Builders FirstSource, Inc. — 2018 Q1 Form 10-Q Summary
Business Context and Reporting Period
Builders FirstSource supplies and manufactures building materials, components, and construction services to professional homebuilders, contractors, remodelers, and consumers. The company operated 402 locations in 40 states and reported four geographic segments: Northeast, Southeast, South, and West. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Sales | $1,700.4 million | $1,533.1 million | 10.9% increase |
| Gross margin | $411.1 million | $376.1 million | 9.3% increase |
| Gross margin percentage | 24.2% | 24.5% | 0.3 percentage-point decrease |
| SG&A expense | $358.9 million | $335.8 million | 6.9% increase |
| Income from operations | $52.1 million | $40.3 million | 29.5% increase |
| Net interest expense | $26.7 million | $36.2 million | $9.4 million decrease |
| Net income | $23.2 million | $3.8 million | Increase of $19.4 million |
| Diluted EPS | $0.20 | $0.03 | Increase of $0.17 |
| Operating cash flow | $(178.3) million | $(136.4) million | Uses increased by $41.9 million |
| Capital expenditures | $20.1 million | $9.8 million | Increase of $10.3 million |
Sales growth reflected estimated volume growth of 1.4% and commodity price inflation of 9.5%; one fewer selling day reduced the comparison. SG&A declined to 21.1% of sales from 21.9%, while operating margin improved to 3.1% from 2.6%. Net margin improved to 1.4% from 0.2%.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $10.1 million at March 31, 2018, compared with $57.5 million at December 31, 2017.
- Total debt and lease obligations, net of discounts and issuance costs, were $1.94 billion, up from $1.78 billion at year-end 2017. The increase primarily reflected higher revolving-facility borrowings.
- Revolving-facility borrowings were $506.0 million under a $900.0 million facility. Net excess borrowing availability was $311.8 million after letters of credit.
- Total liquidity, consisting of cash and net borrowing availability, was $321.9 million.
- The company was in compliance with all debt covenants at March 31, 2018.
- Operating cash use reflected seasonal working-capital investment, including increases in receivables and inventories. Financing activities provided $150.4 million, largely from net revolving-facility borrowings.
Material Changes Versus the Prior Comparable Period
- Lumber and lumber sheet goods sales increased 21.3%, substantially influenced by commodity-price inflation.
- Manufactured products increased 9.0%; windows, doors, and millwork increased 7.3%; siding, metal, and concrete products increased 3.6%.
- Gypsum, roofing, and insulation sales decreased 3.7%, primarily associated with declines in multifamily and light commercial activity.
- West segment sales increased 24.8% and segment pretax income improved from a loss of $3.3 million to income of $5.7 million. Southeast pretax income increased 12.4%.
- Northeast and South segment profitability declined, largely because commodity-price inflation outpaced the company’s ability to adjust customer pricing.
- Interest expense declined because of debt transactions completed in 2017 and the absence of comparable one-time financing charges.
- The company adopted the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. It recorded a $2.0 million reduction to beginning accumulated deficit, or $1.5 million net of tax. Service-contract revenue is now generally recognized over time.
Outlook, Commentary, Risks, and Unusual Items
- Management reported improving housing conditions and cited industry forecasts for 2018 U.S. housing starts of 1.29 million total and 917,000 single-family starts. These are third-party forecasts, not company guidance.
- First-quarter total U.S. housing starts increased 8.0% year over year, while single-family starts increased 6.9%. Housing activity remained below long-term historical averages.
- Management expects long-term housing demand to benefit from demographics, low interest rates, aging housing stock, and population growth. Strategic acquisitions and market-share expansion remain possible.
- Key operating risks include housing-market cyclicality, weather, lumber-price volatility, skilled-labor shortages, competitive pricing pressure, customer credit exposure, interest-rate changes, and limited ability to pass material and freight-cost increases to customers.
- First and fourth quarters are seasonally affected by weather, while first- and second-quarter working-capital requirements typically increase during peak construction activity.
- A 1% increase in interest rates would increase annual interest expense by approximately $5.1 million on the revolving facility and $4.6 million on the term loan, based on March 31 borrowings.
- The company expects the new lease standard, scheduled for adoption on January 1, 2019, to have a significant balance-sheet impact because of its substantial operating leases.
- Known and threatened construction-defect claims are generally insured above deductibles, but potential losses cannot currently be estimated and could materially affect financial position, results, or cash flows.
- The company repurchased 235,644 shares for $4.9 million during the quarter, primarily shares tendered to satisfy tax-withholding obligations on vested restricted stock units; no shares were purchased under a publicly announced repurchase program.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2018, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether commodity-price inflation continues to pressure gross margins and whether pricing actions can offset higher material and freight costs.
- The sustainability of sales growth after separating underlying volume growth from price inflation.
- Operating cash flow and working-capital trends as the seasonal construction cycle progresses.
- Revolving-facility utilization, excess borrowing availability, interest-rate exposure, and progress toward debt reduction.
- The financial effect of adopting the new lease standard in 2019.
- Developments in construction-defect litigation and the extent of insurance coverage relative to potential losses.
- Housing starts, skilled-labor availability, multifamily demand, customer credit quality, and competitive pricing in each geographic segment.