Builders FirstSource, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013; filed August 2, 2013. Builders FirstSource supplies and manufactures structural and related building products and services primarily for U.S. residential new construction. The filing presents one operating segment and unaudited interim results.
Key Financial Metrics
| Metric | Three Months 2013 | Three Months 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Sales | $398.1 million | $271.9 million | $717.9 million | $491.3 million |
| Gross margin | $82.2 million; 20.7% | $53.7 million; 19.7% | $144.6 million; 20.1% | $98.8 million; 20.1% |
| Operating income (loss) | $13.2 million | $(1.4) million | $14.4 million | $(7.2) million |
| Interest expense, net | $61.1 million | $10.5 million | $73.6 million | $23.6 million |
| Net loss | $(48.2) million | $(12.1) million | $(60.0) million | $(31.2) million |
| Net loss per share | $(0.50) | $(0.13) | $(0.62) | $(0.33) |
| Cash flow from operations | Not separately reported | Not separately reported | $(85.9) million | $(37.8) million |
- Second-quarter sales increased 46.4%; six-month sales increased 46.1%.
- Management estimated second-quarter sales growth was attributable 28.9% to volume and 17.5% to price. Six-month growth was estimated at 29.4% from volume and 16.7% from price.
- Second-quarter SG&A was $69.0 million, or 17.3% of sales, versus 20.2% in the prior-year quarter. Six-month SG&A was 18.1% of sales versus 21.5%.
- Second-quarter operating income improved from a loss to $13.2 million, but the company remained loss-making because of elevated interest expense.
- Working-capital investment drove significant cash use: receivables increased cash usage by $41.1 million and inventories by $20.2 million during the first six months.
Balance Sheet, Debt and Liquidity
- At June 30, 2013, cash and cash equivalents were $25.5 million, down from $131.4 million at December 31, 2012. Restricted cash was zero versus $12.1 million at year-end.
- Total assets were $505.5 million; total liabilities were $514.0 million. Stockholders’ equity was a deficit of $8.5 million, compared with positive equity of $48.1 million at December 31, 2012.
- Long-term debt, net of current maturities, was $353.9 million. The debt consisted primarily of $350.0 million of 7.625% senior secured notes due 2021 and $4.0 million of other long-term debt.
- In May 2013, the company issued the 2021 Notes and entered into a new $175.0 million senior secured revolving credit facility due 2018. The refinancing replaced the $225.0 million term loan and $139.7 million of 2016 Notes.
- At June 30, 2013, the revolving facility had no borrowings, $12.7 million of outstanding letters of credit, and $162.3 million of net borrowing availability.
- Reported liquidity was $170.3 million, consisting of $25.5 million of cash and $162.3 million of net revolver availability, less the $17.5 million minimum availability requirement. Management stated that liquidity should be sufficient for at least the next 12 to 18 months.
- The company was not in violation of debt covenants at June 30, 2013. A minimum fixed-charge coverage ratio of 1.00 to 1.00 applies if excess availability falls below specified thresholds.
Material Changes and Unusual Items
- The refinancing generated a $48.4 million loss recorded in second-quarter interest expense, including a $39.5 million term-loan prepayment premium, $6.8 million of debt-discount write-offs and $2.1 million of deferred-loan-cost write-offs.
- Management expects the new capital structure to reduce annual cash interest by approximately $16.0 million, to approximately $28.0 million, assuming no revolver borrowings.
- Operating cash use increased to $85.9 million from $37.8 million in the prior-year period. Cash interest payments were $63.9 million, including the $39.5 million prepayment premium.
- Cash provided by investing activities was $9.1 million, primarily because $13.0 million of restricted cash was released. Capital expenditures were $4.6 million.
- A facility classified as held for sale in Ohio was sold in April 2013, producing an approximately $0.2 million gain included in discontinued operations.
- The company recorded valuation allowances of $17.0 million for the quarter and $21.4 million for the six-month period against deferred tax assets generated by net operating losses.
- BlackRock Kelso exercised warrants on a cashless basis, resulting in the issuance of 128,169 common shares. No common-stock repurchases were reported during the quarter.
Outlook, Management Commentary and Risks
- U.S. single-family housing starts were improving but remained well below historical levels. The annualized rate at June 30, 2013 was 591,000, and management cited an NAHB forecast of 644,000 starts for 2013.
- Management believes long-term housing demand is favorable because of population growth, an aging housing stock and relatively low interest rates. It expects to benefit from increased construction activity and market-share opportunities.
- Near-term results remain sensitive to housing starts, homebuilder credit availability, mortgage-market conditions, employment, consumer confidence, weather, customer production schedules and competition.
- Lumber and lumber sheet-goods prices averaged 21.5% higher year over year in the second quarter and 35.6% higher for the first six months. Commodity inflation can pressure margins when customer pricing commitments delay pass-through of cost increases.
- Gross margin benefited from volume and fixed-cost leverage in the second quarter, but six-month margin benefits were offset by commodity lumber inflation.
- Seasonality typically increases working-capital needs in the second and third quarters and can produce negative operating cash flow during peak construction activity.
- Management believes ordinary-course legal proceedings will not materially affect consolidated results, although future legal or environmental costs could be material in a particular period.
- Disclosure controls and procedures were concluded to be effective, with no material changes in internal control over financial reporting identified during the period.
Investor Verification Checklist
- Verify the sustainability of sales growth after separating volume gains from lumber-price inflation and other pricing effects.
- Monitor whether gross-margin improvement persists as lumber prices declined approximately 30% during the latter half of the second quarter.
- Reconcile operating cash flow with receivables, inventory growth and seasonal working-capital requirements.
- Review the terms, collateral package, restrictive covenants and fixed-charge coverage trigger under the 2021 Notes and 2013 revolving facility.
- Assess liquidity against the company’s continuing losses, negative equity and approximately $28.0 million of expected annual cash interest after refinancing.
- Evaluate the realizability of deferred tax assets and the potential for additional valuation allowances.
- Consider exposure to housing-market weakness, homebuilder credit constraints, customer concentration, weather, competition and volatile material costs.