Builders FirstSource, Inc. 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015, with unaudited quarterly data included for the fourth quarter. Builders FirstSource supplies and manufactures building materials, prefabricated components, and construction services for professional contractors, homebuilders, remodelers, and consumers. Following the July 31, 2015 acquisition of ProBuild, the company operated 399 locations in 40 states and reported four geographic segments: Northeast, Southeast, South, and West.
The ProBuild acquisition materially changed the scale and comparability of the business. ProBuild contributed results from August 1 through December 31, 2015, including $1.863 billion of sales and $48.5 million of net income.
Key financial metrics
| Metric | 2015 | 2014 | Change or margin |
|---|---|---|---|
| Sales | $3.564 billion | $1.604 billion | +122.2% |
| Gross margin | $901.5 million | $357.0 million | 25.3% vs. 22.3% |
| Income from operations | $90.6 million | $50.0 million | 2.6% vs. 3.1% of sales |
| Interest expense, net | $109.2 million | $30.3 million | Higher primarily from acquisition financing |
| Income from continuing operations | $(23.0) million | $18.6 million | $(0.22) vs. $0.19 diluted EPS |
| Net income (loss) | $(22.8) million | $18.2 million | $(0.22) vs. $0.19 diluted EPS |
| Cash flow from operations | $177.0 million | $27.5 million | Improved by $149.5 million |
| Capital expenditures | $43.8 million | $25.7 million | Increased to support growth and capacity |
| Cash and cash equivalents | $65.1 million | $17.8 million | Year-end balance |
| Total debt and lease obligations | $1.998 billion | $383.9 million | Substantially higher after ProBuild |
Fourth-quarter 2015 sales were $1.456 billion and gross margin was $382.3 million. Fourth-quarter loss from continuing operations was $10.6 million, or $(0.10) per diluted share.
Sales increased across all product categories following the ProBuild acquisition. 2015 sales included $1.152 billion of lumber and lumber sheet goods, $868.8 million of windows, doors and millwork, $644.4 million of manufactured products, and $364.4 million of other building products and services. Lumber and lumber sheet goods represented 32.3% of sales and were affected by an 11.1% decline in average commodity prices.
Liquidity, debt, and financial condition
- Year-end liquidity was $683.8 million, consisting of $65.1 million of cash and $618.7 million of net excess availability under the $800.0 million revolving credit facility.
- Revolving facility borrowings were $60.0 million, and letters of credit were $79.1 million at December 31, 2015.
- Debt included $350.0 million of 7.625% secured notes due 2021, $700.0 million of 10.75% unsecured notes due 2023, approximately $598.6 million outstanding under the term loan due 2022, and significant lease finance obligations.
- The company repaid $235.0 million of the original $295.0 million drawn under the revolving facility and $1.4 million of term-loan principal during 2015.
- The company was in compliance with its debt covenants at year-end. The revolving facility requires a 1.00-to-1.00 fixed-charge coverage ratio if excess availability falls below the greater of $80 million or 10% of the facility.
- Contractual cash obligations totaled approximately $3.337 billion, including $1.709 billion of long-term debt, $968.8 million of interest, $406.2 million of lease finance obligations, and $244.4 million of operating leases.
Material changes versus the prior comparable period
- The ProBuild acquisition for approximately $1.63 billion expanded the company from its legacy footprint to 399 locations in 40 states, added the West segment, and materially increased assets, liabilities, revenue, and expenses.
- Goodwill increased to $739.6 million from $139.8 million, and intangible assets increased to $189.6 million from $17.2 million, primarily due to ProBuild.
- Total assets increased to $2.882 billion from $574.1 million, while stockholders’ equity increased to $149.2 million from $40.2 million.
- Gross margin improved by 300 basis points, supported by better pricing relative to costs and a higher mix of value-added products. However, SG&A increased to 22.7% of sales from 19.2%, reflecting acquisition and integration costs, facility closures, and higher amortization.
- Interest expense rose by $78.9 million because of acquisition-related debt, commitment fees, amortization of debt costs, and warrant fair-value adjustments.
- Acquisition and transaction-related costs associated with ProBuild totaled $38.6 million in 2015, including $13.2 million of unused bridge and backstop financing fees.
- The company recorded $1.4 million of asset impairment charges related to a customer-relationship intangible asset and $0.7 million of fair-value adjustments on held-for-sale assets; no goodwill impairment was recorded.
Guidance, outlook, commentary, and risks
Management expected continued improvement in housing activity and cited industry forecasts for approximately 825,000 U.S. single-family housing starts in 2016, up from approximately 714,700 in 2015. Repair and remodeling activity was also expected to grow. The company planned 2016 capital expenditures of approximately $90 million to $100 million.
Management estimated that ProBuild integration could generate annual run-rate cost savings of $100 million to $120 million within two years of closing. Total one-time integration costs were estimated at $90 million to $100 million; approximately $43.0 million had been incurred in 2015, with approximately $30.0 million expected in 2016 and the remainder in 2017.
- Primary risks include housing-market cyclicality, interest rates, mortgage and builder credit availability, labor shortages, weather, lumber-price volatility, competitive pricing pressure, and customer concentration.
- The ten largest customers represented approximately 17.0% of 2015 sales, although no single customer exceeded 5%.
- Approximately 33.0% of outstanding debt, or $658.6 million, carried variable interest rates. A 1% rate increase would have increased annual interest expense by approximately $0.6 million on the revolving facility and $3.7 million on the term loan based on year-end balances.
- Integration of ProBuild’s operations, facilities, personnel, and information systems is a multi-year effort and may produce higher costs, disruptions, or lower-than-expected synergies.
- Management maintained a substantial valuation allowance against deferred tax assets, recording $9.7 million of additional valuation allowance in 2015 because of cumulative losses and uncertainty regarding future taxable income.
- The company faces legal, product liability, construction defect, asbestos, environmental, insurance, lease, and facility-closure contingencies. Management did not expect existing legal proceedings to have a material consolidated effect, but future costs could be material in a particular period.
- Subsequent to year-end, the company exchanged $282.4 million of 2023 notes for $267.6 million of 2021 notes, reducing reported long-term debt by approximately $14.8 million and expected annual cash interest expense by approximately $10.0 million.
Investor verification checklist
- Verify the pro forma effect of ProBuild on revenue, earnings, cash flow, leverage, and segment comparability.
- Reconcile reported debt, lease finance obligations, operating leases, maturity schedules, and post-year-end note exchanges.
- Track achievement of the $100 million to $120 million annual cost-savings target against integration costs and facility closures.
- Assess whether housing starts, repair-and-remodel demand, lumber prices, and customer credit conditions support management’s 2016 outlook.
- Monitor liquidity, borrowing-base availability, letters of credit, variable-rate exposure, and compliance with fixed-charge coverage requirements.
- Evaluate the recoverability of goodwill, intangible assets, and deferred tax assets, particularly if housing recovery or margins weaken.
- Review the exclusion of ProBuild from management’s internal-control assessment; ProBuild represented approximately 56% of consolidated assets and 52% of consolidated sales for 2015.