Builders FirstSource, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021; filed August 5, 2021. Builders FirstSource supplies and manufactures building materials, components, and construction services through approximately 550 locations in 39 states. The company reports one segment.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net sales | $5.577 billion | $1.946 billion | $9.750 billion | $3.733 billion |
| Gross margin | $1.583 billion | $517.3 million | $2.653 billion | $982.7 million |
| Gross margin percentage | 28.4% | 26.6% | 27.2% | 26.3% |
| Income from operations | $680.2 million | $129.3 million | $928.2 million | $190.2 million |
| Net income | $497.2 million | $78.9 million | $669.8 million | $87.7 million |
| Diluted EPS | $2.39 | $0.67 | $3.21 | $0.75 |
| Net income margin | 8.9% | 4.1% | 6.9% | 2.3% |
Q2 sales increased 186.6%; six-month sales increased 161.2%. Management attributed Q2 sales growth primarily to the BMC merger, commodity price inflation, and core organic volume growth. BMC accounted for 96.0% of Q2 sales growth and 88.1% of six-month sales growth; commodity inflation accounted for 51.8% and 41.9%, respectively. The reported growth components overlap and are not additive.
- Operating leverage: SG&A was 16.2% of sales in Q2 versus 19.9% a year earlier and 17.7% for the six months versus 21.2%. Depreciation and amortization related to acquired BMC assets increased SG&A by $95.2 million in Q2 and $197.9 million year to date.
- Interest and taxes: Q2 net interest expense was $27.8 million, compared with $26.8 million. Six-month interest expense declined to $59.6 million from $78.7 million, primarily because 2020 included a $28.0 million debt-extinguishment loss. The effective tax rate was 23.8% in Q2 and 22.9% year to date.
- Cash flow: Operating activities used $203.8 million in the first six months, versus $169.9 million provided in the prior-year period, primarily because of higher receivables and inventory. Investing activities used $171.3 million, including $225.0 million prepaid for the Paradigm acquisition and $24.8 million for John’s Lumber, partially offset by $167.5 million of cash acquired in the BMC merger. Financing activities provided $41.6 million.
- Balance sheet and liquidity: Cash was $90.3 million at June 30, 2021, compared with $423.8 million at December 31, 2020. Total debt before current maturities and debt discounts was approximately $2.071 billion; debt reported net of discounts and current maturities was $2.044 billion. The company had $611.0 million drawn on its $1.4 billion revolving facility, $126.4 million of letters of credit, and $662.6 million of net excess borrowing availability. Reported liquidity was $752.9 million, consisting of cash and availability. No debt covenant violations were reported.
Material Changes Versus the Prior Comparable Period
- The January 1, 2021 all-stock merger with BMC Stock Holdings substantially expanded the company. Consideration transferred was $3.658 billion, including approximately 89.6 million shares issued. BMC contributed $1.8 billion of Q2 sales and $179.6 million of pretax income, and $3.2 billion of six-month sales and $223.1 million of pretax income.
- The merger added $1.752 billion of goodwill and $1.470 billion of intangible assets, primarily customer relationships, and materially increased assets, equity, depreciation, and amortization.
- Total assets increased to $10.626 billion from $4.174 billion at year-end 2020, while stockholders’ equity increased to $5.482 billion from $1.153 billion, largely because of merger-related share issuance and retained earnings.
- The revolving credit facility was amended in January 2021, increasing commitments by $500.0 million to $1.4 billion and extending maturity to January 2026. The company redeemed $82.5 million of 2027 notes in March at a 3% premium.
- Product-category sales increased across all categories. Lumber and lumber sheet goods grew 318.6% in Q2 and represented 46.7% of Q2 sales; manufactured products grew 198.4%.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal company-specific financial guidance in the filing. It cited a positive long-term housing outlook, continued demand for prefabricated components, potential market-share gains, and possible strategic acquisitions. Third-party forecasts cited by management projected 2021 U.S. housing starts of 1.6 million and single-family starts of 1.2 million, with professional repair-and-remodel sales expected to increase approximately 15.5%.
- Key operating risks include housing-cycle exposure, interest rates, housing affordability, lumber and other commodity-price volatility, supply-chain disruptions, labor availability, competition, and the uncertain duration and effects of COVID-19.
- Working capital increased substantially with higher sales and commodity prices. Management expects seasonal working-capital needs to remain elevated during peak construction periods, which can produce negative operating cash flow.
- On June 28, 2021, the company agreed to acquire WTS Paradigm for $450.0 million and paid a $225.0 million exclusivity payment. The payment may be subject to repayment or a termination fee under specified circumstances, including failure to obtain antitrust approval.
- Subsequent to quarter-end, the company completed the $400.0 million acquisition of Alliance, issued $1.0 billion of 4.25% notes due 2032, sold its Eastern U.S. gypsum distribution operations for approximately $76 million, and completed the Paradigm acquisition was not stated as of the filing date.
- Known and threatened construction-defect claims may be covered by insurance above deductibles, but the company cannot estimate a reasonable loss range and stated that resolution could materially affect financial position, results, or cash flow.
- Goodwill impairment testing involves significant assumptions regarding future cash flows, growth, attrition, and discount rates. No triggering events were identified as of June 30, 2021.
- Internal controls were assessed as effective, although BMC’s controls were still being integrated and could be excluded from management’s year-end 2021 assessment as permitted by SEC rules.
Investor Verification Checklist
- Reconcile reported growth and margins on a comparable, pro forma basis because BMC was included only from January 1, 2021.
- Assess the sustainability of commodity-driven pricing, gross-margin expansion, and working-capital consumption.
- Review leverage, revolver availability, debt maturities, covenant headroom, and the effect of the subsequent $1.0 billion notes issuance and repayment of revolver borrowings.
- Evaluate acquisition integration, purchase-price allocations, goodwill and intangible-asset valuation, and the financial impact of Alliance and Paradigm.
- Monitor construction-defect litigation, self-insurance reserves, letters of credit, and potential uninsured losses.
- Verify the effects of the July 2021 gypsum disposition, the NYSE listing transfer, and seasonality on subsequent-period results.