Builders FirstSource, Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing was signed March 1, 2019. Although the request references 2018 Q4, this filing is an annual report and includes fourth-quarter data.
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 401 locations in 39 states, served 75 of the 100 largest U.S. metropolitan statistical areas and employed approximately 15,000 people.
Key offerings include lumber and sheet goods, manufactured trusses and wall panels, engineered wood, windows, doors, millwork, roofing, insulation, siding and installation, framing and shell-construction services. The business is highly exposed to residential construction, repair and remodeling activity, lumber prices, labor availability and broader economic conditions.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Sales | $7,724.8 million | $7,034.2 million | +9.8% |
| Gross margin | $1,922.9 million | $1,727.4 million | +11.3% |
| Gross margin percentage | 24.9% | 24.6% | +0.3 percentage points |
| Income from operations | $369.0 million | $285.1 million | +29.4% |
| Interest expense, net | $108.2 million | $193.2 million | Down $85.0 million |
| Net income | $205.2 million | $38.8 million | +429.0% |
| Diluted EPS | $1.76 | $0.34 | +1.42 |
| Operating cash flow | $282.8 million | $178.5 million | +58.4% |
| Capital expenditures | $101.4 million | $62.4 million | +$39.0 million |
Net margin increased to 2.7% from 0.6%. SG&A rose 7.7% to $1,554.0 million, but declined to 20.1% of sales from 20.5%, reflecting operating leverage. Income tax expense was $55.6 million, with a 21.3% effective tax rate versus 57.8% in 2017.
Fourth-quarter 2018 sales were $1,816.0 million, gross margin was $492.8 million and net income was $52.0 million, compared with fourth-quarter 2017 sales of $1,778.9 million, gross margin of $431.2 million and a net loss of $42.7 million.
Revenue mix and material changes
| Product category | 2018 sales | Share of sales | Year-over-year change |
|---|---|---|---|
| Lumber and lumber sheet goods | $2,902.2 million | 37.6% | +15.6% |
| Manufactured products | $1,392.0 million | 18.0% | +15.2% |
| Windows, doors and millwork | $1,445.9 million | 18.7% | +6.3% |
| Gypsum, roofing and insulation | $528.4 million | 6.9% | -1.8% |
| Siding, metal and concrete | $697.8 million | 9.0% | +6.4% |
| Other building products and services | $758.5 million | 9.8% | -0.2% |
- Management estimated that 6.7% of total sales growth resulted from commodity price inflation. Single-family and repair-and-remodel volume growth was partly offset by lower multifamily activity.
- Gross margin pressure from rising commodity costs in the first half was more than offset by falling commodity costs in the second half.
- Interest expense declined primarily because of debt transactions completed in 2017 and 2018. The 2018 results included a $3.2 million gain on debt extinguishment, while 2017 included $58.7 million of debt transaction charges.
- Debt reduction increased stockholders’ equity to $596.3 million from $376.2 million, while total debt, including lease obligations, declined to $1,577.1 million from $1,803.5 million on a gross basis.
Cash flow, debt and liquidity
Cash provided by operating activities was $282.8 million. Investing cash outflow was $96.7 million, primarily reflecting $101.4 million of capital expenditures. Financing cash outflow was $233.6 million, including $171.0 million of net repayments under the revolving facility and $61.5 million of net long-term debt repayments, largely related to repurchases of senior secured notes. Ending cash was $10.1 million, compared with $57.5 million at year-end 2017.
Gross debt and lease obligations totaled $1,577.1 million, comprising $179.0 million under the 2022 revolving facility, $696.4 million of 2024 notes, $458.3 million under the 2024 term loan, $227.1 million of other finance obligations and $16.4 million of capital lease obligations. Net debt after unamortized debt discount and issuance costs was $1,561.3 million.
The company reported $585.4 million of net excess availability under its $900.0 million revolving facility and total liquidity of $595.5 million, including cash. It was in compliance with all debt covenants at December 31, 2018. Approximately $637.3 million, or 40.4%, of outstanding debt carried variable interest rates.
Outlook, management commentary and risks
- Management described the long-term housing outlook as positive but noted that housing starts remained below historical averages, skilled labor was constrained, and market growth had recently moderated.
- Third-party forecasts cited in the filing projected 2019 U.S. total housing starts of 1.3 million and single-family starts of 0.9 million, each approximately 3.1% above 2018. Professional repair and remodel sales were forecast to increase approximately 6.8%.
- Expected 2019 capital expenditures were approximately $105 million to $125 million, primarily for rolling stock, equipment and facility improvements.
- Strategic priorities include growing prefabricated and other value-added products, improving logistics and pricing, gaining market share, pursuing acquisitions or organic investments, improving working capital and reducing debt.
- The company expected to complete the planned integration of legacy ProBuild enterprise-resource-planning systems in 2019. Adoption of the new lease standard on January 1, 2019 was expected to add approximately $250 million to $300 million of operating lease assets and liabilities to the balance sheet, with no significant income-statement or cash-flow effect.
- Principal risks include housing-cycle weakness, lower affordability, interest-rate increases, lumber-price volatility, competitive pricing pressure, skilled-labor shortages, customer concentration, debt and covenant restrictions, refinancing needs, construction-defect and asbestos claims, lease obligations, cybersecurity and information-technology integration risks.
- Known and threatened construction-defect claims could result in a material adverse effect, but the company could not estimate a reasonable loss range. The company also disclosed asbestos-related litigation involving legacy businesses.
- Goodwill was $740.4 million, or 25.3% of total assets. No goodwill impairment was recorded in 2018; management reported substantial fair-value cushions for all nine reporting units.
Important facts for investors to verify
- Reconcile reported annual and fourth-quarter results, including the impact of the $3.2 million debt-extinguishment gain and the non-comparable 2017 debt and tax items.
- Assess sustainable volume growth separately from commodity-price-driven revenue growth, particularly because lumber and sheet goods represented 37.6% of sales.
- Monitor leverage, variable-rate exposure, 2024 maturities, revolving-facility availability and compliance with the fixed-charge covenant.
- Evaluate whether operating cash flow can fund planned capital expenditures, debt reduction and working-capital needs while cash on hand remains low.
- Review the effect of the 2019 lease-standard adoption on reported assets, liabilities and leverage metrics.
- Track housing starts, repair-and-remodel demand, multifamily activity, labor availability and regional performance, including the Northeast decline in profitability.
- Review the potential financial impact of construction-defect, asbestos, environmental and other legal contingencies for which the filing does not provide a clear loss estimate.
- Confirm the status and cost of the ProBuild ERP integration and any resulting operational disruption or additional investment.