Builders FirstSource, Inc. — Fiscal 2014 Form 10-K
Business context and reporting period
Builders FirstSource supplies and manufactures structural and related building products for residential new construction, primarily in the southern and eastern United States. At December 31, 2014, it operated 56 distribution centers and 55 manufacturing facilities across 34 markets in nine states. The filing covers the fiscal year ended December 31, 2014; fourth-quarter results are included in the unaudited quarterly data.
The company operates in a cyclical, seasonal market tied to housing starts, mortgage and commercial credit availability, interest rates, employment, consumer confidence, weather, and lumber prices. U.S. single-family housing starts increased 4.8% in 2014, while Southern-region starts increased 6.0%.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Sales | $1,604.1 million | $1,489.9 million | +7.7% |
| Gross margin | $357.0 million | $319.9 million | +11.6% |
| Gross margin percentage | 22.3% | 21.5% | +0.8 percentage points |
| Income from operations | $50.0 million | $48.0 million | Improved |
| Interest expense, net | $30.3 million | $89.6 million | -$59.3 million |
| Net income (loss) | $18.2 million | $(42.7) million | Returned to profitability |
| Diluted EPS | $0.18 | $(0.44) | Improved |
| Cash flow from operating activities | $27.5 million | $(47.6) million | Improved by $75.1 million |
Sales growth was driven primarily by higher volume and acquisitions, partially offset by a 2.1% adverse impact from commodity price deflation. Excluding acquisitions, management estimated sales growth of 5.8% overall, with volume growth offset by lower commodity prices. SG&A increased 12.7% to $306.5 million, or 19.1% of sales versus 18.3% in 2013, reflecting added capacity, acquisitions, staffing, delivery, and occupancy costs.
Product-category sales were: prefabricated components $330.9 million, windows and doors $356.9 million, lumber and lumber sheet goods $522.7 million, millwork $160.2 million, and other building products and services $233.4 million. Higher-margin prefabricated components, windows and doors, and millwork represented 52.8% of sales.
Fourth-quarter 2014 sales were $396.7 million, gross margin was $90.6 million, income from continuing operations was $2.5 million, and net income was $2.4 million. The filing does not provide a directly comparable fourth-quarter 2013 net income value in a consistently formatted table, although it reports fourth-quarter 2013 income from continuing operations of $4.6 million.
Balance sheet, debt, liquidity, and cash flow
- Cash and cash equivalents were $17.8 million at December 31, 2014, down from $54.7 million.
- Total debt was $383.9 million, compared with $354.0 million in 2013, consisting primarily of $350.0 million of 7.625% senior secured notes due 2021 and $30.0 million drawn under the revolving facility.
- The $175.0 million revolving credit facility had $129.4 million of net borrowing availability after $30.0 million of borrowings and $15.6 million of letters of credit. Defined excess availability was $146.1 million, including $16.7 million of qualified cash.
- Total liquidity, defined by management as cash plus net revolver availability, was $147.2 million. The company was in compliance with its debt covenants at year-end.
- Cash used in investing activities was $94.8 million, including $69.3 million for acquisitions and $25.7 million of capital expenditures.
- Cash provided by financing activities was $30.4 million, primarily from the $30.0 million revolver borrowing.
- Contractual obligations totaled $667.9 million, including $383.9 million of debt, $177.7 million of debt interest, and $106.2 million of operating leases.
Material changes versus the prior comparable period
- The company returned to profitability, reporting $18.2 million of net income versus a $42.7 million loss in 2013.
- Interest expense fell substantially because 2013 included a $39.5 million prepayment penalty and other write-offs associated with refinancing the prior term loan.
- Operating cash flow improved from a $47.6 million use to $27.5 million provided, reflecting improved earnings, lower cash interest payments, and more limited working-capital investment.
- Gross margin expanded by 80 basis points, primarily from improved customer pricing and lower lumber-price volatility.
- SG&A as a percentage of sales increased 90 basis points, partially offsetting gross-margin gains.
- The company completed five acquisitions for aggregate cash consideration of $69.3 million, expanding its presence in Texas and Florida and adding multi-family, light-commercial, manufacturing, millwork, and installation capabilities.
- Goodwill increased to $139.8 million from $111.2 million, primarily from the acquisitions. No goodwill or significant asset impairment charges were recorded in 2014.
Guidance, outlook, risks, contingencies, and unusual items
Management expected continued housing-market improvement but used a conservative internal forecast of 715,000 U.S. single-family starts in 2015, versus the NAHB forecast of 803,500. For 2015, management projected cash generation of approximately $10 million to $30 million, year-end cash of $25 million to $45 million, liquidity of approximately $160 million to $180 million, and capital expenditures of approximately $25 million to $30 million. The forecast assumed relatively stable commodity prices, improving gross margins, and operating expenses consistent with current levels.
Key risks include housing-market weakness, constrained credit, customer concentration, competitive pricing pressure, lumber-price volatility, shortages of labor or materials, dependence on large production homebuilders, execution and integration risks from acquisitions, fixed costs and long-term leases, debt covenant and refinancing risk, potential impairment of goodwill or other assets, environmental and legal claims, and disruption to information technology or facilities.
The company maintained a substantial valuation allowance against deferred tax assets. It reduced the allowance by $7.2 million in 2014 through utilization of net operating loss carryforwards but continued to conclude that realization of most deferred tax assets was uncertain. The company also reported $254.5 million of federal and $434.4 million of state operating-loss carryforwards.
Unusual items included 2013 refinancing costs that materially depressed prior-year earnings, $0.5 million of 2014 facility-closure costs, $0.4 million of discontinued-operation losses, and a $0.6 million acquisition-related expense. Four facilities remained idled at year-end, and the company had $1.8 million of reserves related to discontinued operations and $1.1 million of continuing-operation facility-closure reserves.
PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2014.
Important facts for investors to verify
- Whether housing starts, credit conditions, and customer volumes support the company’s 2015 cash and liquidity forecast.
- The ability to manage $383.9 million of debt, including the $350.0 million notes due in 2021, and maintain revolver availability and covenant compliance.
- Whether acquisitions generate expected revenue, margins, cash flow, and operational synergies without increasing leverage excessively.
- The sustainability of the 22.3% gross margin as lumber prices, customer pricing, and competitive conditions change.
- The recoverability of $139.8 million of goodwill and the large deferred tax asset balance subject to valuation allowances.
- Exposure to long-term operating leases, residual-value guarantees, self-insurance obligations, facility-closure costs, and potential legal or environmental claims.
- The effect of customer concentration: the top 10 customers represented approximately 25.1% of 2014 sales, although no single customer exceeded 8%.