Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 20152018 was approximately $288.9 million$1.39 billion based on the closing price per share on that dateJune 29, 2018 (the last trading day prior to June 30, 2018) of $19.55$20.85 as reported on the NASDAQNasdaq Stock Market LLC.
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, at March 14, 2016August 8, 2019 was 65,335,54466,649,109 shares.
Cautionary Statement with Respect to Forward-Looking Statements
Some of the statements contained in this Amendment constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.
The forward-looking statements reflect our views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors include without limitation:
the state of the homebuilding industry and repair and remodeling activity, the economy and the credit markets;
fluctuation of commodity prices and prices of our products as a result of national and international economic and other conditions;
the impact of potential changes in our customer or product sales mix;
our concentration of business in the Texas, California and Georgia markets;
the potential loss of significant customers or a reduction in the quantity of products they purchase;
seasonality and cyclicality of the building products supply and services industry;
competitive industry pressures and competitive pricing pressure from our customers and competitors;
our exposure to product liability, warranty, casualty, construction defect, contract, tort, employment and other claims and legal proceedings;
our ability to maintain profitability and positive cash flows;
our ability to retain our key employees and to attract and retain new qualified employees, while controlling our labor costs;
product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, and our dependence on third-party suppliers and manufacturers;
the implementation of our supply chain and technology initiatives;
the impact of long-term non-cancelable leases at our facilities;
our ability to effectively manage inventory and working capital;
the credit risk from our customers;
our ability to identify or respond effectively to consumer needs, expectations, market conditions or trends;
our ability to successfully implement our growth strategy;
the impact of federal, state, local and other laws and regulations;
the impact of changes in legislation and government policy;
the impact of unexpected changes in our tax provisions and adoption of new tax legislation;
our ability to utilize our net operating loss carryforwards;
natural or man-made disruptions to our distribution and manufacturing facilities;
our exposure to environmental liabilities and subjection to environmental laws and regulation;
the impact of health and safety laws and regulations;
the impact of disruptions to our information technology systems;
cybersecurity risks;
our exposure to losses if our insurance coverage is insufficient;
our ability to operate on multiple Enterprise Resource Planning (“ERP”) information systems and convert multiple systems to a single system;
the impact of our indebtedness; and
the impact of the various financial covenants in our secured credit agreement and senior secured notes indenture.
Certain of these and other factors are discussed in more detail in Item 1A. “Risk Factors” of this Amendment. The forward-looking statements included herein, except with respect to the changes discussed in “Explanatory Note”, are made only as of the date of the Original 10-K, and we undertake no obligation to publicly update or revise any forward-looking statement made by us or on our behalf, whether as a result of new information, future developments, subsequent events or circumstances or otherwise, unless otherwise required by law.
PART I
Item 1A. Risk Factors
Risks Related to Our Business
The industry in which we operate is dependent upon the homebuilding industry and repair and remodeling activity, the economy, the credit markets and other important factors.
The building products supply and services industry is highly dependent on new single-family home construction, multi-family construction and repair and remodeling activity, which in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates, wage rates, foreclosure rates, housing inventory levels, housing demand, the availability of land, local zoning and permitting processes, the availability of construction financing, the availability of qualified trade laborers and the health of the economy and mortgage markets. Unfavorable changes in demographics, credit markets, mortgage rates, consumer confidence, health care costs, housing affordability, housing inventory levels, a weakening of the national economy or of any regional or local economy in which we operate, changes in legislation and government policy and other factors beyond our control could adversely affect consumer spending, result in decreased demand for homes and adversely affect our business.
The homebuilding industry underwent a significant downturn that began in mid-2006 and began to stabilize in late 2011. 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 during fiscal years 2007 through 2012. The U.S. Census Bureau reported approximately 873,000 single-family housing starts for 2018, which is an increase of approximately 3% from 2017, but still well below historical averages over the past 50 years.
There is significant uncertainty regarding the timing and extent of any continued recovery in construction and repair and remodeling activity and resulting product demand levels. According to the U.S. Census Bureau, single-family housing starts decreased approximately 8% for the three months ended December 31, 2018, as compared to the prior year period. Additionally, as of October 2018, Dodge Data & Analytics (formerly McGraw-Hill) forecasted that U.S. single-family housing starts will decrease approximately 3% in 2019. If conditions in the housing industry deteriorate, we may need to take goodwill and/or asset impairment charges. Any such non-cash charges would have an adverse effect on our financial results. In addition, we may have to temporarily idle or permanently close certain facilities in under-performing regions. Any such facility closures could have a significant adverse effect on our business, financial condition, operating results and cash flows.
The positive impact of a recovery on our business may also be dampened to the extent average size of new single-family homes decreases, which could cause homebuilders to decrease spending on our products and services. According to the U.S. Census Bureau, the average square footage of a new single-family home start decreased in 2017 and 2016, as compared to the prior year, by 1% and 2%, respectively. This trend has continued through the first three quarters of 2018.
As the housing industry is dependent upon the economy as well as potential homebuyers’ access to mortgage financing and homebuilders’ access to commercial credit, constraint of the credit markets, including an increase in interest rates, could have a significant adverse effect on our business, financial condition, operating results and cash flows.
Certain of our products are commodities and fluctuations in prices of these commodities could adversely affect our operating results.
Many of the building products we distribute, including OSB, plywood, lumber and particleboard, are commodities that are widely available from other manufacturers or distributors with prices and volumes determined frequently based on participants’ perceptions of short-term supply and demand factors. 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.
Prices of commodity products can also change as a result of national and international economic conditions, labor and freight costs, competition, market speculation, government regulation and trade policies and tariffs, as well as from periodic delays in the delivery of lumber and other 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 and pricing pressure from our competitors may limit our ability to pass on such price changes. For example, we frequently enter into extended pricing commitments, which may compress our gross margins in periods of inflation. At times, the price at which we can charge our customers for any one or more products may even fall below the price at which we can purchase such products, requiring us to incur short-term losses on product sales. Excessive spikes in the market prices of certain building products, such as lumber, can also put negative pressure
on our operating cash flows by requiring us to invest more in inventory. We may also be limited in our ability to pass on increases in freight costs on our products due to the price of fuel.
Periods of generally increasing prices provide the opportunity for higher sales and increased gross profit (subject to the extended pricing commitments described above), while generally declining price environments may result in declines in sales and profitability. In particular, low market prices for wood products over a sustained period can adversely affect our business, financial condition, operating results and cash flows, as can excessive spikes in market prices. For the year ended December 31, 2018, average composite framing lumber prices and average composite structural panel prices (a composite calculation based on index prices for OSB and plywood) as reported by Random Lengths were $460 and $481, respectively. However, there was significant volatility during the year, as the average composite framing lumber prices and average composite structural panel prices declined during the second half of 2018 from a peak of $564 and $566, respectively, during June 2018, to $335 and $365, respectively, during December 2018. If lumber or structural panel prices were to remain at or continue to decline significantly from current levels, our sales and profits could be negatively affected as compared to 2018 operating results. Our lumber and lumber sheet goods product category represented approximately 35% of net sales in 2018.
Some of our products are imported into the United States and may be subject to tariffs or import duties that may impact the price of the products and limit their availability. Furthermore, the ongoing trade dispute between the United States and Canada following the expiration of the Softwood Lumber Agreement in 2015 has led to, and could continue to lead to, increased volatility in prices of softwood lumber imported from Canada. For the year ended December 31, 2018, we imported between $285 million and $320 million of inventory, of which between $260 million and $290 million of inventory was from Canada.
Changes in our customer or product sales mix could affect our operating results.
Our operating results may vary according to the amount and type of products we sell to each of our primary customer types: single-family homebuilders, remodeling contractors, and multi-family, commercial and other contractors. We tend to realize higher gross margins on sales to remodeling contractors due to the smaller product volumes purchased by those customers, as well as the more customized nature of the projects those customers generally undertake. Gross margins on sales to single-family, multi-family commercial and other contractors can vary based on a variety of factors, including the purchase volumes of the individual customer, the mix of products sold to that customer, the size and selling price of the project being constructed and the number of upgrades added to the project before or during its construction.
We generate significant business from the large single-family homebuilders; however, our gross margins on sales to them tend to be lower than our gross margins on sales to other market segments. A shift in our sales mix towards the larger homebuilders could negatively impact our gross margins.
In addition, we typically realize greater gross margins on more highly engineered and customized products, or ancillary products that are often purchased based on convenience and are therefore less price sensitive to our customers. For example, sales of lumber and lumber sheet goods tend to generate lower gross margins due to their commodity nature and the relatively low switching costs of sourcing those products from different suppliers. Structural components and millwork, doors and windows often generate higher gross margins relative to other products. A shift in our sales mix towards the lumber and lumber sheet goods product category could negatively impact our gross margins.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information regarding net sales by customer type and product category for each of the last three fiscal years.
We conduct a significant portion of our business in Texas, California and Georgia, which exposes us to the homebuilding activities within the markets of these states.
We presently conduct a significant portion of our business in Texas, California and Georgia, which represented approximately 31%, 14% and 10%, respectively, of 2018 total net sales. Sales activities in these markets and in most of the other markets in which we operate have declined from time to time, particularly as a result of slow economic growth. In the last several years, many of these markets have benefited from better than average employment growth, which has aided homebuilding activities, but we cannot assure you that these conditions will continue. Local economic conditions can depend on a variety of factors, including national economic conditions, local and state budget situations and the impact of cutbacks in federal spending and employment. Additionally, our concentration in these markets increases our exposure to natural disasters and other events adversely impacting these markets. A reduction in construction and remodeling activities in these markets could negatively impact our operating results in the future. If homebuilding activity declines in one or more of these markets or the other markets in which we operate, our costs may not decline at all or at the same rate and therefore may negatively impact our operating results.
Because our operations are currently concentrated in these areas, a prolonged economic downturn or localized adverse events in the future in one or more of these areas or a particular industry that is fundamental to one of these areas, particularly within Texas, could have a material adverse effect on our business, financial condition, operating results and cash flows, and a disproportionately greater impact on us than other lumber and building material companies with more diversified operations. To the extent the oil and gas industries, which can be very volatile, are negatively impacted by declining commodity prices, climate change, legislation or other factors, a result could be a reduction in employment, or other negative economic consequences, which in turn could adversely impact home sales and activities in Texas and certain of our other markets.
The loss of any of our significant customers or a reduction in the quantity of products they purchase could affect our financial health.
Our ten largest customers generated approximately 21% and 20% of our net sales for the years ended December 31, 2018 and 2017, 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.
In addition, production homebuilders and other customers may: (i) seek to purchase some of the products that we currently sell directly from manufacturers; (ii) elect to establish their own building products manufacturing and distribution facilities or (iii) 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 adversely affect our business, financial condition, operating results and cash flows. Furthermore, our customers typically 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 business, financial condition, operating results and cash flows.
The building products supply and services industry is seasonal and cyclical.
Our industry is seasonal. Although weather patterns affect our operating results throughout the year, our first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather patterns in some of our markets, causing reduced construction activity. To the extent that hurricanes, severe storms, earthquakes, floods, fires, droughts, other natural disasters or similar events occur in the markets in which we operate, our business may be adversely affected.
The building products supply and services industry is also subject to cyclical market pressures. Quarterly results historically have reflected, and are expected to continue to reflect, fluctuations from period to period arising from the following factors, among others: 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 and the production schedules of our customers.
Our industry is highly fragmented and competitive, and increased competitive pressure may adversely affect our results.
The building products supply and services industry is highly fragmented and competitive. We face significant competition from local, regional and national building materials chains, as well as from privately-owned single site enterprises. Any of these competitors may have one or more competitive advantages over us by, among other things, (i) foreseeing the course of market development more accurately than we do, (ii) providing superior service and selling superior products, (iii) having the ability to produce or supply similar products and services at a lower cost, (iv) developing stronger relationships with our customers, (v) adapting more quickly to new technologies or evolving customer requirements than we do or (vi) developing a superior branch network in our markets. As a result, we may not be able to compete successfully with them. In addition, home center retailers and/or eCommerce 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 and specialty distributors who sell products to 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 business, financial condition, operating results and cash flows may be adversely affected.
Production homebuilders historically have exerted significant pressure on their outside suppliers to keep prices low because of their market share and ability to leverage such market share in the highly fragmented building products supply and services industry. The housing industry downturn resulted in significantly increased pricing pressures from production homebuilders and other customers. Continued consolidation among homebuilders, and changes in homebuilders’ purchasing policies or payment practices,
could result in additional pricing pressure, which could adversely affect our business, financial condition, operating results and cash flows.
Some of our competitors are larger than we are and have greater financial resources. These resources may afford those competitors greater purchasing power, increased financial flexibility and more capital resources for expansion and improvement.
We are exposed to product liability, warranty, casualty, construction defect, contract, tort, employment and other claims and legal proceedings related to our business, products and services as well as services provided for us through third parties.
We are from time to time involved in product liability, warranty, casualty, construction defect, contract, tort, employment and other claims relating to our business, the products we manufacture, distribute or install, and services we provide, either directly or through third parties, that, if adversely determined, could adversely affect our business, financial condition, operating results and cash flows if we were unable to receive indemnification for such claims or were not adequately insured for such claims. We rely on manufacturers and other suppliers to provide us with many of the products we sell, distribute or install. 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, homebuilders and their subcontractors, and third-party installers for which we may be liable. We and they are subject to regulatory requirements and risks applicable to general contractors, which include management of licensing, permitting and quality of our third-party installers. If we fail to manage these processes effectively or provide proper oversight of these services, we could suffer lost sales, fines and lawsuits, as well as damage to our reputation, which could adversely affect our business.
Product liability, warranty, casualty, construction defect, contract, tort, employment 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. We cannot assure you that any current or future claims will not adversely affect our business, financial condition, operating results and cash flows.
We may be unable to maintain profitability or positive cash flows from operations.
We have set goals to progressively improve our profitability over time by growing our sales, increasing our gross margin and reducing our expenses as a percentage of sales. For the years ended December 31, 2018, 2017 and 2016, we had net income of $119.7 million, $57.4 million and $30.9 million, respectively, and gross margin of 24.7%, 23.6% and 24.0%, respectively. For the years ended December 31, 2018, 2017 and 2016, we generated cash from operations of $210.0 million, $93.9 million, and $106.9 million, respectively. There can be no assurance that we will achieve our profitability goals or continue to generate positive cash flow from operations. Factors that could significantly adversely affect our efforts to achieve these goals include, but are not limited to, the failure to:
grow our revenue through organic growth or through acquisitions;
improve our revenue mix by investing (including through acquisitions) in businesses that provide higher gross margins than we have been able to generate historically;
achieve improvements in purchasing or maintain or increase our rebates from suppliers through our supplier consolidation and/or low-cost country initiatives;
improve our gross margins through the utilization of improved pricing practices and technology and sourcing savings;
maintain or reduce our overhead and support expenses as we grow;
effectively evaluate future inventory reserves;
collect monies owed from customers;
maintain relationships with our significant customers; and
integrate any businesses acquired.
Any of these failures or delays may adversely affect our ability to maintain or increase our profitability.
Our continued success will depend on our ability to retain our key employees and to attract and retain new qualified employees, while controlling our labor costs.
Our success depends in part on our ability to attract, hire, train and retain qualified managerial, operational, sales and other personnel, while at the same time controlling our labor costs. We face significant competition for these types of employees in our industry and from other industries. Labor shortages may impact our ability to hire skilled or unskilled workers with experience in carpentry, construction or fabrication. We may be unsuccessful in attracting and retaining the personnel we require to conduct and expand our operations successfully. In addition, key personnel, including sales force employees with key customer relationships, may leave us and compete against us.
Our success also depends to a significant extent on the continued service of our senior management team. Our officers and divisional vice presidents have experience in manufacturing, distribution, retail and homebuilding, and have been integral to our successful acquisition and integration of businesses to gain scale in our current markets. The loss of any member of our senior management team or other experienced, senior employees or sales force 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 business, financial condition, operating results and cash flows could be adversely affected.
Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governing wages, regulations governing payment of workers on a “piece-work” or “piece-rate” basis, labor relations, healthcare benefits, and health and other insurance costs. In addition, we compete with other companies for many of our employees in hourly and piece-rate positions, and we invest significant resources in training and motivating them to maintain a high level of job satisfaction. These positions have historically had high turnover rates, which can lead to increased training and retention costs. If we are unable to attract or retain highly qualified employees in the future, it could adversely impact our operating results.
Product shortages, loss of key suppliers or failure to develop relationships with qualified 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. Our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our high standards for quality and our need to access products in a timely and efficient manner is a significant challenge. Our ability to access products also can be adversely affected by the financial instability of suppliers (particularly in light of continuing economic difficulties in various regions of the United States and the world), suppliers’ noncompliance with applicable laws, tariffs and import duties, supply disruptions, shipping interruptions or costs, and other factors beyond our control. 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 business, 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. Many of our suppliers also offer us favorable terms based on the volume of our purchases. If market conditions change, suppliers may stop offering us favorable terms. Failure by our suppliers to continue to supply us with products on favorable terms, commercially reasonable terms, or at all, could put pressure on our operating margins or have a material adverse effect on our business, financial condition, operating results and cash flows.
A portion of the workforces of many of our suppliers, particularly our foreign suppliers, are represented by labor unions. Workforce disputes at these suppliers may result in work stoppages or slowdowns. Such disruptions could have a material adverse effect on these suppliers ability to continue meeting our needs.
The implementation of our supply chain and technology initiatives could disrupt our operations, and these initiatives might not provide the anticipated benefits or might fail.
We have made, and we plan to continue to make, significant investments in our supply chain and technology. These initiatives are designed to streamline our operations to allow our employees to continue to provide high quality service to our customers, while simplifying customer interaction and providing our customers with a more interconnected purchasing experience. The cost and potential problems and interruptions associated with the implementation of these initiatives, including those associated with managing third-party service providers and employing new web-based tools and services, could disrupt or reduce the efficiency of our operations. In the event that we grow very rapidly, there can be no assurance that we will be able to keep up, expand or adapt our IT infrastructure to meet evolving demand on a timely basis and at a commercially reasonable cost, or at all. In addition, our improved supply chain and new or upgraded technology might not provide the anticipated benefits, it might take longer than expected to realize the anticipated benefits or the initiatives might fail altogether.
We occupy many of our facilities under long-term non-cancellable leases. If we close a facility, we are still obligated under the applicable lease. We may be unable to renew leases at the end of their terms.
Many of our facilities are located in leased premises. Many of our current leases are non-cancellable and typically have initial terms ranging from five to ten 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-cancellable 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. The inability to terminate leases when idling a facility or exiting a geographic market can have a significant adverse impact on our business, financial condition, operating results and cash flows.
In addition, 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, financial condition, operating results and cash flows. In addition, we may not be able to secure a replacement facility in a location that is as commercially viable, including access to rail service, as the lease we are unable to renew. 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 may be unable to effectively manage our inventory and working capital as our sales volume increases, which could have a material adverse effect on us.
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. We must maintain, and have adequate working capital to purchase, sufficient inventory to meet customer demand. Due to the lead times required by our suppliers, we order products in advance of expected sales. This requires us to forecast our sales and purchases accordingly. In periods of growth, it can be especially difficult to forecast sales accurately. We must also manage our working capital to fund our inventory purchases. In the future, if we are unable to manage effectively our inventory and working capital as we attempt to grow our business, our cash flows may be negatively affected, which could have a material adverse effect on our business, financial condition, operating results and cash flows.
The majority of our net sales are credit sales that are made primarily to customers whose ability to pay is dependent, in part, upon the economic strength of the industry and geographic areas in which they operate, and the failure to collect or timely collect monies owed from customers could adversely affect us.
The majority of our net sales volume in fiscal 2018 was facilitated through the extension of credit to our customers whose ability to pay is dependent, in part, upon the economic strength of the industry in the areas where they operate. We offer credit to customers, either through unsecured credit that is based solely upon the creditworthiness of the customer, or secured credit for materials sold for a specific job where the security lies in lien rights associated with the material going into the job. The type of credit offered depends both on the financial strength of the customer and the nature of the business in which the customer is involved. End users, resellers and other non-contractor customers generally purchase more on unsecured credit than secured credit. During the housing downturn, several of our homebuilder customers defaulted on amounts owed to us or extended their payable days as a result of their financial condition. The inability of our customers to pay off their credit lines in a timely manner, or at all, would adversely affect our business, financial condition, operating results and cash flows. Furthermore, our collections efforts with respect to non-paying or slow-paying customers could negatively impact our customer relations going forward.
Because we depend on the creditworthiness of certain of our customers, if the financial condition of our customers declines, our credit risk could increase. Significant contraction in our markets, coupled with tightened credit availability and financial institution underwriting standards, could adversely affect certain of our customers. Should one or more of our larger customers declare bankruptcy as has occurred in the past, it could adversely affect the collectability of our accounts receivable, bad debt reserves and net income.
We may not timely identify or effectively respond to consumer needs, expectations, market conditions or trends, which could adversely affect our relationship with customers, the demand for our products and services and our market share.
It is difficult to predict successfully the products and services our customers will demand. The success of our business depends in part on our ability to identify and respond promptly to changes in demographics, consumer preferences, expectations, needs and weather conditions, while also managing inventory levels. For example, an increased consumer focus on making homes energy efficient could require us to offer more energy efficient building materials and there can be no assurance that we would be able to identify appropriate suppliers on acceptable terms. Failure to identify timely or effectively respond to changing consumer
preferences, expectations and building product needs could adversely affect our relationship with customers, the demand for our products and services and our market share.
Because we cannot immediately adapt our production capacity and related cost structures to rapidly changing market conditions, when demand is below our expectations, our manufacturing capacity will likely exceed our production requirements. If, during a general market upturn or an upturn in one of our geographic markets, we cannot increase our manufacturing capacity to meet product demand, we will not be able to fulfill orders in a timely manner, which could lead to order cancellations, contract breaches or indemnification obligations. This inability could materially and adversely limit our ability to improve our results. By contrast, if during an economic downturn we had excess manufacturing capacity, then our fixed costs associated with excess manufacturing capacity could have a significant adverse effect on our business, financial condition, operating results and cash flows.
We may be unable to successfully implement our growth strategy, which includes pursuing strategic acquisitions and opening new facilities.
Our long-term business plan 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 acceptable terms could have a material adverse effect on our growth strategy. Moreover, any future reduced operating results as we experienced during the housing downturn, our liquidity position or the requirements of the Second Amended and Restated Senior Secured Credit Agreement (the “Credit Agreement”) 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 business, 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 DOT, work safety regulations promulgated by OSHA, employment regulations promulgated by the United States Equal Employment Opportunity Commission, regulations of the United States Department of Labor, federal and state environmental regulations, and state and local zoning restrictions, building codes and contractors’ licensing regulations. More burdensome regulatory requirements in these or other areas may increase our general and administrative costs and adversely affect our business, financial condition, operating results and cash flows. Moreover, failure to comply with the regulatory requirements applicable to our business could expose us to litigation and/or substantial penalties that could adversely affect our business, financial condition, operating results and cash flows.
Our transportation operations are subject to the regulatory jurisdiction of the DOT. The DOT has broad administrative powers with respect to our transportation operations. More restrictive limitations on vehicle weight and size, trailer length and configuration, or driver hours of service would increase our costs, which, if we are unable to pass these cost increases on to our customers, may increase our selling, general and administrative expenses and adversely affect our business, financial condition, operating results and cash flows. If we fail to comply adequately with DOT regulations or regulations become more stringent, we could experience increased inspections, regulatory authorities could take remedial action including imposing fines or shutting down our operations or we could be subject to increased audit and compliance costs. If any of these events were to occur, our business, financial condition, operating results and cash flows could be adversely affected.
In addition, the homebuilding industry is subject to various local, state and federal statutes, ordinances, codes, rules and regulations concerning zoning, building design and safety, construction, energy conservation, environmental protection and similar matters, including regulations that impose restrictive zoning and density requirements on our business or that 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.
Changes in legislation and government policy may have a material adverse effect on us.
The 2016 presidential and congressional elections in the United States, as well as the 2018 midterm elections, have resulted in uncertainty with respect to, and could result in significant changes in, legislation and government policy. Specific legislative and regulatory proposals discussed during and after these elections that could have a material impact on us include, but are not limited to, modifications to international trade policy and increased regulation related to the employment of foreign workers.
Immigration reform and enforcement continues to attract significant attention in the public arena, the United States Congress and at the state and local levels. We rely in part on a seasonal workforce which requires specific types of visas to enter the United States. If new or more restrictive immigration legislation is enacted at the federal level or in states in which we do business, or if
existing regulations are interpreted or enforced differently, these changes could make it more difficult or costly for us to hire United States citizens and/or legal immigrant workers. In such cases, we may incur additional costs to run our business, including to find and hire replacement workers, or may have to change the way we conduct our operations, either of which could have a material adverse effect on our business, financial condition, operating results and cash flows.
The Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) was enacted during December 2017, which, among other provisions, limits mortgage interest and state and local tax deductions, including property taxes and state income taxes, which may affect demand for new homes. The limitation on state and local tax deductions may have a greater impact in high tax states such as California, which accounted for approximately 14% of our 2018 net sales. Future changes in federal income tax laws may also affect demand for new homes. From time to time, various proposals are discussed, which, if enacted, may have an adverse effect on the homebuilding industry in general. No meaningful prediction can be made as to whether any such proposals will be enacted and, if enacted, the particular form such laws would take. Because we have substantial fixed costs, relatively modest declines in our customers’ production levels could have a significant adverse effect on our business, financial condition, operating results and cash flows.
Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our financial performance.
We are subject to income and other taxes in the United States. We are subject to ongoing tax audits in various jurisdictions. We regularly assess the likely outcome of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcome of these audits, and the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. In addition, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation.
As of December 31, 2018, we had a net deferred tax liability of $3.0 million. The carrying value of our deferred tax assets is dependent on our ability to generate future taxable income in the United States. Future changes in tax legislation could have a significant adverse effect on our tax rate or the carrying value of our deferred tax assets and liabilities. Any of these changes could affect our financial performance.
We may not be able to utilize certain of our net operating loss carryforwards, which could harm our profitability.
We have net operating loss (“NOL”) carryforwards to reduce future taxable income. As of December 31, 2018, we had NOL carryforwards to reduce future U.S. federal and state taxable income of $77.9 million and $75.1 million, respectively. Utilization of our NOL carryforwards may be subject to a substantial limitation under Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”), and comparable provisions of state tax laws, due to changes in ownership of our company that may occur in the future. Under Section 382 and comparable provisions of state tax laws, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change by value in its equity ownership over a three-year period, the corporation’s ability to carry forward its pre-change net operating losses to reduce its post-change income may be limited. We may experience ownership changes in the future as a result of future changes in our stock ownership. As a result, our ability to use our pre-change NOL carryforwards to reduce U.S. federal and state taxable income we produce in the future years may be subject to limitations, which could result in increased future tax liability to us.
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 eastern, southern and western United States. Any widespread disruption to our facilities resulting from fire, earthquake, hurricanes and other weather-related events, an act of terrorism, labor disputes, supply chain disruptions or any other cause could damage a significant portion of our inventory and could materially impair our ability to manufacture and distribute our products to customers. 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. Disruptions to the national or local transportation infrastructure systems may also affect our ability to keep our operations and services functioning properly. If any of these events were to occur, our business, financial condition, operating results and cash flows could be materially adversely affected.
We are subject to exposure to environmental liabilities and are subject to environmental regulation.
We are subject to various federal, state and local environmental laws, ordinances, rules and regulations, including those promulgated by the United States Environmental Protection Agency and analogous state agencies. As current and former owners, lessees and
operators of real property, we can be held liable for the investigation or remediation of contamination at or from such properties, in some circumstances irrespective of whether we knew of or caused such contamination. No assurance can be provided that investigation and remediation will not be required in the future as a result of spills or releases of petroleum products or hazardous substances, the discovery of currently unknown environmental conditions, more stringent standards regarding existing contamination, or changes in legislation, laws, ordinances, rules or regulations or their interpretation or enforcement. Liabilities under these or similar regulations or more burdensome environmental regulatory requirements may increase our costs and adversely affect our business, financial condition, operating results and cash flows.
We are subject to health and safety laws and regulations and any failure to comply with any current or future laws or regulations could have a material adverse effect on us.
Manufacturing and building sites are inherently dangerous workplaces. Our work sites often put our employees and others in close proximity with large pieces of mechanized equipment, moving vehicles, manufacturing processes, and heavy products. As a result, we are subject to a variety of health and safety laws and regulations dealing with occupational health and safety. Unsafe work sites have the potential to increase employee turnover and raise our operating costs. Our safety record can also impact our reputation. We maintain functional groups whose primary purpose is to ensure we implement effective work procedures throughout our organization and take other steps to ensure the health and safety of our work force, but there can be no assurances these measures will be successful in preventing injuries or violations of health and safety laws and regulations. Any failure to maintain safe work sites or violations of applicable law could expose us to significant financial losses and reputational harm, as well as civil and criminal liabilities, any of which could have a material adverse effect on our business, financial condition, operating results and cash flows.
We may be adversely affected by any disruption in our information technology systems.
Our operations are dependent upon our IT systems, which encompass all of our major business functions. A substantial disruption in our IT systems for any prolonged time period (arising from, for example, system capacity limits from unexpected increases in our volume of business, outages, computer viruses, unauthorized access 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. Such delays, problems or costs may have a material adverse effect on our business, financial condition, operating results and cash flows.
We are subject to cybersecurity risks that could adversely affect us, and we may incur increasing costs in an effort to minimize those risks.
Our business relies on systems, including those of third parties with whom we do business, and a website that involve the storage and transmission of customers’ and employees’ personal and proprietary information. Our systems and those of third parties with whom we do business have been, and will likely continue to be, subjected to computer viruses or other malicious codes, unauthorized access attempts and cyber-attacks that include phishing-attacks, denial-of-service attacks, ransomware, malware and hacking. Further, as our eCommerce business expands, our increased visibility and role in accepting electronic payments may put us at a greater risk of being targeted. Breach of our systems or those of third parties with whom we do business could compromise our confidential information and that of our customers or employees, impede or interrupt our business operations, and may result in other negative financial and other consequences, including remediation costs, loss of revenue, litigation, significant legal and financial exposure, loss of intellectual property and reputational damage.
To date, we have not experienced a material breach of cybersecurity. As cyber-attacks become more sophisticated generally, and as we implement changes such as giving customers greater electronic access to our systems and expanding our eCommerce, we may be required to incur significant costs to strengthen our systems from outside intrusions and/or maintain insurance coverage related to the threat of such attacks. Further, the regulatory environment related to information security and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business and those of third parties with whom we do business, and compliance with those requirements could result in additional costs and legal liabilities. Despite our efforts, we may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks on our systems or those of the third parties with whom we do business. While we have implemented administrative and technical controls such as web filtering, endpoint and storage area network antivirus scanning and isolation, next-generation firewalls, a secure email gateway and mobile device administration, purchased cyber insurance coverage and taken other preventive actions to reduce the risk of cyber incidents and protect our IT, these measures, and other measures we may take in the future, can be expensive, and may be insufficient, circumvented or may become ineffective. Any of the foregoing risks and increased costs could have a material adverse effect on our business, financial condition, operating results and cash flows.
Insufficient insurance coverage could have a material adverse effect on us.
We carry insurance for general liability, auto liability and workers’ compensation exposures subject to deductibles and/or self-insured retentions that we believe to be reasonable under the circumstances, and we self-insure for employee and eligible dependent health care claims, with insurance purchased from independent carriers to cover individual claims in excess of the self-insured limits. However, our insurance program does not cover, or may not adequately cover, every potential risk associated with our business and the consequences thereof. In addition, market conditions or any significant claim or a number of claims made by or against us could cause our premiums and deductibles to increase substantially and, in some instances, our coverage may be reduced or become entirely unavailable. In the future, we may not be able to obtain meaningful coverage at reasonable rates for a variety of risks, including certain types of environmental hazards and ongoing regulatory compliance. If our insurance coverage is insufficient, if we are not able to obtain sufficient coverage in the future, or if we are exposed to significant losses as a result of the risks for which we self-insure, any resulting costs or liabilities could have a material adverse effect on our business, financial condition, operating results and cash flows.
Operation on multiple ERP information systems, and the conversion from multiple systems to a single system, may negatively impact our operations.
The Company currently operates on multiple ERP systems, which we use for operations representing virtually all of our sales. Certain of our ERP systems are proprietary systems that have been highly customized by our computer programmers. We rely upon our ERP systems to manage and replenish inventory, to fill and ship customer orders on a timely basis, to coordinate our sales and distribution activities across all of our products and services and to provide information for financial reporting purposes.
Processing, consolidating and reconciling information from multiple ERP systems increases the chance of error, and we may incur significant additional costs related thereto. Inconsistencies in the information from multiple ERP systems could adversely impact our ability to manage our business efficiently and may result in heightened risk to our ability to maintain accurate books and records and comply with regulatory requirements.
Since the completion of the Merger, the Company has implemented the ERP system utilized by Legacy SBS (“the Legacy SBS ERP system”) at certain Legacy BMHC and newly acquired locations. If the remaining implementation of the Legacy SBS ERP system across Legacy BMHC and newly acquired operations is not executed successfully, this could result in business interruptions and loss of customers. If we do not complete the remaining implementation timely and successfully, we may also incur additional costs associated with this project and a delay in our ability to improve existing operations, to support future growth and to take advantage of new applications and technologies.
Such projects are inherently complex, resource intensive, and lengthy. As a result, we could experience unplanned or unforeseen issues that could adversely affect the project, our business or our results of operations, including:
costs of implementation that materially exceed our expectations;
diversion of management’s attention away from normal daily business operations;
risk of incurring asset impairment charges, accelerated depreciation expense or other charges related to the early retirement of information system assets or the early termination of information system supplier agreements;
increased demand on our operations support personnel;
delays in the go-live of one or more of the stages of the project, resulting in additional costs or time for completion;
errors in implementation resulting in errors in the commencement or reporting of business transactions;
failure in the deliverables of our key partners, suppliers and implementation advisors, resulting in an inferior product, reduced business efficacy and the project not providing expected benefits;
loss of sales or customers as a result of errors in business transactions or delays in providing products or services;
deficiencies in the training of employees in the use of the new solution, resulting in errors in the recording of data or transactions, leading to delays in input deliveries and production impairment;
a control failure during or post implementation, which may result in a material weakness in our internal controls over financial reporting; and
other implementation issues leading to delays and impacts on our business.
Any of the foregoing could materially and negatively impact our business, financial condition, operating results and cash flows.
Risks Related to Our Indebtedness
Our 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 the industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our indebtedness.
Our indebtedness includes obligations under the senior secured notes due 2024 (the “Senior Notes”) and our revolving credit facility (excluding unamortized debt issuance costs) under the Credit Agreement, as well as obligations under capital leases. As of December 31, 2018, our total debt was $365.5 million. This leverage could have important consequences, including: making it more difficult for us to satisfy our obligations with respect to our indebtedness; increasing our vulnerability to general adverse economic and industry conditions; requiring us to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, and other general corporate purposes; increasing our vulnerability to and limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; exposing us to the risk of increased interest rates as borrowings under certain of our indebtedness are subject to variable rates of interest; placing us at a competitive disadvantage compared to our competitors that have less debt; and limiting our ability to borrow additional funds.
We are substantially reliant on liquidity provided by the Credit Agreement and cash on hand to provide working capital and fund our operations. Our working capital and capital expenditure requirements are likely to grow as the housing market improves and we execute our strategic growth plan. 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.
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 our outstanding indebtedness. If additional funds are raised through the issuance of additional equity or convertible debt securities, our stockholders may experience significant dilution. We may also incur additional indebtedness in the future, including collateralized debt, subject to the restrictions contained in the Credit Agreement and indenture governing the Senior Notes (the “Indenture”). If new debt is added to our current debt levels, the related risks that we now face could intensify.
The Credit Agreement and Indenture contain various covenants that could limit our ability to operate our business.
The Credit Agreement and Indenture place limitations on our ability and the ability of our subsidiaries to, among other things, incur debt, create other liens on its assets, make investments, sell assets, pay dividends, undertake transactions with affiliates, enter into merger transactions and enter into unrelated businesses. The Credit Agreement also contains a financial covenant requiring us and our subsidiaries to maintain a Fixed Charge Coverage Ratio, as defined therein, of at least 1.00:1.00 at the end of any fiscal quarter during the period from the date that Excess Availability, as defined therein, under the Credit Agreement is less than or equal to the greater of (1) $33.3 million and (2) 10.0% of the Line Cap under the Credit Agreement, as defined therein, until the date that Excess Availability has been greater than the greater of (i) $33.3 million and (ii) 10.0% of the Line Cap for a period of at least 30 consecutive days. The Credit Agreement and Indenture also contain various customary representations and warranties, financial and collateral reporting requirements and other affirmative and negative covenants. Amounts owed under the Credit Agreement and Indenture may be accelerated and the lenders may exercise other remedies available to them upon the occurrence of various events of default set forth in the Credit Agreement and Indenture, including the failure to make principal or interest payments when due, breaches of covenants, representations and warranties set forth in the Credit Agreement and Indenture and defaults under other debt obligations. Acceleration of amounts owed under the Credit Agreement or the Indenture, or the exercise of other remedies available to holders of our debt, could materially and negatively impact our business, financial condition, operating results and cash flows.
Risks Related to Ownership of Our Common Stock
The price of our common stock may fluctuate significantly.
Volatility in the market price of our common stock may prevent you from being able to sell your shares of our common stock at or above the price you paid for them. The market price for our common stock could fluctuate significantly for various reasons, including but not limited to:
our operating and financial performance and prospects;
our quarterly or annual earnings or those of other companies in our industry;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industry;
changes in the frequency of coverage or the failure of research analysts to cover, or downgrades in analyst recommendations regarding, our common stock;
general economic, industry and market conditions;
strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;
sales of common stock by us or members of our management team;
the granting or exercise of employee stock options or other equity compensation;
volume of trading in our common stock; and
the impact of the factors described elsewhere in Item 1A. “Risk Factors.”
In addition, in recent years, the stock market has regularly experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes have at times occurred without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially impact our share price.
We do not currently intend to pay dividends on our common stock.
We do not anticipate paying any cash dividends on our common stock for the foreseeable future. In addition, our existing indebtedness restricts, and we anticipate our future indebtedness may restrict, our ability to pay dividends. Any determination to pay dividends in the future will be at the discretion of our Board and will depend upon many factors, including our financial condition, operating results, projections, cash flows, earnings, legal requirements, restrictions in our indebtedness and agreements governing any other indebtedness we may enter into and other factors that our Board deems relevant. Accordingly, holders of our common stock may need to sell their shares to realize a return on their investment, and may not be able to sell their shares at or above the price paid for them.
Our future operating results may fluctuate significantly and our current operating results may not be a good indication of our future performance. Fluctuations in our financial results could affect our stock price in the future.
Our revenues and operating results have historically varied from period-to-period and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control. Any volatility in our financial results may make it more difficult for us to raise capital in the future or pursue acquisitions that involve issuances of our stock. Our operating results for prior periods may not be effective predictors of future performance.
Factors associated with our industry, the operation of our business and the markets for our products and services may cause our quarterly financial results to fluctuate, including:
the seasonal and cyclical nature of the homebuilding industry;
the highly competitive nature of our industry;
the volatility of prices, availability and affordability of raw materials, including lumber, wood products and other building products;
shortages of skilled and technical labor, increased labor costs and labor disruptions;
the production schedules of our customers;
general economic conditions, including but not limited to housing starts, repair and remodeling activity and commercial construction, inventory levels of new and existing homes for sale, foreclosure rates, interest rates, unemployment rates, relative currency values, mortgage availability and pricing, as well as other consumer financing mechanisms, that ultimately affect demand for our products;
actions of suppliers, customers and competitors, including merger and acquisition activities, plant closures and financial failures;
litigation, claims and investigations involving us;
the financial condition and creditworthiness of our customers;
cost of compliance with government laws and regulations;
weather patterns; and
severe weather phenomena such as drought, hurricanes, tornadoes and fire.
Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our financial and other operating results, including fluctuations in our key metrics. The variability and unpredictability could result in our failing to meet our internal operating plan or the expectations of securities analysts or investors for any period. This
volatility could cause the market price of our shares to fall substantially and we could face costly lawsuits, including securities class action suits.
Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our Board of Directors and may discourage hostile takeover attempts.
Certain provisions of our amended and restated certificate of incorporation (the “Charter”) and amended and restated bylaws may have the effect of delaying or preventing changes in control if our Board determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and amended and restated bylaws include, among other things, the following:
a classified Board with three-year staggered terms;
the ability of our Board, without stockholder approval, to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;
stockholder action can only be taken at a special or regular meeting and not by written consent;
advance notice procedures for nominating candidates to our Board or presenting matters at stockholder meetings;
removal of directors only for cause;
allowing only our Board to fill vacancies on our Board; and
super-majority voting requirements to amend our amended and restated bylaws and certain provisions of the Charter.
Our Charter opts us out of being subject to Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”), an anti-takeover law. In general, Section 203 of the DGCL prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. However, our Charter contains anti-takeover provisions that are substantially similar in effect to Section 203 of the DGCL. The anti-takeover provisions in the Charter prohibit us from engaging in a business combination, such as a merger, with a person or group owning 15% or more of our voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. The Charter includes specified exceptions from anti-takeover provisions, which provide that (i) in certain circumstances (as described below), Davidson Kempner Capital Management LP, The Gores Group, LLC and their respective affiliates or associates (the “Grandfathered Stockholders”), and (ii) any person who would otherwise be an interested stockholder because of a transfer, assignment, conveyance, hypothecation, encumbrance or other disposition of 5% or more of our outstanding voting stock by any Grandfathered Stockholder to such person will be excluded from the “interested stockholder” definition in the Charter. From and after the third anniversary of the closing date of the Merger, each Grandfathered Stockholder is permitted to continue owning its respective ownership amount that it owns, together with its affiliates and associates, on such anniversary and will not be deemed an interested stockholder unless such Grandfathered Stockholder’s ownership level later exceeds such ownership amount of our outstanding voting stock. Moreover, each Grandfathered Stockholder, together with its affiliates and associates, may reduce its ownership amount at any time from and after the third anniversary of the effective time of the Merger; provided that, if such Grandfathered Stockholder reduces its ownership amount below the ownership amount of such Grandfathered Stockholder that exists on the third anniversary of the effective time of the Merger, such Grandfathered Stockholder may not increase its ownership amount above such reduced amount; provided, further, that if such Grandfathered Stockholder reduces its ownership amount below 15% of our outstanding voting stock after the third anniversary of the effective time of the Merger, such Grandfathered Stockholder may own any amount of voting stock below 15% of our outstanding voting stock, in the case of each of the foregoing provisos, without being deemed an interested stockholder.
While these provisions have the effect of encouraging persons seeking to acquire control of us to negotiate with our Board, they could enable the Board to hinder or frustrate a transaction that some, or a majority, of the stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board, which is responsible for appointing the members of our management.
Failure to maintain effective internal control in accordance with Section 404 of the Sarbanes-Oxley Act, or to remediate any existing material weakness, could have a material adverse effect on us and our stock price.
As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public companies. In particular, we are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act, which requires us to furnish
annually a report by management on the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. Therefore, our internal control over financial reporting will not prevent or detect all errors and all fraud.
The efforts required to ensure that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis, and to remediate any existing material weakness, are costly and time-consuming, and may need to be reevaluated frequently. Implementing appropriate changes to our internal controls may take a significant amount of time to complete, including that of directors, officers and employees, and may entail substantial costs in order to modify existing accounting systems.
Additionally, we may experience material weaknesses or significant deficiencies in our internal control over financial reporting in the future. For example, in connection with the preparation of our condensed consolidated financial statements for the quarter ended June 30, 2019, we identified the material weakness in our internal control over financial reporting discussed in greater detail in Item 9A of this Amendment. Remediation efforts can be time-consuming and expensive and can place a significant burden on management, thereby increasing pressure on our financial resources and processes. We may not be successful in making the improvements necessary to remediate the existing or any future material weakness, or in doing so in a timely and cost-effective manner.
Any failure to maintain internal control over financial reporting, or any failure to fully remediate the existing or any future material weaknesses that may be found to exist, could inhibit our ability to accurately and on a timely basis report our cash flows, results of operations or financial condition in compliance with applicable securities laws. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remediate any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets and negatively impact the price and trading market for our common stock.
Our Charter includes an exclusive forum clause, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our Charter provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owned by any director, officer or other employee of the Company to the Company or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our Charter or our bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. The exclusive forum clause may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. It is also possible that, notwithstanding such exclusive forum clause, a court could rule that such a provision is inapplicable or unenforceable.
We are a holding company and depend on the cash flow of our subsidiaries.
We are a holding company with no material assets other than the equity interests of our subsidiaries. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets. Consequently, our cash flow and our ability to meet our obligations and pay any future dividends to our stockholders depends upon the cash flow of our subsidiaries and their ability to make payments, directly or indirectly, to us in the form of dividends, distributions and other payments. Any inability on the part of our subsidiaries to make payments to us could have a material adverse effect on our business, financial condition and results of operations.
PART II
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of
BMC Stock Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of BMC Stock Holdings, Inc.and its subsidiaries(the “Company”) as of December 31, 2018and 2017,and the related consolidated statements of operations, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018and 2017, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2018in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO because a material weakness in internal control over financial reporting related to the approval and issuance of debit memos and the application of customer payments to accounts receivable balances, and inadequate segregation of duties over the ability to create debit memos and apply customer payments by certain employees responsible for establishing and monitoring the valuation of accounts receivable balances existed as of that date.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's annual report on internal control over financial reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidatedfinancial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidatedfinancial statements.
Restatement of Management’s Conclusion Regarding Internal Control over Financial Reporting
Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018. However, management has subsequently concluded that a material weakness in internal control over financial reporting related to the approval and issuance of debit memos and the application of customer payments to accounts receivable balances, and inadequate segregation of duties over the ability to create debit memos and apply customer payments by certain employees responsible for establishing and monitoring the valuation of accounts receivable balances existed as of that date. Accordingly, management’s report has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management’s report referred to above. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A 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
Atlanta, Georgia
February 28, 2019, except with respect to our opinion on internal control over financial reporting insofar as it relates to the effects of the matter described in the penultimate paragraph of Management’s annual report on internal control over financial reporting, as to which the date is August 9, 2019
We have served as the Company’s auditor since 2015.
BMC STOCK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | | |
| | | December 31,
2018 | | December 31,
2017 |
| (in thousands, except share and per share amounts) | | | |
|
| Assets | | | | |
| Current assets | | | | |
| Cash and cash equivalents | | $ | 150,723 |
| | $ | 11,750 |
|
| Accounts receivable, net of allowances | | 298,440 |
| | 322,892 |
|
| Inventories, net | | 309,279 |
| | 309,060 |
|
| Contract assets | | 32,348 |
| | — |
|
| Costs in excess of billings on uncompleted contracts | | — |
| | 28,738 |
|
| Income taxes receivable | | — |
| | 3,748 |
|
| Prepaid expenses and other current assets | | 56,249 |
| | 57,949 |
|
| Total current assets | | 847,039 |
| | 734,137 |
|
| Property and equipment, net of accumulated depreciation | | 294,327 |
| | 295,820 |
|
| Customer relationship intangible assets, net of accumulated amortization | | 158,563 |
| | 166,306 |
|
| Other intangible assets, net of accumulated amortization | | 325 |
| | 1,306 |
|
| Goodwill | | 262,997 |
| | 261,792 |
|
| Other long-term assets | | 12,860 |
| | 13,989 |
|
| Total assets | | $ | 1,576,111 |
| | $ | 1,473,350 |
|
| Liabilities and Stockholders’ Equity | | | | |
| Current liabilities | | | | |
| Accounts payable | | $ | 123,495 |
| | $ | 174,583 |
|
| Accrued expenses and other liabilities | | 110,276 |
| | 96,262 |
|
| Contract liabilities | | 34,888 |
| | — |
|
| Billings in excess of costs on uncompleted contracts | | — |
| | 18,428 |
|
| Income taxes payable | | 902 |
| | — |
|
| Interest payable | | 4,759 |
| | 4,769 |
|
| Current portion: | | | | |
| Long-term debt and capital lease obligations | | 6,661 |
| | 7,739 |
|
| Insurance reserves | | 15,198 |
| | 13,496 |
|
| Total current liabilities | | 296,179 |
| | 315,277 |
|
| Insurance reserves | | 41,270 |
| | 38,470 |
|
| Long-term debt | | 345,197 |
| | 349,059 |
|
| Long-term portion of capital lease obligations | | 8,845 |
| | 14,838 |
|
| Deferred income taxes | | 3,034 |
| | 1,768 |
|
| Other long-term liabilities | | 6,927 |
| | 7,039 |
|
| Total liabilities | | 701,452 |
| | 726,451 |
|
| Commitments and contingencies (Note 13) | |
|
| |
|
|
| Stockholders’ equity | | | | |
| Preferred stock, $0.01 par value, 50.0 million shares authorized, no shares issued and outstanding at December 31, 2018 and December 31, 2017 | | — |
| | — |
|
| Common stock, $0.01 par value, 300.0 million shares authorized, 67.7 million and 67.3 million shares issued, and 67.2 million and 67.1 million outstanding at December 31, 2018 and December 31, 2017, respectively | | 677 |
| | 673 |
|
| Additional paid-in capital | | 672,095 |
| | 659,440 |
|
| Retained earnings | | 210,345 |
| | 90,607 |
|
| Treasury stock, at cost, 0.5 million and 0.2 million shares at December 31, 2018 and December 31, 2017, respectively | | (8,458 | ) | | (3,821 | ) |
| Total stockholders’ equity | | 874,659 |
| | 746,899 |
|
| Total liabilities and stockholders’ equity | | $ | 1,576,111 |
| | $ | 1,473,350 |
|
The accompanying notes are an integral part of these consolidated financial statements.
BMC STOCK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS |
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands, except per share amounts) | | 2018 | | 2017 | | 2016 |
| Net sales | | | | | | |
| Building products | | $ | 2,856,683 |
| | $ | 2,561,454 |
| | $ | 2,336,041 |
|
| Construction services | | 825,765 |
| | 804,514 |
| | 757,702 |
|
| | | 3,682,448 |
| | 3,365,968 |
| | 3,093,743 |
|
| Cost of sales | | | | | | |
| Building products | | 2,095,093 |
| | 1,906,583 |
| | 1,725,843 |
|
| Construction services | | 678,139 |
| | 663,870 |
| | 625,935 |
|
| | | 2,773,232 |
| | 2,570,453 |
| | 2,351,778 |
|
| Gross profit | | 909,216 |
| | 795,515 |
| | 741,965 |
|
| | | | | | | |
| Selling, general and administrative expenses | | 680,273 |
| | 619,546 |
| | 571,799 |
|
| Depreciation expense | | 39,627 |
| | 43,022 |
| | 38,441 |
|
| Amortization expense | | 15,015 |
| | 16,003 |
| | 20,721 |
|
| Merger and integration costs | | 3,998 |
| | 15,336 |
| | 15,340 |
|
| Impairment of assets | | — |
| | 435 |
| | 11,928 |
|
| | | 738,913 |
| | 694,342 |
| | 658,229 |
|
| Income from operations | | 170,303 |
| | 101,173 |
| | 83,736 |
|
| Other income (expense) | | | | | | |
| Interest expense | | (24,035 | ) | | (25,036 | ) | | (30,131 | ) |
| Loss on debt extinguishment | | — |
| | — |
| | (12,529 | ) |
| Other income, net | | 10,646 |
| | 5,690 |
| | 4,070 |
|
| Income before income taxes | | 156,914 |
| | 81,827 |
| | 45,146 |
|
| Income tax expense | | 37,176 |
| | 24,402 |
| | 14,266 |
|
| Net income | | $ | 119,738 |
| | $ | 57,425 |
| | $ | 30,880 |
|
| | | | | | | |
| Weighted average common shares outstanding | | | | | | |
| Basic | | 67,273 |
| | 66,900 |
| | 66,055 |
|
| Diluted | | 67,748 |
| | 67,404 |
| | 66,609 |
|
| | | | | | | |
| Net income per common share | | | | | | |
| Basic | | $ | 1.78 |
| | $ | 0.86 |
| | $ | 0.47 |
|
| Diluted | | $ | 1.77 |
| | $ | 0.85 |
| | $ | 0.46 |
|
The accompanying notes are an integral part of these consolidated financial statements.
BMC STOCK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Retained Earnings | | Total |
| (in thousands) | | Shares | | Amount | | Shares | | Amount | | | |
| Stockholders’ equity as of December 31, 2015 | | 65,360 |
| | $ | 654 |
| | 25 |
| | $ | (426 | ) | | $ | 626,402 |
| | $ | 2,302 |
| | $ | 628,932 |
|
| Issuance of common stock, net of offering costs | | 855 |
| | 8 |
| | — |
| | — |
| | 13,768 |
| | — |
| | 13,776 |
|
| Exercise of stock options | | 175 |
| | 2 |
| | — |
| | — |
| | 1,299 |
| | — |
| | 1,301 |
|
| Shares vested for long-term incentive plan | | 424 |
| | 4 |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
|
| Repurchases of common stock related to equity award activity | | — |
| | — |
| | 119 |
| | (2,023 | ) | | — |
| | — |
| | (2,023 | ) |
| Share withholdings made in satisfaction of exercise price | | — |
| | — |
| | 4 |
| | (80 | ) | | 80 |
| | — |
| | — |
|
| Stock compensation expense | | — |
| | — |
| | — |
| | — |
| | 7,252 |
| | — |
| | 7,252 |
|
| Other | | — |
| | — |
| | — |
| | — |
| | 483 |
| | — |
| | 483 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 30,880 |
| | 30,880 |
|
| Stockholders’ equity as of December 31, 2016 | | 66,814 |
| | 668 |
| | 148 |
| | (2,529 | ) | | 649,280 |
| | 33,182 |
| | 680,601 |
|
| Exercise of stock options | | 260 |
| | 3 |
| | — |
| | — |
| | 3,393 |
| | — |
| | 3,396 |
|
| Shares vested for long-term incentive plan | | 212 |
| | 2 |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
|
| Repurchases of common stock related to equity award activity | | — |
| | — |
| | 59 |
| | (1,292 | ) | | — |
| | — |
| | (1,292 | ) |
| Stock compensation expense | | — |
| | — |
| | — |
| | — |
| | 6,769 |
| | — |
| | 6,769 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 57,425 |
| | 57,425 |
|
| Stockholders’ equity as of December 31, 2017 | | 67,286 |
| | 673 |
| | 207 |
| | (3,821 | ) | | 659,440 |
| | 90,607 |
| | 746,899 |
|
| Exercise of stock options | | 96 |
| | 1 |
| | — |
| | — |
| | 1,326 |
| | — |
| | 1,327 |
|
| Shares vested for long-term incentive plans | | 326 |
| | 3 |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
|
| Repurchases of common stock under share repurchase program | | — |
| | — |
| | 182 |
| | (2,891 | ) | | — |
| | — |
| | (2,891 | ) |
| Repurchases of common stock related to equity award activity | | — |
| | — |
| | 88 |
| | (1,729 | ) | | — |
| | — |
| | (1,729 | ) |
| Share withholdings made in satisfaction of exercise price | | — |
| | — |
| | 1 |
| | (17 | ) | | 17 |
| | — |
| | — |
|
| Stock compensation expense | | — |
| | — |
| | — |
| | — |
| | 11,315 |
| | — |
| | 11,315 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 119,738 |
| | 119,738 |
|
| Stockholders’ equity as of December 31, 2018 | | 67,708 |
| | $ | 677 |
| | 478 |
| | $ | (8,458 | ) | | $ | 672,095 |
| | $ | 210,345 |
| | $ | 874,659 |
|
The accompanying notes are an integral part of these consolidated financial statements.
BMC STOCK HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities | | | | | | |
| Net income | | $ | 119,738 |
| | $ | 57,425 |
| | $ | 30,880 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation expense | | 50,373 |
| | 53,214 |
| | 47,959 |
|
| Amortization of intangible assets | | 15,015 |
| | 16,003 |
| | 20,721 |
|
| Amortization of debt issuance costs | | 1,684 |
| | 1,684 |
| | 3,114 |
|
| Deferred income taxes | | 1,266 |
| | 2,318 |
| | (3,571 | ) |
| Non-cash stock compensation expense | | 11,315 |
| | 6,769 |
| | 7,252 |
|
| Gain on sale of property, equipment and real estate | | (3,321 | ) | | (1,683 | ) | | (1,396 | ) |
| Gain on insurance proceeds | | — |
| | (1,991 | ) | | (1,003 | ) |
| Impairment of assets | | — |
| | 435 |
| | 11,928 |
|
| Loss on debt extinguishment | | — |
| | — |
| | 12,529 |
|
| Amortization of inventory step-up charges | | — |
| | — |
| | 2,884 |
|
| Other non-cash adjustments | | 613 |
| | 552 |
| | 98 |
|
| Change in assets and liabilities, net of effects of acquisitions | | | | | | |
| Accounts receivable, net of allowances | | 16,078 |
| | (3,252 | ) | | (10,128 | ) |
| Inventories, net | | 3,257 |
| | (32,297 | ) | | (31,200 | ) |
| Contract assets | | 5,565 |
| | — |
| | — |
|
| Costs in excess of billings on uncompleted contracts | | — |
| | (2,364 | ) | | (3,845 | ) |
| Income taxes payable/receivable | | 4,650 |
| | (1,311 | ) | | 9,627 |
|
| Prepaid expenses and other current assets | | 2,588 |
| | (13,191 | ) | | (12,208 | ) |
| Other long-term assets | | (69 | ) | | 3,458 |
| | (126 | ) |
| Accounts payable | | (51,348 | ) | | 3,477 |
| | 28,592 |
|
| Accrued expenses and other liabilities | | 19,066 |
| | 5,417 |
| | (5,859 | ) |
| Contract liabilities | | 8,609 |
| | — |
| | — |
|
| Billings in excess of costs on uncompleted contracts | | — |
| | 2,737 |
| | (197 | ) |
| Insurance reserves | | 4,502 |
| | (3,239 | ) | | (16 | ) |
| Other long-term liabilities | | 444 |
| | (227 | ) | | 853 |
|
| Net cash provided by operating activities | | 210,025 |
| | 93,934 |
| | 106,888 |
|
| Cash flows from investing activities | | | | | | |
| Purchases of property, equipment and real estate | | (55,174 | ) | | (63,278 | ) | | (38,067 | ) |
| Purchases of businesses, net of cash acquired | | (20,970 | ) | | (38,438 | ) | | — |
|
| Proceeds from sale of property, equipment and real estate | | 11,432 |
| | 13,445 |
| | 3,187 |
|
| Proceeds from sale of business | | 7,773 |
| | — |
| | — |
|
| Insurance proceeds | | 1,991 |
| | — |
| | 1,151 |
|
| Net cash used in investing activities | | (54,948 | ) | | (88,271 | ) | | (33,729 | ) |
BMC STOCK HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Cash flows from financing activities | | | | | | |
| Proceeds from revolving line of credit | | 854,946 |
| | 995,306 |
| | 1,544,064 |
|
| Repayments of proceeds from revolving line of credit | | (859,408 | ) | | (990,844 | ) | | (1,696,324 | ) |
| Payments on capital lease obligations | | (7,759 | ) | | (9,926 | ) | | (8,800 | ) |
| Principal payments on other notes | | (336 | ) | | (2,627 | ) | | (3,303 | ) |
| Secured borrowings | | 431 |
| | 2,880 |
| | 1,427 |
|
| Proceeds from exercise of stock options | | 1,327 |
| | 3,396 |
| | 1,301 |
|
| Repurchases of common stock under share repurchase program | | (2,891 | ) | | — |
| | — |
|
| Repurchases of common stock related to equity award activity | | (2,044 | ) | | (977 | ) | | (2,023 | ) |
| Holdback payments | | (370 | ) | | — |
| | — |
|
| Payments of debt issuance costs | | — |
| | (38 | ) | | (7,011 | ) |
| Proceeds from issuance of Senior Notes | | — |
| | — |
| | 350,000 |
|
| Redemption of Extinguished Senior Notes | | — |
| | — |
| | (250,000 | ) |
| Proceeds from issuance of common stock, net of offering costs | | — |
| | — |
| | 13,776 |
|
| Payments of debt extinguishment costs | | — |
| | — |
| | (8,438 | ) |
| Net cash used in financing activities | | (16,104 | ) | | (2,830 | ) | | (65,331 | ) |
| Net increase in cash and cash equivalents | | 138,973 |
| | 2,833 |
| | 7,828 |
|
| Cash and cash equivalents | | | | | | |
| Beginning of period | | 11,750 |
| | 8,917 |
| | 1,089 |
|
| End of period | | $ | 150,723 |
| | $ | 11,750 |
| | $ | 8,917 |
|
| | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | |
| Interest paid | | $ | 22,361 |
| | $ | 24,210 |
| | $ | 28,081 |
|
| Cash paid for income taxes, net | | 31,260 |
| | 22,858 |
| | 8,210 |
|
| Non-cash investing and financing transactions | | | | | | |
| Acquisition-related holdback payments due at future date | | 1,403 |
| | 375 |
| | — |
|
| Accrued purchases of property and equipment | | 1,963 |
| | 811 |
| | 505 |
|
| Assets acquired under capital lease obligations | | 821 |
| | 2,481 |
| | 15,089 |
|
The accompanying notes are an integral part of these consolidated financial statements.
BMC STOCK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in thousands except share and per share amounts.)
1. Organization
These financial statements represent the financial statements of BMC Stock Holdings, Inc., and its subsidiaries. All references to “BMC” or the “Company” in this Annual Report on Form 10-K mean BMC Stock Holdings, Inc. and its subsidiaries.
The Company distributes lumber and building materials to new construction and repair and remodeling contractors. Additionally, the Company provides solution-based services to its customers, including component design, product specification and installation services.
2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying consolidated financial statements have been prepared by management in conformity with U.S generally accepted accounting principles (“U.S. GAAP”).
Principles of consolidation
The consolidated financial statements include all accounts of BMC and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and judgments on an ongoing basis and bases its estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. The significant estimates which could change by a material amount in the near term include revenue recognition for construction services, accounts receivable reserves, estimated losses on uncompleted contracts and changes in contract estimates, inventory reserves, supplier rebates, goodwill impairment, impairment of property and equipment, insurance reserves, warranties and share-based compensation. Actual results may differ materially from these estimates under different assumptions or conditions.
Business and credit concentrations
The Company maintains cash at financial institutions in excess of federally insured limits. Accounts receivable potentially expose the Company to concentrations of credit risk. Mitigating this credit risk is collateral underlying certain accounts receivable (perfected liens or lien rights) as well as the Company’s analysis of a customer’s credit history prior to extending credit. Concentrations of credit risk with respect to accounts receivable are limited due to the Company’s large number of customers and their dispersion across various regions of the United States. At December 31, 2018 and 2017, no customer represented more than 10% of accounts receivable. For the years ended December 31, 2018, 2017 and 2016, no customer accounted for more than 10% of revenue.
The Company’s future results could be adversely affected by a number of factors including competitive pressure on sales and pricing, weather conditions, consumer spending and debt levels, interest rates, existing residential home sales and new home construction, lumber prices and product mix.
Cash and cash equivalents
Cash equivalents are highly liquid investments that are readily convertible to known amounts of cash and have a maturity of three months or less from the time of purchase. As of December 31, 2018 and 2017, the Company had cash equivalents of $146.1 million and $0, respectively. Cash equivalents are valued at amortized cost, which approximates fair value due to the short-term maturity of these instruments, and was classified as a Level 1 or Level 2 measurement in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”).
Book overdrafts occur when purchases on corporate purchasing cards and checks written exceed available bank balances at a specific bank, despite there being cash at the Company’s other financial institutions. For accounting purposes, the Company reclassifies these book overdrafts to accounts payable on the consolidated balance sheets. Book overdrafts included in accounts payable were $0.1 million at December 31, 2018 and 2017.
Fair value of financial instruments
ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
|
| | |
| Level 1 | | Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| |
| Level 2 | | Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| |
| Level 3 | | Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument is categorized based upon the lowest level of input that is significant to the fair value calculation.
Accounts receivable
Accounts receivable result from the extending of credit to trade customers for the purchase of goods and services. The terms generally provide for payment within 30 days of being invoiced. On occasion, when necessary to compete in certain circumstances, the Company will sell product under extended payment terms. Accounts receivable are stated at estimated net realizable value. The allowance for doubtful accounts is based on an assessment of individual past due accounts, historical write-off experience, accounts receivable aging, customer disputes and the business environment. Account balances are charged off when the potential for recovery is considered remote. The Company grants trade discounts on a percentage basis. The Company records an allowance against accounts receivable for the amount of discounts it estimates will be taken by customers. The discounts are recorded as a reduction to revenue when products are sold.
Consideration received from suppliers
The Company enters into agreements with many of its suppliers providing for inventory purchase rebates (“supplier rebates”) upon achievement of specified volume purchasing levels. Supplier rebates are accrued as part of cost of goods sold based on progress towards earning the supplier rebates, taking into consideration cumulative purchases of inventory to date and projected purchases through the end of the year. The Company estimates the rebates applicable to inventory on-hand at each period end based on the estimated percentage of supplier rebates to be earned. The Company also receives consideration from suppliers to promote their products (“marketing and advertising allowances”), which are accrued as part of cost of goods sold or selling, general and administrative expenses, depending on the nature of the allowance. Total rebates and marketing and advertising allowances receivable at December 31, 2018 and 2017 were $18.0 million and $23.3 million, respectively, included in prepaid expenses and other current assets.
Revenue recognition
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Accounting Standards Update 2014-09, Revenue from Contracts with Customers, as amended (“Topic 606”). The Company’s building products contracts typically contain a promise to supply multiple distinct products and thus, they generally contain multiple performance obligations under Topic 606. Depending on the nature of the promises within the Company’s construction services contracts and whether they are distinct under Topic 606, there may be a single performance obligation or multiple performance
obligations. For contracts with multiple performance obligations, the contract’s transaction price is allocated to each distinct performance obligation based on the standalone selling price of each distinct good or service, which is generally determined based on the prices charged to customers.
The Company recognizes revenue for its building products contracts when control of the promised goods (the performance obligations) is transferred to the Company’s customers. This generally occurs at a point in time when the products are delivered and the customer obtains physical possession, legal title and the risks and rewards of ownership. However, for certain product offerings, products are customized to customer specifications and the customer benefits from the Company’s performance over time as deliveries are made. As such, the Company has determined that an output method based on units delivered best depicts the transfer of control to the customer.
The Company generally recognizes revenue for its construction services contracts over time using cost based input methods. Periodic estimates of progress towards completion are made based on either a comparison of labor costs incurred to date with total estimated contract labor costs or total costs incurred to date with total estimated contract costs. Incurred costs represent work performed, which correspond and best depict transfer of control to the customer.
Contract revenues and contract costs to be recognized are dependent on the accuracy of estimates, including quantities of materials, labor productivity and other cost estimates. Historically, the Company has made reasonable estimates of the extent of progress towards completion and contract completion costs. Due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates. Revenue recognized for performance obligations satisfied over time for the year ended December 31, 2018 represented approximately 26% of total revenues.
Estimated losses on uncompleted contracts and changes in contract estimates reflect the Company’s best estimate of probable losses of unbilled receivables, and are recognized in the period such revisions are known and can be reasonably estimated. These estimates are recognized in cost of sales. Estimated losses on uncompleted contracts and changes in contract estimates are established by assessing estimated costs to complete, change orders and claims for uncompleted contracts. Assumptions for estimated costs to complete include material prices, labor costs, labor productivity and contract claims. Such estimates are inherently uncertain and it is possible that actual completion costs may vary from these estimates.
All sales recognized are net of allowances for discounts and estimated returns, based on historical experience. Taxes assessed by governmental authorities that are directly imposed on the Company’s revenue-producing transactions are excluded from sales. The Company accounts for shipping and handling costs associated with its contracts as a fulfillment cost and expenses these as incurred within selling, general and administrative expenses.
Contract balances
The timing of revenue recognition, invoicing and cash collection affects receivables, contract assets and contract liabilities on the Company’s consolidated balance sheets. For building products contracts that contain performance obligations satisfied at a point in time, the Company recognizes revenue upon satisfaction of the performance obligation and then bills the customer, resulting in a receivable. For building products contracts that contain performance obligations satisfied over time, the Company recognizes revenue as the performance obligation is satisfied, but prior to billing, resulting in an unbilled receivable, as the Company has an unconditional right to payment.
For the Company’s construction services contracts, amounts are generally billed as work progresses in accordance with agreed-upon contractual terms. Revenue is also recognized over time as the performance obligations are satisfied, which can result in contract assets and liabilities, on a contract-by-contract basis, due to timing differences between billing and revenue recognition. Contract assets include unbilled amounts when the revenue recognized exceeds the amount billed to the customer. Conversely, contract liabilities include amounts that have been billed to the customer in excess of the revenue recognized.
At times, the Company will have a right to payment from previous performance that is conditional on something other than passage of time, such as retainage, which creates a contract asset. Conversely, the Company may receive advances from customers prior to the Company’s performance, which creates a contract liability.
Contract assets are reclassified to a receivable when the right to consideration becomes unconditional. The Company’s terms generally provide for payment within 30 days of being invoiced. On occasion, when necessary to compete in certain circumstances, the Company will offer extended payment terms, which do not exceed one year.
Shipping and handling costs
The Company includes shipping and handling costs in selling, general and administrative expenses and depreciation expense on the consolidated statements of operations. Shipping and handling costs included in selling, general and administrative expenses were $189.6 million, $172.2 million and $152.7 million for the years ended December 31, 2018, 2017 and 2016, respectively. Shipping and handling costs included in depreciation expense were $22.9 million, $24.8 million and $20.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Property and equipment
Property and equipment are stated at cost. Expenditures for renewals and betterments, which extend the useful lives of assets, are capitalized while maintenance and repairs are charged to expense as incurred. Property and equipment obtained through acquisition are stated at estimated fair market value as of the acquisition date, and are depreciated over their estimated remaining useful lives, which may differ from the Company’s stated policies for certain assets. Gains and losses related to the sale of property and equipment are recorded as selling, general and administrative expenses.
Property and equipment are depreciated using the straight-line method and are generally depreciated over the following estimated service lives:
|
| | |
| Buildings and improvements | | 3–30 years |
| Leasehold improvements | | Lesser of life of the asset or remaining |
| | lease term, and not to exceed 15 years |
| Furniture, fixtures and equipment | | 2–10 years |
| Vehicles | | 4–10 years |
Property and equipment that is expected to be sold within the next twelve months, is actively marketed in its current condition for a price that is reasonable in comparison to its estimated fair value and meets other relevant held-for-sale criteria are classified as assets held for sale. Assets held for sale are measured at the lower of carrying amount or fair value less costs to sell and are no longer depreciated. An impairment for assets held for sale is recognized if the carrying amount is not recoverable. Assets held for sale were not presented separately and were classified as other long-term assets in the consolidated balance sheets and were $1.3 million and $2.3 million at December 31, 2018 and 2017, respectively.
Goodwill and other intangible assets
At least annually, or more frequently as changes in circumstances indicate, the Company tests goodwill for impairment. To the extent that the carrying value of the net assets of any of the reporting units having goodwill is greater than their estimated fair value, the Company may be required to record impairment charges. The Company’s five operating segments, which have been determined to be the Company’s reporting units, are the Mid-Atlantic, Southeast, Texas, Intermountain and Western divisions. The chief operating decision maker (“CODM”) reviews aggregate information to allocate resources and assess performance. Based on the CODM’s review, as well as the similar economic characteristics, nature of products, distribution methods and customers of the divisions, the Company has aggregated its operating segments into one reportable segment. The Company is required to make certain assumptions and estimates regarding the fair value of the reporting units containing goodwill when assessing for impairment. Changes in the fact patterns underlying such assumptions and estimates could ultimately result in the recognition of additional impairment losses.
The Company completes its annual impairment assessment during the third quarter of each year. The Company did not recognize any impairment for the years ended December 31, 2018, 2017 and 2016. The Company may consider qualitative factors as part of its annual impairment assessment to determine whether it is more likely than not that a reporting unit’s carrying value exceeds its fair value. If the Company’s qualitative assessment indicates that goodwill impairment is more likely than not, the Company performs the two-step impairment test. Alternatively, the Company may bypass the qualitative test and initiate goodwill impairment testing with the first step of the two-step goodwill impairment test. During the first step of the goodwill impairment test, the fair value of the reporting unit is compared to its carrying value, including goodwill. The Company may derive a reporting unit’s fair value through a combination of the market approach (a guideline transaction method) and the income approach. The income approach uses a reporting unit’s projection of estimated future cash flows that is discounted at a market derived weighted average cost of capital. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures.
If the fair value of a reporting unit exceeds its carrying value, then the Company concludes no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment
test to measure possible goodwill impairment loss. During the second step, the implied fair value of the reporting unit’s goodwill is compared to the carrying value of its goodwill. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, the Company would recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value of the reporting unit’s goodwill.
Acquired intangible assets other than goodwill are amortized over their weighted average amortization period unless they are determined to be indefinite. Acquired intangible assets are carried at cost, less accumulated amortization. For intangible assets purchased in a business combination, the estimated fair values of the assets received are used to establish the carrying value. The fair value of acquired intangible assets is determined using common valuation techniques, and the Company employs assumptions developed using the perspective of a market participant.
Impairment of long-lived assets
Long-lived assets, such as property, equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever facts and circumstances indicate that the carrying amount of an asset may not be recoverable. For impairment testing of long-lived assets, the Company identifies asset groups at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
Treasury stock
During the year ended December 31, 2018, the Company’s board of directors authorized a $75.0 million share repurchase program. Repurchases may be made at management’s discretion from time to time on the open market, subject to applicable laws, or through privately negotiated transactions. The repurchase program will expire on November 20, 2019 or may be suspended or discontinued at any time. During the year ended December 31, 2018, utilizing cash from operations, the Company repurchased 0.2 million shares at a weighted average price of $15.91 per share for a total cost of $2.9 million. These repurchased shares are available for future issuance and are reflected as treasury stock, at cost, on the consolidated balance sheet as of December 31, 2018. As of December 31, 2018, the Company had approximately $72.1 million of capacity remaining under the current share repurchase authorization. Subsequent to December 31, 2018, the Company repurchased 0.7 million shares at a weighted average price of $16.82 per share for a total cost of $11.5 million.
Employees have the option to surrender shares to the Company to satisfy their tax withholding obligations in connection with the vesting of restricted stock and restricted stock unit awards. These surrendered shares are reflected as treasury stock, at cost, on the consolidated balance sheet as of December 31, 2018 and 2017.
Merger and integration costs
Merger and integration costs related to the ongoing integration of Building Materials Holding Corporation (“BMHC”) and Stock Building Supply Holdings, Inc. (“SBS”), as a result of the 2015 merger transaction, consist primarily of severance, rebranding, system integration costs and professional fees.
Income taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax basis of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.
The Company evaluates its deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. In accordance with ASC 740, the Company assesses whether a valuation allowance should be established based on its determination of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends primarily on: (i) the Company’s ability to carry back net operating losses to tax years where it has previously paid income taxes based on applicable federal law; (ii) the timing of the reversal of deferred tax liabilities and (iii) the Company’s ability to generate future taxable income during the periods in which the related deferred tax assets are deductible. The assessment of a valuation allowance includes giving appropriate consideration to all positive and negative evidence related to the realization of the deferred tax asset. This assessment considers, among other things, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company’s experience with operating loss and tax credit carryforwards not expiring unused and tax planning alternatives. Significant judgment
is required in determining the future tax consequences of events that have been recognized in the Company’s consolidated financial statements and/or tax returns. Actual outcomes of these future tax consequences could differ materially from the outcomes that the Company currently anticipates.
ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding the measurement of the resulting tax benefits. These provisions require an enterprise to recognize the financial statement effects of a tax position when it is more likely than not, which is defined as a likelihood of more than 50%, based on technical merits, that the position will be sustained upon examination. The evaluation of whether a tax position meets the more likely than not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. Actual results could differ from estimates. The Company had no material uncertain tax positions as of December 31, 2018.
The Company’s policy is to recognize interest and penalties related to income tax liabilities and unrecognized tax benefits in income tax expense.
Casualty and health insurance
The Company carries insurance for general liability, auto liability and workers’ compensation exposures subject to deductibles or self-insured retentions it believes to be reasonable under the circumstances, and the Company self-insures for employee and eligible dependent health care claims, with insurance purchased from independent carriers to cover individual claims in excess of the self-insured limits. The expected liability for unpaid claims, including incurred but not reported losses, is reflected on the consolidated balance sheets as a liability with current and long-term components. The amount recoverable from insurance providers is reflected on the consolidated balance sheets in prepaid expenses and other current assets. Provisions for losses are developed from actuarial valuations that rely upon the Company’s past claims experience, which considers both the frequency and settlement of claims. The casualty and health insurance liabilities are recorded at their undiscounted value.
In January 2015, the Company entered into a retroactive reinsurance contract to transfer the risk of loss of certain insurance reserves for workers’ compensation claims incurred from 2006 to 2011 to a reinsurer. Pursuant to the reinsurance contract, the reinsurer is obligated to pay an aggregate maximum of $17.5 million for these claims with any excess borne by the Company. The Company maintains the insurance reserves related to these claims as a liability on its consolidated balance sheet with an offsetting reinsurance receivable, which includes current and long-term components. As of December 31, 2018 and 2017, the carrying value of the insurance reserves related to these claims and the offsetting reinsurance receivable was $3.7 million and $4.5 million, respectively. Changes in these claims are recorded as an increase or decrease in the insurance reserves and corresponding increase or decrease in the reinsurance receivable. Additionally, the Company monitors the financial condition of the reinsurer to minimize its exposure to significant losses from reinsurer insolvency.
Retirement savings program
The Company sponsors a defined contribution retirement savings plan. The Company has recorded expense of $5.9 million, $5.2 million and $4.6 million related to employer contributions for the years ended December 31, 2018, 2017 and 2016, respectively. These expenses are recorded to either selling, general and administrative expenses or cost of sales on the consolidated statements of operations, depending on the classification of the employee.
Lease obligations
The Company recognizes lease obligations with fixed escalations of rental payments on a straight-line basis over the lease term, with the amount of rental expense in excess of lease payments recorded as a deferred rent liability. Lease incentives received are also recorded as a deferred rent liability and are amortized as reductions to rent expense over the lease term. As of December 31, 2018 and 2017, the Company had a deferred rent liability of $5.0 million and $4.2 million, respectively, included in accrued expenses and other liabilities and other long-term liabilities on the consolidated balance sheets.
Advertising and promotion
Costs associated with advertising and promoting products and services are expensed in the period incurred. Cooperative advertising allowances that are reimbursement of specific, incremental and identifiable costs incurred to promote vendors’ products are recorded as an offset against advertising expenses in selling, general and administrative expenses. If those conditions are not met, the cooperative advertising allowances are recorded as a reduction in inventory and a subsequent reduction in cost of goods sold when the related product is sold. For the years ended December 31, 2018, 2017 and 2016, the Company recorded $4.9 million, $5.8 million and $3.7 million, respectively, of advertising and promotion expenses, net of cooperative advertising allowances, in selling, general and administrative expenses.
Stock-based compensation
In accordance with the requirements of ASC 718, Compensation—Stock Compensation(“ASC 718”), the Company measures and recognizes compensation expense for all share-based payment awards made to employees using a fair value based pricing model. The compensation expense is recognized over the requisite service period, using graded vesting.
Debt issuance costs
Costs incurred in connection with the Company’s revolving line of credit and senior secured notes are capitalized and amortized over the term of the applicable agreement. Total debt issuance costs, net of accumulated amortization, were $6.4 million and $8.1 million as of December 31, 2018 and 2017, respectively. Debt issuance costs related to the Company’s revolving line of credit and senior secured notes are included in other long-term assets and long-term debt, respectively, on the consolidated balance sheets. Amortization of debt issuance costs for the years ended December 31, 2018, 2017 and 2016 was $1.7 million, $1.7 million and $3.1 million, respectively, and is included in interest expense on the consolidated statements of operations.
Derivatives
The Company will occasionally enter into derivative instruments to offset existing or expected risks associated with fluctuations in commodity prices. The Company does not enter into derivative instruments for speculative or trading purposes. The Company recognizes all derivative instruments as assets or liabilities in the Company’s balance sheets at fair value. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria are reported in earnings. The Company elected not to designate any new derivative instruments as hedges for the years ended December 31, 2018, 2017 or 2016, and therefore, all changes in the fair market value of the derivative instruments have been reported in cost of goods sold on the consolidated statements of operations.
Warranty expense
The Company has warranty obligations with respect to most manufactured products. As of December 31, 2018 and 2017, the Company had warranty liabilities of $2.9 million and $2.5 million, respectively, included in accrued expenses and other liabilities on the consolidated balance sheets.
Comprehensive income
Comprehensive income is equal to the net income for all periods presented.
Statement of cash flows
Proceeds from revolving line of credit and Repayments of proceeds from revolving line of credit as presented on the Consolidated Statements of Cash Flows includes all cash activities and transactions between the Company and its associated lenders in relation to the revolving line of credit, excluding interest and fees, and is specifically inclusive of operating cash receipts which are automatically applied to the revolving line of credit pursuant to a cash sweep agreement. See Note 9 for further details on the Company’s revolving line of credit.
Recently adopted accounting pronouncements
In May 2014, the FASB issued Topic 606. Topic 606 provides a comprehensive revenue recognition model requiring companies to recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The Company adopted Topic 606 on January 1, 2018 using the modified retrospective transition method. See Note 11 for further details.
In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 was issued to decrease the diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows by providing guidance on eight specific cash flow issues. Retrospective application is required. ASU 2016-15 became effective for the Company’s annual and interim periods beginning on January 1, 2018. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that the statement of cash flows include restricted cash in the beginning and end-of-period total amounts shown and that the statement of cash flows explain the changes in restricted cash during the period.
Retrospective application is required. ASU 2016-18 became effective for the Company’s annual and interim periods beginning on January 1, 2018. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 provides guidance in determining when a set of assets and activities meets the definition of a business. Prospective application is required. ASU 2017-01 became effective for the Company’s annual and interim periods beginning on January 1, 2018. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
In February 2017, the FASB issued Accounting Standards Update 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2017-05 clarifies the scope of Subtopic 610-20, which provides guidance for recognizing gains and losses from the sale or transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-05 also provides guidance for partial sales of nonfinancial assets. ASU 2017-05 became effective for the Company’s annual and interim periods beginning on January 1, 2018. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued Accounting Standards Update 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC 718. ASU 2017-09 is to be applied prospectively to an award modified on or after the adoption date. ASU 2017-09 became effective for the Company’s annual and interim periods beginning on January 1, 2018. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
In March 2018, the FASB issued Accounting Standards Update 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”). ASU 2018-05 adds paragraphs to the ASC pursuant to SEC Staff Accounting Bulletin No. 118, which addresses the application of U.S. GAAP in situations when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (the “2017 Tax Act”). ASU 2018-05 provides entities with a one year measurement period from the December 22, 2017 enactment date in order to complete the accounting. The Company recognized a provisional net tax benefit of $3.6 million related to the impact of the 2017 Tax Act during the year ended December 31, 2017. In the fourth quarter of 2018, the Company completed its accounting for the income tax effects of the 2017 Tax Act within the measurement period as provided under ASU 2018-05, which resulted in recognizing an additional tax benefit of $0.5 million for the year ended December 31, 2018.
Recently issued accounting pronouncements not yet adopted
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases, and issued subsequent amendments to the initial guidance to provide additional clarification on specific topics (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The Company plans to adopt the standard on January 1, 2019, utilizing the transition option provided by Accounting Standards Update 2018-11, Leases (Topic 842): Targeted Improvements, which the FASB issued in July 2018 and allows the Company to apply the guidance in ASU 2016-02 as of the adoption date, while applying the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods. As a lessee, certain of the Company’s leases under existing guidance are classified as operating leases that are not recorded on the balance sheet but are recorded in the statement of operations as expense is incurred. Upon adoption of the standard, the Company will be required to record substantially all leases on the balance sheet as a ROU asset and a lease liability. The Company expects to utilize the package of practical expedients permitted by the transition guidance in ASU 2016-02, which allows the Company to carry forward its identification of contracts that are or contain leases, its historical lease classification and its initial direct costs for existing leases. The Company currently expects to recognize lease liabilities for its operating leases totaling between $110.0 million and $125.0 million upon adoption, of which between $22.0 million and $37.0 million will be classified as a current liability. The initial ROU assets recognized will be equal to the initial operating lease liabilities, adjusted for the balance on adoption date of prepaid and accrued rent, lease incentives, unamortized initial direct costs and unamortized assets and liabilities related to favorable and unfavorable lease terms. The Company currently expects to recognize ROU assets totaling between $105.0 million and $120.0 million upon adoption. The Company does not expect adoption of the standard to have a material impact on the Company’s historical capital leases, which will be presented as finance leases under ASU 2016-02. See Note 13 for further information on the Company’s leases.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is effective for the Company’s annual and interim periods beginning on January 1, 2020, with early adoption permitted beginning January 1, 2019. Modified retrospective application is required, with certain exceptions. The Company expects to adopt the standard on January 1, 2020 and continues to evaluate the impact of the standard on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires computation of the implied fair value of a reporting unit’s goodwill. The amount of a goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for the Company’s annual goodwill impairment test and any interim tests during the Company’s annual and interim periods beginning on January 1, 2020. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. Prospective application is required. The adoption of the standard is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, and issued subsequent amendments to the initial guidance to provide additional clarification on specific topics (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements by removing, modifying and adding certain disclosure requirements in ASC 820. ASU 2018-13 is effective for the Company’s annual and interim periods beginning on January 1, 2020, with early adoption permitted. Certain disclosures in ASU 2018-13 are required to be applied prospectively, while others require retrospective application. The Company is evaluating the impact of the standard on its consolidated financial statements.
3. Acquisitions and Disposition
For all acquisitions, the Company allocates the purchase price to assets acquired and liabilities assumed as of the date of acquisition based on the estimated fair values at the date of acquisition. The excess of the fair value of the purchase consideration over the fair values of the identifiable assets and liabilities is recorded as goodwill. Management makes significant estimates and assumptions when determining the fair value of assets acquired and liabilities assumed. These estimates include, but are not limited to, discount rates, projected future net sales, projected future expected cash flows and useful lives.
The Company accounts for all acquisitions using the acquisition method of accounting under ASC 805, Business Combinations (“ASC 805”), whereby the results of operations of the acquired company are included in the Company’s consolidated financial statements beginning on the acquisition date.
2018 Disposition
On November 1, 2018, the Company completed the sale of substantially all of the assets and certain liabilities of its Coleman Floor business (“Coleman Floor”) for a preliminary sale price of $7.8 million, subject to certain customary post-closing adjustments. For the year ended December 31, 2018, the net sales of Coleman Floor represented approximately 1% of the Company’s net sales. The sale does not represent a strategic shift under ASC 205, Presentation of Financial Statements, and as such, is not reported as a discontinued operation in the Company’s consolidated financial statements. The Company recognized a loss on the sale of $0.3 million, which is included in other income, net in the consolidated statements of operations.
2018 Acquisition
On March 1, 2018, the Company acquired substantially all of the assets and assumed certain liabilities of W.E. Shone Co. (“Shone Lumber”), a supplier of building materials in the state of Delaware, for a preliminary purchase price of $22.4 million. This acquisition enhances the Company’s value-added offerings and footprint in the Mid-Atlantic region. The preliminary purchase price includes a holdback which, after certain post-closing adjustments, requires the Company to pay $1.4 million to the sellers one year from the closing date. The holdback amount may be further reduced under certain circumstances. The Company funded the transaction through available cash and borrowings on the Company’s revolving line of credit.
The purchase price allocation resulted in the recognition of goodwill of $2.5 million, a customer relationship intangible asset of $7.0 million, accounts receivable of $6.4 million, inventory of $8.8 million, property and equipment of $2.9 million and total current liabilities of $5.3 million, as well as other operating assets. The customer relationship intangible asset has a useful life of 9 years. Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify
for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. All of the goodwill recognized is expected to be deductible for tax purposes.
For the year ended December 31, 2017, Shone Lumber generated net sales of approximately $70.7 million. The Company incurred transaction costs of $0.2 million for the year ended December 31, 2018, which are included in selling, general and administrative expenses in the consolidated statements of operations.
Net sales and estimated pre-tax earnings for Shone Lumber included in the consolidated statements of operations from the March 1, 2018 acquisition date to December 31, 2018 were $60.9 million and $3.2 million, respectively. The impact of the acquisition was not considered significant for the reporting of pro forma financial information.
2017 Acquisitions
On April 3, 2017, the Company acquired substantially all of the assets and assumed certain liabilities of Texas Plywood & Lumber Company, Inc. (“TexPly”), a supplier of production millwork and doors in the Dallas-Fort Worth area, for a purchase price of $31.7 million. This acquisition enhances the Company’s value-added offerings and footprint in the Dallas-Fort Worth market. The Company funded the transaction through borrowings on the Company’s revolving line of credit.
The purchase price allocation resulted in the recognition of goodwill of $3.6 million, a customer relationship intangible asset of $13.6 million, accounts receivable of $5.2 million, inventory of $3.9 million and real property of $5.4 million, as well as other operating assets and liabilities. The customer relationship intangible asset has a useful life of 13 years. Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. All of the goodwill recognized is expected to be deductible for tax purposes.
On March 27, 2017, the Company acquired substantially all of the assets and assumed certain liabilities of Code Plus Components, LLC (“Code Plus”), a manufacturer of structural components located in Martinsburg, West Virginia, for a purchase price of $7.1 million. This acquisition allowed the Company to add truss manufacturing capability to its value-added offerings in the Washington, DC metro area. The acquisition includes an earnout provision that requires the Company to pay the sellers an additional $0.8 million during the year ended December 31, 2019, due to the acquired operations achieving certain performance targets from the acquisition date through December 31, 2018. The Company funded the transaction through borrowings on the Company’s revolving line of credit.
The purchase price allocation resulted in the recognition of goodwill of $3.4 million, a customer relationship intangible asset of $2.3 million and a non-compete agreement intangible asset of $0.5 million, as well as other operating assets and liabilities. The customer relationship intangible asset and non-compete agreement intangible asset have useful lives of 12 years and 5 years, respectively. Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. All of the goodwill recognized is expected to be deductible for tax purposes.
Net sales and estimated pre-tax earnings for Code Plus and TexPly, in aggregate, included in the consolidated statements of operations were $54.3 million and $3.2 million, respectively, for the year ended December 31, 2017. The impact of the Code Plus and TexPly acquisitions was not considered significant for the reporting of pro forma financial information.
4. Accounts Receivable
Accounts receivable consist of the following at December 31, 2018 and 2017:
|
| | | | | | | | |
| (in thousands) | | 2018 | | 2017 |
| Trade receivables | | $ | 305,363 |
| | $ | 333,954 |
|
| Allowance for doubtful accounts | | (4,904 | ) | | (4,771 | ) |
| Sales returns allowance (a) | | — |
| | (4,127 | ) |
| Other allowances | | (2,019 | ) | | (2,164 | ) |
| | | $ | 298,440 |
| | $ | 322,892 |
|
(a) Effective January 1, 2018, as part of the Company’s adoption of Topic 606, the Company has recorded a liability for estimated returns of inventory as a refund liability within accrued expenses and other liabilities. These balances were previously presented as an allowance within accounts receivable. See Note 11 for further details.
The following table shows the changes in the allowance for doubtful accounts:
|
| | | | | | | | | | | | |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Balance at January 1 | | $ | 4,771 |
| | $ | 4,162 |
| | $ | 2,357 |
|
| Write-offs | | (4,676 | ) | | (3,665 | ) | | (2,186 | ) |
| Recoveries | | 1,460 |
| | 960 |
| | 2,587 |
|
| Increase in allowance | | 4,906 |
| | 3,314 |
| | 1,404 |
|
| Other (a) | | (1,557 | ) | | — |
| | — |
|
| Balance at December 31 | | $ | 4,904 |
| | $ | 4,771 |
| | $ | 4,162 |
|
(a) During the year ended December 31, 2018, the Company entered into a promissory note with one of its customers resulting in a note receivable of $2.6 million and corresponding allowance of $1.3 million, included in other long-term assets. These amounts were previously included in trade receivables and allowance for doubtful accounts, respectively, within accounts receivable. Additionally, the allowance for doubtful accounts balance declined by $0.3 million during the year ended December 31, 2018 in connection with the sale of accounts receivable in the Coleman Floor disposition. See Note 3 for further details.
5. Inventories
Inventories consist principally of materials purchased for resale, including lumber, sheet goods, millwork, doors and windows, as well as certain manufactured products and are valued at the lower of cost or net realizable value, with cost being measured using a weighted average cost approach, which approximates the first-in, first-out approach. A provision for excess and obsolete inventory of $2.3 million and $1.5 million is recorded as of December 31, 2018 and 2017, respectively.
6. Property and Equipment
Property and equipment consists of the following at December 31, 2018 and 2017:
|
| | | | | | | | |
| (in thousands) | | 2018 | | 2017 |
| Land | | $ | 48,027 |
| | $ | 51,009 |
|
| Buildings and improvements | | 106,072 |
| | 104,752 |
|
| Leasehold improvements | | 22,758 |
| | 19,750 |
|
| Furniture, fixtures and equipment | | 186,017 |
| | 161,014 |
|
| Vehicles | | 134,470 |
| | 120,855 |
|
| Construction-in-progress | | 11,695 |
| | 14,519 |
|
| | | 509,039 |
| | 471,899 |
|
| Less: Accumulated depreciation | | (214,712 | ) | | (176,079 | ) |
| | | $ | 294,327 |
| | $ | 295,820 |
|
Total depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $50.4 million, $53.2 million and $48.0 million, respectively, including amortization expense related to capital leases. These amounts include depreciation expense of $10.7 million, $10.2 million and $9.5 million included in cost of goods sold in 2018, 2017 and 2016, respectively.
Impairment of BMHC ERP System
During 2013, BMHC selected a new third-party software vendor for its planned Enterprise Resource Planning (“New ERP”) system and began incurring costs related to design, development and implementation of the New ERP. BMHC also began paying an annual licensing fee. During March 2016, the Company decided to integrate all operations under the Enterprise Resource Planning system utilized by Legacy SBS (the “Legacy SBS ERP system”) and to discontinue the use of the New ERP. In connection with this decision, the Company recorded asset impairment charges of approximately $11.9 million in its consolidated statement of operations for the year ended December 31, 2016 related to capitalized software development costs for New ERP functionality that the
Company had intended to implement in future periods. These costs had previously been recorded as construction-in-progress within property and equipment on the consolidated balance sheets.
During the year ended December 31, 2017, the Company determined that it had ceased receiving economic benefit from certain non-cancellable license and service contracts related to the New ERP. In accordance with ASC 420, Exit or Disposal Cost Obligations, as of the cease use date, the Company recognized approximately $2.8 million of expense within Merger and integration costs in its consolidated statements of operations for the year ended December 31, 2017, consisting of $2.1 million for contractual payments due subsequent to the cease use date, all of which have been paid as of December 31, 2017, and the acceleration of expense recognition of unamortized prepaid costs of $0.7 million.
7. Goodwill and Intangible Assets, Net
Goodwill
The following table details the goodwill activity for the years ended December 31, 2018 and 2017:
|
| | | | |
| (in thousands) | | |
| December 31, 2016 | | $ | 254,832 |
|
| Acquisition of Code Plus | | 3,402 |
|
| Acquisition of TexPly | | 3,558 |
|
| December 31, 2017 | | 261,792 |
|
| Acquisition of Shone Lumber | | 2,526 |
|
| Disposition of Coleman Floor | | (1,321 | ) |
| December 31, 2018 | | $ | 262,997 |
|
Intangible assets
Intangible assets represent the value assigned to trademarks, customer relationships and non-compete agreements in connection with acquired companies. The following table provides the gross carrying amount and related accumulated amortization of definite-lived intangible assets.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Trademarks | | Customer Relationships | | Non-Compete Agreements | | |
| | Gross | | | | Gross | | | | Gross | | | | |
| | Carrying | | Accumulated | | Carrying | | Accumulated | | Carrying | | Accumulated | | |
| (in thousands) | Amount | | Amortization | | Amount | | Amortization | | Amount | | Amortization | | Total |
| December 31, 2015 | $ | 5,350 |
| | $ | (408 | ) | | $ | 179,700 |
| | $ | (2,664 | ) | | $ | 6,512 |
| | $ | (554 | ) | | $ | 187,936 |
|
| Amortization | — |
| | (2,140 | ) | | — |
| | (12,845 | ) | | — |
| | (5,736 | ) | | (20,721 | ) |
| December 31, 2016 | 5,350 |
| | (2,548 | ) | | 179,700 |
| | (15,509 | ) | | 6,512 |
| | (6,290 | ) | | 167,215 |
|
| Acquisition of Code Plus | — |
| | — |
| | 2,300 |
| | — |
| | 500 |
| | — |
| | 2,800 |
|
| Acquisition of TexPly | — |
| | — |
| | 13,600 |
| | — |
| | — |
| | — |
| | 13,600 |
|
| Amortization | — |
| | (2,010 | ) | | — |
| | (13,785 | ) | | — |
| | (208 | ) | | (16,003 | ) |
| December 31, 2017 | 5,350 |
| | (4,558 | ) | | 195,600 |
| | (29,294 | ) | | 7,012 |
| | (6,498 | ) | | 167,612 |
|
| Acquisition of Shone Lumber | — |
| | — |
| | 7,000 |
| | — |
| | — |
| | — |
| | 7,000 |
|
| Disposition of Coleman Floor | (1,000 | ) | | 291 |
| | — |
| | — |
| | — |
| | — |
| | (709 | ) |
| Amortization | — |
| | (83 | ) | | — |
| | (14,743 | ) | | — |
| | (189 | ) | | (15,015 | ) |
| December 31, 2108 | $ | 4,350 |
| | $ | (4,350 | ) | | $ | 202,600 |
| | $ | (44,037 | ) | | $ | 7,012 |
| | $ | (6,687 | ) | | $ | 158,888 |
|
Aggregate amortization expense was $15.0 million, $16.0 million and $20.7 million for the years ended December 31, 2018, 2017 and 2016, respectively. Based upon current assumptions, the Company expects that its definite-lived intangible assets will be amortized according to the following schedule:
|
| | | | |
| (in thousands) | | |
| 2019 | | $ | 14,972 |
|
| 2020 | | 14,972 |
|
| 2021 | | 14,972 |
|
| 2022 | | 14,897 |
|
| 2023 | | 14,872 |
|
| Thereafter | | 84,203 |
|
| | | $ | 158,888 |
|
8. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consists of the following at December 31, 2018 and 2017. Certain prior year amounts have been reclassified to conform to the current year presentation.
|
| | | | | | | | |
| (in thousands) | | 2018 | | 2017 |
| Accrued payroll and other employee related expenses | | $ | 62,518 |
| | $ | 41,798 |
|
| Accrued taxes | | 21,028 |
| | 20,741 |
|
| Accrued rebates payable | | 5,725 |
| | 4,653 |
|
| Refund liability for estimated inventory returns (a) | | 3,850 |
| | — |
|
| Pending litigation accrual | | 2,950 |
| | 2,950 |
|
| Accrued warranty reserve | | 2,930 |
| | 2,467 |
|
| Acquisition holdback and earnout liabilities | | 2,136 |
| | 370 |
|
| Accrued professional fees | | 1,156 |
| | 715 |
|
| Accrued credit card fees | | 1,110 |
| | 1,127 |
|
| Current portion deferred rent | | 694 |
| | 818 |
|
| Unfavorable leases | | 416 |
| | 520 |
|
| Advances from customers (a) | | — |
| | 11,664 |
|
| Other | | 5,763 |
| | 8,439 |
|
| | | $ | 110,276 |
| | $ | 96,262 |
|
(a) Effective January 1, 2018, as part of the Company’s adoption of Topic 606, the Company has recorded a liability for estimated returns of inventory as a refund liability within accrued expenses and other liabilities. These balances were previously presented as an allowance within accounts receivable. Additionally, the Company has presented advances from customers, which were historically presented within accrued expenses and other liabilities, as a contract liability. See Note 11 for further details.
9. Debt
Long-term debt at December 31, 2018 and 2017 consists of the following:
|
| | | | | | | | |
| (in thousands) | | December 31, 2018 | | December 31, 2017 |
| Senior secured notes, due 2024 | | $ | 350,000 |
| | $ | 350,000 |
|
| Revolving credit agreement | | — |
| | 4,462 |
|
| Other | | — |
| | 336 |
|
| | | 350,000 |
| | 354,798 |
|
| Unamortized debt issuance costs related to senior secured notes | | (4,803 | ) | | (5,639 | ) |
| | | 345,197 |
| | 349,159 |
|
| Less: Current portion of long-term debt | | — |
| | 100 |
|
| | | $ | 345,197 |
| | $ | 349,059 |
|
Senior secured notes
On September 15, 2016, the Company issued $350.0 million of senior secured notes due 2024 (the “Senior Notes”) under an unregistered private placement not subject to the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Senior Notes are governed by an indenture dated September 15, 2016 (the “Indenture”). The Senior Notes were issued by BMC East, LLC, a 100% owned subsidiary of the Company, and are guaranteed by the Company and the other subsidiaries that guarantee the Credit Agreement (as defined below). Each of the subsidiary guarantors is 100% owned, directly or indirectly, by the Company, and all guarantees are full and unconditional and joint and several. The Senior Notes mature on October 1, 2024 and are secured by a first priority lien on certain assets of the Company and a second priority lien on the collateral that secures the Credit Agreement on a first-priority basis, which collectively accounts for substantially all assets of the Company. The interest rate is fixed at 5.5% and is payable semiannually on April 1 and October 1.
The Indenture contains customary nonfinancial covenants, including restrictions on new indebtedness, issuance of liens and guarantees, investments, distributions to equityholders, asset sales and affiliate transactions. At any time prior to October 1, 2019, the Company may redeem the Senior Notes in whole or in part at a price equal to 100% of the principal, plus accrued and unpaid interest, plus the greater of (a) 1% of the principal amount of such Senior Note and (b) on any redemption date, the excess (to the extent positive) of the present value of the redemption price of such Senior Note at October 1, 2019 (equal to 104.125%) plus all required interest payments due on such Senior Note to and including October 1, 2019 (excluding accrued but unpaid interest), computed upon the redemption date using a discount rate equal to the applicable treasury rate, as defined in the Indenture, at such redemption date plus 50 basis points, over the outstanding principal amount of such Senior Note. Further, during any twelve month period prior to October 1, 2019, the Company may redeem up to 10% of the Senior Notes at a redemption price equal to 103% plus accrued and unpaid interest. At any time on or after October 1, 2019, the Company may redeem the Senior Notes in whole or in part at the redemption prices set forth in the Indenture plus accrued and unpaid interest. In addition, at any time prior to October 1, 2019, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes with the net cash proceeds of one or more equity offerings, as described in the Indenture, at a price equal to 105.5% plus accrued and unpaid interest. If the Company experiences certain change of control events, holders of the Senior Notes may require the Company to repurchase all or part of their Senior Notes at a price equal to 101% plus accrued and unpaid interest. The Company was in compliance with all debt covenants under the Indenture as of December 31, 2018.
The net cash proceeds from the Senior Notes were used to redeem in full $250.0 million of 9.0% senior secured notes that were issued by BMHC in September 2013 and which were scheduled to mature in September 2018 (the “Extinguished Senior Notes”), and to pay accrued interest on the Extinguished Senior Notes of $11.3 million. In connection with the redemption of the Extinguished Senior Notes, the Company incurred a loss on debt extinguishment of $12.5 million, consisting of a call premium of $8.4 million, and the write off of unamortized debt issuance costs and original issue discount of $4.1 million. The remaining proceeds were used to repay outstanding borrowings on the Revolver (as defined below) and to pay debt issuance costs of $6.7 million, which will be amortized over the term of the Senior Notes.
As of December 31, 2018, the estimated market value of the Senior Notes was $21.0 million lower than the carrying amount. The fair value is based on institutional trading activity and was classified as a Level 2 measurement in accordance with ASC 820.
Revolving credit agreement
On December 1, 2015, in connection with the Merger, the Company entered into a senior secured credit agreement with Wells Fargo Capital Finance, as administrative agent, and certain other lenders (the “Original Credit Agreement”) which includes a revolving line of credit (the “Revolver”). On September 15, 2016, the Company entered into the second amendment to the Credit Agreement (the “Second Amendment” and, the Original Credit Agreement as amended by the Second Amendment, the “Credit Agreement”), which reduced the aggregate commitment from $450.0 million to $375.0 million and increased the letters of credit commitment from $75.0 million to $100.0 million. The Revolver is subject to an asset-based borrowing formula on eligible accounts receivable, credit card receivables and inventory, in each case reduced by certain reserves.
Borrowings under the Revolver bear interest, at the Company’s option, at either the Base Rate (which means the higher of (i) the Federal Funds Rate plus 0.5%, (ii) the LIBOR rate plus 1.0% or (iii) the prime rate) plus a Base Rate Margin (which ranges from 0.25% to 0.75% based on Revolver availability) or LIBOR plus a LIBOR Rate Margin (which ranges from 1.25% to 1.75% based on Revolver availability).
The fee on any outstanding letters of credit issued under the Revolver ranges from 0.75% to 1.25%, depending on whether the letters of credit are fully cash collateralized. The fee on the unused portion of the Revolver is 0.25%. The Credit Agreement contains customary nonfinancial covenants, including restrictions on new indebtedness, issuance of liens, investments, distributions to equityholders, asset sales and affiliate transactions. The Credit Agreement includes a financial covenant that requires us to maintain a Fixed Charge Coverage Ratio, as defined therein, of at least 1.00:1:00, at the end of any fiscal quarter during the period from the date that Excess Availability, as defined therein, under the Credit Agreement is less than or equal to the greater of (1) $33.3 million and (2) 10% of the line cap, and remains in effect until excess availability has been greater than the greater of (1) $33.3 million and (2) 10% of the line cap for a period of at least 30 consecutive days.
The Revolver matures at the earlier of (i) December 1, 2020 and (ii) the date that is three months prior to the maturity of the Senior Notes, or if the Senior Notes are refinanced or repaid, the date that is three months prior to the new maturity date of the replacement notes or other indebtedness that replaced or refinanced the Senior Notes. Due to the redemption of the Extinguished Senior Notes during September 2016, the issuance of the Senior Notes which mature on October 1, 2024 and the Company entering into the Second Amendment, the effective maturity date of the Revolver was extended from June 15, 2018, the date three months prior to the maturity date of the Extinguished Senior Notes, to December 1, 2020. After considering the increase to the remaining term and the reduction of the aggregate commitment resulting from the Second Amendment, the overall borrowing capacity of the Revolver increased. Accordingly, all existing unamortized debt issuance costs and new debt issuance costs related to the Second Amendment are being amortized through December 1, 2020. The Company was in compliance with all debt covenants under the Credit Agreement as of December 31, 2018.
The Company had no outstanding borrowings under the Revolver with net availability of $309.5 million as of December 31, 2018. The Company had $61.0 million in letters of credit outstanding under the Credit Agreement as of December 31, 2018. Obligations under the Credit Agreement are guaranteed by the Company’s material subsidiaries. Obligations under the Credit Agreement and the guarantees of those obligations, are secured by substantially all of the Company’s assets and those of the guarantors, subject to certain exceptions and permitted liens, including a first-priority security interest in certain accounts receivable, inventory and certain other assets of the Company and a second-priority security interest in substantially all other assets of the Company that secure the Senior Notes on a first-priority basis.
Scheduled maturities of long-term debt were as follows:
|
| | | | |
| (in thousands) | | |
| 2019 | | $ | — |
|
| 2020 | | — |
|
| 2021 | | — |
|
| 2022 | | — |
|
| 2023 | | — |
|
| Thereafter | | 350,000 |
|
| | | $ | 350,000 |
|
10. Other Long-term Liabilities
Other long-term liabilities consists of the following at December 31, 2018 and 2017:
|
| | | | | | | | |
| (in thousands) | | 2018 | | 2017 |
| Long-term deferred rent | | $ | 4,347 |
| | $ | 3,428 |
|
| Unfavorable leases | | 1,843 |
| | 2,298 |
|
| Other | | 737 |
| | 1,313 |
|
| | | $ | 6,927 |
| | $ | 7,039 |
|
11. Revenue
Adoption of Topic 606
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy under Topic 605, Revenue Recognition.
The impact of adopting Topic 606 was not material to the Company’s results of operations for the year ended December 31, 2018 and as such, comparability between periods is not materially affected.
Beginning January 1, 2018, the Company has presented contract assets and contract liabilities on its consolidated balance sheets, determined on a contract-by-contract basis. Contract assets contain rights to payment that are conditional on something other than the passage of time, such as retainage, which were historically presented within accounts receivable, net of allowances, as well as the balances that were historically presented within costs in excess of billings on uncompleted contracts on the Company’s consolidated balance sheets. Contract liabilities contain advances from customers, which were historically presented within accrued expenses and other liabilities, as well as the balances that were historically presented within billings in excess of costs on uncompleted contracts on the Company’s consolidated balance sheets. Refer to further discussion of the Company’s contract assets and contract liabilities below.
Additionally, beginning January 1, 2018, the Company has presented a return asset, which represents inventory the Company expects to receive from customers related to estimated sales returns, within prepaid expenses and other current assets on the Company’s consolidated balance sheets. This balance was previously presented within inventories, net, on the Company’s consolidated balance sheets. Conversely, the Company has recorded a refund liability for estimated returns of inventory within accrued expenses and other liabilities on the Company’s consolidated balance sheets. These balances were previously presented as an allowance within accounts receivable, net of allowances, on the Company’s consolidated balance sheets.
The following table reflects the cumulative impact of adoption of Topic 606. As the cumulative impact of adopting Topic 606 on the Company’s historical results of operations was less than $0.1 million, the Company did not record an adjustment to opening retained earnings as of January 1, 2018.
|
| | | | | | | | | | | |
| (in thousands) | December 31, 2017 | | Adoption of Topic 606 | | January 1, 2018 |
| Accounts receivable, net of allowances | $ | 322,892 |
| | $ | (8,884 | ) | | $ | 314,008 |
|
| Inventories, net | 309,060 |
| | (3,128 | ) | | 305,932 |
|
| Contract assets | — |
| | 38,557 |
| | 38,557 |
|
| Costs in excess of billings on uncompleted contracts | 28,738 |
| | (28,738 | ) | | — |
|
| Prepaid expenses and other current assets | 57,949 |
| | 3,128 |
| | 61,077 |
|
| Total assets | 1,473,350 |
| | 935 |
| | 1,474,285 |
|
| | | | | | |
| Accrued expenses and other liabilities | 96,262 |
| | (6,967 | ) | | 89,295 |
|
| Contract liabilities | — |
| | 26,330 |
| | 26,330 |
|
| Billings in excess of costs on uncompleted contracts | 18,428 |
| | (18,428 | ) | | — |
|
| Total liabilities | 726,451 |
| | 935 |
| | 727,386 |
|
| | | | | | |
| Total liabilities and stockholders’ equity | $ | 1,473,350 |
| | $ | 935 |
| | $ | 1,474,285 |
|
The following table reflects the impact of adoption of Topic 606 on the Company’s financial position as of December 31, 2018.
|
| | | | | | | | | | | |
| (in thousands) | Balances without Adoption of Topic 606 | | Adjustments | | As Reported |
| Accounts receivable, net of allowances | $ | 306,600 |
| | $ | (8,160 | ) | | $ | 298,440 |
|
| Inventories, net | 312,055 |
| | (2,776 | ) | | 309,279 |
|
| Contract assets | — |
| | 32,348 |
| | 32,348 |
|
| Costs in excess of billings on uncompleted contracts | 23,769 |
| | (23,769 | ) | | — |
|
| Prepaid expenses and other current assets | 53,473 |
| | 2,776 |
| | 56,249 |
|
| Total assets | 1,575,692 |
| | 419 |
| | 1,576,111 |
|
| | | | | | |
| Accrued expenses and other liabilities | 120,118 |
| | (9,842 | ) | | 110,276 |
|
| Contract liabilities | — |
| | 34,888 |
| | 34,888 |
|
| Billings in excess of costs on uncompleted contracts | 24,627 |
| | (24,627 | ) | | — |
|
| Total liabilities | 701,033 |
| | 419 |
| | 701,452 |
|
| | | | | | |
| Total liabilities and stockholders’ equity | $ | 1,575,692 |
| | $ | 419 |
| | $ | 1,576,111 |
|
Disaggregation of revenue
The following table presents the Company’s net sales disaggregated by customer type. See Note 15 to the consolidated financial statements for a disaggregation of the Company’s net sales by main product lines. As noted above, prior period amounts have not been adjusted under the modified retrospective method and continue to be reported in accordance with the Company’s historic accounting policy under Topic 605.
The following table reflects the Company’s estimate of net sales by each customer type for the years ended December 31, 2018, 2017 and 2016. Certain previously reported amounts for interim periods during the year ended December 31, 2018 and for the year ended December 31, 2017 were revised in the table below. The revisions were not material to the previously issued financial statements.
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Single-family homebuilders | | $ | 2,814,100 |
| | $ | 2,526,837 |
| | $ | 2,262,124 |
|
| Remodeling contractors | | 427,346 |
| | 380,460 |
| | 371,018 |
|
| Multi-family, commercial & other contractors | | 441,002 |
| | 458,671 |
| | 460,601 |
|
| Total net sales | | $ | 3,682,448 |
| | $ | 3,365,968 |
| | $ | 3,093,743 |
|
Contract balances
The following table reflects the Company’s contract balances as of December 31, 2018 and January 1, 2018, the date that the Company adopted Topic 606:
|
| | | | | | | | | | | |
| (in thousands) | December 31, 2018 | | January 1, 2018 | | Change |
| Receivables, including unbilled receivables presented in prepaid expenses and other current assets | $ | 306,370 |
| | $ | 321,418 |
| | $ | (15,048 | ) |
| Contract assets | 32,348 |
| | 38,557 |
| | (6,209 | ) |
| Contract liabilities | $ | 34,888 |
| | $ | 26,330 |
| | $ | 8,558 |
|
During the year ended December 31, 2018, the Company’s contract assets decreased by $6.2 million and the Company’s contract liabilities increased by $8.6 million. The change in contract assets and liabilities was primarily due to the timing of revenue recognition, as the balances were not materially impacted by any other factors. For the year ended December 31, 2018, the Company recognized revenue of $25.1 million, that was included in contract liabilities as of January 1, 2018. Revenue recognized related to performance obligations that were satisfied or partially satisfied in previous periods was not material for the year ended December 31, 2018.
Practical expedients
As permitted by Topic 606, the Company has elected to expense any incremental costs of obtaining a contract as incurred as the amortization period would have been one year or less. Additionally, as permitted by Topic 606, the Company has elected not to adjust the promised amount of consideration for a significant financing component as the Company expects that the period of time between the Company’s satisfaction of the performance obligation and the customer’s payment would have been one year or less. Finally, as permitted by Topic 606, the Company has elected not to disclose the value of unsatisfied performance obligations, as the Company’s contracts generally have an original expected length of one year or less.
12. Income Taxes
The components of income tax expense for the years ended December, 31 2018, 2017 and 2016 are as follows:
|
| | | | | | | | | | | | |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Current | | | | | | |
| Federal | | $ | 32,042 |
| | $ | 20,215 |
| | $ | 16,713 |
|
| State | | 3,868 |
| | 1,869 |
| | 1,124 |
|
| | | 35,910 |
| | 22,084 |
| | 17,837 |
|
| Deferred | | | | | | |
| Federal | | 160 |
| | 1,797 |
| | (3,049 | ) |
| State | | 1,106 |
| | 521 |
| | (522 | ) |
| | | 1,266 |
| | 2,318 |
| | (3,571 | ) |
| | | $ | 37,176 |
| | $ | 24,402 |
| | $ | 14,266 |
|
A reconciliation of differences between the statutory U.S. federal income tax rate and the Company’s effective tax rate from continuing operations for the years ended December 31, 2018, 2017 and 2016 follows:
|
| | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Federal statutory rate | | 21.0 | % | | 35.0 | % | | 35.0 | % |
| State taxes, net of federal tax | | 2.6 |
| | 2.9 |
| | 2.7 |
|
| Nondeductible capitalized transaction costs | | — |
| | 0.2 |
| | 1.4 |
|
| Nondeductible compensation expense | | 0.2 |
| | 0.2 |
| | 0.5 |
|
| Nondeductible (permanent) items | | 0.2 |
| | 0.9 |
| | 1.0 |
|
| IRC Section 199 manufacturing deduction | | 0.1 |
| | (2.5 | ) | | (3.5 | ) |
| Changes in tax rates, including 2017 Tax Act | | (0.2 | ) | | (4.4 | ) | | 1.6 |
|
| Changes related to IRC section 382 limitations | | — |
| | — |
| | (3.9 | ) |
| Excess windfall benefit of stock compensation | | (0.2 | ) | | (2.3 | ) | | (3.7 | ) |
| Other items | | — |
| | (0.2 | ) | | 0.5 |
|
| Effective tax rate | | 23.7 | % | | 29.8 | % | | 31.6 | % |
On December 22, 2017, the 2017 Tax Act was enacted, which significantly changed U.S. tax law effective January 1, 2018 by, among other things, lowering corporate income tax rates from 35% to 21%, eliminating Internal Revenue Code (“IRC”) Section 199 manufacturing deduction, accelerating tax depreciation on certain acquired assets, further limiting executive compensation, and creating certain interest deduction limitations. The Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The Company recognized a net tax benefit of $3.6 million during the year ended December 31, 2017 related to the impact of the 2017 Tax Act for the remeasurement of deferred tax assets and liabilities. During the year ended December 31, 2018, the Company completed its accounting for the income tax effects of the 2017 Tax Act within the measurement period as provided under SEC Staff Accounting Bulletin No. 118, which resulted in recognizing an additional tax benefit of $0.5 million.
For the year ended December 31, 2018, the Company recognized $37.2 million of income tax expense, which included an income tax benefit of $0.5 million related to the 2017 Tax Act. The Company’s effective tax rate for the year ended December 31, 2018 was higher than the Company’s federal and state statutory rates primarily due to nondeductible expenses.
For the year ended December 31, 2017, the Company recognized $24.4 million of income tax expense, which included an income tax benefit of $3.6 million related to the 2017 Tax Act. The Company’s effective tax rate for the year ended December 31, 2017 was lower than the federal and state statutory rates primarily due to the effects of the 2017 Tax Act, an IRC Section 199 manufacturing deduction and excess windfall tax benefits of stock compensation deductions.
For the year ended December 31, 2016, the Company recognized $14.3 million of income tax expense, which included an income tax benefit of $1.7 million as a result of the Company adopting a state tax position related to IRC section 382 limitations on a state net operating loss carry-forward. For the year ended December 31, 2016, the Company’s effective tax rate, excluding the state tax position change, was lower than the Company’s federal and state statutory rates primarily due to excess windfall tax benefits of stock compensation deductions and an IRC section 199 manufacturing deduction.
Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31, 2018 and 2017:
|
| | | | | | | | |
| (in thousands) | | 2018 | | 2017 |
| Deferred tax assets related to: | | | | |
| Accounts receivable | | $ | 2,278 |
| | $ | 2,061 |
|
| Inventory | | 2,631 |
| | 1,931 |
|
| Accrued compensation | | 6,783 |
| | 2,981 |
|
| Insurance reserves | | 11,545 |
| | 10,778 |
|
| Stock-based compensation | | 3,399 |
| | 2,388 |
|
| Restructuring reserves | | 325 |
| | 365 |
|
| Other accrued liabilities | | 1,514 |
| | 1,149 |
|
| Federal net operating loss carryforward | | 16,349 |
| | 17,372 |
|
| State net operating loss carryforward | | 3,882 |
| | 5,559 |
|
| Other | | 1,915 |
| | 1,633 |
|
| | | 50,621 |
| | 46,217 |
|
| Valuation allowance | | (145 | ) | | (145 | ) |
| Total deferred tax assets | | 50,476 |
| | 46,072 |
|
| | | | | |
| Deferred tax liabilities related to: | | | | |
| Goodwill and intangibles | | (21,946 | ) | | (21,030 | ) |
| Property and equipment | | (29,684 | ) | | (25,440 | ) |
| Other assets | | (1,880 | ) | | (1,370 | ) |
| Total deferred tax liabilities | | (53,510 | ) | | (47,840 | ) |
| Net deferred tax liability | | $ | (3,034 | ) | | $ | (1,768 | ) |
As of December 31, 2018, due to IRC section 382 limitations, the Company estimates federal net operating loss carryforwards generated prior to November 2011 will be limited to approximately $4.8 million per year through 2034. These net operating losses may generally be carried forward 20 years. As a result, federal operating losses if unused will expire as follows:
$29.4 million in 2028;
$17.3 million in 2029; and
$31.2 million in years 2030 through 2034.
In addition, as of December 31, 2018, the Company had $75.1 million of state net operating loss carryforwards that expire at various dates commencing in 2022 through 2035.
The Company recognized tax benefits of $0.3 million and $1.9 million during 2018 and 2017, respectively, from stock-based compensation deductions into its income tax expense. Deferred tax assets relating to tax benefits of stock-based compensation were reduced to reflect exercises or vesting; however, some exercises or vesting resulted in tax deductions in excess of previously recorded deferred tax benefits (“windfalls”). Prior to the adoption of ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, windfall tax benefits were recognized as a component of shareholders’ equity, which included $0.4 million for December 31, 2016.
The Company recognized a current income tax payable of $0.9 million and an income tax receivable of $3.7 million as of December 31, 2018 and 2017, respectively. The Company paid federal and state income tax payments of $34.2 million and $23.5 million during 2018 and 2017, respectively. The Company received tax refunds of $2.9 million and $0.6 million in 2018 and 2017, respectively.
In accordance with ASC 740, the Company evaluates its deferred tax assets to determine if valuation allowances are required. In assessing the realizability of deferred tax assets, the Company considers both positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
As of December 31, 2018 and 2017, the primary positive evidence considered to support the realization of the Company’s deferred tax assets includes: (i) the cumulative pre-tax income over the last 36 months, (ii) the reversal of deferred tax liabilities related to depreciation and amortization that would occur within the same jurisdiction and during the carry forward period necessary to absorb the federal and state net operating losses and other deferred tax assets, (iii) current and prior year utilization of federal and state net operating losses, and (iv) no history of material expiring tax attributes. The primary negative evidence considered includes: (i) the Company’s cumulative losses prior to 2013, (ii) unsettled circumstances associated with the general economy and housing market, as well as mortgage credit availability, and (iii) no federal and state net operating loss carryback opportunities. To the extent the Company generates future net operating losses, the Company may be required to increase the valuation allowance on its deferred tax assets and income tax benefit would be adversely affected.
Based upon the positive and negative evidence considered, the Company believes it is more likely than not that it will realize the benefit of the deferred tax assets, net of the existing state tax valuation allowances of $0.1 million as of December 31, 2018 and 2017. To the extent the Company generates sufficient taxable income in the future to fully utilize the tax benefits of the net deferred tax assets on which a valuation allowance was recorded, the Company’s effective tax rate would be impacted as the valuation allowance is reversed. The Company continues to evaluate its deferred tax asset on a quarterly basis and notes that, if economic conditions were to change such that the Company earns less taxable income than the amounts required to fully utilize its deferred tax asset, a portion of the asset may expire unused.
The following table shows the changes in the amount of the Company’s valuation allowance:
|
| | | | | | | | | | | | |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Balance at January 1, | | $ | 145 |
| | $ | 125 |
| | $ | 126 |
|
| Additions charged to expense | | — |
| | 20 |
| | — |
|
| Additions charged to Goodwill/Purchase Accounting | | — |
| | — |
| | — |
|
| Deductions - other | | — |
| | — |
| | (1 | ) |
| Balance at December 31, | | $ | 145 |
| | $ | 145 |
| | $ | 125 |
|
The Company has no material uncertain tax positions as of December 31, 2018 and 2017.
The Company’s state tax returns are open to examination for an average of three years. However, certain jurisdictions remain open to examination longer than three years due to the existence of net operating losses. The Company’s federal returns are open to examination for three years; however, due to statutory waivers, SBS’ tax years ended July 31, 2008 and May 5, 2009 remain open until July 31, 2020 with the federal tax authorities. SBS is currently under examination by the IRS for its tax years ended July 31, 2008 and May 5, 2009. At December 31, 2018 and 2017, the amount recognized related to expected tax, penalties and interest payments as a result of the IRS audits in income taxes payable and income taxes receivable, respectively, on the consolidated balance sheets was immaterial.
The Company’s policy is to recognize interest and penalties related to income tax liabilities and unrecognized tax benefits in income tax expense. During the years ended December 31, 2018, 2017 and 2016, penalties and interest related to income tax liabilities and uncertain tax benefits were not material.
13. Commitments and Contingencies
The Company is obligated under capital leases covering fleet vehicles and certain equipment, as well as certain facilities. The fleet vehicles and equipment leases generally have terms ranging from three to six years and the facility leases have a remaining term of four to five years. The carrying value of property and equipment under capital leases was $17.2 million and $25.2 million at December 31, 2018 and 2017, respectively, net of accumulated depreciation of $42.5 million and $37.1 million, respectively. Amortization of assets held under capital leases is included within depreciation expense or cost of goods sold on the consolidated statements of operations.
The Company also has noncancelable operating leases, primarily for buildings, improvements and equipment. These leases generally contain renewal options for periods ranging from one to five years and may require the Company to pay executory costs such as property taxes, maintenance and insurance.
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 2018 are as follows:
|
| | | | | | | | | |
| (in thousands) | | Capital
Leases | | Operating
Leases | |
| 2019 | | $ | 7,245 |
| | $ | 30,431 |
| |
| 2020 | | 5,599 |
| | 24,210 |
| |
| 2021 | | 2,356 |
| | 21,551 |
| |
| 2022 | | 873 |
| | 17,908 |
| |
| 2023 | | 660 |
| | 14,607 |
| |
| Thereafter | | — |
| | 34,279 |
| |
| | | 16,733 |
| | $ | 142,986 |
| (a) |
| Less: Amounts representing interest | | (1,227 | ) | | | |
| Total obligation under capital leases | | 15,506 |
| | | |
| Less: Current portion of capital lease obligation | | (6,661 | ) | | | |
| Long-term capital lease obligation | | $ | 8,845 |
| | | |
(a) Minimum operating lease payments have not been reduced by minimum sublease rentals of $0.1 million due in the future under noncancelable subleases.
Total rent expense under operating leases, excluding short-term rentals, for the years ended December 31, 2018, 2017 and 2016 was $32.2 million, $30.5 million and $29.3 million, respectively, which are included in either cost of sales or selling, general and administrative expenses on the consolidated statements of operations, depending on the type of operations undertaken by the related facility or asset. Future payments for certain leases will be adjusted based on increases in the consumer price index.
As of December 31, 2018, the Company had purchase commitments totaling $31.6 million related primarily to vehicles and certain IT equipment, which are enforceable and legally binding on the Company.
From time to time, various claims, legal proceedings and litigation are asserted or commenced against the Company principally arising from alleged product liability, warranty, casualty, construction defect, contract, tort, employment and other disputes. In determining loss contingencies, management considers the likelihood of loss as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is considered probable that such a liability has been incurred and when the amount of loss can be reasonably estimated. It is not certain that the Company will prevail in these matters. However, the Company does not believe that the ultimate outcome of any pending matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows. As of December 31, 2018 and 2017, the Company has accrued $3.0 million in relation to pending litigation that was recorded within selling, general and administrative expenses in its statements of operations during the year ended December 31, 2017.
14. Stock Based Compensation
Long-term incentive plan
In connection with its initial public offering in August 2013, SBS adopted the Stock Building Supply Holdings, Inc. 2013 Incentive Compensation Plan (“SBS 2013 Incentive Plan”). The SBS 2013 Incentive Plan provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards, other cash-based compensation and performance awards. In general, if awards under the SBS 2013 Incentive Plan are for any reason canceled, or expire or terminate unexercised, the shares covered by such awards may again be available for the grant of awards under the SBS 2013 Incentive Plan. Awards granted under the SBS 2013 Incentive Plan generally vest over a period of three or four years. Stock options granted under the SBS 2013 Incentive Plan have a maximum contractual term of 10 years from the date of grant. As of December 31, 2018, 2.4 million shares were available for issuance under the SBS 2013 Incentive Plan.
Performance-based restricted stock units
As of December 31, 2018, the Company has performance-based restricted stock units outstanding that were granted during the years ended December 31, 2018 and 2017. The total number of performance-based restricted stock units that could be issued upon future vestings ranges from zero to a maximum of 0.6 million, based 50% upon the Company’s average return on invested capital and 50% upon the Company’s cumulative adjusted earnings per share over three year performance periods. Compensation cost for the performance-based restricted stock units is recorded based on the expected number of units that will vest and is adjusted, as appropriate, throughout the performance period.
Stock based compensation expense
Stock based compensation is included in selling, general and administrative expenses on the consolidated statements of operations. The following table highlights stock based compensation for the years ended December 31, 2018, 2017 and 2016:
|
| | | | | | | | | | | | |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Restricted stock units (a) | | $ | 11,133 |
| | $ | 6,006 |
| | $ | 4,643 |
|
| Restricted stock | | 100 |
| | 436 |
| | 1,559 |
|
| Stock options | | 82 |
| | 327 |
| | 1,050 |
|
| Stock based compensation | | $ | 11,315 |
| | $ | 6,769 |
| | $ | 7,252 |
|
(a) Includes service-based and performance-based restricted stock units.
Stock based award activity
The following is a summary of restricted stock and restricted stock unit activity, excluding performance-based restricted stock units: |
| | | | | | | | | | | | | | |
| | | Restricted Stock | | Restricted Stock Units |
| | | Number of Shares Outstanding (in thousands) | | Weighted Average Grant Date Fair Value | | Number of Units Outstanding (in thousands) | | Weighted Average Grant Date Fair Value |
| December 31, 2015 | | 455 |
| | $ | 13.51 |
| | 282 |
| | $ | 16.99 |
|
| Granted | | — |
| | — |
| | 166 |
| | 17.65 |
|
| Vested | | (301 | ) | | 11.95 |
| | (123 | ) | | 16.86 |
|
| Forfeited | | (37 | ) | | 13.69 |
| | (27 | ) | | 17.16 |
|
| December 31, 2016 | | 117 |
| | 17.42 |
| | 298 |
| | 17.39 |
|
| Granted | | — |
| | — |
| | 396 |
| | 21.79 |
|
| Vested | | (49 | ) | | 16.25 |
| | (163 | ) | | 17.49 |
|
| Forfeited | | (8 | ) | | 19.08 |
| | (21 | ) | | 20.34 |
|
| December 31, 2017 | | 60 |
| | 18.17 |
| | 510 |
| | 20.65 |
|
| Granted | | — |
| | — |
| | 748 |
| | 20.22 |
|
| Vested | | (60 | ) | | 18.17 |
| | (266 | ) | | 20.64 |
|
| Forfeited | | — |
| | — |
| | (88 | ) | | 19.32 |
|
| December 31, 2018 | | — |
| | $ | — |
| | 904 |
| | $ | 20.43 |
|
The following is a summary of the maximum number of performance-based restricted stock units which could be earned and related activity:
|
| | | | | | | |
| | | Performance-Based Restricted Stock Units |
| | | Number of Units Outstanding (in thousands) | | Weighted Average Grant Date Fair Value |
| December 31, 2015 | | — |
| | $ | — |
|
| Granted (a) | | 206 |
| | 16.35 |
|
| Vested | | — |
| | — |
|
| Forfeited | | — |
| | — |
|
| December 31, 2016 | | 206 |
| | 16.35 |
|
| Granted (a) | | 255 |
| | 21.94 |
|
| Vested | | — |
| | — |
|
| Forfeited | | (8 | ) | | 22.90 |
|
| December 31, 2017 | | 453 |
| | 19.37 |
|
| Granted (a) | | 474 |
| | 19.64 |
|
| Vested | | — |
| | — |
|
| Forfeited | | (302 | ) | | 17.76 |
|
| December 31, 2018 | | 625 |
| | $ | 20.36 |
|
(a) Represents the maximum number of performance-based restricted stock units which could be earned.
The following is a summary of stock option award activity:
|
| | | | | | | | | | | | | |
| | | Number of Options (in thousands) | | Weighted Average Exercise Price | | Contractual Term (in years) | | Intrinsic Value (in thousands) |
| Outstanding at December 31, 2015 | | 1,228 |
| | $ | 14.17 |
| | | | |
| Granted | | 3 |
| | 17.04 |
| | | | |
| Exercised | | (175 | ) | | 7.90 |
| | | | |
| Forfeited | | (10 | ) | | 17.04 |
| | | | |
| Expired | | (22 | ) | | 17.53 |
| | | | |
| Outstanding at December 31, 2016 | | 1,024 |
| | 15.15 |
| | | | |
| Granted | | — |
| | — |
| | | | |
| Exercised | | (260 | ) | | 13.05 |
| | | | |
| Forfeited | | (14 | ) | | 17.04 |
| | | | |
| Expired | | (45 | ) | | 19.89 |
| | | | |
| Outstanding at December 31, 2017 | | 705 |
| | 15.59 |
| | | | |
| Granted | | — |
| | — |
| | | | |
| Exercised | | (96 | ) | | 14.01 |
| | | | |
| Forfeited | | (6 | ) | | 17.04 |
| | | | |
| Expired | | (7 | ) | | 16.37 |
| | | | |
| Outstanding at December 31, 2018 | | 596 |
| | $ | 15.82 |
| | 5.3 | | $ | 982 |
|
| | | | | | | | | |
| Exercisable at December 31, 2018 | | 596 |
| | $ | 15.82 |
| | 5.3 | | $ | 982 |
|
| | | | | | | | | |
| Vested and expected to vest at December 31, 2018 | | 596 |
| | $ | 15.82 |
| | 5.3 | | $ | 982 |
|
The weighted average grant date fair value of stock options granted during the year ended December 31, 2016 was $9.70.
During the years ended December 31, 2018, 2017 and 2016, the aggregate intrinsic value of the stock options exercised was $0.8 million, $2.3 million and $1.9 million, respectively.
The following table summarizes the Company’s total unrecognized compensation cost related to equity based compensation as of December 31, 2018:
|
| | | | | | |
| (in thousands, except period data) | | Unrecognized Compensation Cost | | Weighted Average Remaining Period of Expense Recognition (in years) |
| Restricted stock units | | $ | 8,693 |
| | 1.5 |
| Performance-based restricted stock units | | 5,140 |
| | 2.4 |
| | | $ | 13,833 |
| | |
15. Segments
ASC 280, Segment Reporting (“ASC 280”) defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the CODM in deciding how to allocate resources and in assessing performance.
The Company’s five operating segments are the Mid-Atlantic, Southeast, Texas, Intermountain and Western divisions. The CODM reviews aggregate information to allocate resources and assess performance. Based on the CODM’s review, as well as the similar economic characteristics, nature of products, distribution methods and customers of the divisions, the Company has aggregated its operating segments into one reportable segment, “Geographic divisions.”
In addition to the Company’s reportable segment, the Company’s consolidated results include “Other reconciling items.” Other reconciling items comprises the Company’s corporate activities and other income and expenses not allocated to the operating segments.
The following tables present Net sales, Adjusted EBITDA and certain other measures for the reportable segment and total Company operations for the periods indicated. Adjusted EBITDA is used as a performance metric by the CODM in determining how to allocate resources and assess performance.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2018 | | December 31, 2018 |
| (in thousands) | | Net Sales | | Gross Profit | | Depreciation & Amortization | | Adjusted EBITDA | | Total Assets |
| Geographic divisions | | $ | 3,682,448 |
| | $ | 909,216 |
| | $ | 63,381 |
| | $ | 340,464 |
| | $ | 1,405,940 |
|
| Other reconciling items | | — |
| | — |
| | 2,007 |
| | (74,585 | ) | | 170,171 |
|
| | | $ | 3,682,448 |
| | $ | 909,216 |
| | $ | 65,388 |
| | | | $ | 1,576,111 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 | | December 31, 2017 |
| (in thousands) | | Net Sales | | Gross Profit | | Depreciation & Amortization | | Adjusted EBITDA | | Total Assets |
| Geographic divisions | | $ | 3,365,968 |
| | $ | 795,515 |
| | $ | 66,809 |
| | $ | 250,061 |
| | $ | 1,435,970 |
|
| Other reconciling items | | — |
| | — |
| | 2,408 |
| | (50,058 | ) | | 37,380 |
|
| | | $ | 3,365,968 |
| | $ | 795,515 |
| | $ | 69,217 |
| | | | $ | 1,473,350 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 | | December 31, 2016 |
| (in thousands) | | Net Sales | | Gross Profit | | Depreciation & Amortization | | Adjusted EBITDA | | Total Assets |
| Geographic divisions | | $ | 3,093,743 |
| | $ | 741,965 |
| | $ | 66,592 |
| | $ | 244,616 |
| | $ | 1,345,475 |
|
| Other reconciling items | | — |
| | — |
| | 2,088 |
| | (50,726 | ) | | 49,539 |
|
| | | $ | 3,093,743 |
| | $ | 741,965 |
| | $ | 68,680 |
| | | | $ | 1,395,014 |
|
Reconciliation to consolidated financial statements:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Income before income taxes | | $ | 156,914 |
| | $ | 81,827 |
| | $ | 45,146 |
|
| Interest expense | | 24,035 |
| | 25,036 |
| | 30,131 |
|
| Interest income | | (758 | ) | | — |
| | — |
|
| Depreciation and amortization | | 65,388 |
| | 69,217 |
| | 68,680 |
|
| Merger and integration costs | | 3,998 |
| | 15,336 |
| | 15,340 |
|
| Non-cash stock compensation expense | | 11,315 |
| | 6,769 |
| | 7,252 |
|
| Impairment of assets | | — |
| | 435 |
| | 11,928 |
|
| Inventory step-up charges | | — |
| | — |
| | 2,884 |
|
| Loss on debt extinguishment | | — |
| | — |
| | 12,529 |
|
| Sale of Coleman Floor (a) | | 656 |
| | — |
| | — |
|
| Acquisition costs (b) | | 1,829 |
| | 424 |
| | — |
|
| Other items (c) | | 2,502 |
| | 959 |
| | — |
|
| Adjusted EBITDA of other reconciling items | | 74,585 |
| | 50,058 |
| | 50,726 |
|
| Adjusted EBITDA of geographic divisions reportable segment | | $ | 340,464 |
| | $ | 250,061 |
| | $ | 244,616 |
|
(a) For the year ended December 31, 2018, the amount represents the loss on sale of Coleman Floor as well as other expenses incurred related to the disposition.
(b) For the years ended December 31, 2018 and 2017, the amounts represent expenses incurred related to the acquisitions of Barefoot and Company (“Barefoot”), Locust Lumber, Shone Lumber, TexPly and Code Plus. For the year ended December 31, 2018, the amount also includes costs incurred related to the conversion of the enterprise resource planning system utilized by Shone Lumber.
(c) For the year ended December 31, 2018, the amount represents costs incurred in connection with the departure of the Company’s former chief executive officer and the search for and appointment of his permanent replacement. For the year ended December 31, 2017, the amount represents expense incurred related to pending litigation of $3.0 million and income related to the final settlement of insurance claims made by the Company for a fire at one of the Company’s facilities during 2015 of $2.0 million.
The Company does not earn revenues or have long-lived assets located in foreign countries. In accordance with the enterprise-wide disclosure requirements of the accounting standard, the Company’s net sales from external customers by main product lines are as follows for the years ended December 31, 2018, 2017 and 2016.
|
| | | | | | | | | | | | |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Structural components | | $ | 622,105 |
| | $ | 522,619 |
| | $ | 461,761 |
|
| Lumber & lumber sheet goods | | 1,286,481 |
| | 1,114,219 |
| | 938,563 |
|
| Millwork, doors & windows | | 964,684 |
| | 907,377 |
| | 894,889 |
|
| Other building products & services | | 809,178 |
| | 821,753 |
| | 798,530 |
|
| Total net sales | | $ | 3,682,448 |
| | $ | 3,365,968 |
| | $ | 3,093,743 |
|
16. Earnings Per Share
Basic net income per share (“EPS”) is calculated by dividing net income attributable to common stockholders by the weighted average shares outstanding during the period. Diluted EPS is calculated by adjusting weighted average shares outstanding for the dilutive effect of potential common shares, determined using the treasury-stock method. For purposes of the diluted EPS calculation, stock options, restricted stock and restricted stock unit awards are considered to be potential common shares. Performance-based restricted stock units are not included in the calculation of diluted EPS until they are contingently issuable.
The basic and diluted EPS calculations for the years ended December 31, 2018, 2017 and 2016 are presented below:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands, except per share amounts) | | 2018 | | 2017 | | 2016 |
| Income attributable to common stockholders | | $ | 119,738 |
| | $ | 57,425 |
| | $ | 30,880 |
|
| | | | | | | |
| Weighted average common shares outstanding, basic | | 67,273 |
| | 66,900 |
| | 66,055 |
|
| Effect of dilutive securities: | | | | | | |
| Restricted stock units | | 324 |
| | 235 |
| | 129 |
|
| Stock options | | 135 |
| | 204 |
| | 218 |
|
| Restricted stock | | 16 |
| | 65 |
| | 207 |
|
| Weighted average common shares outstanding, diluted | | 67,748 |
| | 67,404 |
| | 66,609 |
|
| | | | | | | |
| Basic income per common share | | $ | 1.78 |
| | $ | 0.86 |
| | $ | 0.47 |
|
| Diluted income per common share | | $ | 1.77 |
| | $ | 0.85 |
| | $ | 0.46 |
|
The following table provides the securities that could potentially dilute EPS in the future, but were not included in the computation of diluted EPS for the periods presented because to do so would have been anti-dilutive. The amounts included in this table exclude performance-based restricted stock units. As of December 31, 2018, the number of currently outstanding performance-based restricted stock units that are issued upon vesting could range from zero to a maximum of 0.6 million.
|
| | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2018 | | 2017 | | 2016 |
| Restricted stock units | | 85 |
| | — |
| | 5 |
|
| Stock options | | 349 |
| | — |
| | 469 |
|
| Restricted stock | | — |
| | — |
| | — |
|
17. Unaudited Quarterly Financial Data
The following tables summarize the consolidated quarterly results of operations for 2018 and 2017:
|
| | | | | | | | | | | | | | | | |
| | | 2018 |
| (in thousands, except per share amounts) | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Net sales | | $ | 834,202 |
| | $ | 998,461 |
| | $ | 990,264 |
| | $ | 859,521 |
|
| Gross profit | | 199,084 |
| | 239,599 |
| | 241,303 |
| | 229,230 |
|
| Net income | | 15,359 |
| | 40,405 |
| | 35,858 |
| | 28,116 |
|
| Basic income per share | | $ | 0.23 |
| | $ | 0.60 |
| | $ | 0.53 |
| | $ | 0.42 |
|
| Diluted income per share | | $ | 0.23 |
| | $ | 0.60 |
| | $ | 0.53 |
| | $ | 0.41 |
|
|
| | | | | | | | | | | | | | | | |
| | | 2017 |
| (in thousands, except per share amounts) | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Net sales | | $ | 757,700 |
| | $ | 886,375 |
| | $ | 881,012 |
| | $ | 840,881 |
|
| Gross profit | | 178,197 |
| | 211,687 |
| | 209,545 |
| | 196,086 |
|
| Net income | | 3,744 |
| | 17,596 |
| | 18,443 |
| | 17,642 |
|
| Basic income per share | | $ | 0.06 |
| | $ | 0.26 |
| | $ | 0.28 |
| | $ | 0.26 |
|
| Diluted income per share | | $ | 0.06 |
| | $ | 0.26 |
| | $ | 0.27 |
| | $ | 0.26 |
|
18. Subsequent Events
On January 14, 2019, the Company acquired substantially all of the assets and assumed certain liabilities of Barefoot, a supplier of windows, exterior doors, hardware, specialty products and installation services in the Charlotte, North Carolina metropolitan area. On February 8, 2019, the Company acquired substantially all of the assets and assumed certain liabilities of Locust Lumber, a supplier of lumber products and building materials primarily to custom homebuilders and professional remodeling contractors in the Charlotte, North Carolina metropolitan area. These acquisitions enhance the Company’s value-added offerings and footprint in the Charlotte, North Carolina metropolitan area. The preliminary purchase price, in aggregate, for these acquisitions was $54.5 million, which includes an initial holdback of $2.5 million due to the sellers of Barefoot one year from the closing date. The holdback amount may be reduced under certain circumstances. The Company funded the transactions through available cash. For the year ended December 31, 2018, Barefoot and Locust Lumber generated net sales, in aggregate, of approximately $105 million.
The results of operations of Barefoot and Locust Lumber will be included in the Company’s consolidated financial statements beginning on the respective acquisition dates. Due to the timing of the close of the acquisitions, the initial purchase accounting for the acquisitions is not complete and therefore, certain disclosures required by ASC 805 have not been included. The Company is in the process of performing its valuation of the acquired assets and liabilities and currently anticipates customer relationship intangible assets and goodwill, among other operating assets and liabilities, to be recognized as part of these acquisitions.
Item 9A. Controls and Procedures
Disclosure controls and procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These disclosure controls and procedures are designed to provide 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. At the time of the filing of the Original 10-K on February 28, 2019, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018. Subsequent to that conclusion, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2018.
Notwithstanding the material weakness described below, management has concluded that our consolidated financial statements included in the Original 10-K (and as presented in this Amendment) were not materially misstated and present fairly, in all material respects, our consolidated financial position as of December 31, 2018 and 2017 and results of operations and cash flows for each of the years in the three-year period ended December 31, 2018.
The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of their inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Management’s annual report on internal control over financial reporting (Restated)
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). 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 U.S. GAAP. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management identified that a former credit manager within one of the Company’s local operations violated the Company's credit policy by intentionally misapplying certain customer payments, both within a single customer balance as well as across multiple customer balances, and created inappropriate debit memos, all with the intent to manipulate the aging of certain unpaid customer invoices. These inappropriate activities resulted in an immaterial understatement of the Company's provision for doubtful accounts in previously issued annual and interim financial statements.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We have identified a design deficiency with respect to effective controls over the approval and issuance of debit memos and the application of customer payments to accounts receivable balances, and inadequate segregation of duties over the ability to create
debit memos and apply customer payments by certain employees responsible for establishing and monitoring the valuation of accounts receivable balances. Management concluded these deficiencies constitute a material weakness in our internal control over financial reporting.
The material weakness resulted in immaterial misstatements to our previously issued interim and annual consolidated financial statements impacting selling, general and administrative expenses and accounts receivable, net of allowances. Additionally, this material weakness could result in misstatements of the aforementioned accounts that would result in a material misstatement to the annual or interim condensed consolidated financial statements that would not be prevented or detected.
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.
In Management's annual report on internal control over financial reporting included in our Original 10-K, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that we maintained effective internal control over financial reporting as of December 31, 2018. We have subsequently concluded that the material weakness described above existed as of December 31, 2018. As a result, we have concluded that we did not maintain effective internal control over financial reporting as of December 31, 2018 based on the criteria in Internal Control - Integrated Framework (2013 framework) issued by COSO. Accordingly, management has restated its report on internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and stated in their report which appears in Part II, Item 8 of this Amendment.
Remediation plan
We are finalizing a plan to remediate this material weakness with the oversight of the Audit Committee of the Board of Directors and are currently implementing actions to address the underlying causes of the material weakness. The following describes the steps that we have taken and plan to take to remediate the material weakness:
We have restricted debit memo functionality within our primary ERP system by role and dollar limit authority, and we plan to implement additional monitoring and analytical controls performed by individuals who do not have conflicting access.
We plan to remove cash application access from our credit directors, and in markets where it is feasible, we also plan to remove cash application access from our credit managers.
In markets where it is not feasible to remove cash application access from our credit managers due to resource limitations, we plan to implement additional monitoring and analytical controls performed by individuals who do not have conflicting access.
We believe the measures described above and others that may be identified and implemented in future periods will strengthen our internal control over financial reporting and remediate the identified material weakness. However, additional steps may be required and we may decide to take additional action to address control deficiencies or determine to modify certain of the remediation measures identified above.
Changes in internal control over financial reporting
There was no change in our internal control over financial reporting during the three months ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART IV
Item 15.Exhibits, and Financial Statement Schedules
(a) The following documents are filed as part of this report:
| |
| 1. | The list of consolidated financial statements and related notes, together with the report of PricewaterhouseCoopers LLP, appear in Part II, Item 8 "Financial“Financial Statements and Supplementary Data"Data” of this Annual Report on Form 10-KAmendment and are hereby incorporated by reference. |
| |
| 2. | Financial statement schedules have been omitted because they are not applicable, not material or the required information is otherwise included. |
| |
| 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 No. | | Description |
2.1+ | | Restructuring and Investment Agreement, dated as of May 5, 2009, by and among Wolseley Investments North America, Stock Building Supply Holdings, LLC and Saturn Acquisition Holdings, LLC (incorporated by reference to Exhibit 2.1 to the Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368) |
2.2 | | Plan of Conversion of Saturn Acquisition Holdings, LLC (incorporated by reference to Exhibit 2.2 to the Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368) |
2.3 | | |
| 3.1 | | |
| 3.2 | | Amended and Restated |
| 4.1 | | |
| 4.2 | | Indenture, dated as of September 20, 2013, by and15, 2016, among Building Materials Holding Corporation,BMC East, LLC, the guarantors party theretoGuarantors named therein and Wilmington Trust, National Association, as trustee, governing Building Materials Holding Corporation’s 9.0% Senior SecuredTrustee and Notes due 2018Collateral Agent (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on December 7, 2015September 16, 2016 in Commission File No. 001-36050) |
4.310.1# | | First Supplemental Indenture,Employment Agreement, dated as of June 1, 2015,August 23, 2018, by and among VNS Corporation, ProCon Construction Services, LLC, TrussMart Building Components, LLCbetween David E. Flitman and Wilmington Trust, National Association, as trusteeBMC Stock Holdings, Inc. (incorporated by reference to Exhibit 4.210.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 1, 2018 in Commission File No. 001-36050) |
10.2# | | |
4.410.3# | | Second Supplemental Indenture, dated as of December 1, 2015, by and among BMC Stock Holdings, Inc., certain subsidiaries of BMC Stock Holdings, Inc. parties thereto and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on December 7, 2015 in Commission File No. 001-36050) |
10.1 | | Amended and Restated Professional Services Agreement, dated as of June 13, 2013, by and between Glendon Partners, Inc. and Stock Building Supply Holdings, Inc. (incorporated by reference to Exhibit 10.11 to the Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368) |
10.2 | | Management Services Agreement, dated as of May 4, 2009, by and between The Gores Group, LLC and Saturn Acquisition Holdings, LLC (incorporated by reference to Exhibit 10.12 to the Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368) |
|
| | |
10.3 | | Termination of Management Services Agreement, dated as of June 13, 2013, by and between The Gores Group, LLC and Stock Building Supply Holdings, Inc. (incorporated by reference to Exhibit 10.13 to the Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368) |
10.4 | | Contribution Agreement, dated as of November 16, 2011, by and between Saturn Acquisition Holdings, LLC and Gores Building Holdings, LLC (incorporated by reference to Exhibit 10.14 to the Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368) |
10.5 | | Director Nomination Agreement, dated as of August 14, 2013, by and among Stock Building Supply Holdings, Inc. and Gores Building Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on August 15, 2013 in Commission File No. 001-36050) |
10.6 | | Employment Agreement Amendment, dated as of June 2, 2015, by and between James F. Major, Jr. and Stock Building Supply Holdings, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 5, 2015 in Commission File No. 001-36050) |
10.710.4# | | |
10.5# | | |
10.6# | | |
10.7# | | |
10.8# | | |
10.9# | | |
|
10.8 | | |
| Exhibit No. | | EmploymentDescription |
10.10# | | |
10.9 | | Consulting Agreement, effective as of December 1, 2015, by and between BMC Stock Holdings, Inc. and Bryan J. Yeazel (incorporated by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2018 in Commission File No. 001-36050) |
10.11# | | |
10.1010.12# | | |
10.13# | | |
10.1110.14# | | |
10.15# | | |
10.1210.16# | | |
10.1310.17# | | Description of Management Incentive Plan for Executive Officers (incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K filed with the Commission on March 4, 2014 in Commission File No. 001-36050) |
10.14 | | |
10.1510.18# | | |
10.1610.19# | | |
10.1710.20 | | Second Amended and Restated Senior Secured Credit Agreement, dated as of December 1, 2015, by and among Building Materials Holding Corporation, Stock Building Supply Holdings, Inc., certain subsidiaries of Building Materials Holding Corporation and Stock Building Supply Holdings, Inc. parties thereto, Wells Fargo Capital Finance, LLC as agent for the lenders, joint lead arranger, and joint book runner, Goldman Sachs Bank USA, as joint lead arranger and joint book runner, and the lenders parties thereto (incorporated by reference to Exhibit 4.310.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on December 7, 2015 in Commission File No. 001-36050) |
10.1810.21 | | Amendment Number One to Second Amended and Restated Senior Secured Credit Agreement and Consent, dated as of January 28, 2016, by and among BMC Stock Holdings, Inc., as parent, the subsidiaries of parent party thereto, as borrowers, the lenders party thereto, and Wells Fargo Capital Finance, LLC, as agent for the lenders (incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K filed with the Commission on March 15, 2016 in Commission File No. 001-36050) |
|
| | |
10.1910.22 | | |
| 10.23 | | |
16.110.24 | | Letter from KPMG LLP |
|
| | |
| Exhibit No. | | Description |
| 21.1 | | |
23.1 | | Consent of PricewaterhouseCoopers LLP (incorporated by reference to Exhibit 23.1 to the Registrant's Annual Report on Form 10-K filed with the Commission on March 15, 2016 in Commission File No. 001-36050) |
23.2 | | Consent of KPMG LLP (incorporated by reference to Exhibit 23.2 to the Registrant's Annual Report on Form 10-K filed with the Commission on March 15, 2016 in Commission File No. 001-36050) |
24.1 | | Powers of Attorney (included on the signature page of the Registrant’s Annual Report on Form 10-K filed with the Commission on March 15, 2016February 28, 2019 in Commission File No. 001-36050 and incorporated herein by reference)001-36050) |
| 23.1 | | |
| 24.1 | | |
| 31.1 | | |
| 31.2 | | |
| 32.1 | | |
| 32.2 | | |
101.INS*101.INS | | XBRL Instance Document |
101.SCH*101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL*101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF*101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB*101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE*101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | | Cover Page Interactive Data File - The cover page from the Amendment is formatted in Inline XBRL. |
_________________
*XBRL (Extensible Business Reporting Language) information is furnished and not filed# Denotes management compensatory plan or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.arrangement.
| |
| + | Certain schedules to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedules will be furnished supplementally to the SEC upon request. |
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.
|
| | | |
| | | BMC STOCK HOLDINGS, INC. |
| Date: | March 17, 2016August 9, 2019 | By: | /s/ James F. Major, Jr. |
| | | | Executive Vice President, Chief Financial Officer and Treasurer |
| | | | (Principal financial and accounting officer and duly authorized officer) |