SELECT INTERIOR CONCEPTS: Management’s discussion and analysis of the financial position and operating results. (form 10-K)
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with Item 6. "Selected Financial Data" above and the accompanying consolidated financial statements and related notes included in this Annual Report. The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Annual Report, particularly in the sections entitled "Special Note Regarding Forward-Looking Statements and Information" and "Risk Factors" included elsewhere in this Annual Report.
Overview
Select Interior Concepts, Inc. (collectively with all of its subsidiaries, "SIC," the "Company," "we," "us" and "our") is an installer and nationwide distributor of interior building products with market positions in residential interior design services. Through our Residential Design Services (which we refer to as "RDS") operating segment, we serve national and regional homebuilders by providing an integrated, outsourced solution for the design, consultation, sourcing, distribution and installation needs of their homebuyer customers. Through our 17 design centers, our designers work closely with homebuyers in the selection of a broad array of interior products and finishes, including flooring, cabinets, countertops, wall tile, and related interior items, primarily for newly constructed homes. We then coordinate the ordering, fulfillment and installation of many of these interior product categories to provide for the homebuyer. With our design centers and our product sourcing and installation capabilities, we enable our homebuilder customers to outsource critical aspects of their business to us, thereby increasing their sales, profitability, and return on capital. We also have leading market positions in the selection and importation of natural and engineered stone slabs for kitchen and bathroom countertops and specialty tiles through our other operating segment,Architectural Surfaces Group (which we refer to as "ASG"). ASG sources natural and engineered stone slabs from a global supply base and markets these materials through a national network of 21 distribution centers and showrooms. In addition to serving the new residential and commercial construction markets with these materials, we also distribute them to the repair and remodel (which we refer to as "R&R") market.
Operational segments
We have defined each of our operating segments based on the nature of its operations and its management structure and product offerings. Our management decisions are made by our Chief Executive Officer, whom we have determined to be our Chief Operating Decision Maker. Our two reportable segments are described below. Residential Design Services RDS, our interior design and installation segment, is a service business that provides design center operation, interior design, product sourcing, and installation services to homebuilders, homeowners, general contractors and property managers. Products sold and installed by RDS include flooring, countertops, cabinets, and wall tile. New single-family and multi-family construction are the primary end markets, although we intend to explore growth opportunities in other markets, such as the R&R market.
ASG, our natural and engineered stone countertop distribution segment,
distributes granite, marble, porcelain and quartz slabs for countertop and other
uses, and ceramic and porcelain tile for flooring and backsplash and wall tile
applications. Primary end markets are new residential and commercial
construction and the R&R market.
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Key factors affecting operating results
Our operating results are impacted by changes in the levels of new residential construction and of the demand for products and services in the R&R market. These are in turn affected by a broad range of macroeconomic factors including the rate of economic growth, unemployment, job and wage growth, interest rates, multi-family project financing, and residential mortgage lending conditions. Other important underlying factors include demographic variables such as household formation, immigration and aging trends, housing stock and vacant inventory levels, changes in the labor force, raw materials prices, the legal environment, and local and regional development and construction regulation.
Cost of materials
The materials that we distribute and install are sourced through a wide array of quarries, manufacturers, and distributors located inNorth America ,South America ,Europe ,Africa andAsia . As demand for these products continues to grow with housing demand, we expect that we may be subject to cost increases from time to time. There is no guarantee that our relationships with our customers will be such that we can pass these increases on to our customers. Affordability issues in new residential construction could temper our homebuilder customers' ability to raise their prices, which could in turn limit our ability to increase prices to compensate for increases in our costs of materials. We believe, however, that over the long term, these same forces affecting housing prices would also limit our suppliers' ability to increase prices, which would help us maintain our margins. Labor Costs Installation labor is a significant component of our aggregate labor force of approximately 1,300 employees. There is no guarantee that we will be able to attract the type and quality of skilled labor that we need in sufficient quantities to accomplish our growth plans. Correspondingly, we expect that tight labor markets will continue to lead to upward pressure on wages and could impact our gross profit margin and overall profitability negatively.
We believe, however, that our scale will continue to give us the ability to provide a stable job, an attractive benefits package and an advantageous work environment, especially compared to our smaller competitors. Over time, we expect that the combination of these factors will gradually increase our relative advantage over smaller, less sophisticated competitors.
Selling, general and administrative expenses
We incur costs related to the operation and administration of our businesses that are reported as period expenses separately from Cost of Goods Sold. These expenses include, but are not limited to, project management, customer service, human resources, accounting, information technology, general management, public company costs, and others. These costs will likely continue to grow as our businesses grow, but we believe that, overall, they will grow more slowly than the rate at which our gross profit grows due to improved utilization rates of these resources and the fact that we have implemented and intend to continue to implement scalable technology and process improvements that increase the efficiency of our operations.
Non-GAAP measures
In addition to the results reported in accordance withUnited States generally accepted accounting principles (which we refer to as "GAAP"), we have provided information in this Report relating to EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin. We have provided definitions below for these non-GAAP financial measures and have provided tables to reconcile these non-GAAP financial measures to the comparable GAAP financial measures. We believe that these non-GAAP financial measures provide valuable information regarding our earnings and business trends by excluding specific items that we believe are not indicative of the ongoing operating results of our businesses, providing a useful way for investors to make a comparison of our performance over time and against other companies in our industry. 27 -------------------------------------------------------------------------------- We have provided these non-GAAP financial measures as supplemental information to our GAAP financial measures and believe these non-GAAP measures provide investors with additional meaningful financial information regarding our operating performance and cash flows. Our management and board of directors also use these non-GAAP measures as supplemental measures to evaluate our businesses and the performance of management, including the determination of performance-based compensation, to make operating and strategic decisions, and to allocate financial resources. We believe that these non-GAAP measures also provide meaningful information for investors and securities analysts to evaluate our historical and prospective financial performance. These non-GAAP measures should not be considered a substitute for or superior to GAAP results. Furthermore, the non-GAAP measures presented by us may not be comparable to similarly titled measures of other companies. EBITDA is defined as consolidated net income (loss) before interest, taxes and depreciation and amortization. Adjusted EBITDA is defined as consolidated net income (loss) before (i) interest expense, (ii) income tax expense (benefit), (iii) depreciation and amortization expense, (iv) equity-based compensation expense, and (v) other costs that are deemed to be transitional in nature or not related to our core operations, including employee related reorganization costs, purchase accounting fair value adjustments, acquisition and integration related costs, other non-recurring costs, integration and savings initiatives costs, facility closures and divestitures, legal settlements, strategic alternatives costs, and other non-operating costs. Adjusted EBITDA margin is calculated as a percentage of our net revenue. EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin are non-GAAP financial measures used by us as supplemental measures in evaluating our operating performance.
Key components of operating results
Net Revenue. Net revenue at our RDS segment is recognized over time based on the terms of the performance obligations with the homebuilder or other contracted customer. In our ASG segment, net revenue is derived from the sale of our products and is recognized at a point in time when such products have been accepted at the customer's designated location and the performance obligation is completed. Cost of Revenue. Cost of revenue consists of the direct costs associated with revenue earned by the sale and installation of our interior products in the case of our RDS segment, or by delivering product in the case of our ASG segment. In our RDS segment, cost of revenue includes direct material costs associated with each project, the direct labor costs associated with installation (including taxes, benefits and insurance), rent, utilities and other period costs associated with warehouses and fabrication shops, depreciation associated with warehouses, material handling, fabrication and delivery costs, and other costs directly associated with delivering and installing product in our customers' projects, offset by vendor rebates. In our ASG segment, cost of revenue includes direct material costs, inbound and outbound freight costs, overhead (such as rent, utilities and other period costs associated with product warehouses), depreciation associated with fixed assets used in warehousing, material handling and warehousing activities, warehouse labor, taxes, benefits and other costs directly associated with receiving, storing, handling and delivering product to customers in revenue earning transactions.
Gross profit and gross margin. Gross profit is net income minus the cost of associated income. Gross margin is gross margin divided by net income.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses include overhead costs such as general
management, project management, purchasing, sales, customer service, accounting,
finance, human resources, depreciation and amortization, information technology,
public company costs and all other forms of wage and salary cost associated with
operating our businesses, and the taxes and benefits associated with those
costs. We also include other general-purpose expenses, including, but not
limited to, office supplies, office rents, legal, consulting, insurance, and
non-cash stock compensation costs. Professional services expenses, including
audit and legal, and transaction costs are also included in SG&A expenses.
Depreciation and Amortization. Depreciation and amortization expenses represent
the estimated decline over time of the value of tangible assets such as
vehicles, equipment and leasehold improvements, and intangible assets such as
customer lists and trade names. We recognize the expenses on a straight-line
basis over the estimated economic life of the asset in question, or over the
shorter of the estimated economic life or the remaining lease term for leasehold
improvements.
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-------------------------------------------------------------------------------- Interest Expense. Interest expense represents amounts paid to or which have become due during the period to lenders and lessors under credit agreements and capital leases, as well as the amortization of debt issuance costs. Income Taxes. Income taxes are recorded using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled.
Results of operations
End of year
Net Revenue. For the year endedDecember 31, 2020 , net revenue decreased by$56.3 million , or 9.2%, to$554.0 million , from$610.4 million for the year endedDecember 31, 2019 . Net revenue for the years endedDecember 31, 2020 and 2019 is adjusted for the elimination of intercompany sales of$2.0 million and$3.0 million , respectively. In our RDS segment, net revenue decreased by$36.1 million , or 9.8%, to$332.5 million for the year endedDecember 31, 2020 , from$368.6 million for the year endedDecember 31, 2019 . The decrease was due in part to volume declines in theEastern Region , primarily attributable to the COVID-19 pandemic, divestiture and discontinuation of certain ancillary product lines, as well as product mix shifts in certain markets resulting from the increase of entry- to mid-level homebuilding and multi-family work as a percentage of our project activity in our markets. Stay at home orders, particularly in the second quarter and early part of the third quarter heavily impacted our business with new safety measures and restrictions lowering productivity at RDS job sites. RDS design center activity was also limited due to lockdowns and customer and employee concerns relating to in-person interaction. The decline in organic volume was partially offset by increased sales from the acquisition of Intown inMarch 2019 . In our ASG segment, net revenue decreased by$21.2 million , or 8.7%, to$223.6 million for the year endedDecember 31, 2020 , from$244.8 million for the year endedDecember 31, 2019 . This decrease was due to a decrease in volume of all products sold. The decrease in overall volume, which peaked in the second quarter, was primarily due to the COVID-19 pandemic. Stay at home orders heavily impacted our business inWashington . ASG showrooms were limited to appointment only sales. Additionally, our fabricator customers were unable to execute in-residence installations due to stay at home orders at many of our locations combined with homeowner concerns about the pandemic. Sales were also impacted by the closure of two branches. Volume decreases were partially offset by increases from price/mix, most of which came from sales of quartz products. Cost of Revenue. For the year endedDecember 31, 2020 , cost of revenue decreased by$27.5 million , or 6.2%, to$418.8 million , from$446.3 million for the year endedDecember 31, 2019 . Cost of revenue for the year endedDecember 31, 2020 and 2019 is adjusted for the elimination of intercompany sales of$2.0 million and$3.1 million , respectively. In our RDS segment, cost of revenue decreased by$14.0 million , or 5.2%, to$255.9 million for the year endedDecember 31, 2020 , from$269.8 million for the year endedDecember 31, 2019 . This was primarily associated with the decrease in sales for the year endedDecember 31, 2020 . In our ASG segment, cost of revenue decreased by$14.6 million , or 8.1%, to$165.0 million for the year endedDecember 31, 2020 , from$179.5 million for the year endedDecember 31, 2019 . This was primarily associated with the decrease in sales for the year endedDecember 31, 2020 . Gross Profit and Margin. For the year endedDecember 31, 2020 , gross profit decreased by$28.9 million , or 17.6%, to$135.2 million , from$164.1 million for the year endedDecember 31, 2019 . For the year endedDecember 31, 2020 , gross margin decreased by 2.5 percentage points to 24.4%, from 26.9% for the year endedDecember 31, 2019 . In our RDS segment, gross margin decreased by 3.8 percentage points to 23.0% for the year endedDecember 31, 2020 , from 26.8% for the year endedDecember 31, 2019 . This decrease is primarily due to unabsorbed fixed costs on our lower revenue base during the year and an unfavorable change in product mix. 29 -------------------------------------------------------------------------------- In our ASG segment, gross margin decreased by 0.5 percentage points to 26.2% for the year endedDecember 31, 2020 , from 26.7% for the year endedDecember 31, 2019 , primarily due to unabsorbed fixed costs on our lower revenue base during the year and a slight decline in product margin. SG&A Expenses. For the year endedDecember 31, 2020 , SG&A expenses decreased by$13.0 million , or 9.0%, to$131.8 million , from$144.8 million for the year endedDecember 31, 2019 . SG&A expenses as a percentage of net revenue were 23.8% and 23.7% for the years endedDecember 31, 2020 and 2019, respectively. In our RDS segment, SG&A expenses decreased by$6.2 million to$75.0 million for the year endedDecember 31, 2020 , from$81.2 million for the year endedDecember 31, 2019 . This decrease was related to furloughs, savings from position eliminations, lower sales commissions and other cost reduction initiatives. In our ASG segment, SG&A expenses decreased by$6.0 million to$39.4 million for the year endedDecember 31, 2020 , from$45.4 million for the year endedDecember 31, 2019 . This decrease was related to furloughs, savings from position eliminations, lower sales commissions and other cost reduction initiatives. The remaining$0.9 million of the decrease in SG&A expenses was primarily the result of a decrease in equity-based compensation costs, partially offset by an increase in professional services fees related to improvements in strategic sourcing, organizational design and productivity, insurance programs, and facility footprint optimization initiatives.
Depreciation and amortization. For the year ended
In our RDS segment, depreciation and amortization expenses decreased by$1.3 million , or 10.2%, to$11.6 million for the year endedDecember 31, 2020 , from$12.9 million for the year endedDecember 31, 2019 , which was primarily due to certain RDS customer list intangibles that fully amortized during third quarter 2019, partially offset by additional assets in-service, including the new ERP system at RDS.
In our ASG segment, depreciation and amortization charges remained constant at
Interest Expense. For the year endedDecember 31, 2020 , interest expense decreased by$2.7 million , or 15.4%, to$14.6 million , from$17.2 million for the year endedDecember 31, 2019 . This decrease is primarily due to decreased interest rates during the year as well as lower borrowings. Income Taxes. For the year endedDecember 31, 2020 , we recognized an income tax benefit of$3.0 million , a decrease of$4.5 million from income tax expense of$1.5 million for the year endedDecember 31, 2019 . The decrease in income taxes is due primarily to the decrease in pre-tax income in 2020 compared to 2019. Net (Loss) Income. For the year endedDecember 31, 2020 , net income decreased by$16.8 million to a$9.9 million loss, from$7.0 million of income for the year endedDecember 31, 2019 . 30
-------------------------------------------------------------------------------- Adjusted EBITDA. For the year endedDecember 31, 2020 , Adjusted EBITDA decreased by$19.7 million to$40.2 million from$59.9 million for the year endedDecember 31, 2019 , primarily as a result of the factors discussed above. For the Year Ended December 31, (in thousands) 2020 2019 Consolidated net income (loss)$ (9,853 ) $
6,984
Income tax expense (benefit) (2,974 )
1,521
Interest expense 14,568
17,220
Depreciation and amortization 22,867 24,157 EBITDA 24,608 49,882 Equity-based compensation 2,796 5,740 Purchase accounting fair value adjustments - (6,029 ) Acquisition and integration related costs 1,401
2,862
Employee related reorganization costs 2,995
1,762
Other non-recurring costs -
2,776
Integration and savings initiatives costs 2,974
–
Facility closures and divestitures 2,117 - Legal settlements 976 - Strategic alternatives costs 1,541 2,880 Other non-operating costs 790 - Adjusted EBITDA$ 40,198 $ 59,873
Adjusted EBITDA margin. For the year ended
End of year
Net Revenue. For the year endedDecember 31, 2019 , net revenue increased by$120.6 million , or 24.6%, to$610.4 million , from$489.8 million for the year endedDecember 31, 2018 . Net revenue for the years endedDecember 31, 2019 and 2018 is adjusted for the elimination of intercompany sales of$3.0 million and$2.6 million , respectively. In our RDS segment, net revenue increased by$100.2 million , or 37.3%, to$368.6 million for the year endedDecember 31, 2019 , from$268.4 million for the year endedDecember 31, 2018 . The increase was primarily due to the acquisitions of Summit, TAC, and Intown, which accounted for$104.1 million of the growth in RDS revenue. During the year, revenue from organic sales decreased$3.9 million as we continue to face softening in theSouthern California housing market of the Western region, which is our largest market. In our ASG segment, net revenue increased by$20.8 million , or 9.3%, to$244.8 million for the year endedDecember 31, 2019 , from$224.0 million for the year endedDecember 31, 2018 . The increase was due to the acquisitions of Bedrock, NSI, andTuscany , which collectively accounted for$8.0 million of ASG growth, with the remainder of the growth of$12.8 million in our ASG segment attributable to increased revenue from organic volume, price and product mix and new locations started in 2018. Cost of Revenue. For the year endedDecember 31, 2019 , cost of revenue increased by$90.0 million , or 25.3%, to$446.3 million , from$356.3 million for the year endedDecember 31, 2018 . Cost of revenue for the year endedDecember 31, 2019 and 2018 is adjusted for the elimination of intercompany sales of$3.1 million and$2.5 million , respectively. In our RDS segment, cost of revenue increased by$75.3 million , or 38.8%, to$269.8 million for the year endedDecember 31, 2019 , from$194.5 million for the year endedDecember 31, 2018 . The acquisitions of Summit, TAC and Intown were primarily responsible for this increase, contributing$74.6 million . The remaining increase of$0.8 million is due to additional costs in the organic business. 31
-------------------------------------------------------------------------------- In our ASG segment, cost of revenue increased by$15.2 million , or 9.2%, to$179.5 million for the year endedDecember 31, 2019 , from$164.3 million for the year endedDecember 31, 2018 . This was partially due to the acquisitions of Bedrock, NSI, andTuscany , which contributed$5.8 million of the increase, with the remaining increase due to costs associated with organic growth. Gross Profit and Margin. For the year endedDecember 31, 2019 , gross profit increased by$30.6 million , or 22.9%, to$164.1 million , from$133.5 million for the year endedDecember 31, 2018 . For the year endedDecember 31, 2019 , gross margin decreased by 0.3 percentage points to 26.9%, from 27.2% for the year endedDecember 31, 2018 . In our RDS segment, gross margin decreased by 0.7 percentage points to 26.8% for the year endedDecember 31, 2019 , from 27.5% for the year endedDecember 31, 2018 . This decrease is due to an unfavorable product mix primarily due to entry- to mid-level homebuilding comprising a larger share of project activity in our markets. In our ASG segment, gross margin remained consistent, increasing by only 0.1 percentage points to 26.7% for the year endedDecember 31, 2019 , from 26.6% for the year endedDecember 31, 2018 , due to the non-recurrence of non-cash inventory expenses that were recorded in the prior year, offset by higher supply chain related costs and lower margin sales in the full year 2019. SG&A Expenses. For the year endedDecember 31, 2019 , SG&A expenses increased by$23.5 million , or 19.3%, to$144.8 million , from$121.4 million for the year endedDecember 31, 2018 . In our RDS segment, SG&A expenses increased by$21.6 million to$81.2 million for the year endedDecember 31, 2019 , from$59.6 million for the year endedDecember 31, 2018 . This increase was primarily related to the acquisitions of Summit, TAC, and Intown. In our ASG segment, SG&A expenses decreased by$2.3 million to$45.4 million for the year endedDecember 31, 2019 , from$47.7 million for the year endedDecember 31, 2018 . This decrease was due to one-time non-recurring expenses related to the Bedrock andTuscany acquisitions, and expenses related to the opening of new locations incurred during the year endedDecember 31, 2018 . The remaining$4.2 million of the increase in SG&A expenses was related to an increase in the amount of equity-based compensation awarded in 2019 in the amount of$3.1 million , as well as other overhead costs at the corporate level that were in place for a full year in 2019 compared to only a partial year in 2018.
Depreciation and amortization. For the year ended
In our RDS segment, depreciation and amortization expenses increased by$3.3 million , or 33.9%, to$12.9 million for the year endedDecember 31, 2019 , from$9.6 million for the year endedDecember 31, 2018 , which was primarily due to depreciation and amortization associated with the assets acquired in the Summit, TAC, and Intown acquisitions. In our ASG segment, depreciation and amortization expenses increased by$0.3 million , or 3.0%, to$11.2 million for the year endedDecember 31, 2019 from$10.8 million for the year endedDecember 31, 2018 , which is primarily due to amortization associated with theTuscany acquisition. Interest Expense. For the year endedDecember 31, 2019 , interest expense increased by$5.8 million , or 50.7%, to$17.2 million , from$11.4 million for the year endedDecember 31, 2018 . This increase is primarily due to the borrowings associated with funding the TAC and Intown acquisitions offset by lower interest rates. 32
-------------------------------------------------------------------------------- Income Taxes. For the year endedDecember 31, 2019 , we recognized income tax expense of$1.5 million , an increase of$0.5 million from income tax expense of$1.0 million for the year endedDecember 31, 2018 . The increase in income taxes is due primarily to the increase in pre-tax income in 2019 compared to 2018. Net (Loss) Income. For the year endedDecember 31, 2019 , net income increased by$9.5 million to$7.0 million , from a net loss of$2.5 million for the year endedDecember 31, 2018 . Adjusted EBITDA. For the year endedDecember 31, 2019 , Adjusted EBITDA increased by$5.5 million to$59.9 million from$54.4 million for the year endedDecember 31, 2018 , primarily as a result of the factors discussed above. For the Year Ended December
31,
(in thousands) 2019
2018
Consolidated net income (loss) $ 6,984$ (2,475 ) Income tax expense 1,521 989 Interest expense 17,220 11,468 Depreciation and amortization 24,157 20,487 EBITDA 49,882 30,469 Equity-based compensation 5,740 2,626 Purchase accounting fair value adjustments (6,029 )
2 109
Acquisition and integration related costs 2,862
5,018
Employee related reorganization costs 1,762
1,807
Other non-recurring costs 2,776
8,326
IPO and public readiness costs - 4,066 Strategic alternatives costs 2,880 - Adjusted EBITDA$ 59,873 $ 54,421
Adjusted EBITDA margin. For the year ended
Liquidity and capital resources
Working capital is the largest element of our capital needs, as inventory and receivables are our most significant investments. We also require funding for acquisitions, to cover ongoing operating expenses, and to meet required obligations related to financing, such as lease payments and principal and interest payments. Our capital resources primarily consist of cash from operations and borrowings under our revolving credit facilities, capital equipment leases, and operating leases. As our revenue and profitability have improved, we have used increased borrowing capacity under our revolving credit facilities to fund working capital needs. We have utilized capital leases and secured equipment loans to finance our vehicles and equipment needed for both replacement and expansion purposes. As ofDecember 31, 2020 , we had$3.0 million of cash and cash equivalents and$67.4 million of available borrowing capacity under our revolving credit facilities. Based on our positive historical cash flow, our ability to effectively manage working capital needs, and available borrowing capacity, we believe that we have sufficient funding available to finance our operations. Financing Sources; Debt SIC Credit Facility InJune 2018 , the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as ofJune 28, 2018 , which was amended onDecember 11, 2018 ,July 23, 2019 andAugust 19, 2019 (which we refer to as the "SIC Credit Facility"), withBank of America, N.A . The SIC Credit Facility is used by the Company, including both RDS and ASG, for operational purposes. Pursuant to the SIC Credit Facility, the Company has a borrowing-base-governed revolving credit facility that provides for borrowings of up to 33
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an aggregate of
All revolving loans under the SIC Credit Facility are due and payable in full on
The Company is required to comply with certain financial and non-financial covenants under the SIC Credit Facility. The Company complied with all financial and non-financial covenants at the
As ofDecember 31, 2020 ,$9.9 million of indebtedness was outstanding under the SIC Credit Facility. The Company also had$0.6 million of outstanding letters of credit under the SIC Credit Facility atDecember 31, 2020 .
Term loan facility
OnFebruary 28, 2017 , AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with third party lenders (which we refer to as the "Term Loan Facility"), which initially provided for a$105.0 million term loan facility. The Term Loan Facility was amended inJune 2018 to define the borrowers asSelect Interior Concepts, Inc. and its subsidiaries. The Term Loan Facility was subsequently amended inDecember 2018 to increase the borrowing capacity to$174.2 million and inJuly 2019 to amend certain covenants. OnAugust 19, 2019 , the Term Loan Facility was further amended, resulting in an adjusted rate of interest payable on borrowings under the Term Loan Facility.
All term borrowings under the term loan facility are due and payable in full on
The Company is required to adhere to certain financial and non-financial covenants under the term loan facility. The Company complied with all financial and non-financial covenants at the
From
Vehicle and equipment financing
We used various loans and secured leases to finance our acquisition of vehicles and equipment. From
Historical cash flow information
Working capital
Inventory and accounts receivable represent approximately 73% of our tangible assets as ofDecember 31, 2020 , and accordingly, management of working capital is important to our businesses. Working capital (defined as current assets less current liabilities, excluding debt and cash) totaled$113.1 million atDecember 31, 2020 , compared to$113.4 million atDecember 31, 2019 . Working capital levels have remained consistent primarily due to the increase in accounts receivable and unbilled amounts, offset by a decrease in inventory and an increase in accounts payable. In our RDS segment, for the year endedDecember 31, 2020 , working capital increased by$11.2 million to$45.9 million , compared to$34.7 million for the year endedDecember 31, 2019 . This increase is primarily due to the increase in accounts receivable and contract assets, offset by an increase in accounts payable.
In our ASG segment, for the year ended
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Cash flow generated by operating activities
Net cash provided by operating activities was$20.6 million and$31.0 million for the years endedDecember 31, 2020 and 2019, respectively. Net income (loss) was$(9.9) million and$7.0 million for the years endedDecember 31, 2020 and 2019, respectively. Adjustments for noncash expenses included in the calculation of net cash provided by operating activities, including amortization and depreciation, changes in deferred income taxes and other noncash items, totaled$28.2 and$23.1 million for the years endedDecember 31, 2020 and 2019, respectively. Changes in operating assets and liabilities resulted in net cash provided of$2.2 million and$0.9 million for the years endedDecember 31, 2020 and 2019, respectively.
Cash flows used in investing activities
For the year endedDecember 31, 2020 , cash flow used in investing activities was$3.3 million , due to capital expenditures for property and equipment, net of proceeds from disposals. For the year endedDecember 31, 2019 , cash flow used in investing activities was$24.6 million , with$11.5 million resulting from our investments in acquisitions,$1.0 million for the indemnity payment related to the Bedrock acquisition, and$3.0 million for the escrow payment related to the Greencraft acquisition. Capital expenditures for property and equipment, net of proceeds from disposals, totaled$9.1 million .
Cash flows used in financing activities
Net cash used in financing activities was
For the year endedDecember 31, 2020 , we made principal payments of$1.1 million on term debt. During the year endedDecember 31, 2020 , aggregate net payments on the SIC Credit Facility were$12.3 million and payments on notes payable and capital leases were$3.2 million . We also received$0.4 million in an ERP financing transaction and purchased$0.9 million of treasury stock. For the year endedDecember 31, 2019 , we borrowed an additional$11.5 million in term debt to fund the Intown acquisition and made principal payments of$1.9 million , for a net increase in term debt of$9.6 million . We also received$2.7 million in an ERP financing transaction. During the year endedDecember 31, 2019 , aggregate net payments on the SIC Credit Facility were$14.9 million and payments on notes payable were$1.9 million . We also classified$5.8 million of the total$8.0 million Greencraft earn-out payment as a financing activity, as this was the fair value of the contingent liability accrued at purchase.
Contractual obligations
In the table below, we set forth our enforceable and legally binding obligations as ofDecember 31, 2020 . Some of the amounts included in the table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table. Payments due by period Less than 1 1 to 3 3 - 5 More than 5 (in thousands) Total year years years years
Long term bonds (1)
- Capital Lease Obligations(2) 8,789 3,042 3,985 1,262 500 Operating Lease Obligations(3) 47,712 15,444 22,232 6,938 3,098 Purchase Obligations(4) 630,444 86,500 224,023 319,921 - Total$ 839,859 $ 121,888 $ 386,252 $ 328,121 $ 3,598 35
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(1) Long-term debts include principal repayments on our term loans
as well as our tickets to pay. Long-term debt securities presented are not
include interest due or charges on the unused portion of our revolving letters
credit or financing costs associated with the issuance of debt securities. the
interest rate valued at
includes all the balance except
(2) Obligations under capital leases include minimum payments under capital leases
for vehicles and equipment purchased. (3) We lease certain locations, including, but not limited to, corporate
offices, warehouses, fabrication shops and design centers. For more
information, see note 11 – Commitments and contingencies of our
financial statements included in this annual report.
(4) These amounts take into account a contract with a supplier of
stone exclusively in certain states
part of the terms of the exclusive right to distribute the products supplied
under the contract we are required to take delivery of a certain minimum
quantity of product from that supplier. If we don’t reach these minimums
purchase requirements in a given calendar year, we have agreed to
negotiate with the supplier to reach a mutually acceptable resolution.
There are no financial penalties for us if these commitments are not honored;
however, in such a case, the supplier reserves the right, under the
contract, to withdraw the exclusive distribution rights granted to us. the
the payment amount is estimated by multiplying the minimum quantity
required under the contract by the average price paid in 2020. See note
11-Commitments and contingencies relating to our condensed consolidated financial position
statements included in this report for further discussion of these
purchasing requirements.
In addition to the contractual obligations set out above, from
Off-balance sheet arrangements
As ofDecember 31, 2020 , with the exception of operating leases that we typically use in the ordinary course of business, we were not party to any material off-balance sheet financial arrangements that are reasonably likely to have a current or future effect on our financial condition or operating results. We do not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.
Accounting policies and critical estimates
Management's discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported using different assumptions or under different conditions. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements.
Revenue recognition
The Company's revenue derived from the sale of imported granite, marble, and
related items, primarily in our ASG operating segment, is recognized at a point
in time when control over a product is transferred to a customer. This transfer
occurs primarily when goods are picked up by a customer at the branch or when
goods are delivered to a customer location.
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The Company's contracts with its home builder customers within our RDS operating
segment are usually short-term in nature and will generally range in length from
several days to several weeks. The Company's contracts related to multi-family
and commercial projects are generally long-term in nature. We recognize revenue
from both short-term and long-term contracts for each distinct performance
obligation identified over time on a percentage-of-completion basis of
accounting, utilizing the output method as a measure of progress, as we believe
this represents the best measure of when goods and services are transferred to
the customer.
Revenue is measured at the transaction price, which is based on the amount of
consideration the Company expects to receive in exchange for transferring the
promised goods or services to the customer. The transaction price will include
estimates of variable consideration, such as any returns and sales incentives.
Applicable customer sales taxes, when remitted, are recorded as a liability and
excluded from revenue on a net basis.
In the fourth quarter of 2019, the Company adopted ASU 2014-09, the new accounting standard under ASC Topic 606, using the retrospective method modified from
Cost of Revenue
The cost of RDS revenue includes the costs of materials and labor to purchase and install products for our customers.
The cost of ASG’s revenues consists primarily of materials purchased, procurement costs for the provision of inventory and transportation costs.
RDS and ASG also include payroll taxes and benefits, workers’ compensation insurance, vehicle expenses and overheads, including rent, depreciation, utilities, property taxes, charges. repairs and maintenance costs into the cost of income.
Our cost of revenue is reduced by discounts given by vendors during the period in which the discount is earned.
Accounts Receivable Accounts receivable are recorded at net realizable value. We continually assess the collectability of outstanding customer invoices; and if deemed necessary, maintain an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, we consider factors such as: historical collection experience, a customer's current creditworthiness, customer concentrations, personal guarantees, credit insurance, age of the receivable balance both individually and in the aggregate and general economic conditions that may affect a customer's ability to pay. We have the ability to place liens against a significant amount of RDS customers in order to secure receivables. Actual customer collections could differ from our estimates. AtDecember 31, 2020 and 2019, the allowance for doubtful accounts was$0.5 million and$0.8 million , respectively.
Inventories
Inventories consist of stone slabs, tile and sinks, and include the costs to
acquire the inventories and transport the respective inventories to its
location. Inventory also includes flooring, cabinets, doors and trim, glass, and
countertops, which have not yet been installed, as well as labor and related
costs for installations in process. Inventory is valued at the lower of cost
(using the specific identification and first-in, first-out methods) or net
realizable value.
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Intangible assets
Intangible assets consist of customer relationships, trade names and non-compete
agreements. We consider all our intangible assets to have definite lives and
such intangible assets are amortized on the straight-line method over the
estimated useful lives of the respective assets or on an accelerated basis based
on the expected cash flows generated by the existing customers as follows:
Range of estimated Weighted average
useful lives useful life
Customer relationships 2 years - 15 years 10 years
Trade names 3 years - 11 years 8 years
Non-compete agreements Life of agreement 4 years
Business Combinations
We record business combinations using the acquisition method of accounting.
Under the acquisition method of accounting, identifiable assets acquired and
liabilities assumed are recorded at their acquisition date fair values. The
excess of the purchase price over the estimated fair value is recorded as
goodwill. Changes in the estimated fair values of net assets recorded for
acquisitions prior to the finalization of more detailed analysis, but not to
exceed one year from the date of acquisition, will adjust the amount of the
purchase price allocable to goodwill. Measurement period adjustments are
reflected in the period in which they occur.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We account for goodwill in accordance with FASB ASC topic 350, Intangibles-Goodwill and Other Intangible Assets, which among other things, addresses financial accounting and reporting requirements for acquired goodwill and other intangible assets having indefinite useful lives. ASC topic 350 requires goodwill to be carried at cost, prohibits the amortization of goodwill and requires us to test goodwill for impairment at least annually. We test for impairment of goodwill annually during the fourth quarter or more frequently if events or changes in circumstances indicate that the goodwill may be impaired. Events or changes in circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations. We identified RDS and ASG as reporting units and determined each reporting unit's fair value substantially exceeded such reporting unit's carrying value. There were no impairment charges related to goodwill for the years endedDecember 31, 2020 and 2019.
Compensation in shares
We account for equity-based awards by measuring the awards at the date of grant and recognizing the grant-date fair value as an expense using either straight-line or accelerated attribution, depending on the specific terms of the award agreements over the requisite service or performance period, which is usually equivalent to the vesting period.
Income taxes
The provision for income taxes is accounted for under the asset and liability
method prescribed by ASC 740 (Topic 740, Income Taxes). Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period the tax rate changes are enacted.
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We recognize the tax benefit from an uncertain tax position only if it is more
likely than not the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such positions are then measured
based on the largest benefit that has a greater than 50% likelihood of being
realized upon settlement.
On December 22, 2017 , the Tax Cuts and Jobs Act (which we refer to as the "Tax
Act") was adopted into law. The Tax Act makes broad and complex changes to the
Internal Revenue Code of 1986, including, but not limited to, (i) reducing the
U.S. federal corporate tax rate from 35% to 21%; (ii) eliminating the corporate
alternative minimum tax ("AMT") and changing how existing AMT credits are
realized; (iii) creating a new limitation on deductible interest expense; and
(iv) changing rules related to uses and limitation of net operating loss
carryforwards created in tax years beginning after December 31, 2017 .
Our policy is to recognize interest and/or penalties related to all tax
positions as income tax expense. To the extent that accrued interest and
penalties do not ultimately become payable, amounts accrued will be reduced and
reflected as a reduction of the overall income tax provision in the period that
such determination is made. We have recognized less than ($0.1) million in
combined interest and penalties related to uncertain tax positions for the year
ended December 31, 2020 . We recognized $0.4 million in combined interest and
penalties related to uncertain tax positions for the year ended December 31,
2019 .
Recent accounting statements
See Note 1 - Organization and Business Description to our audited consolidated financial statements included in this Annual Report for a description of recent accounting pronouncements issued.
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