Builders FirstSource, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Builders FirstSource is a supplier and manufacturer of building materials, manufactured components and construction services serving professional homebuilders, contractors, remodelers and consumers. It operated approximately 550 locations across 39 states and reported one aggregated reportable segment. The filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Comparability is significantly affected by the January 1, 2021 all-stock merger with BMC Stock Holdings. BMC contributed $1.8 billion of third-quarter sales and $5.0 billion of nine-month sales. The company also completed four additional acquisitions during 2021.
Financial performance and key metrics
| ($ in millions, except per-share data) | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $5,508.6 | $2,295.5 | $15,259.0 | $6,028.1 |
| Gross margin | $1,712.5 | $570.7 | $4,365.2 | $1,553.4 |
| Gross margin percentage | 31.1% | 24.9% | 28.6% | 25.8% |
| Income from operations | $837.4 | $139.8 | $1,765.6 | $330.0 |
| Operating margin | 15.2% | 6.1% | 11.6% | 5.5% |
| Net income | $613.1 | $85.9 | $1,283.0 | $173.6 |
| Net margin | 11.1% | 3.8% | 8.5% | 2.8% |
| Diluted EPS | $2.98 | $0.73 | $6.18 | $1.48 |
- Third-quarter sales increased 140.0%; nine-month sales increased 153.1%.
- Management attributed third-quarter sales growth to the BMC merger, commodity price inflation and core organic growth. The BMC merger accounted for 77.3% of third-quarter sales growth and commodity inflation for 38.6%.
- Third-quarter gross margin expanded 620 basis points, while nine-month gross margin expanded 280 basis points. Management cited pricing relative to commodity inflation and growth in value-added product categories.
- SG&A increased 103.1% in the third quarter and 112.5% for the nine months, primarily because of the merger, higher depreciation and amortization, and variable compensation. SG&A as a percentage of sales declined to 15.9% from 18.8% in Q3 and to 17.0% from 20.3% for the nine months.
- Effective tax rates were 23.5% in Q3 2021 and 23.2% for the nine-month period, compared with 23.1% and 22.2%, respectively, in the prior-year periods.
Cash flow, balance sheet, debt and liquidity
- Cash provided by operating activities was $903.2 million for the first nine months of 2021, compared with $155.1 million in the prior-year period.
- Operating cash flow was partly absorbed by $970.4 million of investing outflows, including $898.1 million for acquisitions and $160.2 million of capital expenditures.
- Financing activities used $131.9 million. The company issued $1.0 billion of 4.25% senior unsecured notes due 2032, repurchased $565.6 million of common stock, redeemed $82.5 million of 2027 notes and repaid other debt.
- Cash and cash equivalents declined to $224.7 million at September 30, 2021 from $423.8 million at December 31, 2020.
- Total debt, including current maturities and finance obligations, was approximately $2.5 billion at September 30, 2021, versus approximately $1.7 billion at year-end 2020. Reported long-term debt, net of current maturities, discounts and issuance costs, was $2.42 billion.
- The $1.4 billion revolving credit facility had no outstanding borrowings and $1.27 billion of net excess availability after $126.4 million of letters of credit. Total liquidity, including cash, was approximately $1.5 billion.
- Working capital expanded materially, including accounts receivable of $2.13 billion and inventories of $1.62 billion at September 30, 2021, compared with $880.0 million and $784.5 million, respectively, at December 31, 2020.
- The company reported compliance with all debt covenants at September 30, 2021.
Material changes, outlook and unusual items
- The BMC merger added substantial scale, geographic reach and value-added offerings. It increased goodwill by $1.75 billion and added approximately $1.5 billion of acquired intangible assets, primarily customer relationships.
- Other 2021 acquisitions included John’s Lumber, Alliance, CTF and WTS Paradigm, with aggregate purchase prices stated in the filing of approximately $1.1 billion. The Paradigm purchase price allocation remained preliminary.
- The company sold its standalone Eastern U.S. gypsum distribution operations for $76.2 million, recording a $26.3 million gain.
- The company repurchased 10.96 million shares during the third quarter for approximately $578.2 million at an average price of $52.74 per share under a $1.0 billion authorization. Approximately $422.0 million remained available under the program at September 30.
- Management described the long-term housing outlook as positive and cited favorable demographics, expected housing demand, prefabricated-component adoption and opportunities for market-share gains and strategic acquisitions.
- Third-party forecasts cited by management projected 2021 U.S. total housing starts of 1.6 million and single-family starts of 1.1 million. The filing does not provide formal company earnings or revenue guidance.
- Principal risks include housing-market cyclicality, interest rates and affordability, lumber and commodity-price volatility, supply-chain disruptions, labor shortages, competition, COVID-19 impacts, acquisition integration and leverage.
- Known and threatened construction-defect claims may be covered by insurance above applicable deductibles, but the company cannot estimate a reasonable loss range and states that an adverse resolution could materially affect financial position, results or cash flows.
- Acquisition accounting created significant amortization exposure: intangible-asset amortization was $92.3 million in Q3 and $261.6 million for the first nine months. Estimated remaining 2021 amortization from October 1 was $96.5 million.
- Management concluded that disclosure controls were effective as of September 30, 2021. Integration of BMC and other acquisitions may result in changes to internal controls, and acquired businesses may be excluded from management’s year-end control assessment as permitted by SEC rules.
Most important facts for investors to verify
- Separate organic growth and pricing effects from acquisition-driven and commodity-inflation-driven sales growth.
- Whether elevated gross margins and pricing relative to lumber inflation are sustainable as commodity prices normalize.
- Integration progress, cost synergies and purchase-price allocations for BMC and the other acquisitions, particularly Paradigm.
- Working-capital requirements, inventory and receivables growth, and conversion of reported earnings into cash flow.
- Debt maturities, interest costs, covenant headroom and the effect of future acquisitions or share repurchases on leverage and liquidity.
- Potential exposure from construction-defect claims and the adequacy of insurance and self-insurance reserves.
- Future amortization, goodwill impairment sensitivity and the valuation assumptions for acquired customer relationships and developed technology.