Builders FirstSource, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Builders FirstSource is a U.S. supplier and manufacturer of building materials, manufactured components and construction services, operating approximately 400 locations across 40 states. The filing covers the three and nine months ended September 30, 2020, compared with the same periods in 2019. Results were affected by COVID-19, housing activity, significant lumber and commodity-price inflation, and related working-capital requirements.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $2,295.5 million | $1,981.0 million | $6,028.1 million | $5,516.9 million |
| Net sales growth | 15.9% | — | 9.3% | — |
| Gross margin | 24.9% | 27.3% | 25.8% | 27.2% |
| Income from operations | $139.8 million | $129.6 million | $330.0 million | $317.2 million |
| Operating margin | 6.1% | 6.5% | 5.5% | 5.8% |
| Net income | $85.9 million | $78.1 million | $173.6 million | $180.4 million |
| Diluted EPS | $0.73 | $0.67 | $1.48 | $1.54 |
| Interest expense, net | $28.0 million | $27.8 million | $106.8 million | $82.1 million |
Q3 SG&A was $430.9 million, or 18.8% of sales, versus 20.8% in the prior-year quarter. The nine-month effective tax rate was 22.2%, compared with 23.2% in 2019. Q3 sales growth included 6.7% core organic growth, 7.2% commodity-price inflation and 2.0% acquisition impact. For the nine months, acquisition impact was 2.6%, core organic growth was 2.8%, commodity inflation was 3.3%, and one additional selling day contributed 0.6%.
Cash flow, liquidity and debt
- Cash provided by operating activities was $155.1 million for the first nine months of 2020, down from $360.3 million in 2019. The decline primarily reflected increased working-capital investment, including $230.6 million of receivables growth and $189.7 million of inventory growth.
- Cash used in investing activities was $96.1 million, including $83.5 million of capital expenditures and $15.9 million for the Bianchi acquisition.
- Cash provided by financing activities was $267.8 million, compared with $220.7 million of financing cash usage in 2019. Cash and cash equivalents increased to $340.9 million from $14.1 million at December 31, 2019.
- Total debt, including current maturities and before debt discounts and issuance costs, was approximately $1.624 billion at September 30, 2020, compared with $1.300 billion at year-end 2019. Net debt as reported on the balance sheet was $1.604 billion.
- The company issued $550.0 million of 5.0% senior unsecured notes due 2030 and an additional $350.0 million of 6.75% senior secured notes due 2027. It redeemed the remaining $503.9 million of 2024 notes and $47.5 million of 2027 notes, recording a $28.0 million loss on debt extinguishment in Q1.
- The $900.0 million revolving facility had no outstanding borrowings at September 30, 2020. Net excess availability was $820.9 million after $79.1 million of letters of credit. Total liquidity, including cash, was $1.1618 billion.
- The company reported compliance with all debt covenants at September 30, 2020. A 1% increase in interest rates on the $52.0 million term loan would increase annual interest expense by approximately $0.5 million.
Material changes versus the prior comparable period
- Q3 sales increased 15.9%, led by lumber and lumber sheet goods, which rose 40.6%. All product categories increased except gypsum, roofing and insulation, which was essentially flat.
- Despite higher sales, Q3 gross margin declined 240 basis points to 24.9%, primarily because commodity inflation outpaced the company’s ability to adjust customer pricing under short-term commitments.
- Q3 operating income increased 7.8% and net income increased 10.0%, but nine-month net income declined 3.8% because of higher interest expense, including the $28.0 million debt-extinguishment loss.
- Nine-month operating cash flow declined $205.2 million, reflecting higher receivables and inventory balances associated with commodity inflation and delayed seasonal working-capital patterns.
- The West and Southeast segments showed stronger Q3 profitability, while Northeast and South profitability declined. For the first nine months, Northeast sales and profitability declined, partly because COVID-19 restrictions temporarily halted construction in certain markets.
- On January 9, 2020, the company acquired Bianchi & Company’s millwork operations for $15.9 million in cash. The acquisition added $8.3 million of goodwill and $9.4 million of intangible assets and was not material to consolidated results.
Guidance, outlook, commentary and risks
- Management cited a positive long-term housing outlook based on low interest rates, demographic growth, aging housing stock and increased suburban demand. Management expects to pursue market-share gains and potentially strategic acquisitions, but the filing does not provide formal company revenue or earnings guidance.
- Third-party forecasts cited in the filing estimated 2020 U.S. housing starts of 1.3 million total and 0.9 million single-family starts. HIRI forecast approximately 3.5% growth in professional repair-and-remodel sales.
- COVID-19 could reduce housing demand, disrupt supply chains, increase operating costs, pressure margins and lead to additional facility closures. Certain locations were temporarily closed during the first and second quarters.
- Lumber and other material prices are volatile. Delays in passing price increases to customers may adversely affect gross margins and operating results.
- The company entered into an all-stock merger agreement with BMC Stock Holdings on August 26, 2020. BMC holders were expected to receive 43% of the combined company and Builders FirstSource holders approximately 57%. Closing was expected near year-end 2020 or early 2021, subject to shareholder, antitrust and other regulatory approvals.
- After completion of the BMC merger and a transition period, BMC Chief Executive Officer David Flitman was expected to succeed retiring Builders FirstSource CEO M. Chad Crow.
- Known and threatened construction-defect claims may be covered by insurance above deductibles, but potential losses cannot currently be estimated and could materially affect financial position, results or cash flows.
- The company elected to defer certain payroll taxes under the CARES Act, providing approximately $35 million of additional 2020 liquidity; 50% is due by December 31, 2021 and the remainder by December 31, 2022.
Most important facts for investors to verify
- Whether the BMC merger closed as planned, including final regulatory conditions, transaction costs, share issuance and integration results.
- Whether commodity-price inflation moderated or continued to pressure gross margins and working capital.
- Trends in housing starts, single-family demand, repair-and-remodel activity and regional segment profitability.
- Receivables and inventory conversion, operating cash flow and the sustainability of the unusually large cash balance and revolving-facility availability.
- Debt maturities, interest costs, covenant compliance and the effect of refinancing on future liquidity.
- The status and potential financial exposure of construction-defect litigation and other contingencies.
- The extent to which COVID-19 affected customer demand, employee availability, supply chains, facility operations and future financial results.