# Builders FirstSource, Inc. (BLDR) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from Builders FirstSource, Inc.'s 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1316835/000095017025023953/bldr-20241231.htm Accession: 0000950170-25-023953 Filing date: 2025-02-20 Report date: 2024-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/BLDR/ All MD&A years: /company/BLDR/mda/ Previous year: /company/BLDR/mda/fy2023/ (FY 2023) Next year: /company/BLDR/mda/fy2025/ (FY 2025) 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: • Manufactured Products. Manufactured products consist of wood floor and roof trusses, wall panels, engineered wood and our Ready-Frame® framing system. • 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. • 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. • 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: • 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. 27 • 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. • 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. • 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. • 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. • 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. • 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. • 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. • 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. 28 • 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 29 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: [[GREPCENT_TABLE]] [["","","2024","","","2023"],["Net sales","","","100.0","%","","","100.0","%"],["Cost of sales","","","67.2","%","","","64.8","%"],["Gross margin","","","32.8","%","","","35.2","%"],["Selling, general and administrative expenses","","","23.1","%","","","22.4","%"],["Income from operations","","","9.7","%","","","12.8","%"],["Interest expense, net","","","1.3","%","","","1.1","%"],["Income tax expense","","","1.9","%","","","2.6","%"],["Net income","","","6.5","%","","","9.1","%"]] [[/GREPCENT_TABLE]] Net Sales. Net sales for the year ended December 31, 2024, were $16.4 billion, a 4.1% decrease from net sales of $17.1 billion for 2023. Net sales decreased primarily as a result of a core organic sales decrease of 5.1% due to a continued normalization in the multi-family customer segment and declines in the single-family customer segment as home size and complexity decrease, while commodity price deflation decreased net sales by another 1.8%. These decreases were partially offset by increases in net sales from acquisitions and increased selling days of 2.1% and 0.7%, respectively. 30 The following table shows net sales classified by major product category for the years ended December 31: [[GREPCENT_TABLE]] [["","2024","","","2023"],["($ amounts in millions)","Net Sales","","","% of Net Sales","","","Net Sales","","","% of Net Sales","","","% Change"],["Manufactured products (1)","$","3,931.6","","","","24.0","%","","$","4,669.1","","","","27.3","%","","","(15.8",")%"],["Windows, doors and millwork (1)","","4,226.9","","","","25.7","%","","","4,310.1","","","","25.2","%","","","(1.9",")%"],["Specialty building products and services","","4,050.1","","","","24.7","%","","","3,992.1","","","","23.4","%","","","1.5","%"],["Lumber and lumber sheet goods","","4,191.9","","","","25.6","%","","","4,126.0","","","","24.1","%","","","1.6","%"],["Total net sales","$","16,400.5","","","","100.0","%","","$","17,097.3","","","","100.0","%","","","(4.1",")%"]] [[/GREPCENT_TABLE]] (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 $134.0 million, driven by a decrease in income before income taxes in the current period. Our effective tax rate was 22.3% in 2024 which was relatively flat compared to the 22.4% in 2023. LIQUIDITY AND CAPITAL RESOURCES Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and to fund capital expenditures and potential future growth opportunities. Our capital resources at December 31, 2024, consist of cash on hand and borrowing availability under our Revolving Facility. Our Revolving Facility will be primarily used for working capital, general corporate purposes, and funding capital expenditures and growth opportunities. In addition, we may use the Revolving Facility to assist debt consolidation. Availability under the Revolving Facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables which include progress billings and credit card receivables, and qualified cash that all meet specific criteria contained within the credit agreement, minus agent specified reserves. Net excess borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and letters of credit. 31 The following table shows our borrowing base and excess availability as of December 31, 2024, and 2023: [[GREPCENT_TABLE]] [["","","December 31, 2024","","","December 31, 2023"],["","","(in millions)"],["Accounts receivable availability","","$","721.9","","","$","923.8"],["Inventory availability","","","891.7","","","","920.8"],["Other receivables availability","","","51.5","","","","65.1"],["Gross availability","","","1,665.1","","","","1,909.7"],["Less:"],["Agent reserves","","","(39.3",")","","","(39.8",")"],["Plus:"],["Cash in qualified accounts","","","88.5","","","","13.3"],["Borrowing base","","","1,714.3","","","","1,883.2"],["Aggregate revolving commitments","","","1,800.0","","","","1,800.0"],["Maximum borrowing amount (lesser of borrowing base and aggregate revolving commitments)","","","1,714.3","","","","1,800.0"],["Less:"],["Outstanding borrowings","","","\u2014","","","","(464.0",")"],["Letters of credit","","","(83.3",")","","","(70.3",")"],["Net excess borrowing availability on revolving facility","","$","1,631.0","","","$","1,265.7"]] [[/GREPCENT_TABLE]] 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. 32 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 33 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.