Builders FirstSource, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020; filed July 31, 2020. Builders FirstSource supplies and manufactures building materials, components, and construction services through approximately 400 locations in 40 states. Results reflect the initial operating effects of the COVID-19 pandemic.
Financial Performance and Position
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Net sales | $1,945.6 million | $1,904.5 million | 2.2% |
| Gross margin | $517.3 million; 26.6% | $517.2 million; 27.2% | Margin down 0.6 pts |
| SG&A | $388.1 million; 19.9% | $401.5 million; 21.1% | Expense down 3.3% |
| Operating income | $129.3 million; 6.7% | $115.6 million; 6.1% | 11.8% |
| Interest expense, net | $26.8 million | $29.4 million | Down $2.6 million |
| Net income | $78.9 million | $66.6 million | 18.5% |
| Diluted EPS | $0.67 | $0.57 | 17.5% |
| Metric | Six months 2020 | Six months 2019 | Change |
|---|---|---|---|
| Net sales | $3,732.7 million | $3,535.8 million | 5.6% |
| Gross margin | $982.7 million; 26.3% | $959.1 million; 27.1% | Margin down 0.8 pts |
| Operating income | $190.2 million; 5.1% | $187.5 million; 5.3% | 1.4% |
| Interest expense, net | $78.7 million | $54.3 million | Up $24.5 million |
| Net income | $87.7 million | $102.3 million | Down 14.3% |
| Diluted EPS | $0.75 | $0.88 | Down 14.8% |
Cash flow and liquidity: Six-month operating cash flow was $169.9 million versus $178.8 million in the prior-year period. Investing cash use was $69.3 million, including $54.8 million of capital expenditures and $15.9 million for the Bianchi acquisition. Financing activities provided $270.7 million. Cash increased to $385.5 million from $14.1 million at year-end 2019.
Debt: Total debt, including current maturities and before unamortized discounts and issuance costs, was $1.623 billion at June 30, 2020, compared with $1.300 billion at December 31, 2019. Net debt reported on the balance sheet was $1.602 billion. The company had no revolver borrowings, $817.8 million of net excess revolver availability, and total liquidity of $1.203 billion, including cash. Outstanding letters of credit totaled $82.2 million.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 2.2%, but core organic sales declined 2.1% after excluding acquisitions and commodity-price inflation. Acquisitions contributed 2.5% of growth and commodity inflation contributed 1.8%.
- Six-month sales growth reflected acquisitions, core organic growth, commodity-price inflation, and one additional selling day. Gypsum, roofing, and insulation sales declined 8.8% for the six-month period; other product categories increased.
- Gross margin percentages declined because of normalization in lumber margins and the comparison with commodity-price deflation in the prior year.
- SG&A leverage improved in the second quarter due primarily to lower variable compensation, travel and entertainment, and fuel costs.
- Six-month net income and EPS declined despite higher sales, primarily because first-quarter debt refinancing generated a $28.0 million loss on extinguishment.
- Regional performance was uneven. Northeast sales and profitability declined because of COVID-19-related construction restrictions, while Southeast, South, and West sales generally increased.
- The company acquired Bianchi & Company’s millwork assets and operations for $15.9 million in cash on January 9, 2020. The filing states that the acquisition was not material to consolidated results.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal company-specific financial guidance in the filing. Third-party forecasts cited by management estimated 2020 U.S. housing starts of approximately 1.2 million total and 0.8 million single-family starts, representing declines of 9.6% and 6.5%, respectively, from 2019. Professional repair-and-remodel sales were forecast to decline approximately 8.5%.
Management believes long-term housing demand remains favorable because of low interest rates, demographic growth, aging housing stock, and migration toward suburban living. The company intends to focus on market share, working capital management, cost control, acquisitions, and capital-structure optimization.
- COVID-19 may reduce housing starts and demand, create additional operating costs and margin pressure, disrupt supply chains, and cause temporary facility closures.
- The business is exposed to cyclical housing activity, lumber and other commodity prices, labor availability, customer credit, competition, weather, and economic conditions.
- Substantial indebtedness increases interest expense and may reduce financial flexibility. Fixed-rate 2027 and 2030 notes limit exposure to rising rates, while the term loan and revolver have variable-rate exposure.
- Known and threatened construction-defect claims may result in material losses, although the company cannot currently estimate a reasonable loss range. Insurance coverage may not cover all liabilities.
- The company had no debt covenant violations at June 30, 2020. It deferred certain payroll taxes under the CARES Act, expected to provide approximately $35 million of current-year liquidity.
- The company recorded a $28.0 million debt-extinguishment loss in the first quarter while refinancing $503.9 million of 2024 notes and $47.5 million of 2027 notes. It issued $550.0 million of 5.0% notes due 2030 and an additional $350.0 million of 2027 notes.
- The CEO announced plans to retire during 2020 and remain available in a consulting capacity during the transition.
Investor Verification Items
- Verify the sustainability of sales growth after separating acquisition, commodity-price, and selling-day effects from core organic demand.
- Assess whether gross-margin pressure from lumber normalization and commodity volatility persists.
- Review COVID-19 effects on housing starts, regional operations, repair and remodel demand, supply-chain continuity, and customer credit.
- Reconcile the increase in debt with the company’s liquidity, refinancing benefits, interest burden, maturities, and covenant requirements.
- Monitor construction-defect claims, insurance recoveries, self-insurance exposure, and potential environmental liabilities.
- Evaluate the integration and financial contribution of the Bianchi acquisition and any future acquisitions.
- Confirm management’s CEO succession plan and any associated transition costs or operating changes.