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ProBuild’s Net Losses for Past 13 Quarters Total Near $200mln

The ProBuild operation that Builders FirstSource plans to acquire has recorded net losses totaling $198.1 million in the 39 months between January 2012 and March 2015, filings this month to the Securities and Exchange Commission reveal.

The latest filing, posted May 29, also contains a balance sheet that declares 43% of ProBuild’s assets are classified as “goodwill” and the accumulated deficit to the dealer’s current owners has grown to $815.5 million.

BFS  announced on April 13 it will acquire ProBuild in an all-cash deal worth $1.63 billion, an acquisition that creates America’s biggest pro-oriented building material supplier with  operations from Florida to Alaska.

ProBuild has long been rumored to have lost hundreds of millions of dollars since its creation in 2006. But last week’s filing, combined with a 2012-2014 income statement, posted earlier this month, provide the first comprehensive insights into the Denver-based giant. They generally show a company whose prospects have improved since 2013 but arguably remain weak. The $1.03 billion classified on the balance sheet as goodwill also indicates that ProBuild’s owners indeed have lost big bucks on the deals.

Gross Margins Rise

One case of slow improvement shows up on ProBuild’s gross margins. They rose from 24.3% in 2012 to 25.0% in 2013 and to 25.8% in 2014. That improvement continued in the first quarter of this year: It inched up to 25.9% for January through March compared with 25.3% in the year-earlier period.

Likewise, operating expenses (including depreciation and amortization) as a percentage of net sales also have declined, shrinking from 24.3% of $3.62 billion in sales in 2012 to 23.3% of $4.34 billion in sales in 2013 to 22.9% of $4.48 billion in sales last year. More year-over-year improvement took place in 2015′s first quarter: From 27.4% in operating costs during last year’s first-quarter net sales of $908.4 million, operating costs ate up only 25.9% of the $913.1 million in net sales posted in this year’s opening three months.

Those improvements helped ProBuild swing from a $104.9 million operating loss in 2012 to an $11.1 million operating profit in 2013 and a $70.9 million gain in 2014. ProBuild’s profilts revered again in this year’s first quarter, posting an operating loss of $10.3 million, but that’s just one-third of the $33.3 million operating loss in 2014′s first quarter.

Add it up, and you get operating losses for the 13 quarters totaling $34.5 million. That’s about 2.5% of the $13.35 billion in net sales over those 3-1/4 years.

Interest Expense Burden

So why did net losses total $161.6 million in 2012 and $40.7 million in 2013 before swinging to a $25.2 million net profit in 2013? Mainly because ProBuild paid $173 million in interest expenses during those years. That also was an issue in this year’s first quarter, when $12.9 million in interest expenses helped produce $21 million in net loss from operations. Add the interest burden to the operating losses you get most of what produced $198.1 million in net losses.

All these activities left ProBuild as of March 31 with $2.39 billion worth of assets. Of that, goodwill was the biggest factor, at $1.03 billion. PriceWaterhouse Coopers, the accounting firm that produced the financial report, defines goodwill as “the excess over the purchase price over the fair market value of the net assets of acquired businesses at the dates of acquisition.” Many dealers regard goodwill as a fake asset for LBM operations, as they don’t tend to have as valuable a brand name as, say, Apple Computer or Starbucks.

ProBuild’s other assets include $414.6 million worth of accounts receivables, and $337 million in inventories. It claims $571.8 million in property and equipment, but $267 million of that amount is held under capital leases and lease finance obligations.

On the liabilities side, ProBuild has $1.34 billion worth of notes payable and lease obligations. The stockholder’s equity line shows $869.2 million worth of paid-in capital and $815.5 million worth of accumlated stockholders’ deficit.

The ‘Noncontrolling Interests’ Factor

As with many large companies, ProBuild has a complicated ownership structure and organizational makeup. ProBuild Holdings Inc. and its subsidiaries are owned by ProBuild Capital LLC, which in turn is owned by FMR LLC and an entity related to FMR LLC called ProBuild Investors LLC. FMR is better known as Fidelity, the investment managent company. It owns ProBuild through its private investment unit, Devonshire Investors,

ProBuild Capital also owns ProBuild Real Estate (PBRE) Holdings LLC, which owns properties that are leased to ProBuild Holdings. PBRE is considered a variable interest entity for which, as PriceWaterhouse Coopers sumarizes, the company directs activities and absorbs losses related to property sales and disposals.

Noncontrolling interests racked up losses of $148.4 million in 2012 and $21.6 million in 2013, but swung to a $36.4 million profit last year. This means that net loss attributable to ProBuild Holdings was relatively limited: losses of $13.2 million in 2012, $19.1 million in 2013, and $11.2 million in 2014. (Plus $4.9 million in 2015′s first quarter, when the loss attributable to noncontrolling interests hit $16.1 million.)  But this may be more an accounting distinction than a real difference-maker, as dealer-owners often consider real-estate issues related to their facilities as part of their overall financial management.

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