Builders FirstSource, Inc. — Form 10-Q Summary
Business context and reporting period
Builders FirstSource supplies and manufactures building materials, manufactured components and construction services for professional homebuilders, subcontractors, remodelers and consumers. It operated approximately 550 locations in 40 states and reported one aggregated reportable segment. This unaudited filing covers the three months ended March 31, 2021, compared with the same period in 2020.
Results include BMC Stock Holdings, Inc. from the January 1, 2021 merger date; prior-period results do not include BMC.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $4.174 billion | $1.787 billion | Up 133.6% |
| Gross margin | $1.070 billion; 25.6% | $465.4 million; 26.0% | Margin down 0.4 percentage points |
| Income from operations | $248.0 million; 5.9% | $60.9 million; 3.4% | Improved |
| Net income | $172.6 million; 4.1% | $8.8 million; 0.4% | Improved materially |
| Diluted EPS | $0.83 | $0.07 | Improved |
| Interest expense, net | $31.8 million | $51.9 million | Down $20.1 million |
| Income tax expense | $43.5 million; 20.1% effective rate | $0.2 million; 2.8% effective rate | Higher primarily due to increased earnings |
Sales growth was primarily attributed to the BMC merger, which contributed 79.5% of the increase, and commodity price inflation, which contributed 31.3%. Remaining growth reflected core organic volume growth, partially offset by one fewer selling day.
Selling, general and administrative expense increased to $821.6 million from $404.5 million, but declined to 19.7% of sales from 22.6% because of operating leverage. SG&A included $102.7 million of depreciation and amortization related to BMC-acquired assets and $17.6 million of BMC transaction costs.
Cash flow, liquidity and capital structure
- Operating cash flow was negative $200.5 million, compared with negative $50.7 million in Q1 2020, mainly because of increased receivables and inventory associated with sales growth, commodity inflation and seasonal working-capital needs.
- Investing cash flow was positive $131.4 million, including $167.5 million of cash acquired in the BMC merger, partially offset by $39.3 million of capital expenditures.
- Financing cash flow was negative $335.6 million, primarily reflecting debt repayments, including debt acquired in the BMC merger, and the redemption of $82.5 million of 2027 notes.
- Cash and cash equivalents declined to $19.1 million from $423.8 million at December 31, 2020.
- Total debt was $1.673 billion, net of discounts and issuance costs, including $225.0 million outstanding under the revolving facility. Current maturities were $14.1 million.
- The revolving credit facility was increased to $1.4 billion and extended to January 2026. Net excess borrowing availability was $1.038 billion after outstanding borrowings and $136.7 million of letters of credit.
- Management reported total liquidity of approximately $1.1 billion, consisting of cash and net revolver availability. The company was not in violation of its debt covenants at March 31, 2021.
Material changes versus the prior comparable period
- The BMC merger increased the scale of the company and added approximately $1.75 billion of goodwill and $1.47 billion of intangible assets on a preliminary basis. BMC contributed $1.4 billion of Q1 sales and $42.8 million of income before taxes.
- Shares outstanding increased substantially as approximately 89.6 million shares were issued as merger consideration; period-end common shares outstanding were 206.9 million versus 116.8 million at December 31, 2020.
- Total assets increased to $9.380 billion from $4.174 billion at December 31, 2020, while stockholders’ equity increased to $4.984 billion from $1.153 billion, primarily because of the all-stock merger.
- Gross margin percentage declined modestly because of expense recognized from selling through inventory whose value had been stepped up in the BMC purchase accounting.
- Interest expense decreased from the prior year, which included a $28.0 million debt-extinguishment loss, despite higher debt balances in the current period.
Guidance, outlook, commentary and risks
Management cited a favorable long-term housing outlook, supported by demographics, low interest rates, aging housing stock and expected increases in housing demand. Third-party forecasts cited in the filing projected 2021 U.S. housing starts of 1.5 million, including 1.1 million single-family starts, and approximately 15.5% growth in professional repair and remodel sales.
Management expects to pursue market-share gains, maintain customer and vendor discipline, manage working capital and consider strategic acquisitions. The filing does not provide formal company-specific revenue or earnings guidance.
- Key risks include housing-cycle weakness, interest rates, affordability, economic conditions, customer credit, labor shortages, competition and fluctuating lumber and other material prices.
- Supply-chain disruptions and limited material availability may increase costs, extend lead times and restrict the ability to satisfy demand.
- COVID-19 had not materially adversely affected results through the filing date, but future effects remained uncertain.
- Construction-defect claims could result in material losses, although the company generally has insurance above applicable retentions. A reasonable loss range was not estimable at the filing date.
- The BMC purchase-price allocation was preliminary and could change during the measurement period. Changes in projected cash flows or discount rates could lead to future goodwill or intangible-asset impairment.
- John’s Lumber and Hardware was acquired on May 3, 2021 for $24.9 million in cash; purchase accounting was not complete at the filing date.
- Effective April 1, 2021, Dave Flitman became President and Chief Executive Officer following Chad Crow’s retirement.
Important facts for investors to verify
- Assess the extent to which sales and earnings growth reflects the BMC merger and lumber-price inflation versus sustainable organic growth.
- Monitor working-capital conversion, inventory levels and operating cash flow following the seasonal Q1 cash use.
- Verify debt reduction plans, revolver utilization, covenant headroom and the effect of variable interest rates.
- Review the final BMC purchase-price allocation, acquired intangible-asset amortization and potential impairment exposure.
- Evaluate whether gross-margin pressure from inventory step-up charges, material costs and freight persists.
- Track integration of BMC and related internal-control changes; management stated controls were effective as of March 31, 2021 but integration remained ongoing.
- Review developments in construction-defect litigation, insurance coverage and self-insurance reserves.