BUILDERS FIRSTSOURCE, INC. 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 endedDecember 31, 2022 included in our most recent 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 most recent Form 10-K filed with theSecurities 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 570 locations in 42 states acrossthe 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. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.
We group our building products into four product categories:
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Lumber &
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Manufactured Products. Manufactured products are factory-built substitutes for job-site framing and include wood floor and roof trusses, steel roof trusses, wall panels, and engineered wood that we design, cut and assemble for each home. Manufactured products also include our proprietary whole-house framing solution, Ready-Frame®, which designs, pre-cuts, labels, and bundles lumber and lumber sheet goods into customized framing packages, saving builders both time and money and improving job site safety.
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Windows, Doors & Millwork. Windows & doors are comprised of the manufacturing,
assembly, and distribution of windows, and the assembly and distribution of
interior and exterior door units. Millwork includes interior trim and custom
features, including those that we manufacture under the Synboard ® brand name.
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SpecialtyBuilding Products & Services . Specialty building products & services consist of various products, including vinyl, composite and wood siding, metal studs, cement, roofing, insulation, wallboard, ceilings, cabinets, and hardware. This category also includes services such as turn-key framing, shell construction, design assistance and professional installation of products spanning all of our product categories. We also offer software products through our Paradigm subsidiary, including drafting, estimating, quoting, and virtual home design services, which provide software solutions to retailers, distributors, manufacturers and homebuilders that boost sales, reduce costs, and help them become more competitive.
Our operating results are dependent on the following trends, events and uncertainties, some of which are beyond our control:
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Homebuilding Industry and Market Competition . Our business is driven primarily by the residential new construction market, as well as select multi-family new construction and residential repair and remodel markets, which are in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, housing affordability, household formation, land development costs, the availability of skilled construction labor, rising inflationary pressures, mortgage markets and the health of the economy. According to theU.S. Census Bureau , the seasonally adjusted annual rate ofU.S. total and single-family housing starts were 1.4 million and 0.9 million, respectively, as ofMarch 31, 2023 . Many factors have impacted and may continue to impact our sales and gross margins, including continued consolidation within the building products supply industry, increased competition for homebuilder business, supply chain constraints and cyclical fluctuations in commodity prices. Moreover, our industry remains highly fragmented and competitive, and we will continue to face significant competition from local and regional suppliers. As a result of various current market dynamics, including rising inflationary pressures, mortgage rate increases and shifts in housing affordability, industry forecasters, including theNational Association of Home Builders ("NAHB"), expect to see continued softened housing demand over the near-term. Despite these near-term tempered market conditions, we believe the housing industry remains underbuilt and that there are several meaningful trends that indicateU.S. housing demand will continue to be strong over the long-term, including the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate.
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Targeting Large Production Homebuilders. The homebuilding industry continues to undergo consolidation, and the larger homebuilders continue to increase their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we are facing in servicing large homebuilders with certain profitability expectations. Additionally, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.
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Repair and remodel end market. While influenced by housing starts to a lesser degree than the homebuilding market, the repair and remodel end market is still dependent upon some of the same factors, including demographic trends, interest rates, consumer confidence, employment rates, the health of the economy and home financing markets. As a result of these pressures, we may experience reduced sales demand, challenges in the supply chain, increased margin pressures and/or increased operating costs in this area of our business as a result. We expect that our ability to remain competitive in this space will depend on our continued ability to provide a high level of customer service coupled with a broad product and digital offerings.
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Use of Prefabricated Components. Homebuilders are increasingly using prefabricated components in order to realize increased efficiency, overcome skilled construction labor shortages and improve quality. Shortening cycle time from start to completion is a key imperative of the homebuilders during periods of strong consumer demand. As the availability of skilled construction labor remains limited, we continue to see the demand for prefabricated components increasing within the residential new construction market.
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Economic Conditions. Economic changes both nationally and locally in our markets
impact our financial performance. The building products supply industry is
highly dependent upon new home construction and, to a lesser extent, repair and
remodel activities and is subject to cyclical market changes. Our operations are
subject to fluctuations arising from changes in supply and demand, national and
local economic conditions, labor costs and availability, competition, government
regulation, trade policies, rising inflation and other factors that affect the
homebuilding industry, such as demographic trends, increasing interest rates,
housing starts, the high cost of land development, employment levels, consumer
confidence, and the availability of credit to homebuilders, contractors, and
homeowners. Disruptions and uncertainties as a result of a pandemic or other
health related emergency, like the COVID-19 pandemic, may have a significant
impact on our future operating results.
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Housing Affordability. The affordability of housing can be a key driver in demand for our products. Home affordability is influenced by a number of economic factors, such as the level of employment, consumer confidence, consumer income, supply of houses, the availability of financing and interest rates. Changes in the inventory of available homes and other economic factors relative to home prices could result in changes to the affordability of homes. As a result, homebuyer demand may shift toward smaller or larger homes creating fluctuations in demand for our products.
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Cost and/or Availability of Materials. Prices of building materials, including wood products, which are subject to cyclical market fluctuations, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase certain materials which are then sold to customers as well as used as direct production inputs for our manufactured and prefabricated products. Short-term changes in the cost and/or availability of these materials, some of which are subject to significant fluctuations, are often passed on to our customers, but our pricing quotation periods and market competition may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products. We may also experience challenges sourcing suitable products for our customers and may be forced to provide alternative materials as substitution for contracted orders. Our inability to pass on material price increases to our customers could adversely impact our operating results.
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Controlling Expenses. Another important aspect of our strategy is controlling costs and striving to be a low-cost building materials supplier in the markets we serve. We closely manage our working capital and operating expenses. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.
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Multi-Family and Light Commercial Business. Our primary focus has been on single-family residential new construction and the repair and remodel end market. However, through recent acquisitions we have expanded our operational footprint in the multi-family and light commercial markets, growing our value-add components and millwork product offerings in this end market. We will continue to identify opportunities for profitable growth in these areas.
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Capital Structure. We strive to optimize our capital structure to ensure that our financial needs are met in light of economic conditions, business activities, organic investments, opportunities for growth through acquisition and the overall risk characteristics of our underlying assets. In addition to these factors, we also evaluate our capital structure on the basis of our leverage ratio, our liquidity position, our debt maturity profile, our market capitalization, and market interest rates. As such, we may enter into various debt or equity transactions to appropriately manage and optimize our capital structure and liquidity needs.
RECENT DEVELOPMENTS
Business Combinations
During the period, we completed the business combination of Noltex for a total purchase price of$84.6 million . This acquisition further expands our market footprint and provides additional operations in our value-add product categories and our multi-family customer segment. This transaction is 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
During 2022, the Company's board of directors authorized the repurchases of an aggregate of$3.0 billion of its shares of common stock. During the three months endedMarch 31, 2023 , the Company repurchased 7.5 million shares at a weighted average price of$83.17 per share, for a total cost of approximately$627.6 million , inclusive of fees and taxes. InApril 2023 , the board of directors approved a share repurchase authorization in the amount of$1 billion of the Company's shares of common stock.
Debt Transactions
OnJanuary 17, 2023 , the Company amended the Revolving Facility to extend the maturity on a portion of the total commitments by 13 months toJanuary 17, 2028 , and to include additional pricing tiers for the applicable margin. Subsequently, onApril 3, 2023 , the Company further amended the Revolving Facility to extend the remaining portion of the total commitments toJanuary 17, 2028 and include the additional pricing tiers for the applicable margin. These transactions are described in Note 8 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call its notes, repay debt, repurchase shares of its common stock or otherwise enter into transactions regarding its capital structure. 18 --------------------------------------------------------------------------------
CURRENT OPERATING CONDITIONS AND OUTLOOK
According to theU.S. Census Bureau , actualU.S. total housing starts were 0.3 million for the first quarter of 2023, a decrease of 17.9% compared to the first quarter of 2022. ActualU.S. single-family starts for the first quarter of 2023 were 0.2 million, a decrease of 28.6% compared to the first quarter of 2022. A composite of third-party sources, including theNAHB , are forecasting 1.3 millionU.S. total housing starts and 0.9 millionU.S single family housing starts for 2023, which are projected decreases of 16.4% and 15.4%, respectively, from 2022. In addition, theHome Improvement Research Institute is forecasting sales in the professional repair and remodel end market to increase approximately 3.0% in 2023 compared to 2022. Our net sales for the first quarter of 2023 decreased 31.6% from the same period last year. The decrease was driven by core organic sales decrease of 26.3%, primarily in lumber and lumber sheet goods, with commodity price deflation accounting for another 11.8%, offset by acquisitions contributing growth of 5.5%. Our gross margin percentage in the first quarter of 2023 increased by 3.0% compared to the first quarter of 2022, primarily attributable to an improved product mix toward our value-add products due to our recent strategic investments in multi-family value-add operations and to relative sales strength against decreased housing starts. Our selling, general and administrative expenses, as a percentage of net sales, were 23.3% in the first quarter of 2023, a 6.3% increase from 17.0% in the first quarter of 2022, largely due to decreased cost leverage on lower sales. 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. However, rising interest rates and inflation have dampened, and may continue to dampen, near term housing industry demand as homes become less affordable for consumers, investors and builders. We believe we are well-positioned to take advantage of favorable long-term industry trends and to 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:
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The volatility of lumber prices;
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The cyclical nature of the homebuilding industry;
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General economic conditions in the markets in which we compete;
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The pricing policies of our competitors;
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Disruptions in our supply chain;
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The production schedules of our customers; and
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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.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales of certain costs, expenses and income items:
Three Months Ended
March 31,
2023 2022
Net sales 100.0 % 100.0 %
Cost of sales 64.7 % 67.7 %
Gross margin 35.3 % 32.3 %
Selling, general and administrative expenses 23.3 % 17.0 %
Income from operations 12.0 % 15.3 %
Interest expense, net 1.1 % 0.7 %
Income tax expense 2.4 % 3.2 %
Net income 8.5 % 11.4 %
Three Months Ended
Net Sales . Net sales for the three months endedMarch 31, 2023 were$3.9 billion , a 31.6% decrease over net sales of$5.7 billion for the three months endedMarch 31, 2022 . Core organic sales, primarily in the single family customer segment, and commodity price deflation decreased net sales by 26.3% and 11.8% respectively. These decreases were partially offset by increased net sales from acquisitions and one additional selling day of 5.5% and 1.0%, respectively.
The following table shows net sales classified by product category:
Three Months Ended March 31,
2023 2022
(in millions)
% of Net % of Net
Net Sales Sales Net Sales Sales % Change
Lumber & lumber sheet goods $ 872.1 22.5 % $ 2,336.5 41.1 % -62.7 %
Manufactured products 1,114.8 28.7 % 1,366.1 24.0 % -18.4 %
Windows, doors & millwork 1,058.0 27.2 % 1,025.8 18.1 % 3.1 %
Specialty building products & services 838.4 21.6 % 952.7 16.8 % -12.0 %
Net sales $ 3,883.3 100.0 % $ 5,681.1 100.0 % -31.6 %
We experienced decreased net sales in all of our product categories, except
windows, doors, and millwork, primarily due to a decline in core organic sales
as a result of declining housing starts as well as commodity deflation. Windows,
doors, and millwork was less impacted as houses already under construction which
started in the prior year were completed during this period.
Gross Margin. Gross margin decreased $0.5 billion to $1.4 billion due to
decreased sales. Our gross margin percentage increased to 35.3% in the first
quarter of 2023 from 32.3% in the first quarter of 2022, a 3.0% increase. This
increase was primarily attributable to an improved product mix toward our
value-add products due to our recent strategic investment in multi-family
operations and to relative sales strength against decreased housing starts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $64.4 million , or 6.6%, primarily due to
decreased variable compensation as a result of decreased sales, and partially
offset by additional operating expenses from locations acquired within the last
twelve months.
As a percentage of net sales, selling, general and administrative expenses increased to 23.3%, up from 17.0% in the first quarter of 2022. This increase was primarily due to decreased cost leverage on lower net sales during the period.
Interest Expense, Net. Interest expense was$42.1 million in the first quarter of 2023, an increase of$0.8 million from the first quarter of 2022. The increase was primarily due to higher outstanding debt balances and increased interest rates during the first quarter of 2023 compared to the first quarter of 2022. 20 -------------------------------------------------------------------------------- Income Tax Expense. We recorded income tax expense of$91.3 million and$182.9 million in the first quarters of 2023 and 2022, respectively. Our effective tax rate was 21.5% in the first quarter of 2023 and 22.2% in the first quarter of 2022. The decrease in the tax expense was primarily driven by a decrease in income before income taxes in the current period, while the decrease in the tax rate was primarily related to a reduction in our blended state tax rate and an increase in our stock-based compensation windfall benefit this quarter.
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 atMarch 31, 2023 consist of cash on hand and borrowing availability under our Revolving Facility. Our Revolving Facility will be 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. 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:
March 31, December 31,
2023 2022
(in millions)
Accounts receivable availability $ 752.1 $ 841.1
Inventory availability 979.7 1,064.7
Other receivables availability 67.2 48.1 Gross availability 1,799.0 1,953.9 Less: Agent reserves (51.1 ) (64.7 ) Plus: Cash in qualified accounts 94.9 10.9 Borrowing base 1,842.8 1,900.1 Aggregate revolving commitments 1,800.0
1,800.0
Maximum borrowing amount (lesser of borrowing base and
aggregate revolving commitments) 1,800.0 1,800.0 Less: Outstanding borrowings (481.0 ) (264.0 ) Letters of credit (95.9 ) (128.9 ) Net excess borrowing availability on revolving facility$ 1,223.1
As ofMarch 31, 2023 , we had$481.0 million in outstanding borrowings under our Revolving Facility, and our net excess borrowing availability was$1.2 billion after being reduced by outstanding letters of credit totaling$95.9 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 atMarch 31, 2023 .
Liquidity
Our liquidity at
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.
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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$654.4 million for the three months endedMarch 31, 2023 compared to cash provided by operating activities of$179.8 million for the three months endedMarch 31, 2022 . The increase in cash provided by operating activities was largely the result of a decrease in net working capital, offset by a decrease in net income in the first three months of 2023. For the three months endedMarch 31, 2023 , the Company used a net$178.9 million in cash investing in acquisitions and property, plant and equipment. Compared to the prior year, the Company used$130.5 million more cash in investing during the current period primarily due to$79.0 million used for the current period acquisition and$51.6 million more used for net purchases of property and equipment. Cash used in financing activities was$411.6 million for the three months endedMarch 31, 2023 , which consisted primarily of$626.6 million in repurchases of common stock, offset by$217.0 million net borrowings on the Revolving Facility. Cash provided by financing activities was$107.7 million for the three months endedMarch 31, 2022 , primarily driven by$301.5 million received for the issuance of 4.25% 2032 notes and$168.0 million in net borrowings under the Revolving Facility, offset by cash used to repurchase$355.0 million of common stock.
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 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.
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