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, 2014, compared with the three months ended March 31, 2013.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Sales | $345.9 million | $319.7 million | 8.2% increase |
| Gross margin | $74.9 million; 21.7% | $62.3 million; 19.5% | $12.6 million increase; 2.2 percentage-point expansion |
| Income from operations | $5.4 million; 1.6% | $1.2 million; 0.4% | $4.2 million increase |
| Interest expense, net | $8.8 million | $12.5 million | $3.7 million decrease |
| Loss from continuing operations | $3.3 million | $11.6 million | Improved by $8.3 million |
| Net loss | $3.4 million | $11.8 million | Improved by $8.4 million |
| Basic and diluted loss per share | $0.03 | $0.12 | Improved by $0.09 |
| Operating cash flow | $13.8 million | $(25.2) million | $39.0 million improvement |
Sales growth was primarily volume-driven, with management estimating a 10.5% increase from volume, partly offset by a 2.3% reduction from lower commodity lumber prices. Product-category sales increased for prefabricated components, windows and doors, millwork, and other building products and services; lumber and lumber sheet goods sales declined 1.1% because commodity prices were approximately 14.1% lower.
Selling, general and administrative expense increased 13.5% to $69.3 million and rose to 20.0% of sales from 19.1%, reflecting higher staffing, delivery costs, and adverse weather-related operating inefficiencies. Facility closure costs were $0.2 million. The income tax benefit was $0.1 million, and the company recorded a $1.0 million valuation allowance against deferred tax assets generated by current-period losses.
At March 31, 2014, cash and cash equivalents were $62.8 million, compared with $54.7 million at December 31, 2013. Total assets were $542.8 million and stockholders’ equity was $12.6 million. Total liabilities were $530.2 million.
Debt, Liquidity, and Capital Resources
- Total debt was $354.0 million, consisting principally of $350.0 million of 7.625% senior secured notes due 2021 and $4.0 million of other long-term debt.
- The fair value of the 2021 notes was approximately $375.6 million at March 31, 2014.
- The company had no outstanding borrowings under its $175.0 million senior secured revolving credit facility and approximately $13.9 million of outstanding letters of credit.
- Net borrowing availability was $161.1 million, and reported liquidity, including cash on hand, was $223.9 million. Excess availability, including qualified cash, was $222.9 million.
- The company was in compliance with its debt covenants at March 31, 2014.
- Capital expenditures were $5.3 million, compared with $1.0 million in the prior-year quarter, primarily for machinery, equipment, and vehicles supporting sales growth and capacity.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8.2% despite a 1.7% decline in U.S. single-family housing starts during the quarter and unusually severe winter weather.
- Gross margin improved because of better customer pricing and lower intra-quarter volatility in commodity lumber prices.
- Interest expense declined following the second-quarter 2013 refinancing, which reduced the interest rate and principal amount of outstanding debt.
- Operating cash flow improved substantially, primarily because of better operating results and favorable working-capital changes, including a $21.6 million increase in accounts payable.
- Inventory increased by $13.0 million from year-end, while accounts receivable increased by $4.6 million, consistent with higher sales activity.
- The company granted approximately 1.8 million employee stock options in February 2014 at an exercise price of $7.67 per share.
Guidance, Outlook, Risks, and Unusual Items
Management expected to generate approximately $20 million of cash during 2014, end the year with approximately $60 million to $80 million of cash, and maintain liquidity of approximately $220 million to $240 million. The company may use liquidity to support working capital, delivery fleet investment, staffing, and potentially selective acquisitions.
Management described the long-term housing outlook as positive but noted that single-family housing starts remained well below historical averages. The National Association of Home Builders was forecasting 760,000 U.S. single-family housing starts for 2014, approximately 22.3% above 2013 but still below historical levels.
- Results are highly dependent on residential construction activity, interest rates, employment, consumer confidence, mortgage availability, builder credit, and general economic conditions.
- Limited credit availability for smaller builders and potential homebuyers could delay housing-market recovery.
- Lumber and other material prices are volatile; quotation periods and freight costs may limit the company’s ability to pass cost increases to customers.
- Competition and historically low housing starts continue to pressure pricing and margins.
- First-quarter results were adversely affected by weather more than is typical. Results are also seasonal, with working capital generally increasing during the peak construction season.
- The company stated that deterioration in industry conditions could require additional equity or debt financing, facility closures, workforce reductions, lease renegotiations, or asset divestitures, with no assurance that these actions would be available or successful.
- Warrant fair-value changes are recorded in interest expense. A 10% change in the stock price was estimated to change interest expense by approximately $0.6 million.
- Pending legal matters were described as ordinary-course matters and were not expected to have a material adverse effect, although future costs could be material for a particular period.
- The filing included an indirect Section 13(r) disclosure concerning activities of affiliates of Warburg Pincus and Santander Asset Management; the disclosed activity was not conducted by Builders FirstSource or Warburg Pincus.
Important Facts for Investors to Verify
- Whether housing starts, builder demand, and construction activity support management’s 2014 cash and liquidity outlook.
- Whether gross-margin improvement is sustainable after accounting for lumber-price volatility, competitive pricing, and weather normalization.
- The company’s ability to convert operating profit into cash while inventory and receivables grow during the seasonal construction period.
- Debt-service requirements, refinancing risk related to the 2021 notes, revolver borrowing-base availability, and covenant compliance.
- The adequacy of the $1.0 million deferred-tax valuation allowance and the potential effect of future losses or taxable income.
- Potential exposure from legal, environmental, warranty, and other ordinary-course contingencies.
- The effect of warrant revaluation, stock-based compensation, and future equity issuance or dilution.