Builders FirstSource, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2016; filed August 5, 2016. The company supplies building materials, manufactured components and construction services through approximately 399 locations in 40 states. Results include ProBuild from its July 31, 2015 acquisition, making year-over-year comparisons substantially acquisition-driven.
Financial Results and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $1,677.3 million | $461.5 million | $3,074.4 million | $832.5 million |
| Gross margin | $418.3 million; 24.9% | $110.6 million; 24.0% | $768.1 million; 25.0% | $194.3 million; 23.3% |
| SG&A | $341.9 million; 20.4% | $94.7 million; 20.5% | $668.9 million; 21.8% | $177.7 million; 21.3% |
| Operating income | $76.4 million; 4.5% | $16.0 million; 3.5% | $99.2 million; 3.2% | $16.7 million; 2.0% |
| Interest expense, net | $42.8 million | $12.6 million | $78.0 million | $20.2 million |
| Net income (loss) | $29.4 million | $3.6 million | $12.5 million | $(3.5) million |
| Diluted EPS | $0.26 | $0.03 | $0.11 | $(0.04) |
- Q2 sales increased 263%; management attributed approximately $1,189.4 million of the increase to ProBuild and estimated approximately 6% organic volume growth, partly offset by 1% commodity-price deflation.
- Six-month sales increased 269%; acquisitions contributed approximately $2,172.6 million, while estimated organic volume growth was approximately 12%, partly offset by 4% commodity-price deflation.
- Gross margin improved 90 basis points in Q2 and 170 basis points for the six-month period, primarily from ProBuild and improved profitability in value-added products.
- Operating margin improved despite higher SG&A, while interest expense rose sharply because of acquisition-related debt and lease obligations.
Cash Flow, Balance Sheet, Debt and Liquidity
- Six-month operating cash flow was an outflow of $32.8 million versus an inflow of $17.6 million in the prior-year period. Seasonal increases in receivables and inventory, higher demand and lower accrued liabilities were significant uses of cash.
- Investing cash outflow was $25.7 million, including $22.7 million of capital expenditures and $4.0 million for acquisitions.
- Financing cash flow was an outflow of $0.3 million. The company borrowed $479.0 million under its revolving facility and repaid $435.0 million, along with $42.2 million of long-term debt.
- Cash declined to $6.2 million at June 30, 2016 from $65.1 million at December 31, 2015.
- Total debt and lease obligations before unamortized discounts and issuance costs were $1,978.9 million; net long-term debt and lease obligations were $1,909.8 million, plus $28.5 million of current maturities.
- Debt consisted primarily of $582.6 million of 2021 notes, $417.6 million of 2023 notes, $104.0 million drawn on the revolving facility, $595.9 million under the 2015 term loan and lease obligations.
- Net excess availability under the $800.0 million revolving facility was $611.0 million after $85.0 million of letters of credit. Reported liquidity was $617.2 million, including cash.
- The company was in compliance with debt covenants at June 30, 2016. A 1% increase in rates would increase annual interest expense by approximately $1.0 million on revolving borrowings and $3.8 million on the term loan, based on period-end balances.
Material Changes and Unusual Items
- The ProBuild acquisition materially expanded revenue, geographic reach, product breadth and debt. Q2 2016 included $1,189.4 million of ProBuild sales and $54.0 million of ProBuild net income before allocation of acquisition-related incremental interest expense.
- In February 2016, the company exchanged $282.4 million principal amount of 2023 notes for $267.6 million of 2021 notes, recognizing a $7.8 million net gain on extinguishment.
- In May 2016, the company redeemed $35.0 million of 2021 notes at 103% of principal and recognized a $1.7 million extinguishment loss. Management stated that the debt transactions reduced debt by approximately $14.8 million and annual cash interest expense by approximately $11.8 million.
- The company acquired Alaska Truss in May 2016 for approximately $4.0 million in cash plus $1.0 million of other consideration. Preliminary allocations included $0.8 million of goodwill and $0.8 million of intangible assets.
- The full valuation allowance remained against federal and certain state deferred tax assets, although the company reduced the allowance by $16.0 million in Q2 and $10.9 million year to date. Management indicated that substantially all of the allowance could be reversed as early as the second half of 2016 if profitability continued.
- Depreciation and amortization increased to $61.3 million for the first six months, compared with $6.8 million in the prior-year period, largely reflecting ProBuild-related assets and intangibles.
Outlook, Commentary and Risks
- Management reported Q2 2016 U.S. single-family housing starts of 220,300, up 7.3% year over year, and single-family units under construction up 16.2%.
- Third-party forecasts cited by management projected 809,000 U.S. single-family housing starts in 2016, up 13.2%, and approximately 4.7% growth in repair and remodeling sales.
- Management believes the long-term housing outlook is positive and expects to pursue market-share growth, operating efficiencies and potentially strategic acquisitions.
- Key risks include housing-market cyclicality, interest rates, credit availability, skilled-labor constraints, lumber and other material-price volatility, competitive pricing, seasonality and weather.
- ProBuild integration remains a significant execution risk. The company highlighted the need to realize expected synergies and reduce substantially higher post-acquisition debt.
- Peak-season working-capital needs can produce negative operating cash flow; the company expects receivables and inventory to rise in the second and third quarters.
- Legal proceedings are described as ordinary-course matters that management does not expect to have a material adverse effect, although future costs could be material for a particular period. Environmental remediation exposure also exists.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting. ProBuild remained subject to the company’s 2016 internal-control assessment.
Investor Verification Items
- Verify the sustainability of organic sales growth and gross-margin improvement after separating ProBuild acquisition effects and commodity-price changes.
- Assess ProBuild integration progress, realized synergies, operating leverage and the impact of the West segment, which had no comparable prior-period results.
- Reconcile total debt, maturity schedules, interest rates, covenant requirements and available revolver capacity.
- Monitor seasonal working-capital consumption, negative operating cash flow and the very low cash balance relative to debt obligations.
- Evaluate the likelihood and timing of reversal of the deferred-tax valuation allowance and its effect on future tax expense and cash taxes.
- Review exposure to housing starts, repair-and-remodel demand, lumber prices, labor availability, customer credit and interest-rate changes.
- Confirm the final purchase accounting for Alaska Truss and any subsequent acquisition or integration-related costs.