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Builders FirstSource Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: July 31, 2009 12:01PM

Builders FirstSource Inc. (BLDR) filed Quarterly Report for the period ended 2009-06-30. Builders FirstSource is a leading supplier and manufacturer of structural and related building products for residential new construction in the United States. Manufacturing facilities include plants that manufacture roof and floor trusses wall panels stairs aluminum and vinyl windows custom millwork and pre-hung doors. Builders FirstSource also distributes windows interior and exterior doors dimensional lumber and lumber sheet goods millwork and other building products. Builders FirstSource Inc. has a market cap of $199.1 million; its shares were traded at around $5.52 with and P/S ratio of 0.2.

Highlight of Business Operations:

The housing industry experienced further declines in the first half of 2009. The seasonally adjusted annual rate for national single-family housing starts at June 30, 2009 was 470,000, down 28.2% from an annual rate of 655,000 one year ago, and down 74.2% from the peak of 1,823,000 in the first quarter of 2006. For the second quarter, national single-family housing starts were 123,700, down from starts of 193,900 in the second quarter of 2008, a 36.2% decline. For the first six months of 2009, national single-family housing starts were 202,000, down from starts of 355,800 in the first half of 2008, a 43.2% decline. We felt the impact of these difficult conditions on our second quarter results although we were able to limit the impact through execution of our strategy. Our strategy principally consisted of growing market share, implementing cost containment programs which included reducing physical capacity and adjusting staffing levels, prudently managing credit and, most importantly, conserving cash. Overall, we feel these efforts were successful. We estimate that market share gains contributed 9% sales growth during the current quarter, and contributed 13% sales growth year-to-date, partially offsetting the impact of declining housing starts on our sales. We have reduced our average full-time equivalent headcount by over 2,100 from the second quarter of 2008, a decrease of 40.5%. The reductions in payroll costs coupled with other cost reductions allowed us to reduce our selling, general and administrative expenses by 32% compared to the second quarter of 2008, and by 31% on a year-to-date basis. Because of these measures and others, our net cash used during the quarter was only $2.2 million, excluding a $20 million repayment on our revolving credit facility and the $31.8 million federal income tax refund received during the quarter. We believe these efforts will not only benefit us in the short-term but will allow us to be a more efficient organization in the long-term.

Our sales mix during the quarter was fairly consistent with the second quarter of 2008, with the exception of our lumber and lumber sheet goods category and our other building products and services category. The mix of lumber and lumber sheet goods declined due to the company passing on certain lower margin business in the current quarter in an effort to improve gross margins. This, combined with commodity deflation during the quarter, resulted in our sales mix for this category falling from 24.7% of total sales to 22.5% of total sales. Our other building products and services category grew from 20.6% of total sales to 22.3% of total sales as our installation business continues to penetrate further into the multi-family and light commercial segments. We believe our installation business and our value-added products and services give us a competitive advantage helping us to attract new business during this down cycle.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $24.0 million, or 32.3%. Total average full-time equivalent employee headcount for the quarter was 40.5% lower (38.2% lower for SG&A employees) than the year ago quarter, and our salaries and benefits expense, excluding stock compensation expense, decreased $13.5 million, or 32.0%, compared to a 33.0% decline in sales volume. Additionally, our office general and administrative expense decreased $3.0 million, which included decreases in professional services fees and travel related costs, and our delivery expenses decreased $4.5 million due to lower fuel costs combined with our efforts to eliminate excess fleet. Bad debt expense decreased $1.1 million due to tighter credit standards combined with successful collection efforts on older receivables in the current quarter.

As a percent of sales, selling, general and administrative expenses increased from 26.3% in 2008 to 28.7% in 2009. Salaries and benefit expense as a percentage of sales increased 1.0%, occupancy increased 0.8%, and delivery costs increased 0.6%, all due to fixed costs within these expense categories. We continue to monitor our operating cost structure closely and make adjustments as necessary.

Income Tax Expense. We recognized income tax expense of $0.1 million, or a 1.0% effective tax rate, compared to income tax expense of $12.9 million, or a 43.5% effective tax rate, for the same period a year ago. The income tax rate in the current quarter was impacted by a non-cash valuation allowance of $6.6 million against the net deferred tax assets generated from the net loss during the period related to our continuing operations. Excluding the effect of this valuation allowance, the effective tax rate was a benefit of 35.2%. The income tax rate in the second quarter of 2008 was impacted by a non-cash valuation allowance of $24.1 million recorded as a reserve against primarily all of our net deferred tax assets. Excluding the effect of this valuation allowance, the effective tax rate was a benefit of 37.8% for the second quarter of 2008.

Sales. Sales for the six months ended June 30, 2009 were $335.1 million, a 37.1% decrease from sales of $533.1 million for the six months ended June 30, 2008. In the six months ended June 30, 2009, housing starts in our markets decreased approximately 46%, while market prices for lumber and lumber sheet goods were on average 18.4% lower than the same period a year ago. We were able to mitigate some of this decline by continuing to expand into the multi-family and light commercial segment. Additionally, we were able to grow market share with our Builder 100 customers, and largely hold share with smaller regional and custom builders. These items contributed to an approximate 13% market share growth during the six months ended June 30, 2009. We were limited in growing our market share with some regional and custom builders due to our tight credit standards. Although these tight credit standards reduce our growth potential, they also limit our exposure to large write-offs in future quarters.

Read the The complete Report

BLDR is in the portfolios of Arnold Schneider of Schneider Capital Management.


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