BMC Stock Holdings, Inc. (NASDAQ:BMCH), a diversified lumber and building materials distributor and solutions provider that sells primarily to new construction and remodeling contractors, today reported its financial results for the third quarter ended September 30, 2016.
Third Quarter 2016 Financial Highlights and Merger Integration Update
On December 1, 2015, Stock Building Supply Holdings, Inc. (“SBS”) completed its merger transaction (the “Merger”) with Building Material Holdings Corporation (“Legacy BMC”). As a result of the Merger, current year results reported pursuant to U.S. generally accepted accounting principles (“GAAP”) are not comparable to prior year periods. For a more detailed explanation, see the “Third Quarter 2016 Financial Results – Basis of Presentation” section of this press release. A reconciliation of non-GAAP financial measures to comparable GAAP financial measures is provided in the “Reconciliation of GAAP to Non-GAAP Measures” section of this press release.
During the third quarter of 2016, the Company generated solid operating result improvements and continued to make substantial progress on its integration plan.
| • | Net sales increased 97.2% to $821.2 million, compared to net sales of $416.5 million in the third quarter of 2015, and net sales increased 6.0% to $821.2 million, compared to Adjusted net sales (non-GAAP) of $775.0 million in the third quarter of 2015 |
| • | Net income increased to $9.2 million, or $0.14 per diluted share, including Merger and integration costs of $4.7 million and a loss on debt extinguishment of $12.5 million, compared to net income of $4.0 million, or $0.10 per diluted share, in the third quarter of 2015 |
| • | Adjusted net income (non-GAAP) increased to $21.3 million, or $0.32 per diluted share, compared to Adjusted net income of $15.1 million, or $0.23 per diluted share, in the third quarter of 2015 |
| • | Adjusted EBITDA (non-GAAP) increased 41.9% to $58.2 million, compared to adjusted EBITDA of $41.0 million in the third quarter of 2015 |
| • | Adjusted EBITDA margin (non-GAAP) improved 180 basis points to 7.1%, compared to adjusted EBITDA margin of 5.3% in the third quarter of 2015 |
| • | Net cash provided by operating activities increased $27.7 million to $24.4 million, compared to net cash used in operating activities of $3.3 million in the third quarter of 2015 |
| • | Since closing the Merger, the Company has implemented cost synergy initiatives totaling approximately $28 million in future annual run rate savings, and remains on track to achieve annual run rate synergies of $40 to $50 million by the end of 2017 |
Peter Alexander, President and Chief Executive Officer of BMC, commented, “In the third quarter, our employees continued to provide best-in-class customer service and solutions to grow revenue and further improve profitability. Net sales for the quarter increased 97.2% compared to net sales in the third quarter of 2015 and grew 6.0% when compared to Adjusted net sales in the third quarter of 2015, including millwork, doors and windows Adjusted net sales growth of 9.7%. Another important component of the third quarter net sales growth was ReadyFrame®, our whole-house solution, which enables builders to frame houses 20 to 30 percent faster with less labor and significantly less waste. I am extremely pleased that ReadyFrame®, which grew 43% to $28.6 million in net sales during the quarter, is now available in all of our major markets, setting the stage for substantial future growth capacity for this innovative product offering.”
Jim Major, Executive Vice President and Chief Financial Officer of BMC, added, “We are very encouraged by the significant progress we’ve made on our integration efforts and are pleased with how well positioned we are to execute on future profitable growth opportunities. Specifically, during the third quarter, we achieved additional cost synergies and ended September with $28 million in future annual run rate cost savings. Also, during the quarter, we successfully refinanced our senior secured notes due 2018, extending our maturity to 2024. These refinancing transactions will lower our future interest expense obligations and allow us to maintain an attractive balance sheet with the ratio of long-term debt to trailing twelve month Adjusted EBITDA at the low-end of our target range of two to three times.”
Third Quarter 2016 Financial Results – Basis of Presentation
The Merger was accounted for as a “reverse acquisition” under the acquisition method of accounting, with SBS treated as the legal acquirer and Legacy BMC treated as the acquirer for accounting purposes. As such, the Company has accounted for the Merger by using the Legacy BMC historical information and accounting policies and adding the assets and liabilities of SBS as of the completion date of the Merger at their estimated fair values. As a result, current year results reported pursuant to GAAP are not comparable to prior year periods.
For informational purposes only, the Company has furnished certain Adjusted financial information for the three months and nine months ended September 30, 2016, and the three months and nine months ended September 30, 2015. The prior year Adjusted financial information combines the historical results of Legacy BMC and SBS for the three months and nine months ended September 30, 2015. The Adjusted financial information has not been prepared in accordance with GAAP, and is based upon information and assumptions deemed appropriate by the Company’s management. This Adjusted financial information is not necessarily indicative of what the Company’s results actually would have been had the Merger been completed as of January 1, 2015. In addition, this Adjusted financial information is not indicative of future results or current financial conditions and does not reflect any anticipated synergies, operating efficiencies, cost savings or integration costs that have resulted or may result in the future from the Merger. All Adjusted financial information should be read in conjunction with separate historical financial statements and accompanying notes filed with the Securities and Exchange Commission (“SEC”). A reconciliation of Adjusted financial measures to GAAP financial measures is provided in the “Reconciliation of GAAP to Non-GAAP Measures” section of the press release.
Third Quarter 2016 Financial Results Compared to Prior Year Period
Net sales in the third quarter of 2016 increased 97.2% to $821.2 million, compared to the third quarter of 2015, primarily as a result of the Merger and the acquisition of Robert Bowden, Inc. (“RBI”). Net sales in the third quarter of 2016 increased 6.0% to $821.2 million, compared to Adjusted net sales in the third quarter of 2015. The Company estimates net sales, as compared to Adjusted net sales in the third quarter of 2015, increased 2.0% as a result of the RBI acquisition completed in 2015, 1.6% from other volume growth and 2.4% as a result of lumber and sheet goods commodity price inflation.
Gross profit in the third quarter of 2016 increased 109.0% to $203.0 million, compared to the third quarter of 2015, primarily driven by the Merger and the acquisition of RBI. Gross profit as a percentage of sales increased to 24.7%, compared to 23.3% for the third quarter of 2015, primarily driven by a higher percentage of total net sales being derived from millwork, doors & windows, which generally are sold at a higher gross margin than our other product categories, as well as increased consideration from supplier agreements.
Third quarter 2016 selling, general and administrative expenses increased 95.6% to $149.5 million, compared to the third quarter of 2015, primarily as a result of the Merger and the acquisition of RBI.
Depreciation expense in the third quarter of 2016, including the portion reported within cost of sales, increased to $11.9 million, compared to $4.7 million in the third quarter of 2015. The increase was primarily driven by fixed assets acquired through the Merger and the acquisition of RBI, as well as replacements and additions of delivery fleet, material handling equipment and operating equipment.
Amortization expense in the third quarter of 2016 was $5.3 million, compared to $0.7 million in the third quarter of 2015. The increase in amortization expense for the three months ended September 30, 2016 related to intangible assets acquired through the Merger and the acquisition of RBI.
Interest expense in the third quarter of 2016 was $7.7 million, including $0.8 million of non-cash amortized debt issuance costs, compared to $7.0 million in the third quarter of 2015. This increase was primarily the result of borrowings assumed in the Merger as well as borrowings used to fund the acquisition of RBI.
Merger and integration costs in the third quarter of 2016 were $4.7 million consisting primarily of severance, system integration costs and professional fees, compared to $1.0 million in the third quarter of 2015.
For the third quarter of 2016, the Company reported operating income of $33.7 million, compared to operating income of $15.3 million in the third quarter of 2015, and net income of $9.2 million, or $0.14 per diluted share, compared to net income of $4.0 million, or $0.10 per diluted share, in the third quarter of 2015.
Adjusted net income in the third quarter of 2016 was $21.3 million, or $0.32 per diluted share, compared to Adjusted net income of $15.1 million, or $0.23 per diluted share, in the third quarter of 2015. Adjusted EBITDA in the third quarter of 2016 was $58.2 million, compared to Adjusted EBITDA of $41.0 million in the third quarter of 2015. Adjusted EBITDA margin improved 180 basis points in the third quarter of 2016 to 7.1%, compared to Adjusted EBITDA margin of 5.3% in the third quarter of 2015.
Liquidity and Capital Resources
Total liquidity as of September 30, 2016 was approximately $274.8 million, which includes cash and cash equivalents of $6.8 million and $268.0 million of borrowing availability under the Company’s asset-backed revolver. Capital expenditures during the third quarter of 2016 totaled $6.6 million, primarily to fund purchases of vehicles and equipment to support increased sales volume and replace aged assets, and facility and technology investments to support our operations. In addition, the Company acquired approximately $5.2 million of assets, consisting primarily of material handling equipment, under capital lease arrangements.
During the third quarter of 2016, the Company completed an issuance of $350.0 million of 5.5% senior secured notes due 2024 and utilized the net cash proceeds from the issuance to redeem, in full, the $250.0 million 9.0% senior secured notes due 2018 issued by Legacy BMC as well as repay a portion of the outstanding borrowings under the Company’s asset-backed revolver. In connection with this refinancing, the Company incurred a loss on debt extinguishment of $12.5 million related to the redemption of the extinguished senior notes. The loss was made up of a call premium of $8.4 million and the write-off of unamortized debt issuance costs and original issue discount of $4.1 million. As a result of this refinancing, and based on current borrowing levels and interest rates on its asset-backed revolver, the Company expects to save approximately $7 million in future annualized interest expenses.
Outlook
“Macroeconomic trends remain favorable and should support further growth in the U.S. single-family housing market,” said Alexander. “We are uniquely positioned with a solid balance sheet, which provides substantial flexibility. Therefore, we expect to continue to execute our integration and business plans as we look for opportunities to achieve profitable growth both through organic initiatives as well as through strategic investments next year.”
Conference Call Information
BMC will host a conference call on Monday, November 7, 2016 at 10:00 a.m. Eastern Time and will simultaneously broadcast it live over the Internet. The conference call can be accessed by dialing 877-407-0784 (domestic) or 201-689-8560 (international). A telephonic replay will be available approximately three hours after the call and can be accessed by dialing 844-512-2921, or for international callers, 412-317-6671. The passcode for the live call and the replay is 13646529. The telephonic replay will be available until 11:59 p.m. (Eastern Time) on November 14, 2016. The live webcast of the conference call can be accessed on the Company’s investor relations website at ir.buildwithbmc.com and will be available for approximately 90 days.
Non-GAAP Financial Measures
This press release presents Adjusted net sales, Adjusted EBITDA and Adjusted net income, which are non-GAAP financial measures within the meaning of applicable SEC rules and regulations. For a reconciliation of Adjusted net sales, Adjusted EBITDA and Adjusted net income to the most comparable GAAP measure and a discussion of the reasons why the Company believes that these non-GAAP financial measures provide information that is useful to investors, see the tables included in this document under “Reconciliation of GAAP to Non-GAAP Measures.”
About BMC Stock Holdings, Inc.
Headquartered in Atlanta, Georgia, BMC is one of the nation’s leading providers of diversified building products and services to professional builders and contractors in the residential housing market. The Company’s comprehensive portfolio of products and services spans building materials, including millwork and structural component manufacturing capabilities, consultative showrooms and design centers, value-added installation management services and an innovative eBusiness platform capable of supporting all of the Company’s customers’ needs. BMC serves 42 metropolitan areas across 17 states, principally in the fast-growing South and West regions.