Builders FirstSource, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Builders FirstSource supplies and manufactures structural and related building products and construction services for U.S. residential new construction. The filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $319.7 million | $219.4 million | 45.7% increase |
| Gross margin | $62.3 million; 19.5% | $45.1 million; 20.6% | Margin down 1.1 percentage points |
| SG&A | $61.1 million; 19.1% of sales | $50.8 million; 23.2% of sales | Expense up 20.2%; ratio improved |
| Operating income (loss) | $1.2 million | $(5.8) million | Improved by $7.1 million |
| Net loss | $(11.8) million | $(19.2) million | Improved by $7.4 million |
| Net loss per share | $(0.12) | $(0.20) | Improved |
| Cash flow from operations | $(25.2) million | $(14.9) million | Higher use of cash |
Interest expense was $12.5 million, compared with $13.1 million in the prior-year quarter. The company recorded $0.3 million of income tax expense and maintained valuation allowances against deferred tax assets generated by operating losses.
Cash and cash equivalents were $117.7 million at March 31, 2013, versus $131.4 million at December 31, 2012. Total debt was approximately $361.5 million, net of discount and current maturities, consisting principally of a $225.0 million term loan and $139.7 million of 2016 notes. Stockholders’ equity declined to $37.1 million from $48.1 million at year-end 2012.
Operating cash use reflected an approximately $18.9 million increase in working capital, including increases in receivables and inventory. Investing activities provided $12.1 million, primarily from a $13.0 million decrease in restricted cash. Capital expenditures were $1.0 million.
Material Changes Versus the Prior Comparable Period
- Sales increased 45.7%; management estimated sales volume increased 29.7%, with commodity price inflation contributing approximately 16.0%.
- Commodity lumber prices averaged 51.6% higher year over year, driving substantial growth in lumber and lumber sheet goods sales, but reducing gross margin through customer pricing commitments.
- Sales by category increased as follows: prefabricated components 40.0%, windows and doors 27.9%, lumber and lumber sheet goods 75.8%, millwork 35.7%, and other building products and services 28.8%.
- SG&A grew in absolute dollars due to higher sales activity but declined to 19.1% of sales from 23.2%, reflecting operating leverage and cost controls.
- The company returned to positive operating income, although it remained loss-making after interest, taxes, and discontinued operations.
- Operating cash use increased because higher sales and commodity inflation required additional receivables and inventory investment.
Guidance, Outlook, Risks, and Unusual Items
Management cited improving housing activity: first-quarter U.S. single-family starts increased 28.1% year over year, while South Region starts increased 27.4%. Management expects long-term housing demand to improve and believes the company is gaining market share, but noted that starts remain below historical averages.
The company expects fiscal 2013 cash usage of approximately $30 million to $40 million, year-end cash of $90 million to $100 million, and year-end liquidity of $75 million to $85 million after the $15 million minimum cash requirement under its term loan.
Liquidity at March 31, 2013 was $102.7 million after deducting the minimum qualified cash requirement. Qualified cash was $117.1 million and specified collateral value was $379.7 million, compared with a $225.0 million minimum. The company was not in violation of debt covenants and had $12.6 million of letters of credit outstanding.
- Key risks include the cyclical housing market, constrained mortgage and commercial credit, unemployment and broader economic conditions.
- Lumber and other material-price volatility may compress margins when price changes cannot be passed to customers.
- The company has no revolving credit facility and may need additional equity or debt financing if housing conditions deteriorate or cash usage exceeds expectations.
- Potential liquidity actions include facility closures, workforce reductions, lease renegotiations, and divestitures; the filing provides no assurance these measures would be successful.
- First- and fourth-quarter results are seasonally affected by weather. The first quarter was also affected by improving housing demand and lumber inflation.
- The company reported ordinary-course legal proceedings that management does not expect to have a material effect, while noting that future costs could be material for a particular period.
- A $4.4 million deferred-tax-asset valuation allowance and a $0.4 million fair-value loss on stock warrants were notable non-cash items.
Facts Investors Should Verify
- Whether housing starts, customer demand, and market-share gains sustain the reported sales growth.
- Whether lumber prices stabilize or continue to pressure the 19.5% gross margin.
- Whether working-capital investment reverses sufficiently to improve operating cash flow.
- Compliance with the term-loan minimum cash and collateral covenants and the availability of financing without a revolving credit facility.
- Actual fiscal 2013 cash usage, year-end cash, and liquidity compared with management’s stated ranges.
- The ability to generate taxable income and utilize deferred tax assets currently subject to valuation allowances.