Builders FirstSource, Inc. — Fiscal 2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013, including fourth-quarter results. Builders FirstSource is a supplier, manufacturer and installer of structural and related building products for residential new construction, operating in 34 markets across nine states in the southern and eastern United States. It had 53 distribution centers, 47 manufacturing facilities and approximately 3,330 full-time equivalent employees.
The business benefited from a recovering housing market. U.S. single-family housing starts increased 15.5% in 2013, although activity remained substantially below historical levels. The company operates as one reportable segment and serves production, regional and custom homebuilders.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Sales | $1,489.9 million | $1,070.7 million | +39.2% |
| Gross margin | $319.9 million | $214.6 million | +49.1% |
| Gross margin percentage | 21.5% | 20.0% | +1.5 percentage points |
| Income from operations | $48.0 million | $(8.7) million | Improved |
| Interest expense, net | $89.6 million | $45.1 million | +$44.5 million |
| Loss from continuing operations | $(42.4) million | $(54.4) million | Improved |
| Net loss | $(42.7) million | $(56.9) million | Improved |
| Net loss per share | $(0.44) | $(0.60) | Improved |
| Cash flow from operations | $(47.6) million | $(66.9) million | Improved |
| Capital expenditures | $15.1 million | $10.4 million | Increased |
Sales increased across all product categories. Lumber and lumber sheet goods generated $526.6 million, or 35.4% of sales; windows and doors generated $308.6 million; prefabricated components generated $294.0 million; millwork generated $136.9 million; and other building products and services generated $223.8 million.
Gross margin benefited from improved customer pricing, fixed-cost leverage and sales mix. Selling, general and administrative expense increased to $271.9 million but declined to 18.3% of sales from 20.8% in 2012. Salaries and benefits, excluding stock compensation, declined to 11.5% of sales from 12.8%.
Operating cash flow remained negative primarily because of working-capital investment and $78.2 million of cash interest payments, including a nonrecurring $39.5 million debt prepayment premium. Cash and cash equivalents declined to $54.7 million from $131.4 million. Total debt was $354.0 million, and stockholders’ equity was $15.4 million.
At December 31, 2013, the company had $350.0 million of 7.625% senior secured notes due 2021 and no borrowings under its $175.0 million revolving credit facility. Net borrowing availability was $157.1 million, and reported liquidity was $211.8 million, including cash. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales grew 39.2%, exceeding the 15.5% increase in U.S. single-family housing starts, reflecting volume growth, pricing and market-share gains.
- Gross margin percentage increased from 20.0% to 21.5%; management attributed 0.9 percentage points to customer pricing, 0.5 points to fixed-cost leverage and 0.1 points to sales mix.
- Operating results improved from an operating loss of $8.7 million to operating income of $48.0 million, but net losses continued because of elevated interest expense.
- The company refinanced its capital structure in May 2013, issuing $350.0 million of 2021 notes and entering into the new $175.0 million revolving facility. Proceeds were used to repay the $225.0 million term loan and $139.7 million of 2016 notes.
- Refinancing generated $48.4 million of interest expense, including a $39.5 million prepayment premium, $6.8 million debt-discount write-off and $2.1 million deferred-loan-cost write-off. Management expects annual cash interest to decline by approximately $16.0 million to about $28.0 million, assuming no revolver borrowings.
- Fourth-quarter 2013 sales were $369.1 million, gross margin was $82.8 million, and net income was $4.5 million, compared with fourth-quarter 2012 sales of $287.6 million and a net loss of $12.0 million.
Guidance, outlook, risks and unusual items
Management expected continued housing-market improvement in 2014 and cited an industry forecast of approximately 821,800 U.S. single-family starts. Its internal liquidity forecast assumed 725,000 starts, stable commodity prices, improving gross margin, capital expenditures of approximately $15 million to $20 million, cash generation of approximately $20 million to $30 million, year-end cash of $75 million to $85 million and liquidity of approximately $230 million to $240 million.
Key risks include the cyclical and seasonal nature of residential construction, mortgage and commercial-credit availability, lumber-price volatility, competitive pricing pressure, customer concentration, fixed costs and operating leases, potential product or supplier disruptions, information-technology and facility disruptions, regulatory and environmental liabilities, and the possibility of additional goodwill, asset-impairment or facility-closure charges.
- The top 10 customers represented approximately 22.5% of 2013 sales; no single customer exceeded 5%.
- The company had approximately $97.95 million of future noncancelable operating-lease payments and $13.9 million of outstanding letters of credit.
- Goodwill was $111.2 million, or 21.6% of total assets. No goodwill or significant continuing-operations asset impairment was recorded in 2013.
- A $15.3 million valuation allowance was recorded against primarily all deferred tax assets, reflecting cumulative losses and uncertainty regarding future realization.
- The company had five idled facilities at year-end and approximately $1.7 million of continuing-operations facility-closure reserves, primarily related to future lease payments.
- Legal proceedings were described as ordinary-course matters that management did not believe would have a material adverse effect, although future costs could still be material in a particular period.
- The 2021 notes and revolving facility restrict dividends, additional debt, asset sales, investments and other corporate actions. No cash dividends were paid in the two most recent fiscal years.
Most important facts for investors to verify
- Whether housing starts, customer volumes and market-share gains support the company’s 2014 liquidity and cash-flow forecast.
- Whether gross-margin improvement persists despite lumber-price volatility and homebuilder pricing pressure.
- Whether refinancing-related cash-interest savings materialize and whether debt remains serviceable with negative or weak operating cash flow.
- Whether working-capital investment, receivables quality and inventory levels remain controlled as sales grow.
- Whether deferred tax assets, goodwill and other long-lived assets remain recoverable if the housing recovery slows.
- Whether customer concentration, lease obligations, letters of credit and facility-closure commitments create additional liquidity needs.