Builders FirstSource, Inc. — Q3 2014 Form 10-Q Summary
Business context and reporting period
Builders FirstSource supplies, manufactures, and installs structural and related building products for U.S. residential new construction. The filing covers the unaudited three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. The company reports one operating segment and five product categories.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Sales | $434.9 million | $402.9 million | $1,207.4 million | $1,120.8 million |
| Gross margin | $97.6 million; 22.5% | $92.5 million; 23.0% | $266.4 million; 22.1% | $237.1 million; 21.2% |
| Income from operations | $15.6 million; 3.7% | $20.3 million; 5.0% | $38.4 million; 3.2% | $34.7 million; 3.1% |
| Net income (loss) | $8.5 million | $12.8 million | $15.7 million | $(47.2) million |
| Diluted EPS | $0.07 | $0.13 | $0.14 | $(0.49) |
| Net cash from operating activities | Not separately reported for the quarter | $30.5 million | $(56.2) million |
- Q3 sales increased 7.9%; management attributed the increase to 2.6% from acquisitions and 6.6% from same-store volume, partly offset by a 1.3% commodity-price deflation impact. Same-store sales increased 5.3%.
- Nine-month sales increased 7.7%, with same-store sales up 6.8%. Sales growth was strongest in windows and doors, millwork, and prefabricated components; lumber and lumber sheet goods declined 0.6% because of lower commodity prices.
- Q3 gross margin percentage declined 0.5 percentage points, while the nine-month gross margin percentage improved 0.9 percentage points.
- Q3 SG&A rose 13.3% to $82.0 million, or 18.8% of sales, from 18.0%. Increases reflected higher headcount, health costs, stock compensation, delivery expense, occupancy, and acquisition-related costs.
- At September 30, 2014, cash was $67.8 million, total assets were $609.3 million, and stockholders’ equity was $35.2 million.
- Total debt was approximately $383.9 million, including $350.0 million of 7.625% senior secured notes due 2021, $30.0 million drawn under the revolving facility, and $3.9 million of other debt. Current maturities were $30.1 million.
- Liquidity was $197.2 million, consisting of $67.8 million of cash and $129.4 million of net revolving-facility availability. Excess availability was $195.7 million, and the company reported no debt covenant violations.
Material changes versus the prior comparable period
- Operating income declined 23.4% in Q3 despite higher sales, primarily because SG&A grew faster than revenue and gross margin percentage contracted.
- Net income declined 33.5% in Q3, partly reflecting a $0.5 million tax expense versus a $0.1 million tax benefit in Q3 2013 and lower operating income.
- Nine-month net income improved materially from a $47.2 million loss to $15.7 million of income. The prior-year period included substantial refinancing-related interest, debt discount write-offs, debt issuance costs, and a $39.5 million prepayment premium.
- Operating cash flow improved by $86.7 million year over year, while investing cash usage increased because of acquisitions and higher capital expenditures.
- The company acquired Slone Lumber, West Orange Lumber, and Truss Rite for aggregate cash consideration of $33.2 million during the period, recording $10.8 million of goodwill and $8.4 million of acquired intangible assets.
- On October 1, 2014, after quarter-end, the company acquired Trim Tech for $19.4 million in cash; purchase-price allocation was incomplete as of the filing date.
Outlook, risks, contingencies, and unusual items
- Management stated that housing conditions were improving but remained below historical levels. Q3 U.S. single-family housing starts increased 7.2% year over year, while South Region starts increased 10.5%.
- The company cited a positive long-term housing outlook, supported by demographic growth, relatively low interest rates, aging housing stock, and expected recovery in housing demand. It also expects to pursue selective strategic acquisitions.
- Management forecast year-end 2014 cash of approximately $40 million to $50 million and liquidity of approximately $170 million to $180 million, subject to housing volumes, acquisitions, and borrowing activity.
- Key risks include housing-market cyclicality, limited mortgage and commercial credit, customer concentration and credit exposure, commodity lumber-price volatility, freight and labor costs, competition, weather, and the ability to pass cost increases to customers.
- The company recorded non-cash reductions to its deferred-tax-asset valuation allowance of $3.3 million in Q3 and $6.3 million for the nine-month period. Future losses could require additional valuation allowances and adversely affect tax expense.
- Warrant fair-value adjustments reduced reported net interest expense by $1.3 million for the nine-month period and $1.3 million in Q3; changes in the share price or volatility could affect future earnings.
- Legal proceedings are considered ordinary-course matters, and management does not expect them to have a material adverse effect, although future costs cannot be assured. Environmental remediation exposure also exists.
- New accounting guidance on revenue recognition and going-concern disclosures was not yet adopted; the company was evaluating its impact.
Important facts for investors to verify
- Whether sales-volume growth and acquisition contributions offset continuing commodity-price deflation and margin pressure.
- The sustainability of SG&A growth, particularly labor, health-care, delivery, occupancy, and stock-compensation costs.
- Debt maturities, borrowing-base availability, covenant compliance, and the ability to maintain projected liquidity after acquisitions and capital expenditures.
- The operating contribution and purchase-price allocations of the three 2014 acquisitions and the post-quarter-end Trim Tech acquisition.
- The extent to which deferred-tax valuation allowance reversals affect future effective tax rates and reported earnings.
- Exposure to housing starts, mortgage availability, customer credit quality, lumber prices, and seasonal weather-related working-capital needs.