Builders FirstSource, Inc. Form 10-Q Summary
Business Context and Reporting Period
Builders FirstSource, Inc. supplies and manufactures structural and related building products and installation services primarily for U.S. residential new construction. The filing covers the unaudited three and six months ended June 30, 2014, compared with the corresponding 2013 periods. The company operates as one segment across prefabricated components, windows and doors, lumber and lumber sheet goods, millwork, and other building products and services.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|---|---|
| Sales | $426.5 million | $398.1 million | $772.5 million | $717.9 million |
| Gross margin | $93.8 million; 22.0% | $82.2 million; 20.7% | $168.7 million; 21.8% | $144.6 million; 20.1% |
| Income from operations | $17.4 million; 4.1% | $13.2 million; 3.4% | $22.8 million; 2.9% | $14.4 million; 2.0% |
| Interest expense, net | $6.5 million | $61.1 million | $15.3 million | $73.6 million |
| Net income (loss) | $10.6 million | $(48.2) million | $7.2 million | $(60.0) million |
| Diluted EPS | $0.09 | $(0.50) | $0.07 | $(0.62) |
- Sales increased 7.1% in the second quarter and 7.6% for the six-month period. Management attributed the increase primarily to higher volume, partly offset by lower commodity lumber prices.
- SG&A increased 10.7% in the quarter and 12.0% year to date. SG&A as a percentage of sales rose to 17.9% from 17.3% in the quarter and to 18.9% from 18.1% year to date.
- Cash flow from operations was $0.7 million for the first six months of 2014, compared with $(85.9) million in 2013. Capital expenditures were $12.1 million and acquisition spending was $8.7 million.
- Cash and cash equivalents were $34.5 million at June 30, 2014, compared with $54.7 million at December 31, 2013.
- Total debt was approximately $353.9 million, consisting principally of $350.0 million of 7.625% senior secured notes due 2021. The company had no outstanding borrowings under its $175.0 million revolving facility at June 30, 2014.
- Net borrowing availability was $159.4 million, and reported liquidity, including cash on hand, was $193.9 million. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially as the company moved from a net loss to net income. The principal earnings benefit was the sharp reduction in interest expense following the 2013 refinancing; the 2013 comparison included a $39.5 million prepayment premium and other debt-related write-offs.
- Gross margin improved by 130 basis points in the second quarter and 170 basis points for the six-month period, primarily due to improved customer pricing and lower commodity price volatility.
- Prefabricated components and windows and doors were the fastest-growing product categories in the second quarter, increasing 16.4% and 16.8%, respectively. Lumber and lumber sheet goods sales declined 3.6% because of lower commodity prices.
- Working capital usage continued during the seasonal construction period. Accounts receivable increased to $166.8 million and inventories to $140.7 million at June 30, 2014, from $143.0 million and $123.6 million, respectively, at year-end.
- On June 30, 2014, the company acquired Slone Lumber Company for $8.7 million, including $4.1 million of preliminary goodwill. The acquisition was not material to reported results because it closed at period-end.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected year-end cash of approximately $45 million to $55 million and liquidity of approximately $205 million to $215 million. These estimates could change with housing starts, sales volumes, and other operating assumptions.
- Management cited a long-term positive housing outlook but noted that single-family housing starts remained below historical averages, while credit availability for smaller builders and potential homebuyers remained constrained.
- The company expects continued cyclicality and seasonal pressure, including weaker first- and fourth-quarter activity from weather and higher working-capital needs during the second and third quarters.
- Commodity lumber prices, freight costs, customer pricing, competition, labor availability, interest rates, mortgage credit, economic conditions, and homebuilder production schedules may materially affect results.
- On July 31, 2014, the company acquired West Orange Lumber Company for $9.8 million and borrowed $30.0 million under the revolving facility at a stated interest rate of 1.98%. These events occurred after the reporting date.
- The company recorded net reductions to its deferred-tax valuation allowance of $4.1 million in the quarter and $3.0 million year to date. Future taxable income could further reduce the allowance and tax expense, while future losses could increase it.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect, although future legal or environmental costs could be material in a particular period.
- The company will adopt the new revenue-recognition standard beginning January 1, 2017 and was evaluating its impact. Management did not expect the revised discontinued-operations guidance to materially affect the financial statements.
Most Important Facts for Investors to Verify
- Whether housing starts, customer volume, and market-share gains support the company’s sales growth assumptions.
- Whether improved customer pricing and gross margins can offset commodity lumber deflation, wage growth, delivery costs, and other operating-cost increases.
- The sustainability of positive operating cash flow as receivables and inventories rise during the seasonal construction period.
- Available liquidity, borrowing-base capacity, covenant compliance, and the effect of the $30.0 million post-quarter-end revolver borrowing.
- The integration, purchase-price allocation, and financial contribution of the Slone and West Orange acquisitions.
- The sensitivity of results to housing-market conditions, material prices, interest rates, customer credit, and weather.
- Future changes in the deferred-tax valuation allowance and their effect on the effective tax rate.