Builders FirstSource, Inc. — 2019 Q3 Form 10-Q Summary
Business context and reporting period
Builders FirstSource supplies and manufactures building materials, prefabricated components, and construction services for professional homebuilders, contractors, remodelers, and consumers. It operated approximately 400 locations in 40 U.S. states, organized into Northeast, Southeast, South, and West reportable segments.
This filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The financial statements are unaudited. The company adopted the new lease accounting standard on January 1, 2019, recording operating lease right-of-use assets of $269.7 million and lease liabilities of $267.5 million at adoption.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Sales | $1,981.0 million | $2,118.5 million | $5,516.9 million | $5,908.8 million |
| Gross margin | $541.1 million | $522.8 million | $1,500.3 million | $1,430.2 million |
| Gross margin percentage | 27.3% | 24.7% | 27.2% | 24.2% |
| Income from operations | $129.6 million | $121.8 million | $317.2 million | $278.5 million |
| Operating margin | 6.5% | 5.8% | 5.8% | 4.7% |
| Net income | $78.1 million | $73.3 million | $180.4 million | $153.2 million |
| Diluted EPS | $0.67 | $0.63 | $1.54 | $1.31 |
| Interest expense, net | $27.8 million | $29.1 million | $82.1 million | $84.8 million |
- Q3 sales declined 6.5% year over year and nine-month sales declined 6.6%, primarily because commodity price deflation reduced reported sales by an estimated 17.4% in Q3 and 12.9% for the nine-month period.
- Excluding commodity deflation and the additional selling day in Q3, management reported 9.4% sales growth in single-family, multifamily, and repair-and-remodel/other end markets. For the nine-month period, excluding commodity deflation, reported sales growth was 6.3% in those end markets.
- SG&A increased 2.6% in Q3 and 2.7% for the nine-month period. SG&A as a percentage of sales rose to 20.8% from 18.9% in Q3 and to 21.4% from 19.5% for nine months.
- The effective tax rate increased to 23.3% from 20.9% in Q3 and to 23.2% from 20.9% for nine months.
Cash flow, liquidity, debt, and balance sheet
- Cash provided by operating activities was $360.3 million for the first nine months of 2019, compared with $9.5 million in 2018. The improvement primarily reflected more favorable working-capital changes, including inventory and accounts payable timing.
- Investing cash outflow was $106.4 million, including $77.9 million of capital expenditures and $33.9 million of cash paid at closing for the Sun State Components acquisition.
- Financing cash outflow was $220.7 million, driven by $502.1 million of long-term debt repayments, $179.0 million of net revolving-facility repayments, debt-related costs, and $7.9 million of share repurchases. These outflows were partially offset by $478.4 million of proceeds from issuing 2027 notes.
- Cash and cash equivalents increased to $43.3 million at September 30, 2019 from $10.1 million at December 31, 2018.
- Debt carrying value was $1.365 billion, including $1.378 billion of principal debt before discounts, premiums, and issuance costs. Long-term debt, net of current maturities, was $1.350 billion.
- The company issued $475.0 million of 6.75% senior secured notes due 2027, used proceeds and cash to repurchase 2024 notes and repay approximately $300 million of the 2024 term loan. The $900 million revolving credit facility was extended to November 2023.
- There were no borrowings outstanding under the revolving facility at September 30, 2019. Net excess borrowing availability was $813.5 million after $82.2 million of letters of credit. Total liquidity, including cash, was reported at $856.8 million.
- The company was not in violation of debt covenants. The 2027 notes are secured and contain restrictions on additional debt, liens, dividends, investments, asset sales, and related transactions.
Material changes versus the prior comparable period
- Reported revenue declined because of lumber and commodity-price deflation. Lumber and lumber sheet goods revenue fell 26.0% in Q3 and 24.1% for nine months, while all other product categories increased.
- Manufactured products revenue increased 4.0% and windows, doors, and millwork revenue increased 9.4% in Q3. These higher-margin categories supported improved product mix and gross-margin expansion.
- Gross margin improved by 260 basis points in Q3 and 300 basis points for nine months, reflecting product mix, pricing discipline, and lower commodity costs relative to customer pricing commitments.
- Income from operations increased 6.4% in Q3 and 13.9% for nine months; net income increased 6.5% and 17.8%, respectively.
- Debt was reduced and maturities extended through the refinancing transactions. Interest expense declined despite $6.8 million of one-time debt financing and extinguishment charges during the first nine months.
- On July 1, 2019, the company acquired Sun State Components for $42.5 million. The acquisition added three truss locations in Nevada and Arizona and was not material to consolidated results.
- The company repurchased 460,000 shares for $7.9 million at an average price of $17.24, primarily to offset dilution from employee stock awards.
Outlook, commentary, risks, and unusual items
- Management stated that the long-term housing outlook remains positive, citing demographics, relatively low interest rates, aging housing stock, and expected housing-demand recovery. The company expects to pursue market-share gains and may undertake strategic acquisitions.
- Third-quarter U.S. total housing starts increased 4.1% year over year, while single-family starts increased 3.7%. For the first nine months, total and single-family starts declined 1.3% and 1.8%, respectively.
- Third-party forecasts cited in the filing projected approximately 1.3 million total U.S. housing starts and 0.9 million single-family starts for full-year 2019. These are industry forecasts, not formal company guidance.
- Results are seasonal and generally weaker in the first and fourth quarters because of weather. Performance is sensitive to housing starts, interest rates, housing affordability, economic conditions, labor availability, competition, and lumber-price volatility.
- Management warned that rapid material-price changes or freight-cost increases may not always be passed through to customers, potentially pressuring margins.
- Known and threatened construction-defect claims could have a material adverse effect, although the company cannot estimate a reasonable loss range. Insurance generally covers losses above applicable deductibles, but coverage may not cover all liabilities.
- The company identified potential risk from the phase-out of LIBOR because borrowings under the revolving facility and term loan may use LIBOR-based rates. A 1% increase in the term-loan rate would have increased annual interest expense by approximately $1.6 million based on September 30 balances; there were no revolving-facility borrowings at that date.
- Q3 included $3.1 million of debt-related charges, and the first nine months included $6.8 million of one-time debt financing and extinguishment charges.
Investor verification points
- Verify whether gross-margin gains from product mix and commodity-cost timing are sustainable as lumber prices and customer pricing commitments change.
- Monitor housing starts, homebuilder demand, repair-and-remodel activity, and regional segment trends, particularly the weaker nine-month West results.
- Assess leverage, fixed and variable interest exposure, debt maturities, restrictive covenants, and the effect of future benchmark-rate changes.
- Review cash conversion and working-capital requirements, recognizing that seasonal inventory and receivables can materially affect operating cash flow.
- Track the integration and contribution of Sun State Components and the company’s acquisition strategy.
- Follow construction-defect litigation, insurance coverage, and any environmental or other contingencies for potential liquidity or earnings effects.