Builders FirstSource, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Builders FirstSource is a U.S. supplier and manufacturer of building materials, manufactured components and construction services, operating approximately 575 locations in 42 states. The company reports one operating segment. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the same periods in 2021.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $5.761 billion | $5.509 billion | $18.369 billion | $15.259 billion |
| Gross margin | $2.015 billion | $1.712 billion | $6.259 billion | $4.365 billion |
| Gross margin percentage | 35.0% | 31.1% | 34.1% | 28.6% |
| Income from operations | $1.015 billion | $837.4 million | $3.244 billion | $1.766 billion |
| Net income | $738.0 million | $613.1 million | $2.365 billion | $1.283 billion |
| Diluted EPS | $4.72 | $2.98 | $13.98 | $6.18 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $2.628 billion | $903.2 million |
Q3 net sales increased 4.6%, while nine-month sales increased 20.4%. Q3 operating margin was 17.6% versus 15.2% in the prior-year quarter; nine-month operating margin was 17.7% versus 11.6%. Q3 net margin was 12.8% versus 11.1%; nine-month net margin was 12.9% versus 8.5%.
Q3 selling, general and administrative expenses increased 14.3% and rose to 17.4% of sales from 15.9%. For the nine-month period, SG&A increased 16.0% but declined to 16.4% of sales from 17.0%, reflecting operating leverage. Net interest expense was $44.1 million in Q3 and $156.1 million for the nine-month period, up from $36.0 million and $95.6 million, respectively.
Revenue mix and material changes
- Q3 lumber and lumber sheet goods sales declined 24.5% to $1.816 billion, primarily because of commodity price deflation.
- Q3 manufactured products increased 17.4% to $1.478 billion; windows, doors and millwork increased 46.5% to $1.294 billion; and specialty building products and services increased 22.2% to $1.173 billion.
- Management attributed Q3 sales growth to 6.9% core organic growth and 5.2% acquisition contribution, partly offset by 7.5% commodity price deflation.
- For nine months, core organic growth, acquisitions and commodity price inflation contributed 10.9%, 7.1% and 2.4%, respectively, to sales growth.
- Management attributed gross-margin expansion to growth in value-added product categories, acquisitions and disciplined pricing in a volatile, supply-constrained market.
- Weighted-average diluted shares declined to 156.5 million in Q3 and 169.1 million for nine months, versus 205.6 million and 207.5 million, respectively, due primarily to share repurchases.
Cash flow, liquidity and capital structure
- Nine-month operating cash flow was $2.628 billion, compared with $903.2 million in 2021.
- Investing activities used $817.3 million, including $619.6 million for acquisitions and $205.2 million for property, plant and equipment.
- Financing activities used $1.768 billion, including approximately $2.0 billion of common-stock repurchases, debt repayments and the redemption of the 2027 notes, partly offset by debt issuance.
- Cash and cash equivalents were $85.0 million at September 30, 2022, versus $42.6 million at December 31, 2021.
- Total debt, before current maturities and net of discounts and issuance costs, was $3.169 billion, compared with $2.926 billion at year-end 2021. Principal debt included $450.0 million under the revolving facility, $1.3 billion of 4.25% 2032 notes, $700.0 million of 6.375% 2032 notes and $550.0 million of 2030 notes.
- The revolving credit facility was increased to $1.8 billion. Outstanding revolver borrowings were $450.0 million, and net excess borrowing availability was $1.221 billion after $129.0 million of letters of credit.
- Reported liquidity was approximately $1.3 billion, consisting of cash and net revolver availability. The company was in compliance with its debt covenants at September 30, 2022.
Acquisitions, financing and unusual items
The company completed multiple acquisitions during 2022, including Texas and East Panel Truss businesses, Valley Truss, HomCo, Trussway and Fulcrum. Aggregate cash consideration for acquisitions through September 30 was $619.6 million, net of cash acquired. The company subsequently acquired Pima Door and Supply and Sunrise Carpentry on October 3, 2022 for $9.5 million in cash; purchase accounting was incomplete at filing.
In June 2022, the company issued $700.0 million of 6.375% senior unsecured notes due 2032 and redeemed the remaining $612.5 million of 6.75% senior secured notes due 2027. The redemption produced a $27.4 million loss on debt extinguishment recorded in interest expense. The company also issued an additional $300.0 million of 4.25% notes due 2032 in January 2022.
During the first nine months, the company repurchased 31.7 million shares for approximately $1.9 billion, inclusive of fees. The remaining authorization at September 30 was approximately $618.4 million under the combined February and May 2022 programs.
Outlook, management commentary and risks
- The filing does not provide formal company-issued revenue or earnings guidance.
- Management expects near-term housing demand to soften as rising mortgage rates, inflation and reduced affordability affect consumers, investors and builders.
- Third-party forecasts cited by management projected 2022 total U.S. housing starts down 2.4% and single-family starts down 9.7% from 2021. Professional repair-and-remodel sales were forecast to increase approximately 10.2%.
- Management believes the long-term housing outlook remains favorable because the U.S. housing stock is underbuilt and demographic trends support demand. The company expects to pursue market-share gains and potentially additional strategic acquisitions.
- Key operating risks include housing-cycle exposure, interest rates, inflation, lumber and commodity-price volatility, supply-chain disruptions, labor shortages, material availability, customer credit, housing affordability and acquisition execution.
- Known and threatened construction-defect claims may be insured above deductibles, but a reasonable range of potential loss could not be estimated. The filing states that adverse judgments or costs could materially affect a particular period.
- A 1.0% increase in interest rates on the revolver would increase annual interest expense by approximately $4.5 million based on $450.0 million of outstanding borrowings.
Investor verification checklist
- Verify whether gross-margin gains are sustainable as commodity prices, pricing conditions and housing demand normalize.
- Assess the effect of higher interest rates and weaker single-family housing starts on organic sales, backlog and customer credit.
- Review acquisition integration, purchase-price allocations, goodwill and intangible-asset amortization, including $183.1 million of goodwill and $246.4 million of acquired intangibles recorded in 2022.
- Monitor leverage, variable-rate revolver exposure, covenant headroom and the company’s ability to fund acquisitions and repurchases.
- Evaluate the pace and valuation of share repurchases, which materially reduced share count and consumed approximately $1.9 billion of cash in the first nine months.
- Follow construction-defect litigation, self-insurance reserves and letters of credit totaling $129.0 million.
- Confirm subsequent-period results for the October 2022 Pima acquisition and any additional acquisitions or capital-structure actions.