Builders FirstSource, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The company supplies and manufactures structural and related building products and services for U.S. residential new construction. Results are unaudited.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Sales | $291.8 million | $217.2 million | $783.1 million | $586.4 million |
| Gross margin | $57.7 million; 19.8% | $44.4 million; 20.5% | $156.5 million; 20.0% | $118.7 million; 20.2% |
| Loss from operations | $(1.6) million | $(5.9) million | $(8.8) million | $(29.2) million |
| Interest expense, net | $10.6 million | $5.3 million | $34.2 million | $16.9 million |
| Net loss | $(13.6) million | $(11.6) million | $(44.8) million | $(48.3) million |
| Net loss per share | $(0.14) | $(0.12) | $(0.47) | $(0.51) |
- Revenue growth: Sales increased 34.3% in the third quarter and 33.5% for the first nine months. Management estimated volume growth of approximately 27% in Q3 and 31% for the nine-month period, with commodity inflation contributing approximately 7% and 3%, respectively.
- Margins: Gross margin dollars increased, but gross margin percentage declined 0.7 percentage point in Q3 and 0.2 percentage point for the nine months. Lumber price inflation relative to customer pricing commitments reduced margins, partly offset by higher volume and fixed-cost leverage.
- Operating expenses: Selling, general and administrative expense increased 16.8% in Q3 and 12.7% year to date, primarily from higher commissions, staffing, fuel and maintenance. As a percentage of sales, SG&A improved to 20.1% from 23.1% in Q3 and to 21.0% from 24.9% year to date.
- Cash flow: Cash used in operating activities was $48.8 million for the first nine months, compared with $47.9 million in 2011. Working-capital investment accounted for approximately $21.8 million, driven by increases in receivables and inventory. Investing cash use was $6.7 million, including $9.2 million of capital expenditures. Financing cash use was $0.6 million.
- Liquidity: Cash and cash equivalents were $90.7 million at September 30, 2012, down from $146.8 million at December 31, 2011. Management reported liquidity of $55.7 million after deducting the $35.0 million minimum qualified-cash requirement under the term loan.
- Debt: Long-term debt, net of current maturities, was $298.4 million, consisting primarily of a $160.0 million term loan and $139.7 million of floating-rate notes. Total debt was substantially unchanged from year-end, but interest expense increased materially following the 2011 term loan and warrant-related fair-value adjustments.
- Balance sheet: Total assets were $498.8 million and total liabilities were $439.9 million. Stockholders’ equity declined to $58.9 million from $101.2 million, primarily reflecting cumulative losses.
Material changes versus the prior comparable period
- Sales growth exceeded reported growth in U.S. single-family housing starts, which management attributed to customer expansion, increased sales to existing customers and market-share gains.
- Lumber and lumber sheet-goods sales increased 57.2% in Q3 and 47.4% for the nine months, the largest product-category increases, supported by higher commodity prices and volume.
- Interest expense increased by $5.3 million in Q3 and $17.3 million for the nine months. The increase primarily reflected the new term loan and non-cash warrant valuation adjustments of $0.7 million in Q3 and $4.4 million year to date.
- Net loss improved for the nine-month period but worsened in Q3, partly because discontinued operations included $1.3 million of expense related primarily to revised sub-rental income estimates for a previously closed Ohio facility.
- Facility closure costs were $0.7 million in Q3 and $0.9 million year to date, compared with $0.1 million and $2.0 million, respectively, in the prior-year periods.
- Deferred tax asset valuation allowances were $4.6 million in Q3 and $15.9 million year to date. The filing states that future taxable income could allow reversal, while additional losses could require further allowances.
Guidance, outlook, risks and unusual items
- Management cited improving housing activity but noted that starts remained well below historical levels. The company reported Q3 U.S. single-family starts up 29.0% year over year and South Region starts up 27.7%.
- Management expected approximately $55 million of cash usage for fiscal 2012, at the high end of prior guidance, and projected approximately $90 million of unrestricted cash and $55 million of net liquidity at year-end.
- If sales growth continues at the current pace, management stated that additional capital may be required to fund working-capital needs; financing may not be available on favorable terms, or at all.
- Key operating risks include cyclical housing demand, limited mortgage and commercial credit, unemployment, excess housing inventory, lumber and freight-cost volatility, competitive pricing, customer production schedules and weather-related seasonality.
- The term loan requires at least $35.0 million of qualified cash and specified collateral value of at least $160.0 million during the March 2–October 31 period. At September 30, specified collateral value was $303.0 million, and the company reported no debt-covenant violations.
- A 1.0% increase in interest rates would not have increased annual interest expense based on debt and LIBOR levels at September 30, 2012, because applicable LIBOR floors had not been exceeded.
- Management said pending legal proceedings were ordinary-course matters and were not expected to have a material adverse effect, while noting that future costs could still be material for a particular period.
Investor verification points
- Verify whether the company can convert strong sales growth into positive operating cash flow as receivables and inventory expand.
- Assess exposure to lumber-price changes and the company’s ability to pass cost increases through to customers.
- Review term-loan cash and collateral covenants, minimum liquidity requirements and the potential need for additional capital.
- Separate operational improvement from non-cash effects, including warrant fair-value adjustments, debt discount amortization and deferred-tax valuation allowances.
- Monitor the sustainability of SG&A leverage and whether staffing, commissions, fuel and delivery costs rise with volume.
- Evaluate discontinued-operation and facility-closure reserves, including approximately $2.9 million of discontinued-operation exit reserves and $3.0 million of facility-closure reserves at September 30, 2012.
- Confirm subsequent housing-start trends, credit availability and seasonal working-capital needs before extrapolating third-quarter performance.