Business Context and Reporting Period
Builders FirstSource, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company supplies building materials, manufactured components, installation and construction services through approximately 400 locations in 40 states. Operations are organized into Northeast, Southeast, South and West reportable segments.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Year-over-Year Change | Six Months Ended June 30, 2017 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $1,843.3 million | 9.9% | $3,376.4 million | 9.8% |
| Gross margin | $460.8 million; 25.0% | Margin up 0.1 percentage point | $836.8 million; 24.8% | Margin down 0.2 percentage point |
| Income from operations | $91.3 million; 5.0% | Margin up 0.5 percentage point | $131.6 million; 3.9% | Margin up 0.7 percentage point |
| Net income | $37.9 million | Up from $29.4 million | $41.7 million | Up from $12.5 million |
| Diluted EPS | $0.33 | Up from $0.26 | $0.36 | Up from $0.11 |
| Net interest expense | $33.7 million | Down $9.1 million | $69.9 million | Down $8.2 million |
| Operating cash flow | Not separately provided | Not separately provided | $(76.3) million | Use increased from $(31.8) million |
Second-quarter sales growth reflected estimated volume growth of 3.8% and commodity price inflation of 6.1%. Six-month sales growth reflected estimated volume growth of 4.7% and commodity price inflation of 5.1%. Second-quarter SG&A was 20.0% of sales versus 20.4% in the prior year; six-month SG&A was 20.9% versus 21.8%.
As of June 30, 2017, cash and cash equivalents were $6.9 million, accounts receivable were $720.6 million and inventories were $651.0 million. Total debt and lease obligations before unamortized discounts and issuance costs were $1.929 billion, including $99.0 million drawn on the revolving facility, $465.3 million under the term loan, $367.6 million of 2023 notes, $750.0 million of 2024 notes and lease obligations.
Net excess availability under the $900.0 million revolving facility was $716.1 million after outstanding borrowings and approximately $84.9 million of letters of credit. Reported liquidity, including cash, was $723.0 million. The company was in compliance with its debt covenants at June 30, 2017.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of higher housing-related activity, sales volume and lumber and other commodity price inflation. Lumber and lumber sheet goods sales increased 17.1% in the quarter and 16.2% for the six-month period.
- Quarterly gross margin improved modestly from procurement savings, although commodity inflation relative to short-term customer pricing commitments largely offset those benefits. Six-month gross margin declined because of the same pricing lag.
- Operating profitability improved as SG&A grew more slowly than sales, aided by lower depreciation and amortization on acquired ProBuild assets and cost savings.
- Interest expense declined following prior-year debt transactions and the 2017 repricing and refinancing transactions. Prior-year results also included a $6.0 million net gain on debt extinguishment for the six-month period and a $1.7 million loss on debt extinguishment in the second quarter.
- Cash used in operations increased by $44.5 million, primarily because seasonal working-capital investment in receivables and inventories grew faster than in the prior year.
- The Southeast, South and West segments increased both sales and pretax profitability in the second quarter. Northeast sales and profitability declined in the quarter and six-month profitability also decreased.
Guidance, Outlook, Risks and Unusual Items
Management cited improving housing conditions but noted that single-family housing starts remained below the historical average. The company referenced third-party forecasts of approximately 855,000 U.S. single-family housing starts in 2017, up 9.4% from 2016, and approximately 4.5% growth in professional repair and remodeling sales. The filing does not provide formal company revenue or earnings guidance.
- Management expects long-term housing demand to benefit from demographics, relatively low interest rates and an aging housing stock. It intends to pursue market-share gains, operating-efficiency initiatives and potentially strategic acquisitions.
- Debt reduction remains a key priority. In February 2017, the company repriced and extended its term loan to 2024, reducing the applicable interest rate by 0.75%. In March 2017, it increased and extended its revolving facility to $900.0 million through 2022.
- Key operating risks include housing-market cyclicality, lumber and other commodity-price volatility, shortages of skilled construction labor, competition, customer credit availability, interest rates and the ability to pass material and freight-cost increases to customers.
- Since the fourth quarter of 2016, the company has experienced increased known and threatened construction-defect claims, primarily in two states. The claims are generally insured above deductibles, but a reasonable loss range cannot currently be estimated and an adverse resolution could materially affect financial position, results or cash flows.
- The company adopted updated stock-compensation accounting guidance on January 1, 2017, recording an $8.9 million cumulative-effect increase to accumulated deficit. It also recorded a $3.7 million reduction in its tax valuation allowance during the second quarter.
- The company expects the new lease accounting standard to have a significant balance-sheet impact when adopted. It expects the new revenue-recognition standard, scheduled for adoption January 1, 2018, to primarily affect contracts containing service elements and may result in earlier revenue recognition.
- A 1.0% increase in interest rates would increase annual interest expense by approximately $1.0 million on revolving-facility borrowings and approximately $4.7 million on the term loan, based on balances at June 30, 2017.
Important Facts for Investors to Verify
- Assess whether sales growth driven by commodity inflation is sustainable and whether pricing can catch up with material-cost changes.
- Monitor seasonal working-capital usage, operating cash flow and dependence on revolving-facility borrowings during peak construction periods.
- Review total leverage, debt maturities, variable-rate exposure, covenant requirements and available borrowing capacity.
- Track construction-defect litigation, insurance coverage, deductibles and any eventual loss estimates.
- Evaluate the sustainability of improved operating margins after lower acquired-asset amortization and cost-reduction benefits.
- Verify the effect of tax valuation allowances, net operating loss utilization and future ownership changes under Section 382.
- Review the expected balance-sheet and revenue-recognition effects of the upcoming lease and revenue accounting standards.