Builders FirstSource, Inc. (BLDR)

Item 7. 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 consolidated financial statements and related notes contained in Item 8. Financial Statements and Supplementary Data of this annual report on Form 10-K. See “Risk Factors” contained in Item 1A. Risk Factors of this annual report on Form 10-K and “Cautionary Statement” contained in Item 1. Business of this annual report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.

OVERVIEW

We are a leading supplier and manufacturer of building materials, manufactured components and construction services to professional contractors, sub-contractors and consumers. The Company operates approximately 590 locations in 43 states across the U.S. Given the span and depth of our geographical reach, our locations are organized into three geographical divisions (East, Central, and West), which are also our operating segments. All of our segments have similar customers, products and services, and distribution methods. Due to the similar economic characteristics, categories of products, distribution methods and customers, our operating segments are aggregated into one reportable segment.

We offer an integrated solution to our customers by 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, 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, various window, door and millwork lines along with other various building products. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all of our product categories. We also offer digital solutions through our Paradigm subsidiary, including drafting, estimating, quoting, and virtual home design services.

We group our building products into four product categories:

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Manufactured Products. Manufactured products consist of wood floor and roof trusses, wall panels, engineered wood and our Ready-Frame® framing system.

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Windows, Doors and Millwork. Windows and 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, such as intricate mouldings, stair parts, and columns.

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Specialty Building Products and Services. Specialty building products and services consist of various products, including vinyl, composite and wood siding, exterior trim, metal studs, cement, roofing, insulation, wallboard, ceilings, cabinets, and hardware. This category also includes services such as turn-key framing, shell construction, design assistance and professional installation of products spanning all of our product categories. We also offer software products through our Paradigm subsidiary, including drafting, estimating, quoting, and virtual home design services, which provide digital solutions to retailers, distributors, manufacturers and homebuilders that help them boost sales, reduce costs, and become more competitive.

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Lumber and Lumber Sheet Goods. Lumber and lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing.

Our operating results are dependent on the following trends, strategies, events and uncertainties, some of which are beyond our control:

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Homebuilding Industry and Market Competition. 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, land development costs, the availability of skilled construction labor, rising inflationary pressures, mortgage markets and the health of the economy. Many factors have impacted and may continue to impact our sales and gross margins, including continued consolidation within the building products supply industry, increased competition for homebuilder business, supply chain constraints and cyclical fluctuations in commodity prices. Moreover, our industry remains highly fragmented and competitive, and we will continue to face significant competition from local and regional suppliers. As various current market dynamics, including inflationary pressures, mortgage rates and housing affordability shift, industry forecasters, including the National Association of Home Builders (“NAHB”), expect to see housing demand increase in the near-term. Despite recent tempered market conditions, we believe the housing industry remains underbuilt and that there are several meaningful trends that indicate U.S. housing demand will continue to be strong over the long-term, including the aging of housing stock and normal population growth due to immigration and birthrate exceeding death rate.

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Targeting Large Production Homebuilders. The homebuilding industry continues to undergo consolidation, and the larger homebuilders continue to increase 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 face in servicing large homebuilders with certain profitability expectations. Additionally, we continue to focus on expanding our custom homebuilder base while maintaining acceptable credit standards.

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Multi-family and Light Commercial Business. Our primary focus has been on single-family residential new construction and the repair and remodel end market. However, through recent acquisitions we have expanded our operational footprint in the multi-family market, predominantly five-story and smaller, wood construction, and the light commercial market, growing our value-added components and millwork product offerings in this end market. We will continue to identify opportunities for profitable growth in these areas.

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Repair and remodel end market. While influenced by housing starts to a lesser degree than the homebuilding market, the repair and remodel market is still dependent upon some of the same factors, including demographic trends, interest rates, consumer confidence, employment rates, the health of the economy and home financing markets. As a result of these pressures, we may experience reduced sales demand, challenges in the supply chain, increased margin pressures and/or increased operating costs in this area of our business. 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.

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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 times from start to completion is a key imperative of the homebuilders during periods of strong consumer demand. As the availability of skilled construction labor remains limited, we continue to see the demand for prefabricated components increasing within the residential new construction market.

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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, to a lesser extent, repair and remodel activities, and is 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 (including with respect to tariffs on imported goods), inflation 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. Disruptions and uncertainties as a result of a number of unforeseen environmental, social, economic or other factors, may have a significant impact on our future operating results.

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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 and other economic factors relative to home prices could result in changes to the affordability of homes. As a result, homebuyer demand may shift toward smaller or larger homes creating fluctuations in demand for our products.

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Cost and/or Availability of Materials. Prices of building materials, including wood products, are subject to cyclical market fluctuations, which may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase materials 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 and/or availability of these materials, some of which are subject to significant fluctuations, are often passed on to our customers, but our pricing quotation periods and market competition may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products. We may also experience challenges sourcing suitable products for our customers and may be forced to provide alternative materials as substitution for contracted orders. Our inability to pass on material price increases to our customers could adversely impact our operating results.

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Controlling Expenses. Another important aspect of our strategy is controlling costs and striving to be a low total-cost building materials supplier in the markets we serve. We closely manage our working capital and operating expenses, and we pay careful attention to our logistics function and its effect on our shipping and handling costs. However, we do have significant fixed costs and declines in our customer demand could have an adverse impact on our operating results.

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Capital Structure. 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, our market capitalization, and market interest rates. As such, we may enter into various debt or equity transactions to appropriately manage and optimize our capital structure and liquidity needs.

RECENT DEVELOPMENTS

Business Combinations

During 2024 we completed a number of acquisitions for a combined $345.4 million purchase price, net of cash acquired, including the acquisitions of (i) Quality Door & Millwork, Inc. (“Quality Door”), (ii) Hanson Truss Components, Inc. (“Hanson Truss”), (iii) RPM Wood Products, Inc. (“RPM”), (iv) Schoeneman Bros. Company (“Schoeneman”), (v) TRSMI, LLC (“TRSMI”), (vi) Western Truss & Components (“Western Truss”), (vii) CRi SoCal (“CRi”), (viii) Wyoming Millwork Co. (“Wyoming Millwork”), (ix) Sunrise Wood Designs, LLC (“Sunrise Wood Designs”), (x) Reno Truss, Inc. (“Reno Truss”), (xi) High Mountain Door and Trim, Inc. (“High Mountain”), (xii) Douglas Lumber, Kitchens and Home Center (“Douglas Lumber”), and (xiii) Kleet Lumber (“Kleet Lumber”).

On January 2, 2025, we completed our previously announced acquisition of Alpine Lumber Company, the largest independently operated supplier of building materials in Colorado and northern New Mexico. Alpine serves the Colorado Front Range, western Colorado and northern New Mexico through its 21 operating locations and provides a broad product range, including prefabricated trusses and wall panels and millwork. On February 3, 2025, we completed the acquisition of O.C. Cluss Lumber, a lumber and building supplies provider in southwestern Pennsylvania, western Maryland and northern West Virginia.

These acquisitions further expand our market footprint and provide additional operations in our value-added product categories and are further described in Notes 3 and 16 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Company Shares Repurchases

On February 21, 2024, the Company’s board of directors authorized the repurchase of up to $1.0 billion of the Company’s outstanding shares of common stock, inclusive of the approximately $200 million remaining outstanding in the prior share repurchase plan authorized in April 2023. Share repurchases under this program were completed in May 2024.

On August 5, 2024, the Company’s board of directors authorized a new repurchase plan of up to $1.0 billion of the Company’s outstanding shares of common stock.

Under share repurchase programs authorized by the board of directors since August 2021, the Company has repurchased a total of 95.9 million shares of common stock, or 46.5% of the Company’s total shares outstanding, at an average price of $79.56, inclusive of fees and taxes, including 8.9 million shares of common stock at an average price of $170.74, inclusive of fees and taxes, in 2024. As of December 31,2024, the Company had $500.0 million authorization remaining under its current share repurchase program.

Debt Transactions

On February 29, 2024, the Company completed a private 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 pay related transaction fees and expenses, repay indebtedness outstanding under the Revolving Facility and for general corporate purposes.

This transaction is described further in Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K. 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.

Executive Officer Transition

On September 19, 2024, the Company’s board of directors appointed Peter Jackson as the Company’s next President & Chief Executive Officer and member of its board of directors, effective November 6, 2024. Mr. Jackson previously served as Executive Vice President and Chief Financial Officer of the company since January 2021 and as Senior Vice President and Chief Financial Officer since November 2016. Mr. Jackson succeeded Dave Rush, who served as President and Chief Executive Officer since November 2022 and retired after 25 years of dedicated service to the Company, effective November 6, 2024. Mr. Rush will remain on the Company’s

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board of directors and continue as a special advisor to the Company to ensure a smooth transition. Additionally, the Company’s board of directors appointed Pete Beckmann, Senior Vice President, as Chief Financial Officer to succeed Mr. Jackson, effective November 6, 2024. Mr. Beckmann previously served as Senior Vice President, Financial Planning &Analysis of the Company since January 2021 and has been with the Company and legacy companies since 1999, serving in finance roles of increasing responsibility.

CURRENT OPERATING CONDITIONS AND OUTLOOK

According to the U.S. Census Bureau, actual U.S. total housing starts for the year ended December 31, 2024, were 1.4 million, a decrease of 3.9% compared to the year ended December 31, 2023. Actual U.S. single-family housing starts for the year ended December 31, 2024, were 1.0 million, an increase of 6.5% compared to the year ended December 31, 2023. A composite of third-party sources, including the NAHB, are forecasting 1.4 million U.S. total housing starts and 1.0 million U.S. single-family housing starts for 2025, which are relatively flat from 2024. In addition, in its September 2024 semi-annual forecast, the HIRI forecasted sales in the professional repair and remodel end market to increase 3.2% in 2025 compared to 2024.

We believe the long-term outlook for the housing industry is positive and that the housing industry remains underbuilt due to growth in the underlying demographics compared to historical new construction levels. However, uncertainty around interest rates and inflation may continue to pressure near-term housing industry demand as homes are less affordable for consumers, investors and builders. We believe 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. 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 expand.

RESULTS OF OPERATIONS

A discussion regarding our financial condition and results of operations for the year ended December 31, 2024, compared to the year ended December 31, 2023, is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2023, compared to the year ended December 31, 2022, can be found under Item 7 of Part II of our annual report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 22, 2024.

2024 Compared with 2023

The following table sets forth the percentage relationship to net sales of certain costs, expenses and income items for the years ended December 31:

Net Sales. Net sales for the year ended December 31, 2024, were $16.4 billion, a 4.1% decrease from net sales of $17.1 billion for 2023. Net sales decreased primarily as a result of a core organic sales decrease of 5.1% due to a continued normalization in the multi-family customer segment and declines in the single-family customer segment as home size and complexity decrease, while commodity price deflation decreased net sales by another 1.8%. These decreases were partially offset by increases in net sales from acquisitions and increased selling days of 2.1% and 0.7%, respectively.

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The following table shows net sales classified by major product category for the years ended December 31:

(1) Manufactured products and windows, doors and millwork are collectively referred to as total value-added products.

We experienced decreased net sales in our manufactured products categories primarily due to a continued normalization in multi-family and commodity deflation. Our windows, doors, and millwork sales declined primarily due to price normalization. For the comparable period, specialty building products and services and lumber and lumber sheet goods sales remained relatively consistent.

Gross Margin. Gross margin decreased $0.6 billion to $5.4 billion due to decreased sales. Our gross margin percentage decreased to 32.8% in 2024 from 35.2% in 2023, a 2.4% decrease. This decrease was attributable to single-family and multi-family margin normalization.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $48.2 million, or 1.3%. This decrease in expenses was primarily due to decreased variable compensation costs related to decreased sales and profitability, and reduced intangible amortization expense, partially offset by additional operating expenses from locations acquired within the last twelve months and asset write-offs.

As a percentage of net sales, selling, general and administrative expenses increased to 23.1% from 22.4% in 2023. This increase was primarily due to decreased cost leverage on lower net sales during the period.

Interest Expense, Net. Interest expense, net was $207.7 million in 2024, an increase of $15.6 million from 2023. Interest expense increased primarily due to higher debt balances and average interest rates in 2024 compared to 2023, partially offset by interest income received in 2024.

Income Tax Expense. We recorded income tax expense of $309.6 million during the year ended December 31, 2024, compared to income tax expense of $443.6 million during the year ended December 31, 2023, a decrease of $134.0 million, driven by a decrease in income before income taxes in the current period. Our effective tax rate was 22.3% in 2024 which was relatively flat compared to the 22.4% in 2023.

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 growth opportunities. Our capital resources at December 31, 2024, consist of cash on hand and borrowing availability under our Revolving Facility.

Our Revolving Facility will be primarily used for working capital, general corporate purposes, and funding capital expenditures and growth opportunities. In addition, we may use the Revolving Facility to assist debt consolidation. Availability under the Revolving 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.

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The following table shows our borrowing base and excess availability as of December 31, 2024, and 2023:

As of December 31, 2024, we had no outstanding borrowings under our Revolving Facility and our net excess borrowing availability was $1.6 billion after being reduced by outstanding letters of credit of $0.1 billion. Excess availability must equal or exceed a minimum specified amount, currently $171.4 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 December 31, 2024.

Liquidity

Our liquidity at December 31, 2024, was $1.8 billion, which consists of net borrowing availability under the Revolving Facility and cash on hand.

Our level of indebtedness results in significant 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, 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

A discussion regarding our consolidated cash flows for the year ended December 31, 2024, compared to the year ended December 31, 2023, is presented below. A discussion regarding our consolidated cash flows for the year ended December 31, 2023, compared to the year ended December 31, 2022, can be found under Item 7 of Part II of our annual report on Form 10-K filed with the SEC on February 22, 2024.

2024 Compared with 2023

Cash provided by operating activities was $1.9 billion in 2024 compared to cash provided by operating activities of $2.3 billion in 2023. The decrease in cash provided by operating activities was largely the result of a decrease in net income in 2024 of $0.5 billion.

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For the year ended December 31, 2024, the Company used $42.4 million more cash to invest compared to the prior year ended December 31, 2023, primarily due to $97.8 million more spent on acquisitions, offset by $63.0 million less as a net investment in property, plant and equipment.

Cash used in financing activities was $1.1 billion in 2024 which consisted primarily of $1.5 billion for repurchases of common stock and $0.5 billion net payments on the Revolving Facility, offset by a net $1.0 billion received for the issuance of the 6.375% 2034 notes. Cash used in financing activities was $1.7 billion for 2023 which consisted primarily of $1.8 billion in repurchases of common stock, partially offset by $0.2 billion in net borrowings on the Revolving Facility.

These debt transactions are described in Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Capital Expenditures

Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have, for the most part, remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. We expect our 2025 capital expenditures to be in the range of $350 million to $450 million primarily related to rolling stock, equipment and facility expansion and improvements to support our operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those that both are important to the accurate portrayal of a company’s financial condition and results, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In order to prepare financial statements that conform to generally accepted accounting principles (“GAAP”), we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

We have identified the following accounting policy that requires us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.

Goodwill

Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. At December 31, 2024, our goodwill balance was $3.7 billion, representing 34.8% of our total assets.

We test goodwill for impairment in the fourth quarter of each year or at any other time when impairment indicators exist. Examples of such indicators that could cause us to test goodwill for impairment between annual tests, include a significant change in the business climate, unexpected competition or a significant deterioration in market share. We may also consider market capitalization relative to our net assets. Housing starts are a significant sales driver for us. If there is a significant decline or an expected decline in housing starts, this could adversely affect our expectations for a reporting unit and the value of that reporting unit.

The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Our reporting units are aligned with our three geographical divisions which are also determined to be our operating segments. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of the reporting unit is not less than its carrying amount, then no further testing of the goodwill is required.

However, if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative goodwill impairment test. This test identifies both the existence of and the amount of goodwill impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.

We assessed our goodwill balance at December 31, 2024, using a quantitative assessment. In performing the quantitative impairment test at December 31, 2024, we developed the fair value using a discounted cash flow methodology. Inherent in such fair

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value determinations are significant assumptions relating to future cash flows, expected future revenues, expected future profitability, the discount rate, the terminal value, and our interpretation of current economic indicators and market conditions and their impact on our strategic plans and operations. Due to the uncertainties associated with such estimates, interpretations and assumptions, actual results could differ from projected results, which could result in impairment of goodwill being recorded.

Significant information and assumptions utilized in estimating future cash flows for quantitative goodwill impairment analyses include projections of revenue growth utilizing publicly available industry information such as lumber commodity prices and housing start forecasts developed by industry forecasters, including the NAHB. Expected future profitability reflects current headcount levels and cost structure and are flexed in future years based upon historical trends at various revenue levels. Long-term growth was based on terminal value EBITDA multiples to reflect the relevant expected acquisition prices. The discount rate used is intended to reflect the weighted average cost of capital for a potential market participant and includes all risks of ownership and the associated risks of realizing the stream of projected future cash flows. Decreasing the long-term growth EBITDA multiple or increasing the discount rate would not have changed the results of our impairment testing.

At December 31, 2024, the fair values of each of our reporting units were substantially in excess of their respective carrying amounts. Factors that could negatively impact the estimated fair value of our reporting units and potentially trigger impairment include, but are not limited to, unexpected competition, lower than expected housing starts, an increase in market participant weighted average cost of capital, increases in material or labor cost, and/or significant declines in our market capitalization. Future impairment of goodwill would have the effect of decreasing our earnings or increasing our losses in such period but would not impact our current outstanding debt obligations or compliance with covenants contained in the related debt agreements. We did not have any goodwill impairments in 2024, 2023 or 2022.

RECENTLY ISSUED ACCOUNTING STANDARDS

Information regarding recent accounting pronouncements is discussed in Note 2 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Item 7. 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 consolidated financial statements and related notes contained in Item 8. Financial Statements and Supplementary Data of this annual report on Form 10-K. See “Risk Factors” contained in Item 1A. Risk Factors of this annual report on Form 10-K and “Cautionary Statement” contained in Item 1. Business of this annual report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.

OVERVIEW

We are a leading supplier and manufacturer of building materials, manufactured components and construction services to professional contractors, sub-contractors and consumers. The Company operates approximately 570 locations in 43 states across the U.S. Given the span and depth of our geographical reach, our locations are organized into three geographical divisions (East, Central, and West), which are also our operating segments. All of our segments have similar customers, products and services, and distribution methods. Due to the similar economic characteristics, categories of products, distribution methods and customers, our operating segments are aggregated into one reportable segment.

We offer an integrated solution to our customers by 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, 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, various window, door and millwork lines along with other various building products. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all of our product categories.

We group our building products into four product categories:

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Lumber and Lumber Sheet Goods. Lumber and lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing.

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Manufactured Products. Manufactured products consist of wood floor and roof trusses, wall panels, and engineered wood.

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Windows, Doors and Millwork. Windows and 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, such as intricate mouldings, stair parts, and columns.

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Specialty Building Products and Services. Specialty building products and services consist of various products, including vinyl, composite and wood siding, exterior trim, metal studs, cement, roofing, insulation, wallboard, ceilings, cabinets, and hardware. This category also includes services such as turn-key framing, shell construction, design assistance and professional installation of products spanning all of our product categories. We also offer software products through our Paradigm subsidiary, including drafting, estimating, quoting, and virtual home design services, which provide software solutions to retailers, distributors, manufacturers and homebuilders that help them boost sales, reduce costs, and become more competitive.

Our operating results are dependent on the following trends, strategies, events and uncertainties, some of which are beyond our control:

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Homebuilding Industry and Market Competition. 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, land development costs, the availability of skilled construction labor, rising inflationary pressures, mortgage markets and the health of the economy. Many factors have impacted and may continue to impact our sales and gross margins, including continued consolidation within the building products supply industry, increased competition for homebuilder business, supply chain constraints and cyclical fluctuations in commodity prices. Moreover, our industry remains highly fragmented and competitive, and we will continue to face significant competition from local and regional suppliers. As various current market dynamics, including inflationary pressures, mortgage rate increases and shifts in housing affordability improve, industry forecasters, including the National Association of Home Builders (“NAHB”), expect to see housing demand increase in the near-term. Despite recent tempered market conditions, we believe the housing industry remains underbuilt and that there are several meaningful trends that indicate U.S. housing demand will continue to be strong over the long-term, including the aging of housing stock and normal population growth due to immigration and birthrate exceeding death rate.

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Targeting Large Production Homebuilders. The homebuilding industry continues to undergo consolidation, and the larger homebuilders continue to increase 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 face in servicing large homebuilders with certain profitability expectations. Additionally, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.

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Repair and remodel end market. While influenced by housing starts to a lesser degree than the homebuilding market, the repair and remodel market is still dependent upon some of the same factors, including demographic trends, interest rates, consumer confidence, employment rates, the health of the economy and home financing markets. As a result of these pressures, we may experience reduced sales demand, challenges in the supply chain, increased margin pressures and/or increased operating costs in this area of our business. 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.

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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. As the availability of skilled construction labor remains limited, we continue to see the demand for prefabricated components increasing within the residential new construction market.

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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, to a lesser extent, repair and remodel activities, and is 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, rising inflation and other factors that affect the homebuilding industry, such as demographic trends, increasing interest rates, housing starts, the high cost of land development, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. Disruptions and uncertainties as a result of a number of unforeseen environmental, social, economic or other factors, may have a significant impact on our future operating results.

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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 and other economic factors relative to home prices could result in changes to the affordability of homes. As a result, homebuyer demand may shift toward smaller or larger homes creating fluctuations in demand for our products.

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Cost and/or Availability of Materials. Prices of building materials, including wood products, are subject to cyclical market fluctuations, which may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase materials 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 and/or availability of these materials, some of which are subject to significant fluctuations, are often passed on to our customers, but our pricing quotation periods and market competition may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products. We may also experience challenges sourcing suitable products for our customers and may be forced to provide alternative materials as substitution for contracted orders. Our inability to pass on material price increases to our customers could adversely impact our operating results.

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Controlling Expenses. Another important aspect of our strategy is controlling costs and striving to be a low total-cost building materials supplier in the markets we serve. We closely manage our working capital and operating expenses, and we pay careful attention to our logistics function and its effect on our shipping and handling costs. However, we do have significant fixed costs and declines in our customer demand could have an adverse impact on our operating results.

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Multifamily and Light Commercial Business. Our primary focus has been on single-family residential new construction and the repair and remodel end market. However, through recent acquisitions we have expanded our operational footprint in the multifamily market, predominantly five-story and smaller, wood construction, and the light commercial market, growing our value-add components and millwork product offerings in this end market. We will continue to identify opportunities for profitable growth in these areas.

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Capital Structure. 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, our market capitalization, and market interest rates. As such, we may enter into various debt or equity transactions to appropriately manage and optimize our capital structure and liquidity needs.

RECENT DEVELOPMENTS

Business Combinations

During 2023 we completed a number of acquisitions for a combined $252.5 million purchase price, net of cash acquired, including the acquisitions of (i) Noltex Truss and its affiliates (“Noltex”), (ii) Builders Millwork and Supply, Inc. (“BMS”) (iii) J.B. Millworks, LLC (“JBM”), (iv) Church and Church, Inc. (“Church’s”), (v) Franks Cash and Carry, Inc. (“FCC”), (vi) Standale Lumber, LLC and Granville Lumber Co., LLC (“Standale”), and (vii) Encore Performance, LLC (“Encore”).

These acquisitions further expand our market footprint and provide additional operations in our value-add product categories and our multifamily customer segment and are further described in Note 3 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Company Shares Repurchases

Under share repurchase programs authorized by the board of directors since August 2021, the Company has repurchased a total of 87.1 million shares of common stock, or 42.2% of the Company’s total shares outstanding, at an average price of $70.27, inclusive of fees and taxes, including 17.8 million shares of common stock at an average price of $100.49, inclusive of fees and taxes, in 2023. As of December 31, 2023, the Company had $200.5 million authorization remaining under its current share repurchase program.

On February 21, 2024, the Company’s Board of Directors authorized the repurchase of up to $1.0 billion of the Company’s outstanding shares of common stock, inclusive of the approximately $200 million remaining outstanding in the prior share repurchase plan authorized in April 2023.

Debt Transactions

On January 17 and April 3, 2023, the Company amended the Revolving facility to extend the maturity to January 17, 2028, and to include additional pricing tiers for the applicable margin.

These transactions are described further in Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K. Collectively, these transactions have extended our debt maturity. 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.

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CURRENT OPERATING CONDITIONS AND OUTLOOK

According to the U.S. Census Bureau, actual U.S. total housing starts for the year ended December 31, 2023, were 1.4 million, a decrease of 9.0% compared to the year ended December 31, 2022. Actual U.S. single-family housing starts for the year ended December 31, 2023, were 0.9 million, a decrease of 6.0% compared to the year ended December 31, 2022. A composite of third-party sources, including the NAHB, are forecasting 1.4 million U.S. total housing starts and 1.0 million U.S. single-family housing starts for 2024, which is relatively flat and an increase of 4.7%, respectively, from 2023. In addition, in its September 2023 semi-annual forecast, the Home Improvement Research Institute (“HIRI”) forecasted sales in the professional repair and remodel end market to increase 1.3% in 2024 compared to 2023.

We believe the long-term outlook for the housing industry is positive and that the housing industry remains underbuilt due to growth in the underlying demographics compared to historical new construction levels. However, uncertainty around interest rates and inflation may continue to dampen near-term housing industry demand as homes are less affordable for consumers, investors and builders. We believe 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. 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 expand.

RESULTS OF OPERATIONS

A discussion regarding our financial condition and results of operations for the year ended December 31, 2023, compared to the year ended December 31, 2022, is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2022, compared to the year ended December 31, 2021, can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 28, 2023.

2023 Compared with 2022

The following table sets forth the percentage relationship to net sales of certain costs, expenses and income items for the years ended December 31:

Net Sales. Net sales for the year ended December 31, 2023, were $17.1 billion, a 24.8% decrease from net sales of $22.7 billion for 2022. Net sales decreased primarily as a result of a core organic sales decrease of 17.3% and a commodity price deflation decrease of 11.1%, partially offset by sales growth from acquisitions of 3.6%.

The following table shows net sales classified by major product category for the years ended December 31:

We experienced decreased net sales in all of our product categories primarily due to a slow-down in single-family housing starts throughout the year, resulting in a decline in core organic sales, and commodity price deflation.

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Gross Margin. Gross margin decreased $1.7 billion to $6.0 billion due to decreased sales. Our gross margin percentage increased to 35.2% in 2023 from 34.1% in 2022, a 1.1% increase. This increase was attributable to an improved product mix toward our value-add products, including recent strategic investments in multifamily value-add operations.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.1 billion, or 3.5%. This decrease in expenses was primarily due to decreased variable compensation costs related to decreased sales and profitability, and reduced expense related to customer reserves, partially offset by additional operating expenses from locations acquired within the last twelve months.

As a percentage of net sales, selling, general and administrative expenses increased to 22.4% from 17.5% in 2022. This increase was primarily due to decreased cost leverage on lower net sales during the period.

Interest Expense, Net. Interest expense, net was $192.1 million in 2023, a decrease of $6.3 million from 2022. Interest expense decreased primarily due to the $27.4 million loss on extinguishment recognized in 2022, partially offset by higher debt balances and average interest rates in 2023 compared to 2022.

Income Tax Expense. We recorded income tax expense of $443.6 million during the year ended December 31, 2023, compared to income tax expense of $822.5 million during the year ended December 31, 2022, a decrease of $378.9 million, driven by a decrease in income before income taxes in the current period. Our effective tax rate was 22.4% in 2023 and 23.0% in 2022. Our effective tax rate was favorably affected in 2023 by the impact of federal and state tax credits on decreased tax expense.

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 growth opportunities. Our capital resources at December 31, 2023, consist of cash on hand and borrowing availability under our Revolving facility.

Our Revolving facility will be primarily used for working capital, general corporate purposes, and funding capital expenditures and growth opportunities. In addition, we may use the Revolving facility to assist debt consolidation. Availability under the Revolving facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables which include progress billings and credit card receivables, and qualified cash that all meet specific criteria contained within the credit agreement, minus agent specified reserves. Net excess borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and letters of credit.

The following table shows our borrowing base and excess availability as of December 31, 2023, and 2022:

As of December 31, 2023, we had $464.0 million in outstanding borrowings under our Revolving facility and our net excess borrowing availability was $1.3 billion after being reduced by outstanding letters of credit of $70.3 million. Excess availability must

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equal or exceed a minimum specified amount, currently $180.0 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 December 31, 2023.

Liquidity

Our liquidity at December 31, 2023, was $1.3 billion, which consists of net borrowing availability under the Revolving facility and cash on hand.

Our level of indebtedness results in significant 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, 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

A discussion regarding our consolidated cash flows for the year ended December 31, 2023, compared to the year ended December 31, 2022, is presented below. A discussion regarding our consolidated cash flows for the year ended December 31, 2022, compared to the year ended December 31, 2021, can be found under Item 7 of Part II of our Annual Report on Form 10-K filed with the SEC on February 28, 2023.

2023 Compared with 2022

Cash provided by operating activities was $2.3 billion in 2023 compared to cash provided by operating activities of $3.6 billion in 2022. The decrease in cash provided by operating activities was largely the result of a decrease in net income in 2023 of $1.2 billion.

For the year ended December 31, 2023, compared to the prior year ended December 31, 2022, the Company used cash to invest $0.3 billion less, primarily due to $0.4 billion less spent on acquisitions, offset by $0.1 billion more as a net investment in property, plant and equipment.

Cash used in financing activities was $1.7 billion in 2023 which consisted primarily of $1.8 billion in repurchases of common stock, partially offset by $0.2 billion in net borrowings on the Revolving facility. Cash used in financing activities was $2.6 billion for 2022 which consisted primarily of $2.6 billion in repurchases of common stock, $0.6 billion to redeem the outstanding 6.75% senior secured notes due 2027 (“2027 notes”), and net paydowns on the Revolving facility of $0.3 billion, offset by net proceeds from the issuance of $0.7 billion of 6.375% senior unsecured notes due 2032 (“6.375% 2032 notes”) and the issuance $0.3 billion of 4.25% senior unsecured notes due 2032 (“4.25% 2032 notes,” and together with the 6.375% 2032 notes, the “2032 notes”).

These transactions are described in Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Capital Expenditures

Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have, for the most part, remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. We expect our 2024 capital expenditures to be in the range of $400 million to $500 million primarily related to rolling stock, equipment and facility expansion and improvements to support our operations.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those that both are important to the accurate portrayal of a company’s financial condition and results, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In order to prepare financial statements that conform to generally accepted accounting principles (“GAAP”), we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

We have identified the following accounting policy that requires us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.

Goodwill

Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. At December 31, 2023, our goodwill balance was $3.6 billion, representing 33.9% of our total assets.

We test goodwill for impairment in the fourth quarter of each year or at any other time when impairment indicators exist. Examples of such indicators that could cause us to test goodwill for impairment between annual tests, include a significant change in the business climate, unexpected competition or a significant deterioration in market share. We may also consider market capitalization relative to our net assets. Housing starts are a significant sales driver for us. If there is a significant decline or an expected decline in housing starts, this could adversely affect our expectations for a reporting unit and the value of that reporting unit.

The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Our reporting units are aligned with our three geographical divisions which are also determined to be our operating segments. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of the reporting unit is not less than its carrying amount, then no further testing of the goodwill is required.

However, if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative goodwill impairment test. This test identifies both the existence of and the amount of goodwill impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.

We assessed our goodwill balance at December 31, 2023, using a quantitative assessment. In performing the quantitative impairment test at December 31, 2023, we developed the fair value using a discounted cash flow methodology. Inherent in such fair value determinations are significant assumptions relating to future cash flows, expected future revenues, expected future profitability, the discount rate, the terminal value, and our interpretation of current economic indicators and market conditions and their impact on our strategic plans and operations. Due to the uncertainties associated with such estimates, interpretations and assumptions, actual results could differ from projected results, which could result in impairment of goodwill being recorded.

Significant information and assumptions utilized in estimating future cash flows for quantitative goodwill impairment analyses include projections of revenue growth utilizing publicly available industry information such as lumber commodity prices and housing start forecasts developed by industry forecasters, including the NAHB. Expected future profitability reflects current headcount levels and cost structure and are flexed in future years based upon historical trends at various revenue levels. Long-term growth was based on terminal value earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples to reflect the relevant expected acquisition prices. The discount rate used is intended to reflect the weighted average cost of capital for a potential market participant and includes all risks of ownership and the associated risks of realizing the stream of projected future cash flows. Decreasing the long-term growth EBITDA multiple or increasing the discount rate would not have changed the results of our impairment testing.

At December 31, 2023, the fair values of each of our reporting units were substantially in excess of their respective carrying amounts. Factors that could negatively impact the estimated fair value of our reporting units and potentially trigger impairment include, but are not limited to, unexpected competition, lower than expected housing starts, an increase in market participant weighted average cost of capital, increases in material or labor cost, and/or significant declines in our market capitalization. Future impairment of goodwill would have the effect of decreasing our earnings or increasing our losses in such period but would not impact our current

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outstanding debt obligations or compliance with covenants contained in the related debt agreements. We did not have any goodwill impairments in 2023, 2022 or 2021.

RECENTLY ISSUED ACCOUNTING STANDARDS

Information regarding recent accounting pronouncements is discussed in Note 2 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Item 7. 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 consolidated financial statements and related notes contained in Item 8. Financial Statements and Supplementary Data of this annual report on Form 10-K. See “Risk Factors” contained in Item 1A. Risk Factors of this annual report on Form 10-K and “Cautionary Statement” contained in Item 1. Business of this annual report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.

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 569 locations in 42 states across the United States. Given the span and depth of our geographical reach, our locations are organized into three geographical divisions (East, Central, and West), which are also our operating segments. All of our segments have similar customers, products and services, and distribution methods. Due to the similar economic characteristics, categories of products, distribution methods and customers, our operating segments are aggregated into one reportable segment.

We offer an integrated solution to our customers by 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, 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, various window, door and millwork lines along with other various building products. 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 four product categories:

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Lumber and Lumber Sheet Goods. Lumber and lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing.

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Manufactured Products. Manufactured products consist of wood floor and roof trusses, steel roof trusses, wall panels, and engineered wood.

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Windows, Door and Millwork. Windows and 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, such as intricate mouldings, stair parts, and columns.

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Specialty Building Products and Services. Specialty building products and services consist of various products, including vinyl, composite and wood siding, exterior trim, metal studs, cement, roofing, insulation, wallboard, ceilings, cabinets, and hardware. This category also includes services such as turn-key framing, shell construction, design assistance and professional installation of products spanning all of our product categories. We also offer software products through our Paradigm subsidiary, including drafting, estimating, quoting, and virtual home design services, which provide software solutions to retailers, distributors, manufacturers and homebuilders that boost sales, reduce costs, and help them become more competitive.

Our operating results are dependent on the following trends, strategies, events and uncertainties, some of which are beyond our control:

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Homebuilding Industry and Market Competition. 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, land development costs, the availability of skilled construction labor, rising inflationary pressures, mortgage markets and the health of the economy. According to the U.S. Census Bureau, the seasonally adjusted annual U.S. total and single-family housing starts were 1.4 million and 0.9 million, respectively, in 2022. Many factors have impacted and may continue to impact our sales and gross margins, including continued consolidation within the building products supply industry, increased competition for homebuilder business, supply chain constraints and cyclical fluctuations in commodity prices. Moreover, our industry remains highly fragmented and competitive, and we will continue to face significant competition from local and regional suppliers. As a result of various current market dynamics, including rising inflationary pressures, mortgage rate increases and shifts in housing affordability, industry forecasters, including the National Association of Home Builders (“NAHB”), expect to see housing demand soften near-term. Despite expected near-term tempered market conditions, we believe the housing industry remains underbuilt and that there are several meaningful trends that indicate U.S. housing demand will continue to be strong over the long-term, including the aging of housing stock and normal population growth due to immigration and birthrate exceeding death rate.

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Targeting Large Production Homebuilders. The homebuilding industry continues to undergo consolidation, and the larger homebuilders continue to increase 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 face in servicing large homebuilders with certain profitability expectations. Additionally, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.

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Repair and remodel end market. While influenced by housing starts to a lesser degree than the homebuilding market, the repair and remodel market is still dependent upon some of the same factors, including demographic trends, interest rates, consumer confidence, employment rates, the health of the economy and home financing markets. As a result of these pressures, we may experience reduced sales demand, challenges in the supply chain, increased margin pressures and/or increased operating costs in this area of our business as a result. 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.

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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. As the availability of skilled construction labor remains limited, we continue to see the demand for prefabricated components increasing within the residential new construction market.

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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, to a lesser extent, repair and remodel activities, and is 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, rising inflation and other factors that affect the homebuilding industry, such as demographic trends, increasing interest rates, housing starts, the high cost of land development, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. Disruptions and uncertainties as a result of a pandemic, or other health related emergency, like the COVID-19 pandemic, may have a significant impact on our future operating results.

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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 and other economic factors relative to home prices could result in changes to the affordability of homes. As a result, homebuyer demand may shift toward smaller or larger homes creating fluctuations in demand for our products.

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Cost and/or Availability of Materials. Prices of building materials, including wood products, are subject to cyclical market fluctuations, which may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase materials 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 and/or availability of these materials, some of which are subject to significant fluctuations, are often passed on to our customers, but our pricing quotation periods and market competition may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products. We may also experience challenges sourcing suitable products for our customers and may be forced to provide alternative materials as substitution for contracted orders. Our inability to pass on material price increases to our customers could adversely impact our operating results.

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Controlling Expenses. Another important aspect of our strategy is controlling costs and striving to be a low total-cost building materials supplier in the markets we serve. We closely manage our working capital and operating expenses. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.

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Multifamily and Light Commercial Business. Our primary focus has been on single-family residential new construction and the repair and remodel end market. However, through recent acquisitions we have expanded our operational footprint in the multifamily and light commercial markets, growing our value-add components and millwork product offerings in this end market. We will continue to identify opportunities for profitable growth in these areas.

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Capital Structure. We had $3,015.4 million of indebtedness as of December 31, 2022. 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, our market capitalization, and market interest rates. As such, we may enter into various debt or equity transactions to appropriately manage and optimize our capital structure and liquidity needs.

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RECENT DEVELOPMENTS

Business Combinations

During 2022 and through the date of this filing, we completed a number of acquisitions for a combined $722.3 million purchase price, net of cash acquired, including the acquisitions of (i) Panel Truss of Longview, Inc., Panel Truss – Hearne, LLC, Case-Hill, Inc., Panel Truss-Dallas, LLC, Truss Ops Trucking, LLC and Truss Ops, LLC (the “Texas Panel Truss Businesses”), (ii) Panel Truss – Oakwood, LLC, Panel Truss – Townville, LLC and Panel Truss – Ringgold, LLC (the “East Panel Truss Businesses”), (iii) Valley Truss Co., Inc. (“Valley Truss”), (iv) Odds-N-Ends, Inc., d/b/a HomCo Lumber & Hardware (“HomCo”), (v) Trussway, LLC and its subsidiaries (“Trussway”), (vi) Fulcrum Building Group Holdings, LLC and its subsidiaries (“Fulcrum”), (vii) Pima Door and Supply and Sunrise Carpentry (“Pima”), and subsequent to year-end, (viii) Noltex Truss and its affiliates (“Noltex”).

These acquisitions further expand our market footprint and provide additional operations in our value-add product categories and our multifamily customer segment and are further described in Note 3 and Note 15 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Company Shares Repurchases

On February 18, 2022, the Company announced that its board of directors authorized the repurchase of $1.0 billion of its shares of common stock. On May 9, 2022, the board of directors authorized a new share repurchase program of $2.0 billion, which replaced the previous $1.0 billion program authorized in February 2022. On November 28, 2022, the board of directors authorized an additional $1.0 billion to the existing repurchase program for a total of $1.5 billion inclusive of the remaining outstanding authorization existing at that time.

Under the share repurchase programs authorized by the board of directors since August of 2021, the Company has repurchased a total of 70.2 million shares of common stock, or approximately 34.0% of the Company’s total shares outstanding, at an average price of $62.58, including 41.9 million shares of common stock at an average price of $61.79 in 2022. As of December 31, 2022, the Company had approximately $967.2 million authorization remaining under its current share repurchase program. Share repurchases under the program may be made through a variety of methods, which may include open market purchases, block trades, accelerated share repurchase transactions, trading plans in accordance with Rule 10b-5 or Rule 10b-18 under the Exchange Act, or any combination of such methods. The program does not obligate the Company to acquire any particular amount of its common stock, and the share repurchase program may be suspended or discontinued at any time at the Company’s discretion.

Debt Transactions

On January 21, 2022, the Company completed a private offering of an additional $300.0 million in aggregate principal amount of 4.25% senior unsecured notes due 2032 (“4.25% 2032 notes”) at an issue price equal to 100.50% of par value.

On February 4, 2022, the Company amended the previous credit facility to increase the total commitments by an aggregate amount of $400.0 million resulting in a new $1.8 billion amended credit facility.

On June 15, 2022, the Company completed a private offering of $700.0 million in aggregate principal amount of 6.375% senior unsecured notes due 2032 (“6.375% 2032 notes,” and together with the 4.25% 2032 notes, the “2032 notes”) at an issue price equal to 100% of par value. Subsequently, on June 16, 2022, the Company redeemed the remaining $612.5 million in outstanding aggregate principal amount of 6.75% senior secured notes due 2027 (“2027 notes”).

Subsequent to year-end, on January 17, 2023, the Company amended its revolving credit facility to extend the maturity on a portion of the total commitments by 13 months to January 17, 2028, and to include additional pricing tiers for the applicable margin.

These transactions are described further in Notes 8 and 15 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K. Collectively, these transactions have extended our debt maturity. 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.

Departure and Appointment of President and Chief Executive Officer

On November 18, 2022, Dave Flitman stepped down as President and Chief Executive Officer (“CEO”) to accept another position outside of our industry and the board of directors announced the appointment of Dave Rush as interim CEO. Subsequently, on January 10, 2023, the board announced that Dave Rush had been named CEO, effectively immediately. Mr. Rush has 23 years of dedicated service to the company through which he also led the integrations of the BMC Merger and ProBuild acquisition as well as previously held the position of Chief Operating Officer of the Company’s East Division.

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CURRENT OPERATING CONDITIONS AND OUTLOOK

According to the U.S. Census Bureau, actual U.S. total housing starts for the year ended December 31, 2022 were 1.6 million, a decrease of 3.0% compared to the year ended December 31, 2021. Actual U.S. single-family housing starts for the year ended December 31, 2022 were 1.0 million, a decrease of 10.6% compared to the year ended December 31 2021. A composite of third party sources, including the NAHB, are forecasting 1.3 million U.S. total housing starts and 0.9 million U.S. single-family housing starts for 2023, which are projected decreases of 16.6% and 11.6%, respectively, from 2022. In addition, in its September 2022 semi-annual forecast, the Home Improvement Research Institute (“HIRI”) forecasted sales in the professional repair and remodel end market to increase approximately 3.6% in 2023 compared to 2022.

Our net sales for the year ended December 31, 2022 increased 14.2% over the same period last year. The increase was driven by a 7.3% increase in sales related to acquisitions and core organic sales growth of 6.6%, primarily in our single-family and repair and remodel customer segments. Our gross margin percentage increased by 4.7% during the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to core organic growth in value-added product categories, as well as disciplined pricing in a volatile, supply-constrained marketplace. Our selling, general and administrative expenses, as a percentage of net sales, were 17.5% in 2022, a 0.1% increase from 17.4% in 2021, largely due to additional operating expenses from locations acquired within the last twelve months, and higher wages and variable compensation costs as a result of increased net sales and profitability for the year ended December 31, 2022 compared to the year ended December 31, 2021.

We believe the long-term outlook for the housing industry is positive and that the housing industry remains underbuilt due to growth in the underlying demographics compared to historical new construction levels. However, rising interest rates and inflation may dampen near-term housing industry demand as homes become less affordable for consumers, investors and builders. We believe 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. 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 expand.

RESULTS OF OPERATIONS

A discussion regarding our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 1, 2022.

2022 Compared with 2021

The following table sets forth the percentage relationship to net sales of certain costs, expenses and income items for the years ended December 31:

Net Sales. Net sales for the year ended December 31, 2022 were $22.7 billion, a 14.2% increase from net sales of $19.9 billion for 2021. Net sales from acquisitions and core organic sales growth increased net sales by 7.3% and 6.6% , respectively. Commodity price inflation added another 1.1% to net sales, partially offset by a 0.8% decrease in net sales due to two fewer selling days.

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The following table shows net sales classified by major product category for the years ended December 31:

We achieved increased net sales in all of our product categories except lumber and lumber sheet goods, primarily due to acquisitions, and core organic sales growth. Lumber and lumber sheet goods net sales decreased primarily due to decreased housing starts throughout the second half of 2022 compared to 2021.

Gross Margin. Gross margin increased $1.9 billion to $7.7 billion and our gross margin percentage increased to 34.1% in 2022 from 29.4% in 2021, a 4.7% increase. This increase was primarily attributable to core organic growth, particularly in value-added product categories, acquisitions, and from disciplined pricing in a volatile, supply-constrained marketplace.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.5 billion, or 14.7%. This increase in expenses was primarily due to additional operating expenses from locations acquired within the last twelve months and higher variable compensation costs as a result of higher sales and profitability. As a percentage of net sales, selling, general and administrative expenses increased to 17.5% from 17.4% in 2021.

Interest Expense, Net. Interest expense was $198.4 million in 2022, an increase of $62.5 million from 2021. Interest expense increased primarily due to higher average debt balances and rising interest rates in 2022 compared to 2021, as well as the loss on extinguishment of $27.4 million related to the 2027 notes redemption, partially offset by $8.1 million expensed in 2021 related to the partial 2027 notes redemption and the Revolving facility amendment.

Income Tax Expense. We recorded income tax expense of $822.5 million during the year ended December 31, 2022 compared to income tax expense of $526.1 million during the year ended December 31, 2021, an increase of $296.3 million, driven by an increase in income before income taxes in the current period. Our effective tax rate was approximately 23% in both 2022 and 2021.

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 growth opportunities. Our capital resources at December 31, 2022 consist of cash on hand and borrowing availability under our Revolving facility.

Our Revolving facility will be primarily used for working capital, general corporate purposes, and funding capital expenditures and growth opportunities. In addition, we may use the Revolving facility to assist debt consolidation. Availability under the Revolving 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.

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The following table shows our borrowing base and excess availability as of December 31, 2022 and 2021 (in millions):

As of December 31, 2022, we had $264.0 million in outstanding borrowings under our Revolving facility and our net excess borrowing availability was $1.4 billion after being reduced by outstanding letters of credit of $128.9 million. Excess availability must equal or exceed a minimum specified amount, currently $180.0 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 December 31, 2022.

Liquidity

Our liquidity at December 31, 2022 was $1.5 billion, which consists of net borrowing availability under the Revolving facility and cash on hand.

Our level of indebtedness results in significant 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, 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

A discussion regarding our consolidated cash flows for the year ended December 31, 2022 compared to the year ended December 31, 2021 is presented below. A discussion regarding our consolidated cash flows for the year ended December 31, 2021 compared to the year ended December 31, 2020 can be found under Item 7 of Part II of our Annual Report on Form 10-K filed with the SEC on March 1, 2022.

2022 Compared with 2021

Cash provided by operating activities was $3.6 billion in 2022, compared to cash provided by operating activities of $1.7 billion in 2021. The increase in cash provided by operating activities was largely the result of an increase in net income in 2022 of $1.0 billion, as well as a decrease in working capital of $0.8 billion.

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For the year ended December 31, 2022 the Company used $1.0 billion in cash investing in acquisitions and property, plant and equipment. Compared to the prior year, the Company invested $0.4 billion less primarily due to $0.6 billion less spent on acquisitions, offset by $0.1 billion more as a net investment in property, plant and equipment and $0.1 billion cash proceeds in the prior year from the divestiture of our gypsum operations.

Cash used in financing activities was $2.6 billion in 2022, which consisted primarily of $2.6 billion in repurchases of common stock, $0.6 billion to redeem the outstanding 2027 notes, and net paydowns on the Revolving facility of $0.3 billion, offset by net proceeds from the issuance of $1.0 billion of 2032 notes. Cash used in financing activities was $0.8 billion for 2021, which consisted primarily of $1.7 billion in repurchases of common stock, cash used to extinguish $0.4 billion of debt acquired in the BMC merger and the redemption of $0.2 billion of the Company’s 2027 notes, partially offset by cash received from the issuance of $1.0 billion of 4.25 % 2032 notes and net borrowings under the Revolving facility of $0.5 billion. These transactions are described in Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Capital Expenditures

Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have, for the most part, remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. We expect our 2023 capital expenditures to be in the range of approximately $300 million to $350 million primarily related to rolling stock, equipment and facility expansion and improvements to support our operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those that both are important to the accurate portrayal of a company’s financial condition and results, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In order to prepare financial statements that conform to generally accepted accounting principles, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

We have identified the following accounting policy that requires us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.

Goodwill

Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. At December 31, 2022, our goodwill balance was $3.5 billion, representing 32.6% of our total assets.

We test goodwill for impairment in the fourth quarter of each year or at any other time when impairment indicators exist. Examples of such indicators that could cause us to test goodwill for impairment between annual tests include a significant change in the business climate, unexpected competition or a significant deterioration in market share. We may also consider market capitalization relative to our net assets. Housing starts are a significant sales driver for us. If there is a significant decline or an expected decline in housing starts, this could adversely affect our expectations for a reporting unit and the value of that reporting unit.

The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Our reporting units are aligned with our three geographical divisions which are also determined to be our operating segments. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If it is concluded that it is more likely than not that the fair value of the reporting unit is not less than its carrying amount, then no further testing of the goodwill is required.

However, if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative goodwill impairment test. This test identifies both the existence of and the amount of goodwill impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds

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its carrying amount, goodwill is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.

We assessed our goodwill balance at December 31, 2022 using a quantitative assessment. In performing the quantitative impairment test at December 31, 2022, we developed the fair value using a discounted cash flow methodology. Inherent in such fair value determinations are significant assumptions relating to future cash flows, expected future revenues, expected future profitability, the discount rate, the terminal value, and our interpretation of current economic indicators and market conditions and their impact on our strategic plans and operations. Due to the uncertainties associated with such estimates, interpretations and assumptions, actual results could differ from projected results, which could result in impairment of goodwill being recorded.

Significant information and assumptions utilized in estimating future cash flows for quantitative goodwill impairment analyses include projections of revenue growth utilizing publicly available industry information such as lumber commodity prices and housing start forecasts developed by industry forecasters, including the NAHB. Expected future profitability reflects current headcount levels and cost structure and are flexed in future years based upon historical trends at various revenue levels. Long-term growth was based upon terminal value earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples of 6.0x to reflect the relevant expected acquisition price. A discount rate of 11.0% was used and is intended to reflect the weighted average cost of capital for a potential market participant and includes all risks of ownership and the associated risks of realizing the stream of projected future cash flows. Decreasing the long-term growth to an EBITDA multiple of 5.0x, or increasing the discount rate by 1.0% to 12.0%, would not have changed the results of our impairment testing.

At December 31, 2022, the fair values of each of our reporting units were substantially in excess of their respective carrying amounts. Factors that could negatively impact the estimated fair value of our reporting units and potentially trigger additional impairment include, but are not limited to, unexpected competition, lower than expected housing starts, an increase in market participant weighted average cost of capital, increases in material or labor cost, and significant declines in our market capitalization. Future impairment of goodwill would have the effect of decreasing our earnings or increasing our losses in such period, but would not impact our current outstanding debt obligations or compliance with covenants contained in the related debt agreements. We did not have any goodwill impairments in 2022, 2021 or 2020.

RECENTLY ISSUED ACCOUNTING STANDARDS

Information regarding recent accounting pronouncements is discussed in Note 2 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Item 7. 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 consolidated financial statements and related footnotes contained in Item 8. Financial Statements and Supplementary Data of this annual report on Form 10-K. See “Risk Factors” contained in Item 1A. Risk Factors of this annual report on Form 10-K and “Cautionary Statement” contained in Item 1. Business of this annual report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.

OVERVIEW

We are a leading supplier and manufacturer of building materials, manufactured components and construction services to professional contractors, sub-contractors and consumers. The Company operates approximately 565 locations in 42 states across the United States. Given the span and depth of our geographical reach, our locations are organized into three geographical divisions (East, Central, and West), which were also our operating segments. All of our segments have similar customers, products and services, and distribution methods. Due to the similar economic characteristics, categories of products, distribution methods and customers, our operating segments are aggregated into one reportable segment.

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, 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 along with other various building products. 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:

Our operating results are dependent on the following trends, strategies, events and uncertainties, some of which are beyond our control:

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RECENT DEVELOPMENTS

BMC Merger & Other Acquisitions

On January 1, 2021, we completed our all stock merger transaction with BMC. During the twelve months ended December 31, 2021, we have also completed six other acquisitions. The BMC Merger and the other acquisitions were accounted for using the acquisition method of accounting, with Builders FirstSource, Inc. as the accounting acquirer. The operating results of BMC are included as part of the Company beginning on January 1, 2021, while the results of the other acquired companies are included from the date of each acquisition and as such, the historical financial condition, results of operations and cash flows of the Company presented in this annual report Form 10-K for periods prior to that date do not include BMC or the other acquired companies. These transactions are described in Note 3 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

COVID-19 Pandemic

Despite experiencing disruptions to our operations and implementing a number of health and safety precautions as a result of the COVID-19 pandemic, our financial results and financial condition were not materially adversely affected by the pandemic. Furthermore, housing starts and repair and remodeling activity generally increased throughout our markets despite the pandemic.

Despite the limited impact of the COVID-19 pandemic on our financial results, the extent to which the pandemic may impact our results in future periods is uncertain and will depend upon, among other things, the duration and severity of the outbreak or subsequent outbreaks, related government responses, the pace of recovery of economic activity and the impact to consumers, and contributing effects of the pandemic including any potential supply disruptions, labor shortages, inflation, and the impact of housing starts and repair and remodeling activity, all of which are uncertain and difficult to predict in light of the rapidly evolving landscape. Refer to Part I, Item 1A. Risk Factors for a full discussion of the risks associated with the COVID-19 pandemic.

Company Shares Repurchases

Subsequent to year-end, on February 18, 2022, the Company announced that its board of directors authorized the repurchase of an additional $1.0 billion of its shares of common stock. This authorization is in addition to the two previous $1.0 billion authorizations in 2021, which were completed on January 12, 2022.

These transactions are described in Note 15 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Debt Transactions

During the year ended December 31, 2021, the Company executed several debt transactions, including the issuance of $1.0 billion in aggregate principal amount of 4.25% senior unsecured notes due 2032 (“2032 notes”), redemption of $165.0 million in outstanding aggregate principal amount of 6.75% senior secured notes due 2027 (“2027 notes”), and amendments to our 2026 facility to both extend maturity and increase the total commitments.

Subsequent to year-end, on January 21, 2022, the Company completed a private offering of an additional $300.0 million in aggregate principal amount of 2032 notes at an issue price equal to 100.50% of par value.

On February 4, 2022, the Company amended the 2026 facility to increase the total commitments by an aggregate amount of $400.0 million resulting in a new $1.8 billion amended credit facility.

These transactions are described in Notes 8 and 15 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K. Collectively, these transactions have extended our debt maturity. 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.

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CURRENT OPERATING CONDITIONS AND OUTLOOK

According to the U.S. Census Bureau, actual U.S. total housing starts for the year ended December 31, 2021 were 1.6 million, an increase of 15.8% compared to the year ended December 31, 2020. Actual U.S. single-family housing starts for the year ended December 31, 2021 were 1.1 million, an increase of 13.6% compared to the year ended December 31 2020. A composite of third party sources, including the NAHB, are forecasting 1.7 million U.S. total housing starts and 1.2 million U.S. single-family housing starts for 2022, which are increases of 4.0% and 4.0%, respectively, from 2021. In addition, in its September 2021 semi-annual forecast, the Home Improvement Research Institute (“HIRI”) forecasted sales in the professional repair and remodel end market to increase approximately 7.1% in 2022 compared to 2021.

Our net sales for the year ended December 31, 2021 increased 132.4% over the same period last year. The significant increase was primarily driven by acquisitions with our BMC Merger accounting for 76.6% of our sales growth in the year ended December 31, 2021, while commodity price inflation accounted for another 30.2%. The remainder of the increase was a result of core organic sales growth primarily in the single-family customer segment. Our gross margin percentage increased by 3.4% during the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily attributable to effective pricing relative to the impact of commodity inflation, as well as growth in value-added product categories. Our selling, general and administrative expenses, as a percentage of net sales, were 17.4% in 2021, a 2.2% decrease from 19.6% in 2020, primarily driven by cost leverage on increased net sales in the year ended December 31, 2021 compared to the year ended December 31, 2020.

We believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics compared to historical new construction levels, despite the uncertainty in the industry at the outset of the COVID-19 pandemic. 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 expand.

RESULTS OF OPERATIONS

A discussion regarding our financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 can be found under Item 7 of Part II of our Annual Report on Form 10-K, as amended for the fiscal year ended December 31, 2020, filed with the SEC on February 21, 2021, with such amendment filed with the SEC on July 21, 2021.

2021 Compared with 2020

The following table sets forth the percentage relationship to net sales of certain costs, expenses and income items for the years ended December 31:

Net Sales. Net sales for the year ended December 31, 2021 were $19.9 billion, a 132.4% increase from net sales of $8.6 billion for 2020. The BMC Merger and commodity price inflation increased net sales by 76.6% and 30.2%, respectively. The remaining increase in sales is attributable to core organic growth in our single family customer segment and net sales from other acquisitions.

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The following table shows net sales classified by major product category for the years ended December 31, (dollars in millions):

We achieved increased net sales in all of our product categories, primarily due to the BMC Merger, commodity inflation and core organic sales growth.

Gross Margin. Gross margin increased $3.6 billion to $5.9 billion, driven primarily by the BMC Merger, commodity price inflation, and core organic sales growth. Our gross margin percentage increased to 29.4% in 2021 from 26.0% in 2020, a 3.4% increase. This increase was primarily attributable to pricing relative to the impact of commodity price inflation, as well as growth particularly in value-added product categories.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.8 billion, or 106.3%, and as a percentage of net sales decreased to 17.4% from 19.6% in 2020. This increase in expenses was primarily due to the BMC Merger, which accounted for approximately 73% of the increase including an increase of $387.4 million in related depreciation and amortization expense, and higher variable compensation costs as a result of higher sales and profitability.

Interest Expense, Net. Interest expense was $135.9 million in 2021, an increase of $0.2 million from 2020. Interest expense increased primarily due to higher debt balances in 2021 compared to 2020, offset by one-time charges of $29.4 million related to debt transactions executed in 2020, compared to one-time charges of $8.1 million related to debt transactions executed in 2021.

Income Tax Expense. We recorded income tax expense of $526.1 million during the year ended December 31, 2021 compared to income tax expense of $94.6 million during the year ended December 31, 2020, an increase of $431.5 million, driven by an increase in income before income taxes in the current period. Our effective tax rate was approximately 23% in both 2021 and 2020.

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 growth opportunities. Our capital resources at December 31, 2021 consist of cash on hand and borrowing availability under our 2026 facility.

Our 2026 facility will be primarily used for working capital, general corporate purposes, and funding capital expenditures and growth opportunities. In addition, we may use the 2026 facility to facilitate debt consolidation. Availability under the 2026 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.

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The following table shows our borrowing base and excess availability as of December 31, 2021 and 2020 (in millions):

As of December 31, 2021, we had $588.0 million in outstanding borrowings under our 2026 facility and our net excess borrowing availability was $685.6 million after being reduced by outstanding letters of credit of approximately $126.4 million. Excess availability must equal or exceed a minimum specified amount, currently $140.0 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 December 31, 2021.

Liquidity

Our liquidity at December 31, 2021 was $728.2 million, which consists of net borrowing availability under the 2026 facility and cash on hand.

Our level of indebtedness results in significant 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, 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.

On February 4, 2022, the Company amended the 2026 facility to increase the total commitments by an aggregate amount of $400.0 million resulting in a new $1.8 billion amended credit facility.

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Consolidated Cash Flows

A discussion regarding our consolidated cash flows for the year ended December 31, 2021 compared to the year ended December 31, 2020 is presented below. A discussion regarding our consolidated cash flows for the year ended December 31, 2020 compared to the year ended December 31, 2019 can be found under Item 7 of Part II of our Annual Report on Form 10-K, as amended for the fiscal year ended December 31, 2020, filed with the SEC on February 21, 2021, with such amendment filed with the SEC on July 21, 2021.

2021 Compared with 2020

Cash provided by operating activities was $1.7 billion in 2021, compared to cash provided by operating activities of $260.1 million in 2020. The increase in cash used in operating activities was largely the result of an increase in net income in 2021, exceeding the net income in 2020.

For the year ended December 31, 2021 the Company used $1.3 billion in cash in investing activities, $1.2 billion more than the same period in the prior year. Of this increase, $1.2 billion more was spent on acquisitions and $110.7 million more as a net investment in property, plant and equipment. Offsetting these increases in cash used for investing activities was cash acquired from the Gypsum Divestiture.

Cash used in financing activities was $780.1 million in 2021, which consisted primarily of $1.7 billion in repurchases of common stock, cash used to extinguish $359.8 million of debt acquired in the BMC Merger and the redemption of $165.0 million of the Company’s 2027 notes, partially offset by cash received from the issuance of $1.0 billion of 2032 notes and net borrowings under the 2026 facility of $513.0 million. Cash provided by financing activities was $285.9 million for 2020, which was primarily related to the net proceeds received from the Company’s financing transactions during the period, including the issuance of $550.0 million in 2030 notes and $350.0 million of 2027 notes. The proceeds from these issuances were offset by the redemption of the remaining $503.9 million of 2024 notes, repayment of the remaining $52.0 million term loan, and partial redemption of $47.5 million of 2027 notes. These transactions are described in Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Capital Expenditures

Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have, for the most part, remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. We expect our 2022 capital expenditures to be in the range of approximately $400 million to $420 million primarily related to rolling stock, equipment and facility expansion and improvements to support our operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those that both are important to the accurate portrayal of a company’s financial condition and results, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In order to prepare financial statements that conform to generally accepted accounting principles, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

We have identified the following accounting policy that requires us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.

Business Combinations

We allocate the purchase price of acquired companies to the assets acquired and liabilities assumed based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the identifiable net assets acquired recorded as goodwill. The allocation of the purchase price requires us to make significant estimates and assumptions to determine the fair value of assets acquired and liabilities assumed and the related useful lives of the acquired assets, when applicable, as of the acquisition date.

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Examples of critical estimates used in valuing certain of the intangible assets we have acquired or may acquire in the future include, but are not limited to, future expected cash flows, trade names and customer relationships, the period of time the acquired trade names and customer relationships will continue to be used, anticipated customer attrition rates, and discount rates used to determine the present value of estimated future cash flows. We engage third-party valuation experts to assist in determining the fair value associated with our business combinations and related identifiable intangible assets. These estimates are inherently uncertain and unpredictable, and if different estimates were used, the purchase price for the acquisition could be allocated to the acquired assets and assumed liabilities differently from the allocation that we have made.

Future changes in the judgments, assumptions and estimates that are used in our acquisition valuations and intangible asset and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year.

RECENTLY ISSUED ACCOUNTING STANDARDS

Information regarding recent accounting pronouncements is discussed in Note 2 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.