Builders Firstsource, Inc. annual report, FY2019

Builders FirstSource, Inc. — FY2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019; filed February 21, 2020. The filing is an annual report rather than a standalone quarterly filing. Fourth-quarter 2019 results are included in the filing.

Business context

Builders FirstSource is a U.S. supplier and manufacturer of building materials, prefabricated components and construction services for professional homebuilders, contractors, remodelers and consumers. It operated approximately 400 locations in 40 states and served 77 of the top 100 U.S. metropolitan statistical areas. Its principal offerings include lumber, manufactured trusses and panels, windows, doors, millwork, roofing, insulation and installation or turnkey framing services.

Key financial metrics

Metric	2019	2018	Change
Net sales	$7.280 billion	$7.725 billion	Down 5.8%
Gross margin	$1.977 billion	$1.923 billion	Up 2.8%
Gross margin percentage	27.2%	24.9%	Up 2.3 percentage points
Income from operations	$392.3 million	$369.0 million	Up 6.3%
Net income	$221.8 million	$205.2 million	Up 8.1%
Diluted EPS	$1.90	$1.76	Up 8.0%
Operating cash flow	$504.0 million	$282.8 million	Up $221.2 million
Capital expenditures	$112.9 million	$101.4 million	Up $11.5 million

SG&A increased 2.0% to $1.585 billion and rose to 21.8% of sales from 20.1%. Income from operations represented 5.4% of sales versus 4.8% in 2018, while net income represented 3.1% versus 2.7%. Net interest expense was $109.6 million, including $10.2 million of debt extinguishment and financing charges. The effective tax rate was 21.6% versus 21.3%.

Fourth-quarter 2019 net sales were $1.764 billion, gross margin was $476.6 million and net income was $41.4 million, or diluted EPS of $0.35. Fourth-quarter net income included a $3.5 million loss on debt extinguishment.

Revenue mix and material changes

Lumber and lumber sheet goods sales declined 22.4% to $2.252 billion, primarily reflecting commodity price deflation, despite higher volume.
Manufactured products increased 4.1% to $1.450 billion, and windows, doors and millwork increased 6.7% to $1.543 billion.
Other building products and services increased 4.8% to $795.2 million; siding, metal and concrete increased 2.1% to $712.6 million; gypsum, roofing and insulation was essentially flat at $528.6 million.
Management estimated that commodity price deflation reduced reported sales by 12.3%; excluding that effect, sales grew 6.5% across the single-family, multifamily and repair-and-remodel markets.
Margin expansion reflected improved product mix, pricing discipline and lower commodity costs relative to customer pricing commitments, with growth in higher-margin manufactured products and windows, doors and millwork.
Reported-segment income before taxes increased in the Northeast, Southeast and South, while the West declined 19.1%, principally because commodity deflation offset gross-margin improvement.

Liquidity, debt and capital allocation

Cash and cash equivalents were $14.1 million at December 31, 2019, compared with $10.1 million at year-end 2018.
Balance-sheet debt, including current maturities and finance obligations, was $1.291 billion, down from $1.561 billion. The company separately described total debt as approximately $1.3 billion, including $242.1 million of finance lease and other finance obligations.
The $900.0 million revolving facility had $27.0 million drawn, $82.2 million of letters of credit and $681.2 million of net excess borrowing availability. Total liquidity, including cash, was $695.3 million.
The company was in compliance with its debt covenants at year-end. A 1.00-to-1.00 fixed-charge coverage covenant applies if excess availability falls below the specified threshold.
Financing cash outflows were $300.9 million, including $610.8 million of long-term debt repayments and $152.0 million of net revolving-facility repayments, partly offset by $478.4 million from the issuance of 2027 notes.
The company repurchased 460,000 shares for $7.9 million, primarily to offset employee equity dilution, and does not intend to pay regular dividends.

Guidance, outlook and unusual items

Management described the long-term housing outlook as positive, citing demographics, relatively low interest rates and the aging housing stock. Third-party forecasts cited in the filing projected 2020 total housing starts of 1.3 million and single-family starts of 0.9 million, with increases of approximately 1.0% and 5.8%, respectively. Professional repair-and-remodel sales were forecast to increase approximately 0.9% in 2020.

Expected 2020 capital expenditures were approximately $110 million to $130 million, primarily for rolling stock, equipment and facility improvements. Management emphasized working-capital discipline, customer credit monitoring, inventory management, vendor terms, operating efficiency, market-share gains, value-added products and potential strategic acquisitions.

In 2019, the company acquired Sun State Components and Raney for aggregate cash consideration of approximately $101.5 million. These acquisitions contributed $29.3 million of 2019 sales and $1.3 million of net income.
On January 9, 2020, the company acquired Bianchi & Company for $17.2 million; purchase accounting was not complete when the filing was submitted.
In February 2020, the company issued $550.0 million of 5.0% unsecured notes due 2030 and used the proceeds, together with revolver borrowings, to redeem the remaining 2024 notes and $47.5 million of 2027 notes. This extended maturities but added unsecured long-term debt and redemption costs.
CEO M. Chad Crow announced his planned retirement during 2020 and agreed to assist with the transition while a successor was identified.
The company adopted the new lease accounting standard in 2019, recording approximately $269.7 million of operating lease right-of-use assets and $267.5 million of lease liabilities at adoption.

Principal risks and contingencies

Results are highly sensitive to housing starts, interest rates, economic conditions, housing affordability, skilled-labor availability and builder production levels.
Lumber and other commodity-price volatility can materially affect sales, margins, inventory values and cash flow, and pricing increases may not be passed through promptly.
Substantial debt, variable-rate borrowings, restrictive covenants and cross-default provisions could constrain liquidity and financial flexibility.
The company has known and threatened construction-defect claims and asbestos-related matters. Construction-defect claims may be material, but the filing states that a reasonable range of loss could not currently be estimated.
Goodwill totaled $769.0 million, or 23.7% of assets. No impairment was recorded, but valuation depends on housing forecasts, profitability, discount rates and terminal values.
The business has significant lease and other contractual obligations, including approximately $365.7 million of future operating lease payments and $288.7 million of other finance-obligation payments.
Operational risks include customer concentration, competitive pricing pressure, supplier disruptions, weather and natural disasters, cybersecurity incidents, information-technology outages and regulatory changes.

Investor verification checklist

Reconcile reported debt, finance obligations, lease liabilities and the post-year-end refinancing to assess leverage and maturities.
Verify whether volume growth in higher-margin manufactured products and windows, doors and millwork can offset commodity-driven sales volatility.
Monitor housing starts, lumber prices, gross-margin trends and the West segment’s profitability.
Review construction-defect, asbestos and other litigation disclosures for changes in estimated exposure and insurance coverage.
Assess the impact of the CEO transition, Bianchi acquisition and any additional acquisitions on execution and cash flow.
Evaluate goodwill sensitivity and covenant headroom under weaker housing or commodity-price scenarios.