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 filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Results are unaudited and reflect one operating segment.
Financial Performance and Position
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Sales | $461.5 million | $426.5 million | $832.5 million | $772.5 million |
| Gross margin | $110.6 million | $93.8 million | $194.3 million | $168.7 million |
| Gross margin percentage | 24.0% | 22.0% | 23.3% | 21.8% |
| Income from operations | $15.9 million | $17.4 million | $16.6 million | $22.8 million |
| Net income (loss) | $3.6 million | $10.6 million | $(3.5) million | $7.2 million |
| Diluted EPS | $0.03 | $0.09 | $(0.04) | $0.07 |
- Q2 sales increased 8.2%; six-month sales increased 7.8%. Management attributed growth to higher volume and acquisitions, partially offset by commodity-price deflation.
- Q2 gross margin increased 200 basis points, and six-month gross margin increased 150 basis points, primarily from improved customer pricing relative to costs and a greater mix of value-added products.
- SG&A rose to 20.5% of sales in Q2 from 17.9% and to 21.3% for the six months from 18.9%. Increases reflected ProBuild acquisition-related costs, higher employee costs, depreciation and amortization, stock compensation, and expanded operations.
- Interest expense increased to $12.6 million in Q2 and $20.2 million for the six months. The increase primarily included a non-cash fair-value adjustment associated with exercising the remaining stock warrants: approximately $4.7 million in Q2 and $4.6 million for the six months.
- Cash provided by operating activities was $17.6 million for the six months, compared with $0.7 million in 2014. Capital expenditures were $14.3 million, and cash used for acquisitions was $5.8 million.
- Cash and cash equivalents were $40.2 million at June 30, 2015, versus $17.8 million at December 31, 2014.
- Total debt was $408.9 million, consisting principally of $350.0 million of 2021 notes, $55.0 million under the revolving facility, and $3.9 million of other debt. Current maturities were $55.1 million.
- The $175.0 million revolving facility had $103.6 million of net borrowing availability and $142.8 million of excess availability, including qualified cash. Reported liquidity was $143.8 million, and the company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Product-category sales increased for prefabricated components, windows and doors, millwork, and other building products and services. Lumber and lumber sheet-goods sales declined 2.5% in Q2 and 1.9% for the six months because of lower market prices.
- Despite stronger sales and gross margins, operating income declined 8.1% in Q2 and 27.2% for the six months because SG&A grew faster than sales and interest expense increased.
- The company acquired Timber Tech Texas on February 9, 2015 for approximately $5.8 million in cash. The acquisition added truss, wall-panel, and related manufacturing operations in Texas.
- All remaining 0.7 million stock warrants were exercised on April 14, 2015. The exercise resulted in a non-cash fair-value adjustment recorded in interest expense and eliminated the warrant liability.
- Working capital and operating assets increased with higher sales. Accounts receivable rose to $184.7 million and inventories to $146.2 million at June 30, 2015.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management described the long-term housing outlook as positive but noted that single-family housing starts remained below the historical average. NAHB forecast 716,000 U.S. single-family starts for 2015, approximately 10.8% above 2014.
- Second-quarter U.S. single-family starts increased 12.4% year over year, while starts in the South Region increased 17.1%. Management expects continued opportunities from housing recovery, prefabricated components, market-share gains, and strategic acquisitions.
- Key operating risks include housing-market cyclicality, interest rates, mortgage and commercial-credit availability, lumber-price volatility, competition, labor costs, customer credit exposure, weather, and the ability to pass material and freight-cost increases to customers.
- The company maintained valuation allowances against deferred tax assets. It reported approximately $256.6 million of federal NOL carryforwards and $399.0 million of state operating-loss carryforwards, subject to expiration and potential Section 382 limitations.
- 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 at owned or leased properties.
- On July 31, 2015, after quarter-end, the company acquired ProBuild for $1.63 billion in cash, subject to adjustments. Funding included $700.0 million of 10.75% senior notes due 2023, a $600.0 million term loan, a $295.0 million draw under an $800.0 million asset-backed facility, and issuance of 9.2 million common shares at $12.80 per share.
- The ProBuild transaction substantially increased leverage and future interest expense. Purchase accounting was incomplete at the filing date, and the filing does not provide post-acquisition consolidated results.
- ProBuild-related acquisition and financing costs totaled $15.2 million for the first six months; $11.6 million was expensed in SG&A and $3.6 million was recorded as other assets.
Important Facts for Investors to Verify
- Verify the final purchase-price allocation, goodwill, acquired liabilities, and pro forma financial impact of the ProBuild acquisition.
- Assess post-closing debt balances, interest rates, maturities, covenant requirements, borrowing availability, and liquidity under the new financing structure.
- Determine whether housing starts, customer volumes, pricing, and value-added product mix continue to support gross-margin improvement.
- Monitor whether acquisition-related costs, employee growth, depreciation, and integration expenses cause SG&A to remain elevated.
- Evaluate realization of federal and state deferred tax assets and the potential for changes in valuation allowances.
- Review exposure to lumber-price deflation or inflation, customer credit losses, seasonal working-capital needs, and future acquisition financing.