Builders FirstSource, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The company supplies and manufactures structural and related building products and services for U.S. residential new construction. The financial statements are unaudited.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Sales | $402.9 million | $291.8 million | $1,120.8 million | $783.1 million |
| Gross margin | $92.5 million | $57.7 million | $237.1 million | $156.5 million |
| Gross margin percentage | 23.0% | 19.8% | 21.2% | 20.0% |
| Income (loss) from operations | $20.3 million | $(1.6) million | $34.7 million | $(8.8) million |
| Interest expense, net | $7.5 million | $10.6 million | $81.1 million | $34.2 million |
| Net income (loss) | $12.8 million | $(13.6) million | $(47.2) million | $(44.8) million |
| Diluted EPS | $0.13 | $(0.14) | $(0.49) | $(0.47) |
- Third-quarter sales increased 38.1%, driven by estimated volume growth of 29.6% and pricing growth of 8.5%. Nine-month sales increased 43.1%, with estimated volume and pricing contributions of 29.5% and 13.6%, respectively.
- Q3 gross margin expanded 320 basis points, while SG&A declined to 18.0% of sales from 20.1%. Nine-month SG&A declined to 18.1% of sales from 21.0%.
- Nine-month net loss included approximately $48.4 million of refinancing-related interest expense, including a $39.5 million prepayment premium and debt discount and deferred-cost write-offs.
- Net cash used in operating activities was $56.2 million for the nine months, compared with $48.8 million in 2012. Working-capital investment used approximately $31.8 million, and cash interest payments were $64.3 million.
- Cash and cash equivalents were $50.4 million at September 30, 2013, compared with $131.4 million at December 31, 2012. Total current assets were $351.4 million and total current liabilities were $151.5 million.
- Total debt was approximately $354.0 million before current maturities. Stockholders’ equity declined to $5.5 million from $48.1 million at year-end 2012.
Material changes versus the prior comparable period
- Sales growth occurred across all product categories. Q3 increases ranged from 25.0% in other building products and services to 47.8% in prefabricated components. Lumber and lumber sheet goods sales increased 41.3% in Q3 and 60.4% for the nine-month period.
- The company completed a major debt refinancing in May 2013. It issued $350.0 million of 7.625% senior secured notes due 2021 and entered into a $175.0 million senior secured revolving facility, replacing the $225.0 million term loan and $139.7 million of 2016 notes.
- Although refinancing costs materially increased nine-month interest expense, management expects annual cash interest to decline by approximately $16.0 million to approximately $28.0 million, assuming no revolver borrowings.
- Q3 interest expense declined by $3.1 million year over year following the refinancing.
- An Ohio facility sold in April 2013 generated an approximately $0.2 million gain; discontinued operations also included closed-facility lease and estimate-related expenses.
Liquidity, outlook, risks, and unusual items
- At September 30, 2013, the company had $161.1 million of net borrowing availability under the revolving facility after $13.9 million of letters of credit and no outstanding revolver borrowings. Reported liquidity was $211.5 million, including cash.
- The company stated that liquidity was sufficient for at least the next 12 to 18 months and that it was in compliance with all debt covenants. A fixed-charge coverage covenant applies if excess availability falls below the specified threshold.
- Management cited improving housing activity and a positive long-term housing outlook, but noted that single-family housing starts remained below historical averages. The company referenced an industry forecast of 629,000 U.S. single-family housing starts for 2013.
- Key operating risks include housing-market cyclicality, mortgage and commercial-credit availability, unemployment and economic conditions, commodity lumber-price volatility, competition, weather, customer concentration and the ability to pass material and freight-cost increases to customers.
- Deferred tax assets remain subject to valuation allowances. The company recorded a $17.9 million valuation allowance against deferred tax assets generated by nine-month operating losses and reduced the allowance by $3.4 million in Q3 as it generated quarterly income.
- Legal proceedings are described as ordinary-course matters that management does not expect to have a material adverse effect, although future costs cannot be assured. Environmental remediation expenditures were minimal at the filing date, but additional obligations could arise.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2013, with no material changes in internal control over financial reporting identified during the period.
Important facts for investors to verify
- Reconcile the reported nine-month net loss and cash usage after excluding the nonrecurring refinancing charges and the associated effect on future cash interest.
- Review the terms, collateral priorities, covenants and maturity profile of the 2021 Notes and the 2013 revolving facility.
- Monitor cash conversion, receivables, inventories and seasonal working-capital needs, particularly because operating cash flow was negative during the peak construction season.
- Assess whether sales and margin gains are sustainable after separating housing volume, lumber-price movements, pricing and mix.
- Evaluate the recoverability of deferred tax assets and the potential for additional valuation allowances.
- Review the company’s dependence on residential construction, access to customer credit, lumber prices, weather and competitive pricing.