and cash equivalents .................................................................................................
Accounts receivable, less allowances of $11,771 and $11,571 at December 31, 2017
$
57,533
$
14,449
and 2016, respectively ..................................................................................................
Other receivables ...............................................................................................................
Inventories, net ..................................................................................................................
Other current assets ...........................................................................................................
Total current assets ..................................................................................................
Property, plant and equipment, net .............................................................................................
Assets held for sale .....................................................................................................................
Goodwill......................................................................................................................................
Intangible assets, net ...................................................................................................................
Deferred income taxes ................................................................................................................
Other assets, net ..........................................................................................................................
Total assets...............................................................................................................
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Checks outstanding............................................................................................................
Accounts payable...............................................................................................................
Accrued liabilities..............................................................................................................
Current maturities of long-term debt and lease obligations ..............................................
Total current liabilities.............................................................................................
Long-term debt and lease obligations, net of current maturities, debt discount, and debt
issuance costs .........................................................................................................................
Other long-term liabilities ...........................................................................................................
Total liabilities .........................................................................................................
$
$
Commitments and contingencies (Note 13)
Stockholders equity:
631,992
71,232
601,547
33,564
1,395,868
639,303
5,273
740,411
132,567
75,105
17,597
3,006,124
$
$
514,282
271,597
12,475
798,354
1,771,945
59,616
2,629,915
569,208
55,781
541,771
34,772
1,215,981
656,101
4,361
740,411
159,373
115,320
18,340
2,909,887
35,606
409,759
293,115
16,217
754,697
1,785,835
59,735
2,600,267
Preferred stock, $0.01 par value, 10,000 shares authorized; zero shares issued and
outstanding at December 31, 2017 and 2016................................................................
Common stock, $0.01 par value, 200,000 shares authorized; 113,572 and
111,564 shares issued and outstanding at December 31, 2017 and 2016,
respectively ...................................................................................................................
Additional paid-in capital ..................................................................................................
Accumulated deficit...........................................................................................................
Total stockholders equity........................................................................................
Total liabilities and stockholders equity.................................................................
$
1,136
546,766
(171,693)
376,209
3,006,124
$
1,115
527,868
(219,363)
309,620
2,909,887
The accompanying notes are an integral part of these consolidated financial statements.
38
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
2017
Years Ended December 31,
2016
(In thousands)
2015
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
38,781
$
144,341
$
(22,831)
Depreciation and amortization .....................................................................................
Amortization and write-off of debt issuance costs and debt discount..........................
Loss on extinguishment of debt....................................................................................
Payment of original issue discount...............................................................................
Fair value adjustment of stock warrants.......................................................................
Deferred income taxes..................................................................................................
Bad debt expense..........................................................................................................
Stock compensation expense........................................................................................
Net loss (gain) on sales of assets and asset impairments..............................................
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Receivables...................................................................................................................
Inventories ....................................................................................................................
Other current assets ......................................................................................................
Other assets and liabilities ............................................................................................
Accounts payable and checks outstanding ...................................................................
Accrued liabilities.........................................................................................................
Net cash provided by operating activities .........................................................
Cash flows from investing activities:
Purchases of property, plant and equipment.................................................................
Proceeds from sale of property, plant and equipment ..................................................
Cash used for acquisitions, net .....................................................................................
Net cash used in investing activities .................................................................
Cash flows from financing activities:
ff
Borrowings under revolving credit facility ..................................................................
Payments under revolving credit facility
......................................................................
Proceeds from issuance of notes...................................................................................
Proceeds from term loan...............................................................................................
Repayments of long-term debt and other loans............................................................
Payments of debt extinguishment costs........................................................................
Payments of loan costs .................................................................................................
Proceeds from public offering of common stock, net of issuance costs ......................
Exercise of stock options..............................................................................................
Repurchase of common stock.......................................................................................
Net cash provided by (used in) financing activities ..........................................
Net increase (decrease) in cash and cash equivalents .........................................................................
Cash and cash equivalents at beginning of period ..............................................................................
Cash and cash equivalents at end of period ........................................................................................ $
92,993
6,092
56,657
49,104
197
13,508
6,965
(75,870)
(60,645)
8
8,315
65,764
(23,341)
178,528
(62,407)
2,981
(59,426)
1,370,000
(1,020,000)
(379,926)
(48,704)
(2,799)
8,055
(2,644)
(76,018)
43,084
14,449
57,533
$
109,793
7,502
55,776
(1,259)
(124,787)
1,390
10,549
(336)
(45,942)
(33,965)
(4,873)
(828)
36,585
4,281
158,227
(42,662)
8,305
(3,970)
(38,327)
907,000
(967,000)
750,000
(807,517)
(42,869)
(15,663)
6,627
(1,092)
(170,514)
(50,614)
65,063
14,449
$
58,280
18,929
4,563
3,287
2,285
6,848
1,313
74,089
46,854
(6,320)
5,314
(45,286)
29,709
177,034
(43,811)
4,275
(1,468,511)
(1,508,047)
320,000
(290,000)
700,000
594,000
(4,213)
(58,525)
111,309
6,718
(986)
1,378,303
47,290
17,773
65,063
Supplemental disclosure of non-cash activities
pp
For the years ended December 31, 2017, 2016 and 2015, the Company retired assets subject to lease finance obligations of $14.0 million, $38.1
million and $1.4 million and extinguished the related lease finance obligations of $11.7 million $41.2 million and $1.5 million, respectively.
The Company purchased equipment which was financed through capital lease obligations of $14.2 million $8.1 million and $1.6 million in the
years ended December 31, 2017, 2016 and 2015, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
39
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
Balance at December 31, 2014 ..........................
Issuance of common stock from public
offering, net of issuance costs.......................
Vesting of restricted stock units ........................
Stock compensation expense.............................
Exercise of stock options...................................
Exercise of stock warrants.................................
Repurchase of common stock............................
Net loss ..............................................................
Balance at December 31, 2015 ..........................
Vesting of restricted stock units ........................
Stock compensation expense.............................
Exercise of stock options...................................
Repurchase of common stock............................
Net income.........................................................
Balance at December 31, 2016 ..........................
Vesting of restricted stock units ........................
Stock compensation expense.............................
Exercise of stock options...................................
Repurchase of common stock............................
t adjustment (Note 2) .............
Cumulative effecff
Net income.........................................................
Balance at December 31, 2017 ..........................
Common Stock
Shares
Amount
98,226
$
982
Additional Paid
in
Capital
(In thousands)
380,091
$
Accumulated
Deficit
Total
$
(340,873) $
40,200
9,200
495
1,388
569
(152)
109,726
505
1,496
(163)
111,564
772
1,449
(213)
113,572
$
92
5
14
6
(2)
1,097
5
15
(2)
1,115
8
15
(2)
1,136
$
111,217
(5)
6,848
6,704
7,931
(984)
511,802
(5)
10,549
6,612
(1,090)
527,868
(8)
13,508
8,040
(2,642)
546,766
$
(22,831)
(363,704)
144,341
(219,363)
8,889
38,781
(171,693) $
111,309
6,848
6,718
7,937
(986)
(22,831)
149,195
10,549
6,627
(1,092)
144,341
309,620
13,508
8,055
(2,644)
8,889
38,781
376,209
The accompanying notes are an integral part of these consolidated financial statements.
40
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business
p
Builders FirstSource, Inc., a Delaware corporation formed in 1998, is a leading supplier of building materials, manufactured
components and construction services to professional contractors, sub-contractors, and consumers. The company operates 402
locations in 40 states across the United States.
In this annual report, references to the Company, we, our, ours or us refer to Builders FirstSource, Inc. and its
consolidated subsidiaries (including ProBuild Holdings LLC (ProBuild) as of July 31, 2015), unless otherwise stated or the context
otherwise requires.
2. Summary of Significant Accounting Policies
g
y
g
Principles of Consolidation
The consolidated financial statements present the results of operations, financial position, and cash flows of Builders
FirstSource, Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenuesn
and
expenses during the reporting period. Actual results could materially differ from those estimates.
Estimates are used when accounting for items such as revenue, vendor rebates, allowance for returns, discounts and doubtful
accounts, employee compensation programs, depreciation and amortization periods, income taxes, inventory values, insurance
programs, goodwill, other intangible assets and long-lived assets.
Sales Recognition
We recognize sales of building products upon delivery to the customer. For contracts with service elements, sales are generally
recognized on the completed contract method as these contracts are usually completed within 30 days with the percentage of
completion method applied to the remaining contracts with service elements. Contract costs include all direct material and labor,
equipment costs and those indirect costs related to contract performance. Provisions for estimated losses on uncompleted contracts are
recognized in the period in which such losses are determined. Prepayments for materials or services are deferred until such materials
have been delivered or services have been provided. All sales recognized are net of allowances for discounts and estimated returns,
based on historical experience. We present all sales tax on a net basis in our consolidated financial statements. The Company records
sales incentives provided to customers as a reduction of revenue.
Cash and Cash Equivalents & Checks
CC
Outstanding
Cash and cash equivalents consist of cash on hand and all highly liquid investments with an original maturity date of three
months or less. Also included in cash and cash equivalents are proceeds due from credit card transactions that generally settle within
two business days. We maintain cash at financial institutions in excess of federally insured limits. Further, we maintain various
banking relationships with different financial institutions. Accordingly, when there is a negative net book cash balance resulting from
outstanding checks that had not yet been paid by any single financial institution, they are reflected in checks outstanding on the
accompanying consolidated balance sheets.
Accounts Receivable
We extend credit to qualified professional homebuilders and contractors, in many cases on a non-collateralized basis. Accounts
receivable potentially expose us to concentrations of credit risk. Because our customers are dispersed among our various markets, our
credit risk to any one customer or geographic economy is not significant.
41
Our customer mix is a balance of large national homebuilders, regional homebuilders, local homebuilders and repair and
remodeling contractors. For the year ended December 31, 2017, our top 10 customers accounted for approximately 16.0% of our sales,
and no single customer accounted for more than 5% of sales.
The allowance for doubtful accounts is based on managements assessment of the amount which may become uncollectible in
the future and is estimated using specific review of problem accounts, overall portfolio quality, current economic conditions that may
affect the borrowers abia lity to pay, and historical experience. Accounts receivable are written off when deemed uncollectible. Other
receivables consist primarily of vendor rebates receivable.
We also establish reserves for credit memos and customer returns. The reserve balance was $6.8 million and $5.6 million at
December 31, 2017 and 2016, respectively. The activity in this reserve was not significant for each year presented.
Accounts receivable consisted of the following at December 31:
Accounts Receivable ............................................................... $
Less: allowances for returns and doubtful accounts ................
Accounts receivable, net ................................................ $
643,763
11,771
631,992
$
$
580,779
11,571
569,208
2017
2016
(In thousands)
The following table shows the changes in our allowance for doubtful accounts:
Balance at January 1, .............................................................. $
Additions .................................................................................
Deductions (write-offs, net of recoveries) ..............................
Balance at December 31, ........................................................ $
2017
5,922
197
(1,146)
4,973
2016
(In thousands)
4,245
$
1,390
287
5,922
$
$
$
2015
1,734
2,285
226
4,245
Inventories
Inventories consist principally of materials purchased for resale, including lumber, sheet goods, windows, doors and millwork,
as well as certain manufactured products and are stated at the lower of cost and net realizable value. Cost is determined using the
weighted average method, the use of which approximates the first-in, first-out method. We accruer
for shrink based on the actual
historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions. These
estimates are compared with actual results as physical inventory counts are taken and reconciled to the general ledger.
During the year, we monitor our inventory levels by market and record provisions for excess inventories based on slower
moving inventory. We define potential excess inventory as the amount of inventory on hand in excess of the historical usage,
excluding special order items purchased in the last six months. We then apply our judgment as to forecasted demand and other factors,
including liquidation value, to determine the required adjustments to net realizable value. Our inventories are generally not susceptible
to technological obsolescence.
Our arrangements with vendors provide for rebates of a specified amount of consideration, payable when certain measures,
generally related to a stipulated level of purchases, have been achieved. We account for estimated rebates as a reduction of the prices
of the vendors inventory until the product is sold, at which time such rebates reduce cost of sales in the accompanying consolidated
statement of operations and comprehensive income (loss). Throughout the year we estimate the amount of the rebates based upon the
expected level of purchases. We continually revise these estimates based on actual purchase levels.
We source products from a large number of suppliers. No materials purchased from any single supplier represented more than
8% of our total materials purchased in 2017.
Shipping and Handling Costs
Handling costs incurred in manufacturing activities are included in cost of sales. All other shipping and handling costs are
included in selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive
income (loss) and totaled $296.2 million, $269.8 million and $171.9 million in 2017, 2016 and 2015, respectively.
42
Income Taxes
TT
We account for income taxes utilizing the liability method described in the Income
II
Taxes topic of the FASB Accounting
Standards Codification (Codification). Deferred income taxes are recorded to reflect consequences on future years of differences
between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which differences are expected to affect taxable earnings.
We record a valuation
allowance to reduce deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be
realized.
r
Warranty Expense
We have warranty obligations with respect to most manufactured products; however, the liability for the warranty obligations is
not significant as a result of third-party inspection and acceptance processes.
Debt Issuance Costs and Debt Discount
Loan costs are capitalized upon the issuance of long-term debt and amortized over the life of the related debt. Debt issuance
costs associated with term debt are presented as a reduction to long-term debt. Debt issuance costs associated with revolving debt
arrangements are presented as a component of other assets. Debt issuance costs incurred in connection with revolving debt
arrangements are amortized using the straight-line method. Debt issuance costs incurred in connection with term debt are amortized
using the effective interest method. Debt discount is amortized over the life off
tive interest method.
Amortization of debt issuance costs and the debt discount are included in interest expense. Upon changes to our debt structure, we
evaluate debt issuance costs in accordance with the Debt topic of the Codification. We adjust debt issuance costs as necessary based
on the results of this evaluation, as discussed in Note 8.
f the related debt using the effecff
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives
of the assets. The estimated lives of the various classes of assets are as follows:
Buildings and improvements
Machinery and equipment
Furniture and fixtures
Leasehold improvements
10 to 40 years
3 to 10 years
3 to 5 years
The shorter of the estimated useful life or the remaining lease term
Major additions and improvements are capitalize
a
d, while maintenance and repairs that do not extend the useful life of the
property are charged to expense as incurred. Gains or losses from dispositions of property, plant and equipment are recorded in the
period incurred. We also capitalize certain costs of computer software developed or obtained for internal use, including interest,
provided that those costs are not research and development, and certain other criteria are met. Internal use computer software costs are
included in machinery and equipment and generally depreciated using the straight-line method over the estimated useful lives of the
assets, generally three years.
We periodically evaluate the commercial and strategic operation of the land, related buildings and improvements of our
facilities. In connection with these evaluations, some facilities may be consolidated, and others may be sold or leased. Nonoperating
assets primarily related to land and building real estate assets associated with location closures that are actively being marketed for
value, usually the quoted market price obtained from an
sale within a year are classified as assets held for sale and recorded at fair
independent third-party less the cost to sell. Until the assets are sold, an estimate of the fair value is reassessed at each reporting
period. Net gains or losses related to the sale of real estate and equipment or impairment adjustments related to assets held for sale are
recorded as selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive
income (loss).
ff
43
Long-Lived Assets
We evaluate our long-lived assets, other than goodwill, for impairment when events or changes in circumstances indicate, in our
judgment, that the carrying value of such assets may not be recoverable. The determination of whether or not impairment exists is
based on our estimate of undiscounted future cash flows before interest attributable to the assets as compared to the net carrying value
of the assets. If impairment is indicated, the amount of the impairment recognized is determined by estimating the fair value of the
assets based on estimated discounted future cash flows and recording a provision for loss if the carrying
fair value. The net carrying value of assets identified to be disposed of in the future is compared to their estimated fair value, usually
the quoted market price obtained from an independent third-party less the cost to sell, to determine if impairment exists. Until the
assets are disposed of, an estimate of the fair value is reassessed when related events or circumstances change.
value is greater than estimated
rr
Insurance
We have established insurance programs to cover certain insurable risks consisting primarily of physical loss to property,
business interruptions resulting from such loss, workers compensation, employee healthcare, and comprehensive general and auto
liability. Third party insurance coverage is obtained for exposures above predetermined deductibles as well as for those risks required
to be insured by law or contract. On a quarterly basis, we engage an external actuarial professional to independently assess and
estimate the total liability outstanding. Provisions for losses are developed from these valuations which rely upon our past claims
experience, which considers both the frequency and settlement of claims. We discount our workers compensation liability
based upon
estimated future payment streams at our risk-free rate. Our total insurance reserve balances were $78.0 million and $80.4 million as of
December 31, 2017 and 2016, respectively. Of these balances $45.6 million and $43.6 million were recorded as other long-term
liabilities as of December 31, 2017 and 2016, respectively. Included in these reserve balances as of December 31, 2017 and 2016,
were approximately $8.9 million and $9.4 million, respectively, of claims that exceeded stop-loss limits and are expected to be
recovered under insurance policies which are also recorded as other receivables and other assets in the accompanying consolidated
balance sheet.
a
Net Income (Loss) per Common Share
Net income (loss) per common share, or earnings per share (EPS), is calculated in accordance with the Earnings per Share
topic of the Codification which requires the presentation of basic and diluted EPS. Basic EPS is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common
shares outstanding during the period, plus the dilutive effect of potential common shares.
The table below presents a reconciliation of weighted average common shares used in the calculation of basic and diluted EPS
for the years ended December 31:
Weighted average shares for basic EPS ..................................
Dilutive effect of options and RSUs .......................................
Weighted average shares for diluted EPS ...............................
2017
112,587
3,010
115,597
2016
(In thousands)
110,754
2,831
113,585
2015
103,190
103,190
For the purpose of computing diluted EPS, weighted average shares outstanding have been adjusted for common shares
underlying 2,104,000 options to purchase common stock and 2,249,000 restricted stock units (RSUs) forff
shares outstanding have been adjusted for common shares underlying 3,515,000 options and 2,177,000 RSUs for 2016. Options to
purchase 4,998,000 shares of common stock and 1,516,000 RSUs were not included in the computation of diluted EPS for 2015
because their effecff
in the computation of diluted EPS for 2015 as their effect was anti-dilutive.
t was anti-dilutive. Incremental shares attributable to average warrants outstanding during 2015 were not included
2017. Weighted average
Goodwill and Other Intangible Assets
Intangibles subject to amortization
We recognize an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other
legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged,
either individually or in combination with a related contract, asset or liability. Impairment losses are recognized if the carrying
value
of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its
estimated fair value.
rr
44
Goodwill
We recognize goodwill as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities
assumed. Goodwill is tested for impairment on an annual basis and between annual tests whenever impairment is indicated. This
annual test takes place as of December 31 each year. Impairment losses are recognized whenever the carrying amount of a reporting
unit exceeds its fair
value.
ff
Stock-based Compensation
We have four stock-based employee compensation plans, which are described more fully in Note 10. We issue new common
stock shares upon exercises of stock options and vesting of RSUs. We recognize the effff ecff
actually occur.
t of pre-vesting forfeitures in the period they
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for the year ended December 31:
Expected life .................................................................................
Expected volatility ........................................................................
Expected dividend yield ................................................................
Risk-free rate .................................................................................
2017
6.0 years
59.2%
0.00%
2.20%
2016
6.0 years
60.9%
0.00%
1.41%
2015
6.0 years
75.2%
0.00%
1.75%
The expected life represents the period of time the options are expected to be outstanding. We used the simplified method for
ssumption due to limited historical exercise experience on our stock options. The expected volatility is
determining the expected life aff
based on the historical volatility of our common stock over the most recent period equal to the expected life of the option. The
expected dividend yield is based on our history of not paying regular dividends in the past and our current intention to not pay regular
dividends in the foreseeable future. The risk-free rate is based on the U.S. Treasury yield curve in effeff ct at the time of grant and has a
term equal to the expected life of the options.
The fair value of RSU awards subject to market conditions is estimated on the date of grant using the Monte Carlo simulation
model with the following weighted average assumptions for the year ended December 31:
Expected volatility (company).......................................................
Expected volatility (peer group median) .......................................
Correlation between the company and peer group median ...........
Expected dividend yield ................................................................
Risk-free rate .................................................................................
2017
73.7%
33.8%
0.33
0.00%
1.50%
2016
53.6%
17.3%
0.47
0.00%
1.29%
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 Companys 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. We did not grant any RSUs subject to market conditions in 2015.
Fair Value
The Fair Value Measurements and Disclosures topic of the Codification provides a frame
ff
work for measuring the fair value of
assets and liabilities and establishes a fair
minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:
value hierarchy that requires an entity to maximize the use of observable inputs and
ff
Level 1 unadjusted quoted prices for identical assets or liabilities in active markets accessible by us
Level 2 inputs that are observable in the marketplace other than those inputs classified as Level 1
Level 3 inputs that are unobservable in the marketplace and significant to the valuation
If a financial
ff
instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon
the lowest level of input that is significant to the fair value calculation. The only financial instruments measured at fair value on a
recurring basis were our warrants as discussed in Note 8.
45
As of December 31, 2017 and 2016 the Company does not have any financial instruments which are measured at fair value on a
recurring basis. We have elected to report the value of our 5.625% senior secured notes due 2024 (2024 notes), $467.7 million
senior secured term loan facility due 2024 (2024 term loan) and $900.0 million revolving credit facility (2022 facility) at
amortized cost. The fair
and $464.1 million, respectively, and were determined using Level 2 inputs based on market prices. The carrying
facility at December 31, 2017 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 2022 facility was also classified
as Level 2 in the hierarchy.
values of the 2024 notes and the 2024 term loan at December 31, 2017 were approximately $777.3 million
value of the 2022
ff
rr
Supplemental Cash Flow Information
Supplemental cash flowff
information was as follows for the years ended December 31:
Cash payments for interest (1) ................................................. $
Cash payments for income taxes ..............................................
193,429
5,643
2017
2016
(In thousands)
197,384
$
2,875
$
2015
55,028
1,409
(1) Includes $48.7 million and $42.9 million in payments of debt extinguishment costs which are classified as financing outflows
in the accompanying consolidated statement of cash flows
These payments were recorded to interest expense in the accompanying consolidated statement of operations and
comprehensive income (loss) for their respective years.
for the years ended December 31, 2017 and 2016, respectively.
ff
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It consists of net income (loss) and other gains and losses
affecting stockholders equity that, under GAAP, are excluded from net income. We had no items of other comprehensive income
(loss) for the years ended December 31, 2017, 2016, and 2015.
Recently Issued Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (FASB) issued an update to the existing guidance under the
Compensation-Stock Compensation topic of the Accounting Standards Codification (Codification) to clarify wff
accounting would be applied for a change to the terms or conditions of a share-based award. Under this new guidance modification
accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change
in terms or conditions. This guidance is required to be adopted on a prospective basis for annual periods beginning on or after
December 15, 2017 with early adoption permitted. The Company will adopt this guidance on January 1, 2018. As we do not regularly
modify the terms and conditions of our share-based awards we do not expect the adoption of this guidance to have a significant impact
on our financial statements upon adoption.
hen modification
In January 2017, the FASB issued an update to the existing guidance under the Intangibles-Goodwill and Other topic of the
Codification to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which
requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting units carrying
amount of goodwill. All of the other goodwill impairment guidance will remain
value exceeds its fair value, not to exceed the carrying
largely unchanged, including the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary.
This update is effective for annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early
adoption of this guidance is permitted for annual or interim goodwill tests performed after January 1, 2017. As such, we adopted this
guidance on a prospective basis in the fourth quarter of 2017 in connection with our annual goodwill impairment test. The adoption of
this guidance did not have an impact on our financial statements.
rr
rr
In January 2017, the FASB issued an update to the existing guidance under the Business Combinations topic of the Codification.
This update revises the definition of a business. Under this guidance when substantially all of the assets acquired are concentrated
in a
single asset (or group of similar assets) the assets acquired would not be considered a business. If this initial screen is met the need for
further assessment is eliminated. If this screen is not met in order to be considered a business an acquisition would have to include an
input and a substantive process that together significantly contribute to the ability to create outputs. This update is effective for public
companies for annual and interim reporting periods beginning after December 15, 2017. Early adoption of this guidance is permitted.
This guidance requires prospective application following adoption. The Company will adopt this guidance on January 1, 2018 and the
impact on our financial statements will depend upon the occurrence of any future acquisition activity.
t
46
In March 2016, the FASB issued an update to the existing guidance under the Compensation-Stock Compensation topic of
the Codification. This update simplifies several aspects of accounting for stock compensation including accounting for income taxes,
classification of awards as liabilities or equity, forfeitures and classification on the statement of cash flows. This update was effective
for public companies for annual and interim reporting periods beginning after December 15, 2016. As such, we adopted this guidance
effective January 1, 2017. Upon adoption the Company recognized $8.9 million in previously unrecorded windfall benefits on a
modified retrospective basis through a cumulative-effect adjustment to the beginning balance of our accumulated deficit. All windfalls
or shortfalls are now recognized as a component of income tax expense in the period they occur. The Company elected to recognize
the effect of pre-vesting forfeitures as they actually occur rather than estimating forfei
tures each period.
ff
In February 2016, the FASB issued an update to the existing guidance under the Leases topic of the Codification. Under the new
guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the
commencement date: (1) a lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a
discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessees right to use, or control the use of, a
specified asset for the lease term. This update
comparative period presented in the financial statements. This update
December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company has a significaff
number of leases, primarily related to real estate and rolling stock, which are accounted for as operating leases under existing
guidance. While we are currently evaluating the impact of this new guidance on our financial statements, we are expecting a
significant impact to our balance sheet upon adoption related to the establishment of lease liabilities and the corresponding right-of-
use assets.
is effective for public companies for fiscal years beginning after
nt
requires a modifieff d retrospective transition as of the beginning of the earliest
u
u
In July 2015, the FASB issued an update to the existing guidance under the Inventory topic of the Codification. This update
changes the subsequent measurement of inventory from lower of cost or market to lower of cost and net realizable value. We adopted
this guidance effective January 1, 2017 on a prospective basis. The adoption of this guidance did not have an impact on our financial
statements.
u
In May 2014, the FASB issued an update to the existing guidance under the Revenue Recognition topic of the Codification
which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for
those goods or services. Subsequent to issuance of the original update, the FASB issued several further updates amending this new
guidance. In April 2016, the FASB issued an update clarifying issues related to identifying performance obligations and licensing. In
May 2016, the FASB issued an update regarding the assessment of collectability criteria, presentation of sales taxes, measurement of
noncash consideration and transition guidance forff
guidance beginning on January 1, 2018 on a modified retrospective basis. Under current guidance, we recognize sales from contracts
with service elements on the completed contract method when these contracts are completed within 30 days. The remaining contracts
with service elements are recognized under the percentage of completion method. Under this updated guidance, revenue related to our
contracts with service elements will generally be recognized over time based on the extent of progress towards completion of the
performance obligation because of continuous transfer of control to the customer. We have assessed and updated our business
processes, systems and controls to ensure compliance with the recognition and disclosure requirements of the new standard upon
adoption. The impact from adoption will primarily be associated with deferred revenue on contracts outstanding at December 31, 2017
accounted for under the completed contract method, which will be generally recognized earlier under this new guidance. The adoption
of this guidance will not have a significant impact on our financial statements.
completed contracts and contract modifications. The Company will adopt this
a
3. Acquisitions
q
On July 31, 2015, the Company acquired all of the operating affiliates of ProBuild through the purchase of all issued and
outstanding equity interests in ProBuild for $1.63 billion in cash, subject to certain adjusd
tments. The purchase price was funded by the
net proceeds received from the financing transactions described in Note 8. Previously headquartered in Denver, Colorado, ProBuild is
one of the nations largest professional building materials suppliers. As a result of the ProBuild acquisition, the Company has a greater
diversification of products and services and a significantly improved geographic footprint.
This acquisition was accounted for by the acquisition method, and accordingly the results of operations were included in the
Companys consolidated financial statements from the acquisition date. The purchase price was allocated to the 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.
We incurred acquisition related costs of $20.9 million related to the ProBuild acquisition during the year ended December 31,
2015. These costs include due diligence costs and transaction costs to complete the acquisition, and have been recognized in selling,
47
general and administrative expense in the accompanying condensed consolidated statement of operations and comprehensive income
(loss). We did not incur any acquisition costs related to this acquisition during the years ended December 31, 2017 and 2016.
The operating results of the ProBuild acquisition have been included in the consolidated statement of operations and
comprehensive income (loss) from the acquisition date through December 31, 2017. Net sales and net income attributable to ProBuild
were approximately $4,994 million and $212 million, respectively for the year ended December 31, 2017. Net sales and net income
attributable to ProBuild were approximately $4,520 million and $190 million, respectively for the year ended December 31, 2016. Net
sales and net income attributable to ProBuild were approximately $1,860 million and $50 million, respectively, for the period of
August 1, 2015 through December 31, 2015. Net income attributable to ProBuild does not include an allocation of income tax expense
or of the additional interest expense incurred by the Company as a result of the ProBuild acquisition financing transactions and is also
impacted by changes in the business post-acquisition.
The following table reflects the pro forma operating results for the Company which gives effect to the acquisition of ProBuild as
if it had occurred on January 1, 2014. The pro forma results are based on assumptions that the Company believes are reasonable under
the circumstances. The pro forma results are not necessarily indicative of futff ure results. The pro forma financial information includes
the historical results of the Company and ProBuild adjusted for certain items, which are described below, and does not include the
effects of any synergies or cost reduction initiatives related to the acquisition of ProBuild.
Year Ended
December 31, 2015
(pro-forma)
(in thousands, except per share
amounts)
Net sales ........................................................................................... $
Net loss ............................................................................................ $
Basic net loss per share .................................................................... $
Diluted net loss per share................................................................. $
6,066,791
(10,433)
(0.10)
(0.10)
Pro forma net loss for the year ended December 31, 2015 reflects adjustments primarily related to depreciation and amortization,
the conversion from last-in, first-out to first-in, first out inventory valuation, and interest expense. Pro forma net loss for 2015 was
adjusted to exclude transaction-related expenses of $46.9 million ($34.6 million incurred by the Company and $12.3 million incurred
by ProBuild).
4. Property, Plant and Equipment
q p
y,
p
Property, plant and equipment consisted of the following at December 31:
2017
2016
(In thousands)
$
Land
Buildings and improvements ....................................................
Machinery and equipment ........................................................
Furniture and fixtures ...............................................................
Construction in progress ...........................................................
Property, plant and equipment ..................................................
Less: accumulated depreciation ................................................
Property, plant and equipment, net ........................................... $
188,551
337,536
352,529
61,310
24,228
964,154
324,851
639,303
$
$
195,064
331,498
329,529
56,571
12,771
925,433
269,332
656,101
Depreciation expense was $71.1 million, $87.2 million and $46.3 million, of which $9.8 million, $9.5 million and $5.3 million
was included in cost of sales, in 2017, 2016, and 2015, respectively.
48
Included in property, plant and equipment are certain assets held under capital leases and lease finance obligations. These assets
are recorded at the present value of minimum lease payments and include land, buildings and equipment. Amortization charges
associated with assets held under capital leases and lease finance obligations are included in depreciation expense. The following
balances held under capital lease and lease finance obligations are included on the accompanying consolidated balance sheet:
Land .......................................................................................... $
Buildings and improvements ....................................................
Machinery and equipment ........................................................
Assets held under capital leases and lease finance
obligations ..............................................................................
Less: accumulated amortization ................................................
Assets held under capital leases and lease finance
2017
2016
(In thousands)
$
114,010
142,941
21,875
278,826
15,367
119,287
151,862
11,012
282,161
9,213
obligations, net ....................................................................... $
263,459
$
272,948
5. Goodwill
The following table sets forth the changes in the carrying amount of goodwill by reportable segment for the years ended
December 31, 2017 and 2016 (in thousands):
Northeast
Southeast
South
West
Total
Balance as of December 31, 2016
Goodwill ............................................... $
Accumulated impairment losses ...........
Balance as of December 31, 2017
Goodwill ............................................... $
Accumulated impairment losses ...........
$
97,102 $
(494)
96,608
97,102 $
(494)
96,608 $
60,691 $
(615)
60,076
60,691 $
(615)
60,076 $
329,662 $
(43,527)
286,135
297,592 $
297,592
329,662 $
(43,527)
286,135 $
297,592 $
297,592 $
785,047
(44,636)
740,411
785,047
(44,636)
740,411
We closely monitor trends in economic factors and their effects on operating results to determine if an impairment trigger was
present that would warrant a reassessment of the recoverability of the carrying amount of goodwill prior to the required annual
impairment test in accordance with the Intangibles Goodwill and Other topic of the Codification.
The process of evaluating goodwill for impairment involves the determination of fair value of our reporting units. Inherent in
such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current
economic indicators and market valuations and assumptions about our strategic plans with regard to our operations. Due to the
uncertainties associated with such estimates, actual results could differ from such estimates resulting in further impairment of
goodwill.
In performing our impairment analysis, we developed a range of fair values for our reporting units using a discounted cash flow
methodology. The discounted cash flow methodology establishes fair value by estimating the present value of the projected future
cash flows to be generated from the reporting unit. The discount rate applied
value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The
discounted cash flow methodology uses our projections of financial performance for a five-year
assumptions used in the discounted cash flow methodology are the discount rate, the terminal value and the expected future revenues,
gross margins and operating expenses, which vary among reporting units. Significant assumptions used in our financial projections
include housing starts, lumber commodity prices, and market share gains.
to the projected future cash flows to arrive at the present
period. The most significant
a
ff
We recorded no goodwill impairment charges in 2017, 2016, and 2015.
49
6. Intangible Assets
g
The following table presents intangible assets as of December 31:
Customer relationships ................................................. $
Non-compete agreements ..............................................
Trade names...................................................................
Favorable lease intangibles............................................
Total intangible assets.............................................. $
Unfavorable lease obligations (included in Accrued
2017
2016
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
149,045
1,379
51,361
6,409
208,194
$
$
(In thousands)
(48,925) $
(1,081)
(22,554)
(3,067)
(75,627) $
149,045
1,379
51,361
6,409
208,194
$
$
(33,023)
(375)
(13,286)
(2,137)
(48,821)
liabilities and Other long-term liabilities) ................ $
(19,597) $
13,666
$
(19,597) $
8,746
During the years ended December 31, 2017, 2016, and 2015, we recorded amortization expense in relation to the above-listed
intangible assets of $21.9 million, $22.6 million, and $11.9 million, respectively. In addition, as a result of the facility closure
activities following the ProBuild acquisition, we recorded impairment charges of $1.7 million and $1.4 million against our intangible
assets during the years ended December 31, 2016 and 2015, respectively. We did not record any impairment charges related to our
intangible assets forff
administrative expense in the accompanying consolidated statement of operations and comprehensive income (loss). The following
table presents the estimated amortization expense for these intangible assets for the years ending December 31 (in thousands):
the year ended December 31, 2017. We recognized these impairment charges in selling, general, and
2018 ................................................................................................... $
2019 ...................................................................................................
2020 ...................................................................................................
2021 ...................................................................................................
2022 ...................................................................................................
Thereafter...........................................................................................
Total future net intangible amortization expense......................... $
21,003
17,205
13,010
11,936
10,926
52,556
126,636
7. Accrued Liabilities
Accrued liabilities consisted of the following at December 31:
2017
2016
(In thousands)
Accrued payroll and other employee related expenses ............. $
Customer obligations.................................................................
Self-insurance reserves..............................................................
Accrued business taxes..............................................................
Accrued interest.........................................................................
Unfavorable lease obligations (Note 6).....................................
Facility closure reserves ............................................................
Other ..........................................................................................
Total accrued liabilities ............................................................. $
127,745
46,894
32,424
28,460
14,403
3,195
3,097
15,379
271,597
$
$
127,485
38,448
36,817
30,177
28,570
4,921
3,910
22,787
293,115
50
8. Long-Term Debt
g
Long-term debt and lease obligations consisted of the following (in thousands):
2022 facility ......................................................................................... $
2023 notes ............................................................................................
2024 notes ............................................................................................
2024 term loan .....................................................................................
Lease finance obligations.....................................................................
Capital lease obligations (Note 9)........................................................
Unamortized debt discount and debt issuance costs ............................
Less: current maturities of long-term debt and lease obligations ........
Long-term debt and lease obligations, net of current maturities .... $
December 31,
2017
350,000
750,000
462,950
225,070
15,431
1,803,451
(19,031)
1,784,420
12,475
1,771,945
$
$
December 31,
2016
367,608
750,000
467,650
238,539
7,427
1,831,224
(29,172)
1,802,052
16,217
1,785,835
ProBuild Acquisition Financing
As described in Note 3, we acquired all of the operating affiliates of ProBuild on July 31, 2015 through the purchase of all
issued and outstanding equity interests of ProBuild for $1.63 billion in cash, subject to certain adjusd
funded with the net cash proceeds from (i) the sale of $700.0 million in aggregate principal amount of 10.75% senior unsecured notes
due 2023 (the 2023 notes), (ii) entry into a $600.0 million term loan credit agreement (the 2015 term loan), (iii) a $295.0 million
draw on an amended and restated $800.0 million senior secured revolving credit facility (the 2015 facility), and (iv) a public
offering of 9.2 million new shares of our common stock at an offering price of $12.80 per share (the equity offering).
tments. The purchase price was
In connection with the finff ancing transactions described above, we incurred approximately $65.0 million of various third-party
oan,
fees and expenses. Of these costs, $18.1 million were allocated to the 2023 notes, $16.0 million were allocated to the 2015 term l
$11.2 million were allocated to the 2015 facility and $6.5 million were allocated to the equity offering. The costs allocated to the
2023 notes and the 2015 term loan were recorded as reductions to long-term debt. The costs allocated to the 2015 facility were
recorded as other assets. The costs allocated to the equity offering were recorded as a reduction to additional paid-in capital. In
addition, $13.2 million in costs relate to commitment fees paid forff
with these financing transactions, neither of which was utilized. As such, these fees were recorded as interest expense for the year
ended December 31, 2015. At the closing of these transactions, there were approximately $3.0 million in unamortized debt issuance
costs associated with our previous revolving credit facility, of which approximately $0.9 million were recorded as interest expense for
the year ended December 31, 2015. The remaining $2.1 million in unamortized costs associated with our previous revolving credit
facility were carried over to the 2015 facility.
bridge and backstop financing facilities entered into in connection
rr
2016 Debt Transactions
During the year ended December 31, 2016, the Company executed several debt transactions which are described in more detail
below. These transactions include two debt exchanges, complete extinguishment of our 7.625% senior secured notes due 2021 (the
2021 notes), repricing and partially repaying our 2015 term loan and a cash tender offer in which we further reduced the aggregate
principal amount of outstanding 2023 notes.
Note Exchange Transactions
On February 12, 2016, we completed separate privately negotiated note exchange transactions in which $218.6 million in
aggregate principal amount of our 2023 notes was exchanged for $207.6 million in aggregate principal amount of our previously
outstanding 2021 notes. On February 29, 2016, we completed additional separate privately negotiated note exchange transactions in
which $63.8 million in aggregate principal amount of our 2023 notes was exchanged for $60.0 million in aggregate principal amount
of our previously outstanding 2021 notes.
The note exchange transactions were considered to be debt extinguishments. As such, we recognized a net gain of $7.8 million
which was recorded as an offset to interest expense in the accompanying consolidated statement of operations and comprehensive
income (loss) for the year ended December 31, 2016. Of this $7.8 million gain, $14.8 million was attributable to the reduction in
outstanding principal which was partially offset by the write-off of $7.0 million of unamortized debt issuance costs associated with the
2023 notes which were extinguished in the exchange transactions.
51
s
In connection with issuance of the 2021 notes in the exchange transactions, we incurred $4.9 million of various third-party feeff
and expenses. These costs were previously recorded as a reduction to long-term debt and were subsequently written off to interest
expense in the third quarter of 2016 in connection with the extinguishment of the 2021 notes as described in the 2016 Refinancing
Transactions section below.
Note Redemption Transaction
In May 2016, the Company exercised its contractual right to redeem $35.0 million in aggregate principal amount of 2021 notes
at a price of 103.0%, plus accrued and unpaid interest. The redemption transaction was considered to be a debt extinguishment. As
such, we recognized a loss of $1.7 million which was recorded as a component of interest expense in the accompanying consolidated
statement of operations and comprehensive income (loss) for the year ended December 31, 2016. Of this $1.7 million loss, $1.1
million was attributable to the payment of the redemption premium and $0.6 million was attributable to the write-off of unamortized
debt issuance costs associated with the redeemed notes.
2016 Refinancing Transactions
In August 2016, we completed a private offering of $750.0 million in aggregate principal amount of 5.625% senior secured
notes due 2024 (2024 notes) at an issue price equal to 100% of their face value. At the same time the Company also repriced its
2015 term loan. This repricing lowered the applicable margin to 3.75% in the case of Eurodollar loans and 2.75% in the case of base
rate loans. This reduction represents a 1.25% decrease in the applicable margin for both Eurodollar and base rate loans. In connection
with the repricing, the mandatory quarterly principal repayments were reduced from $1.375 million to $1.175 million.
The proceeds from the issuance of the 2024 notes were used, together with cash on hand and borrowings on the 2015 facility, to
fully redeem the $582.6 million in aggregate outstanding principal amount of 2021 notes, to pay down $125.9 million of the 2015 term
loan and to pay related transaction fees and expenses.
The redemption of the 2021 notes was considered to be a debt extinguishment. As such, we recognized a loss of $43.9 million
which was recorded as a component of interest expense in the accompanying consolidated statement of operations and comprehensive
income (loss) for the year ended December 31, 2016. Of this $43.9 million loss, $33.3 million was attributable to the payment of the
redemption premium and $10.6 million was attributable to the write-off of unamortized debt issuance costs associated with the
redeemed notes. In addition, in connection with the repricing and pay down of the 2015 term loan we recognized $8.2 million in
interest expense in the third quarter of 2016 related to the write-off of unamortized debt discount and debt issuance costs.
In connection with the issuance of the 2024 notes and the 2015 term loan repricing, we incurred approximately
a
$12.0 million of
various third-party fees and expenses. Of these costs $10.5 million were allocated to the 2024 notes and have been recorded as a
reduction to long-term debt. These costs are being amortized over the contractual life of the 2024 notes using the effecff
tive interest
method. The remaining $1.5 million in costs incurred were allocated to the 2015 term loan. Of this $1.5 million, $1.2 million was
recorded to interest expense in the third quarter of 2016. The remaining $0.3 million of new third-party costs together with $10.9
million in remaining unamortized debt discount and debt issuance costs have been recorded as a reduction of long-term debt and are
being be amortized over the remaining contractual life of the 2015 term loan using the effective interest method.
Tender Offer
In October 2016, we purchased $50.0 million in aggregate principal amount of our 2023 notes pursuant to the terms of a cash
tender offer at a price of 117.0% of par value plus accrued and unpaid interest. The purchase of the 2023 notes was funded with cash
on hand and borrowings under our 2015 facility.
The tender offer transaction was considered to be a debt extinguishment. As such, we recognized a loss on extinguishment of
$9.7 million which was recorded as a component of interest expense in the accompanying consolidated statement of operations and
comprehensive income (loss) for the year ended December 31, 2016. Of this loss, approximately $8.5 million was attributable to the
purchase premium paid to the lenders and $1.2 million was attributable to the write-off of unamortized debt issuance costs associated
with the redeemed notes. In addition to the loss described above, we incurred approximately $0.1 million in third party costs which
were recorded to selling, general, and administrative expense in the fourth quarter of 2016.
2017 Debt Transactions
During the year ended December 31, 2017, the Company executed several debt transactions which are described in more detail
below. These transactions included a repricing and extension of the 2015 term loan as well as increasing the borrowing capacity and
52
extending the maturity of our 2015 facility and the complete extinguishment of our 2023 notes. Our 2017 and 2016 debt transactions
and reduced our annual cash interest on a go forward
have extended our debt maturity profileff
basis.
ff
Term Loan Amendment
On February 23, 2017, we repriced our 2015 term loan through an amendment and extension of the term loan credit agreement
providing for a $467.7 million senior secured term loan facility due 2024 (2024 term loan). This repricing reduces the interest rate
by 0.75% and extends the maturity by 19 months to February 29, 2024. Deutsche Bank AG New York Branch continues to serve as
administrative agent and collateral agent under the 2024 term loan agreement.
In connection with the 2024 term loan amendment we recognized $0.4 million in interest expense for the year ended December
31, 2017 related to the write-off of unamortized debt discount and debt issuance costs. We incurred $1.2 million in lender fees which,
together with $10.0 million in remaining unamortized debt discount and debt issuance costs, have been recorded as a reduction of
long-term debt and are being amortized over the remaining contractual life of the 2024 term loan using the effective interest method.
In addition, we also incurred $1.4 million in various third-party fees and expenses related to the 2024 term loan amendment which
were recorded to interest expense for the year ended December 31, 2017.
Revolving Credit Facility Amendment
On March 22, 2017, the Company extended the maturity date and increased the revolving commitments under its 2015 facility.
This transaction resulted in an amended and restated $900.0 million revolving credit facility (2022 facility) and extended the
maturity by 20 months to March 22, 2022. SunTrust Bank continues to serve as administrative agent and collateral agent under the
2022 facility agreement. All other material terms of the 2022 facility remain unchanged from those of the 2015 facility.
In connection with the 2022 facility amendment, we recognized $0.6 million in interest expense for the year ended December 31,
2017 related to the write-off of unamortized debt issuance costs. We incurred $1.6 million in lender and third-party fees which,
together with $8.5 million in remaining unamortized debt issuance costs, have been recorded as other assets and are being amortized
over the remaining contractual life of the 2022 facility on a straight-line basis.
2023 Notes Redemption
In December 2017, the Company exercised its contractual right to redeem $367.6 million in aggregate principal amount of 2023
Notes at a total redemption price of 113.249%, plus accrued and unpaid interest. The redemption of the 2023 Notes was funded with a
combination of borrowings under the 2022 facility and cash on hand.
The redemption of the 2023 notes was considered to be a debt extinguishment. As such, we recognized a loss on extinguishment
of $56.3 million which was recorded as a component of interest expense in the accompanying consolidated statement of operations
and comprehensive income (loss) for the year ended December 31, 2017. Of this $56.3 million loss, $48.7 million was attributable to
the payment of the redemption premium and $7.6 million was attributable to the write-off of unamortized debt issuance costs
associated with the redeemed notes.
2024 Term Loan Credit Agreement
As of December 31, 2017, we have $463.0 million outstanding under the 2024 term loan, which matures on February 29, 2024.
The 2024 term loan bears interest based on either a eurodollar or base rate (a rate equal to the highest of an agreed commercially
available benchmark rate, the federal funds effective rate plus 0.50% or the eurodollar rate plus 1.0%, as selected by the Company)
plus, in each case, an applicable margin. The applicable margin in the 2024 term loan is (x) 3% in the case of Eurodollar rate loans and
(y) 2% in the case of base rate loans. The 2024 term loan has mandatory principal repayments of $1.175 million which are payable in
March, June, September, and December of each year provided that each such payment is subject to reduction as a result of certain
prepayments of the loans in accordance with the loan documentation. The weighted average interest rate of the term loan was 4.3%
during the year ended December 31, 2017.
2022 Revolving Credit Facility
The 2022 facility provides for a $900.0 million revolving credit line to be used for working capital, general corporate purposes
and funding acquisitions. In addition, we may use the 2022 facility to facilitate debt repayment and consolidation. The available
borrowing capacity, or borrowing base, is derived from a percentage of the Companys eligible receivables and inventory, as defineff
d
by the agreement, subject to certain reserves. As of December 31, 2017, we had $350.0 million in outstanding borrowings under our
2022 facility and our net excess borrowing availability was $436.8 million after being reduced by outstanding letters of credit of
53
approximately $84.9 million. During the year ended December 31, 2017, we borrowed $1,370.0 million and repaid $1,020.0 million at
a weighted average interest rate of 2.9%. The 2022 facility matures on March 22, 2022.
Borrowings under the 2022 facility bear interest, at our option, at either a eurodollar rate or a base rate, plus, in each case an
applicable margin. The applicable margin ranges from 1.25% to 1.75% per annum in the case of eurodollar rate loans and 0.25% to
0.75% per annum in the case of base rate loans. The margin in either case is based on a measure of availability under the 2022 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 2022 facility are assessed at a rate equal to the applicable eurodollar margin, currently
1.25%, as well as a fronting
September, and December.
fee at a rate of 0.125% per annum. These fees are payable quarterly in arrears at the end of March, June,
ff
All obligations under the 2024 term loan and 2022 facility will be guaranteed jointly and severally by the Company and all other
subsidiaries that guarantee the 2024 notes. All obligations and the guarantees of those obligations will be secured by substantially all
of the assets of the Company and the guarantors subject to certain exceptions and permitted liens, including (i) with respect to the
2024 term loan, a firsff
security interest in such assets that constitute ABL Collateral (as defined below), and (ii) with respect to the 2022 facility, a firsff
priority security interest in such assets that constitute ABL Collateral and a second-priority security interest in such assets that
constitute Notes Collateral.
t-priority security interest in such assets that constitute Notes Collateral (as defined below) and a second priority
t-
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,tt
cash and cash equivalents, and general intangibles, books and records, supporting obligations and documents and related letters of
credit, commercial tort claims or other claims related to and proceeds of each of the foregoing. Notes Collateral includes all
collateral which is not ABL collateral.
The 2024 term loan and the 2022 facility contain restrictive covenants which, among other things, limit the Companys ability
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 2022 facility also contains a financial
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
$87.2 million as of December 31, 2017.
covenant requiring the satisfaction of a minimum fixed chargea
a
ff
to
Senior Secured Notes due 2024
As of December 31, 2017 we have $750.0 million outstanding in aggregate principal amount of the 2024 notes which mature on
September 1, 2024. Interest accrues on the 2024 notes at a rate of 5.625% per annum and is payable semi-annually on March 1 and
September 1 of each year.
The terms of the 2024 notes are governed by the indenture, dated as of August 22, 2016 (the Indenture), among the Company,
the guarantors named therein (the Guarantors) and Wilmington Trust, National Association, as trustee (the Trustee) and notes
collateral agent (the Notes Collateral Agent). The 2024 notes, subject to certain exceptions, are guaranteed, jointly and severally, on
a senior secured basis, by certain of our direct and indirect wholly owned subsidiaries. All obligations under the 2024 notes, and the
guarantees of those obligations, are secured by substantially all of the assets of the Company and the Guarantors subject to certain
exceptions and permitted liens, including a first-priori
ty security interest in such assets that constitute Notes Collateral (as defined
above) and a second-priority security interest in such assets that constitute ABL Collateral (as defined above).
ff
The Notes Collateral Agent became a party to the ABL/Bond Intercreditor Agreement, dated as of May 29, 2013, among
SunTrust Bank, as agent under the Companys 2022 facility, the Wilmington Trust, National Association, the Company and the
Guarantors, and the Pari Passu Intercreditor Agreement, dated as of July 31, 2015, among Deutsche Bank AG New York Branch, as
term collateral agent under the Companys 2024 term loan, Wilmington Trust, National Association, the Company and the Guarantors.
These documents govern all arrangements in respect of the priority of the security interests in the ABL Collateral and the Notes
Collateral among the parties to the Indenture, the 2022 facility and the 2024 term loan. The 2024 notes constitute senior secured
obligations of the Company and Guarantors, rank senior in right of payment to all future
expressly subordinated in right of payment to the 2024 notes, and rank equally in right of payment with all existing and future
liabilities of the Company and Guarantors that are not so subordinated, including the 2022 facility.
debt of the Company and Guarantors that is
ff
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 Companys subsidiaries ability t
payments to the Company; pay dividends and make other distributions in respect of the Companys and its subsidiaries capital stock;
tt
t
o make
54
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 September 1, 2019, the Company may redeem the 2024 notes in whole or in part at a redemption price
premium set forth in the Indenture. At any time on or
equal to 100% of the principal amount of the 2024 notes plus the applicablea
after September 1, 2019, the Company may redeem the 2024 notes at the redemption prices set forth in the Indenture, plus accrued and
unpaid interest, if any, to the redemption date. At any time and from time to time during the 36-month period following August 22,
2016 (the Closing Date), the Company may redeem up to 10% of the aggregate principal amount of the 2024 notes during each
twelve-month period commencing on the Closing Date at a redemption price of 103% of the aggregate principal amount thereof plus
accrued and unpaid interest to the redemption date. In addition, at any time prior to September 1, 2019, the Company may redeem up
to 40% of the aggregate principal amount of the 2024 notes with the net cash proceeds of one or more equity offerings, as described in
the Indenture, at a price equal to 105.625% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption
date. If the Company experiences certain change of control events, holders of the 2024 notes may require it to repurchase all or part of
their 2024 notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.
As of December 31, 2017 we were not in violation of any covenants or restrictions imposed by any of our debt agreements.
Future maturities of long-term debt as of December 31, 2017 were as follows (in thousands):
Year ending December 31,
2018.................................................................................................... $
2019....................................................................................................
2020....................................................................................................
2021....................................................................................................
2022....................................................................................................
Thereafter...........................................................................................
Total long-term debt (including current maturities) .......................... $
4,700
4,700
4,700
4,700
354,700
1,189,450
1,562,950
Warrants
Our previous term loan included detachable warrants that allowed for the purchase of up to 1.6 million shares of our common
stock at a price of $2.50 per share. In April 2015, the remaining 0.7 million of outstanding, detachable warrants were exercised. The
warrants were considered to be derivative financial instruments and were classified as liabilities. As such, they were measured at fair
value on a recurring basis. Our share price and, to a lesser extent, the historical volatility of our common stock were the primary
factors in the changes to our fair value measurements related to the warrants. All other inputs being equal, an increase or decrease in
our share price or volatility resulted in an increase or decrease in the fair value of our warrants and an increase or decrease in interest
expense.
Non-cash fair value adjustments related to our derivative financial instrument
rr
recorded as interest expense in the consolidated
statement of operations and comprehensive income (loss) for the years ended December 31 (in thousands) were as follows:
Derivative Not Designated
as Hedging Instruments
Warrants.................................................... Interest expense, net
Location of Loss Recognized in Income
2017
Amount of Loss
Recognized in Income
2016
2015
(4,563)
a
We used the income approach
to value our warrants by using the Black-Scholes option-pricing model. Using this model, the
risk-free interest rate was based on the U.S. Treasury yield curve in effect on the valuation date. The expected life was based on the
period of time until the expiration of the warrants. Expected volatility was based on the historical volatility of our common stock over
the most recent period equal to the expected life off
f the warrants. The expected dividend yield was based on our history of not paying
regular dividends in the past.
These techniques incorporated Level 1 and Level 2 inputs. Significant inputs to the derivative valuation for the warrants were
observable in the active markets and are classified as Level 2 in the hierarchy.
55
Lease Finance Obligations
The Company is party to 141 individual property lease agreements with a single lessor as of December 31, 2017. These lease
years (expiring through 2021) and renewal options in five-year increments
agreements have initial terms ranging from nine to fifteen
providing for up to approximately 30-year remaining total lease terms. A related agreement between the lessor and the Company gives
ff market value. As a result of these purchase rights, the
the Company the right to acquire a limited number of the leased facilities at fair
arrangement. The Company is also party to certain
Company treats all of the properties that it leases from this lessor as a financing
additional agreements with the same lessor which commit the Company to perform certain repair and maintenance obligations under
the leases in a specified manner and timeframe.
ff
ff
In 2006, we completed construction on a new multi-purpose facility. Based on the evaluation of the construction project in
accordance with the Leases topic of the Codification, we were deemed the owner of the facility during the construction period.
Effectively, a sale and leaseback of the facility occurred when construction was completed and the lease term began. This transaction
did not qualify for sale-leaseback accounting. As a result the Company treats the lease of this facility as a financing
arrangement.
ff
As of December 31, 2017, lease finance obligations consist of $225.1 million, with cash payments of $22.0 million for the year
ended December 31, 2017. These lease finance obligations are included on the consolidated balance sheet as a component of long-
term debt and lease obligations. The related assets are recorded as components of property, plant, and equipment on the consolidated
balance sheet.
Future minimum commitments for lease finance obligations as of December 31, 2017 were as follows (in thousands):
Year ending December 31,
2018.................................................................................................... $
2019....................................................................................................
2020....................................................................................................
2021....................................................................................................
2022....................................................................................................
Thereafter...........................................................................................
Total .................................................................................................. $
18,418
18,898
17,973
17,712
17,650
238,310
328,961
9. Capital Lease Obligations
p
g
The Company leases certain property and equipment under capital leases expiring through 2020. These leases require monthly
payments of principal and interest, imputed at various interest rates. Future minimum lease payments as of December 31, 2017 are as
follows (in thousands):
Years ending December 31,
2018.................................................................................................... $
2019....................................................................................................
2020....................................................................................................
Thereafter ...........................................................................................
Total minimum lease payments...............................................
Less: amount representing interest .....................................................
Present value of net minimum payments ...............................
Less: current portion...........................................................................
Long-term capital lease obligations, net of current portion .... $
6,689
5,127
4,775
16,591
(1,160)
15,431
(5,986)
9,445
56
10. Employee Stock-Based Compensation
p y
p
2014 Incentive Plan
Under our 2014 Incentive Plan (2014 Plan), the Company is authorized to grant awards in the form of incentive stock options,
non-qualified stock options, restricted stock shares, restricted stock units, other common stock-based awards and cash-based awards.
In May 2016, our shareholders approved an amendment to our 2014 Plan that increased the number of shares of common stock
reserved for the grant of awards under the 2014 Plan from 5.0 million shares to 8.5 million shares, subject to adjustment as provided
by the 2014 Plan. All 8.5 million shares under the Plan may be made subject to options, stock appreciation rights (SARs), or stock-
based awards. Stock options and SARs granted under the 2014 Plan may not have a term exceeding 10 years from the date of grant.
The 2014 Plan also provides that all awards will become fully vested and/or exercisable upon a change in control (as defined in the
2014 Plan) if those awards (i) are not assumed or equitably substituted by the surviving entity or (ii) have been assumed or equitably
substituted by the surviving entity, and the grantees employment is terminated under certain circumstances. Other specific termsrr
for
awards granted under the 2014 Plan shall be determined by our Compensation Committee (or the board of directors if so determined
by the board of directors). Awards granted under the 2014 Plan generally vest ratably over a three to four year period. As of December
31, 2017, 5.4 million shares were available for issuance under the 2014 Plan.
q
2007 Incentive Plan
Under our 2007 Incentive Plan (2007 Plan), the Company was authorized to grant awards in the form of incentive stock
options, non-qualified stock options, restricted stock, other common stock-based awards and cash-based awards. Stock options
and SARs granted under the 2007 Plan may not have a term exceeding 10 years from the date of grant. The 2007 Plan also
provided that all awards will become fully vested and/or exercisable upon a change in control (as defined in the 2007 Plan).
Historically, awards granted under the 2007 Plan generally vested ratably over a three to four-year period. As of May 24, 2017,
no further grants will be made under the 2007 plan.
2005 Equity Incentive Planll
Under our 2005 Equity Incentive Plan (2005 Plan), we were authorized to grant stock-based awards in the form of incentive
stock options, non-qualified stock options, restricted stock and other common stock-based awards. Stock options and SARs granted
under the 2005 Plan could not have a term exceeding 10 years from the date of grant. The 2005 Plan also provided that all awards
become fully vested and/or exercisable upon a change in control (as defined in the 2005 Plan). Historically, awards granted under the
2005 Plan generally vested ratably over a three-year period. As of June 27, 2015, no further grants will be made under the 2005 Plan.
1998 Stock Incentive Plan
Under the Builders FirstSource, Inc. 1998 Stock Incentive Plan (1998 Plan), we were authorized to issue shares of common
stock pursuant to awards granted in various forms, including incentive stock options, non-qualified stock options and other stock-
based awards. The 1998 Plan also authorized the sale of common stock on terms determined by our board of directors. Stock options
granted under the 1998 Plan generally cliff vest after a period of seven to nine years with certain option grants subject to acceleration
if certain financial targets were met. The expiration date is generally 10 years subsequent to date of issuance. As of January 1, 2005,
no further grants will be made under the 1998 Plan.
Stock Options
The following table summarizes our stock option activity:
Outstanding at December 31, 2016..........................................................
Granted.....................................................................................................
Exercised..................................................................................................
Forfeited...................................................................................................
Outstanding at December 31, 2017..........................................................
Exercisable at December 31, 2017...........................................................
Options
(In thousands)
$
3,515
$
57
(1,449) $
(19) $
$
$
2,104
1,522
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Years
Aggregate
Intrinsic Value
(In thousands)
5.51
12.94
5.56
7.44
5.66
4.80
4.8
4.1
$
$
33,927
25,871
57
The outstanding options at December 31, 2017 include 210,000 options under the 2014 plan, 1,384,000 options under the 2007
Plan, 302,000 options under the 2005 Plan and 208,000 options under the 1998 Plan. As of December 31, 2017, 42,000 options under
the 2014 Plan, 1,108,000 options under the 2007 Plan, 164,000 options under the 2005 Plan and 208,000 options under the 1998 Plan
were exercisable. The weighted average grant date fair value of options granted during the years ended December 31, 2017, 2016 and
2015 were $7.26, $3.71 and $4.20, respectively. The total intrinsic value of options exercised during the years ended December 31,
2017, 2016, and 2015 were $16.4 million, $11.6 million and $12.8 million, respectively. Vesting of all of our stock options is
contingent solely on continuous employment over the requisite service period.
Outstanding and exercisable stock options at December 31, 2017 were as follows (shares in thousands):
Range of Exercise Prices
$3.15 ....................................................................................................
$3.19 ...................................................................................................
$6.35 - $6.70.......................................................................................
$7.67- $12.94.....................................................................................
$3.15 - $12.94.....................................................................................
Shares
208
754
161
981
2,104
Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Years
$
$
$
$
$
3.15
3.19
6.45
7.97
5.66
5.9
2.1
7.2
6.3
4.8
Exercisable
Weighted
Average
Exercise
Price
$
$
$
$
$
3.15
3.19
6.47
7.67
4.80
Shares
208
754
48
512
1,522
Restricted Stock Units
The outstanding restricted stock units (RSUs) at December 31, 2017 include 2,015,000 units granted under the 2014 Plan and
234,000 units granted under the 2007 Plan.
The following table summarizes activity for RSUs subject solely to service conditions for the year ended December 31, 2017
(shares in thousands):
Nonvested at December 31, 2016 ..............................................
Granted .............................................................................
Vested...............................................................................
Forfeited ...........................................................................
Nonvested at December 31, 2017 ..............................................
Shares
Weighted
Average Grant
Date Fair Value
$
1,657
$
468
(772) $
(22) $
$
1,331
8.77
14.60
8.88
7.96
10.77
The weighted average grant date fair value of RSUs for which vesting is subject solely to service conditions granted during the
years ended December 31, 2017, 2016 and 2015 were $14.60, $10.68, and $7.26, respectively.
The following table summarizes activity for RSUs subject to both performance and service conditions for the year ended
December 31, 2017 (shares in thousands):
Nonvested at December 31, 2016 ..............................................
Granted .............................................................................
Vested...............................................................................
Forfeited ...........................................................................
Nonvested at December 31, 2017 ..............................................
Shares
Weighted
Average Grant
Date Fair Value
$
260
$
230
$
(3) $
$
487
10.95
15.38
11.09
13.04
The weighted average grant date fair value of RSUs for which vesting is subject to both performance and service conditions
granted during the years ended December 31, 2017 and 2016 were $15.38 and $10.96, respectively. There were no RSUs granted in
2015 which were subject to both performance and service conditions.
58
The following table summarizes activity for RSUs subject to both market and service conditions for the year ended
December 31, 2017 (shares in thousands):
Nonvested at December 31, 2016 ..............................................
Granted .............................................................................
Vested...............................................................................
Forfeited ...........................................................................
Nonvested at December 31, 2017 ..............................................
Shares
Weighted
Average Grant
Date Fair Value
$
260
174
$
$
(3) $
$
431
7.58
11.49
7.72
9.16
The weighted average grant date fair value of RSUs for which vesting is subject to both market and service conditions granted
during the years ended December 31, 2017 and 2016 were $11.49 and $7.58, respectively. There were no RSUs granted in 2015 which
were subject to both market and service conditions.
Our results of operations include stock compensation expense of $13.5 million ($8.2 million net of taxes), $10.5 million ($6.3
million net of taxes) and $6.9 million ($6.9 million net of taxes) for the years ended December 31, 2017, 2016 and 2015, respectively.
As a result of our adoption of the updated guidance related to stock compensation discussed in Note 2 we recognized excess tax
benefits for stock options exercised and RSUs vested of $5.1 million for the year ended December 31, 2017. We recognized no excess
tax benefits for stock options exercised or RSUs vested during the years ended December 31, 2016 and 2015. The total fair value of
options vested during the years ended December 31, 2017, 2016, and 2015 were $2.7 million, $2.8 million and $2.7 million,
respectively. The total faiff
million and $3.7 million, respectively.
r value of RSUs vested during the years ended December 31, 2017, 2016 and 2015 were $6.9 million, $3.9
As of December 31, 2017, there was $14.0 million of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 1.9
years.
11. Income Taxes
The components of income tax expense (benefit) included in continuing operations were as follows for the years ended
December 31:
Current:
Federal ............................................................................ $
State ................................................................................
.................................................................................................
Deferred:
Federal ............................................................................
State ................................................................................
Income tax expense (benefit) ................................................... $
2017
2016
(In thousands)
2015
1,831
2,213
4,044
49,710
(606)
49,104
53,148
$
$
$
2,115
2,115
(110,720)
(14,067)
(124,787)
(122,672) $
1,100
1,100
2,530
757
3,287
4,387
59
Temporary differences, which give rise to deferred tax assets and liabilities, were as follows as of December 31:
Deferred tax assets related to:
Accrued expenses............................................................. $
Insurance reserves............................................................
Stock-based compensation expense.................................
Accounts receivable .........................................................
Inventories........................................................................
Operating loss and credit carryforwards ..........................
Valuation allowance.........................................................
Total deferred tax assets ............................................................
Deferred tax liabilities related to:
Prepaid expenses..............................................................
Goodwill and other intangible assets ...............................
Property, plant and equipment .........................................
Other ................................................................................
Total deferred tax liabilities .............................................
Net deferred tax asset ............................................................... $
2017
2016
(In thousands)
9,615
11,299
4,702
3,355
11,370
68,066
108,407
(2,409)
105,998
(2,706)
(19,431)
(8,593)
(163)
(30,893)
75,105
$
$
13,664
15,128
7,429
5,023
24,628
87,610
153,482
(4,821)
148,661
(3,799)
(15,956)
(13,058)
(528)
(33,341)
115,320
A reconciliation of the statutory federal income tax rate to our effecff
tive rate forff
continuing operations is provided below for the
years ended December 31:
Statutory federal income tax rate............................................
State income taxes, net of federal income tax ........................
Valuation allowance ...............................................................
Stock compensation windfall benefit......................................
Enactment of federal income tax rate change.........................
Permanent difference 162(m) limitation..............................
Permanent difference warrant mark to market ....................
Permanent difference credits ...............................................
Permanent difference other .................................................
Other .......................................................................................
2017
2016
2015
35.0%
7.7
(3.1)
(5.5)
31.5
0.8
(9.6)
0.9
0.1
57.8%
35.0%
6.1
(607.9)
0.6
(1.2)
0.4
0.9
(566.1)%
35.0%
8.3
(52.1)
(5.4)
(8.6)
1.9
(2.8)
0.1
(23.6)%
As discussed in Note 2 the Company adopted updated
u
guidance related to the accounting for stock compensation in 2017. As a
result of this updated guidance all windfalls and shortfalls are now recognized as a component of income tax expense in the period
they occur.
On December 22, 2017, the President signed into law the 2017 Tax Act, which includes a broad range of tax reform proposals
affecting businesses, including corporate tax rates and business deductions. The 2017 Tax Act reduces the statutory federal corporat
e
tax rate from 35% to 21% for periods beginning after December 31, 2017. The Income Taxes topic of the Codification requires that the
effect of a tax rate change on deferred tax assets and liabilities be recognized in the period the rate change was enacted. As such, we
recorded income tax expense of $29.0 million for the year ended December 31, 2017 related to the revaluation of our net deferred tax
assets. We do not expect the 2017 Tax Act to impact the realizability of our deferred tax assets. There were no other material impacts
recognized or unrecognized for the year ended December 31, 2017 as a result of the enactment of the 2017 Tax Act.
rr
At December 31, 2017 and 2016, the Company had deferred tax assets, net of deferred tax liabilities, of $77.5 million and
$120.1 million, respectively, offset by valuation allowances of $2.4 million and $4.8 million, respectively. We have $338.5 million of
state net operating loss carryforwards and $2.8 million of state tax credit carryforwards expiring at various dates through 2037. We
also have $190.8 million of federal net operating loss carryforwards and $11.4 million of federal tax credit carryforwards expiring at
various dates through 2037. As of December 31, 2017, the Company needed to generate approximately $281.4 million of pre-tax
income in future periods to realize its federal deferred tax assets.
60
We evaluate our deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. In accordance
with the Income Taxes topic of the Codification we assess whether it is more likely than not that some or all of our deferred tax assets
will not be realized. Significant judgment is required in estimating valuation allowances for deferred tax assets and in making this
determination, we consider all available positive and negative evidence and make certain assumptions. The realization of a deferred
tax asset ultimately depends on the existence of sufficient taxable income in the applicable carryback or carryforward periods. We
consider nature, frequency, and severity of current and cumulative losses, as well as historical and forecasted financial results, the
overall business environment, our industry's historic cyclicality, the reversal of existing deferred tax liabilities, and tax planning
strategies in our assessment. Changes in our estimates of future taxable income and tax planning strategies will affect our estimate of
the realization of the tax benefits of these tax carryforwards.
We recorded a fulff
l valuation allowance in 2008 due to our cumulative three year loss position at that time, compounded by the
negative industry-wide business trends and outlook. We remained in a cumulative three year loss position until the second quarter of
2016. In the third quarter of 2016, management determined that there was sufficient positive evidence to conclude that it was more
likely than not that the valuation allowance should be released against our net federal and some state deferred tax assets. As a result,
for the year ended December 31, 2016 we recorded a cumulative reduction to the valuation allowance against our net deferred tax
assets of $131.7 million. During 2017, as a result of various activities and tax initiatives that impacted our assessment of the future
utilization and realizability of our state net operating losses (NOLs) we recorded a reduction to the associated valuation allowance
of $2.8 million for the year ended December 31, 2017. For the year ended December 31, 2015, we recorded a valuation allowance of
$9.7 million related to our continuing operations.
ff
Section 382 of the Internal Revenue Code imposes annual limitations on the utilization of NOL carryforwards, other tax
carryforwards, and certain built-in losses upon an ownership change as defined under that section. In general terms, an ownership
change may result from transactions that increase the aggregate ownership of certain stockholders in the Companys stock by more
than 50 percentage points over a three year testing period (Section 382 Ownership Change). In 2017, affilff iates of a significant
shareholder sold their investment in the Company, which triggered a Section 382 Ownership Change. As a result of triggering a
Section 382 Ownership Change, an annual limitation is now imposed on the Companys tax attributes, including its NOLs and other
credits. The Company has evaluated the impact of this limitation on its NOLs and other credits and does not expect it to have a
material impact on their future utilization or realizability.
We base our estimate of deferred tax assets and liabilities on current tax laws and rates. In certain cases, we also base our
t
estimate on business plan forecasts and other expectations about future outcomes. Changes in existing tax laws or rates could affecff
our actual tax results, and future business results may affecff
t 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 industrys 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
t
outcomes
of these future results could have a material impact on our consolidated results of operations or financial position.
The following table shows the changes in our valuation allowance:
Balance at January 1, ............................................................... $
Additions charged to expense ..................................................
Reductions credited to expense................................................
Enactment of federal income tax rate change ..........................
Deductions ...............................................................................
Balance at December 31, ......................................................... $
2017
4,821
(2,839)
427
2,409
2016
(In thousands)
136,548
$
(131,727)
4,821
$
$
$
2015
133,183
9,624
(6,259)
136,548
61
The balance for uncertain tax positions, excluding penalties and interest, was $0.3 million, $0.2 million and $0.2 million as of
December 31, 2017, 2016 and 2015, respectively with no significant impact recorded in the Companys consolidated statement of
operations and comprehensive income (loss) for the years ended December 31, 2017, 2016 or 2015. We accrue interest and penalties
on our uncertain tax positions as a component of our provision for income taxes. We accrued no significant interest and penalties in
2017, 2016 or 2015.
We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Based on completed
examinations and the expiration of statutes of limitations, we have concluded all U.S. federal income tax matters forff
2013. We report in 41 states with various years open to examination.
years through
12. Employee Benefit Plans
p y
We maintain one active defined contribution 401(k) plan. Our employees are eligible to participate in the plans subject to certain
employment eligibility provisions. Participants can contribute up to 75% of their annual compensation, subject to federally mandated
maximums. Participants are immediately vested in their own contributions. We match a certain percentage of the contributions made
by participating employees, subject to IRS limitations. Our matching contributions are subject to a pro-rata five-year vesting schedule.
We recognized expense of $4.6 million, $4.6 million and $6.5 million in 2017, 2016 and 2015, respectively, for contributions to the
plan.
The Company contributes to multiple collectively bargained union retirement plans including multiemployer plans. The
Company does not administer the multiemployer plans, and contributions are determined in accordance with the provisions of
negotiated labor contracts. The risks of participating in multiemployer plans are different from single-employer plans. Assets
contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating
employers. If a participating employer stops contributing to a multiemployer plan, the unfunded obligations of that multiemployer
plan may be borne by the remaining participating employers. If the Company chooses to stop participating in a multiemployer plan,
the Company may be required to pay that plan an amount (withdrawal liability) based on the plans formula
and the underfunded
status of the plan attributable to the Company. Contributions to the plans for the years ended December 31, 2017, 2016 and 2015 were
not significant.
ff
13. Commitments and Contingencies
g
We lease certain land, buildings and equipment used in operations. These leases are generally accounted for as operating leases
with initial terms ranging from one to 20 years and they generally contain renewal options. Certain operating leases are subject to
contingent rentals based on various measures, primarily consumer price index increases. We also lease certain properties from related
parties, including current employees and non-affiliate stockholders. Total rent expense under operating leases was approximately
$77.9 million, $68.7 million and $43.6 million for the years ended December 31, 2017, 2016, and 2015, respectively.
In addition, we have residual value guarantees on certain equipment leases. Under these leases we have the option of
(a) purchasing the equipment at the end of the lease term, (b) arranging for the sale of the equipment to a third party, or (c) returning
the equipment to the lessor to sell the equipment. If the sales proceeds in any case are less than the residual value, we are required to
reimburse the lessor for the deficiency up to a specified level as stated in each lease agreement. If the sales proceeds exceed the
residual value, we are entitled to all of such excess amounts. The guarantees under these leases for the residual values of equipment at
the end of the respective operating lease periods approximated $5.6 million as of December 31, 2017. Based upon the expectation that
none of these leased assets will have a residual value at the end of the lease term that is materially less than the value specified in the
related operating lease agreement or that we will purchase the equipment at the end of the lease term, we do not believe it is probable
that we will be required to fund any amounts under the terms of these guarantee arrangements. Accordingly, no accruals have been
recognized for these guarantees.
62
Future minimum commitments for noncancelable operating leases with initial or remaining lease terms in excess of one year are
as follows:
y
Related Party
Total*
(In thousands)
Year ending December 31,
2018 ........................................................................................... $
2019 ...........................................................................................
2020 ...........................................................................................
2021 ...........................................................................................
2022 ...........................................................................................
Thereafter ..................................................................................
$
852
831
852
527
406
633
4,101
$
$
76,565
64,016
50,562
40,351
27,446
60,927
319,867
*
II
Includes
related party future minimum commitments for noncancelable operating leases.
As of December 31, 2017, we had outstanding letters of credit totaling $84.9 million under our 2022 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 Companys 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
would not be material to our results of operations or liquidity for a particular period.
adverse judgments and costs
ff
14. Segment and Product Information
g
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 402 locations operating in 40 states across the United States, which
regions. Centralized financial and operational oversight, including resource allocation and
have been organized into nine geographical
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).
a
ff
ff
The Company has nine operating segments aligned with its nine geographical regions (Regions 1 through 9). While all of our
operating segments have similar nature of products, distribution methods and customers, certain of our operating segments have been
aggregated due to also containing similar economic characteristics, resulting in the following composition of reportable segments:
•
•
•
•
Regions 1 and 2 have been aggregated to formff
the Northeast reportable segment
Regions 3 and 5 have been aggregated to formff
the Southeast reportable segment
Regions 4 and 6 have been aggregated to formff
the South reportable segment
Region 7, 8 and 9 have been aggregated to form the West reportable segment
In addition to our reportable segments, our consolidated results include corporate overhead, other various operating activities
that are not internally allocated to a geographical region nor separately reported to the CODM, and certain reconciling items primarily
related to allocations of corporate overhead and rent expense, which have collectively been presented as All Other. The accounting
policies of the segments are consistent with those described in Note 2, except forff
noted reconciling items.
63
The following tables present Net sales, Income (loss) before income taxes and certain other measures for the reportable
segments, reconciled to consolidated total operations, for the years ended December 31, (in thousands):
Reportable segments
Northeast.................................................................. $
Southeast..................................................................
South........................................................................
West .........................................................................
Total reportable segments ...............................
All other...................................................................
Total consolidated ....................................................... $
Net Sales
1,285,286
1,542,330
1,855,425
2,188,696
6,871,737
162,472
7,034,209
Reportable segments
Northeast.................................................................. $
Southeast..................................................................
South........................................................................
West .........................................................................
Total reportable segments ...............................
All other...................................................................
Total consolidated ....................................................... $
Net Sales
1,204,100
1,362,259
1,699,371
1,939,206
6,204,936
162,348
6,367,284
Reportable segments
Northeast................................................................... $
Southeast...................................................................
South .........................................................................
West ..........................................................................
Total reportable segments ................................
All other ....................................................................
Total consolidated ........................................................ $
Net Sales
626,985
890,164
1,015,556
785,370
3,318,075
246,350
3,564,425
2017
Depreciation &
Amortization
Interest
Income (loss)
before income
taxes
$
$
13,255
10,457
19,573
26,902
70,187
22,806
92,993
$
$
2016
20,893
22,939
23,320
32,058
99,210
93,964
193,174
Depreciation &
Amortization
Interest
$
$
18,220
11,243
21,670
33,764
84,897
24,896
109,793
$
$
2015
18,660
19,768
22,213
27,130
87,771
126,896
214,667
$
$
$
$
40,359
49,735
90,551
85,628
266,273
(174,344)
91,929
Income (loss)
before income
taxes
35,347
40,261
72,183
72,745
220,536
(198,867)
21,669
Depreciation &
Amortization
Interest
Income (loss)
before income
taxes
$
$
4,202
5,072
9,351
5,811
24,436
33,844
58,280
$
$
7,508
14,214
12,058
6,109
39,889
69,310
109,199
$
$
28,843
17,193
53,435
35,230
134,701
(153,145)
(18,444)
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. The Companys net sales by product category for the periods
indicated were as follows (in thousands):
Sales by product category were as follows for the years ended December 31:
Lumber & lumber sheet goods ................................................ $
Manufactured products............................................................
Windows, doors & millwork ...................................................
Gypsum, roofing & insulation.................................................
Siding, metal & concrete products ..........................................
Other building & product services ..........................................
Total sales ...................................................................... $
2017
2,510,945
1,208,555
1,360,567
538,378
655,889
759,875
7,034,209
2016
(In thousands)
2,131,394
$
1,097,665
1,286,151
520,007
622,344
709,723
6,367,284
$
$
$
2015
1,129,684
635,338
818,131
264,894
319,618
396,760
3,564,425
64
15. Related Party Transactions
y
Certain members of the Companys board of directors serve on the board of directors for one of our suppliers, PGT, Inc.
Further, the Company has entered into certain leases of land and buildings with certain employees or non-affiliate stockholders.
Activity associated with these related party transactions was not significant as of or for the years ended December 31, 2017, 2016 or
2015.
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 Companys results for the years ended December 31, 2017, 2016 or 2015.
16. Unaudited Quarterly Financial Data
Q
y
The following tables summarize the consolidated quarterly results of operations for 2017 and 2016 (in thousands, except per
share amounts):
Net sales............................................................................. $
Gross margin .....................................................................
Net income (loss)...............................................................
Net income (loss) per share
2017
First Quarter
1,533,064
376,052
Second Quarter
1,843,297
$
460,797
Third Quarter
1,878,909
$
459,322
3,822 (1)
37,910(2)
39,750(3)
Fourth Quarter
1,778,939
$
431,220
(42,701)(4)
Basic............................................................................. $
Diluted.......................................................................... $
0.03 (1) $
0.03 (1) $
0.34(2) $
0.33(2) $
0.35(3) $
0.34(3) $
(0.38)(4)
(0.38)(4)
Net sales............................................................................. $
Gross margin .....................................................................
Net income (loss)...............................................................
Net income (loss) per share
2016
First Quarter
1,397,114
349,748
(16,980) (5)
Second Quarter
1,677,300
$
418,331
29,441(6)
Third Quarter
1,745,958
$
437,094
125,469 (7)
Basic............................................................................. $
Diluted.......................................................................... $
(0.15) (5) $
(0.15) (5) $
0.27(6) $
0.26(6) $
1.13 (7) $
1.10 (7) $
Fourth Quarter
1,546,912
$
391,575
6,411 (8)
0.06 (8)
0.06 (8)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Includes the write-off of debt discount and debt issuance costs of $1.0 million and finff ancing costs of $1.4 million as discussed in
Note 8.
Includes a valuation allowance of $(3.7) million as discussed in Note 11.
Includes a valuation allowance of $(0.1) million as discussed in Note 11.
Includes a loss on debt extinguishment of $56.3 million as discussed in Note 8, income tax expense of $29.0 million due to the
enactment of a federal
Note 11.
income tax rate change in December 2017, and a valuation allowance of $1.0 million as discussed in
ff
Includes a gain on debt extinguishment of $7.8 million as discussed in Note 8 and a valuation allowance of $5.1 million as
discussed in Note 11.
Includes a loss on debt extinguishment of $1.7 million as discussed in Note 8 and a valuation allowance of $(16.0) million as
discussed in Note 11.
Includes a loss on debt extinguishment and financing costs of $53.3 million as discussed in Note 8 and a valuation allowance of
$(117.6) million as discussed in Note 11.
Includes a loss on debt extinguishment of $9.7 million as discussed in Note 8 and a valuation allowance of $(3.2) million as
discussed in Note 11.
Earnings per share is computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per
share may not equal the annual earnings per share.
65
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our
principal executive officer (CEO) and principal financial officer (CFO) conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the period covered by this annual report.
Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of
1934, as amended (Exchange Act), are attached as exhibits to this annual report. This Controls and Procedures section includes
the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the
certifications for a more complete understanding of the topics presented.
Limitations on the Effective
ff
ness of Controls. We do not expect that our disclosure controls and procedures will prevent all errors
and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can pa
absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the
design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of
how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions
due to error or fraud may occur and not be detected.
rovide
Scope of the Controls Evaluation. The evaluation of our disclosure controls and procedures included a review of their objectives
and design, the Companys implementation of the controls and procedures and the effect of the controls and procedures on the
information generated for use in this annual report. In the course of the evaluation, we sought to identify whether we had any data
errors, control problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were
being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness
of our disclosure controls and procedures can be reported in our quarterly reports on Form 10-Q. Many of the components of our
disclosure controls and procedures are also evaluated by our internal audit department, our legal department and by personnel in our
finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on
an ongoing basis, and to maintain them as dynamic systems that change as conditions warrant.
a
Conclusions regarding Disclosure Controls. Based on the required evaluation of our disclosure controls and procedures, our
CEO and CFO have concluded that, as of December 31, 2017, we maintained disclosure controls and procedures that were effective in
or submit under the Exchange
providing reasonable assurance that information required to be disclosed by us in the reports that we fileff
Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms, and that such
information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure.
rr
Managements R
eport on Internal Control over Financial Reporting.
e
Our management is responsible for establishing and
ff
reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Internal
maintaining adequate internal control over financial
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles
("GAAP"). Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonablea
that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on the financial statements.
assurance
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate.
66
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation
of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the framework set forth in Internal Control Integrated Framework (2013), our management concluded that our internal
control over financial reporting was effective as of December 31, 2017.
The effectiveness of the Companys internal control over financial reporting as of December 31, 2017, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears
a
herein.
Changes in Internal Control over Financial Reporting. During the quarter ended December 31, 2017, there were no changes in
our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. Other Information
None.
67
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item appears
held May 23, 2018 under the captions
Board and Its Committees, Corporate Governance, Section 16(a) Beneficial Ownership Reporting Compliance, and Executive
Officers of the Registrant, which information is incorporated herein by reference.
in our definitive proxy statement for our annual meeting of stockholders to be
Proposal 1 Election of Directors, Continuing Directors, Information Regarding the
a
a
Code of Business Conduct and Ethics
Builders FirstSource, Inc. and its subsidiaries endeavor to do business according to the highest ethical and legal standards,
complying with both the letter and spirit of the law. Our board of directors approved a Code of Business Conduct and Ethics that
applies to our directors, officers (including our principal executive officer, principal financial officer and controller) and employees.
Our Code of Business Conduct and Ethics is administered by a compliance committee made up ou
human resources, finance and internal audit departments.
f representatives from our legal,
Our employees are encouraged to report any suspected violations of laws, regulations and the Code of Business Conduct and
Ethics, and all unethical business practices. We provide continuously monitored hotlines for anonymous reporting by employees.
Our board of directors has also approved a Supplemental Code of Ethics for the Chief Executive Officer, President, and Senior
Financial Officers of Builders FirstSource, Inc., which is administered by our general counsel.
Both of these policies are listed as exhibits to this annual report on Form 10-K and can be found in the Investors section of our
corporate Web site at: www.bldr.com.
Stockholders may request a freff e copy of these policies by contacting the Corporate Secretary, Builders FirstSource, Inc., 2001
Bryan Street, Suite 1600, Dallas, Texas 75201, United States of America.
In addition, within four business days of:
•
•
Any amendment to a provision of our Code of Business Conduct and Ethics or our Supplemental Code of Ethics for Chief
Executive Officer, President and Senior Financial Officers of Builders FirstSource, Inc. that applies to our chief executive
officer, our chief financial officer or chief accounting officer as it relates to one or more of the items set forth in Item
406(b) of Regulation S-K; or
The grant of any waiver, including an implicit waiver, from a provision of one of these policies to one of these officers
that relates to one or more of the items set forth in Item 406(b) of Regulation S-K.
We will provide information
ff
regarding any such amendment or waiver (including the nature of any waiver, the name of the
person to whom the waiver was granted and the date of the waiver) on our Web site at the Internet address above, and such
information will be available on our Web site for at least a 12-month period. In addition, we will disclose any amendments and
waivers to our Code of Business Conduct and Ethics or our Supplemental Code of Ethics for Chief Executive Officer, President and
Senior Financial Officers of Builders FirstSource, Inc. as required by the listing standards of the NASDAQ Stock Market LLC.
Item 11. Executive Compensation
The information required by this item appears
a
in our definitive proxy statement for our annual meeting of stockholders to be
held May 23, 2018 under the captions
Committees Compensation of Directors, and Compensation Committee Interlocks and Insider Participation, which information
is incorporated herein by reference.
Executive Compensation and Other Information, Information Regarding the Board and its
a
ff
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item appears
a
in our definitive proxy statement for our annual meeting of stockholders to be
held on May 23, 2018 under the caption
a
is incorporated herein by reference.
Ownership of Securities and Equity Compensation Plan Information, which information
68
Item 13. Certain Relationships and Related Transactions,
TT
and Director Independence
The information required by this item appears
a
in our definitive proxy statement for our annual meeting of stockholders to be
held May 23, 2018 under the caption
Committees, and Certain Relationships and Related Party Transactions, which information is incorporated herein by reference.
Election of Directors and Management Information, Information Regarding the Board and its
a
Item 14. Principal Accountant Fees and Services
The information required by this item appears
a
in our definitive proxy statement for our annual meeting of stockholders to be
held May 23, 2018 under the caption
Fees Paid to PricewaterhouseCoopers LLP, which information is incorporated herein by reference.
Proposal 3 Ratification of Selection of Independent Registered Public Accounting Firm
a
69
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) See the index to consolidated financial statements provided in Item 8 forff
a list of the financial statements filed as part of
this report.
(2) Financial statement schedules are omitted because they are either not applicable or not material.
(3) The following documents are filed, furnished or incorporated by reference as exhibits to this report as required by Item 601
of Regulation S-K.
Exhibit
Number
Description
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Amended and Restated Certificate of Incorporation of Builders FirstSource, Inc. (incorporated by reference to
Exhibit 3.1 to Amendment No. 4 to the Registration Statement of the Company on Form S-1, filed with the Securities
and Exchange Commission on June 6, 2005, File Number 333-122788)
Amended and Restated By-Laws of Builders FirstSource, Inc. (incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 6, 2017,
File Number 0-51357)
Indenture, dated as of August 22, 2016, among Builders FirstSource, Inc., the guarantors party thereto, and Wilmington
Trust, National Association, as trustee and notes collateral agent (form of Note included therein) (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on Form 8-K, filed with the Securities and Exchange
Commission on August 23, 2016, File Number 0-51357)
Term Loan Credit Agreement, dated as of July 31, 2015, among Builders FirstSource, Inc., Deutsche Bank AG, New
York Branch, as administrative agent, and the lenders and financial institutions party thereto (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K, filed with the Securities Exchange Commission on
August 6, 2015, File Number 0-51357)
First Amendment to Credit Agreement, dated as of August 22, 2016, by and among Builders FirstSource, Inc., Deutsche
Bank AG, New York Branch, as administrative agent, and the lenders and financial institutions party thereto
(incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, filed with the Securities and
Exchange Commission on August 23, 2016, File Number 0-51357)
Second Amendment to Credit Agreement, dated as of February 23, 2017, by and among Builders FirstSource, Inc.,
Deutsche Bank AG, New York Branch, as administrative agent, and the lenders and financial institutions party thereto
(incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 10-K for the year ended December
31, 2016, filed with the Securities Exchange Commission on March 1, 2017, File Number 0-51357)
Amended and Restated Senior Secured Revolving Credit Facility, dated as of July 31, 2015, among Builders FirstSource,
Inc., SunTrust Bank, as administrative agent and collateral agent, and the lenders and financial institutions party thereto
(incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, filed with the Securities
Exchange Commission on August 6, 2015, File Number 0-51357)
Amendment No. 1 to Credit Agreement, dated as of March 22, 2017, among Builders FirstSource, Inc., SunTrust Bank,
as administrative agent and collateral agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 28, 2017,
File Number 0-51357)
ABL/Bond Intercreditor Agreement, dated as of May 29, 2013, among Builders FirstSource, Inc. and certain of its
subsidiaries, as grantors, SunTrust Bank, as ABL agent, and Wilmington Trust, National Association, as notes collateral
agent (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, filed with the Securities
Exchange Commission on June 3, 2013, File Number 0-51357)
Collateral Agreement, dated as of July 31, 2015, among the Company, certain of its subsidiaries, and Deutsche Bank
AG, New York Branch (incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K, filed
with the Securities Exchange Commission on August 6, 2015, File Number 0-51357)
70
Exhibit
Number
10.8
10.9
10.10
10.11
10.12
10.13+
10.14+
10.15+
10.16+
10.17+
10.18+
10.19+
10.20+
10.21+
10.22+
Description
Amended and Restated ABL Collateral Agreement, dated as of July 31, 2015, among the Company, certain of its
subsidiaries, and SunTrust Bank (incorporated by reference to Exhibit 10.5 to the Companys Current Report on Form 8-
K, filed with the Securities Exchange Commission on August 6, 2015, File Number 0-51357)
Notes Collateral Agreement, dated as of August 22, 2016, among Builders FirstSource, Inc., certain of its subsidiaries,
and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 23, 2016, File Number 0-
51357)
Guarantee Agreement, dated as of July 31, 2015, among the guarantors party thereto and Deutsche Bank AG, New York
Branch (incorporated by reference to Exhibit 10.6 to the Companys Current Report on Form 8-K, filed with the
Securities Exchange Commission on August 6, 2015, File Number 0-51357)
Amended and Restated ABL Guarantee Agreement, dated as of July 31, 2015, among the Guarantors (as defined therein)
and SunTrust Bank (incorporated by reference to Exhibit 10.7 to the Companys Current Report on Form 8-K, filed with
the Securities Exchange Commission on August 6, 2015, File Number 0-51357)
Lease and Master Agreement Guaranty, dated as of July 31, 2015, by the Company in favor of LN Real Estate LLC
(incorporated by reference to Exhibit 10.10 to the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2015, filed with the Securities and Exchange Commission on November 9, 2015, File Number 0-51357)
Builders FirstSource, Inc. 1998 Stock Incentive Plan, as amended, effective March 1, 2004 (incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Registration Statement of the Company on Form S-1, filed with the Securities
and Exchange Commission on April 27, 2005, File Number 333-122788)
Amendment No. 7 to the Builders FirstSource, Inc. 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.6
to the Companys Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Securities and
Exchange Commission on March 12, 2007, File Number 0-51357)
2004 Form of Builders FirstSource, Inc. 1998 Stock Incentive Plan Nonqualified Stock Option Agreement (incorporated
by reference to Exhibit 10.5 to Amendment No. 1 to the Registration Statement of the Company on Form S-1, filed with
the Securities and Exchange Commission on April 27, 2005, File Number 333-122788)
Builders FirstSource, Inc. 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.14 to Amendment No. 4
to the Registration Statement of the Company on Form S-1, filed with the Securities and Exchange Commission on
June 6, 2005, File Number 333-122788)
2006 Form of Builders FirstSource, Inc. 2005 Equity Incentive Plan Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K, filed with the Securities and
Exchange Commission on February 17, 2006, File Number 0-51357)
Builders FirstSource, Inc. 2007 Incentive Plan (incorporated by reference to Annex D of the Companys Definitive
Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on December 15, 2009, File
Number 0-51357)
2008 Form of Builders FirstSource, Inc. 2007 Incentive Plan Nonqualified Stock Option Agreement (incorporated by
reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed
with the Securities and Exchange Commission on May 1, 2008, File Number 0-51357)
2010 Form of Builders FirstSource, Inc. 2007 Incentive Plan Nonqualified Stock Option Agreement for Employee
Directors (incorporated by reference to Exhibit 10.21 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2009, filed with the Securities and Exchange Commission on March 4, 2010, File Number 0-51357)
2014 Form of Builders FirstSource, Inc. 2007 Incentive Plan Restricted Stock Unit Award Certificate (incorporated by
reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed
with the Securities and Exchange Commission on August 1, 2014, File Number 0-51357)
2014 Form of Builders FirstSource, Inc. 2007 Incentive Plan Director Restricted Stock Unit Award Certificate
(incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2014, filed with the Securities and Exchange Commission on November 5, 2014, File Number 0-51357)
71
Exhibit
Number
10.23+
10.24+
10.25+
10.26+
10.27+
10.28+
Description
Builders FirstSource, Inc. 2014 Incentive Plan (incorporated herein by reference to Appendix A of the Companys
Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on April 11, 2014,
File Number 0-51357)
Amendment to the Builders FirstSource, Inc. 2014 Incentive Plan (incorporated by reference to Appendix A of the
Companys Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on April
14, 2016, File Number 0-51357)
2014 Form of Builders FirstSource, Inc. 2014 Incentive Plan Restricted Stock Unit Award Certificate (incorporated by
reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed
with the Securities and Exchange Commission on August 1, 2014, File Number 0-51357)
2015 Form of Builders FirstSource, Inc. 2014 Incentive Plan Non-Statutory Stock Option Award Certificate
(incorporated by reference to Exhibit 10.22 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2014, filed with the Securities and Exchange Commission on March 3, 2015, File Number 0-51357)
2016 Form of Builders FirstSource, Inc. 2014 Incentive Plan Restricted Stock Unit Award Certificate (incorporated by
reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed
with the Securities and Exchange Commission on May 6, 2016, File Number 0-51357)
2017 Form of Builders FirstSource, Inc. 2014 Incentive Plan Director Restricted Stock Unit Award Certificate
(incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2017, filed with the Securities and Exchange Commission on November 9, 2017, File Number 0-51357)
10.29*+
2017 Form of Builders FirstSource, Inc. 2014 Incentive Plan Restricted Stock Unit Award Certificate
10.30*+
Builders FirstSource, Inc. Amended and Restated Director Compensation Policy
10.31+
Builders FirstSource, Inc. Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.13 to
Amendment No. 3 to the Registration Statement of the Company on Form S-1, filed with the Securities and Exchange
Commission on May 26, 2005, File Number 333-122788)
10.32*+
Amended and Restated Employment Agreement, dated December 29, 2017, between Builders FirstSource, Inc. and M.
Chad Crow
10.33+
10.34+
10.35+
10.36+
10.37+
10.38+
10.39+
Employment Agreement, dated January 15, 2004, between Builders FirstSource, Inc. and Morris E. Tolly (incorporated
by reference to Exhibit 10.22 to the Companys Annual Report on Form 10-K for the year ended December 31, 2007,
filed with the Securities and Exchange Commission on March 5, 2008, File Number 0-51357)
Amendment to Employment Agreement, dated October 29, 2008, between Builders FirstSource, Inc. and Morris E. Tolly
(incorporated by reference to Exhibit 10.31 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2008, filed with the Securities and Exchange Commission on March 2, 2009, File Number 0-51357)
Second Amendment to Employment Agreement, dated as of May 19, 2017, between Builders FirstSource, Inc. and
Morris E. Tolly (incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2017, filed with the Securities Exchange Commission on August 4, 2017, File Number 0-51357)
Employment Agreement, dated January 15, 2004, between Builders FirstSource, Inc. and Donald F. McAleenan
(incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005, filed with the Securities Exchange Commission on November 2, 2005, File Number 0-51357)
Amendment to Employment Agreement, dated October 29, 2008, between Builders FirstSource, Inc. and Donald F.
McAleenan (incorporated by reference to Exhibit 10.33 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2008, filed with the Securities and Exchange Commission on March 2, 2009, File Number 0-51357)
Second Amendment to Employment Agreement, dated as of May 19, 2017, between Builders FirstSource, Inc. and
Donald F. McAleenan (incorporated by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 2017, filed with the Securities Exchange Commission on August 4, 2017, File Number 0-
51357)
Employment Agreement, dated November 14, 2016, between Builders FirstSource, Inc. and Peter M. Jackson
(incorporated by reference to Exhibit 10.39 to the Companys Annual Report on Form 10-K for the year ended
December 31, 2016, filed with the Securities and Exchange Commission on March 1, 2017, File Number 0-51357)
72
Exhibit
Number
10.40+
First Amendment to Employment Agreement, dated as of May 19, 2017, between Builders FirstSource, Inc. and Peter M.
Jackson (incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2017, filed with the Securities Exchange Commission on August 4, 2017, File Number 0-51357)
Description
10.41*+
Amended and Restated Employment Agreement, dated January 1, 2018, between Builders FirstSource, Inc. and Floyd
Sherman
14.1*
14.2
21.1*
23.1*
24.1*
31.1*
31.2*
32.1**
101*
Builders FirstSource, Inc. Code of Business Conduct and Ethics
Builders FirstSource, Inc. Supplemental Code of Ethics (incorporated by reference to Exhibit 14.2 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange
Commission on March 13, 2006, File Number 0-51357)
Subsidiaries of the Registrant
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
Power of Attorney (included as part of signature page)
Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, signed by M. Chad Crow as Chief Executive Officer
Certification of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, signed by Peter M. Jackson as Chief Financial Officer
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by M. Chad Crow as Chief Executive Officer and
Peter M. Jackson as Chief Financial Officer
The following financial information from Builders FirstSource, Inc.s Form 10-K filed on March 1, 2018, formatted in
eXtensible Business Reporting Language (XBRL): (i) Consolidated Statement of Operations and Comprehensive
Income (Loss) for the years ended December 31, 2017, 2016, and 2015, (ii) Consolidated Balance Sheet at December 31,
2017 and 2016, (iii) Consolidated Statement of Cash Flows for the years ended December 31, 2017, 2016, and 2015, (iv)
Consolidated Statement of Changes in Stockholders Equity for the years ended December 31, 2017, 2016, and 2015,
and (v) the Notes to Consolidated Financial Statements.
*
**
Filed herewith
Builders FirstSource, Inc. is furnishing, but not filing, the written statement pursuant to Title 18 United States Code 1350, as
added by Section 906 of the Sarbanes-Oxley Act of 2002, of M. Chad Crow, our Chief Executive Officer, and Peter M. Jackson,
our Chief Financial Officer.
+
Indicates a management contract or compensatory plan or arrangement
(b) A list of exhibits filed, furnished or incorporated by reference with this Form 10-K is provided above under Item 15(a)(3) of
this report. Builders FirstSource, Inc. will furnish a copy of any exhibit listed above to any stockholder without charge upon
written request to Donald F. McAleenan, Senior Vice President and General Counsel, 2001 Bryan Street, Suite 1600, Dallas,
Texas 75201.
(c) Not applicable
Item 16. Form 10-K Summary
None.
73
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
March 1, 2018
BUILDERS FIRSTSOURCE, INC.
/s/ M. CHAD CROW
M. Chad Crow
President and Chief Executive Officer
(Principal Executive Officer)
The undersigned hereby constitute and appoint Donald F. McAleenan and his substitutes our true and lawful attorneys-in-fact
with full power to execute in our name and behalf in the capacities indicated below any and all amendments to this report and to file
the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and
hereby ratify and confirm all that such attorney-in-fact or his substitutes shall lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ M. CHAD CROW
M. Chad Crow
Title
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ PETER M. JACKSON
Peter M. Jackson
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Date
March 1, 2018
March 1, 2018
March 1, 2018
/s/ JAMI COULTER
Jami Coulter
/s/ PAUL S. LEVY
Paul S. Levy
/s/ FLOYD F. SHERMAN
Floyd F. Sherman
/s/ CLEVELAND A. CHRISTOPHE
Cleveland A. Christophe
/s/ DANIEL AGROSKIN
Daniel Agroskin
/s/ ROBERT C. GRIFFIN
Robert C. Griffin
/s/ KEVIN J. KRUSE
Kevin J. Kruse
/s/ BRETT N. MILGRIM
Brett N. Milgrim
/s/ CRAIG A. STEINKE
Craig A. Steinke
/s/ DAVID A. BARR
David A. Barr
Chairman and Director
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
Director
Director
Director
Director
Director
Director
Director
Director
74