Builders FirstSource, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2012; filed August 1, 2012. Financial statements are unaudited. Builders FirstSource supplies and manufactures structural and related building products and services primarily for U.S. residential new construction.
Financial performance and condition
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $271.9 million | $206.4 million | $491.3 million | $369.2 million |
| Gross margin | $53.7 million; 19.7% | $42.8 million; 20.7% | $98.8 million; 20.1% | $74.2 million; 20.1% |
| Loss from operations | $(1.4) million | $(8.0) million | $(7.2) million | $(23.3) million |
| Net loss | $(12.1) million | $(15.5) million | $(31.2) million | $(36.7) million |
| Net loss per share | $(0.13) | $(0.16) | $(0.33) | $(0.39) |
| Operating cash flow | Not separately provided | Not separately provided | $(37.8) million | $(38.8) million |
- Q2 sales increased 31.7%; six-month sales increased 33.1%. Management estimated volume growth of approximately 29% in Q2 and 31% for the first six months, with the remainder primarily attributable to commodity-price inflation.
- Q2 gross margin declined 100 basis points to 19.7%, primarily because lumber-cost inflation exceeded customer pricing commitments. Six-month gross margin remained 20.1%.
- Q2 selling, general and administrative expense increased 12.2% but declined to 20.2% of sales from 23.7%. Six-month SG&A declined to 21.5% of sales from 25.9%.
- Net interest expense rose to $10.5 million in Q2 and $23.6 million for the first six months, primarily reflecting the new term loan and non-cash warrant fair-value adjustments.
- At June 30, 2012, cash and cash equivalents were $105.1 million, restricted cash was $14.4 million, and total assets were $499.1 million. Stockholders’ equity was $71.3 million, down from $101.2 million at December 31, 2011.
- Total debt was approximately $298.2 million, consisting primarily of a $160.0 million term loan and $139.7 million of floating-rate notes.
- Six-month operating cash use was driven by the net loss and working-capital investment, including increases of $37.4 million in receivables and $17.7 million in inventories.
Material changes versus the prior comparable periods
- Revenue growth exceeded the increase in U.S. single-family housing starts, which management attributed to customer expansion and market-share gains.
- Operating losses narrowed materially despite higher interest expense and lower Q2 gross margin.
- Facility closure costs declined to $0.1 million for the first six months from $1.9 million in the prior-year period; the company retained approximately $2.6 million of facility and exit-cost reserves at June 30, 2012.
- Interest expense increased by $12.0 million for the first six months, primarily due to the term loan entered into in the fourth quarter of 2011 and warrant valuation changes.
- Cash declined by $41.7 million during the first six months, from $146.8 million to $105.1 million.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2012 cash usage of approximately $45 million to $55 million.
- Management reported $70.1 million of liquidity at June 30, 2012, calculated as cash of $105.1 million less the $35.0 million minimum qualified-cash requirement under the term loan.
- The term loan required minimum qualified cash of $35.0 million and minimum specified collateral value of $160.0 million during the relevant seasonal period. Reported specified collateral value was $309.0 million at June 30, 2012, and the company stated that it was in compliance with all debt covenants.
- Management cited moderate housing-market improvement and a long-term positive outlook, while noting that housing starts remained near historic lows. The NAHB forecast 519,000 U.S. single-family housing starts for 2012, approximately 19.4% above 2011 but below historical levels.
- Key risks include housing-market cyclicality, limited mortgage and commercial credit, unemployment and economic conditions, lumber and freight-price volatility, competitive pricing pressure, customer credit exposure, seasonality, and weather.
- A 1% increase in interest rates was not expected to increase annual interest expense based on debt and LIBOR levels at June 30, 2012, because applicable LIBOR floors had not been exceeded.
- The company recorded deferred-tax valuation allowances of $4.3 million in Q2 and $11.3 million for the first six months. Future taxable income could allow reversal of these allowances; additional operating losses could require further allowances.
- Management reported no material adverse effect expected from ordinary-course legal proceedings and no material control deficiencies. Forward-looking statements remain subject to substantial uncertainty.
Investor verification checklist
- Verify the sustainability of sales growth and market-share gains relative to housing starts.
- Assess whether lumber-cost inflation and customer pricing commitments could continue to pressure gross margins.
- Reconcile projected $45 million–$55 million fiscal-year cash usage with seasonal working-capital needs and operating cash burn.
- Review term-loan covenants, minimum cash requirements, collateral calculations, interest rates, and debt maturities.
- Monitor liquidity after restricted cash, required qualified cash, letters of credit, and other collateral commitments.
- Evaluate the impact of warrant fair-value adjustments and higher interest expense on reported losses and cash interest requirements.
- Review the recoverability of deferred tax assets and the potential for additional valuation allowances.