Net sales for the quarter increased by 15.9% compared to the prior year period

Core organic sales increased 6.7%, excluding acquisitions and commodity impacts

Commodity inflation increased net sales by 7.2%

Acquisitions contributed net sales growth of 2.0%

Adjusted EBITDA increased 15% to $184 million, or 8.0% of net sales, driven by solid demand across all three customer end markets and disciplined pricing in a dynamic market

Net income of $85.9 million, or $0.73 per diluted share, and adjusted net income of $96.7 million, or $0.82 per diluted share

Strong quarter-end balance sheet with a net debt to Adjusted EBITDA ratio of 2.3x and liquidity of $1.2 billion.

Announced transformational merger with BMC Stock Holdings in an all-stock transaction to create the nation’s premier supplier of building materials and services

Net sales for the third quarter ending September 30, 2020 were $2.3 billion, a 15.9% increase compared to a year ago. Core organic sales increased by 6.7% while commodity price inflation added 7.2% to net sales.

Acquisitions completed during the prior four quarters contributed net sales growth of 2.0%.

Value-added core organic sales grew by an estimated 1.9%, led by 2.2% growth in our Manufactured Products category and 1.5% growth in our Windows, Doors, and Millwork category, as solid growth nationally was offset by continued weakness in the Northeast.

Demand improved across our three customer end markets. Single family and repair and remodel / other grew estimated core organic sales by 5.8% and 6.5%, respectively. Multi-family grew core organic sales by 17.6% primarily due to an increase in, and the timing of, projects.

Gross margin was $570.7 million, an increase of $29.5 million compared with the prior year period. Our gross margin percentage decreased to 24.9% from 27.3% in the prior year period. The decrease in gross margin percentage was primarily attributable to the sharp rise in commodity prices during the quarter relative to our short-term customer pricing commitments. Additionally, a shift in product mix towards our lower margin commodity products, also due to commodity inflation compared to the prior year period, contributed to the decline.

Rapid commodity inflation can cause short-term gross margin percentage compression, whereas higher sustained commodity prices will generally increase the Company’s net sales, gross margin and Adjusted EBITDA dollars.

SG&A in the third quarter of 2020 was $430.9 million, an increase of approximately $19.4 million compared to the prior year period, mainly due to higher compensation related to the increase in net sales.

As a percentage of net sales, SG&A decreased by 200 basis points to 18.8% in the third quarter of 2020, driven by cost leverage on commodity price inflation and higher core organic sales.

Interest expense increased by $0.3 million to $28.0 million compared to the same period last year. The year over year increase includes one-time charges related to debt financing transactions executed in the prior year period. Adjusting for the one-time charges in both periods, interest expense increased by $3.4 million due to a higher outstanding debt balance as compared to the prior year quarter, partially offset by the effect of lower interest rates.

Income tax expense in the third quarter of 2020 was $25.8 million, or an effective tax rate of 23.1%. In the prior year period, income tax expense was $23.7 million, or an effective tax rate of 23.3%.

Net income was $85.9 million, or $0.73 per diluted share, compared to $78.1 million, or $0.67 per diluted share, in the same period a year ago.

Adjusted net income was $96.7 million, or $0.82 per diluted share, compared to $84.0 million, or $0.72 per diluted share, in the third quarter of 2019. The increase in adjusted net income of $12.7 million, or 15.1%, was primarily driven by the increase in net sales described above.

Adjusted EBITDA grew $24.0 million to a quarterly record of $184.3 million, an increase of 15%. The increase was primarily driven by the growth in net sales attributable to core organic growth across all three of our customer end markets. Adjusted EBITDA remained steady at 8.0% of net sales in the third quarter, compared to 8.1% in the same period a year ago.

Net sales year to date were $6.0 billion, a 9.3% increase compared to the first nine months of 2019, as acquisitions and core organic growth contributed 2.6% and 2.8% of the increase, respectively.

Commodity inflation and one additional selling day increased net sales by 3.3% and 0.6%, respectively.

Core organic growth was led by our Lumber and Lumber Sheet Goods product category.

Demand increased across all three customer end markets.

Gross margin increased $53.1 million to $1.6 billion driven by strong growth in net sales. Our gross margin percentage was 25.8% in the first nine months of 2020 compared to 27.2% in the first nine months of 2019. The decrease in gross margin percentage was attributable to a sharp rise in commodity prices in 2020 relative to our short-term customer pricing commitments and product mix. Additionally, the expected normalization in our lumber and lumber sheet goods margins also contributed to the decline compared to the prior year period.

Rapid commodity inflation can cause short-term gross margin percentage compression, whereas higher sustained commodity prices will increase, the Company’s net sales, gross margin and Adjusted EBITDA dollars.

SG&A was $1.2 billion, an increase of approximately $40.3 million compared to the prior year period, mainly due to higher compensation related to the increase in net sales.

As a percentage of net sales, SG&A decreased by 110 basis points to 20.3% driven by cost leverage on commodity price inflation and higher core organic sales.

GAAP net income was $173.6 million, or $1.48 per diluted share, compared to $180.4 million, or $1.54 per diluted share, in the first nine months of 2019, a decrease of $0.06 per diluted share, or 3.9%.

Adjusted net income was $216.1 million, or $1.84 per diluted share, compared to $198.0 million, or $1.69 per diluted share, in the first nine months of 2019, an increase of $0.15 per diluted share. The increase in adjusted net income of $18.1 million, or 9.1%, was primarily driven by the increase in net sales, partially offset by higher SG&A.

Adjusted EBITDA for the first nine months of 2020 grew $36.4 million, or 8.9%, to a record $443.2 million, or 7.4% of net sales, compared to $406.8 million, or 7.4% of net sales, for the first nine months of 2019. The year over year improvement was due to the aforementioned growth in organic sales, along with the acquisitions completed over the last four quarters.

Adjusted EBITDA, on a trailing twelve-month basis, was $552.5 million and net debt was $1.3 billion as of September 30, 2020. Our net leverage ratio remained sequentially steady at 2.3x net debt to Adjusted EBITDA at September 30, 2020, below the Company’s target leverage ratio of between 2.5x and 3.5x.

Cash generated by operating activities was $155 million in the first nine months of the year. Cash used in investing activities was $96.1 million in the first nine months of 2020, including capital expenditures, net of proceeds, of $80.2 million and $15.9 million used for our acquisitions.

Liquidity as of September 30, 2020 was $1.2 billion, consisting of $820.9 million in net borrowing availability under the revolving credit facility and $340.9 million cash on hand.

In August of 2020, we entered into a definitive merger agreement under which Builders FirstSource and BMC will combine in an all-stock merger transaction.

With pro forma annual net sales of over $11 billion and approximately 26,000 team members, the combined company will be the nation’s premier supplier of building materials and services within a fragmented industry. The combined company will benefit from greater geographic reach and diversity operating a leading network of 550 distribution and manufacturing locations in 40 states, including 44 of the top 50 metropolitan statistical areas. The combined Company will also benefit from expanded value-added product and service capabilities, building upon a shared commitment to deliver a broad portfolio of value-added offerings. The merged organization will be better positioned to partner and integrate with customers to streamline the construction process. Operating in some of the nation’s largest and fastest growing regions, the combined company will be exceptionally positioned for long-term growth. Increased scale, a strong balance sheet bolstered by robust cash generation, and anticipated annual run-rate synergies of $130 million to $150 million will provide greater resources to invest in growth, innovation and ongoing value creation for all stakeholders.

Under the terms of the agreement, BMC shareholders will receive a fixed exchange ratio of 1.3125 shares of Builders FirstSource common stock for each share of BMC common stock. Upon completion of the merger, existing Builders FirstSource shareholders will own approximately 57% and existing BMC shareholders will own approximately 43% of the combined company on a fully diluted basis.

The transaction is expected to close in late 2020 or early 2021, subject to, among other things, the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, as well as other customary closing conditions. The transaction requires the approval of shareholders of both Builders FirstSource and BMC.

Net sales

Cost of sales

Gross margin

Selling, general and administrative expenses

Income from operations

Interest expense, net

Income before income taxes

Income tax expense

Net income

Comprehensive income

Net income per share:

Basic

Diluted

Weighted average common shares:

Basic

Diluted

(In thousands, except per share

amounts)

Current assets:

Cash and cash equivalents

Accounts receivable, less allowances of $17,325 and $13,492 at September 30, 2020 and December 31, 2019, respectively

Other receivables

Inventories, net

Other current assets

Total current assets

Property, plant and equipment, net

Operating lease right-of-use assets, net

Goodwill

Intangible assets, net

Deferred income taxes

Other assets, net

Total assets

Current liabilities:

Accounts payable

Accrued liabilities

Current portion of operating lease liabilities

Current maturities of long-term debt

Total current liabilities

Noncurrent portion of operating lease liabilities

Long-term debt, net of current maturities, debt discount, and debt issuance costs

Deferred income taxes

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity:

Preferred stock, $0.01 par value, 10,000 shares authorized; zero shares issued and outstanding

Common stock, $0.01 par value, 200,000 shares authorized; 116,803 and 116,052 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

(Unaudited)

(In thousands)

Cash flows from operating activities:

Net income

Adjustments to reconcile net income to net cash from operating activities:

Depreciation and amortization

Amortization of debt issuance costs and debt discount

Loss on extinguishment of debt, net

Deferred income taxes

Stock compensation expense

Net gain on sale of assets and asset impairments

Changes in assets and liabilities, net of assets acquired and liabilities assumed:

Receivables

Inventories

Other current assets

Other assets and liabilities

Accounts payable

Accrued liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Proceeds from sale of property, plant and equipment

Cash used for acquisitions

Net cash used in investing activities

Cash flows from financing activities:

Borrowings under revolving credit facility

Repayments under revolving credit facility

Proceeds from issuance of notes

Repayments of long-term debt and other loans

Payments of debt extinguishment costs

Payments of loan costs

Exercise of stock options

Repurchase of common stock

Net cash provided by (used in) financing activities

Net change in cash and cash equivalents

Cash and cash equivalents at beginning of the period

Cash and cash equivalents at end of the period

Supplemental disclosures of cash flow information:

Cash paid for interest

Cash paid for income taxes

Supplemental disclosures of non-cash activities:

Accrued purchases of property, plant and equipment

Acquisition of assets under operating lease obligations

Acquisition of assets under finance lease obligations

Reconciliation to Adjusted EBITDA:

GAAP Net Income

Acquisition and Integration Expense

Debt issuance and refinancing cost ⁽¹⁾

Adjusted Net Income

Weighted average diluted common shares (in millions)

Diluted adjusted net income per share:

Reconciling items:

Depreciation and amortization expense

Interest expense, net

Income tax expense

Stock compensation expense

Gain on sale and asset impairments

Other management-identified adjustments ⁽²⁾

Adjusted EBITDA

Adjusted EBITDA Margin

Costs associated with issuing and extinguishing long term debt in 2020 and 2019.

Primarily relates to severance and one time cost.

Net sales

Cost of sales

Gross margin

Gross margin %

Adjusted SG&A/Other (excluding depreciation and amortization) as a % of sales ⁽¹⁾

Adjusted EBITDA

Adjusted EBITDA margin %

Depreciation and amortization

Interest expense, net of debt issuance cost and refinancing

Income tax expense

Other adjustments

Adjusted Net Income

Basic adjusted net income per share:

Diluted adjusted net income per share:

Weighted average common shares (in millions)

Basic

Diluted

Adjusted SG&A and other as a percentage of net sales is defined as GAAP SG&A less depreciation and amortization, stock comp, acquisition, integration and other expenses. GAAP SG&A in Q3-20 of $431M less $29M depreciation and amortization, less $11M of acquisition and integration expenses, less $5M of stock comp.

Manufactured Products

Windows, Doors & Millwork

Value-Added Products

Gypsum, Roofing & Insulation

Siding, Metal & Concrete Products

Other

Specialized Products & Other

Lumber & Lumber Sheet Goods

Total adjusted net sales

Core Organic Growth excludes acquisitions, commodity price fluctuations and differences in selling days between periods.

2030 Secured Notes @ 5%

2027 Secured Notes @ 6.75%

2024 Secured Notes @ 5.625%

2024 Term Loan @ 4.4% Floating LIBOR

Revolving Credit Facility @ 3.8% Floating LIBOR

Amortization of debt issuance costs, discount and premium

Finance leases and other finance obligations

Loss on debt extinguishment

Other

Cash

Total

Free Cash Flow

Operating activities

Less: Capital expenditures

Free Cash Flow