Builders FirstSource, Inc. — Q2 2018 Form 10-Q Summary
Business context and reporting period
Builders FirstSource is a supplier and manufacturer of building materials, prefabricated components, and construction services for homebuilders, contractors, remodelers, and consumers. It operated approximately 400 locations across 40 U.S. states, organized into Northeast, Southeast, South, and West reportable segments. The filing covers the unaudited three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Net sales | $2,089.9 million | $1,843.3 million | 13.4% increase |
| Gross margin | $496.3 million; 23.7% | $460.8 million; 25.0% | Margin down 1.3 percentage points |
| Income from operations | $104.6 million; 5.0% | $91.3 million; 5.0% | 14.5% increase |
| Net income | $56.6 million | $37.9 million | 49.4% increase |
| Diluted EPS | $0.49 | $0.33 | Increase |
| Interest expense, net | $29.0 million | $33.7 million | Decrease of $4.8 million |
| Metric | Six months ended June 30, 2018 | Six months ended June 30, 2017 | Change |
|---|---|---|---|
| Net sales | $3,790.3 million | $3,376.4 million | 12.3% increase |
| Gross margin | $907.4 million; 23.9% | $836.8 million; 24.8% | Margin down 0.9 percentage points |
| Income from operations | $156.7 million; 4.1% | $131.6 million; 3.9% | 19.1% increase |
| Net income | $79.8 million | $41.7 million | 91.4% increase |
| Diluted EPS | $0.68 | $0.36 | Increase |
Q2 selling, general and administrative expense increased 6.0% to $391.8 million, but declined to 18.7% of sales from 20.0%. The six-month ratio declined to 19.8% from 20.9%, reflecting operating leverage and cost management. The effective tax rate was 25.1% in Q2 and 21.0% for the six months, compared with 34.2% and 32.4%, respectively, principally reflecting the 2017 Tax Act.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $13.2 million at June 30, 2018, compared with $57.5 million at December 31, 2017.
- Six-month operating cash flow was negative $169.0 million, compared with negative $76.3 million in 2017, primarily because seasonal receivables and inventory investments increased with sales growth and commodity inflation.
- Capital expenditures were $49.9 million, compared with $24.6 million in the prior-year period.
- Financing activities provided $173.5 million, including $183.0 million of net borrowings under the revolving facility, partly offset by debt repayments and $4.9 million of share repurchases.
- Total debt and lease obligations, net of discounts and issuance costs, were approximately $1.97 billion at June 30, 2018, compared with $1.78 billion at year-end 2017. Long-term debt included $533.0 million drawn on the $900.0 million revolving facility, $750.0 million of 2024 notes, and a $460.6 million 2024 term loan.
- Net excess availability under the revolving facility was $284.8 million after $82.2 million of letters of credit. Reported liquidity, including cash, was $298.0 million. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales growth reflected estimated volume increases of 4.6% in Q2 and 3.2% for the six months, with commodity price inflation contributing 8.8% and 9.1%, respectively.
- Lumber and lumber sheet goods grew 23.5% in Q2 and 22.5% for the six months, benefiting substantially from commodity inflation. Gypsum, roofing, and insulation declined 2.1% in Q2 and 2.8% for the six months.
- Gross-margin percentages declined because commodity-cost inflation outpaced the company’s ability to adjust prices under short-term customer commitments.
- Lower interest expense reflected debt transactions completed in 2017, partly offset by higher rates on variable-rate debt.
- The West was the strongest six-month reportable segment, with sales up 19.1% and pretax income up 35.7%. South pretax income declined 7.4%, and Northeast pretax income declined 15.3%, primarily reflecting commodity-cost pressure.
- Effective January 1, 2018, the company adopted the new revenue-recognition standard on a modified retrospective basis. It recognized a $2.0 million reduction to beginning accumulated deficit, or $1.5 million net of tax, related to previously unrecognized service-contract revenue.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific company revenue or earnings guidance in the filing. It cited a positive long-term housing outlook and expected 2018 U.S. housing starts of 1.316 million total and 920,000 single-family starts, based on third-party forecasts. The company expects professional repair-and-remodel sales to increase approximately 4.4% in 2018, according to HIRI.
Management identified housing activity, interest rates, credit availability, skilled-labor shortages, lumber and other commodity prices, freight costs, competition, customer concentration among large homebuilders, seasonality, and economic conditions as important risks. Debt reduction remains a key focus, while strategic acquisitions remain possible.
Known and threatened construction-defect claims are generally covered by insurance above deductibles, but potential losses cannot currently be estimated and could materially affect financial position, results, or cash flows. The company also expects a significant balance-sheet impact when it adopts the new lease standard on January 1, 2019, due to recognition of operating-lease liabilities and right-of-use assets.
Variable-rate exposure was material: a 1 percentage-point increase in rates was estimated to increase annual interest expense by approximately $5.3 million on the revolving facility and $4.6 million on the term loan, based on June 30 borrowings.
Important facts for investors to verify
- Whether commodity inflation and short-term pricing commitments continue to pressure gross margins.
- The sustainability of sales growth after separating underlying volume growth from lumber-price inflation.
- Seasonal working-capital needs, negative first-half operating cash flow, and dependence on revolving-facility borrowings.
- Debt reduction progress, variable-rate exposure, covenant headroom, and available liquidity.
- The status and potential financial impact of construction-defect litigation and insurance coverage.
- The balance-sheet and covenant effects of adopting the lease accounting standard in 2019.
- Whether housing starts, skilled-labor availability, credit conditions, and repair-and-remodel demand track management’s outlook.