Builders FirstSource, Inc. Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Builders FirstSource supplies and manufactures building materials, manufactured components, and construction services for professional homebuilders, contractors, remodelers, and consumers. The company operated 403 locations in 40 states and reported four geographic segments: Northeast, Southeast, South, and West.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Sales | $2,118.5 million | $1,878.9 million | $5,908.8 million | $5,255.3 million |
| Gross margin | 24.7% | 24.4% | 24.2% | 24.7% |
| Income from operations | $121.8 million | $88.7 million | $278.5 million | $220.3 million |
| Operating margin | 5.8% | 4.7% | 4.7% | 4.2% |
| Net income | $73.3 million | $39.8 million | $153.2 million | $81.5 million |
| Diluted EPS | $0.63 | $0.34 | $1.31 | $0.71 |
- Q3 sales increased 12.7%; nine-month sales increased 12.4%. Management estimated that commodity-price inflation contributed 11.2% of Q3 growth and 9.9% of nine-month growth.
- Q3 gross margin expanded 30 basis points, primarily because commodity costs declined sharply relative to customer pricing. Nine-month gross margin contracted 50 basis points because commodity inflation outpaced customer pricing commitments.
- SG&A increased 8.2% in Q3 and 7.0% for the nine-month period, but declined as a percentage of sales to 18.9% and 19.5%, respectively, reflecting operating leverage and cost control.
- Net interest expense declined to $29.1 million in Q3 and $84.8 million for nine months, compared with $33.8 million and $103.7 million in the prior-year periods. Prior-year nine-month interest expense included $2.4 million of one-time debt transaction charges.
- The effective tax rate was 20.9% in both 2018 periods, compared with 27.5% in Q3 2017 and 30.1% for the first nine months of 2017, primarily reflecting the 2017 Tax Act.
Cash flow, debt, and liquidity
- Operating cash flow was $9.5 million for the first nine months of 2018, compared with operating cash use of $7.6 million in 2017. Working-capital investment substantially offset higher earnings.
- Capital expenditures were $78.7 million, up from $48.1 million, primarily for facility improvements, machinery, and rolling stock.
- Cash and cash equivalents were $34.4 million at September 30, 2018, compared with $57.5 million at December 31, 2017.
- Total debt and lease obligations, before unamortized discounts and issuance costs, were $1,858.7 million, compared with $1,803.5 million at year-end 2017. Long-term debt and lease obligations, net of discounts and costs, were $1,827.0 million.
- The company had $404.0 million outstanding under its $900.0 million revolving facility, $82.2 million of letters of credit, and $413.8 million of net excess borrowing availability. Reported liquidity, including cash, was $448.2 million.
- The company was in compliance with all debt covenants at September 30, 2018. A 1% increase in rates on the revolving facility and 2024 term loan would increase annual interest expense by approximately $4.0 million and $4.6 million, respectively, based on period-end borrowings.
Material changes versus the prior comparable period
- Sales growth was concentrated in lumber and lumber sheet goods and manufactured products, which benefited from commodity-price inflation. Q3 category growth was 20.4% and 21.1%, respectively.
- Q3 sales and profitability increased in all four reportable segments. For the first nine months, Northeast profitability declined 3.1% despite 7.7% sales growth, primarily because commodity inflation exceeded the segment’s cost recovery.
- U.S. total housing starts increased 3.5% in Q3 and 6.4% for the first nine months; single-family starts increased 2.4% and 6.0%, respectively, versus the prior-year periods.
- Stockholders’ equity increased to $538.3 million from $376.2 million at December 31, 2017, primarily because of net income and a cumulative-effect adjustment related to revenue recognition.
Guidance, outlook, risks, contingencies, and unusual items
- Management described the long-term housing outlook as positive and expects to pursue market-share gains, organic investments, and potentially strategic acquisitions. Debt reduction and working-capital management remain priorities.
- Third-party forecasts cited by management projected 2018 U.S. total housing starts of 1.278 million and single-family starts of 891,000. The company cited a projected 9.9% increase in professional repair-and-remodel sales, including commodity-price inflation.
- Key risks include housing-market cyclicality, interest rates, credit availability, skilled-labor shortages, lumber and freight-price volatility, competitive pricing, customer concentration among large homebuilders, and the company’s substantial indebtedness.
- Construction-defect claims are generally insured above deductibles, but the company cannot estimate a reasonable range of loss. Resolution could materially affect financial position, results, or cash flows.
- The company adopted the new revenue-recognition standard on January 1, 2018 using a modified retrospective method and recorded a $2.0 million cumulative adjustment to accumulated deficit, or $1.5 million net of tax. It plans to adopt the new lease standard on January 1, 2019 and expects a significant balance-sheet impact from recognizing lease liabilities and right-of-use assets.
- Results are seasonal, with weather typically affecting the first and fourth quarters. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether commodity-price declines or increases continue to affect gross-margin recovery and customer pricing.
- Trends in housing starts, repair-and-remodel demand, skilled-labor availability, and large-homebuilder activity.
- Working-capital requirements and the company’s ability to generate operating cash flow during seasonal peaks.
- Debt reduction, variable-rate exposure, covenant headroom, and continued access to revolving-facility liquidity.
- The ultimate exposure from construction-defect litigation and insurance coverage above self-insured retentions.
- The balance-sheet effects of adopting the lease standard in 2019 and any future impact from the expected-credit-loss standard.