Builders FirstSource, Inc. — 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, subcontractors, remodelers and consumers. It operated approximately 560 locations in 42 states and reported one operating segment. This filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. The financial statements are unaudited.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2022 | Year-over-Year Change | Six Months Ended June 30, 2022 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $6.926 billion | +24.2% | $12.607 billion | +29.3% |
| Gross margin | $2.412 billion | +52.4% | $4.245 billion | +60.0% |
| Gross margin percentage | 34.8% | Up from 28.4% | 33.7% | Up from 27.2% |
| Income from operations | $1.366 billion | +100.8% | $2.230 billion | +140.2% |
| Net income | $987.2 million | +98.6% | $1.627 billion | +143.0% |
| Diluted EPS | $5.75 | Up from $2.39 | $9.27 | Up from $3.21 |
SG&A increased 15.9% in the second quarter and 16.8% for the six-month period, but declined as a percentage of sales to 15.1% from 16.2% and to 16.0% from 17.7%, respectively. Net income margins were 14.3% for the quarter and 12.9% for the six months, compared with 8.9% and 6.9% in the prior-year periods.
For the second quarter, sales growth reflected 12.2% core organic growth, 8.1% contribution from acquisitions and 3.9% commodity price inflation. For the six-month period, the corresponding contributions were 13.2%, 8.2% and 7.9%.
Six-month operating cash flow was $1.127 billion, compared with cash used in operations of $203.8 million in the prior-year period. Investing cash use was $307.1 million, including acquisitions and capital expenditures. Financing cash use was $696.4 million, primarily reflecting $1.3 billion of share repurchases and the redemption of the 2027 notes, partly offset by debt issuance and net revolver borrowings.
At June 30, 2022, cash and cash equivalents were $166.2 million, inventories were $2.065 billion and accounts receivable were $2.408 billion. Total assets were $12.086 billion and stockholders’ equity was $5.136 billion.
Debt consisted principally of $834.0 million outstanding under the revolving credit facility, $1.3 billion of 4.25% 2032 notes, $700.0 million of 6.375% 2032 notes, $550.0 million of 2030 notes and $200.8 million of other finance obligations. Total debt before discounts and issuance costs was $3.588 billion; carrying value, net of discounts and issuance costs, was $3.555 billion. Net excess revolver availability was $838.2 million, and reported liquidity, including cash, was approximately $1.0 billion. The Company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- All product categories recorded higher second-quarter sales: manufactured products increased 56.4%, windows, doors and millwork increased 43.9%, specialty building products and services increased 12.3%, and lumber and lumber sheet goods increased 9.1%.
- Gross margin expansion was attributed to growth in value-added products, acquisitions and disciplined pricing in a volatile, supply-constrained market.
- Interest expense increased to $70.7 million in the second quarter and $112.0 million for the six months, including a $27.4 million loss on extinguishment associated with redeeming the 2027 notes.
- The Company issued $300.0 million of additional 4.25% 2032 notes, expanded its revolving facility from $1.4 billion to $1.8 billion, and issued $700.0 million of 6.375% 2032 notes. Proceeds from the latter issuance, together with cash, funded redemption of the $612.5 million 2027 notes.
- The Company repurchased 20.5 million shares during the first six months for approximately $1.277 billion, reducing shares outstanding from 179.8 million at December 31, 2021 to 160.2 million at June 30, 2022.
- The Company acquired multiple panel-truss businesses and Valley Truss on April 1, 2022 for aggregate consideration of approximately $200.3 million, including $7.0 million of contingent and deferred consideration.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal company-specific revenue or earnings guidance. Management expects near-term housing conditions to be tempered by rising mortgage rates, inflation and reduced affordability, while maintaining a positive long-term view based on demographic growth, an aging housing stock and housing underbuilding.
Third-party forecasts cited by management projected 2022 U.S. total housing starts of approximately 1.6 million, up 0.7% from 2021, and single-family starts of approximately 1.1 million, down 4.1%. Professional repair-and-remodel sales were forecast to increase approximately 7.9% in 2022.
Key risks include housing-cycle deterioration, interest-rate increases, inflation, lumber and other commodity-price volatility, supply-chain disruption, labor shortages, competition, customer credit exposure, acquisition execution and COVID-19-related economic effects. A 1.0 percentage-point increase in interest rates on revolver borrowings would increase annual interest expense by approximately $8.3 million based on the June 30 balance.
The Company had $127.8 million of outstanding letters of credit, principally supporting self-insurance programs. It disclosed known and threatened construction-defect claims for which a reasonable loss range could not be estimated; resolution could materially affect financial position, results or cash flows. On July 1, 2022, it acquired HomCo for approximately $30.5 million in cash, subject to closing adjustments.
Investor Verification Items
- Verify whether gross-margin expansion and pricing discipline remain sustainable as lumber prices, inflation and demand normalize.
- Assess the effect of higher interest rates, housing affordability and potentially lower single-family starts on organic sales and margins.
- Review leverage, fixed-rate versus variable-rate debt exposure, revolver availability and covenant thresholds.
- Evaluate the pace, valuation and integration results of acquisitions, including the April 2022 panel-truss and Valley Truss transactions and the July 2022 HomCo acquisition.
- Monitor the remaining $2.0 billion share-repurchase authorization and its effect on liquidity, leverage and per-share results.
- Review developments in construction-defect litigation, self-insurance claims and other contingencies for potential material cash exposure.