Builders FirstSource, Inc. — Q1 2012 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 unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Operations are exposed to housing starts, mortgage and commercial credit availability, employment, interest rates, lumber prices, weather, customer production schedules and competition. The company reports one reportable segment comprising Atlantic, Southeast and Central operations.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Sales | $219.4 million | $162.8 million | Up 34.7% |
| Gross margin | $45.1 million | $31.4 million | Up $13.7 million |
| Gross margin percentage | 20.6% | 19.3% | Up 1.3 percentage points |
| SG&A | $51.0 million | $46.7 million | Up 9.1% |
| Loss from operations | $(5.8) million | $(15.3) million | Improved $9.4 million |
| Net loss | $(19.2) million | $(21.2) million | Improved $2.1 million |
| Net loss per share | $(0.20) | $(0.22) | Improved $0.02 |
| Net cash used in operating activities | $(14.9) million | $(25.3) million | Improved $10.4 million |
SG&A declined to 23.2% of sales from 28.7%, reflecting operating leverage and cost controls. Interest expense increased to $13.1 million from $5.9 million, primarily because of $4.7 million of interest on the term loan entered into in the fourth quarter of 2011 and a $3.1 million non-cash fair-value adjustment on warrants.
At March 31, 2012, cash and cash equivalents were $129.6 million, restricted cash was $13.4 million on the balance sheet, total debt was $297.8 million net of discount and current maturities, and stockholders’ equity was $82.4 million. Reported liquidity was $94.6 million after deducting the $35.0 million minimum qualified-cash requirement under the term loan.
Material changes versus the prior comparable period
- Sales increased across all product categories, led by prefabricated components, lumber and lumber sheet goods, and other building products and services.
- Sales to the Builder 100 increased 46.7%, compared with a 16.8% increase in actual U.S. single-family housing starts.
- Gross margin improved through higher sales volume and better absorption of fixed costs.
- SG&A increased in dollars because of higher salaries, benefits, delivery expense and sales volume, but decreased materially as a percentage of sales.
- Operating and net losses narrowed despite increased interest expense.
- Cash used in operations decreased primarily because of the lower operating loss and a smaller working-capital investment. Receivables increased $17.4 million and inventories increased $8.7 million during the quarter.
- Capital expenditures increased to $1.7 million from $0.5 million, primarily for manufacturing equipment and buyouts of expiring vehicle and equipment leases.
- The company recorded a $7.0 million additional valuation allowance on deferred tax assets in Q1 2012, compared with $8.1 million in Q1 2011.
Guidance, outlook, commentary and risks
Management expects fiscal 2012 cash usage of approximately $45 million to $55 million, with year-end cash of $90 million to $100 million and liquidity of $55 million to $65 million after the minimum cash requirement. The filing does not provide earnings or revenue guidance.
Management reported that U.S. single-family housing starts remained near historic lows but improved year over year. The company cited an NAHB forecast of 506,000 U.S. single-family housing starts for 2012, approximately 16.6% above 2011 but still below historical averages. Management believes long-term housing demand is supported by demographics, relatively low interest rates and an aging housing stock, and intends to pursue market-share gains, expansion into multifamily and light commercial markets, customer diversification and cost control.
- The term loan requires at least $35.0 million of qualified cash and specified collateral value of at least $160.0 million from March 2 through October 31 and $150.0 million during the remainder of the year. At March 31, specified collateral value was $305.0 million, and the company reported no covenant violations.
- Interest-rate risk is limited by LIBOR floors of 2% on the term loan and 3% on floating-rate notes. Based on March 31 debt and LIBOR levels, a 1% rate increase would not have increased annual interest expense.
- Volatile lumber and freight costs may not always be passed through to customers and could pressure margins.
- Seasonality, weather and working-capital needs historically make the first and fourth quarters weaker and can produce negative operating cash flow during peak construction periods.
- Legal proceedings are considered ordinary course and not expected to have a material adverse effect, although the company cautions that future costs could be material in a particular period.
- Management concluded that disclosure controls were effective as of March 31, 2012, with no material changes in internal control over financial reporting.
Facts investors should verify
- Whether housing starts and mortgage availability support management’s anticipated 2012 recovery and cash objectives.
- Compliance with the term-loan minimum cash and collateral covenants as seasonal working-capital requirements increase.
- Ability to meet the projected $45 million to $55 million of fiscal-year cash usage while maintaining liquidity.
- Sustainability of the 20.6% gross margin and 23.2% SG&A-to-sales ratio if volume growth slows or material prices rise.
- Effect of approximately $297.8 million of debt, floating-rate exposure and warrant fair-value adjustments on future earnings and liquidity.
- Recoverability of deferred tax assets, given the continuing losses and valuation allowance.
- Potential contingencies from ordinary-course litigation, environmental matters and restricted cash supporting letters of credit.