Builders FirstSource, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016, filed March 1, 2017. The filing also provides unaudited fourth-quarter results. Builders FirstSource supplies building materials, manufactured components, installation, framing, and other construction services through approximately 400 locations in 40 states. Results include ProBuild for the full year following its July 2015 acquisition.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|
| Sales | $6.367 billion | $3.564 billion | Up 78.6% |
| Gross margin | $1.597 billion | $901.5 million | Up 77.1% |
| Gross margin percentage | 25.1% | 25.3% | Down 0.2 percentage points |
| Income from operations | $236.3 million | $90.8 million | Up $145.6 million |
| Operating margin | 3.7% | 2.6% | Up 1.1 percentage points |
| Net income (loss) | $144.3 million | $(22.8) million | Returned to profitability |
| Diluted EPS | $1.27 | $(0.22) | Improved |
| Net cash from operating activities | $158.2 million | $177.0 million | Down $18.8 million |
| Cash and equivalents | $14.4 million | $65.1 million | Down $50.6 million |
| Total debt and lease obligations, gross | $1.831 billion | $1.998 billion | Down $166.5 million |
Fourth Quarter 2016
| Metric | Q4 2016 | Q4 2015 |
|---|
| Sales | $1.547 billion | $1.456 billion |
| Gross margin | $391.6 million | $382.3 million |
| Net income | $6.4 million | $(10.6) million |
| Diluted EPS | $0.06 | $(0.10) |
Material Changes Versus Prior Period
- Sales increased primarily because ProBuild contributed approximately $2.659 billion of incremental sales; excluding ProBuild, estimated sales growth was approximately 4% from higher volume.
- ProBuild contributed approximately $4.520 billion of sales and $190 million of net income in 2016, according to the filing.
- Gross margin percentage declined modestly because commodity price inflation outpaced the company’s short-term customer pricing commitments. ProBuild’s higher-margin repair-and-remodel and retail mix substantially offset this pressure.
- Selling, general and administrative expenses declined to 21.4% of sales from 22.7%, reflecting integration synergies, lower payroll and benefits costs, reduced delivery costs, and location consolidations.
- Management reported approximately $74 million of ProBuild synergy cost savings in 2016, compared with $10 million in 2015. Expected annual run-rate savings remain $100 million to $120 million within two years of closing.
- Interest expense increased to $214.7 million from $109.2 million, reflecting higher debt balances, lease obligations, debt extinguishment losses, and financing-cost write-offs.
- The company recognized a $122.7 million income tax benefit, including a $131.7 million reduction in its deferred-tax valuation allowance. This benefit was a major contributor to reported net income and is not an operating cash inflow.
- Operating cash flow decreased despite higher earnings because receivables and inventories increased with sales growth and cash interest payments rose by approximately $99.5 million.
Debt, Liquidity, and Cash Flow
- At December 31, 2016, gross debt and lease obligations were $1.831 billion; reported debt net of unamortized discount and issuance costs was $1.802 billion.
- Debt consisted principally of $750 million of 5.625% senior secured notes due 2024, $367.6 million of 10.75% senior unsecured notes due 2023, $467.7 million under the term loan, $238.5 million of lease finance obligations, and $7.4 million of capital lease obligations.
- The company had no revolver borrowings at year-end, $84.8 million of outstanding letters of credit, and $667.2 million of net excess borrowing availability under its $800 million asset-based revolving facility. Total liquidity, including cash, was $681.6 million.
- 2016 debt actions included exchanges of 2023 notes, redemption of the 2021 notes, issuance of the 2024 notes, a term-loan repricing and partial repayment, and repurchase of $50 million of 2023 notes. These actions reduced annual cash interest expense by approximately $37 million on a go-forward basis, according to management.
- Cash used in investing activities was $38.3 million, including $42.7 million of capital expenditures. Cash used in financing activities was $170.5 million, primarily due to debt repayments and refinancing costs.
- Expected 2017 capital expenditures are approximately $80 million to $90 million, primarily for rolling stock, equipment, and facility improvements.
- The company was in compliance with its debt covenants at year-end. The revolving facility’s minimum fixed-charge coverage covenant applies if excess availability falls below the greater of $80 million or 10% of the maximum borrowing amount; management did not expect this threshold to be breached in 2017.
Outlook, Commentary, Risks, and Unusual Items
- Management remains positive on the long-term housing outlook, citing demographic growth, an aging housing stock, relatively low interest rates, and continued recovery in housing activity.
- Third-party forecasts cited in the filing projected approximately 847,000 U.S. single-family housing starts in 2017, up 8.4% from 2016, and approximately 4.2% growth in the professional repair-and-remodel market.
- Management expects continued focus on working-capital management, cost control, ProBuild integration, debt reduction, market-share gains, prefabricated components, and value-added services.
- The housing market remains below its historical average, and the business is highly cyclical and seasonal. Weather generally weighs on first- and fourth-quarter construction activity.
- Lumber and panel prices are volatile. Lumber and lumber sheet goods represented 33.5% of 2016 sales, and the company may be unable to pass through material-cost increases quickly enough to protect margins.
- Skilled-labor shortages, credit availability, interest rates, housing affordability, construction activity, customer pricing pressure, and competition could materially affect results.
- Integration-related costs were estimated at $90 million to $100 million over two years; approximately $71 million had been incurred through December 31, 2016, with remaining costs expected in 2017.
- The company reported increased known and threatened construction-defect claims, primarily in two states, beginning in the fourth quarter. The potential loss could not be reasonably estimated at filing, although existing insurance may cover losses above deductibles.
- Other risks include substantial leverage, variable-rate debt, restrictive covenants, long-term lease obligations, potential impairment of goodwill or facilities, customer and supplier concentration, cybersecurity and information-technology integration risks, environmental liabilities, and asbestos-related claims.
- On February 23, 2017, the company repriced and extended its term loan to a $467.7 million facility due in 2024, reducing the applicable interest-rate margin by 0.75 percentage points.
Important Facts for Investors to Verify
- Determine how much of reported earnings reflects sustainable operating improvement versus the $131.7 million deferred-tax valuation allowance release.
- Track ProBuild integration progress, realized synergies, remaining integration costs, facility closures, and any effects on customer or employee retention.
- Assess debt-service capacity relative to operating cash flow, fixed contractual obligations of $2.955 billion, and the company’s limited year-end cash balance.
- Monitor gross-margin sensitivity to lumber prices, customer pricing lags, freight costs, and product mix.
- Review the development, insurance coverage, reserves, and potential financial exposure of construction-defect and other legal claims.
- Verify 2017 housing-start and repair-and-remodel forecasts against actual market activity and evaluate the effect of labor shortages and credit conditions.
- Reconcile reported debt amounts using both gross debt and debt net of discounts and issuance costs, and review the February 2017 term-loan amendment.
- Confirm future cash taxes and the realizability of remaining federal and state net operating loss carryforwards, including the potential effect of Section 382 ownership-change limitations.
