Builders FirstSource, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone quarterly filing; fourth-quarter data is included in the unaudited quarterly financial information. Builders FirstSource supplies building materials, manufactured components and construction services through 402 locations in 40 U.S. states.
Financial Performance and Position
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Sales | $7,034.2 million | $6,367.3 million | 10.5% increase |
| Gross margin | $1,727.4 million; 24.6% | $1,596.7 million; 25.1% | Gross margin dollars increased; rate declined 0.5 percentage points |
| Income from operations | $285.1 million; 4.1% of sales | $236.3 million; 3.7% | Increased |
| Net income | $38.8 million | $144.3 million | Decreased |
| Diluted EPS | $0.34 | $1.27 | Decreased |
| Operating cash flow | $178.5 million | $158.2 million | Increased |
| Capital expenditures | $62.4 million | $42.7 million | Increased |
| Cash and equivalents | $57.5 million | $14.4 million | Increased |
| Total debt and lease obligations, gross | $1,803.5 million | $1,831.2 million | Decreased |
Net income was affected by $56.3 million of loss on extinguishment of debt and $29.0 million of tax expense from revaluation of deferred tax assets following the 2017 Tax Act. Excluding the Tax Act and valuation-allowance effects, management reported effective tax rates of 29.4% for 2017 and 41.8% for 2016.
Working capital increased by $94.1 million, primarily reflecting higher accounts receivable and inventory associated with sales growth. The company generated $178.5 million of operating cash flow, used $59.4 million in investing activities and used $76.0 million in financing activities.
Fourth-Quarter Information
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Net sales | $1,778.9 million | $1,546.9 million |
| Gross margin | $431.2 million | $391.6 million |
| Net income (loss) | $(42.7) million | $6.4 million |
| Diluted EPS | $(0.38) | $0.06 |
Fourth-quarter 2017 results included the $56.3 million debt-extinguishment loss and $29.0 million of Tax Act-related income tax expense.
Material Changes Versus the Prior Comparable Period
- Sales increased 10.5%; management estimated 4.3% volume growth and 6.2% commodity-price inflation. Single-family and repair-and-remodel growth was partly offset by lower multifamily activity.
- Lumber and lumber sheet-goods sales increased 17.8% to $2.51 billion and represented 35.7% of sales, making commodity-price movements a significant earnings factor.
- Gross margin rate declined from 25.1% to 24.6%, primarily because lumber inflation compressed margins on commodity products.
- SG&A increased 6.0% to $1.44 billion but declined to 20.5% of sales from 21.4%, reflecting operating leverage and lower amortization of acquired ProBuild assets.
- Net interest expense declined to $193.2 million from $214.7 million after refinancing actions, although 2017 included substantial debt-extinguishment costs.
- The company redeemed $367.6 million of 2023 notes, repriced and extended its term loan to 2024, and increased and extended its revolving facility to $900.0 million maturing in 2022.
Liquidity, Debt and Outlook
- At December 31, 2017, the company had $350.0 million drawn under its $900.0 million revolving facility, $84.9 million of letters of credit and $436.8 million of net excess borrowing availability. Including cash, reported liquidity was $494.3 million.
- Debt included $750.0 million of 5.625% senior secured notes due 2024, approximately $463.0 million under the 2024 term loan and $350.0 million under the 2022 revolving facility, in addition to lease obligations.
- Approximately 45.1% of outstanding debt was variable-rate debt. A 1 percentage-point rate increase was estimated to increase annual interest expense by approximately $4.6 million on the term loan and $3.5 million on the revolving facility.
- Management expected 2018 capital expenditures of approximately $120 million to $130 million, primarily for rolling stock, equipment and facility improvements.
- Management cited a positive long-term housing outlook, continued market-share opportunities, growth in prefabricated and value-added products, cost-management initiatives and debt reduction as priorities.
- Third-party forecasts cited in the filing projected 2018 total U.S. housing starts of 1.292 million and single-family starts of 921,000, with professional repair-and-remodel sales expected to increase approximately 2.5%.
Risks, Contingencies and Unusual Items
- Results are highly dependent on residential construction, repair and remodeling activity, interest rates, credit availability, employment, consumer confidence, skilled-labor availability and general economic conditions.
- Lumber and other commodity prices can materially affect sales, margins, inventory values and cash flow; the company may not be able to pass cost increases to customers promptly.
- Substantial leverage, variable-rate debt, restrictive covenants and cross-default provisions could constrain investment, acquisitions, dividends and financial flexibility. The company was in compliance with its debt covenants at year-end.
- The company has known and threatened construction-defect claims and asbestos-related litigation. Management could not estimate a reasonable range of loss for the construction-defect matters, and an adverse resolution could materially affect results or liquidity.
- Operating lease commitments totaled $319.9 million, excluding certain future equipment leases; the company also has significant lease-finance obligations and approximately $5.6 million of residual-value guarantees.
- ProBuild ERP integration remained ongoing and was expected to be completed in 2019, creating potential execution, disruption and cost risks.
- Goodwill was $740.4 million, or 24.6% of total assets. No goodwill impairment was recorded in 2017, but impairment depends on housing starts, margins, market share, discount rates and other estimates.
- The company does not pay regular dividends, and debt agreements restrict dividend payments and certain other uses of cash.
Investor Verification Priorities
- Reconcile reported net income and fourth-quarter losses to debt-extinguishment costs, Tax Act effects and deferred-tax valuation adjustments.
- Track lumber prices, commodity gross-margin performance and the company’s ability to pass costs through to customers.
- Verify debt maturities, variable-rate exposure, covenant headroom and the availability-based borrowing capacity of the revolving facility.
- Assess operating cash conversion as sales growth increases receivables and inventory requirements.
- Monitor housing starts, labor availability, multifamily trends and repair-and-remodel demand in the company’s geographic markets.
- Review developments in construction-defect, asbestos and other legal proceedings, including insurance coverage and potential uninsured exposure.
- Evaluate progress and costs of the ProBuild ERP integration and the planned 2018 capital-expenditure program.