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Article by DailyStocks_admin    (03-05-12 01:35 AM)

Description

Builders Firsts. 10% Owner Private Equity Warburg Pincus bought 100106 shares on 3-01-2012 at $ 3.11

BUSINESS OVERVIEW

OVERVIEW

Builders FirstSource, Inc. is a leading supplier and manufacturer of structural and related building products for residential new construction. We have operations principally in the southern and eastern United States with 51 distribution centers and 44 manufacturing facilities, many of which are located on the same premises as our distribution centers. We have successfully acquired and integrated 27 companies since our formation and are currently managed as three regional operating groups — Atlantic, Southeast and Central — with centralized financial and operational oversight. In this annual report, references to the “company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries, unless otherwise stated or the context otherwise requires.

Builders FirstSource, Inc. is a Delaware corporation formed in 1998, as BSL Holdings, Inc. On October 13, 1999, our name changed to Builders FirstSource, Inc. Our common stock is listed on the NASDAQ Stock Market LLC under the ticker symbol “BLDR”.

OUR INDUSTRY

We compete in the professional segment (“Pro Segment”) of the U.S. residential new construction building products supply market. Suppliers in the Pro Segment primarily focus on serving professional customers such as homebuilders and remodeling contractors. The Pro Segment consists predominantly of small, privately owned suppliers including framing and shell construction contractors, local and regional materials distributors, single or multi-site lumberyards, and truss manufacturing and millwork operations. Because of the predominance of smaller privately owned companies and the overall size and diversity of the target customer market, the Pro Segment remains fragmented. There were only seven building product suppliers with manufacturing capabilities in the Pro Segment that generated more than $500 million in sales according to ProSales magazine’s 2010 ProSales 100 list. On this list, we were the fourth largest building product supplier with manufacturing capabilities in 2010.

Our industry is driven primarily by the residential new construction market, which is in turn dependent upon a number of factors, including demographic trends, interest rates, employment levels, supply and demand for housing stock, availability of credit, foreclosure rates, consumer confidence and the economy in general. The homebuilding industry has experienced a significant downturn over the past six years due to negative trends in many of the factors listed above. During this downturn, many homebuilders have significantly decreased their housing starts because of lower demand and a surplus of both existing and new home inventory during this time. The weakness in the homebuilding industry has resulted in a significant reduction in demand for our products and services. According to the National Association of Homebuilders (“NAHB”), the single-family residential construction market was an estimated $106.8 billion in 2011, which is consistent with levels experienced over the past three years and indicates that some level of stabilization has occurred, though still down significantly from the historical high of $413.2 billion in 2006.

Adding to the pressure on the housing industry are the severe limitations on credit availability for smaller homebuilders and homebuyers. Beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults, primarily as a result of credit quality deterioration. This disruption resulted in a stricter regulatory environment and reduced availability of mortgages for potential homebuyers due to an illiquid credit market and more restrictive standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders continue to be constrained, which is slowing a recovery in our industry. However, we believe there are several meaningful trends that indicate U.S. housing demand will likely recover in the long term. These trends include relatively low interest rates, the aging of housing stock, and population growth due to immigration and birthrate exceeding death rate. Despite actual U.S. single-family housing starts in 2011 reaching the lowest level since the downturn began in 2006, housing starts increased 4.7% during the fourth quarter of 2011 compared to the fourth quarter of 2010. The NAHB is predicting that U.S. single-family housing starts will increase in 2012 to approximately 499,000, which would represent a 15.9% increase from 2011 actual U.S. single-family housing starts.

OUR CUSTOMERS

We serve a broad customer base ranging from production homebuilders to small custom homebuilders. We believe we have a diverse geographic footprint as we serve 32 markets in 9 states. Based on 2011 U.S. Census data, we have operations in 17 of the top 50 U.S. Metropolitan Statistical Areas, as ranked by single family housing permits in 2011. In addition, approximately 46% of U.S. housing permits in 2011 were issued in states in which we operate.

Our customer mix is a balance of large national homebuilders, regional homebuilders, and local builders. Our customer base is highly diversified. For the year ended December 31, 2011, our top 10 customers accounted for approximately 23.3% of sales, and no single customer accounted for more than 5% of sales. Our top 10 customers are comprised primarily of the largest production homebuilders, including publicly traded companies such as Beazer Homes USA, D.R. Horton, Inc., Lennar Corp., Hovnanian Enterprises, Inc., PulteGroup, Inc., and The Ryland Group, Inc.

In addition to the largest production homebuilders, we also service and supply regional and local custom homebuilders. Custom homebuilders require high levels of service; our sales team must work very closely with the designers on a day-to-day basis in order to ensure the appropriate products are produced and delivered to the building site. To account for these increased service costs, pricing in the industry is tied to the level of service provided and the volumes purchased.

While our primary focus has been on single-family residential new construction, over the past several years we have expanded our multi-family and light commercial business to further diversify our customer base and lessen our dependence on the single-family housing market.

OUR PRODUCTS AND SERVICES

We offer an integrated solution to our customers providing manufacturing, supply, and installation of a full range of structural and related building products. We provide a wide variety of building products and services directly to homebuilder customers. We also manufacture floor trusses, roof trusses, wall panels, stairs, millwork, windows, and doors. In addition to our comprehensive offering of products that includes approximately 63,000 stock keeping units (“SKUs”), we also provide a full range of construction services. We believe our broad product and service offering, combined with our scale and experienced sales force, has driven market share gains, particularly with production homebuilders.

We group our building products and services into five product categories: prefabricated components, windows & doors, lumber & lumber sheet goods, millwork, and other building products & services. For the year ended December 31, 2011, our combined sales of prefabricated components, windows & doors and millwork product categories represented 52.9% of total sales. Each of these categories includes both manufactured and distributed products. Products in these categories typically carry a higher margin and provide us with opportunities to cross-sell other products and services, thereby increasing customer penetration. Sales by product category for the years ended December 31, 2011, 2010 and 2009 can be found under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 7 of this annual report on Form 10-K.

Prefabricated Components. Prefabricated components are factory-built substitutes for job-site framing and include floor trusses, roof trusses, wall panels, stairs, and engineered wood that we design and cut for each home. Our manufactured prefabricated components allow builders to build higher quality homes more efficiently. Roof trusses, floor trusses, wall panels and stair units are built in a factory controlled environment. Engineered floors and beams are cut to the required size and packaged for the given application at many of our locations. Without prefabricated components, builders construct these items on site, where weather and variable labor quality can negatively impact construction cost, quality and installation time. In addition, engineered wood beams have greater structural strength than conventional framing materials, allowing builders to frame houses with more open space creating a wider variety of house designs. Engineered wood floors are also stronger and straighter than conventionally framed floors.

Prior to the current housing downturn, homebuilders were increasingly using prefabricated components in order to realize increased efficiency and improved quality. Shortening cycle time from start to completion was a key imperative of the homebuilders during periods of strong consumer demand. With the current housing downturn, that trend decelerated as cycle time had less relevance. Customers who traditionally used prefabricated components, for the most part, still do. However, the conversion of customers to this product offering has slowed. We expect this trend to continue at least for the duration of this downturn. In response, we have reduced our manufacturing capacity and delayed plans to open new facilities.

Windows & Doors. The windows & doors category comprises the manufacturing, assembly and distribution of windows, and the assembly and distribution of interior and exterior door units. We manufacture aluminum and vinyl windows in our plant in Houston, Texas which allows us to supply builders, primarily in the Texas market, with an adequate supply of cost-competitive products. Our pre-hung interior and exterior doors consist of a door slab with hinges and door jambs attached, reducing on-site installation time and providing higher quality finished door units than those constructed on site. These products typically require a high degree of product knowledge and training to sell. As we continue to emphasize higher margin product lines, we expect value-added goods like windows & doors to increasingly contribute to our sales and overall profitability.

Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood and oriented strand board (“OSB”) products used in on-site house framing. In 2011, this product line was 28.9% of our total sales, which is consistent with the prior year. We expect the lumber & lumber sheet goods business to remain a stable revenue source in the future.

Millwork. Millwork includes interior trim, exterior trim, columns and posts that we distribute, as well as custom exterior features that we manufacture under the Synboard ® brand name. Synboard is produced from extruded PVC and offers several advantages over traditional wood features, such as greater durability and no ongoing maintenance such as periodic caulking and painting.

Other Building Products & Services. Other building products & services consist of various products, including gypsum, hardware, composite materials, roofing and insulation. This category also includes services such as turn-key framing, shell construction, design assistance and professional installation of products spanning all our product categories. We provide professional installation and turn-key services as a solution for our homebuilder customers. Through our installation services program, we help homebuilders realize efficiencies through improved scheduling, resulting in reduced cycle time and better cost controls. By utilizing an energy efficiency software program, we also assist homebuilders in designing energy efficient homes in order to meet increasingly stringent energy rating requirements. Upgrading to our premium windows, doors, and insulating products reduces overall cost to the homebuilder by minimizing costs of the required heating/cooling system. We work closely with the homebuilder to select the appropriate mix of our products in order to meet current and forthcoming energy codes. We believe these services require scale, capital and sophistication that smaller competitors do not possess.

MANUFACTURING

Our manufacturing facilities utilize the latest technology and the highest quality materials to improve product quality, increase efficiency, reduce lead times and minimize production errors. As a result, we believe we incur significantly lower engineering and set-up costs than do our competitors, contributing to improved margins and customer satisfaction. We manufacture products within three of our product categories: prefabricated components, millwork, and windows and doors.

Prefabricated Components — Trusses and Wall Panels. Truss and wall panel production has two steps — design and fabrication. Each house requires its own set of designed shop drawings, which vary by builder type: production versus custom builders. Production builders use prototype house plans as they replicate houses. These house plans may be minimally modified to suit individual customer demand. The number of changes made to a given prototype house, and the number of prototype houses used, varies by builder and their construction and sales philosophy. We maintain an electronic master file of trusses and wall panels for each builder’s prototype houses. There are three primary benefits to master filing. First, master filing is cost effective as the electronic master file is used rather than designing the components individually each time the prototype house is built. Second, it improves design quality as a house’s design is based on the proven prototype except for any minor builder modifications. Third, master filing allows us to change one file and update all related prototype house designs automatically as we improve the design over time or as the builder modifies the base prototype house. We do not maintain a master file for custom builders who do not replicate houses, as it is not cost effective. For these builders, the components are designed individually for each house.

After we design shop drawings for a given house, we download the shop drawings into a proprietary software system to review the design for potential errors and to schedule the job for production. The fabrication process begins by cutting individual pieces of lumber to required lengths in accordance with the shop drawings. We download the shop drawings from our design department to computerized saws. We assemble the cut lumber to form roof trusses, floor trusses or wall panels, and store the finished components by house awaiting shipment to the job site.

We generate fabrication time standards for each component during the design step. We use these standards to measure efficiency by comparing actual production time with the calculated standard. Each plant’s performance is benchmarked by comparing efficiency across plants.

Prefabricated Components — Engineered Wood. As with trusses and wall panels, engineered wood components have a design and fabrication step. We design engineered wood floors using a master filing system similar to the truss and wall panel system. Engineered wood beams are designed to ensure the beam will be structurally sound in the given application. After the design phase, a printed layout is generated. We use this layout to cut the engineered wood to the required length and assemble all of the components into a house package. We then install the components on the job site. We design and fabricate engineered wood at many of our distribution locations.

Prefabricated Components — Stairs. We manufacture box stairs at several of our locations. After a house is framed, our salesman takes measurements at the job site prior to manufacturing to account for any variation between the blueprints and the actual framed house. We fabricate box stairs based on these measurements.

Custom Millwork. Our manufactured custom millwork consists primarily of synthetic exterior trim, custom windows, features and box columns that we sell under our Synboard brand name and throughout our company.

We sand, cut, and shape sheets of 4 foot by 18 or 20 foot Celuka-blown, extruded PVC, or Synboard, to produce the desired product. We produce exterior trim boards by cutting the Synboard into the same industry-standard dimensions used for wood-based exterior trim boards. We form exterior features by assembling pieces of Synboard and other PVC-based moldings that have been cut, heated and bent over forms to achieve the desired shape. For custom windows, we build the frame from Synboard and glaze the glass into place. We fabricate box columns from sections of PVC that are cut on a 45 degree angle and mitered together.

Windows. We manufacture a full line of traditional aluminum and vinyl windows at an approximately 200,000 square foot manufacturing facility located in Houston, Texas. The process begins by purchasing aluminum and vinyl lineal extrusions. We cut these extrusions to size and join them together to form the window frame and sash. We then purchase sheet glass and cut it to size. We combine two pieces of identically shaped glass with a sealing compound to create a glass unit with improved insulating capability. We then insert the sealed glass unit and glaze it into the window frame and sash. The unit is completed when we install a balance to operate the window and add a lock to secure the window in a closed position.

Pre-hung Doors. We pre-hang interior and exterior doors at many of our locations. We insert door slabs and pre-cut door jambs into a door machine, which bores holes into the doors for the door hardware and applies the jambs and hinges to the door slab. We then apply the casing that frames interior doors at a separate station. Exterior doors do not have a casing, and instead may have sidelights applied to the sides of the door, a transom attached over the top of the door unit and a door sill applied to the threshold.

OUR STRATEGY

Our long-term strategy is to leverage our competitive strengths to grow sales, earnings, and cash flow and remain a preferred supplier to the homebuilding industry. We have modified our strategy in response to the extended downturn that has affected our industry. Our strategy during the housing downturn is to maximize financial performance without impairing our ability to compete and create value in the long term. We have implemented this strategy through generating new business, focusing on cost, working capital and operating improvements, and most importantly conserving cash.

Expand Current Customer Base. Over the past ten years, the homebuilding industry has undergone consolidation, and the larger homebuilders have increased their market share. In accordance with this trend, our customer base has increasingly shifted to production homebuilders. We intend to leverage our business model, geographic breadth and scale to continue to grow our sales to the production homebuilders as they continue to gain market share. Sales to our 10 largest production homebuilders represented 23.3% of our total sales in 2011. We expect that our ability to maintain strong relationships with the largest builders will be vital to our ability to grow and expand into new markets as well as maintain our current market share through the current downturn. Additionally, during this downturn, we will continue with our plan to prudently expand our presence in the custom homebuilder base while also continuing to look for ways to expand our multi-family and light commercial business to further diversify our customer base.

Focus on Cost, Working Capital and Operating Improvements. We are extremely focused on expenses and working capital to remain a low cost supplier. We maintain a continuous improvement, “best practices” operating philosophy and regularly implement new initiatives to reduce costs, increase efficiency and manage working capital. For example, we have linked our computer system to those of some customers to streamline the administrative aspects of the quoting, invoicing and billing processes. We also analyze our workforce productivity to determine the optimal labor mix that minimizes cost, and examine our logistics function to reduce the cost of inbound freight. Our focus on cost controls, working capital and operating improvements is particularly important during this downturn. Our largest controllable cost is our salaries and wages. Our ability to identify and implement operating efficiencies is evident in the fact that our salaries and benefits expense, excluding stock compensation expense, decreased $2.0 million in 2011 compared to 2010, despite a $78.8 million increase in sales. We were also able to keep our remaining selling, general and administrative expenses relatively flat during the current year, despite this sales increase. Industry forecasters are predicting that single family housing starts are expected to show improvements in 2012 which could require us to increase our operating expenses, headcount and working capital in order to support the additional demand. We will work to minimize these increases to ensure that we prudently adjust our variable costs with the change in sales volumes. We continue to be diligently focused on the controllable aspects of working capital, including days sales outstanding, inventory turns and accounts payable days outstanding.

Conserve Cash. During a downturn, we realize the importance of acting quickly to conserve capital. We reduced our capital expenditures in recent years to maintenance capital levels. However, in 2010, we increased our capital expenditures due primarily to buyouts of expiring vehicle and equipment leases. We also manage our credit tightly, especially in these conditions. As industry conditions remain challenging, we know it is important to extend credit prudently for a higher probability of collection on our accounts receivable.

Pursue Strategic Acquisitions. The highly fragmented nature of the Pro Segment of the U.S. residential new construction building products supply market presents substantial acquisition opportunities. Our long-term acquisition strategy, subject to our ability to secure long-term capital, centers on the continued growth of our prefabricated components business and on the potential for geographic expansion. First, we will selectively seek to acquire companies that manufacture prefabricated components such as roof and floor trusses, wall panels, stairs, and engineered wood, as well as other value-added products such as millwork. We will also seek to acquire companies that present an opportunity to add manufacturing capabilities in a relatively short period of time. Second, there are a number of attractive homebuilding markets where we do not currently operate. We believe that our proven operating model can be successfully adapted to these markets and that the homebuilders in these markets, many of whom we currently serve elsewhere, would value our broad product and service offering, professional expertise, and superior customer service. When entering a new market, our strategy is to acquire market-leading distributors and subsequently expand their product offerings and/or add manufacturing facilities while integrating their operations into our centralized platform. This strategy allows us to quickly achieve the scale required to maximize profitability and leverage existing customer relationships in the local market. Our senior management team has the experience and ability to identify acquisition candidates and integrate acquisitions, having acquired and integrated 27 companies since 1998. There may be opportunities for industry consolidation in 2012 and we would like to be at the forefront of this trend. However, liquidity continues to be our primary area of focus in 2012, and therefore we will review potential acquisitions in light of our projected liquidity needs.

CEO BACKGROUND

Paul S. Levy, Director and Chairman of the Board, age 63. Mr. Levy became a director in 1998. Mr. Levy is a Managing Director of JLL Partners, Inc., which he founded in 1988. In the last five years, he served on the boards of the following public companies: Patheon, Inc. (current), PGT, Inc. (current), and IASIS Healthcare, LLC (current). The Board believes Mr. Levy’s extensive experience in buying and managing a variety of businesses is of great value to the Board and the Corporation.
David A. Barr, Director, age 47. Mr. Barr became a director in February of 2006. Mr. Barr has served as a general partner of Warburg Pincus & Co and a managing director of Warburg Pincus, LLC since January 2001 and is involved in leveraged buy-out and special situations activities in the United States. Mr. Barr was a managing director at Butler Capital and focused on leveraged buy-out transactions for more than 10 years prior to joining Warburg Pincus in 2000. He also previously worked at Goldman Sachs. He received a B.A. in economics from Wesleyan University and an M.B.A. from Harvard Business School. In the last five years, he served on the boards of the following public companies: Neiman Marcus, Inc. (current), TransDigm Group Incorporated (current), Polypore International, Inc. (current), Wellman, Inc. (previous), and Eagle Family Foods Holdings, Inc./Eagle Family Foods, Inc. (previous). He also currently serves on the board of directors of Scotsman Industries Inc. Mr. Barr’s extensive experience in corporate finance and his service on a number of public company boards brings additional depth and perspective to the Board’s deliberations.
Cleveland A. Christophe, Director, age 65. Mr. Christophe became a director in September of 2005 and is the Chairman of the Compensation Committee and a member of the Audit Committee and the Nominating Committee. The Board of Directors affirmatively determined that he qualifies as an independent director. Mr. Christophe was named President of US&S, Inc., a supplier of services and materials primarily to various agencies of the U.S. Government, in 2009. Mr. Christophe is also the Managing Partner of TSG Capital Group, a private equity investment firm, which he founded in 1992. Previously, Mr. Christophe was Senior Vice President of TLC Group, L.P. From 1971 to 1987, Mr. Christophe held numerous senior positions with Citibank, N.A. He has been a Chartered Financial Analyst since 1975. The Board believes Mr. Christophe’s substantial managerial experience, financial expertise, and prior service on public company audit committees position him to make valuable contributions to the Board.

Craig A. Steinke, Director, age 54. Mr. Steinke became a director in June of 2006 and is the Chairman of the Nominating Committee and a member of the Audit Committee. The Board of Directors affirmatively determined that he qualifies as an independent director. Since September 2010, Mr. Steinke has served as a director and full-time adviser for Lazer Spot Inc., which specializes in providing logistics support to Fortune 500 companies. Prior to that, he was President and Chief Executive Officer of GPX International Tire Corporation, an international manufacturer and distributor of branded industrial and off road equipment tires, and a director of its parent, GPX International, Inc. From 2001 to 2007, Mr. Steinke was President and Chief Executive Officer of Eagle Family Foods, Inc., a consumer products company in the food industry. Prior to his appointment as CEO in 2001, he served as Chief Financial Officer of Eagle Family Foods from 1998 to 2001. His previous positions held include Senior Vice President and Group General Manager of BHP Copper, a significant natural resource company, and President of Magma Metals, a billion-dollar subsidiary of Magma Copper Company. Mr. Steinke, a C.P.A., has nine years of public accounting experience with Arthur Andersen & Company. In the last five years, he served on the boards of the following public companies: Eagle Family Foods Holdings, Inc./Eagle Family Foods, Inc (previous). He also currently serves on the board of directors of Alliance Tires Americas, Inc. The Board recognizes that Mr. Steinke’s extensive experience at the senior executive management level allows him to make significant contributions to the development of the Corporation’s business strategy.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

We are a leading supplier and manufacturer of structural and related building products for residential new construction in the U.S. We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, aluminum and vinyl windows, custom millwork and trim, as well as engineered wood that we design and cut for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods, various window, door and millwork lines, as well as cabinets, roofing and gypsum wallboard. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.

We group our building products into five product categories:




Prefabricated Components. Our prefabricated components consist of wood floor and roof trusses, steel roof trusses, wall panels, stairs, and engineered wood.




Windows & Doors. Our windows & doors category is comprised of the manufacturing, assembly, and distribution of windows and the assembly and distribution of interior and exterior door units.




Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing.




Millwork. Millwork includes interior trim, exterior trim, columns and posts that we distribute, as well as custom exterior features that we manufacture under the Synboard ® brand name.




Other Building Products & Services. Other building products & services are comprised of products such as cabinets, gypsum, roofing and insulation and services such as turn-key framing, shell construction, design assistance, and professional installation spanning all of our product categories.

Our operating results are dependent on the following trends, events and uncertainties, some of which are beyond our control:




Homebuilding Industry. Our business is driven primarily by the residential new construction market, which is in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, foreclosure rates, and the health of the economy and mortgage markets. Over the past few years, many homebuilders significantly decreased their starts because of lower demand and an excess of home inventory. Due to the decline in housing starts and increased competition for homebuilder business, we have and will continue to experience pressure on our gross margins. Single family housing starts in 2011 were the lowest since the downturn began in 2006. However, industry forecasters expect to see some improvement over the next few years. We also still believe there are several meaningful trends that indicate U.S. housing demand will likely recover in the long term and that the current downturn in the housing industry is likely a trough in the cyclical nature of the residential construction industry. These trends include relatively low interest rates, the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate.




Targeting Large Production Homebuilders. Over the past ten years, the homebuilding industry has undergone consolidation, and the larger homebuilders have increased their market share. We expect that trend to continue due to the better liquidity and land positions of the larger homebuilders relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we are facing in our markets with certain profitability expectations. Our sales to the “Builder 100,” the country’s largest 100 homebuilders, increased 9.9% during 2011, despite a 8.6% decrease in actual U.S. single-family housing starts for the year. We expect that our ability to

maintain strong relationships with the largest builders will be vital to our ability to grow and expand into new markets as well as maintain our current market share through the current downturn. Additionally, during this downturn, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.




Expand into Multi-Family and Light Commercial Business. We continue to look for ways to expand our multi-family and light commercial business to further diversify our customer base and lessen our dependence on single-family residential new construction.




Use of Prefabricated Components. Prior to the current housing downturn, homebuilders were increasingly using prefabricated components in order to realize increased efficiency and improved quality. Shortening cycle time from start to completion was a key imperative of the homebuilders during periods of strong consumer demand. With the current housing downturn, that trend decelerated as cycle time had less relevance. Customers who traditionally used prefabricated components, for the most part, still do. However, the conversion of customers to this product offering has slowed. We expect this trend to continue at least for the duration of this downturn. In response, we have reduced our manufacturing capacity and delayed plans to open new facilities.




Economic Conditions. Economic changes both nationally and locally in our markets impact our financial performance. The building products supply industry is highly dependent upon new home construction and subject to cyclical market changes. Our operations are subject to fluctuations arising from changes in supply and demand, national and local economic conditions, labor costs, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, single-family housing starts, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. Over the past few years, the mortgage markets have experienced substantial disruption due to increased defaults. This resulted in a stricter regulatory environment and reduced availability of mortgages for potential homebuyers due to an illiquid credit market and tighter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders continue to be severely constrained. As the housing industry is dependent upon the economy and employment levels as well as potential homebuyers’ access to mortgage financing and homebuilders’ access to commercial credit, it is likely that the housing industry will not significantly improve until conditions in the economy and the credit markets improve and unemployment rates decline.




Cost of Materials. Prices of wood products, which are subject to cyclical market fluctuations, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production inputs for our manufactured and prefabricated products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers, but our pricing quotation periods may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products due to the price of fuel. Our inability to pass on material price increases to our customers could adversely impact our operating results.




Controlling Expenses. Another important aspect of our strategy is controlling costs and enhancing our status as a low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. We have a “best practices” operating philosophy, which encourages increasing efficiency, lowering costs, improving working capital, and maximizing profitability and cash flow. We constantly analyze our workforce productivity to achieve the optimum, cost-efficient labor mix for our facilities. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.

CURRENT OPERATING CONDITIONS AND OUTLOOK

The homebuilding industry continues to be challenging as U.S. single-family housing starts in 2011 were the lowest since the downturn began in 2006. According to the U.S. Census Bureau, actual U.S. single-family housing starts for 2011 were 430,700, down 8.6% compared to 2010. The housing industry continues to struggle due to the limited availability of credit to smaller homebuilders and potential homebuyers, a slow economic recovery, excess home inventory and high unemployment rates, among other factors. However, actual U.S. single-family housing starts for the fourth quarter of 2011 were 100,100, a 4.7% increase from the fourth quarter of 2010. The National Association of Homebuilders (“NAHB”) is forecasting 499,000 U.S. single-family housing starts for 2012, which is an increase of 15.9% from 2011.

We achieved an 11.2% increase in sales during 2011 as compared to the prior year. We believe our broad offering of building products and construction services represents a value proposition to our customers that is superior to that of our competitors. We believe this allowed us to increase our sales volume despite a significant decline in construction activity during the year. This increased sales volume was achieved through the growth of sales to existing customers and the addition of new customers. We were also able to increase our gross margin percentage by 1.5 percentage points during 2011 compared to 2010, primarily due to increased sales volume and our ability to leverage fixed costs within costs of goods sold. We have continued to manage our operating expenses during the downturn with a key focus on conserving liquidity. Our selling, general, and administrative expenses remained relatively flat when compared to the prior year despite our increase in sales. We have made significant changes to our business during the downturn that have improved our operating efficiency and allowed us to better leverage our operating costs against changes in sales.

While many forecasters believe there may only be a moderate improvement in housing in the near-term, we still believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics. Regardless of the rate of recovery in housing, we feel we are well-positioned to take advantage of any construction activity in our markets and continue to increase our market share. We will continue to focus on working capital by closely monitoring the credit exposure of our customers and by working with our vendors to improve our payment terms and pricing on our products. We will also continue to work diligently to achieve the appropriate balance of short-term cost reductions while maintaining the expertise to grow the business when market conditions improve. We want to create long-term shareholder value and avoid taking steps that will limit our ability to compete.

SEASONALITY AND OTHER FACTORS

Our first and fourth quarters have historically been, and are expected to continue to be, adversely affected by weather patterns in some of our markets, causing reduced construction activity. In addition, quarterly results historically have reflected, and are expected to continue to reflect, fluctuations from period to period arising from the following:




The volatility of lumber prices;




The cyclical nature of the homebuilding industry;




General economic conditions in the markets in which we compete;




The pricing policies of our competitors;




The production schedules of our customers; and




The effects of weather.

The composition and level of working capital typically change during periods of increasing sales as we carry more inventory and receivables. Working capital levels typically increase in the second and third quarters of the year due to higher sales during the peak residential construction season. These increases have in the past resulted in negative operating cash flows during this peak season, which historically have been financed through available cash. Collection of receivables and reduction in inventory levels following the peak building and construction season have in the past positively impacted cash flow. We have also from time to time utilized our borrowing availability under credit facilities to cover working capital needs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $7.3 million, or 3.6%. Our office general and administrative expense decreased $5.3 million, primarily due to a $1.0 million decrease in depreciation expense, a $1.2 million litigation settlement we received in 2010, as well as $3.2 million of recapitalization costs we incurred in 2009. Additionally, bad debt expense decreased $1.9 million due to tightened credit standards.

As a percent of sales, selling, general and administrative expenses decreased from 29.7% in 2009 to 27.7% in 2010. Our office general and administrative expense as a percentage of sales decreased 0.9%, delivery costs decreased by 0.3%, occupancy decreased by 0.3% due to the fixed nature of the category and bad debt expense decreased by 0.3%.

Interest Expense, net. Interest expense was $31.7 million in 2010, an increase of $4.6 million. The increase was primarily due to higher interest rates on our 2016 notes issued in January 2010, combined with the write-off of $1.6 million of unamortized debt issuance costs related to long-term debt repaid, $2.5 million of costs incurred related to our recapitalization transaction, and the write-off of $0.6 million in debt issuance costs related to the reduction of our revolving credit facility from $250 million to $150 million in 2010. These increases were partially offset by lower average debt balances and a write-off of $1.2 million in debt issue costs and $1.6 million of expense related to the settlement of one of our swaps in 2009.

Income Tax (Benefit) Expense. We recorded an income tax benefit of $1.1 million during 2010 compared to a benefit of $30.8 million during 2009. Our benefit was reduced by an after tax, non-cash valuation allowance of $35.4 million and $3.9 million related to our net deferred tax assets for 2010 and 2009, respectively. In 2009, we recognized a $2.1 million income tax benefit in continuing operations related to losses generated by our discontinued operations due to recently enacted tax legislation that allowed for an extended carry-back of net operating losses generated in 2009. Excluding the valuation allowance, our effective tax rate would have been 38.3 percent for 2010. Excluding the valuation allowance and the impact of the change in tax law for 2009, our effective tax rate would have been 37.2 percent for 2009.

Discontinued Operations, net. Loss from discontinued operations was $1.2 million in 2010 compared to $5.0 million in 2009. In 2010, we recognized $1.1 million in expense related to future minimum lease obligations on closed facilities and revisions to sub-rental income estimates. In 2009, we recognized $2.4 million in expense related to future minimum lease obligations on closed facilities and employee severance. We also reduced our expense in 2009 by $1.8 million due to a negotiated lease termination. The remaining loss from discontinued operations was primarily related to operating losses incurred in our Ohio market which we exited in 2009.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and fund capital expenditures. In the past, our capital resources have primarily consisted of cash flows from operations and borrowings under our various credit facilities.

In December of 2011, we entered into a $160.0 million first-lien term loan and a stand-alone letter of credit facility, which provides up to $20.0 million of letters of credit. The term loan, which was issued at 97%, provided $119.6 million of net proceeds after repaying the $20.0 million outstanding under the existing senior secured revolving credit facility, using $14.2 million to collateralize letters of credit outstanding under the new letter of credit facility, and paying fees and expenses related to this transaction. In conjunction with the closing of the term loan, we terminated our existing senior secured revolving credit facility (See Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K). The homebuilding industry, and therefore our industry, has been in a significant downturn since 2006. We are expecting increased stability and a slight improvement in the housing industry in 2012. Beyond 2012, it is difficult for us to predict what will happen as our industry is dependent on a number of factors, including national economic conditions, employment levels, the availability of credit for homebuilders and potential home buyers, the level of foreclosures, existing home inventory, and interest rates. With the sustained downturn in the housing industry, our operations are no longer providing positive cash flows, and we are not expecting our cash flows from operations to be positive in 2012.

Consolidated Cash Flows

Cash used in operating activities was $66.4 million and $41.7 million for 2011 and 2010, respectively. We received a federal income tax refund related to the carry-back of losses of approximately $33.8 million in 2010. Excluding the federal income tax refund received in 2010, our cash used for 2010 was approximately $75.5 million. The decrease in cash used in operating activities, net of the income tax refund, is primarily related to lower operating losses in 2011 compared to 2010 due to increased sales and improved gross margins. This decrease was partially offset by an increase in cash used due to changes in working capital. Of the $66.4 million of cash used in 2011, approximately $24.6 million was due to an increase in working capital, which was primarily related to increases in accounts receivable and inventory to support our strong sales performance. Our asset utilization remained healthy as our accounts receivable days decreased in 2011 compared to 2010, as we increased the rate of our overall receivable collections. Our inventory turns were relatively flat, however, our accounts payable days decreased from 2010. We continue our focus on diligently managing working capital.

Cash used in operating activities increased $39.0 million in 2010 compared to 2009. We received federal income tax refunds related to the carry-back of losses of approximately $33.8 million and $31.8 million in 2010 and 2009, respectively. Excluding the federal income tax refund received in 2010, our cash used for 2010 was approximately $75.5 million. Of this cash used in 2010, approximately $5.5 million related to an increase in working capital, primarily related to increased inventory purchases towards the end of the year in an attempt to protect our first quarter 2011 pricing commitments. The remaining cash used was to fund our operating losses and cash interest payments. Our asset utilization improved as our accounts receivable days decreased in 2010 compared to 2009 as we continued reducing our overall delinquency rate and increased the rate of our overall receivable collections. Our inventory turns remained flat year-over-year and our accounts payable days increased slightly from 2009.

Cash used in investing activities increased by $10.3 million in 2011 compared to 2010. The increase was primarily due to a $14.2 million increase in restricted cash used to collateralize letters of credit outstanding under our letter of credit facility. Capital expenditures decreased $4.2 million as we had fewer buyouts of expiring vehicle and equipment leases in the current year.

Cash used in investing activities increased by $8.2 million in 2010 compared to 2009. The increase was primarily due to a $6.9 million increase in capital expenditures related to buyouts of expiring vehicle and equipment leases. In addition, proceeds from the sale of assets decreased $1.4 million as we actively sold off excess equipment in 2009.

Net cash provided by financing activities increased by $59.4 million in 2011 compared to 2010. In 2011, our net cash provided by financing activities of $128.6 million was primarily due to the $155.2 million of proceeds from our term loan, net of debt discount, partially offset by $20.0 million of payments under our revolving credit facility and $5.3 million used to repay our remaining 2012 notes. The net proceeds received upon completion of our rights offering and debt exchange in the first quarter of 2010 was the primary source of the cash provided in 2010.

Net cash provided by financing activities was $69.2 million in 2010 compared to net cash used in financing activities of $19.9 million in 2009. The net proceeds received upon completion of our rights offering and debt exchange in the first quarter of 2010 was the primary source of the cash provided in 2010. The primary use of cash in 2009 was $20.0 million of payments under our revolving credit facility.

Capital Resources

First-Lien Term Loan and Letter of Credit Facility

In December 2011, we completed a $160.0 million first-lien term loan which included detachable warrants (“warrants”) that allow for the purchase of up to 1.6 million shares of our common stock at a price of $2.50 per share. At the same time, we entered into a stand-alone letter of credit facility (“letter of credit facility”), which provides for the issuance of up to $20.0 million of letters of credit. The term loan and the letter of credit facility are both scheduled to mature on September 30, 2015.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

COMPANY OVERVIEW
We are a leading supplier and manufacturer of structural and related building products for residential new construction in the U.S. We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, aluminum and vinyl windows, custom millwork and trim, as well as engineered wood that we design and cut for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods, various window, door and millwork lines, as well as cabinets, roofing and gypsum wallboard. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.
We group our building products into five product categories:
• Prefabricated Components. Our prefabricated components consist of wood floor and roof trusses, steel roof trusses, wall panels, stairs, and engineered wood.
• Windows & Doors. Our windows & doors category is comprised of the manufacturing, assembly, and distribution of windows and the assembly and distribution of interior and exterior door units.
• Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing.
• Millwork. Millwork includes interior trim, exterior trim, columns and posts that we distribute, as well as custom exterior features that we manufacture under the Synboard ® brand name.
• Other Building Products & Services. Other building products & services are comprised of products such as cabinets, gypsum, roofing and insulation and services such as turn-key framing, shell construction, design assistance, and professional installation spanning all of our product categories.
Our operating results are dependent on the following trends, events and uncertainties, some of which are beyond our control:
• Homebuilding Industry. Our business is driven primarily by the residential new construction market, which is in turn dependent upon a number of factors, including interest rates, consumer confidence, foreclosure rates, and the health of the economy and mortgage markets. Over the past few years, many homebuilders significantly decreased their housing starts because of lower demand and an excess of home inventory. Due to the decline in housing starts and increased competition for homebuilder business, we have and will continue to experience pressure on our gross margins. Housing starts remain at historically low levels but industry forecasters expect to see some improvement over the next few years. We also still believe there are several meaningful trends that indicate U.S. housing demand will likely recover in the long term and that the current downturn in the housing industry is likely a trough in the cyclical nature of the residential construction industry. These trends include relatively low interest rates, the aging of housing stock, and population growth due to immigration and birthrate exceeding death rate.
• Targeting Large Production Homebuilders. Over the past 10 years, the homebuilding industry has undergone significant consolidation, with the larger homebuilders substantially increasing their market share. We expect that trend to continue due to the better liquidity and land positions of the larger homebuilders relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we are facing in our markets. We expect that our ability to maintain strong relationships with the largest builders will be vital to our ability to grow and expand into new markets as well as maintain our current market share through the current downturn. Additionally, during this downturn, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.
• Expand into Multi-Family and Light Commercial Business. We continue to look for ways to expand our multi-family and light commercial business to further diversify our customer base and lessen our dependence on single-family residential new construction.
• Use of Prefabricated Components. Prior to the current housing downturn, homebuilders were increasingly using prefabricated components in order to realize increased efficiency and improved quality. Shortening cycle time from start to completion was a key imperative of the homebuilders during periods of strong consumer demand. With the current housing downturn, that trend decelerated as cycle time had less relevance. Customers who traditionally used prefabricated components, for the most part, still do. However, the conversion of customers to this product offering has slowed. We expect this trend to continue at least for the duration of this downturn. In response, we have reduced our manufacturing capacity and delayed plans to open new facilities.
• Economic Conditions. Economic changes both nationally and locally in our markets impact our financial performance. The building products supply industry is highly dependent upon new home construction and subject to cyclical market changes. Our operations are subject to fluctuations arising from changes in supply and demand, national economic conditions, labor costs, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, single-family housing starts, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. Over the past few years, the mortgage markets have experienced substantial disruption due to increased defaults. This disruption resulted in a stricter regulatory environment and reduced availability of mortgages for potential homebuyers due to an illiquid credit market and tighter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders continue to be severely constrained. As the housing industry is dependent upon the economy and employment levels as well as potential homebuyers’ access to mortgage financing and homebuilders’ access to commercial credit, it is likely that the housing industry will not significantly improve until conditions in the economy and the credit markets improve and unemployment rates decline.
• Cost of Materials. Prices of wood products, which are subject to cyclical market fluctuations, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production inputs for our manufactured and prefabricated products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers, but our pricing quotation periods may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products due to the price of fuel. Our inability to pass on material price increases to our customers could adversely impact our operating results.
• Controlling Expenses. Another important aspect of our strategy is controlling costs and enhancing our status as a low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. We have a “best practices” operating philosophy, which encourages increasing efficiency, lowering costs, improving working capital, and maximizing profitability and cash flow. We constantly analyze our workforce productivity to achieve the optimum, cost-efficient labor mix for our facilities. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.

CURRENT OPERATING CONDITIONS AND OUTLOOK
The homebuilding industry continues to be challenging as the annualized rate for U.S. single-family housing starts, according to the U.S. Census Bureau, at September 30, 2011 was 425,000, down 4.9% when compared to September 2010. Actual U.S. single-family housing starts for the third quarter of 2011 were 117,300, which was down 1.4% from the same quarter last year. For the quarter, however, actual single-family housing starts in the South Region, as defined by the U.S. Census Bureau and which encompasses our entire geographic footprint, increased to 61,800, up 5.1% from the third quarter of 2010. The housing industry continues to struggle due to the limited availability of credit to smaller homebuilders and potential homebuyers, a slow economic recovery, excess home inventory and high unemployment rates, among other factors. The National Association of Homebuilders (“NAHB”) is only forecasting 422,000 U.S. single-family housing starts for 2011, which is down approximately 10.4% from 2010.
Despite the continued sluggish housing market, we achieved a 20.4% increase in sales during the third quarter of 2011 as compared to the third quarter of 2010. This was primarily due to increased sales volume, as we gained market share by expanding our customer base and promoting our wide array of products and services to existing and new customers. We were also able to increase our gross margin percentage by 0.8 percentage points during the quarter compared to the prior year, primarily due to this increased sales volume combined with a decrease of fixed costs in costs of goods sold. We have continued to manage our operating expenses during the downturn with a key focus on conserving liquidity. Our selling, general, and administrative expenses, excluding stock compensation expense and the benefit of a $1.2 million litigation settlement recorded in the third quarter of 2010, increased only $0.8 million during the current quarter when compared to the same quarter in the prior year despite a $36.8 million increase in sales. We have made significant changes to our business during the downturn that have improved our operating efficiency and allowed us to better leverage our operating costs against changes in sales.
We still believe that the long-term outlook for the housing industry is positive due to the growth in the underlying demographics. We will continue to focus on working capital by closely monitoring the credit exposure of our customers and by working with our vendors to improve our payment terms and pricing on our products. We will also continue to work diligently to achieve the appropriate balance of short-term cost reductions while maintaining the expertise to grow the business when market conditions improve. We want to create long-term shareholder value and avoid taking steps that will limit our ability to compete.
SEASONALITY AND OTHER FACTORS
Our first and fourth quarters have historically been, and are expected to continue to be, adversely affected by weather patterns in some of our markets, resulting in reduced construction activity. In addition, quarterly results historically have reflected, and are expected to continue to reflect, fluctuations from period to period arising from the following:
• The volatility of lumber prices;
• The cyclical nature of the homebuilding industry;
• General economic conditions in the markets in which we compete;
• The pricing policies of our competitors;
• The production schedules of our customers; and
• The effects of weather.
The composition and level of working capital typically change during periods of increasing sales as we carry more inventory and receivables. Working capital levels typically increase in the second and third quarters of the year due to higher sales during the peak residential construction season. These increases have in the past resulted in negative operating cash flows during this peak season, which generally have been financed through available cash. Collection of receivables and reduction in inventory levels following the peak building and construction season have in the past positively impacted cash flow. We have also from time to time utilized our credit facility to cover working capital needs.

Our borrowing base consists of trade accounts receivable, inventory and fixed assets, which meet specific criteria contained within the credit agreement, minus agent specified reserves. Our net borrowing base availability, net of the minimum liquidity requirement, at September 30, 2011 was $47.1 million. Excess availability is the sum of borrowing base plus qualified cash, defined as cash on deposit with the agent subject to a control agreement, minus outstanding borrowings and letters of credit. This amount must equal or exceed a specified minimum liquidity requirement at the monthly reporting dates or we are required to meet a fixed charge coverage ratio of 1 to 1, which we currently would not meet.
Further declines in our borrowing base, if any, could compel us to either repay outstanding borrowings under the senior secured revolving credit facility or increase our cash on deposit with the agent in order to meet the minimum liquidity requirement. At September 30, 2011, we had $52.9 million of cash that can be used to either repay the $32.8 million currently funded under the facility, which consists of $20.0 million of outstanding borrowings and $12.8 million of letters of credit, or support any shortfall in the net borrowing base availability. At September 30, 2011, we were not in violation of any covenants or restrictions imposed by any of our debt agreements.
At September 30, 2011, we had total liquidity of $100.0 million, which consisted of $52.9 million of cash on hand and $47.1 million of net borrowing base availability. We expect our fourth quarter to essentially be cash neutral as cash used to fund operations, pay interest, and repay our remaining 2012 notes should largely be offset by seasonal reductions in working capital. As a result, we expect our cash used in fiscal year 2011 to approximate $50 – $55 million. However, due to the seasonal reductions in working capital in the fourth quarter of 2011 and the corresponding decrease in our borrowing base, we expect to end the year with total liquidity of approximately $80 million. We believe our current liquidity is sufficient to meet our needs over the next twelve months and do not expect working capital to be a significant source of funds during this time period. We will continue to explore various financing alternatives in order to strengthen our liquidity position. Our senior secured revolving credit facility, which provides a substantial portion of our liquidity, is scheduled to mature in December 2012. Prior to the expiration date, we will be required to either extend the term beyond December 2012, enter into a new credit facility, or raise additional funds through the sale of common stock or debt in the public capital markets or in privately negotiated transactions. There can be no assurance that any of these financing options would be available on favorable terms, if at all.
Consolidated Cash Flows
Cash used in operating activities was $47.9 million and $24.1 million for the nine months ended September 30, 2011 and 2010, respectively. We received a federal income tax refund of $33.8 million in 2010. Excluding this federal income tax refund, our cash used in operations for the nine months ended September 30, 2010 was approximately $57.9 million. The decrease in cash used in operating activities, net of the income tax refund, is primarily related to lower operating losses in 2011 compared to 2010 due to increased sales and improved gross margins, partially offset by an increase in cash used due to changes in working capital.
During the nine months ended September 30, 2011 and 2010, cash used in investing activities was $2.3 million and $7.8 million, respectively. The decrease was primarily due to a $5.4 million decrease in capital expenditures as we had more buyouts of expiring vehicle and equipment leases in the prior year.
Cash from financing activities for the nine months ended September 30, 2011 decreased $69.3 million as compared to the nine months ended September 30, 2010. The decrease was primarily due to the net proceeds received upon completion of the rights offering and debt exchange in the first quarter of 2010.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2011, the FASB issued an update to existing guidance under the Intangibles — Goodwill and Other topic of the Codification. The new guidance permits an entity to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines this to be the case, it is then required to perform the current two-step goodwill impairment test to identify any potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any. Otherwise, the two-step goodwill impairment test is not required. This guidance becomes effective for us on January 1, 2012, for all annual and interim goodwill impairment tests. We do not expect these changes to have a material impact on our financial position or results of operations.
In June 2011, the FASB issued guidance under the Comprehensive Income topic of the Codification which eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. Rather, an entity will be required to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This guidance becomes effective for us on January 1, 2012, and we are currently evaluating the two presentation options. These changes will be for presentation and disclosure only and will have no impact on our financial position or results of operations.

CONF CALL

Floyd Sherman

Thank you and good morning. Welcome to our first quarter 2009 earnings call. Joining me from our management team is Charles Horn, Senior Vice President and Chief Financial Officer. I will start with a recap of the first quarter and then I’ll turn the call over to Charles who’ll discuss our first quarter financial results in more detail. After my closing comments regarding our outlook we’ll take your questions.

First quarter of 2009 was very much as we had anticipated. It was an extremely difficult quarter for those in the housing industry. Single family housing starts declined 51.7% from the first quarter of 2008 and fell 24.2% from the fourth quarter of 2008.

We felt the impact of these difficult conditions on our first quarter results, although we were able to partially mitigate the overall impact to our action plan of conserving cash, growing market share, reducing physical capacity, adjusting staffing levels, implementing cost containment programs and prudently managing credit.

We feel these efforts were successful as our net cash used during the quarter was only $4.3 million. This is consistent with net cash used in the fourth quarter of 2008, but we were able to accomplish this on $37.5 million less sales.

We estimate that market share gains reduced our sales decline quarter-over-quarter by an estimated 17%. We were able to achieve these gains by largely holding share with our builder 100 customers, expanding our presence with regional and local custom builders and penetrating further into the multifamily and light commercial segment.

From a capacity standpoint we closed two facilities during the quarter. As a result of these closures and other staffing reductions, our average FTEs for the quarter dropped to 3169, down 38% from the first quarter of 2008 and down 22% from the fourth quarter. The reductions in payroll costs, coupled with other cost reductions allow us to reduce our selling, general and administrative expenses by 29% or approximately 88% variable with our sales volume decline of 33%.

Excluding facility closure cost, the write-off of debt issue costs and the valuation allowance, our loss from continuing operations per diluted share was $0.46 compared to a loss of $0.43 per diluted share for the first quarter of 2008. We feel our action plan has been successful and continues to be the correct course of action to insure both the short term and long term health of our company.

I will now turn the call over to Charles who will review the first quarter results in more detail.

Charles Horn

Good morning everyone. I will walk you through our first quarter results in more detail. We reported sales of $163.8 million, compared to $259.9 million a year ago, a decline of $96.1 million or 37%. Our sales volume dropped an estimated 33% compared to an estimated 50% decline in housing starts within our markets. This indicates a contribution from market share gains of approximately 15% to 17%.

Breaking down our product categories, prefabricated components decline $21.7 million, 42.1% from the first quarter of 2008. Windows and doors were down 39.2%. Lumber and lumber sheet goods declined 34.7% to $40 million. Millwork declined 38.6% and lastly other building products and services decreased 30.9%.

The categories of prefabricated components and lumber and lumber sheet goods, continues to be negatively impacted by price deflation, as our commodity price index dropped an estimated 15% year-over-year.

Our gross margin percentage was 20.9% for the first quarter of 2009, down from 22.3% last year, a 140 basis point decline. Specifically, our gross margin percentage declined 30 basis points due to lower prices, 60 basis points due to volume, which is due to our fixed cost and cost of goods sold and 50 basis points due to a shift in sales mix, towards lower gross margin products and services.

Our selling, general and administrative expenses decreased $21.8 million or 29% to $54.4 million. As a percentage of sales however, SG&A expense increased from 29.3% in the first quarter of 2008 to 33.2% in the same period of 2009, which is reflective of fixed cost items becoming a larger percentage of our SG&A.

Within salaries and SG&A, salaries and benefits expense declined $14.3 million or 31.3% from the first quarter of 2008. This decline was 95% variable with our sales volume decline of 33%. Office G&A expense decreased $3.1 million or 34.3% from the same quarter of last year.

Occupancy expenses were down $1 million, but up from 2.5% of sales a year ago, to 3.4% of sales in the current quarter. This is reflective of the fixed cost nature of this category. Delivery expenses decreased $4.1 million to $10.1 million during the quarter. The 28.9% decline is primarily due to a $2.2 million decrease in fuel costs and a $1.3 million decrease in fleet lease and maintenance expenses. Our bad debt expense was $1.2 million or 70 basis points of sales compared to $3.3 million or 10 basis points of sales in the year ago quarter.

We recorded $560,000 of facility closure costs during the quarter, primarily related to our remaining lease obligations on the distribution facility in Maryland and administrative offices in South Carolina. Interest expense were $7.5 million, an increase of $1.1 million over the prior year due to write-off of $1.2 million debt issue cost related to a capacity reduction in our revolving credit facility from $350 million to $250 million.

We recorded tax expense of $2.1 million or a 7.5% effective tax rate during the quarter, compared to a tax benefit of $9.5 million or a 38.3% tax benefit rate in the first quarter last year. Our benefit for the quarter was reduced by an after-tax, non-cash valuation allowance of $12.9 million or $0.36 per diluted share, related to our net deferred tax assets. Absent this valuation allowance our tax benefit rates would have been 38.1%.

Our loss from continuing operations for the quarter was $30.4 million or $0.85 loss per diluted share compared to $15.3 million or $0.43 loss per diluted share in the same period last year. Excluding the valuation allowance, facility closure costs and the write-off of debt issue, our loss from continuing operations was $0.46 per diluted share for the current quarter, compared to $0.43 last year.

Adjusted EBITDA for the quarter was a loss of $13.7 million compared to a loss of $10.2 million in the same quarter a year ago. EBITDA declined $3.5 million year-over-year, on a $96.1 million sales decline, which equates to only 3.6% negative flow through from the loss sales.

Our net cash used during the quarter was $4.3 million, leaving a cash balance of $102.6 million at March 31, 2009. Our net borrowing availability at March 31, 2009 was essentially zero due to a drop in our eligible borrowing base, which is supported by trade receivables and inventory balances. Approximately $19.1 million of cash on hand at March 31, 2009 supported a short fall in the calculation of the $35 million minimum liquidity covenants contained in you credit agreement.

This covenants collated eligible borrowing base minus outstanding borrowings and the resulting amount $35 million or the company’s required to meet a fixed charge coverage ratio, which we currently could not meet. The calculation of minimum liquidity allows cash on deposit with the agent to be included as eligible borrowing base. Absent the use of cash in this calculation we would have been forced to repay $19.1 million in borrowings, in order to comply with the covenant. Accordingly our available cash was $83.5 million at March 31, 2009.

An updated on our tax income refunds. We expect to are e receive a $33 million tax income refund within the next two weeks. In looking forward, both the House and the Senate have introduced bills that would allow for a five year carry back for net operating losses. If that’s passed, that could allow us to generate up to $15 million of potential refunds in 2010.

Our working capital percentage excluding cash and income tax receivables was 12.6% compared to 12.9% last year. However, our cash conversion days worsened from 53 days last year to 60 days this quarter. The increase in our cash conversion days was primarily due to a decrease in our accounts payable days. Our accounts receivable days actually improved slightly dropping to 41 days from 41.9 days last year.

Our inventory turns essentially remains flat between years. Our accounts payable days decreased due to an increasing amount of outside contract labor and due to slow inventory turns. Our subcontractors generally require us to pay on a daily to weekly basis. We recently have extended these terms by negotiations to a net of about 15 days, which should improve our 80 days in the second quarter.

I will now turn the call back over to Floyd for his closing comments.

Floyd Sherman

Thank you Charles. First quarter single family housing starts dropped 52% compared to the same quarter a year ago and on a seasonally adjusted annual rate, single family starts dropped almost 50% to 358,000 starts, further indication that 2009 will likely be more challenging than 2008.

We believe our action plan has been successful and limiting the impact of the difficult conditions on our results and we will continue to execute our strategy of implementing cost containment programs, prudently managing credit, rationalizing physical capacity and staffing levels, growing market share and conserving cash. This continued strategy execution coupled with $83.5 million in available cash and over $30 million in expected income tax refunds in 2009 should provide the liquidity to withstand these challenging conditions within our industry.

Since the housing correction began 36 months ago, we’ve asked a tremendous amount from our employees. The past three years have not been easy, but I’m very proud of the sacrifices our employees have made and I’m also very proud of their willingness to do whatever it takes to get the job done. They’ve responded admirably and for this, I owe them an enormous amount of gratitude.

I’ll now turn the call over to the operator for Q-and-A.

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