Builders FirstSource Reports Third Quarter 2020 Results

Builders FirstSource, Inc. (“Builders FirstSource” or the “Company”) reported its results for the third quarter ending September 30, 2020.

Third Quarter 2020 Highlights:

– Net sales for the quarter increased by 15.9% compared to the prior year period:  Core organic sales increased 6.7%, excluding acquisitions and commodity impacts; Commodity inflation increased net sales by 7.2%; Acquisitions contributed net sales growth of 2.0%

– Adjusted EBITDA increased 15% to $184 million, or 8.0% of net sales, driven by solid demand across all three customer end markets and disciplined pricing in a dynamic market

– Net income of $85.9 million, or $0.73 per diluted share, and adjusted net income of $96.7 million, or $0.82 per diluted share

–  Strong quarter-end balance sheet with a net debt to Adjusted EBITDA ratio of 2.3x and liquidity of $1.2 billion.

– Announced transformational merger with BMC Stock Holdings in an all-stock transaction to create the nation’s premier supplier of building materials and services

CEO Chad Crow said, “Our third quarter 2020 results reflect our team’s collective efforts to execute our strategic plan, which led to record sales and Adjusted EBITDA. These exceptional results were underpinned by strong demand for our integrated services and by our team’s ability to react quickly to market fluctuations, including the sharp rise in lumber costs. In August, we were thrilled to announce our planned merger with BMC, a transaction that is expected to create significant value for all shareholders in the coming years. As we look to the remainder of 2020, we will continue to focus on executing our growth strategy with a safety-first emphasis and planning for the transformational merger of Builders FirstSource and BMC.”

CFO Peter Jackson added, “Our enhanced focus on cost controls contributed to our achievement of record Adjusted EBITDA and EPS. Our team delivered a better-than-expected gross margin of 24.9% in the third quarter despite record high lumber costs. At the same time, we significantly improved SG&A as a percentage of net sales year-over-year which allowed us to hold Adjusted EBITDA margin effectively flat, demonstrating the strength of our business model. We entered the fourth quarter with a strong and flexible balance sheet, including $1.2 billion of liquidity and a stable net leverage ratio of 2.3x. We are at an exceptional point in our Company’s history to complete our announced merger with BMC and further position our business for continued success.”

Third Quarter 2020 Compared to Third Quarter 2019

Net Sales

Net sales for the third quarter ending September 30, 2020 were $2.3 billion, a 15.9% increase compared to a year ago. Core organic sales increased by 6.7% while commodity price inflation added 7.2% to net sales.

Acquisitions completed during the prior four quarters contributed net sales growth of 2.0%.

Value-added core organic sales grew by an estimated 1.9%, led by 2.2% growth in our Manufactured Products category and 1.5% growth in our Windows, Doors, and Millwork category, as solid growth nationally was offset by continued weakness in the Northeast.

Demand improved across our three customer end markets. Single family and repair and remodel / other grew estimated core organic sales by 5.8% and 6.5%, respectively. Multi-family grew core organic sales by 17.6% primarily due to an increase in, and the timing of, projects.

Gross Margin

Gross margin was $570.7 million, an increase of $29.5 million compared with the prior year period. Our gross margin percentage decreased to 24.9% from 27.3% in the prior year period. The decrease in gross margin percentage was primarily attributable to the sharp rise in commodity prices during the quarter relative to our short-term customer pricing commitments. Additionally, a shift in product mix towards our lower margin commodity products, also due to commodity inflation compared to the prior year period, contributed to the decline.

Rapid commodity inflation can cause short-term gross margin percentage compression, whereas higher sustained commodity prices will generally increase the Company’s net sales, gross margin and Adjusted EBITDA dollars.

Selling, General and Administrative Expenses

SG&A in the third quarter of 2020 was $430.9 million, an increase of approximately $19.4 million compared to the prior year period, mainly due to higher compensation related to the increase in net sales.

As a percentage of net sales, SG&A decreased by 200 basis points to 18.8% in the third quarter of 2020, driven by cost leverage on commodity price inflation and higher core organic sales.

Interest Expense

Interest expense increased by $0.3 million to $28.0 million compared to the same period last year. The year over year increase includes one-time charges related to debt financing transactions executed in the prior year period. Adjusting for the one-time charges in both periods, interest expense increased by $3.4 million due to a higher outstanding debt balance as compared to the prior year quarter, partially offset by the effect of lower interest rates.

Income Tax Expense

Income tax expense in the third quarter of 2020 was $25.8 million, or an effective tax rate of 23.1%. In the prior year period, income tax expense was $23.7 million, or an effective tax rate of 23.3%.

Adjusted Net Income

Net income was $85.9 million, or $0.73 per diluted share, compared to $78.1 million, or $0.67 per diluted share, in the same period a year ago.

Adjusted net income was $96.7 million, or $0.82 per diluted share, compared to $84.0 million, or $0.72 per diluted share, in the third quarter of 2019. The increase in adjusted net income of $12.7 million, or 15.1%, was primarily driven by the increase in net sales described above.

Adjusted EBITDA

Adjusted EBITDA grew $24.0 million to a quarterly record of $184.3 million, an increase of 15%. The increase was primarily driven by the growth in net sales attributable to core organic growth across all three of our customer end markets. Adjusted EBITDA remained steady at 8.0% of net sales in the third quarter, compared to 8.1% in the same period a year ago.

Year to Date September 30, 2020 Compared to September 30, 2019

Net Sales

Net sales year to date were $6.0 billion, a 9.3% increase compared to the first nine months of 2019, as acquisitions and core organic growth contributed 2.6% and 2.8% of the increase, respectively.

Commodity inflation and one additional selling day increased net sales by 3.3% and 0.6%, respectively.

Core organic growth was led by our Lumber and Lumber Sheet Goods product category.

Demand increased across all three customer end markets.

Gross Margin

Gross margin increased $53.1 million to $1.6 billion driven by strong growth in net sales. Our gross margin percentage was 25.8% in the first nine months of 2020 compared to 27.2% in the first nine months of 2019. The decrease in gross margin percentage was attributable to a sharp rise in commodity prices in 2020 relative to our short-term customer pricing commitments and product mix. Additionally, the expected normalization in our lumber and lumber sheet goods margins also contributed to the decline compared to the prior year period.

Rapid commodity inflation can cause short-term gross margin percentage compression, whereas higher sustained commodity prices will increase, the Company’s net sales, gross margin and Adjusted EBITDA dollars.

Selling, General and Administrative Expenses

SG&A was $1.2 billion, an increase of approximately $40.3 million compared to the prior year period, mainly due to higher compensation related to the increase in net sales.

As a percentage of net sales, SG&A decreased by 110 basis points to 20.3% driven by cost leverage on commodity price inflation and higher core organic sales.

Adjusted Net Income

GAAP net income was $173.6 million, or $1.48 per diluted share, compared to $180.4 million, or $1.54 per diluted share, in the first nine months of 2019, a decrease of $0.06 per diluted share, or 3.9%.

Adjusted net income was $216.1 million, or $1.84 per diluted share, compared to $198.0 million, or $1.69 per diluted share, in the first nine months of 2019, an increase of $0.15 per diluted share. The increase in adjusted net income of $18.1 million, or 9.1%, was primarily driven by the increase in net sales, partially offset by higher SG&A.

Adjusted EBITDA

Adjusted EBITDA for the first nine months of 2020 grew $36.4 million, or 8.9%, to a record $443.2 million, or 7.4% of net sales, compared to $406.8 million, or 7.4% of net sales, for the first nine months of 2019. The year over year improvement was due to the aforementioned growth in organic sales, along with the acquisitions completed over the last four quarters.

Capital Structure, Leverage, and Liquidity Information:

Adjusted EBITDA, on a trailing twelve-month basis, was $552.5 million and net debt was $1.3 billion as of September 30, 2020. Our net leverage ratio remained sequentially steady at 2.3x net debt to Adjusted EBITDA at September 30, 2020, below the Company’s target leverage ratio of between 2.5x and 3.5x.

Cash generated by operating activities was $155 million in the first nine months of the year. Cash used in investing activities was $96.1 million in the first nine months of 2020, including capital expenditures, net of proceeds, of $80.2 million and $15.9 million used for our acquisitions.

Liquidity as of September 30, 2020 was $1.2 billion, consisting of $820.9 million in net borrowing availability under the revolving credit facility and $340.9 million cash on hand.

Announced Merger with BMC Stock Holdings:

In August of 2020, we entered into a definitive merger agreement under which Builders FirstSource and BMC will combine in an all-stock merger transaction.

With pro forma annual net sales of over $11 billion and approximately 26,000 team members, the combined company will be the nation’s premier supplier of building materials and services within a fragmented industry. The combined company will benefit from greater geographic reach and diversity operating a leading network of 550 distribution and manufacturing locations in 40 states, including 44 of the top 50 metropolitan statistical areas. The combined Company will also benefit from expanded value-added product and service capabilities, building upon a shared commitment to deliver a broad portfolio of value-added offerings. The merged organization will be better positioned to partner and integrate with customers to streamline the construction process. Operating in some of the nation’s largest and fastest growing regions, the combined company will be exceptionally positioned for long-term growth. Increased scale, a strong balance sheet bolstered by robust cash generation, and anticipated annual run-rate synergies of $130 million to $150 million will provide greater resources to invest in growth, innovation and ongoing value creation for all stakeholders.

Under the terms of the agreement, BMC shareholders will receive a fixed exchange ratio of 1.3125 shares of Builders FirstSource common stock for each share of BMC common stock. Upon completion of the merger, existing Builders FirstSource shareholders will own approximately 57% and existing BMC shareholders will own approximately 43% of the combined company on a fully diluted basis.

The transaction is expected to close in late 2020 or early 2021, subject to, among other things, the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, as well as other customary closing conditions. The transaction requires the approval of shareholders of both Builders FirstSource and BMC.

Outlook

Mr. Crow concluded, “I am confident in the outlook for our business, which is supported by robust housing dynamics across our attractive and diverse national footprint. Market conditions should continue to provide positive tailwinds through the end of the year and beyond. We will continue to react to changing market conditions in order to provide our customers the products and services needed to meet continued strong demand for new construction.

Upon closing the merger with BMC, we will build upon the strength of our larger platform to better serve our customers and create incremental value for all our stakeholders. I would like to thank our entire team for their continued dedication to excellence and their commitment to executing our long-range plan.”

The Company has provided supplemental non-GAAP financial information for the consolidated company that is adjusted to exclude one-time integration, one-time refinancing, and other costs (“Adjusted”). As the information included herein includes non-GAAP financial information, please refer to the accompanying financial schedules for non-GAAP reconciliations to their GAAP equivalents. Please refer to the accompanying financial schedules for more information.

For the full third quarter results, click here.

About Builders FirstSource

Headquartered in Dallas, Texas, Builders FirstSource is the largest U.S. supplier of building products, prefabricated components, and value-added services to the professional market segment for new residential construction and repair and remodeling. We provide customers an integrated homebuilding solution, offering manufacturing, supply, delivery and installation of a full range of structural and related building products. We operate in 40 states with approximately 400 locations and have a market presence in 77 of the top 100 Metropolitan Statistical Areas, providing geographic diversity and balanced end market exposure. We service customers from strategically located distribution and manufacturing facilities (certain of which are co-located) that produce value-added products such as roof and floor trusses, wall panels, stairs, vinyl windows, custom millwork and pre-hung doors. Builders FirstSource also distributes dimensional lumber and lumber sheet goods, millwork, windows, interior and exterior doors, and other building products. For more information about Builders FirstSource, visit the Company’s website at www.bldr.com.

Contact:

Binit Sanghvi – Vice President Investor Relations – (214) 765-3804

Source: Builders FirstSource, Inc.