Builders FirstSource, Inc. - Quarter Report: 2019 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-51357
BUILDERS FIRSTSOURCE, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
52-2084569 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
|
|
2001 Bryan Street, Suite 1600 |
|
|
|
Dallas, Texas |
|
75201 |
|
(Address of principal executive offices) |
|
(Zip Code) |
(214) 880-3500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☒ |
|
Accelerated filer |
|
☐ |
Non-accelerated filer |
|
☐ |
|
Small reporting company |
|
☐ |
Emerging growth company |
|
☐ |
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered |
Common stock, par value $0.01 per share |
BLDR |
NASDAQ Stock Market LLC |
The number of shares of the issuer’s common stock, par value $0.01, outstanding as of July 31, 2019 was 115,528,606.
BUILDERS FIRSTSOURCE, INC.
Index to Form 10-Q
|
|
|
|
Page |
|
|
|
|
|
Item 1. |
|
|
3 |
|
|
|
|
3 |
|
|
|
Condensed Consolidated Balance Sheet (Unaudited) as of June 30, 2019 and December 31, 2018 |
|
4 |
|
|
|
5 |
|
|
|
|
6 |
|
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited) |
|
7 |
Item 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
19 |
Item 3. |
|
|
27 |
|
Item 4. |
|
|
27 |
|
|
|
|
|
|
Item 1. |
|
|
29 |
|
Item 1A. |
|
|
29 |
|
Item 2. |
|
|
29 |
|
Item 3. |
|
|
30 |
|
Item 4. |
|
|
30 |
|
Item 5. |
|
|
30 |
|
Item 6. |
|
|
31 |
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
|
||||
|
|
(Unaudited) |
|
|
|||||||||||||
|
|
(In thousands, except per share amounts) |
|
|
|||||||||||||
Sales |
|
$ |
1,904,523 |
|
|
$ |
2,089,888 |
|
|
$ |
3,535,823 |
|
|
$ |
3,790,324 |
|
|
Cost of sales |
|
|
1,387,367 |
|
|
|
1,593,560 |
|
|
|
2,576,692 |
|
|
|
2,882,944 |
|
|
Gross margin |
|
|
517,156 |
|
|
|
496,328 |
|
|
|
959,131 |
|
|
|
907,380 |
|
|
Selling, general and administrative expenses |
|
|
401,511 |
|
|
|
391,769 |
|
|
|
771,595 |
|
|
|
750,677 |
|
|
Income from operations |
|
|
115,645 |
|
|
|
104,559 |
|
|
|
187,536 |
|
|
|
156,703 |
|
|
Interest expense, net |
|
|
29,382 |
|
|
|
28,957 |
|
|
|
54,283 |
|
|
|
55,699 |
|
|
Income before income taxes |
|
|
86,263 |
|
|
|
75,602 |
|
|
|
133,253 |
|
|
|
101,004 |
|
|
Income tax expense |
|
|
19,659 |
|
|
|
18,980 |
|
|
|
30,941 |
|
|
|
21,162 |
|
|
Net income |
|
$ |
66,604 |
|
|
$ |
56,622 |
|
|
$ |
102,312 |
|
|
$ |
79,842 |
|
|
Comprehensive income |
|
$ |
66,604 |
|
|
$ |
56,622 |
|
|
$ |
102,312 |
|
|
$ |
79,842 |
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.58 |
|
|
$ |
0.49 |
|
|
$ |
0.89 |
|
|
$ |
0.70 |
|
|
Diluted |
|
$ |
0.57 |
|
|
$ |
0.49 |
|
|
$ |
0.88 |
|
|
$ |
0.68 |
|
|
Weighted average common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
115,757 |
|
|
|
114,636 |
|
|
|
115,592 |
|
|
|
114,365 |
|
|
Diluted |
|
|
116,919 |
|
|
|
116,693 |
|
|
|
116,726 |
|
|
|
116,695 |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2019 |
|
|
2018 |
|
||
|
|
(Unaudited) |
|
|||||
|
|
(In thousands, except per share amounts) |
|
|||||
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
10,552 |
|
|
$ |
10,127 |
|
Accounts receivable, less allowances of $12,772 and $13,054 at June 30, 2019 and December 31, 2018, respectively |
|
|
715,405 |
|
|
|
654,170 |
|
Other receivables |
|
|
54,257 |
|
|
|
68,637 |
|
Inventories, net |
|
|
617,527 |
|
|
|
596,896 |
|
Other current assets |
|
|
36,217 |
|
|
|
43,921 |
|
Total current assets |
|
|
1,433,958 |
|
|
|
1,373,751 |
|
Property, plant and equipment, net |
|
|
675,310 |
|
|
|
670,075 |
|
Operating lease right-of-use assets, net |
|
|
273,971 |
|
|
|
- |
|
Goodwill |
|
|
740,411 |
|
|
|
740,411 |
|
Intangible assets, net |
|
|
95,417 |
|
|
|
103,154 |
|
Deferred income taxes |
|
|
7,343 |
|
|
|
22,766 |
|
Other assets, net |
|
|
23,561 |
|
|
|
22,152 |
|
Total assets |
|
$ |
3,249,971 |
|
|
$ |
2,932,309 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
516,897 |
|
|
$ |
423,168 |
|
Accrued liabilities |
|
|
258,096 |
|
|
|
292,526 |
|
Current portion of operating lease liabilities |
|
|
60,576 |
|
|
|
- |
|
Current maturities of long-term debt |
|
|
12,650 |
|
|
|
15,565 |
|
Total current liabilities |
|
|
848,219 |
|
|
|
731,259 |
|
Noncurrent portion of operating lease liabilities |
|
|
218,001 |
|
|
|
- |
|
Long-term debt, net of current maturities, debt discount, and debt issuance costs |
|
|
1,420,462 |
|
|
|
1,545,729 |
|
Deferred income taxes |
|
|
5,967 |
|
|
|
- |
|
Other long-term liabilities |
|
|
53,191 |
|
|
|
58,983 |
|
Total liabilities |
|
|
2,545,840 |
|
|
|
2,335,971 |
|
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000 shares authorized; zero shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 200,000 shares authorized; 115,880 and 115,078 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively |
|
|
1,159 |
|
|
|
1,151 |
|
Additional paid-in capital |
|
|
565,694 |
|
|
|
560,221 |
|
Retained earnings |
|
|
137,278 |
|
|
|
34,966 |
|
Total stockholders' equity |
|
|
704,131 |
|
|
|
596,338 |
|
Total liabilities and stockholders' equity |
|
$ |
3,249,971 |
|
|
$ |
2,932,309 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements. |
|
4
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
Six Months Ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2019 |
|
|
2018 |
|
||
|
|
(Unaudited) (In thousands) |
|
|||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
102,312 |
|
|
$ |
79,842 |
|
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
47,390 |
|
|
|
47,587 |
|
Amortization of debt issuance costs and debt discount |
|
|
2,132 |
|
|
|
2,308 |
|
Loss on extinguishment of debt, net |
|
|
1,498 |
|
|
|
- |
|
Deferred income taxes |
|
|
21,390 |
|
|
|
18,863 |
|
Stock compensation expense |
|
|
6,038 |
|
|
|
6,428 |
|
Net gain on sale of assets and asset impairments |
|
|
(1,023 |
) |
|
|
(326 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
|
(47,113 |
) |
|
|
(177,765 |
) |
Inventories |
|
|
(20,631 |
) |
|
|
(189,925 |
) |
Other current assets |
|
|
7,271 |
|
|
|
(5,693 |
) |
Other assets and liabilities |
|
|
1,057 |
|
|
|
2,498 |
|
Accounts payable |
|
|
90,050 |
|
|
|
67,129 |
|
Accrued liabilities |
|
|
(31,586 |
) |
|
|
(19,915 |
) |
Net cash provided by (used in) operating activities |
|
|
178,785 |
|
|
|
(168,969 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(45,392 |
) |
|
|
(49,948 |
) |
Proceeds from sale of property, plant and equipment |
|
|
4,620 |
|
|
|
1,075 |
|
Net cash used in investing activities |
|
|
(40,772 |
) |
|
|
(48,873 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility |
|
|
594,000 |
|
|
|
904,000 |
|
Repayments under revolving credit facility |
|
|
(700,000 |
) |
|
|
(721,000 |
) |
Proceeds from issuance of notes |
|
|
400,000 |
|
|
|
- |
|
Repayments of long-term debt and other loans |
|
|
(423,743 |
) |
|
|
(6,852 |
) |
Payments of loan costs |
|
|
(7,278 |
) |
|
|
- |
|
Exercise of stock options |
|
|
1,883 |
|
|
|
2,212 |
|
Repurchase of common stock |
|
|
(2,450 |
) |
|
|
(4,855 |
) |
Net cash provided by (used in) financing activities |
|
|
(137,588 |
) |
|
|
173,505 |
|
Net change in cash and cash equivalents |
|
|
425 |
|
|
|
(44,337 |
) |
Cash and cash equivalents at beginning of the period |
|
|
10,127 |
|
|
|
57,533 |
|
Cash and cash equivalents at end of the period |
|
$ |
10,552 |
|
|
$ |
13,196 |
|
Supplemental disclosure of non-cash activities
Purchases of property, plant and equipment included in accounts payable were $4.0 million and $3.7 million for the six months ended June 30, 2019 and 2018, respectively.
The Company purchased equipment which was financed through finance lease obligations of $7.0 million and capital lease obligations of $6.8 million in the six months ended June 30, 2019 and 2018, respectively.
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Additional Paid |
|
|
Retained Earnings |
|
|
|
|
|||||
|
|
Common Stock |
|
|
in |
|
|
(Accumulated |
|
|
|
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit) |
|
|
Total |
|
|||||
|
|
(Unaudited) |
|
|||||||||||||||||
|
|
(In thousands) |
|
|||||||||||||||||
Balance at December 31, 2017 |
|
|
113,572 |
|
|
$ |
1,136 |
|
|
$ |
546,766 |
|
|
$ |
(171,693 |
) |
|
$ |
376,209 |
|
Vesting of restricted stock units |
|
|
766 |
|
|
|
7 |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
Stock compensation expense |
|
|
— |
|
|
|
— |
|
|
|
2,890 |
|
|
|
— |
|
|
|
2,890 |
|
Exercise of stock options |
|
|
517 |
|
|
|
5 |
|
|
|
2,036 |
|
|
|
— |
|
|
|
2,041 |
|
Repurchase of common stock |
|
|
(236 |
) |
|
|
(2 |
) |
|
|
(4,853 |
) |
|
|
— |
|
|
|
(4,855 |
) |
Cumulative effect adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,468 |
|
|
|
1,468 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,220 |
|
|
|
23,220 |
|
Balance at March 31, 2018 |
|
|
114,619 |
|
|
|
1,146 |
|
|
|
546,832 |
|
|
|
(147,005 |
) |
|
|
400,973 |
|
Vesting of restricted stock units |
|
|
6 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
Stock compensation expense |
|
|
— |
|
|
|
— |
|
|
|
3,538 |
|
|
|
— |
|
|
|
3,538 |
|
Exercise of stock options |
|
|
46 |
|
|
|
— |
|
|
|
338 |
|
|
|
— |
|
|
|
338 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
56,622 |
|
|
|
56,622 |
|
Balance at June 30, 2018 |
|
|
114,671 |
|
|
$ |
1,147 |
|
|
$ |
550,707 |
|
|
$ |
(90,383 |
) |
|
$ |
461,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
|
115,078 |
|
|
$ |
1,151 |
|
|
$ |
560,221 |
|
|
$ |
34,966 |
|
|
$ |
596,338 |
|
Vesting of restricted stock units |
|
|
662 |
|
|
|
7 |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
Stock compensation expense |
|
|
— |
|
|
|
— |
|
|
|
2,659 |
|
|
|
— |
|
|
|
2,659 |
|
Exercise of stock options |
|
|
59 |
|
|
|
— |
|
|
|
216 |
|
|
|
— |
|
|
|
216 |
|
Repurchase of common stock |
|
|
(196 |
) |
|
|
(2 |
) |
|
|
(2,448 |
) |
|
|
— |
|
|
|
(2,450 |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
35,708 |
|
|
|
35,708 |
|
Balance at March 31, 2019 |
|
|
115,603 |
|
|
|
1,156 |
|
|
|
560,641 |
|
|
|
70,674 |
|
|
|
632,471 |
|
Vesting of restricted stock units |
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock compensation expense |
|
|
— |
|
|
|
— |
|
|
|
3,379 |
|
|
|
— |
|
|
|
3,379 |
|
Exercise of stock options |
|
|
266 |
|
|
|
3 |
|
|
|
1,674 |
|
|
|
— |
|
|
|
1,677 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
66,604 |
|
|
|
66,604 |
|
Balance at June 30, 2019 |
|
|
115,880 |
|
|
$ |
1,159 |
|
|
$ |
565,694 |
|
|
$ |
137,278 |
|
|
$ |
704,131 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
Builders FirstSource, Inc., a Delaware corporation formed in 1998, is a leading supplier and manufacturer of building materials, manufactured components and construction services to professional homebuilders, sub-contractors, remodelers and consumers. The Company operates 400 locations in 39 states across the United States. In this quarterly report, references to the “Company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all recurring adjustments and normal accruals necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. Intercompany transactions are eliminated in consolidation.
The condensed consolidated balance sheet as of December 31, 2018 is derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. This condensed consolidated balance sheet as of December 31, 2018 and the unaudited condensed consolidated financial statements included herein should be read in conjunction with the more detailed audited consolidated financial statements for the year ended December 31, 2018 included in our most recent annual report on Form 10-K. Accounting policies used in the preparation of these unaudited condensed consolidated financial statements are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in our Form 10-K, except as noted below relating to the adoption of updated guidance under the Leases topic of the Accounting Standards Codification (“Codification”).
Recent Accounting Pronouncements
In June 2016, the FASB issued an update to existing guidance under the Investments topic of the Codification. This update introduces a new impairment model for financial assets, known as the current expected credit losses (“CECL”) model that is based on expected losses rather than incurred losses. The CECL model requires an entity to estimate credit losses on financial assets, including trade accounts receivable, based on historical information, current information and reasonable and supportable forecasts. Under this guidance companies will record an allowance through earnings for expected credit losses upon initial recognition of the financial asset. The aspects of this guidance applicable to us will be required to be adopted on a modified retrospective basis. This update is effective for public companies for annual and interim periods beginning after December 15, 2019, with early adoption permitted for annual and interim periods beginning after December 15, 2018. While we are still evaluating the impact of this guidance on our financial statements, we do not currently expect it to have a material impact.
In February 2016, the FASB issued an update to the existing guidance under the Leases topic of the Codification. Under the new guidance, lessees are now required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
We adopted this guidance on January 1, 2019 by applying the provisions of this guidance on a modified retrospective basis as of the effective date. As such, comparative periods have not been restated and the disclosures required under the new standard have not been provided for periods prior to January 1, 2019. We elected the package of practical expedients whereby we were not required to: i) reassess whether any expired or existing contracts are or contain leases, ii) reassess the lease classification of existing leases and iii) reassess initial direct costs for any existing leases. We did not elect the hindsight practical expedient or the practical expedient related to land easements. We have assessed and updated our business processes, systems and controls to ensure compliance with the recognition and disclosure requirements of the new standard.
Adoption of the new standard resulted in the recording of right-of-use assets and lease liabilities of $269.7 million and $267.5 million, respectively, as of January 1, 2019 to recognize operating leases, primarily related to real estate and rolling stock, which were not recognized on our balance sheet under previous guidance. Further, the adoption of this guidance had no impact to our remaining other finance obligations as they continue to fail to meet the sale-leaseback requirements of the new standard. The adoption of this guidance did not have a material impact on our condensed consolidated statement of operations and comprehensive income or on our condensed consolidated statement of cash flows as our leases retained their classifications as determined under previous guidance.
7
2. Revenue
The following table disaggregates our sales by product category (in thousands):
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Lumber & lumber sheet goods |
$ |
601,487 |
|
|
$ |
811,159 |
|
|
$ |
1,119,176 |
|
|
$ |
1,455,068 |
|
Manufactured products |
|
374,299 |
|
|
|
370,891 |
|
|
|
691,651 |
|
|
|
665,069 |
|
Windows, doors & millwork |
|
391,049 |
|
|
|
375,515 |
|
|
|
744,439 |
|
|
|
707,667 |
|
Gypsum, roofing & insulation |
|
138,388 |
|
|
|
141,273 |
|
|
|
259,307 |
|
|
|
254,149 |
|
Siding, metal & concrete products |
|
191,289 |
|
|
|
189,536 |
|
|
|
341,207 |
|
|
|
331,699 |
|
Other building products & services |
|
208,011 |
|
|
|
201,514 |
|
|
|
380,043 |
|
|
|
376,672 |
|
Net sales |
$ |
1,904,523 |
|
|
$ |
2,089,888 |
|
|
$ |
3,535,823 |
|
|
$ |
3,790,324 |
|
Information regarding disaggregation of sales by segment is discussed in Note 10 to the condensed consolidated financial statements. Sales related to contracts with service elements represents less than 10% of the Company’s net sales for each period presented.
The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, contract assets and contract liabilities. Contract asset balances were not significant as of June 30, 2019 or December 31, 2018. Contract liabilities consist of deferred revenue and customer advances and deposits. Contract liability balances are included in accrued liabilities on our consolidated balance sheet and were $49.6 million and $42.1 million as of June 30, 2019 and December 31, 2018, respectively.
3. Net Income per Common Share
Net income per common share (“EPS”) is calculated in accordance with the Earnings per Share topic of the Codification, which requires the presentation of basic and diluted EPS. Basic EPS is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common shares.
The table below presents the calculation of basic and diluted EPS (in thousands, except per share amounts):
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
$ |
66,604 |
|
|
$ |
56,622 |
|
|
$ |
102,312 |
|
|
$ |
79,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic |
|
115,757 |
|
|
|
114,636 |
|
|
|
115,592 |
|
|
|
114,365 |
|
Dilutive effect of options and RSUs |
|
1,162 |
|
|
|
2,057 |
|
|
|
1,134 |
|
|
|
2,330 |
|
Weighted average shares outstanding, diluted |
|
116,919 |
|
|
|
116,693 |
|
|
|
116,726 |
|
|
|
116,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.58 |
|
|
$ |
0.49 |
|
|
$ |
0.89 |
|
|
$ |
0.70 |
|
Diluted |
$ |
0.57 |
|
|
$ |
0.49 |
|
|
$ |
0.88 |
|
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive and contingent options and RSUs excluded from diluted EPS |
|
325 |
|
|
|
588 |
|
|
|
659 |
|
|
|
345 |
|
8
4. Debt
Long-term debt consisted of the following (in thousands):
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
2023 facility (1) |
$ |
73,000 |
|
|
$ |
179,000 |
|
2024 notes |
|
578,923 |
|
|
|
696,361 |
|
2024 term loan (2) |
|
157,075 |
|
|
|
458,250 |
|
2027 notes |
|
400,000 |
|
|
|
— |
|
Other finance obligations (Note 5) |
|
222,916 |
|
|
|
227,071 |
|
Finance lease obligations (Note 5) |
|
17,347 |
|
|
|
16,445 |
|
|
|
1,449,261 |
|
|
|
1,577,127 |
|
Unamortized debt discount and debt issuance costs |
|
(16,149 |
) |
|
|
(15,833 |
) |
|
|
1,433,112 |
|
|
|
1,561,294 |
|
Less: current maturities of long-term debt |
|
12,650 |
|
|
|
15,565 |
|
Long-term debt, net of current maturities |
$ |
1,420,462 |
|
|
$ |
1,545,729 |
|
(1) |
The weighted average interest rate was 4.4% and 3.9% as of June 30, 2019 and December 31, 2018, respectively. |
(2) |
The weighted average interest rate was 5.7% and 5.2% as of June 30, 2019 and December 31, 2018, respectively. |
2019 Debt Transactions
During the six months ended June 30, 2019, the Company executed several debt transactions which are described in more detail below. These transactions include: (i) open market purchases of our 5.625% senior secured notes due 2024 (“2024 notes”), (ii) extension of the maturity of our $900.0 million revolving credit facility (“2023 facility”) and (iii) privately negotiated purchases of our 2024 notes and a partial repayment of our senior secured term loan facility due 2024 (“2024 term loan”) with the proceeds from the issuance of 6.75% senior secured notes due 2027 (“2027 notes”). These transactions collectively have extended our debt maturity profile and reduced the amount of long-term debt outstanding.
2024 Note Repurchase Transactions
In the first quarter of 2019, the Company executed a series of open market purchases of its 2024 notes. These transactions resulted in $20.4 million in aggregate principal amount of the 2024 notes being repurchased at prices ranging from 94.9% to 95.9% of par value.
These repurchases of the 2024 notes were considered to be debt extinguishments. As such, we recognized a gain on debt extinguishment of $0.7 million which was recorded as a component of interest expense in the first quarter of 2019. Of this gain, approximately $0.9 million was attributable to the repurchase of the notes at a discount to par value which was partially offset by a $0.2 million write-off of unamortized debt issuance costs associated with the 2024 notes repurchased.
Revolving Credit Facility Amendment
In April 2019, the Company extended the maturity date of its 2023 facility by 20 months to November 22, 2023. All other material terms of the 2023 facility remain unchanged from those of the previous agreement.
In connection with the 2023 facility amendment we incurred $1.2 million in lender and third-party fees which, together with $5.9 million in remaining unamortized debt issuance costs, have been recorded as other assets and are being amortized over the remaining contractual life of the 2023 facility on a straight-line basis.
2019 Refinancing Transactions
In May 2019, we completed a private offering of $400.0 million in aggregate principal amount of 2027 notes at an issue price equal to 100% of their par value. The proceeds from the issuance of the 2027 notes were used, together with cash on hand, to purchase $97.0 million in aggregate principal amount of 2024 notes, to repay $300.0 million of the 2024 term loan and to pay related transaction fees and expenses.
9
In connection with the issuance of the 2027 notes, we incurred $6.1 million of various third-party fees and expenses. Of these costs, $2.1 million were recorded to interest expense in the second quarter of 2019. The remaining $4.0 million in costs incurred have been recorded as a reduction to long-term debt and are being amortized over the contractual life of the 2027 notes using the effective interest method. Further, we recorded an additional $2.2 million to interest expense in the second quarter of 2019 related to the write-off of unamortized debt discount and debt issuance costs in connection with the partial repayment of the 2024 term loan.
Senior Secured Notes due 2027
As of June 30, 2019, we have $400.0 million outstanding in aggregate principal amount of the 2027 notes which mature on June 1, 2027. Interest accrues on the 2027 notes at a rate of 6.75% per annum and is payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2019.
The terms of the 2027 notes are governed by the indenture, dated as of the May 30, 2019 (the “Indenture”), among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee and as notes collateral agent. The 2027 notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior secured basis, by certain of the Company’s direct and indirect wholly owned subsidiaries (the “Guarantors”). All obligations under the 2027 notes, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and the Guarantors subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute Notes Collateral (as defined below) and a second-priority security interest in such assets that constitute ABL Collateral (as defined below).
“ABL Collateral” includes substantially all presently owned and after-acquired accounts, inventory, rights of an unpaid vendor with respect to inventory, deposit accounts, investment property, cash and cash equivalents, and instruments and chattel paper and general intangibles, books and records and documents related to and proceeds of each of the foregoing. “Notes Collateral” includes all collateral which is not ABL Collateral.
The Indenture contains restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional debt or issue preferred stock, create liens, create restrictions on the Company’s subsidiaries’ ability to make payments to the Company, pay dividends and make other distributions in respect of the Company’s and its subsidiaries’ capital stock, make certain investments or certain other restricted payments, guarantee indebtedness, designate unrestricted subsidiaries, sell certain kinds of assets, enter into certain types of transactions with affiliates, and effect mergers and consolidations.
At any time prior to June 1, 2022, the Company may redeem the 2027 notes in whole or in part at a redemption price equal to 100% of the principal amount of the 2027 notes plus the “applicable premium” set forth in the Indenture. At any time on or after June 1, 2022, the Company may redeem the 2027 notes at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to the redemption date. At any time and from time to time during the 36-month period following the Closing Date, the Company may redeem up to 10% of the aggregate principal amount of the 2027 notes during each twelve-month period commencing on the Closing Date at a redemption price of 103% of the aggregate principal amount thereof plus accrued and unpaid interest to the redemption date. In addition, at any time prior to June 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 2027 notes with the net cash proceeds of one or more equity offerings, as described in the Indenture, at a price equal to 106.750% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. If the Company experiences certain change of control events, holders of the 2027 notes may require it to repurchase all or part of their 2027 notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.
Fair Value
As of June 30, 2019 and December 31, 2018, the Company does not have any financial instruments which are measured at fair value on a recurring basis. We have elected to report the value of our 2027 notes, 2024 notes, 2024 term loan and 2023 facility at amortized cost. The fair values of the 2027 notes, 2024 notes and the 2024 term loan at June 30, 2019 were approximately $423.4 million, $597.2 million and $156.8 million, respectively, and were determined using Level 2 inputs based on market prices. The carrying value of the 2023 facility at June 30, 2019 approximates fair value as the rates are comparable to those at which we could currently borrow under similar terms, are variable and incorporate a measure of our credit risk. As such, the fair value of the 2023 facility was also classified as Level 2 in the hierarchy.
We were not in violation of any covenants or restrictions imposed by any of our debt agreements at June 30, 2019.
10
5. Leases and Other Finance Obligations
We lease certain land, buildings, rolling stock and other types of equipment for use in our operations. These leases typically have initial terms ranging from one to 15 years. Many of our leases contain renewal options which are exercisable at our discretion. These renewal options generally have terms ranging from one to five years. We also lease certain properties from related parties, including current employees and non-affiliate stockholders. Leases with related parties are not significant as of or for the six months ended June 30, 2019 or 2018.
We determine if an arrangement is a lease at the inception of the arrangement. Lease liabilities are recognized based on the present value of lease payments over the lease term at the arrangement’s commencement date. Right-of-use assets are recognized based on the amount of the measurement of the lease liability adjusted for any lease payments made to the lessor at or before the commencement date, minus any lease incentives received and any initial direct costs incurred. Renewal options are included in the calculation of our right-of-use assets and lease liabilities when it is determined that they are reasonably certain of exercise based on an analysis of the relevant facts and circumstances. As the implicit rate of return of our lease agreements is usually not readily determinable, we generally use our incremental borrowing rate in determining the present value of lease payments. We determine our incremental borrowing rate based on information available to us at the lease commencement date. Certain of our lease arrangements contain lease and non-lease components. We have elected to account for non-lease components as a part of the related lease components for all of our leases. Leases with an initial term of 12 months or less are not recognized on our balance sheet. We recognize the expense for these leases on a straight-line basis over the lease term.
Certain of our leases are subject to variable lease payments based on various measures, such as rent escalations determined by percentage changes in the consumer price index. As these types of variable lease payments are determined on a basis other than an index or a rate, they are generally excluded from the calculation of lease liabilities and right-of-use assets and are expensed as incurred.
In addition, we have residual value guarantees on certain equipment leases. Under these leases, we have the option of (a) purchasing the equipment at the end of the lease term, (b) arranging for the sale of the equipment to a third party, or (c) returning the equipment to the lessor to sell the equipment. If the sales proceeds in any case are less than the residual value, we are required to reimburse the lessor for the deficiency up to a specified level as stated in each lease agreement. If the sales proceeds exceed the residual value, we are entitled to all of such excess amounts. The guarantees under these leases for the residual values of equipment at the end of the respective operating lease periods approximated $5.6 million as of June 30, 2019. Based upon the expectation that none of these leased assets will have a residual value at the end of the lease term that is materially less than the value specified in the related operating lease agreement or that we will purchase the equipment at the end of the lease term, we do not believe it is probable that we will be required to fund any amounts under the terms of these guarantee arrangements. Accordingly, these guarantees have not been recognized in the calculation of our right-of-use assets and lease liabilities. Our lease agreements do not impose any significant restrictions or covenants on us. As of June 30, 2019, we had no significant future lease payments related to leases which have been signed, but have not yet commenced.
Right-of-use assets and lease liabilities consisted of the following (in thousands):
|
June 30, 2019 |
|
|
Assets |
|
|
|
Operating lease right-of-use assets, net |
$ |
273,971 |
|
Finance lease right-of-use assets, net (included in property, plant and equipment, net) |
|
25,770 |
|
Total right-of-use assets |
$ |
299,741 |
|
Liabilities |
|
|
|
Current |
|
|
|
Current portion of operating lease liabilities |
$ |
60,576 |
|
Current portion of finance lease liabilities (included in current maturities of long-term debt) |
|
10,148 |
|
Noncurrent |
|
|
|
Noncurrent portion of operating lease liabilities |
$ |
218,001 |
|
Noncurrent portion of finance lease liabilities (included in long-term debt, net of current maturities) |
|
7,199 |
|
Total lease liabilities |
$ |
295,924 |
|
11
Total lease costs consisted of the following (in thousands):
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|||
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
2019 |
|
|||
Operating lease costs* |
|
|
|
|
|
|
|
|
|
$ |
21,195 |
|
|
$ |
42,102 |
|
|
Finance lease costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of finance lease right-of-use assets |
|
|
|
|
|
|
|
|
|
|
1,219 |
|
|
|
2,334 |
|
|
Interest on finance lease liabilities |
|
|
|
|
|
|
|
|
|
|
267 |
|
|
|
517 |
|
|
Variable lease costs |
|
|
|
|
|
|
|
|
|
|
4,049 |
|
|
|
8,081 |
|
|
Total lease costs |
|
|
|
|
|
|
|
|
|
$ |
26,730 |
|
|
$ |
53,034 |
|
* |
Includes short-term lease costs and sublease income which were not material for the three and six months ended June 30, 2019. |
Future maturities of lease liabilities as of June 30, 2019 were as follows (in thousands):
|
Finance Leases |
|
|
Operating Leases |
|
||
2019 (from July 1, 2019) |
$ |
6,054 |
|
|
$ |
39,393 |
|
2020 |
|
7,972 |
|
|
|
72,824 |
|
2021 |
|
3,811 |
|
|
|
62,087 |
|
2022 |
|
559 |
|
|
|
47,155 |
|
2023 |
|
— |
|
|
|
34,123 |
|
Thereafter |
|
— |
|
|
|
85,615 |
|
Total lease payments |
|
18,396 |
|
|
|
341,197 |
|
Less: amount representing interest |
|
(1,049 |
) |
|
|
(62,620 |
) |
Present value of lease liabilities |
|
17,347 |
|
|
|
278,577 |
|
Less: current portion |
|
(10,148 |
) |
|
|
(60,576 |
) |
Long-term lease liabilities, net of current portion |
$ |
7,199 |
|
|
$ |
218,001 |
|
Weighted average lease terms and discount rates as of June 30, 2019 were as follows:
Weighted average remaining lease term (years) |
|
|
|
Operating leases |
|
5.9 |
|
Finance leases |
|
1.9 |
|
Weighted average discount rate |
|
|
|
Operating leases |
|
6.9 |
% |
Finance leases |
|
5.9 |
% |
12
Future maturities of lease obligations as of December 31, 2018 were as follows (in thousands):
|
Capital Leases |
|
|
Operating Leases |
|
||
2019 |
$ |
10,784 |
|
|
$ |
77,297 |
|
2020 |
|
5,392 |
|
|
|
63,633 |
|
2021 |
|
1,242 |
|
|
|
51,804 |
|
2022 |
|
— |
|
|
|
37,054 |
|
2023 |
|
— |
|
|
|
23,327 |
|
Thereafter |
|
— |
|
|
|
57,000 |
|
Total minimum lease payments |
|
17,418 |
|
|
$ |
310,115 |
|
Less: amount representing interest |
|
(973 |
) |
|
|
|
|
Present value of lease liabilities |
|
16,445 |
|
|
|
|
|
Less: current portion |
|
(10,039 |
) |
|
|
|
|
Long-term lease liabilities, net of current portion |
$ |
6,406 |
|
|
|
|
|
The following table presents cash paid for amounts included in the measurement of lease liabilities as well supplemental noncash information (in thousands):
|
Six Months Ended June 30, |
|
|
|
2019 |
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
Operating cash flows from operating leases |
$ |
41,154 |
|
Operating cash flows from finance leases |
|
517 |
|
Financing cash flows from finance leases |
|
6,162 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
35,949 |
|
Right-of-use assets obtained in exchange for new finance lease liabilities |
|
7,036 |
|
Other Finance Obligations
In addition to the operating and finance lease arrangements described above, the Company is party to 140 individual property lease agreements with a single lessor as of June 30, 2019. These lease agreements have initial terms ranging from nine to 15 years (expiring through 2021) and renewal options in five-year increments providing for up to approximately 30-year total lease terms. A related agreement between the lessor and the Company gives the Company the right to acquire a limited number of the leased facilities at fair market value. These purchase rights represent a form of continuing involvement with these properties which precluded sale-leaseback accounting. As a result, the Company treats all of the properties that it leases from this lessor as a financing arrangement. The Company is also party to certain additional agreements with the same lessor which commit the Company to perform certain repair and maintenance obligations under the leases in a specified manner and timeframe.
We were deemed the owner of certain of our facilities during their construction period based on an evaluation made in accordance with the Leases topic of the Codification. Effectively, a sale and leaseback of these facilities occurred when construction was completed and the lease term began. These transactions did not qualify for sale-leaseback accounting. As a result, the Company treats the lease of these facilities as a financing arrangement.
As of June 30, 2019, other finance obligations consist of $222.9 million, with cash payments of $10.5 million for the six months ended June 30, 2019. These other finance obligations are included on the condensed consolidated balance sheet as part of long-term debt. The related assets are recorded as components of property, plant, and equipment on the condensed consolidated balance sheet.
13
Future maturities for other finance obligations as of June 30, 2019 were as follows (in thousands):
2019 (from July 1, 2019) |
|
$ |
9,116 |
|
2020 |
|
|
18,148 |
|
2021 |
|
|
17,784 |
|
2022 |
|
|
17,668 |
|
2023 |
|
|
17,677 |
|
Thereafter |
|
|
220,570 |
|
Total |
|
$ |
300,963 |
|
6. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
|
|
(In thousands) |
|
|||||
Land |
|
$ |
197,140 |
|
|
$ |
198,304 |
|
Buildings and improvements |
|
|
359,966 |
|
|
|
358,411 |
|
Machinery and equipment |
|
|
392,887 |
|
|
|
403,765 |
|
Furniture, fixtures and computer equipment |
|
|
84,509 |
|
|
|
78,910 |
|
Construction in progress |
|
|
28,609 |
|
|
|
20,810 |
|
Finance lease right-of-use assets |
|
|
28,046 |
|
|
|
— |
|
Property, plant and equipment |
|
|
1,091,157 |
|
|
|
1,060,200 |
|
Less: accumulated depreciation |
|
|
415,847 |
|
|
|
390,125 |
|
Property, plant and equipment, net |
|
$ |
675,310 |
|
|
$ |
670,075 |
|
Depreciation expense was $19.9 million and $18.6 million, of which $4.9 million and $4.8 million was included in cost of sales, for the three months ended June 30, 2019 and 2018, respectively. Depreciation expense was $39.7 million and $36.0 million, of which $9.8 million and $9.2 million was included in cost of sales, for the six months ended June 30, 2019 and 2018, respectively.
Included in property, plant and equipment are certain assets held under other finance obligations. These assets are recorded at the present value of the lease payments and include land, buildings and equipment. Amortization charges associated with assets held under other finance obligations are included in depreciation expense. The following balances held under other finance obligations are included on the accompanying consolidated balance sheet:
|
|
June 30, 2019 |
|
|
December 31, 2018* |
|
||
|
|
(In thousands) |
|
|||||
Land |
|
$ |
118,683 |
|
|
$ |
118,677 |
|
Buildings and improvements |
|
|
137,050 |
|
|
|
142,345 |
|
Machinery and equipment |
|
|
— |
|
|
|
27,188 |
|
Assets held under other finance obligations |
|
|
255,733 |
|
|
|
288,210 |
|
Less: accumulated amortization |
|
|
16,612 |
|
|
|
21,786 |
|
Assets held under other finance obligations, net |
|
$ |
239,121 |
|
|
$ |
266,424 |
|
* |
Totals as of December 31, 2018 included assets which, under previous guidance, were held under capital leases. As of June 30, 2019 these assets are now presented as finance lease right-of-use assets as reflected in the table above. |
7. Employee Stock-Based Compensation
Time Based Restricted Stock Unit Grants
In the first six months of 2019, our board of directors granted 745,000 RSUs to employees and eligible directors under our 2014 Incentive Plan for which vesting is based solely on continuous employment over the requisite service period. 618,000 of the RSUs vest at 33% per year at each anniversary of the grant date over the next three years, 73,000 of the RSUs cliff vest on the fourth
14
anniversary of the grant date and 54,000 of the RSUs cliff vest on the first anniversary of the grant date. The weighted average grant date fair value for these RSUs was $14.17 per unit, which was based on the closing stock price on the grant date.
Performance, Market and Service Condition Based Restricted Stock Unit Grants
In the first six months of 2019, our board of directors granted 397,000 RSUs to employees under our 2014 Incentive Plan, that cliff vest on the third anniversary of the grant date based on the Company’s level of achievement of performance goals relating to return on invested capital (“ROIC”) over a three-year period (“performance condition”) as well as continued employment during the performance period. The total number of shares of common stock that may be earned from the performance condition ranges from zero to 200% of the RSUs granted. The number of shares earned from the performance condition may be further increased by 10% or decreased by 10% based on the Company’s total shareholder return relative to a peer group during the performance period (“market condition”). The average grant date fair value for these RSUs, with consideration of the market condition, was $14.42 per unit, which was determined using the Monte Carlo simulation model using the following assumptions:
Expected volatility (company) |
38.3% |
|
Expected volatility (peer group median) |
33.2% |
|
Correlation between the company and peer group median |
0.5 |
|
Expected dividend yield |
0.0% |
|
Risk-free rate |
2.6% |
|
The expected volatilities and correlation are based on the historical daily returns of our common stock and the common stocks of the constituents of the Company’s peer group over the most recent period equal to the measurement period. The expected dividend yield is based on our history of not paying regular dividends in the past and our current intention to not pay regular dividends in the foreseeable future. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant and has a term equal to the measurement period.
8. Income Taxes
A reconciliation of the statutory federal income tax rate to our effective rate for continuing operations is provided below:
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Statutory federal income tax rate |
|
21.0 |
% |
|
|
21.0 |
% |
|
|
21.0 |
% |
|
|
21.0 |
% |
State income taxes, net of federal income tax |
|
4.4 |
|
|
|
5.1 |
|
|
|
4.4 |
|
|
|
5.1 |
|
Stock compensation windfall benefit |
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
(0.3 |
) |
|
|
(4.2 |
) |
Permanent differences and other |
|
(2.2 |
) |
|
|
(0.9 |
) |
|
|
(1.9 |
) |
|
|
(0.9 |
) |
|
|
22.8 |
% |
|
|
25.1 |
% |
|
|
23.2 |
% |
|
|
21.0 |
% |
We base our estimate of deferred tax assets and liabilities on current tax laws and rates. In certain cases, we also base our estimate on business plan forecasts and other expectations about future outcomes. Changes in existing tax laws or rates could affect our actual tax results, and future business results may affect the amount of our deferred tax liabilities or the valuation of our deferred tax assets over time. Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods, as well as the residential homebuilding industry’s cyclicality and sensitivity to changes in economic conditions, it is possible that actual results could differ from the estimates used in previous analyses.
Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position.
9. Commitments and Contingencies
As of June 30, 2019, we had outstanding letters of credit totaling $82.2 million under our 2023 facility that principally support our self-insurance programs.
The Company has a number of known and threatened construction defect legal claims. While these claims are generally covered under the Company’s existing insurance programs to the extent any loss exceeds the deductible, there is a reasonable possibility of loss that is not able to be estimated at this time because (i) many of the proceedings are in the discovery stage, (ii) the outcome of future litigation is uncertain, and/or (iii) the complex nature of the claims. Although the Company cannot estimate a
15
reasonable range of loss based on currently available information, the resolution of these matters could have a material adverse effect on the Company's financial position, results of operations or cash flows.
In addition, we are involved in various other claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of such claims and lawsuits. Although the ultimate disposition of these other proceedings cannot be predicted with certainty, management believes the outcome of any such claims that are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on our consolidated financial position, cash flows or results of operations. However, there can be no assurances that future adverse judgments and costs would not be material to our results of operations or liquidity for a particular period.
10. Segment Information
We offer an integrated solution to our customers providing manufacturing, supply, and installation of a full range of structural and related building products. We provide a wide variety of building products and services directly to homebuilder customers. We manufacture floor trusses, roof trusses, wall panels, stairs, millwork, windows, and doors. We also provide a full range of construction services. These product and service offerings are distributed across 400 locations operating in 39 states across the United States, which are organized into nine geographical regions. Centralized financial and operational oversight, including resource allocation and assessment of performance on an income before income taxes basis, is performed by our CEO, whom we have determined to be our chief operating decision maker (“CODM”).
The Company has nine operating segments aligned with its nine geographical regions (Regions 1 through 9). While all of our operating segments have products, distribution methods and customers of a similar nature, certain of our operating segments have been aggregated due to also containing similar economic characteristics, resulting in the following composition of reportable segments:
|
• |
Regions 1 and 2 have been aggregated to form the “Northeast” reportable segment |
|
• |
Regions 3 and 5 have been aggregated to form the “Southeast” reportable segment |
|
• |
Regions 4 and 6 have been aggregated to form the “South” reportable segment |
|
• |
Region 7, 8 and 9 have been aggregated to form the “West” reportable segment |
In addition to our reportable segments, our consolidated results include corporate overhead, other various operating activities that are not internally allocated to a geographical region nor separately reported as a single unit to the CODM, and certain reconciling items primarily related to allocations of corporate overhead and rent expense, which have collectively been presented as “All Other”. The accounting policies of the segments are consistent with those referenced in Note 1, except for noted reconciling items.
16
The following tables present Net sales, income before income taxes and certain other measures for the reportable segments, reconciled to total consolidated operations, for the periods indicated (in thousands):
|
|
Three months ended June 30, 2019 |
|
|||||||||||||
Reportable segments |
|
Net Sales |
|
|
Depreciation & Amortization |
|
|
Interest |
|
|
Income before income taxes |
|
||||
Northeast |
|
$ |
350,671 |
|
|
$ |
3,256 |
|
|
$ |
5,280 |
|
|
$ |
18,674 |
|
Southeast |
|
|
419,085 |
|
|
|
3,100 |
|
|
|
5,521 |
|
|
|
24,281 |
|
South |
|
|
476,577 |
|
|
|
4,914 |
|
|
|
5,859 |
|
|
|
29,117 |
|
West |
|
|
596,981 |
|
|
|
6,536 |
|
|
|
9,159 |
|
|
|
35,203 |
|
Total reportable segments |
|
|
1,843,314 |
|
|
|
17,806 |
|
|
|
25,819 |
|
|
|
107,275 |
|
All other |
|
|
61,209 |
|
|
|
6,008 |
|
|
|
3,563 |
|
|
|
(21,012 |
) |
Total consolidated |
|
$ |
1,904,523 |
|
|
$ |
23,814 |
|
|
$ |
29,382 |
|
|
$ |
86,263 |
|
|
|
Three months ended June 30, 2018 |
|
|||||||||||||
Reportable segments |
|
Net Sales |
|
|
Depreciation & Amortization |
|
|
Interest |
|
|
Income before income taxes |
|
||||
Northeast |
|
$ |
357,258 |
|
|
$ |
3,523 |
|
|
$ |
6,012 |
|
|
$ |
12,110 |
|
Southeast |
|
|
454,734 |
|
|
|
2,922 |
|
|
|
6,545 |
|
|
|
16,266 |
|
South |
|
|
538,168 |
|
|
|
5,326 |
|
|
|
6,740 |
|
|
|
23,435 |
|
West |
|
|
676,374 |
|
|
|
6,765 |
|
|
|
10,887 |
|
|
|
39,558 |
|
Total reportable segments |
|
|
2,026,534 |
|
|
|
18,536 |
|
|
|
30,184 |
|
|
|
91,369 |
|
All other |
|
|
63,354 |
|
|
|
6,232 |
|
|
|
(1,227 |
) |
|
|
(15,767 |
) |
Total consolidated |
|
$ |
2,089,888 |
|
|
$ |
24,768 |
|
|
$ |
28,957 |
|
|
$ |
75,602 |
|
|
|
Six months ended June 30, 2019 |
|
|||||||||||||
Reportable segments |
|
Net Sales |
|
|
Depreciation & Amortization |
|
|
Interest |
|
|
Income before income taxes |
|
||||
Northeast |
|
$ |
637,268 |
|
|
$ |
6,469 |
|
|
$ |
10,400 |
|
|
$ |
25,450 |
|
Southeast |
|
|
808,564 |
|
|
|
6,147 |
|
|
|
11,146 |
|
|
|
41,349 |
|
South |
|
|
937,656 |
|
|
|
9,773 |
|
|
|
11,795 |
|
|
|
58,259 |
|
West |
|
|
1,038,313 |
|
|
|
12,998 |
|
|
|
18,062 |
|
|
|
33,978 |
|
Total reportable segments |
|
|
3,421,801 |
|
|
|
35,387 |
|
|
|
51,403 |
|
|
|
159,036 |
|
All other |
|
|
114,022 |
|
|
|
12,003 |
|
|
|
2,880 |
|
|
|
(25,783 |
) |
Total consolidated |
|
$ |
3,535,823 |
|
|
$ |
47,390 |
|
|
$ |
54,283 |
|
|
$ |
133,253 |
|
|
|
Six months ended June 30, 2018 |
|
|||||||||||||
Reportable segments |
|
Net Sales |
|
|
Depreciation & Amortization |
|
|
Interest |
|
|
Income before income taxes |
|
||||
Northeast |
|
$ |
641,650 |
|
|
$ |
6,690 |
|
|
$ |
11,556 |
|
|
$ |
13,253 |
|
Southeast |
|
|
844,187 |
|
|
|
5,508 |
|
|
|
12,395 |
|
|
|
27,839 |
|
South |
|
|
1,006,615 |
|
|
|
10,188 |
|
|
|
12,689 |
|
|
|
43,466 |
|
West |
|
|
1,184,933 |
|
|
|
13,107 |
|
|
|
19,561 |
|
|
|
45,562 |
|
Total reportable segments |
|
|
3,677,385 |
|
|
|
35,493 |
|
|
|
56,201 |
|
|
|
130,120 |
|
All other |
|
|
112,939 |
|
|
|
12,094 |
|
|
|
(502 |
) |
|
|
(29,116 |
) |
Total consolidated |
|
$ |
3,790,324 |
|
|
$ |
47,587 |
|
|
$ |
55,699 |
|
|
$ |
101,004 |
|
Asset information by segment is not reported internally or otherwise reviewed by the CODM nor does the Company earn revenues or have long-lived assets located in foreign countries.
17
11. Related Party Transactions
Certain members of the Company’s board of directors also serve on the board of directors of one of our suppliers, PGT, Inc. Further, the Company has entered into certain leases of land and buildings with certain employees or non-affiliate stockholders. Activity associated with these related party transactions was not significant as of or for the six months ended June 30, 2019 or 2018.
Transactions between the Company and other related parties occur in the ordinary course of business. However, the Company carefully monitors and assesses related party relationships. Management does not believe that any of these transactions with related parties had a material impact on the Company’s results for the six months ended June 30, 2019 or 2018.
12. Subsequent Events
Acquisition
In July 2019, we acquired certain assets and the operations of Sun State Components (“Sun State”) for $42.9 million in cash, subject to certain adjustments. Sun State is comprised of three truss companies, which are located in Las Vegas, Nevada; Surprise, Arizona; and Kingman, Arizona. Sun State manufactures roof trusses and floor trusses and distributes lumber and related products to residential homebuilders and commercial contractors.
The accounting for this acquisition has not been completed at the date of this filing given the proximity to the acquisition date. The acquisition will be accounted for by the acquisition method, and accordingly the results of operations will be included in the Company’s consolidated financial statements from the acquisition date. The purchase price will be allocated to the net assets acquired based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill.
Debt Transactions
In July 2019, we completed a private offering of an additional $75.0 million in aggregate principal amount of 2027 notes at an issue price of 104.5% of their par value. The proceeds from this offering were used to redeem an additional $75.0 million in aggregate principal amount of our 2024 notes at a price of 103.0% of their face value and to pay the related transaction fees and expenses.
Common Stock Repurchases
In February 2019, the Company announced that our board of directors has authorized the repurchase of up to $20.0 million of our common stock. From July 1, 2019 through July 31, 2019, the Company repurchased 360,000 shares of our common stock, at an average price of $16.88 per share, for $6.1 million pursuant to this repurchase plan.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year ended December 31, 2018 included in our most recent annual report on Form 10-K. The following discussion and analysis should also be read in conjunction with the unaudited condensed consolidated financial statements appearing elsewhere in this report. In this quarterly report on Form 10-Q, references to the “company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.
Cautionary Statement
Statements in this report and the schedules hereto that are not purely historical facts or that necessarily depend upon future events, including statements about expected market share gains, forecasted financial performance or other statements about anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements. In addition, oral statements made by our directors, officers and employees to the investor and analyst communities, media representatives and others, depending upon their nature, may also constitute forward-looking statements. As with the forward-looking statements included in this report, these forward-looking statements are by nature inherently uncertain, and actual results may differ materially as a result of many factors. All forward-looking statements are based upon information available to Builders FirstSource, Inc. on the date this report was submitted. Builders FirstSource, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks or uncertainties related to the Company’s growth strategies, including gaining market share, or the Company’s revenues and operating results being highly dependent on, among other things, the homebuilding industry, lumber prices and the economy. Builders FirstSource, Inc. may not succeed in addressing these and other risks. Further information regarding factors that could affect our financial and other results can be found in the risk factors section of Builders FirstSource, Inc.’s most recent annual report on Form 10-K filed with the Securities and Exchange Commission. Consequently, all forward-looking statements in this report are qualified by the factors, risks and uncertainties contained therein.
COMPANY OVERVIEW
We are a leading supplier and manufacturer of building materials, manufactured components and construction services to professional contractors, sub-contractors and consumers. The Company operates 400 locations in 39 states across the United States. Given the span and depth of our geographical reach, our locations are organized into nine geographical regions (Regions 1 through 9), which are also our operating segments, and these are further aggregated into four reportable segments: Northeast, Southeast, South and West. All of our segments have similar customers, products and services, and distribution methods. Our financial statements contain additional information regarding segment performance which is discussed in Note 10 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.
We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, vinyl windows, custom millwork and trim, as well as engineered wood that we design, cut, and assemble for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods and various window, door and millwork lines. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.
We group our building products into six product categories:
|
• |
Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing. |
|
• |
Manufactured Products. Manufactured products consist of wood floor and roof trusses, steel roof trusses, wall panels, stairs, and engineered wood. |
|
• |
Windows, Door & Millwork. Windows & doors are comprised of the manufacturing, assembly, and distribution of windows and the assembly and distribution of interior and exterior door units. Millwork includes interior trim and custom features that we manufacture under the Synboard ® brand name. |
|
• |
Gypsum, Roofing & Insulation. Gypsum, roofing, & insulation include wallboard, ceilings, joint treatment and finishes. |
19
|
• |
Siding, Metal, and Concrete. Siding, metal, and concrete includes vinyl, composite, and wood siding, exterior trim, other exteriors, metal studs and cement. |
|
• |
Other Building Products & Services. Other building products & services are comprised of products such as cabinets and hardware as well as services such as turn-key framing, shell construction, design assistance, and professional installation spanning the majority of our product categories. |
Our operating results are dependent on the following trends, events and uncertainties, some of which are beyond our control:
|
• |
Homebuilding Industry. Our business is driven primarily by the residential new construction market and the residential repair and remodel market, which are in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, housing affordability, household formation, the availability of skilled construction labor, and the health of the economy and mortgage markets. According to the U.S. Census Bureau, the seasonally adjusted annualized rates for U.S. total housing starts and U.S. single-family housing starts were 1.3 million and 0.8 million, respectively, as of June 30, 2019. However, both total and single-family housing starts remain below the normalized historical annual averages (from 1959 through 2018) of 1.5 million and 1.1 million, respectively. Due to the lower levels in housing starts versus historical norms, increased competition for homebuilder business and cyclical fluctuations in commodity prices, we may experience pressure on our gross margins. In addition to these factors, there has been a trend of consolidation within the building products supply industry. However, our industry remains highly fragmented and competitive and we will continue to face significant competition from local and regional suppliers. We still believe there are several meaningful trends that indicate U.S. housing demand will continue to trend towards recovering to the historical average. These trends include relatively low interest rates, the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate. While the rate of market growth has recently eased, industry forecasters, including the National Association of Homebuilders (“NAHB”), expect to see continued increases in housing demand over the next few years. |
|
• |
Targeting Large Production Homebuilders. In recent years, the homebuilding industry has undergone consolidation, and the larger homebuilders have increased their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we are facing in servicing large homebuilders with certain profitability expectations. Additionally, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards. |
|
• |
Repair and remodel end market. Although the repair and remodel end market is influenced by housing starts to a lesser degree than the homebuilding market, the repair and remodel end market is still dependent upon some of the same factors as the homebuilding market, including demographic trends, interest rates, consumer confidence, employment rates and the health of the economy and home financing markets. We expect that our ability to remain competitive in this space will depend on our continued ability to provide a high level of customer service coupled with a broad product offering. |
|
• |
Use of Prefabricated Components. Homebuilders are increasingly using prefabricated components in order to realize increased efficiency, overcome skilled construction labor shortages and improve quality. Shortening cycle time from start to completion is a key imperative of the homebuilders during periods of strong consumer demand. We see the demand for prefabricated components increasing as the residential new construction market continues to strengthen and the availability of skilled construction labor remains limited. |
|
• |
Economic Conditions. Economic changes both nationally and locally in our markets impact our financial performance. The building products supply industry is highly dependent upon new home construction and subject to cyclical market changes. Our operations are subject to fluctuations arising from changes in supply and demand, national and local economic conditions, labor costs and availability, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, housing starts, the high cost of land development, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. |
|
• |
Housing Affordability. The affordability of housing can be a key driver in demand for our products. Home affordability is influenced by a number of economic factors, such as the level of employment, consumer confidence, consumer income, supply of houses, the availability of financing and interest rates. Changes in the inventory of available homes as well as economic factors relative to home prices could result in changes to the affordability of homes. As a result, homebuyer demand may shift towards smaller, or larger, homes creating fluctuations in demand for our products. |
20
|
• |
Cost of Materials. Prices of wood products, which are subject to cyclical market fluctuations, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production inputs for our manufactured and prefabricated products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are oftentimes passed on to our customers, but our pricing quotation periods may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products. Our inability to pass on material price increases to our customers could adversely impact our operating results. |
|
• |
Controlling Expenses. Another important aspect of our strategy is controlling costs and striving to be the low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs. |
|
• |
Multi-Family and Light Commercial Business. Our primary focus has been, and continues to be, on single-family residential new construction and the repair and remodel end market. However, we will continue to identify opportunities for profitable growth in the multi-family and light commercial markets. |
|
• |
Capital Structure: As a result of our historical growth through acquisitions, we have substantial indebtedness. We strive to optimize our capital structure to ensure that our financial needs are met in light of economic conditions, business activities, organic investments, opportunities for growth through acquisition and the overall risk characteristics of our underlying assets. In addition to these factors, we also evaluate our capital structure on the basis of our leverage ratio, our liquidity position, our debt maturity profile and market interest rates. As such, we may enter into various debt or equity transactions in order to appropriately manage and optimize our capital structure. |
RECENT DEVELOPMENTS
During the six months ended June 30. 2019, the Company executed several debt transactions, including extending the maturity of our $900.0 million revolving credit facility (“2023 facility”), redemption of $117.4 million in aggregate principal amount of our 5.625% senior secured notes due 2024 (“2024 notes”), and repayment of $301.2 million of our senior secured term loan facility due 2024 (“2024 term loan”). The repayments of our 2024 notes and 2024 term loan were funded with the proceeds from the issuance of $400.0 million in aggregate principal amount of our 6.75% senior secured notes due 2027 (“2027 notes”) and cash on hand. Further, in July 2019, we redeemed an additional $75.0 million in aggregate principal amount of our 2024 notes using the proceeds from the issuance of an additional $75.0 million in aggregate principal amount of our 2027 notes. Collectively, these transactions have extended our debt maturity profile and reduced the amount of long-term debt outstanding.
In February 2019, the Company announced that our board of directors has authorized the repurchase of up to $20.0 million of our common stock. From July 1, 2019 through July 31, 2019, the Company repurchased 360,000 shares of our common stock, at an average price of $16.88 per share, for $6.1 million pursuant to this repurchase plan.
These transactions are described in Notes 4 and 12 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call our notes, repay debt, repurchase shares of our common stock or otherwise enter into transactions regarding its capital structure.
In July 2019, we acquired certain assets and the operations of Sun State Components (“Sun State”) for $42.9 million in cash, subject to certain adjustments. Sun State is comprised of three truss companies, which are located in Las Vegas, Nevada; Surprise, Arizona; and Kingman, Arizona. Sun State manufactures roof trusses and floor trusses and distributes lumber and related products to residential homebuilders and commercial contractors.
CURRENT OPERATING CONDITIONS AND OUTLOOK
For the second quarter of 2019, actual U.S. total housing starts were 0.4 million, a 0.2% decrease compared to the second quarter of 2018. Actual U.S. single-family starts were 0.2 million in the second quarter of 2019, a 6.2% decrease compared to the same quarter a year ago. For the six months ended June 30, 2019 actual U.S. total housing starts were 0.6 million, a 3.7% decrease compared to the six months ended June 30, 2018. Actual U.S. single-family starts were 0.4 million in the first six months of 2019, a 4.9% decrease compared to the same period a year ago. A composite of third party sources, including the NAHB, are forecasting 1.3 million U.S. total housing starts for the full year 2019, an increase of 1.2% from 2018, and 0.9 million U.S single family housing starts, a decrease of 0.4% from 2018. In addition, in its March 2019 semi-annual forecast, the Home Improvement Research Institute (“HIRI”) forecasted sales in the professional repair and remodel end market to increase approximately 6.0% in 2019 compared to 2018.
21
Our net sales for the second quarter of 2019 decreased 8.9% from the same period last year. Commodity price deflation decreased our sales in the second quarter of 2019 by 11.3%. Excluding the impact of commodity price deflation, we achieved 2.4% sales growth in the second quarter of 2019. Our single-family and multi-family segments grew primarily as a result of sales volume growth in our manufactured products and windows, doors & millwork categories. However, sales growth in the single-family and multi-family segments was partially offset by a decline in the repair and remodel/other end market in the second quarter of 2019. Our gross margin percentage increased by 3.5% during the second quarter of 2019 compared to the second quarter of 2018. This increase in gross margin percentage was primarily attributable to an improved product mix, the decline in the cost of commodities relative to our customer pricing commitments and continued pricing discipline. In addition, sales growth in our value-add higher margin product categories, primarily our manufactured products and windows, doors & millwork categories, contributed to increased gross profit dollars and percentage compared to the second quarter of 2018. Our selling, general and administrative expenses, as a percentage of net sales, were 21.1% in the second quarter of 2019, a 2.4% increase from 18.7% in the second quarter of 2018. This increase was largely due to the effects of commodity price deflation on our net sales and an increase in variable compensation related to our increased gross margin in the second quarter of 2019 over the second quarter of 2018.
We believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics. We feel we are well-positioned to take advantage of the construction activity in our markets and to increase our market share, which may include strategic acquisitions. We will continue to focus on working capital by closely monitoring the credit exposure of our customers, remaining focused on maintaining the right level of inventory and by working with our vendors to improve payment terms and pricing on our products. We strive to achieve the appropriate balance of short-term expense control while maintaining the expertise and capacity to grow the business as market conditions improve. In addition, optimization of our capital structure will continue to be a key area of focus for the Company.
SEASONALITY AND OTHER FACTORS
Our first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather causing reduced construction activity during these quarters. In addition, quarterly results historically have reflected, and are expected to continue to reflect, fluctuations from period to period arising from the following:
|
• |
The volatility of lumber prices; |
|
• |
The cyclical nature of the homebuilding industry; |
|
• |
General economic conditions in the markets in which we compete; |
|
• |
The pricing policies of our competitors; |
|
• |
The production schedules of our customers; and |
|
• |
The effects of weather. |
The composition and level of working capital typically change during periods of increasing sales as we carry more inventory and receivables. Working capital levels typically increase in the first and second quarters of the year due to higher sales during the peak residential construction season. These increases may result in negative operating cash flows during this peak season, which historically have been financed through available cash and borrowing availability under credit facilities. Generally, collection of receivables and reduction in inventory levels following the peak building and construction season positively impact cash flow.
22
RESULTS OF OPERATIONS
The following table sets forth, for the three and six months ended June 30, 2019 and 2018, the percentage relationship to net sales of certain costs, expenses and income items:
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Net sales |
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
72.8 |
% |
|
|
76.3 |
% |
|
|
72.9 |
% |
|
|
76.1 |
% |
Gross margin |
|
27.2 |
% |
|
|
23.7 |
% |
|
|
27.1 |
% |
|
|
23.9 |
% |
Selling, general and administrative expenses |
|
21.1 |
% |
|
|
18.7 |
% |
|
|
21.8 |
% |
|
|
19.8 |
% |
Income from operations |
|
6.1 |
% |
|
|
5.0 |
% |
|
|
5.3 |
% |
|
|
4.1 |
% |
Interest expense, net |
|
1.6 |
% |
|
|
1.4 |
% |
|
|
1.5 |
% |
|
|
1.5 |
% |
Income tax expense |
|
1.0 |
% |
|
|
0.9 |
% |
|
|
0.9 |
% |
|
|
0.5 |
% |
Net income |
|
3.5 |
% |
|
|
2.7 |
% |
|
|
2.9 |
% |
|
|
2.1 |
% |
Three Months Ended June 30, 2019 Compared with the Three Months Ended June 30, 2018
Net Sales. Net sales for the three months ended June 30, 2019 were $1,904.5 million, an 8.9% decrease from net sales of $2,089.9 million for the three months ended June 30, 2018. Commodity price deflation decreased our sales in the second quarter of 2019 by 11.3%. Excluding the impact of commodity price deflation, we achieved 2.4% sales growth in the second quarter of 2019. Our single-family and multi-family segments grew primarily as a result of sales volume growth in our manufactured products and windows, doors & millwork categories. However, sales growth in the single-family and multi-family segments was partially offset by a decline in the repair and remodel/other end market in the second quarter of 2019.
The following table shows net sales classified by product category (dollars in millions):
|
Three Months Ended June 30, |
|
|
|
|
||||||||||||||
|
2019 |
|
|
2018 |
|
|
|
|
|||||||||||
|
Net Sales |
|
|
% of Net Sales |
|
|
Net Sales |
|
|
% of Net Sales |
|
|
% Change |
|
|||||
Lumber & lumber sheet goods |
$ |
601.5 |
|
|
|
31.6 |
% |
|
$ |
811.2 |
|
|
|
38.8 |
% |
|
|
(25.8 |
)% |
Manufactured products |
|
374.3 |
|
|
|
19.7 |
% |
|
|
370.9 |
|
|
|
17.7 |
% |
|
|
0.9 |
% |
Windows, doors & millwork |
|
391.0 |
|
|
|
20.5 |
% |
|
|
375.5 |
|
|
|
18.0 |
% |
|
|
4.1 |
% |
Gypsum, roofing & insulation |
|
138.4 |
|
|
|
7.3 |
% |
|
|
141.3 |
|
|
|
6.8 |
% |
|
|
(2.0 |
)% |
Siding, metal & concrete products |
|
191.3 |
|
|
|
10.0 |
% |
|
|
189.5 |
|
|
|
9.1 |
% |
|
|
0.9 |
% |
Other building products & services |
|
208.0 |
|
|
|
10.9 |
% |
|
|
201.5 |
|
|
|
9.6 |
% |
|
|
3.2 |
% |
Net sales |
$ |
1,904.5 |
|
|
|
100.0 |
% |
|
$ |
2,089.9 |
|
|
|
100.0 |
% |
|
|
(8.9 |
)% |
The decrease in net sales in our lumber and lumber sheet goods categories resulted from the impact of commodity price deflation in the second quarter of 2019 compared to the prior year. We achieved increased sales in our remaining product categories, other than gypsum, roofing and insulation, due to higher sales volume.
Gross Margin. Gross margin increased $20.8 million to $517.2 million. Our gross margin percentage increased to 27.2% in the second quarter of 2019 from 23.7% in the second quarter of 2018, a 3.5% increase. Our gross margin percentage increase was primarily attributable to an improved product mix, the decline in the cost of commodities relative to our customer pricing commitments and continued pricing discipline. In addition, sales growth in our value-add higher margin product categories, primarily our manufactured products and windows, doors & millwork categories, contributed to increased gross profit dollars and percentage compared to the second quarter of 2018.
Selling, General and Administrative Expenses. In the second quarter of 2019, selling, general and administrative expenses increased $9.7 million, or 2.5% and as a percentage of sales increased to 21.1% from 18.7% in the second quarter of 2018. This increase was primarily due to increases in variable compensation, including commissions and incentives, related to our increased gross margin. The increase as a percentage of net sales was also attributable to the effect of commodity price deflation on our net sales.
23
Interest Expense, Net. Interest expense was $29.4 million in the second quarter of 2019, an increase of $0.4 million from the second quarter of 2018. Interest expense for the second quarter of 2019 includes $4.3 million in one-time charges related to the debt financing transactions executed in that period. However, these one-time charges and the effect of higher interest rates were mostly offset by reduced interest expense attributable to lower outstanding debt balances in the second quarter of 2019 compared to the second quarter of 2018.
Income Tax Expense. We recorded income tax expense of $19.7 million and $19.0 million in the second quarters of 2019 and 2018, respectively. Our effective tax rate was 22.8% and 25.1% in the second quarters of 2019 and 2018, respectively.
Six Months Ended June 30, 2019 Compared with the Six Months Ended June 30, 2018
Net Sales. Net sales for the six months ended June 30, 2019 were $3,535.8 million, a 6.7% decrease over net sales of $3,790.3 million for the six months ended June 30, 2018. Commodity price deflation decreased our sales in the first six months of 2019 by 10.4%, while one less selling day decreased sales by 0.7%. Excluding the impact of commodity price deflation and the impact of one less selling day, we achieved 4.4% sales growth in the single-family, multi-family and repair and remodel/other end markets primarily as a result of sales volume growth in our manufactured products and windows, doors & millwork categories.
The following table shows net sales classified by product category (dollars in millions):
|
Six Months Ended June 30, |
|
|
|
|
||||||||||||||
|
2019 |
|
|
2018 |
|
|
|
|
|||||||||||
|
Net Sales |
|
|
% of Net Sales |
|
|
Net Sales |
|
|
% of Net Sales |
|
|
% Change |
|
|||||
Lumber & lumber sheet goods |
$ |
1,119.2 |
|
|
|
31.7 |
% |
|
$ |
1,455.0 |
|
|
|
38.4 |
% |
|
|
(23.1 |
)% |
Manufactured products |
|
691.7 |
|
|
|
19.6 |
% |
|
|
665.1 |
|
|
|
17.5 |
% |
|
|
4.0 |
% |
Windows, doors & millwork |
|
744.4 |
|
|
|
21.1 |
% |
|
|
707.7 |
|
|
|
18.7 |
% |
|
|
5.2 |
% |
Gypsum, roofing & insulation |
|
259.3 |
|
|
|
7.3 |
% |
|
|
254.1 |
|
|
|
6.7 |
% |
|
|
2.0 |
% |
Siding, metal & concrete products |
|
341.2 |
|
|
|
9.6 |
% |
|
|
331.7 |
|
|
|
8.8 |
% |
|
|
2.9 |
% |
Other building products & services |
|
380.0 |
|
|
|
10.7 |
% |
|
|
376.7 |
|
|
|
9.9 |
% |
|
|
0.9 |
% |
Net sales |
$ |
3,535.8 |
|
|
|
100.0 |
% |
|
$ |
3,790.3 |
|
|
|
100.0 |
% |
|
|
(6.7 |
)% |
The decrease in net sales in our lumber and lumber sheet goods categories resulted from the impact of commodity price deflation in the first six months of 2019 compared to the prior year. We achieved increased sales in our remaining product categories due to higher sales volume.
Gross Margin. Gross margin increased $51.8 million to $959.1 million. Our gross margin percentage increased to 27.1% in the first six months of 2019 from 23.9% in the first six months of 2018, a 3.2% increase. Our gross margin percentage increase was primarily attributable to an improved product mix, the decline in the cost of commodities relative to our customer pricing commitments and continued pricing discipline. In addition, sales growth in our value-add higher margin product categories, primarily our manufactured products and windows, doors & millwork categories, contributed to increased gross profit dollars and percentage compared to the six months ended June 30, 2018.
Selling, General and Administrative Expenses. For the six months ended June 30, 2019, selling, general and administrative expenses increased $20.9 million, or 2.8% and as a percentage of sales increased to 21.8% from 19.8% in the first six months of 2018. This increase was primarily due to increases in variable compensation, including commissions and incentives, related to our increased gross margin as well as an increase in insurance costs. The increase as a percentage of net sales was also attributable to the effect of commodity price deflation on our net sales.
Interest Expense, Net. Interest expense was $54.3 million for the six months ended June 30, 2019, a decrease of $1.4 million compared to the six months ended June 30, 2018. This decrease in interest expense is primarily due to lower outstanding debt balances during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. However, this decrease was partially offset by $3.6 million in one-time charges related to the debt financing transactions executed in the first six months of 2019 as well as the effect of higher interest rates.
Income Tax Expense. We recorded income tax expense of $30.9 million and $21.2 million for the six months ended June 30, 2019 and 2018, respectively. Our effective tax rate was 23.2% and 21.0% in the first six months of 2019 and 2018, respectively.
24
Results by Reportable Segment
The following tables show net sales and income before income taxes by reportable segment excluding the “All Other” caption as shown in Note 10 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q (dollars in thousands):
|
|
Three months ended June 30, |
|
|||||||||||||||||||||||||||||||||||||
|
|
Net sales |
|
|
Income before income taxes |
|
||||||||||||||||||||||||||||||||||
|
|
2019 |
|
|
% of net sales |
|
|
2018 |
|
|
% of net sales |
|
|
% change |
|
|
2019 |
|
|
% of net sales |
|
|
2018 |
|
|
% of net sales |
|
|
% change |
|
||||||||||
Northeast |
|
$ |
350,671 |
|
|
|
19.0 |
% |
|
$ |
357,258 |
|
|
|
17.6 |
% |
|
|
(1.8 |
)% |
|
$ |
18,674 |
|
|
|
5.3 |
% |
|
$ |
12,110 |
|
|
|
3.4 |
% |
|
|
54.2 |
% |
Southeast |
|
|
419,085 |
|
|
|
22.7 |
% |
|
|
454,734 |
|
|
|
22.4 |
% |
|
|
(7.8 |
)% |
|
|
24,281 |
|
|
|
5.8 |
% |
|
|
16,266 |
|
|
|
3.6 |
% |
|
|
49.3 |
% |
South |
|
|
476,577 |
|
|
|
25.9 |
% |
|
|
538,168 |
|
|
|
26.6 |
% |
|
|
(11.4 |
)% |
|
|
29,117 |
|
|
|
6.1 |
% |
|
|
23,435 |
|
|
|
4.4 |
% |
|
|
24.2 |
% |
West |
|
|
596,981 |
|
|
|
32.4 |
% |
|
|
676,374 |
|
|
|
33.4 |
% |
|
|
(11.7 |
)% |
|
|
35,203 |
|
|
|
5.9 |
% |
|
|
39,558 |
|
|
|
5.8 |
% |
|
|
(11.0 |
)% |
|
|
$ |
1,843,314 |
|
|
|
100.0 |
% |
|
$ |
2,026,534 |
|
|
|
100.0 |
% |
|
|
|
|
|
$ |
107,275 |
|
|
|
5.8 |
% |
|
$ |
91,369 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
Six months ended June 30, |
|
|||||||||||||||||||||||||||||||||||||
|
|
Net sales |
|
|
Income before income taxes |
|
||||||||||||||||||||||||||||||||||
|
|
2019 |
|
|
% of net sales |
|
|
2018 |
|
|
% of net sales |
|
|
% change |
|
|
2019 |
|
|
% of net sales |
|
|
2018 |
|
|
% of net sales |
|
|
% change |
|
||||||||||
Northeast |
|
$ |
637,268 |
|
|
|
18.6 |
% |
|
$ |
641,650 |
|
|
|
17.4 |
% |
|
|
(0.7 |
)% |
|
$ |
25,450 |
|
|
|
4.0 |
% |
|
$ |
13,253 |
|
|
|
2.1 |
% |
|
|
92.0 |
% |
Southeast |
|
|
808,564 |
|
|
|
23.7 |
% |
|
|
844,187 |
|
|
|
23.0 |
% |
|
|
(4.2 |
)% |
|
|
41,349 |
|
|
|
5.1 |
% |
|
|
27,839 |
|
|
|
3.3 |
% |
|
|
48.5 |
% |
South |
|
|
937,656 |
|
|
|
27.4 |
% |
|
|
1,006,615 |
|
|
|
27.4 |
% |
|
|
(6.9 |
)% |
|
|
58,259 |
|
|
|
6.2 |
% |
|
|
43,466 |
|
|
|
4.3 |
% |
|
|
34.0 |
% |
West |
|
|
1,038,313 |
|
|
|
30.3 |
% |
|
|
1,184,933 |
|
|
|
32.2 |
% |
|
|
(12.4 |
)% |
|
|
33,978 |
|
|
|
3.3 |
% |
|
|
45,562 |
|
|
|
3.8 |
% |
|
|
(25.4 |
)% |
|
|
$ |
3,421,801 |
|
|
|
100.0 |
% |
|
$ |
3,677,385 |
|
|
|
100.0 |
% |
|
|
|
|
|
$ |
159,036 |
|
|
|
4.6 |
% |
|
$ |
130,120 |
|
|
|
3.5 |
% |
|
|
|
|
We have four reportable segments based on an aggregation of the geographic regions in which we operate. While there is some geographic similarity between our reportable segments and the regions as defined by the U.S. Census Bureau, our reportable segments do not necessarily fully align with any single U.S. Census Bureau region.
According to the U.S. Census Bureau, actual single-family housing starts in the second quarter of 2019 decreased 19.8%, 6.2%, 3.5% and 8.0% in the Northeast, Midwest, South and West regions, respectively, compared to the second quarter of 2018. For the second quarter of 2019, our net sales declined in all of our reportable segments primarily due to the impact of commodity price deflation in the second quarter of 2019 compared to the second quarter of 2018. We achieved increased profitability in our Northeast, Southeast and South reportable segments largely due to the decline in the cost of commodities relative to our customer pricing commitments as well as continued pricing discipline and growth in value-added products. However, profitability declined in our West reportable segment largely due to the impact of commodity price deflation offsetting the improvement in gross margin percentage.
According to the U.S. Census Bureau, actual single-family housing starts in the first six months of 2019 decreased 13.5%, 8.3% and 13.4% in the Northeast, Midwest and West regions, respectively, compared to the first six months of 2018. However, single-family housing starts increased 1.0% in the South region over the same period. For the six months ended June 30, 2019, our net sales declined in all of our reportable segments primarily due to the impact of commodity price deflation in the first six months of 2019 compared to the first six months of 2018. We achieved increased profitability in our Northeast, Southeast and South reportable segments largely due to the decline in the cost of commodities relative to our customer pricing commitments as well as continued pricing discipline and growth in value-added products. However, profitability declined in our West reportable segment largely due the impact of commodity price deflation offsetting the improvement in gross margin percentage.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and to fund capital expenditures and potential future acquisitions. Our capital resources at June 30, 2019 consist of cash on hand and borrowing availability under our 2023 facility.
Our 2023 facility will be primarily used for working capital, general corporate purposes, and funding acquisitions. In addition, we may use the 2023 facility to facilitate debt consolidation. Availability under the 2023 facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables which include progress billings and credit card receivables, and qualified cash that all meet specific criteria contained within the credit agreement, minus agent specified reserves. Net excess borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and letters of credit.
25
The following table shows our borrowing base and excess availability as of June 30, 2019 and December 31, 2018 (in millions):
|
As of |
|
|||||
|
June 30, 2019 |
|
|
December 31, 2018 |
|
||
Accounts Receivable Availability |
$ |
483.3 |
|
|
$ |
431.9 |
|
Inventory Availability |
|
409.5 |
|
|
|
395.4 |
|
Other Receivables Availability |
|
29.6 |
|
|
|
18.8 |
|
Gross Availability |
|
922.4 |
|
|
|
846.1 |
|
Less: |
|
|
|
|
|
|
|
Agent Reserves |
|
(23.4 |
) |
|
|
(25.5 |
) |
Plus: |
|
|
|
|
|
|
|
Cash in Qualified Accounts |
|
9.4 |
|
|
|
26.0 |
|
Borrowing Base |
|
908.4 |
|
|
|
846.6 |
|
Aggregate Revolving Commitments |
|
900.0 |
|
|
|
900.0 |
|
Maximum Borrowing Amount (lesser of Borrowing Base and Aggregate Revolving Commitments) |
|
900.0 |
|
|
|
846.6 |
|
Less: |
|
|
|
|
|
|
|
Outstanding Borrowings |
|
(73.0 |
) |
|
|
(179.0 |
) |
Letters of Credit |
|
(82.2 |
) |
|
|
(82.2 |
) |
Net Excess Borrowing Availability on Revolving Facility |
$ |
744.8 |
|
|
$ |
585.4 |
|
As of June 30, 2019, we had $73.0 million in outstanding borrowings under our 2023 facility and our net excess borrowing availability was $744.8 million after being reduced by outstanding letters of credit of approximately $82.2 million. Excess availability must equal or exceed a minimum specified amount, currently $90.0 million, or we are required to meet a fixed charge coverage ratio of 1:00 to 1:00. We were not in violation of any covenants or restrictions imposed by any of our debt agreements at June 30, 2019.
Liquidity
Our liquidity at June 30, 2019 was $755.3 million, which consists of net borrowing availability under the 2023 facility and cash on hand.
We have substantial indebtedness following our historical acquisitions, which increased our interest expense and could have the effect of, among other things, reducing our flexibility to respond to changing business and economic conditions. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call our notes, repay debt, repurchase shares or otherwise enter into transactions regarding its capital structure.
Should the current industry conditions deteriorate or we pursue additional acquisitions, we may be required to raise additional funds through the sale of capital stock or debt in the public capital markets or in privately negotiated transactions. There can be no assurance that any of these financing options would be available on favorable terms, if at all. Alternatives to help supplement our liquidity position could include, but are not limited to, idling or permanently closing additional facilities, adjusting our headcount in response to current business conditions, attempts to renegotiate leases, managing our working capital and/or divesting of non-core businesses. There are no assurances that these steps would prove successful or materially improve our liquidity position.
Consolidated Cash Flows
Cash provided by operating activities was $178.8 million for the six months ended June 30, 2019 compared to cash used in operating activities of $169.0 million for the six months ended June 30, 2018. The $347.7 million increase in cash provided by operations was largely the result of our working capital increase of $326.2 million in the first six months of 2018 exceeding the working capital increase of $2.0 million for the first six months of 2019. This change in working capital was primarily due to the timing and impact of changes in commodity prices on the value of cash received from customers, inventory purchases and cash paid to vendors in the first six months of 2018 compared to the first six months of 2019.
Cash used in investing activities was $40.8 million and $48.9 million for the six months ended June 30, 2019 and 2018, respectively. This decrease in cash used in investing activities was primarily due to the timing of capital expenditures in the first six months of 2019 compared to the first six months of 2018.
26
Cash used in financing activities was $137.6 million for the six months ended June 30, 2019 compared to cash provided by financing activities of $173.5 million for the six months ended June 30, 2018. Cash used in financing activities for the first six months of 2019 was primarily due to $423.7 million in long-term debt repayments, largely consisting of $301.2 million in repayments of the 2024 term loan and $116.5 million in cash repayments of our 2024 notes. These payments were mostly offset by proceeds received from the issuance of $400.0 million in aggregate principal amount of 2027 notes. In connection with the issuance of 2027 notes and the amendment of our 2023 facility we paid $7.3 million in debt issuance costs. In addition, we had $106.0 million in net repayments on our 2023 facility largely attributable to the increase in operating cash flows during the current year. Cash provided by financing activities for the first six months of 2018 were primarily due to $183.0 million in net borrowings on the 2023 facility.
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding recent accounting pronouncements is discussed in Note 1 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We may experience changes in interest expense if changes in our debt occur. Changes in market interest rates could also affect our interest expense. Our 2024 notes and 2027 notes bear interest at a fixed rate, therefore, our interest expense related to these notes would not be affected by an increase in market interest rates. Borrowings under the 2023 facility and the 2024 term loan bear interest at either a base rate or eurodollar rate, plus, in each case, an applicable margin. A 1.0% increase in interest rates on the 2023 facility would result in approximately $0.7 million in additional interest expense annually as we had $73.0 million in outstanding borrowings as of June 30, 2019. The 2023 facility also assesses variable commitment and outstanding letter of credit fees based on quarterly average loan utilization. A 1.0% increase in interest rates on the 2024 term loan would result in approximately $1.6 million in additional interest expense annually as of June 30, 2019.
We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production inputs for our manufactured products that we deliver. Short-term changes in the cost of these materials and the related in-bound freight costs, some of which are subject to significant fluctuations, are sometimes, but not always, passed on to our customers. Delays in our ability to pass on material price increases to our customers can adversely impact our operating results.
Item 4. Controls and Procedures
Disclosure Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report.
Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are attached as exhibits to this quarterly report. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation. The evaluation of our disclosure controls and procedures included a review of their objectives and design, and the effect of the controls and procedures on the information generated for use in this quarterly report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our quarterly reports on Form 10-Q. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis, and to maintain them as dynamic systems that change as conditions warrant.
27
Conclusions regarding Disclosure Controls. Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of June 30, 2019, we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. During the period covered by this report, there have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
28
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company has a number of known and threatened construction defect legal claims. While these claims are generally covered under the Company’s existing insurance programs to the extent any loss exceeds the deductible, there is a reasonable possibility of loss that is not able to be estimated at this time because (i) many of the proceedings are in the discovery stage, (ii) the outcome of future litigation is uncertain, and/or (iii) the complex nature of the claims. Although the Company cannot estimate a reasonable range of loss based on currently available information, the resolution of these matters could have a material adverse effect on the Company's financial position, results of operations or cash flows.
In addition, we are involved in various other claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of such claims and lawsuits. Although the ultimate disposition of these other proceedings cannot be predicted with certainty, management believes the outcome of any such claims that are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on our consolidated financial position, cash flows or results of operations. However, there can be no assurances that future adverse judgments and costs would not be material to our results of operations or liquidity for a particular period.
Although our business and facilities are subject to federal, state and local environmental regulation, environmental regulation does not have a material impact on our operations. We believe that our facilities are in material compliance with such laws and regulations. As owners and lessees of real property, we can be held liable for the investigation or remediation of contamination on such properties, in some circumstances without regard to whether we knew of or were responsible for such contamination. Our current expenditures with respect to environmental investigation and remediation at our facilities are minimal, although no assurance can be provided that more significant remediation may not be required in the future as a result of spills or releases of petroleum products or hazardous substances or the discovery of unknown environmental conditions.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial conditio