Building Materials Holding Corporation
Annual Report 2016

Plain-text annual report

2015 ANNUAL REPORT 2016 ANNUAL REPORT build with BMC company overview • A leading national building solutions provider with strategic footprint in attractive long-term growth markets • Locations in 17 states representing 63% of 2016 single-family building permits • Significant market presence in 42 attractive metropolitan areas • Focus on differentiated, value-added products and services that meet critical industry needs • Proven growth track record in highly fragmented industry positioned for continued recovery 17 91 42 STATES DISTRIBUTION CENTERS METROPOLITAN AREAS DISTRIBUTION SERVICES 91 Lumber and Building Materials Distribution Yards TRUSS MANUFACTURING 49 READY-FRAME®, EWP, and Truss and Panel Manufacturing Facilities MILLWORK MANUFACTURING 50 Custom Millwork Operations READY-FRAME® Computerized Precision Pre-Cut Framing Packages TURNKEY SOLUTIONS Installation Management DESIGN SERVICES Design Centers and Showrooms eBUSINESS PLATFORM Logistics, Account Services and eCommerce CORPORATE HEADQUARTERS TWO LAKESIDE COMMONS SUITE 500 980 HAMMOND DR. NE ATLANTA, GA 30328 678-222-1219 678.222.1316 FAX www.BuildWithBMC.com To our shareholders: 2016 was an exciting year for BMC. The BMC team came together to drive strong levels of operational and financial performance as we remained focused on creating a best-in-class building solutions platform. Through the combination of BMC’s innovation, wide breadth of high-quality, value-added products and services and strong financial footing, we are providing what our professional builder and remodeler customers need to be more successful while driving market share gains, profitable growth and long-term shareholder value. We were pleased to celebrate the one-year anniversary of the merger of BMC and Stock Building Supply on December 1, 2016. Today, we are one of the nation’s leading building solutions providers in the homebuilding distribution space, and we believe that we have more millwork capabilities and a wider mix of products than any other U.S. competitor in our space. In 2016, we grew net sales to $3.1 billion and improved profitability. We continued our highly successful integration efforts, achieving cost savings of $31 million for the year and, in line with our commitment to maintain an attractive balance sheet, we successfully refinanced our long-term debt which reduced our future annual interest expense obligations by $7 million. Our team continued to execute on a number of key strategic initiatives, including bringing our Ready-Frame® whole-house solution to nine new markets while gaining traction in existing locations. Overall, we grew Ready-Frame® sales by 46% to over $100 million for the year. In addition, we continue to move forward with our eBusiness technology initiatives, introducing our industry-leading transactional website in 14 markets since its launch. As part of our technology initiatives, we also successfully standardized our fleet and logistics program. We reduced the number of providers we use for fuel, fleet maintenance and telematics, which will drive future savings as well as productivity and compliance gains. Our positive results are a direct result of the team’s ongoing execution of our long-term strategy, and BMC is strongly positioned to achieve even more as we move forward in 2017. With the bulk of our integration efforts behind us, we are turning much of our focus to strategic growth initiatives in the future, and we are confident in our ability to capitalize on both organic and inorganic expansion opportunities. We are finding innovative ways for our customers to do business faster, when and how they want to do it. Further, we are uniquely positioned among our public peers with a strong balance sheet, which will enable us to continue making investments to expand our footprint in existing and new markets while having available capital for the cyclicality of the homebuilding business. In early 2017, we appointed Michael McGaugh to the role of Executive Vice President and Chief Operating Officer and named Lisa Hamblet as Executive Vice President, eBusiness and Pro Remodeling, expanding her areas of responsibility. BMC has a talented leadership team and these appointments will help support our growth. BMC entered 2017 poised to build on the Company’s strong foundation and we look forward to continuing our momentum. I am confident that our team’s focus on innovation, value-added products, customer service and strategic expansions will continue to drive future shareholder value. On behalf of the entire BMC team, I thank you for your continued support. Sincerely, Peter Alexander President and Chief Executive Officer SERVICE YOU CAN COUNT ON  UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_____________________________Form 10-K_____________________________x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016ORoo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ___ to ___Commission file number 001-36050BMC Stock Holdings, Inc.(Exact name of Registrant as specified in its charter)Delaware26-4687975(State or other jurisdictionof incorporation or organization)(I.R.S. EmployerIdentification No.)Two Lakeside Commons980 Hammond Drive NE, Suite 500Atlanta, Georgia 30328(Address of principal executive offices, including zip code)Registrant’s telephone number, including area code: (678) 222-1219Securities registered pursuant to Section 12(b) of the Act:Common stock, par value $0.01 per share The NASDAQ Stock Market LLC(Title of each class) (Name of exchange on which registered)Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No oIndicate 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 xIndicate 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 12months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No oIndicate 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 andposted 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 xNo oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate 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 “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filerxAccelerated fileroNon-accelerated filero (Do not check if a smaller reporting company)Smaller reporting companyoIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No xThe aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2016 was approximately $824.9 million based on the closingprice per share on that date of $17.82 as reported on the NASDAQ Stock Market LLC.The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, at February 28, 2017 was 66,676,366 shares.Documents Incorporated by ReferencePortions of the registrant's Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K tothe 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, 2016. BMC STOCK HOLDINGS, INC. AND SUBSIDIARIESTable of Contents to Form 10-K PART 1 Item 1.Business2Item 1A.Risk Factors8Item 1B.Unresolved Staff Comments22Item 2.Properties23Item 3.Legal Proceedings23Item 4.Mine Safety Disclosures23 PART II Item 5Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities24Item 6.Selected Financial Data26Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations27Item 7A.Quantitative and Qualitative Disclosures About Market Risk42Item 8.Financial Statements and Supplementary Data44Item 9.Changes in and Disagreements with Accountants and Financial Disclosures80Item 9A.Controls and Procedures80Item 9B.Other Information80 PART III Item 10.Directors, Executive Officers and Corporate Governance81Item 11.Executive Compensation81Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters81Item 13.Certain Relationships and Related Transactions, and Director Independence81Item 14.Principal Accountant Fees and Services81 PART IV Item 15.Exhibits and Financial Statement Schedules82Item 16.Form 10-K Summary84 Signatures85iCautionary Statement with Respect to Forward-Looking StatementsSome of the statements contained in this Annual Report on Form 10-K constitute forward-looking statements. Forward-looking statements relate toexpectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historicalfacts 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 thatmay cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that theexpectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance orachievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Thesefactors 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, employment and other claims and legal proceedings;•our ability to maintain profitability;•the impact of our indebtedness;•the various financial covenants in our secured credit agreement and senior secured notes indenture;•our concentration of business in the Texas, California and Georgia markets;•the potential negative impacts from the significant decline in oil prices on employment, home construction and remodeling activity in Texas(particularly the Houston metropolitan area) and other markets dependent on the energy industry;•our ability to retain our key employees and to attract and retain new qualified employees, while controlling our labor costs;•product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, and our dependence on third-party suppliers andmanufacturers;•the implementation of our supply chain and technology initiatives;•the impact a housing market decline may have on our business, including the potential for impairment losses or the closing or idling of under-performing locations;•the impact of long-term non-cancelable leases at our facilities;•our ability to effectively manage inventory and working capital;•the credit risk from our customers;•the impact of pricing pressure from our customers;•our ability to identify or respond effectively to consumer needs, expectations or trends;•our ability to successfully implement our growth strategy;•the impact of federal, state, local and other laws and regulations;•the impact of changes in legislation and government policy;•the impact of unexpected changes in our tax provisions and adoption of new tax legislation;•our ability to utilize our net operating loss carryforwards;•the potential loss of significant customers or a reduction in the quantity of products they purchase;•natural or man-made disruptions to our distribution and manufacturing facilities;•our exposure to environmental liabilities and subjection to environmental laws and regulation;•the impact of disruptions to our information technology systems;•cybersecurity risks;•risks related to the continued integration of Building Materials Holding Corporation and Stock Building Supply Holdings, Inc. and successfuloperation of the post-merger company; and•our ability to operate on multiple Enterprise Resource Planning ("ERP") information systems and convert multiple systems to a single system. 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-lookingstatements 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 anyforward-looking statement made by us or on our behalf, whether as a result of new information, future developments, subsequent events or circumstances orotherwise.1PART IItem 1. BusinessOverviewBMC Stock Holdings, Inc. is one of the nation's leading providers of diversified building products and services in the U.S. residential construction market.Our objective is to provide best-in-class customer service and value-added products to our customers, which are primarily single- and multi-family homebuilders and professional remodelers. Our product offerings include lumber and lumber sheet goods and an array of value-added products, includingmillwork, doors, windows, structural components (such as engineered wood products (“EWP”)), floor and roof trusses and wall panels. Our whole-houseframing solution, Ready-Frame®, which is one of our fastest growing product offerings, saves builders both time and money and improves job site safety. Wealso offer our customers important services, such as design, product specification, installation and installation management.The 17 states in which we operate accounted for approximately 63% of 2016 U.S. single-family housing permits according to the U.S. Census Bureau. Ourprimary 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 ournet sales derived from markets within Texas, California and Georgia. Given the local nature of our business, we locate our facilities in close proximity to ourkey customers and often co-locate multiple operations in one facility to increase customer service and efficiency.The Company is a Delaware corporation and its common stock is listed on the NASDAQ Stock Market under the ticker symbol “BMCH.”Merger of Stock Building Supply Holdings, Inc. and Building Materials Holding CorporationOn December 1, 2015, Stock Building Supply Holdings, Inc. (“SBS” or “Legacy SBS”) completed a business combination with privately-held BuildingMaterials Holding Corporation (“BMHC" or "Legacy BMHC") in accordance with the terms of the Agreement and Plan of Merger, dated as of June 2, 2015,by and between SBS and BMHC (the “Merger Agreement”), pursuant to which BMHC merged with and into SBS (the “Merger”). As a result of the businesscombination, SBS survived the Merger and in connection therewith changed its name to BMC Stock Holdings, Inc. All references to “BMC,” “we,” “us,” “our” or the “Company” in this Annual Report on Form 10-K mean BMC Stock Holdings, Inc.Under generally accepted accounting principles in the United States, the Merger is treated as a “reverse merger” under the acquisition method of accounting.For accounting purposes, BMHC is considered to have acquired SBS. Consequently, the historical financial statements of the Company reflect only theoperations and financial condition of BMHC. The operating results of SBS are reported as part of the Company beginning on the closing date of the Merger.Our IndustryThe lumber and building materials ("LBM") distribution industry in the United States is highly fragmented, with a number of retailers and distributorsoffering a broad range of products and services. Demand for our products is largely driven by the level of activity in the U.S. residential construction market,particularly in single-family new construction, which has experienced improving demand trends influenced by job growth, consumer confidence, marketdemographics, levels of household formations, interest rate levels, inventories of available housing units and other external factors.According to the U.S. Census Bureau, from 2005 to 2011, single-family housing starts in the United States declined by approximately 75% to 0.43 million,which was significantly less than the 50-year average rate of approximately 1.0 million per year. Following several challenging years, single-family housingstarts increased on a year-over-year basis each year from 2012 to 2016, with starts in 2014, 2015 and 2016 reaching 0.65 million, 0.71 million and 0.78million, respectively. As a result, demand for the products we distribute and for our services has also increased.As of October 2016, Dodge Data & Analytics (formerly McGraw-Hill) forecasted that U.S. single-family housing starts will increase approximately 9% in2017. Additionally, the S&P Corelogic Case-Shiller Home Price Index, a leading measure of pricing for the U.S. residential housing market, has increased ona year-over-year basis for 55 straight months as of November 2016 and during 2016, the index reached its highest levels ever.2While sales to single-family homebuilders make up the largest portion of our revenues, we are active participants and believe there is significant growthpotential for our products and services in both multi-family construction and the professional remodeling space.According to the U.S. Census Bureau, multi-family housing starts in the United States reached a low of 0.11 million in 2009, but have increased to 0.36million, 0.40 million and 0.39 million in 2014, 2015 and 2016, respectively. The multi-family space represents a large opportunity for us to captureadditional market share and provide value-added solutions.The professional remodeling space, when compared to new home construction, tends to be less price sensitive and more resilient to broader economicconditions. As of September 2016, the Home Improvement Research Institute (“HIRI”) estimated 2016 and 2017 U.S. sales of home maintenance, repair andimprovement products to the professional market would reach approximately $98 billion and $102 billion, respectively, compared to sales of approximately$87 billion and $92 billion in 2014 and 2015, respectively. Several factors, including the overall age of the U.S. housing stock, rising home prices,availability of consumer capital at historically low interest rates and focus on energy efficiency may drive long-term growth in repair and remodelingexpenditures.Our Strategy Expand our business with existing customers by investing in value-added products and servicesWe 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 andservices we offer in each of our local markets, we believe that we can continue to enhance the value offering for, and relationships with, our existingcustomers and grow our revenues and profitability. Products and services we intend to expand organically include millwork and structural componentsmanufacturing, Ready-Frame® pre-cut framing packages and enhanced specification, showroom and design services. Additionally, we intend to use oureBusiness solutions to improve customer service, reduce waste and improve productivity. By continuing to invest systematically in our core LBMcapabilities and in technologies that streamline our processes and improve customer service, we believe we can provide a broader range of products andservices at each of our locations and that more customers will look to us as the key solutions provider for their building needs.Focus on improving customer service, productivity and operational excellence as our business growsWe have developed a talent training and development program focused on specific skills training, business development and operational productivityinitiatives. Using these skills, our market managers, division management and senior leadership team examine customer service, operating and financialmetrics and use this information to increase customer service and operating expense productivity. Our management team has also implemented, and willcontinue to pursue, LEAN business practices to increase productivity and identify opportunities for continuing improvement.We currently operate two primary ERP systems across the significant majority of our locations, and we continue to focus on the use of technology to improvecustomer service and productivity. This includes an integrated logistics software module used by the majority of our operations that schedules orders fordelivery, utilizes GPS and mobile technology in our delivery fleet and provides customers with real-time information on their order status, includingnotification and pictures of completed deliveries. During 2016, we also implemented a transactional eCommerce platform in several markets. We plan tointroduce these capabilities to additional markets in 2017.Expand in existing, adjacent and new geographiesWe also plan to expand our business through organic means. We intend to expand our reach and service capabilities in our current metropolitan areas byopening new locations, relocating facilities as needed and increasing capacity at existing facilities. In addition, while we have operations in 17 states thataccounted for approximately 63% of 2016 U.S. single-family housing permits, our markets within those states accounted for approximately half of thosepermits 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 residential remodeling, multi-family and light commercial contractors.Selectively pursue strategic acquisitionsWe also plan to expand our business through acquisitive means, provided those opportunities help to accelerate the execution of our strategic plan. Weintend to pursue additional acquisition opportunities in markets adjacent to our existing operations or3acquisitions that enhance our presence and capabilities in our 42 existing metropolitan areas. Additionally, we will consider acquiring operations orcompanies to enter new geographic regions.Our CustomersWe serve a broad customer base across 42 metropolitan areas in 17 states that includes a mix of large-scale production homebuilders, custom homebuilders,multi-family builders and professional repair and remodeling contractors. Our largest 10 customers accounted for approximately 18% of our 2016 net sales,with no single customer accounting for more than 5% of our 2016 net sales. Our largest customers are comprised primarily of the large productionhomebuilders, including publicly traded companies such as D.R. Horton, Inc., Hovnanian Enterprises, Inc., Lennar Corporation, PulteGroup, Inc. and TollBrothers, Inc. In addition to these large production homebuilders, we also service and supply regional and local custom homebuilders. We also serveprofessional residential remodeling contractors and multi-family and light commercial contractors in most of our markets.Our Products and ServicesWe provide a wide variety of building products and services directly to homebuilder and professional contractor customers. We offer a broad range ofproducts sourced through a network of suppliers with whom we have strategic supplier agreements. These products are available through our distributionlocations and, in most instances, delivered to the job site. We manufacture floor trusses, roof trusses, wall panels, stairs, specialty millwork, windows and pre-hung doors. We also provide an extensive range of installation services and special order products.We group our building products and services into four product categories: (i) structural components, (ii) lumber & lumber sheet goods, (iii) millwork, doors &windows, and (iv) other building products & services. For the year ended December 31, 2016, our sales of structural components and millwork, doors &windows products represented 44% of net sales. Each of these categories includes both manufactured and distributed products. Products in these categoriestypically carry a higher gross margin and provide us with opportunities to cross-sell other products and services.Structural components. Structural components are factory-built substitutes for job-site framing and include floor trusses, roof trusses, wall panels and EWPthat in many cases we design and cut for each home. Roof trusses, floor trusses and wall panels are built in a factory controlled environment. Engineeredfloors and beams are cut to the required size and packaged for the given application at many of our locations. Without structural components, buildersconstruct 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.Lumber & lumber sheet goods. Lumber & lumber sheet goods include dimensional lumber, plywood and oriented strand board ("OSB") products used in on-site house framing. We have developed several proprietary capabilities to design, pre-cut, label and bundle lumber and lumber sheet goods into customizedframing packages, which we have branded Ready-Frame®.Millwork, doors & windows. The millwork, doors & windows products category includes interior and exterior doors, windows, interior trim, custommillwork, moldings, stairs and stair parts, and cabinetry, among other products. We pre-hang interior and exterior doors in many of our markets, whichconsists of attaching hinges and door jambs to a door slab, thereby reducing on-site installation time and providing a higher quality finished door unit thanthose constructed on site. Selecting, designing and managing the procurement of the proper window package for performance and architectural reasons is akey service provided by our employees. Other building products & services. Other building products & services consist of various products, including hardware, wood boards, gypsum, insulation,roofing, siding and flooring. This category also includes design assistance and professional installation services of products spanning most of our productcategories. Through our installation services program, we offer scheduling, supplier and subcontractor management, and other services to many of ourcustomers. We also provide professional estimating, product advisory and product display services that assist homebuilders and their clients in selecting theappropriate mix of products to meet their needs.ManufacturingOur manufacturing facilities and related design capabilities are utilized to improve quality, cost and service to our homebuilder and repair and professionalremodeling customers. We utilize specialized assembly and manufacturing technology and various4design software packages in our manufacturing and assembly activities. We manufacture and assemble products within two of our product categories:structural components and millwork, doors & windows.Sales and MarketingWe seek to attract and retain customers through customer service, product quality, a range of product and service offerings and competitive pricing. Thisstrategy is centered on building and maintaining strong customer relationships. 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.Our experienced sales and service professionals advise the homebuilder or contractor in areas such as opportunities for cost optimization, increased buildingor project efficiencies, new products and regional product preferences. The team coordinates a sequence of site deliveries with the customer. Our largedelivery fleet and inventory management systems enable us to provide “just-in-time” product delivery. We believe this level of service is valued by ourcustomers and generates customer loyalty. At January 31, 2017, we employed approximately 850 sales professionals.Materials and Supplier RelationshipsWe purchase inventory primarily for distribution, some of which is also utilized in our manufacturing plants. The key materials we purchase includedimensional lumber, OSB, EWP, windows, doors and millwork. Our largest suppliers are national lumber and wood products producers and distributors suchas BlueLinx Holdings Inc., Boise Cascade Company, Interfor US Inc., Hampton Lumber, LP, West Fraser Timber Co. Ltd. and Weyerhaeuser Company andbuilding products manufacturers such as James Hardie, JELD-WEN, Inc., Metrie, Inc., MI Windows and Doors, Inc. and Masonite Corp. We believe there issufficient supply in the marketplace to source most of our requirements without reliance on any particular supplier and that our diversity of suppliers affordsus purchasing flexibility. We also work with our suppliers to ensure that we have sufficient adaptability and flexibility to service our customers' needs as theyevolve and as their markets grow. For certain customers, we institute purchasing programs on raw materials such as OSB to align portions of our procurementcosts with our customer pricing commitments. We balance our lumber and OSB purchases with a mix of contract and spot market purchases to ensureconsistent quantities of product necessary to fulfill customer contracts, to source products at the lowest possible cost and to minimize our exposure to thevolatility 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. Forthe year ended December 31, 2016, no supplier accounted for more than 10% of our total materials purchases. We believe we are one of the largest customersfor many of our suppliers, and therefore have significant purchasing leverage.We seek to maintain strong relationships with our suppliers and we believe opportunities exist to improve purchasing terms in the future, including inventorystorage or “just-in-time” delivery to reduce our inventory carrying costs.CompetitionWe 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 targetmarket than home center retailers such as The Home Depot and Lowe’s, which primarily serve do-it-yourself and remodeling customers. The principalmethods of competition in the Pro Segment are developing long-term relationships with professional builders and retaining such customers by delivering afull range of high-quality products on time and offering trade credit, competitive pricing, flexibility in transaction processing, and integrated service andproduct packages, as well as offering value-added products and services such as structural components and installation. Our market positions in the highlycompetitive Pro Segment create economies of scale that allow us to supply our customers cost-effectively, which both enhances profitability and reduces therisk of losing customers to competitors.We have and will continue to experience competition for homebuilder business. Many of our competitors are predominantly small, privately ownedcompanies, local and regional materials distributors, single or multi-site lumberyards, and truss manufacturing and millwork operations. Many of thesecompanies have limited access to capital and lack sophisticated IT systems and large-scale procurement capabilities. We believe we have substantialcompetitive advantages over these smaller competitors due to our long-standing customer relationships, local market knowledge, integrated supply chainand competitive pricing. We also face competition from large national lumber and building materials companies. For example, our largest competitors in ourlocal markets often include one or more of 84 Lumber Co., Builders FirstSource, Inc., Carter Lumber Company and US LBM Holdings, LLC.5Some of our competitors are larger than we are and may have greater financial resources. These resources may afford those competitors greater purchasingpower, increased financial flexibility and more capital resources for expansion and improvement.EmployeesAt January 31, 2017, we had approximately 9,000 full-time equivalent employees, approximately 200 of whom were represented by unions. We believe thatwe have good relations with our employees.Seasonality and Other FactorsOur first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather patterns in some of ourmarkets, causing reduced construction activity. In addition, quarterly results historically have reflected, and are expected to continue to reflect, fluctuationsfrom period to period arising from the following factors, among others:•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.HistoryBMHC was created in 1987 and initially operated approximately 20 lumber and building materials distribution facilities located in the West. The companygrew primarily through acquisitions and expanded its footprint throughout the South and West regions of the United States.SBS’s predecessor was founded as Carolina Builders Corporation in Raleigh, North Carolina in 1922 and began operating under the Stock Building Supplyname in 2003. In addition, certain companies acquired by SBS were founded as early as 1822. On August 14, 2013, SBS completed its initial public offering("IPO").On December 1, 2015, BMHC and SBS completed the Merger, with SBS surviving the Merger. In connection with the Merger, SBS was renamed BMC StockHoldings, Inc.Intellectual PropertyWe possess an array of intellectual property rights, including patents, trademarks, trade names, proprietary technology and know-how and other proprietaryrights that are important to our brand and marketing strategy. In particular, we maintain registered trademarks for BMC® and Stock Building Supply® and theBMC and Stock Building Supply logos, Fortis® and Artrim®, two of our private label lines, and our Ready-Frame® system. In addition, we maintainregistered 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 ofour trademarks, we believe that our trademarks are important to the development and conduct of our business as well as the marketing of our products. Wevigorously protect all of our intellectual property rights.Regulation and LegislationWe 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, contractor licensing and fire codes. We strive to operate each of our distribution, manufacturing, retail and service facilities in accordancewith 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 broadadministrative powers with respect to our transportation operations. We are subject to safety requirements governing interstate operations prescribed by theDOT. Vehicle dimensions and driver hours of service also are subject to both federal and state regulation. Our operations are also subject to the regulatoryjurisdiction of the Occupational Safety and Health Administration ("OSHA"), which has broad administrative powers with respect to workplace and jobsitesafety. Our operators are also subject to state and federal labor laws regulating hours worked and compensation paid.6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 ofcontaminated properties, including off-site disposal locations. We have not incurred material costs in the past to comply with environmental laws andregulations. However, we could be subject to material costs, liabilities or claims relating to environmental compliance in the future, especially in the event ofchanges in existing laws and regulations or in their interpretation or enforcement.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 fromsuch properties, in some circumstances regardless of whether we knew of or caused such contamination. Our current expenditures with respect toenvironmental investigation and remediation at our facilities are immaterial, although no assurance can be provided that more significant investigation andremediation 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 currentlyunknown 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. Weconsult 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 issuedand/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 ensurematerial 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 materialadverse effect on our financial condition or operating results. However, there can be no assurance that such laws and regulations will not become morestringent 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 capitalexpenditures for environmental controls in fiscal year 2016 and do not anticipate material capital expenditures in this regard in fiscal year 2017.Available InformationWe are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, we file reports, proxystatements 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 statements and other information and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934 are, or will be, available through the investor relations section of our website under the links to “SEC Filings.” Ourinvestor relations Internet address is ir.buildwithbmc.com. Reports are available on our website free of charge as soon as reasonably practicable after weelectronically file them with, or furnish them to, the SEC. In addition, our directors and certain senior officers are required to file with the SEC initialstatements of beneficial ownership and statements of change in beneficial ownership of our securities, which are also available on our website at the samelocation. The information on the respective websites of the Company, its subsidiaries or affiliates is not, and shall not be deemed to be a part of this AnnualReport on Form 10-K or incorporated into any other filings the Company makes with the SEC. 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 SECmaintains an Internet site that contains our reports, proxy statements and other information that we electronically file with, or furnish to, the SEC atwww.sec.gov.7Item 1A. Risk FactorsRisks Related to Our BusinessThe industry in which we operate is dependent upon the homebuilding industry and repair and remodeling activity, the economy, the credit markets andother important factors.The building products supply and services industry is highly dependent on new single-family home construction, multi-family construction and repair andremodeling activity, which in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates, wage rates,foreclosure rates, housing inventory levels, housing demand, the availability of land, local zoning and permitting processes, the availability of constructionfinancing and the health of the economy and mortgage markets. Unfavorable changes in demographics, credit markets, consumer confidence, health carecosts, housing affordability, housing inventory levels, a weakening of the national economy or of any regional or local economy in which we operate andother factors beyond our control could adversely affect consumer spending, result in decreased demand for homes and adversely affect our business.The homebuilding industry underwent a significant downturn that began in mid-2006 and began to stabilize in late 2011. The downturn in the homebuildingindustry resulted in a substantial reduction in demand for our products and services, which in turn had a significant adverse effect on our business duringfiscal years 2007 through 2012. The U.S. Census Bureau reported approximately 782,000 single-family housing starts for 2016, which is an increase ofapproximately 9% from 2015, but still well below historical averages over the past 50 years. There is significant uncertainty regarding the timing and extentof any recovery in construction and repair and remodeling activity and resulting product demand levels. The positive impact of a recovery on our businessmay also be dampened to the extent the average selling price or average size of new single family homes decreases, which could cause homebuilders todecrease spending on our products and services.In addition, beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults, primarily as a result of credit qualitydeterioration. The disruption resulted in a stricter regulatory environment and reduced availability of mortgages for potential home buyers due to a tightcredit market and stricter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders, as well as for thedevelopment of new residential lots, continue to be constrained. As the housing industry is dependent upon the economy 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 inthe economy and the credit markets improve. 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 ofbusiness. We refer to the large homebuilders as “production homebuilders.” While we generate significant business from these homebuilders, our grossmargins 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 homebuildingrecovers if the market share held by the production homebuilders increases.Changes in federal income tax laws may also affect demand for new homes. Various proposals have been publicly discussed to limit mortgage interestdeductions and to limit the exclusion of gain from the sale of a principal residence. Enactment of such proposals may have an adverse effect on thehomebuilding industry in general. No meaningful prediction can be made as to whether any such proposals will be enacted and, if enacted, the particularform such laws would take. Because we have substantial fixed costs, relatively modest declines in our customers’ production levels could have a significantadverse effect on our financial condition, operating results and cash flows.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, andare generally expected to continue to be, adversely affected by weather patterns in some of our markets, causing reduced construction activity. To the extentthat hurricanes, severe storms, earthquakes, floods, fires, droughts, other natural disasters or similar events occur in the markets in which we operate, ourbusiness may be adversely affected.The building products supply and services industry is also subject to cyclical market pressures. Quarterly results historically have reflected, and are expectedto continue to reflect, fluctuations from period to period arising from the following factors, among others: the volatility of lumber prices; the cyclical natureof the homebuilding industry; general economic conditions in the markets in which we compete; the pricing policies of our competitors and the productionschedules of our customers.8Because we cannot immediately adapt our production capacity and related cost structures to rapidly changing market conditions, when demand is below ourexpectations, our manufacturing capacity will likely exceed our production requirements. If, during a general market upturn or an upturn in one of ourgeographic markets, we cannot increase our manufacturing capacity to meet product demand, we will not be able to fulfill orders in a timely manner, whichcould lead to order cancellations, contract breaches or indemnification obligations. This inability could materially and adversely limit our ability to improveour results. By contrast, if during an economic downturn we had excess manufacturing capacity, then our fixed costs associated with excess manufacturingcapacity could have a significant adverse effect on our financial condition, operating results and cash flows.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 nationalbuilding materials chains, as well as from privately-owned single site enterprises. Any of these competitors may (i) foresee the course of market developmentmore accurately than we do, (ii) provide superior service and sell superior products, (iii) have the ability to produce or supply similar products and services ata lower cost, (iv) develop stronger relationships with our customers, (v) adapt more quickly to new technologies or evolving customer requirements than wedo or (vi) develop a superior branch network in our markets. As a result, we may not be able to compete successfully with them. In addition, home centerretailers, which have historically concentrated their sales efforts on retail consumers and small contractors, may in the future intensify their marketing effortsto professional homebuilders. Furthermore, certain product manufacturers sell and distribute their products directly to production homebuilders. The volumeof such direct sales could increase in the future. Additionally, manufacturers and specialty distributors who sell products to us may elect to sell and distributedirectly to homebuilders in the future or enter into exclusive supplier arrangements with other distributors. Consolidation of production homebuilders mayresult 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 forus to compete effectively. If we are unable to compete effectively, our financial condition, operating results and cash flows may be adversely affected.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 othermanufacturers or distributors with prices and volumes determined frequently based on participants’ perceptions of short-term supply and demand factors. Ashortage of capacity or excess capacity in the industry can result in significant increases or declines in market prices for those products, often within a shortperiod of time.Prices of commodity products can also change as a result of national and international economic conditions, labor and freight costs, competition, marketspeculation, government regulation and trade policies, as well as from periodic delays in the delivery of lumber and other products. Short-term changes in thecost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers but our pricing quotation periods andpricing pressure from our competitors may limit our ability to pass on such price changes. For example, we frequently enter into extended pricingcommitments, 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 moreproducts 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 belimited in our ability to pass on increases in freight costs on our products due to the price of fuel.Some of our products are imported into the United States and may be subject to tariffs or import duties that may impact the price of the products and limittheir availability. Furthermore, the ongoing trade dispute between the United States and Canada following the expiration of the Softwood Lumber Agreementin 2015 could lead to increased volatility in prices of softwood lumber imported from Canada.Periods of generally increasing prices provide the opportunity for higher sales and increased gross profit (subject to the extended pricing commitmentsdescribed above), while generally declining price environments may result in declines in sales and profitability. In particular, low market prices for woodproducts over a sustained period can adversely affect our financial condition, operating results and cash flows, as can excessive spikes in market prices. Forthe year ended December 31, 2016, average composite framing lumber prices and average composite structural panel prices (a composite calculation basedon index prices for OSB and plywood) as reported by Random Lengths were approximately 5% and 1% higher, respectively, than the prior year. Our lumber& lumber sheet goods product category represented approximately 30% of net sales in 2016. If lumber or structural panel prices were to decline significantlyfrom current levels, our sales and profits would be negatively affected.9We are exposed to product liability, warranty, casualty, construction defect, contract, tort, employment and other claims and legal proceedings relatedto 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, employment and other claims relating to ourbusiness, 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 receive indemnification for such claims or were notadequately 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 risksrelating to the quality of such products. In addition, we are exposed to potential claims arising from the conduct of our employees, homebuilders and theirsubcontractors, and third-party installers for which we may be liable. We and they are subject to regulatory requirements and risks applicable to generalcontractors, which include management of licensing, permitting and quality of our third-party installers. If we fail to manage these processes effectively orprovide proper oversight of these services, we could suffer lost sales, fines and lawsuits, as well as damage to our reputation, which could adversely affect ourbusiness.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 thatwe will be able to maintain such insurance on acceptable terms or that such insurance will provide adequate protection against potential liabilities. Productliability, warranty, casualty, construction defect, contract, tort, employment and other claims can be expensive to defend and can divert the attention ofmanagement and other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact oncustomer confidence in our products and our Company. We cannot assure you that any current or future claims will not adversely affect our financialcondition, operating results and cash flows. We may be unable to maintain profitability or positive cash flows from operations.We have set goals to progressively improve our profitability over time by growing our sales, increasing our gross margin and reducing our expenses as apercentage of sales. For the fiscal year ended December 31, 2016, we had net income of $30.9 million and cash provided by operations of $106.9 million. Forthe fiscal year ended December 31, 2015, we had a net loss of $4.8 million and cash provided by operations of $0.7 million. There can be no assurance thatwe will achieve our profitability goals or continue to generate positive cash flow from operations. Factors that could significantly adversely affect our effortsto 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 togenerate historically;•achieve improvements in purchasing or maintain or increase our rebates from suppliers through our supplier consolidation and/or low-cost countryinitiatives;•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;•effectively evaluate future inventory reserves;•collect monies owed from customers;•maintain relationships with our significant customers;•integrate any businesses acquired; and•continue to successfully integrate BMHC and SBS.Any of these failures or delays may adversely affect our ability to maintain or increase our profitability.10Our indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in theeconomy or the industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under ourindebtedness.As of December 31, 2016, our total debt was $383.0 million, which includes obligations under the Senior Notes (excluding unamortized debt issuance costs),as discussed below, as well as obligations under capital leases and certain other notes. This leverage could have important consequences, including: makingit more difficult for us to satisfy our obligations with respect to our indebtedness; increasing our vulnerability to general adverse economic and industryconditions; requiring us to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cashflow to fund working capital, capital expenditures, research and development efforts, and other general corporate purposes; increasing our vulnerability toand limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; exposing us to the risk of increasedinterest rates as borrowings under certain of our indebtedness are subject to variable rates of interest; placing us at a competitive disadvantage compared toour competitors that have less debt; and limiting our ability to borrow additional funds.On September 15, 2016, we issued $350.0 million of senior secured notes (the "Senior Notes"). The Senior Notes are governed by an indenture datedSeptember 15, 2016 (the "Indenture"). A portion of the proceeds from the Senior Notes was used to redeem in full the $250.0 million of senior secured notesthat were issued by BMHC in September 2013 ("Extinguished Senior Notes"). This refinancing reduced our expected annual interest payments byapproximately $7 million.On December 1, 2015, in connection with the Merger, we entered into the Second Amended and Restated Senior Secured Credit Agreement with Wells FargoCapital Finance (the "Credit Agreement"), which includes a revolving line of credit (the “Revolver”). The Credit Agreement was amended on September 15,2016. The Revolver has a maximum availability of $375.0 million, subject to an asset borrowing formula based on eligible accounts receivable, credit cardreceivables and inventory. As of December 31, 2016, we had $274.3 million of unused borrowing capacity under our Revolver.We are substantially reliant on liquidity provided by our Credit Agreement and cash on hand to provide working capital and fund our operations. Ourworking capital and capital expenditure requirements are likely to grow as the housing market improves and we execute our strategic growth plan. Economicand credit market conditions, the performance of the homebuilding industry, and our financial performance, as well as other factors, may constrain ourfinancing abilities. Our ability to secure additional financing, if available, and to satisfy our financial obligations under indebtedness outstanding from timeto time will depend upon our future operating performance, the availability of credit, economic conditions and financial, business and other factors, many ofwhich are beyond our control. The worsening of current housing market conditions and the macroeconomic factors that affect our industry could require us toseek 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 financialobligations under our outstanding indebtedness. If additional funds are raised through the issuance of additional equity or convertible debt securities, ourstockholders may experience significant dilution. We may also incur additional indebtedness in the future, including collateralized debt, subject to therestrictions contained in the Credit Agreement and Indenture. If new debt is added to our current debt levels, the related risks that we now face couldintensify.The Credit Agreement and Indenture contain various covenants that could limit our ability to operate our business.The Credit Agreement and Indenture place limitations on our ability and the ability of our subsidiaries to, among other things, incur debt, create other lienson its assets, make investments, sell assets, pay dividends, undertake transactions with affiliates, enter into merger transactions and enter into unrelatedbusinesses. The Credit Agreement also contains a financial covenant requiring us and our subsidiaries to maintain a Fixed Charge Coverage Ratio, as definedtherein, of at least 1.00:1.00 at the end of any fiscal quarter during the period from the date that Excess Availability, as defined therein, under the CreditAgreement is less than or equal to the greater of (1) $33.3 million and (2) 10.0% of the Line Cap under the Credit Agreement until the date that ExcessAvailability has been greater than the greater of (i) $33.3 million and (ii) 10.0% of the Line Cap for a period of at least 30 consecutive days. The CreditAgreement and Indenture also contain various customary representations and warranties, financial and collateral reporting requirements and other affirmativeand negative covenants. Amounts owed under the Credit Agreement and Indenture may be accelerated and the lenders may exercise other remedies availableto them upon the occurrence of various events of default set forth in the Credit Agreement and Indenture, including the failure to make principal or interestpayments when due, breaches of covenants, representations and warranties set forth in the Credit Agreement and Indenture and defaults under other debtobligations. Acceleration of amounts owed under the Credit Agreement or the Indenture, or the exercise of other remedies available to holders of our debt,could materially and negatively impact our operating results, cash flows or financial condition.11Homebuilding activities in Texas, California and Georgia have a large impact on our results of operations because we conduct a significant portion ofour business in markets within these states.We presently conduct a significant portion of our business in Texas, California and Georgia, which represented approximately 33%, 13% and 13%,respectively, of 2016 total net sales. 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, many of 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 varietyof factors, including national economic conditions, local and state budget situations and the impact of cutbacks in federal spending and employment. Inaddition, the significant decline in oil prices in recent years may negatively impact home construction and remodeling activity in Texas (particularly in theHouston metropolitan area, which accounted for 12% of our 2016 total net sales) and other markets with significant employment in the energy sector. Such areduction in construction and remodeling activities could negatively impact our operating results in those markets in the future. If homebuilding activitydeclines in one or more of the markets in which we operate, our costs may not decline at all or at the same rate and therefore may negatively impact ouroperating results.Because our operations are currently concentrated in these areas, a prolonged economic downturn in the future in one or more of these areas or a particularindustry that is fundamental to one of these areas, particularly within Texas, could have a material adverse effect on our business, prospects, liquidity,financial condition and results of operations, and a disproportionately greater impact on us than other lumber and building material companies with morediversified operations. To the extent the oil and gas industries, which can be very volatile, are negatively impacted by declining commodity prices, climatechange, legislation or other factors, a result could be a reduction in employment, or other negative economic consequences, which in turn could adverselyimpact home sales and activities in Texas and certain of our other markets.Our continued success will depend on our ability to retain our key employees and to attract and retain new qualified employees, while controlling ourlabor 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 timecontrolling our labor costs. We face significant competition for these types of employees in our industry and from other industries. Labor shortages mayimpact our ability to hire skilled or unskilled workers with experience in carpentry, construction or fabrication. We may be unsuccessful in attracting andretaining the personnel we require to conduct and expand our operations successfully. In addition, key personnel, including sales force employees with keycustomer relationships, may leave us and compete against us. Our success also depends to a significant extent on the continued service of our seniormanagement team. Our officers and divisional vice presidents have experience in manufacturing, distribution, retail and homebuilding, and have beenintegral to our successful acquisition and integration of businesses to gain scale in our current markets. The loss of any member of our senior managementteam or other experienced, senior employees or sales force employees could impair our ability to execute our business plan, cause us to lose customers andreduce our net sales, or lead to employee morale problems and/or the loss of other key employees. In any such event, our financial condition, operatingresults and cash flows could be adversely affected.Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governingwages, regulations governing payment of workers on a "piece-work" or "piece-rate" basis, labor relations, healthcare benefits, and health and other insurancecosts. In addition, we compete with other companies for many of our employees in hourly and piece-rate positions, and we invest significant resources intraining and motivating them to maintain a high level of job satisfaction. These positions have historically had high turnover rates, which can lead toincreased training and retention costs. If we are unable to attract or retain highly qualified employees in the future, it could adversely impact our operatingresults.Product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, and our dependence on third-party suppliers andmanufacturers 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 othersuppliers. Generally, our products are obtainable from various sources and in sufficient quantities. Our ability to continue to identify and developrelationships with qualified suppliers who can satisfy our high standards for quality and our need to access products in a timely and efficient manner is asignificant challenge. Our ability to access products also can be adversely affected by the financial instability of suppliers (particularly in light of continuingeconomic difficulties in various regions of the United States and the world), suppliers’ noncompliance with applicable laws, tariffs and import duties, supplydisruptions, shipping interruptions or costs, and other factors beyond our control. The loss of, or a substantial decrease in the availability of, products fromour suppliers or the loss of key supplier arrangements could adversely impact our financial condition, operating results and cash flows.12Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on limited notice. Many of oursuppliers 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 ouroperating 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 suppliersmay result in work stoppages or slowdowns. 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 anticipatedbenefits 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 ouroperations to allow our employees to continue to provide high quality service to our customers, while simplifying customer interaction and providing ourcustomers with a more interconnected purchasing experience. The cost and potential problems and interruptions associated with the implementation of theseinitiatives, including those associated with managing third-party service providers and employing new web-based tools and services, could disrupt or reducethe 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 ITinfrastructure 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 orupgraded technology might not provide the anticipated benefits, it might take longer than expected to realize the anticipated benefits or the initiatives mightfail altogether.If the housing market declines, we may be required to take impairment charges relating to our operations or temporarily idle or permanently closeunder-performing locations.If conditions in the housing industry deteriorate, we may need to take goodwill and/or asset impairment charges. Any such non-cash charges would have anadverse effect on our financial results. In addition, in response to industry conditions, we may have to temporarily idle or permanently close certain facilitiesin under-performing regions. Any such facility closures could have a significant adverse effect on our financial condition, operating results and cash flows.We occupy many 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 afacility, we are still obligated under the applicable lease.Many 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 tenyears, 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 applicablelease, which would include, among other things, payment of the base rent, insurance, taxes and other expenses on the leased property for the balance of thelease term. The inability to terminate leases when idling a facility or exiting a geographic market can have a significant adverse impact on our financialcondition, operating results and cash flows.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 turncould 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 isas commercially viable, including access to rail service, as the lease we are unable to renew. For example, closing a facility, even during the time ofrelocation, will reduce the sales that the facility would have contributed to our revenues. Additionally, the revenue and profit, if any, generated at a relocatedfacility may not equal the revenue and profit generated at the existing one.We may be unable to effectively manage our inventory and working capital as our sales volume increases or material prices fluctuate, which couldhave 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 manufacturedand prefabricated products. We must maintain, and have adequate working capital to purchase, sufficient inventory to meet customer demand. Due to the leadtimes required by our suppliers, we order products in advance of expected sales. This requires us to forecast our sales and purchase accordingly. In periods ofgrowth, it can be especially difficult to forecast sales accurately. We must also manage our working capital to fund our inventory purchases. Excessive spikesin the market prices of certain building products, such as lumber, can put negative pressure on our operating cash flows by requiring us to invest more13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 maybe 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 economicstrength of the industry and geographic areas in which they operate, and the failure to collect or timely collect monies owed from customers couldadversely affect our financial condition.The majority of our net sales volume in fiscal 2016 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 solelyupon the creditworthiness of the customer, or secured credit for materials sold for a specific job where the security lies in lien rights associated with thematerial 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 thecustomer is involved. End users, resellers and other non-contractor customers generally purchase more on unsecured credit than secured credit. The inabilityof 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 affectcertain of our customers. Should one or more of our larger customers declare bankruptcy as has occurred in the past, it could adversely affect the collectabilityof 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 abilityto leverage such market share in the highly fragmented building products supply and services industry. The housing industry downturn resulted insignificantly increased pricing pressures from production homebuilders and other customers. Continued consolidation among homebuilders, and changes inhomebuilders’ purchasing policies or payment practices, could result in additional pricing pressure which could adversely affect our operating results andcash flows. Moreover, during the housing downturn, several of our homebuilder customers defaulted on amounts owed to us or extended their payable daysas 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 withcustomers, 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 toidentify and respond promptly to changes in demographics, consumer preferences, expectations, needs and weather conditions, while also managinginventory levels. For example, an increased consumer focus on making homes energy efficient could require us to offer more energy efficient buildingmaterials and there can be no assurance that we would be able to identify appropriate suppliers on acceptable terms. Failure to identify timely or effectivelyrespond to changing consumer preferences, expectations and building product needs could adversely affect our relationship with customers, the demand forour products and services and our market share.We may be unable to successfully implement 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 orthe expansion of existing facilities. Failure to identify and acquire suitable acquisition candidates on appropriate terms could have a material adverse effecton our growth strategy. Moreover, our reduced operating results during the housing downturn, our liquidity position or the requirements of the CreditAgreement could prevent us from obtaining the capital required to effect new acquisitions or expansions of existing facilities. Our failure to make successfulacquisitions or to build or expand facilities, including manufacturing facilities, produce saleable product or meet customer demand in a timely manner couldresult in damage to or loss of customer relationships, which could adversely affect our financial condition, operating results and cash flows.14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 safetyregulations promulgated by OSHA, employment regulations promulgated by the United States Equal Employment Opportunity Commission, regulations ofthe United States Department of Labor, federal and state environmental regulations, accounting standards issued by the Financial Accounting StandardsBoard or similar entities, and state and local zoning restrictions, building codes and contractors’ licensing regulations. More burdensome regulatoryrequirements in these or other areas may increase our general and administrative costs and adversely affect our financial condition, operating results and cashflows. Moreover, failure to comply with the regulatory requirements applicable to our business could expose us to litigation and/or substantial penalties thatcould 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 ourtransportation operations. More restrictive limitations on vehicle weight and size, trailer length and configuration, or driver hours of service would increaseour costs, which, if we are unable to pass these cost increases on to our customers, may increase our selling, general and administrative expenses andadversely affect our financial condition, operating results and cash flows. If we fail to comply adequately with DOT regulations or regulations become morestringent, we could experience increased inspections, regulatory authorities could take remedial action including imposing fines or shutting down ouroperations or we could be subject to increased audit and compliance costs. If any of these events were to occur, our financial condition, operating results andcash flows would be adversely affected.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 restrictivezoning and density requirements on our business or that limit the number of homes that can be built within the boundaries of a particular area. Regulatoryrestrictions may increase our operating expenses and limit the availability of suitable building lots for our customers, which could negatively affect our salesand earnings.Changes in legislation and government policy may have a material adverse effect on our business in the future.The recent presidential and congressional elections in the United States have resulted in uncertainty with respect to, and could result in significant changesin, legislation and government policy. Specific legislative and regulatory proposals discussed during and after the election that could have a material impacton us include, but are not limited to, reform of the federal tax code, modifications to international trade policy and increased regulation related to theemployment of foreign workers. Furthermore, proposals have been discussed regarding the imposition of new or additional taxes or tariffs on goods importedfrom abroad or the elimination of income tax deductibility of imported products. For the year ended December 31, 2016, we purchased between $195 millionand $215 million of inventory from outside of the United States.We are currently unable to predict whether reform discussions will meaningfully change existing legislative and regulatory environments relevant to ourbusiness, or if any such changes would favorably or unfavorably impact our business. To the extent that such changes have a negative impact on us or theindustries we serve, these changes may materially and adversely impact our business, financial condition, result of operations and cash flows.Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our financialperformance.We are subject to income and other taxes in the United States. We are subject to ongoing tax audits in various jurisdictions. We regularly assess the likelyoutcome of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict theoutcome of these audits, and the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in ourincome tax expense and therefore could have a material impact on our tax provision, net income and cash flows. In addition, our effective tax rate in thefuture could be adversely affected by changes to our operating structure, changes in the valuation of deferred tax assets and liabilities, changes in tax lawsand the discovery of new information in the course of our tax return preparation.As of December 31, 2016, we had a net deferred tax asset of $0.6 million. The carrying value of our deferred tax assets is dependent on our ability to generatefuture taxable income in the United States. In addition, there are proposals for tax legislation that have been introduced or that are being considered thatcould have a significant adverse effect on our tax rate or the carrying value of our deferred tax assets and liabilities. Any of these changes could affect ourfinancial performance.15We may not be able to utilize certain of our net operating loss carryforwards, which could harm our profitability.As of December 31, 2016, we had (i) approximately $88 million of net operating loss (“NOL”) carryforwards available to reduce U.S. federal taxable incomein future years and (ii) approximately $134 million of NOL carryforwards available to reduce state-level taxable income in future years. Under Section 382 ofthe Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its federal pre-change NOL carryforwards andother federal pre-change tax attributes to offset its post-change U.S. federal income taxes may be limited. In general, an “ownership change” occurs if there isa cumulative change in ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may applyunder state tax laws.Due to “ownership changes” from the Company’s prior periods, our ability to utilize NOL carryforwards is currently subject to limitation pursuant to the rulesdescribed above. However, future issuances or sales of our stock (including certain transactions involving our stock that are outside of our control) couldcause an additional “ownership change,” which would potentially result in further limitations upon our ability to utilize NOL carryforwards.The loss of any of our significant customers or a reduction in the quantity of products they purchase could affect our financial health.Our ten largest customers generated approximately 18% and 20% of our net sales for the years ended December 31, 2016 and 2015, respectively. We cannotguarantee that we will maintain or improve our relationships with these customers or that we will continue to supply these customers at historical levels. Dueto the weak housing market over the past several years in comparison to long-term averages, many of our homebuilder customers substantially reduced theirconstruction 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 distributionintermediaries in which they have an economic stake. Continued consolidation among production homebuilders could also result in a loss of some of ourpresent customers to our competitors. The loss of one or more of our significant customers or deterioration in our relations with any of them could adverselyaffect our financial condition, operating results and cash flows. Furthermore, our customers typically are not required to purchase any minimum amount ofproducts from us. The contracts into which we have entered with most of our professional customers typically provide that we supply particular products orservices for a certain period of time when and if ordered by the customer. Should our customers purchase our products in significantly lower quantities thanthey have in the past, such decreased purchases could 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. Anywidespread disruption to our facilities resulting from fire, earthquake, weather-related events, an act of terrorism or any other cause could damage asignificant portion of our inventory and could materially impair our ability to manufacture and distribute our products to customers. We could incursignificantly higher costs and longer lead times associated with distributing our products to our customers during the time that it takes for us to reopen orreplace a damaged facility. In addition, any shortages of fuel or significant fuel cost increases could disrupt our ability to distribute products to ourcustomers. Disruptions to the national or local transportation infrastructure systems, including those related to a domestic terrorist attack, may also affect ourability to keep our operations and services functioning properly. If any of these events were to occur, our financial condition, operating results and cash flowscould 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 StatesEnvironmental Protection Agency and analogous state agencies. As current and former owners, lessees and operators of real property, we can be held liablefor the investigation or remediation of contamination at or from such properties, in some circumstances irrespective of whether we knew of or caused suchcontamination. No assurance can be provided that investigation and remediation will not be required in the future as a result of spills or releases of petroleumproducts 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. More16burdensome environmental regulatory requirements may increase our costs and adversely affect our financial condition, operating results and cash flows.We may be adversely affected by any disruption in our information technology systems.Our operations are dependent upon our IT systems, which encompass all of our major business functions. A substantial disruption in our IT systems for anyprolonged 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 ourcustomer service and relationships. Our systems might be damaged or interrupted by natural or man-made events or by computer viruses, physical orelectronic break-ins, or similar disruptions affecting the global Internet. Such delays, problems or costs may have a material adverse effect on our financialcondition, 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 couldexpose us to a risk of loss or misuse of this information, litigation and potential liability. We may not have the resources or technical sophistication toanticipate or prevent rapidly evolving types of cyber-attacks. Any compromise of our security could result in a violation of applicable privacy and otherlaws, 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 applicableto 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 ourconfidential information, impede or interrupt our business operations, and may result in other negative consequences, including remediation costs, loss ofrevenue, litigation and reputational damage. To date, we have not experienced a material breach of cybersecurity. As cyber-attacks become moresophisticated generally, and as we implement changes giving customers greater electronic access to our systems, we may be required to incur significant coststo strengthen our systems from outside intrusions and/or maintain insurance coverage related to the threat of such attacks. While we have implementedadministrative and technical controls, purchased cyber insurance coverage and taken other preventive actions to reduce the risk of cyber incidents andprotect our IT, they may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems.Successful continued integration of BMHC and SBS and successful operation of the Company in the future are not assured. Also, integrating BMHC’sbusiness may divert the attention of management away from operations.There can be no assurance that we will be able to maintain and grow the continuing businesses and operations of the Company during, and following, theintegration of BMHC and SBS. In addition, the market segments in which the Company operates may experience declines in demand and/or new competitors.Integrating and coordinating certain aspects of the operations, portfolio of products and personnel of BMHC and SBS involves complex operational,technological and personnel-related challenges. This process has been and will continue to be time-consuming and expensive, may disrupt the business ofthe Company and may not result in the full benefits expected from the Merger, including cost synergies expected to arise from efficiencies and overlappinggeneral and administrative functions. The potential difficulties, and resulting costs and delays, include:•consolidating corporate and administrative infrastructures;•difficulties attracting and retaining key personnel;•loss of customers and suppliers and inability to attract new customers and suppliers;•issues in integrating information technology, communications and other systems;•incompatibility of purchasing, logistics, marketing, administration and other systems and processes; and•unforeseen and unexpected liabilities related to the Merger.Additionally, the continued integration of the Company’s operations, products and personnel may place a significant burden on management and otherinternal resources. The diversion of management’s attention, and any difficulties encountered in the transition and integration process, could harm ourbusiness, financial condition and operating results.Operation on multiple ERP information systems, and the conversion from multiple systems to a single system, may negatively impact our operations.The Company currently operates on multiple ERP systems, which we use for operations representing virtually all of our sales. Certain of our ERP systems areproprietary systems that have been highly customized by our computer programmers. We rely17upon our ERP systems to manage and replenish inventory, to fill and ship customer orders on a timely basis, to coordinate our sales and distribution activitiesacross all of our products and services and to provide information for financial reporting purposes.Processing, consolidating and reconciling information from multiple ERP systems increases the chance of error, and we may incur significant additional costsrelated thereto. In markets in which both Legacy SBS and Legacy BMHC stores operate, some orders and processes require manual input to consolidatepurchasing, inventory, sales and billing functions. Inconsistencies in the information from multiple ERP systems could adversely impact our ability tomanage our business efficiently and may result in heightened risk to our ability to maintain accurate books and records and comply with regulatoryrequirements.During 2013, BMHC selected a new third-party software vendor for its planned ERP ("New ERP") system and began incurring costs related to design,development and implementation of the New ERP. BMHC also began paying an annual licensing fee. During March 2016, the Company decided to integrateall operations under the ERP system utilized by Legacy SBS (the "Legacy SBS ERP system") and to discontinue the use of the New ERP. In connection withthis decision, we recorded asset impairment charges of $11.9 million in our consolidated statement of operations for the the year ended December 31, 2016.We remain obligated under a license agreement through 2017 related to the New ERP, which will require us to make future payments totaling approximately$2.0 million. We may be required to recognize these and other costs in our statements of operations once we cease using the New ERP.During 2016, the Company implemented the Legacy SBS ERP system at certain Legacy BMHC locations. If the remaining implementation of the LegacySBS ERP system across Legacy BMHC operations is not executed successfully, this could result in business interruptions and loss of customers. If we do notcomplete the remaining implementation timely and successfully, we may also incur additional costs associated with this project and a delay in our ability toimprove existing operations, to support future growth and to take advantage of new applications and technologies.Such projects are inherently complex, resource intensive, and lengthy. As a result, we could experience unplanned or unforeseen issues that could adverselyaffect the project, our business or our results of operations, including: •costs of implementation that materially exceed our expectations;•diversion of management’s attention away from normal daily business operations;•risk of incurring asset impairment charges, accelerated depreciation expense or other charges related to the early retirement of information systemassets or the early termination of information system supplier agreements;•increased demand on our operations support personnel;•delays in the go-live of one or more of the stages of the project, resulting in additional costs or time for completion;•errors in implementation resulting in errors in the commencement or reporting of business transactions;•failure in the deliverables of our key partners, suppliers and implementation advisors, resulting in an inferior product, reduced business efficacy andthe project not providing expected benefits;•loss of sales or customers as a result of errors in business transactions or delays in providing products or services;•deficiencies in the training of employees in the use of the new solution, resulting in errors in the recording of data or transactions, leading to delaysin input deliveries and production impairment;•a control failure during or post implementation, which may result in a material weakness in our internal controls over financial reporting; and•other implementation issues leading to delays and impacts on our business.Any of the foregoing could materially and negatively impact our operating results, cash flows or financial condition.Risks Related to Ownership of Our Common StockThe 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 paidfor them. The market price for our common stock could fluctuate significantly for various reasons, including but not limited to:•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 othercompanies in our industry;18•the failure of research analysts to cover our common stock;•general economic, industry and market conditions;•strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;•changes in accounting standards, policies, guidance, interpretations or principles;•material litigation or government investigations;•changes in general conditions in the United States and global economies or financial markets, including those resulting from war, incidents ofterrorism or responses to such events;•changes in key personnel;•sales of common stock by us, our principal stockholders or members of our management team;•the granting or exercise of employee stock options or other equity compensation;•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 impacton the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard tothe operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing todo with us and these fluctuations could materially reduce our share price.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 ourgrowth. In addition, our existing indebtedness restricts, and we anticipate our future indebtedness may restrict, our ability to pay dividends. Therefore, youmay not receive a return on your investment in our common stock by receiving a payment of dividends.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 ourcommon stock and could impair our ability to raise capital through the sale of additional shares. Our two largest stockholders, The Gores Group, LLC("Gores") and Davidson Kempner Capital Management LP ("DK"), own approximately 13.8 million of these shares, with approximately 7.4 million (11.1%) ofthese shares beneficially owned by Gores and approximately 6.4 million (9.6%) of these shares beneficially owned by DK.In connection with the Merger, we entered into a Registration Rights Agreement (the "Registration Rights Agreement") with Gores, DK and Robotti &Company Advisors, LLC (collectively the "Stockholder Group"). Under the Registration Rights Agreement, and subject to certain conditions and limitationsstated therein, we granted the Stockholder Group registration rights with respect to the shares of Company common stock held by such stockholders. Theserights include demand registration rights, shelf registration rights and “piggyback” registration rights, as well as customary indemnification provisions. Theregistration rights are subject to certain holdback and suspension periods. We generally will bear all fees, costs and expenses related to registrations, otherthan underwriting discounts and commissions attributable to the sale of registrable shares by the Stockholder Group under a demand registration or apiggyback registration, as applicable. Sales by the Stockholder Group of a substantial number of shares could significantly reduce the market price of ourcommon stock.There are 5.6 million shares authorized for issuance under the Stock Building Supply Holdings, Inc. 2013 Incentive Compensation Plan ("SBS 2013Incentive Plan"), all of which are registered. As of January 31, 2017, approximately 3.6 million of these shares were available for issuance, not includingshares underlying outstanding unvested restricted stock awards and restricted stock units ("RSUs") and outstanding vested and unvested stock options. Inaddition, as of January 31, 2017, there were issued and outstanding approximately (i) 0.1 million shares of nonvested stock, (ii) 0.3 million RSUs that convertinto common stock upon vesting, and (iii) 1.0 million options for the purchase of common stock under the SBS 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 publicmarket, the sales could reduce the trading price of our common stock.19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 offactors, 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 ofsecurities analysts and investors, our stock price could be negatively affected. Any volatility in our quarterly financial results may make it more difficult forus to raise capital in the future or pursue acquisitions that involve issuances of our stock. Our operating results for prior periods may not be effectivepredictors 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 tofluctuate, 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, mortgageavailability 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 us;•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 financialand other operating results, including fluctuations in our key metrics. The variability and unpredictability could result in our failing to meet our internaloperating 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 otherreasons, 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 compositionof our Board of Directors ("Board") and may discourage hostile takeover attempts.Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventingchanges 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 ouramended 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 thoseshares without stockholder approval;•stockholder action can only be taken at a special or regular meeting and not by written consent;•advance notice procedures for nominating candidates to our Board or presenting matters at stockholder meetings;•removal of directors only for cause;•allowing only our Board to fill vacancies on our Board; and•super-majority voting requirements to amend our amended and restated bylaws and certain provisions of our amended and restated certificate ofincorporation (the "Charter").Our Charter opts us out of being subject to Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”), an anti-takeover law. Ingeneral, Section 203 of the DGCL prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a personor 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 business20combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. However, our Charter contains anti-takeover provisions that are substantially similar in effect to Section 203 of the DGCL. The anti-takeover provisions in the Charter prohibit us from engagingin a business combination, such as a merger, with a person or group owning 15% or more of our voting stock for a period of three years following the date theperson became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became aninterested stockholder is approved in a prescribed manner. The Charter includes specified exceptions from anti-takeover provisions, which provide that (i) incertain circumstances (as described below), DK, Gores and their respective affiliates or associates (the “Grandfathered Stockholders”), and (ii) any person whowould otherwise be an interested stockholder because of a transfer, assignment, conveyance, hypothecation, encumbrance or other disposition of 5% or moreof our outstanding voting stock by any Grandfathered Stockholder to such person will be excluded from the “interested stockholder” definition in theCharter. At any time during the period beginning on the closing date of the Merger and ending on the third anniversary thereof, each GrandfatheredStockholder is permitted to own any amount less than 20% of our outstanding voting stock and will not be deemed an interested stockholder unless suchGrandfathered Stockholder’s ownership level meets or exceeds 20% of our outstanding voting stock during such three-year period. From and after the thirdanniversary of the closing date of the Merger, each Grandfathered Stockholder is permitted to continue owning its respective ownership amount that it owns,together with its affiliates and associates, on such anniversary and will not be deemed an interested stockholder unless such Grandfathered Stockholder’sownership level later exceeds such ownership amount of our outstanding voting stock. Moreover, each Grandfathered Stockholder, together with its affiliatesand associates, may reduce its ownership amount at any time from and after the third anniversary of the effective time of the Merger; provided that, if suchGrandfathered Stockholder reduces its ownership amount below the ownership amount of such Grandfathered Stockholder that exists on the third anniversaryof the effective time of the Merger, such Grandfathered Stockholder may not increase its ownership amount above such reduced amount; provided, further,that if such Grandfathered Stockholder reduces its ownership amount below 15% of our outstanding voting stock after the third anniversary of the effectivetime of the Merger, such Grandfathered Stockholder may own any amount of voting stock below 15% of our outstanding voting stock, in the case of each ofthe foregoing provisos, without being deemed an interested stockholder.While these provisions have the effect of encouraging persons seeking to acquire control of us to negotiate with our Board, they could enable the Board tohinder 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 ordiscourage 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 forstockholders 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 commonstock, 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 thenumber of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock couldbe issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delayor 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 andthe voting and other rights of the holders of our common stock.Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on ourbusiness and stock price.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 controlsystems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues andinstances of fraud will be detected.Ensuring that the Company has adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on atimely basis is a costly and time-consuming effort that needs to be reevaluated frequently. Implementing appropriate changes to the internal controls of theCompany may take a significant period of time to complete, may distract directors, officers and employees, and may entail substantial costs in order tomodify existing accounting systems.Additionally, the Company may experience material weaknesses or significant deficiencies in its internal control over financial reporting in the future. Anyfailure to maintain internal control over financial reporting could severely inhibit the Company’s ability to accurately report its cash flows, results ofoperations or financial condition. If the Company is unable to conclude that its internal21control over financial reporting is effective, or if its independent registered public accounting firm determines the Company has a material weakness orsignificant deficiency in its internal control over financial reporting, the Company could lose investor confidence in the accuracy and completeness of itsfinancial reports, the market price of its common stock could decline and the Company could be subject to sanctions or investigations by NASDAQ, the SECor other regulatory authorities. Failure to remedy any material weakness in the Company’s internal control over financial reporting, or to implement ormaintain other effective control systems required of public companies, could also restrict its future access to the capital markets and reduce or eliminate thetrading market for our common stock.If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and tradingvolume could decline.If we were to lose securities or industry analyst coverage of our Company, the trading price for our stock may be negatively impacted. If we maintain orobtain new or additional securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishesinaccurate 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 topublish 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 CommentsNone.22Item 2. PropertiesWe have a broad network of distribution and manufacturing operations across 150 facilities in 17 states throughout the eastern, southern and western UnitedStates. These branches are supported from our headquarters in Atlanta, Georgia and and our main operating center in Raleigh, North Carolina. Many of ouroperations are co-located within a single facility: we have 91 distribution operations, 50 millwork fabrication operations, 49 structural component fabricationoperations, and 12 flooring distribution operations. Distribution facilities generally include five to 25 acres of outside storage, a 30,000 to 60,000 square foot warehouse, office and product display space, and15,000 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 storesmillwork, doors and windows. The distribution facilities are usually located in industrial areas with low cost real estate and easy access to freeways tomaximize distribution efficiency and convenience. In most markets, at least one of the distribution facilities is situated on a rail line to facilitate theprocurement 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 andcustom millwork. In most cases, they are located on the same premises as our distribution facilities, which facilitates the efficient distribution of product tocustomers. Millwork fabrication operations typically vary in size from 5,000 to 50,000 square feet of warehouse space to accommodate fabrication lines andthe storage of base components and finished goods. Structural component fabrication operations vary in size from 20,000 to 50,000 square feet with five to25 acres of outside storage for lumber and for finished goods. As of January 31, 2017, we lease 94 facilities, including our corporate and branch support offices, and own 56 facilities. Many of our leases are non-cancellable and typically have an initial operating lease term of five to ten years and most provide options to renew for specified periods of time. A majorityof our leases provide for fixed annual rentals. Certain of our leases include provisions for escalating rent, as an example, based on changes in the consumerprice index. Most of the leases require us to pay taxes, insurance and maintenance expenses associated with the properties.Item 3. Legal ProceedingsWe are currently involved in various claims, legal proceedings and lawsuits incidental to the conduct of our business in the ordinary course. We are adefendant in various pending lawsuits, legal proceedings and claims arising from assertions of alleged product liability, warranty, casualty, constructiondefect, contract, tort, employment and other claims. We carry insurance in such amounts in excess of our self-insurance or deductibles as we believe to bereasonable 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 believethat 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 DisclosuresNot applicable.23PART IIItem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket Information for Common StockOur common stock is traded on the NASDAQ Stock Market under the symbol “BMCH”. The table below sets forth the high and low sales prices of ourcommon stock for the periods indicated: High Low2016 First quarter $17.06 $12.14Second quarter $19.99 $16.01Third quarter $21.50 $17.34Fourth quarter $20.15 $15.452015 First quarter $18.15 $13.58Second quarter $25.20 $16.47Third quarter $19.84 $17.05Fourth quarter $19.62 $14.45Holders of RecordAs of January 31, 2017, there were approximately 100 stockholders of record of our common stock. Because many of our shares of common stock are held bybrokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these record holders.Dividend PolicyWe 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 ourBoard and will depend upon our financial condition, earnings, contractual conditions, restrictions imposed by the Credit Agreement and Indenture orapplicable laws and other factors that our Board may deem relevant.Securities Authorized for Issuance Under Equity Compensation PlansFor information on securities authorized for issuance under our equity compensation plans, see "Item 12. Security Ownership of Certain Beneficial Ownersand Management."24Stock Performance GraphThe following graph shows a comparison from August 9, 2013 (the date trading commenced on our common stock on the NASDAQ) through December 31,2016 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).25Item 6. Selected Financial DataOn December 1, 2015, BMHC and SBS completed the Merger. As the Merger constituted a reverse acquisition for accounting purposes under generallyaccepted accounting principles in the United States, the historical financial statements of the Company reflect only the operations and financial condition ofBMHC. The operating results of SBS are reported as part of the Company beginning on the closing date of the Merger. The selected consolidated financialdata as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 have been derived from our audited consolidatedfinancial statements included as Item 8 of this Annual Report on Form 10-K. Selected consolidated financial data as of December 31, 2014, 2013 and 2012and for the years ended December 31, 2013 and 2012 were derived from BMHC's consolidated financial statements, which are not included herein. Earningsper share for the year ended December 31, 2012 was not previously presented in the consolidated financial statements of BMHC, but is included in the tablebelow for comparison purposes.The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" containedin 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 onForm 10-K: Year Ended December 31,(in thousands, expect per share data)2016 2015 2014 2013 2012Statement of operations data: Net sales$3,093,743 $1,576,746 $1,311,498 $1,210,156 $886,740Gross profit741,965 361,410 295,074 256,547 180,047Selling, general and administrative expenses571,799 306,843 229,316 200,588 173,382Net income (loss)30,880 (4,831) 94,032 21,655 (17,533)Net income (loss) per share - diluted$0.46 $(0.12) $2.39 $0.56 $(0.47) Statement of cash flows data: Net cash provided by (used in): Operating activities$106,888 $743 $30,732 $15,357 $(38,020)Investing activities(33,729) (135,076) (16,262) (63,999) 9,323Financing activities(65,331) 72,160 (424) 96,098 28,045 Other financial data: Depreciation and amortization$68,680 $24,589 $15,457 $13,767 $13,248Capital expenditures38,067 31,319 28,275 15,057 10,222 Balance sheet data (at period end): Total current assets$666,942 $613,960 $358,095 $323,262 $193,742Property and equipment, net of accumulateddepreciation286,741 295,978 140,435 122,930 105,083Total assets (1)1,395,014 1,371,139 581,853 459,805 320,513Total debt and capital lease obligations (includingcurrent portion) (1)376,563 426,840 263,449 257,276 150,929Total stockholders' equity680,601 628,932 179,078 82,229 56,057(1)Total assets and total debt and capital lease obligations (including current portion) reflect the reclassification of unamortized debt issuance costs related to the Company'ssenior secured notes from long-term assets to a reduction of long-term debt in connection with the Company's adoption of Accounting Standards Update 2015-03,Simplifying the Presentation of Debt Issuance Costs, during the first quarter of 2016. Accounting Standards Update 2015-03 is required to be applied retrospectively.Unamortized debt issuance costs reclassified as of December 31, 2015, 2014, 2013 and 2012 were $4.9 million, $6.7 million, $8.5 million and $0 million, respectively.26Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis should be read in conjunction with Item 6. “Selected Financial Data” and our consolidated financial statements andthe related notes to those statements included in Item 8. “Financial Statements and Supplementary Data.” The following discussion contains, in addition tohistorical information, forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from thoseanticipated in these forward-looking statements as a result of many factors, including those set forth under the heading Item 1A. “Risk Factors” andelsewhere in this report.OverviewOn December 1, 2015, SBS completed the Merger with privately-held BMHC in accordance with the terms of the Merger Agreement, pursuant to whichBMHC merged with and into SBS. SBS survived the Merger and in connection therewith changed its name to “BMC Stock Holdings, Inc.” The financialstatements represent the financial statements of BMC Stock Holdings, Inc. and its subsidiaries.Under generally accepted accounting principles in the United States, the Merger is treated as a “reverse merger” under the acquisition method of accounting.For accounting purposes, BMHC is considered to have acquired SBS. Consequently, the historical financial statements of the Company reflect only theoperations and financial condition of BMHC. The operating results of SBS are reported as part of the Company beginning on the closing date of the Merger.We are one of the nation's leading providers of diversified building products and services in the U.S. residential construction market. Our objective is toprovide best-in-class customer service and value-added products to our customers, which are primarily single- and multi-family home builders andprofessional remodelers. Our product offerings include lumber and lumber sheet goods and an array of value-added products including millwork, doors,windows, structural components (such as engineered wood products (“EWP”)), floor and roof trusses and wall panels. Our whole-house framing solution,Ready-Frame®, which is one of our fastest growing product offering, saves builders both time and money and improves job site safety. We also offer ourcustomers important services such as design, product specification, installation and installation management.The 17 states in which we operate accounted for approximately 63% of 2016 U.S. single-family housing permits according to the U.S. Census Bureau. Inthese 17 states, we operate in 42 metropolitan areas.Primarily as a result of the improving conditions in the residential construction market, the Merger and two acquisitions, our net sales for the year endedDecember 31, 2016 increased 96.2%. We estimate net sales increased 6.3% due to organic sales volume, 88.7% due to the Merger and acquisitions of VNSand RBI, and 1.2% due to commodity price inflation. Our gross margin was 24.0% for the year ended December 31, 2016 compared to 22.9% for the prioryear period. We recorded income from operations of $83.7 million during the year ended December 31, 2016, compared with $12.2 million during the yearended December 31, 2015. See further discussion in “-Operating Results” below.Factors Affecting Our Operating ResultsOur operating results and financial performance are influenced by a variety of factors, including, among others, acquisitions, conditions in the housingmarket 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.Merger and acquisitionsAs discussed above, on December 1, 2015, SBS completed the Merger with privately-held BMHC in accordance with the terms of the Merger Agreement,pursuant to which BMHC merged with and into SBS.On September 1, 2015, BMHC purchased certain assets and assumed certain liabilities of Marietta, Georgia-based RBI for a purchase price of $102.4 million.RBI has three locations in the Atlanta, Georgia area and sells millwork and window products to homebuilders and residential contractors.On May 1, 2015, BMHC completed the acquisition of Vidalia, Georgia-based VNS for a purchase price of $47.1 million. VNS has nine locations in southernGeorgia and sells building materials and provides construction services in the southeastern United States.27Net sales increased by approximately $1.4 billion for the year ended December 31, 2016 as a result of the Merger and acquisitions of RBI and VNS.Conditions in the housing and construction marketThe building products supply and services industry is highly dependent on new single-family home and multi-family construction and repair and remodelingactivity, which in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates, foreclosure rates, housinginventory 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. CensusBureau, single-family housing starts in 2014, 2015 and 2016 were 0.65 million, 0.71 million and 0.78 million, respectively, which was significantly less thanthe 50-year average rate of approximately 1.0 million. Single-family houses under construction as of December 31, 2014, 2015 and 2016 were 0.34 million,0.40 million and 0.43 million, respectively. There remains uncertainty regarding the timing and extent of any recovery in construction and repair andremodeling activity and resulting product demand levels. Many industry forecasters expect to see continued improvement in housing demand over the nextfew years. For example, as of October 2016, Dodge Data & Analytics (formerly McGraw-Hill) forecasted that U.S. single-family housing starts will increaseapproximately 9% in 2017. We believe there are several trends that indicate U.S. housing demand will likely recover in the long term and that the recentdownturn in the housing industry is likely a trough in the cyclical nature of the residential construction industry. We believe that these trends are supportedby positive economic and demographic indicators that are beginning to take hold in many of the markets in which we operate. These indicators, which webelieve are typically indicative of housing market strength, include declining unemployment rates, rising home values, increasing household formations anda favorable consumer interest rate environment supporting affordability and home ownership.Overall economic conditions in the markets where we operateEconomic 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 localeconomy in which we operate and other factors beyond our control could adversely affect consumer spending, result in decreased demand for homes andadversely affect our business. We believe continued employment growth, prospective home buyers’ access to financing and improved consumer confidencewill be necessary to increase household formation rates. We believe improved household formation rates in turn will increase demand for housing andstimulate new construction.Commodity nature of our productsMany of the building products we distribute, including lumber, OSB, plywood and particleboard, are commodities that are widely available from othermanufacturers or distributors with prices and volumes determined frequently based on participants’ perceptions of short-term supply and demand factors.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). These prices represent transactions between manufacturers and their customers as reported by Random Lengths and may differ inmagnitude or timing from the actual selling prices or cost of goods reported in our operating results. The average composite structural panel prices are basedon index prices for OSB and plywood. Year Ended December 31, 2016 Versus2015 2016AveragePrice 2015 Versus2014 2015AveragePrice 2014 Versus2013 2014AveragePriceChange in framing lumber prices 5% $346 (14)% $330 — % $383Change in structural panel prices 1% $370 (5)% $365 (10)% $385Periods of increasing prices provide the opportunity for higher sales and increased gross profit, while periods of declining prices may result in declines insales and profitability. In particular, low market prices for wood products over a sustained period can adversely affect our financial condition, operatingresults and cash flows, as can excessive spikes in market prices. For further discussion of the impact of commodity prices on historical periods, see “-Operating Results.”28Consolidation of large homebuildersOver the past ten years, the homebuilding industry has undergone consolidation and many larger homebuilders have increased their market share. We expectthat trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is onmaintaining relationships and market share with these customers while balancing the competitive pressures we face in our markets with certain profitabilityexpectations. We expect that our ability to maintain strong relationships with the largest builders will be vital to our ability to expand into new markets aswell 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 ourgross margins on sales to other market segments. This could impact our gross margins as homebuilding recovers if the market share held by the productionhomebuilders continues to increase.Our ability to control expensesWe pay close attention to managing our working capital and operating expenses. We employ a LEAN process operating philosophy, which encouragescontinuous improvement in our core processes to minimize waste, improve customer service, increase expense productivity, improve working capital andmaximize 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 across certain markets to improve customer serviceand improve productivity of our shipping and handling costs.Mix of products soldWe typically realize greater gross margins on more highly engineered and customized products, or ancillary products that are often purchased based onconvenience and are therefore less price sensitive to our customers. For example, sales of lumber & lumber sheet goods tend to generate lower gross marginsdue to their commodity nature and the relatively low switching costs of sourcing those products from different suppliers. Structural components andmillwork, doors & windows often generate higher gross profit dollars relative to other products. Homebuilders often use structural components in order torealize increased efficiency and improved quality. We believe shortening cycle time from start to completion is a key goal of homebuilders during periods ofstrong consumer demand or limited availability of framing labor. As the residential new construction market continues to strengthen, we expect the use ofstructural components by homebuilders to increase.Changes in customer sales mixOur operating results may vary according to the amount and type of products we sell to each of our primary customer types: new single-family homebuilders,remodeling contractors, and multi-family builders and light commercial builders. The following table reflects our estimate of net sales by each customer type: 2016 2015 2014(in thousands)Net Sales % of Sales % Changevs. 2015 Net Sales % of Sales % Changevs. 2014 Net Sales % of SalesSingle-family homebuilders$2,330,622 75.3% 85.1% $1,258,938 79.8% 20.4% $1,045,806 79.7%Remodeling contractors374,091 12.1% 176.7% 135,184 8.6% 17.4% 115,144 8.8%Other (including multi-family & lightcommercial builders)389,030 12.6% 113.0% 182,624 11.6% 21.3% 150,548 11.5%Total net sales$3,093,743 100.0% 96.2% $1,576,746 100.0% 20.2% $1,311,498 100.0%We tend to realize higher gross margins on sales to remodeling contractors due to the smaller product volumes purchased by those customers, as well as themore customized nature of the projects those customers generally undertake. Gross margins on sales to single-family, multi-family and light commercialcustomers can vary based on a variety of factors, including the purchase volumes of the individual customer, the mix of products sold to that customer, thesize and selling price of the project being constructed and the number of upgrades added to the project before or during its construction. 29Freight costs and fuel chargesA 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 InformationAdministration, the average retail price per gallon for No. 2 diesel fuel was $2.31, $2.71 and $3.83 for the years ended December 31, 2016, 2015 and 2014,respectively. For the year ended December 31, 2016, we incurred costs of approximately $12.4 million within selling, general and administrative expenses fordiesel 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 cashflows if we are unable to pass along these cost increases to our customers through increased prices.Operating ResultsThe following tables set forth our operating results in dollars and as a percentage of net sales for the periods indicated: Year Ended December 31,(in thousands) 2016 2015 2014Net sales $3,093,743 100.0 % $1,576,746 100.0 % $1,311,498 100.0 %Cost of goods sold 2,351,778 76.0 % 1,215,336 77.1 % 1,016,424 77.5 %Gross profit 741,965 24.0 % 361,410 22.9 % 295,074 22.5 %Operating expenses: Selling, general and administrativeexpenses 571,799 18.5 % 306,843 19.5 % 229,316 17.5 %Depreciation expense 38,441 1.2 % 15,700 1.0 % 11,492 0.9 %Amortization expense 20,721 0.7 % 3,626 0.2 % — 0.0 %Impairment of assets 11,928 0.4 % — 0.0 % 134 0.0 %Merger and integration costs 15,340 0.5 % 22,993 1.5 % — 0.0 %Income from operations 83,736 2.7 % 12,248 0.8 % 54,132 4.1 %Other income (expenses) Interest expense (30,131) (1.0)% (27,552) (1.7)% (27,090) (2.1)%Loss on debt extinguishment (12,529) (0.4)% — 0.0 % — 0.0 %Other income, net 4,070 0.1 % 784 0.0 % 1,413 0.1 %Income (loss) before income taxes 45,146 1.5 % (14,520) (0.9)% 28,455 2.2 %Income tax expense (benefit) 14,266 0.5 % (9,689) (0.6)% (65,577) (5.0)%Net income (loss) $30,880 1.0 % $(4,831) (0.3)% $94,032 7.2 %2016 compared to 2015Net salesFor the year ended December 31, 2016, net sales increased $1,517.0 million, or 96.2%, to $3,093.7 million from $1,576.7 million during the year endedDecember 31, 2015. The increase in net sales was driven primarily by increased volume of approximately 6.3% related to existing operations and 88.7%related to the Merger and acquisitions of VNS and RBI, while the impact of commodity price inflation increased net sales by approximately 1.2%. Weestimate approximately 75% of our net sales for the year ended December 31, 2016 were to customers engaged in new single-family construction. Accordingto the U.S. Census Bureau, single-family housing starts increased approximately 9.4% for the year ended December 31, 2016 as compared to the prior year,while single-family houses completed increased 14.0% during the same time period.30The following table shows net sales classified by major product category: 2016 2015 (in thousands) Net Sales % of Sales Net Sales % of Sales % ChangeStructural components $471,619 15.2% $249,371 15.8% 89.1%Lumber & lumber sheet goods 921,304 29.8% 459,446 29.1% 100.5%Millwork, doors & windows 898,769 29.1% 442,675 28.1% 103.0%Other building products & services 802,051 25.9% 425,254 27.0% 88.6%Total net sales $3,093,743 100.0% $1,576,746 100.0% 96.2%Cost of goods soldFor the year ended December 31, 2016, cost of goods sold increased $1,136.4 million, or 93.5%, to $2,351.8 million from $1,215.3 million during the yearended December 31, 2015. We estimate our cost of sales increased approximately 92.1% as a result of the Merger and acquisitions of VNS and RBI, whileorganic change accounted for an increase of 1.4%. Cost of goods sold for the years ended December 31, 2016 and 2015 includes $2.9 million and $10.3million, respectively, of expense incurred in relation to the sell-through of Legacy SBS inventory which was stepped up in value in connection with theMerger.Gross profitFor the year ended December 31, 2016, gross profit increased $380.6 million, or 105.3%, to $742.0 million from $361.4 million for the year endedDecember 31, 2015, driven primarily by the Merger and the acquisitions of VNS and RBI, as well as increased sales volumes. Our gross margin was 24.0% forthe year ended December 31, 2016 and 22.9% for the year ended December 31, 2015. This increase was primarily driven by a higher percentage of total netsales being derived from millwork, doors & windows, which generally are sold at a higher gross margin than our other products categories, as well asincreased consideration from supplier agreements.Operating expensesFor the year ended December 31, 2016:•selling, general and administrative expenses increased $265.0 million, or 86.3%, to $571.8 million, or 18.5% of net sales, from $306.8 million, or19.5% of net sales, for the year ended December 31, 2015, primarily as a result of the Merger and acquisitions of VNS and RBI.•depreciation expense increased $22.7 million, or 144.8%, to $38.4 million from $15.7 million during the year ended December 31, 2015, primarilyas a result of fixed assets acquired through the Merger and acquisitions of VNS and RBI, as well as replacements and additions of delivery fleet,material handling equipment and operating equipment.•amortization expense was $20.7 million compared to $3.6 million in the prior year. The amortization expense recognized for the year endedDecember 31, 2016 relates to intangible assets acquired through the Merger and acquisitions of VNS and RBI.•the Company recognized asset impairment charges of $11.9 million. During the first quarter of 2016, the Company decided to integrate alloperations under the Legacy SBS ERP system, and to discontinue use of the New ERP (see Note 6 to the consolidated financial statements includedin Item 8 of this Annual Report on Form 10-K for further description of the New ERP). In connection with this decision, the Company impairedcapitalized software costs that had previously been recorded as construction-in-progress within property and equipment on the consolidated balancesheets.•the Company incurred $15.3 million of Merger and integration costs related to the ongoing integration of BMHC and SBS, consisting primarily ofseverance, system integration costs and professional fees compared to $23.0 million for the year ended December 31, 2015.Interest expenseFor the year ended December 31, 2016, interest expense was $30.1 million compared to $27.6 million for the year ended December 31, 2015. This increaserelates primarily to SBS borrowings that were assumed by the Company as of the date of the31Merger and borrowings used to fund the acquisition of RBI. This increase was partially offset by reduced borrowing levels on the Revolver after repayingapproximately $74 million of Revolver borrowings from proceeds received from the Company's refinancing of its Senior Notes in September 2016. Non-cashamortization of debt issuance costs, which is included in interest expense, was $3.1 million and $2.5 million for the years ended December 31, 2016 and2015, respectively.Loss on debt extinguishmentFor the year ended December 31, 2016, the Company incurred a loss on debt extinguishment of $12.5 million related to the redemption of the ExtinguishedSenior Notes. The loss is made up of a call premium of $8.4 million and the write off of unamortized debt issuance costs and original issue discount of $4.1million.Other income, netFor the year ended December 31, 2016, other income, net increased $3.3 million compared to the year ended December 31, 2015. Approximately $1.9 millionof this increase was due to insurance proceeds received during the year ended December 31, 2016 related to a fire at one of the Company's facilities during2015. The remaining increase relates primarily to service charges assessed on past due accounts receivable for Legacy SBS operations.Income taxFor the year ended December 31, 2016, income tax expense was $14.3 million compared to income tax benefit of $9.7 million for the year endedDecember 31, 2015. The effective tax rate for the year ended December 31, 2016 was 31.6% compared to 66.7% for the year ended December 31, 2015. Forthe year ended December 31, 2016, the Company's effective tax rate was lower than the Company's federal and state statutory rates primarily due to theadoption of a state tax position related to Internal Revenue Code ("IRC") section 382 limitations on a state net operating loss carryforward, excess windfalltax benefits of stock compensation deductions, and an IRC section 199 manufacturing deduction. For the year ended December 31, 2015, the Company'seffective tax rate was higher than the Company's federal and state statutory rates primarily due to adopting a tax position related to IRC section 382limitations on its federal and state net operating loss carryforwards and other built-in losses.2015 compared to 2014Net salesFor the year ended December 31, 2015, net sales increased $265.2 million, or 20.2%, to $1,576.7 million from $1,311.5 million during the year endedDecember 31, 2014. The increase in net sales was driven primarily by increased volume of approximately 7.0% related to existing operations and 17.9%related to the Merger and acquisitions of VNS and RBI, while the impact of commodity price deflation decreased net sales by approximately 5.0%. Weestimate approximately 80% of our net sales for the year ended December 31, 2015 were to customers engaged in new single-family construction. Accordingto the U.S. Census Bureau, single-family housing starts increased approximately 10.3% for the year ended December 31, 2015 as compared to the prior year,while single-family houses completed increased 4.5% during the same time period.The following table shows net sales classified by major product category: 2015 2014 (in thousands) Net Sales % of Sales Net Sales % of Sales % ChangeStructural components $249,371 15.8% $205,036 15.6% 21.6%Lumber & lumber sheet goods 459,446 29.1% 428,084 32.6% 7.3%Millwork, doors & windows 442,675 28.1% 328,063 25.0% 34.9%Other building products & services 425,254 27.0% 350,315 26.8% 21.4%Total net sales $1,576,746 100.0% $1,311,498 100.0% 20.2%Cost of goods soldFor the year ended December 31, 2015, cost of goods sold increased $198.9 million, or 19.6%, to $1,215.3 million from $1,016.4 million during the yearended December 31, 2014. We estimate our cost of sales increased approximately 18.6% as a result of the Merger and acquisitions of VNS and RBI, whileorganic change accounted for an increase of 1.0%.32Gross profitFor the year ended December 31, 2015, gross profit increased $66.3 million, or 22.5%, to $361.4 million from $295.1 million for the year endedDecember 31, 2014, driven primarily by increased sales volumes, the Merger and the acquisitions of VNS and RBI. Our gross margin was 22.9% for the yearended December 31, 2015 and 22.5% for the year ended December 31, 2014. This increase was primarily driven by a higher percentage of total net salesbeing derived from non-commodity product offerings.Operating expensesFor the year ended December 31, 2015:•selling, general and administrative expenses increased $77.5 million, or 33.8%, to $306.8 million, or 19.5% of net sales, from $229.3 million, or17.5% of net sales, for the year ended December 31, 2014. Approximately $43.9 million of this increase related to the operations of Legacy SBS,VNS and RBI, while $33.6 million related to Legacy BMC existing operations. The increase in SG&A related to Legacy BMC existing operationswas driven primarily by higher salary, wage, benefit and other variable costs to serve higher sales volume, increased insurance costs, headquartersrelocation costs and third party costs associated with the acquisitions of VNS and RBI.•depreciation expense increased $4.2 million, or 36.6%, to $15.7 million from $11.5 million during the year ended December 31, 2014, primarily as aresult of fixed assets acquired through the Merger and acquisitions of VNS and RBI, as well as replacements and additions of delivery fleet, materialhandling equipment and operating equipment.•amortization expense was $3.6 million compared to $0 in the prior year. The amortization expense recognized in 2015 relates to intangible assetsacquired through the Merger and acquisitions of VNS and RBI.•the Company incurred $23.0 million of Merger and integration costs which primarily included third-party advisory, legal, accounting and otherprofessional fees and severance costs.Interest expenseFor the year ended December 31, 2015, interest expense was $27.6 million compared to $27.1 million for the year ended December 31, 2014. This increaserelates primarily to borrowings on BMHC's Revolver (the "BMHC Revolver") used to fund the purchase of RBI in September 2015.Income taxFor the year ended December 31, 2015, income tax benefit was $9.7 million compared to $65.6 million for the year ended December 31, 2014. The effectivetax rate for the year ended December 31, 2015 was 66.7% compared to (230.5)% for the year ended December 31, 2014. The change in the tax rate isprimarily due to the release of valuation allowance against deferred tax assets of $75.2 million creating a tax rate decrease of 267.6% during 2014, and anincrease in income tax benefit of $8.1 million during 2015 related to the adoption of a tax position involving change of control limitations on the Company'sfederal and state net operating loss carry-forwards and other built-in losses under IRC section 382.Liquidity and Capital ResourcesOur primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments and fund capitalexpenditures. During 2016 and 2015, our capital resources have primarily consisted of cash and cash equivalents generated through operating cash flows,proceeds from the September 2016 issuance of the Senior Notes, borrowings under our Revolver and, prior to the Merger, the BMHC Revolver.Our liquidity at December 31, 2016 was $283.2 million, which includes $8.9 million in cash and cash equivalents and $274.3 million of unused borrowingcapacity 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 debtservice requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital for at leastthe next 12 months.33Historical Cash Flow InformationNet current assetsNet current assets (current assets less current liabilities) were $364.1 million and $335.7 million as of December 31, 2016 and 2015, respectively, assummarized in the following table:(in thousands) December 31, 2016 December 31, 2015Cash and cash equivalents $8,917 $1,089Accounts receivable, net of allowances 313,304 303,176Inventories, net 272,276 243,960Other current assets 70,008 54,345Income taxes receivable 2,437 11,390Accounts payable, accrued expenses and other current liabilities (291,657) (268,178)Current portion of long-term debt and capital lease obligations (11,155) (10,129)Total net current assets $364,130 $335,653Accounts receivable, net, increased $10.1 million from December 31, 2015 to December 31, 2016 primarily due to increases in sales. Days sales outstanding(measured against net sales in the fourth quarter of each period and including pre-acquisition sales of Legacy SBS for the fourth quarter of 2015) werematerially consistent at 37 days at December 31, 2015 and 38 days at December 31, 2016.Inventories, net, increased $28.3 million from December 31, 2015 to December 31, 2016 and inventory days on hand (measured against cost of goods sold inthe fourth quarter of each period and including pre-acquisition cost of goods sold of Legacy SBS for the fourth quarter of 2015) increased from 39 days atDecember 31, 2015 to 43 days at December 31, 2016, primarily due to increases in sales, commodity price inflation and strategic inventory purchases ofcertain products.Other current assets, which include prepaid expenses and other current assets and costs in excess of billings on uncompleted contracts, increased $15.7million from December 31, 2015 to December 31, 2016. This increase relates primarily to increases in rebates due from vendors as a result of increasedinventory purchases, as well as an increase in costs in excess of billings as a result of higher sales volume.Income taxes receivable decreased $9.0 million from December 31, 2015 to December 31, 2016 due primarily to an increase in income before taxes andunfavorable temporary differences between net income and taxable income related to fixed assets during 2016.Accounts payable, accrued expenses and other current liabilities increased $23.5 million from December 31, 2015 to December 31, 2016 primarily due to anincrease in accounts payable related to increased inventory purchases in connection with higher sales volume and the alignment of purchase terms betweenthe Legacy BMHC and Legacy SBS suppliers.34Cash flows from operating activitiesNet cash provided by operating activities was $106.9 million, $0.7 million and $30.7 million for the years ended December 31, 2016, 2015 and 2014,respectively, as summarized in the following table: Year Ended December 31,(in thousands) 2016 2015 2014Net income (loss) $30,880 $(4,831) $94,032Loss on debt extinguishment 12,529 — —Impairment of assets 11,928 — 134Change in deferred income taxes (3,571) (5,892) (70,492)Other non-cash expenses 79,629 39,895 20,597Change in working capital and other assets and liabilities (24,507) (28,429) (13,539)Net cash provided by operating activities $106,888 $743 $30,732Net cash provided by operating activities increased by $106.1 million for the year ended December 31, 2016 as compared to the year ended December 31,2015 primarily due to the following:•Net income (loss) increased by $35.7 million as discussed in “Operating Results” above.•The Company recognized a loss on debt extinguishment of $12.5 million in relation to the redemption of the Extinguished Senior Notes asdiscussed in "Operating Results" above.•The Company recognized asset impairment charges of $11.9 million during the year ended December 31, 2016 related to the New ERP as discussedin "Operating Results" above.•Other non-cash expenses increased by $39.7 million primarily as a result of increases in depreciation and amortization as discussed in "OperatingResults" above.•Change in deferred income taxes declined by $2.3 million due primarily to temporary book and tax basis difference changes in our fixed assetsrelated to current year book over tax depreciation expense.•Cash outflows from changes in working capital and other assets and liabilities relate primarily to year-over-year increases in accounts receivable andinventory in relation to higher sales volume, offset by increases to accounts payable.Net cash used in operating activities declined by $30.0 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014primarily due to the following:•Net income (loss) declined by $98.9 million as discussed in “Operating Results” above.•Non-cash expenses increased by $19.3 million primarily as a result of increases in depreciation and amortization expense, which was drivenprimarily by fixed assets and intangible assets acquired through the Merger and acquisitions of VNS and RBI.•Change in deferred income taxes declined by $64.6 million due primarily to the reversal of $75.2 million of valuation allowance against deferredtax assets during 2014 and the Company's adoption of a tax position related to IRC section 382 limitations, which increased its deferred tax assetsby $8.1 million during 2015.•Cash outflows from changes in working capital and other assets and liabilities relate primarily to year-over-year increases in accounts receivable andinventory in relation to higher sales volume, offset by increases to accounts payable.35Cash flows from investing activitiesNet cash used in investing activities was $33.7 million, $135.1 million and $16.3 million for the years ended December 31, 2016, 2015 and 2014,respectively, as summarized in the following table: Year Ended December 31,(in thousands) 2016 2015 2014Purchases of property, equipment and real estate $(38,067) $(31,319) $(28,275)Insurance proceeds 1,151 — —Cash acquired in the Merger — 6,342 —Purchases of businesses, net of cash acquired — (149,485) (236)Change in restricted assets — 36,106 10,326Other investing activities 3,187 3,280 1,923Net cash used in investing activities $(33,729) $(135,076) $(16,262)Cash used for the purchase of property, equipment and real estate for the years ended December 31, 2016, 2015 and 2014 resulted primarily from the purchaseof vehicles and equipment to support increased sales volume and replace aged assets, and facility and technology investments to support our operations.During the year ended December 31, 2016, the Company received insurance proceeds related to a fire at one of the Company's facilities during 2015, ofwhich $1.2 million related to property, plant and equipment damaged in the fire.Cash acquired in the Merger of $6.3 million represents cash and cash equivalents of SBS on the closing date of the Merger.Cash used for purchases of businesses in 2015 relates to the acquisition of VNS for $47.1 million on May 1, 2015 and the acquisition of RBI for $102.4million on September 1, 2015.During 2013, BMHC deposited $46.4 million in a separate bank account to collateralize letters of credit related to insurance claims for periods prior toJanuary 2010. During 2014 and 2015, BMHC was able to release the majority of these amounts into unrestricted cash as a result of reductions in claims andthe transfer of the risk of loss of certain claims to a reinsurer in January 2015. In connection with the Credit Agreement entered into on December 1, 2015, theCompany was able to release the remaining cash collateral into unrestricted cash.Other investing activities relates primarily to proceeds from sale of property, equipment and real estate.Cash flows from financing activitiesNet cash (used in) provided by financing activities was $(65.3) million, $72.2 million and $(0.4) million for the years ended December 31, 2016, 2015 and2014, respectively, as summarized in the following table: Year Ended December 31,(in thousands) 2016 2015 2014Proceeds from issuance of Senior Notes $350,000 $— $—Redemption of Extinguished Senior Notes (250,000) — —Net (repayments of) proceeds from Revolver (152,260) 84,546 —Proceeds from issuance of common stock, net of offering costs 13,776 — —Payments of debt issuance costs (7,011) (3,567) (10)Payments of debt extinguishment costs (8,438) — —Payments on capital leases and other notes (12,103) (10,623) (9,812)Borrowings under other notes — 2,491 9,991Other financing activities, net 705 (687) (593)Net cash (used in) provided by financing activities $(65,331) $72,160 $(424)36During September 2016, the Company completed an issuance of $350.0 million of Senior Notes and utilized a portion of the cash proceeds from the issuanceto redeem in full the $250.0 million Extinguished Senior Notes. The Company incurred $6.7 million of debt issuance costs related to the Senior Notes, andpaid a call premium of $8.4 million related to the Extinguished Senior Notes. The debt issuance costs incurred during 2015 relate primarily to third-party andlender costs incurred in relation to the Credit Agreement.The Company made net repayments of $152.3 million on the Revolver during the year ended December 31, 2016. Approximately $74 million of thisrepayment was funded through net proceeds from the September 2016 Senior Notes issuance, after payment of accrued interest, debt issuance costs and thecall premium. Proceeds from the Revolver, net of repayments, of $84.5 million for the year ended December 31, 2015 relates primarily to amounts borrowedto purchase RBI in September 2015, as well as purchases of property and equipment. No amounts were borrowed under the Revolver for the year endedDecember 31, 2014.During May 2016, the Company commenced a public offering of 5,700,000 shares of its common stock by certain stockholders. In connection with theoffering, the Company granted the underwriters an option to purchase up to an additional 855,000 shares of common stock. The underwriters exercised thisoption, which generated gross proceeds of $14.5 million and net proceeds of $13.8 million, after subtracting $0.7 million of underwriting commissions andother fees.Payments on capital leases and other notes increased during the year ended December 31, 2016 compared to the years ended December 31, 2015 and 2014due primarily to payments on Legacy SBS capital leases assumed through the Merger and new financing of delivery and handling equipment to supporthigher sales volumes.Borrowings under other notes for the years ended December 31, 2015 and 2014 relate to long-term notes secured by delivery and handling equipment withvarious maturities through April 2019 and a term note secured by real property, which matures in March 2021. No such borrowings were made during the yearended December 31, 2016.Other financing activities, net consist primarily of net repayments of secured borrowings, proceeds from stock option exercises and purchases of treasurystock in connection with shares withheld on vesting and exercises of equity awards.Capital expendituresCapital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. We expect our 2017 capitalexpenditures to be approximately $60.0 million to $70.0 million (including the incurrence of capital lease obligations) primarily related to vehicles andequipment, including lease buyouts, and facility and technology investments to support our operations.Revolving credit agreementOn December 1, 2015, in connection with the Merger, the Company entered into the Credit Agreement with Wells Fargo Capital Finance, as administrativeagent, and certain other lenders. The Credit Agreement, which includes the Revolver, was amended on September 15, 2016 when the Company entered intothe Second Amendment. The Second Amendment decreased the maximum availability from $450.0 million to $375.0 million and increased the amount thatmay be used for issuance of letters of credit from $75.0 million to $100.0 million. The Revolver matures at the earlier of (i) December 1, 2020 and (ii) the datethat is three months prior to the maturity of the Senior Notes, or if the Senior Notes are refinanced or repaid, the date that is three months prior to the newmaturity date of the replacement notes or other indebtedness that replaced or refinanced the Senior Notes. The Revolver is subject to an asset-basedborrowing formula on eligible accounts receivable, credit card receivables and inventory, in each case reduced by certain reserves. We were in compliancewith all debt covenants for the year ended December 31, 2016.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%, (ii) theLIBOR rate plus 1.0% or (iii) the prime rate) plus a Base Rate Margin (which ranges from 0.25% to 0.75% based on Revolver availability) or LIBOR plus aLIBOR Rate Margin (which ranges from 1.25% to 1.75% based on Revolver availability).The fee on any outstanding letters of credit issued under the Revolver ranges from 0.75% to 1.25%, depending on whether the letters of credit are fully cashcollateralized. The fee on the unused portion of the Revolver is 0.25%. The Credit Agreement contains customary nonfinancial covenants, includingrestrictions on new indebtedness, issuance of liens, investments, distributions to equityholders, asset sales and affiliate transactions. The Credit Agreementincludes a financial covenant that requires us to maintain a minimum Fixed Charge Coverage Ratio of 1.00:1:00, as defined therein. However, the covenantis only applicable if excess availability under the Credit Agreement is less than or equal to the greater of (1) $33.3 million and (2) 10% of the line cap, and37remains in effect until excess availability has been greater than the greater of (1) $33.3 million and (2) 10% of the line cap for 30 consecutive days. Whilethere can be no assurances, based upon our forecast, we do not expect the financial covenant to become applicable during the year ended December 31, 2017.Obligations under the Credit Agreement are guaranteed by our material subsidiaries. Obligations under the Credit Agreement, and the guarantees of thoseobligations, are secured by substantially all of our assets and those of the guarantors, subject to certain exceptions and permitted liens, including a first-priority security interest in certain accounts receivable, inventory and certain other assets of the Company and a second-priority security interest insubstantially all other assets of the Company that secure the Senior Notes on a first-priority basis.We had no outstanding borrowings under the Revolver as of December 31, 2016. We had $70.3 million in letters of credit outstanding under the CreditAgreement as of December 31, 2016.Senior secured notesOn September 15, 2016, the Company issued $350.0 million of Senior Notes under an unregistered private placement not subject to the registrationrequirements of the Securities Act. The Senior Notes mature on October 1, 2024 and are secured by a first priority lien on certain assets of the Company and asecond priority lien on the collateral that secures the Credit Agreement on a first-priority basis, which collectively approximates substantially all assets of theCompany, subject to certain exceptions and permitted liens. The interest rate is fixed at 5.5% and is payable semiannually on April 1 and October 1,beginning on April 1, 2017. The Indenture contains customary nonfinancial covenants, including restrictions on new indebtedness, issuance of liens andguarantees, investments, distributions to equityholders, asset sales and affiliate transactions. The Senior Notes were issued by BMC East, LLC, a 100% ownedsubsidiary of the Company, and are guaranteed by the Company and the other subsidiaries that guarantee the Credit Agreement. Each of the subsidiaryguarantors is 100% owned, directly or indirectly, by the Company, and all guarantees are full and unconditional and joint and several. The net cash proceedsfrom the Senior Notes were partially used to redeem in full the $250.0 million Extinguished Senior Notes, with the remaining proceeds used to repayoutstanding borrowings on the Revolver and pay related fees and expenses.Contractual Obligations and Commercial CommitmentsIn the table below, we set forth our enforceable and legally binding obligations as of December 31, 2016. Some of the amounts included in the table are basedon management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third partiesand 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. Anyamounts 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) Total 2017 2018-2019 2020-2021 ThereafterSenior Notes obligations (1) $504.9 $20.1 $38.5 $38.5 $407.8Capital lease obligations (2) 32.5 10.5 14.1 6.6 1.3Other long-term debt (3) 3.1 1.8 1.2 0.1 —Operating lease obligations (4) 135.2 27.7 43.1 26.8 37.6Purchase commitments (5) 4.8 4.8 — — — Total $680.5 $64.9 $96.9 $72.0 $446.738(1)Represents principal of $350.0 million and semi-annual interest payments at a 5.5% interest rate. The Senior Notes mature in October 2024. For further information, refer toNote 9 to our audited financial statements included elsewhere in this Annual Report on Form 10-K.(2)Represents payments under our capital leases for real estate, fleet vehicles and various equipment. For further information, refer to Note 12 to our audited financialstatements included elsewhere in this Annual Report on Form 10-K.(3)Represents payments on term notes secured by delivery and handling equipment with various maturities through November 2018 and a term note secured by real propertywhich matures in February 2021. The interest rates on these notes range from 4.3% to 7.0%. For further information, refer to Note 9 to our audited financial statementsincluded elsewhere in this Annual Report on Form 10-K.(4)Represents payments under our operating leases, primarily for buildings, improvements and equipment. For further information, refer to Note 12 to our audited financialstatements included elsewhere in this Annual Report on Form 10-K.(5)Consists primarily of obligations to purchase vehicles which are enforceable and legally binding on us and a commitment for a subscription for our enterprise resourceplanning software. Excludes purchase orders made in the ordinary course of business that are short-term or cancellable.Off-Balance Sheet Arrangements At December 31, 2016 and 2015, 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 FactorsOur first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather patterns in some of ourmarkets, causing reduced construction activity. In addition, quarterly results historically have reflected, and are expected to continue to reflect, fluctuationsfrom 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 isgenerally 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 tohigher sales during the peak residential construction season. These increases have in the past resulted in negative operating cash flows during this peakseason, which historically have been financed through available cash or excess availability on our Revolver. Collection of receivables and reduction ininventory levels following the peak building and construction season have in the past positively impacted cash flow. In the past, we have also utilized ourborrowing availability under credit facilities to cover working capital needs.Recently Issued Accounting PronouncementsRefer to Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for a summary of recently issued accountingpronouncements.Critical Accounting PoliciesOur discussion and analysis of operating results and financial condition are based upon our audited financial statements. The preparation of our financialstatements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expensesand related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonableunder the circumstances, and we evaluate these estimates on an ongoing basis. Our critical accounting policies are those that materially affect our financialstatements and involve difficult, subjective or complex judgments by management. Although these estimates are based on management’s best knowledge ofcurrent 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 consolidatedfinancial statements and that the judgments and estimates are reasonable.Revenue recognition We recognize revenue for sales of building products when products are delivered and the customer takes ownership and assumes risk of loss, collection of therelevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. All sales recognized arenet of allowances for discounts and estimated returns, based on historical experience. Taxes assessed by governmental authorities that are directly imposedon our revenue-producing transactions are excluded from sales.The percentage-of-completion method is used to recognize revenue for construction services. Periodic estimates of progress towards completion are madebased on either a comparison of labor costs incurred to date with total estimated contract labor costs or total costs incurred to date with total estimatedcontract costs. The percentage-of-completion method requires the use of various estimates, including among others, the extent of progress towardscompletion, contract revenues and contract completion costs. Contract revenues and contract costs to be recognized are dependent on the accuracy ofestimates, including quantities of materials, labor productivity and other cost estimates. The Company has a history of making reasonable estimates of theextent of progress towards completion, contract revenues and contract completion costs. Due to uncertainties inherent in the estimation process, it is possiblethat actual contract revenues and completion costs may vary from estimates.Estimated losses on uncompleted contracts and changes in contract estimates reflect the Company's best estimate of probable losses of unbilled receivables,and are recognized in the period such revisions are known and can be reasonably estimated. These estimates are recognized in cost of sales. Estimated losseson uncompleted contracts and changes in contract estimates are established by assessing estimated costs to complete, change orders and claims foruncompleted contracts. Assumptions for estimated costs to complete include material prices, labor costs, labor productivity and contract claims. Suchestimates are inherently uncertain and therefore it is possible that actual completion costs may vary from these estimates.Allowance for doubtful accountsWe maintain an allowance for doubtful accounts for estimated losses due to the failure of our customers to make required payments. Management believesthe accounting estimate related to the allowance for doubtful accounts is a “critical accounting estimate” as it involves 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, accountsreceivable 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 majorcustomer’s financial condition, if the Company becomes aware of additional information related to the credit-worthiness of a major customer, or if futureactual default rates on trade receivables in general differ from those currently anticipated, the Company may have to adjust its allowance for doubtfulaccounts, which would affect earnings in the period the adjustments were made.39InventoriesInventories consist primarily of materials purchased for resale, including lumber and sheet goods, millwork, doors and windows as well as certainmanufactured products, and are carried at the lower of cost or market. The cost of substantially all of our inventories is determined by the weighted averagecost 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 thelower of cost or market. This evaluation includes an analysis of historical physical inventory results, a review of potential excess and obsolete inventoriesbased on inventory aging and anticipated future demand. At least quarterly, each branch’s perpetual inventory records are adjusted to reflect any declines innet realizable value below inventory carrying cost. To the extent historical physical inventory results are not indicative of future results and if future eventsimpact, either favorably or unfavorably, the salability of our products or our relationships with certain key suppliers, our inventory reserves could differsignificantly, resulting in either higher or lower future inventory provisions.Business combinationsFor all acquisitions, we allocate the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition. Theexcess of the fair value of the purchase consideration over the fair values of the identifiable assets and liabilities is recorded as goodwill. Management makessignificant estimates and assumptions when determining the fair value of assets acquired and liabilities assumed. These estimates include, but are not limitedto, discount rates, projected future net sales, projected future expected cash flows and useful lives. When necessary, we will engage third-party valuation firmsto assist us in determining fair values of acquired assets and assumed liabilities.Valuation of goodwill, long-lived assets and amortizable other intangible assetsOur long-lived assets consist primarily of property, equipment, purchased intangible assets and goodwill. The valuation and the impairment testing of theselong-lived assets involve significant judgments and assumptions, particularly as they relate to the identification of reporting units, asset groups and thedetermination 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 carryingamount of an asset may not be recoverable. We test goodwill for impairment annually, or more frequently if triggering events occur indicating that there maybe 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 abusiness unit one level below an operating segment for which discrete financial information is available, and for which management regularly reviews theoperating results. Additionally, components within an operating segment are aggregated as a single reporting unit if they have similar economiccharacteristics. For the year ended December 31, 2016, we have determined that our reporting units are equivalent to our six operating segments, which arethe Mid-Atlantic, Southeast, Texas, Intermountain, Western and Mountain West divisions. Beginning January 1, 2017, the Company will have five reportingunits after the Company realigned certain of its markets, which resulted in the consolidation of the Mountain West division into the Intermountain division.After this realignment, the Company will continue to have one reportable segment. We complete our annual impairment assessment during the third quarterof each year. We did not recognize any impairment for the years ended December 31, 2016, 2015 and 2014.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 cashflows 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 toestimated undiscounted future cash flows expected to be generated by the assets. If the carrying amount of an asset exceeds its estimated future cash flows, animpairment 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 reportingunits and other similar circumstances could affect the assumptions used in the impairment tests. Although management currently believes that the estimatesused in the evaluation of goodwill and other long-lived assets are reasonable, differences between actual and expected net sales, operating results and cashflow 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 operationsand financial position, but not our cash flow from operations.40Stock based compensationThe SBS 2013 Incentive Plan remained in effect upon consummation of the Merger. Upon consummation of the Merger, the Company assumed allobligations of BMHC under the BMHC 2010 Incentive Plan and BMHC 2013 Incentive Plan, including BMHC's time-vesting restricted stock andperformance-vesting restricted stock. At the effective time of the Merger, each BMHC time-vesting restricted share outstanding immediately prior to suchtime was converted, on the same terms and conditions as were applicable to such BMHC time-vesting restricted share at such time, into a restricted share withrespect to the number of shares of BMC common stock determined by multiplying each BMHC time-vesting restricted share by the exchange ratio, roundedup to the nearest whole share. The performance goals of each award of BMHC performance-vesting restricted stock outstanding immediately prior to theMerger was deemed satisfied at maximum and was converted, on the same terms and conditions (other than the terms and conditions relating to achievementof performance goals), into a restricted share with respect to that number of shares of BMC common stock determined by multiplying each BMHCperformance-vesting restricted share by the exchange ratio, rounded up to the nearest whole share, provided that the vesting criteria applicable to suchconversion will provide for vesting based solely on the holder's continuation of service through the time of vesting.Under the SBS 2013 Incentive Plan, the merger constituted a "change in control" of SBS. In connection with a "change in control," as defined in the SBS2013 Incentive Plan, the vesting of outstanding awards under the SBS 2013 Incentive Plan was accelerated, with the exception of 0.2 million outstandingstock options and 0.3 million outstanding restricted stock units awarded to certain Legacy SBS employees during November 2015.We account for restricted stock awards and restricted stock unit awards granted to employees and directors by recording compensation expense based on theaward’s fair value at the date of grant. As BMHC was a privately held company prior to the Merger, there was no active market for its shares. The fair value ofequity awards was calculated using the enterprise value per share. The enterprise value per share was derived using a blend of the market approach, incomeapproach and prior sales of BMHC's shares. Weights were assigned to each approach to calculate a weighted average enterprise value. Adjustments were madefor lack of marketability and non-operating assets and liabilities. Due to uncertainties inherent in the assumptions used in various valuation approachesdescribed above, it is possible that the actual share-based compensation realized by the participant may vary from the estimate of the fair value of theserestricted shares. For restricted stock unit awards with performance conditions, we record compensation expense based on the expected number of units thatwill vest, which is adjusted, as appropriate, throughout the performance period. We account for stock options granted to employees by recording compensation expense based on the award’s fair value, estimated on the date of grant usingthe Black-Scholes option-pricing model. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period of theaward, which generally equals the vesting period. Determining the fair value of stock options under the Black-Scholes option-pricing model requiresjudgment, including estimating the fair value per share of our common stock, volatility, expected term of the awards, dividend yield and risk-free interestrate. The assumptions used in calculating the fair value of stock options represent our best estimates, based on management's judgment and subjective futureexpectations. These estimates involve inherent uncertainties. If any of the assumptions used in the model change significantly, share-based compensationrecorded for future awards may differ materially from that recorded for awards granted previously.We developed our assumptions as follows:•Fair value of common stock. We use quoted market prices to determine the fair value of our common stock.•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 theforeseeable future. Consequently, we used an expected dividend yield of zero.•Volatility. The expected price volatility for our common stock was estimated by taking the median historic price volatility for industry peers.•Risk-free interest rate. The risk-free interest rate is based on the yields of United States Treasury securities with maturities similar to the expectedterm of the options.•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 useof this approach is appropriate as we have limited prior history of option exercises upon which to base an expected term.During the year ended December 31, 2016, we elected to early adopt Accounting Standards Update 2016-09, Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). One of the provisions of ASU 2016-09 allows a company to make anaccounting policy election to either record forfeitures as they occur or by application of an estimated forfeiture rate. As permitted by the standard, we made apolicy election to account for forfeitures as they occur.41Casualty and health insuranceWe carry insurance for general liability, auto liability and workers' compensation exposures subject to deductibles or self-insured retentions that we believeto be reasonable under the circumstances, and we self-insure for employee and eligible dependent health care claims, with insurance purchased fromindependent carriers to cover individual claims in excess of the self-insured limits. The expected liability for unpaid claims, including incurred but notreported losses, is determined using the assistance of third-party actuaries and is reflected on the consolidated balance sheets as a liability with current andlong-term components. We have elected not to discount this liability. The amount recoverable from insurance providers is reflected on the consolidatedbalance sheets in prepaid expenses and other current assets. Our accounting policy includes an internal evaluation and adjustment of our reserve for allinsured losses on a quarterly basis. At least on an annual basis, we engage external actuarial professionals to independently assess and estimate the totalliability outstanding, which is compared to the actual reserve balance at that time and adjusted accordingly.Deferred income taxesIn accordance with ASC 740 “Income Taxes,” we evaluate our deferred tax assets to determine if valuation allowances are required. In assessing therealizability of deferred tax assets, we consider both positive and negative evidence in determining whether it is more likely than not that some portion or allof 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 recent prior periods with cumulative operating income and the reversal of deferred tax liabilities relatedto depreciation and amortization that would occur within the same jurisdiction and during the carry-forward period necessary to absorb the state netoperating losses and other deferred tax assets.During 2016, the Company evaluated the positive and negative evidence in assessing the realizability of its deferred tax assets. As of December 31, 2016, weconcluded that it is more likely than not that we will realize the benefit of our deferred tax assets, net of a state tax valuation allowance of $0.1 million.During the second quarter of 2014, the Company conducted such an analysis and, based on an evaluation of available positive and negative evidence andthe Company’s projection of the income expected to be generated in future years, we concluded that it was more likely than not that all of its deferred taxasset would be realized. As a result, in accordance with ASC 740, we recognized a $76.1 million income tax benefit that resulted from the reversal of all of itsdeferred tax asset valuation allowance. We conducted a similar analysis in December 2014 and concluded that no valuation allowance was needed as wecontinued to conclude that it was more likely than not that all of its deferred tax asset would be realized.ASC 740 also prescribes a recognition threshold and certain measurement principles for the financial statements related to tax positions taken or expected tobe 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 ismore 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 a50% likelihood of being sustained. Additionally, ASC 740 provides guidance on derecognition, classification, interest and penalties associated with incometaxes, accounting in interim periods, disclosures and transition requirements.Consideration received from suppliersWe enter into arrangements with many of our suppliers providing for inventory purchase rebates (“supplier rebates”) upon achievement of specified volumepurchasing levels. We accrue estimated supplier rebates monthly as part of cost of goods sold based on progress toward earning the supplier rebates, takinginto consideration cumulative purchases of inventory to date and projected purchases through the end of the year. We estimate the rebates applicable toinventory 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 thesechanges 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 RiskIn the normal course of business, we are exposed to financial risks such as changes in interest rates and commodity price risk.42Interest Rate RiskWhen we have loan amounts under our Revolver, we are exposed to interest rate risk arising from fluctuations in interest rates. During 2016, 2015 and 2014,we did not use any interest rate swap contracts to manage this risk. There were no outstanding borrowings under the Revolver as of December 31, 2016.Commodity Price RiskMany of the products we purchase and resell are commodities whose price is determined by the market's supply and demand for such products. Pricefluctuations in our selling prices and key costs have a significant effect on our financial performance. The markets for most of these commodities are cyclicaland are affected by factors such as global economic conditions, including the strength of the U.S. housing market, changes in, or disruptions to, industryproduction capacity and changes in inventory levels and other factors beyond our control. During 2016, 2015 and 2014, we did not manage commodity pricerisk with derivative instruments, except for immaterial lumber future contracts. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Factors Affecting Our Operating Results—Commodity nature of our products" for further discussion. We estimate that a 1% increase(decrease) in the cost of lumber & lumber sheet goods, assuming no offsetting pricing changes, would decrease (increase) our annual operating income byapproximately $7.6 million (based on our operating results for the year ended December 31, 2016). However, we would likely adjust our pricing to offset anysignificant changes in our cost of goods.43Item 8 Financial Statements and Supplementary DataReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofBMC Stock Holdings, Inc.In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cashflows present fairly, in all material respects, the financial position of BMC Stock Holdings, Inc. and its subsidiaries at December 31, 2016 and December 31,2015, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2016 in conformity with accountingprinciples generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, formaintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, includedin Management’s annual report on internal control over financial reporting appearing under Item 9A. Our responsibility is to express opinions on thesefinancial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordancewith the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reportingwas maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overallfinancial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on theassessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits providea reasonable basis for our opinions.As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it presents unamortized debt issuance costs andthe manner in which it accounts for share-based compensation in 2016.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPRaleigh, North CarolinaMarch 1, 201744Report of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersBMC Stock Holdings, Inc.:We have audited the accompanying consolidated statements of operation, stockholders’ equity and cash flows of BMC Stock Holdings, Inc. (formerly knownas Building Materials Holding Corporation and subsidiaries, hereinafter referred to as the Company) for the year ended December 31, 2014. Theseconsolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.We conducted our audit in accordance with generally accepted auditing standards as established by 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 ofmaterial misstatement. An audit also 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, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows ofthe Company for the year ended December 31, 2014 in conformity with U.S. generally accepted accounting principles./s/ KPMG LLPBoise, IdahoMarch 15, 201645BMC STOCK HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS December 31, 2016 December 31, 2015(in thousands, except share and per share amounts) Assets Current assets Cash and cash equivalents $8,917 $1,089Accounts receivable, net of allowances 313,304 303,176Inventories, net 272,276 243,960Costs in excess of billings on uncompleted contracts 26,373 22,528Income taxes receivable 2,437 11,390Prepaid expenses and other current assets 43,635 31,817Total current assets 666,942 613,960Property and equipment, net of accumulated depreciation 286,741 295,978Deferred income taxes 550 —Customer relationship intangible assets, net of accumulated amortization 164,191 177,036Other intangible assets, net of accumulated amortization 3,024 10,900Goodwill 254,832 254,664Other long-term assets 18,734 18,601Total assets $1,395,014 $1,371,139Liabilities and Stockholders' Equity Current liabilities Accounts payable $165,540 $135,632Accrued expenses and other liabilities 88,786 91,888Billings in excess of costs on uncompleted contracts 15,691 15,888Interest payable 5,619 6,882Current portion: Long-term debt and capital lease obligation 11,155 10,129Insurance reserves 16,021 17,888Total current liabilities 302,812 278,307Insurance reserves 39,184 37,334Long-term debt 344,827 400,216Long-term portion of capital lease obligation 20,581 16,495Deferred income taxes — 3,021Other long-term liabilities 7,009 6,834Total liabilities 714,413 742,207Commitments and contingencies (Note 12) Stockholders' equity Preferred stock, $0.01 par value, 50.0 million shares authorized, no shares issued and outstanding at December 31, 2016 andDecember 31, 2015 — —Common stock, $0.01 par value, 300.0 million shares authorized, 66.8 million and 65.4 million shares issued, and 66.7million and 65.3 million outstanding at December 31, 2016 and December 31, 2015, respectively 668 654Additional paid-in capital 649,280 626,402Retained earnings 33,182 2,302Treasury stock, at cost, 0.1 million and less than 0.1 million shares at December 31, 2016 and December 31, 2015,respectively (2,529) (426)Total stockholders' equity 680,601 628,932Total liabilities and stockholders' equity $1,395,014 $1,371,139The accompanying notes are an integral part of these consolidated financial statements.46BMC STOCK HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31,(in thousands, except per share amounts) 2016 2015 2014Net sales Building products $2,336,041 $1,146,190 $937,048Construction services 757,702 430,556 374,450 3,093,743 1,576,746 1,311,498Cost of sales Building products 1,725,843 864,485 705,812Construction services 625,935 350,851 310,612 2,351,778 1,215,336 1,016,424Gross profit 741,965 361,410 295,074 Selling, general and administrative expenses 571,799 306,843 229,316Depreciation expense 38,441 15,700 11,492Amortization expense 20,721 3,626 —Impairment of assets 11,928 — 134Merger and integration costs 15,340 22,993 — 658,229 349,162 240,942Income from operations 83,736 12,248 54,132Other income (expense) Interest expense (30,131) (27,552) (27,090)Loss on debt extinguishment (12,529) — —Other income, net 4,070 784 1,413Income (loss) before income taxes 45,146 (14,520) 28,455Income tax expense (benefit) 14,266 (9,689) (65,577)Net income (loss) $30,880 $(4,831) $94,032 Weighted average common shares outstanding Basic 66,055 41,260 38,828Diluted 66,609 41,260 39,291 Net income (loss) per common share Basic $0.47 $(0.12) $2.42Diluted $0.46 $(0.12) $2.39The accompanying notes are an integral part of these consolidated financial statements.47BMC STOCK HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Treasury Stock AdditionalPaid-inCapital RetainedEarnings(Deficit) Total(in thousands) Shares Amount Shares Amount Stockholders' equity as of December 31, 2013 39,173 $392 484 $(1,234) $169,970 $(86,899) $82,229Shares vested for long-term incentive plan 282 3 (126) 188 (191) — —Shares repurchased — — 124 (1,607) — — (1,607)Stock compensation expense — — — — 3,410 — 3,410Tax benefits related to stock based compensationplans — — — — 1,014 — 1,014Net income — — — — — 94,032 94,032Stockholders' equity as of December 31, 2014 39,455 395 482 (2,653) 174,203 7,133 179,078Effect of reverse merger 26,186 262 — — 453,128 — 453,390Cancellation of BMHC treasury stock in connectionwith the Merger (434) (4) (434) 3,487 (3,483) — —Shares vested for long-term incentive plan 153 1 (126) 194 (195) — —Shares repurchased — — 103 (1,454) — — (1,454)Stock compensation expense — — — — 2,749 — 2,749Net loss — — — — — (4,831) (4,831)Stockholders' equity as of December 31, 2015 65,360 654 25 (426) 626,402 2,302 628,932Issuance of common stock, net of offering costs 855 8 — — 13,768 — 13,776Exercise of stock options 175 2 — — 1,299 — 1,301Shares vested for long-term incentive plans 424 4 — — (4) — —Shares repurchased — — 119 (2,023) — — (2,023)Share withholdings made in satisfaction of exerciseprice — — 4 (80) 80 — —Stock compensation expense — — — — 7,252 — 7,252Other — — — — 483 — 483Net income — — — — — 30,880 30,880Stockholders' equity as of December 31, 2016 66,814 $668 148 $(2,529) $649,280 $33,182 $680,601The accompanying notes are an integral part of these consolidated financial statements.48BMC STOCK HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31,(in thousands) 2016 2015 2014Cash flows from operating activities Net income (loss) $30,880 $(4,831) $94,032Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation expense 47,959 20,963 15,457Amortization of intangible assets 20,721 3,626 —Amortization of debt issuance costs 3,114 2,525 2,277Amortization of original issue discount 174 244 257Amortization of inventory step-up charges 2,884 10,285 —Amortization of favorable and unfavorable leases (76) — —Deferred income taxes (3,571) (5,892) (70,492)Non-cash stock compensation expense 7,252 2,749 3,410Impairment of assets 11,928 — 134Gain on sale of property, equipment and real estate (1,396) (497) (804)Gain on insurance proceeds (1,003) — —Loss on debt extinguishment 12,529 — —Change in assets and liabilities, net of effects of acquisitions Accounts receivable, net of allowances (10,128) (24,061) (6,299)Inventories, net (31,200) (16,452) (15,927)Costs in excess of billings on uncompleted contracts (3,845) (4,026) 276Current income taxes receivable/payable 9,627 (8,176) —Other current assets (12,208) (1,202) (9,163)Other long-term assets (126) 1,240 (1,688)Accounts payable 28,592 873 9,666Accrued expenses and other liabilities (5,859) 4,377 1,633Billings in excess of costs on uncompleted contracts (197) 8,360 1,776Insurance reserves (16) 7,973 6,165Other long-term liabilities 853 2,665 22Net cash provided by operating activities 106,888 743 30,732Cash flows from investing activities Purchases of property, equipment and real estate (38,067) (31,319) (28,275)Proceeds from sale of property, equipment and real estate 3,187 3,280 1,919Insurance proceeds 1,151 — —Change in restricted assets — 36,106 10,326Cash acquired in the Merger — 6,342 —Purchases of businesses, net of cash acquired — (149,485) (236)Other investing activities — — 4Net cash used in investing activities (33,729) (135,076) (16,262)Cash flows from financing activities Proceeds from revolving line of credit 1,544,064 293,183 —Repayments of proceeds from revolving line of credit (1,696,324) (208,637) —49BMC STOCK HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31,(in thousands) 2016 2015 2014Proceeds from issuance of Senior Notes 350,000 — —Redemption of Extinguished Senior Notes (250,000) — —Borrowings under other notes $— $2,491 $9,991Principal payments on other notes (3,303) (6,081) (5,999)Secured borrowings 1,427 767 —Proceeds from issuance of common stock, net of offering costs 13,776 — —Proceeds from exercise of stock options 1,301 — —Tax benefits related to stock based compensation — — 1,014Purchase of treasury stock (2,023) (1,454) (1,607)Payments of debt issuance costs (7,011) (3,567) (10)Payments of debt extinguishment costs (8,438) — —Payments on capital lease obligations (8,800) (4,542) (3,813)Net cash (used in) provided by financing activities (65,331) 72,160 (424)Net increase (decrease) in cash and cash equivalents 7,828 (62,173) 14,046Cash and cash equivalents Beginning of period 1,089 63,262 49,216End of period $8,917 $1,089 $63,262 Supplemental disclosure of cash flow information Interest paid $28,081 $23,970 $24,351Cash paid for income taxes, net 8,210 4,310 12,917Non-cash investing and financing transactions Accrued purchases of property and equipment 505 1,968 —Assets acquired under capital lease obligations 15,089 2,342 3,929Consideration transferred in connection with the Merger — 453,390 —The accompanying notes are an integral part of these consolidated financial statements.50BMC STOCK HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(All amounts are presented in thousands except share and per share amounts.)1. OrganizationOn December 1, 2015, Stock Building Supply Holdings, Inc. (“SBS”) completed a business combination with privately-held Building Materials HoldingCorporation (“BMHC”) in accordance with the terms of the Agreement and Plan of Merger, dated as of June 2, 2015, by and between SBS and BMHC (the“Merger Agreement”), pursuant to which BMHC merged with and into SBS (the “Merger”). As a result of the business combination, SBS survived the Mergerand in connection therewith changed its name to “BMC Stock Holdings, Inc.”. These financial statements represent the financial statements of BMC Stock Holdings, Inc., and its subsidiaries. All references to “BMC,” “we,” “us,” “our” orthe “Company” in this Annual Report on Form 10-K mean BMC Stock Holdings, Inc.Under U.S. generally accepted accounting principles ("U.S. GAAP"), the Merger is treated as a “reverse merger” under the acquisition method of accounting.For accounting purposes, BMHC is considered to have acquired SBS. Consequently, the historical financial statements of the Company reflect only theoperations and financial condition of BMHC prior to the date of the Merger. The operating results of SBS are reported as part of the Company beginning onthe closing date of the Merger.2. Summary of Significant Accounting PoliciesBasis of presentationThe accompanying consolidated financial statements have been prepared by management in conformity with U.S. GAAP.Principles of consolidationThe consolidated financial statements include all accounts of BMC and its wholly-owned subsidiaries. All material intercompany accounts and transactionshave been eliminated in consolidation.Use of estimatesThe preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. The Company evaluates these estimates and judgments on an ongoing basis and bases its estimates on historicalexperience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates formthe basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect tocommitments and contingencies. The significant estimates which could change by a material amount in the near term include revenue recognition forconstruction services, accounts receivable reserves, estimated losses on uncompleted contracts and changes in contract estimates, inventory reserves, supplierrebates, goodwill impairment, impairment of property and equipment, insurance reserves, warranties and share-based compensation. Actual results may differmaterially from these estimates under different assumptions or conditions.Business and credit concentrationsThe Company maintains cash at financial institutions in excess of federally insured limits. Accounts receivable potentially expose the Company toconcentrations of credit risk. Mitigating this credit risk is collateral underlying certain accounts receivable (perfected liens or lien rights) as well as theCompany’s analysis of a customer’s credit history prior to extending credit. Concentrations of credit risk with respect to accounts receivable are limited dueto the Company’s large number of customers and their dispersion across various regions of the United States. At December 31, 2016 and 2015, no customerrepresented more than 10% of accounts receivable. For the years ended December 31, 2016, 2015 and 2014, no customer accounted for more than 10% ofrevenue.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.51Cash and cash equivalentsCash equivalents are highly liquid investments that are readily convertible to known amounts of cash and have a maturity of three months or less from thetime of purchase.Book overdrafts occur when purchases on corporate purchasing cards and checks written exceed available bank balances at a specific bank, despite therebeing cash at the Company's other financial institutions. For accounting purposes, the Company reclassifies these book overdrafts to accounts payable on theconsolidated balance sheets. Book overdrafts included in accounts payable were $0.2 million and $0.3 million at December 31, 2016 and 2015, respectively.Restricted assetsHistorically, the Company had restricted assets, which related to amounts deposited in a separate bank account to collateralize letters of credit related toinsurance claims for periods prior to January 2010. During the years ended December 31, 2015 and 2014, the Company was able to release the majority ofthese amounts into unrestricted cash as a result of reductions in claims and the transfer of the risk of loss of certain claims to a reinsurer. In connection withthe senior secured credit agreement entered into on December 1, 2015 with Wells Fargo Capital Finance, described elsewhere in this document, the Companywas able to release the remaining cash collateral into unrestricted cash.Fair value of financial instrumentsASC 820, Fair Value Measurements and Disclosures (“ASC 820”), clarifies the definition of fair value, prescribes methods for measuring fair value, andestablishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:Level 1 Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. Level 2 Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets andliabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated byobservable market data. Level 3 Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would usein 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 is categorized based upon the lowest level of input that issignificant to the fair value calculation.Accounts receivableAccounts receivable result from the extending of credit to trade customers for the purchase of goods and services. The terms generally provide for paymentwithin 30 days of being invoiced. On occasion, when necessary to compete in certain circumstances, the Company will sell product under extended paymentterms. Accounts receivable are stated at estimated net realizable value. The allowance for doubtful accounts is based on an assessment of individual past dueaccounts, historical write-off experience, accounts receivable aging, customer disputes and the business environment. Account balances are charged off whenthe potential for recovery is considered remote. The Company grants trade discounts on a percentage basis. The Company records an allowance againstaccounts receivable for the amount of discounts it estimates will be taken by customers. The discounts are recorded as a reduction to revenue when productsare sold.Consideration received from suppliersThe Company enters into agreements with many of its suppliers providing for inventory purchase rebates (“supplier rebates”) upon achievement of specifiedvolume purchasing levels. Supplier rebates are accrued as part of cost of goods sold based on progress towards earning the supplier rebates, taking intoconsideration cumulative purchases of inventory to date and projected purchases through the end of the year. The Company estimates the rebates applicableto inventory on-hand at each period end based on the estimated percentage of supplier rebates to be earned. Total rebates receivable at December 31, 2016and 2015 are $21.4 million and $13.7 million, respectively, included in prepaid expenses and other current assets.52Revenue recognitionThe Company recognizes revenue for sales of building products when products are delivered 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 salesrecognized are net of allowances for discounts and estimated returns, based on historical experience. Taxes assessed by governmental authorities that aredirectly imposed on our revenue-producing transactions are excluded from sales.The percentage-of-completion method is used to recognize revenue for construction services. Periodic estimates of progress towards completion are madebased on either a comparison of labor costs incurred to date with total estimated contract labor costs or total costs incurred to date with total estimatedcontract costs. The percentage-of-completion method requires the use of various estimates, including among others, the extent of progress towardscompletion, contract revenues and contract completion costs. Contract revenues and contract costs to be recognized are dependent on the accuracy ofestimates, including quantities of materials, labor productivity and other cost estimates. The Company has a history of making reasonable estimates of theextent of progress towards completion, contract revenues and contract completion costs. Due to uncertainties inherent in the estimation process, it is possiblethat actual contract revenues and completion costs may vary from estimates. Revenue recognized using the percentage-of-completion method for the yearsended December 31, 2016, 2015 and 2014 represented approximately 94%, 92% and 94% of the total revenue for construction services for the respectiveperiods.Estimated losses on uncompleted contracts and changes in contract estimates reflect the Company's best estimate of probable losses of unbilled receivables,and are recognized in the period such revisions are known and can be reasonably estimated. These estimates are recognized in cost of sales. Estimated losseson uncompleted contracts and changes in contract estimates are established by assessing estimated costs to complete, change orders and claims foruncompleted contracts. Assumptions for estimated costs to complete include material prices, labor costs, labor productivity and contract claims. Suchestimates are inherently uncertain and therefore it is possible that actual completion costs may vary from these estimates.Shipping and handling costsThe Company includes shipping and handling costs in selling, general and administrative expenses on the consolidated statements of operations. Shippingand handling costs were $152.7 million, $81.6 million and $60.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.Property and equipmentProperty and equipment are stated at cost. Expenditures for renewals and betterments, which extend the useful lives of assets, are capitalized whilemaintenance and repairs are charged to expense as incurred. Property and equipment obtained through acquisition are stated at estimated fair market value asof the acquisition date, and are depreciated over their estimated remaining useful lives, which may differ from our stated policies for certain assets. Gains andlosses related to the sale of property and equipment are recorded as selling, general and administrative expenses.Property and equipment are depreciated using the straight-line method and are generally depreciated over the following estimated service lives:Buildings and improvements 10–30 yearsLeasehold improvements Lesser of life of the asset or remaining lease term, and not to exceed 15 yearsFurniture, fixtures and equipment 2–10 yearsVehicles 4–10 years Property and equipment that is expected to be sold within the next twelve months, is actively marketed in its current condition for a price that is reasonablein comparison to its estimated fair value and meets other relevant held-for-sale criteria are classified as assets held for sale. Assets held for sale are measured atthe lower of carrying amount or fair value less costs to sell and are no longer depreciated. An impairment for assets held for sale is recognized if the carryingamount is not recoverable. Assets held for sale were not presented separately and were classified as other long-term assets in the consolidated balance sheetsand were $2.0 million and $0 at December 31, 2016 and 2015, respectively.53Goodwill and other intangible assetsAt least annually, or more frequently as changes in circumstances indicate, the Company tests goodwill for impairment. To the extent that the carrying valueof 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 impairmentcharges. For the year ended December 31, 2016, we have determined that our reporting units are equivalent to our six operating segments, which are the Mid-Atlantic, Southeast, Texas, Intermountain, Western and Mountain West divisions. Beginning January 1, 2017, the Company will have five reporting unitsafter the Company realigned certain of its markets, which resulted in the consolidation of the Mountain West division into the Intermountain division. Afterthis realignment, the Company will continue to have one reportable segment. The Company is required to make certain assumptions and estimates regardingthe fair value of the reporting units containing goodwill when assessing for impairment. Changes in the fact patterns underlying such assumptions andestimates could ultimately result in the recognition of additional impairment losses.We complete our annual impairment assessment during the third quarter of each year. We did not recognize any impairment for the years ended December 31,2016, 2015 and 2014. We may consider qualitative factors as part of our annual impairment assessment to determine whether it is more likely than not that areporting unit's carrying value exceeds its fair value. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform thetwo-step impairment test. Alternatively, we may bypass the qualitative test and initiate goodwill impairment testing with the first step of the two-stepgoodwill impairment test. During the first step of the goodwill impairment test, the fair value of the reporting unit is compared to its carrying value, includinggoodwill. We may derive a reporting unit's fair value through a combination of the market approach (a guideline transaction method) and the incomeapproach. The income approach uses a reporting unit’s projection of estimated future cash flows that is discounted at a market derived weighted average costof 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.If the fair value of a reporting unit exceeds its carrying value, then we conclude no goodwill impairment has occurred. If the carrying value of the reportingunit exceeds its fair value, we perform the second step of the goodwill impairment test to measure possible goodwill impairment loss. During the second step,the implied fair value of the reporting unit's goodwill is compared to the carrying value of its goodwill. If the carrying value of the reporting unit's goodwillexceeds the implied fair value of the goodwill, we would recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value ofthe reporting unit's goodwill.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 fairvalues of the assets received are used to establish the carrying value. The fair value of acquired intangible assets is determined using common valuationtechniques, and the Company employs assumptions developed using the perspective of a market participant.Impairment of long-lived assetsLong-lived assets, such as property, equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever facts andcircumstances indicate that the carrying amount of an asset may not be recoverable. For impairment testing of long-lived assets, the Company identifies assetgroups at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Recoverabilityof 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 begenerated by the assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount bywhich the carrying amount of the asset exceeds the estimated fair value of the asset.Merger and integration costsMerger and integration costs related to the ongoing integration of BMHC and SBS consist primarily of severance, system integration costs and professionalfees.Income taxesThe Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes ("ASC 740"), which requires an asset and liability approach formeasuring deferred taxes based on temporary differences between the financial statement and tax basis of assets and liabilities existing at each balance sheetdate using enacted tax rates for years in which taxes are expected to be paid or recovered.54The Company evaluates its deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. In accordance with ASC 740, theCompany assesses whether a valuation allowance should be established based on its determination of whether it is more likely than not that some portion orall of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends primarily on: (i) the Company's ability to carry backnet operating losses to tax years where it has previously paid income taxes based on applicable federal law; (ii) the timing of the reversal of deferred taxliabilities and (iii) the Company's ability to generate future taxable income during the periods in which the related deferred tax assets are deductible. Theassessment of a valuation allowance includes giving appropriate consideration to all positive and negative evidence related to the realization of the deferredtax asset. This assessment considers, among other things, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability,the duration of statutory carryforward periods, the Company's experience with operating loss and tax credit carryforwards not expiring unused and taxplanning alternatives. Significant judgment is required in determining the future tax consequences of events that have been recognized in the Company'sconsolidated financial statements and/or tax returns. Actual outcomes of these future tax consequences could differ materially from the outcomes that theCompany currently anticipates.ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding the measurement of theresulting tax benefits. These provisions require an enterprise to recognize the financial statement effects of a tax position when it is more likely than not,which is defined as a likelihood of more than 50%, based on technical merits, that the position will be sustained upon examination. The evaluation ofwhether a tax position meets the more likely than not recognition threshold requires a substantial degree of judgment by management based on theindividual facts and circumstances. Actual results could differ from estimates. The Company had no material uncertain tax positions as of December 31, 2016.The Company recognized a liability of $3.0 million for uncertain tax positions as of December 31, 2015, which is included in income taxes receivable on theconsolidated balance sheets.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 insuranceThe Company carries insurance for general liability, auto liability and workers' compensation exposures subject to deductibles or self-insured retentions itbelieves to be reasonable under the circumstances, and the Company self-insures for employee and eligible dependent health care claims, with insurancepurchased from independent carriers to cover individual claims in excess of the self-insured limits. The expected liability for unpaid claims, includingincurred but not reported losses, is reflected on the consolidated balance sheets as a liability with current and long-term components. The amount recoverablefrom insurance providers is reflected on the consolidated balance sheets in prepaid expenses and other current assets. Provisions for losses are developed fromactuarial valuations that rely upon the Company’s past claims experience, which considers both the frequency and settlement of claims. The casualty andhealth insurance liabilities are recorded at their undiscounted value.In January 2015, the Company entered into a retroactive reinsurance contract to transfer the risk of loss of certain insurance reserves for workers’compensation claims incurred from 2006 to 2011 to a reinsurer. As a part of the contract, the Company paid $11.1 million to the reinsurer to assume $8.3million of insurance reserves. The $2.8 million difference between the amount paid to the reinsurer and the reserves transferred was recorded in selling,general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2015. Pursuant to the reinsurance contract,the reinsurer is obligated to pay an aggregate maximum of $17.5 million for these claims with any excess borne by the Company.The Company maintains the insurance reserves related to these claims as a liability on its consolidated balance sheet with an offsetting reinsurancereceivable, which includes current and long-term components. As of December 31, 2016 and 2015, the carrying value of the insurance reserves related tothese claims and the offsetting reinsurance receivable was $5.6 million and $6.4 million, respectively. Changes in these claims are recorded as an increase ordecrease in the insurance reserves and corresponding increase or decrease in the reinsurance receivable. Additionally, the Company monitors the financialcondition of the reinsurer to minimize its exposure to significant losses from reinsurer insolvency.Retirement savings programThe Company sponsors a defined contribution retirement savings plan. The Company has recorded expense of $4.6 million, $2.4 million and $1.6 millionrelated to employer contributions for the years ended December 31, 2016, 2015 and 2014, respectively. These expenses are recorded to either selling, generaland administrative expenses or cost of sales on the consolidated statements of operations, depending on the classification of the employee.55Lease obligationsThe Company recognizes lease obligations with fixed escalations of rental payments on a straight-line basis over the lease term, with the amount of rentalexpense in excess of lease payments recorded as a deferred rent liability. As of December 31, 2016 and 2015, the Company had a deferred rent liability of$3.6 million and $0.8 million, respectively, included in accrued expenses and other liabilities and other long-term liabilities on the consolidated balancesheets.Advertising and promotionCosts associated with advertising and promoting products and services are expensed in the period incurred. Cooperative advertising allowances that arereimbursement of specific, incremental and identifiable costs incurred to promote vendors' products are recorded as an offset against advertising expenses inselling, general and administrative expenses. If those conditions are not met, the cooperative advertising allowances are recorded as a reduction in inventoryand a subsequent reduction in cost of goods sold when the related product is sold. For the year ended December 31, 2016, the Company recorded $3.7million of advertising and promotion expenses, net of cooperative advertising allowances, in selling, general and administrative expenses. Advertising andpromotion expenses, net of cooperative advertising allowances, were not material for the years ended December 31, 2015 and 2014.Stock-based compensationIn accordance with the requirements of ASC 718, Compensation—Stock Compensation (“ASC 718”), the Company measures and recognizes compensationexpense for all share-based payment awards made to employees using a fair value based pricing model. The compensation expense is recognized over therequisite service period.Exit or disposal costsThe Company accounts for costs associated with exit or disposal in accordance with ASC 420, Exit or Disposal Cost Obligations (“ASC 420”), whichrequires that: (i) liabilities associated with exit and disposal activities be measured at fair value; (ii) one-time termination benefits be expensed at the date theentity 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 benefitto the entity (i.e., the entity ceases to utilize the rights conveyed by the contract) and (iv) all other costs related to an exit or disposal activity be expensed asincurred.Debt issuance costsCosts incurred in connection with the Company’s revolving line of credit and senior secured notes are capitalized and amortized over the term of theagreement. Total debt issuance costs, net of accumulated amortization, were $9.8 million and $9.5 million as of December 31, 2016 and 2015, respectively.As a result of the Company's adoption of ASU 2015-03 and ASU 2015-15 (as defined below) during the year ended December 31, 2016, debt issuance costsrelated to the Company's revolving line of credit and senior secured notes are included in other long-term assets and long-term debt, respectively, on theconsolidated balance sheets. Amortization of debt issuance costs for the years ended December 31, 2016, 2015 and 2014 was $3.1 million, $2.5 million and$2.3 million, respectively, and is included in interest expense on the consolidated statements of operations.DerivativesThe Company will occasionally enter into derivative instruments to offset existing or expected risks associated with fluctuations in commodity prices. TheCompany does not enter into derivative instruments for speculative or trading purposes. The Company recognizes all derivative instruments as assets orliabilities 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 notmeet the hedge accounting criteria are reported in earnings. The Company elected not to designate any new derivative instruments as hedges for the years2016, 2015 or 2014, and therefore, all changes in the fair market value of the derivative instruments have been reported in cost of goods sold on theconsolidated statements of operations.Warranty expenseThe Company has warranty obligations with respect to most manufactured products. As of December 31, 2016 and 2015, the Company had warrantyliabilities of $1.8 million and $1.8 million, respectively, included in accrued expenses and other liabilities on the consolidated balance sheets.Comprehensive income (loss)Comprehensive income (loss) is equal to the net income (loss) for all periods presented.56Recently adopted accounting pronouncementsIn April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-03, Simplifying the Presentation of DebtIssuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carryingamount of the associated debt liability, consistent with the presentation of debt discounts, instead of as an asset. In August 2015, the FASB issuedAccounting Standards Update No. 2015-15, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associatedwith Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (“ASU 2015-15”). ASU2015-15 clarifies the treatment of debt issuance costs for line-of-credit arrangements, which was not addressed in ASU 2015-03, by indicating that the SECstaff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizingthe deferred debt issuance costs ratably over the term of such arrangement, regardless of whether there are any outstanding borrowings on the line-of-creditarrangement. ASU 2015-03 and ASU 2015-15 became effective for the Company’s annual and interim periods beginning on January 1, 2016. ASU 2015-03 isrequired to be applied retrospectively, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effectsof the new guidance. Accordingly, unamortized debt issuance costs related to the Company’s senior secured notes of $6.5 million as of December 31, 2016have been presented as a direct deduction of long-term debt and unamortized debt issuance costs related to the senior secured notes of $4.9 million as ofDecember 31, 2015 have been reclassified from non-current assets to a direct deduction of long-term debt on the consolidated balance sheets. Unamortizeddebt issuance costs related to the Company’s revolving line of credit of $3.3 million and $4.6 million as of December 31, 2016 and 2015, respectively, arereflected in other long-term assets on the consolidated balance sheets as permitted by ASU 2015-15.In March 2016, the FASB issued Accounting Standards Update 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting (“ASU 2016-09”), which involves several aspects of the accounting for share-based payment transactions, including (1) recognition ofall income tax benefits and deficiencies related to exercised or vested awards in income tax expense, (2) classification of excess tax benefits as an operatingactivity in the statement of cash flows, (3) the ability of companies to make a policy election as to either estimate forfeitures or account for forfeitures as theyoccur, (4) stipulation that partial cash settlement for tax-withholding purposes would not result, by itself, in liability classification provided the amountwithheld does not exceed the maximum statutory rate for an employee in the applicable jurisdictions and (5) clarification that cash paid by an employer to ataxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows.For each provision, the standard indicates whether the provision should be adopted on a retrospective, prospective or modified retrospective basis. ASU2016-09 is effective for annual and interim periods beginning on or after December 15, 2016, however, early adoption is permitted. The Company elected toearly adopt this standard during the first quarter of 2016. No provisions that required retrospective or modified retrospective application had a materialimpact on our financial statements. The Company has made a policy election to account for forfeitures as they occur. The Company has also elected to applythe guidance related to classification of excess tax benefits on the statement of cash flows prospectively, and therefore prior periods have not been adjusted.In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40):Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 defines management's responsibility inpreparing quarterly and annual financial statements to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern.Certain footnote disclosures are required if substantial doubt exists. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and forannual and interim periods thereafter. The adoption of the guidance did not have an impact on our financial statements.57Recently issued accounting pronouncements not yet adoptedIn May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), and issued subsequentamendments to the initial guidance within Accounting Standards Update 2016-08, Revenue from Contracts with Customers, Principal versus AgentConsiderations (“ASU 2016-08") issued in March 2016, Accounting Standards Update 2016-10, Revenue from Contracts with Customers, IdentifyingPerformance Obligations and Licensing (“ASU 2016-10”) issued in April 2016, Accounting Standards Update 2016-12, Revenue from Contracts withCustomers, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”) issued in May 2016 and Accounting Standards Update 2016-20,Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers ("ASU 2016-20") issued in December 2016 (ASU 2014-09,ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 collectively “Topic 606”). Topic 606 provides a comprehensive revenue recognition modelrequiring companies to recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receivein exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue andcash flows arising from customer contracts. In July 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year, and therefore the standard iseffective for the Company’s annual and interim periods beginning on January 1, 2018. The guidance permits the use of either a retrospective or cumulativeeffect transition method. We are continuing to evaluate the impact of the standard on our financial statements, including which transition method to use, butbased on our preliminary assessment, we believe that contracts with a service element may be impacted. We expect to adopt the standard on January 1, 2018.In July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requiresthat inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Prior to the issuance of the standard, inventory wasmeasured at the lower of cost or market, where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable valueless a normal profit margin. Inventory measured using last-in, first-out (LIFO) and the retail inventory method are not impacted by the new guidance.Prospective application is required and early adoption is permitted. ASU 2015-11 is effective for the Company’s annual and interim periods beginning onJanuary 1, 2017. The adoption of the standard is not expected to have a material impact on our financial statements.In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”)model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will beclassified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective forthe Company’s annual and interim periods beginning on January 1, 2019. A modified retrospective transition approach is required for lessees for capital andoperating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practicalexpedients available. We are in the process of evaluating the impact of the standard on our financial statements. As a lessee, certain of our various leasesunder existing guidance are classified as operating leases that are not recorded on the balance sheet but are recorded in the statement of operations as expenseis incurred. Upon adoption of the standard, we will be required to record substantially all leases on the balance sheet as a ROU asset and a lease liability. Thetiming of expense recognition and classification in the statement of operations could change based on the classification of leases as either operating orfinancing.In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts andCash Payments (“ASU 2016-15”). ASU 2016-15 was issued to decrease the diversity in practice of how certain cash receipts and cash payments are presentedand classified in the statement of cash flows by providing guidance on eight specific cash flow issues. ASU 2016-15 is effective for the Company’s annualand interim periods beginning on January 1, 2018, with early adoption permitted and retrospective application required. We are evaluating the impact of thestandard on our financial statements.In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU2016-18 requires that the statement of cash flows include restricted cash in the beginning and end-of-period total amounts shown and that the statement ofcash flows explain the changes in restricted cash during the period. ASU 2016-18 is effective for the Company's annual and interim periods beginning onJanuary 1, 2018. Retrospective application is required and early adoption is permitted. The adoption of the standard is not expected to have a material impacton our financial statements.In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU2017-01"). ASU 2017-01 provides guidance in determining when a set of assets and activities meets the definition of a business. ASU 2017-01 is effective forthe Company's annual and interim periods beginning on January 1, 2018. Early application is permitted for transactions meeting certain criteria andprospective application is required. The adoption of the standard is not expected to have a material impact on our financial statements.58In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for GoodwillImpairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, whichrequires computation of the implied fair value of a reporting unit's goodwill. The amount of a goodwill impairment will now be the amount by which areporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for the Company's annualgoodwill impairment test and any interim tests during the Company's annual and interim periods beginning on January 1, 2020. Early adoption is permittedfor goodwill impairment tests performed on testing dates after January 1, 2017. Prospective application is required. The adoption of the standard is notexpected to have a material impact on our financial statements.AdjustmentDuring the year ended December 31, 2016, the Company recorded an out-of-period expense of approximately $0.7 million in selling, general andadministrative costs and a corresponding increase to accrued expenses and other liabilities to correct an error in the calculation of deferred rent. TheCompany has determined the adjustment is not material to the current period or any previously issued financial statements.3. AcquisitionsFor all acquisitions, we allocate the purchase price to assets acquired and liabilities assumed as of the date of acquisition based on the estimated fair values atthe date of acquisition. The excess of the fair value of the purchase consideration over the fair values of the identifiable assets and liabilities is recorded asgoodwill. Management makes significant estimates and assumptions when determining the fair value of assets acquired and liabilities assumed. Theseestimates include, but are not limited to, discount rates, projected future net sales, projected future expected cash flows and useful lives. When necessary, wewill engage third-party valuation firms to assist us in determining fair values of acquired assets and assumed liabilities.Merger with Stock Building Supply Holdings, Inc.As described in Note 1, BMHC and SBS were merged in an all-stock transaction on December 1, 2015. The Merger was accounted for as a reverse acquisitionwith BMHC deemed to be the acquirer solely for accounting purposes. Accordingly, the consideration transferred has been allocated to the acquired assetsand liabilities of SBS based upon their estimated fair values. The consideration transferred was calculated as the number of SBS common shares outstandingimmediately prior to the Merger multiplied by the closing stock price of SBS on the closing date of the Merger. In addition, consideration transferredincludes the fair value of outstanding SBS restricted stock units and stock options that vested upon consummation of the Merger, as well as the fair value ofunvested SBS stock options multiplied by the portion of the requisite service period that elapsed prior to the closing date of the Merger.The final calculation of consideration transferred is as follows:(in thousands, except share and per share data) Number of SBS shares outstanding on the closing date of the Merger 26,186,111SBS common stock price per share on the closing date of the Merger $16.99Deemed (for accounting purposes only) issuance of BMC stock to SBS shareholders 444,902Fair value of SBS equity awards 8,488Total consideration transferred $453,39059The final allocated fair values of acquired assets and assumed liabilities is summarized as follows:(in thousands) Cash and cash equivalents $6,342Accounts receivable 124,526Inventories 115,888Other current assets 26,504Property and equipment 125,717Customer relationships 129,800Trademarks 4,500Non-compete agreements 6,112Favorable lease agreements 5,050Other long-term assets 1,302Accounts payable (77,062)Accrued expenses and other liabilities (40,652)Unfavorable lease agreements (4,550)Current portion of capital lease obligations (3,275)Other current liabilities (6,664)Long-term debt (67,713)Deferred income taxes (75,006)Long-term portion of capital lease obligations (11,612)Other long-term liabilities (5,666)Identifiable net assets acquired 253,541Goodwill 199,849Total net assets acquired $453,390The gross contractual value and fair value of accounts receivable acquired were $129.2 million and $124.5 million, respectively.Inventory was valued at its estimated net realizable value, which is defined as expected sales price less cost to sell, plus a reasonable margin for the sellingeffort. The step-up in the basis of SBS's inventory totaled $13.2 million, of which $2.9 million was recognized in cost of goods sold in the Company'sconsolidated statements of operations during the year ended December 31, 2016 and $10.3 million was recognized during the year ended December 31,2015.Personal property assets were valued using the cost approach and/or market approach, real property assets were valued using the sales comparison and/or costapproach, customer relationships were valued using the excess earnings method, trademarks were valued using the relief from royalty method and non-compete agreements were valued using the lost profit method. In estimating the fair value of favorable and unfavorable lease agreements, market rents wereestimated for each of SBS’s leased locations. If the contractual rents were considered to be below/above the market rent, a favorable/unfavorable leaseagreement was valued by discounting the difference between the contractual rent and estimated market rates over the remaining lease term.The customer relationships, trademarks and non-compete agreements are being amortized over weighted average periods of 16.5 years, 3.8 years and 1.0 year,respectively. Acquired property and equipment is being depreciated on a straight-line basis over the respective estimated remaining useful lives.Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, andrepresents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, includingassembled workforce and non-contractual relationships, as well as expected future synergies. None of the goodwill recognized is expected to be be taxdeductible.Net sales and estimated pre-tax loss of Legacy SBS included in the consolidated statements of operations for the year ended December 31, 2015 were $103.6million and $18.6 million, respectively.60Acquisition of Robert Bowden, Inc.On September 1, 2015, BMHC purchased certain assets (excluding cash) and assumed certain liabilities of Marietta, Georgia-based Robert Bowden Inc.("RBI") for a purchase price of $102.4 million in cash (subject to certain adjustments). RBI has three locations in the Atlanta, Georgia area, including itsmanufacturing facility in Marietta. RBI sells millwork and window products to homebuilders and residential contractors primarily in the Atlanta metromarket. BMHC funded the transaction through borrowings under BMHC's revolving line of credit (the "BMHC Revolver"). The acquisition was accountedfor using the acquisition method of accounting under ASC 805, Business Combinations.The final allocated fair values of acquired assets and assumed liabilities is summarized as follows:(in thousands) Accounts receivable $8,343Inventories 6,702Prepaid expenses and other current assets 122Property and equipment 5,524Customer relationships 39,900Non-compete agreements 400Accounts payable and other accrued liabilities (3,058)Identifiable net assets acquired 57,933Goodwill 44,417Total net assets acquired $102,350Inventory and property and equipment were valued using the cost approach and/or market approach, customer relationships were valued using the excessearnings method and non-compete agreements were valued using the lost profit method. The customer relationships and non-compete agreements are beingamortized over periods of 10 years and 3 years, respectively.Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition,including assembled workforce and non-contractual relationships, as well as expected future synergies. All of the goodwill recognized is expected to be betax deductible. Net sales and estimated pre-tax income of RBI included in the consolidated statements of operations for the year ended December 31, 2015 were $27.0million and $1.2 million, respectively.Acquisition of VNS CorporationOn May 1, 2015, BMHC completed the acquisition of Vidalia, Georgia-based VNS Corporation (“VNS”), enabling BMHC to expand its product offeringsinto the southeastern United States. BMHC funded the transaction through the use of available cash and borrowings on the BMHC Revolver. The purchaseprice was $47.1 million, net of $2.3 million of acquired cash. The acquisition was accounted for using the acquisition method of accounting under ASC 805,Business Combinations.61The final allocated fair values of acquired assets and assumed liabilities is summarized as follows:(in thousands) Cash $2,344Accounts receivable 19,452Inventories 10,665Prepaid expenses and other current assets 952Property and equipment 11,643Customer relationships 10,000Trademarks 850Other long-term assets 59Accounts payable (7,464)Accrued payable and other accrued liabilities (4,087)Deferred taxes (4,364)Identifiable net assets acquired 40,050Goodwill 9,429Total net assets acquired $49,479Inventory and property and equipment were valued using the cost approach and/or market approach, customer relationships were valued using the excessearnings method and trademarks were valued using the relief from royalty method. The customer relationships and trademarks are being amortized overperiods of 10 years and 2 years, respectively.Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition,including assembled workforce and non-contractual relationships, as well as expected future synergies. None of the goodwill recognized is expected to be bedeductible for tax purposes.Net sales and estimated pre-tax income of VNS included in the consolidated statements of operations for the year ended December 31, 2015 were $103.1million and $4.7 million, respectively.Pro Forma Financial Information (Unaudited)The following unaudited pro forma combined results of operations give effect to the Merger and acquisitions of RBI and VNS by the Company as if SBS, RBIand VNS had been acquired on January 1, 2014, the beginning of the comparable prior annual period, applying certain assumptions and pro formaadjustments. These pro forma adjustments primarily relate to depreciation expense on stepped up fixed assets, amortization of acquired intangibles, cost ofgoods sold expense related to the sale of stepped up inventory, interest expense related to additional debt that would be needed to fund the acquisitions andthe estimated impact of these adjustments on the Company's income tax provision. The unaudited pro forma consolidated results of operations are providedfor illustrative purposes only and are not indicative of the Company's actual consolidated results of operations or consolidated financial position. Theunaudited pro forma results of operations do not reflect any operating efficiencies or potential cost savings which may result from the Merger andacquisitions of RBI and VNS.Unaudited pro forma financial information is as follows: Pro Forma Year Ended December 31,(in thousands) 2015 2014Net sales $2,890,163 $2,819,398Net income 15,098 56,710Basic net income per share 0.23 0.87Diluted net income per share 0.23 0.86624. Accounts ReceivableAccounts receivable consist of the following at December 31, 2016 and 2015:(in thousands) 2016 2015Trade receivables $323,725 $311,932Allowance for doubtful accounts (4,162) (2,357)Other allowances (6,259) (6,399) $313,304 $303,176The following table shows the changes in our allowance for doubtful accounts:(in thousands) 2016 2015 2014Balance at January 1 $2,357 $1,560 $1,259Write-offs (2,186) (558) (488)Recoveries 2,587 236 139Increase (decrease) in allowance 1,404 1,119 650Balance at December 31 $4,162 $2,357 $1,5605. InventoriesInventories consist principally of materials purchased for resale, including lumber, sheet goods, millwork, doors and windows, as well as certain manufacturedproducts and are valued at the lower of cost or market, with cost being measured using a weighted average cost approach, which approximates the first-in,first-out approach. A provision for excess and obsolete inventory of $1.7 million and $0.6 million is recorded as of December 31, 2016 and 2015,respectively.6. Property and EquipmentProperty and equipment consists of the following at December 31, 2016 and 2015:(in thousands) 2016 2015Land $57,693 $58,757Buildings and improvements 93,252 90,429Leasehold improvements 17,610 10,934Furniture, fixtures and equipment 136,513 115,861Vehicles 97,119 87,307Construction-in-progress 12,574 16,349 414,761 379,637Less: Accumulated depreciation (128,020) (83,659) $286,741 $295,978Total depreciation expense for the years ended December 31, 2016, 2015 and 2014 was $48.0 million, $21.0 million and $15.5 million, respectively,including amortization expense related to capital leases. These amounts include depreciation expense of $9.5 million, $5.3 million and $4.0 millionincluded in cost of goods sold in 2016, 2015 and 2014, respectively.Impairment of BMHC ERP SystemDuring 2013, BMHC selected a new third-party software vendor for its planned Enterprise Resource Planning ("New ERP") system and began incurring costsrelated to design, development and implementation of the New ERP. BMHC also began paying an annual licensing fee. During March 2016, the Companydecided to integrate all operations under the Enterprise Resource Planning system utilized by Legacy SBS (the "Legacy SBS ERP system") and todiscontinue the use of the New ERP. In connection with this decision, the Company recorded asset impairment charges of approximately $11.9 million in itsconsolidated statement of operations for the year ended December 31, 2016 related to capitalized software development costs for New ERP functionality thatthe63Company had intended to implement in future periods. These costs had previously been recorded as construction-in-progress within property and equipmenton the consolidated balance sheets.As of December 31, 2016, the Company had approximately $1.6 million of unamortized prepaid expenses related to the New ERP recorded within prepaidexpenses and other current assets on its consolidated balance sheet. These unamortized prepaid expenses relate to license and service contracts that willcontinue to be utilized by the Company until the time the Company ceases using the New ERP system. The Company is also obligated under a non-cancellable agreement to make future payments through 2017 of approximately $2.0 million related to New ERP software licenses. The Company may berequired to accelerate the expense recognition of any unamortized prepaid costs and future contractual costs once we cease using the New ERP. 7. Goodwill and Intangible Assets, NetGoodwillThe carrying value of goodwill was $1.1 million as of December 31, 2013. There was no goodwill activity for the year ended December 31, 2014. Thefollowing table details the goodwill activity for the years ended December 31, 2016 and 2015:(in thousands) December 31, 2014 $1,137Acquisition of VNS Corporation 9,287Acquisition of Robert Bowden, Inc. 44,541Merger with Stock Building Supply Holdings, Inc. 199,699December 31, 2015 254,664VNS measurement period adjustment 142RBI measurement period adjustment (124)SBS measurement period adjustment 150December 31, 2016 $254,832 Intangible assetsIntangible assets represent the value assigned to trademarks, customer relationships and non-compete agreements in connection with acquired companies.The following table provides the gross carrying amount and related accumulated amortization of definite-lived intangible assets. Trademarks Customer Relationships Non-Compete Agreements Gross Gross Gross Carrying Accumulated Carrying Accumulated Carrying Accumulated (in thousands)Amount Amortization Amount Amortization Amount Amortization TotalDecember 31, 2014$— $— $— $— $— $— $—Acquisition of VNS850 — 10,000 — — — 10,850Acquisition of RBI— — 39,900 — 400 — 40,300Merger with SBS4,500 — 129,800 — 6,112 — 140,412Amortization— (408) — (2,664) — (554) (3,626)December 31, 20155,350 (408) 179,700 (2,664) 6,512 (554) 187,936Amortization— (2,140) — (12,845) — (5,736) (20,721)December 31, 2016$5,350 $(2,548) $179,700 $(15,509) $6,512 $(6,290) $167,215Aggregate amortization expense was $20.7 million, $3.6 million and $0.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.Based upon current assumptions, the Company expects that its definite-lived intangible assets will be amortized according to the following schedule:64(in thousands) 2017 $15,0002018 13,0462019 12,9572020 12,9572021 12,957Thereafter 100,298 $167,2158. Accrued Expenses and Other LiabilitiesAccrued expenses and other liabilities consists of the following at December 31, 2016 and 2015:(in thousands) 2016 2015Accrued payroll and other employee related expenses $41,728 $42,776Accrued taxes 19,083 19,744Advances from customers 10,062 10,133Accrued rebates payable 2,564 1,840Accrued warranty reserve 1,813 1,762Unfavorable leases 789 789Accrued professional fees 727 2,442Accrued lending fees 186 2,520Other 11,834 9,882 $88,786 $91,8889. DebtLong-term debt at December 31, 2016 and 2015 consists of the following:(in thousands) December 31, 2016 December 31, 2015Senior secured notes, due 2024 $350,000 $—Senior secured notes, due 2018 — 250,000Revolving credit agreement — 152,260Other 2,963 6,266 352,963 408,526Unamortized debt issuance costs related to senior secured notes (6,474) (4,869)Unamortized original issue discount — (664) 346,489 402,993Less: Current portion of long-term debt 1,662 2,777 $344,827 $400,216Senior Secured NotesOn September 15, 2016, the Company issued $350.0 million of senior secured notes due 2024 (the “Senior Notes”) under an unregistered private placementnot subject to the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Senior Notes are governed by an indenturedated September 15, 2016 (the “Indenture”). The Senior Notes were issued by BMC East, LLC, a 100% owned subsidiary of the Company, and are guaranteedby the Company and the other subsidiaries that guarantee our Credit Agreement (as defined below). Each of the subsidiary guarantors is 100% owned,directly or indirectly, by the Company, and all guarantees are full and unconditional and joint and several. The Senior Notes mature on October 1, 2024 andare secured by a first priority lien on certain assets of the Company and a second priority lien on the collateral that secures the65Credit Agreement (as defined below) on a first-priority basis, which collectively accounts for substantially all assets of the Company. The interest rate is fixedat 5.5% and is payable semiannually on April 1 and October 1, beginning on April 1, 2017.The Indenture contains customary nonfinancial covenants, including restrictions on new indebtedness, issuance of liens and guarantees, investments,distributions to equityholders, asset sales and affiliate transactions. At any time prior to October 1, 2019, the Company may redeem the Senior Notes in wholeor in part at a price equal to 100% of the principal, plus accrued and unpaid interest, plus the greater of (a) 1% of the principal amount of such note and (b) onany redemption date, the excess (to the extent positive) of the present value of the redemption price of such note at October 1, 2019 (equal to 104.125%) plusall required interest payments due on such note to and including October 1, 2019 (excluding accrued but unpaid interest), computed upon the redemptiondate using a discount rate equal to the applicable treasury rate, as defined in the Indenture, at such redemption date plus 50 basis points, over the outstandingprincipal amount of such note. Further, during any twelve month period prior to October 1, 2019, the Company may redeem up to 10% of the Senior Notes ata redemption price equal to 103% plus accrued and unpaid interest. At any time on or after October 1, 2019, the Company may redeem the Senior Notes inwhole or in part at the redemption prices set forth in the Indenture plus accrued and unpaid interest. In addition, at any time prior to October 1, 2019, theCompany may redeem up to 40% of the aggregate principal amount of the Senior Notes with the net cash proceeds of one or more equity offerings, asdescribed in the Indenture, at a price equal to 105.5% plus accrued and unpaid interest. If the Company experiences certain change of control events, holdersof the Senior Notes may require the Company to repurchase all or part of their Notes at a price equal to 101% plus accrued and unpaid interest.The net cash proceeds from the Senior Notes were used to redeem in full $250.0 million of 9.0% senior secured notes that were issued by BMHC in September2013 and which were scheduled to mature in September 2018 (the “Extinguished Senior Notes”), and to pay accrued interest on the Extinguished SeniorNotes of $11.3 million. In connection with the redemption of the Extinguished Senior Notes, the Company incurred a loss on debt extinguishment of $12.5million, consisting of a call premium of $8.4 million, and the write off of unamortized debt issuance costs and original issue discount of $4.1 million. Theremaining proceeds were used to repay outstanding borrowings on the Revolver (as defined below) and to pay debt issuance costs of $6.7 million, which willbe amortized over the term of the Senior Notes.As of December 31, 2016, the estimated market value of the Senior Notes approximated the carrying amount. The fair value is based on institutional tradingactivity and was classified as a Level 2 measurement in accordance with ASC 820.Revolving Credit AgreementOn December 1, 2015, in connection with the Merger, we entered into a senior secured credit agreement with Wells Fargo Capital Finance, as administrativeagent, and certain other lenders (the “Credit Agreement”) which includes a revolving line of credit (the “Revolver”). On September 15, 2016, the Companyentered into the second amendment to the Credit Agreement (the “Second Amendment”), which reduced the aggregate commitment from $450.0 million to$375.0 million and increased the letters of credit commitment from $75.0 million to $100.0 million. The Revolver is subject to an asset-based borrowingformula on eligible accounts receivable, credit card receivables and inventory, in each case reduced by certain reserves.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%, (ii) theLIBOR rate plus 1.0% or (iii) the prime rate) plus a Base Rate Margin (which ranges from 0.25% to 0.75% based on Revolver availability) or LIBOR plus aLIBOR Rate Margin (which ranges from 1.25% to 1.75% based on Revolver availability).The fee on any outstanding letters of credit issued under the Revolver ranges from 0.75% to 1.25%, depending on whether the letters of credit are fully cashcollateralized. The fee on the unused portion of the Revolver is 0.25%. The Credit Agreement contains customary nonfinancial covenants, includingrestrictions on new indebtedness, issuance of liens, investments, distributions to equityholders, asset sales and affiliate transactions. The Credit Agreementincludes a financial covenant that requires us to maintain a Fixed Charge Coverage Ratio, as defined therein, of at least 1.00:1:00, at the end of any fiscalquarter during the period from the date that Excess Availability, as defined therein, under the Credit Agreement is less than or equal to the greater of (1) $33.3million and (2) 10% of the line cap, and remains in effect until excess availability has been greater than the greater of (1) $33.3 million and (2) 10% of theline cap for a period of at least 30 consecutive days.The Revolver matures at the earlier of (i) December 1, 2020 and (ii) the date that is three months prior to the maturity of the Senior Notes, or if the SeniorNotes are refinanced or repaid, the date that is three months prior to the new maturity date of the replacement notes or other indebtedness that replaced orrefinanced the Senior Notes. Due to the redemption of the Extinguished Senior Notes during September 2016, the issuance of the Senior Notes which matureon October 1, 2024 and the Company entering into the Second Amendment, the effective maturity date of the Revolver was extended from June 15, 2018, thedate three months prior to66the maturity date of the Extinguished Senior Notes, to December 1, 2020. After considering the increase to the remaining term and the reduction of theaggregate commitment resulting from the Second Amendment, the overall borrowing capacity of the Revolver increased. Accordingly, all existingunamortized debt issuance costs and new debt issuance costs related to the Second Amendment are being amortized through December 1, 2020. We were incompliance with all debt covenants for the year ended December 31, 2016.We had no outstanding borrowings under the Revolver as of December 31, 2016. We had $70.3 million in letters of credit outstanding under the CreditAgreement as of December 31, 2016. Obligations under the Credit Agreement are guaranteed by our material subsidiaries. Obligations under the CreditAgreement and the guarantees of those obligations, are secured by substantially all of our assets and those of the guarantors, subject to certain exceptions andpermitted liens, including a first-priority security interest in certain accounts receivable, inventory and certain other assets of the Company and a second-priority security interest in substantially all other assets of the Company that secure the Senior Notes on a first-priority basis.OtherOther long-term debt consists of $2.5 million of term notes secured by delivery and handling equipment with various maturities through November 2018 anda $0.4 million term note secured by real property with a maturity of February 2021. The interest rates range from 4.3% to 7.0%. Interest is paid monthly.Based on interest rates available to us, the estimated market value of other long-term debt approximates the carrying amount.Scheduled maturities of long-term debt were as follows:(in thousands) 2017 $1,6622018 1,0652019 1072020 1152021 14Thereafter 350,000 $352,96310. Other Long-term LiabilitiesOther long-term liabilities consists of the following at December 31, 2016 and 2015:(in thousands) 2016 2015Unfavorable leases $2,907 $3,696Long-term deferred rent 3,170 774Long-term severance reserve 232 1,986Other 700 378 $7,009 $6,8346711. Income TaxesThe components of income tax expense (benefit) for the years ended December, 31 2016, 2015 and 2014 are as follows:(in thousands) 2016 2015 2014Current Federal $16,713 $(4,202) $3,765State 1,124 405 1,150 17,837 (3,797) 4,915Deferred Federal (3,049) (4,176) (69,281)State (522) (1,716) (1,211) (3,571) (5,892) (70,492) $14,266 $(9,689) $(65,577)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 forthe years ended December 31, 2016, 2015, and 2014 follows: 2016 2015 2014Federal statutory rate 35.0 % 35.0 % 35.0 %State taxes, net of federal tax 2.7 1.7 4.1Nondeductible capitalized transaction costs 1.4 (16.2) —Nondeductible compensation expense 0.5 — —Nondeductible (permanent) items 1.0 (3.0) 0.6IRC Section 199 manufacturing deduction (3.5) — —Changes in tax rates 1.6 (6.2) —Changes related to IRC section 382 limitations (3.9) 55.5 —Excess windfall benefit of stock compensation (3.7) — —Other items 0.5 (0.1) (2.6)Valuation allowance — — (267.6)Effective tax rate 31.6 % 66.7 % (230.5)%For the year ended December 31, 2016, the Company recognized $14.3 million of income tax expense, which included an income tax benefit of $1.7 millionas a result of the Company adopting a state tax position related to Internal Revenue Code ("IRC") section 382 limitations on a state net operating loss carry-forward. For the year ended December 31, 2016, the Company's effective tax rate, excluding the state tax position change, was lower than the Company’sfederal and state statutory rates primarily due to excess windfall tax benefits of stock compensation deductions and an IRC section 199 manufacturingdeduction.For the year ended December 31, 2015, the Company recognized a $9.7 million income tax benefit, which included an income tax benefit of $8.1 million as aresult of the Company adopting a tax position related to IRC section 382 limitations on its federal and state net operating loss carryforwards and other built-in losses. IRC section 382 imposes annual limitations on the utilization of net operating loss carry-forwards, other tax carry-forwards and certain built-inlosses (collectively, “Tax Attributes”) upon an ownership change as defined under that section. In general terms, an ownership change may result fromtransactions that increase the aggregate ownership of certain stockholders in the Company’s stock by more than 50 percentage points over a three year testingperiod. If the Company were to experience an IRC section 382 ownership change, an annual limitation could be imposed on certain Tax Attributes. Upon theMerger, the Company reviewed whether any of its Tax Attributes would be subject to IRC section 382 limitation and from such review, identified a taxposition, which involves using a specific identification method, instead of the Company's previous ratable allocation method, to determine the amount oftax-deductible built-in losses subject to IRC section 382 limitations. As a result of adopting this tax position in the fourth quarter of 2015, the Companymore likely than not expects to realize additional federal and state net operating loss carry-forwards that were previously limited under the prior method ofdetermining IRC section 382 limitations against its Tax Attributes. The Company did not recognize any material unfavorable adjustments to its TaxAttributes specifically related to the change of control from the Merger on December 1, 2015. For the year68ended December 31, 2015, the Company's effective tax rate, excluding the IRC section 382 tax position change, was lower than the Company's federal andstate statutory rates primarily due to non-deductible merger-related transaction costs.In the fourth quarter of 2015, the Company recorded an out-of-period benefit of approximately $0.9 million to income taxes related to an error in thecalculation of state net operating loss carryforwards. The Company has determined the adjustment is not material to the period of correction or anypreviously issued financial statements.On December 1, 2015, BMHC and SBS completed the Merger. The Merger qualified as a tax-free reorganization within the meaning of IRC section 368(a),and therefore, the Company assumed the carryover tax basis of the acquired assets and liabilities of SBS. As a result, the Company recorded a net deferred taxliability of $75.0 million and a tax payable of $3.2 million impacting goodwill as part of purchase accounting. None of the goodwill recognized as part ofthis transaction is deductible for income tax purposes.On September 1, 2015, BMHC acquired the assets of RBI and recognized an increase in tax basis based on the purchase price. Goodwill recognized as part ofthis transaction is deductible for income tax purposes.On May 1, 2015, BMHC completed its stock acquisition of VNS. The Company assumed the carryover tax basis of the acquired assets and liabilities of VNS.As a result, the Company recorded a net deferred tax liability of $4.4 million and a tax receivable of $0.4 million impacting goodwill as part of purchaseaccounting. None of the goodwill recognized as part of this transaction is deductible for income tax purposes.For 2014, the Company recognized a $65.6 million income tax benefit primarily related to $76.1 million reversal of the valuation allowance, a discrete item,on BMC’s deferred tax assets during the three months ended June 30, 2014. This income tax benefit was reduced by $10.6 million income tax expense forfederal and certain states. The Company’s effective tax rate prior to the reversal of the valuation allowance was 37.1% and was lower than the Company’sfederal and state statutory rates due to tax credits partially offset by non-deductible expenses and non-deductible loss limitation.Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31, 2016 and 2015:(in thousands) 2016 2015Deferred tax assets related to: Accounts receivable $2,951 $3,780Inventory 2,857 4,725Goodwill and intangibles — —Accrued compensation 6,044 5,462Insurance reserves 17,126 14,186Stock-based compensation 3,210 2,759Restructuring reserves 1,868 4,008Other accrued liabilities 665 918Federal net operating loss carryforward 30,664 32,361State net operating loss carryforward 5,593 5,036Other 2,398 283 73,376 73,518Valuation allowance (125) (126) Total deferred tax assets 73,251 73,392 Deferred tax liabilities related to: Goodwill and intangibles (31,808) (32,452)Property and equipment (38,836) (42,261)Other assets (2,057) (1,700) Total deferred tax liabilities (72,701) (76,413) Net deferred tax asset (liability) $550 $(3,021)69At December 31, 2016, due to IRC section 382 limitations, the Company estimates federal net operating loss carryforwards generated prior to November 2011will be limited to approximately $4.8 million per year through 2034. These net operating losses may generally be carried forward 20 years. As a result, federaloperating losses if unused will expire as follows:•$39.3 million in 2028;•$17.3 million in 2029; and•$31.2 million in years 2030 through 2034.In addition, at December 31, 2016, the Company had $133.8 million of state net operating loss carryforwards that expire at various dates commencing in2017 through 2032.During the first quarter of 2016, the Company elected to early adopt ASU 2016-09 and has prospectively recognized tax benefits of $1.7 million during 2016from stock-based compensation deductions into its income tax expense. Prior to the adoption of ASU 2016-09, deferred tax assets relating to tax benefits ofstock-based compensation were reduced to reflect exercises or vesting. Some exercises or vesting resulted in tax deductions in excess of previously recordeddeferred tax benefits based on the value at the time of grant ("windfalls"). Prior to the adoption of ASU 2016-09, the Company had excluded excess windfalltax benefits resulting from stock-based compensation vesting and exercises as components of the Company’s gross deferred tax assets, as Tax Attributesrelated to such windfall tax benefits were not recognized until they resulted in a reduction of taxes payable. The tax effected amount of unrealized netoperating loss carryforwards resulting from stock-based compensation awards vested and/or exercised was $0, $0.4 million, and $0 at December 31, 2016,2015, and 2014, respectively. When realized, these excess windfall tax benefits were credited to additional paid-in capital. Excess windfall tax benefitsrecognized as a component of shareholders' equity were $0.4 million, $0, and $1.0 million for December 31, 2016, 2015, and 2014, respectively. TheCompany had followed the "with-and-without" allocation approach to determine when such net operating loss carryforwards have been realized.The Company recognized a current income tax receivable of $2.4 million and $11.4 million at December 31, 2016 and 2015, respectively. The Companypaid federal and state income tax payments of $8.8 million and $4.6 million during 2016 and 2015, respectively. The Company received tax refunds of $0.6million and $0.3 million in 2016 and 2015, respectively.In accordance with ASC 740, the Company evaluates its deferred tax assets to determine if valuation allowances are required. In assessing the realizability ofdeferred tax assets, the Company considers both positive and negative evidence in determining whether it is more likely than not that some portion or all ofthe deferred tax assets will not be realized.As of December 31, 2016 and December 31, 2015, the primary positive evidence considered to support the realization of the Company's deferred tax assetsincludes: (i) the cumulative pre-tax income over the last 36 months, (ii) the reversal of deferred tax liabilities related to depreciation and amortization thatwould occur within the same jurisdiction and during the carry forward period necessary to absorb the federal and state net operating losses and other deferredtax assets, (iii) current and prior year utilization of federal and state net operating losses, and (iv) no history of material expiring Tax Attributes. The primarynegative evidence considered includes: (i) the Company's cumulative losses prior to 2013, (ii) unsettled circumstances associated with the general economyand housing market, as well as mortgage credit availability, and (iii) no federal and state net operating loss carryback opportunities. To the extent theCompany generates future net operating losses, the Company may be required to increase the valuation allowance on its deferred tax assets and income taxbenefit would be adversely affected.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 taxassets, net of the existing state tax valuation allowances of $0.1 million and $0.1 million as of December 31, 2016 and December 31, 2015, respectively. Tothe 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 valuationallowance was recorded, the Company’s effective tax rate would be impacted as the valuation allowance is reversed. The Company continues to evaluate itsdeferred tax asset on a quarterly basis and notes that, if economic conditions were to change such that the Company earns less taxable income than theamounts required to fully utilize its deferred tax asset, a portion of the asset may expire unused.As of June 30, 2014, the Company recognized no valuation allowance against the $76.1 million in total deferred tax assets compared to a valuationallowance of $75.2 million against total deferred tax assets as of December 31, 2013. The Company performed its quarterly assessment of all positive andnegative evidence and determined that it was more likely than not that the deferred tax assets would be realizable. As of June 30, 2014, significantcomponents of the deferred tax assets consisted of: (i) $30.5 million (or approximately $87.1 million of federal net operating loss carryforwards on a pre-taxeffect basis) associated with federal net operating loss carryforwards; (ii) $24.8 million related to intangible assets reversing through 2020; (iii) $1.8 millionin net operating losses from various states expiring between 2015 and 2031; and (iv) $19.0 million of deductible timing differences, primarily related toinsurance reserves and other accruals.70The positive evidence supporting the reversal of the Company's deferred tax asset valuation allowance as of June 30, 2014 included: (i) cumulative pre-taxincome for the three years ended June 30, 2014; (ii) cumulative pre-tax income in the five quarters ending June 30, 2014; (iii) increase in sales in most ofLegacy BMHC's markets during 2013 and the six months ended June 30, 2014; (iv) projected future taxable income based on positive financial indicatorscompared to the prior year; and (v) no history of expiring tax attributes. Contributing to projected future taxable income were increases in sales and grossmargin, as well as external factors, such as macroeconomic reports indicating falling unemployment, historically low interest rates and high housingaffordability. The negative evidence evaluated included: (i) the Company's cumulative losses prior to 2013; (ii) unsettled circumstances associated with thegeneral economy and housing market, as well as mortgage credit availability; (iii) Section 382 limitations related to federal net operating loss; and (iv) notaxable income in the carryback periods.Taking all of the foregoing information into account, the Company's analysis showed that, even if U.S. housing permits and starts were to stop growing at thepace they grew in 2013, such that the Company was unable to achieve pre-tax income in excess of the $27.9 million it experienced during 2013, which theCompany's projections for 2014 indicated would not be the case, then the Company would still be able to fully utilize its deferred tax asset allowed in 2014,with respect to which it reversed the valuation allowance. This fact, coupled with the other positive evidence described above, in the Company’s viewsignificantly outweighed the available negative evidence and required the Company to conclude, in accordance with ASC 740, that it was more likely thannot that the deferred tax assets at June 30, 2014 would be realized.As of December 31, 2014, the Company evaluated the realizability of its deferred tax assets and concluded that a valuation allowance was not required at thatdate. Positive evidence supporting the conclusion as of December 31, 2014 included the following: (i) the Company continued to recognize a cumulativepretax income for the three years ended December 31, 2014; (ii) the Company recorded sales and pre-tax income of $1.3 billion and $28.5 million,respectively, for 2014, increases of 8.4% and 2.2%, respectively, from 2013; (iii) the Company utilized federal and state net operating losses and otherallowed deferred tax assets in 2014 and recorded taxable income for the year 2014; and (iv) no history of expiring tax attributes.The following table shows the changes in the amount of the Company’s valuation allowance:(in thousands) 2016 2015 2014Balance at January 1, $126 $— $75,248Additions charged to expense — — — Additions charged to Goodwill/Purchase Accounting — 126 —Deductions - other (1) — (75,248)Balance at December 31, $125 $126 $—The Company has no material uncertain tax positions as of December 31, 2016. The Company has recorded a liability for uncertain tax positions of $3.0million within income taxes receivable on the condensed consolidated balance sheets as of December 31, 2015 related to the Company’s tax accountingmethod to accelerate certain temporary tax deductions on its 2014 federal and state income tax returns. During the three months ended June 30, 2016, theCompany filed applications to change its tax accounting method for certain temporary tax deductions with the Internal Revenue Service. From such filings,the Company believes these tax accounting methods are more likely than not to be recognized; therefore, the Company decreased its liability for uncertaintax positions by $3.0 million with a corresponding increase to its deferred income tax liability.A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (exclusive of the effect of interest and penalties) is as follows:(in thousands) 2016 2015Balance at January 1, $3,224 $—Tax positions taken in prior periods: Gross increases — — Gross decreases (3,224) —Tax positions taken in current period: Gross increases — 3,224Settlements with taxing authorities — —Lapse of applicable statute of limitations — —Balance at December 31, $— $3,22471The Company‘s state tax returns are open to examination for an average of three years. However, certain jurisdictions remain open to examination longer thanthree years due to the existence of net operating losses. The Company’s federal returns are open to examination for three years; however, due to statutorywaivers, SBS' tax years ended July 31, 2008 and May 5, 2009 remain open until January 31, 2018 with the federal tax authorities. SBS is currently underexamination by the IRS for its tax years ended July 31, 2008 and May 5, 2009. At December 31, 2016 and 2015, the amount recognized related to expectedtax, penalties and interest payments as a result of the IRS audits in income taxes receivable on the consolidated balance sheets was immaterial.The Company’s policy is to recognize interest and penalties related to income tax liabilities and unrecognized tax benefits in income tax expense. During theyears ended December 31, 2016, 2015 and 2014, penalties and interest related to income tax liabilities and uncertain tax benefits were not material.12. Commitments and ContingenciesThe Company is obligated under capital leases covering fleet vehicles and certain equipment, as well as one facility. The fleet vehicles and equipment leasesgenerally have terms ranging from three to six years and the facility lease has a remaining term of seven years. The carrying value of property and equipmentunder capital leases was $32.6 million and $26.3 million at December 31, 2016 and 2015, respectively, net of accumulated depreciation of $28.8 million and$21.5 million, respectively. Amortization of assets held under capital leases is included within depreciation expense or cost of goods sold on theconsolidated statements of operations.The Company also has noncancellable operating leases, primarily for buildings, improvements and equipment. These leases generally contain renewaloptions 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 minimumcapital lease payments as of December 31, 2016 are as follows:(in thousands) Capital Leases Operating Leases 2017 $10,460 $27,668 2018 7,818 22,894 2019 6,354 20,202 2020 4,887 14,351 2021 1,702 12,453 Thereafter 1,320 37,607 32,541 $135,175(a)Less: Amounts representing interest (2,467) Total obligation under capital leases 30,074 Less: Current portion of capital lease obligation (9,493) Long term capital lease obligation $20,581 (a) Minimum operating lease payments have not been reduced by minimum sublease rentals of $0.1 million due in the future under noncancelablesubleases. Total rent expense under operating leases, excluding short-term rentals, for the years ended December 31, 2016, 2015 and 2014 was $29.3 million, $8.1million and $4.2 million, respectively, which are included in either cost of sales or selling, general and administrative expenses on the consolidatedstatements of operations, depending on the type of operations undertaken by the related facility or asset. Future payments for certain leases will be adjustedbased on increases in the consumer price index.As of December 31, 2016, the Company had purchase commitments totaling $4.8 million related primarily to vehicles and certain IT equipment, which areenforceable and legally binding on us.From time to time, various claims, legal proceedings and litigation are asserted or commenced against the Company principally arising from alleged productliability, warranty, casualty, construction defect, contract, tort, employment and other disputes. In determining loss contingencies, management considers thelikelihood of loss as well as the ability to reasonably estimate the72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 ofloss can be reasonably estimated. It is not certain that the Company will prevail in these matters. However, the Company does not believe that the ultimateoutcome of any pending matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.13. Stockholders' EquityMergerIn connection with the Merger, each share of issued and outstanding BMHC common stock, par value $0.001 per share, excluding (i) any shares of BMHCcommon stock held in treasury or by any wholly owned subsidiary of BMHC or (ii) any shares of BMHC common stock held by any BMHC stockholder whowas entitled to exercise, and properly exercised, appraisal rights with respect to such shares of BMHC common stock pursuant to the General CorporationLaw of the State of Delaware, was converted into the right to receive 0.5231 shares of Company common stock, par value $0.01 per share. As a result,approximately 39.2 million shares of Company common stock were issued to BMHC stockholders. Each holder of BMHC common stock converted pursuantto the Merger who would otherwise have been entitled to receive a fraction of a share of Company common stock received cash in lieu thereof in an amounteach to such fractional amount multiplied by $17.19, the last reported sale price of SBS common stock on the last complete trading day prior to the Merger.Shares and price per share of BMHC common stock for all prior periods have been restated to reflect the 0.5231 exchange ratio and BMC's par value of $0.01per share.Treasury stockEmployees have the option to surrender shares to the Company to satisfy their tax withholding obligations in connection with the vesting of restricted stockand restricted stock unit awards. These surrendered shares are reflected as treasury stock, at cost, on the consolidated balance sheet as of December 31, 2016and 2015.All BMHC treasury shares were canceled in connection with the Merger.14. Stock Based CompensationBMHC long-term incentive plansIn March 2013, BMHC's Board of Directors approved the 2013 long-term incentive plan ("BMHC 2013 Incentive Plan") as subsequently approved byBMHC's shareholders in May 2013. The BMHC 2013 Incentive Plan provided for grants of stock options, restricted stock and other stock-based awards.There were 1.6 million common shares reserved for issuance under the plan. The awards granted under this plan vest immediately for directors and over athree year period for key employees.In March 2010, BMHC's Board of Directors approved the 2010 long-term incentive plan ("BMHC 2010 Incentive Plan") as approved by BMHC'sreorganization plan. The BMHC 2010 Incentive Plan provided for grants of restricted stock. There were 5.2 million common shares reserved for issuanceunder the plan. The awards granted under this plan vest over a two year period for directors and a three year period for key employees.SBS long-term incentive planIn connection with its IPO in August 2013, SBS adopted the Stock Building Supply Holdings, Inc. 2013 Incentive Compensation Plan ("SBS 2013 IncentivePlan"). The SBS 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. In general, if awards under the SBS 2013 Incentive Plan are for any reason canceled, or expire or terminateunexercised, the shares covered by such awards may again be available for the grant of awards under the SBS 2013 Incentive Plan. Awards granted under theSBS 2013 Incentive Plan generally vest over a period of three or four years. Stock options granted under the SBS 2013 Incentive Plan have a maximumcontractual term of 10 years from the date of grant. Shares awarded that revert to the Company as a result of forfeiture or termination, expiration orcancellation of an award or that are used to exercise an award or for tax withholding, will be again available for issuance.73Effect of the Merger on stock based awardsThe SBS 2013 Incentive Plan remained in effect upon consummation of the Merger. In connection with the Merger, the Company amended the SBS 2013Incentive Plan in order to increase the number of shares of common stock authorized for issuance from 1.8 million to 5.6 million. As of December 31, 2016,approximately 3.6 million common shares were available for issuance under the SBS 2013 Incentive Plan.Upon consummation of the Merger, the Company assumed all obligations of BMHC under the BMHC 2010 Incentive Plan and BMHC 2013 Incentive Plan,including BMHC's time-vesting restricted stock and performance-vesting restricted stock. At the effective time of the Merger, (i) each BMHC time-vestingrestricted share outstanding immediately prior to such time was converted, on the same terms and conditions as were applicable to such BMHC time-vestingrestricted share at such time, into a restricted share with respect to the number of shares of BMC common stock determined by multiplying each BMHC time-vesting restricted share by the exchange ratio, rounded up to the nearest whole share. The performance goals of each award of BMHC performance-vestingrestricted stock outstanding immediately prior to the Merger was deemed satisfied at maximum and was converted, on the same terms and conditions (otherthan the terms and conditions relating to achievement of performance goals), into a restricted share with respect to that number of shares of BMC commonstock determined by multiplying each BMHC performance-vesting restricted share by the exchange ratio, rounded up to the nearest whole share, providedthat the vesting criteria applicable to such conversion will provide for vesting based solely on the holder's continuation of service through the time ofvesting.Under the SBS 2013 Incentive Plan, the merger constituted a "change in control" of SBS. In connection with a "change in control," as defined in the SBS2013 Incentive Plan, the vesting of outstanding awards under the SBS 2013 Incentive Plan was accelerated, with the exception of 0.2 million outstandingstock options and 0.3 million outstanding restricted stock units awarded to certain Legacy SBS employees during November 2015. The fair value of thevested awards on the Merger date of $8.3 million and the fair value of the non-vested awards on the closing date of the Merger related to pre-Merger servicerendered of $0.2 million were included in the calculation of consideration transferred.Performance-based restricted stock unitsDuring the year ended December 31, 2016, the Company granted performance-based restricted stock units that vest on March 15, 2019. The grant date fairvalue of the performance-based restricted stock units was $16.35. The number of performance-based restricted stock units that are issued on the vesting datecould range from zero to a maximum of 206,250, based upon the Company's cumulative Adjusted EBITDA over the three year period from January 1, 2016through December 31, 2018. As of December 31, 2016, the Company expects that 109,676 of the performance-based restricted stock units will vest.Compensation cost for the performance-based restricted stock units is recorded based on the expected number of units that will vest and is adjusted, asappropriate, throughout the performance period.Valuation of stock based awardsPrior to the Merger, the fair value of BMHC equity awards was calculated using the enterprise value per share. The enterprise value was derived using a blendof the market approach, the income approach and prior sales of BMHC shares. Weights were assigned to each approach to calculate a weighted averageenterprise value. The value of these awards was discounted for a lack of marketability and non-operating assets and liabilities. Due to the uncertaintiesinherent in the assumptions used in these various valuation approaches, it is possible that actual share-based compensation realized by the participant mayvary from the estimate of the fair value of these restricted stock units.The fair value of stock options granted during the year ended December 31, 2016 and November 2015 was estimated using the Black-Scholes option pricingmodel, with the following assumptions: 2016 2015Expected dividend yield0% 0%Expected volatility factor (a)44% 44%Risk-free interest rate (b)1% 2%Expected term (in years) (c)6.0 6.0(a) The volatility factor was based on the average volatilities of similar public entities.(b) The risk-free interest rate was based on the U.S. Treasury yield at the time of grant.(c)The expected term was derived utilizing the "simplified method" in accordance with Securities and Exchange Commission Staff AccountingBulletin No. 110, which uses the mid-point between the vesting date and the expiration date of the74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.Stock based compensation is included in selling, general and administrative expenses on the consolidated statements of operations. The following tablehighlights stock based compensation for the years ended December 31, 2016, 2015 and 2014:(in thousands) 2016 2015 2014Stock options $1,050 $42 $—Restricted stock 1,559 2,607 3,410Restricted stock units 4,185 100 —Performance-based restricted stock units 458 — —Stock based compensation $7,252 $2,749 $3,410Stock based award activityThe following is a summary of restricted stock and restricted stock unit activity, excluding performance-based restricted stock units: Restricted Stock Restricted Stock Units Number of SharesOutstanding(in thousands) Weighted AverageGrant Date FairValue Number ofUnitsOutstanding (inthousands) WeightedAverageGrant DateFair ValueDecember 31, 2013 893 $7.25 — $—Granted 264 11.66 — —Vested (408) 4.95 — —Forfeited (43) 8.97 — —December 31, 2014 706 10.15 — —Legacy SBS restricted stock units assumed — — 318 16.99Granted 206 17.15 — —Vested (279) 9.07 — —Forfeited (178) 11.37 (36) 16.99December 31, 2015 455 13.51 282 16.99Granted — — 166 17.65Vested (301) 11.95 (123) 16.86Forfeited (37) 13.69 (27) 17.16December 31, 2016 117 $17.42 298 $17.3975The following is a summary of stock option award activity. No stock options were granted by BMHC during any periods prior to the Merger. Number of Options(in thousands) Weighted AverageExercise Price ContractualTerm(in years) IntrinsicValue(in thousands)Outstanding at December 31, 2014 — $— Legacy SBS stock options assumed 1,229 14.18 Granted — — Exercised — — Forfeited (1) 17.04 Expired — — Outstanding at December 31, 2015 1,228 $14.17 Granted 3 17.04 Exercised (175) 7.90 Forfeited (10) 17.04 Expired (22) 17.53 Outstanding at December 31, 2016 1,024 $15.15 7.2 $4,728 Exercisable at December 31, 2016 884 $14.85 6.9 $4,382 Vested and expected to vest at December 31, 2016 1,024 $15.15 7.2 $4,728The grant date fair value of Legacy SBS unvested stock options assumed in the Merger was $7.48. The weighted average grant date fair value of stockoptions granted during the year ended December 31, 2016 was $9.70.During the year ended December 31, 2016, the aggregate intrinsic value of the stock options exercised was $1.9 million.The following table summarizes the Company’s total unrecognized compensation cost related to equity based compensation as of December 31, 2016:(in thousands, except period data) UnrecognizedCompensation Cost Weighted AverageRemaining Periodof ExpenseRecognition(in years)Stock options $550 1.4Restricted stock 673 1.1Restricted stock units 2,771 1.4Performance-based restricted stock units 1,335 2.2 $5,329 15. SegmentsASC 280, Segment Reporting (“ASC 280”) defines operating segments as components of an enterprise about which separate financial information isavailable that is evaluated regularly by the chief operating decision maker ("CODM") in deciding how to allocate resources and in assessing performance.As of December 31, 2016, the Company's operating segments consisted of the Mid-Atlantic, Southeast, Texas, Intermountain, Western and Mountain Westdivisions. Beginning January 1, 2017, the Company will have five operating segments after the Company realigned certain of its markets, which resulted inthe consolidation of the Mountain West division into the Intermountain division. Due to the similar economic characteristics, nature of products, distributionmethods and customers, both before and76after the January 2017 market realignment, the Company has aggregated our operating segments into one reportable segment, "Geographic divisions."In addition to our reportable segment, the Company's consolidated results include "Other reconciling items." Other reconciling items is comprised of ourcorporate activities.The following tables present Net sales, Adjusted EBITDA and certain other measures for the reportable segment and total Company operations for the periodsindicated. Adjusted EBITDA is used as a performance metric by the CODM in determining how to allocate resources and assess performance. Year Ended December 31, 2016 December 31, 2016(in thousands) Net Sales Gross Profit Depreciation &Amortization Adjusted EBITDA Total AssetsGeographic divisions 3,093,743 741,965 66,592 244,616 1,345,475Other reconciling items — — 2,088 (50,726) 49,539 $3,093,743 $741,965 $68,680 $1,395,014 Year Ended December 31, 2015 December 31, 2015(in thousands) Net Sales Gross Profit Depreciation &Amortization Adjusted EBITDA Total AssetsGeographic divisions 1,576,746 361,410 23,726 122,914 1,305,545Other reconciling items — — 863 (36,872) 65,594 $1,576,746 $361,410 $24,589 $1,371,139 Year Ended December 31, 2014 December 31, 2014(in thousands) Net Sales Gross Profit Depreciation &Amortization Adjusted EBITDA Total AssetsGeographic divisions 1,311,498 295,074 14,906 98,933 487,027Other reconciling items — — 551 (21,664) 94,826 $1,311,498 $295,074 $15,457 $581,85377Reconciliation to consolidated financial statements: Year Ended December 31,(in thousands) 2016 2015 2014Income (loss) before income taxes $45,146 $(14,520) $28,455Interest expense 30,131 27,552 27,090Depreciation and amortization 68,680 24,589 15,457Impairment of assets 11,928 — 134Merger and integration costs 15,340 22,993 —Inventory step-up charges 2,884 10,285 —Non-cash stock compensation expense 7,252 2,749 3,410Loss on debt extinguishment 12,529 — —Headquarters relocation (a) — 3,865 2,054Insurance reserve adjustments and casualty fire loss — 3,026 669Loss portfolio transfer — 2,826 —Acquisition costs and other items — 2,677 —Adjusted EBITDA of other reconciling items 50,726 36,872 21,664Adjusted EBITDA of geographic divisions reportable segment $244,616 $122,914 $98,933(a) Represents expenses incurred to relocate BMHC's headquarters to Atlanta, Georgia, including employee retention, severance, recruiting, relocation andprofessional fees.The Company does not earn revenues or have long-lived assets located in foreign countries. In accordance with the enterprise-wide disclosure requirementsof the accounting standard, the Company's net sales from external customers by main product lines are as follows for the years ended December 31, 2016,2015 and 2014:(in thousands) 2016 2015 2014Structural components $471,619 $249,371 $205,036Lumber & lumber sheet goods 921,304 459,446 428,084Millwork, doors & windows 898,769 442,675 328,063Other building products & services 802,051 425,254 350,315Total net sales $3,093,743 $1,576,746 $1,311,49816. Earnings Per Common ShareBasic net income (loss) per share (“EPS”) is calculated by dividing net income (loss) attributable to common stockholders by the weighted average sharesoutstanding during the period. Diluted EPS is calculated by adjusting weighted average shares outstanding for the dilutive effect of potential common shares,determined using the treasury-stock method. For purposes of the diluted EPS calculation, stock options, restricted stock and restricted stock unit awards areconsidered to be potential common shares. During periods of net loss, no effect is given to potential common shares as they are anti-dilutive. Performance-based restricted stock units are not included in the calculation of diluted EPS until they are contingently issuable.78The basic and diluted EPS calculations for the years ended December 31, 2016, 2015 and 2014 are presented below: Year Ended December 31,(in thousands, except per share amounts) 2016 2015 2014Income (loss) attributable to common stockholders $30,880 $(4,831) $94,032 Weighted average common shares outstanding, basic 66,055 41,260 38,828Effect of dilutive securities: Restricted stock 207 — 463Restricted stock units 129 — —Stock options 218 — —Weighted average common shares outstanding, diluted 66,609 41,260 39,291 Basic income (loss) per common share $0.47 $(0.12) $2.42Diluted income (loss) per common share $0.46 $(0.12) $2.39The following table provides the securities that could potentially dilute EPS in the future, but were not included in the computation of diluted EPS becauseto do so would have been anti-dilutive. The amounts included in this table exclude performance-based restricted stock units. The number of currentlyoutstanding performance-based restricted stock units that are issued upon vesting could range from zero to a maximum of 206,250. Year Ended December 31,(in thousands) 2016 2015 2014Stock options 469 1,228 —Restricted stock — 455 —Restricted stock units 5 282 —17. Unaudited Quarterly Financial DataThe following tables summarize the consolidated quarterly results of operations for 2016 and 2015: 2016(in thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth QuarterNet sales $727,418 $797,547 $821,204 $747,574Gross profit 166,617 191,655 202,966 180,727Net (loss) income (6,756) 17,982 9,236 10,418Basic (loss) income per share $(0.10) $0.27 $0.14 $0.16Diluted (loss) income per share $(0.10) $0.27 $0.14 $0.16 2015(in thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth QuarterNet sales $292,826 $357,287 $416,471 $510,162Gross profit 66,697 83,818 97,101 113,794Net (loss) income (3,561) 2,125 4,047 (7,442)Basic (loss) income per share $(0.09) $0.05 $0.10 $(0.16)Diluted (loss) income per share $(0.09) $0.05 $0.10 $(0.16)79Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresNone.Item 9A. Controls and ProceduresDisclosure controls and proceduresOur management is responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). These disclosure controls and procedures are designed to ensure that informationrequired 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 timeperiods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensurethat 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 theissuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allowtimely 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 theend 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 ourmanagement. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures wereeffective as of December 31, 2016.Management's annual report on internal control over financial reportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under theExchange Act). Management, with the participation of our principal executive officer and principal financial officer, conducted an assessment of theeffectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment, management has concluded that theinternal control over financial reporting of BMC Stock Holdings, Inc. was effective as of December 31, 2016 to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements in accordance with GAAP.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an audit reportwith respect to the effectiveness of our internal control over financial reporting as of December 31, 2016, which appears in Part II, Item 8 of this AnnualReport on Form 10-K.Changes in internal control over financial reportingThere was no change in our internal control over financial reporting during the three months ended December 31, 2016 that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting. Consistent with the year ended December 31, 2015, the Companymaintained two primary ERP systems during the year ended December 31, 2016. During 2016, the Company made the decision to integrate all operationsunder the Legacy SBS ERP system and to discontinue use of the New ERP, and began implementing the Legacy SBS ERP system at Legacy BMC locations.The Company expects this ERP integration to materially affect the Company’s internal control over financial reporting as it is completed.Item 9B. Other InformationNone.80PART IIIItem 10. Directors, Executive Officers and Corporate GovernanceCode of Business Conduct and Ethics for Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. We have adopted a Code of Ethicswhich applies to our chief executive officer, chief financial officer, chief accounting officer and all our other employees, and which can be found through ourwebsite, www.buildwithbmc.com under the Investors section. We are not including this or any other information on our website as a part of, nor incorporatingit by reference into, this Annual Report on Form 10-K or any of our other SEC filings.The information required by Item 401 of Regulation S-K will be included under the captions “Proposal 1 - Election of Directors” and “Executive Officers” inthe Company’s definitive Proxy Statement for the Annual Meeting of Stockholders (“Fiscal 2016 Proxy Statement”) which is currently expected to be heldMay 11, 2017, 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 willbe included under the captions “Stock Ownership Information-Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” inthe Fiscal 2016 Proxy Statement, which sections are incorporated in this item by reference.Item 11. Executive CompensationThe information required by Item 402 of Regulation S-K will be included under the captions “Executive Compensation” and “Director Compensation” in theFiscal 2016 Proxy Statement, which section is incorporated in this item by reference. The information required by Item 407(e)(4) of Regulation S-K will beincluded under the caption “Compensation Committee Interlocks and Insider Participation” in the Fiscal 2016 Proxy Statement, which section isincorporated 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 2016Proxy Statement, which section is incorporated in this item by reference; however, such information is only “furnished” hereunder and not deemed “filed” forpurposes of Section 18 of the Exchange Act.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this item will appear under the headings “Stock Ownership Information” in our Fiscal 2016 Proxy Statement, which section isincorporated 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 2016 ProxyStatement, 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 2016 ProxyStatement, which section is incorporated in this item by reference.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by Item 404 of Regulation S-K will be included under the caption “Related Person Transactions” in our Fiscal 2016 ProxyStatement, 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 2016 Proxy Statement,which sections are incorporated in this item by reference.Item 14. Principal Accountant Fees and ServicesThe information required by this item will appear under the heading “Proposal 2 - Ratification of Selection of Independent Registered Public AccountingFirm” in our Fiscal 2016 Proxy Statement, which section is incorporated in this item by reference.81PART IVItem 15. Exhibits and Financial Statement Schedules(a) The following documents are filed as part of this report:1.The list of consolidated financial statements and related notes, together with the reports of PricewaterhouseCoopers LLP and KPMG LLP, appear inPart II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K and are hereby incorporated by reference.2.Financial statement schedules have been omitted because they are not applicable, not material or the required information is otherwise included.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. Description2.1 Agreement and Plan of Merger, dated as of June 2, 2015, by and between Stock Building Supply Holdings, Inc. and Building MaterialsHolding Corporation (incorporated by reference to Exhibit 2.1 to the Form 8-K filed with the SEC on June 5, 2015 in Commission FileNo. 001-36050)3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Annex C to the definitive Joint Proxy and ConsentSolicitation Statement/Prospectus filed with the SEC on November 2, 2015 in Commission File No. 333-206421)3.2 Amended and Restated Bylaws of Stock Building Supply Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’sCurrent Report on Form 8-K filed with the Commission on August 15, 2013 in Commission File No. 001-36050)4.1 Form of stock certificate (incorporated by reference to Exhibit 4.1 to the Stock Building Supply Holdings, Inc. Registration Statement onForm S-1, as amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368)4.2 Indenture, dated as of September 20, 2013, by and among Building Materials Holding Corporation, the guarantors party thereto andWilmington Trust, National Association, as trustee, governing Building Materials Holding Corporation’s 9.0% Senior Secured Notes due2018 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on December 7,2015 in Commission File No. 001-36050)4.3 First Supplemental Indenture, dated as of June 1, 2015, by and among VNS Corporation, ProCon Construction Services, LLC, TrussMartBuilding Components, LLC and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4.2 to theRegistrant’s Current Report on Form 8-K filed with the Commission on December 7, 2015 in Commission File No. 001-36050)4.4 Second Supplemental Indenture, dated as of December 1, 2015, by and among BMC Stock Holdings, Inc., certain subsidiaries of BMCStock Holdings, Inc. parties thereto and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4.3 tothe Registrant’s Current Report on Form 8-K filed with the Commission on December 7, 2015 in Commission File No. 001-36050)4.5 Indenture, dated as of September 15, 2016, among BMC East, LLC, the Guarantors named therein and Wilmington Trust, NationalAssociation, as Trustee and Notes Collateral Agent (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form8-K filed with the Commission on September 16, 2016 in Commission File No. 001-36050).10.1 Amended and Restated Professional Services Agreement, dated as of June 13, 2013, by and between Glendon Partners, Inc. and StockBuilding Supply Holdings, Inc. (incorporated by reference to Exhibit 10.11 to the Stock Building Supply Holdings, Inc. RegistrationStatement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368)10.2 Amended and Restated Employment Agreement, dated as of April 1, 2016, by and between Peter C. Alexander and BMC Stock Holdings,Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the Commission on April 7, 2016 in CommissionFile No. 001-36050)10.3 Employment Agreement Amendment, dated as of June 2, 2015, by and between James F. Major, Jr. and Stock Building Supply Holdings,Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K filed with the Commission on June 5, 2015 in CommissionFile No. 001-36050)10.4 Employment Agreement Amendment, dated as of June 2, 2015, by and between Lisa M. Hamblet and Stock Building Supply Holdings,Inc. (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K filed with the Commission on June 5, 2015 in CommissionFile No. 001-36050)82Exhibit No. Description10.5 Employment Agreement Amendment, dated as of June 2, 2015, by and between C. Lowell Ball and Stock Building Supply Holdings, Inc.(incorporated by reference to Exhibit 10.6 to the Registrant’s Form 8-K filed with the Commission on June 5, 2015 in Commission FileNo. 001-36050)10.6 Amended and Restated Employment Agreement, dated as of August 1, 2010, by and between Paul Street and Building Materials HoldingCorporation10.7 Offer of Employment, dated as of October 16, 2015, by and between Thomas J. Barnes and Building Materials Holding Corporation10.8 Supplemental Retention Agreement, dated as of February 22, 2016, by and between Thomas J. Barnes and BMC Stock Holdings, Inc.10.9 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.20 to the Stock Building Supply Holdings, Inc. RegistrationStatement on Form S-1, as amended, filed with the Commission on June 14, 2013 in Commission File No. 333-189368)10.10 Form of Stock Building Supply Holdings, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.21 to theStock Building Supply Holdings, Inc. Registration Statement on Form S-1, as amended, filed with the Commission on June 14, 2013 inCommission File No. 333-189368)10.11 Amendment to the Stock Building Supply Holdings, Inc. 2013 Incentive Compensation Plan, (incorporated by reference to Annex B tothe definitive Joint Proxy and Consent Solicitation Statement/Prospectus filed with the SEC on November 2, 2015 in Commission FileNo. 333-206421)10.12 Description of Management Incentive Plan for Executive Officers (incorporated by reference to Exhibit 10.24 to the Registrant's AnnualReport on Form 10-K filed with the Commission on March 4, 2014 in Commission File No. 001-36050)10.13 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 FormS-1, as amended, filed with the Commission on July 29, 2013 in Commission File No. 333-189368)10.14 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 FormS-1, as amended, filed with the Commission on July 29, 2013 in Commission File No. 333-189368)10.15 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 FormS-1, as amended, filed with the Commission on July 29, 2013 in Commission File No. 333-189368)10.16 Second Amended and Restated Senior Secured Credit Agreement, dated as of December 1, 2015, by and among Building MaterialsHolding Corporation, Stock Building Supply Holdings, Inc., certain subsidiaries of Building Materials Holding Corporation and StockBuilding Supply Holdings, Inc. parties thereto, Wells Fargo Capital Finance, LLC as agent for the lenders, joint lead arranger, and jointbook runner, Goldman Sachs Bank USA, as joint lead arranger and joint book runner, and the lenders parties thereto (incorporated byreference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on December 7, 2015 in CommissionFile No. 001-36050)10.17 Amendment Number One to Second Amended and Restated Senior Secured Credit Agreement and Consent, dated as of January 28, 2016,by and among BMC Stock Holdings, Inc., as parent, the subsidiaries of parent party thereto, as borrowers, the lenders party thereto, andWells Fargo Capital Finance, LLC, as agent for the lenders (incorporated by reference to Exhibit 10.18 to the Registrant's Annual Reporton Form 10-K filed with the Commission on March 15, 2016 in Commission File No. 001-36050)10.18 Amendment Number Two to Second Amended and Restated Senior Secured Credit Agreement and Amendment Number One to SecondAmended and Restated Security Agreement, dated as of September 15, 2016, by and among BMC Stock Holdings, Inc., the subsidiariesparty thereto, the lenders identified on the signature page thereto and Wells Fargo Capital Finance, LLC, as agent for the lenders(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on September 16,2016 in Commission File No. 001-36050).10.19 Registration Rights Agreement, effective as of December 1, 2015, by and among Stock Building Supply Holdings, Inc. and certainstockholders affiliated with Davidson Kempner Capital Management LP, Robotti & Company Advisors, LLC and The Gores Group, LLC(incorporated by reference to Annex G to the definitive Joint Proxy and Consent Solicitation Statement/Prospectus filed with the SEC onNovember 2, 2015 in Commission File No. 333-206421)10.20 First Supplement to the Registration Rights Agreement, dated as of May 18, 2016, by and among the Registrant and certain stockholdersaffiliated with Davidson Kempner Capital Management LP, Robotti & Company Advisors, LLC and The Gores Group, LLC (incorporatedby reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 24, 2016 in CommissionFile No. 001-36050).83Exhibit No. Description16.1 Letter from KPMG LLP to the U.S. Securities and Exchange Commission (incorporated by reference to Exhibit 16.1 to the Registrant’sForm 8-K filed with the Commission on December 21, 2015 in Commission File No. 001-36050)21.1 List of subsidiaries of BMC Stock Holdings, Inc.23.1 Consent of PricewaterhouseCoopers LLP23.2 Consent of KPMG LLP24.1 Powers of Attorney (included on the signature page)31.1 Certification by Peter C. Alexander, President and Chief Executive Officer, pursuant to Exchange Act Rule 13a-14/15d-14(a), as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 Certification by James F. Major, Jr., Executive Vice President, Chief Financial Officer and Treasurer, pursuant to Exchange Act Rule 13a-14/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.INS* XBRL Instance Document101.SCH* XBRL Taxonomy Extension Schema Document101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document101.DEF* XBRL Taxonomy Extension Definition Linkbase Document101.LAB* XBRL Taxonomy Extension Label Linkbase Document101.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 theSecurities 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 underthese sections.Item 16. Form 10-K SummaryNone.84SIGNATURESPursuant 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 itsbehalf by the undersigned, thereunto duly authorized. BMC STOCK HOLDINGS, INC.Date:March 1, 2017By:/s/ James F. Major, Jr. Executive Vice President, Chief Financial Officer and Treasurer (Principal financial officer and duly authorized officer)POWER OF ATTORNEYEach person whose signature appears below constitutes and appoints Paul Street, his true and lawful attorney-in-fact and agent, with full power ofsubstitution 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 onForm 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 andagents 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 onbehalf of the registrant and in the capacities and on the dates indicated.85SignatureTitleDate/s/ Peter C. AlexanderPresident and Chief Executive Officer (principal executiveofficer)March 1, 2017Peter C. Alexander/s/ James F. Major, Jr.Executive Vice President, Chief Financial Officer andTreasurer (principal financial officer)March 1, 2017James F. Major, Jr./s/ Noah GaySenior Vice President and Chief Accounting Officer(principal accounting officer)March 1, 2017Noah Gay/s/ David BullockDirector and Chairman of the BoardMarch 1, 2017David Bullock/s/ Barry J. GoldsteinDirectorMarch 1, 2017Barry J. Goldstein/s/ David L. KeltnerDirectorMarch 1, 2017David L. Keltner/s/ Michael MillerDirectorMarch 1, 2017Michael Miller/s/ James O'LearyDirectorMarch 1, 2017James O'Leary/s/ Jeffrey G. ReaDirectorMarch 1, 2017Jeffrey G. Rea/s/ Carl R. Vertuca, Jr.DirectorMarch 1, 2017Carl R. Vertuca, Jr.86MANAGEMENT PETER ALEXANDER President and Chief Executive Officer MIKE McGAUGH Executive Vice President and Chief Operating Officer JIM MAJOR Executive Vice President, Chief Financial Officer and Treasurer PAUL STREET General Counsel and Corporate Secretary JOE BARNES Senior Vice President, Supply Chain and Operations LISA HAMBLET Executive Vice President, eBusiness and Pro Remodeling KEITH COSTELLO Senior Vice President, Sales and Marketing MIKE FARMER Senior Vice President, Human Resources SHAREHOLDER AND CORPORATE INFORMATION CORPORATE HEADQUARTERS 980 Hammond Drive Suite 500 Atlanta, GA 30328 678.222.1219 CORPORATE WEBSITE www.BuildWithBMC.com STOCK EXCHANGE LISTING The Company’s common stock is listed on the NASDAQ Stock Exchange. Ticker symbol: BMCH 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 INVESTOR RELATIONS Shareholders, Investors and Security Analysts are invited to contact: Carey Phelps, Director, Investor Relations 678.222.1228 Carey.Phelps@BuildWithBMC.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.buildwithbmc.com BOARD OF DIRECTORS DIRECTOR INDEPENDENT (Y/N) AUDIT COMMITTEE COMPENSATION COMMITTEE DAVID W. BULLOCK (Chairman of Board) PETER C. ALEXANDER BARRY J. GOLDSTEIN DAVID L. KELTNER MICHAEL T. MILLER JAMES O’LEARY JEFFREY G. REA CARL R. VERTUCA, JR. Y N Y Y Y Y N Y X (Chair) X X X X X (Chair) CORPORATE GOVERNANCE AND NOMINATING COMMITTEE X X X (Chair) Two Lakeside Commons 980 Hammond Drive NE, Suite 500 • Atlanta, GA 30328 678.222.1219 • BuildWithBMC.com 

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