Builders FirstSource, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Builders FirstSource supplies and manufactures structural and related building products and services for U.S. residential new construction, including prefabricated components, windows and doors, lumber, millwork, and installation and framing services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. The filing was signed October 28, 2011.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Sales | $217.2 million, up 20.4% | $586.4 million, up 6.0% |
| Gross margin | $44.4 million; 20.5% of sales | $118.7 million; 20.2% of sales |
| Loss from operations | $(5.9) million | $(29.2) million |
| Net loss | $(11.6) million; $(0.12) per share | $(48.3) million; $(0.51) per share |
| Cash used in operating activities | Not separately provided | $(47.9) million |
- SG&A was $50.2 million in the quarter and $145.9 million for the nine months. SG&A was 23.1% and 24.9% of sales, respectively.
- Interest expense was $5.3 million in the quarter and $16.9 million for the nine months.
- Cash and cash equivalents were $52.9 million at September 30, 2011, versus $103.2 million at December 31, 2010.
- Total debt was $169.1 million, including $20.0 million outstanding under the revolving credit facility and $5.3 million of current maturities. The company repaid the remaining $5.3 million of its 2012 notes in October 2011.
- Net borrowing availability was $47.1 million, and total liquidity was approximately $100.0 million, consisting of cash and net borrowing availability.
- Capital expenditures were $2.7 million for the nine months, compared with $8.2 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased $36.8 million, principally from approximately 22% higher sales volume, customer expansion, and increased sales to existing customers; commodity price deflation partially offset volume growth.
- Nine-month sales increased $33.2 million despite U.S. single-family housing starts declining 12.1% and South Region starts declining 9.9% year over year.
- Gross margin improved by 0.8 percentage points in the quarter and 1.5 percentage points for the nine months, reflecting higher volume, lower fixed costs in cost of sales, improved manufactured-product pricing, and less commodity volatility.
- Operating losses narrowed from $13.3 million to $5.9 million in the quarter and from $46.0 million to $29.2 million for the nine months.
- Interest expense declined $1.6 million in the quarter and $7.9 million for the nine months, primarily because interest-rate swaps expired and prior-year debt-related costs were not repeated.
- Operating cash use increased from $24.1 million to $47.9 million for the nine months. The 2010 comparison included a $33.8 million federal income-tax refund; excluding that refund, 2010 operating cash use was approximately $57.9 million.
- The company closed an idled Georgia distribution facility in the second quarter and recorded $1.9 million of related closure costs. Facility and other exit-cost reserves totaled $3.0 million at September 30, 2011.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects fourth-quarter cash flow to be essentially neutral as seasonal working-capital reductions largely offset operating cash needs, interest payments, and repayment of the 2012 notes. The company projected fiscal-year 2011 cash use of approximately $50 million to $55 million and year-end total liquidity of approximately $80 million.
- Management stated that current liquidity was sufficient for the following twelve months, but the $150 million revolving credit facility matures in December 2012. The company will need to extend, replace, or refinance the facility or raise additional equity or debt; availability and terms are uncertain.
- The credit facility requires minimum liquidity. The company was not in covenant violation at September 30, 2011, but stated that it would not meet the 1.0x fixed-charge coverage ratio if that test were triggered. Further declines in the borrowing base could require repayment of borrowings or additional cash deposits.
- Housing starts remained historically low, with constrained mortgage and commercial credit, excess housing inventory, high unemployment, and a slow economic recovery. Results remain exposed to housing cycles, customer production schedules, competition, weather, lumber and fuel prices, and the ability to pass material-cost increases to customers.
- The company recorded non-cash deferred-tax valuation allowances of $4.7 million in the quarter and $19.6 million for the nine months. Continued losses could require additional allowances; future taxable income could permit reversals.
- Interest-rate swaps with $150 million of aggregate notional value expired May 15, 2011. Based on debt and rates at September 30, 2011, a 1.0% increase in interest rates would increase annual interest expense by approximately $0.2 million.
- Management expects possible additional facility closures, closure costs, or impairment charges if housing conditions worsen or recovery is delayed. Pending legal proceedings are considered not materially adverse by management, although future costs cannot be assured.
Important Facts for Investors to Verify
- Whether the company can sustain sales-volume and gross-margin improvements while housing starts remain depressed.
- Actual fourth-quarter operating cash flow, fiscal-year cash use, and year-end liquidity relative to management’s projections.
- Progress toward refinancing or replacing the revolving credit facility before its December 2012 maturity.
- Borrowing-base availability, minimum-liquidity compliance, and whether the fixed-charge coverage test becomes applicable.
- Changes in deferred-tax valuation allowances, goodwill and asset-impairment assessments, and facility-closure reserves.
- Exposure to lumber, fuel, interest-rate, customer-credit, and residential-construction market volatility.