Monday, June 20, 2011

Builders First Source - another company in which Stadium Capital Management has a big bet (SCM is a major shareholder in ARC)

In a previous post on Reprographics 101, I mentioned that an investment company, Stadium Capital Management, is a very large shareholder in American Reprographics Co (ARC). (You can find previous posts that mentioned Stadium Capital Management by using the search box-window on this blog-site.)

Apparently, Stadium Capital Management has made other big bets that the construction industry will, at some point in the future, experience a robust rebound. That will happen, at some point in time, but the big question is, “when will that happen.”

Stadium Capital Management (at least as of March 31, 2011) was a very, very significant shareholder in Builders First Source – Stadium Capital Management reportedly owned (at least as of date above) 15.3% of the total outstanding stock of Builders First Source.


Builders First Source, Inc. (Nasdaq: BLDR), is a leading supplier and manufacturer of structural and related building products for residential new construction in the United States

If you're a new homebuilder, Builders First Source wants you to look no further. The company sells hardware and doors, windows, lumber, and other structural building products to construction professionals. Customers have included D.R. Horton and Hovnanian Enterprises. Builders First Source has grown through acquisitions to operate about 55 distribution centers and 50 manufacturing plants in nearly 15 states. The company was founded in 1998 as BSL Holdings by a management team headed by former CEO John Roach and private investment firm JLL Partners. Affiliates of JLL and private equity firm Warburg Pincus own about 50% of Builders First Source's stock.

Hopefully (for Stadium Capital Management), they purchased their shares in Builders First Source when Builders First Source shares were trading at very low prices.

Take a look at this!

On Feb 17, 2006, Builders First Source shares traded at $24.10 per share.

When I looked up a quote for that stock today, June 20, 2011), it was trading at around $2.13 per share.

Builders First Source has two other very, very significant shareholders; Warburg Pincus, LLC and JLL Fund. It looks like one of those significant shareholders has not done very well on its ownership of Builders First Source shares, and I say that because of an article I found, from Feb 2006, about Warburg Pincus’ purchase of a significant stake in Builders First Source.

Warburg Pincus and New JLL Fund to Acquire Significant Interests in Builders FirstSource

DALLAS, Feb 06, 2006 -- Builders FirstSource, Inc. (Nasdaq: BLDR), a leading supplier and manufacturer of structural and related building products for residential new construction in the United States, today announced that Warburg Pincus LLC, through its affiliate, Warburg Pincus Private Equity IX, L.P., an $8 billion dollar global private equity fund, has agreed to acquire a 26.2 percent beneficial ownership interest in the company from JLL Partners. Additionally, JLL Partners Fund V, L.P., a new JLL fund, will acquire the remaining 26.2 percent beneficial ownership interest in Builders FirstSource currently held by other funds controlled by JLL. The transaction is subject to customary closing conditions (including Hart-Scott- Rodino clearance) and is expected to close during the first quarter of 2006.

I’ve put in my Google Docs library an Excel file that shows the company’s major shareholders; you can find that file at this link:

I don’t know what price Warburg Pincus paid for its shares in Builders First Source, but, on Feb 17, 2006, eleven days after the article was published, Builders First Source shares were trading at $24.10 per share. Like I said earlier, Builders First Source shares were trading at around $2.13 per share this morning!

Builders First Source appears to be doing quite lousy, financially speaking. According to information I reviewed on Google Finance this morning, Builders First Source has lost money every year for the past four years. Total losses over the past four years have amounted to approximately $320 million!

Sales history:

2007 - $1.468 bil

2008 - $992 mil

2009 - $678 mil

2010 - $700 mil

Sales for Q1 2011 were about the same as Sales in Q1 2010, so it does look like sales have hit bottom. Perhaps a recovery will start from here?

Although Builders First Source has reported losses for the four past years, and lost money in Q1 2011 as well, the officer/managers of Builders First Source are definitely NOT shy about pulling compensation out of the company! For 2010, the company’s 5 most highly compensated officer/managers pulled just over $7.2 million in total compensation! And total compensation paid in 2010 was, apparently, higher than total compensation paid in 2009.

I’ve put in my Google Docs library an Excel file that shows this compensation; you can find that file at this link:

To end this post, I’ve included part of the section from the company’s recent Proxy Statement that explained “executive compensation”:


Compensation Discussion and Analysis


In the discussion that follows, we will give an overview and analysis of our compensation program and policies, the material compensation decisions we have made under those programs and policies with respect to our top executive officers, and the material factors that we considered in making those decisions. The persons who served as our Chief Executive Officer and Chief Financial Officer during 2010, as well as the other individuals named in the “Summary Compensation Table,” are referred to as the “named executive officers” or

“NEOs” throughout this Proxy Statement.

Executive Summary

As for most companies in the housing industry, the past several years have been a very challenging period for us. Due to the ongoing housing downturn, our Company incurred significant operating losses in 2008 and 2009, which adversely affected our liquidity and financial position. In light of these circumstances and the ongoing weak housing market, the Company implemented and successfully closed a rights offering and debt exchange in January 2010, which allowed the Company to reduce its debt by $130 million and provided us with substantial additional cash to fund operations. While the rights offering and debt exchange provided us with additional liquidity and improved our financial flexibility, the Company continued to face a struggling housing market in 2010. In this environment, our Compensation Committee made some important decisions regarding executive compensation during 2010, including the following:

Based on senior management’s recommendation, the Compensation Committee and the Board decided to continue a company-wide freeze on salaries, including those of our executive officers, during 2010, as part of the Company’s ongoing expense reduction program.

The Compensation Committee and the Board decided to continue the basic company-wide performance-based annual incentive bonus program that was in effect for 2008 and 2009, which we refer to as the Management Incentive Plan. This program, which was adopted in response to the industry downturn, focuses on maximizing current year profitability. The Company did not meet the earnings goals under the 2010 Management Incentive Plan, and therefore the NEOs did not receive any financial performance incentive payment for 2010.

In a departure from the 2009 bonus program, the Committee decided to include a discretionary bonus opportunity in the 2010 Management Incentive Plan in order to retain and incentivize key managers. The Committee determined that our NEOs would be eligible for a maximum discretionary bonus of up to 25% of their base salary. However, at the time of adopting the Plan, the Committee determined that payment of discretionary bonuses for 2010 would be contingent not only on the performance of our executives, but also on the condition of the housing market during the year and the Company’s liquidity position at the end of the year. In early 2011, the Committee and the Board, in accordance with senior management’s recommendation, decided that no discretionary bonus payments would be made to our executives for performance during 2010.

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