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:

 

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Lumber & Lumber Sheet Goods. Lumber & 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 & Millwork. Windows & 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 and exterior trim and custom features that we manufacture, such as intricate mouldings, stair parts, and columns.  

 

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Gypsum, Roofing & Insulation. Gypsum, roofing, & insulation include wallboard, ceilings, joint treatment and finishes.  

 

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Siding, Metal, and Concrete. Siding, metal, and concrete includes vinyl, composite, and wood siding, exterior trim, other exteriors, metal studs and cement.

 

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Other Building Products & Services. Other building products & services are comprised of products such as cabinets and hardware as well as services such as turn-key framing, shell construction, design assistance, and professional installation spanning the majority of our product categories, as well as revenue from our Paradigm subsidiary.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, and the health of the economy and mortgage markets. According to the U.S. Census Bureau, annual U.S. total and single-family housing starts were 1.6 million and 1.1 million, respectively, in 2021. Due to increased competition for homebuilder business and cyclical fluctuations in commodity prices, we may experience pressure on our gross margins. In addition to these factors, there has been a trend of consolidation within the building products supply industry. However, our industry remains highly fragmented and competitive and we will continue to face significant competition from local and regional suppliers. We believe there are several meaningful trends that indicate U.S. housing demand will continue to grow, including historically low interest rates, the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate. Building upon the current rate of market growth, industry forecasters, including the National Association of Homebuilders (“NAHB”), expect to see continued increases in housing demand over the next year.

 

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Effect of COVID-19 Pandemic. In March of 2020, the U.S. economy began to see significant disruption, uncertainty and record high levels of unemployment as a result of the COVID-19 pandemic. While the COVID-19 pandemic has not had a materially adverse impact on our financial results to date, the extent and duration of any future impact resulting from the pandemic is not fully known, and we may experience a decline in housing starts, reduced sales demand, volatility in commodity prices, challenges in the supply chain, labor shortages, increased margin pressures and/or increased operating costs as a result.

 

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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 are facing 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.  Although the repair and remodel end market is influenced by housing starts to a lesser degree than the homebuilding market, the repair and remodel end market is still dependent upon some of the same factors as the homebuilding market, including demographic trends, interest rates, consumer confidence, employment rates and the health of the economy and home financing markets. The repair and remodel end market has been impacted by the COVID-19 pandemic and while the extent of this impact and related uncertainties are yet to be fully known, 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. We continue to see the demand for prefabricated components increasing within the residential new construction market as the availability of skilled construction labor remains limited.

 

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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 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, interest rates, housing starts, the high cost of land development, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. The disruptions and uncertainties as a result of the ensuing 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 as well as economic factors relative to home prices could result in changes to the affordability of homes. As a result, homebuyer demand may shift towards smaller, or larger, homes creating fluctuations in demand for our products.

 

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Cost and/or Availability of Materials. Prices of wood products, which are subject to cyclical market fluctuations, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase certain materials, including lumber products, 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 oftentimes 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 be limited in our ability to find suitable products for our customers and may be forced to provide other 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-cost building materials supplier in the markets we serve. We pay close attention to managing 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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Multi-Family and Light Commercial Business. Our primary focus has been, and continues to be, on single-family residential new construction and the repair and remodel end market. However, we will continue to identify opportunities for profitable growth in the multi-family and light commercial markets.

 

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Capital Structure. We had $2,957.3 million of indebtedness as of December 31, 2021. 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 and market interest rates. As such, we may enter into various debt or equity transactions in order to appropriately manage and optimize our capital structure and liquidity needs.

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.

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.

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: [Table with ~8 rows, ~18 numbers, and 435 characters.] 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. The following table shows net sales classified by major product category for the years ended December 31, (dollars in millions): [Table with ~7 rows, ~38 numbers, and 926 characters.] 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.

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: [Table with ~8 rows, ~18 numbers, and 435 characters.] 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. The following table shows net sales classified by major product category for the years ended December 31, (dollars in millions): [Table with ~7 rows, ~38 numbers, and 926 characters.] 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. The following table shows our borrowing base and excess availability as of December 31, 2021 and 2020 (in millions): [Table with ~15 rows, ~26 numbers, and 961 characters.] 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.

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.

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.

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.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.

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.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.