Builders FirstSource, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; filed May 6, 2016. The company supplied building materials, manufactured components, and construction services through approximately 396 locations in 40 states following the July 2015 acquisition of ProBuild.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales | $1,397.1 million | $371.0 million | +276.6% |
| Gross margin | $349.7 million | $83.7 million | +317.6% |
| Gross margin percentage | 25.0% | 22.6% | +2.4 percentage points |
| Income from operations | $22.8 million | $0.7 million | Improved |
| Operating margin | 1.6% | 0.2% | Improved |
| Interest expense, net | $35.2 million | $7.6 million | +$27.6 million |
| Net loss | $17.0 million | $7.1 million | Loss increased |
| Basic and diluted loss per share | $0.15 | $0.07 | Loss increased |
| Cash used in operating activities | $43.3 million | Cash provided of $9.9 million | Declined |
Sales increased primarily because ProBuild contributed approximately 265% of the reported increase. Excluding acquisitions, management estimated sales increased approximately 19% from higher volume, partly offset by a 7% decrease attributable to commodity-price deflation. Gross margin benefited from improved customer pricing, commodity deflation, and a higher mix of value-added sales.
SG&A was $327.0 million, or 23.4% of sales, compared with 22.4% in the prior-year quarter. The increase reflected ProBuild-related employees, integration activities, delivery costs, occupancy, and intangible-asset amortization. The company recorded $4.5 million of income tax expense and increased its deferred-tax valuation allowance by $5.1 million.
At March 31, 2016, cash and cash equivalents were $3.7 million, compared with $65.1 million at December 31, 2015. Total assets were $2.85 billion, total liabilities were $2.72 billion, and stockholders’ equity was $133.9 million.
Debt, Liquidity, and Cash Flow
- Debt and lease obligations, net of current maturities, were $1.90 billion; total debt and lease obligations before discounts and issuance costs were $1.97 billion.
- The company completed note exchanges in February 2016, exchanging $282.4 million of 2023 notes for $267.6 million of 2021 notes. The transactions reduced outstanding principal by approximately $14.8 million and annual cash interest expense by approximately $10.0 million.
- A $7.8 million net gain from the exchanges reduced first-quarter interest expense, partially offset by a $7.0 million write-off of debt issuance costs.
- The $800.0 million senior secured revolving facility had $59.0 million outstanding and $619.1 million of net excess borrowing availability at March 31, 2016. Including cash, reported liquidity was $622.8 million.
- The company was in compliance with its debt covenants at March 31, 2016. Letters of credit reduced availability by approximately $85.0 million.
- Capital expenditures were $9.0 million. There were no acquisition-related cash payments in the quarter.
Material Changes Versus the Prior Comparable Period
- The ProBuild acquisition transformed the scale and geographic footprint of the business and added the West reportable segment, which generated $386.4 million of first-quarter sales but a $1.9 million pretax loss.
- Reported sales rose 276.6%, while the prior-year period included $5.3 million of company acquisition-related costs; no such costs were incurred in Q1 2016.
- Gross margin percentage improved from 22.6% to 25.0%, but SG&A as a percentage of sales increased from 22.4% to 23.4%.
- Interest expense increased substantially because of acquisition financing and higher debt balances, limiting the benefit of operating profitability and leaving the company with a larger net loss.
- Operating cash flow shifted from a $9.9 million inflow to a $43.3 million outflow, primarily due to seasonal increases in receivables and inventory, the ProBuild integration, accrued-liability changes, and higher cash interest payments.
Outlook, Commentary, Risks, and Unusual Items
Management reported improving housing conditions but noted that single-family housing starts remained below the historical average. First-quarter 2016 single-family starts increased 22.2% year over year, and management cited external forecasts for 818,000 U.S. single-family starts in 2016 and approximately 4.7% growth in repair-and-remodel sales.
Management expects continued long-term housing recovery and intends to pursue market-share growth, operating efficiencies, working-capital discipline, and potentially strategic acquisitions. Integrating ProBuild and reducing the substantially increased debt burden were identified as key imperatives.
- Results are seasonal, with the first and fourth quarters generally affected by weather and lower construction activity.
- The business is exposed to housing cycles, interest rates, consumer confidence, mortgage and commercial-credit availability, labor shortages, competition, and local economic conditions.
- Lumber and other material prices can fluctuate rapidly, and quotation periods may limit the company’s ability to pass cost increases to customers.
- The company remains in a cumulative loss position for the three-year period ended March 31, 2016 and maintained a valuation allowance against deferred tax assets. Management expected a transition to a three-year cumulative income position during 2016, but acknowledged continued uncertainty.
- Legal proceedings are considered ordinary course and are not expected by management to have a material adverse effect, although future costs could be material in a particular period. Environmental remediation exposure also remains possible.
- Disclosure controls were deemed effective, and no material change in internal control over financial reporting was identified; ProBuild control integration remained ongoing.
Important Facts for Investors to Verify
- Whether ProBuild integration produces expected synergies and operating-margin improvement, particularly in the West segment.
- Whether operating cash flow improves after seasonal working-capital investment and whether liquidity remains adequate despite minimal cash on hand.
- Debt reduction progress, interest burden, covenant headroom, and the availability and terms of future refinancing.
- Trends in housing starts, repair-and-remodel demand, lumber prices, customer pricing, and skilled-labor availability.
- The timing and potential magnitude of any reversal of the deferred-tax valuation allowance and the company’s ability to use its federal and state tax-loss carryforwards.
- The comparability of year-over-year results, given that ProBuild was included only from July 31, 2015 and the filing’s prior-year reported results exclude ProBuild.