Builders FirstSource, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Builders FirstSource supplies and manufactures building materials, prefabricated components, and construction services for professional homebuilders, subcontractors, remodelers, and consumers. The company operated approximately 400 locations in 39 U.S. states. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Sales | $1,631.3 million | $1,700.4 million | (4.1%) |
| Gross margin dollars | $442.0 million | $411.1 million | +7.5% |
| Gross margin | 27.1% | 24.2% | +2.9 percentage points |
| SG&A | $370.1 million | $358.9 million | +3.1% |
| Income from operations | $71.9 million | $52.1 million | +37.9% |
| Net interest expense | $24.9 million | $26.7 million | $(1.8) million |
| Net income | $35.7 million | $23.2 million | +53.8% |
| Diluted EPS | $0.31 | $0.20 | +$0.11 |
| Cash from operating activities | $6.1 million | $(178.3) million | +$184.4 million |
Operating margin increased to 4.4% from 3.1%, while net margin increased to 2.2% from 1.4%. The effective tax rate was 24.0%, compared with 8.6% in the prior-year quarter, primarily because the prior period benefited from a significant stock-compensation windfall tax benefit.
At March 31, 2019, cash and cash equivalents were $11.7 million. Net excess availability under the $900.0 million revolving facility was $574.2 million after $222.0 million of borrowings and $82.2 million of letters of credit. Reported liquidity was $585.9 million, including cash. Long-term debt, net of current maturities and issuance costs, was $1.562 billion; total debt before discounts and issuance costs was approximately $1.594 billion.
Capital expenditures were $21.5 million. Net cash used in investing activities was $20.8 million, and net cash provided by financing activities was $16.3 million. Inventories increased to $635.5 million from $596.9 million at year-end 2018, while accounts payable increased to $471.3 million from $423.2 million.
Material changes versus the prior comparable period
- Sales declined because commodity-price deflation reduced revenue by 9.3% and one fewer selling day reduced revenue by 1.6%. Excluding those effects, management reported 6.8% growth in the single-family, multifamily, and repair-and-remodel/other end markets.
- Lumber and lumber sheet goods sales fell 19.6% to $517.7 million, while manufactured products increased 7.9% to $317.4 million and windows, doors, and millwork increased 6.4% to $353.4 million.
- Gross margin benefited from lower commodity costs relative to customer pricing commitments, pricing discipline, and growth in higher-margin value-added products.
- SG&A increased due mainly to higher variable compensation and insurance costs. SG&A as a percentage of sales increased to 22.7% from 21.1%.
- Segment income before taxes improved in the Northeast, Southeast, and South. West segment sales declined 13.3%, and the West reported a $1.5 million pretax loss versus $5.8 million of pretax income in the prior-year quarter, partly due to adverse weather.
- Operating cash flow improved substantially because the working-capital investment was much lower than in the prior-year period.
Guidance, outlook, commentary, risks, and unusual items
- Management did not provide explicit company revenue or earnings guidance in the filing. External forecasts cited by management projected 2019 U.S. housing starts of approximately 1.3 million total and 0.9 million single-family starts, and approximately 6% growth in professional repair and remodel sales.
- Management described the long-term housing outlook as positive, citing demographics, relatively low interest rates, aging housing stock, and expected housing-demand recovery. Strategic acquisitions and market-share gains remain potential growth avenues.
- Housing starts remained below historical averages, and first-quarter 2019 total and single-family starts declined year over year. The business is exposed to housing cycles, weather, interest rates, affordability, employment, credit availability, labor shortages, competition, and economic conditions.
- Lumber and other material prices can fluctuate significantly. The company may be unable to pass through material or freight-cost increases during quotation periods.
- The company repurchased $20.4 million principal amount of its 5.625% senior secured notes due 2024, recognizing a $0.7 million gain on extinguishment. In April 2019, it extended the revolving facility maturity by 20 months to November 22, 2023.
- Operating lease adoption on January 1, 2019 added approximately $269.7 million of right-of-use assets and $267.5 million of lease liabilities. Management reported no material impact on earnings or cash flow.
- Known and threatened construction-defect claims present a reasonable possibility of loss that cannot currently be estimated. Although generally insured above deductibles, an adverse resolution could materially affect financial position, results, or cash flows.
- Management reported compliance with debt covenants as of March 31, 2019 and effective disclosure controls, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether housing starts, commodity prices, and weather trends support continued volume growth and margin performance.
- Whether the West segment’s deterioration is temporary or reflects broader regional demand or execution issues.
- The sustainability of the 27.1% gross margin amid lumber-price volatility and competitive pricing.
- Debt reduction, variable-rate exposure, and available revolver capacity; a 1 percentage-point rate increase was estimated to add approximately $2.2 million of annual interest on the revolver and $4.6 million on the term loan.
- The timing and potential magnitude of construction-defect claims and related insurance recoveries.
- Working-capital requirements and seasonal cash-flow pressure, particularly during the first and second quarters.