UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
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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)
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Delaware |
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52-2084569 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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2001 Bryan Street, Suite 1600 Dallas, Texas |
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75201 |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code:
(214) 880-3500
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of Exchange on Which Registered |
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Common stock, par value $0.01 per share |
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NASDAQ Stock Market LLC |
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 ¨ No þ
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 ¨ No þ
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 þ No ¨
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 þ No ¨
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 registrant’s 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ¨ |
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Accelerated filer þ |
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Non-accelerated filer ¨ |
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Smaller reporting company ¨ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2014 was approximately $357.6 million based on the closing price per share on that date of $7.48 as reported on the NASDAQ Stock Market LLC.
The number of shares of the registrant’s common stock, par value $0.01, outstanding as of February 27, 2015 was 98,225,978.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its annual meeting of stockholders to be held on May 27, 2015 are incorporated by reference into Part II and Part III of this Form 10-K.
BUILDERS FIRSTSOURCE, INC.
Table of Contents to Form 10-K
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Item 1. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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CAUTIONARY STATEMENT
Statements in this report which are not purely historical facts or which necessarily depend upon future events, including statements regarding our 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. All forward-looking statements in this report are based upon information available to us on the date of this report. We undertake 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 made in this report 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. Readers are cautioned not to place undue reliance on these forward-looking statements. In addition, oral statements made by our directors, officers and employees to the investment community, 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. 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
Builders FirstSource, Inc. is a leading supplier and manufacturer of structural and related building products for residential new construction. We have operations principally in the southern and eastern United States with 56 distribution centers and 55 manufacturing facilities, many of which are located on the same premises as our distribution centers. In this annual report, references to the “company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries, unless otherwise stated or the context otherwise requires.
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 new construction 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 eight non-specialty building product suppliers in the Pro Segment that generated more than $500 million in sales according to ProSales magazine’s 2013 ProSales 100 list. On this list, we were the third largest building product supplier.
Our industry is driven primarily by the residential new construction market, which is in turn dependent upon a number of factors, including demographic trends, interest rates, employment levels, supply and demand for housing stock, availability of credit, foreclosure rates, consumer confidence and the economy in general. 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 activity has strengthened over the past three years. According to the National Association of Homebuilders (“NAHB”), the single-family residential construction market was an estimated $191.4 billion in 2014, which was 12.1% higher than 2013, though still down significantly from the historical high of $413.2 billion in 2006.
Beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults, primarily as a result of credit quality deterioration. This disruption resulted in a stricter regulatory environment and reduced availability of mortgages for potential homebuyers due to an illiquid credit market and more restrictive standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders continue to be constrained, which is slowing a recovery in our industry. However, we believe there are several meaningful trends that indicate U.S. housing demand will likely continue to recover to levels consistent with the historical average of the past fifty years. These trends include relatively low interest rates, the aging of housing stock, and population growth due to immigration and birthrate exceeding death rate. U.S. single-family housing starts increased 4.8% in 2014 compared to 2013. The NAHB is predicting that U.S. single-family housing starts will increase to approximately 803,500 in 2015, which would represent a 24.2% increase from 2014 actual NAHB U.S. single-family housing starts of 646,800.
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OUR CUSTOMERS
We serve a broad customer base ranging from production homebuilders to small custom homebuilders. We believe we have a diverse geographic footprint as we serve 34 markets in 9 states. Based on 2014 U.S. Census data, we have operations in 18 of the top 50 U.S. Metropolitan Statistical Areas, as ranked by single family housing permits in 2014. In addition, approximately 47% of U.S. housing permits in 2014 were issued in states in which we operate.
Our customer mix is a balance of large national homebuilders, regional homebuilders, and local builders. Our customer base is highly diversified. For the year ended December 31, 2014, our top 10 customers accounted for approximately 25.1% of sales, and no single customer accounted for more than 8% of sales. Our top 10 customers are comprised primarily of the largest production homebuilders, including publicly traded companies such as Beazer Homes USA, Inc., D.R. Horton, Inc., Hovnanian Enterprises, Inc., Standard Pacific Corporation., and The Ryland Group, Inc.
In addition to the largest production homebuilders, we also service and supply regional and local custom homebuilders. Custom homebuilders require high levels of service; our sales team must work very closely with the designers on a day-to-day basis in order to ensure the appropriate products are 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.
Our primary focus has been, and continues to be, on single-family residential new construction. However, we have recently acquired companies with multi-family manufacturing capabilities to further diversify our customer base. We will continue to identify opportunities for profitable growth in the multi-family and light commercial markets.
OUR PRODUCTS AND SERVICES
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 also manufacture floor trusses, roof trusses, wall panels, stairs, millwork, windows, and doors. In addition to our comprehensive offering of products that includes approximately 73,000 stock keeping units (“SKUs”), we also provide a full range of construction services. We believe our broad product and service offering, combined with our scale and experienced sales force, has driven market share gains with both large and small homebuilders.
We group our building products and services into five product categories: prefabricated components, windows & doors, lumber & lumber sheet goods, millwork, and other building products & services. For the year ended December 31, 2014, our combined sales of prefabricated components, windows & doors and millwork product categories represented 52.8% of total sales. Each of these categories includes both manufactured and distributed products. Products in these categories typically carry a higher margin and provide us with opportunities to cross-sell other products and services, thereby increasing customer penetration. As we continue to emphasize higher margin product lines, we expect these categories to increasingly contribute to our sales and overall profitability. Sales by product category for the years ended December 31, 2014, 2013 and 2012 can be found under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 of this annual report on Form 10-K.
Prefabricated Components. Prefabricated components are factory-built substitutes for job-site framing and include floor trusses, roof trusses, wall panels, stairs, and engineered wood that we design, cut, and assemble for each home. Our manufactured prefabricated components allow builders to build higher quality homes more efficiently. Roof trusses, floor trusses, wall panels and stair units are built in a factory controlled environment. Engineered floors and beams are cut to the required size and packaged for the given application at many of our locations. Without prefabricated components, 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.
Windows & Doors. The windows & doors category comprises the manufacturing, assembly and distribution of windows, and the assembly and distribution of interior and exterior door units. We manufacture aluminum and vinyl windows 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.
Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood and oriented strand board (“OSB”) products used in on-site house framing. In 2014, this product line was 32.6% of our total sales, a 2.8% decrease from 2013. We expect the lumber & lumber sheet goods business to remain a stable revenue source in the future.
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Millwork. Millwork includes interior trim, exterior trim, columns and posts that we distribute, as well as custom exterior 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.
Other Building Products & Services. Other building products & services consist of various products, including hardware, composite materials, roofing and insulation. 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.
MANUFACTURING
Our manufacturing facilities utilize the latest technology and the highest quality materials to improve product quality, increase efficiency, reduce lead times and minimize production errors. We manufacture products within three of our product categories: prefabricated components, millwork, and windows and doors.
Prefabricated Components — 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 builder’s prototype 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 house’s design is based on the proven prototype except for any minor builder modifications. Third, master filing allows us to change one file 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 file for custom builders who do not replicate houses, as it is not cost effective. For these builders, the components are designed individually for each house.
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 fabrication process begins by cutting individual pieces of 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.
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 plant’s performance is benchmarked by comparing efficiency across plants.
Prefabricated Components — 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 then install the components on the job site. We design and fabricate engineered wood at many of our distribution locations.
Prefabricated Components — 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 framed house. We fabricate box stairs based on these measurements.
Custom Millwork. Our manufactured custom millwork consists primarily of synthetic exterior trim, custom windows, features and box columns that we sell under our Synboard brand name and throughout our company.
We sand, cut, and shape sheets of 4 foot 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,
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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 fabricate box columns from sections of PVC that are cut on a 45 degree angle and mitered together.
Windows. We manufacture a full line of traditional aluminum and vinyl windows at an approximately 200,000 square foot manufacturing facility located in Houston, Texas. The process begins by purchasing aluminum and vinyl lineal extrusions. We cut these extrusions to size and join them together to form the window frame and sash. We then purchase sheet glass and cut it to size. We combine two pieces of identically shaped glass with a sealing compound to create a glass unit with improved insulating capability. We then insert the sealed 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.
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.
OUR STRATEGY
Our long-term strategy is to leverage our competitive strengths to grow sales, earnings, and cash flow and remain a preferred supplier to the homebuilding industry. We modified our strategy in response to the extended downturn that affected our industry. During that time, our goal was to maximize financial performance without impairing our ability to compete and create long term value. We implemented that strategy through generating new business, controlling costs, diligently managing working capital, improving operating efficiencies, and most importantly conserving cash. While we continue to focus on these areas, we also plan to prudently utilize our improved liquidity to support anticipated sales growth as the housing industry recovers. As the housing industry and our sales improve, we believe our operating leverage will also enhance our financial results.
We intend to build on our strong market positions and increase our sales and profits by pursuing the following strategies:
Utilize our strengths to capitalize on housing market recovery and growth. We intend to utilize our leading market positions and integrated product and service offerings to capitalize on the housing market recovery and to capture additional market share. The NAHB forecasts that U.S. single-family housing starts will grow by 24.2% and 36.9% in 2015 and 2016, respectively. We believe that our scale, local-market presence and our customers’ desire to seek strategic relationships with a limited number of full-line suppliers position us to increase our market share and benefit from the expected continuing recovery in new home construction.
Maximize our “share of wallet” with individual customers and across our served markets. Homebuilding customers of the Pro Segment continue to emphasize the importance of competitive pricing across a broad product portfolio, sales force knowledge, on-site services and overall “ease-of-use” of their building products suppliers. In our ongoing pursuit to increase our market share, we will continue to look for ways to enhance our “one-stop shop” strategy by bolstering our service offerings and manufacturing capabilities in ways that will drive additional pull through of our products. We believe that homebuilders will continue to place an increased value on these capabilities, which should further differentiate us from most of our competitors.
Optimize cash flow with highly scalable cost structure. Through the downturn we focused on standardizing processes and technology-based workflows to maximize operational efficiencies, reduce costs and enhance working capital efficiency. Our focus on cost controls, working capital and operating improvements proved to be valuable during the downturn and will be an integral part of our strategy going forward. Industry forecasters are predicting that single family housing starts will show continued improvements in 2015, which could require us to increase our operating expenses, headcount and working capital in order to support the additional demand. We will work to minimize these increases to ensure that we prudently adjust our variable costs with the change in sales volumes, and will remain extremely focused on expenses and working capital. Our cost structure is scalable, and we expect these efficiencies will drive enhanced profit margins and cash flow conversion as we grow with improving market conditions.
Continue to leverage our strategic vendor relationships. We strive to continually enhance our role as a preferred channel partner for our building products vendors. Our size, liquidity position and access to the capital markets address a major concern for many vendors, who otherwise must invest significant time and effort to monitor the creditworthiness of a large number of smaller customers. Our relative size and strong homebuilder relationships also provide our vendors access to a large customer base with significant purchasing power. This channel strength and our financial position allow us to negotiate favorable pricing (including back-end rebates) and to receive a higher priority with our vendors when product supply is limited. Furthermore, our broad product portfolio, which includes a variety of higher-margin specialty products, enhances our preferred partner status, enabling us to participate in mutually beneficial, joint marketing programs with our vendors. We anticipate our strategic vendor relationships will become even more critical in the event that demand exceeds product availability and vendors will need to prioritize their partners and product allocations.
Selectively pursue opportunities for organic growth and strategic acquisitions. The fragmented nature of our industry provides numerous organic growth and strategic acquisition opportunities. We plan to continue to grow our business by investing in our
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existing sales force and by adding talented new members to our sales force. We also plan to grow by acquiring suppliers in our existing markets and by selectively entering new markets through the opening of new facilities or acquiring existing suppliers. When adding facilities, we seek to leverage our strong brand name and economies of scale to increase our profitability and expand our market penetration. Furthermore, from time to time, our customers request that we enter new markets to support their growth. We assess potential new markets while adhering to a disciplined selection process by analyzing demographic, economic and competitive factors, while also focusing on site selection and the long-term profit opportunity in such market. Accordingly, we plan to continue to take a disciplined approach to organic growth and strategic acquisitions that strengthen our business, broaden our product and service offerings, leverage our existing infrastructure and enhance our existing customer and vendor relationships.
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.
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 homebuilder’s 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 efficiencies, and regional aesthetic preferences. Next, the team determines the specific package of products that are needed to complete the project and schedules a sequence of site deliveries. Our large delivery fleet and comprehensive inventory management system enable us to provide “just-in-time” product delivery, ensuring a smoother and faster production cycle for the 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, 2014, we employed approximately 458 sales representatives, who are typically paid a commission based on gross margin dollars collected and work with approximately 242 sales coordinators and product specialists.
BACKLOG
Due to the nature of our business, backlog information is not meaningful. While our customers may provide an estimate of their future needs, in most cases we do not receive a firm order from them until just prior to the anticipated delivery dates. Accordingly, in many cases the time frame from receipt of a firm order and shipment does not exceed a few days.
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 lumber, plywood, OSB, engineered wood, windows, doors, and millwork. Our largest suppliers are national lumber and wood products producers and distributors such as Boise Cascade Company, U.S. Lumber Group, Canfor Corporation, Georgia-Pacific Building Products, BlueLinx Holdings Inc., and Weyerhaeuser Company and building products manufacturers such as Masonite International Corporation, M I Windows and Doors, Inc., Gilman Building Products, and Norbord, 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 oversight of purchasing and our large lumber and OSB purchasing volumes, we believe we are better able to maximize the advantages of both our, and our suppliers’, broad footprints and negotiate purchases in 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 raw materials such as OSB to align portions of our procurement costs with our customer pricing commitments. We balance our lumber and OSB purchases with a mix of contract and spot market purchases to ensure consistent quantities 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 3,500 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 10% of our total materials purchases in 2014, 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 future, including inventory storage or “just-in-time” delivery to reduce our inventory carrying costs. We will continue to pursue additional procurement cost savings and purchasing synergies which would further enhance our margins and cash flow.
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COMPETITION
We compete in the Pro Segment of the U.S. residential new construction 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. Many of our competitors in the Pro Segment are small, privately owned companies, including framing and shell construction contractors, local and regional materials distributors, single or multi-site lumberyards, and truss manufacturing and millwork operations. Most of these companies have limited access to capital and lack sophisticated information technology systems and large-scale procurement capabilities. 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. and Pro-Build Holdings, Inc., which are privately held, as well as Stock Building Supply, which is publicly held.
Our customers primarily consist of professional homebuilders and those that provide construction services to them, with whom we have developed 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 delivering a full range of high-quality products on time and offering trade credit, competitive pricing, flexibility in transaction processing, and integrated service and product packages, such as turn-key framing and shell construction, as well as prefabricated 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.
EMPLOYEES
At December 31, 2014, we had approximately 3,800 full-time equivalent employees, none of whom were represented by a union. We believe that we have good relations with our employees.
INFORMATION TECHNOLOGY SYSTEMS
Our primary enterprise resource planning (“ERP”) system, which we use for operations representing approximately 97% of our sales, is a proprietary system that has been highly customized by our computer programmers. The system has been designed to operate our businesses in a highly efficient manner. 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 customer’s order can be tracked at each stage of the process and billing can be customized to reduce a customer’s administrative costs and speed payment.
We have a single financial reporting system that has been highly customized for our business. Consolidated financial, sales and workforce reporting is integrated using Hyperion Business Intelligence system, which aggregates data from our ERP systems along with workforce information from our third-party payroll administrator. 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 for use in our component plants. This software reviews product designs for errors, schedules the plants and provides the data used to measure plant efficiency. In addition, we have purchased several software products that have been integrated with our primary ERP system. These programs assist in analyzing blueprints to generate material lists and in purchasing lumber products at the lowest cost.
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:
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The volatility of lumber prices; |
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The cyclical nature of the homebuilding industry; |
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General economic conditions in the markets in which we compete; |
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The pricing policies of our competitors; |
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The production schedules of our customers; and |
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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
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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.
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 file 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 to the SEC at the SEC’s 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.
EXECUTIVE OFFICERS
Floyd F. Sherman, Chief Executive Officer and Director, age 75. Mr. Sherman has been our Chief Executive Officer and a director since 2001, when he joined the company. He served as President of the company from 2001 until October 2006 and also served from February 2008 until November 2014. Prior to joining the company, he spent 28 years at Triangle Pacific/Armstrong Flooring, the last nine of which he served as Chairman and Chief Executive Officer. Mr. Sherman is currently a director of PGT, Inc. Mr. Sherman has over 40 years of experience in the building products industry. A native of Kerhonkson, New York and a veteran of the U.S. Army, Mr. Sherman is a graduate of the New York State College of Forestry at Syracuse University. He also holds an M.B.A. degree from Georgia State University.
M. Chad Crow, President, Chief Operating Officer and Chief Financial Officer, age 46. Mr. Crow joined the company in September 1999 as Assistant Controller. He served as Vice President – Controller of the company from May 2000 and was promoted to Senior Vice President and Chief Financial Officer in November 2009. In November 2014, he was appointed to the position of President and Chief Operating Officer. Prior to joining the company, Mr. Crow served in a variety of positions at Pier One Imports. Mr. Crow also has five years of public accounting experience with Price Waterhouse LLP. Mr. Crow is a C.P.A. and received his B.B.A. degree from Texas Tech University.
Donald F. McAleenan, Senior Vice President and General Counsel, age 60. 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 — Operations, age 71. Mr. Tolly has served as Senior Vice President — Operations of the company since January 25, 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 Pelican’s acquisition. In 2000, he was promoted to President of the company’s Southeast Group, with responsibility for 48 locations.
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.
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The industry in which we operate is dependent upon the homebuilding industry, the economy, the credit markets, and other important factors.
The building products industry is highly dependent on new home construction, which in turn is dependent upon a number of factors, including interest rates, consumer confidence, employment rates, foreclosure rates, housing inventory levels, housing demand and the health of the economy and mortgage markets. Unfavorable changes in demographics, credit markets, consumer confidence, housing affordability, or housing inventory levels, or a weakening of the national economy or of any regional or local economy in which we operate, could adversely affect consumer spending, result in decreased demand for homes, and adversely affect our business. Production of new homes may also decline because of shortages of qualified tradesmen, reliance on inadequately capitalized homebuilders and sub-contractors, and shortages of material. The homebuilding industry is currently experiencing a shortage of qualified, trained labor in many markets, including those served by us. In addition, the homebuilding industry is subject to various local, state, and federal statutes, ordinances, rules, and regulations concerning zoning, building design and safety, construction, energy 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. Regulatory restrictions may increase our operating expenses and limit the availability of suitable building lots for our customers, which could negatively affect our sales and earnings. Because we have substantial fixed costs, relatively modest declines in our customers’ production levels could have a significant adverse effect on our financial condition, operating results and cash flows.
The homebuilding industry underwent a significant downturn that began in mid-2006 and began to stabilize in late 2011. U.S. homebuilding activity increased in 2013 and 2014 to approximately 617,700 and 647,300 single-family starts, respectively, although it remains well below the historical average (from 1959 through 2013) of 1.0 million single-family starts per year. According to the U.S. Census Bureau, actual U.S. single family housing starts in the U.S. during 2014 were 55.8% lower than in 2006. We believe that the slow recovery of the housing market is due to a variety of factors including: a severe economic recession, followed by a gradual economic recovery; significant unemployment; limited credit availability; shortages of suitable building lots in many markets; shortages of experienced labor; a substantial reduction in speculative home investment; and soft housing demand. The downturn in the homebuilding industry resulted in a substantial reduction in demand for our products and services, which in turn had a significant adverse effect on our business and operating results during fiscal years 2007 through 2012.
In addition, beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults, primarily as a result of credit quality deterioration. The disruption resulted in a stricter regulatory environment and reduced availability of mortgages for potential homebuyers due to a tight credit market and stricter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders continue to be constrained, which is slowing a recovery in our industry. Since the housing industry is dependent upon the economy as well as potential homebuyers’ access to mortgage financing and homebuilders’ access to commercial credit, it is likely that the housing industry will not fully recover until conditions in the economy and the credit markets further improve.
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If the housing market declines, we may be required to take additional impairment charges relating to our operations or temporarily idle or permanently close under-performing locations.
We recorded no goodwill or significant asset impairment charges in continuing operations in 2014 or 2013. 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 and market conditions, we may have to temporarily idle or permanently close certain facilities in under-performing markets, although we have no specific plans to close or idle additional facilities at this time. Any such facility closures could have a significant adverse effect on our financial condition, operating results, and cash flows.
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, 2014, our debt consisted of $350.0 million of our 7.625% Senior Secured Notes due in 2021 (“2021 notes”). We also have a $175.0 million senior secured revolving credit facility (“2013 facility”). As of December 31, 2014 we had $30.0 million in borrowings, as well as $15.6 million of letters of credit outstanding under the 2013 facility. In addition, we have significant obligations under ongoing operating leases that are not reflected on our balance sheet. See Note 10 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.
As of December 31, 2014, the $350.0 million of 2021 notes bears interest at a fixed rate, and therefore, our interest expense related to the 2021 notes would not be affected by changes in market interest rates. The $30.0 million in outstanding borrowings under the 2013 facility bears interest at a variable rate, and therefore, if interest rates rise, our interest expense could increase. At December 31, 2014, a 1.0% increase in interest rates would result in approximately $0.3 million in additional annual interest expense.
Our substantial debt could have important consequences to us, including:
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increasing our vulnerability to general economic and industry conditions; |
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requiring a substantial portion of our cash flow used in operations 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; |
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exposing us to the risk of increased interest rates, and corresponding increased interest expense, because future borrowings under the 2013 facility would be at variable rates of interest; |
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limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes; and |
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limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may have less debt. |
In addition, some of our debt instruments, including those governing the 2013 facility and our 2021 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 and that of our subsidiaries is 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 agreement governing the 2013 facility and the indenture governing our 2021 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.
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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 2013 facility, which totaled $147.2 million at December 31, 2014, to provide working capital and fund our operations. Our working capital requirements are likely to grow assuming the housing market improves. Our inability to renew, amend or replace the 2013 facility or our 2021 notes when required or when business conditions warrant could have a material adverse effect on our business, financial condition, and results of operations.
Economic and credit market conditions, the performance of the homebuilding 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 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 and 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 or 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 our 2021 notes and the 2013 facility. The agreement governing the 2013 facility, and the indenture governing the 2021 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 financing agreement governing the 2013 facility and the indenture governing our 2021 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 financing agreement governing the 2013 facility and the indenture governing our 2021 notes, contain various provisions that limit our ability to, among other things:
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transfer or sell assets, including the equity interests of our restricted subsidiaries, or use asset sale proceeds; |
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incur additional debt; |
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pay dividends or distributions on our capital stock or repurchase our capital stock; |
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make certain restricted payments or investments; |
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create liens to secure debt; |
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enter into transactions with affiliates; |
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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 |
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engage in unrelated business activities. |
The agreement governing the 2013 facility contains a financial covenant requiring the satisfaction of a minimum fixed charge coverage ratio of 1.00 to 1.00 if our excess availability, defined as the sum of our net borrowing availability plus qualified cash, falls below the greater of $17.5 million or 10% of the maximum borrowing amount. As of December 31, 2014, our excess availability was $146.1 million. Qualified cash is defined as the amount of unrestricted cash and cash equivalents held in deposit or securities accounts which are subject to control agreements in favor of our lenders.
These provisions may restrict our ability to expand or fully pursue our business strategies. Our ability to comply with the agreement governing the 2013 facility and the indenture governing our 2021 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 2013 facility and the indenture governing our 2021 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.
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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.
Most of our facilities are located in leased premises. Many of our current leases are non-cancelable and typically have initial terms ranging from 5 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 likely be long-term and non-cancelable and have similar renewal options. If we close or idle a facility, most likely we remain committed to perform our obligations under the applicable lease, which would include, among other things, payment of the base rent, insurance, taxes, and other expenses on the leased property for the balance of the lease term. During the period from 2007 through 2012, we closed or idled a number of facilities for which we remain liable on the lease obligations. Our obligation to continue making rental payments in respect of leases for closed or idled facilities could have a material adverse effect on our business and results of operations. Alternatively, at the end of the lease term and any renewal period for a facility, we may be unable to renew the lease without substantial additional cost, if at all. If we are unable to renew our facility leases, we may close or relocate a facility, which could subject us to construction and other costs and risks, which in turn could have a material adverse effect on our business and results of operations. For example, closing a facility, even during the time of relocation, will reduce the sales that the facility would have contributed to our revenues. Additionally, the revenue and profit, if any, generated at a relocated facility may not equal the revenue and profit generated at the existing one.
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 2013 facility, the terms of the indenture governing our 2021 notes, and the covenants of any future outstanding indebtedness we or our subsidiaries incur.
The building supply industry is cyclical and seasonal.
The building products 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 market prices for wood products over a sustained period can adversely affect our financial condition, operating results and cash flows, as can excessive spikes in market prices. For the year ended December 31, 2014, average prices for lumber and lumber sheet goods were 4.9% lower than the prior year. Our lumber and lumber sheet goods product category represented 32.6% of total sales for the year ended December 31, 2014. We have limited ability to control the timing and amount of pricing changes for building products. In addition, the supply of building products fluctuates based on available manufacturing capacity. A shortage of capacity or excess capacity in the industry can result in significant increases or declines in market prices for those products, often within a short period of time. Such price fluctuations can adversely affect our financial condition, operating results and cash flows.
In addition, although weather patterns affect our operating results throughout the year, adverse weather historically has reduced construction activity in the first and fourth quarters in our markets. To the extent that hurricanes, severe storms, floods, other natural disasters or similar events occur in the markets in which we operate, our business may be adversely affected. We anticipate that fluctuations from period to period will continue in the future.
The loss of any of our significant customers could affect our financial health.
Our 10 largest customers generated approximately 25.1% and 22.5% of our sales for the years ended December 31, 2014 and 2013, respectively. We cannot guarantee that we will maintain or improve our relationships with these customers or that we will continue to supply these customers at historical levels. Due to the weak housing market over the past several years, many of our homebuilder customers substantially reduced their construction activity. Some homebuilder customers exited or severely curtailed building activity in certain of our markets.
In addition, production homebuilders 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
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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 on our financial condition, operating results, and cash flows.
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 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, (5) adapt more quickly to new technologies or evolving customer requirements than we do, or (6) have access to financing on more favorable terms that 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, may in the future intensify their marketing efforts to professional homebuilders. Furthermore, certain product manufacturers sell and distribute their products directly to production homebuilders. 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 in the future or enter into exclusive supplier arrangements with other distributors. Consolidation of production homebuilders 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 affected.
We are subject to competitive pricing pressure from our customers.
Production homebuilders historically have exerted 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 fragmented building products supply industry. The housing industry downturn 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, and changes in production homebuilders’ purchasing policies or payment practices, could result in additional pricing pressure.
The ownership position of affiliates of JLL Partners Inc. and Warburg Pincus LLC limits other stockholders’ ability to influence corporate matters.
JLL Partners Inc. (“JLL”) and Warburg Pincus LLC (“Warburg Pincus”) together own approximately 50% of our outstanding common stock. Five of our ten directors hold positions with affiliates of either JLL or Warburg Pincus. Accordingly, JLL and Warburg Pincus have significant influence over our management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets. This concentrated ownership position limits other stockholders’ ability to influence corporate matters and, as a result, we may take actions that some of our stockholders do not view as beneficial. Additionally, JLL and Warburg Pincus are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. These entities may also pursue, for their own accounts, acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. Further, certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may limit your ability to influence corporate matters, and, as a result, we may take actions that some of our stockholders do not view as beneficial.
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 and from other industries. We may be 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.
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The nature of our business exposes us to product liability, product warranty, casualty, construction defect, vehicle and other claims and legal proceedings.
We are involved in product liability, product warranty, casualty, construction defect, vehicle, and other claims relating to the products we manufacture and distribute, and services we provide 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 do not have 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. In addition, we are exposed to potential claims arising from the conduct of our employees and subcontractors, and homebuilders 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 acceptable terms or that such insurance will provide adequate protection against potential liabilities. Product liability, product warranty, casualty, construction defect, 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 current or future claims will not adversely affect our financial condition, operating results, and cash flows.
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.
Although in many instances we have agreements with our suppliers, these agreements are generally terminable 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.
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, (3) general economic conditions in the various local markets in which we compete, (4) the pricing policies of our 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.
We may be adversely affected by any disruption in our information technology systems.
Our operations are dependent upon our information technology systems, which encompass all of our major business functions. Our primary ERP system, which we use for operations representing approximately 97% of our sales, is a proprietary system that has been highly customized by our computer programmers. Our centralized financial reporting system currently draws data from our ERP systems. We rely upon such 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.
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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 southern and eastern 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 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 and opening new facilities.
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 for 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 reduced operating results during the current slow economic recovery, our liquidity position, or the requirements of the 2013 facility or the indenture governing our 2021 notes, could prevent us from obtaining the capital required to effect new acquisitions or expansions of existing facilities. Our failure to make successful acquisitions or to build or expand facilities, including manufacturing facilities, produce saleable product, or meet customer demand in a timely manner could result in damage to or loss of customer relationships, which could adversely affect our financial condition, operating results, and cash flows. In addition, although we have been successful in the past in integrating 32 acquisitions, we may not be able to integrate the operations of future acquired businesses with our own in an efficient and cost-effective manner or without significant disruption to our existing operations. Moreover, acquisitions involve significant risks and uncertainties, including uncertainties as to the future financial performance of the acquired business, difficulties integrating acquired personnel and corporate cultures into our business, the potential loss of key employees, customers or suppliers, difficulties in integrating different computer and accounting systems, exposure to unforeseen liabilities of 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, which debt may be substantial and may limit our flexibility in using our cash flow from operations. Our failure to 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.
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 the Department of Transportation and applicable to our fleet of delivery trucks, work safety regulations promulgated by the Department of Labor’s 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, 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. Moreover, failure to comply with the regulatory requirements applicable to our business could expose us to substantial penalties that could adversely affect 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 affect our financial condition, operating results, and cash flows.
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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, Eastern Europe or elsewhere.
Instability in the economy and financial markets, including as a result of terrorism or unrest in the Middle East, Eastern 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.
Item 1B. Unresolved Staff Comments
None.
17
We have a broad network of distribution and manufacturing facilities in 9 states throughout the southern and eastern U.S. We have 56 distribution facilities and 55 manufacturing facilities, many of which are co-located in the following markets:
|
Alabama |
|
Maryland/Virginia |
|
South Carolina |
|
Auburn |
|
Baltimore/Washington* |
|
Seneca |
|
Central Alabama* |
|
Northeast Maryland* |
|
Charleston* |
|
|
|
|
|
Columbia* |
|
Florida |
|
North Carolina |
|
Florence |
|
Bunnell Emerald Coast* Jacksonville* Orlando* South Florida* Tampa*
Georgia Atlanta* Central Georgia Northern Georgia
|
|
Charlotte* Fayetteville High Point* Raleigh* Washington Western North Carolina* Wilmington |
|
Grand Strand* Greenville* Southeast South Carolina
Tennessee Eastern Tennessee* Knoxville Nashville*
Texas Dallas/Fort Worth* San Antonio* Austin* Houston* |
|
*Markets with manufacturing facilities |
|
|
|
|
Distribution centers typically include 15 to 25 acres of outside storage, a 60,000 square foot warehouse, 10,000 square feet of office space, and 30,000 square feet of covered storage. The outside area provides space for lumber storage and a staging area for 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. A majority of the 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 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 lease 55 facilities and own 25 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.
We operate a fleet of approximately 1,200 trucks to deliver products from our distribution and manufacturing centers to 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 rapid restocking ability, we reduce 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.
18
We are involved in various 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 claims and lawsuits. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, cash flows or operating results.
Although our business and facilities are subject to federal, state and local environmental regulation, environmental regulation does not have a material effect 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 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. Our current expenditures with respect to environmental investigation and remediation at our facilities are minimal, although no assurance can be provided that more significant remediation may not be required in the future as a result of spills or releases of petroleum products or hazardous substances or the discovery of unknown environmental conditions, or changes in legislation, laws, rules or regulations.
Item 4. Mine Safety Disclosures
Not applicable.
19
Item 5. Market for Registrant’s Common 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 27, 2015, the closing price of our common stock as reported on the NASDAQ Stock Market LLC was $6.03. The approximate number of stockholders of record of our common stock on that date was 80, 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:
|
|
|
High |
|
|
Low |
|
||
|
2014 |
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
9.16 |
|
|
$ |
7.14 |
|
|
Second quarter |
|
$ |
9.40 |
|
|
$ |
6.92 |
|
|
Third quarter |
|
$ |
7.92 |
|
|
$ |
5.10 |
|
|
Fourth quarter |
|
$ |
6.98 |
|
|
$ |
4.85 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
6.55 |
|
|
$ |
5.13 |
|
|
Second quarter |
|
$ |
7.33 |
|
|
$ |
5.00 |
|
|
Third quarter |
|
$ |
6.94 |
|
|
$ |
5.15 |
|
|
Fourth quarter |
|
$ |
7.94 |
|
|
$ |
5.55 |
|
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. The financing agreement governing the 2013 facility and the indenture governing our 2021 notes currently restrict our ability to pay dividends. See “Management’s 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.
20
The following graph and table demonstrate the performance of the cumulative total return to the stockholders of our common stock during the five year period in comparison to the cumulative total returns of the Russell 2000 index and the S&P 600 Building Products index. The graph and table track the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 2009 to December 31, 2014.
|
|
|
Year Ended December 31, |
|
|||||||||||||||||||||
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
||||||
|
Builders FirstSource, Inc. |
|
$ |
100.00 |
|
|
$ |
51.30 |
|
|
$ |
53.13 |
|
|
$ |
145.31 |
|
|
$ |
185.68 |
|
|
$ |
178.91 |
|
|
Russell 2000 |
|
$ |
100.00 |
|
|
$ |
126.86 |
|
|
$ |
121.56 |
|
|
$ |
141.43 |
|
|
$ |
196.34 |
|
|
$ |
205. 95 |
|
|
S&P 600 Building Products |
|
$ |
100.00 |
|
|
$ |
111.22 |
|
|
$ |
100.28 |
|
|
$ |
127.29 |
|
|
$ |
172.59 |
|
|
$ |
175.10 |
|
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 27, 2015 under the caption “Equity Compensation Plan Information,” which information is incorporated herein by reference.
21
Item 6. Selected Financial Data
The following selected consolidated financial data for the years ended December 31, 2014, 2013 and 2012 and as of December 31, 2014 and 2013 were derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm, and are included as Item 8 of this annual report on Form 10-K. Selected consolidated financial data as of December 31, 2012 and as of and for the years ended December 31, 2011 and 2010 were derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers LLP, but are not included herein.
The following data should be read in conjunction with “Management’s 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 as Item 8 of this annual report on Form 10-K.
|
|
|
Year Ended December 31, |
|
|||||||||||||||||
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
|||||
|
|
|
(In thousands, except per share amounts) |
|
|||||||||||||||||
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
1,604,096 |
|
|
$ |
1,489,892 |
|
|
$ |
1,070,676 |
|
|
$ |
779,093 |
|
|
$ |
700,343 |
|
|
Gross margin |
|
|
356,997 |
|
|
|
319,920 |
|
|
|
214, 566 |
|
|
|
157,945 |
|
|
|
131,756 |
|
|
Selling, general and administrative expenses |
|
|
306,508 |
|
|
|
271,885 |
|
|
|
222,263 |
|
|
|
192,959 |
|
|
|
194,092 |
|
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
48 |
|
|
|
— |
|
|
|
839 |
|
|
Facility closure costs |
|
|
471 |
|
|
|
(7) |
|
|
|
958 |
|
|
|
2,461 |
|
|
|
558 |
|
|
Income (loss) from continuing operations(1)(2) |
|
|
18,558 |
|
|
|
(42,365 |
) |
|
|
(54,419 |
) |
|
|
(64,631 |
) |
|
|
(94,293 |
) |
|
Income (loss) from continuing operations per share — basic |
|
$ |
0.19 |
|
|
$ |
(0.44 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.68 |
) |
|
$ |
(1.03 |
) |
|
Income (loss) from continuing operations per share — diluted |
|
$ |
0.18 |
|
|
$ |
(0.44 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.68 |
) |
|
$ |
(1.03 |
) |
|
Balance sheet data (end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
17,773 |
|
|
$ |
54,696 |
|
|
$ |
131,432 |
|
|
$ |
146,833 |
|
|
$ |
103,234 |
|
|
Total assets(3) |
|
|
583,065 |
|
|
|
515,839 |
|
|
|
550,841 |
|
|
|
493,794 |
|
|
|
419,088 |
|
|
Total debt (including current portion) |
|
|
383,904 |
|
|
|
353,971 |
|
|
|
360,955 |
|
|
|
297,509 |
|
|
|
169,102 |
|
|
Stockholders’ equity |
|
|
40,200 |
|
|
|
15,368 |
|
|
|
48,096 |
|
|
|
101,224 |
|
|
|
159,505 |
|
|
Other financial data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (excluding discontinued operations) |
|
$ |
9,519 |
|
|
$ |
9,305 |
|
|
$ |
11,120 |
|
|
$ |
14,041 |
|
|
$ |
15,433 |
|
|
(1) |
Income from continuing operations included 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. Loss from continuing operations included a valuation allowance of $15.3 million against primarily all of our deferred tax assets for the year ended December 31, 2013, which is exclusive of $0.6 million related primarily to reversals of uncertain tax positions due to statute expirations that affected our net operating loss carryforward and valuation allowance. Loss from continuing operations included a valuation allowance of $19.6 million, $26.1 million and $35.4 million against primarily all of our deferred tax assets for the years ended December 31, 2012, 2011 and 2010, as discussed in Note 12 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K. |
|
(2) |
Loss from continuing operations for year ended December 31, 2013 included a $39.5 million prepayment penalty related to the early termination of our $225.0 million first-lien term loan due 2015. |
|
(3) |
Total assets for December 31, 2011 have been reclassified to conform to current period presentation. In addition, amounts for December 31, 2011 and 2010 have been revised to present insurance related receivables and payables on a gross basis. This revision increased total assets by $4.2 million and $6.3 million, respectively. |
22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the 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 and manufacturer of structural and related building products for residential new construction in the U.S. We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, aluminum and vinyl windows, custom millwork and trim, as well as engineered wood that we design and cut 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, various window, door and millwork lines, as well as cabinets, roofing and hardware. 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 five product categories:
|
● |
Prefabricated Components. Our prefabricated components consist of wood floor and roof trusses, steel roof trusses, wall panels, stairs, and engineered wood. |
|
● |
Windows & Doors. Our windows & doors category is comprised of the manufacturing, assembly, and distribution of windows and the assembly and distribution of interior and exterior door units. |
|
● |
Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing. |
|
● |
Millwork. Millwork includes interior trim, exterior trim, columns and posts that we distribute, as well as custom exterior features that we manufacture under the Synboard ® brand name. |
|
● |
Other Building Products & Services. Other building products & services are comprised of products such as cabinets, roofing and insulation and services such as turn-key framing, shell construction, design assistance, and professional installation spanning all of our product categories. |
Our operating results are dependent on the following trends, events and uncertainties, some of which are beyond our control:
|
● |
Homebuilding Industry. Our business is driven primarily by the residential new construction market, which is in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, foreclosure rates, and the health of the economy and mortgage markets. During the housing downturn, which began in 2006, many homebuilders significantly decreased their starts because of lower demand and an excess of home inventory. The housing market started to strengthen in 2011. According to the U.S. Census Bureau, annual U.S. single-family housing starts were 647,300 in 2014. However, single-family housing starts remain well below the historical average (from 1959 through 2013) of 1.0 million per year. Due to the lower levels in housing starts and increased competition for homebuilder business, we have and will continue to experience pressure on our gross margins. We still believe there are several meaningful trends that indicate U.S. housing demand will likely recover in the long term and that the recent downturn in the housing industry is likely 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 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. Our sales to the “Builder 100,” the country’s largest 100 homebuilders, increased 8.1% during 2014, compared to a 7.7% increase in our total sales for the year. 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. |
23
|
● |
Use of Prefabricated Components. Prior to the housing downturn, homebuilders were increasingly using prefabricated components in order to realize increased efficiency and improved quality. Shortening cycle time from start to completion was a key imperative of the homebuilders during periods of strong consumer demand. During the housing downturn, that trend decelerated as cycle time had less relevance. Customers who traditionally used prefabricated components, for the most part, still do. However, the conversion of customers to this product offering slowed during the downturn. We are now seeing the demand for prefabricated components increase 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, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, single-family housing starts, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. Beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults. This resulted in a stricter regulatory environment and reduced availability of mortgages for potential homebuyers due to an illiquid credit market and tighter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders continue to be constrained, although there have been recent signs of easing. As the housing industry is dependent upon the economy as well as potential homebuyers’ access to mortgage financing and homebuilders’ access to commercial credit, it is likely that the housing industry will not fully recover until conditions in the economy and the credit markets further improve. |
|
● |
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 enhancing our status as a low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. We have a “best practices” operating philosophy, which encourages increasing efficiency, lowering costs, improving working capital, and maximizing profitability and cash flow. We constantly analyze our workforce productivity to achieve the optimum, cost-efficient labor mix for our facilities. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs. |
|
● |
Expand into Multi-Family and Light Commercial Business. Our primary focus has been, and continues to be, on single-family residential new construction. However, we have recently acquired companies with multi-family manufacturing capabilities to further diversify our customer base. We will continue to identify opportunities for profitable growth in the multi-family and light commercial markets. |
RECENT DEVELOPMENTS
Acquisitions
On June 30, 2014, the Company acquired certain assets and the operations of Slone Lumber Company, Inc. (“Slone”) for $8.7 million in cash. Based in Houston, Texas, Slone is a full-line building materials supplier. Slone’s product offerings include lumber, engineered beams, interior and exterior door units, moulding, trim, and cabinets. Slone also offers installation services on exterior doors, shutters, and cabinets.
On July 31, 2014, the Company acquired certain assets and the operations of West Orange Lumber Company, Inc. (“West Orange”) for $9.8 million in cash. Based in Groveland, Florida, West Orange supplies lumber, roof and floor trusses, custom windows and doors, as well as installation services, to both residential homebuilders and commercial contractors in central Florida.
On August 6, 2014, the Company acquired certain assets and the operations of Truss Rite, LLC (“Truss Rite”) for $14.6 million in cash. Based in Sherman, Texas, Truss Rite primarily manufactures wood roof and floor trusses for large multi-family and commercial projects throughout Texas and parts of Oklahoma. Truss Rite predominately serves developers and general contractors in the multi-family residential housing sector.
On October 1, 2014, the Company acquired certain assets and the operations of Trim Tech of Austin, Inc. (“Trim Tech”) for $19.4 million in cash. Trim Tech is based in Hutto, Texas, which is approximately 30 miles north of downtown Austin. Trim Tech is a turn-key supplier of custom cabinets, interior and exterior doors, stair parts, and custom millwork and molding.
On December 22, 2014 the Company acquired certain assets and the operations of Empire Truss, Ltd. (“Empire”) for $16.8 million in cash. Empire is a Texas-based manufacturer of custom designed roof trusses and floor trusses, and a distributor of
24
engineered wood products with its primary operations located in Huntsville, Texas, approximately 65 miles north of downtown Houston. Empire also operates a manufacturing facility in Ferris, Texas, which is 20 miles southeast of Dallas. Empire’s primary focus is on multi-family and light commercial customers.
On February 6, 2015 the Company acquired certain assets and the operations of Timber Tech Texas, Inc. (“Timber Tech”) for $5.8 million in cash. Timber Tech is based in Cibolo, Texas, which is approximately 25 miles northeast of downtown San Antonio. Timber Tech is a manufacturer of roof trusses, floor trusses, wall panels and sub-components, as well as a supplier of glue laminated timber and veneer lumber beams.
These transactions were accounted for by the acquisition method. Accordingly, the results of operations will be included in the Company’s consolidated financial statements from their respective acquisition dates. The purchase price will be 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.
2013 Facility Borrowing
On July 31, 2014, we borrowed $30.0 million under our $175.0 million senior secured revolving credit facility (“2013 facility”) at an interest rate of 1.98%. Amounts borrowed under our 2013 facility will be used to fund working capital needs and potential future acquisitions.
CURRENT OPERATING CONDITIONS AND OUTLOOK
Though the level of housing starts remains near historic lows, the homebuilding industry has shown improvement since 2011. According to the U.S. Census Bureau, actual U.S. single-family housing starts for 2014 were 647,300, an increase of 4.8% compared to 2013, but approximately 55.8% lower than when the downturn began in 2006. Actual single-family starts in the South Region, as defined by the U.S. Census Bureau and which encompasses our entire geographic footprint, increased to 345,500 in the current year, up 6.0% from 2013, while single-family units under construction in the South Region increased 14.0% compared to 2013. While the housing industry has strengthened over the past few years, the limited availability of credit to smaller homebuilders and potential homebuyers and the slow economic recovery, among other factors, have hampered a stronger recovery. The NAHB is forecasting 803,500 U.S. single-family housing starts for 2015, which is an increase of 24.2% from 2014. However, our internal forecasts are based on a more conservative 715,000 U.S. single-family housing starts for 2015.
We achieved a 7.7% increase in sales during 2014 as compared to the prior year. Excluding the impact of recent acquisitions, we estimate sales increased 7.9% due to increased volume, which was partially offset by a 2.1% decrease due to the impact of commodity price deflation on sales, while sales increased an additional 1.9% due to recent acquisitions during the year ended December 31, 2014 compared to the prior year. We believe our broad offering of products and services will allow us to continue to gain market share and expand our customer base. Our gross margin percentage increased 0.8% year over year primarily due to improved customer pricing and lower volatility in commodity lumber prices in 2014 compared to 2013. We made significant changes to our business during the downturn that have improved our operating efficiency and allowed us to better leverage our operating costs against changes in sales. However, our selling, general, and administrative expenses, as a percentage of sales, increased 0.9% in the current year compared to 2013 primarily due to the negative impact of commodity price deflation on our sales in 2014 as well as incremental expense associated with increasing our capacity in anticipation of increasing sales volumes.
We still 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 continue 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 will also continue to work diligently to achieve the appropriate balance of short-term expense control while maintaining the expertise and capacity to grow the business as market conditions improve. We want to create long-term shareholder value and avoid taking steps that will limit our ability to compete.
25
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:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost of sales |
|
|
77.7 |
% |
|
|
78.5 |
% |
|
|
80.0 |
% |
|
Gross margin |
|
|
22.3 |
% |
|
|
21.5 |
% |
|
|
20.0 |
% |
|
Selling, general and administrative expenses |
|
|
19.1 |
% |
|
|
18.3 |
% |
|
|
20.8 |
% |
|
Asset impairments |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Facility closure costs |
|
|
0.1 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Income (loss) from operations |
|
|
3.1 |
% |
|
|
3.2 |
% |
|
|
(0.8 |
)% |
|
Interest expense, net |
|
|
1.9 |
% |
|
|
6.0 |
% |
|
|
4.2 |
% |
|
Income tax expense |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
Income (loss) from continuing operations |
|
|
1.1 |
% |
|
|
(2.9 |
)% |
|
|
(5.1 |
)% |
|
Loss from discontinued operations, net of tax |
|
|
(0.0 |
)% |
|
|
(0.0 |
)% |
|
|
(0.2 |
)% |
|
Net income (loss) |
|
|
1.1 |
% |
|
|
(2.9 |
)% |
|
|
(5.3 |
)% |
2014 Compared with 2013
Sales. Sales for the year ended December 31, 2014 were $1,604.1 million, a 7.7% increase from sales of $1,489.9 million for 2013. Excluding the impact of recent acquisitions our sales grew 5.8% for the year ended December 31, 2014 compared to the prior year. According to the U.S Census Bureau, actual U.S. single-family housing starts increased 4.8% in 2014 as compared to 2013. In the South Region, actual single-family starts increased 6.0% compared to 2013, and single-family units under construction increased 14.0% over this same time period. Excluding the impact of recent acquisitions, we estimate sales increased 7.9% due to increased volume, which was partially offset by a 2.1% decrease due to the impact of commodity price deflation on sales, while sales increased an additional 1.9% due to recent acquisitions during the year ended December 31, 2014 compared to the prior year.
The following table shows sales classified by major product category (dollars in millions):
|
|
|
2014 |
|
|
2013 |
|
|
|
|
|||||||||||
|
|
|
Sales |
|
|
% of Sales |
|
|
Sales |
|
|
% of Sales |
|
|
% Change |
|
|||||
|
Prefabricated components |
|
$ |
330.9 |
|
|
|
20.6 |
% |
|
$ |
294.0 |
|
|
|
19.7 |
% |
|
|
12.5 |
% |
|
Windows & doors |
|
|
356.9 |
|
|
|
22.2 |
% |
|
|
308.6 |
|
|
|
20.7 |
% |
|
|
15.6 |
% |
|
Lumber & lumber sheet goods |
|
|
522.7 |
|
|
|
32.6 |
% |
|
|
526.6 |
|
|
|
35.4 |
% |
|
|
(0.8 |
)% |
|
Millwork |
|
|
160.2 |
|
|
|
10.0 |
% |
|
|
136.9 |
|
|
|
9.2 |
% |
|
|
17.1 |
% |
|
Other building products & services |
|
|
233.4 |
|
|
|
14.6 |
% |
|
|
223.8 |
|
|
|
15.0 |
% |
|
|
4.3 |
% |
|
Total sales |
|
$ |
1,604.1 |
|
|
|
100.0 |
% |
|
$ |
1,489.9 |
|
|
|
100.0 |
% |
|
|
7.7 |
% |
Increased sales were achieved across all product categories, except lumber and lumber sheet goods, primarily due to increased volume. The decrease in sales for lumber and lumber sheet goods is primarily attributable to the impact of commodity price deflation, which was mostly offset by an increase in volume, for the year ended December 31, 2014 compared to the prior year.
Gross Margin. Gross margin increased $37.1 million to $357.0 million. Our gross margin percentage increased from 21.5% in 2013 to 22.3% in 2014, a 0.8% increase. Our gross margin percentage increased primarily due to improved customer pricing and lower volatility in commodity lumber prices during the year ended December 31, 2014 compared to the prior year.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $34.6 million, or 12.7%. Our salaries and benefits expense, excluding stock compensation expense, was $191.1 million for 2014, an increase of $19.4 million from 2013. Delivery expenses increased $5.9 million and office general and administrative expense increased $4.3 million primarily due to increased sales volume. Occupancy expenses increased $3.0 million, primarily due to acquisitions and expansions at existing facilities.
As a percentage of sales, selling, general and administrative expenses increased from 18.2% in 2013 to 19.1% in 2014. As a percentage of sales, salaries and benefits expense, excluding stock compensation expense, increased 0.4%, delivery costs increased by 0.1%, our office general and administrative expense increased 0.1% and occupancy expenses increased by 0.1%. These increases were primarily due to the negative impact of commodity lumber price deflation on our sales during 2014.
Interest Expense, net. Interest expense was $30.3 million in 2014, a decrease of $59.3 million from 2013. The decrease is primarily related to our refinancing in the second quarter of 2013, which included $10.6 million of interest on our then outstanding
26
$225.0 million first-lien term loan due 2015 (“term loan”), the write-off of $6.8 million in unamortized debt discount and $2.1 million of debt issuance costs, and a $39.5 million prepayment premium related to the early termination of the term loan.
Income Tax Expense. We recorded income tax expense of $1.1 million and $0.8 million during 2014 and 2013, respectively. We recorded a $7.2 million reduction to our valuation allowance due to utilization of net operating loss carryforwards to reduce our taxable income in 2014. We recorded an after-tax, non-cash valuation allowance of $15.3 million related to our net deferred tax assets for 2013, which is exclusive of $0.6 million primarily related to reversals of uncertain tax positions due to statute expirations that affected our net operating loss carryforward and valuation allowance. Absent this valuation allowance, our effective tax rate would have been 42.1% and 35.0% for 2014 and 2012, respectively.
2013 Compared with 2012
Sales. Sales for the year ended December 31, 2013 were $1,489.9 million, a 39.2% increase from sales of $1,070.7 million for 2012. Actual U.S. single-family housing starts increased 15.5% in 2013 as compared to 2012. In the South Region, actual single-family starts also increased 15.5% compared to 2012, and single-family units under construction increased 25.4% over this same time period. We achieved this increase in sales as we continued to expand our customer base while increasing sales to current customers. We estimate sales increased 29.2% due to volume and 10.0% due to price for the year ended December 31, 2013 compared to the year ended December 31, 2012.
The following table shows sales classified by major product category (dollars in millions):
|
|
|
2013 |
|
|
2012 |
|
|
|
|
|||||||||||
|
|
|
Sales |
|
|
% of Sales |
|
|
Sales |
|
|
% of Sales |
|
|
% Change |
|
|||||
|
Prefabricated components |
|
$ |
294.0 |
|
|
|
19.7 |
% |
|
$ |
203.7 |
|
|
|
19.0 |
% |
|
|
44.3 |
% |
|
Windows & doors |
|
|
308.6 |
|
|
|
20.7 |
% |
|
|
233.1 |
|
|
|
21.8 |
% |
|
|
32.4 |
% |
|
Lumber & lumber sheet goods |
|
|
526.6 |
|
|
|
35.4 |
% |
|
|
348.1 |
|
|
|
32.5 |
% |
|
|
51.3 |
% |
|
Millwork |
|
|
136.9 |
|
|
|
9.2 |
% |
|
|
104.2 |
|
|
|
9.7 |
% |
|
|
31.4 |
% |
|
Other building products & services |
|
|
223.8 |
|
|
|
15.0 |
% |
|
|
181.6 |
|
|
|
17.0 |
% |
|
|
23.2 |
% |
|
Total sales |
|
$ |
1,489.9 |
|
|
|
100.0 |
% |
|
$ |
1,070.7 |
|
|
|
100.0 |
% |
|
|
39.2 |
% |
Increased sales volume was achieved across all product categories. Commodity prices for lumber and lumber sheet goods were on average 17.8% higher in 2013 compared to 2012. During 2013 and 2012, prices rose to levels not seen on a consistent basis since 2005 and 2006. This commodity price inflation contributed to sales growth for lumber & lumber sheet goods and prefabricated components exceeding that of our other product categories. Growth in prefabricated components was also due to increased customer demand for these products as builders have become more focused on reducing construction cycle time.
Gross Margin. Gross margin increased $105.4 million to $319.9 million. Our gross margin percentage increased from 20.0% in 2012 to 21.5% in 2013, a 1.5% increase. Our gross margin percentage increased 0.9% due to improved customer pricing, 0.5% due to leveraging fixed costs within cost of goods sold and 0.1% due to improved sales mix.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $49.6 million, or 22.3%. Our salaries and benefits expense, excluding stock compensation expense, was $171.7 million for 2013, an increase of $34.1 million from 2012. Delivery expenses increased $6.7 million primarily due to higher fuel costs and increased maintenance costs on vehicles as a result of increased sales volume. Occupancy expenses increased $1.6 million and our office general and administrative expense increased $6.5 million, primarily due to increased sales volumes in 2013.
As a percent of sales, selling, general and administrative expenses, excluding asset impairments and stock compensation expense, decreased from 20.4% in 2012 to 18.0% in 2013. Salaries and benefits expense, excluding stock compensation expense, decreased 1.3% and delivery costs decreased by 0.7%. Occupancy decreased by 0.4% due to the fixed nature of the category and our office general and administrative expense decreased 0.1%.
Interest Expense, net. Interest expense was $89.6 million in 2013, an increase of $44.5 million primarily related to our 2013 refinancing. The increase includes $6.8 million of unamortized debt discount and $2.1 million of debt issuance cost write-offs, as well as a $39.5 million prepayment premium all related to the early termination of our term loan. These increases were partially offset by a $3.5 million decrease in fair value adjustments in 2013 from 2012 on the warrants issued as part of the term loan entered into in 2011.
Income Tax Expense. We recorded income tax expense of $0.8 million and $0.6 million during 2013 and 2012, respectively. We recorded an after-tax, non-cash valuation allowance of $15.3 million related to our net deferred tax assets for 2013, which is exclusive of $0.6 million primarily related to reversals of uncertain tax positions due to statute expirations that affected our net operating loss carryforward and valuation allowance. We recorded an after-tax valuation allowance of $19.6 million related to our net deferred tax
27
assets for 2012. Absent this valuation allowance, our effective tax rate would have been 35.0% and 35.3% for 2013 and 2012, respectively.
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 expenditures and potential future acquisitions. Our capital resources at December 31, 2014 consist of cash on hand and borrowing availability under our revolving credit facility.
Our 2013 facility is primarily used for working capital, general corporate purposes, and funding acquisitions. Availability under the 2013 facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory and other receivables, including progress billings and credit card receivables, that meet specific criteria contained within the credit agreement, minus agent specified reserves. Net borrowing availability is the sum of the maximum borrowing amount minus outstanding borrowings and letters of credit.
The following table shows our borrowing base and excess availability as of December 31, 2014 and December 31, 2013 (in millions):
|
|
As of |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
|
Accounts Receivable Availability |
$ |
102.8 |
|
|
$ |
99.3 |
|
|
Inventory Availability |
|
79.6 |
|
|
|
67.6 |
|
|
Other Receivables Availability |
|
11.5 |
|
|
|
11.0 |
|
|
Gross Availability |
|
193.9 |
|
|
|
177.9 |
|
|
Less: |
|
|
|
|
|
|
|
|
Agent Reserves |
|
(8.0 |
) |
|
|
(6.9 |
) |
|
Borrowing Base |
|
185.9 |
|
|
|
171.0 |
|
|
Aggregate Revolving Commitments |
|
175.0 |
|
|
|
175.0 |
|
|
Maximum Borrowing Amount (lesser of Borrowing Base and Aggregate Revolving Commitments) |
|
175.0 |
|
|
|
171.0 |
|
|
Less: |
|
|
|
|
|
|
|
|
Outstanding Borrowings |
|
(30.0 |
) |
|
|
— |
|
|
Letters of Credit |
|
(15.6 |
) |
|
|
(13.9 |
) |
|
Net Borrowing Availability on Revolving Facility |
$ |
129.4 |
|
|
$ |
157.1 |
|
|
Plus: |
|
|
|
|
|
|
|
|
Cash in Qualified Accounts |
|
16.7 |
|
|
|
54.2 |
|
|
Excess Availability, as defined |
$ |
146.1 |
|
|
$ |
211.3 |
|
As of December 31, 2014, we had $30.0 million in outstanding borrowings under our 2013 facility and our net borrowing availability was $129.4 million after being reduced by outstanding letters of credit of approximately $15.6 million. Excess availability is the sum of our net borrowing availability plus qualified cash, defined as cash on deposit that is subject to a control agreement in favor of the agent. Excess availability must equal or exceed a minimum specified amount, currently $17.5 million, or we are required to meet a fixed charge coverage ratio of 1 to 1. At December 31, 2014, our excess availability was $146.1 million, including $129.4 million in net borrowing availability and $16.7 million in qualified cash. We were not in violation of any covenants or restrictions imposed by any of our debt agreements at December 31, 2014.
Liquidity
Our liquidity at December 31, 2014 was $147.2 million, which includes $129.4 million in net borrowing availability under the 2013 facility and $17.8 million of cash on hand. We are expecting increased stability and continued improvement in the housing industry in 2015. Beyond 2015, 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 believe our liquidity is sufficient to meet our needs in 2015. We expect to generate cash of approximately $10-$30 million in 2015 and to end the year with (i) cash of $25-$45 million and (ii) liquidity of approximately $160-$180 million. This forecast is based on 715,000 U.S. single-family housing starts for 2015, market prices for commodity products remaining relatively stable for the year, improvement in gross margin, an operating expense structure consistent with current levels, and capital expenditures of
28
approximately $25-$30 million. We considered various scenarios when evaluating our liquidity for 2015, including housing starts consistent with 2014. We do not expect working capital to be a source of funds for the next twelve months.
In the event that housing starts or sales volume for 2015 are higher or lower than expected, or if other assumptions used in our forecasting differ from actual results, our forecasted cash usage and liquidity levels may change. Should the current industry conditions deteriorate or we pursue acquisitions, we may be required to raise additional funds through the sale of common 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, and divesting of non-core businesses. There are no assurances that these steps would prove successful.
Since the beginning of the housing downturn, a primary focus has been on protecting our liquidity. Our action plan, which consisted of generating new business, reducing physical capacity, adjusting staffing levels, implementing cost containment programs, managing credit tightly, raising additional capital when needed, and conserving cash allowed us to mitigate the effects of the difficult industry conditions. While we continue to focus on these areas, we also plan to prudently utilize our liquidity to support anticipated sales growth, primarily related to our working capital, delivery fleet and staffing levels. Also, we have and will likely continue to selectively pursue strategic acquisitions, which may impact our liquidity.
Consolidated Cash Flows
Cash provided by operating activities was $27.5 million in 2014 compared to cash used in operating activities of $47.6 million in 2013. The change of $75.1 million was primarily due to our refinancing in the second quarter of 2013 and our improved financial performance in 2014. Cash interest payments were $28.3 million in 2014 compared to $78.2 million in 2013. The $78.2 million in cash interest payments in 2013 included a $39.5 million prepayment penalty related to the termination of our term loan. In addition, our working capital only increased $7.8 million compared to an increase in working capital of $31.8 million in 2013.
Cash used in operating activities was $47.6 million and $66.9 million for 2013 and 2012, respectively. Of the cash used in operating activities, approximately $78.2 million and $37.8 million were cash interest payments in 2013 and 2012, respectively. The $78.2 million in cash interest payments for 2013 includes a non-recurring $39.5 million prepayment premium related to the termination of our term loan. In addition, approximately $31.8 million and $34.0 million of the cash used in operating activities were due to increases in working capital for 2013 and 2012, respectively. The increases in accounts receivable and inventory were partially offset by an increase in accounts payable and accrued liabilities. For 2013 and 2012 these increases in working capital and cash interest payments were partially offset by a reduction in cash used in operations primarily due to increased sales and improved profitability.
Cash used in investing activities increased $95.4 million in 2014 compared to 2013. The increase is primarily due to $69.3 million in cash used for acquisitions in 2014 and a $10.7 million increase in capital expenditures in 2014 compared to 2013. The remaining change is primarily due to a decrease of $13.0 million in restricted cash related to the transfer of our outstanding letters of credit from the previous facility to our new letter of credit sub-facility, which eliminated our cash collateral requirement for outstanding letters of credit in 2013. The increase in capital expenditures during 2014 primarily relates to the purchase of facilities in Greensboro, NC, Conroe, TX, and Schertz, TX, improvements related to the relocation of two facilities, as well as purchasing machinery and equipment to support sales growth and to increase capacity at existing locations.
Cash provided by investing activities was $0.6 million in 2013 compared to cash used in investing activities of $9.0 in 2012. The change was primarily due to a decrease of $11.9 million in restricted cash during 2013 compared to 2012 as our cash collateral requirement for outstanding letters of credit was eliminated. Proceeds from the sale of property, plant and equipment increased by $2.4 million in 2013 compared to 2012. Partially offsetting these changes, our capital expenditures increased $4.7 million in 2013 compared to 2012 primarily related to purchasing a facility in Knoxville, TN as well as purchasing machinery and equipment to support sales growth and to increase capacity at existing locations.
Cash provided financing activities for 2014 was $30.4 million compared to cash used in financing activities in 2013 of $29.7 million. Cash provided by financing activities for 2014 primarily relates to our $30.0 million borrowing under the 2013 facility. Cash used in 2013 primarily relates to our refinancing in the second quarter of 2013. In the second quarter of 2013 we issued $350.0 million of 7.625% senior secured notes due 2021 (“2021 notes ‘) and repaid our $225.0 million term loan and $139.7 million of our second priority senior secured floating rate notes due 2016 (“2016 notes”). The remaining change is primarily due to $15.6 million in payments of deferred loan costs related to our 2013 facility and 2021 notes.
29
Cash used in financing activities was $29.7 million in 2013 compared to cash provided by financing activities of $60.5 million in 2012. In 2013, we issued $350.0 million of 2021 notes and repaid our $225.0 term loan and $139.7 million of 2016 notes. The remaining change in 2013 is primarily due to $15.6 million in payments of deferred loan costs related to our 2013 facility and the 2021 notes. In 2012, our net cash provided by financing activities of $60.5 million was primarily due to the $62.1 million of proceeds from the amendment to our term loan, net of debt discount, partially offset by $1.6 million of payments of deferred loan costs.
Capital Expenditures
Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have for the most part remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. We expect our 2015 capital expenditures to be approximately $25-$30 million primarily related to rolling stock, equipment and facility improvements to support our operations.
DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes our contractual obligations as of December 31, 2014 (in thousands):
|
|
|
Payments Due by Period |
|
|||||||||||||||||
|
Contractual obligations |
|
Total |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
More than 5 years |
|
|||||
|
Long-term debt |
|
$ |
383,904 |
|
|
$ |
30,074 |
|
|
$ |
277 |
|
|
$ |
113 |
|
|
$ |
353,440 |
|
|
Interest on long-term debt(1) |
|
|
177,739 |
|
|
|
28,252 |
|
|
|
56,091 |
|
|
|
54,832 |
|
|
|
38,564 |
|
|
Operating leases |
|
|
106,235 |
|
|
|
24,554 |
|
|
|
39,827 |
|
|
|
25,236 |
|
|
|
16,618 |
|
|
Uncertain tax positions(2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total contractual cash obligations |
|
$ |
667,878 |
|
|
$ |
82,880 |
|
|
$ |
96,195 |
|
|
$ |
80,181 |
|
|
$ |
408,622 |
|
|
(1) |
We had $30.0 million in borrowings under the 2013 facility as of December 31, 2014. Borrowings under the 2013 facility bear interest at a variable rate. Therefore, actual interest may differ from the amounts presented above due to any future borrowing activity under the 2013 facility. |
|
(2) |
We have $0.4 million of uncertain tax positions recorded in long-term liabilities or as a reduction to operating loss carryforwards. We also have $0.3 million in interest and penalties accrued related to these uncertain tax positions. It is not reasonably possible to predict at this time when (or if) any of these amounts will be settled. |
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, 2014. 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 liable under purchase orders are reflected on our consolidated balance sheet as accounts payable and accrued liabilities. We plan to lease additional delivery equipment during 2015 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 $2.8 million as of December 31, 2014.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those that both are important to the accurate portrayal of a company’s 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.
30
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.
We have identified the following accounting policies that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.
Vendor Rebates. Many of our arrangements with our vendors provide for us to receive a rebate of a specified amount payable to us when we achieve any of a number of measures, generally related to the volume of purchases from our vendors. We account for these rebates as a reduction of the prices of the vendor’s products, which reduces inventory until we sell the product, at which time these rebates reduce cost of sales. Throughout the year, we estimate the amount of rebates based upon our historical level of purchases. We continually revise these estimates to reflect actual purchase levels.
If market conditions were to change, vendors may change the terms of some or all of these programs. Although these changes would not affect the amounts which we have recorded related to product already purchased, it may impact our gross margins on products we sell or sales earned in future periods.
Allowance for Doubtful Accounts and Related Reserves. We maintain an allowance for doubtful accounts for estimated losses due to the failure of our customers to make required payments. We perform periodic credit evaluations of our customers and typically do not require collateral. However, we have, in some cases, required customers to collateralize their debt with us. Consistent with industry practices, we typically require payment from most customers within 30 days. As our business is seasonal in certain regions, our customers’ businesses are also seasonal. Sales are lowest in the winter months, and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. Throughout the year, we record estimated reserves based upon our historical write-offs of uncollectible accounts, taking into consideration certain factors, such as aging statistics and trends, customer payment history, independent credit reports, and discussions with customers. Periodically, we perform a specific analysis of all accounts past due and write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. We charge these write-offs against our allowance for doubtful accounts. Any future decline in the macroeconomic factors that affect the overall housing industry or our specific customers’ business could cause us to revise our estimate of expected losses and increase our allowance for doubtful accounts.
Impairment of Long-Lived Assets. Long-lived assets, including property and equipment, are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. Our long-lived assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Our asset groups consist of geographical markets, which are one level below our reporting units. Our judgment regarding the existence of impairment indicators is based on market and operational performance. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available.
We use internal cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate. These cash flow estimates are over the remaining useful lives of the assets within each market. Forecasted housing starts for each market are used to help estimate future revenue. Historical trends are then used to project gross margins and operating expenses based upon various revenue levels. If these projected cash flows are less than the carrying amount, an impairment loss is recognized based on the fair value of the asset group. Due to the uncertainties associated with these projections, actual results could differ from projected results, and further impairment of long-lived assets could be recorded. Future non-cash impairment of long-lived assets 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 recorded no significant asset impairment charges in continuing operations in 2014, 2013 or 2012.
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, 2014, our goodwill balance was $139.8 million, representing 24.0% of our total assets.
We test goodwill for 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. Our industry
31
experienced a significant and severe downturn that began in mid-2006. As such, we have closely monitored the 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 and performed interim impairment tests when warranted. 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. We did not have any goodwill impairments in continuing operations in 2014, 2013 or 2012.
The process of evaluating goodwill for impairment involves the determination of fair value of our reporting units. Our reporting units: Atlantic, Raleigh, Southeast, Florida, Dallas and South Texas represent financially discrete, self-sustaining components. We evaluate goodwill for impairment using a two-step process. The first step is to identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value of a reporting unit exceeds the book value, goodwill is not impaired. If the book value exceeds the fair value, the second step of the process is performed to measure the amount of impairment. In step two, the estimated fair value of the reporting unit is allocated to all other assets and liabilities of that reporting unit based on their respective fair values. The excess of the fair value of the reporting unit over the amount allocated to its assets and liabilities is the implied fair value of goodwill. Goodwill impairment is measured as the excess of the carrying value over its implied fair value. The fair value of a reporting unit is estimated based upon the projected discounted cash flow expected to be generated from the reporting unit using a discounted cash flow methodology. Where available and appropriate, comparative market multiples are used to corroborate the results of the discounted cash flow.
We developed a range of fair values for our reporting units using a five-year discounted cash flow methodology. Inherent in such fair value determinations are estimates relating to future cash 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, and further impairment of goodwill could be recorded.
Significant information and assumptions utilized in estimating future cash flows for our reporting units includes 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 5.5x for all reporting units to reflect the relevant expected acquisition price. A discount rate of 11.3% 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 4.5x, or increasing the discount rate by 1.0% to 12.3%, would not have changed the results of our impairment testing.
At December 31, 2014, the fair values of each our reporting units were substantially in excess of their respective carrying values. The excess (or “cushion”) of the implied fair value of goodwill over the carrying value of goodwill for each of our six reporting units which have remaining goodwill balances ranged from $33.1 million to $277.9 million. The cushion for one of our reporting units at December 31, 2014, was $33.1 million. Nonetheless, moderate deviations from projected cash flows for this reporting unit could result in future goodwill impairment. This reporting unit had a goodwill balance of $11.0 million at December 31, 2014. 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 non-cash 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.
Deferred Income Taxes. 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 Accounting Standards Codification (“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. 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, among other matters, the reversal of existing deferred tax liabilities, historical and forecasted taxable income, 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.
Poor housing market conditions have contributed to our cumulative loss position for the past several years. While we generated income in 2014, we still have a cumulative loss for the three year period ending December 31, 2014. We believe this, as well as uncertainty around the extent and timing of the housing market recovery, represents significant negative evidence in considering whether our deferred tax assets are realizable. Further, we do not believe that relying on projections of future taxable income to support the recovery of deferred tax assets is sufficient. Based on an evaluation of positive and negative evidence, we concluded that
32
the negative evidence regarding our ability to realize our deferred tax assets outweighed the positive evidence as of December 31, 2014.
In 2014, we reduced our valuation allowance by $7.2 million due to the utilization of net operating losses against federal and state taxable income. In 2013, we recorded a valuation allowance of approximately $15.3 million related to our continuing operations, which is exclusive of $0.6 million related primarily to reversals of uncertain tax positions due to statute expirations that affected our net operating loss carryforward and valuation allowance. In 2012, we recorded a valuation allowance of approximately $19.6 million related to our continuing operations.
Without continued improvement in housing activity, we could be required to establish additional valuation allowances. However, we had positive earnings before taxes in 2014. To the extent we continue to generate sufficient taxable income in the same jurisdictions in the future to utilize the tax benefits of the related net deferred tax assets, we may reverse some or all of the valuation allowance. We currently estimate that we will likely transition into a three year cumulative income position on a rolling three year period at some time during the year ending December 2015. However, there continues to be uncertainty around housing market projections. Simply coming out of a cumulative loss is not viewed as a bright line and may not be considered sufficient positive evidence to reverse some or all of the valuation allowance if there are other offsetting negative factors. In upcoming quarters, we will closely monitor the positive and negative evidence surrounding our ability to realize our deferred tax assets.
We base our estimate of deferred tax assets and liabilities on current tax laws and rates. In certain cases, we also base our estimate on business plan forecasts and other expectations about future outcomes. Changes in existing tax laws or rates could affect our actual tax results, and future business results may affect the amount of our deferred tax liabilities or the valuation of our deferred tax assets over time. Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods, as well as the residential homebuilding industry’s cyclicality and sensitivity to changes in economic conditions, it is possible that actual results could differ from the estimates used in previous analyses.
Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position.
Insurance. We are insured for general liability, auto liability and workers’ compensation exposures, subject to deductible amounts. The expected liability for unpaid claims, including incurred but not reported losses, is determined using the assistance of a third-party actuary and is reflected on our balance sheet as an accrued liability. The amount recoverable from our insurance provider is reflected as an other asset. Our accounting policy includes an internal evaluation and adjustment of our reserve for all insured losses on a quarterly basis. At least on an annual basis, we engage an external actuarial professional to independently assess and estimate the total liability outstanding, which is compared to the actual reserve balance at that time and adjusted accordingly.
Stock-Based Compensation. Calculating stock-based compensation expense requires the input of subjective assumptions. We determine the fair value of each option grant using the Black-Scholes option-pricing model with assumptions based primarily on historical data. Specific inputs to the model include: the expected life of the stock-based awards, stock price volatility, dividend yield and risk-free rate.
The expected life represents the period of time the options are expected to be outstanding. We have used the simplified method for determining the expected life assumption due to limited historical exercise experience on our stock options. The expected volatility is 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 effect at the time of grant and has a term equal to the expected life of the options. We record expense for the unvested portion of grants over the requisite service (i.e., vesting) periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2015 the FASB issued an update to the existing guidance under the Income Statement topic of the Codification. This update eliminates the concept of extraordinary items and the requirement to assess whether an event or transaction is both unusual in nature and infrequent in occurrence and to separately present any such items on the statement of operations after income from continuing operations. Under the updated guidance such items will either be presented as a separate component of income from continuing operations or disclosed in the notes to the financial statements. This guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption, but not required. The guidance allows either prospective or retrospective methods of adoption. We do not currently expect that the adoption of this update will have an impact on our financial statements.
33
In November 2014 the FASB issued an update to the existing guidance under the Business Combinations topic of the Codification. This update allows, but does not require, an acquired entity to apply pushdown accounting in its stand-alone financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The decision to apply pushdown accounting may be made independently for each change in control event. This new guidance was effective on November 18, 2014 and can be applied retrospectively. This updated guidance did not have an impact on our financial statements. We will assess the need to apply pushdown accounting for future acquisitions on an individual basis, when necessary.
In August 2014, the FASB issued an update to the existing guidance under the Presentation of Financial Statements topic of the Codification. This update requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. This new guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted, but not required. We are currently evaluating the impact of this guidance on our financial statements.
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. This new guidance is effective for annual reporting periods beginning after December 15, 2016. Accordingly, we will adopt this guidance beginning January 1, 2017. Early adoption of this guidance is not permitted. This guidance allows either full retrospective or modified retrospective methods of adoption. We are currently evaluating the impact of this guidance on our financial statements.
In April 2014, the FASB issued an update to the existing guidance under the Presentation of Financial Statements and Property, Plant, and Equipment topics of the Codification. This update changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the previous guidance any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results to be presented as a discontinued operation. This update is effective for fiscal years, and interim periods beginning after December 15, 2014. Early adoption is permitted, but not required. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. We do not expect that the adoption of this update will have an impact on our financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We may experience changes in interest expense if there were changes in our debt. Changes in market interest rates could also increase these risks. Our 2021 Notes bear interest at a fixed rate, therefore, our interest expense related to the 2021 Notes would not be affected by an increase in market interest rates. Borrowings under the 2013 facility bear interest at either a base rate or eurodollar rate, plus, in each case, an applicable margin. At December 31, 2014, a 1.0% increase in interest rates would result in approximately $0.3 million in additional interest expense annually as we had $30.0 million in outstanding borrowings under the 2013 facility. The 2013 facility also assesses variable commitment and outstanding letter of credit fees based on quarterly average loan utilization.
Our share price and, to a lesser extent, the historical volatility of our common stock are the primary factors in the changes to our fair value measurements related to our outstanding warrants. All other inputs being equal, an increase or decrease in our share price or volatility would result in an increase or decrease in the fair value of our warrants and an increase or decrease in interest expense. Based on the warrants outstanding and the historical volatility of our common stock as of December 31, 2014, a 10% change in our share price would result in approximately a $0.5 million change in our interest expense. Based on the warrants outstanding and our share price as of December 31, 2014, a 10% change in the historical volatility of our common stock would result in approximately a $0.1 million change in our interest expense.
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. Our delayed ability to pass on material price increases to our customers can adversely affect our operating income.
34
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
36 |
|
|
|
37 |
|
|
|
38 |
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 |
|
39 |
|
|
40 |
|
|
|
41 |
35
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Builders FirstSource, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Builders FirstSource, Inc. and its subsidiaries at December 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 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, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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.
A company’s 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 company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the 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 company’s assets that could have a material effect on the financial statements.
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 3, 2015
36
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
(In thousands, except per share amounts) |
|
|||||||||
|
Sales |
|
$ |
1,604,096 |
|
|
$ |
1,489,892 |
|
|
$ |
1,070,676 |
|
|
Cost of sales |
|
|
1,247,099 |
|
|
|
1,169,972 |
|
|
|
856,110 |
|
|
Gross margin |
|
|
356,997 |
|
|
|
319,920 |
|
|
|
214,566 |
|
|
Selling, general and administrative expenses |
|
|
306,508 |
|
|
|
271,885 |
|
|
|
222,263 |
|
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
48 |
|
|
Facility closure costs |
|
|
471 |
|
|
|
(7 |
) |
|
|
958 |
|
|
Income (loss) from operations |
|
|
50,018 |
|
|
|
48,042 |
|
|
|
(8,703 |
) |
|
Interest expense, net |
|
|
30,349 |
|
|
|
89,638 |
|
|
|
45,139 |
|
|
Income (loss) from continuing operations before income taxes |
|
|
19,669 |
|
|
|
(41,596 |
) |
|
|
(53,842 |
) |
|
Income tax expense |
|
|
1,111 |
|
|
|
769 |
|
|
|
577 |
|
|
Income (loss) from continuing operations |
|
|
18,558 |
|
|
|
(42,365 |
) |
|
|
(54,419 |
) |
|
Loss from discontinued operations (net of income tax expense of $0 in 2014, 2013 and 2012) |
|
|
(408 |
) |
|
|
(326 |
) |
|
|
(2,437 |
) |
|
Net income (loss) |
|
$ |
18,150 |
|
|
$ |
(42,691 |
) |
|
$ |
(56,856 |
) |
|
Comprehensive income (loss) |
|
$ |
18,150 |
|
|
$ |
(42,691 |
) |
|
$ |
(56,856 |
) |
|
Basic net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
0.19 |
|
|
$ |
(0.44 |
) |
|
$ |
(0.57 |
) |
|
Loss from discontinued operations |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.03 |
) |
|
Net income (loss) |
|
$ |
0.19 |
|
|
$ |
(0.44 |
) |
|
$ |
(0.60 |
) |
|
Diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
0.18 |
|
|
$ |
(0.44 |
) |
|
$ |
(0.57 |
) |
|
Loss from discontinued operations |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.03 |
) |
|
Net income (loss) |
|
$ |
0.18 |
|
|
$ |
(0.44 |
) |
|
$ |
(0.60 |
) |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
98,050 |
|
|
|
96,449 |
|
|
|
95,463 |
|
|
Diluted |
|
|
100,522 |
|
|
|
96,449 |
|
|
|
95,463 |
|
The accompanying notes are an integral part of these consolidated financial statements.
37
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
|
|
|
December 31, |
|
|||||
|
|
|
2014 |
|
|
2013 |
|
||
|
|
|
(In thousands, except per share amounts) |
|
|||||
|
ASSETS |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
17,773 |
|
|
$ |
54,696 |
|
|
Accounts receivable, less allowances of $3,153 and $3,605 for 2014 and 2013, respectively |
|
|
148,352 |
|
|
|
143,036 |
|
|
Inventories |
|
|
138,156 |
|
|
|
123,636 |
|
|
Other current assets |
|
|
27,259 |
|
|
|
9,793 |
|
|
Total current assets |
|
|
331,540 |
|
|
|
331,161 |
|
|
Property, plant and equipment, net |
|
|
75,679 |
|
|
|
49,392 |
|
|
Goodwill |
|
|
139,774 |
|
|
|
111,193 |
|
|
Intangible assets, net |
|
|
17,228 |
|
|
|
827 |
|
|
Other assets, net |
|
|
18,844 |
|
|
|
23,266 |
|
|
Total assets |
|
$ |
583,065 |
|
|
$ |
515,839 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
75,868 |
|
|
$ |
81,046 |
|
|
Accrued liabilities |
|
|
66,225 |
|
|
|
45,310 |
|
|
Current maturities of long-term debt |
|
|
30,074 |
|
|
|
67 |
|
|
Total current liabilities |
|
|
172,167 |
|
|
|
126,423 |
|
|
Long-term debt, net of current maturities |
|
|
353,830 |
|
|
|
353,904 |
|
|
Deferred income taxes |
|
|
6,441 |
|
|
|
6,670 |
|
|
Other long-term liabilities |
|
|
10,427 |
|
|
|
13,474 |
|
|
Total liabilities |
|
|
542,865 |
|
|
|
500,471 |
|
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000 shares authorized; zero shares issued and outstanding at December 31, 2014 and 2013 |
|
|
— |
|
|
|
— |
|
|
Common stock, $0.01 par value, 200,000 shares authorized; 98,226 and 97,905 shares issued and outstanding at December 31, 2014 and 2013, respectively |
|
|
982 |
|
|
|
973 |
|
|
Additional paid-in capital |
|
|
380,091 |
|
|
|
373,418 |
|
|
Accumulated deficit |
|
|
(340,873 |
) |
|
|
(359,023 |
) |
|
Total stockholders’ equity |
|
|
40,200 |
|
|
|
15,368 |
|
|
Total liabilities and stockholders’ equity |
|
$ |
583,065 |
|
|
$ |
515,839 |
|
The accompanying notes are an integral part of these consolidated financial statements.
38
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
18,150 |
|
|
$ |
(42,691 |
) |
|
$ |
(56,856 |
) |
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
9,519 |
|
|
|
9,305 |
|
|
|
11,120 |
|
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
48 |
|
|
Amortization and write-off of deferred loan costs |
|
|
2,432 |
|
|
|
4,067 |
|
|
|
744 |
|
|
Amortization and write-off of debt discount |
|
|
— |
|
|
|
7,794 |
|
|
|
1,425 |
|
|
Fair value adjustment of stock warrants |
|
|
(456 |
) |
|
|
1,502 |
|
|
|
4,992 |
|
|
Deferred income taxes |
|
|
524 |
|
|
|
917 |
|
|
|
458 |
|
|
Bad debt expense |
|
|
(274 |
) |
|
|
900 |
|
|
|
751 |
|
|
Net non-cash expense (income) from discontinued operations |
|
|
— |
|
|
|
(195 |
) |
|
|
1,064 |
|
|
Stock compensation expense |
|
|
6,157 |
|
|
|
4,245 |
|
|
|
3,628 |
|
|
Net gain on sales of assets |
|
|
(114 |
) |
|
|
(284 |
) |
|
|
(38 |
) |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
4,503 |
|
|
|
(26,531 |
) |
|
|
(41,727 |
) |
|
Inventories |
|
|
(9,103 |
) |
|
|
(14,637 |
) |
|
|
(31,914 |
) |
|
Other current assets |
|
|
(8,181 |
) |
|
|
(177 |
) |
|
|
(710 |
) |
|
Other assets and liabilities |
|
|
(660 |
) |
|
|
(1,344 |
) |
|
|
(195 |
) |
|
Accounts payable |
|
|
(5,178 |
) |
|
|
1,649 |
|
|
|
30,779 |
|
|
Accrued liabilities |
|
|
10,174 |
|
|
|
7,904 |
|
|
|
9,581 |
|
|
Net cash provided by (used in) operating activities |
|
|
27,493 |
|
|
|
(47,576 |
) |
|
|
(66,850 |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(25,716 |
) |
|
|
(15,051 |
) |
|
|
(10,398 |
) |
|
Proceeds from sale of property, plant and equipment |
|
|
213 |
|
|
|
2,592 |
|
|
|
230 |
|
|
Cash used for acquisitions, net |
|
|
(69,337 |
) |
|
|
— |
|
|
|
— |
|
|
Decrease in restricted cash |
|
|
— |
|
|
|
13,030 |
|
|
|
1,135 |
|
|
Net cash provided by (used in) investing activities |
|
|
(94,840 |
) |
|
|
571 |
|
|
|
(9,033 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility |
|
|
30,000 |
|
|
|
30,000 |
|
|
|
— |
|
|
Payments under revolving credit facility |
|
|
— |
|
|
|
(30,000 |
) |
|
|
— |
|
|
Proceeds from issuance of long term debt |
|
|
— |
|
|
|
350,000 |
|
|
|
62,075 |
|
|
Payments of long-term debt and other loans |
|
|
(67 |
) |
|
|
(364,778 |
) |
|
|
(54 |
) |
|
Deferred loan costs |
|
|
(34 |
) |
|
|
(15,634 |
) |
|
|
(1,639 |
) |
|
Payment of recapitalization costs |
|
|
— |
|
|
|
(37 |
) |
|
|
— |
|
|
Exercise of stock options |
|
|
1,831 |
|
|
|
1,754 |
|
|
|
596 |
|
|
Repurchase of common stock |
|
|
(1,306 |
) |
|
|
(1,036 |
) |
|
|
(496 |
) |
|
Net cash provided by (used in) financing activities |
|
|
30,424 |
|
|
|
(29,731 |
) |
|
|
60,482 |
|
|
Net decrease in cash and cash equivalents |
|
|
(36,923 |
) |
|
|
(76,736 |
) |
|
|
(15,401 |
) |
|
Cash and cash equivalents at beginning of period |
|
|
54,696 |
|
|
|
131,432 |
|
|
|
146,833 |
|
|
Cash and cash equivalents at end of period |
|
$ |
17,773 |
|
|
$ |
54,696 |
|
|
$ |
131,432 |
|
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
|
|
|
|
|
|
|
|
|
Additional Paid |
|
|
|
|
|
Accumulated |
|
|
|
|
||||||
|
|
|
Common Stock |
|
|
in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
|
|
|||||||||
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
(Loss) Income |
|
|
Total |
|
||||||
|
|
|
(In thousands) |
|
|||||||||||||||||||||
|
Balance at December 31, 2011 |
|
|
96,806 |
|
|
$ |
950 |
|
|
$ |
359,750 |
|
|
$ |
(259,476 |
) |
|
$ |
— |
|
|
$ |
101,224 |
|
|
Issuance of restricted stock, net of forfeitures |
|
|
89 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Vesting of restricted stock |
|
|
— |
|
|
|
7 |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock compensation expense |
|
|
— |
|
|
|
— |
|
|
|
3,628 |
|
|
|
— |
|
|
|
— |
|
|
|
3,628 |
|
|
Exercise of stock options |
|
|
187 |
|
|
|
2 |
|
|
|
594 |
|
|
|
— |
|
|
|
— |
|
|
|
596 |
|
|
Repurchase of common stock |
|
|
(166 |
) |
|
|
(2 |
) |
|
|
(494 |
) |
|
|
— |
|
|
|
— |
|
|
|
(496 |
) |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(56,856 |
) |
|
|
|
|
|
|
(56,856 |
) |
|
Total comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(56,856 |
) |
|
Balance at December 31, 2012 |
|
|
96,916 |
|
|
|
957 |
|
|
|
363,471 |
|
|
|
(316,332 |
) |
|
|
— |
|
|
|
48,096 |
|
|
Issuance of restricted stock, net of forfeitures |
|
|
32 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Vesting of restricted stock |
|
|
— |
|
|
|
7 |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock Compensation Expense |
|
|
— |
|
|
|
— |
|
|
|
4,245 |
|
|
|
— |
|
|
|
— |
|
|
|
4,245 |
|
|
Exercise of stock options |
|
|
543 |
|
|
|
5 |
|
|
|
1,749 |
|
|
|
— |
|
|
|
— |
|
|
|
1,754 |
|
|
Exercise of stock warrants |
|
|
579 |
|
|
|
6 |
|
|
|
4,994 |
|
|
|
— |
|
|
|
— |
|
|
|
5,000 |
|
|
Repurchase of common stock |
|
|
(165 |
) |
|
|
(2 |
) |
|
|
(1,034 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,036 |
) |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42,691 |
) |
|
|
— |
|
|
|
(42,691 |
) |
|
Total comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42,691 |
) |
|
Balance at December 31, 2013 |
|
|
97,905 |
|
|
|
973 |
|
|
|
373,418 |
|
|
|
(359,023 |
) |
|
|
— |
|
|
|
15,368 |
|
|
Vesting of restricted stock |
|
|
— |
|
|
|
6 |
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock compensation expense |
|
|
— |
|
|
|
— |
|
|
|
6,157 |
|
|
|
— |
|
|
|
— |
|
|
|
6,157 |
|
|
Exercise of stock options |
|
|
492 |
|
|
|
5 |
|
|
|
1,826 |
|
|
|
— |
|
|
|
— |
|
|
|
1,831 |
|
|
Repurchase of common stock |
|
|
(171 |
) |
|
|
(2 |
) |
|
|
(1,304 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,306 |
) |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,150 |
|
|
|
— |
|
|
|
18,150 |
|
|
Total comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,150 |
|
|
Balance at December 31, 2014 |
|
|
98,226 |
|
|
$ |
982 |
|
|
$ |
380,091 |
|
|
$ |
(340,873 |
) |
|
$ |
— |
|
|
$ |
40,200 |
|
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
Builders FirstSource, Inc., a Delaware corporation formed in 1998, is a leading supplier and manufacturer of structural and related building products for residential new construction in the United States. We serve 34 markets in 9 states, principally in the southern and eastern United States. We have 56 distribution centers and 55 manufacturing facilities, many of which are located on the same premises as our distribution centers. We serve a broad customer base ranging from production homebuilders to small custom homebuilders.
In this annual report, references to the “company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries, unless otherwise stated or the context otherwise requires.
2. Summary of Significant Accounting Policies
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 significant 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 revenues 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. 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and all highly liquid investments with an original maturity date of three months or less.
Restricted Cash
Restricted cash consists of amounts used to collateralize outstanding letters of credit and other potential casualty insurance obligations and is classified as a current or non-current asset based on its designated purpose.
Financial Instruments
We use financial instruments in the normal course of business as a tool to manage our assets and liabilities. We do not hold or issue financial instruments for trading purposes.
We issued detachable warrants in 2011, which are measured at fair value on a recurring basis as discussed in Note 9.
41
Accounts Receivable
We extend credit to qualified professional homebuilders and contractors, in many cases on a non-collateralized basis. The allowance for doubtful accounts is based on management’s 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 borrower’s ability to pay, and historical experience. Accounts receivable are written off when deemed uncollectible. Other receivables consist primarily of vendor rebates receivable.
Accounts receivable consisted of the following at December 31:
|
|
|
2014 |
|
|
2013 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Trade receivables |
|
$ |
142,204 |
|
|
$ |
136,359 |
|
|
Other |
|
|
9,301 |
|
|
|
10,282 |
|
|
Accounts receivable |
|
|
151,505 |
|
|
|
146,641 |
|
|
Less: allowance for returns and doubtful accounts |
|
|
3,153 |
|
|
|
3,605 |
|
|
Accounts receivable, net |
|
$ |
148,352 |
|
|
$ |
143,036 |
|
The following table shows the changes in our allowance for doubtful accounts:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Balance at January 1, |
|
$ |
2,413 |
|
|
$ |
1,864 |
|
|
$ |
1,441 |
|
|
Additions charged to expense |
|
|
(274 |
) |
|
|
900 |
|
|
|
751 |
|
|
Deductions (write-offs, net of recoveries) |
|
|
(405 |
) |
|
|
(351 |
) |
|
|
(328 |
) |
|
Balance at December 31, |
|
$ |
1,734 |
|
|
$ |
2,413 |
|
|
$ |
1,864 |
|
We also establish reserves for credit memos and customer returns. The reserve balance was $1.4 million, $1.2 million, and $1.0 million at December 31, 2014, 2013, and 2012, respectively. The activity in this reserve was not significant for each year presented.
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 or market. Cost is determined using the weighted average method, the use of which approximates the first-in, first-out method. We accrue for shrinkage based on the actual historical shrinkage 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 three 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 vendor’s inventory until the product is sold, at which time such rebates reduce cost of sales in the accompanying consolidated statements of operations and comprehensive 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.
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 statements of operations and comprehensive income (loss) and totaled $79.7 million, $71.1 million and $58.5 million in 2014, 2013 and 2012, respectively.
42
Income Taxes
We account for income taxes utilizing the liability method described in the Income Taxes topic of the Financial Accounting Standards Board (“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.
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.
Deferred Loan Costs and Debt Discount
Loan costs are capitalized upon the issuance of long-term debt and amortized over the life of the related debt. Loan costs incurred are amortized using either the straight-line method or the effective interest method. Debt discount is amortized over the life of the related debt using the effective interest method. Amortization of deferred loan 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 9.
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 |
|
20 to 40 years |
|
|
|
Machinery and equipment |
|
3 to 10 years |
|
|
|
Furniture and fixtures |
|
3 to 5 years |
|
|
|
Leasehold improvements |
|
The shorter of the estimated useful life or the remaining lease term |
Major additions and improvements are capitalized, 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.
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. Net gains or losses related to the sale of real estate and equipment are recorded as selling, general and administrative expenses.
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 value is greater than estimated 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. Asset impairment charges are presented in the consolidated statements of operations and comprehensive income (loss) for the respective years.
43
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. Provisions for losses are developed from valuations that 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.
Net Loss per Common Share
Net 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:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Weighted average shares for basic EPS |
|
|
98,050 |
|
|
|
96,449 |
|
|
|
95,463 |
|
|
Dilutive effect of options |
|
|
2,472 |
|
|
|
— |
|
|
|
— |
|
|
Weighted average shares for diluted EPS |
|
|
100,522 |
|
|
|
96,449 |
|
|
|
95,463 |
|
Our restricted stock shares include rights to receive dividends that are not subject to the risk of forfeiture even if the underlying restricted stock shares on which the dividends were paid do not vest. In accordance with the Earnings Per Share topic of the Codification, unvested share-based payment awards that contain non-forfeitable rights to dividends are deemed participating securities and should be considered in the calculation of basic EPS. Since the restricted stock shares do not include an obligation to share in losses, they will be included in our basic EPS calculation in periods of net income and excluded from our basic EPS calculation in periods of net loss. Accordingly, there were 27,000 restricted stock shares included in our basic EPS calculation for 2014 as we generated net income. There were 610,000 and 1,229,000 restricted stock shares excluded from the computation of basic EPS in 2013, and 2012, respectively, because we generated a net loss.
For the purpose of computing diluted EPS, weighted average shares outstanding have been adjusted for common shares underlying 6,246,000 options, 700,000 warrants, and 1,855,000 restricted stock units (“RSUs”) for 2014. In addition, $0.5 million of income due to fair value adjustments related to the warrants was excluded from net income in the computation of diluted EPS for 2014. Options to purchase 4,933,000, and 5,514,000 shares of common stock were not included in the computations of diluted EPS in 2013, and 2012, respectively, because their effect was anti-dilutive. Warrants to purchase 700,000 and 1,600,000 shares of common stock were not included in the computations of diluted EPS in 2013 and 2012 because their effect was anti-dilutive.
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.
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 implied fair value of goodwill is less than its carrying value.
44
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, grants of restricted stock, and vesting of RSUs.
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:
|
|
|
2014 |
|
|
2012 |
|
Expected life |
|
5.8 years |
|
|
6.0 years |
|
Expected volatility |
|
92.1% |
|
|
94.4% |
|
Expected dividend yield |
|
0.00% |
|
|
0.00% |
|
Risk-free rate |
|
1.83% |
|
|
1.18% |
The expected life represents the period of time the options are expected to be outstanding. We used the simplified method for determining the expected life assumption due to limited historical exercise experience on our stock options. The expected volatility is 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 effect at the time of grant and has a term equal to the expected life of the options. We did not grant any stock option awards in 2013.
Recently Issued Accounting Pronouncements
In January 2015 the FASB issued an update to the existing guidance under the Income Statement topic of the Codification. This update eliminates the concept of extraordinary items and the requirement to assess whether an event or transaction is both unusual in nature and infrequent in occurrence and to separately present any such items on the statement of operations after income from continuing operations. Under the updated guidance such items will either be presented as a separate component of income from continuing operations or disclosed in the notes to the financial statements. This guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption, but not required. The guidance allows either prospective or retrospective methods of adoption. We do not currently expect that the adoption of this update will have an impact on our financial statements.
In November 2014 the FASB issued an update to the existing guidance under the Business Combinations topic of the Codification. This update allows, but does not require, an acquired entity to apply pushdown accounting in its stand-alone financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The decision to apply pushdown accounting may be made independently for each change in control event. This new guidance was effective on November 18, 2014 and can be applied retrospectively. This updated guidance did not have an impact on our financial statements. We will assess the need to apply pushdown accounting for future acquisitions on an individual basis, when necessary.
In August 2014, the FASB issued an update to the existing guidance under the Presentation of Financial Statements topic of the Codification. This update requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. This new guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted, but not required. We are currently evaluating the impact of this guidance on our financial statements.
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. This new guidance is effective for annual reporting periods beginning after December 15, 2016. Accordingly, we will adopt this guidance beginning January 1, 2017. Early adoption of this guidance is not permitted. This guidance allows either full retrospective or modified retrospective methods of adoption. We are currently evaluating the impact of this guidance on our financial statements.
45
In April 2014, the FASB issued an update to the existing guidance under the Presentation of Financial Statements and Property, Plant, and Equipment topics of the Codification. This update changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the previous guidance any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results to be presented as a discontinued operation. This update is effective for fiscal years, and interim periods beginning after December 15, 2014. Early adoption is permitted, but not required. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. We do not expect that the adoption of this update will have an impact on our financial statements.
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, 2014, 2013, and 2012.
3. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
|
|
|
2014 |
|
|
2013 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Land |
|
$ |
17,334 |
|
|
$ |
14,437 |
|
|
Buildings and improvements |
|
|
64,776 |
|
|
|
58,974 |
|
|
Machinery and equipment |
|
|
113,609 |
|
|
|
100,109 |
|
|
Furniture and fixtures |
|
|
18,936 |
|
|
|
17,734 |
|
|
Construction in progress |
|
|
13,341 |
|
|
|
4,978 |
|
|
Property, plant and equipment |
|
|
227,996 |
|
|
|
196,232 |
|
|
Less: accumulated depreciation |
|
|
152,317 |
|
|
|
146,840 |
|
|
Property, plant and equipment, net |
|
$ |
75,679 |
|
|
$ |
49,392 |
|
Depreciation expense was $8.5 million, $8.9 million and $10.7 million, of which $2.5 million, $2.4 million and $3.1 million was included in cost of sales, in 2014, 2013, and 2012, respectively.
4. Discontinued Operations
In the second quarter of 2009, we announced our intent to exit the entire Ohio market based upon several factors, including the unfavorable conditions that affected our industry and a poor competitive position which prevented us from generating profitable results. We completed our exit plan in the second quarter of 2009 and have no further significant, continuing involvement in these operations. The cessation of operations in these markets was treated as discontinued operations as they had distinguishable cash flow and operations that have been eliminated from our ongoing operations. As a result, the operating results of the Ohio market for the current and prior periods have been aggregated and reclassified as discontinued operations in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2014, 2013, and 2012.
We recognized $0.4 million, $0.4 million, and $1.3 million of expense in 2014, 2013 and 2012, respectively, which was primarily related to future minimum lease obligations on closed facilities, and revisions to sub-rental income estimates. These amounts are included in loss from discontinued operations in the accompanying consolidated statement of operations and comprehensive income (loss) for the years ended December 31, 2014, 2013, and 2012, respectively.
In December 2012, an Ohio facility met the criteria for held for sale classification. As such, it was reclassified from property, plant, and equipment to other assets. We recorded a $1.1 million impairment charge to adjust the value of this property to its fair value. This amount was included in loss from discontinued operations in the accompanying consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2012. In April 2013, this facility was sold and the resulting gain of approximately $0.2 million was included in loss from discontinued operations in the accompanying consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2013.
46
An analysis of our facility closure reserves related to our discontinued operations for the periods reflected is as follows:
|
|
|
2012 |
|
|
Additions |
|
|
Payments |
|
|
2013 |
|
|
Additions |
|
|
Payments |
|
|
2014 |
|
|||||||
|
|
|
(In thousands) |
|
|||||||||||||||||||||||||
|
Facility and other exit costs, net of estimated sub-lease rental income |
|
$ |
2,611 |
|
|
$ |
373 |
|
|
$ |
(867 |
) |
|
$ |
2,117 |
|
|
$ |
417 |
|
|
$ |
(772 |
) |
|
$ |
1,762 |
|
The facility and other exit cost reserves related to our discontinued operations at December 31, 2014 were $1.8 million, of which $1.0 million is recorded as other long-term liabilities. The reserves are primarily related to future minimum lease payments on vacated facilities.
Our loss before income taxes attributable to our discontinued operations were $0.4 million, $0.3 million, and $2.4 million for the years ended December 31, 2014, 2013, and 2012, respectively.
5. Acquisitions
On June 30, 2014 the Company acquired certain assets and the operations of Slone Lumber Company, Inc. (“Slone”) for $8.7 million in cash (including certain adjustments). Based in Houston, Texas, Slone is a full-line building materials supplier. Slone’s product offerings include lumber, engineered beams, interior and exterior door units, moulding, trim, and cabinets. Slone also offers installation services on exterior doors, shutters, and cabinets.
On July 31, 2014 the Company acquired certain assets and the operations of West Orange Lumber Company, Inc. (“West Orange”) for $9.8 million in cash (including certain adjustments). Based in Groveland, Florida, West Orange supplies lumber, roof and floor trusses, custom windows and doors, as well as installation services, to both residential homebuilders and commercial contractors in central Florida.
On August 6, 2014 the Company acquired certain assets and the operations of Truss Rite, LLC (“Truss Rite”) for $14.6 million in cash (including certain adjustments). Based in Sherman, Texas Truss Rite primarily manufactures wood roof and floor trusses for large multi-family and commercial projects throughout Texas and parts of Oklahoma. Truss Rite predominately serves developers and general contractors in the multi-family residential housing sector.
On October 1, 2014 the Company acquired certain assets and the operations of Trim Tech of Austin, Inc. (“Trim Tech”) for $19.4 million in cash (including certain adjustments). Trim Tech is based in Hutto, Texas, which is approximately 30 miles north of downtown Austin. Trim Tech is a turn-key supplier of custom cabinets, interior and exterior doors, stair parts, and custom millwork and molding.
On December 22, 2014 the Company acquired certain assets and the operations of Empire Truss, Ltd. (“Empire”) for $16.8 million in cash (including certain adjustments). Empire is a Texas-based manufacturer of custom designed roof trusses and floor trusses, and a distributor of engineered wood products with its primary operations located in Huntsville, Texas, approximately 65 miles north of downtown Houston. Empire also operates a manufacturing facility in Ferris, Texas, which is 20 miles southeast of Dallas. Empire’s primary focus is on multi-family and light commercial customers.
These transactions were accounted for by the acquisition method, and accordingly the results of operations were included in the Company’s consolidated financial statements from their respective acquisition dates. 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. The allocations shown in the table below are preliminary and are subject to adjustment. Pro forma results of operations are not presented as these acquisitions are not material individually or in the aggregate.
We incurred $0.6 million in acquisition related costs during the year ended December 31, 2014. These costs include due diligence costs and transaction costs to complete the acquisitions, and have been recognized in selling, general and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2014.
47
The following table summarizes the aggregate fair values of the assets acquired and liabilities assumed at the acquisition dates for Slone, West Orange, Truss Rite, Trim Tech, and Empire (in thousands):
|
Accounts Receivable |
$ |
9,544 |
|
|
Inventory |
|
5,417 |
|
|
Property, plant and equipment |
|
8,580 |
|
|
Other intangible assets (Note 7) |
|
17,467 |
|
|
Other assets |
|
34 |
|
|
Goodwill (Note 6) |
|
28,581 |
|
|
Current liabilities |
|
(286 |
) |
|
Total net assets acquired |
$ |
69,337 |
|
6. Goodwill
The following table sets forth the changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 (in thousands):
|
|
|
2014 |
|
|
2013 |
|
|
Balance as of January 1, |
|
|
|
|
|
|
|
Goodwill |
$ |
155,829 |
|
$ |
155,829 |
|
|
Accumulated impairment losses |
|
(44,636 |
) |
|
(44,636 |
) |
|
|
|
111,193 |
|
|
111,193 |
|
|
Acquisitions and other purchase price adjustments |
|
28,581 |
|
|
— |
|
|
Balance as of December 31, |
|
|
|
|
|
|
|
Goodwill |
$ |
184,410 |
|
$ |
155,829 |
|
|
Accumulated impairment losses |
|
(44,636 |
) |
|
(44,636 |
) |
|
|
$ |
139,774 |
|
$ |
111,193 |
|
In 2014 the change in the carrying amount of goodwill is attributable to our acquisitions of Slone, West Orange, Truss Rite, Trim Tech, and Empire. The amounts allocated to goodwill as a result of these acquisitions is preliminary. There were no changes to the carrying amount of goodwill in 2013. The amount allocated to goodwill is attributable to the assembled workforce of the acquired companies as well as the synergies expected to arise as a result of these acquisitions. All of the goodwill recognized from these acquisitions is expected to be deductible for tax purposes. The goodwill recognized from these acquisitions will be amortized ratably over a 15 year period for tax purposes.
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 to the projected future cash flows to arrive at the present 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 period. The most significant 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.
We recorded no goodwill impairment charges in 2014, 2013, and 2012.
48
7. Intangible Assets
The following table presents intangible assets as of December 31:
|
|
|
2014 |
|
|
2013 |
|
||||||||||
|
|
|
Gross |
|
|
Accumulated |
|
|
Gross |
|
|
Accumulated |
|
||||
|
|
|
(In thousands) |
|
|||||||||||||
|
Customer relationships |
|
$ |
18,423 |
|
|
$ |
(2,695 |
) |
|
$ |
3,334 |
|
|
$ |
(2,507 |
) |
|
Non-compete agreements |
|
|
392 |
|
|
|
(31 |
) |
|
|
— |
|
|
|
— |
|
|
Trade names |
|
|
1,234 |
|
|
|
(95 |
) |
|
|
— |
|
|
|
— |
|
|
Total intangible assets |
|
$ |
20,049 |
|
|
$ |
(2,821 |
) |
|
$ |
3,334 |
|
|
$ |
(2,507 |
) |
In connection with the acquisitions of Slone, West Orange, Truss Rite, Trim Tech, and Empire we recorded intangible assets of $17.5 million, which includes $1.2 million of trade names, $0.4 million of non-compete agreements and $15.9 million of customer relationships. The amounts allocated to intangible assets as a result of these acquisitions is preliminary. The weighted average useful lives of the acquired assets are 5.0 years for trade names and non-compete agreements, and 10.3 years for customer relationships.
During the years ended December 31, 2014, 2013, and 2012, we recorded amortization expense in relation to the above-listed intangible assets of $1.1 million, $0.4 million, and $0.4 million, respectively. The following table presents the estimated amortization expense for these intangible assets for the years ending December 31 (in thousands):
|
2015 |
|
$ |
2,281 |
|
|
2016 |
|
|
2,162 |
|
|
2017 |
|
|
1,995 |
|
|
2018 |
|
|
1,995 |
|
|
2019 |
|
|
1,783 |
|
8. Accrued Liabilities
Accrued liabilities consisted of the following at December 31:
|
|
|
2014 |
|
|
2013 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Accrued payroll and other employee related expenses |
|
$ |
18,974 |
|
|
$ |
11,585 |
|
|
Accrued taxes |
|
|
9,167 |
|
|
|
8,439 |
|
|
Self-insurance reserves |
|
|
10,386 |
|
|
|
7,939 |
|
|
Accrued interest |
|
|
2,329 |
|
|
|
2,227 |
|
|
Facility closure reserves |
|
|
1,646 |
|
|
|
1,568 |
|
|
Casualty claims in excess of retained loss limit |
|
|
11,335 |
|
|
|
2,085 |
|
|
Deferred revenue |
|
|
4,665 |
|
|
|
5,540 |
|
|
Other |
|
|
7,723 |
|
|
|
5,927 |
|
|
Total accrued liabilities |
|
$ |
66,225 |
|
|
$ |
45,310 |
|
49
9. Long-Term Debt
Long-term debt consisted of the following at December 31:
|
|
|
2014 |
|
|
2013 |
|
||
|
|
|
(In thousands) |
|
|||||
|
2021 notes |
|
|
350,000 |
|
|
|
350,000 |
|
|
2013 facility |
|
|
30,000 |
|
|
|
— |
|
|
Other long-term debt* |
|
|
3,904 |
|
|
|
3,971 |
|
|
|
|
|
383,904 |
|
|
|
353,971 |
|
|
Less: current portion of long-term debt |
|
|
30,074 |
|
|
|
67 |
|
|
Total long-term debt, net of current maturities |
|
$ |
353,830 |
|
|
$ |
353,904 |
|
|
* |
We completed construction on a new multi-purpose facility during 2006. Other long-term debt represents an unfunded lease obligation for this facility. For accounting purposes, we are deemed the owner. As a result, the building and the long-term lease obligation are included on the consolidated balance sheet as a component of fixed assets and other debt, respectively. |
Second Priority Senior Secured Floating Rate Notes due 2016
As of December 31, 2012, we had $139.7 million in aggregate principal amount of Second Priority Senior Secured Floating Rate Notes due 2016 (“2016 notes”) that matured on February 15, 2016. Interest accrued on the 2016 notes at a 3-month LIBOR (subject to a 3.0% floor) plus 10.0%. LIBOR was reset at the beginning of each quarterly period. In May 2013, we repaid the full $139.7 million in outstanding notes as part of the 2013 refinancing transaction discussed below.
First-Lien Term Loan and Letter of Credit Facilities
In December 2011, we completed a $160.0 million first-lien term loan (“term loan”) that included detachable warrants that allow for the purchase of up to 1.6 million shares of our common stock at a price of $2.50 per share. These warrants were exercisable immediately upon issuance and expire in December 2018. The warrant agreement contains certain settlement adjustment features which preclude the warrants from being considered to be indexed to our stock. Specifically, it includes a “down-round” provision that requires an adjustment to be made to the exercise price and number of warrants upon the Company issuing additional common shares or convertible securities at a price that is less than the exercise price of the warrants at that time. This adjustment would be required even if the issue price of the common shares or convertible securities was at-market. As such, the outstanding warrants are considered to be derivative financial instruments and are classified as liabilities. As of December 31, 2014 there were 0.7 million warrants outstanding.
At the same time, we entered into a $20.0 million stand-alone letter of credit facility (“stand-alone facility”). The term loan and the stand-alone facility were both scheduled to mature on September 30, 2015. The term loan, which was issued at 97%, provided $119.6 million of net proceeds after repaying the $20.0 million outstanding under the existing senior secured revolving credit facility, using $14.2 million to collateralize letters of credit outstanding under the new stand-alone facility, and paying fees and expenses related to this transaction
In December of 2012, we amended our first-lien term loan to enhance our liquidity position to support both current and anticipated increases in sales volume. Terms of the amendment included increasing the principal amount by $65.0 million, reducing the minimum cash requirement from $35.0 million to $15.0 million, adding a new $15.0 million letter of credit sub-facility (“sub-facility”), and increasing the minimum specified collateral value to $225.0 million, contingent upon maintaining certain levels of qualified cash. The additional term loan amount, which was issued at 95.5%, provided $60.9 million of net proceeds after paying fees and expenses related to the transaction.
The term loan was collateralized by a first lien on substantially all of our assets, and was guaranteed by all of our subsidiaries. Interest accrued on the loan at 3-month LIBOR (subject to a 2% floor) plus 9.5%. The stand-alone facility included a commitment fee of 0.5% on any unused amount and assessed interest at a rate of 2.0% on any outstanding letters of credit. All letters of credit issued under the stand-alone facility were collateralized by cash equal to 105% of the face amount of the letters of credit. The sub-facility also included a commitment fee of 0.5% on any unused amount and assessed interest at a rate of 3.0% on any outstanding letters of credit. Letters of credit issued under the sub-facility were not required to be cash collateralized.
As of December 2012, we had outstanding letters of credit totaling $12.4 million under our stand-alone facility that principally support our self insurance programs. We collateralized these letters of credit with $13.0 million of restricted cash. In January 2013, we finalized our letter of credit sub-facility and at the same time, transferred the $12.4 million of outstanding letters of credit from our stand-alone facility over to the new sub-facility. As such, we were able to eliminate the cash collateral requirement for our outstanding
50
letters of credit, thus increasing our liquidity by an additional $13.0 million. We also amended the stand-alone facility from $20.0 million down to $10.0 million.
In May 2013, we repaid the full $225.0 million outstanding term loan as part of the 2013 refinancing transaction discussed below. At the same time, we terminated the term loan and letter of credit sub-facility, as well as the amended stand-alone facility.
2013 Refinancing
In May 2013 we completed a private offering of $350.0 million in aggregate principal amount of 7.625% senior secured notes due 2021 (“2021 notes”) at a price equal to 100% of their face value. In conjunction with the offering, we also entered into a new 5-year $175.0 million senior secured revolving credit facility agreement (“2013 facility”) provided by a syndicate of financial institutions led by SunTrust Bank as administrative agent.
We used the net proceeds from the offering of the 2021 notes, together with cash on hand, to (i) redeem $139.7 million in aggregate outstanding principal amount of our 2016 notes at par plus accrued and unpaid interest thereon to the redemption date, (ii) repay $225.0 million in borrowings outstanding under our existing first-lien term loan plus a prepayment premium of approximately $39.5 million and accrued and unpaid interest and (iii) pay the related commissions, fees and expenses. The repayment of the 2016 notes and the term loan was considered to be an extinguishment. As such, we recognized a loss of $48.4 million, which was recorded as interest expense in the second quarter of 2013. Of this $48.4 million loss, $39.5 million was due to the prepayment premium on the term loan, $6.8 million was due to a write-off of unamortized debt discount on the term loan and $2.1 million was due to a write-off of unamortized deferred loan costs on the 2016 notes and the term loan.
Upon the repayment of the outstanding borrowings and payment of the prepayment premium and accrued interest, we terminated the term loan, which included the $15.0 million letter of credit sub-facility. The $12.7 million of outstanding letters of credit under the sub-facility at the time were transferred to the 2013 facility. At the same time, we also terminated our $10.0 million letter of credit stand-alone facility. There were no letters of credit outstanding under the stand-alone facility at the time of termination.
In connection with the issuance of the 2021 notes and entering into the 2013 facility we incurred approximately $15.6 million of various third-party fees and expenses. Of these costs, $11.2 million were allocated to the 2021 notes and $4.4 million were allocated to the 2013 facility. These costs have been capitalized and will be amortized over the respective terms of the 2021 notes and the 2013 facility. The $0.9 million in remaining unamortized deferred loan costs related to the sub-facility and stand-alone facility are being amortized over the term of the 2013 facility.
Senior Secured Notes due 2021
As of December 31, 2014, we have $350.0 million outstanding in aggregate principal amount of 2021 notes that mature on June 1, 2021. The 2021 notes were issued pursuant to an indenture, dated as of May 29, 2013 (“Indenture”), by and between us, certain of our subsidiaries, as guarantors (“Guarantors”), and Wilmington Trust, National Association, as trustee and notes collateral agent (“Trustee”). Interest accrues on the 2021 notes at a rate of 7.625% per annum and is payable semi-annually in arrears on June 1 and December 1 of each year.
The 2021 notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior secured basis, by each of the Guarantors. All obligations under the 2021 notes, and the guarantees of those obligations, will be secured by substantially all of our assets and the assets of the Guarantors subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute Notes Collateral (as defined therein) and a second-priority security interest in such assets that constitute ABL Collateral (as defined therein). An intercreditor agreement (“ABL/Bond Intercreditor Agreement”), dated as of May 29, 2013, among us, the Guarantors, SunTrust Bank, as ABL Collateral agent, and the Trustee, as Notes Collateral agent, will govern all arrangements in respect of the priority of the security interest in the ABL Collateral and the Notes Collateral.
“ABL Collateral” includes substantially all presently owned and after-acquired accounts receivable, inventory, rights of an unpaid vendor with respect to inventory, deposit accounts, investment property, cash and cash equivalents, and instruments and chattel paper and general intangibles, books and records and documents related to and proceeds of each of the foregoing. “Notes Collateral” includes substantially all collateral which is not ABL Collateral.
The Indenture contains certain restrictive covenants, which, among other things, relate to the payment of dividends, incurrence of indebtedness, repurchase of common stock, distributions, asset sales and investments. At any time we can redeem some or all of the 2021 notes at a redemption price equal to par plus a specified premium that declines to par by 2019. In the event of a change of control, we may be required to offer to purchase the 2021 notes at a purchase price equal to 101% of the principal, plus accrued and unpaid interest.
51
2013 Senior Secured Revolving Credit Facility
The 2013 facility provides for a $175.0 million revolving credit line to be used for working capital and general corporate purposes. The available borrowing capacity, or borrowing base, is derived primarily from a percentage of the Company’s eligible receivables and inventory, as defined by the agreement, subject to certain reserves. The 2013 facility is scheduled to mature on May 29, 2018. At December 31, 2014, the net borrowing availability under the 2013 facility totaled $129.4 million after being reduced by outstanding letters of credit of approximately $15.6 million and $30.0 million of borrowings currently outstanding. During the third quarter of 2014 we borrowed $30.0 million under the 2013 facility at a weighted-average interest rate of 1.98%. During the second quarter of 2013 we borrowed and repaid $30.0 million under the 2013 facility at a weighted-average interest rate of 4.0%.
Borrowings under the 2013 facility bear interest, at our option, at either a base rate or eurodollar rate, plus, in each case, an applicable margin. The applicable margin ranges from 0.75% to 1.25% for base rate loans and 1.75% to 2.25% for eurodollar rate loans, in each case based on a measure of our availability under the revolver. A variable commitment fee, currently at a rate of 0.5%, is charged on the unused amount of the revolver based on quarterly average loan utilization. Letters of credit issued and outstanding under the 2013 facility are assessed a fee at a rate equal to the applicable eurodollar rate margin, currently 1.75%, and is payable quarterly in arrears at the end of March, June, September and December. They are also assessed a fronting fee at a rate of 0.125%.
All obligations under the 2013 facility will be guaranteed jointly and severally by us and all our subsidiaries that guarantee the 2021 notes. All obligations under the 2013 facility, and the guarantees of those obligations, will be secured by substantially all of our assets and the guarantors subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute ABL Collateral and a second-priority security interest in such assets that constitute Notes Collateral.
The 2013 facility contains certain restrictive covenants, which, among other things, relate to the incurrence of indebtedness, payment of dividends, repurchase of common stock, distributions, asset sales and investments. The agreement also contains a financial covenant requiring the satisfaction of a minimum fixed charge coverage ratio of 1.00 to 1.00 if our excess availability, defined as the sum of our net borrowing availability plus qualified cash, falls below the greater of $17.5 million or 10% of the maximum borrowing amount. Qualified cash is defined as cash on deposit that is subject to a control agreement in favor of the agent. As of December 31, 2014, our excess availability was $146.1 million, which includes $129.4 million in net borrowing availability and $16.7 million in qualified cash. The agreement governing the 2013 facility also includes customary events of default, including change of control. If an event of default occurs, the lenders under the 2013 facility would be entitled to take various actions, including the acceleration of amounts due under the revolver and all actions permitted to be taken by a secured creditor (subject to the terms of the ABL/Bond Intercreditor Agreement).
At December 31, 2014, we were not in violation of any covenants or restrictions imposed by any of our debt agreements.
Fair Value
The Fair Value Measurements and Disclosures topic of the Codification provides a framework for measuring the fair value of assets and liabilities and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:
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 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.
52
The tables below present the effect of our derivative financial instrument on the consolidated statements of operations and comprehensive income (loss) for the years ended December 31 (in thousands):
|
Derivative Not Designated as Hedging Instruments |
|
Location of Gain (Loss) Recognized in Income |
|
Amount of Gain (Loss) |
|
|||||||||
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||||
|
Warrants |
|
Interest expense, net |
|
|
455 |
|
|
|
(1,502 |
) |
|
|
(4,992 |
) |
We use the income approach to value our warrants by using the Black-Scholes option-pricing model. Using this model, the risk-free interest rate is based on the U.S. Treasury yield curve in effect on the valuation date. The expected life is based on the period of time until the expiration of the warrants. Expected volatility is based on the historical volatility of our common stock over the most recent period equal to the expected life of the warrants. 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.
These techniques incorporate Level 1 and Level 2 inputs. Significant inputs to the derivative valuation for the warrants are observable in the active markets and are classified as Level 2 in the hierarchy.
The following fair value hierarchy table presents information about our financial instrument measured at fair value on a recurring basis using significant other observable inputs (Level 2) (in thousands):
|
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
||||
|
Warrants (included in Other long-term liabilities) |
|
$ |
3,375 |
|
|
$ |
3,375 |
|
|
$ |
3,830 |
|
|
$ |
3,830 |
|
We have elected to report the value of our 2021 Notes at amortized cost. The fair value of the 2021 Notes at December 31, 2014 was approximately $356.8 million and was determined using Level 2 inputs based on market prices.
Other Long-Term Debt
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 building and the long-term lease obligation are included on the consolidated balance sheet as a component of fixed assets and other long-term debt, respectively.
Future maturities of long-term debt as of December 31, 2014 were as follows (in thousands):
|
Year ending December 31, |
|
|
|
|
|
2015 |
|
$ |
30,074 |
|
|
2016 |
|
|
83 |
|
|
2017 |
|
|
92 |
|
|
2018 |
|
|
102 |
|
|
2019 |
|
|
113 |
|
|
Thereafter |
|
|
353,440 |
|
|
Total long-term debt (including current portion) |
|
$ |
383,904 |
|
53
10. Employee Stock-Based Compensation
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. The maximum number of common shares reserved for the grant of awards under the 2014 Plan is 5.0 million, subject to adjustment as provided by the 2014 Plan. All 5.0 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 grantee’s employment is terminated under certain circumstances. Other specific terms 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 four year period. As of December 31, 2014, 3.7 million shares were available for issuance under the 2014 Plan.
2007 Incentive Plan
Under our 2007 Incentive Plan (“2007 Plan”), the Company is 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. In January 2010, our shareholders approved an amendment to our 2007 Plan which increased the number of shares of common stock that may be granted pursuant to awards under the 2007 Plan from 2.5 million shares to 7.0 million shares. The maximum number of common shares reserved for the grant of awards under the 2007 Plan is 7.0 million, subject to adjustment as provided by the 2007 Plan. No more than 7.0 million shares may be made subject to options SARs granted under the 2007 Plan, and no more than 3.5 million shares may be made subject to stock-based awards other than options or SARs. 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 provides that all awards will become fully vested and/or exercisable upon a change in control (as defined in the 2007 Plan). Other specific terms for awards granted under the 2007 Plan shall be determined by our Compensation Committee (or the board of directors if so determined by the board of directors). Historically, awards granted under the 2007 Plan generally vest ratably over a three to four-year period. As of December 31, 2014, 25,000 shares were available for issuance under the 2007 Plan, 25,000 of which may be made subject to stock-based awards other than options or SARs.
2005 Equity Incentive Plan
Under our 2005 Equity Incentive Plan (“2005 Plan”), we are 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. The maximum number of common shares reserved for the grant of awards under the 2005 Plan is 2.2 million, subject to adjustment as provided by the 2005 Plan. No more than 2.2 million shares may be made subject to options or SARs granted under the 2005 Plan, and no more than 1.1 million shares may be made subject to stock-based awards other than options or SARs. Stock options and SARs granted under the 2005 Plan may not have a term exceeding 10 years from the date of grant. The 2005 Plan also provides that all awards will become fully vested and/or exercisable upon a change in control (as defined in the 2005 Plan). Other specific terms for awards granted under the 2005 Plan shall be determined by our board of directors (or a committee of its members). Historically, awards granted under the 2005 Plan generally vest ratably over a three-year period. As of December 31, 2014, 2,700 shares were available for issuance under the 2005 Plan, 2,700 of which may be made subject to stock-based awards other than options or SARs.
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.
54
The following table summarizes our stock option activity:
|
|
|
Options |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
||||
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
(In thousands) |
|
||||
|
Outstanding at December 31, 2013 |
|
|
4,933 |
|
|
$ |
4.01 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,817 |
|
|
$ |
7.67 |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(492 |
) |
|
$ |
3.72 |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(12 |
) |
|
$ |
7.05 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014 |
|
|
6,246 |
|
|
$ |
5.09 |
|
|
|
6.4 |
|
|
$ |
12,782 |
|
|
Exercisable at December 31, 2014 |
|
|
4,379 |
|
|
$ |
4.04 |
|
|
|
5.2 |
|
|
$ |
12,614 |
|
The outstanding options at December 31, 2014 include options to purchase 4,113,000 shares granted under the 2007 Plan, 1,319,000 shares granted under the 2005 Plan and 814,000 shares granted under the 1998 Plan. As of December 31, 2014, options to purchase 2,796,000 shares under the 2007 Plan, 769,000 shares under the 2005 Plan and 814,000 shares under the 1998 Plan awards were exercisable. The weighted average grant date fair value of options granted during the years ended December 31, 2014 and 2012 were $5.71 and $2.83, respectively. No option awards were granted during 2013. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013, and 2012 were $2.0 million $1.8 million and $0.4 million, respectively. We realized no tax benefits for stock options exercised during the years ended December 31, 2014, 2013 and 2012.
Outstanding and exercisable stock options at December 31, 2014 were as follows (shares in thousands):
|
|
|
Outstanding |
|
|
Exercisable |
|
||||||||||||||
|
Range of Exercise Prices |
|
Shares |
|
|
Weighted |
|
|
Weighted |
|
|
Shares |
|
|
Weighted |
|
|||||
|
$3.15 |
|
|
814 |
|
|
$ |
3.15 |
|
|
|
7.8 |
|
|
|
814 |
|
|
$ |
3.15 |
|
|
$3.19 - $3.72 |
|
|
2,652 |
|
|
$ |
3.21 |
|
|
|
5.2 |
|
|
|
2,598 |
|
|
$ |
3.20 |
|
|
$6.70 - $7.15 |
|
|
967 |
|
|
$ |
7.06 |
|
|
|
3.3 |
|
|
|
967 |
|
|
$ |
7.06 |
|
|
$7.67 |
|
|
1,813 |
|
|
$ |
7.67 |
|
|
|
9.1 |
|
|
|
— |
|
|
$ |
— |
|
|
$3.15 - $7.67 |
|
|
6,246 |
|
|
$ |
5.09 |
|
|
|
6.4 |
|
|
|
4,379 |
|
|
$ |
4.04 |
|
The following table summarizes restricted stock activity for the year ended December 31, 2014 (shares in thousands):
|
|
|
Shares |
|
|
Weighted |
|
||
|
Nonvested at December 31, 2013 |
|
|
610 |
|
|
$ |
3.42 |
|
|
Granted |
|
|
— |
|
|
$ |
— |
|
|
Vested |
|
|
(583 |
) |
|
$ |
3.40 |
|
|
Forfeited |
|
|
— |
|
|
$ |
— |
|
|
Nonvested at December 31, 2014 |
|
|
27 |
|
|
$ |
3.72 |
|
The outstanding restricted stock units (“RSUs”) at December 31, 2014 include 1,300,000 units granted under the 2014 Plan and 555,000 units granted under the 2007 Plan. The weighted average grant date fair value of RSUs granted during the year ended December 31, 2014 was $7.48. No RSUs were granted during 2013 or 2012.
The following table summarizes restricted stock unit activity for the year ended December 31, 2014 (shares in thousands):
|
|
|
Shares |
|
|
Weighted |
|
||
|
Nonvested at December 31, 2013 |
|
|
— |
|
|
$ |
— |
|
|
Granted |
|
|
1,858 |
|
|
$ |
7.48 |
|
|
Vested |
|
|
— |
|
|
$ |
— |
|
|
Forfeited |
|
|
(3 |
) |
|
$ |
7.52 |
|
|
Nonvested at December 31, 2014 |
|
|
1,855 |
|
|
$ |
7.48 |
|
55
Our results of operations included stock compensation expense of $6.2 million ($6.2 million net of taxes), $4.2 million ($4.2 million net of taxes) and $3.6 million ($3.6 million net of taxes) for the years ended December 31, 2014, 2013 and 2012, respectively. The total fair value of options vested during the years ended December 31, 2014, 2013, and 2012 were $3.0 million, $3.0 million and $3.1 million, respectively. The total fair value of restricted stock vested during the years ended December 31, 2014, 2013 and 2012 were $2.0 million, $2.1 million and $2.0 million, respectively. There were no RSUs which vested in 2014, 2013, or 2012.
As of December 31, 2014, there was $17.4 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 3.0 years.
11. Facility Closure Costs
In 2014, we recognized $0.5 million in expense primarily related to the minimum future lease obligations on a facility in Tennessee, which was closed in 2014, return condition obligations on a previously closed facility in South Carolina, and revised sub-rental income estimates on a previously closed facility in Tennessee. We recognized this expense in facility closure costs and interest expense, net in the accompanying consolidated statement of operations and comprehensive income (loss).
In 2013, we recognized $0.1 million in expense primarily related to revisions of sub-rental income estimates on a previously closed facility in Tennessee and future minimum lease obligations on our vacated facilities, net of estimated sub-rental income. We recognized this expense in facility closure costs and interest expense, net in the accompanying consolidated statement of operations and comprehensive income (loss). There were no new facility closures in 2013.
In 2012 we recognized $1.1 million in expense, which was primarily related to revisions of sub-rental income estimates on two previously closed facilities in South Carolina and Tennessee and future minimum lease obligations on our vacated facilities, net of estimated sub-rental income. Of the $1.1 million expense we recognized during 2012, $1.0 million was included in facility closure costs and $0.1 million was included in interest expense, net in the accompanying consolidated statement of operations and comprehensive income (loss). There were no new facility closures in 2012.
An analysis of our facility closure reserves for the periods reflected is as follows:
|
|
|
2012 |
|
|
Additions |
|
|
Payments |
|
|
2013 |
|
|
Additions |
|
|
Payments |
|
|
2014 |
|
|||||||
|
|
|
(In thousands) |
|
|||||||||||||||||||||||||
|
Facility and other exit costs, net of estimated sub-lease rental income |
|
$ |
2,834 |
|
|
$ |
82 |
|
|
$ |
(1,216 |
) |
|
$ |
1,700 |
|
|
$ |
515 |
|
|
$ |
(1,068 |
) |
|
$ |
1,147 |
|
The facility and other exit cost reserves of $1.1 million at December 31, 2014, of which $0.3 million is recorded as other long-term liabilities, are primarily related to future minimum lease payments on vacated facilities.
As plans to close facilities are developed and executed, assets that can be used at other facilities are transferred and assets to be abandoned or sold are written down to their net realizable value, including any long-lived assets. In situations where multiple facilities serve the same market we may temporarily close, or idle, facilities with plans to reopen these facilities once demand returns to the market. At December 31, 2014, we had four idled facilities; two in Florida and two in South Carolina. In these situations, finite lived assets continue to be depreciated and assessed for impairment. Should conditions in our markets worsen, or recovery take significantly longer than forecasted, we may temporarily idle or permanently close additional facilities, at which time we may incur additional facility closure costs or asset impairment charges. Future non-cash impairment charges 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 continuously monitor economic conditions in all our markets, and while at the present time there are no plans to close or idle additional facilities, changes in market conditions may warrant future closings or idling of facilities.
56
12. Income Taxes
The components of income tax expense (benefit) included in continuing operations were as follows for the years ended December 31:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
(594 |
) |
|
$ |
— |
|
|
State |
|
|
587 |
|
|
|
446 |
|
|
|
119 |
|
|
|
|
|
587 |
|
|
|
(148 |
) |
|
|
119 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
457 |
|
|
|
827 |
|
|
|
378 |
|
|
State |
|
|
67 |
|
|
|
90 |
|
|
|
80 |
|
|
|
|
|
524 |
|
|
|
917 |
|
|
|
458 |
|
|
Income tax expense |
|
$ |
1,111 |
|
|
$ |
769 |
|
|
$ |
577 |
|
Temporary differences, which give rise to deferred tax assets and liabilities, were as follows as of December 31:
|
|
|
2014 |
|
|
2013 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Deferred tax assets related to: |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
1,764 |
|
|
$ |
1,897 |
|
|
Insurance reserves |
|
|
4,461 |
|
|
|
3,596 |
|
|
Facility closure reserves |
|
|
1,128 |
|
|
|
1,486 |
|
|
Stock-based compensation expense |
|
|
8,066 |
|
|
|
7,943 |
|
|
Accounts receivable |
|
|
658 |
|
|
|
921 |
|
|
Inventories |
|
|
6,394 |
|
|
|
5,117 |
|
|
Operating loss and credit carryforwards |
|
|
106,593 |
|
|
|
116,926 |
|
|
Goodwill and other intangible assets |
|
|
1,999 |
|
|
|
2,593 |
|
|
Property, plant and equipment |
|
|
5,931 |
|
|
|
6,307 |
|
|
Other |
|
|
512 |
|
|
|
435 |
|
|
|
|
|
137,506 |
|
|
|
147,221 |
|
|
Valuation allowance |
|
|
(133,183 |
) |
|
|
(143,682 |
) |
|
Total deferred tax assets |
|
|
4,323 |
|
|
|
3,539 |
|
|
Deferred tax liabilities related to: |
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
(2,223 |
) |
|
|
(1,383 |
) |
|
Goodwill and other intangible assets |
|
|
(8,281 |
) |
|
|
(7,812 |
) |
|
Total deferred tax liabilities |
|
|
(10,504 |
) |
|
|
(9,195 |
) |
|
Net deferred tax liability |
|
$ |
(6,181 |
) |
|
$ |
(5,656 |
) |
A reconciliation of the statutory federal income tax rate to our effective rate for continuing operations is provided below for the years ended December 31:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
Statutory federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State income taxes, net of federal income tax |
|
|
5.2 |
|
|
|
0.1 |
|
|
|
3.5 |
|
|
Valuation allowance |
|
|
(36.5 |
) |
|
|
(36.9 |
) |
|
|
(36.3 |
) |
|
Permanent differences |
|
|
1.9 |
|
|
|
(1.3 |
) |
|
|
(3.3 |
) |
|
Other |
|
|
− |
|
|
|
1.2 |
|
|
|
− |
|
|
|
|
|
5.6 |
% |
|
|
(1.9 |
)% |
|
|
(1.1 |
)% |
We have $434.4 million of state operating loss carry-forwards, which includes $2.6 million of state tax credit carry-forwards expiring at various dates through 2032. We also have $254.5 million of federal net operating loss carry-forwards that will expire at various dates through 2033. The federal and state operating loss carry-forwards exclude approximately $6.7 million of gross windfall tax benefits from stock option exercises that have not been recorded as of December 31, 2014. These deferred tax assets will be recorded as an increase to additional paid in capital when the related tax benefits are realized. To the extent we generate sufficient
57
taxable income in the future to fully utilize the tax benefits of the net deferred tax assets on which a valuation allowance was recorded, our effective tax rate may decrease as the valuation allowance is reversed.
Section 382 of the Internal Revenue Code imposes annual limitations on the utilization of net operating loss (“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 Company’s stock by more than 50 percentage points over a three year testing period (“Section 382 Ownership Change”). If the Company were to experience a Section 382 Ownership Change, an annual limitation would be imposed on certain of the Company’s tax attributes, including NOL and capital loss carryforwards, and certain other losses, credits, deductions or tax basis.
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. 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, among other matters, the reversal of existing deferred tax liabilities, historical and forecasted taxable income, 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.
Poor housing market conditions have contributed to our cumulative loss position for the past several years. While we generated income in 2014, we still have a cumulative loss for the three year period ending December 31, 2014. We believe this, as well as uncertainty around the extent and timing of the housing market recovery, represents significant negative evidence in considering whether our deferred tax assets are realizable. Further, we do not believe that relying on projections of future taxable income to support the recovery of deferred tax assets is sufficient. Based on an evaluation of positive and negative evidence, we concluded that the negative evidence regarding our ability to realize our deferred tax assets outweighed the positive evidence as of December 31, 2014.
In 2014, we reduced our valuation allowance by $7.2 million due to the utilization of net operating losses against federal and state taxable income. In 2013, we recorded a valuation allowance of approximately $15.3 million related to our continuing operations, which is exclusive of $0.6 million related primarily to reversals of uncertain tax positions due to statute expirations that affected our net operating loss carryforward and valuation allowance. In 2012, we recorded a valuation allowance of approximately $19.6 million related to our continuing operations.
Without continued improvement in housing activity, we could be required to establish additional valuation allowances. However, we had positive earnings before taxes in 2014. To the extent we continue to generate sufficient taxable income in the same jurisdictions in the future to utilize the tax benefits of the related net deferred tax assets, we may reverse some or all of the valuation allowance. We currently estimate that we will likely transition into a three year cumulative income position on a rolling three year period at some time during the year ending December 2015. However, there continues to be uncertainty around housing market projections. Simply coming out of a cumulative loss is not viewed as a bright line and may not be considered sufficient positive evidence to reverse some or all of the valuation allowance if there are other offsetting negative factors. In upcoming quarters, we will closely monitor the positive and negative evidence surrounding our ability to realize our deferred tax assets.
We base our estimate of deferred tax assets and liabilities on current tax laws and rates. In certain cases, we also base our estimate on business plan forecasts and other expectations about future outcomes. Changes in existing tax laws or rates could affect our actual tax results, and future business results may affect the amount of our deferred tax liabilities or the valuation of our deferred tax assets over time. Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods, as well as the residential homebuilding industry’s cyclicality and sensitivity to changes in economic conditions, it is possible that actual results could differ from the estimates used in previous analyses.
Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position.
58
The following table shows the changes in our valuation allowance:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Balance at January 1, |
|
$ |
143,682 |
|
|
$ |
127,700 |
|
|
$ |
112,392 |
|
|
Additions charged to expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
— |
|
|
|
15,878 |
|
|
|
19,559 |
|
|
Discontinued operations |
|
|
131 |
|
|
|
178 |
|
|
|
905 |
|
|
Reductions credited to expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
(7,178 |
) |
|
|
— |
|
|
|
— |
|
|
Discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Deductions |
|
|
(3,452 |
) |
|
|
(74) |
|
|
|
(5,156 |
) |
|
Balance at December 31, |
|
$ |
133,183 |
|
|
$ |
143,682 |
|
|
$ |
127,700 |
|
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 2014, 2013 or 2012. We had a total of $0.3 million and $0.2 million accrued for interest and penalties for our uncertain tax positions as of December 31, 2014 and 2013, respectively.
The following table shows the changes in the amount of our uncertain tax positions (exclusive of the effect of interest and penalties):
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Balance at January 1, |
|
$ |
950 |
|
|
$ |
2,080 |
|
|
$ |
2,257 |
|
|
Tax positions taken in prior periods: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross increases |
|
|
2 |
|
|
|
— |
|
|
|
22 |
|
|
Gross decreases |
|
|
— |
|
|
|
— |
|
|
|
(64 |
) |
|
Tax positions taken in current period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross increases |
|
|
13 |
|
|
|
11 |
|
|
|
7 |
|
|
Settlements with taxing authorities |
|
|
— |
|
|
|
— |
|
|
|
(142 |
) |
|
Lapse of applicable statute of limitations |
|
|
(587 |
) |
|
|
(1,141 |
) |
|
|
— |
|
|
Balance at December 31, |
|
$ |
378 |
|
|
$ |
950 |
|
|
$ |
2,080 |
|
The balance for uncertain tax positions was $0.4 million as of December 31, 2014 excluding penalties and interest. If this balance were recognized, the tax provision would decrease by $0.2 million excluding the impact to the valuation allowance.
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 for years through 2004. We report in 17 states with various years open to examination.
13. Employee Benefit Plans
We maintain one active defined contribution 401(k) plan. Our employees are eligible after completing six months of employment to participate in the Builders FirstSource, Inc. 401(k) Plan. Participants can contribute up to 15% 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 $0.4 million, $0.4 million and $0.3 million in 2014, 2013 and 2012, respectively, for contributions to the plan.
14. Commitments and Contingencies
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. Total rent expense under operating leases was approximately $25.4 million, $20.5 million and $19.0 million for the years ended December 31, 2014, 2013, and 2012, 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
59
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 $2.8 million as of December 31, 2014. 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.
Future minimum commitments for noncancelable operating leases with initial or remaining lease terms in excess of one year are as follows:
|
|
|
Related Party |
|
|
Total* |
|
||
|
|
|
(In thousands) |
|
|||||
|
Year ending December 31, |
|
|
|
|
|
|
|
|
|
2015 |
|
$ |
636 |
|
|
$ |
24,554 |
|
|
2016 |
|
|
333 |
|
|
|
21,756 |
|
|
2017 |
|
|
285 |
|
|
|
18,071 |
|
|
2018 |
|
|
242 |
|
|
|
15,979 |
|
|
2019 |
|
|
227 |
|
|
|
9,257 |
|
|
Thereafter |
|
|
1,078 |
|
|
|
16,618 |
|
|
|
|
$ |
2,801 |
|
|
$ |
106,235 |
|
|
* |
Includes related party future minimum commitments for noncancelable operating leases. |
As of December 31, 2014, we had outstanding letters of credit totaling $15.6 million under our 2013 Facility that principally support our self insurance programs.
We received $0.6 million from litigation settlements in 2012. These settlements were recorded as a reduction of selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive income (loss) in 2012.
We are a party to various legal proceedings in the ordinary course of business. Although the ultimate disposition of these proceedings cannot be predicted with certainty, management believes the outcome of any claim that is 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 costs would not be material to our results of operations or liquidity for a particular period.
15. Segment and Product Information
We offer an integrated solution to our customers providing manufacturing, supply, and installation of a full range of structural and related building products. We provide a wide variety of building products and services directly to homebuilder customers. We manufacture floor trusses, roof trusses, wall panels, stairs, millwork, windows, and doors. We also provide a full range of construction services. We group our building products and services into five product categories: prefabricated components, windows & doors, lumber & lumber sheet goods, millwork, and other building products & services. We have one operating segment with centralized financial and operational oversight.
Sales by product category were as follows for the years ended December 31:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Prefabricated components |
|
$ |
330,852 |
|
|
$ |
294,008 |
|
|
$ |
203,687 |
|
|
Windows & doors |
|
|
356,897 |
|
|
|
308,607 |
|
|
|
233,111 |
|
|
Lumber & lumber sheet goods |
|
|
522,655 |
|
|
|
526,633 |
|
|
|
348,132 |
|
|
Millwork |
|
|
160,242 |
|
|
|
136,883 |
|
|
|
104,165 |
|
|
Other building products & services |
|
|
233,450 |
|
|
|
223,761 |
|
|
|
181,581 |
|
|
Total sales |
|
$ |
1,604,096 |
|
|
$ |
1,489,892 |
|
|
$ |
1,070,676 |
|
60
16. Related Party Transactions
An affiliate of JLL Partners, Inc. was a principal beneficial owner of PGT, Inc. until late 2013. Floyd F. Sherman, our chief executive officer, serves on the board of directors for PGT, Inc. We purchased windows from PGT, Inc. totaling $6.3 million, $5.0 million and $4.4 million in 2014, 2013 and 2012, respectively. We had accounts payable to PGT, Inc. in the amounts of $0.8 million and $0.5 million as of December 31, 2014 and 2013, respectively.
In 2014, 2013 and 2012, we paid approximately $0.9 million, $0.8 million and $1.2 million, respectively, in rental expense to employees or our non-affiliate stockholders for leases of land and buildings.
17. Concentrations
We maintain cash at financial institutions in excess of federally insured limits. Accounts receivable potentially expose us to concentrations of credit risk. We provide credit in the normal course of business to customers in the residential construction industry. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses. Because customers are dispersed among our various markets, our credit risk to any one customer or state economy is not significant.
Our customer mix is a balance of large national homebuilders, regional homebuilders and local homebuilders. For the year ended December 31, 2014, our top 10 customers accounted for approximately 25.1% of our sales, and no single customer accounted for more than 8% of sales.
We source products from a large number of suppliers. No materials purchased from any single supplier represented more than 10% of our total materials purchased in 2014.
18. Supplemental Cash Flow Information
Supplemental cash flow information was as follows for the years ended December 31:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Cash payments for interest |
|
$ |
28,338 |
|
|
$ |
78,232 |
|
|
$ |
37,846 |
|
|
Cash payments (refunds) for income taxes |
|
|
456 |
|
|
|
407 |
|
|
|
281 |
|
61
19. Unaudited Quarterly Financial Data
The following tables summarize the consolidated quarterly results of operations for 2014 and 2013 (in thousands, except per share amounts):
|
|
|
2014 |
|
|||||||||||||
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
||||
|
Net sales |
|
$ |
345,909 |
|
|
$ |
426,543 |
|
|
$ |
434,907 |
|
|
$ |
396,737 |
|
|
Gross margin |
|
|
74,915 |
|
|
|
93,799 |
|
|
|
97,647 |
|
|
|
90,636 |
|
|
Income (loss) from continuing operations |
|
|
(3,312 |
)(1) |
|
|
10,620 |
(2) |
|
|
8,739 |
(3) |
|
|
2,511 |
(4) |
|
Loss from discontinued operations, net of tax |
|
|
(72 |
) |
|
|
(11 |
) |
|
|
(235 |
) |
|
|
(90 |
) |
|
Net income (loss) |
|
|
(3,384 |
) |
|
|
10,609 |
|
|
|
8,504 |
|
|
|
2,421 |
|
|
Basic net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.03 |
)(1) |
|
$ |
0.11 |
(2) |
|
$ |
0.09 |
(3) |
|
$ |
0.02 |
(4) |
|
Loss from discontinued operations |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
Net income (loss) |
|
$ |
(0.03 |
) |
|
$ |
0.11 |
|
|
$ |
0.09 |
|
|
$ |
0.02 |
|
|
Diluted net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.03 |
)(1) |
|
$ |
0.09 |
(2) |
|
$ |
0.07 |
(3) |
|
$ |
0.02 |
(4) |
|
Loss from discontinued operations |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
Net income (loss) |
|
$ |
(0.03 |
) |
|
$ |
0.09 |
|
|
$ |
0.07 |
|
|
$ |
0.02 |
|
|
|
|
2013 |
|
|||||||||||||
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
||||
|
Net sales |
|
$ |
319,702 |
|
|
$ |
398,148 |
|
|
$ |
402,931 |
|
|
$ |
369,111 |
|
|
Gross margin |
|
|
62,347 |
|
|
|
82,232 |
|
|
|
92,494 |
|
|
|
82,847 |
|
|
Income (loss) from continuing operations |
|
|
(11,605 |
)(5) |
|
|
(48,289 |
)(6) |
|
|
12,952 |
(7) |
|
|
4,577 |
(8) |
|
Income (loss) from discontinued operations, net of tax |
|
|
(203 |
) |
|
|
83 |
|
|
|
(158 |
) |
|
|
(48 |
) |
|
Net income (loss) |
|
|
(11,808 |
) |
|
|
(48,206 |
) |
|
|
12,794 |
|
|
|
4529 |
|
|
Basic and diluted net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.12 |
)(5) |
|
$ |
(0.50 |
)(6) |
|
$ |
0.13 |
(7) |
|
$ |
0.05 |
(8) |
|
Income (loss) from discontinued operations |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
Net income (loss) |
|
$ |
(0.12 |
) |
|
$ |
(0.50 |
) |
|
$ |
0.13 |
|
|
$ |
0.05 |
|
|
(1) |
Includes fair value adjustments for the warrants of $1.2 million as discussed in Note 9 and a valuation allowance of $1.0 million as discussed in Note 12. |
|
(2) |
Includes fair value adjustments for the warrants of $(1.2) million as discussed in Note 9, and a valuation allowance of $(4.1) million as discussed in Note 12. |
|
(3) |
Includes fair value adjustments for the warrants of $(1.3) million as discussed in Note 9, facility closure costs of $0.1 million as discussed in Note 11, and a valuation allowance of $(3.3) million as discussed in Note 12. |
|
(4) |
Includes fair value adjustments for the warrants of $0.9 million as discussed in Note 9, facility closure costs of $0.2 million as discussed in Note 11, and a valuation allowance of $(0.9) million as discussed in Note 12. |
|
(5) |
Includes fair value adjustments for the warrants of $0.4 million as discussed in Note 9 and a valuation allowance of $4.4 million as discussed in Note 12. |
|
(6) |
Includes a pre-payment premium on the term loan of $39.5 million as discussed in Note 9, debt discount write-off of $6.8 million as discussed in Note 9, debt issuance cost write-off of $2.1 million as discussed in Note 9, fair value adjustments for the warrants of $0.3 million as discussed in Note 9, and a valuation allowance of $17.0 million as discussed in Note 12. |
|
(7) |
Includes fair value adjustments for the warrants of $(0.2) million as discussed in Note 9, facility closure costs of $(0.2) million as discussed in Note 11, and a valuation allowance of $(3.4) million as discussed in Note 12. |
|
(8) |
Includes fair value adjustments for the warrants of $0.9 million as discussed in Note 9, facility closure costs of $0.1 million as discussed in Note 11, and a valuation allowance of $(2.6) million as discussed in Note 12. |
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.
62
20. Subsequent Event
On February 6, 2015 the Company acquired certain assets and the operations of Timber Tech Texas, Inc. (“Timber Tech”) for $5.8 million in cash (including certain adjustments). Timber Tech is based in Cibolo, Texas, which is approximately 25 miles northeast of downtown San Antonio. Timber Tech is a manufacturer of roof trusses, floor trusses, wall panels and sub-components, as well as a supplier of glue laminated timber and veneer lumber beams.
This transaction will be accounted for by the acquisition method, and accordingly the results of operations will be included in the Company’s consolidated financial statements from the acquisition date. The purchase price will be allocated to the 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. The accounting for this acquisition has not been completed at the date of this filing given the proximity to the acquisition date.
63
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. The controls evaluation was conducted by our Disclosure Committee, comprised of senior representatives from our finance, accounting, internal audit, and legal departments under the supervision of our CEO and CFO.
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 Effectiveness 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 provide 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.
Scope of the Controls Evaluation. The evaluation of our disclosure controls and procedures included a review of their objectives and design, the Company’s 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.
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, 2014, we maintained disclosure controls and procedures that were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s 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.
Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. 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, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting. During the quarter ended December 31, 2014, there were no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
64
Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934
Pursuant to Section 13(r) of the Exchange Act, we may be required to disclose in our annual and quarterly reports to the SEC whether we or any of our “affiliates” knowingly engaged in certain activities, transactions or dealings relating to Iran or with certain individuals or entities targeted by US economic sanctions. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law. Because the SEC defines the term “affiliate” broadly, it includes any entity under common “control” with us (and the term “control” is also construed broadly by the SEC).
The description of the activities below has been provided to us by Warburg Pincus LLC (“WP”), affiliates of which (i) beneficially own more than 10% of our outstanding common stock and are members of our board of directors and (ii) beneficially own more than 10% of the equity interests of, and have the right to designate members of the board of directors of, Endurance International Group (“EIG”) and Santander Asset Management Investment Holdings Limited (“SAMIH”). EIG and SAMIH may therefore be deemed to be under common “control” with us. However, this statement is not meant to be an admission that common control exists.
The disclosure below relates solely to activities conducted by EIG and SAMIH and their non-U.S. affiliates that may be deemed to be under common “control” with us. The disclosure does not relate to any activities conducted by us or by WP and does not involve our or WP’s management. Neither we nor WP has had any involvement in or control over the disclosed activities of SAMIH or EIG. Neither we nor WP has independently verified or participated in the preparation of the disclosure. Neither we nor WP is representing as to the accuracy or completeness of the disclosure, nor do we or WP undertake any obligation to correct or update it.
As to EIG:
We understand that EIG’s affiliates intend to disclose in their next annual or quarterly SEC report that: “on July 2, 2013, the billing information for a subscriber account, or the Subscriber Account was updated to include Seyed Mahmoud Mohaddes, or Mohaddes. On September 16, 2013, the Office of Foreign Assets Control, or OFAC, designated Mohaddes as a Specially Designated National, or SDN, pursuant to 31 C.F.R. Part 560.304. On or around September 26, 2014, during a routine compliance scan of new and existing subscriber accounts, EIG discovered that Mohaddes, a SDN, was named as an account contact for the Subscriber Account. EIG promptly suspended the Subscriber Account, locked the domain name IOCUKLTD.COM, which was registered to the Subscriber Account, and reported the domain name to OFAC as potentially the property of a SDN subject to blocking pursuant to Executive Order 13599. Since September 16, 2013, when Mohaddes was added to the SDN list, charges in the total amount of $120.35 were made to the Subscriber Account for web hosting and domain privacy services. EIG has ceased billing for the Subscriber Account. To date, EIG has not received any correspondence from OFAC regarding this matter.”
“On July 10, 2014, OFAC designated each of Stars Group Holding, or Stars, and Teleserve Plus SAL, or Teleserve, as SDNs under Executive Order 13224, and their property became subject to blocking pursuant to the Global Terrorism Sanctions Regulations, 31 C.F.R. Part 594. On July 15, 2014, as part of EIG’s compliance review processes, EIG discovered that the domain names associated with each of Stars, STARSCOM.NET, and Teleserve, TELESERVEPLUS.COM, or collectively, the Stars/Teleserve Domain Names, were registered through EIG’s platform. EIG immediately took steps to suspend and lock the Stars/Teleserve Domain Names to prevent them from being transferred or resolving to a website, and EIG promptly reported the Domain Names as potentially blocked property to OFAC. EIG did not generate any revenue from the Stars/Teleserve Domain Names between when they were added to the SDN list on July 10, 2014 and when EIG discovered that they were registered through EIG’s platform on July 15, 2014. To date, EIG has not received any correspondence from OFAC regarding the matter.”
“On July 15, 2014 during a compliance scan of all domain names on one of our platforms, EIG identified the domain name KAHANETZADAK.COM, or the Domain Name, which was listed as an ‘also known as,’ or AKA, of the entity Kahane Chai which operates as the American Friends of the United Yeshiva. Kahane Chai was designated as a SDN on November 2, 2001 pursuant to Executive Order 13224. Because the Domain Name was transferred into a customer account of one of EIG’s resellers, there was no direct financial transaction between EIG and the registered owner of the Domain Name. The Domain Name was suspended upon EIG’s discovering it on EIG’s platform, and EIG reported the Domain Name to OFAC as potentially the property of a SDN. To date, EIG have not received any correspondence from OFAC regarding the matter.”
As to SAMIH:
We understand that SAMIH’s affiliates intend to disclose in their next annual or quarterly SEC report that “Santander UK holds frozen savings and current accounts for three customers resident in the U.K. who are currently designated by the U.S. for terrorism. The accounts held by each customer were blocked after the customer’s designation and remained blocked and dormant throughout 2014. No revenue has been generated by Santander UK on these accounts. The bank account held for one of these customers was closed in the fourth quarter of 2014.”
65
“An Iranian national, resident in the U.K., who is currently designated by the U.S. under the Iranian Financial Sanctions Regulations and the Weapons of Mass Destruction Proliferators Sanctions Regulations (“NPWMD sanctions program”), holds a mortgage with Santander UK that was issued prior to any such designation. No further drawdown has been made (or would be permitted) under this mortgage although Santander UK continues to receive repayment installments. In 2014, total revenue in connection with the mortgage was approximately £2,580 and net profits were negligible relative to the overall profits of Santander UK. The same Iranian national also holds two investment accounts with Santander Asset Management UK Limited. The accounts have remained frozen during 2014. The investment returns are being automatically reinvested, and no disbursements have been made to the customer. Total revenue for the Santander Group in connection with the investment accounts was £250 and net profits in 2014 were negligible relative to the overall profits of Banco Santander, S.A.”
“In addition, during the third quarter 2014, Santander UK identified two additional customers: a UK national designated by the U.S. under the NPWMD sanctions program held a business account. No transactions were made and the account was closed in the fourth quarter of 2014. No revenue or profit has been generated. A second UK national designated by the US for reasons of terrorism held a personal current account and a personal credit card account, both of which were closed in the third quarter of 2014. Although transactions took place on the current account during the third quarter of 2014, revenue and profits generated were negligible. No transactions took place on the credit card.”
66
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders to be held May 27, 2015 under the captions “Proposal 1 — Election of Directors,” “Continuing Directors,” “Information Regarding the 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.
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 of representatives from our legal, human resources, finance and internal audit departments.
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 free 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:
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· |
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 controller; 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 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 in our definitive proxy statement for our annual meeting of stockholders to be held May 27, 2015 under the captions “Executive Compensation and Other Information,” “Information Regarding the Board and its Committees — Compensation of Directors,” and “Compensation Committee Interlocks and Insider Participation,” which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders to be held on May 27, 2015 under the caption “Ownership of Securities” and “Equity Compensation Plan Information,” which information is incorporated herein by reference.
67
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders to be held May 27, 2015 under the caption “Election of Directors and Management Information,” “Information Regarding the Board and its Committees,” and “Certain Relationships and Related Party Transactions,” which information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders to be held May 27, 2015 under the caption “Proposal 2 — Ratification of Selection of Independent Registered Public Accounting Firm — Fees Paid to PricewaterhouseCoopers LLP,” which information is incorporated herein by reference.
68
Item 15. Exhibits and Financial Statement Schedules
(a) (1) See the index to consolidated financial statements provided in Item 8 for 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 |
|
Description |
|
3.1 |
|
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) |
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3.2 |
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Amended and Restated By-Laws of Builders FirstSource, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 5, 2007, File Number 0-51357) |
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4.1 |
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Registration Rights Agreement, dated as of January 21, 2010, among Builders FirstSource, Inc., JLL Partners Fund V, L.P., and Warburg Pincus Private Equity IX, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 22, 2010, File Number 0-51357) |
|
4.2
|
|
Indenture, dated as of May 29, 2013, among Builders FirstSource, Inc., the guarantors party thereto, and Wilmington Trust Company, as trustee (form of Note included therein) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed with the Securities Exchange Commission on June 3, 2013, File Number 0-51357) |
|
10.1 |
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Credit Agreement, dated as of May 29, 2013, among Builders FirstSource, Inc., as borrower, the additional borrowers party thereto, the lenders party thereto, and SunTrust Bank, as administrative agent, swing line lender, and letter of credit issuer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities Exchange Commission on June 3, 2013, File Number 0-51357) |
|
10.2 |
|
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 Company’s Current Report on Form 8-K, filed with the Securities Exchange Commission on June 3, 2013, File Number 0-51357) |
|
10.3 |
|
Notes Collateral Agreement, dated as of May 29, 2013, by and among Builders FirstSource, Inc. and certain of its subsidiaries, as grantors, and Wilmington Trust, National Association, as collateral agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with the Securities Exchange Commission on June 3, 2013, File Number 0-51357) |
|
10.4 |
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Security Agreement, dated as of May 29, 2013, by and among Builders FirstSource, Inc. and certain of its subsidiaries, as grantors, and SunTrust Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed with the Securities Exchange Commission on June 3, 2013, File Number 0-51357) |
|
10.5 |
|
Guaranty, dated as of May 29, 2013, among Builders FirstSource, Inc., the other guarantors party thereto from time to time, and SunTrust Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, filed with the Securities Exchange Commission on June 3, 2013, File Number 0-51357) |
|
10.6 |
|
Warrant Issuance Agreement, dated as of December 2, 2011, by and among Builders FirstSource, Inc., Highbridge Principal Strategies – Senior Loan Fund II, L.P., Highbridge Onshore Senior Investments, LLC, and Highbridge Senior Loan Sector A Investment Fund, L.P. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 8, 2011, File Number 0-51357) |
|
10.7 |
|
Form of Warrant issued pursuant to the Warrant Issuance Agreement dated December 2, 2011 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 8, 2011, File Number 0-51357) |
|
10.8+ |
|
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) |
69
|
Exhibit |
|
Description |
|
10.9+ |
|
Amendment No. 7 to Builders FirstSource, Inc. 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s 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) |
|
10.10+ |
|
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) |
|
10.11+ |
|
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) |
|
10.12+ |
|
2007 Form of Builders FirstSource, Inc. 2005 Equity Incentive Plan Nonqualified Stock Option Agreement for Employee Directors (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 5, 2007, File Number 0-51357) |
|
10.13+ |
|
2012 Form of Builders FirstSource, Inc. 2005 Equity Incentive Plan Director Restricted Stock Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the Securities and Exchange Commission on August 1, 2012, File Number 0-51357) |
|
10.14+ |
|
Builders FirstSource, Inc. 2007 Incentive Plan (incorporated by reference to Annex D of the Company’s definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on December 15, 2009, File Number 0-51357) |
|
10.15+ |
|
2008 Form of Builders FirstSource, Inc. 2007 Incentive Plan Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s 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) |
|
10.16+ |
|
2008 Form of Builders FirstSource, Inc. 2007 Incentive Plan Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s 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) |
|
10.17+ |
|
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 Company’s 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) |
|
10.18+ |
|
2014 Form of Builders FirstSource, Inc. 2007 Incentive Plan Restricted Stock Unit Award Certificate (incorporated by reference to Exhibit 10.2 to the Company’s 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) |
|
10.19+ |
|
2014 Form of Builders FirstSource, Inc. 2007 Incentive Plan Director Restricted Stock Unit Award Certificate (incorporated by reference to Exhibit 10.1 to the Company’s 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) |
|
10.20+ |
|
Builders FirstSource, Inc. 2014 Incentive Plan (incorporated herein by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 11, 2014, File Number 0-51357) |
|
10.21+ |
|
2014 Form of Builders FirstSource, Inc. 2014 Incentive Plan Restricted Stock Unit Award Certificate (incorporated by reference to Exhibit 10.3 to the Company’s 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) |
|
10.22*+ |
|
2015 Form of Builders FirstSource, Inc. 2014 Incentive Plan Non-Statutory Stock Option Award Certificate |
|
10.23+ |
|
Builders FirstSource, Inc. Amended and Restated Director Compensation Policy (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on February 28, 2014, File Number 0-51357) |
|
10.24+ |
|
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) |
70
|
Exhibit |
|
Description |
|
10.25+ |
|
Employment Agreement, dated September 1, 2001, between Builders FirstSource, Inc. and Floyd F. Sherman (incorporated by reference to Exhibit 10.9 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) |
|
10.26+ |
|
Amendment to Employment Agreement, dated June 1, 2005, between Builders FirstSource, Inc. and Floyd F. Sherman (incorporated by reference to Exhibit 10.15 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) |
|
10.27+ |
|
Second Amendment to Employment Agreement, dated October 29, 2008, between Builders FirstSource, Inc. and Floyd F. Sherman (incorporated by reference to Exhibit 10.27 to the Company’s 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) |
|
10.28+ |
|
Employment Agreement, dated February 23, 2010, between Builders FirstSource, Inc. and M. Chad Crow (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 26, 2010, File Number 0-51357) |
|
10.29+ |
|
Employment Agreement, dated January 15, 2004, between Builders FirstSource, Inc. and Morris E. Tolly (incorporated by reference to Exhibit 10.22 to the Company’s 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) |
|
10.30+ |
|
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 Company’s 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) |
|
10.31+ |
|
Employment Agreement, dated January 15, 2004, between Builders FirstSource, Inc. and Donald F. McAleenan (incorporated by reference to Exhibit 10.3 to the Company’s 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) |
|
10.32+ |
|
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 Company’s 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) |
|
14.1 |
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Builders FirstSource, Inc. Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the Company’s 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) |
|
14.2 |
|
Builders FirstSource, Inc. Supplemental Code of Ethics (incorporated by reference to Exhibit 14.2 to the Company’s 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) |
|
21.1 |
|
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Company’s 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) |
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23.1* |
|
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm |
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24.1* |
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Power of Attorney (included as part of signature page) |
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31.1* |
|
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 Floyd F. Sherman as Chief Executive Officer |
|
31.2* |
|
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 M. Chad Crow as Chief Financial Officer |
|
32.1** |
|
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 Floyd F. Sherman as Chief Executive Officer and M. Chad Crow as Chief Financial Officer |
71
|
Exhibit |
|
Description |
|
101* |
|
The following financial information from Builders FirstSource, Inc.’s Form 10-K filed on March 3, 2015, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012, (ii) Consolidated Balance Sheets at December 31, 2014 and 2013, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012, 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 Floyd F. Sherman, our Chief Executive Officer, and M. Chad Crow, 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
72
SIGNATURES
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.
March 3, 2015
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BUILDERS FIRSTSOURCE, INC. |
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|
|
/s/ FLOYD F. SHERMAN |
|
Floyd F. Sherman |
|
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.
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Signature |
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Title |
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Date |
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|
|
|
||
|
/s/ FLOYD F. SHERMAN |
|
Chief Executive Officer and Director |
|
March 3, 2015 |
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Floyd F. Sherman |
|
(Principal Executive Officer) |
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|
|
|
|
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||
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/s/ M. CHAD CROW |
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President, Chief Operating Officer and Chief Financial |
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March 3, 2015 |
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M. Chad Crow |
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Officer (Principal Financial and Accounting Officer) |
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/s/ PAUL S. LEVY |
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Chairman and Director |
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March 3, 2015 |
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Paul S. Levy |
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/s/ DAVID A. BARR |
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Director |
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March 3, 2015 |
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David A. Barr |
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/s/ CLEVELAND A. CHRISTOPHE |
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Director |
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March 3, 2015 |
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Cleveland A. Christophe |
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/s/ DANIEL AGROSKIN |
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Director |
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March 3, 2015 |
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Daniel Agroskin |
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/s/ MICHAEL GRAFF |
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Director |
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March 3, 2015 |
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Michael Graff |
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/s/ ROBERT C. GRIFFIN |
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Director |
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March 3, 2015 |
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Robert C. Griffin |
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/s/ KEVIN J. KRUSE |
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Director |
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March 3, 2015 |
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Kevin J. Kruse |
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/s/ BRETT N. MILGRIM |
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Director |
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March 3, 2015 |
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Brett N. Milgrim |
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/s/ CRAIG A. STEINKE |
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Director |
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March 3, 2015 |
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Craig A. Steinke |
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