BMC STOCK HOLDINGS, INC. The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements included in our 2019 Annual Report on Form 10-K. All references to "BMC," "we," "us," "our" or the "Company" meanBMC Stock Holdings, Inc. and its subsidiaries. Cautionary Statement with Respect to Forward-Looking Statements Some of the statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions. In many cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or the negative of these terms or other comparable terminology. The forward-looking statements reflect our views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement, and many of these risks and uncertainties are, and may continue to be, amplified by the COVID-19 pandemic. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors include, without limitation: •the impact of the COVID-19 pandemic on our business operations and on local, national and global economies; •the state of the homebuilding industry and repair and remodeling activity, the economy and the credit markets; •fluctuation of commodity prices and prices of our products as a result of national and international economic and other conditions; •the impact of potential changes in our customer or product sales mix; •our concentration of business in theTexas ,California andGeorgia markets; •the potential loss of significant customers or a reduction in the quantity of products they purchase; •seasonality and cyclicality of the building products supply and services industry; •competitive industry pressures and competitive pricing pressure from our customers and competitors; •our exposure to product liability, warranty, casualty, construction defect, contract, tort, employment and other claims and legal proceedings; •our ability to maintain profitability and positive cash flows; •our ability to retain our key employees and to attract and retain new qualified employees, while controlling our labor costs; •product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, and our dependence on third-party suppliers and manufacturers; •the implementation of our supply chain and technology initiatives; •the impact of long-term noncancellable leases at our facilities; •our ability to effectively manage inventory and working capital; •the credit risk from our customers; •our ability to identify or respond effectively to consumer needs, expectations, market conditions or trends; •our ability to successfully implement our growth strategy; •the impact of federal, state, local and other laws and regulations; •the impact of changes in legislation and government policy; •the impact of unexpected changes in our tax provisions and adoption of new tax legislation; •our ability to utilize our net operating loss carryforwards; •natural or man-made disruptions to our distribution and manufacturing facilities; •our exposure to environmental liabilities and subjection to environmental laws and regulation; •the impact of health and safety laws and regulations; •the impact of disruptions to our information technology systems; •cybersecurity risks; •our exposure to losses if our insurance coverage is insufficient; •our ability to operate on multiple Enterprise Resource Planning ("ERP") information systems and convert multiple systems to a single system; 15 -------------------------------------------------------------------------------- •the impact of our indebtedness; •the impact of the various financial covenants in our secured credit agreement and senior secured notes indenture; •the completion of the merger with Builders FirstSource, including the receipt of required approvals and satisfying the other closing conditions; •the disruption to and restrictions placed on our business in connection with the merger with Builders FirstSource; and •the incurrence of costs related to the merger with Builders FirstSource. Certain of these and other factors are discussed in more detail in "Item 1A. Risk Factors" of our 2019 Annual Report on Form 10-K, as supplemented in "Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q. The forward-looking statements included herein are made only as of the date of this Quarterly Report on Form 10-Q and we undertake no obligation to publicly update or review any forward-looking statement made by us or on our behalf, whether as a result of new information, future developments, subsequent events or circumstances or otherwise, unless otherwise required by law.
Overview
We are one of the leading providers of diversified building products and services in theU.S. residential construction market. Our objective is to provide best-in-class customer service and value-added products to our customers, which are primarily single- and multi-family home builders and professional remodelers. Our product offerings include lumber and lumber sheet goods and an array of value-added products including millwork, doors, windows and structural components such as engineered wood products, floor and roof trusses and wall panels. We believe our whole-house framing solution, Ready-Frame®, which is one of our fastest growing product offerings, saves builders both time and money and improves job site safety. We also offer our customers important services such as design, product specification, installation and installation management. The 18 states in which we operate accounted for approximately 66% of 2019 U.S. single-family housing permits according to theU.S. Census Bureau . In these 18 states, we operate in 45 metropolitan areas. Our net sales for the three months endedSeptember 30, 2020 increased 13.1% compared to the prior year period. Our gross profit as a percentage of sales ("gross margin") was 25.0% for the three months endedSeptember 30, 2020 compared to 26.4% for the prior year period. We recorded income from operations of$61.2 million during the three months endedSeptember 30, 2020 compared to$49.0 million during the three months endedSeptember 30, 2019 . See further discussion in "-Operating Results" below. COVID-19 Update InDecember 2019 , a novel strain of coronavirus (COVID-19) surfaced inWuhan, China . Since then, the virus has spread globally, including tothe United States . Public health organizations and international, federal, state and local governments have implemented measures to combat the spread of COVID-19, including restrictions on movement such as quarantines, "stay-at-home" orders and social distancing ordinances and restricting or prohibiting outright some or all forms of commercial and business activity. The pandemic has adversely affected many industries as well as the economies and financial markets of many countries, includingthe United States , causing a significant deceleration of economic activity, including reduced production, decreased demand for a broad variety of goods and services, diminished trade-levels and widespread corporate downsizing. To date, the Company's and our customers' businesses have generally been classified as "essential business" in most of the jurisdictions in which we operate, permitting the Company and its customers to continue operations in most of the Company's markets. However, beginning inMarch 2020 , the Company significantly reduced operations in theState of Washington , which represented approximately 5% of the Company's net sales for the year endedDecember 31, 2019 . We also temporarily reduced or otherwise limited operations in other jurisdictions, includingPennsylvania and portions of northernCalifornia that implemented restrictions on construction activity. In May andJune 2020 , these jurisdictions reopened building construction. We and our customers may need to make further reductions in operations in the future if more preventive measures are implemented or if we or our customers voluntarily limit or cease operations in one of our markets. Even in certain of our markets where our and our customers' operations have not been limited by voluntary or involuntary measures, certain customers have decreased purchases of our products in response to the various impacts of COVID-19 on their business. Certain of our suppliers across our markets have either reduced or ceased production in some or all of their facilities in response to the COVID-19 pandemic. Although these actions did not have a material negative impact on our results of operations for the three and nine months endedSeptember 30, 2020 , we expect that these actions, along with any further reductions in production levels of our suppliers, may limit the supply of certain materials or extend lead times, which could, among other things, cause the cost of materials we purchase to rise or limit our ability to procure the materials we need to fulfill customer demand. Recently, due in part to the continued impacts of COVID-19 on certain suppliers, the supply of certain products, including 16 -------------------------------------------------------------------------------- interior doors, lumber, structural panels, vinyl windows and engineered wood products ("EWP"), has been significantly curtailed, increasing lead times. The impact of COVID-19 has also led to significant volatility in market prices for wood products during the three and nine months endedSeptember 30, 2020 . See further discussion of the volatility and the impact of commodity prices on our business in "Commodity nature of our products" below. Additionally, we enter into arrangements with many of our suppliers providing for inventory purchase rebates ("supplier rebates") upon achievement of specified volume purchasing levels. Should we not achieve specified volume purchasing levels as a result of the impacts of COVID-19 and as such, reduce our supplier rebate income, our margins and profitability would be negatively impacted. We have taken a number of precautionary measures intended to mitigate the impact of COVID-19 on our business and the risk to our employees. These include implementation of detailed cleaning and disinfecting processes at our facilities, adhering to social distancing protocols, suspending non-essential air travel, implementing appropriate reductions in workforce, including furloughs, and encouraging employees to work from home when possible. See "Liquidity and Capital Resources" below for a discussion of other precautionary measures taken with respect to our liquidity and financial position in response to the pandemic. OnMarch 27, 2020 , the CARES Act was signed into law. The CARES Act provides numerous tax provision and other stimulus measures. We have benefited from, and expect to continue benefiting from, the temporary suspension of certain payment requirements for the employer portion ofSocial Security taxes. We estimate that this will defer approximately$23 million of payments that would have been paid during 2020, such that under the CARES Act, approximately$11.5 million will now be paid onDecember 31, 2021 and the remaining$11.5 million will be paid onDecember 31, 2022 . We also expect to benefit from the creation of certain refundable employee retention credits and the technical correction for qualified leasehold improvements, which provides for tax bonus depreciation. If we generate a NOL in 2020, we would also expect to benefit from the five-year NOL carryback provisions. To the extent that states in which the Company operates provide for similar stimulus measures, we will evaluate potential benefits at the state-level as well. Due to the unprecedented nature and considerable uncertainty surrounding the COVID-19 pandemic and its impact on our industry and global economies and markets as a whole, we are unable to identify all potential risks, uncertainties and consequences or predict the full extent and scope of the ultimate impact of the COVID-19 pandemic on our business, financial condition, operating results and cash flows as well as our future plans and strategies. See "Item 1A. Risk Factors" for additional discussion regarding risks related to the COVID-19 pandemic. Factors Affecting Our Operating Results Our operating results and financial performance are influenced by a variety of factors, including, among others, conditions in the housing market and economic conditions generally, acquisitions and closures, changes in the cost of the products we sell (particularly commodity products), pricing policies of our competitors, production schedules of our customers and seasonality. Some of the more important factors are discussed in our 2019 Annual Report on Form 10-K, as supplemented by the additional discussion below. In addition, as discussed above and below, we expect the COVID-19 pandemic and the responses by governments, us and our customers and suppliers will impact our operating results for at least the remainder of 2020. Conditions in the housing and construction market The building products supply and services industry is highly dependent on new single-family home and multi-family construction and repair and remodeling activity, which in turn are dependent upon a number of factors, including, among other things, overall economic conditions. Unfavorable economic changes, both nationally and locally in our markets, could adversely affect consumer spending, result in decreased demand for new homes and adversely affect our business. According to theU.S. Census Bureau , single-family housing starts in the South and West regions ofthe United States , which are our primary operating regions, increased approximately 17.3% for the three months endedSeptember 30, 2020 compared to the same period in the prior year. However, the COVID-19 pandemic may have a negative impact in future periods on our customers and the homebuilding industry as it may affect, among other factors, employment levels, consumer spending and consumer confidence, which could decrease demand for new homes, adversely affecting our business. Acquisitions and closures The Company completed the following acquisitions during the year endedDecember 31, 2019 (the "2019 Acquisitions"): •OnJanuary 14, 2019 , the Company acquired substantially all of the assets and assumed certain liabilities of Barefoot, a supplier of windows, exterior doors, hardware, specialty products and installation services in theCharlotte, North Carolina metropolitan area. 17 -------------------------------------------------------------------------------- •OnFebruary 8, 2019 , the Company acquired substantially all of the assets and assumed certain liabilities of Locust Lumber, a supplier of lumber products and building materials primarily to custom homebuilders and professional remodeling contractors in theCharlotte, North Carolina metropolitan area. •OnAugust 1, 2019 , the Company acquired substantially all of the assets and assumed certain liabilities of Kingston Lumber, a supplier of lumber products, trusses and other building materials primarily to custom homebuilders and professional remodeling contractors in theSeattle, Washington metropolitan area. •OnSeptember 3, 2019 , the Company acquired substantially all of the assets and assumed certain liabilities of Heritage One, a supplier of pre-hung doors, millwork, hardware and finish carpentry services in theSacramento, California metropolitan area. •OnSeptember 16, 2019 , the Company acquired substantially all of the assets and assumed certain liabilities of Colorado Fasteners, a supplier of fasteners, tools and other related products in theDenver, Colorado metropolitan area. •OnDecember 2, 2019 , the Company acquired substantially all of the assets and assumed certain liabilities ofDeFord Lumber ("DeFord"), a supplier of millwork, doors, windows, structural components and other building materials primarily to custom and regional homebuilders in theDallas-Fort Worth metropolitan area. During the three and nine months endedSeptember 30, 2020 , the Company closed certain of its facilities, including facilities inGreensboro, NC andGreenville, SC , which were not related to the COVID-19 pandemic and were not material to our operations. Additionally, as ofDecember 31, 2019 , the Company ceased conducting business in itsArkansas market, which accounted for less than 1% of the Company's net sales for the year endedDecember 31, 2019 . Net sales increased by approximately$24.1 million for the three months endedSeptember 30, 2020 as a result of the Kingston Lumber, Heritage One,Colorado Fasteners and DeFord acquisitions (the "Recent Acquisitions"), net of closed facilities. Due to the impact of COVID-19, the Company's acquisition activity has been and may continue to be curtailed in the near-term to preserve liquidity. In addition, the Merger Agreement restricts us from making certain acquisitions and taking other specified strategic actions without the consent of Builders FirstSource. See "Liquidity and Capital Resources" below for a discussion of precautionary measures taken with respect to our liquidity and financial position in response to the pandemic and "-Merger Agreement with Builders FirstSource, Inc." below for a discussion of the Merger and the Merger Agreement. Commodity nature of our products Many of the building products we distribute, including lumber, oriented strand board ("OSB"), plywood and particleboard, are commodities that are widely available from other manufacturers or distributors with prices and volumes determined frequently based on participants' perceptions of short-term supply and demand factors. The following table reflects changes in the average composite framing lumber prices (per thousand board feet) and average composite structural panel prices (per thousand square feet). These prices represent transactions between manufacturers and their customers as reported by Random Lengths and may differ in magnitude or timing from the actual selling prices or cost of goods reported in our operating results. The average composite structural panel prices are based on index prices for OSB and plywood. Three Months Ended September 30, Nine Months Ended September 30, 2020 average 2020 average 2020 versus 2019 price 2020 versus 2019 price
Framing lumber prices 113.4 % $ 762 48.7 % $ 525 Structural panel prices 102.4 % $ 682 38.8 % $ 490 Due to the impact of the COVID-19 pandemic on lumber production of suppliers and the commodity markets in general, there was significant volatility in commodity prices during the three and nine months endedSeptember 30, 2020 . The average composite framing lumber prices and average composite structural panel prices began decreasing in the second half ofMarch 2020 and continued to decrease untilMay 2020 , when prices began to increase rapidly. Prices continued to increase untilOctober 2020 , when prices began to decrease again. As ofOctober 31, 2020 , the composite framing lumber price and composite structural panel price were$610 and$705 , respectively. Due to changes in supply and demand in the commodity markets from COVID-19, there may be additional volatility in commodity prices in the future. 18 -------------------------------------------------------------------------------- Periods of increasing prices provide the opportunity for higher sales and increased gross profit, while periods of declining prices may result in declines in sales and profitability. In particular, low market prices for wood products over a sustained period can adversely affect our financial condition, operating results and cash flows, as can excessive spikes in market prices. The impact of commodity price changes on our operating results is partially dependent on pricing commitments with our customers. For further discussion of the impact of commodity prices on historical periods, see "-Operating Results" below. Mix of products sold We typically realize greater gross margins on more highly engineered and customized products, or ancillary products that are often purchased based on convenience and are therefore less price sensitive to our customers. For example, sales of lumber and lumber sheet goods tend to generate lower gross margins due to their commodity nature and the relatively low switching costs of sourcing those products from different suppliers. Structural components and millwork, doors and windows often generate higher gross margins relative to other products. Should the impact of COVID-19 cause supply chain limitations of certain products or cause customers to change the types or quantities of materials they purchase from us, we could see a change in the mix of products sold, impacting, among other things, our gross margin. For example, during the three months endedSeptember 30, 2020 , due to commodity price inflation, a higher percentage of total net sales was derived from lumber and lumber sheet goods as compared to the three months endedSeptember 30, 2019 . For further discussion of the impact of mix of products sold on historical periods, see "-Operating Results" below. Changes in customer sales mix Our operating results may vary according to the amount and type of products we sell to each of our primary customer types: single-family homebuilders, remodeling contractors and multi-family, commercial and other contractors. We tend to realize higher gross margins on sales to remodeling contractors due to the smaller product volumes purchased by those customers, as well as the more customized nature of the projects those customers generally undertake. Gross margins on sales to our other primary customer types can vary based on a variety of factors. If the COVID-19 pandemic has a greater impact on one or more of our primary customer types, or on certain customers within our primary customer types, we could see a change in our customer sales mix, which could, among other things, impact our gross margin. Seasonality Our first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather patterns in some of our markets, causing reduced construction activity. As a result, sales are usually lower in the first and fourth quarters than in the second and third quarters. Merger Agreement with Builders FirstSource, Inc. OnAugust 26, 2020 , the Company, Builders FirstSource and Merger Sub entered into the Merger Agreement, pursuant to which the Company and Builders FirstSource will combine in an all-stock merger transaction. Upon the terms and subject to the conditions set forth in the Merger Agreement, at the Effective Time, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and becoming a wholly owned subsidiary of Builders FirstSource, with Builders FirstSource identified as the accounting acquirer. Under the terms of the Merger Agreement, which has been unanimously approved by the board of directors of each company, at the Effective Time, each issued and outstanding share of BMC Common Stock will automatically be converted into the right to receive 1.3125 shares of BLDR Common Stock. No fractional shares of BLDR Common Stock will be issued in the Merger, and holders of shares of BMC Common Stock will receive cash in lieu of any such fractional shares. Upon consummation of the Merger, Builders FirstSource's stockholders will own approximately 57% and the Company's stockholders will own approximately 43% of the combined company. Each outstanding BMC stock option held by a current employee or service-provider will become, at the Effective Time, an option to purchase shares of BLDR Common Stock, with the number of shares and the exercise price adjusted by the Exchange Ratio. Each outstanding BMC stock option held by any former BMC employee or service-provider will be converted at the Effective Time into the right to receive cash in an amount equal to the product of (i) the number of shares of BMC Common Stock subject to such BMC stock option as of immediately prior to the Effective Time and (ii) the excess of the market value of 1.3125 shares of BLDR Common Stock over the applicable exercise price per share of such option, subject to applicable withholding taxes. Each outstanding BMC time-vested and performance-vested restricted stock unit will vest and settle at the Effective Time in a number of shares of BLDR Common Stock equal to the number of shares of BMC Common Stock otherwise issuable upon settlement of such BMC restricted stock unit (assuming target level of performance for performance-vested awards), multiplied by the Exchange Ratio, and subject to applicable withholding taxes. 19 -------------------------------------------------------------------------------- The Merger is intended to qualify as a tax-free reorganization under the Internal Revenue Code so that none of the Company, Builders FirstSource, Merger Sub, or any of the Company's stockholders generally will recognize any gain or loss on the issuance or receipt of BLDR Common Stock in the Merger, except that the Company's stockholders generally may recognize gain or loss with respect to cash received in lieu of fractional shares of BLDR Common Stock. The Company and Builders FirstSource have made customary representations, warranties and covenants in the Merger Agreement, including covenants regarding the conduct of their respective businesses during the pre-closing period and their use of reasonable best efforts to consummate the Merger. In addition, the Merger Agreement contains restrictions on the Company's and Builders FirstSource's ability to (i) solicit competing acquisition proposals and (ii) subject to certain exceptions if their respective boards of directors determine it would be inconsistent with their fiduciary duties, to participate in any discussions or negotiations, or provide any non-public information, or take other actions in furtherance of or relating to any competing acquisition proposals, or change, withdraw, qualify, or modify the recommendation by the Company's or Builders FirstSource's board of directors to their respective stockholders to adopt the Merger Agreement and approve the Stock Issuance, respectively. The Merger Agreement contains certain termination rights for both the Company and Builders FirstSource, including (i) if the Merger is not consummated on or before the "outside date" ofMay 26, 2021 (subject to extension toAugust 26, 2021 , under certain circumstances), (ii) if the required approval of the Company's stockholders or Builders FirstSource's stockholders is not obtained, (iii) if any law or order prohibiting the Merger or the Stock Issuance has become final and non-appealable, (iv) if the board of directors of the other party changes its recommendation of the Merger prior to the receipt of its stockholder approval, (v) if the other party breaches its obligation not to solicit competing acquisition proposals in any material respect, or (vi) if the other party breaches its representations or warranties or fails to perform its covenants and such breach would cause a failure of the related closing condition and either is not curable by the outside date or is not cured within thirty days of notice of the breach. Upon termination of the Merger Agreement, under certain specified circumstances, the Company may be required to pay a termination fee of$66 million to Builders FirstSource or Builders FirstSource may be required to pay a termination fee of$100 million to the Company.
See "Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q for additional information regarding certain risks related to the Merger and its potential impacts on our business and results of operations.
For further information related to the Merger, please refer to the Company's Current Report on Form 8-K filed with theSEC onAugust 27, 2020 . The foregoing description of the Merger Agreement is not complete and is qualified in its entirety by reference to the full text of the Merger Agreement included as Exhibit 2.1 to the Company's Current Report on Form 8-K filed with theSEC onAugust 27, 2020 and incorporated by reference in this Quarterly Report on Form 10-Q. 20 --------------------------------------------------------------------------------
Operating Results The following table sets forth our operating results in dollars and as a percentage of net sales for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2020 2019 2020 2019
Net sales $ 1,090,343 100.0 % $ 964,249 100.0 % $ 2,991,118 100.0 % $ 2,736,029 100.0 %
Cost of sales 817,261 75.0 % 709,482 73.6 % 2,228,086 74.5 % 2,019,363 73.8 %
Gross profit 273,082 25.0 % 254,767 26.4 % 763,032 25.5 % 716,666 26.2 %
Operating expenses:
Selling, general and
administrative expenses 195,143 17.9 % 190,579 19.8 % 557,010 18.6 % 546,116 20.0 %
Depreciation expense 11,767 1.1 % 10,501 1.1 % 34,990 1.2 % 30,117 1.1 %
Amortization expense 5,016 0.5 % 4,552 0.5 % 15,045 0.5 % 13,237 0.5 %
Impairment of assets - 0.0 % 115 0.0 % 2,255 0.1 % 644 0.0 %
Income from operations 61,156 5.6 % 49,020 5.1 % 153,732 5.1 % 126,552 4.6 %
Other income (expense)
Interest expense (5,744) (0.5) % (5,773) (0.6) % (17,880) (0.6) % (17,385) (0.6) %
Other income, net 3,289 0.3 % 3,540 0.4 % 9,128 0.3 % 10,159 0.4 %
Income before income taxes 58,701 5.4 % 46,787 4.9 % 144,980 4.8 % 119,326 4.4 %
Income tax expense 13,806 1.3 % 13,190 1.4 % 34,434 1.2 % 29,680 1.1 %
Net income $ 44,895 4.1 % $ 33,597 3.5 % $ 110,546 3.7 % $ 89,646 3.3 %
Three months ended September 30, 2020 compared to three months ended September
30, 2019
Net sales
For the three months ended September 30, 2020 , net sales increased $126.1
million , or 13.1%, to $1,090.3 million from $964.2 million during the three
months ended September 30, 2019 . We estimate that net sales increased 10.0% from
price inflation within the lumber and lumber sheet goods and structural
components product categories, 3.5% from the Recent Acquisitions and 0.6% from
other organic growth, partially offset by a decrease of 1.0% from closed
facilities. Other organic growth was negatively impacted by the COVID-19
pandemic, particularly in jurisdictions that implemented restrictions on
construction activity.
We estimate approximately 74% of our net sales for the three months ended
September 30, 2020 were to customers engaged in new single-family
construction. According to the U.S. Census Bureau , single-family housing starts
in the South and West regions of the United States , which are our primary
operating regions, increased approximately 17.3% for the three months ended
September 30, 2020 compared to the same period in the prior year, while
single-family houses completed increased approximately 6.1% during the same
period. We estimate that net sales to single-family homebuilders and remodeling
contractors increased 14.4% in the aggregate and net sales to multi-family,
commercial and other contractors increased 4.6%.
The following table shows net sales classified by major product category:
Three Months Ended Three Months Ended
September 30, 2020 September 30, 2019
(in thousands) Net Sales % of Sales Net Sales % of Sales % Change
Millwork, doors & windows $ 299,812 27.5 % $ 285,750 29.6 % 4.9 %
Structural components 185,910 17.1 % 175,344 18.2 % 6.0 %
Lumber & lumber sheet goods 383,626 35.2 % 274,908 28.5 % 39.5 %
Other building products &
services 220,995 20.2 % 228,247 23.7 % (3.2) %
Total net sales $ 1,090,343 100.0 % $ 964,249 100.0 % 13.1 %
The increase in net sales in our lumber and lumber sheet goods product category was primarily related to commodity price inflation.
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Cost of sales
For the three months ended September 30, 2020 , cost of sales increased $107.8
million , or 15.2%, to $817.3 million from $709.5 million during the three months
ended September 30, 2019 . We estimate our cost of sales increased 11.2% as a
result of commodity cost inflation, 3.3% from the Recent Acquisitions and 1.8%
from other organic growth, partially offset by a decrease of 1.1% from closed
facilities.
Gross profit
For the three months ended September 30, 2020 , gross profit increased $18.3
million , or 7.2%, to $273.1 million from $254.8 million for the three months
ended September 30, 2019 , driven primarily by commodity price increases and the
Recent Acquisitions. Our gross margin was 25.0% for the three months ended
September 30, 2020 and 26.4% for the three months ended September 30, 2019 . This
decrease was primarily due to a decrease in the gross margin in the lumber and
lumber sheet goods and structural components product categories, and a higher
percentage of total net sales being derived from lumber and lumber sheet goods.
Gross margins in our lumber and lumber sheet goods and structural components
product categories were lower due to a significant increase in commodity costs,
which increased at a faster rate than our average selling prices.
For the three months ended September 30, 2020 :
•selling, general and administrative expenses were $195.1 million , an increase
of $4.6 million , or 2.4%, from $190.6 million for the three months ended
September 30, 2019 . This increase was primarily related to an increase of
approximately $8.5 million from costs incurred in relation to the Merger
described in "-Merger Agreement with Builders FirstSource, Inc." above and
$7.6 million related to selling, general and administrative expenses of the
Recent Acquisitions. These increases were offset by an $11.5 million decrease in
other selling, general and administrative expenses, primarily related to
employee wages, benefits and other employee-related costs, as well as lower fuel
costs.
•depreciation expense was $11.8 million compared to $10.5 million for the three
months ended September 30, 2019 . This increase resulted from the depreciation of
assets placed into service.
•amortization expense was $5.0 million compared to $4.6 million for the three
months ended September 30, 2019 . This increase resulted from the amortization of
intangible assets acquired in the Recent Acquisitions.
We expect our selling, general and administrative expenses to continue to be
impacted by the COVID-19 pandemic as we have implemented measures to reduce our
operating expenses to preserve liquidity. While certain cost reduction measures,
such as permanent headcount reductions, are more permanent in nature, others,
such as reductions in travel and certain other costs, are more temporary in
nature. Further, certain variable costs, such as commissions, will fluctuate
with changes in net sales. It is also possible that bad debt expense may
increase if the effects of COVID-19 impact our customers' liquidity and their
ability to pay our outstanding receivables. We also anticipate incurring
additional selling, general and administrative expenses in connection with the
Merger through the Effective Time. As such, our selling, general and
administrative expenses may increase in the future compared to the three months
ended September 30, 2020 due to these factors, among others.
Interest expense
For the three months ended September 30, 2020 and 2019, interest expense was
$5.7 million and $5.8 million , respectively. Non-cash amortization of debt
issuance costs, which is included in interest expense, was $0.3 million for the
three months ended September 30, 2020 and 2019.
Other income, net
For the three months ended September 30, 2020 and 2019, other income, net, which
was derived primarily from state and local tax incentive programs, interest
income and service charges assessed on past due accounts receivable, was $3.3
million and $3.5 million , respectively.
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Income tax
For the three months ended September 30, 2020 , income tax expense was $13.8
million compared to $13.2 million for the three months ended September 30, 2019 .
The effective tax rate for the three months ended September 30, 2020 was 23.5%,
which varied from the federal statutory rate of 21% primarily due to state
income taxes and nondeductible Merger-related costs. The effective tax rate for
the three months ended September 30, 2019 was 28.2%, which varied from the
federal statutory rate of 21% primarily due to state income taxes and an out of
period adjustment.
Nine months ended September 30, 2020 compared to nine months ended September 30,
2019
Net sales
For the nine months ended September 30, 2020 , net sales increased $255.1
million , or 9.3%, to $2,991.1 million from $2,736.0 million during the nine
months ended September 30, 2019 . We estimate that net sales increased 4.4% from
the 2019 Acquisitions, 4.1% from price inflation within the lumber and lumber
sheet goods and structural components product categories, 1.0% from other
organic growth and 0.6% from an additional selling day versus the prior year
period, partially offset by a decrease of 0.8% from closed facilities. Other
organic growth was negatively impacted by the effects of the COVID-19 pandemic,
particularly in jurisdictions that implemented restrictions on construction
activity.
We estimate approximately 73% of our net sales for the nine months ended
September 30, 2020 were to customers engaged in new single-family
construction. According to the U.S. Census Bureau , single-family housing starts
in the South and West regions of the United States , which are our primary
operating regions, increased approximately 6.3% for the nine months ended
September 30, 2020 compared to the same period in the prior year, while
single-family houses completed increased approximately 3.4% during the same
period. We estimate that net sales to single-family homebuilders and remodeling
contractors increased 7.8% in the aggregate and net sales to multi-family,
commercial and other contractors increased 19.5%.
The following table shows net sales classified by major product category:
Nine Months Ended Nine Months Ended
September 30, 2020 September 30, 2019
(in thousands) Net Sales % of Sales Net Sales % of Sales % Change
Millwork, doors & windows $ 883,480 29.5 % $ 796,807 29.1 % 10.9 % Structural components 510,789 17.1 % 483,575 17.7 % 5.6 % Lumber & lumber sheet goods 935,582 31.3 % 798,722 29.2 % 17.1 % Other building products & services 661,267 22.1 % 656,925 24.0 % 0.7 % Total net sales$ 2,991,118 100.0 %$ 2,736,029 100.0 % 9.3 % The increase in net sales in our millwork, doors and windows product category was primarily related to the 2019 Acquisitions and other organic growth. The increase in net sales in our lumber and lumber sheet goods product category was primarily related to commodity price inflation. Cost of sales For the nine months endedSeptember 30, 2020 , cost of sales increased$208.7 million , or 10.3%, to$2,228.1 million from$2,019.4 million during the nine months endedSeptember 30, 2019 . We estimate our cost of sales increased 4.8% as a result of commodity cost inflation, 4.3% from the 2019 Acquisitions, 1.4% from other organic growth and 0.6% from an additional selling day versus the prior year period, partially offset by a decrease of 0.8% from closed facilities. Gross profit For the nine months endedSeptember 30, 2020 , gross profit increased$46.4 million , or 6.5%, to$763.0 million from$716.7 million for the nine months endedSeptember 30, 2019 , driven primarily by the 2019 Acquisitions, commodity price inflation and other organic growth. Our gross margin was 25.5% for the nine months endedSeptember 30, 2020 and 26.2% for the nine months endedSeptember 30, 2019 . This decrease was primarily due to a decrease in the gross margin in the lumber and lumber sheet goods and structural components product categories, and a higher percentage of total net sales being derived from lumber and lumber sheet goods. Gross margins in our lumber and lumber sheet goods and structural components product categories were lower due to a significant increase in commodity costs, which increased at a faster rate than our average selling prices. 23 -------------------------------------------------------------------------------- Operating expenses For the nine months endedSeptember 30, 2020 : •selling, general and administrative expenses were$557.0 million , up$10.9 million , or 2.0%, from$546.1 million for the nine months endedSeptember 30, 2019 . Excluding the$4.3 million impact of an out of period correction during the nine months endedSeptember 30, 2019 , selling, general and administrative expenses increased$15.2 million . Other factors impacting selling, general and administrative expense were an increase of$27.3 million from selling, general and administrative expenses of the 2019 Acquisitions and$9.2 million of Merger-related costs in relation to the Merger described in "-Merger Agreement with Builders FirstSource, Inc." above. These increases were offset by an$21.3 million decrease in other selling, general and administrative expenses, primarily related to employee wages, benefits and other employee-related costs, as well as lower fuel costs. •depreciation expense was$35.0 million compared to$30.1 million for the nine months endedSeptember 30, 2019 . This increase resulted from the depreciation of assets placed into service. •amortization expense was$15.0 million compared to$13.2 million for the nine months endedSeptember 30, 2019 . This increase resulted from the amortization of intangible assets acquired in the 2019 Acquisitions. •the Company recognized asset impairment charges of$2.3 million related to the closure or relocation of the operations of certain of the Company's facilities, which were not related to the COVD-19 pandemic. For the nine months endedSeptember 30, 2019 , the Company recognized asset impairment charges of$0.6 million related to the relocation of the operations of certain of the Company's facilities. Interest expense For the nine months endedSeptember 30, 2020 and 2019, interest expense was$17.9 million and$17.4 million , respectively. This increase was primarily related to interest expense from precautionary borrowings made under our revolving credit facility during the three months endedMarch 31, 2020 , which were repaid during the three months endedJune 30, 2020 . Non-cash amortization of debt issuance costs, which is included in interest expense, was$1.0 million and$1.1 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Other income, net For the nine months endedSeptember 30, 2020 and 2019, other income, net, which was derived primarily from state and local tax incentive programs, interest income and service charges assessed on past due accounts receivable, was$9.1 million and$10.2 million , respectively. This decrease was primarily due to a decrease in interest income. Income tax For the nine months endedSeptember 30, 2020 , income tax expense was$34.4 million compared to$29.7 million for the nine months endedSeptember 30, 2019 . The effective tax rate for the nine months endedSeptember 30, 2020 was 23.8%, which varied from the federal statutory rate of 21% primarily due to state income taxes and nondeductible Merger-related costs. The effective tax rate for the nine months endedSeptember 30, 2019 was 24.9%, which varied from the federal statutory rate of 21% primarily due to state income taxes and an out of period adjustment. Liquidity and Capital Resources Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, fund capital expenditures and support our acquisition activity. During 2020 and 2019, our capital resources have primarily consisted of cash and cash equivalents generated through operating cash flows and borrowings under our Revolver. In light of the uncertainty around COVID-19, including its impact on financial and capital markets, as a precautionary measure and to increase cash on hand and financial flexibility, we borrowed$144.0 million under our revolving credit facility during the three months endedMarch 31, 2020 . We repaid the$144.0 million borrowing during the three months endedJune 30, 2020 . Our liquidity atSeptember 30, 2020 was$648.5 million , which included$286.2 million in cash and cash equivalent and$362.3 million of unused borrowing capacity under our Revolver. We have taken steps to preserve our liquidity in response to the COVID-19 pandemic, including, but not limited to, postponing certain growth-related capital projects and share repurchases, reducing operating expenses, reducing associate staffing levels, 24 -------------------------------------------------------------------------------- reducing or eliminating certain other costs and actively managing working capital. We have utilized, and plan to continue utilizing, certain benefits of the CARES Act to preserve our liquidity, including the temporary suspension of certain payment requirements for the employer portion ofSocial Security taxes. We estimate that this will defer approximately$23 million of payments that would have been paid during 2020, such that under the CARES Act, approximately$11.5 million will now be paid onDecember 31, 2021 and the remaining$11.5 million will be paid onDecember 31, 2022 . We currently believe that these measures and any others we may determine to take in the future to preserve our cash flows from operations, combined with our current cash levels and available borrowing capacity, will provide sufficient liquidity to fund debt service requirements and support our ongoing operations, lease obligations and working capital for at least the next 12 months. However, due to the unpredictable and unprecedented nature of the pandemic and its impacts, it is impractical to identify all potential risks to or estimate the ultimate adverse impact on our liquidity needs and cash flows in the next 12 months and beyond. InNovember 2018 , the Company's board of directors authorized a$75.0 million share repurchase program. Repurchases may be made at management's discretion from time to time on the open market, subject to applicable laws, or through privately negotiated transactions. The repurchase program will expire onNovember 20, 2020 or may be suspended or discontinued at any time. During the nine months endedSeptember 30, 2020 , the Company repurchased 0.1 million shares at a weighted average price of$16.20 per share for a total cost of$1.4 million . Under the Merger Agreement described in "-Merger Agreement with Builders FirstSource, Inc." above, the Company has generally agreed not to make any share repurchases prior to the Effective Time. Historical Cash Flow Information Net current assets Net current assets (current assets less current liabilities) were$676.8 million and$538.3 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively, as summarized in the following table: September 30, December 31, (in thousands) 2020 2019 Cash and cash equivalents$ 286,221 $ 165,496 Accounts receivable, net of allowances 393,735 325,741 Inventories 413,031 331,969 Other current assets 112,661 106,447
Accounts payable, accrued expenses and other current liabilities
(498,053) (359,650)
Current portion of long-term debt and finance lease obligations
(3,210) (5,577)
Current portion of operating lease liabilities (27,635) (26,147)
Total net current assets $
676,750
Accounts receivable, net of allowances, increased$68.0 million fromDecember 31, 2019 toSeptember 30, 2020 primarily due to seasonal increases in sales and higher selling prices due to commodity price inflation. Days sales outstanding (measured against net sales in the current fiscal quarter of each period) were 33 days atDecember 31, 2019 andSeptember 30, 2020 . Inventories increased$81.1 million fromDecember 31, 2019 toSeptember 30, 2020 primarily due to commodity price inflation. Inventory days on hand (measured against cost of sales in the current fiscal quarter of each period) were 46 days and 45 days atDecember 31, 2019 andSeptember 30, 2020 , respectively.
Accounts payable, accrued expenses and other current liabilities increased
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Cash flows from operating activities
Net cash provided by operating activities was $207.2 million and $198.4 million
for the nine months ended September 30, 2020 and 2019, respectively, as
summarized in the following table:
Nine Months Ended September 30,
(in thousands) 2020 2019
Net income $ 110,546 $ 89,646
Non-cash expenses 74,686 63,735
Change in deferred income taxes 7,418 4,857
Change in working capital and other assets and liabilities 14,544 40,179
Net cash provided by operating activities $
207,194
Net cash provided by operating activities increased by$8.8 million for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . This increase was primarily related to the steps taken to preserve liquidity discussed above, including, but not limited to, reducing operating expenses, reducing associate staffing levels and reducing or eliminating certain other costs, as well as an increase of$15.1 million due to the temporary suspension of certain payment requirements for the employer portion ofSocial Security taxes under the CARES Act. These increases were partially offset by an increase in cash paid for inventory due to commodity price inflation. Cash flows from investing activities Net cash used in investing activities was$69.8 million and$148.8 million for the nine months endedSeptember 30, 2020 and 2019, respectively, as summarized in the following table: Nine Months Ended September 30, (in thousands) 2020 2019 Purchases of property, equipment and real estate$ (71,037) $ (67,582) Proceeds from sale of property, equipment and real estate 1,258 4,444 Purchases of businesses, net of cash acquired - (85,780) Insurance proceeds - 107 Net cash used in investing activities $
(69,779)
Cash used for the purchase of property, equipment and real estate for the nine months endedSeptember 30, 2020 and 2019 resulted primarily from the purchase of vehicles and equipment to support increased sales volume and replace aged assets, and facility, technology and automation investments to support our operations. Proceeds from the sale of property, equipment and real estate during the nine months endedSeptember 30, 2019 related primarily to the sale of real estate of$3.6 million . Purchases of businesses, net of cash acquired, for the nine months endedSeptember 30, 2019 , related to the cash paid at closing for the Barefoot, Locust Lumber, Kingston Lumber, Heritage One and Colorado Fasteners acquisitions. During the nine months endedSeptember 30, 2019 , the Company received insurance proceeds related to a fire at one of the Company's facilities during 2015. Cash flows from financing activities Net cash used in financing activities was$16.7 million and$27.1 million for the nine months endedSeptember 30, 2020 and 2019, respectively, as summarized in the following table: Nine Months Ended September 30, (in thousands) 2020 2019 Net proceeds from Revolver $ - $ - Repurchases of common stock under share repurchase program (1,416) (16,446) Payments on finance lease obligations (4,613) (5,094) Other financing activities, net (10,661) (5,530) Net cash used in financing activities $
(16,690)
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In light of the uncertainty around COVID-19, including its impact on financial
and capital markets, as a precautionary measure and to increase cash on hand and
financial flexibility, we borrowed $144.0 million under our revolving credit
facility during the three months ended March 31, 2020 . We repaid the $144.0
million borrowing during the three months ended June 30, 2020 .
Under the $75.0 million share repurchase program authorized by the Company's
board of directors, the Company repurchased 0.1 million shares at a weighted
average price of $16.20 during the nine months ended September 30, 2020 and
1.0 million shares at a weighted average price of $17.11 per share during nine
months ended September 30, 2019 .
Other financing activities, net includes proceeds from the exercise of stock
options, net activity related to secured borrowings and repurchases of common
stock in connection with the vesting of restricted stock unit awards. For the
nine months ended September 30, 2020 , other financing activities, net also
included the release of the holdbacks for certain of the 2019 Acquisitions, net
of a post-closing adjustment received. For the nine months ended September 30,
2019 , other financing activities, net also included the release of the holdbacks
for the W.E. Shone Co. and Barefoot acquisitions, the payment of the earnout
provision for the Code Plus Components, LLC acquisition and payments of debt
issuance costs related to an amendment to our Credit Agreement.
Capital expenditures
Capital expenditures vary depending on prevailing business factors, including
current and anticipated market conditions. We have taken steps to preserve our
liquidity in response to the COVID-19 pandemic, including, among others,
postponing certain growth-related capital projects. We will continue to invest
in safety and productivity-related capital expenditures. We expect our 2020
capital expenditures, net of proceeds from the sale of property, equipment and
real estate, to be approximately $80.0 million to $90.0 million . For the nine
months ended September 30, 2020 , capital expenditures, net of proceeds from the
sale of property, equipment and real estate, were $69.8 million , which were
primarily related to vehicles and equipment to replace aged assets and support
increased sales volume, and facility, technology and automation investments to
support our operations.
Senior secured notes
On September 15, 2016 , the Company issued $350.0 million of Senior Notes. The
Senior Notes mature on October 1, 2024 and are secured by a first priority lien
on certain assets of the Company and a second priority lien on the collateral
that secures the Credit Agreement, which collectively approximates substantially
all assets of the Company. The interest rate is fixed at 5.5% and is payable
semiannually on April 1 and October 1 . The indenture governing the Senior Notes
(the "Indenture") contains customary nonfinancial covenants, including
restrictions on new indebtedness, issuance of liens and guarantees, investments,
distributions to equity holders, asset sales and affiliate transactions. The
Senior Notes were issued by BMC East, LLC , a 100% owned subsidiary of the
Company, and are guaranteed by the Company and the other subsidiaries that
guarantee the Credit Agreement. Each of the subsidiary guarantors is 100% owned,
directly or indirectly, by the Company, and all guarantees are full and
unconditional and joint and several. We were in compliance with all covenants
under the Indenture as of September 30, 2020 .
Revolving credit agreement
On December 1, 2015 , the Company entered into the Original Credit Agreement with
Wells Fargo Capital Finance, as administrative agent, and certain other lenders.
The Credit Agreement, which includes the Revolver, has an aggregate commitment
of $425.0 million and a letters of credit sublimit of $100.0 million . The
Revolver matures at the earlier of (i) May 31, 2024 and (ii) if the Senior Notes
are refinanced or repaid, the date that is 91 days prior to the new maturity
date of the replacement notes or other indebtedness that replaced or refinanced
the Senior Notes. The Revolver is subject to an asset-based borrowing formula on
eligible accounts receivable, credit card receivables and inventory, in each
case reduced by certain reserves.
Borrowings under the Revolver bear interest, at our option, at either the Base
Rate (which means the higher of (i) the Federal Funds Rate plus 0.5%, (ii) the
LIBOR rate plus 1.0% or (iii) the prime rate) plus a Base Rate Margin (which
ranges from 0.25% to 0.50% based on Revolver availability) or LIBOR plus a LIBOR
Rate Margin (which ranges from 1.25% to 1.50% based on Revolver availability).
The Credit Agreement includes customary provisions for implementation of
replacement rates for rate-based and LIBOR-based loans upon any phase-out of
LIBOR. The fee on any outstanding letters of credit issued under the Revolver
ranges from 0.75% to 1.25%, depending on whether the letters of credit are fully
cash collateralized. The fee on the unused portion of the Revolver is 0.25%.
The Credit Agreement contains customary nonfinancial covenants, including
restrictions on new indebtedness, issuance of liens, investments, distributions
to equity holders, asset sales, affiliate transactions, merger transactions and
entering into unrelated businesses. The Credit Agreement includes a financial
covenant that requires us to maintain a minimum Fixed Charge
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Coverage Ratio of 1.00:1:00, as defined therein. However, the covenant is only
applicable if excess availability under the Credit Agreement is less than or
equal to the greater of (i) $37.7 million and (ii) 10% of the line cap, and
remains in effect until excess availability has been greater than the greater of
(i) $37.7 million and (ii) 10% of the line cap for 30 consecutive days. While
there can be no assurances, based upon our forecast, we do not expect the
financial covenant to become applicable during the year ending December 31,
2020 . We were in compliance with all covenants under the Credit Agreement as of
September 30, 2020 .
We had no outstanding borrowings with net availability of $362.3 million as of
September 30, 2020 . We had $61.6 million in letters of credit outstanding under
the Credit Agreement as of September 30, 2020 .
Contractual Obligations and Commercial Commitments
Off-Balance Sheet Arrangements AtSeptember 30, 2020 andDecember 31, 2019 , other than letters of credit issued under the Credit Agreement, we had no material off-balance sheet arrangements with unconsolidated entities. Recently Issued Accounting Pronouncements See Note 2 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.
Critical Accounting Policies There have been no material changes to the critical accounting policies as disclosed in the Company's 2019 Annual Report on Form 10-K.
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