Builders FirstSource Inc

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 approximately 570 locations in 43 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, 2023, 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, 2023, 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, 2023, included in our most recent annual report on Form 10-K for fiscal year 2023 (“2023 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 2023 Form 10-K.

The accounting policies of our operating segments are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in our 2023 Form 10-K. Since the Company operates in one reportable segment, the primary measures reviewed by our CEO, whom we have determined to be our chief operating decision maker, including revenue, gross margin and income before income taxes, are shown in these condensed consolidated financial statements.

When they meet the requirements under ASC 805, Business Combinations, merger and acquisition transactions are accounted for using the acquisition method, and accordingly the results of operations of the acquiree are included in the Company’s consolidated financial statements from the acquisition date. The consideration transferred is allocated to the identifiable assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with any excess recorded as goodwill. Transaction-related costs are expensed in the period the costs are incurred. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill.

Comprehensive Income

Comprehensive income is equal to net income for all periods presented.

Equity Investments

The Company’s equity investments are accounted for using equity method accounting and are recorded as other assets, net in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2024, and are not considered significant to the Company.

Reclassifications

Certain prior periods’ amounts have been reclassified to conform to the current year presentation, including changing the composition of our product categories, amounts presented as repurchases of common stock and tax withholdings on and exercises of equity awards, and amounts reported as borrowings under revolving credit facility and repayments under revolving credit facility. Prior period amounts related to product categories as disclosed in Note 3 have been reclassified to conform to the current year presentation.

The prior period amounts in the Condensed Consolidated Statements of Cash Flows for borrowings and repayments under the revolving credit facility have been reclassified to conform to the current year presentation. This change to reflect net amounts rather than gross amounts, resulted in a $466.0 million reduction in both borrowings under the revolving credit facility and repayments under the revolving credit facility. Additionally, the prior period amounts related to tax withholdings on equity awards have been reclassified from repurchases of common stock and combined with exercises of stock options to conform to the present year presentation. Reclassifications had no impact on net income, total assets and liabilities, stockholders’ equity, financing cash flows, or total cash flows as previously reported.

Recent Accounting Pronouncements

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to improve reportable segment disclosure requirements, primarily through additional and more detailed information about a reportable segment's expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The guidance is to be applied retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is intended to enhance the transparency and decision usefulness of income tax disclosures. This amendment modifies the rules on income tax disclosures to require entities to disclose: (i) specific categories in the rate reconciliation and additional information for reconciling items that meet a quantitative threshold; (ii) the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes, as well as individual jurisdictions in which income taxes paid is equal to or greater than five percent of total income taxes paid net of refunds; (iii) the income or loss from continuing operations before income tax expense, or benefit, disaggregated between domestic and foreign; and (iv) income tax expense or benefit from continuing operations disaggregated by federal, state and foreign. The guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted, and should be applied on a prospective basis, though retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.

2. Business Combinations

During the first three months of 2024, we acquired certain assets and the operations of Quality Door & Millwork, Inc. (“Quality Door”) and Hanson Truss Components, Inc. (“Hanson Truss”) for a combined total of approximately $59.0 million. Quality Door is a millwork distributor, serving Idaho markets in the Boise and Idaho Falls areas. Hanson Truss produces trusses, serving the areas of Northern California and Western Nevada.

During the first three months of 2023, we acquired certain assets and operations of Noltex Holdings, Inc. and affiliates (“Noltex”) for $84.6 million. Noltex manufactures trusses and provides building componentsto the single and multi-family markets, serving Texas markets in the Dallas-Fort Worth, San Antonio, Houston, Lubbock, and Midland areas.

The acquisitions were funded with a combination of cash on hand and borrowings under our $1.8 billion revolving credit facility due January 17, 2028 (the “Revolving Facility”). The transactions were accounted for by the acquisition method, and accordingly the results of operations have been included in the Company’s consolidated financial statements from the acquisition dates. The purchase price was allocated to the assets acquired and liabilities assumed based on estimated fair values at the acquisition dates, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill.

The following table summarizes the aggregate fair values of the assets acquired and liabilities assumed for acquisitions during the periods ended March 31, 2024, and March 31, 2023:

3. Revenue

The following table disaggregates our sales by product category:

We reclassified net sales of $54.0 million into the Specialty building products and services product category for thethree months ended March 31, 2023, to conform to the current year presentation.

The timing of revenue recognition, invoicing and cash collection results in accounts receivable, unbilled receivables, contract assets and contract liabilities. Contract assets include unbilled amounts when the revenue recognized exceeds the amount billed to the customer, and amounts representing a right to payment from previous performance that is conditional on something other than passage of time, such as retainage. Contract liabilities consist of customer advances and deposits, and deferred revenue.

Through March 31, 2024, and 2023, we recognized as revenue approximately 75% and 70% of the contract liabilities balances outstanding as of December 31,2023, and 2022, respectively.

4. Net Income per Common Share

Net income per common share (“EPS”) is calculated in accordance with the Earnings per Share topic of the FASB Accounting Standards 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:

5. Goodwill

The following table sets forth the changes in the carrying amount of goodwill:

(1) Goodwill is presented net of historical accumulated impairment losses of $44.6 million.

In 2024, the change in the carrying amount of goodwill is attributable to the acquisitions completed during the year. As of March 31, 2024, no triggering events have occurred. The amount allocated to goodwill is attributable to the assembled workforce, synergies and expected growth from the expanded product and service offerings of acquisitions. The goodwill recognized from the current year acquisitions is expected to be deductible and amortized ratably over a 15-year period for tax purposes.

6. Intangible Assets

The following table presents intangible assets as of:

In connection with the current year acquisitions, we recorded customer relationships intangible assets of$24.1 million. The weighted average useful life of the current year acquired intangible assets is 3.0 years. The fair value of acquired customer relationship intangible assets was primarily estimated by applying the multi-period excess earnings method, which involved the use of significant estimates and assumptions primarily related to forecasted revenue growth rates, gross margin, contributory asset charges, customer attrition rates, and market-participant discount rates. These measures are based on significant Level 3 inputs not observable in the market. Key assumptions developed based on the Company’s historical experience, future projections and comparable market data include future cash flows, long-term growth rates, attrition rates and discount rates.

During the three months ended March 31, 2024, and March 31, 2023, we recorded amortization expense in relation to the above-listed intangible assets of$79.9 million and$84.6 million, respectively.

The following table presents the estimated amortization expense for intangible assets for the years ending December 31:

7. Accrued Liabilities

Accrued liabilities consisted of the following as of:

8. Long-Term Debt

Long-term debt consisted of the following as of:

(1)

The weighted average interest rate was 8.0% and 7.1% as of March 31, 2024, and December 31, 2023, respectively.

2024 Debt Transactions

On February 29, 2024, the Company completed aprivate offering of $1.0 billion in aggregate principal amount of 6.375% senior unsecured notes due 2034 (“6.375% 2034 Notes”) at an issue price equal to 100% of par value. The net proceeds from the offering were used to repay indebtedness outstanding under the Revolving Facility and for general corporate purposes.

In connection with the issuance of the 6.375% 2034 notes, we incurred $12.8 million of various third-party fees and expenses. These costs have been recorded as a reduction to long-term debt and are being amortized over the contractual life of the 6.375% 2034 notes using the effective interest method.

The 6.375% 2034 Notes mature on March 1, 2034, with interest accruing at a rate of 6.375% per annum andinterest payable semi-annually on March 1 and September 1 of each year.

The terms of the 6.375% 2034 Notes are governed by the indenture, dated as of February 29, 2024 (“2034 Indenture”). The 2034 Indenture contains consistent terms and are among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee.

The 6.375% 2034 Notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior unsecured basis, by each of the Company’s direct and indirect wholly-owned subsidiaries (the “Guarantors”) that guarantee the Revolving Facility, the 5.000% senior notes due 2030 (the “5.00% 2030 Notes”), the 4.250% senior notes due 2032 (the “4.25% 2032 Notes”) and the 6.375% senior notes due 2032 (the “6.375% 2032 Notes” and, collectively with the 5.00% 2030 Notes and the 4.25% 2032 Notes, the “Existing Notes”).

The 6.375% 2034 Notes constitute senior unsecured obligations of the Company and Guarantors, pari passu in right of payment, with all of the existing and future senior indebtedness of the Company, including indebtedness under the Revolving Facility and the Existing Notes effectively subordinated to all existing and future secured indebtedness of the Company and the Guarantors (including indebtedness under the Revolving Facility) to the extent of the value of the assets securing such indebtedness, senior to all of the future subordinated indebtedness of the Company and the Guarantors and structurally subordinated to any existing and future indebtedness and other liabilities, including preferred stock, of the Company’s subsidiaries that do not guarantee the 6.375% 2034 Notes.

The 2034 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.

The Company may redeem the 6.375% 2034 Notes within five years from the date of issuance, in whole or in part, at a redemption price equal to 100% of the principal amount of the 6.375% 2034 Notes plus the “applicable premium” set forth in the 2034 Indenture. The Company may, within three years of the date of issuance, redeem up to 40% of the aggregate principal amount of the 6.375% 2034 Notes with the net cash proceeds of one or more equity offerings at 106.375%of the principal amount thereof plus accruedand unpaid interest, if any, to the redemption date. After the five-year period from original issuance, the Company may redeem the 6.375% 2034 Notes at the redemption prices set forth in the 2034 Indenture, plus accrued and unpaid interest, if any, to the redemption date. If the Company experiences certain change of control triggering events, holders of the 6.375% 2034 Notes may require it to repurchase all or part of their notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.

The Company’s Revolving Facility and other outstanding senior unsecured notes are discussed in more detail in our 2023 Form 10-K.

Fair Value

As of March 31, 2024, and December 31, 2023, the Company does not have any financial instruments that are measured at fair value on a recurring basis. We have elected to report the value of our Existing Notes, the 6.375% 2034 Notes, and Revolving Facility at amortized cost. The fair values of the 5.00% 2030 Notes,4.25% 2032 Notes,6.375% 2032 Notes, and 6.375% 2034 Notes at March 31, 2024, were approximately$525.5 million,$1.2 billion,$711.3 million, and$1.0 billion, respectively, which were determined using Level 2 inputs based on market prices.

We were not in violation of any covenants or restrictions imposed by any of our debt agreements at March 31, 2024.

9. Employee Stock-Based Compensation

Time Based Restricted Stock Unit Grants

In the first three months of 2024, our board of directors granted 246,000 restricted stock units (“RSUs”) to employees under our 2014 Incentive Plan for which vesting is based solely on continuous employment over the requisite service period. These grants vest over a service period betweenone andfour years. The weighted average grant date fair value for these RSUs was$189.36 per unit, which was based on the closing stock price on the respective grant dates.

Performance, Market and Service Condition Based Restricted Stock Unit Grants

In the first three months of 2024, our board of directors granted 81,000 RSUs to employees under our 2014 Incentive Plan, which 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 over athree-year period (“performance condition”) and continued employment during the performance period (“service condition”). 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$202.84 per unit, which was determined using the Monte Carlo simulation model, applying the following assumptions:

The expected volatilities and correlation are based on the historical daily returns of our common stock and the common stocks of the constituents of our 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.

10. Income Taxes

A reconciliation of the statutory federal income tax rate to our effective rate for continuing operations is provided below:

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. These differences could have a material impact on our consolidated results of operations or financial position.

11. Commitments and Contingencies

As of March 31, 2024, we had outstanding letters of credit totaling$66.5 million under our Revolving 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 reasonable range of loss based on currently available information, the resolution of these matters could materially affect 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 amounts in excess of our self-insured retention that 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 materially affect 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.

12. Subsequent Events

Subsequent to March 31, 2024, we completed a transaction to acquire certain assets and the operations of Schoeneman’s Building Materials who manufactures trusses and distributes building material products in the Sioux Falls, South Dakota area. The accounting for this business combination has not been completed at the date of this filing given the proximity of the acquisition date.

Item 2. Management’s Discussion and Analysis of