Builders FirstSource, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2011; filed July 29, 2011. Builders FirstSource supplies and manufactures structural and related building products and services for U.S. residential new construction. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $206.4 million | $211.5 million | $369.2 million | $372.9 million |
| Gross margin | $42.8 million; 20.7% | $38.7 million; 18.3% | $74.2 million; 20.1% | $68.2 million; 18.3% |
| Loss from operations | $(8.0) million | $(12.7) million | $(23.3) million | $(32.7) million |
| Net loss | $(15.5) million | $(19.0) million | $(36.7) million | $(50.4) million |
| Net loss per share | $(0.16) | $(0.20) | $(0.39) | $(0.57) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(38.8) million | $(22.4) million |
- Sales mix: Q2 sales declined 2.4%. Lumber and lumber sheet goods decreased 8.2%, while other building products and services increased 4.0%; windows and doors increased 0.3%.
- Margins and expenses: Gross margin improved by 2.4 percentage points in Q2 and 1.8 points year to date, reflecting improved manufactured-product pricing, lower commodity volatility, increased volume, and lower fixed costs. SG&A declined 4.8% in Q2 and 5.2% year to date, partly due to headcount reductions.
- Balance sheet: Cash and cash equivalents were $63.1 million at June 30, 2011, compared with $103.2 million at December 31, 2010. Total assets were $396.8 million and stockholders’ equity was $126.9 million.
- Debt: Total debt was approximately $169.1 million, including $20.0 million outstanding under the revolving facility, $5.3 million of current maturities, and $139.7 million of 2016 notes. Net interest expense was $5.7 million in Q2 and $11.5 million year to date.
- Liquidity: Net borrowing availability was $48.9 million, and total liquidity was $112.0 million, consisting of cash and borrowing availability. The company reported compliance with its debt covenants at June 30, 2011.
Material changes versus prior comparable periods
- Despite a 13.1% decline in Q2 U.S. single-family housing starts and a 20.8% decline in average lumber prices, sales fell only 2.4%.
- Operating losses narrowed by $4.7 million in Q2 and $9.4 million for the first six months, primarily from stronger gross margins and lower SG&A.
- Interest expense declined by $0.9 million in Q2 and $6.3 million year to date. The year-to-date comparison benefited from the absence of certain 2010 debt issuance and recapitalization costs and from the expiration of interest-rate swaps.
- Operating cash usage increased to $38.8 million from $22.4 million. The 2010 period included a $33.8 million federal income tax refund; excluding that refund, 2010 operating cash usage was approximately $56.2 million.
- Cash declined by $40.1 million during the first six months, compared with a $40.5 million increase in the prior-year period, which benefited from rights-offering proceeds and other financing activity.
Outlook, risks, contingencies, and unusual items
- Management cited historically low housing activity, constrained mortgage and commercial credit, excess home inventory, unemployment, and a slow economic recovery. The company reported that NAHB forecast 437,000 U.S. single-family housing starts for 2011, approximately 7.2% below 2010.
- Management continues to view the long-term housing outlook as positive but expects significant near-term uncertainty. Priorities include conserving liquidity, controlling costs, managing customer credit exposure, improving vendor terms, and expanding multi-family and light commercial activity.
- The company expects approximately $50 million of cash usage for fiscal 2011, including $5.3 million to repay the remaining 2012 notes, and expects year-end total liquidity of approximately $85 million if market conditions continue. Management believes current liquidity is sufficient for the next twelve months.
- The company would not meet the 1.0x fixed-charge coverage ratio based on its 2011 forecast if that covenant were triggered. Management expects to remain above the minimum liquidity requirement, but further borrowing-base declines could require repayment of revolver borrowings or additional cash deposits.
- A Georgia distribution facility was closed during Q2, resulting in $1.9 million of facility closure costs. Facility and other exit-cost reserves totaled $3.1 million at June 30, 2011, primarily for future lease obligations.
- The company recorded deferred-tax valuation allowances of $6.8 million in Q2 and $14.9 million year to date. Future taxable income could reverse these allowances; additional losses could require further allowances.
- Interest-rate swaps with aggregate notional amounts of $150 million expired on May 15, 2011. The 2016 notes bear interest at three-month LIBOR, subject to a 3.0% floor, plus 10.0%; management estimated that a 1% increase in interest rates would add approximately $0.2 million of annual interest expense.
- Legal proceedings are described as ordinary-course matters that management does not expect to have a material adverse effect, although future costs cannot be assured. Additional risks are incorporated by reference to the 2010 Form 10-K.
Investor verification points
- Verify the company’s ability to maintain the minimum liquidity requirement and avoid triggering the 1.0x fixed-charge coverage covenant.
- Reconcile the forecast of approximately $50 million in fiscal-year cash usage with the $85 million projected year-end liquidity.
- Monitor housing starts, customer credit availability, lumber prices, and the company’s ability to pass through material and freight-cost changes.
- Assess whether improved gross margins and lower SG&A are sustainable despite continued depressed housing demand.
- Review the remaining debt maturities, revolver borrowing-base calculations, letters of credit, and the $5.3 million 2012 notes repayment.
- Evaluate potential additional facility closures, impairment charges, lease obligations, and changes in deferred-tax valuation allowances.