Builders FirstSource, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Builders FirstSource supplies building materials, manufactured components and construction services to professional contractors, homebuilders, subcontractors and consumers. The July 31, 2015 acquisition of ProBuild substantially expanded the company to approximately 450 locations in 40 states and materially affects year-over-year comparability.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $1,276.1 million | $434.9 million | $2,108.6 million | $1,207.4 million |
| Gross margin | $324.8 million; 25.5% | $97.6 million; 22.5% | $519.1 million; 24.6% | $266.4 million; 22.1% |
| Income from operations | $38.2 million; 3.0% | $15.6 million; 3.7% | $54.8 million; 2.6% | $38.4 million; 3.2% |
| Interest expense, net | $46.0 million | $6.4 million | $66.2 million | $21.7 million |
| Net income (loss) | $(8.8) million | $8.5 million | $(12.3) million | $15.7 million |
| Diluted EPS | $(0.08) | $0.07 | $(0.12) | $0.14 |
Q3 sales increased 193.4%, primarily because of ProBuild. Excluding acquisitions, sales increased 11.8% from higher volume but were reduced by a 7.3% impact from commodity-price deflation. Nine-month sales increased 74.6%; excluding acquisitions, sales rose 8.7%, partly offset by a 5.3% commodity-price effect.
Gross margin percentage improved by 3.0 percentage points in Q3 and 2.5 percentage points for nine months, reflecting improved pricing relative to costs and a greater mix of value-added products. Selling, general and administrative expense rose to 22.5% of sales in Q3 from 18.8% and to 22.0% for nine months from 18.9%, driven by acquisition and integration costs, facility closures, amortization and higher staffing. Interest expense increased substantially because of acquisition financing, commitment fees and amortization of debt-related costs.
- Cash and cash equivalents were $101.2 million at September 30, 2015, compared with $17.8 million at December 31, 2014.
- Operating cash flow was $118.8 million for the first nine months, compared with $30.5 million in the prior-year period.
- Investing cash flow was $(1.491) billion, primarily reflecting the $1.459 billion ProBuild acquisition and $28.3 million of capital expenditures.
- Financing cash flow was $1.456 billion, including $700.0 million of notes, $594.0 million of term-loan proceeds and $111.3 million from a common-stock offering, partly offset by revolving-credit repayments and financing fees.
- Total debt and lease obligations were approximately $2.075 billion gross, including $700.0 million of 2023 notes, $600.0 million of term debt, $135.0 million under the revolving facility, and significant lease-finance obligations.
- Net excess revolving availability was $584.5 million after $135.0 million of borrowings and $80.5 million of letters of credit. Reported liquidity, including cash, was $685.7 million.
Material changes versus the prior comparable period
- The ProBuild acquisition added $811.9 million of sales and $24.8 million of net income for the August 1 through September 30 period included in the 2015 results.
- Debt increased sharply to fund the acquisition, causing substantially higher interest expense and reducing earnings despite stronger operating income.
- The company issued 9.2 million common shares for net proceeds of $111.3 million, increasing shares outstanding to 109.3 million at September 30, 2015 from 98.2 million at year-end 2014.
- Goodwill increased to $596.4 million and intangible assets to $334.2 million, primarily from ProBuild; purchase-price accounting remained preliminary.
- Q3 included $8.8 million of acquisition-related costs, while nine-month acquisition costs totaled $20.4 million. The company also recognized a $1.4 million intangible-asset impairment charge related to facility closures.
- The remaining stock warrants were exercised in April 2015; no warrants were outstanding at quarter-end.
Guidance, outlook, risks and unusual items
Management did not provide formal company-specific earnings or sales guidance in the filing. Management expects continued long-term improvement in housing demand and cited 2015 industry forecasts of approximately 719,000 U.S. single-family housing starts, still below the historical average of approximately 1.0 million. The company intends to pursue ProBuild integration, cost savings, working-capital improvements, debt reduction and potentially strategic acquisitions.
Management estimated ProBuild integration-related costs of approximately $90 million to $100 million over the two years following closing. The company expects integration to be difficult and potentially costly, and anticipated synergies may be delayed or not realized.
- Housing demand remains cyclical and sensitive to interest rates, credit availability, employment, consumer confidence and regional economic conditions.
- Lumber and other commodity-price volatility can affect both revenue and margins; lower lumber prices reduced reported sales in 2015.
- Substantial leverage increases interest expense, refinancing risk, covenant risk and sensitivity to operating underperformance. A 1% increase in rates would increase annual interest expense by approximately $1.4 million on the revolving facility and $6.0 million on the term loan based on quarter-end borrowings.
- The revolving facility includes a minimum fixed-charge coverage ratio of 1.00 to 1.00 if excess availability falls below the specified threshold. The company reported no covenant violations at September 30, 2015.
- Operating leases, lease-finance obligations, letters of credit, facility closures, legal claims, environmental matters and self-insurance exposures represent additional commitments or contingencies.
- The company maintained a valuation allowance against deferred tax assets and recorded a $2.9 million increase for the first nine months. Future utilization depends on sustained taxable income and housing-market improvement.
- ProBuild’s internal controls were excluded from management’s year-end 2015 assessment under permitted SEC rules while integration proceeds; company-wide disclosure controls were deemed effective with reasonable assurance.
Important facts for investors to verify
- Progress and actual cost of ProBuild integration, facility consolidations and realization of expected synergies.
- Debt reduction, interest burden, refinancing needs and compliance with the revolving-facility availability threshold and other covenants.
- Organic sales volume and margin trends excluding ProBuild, particularly the impact of lumber-price deflation and customer pricing.
- Final purchase-price allocations for ProBuild, including goodwill, intangible assets, lease obligations and any subsequent measurement-period adjustments.
- Cash conversion, working-capital requirements and liquidity during seasonal construction slowdowns.
- Future impairment charges, deferred-tax-asset valuation allowances, lease commitments and other integration-related costs.