BLDR

Business Context and Reporting Period

Company: Builders FirstSource, Inc. (BLDR)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Industry: Supplier and manufacturer of structural building products for residential new construction.
Operations: 55 distribution centers and 51 manufacturing facilities across 9 states in the southern and eastern U.S., managed as three regional groups (Atlantic, Southeast, Central).

Key Financial Metrics

Product Mix (2009): Lumber & Sheet Goods (24.3%), Windows & Doors (24.2%), Other Products & Services (21.7%), Prefabricated Components (19.1%), Millwork (10.7%).

Material Changes vs. Prior Period

• Revenue Decline: Sales dropped 31.7% primarily due to a 28.4% decline in U.S. single-family housing starts and tighter credit policies.
• Cost Reductions: Selling, General, and Administrative (SG&A) expenses decreased 28.1% to $201.4 million, driven by a 33.0% reduction in full-time equivalent headcount and lower salaries/benefits.
• Impairments: Asset impairments dropped significantly to $0.5 million in 2009 compared to $46.9 million in 2008 (which included $39.9 million in goodwill impairment for the Florida reporting unit).
• Discontinued Operations: The company exited the Ohio and New Jersey markets, reclassifying results as discontinued operations. Loss from discontinued operations was $5.0 million in 2009.
• Interest Expense: Increased slightly to $27.0 million due to write-offs of debt issue costs and swap settlements, partially offset by lower average interest rates.

Guidance, Outlook, and Risks

Outlook: Management expects the housing industry to stabilize with a potential slight improvement in 2010, citing NAHB forecasts of a 25.8% increase in housing starts. The company plans to continue cost containment, working capital management, and cash conservation.

Subsequent Event (Jan 2010): Completed a $205 million rights offering and debt exchange. Raised $180.1 million in equity and reduced indebtedness by $130.0 million, extending the maturity of $139.7 million of notes to 2016.

Key Risks:

• Liquidity Covenants: As of Dec 31, 2009, net available borrowing capacity in excess of the $35 million minimum liquidity covenant was zero. The company relied on $15.7 million of cash on deposit to meet this covenant. Failure to meet the covenant would trigger a fixed charge coverage ratio requirement of 1:1, which the company did not meet.
• Market Dependence: Highly dependent on the residential new construction market, which remains in a severe downturn.
• Customer Concentration: Top 10 customers accounted for 21.8% of sales; no single customer exceeded 6%.
• Debt Structure: Significant portion of debt is at variable rates, though largely hedged via interest rate swaps.

Investor Verification Checklist

• Liquidity Position: Verify the status of the $35 million minimum liquidity covenant and the company's ability to maintain it without triggering the fixed charge coverage ratio.
• Post-Recapitalization Debt: Confirm the terms and interest rates of the new 2016 notes issued in the January 2010 debt exchange (LIBOR + 10% with a 3% floor).
• Goodwill Valuation: Assess the remaining goodwill balance ($111.2 million) and the "cushion" for reporting units with thin margins, as further impairments are possible if housing starts decline.
• Operating Cash Flow: Monitor the ability to generate positive operating cash flow, as the company currently expects to use $60-70 million of cash over the next 12 months to fund operations.
• Discontinued Operations: Review the final costs associated with the exit of the Ohio and New Jersey markets, specifically lease obligations on vacated facilities.