UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
Form 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 001-36050
Stock Building Supply Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
26-4687975
(I.R.S. Employer
Identification No.)
8020 Arco Corporate Drive, Suite 400
Raleigh, North Carolina 27617
(Address of principal executive offices, including zip code)
(919) 431-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $0.01 per share
(Title of each class)
The NASDAQ Stock Market LLC
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the Registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Accelerated filer
o
o
Non-accelerated filer
x (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 30, 2013, the last business day of the registrant's most recently completed second fiscal quarter, there was no established public
trading market for the Registrant's equity securities.
The number of shares outstanding of the Registrant’s common stock, par value $0.01 per share, at February 28, 2014 was 26,112,007 shares.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the 2014 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this
Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within
120 days of the Registrant's fiscal year ended December 31, 2013.
3
STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
Table of Contents to Form 10-K
Item 1.
PART 1
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants and Financial Disclosures
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
Page
6
12
25
26
27
27
28
29
32
48
49
79
79
79
80
80
80
80
80
81
84
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Cautionary Statement with Respect to Forward-Looking Statements
Some of the statements contained in this Annual Report on Form 10-K constitute forward-looking statements. Forward-looking
statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical facts or present facts or conditions. In many cases, you can identify forward-
looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential” or the negative of these terms or other comparable terminology.
The forward-looking statements reflect our views about future events and are subject to risks, uncertainties, assumptions and
changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any
forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable,
we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors
could cause actual results to differ materially from those indicated by the forward-looking statements. These factors include
without limitation:
the state of the homebuilding industry and repair and remodeling activity, the economy and the credit markets;
seasonality and cyclicality of the building products supply and services industry;
competitive industry pressures and competitive pricing pressure from our customers and competitors;
inflation or deflation of prices of our products;
•
•
•
•
• our exposure to product liability, warranty, casualty, construction defect, contract, tort and other claims and legal
proceedings;
• our ability to maintain profitability;
•
• our ability to retain our key employees and to attract and retain new qualified employees, while controlling our labor
failure of the residential renovation and improvement activities to return to historic levels;
costs;
• product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, and our dependence
the credit risk from our customers;
on third-party suppliers and manufacturers;
the implementation of our supply chain and technology initiatives;
the impact of long-term non-cancelable leases at our facilities;
•
•
• our concentration of business in the Texas, North Carolina, Utah, California and Georgia markets;
• our ability to effectively manage inventory and working capital;
•
• our ability to identify or respond effectively to consumer needs, expectations or trends;
•
•
• our ability to obtain additional financing on acceptable terms;
•
• disruptions in our information technology ("IT") systems;
• natural or man-made disruptions to our distribution and manufacturing facilities;
• our exposure to environmental liabilities and subjection to environmental laws and regulation; and
•
the impact of federal, state, local and other laws and regulations;
the potential loss of significant customers;
the various financial covenants in our secured credit agreement (the "Credit Agreement");
cybersecurity risks.
Certain of these and other factors are discussed in more detail in “Item 1A. Risk Factors” of this Annual Report on Form 10-K.
The forward-looking statements included herein are made only as of the date of this Annual Report on Form 10-K and we
undertake no obligation to publicly update or review any forward-looking statement made by us or on our behalf, whether as a
result of new information, future developments, subsequent events or circumstances or otherwise.
5
Item 1. Business
Overview
PART I
Stock Building Supply Holdings, Inc. and its subsidiaries (the "Company," "we," "us" and "our") is a large, diversified lumber and
building materials ("LBM") distributor and solutions provider that sells to new construction and repair and remodeling contractors.
We carry a broad line of products and have operations throughout the United States. Our primary products are lumber & lumber
sheet goods, millwork, doors, flooring, windows, structural components such as engineered wood products ("EWP"), trusses and
wall panels and other exterior products. Additionally, we provide solution-based services to our customers, including design,
product specification and installation management services. We serve a broad customer base, including large-scale production
homebuilders, custom homebuilders and repair and remodeling contractors. We offer approximately 39,000 stock keeping units
("SKUs"), as well as a broad range of customized products, all sourced through our strategic network of suppliers, which together
with our various solution-based services, represent approximately 50% of the construction cost of a typical new home. By enabling
our customers to source a significant portion of their materials and services from one supplier, we have positioned ourselves as the
supply partner of choice for many of our customers.
We have operations in 14 states that accounted for approximately 56% of 2013 U.S. single-family housing permits according to
the U.S. Census Bureau. Our primary operating regions include the South and West regions of the United States (as defined by the
U.S. Census Bureau), with a significant portion of our net sales derived from markets within Texas, North Carolina, Utah,
California and Georgia. We serve our customers from 69 locations, which include 48 distribution and retail operations, 20
millwork fabrication operations, 14 structural components fabrication operations and 15 flooring operations. Given the local nature
of our business, we locate our facilities in close proximity to our key customers and often co-locate multiple operations in one
facility to increase customer service and efficiency.
Our Industry
The LBM distribution industry in the United States is highly fragmented, with a number of retailers and distributors offering a
broad range of products and services. Demand for our products is principally influenced by new residential construction and
residential repair and remodeling activity. From 2005 to 2011, single-family housing starts in the United States declined by
approximately 75%. According to the U.S. Census Bureau, single-family housing starts in 2011 were 0.43 million, which was
significantly less than the 50-year average rate of approximately 1.0 million units per year. Following several challenging years,
single-family housing starts increased in 2013 and 2012 to 0.62 million and 0.54 million, respectively, and, as a result, demand for
the products we distribute and for our services has also increased. We believe that there is considerable growth potential in the
U.S. housing sector. As of December 2013, McGraw-Hill Construction forecasts that U.S. single-family housing starts will
increase to 1.0 million in 2015. Additionally, the S&P / Case-Shiller Index, a leading measure of pricing for the U.S. residential
housing market, has increased on a year-over-year basis for 19 straight months as of December 2013 and is at its highest levels
since July 2008.
The products we distribute are also used in professional remodeling and home improvement projects. According to the U.S.
Census Bureau, the value of private residential improvement construction put in place in 2013 was $129.9 billion, which
represented an increase from the value put in place of $126.0 billion in 2012 and $120.9 billion in 2011, but remained below the
value put in place of $144.9 billion in 2006. Several factors, including the overall age of the U.S. housing stock, heightened focus
on energy efficiency, rising home prices and availability of consumer capital at historically low interest rates, are expected to drive
long-term growth in repair and remodeling expenditures. As of March 2014, the Home Improvement Research Institute ("HIRI")
estimated U.S. sales of home maintenance, repair and improvement products to the professional market will grow at a rate of
6.8% in 2014 and 6.0% in 2015.
Our Strategy
We intend to capitalize on our strong market position in LBM distribution to increase revenues and profits and maximize operating
cash flow as the U.S. housing market recovers. We seek to achieve this by executing on the following strategies:
Expand our business with existing customers by offering additional value
We plan to continue to grow our net sales by increasing our share of our existing customers’ business. By growing our scale and
expanding the products and services we offer in each of our local markets, we believe that we can continue to enhance the value
offering for, and relationships with, our existing customers and grow our revenues and profitability. Several of our existing
facilities provide only a portion of the value-added solutions our customers need to optimize their construction projects. Products
and services we intend to expand organically include millwork and structural components manufacturing, enhanced specification
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and design services, and additional "LEAN" eBusiness solutions to improve customer service, reduce waste and improve
productivity. By continuing to invest systematically in our core LBM capabilities and in technologies that streamline our processes
and improve customer service, we believe we can provide a broader range of products and services at each of our locations and
that more customers will look to us as the key solution provider for their building needs.
Expand in existing, adjacent and new geographies
We plan to expand our business through organic and acquisitive means in order to take advantage of our national supply chain and
broad LBM capabilities. We intend to expand our reach and service capabilities in our current metropolitan areas by opening new
locations, relocating facilities as needed and increasing capacity at existing facilities. In addition, while we have operations in 14
states that accounted for approximately 56% of 2013 U.S. single-family housing permits, our markets within those states
accounted for less than half of those permits according to the U.S. Census Bureau, providing significant opportunity for growth
into markets adjacent to our current markets within these states. Growth opportunities also exist through increasing net sales to
remodeling contractors. Our 2013 net sales to repair and remodeling contractors were $201.1 million, which represented less than
1% of 2013 U.S. sales of home maintenance, repair and improvement products to the professional market of $78.9 billion, as
reported by HIRI. We believe that our scale, integrated supply chain, product knowledge, eBusiness solutions and professional
customer service will enable us to grow significantly as we expand in our existing markets and in markets adjacent to our existing
markets within the states where we currently operate, as well as into additional states as market and competitive conditions support
further growth. We believe that our balance sheet and liquidity position will support our growth strategy.
Deliver leading customer service, productivity and operational excellence as our business grows
We strive for continued operational excellence. We have implemented a talent training and development program focused on
specific skills training, business development and LEAN initiatives. Using these skills, our branch managers, regional management
and senior leadership team continually examine customer service, operating and financial metrics and use this information to
optimize regional and local strategies to increase customer service and operating expense productivity. Our management team has
also implemented, and will continue to pursue, LEAN business practices to increase productivity. Implementation of these
strategies has contributed to a reduction in our selling, general and administrative expense as a percent of net sales from 28.0% in
2011 to 21.3% in 2013. We believe that the customer service and productivity gains we realized from these initiatives will
continue as they are implemented more broadly across our organization.
Our Enterprise Resource Planning ("ERP") system has been implemented across all our branches, and our proprietary eBusiness
system, which includes Stock Logistics Solutions, will provide the platform for continued service improvements. In addition, we
are continuing to implement our Stock Installation Solutions system in 2014, which is designed to track the timing and completion
of installation work and will provide further enhancements to our customer service. We will continue to leverage operational best
practices and optimize our supplier network in order to improve efficiency and profitability. We believe that there is an
opportunity for further margin improvement as we expand our business and continue to implement LEAN initiatives and
technology solutions that bring value to our customers.
Selectively pursue strategic acquisitions
Our industry remains highly fragmented. We believe small and larger acquisition opportunities will offer attractive growth
characteristics and favorable synergy potential. We intend to focus on using our operating platform and proven integration
capabilities to pursue additional acquisition opportunities while minimizing execution risk. We will focus on investments in
markets adjacent to our existing operations or acquisitions that enhance our presence and capabilities in our 21 existing
metropolitan areas. Additionally, we will consider acquiring operations or companies to enter new geographic regions. We believe
our capital structure positions us to acquire businesses we find strategically attractive.
Our Customers
We serve a broad customer base that is a balanced mix of large-scale production homebuilders, custom homebuilders and repair
and remodeling contractors. We believe we have a diverse geographic footprint as we serve 21 metropolitan areas in 14 states.
Approximately 56% of U.S. housing permits in 2013 were issued in states in which we operate. We believe the 21 metropolitan
areas we serve are in states that have attractive potential for economic growth based on population migration trends and above-
average employment growth.
Our customer base is also highly diversified. As an example, for the year ended December 31, 2013, we had approximately 12,000
buying accounts and our largest 100 customers accounted for approximately 48% of our 2013 net sales, with no single customer
accounting for more than 6% of our 2013 net sales.
Our largest customers are comprised primarily of the large production homebuilders, including publicly traded companies such as
D.R. Horton, Inc., Hovnanian Enterprises, Inc., Lennar Corporation, PulteGroup, Inc., and Weyerhaeuser Real Estate Company (a
subsidiary of Weyerhaeuser Company). In addition to these large production homebuilders, we also service and supply regional
7
and local custom homebuilders. Many of our homebuilder customers require and value significantly higher levels of support from
our employees and utilize many of the service and product offerings we provide. Our capabilities allow us also to serve residential
remodeling contractors, multi-family and light commercial contractors in each of our markets, which diversifies our customer
base. Our sales and service professionals must work very closely with our customers on a day-to-day basis in order to help them
scope, specify, bid, construct and complete their projects in a timely and successful manner. These customers have valued and, we
believe, will continue to value and utilize the offerings we provide the U.S. residential and light-commercial construction industry.
Our Products and Services
We provide a wide variety of building products and services directly to homebuilder and professional contractor customers. We
have a comprehensive offering of approximately 39,000 SKUs, as well as a broad range of customized products, that are available
through our distribution locations and, in many instances, delivered to the job site. We manufacture floor trusses, roof trusses, wall
panels, stairs, specialty millwork, windows and doors. We also provide an extensive range of installation services and special order
products. We believe our broad product and service offerings, combined with our scale and experienced sales force, position our
Company to grow significantly as the U.S. housing market recovers.
We group our building products and services into five product categories: structural components, millwork & other interior
products, lumber & lumber sheet goods, windows & other exterior products, and other building products & services. For the year
ended December 31, 2013, our combined sales of structural components, millwork & other interior products, and windows & other
exterior products represented 52% of net 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 sales to each customer. Sales by product category for the years ended December 31, 2013, 2012 and
2011 can be found under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Operating results—2013 compared to 2012—Net sales” and “—2012 compared to 2011—Net sales.”
Structural components Structural components are factory-built substitutes for job-site framing and include floor trusses, roof
trusses, wall panels, and engineered wood that in many cases we design and cut for each home. Our manufactured structural
components allow builders to build higher quality homes more efficiently. Roof trusses, floor trusses and wall panels 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 structural components, builders construct these items on site, where weather and variable labor
quality can negatively impact construction cost, quality and installation time.
In addition to increased efficiency and improved quality, a primary benefit of using structural components is shortening cycle time
from start to completion, eliminating job-site waste and clutter and minimizing the amount of skilled labor that must be sourced for
a job site. As the housing market recovers, we believe these factors will increase demand for structural components relative to total
housing starts and provide opportunities for incremental revenue and gross profit growth.
Millwork & other interior products The millwork & other interior products category includes interior doors, interior trim, custom
millwork, moldings, stairs and stair parts, flooring, cabinets, gypsum and other products that are used primarily inside the structure
of the home. We pre-hang interior doors in many of our markets, which consists of attaching hinges and door jambs to a door slab,
thereby reducing on-site installation time and providing a higher quality finished door unit than those constructed on site. We also
sell and install flooring products, primarily as a subcontractor for the professional homebuilder, through our Coleman Floor and
several other Company locations. These and other interior products typically require a higher degree of product knowledge and
training to sell. As we continue to emphasize higher value-added product lines, we expect the millwork & other interior products
category to contribute increasingly to our overall sales and 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 2013, this product line was approximately 36% of our net sales, and revenue
dollars increased approximately 28% from 2012, partly due to increases in the cost of these goods.
Windows & other exterior products The windows & other exterior products category includes exterior door units, as well as
exterior products such as roofing and siding. Selecting, designing and managing the procurement of the proper window package
for performance and architectural reasons is a key service provided by our skilled employees. Additionally, our prehung exterior
doors consist of a door slab with hinges and door jambs attached, thereby reducing on-site installation time and providing higher
quality finished door units than those constructed on site.
Other building products & services Other building products & services consist of various products, including hardware, boards
and insulation. This category also includes design assistance and professional installation services of products spanning most of
our product categories. Through our installation services program, we help homebuilders realize efficiencies through improved
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scheduling, supplier and subcontractor management, and other services resulting in reduced cycle time, simplified administration
and better cost controls.
We also provide professional estimating, product advisory and product display services that assist homebuilders and their clients in
selecting the appropriate mix of products to meet their needs. We believe these services require scale, capital and sophistication
that smaller competitors often do not possess.
Manufacturing
Our manufacturing facilities and related design capabilities are utilized to improve quality, cost and service to our homebuilder and
repair and remodel customers. We utilize specialized assembly and manufacturing technology, building science-based material
selection and various design software packages to improve product quality, increase efficiency, reduce lead times and provide
cost-effective products for our customers. We manufacture and assemble products within three of our product categories: structural
components, millwork & other interior products, and windows & other exterior products. As the housing recovery continues, we
expect the services provided by our manufacturing and design capabilities to become more important in helping our customers to
meet their client and customer commitments and improve their operations. In 2013, manufactured products represented
approximately 12.4% of our net sales.
Sales and Marketing
We seek to attract and retain customers through exceptional customer service, leading product quality, broad product and service
offerings and competitive pricing. This strategy is centered on building and maintaining strong customer relationships rather than
traditional marketing and advertising. We strive to add value for homebuilders through solution-based selling, improved product
selection and procurement processes, lower material costs and general project coordination and support. By executing this strategy,
we believe we will continue to generate incremental sales volumes with new and existing customers.
Our experienced sales and service professionals are at the core of our customer growth and expansion efforts. We deploy
salespeople who are skilled in housing construction to meet with a homebuilder’s construction superintendent, contractor, local
purchasing agent or local executive with the goal of becoming the primary product supplier. If selected by the homebuilder or
contractor, the salesperson and his or her team review blueprints for the contracted homes and advise the homebuilder or
contractor in areas such as opportunities for cost optimization, increased building or project efficiencies, and regional product
preferences. Next, the team determines the specific package of products that are needed to complete the project and schedules a
sequence of site deliveries. Our large delivery fleet and comprehensive inventory management system enable us to provide “just-
in-time” product delivery, ensuring a smoother and faster production cycle for the homebuilder. Throughout the construction
process, our employees make frequent site visits to ensure timely delivery and installation and to provide general service support.
We believe this level of service is highly valued by our customers and generates significant customer loyalty. At January 31, 2014,
we employed approximately 467 sales professionals.
Materials and Supplier Relationships
We purchase inventory primarily for distribution, some of which is also utilized in our manufacturing plants. The key materials we
purchase include dimensional lumber, OSB, EWP, windows, doors and millwork. Our largest suppliers are national lumber and
wood products producers and distributors such as BlueLinx Holdings Inc., Boise Cascade Company, Louisiana Pacific and
Weyerhaeuser Company and building products manufacturers such as JELD-WEN, inc., Moulding and Millwork Inc., MI
Windows and Doors, Inc., James Hardie and Norbord, Inc. We believe there is sufficient supply in the marketplace to source most
of our requirements competitively without reliance on any particular supplier and that our diversity of suppliers affords us
purchasing flexibility. We also work with our suppliers to ensure that we have sufficient adaptability and flexibility to service our
customers' needs as they evolve and as their markets grow. Due to our centralized oversight of purchasing and our large lumber
and OSB purchasing volumes, we believe we are better able to maximize the advantages of both our, and our suppliers’, broad
footprints and negotiate purchases in multiple markets to achieve more favorable contracts with respect to price, terms of sale, and
supply than our regional competitors. Additionally, for certain customers, we institute purchasing programs on raw materials such
as OSB to align portions of our procurement costs with our customer pricing commitments. We balance our lumber and OSB
purchases with a mix of contract and spot market purchases to ensure consistent quantities of product necessary to fulfill customer
contracts, to source products at the lowest possible cost, and to minimize our exposure to the volatility of commodity lumber
prices.
We currently source products from over 1,000 suppliers in order to reduce our dependence on any single company and to
maximize purchasing leverage. Although no materials purchases from any single supplier represented more than 9% of our total
materials purchases in 2013, we believe we are one of the largest customers for many suppliers, and therefore have significant
9
purchasing leverage. We have found that using multiple suppliers ensures a stable source of products and the best purchasing terms
as the suppliers compete to gain and maintain our business.
We seek to maintain strong relationships with our suppliers, and we believe opportunities exist to improve purchasing terms in the
future, including inventory storage or “just-in-time” delivery to reduce our inventory carrying costs. We will continue to pursue
additional procurement cost savings and purchasing synergies that would further enhance our gross margins (defined as gross
profit as a percentage of net sales) and cash flow.
Competition
We compete in the professional building contractor segment of the U.S. residential new construction building products supply
market (the “Pro Segment”). Our customers primarily consist of professional homebuilders and those that provide construction
services to them. We focus on a distinctly different target market than home center retailers such as The Home Depot and Lowe’s,
which currently primarily serve do-it-yourself and remodeling customers. The principal methods of competition in the Pro
Segment are developing long-term relationships with professional builders and retaining such customers by delivering a full range
of high-quality products on time and offering trade credit, competitive pricing, flexibility in transaction processing, and integrated
service and product packages, as well as offering value-added products and services such as structural components and installation.
Our leading market positions in the highly competitive Pro Segment create economies of scale that allow us to supply our
customers cost-effectively, which both enhances profitability and reduces the risk of losing customers to competitors.
We have and will continue to experience competition for homebuilder business. Many of our competitors are predominantly small,
privately owned companies, local and regional materials distributors, single or multi-site lumberyards, and truss manufacturing and
millwork operations. Most of these companies have limited access to capital and lack sophisticated IT systems and large-scale
procurement capabilities. We believe we have substantial competitive advantages over these smaller competitors due to our long-
standing customer relationships, local market knowledge, integrated supply chain and competitive pricing. Our largest competitors
in our markets include 84 Lumber Co., Builders FirstSource, Inc., Building Materials Holding Corporation and Pro-Build
Holdings, Inc. Some of our competitors are larger than we are and may have greater financial resources. These resources may
afford those competitors greater purchasing power, increased financial flexibility, and more capital resources for expansion and
improvement.
Employees
At January 31, 2014, we had approximately 3,025 full-time equivalent employees, none of whom were represented by a union. We
believe that we have good relations with our employees. Additionally, we believe that the training provided through our ongoing
development programs to our professional employees and an entrepreneurial, performance-based culture provide significant
benefits to our customers.
IT Systems
Our primary ERP system, which we use for all of our operations, was purchased from NxTrend (now a division of Infor) and has
been highly customized for our needs. The system has been designed to operate our businesses in an efficient manner. The
materials required for thousands of standard builder plans are stored by the system for rapid quoting or order entry. Hundreds of
price lists are maintained on thousands of SKUs, facilitating rapid price changes in a changing product cost environment. A
customer’s order can be tracked at each stage of the process and billing can be customized to reduce a customer’s administrative
costs and speed payment. As this ERP platform supported our business in 2006 when our sales volumes, number of locations and
revenues were significantly larger, we believe this platform to be scalable and able to support our growth.
We have a single financial reporting system that has been highly customized for our business. Consolidated financial, sales and
workforce reporting is integrated using Oracle Business Intelligence system and custom databases, which aggregates data from our
ERP system along with workforce information from our third-party payroll administrator. This technology platform provides
management with robust corporate and location level performance management capabilities by leveraging standardized metrics
and analytics allowing us to plan, track and report performance and compensation measures.
We utilize proprietary software in our distribution and installation operations. Stock Logistics Solutions schedules orders from our
ERP system for delivery, utilizes GPS and mobile technology in our delivery fleet and provides customers with real-time
information on their order status, including notification and pictures of completed deliveries. Stock Installation Solutions is a
system designed to improve the execution of our installation services and facilitate more effective communication with customers.
In addition, we have purchased several software products that have been integrated with our primary ERP system. These programs
assist in designing and manufacturing structural components, analyzing blueprints to generate material lists and purchasing lumber
products at the lowest cost.
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Seasonality and Other Factors
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality and other factors” for
a discussion of seasonality and other factors contributing to variability in our quarterly results.
History
The Company’s predecessor was founded as Carolina Builders Corporation in Raleigh, North Carolina in 1922 and began
operating under the Stock Building Supply name in 2003. In addition, certain companies acquired by us were founded as early as
1822.
In May 2009, Gores Building Holdings, LLC ("Gores Holdings"), an affiliate of The Gores Group, LLC ("Gores"), acquired 51%
of the voting interests of our subsidiary, Stock Building Supply Holdings, LLC, through a newly formed subsidiary, Saturn
Acquisition Holdings, LLC, from an affiliate of Wolseley plc ("Wolseley"). Immediately after the acquisition, we entered into a
prepackaged reorganization plan pursuant to Chapter 11 of the Bankruptcy Code. The prepackaged reorganization was pursuant to
a pre-arranged plan with the Company’s creditors, which took effect upon filing and enabled us to terminate certain real property
leases in undesirable locations in exchange for payment of a statutory amount of damages. The reorganization, which was
undertaken in less than two months, did not include a compromise of any claims of any suppliers, creditors or employees. In
November 2011, Gores Holdings purchased the remaining minority interest in us from Wolseley. On May 2, 2013, Saturn
Acquisition Holdings, LLC converted to a corporation and changed its name to Stock Building Supply Holdings, Inc. On August
14, 2013, we completed our initial public offering ("IPO") and the Company's common stock is now listed on The NASDAQ
Stock Market under the ticker symbol "STCK". Stock Building Supply Holdings, Inc. is a holding company that derives all of its
operating income from its subsidiaries.
Intellectual Property
We possess an array of intellectual property rights, including patents, trademarks, trade names, proprietary technology and know-
how and other proprietary rights that are important to our brand and marketing strategy. In particular, we maintain registered
trademarks for Stock Building Supply® and our logo, as well as for Fortis® and Artrim®, two of our private label lines. In addition,
we maintain registered trademarks for the trade names under which many of our local branches operate. While we do not believe
our business is dependent on any one of our trademarks, we believe that our trademarks are important to the development and
conduct of our business as well as the marketing of our products. We vigorously protect all of our intellectual property rights.
Regulation and Legislation
While we are not engaged in a “regulated industry,” we are subject to various federal, state and local government regulations
applicable to the business generally in the jurisdictions in which we operate, including laws and regulations relating to our
relationships with our employees, public health and safety, work place safety, transportation, zoning, business, environmental and
contractor licensing and fire codes. We strive to operate each of our distribution, manufacturing, retail and service facilities in
accordance with applicable laws, codes and regulations.
Our operations in domestic interstate commerce are subject to the regulatory jurisdiction of the Department of Transportation
("DOT"), which has broad administrative powers with respect to our transportation operations. We are subject to safety
requirements governing interstate operations prescribed by the DOT. Vehicle dimensions and driver hours of service also are
subject to both federal and state regulation. See “Risk Factors—Federal, state, local and other regulations could impose substantial
costs and/or restrictions on our operations that would reduce our net income.” Our operations are also subject to the regulatory
jurisdiction of the Occupational Safety and Health Administration ("OSHA"), which has broad administrative powers with respect
to workplace and jobsite safety.
Our operations and properties are also subject to federal, state and local laws and regulations relating to the use, storage, handling,
generation, transportation, treatment, emission, release, discharge and disposal of hazardous materials, substances and wastes and
relating to the investigation and cleanup of contaminated properties, including off-site disposal locations. We have not incurred
material costs in the past to comply with environmental laws and regulations. However, we could be subject to material costs,
liabilities or claims relating to environmental compliance in the future, especially in the event of changes in existing laws and
regulations or in their interpretation or enforcement.
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As current and former owners, lessees and operators of real property, we can be held liable for the investigation or remediation of
contamination on or from such properties, in some circumstances regardless of whether we knew of or caused such contamination.
Our current expenditures with respect to environmental investigation and remediation at our facilities are immaterial, although no
assurance can be provided that more significant investigation and remediation will not be required in the future as a result of spills
or releases of petroleum products or other hazardous substances or the discovery of currently unknown environmental conditions,
or changes in legislation, laws, rules or regulations or their interpretation or enforcement.
Our suppliers are subject to various laws and regulations, including in particular laws and regulations regulating labor, forestry and
the environment. We consult with our suppliers as appropriate to confirm they have determined they are in material compliance
with applicable laws and regulations. Generally, our suppliers agree contractually to comply with our expectations concerning
environmental, labor and health and safety matters.
Products that we import into the United States are subject to laws and regulations imposed in conjunction with such importation,
including those issued and/or enforced by U.S. Customs and Border Protection. In addition, certain of our products are subject to
laws and regulations relating to the importation, acquisition or sale of illegally harvested agricultural products and the emissions of
hazardous materials. We work closely with our suppliers to help ensure material compliance with the applicable laws and
regulations in these areas.
To date, costs to comply with applicable laws and regulations relating to the protection of the environment and natural resources
have not had a material adverse effect on our financial condition or operating results. However, there can be no assurance that such
laws and regulations will not become more stringent in the future or that we will not incur costs in the future in order to comply
with such laws and regulations. We did not incur material capital expenditures for environmental controls in fiscal year 2013 and
do not anticipate material capital expenditures in this regard in fiscal year 2014.
Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance
therewith, we file reports, proxy and information statements and other information with the Securities and Exchange Commission
(“SEC”). Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information
statements and other information and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are, or will be, available through the investor relations section of our website under the links to
“SEC Filings.” Our Internet address is www.stocksupply.com. Reports are available on our website free of charge as soon as
reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, our directors and certain
senior officers are required to file with the SEC initial statements of beneficial ownership and statements of change in beneficial
ownership of our securities, which are also available on our website at the same location. We are not including this or any other
information on our website as a part of, nor incorporating it by reference into, this Form 10-K or any of our other SEC filings.
In addition to our website, you may read and copy public reports we file with or furnish to the SEC at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains our reports, proxy and information
statements, and other information that we electronically file with, or furnish to, the SEC at www.sec.gov.
Item 1A. Risk Factors
Risks related to our business
The industry in which we operate is dependent upon the homebuilding industry and repair and remodeling activity, the
economy, the credit markets and other important factors.
The building products supply and services industry is highly dependent on new home construction and repair and remodeling
activity, which in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates,
foreclosure rates, housing inventory levels, housing demand, the availability of land, the availability of construction financing and
the health of the economy and mortgage markets. Unfavorable changes in demographics, credit markets, consumer confidence,
health care costs, housing affordability, housing inventory levels, a weakening of the national economy or of any regional or local
economy in which we operate and other factors beyond our control could adversely affect consumer spending, result in decreased
demand for homes and adversely affect our business. Changes in federal income tax laws may also affect demand for new homes.
Various proposals have been publicly discussed to limit mortgage interest deductions and to limit the exclusion of gain from the
sale of a principal residence. Enactment of such proposals may have an adverse effect on the homebuilding industry in general. No
meaningful prediction can be made as to whether any such proposals will be enacted and, if enacted, the particular form such laws
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would take. Because we have substantial fixed costs, relatively modest declines in our customers’ production levels could have a
significant adverse effect on our financial condition, operating results and cash flows.
The homebuilding industry underwent a significant downturn that began in mid-2006 and began to stabilize in late 2011. The
downturn in the homebuilding industry resulted in a substantial reduction in demand for our products and services, which in turn
had a significant adverse effect on our business during fiscal years 2007 through 2012 and led to our filing for bankruptcy in 2009.
The U.S. Census Bureau reported approximately 618,000 single-family housing starts for 2013, which is an increase of
approximately 15% from 2012, but still well below historical averages. There is significant uncertainty regarding the timing and
extent of any recovery in construction and repair and remodeling activity and resulting product demand levels. The positive impact
of a recovery on our business may also be dampened to the extent the average selling price or average size of new single family
homes decreases, which could cause homebuilders to decrease spending on our products and services. New U.S. single-family
housing starts slowed to a seasonally-adjusted annual rate of 573,000 in January 2014. While we believe weather is a primary
cause of this, we cannot assure that conditions will improve with the weather.
In addition, beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults, primarily as a
result of credit quality deterioration. The disruption resulted in a stricter regulatory environment and reduced availability of
mortgages for potential home buyers due to a tight credit market and stricter standards to qualify for mortgages. Mortgage
financing and commercial credit for smaller homebuilders, as well as for the development of new residential lots, continue to be
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 fully
recover until conditions in the economy and the credit markets improve and unemployment rates decline. Prolonged weakness in
the homebuilding industry would have a significant adverse effect on our business, financial condition and operating results.
As a result of the homebuilding industry downturn, there has been a trend of significant consolidation as smaller, private
homebuilders have gone out of business. We refer to the large homebuilders as “production homebuilders.” While we generate
significant business from these homebuilders, our gross margins on sales to them tend to be lower than our gross margins on sales
to other market segments. This could impact our gross margins as homebuilding recovers if the market share held by the
production homebuilders increases.
The building products supply and services industry is seasonal and cyclical.
Our industry is seasonal. Although weather patterns affect our operating results throughout the year, our first and fourth quarters
have historically been, and are generally expected to continue to be, adversely affected by weather patterns in some of our markets,
causing reduced construction activity. To the extent that hurricanes, severe storms, earthquakes, floods, fires, other natural
disasters or similar events occur in the markets in which we operate, our business may be adversely affected. For example, in the
first quarter of 2014 to date, many of our customers and local operations were impacted by adverse weather events that slowed
construction activity.
The building products supply and services industry is also subject to cyclical market pressures. 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 and the production schedules of our customers.
Our industry is highly fragmented and competitive, and increased competitive pressure may adversely affect our results.
The building products supply and services industry is highly fragmented and competitive. We face significant competition from
local, regional and national building materials chains, as well as from privately-owned single site enterprises. Any of these
competitors may (i) foresee the course of market development more accurately than we do, (ii) provide superior service and sell
superior products, (iii) have the ability to produce or supply similar products and services at a lower cost, (iv) develop stronger
relationships with our customers, (v) adapt more quickly to new technologies or evolving customer requirements than we do, (vi)
develop a superior branch network in our markets or (vii) have access to financing on more favorable terms that we can obtain. As
a result, we may not be able to compete successfully with them. In addition, home center retailers, which have historically
concentrated their sales efforts on retail consumers and small contractors, may in the future intensify their marketing efforts to
professional homebuilders. Furthermore, certain product manufacturers sell and distribute their products directly to production
homebuilders. The volume of such direct sales could increase in the future. Additionally, manufacturers and specialty distributors
who sell products to us may elect to sell and distribute directly to homebuilders in the future or enter into exclusive supplier
arrangements with other distributors. Consolidation of production homebuilders may result in increased competition for their
business. Finally, we may not be able to maintain our operating costs or product prices at a level sufficiently low for us to compete
effectively. If we are unable to compete effectively, our financial condition, operating results and cash flows may be adversely
affected.
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Certain of our products are commodities and fluctuations in prices of these commodities could affect our operating results.
Many of the building products we distribute, including OSB, plywood, lumber and particleboard, are commodities that are widely
available from other manufacturers or distributors with prices and volumes determined frequently based on participants’
perceptions of short-term supply and demand factors. A shortage of capacity or excess capacity in the industry can result in
significant increases or declines in market prices for those products, often within a short period of time.
Prices of commodity products can also change as a result of national and international economic conditions, labor and freight
costs, competition, market speculation, government regulation, and trade policies, as well as from periodic delays in the delivery of
lumber and other 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 and pricing pressure from our competitors may limit
our ability to pass on such price changes. For example, we frequently enter into extended pricing commitments, which may
compress our gross margins in periods of inflation. At times, the price at which we can charge our customers for any one or more
products may even fall below the price at which we can purchase such products, requiring us to incur short-term losses on product
sales. We may also be limited in our ability to pass on increases in freight costs on our products due to the price of fuel.
Periods of generally increasing prices provide the opportunity for higher sales and increased gross profit (subject to the extended
pricing commitments described above), while generally declining price environments may result in declines in sales and
profitability. In particular, low market prices for wood products over a sustained period can adversely affect our financial
condition, operating results and cash flows, as can excessive spikes in market prices. We have generally experienced increasing
prices as the homebuilding market has recovered. For the year ended December 31, 2013, average composite framing lumber
prices and average composite structural panel prices (a composite calculation based on index prices for OSB and plywood) as
reported by Random Lengths were 19% and 11% higher, respectively, than the prior year. Our lumber & lumber sheet goods
product category represented approximately 36% of net sales for that period. If lumber or structural panel prices were to decline
significantly from current levels, our sales and profits would be negatively affected.
We are exposed to product liability, warranty, casualty, construction defect, contract, tort, and other claims and legal
proceedings related to our business, products and services as well as services provided for us through third parties.
We are from time to time involved in product liability, warranty, casualty, construction defect, contract, tort and other claims
relating to our business, the products we manufacture, distribute or install, and services we provide, either directly or through third
parties, that, if adversely determined, could adversely affect our financial condition, operating results and cash flows if we were
unable to seek indemnification for such claims or were not adequately insured for such claims. We rely on manufacturers and other
suppliers to provide us with many of the products we sell, distribute or install. Because we do not have direct control over the
quality of such products manufactured or supplied by such third-party suppliers, we are exposed to risks relating to the quality of
such products. In addition, we are exposed to potential claims arising from the conduct of our employees, homebuilders and their
subcontractors, and third-party installers for which we may be liable. We and they are subject to regulatory requirements and risks
applicable to general contractors, which include management of licensing, permitting and quality of our third-party installers. If we
fail to manage these processes effectively or provide proper oversight of these services, we could suffer lost sales, fines and
lawsuits, as well as damage to our reputation, which could adversely affect our business.
Although we currently maintain what we believe to be suitable and adequate insurance in excess of our self-insured amounts, there
can be no assurance that we will be able to maintain such insurance on acceptable terms or that such insurance will provide
adequate protection against potential liabilities. Product liability, warranty, casualty, construction defect, contract, tort and other
claims can be expensive to defend and can divert the attention of management and other personnel for significant periods,
regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our
products and our Company. We cannot assure you that any current or future claims will not adversely affect our financial
condition, operating results and cash flows.
Pursuant to the restructuring and investment agreement dated May 5, 2009 by and among our predecessor, Saturn Acquisition
Holdings, LLC, Gores Holdings and Wolseley, Wolseley agreed to indemnify us for, among other things, losses arising from any
third-party claim (i) existing as of May 5, 2009 or (ii) brought or asserted against the Company arising from actions taken by
Wolseley or the Company prior to May 5, 2009. In accordance with the restructuring and investment agreement, Wolseley was not
liable for any claim for indemnification until the aggregate amount to be recovered by us exceeded $3.0 million, which occurred in
2011. In the event Wolseley is unable or unwilling to satisfy its indemnification obligations to us, we would be responsible for any
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liabilities arising from actions taken prior to May 5, 2009 and the costs of defending claims related thereto. The resulting increase
in our liabilities or litigation expenses could have a material adverse effect on our financial results.
We may be unable to achieve or maintain profitability or positive cash flows from operations.
We have set goals to improve progressively our profitability over time by growing our sales, increasing our gross margin and
reducing our expenses as a percentage of sales. For the fiscal years 2013 and 2012 we had net losses of $4.6 million and $14.5
million, respectively, and used cash from operations of $40.3 million and $12.2 million, respectively. There can be no assurance
that we will achieve our enhanced profitability goals or generate positive cash flow from operations. Factors that could
significantly adversely affect our efforts to achieve these goals include, but are not limited to, the failure to:
• grow our revenue through organic growth or through acquisitions;
•
improve our revenue mix by investing (including through acquisitions) in businesses that provide higher gross margins
than we have been able to generate historically;
achieve improvements in purchasing or maintain or increase our rebates from suppliers through our supplier consolidation
and/or low-cost country initiatives;
improve our gross margins through the utilization of improved pricing practices and technology and sourcing savings;
•
•
• maintain or reduce our overhead and support expenses as we grow;
•
•
• maintain relationships with our significant customers; and
•
effectively evaluate future inventory reserves;
collect monies owed from customers;
integrate any businesses acquired.
Any of these failures or delays may adversely affect our ability to increase our profitability.
Residential renovation and improvement activity levels may not return to historic levels, which may negatively impact our
business, liquidity and results of operations.
Our business relies on residential renovation and improvement (including repair and remodeling) activity levels. Unlike most
previous cyclical declines in new home construction in which we did not experience comparable declines in our sales related to
home improvement, the recent economic decline adversely affected our home improvement business as well. According to the
U.S. Census Bureau, residential improvement project spending in the United States increased approximately 3% in 2013 compared
to 2012, but remains approximately 10% below its peak in 2006. Continued high unemployment levels, high mortgage
delinquency and foreclosure rates, limitations in the availability of mortgage and home improvement financing and significantly
lower housing turnover, may continue to limit consumers’ spending, particularly on discretionary items, and affect their
confidence level leading to continued reduced spending on home improvement projects.
We cannot predict the timing or strength of a significant recovery, if any. Continued depressed activity levels in consumer
spending for home improvement and new home construction will continue to adversely affect our results of operations and our
financial position. Furthermore, continued economic weakness may cause unanticipated shifts in consumer preferences and
purchasing practices and in the business models and strategies of our customers. Such shifts may alter the nature and prices of
products demanded by the end consumer and our customers and could adversely affect our operating performance.
Our continued success will depend on our ability to retain our key employees and to attract and retain new qualified
employees, while controlling our labor costs.
Our success depends in part on our ability to attract, hire, train and retain qualified managerial, operational, sales and other
personnel, while at the same time controlling our labor costs. We face significant competition for these types of employees in our
industry and from other industries. We may be unsuccessful in attracting and retaining the personnel we require to conduct and
expand our operations successfully. In addition, key personnel, including sales force employees with key customer relationships,
may leave us and compete against us. Our success also depends to a significant extent on the continued service of our senior
management team. Our senior management team has more than 145 years of combined experience in manufacturing and
distribution, and has been integral to our successful acquisition and integration of businesses to gain scale in our current markets.
These factors make our current senior management team uniquely qualified to execute our business strategy. The loss of any
member of our senior management team or other experienced, senior employees or sales force employees could impair our ability
to execute our business plan, cause us to lose customers and reduce our net sales, or lead to employee morale problems and/or the
loss of other key employees. In any such event, our financial condition, operating results and cash flows could be adversely
affected.
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Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates, the impact of legislation
or regulations governing wages, labor relations or healthcare benefits, and health and other insurance costs. In addition, we
compete with other companies for many of our employees in hourly positions, and we invest significant resources in training and
motivating them to maintain a high level of job satisfaction. These positions have historically had high turnover rates, which can
lead to increased training and retention costs. If we are unable to attract or retain highly qualified employees in the future, it could
adversely impact our operating results.
Product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, and our dependence on
third-party suppliers and manufacturers could affect our financial health.
Our ability to offer a wide variety of products to our customers is dependent upon our ability to obtain adequate product supply
from manufacturers and other suppliers. Generally, our products are obtainable from various sources and in sufficient quantities.
Our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our high standards for quality
and our need to access products in a timely and efficient manner is a significant challenge. Our ability to access products also can
be adversely affected by the financial instability of suppliers (particularly in light of continuing economic difficulties in various
regions of the United States and the world), suppliers’ noncompliance with applicable laws, supply disruptions, shipping
interruptions or costs, and other factors beyond our control. The loss of, or a substantial decrease in the availability of, products
from our suppliers or the loss of key supplier arrangements could adversely impact our financial condition, operating results and
cash flows.
Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on
limited notice. Many of our suppliers also offer us favorable terms based on the volume of our purchases. If market conditions
change, suppliers may stop offering us favorable terms. Failure by our suppliers to continue to supply us with products on
favorable terms, commercially reasonable terms, or at all, could put pressure on our operating margins or have a material adverse
effect on our financial condition, operating results and cash flows.
A portion of the workforces of many of our suppliers, particularly our foreign suppliers, are represented by labor unions.
Workforce disputes at these suppliers may result in work stoppages or slowdowns. For example, in recent years our suppliers in
Chile (who provide a significant portion of certain of our products) have been subject to numerous labor stoppages. Such
disruptions could have a material adverse effect on these suppliers ability to continue meeting our needs.
The implementation of our supply chain and technology initiatives could disrupt our operations, and these initiatives might
not provide the anticipated benefits or might fail.
We have made, and we plan to continue to make, significant investments in our supply chain and technology. These initiatives are
designed to streamline our operations to allow our employees to continue to provide high quality service to our customers, while
simplifying customer interaction and providing our customers with a more interconnected purchasing experience. The cost and
potential problems and interruptions associated with the implementation of these initiatives, including those associated with
managing third-party service providers and employing new web-based tools and services, could disrupt or reduce the efficiency of
our operations. In the event that we grow very rapidly, there can be no assurance that we will be able to keep up, expand or adapt
our IT infrastructure to meet evolving demand on a timely basis and at a commercially reasonable cost, or at all. In addition, our
improved supply chain and new or upgraded technology might not provide the anticipated benefits, it might take longer than
expected to realize the anticipated benefits or the initiatives might fail altogether.
We occupy most of our facilities under long-term non-cancellable leases. We may be unable to renew leases at the end of
their terms. If we close a facility, we are still obligated under the applicable lease.
Most of our facilities are located in leased premises. Many of our current leases are non-cancellable and typically have initial terms
ranging from five to ten years and most provide options to renew for specified periods of time. We believe that leases we enter into
in the future will likely be long-term and non-cancellable and have similar renewal options. If we close or idle a facility, most
likely we remain committed to perform our obligations under the applicable lease, which would include, among other things,
payment of the base rent, insurance, taxes, and other expenses on the leased property for the balance of the lease term. The
inability to terminate leases when idling a facility or exiting a geographic market can have a significant adverse impact on our
financial condition, operating results and cash flows. For example, in response to the significant downturn in the homebuilding
industry that began in 2006, we determined that it was necessary to discontinue operations in certain unprofitable markets. Because
we were unable to terminate leases in these locations and were no longer able to make required payments under the leases, we
undertook a prepackaged reorganization under the bankruptcy code in 2009 in order to terminate the real property leases in those
markets in exchange for payment of a statutory amount of damages.
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In addition, at the end of the lease term and any renewal period for a facility, we may be unable to renew the lease without
substantial additional cost, if at all. If we are unable to renew our facility leases, we may close or relocate a facility, which could
subject us to construction and other costs and risks, which in turn could have a material adverse effect on our business and
operating results. In addition, we may not be able to secure a replacement facility in a location that is as commercially viable,
including access to rail service, as the lease we are unable to renew. For example, closing a facility, even during the time of
relocation, will reduce the sales that the facility would have contributed to our revenues. Additionally, the revenue and profit, if
any, generated at a relocated facility may not equal the revenue and profit generated at the existing one.
Homebuilding activities in the Texas, North Carolina, Utah, California and Georgia markets have a large impact on our
results of operations because we conduct a significant portion of our business in these markets.
We presently conduct a significant portion of our business in the Texas, North Carolina, Utah, California and Georgia markets,
which represented approximately 32%, 15%, 10%, 10% and 10%, respectively, of our 2013 total net sales. Home prices and sales
activities in these markets and in most of the other markets in which we operate have declined from time to time, particularly as a
result of slow economic growth. In the last several years, these markets have benefited from better than average employment
growth, which has aided homebuilding activities, but we cannot assure you that these conditions will continue. Local economic
conditions can depend on a variety of factors, including national economic conditions, local and state budget situations and the
impact of federal cutbacks. If homebuilding activity declines in one or more of the markets in which we operate, our costs may not
decline at all or at the same rate and may negatively impact our operating results.
We may be unable to manage effectively our inventory and working capital as our sales volume increases or material
prices fluctuate, which could have a material adverse effect on our business, financial condition and operating results.
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. We must maintain, and have adequate working capital to purchase,
sufficient inventory to meet customer demand. Due to the lead times required by our suppliers, we order products in advance of
expected sales. This requires us to forecast our sales and purchase accordingly. In periods of growth, it can be especially difficult
to forecast sales accurately. We must also manage our working capital to fund our inventory purchases. Excessive spikes in the
market prices of certain building products, such as lumber, can put negative pressure on our operating cash flows by requiring us
to invest more in inventory. In the future, if we are unable to manage effectively our inventory and working capital as we attempt
to grow our business, our cash flows may be negatively affected, which could have a material adverse effect on our business,
financial condition and operating results.
The majority of our net sales are credit sales that are made primarily to customers whose ability to pay is dependent, in
part, upon the economic strength of the industry and geographic areas in which they operate, and the failure to collect or
timely collect monies owed from customers could adversely affect our financial condition.
The majority of our net sales volume in fiscal 2013 was facilitated through the extension of credit to our customers whose ability
to pay is dependent, in part, upon the economic strength of the industry in the areas where they operate. We offer credit to
customers, either through unsecured credit that is based solely upon the creditworthiness of the customer, or secured credit for
materials sold for a specific job where the security lies in lien rights associated with the material going into the job. The type of
credit offered depends both on the financial strength of the customer and the nature of the business in which the customer is
involved. End users, resellers and other non-contractor customers generally purchase more on unsecured credit than secured credit.
The inability of our customers to pay off their credit lines in a timely manner, or at all, would adversely affect our financial
condition, operating results and cash flows. Furthermore, our collections efforts with respect to non-paying or slow-paying
customers could negatively impact our customer relations going forward.
Because we depend on the creditworthiness of certain of our customers, if the financial condition of our customers declines, our
credit risk could increase. Significant contraction in our markets, coupled with tightened credit availability and financial institution
underwriting standards, could adversely affect certain of our customers. Should one or more of our larger customers declare
bankruptcy as has occurred in the past, it could adversely affect the collectability of our accounts receivable, bad debt reserves and
net income.
We are subject to competitive pricing pressure from our customers.
Production homebuilders historically have exerted significant pressure on their outside suppliers to keep prices low because of
their market share and ability to leverage such market share in the highly fragmented building products supply and services
industry. The housing industry downturn resulted in significantly increased pricing pressures from production homebuilders and
other customers. These pricing pressures have adversely affected our operating results and cash flows. In addition, continued
consolidation among homebuilders, and changes in homebuilders’ purchasing policies or payment practices, could result in
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additional pricing pressure. Moreover, during the housing downturn, several of our homebuilder customers defaulted on amounts
owed to us or extended their payable days as a result of their financial condition. If such payment failures or delays were to recur,
it could significantly adversely affect our financial condition, operating results and cash flows.
We may not timely identify or effectively respond to consumer needs, expectations or trends, which could adversely affect
our relationship with customers, the demand for our products and services and our market share.
It is difficult to predict successfully the products and services our customers will demand. The success of our business depends in
part on our ability to identify and respond promptly to changes in demographics, consumer preferences, expectations, needs and
weather conditions, while also managing inventory levels. For example, an increased consumer focus on making homes energy
efficient could require us to offer more energy efficient building materials and there can be no assurance that we would be able to
identify appropriate suppliers on acceptable terms. Failure to identify timely or effectively respond to changing consumer
preferences, expectations and building product needs could adversely affect our relationship with customers, the demand for our
products and services and our market share.
We may be unable to implement successfully our growth strategy, which includes pursuing strategic acquisitions and
opening new facilities.
Our long-term business plan provides for continued growth through strategic acquisitions and organic growth through the
construction of new facilities or the expansion of existing facilities. Failure to identify and acquire suitable acquisition candidates
on appropriate terms could have a material adverse effect on our growth strategy. Moreover, our reduced operating results during
the housing downturn, our liquidity position, or the requirements of our Credit Agreement, could prevent us from obtaining the
capital required to effect new acquisitions or expansions of existing facilities. Our failure to make successful acquisitions or to
build or expand facilities, including manufacturing facilities, produce saleable product, or meet customer demand in a timely
manner could result in damage to or loss of customer relationships, which could adversely affect our financial condition, operating
results and cash flows.
In addition, we may not be able to integrate the operations of future acquired businesses in an efficient and cost-effective manner
or without significant disruption to our existing operations. Acquisitions involve significant risks and uncertainties, including
uncertainties as to the future financial performance of the acquired business, difficulties integrating acquired personnel and
corporate cultures into our business, the potential loss of key employees, customers or suppliers, difficulties in integrating different
computer and accounting systems, exposure to unknown or unforeseen liabilities of acquired companies, and the diversion of
management attention and resources from existing operations. We may be unable to complete successfully potential acquisitions
due to multiple factors, such as issues related to regulatory review of the proposed transactions. We may also be required to incur
additional debt in order to consummate acquisitions in the future, which debt may be substantial and may limit our flexibility in
using our cash flow from operations. Our failure to integrate future acquired businesses effectively or to manage other
consequences of our acquisitions, including increased indebtedness, could prevent us from remaining competitive and, ultimately,
could adversely affect our financial condition, operating results and cash flows.
Federal, state, local and other regulations could impose substantial costs and/or restrictions on our operations that would
reduce our net income.
We are subject to various federal, state, local, and other regulations, including, among other things, regulations promulgated by the
DOT, work safety regulations promulgated by the OSHA, employment regulations promulgated by the United States Equal
Employment Opportunity Commission, regulations of the United States Department of Labor, accounting standards issued by the
Financial Accounting Standards Board or similar entities, and state and local zoning restrictions, building codes and contractors’
licensing regulations. More burdensome regulatory requirements in these or other areas may increase our general and
administrative costs and adversely affect our financial condition, operating results and cash flows. Moreover, failure to comply
with the regulatory requirements applicable to our business could expose us to litigation and/or substantial penalties that could
adversely affect our financial condition, operating results and cash flows.
Our transportation operations are subject to the regulatory jurisdiction of the DOT. The DOT has broad administrative powers with
respect to our transportation operations. More restrictive limitations on vehicle weight and size, trailer length and configuration, or
driver hours of service would increase our costs, which, if we are unable to pass these cost increases on to our customers, may
increase our selling, general and administrative expenses and adversely affect our financial condition, operating results and cash
flows. If we fail to comply adequately with DOT regulations or regulations become more stringent, we could experience increased
inspections, regulatory authorities could take remedial action including imposing fines or shutting down our operations or we
could be subject to increased audit and compliance costs. If any of these events were to occur, our financial condition, operating
results and cash flows would be adversely affected.
18
In addition, the homebuilding industry is subject to various local, state and federal statutes, ordinances, codes, rules and
regulations concerning zoning, building design and safety, construction, energy conservation, environmental protection and similar
matters, including regulations that impose restrictive zoning and density requirements on our business or that limit the number of
homes that can be built within the boundaries of a particular area. Regulatory restrictions may increase our operating expenses and
limit the availability of suitable building lots for our customers, which could negatively affect our sales and earnings.
The loss of any of our significant customers could affect our financial health.
Our ten largest customers generated approximately 20.7% and 20.5% of our net sales for the years ended December 31, 2013 and
2012, respectively. We cannot guarantee that we will maintain or improve our relationships with these customers or that we will
continue to supply these customers at historical levels. Due to the weak housing market over the past several years, many of our
homebuilder customers substantially reduced their construction activity. Some homebuilder customers exited or severely curtailed
building activity in certain of our markets.
In addition, production homebuilders and other customers may: (i) seek to purchase some of the products that we currently sell
directly from manufacturers; (ii) elect to establish their own building products manufacturing and distribution facilities or (iii) give
advantages to manufacturing or distribution intermediaries in which they have an economic stake. Continued consolidation among
production homebuilders could also result in a loss of some of our present customers to our competitors. The loss of one or more
of our significant customers or deterioration in our relations with any of them could adversely affect our financial condition,
operating results and cash flows. Furthermore, our customers typically are not required to purchase any minimum amount of
products from us. The contracts into which we have entered with most of our professional customers typically provide that we
supply particular products or services for a certain period of time when and if ordered by the customer. Should our customers
purchase our products in significantly lower quantities than they have in the past, such decreased purchases could have a material
adverse effect on our financial condition, operating results and cash flows.
We may have future capital needs that require us to incur additional debt and may not be able to obtain additional
financing on acceptable terms, if at all.
We are substantially reliant on liquidity provided by our Credit Agreement and cash on hand to provide working capital and fund
our operations. Our working capital and capital expenditure requirements are likely to grow as the housing market improves.
Economic and credit market conditions, the performance of the homebuilding industry, and our financial performance, as well as
other factors, may constrain our financing abilities. Our ability to secure additional financing, if available, and to satisfy our
financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, the
availability of credit, economic conditions and financial, business and other factors, many of which are beyond our control. The
prolonged continuation or worsening of current housing market conditions and the macroeconomic factors that affect our industry
could require us to seek additional capital and have a material adverse effect on our ability to secure such capital on favorable
terms, if at all.
We may be unable to secure additional financing or financing on favorable terms or our operating cash flow may be insufficient to
satisfy our financial obligations under our outstanding indebtedness. If additional funds are raised through the issuance of
additional equity or convertible debt securities, our stockholders may experience significant dilution. We may also incur additional
indebtedness in the future, including collateralized debt, subject to the restrictions contained in the Credit Agreement. If new debt
is added to our current debt levels, the related risks that we now face could intensify.
The Credit Agreement contains various financial covenants that could limit our ability to operate our business.
The Credit Agreement includes a financial covenant that requires us to maintain a minimum Fixed Charge Coverage Ratio of 1.0
as defined therein. However, the covenant is only applicable if the sum of availability under the revolving line of the Credit
Agreement ("Revolver") plus Qualified Cash (which includes cash and cash equivalents in deposit accounts or securities accounts
or any combination thereof that are subject to a control agreement) falls below $20 million at any time, and remains in effect until
the sum of availability under the Revolver plus Qualified Cash exceeds $20 million for 30 consecutive days. While there can be no
assurances, based upon our forecast, we do not expect the covenant to become applicable during the year ending December 31,
2014. However, while we would currently satisfy this covenant if it were applicable, should this not be the case, we would
evaluate our liquidity options including amending the Credit Agreement, seeking alternative financing arrangements of debt and/or
equity and/or selling assets. No assurances can be given that such alternative financing would be available, or if available, under
terms similar to our existing Credit Agreement or that we would be able to sell assets on a timely basis.
19
We may be adversely affected by any disruption in our IT systems.
Our operations are dependent upon our IT systems, which encompass all of our major business functions. Our ERP system, which
we use for operations representing virtually all of our sales, is a proprietary system that has been highly customized by our
computer programmers. Our centralized financial reporting system currently draws data from our ERP system. We rely upon such
IT systems to manage and replenish inventory, to fill and ship customer orders on a timely basis and to coordinate our sales and
distribution activities across all of our products and services. A substantial disruption in our IT systems for any prolonged time
period (arising from, for example, system capacity limits from unexpected increases in our volume of business, outages, computer
viruses, unauthorized access or delays in our service) could result in delays in receiving inventory and supplies or filling customer
orders and adversely affect our customer service and relationships. Our systems might be damaged or interrupted by natural or
man-made events or by computer viruses, physical or electronic break-ins, or similar disruptions affecting the global Internet.
There can be no assurance that such delays, problems or costs will not have a material adverse effect on our financial condition,
operating results and cash flows.
We may be adversely affected by any natural or man-made disruptions to our distribution and manufacturing facilities.
We currently maintain a broad network of distribution and manufacturing facilities throughout the eastern, southern and western
United States. Any widespread disruption to our facilities resulting from fire, earthquake, weather-related events, an act of
terrorism or any other cause could damage a significant portion of our inventory and could materially impair our ability to
distribute our products to customers. We could incur significantly higher costs and longer lead times associated with distributing
our products to our customers during the time that it takes for us to reopen or replace a damaged facility. In addition, any shortages
of fuel or significant fuel cost increases could disrupt our ability to distribute products to our customers. Disruptions to the national
or local transportation infrastructure systems including those related to a domestic terrorist attack may also affect our ability to
keep our operations and services functioning properly. If any of these events were to occur, our financial condition, operating
results and cash flows could be materially adversely affected.
We are subject to exposure to environmental liabilities and are subject to environmental regulation.
We are subject to various federal, state and local environmental laws, ordinances, rules and regulations including those
promulgated by the United States Environmental Protection Agency and analogous state agencies. As current and former owners,
lessees and operators of real property, we can be held liable for the investigation or remediation of contamination at or from such
properties, in some circumstances irrespective of whether we knew of or caused such contamination. No assurance can be provided
that investigation and remediation will not be required in the future as a result of spills or releases of petroleum products or
hazardous substances, the discovery of currently unknown environmental conditions, more stringent standards regarding existing
contamination, or changes in legislation, laws, ordinances, rules or regulations or their interpretation or enforcement. More
burdensome environmental regulatory requirements may increase our costs and adversely affect our financial condition, operating
results and cash flows.
We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks.
Our business employs systems and a website that allow for the secure storage and transmission of customers’ proprietary
information. Security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. We
may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Any
compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial
exposure, damage to our reputation and a loss of confidence in our security measures, which could harm our business. The
regulatory environment related to information security and privacy is increasingly rigorous, with new and constantly changing
requirements applicable to our business, and compliance with those requirements could result in additional costs. Our computer
systems have been, and will likely continue to be, subjected to computer viruses or other malicious codes, unauthorized access
attempts and cyber- or phishing-attacks. These events could compromise our confidential information, impede or interrupt our
business operations, and may result in other negative consequences, including remediation costs, loss of revenue, litigation and
reputational damage. To date, we have not experienced a material breach of cybersecurity. As cyber-attacks become more
sophisticated generally, and as we implement changes giving customers greater electronic access to our systems, we may be
required to incur significant costs to strengthen our systems from outside intrusions and/or obtain insurance coverage related to the
threat of such attacks, as we currently do not carry any such coverage. While we have implemented administrative and technical
controls and have taken other preventive actions to reduce the risk of cyber incidents and protect our IT, they may be insufficient
to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems.
20
Risks related to ownership of our common stock
The price of our common stock may fluctuate significantly.
Volatility in the market price of our common stock may prevent you from being able to sell your shares of our common stock at or
above the price you paid for them. The market price for our common stock could fluctuate significantly for various reasons,
including:
• our operating and financial performance and prospects;
• our quarterly or annual earnings or those of other companies in our industry;
•
•
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock
or the stock of other companies in our industry;
the failure of research analysts to cover our common stock;
strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;
•
• general economic, industry and market conditions;
•
• new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•
• material litigation or government investigations;
•
changes in accounting standards, policies, guidance, interpretations or principles;
changes in general conditions in the United States and global economies or financial markets, including those resulting
from war, incidents of terrorism or responses to such events;
•
changes in key personnel;
•
sales of common stock by us, our principal stockholder or members of our management team;
•
the granting or exercise of employee stock options;
• payment of liabilities for which we are self-insured;
• volume of trading in our common stock;
•
•
threats to, or impairments of, our intellectual property; and
the impact of the factors described elsewhere in “Risk Factors.”
In addition, in recent years, the stock market has regularly experienced significant price and volume fluctuations. This volatility
has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The
changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our
common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially
reduce our share price.
The requirements of being a public company have increased certain of our costs and require significant management focus.
As a public company, our legal, accounting and other expenses associated with compliance-related and other activities have
increased. For example, in connection with our IPO, we created new board of directors ("Board") committees and appointed an
independent director to comply with the corporate governance requirements of the NASDAQ. Costs to obtain director and officer
liability insurance have contributed to our increased costs. As a result of the associated liability, it may be more difficult for us to
attract and retain qualified persons to serve on our Board or as executive officers. Advocacy efforts by stockholders and third
parties may also prompt even more changes in governance and reporting requirements, which could further increase our
compliance costs.
We are exempt from certain corporate governance requirements since we are a “controlled company” within the meaning
of the NASDAQ rules and, as a result, you will not have the protections afforded by these corporate governance
requirements.
Gores Holdings, an affiliate of Gores, holds a majority of our common stock. As a result, we are considered a “controlled
company” for the purposes of the listing requirements of the NASDAQ. Under these rules, a company of which more than 50% of
the voting power is held by a group is a “controlled company” and may elect not to comply with certain corporate governance
requirements of the NASDAQ, including the requirements that our Board, our Compensation Committee and our Corporate
Governance and Nominating Committee meet the standard of independence established by those corporate governance
requirements. The independence standards are intended to ensure that directors who meet the independence standard are free of
any conflicting interest that could influence their actions as directors. Accordingly, you may not have the same protections
afforded to stockholders of companies that are subject to all of the NASDAQ's corporate governance requirements.
21
Our majority stockholder, Gores Holdings, has the ability to control significant corporate activities and its majority
stockholder's interests may not coincide with yours.
Gores Holdings and its affiliates beneficially owned approximately 61.2% of our common stock as of February 28, 2014. As a
result of its current ownership, Gores Holdings (and indirectly, Gores, given its control of Gores Holdings), so long as it holds a
majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of stockholders and,
through our Board, the ability to control decision-making with respect to our business direction and policies.
Matters over which Gores Holdings (and indirectly, Gores, given its control of Gores Holdings) can exercise control include:
election of directors;
•
• mergers and other business combination transactions, including proposed transactions that would result in our
stockholders receiving a premium price for their shares;
• other acquisitions or dispositions of businesses or assets;
•
•
•
incurrence of indebtedness and the issuance of equity securities;
repurchase of stock and payment of dividends; and
the issuance of shares to management under the Stock Building Supply Holdings, Inc. 2013 Incentive Compensation Plan
("2013 Incentive Plan").
Even if Gores Holdings' ownership of our shares falls below a majority, it may continue to be able to strongly influence or
effectively control our decisions. In addition, Gores Holdings has a contractual right to designate a number of directors
proportionate to its stock ownership.
Conflicts of interest may arise because some of our directors are affiliated with our largest stockholder.
Messrs. Freedman, Meyer and Yager, who are officers or employees of Gores or its affiliates, serve on our Board. Gores controls
Gores Holdings, our majority stockholder. Gores or its affiliates may hold equity interests in entities that directly or indirectly
compete with us, and companies in which it or one of its affiliates is an investor or may invest in the future may begin competing
with us or become customers of or vendors to the Company. As a result of these relationships, when conflicts between the interests
of Gores, on the one hand, and of our other stockholders, on the other hand, arise, these directors may not be disinterested.
Although our directors and officers have a duty of loyalty to us under Delaware law and our amended and restated certificate of
incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so
long as (i) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our
Board and a majority of our disinterested directors approves the transaction, (ii) the material facts relating to the director’s or
officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested
stockholders approve the transaction or (iii) the transaction is otherwise fair to us. Our amended and restated certificate of
incorporation also provides that any principal, officer, member, manager and/or employee of Gores or any entity that controls, is
controlled by or under common control with Gores or any investment funds managed by Gores will not be required to offer any
transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other
companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors.
We do not currently intend to pay dividends on our common stock.
We do not anticipate paying any cash dividends on our common stock for the foreseeable future. Instead, we intend to retain future
earnings to fund our growth. In addition, our existing indebtedness restricts, and we anticipate our future indebtedness may restrict,
our ability to pay dividends. Therefore, you may not receive a return on your investment in our common stock by receiving a
payment of dividends.
Stock Building Supply Holdings, Inc. does not conduct any substantive operations and, as a result, its ability to pay dividends is
dependent upon the financial results and cash flows of its operating subsidiaries and the distribution or other payment of cash to it
in the form of dividends or otherwise. The direct and indirect subsidiaries of Stock Building Supply Holdings, Inc. are separate and
distinct legal entities and have no obligation to make any funds available to the Stock Building Supply Holdings, Inc.
Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our
stock price.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could
adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares.
As of February 28, 2014, there were 26,112,007 shares of our common stock outstanding. Our pre-IPO investors own as many as
18,062,007 of these shares, with approximately 15,988,767 of these shares beneficially owned by affiliates of Gores. Gores’
22
affiliates have the right to require us to register their shares, and our other pre-IPO stockholders have the right to include their
shares in any such registration. Sales by such Gores’ affiliates or our other pre-IPO stockholders of a substantial number of shares
could significantly reduce the market price of our common stock.
We also have 1,249,489 registered shares of our common stock available for issuance under the 2013 Incentive Plan as of February
28, 2014, not including shares underlying outstanding stock options and restricted stock units (“RSUs”). In addition, as of
February 28, 2014, there were issued and outstanding approximately (i) 47,634 shares of restricted stock, (ii) 10,000 RSUs that
convert into common stock upon vesting, and (iii) 492,877 options for the purchase of common stock under the 2013 Incentive
Plan. Upon vesting, conversion or exercise as applicable, such registered shares can be freely sold in the public market. If a large
number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.
Our future operating results may fluctuate significantly and our current operating results may not be a good indication of
our future performance. Fluctuations in our quarterly financial results could affect our stock price in the future.
Our revenues and operating results have historically varied from period-to-period and we expect that they will continue to do so as
a result of a number of factors, many of which are outside of our control. If our quarterly financial results or our predictions of
future financial results fail to meet the expectations of securities analysts and investors, our stock price could be negatively
affected. Any volatility in our quarterly financial results may make it more difficult for us to raise capital in the future or pursue
acquisitions that involve issuances of our stock. Our operating results for prior periods may not be effective predictors of future
performance.
Factors associated with our industry, the operation of our business and the markets for our products and services may cause our
quarterly financial results to fluctuate, including:
•
•
•
the seasonal and cyclical nature of the homebuilding industry;
the highly competitive nature of our industry;
the volatility of prices, availability and affordability of raw materials, including lumber, wood products and other building
products;
shortages of skilled and technical labor, increased labor costs and labor disruptions;
the production schedules of our customers;
•
•
• general economic conditions, including but not limited to housing starts, repair and remodeling activity and light
commercial construction, inventory levels of new and existing homes for sale, foreclosure rates, interest rates,
unemployment rates, relative currency values, mortgage availability and pricing, as well as other consumer financing
mechanisms, that ultimately affect demand for our products;
actions of suppliers, customers and competitors, including merger and acquisition activities, plant closures and financial
failures;
litigation, claims and investigations involving the Company;
the financial condition and creditworthiness of our customers;
cost of compliance with government laws and regulations;
•
•
•
•
• weather patterns; and
•
severe weather phenomena such as drought, hurricanes, tornadoes and fire.
Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations
in our quarterly financial and other operating results, including fluctuations in our key metrics. The variability and unpredictability
could result in our failing to meet our internal operating plan or the expectations of securities analysts or investors for any period.
If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fall substantially
and we could face costly lawsuits, including securities class action suits.
Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders
to change the composition of our Board and may discourage hostile takeover attempts that some of our stockholders may
consider to be beneficial.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have the effect
of delaying or preventing changes in control if our Board determines that such changes in control are not in the best interests of us
and our stockholders. The provisions in our amended and restated certificate of incorporation and amended and restated bylaws
include, among other things, the following:
•
•
a classified Board with three-year staggered terms;
the ability of our Board to issue shares of preferred stock and to determine the price and other terms, including
preferences and voting rights, of those shares without stockholder approval;
23
•
•
•
•
•
stockholder action can only be taken at a special or regular meeting and not by written consent following the time that
Gores Holdings and its affiliates cease to beneficially own a majority of our common stock;
advance notice procedures for nominating candidates to our Board or presenting matters at stockholder meetings;
removal of directors only for cause following the time that Gores Holdings and its affiliates cease to beneficially own a
majority of our common stock;
allowing only our Board to fill vacancies on our Board; and
following the time that Gores Holdings and its affiliates cease to beneficially own a majority of our common stock, super-
majority voting requirements to amend our amended and restated bylaws and certain provisions of our amended and
restated certificate of incorporation.
In addition, we have entered into a Director Nomination Agreement with Gores Holdings that provides Gores Holdings the right to
designate nominees for election to our Board for so long as Gores Holdings beneficially owns 10% or more of the total number of
shares of our common stock then outstanding.
We have elected in our amended and restated certificate of incorporation not to be subject to Section 203 of the Delaware General
Corporation Law , an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a
business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period
of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business
combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner.
Accordingly, we are not subject to any anti-takeover effects of Section 203. However, our amended and restated certificate of
incorporation contains provisions that have the same effect as Section 203, except that they provide that Gores Holdings, its
affiliates (including any investment funds managed by Gores) and any person that becomes an interested stockholder as a result of
a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the “interested stockholder”
definition in our amended and restated certificate of incorporation and are therefore not subject to the restrictions set forth therein
that have the same effect as Section 203.
While these provisions have the effect of encouraging persons seeking to acquire control of our Company to negotiate with our
Board, they could enable the Board to hinder or frustrate a transaction that some, or a majority, of the stockholders might believe
to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by
making it more difficult for stockholders to replace members of our Board, which is responsible for appointing the members of our
management.
Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely
affect holders of our common stock, which could depress the price of our common stock.
Our Board has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of
preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote
or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to
the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us,
discouraging bids for our common stock at a premium over the market price, and adversely affect the market price and the voting
and other rights of the holders of our common stock.
Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act
could have a material adverse effect on our business and stock price.
We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and
therefore are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that
purpose. We are required, however, to comply with the SEC's rules implementing Section 302 of the Sarbanes-Oxley Act, which
require management to certify financial and other information in our quarterly and annual reports. Though we are required to
disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual
assessment of our internal control over financial reporting pursuant to Section 404 until our fiscal year 2014 annual report. To
comply with these requirements, we may need to undertake various actions, such as implementing new internal controls and
procedures and hiring accounting or internal audit staff. Testing and maintaining internal control could divert our management's
attention from other matters that are important to the operation of our business.
Our independent registered public accounting firm will be required to attest formally to the effectiveness of our internal controls
over financial reporting beginning with our fiscal year 2014 annual report, as the phase-in period to comply with that requirement
will have expired because our gross revenues exceeded $1 billion for the year ended December 31, 2013 and therefore, we are no
24
longer an "emerging growth company." At such time, our independent registered public accounting firm may issue a report that is
adverse, in the event it is not satisfied with the level at which our controls are documented, designed or operating. If we are unable
to conclude that we have effective internal control over financial reporting, we may suffer adverse consequences including: our
independent registered public accounting firm may be required to note a finding of a material weakness, we may fail to meet our
public reporting obligations and/or investors could lose confidence in our reported financial information, which could have a
negative effect on the trading price of our stock. We had a material weakness in the past that we remediated during the third and
fourth quarters of 2013.
Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we are unable
to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements, and we
or our independent registered public accounting firm may conclude that our internal control over financial reporting is not
effective. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations
by NASDAQ, the SEC or other regulatory authorities.
Our business and stock price may suffer as a result of our lack of public company operating experience. In addition, if
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
Prior to the completion of our IPO in August 2013, we were a privately-held company. Our limited public company operating
experience may make it difficult to forecast and evaluate our future prospects. If we are unable to execute our business strategy,
either as a result of our inability to manage effectively our business in a public company environment or for any other reason, our
business, prospects, financial condition and operating results may be harmed. In addition, as a new public company we may lose
research coverage by securities and industry analysts. If we lose securities or industry analyst coverage of our Company, the
trading price for our stock may be negatively impacted. If we maintain or obtain new or additional securities or industry analyst
coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research
about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish
reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
Item 1B. Unresolved Staff Comments
None.
25
Item 2. Properties
We have a broad network of distribution and manufacturing operations across 69 facilities in 14 states throughout the eastern,
southern and western United States. These branches are supported from our headquarters in Raleigh, North Carolina. Many of our
operations are co-located within a single facility: we have 48 distribution and retail operations, 20 millwork fabrication operations,
14 structural component fabrication operations, and 15 flooring distribution operations. Our distribution and manufacturing
facilities and their related uses as of January 31, 2014, are summarized in the table below:
Facility use
Approximate
aggregate
square
footage of
buildings
(millions)
Distribution
& retail
operations
Millwork
fabrication
Structural
components
fabrication
Flooring
operations
0.27
0.34
0.00
0.30
0.04
0.01
0.10
0.86
0.17
0.30
1.42
0.37
0.33
0.05
0.04
4.60
1
11
3
1
1
5
1
4
10
6
4
1
1
2
2
1
1
1
4
4
3
1
1
2
1
2
1
1
3
2
1
1
1
2
5
1
3
2
48
20
14
15
Total # of
Properties
1
13
1
4
1
2
2
11
1
8
10
8
6
1
1
70
State
Arkansas
California
Florida
Georgia
Idaho
Maryland
New Mexico
North Carolina
Pennsylvania
South Carolina
Texas
Utah
Virginia
Washington
Raleigh, NC Corporate Office
Total
Distribution and retail facilities generally include five to 25 acres of outside storage, a 30,000 to 60,000 square foot warehouse,
office and product display space, and 15,000 to 30,000 square feet of covered storage. The outside area provides space for lumber
storage and a staging area for delivery while the warehouse stores millwork, windows and doors. The distribution facilities are
usually located in industrial areas with low cost real estate and easy access to freeways to maximize distribution efficiency and
convenience. In most markets, at least one of the distribution and retail facilities is situated on a rail line to facilitate the
procurement of dimensional lumber in rail car quantities and minimize our cost of goods.
Our fabrication operations produce roof and floor trusses, wall panels, pre-cut engineered wood, stairs, windows, pre-hung interior
and exterior doors and custom millwork. In most cases, they are located on the same premises as our distribution and retail
facilities, which facilitates the efficient distribution of product to customers. Millwork fabrication operations typically vary in size
from 5,000 square feet to 50,000 square feet of warehouse space to accommodate fabrication lines and the storage of base
components and finished goods. Structural component fabrication operations vary in size from 20,000 square feet to 50,000 square
feet with five to 25 acres of outside storage for lumber and for finished goods.
We lease 58 facilities and own 12 facilities. Our leases typically have an initial operating lease term of five to 10 years and most
provide options to renew for specified periods of time. A majority of our leases provide for fixed annual rentals. Certain of our
leases include provisions for escalating rent, as an example, based on changes in the consumer price index. Most of the leases
require us to pay taxes, insurance and maintenance expenses associated with the properties.
As of January 31, 2014, we operate a fleet of approximately 578 trucks to deliver products from our distribution and
manufacturing centers to job sites. Through our emphasis on efficient scheduling and material handling processes and strategically
placed locations, we minimize shipping and freight costs, which are largely passed onto our customers, while maintaining a high
26
degree of local market expertise. We also employ a sales, inventory and operations planning process to forecast local customer
demand and adjust product replenishment levels, thereby minimizing working capital requirements while guarding against out-of-
stock products. We believe that this reliability is highly valued by our customers and reinforces customer relationships.
Item 3. Legal Proceedings
We are currently involved in various claims, legal proceedings and lawsuits incidental to the conduct of our business in the
ordinary course. We are a defendant in various pending lawsuits, legal proceedings and claims arising from assertions of alleged
product liability, warranty, casualty, construction defect, contract, tort, employment and other claims. We carry insurance in such
amounts in excess of our self-insurance as we believe to be reasonable under the circumstances although insurance may or may not
cover any or all of our liabilities in respect of claims and lawsuits. We do not believe that the ultimate resolution of these matters
will have a material adverse effect on our consolidated financial position, cash flows or operating results.
Item 4. Mine Safety Disclosures
Not applicable.
27
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock is traded on the NASDAQ Stock Market under the symbol “STCK”. The table below sets forth the high and
low sales prices of our common stock for the periods indicated:
Third Quarter 2013 (from August 9, 2013)
Fourth Quarter 2013
Holders of Record
High
$15.50
$19.02
Low
$12.74
$12.45
As of February 28, 2014, there were approximately 15 stockholders of record of our common stock. Because many of our shares of
common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of
beneficial owners represented by these record holders.
Dividend Policy
We do not plan to pay a regular dividend on our common stock. The declaration and payment of all future dividends, if any, will
be at the discretion of our Board and will depend upon our financial condition, earnings, contractual conditions, restrictions
imposed by the Credit Agreement or applicable laws and other factors that our Board may deem relevant.
Additionally, because we are a holding company, our ability to pay dividends on our common stock is limited by restrictions on
the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements
governing our indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Liquidity and capital resources—Revolving credit facility.” Any future determination to pay dividends will be at the discretion of
our Board, subject to compliance with covenants in current and future agreements governing our indebtedness, and will depend
upon our operating results, financial condition, capital requirements and other factors that our Board deems relevant.
Stock Performance Graph
The following graph shows a comparison from August 9, 2013 (the date trading commenced on our common stock on NASDAQ)
through December 31, 2013 of the cumulative return for our common stock, the Russell 2000 Index and the S&P 600 Building
Products Index (ticker symbol "^SP600-201020"). The graph tracks the performance of a $100 investment in our common stock
and in each of the indices (with the reinvestment of dividends).
28
Item 6. Selected Financial Data
The following table sets forth our selected consolidated financial data. The selected consolidated financial data as of December 31,
2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 have been derived from our audited consolidated
financial statements included as Item 8 of this Annual Report on Form 10-K. Selected consolidated financial data as of December
31, 2011 and 2010 and for the year ended December 31, 2010 were derived from our consolidated financial statements, which are
not included herein.
The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained in Item 7 of this Annual Report on Form 10-K and with our consolidated financial statements and related
notes included as Item 8 of this Annual Report on Form 10-K:
(in thousands, expect per share data)
Statement of operations data:
Net sales
Gross profit
Selling, general and administrative expenses
Loss from continuing operations
Loss from continuing operations per share - basic and diluted
Statement of cash flows data:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Other financial data:
Depreciation and amortization
Capital expenditures
EBITDA (1)
Adjusted EBITDA (1)
Balance sheet data (at period end):
Cash and cash equivalents
Total current assets
Property and equipment, net of accumulated depreciation
Total assets
Total debt (including current portion)
Redeemable preferred stock
Total stockholders' equity
Year Ended December 31,
2013
2012
2011
2010
$ 1,197,037 $ 942,398 $ 759,982 $ 751,706
164,014
246,338
(65,780 )
$ (0.38 ) $ (1.83 ) $ (2.07 ) $ (3.01 )
274,403
254,935
(5,036 )
168,965
213,036
(41,931 )
214,728
221,192
(14,582 )
$ (40,264 ) $ (12,243 ) $ (7,001 ) $ (57,999 )
8,093
(20,415 )
(1,863 )
40,574
(4,861 )
14,838
7,322
138
$ 12,060 $ 1,718 $ 16,188 $ 36,149
2,506
(79,733 )
(57,987 )
1,339
(45,435 )
(30,799 )
7,448
14,092
27,803
2,741
(6,862 )
1,993
$ 1,138 $ 2,691 $ 4,957 $ 4,498
188,227
72,821
294,970
15,174
50,809
122,229
227,134
56,039
318,540
66,323
—
127,681
155,455
57,759
254,641
35,915
54,997
51,426
194,345
55,076
286,012
79,182
41,477
34,164
29
(1)
EBITDA is defined as net loss before interest expense, income tax expense (benefit) and depreciation and amortization. Adjusted
EBITDA is defined as EBITDA plus impairment of assets held for sale, initial public offering ("IPO") transaction-related costs,
restructuring expense, bargain purchase gain, discontinued operations, net of taxes, management fees, non-cash compensation
expense, acquisition costs, severance and other expense related to store closures and business optimization, other expense related to
reduction of a tax indemnification asset and other items. EBITDA and Adjusted EBITDA are intended as supplemental measures of
our performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United
States (“GAAP”). We believe that EBITDA and Adjusted EBITDA provide useful information to management and investors
regarding certain financial and business trends relating to our financial condition and operating results. Our management uses
EBITDA and Adjusted EBITDA to compare our performance to that of prior periods for trend analyses, for purposes of determining
management incentive compensation and for budgeting and planning purposes. EBITDA and Adjusted EBITDA are used in monthly
financial reports prepared for management and our Board. We believe that the use of EBITDA and Adjusted EBITDA provide
additional tools for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with
other distribution and retail companies, which may present similar non-GAAP financial measures to investors. However, our
calculation of EBITDA and Adjusted EBITDA are not necessarily comparable to similarly titled measures reported by other
companies. Our management does not consider EBITDA and Adjusted EBITDA in isolation or as alternatives to financial measures
determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant
expenses and income that are required by GAAP to be recorded in the Company’s financial statements. Some of these limitations are:
(i) EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; (ii) EBITDA and
Adjusted EBITDA do not reflect our interest expense, or the requirements necessary to service interest or principal payments on our
debt; (iii) EBITDA and Adjusted EBITDA do not reflect our income tax expenses or the cash requirements to pay our taxes;
(iv) EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditure or
contractual commitments and (v) although depreciation and amortization charges are non-cash charges, the assets being depreciated
and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements
for such replacements. In order to compensate for these limitations, management presents EBITDA and Adjusted EBITDA in
conjunction with GAAP results. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below, and
should not rely on any single financial measure to evaluate our business.
30
The following is a reconciliation of net loss to EBITDA and Adjusted EBITDA:
(dollars in thousands)
Net loss
Interest expense
Income tax expense (benefit)
Depreciation and amortization
EBITDA
Impairment of assets held for sale (a)
IPO transaction-related costs (b)
Restructuring expense
Bargain purchase gain (c)
Discontinued operations, net of taxes
Management fees (d)
Non-cash compensation expense
Acquisition costs (e)
Year ended December 31,
2013
2012
2011
2010
4,037
(8,084 )
11,718
3,793
2,874
12,060
2,842
(22,332 )
16,188
$ (4,635 ) $ (14,533 ) $ (42,133 ) $ (69,994 )
1,575
(47,463 )
36,149
$ 14,092 $ (6,862 ) $ (45,435 ) $ (79,733 )
2,944
—
7,089
(11,223 )
4,214
2,597
288
4,086
432
10,008
141
—
(401 )
1,307
1,049
257
361
—
2,853
—
(49 )
1,379
1,305
284
580
—
1,349
—
202
2,406
384
1,017
Severance and other expense related to store closures and
business optimization (f)
Reduction of tax indemnification asset (g)
Other items (h)
Adjusted EBITDA
1,113
—
(195 )
$ 27,803
2,375
347
—
12,642
3,056
(3,947 )
$ 1,993 $ (30,799 ) $ (57,987 )
6,761
1,937
—
(a)
Impairment of assets held for sale represents the write down of such assets to the lower of depreciated cost or estimated fair value less
expected disposition costs. See Note 9 to our audited financial statements included elsewhere in this Annual Report on Form 10-K.
(b) Represents a $9.0 million fee for terminating our management services agreement with Gores and $1.0 million of other IPO transaction-
related costs for the year ended December 31, 2013.
(c)
(d)
(e)
(f)
Represents the excess of the net assets acquired over the purchase price of certain assets and liabilities of National Home Centers, Inc.
(“NHC”) in April 2010.
Represents the expense for management services provided by Gores and by Wolseley through August 2013 and November 2011,
respectively, and professional services provided by an affiliate of Gores.
Represents (i) $0.3 million for each of the years ended December 31, 2013 and 2012 related to the acquisitions of Total Building
Services Group, LLC ("TBSG") and Chesapeake Structural Systems, Inc., Creative Wood Products, LLC and Chestruc, LLC
(collectively “Chesapeake”), (ii) $0.8 million and $0.2 million for the year ended December 31, 2011 related to an abandoned acquisition
and the acquisition of Bison Building Materials, LLC ("Bison"), respectively, and (iii) $2.1 million and $2.0 million for the year ended
December 31, 2010 related to the acquisition of NHC and Bison, respectively.
Represents (i) $0.2 million, $0.5 million, $2.0 million and $1.6 million of severance expense for the years ended December 31, 2013,
2012, 2011 and 2010, respectively, (ii) $0.9 million, $1.8 million, $3.9 million and $7.7 million related to closed locations, consisting of
pre-tax losses incurred during closure and post-closure activities, for the years ended December 31, 2013, 2012, 2011 and 2010,
respectively, (iii) $1.4 million loss on the sale of land and buildings for the year ended December 31, 2010 and (iv) $0, $0, $0.9 million
and $1.9 million of business organization expenses, primarily consulting fees related to cost saving initiatives, for the years ended
December 31, 2013, 2012, 2011 and 2010, respectively.
(g) Represents expense related to the reduction of a tax indemnification asset, with a corresponding increase in income tax benefit, for the
years ended December 31, 2012, 2011 and 2010. This indemnification asset corresponds to the long-term liability related to uncertain tax
positions for which Wolseley had indemnified the Company, which was reduced upon the expiration of the statute of limitations for
certain tax periods. See Note 15 to our audited financial statements included elsewhere in this Annual Report on Form 10-K.
(h) Represents (i) a gain of $0.2 million for the year ended December 31, 2013 related to the reduction of an earnout liability associated with
the TBSG acquisition and (ii) $4.6 million received as proceeds from the settlement of a legal proceeding offset by $0.7 million of
expenses related to the Company's prepackaged reorganization for the year ended December 31, 2010.
31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read this discussion and analysis in conjunction with our historical consolidated financial statements and the notes
thereto included elsewhere in this Annual Report on Form 10-K. This discussion and analysis covers periods prior to our initial
public offering and related transactions. As a result, the discussion and analysis of historical periods does not reflect the impact
that the offering, our conversion to a corporation and other related transactions will have on us. Our historical results may not be
indicative of our future performance. This discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ from those anticipated in these forward-looking statements as a result
of many factors. Our risk factors are set forth in “Part I, Item 1A. Risk Factors.”
Overview
We are a large, diversified LBM distributor and solutions provider that sells to new construction and repair and remodeling
contractors. We carry a broad line of products and have operations throughout the United States. Our primary products are lumber
& lumber sheet goods, millwork, doors, flooring, windows, structural components such as EWP, trusses and wall panels and other
exterior products. Additionally, we provide solution-based services to our customers, including design, product specification and
installation management services. We serve a broad customer base, including large-scale production homebuilders, custom
homebuilders and repair and remodeling contractors. We offer approximately 39,000 SKUs, as well as a broad range of
customized products, all sourced through our strategic network of suppliers, which together with our various solution-based
services, represent approximately 50% of the construction cost of a typical new home. By enabling our customers to source a
significant portion of their materials and services from one supplier, we have positioned ourselves as the supply partner of choice
for many of our customers.
We have operations in 14 states, which states accounted for approximately 56% of 2013 U.S. single-family housing permits
according to the U.S. Census Bureau. In these 14 states, we operate in 21 metropolitan areas that we believe have an attractive
potential for economic growth based on population trends and above-average employment growth.
Primarily as a result of the improving conditions in the residential construction market, our net sales for the year ended December
31, 2013 increased 27.0%. We estimate sales increased 19.6% due to volume, including acquisitions, and 7.4% due to commodity
price inflation. Our gross margin was 22.9% for the year ended December 31, 2013 compared to 22.8% for the prior year period.
Our selling, general and administrative expenses as a percentage of our net sales declined to 21.3% for the year ended December
31, 2013 as compared to 23.5% for the year ended December 31, 2012 as we successfully leveraged the increase in our net sales
across the fixed elements of our operating cost base.
We recorded income from operations of $0.8 million during the year ended December 31, 2013, compared with a loss from
operations of $18.9 million during the year ended December 31, 2012. The income from operations for the year ended December
31, 2013 included $10.0 million in IPO transaction-related expenses as compared to $0 for the year ended December 31, 2012. See
further discussion in “-Operating Results” below.
On August 14, 2013, we issued 4,411,765 shares of common stock in our IPO. In connection with our IPO, we received proceeds
of $55.2 million, net of underwriting discounts and offering expenses. At December 31, 2013, we had $1.1 million of cash and
cash equivalents and $71.0 million of unused borrowing capacity under our Revolver. We used $1.6 million of cash during the
year ended December 31, 2013, as cash provided by net proceeds from our IPO was partially offset by cash used for operations of
$40.3 million, and net repayments on our Revolver of $13.1 million. These changes are discussed further in "—Liquidity and
Capital Resources" below.
Factors affecting our operating results
Our operating results and financial performance are influenced by a variety of factors, including, among others, conditions in the
housing market and economic conditions generally, changes in the cost of the products we sell (particularly commodity products),
pricing policies of our competitors, production schedules of our customers and seasonality. Some of the more important factors are
briefly discussed below.
Conditions in the housing and construction market
The building products supply and services industry is highly dependent on new home construction and repair and remodeling
activity, which in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates,
foreclosure rates, housing inventory levels, housing demand, the availability of land, the availability of construction financing and
the health of the economy and mortgage markets. The homebuilding industry underwent a significant downturn that began in mid-
2006 and began to stabilize in late 2011. According to the U.S. Census Bureau, single-family housing starts in 2013, 2012 and
2011 were 0.62 million, 0.54 million and 0.43 million respectively, which was significantly less than the 50-year average rate of
32
approximately 1.0 million. There remains uncertainty regarding the timing and extent of any recovery in construction and repair
and remodeling activity and resulting product demand levels. Many industry forecasters expect to see continued improvement in
housing demand over the next few years. For example, as of December 2013, McGraw-Hill Construction forecasts that U.S.
single-family housing starts will increase to 1.0 million by 2015. We believe there are several trends that indicate U.S. housing
demand will likely recover in the long term and that the recent downturn in the housing industry is likely a trough in the cyclical
nature of the residential construction industry. We believe that these trends are supported by positive economic and demographic
indicators that are beginning to take hold in many of the markets in which we operate. These indicators, which we believe are
typically indicative of housing market strength, include declining unemployment rates, rising home values, rebounding household
formations and a favorable consumer interest rate environment supporting affordability and home ownership.
Overall economic conditions in the markets where we operate
Economic changes both nationally and locally in our markets impact our financial performance. Unfavorable changes in
demographics, credit markets, consumer confidence, health care costs, housing affordability, housing inventory levels, a
weakening of the national economy or of any regional or local economy in which we operate and other factors beyond our control
could adversely affect consumer spending, result in decreased demand for homes and adversely affect our business. We believe
continued employment growth, prospective home buyers’ access to financing and improved consumer confidence will be
necessary to increase household formation rates. Improved household formation rates in turn will increase demand for housing and
stimulate new construction.
Commodity nature of our products
Many of the building products we distribute, including lumber, OSB, plywood and particleboard, are commodities that are widely
available from other manufacturers or distributors with prices and volumes determined frequently based on participants’
perceptions of short-term supply and demand factors. A shortage of capacity or excess capacity in the industry can result in
significant increases or declines in market prices for those products, often within a short period of time. Prices of commodity
products can also change as a result of national and international economic conditions, labor and freight costs, competition, market
speculation, government regulation and trade policies, as well as from periodic delays in the delivery of lumber and other 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 and pricing pressure from our competitors may limit our ability to pass on such
price changes. For example, from time to time we enter into extended pricing commitments, which could compress our gross
margins in periods of inflation.
The following table reflects changes in the average composite framing lumber prices (per thousand board feet) and average
composite structural panel prices (per thousand square feet). This composite calculation is based on index prices for OSB and
plywood as reported by Random Lengths for the periods noted below.
Change in framing lumber prices
Change in structural panel prices
Year ended December 31,
2013
average
price
$ 384
$ 426
2013
versus
2012
2012
average
price
2012
versus
2011
2011
average
price
2011
versus
2010
19 % $ 322
11 % $ 384
18 % $ 272
32 % $ 292
(4 )%
(10 )%
Periods of increasing prices provide the opportunity for higher sales and increased gross profit, while periods of declining prices
may result in declines in sales and profitability. In particular, low market prices for wood products over a sustained period can
adversely affect our financial condition, operating results and cash flows, as can excessive spikes in market prices. The increase in
lumber and panel prices during the year ended December 31, 2013, compared with the same period in 2012, was one component of
our improved net sales and gross profit for the year ended December 31, 2013, which increased $254.6 million and $59.7 million,
respectively. For further discussion of the impact of commodity prices on historical periods, see “-Operating results.”
Consolidation of large homebuilders
Over the past ten years, the homebuilding industry has undergone consolidation and many larger homebuilders have increased
their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions 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 face in our markets with certain profitability expectations. Our sales to production
homebuilders, which include many of the country’s largest 100 homebuilders, increased approximately 29% on a year-over-year
basis during the year ended December 31, 2013, compared to an increase in actual U.S. single-family housing starts of
approximately 15% during the same period. We expect that our ability to maintain strong relationships with the largest builders
will be vital to our ability to expand into new markets as well as grow our market share. While we generate significant sales from
these homebuilders, our gross margins on sales to them tend to be lower than our gross margins on sales to other market segments.
33
This could impact our gross margins as homebuilding recovers if the market share held by the production homebuilders continues
to increase.
Our ability to control expenses
We pay close attention to managing our working capital and operating expenses. We employ a LEAN process operating
philosophy, which encourages continuous improvement in our core processes to minimize waste, improve customer service,
increase expense productivity, improve working capital and maximize profitability and cash flow. We regularly 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 have implemented GPS-based technology to improve customer service and improve productivity of our
shipping and handling costs.
Mix of products sold
We typically realize greater gross margins on more highly engineered and customized products, or ancillary products that are often
purchased based on convenience and are therefore less price sensitive to our customers. For example, sales of lumber & lumber
sheet goods tend to generate lower gross margins due to their commodity nature and the relatively low switching costs of sourcing
those products from different suppliers. Structural components and millwork & other interior products often generate higher gross
profit dollars relative to other products. Homebuilders often use structural components in order to realize increased efficiency and
improved quality. Shortening cycle time from start to completion is a key imperative of homebuilders during periods of strong
consumer demand or limited availability of framing labor. As the residential new construction market continues to strengthen, we
expect the use of structural components by homebuilders to increase.
Changes in sales mix among construction segments
Our operating results may vary according to the amount and type of products we sell to each of our four primary construction
segments: single-family homebuilders; remodeling contractors; multi-family contractors and light commercial. The following table
reflects our estimated net sales by construction segment:
(dollars in thousands)
Net Sales
2013
% of
Sales
%
Change
vs. 2012
Net Sales
2012
% of
Sales
2011
%
Change
vs. 2011
Net Sales
% of
Sales
Single-family home builders
$
Remodeling contractors
Other (including multi-family & light
commercial)
889,925
201,112
74.3 %
16.8 %
30.9 % $
18.7 %
679,800
169,411
72.1 %
18.0 %
31.1 % $
5.0 %
518,342
161,360
68.2 %
21.2 %
106,000
8.9 %
13.7 %
93,187
9.9 %
16.1 %
80,280
10.6 %
Total net sales
$ 1,197,037
100.0 %
27.0 % $
942,398
100.0 %
24.0 % $
759,982
100.0 %
We tend to realize higher gross margins on sales to the remodeling segment due to the smaller product volumes purchased by those
customers, as well as the more customized nature of the projects those customers generally undertake. Gross margins within the
new single-family, multi-family and light commercial construction segments can vary based on a variety of factors, including the
purchase volumes of the individual customer, the mix of products sold to that customer, the size and selling price of the project
being constructed and the number of upgrades added to the project before or during its construction.
Freight costs and fuel charges
A portion of our shipping and handling costs is comprised of diesel or other fuels purchased for our delivery fleet. According to
the U.S. Energy Information Administration, the average retail price per gallon for No. 2 diesel fuel was $3.92, $3.97 and $3.85
for the years ended December 31, 2013, 2012 and 2011, respectively. For the year ended December 31, 2013, we incurred costs of
approximately $9.8 million within selling, general and administrative expenses for diesel and other fuels. Future increases in the
cost of fuel, or inbound freight costs for the products we purchase, could impact our operating results and cash flows if we are
unable to pass along these cost increases to our customers through increased prices.
Certain factors affecting our financial statements
Acquisitions
The assets of TBSG were acquired on December 21, 2012 and the assets of Chesapeake were acquired on April 8, 2013. Our
revenues for the year ended December 31, 2013 increased by approximately $28.3 million as a result of these acquisitions. The
TBSG acquisition did not have a material impact on our 2012 operating results.
34
Operating results
The following tables set forth our operating results in dollars and as a percentage of net sales for the periods indicated:
(dollars in thousands)
Net sales
Cost of goods sold
Gross profit
Operating expenses:
Selling, general and administrative expenses
Depreciation expense
Amortization expense
Impairment of assets held for sale
IPO transaction-related costs
Restructuring expense
Income (loss) from operations
Other income (expenses)
Interest expense
Other income (expense), net
Loss from continuing operations before
income taxes
Income tax benefit (expense)
Loss from continuing operations
Income (loss) from discontinued operations,
net of income tax expense of $243, $52 and
$658, respectively
Net loss
Year ended December 31,
2013
2012
2011
$ 1,197,037
922,634
274,403
100.0 % $ 942,398
727,670
77.1 %
214,728
22.9 %
100.0 % $ 759,982
591,017
77.2 %
168,965
22.8 %
100.0 %
77.8 %
22.2 %
254,935
5,890
2,236
432
10,008
141
761
(3,793 )
870
(2,162 )
(2,874 )
(5,036 )
21.3 %
0.5 %
0.2 %
0.0 %
0.8 %
0.0 %
0.1 %
(0.3 )%
0.1 %
(0.2 )%
(0.2 )%
(0.4 )%
221,192
7,759
1,470
361
—
2,853
(18,907 )
(4,037 )
278
(22,666 )
8,084
(14,582 )
23.5 %
0.8 %
0.2 %
0.0 %
0.0 %
0.3 %
(2.0 )%
(0.4 )%
0.0 %
(2.4 )%
0.9 %
(1.5 )%
213,036
11,844
1,457
580
—
1,349
(59,301 )
(2,842 )
(2,120 )
(64,263 )
22,332
(41,931 )
28.0 %
1.6 %
0.2 %
0.1 %
0.0 %
0.2 %
(7.8 )%
(0.4 )%
(0.3 )%
(8.5 )%
2.9 %
(5.5 )%
401
(4,635 )
$
0.0 %
(0.4 )% $
49
(14,533 )
0.0 %
(1.5 )% $
(202 )
(42,133 )
0.0 %
(5.5 )%
2013 compared to 2012
Net sales
For the year ended December 31, 2013, net sales increased $254.6 million, or 27.0%, to $1,197.0 million from $942.4 million
during the year ended December 31, 2012. We estimate our sales volume increased approximately 19.6% while commodity price
inflation resulted in an additional 7.4% increase in net sales. The increase in sales volume was driven primarily by increased
single-family housing starts (as described below), $28.3 million in net sales from the acquisitions of TBSG and Chesapeake and
increases in demand from higher repair and remodeling activity. According to the U.S. Census Bureau, single-family housing
starts, which were the primary driver for approximately 74% of our sales for the year ended December 31, 2013, increased
approximately 15.5% for the year ended December 31, 2013 as compared to the same period in the prior year. Increases in net
sales from Texas, North Carolina, Utah, California and Georgia represented approximately 77% of the total net sales increase for
2013 compared to 2012.
The following table shows net sales classified by major product category:
2013
2012
(dollars in thousands)
Structural components
Millwork & other interior products
Lumber & lumber sheet goods
Windows & other exterior products
Other building products & services
Total net sales
Net Sales
$ 157,975
219,191
428,384
249,711
141,776
$ 1,197,037
% of Sales
Net Sales
% of Sales
% Change
13.2 % $ 106,745
178,449
18.3 %
333,952
35.8 %
202,532
20.9 %
120,720
11.8 %
100.0 % $ 942,398
11.3 %
18.9 %
35.5 %
21.5 %
12.8 %
100.0 %
48.0 %
22.8 %
28.3 %
23.3 %
17.4 %
27.0 %
35
Increased sales volume was achieved across all product categories. Average selling prices for lumber & lumber sheet goods were
approximately 21.0% higher during the year ended December 31, 2013 compared to the year ended December 31, 2012. Structural
components growth exceeded that of our other product categories primarily as a result of acquisitions.
Cost of goods sold
For the year ended December 31, 2013, cost of goods sold increased $194.9 million, or 26.8%, to $922.6 million from $727.7
million during the year ended December 31, 2012. We estimate our cost of sales increased approximately 19.4% as a result of
increased sales volumes, while commodity cost inflation resulted in an additional 7.4% increase in cost of goods sold.
Gross profit
For the year ended December 31, 2013, gross profit increased $59.7 million, or 27.8%, to $274.4 million from $214.7 million for
the year ended December 31, 2012, driven primarily by increased sales volumes. Our gross profit as a percentage of net sales
(“gross margin”) was 22.9% for the year ended December 31, 2013 and 22.8% for the year ended December 31, 2012.
Operating expenses
For the year ended December 31, 2013, selling, general and administrative expenses increased $33.7 million, or 15.3%, to $254.9
million, or 21.3% of net sales, from $221.2 million, or 23.5% of net sales, for the year ended December 31, 2012. This was driven
primarily by variable costs to serve higher sales volumes, such as sales commissions, shipping and handling costs and other
variable compensation, which increased by $18.9 million in the aggregate for the year ended December 31, 2013 as compared to
the year ended December 31, 2012. For the year ended December 31, 2013, other salary, wage, benefit and employer taxation costs
increased $10.3 million compared to the year ended December 31, 2012, primarily as a result of headcount additions to serve
increased sales volumes and capture sales opportunities arising from the improved residential construction market.
For the year ended December 31, 2013, the Company incurred $10.0 million of non-capitalizable costs associated with our IPO,
which included a $9.0 million fee for terminating our management services agreement with Gores.
For the year ended December 31, 2013, depreciation expense decreased $1.9 million, or 24.1%, to $5.9 million from $7.8 million
during the year ended December 31, 2012, driven primarily by the full depreciation of certain fixed assets.
For the year ended December 31, 2013, amortization expense increased to $2.2 million from $1.5 million for the year ended
December 31, 2012, due primarily to amortization of intangible assets acquired in the TBSG and Chesapeake acquisitions.
For the year ended December 31, 2013, restructuring expense of $0.1 million decreased from $2.9 million during the year ended
December 31, 2012. The expense incurred during the year ended December 31, 2012 resulted primarily from management's
determination that subleasing closed properties could no longer be reasonably assumed, which resulted in a revised estimate of our
restructuring reserves.
Other income (expenses)
Interest expense. For the year ended December 31, 2013, interest expense was $3.8 million compared to $4.0 million for the year
ended December 31, 2012. This decrease relates primarily to (i) lower average Revolver borrowing rates resulting from the
December 2012 and June 2013 amendments to the Credit Agreement, which lowered interest rate margins by 50 basis points and
75 basis points, respectively, and (ii) lower deferred financing cost amortization resulting from the extension of the maturity date
of the Credit Agreement, offset by (iii) higher average Revolver borrowings and (iv) interest expense related to a capital lease
assumed in the TBSG acquisition.
Other income (expense), net. For the year ended December 31, 2013, other income (expense), net was $0.9 million compared to
$0.3 million for the year ended December 31, 2012. This increase relates primarily to $0.3 of expense associated with the write-off
of a tax indemnification asset during the year ended December 31, 2012 compared to $0 during the year ended December 31,
2013.
Income tax from continuing operations
For the year ended December 31, 2013, income tax expense from continuing operations increased $11.0 million, or 135.6%, to
$2.9 million from an income tax benefit of $8.1 million for the year ended December 31, 2012, driven primarily by a reduction in
our loss from continuing operations before income taxes and the non-deductibility of the termination fee of $9.0 million related to
our management services agreement with Gores. The effective tax rate from continuing operations for the year ended December
31, 2013 was (132.9%) compared to 35.7% for the year ended December 31, 2012. The decrease in the effective tax rate is
primarily due to the non-deductibility of the termination fee paid to Gores.
36
2012 compared to 2011
Net sales
For the year ended December 31, 2012, net sales increased $182.4 million, or 24.0%, to $942.4 million from $760.0 million during
the year ended December 31, 2011, driven primarily by increases in housing starts in the markets we serve, as well as inflation in
commodity products. According to the U.S. Census Bureau, single-family housing starts, which were the primary driver for
approximately 75% of our 2012 net sales, increased 24.3% for the year, compared with 2011. We estimate our sales volume
increased approximately 19.5%, while commodity price inflation resulted in an additional 4.5% increase in net sales during 2012
compared to 2011. Increases in net sales from our locations in Texas, Utah, Georgia and North Carolina represented approximately
75% of the total increase in net sales for 2012 compared to 2011.
The following table shows net sales classified by major product category:
2012
2011
(dollars in thousands)
Structural components
Millwork & other interior products
Lumber & lumber sheet goods
Windows & other exterior products
Other building products & services
Total net sales
Net Sales
$ 106,745
178,449
333,952
202,532
120,720
$ 942,398
% of Sales
Net Sales
% of Sales
% Change
11.3 % $ 87,542
143,128
18.9 %
247,299
35.5 %
178,361
21.5 %
103,652
12.8 %
100.0 % $ 759,982
11.5 %
18.8 %
32.6 %
23.5 %
13.6 %
100.0 %
21.9 %
24.7 %
35.0 %
13.6 %
16.5 %
24.0 %
Increased sales volume was achieved across all product categories. Average selling prices for lumber & lumber sheet goods were
approximately 13.9% higher in 2012, compared to 2011. During 2012, prices rose to a level not seen on a consistent basis since
2005 and 2006. This commodity price inflation has resulted in net sales growth for lumber & lumber sheet goods exceeding that of
our other product categories. Windows & other exterior products, and other building products & services include subcategories,
such as roofing, siding and hardware, that are driven more by the repair and remodeling market and therefore experienced slower
growth in net sales volumes than other product categories.
Cost of goods sold
For the year ended December 31, 2012, cost of goods sold increased $136.7 million, or 23.1%, to $727.7 million from $591.0
million during the year ended December 31, 2011. We estimate that our cost of sales increased approximately 19.2% as a result of
increased sales volumes, while commodity cost inflation resulted in an additional 3.9% increase in cost of goods sold.
Gross profit
For the year ended December 31, 2012, gross profit increased $45.8 million, or 27.1%, to $214.7 million from $169.0 million
during the year ended December 31, 2011, driven primarily by increased sales volumes. Our gross margin increased to 22.8% in
2012 from 22.2% in 2011, primarily as a result of spreading fixed costs over a larger sales base and operational improvements.
Operating expenses
For the year ended December 31, 2012, selling, general and administrative expenses increased $8.2 million, or 3.8%, to $221.2
million from $213.0 million during the year ended December 31, 2011. This was driven primarily by variable costs to serve higher
sales volumes, such as sales commissions, shipping and handling costs and other variable compensation, which increased by $7.3
million in the aggregate in 2012 as compared to the prior year.
For the year ended December 31, 2012, depreciation expense decreased $4.1 million, or 34.5%, to $7.8 million from $11.8 million
during the year ended December 31, 2011, driven primarily by a reduction in the size of our distribution fleet and the full
depreciation of certain fixed assets.
For the year ended December 31, 2012, amortization expense of $1.5 million was unchanged from $1.5 million during the year
ended December 31, 2011, and represented the amortization of intangible assets arising from the acquisitions of certain businesses
in prior years.
For the year ended December 31, 2012, impairment of assets held for sale of $0.4 million decreased from $0.6 million during the
year ended December 31, 2011, driven primarily by a reduction in the number of assets identified as excess or underutilized and
offered for sale. For the year ended December 31, 2012, restructuring expense of $2.9 million increased from $1.3 million during
the year ended December 31, 2011. This increase resulted primarily from management’s determination that subleasing closed
properties could no longer be reasonably assumed, which resulted in a revised estimate of our restructuring reserves.
37
Other income (expenses)
Interest expense. For the year ended December 31, 2012, interest expense increased $1.2 million, or 42.0%, to $4.0 million from
$2.8 million during the year ended December 31, 2011, driven primarily by increased average daily borrowings under our
Revolver. The increase in average daily borrowings was primarily the result of cash used by operations of $7.0 million and $12.2
million in 2011 and 2012, respectively, the redemption of Class A Junior Preferred shares and Class A Common shares for $25.0
million in 2011, and the redemption of Class B Senior Preferred shares payment of dividends totaling $23.0 million in 2012. These
uses, partially offset by cash provided from other activities, increased the balance on the Revolver by $20.9 million in 2011 and
$38.4 million in 2012.
Other income, net. For the year ended December 31, 2012, other income, net was $0.3 million, compared to other expense, net of
$2.1 million during the year ended December 31, 2011. This change was driven primarily by a reduction in expense associated
with the write-off of a tax indemnification asset.
Income tax from continuing operations
For the year ended December 31, 2012, income tax benefit from continuing operations decreased $14.2 million, or 63.7%, to $8.1
million from $22.3 million during the year ended December 31, 2011, driven primarily by a reduction in our loss from continuing
operations before income taxes. Our effective tax rate for 2012 was 35.7% compared to 34.8% for 2011.
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. Since 2010, our capital resources have primarily consisted of cash and cash equivalents,
borrowings under our Revolver and proceeds from our IPO.
The homebuilding industry, and therefore our business, experienced a significant downturn that started in 2006. However, activity
improved as 2012 and 2013 saw the first meaningful increases in housing starts since the downturn began. Beyond 2013, it is
difficult for us to predict what will happen as our industry is dependent on a number of factors, including, among others, 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. Due to the increases in adjusted working capital (as defined and described
below) and the effects of the significant housing industry downturn, our operations incurred operating losses for the years ended
December 31, 2012 and 2011 and used cash for operations for the years ended December 31, 2013, 2012 and 2011.
Our liquidity at December 31, 2013 was $72.1 million, which includes $1.1 million in cash and cash equivalents and $71.0 million
of unused borrowing capacity under our Revolver.
We believe that our cash flows from operations, combined with our current cash levels, and available borrowing capacity, will be
adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures,
lease obligations and working capital for at least the next 12 months.
38
Historical cash flow information
Adjusted working capital* and net current assets
Adjusted working capital was $122.6 million, $81.3 million and $68.6 million as of December 31, 2013, 2012 and 2011,
respectively, and net current assets (current assets less current liabilities) were $124.2 million, $15.6 million and $44.1 million as
of December 31, 2013, 2012 and 2011, respectively, as summarized in the following table:
(dollars in thousands)
Accounts receivable, net
Inventories, net
Other current assets
Income taxes receivable (payable)
Accounts payable, accrued expenses and other current liabilities
Total adjusted working capital*
Cash and cash equivalents
Restricted assets
Revolving line of credit
Total net current assets
December 31,
2013
December 31,
2011
December 31,
2012
$ 111,285 $ 90,297 $ 65,206
49,682
22,091
9,171
(77,509 )
68,641
4,957
4,348
(33,850 )
$ 124,200 $ 15,599 $ 44,096
73,918
23,618
(2,939 )
(103,589 )
81,305
2,691
3,821
(72,218 )
91,303
22,948
(2,989 )
(99,945 )
122,602
1,138
460
—
*Adjusted working capital is a non-GAAP financial measure that management uses to assess the Company’s financial position and
liquidity. Management believes adjusted working capital provides investors with an additional view of the Company’s liquidity
and ability to repay current obligations. We calculate adjusted working capital as current assets, as determined under GAAP,
excluding cash and cash equivalents and restricted assets, minus current liabilities, as determined under GAAP, excluding the
Revolver. The presentation of this additional information is not meant to be considered superior to, in isolation of or as a
substitute for results prepared in accordance with GAAP or as an indication of our performance. Our calculation of adjusted
working capital is not necessarily comparable to similarly titled measures reported by other companies.
Accounts receivable, net, increased $21.0 million from December 31, 2012 to December 31, 2013 and $25.1 million from
December 31, 2011 to December 31, 2012 primarily as a result of year-over-year increases in net sales. Days sales outstanding at
December 31, 2013, 2012 and 2011 (measured against net sales in the current fiscal quarter of each period) were each
approximately 33 days.
Inventories, net, increased $17.4 million from December 31, 2012 to December 31, 2013 and $24.2 million from December 31,
2011 to December 31, 2012 due to increases in inventory purchases to support higher net sales. Inventory days on hand at
December 31, 2013, 2012 and 2011 (measured against cost of goods sold in the current fiscal quarter of each period) were
approximately 36, 35 and 32 days, respectively.
Other current assets decreased $0.7 million from December 31, 2012 to December 31, 2013. Other current assets increased $1.5
million from December 31, 2011 to December 31, 2012 due primarily to the establishment of a $1.8 million indemnification asset
related to the resolution of a lawsuit in which the Company was fully indemnified by Wolseley.
Income taxes payable increased $0.1 million from December 31, 2012 to December 31, 2013 due to the Company's taxable income
position for the year ended December 31, 2013. The change from income taxes receivable of $9.2 million at December 31, 2011 to
income taxes payable of $2.9 million at December 31, 2012 resulted primarily from the collection of tax refunds totaling $16.4
million in 2012 and a $2.9 million liability as of December 31, 2012 for taxes, interest and penalties related to certain IRS audits.
Accounts payable, accrued expenses and other liabilities decreased $3.6 million from December 31, 2012 to December 31, 2013
and increased $26.1 million from December 31, 2011 to December 31, 2012 primarily as a result of changes in the volume of
inventory purchases leading up to each balance sheet date as well as the timing of supplier and payroll disbursements.
39
Cash flows from operating activities
Net cash used in operating activities was $40.3 million, $12.2 million and $7.0 million for the years ended December 31, 2013,
2012 and 2011, respectively, as summarized in the following table:
Year ended December 31,
(dollars in thousands)
Net loss
Non-cash expenses
(Loss) gain on sale of property, equipment and real estate
Change in deferred income taxes
Change in working capital and other
Net cash used in operating activities
2013
2011
2012
$ (4,635 ) $ (14,533 ) $ (42,133 )
21,014
(2,609 )
(5,926 )
22,653
$ (40,264 ) $ (12,243 ) $ (7,001 )
14,996
(60 )
(1,257 )
(49,308 )
16,790
169
(3,633 )
(11,036 )
Net cash used in operating activities increased by $28.0 million for the year ended December 31, 2013 as compared to the year
ended December 31, 2012 primarily due to the following:
• net loss declined by $9.9 million as discussed in “Operating Results” above.
• non-cash expenses declined by $1.8 million primarily as a result of a decrease in bad debt expense which was a result of
•
•
improving collection trends on accounts receivable.
change in deferred income taxes declined by $2.4 million due to a reduction in the timing differences between our losses
before income taxes under GAAP and our taxable income. The reduction in timing differences primarily resulted from a
larger decrease in tax depreciation versus GAAP depreciation expense from 2012 to 2013.
changes in working capital and other decreased by $38.3 million due primarily to the increase in accounts receivable, net
and inventories, net during 2013 discussed above.
Net cash used in operating activities increased by $5.2 million in 2012 as compared to 2011 primarily due to the following:
• net loss declined by $27.6 million as discussed in “Operating Results” above.
• non-cash expenses declined by $4.2 million due primarily to a reduction in depreciation expense of $5.0 million primarily
•
•
•
resulting from the full depreciation of certain fixed assets.
loss on sales of property, equipment and real estate of $0.2 million in 2012 declined from a gain of $2.6 million in 2011
as a result of fewer disposals of excess equipment and vehicles.
change in deferred income taxes declined by $2.3 million due to a reduction in the timing differences between our losses
before income taxes under GAAP and our taxable income. The reduction in timing differences primarily resulted from the
decrease in depreciation expense from 2011 to 2012.
changes in working capital and other decreased by $33.7 million due primarily to the increase in adjusted working capital
during 2012 discussed above, as compared to a decrease in adjusted working capital during 2011.
Cash flows from investing activities
Net cash provided by (used in) investing activities was ($1.9) million, ($4.9) million and $7.3 million for the years ended
December 31, 2013, 2012 and 2011, respectively, as summarized in the following table:
Year ended December 31,
(dollars in thousands)
Purchases of property and equipment
Purchases of businesses
Proceeds from sale of property, equipment and real estate
Change in restricted assets
Net cash (used in) provided by investing activities
2013
2011
2012
$ (7,448 ) $ (2,741 ) $ (1,339 )
—
6,106
2,555
$ (1,863 ) $ (4,861 ) $ 7,322
(6,582 )
1,393
3,069
(2,373 )
3,754
4,204
Cash used for the purchase of property and equipment for the years ended December 31, 2013, 2012 and 2011 resulted primarily
from the replacement of certain aged vehicles and equipment in order to minimize maintenance costs and asset down time.
Cash used for the purchase of businesses resulted from the acquisition of Chesapeake during the year ended December 31, 2013
and TBSG during the year ended December 31, 2012. See Note 4 to our audited financial statements included in this Annual
Report on Form 10-K.
40
Cash provided by the sale of property, equipment and real estate of $3.8 million for the year ended December 31, 2013 resulted
primarily from the sale of two properties for $3.2 million. Cash provided by the sale of property, equipment and real estate of $1.4
and $6.1 million for the years ended December 31, 2012 and 2011, respectively resulted primarily from the sale of excess or
underutilized assets arising from our restructuring and business optimization activities.
Cash provided by restricted assets during the years ended December 31, 2013, 2012 and 2011 resulted primarily from the release
of escrow funds and excess deposits used to pre-fund expected losses for self-insured casualty and health claims incurred by the
Company.
Cash flows from financing activities
Net cash provided by financing activities was $40.6 million, $14.8 million and $0.1 million for the years ended December 31,
2013, 2012 and 2011, respectively, as summarized in the following table:
Year ended December 31,
(dollars in thousands)
Proceeds from issuance of common stock, net of offering costs
Proceeds from Revolver, net of repayments
Dividends paid and redemption of Class B Senior Preferred stock
Redemption of Class A Junior Preferred and Class A Common stock
Cash received from stockholder
Payments on capital leases
Other financing activities, net
Net cash provided by financing activities
2013
2011
2012
$ 55,225 $ — $ —
20,850
—
(25,000 )
5,000
(1,511 )
799
$ 40,574 $ 14,838 $ 138
38,368
(23,000 )
—
—
(1,311 )
781
(13,146 )
—
—
—
(1,610 )
105
During the year ended December 31, 2013, we completed our IPO and received net proceeds of $55.2 million after deducting
underwriting discounts of $4.3 million and other expenses directly associated with the IPO of $2.2 million. Of this amount, $46.2
million was used to pay down outstanding balances under the Revolver and $9.0 million was paid to Gores to terminate our
management services agreement with Gores.
Proceeds from the Revolver were primarily used to fund cash used by operating activities and other uses of cash from financing
activities for the years ended December 31, 2013, 2012 and 2011.
In 2012, the Company paid accrued dividends of $10.6 million and redeemed 12,372 shares of Class B Senior Preferred stock for
$12.4 million.
In 2011, the Company redeemed the Class A Junior Preferred and Class A Common shares owned by Wolseley for $25.0 million.
In 2011, the Company received $5.0 million from Gores Holdings, which was included in current liabilities at December 31, 2011
and in January 2012 issued 5,000 shares of Class C Convertible Preferred stock to settle this liability.
Payments on capital leases increased $0.3 million from December 31, 2012 to December 31, 2013 primarily due to a property
lease incurred as part of the TBSG acquisition in December 2012.
Other financing activities, net consists primarily of secured borrowings, repayments of promissory notes from certain related
parties (see Note 14 to our audited financial statements included elsewhere in this Annual Report on Form 10-K) and payment of
debt issuance costs.
Capital expenditures
Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions.
Historically, capital expenditures have for the most part remained at relatively low levels in comparison to the operating cash flows
generated during the corresponding periods. We expect our 2014 capital expenditures to be approximately $30 to $40 million
(including the incurrence of capital lease obligations) primarily related to rolling stock and equipment, including lease buyouts,
and facility and technology investments to support our operations.
41
Revolving credit facility
On September 30, 2009, we entered into the Credit Agreement with Wells Fargo Capital Finance, which includes the Revolver.
The Credit Agreement was amended during 2014, 2013, 2012, 2011 and 2010. The most recent amendment, which was entered
into on February 18, 2014, increased the maximum availability under the Revolver and extended the maturity date to December
31, 2017, among other changes. We were in compliance with all debt covenants for the year ended December 31, 2013.
As of the date of the most recent amendment, the Revolver has a maximum availability of $200.0 million, subject to an asset
borrowing formula based on eligible accounts receivable, credit card receivables, inventory and fixed assets.
Borrowings under the Revolver bear interest, at our option, at either the Base Rate (which means the higher of (i) the Federal
Funds Rate plus 0.5% or (ii) the prime rate) plus a Base Rate Margin (which ranges from 0.50% to 1.00% based on Revolver
availability) or LIBOR plus a LIBOR Rate Margin (which ranges from 1.50% to 2.00% based on Revolver availability).
The Credit Agreement provides that we can use the Revolver availability to issue letters of credit. The fees on any outstanding
letters of credit issued under the Revolver include a participation fee equal to the LIBOR Rate Margin. The fee on the unused
portion of the Revolver is 0.25%. The Credit Agreement contains customary nonfinancial covenants, including restrictions on new
indebtedness, issuance of liens, investments, distributions to equityholders, asset sales and affiliate transactions. The Credit
Agreement also includes a financial covenant that requires us to maintain a minimum Fixed Charge Coverage Ratio of 1.00:1.00,
as defined in the Credit Agreement. However, the financial covenant is only applicable if the sum of availability under the
Revolver plus Qualified Cash falls below $20 million at any time, and remains in effect until the sum of availability under the
Revolver plus Qualified Cash exceeds $20 million for 30 consecutive days. While there can be no assurances, based upon our
forecast, we do not expect the financial covenant to become applicable during the year ended December 31, 2014.
We had outstanding borrowings of $59.1 million with net availability of $71.0 million as of December 31, 2013. The interest rate
on outstanding LIBOR Rate borrowings of $52.0 million was 1.9% and the interest rate on outstanding Base Rate borrowings of
$7.1 million was 4.0% as of December 31, 2013. We had $8.9 million in letters of credit outstanding under the Credit Agreement
as of December 31, 2013. The Revolver is collateralized by substantially all of our assets.
42
Contractual obligations and commercial commitments
In the table below, we set forth our enforceable and legally binding obligations as of December 31, 2013. Some of the amounts
included in the table are based on management's estimates and assumptions about these obligations, including their duration, the
possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are
necessarily subjective, our actual payments may vary from those reflected in the table. Purchase orders made in the ordinary
course of business and commitments that are cancellable on 30 days' notice are excluded from the table below. Any amounts for
which we are liable under purchase orders are reflected on the consolidated balance sheets as accounts payable and accrued
liabilities.
Payments due by period
(in millions)
Revolver obligations (1)
Capital lease obligations (2)
Operating lease obligations (3)
Purchase commitments (4)
Earnout obligations (5)
Total
2014
Total
2017-2018
2015-2016
Thereafter
$ 59.2 $ 0.1 $ 59.1 $ — $ —
3.3
15.1
—
—
$ 141.3 $ 29.4 $ 82.6 $ 10.9 $ 18.4
9.1
64.4
8.6
—
2.4
21.1
—
—
1.6
19.1
8.6
—
1.8
9.1
—
—
(1) Represents principal of $59.1 million and interest payments outstanding on our Revolver of $0.1 million as of December 31, 2013,
based on interest rates in effect on December 31, 2013, which ranged from 1.9% to 4.0%. To the extent that a decrease in eligible
accounts receivable and inventory reduces the maximum availability under the Revolver below the amount then outstanding, amounts
outstanding could become due sooner than reflected in the table. On February 18, 2014, we entered into Amendment Eleven to the
credit agreement governing the Revolver, which extended the maturity of the Revolver to December 31, 2017. See “—Liquidity and
capital resources—Revolving credit facility.”"
(2) Consists of payments under our capital leases for fleet vehicles and various equipment. For further information refer to Note 16 to our
audited financial statements included elsewhere in this Annual Report on Form 10-K.
(3) Represents payments under our operating leases, primarily for buildings, improvements and equipment. For further information, refer
to Note 16 to our audited financial statements included elsewhere in this Annual Report on Form 10-K.
(4) Consists primarily of obligations to purchase vehicles which are enforceable and legally binding on us. Excludes purchase orders made
in the ordinary course of business that are short-term or cancellable.
(5) Under the asset purchase agreement to acquire the assets of TBSG, we agreed to pay the sellers a cash earnout based on the
performance of the business acquired. As of December 31, 2013, the Company estimated the undiscounted value of the earnout to be
$0.9 million, which has been reduced by $0.9 million that the Company advanced to the sellers against future earnout payments. For
further information, refer to Note 4 to our audited financial statements included elsewhere in this Annual Report on Form 10-K.
Off-balance sheet arrangements
At December 31, 2013, 2012 and 2011, other than operating leases described above and letters of credit issued under the Credit
Agreement, we had no material off-balance sheet arrangements with unconsolidated entities.
Seasonality and other factors
Our first and fourth quarters have historically been, and are generally 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, although this is generally offset in part by higher trade payables to our suppliers. 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 or excess availability on our Revolver. Collection of receivables and reduction in inventory levels following
43
the peak building and construction season have in the past positively impacted cash flow. In the past, we have also utilized our
borrowing availability under credit facilities to cover working capital needs.
Recently issued accounting pronouncements
There were no significant new accounting pronouncements or changes to existing guidance that were applicable to us.
Critical accounting policies
Our discussion and analysis of operating results and financial condition are based upon our audited financial statements. The
preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our
estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these
estimates on an ongoing basis. Our critical accounting policies are those that materially affect our financial statements and involve
difficult, subjective or complex judgments by management. Although these estimates are based on management’s best knowledge
of current events and actions that may impact us in the future, actual results may be materially different from the estimates.
We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of
our consolidated financial statements and that the judgments and estimates are reasonable.
Revenue recognition
We recognize revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the
relevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.
All sales recognized are net of allowances for discounts and estimated returns, based on historical experience.
We generally recognize revenues from construction contracts on the completed contract basis, as these contracts generally are
completed within 30 days. Revenues from certain construction contracts, which are generally greater than 30 days, are recognized
on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated costs for each contract.
For the years ended December 31, 2013, 2012 and 2011, we recognized 2.2%, 1.7% and 0.8%, respectively, of our net sales using
the percentage-of-completion method. Costs of goods sold related to construction contracts include all direct material,
subcontractor and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and
repairs. General and administrative costs are charged to expense as incurred. We record provisions for estimated losses on
uncompleted contracts in the period in which such losses are determined, which are generally completed within 30 days.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for estimated losses due to the failure of our customers to make required
payments. Management believes the accounting estimate related to the allowance for doubtful accounts is a “critical accounting
estimate” as it involves complex judgments about our customers’ ability to pay. The allowance for doubtful accounts is based on
an assessment of individual past due accounts, historical write-off experience, accounts receivable aging, customer disputes and
the business environment. Account balances are charged off when the potential for recovery is considered remote.
Management believes the allowance amounts recorded, in each instance, represent its best estimate of future outcomes. If there is a
deterioration of a major customer’s financial condition, if the Company becomes aware of additional information related to the
credit-worthiness of a major customer, or if future actual default rates on trade receivables in general differ from those currently
anticipated, the Company may have to adjust its allowance for doubtful accounts, which would affect earnings in the period the
adjustments were made.
Inventories
Inventories consist primarily of materials purchased for resale, including lumber and sheet goods, millwork, windows and doors as
well as certain manufactured products and are carried at the lower of cost or market. The cost of substantially all of our inventories
is determined by the average cost method, which approximates the first-in, first-out approach. We evaluate our inventory value at
the end of each quarter to ensure that it is carried at the lower of cost or market. This evaluation includes an analysis of historical
physical inventory results, a review of potential excess and obsolete inventories based on inventory aging and anticipated future
demand. At least quarterly, each branch’s perpetual inventory records are adjusted to reflect any declines in net realizable value
below inventory carrying cost. To the extent historical physical inventory results are not indicative of future results and if future
events impact, either favorably or unfavorably, the salability of our products or our relationships with certain key suppliers, our
inventory reserves could differ significantly, resulting in either higher or lower future inventory provisions.
44
Valuation of goodwill, long-lived assets and amortizable other intangible assets
Our long-lived assets consist primarily of property, equipment, purchased intangible assets and goodwill. The valuation and the
impairment testing of these long-lived assets involve significant judgments and assumptions, particularly as they relate to the
identification of reporting units, asset groups and the determination of fair market value.
We test our tangible and intangible long-lived assets subject to amortization for impairment whenever facts and circumstances
indicate that the carrying amount of an asset may not be recoverable. We test goodwill for impairment annually, or more
frequently if triggering events occur indicating that there may be impairment.
We have recorded goodwill and perform testing for potential goodwill impairment at a reporting unit level. A reporting unit is an
operating segment, or a business unit one level below an operating segment for which discrete financial information is available,
and for which management regularly reviews the operating results. Additionally, components within an operating segment are
aggregated as a single reporting unit if they have similar economic characteristics. We have determined that our reporting units are
equivalent to our four operating segments and consist of our East, South and West divisional regions and Coleman Floor. During
the third quarter of 2013, 2012 and 2011, we performed our annual impairment assessment of goodwill, which did not indicate that
an impairment existed. During each assessment, we determined that the fair value of our reporting unit containing goodwill
substantially exceeded its carrying value.
For impairment testing of long-lived assets, we identify asset groups at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other groups of assets and liabilities. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated
by the assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
As discussed above, changes in management intentions, market events or conditions, projected future net sales, operating results,
cash flow of our reporting units and other similar circumstances could affect the assumptions used in the impairment tests.
Although management currently believes that the estimates used in the evaluation of goodwill and other long-lived assets are
reasonable, differences between actual and expected net sales, operating results and cash flow could cause these assets to be
impaired. If any asset were determined to be impaired, this could have a material adverse effect on our results of operations and
financial position, but not our cash flow from operations.
Equity based compensation
We account for our nonvested stock awards granted to certain employees by recording compensation expense based on the award’s
fair value at the date of grant. We account for our stock options granted to employees and directors by recording compensation
expense based on the award’s fair value, estimated on the date of grant using the Black-Scholes option-pricing model. Share-based
compensation expense is recognized on a straight-line basis over the requisite service period of the award, which generally equals
the vesting period. Our share-based compensation expense included in selling, general and administrative expenses for the years
ended December 31, 2013, 2012 and 2011 was $1.0 million, $1.3 million and $0.4 million, respectively.
Determining the fair value of stock options under the Black-Scholes option-pricing model requires judgment, including estimating
the fair value per share of our common stock, volatility, expected term of the awards, dividend yield and risk-free interest rate. The
assumptions used in calculating the fair value of stock options represent our best estimates, based on management's judgment and
subjective future expectations. These estimates involve inherent uncertainties. If any of the assumptions used in the model change
significantly, share-based compensation recorded for future awards may differ materially from that recorded for awards granted
previously.
We developed our assumptions as follows:
• Fair value of common stock. Prior to August 9, 2013, our common stock was not publicly traded, which required that we
estimate the fair value of our common stock, as discussed in "Valuation of common stock prior to Initial Public Offering"
below. Subsequent to August 9, 2013, we use quoted market prices to determine the fair value of our common stock.
• Volatility. The expected price volatility for our common stock was estimated by taking the median historic price volatility
for industry peers.
• Expected term. The expected term was estimated to be the mid-point between the vesting date and the expiration date of
the award. We believe use of this approach is appropriate as we have no prior history of option exercises upon which to
base an expected term.
• Risk-free interest rate. The risk-free interest rate is based on the yields of United States Treasury securities with maturities
similar to the expected term of the options.
• Dividend yield. We have never declared or paid any cash dividends on our common stock and do not presently plan to pay
cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.
45
We estimate potential forfeitures of stock options and adjust share-based compensation expense accordingly. The estimate of
forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ from prior estimates. We estimate
forfeitures based upon our historical experience with employee turnover, and, at each period, review the estimated forfeiture rate
and make changes as factors affecting the forfeiture rate calculations and assumptions changes.
The fair value of employee stock options was estimated using the following weighted-average assumptions for the years ended
December 31, 2013, 2012 and 2011:
Expected dividend yield
Expected volatility factor
Risk-free interest rate
Expected term (in years)
2013
2012
2011
0 %
49% - 51%
1.8% - 2.0%
6.0 - 6.5
0 %
58 %
0.8% - 0.9%
3.7 - 3.9
0 %
59 %
1.0 %
4.3
Valuation of common stock prior to Initial Public Offering
Prior to our IPO in August 2013, determining the underlying value of our common stock required significant judgment. In the
absence of a public market, our Board, with input from management, determined a reasonable estimate of the then-current fair
value of our common stock for purposes of granting stock-based compensation. We determined the fair value of our common stock
utilizing methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants
Practice Aid, "Valuation of Privately-Held-Company Equity Securities issued as Compensation." In addition, we exercised
judgment in evaluating and assessing the foregoing based on several factors including:
rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;
the nature and history of our business;
•
• our current and historical operating performance;
• our expected future operating performance;
• prices for our convertible preferred stock issued to Gores Holding;
•
• our financial condition at the grant date;
•
•
•
• macroeconomic conditions
the lack of marketability of our common stock;
the likelihood of achieving different liquidity event or remaining a private company;
industry information such as market size and growth; and
We relied upon the probability-weighted expected return method (“PWERM”), and the option pricing model (“OPM”), to allocate
our company value to each of our classes of stock.
Probability-weighted expected return method. PWERM values each class of equity based on an analysis of the range of potential
future enterprise values of the Company and the manner in which those values would accrue to the owners of the different classes
of equity. This method involves estimating the overall value of the subject company under various projected operating results
scenarios and allocating the value to the various share classes based on their respective claim on the proceeds as of the date of each
event. These different scenarios typically include a base case scenario and two to four additional scenarios of projected operating
results, each resulting in a different value. For each scenario, the future value of each share class is calculated and discounted to a
present value. The results of each scenario are then probability-weighted in order to arrive at an estimate of fair value for each
share class as of a current date.
We used PWERM to allocate our estimated enterprise value between our preferred stock and common stock. At certain periods,
we also utilized OPM as described below. Under PWERM, we analyzed the value of our Company using several scenarios, which
included a base case scenario (“Base Case Scenario”), upside scenario (“Upside Scenario”) and downside scenario ("Downside
Scenario"). For all scenarios, we assumed an exit date on December 31 of the fourth full fiscal year following the date being
valued, and we applied an exit multiple to the projected EBITDA of the exit year.
The Base Case Scenario was based on consensus housing start forecasts and other forecasted business drivers being applied to our
current operating results and financial position to determine a projection of future operating results and cash flows. The Upside
Scenario applied a more optimistic set of housing start and business assumptions than the Base Case Scenario to project our future
operating results and cash flows, while the Downside Scenario applied a more pessimistic set of assumptions than the Base Case
Scenario to project our future operating results and cash flows.
46
We determined the value of our preferred stock and common stock under each scenario by allocating the equity value to each class
of stock and discounting the value back to the present using a risk-adjusted discount rate. In certain scenarios, a large portion of the
equity value is allocated to the convertible preferred stock to incorporate higher aggregate liquidation preferences. We then
weighted the present value of the common stock under each scenario based upon the estimate of the probability of each scenario
occurring in order to determine a final indication of value for the common stock.
Option pricing model. OPM uses option theory to value the various classes of a company’s securities in light of their respective
claims to the enterprise value. Total members’ equity value is allocated to the various share classes based upon their respective
claims on a series of call options with strike prices at various value levels depending upon the rights and preferences of each class.
A Black-Scholes closed-form option pricing model is typically employed in this analysis, with an option-term assumption that is
consistent with our expected time to a liquidity event and a volatility assumption based on the estimated stock price volatility of a
peer group of comparable public companies over a similar term.
Purchase of Wolseley shares and January 2012 valuation. On November 16, 2011, we purchased 11,135,495 Class A Common
shares held by Wolseley for $25.0 million or approximately $2.25 per Class A Common share. This purchase was partially
financed by $5.0 million advanced by Gores Holdings, which in January 2012 was settled by the issuance of 5,000 shares of Class
C Convertible Preferred shares to Gores Holdings. The Class C Convertible Preferred shares were convertible to 4,454,889 Class
A Common shares, representing an equivalent price per Class A Common share of approximately $1.122 per share. We
determined that the difference between the price per share paid to acquire Wolseley’s interests of $2.25 and the price per share
implied in our Class C Convertible Preferred shares of $1.122 represented a beneficial conversion feature totaling $5.0 million.
The Class C Convertible Preferred shares were convertible to Class A Common shares at any time by the stockholder and
therefore, we immediately recognized the value of the beneficial conversion feature as a deemed dividend, which increased our
2012 loss attributable to common stockholders by $5.0 million, and our 2012 basic and diluted loss per share by approximately
$0.38 per share.
In determining the fair value of our Class B Common shares in January 2012, we utilized a PWERM, using a Base Case Scenario,
Upside Scenario, and Downside Scenario (as described above), an exit date of December 31, 2016 and a terminal multiple of
EBITDA of 5.50x. This valuation yielded a price per Class B Common share of $1.98, which we believe was reasonable in light of
the November 2011 Wolseley transaction, and after consideration of the non-voting characteristics of the Class B Common shares.
The following table summarizes the significant assumptions we used in our valuations to determine the fair value of our common
stock as of the dates indicated:
Option pricing model
Probability weighted expected return method
Weighting of scenarios:
Base
Upside
Downside
Exit date
Terminal multiple of EBITDA
Stock value per share-Class B Common
Grant Date
November 2011
50 %
50 %
65 %
10 %
25 %
12/31/2015
5.75x
January 2012
0.0 %
100 %
65 %
10 %
25 %
12/31/2016
5.50x
$ 1.92
$ 1.98
Casualty and health insurance
We are self insured for general liability, auto liability and workers’ compensation exposures, as well as employee and eligible
dependent health care claims, with specific excess insurance purchased from independent carriers to cover individual claims in
excess of the self-insured limits. The expected liability for unpaid claims, including incurred but not reported losses, is determined
using the assistance of third-party actuaries and is reflected on the consolidated balance sheets as a liability with current and long-
term components. The amount recoverable from insurance providers is reflected on the consolidated balance sheets in prepaid
expenses and other current assets. Our accounting policy includes an internal evaluation and adjustment of our reserve for all
insured losses on a quarterly basis. At least on an annual basis, we engage external actuarial professionals to independently assess
and estimate the total liability outstanding, which is compared to the actual reserve balance at that time and adjusted accordingly.
47
Deferred income taxes
In accordance with ASC 740 “Income Taxes,” we evaluate our deferred tax assets to determine if valuation allowances are
required. In assessing the realizability of deferred tax assets, we consider both positive and negative evidence in determining
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The primary negative
evidence considered includes the cumulative operating losses generated in prior periods. The primary positive evidence considered
includes the reversal of deferred tax liabilities related to depreciation and amortization that would occur within the same
jurisdiction and during the carry-forward period necessary to absorb the Federal and state net operating losses and other deferred
tax assets. The reversal of such liabilities would utilize the Federal and state net operating losses and other deferred tax assets.
Based upon the positive and negative evidence considered, we believe it is more likely than not that we will realize the benefit of
the deferred tax assets, net of the existing valuation allowances of $1.9 million, $1.9 million and $1.4 million as of December 31,
2013, 2012 and 2011, respectively. To the extent we generate sufficient taxable income in the future to fully utilize the tax benefits
of the net deferred tax assets on which a valuation allowance was recorded, our effective tax rate may decrease as the valuation
allowance is reversed. As of December 31, 2013, we are no longer able to carry back our tax net operating losses; therefore, to the
extent we generate future tax net operating losses, we may be required to increase the valuation allowance on net deferred tax
assets and income tax benefit would be adversely affected.
ASC 740 also prescribes a recognition threshold and certain measurement principles for the financial statements related to tax
positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain tax position on an income tax
return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Additionally, ASC 740 provides guidance on derecognition, classification, interest and penalties associated with income taxes,
accounting in interim periods, disclosures and transition requirements.
Consideration received from suppliers
We enter into arrangements with many of our suppliers providing for inventory purchase rebates (“supplier rebates”) upon
achievement of specified volume purchasing levels. We accrue estimated supplier rebates monthly as part of cost of goods sold
based on progress toward earning the supplier rebates, taking into consideration cumulative purchases of inventory to date and
projected purchases through the end of the year. We estimate the rebates applicable to inventory on-hand at each period end based
on the inventory turns of the related items.
Under certain circumstances, including if market conditions were to change, suppliers may change the terms of some or all of these
programs. Although these changes would not affect the amounts which we have recorded related to product already purchased, it
may impact our gross margins in future periods.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to financial risks such as changes in interest rates and commodity price risk.
Interest Rate Risk
When we have loan amounts under our Revolver, we are exposed to interest rate risk arising from fluctuations in interest rates.
During 2013, 2012 and 2011, we did not use any interest rate swap contracts to manage this risk. A 1% increase in interest rates on
our variable-rate debt would increase our annual forecasted interest expense by approximately $0.6 million (based on our
borrowings as of December 31, 2013).
Commodity Price Risk
Many of the products we purchase and resell are commodities whose price is determined by the market's supply and demand for
such products. Price fluctuations in our selling prices and key costs have a significant effect on our financial performance. The
markets for most of these commodities are cyclical and are affected by factors such as global economic conditions, including the
strength of the U.S. housing market, changes in, or disruptions to, industry production capacity and changes in inventory levels and
other factors beyond our control. During 2013, 2012 and 2011, we did not manage commodity price risk with derivative
instruments, except for immaterial lumber future contracts that we entered into during those years. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Factors affecting our operating results—Commodity
nature of our products" for further discussion.
48
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Stock Building Supply Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of
stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Stock Building Supply
Holdings, Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 3, 2014
49
STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share and per share amounts)
Assets
Current assets
Cash and cash equivalents
Restricted assets
Accounts receivable, net
Inventories, net
Costs in excess of billings on uncompleted contracts
Assets held for sale
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property and equipment, net of accumulated depreciation
Intangible assets, net of accumulated amortization
Goodwill
Restricted assets
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable
Accrued expenses and other liabilities
Revolving line of credit
Income taxes payable
Current portion of restructuring reserve
Current portion of capital lease obligation
Billings in excess of costs on uncompleted contracts
Total current liabilities
Revolving line of credit
Long-term portion of capital lease obligation
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 16)
Redeemable Class A Junior Preferred stock, $0.01 par value, no shares authorized, issued and outstanding at
December 31, 2013, 10,000 shares authorized and issued, 5,100 shares outstanding at December 31, 2012
Redeemable Class B Senior Preferred stock, $0.01 par value, no shares authorized, issued and outstanding at
December 31, 2013, 500,000 shares authorized, 75,000 shares issued, 36,388 shares outstanding at December 31,
2012
Class C Convertible Preferred stock, $0.01 par value, no shares authorized, issued and outstanding at December
31, 2013, 5,000 shares authorized, issued and outstanding at December 31, 2012
Stockholders' equity
Class A Common stock, $0.01 par value, no shares authorized, issued and outstanding at December 31, 2013,
22,725,500 shares authorized and issued, 11,590,005 shares outstanding at December 31, 2012
Class B Common stock, $0.01 par value, no shares authorized, issued and outstanding at December 31, 2013,
3,246,500 shares authorized, 2,870,712 shares issued and outstanding at December 31, 2012
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding at December
31, 2013, no shares authorized, issued and outstanding at December 31, 2012
Common stock, $0.01 par value, 300,000,000 shares authorized, 26,112,007 shares issued and outstanding at
December 31, 2013, no shares authorized, issued and outstanding at December 31, 2012
Additional paid-in capital
Retained deficit
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2013
December 31,
2012
$ 1,138 $ 2,691
3,821
90,297
73,918
5,176
6,198
8,682
3,562
194,345
55,076
25,865
6,511
2,202
2,013
$ 318,540 $ 286,012
460
111,285
91,303
7,921
2,363
9,332
3,332
227,134
56,039
24,789
7,186
1,359
2,033
$ 64,984 $ 74,231
25,277
72,218
2,939
1,513
1,329
1,239
178,746
—
5,635
16,983
9,007
210,371
30,528
—
2,989
1,594
1,240
1,599
102,934
59,072
6,011
15,496
7,346
190,859
—
—
—
—
—
—
—
36,477
5,000
116
29
—
—
46,534
(12,515 )
34,164
$ 318,540 $ 286,012
261
144,570
(17,150 )
127,681
The accompanying notes are an integral part of these consolidated financial statements.
50
STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
(in thousands of dollars, except share and per share amounts)
Net sales
Cost of goods sold
Gross profit
2013
$ 1,197,037
922,634
274,403
2012
$ 942,398
727,670
214,728
2011
$ 759,982
591,017
168,965
Selling, general and administrative expenses
254,935
221,192
Depreciation expense
Amortization expense
Impairment of assets held for sale
IPO transaction-related costs
Restructuring expense
Income (loss) from operations
Other income (expenses)
Interest expense
Other income (expense), net
Loss from continuing operations before income taxes
Income tax (expense) benefit
Loss from continuing operations
Income (loss) from discontinued operations, net of tax expense of $243, $52, and $658
respectively
Net loss
Class B Senior Preferred stock deemed dividend
Accretion of beneficial conversion feature on Class C Convertible Preferred stock
5,890
2,236
432
10,008
141
273,642
761
(3,793 )
870
(2,162 )
(2,874 )
(5,036 )
401
(4,635 )
(1,836 )
—
7,759
1,470
361
—
2,853
233,635
(18,907 )
(4,037 )
278
(22,666 )
8,084
(14,582 )
49
(14,533 )
(4,480 )
(5,000 )
213,036
11,844
1,457
580
—
1,349
228,266
(59,301 )
(2,842 )
(2,120 )
(64,263 )
22,332
(41,931 )
(202 )
(42,133 )
(4,188 )
—
Loss attributable to common stockholders
$ (6,471 ) $ (24,013 ) $ (46,321 )
Weighted average common shares outstanding, basic and diluted
18,205,892
13,153,446
22,262,337
Basic and diluted income (loss) per share
Loss from continuing operations
Income (loss) from discontinued operations
Net loss per share
$ (0.38 ) $ (1.83 ) $ (2.07 )
0.02
—
(0.01 )
$ (0.36 ) $ (1.83 ) $ (2.08 )
The accompanying notes are an integral part of these consolidated financial statements.
51
(in thousands of dollars, except
share amounts)
Stockholders' equity as of
December 31, 2010
Dividends accrued on Class B
Senior Preferred stock
Purchase of shares from existing
stockholders
Stockholder loans related to tax
withholding on stock issuance
Issuance of nonvested stock
awards, net of forfeitures
Stock compensation expense
Net loss
Stockholders' equity as of
December 31, 2011
Recognition of beneficial
conversion feature on Class C
Convertible Preferred stock
Deemed dividend on Class C
Convertible Preferred stock
Dividends accrued on Class B
Senior Preferred stock
Issuance of common stock to
related party (Note 14)
Issuance of shares to existing
stockholders
Stockholder loans related to tax
withholding on stock issuance
Issuance of nonvested stock
awards, net of forfeitures
Exercise of stock options (Note 18)
Stock compensation expense
Net loss
Stockholders' equity as of
December 31, 2012
Dividends accrued on Class B
Senior Preferred stock
Issuance of common stock, net of
offering costs
Conversion of Class A Common
stock to common stock
Conversion of Class B Common
stock to common stock
Reclassification and conversion of
preferred stock to common stock in
connection with the IPO (Note 2)
Issuance of nonvested stock
awards, net of forfeitures
Repayment of stockholder loans
Stock compensation expense
Net loss
Stockholders' equity as of
December 31, 2013
STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Class A Common stock Class B Common stock
Common stock
Shares
Amount
Shares
Amount
Shares
Amount
Additional
paid-in
capital
Retained
earnings
(deficit)
Total
22,725,500
$ 227
1,973,509
$ 20
—
$ —
$ 73,643
$ 48,339
$ 122,229
—
—
(11,135,495 )
(111 )
—
—
—
—
—
—
—
—
—
—
—
(272,706 )
—
—
11,590,005
116
1,700,803
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
110,381
337,636
—
175,648
546,244
—
—
11,590,005
116
2,870,712
—
—
—
—
(11,590,005 )
(116 )
—
—
—
—
—
—
(3 )
—
—
17
—
—
—
1
3
—
2
6
—
—
29
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,411,765
—
11,590,005
—
—
(2,870,712 )
(29 )
2,870,712
—
—
—
—
—
—
—
(4,188 )
(4,188 )
(24,889 )
134
3
384
—
—
—
—
(25,000 )
134
—
—
(42,133 )
384
(42,133 )
—
49,275
2,018
51,426
—
—
—
—
—
—
—
—
—
—
—
—
44
116
29
5,000
(5,000 )
(4,480 )
106
325
11
(2 )
(6 )
—
—
—
—
—
—
—
—
5,000
(5,000 )
(4,480 )
107
328
11
—
—
1,305
—
—
(14,533 )
1,305
(14,533 )
46,534
(12,515 )
34,164
(1,836 )
55,181
—
—
—
—
—
—
—
—
—
—
(4,635 )
(1,836 )
55,225
—
—
43,313
—
401
1,049
(4,635 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,191,891
72
43,241
—
—
—
—
47,634
—
—
—
—
—
—
—
—
401
1,049
—
—
$
—
—
$
—
26,112,007
$ 261
$ 144,570
$(17,150 ) $ 127,681
The accompanying notes are an integral part of these consolidated financial statements.
52
STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
2013
Year ended December 31,
2012
2011
$ (4,635 ) $ (14,533 ) $ (42,133 )
Depreciation expense
Amortization of intangible assets
Amortization of debt issuance costs
Deferred income taxes
Non-cash stock compensation expense
Impairment of assets held for sale
(Loss) gain on sale of property, equipment and real estate
Gain on reduction of earnout liability (Note 4)
Bad debt expense
Change in assets and liabilities
Accounts receivable
Inventories, net
Costs in excess of billings on uncompleted contracts
Prepaid expenses and other current assets
Current income taxes receivable/payable
Other assets
Accounts payable
Accrued expenses and other liabilities
Restructuring reserve
Billings in excess of costs on uncompleted contracts
Other long-term liabilities
Net cash used in operating activities
Cash flows from investing activities
Change in restricted assets
Purchases of businesses
Loan to seller of Total Building Services Group, LLC (Note 4)
Proceeds from sale of property, equipment and real estate
Purchases of property and equipment
Net cash (used in) provided by investing activities
Cash flows from financing activities
Proceeds from revolving line of credit
Repayments of proceeds from revolving line of credit
Redemption of Class B Senior Preferred stock
Redemption of Class A Junior Preferred stock and Class A Common stock
Cash received from stockholder
Proceeds from issuance of common stock, net of offering costs
Loans from related parties
Sale of Class B Senior Preferred stock
Dividends paid on Class B Senior Preferred stock
Payments of debt issuance costs
Payments on capital leases
Secured borrowings
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents
Beginning of period
End of period
Supplemental disclosure of cash flow information
Interest paid
Income taxes paid
Income tax refunds received
Non-cash investing and financing transactions
9,827
2,236
596
(1,257 )
1,049
432
(60 )
(195 )
1,051
(21,008 )
(16,858 )
(2,745 )
(650 )
50
(13 )
(10,795 )
3,736
(1,522 )
360
137
(40,264 )
4,204
(2,373 )
—
3,754
(7,448 )
(1,863 )
1,301,290
(1,314,436 )
—
—
—
55,225
401
—
—
(298 )
(1,610 )
2
40,574
(1,553 )
10,299
1,470
902
(3,633 )
1,305
481
169
—
2,333
(27,026 )
(22,712 )
(1,288 )
(784 )
12,110
2,314
24,821
1,798
1,125
131
(1,525 )
(12,243 )
3,069
(5,732 )
(850 )
1,393
(2,741 )
(4,861 )
1,042,850
(1,004,482 )
(12,372 )
—
—
—
11
328
(10,628 )
(555 )
(1,311 )
997
14,838
(2,266 )
15,257
1,457
1,553
(5,926 )
384
610
(2,609 )
—
1,753
(677 )
14,593
(1,165 )
1,022
8,920
(5,771 )
(1,162 )
(699 )
(462 )
47
8,007
(7,001 )
2,555
—
—
6,106
(1,339 )
7,322
787,394
(766,544 )
—
(25,000 )
5,000
—
134
—
—
—
(1,511 )
665
138
459
4,498
$ 1,138 $ 2,691 $ 4,957
4,957
2,691
$ 3,424 $ 3,046 $ 1,165
2,049
24,782
244
16,399
4,535
206
Accrued purchases of property and equipment
Sale of assets in exchange for note receivable
Capital lease obligations
Disposals of capital lease assets
Reclassification and conversion of preferred stock to common stock in connection with
the IPO (Note 2)
Dividends accrued on Class B Senior Preferred stock (Note 17)
Issuance of Class C Convertible Preferred stock (Note 17)
Dividends on Class C Convertible Preferred stock (Note 17)
Beneficial conversion feature on Class C Convertible Preferred stock (Note 17)
Issuance of Class B Common stock (Note 14)
Fair value of earnout agreement (Note 4)
1,651
305
1,951
54
43,313
1,836
—
—
—
—
—
—
—
6,135
—
—
4,480
5,000
5,000
5,000
107
1,075
—
—
1,401
198
—
4,188
—
—
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
53
STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are presented in thousands except share and per share amounts.)
1.
Organization
Stock Building Supply Holdings, Inc., formerly known as Saturn Acquisition Holdings, LLC ("Saturn"), and its subsidiaries (the
“Company,” “we,” “us” and “our” ) distributes lumber and building materials to new construction and repair and remodel
contractors. Additionally, we provide solution-based services to our customers, including component design, production
specification and installation management services.
On May 2, 2013, Saturn filed a Certificate of Conversion with the Secretary of State of the State of Delaware to effect a
conversion from a Delaware limited liability company to a Delaware corporation and change the name of Saturn to Stock Building
Supply Holdings, Inc. In connection with the conversion to a corporation, each one share of Class A Common stock, Class B
Common stock, Class A Junior Preferred stock and Class C Convertible Preferred stock converted into one share of the same class
of the converted entity. Each share of Class B Senior Preferred stock converted into 1.02966259 shares of the same class of the
converted entity (with the additional shares representing the accumulated dividends thereon to the date of the conversion).
On July 29, 2013, the Company filed an amendment to its Certificate of Incorporation effecting a 25.972-for-1 stock split of the
Company’s common stock. The consolidated financial statements give retroactive effect to the stock split.
2.
Initial Public Offering
On August 14, 2013, the Company completed its Initial Public Offering ("IPO") of 7,000,000 shares of common stock at a price of
$14.00 per share. A total of 4,411,765 shares were offered by the Company and a total of 2,588,235 shares were sold by Gores
Building Holdings, LLC and other selling stockholders of the Company. In connection with the IPO, the underwriters exercised in
full their option to purchase an additional 1,050,000 shares of common stock from certain selling stockholders. As a result, the
total IPO size was 8,050,000 shares. The Company received net proceeds of $55,225 after deducting underwriting discounts of
$4,324 and other expenses directly associated with the IPO of $2,216, including legal, accounting, printing and roadshow
expenses. The underwriting discounts and other expenses directly associated with the IPO have been recorded in additional paid-
in-capital as a reduction of the IPO proceeds on the condensed consolidated balance sheets as of December 31, 2013. The
Company used $46,225 of the net proceeds to pay down outstanding balances under its revolving line of credit and $9,000 was
paid to The Gores Group, LLC ("Gores") to terminate our management services agreement with Gores.
Upon the closing of the IPO, all outstanding shares of the Company’s Class A Common stock and Class B Common stock were
reclassified and converted into an equal number of shares of a single class of common stock, all outstanding options to purchase
Class B Common stock held by certain members of management were reclassified and converted into options to purchase an equal
number of shares of common stock and all outstanding Class A Junior Preferred stock, Class B Senior Preferred stock and Class C
Convertible Preferred stock were reclassified and converted into an aggregate of 7,191,891 shares of the Company’s common
stock.
As a result of the IPO, the Company expensed certain costs associated with the offering that were not directly attributable to the
securities offered. The following table summarizes these costs for the year ended December 31, 2013:
Year ended
December 31, 2013
9,000
1,008
10,008
$
$
Management services agreement termination fee paid to Gores
Other IPO transaction-related costs
54
3.
Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements have been prepared by management in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP").
Principles of consolidation
The consolidated financial statements include all accounts of Stock Building Supply, Inc., and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates
and judgments on an ongoing basis and bases its estimates on historical experience, current conditions and various other
assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making
judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with
respect to commitments and contingencies. The significant estimates which could change by a material amount in the near term
include accounts receivable reserves, inventory reserves, supplier rebates and goodwill impairment. Actual results may differ
materially from these estimates under different assumptions or conditions.
Business and credit concentrations
The Company maintains cash at financial institutions in excess of federally insured limits. Accounts receivable potentially expose
the Company to concentrations of credit risk. Mitigating this credit risk is collateral underlying certain accounts receivable
(perfected liens or lien rights) as well as the Company’s analysis of a customer’s credit history prior to extending credit.
Concentrations of credit risk with respect to accounts receivable are limited due to the Company’s large number of customers and
their dispersion across various regions of the United States. At December 31, 2013 and 2012, no customer represented more than
10% of accounts receivable. For the years ended December 31, 2013, 2012 and 2011, no customer represented more than 10% of
revenue.
The Company’s future results could be adversely affected by a number of factors including: competitive pressure on sales and
pricing, weather conditions, consumer spending and debt levels, interest rates, existing residential home sales and new home
construction, lumber prices and product mix.
Cash and cash equivalents
Cash equivalents are highly liquid investments that are readily convertible to known amounts of cash and have a maturity of three
months or less from the time of purchase.
Restricted assets
Restricted assets consisted of the following at December 31, 2013 and 2012:
Deposits for payment of casualty & health insurance claims
Other deposits
2013
2012
$ 1,306 $ 5,690
333
$ 1,819 $ 6,023
513
Restricted assets are classified as current or non-current assets based on their designated purpose.
55
Fair value of financial instruments
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), clarifies the definition of fair value, prescribes methods for
measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1
Level 2
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the
measurement date.
Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical
or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable,
and inputs derived from or corroborated by observable market data.
Level 3
Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the
market participants would use in pricing the asset or liability based on the best available information.
If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the
lowest level of input that is significant to the fair value calculation.
Accounts receivable
Accounts receivable result from the extending of credit to trade customers for the purchase of goods and services. The terms
generally provide for payment within 30 days of being invoiced. On occasion, when necessary to compete in certain
circumstances, the Company will sell product under extended payment terms. Accounts receivable are stated at estimated net
realizable value. The allowance for doubtful accounts is based on an assessment of individual past due accounts, historical write-
off experience, accounts receivable aging, customer disputes and the business environment. Account balances are charged off
when the potential for recovery is considered remote. The Company grants trade discounts on a percentage basis. The Company
records an allowance against accounts receivable for the amount of discounts it estimates will be taken by customers. The
discounts are recorded as a reduction to revenue when products are sold.
Consideration received from suppliers
The Company enters into agreements with many of its suppliers providing for inventory purchase rebates (“supplier rebates”) upon
achievement of specified volume purchasing levels. Supplier rebates are accrued as part of cost of goods sold based on progress
towards earning the supplier rebates, taking into consideration cumulative purchases of inventory to date and projected purchases
through the end of the year. The Company estimates the rebates applicable to inventory on-hand at each period end based on the
inventory turns of the related items. Total rebates receivable at December 31, 2013 and 2012 are $4,885 and $2,599, respectively,
included in prepaid expenses and other current assets.
Revenue recognition
The Company recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed
or determinable. All sales recognized are net of allowances for discounts and estimated returns, based on historical experience, and
sales tax.
Revenues from construction contracts generally are recognized on the completed contract basis, as these contracts generally are
completed within 30 days. Revenues from certain construction contracts, which are generally greater than 30 days, are recognized
on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated costs for each contract.
Costs of goods sold related to construction contracts include all direct material, subcontractor and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools and repairs. General and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
Shipping and handling costs
The Company includes shipping and handling costs in selling, general and administrative expenses on the consolidated statements
of operations. Shipping and handling costs were $62,517, $50,943 and $48,139 for the years ended December 31, 2013, 2012 and
2011, respectively.
Property and equipment
Property and equipment are stated at cost. Expenditures for renewals and betterments, which extend the useful lives of assets, are
capitalized while maintenance and repairs are charged to expense as incurred. Property and equipment obtained through
acquisition are stated at estimated fair market value as of the acquisition date, and are depreciated over their estimated remaining
useful lives, which may differ from our stated policies for certain assets. Gains and losses related to the sale of property and
equipment are recorded as selling, general and administrative expenses.
56
Property and equipment are depreciated using the straight-line method and are generally depreciated over the following estimated
service lives:
Buildings and improvements
Leasehold improvements
Furniture, fixtures and equipment
Vehicles
40 years
Lesser of life of the asset or remaining
lease term, and not to exceed 10 years
2–10 years
4–7 years
Property and equipment acquired in connection with business combinations may be assigned remaining estimated service lives
outside of these ranges.
Assets are classified as held for sale if the Company commits to a plan to sell the asset within one year and actively markets the
asset in its current condition for a price that is reasonable in comparison to its estimated fair value. Assets held for sale are stated at
the lower of depreciated cost or estimated fair value less expected disposition costs. The majority of assets classified as held for
sale as of December 31, 2013 are under contract to be sold during 2014.
Goodwill and other intangible assets
At least annually, or more frequently as changes in circumstances indicate, the Company tests goodwill for impairment. To the
extent that the carrying value of the net assets of any of the reporting units having goodwill is greater than their estimated fair
value, the Company may be required to record impairment charges. The Company’s reporting units are its East, South and West
geographic divisions and Coleman Floor. The Company is required to make certain assumptions and estimates regarding the fair
value of the reporting units containing goodwill when assessing for impairment. Changes in the fact patterns underlying such
assumptions and estimates could ultimately result in the recognition of additional impairment losses.
During the third quarter of 2013, 2012 and 2011, the Company performed its annual impairment assessment of goodwill which did
not indicate that an impairment existed. During each assessment, the Company determined that the fair value of its reporting units
containing goodwill substantially exceeded their carrying value. The Company estimated the fair value of the reporting units using
the income approach. The income approach uses a reporting unit’s projection of estimated future cash flows that is discounted at a
market derived weighted average cost of capital. The projection uses management’s best estimates of economic and market
conditions over the projected period including growth rates in sales, costs, estimates of future expected changes in operating
margins and cash expenditures. As part of the 2013 assessment, the aggregate fair values of the reporting units were compared and
reconciled to the Company's market capitalization. There was no active trading market for our equity or debt in 2012 and 2011.
Acquired intangible assets other than goodwill are amortized over their weighted average amortization period unless they are
determined to be indefinite. Acquired intangible assets are carried at cost, less accumulated amortization. For intangible assets
purchased in a business combination, the estimated fair values of the assets received are used to establish the carrying value. The
fair value of acquired intangible assets is determined using common valuation techniques, and the Company employs assumptions
developed using the perspective of a market participant.
Impairment of long-lived assets
Long-lived assets, such as property, equipment and purchased intangible assets subject to amortization are reviewed for
impairment whenever facts and circumstances indicate that the carrying amount of an asset may not be recoverable. For
impairment testing of long-lived assets, the Company identifies asset groups at the lowest level for which identifiable cash flows
are largely independent of the cash flows of other groups of assets and liabilities. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated
by the assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
Income taxes
The Company computes income taxes using the asset and liability method in accordance with ASC 740, Income Taxes(“ASC
740”). Deferred taxes represent the difference between the tax basis of assets or liabilities, calculated under tax laws, and the
reported amounts in the Company’s consolidated financial statements. The Company will establish a valuation allowance for
deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their
benefits, or that future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on
management’s assessments of realizable deferred tax assets.
57
ASC 740 also prescribes a recognition threshold and certain measurement principles for the financial statements related to tax
positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain tax position on an income tax
return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Additionally, ASC 740 provides guidance on derecognition, classification, interest and penalties associated with income taxes,
accounting in interim periods, disclosures and transition requirements.
The Company’s policy is to recognize interest and penalties related to income tax liabilities and unrecognized tax benefits in
income tax expense.
Casualty and health insurance
The Company is self insured for general liability, auto liability and workers’ compensation exposures, as well as health care
claims, with specific excess insurance purchased from independent carriers to cover individual claims in excess of the self-insured
limits. The expected liability for unpaid claims, including incurred but not reported losses, is reflected on the consolidated balance
sheets as a liability with current and long-term components. The amount recoverable from insurance providers is reflected on the
consolidated balance sheets in prepaid expenses and other current assets. Provisions for losses are developed from valuations that
rely upon the Company’s past claims experience, which considers both the frequency and settlement of claims. The casualty and
health insurance liabilities are recorded at their undiscounted value.
Retirement savings program
The Company sponsors a defined contribution retirement savings plan. Employees who have attained the age of 18 and have
completed 90 days of service prior to the plan entry date are eligible to participate in the plan. The Company has recorded expense
of $1,200, $904 and $0 related to its retirement savings programs for the years ended December 31, 2013, 2012 and 2011,
respectively, which is included in selling, general and administrative expenses on the consolidated statements of operations.
Lease obligations
The Company recognizes lease obligations with fixed escalations of rental payments on a straight-line basis over the lease term,
with the amount of rental expense in excess of lease payments recorded as a deferred rent liability. As of December 31, 2013 and
2012, the Company had a deferred rent liability of $1,614 and $1,927, respectively, included in accrued expenses and other
liabilities and other long-term liabilities on the consolidated balance sheets.
Advertising and promotion
Costs associated with advertising and promoting products and services are expensed in the period incurred and totaled $1,631,
$1,323 and $399 for the years ended December 31, 2013, 2012 and 2011, respectively. These costs are included in selling, general
and administrative expenses on the consolidated statements of operations.
Stock-based compensation
In accordance with the requirements of ASC 718, Compensation—Stock Compensation (“ASC 718”), the Company measures and
recognizes compensation expense for all share-based payment awards made to employees using a fair value based pricing model. The
compensation expense is recognized over the requisite service period.
Restructuring and related expenses
The Company accounts for costs associated with exit or disposal in accordance with ASC 420, Exit or Disposal Cost Obligations
(“ASC 420”), which requires that: (i) liabilities associated with exit and disposal activities be measured at fair value; (ii) one-time
termination benefits be expensed at the date the entity notifies the employee, unless the employee must provide future service, in
which case the benefits are expensed ratably over the future service period; (iii) liabilities related to an operating lease/contract be
recognized and measured at its fair value when the contract does not have any future economic benefit to the entity (i.e., the entity
ceases to utilize the rights conveyed by the contract); and (iv) for typically all other costs related to an exit or disposal activity to be
expensed as incurred.
Debt issuance costs
Costs incurred in connection with the Company’s secured credit agreement are capitalized and amortized over the term of the
agreement. Total debt issuance costs, net of accumulated amortization, included in other assets on the consolidated balance sheets
were $1,640 and $1,937 as of December 31, 2013 and 2012, respectively. Amortization of debt issuance costs for the years ended
December 31, 2013, 2012 and 2011 was $596, $902 and $1,553, respectively, and is included in interest expense on the consolidated
statements of operations.
Derivatives
The Company recognizes all derivative instruments as assets or liabilities in the Company’s balance sheets at fair value. Changes
in the fair value of derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria are
58
reported in earnings. The Company elected not to designate any new derivative instruments as hedges for the years 2013, 2012 or
2011, and therefore all changes in the fair market value of the hedge contracts have been reported in cost of goods sold, on the
consolidated statements of operations.
The Company may decide to designate these instruments as hedges in future periods. The Company does not enter into any
derivatives for speculative or trading purposes; all derivatives are used to offset existing or expected risks associated with
fluctuations in interest rates or commodities.
Warranty expense
We have warranty obligations with respect to most manufactured products; however, the liability for the warranty obligations is
not significant as a result of third-party inspection and acceptance processes.
Comprehensive loss
Comprehensive loss is equal to the net loss for all periods presented.
Recently issued accounting pronouncements
There were no significant new accounting pronouncements or changes to existing guidance that were applicable to us.
4.
Acquisitions
For all acquisitions, the Company allocates the purchase price to the estimated fair values of the assets acquired and liabilities
assumed as of the date of the acquisition. The market approach, which indicates value based on available market pricing for
comparable assets, is utilized to estimate the fair value of inventory, property and equipment. The income approach, which
indicates value based on the present value of future cash flows, is primarily used to value intangible assets. The cost approach,
which estimates values by determining the current cost of replacing an asset with another of equivalent utility, is used, as
appropriate, for certain assets for which the market and income approaches could not be applied due to the nature of the asset.
Total Building Services Group, LLC
On December 22, 2012, the Company purchased certain assets and liabilities of Total Building Services Group, LLC (“TBSG”) for
$6,807. TBSG consists of one location in Georgia and sells framing, millwork and building materials and services primarily to
residential contractors. The purchase of TBSG includes an earnout agreement (“Earnout”) in which the seller of TBSG participates
in earnings over certain thresholds during the three fiscal years beginning January 1, 2013. At the acquisition date, the Company
estimated the value of the Earnout to be $1,075 using discounted future cash flows. The Earnout has been classified as a Level 3
measurement in accordance with ASC 820. The Company advanced $850 against future Earnout payments and earns 9% interest
on the advanced amount. As of December 31, 2013, the net value of the Earnout and related advance was $0, based on cash flow
projections as of that date. The Company recognized a gain of $195 for the year ended December 31, 2013 within selling, general
and administrative expenses on the consolidated statements of operations related to the reduction of the Earnout liability. The
Company incurred transaction costs of $106 and $183 during the years ended December 31, 2013 and 2012, respectively, which
are included in selling, general and administrative expenses on the consolidated statements of operations. Net sales of TBSG for
the year ended December 31, 2013 were $20,419. As the acquisition occurred on December 22, 2012, net sales of TBSG from the
date of acquisition through December 31, 2012 is not significant. The impact of this acquisition on our operating results was not
considered material for the reporting of pro forma financial information.
59
The following table summarizes the final allocation of the purchase price to the estimated fair values of the assets acquired and
liabilities assumed on December 22, 2012.
Accounts receivable
Inventories
Property and equipment
Intangible assets-trademarks
Intangible assets-supply agreement
Intangible assets-customer relationships
Total assets acquired
Accounts payable
Accrued expenses and other liabilities
Current portion of capital lease obligation
Long-term portion of capital lease obligation
Total liabilities assumed
Net assets acquired
$ 398
1,524
6,128
1,132
4,484
1,967
15,633
(3,395 )
(56 )
(423 )
(4,952 )
(8,826 )
$ 6,807
Chesapeake Structural Systems
On April 8, 2013, Commonwealth Acquisition Holdings, LLC, a wholly-owned subsidiary of the Company, purchased certain
assets and assumed certain liabilities of Chesapeake Structural Systems, Inc., Creative Wood Products, LLC and Chestruc, LLC
(collectively “Chesapeake”) for an adjusted purchase price of $2,623. This amount includes an initial holdback amount of $250
due to the sellers on April 8, 2014. The holdback amount may be reduced under certain circumstances, including the Company’s
inability to collect upon acquired accounts receivable. The acquisition provides the Company with component manufacturing
capability to serve customers in the Central and Northern Virginia markets. The Company incurred transaction costs of $151
during the year ended December 31, 2013 which are included in selling, general and administrative expenses on the consolidated
statements of operations. Net sales of Chesapeake for the period from April 8, 2013 through December 31, 2013 were $7,929. The
impact of this acquisition on our operating results was not considered material for the reporting of pro forma financial information.
The Company acquired total assets of $3,108 and assumed liabilities of $1,410. The assets acquired include a customer
relationship intangible asset of $1,160. Goodwill of $675 arising from the acquisition consists of expected synergies and cost
savings from excess purchase price over identifiable intangible net assets, as well as intangible assets that do not qualify for
separate recognition, such as assembled workforce. All of the goodwill from this transaction is expected to be deductible for
income tax purposes.
5.
Discontinued operations
During the years ended December 31, 2012 and 2011, the Company ceased operations in certain geographic markets due to
declines in residential home building throughout the U.S. and other strategic reasons. The Company will have no further
significant continuing involvement in the sold operations and exited geographic markets. The cessation of operations in these
markets has been treated as discontinued operations as the markets had distinguishable cash flows and operations that have been
eliminated from ongoing operations. To determine if cash flows have been (or will be) eliminated from ongoing operations, we
evaluate a number of qualitative and quantitative factors, including, but not limited to, proximity of a closing store to any
remaining open stores and the potential sales migration from the closed store to any stores remaining open.
60
The operating results of the discontinued operations for the years ended December 31, 2013, 2012 and 2011 are as follows:
Year ended December 31,
Net sales
Restructuring charges
Income from discontinued operations before income taxes
Income tax expense
Net income (loss)
2013
2011
2012
$ — $ 1,103 $ 14,670
(1,033 )
456
(658 )
(202 )
(31 )
644
(243 )
401
(55 )
101
(52 )
49
The assets and liabilities of discontinued operations reflected on the consolidated balance sheets at December 31, 2013 and 2012
are as follows:
Inventories, net
Real estate held for sale
Prepaid expenses and other current assets
Current assets of discontinued operations
Property and equipment, net of accumulated depreciation
Noncurrent assets of discontinued operations
Accounts payable
Accrued expenses and other liabilities
Restructuring reserve
Current liabilities of discontinued operations
Long-term restructuring reserve
Other long-term liabilities
Noncurrent liabilities of discontinued operations
6.
Restructuring costs
2013
2012
$ — $ 20
700
700
35
8
755
708
28
—
28
—
2
—
167
37
277
295
446
332
384
89
4
—
$ 89 $ 388
In addition to discontinuing operations in certain markets, the Company has instituted store closures and reductions in headcount
in continuing markets (collectively, the “Restructurings”) in an effort to: (i) strengthen the Company’s competitive position; (ii)
reduce costs and (iii) improve operating margins within existing markets that management believes have favorable long-term
growth demographics.
No additional costs, other than interest accretion, are expected to be incurred related to the Restructurings.
The following table summarizes the restructuring expenses incurred in connection with the Restructurings and the remaining
reserves as of and for the years ended December 31, 2013, 2012 and 2011:
Restructuring reserves, December 31, 2010
Restructuring charges incurred
Cash payments
Restructuring reserves, December 31, 2011
Restructuring charges incurred
Cash payments
Restructuring reserves, December 31, 2012
Restructuring charges incurred
Cash payments
Restructuring reserves, December 31, 2013
61
Total
Work force
reductions
Store
closures
$ 671 $ 3,791 $ 4,462
2,382
(2,844 )
4,000
2,908
(1,783 )
5,125
209
(1,732 )
$ 190 $ 3,412 $ 3,602
2,285
(2,141 )
3,935
2,555
(1,718 )
4,772
209
(1,569 )
97
(703 )
65
353
(65 )
353
—
(163 )
The restructuring charges incurred for store closures for the year ended December 31, 2012 primarily relate to management’s
determination that subleasing closed properties was no longer reasonably assumed which resulted in revised estimates.
The remaining accrual for work force reduction of $190 is expected to be fully paid by January 2015. The remaining accrual for
store closures of $3,412 is expected to be fully paid by January 2017 as the related leases expire.
The restructuring reserve at December 31, 2013 consists of a current portion of $1,594 and a long-term portion of $2,008, which is
included in other long-term liabilities on the consolidated balance sheets.
7.
Accounts receivable
Accounts receivable consist of the following at December 31, 2013 and 2012:
Trade receivables
Allowance for doubtful accounts
Allowance for sales returns and discounts
The following table shows the changes in our allowance for doubtful accounts:
2013
2012
$ 115,876 $ 94,962
(3,095 )
(1,570 )
$ 111,285 $ 90,297
(2,707 )
(1,884 )
Balance at January 1
Additions charged to expense
Deductions (write-offs)
Balance at December 31
2013
2011
2012
$ 3,095 $ 2,669 $ 4,826
1,753
(3,910 )
$ 2,707 $ 3,095 $ 2,669
2,333
(1,907 )
1,051
(1,439 )
Recoveries of amounts previously written off were $1,785, $3,402 and $9,084 for the years ended December 31, 2013, 2012 and
2011, respectively.
8.
Inventories
Inventories consist principally of materials purchased for resale, including lumber, sheet goods, millwork, windows and doors, as
well as certain manufactured products and are valued at the lower of cost or market, with cost being measured using an average
cost approach, which approximates the first-in, first-out approach. A provision for excess and obsolete inventory of $2,174 and
$1,833 is recorded as of December 31, 2013 and 2012, respectively.
9.
Property and equipment
Property and equipment consists of the following at December 31, 2013 and 2012:
Land
Buildings and improvements
Leasehold improvements
Furniture, fixtures and equipment
Vehicles
Construction-in-progress
Less: Accumulated depreciation
2013
2012
$ 18,210 $ 18,210
24,992
7,178
51,554
25,387
293
127,614
(72,538 )
$ 56,039 $ 55,076
25,279
7,721
51,713
27,918
2,719
133,560
(77,521 )
Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $9,827, $10,299 and $15,257, respectively,
including amortization expense related to capital leases. Depreciation expense of $3,936, $2,489 and $2,887 was included in cost
of goods sold, in 2013, 2012 and 2011, respectively.
62
As of December 31, 2013, the Company had real estate held for sale of $1,663 and $700 included in continuing operations and
discontinued operations, respectively, related to closed branches. As of December 31, 2012, the Company had real estate held for
sale of $5,117 and $700 included in continuing operations and discontinued operations, respectively, related to closed branches.
During the years ended December 31, 2013 and 2012, the Company reclassified $0 and $970, respectively, of property and
equipment to assets held for sale, as the assets met the held for sale criteria as set forth in ASC 360, Property, Plant and
Equipment (“ASC 360”).
As of December 31, 2013 and 2012, the Company had other assets held for sale of $0 and $381, respectively, in continuing
operations, consisting primarily of information technology equipment.
For the years ended December 31, 2013, 2012 and 2011, the Company recorded impairment charges related to assets held for sale
of $432, $481 and $610, respectively. The impairment charges arose primarily from declining commercial real estate values. The
Company estimated the fair value of the assets classified as held for sale using recent sales data for similar properties in the area
and analyzed the expected cash flows from different sales scenarios.
During the years ended December 31, 2013, 2012 and 2011, the Company had proceeds from the sale of property and equipment
of $553, $952 and $5,220, respectively, and proceeds from the sales of real estate held for sale of $3,201, $441 and $886,
respectively. These disposals were primarily related to assets of stores closed as part of the restructuring events discussed in Note
6.
10.
Goodwill and intangible assets, net
Goodwill
December 31, 2012
Acquisition of Chesapeake (Note 4)
December 31, 2013
$ 6,511
675
$ 7,186
The following table shows changes in goodwill for the year ended December 31, 2013. All of the Company's goodwill as of
December 31, 2013 is recorded in the Geographic divisions reportable segment (Note 19).
Intangible assets
Intangible assets represent the value assigned to trademarks, customer relationships and a supply agreement in connection with
acquired companies. The trademarks, customer relationships and supply agreement are being amortized over weighted-average
periods of 17.3 years, 11.6 years and 13.0 years, respectively. The following table provides the gross carrying amount and related
accumulated amortization of definite-lived intangible assets.
Trademarks
Customer Relationships
Gross
Gross
Supply Agreement
Gross
Total
Carrying
Amount
Accumulated
Amortization
Carrying
Amount
Accumulated
Amortization
Carrying
Amount
Accumulated
Amortization
Amortization
December 31, 2011 $ 15,853 $ (2,221 ) $ 6,982 $ (862 ) $ — $ — $19,752
7,583
1,967
Acquisitions
—
(1,470 )
25,865
8,949
1,160
1,160
—
Amortization
(2,236 )
December 31, 2013 $ 16,985 $ (4,120 ) $ 10,109 $ (2,310 ) $ 4,484 $ (359 ) $24,789
1,132
—
16,985
—
—
—
(909 )
(3,130 )
—
(990 )
—
(552 )
(1,414 )
—
(896 )
4,484
—
4,484
—
—
—
(9 )
(9 )
—
(350 )
December 31, 2012
Acquisitions
63
Aggregate amortization expense was $2,236, $1,470 and $1,457 for the years ended December 31, 2013, 2012 and 2011,
respectively. Based upon current assumptions, the Company expects that its definite-lived intangible assets will be amortized
according to the following schedule:
2014
2015
2016
2017
2018
Thereafter
$
$
2,253
2,253
2,253
2,253
2,253
13,524
24,789
11.
Accrued expenses and other liabilities
Accrued expenses and other liabilities consists of the following at December 31, 2013 and 2012:
Accrued payroll and other employee related expenses
Accrued taxes
Self-insurance reserves
Advances from customers
Accrued professional fees
Accrued rebates payable
Accrued short-term deferred rent
Accrued related party management fees (Note 14)
Accrued interest and lending fees
Litigation reserve (Note 16)
Other
12.
Secured Credit Agreement
2013
2012
$ 12,595 $ 6,940
4,156
3,365
2,981
1,214
826
593
119
778
2,146
2,159
$ 30,528 $ 25,277
5,421
3,236
3,725
1,366
853
586
130
178
140
2,298
On June 30, 2009, the Company entered into a Secured Credit Agreement (the “Credit Agreement”) with Wells Fargo Capital
Finance (“WFCF”), which includes a revolving line of credit (the “Revolver”). The Revolver was amended during 2012 and 2013
for changes in financial covenants, maximum availability, maturity date and interest rate. The following is a summary of the
significant terms of the Revolver as of December 31, 2013:
Maturity
Interest/Usage Rate
Maximum Availability
Periodic Principal Payments None
(a)
December 31, 2016
Company’s option of Base Rate(a) plus a Base Rate Margin (ranges from 0.50%–1.00% based
on Revolver availability) or LIBOR plus a LIBOR Rate Margin (ranges from 1.50%–2.00%
based on Revolver availability)
Lesser of $150,000 or the borrowing base(b)
Base Rate is the higher of (i) the Federal Funds Rate plus 0.5% or (ii) the prime rate.
(b)
The Revolver’s borrowing base is calculated as the sum of (i) 85% of the Company’s eligible accounts receivable plus (ii)
the lesser of 90% of the eligible credit card receivables and $5,000, plus (iii) the lesser of $125,000, 65% of the eligible
inventory or 85% of the net liquidation value of eligible inventory as defined in the Credit Agreement minus (iv) reserves
from time to time set by the administrative agent. The eligible accounts receivable and inventories are further adjusted as
specified in the Credit Agreement. The Company’s borrowing base can also be increased pursuant to certain terms
outlined in the Credit Agreement.
64
The Credit Agreement provides that the Company can use the Revolver availability to issue letters of credit. The fees on any
outstanding letters of credit issued under the Revolver include a participation fee equal to the LIBOR Rate Margin. The fee on the
unused portion of the Revolver is 0.375% if the average daily usage is $75,000 or below, and 0.25% if the average daily usage is
above $75,000. The Revolver includes a financial covenant that requires the Company to maintain a minimum Fixed Charge
Coverage Ratio of 1.00:1.00 as defined by the Credit Agreement. The Fixed Charge Coverage Ratio requirement is only applicable
if the sum of (i) availability under the Revolver and (ii) qualified cash ("Adjusted Liquidity") is less than $15,000, and remains in
effect until the date on which Adjusted Liquidity has been greater than or equal to $15,000 for a period of 30 consecutive days.
The Company has incurred operating losses for the years ended December 31, 2012 and 2011 and has used cash for operating
activities for the years ended December 31, 2013, 2012 and 2011. While there can be no assurances, based upon the Company’s
forecast, the Company does not expect the financial covenants to become applicable during the year ended December 31, 2014.
The Company had outstanding borrowings of $59,072 and $72,218 with net availability of $71,002 and $31,344 as of December
31, 2013 and 2012, respectively. The interest rate on outstanding LIBOR Rate borrowings of $52,000 was 1.9% and the interest
rate on outstanding Base Rate borrowings of $7,072 was 4.00% as of December 31, 2013. The interest rate on outstanding LIBOR
Rate borrowings of $65,000 ranged from 3.1%-3.3% and the interest rate on outstanding Base Rate borrowings of $7,218 was
5.0% as of December 31, 2012. The Company had $8,900 and $7,550 in letters of credit outstanding under the Credit Agreement
as of December 31, 2013 and 2012, respectively. The Revolver is collateralized by substantially all assets of the Company. The
carrying value of the Revolver at December 31, 2013 and December 31, 2012 approximates fair value as the Revolver contains a
variable interest rate. As such, the fair value of the Revolver was classified as a Level 2 measurement in accordance with ASC
820.
The Revolver is classified as a long-term liability as of December 31, 2013 as the Company is no longer required to maintain a
lockbox sweep arrangement with WFCF, due to net availability exceeding a minimum threshold defined in the Credit Agreement.
The Company entered into Amendment Eleven to the Credit Agreement on February 18, 2014. See Note 22 for the significant
provisions included in the amendment.
13.
Other long-term liabilities
Other long-term liabilities consists of the following at December 31, 2013 and 2012:
Self-insurance reserve (Note 3)
Long-term restructuring reserve (Note 6)
Long-term deferred rent (Note 3)
Other
14.
Related party transactions
2013
2012
$ 4,310 $ 3,866
3,612
1,334
195
$ 7,346 $ 9,007
2,008
1,028
—
During the years ended December 31, 2013, 2012 and 2011, the Company incurred expenses related to management services
provided by Gores and Glendon Saturn Holdings, LLC ("Glendon"), an affiliate of Gores. For the years ended December 31, 2013,
2012 and 2011, these expenses were $1,306, $1,379 and $1,963, respectively, and are included in selling, general and
administrative expenses on the consolidated statements of operations. The management services agreement with Gores was
terminated on August 14, 2013 in connection with the IPO, and the Company paid Gores a $9,000 termination fee on that date
(Note 2).
During the year ended December 31, 2013, the Company incurred fees related to services provided by members of the Company's
Board of Directors who are employed by Gores and Glendon of $113. These fees are included in selling, general and
administrative expenses on the consolidated statements of operations.
The Company incurred expenses related to management services provided by Wolseley plc ("Wolseley") through November 16,
2011. For the year ended December 31, 2011, these expenses were $443 and are included in selling, general and administrative
expenses on the consolidated statements of operations.
As of December 31, 2012, the Company had related party promissory note balances of $401, which represented advances, and
accrued interest thereon, due from Glendon and other shareholders of the Company. These notes were repaid in full during the
second quarter of 2013.
65
On July 1, 2012, the Company made a $531 loan to an executive of the Company related to an exercise of stock options. This loan
was forgiven by the Company on June 14, 2013 (Note 18).
On March 1, 2012, the Company issued Glendon 110,381 Class B Common shares.
The Company leases an operating facility from a partnership that is partially owned by an employee. Rental payments of $114
were made during the year ended December 31, 2013 related to this lease. No rental payment were made during the years ended
December 31, 2012 and 2011 related to this lease.
Prior to July 1, 2013, the Company was part of a group health care plan with Gores. As of December 31, 2013 and December 31,
2012, the Company had $0 and $750, respectively, on deposit with Gores as a reserve for the payment of run-off health care claims
in the event of a Plan termination, which is included in restricted assets on the consolidated balance sheets. As of July 1, 2013, the
Company is no longer part of the group health care plan with Gores and maintains an independent health care plan.
On February 22, 2010, the Company entered into a Software, Services, License and Maintenance Services Agreement with United
Road Services Inc. and its subsidiary Vehix Transvision, LLC (collectively “URS”) for the development, implementation,
maintenance and support of customized software related to our Stock Logistics Solutions capability. The agreement with URS was
subsequently amended and restated on March 3, 2013 to update certain services and deliverables. When we entered into the
original agreement in 2010, URS was also owned by Gores as one of its portfolio companies. Gores divested its ownership interest
in URS on December 14, 2012 and URS is no longer under common ownership with the Company. Accordingly, the Company
does not consider URS a related party subsequent to December 14, 2012. The Company paid URS $773 and $883 during the year
ended December 31, 2012 and 2011, respectively.
15.
Income taxes
The components of income tax expense (benefit) for the years ended December, 31 2013, 2012 and 2011 are as follows:
2013
2012
2011
Current
Federal
State
Deferred
Federal
State
$ 3,961 $ (4,596 ) $ (16,300 )
552
(15,748 )
197
(4,399 )
413
4,374
(1,859 )
602
(1,257 )
(4,513 )
(1,413 )
(5,926 )
$ 3,117 $ (8,032 ) $ (21,674 )
(2,759 )
(874 )
(3,633 )
The 2013 income tax expense of $3,117 consists of $2,874 related to continuing operations and $243 related to discontinued
operations. The 2012 income tax benefit of $8,032 consists of $8,084 related to continuing operations and ($52) related to
discontinued operations. The 2011 income tax benefit of $21,674 consists of $22,332 related to continuing operations and ($658)
related to discontinued operations.
66
A reconciliation of differences between the statutory U.S. Federal income tax rate of 35% and the Company’s effective tax rate
from continuing operations for the years ended December 31, 2013, 2012, and 2011 follows:
Income tax expense at statutory rate
State taxes, net of federal tax
Nondeductible termination fee on management services agreement
Nondeductible capitalized transaction costs
Nondeductible compensation expense
Nondeductible (permanent) items- other
IRC Section 199 manufacturing deduction
Changes in tax rates
Indemnity tax asset
Uncertain tax positions
Other items
Valuation allowance
2013
2012
2011
35.0 %
(0.4 )
(157.6 )
(3.8 )
(8.1 )
(1.3 )
17.0
(11.2 )
—
—
(3.7 )
1.2
(132.9 )%
35.0 %
1.7
—
—
—
(1.0 )
—
0.5
(0.5 )
1.5
0.8
(2.3 )
35.7 %
35.0 %
2.5
—
—
—
(0.2 )
—
0.2
(1.1 )
3.0
(2.5 )
(2.1 )
34.8 %
Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31, 2013 and 2012:
Deferred tax assets related to
Accounts receivable
Inventory
Accrued expenses
Other reserves and liabilities
Net operating loss and credit carryforwards
Valuation allowance
Total deferred tax assets
Deferred tax liabilities related to
Real estate held for sale
Intangible assets
Property and equipment
Other assets
Total deferred tax liabilities
Net deferred tax liability
2013
2012
$ 1,385 $ 516
1,763
5,218
3,913
3,325
14,735
(1,946 )
12,789
1,322
3,375
5,464
2,160
13,706
(1,919 )
11,787
(903 )
(4,523 )
(17,474 )
(1,051 )
(23,951 )
(2,296 )
(4,391 )
(18,735 )
(788 )
(26,210 )
$ (12,164 ) $ (13,421 )
At December 31, 2013, the Company had $53,854 of state net operating loss carryforwards expiring at various dates through 2032.
During 2013, the Company fully utilized its prior year Federal net operating loss carryforward and credits to reduce its current year
federal income tax liability.
Section 382 of the Internal Revenue Code (“IRC”) imposes annual limitations on the utilization of net operating loss carry-
forwards, other tax carry-forwards, and certain built-in losses upon an ownership change as defined under that section. In general
terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in the
Company’s stock by more than 50 percentage points over a three year testing period. If the Company were to experience an IRC
section 382 ownership change, an annual limitation could be imposed on certain of the Company’s tax attributes, including its net
operating losses, capital loss carry-forwards, and certain other losses, credits, deductions or tax basis.
67
The Company recognized a current income tax payable of $2,989 and $2,939 at December 31, 2013 and 2012, respectively.
During 2013 and 2012, the Company paid $4,535 and $244 in Federal and state income tax payments, respectively. During 2013
and 2012, the Company carried back certain state tax net operating losses as a tax deduction to offset taxable income in prior
taxable periods. As a result of this tax loss carry back, the Company received tax refunds of $206 in 2013 and $16,399 in 2012. As
of December 31, 2012, the Company is no longer able to carry back its tax net operating losses; therefore, to the extent the
Company generates future tax net operating losses, the Company may be required to increase the valuation allowance on net
deferred tax assets and income tax benefit would be adversely affected.
In accordance with ASC 740, the Company evaluates its deferred tax assets to determine if valuation allowances are required. In
assessing the realizability of deferred tax assets, the Company considers both positive and negative evidence in determining
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The primary negative
evidence considered includes the cumulative operating losses generated in prior periods. The primary positive evidence considered
includes the reversal of deferred tax liabilities related to depreciation and amortization that would occur within the same
jurisdiction and during the carry forward period necessary to absorb the Federal and state net operating losses and other deferred
tax assets. The reversal of such liabilities would utilize the state net operating losses and other deferred tax assets.
Based upon the positive and negative evidence considered, the Company believes it is more likely than not that it will realize the
benefit of the deferred tax assets, net of the existing state tax valuation allowances of $1,919 and $1,946 as of December 31, 2013
and 2012, respectively. To the extent the Company generates sufficient taxable income in the future to fully utilize the tax benefits
of the net deferred tax assets on which a valuation allowance was recorded, the Company’s effective tax rate would be impacted as
the valuation allowance is reversed.
The following table shows the changes in the amount of the Company’s valuation allowance:
Balance at January 1,
Additions charged to expense
Deductions - other
Balance at December 31,
2013
2011
2012
$ 1,946 $ 1,418 $ 50
1,368
—
$ 1,919 $ 1,946 $ 1,418
528
—
—
(27 )
During 2013, several state tax jurisdictions in which the Company conducts business enacted new laws to change their respective
income tax rates prospectively. As a result of the change in tax rates, the Company reduced its net deferred tax liabilities and
assets as well as the respective valuation allowances.
At December 31, 2013 and 2012, the Company has recognized no material uncertain tax positions. During 2012, the statute of
limitations expired for certain tax periods where the Company had previously recognized a long-term liability related to uncertain
tax positions. As a result, the Company increased current income tax benefit for the year ended December 31, 2012 by $347 and
decreased the long-term liability related to the uncertain tax positions. The Company also recognized $347 within other income
(expense), net, on the consolidated statement of operations due to the reduction in a corresponding related Wolseley indemnity
asset.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (exclusive of the effect of interest and
penalties) is as follows:
Balance at January 1,
Tax positions taken in prior periods:
Gross increases
Gross decreases
Tax positions taken in current period:
Gross increases
Settlements with taxing authorities
Lapse of applicable statute of limitations
Balance at December 31,
2013
2012
2011
$
— $
266 $
2,027
—
—
—
—
—
— $
—
—
—
—
(266 )
— $
—
—
—
—
(1,761 )
266
$
68
Certain state tax returns are under examination by various regulatory authorities. The Company‘s state tax returns are open to
examination for an average of three years. However, certain jurisdictions remain open to examination longer than three years due
to the existence of net operating losses and statutory waivers. The Company’s Federal returns are open to examination for three
years; however, due to statutory waivers, the Company's tax years ended July 31, 2008 and May 5, 2009 remain open until
December 31, 2014 with the Federal tax authorities. The Company is currently under examination by the IRS for its tax years
ended July 31, 2008, May 5, 2009, March 31, 2010, March 31, 2011 and March 31, 2012. At December 31, 2013 and 2012, the
Company has recognized $2,859 and $2,923, respectively, related to expected tax, penalties and interest payments as a result of the
IRS audits in its current income tax payable.
The Company’s policy is to recognize interest and penalties related to income tax liabilities and unrecognized tax benefits in
income tax expense and to the extent the liability relates to pre-Acquisition Date tax periods, the Company recognizes a
corresponding benefit related to the indemnity agreement from a subsidiary of Wolseley. As of December 31, 2013 and 2012, the
Company has neither material unrecognized tax benefits nor any associated interest and penalties. During the years ended
December 31, 2013, 2012 and 2011, the Company recognized penalties and interest related to income tax liabilities and uncertain
tax benefits of $64, $73 and $213 in income tax expense, respectively. As of December 31, 2013 and 2012, the Company
recognized penalties and interest of $248 and $180, respectively, within its current income tax payable.
16.
Commitments and contingencies
The Company is obligated under capital leases covering fleet vehicles and certain equipment, as well as one facility. The fleet
vehicles and equipment leases generally have terms ranging from three to six years and the facility lease has a term of eleven
years. The carrying value of property and equipment under capital leases was $7,218 and $6,999 at December 31, 2013 and 2012,
respectively, net of accumulated depreciation of $3,942 and $2,799, respectively. Amortization of assets held under capital leases
is included with depreciation expense on the consolidated statements of operations.
The Company also has several noncancellable operating leases, primarily for buildings, improvements, and equipment. These
leases generally contain renewal options for periods ranging from one to five years and require the Company to pay all executory
costs such as property taxes, maintenance and insurance.
Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year)
and future minimum capital lease payments as of December 31, 2013 are as follows:
2014
2015
2016
2017
2018
Thereafter
Less: Amounts representing interest
Total obligation under capital leases
Less: Current portion of capital lease obligation
Long term capital lease obligation
Capital leases
Operating leases
$ 1,628 $ 19,103
10,978
10,135
5,946
3,147
15,120
1,371
1,019
926
856
3,340
9,140 $ 64,429 (a)
(1,889 )
7,251
(1,240 )
$ 6,011
(a) Minimum operating lease payments have not been reduced by minimum sublease rentals of $1,431 due in the future under
noncancelable subleases.
Total rent expense under these operating leases for the years ended December 31, 2013, 2012 and 2011 was $19,066, $18,616 and
$21,070, respectively, which are included in selling, general and administrative expenses on the consolidated statements of
operations. Future payments for certain leases will be adjusted based on increases in the consumer price index.
As of December 31, 2013, the Company had commitments to purchase $8,645 of vehicles and certain equipment, which are
enforceable and legally binding on us. We expect to pay for and take possession of these assets during the first quarter of 2014.
In 2012 and 2013, the Company was a defendant in various pending lawsuits arising from assertions of defective drywall
manufactured in China and purchased and installed by certain of the Company’s subcontractors, including In re: Chinese-
69
Manufactured Drywall Products Liability Litigation, MDL Case No. 2047, in the United States District Court Eastern District of
Louisiana (the “MDL”). The Company has sought and continues to seek reimbursement from Wolseley, the manufacturer,
intermediate distributors, insurers, and others related to any costs incurred to investigate and repair defective Chinese drywall and
resulting damage. As of December 31, 2012, the Company had recorded a liability of $1,638 in accrued expenses and other
liabilities on the consolidated balance sheets as an estimate of probable future payouts related to the MDL. As of December 31,
2012, the Company had also recorded an indemnification asset of $1,638 in prepaid expenses and other current assets on the
consolidated balance sheets as it expected full indemnification for any amounts paid related to these claims. The MDL was
resolved in March 2013 without any impact to the Company’s income statement or cash flows and the Company no longer holds
the liability nor the asset relating to the aforementioned matter.
From time to time, various claims, legal proceedings and litigation are asserted or commenced against the Company principally
arising from alleged product liability, product warranty, casualty, construction defect, contract, tort, employment and other
disputes. In determining loss contingencies, management considers the likelihood of loss as well as the ability to reasonably
estimate the amount of such loss or liability. An estimated loss is recorded when it is considered probable that such a liability has
been incurred and when the amount of loss can be reasonably estimated. It is not certain that the Company will prevail in these
matters. However, the Company does not believe that the ultimate outcome of any pending matters will have a material adverse
effect on its consolidated financial position, results of operations or cash flows.
17.
Equity and redeemable securities
Equity securities subsequent to the IPO
Upon the consummation of the IPO and the filing of its Amended and Restated Certificate of Incorporation on August 14, 2013,
and as of December 31, 2013, the Company’s classes of stockholders’ equity consist of (i) common stock, $0.01 par value,
300,000,000 shares authorized and (ii) preferred stock, $0.01 par value, 50,000,000 shares authorized.
Equity and redeemable securities prior to the IPO
Prior to the IPO, the Company had the following classes of common and preferred stock:
Common Stock
The Company's common stock consisted of Class A Voting Common shares and Class B Nonvoting Common shares, each with a
par value of $0.01 per share.
Class A Junior Preferred Stock
These preferred shares, held by Gores, had a par value of $0.01 per share and were redeemable by the Company at any time after
July 31, 2012 for the liquidation preference of $1.00 per share, but had no voting or participation rights other than in the event of a
liquidation.
In the event of an involuntary liquidation, these shares were entitled to the liquidation preference which was to be paid out after
Class B Senior Preferred shares and Class C Convertible Preferred shares but before all common shares. Further, these shares had
no conversion features into common shares. These shares are recorded as redeemable securities (outside of permanent equity) on
the accompanying consolidated balance sheets as of December 31, 2012.
Class B Senior Preferred Stock
These preferred shares, held by Gores, had a par value of $0.01 per share and were redeemable at any time after May 5, 2011 by
the Company for the liquidation preference of $1,000 per share plus accumulated and unpaid dividends.
These shares had no voting or participating rights, but were eligible to receive cumulative preferential distributions of 8% annually
when authorized by the board. Dividends earned, but not declared or paid by the Class B Senior Preferred shares as of
December 31, 2012 were $89. In the event of an involuntary liquidation, these shares were entitled to the liquidation preference
which was to be paid out before all other preferred and common shares. These shares were also mandatorily redeemable at the
liquidation preference upon an IPO. These shares had no conversion features into common shares. These shares are recorded as
redeemable securities (outside of permanent equity) on the accompanying consolidated balance sheets as of December 31, 2012.
Class C Convertible Preferred Stock
These preferred shares, held by Gores, had the same voting rights as the Class A Common shares. The shares were entitled to
receive distributions equal to the amount of distributions as if the shares had been converted into Class A Common shares. In the
event of an involuntary liquidation, these shares were entitled to the liquidation which was to be paid out after Class B Senior
Preferred shares but before all other preferred and common shares. These shares also provided Gores with the option to convert
into 4,454,889 Class A Common shares at any time at a conversion price of $1.1223625. These shares are recorded as redeemable
securities (outside of permanent equity) on the accompanying consolidated balance sheets as of December 31, 2012.
70
As the conversion rate was less than the deemed fair value of the Class A Common shares of $2.25, the Class C Convertible
Preferred shares contained a beneficial conversion feature as described in ASC 470. The difference in the stated conversion price
and estimated fair value of the Class A Common shares of $5,000 was accounted for as a beneficial conversion feature. As the
option to convert the shares belonged to the holders, the beneficial conversion feature was recognized in the year ended December
31, 2012 as a deemed dividend, which increased the Company's net loss attributable to common stockholders by $5,000 as well as
the Company's net loss per share by $0.38.
As discussed in Note 2, upon the closing of the IPO, all shares of existing common and preferred stock were reclassified and
converted into shares of common stock.
The following table shows the changes in the classes of preferred stock, which are recorded as redeemable securities (outside of
permanent equity):
Class A
Class B
Class C
December 31, 2011
Issuance of Class C Convertible Preferred stock
Recognition of beneficial conversion
Class C Convertible Preferred stock
feature on
Deemed dividend on Class C Convertible Preferred
stock
Dividends accrued on Class B Senior Preferred stock
Redemption of Class B Senior Preferred stock
Dividends paid on Class B Senior Preferred stock
December 31, 2012
Conversion of Saturn Acquisition Holdings, LLC
preferred stock to Stock Building Supply Holdings, Inc.
preferred stock (Note 1)
Dividends accrued on Class B Senior Preferred stock
Reclassification and conversion of preferred stock to
common stock in connection with the IPO (Note 2)
December 31, 2013
18.
Equity based compensation
Shares Amount Shares Amount Shares Amount
— $ —
5,000
48,760 $54,997
—
5,100 $ —
—
5,000
—
—
—
—
—
—
—
5,100
—
—
—
—
—
—
—
—
—
—
—
—
—
(5,000 )
—
—
(12,372 )
—
36,388
—
4,480
(12,372 )
(10,628 )
36,477
—
—
—
—
5,000
5,000
—
—
—
5,000
1,079
—
—
1,836
—
—
—
—
(5,100 )
—
— $ —
(37,467 )
(38,313 )
— $ —
(5,000 )
(5,000 )
— $ —
2013 Incentive Plan
In connection with the IPO, the Company adopted the Stock Building Supply Holdings, Inc. 2013 Incentive Compensation Plan
("2013 Incentive Plan"). The 2013 Incentive Plan provides for grants of stock options, stock appreciation rights, restricted stock,
other stock-based awards, other cash-based compensation and performance awards. The aggregate number of shares of common
stock which may be issued or used for reference purposes under the 2013 Incentive Plan or with respect to which awards may be
granted may not exceed 1,800,000 shares. In general, if awards under the 2013 Incentive Plan are for any reason canceled, or
expire or terminate unexercised, the shares covered by such awards may again be available for the grant of awards under the 2013
Incentive Plan. As of December 31, 2013, a total of 1,254,489 common shares were available for issuance under the 2013
Incentive Plan.
Nonvested stock awards
Certain employees of the Company were granted common shares during the years ended December 31, 2013, 2012 and 2011.
These shares vest over a period of three or four years based on continued employment with the Company and the related
compensation expense is amortized over the vesting period and included in selling, general and administrative expense on the
consolidated statements of operations.
Stock option awards
During the years ended December 31, 2013, 2012 and 2011, certain directors and employees of the Company were awarded
options to purchase common shares. These options vest over a period of three or four years based on continued employment with
the Company and the related compensation expense is amortized over the vesting period and included in selling, general and
administrative expense on the consolidated statements of operations. The stock options have a maximum contractual term of 10
71
years from the date of grant. There was no cash impact related to the stock option awards during the years ended December 31,
2013, 2012 and 2011.
Restricted stock units
During the year ended December 31, 2013, certain directors of the Company were awarded restricted stock units. These units vest
over a period of two years based on continuing service on the Company's Board of Directors.
Stock purchases
In January 2012, the Company’s board of directors approved the issuance and sale of 337,636 Class B Common shares to certain
members of management for $0.97 per share. These shares were estimated to have a fair value at issuance of $1.98 per share. The
Company recorded $342 in stock compensation expense in 2012 as a result of these sales of stock at a price below fair value.
Shares awarded that revert to the Company as a result of forfeiture or termination, expiration or cancellation of an award or that
are used to exercise an award or for tax withholding, will be again available for issuance. The following table highlights the
expense related to share-based payments for the years ended December 31, 2013, 2012 and 2011:
Nonvested stock
Stock options
Restricted stock units
Stock purchases
Stock based compensation
2013
2011
2012
$ 512 $ 580 $ 127
257
—
—
$ 1,049 $ 1,305 $ 384
383
—
342
511
26
—
The fair value of stock options was estimated using the Black-Scholes option pricing model. The Company used the following
assumptions to value the stock options issued during the years ended December 31, 2013, 2012 and 2011:
Expected dividend yield
Expected volatility factor (a)
Risk-free interest rate (b)
Expected term (in years) (c)
2013
2012
2011
0 %
49% - 51%
1.8% - 2.0%
6.0 - 6.5
0 %
58 %
0.8% - 0.9%
3.7 - 3.9
0 %
59 %
1.0 %
4.3
(a)
(b)
(c)
The Company estimated its volatility factor based on the average volatilities of similar public entities.
The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant.
For stock options granted during the year ended December 31, 2013, the expected term was derived utilizing the
"simplified method" in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 110, which
uses the mid-point between the vesting date and the expiration date of the award. We believe use of this approach is
appropriate given the lack of prior history of option exercises upon which to base an expected term. For stock options
granted during the years ended December 31, 2012 and 2011, the expected term was based on the vesting term and
contractual term of the options and the expected exercise behavior of the option holders.
72
The following is a summary of nonvested stock and restricted stock unit activity:
December 31, 2010
Granted
Vested
Forfeited
December 31, 2011
Granted
Vested
Forfeited
December 31, 2012
Granted
Vested
Forfeited
December 31, 2013
Nonvested Stock
Restricted Stock Units
Number of
shares
outstanding
Weighted
average
grant date
fair value
Number of
units
outstanding
Weighted
average
grant date
fair value
1,123,289 $ 1.06
1.92
0.98
1.16
1.11
1.98
1.51
1.92
1.06
16.78
6.51
—
427,993 $ 15.72
64,930
(181,804 )
(337,636 )
668,779
234,086
(448,355 )
(58,437 )
396,073
593,878
(561,958 )
—
— $ —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13.96
10,000
—
—
—
—
10,000 $ 13.96
The following is a summary of stock option award activity:
Number of
options
Weighted
average
exercise price
Contractual
term (in
years)
Intrinsic value
Outstanding at December 31, 2010
Granted
Exercised
Forfeited/Canceled
Outstanding at December 31, 2011
Granted
Exercised
Forfeited/Canceled
Outstanding at December 31, 2012
Granted
Exercised
Forfeited/Canceled
Outstanding at December 31, 2013
845,259 $ 2.05
1.92
64,930
—
—
—
—
2.04
910,189
0.97
1,006,936
—
—
1.82
(1,144,274 )
0.97
772,851
14.17
489,377
0.97
(546,244 )
14.00
(1,500 )
714,484 $ 9.98
9.0 $ 5,883
Exercisable at December 31, 2013
94,083 $ 0.97
6.9 $ 1,623
Vested and expected to vest at December 31, 2013
635,276 $ 9.59
8.9 $ 5,480
During the year ended December 31, 2012, the exercise price on 910,189 stock options was revised to $0.97, and 234,086 options
were canceled and reissued as nonvested shares. These transactions were accounted for as modifications under ASC 718.
73
The weighted average grant date fair value of stock options granted during the years ended December 31, 2013, 2012 and 2011
was $7.03, $1.23 and $0.91, respectively. The weighted average grant date fair value for 2012 excludes 910,189 stock options that
were affected by the modification described above.
As described in Note 14, the Company forgave a $531 loan to an executive of the Company on June 14, 2013 related to an exercise
of 546,244 stock options. Prior to the date of the loan forgiveness, the options were legally exercised, but not considered exercised
for accounting purposes. As of the date of the loan forgiveness, the options were considered exercised for accounting purposes.
The exercised shares retained their original vesting requirements, and as such, are presented as both an exercise of stock options
and a grant of nonvested stock in the tables above.
No stock options were exercised for cash during the years ended December 31, 2013, 2012 and 2011.
The following table summarizes the Company’s total unrecognized compensation cost related to equity based compensation as of
December 31, 2013:
Nonvested stock
Stock options
Restricted stock units
Unrecognized
compensation cost
$ 1,058
2,655
113
$ 3,826
Weighted average
remaining period of
expense recognition
(in years)
2.1
2.8
1.6
74
19.
Segments
ASC 280, Segment Reporting (“ASC 280”) defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
The Company's operating segments consist of the East, South, and West divisions along with Coleman Floor, which offers
professional flooring installation services. Due to the similar economic characteristics, nature of products, distribution methods and
customers, the Company has aggregated our East, South and West operating segments into one reportable segment, "Geographic
divisions."
In addition to our reportable segment, the Company's consolidated results include "Coleman Floor" and "Other reconciling items,"
which is comprised of our corporate activities.
The following tables present Net sales, Adjusted EBITDA and certain other measures for the reportable segment and total
continuing operations for the periods indicated. In the Company's previously issued consolidated financial statements for the years
ended December 31, 2012 and 2011, Coleman Floor and Other reconciling items were combined into a single category called
Other. These amounts are presented separately in the tables below. Furthermore, certain corporate assets totaling $7,578 and
$7,224 as of December 31, 2012 and 2011, respectively, have been recategorized from Geographic divisions to Other reconciling
items.
Geographic divisions
Coleman Floor
Other reconciling items
Geographic divisions
Coleman Floor
Other reconciling items
Geographic divisions
Coleman Floor
Other reconciling items
December 31,
2013
Net Sales
Gross Profit
Year ended December 31, 2013
Depreciation
&
Amortization
Total Assets
$ 1,148,032 $ 264,322 $ 11,124 $ 52,780 $ 292,047
10,096
16,397
$ 318,540
134
802
$ 1,197,037 $ 274,403 $ 12,060
2,127
(27,104 )
10,081
—
49,005
—
Adjusted
EBITDA
December 31,
2012
Net Sales
Gross Profit
Year ended December 31, 2012
Depreciation
&
Amortization
Total Assets
$ 905,278 $ 206,407 $ 9,901 $ 23,992 $ 255,441
6,327
24,244
$ 286,012
118
1,699
$ 942,398 $ 214,728 $ 11,718
1,798
(23,797 )
37,120
—
8,204
117
Adjusted
EBITDA
December 31,
2011
Net Sales
Gross Profit
Year ended December 31, 2011
Depreciation
&
Amortization
Total Assets
$ 733,947 $ 163,400 $ 14,152 $ (3,342 ) $ 207,827
4,709
42,105
$ 254,641
281
1,755
$ 759,982 $ 68,965 $ 16,188
26,035
—
(564 )
(26,893 )
Adjusted
EBITDA
5,565
—
75
Reconciliation to consolidated financial statements:
Year ended December 31,
Net loss, as reported
Interest expense
Income tax expense (benefit)
Depreciation and amortization
Impairment of assets held for sale
IPO transaction-related costs
Restructuring expense
Discontinued operations, net of taxes
Management fees
Non-cash compensation expense
Acquisition costs
Severance and other expense related to store closures and business
optimization
Reduction of tax indemnification asset
Other items
Adjusted EBITDA of Coleman Floor
Adjusted EBITDA of other reconciling items
Adjusted EBITDA of geographic divisions reportable segment
2013
2011
2012
$ (4,635 ) $ (14,533 ) $ (42,133 )
2,842
(22,332 )
16,188
580
—
1,349
202
2,406
384
1,017
4,037
(8,084 )
11,718
361
—
2,853
(49 )
1,379
1,305
284
3,793
2,874
12,060
432
10,008
141
(401 )
1,307
1,049
257
1,113
—
(195 )
(2,127 )
27,104
6,761
1,937
—
564
26,893
$ 52,780 $ 23,992 $ (3,342 )
2,375
347
—
(1,798 )
23,797
The Company does not earn revenues or have long-lived assets located in foreign countries. In accordance with the enterprise-wide
disclosure requirements of the accounting standard, the Company's net sales from external customers by main product lines are as
follows for the years ended December 31, 2013, 2012 and 2011:
2013
2011
2012
$ 157,975 $ 106,745 $ 87,542
143,128
247,299
178,361
103,652
$ 1,197,037 $ 942,398 $ 759,982
219,191
428,384
249,711
141,776
178,449
333,952
202,532
120,720
Structural components
Millwork & other interior products
Lumber & lumber sheet goods
Windows & other exterior products
Other building products & services
Total net sales
76
20.
Income (loss) per common share
Basic net income (loss) per share (“EPS”) is calculated by dividing net income (loss) attributable to common stockholders by the
weighted average shares outstanding during the period. Diluted EPS is calculated by adjusting weighted average shares
outstanding for the dilutive effect of common share equivalents outstanding for the period, determined using the treasury-stock
method. For purposes of the diluted EPS calculation, stock options and nonvested stock awards are considered to be common stock
equivalents. Class C Convertible Preferred shares are considered to be participating securities. During periods of net income,
participating securities are allocated a proportional share of net income determined by dividing total weighted average
participating securities by the sum of total weighted average common shares and participating securities (“the two-class method”).
During periods of net loss, no effect is given to participating securities since they do not share in the losses of the Company.
The basic and diluted EPS calculations for the years ended December 31, 2013, 2012 and 2011 are presented below:
Year ended December 31,
Loss from continuing operations
Class B Senior Preferred stock deemed dividend
Accretion of beneficial conversion feature on Class C Convertible
Preferred stock
Loss attributable to common stockholders, from continuing operations
Income (loss) from discontinued operations, net of tax
Loss attributable to common stockholders
2013
2012
$ (5,036 ) $ (14,582 ) $ (41,931 )
(4,188 )
(4,480 )
(1,836 )
2011
—
(6,872 )
401
—
(46,119 )
(202 )
$ (6,471 ) $ (24,013 ) $ (46,321 )
(5,000 )
(24,062 )
49
Weighted average common shares outstanding, basic and diluted
Basic and diluted EPS
18,205,892
13,153,446
22,262,337
Loss from continuing operations
Income (loss) from discontinued operations
Net loss per share
$ (0.38 ) $ (1.83 ) $ (2.07 )
(0.01 )
$ (0.36 ) $ (1.83 ) $ (2.08 )
0.02
—
The following table provides the securities that could potentially dilute basic earnings per share in the future, but were not included
in the computation of diluted earnings per share because to do so would have been anti-dilutive:
Stock option awards
Nonvested stock awards
Restricted stock units
Class C Convertible Preferred Stock (as converted basis)
Year ended December 31,
2013
714,484
427,993
10,000
—
2012
772,851
396,073
—
4,454,889
2011
910,189
668,779
—
—
77
21.
Unaudited Quarterly Financial Data
The following tables summarize the consolidated quarterly results of operations for 2013 and 2012:
2013
(in thousands, except per share amounts)
Net sales
Gross profit
(Loss) income from continuing operations
Income from discontinued operations, net of
taxes
Net (loss) income
Basic (loss) income per share
Income (loss) from continuing operations
Income from discontinued operations
Net (loss) income per share
Diluted (loss) income per share
(Loss) income from continuing operations
Income from discontinued operations
Net (loss) income per share
(in thousands, except per share amounts)
Net sales
Gross profit
Loss from continuing operations
(Loss) income from discontinued operations, net
of taxes
Net (loss) income
Basic and diluted (loss) income per share
Loss from continuing operations
(Loss) income from discontinued operations
Net loss per share
22.
Subsequent events
First Quarter
Second Quarter Third Quarter Fourth Quarter
$ 248,726 $ 314,653 $ 328,468 $ 305,190
73,722
2,897
75,381
(5,603 )
71,510
1,884
53,790
(4,214 )
157
(4,057 )
94
1,978
90
(5,513 )
60
2,957
$ (0.36 ) $ 0.06 $ (0.30 ) $ 0.12
—
$ (0.35 ) $ 0.07 $ (0.30 ) $ 0.12
0.01
0.01
—
$ (0.36 ) $ 0.06 $ (0.30 ) $ 0.11
—
$ (0.35 ) $ 0.07 $ (0.30 ) $ 0.11
0.01
0.01
—
2012
First Quarter
Second Quarter Third Quarter Fourth Quarter
$ 187,939 $ 246,492 $ 255,833 $ 252,134
57,727
(3,771 )
58,516
(249 )
55,054
(2,109 )
43,431
(8,453 )
(113 )
(8,566 )
(128 )
(2,237 )
289
40
1
(3,770 )
$ (1.15 ) $ (0.24 ) $ (0.10 ) $ (0.36 )
—
$ (1.16 ) $ (0.25 ) $ (0.08 ) $ (0.36 )
0.02
(0.01 )
(0.01 )
On February 18, 2014, the Company entered into Amendment Eleven to the Credit Agreement. The significant provisions included
in the amendment are as follows:
• The maximum availability under the Revolver was increased to $200,000.
• The maturity date was extended to December 31, 2017.
• The borrowing base is calculated as the sum of (i) 85% of the Company’s eligible accounts receivable plus (ii) the lesser
of 90% of the eligible credit card receivables and $5,000, plus (iii) the lesser of $150,000, 65% of the eligible inventory or
85% of the net liquidation value of eligible inventory plus (iv) the lesser of $30,000, 85% of the net liquidation value of
eligible fixed assets or the net book value of fixed assets, all as defined in the Credit Agreement, minus (v) reserves from
time to time set by the administrative agent.
• The fee on the unused portion of the Revolver was set at 0.25%, regardless of average daily usage.
• The Fixed Charge Coverage Ratio requirement is only applicable if Adjusted Liquidity is less than $20,000, and remains
in effect until the date on which Adjusted Liquidity has been greater than or equal to $20,000 for a period of 30
consecutive days.
78
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Disclosure controls and procedures
Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its
principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and
Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2013.
Management's annual report on internal control over financial reporting
This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an
attestation report of the Company's registered public accounting firm due to a transition period established by rules of the SEC for
newly public companies.
Remediation of material weakness
A material weakness in our internal control over financial reporting existed as of December 31, 2012 and September 30, 2013.
During 2013, we identified transactions that should have been considered in the January 1, 2012 valuation of the Company’s Class
A and Class B Common stock.
We have remediated the material weakness. Remediation included designing, implementing and testing improved processes and
controls during the third and fourth quarters of 2013 related to the review of the underlying assumptions and inputs to be used in
valuations and the evaluation of how different value outputs may give rise to different equity accounting treatments. Further, the
completion of our IPO on August 14, 2013 created an active market for our common stock. In valuing the equity based awards
issued upon the consummation of our IPO, we used quoted market prices for our common stock, and we will review to verify that
quoted market prices are used for our common stock, where applicable, in future valuations. We cannot assure you that the
measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material
weaknesses.
Changes in internal control over financial reporting
Except as described above in “—Remediation of Material Weakness,” there was no change in our internal control over financial
reporting during the three months ended December 31, 2013 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information
None.
79
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Code of Business Conduct and Ethics for Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer-We have
adopted a Code of Ethics which applies to our chief executive officer, chief financial officer, chief accounting officer and all our
other employees, and which can be found through our website, www.stocksupply.com under the Investors section.
The information required by Item 401 of Regulation S-K will be included under the captions “Election of Directors (Proposal 1)”
and “Directors and Executive Officers” in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders
(“Fiscal 2013 Proxy Statement”) to be held May 21, 2014, which section is incorporated in this item by reference. The information
required by Items 405, 407(d)(4) and 407(d)(5) of Regulation S-K will be included under the captions “Stock Ownership
Information-Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in the Fiscal 2013 Proxy
Statement, which sections are incorporated in this item by reference.
Item 11. Executive Compensation
The information required by Item 402 of Regulation S-K will be included under the captions “Executive Compensation” and
“Director Compensation” in the Fiscal 2013 Proxy Statement, which section is incorporated in this item by reference. The
information required by Item 407(e)(4) of Regulation S-K will be included under the caption “Compensation Committee Interlocks
and Insider Participation” in the Fiscal 2013 Proxy Statement, which section is incorporated in this item by reference.
The information required by Item 407(e)(5) of Regulation S-K will be included under the caption “Compensation Committee
Report” in the Fiscal 2013 Proxy Statement, which section is incorporated in this item by reference; however, such information is
only “furnished” hereunder and not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will appear under the headings “Stock Ownership Information” in our Fiscal 2013 Proxy
Statement, which section is incorporated in this item by reference.
The information required by Item 201(d) of Regulation S-K will be included under the caption “Stock Ownership Information” in
our Fiscal 2013 Proxy Statement, which section is incorporated in this item by reference.
The information required by Item 403 of Regulation S-K will be included under the caption “Stock Ownership Information” in our
Fiscal 2013 Proxy Statement, which section is incorporated in this item by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by Item 404 of Regulation S-K will be included under the caption “Related Person Transactions” in our
Fiscal 2013 Proxy Statement, which sections are incorporated in this item by reference.
The information required by Item 407(a) of Regulation S-K will be included under the caption “Director Independence” in our
Fiscal 2013 Proxy Statement, which sections are incorporated in this item by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item will appear under the heading “Ratification of Selection of Independent Registered Public
Accounting Firm (Proposal No.
2)” in our Fiscal 2013 Proxy Statement, which section is incorporated in this item by reference.
80
Item 15.
Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
PART IV
1. The list of consolidated financial statements and related notes, together with the report of PricewaterhouseCoopers
LLP, appear in Part II, Item 8 "Financial Statements and Supplementary Data" of this Form 10-K and are hereby
incorporated by reference.
2. Financial statement schedules are omitted because they are not applicable.
3. The following documents are filed, furnished or incorporated by reference as exhibits to this report as required by
Item 601 of Regulation S-K.
Exhibit No.
Description
2.1
2.2
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
Restructuring and Investment Agreement, dated as of May 5, 2009, by and among Wolseley Investments North
America, Stock Building Supply Holdings, LLC and Saturn Acquisition Holdings, LLC (incorporated by
reference to Exhibit 2.1 to the Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as
amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368)
Plan of Conversion of Saturn Acquisition Holdings, LLC (incorporated by reference to Exhibit 2.2 to the Stock
Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission
on June 14, 2013 in Commission File No. 333-189368)
Amended and Restated Certificate of Incorporation of Stock Building Supply Holdings, Inc. (incorporated by
reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on August
15, 2013 in Commission File No. 001-36050)
Amended and Restated Bylaws of Stock Building Supply Holdings, Inc. (incorporated by reference to Exhibit
3.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on August 15, 2013 in
Commission File No. 001-36050)
Form of stock certificate (incorporated by reference to Exhibit 4.1 to the Stock Building Supply Holdings, Inc.
Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission
File No. 333-189368)
Credit Agreement, dated as of June 30, 2009, by and among Stock Building Supply Holdings II, LLC, as
parent, the subsidiaries of parent party thereto, as borrowers, the lenders party thereto, and Wells Fargo Capital
Finance (f/k/a Wells Fargo Foothill, LLC), as the co-lead arranger and administrative agent (incorporated by
reference to Exhibit 10.1 to the Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as
amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368)
Amendment No. 1 and Waiver to Credit Agreement, dated as of January 11, 2010, by and among Stock
Building Supply Holdings II, LLC, as parent, the subsidiaries of parent party thereto, as borrowers, the lenders
party thereto, and Wells Fargo Capital Finance (f/k/a Wells Fargo Foothill, LLC), as the co-lead arranger and
administrative agent (incorporated by reference to Exhibit 10.2 to the Stock Building Supply Holdings, Inc.
Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission
File No. 333-189368)
Amendment No. 2 and Waiver to Credit Agreement, dated as of April 2, 2010, by and among Stock Building
Supply Holdings II, LLC, as parent, the subsidiaries of parent party thereto, as borrowers, the lenders party
thereto, and Wells Fargo Capital Finance (f/k/a Wells Fargo Foothill, LLC), as the co-lead arranger and
administrative agent (incorporated by reference to Exhibit 10.3 to the Stock Building Supply Holdings, Inc.
Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission
File No. 333-189368)
Amendment No. 3 to Credit Agreement and Consent, dated as of June 30, 2010, by and among Stock Building
Supply Holdings II, LLC, as parent, the subsidiaries of parent party thereto, as borrowers, the lenders party
thereto, and Wells Fargo Capital Finance (f/k/a Wells Fargo Foothill, LLC), as the co-lead arranger and
administrative agent (incorporated by reference to Exhibit 10.4 to the Stock Building Supply Holdings, Inc.
Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission
File No. 333-189368)
Amendment No. 4 to Credit Agreement and Consent, dated as of November 16, 2011, by and among Stock
Building Supply Holdings II, LLC, as parent, the subsidiaries of parent party thereto, as borrowers, the lenders
party thereto, and Wells Fargo Capital Finance (f/k/a Wells Fargo Foothill, LLC), as the co-lead arranger and
administrative agent (incorporated by reference to Exhibit 10.5 to the Stock Building Supply Holdings, Inc.
Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission
File No. 333-189368)
81
Exhibit No.
Description
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
Amendment No. 5 to Credit Agreement, dated as of May 31, 2012, by and among Stock Building Supply
Holdings II, LLC, as parent, the subsidiaries of parent party thereto, as borrowers, the lenders party thereto,
and Wells Fargo Capital Finance (f/k/a Wells Fargo Foothill, LLC), as the co-lead arranger and administrative
agent (incorporated by reference to Exhibit 10.6 to the Stock Building Supply Holdings, Inc. Registration
Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission File No.
333-189368)
Amendment No. 6 to Credit Agreement and Consent, dated as of December 13, 2012, by and among Stock
Building Supply Holdings II, LLC, as parent, the subsidiaries of parent party thereto, as borrowers, the lenders
party thereto, and Wells Fargo Capital Finance (f/k/a Wells Fargo Foothill, LLC), as the co-lead arranger and
administrative agent (incorporated by reference to Exhibit 10.7 to the Stock Building Supply Holdings, Inc.
Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission
File No. 333-189368)
Amendment No. 7 to Credit Agreement and Consent, dated as of December 21, 2012, by and among Stock
Building Supply Holdings II, LLC, as parent, the subsidiaries of parent party thereto, as borrowers, the lenders
party thereto, and Wells Fargo Capital Finance (f/k/a Wells Fargo Foothill, LLC), as the co-lead arranger and
administrative agent (incorporated by reference to Exhibit 10.8 to the Stock Building Supply Holdings, Inc.
Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission
File No. 333-189368)
Amendment No. 8 to Credit Agreement and Consent, dated as of May 31, 2013, by and among Stock Building
Supply Holdings II, LLC, as parent, the subsidiaries of parent party thereto, as borrowers, the lenders party
thereto, and Wells Fargo Capital Finance (f/k/a Wells Fargo Foothill, LLC), as the co-lead arranger and
administrative agent (incorporated by reference to Exhibit 10.9 to the Stock Building Supply Holdings, Inc.
Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission
File No. 333-189368)
Amendment No. 9 to Credit Agreement and Amendment No. 2 to Security Agreement and Consent, dated as
of June 13, 2013, by and among Stock Building Supply Holdings II, LLC, as parent, the subsidiaries of parent
party thereto, as borrowers, the lenders party thereto, and Wells Fargo Capital Finance (f/k/a Wells Fargo
Foothill, LLC), as the co-lead arranger and administrative agent (incorporated by reference to Exhibit 10.10 to
the Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the
Commission on June 14, 2013 in Commission File No. 333-189368)
Amendment No. 10 to Credit Agreement, dated as of October 3, 2013, by and among Stock Building Supply
Holdings, Inc., as parent, the subsidiaries of parent party thereto, as borrowers, the lenders party thereto, and
Wells Fargo Capital Finance (f/k/a Wells Fargo Foothill, LLC), as the co-lead arranger and administrative
agent (incorporated by reference to Exhibit 10.6 to the Amended Quarterly Report on Form 10-Q/A, filed with
the Commission on November 1, 2013 in Commission File No. 001-36050)
Amended and Restated Professional Services Agreement, dated as of June 13, 2013, by and between Glendon
Partners, Inc. and Stock Building Supply Holdings, Inc. (incorporated by reference to Exhibit 10.11 to the
Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the
Commission on June 14, 2013 in Commission File No. 333-189368)
Management Services Agreement, dated as of May 4, 2009, by and between The Gores Group, LLC and
Saturn Acquisition Holdings, LLC (incorporated by reference to Exhibit 10.12 to the Stock Building Supply
Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013
in Commission File No. 333-189368)
Termination of Management Services Agreement, dated as of June 13, 2013, by and between The Gores
Group, LLC and Stock Building Supply Holdings, Inc. (incorporated by reference to Exhibit 10.13 to the Stock
Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission
on June 14, 2013 in Commission File No. 333-189368)
Contribution Agreement, dated as of November 16, 2011, by and between Saturn Acquisition Holdings, LLC
and Gores Building Holdings, LLC (incorporated by reference to Exhibit 10.14 to the Stock Building Supply
Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013
in Commission File No. 333-189368)
Registration rights provisions applicable to certain stockholders of Stock Building Supply Holdings, Inc.
(incorporated by reference from Exhibit D of Exhibit 2.2 hereof)
Director Nomination Agreement, dated as of August 14, 2013, by and among Stock Building Supply Holdings,
Inc. and Gores Building Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed with the Commission on August 15, 2013 in Commission File No. 001-36050)
Amended and Restated Employment Agreement, dated as of August 14, 2013, between Stock Building Supply
Holdings, Inc. and Jeffrey G. Rea (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report
on Form 8-K filed with the Commission on August 15, 2013 in Commission File No. 001-36050)
Amended and Restated Employment Agreement, dated as of August 14, 2013, between Stock Building Supply
Holdings, Inc. and James F. Major, Jr. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current
Report on Form 8-K filed with the Commission on August 15, 2013 in Commission File No. 001-36050)
82
Exhibit No.
Description
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
21.1
23.1
24.1
31.1
31.2
32.1
32.2
Amended and Restated Employment Agreement, dated as of August 14, 2013, between Stock Building Supply
Holdings, Inc. and Bryan J. Yeazel (incorporated by reference to Exhibit 10.4 to the Registrant’s Current
Report on Form 8-K filed with the Commission on August 15, 2013 in Commission File No. 001-36050)
Severance Agreement, dated December 16, 2013, between Stock Building Supply Holdings, Inc. and Lisa M.
Hamblet
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.20 to the Stock Building Supply
Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013
in Commission File No. 333-189368)
Form of Stock Building Supply Holdings, Inc. 2013 Incentive Compensation Plan (incorporated by reference
to Exhibit 10.21 to the Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended,
filed with the Commission on June 14, 2013 in Commission File No. 333-189368)
Description of Management Incentive Plan for Executive Officers
Form of Nonqualified Stock Option Agreement Pursuant to the Stock Building Supply Holdings, Inc. 2013
Incentive Compensation Plan (incorporated by reference to Exhibit 10.23 to Amendment 2 to the Stock
Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission
on July 29, 2013 in Commission File No. 333-189368)
Form of Restricted Stock Agreement Pursuant to the Stock Building Supply Holdings, Inc. 2013 Incentive
Compensation Plan (incorporated by reference to Exhibit 10.24 to Amendment 2 to the Stock Building Supply
Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on July 29, 2013
in Commission File No. 333-189368)
Form of Restricted Stock Unit Agreement Pursuant to the Stock Building Supply Holdings, Inc. 2013 Incentive
Compensation Plan (incorporated by reference to Exhibit 10.25 to Amendment 2 to the Stock Building Supply
Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on July 29, 2013
in Commission File No. 333-189368)
List of subsidiaries of Stock Building Supply Holdings, Inc. (incorporated by reference to Exhibit 10.21 to the
Stock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the
Commission on June 14, 2013 in Commission File No. 333-189368)
Consent of PricewaterhouseCoopers LLP
Powers of Attorney (included on the signature page)
Certification by Jeffrey G. Rea, President and Chief Executive Officer, pursuant to Exchange Act Rule 13a-14,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by James F. Major, Jr., Executive Vice President, Chief Financial Officer and Treasurer, pursuant
to Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes
of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and otherwise is not subject to liability under these sections.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 3, 2014
By: /s/ James F. Major, Jr.
STOCK BUILDING SUPPLY HOLDINGS, INC.
Executive Vice President, Chief Financial Officer
and Treasurer
(Principal financial and accounting officer and duly
authorized officer)
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Jeffrey G. Rea and Bryan J. Yeazel and each of them singly,
his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with
all exhibits thereto and all other documents in connection therewith, with the SEC, granting unto each said attorney-in-fact and
agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
President and Chief Executive Officer (principal executive
officer)
Date
March 3, 2014
/s/ Jeffrey G. Rea
Jeffrey G. Rea
/s/ James F. Major, Jr.
James F. Major, Jr.
/s/ Timothy P. Meyer
Timothy P. Meyer
/s/ Andrew Freedman
Andrew Freedman
/s/ Barry J. Goldstein
Barry J. Goldstein
/s/ Robert E. Mellor
Robert E. Mellor
/s/ Steve C. Yager
Steven C. Yager
Executive Vice President, Chief Financial Officer and
Treasurer (principal financial and accounting officer)
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
Director and Chairman of the Board
Director
Director
Director
Director
84
Corporate and Shareholder Information
MAIN BRANCH
8020 Arco Corporate Drive
Suite 400
Raleigh, North Carolina 27617
919-431-1000
CORPORATE WEBSITE
www.stocksupply.com
ANNUAL SHAREHOLDERS’ MEETING
Wednesday, May 21, 2014 at 9:00 a.m. ET
Doubletree by Hilton Hotel
4810 Page Creek Lane
Durham, North Carolina 27703
STOCK EXCHANGE LISTING
The Company’s common stock is listed on
the NASDAQ Stock Exchange
Ticker symbol: STCK
TRANSFER AGENT AND REGISTRAR
Computershare
P.O. Box 30170
College Station, TX 77842-3170
877-373-6374
www.computershare.com/investor
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
Raleigh, North Carolina
INVESTOR RELATIONS
Shareholders, Investors and Security Analysts are
invited to contact:
Mark Necaise, Director, Investor Relations
919-431-1021
mark.necaise@stocksupply.com
FINANCIAL INFORMATION
For financial reports, filings with the Securities and Exchange
Commission (including Form 10-K), news releases and other
investor information, please visit our investor website at:
ir.stocksupply.com
EXECUTIVE TEAM
Jeffrey G. Rea
President and Chief Executive Officer
Lisa M. Hamblet
Executive Vice President, eBusiness
James F. Major, Jr.
Executive Vice President, Chief Financial Officer and Treasurer
Bryan J. Yeazel
Executive Vice President, Chief Administrative Officer,
General Counsel and Corporate Secretary
BOARD OF DIRECTORS
Andrew Freedman 2, 3
Chairman of the Board
Managing Director, Operations, The Gores Group
Jeffrey G. Rea 3
President and Chief Executive Officer and Director
Steven G. Eisner 2, *3
Director
Managing Director, Fund General Counsel and
Chief Compliance Officer, The Gores Group
Barry J. Goldstein *1, 3
Director
Former Executive Vice President and Chief Financial Officer,
Office Depot Inc.
David L. Keltner 1
Director
Chief Financial Officer, Ferguson Enterprises Inc.
Robert E. Mellor 1, *2
Director
Former Chief Executive Officer,
Building Materials Holding Corporation
Joseph P. Page
Director
Chief Operating Officer, The Gores Group
Steven C. Yager
Director
Senior Managing Director and President M&A,
The Gores Group
1 Audit Committee
2 Compensation Committee
3 Corporate Governance and Nominating Committee
* Committee Chair