I
tem 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2017 included in our most recent annual report on 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. In this quarterly report on Form 10-Q, references to the “company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.
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 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. Any 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, including risks or uncertainties related to the Company’s growth strategies, including gaining market share, or the Company’s revenues and operating results being highly dependent on, among other things, the homebuilding industry, lumber prices and the economy. The Company may not succeed in addressing these and other risks. Further information regarding factors that could affect our financial and other results can be found in the risk factors section of the Company’s most recent annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) and may also be described from time to time in the other reports the Company files with the SEC. 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 403 locations in 40 states across the United States. Given the span and depth of our geographical reach, our locations are organized into nine geographical regions (Regions 1 through 9), which are also our operating segments, and these are further aggregated into four reportable segments: Northeast, Southeast, South and West. All of our segments have similar customers, products and services, and distribution methods. Our financial statements contain additional information regarding segment performance which is discussed in Note 8 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.
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 six product categories:
|
•
|
Lumber & Lumber Sheet Goods.
Lumber & lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing.
|
|
•
|
Manufactured Products.
Manufactured products consist of wood floor and roof trusses, steel roof trusses, wall panels, stairs, and engineered wood.
|
|
•
|
Windows, Door & 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.
|
15
|
•
|
Gypsum, Roofing & Insulation.
Gypsum, roofing, & insulation include wallboard, ceilings, joint treatment and finishes.
|
|
•
|
Siding, Metal, and Concrete.
Siding, metal, and concrete includes vinyl, composite, and wood siding, exterior trim, other exteriors, metal studs and cement.
|
|
•
|
Other Building Products & Services.
Other building products & services are comprised of products such as cabinets and hardware as well as services such as turn-key framing, shell construction, design assistance, and professional installation spanning the majority of our product categories.
|
Our operating results are dependent on the following trends, events and uncertainties, some of which are beyond our control:
|
•
|
Homebuilding Industry.
Our business is driven primarily by the residential new construction market and the residential repair and remodel market, which are in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, the high cost of land development, the availability of skilled construction labor, and the health of the economy and mortgage markets. According to the U.S. Census Bureau, the seasonally adjusted annualized rate for U.S. total housing starts was 1,201,000 as of September 30, 2018. The seasonally adjusted annualized rate for U.S. single-family housing starts was 871,000 as of September 30, 2018. However, both total and single-family housing starts remain well below the normalized historical annual averages (from 1959 through 2017) of 1.5 million and 1.1 million, respectively. We believe the housing industry is currently experiencing a shortage of skilled construction labor, which is constraining housing activity. Due to the lower levels in housing starts, increased competition for homebuilder business and cyclical fluctuations in commodity prices we have seen and may continue to experience pressure on our gross margins. In addition to these factors, there has been a trend of consolidation within the building products supply industry. However, our industry remains highly fragmented and competitive and we will continue to face significant competition from local and regional suppliers. We still believe there are several meaningful trends that indicate U.S. housing demand will continue to trend towards recovering to the historical average. These trends include relatively low interest rates, the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate. Industry forecasters, including the National Association of Homebuilders (“NAHB”), expect to see continued increases in housing demand over the next year.
|
|
•
|
Targeting Large Production Homebuilders.
In recent years, the homebuilding industry has undergone consolidation, and the larger homebuilders have increased 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. We expect that our ability to maintain strong relationships with the largest builders will be vital to our ability to expand into new markets as well as grow our market share. Additionally, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.
|
|
•
|
Repair and remodel end market
. Although the repair and remodel end market is 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 as the homebuilding market, including demographic trends, interest rates, consumer confidence, employment rates, the availability of skilled labor and the health of the economy and home financing markets. We expect that our ability to remain competitive in this space as well as grow our market share will depend on our continued ability to provide a high level of customer service coupled with a broad product offering.
|
|
•
|
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. We see the demand for prefabricated components increasing as the residential new construction market continues to strengthen and the availability of skilled construction labor remains limited.
|
|
•
|
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 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 and other factors that affect the homebuilding industry such as demographic trends, interest rates, housing starts, the high cost of land development, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners.
|
16
|
•
|
Cost of Materials.
Prices of 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, including lumber products, which are then sold to customers as wel
l as used as direct production inputs for our manufactured and prefabricated products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers, but our pricing quota
tion periods 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. Our inability to pass on material price increases to our customers could adversely impac
t our operating results.
|
|
•
|
Controlling Expenses.
Another important aspect of our strategy is controlling costs and striving to be the low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.
|
|
•
|
Multi-Family and Light Commercial Business.
Our primary focus has been, and continues to be, on single-family residential new construction and the repair and remodel end market. However, we will continue to identify opportunities for profitable growth in the multi-family and light commercial markets.
|
|
•
|
Capital Structure.
As a result of our historical growth through acquisitions, we have substantial indebtedness. 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. We evaluate our capital structure on the basis of our leverage ratio as well as the factors described above. While debt reduction will continue to be a key area of focus for the Company, we may adjust debt or equity levels in order to appropriately manage and optimize our capital structure.
|
CURRENT OPERATING CONDITIONS AND OUTLOOK
Though the level of housing starts remains below the historical average, the homebuilding industry has shown improvement since 2011. For the third quarter of 2018, actual U.S. total housing starts were 330,600, a 3.5% increase compared to the third quarter of 2017. Actual U.S. single-family starts were 235,600 in the third quarter of 2018, a 2.4% increase compared to the same quarter a year ago. For the nine months ended September 30, 2018, actual U.S. total housing starts were 972,200, a 6.4% increase compared to the nine months ended September 30, 2017. Actual U.S. single-family starts were 687,700 in the first nine months of 2018, a 6.0% increase compared to the same period a year ago. While the housing industry has strengthened over the past few years, the limited availability of credit to smaller homebuilders and potential homebuyers, the high cost of land development in many major metropolitan areas and the high demand for a limited supply of skilled construction labor, among other factors, have hampered a stronger recovery. A composite of third party sources, including the NAHB, are forecasting 1,278,000 U.S. total housing starts and 891,000 U.S single family housing starts for 2018, which are increases of 6.2% and 5.0%, respectively, from 2017. In addition, the Home Improvement Research Institute (“HIRI”) is forecasting sales in the professional repair and remodel end market to increase approximately 9.9%, inclusive of commodity price inflation, in 2018 compared to 2017.
Our net sales for the third quarter of 2018 were up 12.7% over the same period last year. We estimate that 11.2% of this increase is attributable to the impact of commodity price inflation on sales during the third quarter of 2018 compared to the third quarter of 2017. Increases in single-family and multi-family sales volume were partially offset by declines in the repair and remodel/other end market. Our gross margin percentage increased by 0.3% during the third quarter of 2018 compared to the third quarter of 2017, primarily due to the sharp decline in commodity costs during the third quarter of 2018 relative to our customer pricing. We continue to invest in our business to improve our operating efficiency, which, along with operating leverage and disciplined cost management, has allowed us to better leverage our operating costs against changes in net sales. Our selling, general and administrative expenses, as a percentage of net sales, were 18.9% in the third quarter of 2018, a 0.8% decrease from 19.7% in the third quarter of 2017. This decrease in selling, general and administrative expenses, as a percentage of net sales on a year over year basis, was primarily driven by cost leverage as well as continued cost management.
While the rate of market growth has recently eased we still believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics. We feel we are well-positioned to take advantage of the construction activity in our markets and to increase our market share, which may include strategic acquisitions or investments in organic growth opportunities. We will continue to focus on working capital by closely monitoring the credit exposure of our customers and by working with our vendors to improve our 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 improve. In addition, debt reduction will continue to be a key area of focus for the Company.
17
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 volatility of lumber prices;
|
|
•
|
The cyclical nature of the homebuilding industry;
|
|
•
|
General economic conditions in the markets in which we compete;
|
|
•
|
The pricing policies of our competitors;
|
|
•
|
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 in anticipation of higher sales during the peak residential construction season. These increases have in the past resulted in negative operating cash flows during this peak season, which historically have been financed through available cash and borrowing availability under credit facilities. Collection of receivables and reduction in inventory levels following the peak building and construction season have in the past positively impacted cash flow and resulted in seasonal debt reduction, primarily in the fourth quarter.
RESULTS OF OPERATIONS
The following table sets forth, for the three and nine months ended September 30, 2018 and 2017, the percentage relationship to net sales of certain costs, expenses and income items:
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
75.3
|
%
|
|
|
75.6
|
%
|
|
|
75.8
|
%
|
|
|
75.3
|
%
|
Gross margin
|
|
24.7
|
%
|
|
|
24.4
|
%
|
|
|
24.2
|
%
|
|
|
24.7
|
%
|
Selling, general and administrative expenses
|
|
18.9
|
%
|
|
|
19.7
|
%
|
|
|
19.5
|
%
|
|
|
20.5
|
%
|
Income from operations
|
|
5.8
|
%
|
|
|
4.7
|
%
|
|
|
4.7
|
%
|
|
|
4.2
|
%
|
Interest expense, net
|
|
1.4
|
%
|
|
|
1.8
|
%
|
|
|
1.4
|
%
|
|
|
2.0
|
%
|
Income tax expense
|
|
0.9
|
%
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
|
|
0.7
|
%
|
Net income
|
|
3.5
|
%
|
|
|
2.1
|
%
|
|
|
2.6
|
%
|
|
|
1.5
|
%
|
18
Three Months Ended September 30, 2018 Compared with the Three Months Ended September 30, 2017
Net Sales.
Net
sales for the three months ended September 30, 2018 were $2,118.5 million, a 12.7% increase over net sales of $1,878.9 million for the three months ended September 30, 2017. We estimate that 11.2% of this increase is attributable to the impact of commodity price inflation on sales during the third quarter of 2018 compared to the third quarter of 2017. Single-family and multi-family sales volume growth in the third quarter of 2018 was partially offset by declines in the repair and remodel/other end markets.
The following table shows net sales classified by product category (dollars in millions):
|
Three Months Ended September 30,
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Net Sales
|
|
|
% of Net Sales
|
|
|
Net Sales
|
|
|
% of Net Sales
|
|
|
% Change
|
|
Lumber & lumber sheet goods
|
$
|
818.7
|
|
|
|
38.6
|
%
|
|
$
|
679.9
|
|
|
|
36.2
|
%
|
|
|
20.4
|
%
|
Manufactured products
|
|
385.9
|
|
|
|
18.2
|
%
|
|
|
318.6
|
|
|
|
16.9
|
%
|
|
|
21.1
|
%
|
Windows, doors & millwork
|
|
372.5
|
|
|
|
17.6
|
%
|
|
|
347.5
|
|
|
|
18.5
|
%
|
|
|
7.2
|
%
|
Gypsum, roofing & insulation
|
|
146.6
|
|
|
|
6.9
|
%
|
|
|
147.9
|
|
|
|
7.9
|
%
|
|
|
(0.9
|
)%
|
Siding, metal & concrete products
|
|
196.6
|
|
|
|
9.3
|
%
|
|
|
183.5
|
|
|
|
9.8
|
%
|
|
|
7.1
|
%
|
Other building products & services
|
|
198.2
|
|
|
|
9.4
|
%
|
|
|
201.5
|
|
|
|
10.7
|
%
|
|
|
(1.6
|
)%
|
Net sales
|
$
|
2,118.5
|
|
|
|
100.0
|
%
|
|
$
|
1,878.9
|
|
|
|
100.0
|
%
|
|
|
12.7
|
%
|
The impact of commodity price inflation in the third quarter of 2018 resulted in the sales growth of our lumber and lumber sheet goods and manufactured products categories exceeding the sales growth of our other product categories.
Gross Margin.
Gross margin increased $63.5 million to $522.8 million. Our gross margin percentage increased to 24.7% in the third quarter of 2018 from 24.4% in the third quarter of 2017, a 0.3% increase. Our gross margin percentage increased primarily due to the sharp decline in commodity costs during the third quarter of 2018 relative to our customer pricing.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased $30.4 million, or 8.2%. Largely due to our increase in sales, our salaries and benefits expense was $267.6 million, an increase of $28.6 million from the third quarter of 2017. In addition, our fuel expense increased of $2.9 million in the third quarter of 2018 compared to the third quarter of 2017.
As a percentage of net sales, selling, general and administrative expenses decreased to 18.9% in the third quarter of 2018 from 19.7% in the third quarter of 2017, a 0.8% decrease. This improvement was primarily driven by cost leverage as well as continued cost management.
Interest Expense, Net.
Interest expense was $29.1 million in the third quarter of 2018, a decrease of $4.7 million from the third quarter of 2017. This decrease, which is largely attributable to the positive results of our debt transactions executed in fiscal year 2017, was partially offset by increased interest expense on our variable rate debt instruments due to increased market interest rates in the third quarter of 2018 compared to the third quarter of 2017.
Income Tax Expense.
We recorded income tax expense of $19.4 million and $15.1 million in the third quarters of 2018 and 2017, respectively. Our effective tax rate was 20.9% in the third quarter of 2018, largely due to the Tax Cut and Jobs Act (“the 2017 Tax Act”), compared to 27.5% in the third quarter of 2017.
19
Nine Mont
hs Ended September 30, 2018 Compared with the Nine Months Ended September 30, 2017
Net Sales.
Net
sales for the nine months ended September 30, 2018 were $5,908.8 million, a 12.4% increase over net sales of $5,255.3 million for the nine months ended September 30, 2017. We estimate that 9.9% of this increase is attributable to the impact of commodity price inflation on sales during the first nine months of 2018 compared to the first nine months of 2017. Single-family and repair and remodel/other end market sales volume growth in the first nine months of 2018 was partially offset by declines in multi-family.
The following table shows net sales classified by product category (dollars in millions):
|
Nine Months Ended September 30,
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Net Sales
|
|
|
% of Net Sales
|
|
|
Net Sales
|
|
|
% of Net Sales
|
|
|
% Change
|
|
Lumber & lumber sheet goods
|
$
|
2,273.8
|
|
|
|
38.5
|
%
|
|
$
|
1,867.6
|
|
|
|
35.5
|
%
|
|
|
21.7
|
%
|
Manufactured products
|
|
1,051.0
|
|
|
|
17.8
|
%
|
|
|
900.9
|
|
|
|
17.2
|
%
|
|
|
16.7
|
%
|
Windows, doors & millwork
|
|
1,080.1
|
|
|
|
18.3
|
%
|
|
|
1,016.7
|
|
|
|
19.3
|
%
|
|
|
6.2
|
%
|
Gypsum, roofing & insulation
|
|
400.8
|
|
|
|
6.8
|
%
|
|
|
409.4
|
|
|
|
7.8
|
%
|
|
|
(2.1
|
)%
|
Siding, metal & concrete products
|
|
528.3
|
|
|
|
8.9
|
%
|
|
|
498.9
|
|
|
|
9.5
|
%
|
|
|
5.9
|
%
|
Other building products & services
|
|
574.8
|
|
|
|
9.7
|
%
|
|
|
561.8
|
|
|
|
10.7
|
%
|
|
|
2.3
|
%
|
Net sales
|
$
|
5,908.8
|
|
|
|
100.0
|
%
|
|
$
|
5,255.3
|
|
|
|
100.0
|
%
|
|
|
12.4
|
%
|
The impact of commodity price inflation in the first nine months of 2018 resulted in the sales growth of our lumber and lumber sheet goods categories exceeding the sales growth of our other product categories. The decrease in net sales in our gypsum, roofing & insulation category was largely associated with declines in multi-family and light commercial sales in the first nine months of 2018 compared to the first nine months of 2017.
Gross Margin.
Gross margin increased $134.0 million to $1,430.2 million. Our gross margin percentage decreased to 24.2% in the first nine months of 2018 from 24.7% in the first nine months of 2017, a 0.5% decrease. Our gross margin percentage decreased primarily due to the impact of commodity price inflation during the nine months ended September 30, 2018 relative to our customer pricing commitments.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased $75.8 million, or 7.0%. Largely due to our increase in sales, our salaries and benefits expense was $758.2 million, an increase of $62.1 million from the first nine months of 2017, and our fuel expense increased $8.4 million. In addition, office general and administrative expense increased $3.1 million, bad debt expense increased $1.8 million and occupancy expense increased $0.9 million. Further, we recognized a $4.4 million loss on the disposal of assets in the first nine months of 2017.
As a percentage of net sales, selling, general and administrative expenses decreased to 19.5% in the first nine months of 2018 from 20.5% in the first nine months of 2017, a 1.0% decrease. This improvement was primarily driven by cost leverage as well as continued cost management.
Interest Expense, Net.
Interest expense was $84.8 million for the nine months ended September 30, 2018, a decrease of $18.9 million compared to the nine months ended September 30, 2017. This decrease, which is largely attributable to the positive results of our debt transactions executed in fiscal year 2017, was partially offset by increased interest expense on our variable rate debt instruments due to increased market interest rates in the first nine months of 2018 compared to the first nine months of 2017. Additionally, interest expense for the nine months ended September 30, 2017 included one-time charges of $2.4 million related to the debt financing transactions executed in that period.
Income Tax Expense.
We recorded income tax expense of $40.5 million and $35.1 million for the nine months ended September 30, 2018 and 2017, respectively. Our effective tax rate was 20.9% for the nine months ended September 30, 2018, largely due to the 2017 Tax Act, compared to 30.1% for the nine months ended September 30, 2017.
20
Re
sults by Reportable Segment
The following tables show net sales and income before income taxes by reportable segment excluding the “All Other” caption as shown in Note 8
to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q (dollars in thousands):
|
|
Three months ended September 30,
|
|
|
|
Net sales
|
|
|
Income before income taxes
|
|
|
|
2018
|
|
|
% of net sales
|
|
|
2017
|
|
|
% of net sales
|
|
|
% change
|
|
|
2018
|
|
|
% of net sales
|
|
|
2017
|
|
|
% of net sales
|
|
|
% change
|
|
Northeast
|
|
$
|
366,179
|
|
|
|
17.6
|
%
|
|
$
|
341,188
|
|
|
|
18.7
|
%
|
|
|
7.3
|
%
|
|
$
|
13,304
|
|
|
|
3.6
|
%
|
|
$
|
11,875
|
|
|
|
3.5
|
%
|
|
|
12.0
|
%
|
Southeast
|
|
|
456,313
|
|
|
|
22.0
|
%
|
|
|
389,431
|
|
|
|
21.3
|
%
|
|
|
17.2
|
%
|
|
|
19,646
|
|
|
|
4.3
|
%
|
|
|
10,613
|
|
|
|
2.7
|
%
|
|
|
85.1
|
%
|
South
|
|
|
547,173
|
|
|
|
26.4
|
%
|
|
|
463,645
|
|
|
|
25.3
|
%
|
|
|
18.0
|
%
|
|
|
33,391
|
|
|
|
6.1
|
%
|
|
|
21,451
|
|
|
|
4.6
|
%
|
|
|
55.7
|
%
|
West
|
|
|
705,170
|
|
|
|
34.0
|
%
|
|
|
635,573
|
|
|
|
34.7
|
%
|
|
|
11.0
|
%
|
|
|
38,871
|
|
|
|
5.5
|
%
|
|
|
34,489
|
|
|
|
5.4
|
%
|
|
|
12.7
|
%
|
|
|
$
|
2,074,835
|
|
|
|
100.0
|
%
|
|
$
|
1,829,837
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
105,212
|
|
|
|
5.1
|
%
|
|
$
|
78,428
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
Net sales
|
|
|
Income before income taxes
|
|
|
|
2018
|
|
|
% of net sales
|
|
|
2017
|
|
|
% of net sales
|
|
|
% change
|
|
|
2018
|
|
|
% of net sales
|
|
|
2017
|
|
|
% of net sales
|
|
|
% change
|
|
Northeast
|
|
$
|
1,022,131
|
|
|
|
17.7
|
%
|
|
$
|
949,484
|
|
|
|
18.6
|
%
|
|
|
7.7
|
%
|
|
$
|
25,830
|
|
|
|
2.5
|
%
|
|
$
|
26,665
|
|
|
|
2.8
|
%
|
|
|
(3.1
|
)%
|
Southeast
|
|
|
1,303,126
|
|
|
|
22.5
|
%
|
|
|
1,133,575
|
|
|
|
22.1
|
%
|
|
|
15.0
|
%
|
|
|
46,789
|
|
|
|
3.6
|
%
|
|
|
34,964
|
|
|
|
3.1
|
%
|
|
|
33.8
|
%
|
South
|
|
|
1,564,446
|
|
|
|
27.0
|
%
|
|
|
1,394,597
|
|
|
|
27.3
|
%
|
|
|
12.2
|
%
|
|
|
76,254
|
|
|
|
4.9
|
%
|
|
|
67,779
|
|
|
|
4.9
|
%
|
|
|
12.5
|
%
|
West
|
|
|
1,894,311
|
|
|
|
32.8
|
%
|
|
|
1,633,851
|
|
|
|
32.0
|
%
|
|
|
15.9
|
%
|
|
|
83,954
|
|
|
|
4.4
|
%
|
|
|
67,702
|
|
|
|
4.1
|
%
|
|
|
24.0
|
%
|
|
|
$
|
5,784,014
|
|
|
|
100.0
|
%
|
|
$
|
5,111,507
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
232,827
|
|
|
|
4.0
|
%
|
|
$
|
197,110
|
|
|
|
3.9
|
%
|
|
|
|
|
We have four reportable segments based on an aggregation of the geographic regions in which we operate. While there is some geographic similarity between our reportable segments and the regions as defined by the U.S. Census Bureau, our reportable segments do not necessarily fully align with any single U.S. Census Bureau region.
According to the U.S. Census Bureau, actual single-family housing starts in the third quarter of 2018 increased 7.1%, 1.1% and 8.2% in the Midwest, South and West regions, respectively, compared to the third quarter of 2017. However, single-family housing starts decreased 13.1% in the Northeast region over the same period. For the third quarter of 2018, we achieved increased net sales and profitability across all of our reportable segments.
According to the U.S. Census Bureau, actual single-family housing starts for the nine months ended September 30, 2018 increased 0.2%, 4.9% and 14.7% in the Northeast, South and West regions, respectively, compared to the nine months ended September 30, 2017. However, single-family housing starts decreased 1.0% in the Midwest region over the same period. For the first nine months of 2018, we achieved increased net sales and profitability in our Southeast, South and West reportable segments. While we also achieved increased net sales in our Northeast reportable segment, profitability for that segment declined largely due to the impact of commodity price inflation relative to our costs.
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, 2018 consist of cash on hand and borrowing availability under our 2022 facility.
Our 2022 facility will be primarily used for working capital, general corporate purposes, and funding growth opportunities. In addition, we may use the 2022 facility to facilitate debt consolidation. Availability under the 2022 facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables which include progress billings and credit card 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.
21
The following table shows our borrowing base and excess availability as of September 30, 2018 and December 31, 2017 (in millions):
|
As of
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accounts Receivable Availability
|
$
|
554.8
|
|
|
$
|
437.2
|
|
Inventory Availability
|
|
451.8
|
|
|
|
380.8
|
|
Other Receivables Availability
|
|
35.2
|
|
|
|
39.2
|
|
Gross Availability
|
|
1,041.8
|
|
|
|
857.2
|
|
Less:
|
|
|
|
|
|
|
|
Agent Reserves
|
|
(28.6
|
)
|
|
|
(24.9
|
)
|
Plus:
|
|
|
|
|
|
|
|
Cash in Qualified Accounts
|
|
38.3
|
|
|
|
39.4
|
|
Borrowing Base
|
|
1,051.5
|
|
|
|
871.7
|
|
Aggregate Revolving Commitments
|
|
900.0
|
|
|
|
900.0
|
|
Maximum Borrowing Amount (lesser of Borrowing Base and
Aggregate Revolving Commitments)
|
|
900.0
|
|
|
|
871.7
|
|
Less:
|
|
|
|
|
|
|
|
Outstanding Borrowings
|
|
(404.0
|
)
|
|
|
(350.0
|
)
|
Letters of Credit
|
|
(82.2
|
)
|
|
|
(84.9
|
)
|
Net Excess Borrowing Availability on Revolving Facility
|
$
|
413.8
|
|
|
$
|
436.8
|
|
As of September 30, 2018, we had $404.0 million in outstanding borrowings under our 2022 facility and our net excess borrowing availability was $413.8 million after being reduced by outstanding letters of credit of approximately $82.2 million. Excess availability must equal or exceed a minimum specified amount, currently $90.0 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, 2018.
Liquidity
Our liquidity at September 30, 2018 was $448.2 million, which consists of net borrowing availability under the 2022 facility and cash on hand.
We have substantial indebtedness following our recent historical acquisitions, which increased our 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, the Company may repurchase or call the 2024 notes, repay debt, or otherwise enter into transactions regarding its capital structure.
Should the current industry conditions deteriorate or we pursue additional growth opportunities, 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 $9.5 million for the nine months ended September 30, 2018 compared to cash used in operating activities of $7.6 million for the nine months ended September 30, 2017. The increase in cash provided by operating activities is largely due to increased sales and profitability during the nine months ended September 30, 2018 compared to the prior year. In addition, cash interest payments for the first nine months of 2018 decreased $29.2 million compared to the first nine months of 2017. However, the increase in cash provided by operating activities was mostly offset by the working capital increase of $266.5 million in 2018 exceeding the working capital increase of $212.9 million in 2017. This change in working capital was primarily due to the timing of both inventory purchases and cash paid to vendors during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.
22
Cash used in investing activities was $76.8 million and $43.3 million for the nine months ended September 30, 2018 and 2017
, respectively. The change is primarily due to an increase in capital expenditures in the first nine months of 2018 compared to the first nine months of 2017. The increase in capital expenditures in 2018 largely relates to facility improvements and the pur
chase of machinery and rolling stock to support sales growth.
Cash provided by financing activities was $44.2 million and $45.7 million for the nine months ended September 30, 2018 and 2017, respectively. Our net borrowing activity under our long-term debt arrangements for the first nine months of 2018 was largely unchanged from the first nine months of 2017. The decrease in cash provided by financing activities is primarily due to a $2.4 million increase in repurchases of common stock related to restricted stock tendered in order to meet minimum withholding tax requirements for shares vested and a $2.2 million decrease in cash received from employee option exercises in 2018 compared to 2017. These decreases were partially offset by $2.8 million in payments of debt issuance costs in 2017.
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.