Builders FirstSource, Inc. — 2011 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2011, filed March 2, 2012. Builders FirstSource supplies and manufactures structural and related building products and services for residential new construction, primarily in the southern and eastern United States. The company operated 51 distribution centers and 44 manufacturing facilities across 32 markets in nine states and reported one operating segment.
The housing market remained depressed, with U.S. single-family housing starts down 8.6% in 2011 to 430,700, although fourth-quarter starts increased 4.7% year over year. The company’s top 10 customers represented 23.3% of sales; no individual customer exceeded 5%.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Sales | $779.1 million | $700.3 million | +11.2% |
| Gross margin | $157.9 million | $131.8 million | +19.9% |
| Gross margin percentage | 20.3% | 18.8% | +1.5 percentage points |
| Loss from operations | $(37.5) million | $(63.7) million | Improved |
| Interest expense, net | $24.9 million | $31.7 million | $(6.7) million |
| Loss from continuing operations | $(64.6) million | $(94.3) million | Improved |
| Net loss | $(65.0) million | $(95.5) million | Improved |
| Net loss per share | $(0.68) | $(1.04) | Improved |
| Cash flow from operations | $(66.4) million | $(41.7) million | More cash usage |
| Capital expenditures | $4.8 million | $9.0 million | Lower |
| Cash and cash equivalents | $146.8 million | $103.2 million | +$43.6 million |
| Total debt, net of discount | $297.5 million | $169.1 million | Higher |
| Stockholders’ equity | $101.2 million | $159.5 million | Lower |
Sales growth reflected an estimated 12% increase in volume, partially offset by commodity price deflation. All product categories grew, led by windows and doors, up 13.8%, and other building products and services, up 11.9%. Lumber and lumber sheet goods represented 28.9% of sales, while prefabricated components, windows and doors, and millwork together represented 52.9%.
Selling, general and administrative expense declined 0.6% despite higher sales. Salaries and benefits, excluding stock compensation, decreased $2.0 million. The company recorded $2.2 million of income tax expense and a $26.1 million non-cash valuation allowance against deferred tax assets.
Material changes versus the prior comparable period
- Sales increased $78.8 million, driven primarily by market-share gains, additional customers, and higher sales volume despite lower housing starts.
- Gross margin improved by $26.2 million, with margin expansion attributed to volume leverage, improved customer pricing, and lower commodity-market volatility.
- Operating loss narrowed by $26.3 million, despite $2.5 million of facility closure costs and no 2011 asset impairment charge.
- Operating cash flow deteriorated to a $66.4 million use, including approximately $24.6 million invested in working capital to support increased sales.
- In December 2011, the company replaced its revolving credit facility with a $160.0 million first-lien term loan and a separate $20.0 million letter-of-credit facility. It also repaid the remaining $5.3 million of 2012 notes.
- Net debt increased substantially because of the new term loan, while cash increased primarily from financing proceeds.
- The company closed five facilities and idled one manufacturing facility during 2011, recording approximately $2.6 million of related expense. Eight facilities remained idled at year-end.
Liquidity, debt and outlook
At December 31, 2011, liquidity was reported at $111.8 million after deducting the $35.0 million minimum qualified-cash requirement. Qualified cash was $146.6 million, specified collateral value was $296.3 million, and $14.2 million of restricted cash collateralized letters of credit. The company was in compliance with its debt covenants at year-end.
The first-lien term loan matures September 30, 2015 and bears interest at three-month LIBOR, subject to a 2% floor, plus 9.5%; its weighted-average rate was 11.5% at year-end. The $139.7 million of second-priority notes mature February 15, 2016 and bear interest at LIBOR, subject to a 3% floor, plus 10.0%; the weighted-average rate was 13.0%. The term loan also included warrants for up to 1.6 million shares at an exercise price of $2.50 per share.
Management expected 2012 cash usage of $45 million to $55 million, year-end cash of $90 million to $100 million, and liquidity of approximately $55 million to $65 million. This outlook assumed 460,000 single-family housing starts, stable commodity prices, continued gross-margin improvement, current operating-expense levels, and capital expenditures of $8 million to $10 million. Management did not expect positive operating cash flow in 2012.
Risks, contingencies and unusual items
- Results remain highly dependent on housing starts, mortgage and commercial credit availability, employment, consumer confidence, inventory levels, interest rates, weather, and regional economic conditions.
- All funded debt carried variable interest rates. Although a 1.0% rate increase would not have affected annual interest expense at year-end LIBOR levels because of rate floors, future rate increases above the floors could increase costs.
- Debt agreements restrict additional borrowing, asset sales, dividends, investments, liens, and other corporate actions. Cross-default provisions could accelerate multiple obligations following a default.
- The company had $82.4 million of future minimum operating lease payments and $149.9 million of scheduled interest payments in its contractual-obligation table. Operating leases are not recorded on the balance sheet.
- Goodwill was $111.2 million, or 22.7% of total assets. No goodwill impairment was recorded, but one reporting unit had only an $8.1 million valuation cushion, creating sensitivity to lower housing starts, weaker margins, higher discount rates, or reduced market capitalization.
- Deferred tax assets were subject to a total valuation allowance of $112.4 million at year-end, including $26.1 million charged to continuing operations in 2011.
- Facility closure reserves totaled $3.1 million at year-end, primarily for future lease payments on vacated facilities. Additional closures, idling, impairment charges, or lease obligations remain possible if housing conditions worsen.
- Legal proceedings are ordinary-course matters that management does not believe will have a material adverse effect, although future costs cannot be assured. The company also faces product liability, environmental, insurance, supplier, customer-credit, and information-technology risks.
Most important facts for investors to verify
- Whether housing starts and customer demand improve sufficiently to support management’s 2012 liquidity assumptions.
- Whether projected cash usage of $45 million to $55 million and year-end liquidity of $55 million to $65 million are achieved.
- The company’s ability to service or refinance the $160.0 million term loan due in 2015 and $139.7 million of notes due in 2016 while operating cash flow remains negative.
- Compliance with the $35.0 million qualified-cash covenant and specified collateral requirements.
- Future goodwill or long-lived-asset impairment risk, particularly for the reporting unit with an $8.1 million cushion.
- Changes in gross margins, commodity prices, customer credit quality, receivables, inventory, and working-capital usage.
- The effect of facility closures, lease obligations, restricted cash, and collateralized letters of credit on available liquidity.