Builders FirstSource Inc (BLDR) 2006 Q3 法說會逐字稿

Good morning, and welcome to the Builders FirstSource third-quarter 2006 earnings conference call. Your host for today's call is Mr. Floyd Sherman, Chief Executive Officer. At this time, all participants are in a listen-only made. Later, we will connect a question-and-answer session, and instructions will follow at that time.

Any reproduction of this call, in whole or in part, is not permitted without prior written authorization of Builders FirstSource. At a reminder, this conference is being recorded today, October 27, 2006.

I would like to turn the call over to Geralyn DeBusk, with Halliburton Investor Relations, who will begin the call. Please go ahead.

Good morning, and thank you for joining us today to discuss the third-quarter 2006 financial results for Builders FirstSource. The Company issued a press release after the market closed yesterday. If you do not have a copy, it can be found on the Company's website at www.bldr.com.

Before we begin, I would like to remind you that during the course of this conference call, management may make statements concerning the Company's future prospects, business strategies and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations. Please refer to the Company's most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risks.

The Company undertake no obligation to publicly update or revise any forward-looking statement. The Company has provided reconciliations of adjusting items and non-GAAP financial measures in its earnings press release and detailed explanation of non-GAAP financial measures in its Form 8-K filed yesterday, both of which are available on the Company's website.

At this time, I will turn the call over to Floyd Sherman.

Thank you, Geralyn. Good morning, and welcome to our third-quarter 2006 earnings call. Joining me from our management team are Kevin O'Meara, President and Chief Operating Officer, and Charles Horn, Senior VP and Chief Financial Officer.

Following my review of the third-quarter highlights, I will turn the call over to Charles, who will discuss our financial results in more detail. I will then conclude with some additional comments on our outlook, given the current operating environment, and then we will take some questions.

Like other building material suppliers, our third-quarter results reflect the current challenges facing the industry, as many home builders work through excess inventory. Even though we anticipated the national housing market to weaken in 2006, we did not anticipate the unprecedented speed and depth of the decline. Unfavorable operating conditions were the primary factors driving our year-over-year sales declined. Our sales decreased only 11.5%, despite a 20.6% decrease in housing starts in our markets and a 14.3% decrease in nationwide commodity lumber and lumber sheet good prices.

We partially offset these market conditions by gaining market share, while simultaneously improving our gross margin percentage and reducing our operating costs. Net income for the third quarter was $17.3 million or $0.48 per diluted share, compared to $27.8 million or $0.80 per diluted share in the same quarter last year.

I would like to point out that third-quarter 2006 net income included a $4.3 million impairment charge related to goodwill for one of our reporting units and $800,000 of stock-based compensation expense in accordance with FASB Statement 123(R), which we adopted at the beginning of last year. Both of the these amounts are net of tax, and combined, they had a $0.14 negative impact on our earnings per share. Our return on net assets, calculated on a 12-month basis, was an impressive 32.4%, including the negative impact of the charges I just mentioned.

I will now turn the call over to Charles for a more detailed review of the financials.

Thank you, Floyd. Good morning to everyone. Reviewing our financial highlights, we reported third-quarter sales of $569.9 million, a decrease of 11.5% compared to $644 million for the same 2005 period. Our sales to the top 10 builders in the country decreased 11.6% during the quarter, commensurate with our overall sales decline.

As Floyd mentioned, the current macroeconomic factors created significant headwinds for us. However, we continued to deliver on the controllable sales drivers such as growing market share and opening new locations and new component plants in existing markets. Unfortunately, our actions were not enough to offset the deteriorating industry conditions.

We managed our cost structure very well during the quarter, adjusting our operating expenses, again commensurate with the decline in sales volume. We continue to evaluate other opportunities to reduce costs and conserve capital on an ongoing basis. We now estimate our 2006 capital expenditures will range from $26 million to $28 million, down from our previous forecast of $35 million to $37 million.

Breaking down the year-over-year change in our third-quarter sales, housing starts for our markets declined an estimated 20.6% compared to the same period in 2005. Many of our larger markets such as Texas, Georgia and the Carolinas, which experienced year-over-year year growth during the first half of the year, started to experience year-over-year declines in housing starts.

Compared to the third quarter last year, nationwide commodity lumber and lumber sheet good prices declined approximately 14%. Commodity profits continued to decrease beyond our expectations during the quarter, but we did a very good job of mitigating the negative impact on our sales to only a 3.8% decline, primarily through pricing management and product mix. Market-share gains during the quarter exceeded our expectations, adding an estimated 11.2 percentage points. Finally, new operations had a positive impact of sales growth of 1.7%.

We continued to improve our sales mix during the quarter, as we transitioned from commodity items to higher-margin value-added products and services. In addition, our sales mix benefited from the building process. Currently, more houses are being finished than started, so lumber and lumber sheet goods and prefabricated components, both of which are tied to the beginning stages of building a house, experienced a sharper decline than our other categories, which in general are more closely tied to the end of the building process.

If we break it down further, lumber and lumber sheet goods declined 25.5% and decreased to 30.4% of our total sales, down from 36% in the 2005 third quarter. The decrease was primarily due to lower commodity pricing, which had a negative effect of $23.7 million, in addition to lower unit volume impact of $35.4 million.

Prefabricated components decreased 16.9% from the prior-year quarter, due to a combination of lower volume and lower raw material prices. This product category represents 20.8% of our total sales for the quarter. Windows and doors was down only slightly, and represented 21.1% of total sales, up from 18.9% of total sales a year ago. Millwork also decreased by 0.1% and represented 9.3% of total sales. Lastly, other building products and services increased 14% and increased to 18.4% of total sales. Please refer to the table included in our press release for complete details on sales data by product category.

For the third quarter, our overall gross margin was 26.6% compared to 26.4% in last year's third quarter. The margin expansion was primarily driven by a decline in procurement prices and effective pricing management, resulting in a higher margin for our prefabricated components and lumber and lumber sheet goods categories. However, if market conditions deteriorate and create continued competitive pressure, we may not be able to maintain these margins in the fourth quarter.

During the third quarter, we also recorded a $4.3 million or $0.12 charge to reduce the carrying value of goodwill related to one of our reporting units. Market conditions for this reporting unit worsened appreciably during the third quarter, and based upon our interim impairment testing, we determined that a carrying value of goodwill for the reporting unit was impaired. We still believe this is an attractive market for us long-term. However, the current results do not merit the amount of goodwill that we had assigned to the market.

Our SG&A expense was $110.6 million for the third quarter of 2006, down $5.4 million compared to Q3 2005. Again, we managed our operating cost structure very well during the quarter. As a percentage of sales, however, third-quarter SG&A increased from 18% in 2005 to 19.4% in 2006. It is important to note the commodity deflation impact of $23.7 million inflated our SG&A percentage for the quarter by approximately 70 basis points.

Stock compensation charge, which was not present in 2005, added 20 basis points in costs associate with our Sarbanes-Oxley compliance effort -- added 20 basis points. Revised for these factors, our SG&A percentage was 18.3% versus 18% in the prior-year quarter.

Salaries and benefit expense decreased $5.7 million or 7.3%, in line with our sales volume decline of 7.7%. Headcount reductions, as well as reduced bonuses and sales commissions related to the decline in sales and profitability, primarily drove the decrease, but were partially offset by increased group health insurance of $1 million and stock-based compensation expense of $1.2 million. Again, there was no stock-based compensation expense in 2005 prior to the adoption of FAS 123(R) on January 1, 2006. In addition, professional service fees increased $1 million, primarily related to our Sarbanes-Oxley 404 compliance efforts, and fuel costs increased $0.5 million.

Our interest expense for the third quarter was $7.3 million, down $0.8 million from the third quarter of 2005. The decrease was primarily attributable to a reduction in debt issuance cost amortization and lower average debt levels, which were slightly offset by higher interest rates during Q3 2006.

Our effective tax rate dropped to 36.3% for Q3 2006, compared to 39.3% for Q3 2005. The decrease in the effective tax rate was primarily due to various state tax credits and tax deductions for qualified production activities during the third quarter of 2006.

Our net income for the third quarter was $17.3 million, or $0.48 per diluted share, compared to $27.8 million or $0.80 per diluted share in the same period last year. Diluted weighted average shares for the quarter were $36 million, compared to $35.0 million in the same quarter last year.

EBITDA for the 2006 third quarter was $47 million, compared to $58.7 million in the prior-year quarter. EBITDA as a percentage of sales decreased to 8.3% from 9.1% last year.

Our average working capital for the third quarter increased to 9.8% of sales, compared to 8.1% in 2005. We continue to be very focused on working capital management. However, the significant decrease in sales toward the end of the third quarter had a negative impact on our overall inventory turns. Even though our working capital utilization worsened as compared to September 2005, we still believe we have the best working capital management in our industry.

I will reiterate what Floyd previously mentioned. On a trailing 12-month basis, our return on net assets improved to 32.4% for the current period, including the $4.3 million impairment charge. For the third quarter of 2005, our return on net assets was 23.9%. Adjusted for items related to our IPO, third-quarter 2005 return on assets was 31.3%. Our focus on asset management, continued market share gains and cost control continues to drive this key metric.

From a debt perspective, as of September 30, 2006, our cash on hand was $65.8 million and our debt was $315 million. We do not reduce our borrowings during the quarter, but our leverage ratio improved to approximately 1.3 times.

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

Thank you, Charles. We believe we can continue to mitigate some of the unfavorable operating conditions by gaining market share to grow faster than our underlying markets. We also believe we can continue to increase sales through new operations. However, we think the difficult market conditions affecting our business will continue to have a negative effect on our operating results and year-over-year comparisons through at least mid-2007, due to the very strong comparable quarters during the first half of 2006. To help guide you through the market uncertainties, we will continue to provide you with updated housing starts and commodity price information, based on publicly available data, on our website each month.

While we are very focused on reducing costs and conserving capital during this very challenging period, we want to avoid taking steps that will limit our ability to compete and create shareholder value in the long term. We will continue to be very diligent in managing our working capital, in order to generate cash flow. We plan to use our cash flow to grow via acquisition when the right opportunity presents itself, and to retire debt when appropriate. Our acquisition pipeline is robust, and we are actively seeking strategic candidates. These are companies that are well-managed leaders in the markets we think will be attractive over the long term, and where the performance of the target company can be enhanced by being part of Builders FirstSource.

Certainly, there are adjustments we are making as we manage through the current downturn. Still, we remain confident in our core business model and operating strategy that we designed to not only grow our business, but also to continue increasing our market-share sales growth during moderate cyclical declines in housing demand. We also believe our diverse geographic footprint gives us a competitive advantage during both contracting and expanding housing markets. We plan to invest judiciously in new operations and strategically seek acquisition candidates. We also continue to believe that the long-term outlook for the housing market is very positive.

Finally, and perhaps most importantly, we have assembled the best team of people in the business at Builders FirstSource. They are proven professionals who have performed well in markets like this before, and will continue to perform well during the current market conditions.

I will now turn the call over to the operator for Q&A.

(OPERATOR INSTRUCTIONS). Nishu Sood, Deutsche Bank.

First question for Floyd -- Floyd, you described how the pace of this downturn has been surprising to you. I just wanted to get some color on that, especially given the number of housing cycles that you have lived through. If you look at the historical charts, when starts fall off, they tend to really kind of fall off a cliff, and it is kind of the same thing that has happened here in this cycle. So what is it about it, or what did you mean when you said that this cycle has been surprising in the way that it has unfolded?

The things that I was thinking that are different this time from the past cycles is the speed in which the builders reacted typically in the past, that deceleration or fall-off was spread over a lot greater number of months than what we saw this time. Literally, in early July, it was just as though somebody turned off the faucet. The builders began adjusting very quickly, curtailing operation out at the job site. So the speed at which they adjusted, and over a much shorter time duration than anything I have seen before, I think they were in earnest about getting the inventories down and meeting what they saw was a declining sales within all of their markets. We saw this adjustment spread on a market-by-market basis. It was not across the board in every market. Some of the markets were much faster at pulling down than others, but then the other states began to fall right in line.

Are you seeing a difference in the behavior between, let's say, than big large public and the private builders?

No, I really cannot say that. As Charles indicated in his numbers, our sales to the top 10 nation home builders, our sales were down with them just about right in line with what our total business was down. So we are seeing a very uniform slowdown with all builders -- small, large, local as well as national.

I appreciate your policy of not giving guidance, but when you say that you are expecting to see down year-over-year comparisons for at least the middle of 2007, are you thinking about that in terms of volumes, or are you thinking about that in terms of volumes as well as the effect that that is likely to have on your operating leverage? How exactly are you thinking about that? What does that mean?

We are thinking about that primarily as it relates to volumes in the new home start permits, as well as with commodity pricing. I think the analysts have certainly developed their models. They can crank those numbers in, and they can very quickly see what the effect is on the leverage on our business.

Charles, you mentioned that part of the reason for the difference in the relative performance between the different segments was because of their exposure to the different stage of the building process. Was that just something that you saw in this quarter, or would we expect to see, for example, as housing starts began to recover that you would see leading that the number and the prefab components?

That is exactly what we're seeing, is again, you are seeing more homes be finished now, so you're having more finish-out products versus the initial framing type products. So, let's say that the cycle retreats start going back up, you'll see the mix again shift toward more your initial structural product than your finish-out product. But again, it's all part and parcel of our continued focus on trying to drive toward more value-added products. So even with that shift, you still expect to expand your overall value-added product mix and decrease your dependency on more commodity type products.

Robert Manowitz, UBS.

I was wondering if you could elaborate on target multiples. You mentioned acquisitions. What are you seeing in terms of total enterprise value valuations?

Quite honestly, we can give you almost any number we want, because what it really comes down to is multiple of what? What we're really being thoughtful on now is looking at what time period of EBITDA do you need to look at and potentially average to really understand what the underlying value is of the Company. So I do not know that the multiple that you're paying on an acquisition is important. It is really is this a business that you want to own? Is it in a good market? Is it a market leader? Does it have good people? Frankly, is there a price at which it makes sense for the seller to sell and for us to buy?

I guess as you assess those multiples, whether they be 12-month forward EBITDA or 12-month backward-looking EBITDA, do you then sort of compare those multiples to your stock price? Would you look at buying back shares?

You have asked two questions. The second one, I'll defer to Floyd. The first one, not necessarily. Our value as a Company tends to change, obviously, every minute. We really look at the intrinsic long-term value of an acquisition, both the Company as well as what we can do with it going forward. So I do not know that that really has a lot of connection to how the market may value our stock at a given point in time.

I will also add, at this point in time, the Board or ourselves have any indication or we certainly are not looking at stock buyback. We do not think that is the best use of our cash. So we're going to continue to look at and pursue acquisition candidates, as well as use it for investing in our businesses in the way of capital expenditures.

My last question -- maybe this one is for Charles. In your description of your working capital relative to sales, obviously the deterioration I think reflects timing. I am wondering what time horizon do we need to see go by, before you are able to react with inventory levels and adjust your receivables to better match the sales declines?

I think you have to break down the three major components. Our AR, we really had no deterioration in our AR or in our AP days. So primarily, what you saw was a sales decline toward the end of September that was greater than we anticipated, so we got caught with a little bit of excess inventory. But again, even with that, we are turning our inventory 10 to 11 times.

So it is not a very difficult correction. In fact, the correction is already being made to pull it in line with what our expected sales volumes are. So it is a very easy correction.

Thank you very much. Good luck.

Steven Fisher, UBS.

If I understand your lumber pricing process correctly, the last two weeks of a quarter are important to the next quarter. So I just want to understand the trend that we are going to see here in the fourth quarter. I am assuming in the third quarter, you're using something like $330 versus maybe $400 for 2005, and then I am assuming for the fourth quarter you are going to have maybe likely a $280 number versus $400. If that the right way to understand it?

Yes, I think so.

So how will we -- a bit of a deteriorating trend on the lumber in the fourth quarter.

I think more of a -- rather than saying deteriorating, I think what we are now doing is reaching -- our commodity prices we see are starting to level out. So we will be pricing off of a lower base. We obviously had some advantage during the third quarter of carrying a better marking period going into the third quarter, and that helped carry us through the third quarter. Now, we're resetting at lower price points.

I do not know that we are going to -- I think right now, the commodity markets are trying to find itself. We are seeing capacity being taken off the market, and we certainly are not seeing the fall-off in prices near to the extent that we have seen over the past 90 days. So it is our hope that maybe we're going to begin leveling out, and possibly the markets may improve as we go into next year.

That's helpful. Why was the other products and services higher, and is that sustainable?

I think it is the case that with a little bit of the declining volume, we were able to finish up many more jobs than we originally anticipated. We recognize revenue on installed products when complete, not when delivered. So during the third quarter, we were able to really catch up on a number of jobs and go ahead and get the revenue recognized.

So it sounds like that may not carry into the fourth quarter specifically?

One of the things that we are seeing is that our installed business continues to grow. So yes, there was some finishing up, as Charles mentioned, but that still remains a growing aspect of our business.

Fair enough. Then you took your CapEx assumptions down. Maybe you could just talk a little bit about which facilities drove that 1.7% growth in sales. Then there have been eight projects you highlighted last quarter, and again you took your CapEx. Where do you stand with each of those?

There were a number of facilities that go into driving the 1.7%. It would be Port St. Lucie, Hagerstown truss, a new Cambridge, Maryland location that we have up and going. So there were a number of them that went in. The key initiatives we are still focused on are our San Antonio truss and panel. We're looking at a new panel operation in Jacksonville, Florida.

The [Loris], South Carolina truss plant, which is now under construction. As Charles mentioned, the Cambridge, Maryland distribution unit. Indianapolis, Indiana -- that DC is now operating. That also contributed as a new operation growth. We are also, we will be opening soon a lumber and lumber sheet goods DC unit out of Lake City, Florida. We are getting the advantages of a new and expanded millwork facility in Greenville, South Carolina. Our new DC in Knoxville, Tennessee, is now opened and operating, and we've got minimal improvement from that operation, I guess, in August -- certainly a little bit in September and a little bit in August.

The way that we are managing the business is we still are looking for opportunities to grow. Anything that we talked about in the past, nothing was discontinued. We move forward aggressively trying to build those facilities. Where the majority of the capital has come out has been on things that are nice to have -- paving that is not necessary, a shed would be nice to have -- those are the kind of thing that we are curtailing now and will be for the next couple of quarters.

Well, and we've also done a reallocation of certain assets. Rather than in some of the truss and panel plans, we have been able to deploy certain pieces of equipment that were being underutilized, and rather than buy a new piece of equipment, were able to transfer it into one of the new operations at a later date. When we see again an expansion in our capacity needs, we will have to buy and replace that with a piece of equipment. But at least we've been able to move that expansion further out.

That's great. Just to clarify, San Antonio truss plant and the Jacksonville plant -- have they both come online?

Just now. Yes.

Terrific. Great. Thanks very much, and congratulations, Kevin, on the new position.

David Manthey, Robert W. Baird.

Again, Floyd, just trying to benefit from your experience here -- as you look at this market, and I think it is interesting that you talked about the speed at which things slowed down. Is there any data that you are looking at that would give you an idea that the bottom may be approaching? Is it the inventory of new homes? Is it, as you mentioned, an uptick in lumber prices or demand for lumber? Anything that you follow closely that is sort of a leading indicator that you think?

No. The thing that I would follow more closely and look at is what are the new home sales, and balanced against what the builders are producing. Those are going to be the more critical items, to me.

Well, do you think since the faucet was sht off so uniformly -- and obviously the turnover rate is slower today. But the inventory levels I guess the last two months have been actually ticking down. The level they are at is -- on an absolute basis, it looks like it is maybe a little bit below average for past peaks. But do you take some comfort in that, that maybe the cycle is not three more years, than it might just be a year or some period shorter than we have seen in past cycles?

I guess caution would tell you it is still too early to tell. I am a believer, and I believe -- my feeling is that it will be shorter rather than longer. I certainly am not thinking in terms of -- and I don't have the feel myself personally that it is a three year before we get back to healthier levels of housing. Again, all we can do is react to it, because we are not buying houses or we are not -- we're certainly building them.

But I do not know that we have seen the bottom yet, I think we have certainly seen the major fall-off that is going to occur. Now, I think it's just we're trying to get balanced, and when the buyers really return to an active buying mode, when do we bleed through this excess inventory that has been created by the investors pulling out as the home prices are starting to retreat somewhat? I think that remains the issue that the market is still trying to find an answer to.

In terms of M&A and investment, hearing what's going on industry-wide with some of your competitors, it seems like the slowing market really has not slowed down the M&A activity or people's willingness to expand. Do you fell that that is something different this time? Is that a risk to you, or do you feel like that is just natural sort of this secular trend of the big getting bigger?

I actually think in times like this, you see more activity. The reason is folks will see that their business just peaked, starts to decline. They have to ask themselves, am I mad as hell and I can't take it anymore, or do I hang in for the next cycle? So they have got somewhere between a 3 and 12-month window to make that decision, and they will do that. So in these periods, you will see more activity. We saw this in a comparable period kind of in the 1999 and 2000 timeframe, where you had the same things going on with lumber prices. You had a small dip in housing starts and a lot of activity. That is what we're seeing now in this period is no different.

I think the key is, David, it's the time when you separate from the pack. You continue to grow your market share and you grow the acquisition during the correction that is going on in the market. Then, when the housing cycle returns to a more normal state, you're in a better position, and you've really removed yourself from some of the competitive pack chasing you. I think that is the key that we want to focus on, and why we continue to try to pursue acquisitions and reinvest in the Company, versus buying back our own shares.

Then finally, given that dynamic, do you think that there is net capacity that has come out of the system from a distribution standpoint during this downturn? Or as we just talked about, are the larger players expanding and acquiring, and really there is no net change or maybe even a net positive change?

I do not think there is any capacity coming out, because the last couple or three years have been very good for everybody. So there may be an isolated instance where somebody got really aggressive, a mom-and-pop, and built a truss plant or a millwork shop or whatever and over-levered. But those are going to be very few and far between. I think you're in a period now where folks have done very well, the balance sheets are in good shape and again, they are either going to sell their business because they do not want to to through it for the next year or so, or they are going to hunker down and move forward.

But there is still consolidation within the industry going on, and I do not want to minimize that. Obviously, just like the builders have gone through a period a consolidation, our industry continues to go through consolidation. And that drives some of it, as well, because you see the folks that are buying businesses, it is not the small private equity firms. It is not the small mom-and-pops buying other mom-and-pops. It is the larger industry leaders buying the companies.

But I have to believe that on an overall basis, we are taking business away from our competitors. With our market share sales growth of 11.5%, we are taking that at the expense of some competition. So I definitely believe we are outperforming the people we compete with in our markets. So ultimately, will this bring about some changes in capacity in the market? Right now, probably a little bit too early to say, but if we continue going on this basis, I definitely think we are going to begin eliminating some capacity in the market.

Well, I also think that we have to talk about capacity for what. Clearly, an important part of our market-share gain has been the component products, the trusses and panel plants, and that is why, as Floyd went through the list, you saw a fair number of where we are putting in truss and panel plants. The capacity for those is growing, but what we're doing is we are taking houses that would have been built with stick lumber and now building them with trusses and panels.

Michael Rehaut, JPMorgan.

This is Jennifer Consoli on the line for Mike. Just wanted to get a better sense of the market-share gains, if you could talk about them across your different segments, and if you gained share in all of your segments, or how that is looking?

By segments, are you referring to the product categories?

Yes, product categories.

I think the one category that we would probably look at that we have not gained share would be the lumber and lumber sheet goods. That tends to be where you have the most price competition. Since we are focused on trying to maintain gross margins and prudently grow our market share, I would say that is the one category that is probably slightly down.

Just a quick housekeeping item. The tax rate next quarter, are you expecting it look similar to the third quarter, or will it revert back to the higher levels you saw in the first and second quarters?

I think for this year, it is going to be closer to that 37%, 37.5%. Next year, probably in the 38% range.

David Schneider, Hoover Investment Management.

In the outset, I thought I heard you say that health insurance for your employees dropped by $1 million.

Actually, it increased. It it was offsetting the improvement we made in our salaries and wages.

I have a tendency to confuse things going down with things going up. Your staff in January 2006 was extremely high. If I pull a chart, it was I think as high as $26 in early February. Given the financial leverage that you have, I am wondering what was going through your minds, then, as far as maybe doing an offering to reduce your debt? Because obviously, on occasion you do acquisitions, and financial flexibility could be really great for you, as far as kind of consolidating the industry. I know you did a debt refinancing of some sort. I think it was around that time, maybe a month or two earlier. But as far as selling more equity when your stock was that high, what was going on through your mind? Because our balance sheet could look a lot different now if you had done it.

Well, there's two things. The first question was we were obviously in the midst of selling about 50% of our majority shareholders' stock in a privately placed transaction, and that transpired in February.

The second part of it is the leverage is not overly concerning to us. If you look at it currently on a net debt standpoint, it is less than $250 million, on an LTM EBITDA of over $190 million. So again, the leverage is very small on a cash-flow basis. If one goes to measure it based upon just booked capital, that may give an artificial indication, because we have paid off two large dividends in our history.

So what we tend to look at is how do we cover it from a cash flow perspective, what is our projected interest coverage, debt coverage and so forth, and that is how we evaluate how much leverage we are willing to assume. So with a leverage ratio which is debt to EBITDA of 1.3 times now, even with the correction that has taken place in sales, we feel we have a very prudent amount of leverage.

So that would be the answer to your second. Then the first, we would not have wanted to be out doing a secondary offering at the same time we were in the midst of a private placement with our majority owner.

How much -- are they completely out, or --?

No. They still own approximately 25% of the business.

Are they restricted as far as that 25% locked up for -- or is it free to trade?

It is not free to trade. They are an affiliate of the Company.

So could you describe the lock-up terms?

I think it is more from an SEC standpoint than any type of contractual arrangement. It would be the same as management. They would be subject to dribble-out rules and open periods in the market to sell. So in most circumstances, if they were to try to sell a big piece, they would have to come out with a secondary.

Rick Bandazian, Putnam Lovell.

Somewhat along the same lines of the M&A comments that you had made earlier, how would you characterize the environment right now? Are we at the beginning stages of discussions between parties? Are we in the late stages? Are we on the verge of potentially seeing some sizable transactions?

We typically don't comment on either transactions, acquisitions, individually or in the aggregate. What we will tell you is that it is a period now where there are good businesses for sale that are interesting. We do not how long that will continue. History would suggest that that will not continue indefinitely. We are evaluating the various opportunities right now. We're not in a position -- nothing is far enough along to be in a position to disclose.

Whether it pertains to you or not, just speaking generically?

Generically, I would say that we are probably in the late third quarter, early fourth quarter of the game.

(OPERATOR INSTRUCTIONS). Mike Peasley, Priority Capital.

Maybe I missed this, but in the event that I did, would you rehash on your goodwill impairment charge, what business it was or what geography it was in?

Our company is broken down into various reporting units, which we do not use with any type of disclosure metric in any of our SEC filings. It is just an area of the country where our permits have fallen greater than what the overall national norm is. It is a business that we still very good at and good with, but conversely did have a large amount of goodwill, that once we factored in the current operating environment in our projected environment in that market for the foreseeable future, that triggers the accounting impairment. But in terms of disclosing specific reporting units, we do not.

Let me ask it another way. What it manufacturing-related or service-related or --?

No. No manufacturing.

Then you mentioned headcount reductions. Did you gave a number in absolute value on that?

What we looked at for the quarter, we tend to measure things in full-time equivalent employees, which incorporates overtime as well as temporary labor. From a workforce standpoint, we have flexed down our FTEs about 7.6% on an overall sales volume decline of 7.7%. So we feel we have responded very quickly in terms of this major cost category.

One last question, just back to the acquisition for a minute. I do not think -- you do have some services, obviously, some installation services. You are not real big on stick framing services, although I think you do have some operations there. Is that an area that you are going to look to expand upon here looking forward?

We do not have any plans to expand that way in terms of acquisitions. We are growing the business aggressively in the services in the installed services area. We prefer doing it organically, as an offshoot to our truss and panel plants and installing the output of those plants as opposed to growing the business through acquisition.

At this time, there appear to be no more questions. Mr. Sherman, I will turn the conference back to you for closing remarks.

Thank you for joining us today. If you have any further questions, please feel free to contact Charles Horn.

This concludes the Builders FirstSource conference call. You may now disconnect.