Builders Firstsource, Inc. annual report, FY2020

Builders FirstSource, Inc. — FY2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020. The filing also provides unaudited fourth-quarter results. Historical results exclude BMC Stock Holdings, Inc.; the all-stock BMC merger closed on January 1, 2021 and BMC results are included only prospectively.

Business context

Builders FirstSource supplies and manufactures building materials, prefabricated components and construction services for professional homebuilders, contractors, remodelers and consumers. Its offerings include lumber, manufactured trusses and wall panels, windows, doors, millwork, roofing, insulation, siding and installation or turn-key construction services. Before the BMC merger, the company operated approximately 400 locations in 40 states; the combined company operates approximately 550 locations in 40 states.

Demand is tied primarily to U.S. residential construction, repair and remodeling, housing affordability, interest rates, labor availability and commodity prices. The company reported that construction was generally treated as an essential activity during the COVID-19 pandemic and that the pandemic did not materially adversely affect its 2020 financial results, although supply-chain and pricing risks remained significant.

Key financial metrics

Metric	2020	2019	Change or margin
Net sales	$8,558.9 million	$7,280.4 million	+17.6%
Gross margin	$2,222.6 million	$1,976.8 million	26.0% vs. 27.2%
Income from operations	$543.9 million	$392.3 million	6.4% vs. 5.4% of sales
Net income	$313.5 million	$221.8 million	+41.3%
Diluted EPS	$2.66	$1.90	+40.0%
Cash flow from operations	$260.1 million	$504.0 million	Down $243.9 million
Capital expenditures	$112.1 million	$112.9 million	Approximately flat
Cash and cash equivalents	$423.8 million	$14.1 million	Up $409.7 million
Total debt, including current portion	$1,624.2 million	$1,291.3 million	Up $332.9 million

Income tax expense was $94.6 million, compared with $60.9 million in 2019, and the effective tax rate increased to 23.2% from 21.6%. Interest expense was $135.7 million, including $29.4 million of net losses and other costs related to debt transactions.

Fourth-quarter 2020 net sales were $2,530.8 million, gross margin was $669.2 million and net income was $139.9 million, compared with fourth-quarter 2019 net sales of $1,763.6 million, gross margin of $476.6 million and net income of $41.4 million.

Revenue and operating performance

Lumber and lumber sheet goods generated $3,076.4 million, or 35.9% of sales, up 36.6%, primarily reflecting commodity price inflation.
Manufactured products generated $1,640.5 million, up 13.2%.
Windows, doors and millwork generated $1,629.2 million, up 5.6%.
Other building products and services generated $924.6 million, up 16.3%.
Gypsum, roofing and insulation was the only product category with lower sales, declining 2.6% to $514.6 million.
Management attributed the 17.6% sales increase to 5.6% core organic growth, 9.0% commodity price inflation, 2.5% acquisitions and 0.5% from one additional selling day.
Gross margin percentage declined 1.2 percentage points because customer pricing commitments did not fully offset rapid commodity cost inflation.
SG&A increased 5.9% to $1,678.7 million but declined to 19.6% of sales from 21.8%, primarily due to operating leverage from higher sales and commodity inflation.

Cash flow, liquidity and debt

Operating cash flow declined to $260.1 million from $504.0 million, principally because working capital increased by $263.2 million. Receivables and inventories rose substantially as commodity prices increased and the normal construction season shifted later in the year.
Cash used in investing activities was $136.2 million, including $112.1 million of capital expenditures and $32.6 million for the Bianchi and Kansas Building Supply acquisitions.
Cash provided by financing activities was $285.9 million, mainly reflecting debt issuance and refinancing activity.
At December 31, 2020, net excess availability under the $900.0 million revolving credit facility was $747.0 million after $75.0 million of borrowings and approximately $78.0 million of letters of credit. Total liquidity, including cash, was $1,170.8 million.
Debt principal consisted primarily of $777.5 million of 2027 notes, $550.0 million of 2030 notes, $75.0 million drawn under the revolving facility and $239.9 million of finance and other finance obligations. The filing reports total debt of $1,642.4 million before discounts and issuance costs.
The company was in compliance with its debt covenants at year-end. Its revolving facility requires a minimum 1.00-to-1.00 fixed-charge coverage ratio if excess availability falls below the specified threshold.
On January 29, 2021, the revolving facility was increased to $1.4 billion and its maturity was extended to January 2026.

Material changes versus the prior comparable period

Sales, operating income, net income and diluted EPS increased materially in 2020, supported by housing demand, organic volume growth and commodity inflation.
Gross margin percentage compressed despite higher gross profit, reflecting difficulty passing through rapid lumber and other material cost increases.
Operating cash flow fell sharply because of working-capital investment, reversing the substantial working-capital benefit realized in 2019.
Debt increased following refinancing transactions, including the issuance of $550.0 million of 5.00% 2030 notes and an additional $350.0 million of 2027 notes. The company redeemed the remaining 2024 notes and repaid the remaining 2024 term loan.
The company acquired Bianchi and KBS for aggregate cash consideration of $32.6 million. The acquisitions contributed $29.2 million of sales and $2.5 million of net income in 2020.
Goodwill increased to $785.3 million from $769.0 million. No goodwill or intangible-asset impairment was recorded.

Guidance, outlook and management commentary

Third-party sources cited by management forecast 2021 U.S. total housing starts of approximately 1.5 million and single-family starts of approximately 1.1 million. The filing also cites a forecast of approximately 5.3% growth in professional repair and remodeling sales.
Management described the long-term housing outlook as positive, citing demographic trends, historically low interest rates and housing demand below historical construction levels.
Management expects 2021 capital expenditures of approximately $210 million to $230 million following the BMC merger, primarily for rolling stock, equipment and facility improvements.
Strategic priorities include growing higher-margin prefabricated and value-added products, improving operational efficiency, managing working capital, pursuing acquisitions and optimizing the capital structure.
The BMC merger issued approximately 89.6 million shares. Purchase accounting was not complete as of the filing date, so the eventual allocation of acquired assets, liabilities and goodwill remained subject to finalization.
The company does not pay regular dividends and stated that debt agreements restrict dividend payments.

Risks, contingencies and unusual items

COVID-19 may continue to affect demand, labor availability, operating costs, supply chains and product pricing. The filing specifically identifies shortages and shipping delays in windows and lumber.
Lumber and other commodity prices are volatile. Lumber and lumber sheet goods represented 35.9% of 2020 sales, and margin results may be adversely affected when price increases cannot be passed through promptly.
The business is cyclical and has substantial fixed costs; lower housing starts, weaker repair and remodeling activity or customer production could materially reduce earnings and cash flow.
Customer concentration is moderate but material: the top 10 customers represented approximately 15.8% of 2020 sales, while no individual customer exceeded 6%.
The company faces integration, execution, retention and systems risks associated with the BMC merger, including potentially significant nonrecurring integration costs.
Known and threatened construction-defect claims and asbestos-related matters exist. The company could not estimate a reasonable range of loss for certain construction-defect claims, and an adverse resolution could materially affect financial position, results or cash flow.
Contractual cash obligations totaled approximately $2.64 billion, including debt, estimated interest, finance obligations and operating leases. Residual-value guarantees on certain equipment leases totaled approximately $4.5 million.
Goodwill was 18.8% of total assets and is sensitive to housing starts, projected profitability, discount rates and terminal values, although no impairment was recorded in 2020.

Investor verification checklist

Verify the post-merger 2021 revenue, margins, leverage, share count, integration costs and realized synergies, since 2020 historical results exclude BMC.
Reconcile reported sales growth with underlying volume growth versus the 9.0% contribution from commodity price inflation.
Monitor gross-margin recovery and the company’s ability to pass through lumber, freight, labor and other input-cost increases.
Review working-capital trends, inventory levels, receivables and operating cash conversion after the 2020 cash-flow decline.
Confirm debt maturities, refinancing activity, interest-rate exposure and covenant headroom, including the amended $1.4 billion revolving facility and the 2027-note redemption announced for March 2021.
Assess the financial impact and disclosure of construction-defect, asbestos, insurance and other legal contingencies.
Compare actual housing starts and repair-and-remodel demand with management’s cited 2021 forecasts and planned capital expenditures.