Builders FirstSource, Inc. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Builders FirstSource supplies and manufactures building materials, prefabricated components and construction services for homebuilders, contractors, remodelers and consumers. It operated 400 locations across 39 U.S. states and reported four geographic segments: Northeast, Southeast, South and West. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Sales | $1,904.5 million | $2,089.9 million | $3,535.8 million | $3,790.3 million |
| Gross margin | $517.2 million; 27.2% | $496.3 million; 23.7% | $959.1 million; 27.1% | $907.4 million; 23.9% |
| Income from operations | $115.6 million; 6.1% | $104.6 million; 5.0% | $187.5 million; 5.3% | $156.7 million; 4.1% |
| Net income | $66.6 million; 3.5% | $56.6 million; 2.7% | $102.3 million; 2.9% | $79.8 million; 2.1% |
| Diluted EPS | $0.57 | $0.49 | $0.88 | $0.68 |
| Interest expense, net | $29.4 million | $29.0 million | $54.3 million | $55.7 million |
Six-month operating cash flow was $178.8 million, compared with cash used in operations of $169.0 million in the prior-year period. Capital expenditures, net of asset-sale proceeds, were $40.8 million. Cash at June 30, 2019 was $10.6 million.
At June 30, 2019, gross debt was approximately $1.45 billion before unamortized discounts and issuance costs, and reported debt was $1.43 billion, including $12.7 million of current maturities. Operating lease liabilities totaled $278.6 million on a present-value basis following adoption of the new lease standard. Net excess availability under the revolving facility was $744.8 million, and total liquidity, including cash, was $755.3 million.
Material changes versus the prior comparable period
- Second-quarter sales declined 8.9%; six-month sales declined 6.7%. Management attributed the decline primarily to commodity price deflation, which reduced sales by 11.3% in the quarter and 10.4% for the six-month period.
- Excluding commodity price deflation, second-quarter sales increased 2.4%; excluding commodity deflation and one fewer selling day, six-month sales increased 4.4% across the single-family, multifamily and repair-and-remodel/other end markets.
- Lumber and lumber sheet goods sales fell 25.8% in the quarter and 23.1% year to date. Manufactured products and windows, doors and millwork increased 0.9% and 4.1%, respectively, in the quarter, supported by volume growth.
- Gross margin percentage expanded 350 basis points in the quarter and 320 basis points year to date, reflecting product mix, pricing discipline and commodity costs declining relative to customer pricing commitments.
- SG&A increased 2.5% in the quarter and 2.8% year to date. SG&A as a percentage of sales rose to 21.1% from 18.7% in the quarter and to 21.8% from 19.8% year to date, partly because of lower commodity-driven revenue and higher variable compensation.
- Net income increased 17.6% in the quarter and 28.1% year to date. The effective tax rate was 22.8% in the quarter versus 25.1% and 23.2% year to date versus 21.0%.
- Operating cash flow improved by $347.8 million year to date, principally because working-capital investment was substantially lower than in 2018.
Guidance, outlook, risks and unusual items
The filing does not provide formal company-specific financial guidance. Management described the long-term housing outlook as positive, citing demographic growth, relatively low interest rates, aging housing stock and expected demand recovery. It expects continued opportunities to gain market share, including through strategic acquisitions, while focusing on working capital, expense control and capital-structure optimization.
U.S. housing starts remained below historical averages. Management identified sensitivity to housing activity, interest rates, housing affordability, economic conditions, skilled-labor availability, competition, lumber and other commodity prices, freight costs, weather and customer production schedules. First- and fourth-quarter results are typically affected by weather and seasonality.
- During the first six months, the company issued $400.0 million of 6.75% senior secured notes due 2027, repurchased or redeemed 2024 notes and repaid approximately $301.2 million of the 2024 term loan. The revolving facility maturity was extended to November 2023. The transactions reduced and extended the debt maturity profile.
- Second-quarter interest expense included $4.3 million of one-time debt-financing charges; six-month interest expense included $3.6 million of such charges.
- In July 2019, the company issued an additional $75.0 million of 2027 notes, redeemed an additional $75.0 million of 2024 notes, acquired Sun State Components for $42.9 million in cash and repurchased 360,000 shares for $6.1 million.
- Known and threatened construction-defect claims could materially affect financial position, results or cash flow, although the company cannot currently estimate a reasonable loss range. The claims are generally covered above applicable insurance deductibles.
- Letters of credit totaled $82.2 million, principally supporting self-insurance programs. The company was not in violation of debt covenants at quarter end.
- The company adopted the new lease standard on January 1, 2019, recording approximately $269.7 million of operating lease right-of-use assets and $267.5 million of lease liabilities initially, without a material income-statement or cash-flow impact.
- The company identified the potential phaseout of LIBOR as an additional risk for variable-rate borrowings under the revolving facility and term loan.
Important facts for investors to verify
- Whether gross-margin expansion and volume growth in value-added products persist after commodity prices stabilize.
- The effect of housing starts, mortgage rates, affordability, labor availability and regional housing conditions on demand.
- Debt maturities, fixed versus variable-rate exposure, refinancing requirements and compliance with covenant and minimum-availability provisions.
- Whether operating cash flow remains positive after seasonal working-capital needs, capital expenditures, acquisitions and debt transactions.
- The ultimate cost and insurance coverage of construction-defect claims and other contingencies.
- The purchase-price allocation and operating contribution from the July 2019 Sun State Components acquisition.
- The effect of commodity-price movements and the company’s ability to pass material and freight-cost changes through to customers.