US LBM IPO: Positive Cash Flow From Operations, But A Risky Bet

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About: US LBM Holdings (LBM), Includes: BECN, BLDR, BMCH, FMB
by: Wilsonville Capital
Summary

US LBM Holdings distributes specialty building materials in the United States. The company is a massive player in its industry supplying more than 60,000 stock keeping units for custom homebuilders.

The total amount of debt seems elevated as compared to the total amount of cash and assets. The amount of long-term debt is equal to $1.03 billion.

LBM should pay a total of $1.082 billion in 2022-2023. The company does not seem to have this amount of money in cash.

Common stock owners may not appreciate this name as the amount of net income remaining after the payment of the interest expenses is not much.

Certain investors may not appreciate that the company expects to use the proceeds to acquire LLC interests and to pay a portion of the debt.

In 2018, US LBM Holdings (LBM) has been making remarkable efforts to report cash flow from operations of more than $132 million. In addition, the private equity that controls the company has been quite successful in the acquisition of other businesses and pushing up the net income.

Having said this, it is still not clear whether common stock owners will be able to profit from the efforts. Bear in mind that US LBM Holdings is paying an interest rate of more than 9% and the debt is not small. In addition, the amount of goodwill and intangible assets should be studied as they are not small. As a result, the impairment risk is large on this name.

Source: Prospectus

Source: Prospectus

Business

US LBM Holdings distributes specialty building materials in the United States. The company is a massive player in its industry supplying more than 60,000 stock keeping units for custom homebuilders and specialty contractors. The company casts itself with the following words on its website:

Source: Company’s Website

The company deals with a wide range of building materials including windows, doors, millwork, roofing, siding, cabinetry and wallboard along with wood products. US LBM Holdings works with 72% of the overall building materials mix in 2018.

US LBM Holdings is composed of a large amount of divisions around the United States:

Source: Company’s Website

Most investors will be very interested in the private equity controlling US LBM Holdings. Kelso & Company has experience of more than 35 years and has invested $12 billion of equity capital in 120 investments.

Investors should understand well whether the US LBM is being helped by the private equity or not. Many times, financial buyers acquire targets with a massive amount of debt and large interest rates. As a result, the company has to pay large interest expenses and the net income remaining is close to zero. When this happens, minority shareholders don’t make money.

Balance Sheet And Acquisition Targets

While the asset/liability ratio of US LBM Holdings is above one, there are several items in the balance sheet that investors should understand very well.

First of all, the amount of goodwill and intangible assets represent 49% of the total amount of assets. This may be worrying for certain investors as these intangible assets are many times very difficult to value.

The amount of cash, equal to $1 million, is also small, which means that the company may have liquidity issues in the future. In addition, accounts receivable accounts for 22% of the total amount of assets. Some market participants may believe that the company is having problems in collecting payments from clients.

The image below provides further details on the list of assets:

Source: Prospectus

With regards to the businesses acquired by US LBM Holdings, assessing each transaction made should be very difficult. Hence, let’s review the most recent acquisitions to understand the amount of goodwill that the company is registering.

As shown in the image below, in the acquisition of Darby, LBM acquired net assets of $57 million and noted goodwill of $26 million and customer relationships of $18 million. In the acquisition of Raymond, LBM acquired net assets of $88 million and registered goodwill of $31 million and customer relationships of $17.7 million.

With these figures in mind, investors should understand whether the company is paying too much for these acquisitions. Keep in mind that the building materials industry is not growing at a high pace. Certain market participants may have difficulties in justifying large valuations and large goodwill for acquisition targets. The image below provides further details on this matter:

Source: Prospectus

The list of liabilities is not worrying. The company reports liabilities of $1.39 billion, which is below the total amount of assets. However, the total amount of debt seems elevated as compared to the total amount of cash and assets. The amount of long-term debt is equal to $1.03 billion. It is shown in the image below:

Source: Prospectus

What investors should get to know is when LBM should pay the debt. While the amount of obligations doesn’t seem that large in 2019, 2020 and 2021, LBM should pay a total of $1.082 billion in 2022-2023. The company does not seem to have this amount of money in cash and may have difficulties in obtaining this amount of financing from equity investors. With this in mind, investors should remember that the company may have solvency issues in 2022. The image below provides further details on this matter:

Source: Prospectus

Income Statement And Cash Flow

LBM does report revenue growth. In 2016, net sales were equal to $2.66 billion and on December 31, 2018, this figure increased to $3.348 billion. Gross profit also increased from $0.745 billion to $0.925 billion in 2018. Having mentioned this feature, the most beneficial is that the net income increased from -$47 million in 2016 to +$38 million in 2018. The image below provides further details on this matter:

Source: Prospectus

The company is making a lot of efforts. The fact that LBM increased its net income in the last three years seems very beneficial. Value investors should appreciate it.

In addition, it seems also quite interesting that CFO increased from $15.03 million in 2016 to more than $132 million in 2018. While the company should not be able to generate sufficient cash to pay its debt in 2022-2023, it is beneficial. The image below provides further details on this matter:

Source: Prospectus

For those assessing EBITDA margins and EV/EBITDA ratios, the company seems also beneficial. The EBITDA increased from $147 million in 2016 to $215 million in 2018, and the Adjusted EBITDA margin is 7.1%. The image below provides further details on the net income, interest expenses, and the EBITDA:

Source: Prospectus

Stockholders

The list of shareholders reveals that US LBM Holdings is owned and controlled by several institutional investors and private equities. Take a look at the list provided in the prospectus:

Source: Prospectus

The image below obtained from the prospectus shows that Kelso Affiliates are expected to control the company through ownership of class B shares. Investors acquiring shares in the IPO are expected to own class A shares. The dual class structure may not be appreciated. It seems a strategy to protect the Kelso’s ownership in US LBM Holdings.

Source: Prospectus

Competition

The company mentions the following competitors in the prospectus:

Source: Prospectus

Among the peers, the public companies include Beacon Roofing Supply (BECN), BMC Stock Holdings, Inc. (BMCH), Builders FirstSource, Inc. (BLDR), and Foundation Building Materials (FMB). They trade at about 5x-13x EBITDA, and the amount of debt to assets is 22%-53%. The images below provide further details on this matter:

Source: Ycharts

Source: Ycharts

US LBM Holdings reports total assets of $1.853 billion and financial debt of more than $1 billion. It means that the company seems more leveraged than its competitors. With this in mind, the company may not be able to trade a lot higher than peers. The company’s EV/EBITDA ratio should be in the lower range of 5x-13x EBITDA if not lower.

Controlled Company

The fact that the company is expected to be controlled by Kelso may not be appreciated. Investors should understand that the Board of Directors may not be independent. As a result, directors may accept decisions to benefit the largest shareholders, which may be very detrimental for minority shareholders. The lines below were included in the prospectus:

Source: Prospectus

Use Of Proceeds

Certain investors may not appreciate that the company expects to use the proceeds to acquire LLC interests and to pay a portion of the debt. The image below was taken from the prospectus:

Source: Prospectus

It makes sense that the company is trying to pay its debt. Please understand that US LBM Holdings is paying interest rate higher than 9%. With that, investors may not appreciate that money from the IPO ends up in the hands of debt holders and it is not invested to reinforce business growth. The lines below provide further details on the interest rate being paid:

Source: Prospectus

Conclusion

The EBITDA increased from $147 million in 2016 to $215 million in 2018, and the Adjusted EBITDA margin is 7.1%. This is very beneficial.

With that, common stock owners may not appreciate this name as the amount of net income remaining after the payment of the interest expenses is not much. The company paid interest expenses of $89 million in 2018, and the net income was equal to $38 million in the same period. Using EV/EBITDA ratios seems the way to proceed to assess the valuation. However, common stock owners should focus on the assessment of the net income. Keep in mind that the debt to be paid in this case is not small.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.