Builders FirstSource, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2023, filed November 1, 2023. Builders FirstSource supplies and manufactures building materials, manufactured components and construction services through approximately 570 locations in 42 U.S. states. The Company operates as one reportable segment.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Net sales | $4.534 billion | $5.761 billion | Down 21.3% |
| Gross profit | $1.581 billion | $2.015 billion | Down 21.5% |
| Gross margin | 34.9% | 35.0% | Down 0.1 percentage point |
| Income from operations | $641.6 million | $1.015 billion | Down 36.8% |
| Operating margin | 14.2% | 17.6% | Down 3.4 percentage points |
| Net income | $451.5 million | $738.0 million | Down 38.8% |
| Diluted EPS | $3.59 | $4.72 | Down 23.9% |
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|---|---|---|
| Net sales | $12.946 billion | $18.369 billion | Down 29.5% |
| Gross profit | $4.547 billion | $6.259 billion | Down 27.4% |
| Gross margin | 35.1% | 34.1% | Up 1.0 percentage point |
| Income from operations | $1.686 billion | $3.244 billion | Down 48.0% |
| Net income | $1.190 billion | $2.365 billion | Down 49.7% |
| Diluted EPS | $9.10 | $13.98 | Down 34.9% |
Q3 selling, general and administrative expense declined 6.1% to $939.5 million, but increased to 20.7% of sales from 17.4% because of reduced operating leverage. Net interest expense increased to $50.2 million from $44.1 million. The Q3 effective tax rate was 23.7%, compared with 23.9%.
For the first nine months, operating cash flow was $1.695 billion, compared with $2.628 billion in 2022. Investing cash outflow was $476.1 million, including $142.9 million for acquisitions and $376.6 million for property, plant and equipment. Financing cash outflow was $1.211 billion, primarily reflecting $1.625 billion of share repurchases, partly offset by net revolving-facility borrowings.
At September 30, 2023, cash and cash equivalents were $88.1 million. Long-term debt, including current maturities and before subtracting cash, was approximately $3.428 billion at face carrying amounts, or $3.399 billion net of discounts and issuance costs. Revolving-facility borrowings were $682.0 million, with $70.3 million of outstanding letters of credit and $1.048 billion of net excess availability. Reported liquidity was approximately $1.1 billion, including cash and excess revolving-facility availability.
Material changes versus the prior comparable period
- Q3 sales declined 21.3%, driven by a 13.5% decrease in core organic sales, 9.1% commodity-price deflation and 1.6% fewer selling days; acquisitions contributed 2.9% growth.
- All product categories declined in Q3: lumber and lumber sheet goods fell 36.7%, manufactured products 20.2%, windows, doors and millwork 14.8%, and specialty building products and services 5.8%.
- For the first nine months, core organic sales decreased 21.0% and commodity deflation decreased sales 12.6%, partly offset by 4.1% acquisition-related growth.
- Nine-month gross margin improved to 35.1% from 34.1%, reflecting product mix toward value-added products, commodity purchase timing benefits in the multifamily segment and normalization of core organic margins.
- The Company completed acquisitions of Noltex, Builder’s Millwork Supply, JB Millworks, Church’s Lumber and Frank’s Cash and Carry for aggregate consideration of $156.7 million, including $142.9 million of cash consideration. The acquisitions added $64.3 million of goodwill.
- The Company repurchased 16.2 million shares during the first nine months for approximately $1.6 billion. Approximately $407.3 million remained available under authorized repurchase programs at September 30, 2023.
- Debt increased from $3.015 billion at December 31, 2022, to $3.428 billion before discounts and issuance costs. The revolving facility was amended to extend $1.8 billion of commitments to January 17, 2028.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a specific Company-issued financial outlook or formal earnings guidance. Management states that the long-term housing outlook remains positive because of underlying demographic-driven housing underbuilding, but near-term demand is being tempered by higher interest rates and inflation.
U.S. total housing starts decreased 6.2% year over year in Q3 2023, while single-family starts increased 6.8%, according to the filing. Third-party forecasts cited by management projected 2023 total housing starts of 1.4 million, down 9.9%, single-family starts of 0.9 million, down 8.0%, and professional repair-and-remodel sales down approximately 5.0%.
Key risks include housing-cycle weakness, interest rates, inflation, consumer and builder affordability, labor and supply shortages, lumber and other commodity-price volatility, customer credit exposure, supply-chain disruption, weather seasonality, acquisition execution and leverage. A 1.0 percentage-point increase in revolving-facility interest rates would add approximately $6.8 million of annual interest expense based on September 30 borrowings.
The Company has known and threatened construction-defect claims. Although insurance generally covers losses above deductibles, the filing states that a reasonable range of loss cannot currently be estimated and that resolution could materially affect financial position, results or cash flows. The Company was not in violation of debt covenants at September 30, 2023.
Goodwill was $3.521 billion at September 30, 2023, and management reported no goodwill impairment triggering events. Future intangible-asset amortization was estimated at $1.349 billion. Disclosure controls and procedures were determined to be effective, and no material changes in internal control over financial reporting were identified.
Important facts for investors to verify
- Whether housing starts, mortgage rates and builder demand stabilize or further reduce core organic sales.
- Whether gross-margin benefits from value-added products and commodity timing persist as pricing and product mix change.
- The pace of debt reduction or additional borrowing, revolving-facility interest costs and remaining liquidity.
- The timing and economic contribution of the 2023 acquisitions, including integration and purchase-accounting assumptions.
- Future share repurchases and their effect on share count, liquidity and leverage.
- The development, insurance coverage and potential financial exposure of construction-defect litigation.
- The accuracy of significant estimates supporting goodwill, acquired customer relationships, tax balances and self-insurance reserves.