Builders FirstSource, Inc. 2020 Q1 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 400 locations in 40 states and reported four geographic segments: Northeast, Southeast, South and West. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,787.0 million | $1,631.3 million | +9.5% |
| Gross profit | $465.4 million | $442.0 million | +5.3% |
| Gross margin | 26.0% | 27.1% | Down 1.1 percentage points |
| Income from operations | $60.9 million | $71.9 million | -15.2% |
| Operating margin | 3.4% | 4.4% | Down 1.0 percentage point |
| Interest expense, net | $51.9 million | $24.9 million | +$27.0 million |
| Net income | $8.8 million | $35.7 million | -75.4% |
| Net margin | 0.5% | 2.2% | Down 1.7 percentage points |
| Diluted EPS | $0.07 | $0.31 | -$0.24 |
| Operating cash flow | $(50.7) million | $6.1 million | Down $56.8 million |
| Capital expenditures | $28.5 million | $21.5 million | +$7.0 million |
Sales growth comprised 3.9% core organic growth, 3.5% from acquisitions, 1.7% from one additional selling day and 0.4% from commodity price inflation. Product-category sales increased except for gypsum, roofing and insulation, which declined 8.4%.
SG&A increased 9.3% to $404.5 million but declined slightly as a percentage of sales to 22.6% from 22.7%. The effective tax rate fell to 2.8% from 24.0%, primarily because of lower pretax earnings and tax benefits related to stock compensation.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $163.9 million at March 31, 2020, compared with $14.1 million at December 31, 2019.
- Total debt, including current maturities and before unamortized discounts and issuance costs, was $1.579 billion; carrying value after discounts and costs was $1.568 billion, compared with $1.291 billion at year-end 2019.
- Long-term debt, net of current maturities, was $1.545 billion.
- The company had $310.0 million outstanding under its $900.0 million revolving facility, $82.2 million of letters of credit and $507.8 million of net excess borrowing availability.
- Total reported liquidity was $671.7 million, consisting of cash and net revolving-facility availability. The company was in compliance with its debt covenants at March 31, 2020.
- Working capital increased materially, including accounts receivable of $702.2 million and inventories of $640.0 million at March 31, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue grew 9.5%, but gross margin contracted because Q1 2019 benefited from commodity deflation and stronger pricing conditions.
- Operating income and net income declined despite higher sales, primarily because of lower gross margin and substantially higher interest expense.
- Interest expense included a $28.0 million loss on extinguishment related to redeeming the 2024 notes and partially redeeming the 2027 notes.
- In February 2020, the company issued $550.0 million of 5.0% senior unsecured notes due 2030. Proceeds, together with revolver borrowings, funded debt redemptions and related costs.
- Operating cash flow turned negative because working-capital investment increased, principally from receivables and inventories. Financing activities provided $244.3 million, largely reflecting increased revolver borrowings and debt refinancing.
- On January 9, 2020, the company acquired Bianchi & Company’s millwork operations for $15.9 million. The acquisition added $8.3 million of goodwill and $9.4 million of intangible assets and was not material to reported results.
- In April 2020, after the quarter ended, the company issued an additional $350.0 million of 2027 notes, intending to repay revolver borrowings and fund general corporate purposes.
Outlook, Commentary, Risks and Unusual Items
Management stated that the COVID-19 pandemic was creating significant economic and operating uncertainty. The company expected reduced demand, margin pressure, increased operating costs, possible facility closures and supply-chain disruption. It also identified risks from substantial indebtedness, cyclical housing demand, lumber-price volatility, competition, labor availability and customers’ credit quality.
Management cited third-party forecasts for 2020 U.S. housing starts of approximately 1.2 million total and 0.8 million single-family starts, declines of approximately 7.2% and 7.1%, respectively, from 2019. HIRI forecast a roughly 10% decline in professional repair-and-remodel sales. The company did not provide formal company-specific revenue or earnings guidance in the filing.
Management continued to view the long-term housing outlook favorably because of demographic growth, relatively low interest rates and aging housing stock. It planned to focus on market share, working-capital discipline, customer credit exposure, inventory levels, vendor terms, expense control and capital-structure optimization.
Known and threatened construction-defect claims could result in material losses, although the company could not estimate a reasonable range of loss. Outstanding letters of credit principally supported self-insurance programs. The CARES Act’s financial-statement impact was still under evaluation.
Important Facts for Investors to Verify
- Whether COVID-19 materially reduced subsequent-quarter sales volumes, housing starts and repair-and-remodel activity.
- Actual gross-margin performance and the company’s ability to pass through lumber, freight and other material-cost changes.
- Revolver borrowings, excess availability, covenant compliance and liquidity after the April 2020 debt issuance.
- Whether negative seasonal operating cash flow and elevated receivables and inventories converted to cash as construction activity changed.
- The effect of the debt refinancing and additional 2027 notes on annual interest expense, maturities and leverage.
- The ultimate cost and insurance coverage of construction-defect litigation and other contingencies.
- Execution of the Bianchi integration and any further acquisitions or capital-structure transactions.
- CEO succession timing, since the CEO’s planned retirement was deferred until COVID-19 conditions stabilized.