BUILDERS FIRSTSOURCE, INC. The following discussion of our financial condition and results of operations should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year endedDecember 31, 2019 included in our most recent annual report on Form 10-K. The following discussion and analysis should also be read in conjunction with the unaudited condensed consolidated financial statements appearing elsewhere in this report. In this quarterly report on Form 10-Q, references to the "company," "we," "our," "ours" or "us" refer toBuilders FirstSource, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.
Cautionary Statement
Statements in this report and the schedules hereto that are not purely historical facts or that necessarily depend upon future events, including statements about expected market share gains, forecasted financial performance or other statements about anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements. In addition, oral statements made by our directors, officers and employees to the investor and analyst communities, media representatives and others, depending upon their nature, may also constitute forward-looking statements. As with the forward-looking statements included in this report, these forward-looking statements are by nature inherently uncertain, and actual results may differ materially as a result of many factors. All forward-looking statements are based upon information available toBuilders FirstSource, Inc. on the date this report was submitted.Builders FirstSource, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks or uncertainties related to the novel coronavirus disease 2019 ("COVID-19") pandemic, the Company's growth strategies, including gaining market share, or the Company's revenues and operating results being highly dependent on, among other things, the homebuilding industry, lumber prices and the economy.Builders FirstSource, Inc. may not succeed in addressing these and other risks. Further information regarding factors that could affect our financial and other results can be found in the risk factors section ofBuilders FirstSource, Inc.'s most recent annual report on Form 10-K filed with theSecurities and Exchange Commission . Consequently, all forward-looking statements in this report are qualified by the factors, risks and uncertainties contained therein.
COMPANY OVERVIEW
We are a leading supplier and manufacturer of building materials, manufactured components and construction services to professional contractors, sub-contractors and consumers. The Company operates approximately 400 locations in 40 states acrossthe United States . Given the span and depth of our geographical reach, our locations are organized into nine geographical regions (Regions 1 through 9), which are also our operating segments, and these are further aggregated into four reportable segments: Northeast, Southeast, South and West. All of our segments have similar customers, products and services, and distribution methods. Our financial statements contain additional information regarding segment performance which is discussed in Note 11 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q. We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, vinyl windows, custom millwork and trim, as well as engineered wood that we design, cut, and assemble for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods and various window, door and millwork lines. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.
We group our building products into six product categories:
• Lumber & Lumber Sheet Goods . Lumber & lumber sheet goods include
dimensional lumber, plywood, and OSB products used in on-site house
framing.
• Manufactured Products. Manufactured products consist of wood floor and
roof trusses, steel roof trusses, wall panels, stairs, and engineered
wood.
• Windows, Door & Millwork. Windows & doors are comprised of themanufacturing, assembly, and distribution of windows and the assembly and
distribution of interior and exterior door units. Millwork includes
interior trim and custom features that we manufacture under the Synboard ®
brand name.
• Gypsum, Roofing & Insulation. Gypsum, roofing, & insulation include
wallboard, ceilings, joint treatment and finishes.
17
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• Siding, Metal, and Concrete. Siding, metal, and concrete includes vinyl,
composite, and wood siding, exterior trim, other exteriors, metal studs
and cement.
• Other
comprised of products such as cabinets and hardware as well as services
such as turn-key framing, shell construction, design assistance, and
professional installation spanning the majority of our product categories.
Our operating results are dependent on the following trends, events and uncertainties, some of which are beyond our control:
• Homebuilding Industry. Our business is driven primarily by the residential
new construction market and the residential repair and remodel market,
which are in turn dependent upon a number of factors, including
demographic trends, interest rates, consumer confidence, employment rates,
housing affordability, foreclosure rates, the availability of skilled
construction labor, and the health of the economy and mortgage markets.
According to the
rates for
were 1.4 million and 1.1 million, respectively, as of September 30, 2020 .
• Effect of COVID-19 Pandemic. In March of 2020, the U.S. economy began tosee significant disruption, uncertainty and record high levels of
unemployment as a result of the COVID-19 pandemic. The extent and duration
of this disruption and uncertainty are yet to be fully known, and we may
experience a decline in housing starts, reduced sales demand, volatility
in commodity prices, increased margin pressures and/or increased operating
costs as a result.
•
may continue to experience pressure on our gross margins due to lower
levels of housing starts versus historical norms, increased competition
for homebuilder business and cyclical fluctuations in commodity prices.
Although there has been a trend of consolidation within the building
products supply industry over the past several years, our industry remains
highly fragmented and competitive and we will continue to face significant
competition from local and regional suppliers. While the extent to which
demand will be disrupted due to the current pandemic is uncertain, we
still believe there are several meaningful trends that indicate U.S. housing demand will continue to trend towards the historical average.
These trends include historically low interest rates, the aging of housing
stock, a shift to suburban living and normal population growth due to
immigration and birth rate exceeding death rate. Industry forecasters,
including the
housing demand continue to increase.
• Targeting Large Production Homebuilders. In recent years, the homebuilding
industry has undergone consolidation, and the larger homebuilders have
increased their market share. We expect that trend to continue as larger
homebuilders have better liquidity and land positions relative to the
smaller, less capitalized homebuilders. Our focus is on maintaining
relationships and market share with these customers while balancing the
competitive pressures we are facing in servicing large homebuilders withcertain profitability expectations. Additionally, we have been successful
in expanding our custom homebuilder base while maintaining acceptable
credit standards.
• Repair and remodel end market. Although the repair and remodel end market
is influenced by housing starts to a lesser degree than the homebuilding
market, the repair and remodel end market is still dependent upon some of
the same factors as the homebuilding market, including demographic trends,
interest rates, consumer confidence, employment rates and the health of
the economy and home financing markets. The repair and remodel end market
has been impacted by the COVID-19 pandemic and while the extent of this
impact and related uncertainties are yet to be fully known, we may
experience reduced sales demand, increased margin pressures and/or
increased operating costs in this area of our business as a result. Weexpect that our ability to remain competitive in this space will depend on
our continued ability to provide a high level of customer service coupled
with a broad product offering.
• Use of Prefabricated Components. Homebuilders are increasingly using
prefabricated components in order to realize increased efficiency,
overcome skilled construction labor shortages and improve quality.
Shortening cycle time from start to completion is a key imperative of the
homebuilders during periods of strong consumer demand. We continue to see
the demand for prefabricated components increasing within the residential
new construction market as the availability of skilled construction labor
remains limited.
• Economic Conditions. Economic changes both nationally and locally in our
markets impact our financial performance. The building products supply
industry is highly dependent upon new home construction and subject to
cyclical market changes. Our operations are subject to fluctuations
arising from changes in supply and demand, national and local economic
conditions, labor costs and availability, competition, government
regulation, trade policies and other factors that affect the homebuilding
industry such as demographic trends, interest rates, housing starts, the
high cost of land development, employment levels, consumer confidence, and
the availability of credit to homebuilders, contractors, and homeowners.
The disruptions and uncertainties as a result of the ensuing COVID-19
pandemic may have a significant impact on our future operating results.
18
--------------------------------------------------------------------------------• Housing Affordability. The affordability of housing can be a key driver in
demand for our products. Home affordability is influenced by a number of
economic factors, such as the level of employment, consumer confidence,
consumer income, supply of houses, the availability of financing and
interest rates. Changes in the inventory of available homes as well as
economic factors relative to home prices could result in changes to theaffordability of homes. As a result, homebuyer demand may shift towards
smaller, or larger, homes creating fluctuations in demand for our
products.
• Cost of Materials. Prices of wood products, which are subject to cyclical
market fluctuations, may adversely impact operating income when prices
rapidly rise or fall within a relatively short period of time. We purchase
certain materials, including lumber products, which are then sold to
customers as well as used as direct production inputs for our manufactured
and prefabricated products. Short-term changes in the cost of these
materials, some of which are subject to significant fluctuations, are
oftentimes passed on to our customers, but our pricing quotation periods
and market competition may limit our ability to pass on such price
changes. We may also be limited in our ability to pass on increases on
in-bound freight costs on our products. Our inability to pass on material
price increases to our customers could adversely impact our operating
results.
• Controlling Expenses. Another important aspect of our strategy is
controlling costs and striving to be a low-cost building materialssupplier in the markets we serve. We pay close attention to managing our
working capital and operating expenses. Further, we pay careful attention
to our logistics function and its effect on our shipping and handling
costs. The disruptive impacts of the COVID-19 pandemic on our ongoing
operating expenses could be significant.
• Multi-Family and Light Commercial Business. Our primary focus has been,
and continues to be, on single-family residential new construction and the
repair and remodel end market. However, we will continue to identify
opportunities for profitable growth in the multi-family and light
commercial markets.
• Capital Structure: As a result of our historical growth throughacquisitions, we have substantial indebtedness. We strive to optimize our
capital structure to ensure that our financial needs are met in light of
economic conditions, business activities, organic investments,
opportunities for growth through acquisition and the overall risk
characteristics of our underlying assets. In addition to these factors, we
also evaluate our capital structure on the basis of our leverage ratio,
our liquidity position, our debt maturity profile and market interest
rates. As such, we may enter into various debt or equity transactions in
order to appropriately manage and optimize our capital structure and
liquidity needs.
RECENT DEVELOPMENTS
General
On August 26, 2020 , the Company and BMC Stock Holdings, Inc., a Delaware
corporation ("BMC"), entered into an Agreement and Plan of Merger to combine the
respective companies in an all-stock merger transaction to create the nation's
premier supplier of building materials and services. Upon completion of the
merger, each issued and outstanding share of BMC common stock will be converted
into the right to receive 1.3125 shares of BFS common stock. The merger is
expected to close near the end of 2020 or the beginning of 2021 and is subject
to customary closing conditions, including receipt of required regulatory
approvals and the approval of both BMC's and our shareholders.
Business Combinations
OnJanuary 9, 2020 , we acquired certain assets and operations ofBianchi & Company, Inc. ("Bianchi") for$15.9 million in cash. Located inCharlotte, North Carolina , Bianchi is a supplier and installer of interior and exterior millwork. This acquisition is described in Note 2 to the consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.
Debt Transactions
During the nine months endedSeptember 30, 2020 , the Company executed several debt transactions, including the redemption of$503.9 million in outstanding aggregate principal amount of 5.625% senior secured notes due 2024 ("2024 notes") and$47.5 million in aggregate principal amount of 6.75% senior secured notes due 2027 ("2027 notes"). The repayments of our 2024 notes and 2027 notes were funded with the proceeds of the issuance of$550.0 million in aggregate principal amount of 5.0% unsecured senior notes due 2030 ("2030 notes") and cash on hand. Additionally, the Company issued$350.0 million in aggregate principal amount of our 2027 notes. Collectively, these transactions have extended our debt maturity profile and strengthened our liquidity position. These transactions are described in Note 5 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call our notes, repay debt, repurchase shares of our common stock or otherwise enter into transactions regarding its capital structure. 19 --------------------------------------------------------------------------------
Retirement of President and Chief Executive Officer
InJanuary 2020 ,Mr. Crow notified our Board of his decision to retire as President and Chief Executive Officer of the Company during 2020 after assisting the Board in hiring his replacement.Mr. Crow has agreed to continue to serve as the Company's Chief Executive Officer through the completion of the BMC merger and for a transition period of 90 days post-merger, following which BMC's Chief Executive Officer, Mr.Dave Flitman , will succeedMr. Crow as Chief Executive Officer of the Company.
CURRENT OPERATING CONDITIONS AND OUTLOOK
In March of 2020, theU.S. economy began to see significant disruption, uncertainty and a record level of unemployment as a result of the COVID-19 pandemic. While the extent of these disruptions and uncertainties is yet to be fully known, we may experience reduced sales demand, volatility in commodity prices, increased margin pressures and/or increased operating costs as a result. For the third quarter of 2020, actualU.S. total housing starts were 0.4 million, a 11.4% increase compared to the third quarter of 2019. ActualU.S. single-family starts were 0.3 million in the third quarter of 2020, a 16.7% increase compared to the same quarter a year ago. For the nine months endedSeptember 30, 2020 actualU.S. total housing starts were 1.0 million, a 5.5% increase compared to the nine months endedSeptember 30, 2019 . ActualU.S. single-family starts were 0.7 million in the first nine months of 2020, a 6.2% increase compared to the same period a year ago. Recent forecasts from a composite of third party sources, including theNAHB , estimate 1.3 millionU.S. total housing starts and 0.9 millionU.S single family housing starts for the full year 2020, which are increases of 4.5% and 2.5%, respectively, from 2019. In addition, theHome Improvement Research Institute ("HIRI") is forecasting sales in the professional repair and remodel end market to increase approximately 3.5% in 2020 compared to 2019. Our net sales for the third quarter of 2020 increased 15.9% from the same period last year. Commodity price inflation accounted for 7.2% of our net sales growth in the third quarter of 2020, while acquisitions accounted for another 2.0%. Excluding the impact of rapid commodity price inflation and acquisitions, we achieved 6.7% core organic sales growth. Our gross profit percentage in the third quarter of 2020 decreased by 2.4% compared to the third quarter of 2019 which is primarily attributable to margin pressures as a result of the increase in commodity price inflation. Our selling, general and administrative expenses, as a percentage of net sales, were 18.8% in the third quarter of 2020, a 2.0% decrease from 20.8% in the third quarter of 2019, primarily driven by the effect of commodity price inflation on our net sales in the third quarter of 2020. While temporarily impacted by the disruptions and uncertainties brought on by the COVID-19 pandemic, we believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics compared to historical new construction levels. We feel we are well-positioned to take advantage of the construction activity in our markets and to increase our market share, which may include strategic acquisitions. We will continue to focus on working capital by closely monitoring the credit exposure of our customers, remaining focused on maintaining the right level of inventory and by working with our vendors to improve payment terms and pricing on our products. We strive to achieve the appropriate balance of short-term expense control while maintaining the expertise and capacity to grow the business as market conditions improve. In addition, optimization of our capital structure will continue to be a key area of focus for the Company.
SEASONALITY AND OTHER FACTORS
Our first and fourth quarters have historically been, and are generally expected
to continue to be, adversely affected by weather causing reduced construction
activity during these quarters. In addition, quarterly results historically have
reflected, and are expected to continue to reflect, fluctuations from period to
period arising from the following:
• The volatility of lumber prices;
• The cyclical nature of the homebuilding industry;
• General economic conditions in the markets in which we compete;
• The pricing policies of our competitors;
• Disruptions in our supply chain;
• The production schedules of our customers; and
• The effects of weather.
20
-------------------------------------------------------------------------------- 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 first and second quarters of the year due to higher sales during the peak residential construction season. These increases may result in negative operating cash flows during this peak season, which historically have been financed through available cash and borrowing availability under credit facilities. Generally, collection of receivables and reduction in inventory levels following the peak building and construction season positively impact cash flow. Through the first nine months of 2020, the Company's typical seasonal working capital has been influenced by the COVID-19 pandemic, which had the effect of deferring the typical peak residential construction season later into the year, as well as, by the significant commodity inflation experienced in the third quarter of 2020.
RESULTS OF OPERATIONS
The following table sets forth, for the three and nine months endedSeptember 30, 2020 and 2019, the percentage relationship to net sales of certain costs, expenses and income items: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 75.1 % 72.7 % 74.2 % 72.8 % Gross margin 24.9 % 27.3 % 25.8 % 27.2 % Selling, general and administrative 18.8 20.8 20.3 21.4 expenses % % % % Income from operations 6.1 % 6.5 % 5.5 % 5.8 % Interest expense, net 1.2 % 1.4 % 1.8 % 1.5 % Income tax expense 1.2 % 1.2 % 0.8 % 1.0 % Net income 3.7 % 3.9 % 2.9 % 3.3 %
Three Months Ended
Net Sales . Net sales for the three months endedSeptember 30, 2020 were$2,295.5 million , a 15.9% increase from net sales of$1,981.0 million for the three months endedSeptember 30, 2019 . Core organic growth increased net sales by 6.7% in the third quarter of 2020 compared to the third quarter of 2019, while commodity inflation accounted for 7.2% and acquisitions accounted for another 2.0%. Core organic growth came primarily from increased sales volume within our single-family end market. The following table shows net sales classified by product category (dollars in millions): Three Months Ended September 30, 2020 2019 Net sales % of Net sales Net sales % of Net sales % Change Lumber & lumber sheet goods$ 851.6 37.1 %$ 605.5 30.6 % 40.6 % Manufactured products 421.3 18.4 % 401.2 20.3 % 5.0 % Windows, doors & millwork 420.2 18.3 % 407.4 20.6 % 3.1 % Gypsum, roofing & insulation 149.5 6.5 % 149.7 7.6 % (0.1 )% Siding, metal & concrete products 212.4 9.3 % 201.1 10.1 % 5.6 % Other building products & services 240.5 10.4 % 216.1 10.8 % 11.3 % Net sales$ 2,295.5 100.0 %$ 1,981.0 100.0 % 15.9 % We achieved increased net sales in all our product categories, except in our Gypsum, roofing and insulation category, which was relatively flat. Despite the disruptions from the pandemic, we achieved increased net sales in our remaining product categories due to higher sales volume and the impact of commodity inflation. Gross Margin. Gross margin increased$29.5 million to$570.7 million . Our gross margin percentage decreased to 24.9% in the third quarter of 2020 from 27.3% in the third quarter of 2019, a 2.4% decrease. The decrease was primarily attributable to the impact of commodity price inflation during the third quarter of 2020 relative to our short-term customer pricing commitments. 21 -------------------------------------------------------------------------------- Selling, General and Administrative Expenses. In the third quarter of 2020, selling, general and administrative expenses increased$19.4 million , or 4.7%, and as a percentage of sales decreased to 18.8% from 20.8% in the third quarter of 2019. This increase was primarily driven by higher professional service expense, compensation expense and depreciation expense, which were partially offset by lower travel and entertainment costs, as well as lower fuel costs. Contributing to the decrease as a percentage of net sales was the effect of commodity price inflation on our net sales in the third quarter of 2020. Interest Expense, Net. Interest expense was$28.0 million in the third quarter of 2020, an increase of$0.3 million from the third quarter of 2019. Interest expense for the third quarter of 2019 includes$3.1 million in one-time charges related to the debt financing transactions executed in that period. Adjusting for the one-time charges, interest expense increased by$3.4 million due to a higher outstanding debt balance as compared to the third quarter of 2019, partially offset by the effect of lower interest rates. Income Tax Expense. We recorded income tax expense of$25.8 million and$23.7 million in the third quarters of 2020 and 2019, respectively. Our effective tax rate was 23.1% and 23.3% for the three month periods endedSeptember 30, 2020 and 2019, respectively.
Nine Months Ended
Net Sales . Net sales for the nine months endedSeptember 30, 2020 were$6,028.1 million , a 9.3% increase over net sales of$5,516.9 million for the nine months endedSeptember 30, 2019 . In the first nine months of 2020, acquisitions increased net sales by 2.6%, with additional core organic growth of 2.8%. In addition, commodity price inflation and one additional selling day also increased net sales in the first nine months of 2020 by 3.3% and 0.6%, respectively. Excluding the impact of commodity price inflation and the impact of one additional selling day, we achieved growth across all of our customer end markets. The following table shows net sales classified by product category (dollars in millions): Nine Months Ended September 30, 2020 2019 Net sales % of Net sales Net sales % of Net sales % Change Lumber & lumber sheet goods$ 2,026.2 33.6 %$ 1,724.7 31.3 % 17.5 % Manufactured products 1,141.5 18.9 % 1,092.9 19.8 % 4.4 % Windows, doors & millwork 1,215.5 20.2 % 1,151.8 20.9 % 5.5 % Gypsum, roofing & insulation 386.2 6.4 % 409.0 7.4 % (5.6 )% Siding, metal & concrete products 581.8 9.7 % 542.3 9.8 % 7.3 % Other building products & services 676.9 11.2 % 596.2 10.8 % 13.5 % Net sales$ 6,028.1 100.0 %$ 5,516.9 100.0 % 9.3 % We achieved increased net sales in all our product categories, except in our Gypsum, roofing and insulation category, which saw a particularly adverse impact from several state and local shutdowns related to the COVID-19 pandemic in the second quarter of 2020, primarily due to higher sales volumes and as a result of our continued efforts to focus on higher margin opportunities through both acquisition targets and core organic growth. Gross Margin. Gross margin increased$53.1 million to$1,553.4 million . Our gross margin percentage decreased to 25.8% in the first nine months of 2020 from 27.2% in the first nine months of 2019, a 1.4% decrease. We experienced a stronger gross margin percentage in the first nine months of 2019 as a result of commodity price deflation in the period, as compared to the commodity price inflation experienced during the first nine months of 2020. Selling, General and Administrative Expenses. For the nine months endedSeptember 30, 2020 , selling, general and administrative expenses increased$40.3 million , or 3.4%, and as a percentage of sales decreased to 20.3% from 21.4% in the first nine months of 2019. This increase was primarily due to higher professional service expense, compensation expense and depreciation expense in the first nine months of 2020, offset by lower travel and entertainment costs, as well as lower fuel costs. The decrease as a percentage of net sales was attributable to the effect of commodity price inflation on our net sales during the first nine months of 2020. Interest Expense, Net. Interest expense was$106.8 million for the nine months endedSeptember 30, 2020 , an increase of$24.7 million compared to the nine months endedSeptember 30, 2019 . This increase in interest expense is primarily due to a$28.0 million loss on debt extinguishment related to the repurchase of our 2024 notes and partial repurchase of our 2027 notes recorded in the first quarter of 2020. 22
-------------------------------------------------------------------------------- Income Tax Expense. We recorded income tax expense of$49.6 million and$54.7 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Our effective tax rate was 22.2% and 23.2% for the first nine months of 2020 and 2019, respectively.
Results by Reportable Segment
The following tables show net sales and income before income taxes by reportable
segment excluding the "All Other" caption as shown in Note 11 to the condensed
consolidated financial statements included in Item 1 of this quarterly report on
Form 10-Q (dollars in thousands):
Three months ended September 30,
Net sales Income before income taxes
% of Net % of Net % of Net % of Net
2020 sales 2019 sales % change 2020 sales 2019 sales % change
Northeast $ 360,194 16.2 % $ 359,345 19.0 % 0.2 % $ 14,990 4.2% $ 19,951 5.6% (24.9 )%
Southeast 507,782 22.8 % 414,022 21.9 % 22.6 % 31,368 6.2% 23,353 5.6% 34.3 %
South 588,752 26.4 % 471,997 24.9 % 24.7 % 24,574 4.2% 29,625 6.3% (17.0 )%
West 769,533 34.6 % 648,730 34.2 % 18.6 % 62,236 8.1% 39,397 6.1% 58.0 %
$ 2,226,261 100.0 % $ 1,894,094 100.0 % $ 133,168 6.0% $ 112,326 5.9%
Nine months ended September 30,
Net sales Income before income taxes
% of Net % of Net % of Net % of Net
2020 sales 2019 sales % change 2020 sales 2019 sales % change
Northeast $ 949,981 16.3 % $ 994,817 18.8% (4.5 )% $ 32,738 3.4% $ 46,062 4.6% (28.9 )%
Southeast 1,358,829 23.4 % 1,216,775 23.0% 11.7 % 78,888 5.8% 64,869 5.3% 21.6 %
South 1,599,009 27.5 % 1,404,368 26.6% 13.9 % 78,702 4.9% 87,520 6.2% (10.1 )%
West 1,904,034 32.8 % 1,670,216 31.6% 14.0 % 107,404 5.6% 74,968 4.5% 43.3 %
$ 5,811,853 100.0 % $ 5,286,176 100.0% $ 297,732 5.1% $ 273,419 5.2%
We have four reportable segments based on an aggregation of the geographic
regions in which we operate. While there is some geographic similarity between
our reportable segments and the regions as defined by the U.S. Census Bureau ,
our reportable segments do not necessarily fully align with any single U.S.
Census Bureau region.
According to the U.S. Census Bureau , actual single-family housing starts in the
third quarter of 2020 increased 10.3%, 15.8%, 19.8% and 11.9% in the Northeast,
Midwest, South and West regions, respectively, compared to the third quarter of
2019. For the third quarter of 2020, our net sales increased across all our
reportable segments largely due to an increase in sales volume across the
majority of our product categories, and the impact of commodity price inflation.
We achieved increased profitability in our Southeast, and West reportable
segments largely due to sales volume growth. However, profitability declined in
our Northeast and South reportable segment largely due to the impact of the
COVID-19 pandemic on net sales and the impact of gross margin compression from
commodity price inflation.
According to the U.S. Census Bureau , actual single-family housing starts in the
first nine months of 2020 increased 8.1%, 6.4% and 6.2% in the Midwest, South
and West regions, respectively, compared to the first nine months of 2019.
Actual single-family housing starts decreased 0.2% in the Northeast region in
the first nine months of 2020 compared to the first nine months of 2019. For the
nine months ended September 30, 2020 , our net sales increased in the Southeast,
South and West reportable segments primarily due to an increase in sales volume
across the majority of our product categories, and commodity price inflation
compared to the nine months ended September 30, 2019 . Net sales decreased in the
first nine months of 2020 in the Northeast reportable segment as that area of
the country was impacted by state and local mandates that prohibited
construction activity as a result of the COVID-19 pandemic. We achieved
increased profitability in our Southeast and West reportable segments largely
due to sales volume growth. However, profitability declined in our Northeast and
South reportable segment largely due to the impact of the COVID-19 pandemic on
net sales and the impact of gross margin compression from commodity price
inflation.
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 atSeptember 30, 2020 consist of cash on hand and borrowing availability under our 2023 facility. 23
-------------------------------------------------------------------------------- Our 2023 facility will be primarily used for working capital, general corporate purposes, and funding acquisitions. In addition, we may use the 2023 facility to facilitate debt consolidation. Availability under the 2023 facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables which include progress billings and credit card receivables, and qualified cash that all meet specific criteria contained within the credit agreement, minus agent specified reserves. Net excess borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and letters of credit.
The following table shows our borrowing base and excess availability as of
As of
September 30, December 31,
2020 2019
Accounts Receivable Availability $ 606.8 $ 413.0
Inventory Availability 494.3 370.0
Other Receivables Availability 49.4 29.8 Gross Availability 1,150.5 812.8 Less: Agent Reserves (41.7 ) (26.6 ) Plus: Cash in Qualified Accounts 318.4 4.2 Borrowing Base 1,427.2 790.4 Aggregate Revolving Commitments 900.0
900.0
Maximum Borrowing Amount (lesser of Borrowing Base and
Aggregate Revolving Commitments) 900.0 790.4 Less: Outstanding Borrowings 0.0 (27.0 ) Letters of Credit (79.1 )
(82.2 )
Net Excess Borrowing Availability on Revolving Facility $ 820.9
As ofSeptember 30, 2020 , we do not have any outstanding borrowings under our 2023 facility and our net excess borrowing availability was$820.9 million after being reduced by outstanding letters of credit of approximately$79.1 million . Excess availability must equal or exceed a minimum specified amount, currently$90.0 million , or we are required to meet a fixed charge coverage ratio of 1:00 to 1:00. We were not in violation of any covenants or restrictions imposed by any of our debt agreements atSeptember 30, 2020 .
Liquidity
Our liquidity at
We have substantial indebtedness following our historical acquisitions, which
increased our interest expense and could have the effect of, among other things,
reducing our flexibility to respond to changing business and economic
conditions. From time to time, based on market conditions and other factors and
subject to compliance with applicable laws and regulations, the Company may
repurchase or call our notes, repay debt, repurchase shares or otherwise enter
into transactions regarding its capital structure.
24
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Should the current economic and industry conditions deteriorate further from the
disruptions of the COVID-19 pandemic or otherwise, or we pursue additional
acquisitions, we may be required to raise additional funds through the sale of
capital stock or debt in the public capital markets or in privately negotiated
transactions. There can be no assurance that any of these financing options
would be available on favorable terms, if at all. Alternatives to help
supplement our liquidity position could include, but are not limited to, idling
or permanently closing additional facilities, adjusting our headcount in
response to current business conditions, attempts to renegotiate leases,
managing our working capital and/or divesting of non-core businesses. There are
no assurances that these steps would prove successful or materially improve our
liquidity position.
Consolidated Cash Flows
Cash provided by operating activities was $155.1 million for the nine months
ended September 30, 2020 compared to cash provided by operating activities of
$360.3 million for the nine months ended September 30, 2019 . The $205.2 million
decrease in cash provided by operations was largely the result of our working
capital increase of $187.9 million in the first nine months of 2020 exceeding
the working capital decrease of $54.2 million in the first nine months of 2019.
This increase in the use of cash for working capital is primarily related to the
impact of commodity inflation on our working capital and was partially offset by
cash provided by other assets and liabilities and deferred income taxes of $25.3
million in the nine months ended September 30, 2020 compared to the nine months
ended September 30, 2019 .
Cash used in investing activities was $96.1 million and $106.4 million for the
nine months ended September 30, 2020 and 2019, respectively. This decrease in
cash used in investing activities was primarily due to the decrease in cash used
for acquisitions, partially offset by an increase in annual capital expenditures
through the first nine months of 2020 compared to the first nine months of 2019.
Cash provided by financing activities was $267.8 million for the nine months
ended September 30, 2020 compared to cash used in financing activities of $220.7
million for the nine months ended September 30, 2019 . Cash provided by financing
activities for the first nine months of 2020 was primarily related to the net
proceeds received from the Company's financing transactions during the period,
including the issuance of $550.0 million of 2030 notes and the issuance of
$350.0 million of 2027 notes. The proceeds from these issuances were offset by
the redemption of the remaining $503.9 million in outstanding aggregate
principal amount of 2024 notes, and $47.5 million in aggregate principal amount
of senior secured notes due 2027.
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding recent accounting pronouncements is discussed in Note 1 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.
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