BLDR

Builders Firstsource, Inc. - 10-Q Summary (Q3 2010)

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2010. Builders Firstsource, Inc. is a leading supplier and manufacturer of structural and related building products for residential new construction in the United States. The company operates through three regional segments (Atlantic, Southeast, and Central) but reports as a single segment. The business is heavily dependent on the residential housing market, which experienced a decline in activity during the third quarter of 2010 following the expiration of the federal first-time homebuyer tax credit.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales: Sales decreased 4.5% in Q3 2010 compared to Q3 2009, driven by a 13.5% decline in U.S. single-family housing starts. However, for the nine-month period, sales increased 5.6% year-over-year, aided by higher lumber prices and increased sales to the top 100 homebuilders.
• Profitability: Gross margin percentage declined 1.2 percentage points in Q3 (to 19.7%) and 2.7 percentage points for the nine months (to 18.7%) due to competitive pricing pressure and volatile commodity costs.
• Debt Structure: In January 2010, the company completed a rights offering and debt exchange, reducing total indebtedness by $130.0 million and extending the maturity of $139.7 million of notes to 2016. Long-term debt decreased from $299.1 million at year-end 2009 to $169.1 million at September 30, 2010.
• Costs: The company incurred $0.4 million in facility closure costs and $0.8 million in asset impairments in Q3 2010, compared to minimal amounts in the prior year, as it idled six facilities to reduce capacity.

Outlook, Risks, and Management Commentary

• Outlook: Management expects difficult market conditions to persist into 2011. They do not anticipate building activity to improve for the remainder of 2010. The company projects year-end 2010 liquidity to range between $100 million and $110 million.
• Liquidity Strategy: The company is focused on conserving liquidity, managing working capital, and adjusting physical capacity. As of September 30, 2010, available liquidity was approximately $126 million (including $121.4 million in cash and $4.2 million in net borrowing availability).
• Risks: Key risks include the cyclical nature of the homebuilding industry, volatility in lumber prices, and the company's ability to pass on material cost increases to customers. The company is currently not in compliance with its fixed charge coverage ratio covenant but is not required to meet it as long as excess availability remains above $35 million.
• Unusual Items: A $1.2 million litigation settlement was received in Q3, recorded as a reduction to SG&A expenses. Significant non-cash valuation allowances were recorded against deferred tax assets ($7.2 million in Q3, $25.9 million for the nine months).

Investor Verification Checklist

• Verify the sustainability of the $126 million liquidity position given the negative operating cash flow of $24.1 million for the nine-month period.
• Monitor the "Builder 100" sales concentration, which increased 20.5% year-over-year, to assess customer diversification risks.
• Review the impact of the $35 million minimum liquidity covenant on the revolving credit facility and the potential need to deposit cash if borrowing base availability declines.
• Assess the trajectory of gross margins, which have compressed significantly due to pricing pressure and commodity volatility.
• Confirm the status of the fixed charge coverage ratio, which is currently negative (-1.99x) but not triggered due to sufficient excess availability.