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BLDR > SEC Filings for BLDR > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for BUILDERS FIRSTSOURCE, INC.



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year ended December 31, 2013 included in our most recent annual report on Form 10-K. The following discussion and analysis should also be read in conjunction with the unaudited condensed consolidated financial statements appearing elsewhere in this report. In this quarterly report on Form 10-Q, references to the "company," "we," "our," "ours" or "us" refer to Builders FirstSource, Inc. and its consolidated subsidiaries, unless otherwise stated or the context otherwise requires.

Cautionary Statement

Statements in this report which are not purely historical facts or which necessarily depend upon future events, including statements regarding our anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements in this report are based upon information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements made in this report involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. In addition, oral statements made by our directors, officers and employees to the investor and analyst communities, media representatives and others, depending upon their nature, may also constitute forward-looking statements. As with the forward-looking statements included in this report, these forward-looking statements are by nature inherently uncertain, and actual results may differ materially as a result of many factors. Further information regarding the risk factors that could affect our financial and other results are included as Item 1A of our annual report on Form 10-K.


We are a leading supplier and manufacturer of structural and related building products for residential new construction in the U.S. We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, aluminum and vinyl windows, custom millwork and trim, as well as engineered wood that we design, cut, and assemble for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods, various window, door and millwork lines, as well as cabinets, roofing, and hardware. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.

We group our building products into five product categories:

- Prefabricated Components. Our prefabricated components consist of wood floor and roof trusses, steel roof trusses, wall panels, stairs, and engineered wood.

- Windows & Doors. Our windows & doors category is comprised of the manufacturing, assembly, and distribution of windows and the assembly and distribution of interior and exterior door units.

- Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing.

- Millwork. Millwork includes interior trim, exterior trim, columns and posts that we distribute, as well as custom exterior features that we manufacture under the Synboard brand name.

- Other Building Products & Services. Other building products & services are comprised of products such as cabinets, roofing and insulation and services such as turn-key framing, shell construction, design assistance, and professional installation spanning all of our product categories.

Our operating results are dependent on the following trends, events and uncertainties, some of which are beyond our control:

- Homebuilding Industry. Our business is driven primarily by the residential new construction market, which is in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, foreclosure rates, and the health of the economy and mortgage markets. During the housing downturn, which began in 2006, many homebuilders significantly decreased their housing starts because of lower demand and an excess of home inventory. However, according to the U.S Census Bureau, U.S. single-family housing starts increased to an annualized rate of 635,000 as of March 31, 2014, which is one of the highest levels achieved since 2008. Despite this increase, single-family housing starts remain well below the historical average (from 1959 through 2013) of approximately 1.0 million per year. Due to the lower levels in housing starts and increased competition for homebuilder business, we

have and will continue to experience pressure on our gross margins. We still believe there are several meaningful trends that indicate U.S. housing demand will likely recover in the long term and that the recent downturn in the housing industry is likely a trough in the cyclical nature of the residential construction industry. These trends include relatively low interest rates, the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate. Industry forecasters expect to see continued improvement in housing demand over the next few years.

- Targeting Large Production Homebuilders. Over the past ten years, the homebuilding industry has undergone consolidation, and the larger homebuilders have increased their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we are facing in servicing large homebuilders with certain profitability expectations. We expect that our ability to maintain strong relationships with the largest builders will be vital to our ability to expand into new markets as well as grow our market share. Additionally, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.

- Use of Prefabricated Components. Prior to the housing downturn, homebuilders were increasingly using prefabricated components in order to realize increased efficiency and improved quality. Shortening cycle time from start to completion was a key imperative of the homebuilders during periods of strong consumer demand. During the housing downturn, that trend decelerated as cycle time had less relevance. Customers who traditionally used prefabricated components, for the most part, still do. However, the conversion of customers to this product offering slowed during the downturn. We are seeing this trend reverse as the residential new construction market continues to strengthen.

- Economic Conditions. Economic changes both nationally and locally in our markets impact our financial performance. The building products supply industry is highly dependent upon new home construction and subject to cyclical market changes. Our operations are subject to fluctuations arising from changes in supply and demand, national and local economic conditions, labor costs, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, single-family housing starts, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. Over the past few years, the mortgage markets have experienced substantial disruption due to increased defaults. This resulted in a stricter regulatory environment and reduced availability of mortgages for potential homebuyers due to an illiquid credit market and tighter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders continue to be constrained. As the housing industry is dependent upon the economy and employment levels as well as potential homebuyers' access to mortgage financing and homebuilders' access to commercial credit, it is likely that the housing industry will not fully recover until conditions in the economy and the credit markets improve and unemployment rates decline further.

- Cost of Materials. Prices of wood products, which are subject to cyclical market fluctuations, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production inputs for our manufactured and prefabricated products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers, but our pricing quotation periods may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products due to the price of fuel. Our inability to pass on material price increases to our customers could adversely impact our operating results.

- Controlling Expenses. Another important aspect of our strategy is controlling costs and enhancing our status as a low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. We have a "best practices" operating philosophy, which encourages increasing efficiency, lowering costs, improving working capital, and maximizing profitability and cash flow. We constantly analyze our workforce productivity to achieve the optimum, cost-efficient labor mix for our facilities. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.

- Multi-Family and Light Commercial Business. Our primary focus has been, and continues to be, on single-family residential new construction. However, we will continue to identify opportunities for incremental profitable growth in the multi-family and light commercial markets.


Though the level of housing starts remains near historic lows, the homebuilding industry has shown improvement since 2011. According to the U.S. Census Bureau, the annualized rate for U.S. single-family housing starts at March 31, 2014 was 635,000, a 1.9% improvement from one year ago but approximately 56.7% lower than when the downturn began in 2006. For the first quarter of 2014, actual U.S. single-family housing starts were 133,800, a 1.7% decrease compared to the first quarter of 2013. Actual single-family housing starts in the South Region, as defined by the U.S. Census Bureau and which encompasses our entire geographic footprint, were 79,400 in the first quarter of 2014, a 0.1% decrease from the first quarter of 2013. However, single-family units under construction in the South Region increased 21.1% during the first quarter of 2014 compared to the same quarter a year ago. While the housing industry has strengthened over the past two years, the limited availability of credit to smaller homebuilders and potential homebuyers, a slow economic recovery and high unemployment rates, among other factors, could delay a stronger recovery. The National Association of Homebuilders ("NAHB") is forecasting 760,000 U.S. single-family housing starts for 2014, which is up approximately 22.3% from 2013, but still well below historical averages.

Our sales for the first quarter of 2014 were up 8.2% over the same period last year despite the extreme winter weather conditions, the negative impact of decreased market prices for commodity lumber products which were, on average, 14% lower than in the first quarter of 2013, and relatively flat housing starts in our markets. We believe our broad offering of products and services allows us to continue to gain market share and expand our customer base. At the same time, our gross margin percentage increased by 2.2% during the first quarter of 2014 compared to the first quarter of 2013, primarily due to improved customer pricing and less intra-quarter volatility in commodity lumber prices during the first quarter of 2014 compared to the first quarter of 2013. Lumber and lumber sheet goods prices rose sharply during the first quarter of 2013, while prices fell during the first quarter of 2014. We have continued to manage our operating expenses with a key focus on conserving liquidity. We made significant changes to our business during the downturn that have improved our operating efficiency and allowed us to better leverage our operating costs against changes in sales. However, our selling, general and administrative expenses, as a percentage of sales, increased 0.9% in the quarter compared to the same period a year ago primarily due to adverse weather conditions impacting our sales and operational efficiency.

We still believe that the long-term outlook for the housing industry is positive due to growth in the underlying demographics. We feel we are well-positioned to take advantage of the construction activity in our markets and continue to increase our market share. We will continue to focus on working capital by closely monitoring the credit exposure of our customers and by working with our vendors to improve our payment terms and pricing on our products. We will also continue to work diligently to achieve the appropriate balance of short-term expense control while maintaining the expertise to grow the business as market conditions improve. We want to create long-term shareholder value and avoid taking steps that will limit our ability to compete.


Our first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather causing reduced construction activity during these quarters. This pattern affected our financial results in the first quarter of 2014 to a greater extent than is typical. In addition, quarterly results historically have reflected, and are expected to continue to reflect, fluctuations from period to period arising from the following:

- The volatility of lumber prices;

- The cyclical nature of the homebuilding industry;

- General economic conditions in the markets in which we compete;

- The pricing policies of our competitors;

- The production schedules of our customers; and

- The effects of weather.

The composition and level of working capital typically change during periods of increasing sales as we carry more inventory and receivables. Working capital levels typically increase in the second and third quarters of the year due to higher sales during the peak residential construction season. These increases have in the past resulted in negative operating cash flows during this peak season, which historically have been financed through available cash and borrowing availability under credit facilities. Collection of receivables and reduction in inventory levels following the peak building and construction season have in the past positively impacted cash flow.


The following table sets forth, for the three months ended March 31, 2014 and
2013, the percentage relationship to sales of certain costs, expenses and income

                                                       Three Months Ended
                                                            March 31,
                                                       2014           2013
       Sales                                             100.0 %       100.0 %
       Cost of sales                                      78.3 %        80.5 %
       Gross margin                                       21.7 %        19.5 %
       Selling, general and administrative expenses       20.0 %        19.1 %
       Facility closure costs                              0.1 %         0.0 %
       Income from operations                              1.6 %         0.4 %
       Interest expense, net                               2.6 %         3.9 %
       Income tax (benefit) expense                       (0.0 )%        0.1 %
       Loss from continuing operations                    (1.0 )%       (3.6 )%
       Loss from discontinued operations, net of tax      (0.0 )%       (0.1 )%
       Net loss                                           (1.0 )%       (3.7 )%

Three Months Ended March 31, 2014 Compared with the Three Months Ended March 31, 2013

Sales. Sales for the three months ended March 31, 2014 were $345.9 million, an 8.2% increase over sales of $319.7 million for the three months ended March 31, 2013. According to the U.S. Census Bureau, actual U.S. single-family housing starts decreased 1.7% in the first quarter of 2014 as compared to the first quarter of 2013. In the South Region, actual single-family starts decreased 0.1% in the first quarter of 2014 as compared to the first quarter of 2013. However, the number of single-family units under construction in the South Region increased 21.1% over this same time period. We estimate that our sales increased 10.5% due to volume; however this increase was partially offset by a 2.3% decrease due to lower market prices for commodity lumber products.

The following table shows sales classified by product category (dollars in millions):

                                                       Three Months Ended March 31,
                                                     2014                         2013
                                            Sales       % of Sales       Sales       % of Sales       % Change
Prefabricated components                   $  70.5             20.4 %   $  60.8             19.0 %         15.9 %
Windows & doors                               76.3             22.0 %      63.6             19.9 %         19.9 %
Lumber & lumber sheet goods                  115.5             33.4 %     116.8             36.5 %         (1.1 )%
Millwork                                      33.5              9.7 %      29.1              9.1 %         15.2 %
Other building products & services            50.1             14.5 %      49.4             15.5 %          1.5 %
Total sales                                $ 345.9            100.0 %   $ 319.7            100.0 %          8.2 %

Increased sales were achieved across all product categories, except lumber and lumber sheet goods, primarily due to increased volume. The change in sales for lumber and lumber sheet goods is due to a 14.1% decrease in commodity prices in the first quarter of 2014 compared to the first quarter of 2013, which was partially offset by an increase in sales volume.

Gross Margin. Gross margin increased $12.6 million to $74.9 million. Our gross margin percentage increased to 21.7% in the first quarter of 2014 from 19.5% in the first quarter of 2013, a 2.2% increase. Our gross margin percentage increased primarily due to improved customer pricing and less intra-quarter volatility in commodity lumber prices in the first quarter of 2014 compared to the first quarter of 2013.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $8.2 million, or 13.5%. Our salaries and benefits expense, excluding stock compensation expense, was $43.5 million, an increase of $5.8 million from the first quarter of 2013 primarily due to a 14% increase in full-time equivalent employees. Delivery expense increased $1.5 million and other general administrative expense increased $1.0 million, primarily due to increased sales volume.

As a percentage of sales, selling, general and administrative expenses increased from 19.1% in the first quarter of 2013 to 20.0% in the first quarter of 2014. As a percentage of sales, salaries and benefits expense, excluding stock compensation expense, increased 0.8%, delivery costs increased by 0.2% and other general administrative expense increased 0.2%. These increases were primarily due to adverse weather conditions impacting our sales and operational efficiency.

Interest Expense, net. Interest expense was $8.8 million in the first quarter of 2014, a decrease of $3.7 million from the first quarter of 2013. The decrease is primarily related to our refinancing in the second quarter of 2013, which lowered the interest rate and principal amount of our outstanding debt.

Income Tax Expense. We recorded an income tax benefit of $0.1 million during the first quarter of 2014 compared to $0.3 million of income tax expense in the first quarter of 2013. We recorded an after-tax, non-cash valuation allowance of $1.0 million and $4.4 million, in 2014 and 2013, respectively, related to our net deferred tax assets. Absent this valuation allowance, our effective tax rate would have been 33.1% and 36.3% in the first quarters of 2014 and 2013, respectively.


Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and fund capital expenditures. Our capital resources at March 31, 2014 consist of cash on hand and borrowing availability under our revolving credit facility.

Our $175.0 million senior secured revolving credit facility ("2013 facility") is primarily used for working capital and general corporate purposes. Availability under the 2013 facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory and other receivables, including progress billings and credit card receivables, that meet specific criteria contained within the credit agreement, minus agent specified reserves. Net borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and letters of credit.

The following table shows our borrowing base and excess availability as of March 31, 2014 and December 31, 2013 (in millions):

                                                           As of
                                                March 31,       December 31,
                                                  2014              2013
      Accounts Receivable Availability         $     107.3      $        99.3
      Inventory Availability                          72.6               67.6
      Other Receivables Availability                  11.1               11.0
      Gross Availability                             191.0              177.9
      Agent Reserves                                  (8.3 )             (6.9 )
      Borrowing Base                                 182.7              171.0
      Aggregate Revolving Commitments                175.0              175.0
      Maximum Borrowing Amount (lesser of
      Borrowing Base and Aggregate Revolving
      Commitments)                                   175.0              171.0
      Outstanding Borrowings                             -                  -
      Letters of Credit                              (13.9 )            (13.9 )
      Net Borrowing Availability on Revolving
      Facility                                 $     161.1      $       157.1
      Cash in Qualified Accounts                      61.8               54.2
      Excess Availability, as defined          $     222.9      $       211.3

As of March 31, 2014, we had no outstanding borrowings under our 2013 facility and our net borrowing availability was $161.1 million after being reduced by outstanding letters of credit of approximately $13.9 million. Excess availability is the sum of our net borrowing availability plus qualified cash, defined as cash on deposit that is subject to a control agreement in favor of the agent. Excess availability must equal or exceed a minimum specified amount, currently $17.5 million, or we are required to meet a fixed charge coverage ratio of 1 to 1. At March 31, 2014, our excess availability was $222.9 million, including $161.1 million in net borrowing availability and $61.8 million in qualified cash. We were not in violation of any covenants or restrictions imposed by any of our debt agreements at March 31, 2014.


Our liquidity at March 31, 2014 was $223.9 million, which includes $161.1 million in net borrowing availability under the 2013 facility and $62.8 million of cash on hand. We expect to generate cash of approximately $20 million in 2014 and to end the year with (i) cash of approximately $60-$80 million and
(ii) liquidity of approximately $220-$240 million.

In the event that housing starts or sales volume for 2014 are higher or lower than expected, or if other assumptions used in our forecasting differ from actual results, our forecasted cash usage and liquidity levels may change. Should the current industry conditions deteriorate, we may be required to raise additional funds through the sale of common stock or debt in the public capital markets or in privately negotiated transactions. There can be no assurance that any of these financing options would be available on favorable terms, if at all. Alternatives to help supplement our liquidity position could include, but are not limited to, idling or permanently closing additional facilities, adjusting our headcount in response to current business conditions, attempts to renegotiate leases, and divesting of non-core businesses. There are no assurances that these steps would prove successful.

Since the beginning of the housing downturn, a primary focus has been on protecting our liquidity. Our action plan, which consisted of generating new business, reducing physical capacity, adjusting staffing levels, implementing cost containment programs, managing credit tightly, raising additional capital when needed, and conserving cash allowed us to mitigate the effects of the difficult industry conditions. While we continue to focus on these areas, we also plan to prudently utilize our liquidity to support anticipated sales growth, primarily related to our working capital, delivery fleet and staffing levels. We may also selectively pursue strategic acquisitions.

Consolidated Cash Flows

Cash provided by operating activities for the three months ended March 31, 2014 was $13.8 million compared to cash used in operating activities of $25.2 million for the three months ended March 31, 2013. The change was primarily attributable to our improved financial performance and a reduction in working capital primarily due to an increase in accounts payable. However, this increase in accounts payable was partially offset by increases in inventory and accounts receivable due to increased sales volume during the three months ended March 31, 2014 when compared to the three months ended March 31, 2013. Cash interest payments were $0.4 million and $10.9 million for the three months ended March 31, 2014 and 2013, respectively. We pay interest on our outstanding 7.625% senior secured notes due 2021 ("2021 notes") semi-annually; prior to the 2013 refinancing we paid interest on our second priority senior secured floating rate notes due 2016 ("2016 notes") and our first-lien term loan due 2015 ("term loan") quarterly.

. . .

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