Builders FirstSource, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012, with unaudited quarterly data including the fourth quarter. Builders FirstSource supplies and manufactures structural and related building products for U.S. residential new construction. It operated 53 distribution centers and 44 manufacturing facilities across 33 markets in nine states, primarily in the southern and eastern United States.
The company reported one operating segment and served production, regional, local, and custom homebuilders. Its product categories were prefabricated components, windows and doors, lumber and lumber sheet goods, millwork, and other building products and services.
Financial performance and key metrics
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Sales | $1,070.7 million | $779.1 million | 37.4% increase |
| Gross margin | $214.6 million; 20.0% | $157.9 million; 20.3% | Margin down 0.3 percentage points |
| Loss from operations | $8.7 million | $37.5 million | Loss reduced |
| Net loss | $56.9 million | $65.0 million | Loss reduced |
| Net loss per share | $0.60 | $0.68 | Improved |
| Operating cash flow | $(66.9) million | $(66.4) million | Cash use broadly stable |
| Capital expenditures | $10.4 million | $4.8 million | Increased |
| Cash and cash equivalents | $131.4 million | $146.8 million | Decreased |
| Total debt, including current portion | $361.0 million | $297.5 million | Increased |
| Stockholders’ equity | $48.1 million | $101.2 million | Decreased |
Sales growth reflected an estimated 32.2% increase in sales volume and a 5.2% contribution from commodity price inflation. Average lumber and lumber sheet goods prices increased 23.0% year over year. Lumber and lumber sheet goods represented 32.5% of sales.
Product-category sales were $203.7 million for prefabricated components, $233.1 million for windows and doors, $348.1 million for lumber and lumber sheet goods, $104.2 million for millwork, and $181.6 million for other building products and services. The combined prefabricated components, windows and doors, and millwork categories represented 50.5% of sales.
SG&A increased 15.2% to $222.3 million but declined to 20.8% of sales from 24.8%. Salaries and benefits, excluding stock compensation, were 12.8% of sales versus 14.2% in 2011. Net interest expense rose to $45.1 million from $24.9 million, primarily because of the first-lien term loan and warrant fair-value adjustments.
Material changes versus the prior comparable period
- Sales increased substantially faster than U.S. single-family housing starts, which rose 24.2% in 2012, suggesting market-share gains and increased customer penetration.
- Gross margin dollars increased, but gross margin percentage declined because commodity lumber inflation was not fully recovered under customer pricing commitments.
- Operating losses narrowed materially as higher sales volumes leveraged fixed costs and SG&A was reduced as a percentage of sales.
- Operating cash flow remained significantly negative because approximately $34.0 million was invested in working capital, principally receivables and inventory.
- Debt increased after the company amended its first-lien term loan in December 2012, raising principal by $65.0 million to $225.0 million and generating $60.9 million of net proceeds.
- Capital spending increased for vehicle and equipment lease buyouts, the purchase of the Chelsea, Alabama facility, and expansion of the Houston window manufacturing facility.
- The company recorded $48,000 of asset impairment charges in continuing operations and $958,000 of facility closure costs, compared with no asset impairments and $2.5 million of facility closure costs in 2011. It recorded no goodwill impairment.
Liquidity, debt, outlook, and risks
At December 31, 2012, the company had $131.4 million of cash, $14.0 million of restricted cash, and reported liquidity of $116.4 million after deducting the $15.0 million minimum qualified-cash requirement. Qualified cash was $130.8 million and specified collateral value was $349.2 million, compared with a $225.0 million minimum. The company was in compliance with its debt covenants at year-end.
Debt consisted principally of a $225.0 million first-lien term loan due in 2015 and $139.7 million of second-priority senior secured floating-rate notes due in 2016. Both instruments had variable interest rates; the term loan carried a weighted-average rate of 11.5% and the 2016 notes 13.0% at year-end. The company stated that a 1.0% increase in interest rates would not have increased annual interest expense at December 31, 2012 because of LIBOR floors.
In January 2013, the company transferred $12.4 million of outstanding letters of credit to a new $15.0 million sub-facility that did not require cash collateralization. Management stated that this increased liquidity by approximately $13.0 million and reduced the separate letter-of-credit facility from $20.0 million to $10.0 million.
Management expected 2013 cash usage of approximately $30 million to $40 million, year-end cash of $90 million to $100 million, liquidity of approximately $75 million to $85 million, and capital expenditures of approximately $8 million to $12 million. The forecast assumed approximately 650,000 single-family housing starts, stable commodity prices, improved gross margins, and operating expenses consistent with current levels. Management did not expect positive operating cash flow in 2013.
The principal risks include continued weakness in residential construction, limited mortgage and commercial credit, customer pricing pressure, lumber-price volatility, seasonal and weather-related demand fluctuations, substantial fixed costs, variable-rate debt, debt covenant and refinancing requirements, reliance on cash on hand because there was no revolving credit facility, customer and lease obligations, competition, potential impairment charges, and product liability or environmental claims. The top ten customers represented approximately 22.8% of 2012 sales, although no single customer exceeded 5%.
The company maintained a $127.7 million valuation allowance against deferred tax assets at year-end and reported approximately $236.7 million of federal and $503.0 million of state operating loss carryforwards. It also had approximately $74.2 million of future operating lease payments and $133.2 million of scheduled interest payments included in contractual obligations.
Most important facts for an investor to verify
- Whether housing starts and customer volumes were sufficient to support management’s 2013 cash-use and liquidity forecast.
- Progress toward positive operating cash flow and the effect of receivables and inventory growth on liquidity.
- Compliance with the $15.0 million qualified-cash and $225.0 million specified-collateral covenants.
- Refinancing or repayment plans for the $225.0 million term loan due in 2015 and $139.7 million of notes due in 2016.
- The ability to recover higher lumber and other input costs through customer pricing without further gross-margin erosion.
- Potential additional goodwill, long-lived-asset, or facility-closure charges if the housing recovery weakens.
- The realizability of deferred tax assets and the impact of the $127.7 million valuation allowance.
- Execution and returns from capacity expansion, facility ownership, equipment purchases, and any prospective acquisitions.