Builders FirstSource, Inc. — Form 10-Q Summary
Business context and reporting period
Builders FirstSource supplies and manufactures structural and related building products and construction services for U.S. residential new construction. The company operates as one segment across prefabricated components, windows and doors, lumber and lumber sheet goods, millwork, and other building products and services. This unaudited filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales | $371.0 million | $345.9 million | 7.2% increase |
| Gross margin | $83.7 million; 22.6% | $74.9 million; 21.7% | Margin up 0.9 percentage points |
| SG&A expense | $82.8 million; 22.3% of sales | $69.3 million; 20.0% | 19.5% increase |
| Income from operations | $0.6 million | $5.4 million | Declined $4.8 million |
| Net loss | $7.1 million; $0.07 per diluted share | $3.4 million; $0.03 per diluted share | Loss increased $3.7 million |
| Operating cash flow | $9.9 million | $13.8 million | Declined $3.9 million |
| Capital expenditures | $9.1 million | $5.3 million | Increased $3.8 million |
At March 31, 2015, cash and cash equivalents were $36.8 million, total assets were $625.5 million, and stockholders’ equity was $34.0 million. Total debt was $408.9 million, consisting primarily of $350.0 million of 2021 notes and $55.0 million outstanding under the $175.0 million revolving credit facility. Net borrowing availability was $104.4 million, and reported liquidity, including cash on hand, was $141.2 million. Excess availability under the facility was $140.5 million, and the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales increased 7.2%; management attributed 6.0% of the increase to acquisitions and 2.2% to higher volume, partly offset by a 1.0% reduction from commodity price deflation.
- Gross margin improved because of better customer pricing relative to costs and a higher mix of value-added sales.
- SG&A increased $13.5 million, driven by ProBuild transaction costs, higher employee costs, stock compensation, acquisitions, facility expansion, and increased depreciation and amortization.
- Operating income fell despite higher sales and gross margin because SG&A grew faster than revenue. Interest expense declined $1.2 million, primarily because of a smaller unfavorable fair-value adjustment on stock warrants.
- Operating cash flow decreased as additional cash was invested in receivables, inventory, new or relocated facilities, and acquisitions. Investing cash use increased to $14.9 million, including $5.8 million for the Timber Tech acquisition.
- The company borrowed an additional $25.0 million under its revolving credit facility during the quarter.
- Product-category sales increased for prefabricated components, windows and doors, millwork, and other products and services; lumber and lumber sheet goods sales declined 1.0% due primarily to a 5.9% decline in market prices.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal company-specific earnings guidance. It reported improving housing activity but noted that single-family housing starts remained below historical averages. First-quarter U.S. single-family housing starts increased 4.4% year over year, while starts in the South Region increased 5.3%. The NAHB forecast 738,000 U.S. single-family starts for 2015, approximately 14.1% above 2014.
Management expects long-term housing demand to benefit from demographic growth, low interest rates, an aging housing stock, and limited skilled construction labor. It intends to pursue market-share growth, cost control, working-capital management, and selective acquisitions. Results remain seasonal, with weather generally affecting the first and fourth quarters and working-capital needs typically increasing during the second and third quarters.
- On February 9, 2015, the company acquired Timber Tech for $5.8 million in cash. Preliminary purchase accounting recorded $1.3 million of goodwill.
- On April 13, 2015, after the reporting date, the company agreed to acquire ProBuild for approximately $1.63 billion, subject to adjustments and customary closing conditions. The transaction was subject to antitrust review and financing requirements.
- Committed financing for the proposed ProBuild acquisition included an $800 million senior secured credit facility, a $550 million senior secured term loan, and a $750 million bridge facility or substitute unsecured notes. Equity commitments totaled $100 million if a proposed public equity offering did not raise at least $100 million.
- A reverse termination fee of $81.3 million could become payable under specified circumstances, including certain failures to obtain regulatory approval or financing.
- The remaining 0.7 million warrants were exercised on April 14, 2015. The company expected to record an approximately $4.7 million non-cash fair-value adjustment as interest expense in the second quarter.
- The company increased its valuation allowance on deferred tax assets by $3.1 million in the quarter. It reported $263.5 million of federal and $391.8 million of state operating loss carryforwards, subject to potential Section 382 limitations.
- Key risks include housing-market and credit conditions, weather, lumber and freight-price volatility, competition, customer concentration and credit exposure, execution and financing of the ProBuild transaction, and potential environmental or legal liabilities. Management did not expect current legal proceedings to have a material adverse effect, but stated that future costs could be material for a particular period.
Important facts for investors to verify
- Confirm the status, closing conditions, regulatory approvals, financing, equity issuance, and final purchase price of the ProBuild acquisition.
- Assess the effect of the proposed acquisition on leverage, liquidity, interest expense, covenant compliance, and integration costs.
- Verify the second-quarter accounting impact of the approximately $4.7 million warrant fair-value adjustment.
- Monitor whether housing starts, customer demand, and commodity prices support management’s margin and sales expectations.
- Evaluate the sustainability of liquidity given seasonal working-capital needs, capital expenditures, acquisition spending, and existing debt maturities.
- Review the realizability of deferred tax assets and any future changes to the valuation allowance or Section 382 limitations.