Builders FirstSource, Inc.: Form 10-Q for the period ended Sep 30, 2024

The following discussion of our financial condition and results of operations should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year ended December 31, 2023, included in our 2023 Form 10-K. The following discussion and analysis should also be read in conjunction with the unaudited condensed consolidated financial statements appearing elsewhere in this report.

Cautionary Statement

Statements in this report and the schedules hereto that are not purely historical facts or that necessarily depend upon future events, including statements about expected market share gains, forecasted financial performance, industry and business outlook or other statements about anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements. In addition, oral statements made by our directors, officers and employees to the investor and analyst communities, media representatives and others, depending upon their nature, may also constitute forward-looking statements. All forward-looking statements are based upon currently available information and the Company’s current assumptions, expectations and projections about future events. Forward-looking statements are by nature inherently uncertain, and actual results or events may differ materially from the results or events described in the forward-looking statements as a result of many factors. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements involve risks and uncertainties, many of which are beyond the Company’s control or may be currently unknown to the Company, that could cause actual events or results to differ materially from the events or results described in the forward-looking statements; such risks or uncertainties include those related to the Company’s growth strategies, including acquisitions, organic growth and digital strategies, or the dependence of the Company’s revenues and operating results on, among other things, the homebuilding industry and, to a lesser extent, repair and remodel activity, which in each case is dependent on economic conditions, including inflation, interest rates, consumer confidence, labor and supply shortages, and also lumber and other commodity prices. The Company may not succeed in addressing these and other risks. Further information regarding the risk factors that could affect our financial and other results can be found in the risk factors section of the Company’s 2023 Form 10-K filed with the Securities and Exchange Commission. Consequently, all forward-looking statements in this report are qualified by the factors, risks and uncertainties contained therein.

COMPANY OVERVIEW

We are a leading supplier and manufacturer of building materials, manufactured components and construction services to professional contractors, sub-contractors and consumers. The Company operates approximately 580 locations in 43 states across the United States, which are internally organized into geographic operating divisions. Due to the similar economic characteristics, categories of products, distribution methods and customers, our operating divisions are aggregated into one reportable segment.

We offer an integrated solution to our customers, providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, vinyl windows, custom millwork and trim, as well as engineered wood that we design, cut, and assemble for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional-grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods and various window, door and millwork lines, along with a full complement of specialty building products. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans our product categories.

RECENT DEVELOPMENTS

Business Combinations

Through September 30, 2024, we have completed the acquisitions of Quality Door, Hanson Truss, RPM, Schoeneman, TRSMI, Western Truss, CRi, Wyoming Millwork, Sunrise Wood Designs, Reno Truss and High Mountain for an aggregate purchase price of approximately $265.4 million, net of cash acquired. Among other opportunities, these acquisitions further expand our market footprint and provide additional operations in our value-add product categories. These transactions are described in further detail in Note 2 to these condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.

Company Shares Repurchases

On August 5, 2024, the Company’s board of directors authorized a new repurchase plan of up to $1.0 billion of the Company’s outstanding shares of common stock. During the nine months ended September 30, 2024, under the previous program and the current authorization, the Company repurchased 6.8 million shares at a weighted average price of $171.37 per share, inclusive of applicable fees and taxes, for a total cost of $1.2 billion.

Executive Officer Transition

On September 19, 2024, the Company’s board of directors appointed Peter Jackson, Executive Vice President and Chief Financial Officer, as the Company’s next President & Chief Executive Officer and member of its Board of Directors, effective November 6, 2024. Mr. Jackson will succeed Dave Rush, who has served as President & Chief Executive Officer since November 2022 and is retiring after 25 years of dedicated service to the Company, effective November 6, 2024. Mr. Rush will remain on the Company’s board of directors and continue as a special advisor to the Company to ensure a smooth transition. Additionally, the Company’s board of directors appointed Pete Beckmann, Senior Vice President, Financial Planning & Analysis of the Company, to succeed Mr. Jackson as Chief Financial Officer, effective November 6, 2024.

CURRENT OPERATING CONDITIONS AND OUTLOOK

According to the U.S. Census Bureau, actual U.S. total housing starts were 0.4 million for the third quarter of 2024, a decrease of 3.5% compared to the third quarter of 2023, and 1.0 million for the nine months ended September 30, 2024, a 3.4% decrease compared to the nine months ended September 30, 2023. Actual U.S. single-family starts for the third quarter of 2024 were 0.3 million, a decrease of 0.5% compared to the third quarter of 2023, and 0.8 million in the first nine months of 2024, a 10.1% increase compared to the same period a year ago. A composite of third-party sources, including the National Association of Home Builders, are forecasting 1.3 million U.S. total housing starts and 1.0 million single-family starts for 2024, which is a decrease of 5.3% and an increase of 5.6%, respectively from 2023. In addition, the Home Improvement Research Institute is forecasting sales in the professional repair and remodel end market to increase approximately 0.1% in 2024 compared to 2023.

We believe the long-term outlook for the housing industry is positive and that the housing industry remains underbuilt due to growth in the underlying demographics compared to historical new construction levels. Despite the challenges posed by higher interest rates and inflation that have impacted demand and affordability for consumers, investors and builders, new home sales remain resilient due to low inventory of existing homes for sale, builder incentives and modifications to home size and complexity. We believe we are well-positioned to take advantage of favorable long-term industry trends and to strategically increase our market share, both organically and through acquisitions. We will continue to focus on working capital by closely monitoring the credit exposure of our customers, remaining focused on maintaining the right level of inventory and by working with our vendors to improve payment terms and pricing on our products. We strive to achieve the appropriate balance of short-term expense control while maintaining the expertise and capacity to grow the business as market conditions expand.

SEASONALITY AND OTHER FACTORS

Our first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather causing reduced construction activity during these quarters. In addition, quarterly results historically have reflected, and are expected to continue to reflect, fluctuations from period to period arising from the following:

• The cyclical nature of the homebuilding industry;
• General economic conditions in the markets in which we compete;
• The volatility of lumber prices;
• The pricing policies of our competitors;
• Disruptions in our supply chain;
• The production schedules of our customers; and
• The effects of weather.

The composition and level of working capital typically change during periods of increasing sales as we carry more inventory and receivables. Working capital levels typically increase in the first and second quarters of the year due to higher sales during the peak residential construction season. These increases may result in negative operating cash flows during this peak season, which historically have been financed through available cash and borrowing availability under credit facilities. Generally, collection of receivables and reduction in inventory levels following the peak building and construction season positively impact cash flow.

RESULTS OF OPERATIONS

The following table sets forth the percentage relationship to net sales of certain costs, expenses and income items:

Three Months Ended September 30, 2024 Compared with the Three Months Ended September 30, 2023

Net Sales. Net sales for the three months ended September 30, 2024, were $4.2 billion, a 6.7% decrease from net sales for the three months ended September 30, 2023. Core organic sales decreased net sales by 7.2%, primarily due to a continued downward trend in the multi-family customer segment and decreased single-family activity due to lower housing starts, while commodity price deflation decreased net sales by another 2.9%. These decreases were partially offset by increases in net sales from acquisitions and increased selling days of 2.0% and 1.4%, respectively.

The following table shows net sales classified by product category:

(in millions)

We experienced decreased net sales in our lumber and lumber sheet goods primarily due to commodity deflation. Our manufactured products sales declined as multi-family continues to trend downward. For the comparable period, specialty building products and services and windows, doors and millwork sales remained consistent.

Gross Margin. Gross margin decreased $0.2 billion to $1.4 billion. Our gross margin percentage decreased to 32.8% in the third quarter of 2024 from 34.9% in the third quarter of 2023, a 2.1% decrease. This decrease was driven by ongoing multi-family and core organic margin normalization.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $958.3 million, an increase of $18.8 million, or 2.0%, over the third quarter of 2023. Increases in selling, general and administrative expenses were driven by additional operating expenses from locations acquired within the last twelve months and asset write-offs, which were partially offset by lower variable compensation on decreased sales.

As a percentage of net sales, selling, general and administrative expenses increased to 22.6%, up from 20.7%, for the three months ended September 30, 2024 and 2023, respectively, primarily attributable to reduced operating leverage.

Interest Expense, Net. Interest expense was $54.3 million in the third quarter of 2024, an increase of $4.1 million from the third quarter of 2023. The increase was due to higher average debt balances.

Income Tax Expense. We recorded income tax expense of $89.0 million and $140.0 million in the third quarters of 2024 and 2023, respectively. Our effective tax rate was 23.8% in the third quarter of 2024 and 23.7% in the third quarter of 2023. The decrease in the tax expense was primarily driven by a decrease in income before income taxes in the current period.

Nine Months ended September 30, 2024 Compared with the Nine Months ended September 30, 2023

Net Sales. Net sales for the nine months ended September 30, 2024, were $12.6 billion, a 2.8% decrease over net sales of $12.9 billion for the nine months ended September 30, 2023. Core organic sales decreased net sales by 3.8%, primarily due to a continued downward trend in the multi-family customer segment, a slight decrease in the single-family customer segment offset by a similar increase in the repair and remodel and other customer segment, while commodity price deflation decreased net sales by an additional 1.4%. These decreases were partially offset by increased net sales from acquisitions and selling days of 1.9% and 0.5%, respectively.

The following table shows net sales classified by product category:

(in millions)

We experienced increased net sales in our lumber and lumber sheet goods primarily due to increased single-family housing starts. Our manufactured products sales declined as multi-family continues to trend downward. For the comparable period, specialty building products and services and windows, doors and millwork sales remained relatively consistent.

Gross Margin. Gross margin decreased $0.4 billion to $4.1 billion, and our gross margin percentage decreased to 33.0% for the nine months ended September 30, 2024, from 35.1% in the nine months ended September 30, 2023, a 2.1% decrease. This decrease was attributable to margin normalization, particularly in our multi-family operations.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $2.9 billion, a decrease of $3.8 million, or 0.1% from 2023. This decrease was primarily due to decreased variable compensation on decreased sales and reduced intangible amortization, partially offset by additional operating expenses from locations acquired within the last twelve months and asset write-offs.

As a percentage of net sales, selling, general and administrative expenses increased to 22.7%, up from 22.1% for the nine months ended September 30, 2024 and 2023, respectively, primarily attributable to reduced operating leverage.

Interest Expense, Net. Interest expense was $154.6 million in the nine months ended September 30, 2024, an increase of $9.3 million from the nine months ended September 30, 2023. Interest expense increased primarily due to higher debt balances partially offset by interest income received in 2024.

Income Tax Expense. We recorded income tax expense of $248.8 million and $350.7 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease in the tax expense was primarily driven by a decrease in income before income taxes in the current period. Our effective tax rate was 21.9% in the first nine months ended September 30, 2024, a decrease from 22.8% in the first nine months ended September 30, 2023, primarily related to an increase in our stock-based compensation windfall benefit, partially offset by permanent and other differences.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and to fund capital expenditures and potential future growth opportunities. Our capital resources at September 30, 2024, consist of cash on hand and borrowing availability under our Revolving Facility.

Our Revolving Facility is primarily used for working capital, general corporate purposes and funding capital expenditures and growth opportunities. In addition, we may use borrowings under the Revolving Facility to facilitate debt repayment and consolidation and to fund share repurchases. Availability under the Revolving Facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables, and qualified cash that all meet specific criteria contained within the credit agreement, minus agent specified reserves. Net excess borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and letters of credit.

The following table shows our borrowing base and excess availability as of:

(in millions)

As of September 30, 2024, we had no outstanding borrowings under our Revolving Facility, and our net excess borrowing availability was $1.7 billion after being reduced by outstanding letters of credit totaling $65.4 million. Excess availability must equal or exceed a minimum specified amount, currently $180.0 million, or we are required to meet a fixed charge coverage ratio of 1.00 to 1.00. We were not in violation of any covenants or restrictions imposed by any of our debt agreements at September 30, 2024.

Liquidity

Our liquidity at September 30, 2024, was $2.1 billion, which consists of net borrowing availability under the Revolving Facility and cash on hand.

Our level of indebtedness results in significant interest expense and could have the effect of, among other things, reducing our flexibility to respond to changing business and economic conditions. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, we may repurchase or call our notes, repay, refinance or modify our debt or otherwise enter into transactions regarding our capital structure.

If industry conditions deteriorate or if we pursue additional acquisitions, we may be required to raise additional funds through the sale of capital stock or debt in the public capital markets or in privately negotiated transactions. There can be no assurance that any of these financing options would be available on favorable terms, if at all. Alternatives to help supplement our liquidity position could include, but are not limited to, idling or permanently closing additional facilities, adjusting our headcount in response to current business conditions, attempts to renegotiate leases, managing our working capital and/or divesting of non-core businesses. There are no assurances that these steps would prove successful or materially improve our liquidity position.

Consolidated Cash Flows

Cash provided by operating activities was $1.5 billion for the nine months ended September 30, 2024, compared to cash provided by operating activities of $1.7 billion for the nine months ended September 30, 2023. The decrease in cash provided by operating activities was largely the result of lower net income and changes in the timing of accounts payable outflows, partially offset by cash inflows from accounts receivable in the first nine months of 2024.

For the nine months ended September 30, 2024, the cash used in investing increased $58.8 million when compared to the prior year primarily due to using $114.0 million more cash for acquisitions, offset by $62.8 million less cash for net purchases of property and equipment.

Cash used in financing activities was $0.7 billion for the nine months ended September 30, 2024, which consisted primarily of $1.2 billion for repurchases of common stock and $0.5 billion net payments on the Revolving Facility, offset by a net $1.0 billion received for the issuance of the 6.375% 2034 Notes. Cash used in financing activities was $1.2 billion for the nine months ended September 30, 2023, which consisted primarily of $1.6 billion for repurchases of common stock, offset by $0.4 billion in net borrowings on the Revolving Facility.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those that are both important to the accurate portrayal of a company’s financial condition and results, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

To prepare financial statements that conform to generally accepted accounting principles, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

Refer to Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Form 10-K for a discussion of our critical accounting estimates and assumptions.

RECENT ACCOUNTING PRONOUNCEMENTS

Information regarding recent accounting pronouncements is discussed in Note 1 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.

We may experience changes in interest expense if changes in our debt occur. Changes in market interest rates could also affect our interest expense. Our 5.00% 2030 Notes, 4.25% 2032 Notes, 6.375% 2032 Notes and 6.375% 2034 Notes bear interest at a fixed rate, and therefore our interest expense related to these notes would not be affected by an increase in market interest rates. Borrowings under the Revolving Facility bear interest at either a base rate or SOFR, plus, in each case, an applicable margin. We did not have any outstanding borrowings on the Revolving Facility as of September 30, 2024. The Revolving Facility also assesses variable commitment and outstanding letter of credit fees based on quarterly average loan utilization.

We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production inputs for our manufactured products that we deliver. Short-term changes in the cost of these materials and the related in-bound freight costs, some of which are subject to significant fluctuations, are sometimes, but not always, passed on to our customers. Delays in our ability to pass on material price increases to our customers can adversely impact our operating results.

Disclosure Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report.

Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are attached as exhibits to this quarterly report. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation. The evaluation of our disclosure controls and procedures included a review of their objectives and design, the Company’s implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this quarterly report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our quarterly reports on Form 10-Q. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, by our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis, and to maintain them as dynamic systems that change as conditions warrant.

Conclusions Regarding Disclosure Controls. Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of September 30, 2024, we maintained disclosure controls and procedures that were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. During the period covered by this report, there were no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our 2023 Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our 2023 Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

There were no material changes to the risk factors reported in Part 1, “Item 1A. Risk Factors” in our 2023 Form 10-K.